Vontier Corporation (VNT) Earnings Call Transcript & Summary

Very pleased to be sitting down virtually with Mark Morelli, President and CEO; and Dave Naemura, CFO. And in the background is Lisa. Lisa will be on camera, but she's there in the background. So Mark, you've been CEO for a couple of years now and -- over 2 years. So looking forward to really catching up on some of the trends there. Mark, you've got great background. You're a veteran. You are a veteran. You've spent a lot -- many years at Carrier. You were COO, I think, at Box Automation; CEO at Columbus McKinnon; and now 2.5 years at Vontier. So I'd be really curious to maybe kick off the conversation with -- as you've kind of like joined Vontier and spent a couple of years there. Maybe just talk about the operational capabilities of the company and sort of areas of improvement and what impact you're having with the organization.

Yes. Good morning, Nigel. Really happy to be here. I think that's a great step back perspective question. And I'll tell you, when I reflect on our trajectory here at Vontier, obviously launching a company in fairly turbulent times, the company has got a great pedigree. It's got a basic DNA that's a tremendous amount to work with, a lot of great market positions as well. But you spend with what you got, and as a consequence, when we set out on this path, we said, look, this company has just got to perform. We've got the EMV headwind coming pretty strong, as you know, the first half of this year, where we've got really strong comp compared to last year because we were firing on all cylinders with EMV. And of course, we saw that coming, and we set up a very strong agenda of profitable growth initiatives. And I couldn't be more pleased with how we've been executing on those consistently, a ton of momentum there. I think the other perspective, too, as we said, look, this company has got to establish itself with a strong track record of performance. And we want to be consistent with that, and I think we're executing right along those lines. The other issue that we said is we've got to do good at the portfolio transformation. This is going to be a multiyear, multistep process to transform the portfolio, which means both addition and subtraction. And we executed really well in our first year with DRB. I couldn't be more pleased with the way that's performing. It's ahead of our projections at this point, early innings. But I think we did the right M&A, strategy-led. At the same time, we executed well with the elements that we need to integrate and making sure that it's growing profitably. I think investors now see that. So I think we're establishing early innings, but establishing a good track record there. I couldn't be more excited about the other moves we're making on the portfolio transformation. So I think a lot of headwinds in the last couple of years, but I think we're demonstrating that we're a company that's fit for that, and that we're going to continue to work through that appropriately.

That's great. We're going to talk about capital allocation a little later. But I do acknowledge this morning that you've topped up the buyback to $0.5 billion. So -- but we will touch on that in a moment. But maybe just touch base on operations, the tempo of the quarter. I don't know how much you want to comment on this, but you're looking for flat organic sales. Maybe any color you can give us in terms of what you see in intra-quarter?

Yes. So when you think of our remarks on our last earnings call, those are very relevant today. I think that what we see in terms of the macro environment is the same that other folks are seeing, the same kind of headwinds. I think we've demonstrated we can execute through that admirably well. We continue to be on that path. We respond well to curve balls. And as you know, in this environment, you just get -- you get your fair share of them. And you also mentioned -- just go back to that demand environment, particularly related to ex EMV. The backdrop there was good. We have got a lot of momentum there. So we continue to see the same kind of strong momentum that we have, and we've got to execute on that like we always have. And we're -- I think we're fit to do that. At the same time, the comp last year was pretty steep. If you remember, in April 2021, that was the cutoff for EMV, for U.S. EMV. If folks recall that date, that drove a ton of volume into the first half of last year. We also had some benefits from regulatory within Mexico that drove a lot. So we've got some tough comps this first half of the year, as you referenced. But that headwind, from a comp perspective, turns into tailwind in the second half.

Right. Okay. So if we -- just remind us, if we take out the EMV headwind this quarter, your growth would be in that low to mid-single-digit range, if I'm not mistaken?

Yes, that's correct. I'll turn it over to Dave. Dave, do you want to give any color on the guidance?

That's right, Nigel. I mean, EMV is still a headwind for the first half of the year. So our core growth guide contemplates continued headwind. So you've got it about right.

Okay. Good. All right. I don't know if you want to comment on how the businesses ex EMV are tracking right now. I don't know if you want to get into that color.

