Vontier Corporation (VNT) Earnings Call Transcript & Summary

[Audio Gap] industrial equipment. I'm very pleased to introduce Vontier this morning. Vontier is a global provider of mobility technologies that deliver productivity and automation solutions throughout the ecosystem it serves. The company's portfolio has been overlaid with a proven business system, an experienced leadership team and a culture of continuous improvement as well. And we're very pleased to have with us this morning, Mark Morelli, who is President and CEO; and Anshooman Aga, who is the CFO. So I think we're just going to go right into our questions here, but I would encourage you if you have any questions. You're supposed to send these up to the iPad, and hopefully, the WiFi is now working. But if that doesn't work, we'll just do it manual.

But maybe just to start off, Mark, just kind of rewind here just a few weeks, third quarter results were above guidance, above expectations. Most areas of the business seem to show good strength. This baseline core growth that we're talking about was up double digits. It seems fairly broad-based. I guess as we think about the areas where you have some momentum right now and then maybe trying to look forward into 2024, what would you want to call out in terms of parts of Vontier that are firing on all cylinders right now.

So thanks for having us, Rob. We felt like we had a really healthy quarter. And to answer your question, all 3 of our platforms performed well. And if you kind of peel it back a little bit on our mobility technologies, super happy to see continued progress in DRB posting double-digit growth. And the underlying drivers there is that the industry continues to appreciate our integrated solution there for deeply embedded point of sale for car wash, application software, and it's very much in the theme of providing productivity for folks that are consolidating the industry or having larger car wash footprints. So we're continuing to see good growth there, both on build-out of the car wash as well as operators that are trying to run more efficient operations. At the same time, in our Retail Solutions, or Invenco by GVR business, also really good growth there. And that's off the backs of some of our recent launches. If you notice, we're bringing a lot more products to market than we have over the last couple of years. And I think we've got a pretty outstanding lineup and that new innovation has shown itself with our iNFX platform. We had a recent win, as you may know, with Shell, with 13,000 storefronts and Chevron with 8,000 storefronts. And so those rollouts are going really well. And we're seeing good demand in the pipeline for that offering that, I think, bodes well for the future as well. Same thematic, where folks that are trying to manage all these assets or convenience store where they're having these very complex set of operations that are out there, our iNFX platform provides a great productivity and automation solution for them and for the larger folks that are also consolidating, managing large footprints. Our alternative energy business, or ANGI, you might reference it that way, grew at 20% too, and that's off the backs of strong compressed natural gas, renewable natural gas dispensing, as well as we're beginning to launch our hydrogen, which I think bodes more for the future than showed up in the quarterly results. So I think mobility technology is really driven by that. Environmental fueling also did well. Our build-out of dispensers in the United States continues at a same thematic that we've had, where folks that are mostly the leaders in the industry for dispensing fuel by our solution because of the total cost of ownership is better with that solution. So some of the largest folks in that, in the industry continue to buy ours as they build out their footprint as well. So we saw good growth there as well as our underground business, our environmental business, we saw high single-digit growth there. We've had some destocking that folks are talking about in the industry that's mostly impacted our North American business. But international is strong and we have an outstanding lineup. And I think what bodes well for the future is that we're early stages of this underground tank upgrade cycle. And while there's still some destocking that will exist in the United States market, we think there's an excellent backdrop there. We've launched some new products that we think will make us even more competitive than we are with an outstanding set of offerings. And then on the Matco side, we also saw strength with 5% organic growth. And I think what's really driving that is in two things: one is a great backdrop with the service technician where the age of the fleet is up to 12.5 years, complexity of repair is very high right now and they're at a all-time high wage. And so the repair technicians are continuing to invest in the tools to make them more productive. And that's a great backdrop for that industry and for that market. And so that's one thing that we've got going for us and that leads, I think, a bit into next year as well as we have an outstanding product lineup. And I think we're seeing great demand when you have a great product line up, our toolboxes sold 20% growth, and our power tools are doing exceedingly well and we're currently in process of launching a new diagnostics platform which will carry into next year. So I think we saw some really good health across our businesses with some really good bright spots that give us a really good setup for 2024.

