Vontier Corporation (VNT) Earnings Call Transcript & Summary

Being here, it's my pleasure to have up next Vontier Corporation, Mark Morelli, President and CEO; and Anshooman Aga, Chief Financial Officer. I think you've got a couple of minutes of prepared remarks, Mark so please lead us and thanks for being here.

Yes. Julian, thank you. We're really happy to be here. You may have seen that we announced earnings last Thursday, and I think 2023 was a year of strong operational execution for us as well as an opportunity to demonstrate that our portfolio is, in fact, transforming. Really, the power of VBS was at work where you see the underlying baseline growth improving in margins as well. And I will definitely say we are extremely excited to be past the EMV cycle as we've now sunset that, having 3 full years of headwind. It's been a long time for us. So we'll be posting organic growth clean this year with operating margin expansion, and that's in our 2024 guide as well as $450 million of cash flow this year. So really excited about the momentum that we have in entering the year. For those of you that are new to the Vontier story, Vontier is a leading industrial technology company with solutions for the mobility ecosystem, which is roughly a $30 billion market, growing at mid-single-digit growth rate. The mobility ecosystem is the critical infrastructure, which is responsible for the movement of people, goods, data and energy. Essentially, we have technologies that enable mobility. And it's a very growthy space. There is a lot of investment that is going into this infrastructure. And we have leading positions within it. And in fact, when you look across the mobility ecosystem, there's a few players that have the kind of depth that we have on integrated solutions and our ability to leverage that and to growthy opportunities at high margin and growing margins is something that we're really excited about. There are -- we have 3 platforms that we have for our business. We resegmented our business in March of last year to offer folks transparency. And there are 3 secular drivers that cut across those 3 platforms. So let me just walk you through the secular drivers at a high level. The first one is related to the increased complexity of the mobility ecosystem. There's a lot of investment going in. There's regulatory drivers. There's industry consolidation that is occurring, and many of the larger players are building out their footprints. But this means that there's a lot of complexity and a lot of change that is, in fact, occurring in that the mobility ecosystem. At the same time, the secular driver is around labor challenges. Both the auto repair industry as well as convenience store fleet operators, they had labor challenges before labor challenges were a thing in the recent couple of years. I mean very high turnover, really low skill base. There were a lot of assets to manage with the low skill base. And so the opportunity to offset that through productivity is pretty huge. And then the third secular driver is the energy transition. It is a trilemma. And that trilemma for the energy transition means that, of course, people are thinking about sustainability and making investments around sustainability, both government subsidized as well as companies stepping forward. But at the same time, you have to balance the cost of the energy, and you have to balance the access or security of that. And so we believe that means there's a multi-fuel future. There's not 1 fuel future in 1 region or geography. And as a consequence, we are a leader in all of that refueling and we have stakes in the alternative energy, both compressed natural gas, renewable natural gas, hydrogen as well as electrification, and advancing the existing [indiscernible] infrastructure in a more sustainable ways. We call our strategy, the connected mobility strategy and that strategy essentially enables productivity in the mobility ecosystem.

Perfect. Thanks very much, Mark, for that backdrop. Maybe start off by talking about some of the residual sort of areas of maybe demand softness from last year. The biggest headwind you got which is that -- sort of hangover. I think there's parts of maybe car wash or repair tools where we get some sort of mixed signals for some of your peers. How do you see that right now and sort of the rest of the year?

