Vontier Corporation (VNT) Earnings Call Transcript & Summary

Great. Thank you, everyone, for joining. It's my pleasure to have now for our fireside chat the Vontier CEO and CFO, Mark Morelli and Dave Naemura. As a reminder, any questions anyone dialed in has, please e-mail me, and I'll make sure to get to those questions. And also please take a minute to look at the surveys at the side of the screen. So I think we'll start off with some quick prepared remarks before going into the Q&A. So I'll hand it over to Mark and to Dave.

Great. Julian, thanks for having us. As you can see, we've got our safe harbor statements here. You can review them at your leisure. If you go to Slide 4, we -- just give us one second here, and we'll get to the chart. So we've launched an industrial technology company of scale with a portfolio of market-leading brands and technologies, serving attractive mobility and transportation markets. We have a large global installed base with low cyclicality and high recurring revenue. In fact, you can see in this pie chart in the lower right, about 30% of our business comes from retail refueling hardware. And I think that's something that a lot of investors miss, and it's only 30% of our revenue. And about 1/4 of our revenue is recurring revenue and 1/3 of that is SaaS and the other 2/3 is service. We have an outstanding financial profile, as shown here on the right-hand chart -- of this chart, with strong margins and free cash flow and a pension for M&A. And the Vontier business system is something that few companies can lay claim to in terms of a legacy that we're carrying forward. And it is the basis for organic initiatives that enhance our growth profile as well as our ability to deliver increasing margins off a base of already strong margins. I might add that this is a management team with a proven track record for substantial growth and portfolio transformation. Go to the next chart. If you can see from our Q4 earnings that we released last week, that we delivered a strong finish to 2020 as VBS continues to help us deliver top-tier financial performance where we had another quarter of double-digit earnings growth and impressive free cash flow, conversion, core revenue growth and margin expansion. So we continue to position the portfolio for the future, and we are investing ahead for profitable growth opportunities. Also, what we discussed in the earnings call last week is that we initiated a guide that reflects really a story of 2 halves. Because we have this comparison dynamic that's fairly unique to us as we saw strong demand come through in the second half of this year, as we rebounded from COVID and also took advantage of the opportunities that were available to us and also did things like gain share, coupled with the EMV headwind that we're going to face in the second half of 2021. That said, we view 2021 as a springboard to a multiyear transformation as we accelerate profitable growth and continue to invest both in organic and inorganic opportunities. Go to the next chart. This is a view of our large $27 billion market, which is an excellent runway for us to have earnings growth. And the top half of this chart is our mobility technology platform. And this consists of Gilbarco Veeder-Root or GVR; Teletrac Navman; or GTT, which is Global Traffic Technologies. And our installed base here positions us well to expand into attractive market adjacencies, such as our ability to leverage e-mobility, smart cities as well as fleet monitoring management and the ability to landscape into logistics and supply chain management. On the bottom half of the chart is our diagnostics and repair technology platform and this is based on our Matco and our Hennessy's brands. And what gives us an ability to leverage here going forward is increasing miles driven and aging car park and also the complete complexity of repair that it continues to go up. So this gives us a unique opportunity to leverage workflow solutions as well as diagnostics. Turn to the next chart, please. This brings us to how we bring this altogether. And our business model is around this growth algorithm about the value creation flywheel. And this is about continued revenue growth at GDP+, margin expansion as well as an investment-grade style balance sheet that funds our ability to compound earnings through M&A. All of this centered around VBS that is our unique heritage that, as you can see, we're carrying forward. And this brings us to our last chart. This really makes a -- what we believe a very compelling value creation and opportunity for us to invest into the future, and we think a very good compelling investment opportunity. So with that, we're excited to mobilize the future to create a better world, and we're happy to take questions, Julian.

Thank you very much, Mark, for that introduction. I suppose one question we commonly get is, it's been very recent since Vontier spun out as a stand-alone company, how satisfied are you with what's changing so far, even though it's only been a handful of months? And what are sort of the main 1 or 2 things that you really hope in a year, we can look back on and say, okay, X and Y changed or improved, and that's probably something you'll see internally much more than we'll see on the outside? But maybe just to help us understand some of the priorities you and Dave have.