Mark, one thing that we've -- clearly, the industrial spaces served over the last couple of quarters is just coming off these higher, longer lead times and normalization effect going on. You've seen that show up in the book-to-bills as those go well below one -- you're below 1, but it's like 0.97. So is there really -- are we past the, kind of, lead time normalization effect at Vontier? Or is that weighing on order rates? And you mentioned some destocking in 1 area, but that was somewhat isolated, I guess, across the portfolio.

Yes. So we have definitely seen an improvement in lead times, which a lot of folks have managed their supply chains better with what's going on. So we still have an elevated backlog. It's about 60% over where it was in 2019. But we're not running into some of the challenges that we've had in our backlog and serving our customers' needs and demand. So we've definitely seen a normalization of that and anticipate continuing to have very good supply chain going forward. But we think the important thing to think about here is that our businesses are, we think, are in good, resilient markets with probably minimal exposure to destocking in areas that we have, we've been able to offset with our pockets of growth, mostly based on our positions in the market that we serve, which I think is differentiated as well as our product lineups are much better than they used to be.

And you will see, as we go into the fourth quarter -- comparisons do start to stepping up if we look at it in the, kind of, the baseline level, and we're seeing some of the deceleration there, I guess, in your guided core growth. Does that -- does tough comps present some of a challenge because you -- as you move into '24, do you think that is manageable. Again, trying to, luckily once we get into 2024, we'll maybe no longer talk about baseline or non-EMV and we'll be talking about a consolidated core growth, but trying to tease out maybe what the go-forward momentum is in the business as we go into...

Yes, I'll answer and I'll let Anshooman chime in here as well. So first of all, we think -- splitting out baseline growth in OMX is perhaps helpful to folks so they can see a bit of the progress that we've been making with our portfolio transformation and our growth initiatives. But we are very, very happy to tell you that we're not going to be using baseline numbers next year. We're not going to be adjusting revenue. We understand that can be unnatural at some level, but we do think that it is indicative of some of the growth that we see based on -- and the best way to show that to folks is to indicate that. But next year, once we report our fourth quarter, that will be done, EMV is done. I couldn't be more happy and excited to say that again and again and again, so that we won't have to be telling the EMV story. But I think it's in our rearview mirror. And I think that we'll be able to see that underlying growth in OMX that we keep talking about read through in our top line in OMX.

Yes. And the tough compare for the fourth quarter, there's a couple of phenomena. One, in Q3, we saw the benefit of easing supply chains, not for our products, our supply chains have normalized, but our customers' projects. Take the underground tanks, for example, we don't build those tanks, but we supply probe sensors that go with these tanks. The lead time for those was over 40 weeks. That's come down materially. So some of our customer projects move faster, which allowed us to deliver some of the backlog faster. Also remember, in Q3 last year, we had a supplier that had a supply chain issue where they had to shut down manufacturing for 3 weeks, which pushed some of our volume into the fourth quarter last year. And last year, we had a 10% core growth number in the fourth quarter. So that was the compare issue we had. Our underlying markets remain healthy. We feel pretty good going into next year. Now this year, we've had some early seasonality benefit during the year from normalizing supply chains. Obviously, next year will be more of a normal seasonality from a quarter-to-quarter basis with Q1 being our lowest quarter and ramping up sequentially to the fourth quarter being our strongest quarter. So back to more normal seasonality starting next year, but our end markets do remain healthy.

Yes. Maybe just shifting more broadly to -- or specifically on the Mobility Technologies segment. When I think about this push to automate and deliver more productivity via the solutions, this segment seems to contain more of those type businesses explicitly. It's also where you expect the highest growth over the long term. Maybe just to start on the Invenco business, which was -- is your -- you've rebranded part of your pre-existing retail solutions that, but that Invenco was an acquisition as well that's come in about 15 months ago. It seems like it's already proven to be a big unlock for opportunity that you talked about, just in point-of-sale and store operations. I guess where have you been most surprised positively. It seems like it's gone well. And is there anything -- any other opportunities that you're looking at to drive out of Invenco?

