Vontier Corporation (VNT) Earnings Call Transcript & Summary

Well, good afternoon, everyone. Thanks for being in the room. I'm very pleased to get the show rolling in with Vontier Corporation. And this is the first time I've done a fire side chat with Anshooman Aga, CFO of Vontier. And on stage, we've got Ryan Edelman, who heads up Investor Relations. So this is going to be Q&A. I will come to the audience for any hands in the air for questions from the audience. But let me, Anshooman, kick it off. And I think I was just talking to some in the audience that a lot of conflicting data points out there right now. And I think that you sort of, I think, what you reported last quarter. So I think it's kind of like -- it's almost emblematic what we've seen out there. So we still have a lot of pressure in your retail solutions business in 2023 -- that's now '22 then '23 started growth, '24, and then some pressure in other parts or your portfolio. So that's -- it's a very sort of uneven kind of trends out there right now. So maybe just kind of give us your perspective on sort of the macro. Let's talk about macro first and then we will get into your businesses.

Perfect, Nigel, and thanks for having us here today. So what you talked about the pressure in 2022, 2023, that was the 3 that are bad word that we don't use anymore of EMV. For those of you who weren't familiar with it, we had a big secular driver that started in the 2015 kind of a range and that drove up volumes with a big upgrade cycle as convenience stores went from the swipe technology to the chip technology. And then that run-up basically came to an end and there was a decline in volume. So this year, we're printing clean organic growth, that EMV cycle is behind us. And if you really start looking at our end markets, let's start off with the convenience store, which is about 60% of our revenue. It's our environmental and fueling business. And it also Invenco by GVR business. The end market is extremely healthy. If you look at convenience stores over the last 2 decades, they've grown at a 5% CAGR and they've gone through a cycle through recessions. And if you look at the convenience store, the inside sales post COVID, they've been growing at about a 10% CAGR. So very healthy industry. Also, besides the strength inside the convenience stores, the gas margins are up. They used to be about $0.10 to $0.15 pre-COVID, they are right now running about $0.35. So good gas margins also. So also this industry is very fragmented at this stage and this consolidation happening. If you think about 60% of the convenience stores are owned by operators of less than 10 sites. So we're continuing to see investments not only as the sites become more relevant with modern formats to drive consumers with fresh food, but also consolidation happening. So significant investment and good health of this industry. If we move to another big market for us, which is about $650 million of our revenue with the repair solutions business. Here, we sell to the technician. When you look at the underlying fundamentals of that market, they remain healthy. The age of the car park is now up at 12.5 years. The miles driven is up. The complexity of the repair is increasing. Not only are you bringing more electric vehicles and hybrid vehicles into the car park along with ICE vehicles, but also the sensors and automation that's coming into cars, that's making the car park more complex to repair. And then when you look at the health of the technicians, it's at record levels, employment -- technician employment is up. It's up 3% year-on-year and is at record levels. Technician wages are up about 7% to last year and again at record levels. So overall, the fundamentals are very strong. But at the same time, the technician is a U.S. consumer and U.S. consumers are feeling the impact of high inflation and with energy prices up with food prices up, housing prices up, the technician also feels that. So the technician is more selective in what they buy and that's why product vitality and bringing what's relevant and drives productivity for the technician is more important now than ever. Then on the fleet side, that market remains very healthy. Our customers on the fleet side are not only thinking about productivity and driving improvement, energy being a large part of the total operational spend, but they also have sustainability goals that they're trying to achieve. And as a result, especially on our CNG, compressed natural gas, RNG, renewable natural gas side, we're seeing really good growth. That business has been growing well into the double digits. And it's a $100 million business now, and we think it's going to grow in the teens again this year. And then the final market that we're serving is the ton of car wash space, the car wash is less than 8% of our total revenue. And what we've seen on the car wash side is some of the large enterprise accounts are taking a pause after a few years of exceptional growth. They've slowed down their M&A activity and they've slowed down their greenfield activity to really focus on operations. In the space, in the car wash space, if you think of the smaller regional and down ship operators, those that are running 2 to 40 sites, they have been funding their growth through operational cash flow, they've been adding a few sites a year, and they're continuing to build out because the economics of a car wash still remains strong. It's just with the higher interest rates, some of the larger operators have slowed down and taken a pause. So that market is actually slightly down this year. But overall, when you look at our bigger markets, lots of good strength that's compensating for some of this normalization of growth in the car wash.

