Vontier Corporation (VNT) Earnings Call Transcript & Summary

[Audio Gap] industrial analyst. And for me, this is the last presentation of the day, and we have Vontier, which is our U.S. One name, which means it's on the best ideas list. And with us, we have Mark Morelli, President and Chief Executive Officer; and Anshooman Aga, Senior VP and CFO. And the format is going to be we're going to go just to fireside chat format. So thank you very much for being here.

Thanks for having us, Andrew.

Yes, of course. No, thank you.

So yes. So maybe I'll start out with a question on broad market. So Vontier operates in defensive markets, C-stores, auto repair, fueling. But you are seeing an improving -- a set of improving orders with book-to-bill over 1 in first quarter versus slightly below 1 last quarter. So what products or end markets are seeing improved demand?

Yes. So Andrew, we saw good order growth up mid-single digit. And I would say that it's a broad-based inflection that we're seeing across our businesses, but in particular, our Mobility Technologies was above 1 and our Repair Solutions segment was above 1, probably a little bit earlier than we expected. We had indicated in Q4 of prior year that we thought we would see an inflection above 1, but it's great to see it happen sort of right out of the chutes in the first quarter. I think what we're seeing is really the play out of some secular drivers. We've been talking about the strength of the convenience store format. There is continued build-out of that infrastructure, where the large national and regional players are very profitable. They continue to expand through both new sites as well as through M&A, and we have a leading share in those positions. So we're definitely seeing the uptick for our products along those lines. And so I think we're pretty excited because I think it's the strategy we've been talking about, which is this connected mobility strategy where we connect smart hardware, application software and scaling on the cloud. We have a number of offerings around the convenience store space that we're selling into that, and it's more of an integrated solutions play. And I think we're seeing it both on the aboveground dispenser side for environmental fueling, belowground with the environmental -- excuse me, aboveground dispenser side as well as the belowground environmental fueling side as well as in the mobility tech side, where we've got a number of businesses that leverage that. I would say the other area of growth is around fleet operators. Fleet operators are looking for multi-fuel solutions, are looking to decarbonize. We have a business in there called ANGI that is $100 million business, but is posting consecutive year-over-year really strong growth...

Yes, I'm going to ask that.

So I think these are the things that we're seeing that encourage us to say our strategy is working, and we're seeing good growth and margin improvement as well.

And then I'll just ask '24 core revenue guidance is right in line with your medium-term targets, both at 4% to 6%. In first quarter, you did tweak your outlook for the Environmental & Fueling Solutions segment up a bit. That's now mid-single digit or better. So what change in customer tone, order strength or macro to make you see possible upside there?

Andrew, as Mark mentioned, what we're seeing on the convenience store side has continued strength in that business. If you think of convenience retail over the past 2 decades, it's grown at a 5% CAGR. And that CAGR has actually accelerated post COVID, where they've grown about 10% a year. And they're bringing in fresh food and the formats are getting more modern. So they're bringing -- putting in more investment in there. Fuel margins are high, which also supports their investments. Also, this industry is pretty fragmented. When you think about 150,000, 160,000 convenience stores, about 60% of them are owned by operators of less than 10 sites. So there's continued consolidation happening. And as the large national and regional chains consolidate, that bodes well for us because we have a stronger market share with these players. On top of that, there's continued regulation that drives growth. For example, there's underground environmental regulation, the U.S., we've talked about the tank upgrade cycle but also vapor recovery around the world. Payment card industry standards keep changing. So PCI 2 payment card industry is sunsetting and PCI 6 is now the latest standard. So all of these drivers are helping us to see good investment in this business and that gave us confidence to tweak the guidance up a little bit.

Excellent. And then just -- this is just a little detour. So you sort of talk C-stores, auto repair and fueling, right? So as I think about the ecosystem, and Ryan probably will do a much better job here. But -- so the idea is, so you have the C-store. So that's the convenience store at the gas station, right? And there, you offer software and payments that ties the store to the rest of the gas station. And then you have hardware, software and payments. And so maybe the guy who owns the gas station, maybe he owns a car wash, that's adjacent, right? And then you also provide automotive repair tools at Matco, so maybe there is if you think like this station, there is a shop on site, right? And then the core business, environmental and fueling solutions, you will also, right, you'll have the fuel dispensing, fuel storage. And then as I said, you also offer the software that ties it all together helps you pay for the stuff, helps you order the stuff and it helps the convenience store. So if I go and have to pay for the gas inside the store, you will manage that or if there is like a screen that tells me to buy a sandwich because I have a loyalty card, right, and you manage it. Is that the right way of describing your ecosystem? Did I miss something?