Absolutely. The first thing is we're really proud of the legacy that we have, which includes the DNA from Danaher and Fortive and includes what we carry forward in VBS. But the separation really does provide us a unique opportunity for focus. And what we mean by that is both organically, we believe there is an excellent runway to continue to invest and to continue to drive both earnings growth as well as organic growth as well as the strong balance sheet that we have and the legacy that we've got for accelerating growth through M&A as well. So both those 2 elements, we think, will play out, and you'll begin to see them playing out. And the runway in the business itself is also quite relevant. Yes, I think you heard us talk about some of the businesses that are a little bit below fleet margins, opportunities there, so this enhanced focus. But not only that, I've spoken about our ability to get better drop through R&D. And while we spend a healthy amount, about 5% on R&D, we think we can do a lot better in terms of the returns that we get off that. So lots of improvement opportunity, and we're very excited on the road ahead.

Perfect. And in terms of the organic sort of growth outlook, even though it's only 1/3 of the sales mix. You probably have to start with retail fueling. But we look at GVR, in aggregate, you mentioned that mid-single-digit growth sort of outlook there. I understand -- and leaving aside the noise around EMV in the U.S. in the short term. But what's the conviction level that, that mid-single-digit growth outlook is realistic amidst what's happening with that ICE to EV transition globally?

Yes. So first of all, we're very confident with the growth that we can get out of GVR, both in the near term as well as the medium term and ex EMV. And this is because of this history. And we have not only successfully delivered this, there's a lot of secular drivers here that continue to be at play. Not only that, many of the infrastructure kind of build-outs that you see both in your developed market as well as high-growth markets are quite different. High-growth markets can be lumpy, but you can see that in Q4, they've returned to growth for us. And it really is kind of unique to -- our ability to kind of deliver on a global scale. And you see some of that happen in Mexico this past quarter, where I think it's a great example. Where not only can we get price, we can increase share, we can leverage VBS to get higher margins. So I think all things are sort of at play, and you start seeing them read through on some of our financial results already. And you also touched on EV and e-mobility. We view this as an and opportunity. So this is not -- this is where we can leverage our global base here, our infrastructure and the fact that we serve customers with market-leading brands. And what -- so by being part of that infrastructure means that we really have a right to play. And if you keep in mind, the market is pretty nascent. I mean we're less than 1% penetrated right now in electric vehicles. And so for many years to come, not only with the ICE car parc build-out, but we have these minority investments. And we have a front-row seat as this market begins to evolve and as we pick through the profit pools in the right areas to invest and develop for growth.

And within the high-growth regions, maybe help us understand sort of Vontier's market position, market share, perhaps, and what sort of growth rate over time within the high-growth regions we can expect and how much of that might be share gain versus the TAM or the broad market expanding.

Yes. Happy to provide clarity there. So high-growth markets, as we talked about, are an important part of our strategy and how we can untap value here. To answer you specifically there, it represents about 16% of the total Vontier revenues today. And if you look at the kind of growth we expect, it's mid-single-digit plus growth in 2021. If you look at some of the markets, primarily India, it's been based off the tender wins. We've got a very good backlog that we're beginning to serve off right now. And COVID has kind of thawed the ability for us to do installation. So you're starting to see some of that revenue come through, which we're really excited about. And then the combination of India and China represent 7% of GVR specifically. So if you look at the high-growth market build-out, it's not just the infrastructure build-out, it's the opportunity to move up in terms of technology, more towards automation-type solutions, which we have a lot more electronic content. And we can also increase margins in that format going forward, too.

I see. And when you think about the profitability dynamics, if and when we see those high-growth regions form a higher share of GVR and maybe Vontier's overall sales mix, is there any major sort of margin headwind that's carried with that? Or you think you can earn very good operating leverage in those high-growth regions as well?

Yes. I think it will follow a similar model like the build-out in developed markets where the margin profile is less. But through application of VBS and through consolidating wins, through moving up the technology stack, like we talked about, towards more automation, these are all great opportunities for us apply leverage of VBS. And we did it in developed markets, and we'll do it in high-growth markets. So it's an excellent runway of opportunity ahead.

And if we look at the diagnostics and repair side of the company, the sales there were fairly sort of flattish perhaps for a few years, pre-COVID. Post-COVID, it's having a sort of a -- or alongside COVID, a surge right now. But when you look at diagnostics and repair, have you done things to sort of rejuvenate the growth there, rejuvenate the market share? And there are some new product introductions that should mean that once we get to a sort of normalized environment, the growth profile for it is higher than perhaps it had been before the spinout.