Well, I think, Nigel, ex EMV, I think we've tried to highlight that because we think, underlying this regulatory roll-off, we've seen continued and -- continued improving the strong performance from ex EMV. So we talked about the ex EMV growth being much stronger than the growth we're trying to provide, about high single digits. And I think you've seen in the presentation we put forth for the first quarter when we tried to highlight some of the activities we've been doing. Matco continues to run strong. We're seeing mid-single-digit growth there. And then in Mobility Technologies, of course, not included in core is our ERP, which is running kind of teens growth this year, ahead of what we anticipated. So if you back up, you look at the year, if you will, we had a kind of low to mid-single-digit guide. But on a reported basis, because DRB is not core, more like high single digits, and that's with the full year of about $50 million EMV roll-off. So when you back up from that, and you look at kind of ex EMV, that's supported by a pretty strong growth rate from those other business units. So hitting on a lot of cylinders right now in both platforms, offset by that EMV headwind.

Yes. I do look forward to the day when we're not talking about EMV headwinds. So -- and I know that's not going to be anytime soon, but it will happen one day, I'm sure.

Yes.

But can you just help us understand -- and I know you've talked about this before. But for the benefit of those in the room and on the webcast, we've got the tough comp in the first half of this year. You then talked about the normalization of the comp in the second half of the year, so that's why growth accelerates. And then we got a big cliff event in 2023. So just maybe help us understand the dynamics of that and how that's playing through the P&L.

So not only is the comp kind of a challenge, also supply has impacted the shape of the EMV tail here more broadly, Nigel. But the comp gets a little easier, and I think we anticipate by getting a little more throughput in the second half of the year. But overall, what we see from EMV right now is first half, a headwind; second half, a small tailwind, kind of resulting in net $50 million down for the year. And as we came out about a quarter ago, we talked about 2023 being the larger fall-off. Part of that was kind of demand pulling into 2022. 2022 is better than we had previously anticipated. And also, we see -- so demand is pulled in, and we saw some of the pushout happen as well from supply. So the demand is strong. It just happens to be about what we had anticipated, just a little bit different shape. And as you know, we've talked about this consistently. It's very hard to estimate. We're talking about thousands and thousands of smaller customers. The larger customers are much more easy for us to understand their capital plans and their purchasing time line. Then you get down into thousands of customers. So we've continued to be transparent. I think we've updated the Street as we've continued to move forward. And last quarter, I think we had a pretty good dimensionalization brand. We put a reasonably good-sized band around it. And as we get more information at some point this year, we'll continue to update folks as we get better visibility.

Yes. That's fine. And I think that -- this is the last question on EMV, I hope. But when we -- so when we exit this year, we should be at a run rate of what, $575 million or thereabouts, $600 million or thereabouts for that business. You're saying $300 million down in 2023. That gets it down to sort of $250 million, $300 million run rate, which is where the business was before the upgrade cycle, correct? That's how to think about it.

Yes. I think that's generally right. I mean, we see this returning to around a $300-ish million type U.S. business. That we will see return to growth there as we see normalization of the refresh cycle. And we anticipate the broader retail solutions business here returning to -- retail fueling business in North America returning to kind of that low to mid-single-digit growth rate over time. Ultimately, as you point out, what EMV has done is it's kind of compressed the refresh cycle. Now we'll get back to more of a normalized run rate and back to more of a normalized growth, if you will.

Yes. So obviously, GVR was roughly a $1.9 billion business, $1.8 billion, $1.9 billion business. Can we talk about the opportunities outside of the North American above-ground business, the EMV business? Can we just talk about other countries and, in particular, emerging markets? And you used to talk about India, China. Are these emerging markets still adding gas stations? Are these still growth markets for you? And then we'll get on to Payment Solutions in a second.

Yes. Look, briefly, these are great markets, the emerging markets, right? We think these are -- have an outsized growth potential for us going into the future here. If we think of India alone, we've been there for a considerable amount of time. So we've positioned ourselves years, in some cases, decades ago in some of these emerging economies. And I think we're benefiting from that now. We're a market leader in the places you mentioned, Mexico and India. And the build-out of the retail fuel infrastructure in India is something we're very bullish on, and I think we're well positioned to participate in. Yes, albeit some of these markets can be quite lumpy. In Mexico, as you know, in the latter half of '20 and early 2021, the -- we saw a regulatory driver, which grew a significant amount of business towards the end of '20 and turning into 2021. So that compressed some activity there. But that's what we see in these markets, lumpy. But our position and our leading position in some of these markets, we feel very, very good about moving into the next long runway of years.

Okay. And China, is that still growing?

China remains an area of softness. I think within the high-growth markets, China has been soft and has kind of remained that way for us. But it's a smaller market for us also. And we're more focused on places like South America, in some cases, Middle East, Africa, India, for sure.

