Vontier Corporation (VNT) Earnings Call Transcript & Summary

So I think you are last but not least in terms of my fireside chats, and this I think I've had about 18 of them. You're only the third company to mention return on invested capital.

Well, we think that's a differentiator over the long term. I think one of the things, Joe, that maybe people miss with the story is that, one, we're going to generate a lot of cash flow for a long period of time. And two, if you believe we're really good stewards of capital, then this is a very -- there's a lot of room for this stock to move.

That's helpful. You mentioned a $30 billion TAM. Is that focused solely in the U.S.? I know that there's some thoughts around expanding geographically, maybe into Canada. Just any thoughts around that would be helpful.

So we do have businesses with good reach internationally. As you might know, our Environmental & Fueling business is about 1/3 of that, comes from international. Teletrac Navman likewise has got an international reach. But one of our business, DRB is very strong. It's only in the U.S. And so to your point, we think there are leverage points. It's a great growth platform, but we've just been capturing so much growth right now in the U.S. market with what we're doing in that space, and we think there's room for us to grow into Canada. We met with some great Canadian folks earlier this week that are looking for expansion and then we're certainly looking beyond that. So there's no question that there's lots of areas that we can continue sort of this good run that we're on and extend the things that are working in the North American market internationally.

Makes sense. Switching gears a little bit. There's been a lot of concern over the last, call it, 6 weeks regarding SVB and bank financing. And ultimately, I'm just curious, how do you think that potentially impacts your portfolio? And I think you've got the kind of the national well-capitalized customers. But then I'm sure you also have like smaller to medium-sized customers as well.

We do. So from a near-term perspective, SVB and similar issues don't really impact the business because when you start thinking about construction cycles, they're longer. They have to go from site acquisition, permits, construction. So these are well-planned-out projects, and they're continuing. Also, when you start thinking, the banks aren't closed for business, they're more selective. Fuel margins are strong. Return on investment on C-stores through recessions has been good because they've grown through recessions. We run models on car wash, new car wash build-outs and the returns with the current interest rates are still in the mid-teens for a lot of these car washes. So these are good projects, so they're continuing. So we see that momentum still in our business. We've been talking to our customers. So we definitely see momentum. So while our industry isn't recession-proof, we tend to do well and manage through recessions and cycles pretty well.

Okay. And then Anshooman, I guess, at Investor Day, you guys laid out some long-term targets. So 30% to 35% incremental margins, a path to achieve 150 basis points of margin expansion through 2026. Maybe just kind of talk about what are the key pieces that underpin that.

Yes. So the first pillar of our strategy that we laid out at Investor Day and Mark mentioned is optimize the core, and that's about making our current set of businesses better and more efficient at what they do. And that's really part of our Vontier Business System. It's our culture of continuous improvement. And that's an early innings of where we are from an execution perspective. One of the examples that we've talked about is the product line simplification. We started off with 32 global platforms for dispensers, over 4,100 SKUs. We've cut that down to 20. We're going to take down to less than 10. It's going to reduce 1,500 SKUs, just think of not only the operational efficiencies, productional efficiencies, but the working capital benefit because you don't have 1,500 SKUs that are in inventory anymore. That also enables the next piece, next example we laid out is our global manufacturing footprint. We're going from 3.8 million square feet -- manufacturing square feet to 2.8 million, so 1 million square foot being reduced. And there are multiple other examples that we're going to continue to drive through our mindset of continuous improvement through VBS. And the 30% to 35% incrementals that we've laid out, that's net of investments. We continue to invest organically in our business that drives the acquisition, which is right now investment. When we talked about customer wins, they won 60 premier customers and they're set for poised to grow as our customers grow. It's a great revenue model because not only do we get recurring revenue for each charge point under management, we also get a transaction fee every time someone uses the charger. So when our customers, who are in the early stages of building out their network of chargers, add more chargers, we get more recurring revenue. When more people drive EVs and use those charge points, we get another set of recurring revenue. So I think we're setting up to have a lot of successful growth in our businesses.

Yes. That's great to hear. I'll turn it to the audience in a second, but maybe just touching on the margin piece of it. And I do want to touch on recurring revenue as well. At the start of the year, I think your margins were down, I think, about 110 basis points year-over-year, and that includes the EMV headwinds. EMV headwinds are expected to be more of a headwind as you progress through the year. So maybe kind of step us through what's driving kind of better core margin expansion as we progress through 2023?