So we don't have much destocking through most of that headwind. We have a little bit of destocking on the environmental side, but that should clear up in the first half of the year. But that was never a big exposure. We don't have China exposure, which is good. We are seeing some pretty good signals from the store operators. And the reason why is that we are selling the highest share to the leading players in the industry. And these folks are making a lot of money off these store operations -- operations. So they're not impinged by a higher interest rate environment. Of course, the cost of capital is up, but they have very successful business models. And you may have seen in the announcement of Wawa, more recently this week, you see a pretty steady drumbeat of these convenience store operators expanding their footprint, and they're thinking out several years with their build-outs. They're also not impinged by a share of a recession because they know their franchisees, they work pretty well in market downturns. So they're not really scared off by what they see and they continue to build out. Now the fact that we have leading share with these folks gives us confidence. Now we don't have bookings visibility into that as we book on a relatively short cycle, but those are strong indicators for us. On the repair technician side, repair technician has never been healthier. There's about 1 million repair technicians out there. There's labor shortage. They're at an all-time wage rate. You can track wage rates like we do every week. The amount of travel is up. So it's a very healthy backdrop for the technician. The issue though is they are also a U.S. consumer, they're dealing with higher interest rates. And at the same time, there's -- they might have competing priorities with higher cost of goods of either families, things like that. But if there's a good lineup, we have found that they are willing to buy, particularly around productivity. We talked about the productivity needed and there's labor shortage in the repair shops. If they can get a vehicle out faster with more productivity by having the right tools or better tools to meet those needs, they're going to be willing to spend money. We saw a great uplift in our power tool lineup this past year, which is a new lineup. We're selling our new diagnostics that launched in Q4 of last year quite well, which is a higher ticket item, and toolboxes have been, which is kind of the first thing to go in the discretionary spend and have been really strong. So I think we're cautiously optimistic about that because we don't know what's going to come with the U.S. consumer this year. But at the same time, we've dialed in something that seems to be working and we have the [ Matco ] Expo which has about 6,000 of our distributors and their families in Orlando this week launching our new lineup. So I think we're pretty encouraged by what we see.

Perfect. And if we think about that sort of traditional dispensing business, had the big up for a couple of years, and the big down. What should people expect the kind of medium-term growth to look like?

I think our environmental fueling business is going to have a good growth year. We think that longer term, this is a low to mid-single-digit grower, and I think we'll be seeing mid-single-digit growth this year. And it's really on the backs of the infrastructure build out by the leading players, whether they're doing a refresh, rebuild, new site builds or doing acquisition and integration of that. I think we have leading share there. And I think it's -- a lot of times, you would get into like what's the dispense of life cycle. I think what we will miss is that the underlying caveat of the community store market is growing and the benefits are accruing to people that are making those investments. And so you see these very successful formats being rolled out. And that's really driving us. At the same time, we have an underground cycle in the United States for underground tanks that's being replaced. And once we get through a little bit more of this destocking, we think will represent good growth this year as well.

Okay. And so just summing the destocking as well, there's a few more months left, but the indicators you look at those levels have come down recently.

Yes. We had only about 15% of our business was exposed to what people are referring to as destocking. So not a high exposure, but we are through the aftermarket parts. That was an area that throw us back at very high margin, but Q4, we posted a 10% growth in that business. And so we think that's back on and then environmental in the United States has been impacted by that. We were flat overall in Q4 for environmental because the decline in the U.S. market was offset by some of the international markets like Mexico, which is doing a vapor recovery trend, which will also continue. And then this year, we have a leading share in Mexico and so that was flat overall in Q4. But I think we'll be through that destocking on the underground within the first 6 months of this year.

And then sort of the volume side of things. Pricing, I guess it can be tricky for people to think about different businesses, the retail point of sale, repair tools, the dispensing. Aggregate price, I think, was up low single digits the last few months. How are you thinking about that over the balance of this year? And how much does the competitive discipline vary across the divisions?

Yes. So from an overall perspective, in 2023, price was a little above 3%. So there was good volume growth. Also for this year, we're expecting about 150 basis point price increase across the portfolio. And other things to keep in mind, we always say pricing is dynamic. We always remain price cost positive, and we're very happy to -- every quarter post spend, we've been price cost positive, so a lot of discipline around pricing. Markets are disciplined across the board. But also, we have a leading care in most of the markets we operate which allows us to, as a technology leader also be disciplined on pricing and make sure we're getting our price cost equation right.