Yes. I think Invenco has been a great acquisition. I think you saw the first quarter we owned it, it was a breakeven business. It had 2 pieces that were quite relevant. One was a connected hard -- a smart hardware piece of the business and the other was a microservices software platform. And so we've launched that microservices software platform and what's so important about that is that if you think about what's happening in convenience stores and what is needed, there is a huge amount of investment that is going in with the leaders in the space. They're trying to help consolidate the industry. They're trying to manage a bunch of disparate assets. There's investments going in. There's regulatory changes that are happening all the time, like regulatory payment type applications or even things related to [indiscernible] recovery and more sustainability. And so this software platform enables them to do a microservices application based, very easy up upgrade to the latest regulatory environment or if they're consolidating assets and buying or acquiring small mom-and-pops, they have more ability to do that more easily where they don't have to throw as much labor and managing that more effectively. At the same time, with the integrated smart hardware, you can now do over-the-air updates for your dispenser. So you can imagine the ability to manage that service offering a lot more contemporarily, making it much more easy to use for consumers because you can provide them the latest software and -- as well as any regulatory change you can do over the air and try to address some of those issues. So I think you see the power in that based on the uptake we're having from some of our very large customers. And I think it's indicative of mobility technologies in the sense of what we're doing is, we're providing an integrated solution for convenience stores. We're providing an integrated solution and a platform for car wash. We're providing an integrated solution for fleets and fleet management with the multi-energy future on compressed natural gas and going into hydrogen. We're providing an integrated solution around electric charging and electric charging networks. And then we have the opportunity also to cross-fertilize because when you get them to a microservices-based platform for each platform, then you can look across payment, you can look across loyalty, you can look across applications. And I think what we're seeing happening is equivalent to the mobility ecosystem 1.0. And there's really no other player that has the depth and breadth that we have and is focused on these integrated solutions and tools for productivity and automation. And I think there's no better embodiment of that than the mobility technology segment that we're disclosing. You're seeing the profitability, you're seeing the growth. And I think that's where we target our M&A, which with DRB is continuing to perform quite well. So we couldn't be more pleased to show investors the progress that we're making.

Just to put it into context, those 2 wins that we've talked about with the new platform, Shell, Chevron. I think you've said that's about 15% of C-store states in the U.S. How should we think about it on a go-forward basis, how long, I would imagine those are pretty involved sales cycles to convert an entire footprint over like that. How should we think on a go-forward basis sales cycles for new opportunities and also just on those Shell and Chevron wins, are they taking the full suite? Or do you have more upsell opportunity?

So there's 2 parts to that question. So the first one is, those orders are representative of 4- to 5-year contracts, about 20% is that upfront hardware and about 80% is recurring revenue. So it's a large recurring revenue business. And I think that -- and we're ramping that technology really well, and I think we're pleasing our customers so far with the rollout. So we're quite optimistic on that. I think there's a lot of other customers that are watching that. We're continuing to build the pipeline for other folks that are in similar situations that manage large parts of that infrastructure. And I think that bodes really well for that platform. But the other part of that question was how do we build out because if you think of headless commerce platform or a microservices-based software, this is one application that's around payment. And you can build on to that with other applications related to car wash, as an example, or other aspects that need to be managed. And right now, the way that people manage it is through a monolithic software system that has to be stitched together by whoever owns that, whether that be Circle K as an example or Shell or Chevron. And this gives them a very contemporary architecture where they can pick different applications and they can integrate it onto that platform. So there's a build-out opportunity based on the footprint that we're establishing.

And competitively speaking, the traditional -- the other approaches your competitors are taking to offer those type of platforms that can...

I think the competitive solution is what the owner of these assets, let's say, Shell has to do internally to stitch them all together. The fact that this is also an open system architecture means that we can incorporate best-of-breed or even custom-built solutions for that operator. Let's suppose, on the loyalty side, they want to have their own homegrown loyalty or they want to adopt somebody's loyalty system. This being an open system architecture means that you can incorporate that. It's a very flexible, very contemporary architecture that enables them to be competitive in the marketplace and very fast to market, any time they do an upgrade to that system or incorporate new aspects to it. So we have the footprint to continue building that out. And I think it's on a great path, a great trajectory.

Yes. I wanted to touch on the DRB vehicle wash business, car wash business as well. It's clearly been, maybe growing ahead of where we would have expected when you announced that transaction had some nice tailwinds and doing well in the marketplace as well. Just address some of the concerns investors have and they pick up just from some of the public commentary. There's not a lot of public car wash commentary, market is largely private around new builds, around just M&A in the space and how you're insulated or where you would see shifts in your business related to what we're picking up in the public sector and maybe how that differs from what you're seeing in totality.

