Vontier Corporation (VNT) Earnings Call Transcript & Summary

All right. I think we're on. Great. I'm [ Will Dodson ]. I'm from Morgan Stanley. I'm delighted to be joined today by Mark Morelli, who is the President and CEO of Vontier as well as Anshooman Aga, who is Senior Vice President and Chief Financial Officer; and Ryan Edelman from IR here as well. And we're going to spend the next half hour or so talking about the Vontier business.

Let me start with just a bit of a preamble and set the stage because I think it's a timely discussion. It's been 4 years since -- almost to the day, candidly, since Vontier spun from Fortive. And I would say some elements of the transition have been more visible to those of us on the outside than others. Lots going on, a major product cycle downturn with EMV. You spent the last several years reaccelerating growth in operating margins across the portfolio, lots of investment in R&D, leadership changes. And at the initial stages, I would say, of a multiyear portfolio shift. So when you step back and think about all of that, where are you in that journey? What inning? And how do you think you want to position the company for the longer term? What's sort of the end state?

Yes. Well, look, I think it's been a really interesting journey since spin. I think there are a lot of transformational work. I think one of the more salient things to bring out here coming up on a 4-year anniversary is I think the portfolio is significantly different. We've certainly repositioned it through some acquisitions through organic revenue growth as well as through divestitures. But I think the thing that was one of the more harder things to do in the face of everything that you discussed was how to bring this set of assets into focus by which there is some real ability for it to work together and you can create a network effect and create a more growthier profile. So let me kind of describe that maybe put that in a nutshell for folks. I think we've -- we articulate the market that we serve is the leader in the mobility ecosystem. And if you haven't thought about this, it touches people's lives every day. And it's the critical infrastructure, both physical and digital by which vehicles stop and get fuels, recharge, service, repaired and consumers like you and I stop and get your essentials. And there's really 3 verticals that this applies to. The first one is the convenience store stop in your local neighborhood or your truck stop along the highway. I think you all recognize that, that format been changing. There's been a lot of investment going into that. And we are either the #1 or #2 of this critical infrastructure in each one of our businesses where we sell to that space as a technology provider. The second vertical is on fleet management and fleet depots where if you think about this as commercial trucking to even like a plumbing contractor in your local neighborhood or UPS or waste management, all of these vehicles are undergoing the same transformation in the mobility ecosystem. And the third vertical that is relevant here is around vehicle repair, truck and car repair. And so those 3 verticals are also benefiting from a set of secular drivers that make them really growthy and very attractive. The first of which is it's no secret to anybody. It's all -- we're all going through an energy transition and that energy transition is about sustainability. It's about affordability of energy and it's about energy security. And when you look around the world, the pace and rate of that is ebbing and flowing, whether it's electric vehicles or hydrogen or folks are continuing to use petrol and diesel. So that's one secular driver that is very, I think, accretive for our business. The second one is the complexity of this infrastructure. It is receiving a lot of investment, just read the news about Wawa or QuikTrip or Sheetz where they're building out their footprint. And folks are going to this more attractive space, which is requiring a lot of investment and infrastructure spend that is going into it, but that means that it is complex. There's also a lot of acquisitions that are going. Industry is consolidating. The larger folks are buying smaller mom and pops and this adds also a lot of complexity to that. And then the third one is that there is labor challenges. And if you think about labor challenges, pretty much any of this infrastructure I'm talking about is probably at the top of the list in terms of labor turnover. In a C-store space, labor turnover on average is 140%. And so folks struggle with how to manage this infrastructure. And when you're #1 or #2 in the most critical verticals here, you are meeting the high-value problems to be able to provide a more productive set of tools and capabilities and they're trying to attract consumers to their site, which involves a network effect that we are, I think, finally now been able to put on the table and be able to demonstrate growth around.

One of the things, Mark, you've talked a bit about that I find super interesting is the strategy around connected mobility. Talk about the role that plays with this go-forward vision for the company?