Yes. So there's a couple of things that are going to drive our margins. One, we talked about our restructuring program, where we're taking out $45 million of cost this year. At run rate, it's going to be $55 million, so about another $10 million next year. We executed some of those measures in the middle, late Q1, some in Q2. So really, we don't get into run rate savings till sometime in Q3. So that's going to expand our margins in the second half of the year. The second thing is the Invenco acquisition that we talked about on our earnings call, $17 million of revenue at breakeven in the first quarter, that portfolio -- Invenco portfolio becomes profitable in the back half of the year and really 3 dynamics to think about it there. One is the restructuring -- or I shouldn't say restructuring, it's the synergies of integration. The second is the iNFX platform. Mark talked about the large win we've had with C-store operator with more than 10,000 sites in the U.S. There's a lot of interest in that platform. And there -- not only do we put hardware in these stores, there's subscription revenues or recurring revenue coming off these software-like margins then. And then finally, it gives us optionality with payment on the dispensers as we go through certifications, et cetera, in the back half of the year. So both of these are going to help drive margins in the second half of the year.

Just a follow-up there, for a 10,000 store win, it seems like a really long-term opportunity. Over what period of time does that -- I recognize that there's a subscription-based component to this that tails even longer. But on the equipment side of things, how many years does that span across?

Yes. It's not as long as you might think because this is really a software adoption model. So it's when folks begin to scale and we show the support model for the software side. So that's really what we should think about. So -- but there's -- we have both sort of shorter-term and longer-term things that we think are really good secular drivers here. It gives us a lot of confidence back to what Anshooman was talking about, the bookings and the backlog we have. By the way, our backlog is over 50% higher than it was in 2019. And if you think about that, in 2019, which floated the backlog was EMV. And so without EMV in your backlog, by being 50% higher, it really shows a lot of the things we're talking about from growth are really in the backlog today. And then we had a book-to-bill of 1. So that means even though we had strong sales, we're able to continue to book. So there's some really good secular drivers here. And then on the cost reduction side, that gives us visibility into our margins into the back end of the year. So I think we've got a really responsible guide for the full year.

Great. Any questions from the audience? Right here, up front. Yes, I think you can probably hear, yes.

And just a question, you mentioned underground tanks and the regulatory upgrade cycle there. Can you just spend maybe a minute on that in terms of how long that's going to last? And what the attach rate is on terminals from that? So if I'm taking out the underground tank, how likely am I to make a terminal change as well?

So I'll start, and I'll let Anshooman answer on this one as well. Look, this is very interesting because about 30 years ago, there was a large wave of these convenience stores that were going in or at that time, gas stations is what we call them, and they put a lot of this underground. And it turns out after 30 years, insurance companies don't like to insure that any longer. So it's hard to get insurance because they might be prone to leak. And so we're at very early innings of this upgrade cycle in the United States, which it's great -- it's really great for us for a couple of reasons, one of which is it's very good for the environment that you're out there replacing these tanks and they prevent leakage. And at the same time, it provides upgrade opportunities with a better tankage. In California, they passed a legislation from the California Air Resource Board, specifying the needs for what's called an ATG or automatic tank gauge that has better capabilities, which, of course, is also for sustainable reasons. We have a great product there. We have a market-leading product there. And so there's lots of opportunity for us to enjoy that with the equipment that we provide on that site. What's happening in the forecourt side or aboveground might also represent good opportunities if folks are in there doing the work to sort of take the tanks out and they haven't done a refresh or upgrade. And by the way, we're seeing a lot of that right now. And what's driving these refresh and upgrades above ground is there's a lot of investment that is going into this infrastructure. And if you've ever gone to a convenience store and you looked on the street corner, which is the modern format with great food, a capability, nice clean bathrooms, well-lit, clean forecourt, all these things, folks tend to go to that footprint where they may not go to one that has been upgraded. And so the benefits are accruing to folks that are making the investment into that. And so other folks that have made that investment have to decide, am I going to sell? And certainly, there are opportunities to sell that or they are going to make their investments as well to stay up to date. So we think that, that's going on. So to answer your question, when they're doing the upgrade cycle is yet another opportunity for them to think about are they going to do an upgrade. Also, there are these things in the industry driven by payment card industry, which drives if you follow that kind of regulatory body where they have security of payment type upgrades. And it's interesting, there's one going through in Canada right now, and that means you might upgrade your dispenser with your payment kit. So there is a payment kit upgrade opportunity and possibly dispenser opportunity. And then starting in the United States, they're sunsetting payment card industry #2 and we're currently on #6 in the industry. So that -- they're sunsetting payment card industry #2 in the U.S. starting next year. So what's essentially happening is that these regulatory cycles are actually increasing. Now none of them as big as that onetime EMV, but there is this drip of these regulatory. And we're operating in a more regulated environment than a less regulated environment. And what governments are really interested and they're certainly interested in sustainability. So you hear that theme, which is great for the environment. It's a great business for us. But they're also interested in fiscalization type things, and this goes to high-growth markets as well because if people are -- if they're stealing at the pump, that means the government is not getting tax revenue. So they hate that. So these fiscalization things are good for societal benefits, but they're also good for governments, and they're regulating more of this. There's a big one coming up in Brazil that it's at very early innings around that. And so these regulatory drivers, they're not going away. They're actually -- there's more of them than we've ever seen before. And we think this is great for business, and it's certainly good for the environment and is good for society.