Okay. And then your Payment Solutions business, I think, if I'm not mistaken, that's maybe 15% of the GVR cluster. So that's, call it, $200 million, $250 million of sales, correct me if I'm wrong. What is the strategy around that? How well-protected is that business? How do you grow that business? And maybe talk about how you sort of expand within the C-store potentially.

Yes. Let me take that one. We've got a really good product offering there. It's centered on what's called Passport X. And what we've known from our business inside of North America being the #2 seller of point-of-sale systems is that there's a lot of workflow software that is very relevant. Because convenience stores have significant issues with labor shortage, operations management, as well as they're very concerned with how they get sticky with their customers, so all of these things are quite relevant with the software offerings that you can provide to them. And so having a leading offering in the marketplace creates a very sticky opportunity. Once you're in with them on these kind of solutions, it's like their operating systems for the convenience store with the point of sale. So it's a very effective means of -- it's capitalizing on the relationship that we already have, where we're a trusted supplier, and we've got great product offerings. And then the issue is just if you think about what's going on in high-growth markets and what we've talked about in the past, well, they're very interested in having modern convenience stores. This is roughly $185 million business for us. But I'll tell you, it's no question a growth opportunity because, look, they're going from fueling kiosks in many high-growth markets to more automated, security of payment, things like this, better operational control of their assets. I mean all these things that you see in a modern convenience store, where they're pushing the envelope on developing markets even more so. And the content goes way up. The point-of-sale system itself adds another $85 million. So it's a growth -- these set of opportunities worldwide, where we're well positioned to not only compete but to win.

Yes. Okay. So you think emerging markets is the big opportunity for the Passport business. And then a question we get from a lot of investors is, there's a lot of very capable payments companies out there. How do you win in this market? Is it because of the sort of connection with the pumps, and that's your key protection, your key wall [ gum ]?

Yes, I'm not -- it used to be kind of the connection with pumps was sort of the major issue in terms of how it's competing. But more and more, you can -- it's that relationship that you establish, and it's being a really good supplier. So I think it was our entree into that. And in many cases, that provides a good basis for us to begin competing. But it can't end there. It's how you continue to execute on this workflow software opportunity. And I think we're into that realm of where that's the most relevant thing at this point. And I think having the point-of-sale system itself is a major, major advantage for a lot of other workflow software opportunities, including payments on top of that. So I think one advantage leads to another. And I think we've clearly got the ball rolling here.

Yes. And of course, the payments and software capability is an important facet of the DRB acquisitions. We'll go into that in a second. 2023, you've given some initial thoughts and framework for 2023. You've got the $0.70 cliff event on EMV put in your framework. But you're confident you can maintain the line on earnings. And you talked about profitable growth initiatives, and you talked about platform strategies as an offset, as key offsets, along with capital allocation. So Mark or Dave, do you want to just run through some of the key initiatives underway and the visibility you've got around those tailwinds?

Yes, I'll be happy to do that. It's a good reference point back to our Slide 8 in our last earnings call because we specifically wanted to create a framework around that. And so I'm glad you're picking up on that reference in it, because it will be something that we'll be talking about for a while. I think the profitable growth initiatives -- and you see there a pretty big uplift in earnings, not only because of top line growth, but also really great drop-through. And the initiatives here that we've started -- actually, last year, got a lot of momentum on or continuing are based on simplification that -- after that very strong bottom line opportunity that goes with this, and we're seeing that pay off. And what we know is, it being in early innings on this, that we've got a multiyear strong trajectory here. So a lot of confidence because the things there are not particularly new. It's what we've been mining. And we're continuing to get a lot out of that initiative. Platform growth strategies are more growthy by their nature. These are highlighted by the Retail Solutions type activity. The alternative energy announcement that we made in Q1 fare prominently there as well. And then also think about the digital transformation elements that we're all leaning towards, and we're moving up the tech stack accordingly. And so we'd love to illuminate those more, particularly as we get into an Investor Day later this year. I think it would be a great time to really to show the depth that we've got there. And I would happy -- be really happy to spend more time on that.

Absolutely. That's probably the best -- the better forum to kind of deep dive on that. But maybe just run through what your alternative energy play is. Because you obviously -- on the gas side, if you like, the ICE side right now, but what is your play on alternative energies and maybe alternate fuels?