Got it. And I think probably the least we've understood business is probably that convenience retail element within mobility division. So maybe just help us understand what does the competitive landscape look like? What's your market share? And it seems from the outside like it must be extremely competitive with a lot of players, but then obviously, that payments are very fragmented depending on the vertical and...

Yes. So the best way maybe to understand that is how the convenience store operators manage that today. So you can imagine there's dozens of workflows that they have to manage on their footprint. And you can also imagine that as the situation is dynamic, regulatory changes are happening all the time as security payment one is happening. There's vapor recovery. There's all kinds of issues that are impacting that we live in a more regulated world, not a less regulated one. And then, of course, through acquisition and investment -- build-out, you have a changing dynamic. And the way they manage this today is they stitch this together, normally for their internal IT department like creating all this to work together. And for a period of time, that's great until the regulatory change happens. And then they will have to just say, fiscalization one or a security payment one, and they have to requalify the entire monolithic system, and they have to get the whole thing recertified. And that takes a lot of time and effort. Sometimes it could take them up to 18 months just for one change in the system. And then they have to roll trucks as part of it. Sounds like a very archaic infrastructure in temporary sense. We have a modern micro services-based offering with iNFX that we just launched. And with that fabric, we now have an application base. So we are -- we sold to Shell 13,000 sites in 1 order. We sold to Chevron around 8,000 sites in one order because of the massive productivity benefit of having the security of payment or the payment application as a micro service. Now every time there is a payment security can you imagine how many security updates you get on your iPhone, that's an over there update. Now you do an over there update, you don't have to roll trucks. You're just qualifying that application, you're not having to stitch the whole system together. Can you imagine site management platform, that is now micro services-based. And all of these applications that are running there are managed on the edge and you could then change each application and you could plug and play those applications. So it's a contemporary architecture that doesn't exist for convenience store operators today. So we think that we're probably a couple of years ahead of other folks that may be able to do this, and there's not as many -- we also have many of those other touch points, whether it be car wash or electric charging or for fleet operators who do compressed natural gas, renewable natural gas. So we can do this because we have also, we can do it better because we have many of those other touch points as well.

Got it. And when we think about kind of operating leverage in that business, it sounds fairly high topline growth. How do you think about kind of penetration rates there? What your market share might be? And then what sort of leverage or incremental margin should people expect?

Yes. So on the iNFX that Mark just mentioned, with the 2 large wins, we have about 15% of the U.S. convenience store market. But at the same time, we're in discussions with other customers, both U.S. and international, and we're doing already a few pilots. So this is going to continue to expand. Also with Shell and Chevron what we've provided is the first set of micro services, which is around payments, but they have other pain points other connectivity that over time will continue to expand. The edge device that we have, which provides a cloud connectivity won't change, but you'll have additional micro services that you bring in. And then other things that you might just open up APIs and get a fee for opening up the APIs as they could integrate a third-party application also in there. But really, what we're providing is the site management platform now, which is going to be very compelling and drive a lot of recurring revenue over the future years.

Perfect. I guess when we think about Vontier overall, I think there's a lot of businesses offering good secular growth inside it, not particularly appreciated from the outside yet. Looking sort of added up telematics EV charging in energy applications, kind of in aggregate, what portion of the business does that comprise today?

I think it's about 10% of the total revenue. So it's relatively small, but experiencing very high growth rates.

And in telematics, a few years ago, it was struggling, maybe undermanaged, attrition was pretty high. It seems that that's been turned around the last couple of years. So I guess, what should we expect the growth rate at piece. And also, that seems a fairly competitive kind of space as they were allocating R&D and so on ahead.

