Vontier Corporation (VNT) Earnings Call Transcript & Summary

Well, thanks, everyone, for being here. It's my pleasure to have up next Vontier Corporation. Mark Morelli, President and CEO; and also Anshooman Aga, SVP and CFO.

So maybe just to start off, Mark and Anshooman, talk a little bit about the demand environment. I think you sounded pretty upbeat around the orders that you have seen. Sales are lagging a little bit in common with many companies at this conference. Sort of what explains the difference? Do you think that orders growth signifies some broader upswell of customer sentiment.

Yes. Thank you, Julian. Look, let's just take it by sort of major market segment, if you will. Our biggest segment that we serve is in convenience retail. If you look what slowed down the convenience retail market last year around the Q2 time frame, it was more the refresh/retrofit portion of that market, a little trepidation headed towards the elections. And the other aspect of the market is new to industry or new build. What we've seen transpire through the second half of last year is that new build continues to be really strong. And as we look into the outlook for 2025, we just come from an industry conference meeting with some of the largest CEOs in the industry -- or largest company CEOs in the industry. And their outlooks, they continue to build out new stores and that format that has been quite successful for them, strong balance sheets, they don't see any slowing of that. So that is full speed ahead. The refresh/retrofit market that did slow, we saw a pretty good uptick in the second half of last year. Part of that in the back of bunch of FlexPay 6 that gained traction. So innovation coming to market, and at the same time, maybe getting post election. So as we look into 2025, we think there's good outlooks for that marketplace as well. There could be some timing issues on orders or adoption of technologies, as always, but a good backdrop. When you look at the markets that have been the most sort of slowed, one is the repair market, which is our Matco business. Pretty good backdrop on that market. Repair is pretty healthy. The age of the car park continues to get longer, so you've got 13 years now for the average age of the car park. So that continues to extend. The reason why that's relevant is if you look at the market for repair, it's mostly a vehicle that's 5 to 7 years old or until its end of life. So if the end of life keeps getting longer, that repair market size grows for us. The complexity of repair is up, vehicle miles travel is up, all that's great for repair. Repair technician wages are up, labor is at full employment, all that's great. So the market should be growing. Why is it not growing is because we sell to service technicians in the United States. That's represented by the working class. I think post-elections, they feel really good about the election results. However, they also continue to be impinged by inflation. While the wage rates to inflation spread has certainly gotten there, the problem is that maybe that's not enough to have worked through the system where we're seeing demand pick up. So they're buying, but they're buying more low-priced items. More things on productivity. The higher-priced items such as toolboxes continue to be a bit impinged by that. So we believe there's a great backdrop for repair. However, the pace by which that comes to our business is hard for us to predict. So we're -- a little cautionary there. The other market that we indicated it slowed last year was DRB. That market has stabilized, just like the repair market has stabilized, which is great. The backdrop on that is we believe that tunnels, which are the biggest aspect of the car wash market, are kind of flattish. We've got -- 60% of our business is recurring revenue. We're launching a new product there, Patheon. We think innovation will have some impact. But at the same time, with interest rates that are not quite coming down much to stimulate that market, we think that's also flattish for 2025. So those are sort of the major end markets that we touch.

That's helpful. And in terms of sort of phasing through the year, just the last one on the very short term, I think some investors sort of thought maybe have a bigger second quarter pickup or something, particularly around Matco and the expo timing. Sort of the caveat would be it's a fairly new company stand-alone and you've done acquisitions and divestments. So we don't have a great track record to think about seasonality of the company.

Yes. If we look at the last 3 years or so, we typically do about 48% of our revenue in the first half and about 46% of our EPS in the first half. Our seasonality for 2025 is in line with that, we said we'd do about 48%, a little above that, in the first half, and a little over 46%. So somewhere between 46% and 47% of EPS in the first half. Matco Expo, which was our largest repair solutions sales event of the year, our largest promotional event of the year where we get a whole -- all our distributors together, that shifted from Q1 to Q2 last year, which was a record expo year in a pretty strong backdrop, was about $30 million, that's shifting. Now this year, obviously, the backdrop that Mark explained is a little different. So maybe a little less than $30 million will come in, in Q2. And then we have typical seasonality quarter-to-quarter from a bookings perspective. Things move a bit here and there. But our forecast for the second quarter is pretty strong. If you look at the midpoint of the implied guide for Q2 from an EPS perspective, that would be up 13% versus Q2 of last year even though Q2 was a little slow last year. First half, our core growth at the midpoint is about 1.5%. The full year midpoint is about 2.2%, 2.3%. So relatively in line. EPS Is growing at about 5% in the first half at the midpoint of our guide versus 6.5% for the full year. So some back-end seasonality, which is pretty typical of us, but I think a pretty responsible look through the year.