It is. And I think let me just try to also compartmentalize exactly what you're saying. So we see retail solutions around the convenience store where as a consumer, you might interact with that. And what the folks that own these large, very successful chains are trying to do is they're trying to offer customized consumer preference like you when you go in there, they want to own you with loyalty. They want a seamless transaction. They want to offer you your price at the pump based on your loyalty. They want you to be able to order food and have it delivered curbside. They want the car wash in the same transaction. And the tools and capability be able to manage this from a consumer preference perspective were not there. The other thing they're trying to do what you're talking about, is they're trying to manage this infrastructure more productively. As Anshooman said, it grows top line, but it's difficult to manage this. And so by having these integrated solutions, you can do an over-the-air update for security, a payment instead of rolling the truck to be able to have to do a security payment. So just think of the productivity benefits they get out of a more modern microservices infrastructure. And so that's one segment. The other segment is fleet operators because fleet operators are also looking to manage their fleets more like waste management, is a greater WM is a great example of that. They're also looking on how to decarbonize and how to be able to manage that. We have products and offerings to be able to do that, that are also market-leading products and offerings. And then the third segment was on the repair technician side, where they're trying to be more productive because of the complexity of repair, aged vehicles that are getting more -- people are not buying as many new vehicles today as they are and they're stretching out the life of the vehicle, the complexity of repair is going up. So these are the 3 segments that we think about with the drivers behind it.

And just to focus, and then I'll go just to set the stage. You've also noted -- it seems that being a business selling gas is quite a bit more profitable these days than it was 5 to 10 years ago. How sticky because the whole ecosystem is more profitable for the operator. how -- A, is that a correct statement? And B, how sticky is it?

So I think it's a great question. And in fact, I've met with some presidents and CEOs of these large convenience store chains recently and ask them exactly that same question because these are the folks that are dispensing the fuel. And I think they get that question quite frequently. I think what has happened in the industry. So first of all, there's been -- there is more consolidation. But I think these successful formats are also building out as destinations where people want to stop because of there's a sandwich offering or drink offerings or the format of what they've got with clean restrooms or place where they might be able to stay and charge their vehicle. It's also, they're looking for something else other than just a tank of gas. And as that has expanded over the last couple of years and very successful franchise like Wawa is a great example, has a following. And they want to enhance that following and folks are not looking -- the entire industry is not looking out on how to discount fuel.

Right. No, I was driving through Texas and like my friend just made me stop at Bucky's and like -- and he said, look, how many kinds of beef jerky they've had? And literally, that was a destination.

Yes. That's a mandatory stop, by the way, and a great customer of ours. So I think it's -- these are the kind of things that the industry is now undergoing, which is why these folks are looking several years out on building their infrastructure out because they are -- even in downturns, this has done well. And so these folks are -- and the fact that we have leading share here, we've got more than 60% share of dispensers in the United States with the leading players. And so the benefit [indiscernible] as they build their footprints out as they consolidate other players, and it gives them confidence even in downturns, folks might trade down to a convenience store offering. And so that they're still bullish on their build-out plans looking at the future.

Okay. So having set the stage because I think -- just I think the end market is quite interesting, let's sort of dive into software and payments opportunity, right, which is the fast growth and clearly, you've outlined in your slide decks, but I think it's the part that's really underappreciated. So I think, Vontier's installed base includes, I think, we estimated 50% of all the U.S. fuel dispensers. But on the payment side, your share is 15%. So could you walk through what has changed in the market? And how Vontier is actually winning share in payments?

Yes. So just a little...

And the 60% number, is it for...

It 60%.

It's 60%, so the install is 60%.