So I think DRB has been a great acquisition for us. I think it performed better than our investment case. And so when you looked at when we paid essentially, not including the tax -- or including the tax benefit, high teens multiple, and you roll that forward after our first year of ownership, we essentially paid 10x because of more than 30% top line growth and 400 basis points of margin expansion in our first year. So I think the industry, obviously, wasn't growing that fast. I think it showed the leadership position of a deeply embedded point-of-sale system with application software and the ability for folks that are making investments in the car wash to be able to sweat their assets better, to get better throughput, as an example, through the car wash, operate it better. And if you look back over maybe 5 years ago, the industry has really grown up a lot, not as s*** as launching a new electric vehicle, mind you, but incredibly margin-accretive business that is going through, we think, a pretty outstanding growth cycle, but the industry is still in its infancy. There is still a lot of mom-and-pops that are out there. There's still a lot of industry consolidation. And one of our operators that we spoke with recently that has more than 100 car wash has said that through 2022, it was a big effort with building out their footprint. But I think what you see happening is that folks are now focused on not only, there is M&A that is continuing, but also managing their assets better. And that operational productivity, you start seeing that read through, maybe some of the folks that are talking about that in the industry. And that's exactly what our product does. That's exactly what the DRB platform does and our launch of Patheon, which is a SaaS-based cloud software that helps folks manage our assets and be more productive with that. So I think we are also positioned for growth. Now we've never promised 30% growth would continue perpetually. We've said that it would slow. So there is no surprise to us to see that relative slowing to the industry. But it's still a great industry, still very growthy with a very high-margin platform that we continue to offer and we think has still good uptake opportunities for it.

When you say slowdown from that level, is it at a level that's consistent with or accretive to high single digit for Mobility Technologies, do you think?

Yes. It is. Go ahead.

It is high single digits, that's what we're expecting that business to grow and we continue to see investments in greenfield. Our customers continue to grow, as Mark said, and there's also investments in productivity, which our solution helps drive them at scale.

Real quick, just sticking still within Mobility Technologies, your ANGI business, it's serving some alternative energy applications. How should investors think about the growth rate there? Because it has been high, but is -- granted it's a smaller business, but is seeing some really good growth. Over the intermediate term, what's reasonable, as hydrogen starts to maybe filter into that business in the next year or 2?

Yes. So it's been growing at 20%, about $100 million business now. It's mostly on the backs of compressed natural gas, renewable natural gas now, is where we're getting that growth out of, but I think you see some of the announcements that we've made. We've launched a hydrogen dispenser. We're selling a hydrogen dispenser in the market. Folks have pulled us into the hydrogen space because of our position with our -- our leading position with compressed natural gas. It's very difficult to provide a high reliable, safe refueling experience. And so that's exactly what is needed in the hydrogen space. Also, it's at higher pressures, which is hard to do, compressed natural gas is at higher pressures, hydrogen is at higher pressure. So I think we have a lot of the engineering design capability. So we've launched what we think is a great product line there. But more importantly, we're also doing substation like we do in compressed natural gas, renewable natural gas, we do substation design and installation, and we've announced that on our last earnings call as well that we've sold our first substation. And we feel like what we can bring to the party here is not only great hardware and solutions, it's regulatory-driven environment. But at the same time, you can have the application software and you can have the cloud-based software to also scale this and manage this more effectively. And I think that's the same theme that you see in our other businesses that we're able to provide, particularly for that hydrogen business going forward. So it's hard to tell what will happen with hydrogen in terms of the rate and pace. The U.S. government has done a $7 billion hydrogen hub infrastructure. We're not a direct beneficiary of that funding, but folks that need to dispense it at some point, will need to make those investments. So that $1.2 billion of that for California means they have to build-out 200 substations in California and that's a great opportunity for us to do. So we've been here before where we've seen this great hydrogen economy that might happen. So it's hard to know the rate and pace that hydrogen might take. But we believe in what we call the energy trilemma, where the energy transition is about, of course, sustainability, but it's also about affordability and security of energy, which is the access, the energy and things like the electric grid or components to electric vehicles. And so that's going to need a multi-energy future. We believe that petrol-based dispensing will play a role in certain markets for quite a long time, electrification, but also hydrogen, we believe, has a role as well particularly for long-haul fleets in some markets. And so we are well positioned with our portfolio to serve this multi-energy future.