So just a little color on your comment. The attrition you're talking about is churn. It's a SaaS business, 95% SaaS. So obviously, you measure churn, and we were churning at 25% in the early quarters of 2020. And we had gotten off track on the technology side. And so it is a competitive market, no question about it, and that's indicative if you make mistakes in that marketplace, it's really unforgiving. So we put the product line on reinvigorated with TN360, which we've launched. We've fixed many of the issues to some churns. It is now much more manageable. We flip the business to up the ARR growth in the year before and last year, we grew at high-single digit ARR and it was the first time we grew organic growth in the business, low organic growth, but it was first time we flipped to organic growth in a couple of years. So turning technology-intensive, once you get behind that power curve, is very difficult to turn SaaS businesses. I think we've successfully turned it. And I think we have a runway of growth in front of us. So we're pretty excited about that. It is competitive, no question about it. So we are looking at ways that we differentiate ourselves by also leveraging our alternative energy capabilities on fleets and having linkages on that, too, because we're a leader in the alternative energy management there. And so we think that, that can offer some differentiation. But you do look at differentiation. We have great differentiation in Australia and New Zealand. We have high leading share there. So there are real pockets of differentiation, which you look to find those because it is a competitive space, but I think we're really proud of the turnaround. We're proud of the management capability to do that, and it represents its underfleet gross margins -- excuse me, not growth margins, underfleet operating margins and growth rates is a runway opportunity for us.

That's correct. It should have mid-single digits growth that average fleet gross margin. So as we continue to expand the runways to improve margin...

Perfect. And reinvestment needs there, like is the competitive landscape kind of settling out now? It seems like a business that will need little R&D, there's some big rivals there.

Yes. There are some large companies that have done really well in that space. And I think the opportunity for us is to continue to offer differentiation where in the markets that we've competed really well, and it's really tough to compete in a market such as Australia and New Zealand, where all about the tax code. There's a lot of barriers to entry to that market, has not been easy. And then continue to build out. We also have a construction footprint that is -- that has been doing quite well. So I think it's important to find your niches and where can you help manage and I think that leverage from the alternative energy side can also be quite helpful. So we're -- I think we've been really happy to be able to turn that business around and demonstrate our capability to do that. And -- but it's a very strong market growth, but you have to be a really good operator in the market like we are.

And then small challenging exposes of the EP space, maybe flesh out a little bit kind of Vontier's approach there.

Absolutely. So we have about 55,000 ports under management or plugs under management, which is probably one of the leading in terms of number of plugs that are out there. Strong leading share in the Nordics, in Europe, in the U.K., in the United States. And we have an asset-light model. So what we offer is somebody who wants to be a charge point operator, the software network to be able to manage their fleet of chargers, the uptime, the payment facilitation, the backing into the grid, the consumer app. So if you want to be a charge point operator, you have a decision to write your own software or you can leverage our network, which is a leading platform out there. And it's on the rate of doubling plugs under management every year. So a very high uptick. And what tends to work best is folks that are trying something for a little while to understand how difficult it is to manage the uptime, consumer interface, the energy management and when they run into those challenges, those are our best customers. And we're also adding folks at scale. So we've been really happy about the progress we've been making in that and we've been making some investments clearly in the network platform, but it's not a capital intensive because we're hardware agnostic. And we leverage the drop in price points of the hardware network -- the hardware this funding on site. And so we think that's a really strong business model. It's interesting -- folks that maybe didn't see themselves as charge point operators are now understand they can be their own charge point operator, like a convenience store, such as I'll say, Circle Pay or even Shell. They originally had invited charge point operators on their site, but the consumer benefit doesn't accrue to them. It accrues to the charge point operator, then they're like, well, our business is really serving consumers and they can integrate it with the rest of their offerings and they can manage conversion. Conversion is going from the pump or from the charger into the store. And they can do that all on the same sale. So in the same loyalty program. And if you want to own that consumer experience, then they decide, well, hey, I can now become my own charge point operator. And then our solution for them is really the right thing.

And where are you on that sort of profitability chart for that business, this is the investment upfront early on?