So the way that we articulate how we're solving our customers' problems in this space is what we call the connected mobility strategy. And this strategy is about connecting smart hardware, providing application software and scaling on the cloud software. And when we spun, it was about -- we've increased our recurring revenues about 10 points across our platform. We have more than 1,000 software engineers. At the same time, the problems that we're solving are problems that we are able to solve more for -- in the sense of a digital transformation. If you talk to some of these -- heads of some of these businesses, they are all wrestling with how do their tools and capabilities, which, by the way, underserve, where they are in terms of their development and their infrastructure build-out. And when you can start providing a leading system, whether it be the leading system on a car wash solution, leading system on a petrol-based dispenser with a payment kit, the leading point-of-sale system, leading in-site management software, the leading fleet management dispensers, both compressed natural gas, renewable natural gas going to hydrogen. When you're providing all these, then the ability to connect this and manage it and cross-fertilize is really relevant. Let me give you a customer problem. You go into a convenience store, and you pump gas, that's on 1 track, that's one-on-one transaction with a payment transaction. You go inside the store, that's on a separate transaction. You do a car wash that's on a third transaction. Why isn't that the same payment kit, why isn't that the same payment transaction? Why isn't it all accrued to their loyalty program? It seems basic. Why can't you order phone -- food ahead and have delivered curbside? All these things are pretty basic to be able to provide. And since we're the leader in all this space, we were able to provide a microservices-based platform where you can share APIs across the infrastructure, you can provide site management. That's a huge productivity benefit for folks in this space where there's nobody out there. It's highly differentiated based on what we're able to provide.

Well, why don't we use that as a jumping off point to talk about the portfolio in a little bit more detail. And I think a great place to start, just given that discussion is in Mobility Technologies. So you went to a new reporting structure about 1.5 years ago. I think that's clarified the company's operation and business units tremendously. Mobility though, there's -- in MT, there's still a fair bit of complexity to that business, several different segments. Why don't you talk a little bit about how you see the clarity in that particular portfolio and then we'll get into the other 2 segments in a second, but how the segment for MT differs -- sorry, the strategy for MT differs from those other 2 segments?

Yes. Our Mobility Technologies segment really serves 2 end markets that serves the convenience retail market and then the fleet customers of ours. And the common thread across the portfolio is the connected hardware application software and scaling in the cloud. We're a market leader and a technology leader in this space. And through our digitalization efforts, we're driving productivity and automation for our customers and also bringing in a better consumer experience. So taking the convenience retail space, we have our Invenco business in that space, which provides point-of-sale, payment and enterprise productivity solutions for the convenience store. We're a clear market leader and one of the simple examples, from just this morning, we had a press release around Costco in Canada, where they're taking our payment solution and our site management or enterprise productivity solution, iNFX, and launching that across all their sites in Canada. We do the same thing on the car wash site with our DRB solution where we have a deeply embedded point of sale and control software. And we're the clear market leader, 17 of the 20 largest tunnel operators in the space -- tunnel car wash operators in the space use our solution. And then for EV charging, we provide the network management software. And we're a leading provider of the network management software and energy management for the site. We have over 85,000 plugged under management, making us the second largest provider of the software in the space. On the fleet sites, we're helping our customers through their decarbonization journey. Significant piece of the emissions are from fleet and all our fleet customers are working on their decarbonization journey. We do believe in a multi-energy future and as they're planning out their fleets and moving towards a mix fleets of diesel, CNG, RNG or even electric vehicle, how do they plan, how do they manage their fleets through a single pane of glass, and that's where our solutions come in. We have the leading CNG, RNG provider dispensing solution in the space with ANGI. We're also in the hydrogen space now. A perfect example is waste management, where we provide the substation for RNG -- CNG RNG today for 22 of their locations. And then we have a telematics business, which is helping our fleet customers also call Teletrac.

Well, let's talk for a second about Invenco. Mark gave a good example of the convenience store problem set. This is where a lot of the activity in your business is taking place around the convenience store. You mentioned, Anshooman, the recent win in press release this morning around Costco. Talk a little bit more about what's going on in that particular business. How you see the C-store evolving, some of the other things that you guys are doing there, some of the other developments?