Yes. Great. Thanks, Anshooman. So let's breakdown the convenience store between the view in size and the payments and software and some of the automations that you do inside the store. Maybe talk about the payment solutions and where Vontier plays there, why you've got a right to win in that market. And what kind of growth rate you see today and what kind of momentum?

Yes. So we're -- in our Invenco by GVR business, which is really inside the convenience store, we have payment solutions and we have productivity and automation solutions. When you think of payments, think of the point-of-sale payment terminals and some consumer engagement products. And then on the productivity and the automation side, where we're driving enterprise productivity, think of that as automation solutions, asset management solutions and our new NFX platform also. When you think of payments, we see significant growth potential in that business. Our latest FlexPay 6 product is allowing for a lot of things that are not only improving the consumer experience, but also are going to drive revenue yield management. For example, on new FlexPay 6, where we're headed with that is allowing people to order at the pump. So if you're ordering fresh food instead of gassing up your car in one transaction, going in and placing an order for a sandwich and in a second transaction, you can do that in one transaction and really think if your loyalty member personalized experience comes on the sandwich you typically order at lunch while you get gas is already pre-customized, you can pay. And by the time, if you finish gassing up either they could bring it out to your car because it's ready or you could go in and pick it up. You don't have to run multiple transactions. So that drives revenue yield management for a customer, it drives productivity and drives a better consumer experience. Also on FlexPay 6, one of the things we brought to market is over-the-air updates. In the past, you didn't have over-the-air updates. Every time you had a software update for the payment terminal related to PCI compliance, payment card industry compliance or just a regular update, you couldn't do it over the air, you have to roll a truck. Now we brought over the air updates, which will have a recurring revenue stream as we provide that service to our customers. Also, when you start thinking of our customers, as their sites are getting more complex as they're bringing in more and more assets and their labor is becoming a challenge, they have to have this automation and productivity solutions. One, we've talked a lot about is NFX, which is a microservices-based platform where, ultimately, this is going to become a site management platform for our customers where each microservice module can get connected in, you could have the volunteer applications, but you could also have third-party applications that you connect in through APIs and we get a fee for opening up the APIs. So lots happening in this industry. We're at the forefront of driving this innovation for our customers and we believe we're a couple of years ahead of our competition with NFX.

And the growth, what you're seeing today and where you see growth going forward?

We think, this year, this Invenco by GVR business will be growing high single digits, and we think longer term, there's good potential to continue a high single-digit growth in the business.

You mentioned the sort of the multi-transaction nature of the fueling experience. Now I think the [indiscernible] always to try and get the consumer from the pump into the C-store. I now do that, by the way. But I'm not aware that there's that many pumps where you have that kind of transaction. So that's an opportunity, like a big sort of upgrade cycle to come through. Is that fair?

Yes, I think so. Over time, we've just introduced our FlexPay 6 on our dispensers and we're working with our customers, bringing these new functionality and features and what's becoming very important to our consumers because of not only managing the consumer experience, everyone talks about Starbucks, app is best-in-class, not only managing that, but also driving personalized experiences, which leads to higher revenue for our customers. Many years ago, when I was still young, we went to the gas station to get gas. Maybe we bought a coke or something, but now people are going in for fresh food. My kids, they order sandwiches from Wawa and GrubHubs. So the experience and offerings of a convenience store customers have evolved and as they're evolving, we're providing them their technology and solutions to continue to drive good returns.

Okay. That's great. And then does having the full court equipment help inside the store as well as is there connectivity between the 2 sites?

There is -- when you start thinking about payments, there's connectivity between the forecourt and inside the convenience store. When you think about NFX, which will integrate payments in the forecourt, but that's the first micro services. But think about what exists at a convenience store, there's a car wash, they might be EV charging now all the payments of that and the integration that NFX will allow for that loyalty programs. So there's a lot of connectivity and worth we're seeing to drive better productivity and automation for the customers to drive better revenue yield management this connected hardware application software and scaling in the cloud, which is our connected mobility strategy, is becoming more and more important.

Okay. So we do have questions about could you be disrupted by silver value-based payment solution provider. I mean, is that -- it sounds like it's pretty important to have the equipment on the forecourt, the Payment Solutions side is that [indiscernible]?

It is. And also, there are other complexities. The point-of-sale system is doing a lot of calculations around fuel, there's lot of reporting compliance, reporting requirements that's happening and also some of these multinational oil companies have their own payment rails. And our solutions are integrated with that, which is another barrier to increase. So overall, with more integrated solutions, more complexity, we have more varieties to enter it.