So we made a press release last quarter, $500 million over the next 5 years for inorganic and organic growth. A part of that was what we brought to market with our Driivz acquisition and [ Spark Young ], which is a technology player that works in concert with that. There's obviously a big electrification theme there and happy to spend more time exactly on what Driivz does and why we're so excited about that, but that's clearly in it. We believe that this energy transition is something that, specifically in the area of operating system software for electric charging networks, is very compelling and adjacencies around that. That's one. The other is we have a capability in dispensing gaseous fuels. The basis of that is a leading product line in the U.S. from a business called ANGI that we've owned now for a while, where we dispense CNG. And that's a high-pressure gas. Given that we already have a market-leading offering there, and we provide integrated solutions around that, and of course, it's growing nicely with high petrol prices right now, but it also gives us a basis to compete in hydrogen for the same type product offerings. Because you're dealing with gaseous high pressure, there's safety, there's a lot of regulatory issues. We're very good at that already. Our customers are asking us to play a role here. So we also think that, that plays a role. So both these areas like we thought to really carefully. This is a very -- the energy transition is something that so many folks were keyed off because it is so huge and such a global trend. But we need to be really specific and very incisive about how we're going to compete here because we want to pick places where not only we think we compete, but we can win.

That seems that your dominant position. I don't like to use the word dominant, but it really is, within traditional fueling solutions. It gives you a head start, if you will, in these alternate fuels.

Well, what it gives us is a really strong ability to bring forward complex solutions. And we solve these problems globally for customers. And they're difficult, and our customers know that. We're very reliable. We're a partner to them, making very difficult value propositions. And by the way, the regulatory drivers that are kind of steady along these lines, whether it be about energy transition or vapor recovery or when they're about payments and security of payments, these kind of things are all difficult things to solve, and we solve them with really demanding customers. And so that gives us the right to also play in these adjacencies that we're talking about.

Right. Definitely, we'd like to run through Driivz. That was a chunky acquisition, about $185 million. You had a small stake in Driivz, and you exercise the option to take full control. So maybe talk about what that is, and perhaps, more importantly, how you see that business scaling. I mean, what is the 5-year view on Driivz?

So we're excited about Driivz. Like I said, we very carefully picked our position here after -- like Dave said, I've said, that our capital allocation is strategy-led. What it does, let me just kind of put it in a nutshell for you, is it is the operating system to manage a network of electric chargers. And so if you think about what needs to be managed there -- and there is a recent study in earlier in May released in California, where the researchers found that 25% of the electric chargers in California were, at any given time, inoperable. Well, okay, think about that. How do you know whether your charger is up or whether it's operable? Can you reset that through software? How do you manage the billing, the tolling? So it's asset management, it's connection to the customer, and it's also a connection to the grid. How do you know you have the energy to be able to be sourced there? Or do you have to go into alternative energy sources such as battery backup or solar that might be on site? All of that is done through the operating system software. That's what Driivz is a market leader of. We have 20% of the market for white label operating system software because we believe not everybody is going to want to write their own software to do that. Everybody that would want to own a network of electric chargers needs to figure these things out. Are they going to write their own software? It's pretty complicated. And so they've been working on this for about 10 years. So it's -- we've got a pedigree set of customers here. I think we're in a great position to be able to leverage up some of the same customers that we have in our other parts of the businesses. But if you think about fleet, fleet managers need these kind of solutions. Destination, as well as on the go, which are the same convenience type customers that we have today. So good leverage points across our businesses as well. Keep in mind, this is hardware-agnostic, so we can leverage whatever hardware that is out there. That's the important thing with this. And it's a high-recurring revenue, cloud-based software. So these are the kind of things that we talk about when we think about workflow software solutions as well. Payment facilitation is also something relevant. So I think we have high expectations for this business. It's small. It's less than $10 million, but we expect it will be on a high growth rate.

Yes. So how do you monetize? So how do you -- so what is the revenue model for Driivz? Do you -- is it a SaaS-based model, where the actual operators, the installers of the chargers pay you a monthly fee? What is the revenue model?

So it's a high-recurring revenue SaaS model. So it's exactly that. So they license the software, and it's the number of plugs under management, is what it's called, is how we also monetize. So as that infrastructure builds and then there's more plugs under management, then we get more SaaS revenue. So it's a fantastic model. So once you get in with the operating system, it's very sticky. People don't like to change in terms of that regard. And then as it scales, then you can also monetize and build quite quickly.