Really high gross margins. It's great -- Anshooman describe some of the economics issuing on this.

Yes. So really, the 2 large revenue streams for that business are both recurring. We get a fixed fee per port under management of monthly recurring revenue from the ports under management. But then since we're also doing lot of the transactional billing and financial settlement, we also get a transaction fees, our current customers continue to add chargers, the revenue increases as the utilization on those chargers goes up, revenue increases. And then we continue to win new customers and bring them on. When you bring them on, you get a onetime fee within a month, which is a small piece of the overall pie. And as Mark said, these are software gross margins, recurring revenue, it is burning cash from an R&D perspective right now. But as we continue to double this business over the last couple of years and continue to increase in scale. So we see a part to breakeven over the next few years and profitable after that.

And on the portfolio kind of overall, is it fair to say most of the heavy lifting on divestment is sort of behind you and then it's really about acquisitions from here? And should we accept the mobility definition gets most of the M&A.

Well, I think we're always in the market doing market work, strategy work and cultivation across our businesses. I think we love everything we have. We do revisit the portfolio every year as changes occur and -- but we're really happy with what we have at the moment. And the largest market out there out of our $30 billion is the Mobility Technology segment. And it's also pretty fragmented, pretty growthy and we see opportunities also to cross-fertilize with our different businesses, which you have an integrated -- leading integrated solution, other ways to do M&A that bring things together that enhance productivity for our customers or enhance our ability to attract consumers. And so we think it's a really, really great space to do M&A in. We're very disciplined on our M&A front. I think you've seen us say no to a couple of things that have been quite visible if you follow the story, and at the same time, the acquisitions we've done, I think we're showing really strong returns. Our DRB, Invenco in particular are showing returns ahead of what we've articulated the models to be, the double-digit for DRB in 4 years and 3 years will be 20% returns for Invenco. And so we're really pleased with the returns we've made on M&A, and we're constantly looking at it.

And when you do that sort of buyback versus that because there's an imperative action to keep mixing the portfolio up to get that ICE share down, then the valuation is very low. So should we assume this kind of balance between the buybacks and M&A from here?

Well, we have a dynamic model that we're deploying you want to describe that?

Yes. We always deploy [indiscernible] the highest return for the shareholders and paid models, the buybacks and the model M&A. And over the last couple of years, we brought back $400 million of shares at average price of $25 a share. We did Invenco, which was a 20% ROIC at 3 years. And share buybacks are still attractive for us. If you look at our growth rates going forward, look at our EBITDA margins, the free cash flow conversions, we're definitely up there from a multi-industrial perspective. From a valuation perspective, we're probably at the bottom end of the spectrum. And just a 3-turn expansion of multiple as we post our growth as we post our margin expansion and now it's clean growth past EMV. That's free turns is about $13 to [ $15 ] a share. So -- but at the same time, we'll be balanced. We'll be disciplined. We really focus on the markets and then out of way properties, we've said no before. Last year, there were a couple of deals we were looking at. And we did not transact and actually neither of the properties transacted because the seller by a big spread was just too high. So we'll remain disciplined. We have lots of time. We have a great portfolio, the depth and breadth of the portfolio is unique in this space and we'll generate a lot of cash flow.

Perfect. Well, I think with that, we have to switch to the audience response survey. So the first question is around sort of ownership of the stock. So not much yet. Question 2 is around sort of general perspective to the stock right now. Positive but not much ownership yet, which is good. Number 3 is around through-cycle earnings growth for Vontier against the sort of multi-industry average. So about middle of the pack. Number four, is around sort of uses of excess cash. There's a broad list there. We generally buy backs on the whole. Number five, is around the valuation of Vontier in terms of year 1 PE. Generally, you're sort of mid-high teens multiple. And the last question is kind of what's the main barrier holding people back from owning more of the stock. So mostly cool growth still so we will see how the year plays out. Well, great. Thanks very much, Mark.