So as Anshooman was saying that an important part of this infrastructure and capability is around how we provide these tools and capabilities to the C-store owners? So just a little bit of history. This business, there was a kernel of this when it spun. But it was embedded in part of GVR, but it's essentially a connected smart hardware and software business, so essentially a software business. And it was not growing. It didn't have the investment for growth. It didn't have the structure for growth. It was very siloed out geographically because we sell these products around the world, like point-of-sale system and convenience store is actually different in Spain than it is in the United States or in the Middle East. And so a very siloed, very fragmented, not getting growth investment, not getting -- have the growth infrastructure. So what we did was we performed this into a business, it's roughly $0.5 billion business, credit leadership from the outside that has technical leadership, pulled it out, has a direct report into myself and be able to invest with the right leadership and management team for a software-enabled business. We did an acquisition called Invenco, which -- that will be a 20% return on invested capital in 2 years, and we rebranded this business, Invenco, by GVR. Now last year, this business didn't grow. But what's happening is on the launch of the FlexPay 6 payment terminal as an example or iNFX site management software, which, by the way, we've rolled out to more than 10,000 sites at Shell, and we've rolled to -- and we're rolling out to 8,000 sites in Chevron. What Anshooman just talked about was a combination for Costco in Canada of not only the FlexPay 6 payment terminal, but the iNFX site management software. So all this capability is coming to its [indiscernible]. So last year, it didn't grow. This year, it will post really healthy growth on the backs of that, and I think demonstrates the fundamental change that's happening there. We're also consolidating the software platforms into a software factory. Most of that work is being done out of design centers that we're building actually in India and a lot of the software activity and growth is happening there. But a couple of other things to highlight. We've talked about ability for security of payment. We have in the Middle East, a leading offering called VIS or vehicle identification software. This is where the vehicle itself will identify with the user and when you're dispensing fuel, that's a highly secure payment. We're rolling that out in an another country in the Middle East. And so these type of payment security issues are big. These regulatory drivers are happening all the time in the industry. It drives our industry forward. There's a great societal benefit from that. And in developed markets, it's great. But also in developing markets, it's advancing a lot too. And this automation capability is a real capability that we see long term with a strong secular driver, where we are building out with great investment and we think excellent traction, which we're articulating mostly right now through press release, but this year will post really strong growth.

Another part of that Mobility Technologies portfolio that has grown significantly over the last couple of years has been the alternative energy business, I think, 20 plus in the last -- over the last couple of years. What do you see driving long-term growth there? Is that fundamentals in place -- are the fundamentals in place for that to continue?

Yes, they are. And when you think about this business, what it really is, is it's the ability to serve fleet managers and fleet depots with their technology to decarbonize. So the transportation industry today in the United States represents about 30% of the greenhouse gas emissions that are occurring. And less than 1% of commercial fleets are decarbonized. So you can imagine the pressure that these fleet operators are under to decarbonize. But it's very complicated for them to do that. They all have mixed fleets. They all have different routes. If you're a small fleet operator or if you're a major long-haul trucker, you're in a completely different profile. If you have a municipal government-owned fleet, it's very different. So the fabric of how do you make progress with a trusted partner is a really big deal. And so the businesses that we have, ANGI is one of these businesses where we're the leader on compressed natural gas, which is now going to renewable natural gas. We've just launched a line of hydrogen. Of course, we offer electrification. I'll talk about the electrification here in a second because we're actually the leader in providing that. And so for fleet operators to put this on a single pane of glass where they're able to manage this productively you have a trusted partner. Waste Management is a great customer of ours. UPS is a great customer. These folks all need this partnership and capability. But if you look back over a couple of years ago, this business has now doubled and that same connect, manage, scale part of for a fleet operator, it's a high-value problem for them where we're playing a critical role.

Well, you mentioned electrification. Obviously, big shift -- sentiment shift around EVs just in the course of the last year. Talk about the impacts of that on your EVolve business and what your outlook is for that going forward?