Perfect. And when you focus on that Repair business, as you said, there's been sort of some mix down maybe because of general high inflation and interest rates. Sort of how comfortable do you feel with your market share in Repair? How is the competitive landscape amidst this sort of softer demand backdrop?

I think we've been doing really good. There's always ebbs and flows quarter-to-quarter. But if you look at sort of this medium-term back look, we're definitely on a gain share trend. I think also the business model with the brand has really never been stronger. Folks really -- it's a professional brand to a professional market that is, I think, quite valued. It's just this buying dynamic that's sort of underfoot at the moment. And that, hopefully, we'll see clear up here, but it's just, once again, a little bit hard to call when that happens. But nothing fundamentally happening in a bad way with the business model. We're also offering some great innovations to the market with Milwaukee brand that we've launched that's been well received. We have new product coming to market that's really helping on the productivity side. So quite vibrant in that regard. And I think quite well appreciated. A new diagnostics line that came out recently. We think that positions us really well for the future as well. So I think we feel good about what's happening there. We wish we would see the consumer kind of come back a little more strongly, and hopefully, that will happen soon.

Yes. Got it. And the main gating factor there, what, it's really sort of interest rate inflation and your point is maybe in the second half that gets a little bit easier.

You're talking to overall business?

In Repair, specifically.

Yes. Well, you're looking at better comps clearly. Q1, you're still dealing with a difficult compare to prior year. They were still buying a lot of high-priced items in Q1 of last year, which I think was ahead of competition last year because I think a lot of the competition that we read about saw a fall-off well before that, but we were still hanging in there. We had the strongest expo last year in February than we've ever had in the business. So we're lapping that compare this year.

Got it. And when we look at Vontier overall, added a bunch of core brands really in recent years, businesses that have become very important, Invenco, DRB and so forth. So maybe just kind of remind us some of the biggest revenue buckets, if you like, for, say, last 12 months. What are the biggest main pieces within the organization sort of brand-wise as you're looking at it?

Yes. If we break the market into different pieces, and let's start off with the convenience retail and fueling market. In the convenience retail and fueling market, if we look at the fueling part of the business, both above the ground, below the ground, which is from a segment perspective, our Environmental & Fueling segment, that's about a $1.4 billion segment. Above the ground, which is the dispensers globally, it's about $650 million. Environmental below the ground is a little north of $300 million. Aftermarket parts, a little above $200 million. Services, about $200 million. So that's the Environmental & Fueling piece of the business. Also in that segment, we have -- in that market we have our Invenco business, which is just part of the Mobility Tech segment. And that business is north of $525 million, and that's where a lot of the innovation we're bringing. Connectivity to our customers is starting to read through. And that segment is also growing really fast. The car wash, which is DRB, which was an acquisition that has done relatively well since acquisition, that's a little north of $210 million in revenue. Then our Teletrac business, about $165 million. EVolve, which is our EV charging business where we have a pure SaaS model, it's #2 provider of EV charging network software management around the world, that's about $20 million and growing very quickly as the number of plugs under management is doubling. Our ANGI business, which gives us another optionality into a multi-energy future, mainly deals with compressed natural gas, but also renewable natural gas, that's about a $100 million business. And then Repair Solutions, which is Matco, is about $650 million. So hopefully, that gives you a good overview of the different businesses.

When you break it down like that, Julian, it sounds a bit complicated. But when you step back, we serve 3 major markets just simplistically. One is the convenience retail market. It's the stop along the highway or your local neighborhood. A pretty large market and opportunity. The second market is fleet and fleet operators. So we sell them their refueling options and also major optionalities, not only for high-flow diesel, which is pumping large quantities of diesel in a short period of time. We're the market leader in that, but we're also the market leader in gaseous dispensing, which is a great way to decarbonize, going into biogas and hydrogen. So that's a great business and market for us, and we have leadership positions in that. And then the third one is Repair with Matco where we're #2. So when you look at what Anshooman just spoke about, we're like #1 or #2 in every business within these markets that we serve.

Yes. And I think Invenco is one that stands out because it's -- you've had it for a couple of years. I think double-digit growth in 2024. It's also won some large contracts with sort of marquee customers. What's the -- how do we think about its market share? How do we think about the sort of growth entitlement for you medium term?