Yes. Okay. That sounds great. And then just finally on Driivz, is this today a U.S.-dominant business? Or is it -- is there other global ambitions here?

So it's Israeli-based from a technology start-up capability that's been built there, and as other Israeli-based type start-up activities. Israel is not a big market for much of the software that's developed there. And as you can imagine, it is a global opportunity. Europe is clearly in its sight. So most of the sales are coming from Europe right now. As you know, they're ahead on the electric charger build-out infrastructure. But also, in the U.S., we've got some great customers in the U.S. like EVgo, as an example. And we're building it out globally. So strong global opportunity for this value proposition.

Great, thank you. DRB, so I had no idea how growthy the car wash market could be, and it seems that it actually is. Obviously, a very strong start to life as a Vontier company. I think you had low teens growth in 1Q. Obviously, that's not organic, but just very strong growth. Maybe talk about the opportunities you see for DRB. I think, today, it's largely a tunnel business. But I'd be interested in terms of how you scale that business and gain share. And then secondly, the software and payments opportunity within DRB.

Yes. Well, thanks for that question. DRB has been doing really well. And I think it shows the power of our -- the M&A in terms of strategy-led. This is the capability of a market leader and a strong growing market. And what's happening here is think about the mobility ecosystem. It is all moving forward. And it's -- I think it's surprising that a lot of people who see that these type of opportunities exist. And in the next 10 years, we think that this ecosystem is going to have a lot more changes that are also going to be growth in very profitable opportunities. And people pay a lot of attention to electric vehicles and at a lot of sexy things that are happening. But this mobility ecosystem, not as sexy, like you said, you're a little surprised on it, but tremendous opportunities here. And this is the areas that we play is to be able to leverage our capability on the mobility ecosystem and be a leader on those and those kind of changes. What's essentially happening is the carwash industry is very profitable and growing right now because it's a do-it-for-me type economy. Folks are recognizing the benefits of having a car washing, particularly as we have more sensors on vehicles. This is going to be something that we think people are going to be more attracted to as having a clean vehicle. And so we're kind of squarely in the sights on that. But more to your question, like where do we go? There's a lot of workflow opportunities that you can leverage off that footprint. Because once you have the carwash location in the right location, you can build out the services there, you can build a lot of capability there. And we're very well positioned, not only in our business, but with retail solutions like we talked about. There's a convergence. Think about the data analytics. We use data analytics in the carwash business based on consumer behavioral economics. And we find the right location to put a carwash for our customers, how relevant is that also to the other parts of the mobility ecosystem. So a lot of growthy workflow opportunities based on data analytics. Payment facilitation as well. I mean, you see that reading through in our financials. When we acquired DRB and we said, "Hey, this is going to be a growing business, and we're going to expand margins." I think there was a lot of skepticism about that. I think what you see happening is exactly that. And a big part of that, too, is that payment facilitation piece coming through, because it's growthy, excellent drop-through and that is extendable across mobile ecosystem and other select spots, where I think we not only see the opportunity, but we have a beat on that opportunity. So you got to think about this not just as a carwash, think about it as part of the mobility ecosystem moving forward and how do these things also come together.

Yes. No, absolutely. And I think payments with Driivz -- payments and software, if we think about the Passport, Driivz and DRB, there's definitely a nexus there in terms of payments and software, which, I think, is really important. And then, look, we're out of time, Mark, but maybe just touch on capital allocation. You've committed to $750 million of capital allocation by year-end '23. Obviously, you got a very strong start in 1Q with the buybacks and the Driivz acquisition. You've got the new announcement this morning on the authorization. Where is the pendulum right now between acquisitions and buybacks?

Nigel, I'll jump in right there. Look, I think what you saw in the first quarter when we came out is really making return of capital to shareholders the immediate priority. And I think that fits with the ASR that we put in place in the first quarter. And what we've talked about is a balanced approach. So we took advantage of a position where we thought there was a real dislocation between the share price and the intrinsic value of [ share ]. And I think [ we have ] to act accordingly. As you said, we replenished the authorization. That gives us flexibility as we move forward, which is a good thing. So -- but given our strong free cash flow, we think we can do both pretty effectively. So we'll continue to assess market conditions and act accordingly, I think, as the year progresses.

Very clear. Well, guys, we're out of time. So let's leave it there. But thanks for the time. Thanks for the discussion. Mark, I know you're not feeling well, so I hope you feel better soon. And Dave, thanks so much.

Always. Thanks, Nigel.

Thank you, Nigel.

Thanks.