So when you go into the painful correction, I don't want to use those 3 [indiscernible] word again, the EMV correction from 7 million, down to 300 or so. It felt like it's never to recover out again. It felt like we actually have a debt cap might just be steady state or maybe decline from there. We saw growth leadership from the -- your Environmental Payment Solutions business in 1Q '24. It sounds like it's going to continue through this year so, how do we think about the growth potential for beyond 2024 for your payment solutions portfolio?

Yes, we have a multiyear growth cycle for our fueling equipment. When you think about it, there's continued build-out of new sites, and that's driving revenue. Most of our customers have multiyear plans when you talk to any of our large customers, they're planning out multiple years with their site build-outs. There's consolidation, which, as I mentioned earlier, bodes well for us. Also, at the same time, the average life of our dispenser is 10 to 12 years. So think of all those EMV dispensers that went in starting in 2014, 2015. All of those will come over the next few years are going to -- there's going to be a replacement cycle. In our earnings -- Q1 earnings slides, we actually had a slide, which showed that the replacement cycle will be about 5% growth over the next decade. Also, at the same time, there's continued regulation. There's regulation related to payments, there is regulation related to underground equipment. From a payments perspective, while there isn't a super cycle like EMV, there is continuous upgrade cycles, PCI 2, the payment card industry standard 2 will be sunset by 2027. The first EMV dispensers that had shipped out with PCI 2 readers. So those will get replaced. Countries around the world are looking at fiscalization, which is another way of saying preventing tax fraud. So that's requiring payment updates. When you go below the ground and its vapor recovery. And then in the U.S., we're in the early stages of a tank replacement cycle, 30, 35 years ago, the underground tanks, which we don't make, used to be steel, and there was leaching [Operator Instructions]of gasoline into the groundwater, EVM and a double-walled resin-based tanks. And their useful life is about 30 years after that, insurance becomes hard. So all of these tanks are starting to get replaced. And while we don't provide the tanks, we provide the intelligence, the sensors, gauges, the submersible pumps that go with a tank, and we're in the early stages of the time replacement cycle, which is good for our environmental business. So lots of legs to our environmental and fueling business, and we feel pretty good about this business.

And they can't just reuse those pumps. They have to replace those pumps for good as well?

All equipment has a useful life. So for tank has a 30 year useful life, there's probably a mid-cycle replacement for equipment and then at the end of the cycle other replacement of our equipment.

So you just painted a pretty broad picture on EFS. I mean -- if we think about, I don't know, 5% growth of the portfolio, is it -- would it be a stretch to have seen that EFS is not going to grow that big?

For this year, we said EFS will be mid-single digits plus growth. So definitely, for this year, we're going to see good strong growth. But longer term, also, we feel very good about this business.

That's great. Switching to the franchise tools business, we saw SAP really struggling in the quarter. You guys did well, but certainly the growth was [indiscernible] below single-digit level. Maybe just talk about the fundamentals are still good in this business, but you've seen some pressure as the consumer gets the higher rates. Maybe just talk about how you see this business evolving next several quarters?

Yes. So one thing I'll also point out before I talk about where I see the business heading. Last year, supply chain started normalizing in the beginning of last fiscal year. For the first 8 months or so, we saw benefit from easing supply chain environments, and we were able to serve our backlog quicker, which accelerated some of the growth last year. So it's a tougher compare for the first 2.5 quarters of this fiscal year. Having said that, underlying fundamentals of the technician and the industry remain very strong. But as I also mentioned, their U.S. consumers and U.S. consumers are feeling the impact of higher inflation. So they've become more selective about what they're buying. If you can drive improvements to their productivity, they're still buying, and that's the benefit of our business model. We aren't vertically integrated. We leverage our supply chain and, as a result, we can spend a lot of time bringing in new products to market, and we measure that in terms of product vitality. And a 1-year product vitality is about 25%. So 25% of what we sell is new to market that year, which is a benefit for us. Also, over the years, we're able to add the number of franchisees. We still have about 30% of the market unserved from a franchisee count perspective. So we continue to add 1% or 2% franchisee growth every year. So we're continuing to focus on that. Inflation is coming down. I think that will correct this year, we've said low single digits growth for our Matco business. But mid- to longer term, we still believe this is a mid-single-digit growth.