So the way we think about the energy transition, like we said, it's a trilemma. And there -- what we're seeing happening with electric vehicles is a more sense of reality in terms of adoption rate. But we serve the electric charging market, and we've been working pretty earnestly on this since spin. And we've emerged as a network software provider that has, by the end of this quarter, between 90,000 and 100,000 plugs on our management. So it's probably #2 worldwide from high-speed plugs under management or even a level 2 charger. And this is on a rate of doubling the monthly recurring revenue. It's a SaaS business every month. So the issue for us is that we see that there are certain markets like the Nordics in Europe, where 95% of vehicles sold today are electric vehicles. And they're reaching very high percentages of the car park that's already electrified. And we have about 80% of all public chargers under management with our network software from EVolve today. That's great. But in the U.S., there will be places in the U.S., it will take a lot longer to reach electrification rates. And I think the benefit with our portfolio is that we benefit with whatever rate and pace a certain geography might require in order to decarbonize and be more sustainable. We have the solutions to be able to lead them towards a more sustainable future with the right kind of assets. So -- we're really happy with where we're positioned in terms of portfolio. I couldn't have said this certainly at spin because this wasn't part of our portfolio then. We now have a turnkey electric charging, high-speed charging offering with our partnership with SK, where we're combining our network software with that turnkey. We launched that this summer. We have about $100 million in the pipeline. There's a really strong uptake in that with NEVI funding in the United States. That's part of the infrastructure build-out. So I feel like we're at a point where we can have the right solution for the markets that require those solutions at whatever rate and pace that they're going to decarbonize at or electrify. And I think the portfolio is in a really good position to be able to recognize growth based on that.

Great. Right. Before we get into fueling and Matco, we just -- now that we've wrapped our Mobility Technologies. Let me see if there are any questions in the room before we go into the other segments. Why don't we talk -- why don't we then start on retail fueling? Yes, this is the business that's obviously been challenged by -- or you guys had to rise to the challenge of the EMV down cycle. Talk about, now that that's behind us prospects for growth, how are you feeling that, that business is positioned?

So when we think about our fueling business, it's a global business. It's both aboveground dispensing -- dispensers that all of you recognize when you dispense fuel, but also the underground and the associated software that goes with that and also the payment technology that goes with that as well. That business is fundamentally driven by regulatory drivers, whether it be vapor recovery for sustainability, whether it be security or payment drivers. And we live in a more regulated environment now than we ever have before on a global basis, whether it be a vapor recovery going through Mexico, whether it be security, payment adoption in Brazil where the dispensers are being replaced -- the Costco announcement that we made earlier today, that was fundamentally driven because in Canada, there was something called the payment card industry version 4 that is being sunset as a payment security standard in Canada, and that's not being extended. That payment security offering gives us an opportunity to advance with a more modern architecture, but the major -- the underlying driver there is security of payment. This step folks is not going away. We're in a more regulated environment globally than we ever have been before. And these regulatory drivers are constantly driving our business forward. On the underground side, very growthy businesses. Our Veeder-Root brand, it competes extremely well at high margins, growthy business. Last year was experiencing some destocking that we had talked about. This year, we're out of that. We've launched new offerings like a new submersible pump, which is at 4 horsepower. The relevancy of that, it's bigger because there's certainly more larger underground tanks that are going in. This enables us to be more cost effective. We have a new automatic tankage that has the world standard for vapor recovery. So all this innovation means that we've been gaining share in the marketplace, both domestically as well as internationally, outstanding business for us. So -- now we're post-EMV. That was a major secular driver. But now you have all of these smaller drivers that are happening for regulatory drivers around the globe. And this means a pretty stable growthy, very profitable business, where we're also being able to expand already healthy margins. So we really like that business. It's an oligopoly. So there's really only a couple of players in the market worldwide. So it's very disciplined, probably not a lot of new entrants coming into this market as well and our investments, I think, are paying off as you can see pretty good share gain trends that we've been able to stack up in this industry.