Right. And the payment number is roughly correct, around 15%. But I think what's happening and what's changing in the industry is folks are looking for new capabilities to be able to manage that infrastructure more productively. And I make it -- I make an analogy with Industry 4.0. I think people have recognized that on the factory floor, you can get benefits by connecting your smart hardware application, software and scaling on the cloud, and there's productivity for it. But I think what we're seeing, Andrew, this is mobility ecosystem 4.0 that people can envision. But in today, it only exists as mobility ecosystem 2.0. So they're looking for these solutions, particularly around the payment side. So think about this. There is a regulatory payment regulation that's being rolled out. And by the way, they're constantly being rolled out. And as it gets rolled out, you have to actually, with the existing infrastructure that's in place, you have to roll a truck for an on-prem upgrade to the regulated -- the new regulation, and you have to recertify your entire monolithic software that's all stitched together, which includes your car wash, your in-store payment system, you payment regulation at the pump, all of that has to be recertified. So it's very laborsome and of course, we all know labor costs are going up, and it's very slow to be able to update. It might take 12 months, 18 months to recertify that whole system. With now a new microservices application-based software, you can -- you may only have to be able to make that one application updated to comply. And then the whole system is modernized. So that -- and you can do it over the air. So it's just making it more contemporary. So what is changing is the ability to bring this technology to an industry that needs these productivity solutions.

So on the last call, you said, and I think iNFX is like so interesting, you had several iNFX pilots running both U.S. and internationally. So have you got software versions ready for EU, Canada and India? And just to put in perspective, last year, you won Shell and Chevron here in the U.S., 21,000 locations, which takes your market share up very, very meaningfully. So are the current pilots as meaningful?

We have pilots underway in Canada and European countries. These are progressing well. I think they're off the backs of, I think, quite successful rollouts with Shell and Chevron that are ongoing as we speak. And the benefit of writing this in applications is a lot of that is reusable software and the same. But there has to be some tailorization to specific fiscal issues related to or government regulation issues related to by country. But you have a lot of that already written in microservices in the application itself. So we are making those as we're bidding out as we're putting in these pilots in different countries, we're currently in the process of doing that. So I think the architecture lends itself for expanding internationally.

And how long would it take -- just remind us how long would it take for Shell and Chevron to ramp up? And what share are you going to have once it at scale?

So Shell and Chevron, those are U.S. contracts and all the sites in the U.S. are going to have iNFX platform implemented. The rollout is going on as we speak, it's going to ramp through the rest of this year and into next year, but a large part of the 21,000 stores we won will be done by this year. And as implementation happens at a site, the recurring revenue starts at the same time.

And what's the revenue recognition method?

So when you think of these large contracts, these are 4- to 5-year contracts, about 80% of the revenue is recurring over the 4 to 5 years of the contract duration and 20% is the edge device, which is the hardware revenue, which we get upon shipment of that device.

But basically because it SaaS there's going to be -- it's going to roll...

It's a monthly recurring revenue [ 42% ]...

You're going to report it sort of -- there's going to be a gradual buildup?

Yes.

Okay. And then Vontier is already the #2 point-of-sale software provider to convenience stores. This is the software inside the store. Does winning the payments side helps you in winning point-of-sale inside the store?

It definitely helps us. When you really think of system architectures having one seamless system architecture helps. So as we go win share with iNFX, our customers over time as they think about replacing the point-of-sale system, will be talking to us because of the seamless adoption and capabilities of having an integrated system that we would be able to provide.

Excellent. So maybe -- so this is -- we started with a really exciting stuff, but -- so maybe we'll talk about DRB, which is car wash software and payments, just put in perspective, what, 8% of revenues.

That's correct.

So yes, so this is software and payment solution for car wash operators. What's changed in the market backdrop here? And what's your outlook for '24?

Yes. It's still exciting stuff, Andrew, DRB. So DRB has -- since we acquired the company about 2.5 years ago, it's experienced exceptional growth. It's grown over 50% in the 2.5 years that we've owned it. And what we've seen after this period of exceptional growth is some normalization of the growth and especially around our large enterprise customers where the -- over the last 2 years, built out rapidly, and they're taking a pause to digest and really focus on operational improvement. . At the same time, when you think of the regional and township customers of ours, think of these people as operating 2- to 40 site tunnel systems, these people are continuing to expand. They're continuing to grow. They funded most of the growth through operational cash. We're -- also we're seeing good growth in this business. Also, about 40% of the DRB revenue is recurring in nature, and we're continuing to see growth in this recurring revenue. And then we've also recently a few months ago, launched our Patheon solution, which is our latest cloud connected software platform for tunnel car wash operators.

All right. So just to reaffirm, so 40% of DRB's revenue recurring software and payment fees and you said that part continues to grow, right?