So this -- the catalyst here has been the acquisition that we did. We combined it with our other businesses. So just to get the accounting straight on that, we did that acquisition, said it would be a 20% return in 3 years. It's been a 20% return in 2 years. And so I think what it really shows is that the industry is really ripe for innovation. We had -- we made some organic investments around that, that's certainly shown up in our R&D. But now what you see happening is the real need that the industry has for this contemporary technology that enables them to manage their assets a lot better, micro services, edge-based. Why would these companies go out there and spend so much capital in this day and age? One, they're looking at very resilient end markets. Two, they don't really have the technology available to be able to manage these assets. A lot of these costs that are being taken out of are borne by their internal IT department that has to stitch together these monolithic systems. And the market is very dynamic. If everything were just static, maybe that would work quite well. But the industry is consolidating. You're buying other players, you're incorporating other technologies, the markets are changing. They demand more loyalty programs that are out there to try to attract consumers to their sites, so they want to contemporize that. They want better media options to bring people inside the store. There's regulatory drivers on payment security. Can you imagine that, Julian, another payment security technology coming out? PCI 5 is obsolete in '25. Now it's not the mother of all [ 31s ] that we had to live through. But these drabs are constantly happening and so how do you manage that infrastructure? And iNFX effect gives them a contemporary way to manage that much more cost-effective, over-the-year updates instead of rolling trucks for on-prem updates. So you see that it is a combination of, well, we don't compete with necessarily one same player everywhere. Franklin is a great competitor, they compete with us underground. Dover is a great competitor, we compete with Wayne on most of the above ground. NCR, great companies, we compete with them is sort of point of sale. But there's nobody that competes with us across the board where we can integrate solutions here and provide holistic solutions to our customers, and that's what Invenco represents and the strong growth profile that we're now beginning to demonstrate.

Got it. And that's a business that we could see grow high single-digit plus for years then?

That's right. And it grew faster than that in the second half. So real opportunity there. And [indiscernible] of that was not growing.

Right. Yes.

And a lot of the growth is also coming from recurring revenue, so a very sustainable long-term growth.

Yes. And I think one that often surprises people when they first start looking at the company is that R&D-to-sales is high. I think it's double the average of the companies at this conference. It's sort of close to 6% or so. Maybe help us understand what are some of the main 2 or 3 areas that you're putting the most organic investment into right now.

So I think some of these business models that we were just talking about are certainly -- have soaked up some R&D. But I do think you're seeing the proof points of that begin to read through. Also, this concept that convenience stores as well as fleet operators are really needing these tools and capabilities. I mean, think about what folks are dealing with in convenience stores or in car washes. They face some of the highest labor turnover of anything you can think of. I mean, folks in factories, we see turnover in our factories. I mean, we -- people complain about labor turnover. That is nothing compared to these industries that are dealing with this. So look at the labor challenges they have. Look at how much capital is going in the ground and how complicated the mix of things they have to manage. Everything from selling lottery tickets, alcohol, fresh food, which is more and more in demand, dispensing gas, car wash, electric charge, all of this with a very limited amount of labor on site in remote locations around a geography. So this is ripe for innovation. So I think what we're seeing is innovation that is paying off. Also the other thing that is ripe for innovation is optionality on fueling. It's decarbonizing and it's happening in a very strong return way. Let's talk about sunsetting of -- or vapor recovery. We work with California Air Resources Board automatic tankage, which has the best vapor recovery. This is not political football. It's if you can make that a more sustainable infrastructure, people are all for that. If you can advance the state of this not only in developed countries, but in developing markets, infrastructure in developing markets can happen in a more sustainable way. All this is taking R&D resources, but excellent returns are associated with that infrastructure. And then electric charging has been taking certainly some of our resources there. But strong business model. We're going to exit 2026 with -- it's #2 worldwide on plugs under management. So let's take a market like the U.K. We have 30% share of EV charging in the U.K. Tesla, example, has 11% share. Strong growth market. U.K. is fully behind electrification. We've built a strong leadership position. We'll exit 2026 with a $50 million run rate business now making money. And when you think about it, the margins on this business are outstanding. It's asset light, so it's not capital intensive and you're building a business model that is quite resilient for long term.

Got it. And when you first spun out close to 5 years ago, a lot of focus on the traditional fueling business, particularly above ground. We've seen the sort of hype wave for electric vehicle kind of ebb and flow. Where you sit now? What do you think the growth entitlement is for that traditional GVR business, call it?