Okay. Final segment, Repair Solutions and Matco business, another legacy part of the portfolio. Fundamentals there seem to be intact and supportive of certainly near medium-term positive performance. Talk a little bit about how you're thinking about that business and what you see as the near-term trends?

Yes. Well, the underlying fundamentals for car repair are extremely strong. When you look at the average age of the car park, it's up 12.6 years. The sweet spot of repair of cars is over 5 years. So that car park is increasing. When you look at miles driven, that's the complexity of the car park with electric vehicles, hybrids, along with the ICE vehicles is increasing. And then when you look at the technician, technician wages are at record levels and technician employment are at record levels. So the fundamental backdrop is extremely strong. At the same time, the technician who buys our tools is a U.S. consumer and they're feeling the impact of high inflation, high interest rates. So what we've seen is, at this stage, there's a little bit of a slowdown where this -- they're not buying discretionary items at the rate they were buying. We've seen quarters -- a few quarters in a row where we were selling discretionary items like toolboxes, high-priced items at double-digit growth. And that kind of turned in the second quarter, especially late in the second quarter. Having said that, we feel this is a great business, and we'll continue to drive product vitality, which allows us to continue to grow share in this space. But also from a longer-term perspective, we think it's a mid-single-digit kind of growth business. When you really look at it, there's 3 levers for growth in this business. First is same-store sales at constant prices. We should be able, through our product vitality get about a couple of points of growth from that. Additionally, about 30% percent of the routes through our franchisees are unserved right now. And we're adding a couple of percent of growth by adding new storefronts or new franchisees every year. And then we should be getting 1% to 2% of price every year through just power of our Matco brand. So at the end of the day, this business should be a mid-single-digit grower for us. Longer term, right now, we are seeing some of the impacts to our technicians, but we feel good about the business.

Okay. I want to ask one last question about capital allocation in a second. But before I do that, let me open it up to the room as we wrap up the portfolio discussion. Okay. Well, let's -- then let's finish on capital allocation. I think after Q2, you guys signaled a clear -- there was a clear signal that preference is going to be for share buyback. Does that mean deals are off table for the foreseeable future? Just talk about capital allocation priorities going forward?

Yes. Deals are on top of the table. But our capital allocation very intentionally is, how we describe, dynamic meaning that we always go towards the highest return option for our shareholders. We're very return on invested capital focused. We believe we're trading significantly below the intrinsic value of our shares and below our peers. And as a result, share buybacks are a great return and use of capital for us. And what we said for the back half of this year, Q3, Q4, the majority of our cash flow will be deployed towards share buyback. For Q3, we had $100 million ASR that we've executed on, and we'd expect more share buybacks in the fourth quarter. Having said that, we're very active in cultivating our M&A pipeline. It's very strategy-led. But think of it more bolt-on kind of transactions. But we're going to remain very disciplined and very returns focused. We generate $400 million to $500 million of free cash flow a year. So over the next 3 years, about $1.5 billion of cash. And between buybacks and M&A, I think we will deploy with high returns. And looking back over the past 3 or 4 years since spin, we've generated about $1.7 billion, $1.8 billion of cash, and we've deployed 100% of that cash both through acquisitions and buybacks. And on a cumulative basis through end of the second quarter that was already at double-digit returns. So we are building as a young company, a strong track record of deploying capital with high returns. And that's what we plan to do with having our dynamic capital allocation policy.

All right. Well, since we got 51 seconds. Talk about balance sheet supporting all of that leverage targets based on where you are today, where you'd like to get to, how you see that evolving?

Yes, our balance sheet is pretty healthy. We're at 2.7x net leverage. We're split rated today. We've got 2 of the agencies at investment grade 1, a notch below with a positive outlook. So as our EBITDA is going to increase, that's a natural deleveraging event and we generated a lot of cash. Our portfolio, while it's not recession-proof, it tends to do well through recessions in the past. And we feel pretty confident in the ability to generate a lot of cash every year. And so we feel pretty comfortable where we are with our balance sheet.

Perfect. It's a great place to wrap. So Mark and Anshooman, thanks for joining us.

Well, thanks for having us.