Any other questions? Okay. I told you I'd get back to recurring revenue. So you called out, I think, maybe 40% of your business in mobility tech was recurring. Just help us understand how sticky that business is. And then also, as you think about the longer-term growth profile for the business, excluding EMV, that high single-digit growth that you're forecasting, just help us get comfortable with that number going forward.

Yes. I'll start off with the recurring revenue. Let's take it into the pieces within Mobility Technologies. We have Teletrac Navman, which is close to 100% recurring. And that is sticky because if there is a recession, we help our customers improve efficiency, productivity, and they're more likely to keep solutions and deploy solutions that's going to improve their fleet productivity. So that business is sticky from a revenue perspective. Then we have a recurring revenue under Retail Solutions around the point of sale. And again, in the past recession, C-stores have grown through recessions. They've delivered a consistent 5% mid-single digits CAGR. And so we think that revenue is also well-protected and sticky. DRB, one of the things DRB has led with is they've helped shape the market with people moving these expressed tunnel washers and moving to a membership model. And what we've seen is these memberships tend to be sticky and a lot of our recurring revenue, some of it coming through payments, some of it coming through maintenance subscription, some of it coming through parts, also tends to do well because, as I mentioned, 70% of some of these car wash revenues are coming from subscriptions now and 30% is retail people just going through a car wash. A long-winded way to say that this 40% is sticky. Mark, do you want to talk about the mid-single-digit -- high single-digit growth in this business and why we feel good about it?

Yes. So overall, the market for Mobility Technologies segment is about $24 billion of our $30 million. So it's the vast majority of it. And it is growing at high single digits. So when you start looking at what are the market segments within it. So for us to grow at high single digits, I don't think, is a stretch given that we have some real strong leadership positions there. We've had to catch up in a number of areas like in the Teletrac Navman space. The business was behind if you followed the story. But if you look at our ACV or annual contract, that is growing at double digits. So -- then your ARR is actually growing at double digits. So eventually, we got to catch up to our ARR in that business because the organic revenue will catch up to the ARR in that business, I should say it that way. And so those are sort of laggards there. The DRB has been outgrowing the market, which the market is growing at high single digits. So I think that's a pretty easy one for people to believe that we'll continue to do well at the market or better. In our Retail Solutions side, we're making investments in with the iNFX platform. We've re sort of put that business on different footing with the new management team. We've got a Chief Product Officer, Chief Innovation Officer, Chief Technology Officer. We hired a great executive to lead that business. We now have investments in our microservices software. So I mean, why wouldn't we grow at the market, at least as well? So when you look at all the pieces that we've got and then the alternative fueling element which is clearly in there in electric vehicle charging. I mean that's a fast-growing business. We're seeing really interesting trends in hydrogen, where we have a real right to play and win. We're the leader in dispensing compressed natural gas. We've done some organic investments into hydrogen dispensing because our customers are trying to pull us into that. And so when you look at all of them, they have a really good growth profile and with strong secular drivers behind that. I think the secular drivers that are the sustainability theme, digitization for sure is a huge theme there. And these strong secular drivers that are driving the industry around sustainability, and we believe in this multi-fuel future and that kind of -- that really falls into our wheelhouse. So I think there's a lot of really great legs supported by these secular drivers.

That's great. I think that's a good place to end. Mark, Anshooman, thanks so much for being here with us today. It's great to see you.

Thanks for having us.

Thanks for having us.