What is the revenue when you talk about a hydrogen station, what is the revenue pull-through for station versus just the dispenser.

So a dispenser, it depends on how many dispensers you put on site, but you are definitely less than $100,000 for a couple of dispensers and north of $500,000 to a couple of million dollars for a substation. And we think we're uniquely prepared to compete there based on what's available right now in the industry. And this is -- it's been a great offering that we have in the compressed natural gas business, renewable natural gas, as an example, like UPS or Waste Management, we provide substations for them as well as dispensing technology. So I think we have a leading offering there, and we think this represents a good growth opportunity for us going forward.

Real quick, just to discuss a few elements in the environmental fueling business. Just your North America dispenser business, a topic of a lot of conversation a year ago as we were ramping off EMV. You set out a baseline of around $250 million, you thought that would settle out. I think it's done better than that this year. Any sense as to how much you've been able to outperform that?

Yes. We've said it's north of $300 million this year. I think the thing that's been really great for that industry is you see folks in convenience store that also dispense fuel continue to build their footprints out. You look at companies like Costco, Wawa, Sheetz, QuikTrip, Love's, Pilot. These folks are operating very successful footprints where they're making great margins off their business and really strong cash flows and they're using their very strong balance sheet to continue to invest. Buc-ee's is another example of that. And these are primary customers that we've enjoyed a really healthy business relationships with. And as they are continuing to build out their footprint, sometimes they're looking more than a year out, a year to 2 years out and they don't have to leverage the capital markets on that. And so they're putting their strong cash flows to work with very successful footprint build-out. And we're a strong beneficiary of that. So I think you see that in our dispenser business. You also see that in our underground business. And you also see markets, international markets like Brazil, which is going through a regulatory change, where you're going to have to change out every dispenser in the market, see the Middle East building out its footprint as well. In India, a little bit more lumpy this year compared to last year and there's a couple of reasons for that. But at the same time, we think bodes well for a long-term build out. So that business is obviously, quite a profitable strong cash flow business for us. We're continuing to make investments to consolidate the product line, for best-of-breed offerings and simplify that product line. And I think you're seeing the benefit of that.

I'll pause here real quick, just to see if there's any questions yes, upfront.

So if you take a step back, when you guys came out of the quarter, again a very stable business, above average margin, great cash flow, good secular trends in the business. But at the end of the day that's [ $30 stock ] that's going to move up. Why not be more aggressive on share buyback given the [indiscernible]?

Yes, I think that what you've seen us do is, we're very returns-focused for investors. So we did pivot to a stock buyback program. And I think Anshooman can talk about the returns that we've gotten there. We still look at buybacks as an important way to deploy capital. We're going to generate $2 billion of cash with a $5 billion market cap company over the next couple of years. And out of that, I think the buybacks at the kind of stock prices that we've had, we think is a great return. You want to talk about the returns?

Yes. In the last 18 months or so, we did pivot to buybacks. We bought back 9% of the shares outstanding at a average price just north of $24 a share. And we continue to do buybacks. This year, we've also started deleveraging a little bit, making our balance sheet healthier. We brought leverage down from 3.3x net to 2.9x. So our capital allocation this year has been focused around deleveraging and buybacks also. Buybacks will continue, given the current stock price and the returns to our investors, it will be part of our playbook and we'll continue to do buybacks.

Where does M&A fit into the calculus?

We continue to look at our pipeline of opportunities there. We're strategy led. We're extremely picky. I think you can see the discipline that we've exercised so far and the execution that we've had. We are open at the right time and pace to do bolt-on. It's always difficult to judge timing of those kind of things. But we've been, I think, incredibly disciplined on our M&A, and I think you can expect the same.

We've said our capital allocation policy is dynamic, i.e., we go to the highest return option for our shareholders. We were doing buybacks, but we also did the Invenco acquisition, which we said would be a 20% return on invested capital for our shareholders in 3 years. So we always look at what's the best return option for our shareholders, and we're going to continue to do that.

Very good.

Thank you, Rob.

We're out of time. We'll break there. There is a breakout session for Vontier upstairs in the [indiscernible] room.

Thanks.

Thanks, Rob.