Julian, we tend to look at our diagnostics and repair platforms kind of a low single-digit business that has jumped around some. We've seen greater product vitality there, and [ we see it here ], particularly out of Matco. Our growth algorithm there support that kind of low single digits is continuing to grow same-store sales. But also recall that about 30% of our available franchise territories in Matco remain unpenetrated. So we have a real good runway of growth there and a very good operating model. And right now, there's very good conditions for growth. The end user technician, employment levels are healthy and the personal balance sheets of those customers is very healthy as well. So we see a good dynamic that should maintain that historical low single-digit growth that we've seen in what is an above kind of fleet average profitability-type business.

And if we look -- thank you, David. If we look across Vontier, how comfortable is the management that market share in general is something that can expand now that the company is stand-alone? Or is that less of a priority even improving the margins and inorganically expanding M&A?

Yes. I'll take that one. I think that we absolutely are focused on picking up as much opportunity that might be available to us. I think if you look at some of the results that we're posting that we do believe we are gaining share in the refueling side. And we think that, that's great because what happens is you build out more of your installed base, and that's a great thing for you to leverage going forward, both on connecting your forecourt as well as service opportunities. So there's no question that part of our core value drivers is also about organic growth. I think you've also seen some restructuring read-through in the numbers. You might expect that, early innings, when those opportunities might be afforded to us, particularly with the separation and the roll-off of EMV. So we're laser-focused on the opportunities on both the organic side as well as picking up things on the bottom line.

Perfect. And I suppose telematics is something that offers, I think everyone would agree, high growth as a market. Maybe help us understand sort of what Vontier's doing to help improve its participation there, get the churn down, get the share up and the stickiness of the customer base up and what that means maybe for margins in telematics, like what should a business like that in steady state, assuming it's successfully sort of turned around.

Yes. So we made really good progress this last year in telematics. We dramatically improved year-over-year. This time last year, the churn has really stabilized quite a bit. More work to go, for sure, but the improvement has been really solid. And this past year, we launched a new platform. And it's called TN360, and we're continuing to launch features for that. This year, we'll be launching a feature on ELD for the North American market. So really happy to see the progress we're making. But at the same time, it's, as we said, roughly a breakeven business. So margins have a way to go. Gross margins are healthy in the business. But clearly, we've got opportunities for simplification. We've got opportunities to continue to stabilize churn, to enhance our focus on growth with TN360 in the regions that we serve and in the segments that we serve. And as a SaaS business, that will take some time for it to throw through the P&L. And to answer your question, the backdrop in this market is good. It's a market that is -- can support healthy margins. And is a high single-digit growth market as well. So while it will take some time for us to get that kind of drop-through to read through a SaaS business, we're happy with what we've been able to achieve so far. And we're happy with the market backdrop.

Thank you. And on the overall sort of profitability side, just because Vontier as a stand-alone entity is fairly new, maybe help us understand how comfortable management is with growing margins and seeing good operating leverage this year, ex EMV, in that context of sort of higher input costs and the risk that, that might pose to the business.

Are you talking about across the business or about telematics?

Across the -- sorry, across the whole of Vontier exactly.

Yes.

So Julian, we -- in the guide that we put out for 2021, we've assumed that we effectively offset the rising cost of inputs, which we anticipate by effectively pricing and passing that through price, plus our other procurement initiatives, which I think we've had a history of showing we've effectively been able to do and manage kind of price material economics. We guided to greater than 25 basis points of operating margin expansion, which contemplates a headwind from a couple of things. EMV coming off, which comes off a little bit higher than the fleet average margins. And then we took out some costs in Q2 of the prior year, which will come back to us this year to a very temporary nature. That was about $20 million in the second quarter of the prior year, of which -- majority of which should come in -- back in this year, maybe excluding a little bit of travel. But our efforts around simplification, other cost measures, you've seen those manifest themselves in some of the restructuring we've talked about. We won't always be talking about restructuring, but I think given some of the unique developments of this year that over the course of the year, we think we effectively offset those headwinds. And that's kind of how we got to that guide of about 25 basis points of operating margin expansion for the year.