Well, we said it's low to mid-single digit. We invested also in the underground business, the Environmental business, and we've offered real innovations there that we think are gaining quite amount -- a bit of share. And we're also investing on the global scale. So it's not only within the United States, there's a lot of growth. You have 350,000 underground locations around the world and that represents strong growth and a lot of aftermarket. So when you combine all of that, aboveground, below ground and then we gained share during the EMV cycle and you see a strong aftermarket business, a lot -- you see those product lines coming out of warranty now. So that's leading to this really strong aftermarket growth. So I think low single digit to mid-single digit, great profitability. There's real resilience in this global footprint. We announced some great orders in India on above ground and also below ground. This is an infrastructure that's going to be built out here for a long time. So I think we're really happy with the way that business model has shaped since spin and the investments that we've made there are really paying off.

And you have these -- if we sort of tie it together, you've got these financial targets for 2026, around that mid-single-digit revenue CAGR, 150 points of operating margin expansion. Sort of as you sit today, still 18 months to go, call it, how comfortable do you feel with those 2 financial targets?

Let's start off with the operating profit margin target and then I'll touch on revenue. I think on the operating profit margin, we still see the 150 basis points of margin expansion as viable. Pillar 1 of our strategic framework, what we call optimize the core, is all about our focus on prioritization process and product line simplification. For example, we've significantly reduced the number of dispensers from 32 to 15. We've increased the number of standardized components, but we're about halfway there in our journey. So there's more margin expansion out there. Similarly, on the Invenco side, we had 34 different global platforms -- software platforms. We're down to 18 and we're going to reduce that to handfuls. And in our Environmental & Fueling business in 2024, we expanded margins 110 bps. Now we're going to see a lot of that benefit in Invenco and Mobility Technologies in 2025 coming through. But there's a lot of runway out there. We're continuing to work on simplification of our organization with more shared services across Vontier and really the One Vontier concept. So we feel there is significant potential for margin expansion, and we still think the 150 basis points is viable. From a revenue perspective, if you look at most of our businesses, they're on track or ahead of their long-term framework that we put out with the 2 exceptions of being the car wash business and the Repair Solutions business. Repair Solutions, the underlying fundamentals, as Mark talked about, remain extremely strong. And it's just about when do we see that inflection up in the business. It's a little bit hard to call given the macro is still changing and moving. So -- but we feel confident that, that business will return to the mid-single-digit growth over time that we've called out. And then also the car wash business, which is now 60% recurring. The recurring revenue is growing. The new tunnel builds in 2025, it's flat to slightly down. But I think as the macro improves, the interest rates come down, the construction costs have stabilized, there's still good -- it's still a good business model and the demand for new car washes still exists out there. And we're seeing the good operators in the space continuing to build out. So I think that business, again, moves to the mid-single-digit growth rate, especially with our Patheon solution, which is a cloud-based solution out there. So we still think next year that we can get into the target range from a growth perspective in 2026. This year, obviously, we've guided to below. And then over the 3 years, the 150 basis point margin expansion target we still think is viable.

Perfect. And then maybe lastly before the audience response survey questions. Capital deployment, decent buyback last year. The multiple is very low. But you're in this sort of interesting ecosystem around the gas station forecourt, if you like, including car wash and then repair and C-store. So there's a lot you could buy, I think, around that. But is it just the multiple is so low?

We continue to work the pipeline of M&A and we had a number of LOIs out last year that didn't transact. We have a dynamic capital allocation model. And with the multiple as low as it is, it's been hard to compete with buybacks. And we've done pretty well on the returns on those buybacks. And so right now, we do view that bolt-ons will be attractive, like Invenco was a great one, and we are constantly hunting for the right kind of bolt-ons to do.

Perfect. Well, with that, we'll switch to audience response survey. So the first question, do you currently own the stock. [Voting]

So very big opportunity there, I think, in this room. Secondly, what's the sort of general bias? Positive, negative, neutral. [Voting]

So fairly even positive and neutral. Thirdly is around sort of through-cycle earnings growth expected for Vontier versus the kind of multi-industry average. [Voting]

Sort of in line to below. Next question is around what should the company do with excess cash? [Voting]

So mostly bolt-on M&A is the preferred one. Next question is around, I think, valuation. What near-term PE multiple should Vontier trade at? [Voting]

So sort of a maybe 3 turn discount to the S&P. And next one is what's the most significant sort of headwind facing the stock? Why do people think it should trade at a discount to the market? [Voting]

So core growth with that. Great, with that, thanks so much, Mark and Anshooman.

Thank you.

Thank you, Julian.