Vontier Corporation (VNT) Earnings Call Transcript & Summary

Good afternoon, I think we'll go ahead and get started. Welcome to the session for Vontier Corporation. I'm Rob Mason, the senior analyst at Baird, covering advanced industrial equipment. Very glad to have Vontier with us. Vontier is a global provider of mobility technologies, delivering productivity and automation solutions throughout the ecosystem. The company's portfolio is overlaid with a proven business system, experienced leadership team and a culture of continuous improvement. With us today, we have Anshooman Aga, who is the CFO of Vontier, who's going to be able to take your questions as well as mine, we'll get started with those in just a moment. If you do have any questions, feel free to shoot those up at we're at [email protected], and we'll work those into the conversation. So welcome Anshooman.

Rob, thanks for having us.

Thank you. I think we'll just go ahead and jump right into Q&A. I kind of start on business trends in just out of the third quarter. I think at a high level, your overall bookings demand is relatively solid. Your book-to-bill has been staying above 1.0. Some uneven demand across the portfolio, but also some areas of strength to offset some of that. I guess if you could just update us on where you think the larger portfolio businesses sit with respect to end demand as we exit 2024 and then if you could, as well, just kind of speak to the momentum you think will carry into 2025 at this point?

Yes. Thanks for the question. So if you start off with our largest end market, which is convenience retail and fueling we've seen strength across that portfolio. There is significant investment going into the space, both from new site build-outs, but also consolidation. And what our customers are challenged with is rising site complexity, rising costs and labor challenges. At a convenience store, the turnover is north of 100%. So to solve a lot of these challenges, we have a broad breadth of connected hardware, software solutions that is enabling our customers, not only unified payment, but productivity. And so what we're seeing is the strength in the new build-out continues. In Q2, we've seen a step back in some of the replacement projects, but also with our new release of FlexPay 6, that's given a reason for customers to spend. So we saw some of that activity come back. Across our Invenco business, we've seen double-digit growth both in orders and sales for both Q3 and for the full year. And that's really driven on the back of this connected hardware, application software and scaling in the cloud. We have unified payment solutions. We have enterprise productivity solutions that are solving some of these hard challenges of our customers. Both of these businesses have good momentum and should continue to see good momentum into 2025. Our carwash business, after a few years of strong growth, this year, we saw a step back in the growth in the market. At the peak, there were about 800 new tunnel car washes being built that step back to about 500. The lower interest rates will help, but there's a lag effect between rates coming down, and we're really seeing a benefit. So we expect that business to be flattish in 2025. If we move to the next market vertical that we have, Repair Solutions. The underlying fundamentals of the business are really strong. When you look at the complexity of the car parc with traditional ICE vehicles with hybrids, with EVs all coming in. When you look at the average age of the car parc is now up to 12.6 years. Miles driven is up. Technician wages is up. Technician employment is up. But what we've seen is also the technician is a U.S. consumer and with the high inflation, especially in noncore inflation, which is food and energy prices, we've seen a step back in the spend where the technicians are prioritizing lower spend items with quick paybacks. So that business did step back from a growth perspective this year, but we've seen signs of stabilization in that business. And again, as the U.S. consumer is getting healthier, there's going to be a lag effect, and we expect that business also to be flattish. In our fleets business, the last vertical that we cover, we are seeing continued strength in that business. Our customers are on a decarbonization journey, less than 1% of the fleet is decarbonized. And whether it's just traditional fuels to biofuels to CNG, RNG, renewable natural gas, to hydrogen or even EV charging, we have the leading positions in all fuel types across the right profit pools, and we're in a unique position to help our customers. So most of our end markets are healthy. We see good momentum going into 2025. There are a couple of businesses, which will be more flattish from a market perspective are our Repair Solutions and carwash and to quantify it. Those 2 businesses are about 30% of the market. So we see good growth in the 70% of our market with 2 of the other businesses being a little flatter.

Very good. Before we dig in further and just to some of the businesses, maybe just step back at a high level, and just get your point of view on the election just last week, new Trump administration coming in. It's pretty clear, China tariffs is one of the policies they're going to try to enact right away. We'll see about some of the others as we go forward. But just refresh us on what your exposure might be around higher China tariffs what you would source from China, your production in China or just the impact on frontier, should those go higher?

Yes. So tariffs in China is not a new concept, as we saw tariffs come into play in 2018 and us and our supply chain have reacted. We don't have any direct manufacturing exposure in China. We do buy roughly $100 million, a little over $100 million out of China. A lot of that is exempt from tariffs under the current policy. But if there are tariffs, we have plans already in place, which would move some of the production, move some of our supply chain to counter that. So we have obviously thought through those scenarios and have plans in place in case there are tariffs on those products that we import today.

And that $100 million or so, is that disproportionate to any of the business units?

Yes, about 75%, 80% of our imports are in the Matco or the Repair Solutions business out there.

And what about your ability to price to the extent that, that becomes an issue, your ability to price through the tariff headwind?

Yes, we've been very disciplined in terms of pricing where we have been price cost positive every quarter since spin. We've been a public company 4 years now. And we are in responsible end markets where we do have pricing power and have been able to price for inflation in the past and where we would not be able to offset, we would push through in terms of pricing.

And then we'll see how this plays out, of course, but the expectation that there may be a lighter hand on the regulatory side, whether that means faster permitting or fewer regulations. Just is there anything that you -- at this point that you could point to and say that could be a tailwind for Vontier?

We are very well positioned across all fuel types. And we believe that the future, even from a decarbonization perspective, has a space and a place for different fuel types. It's about energy security, it's about energy availability and energy affordability. And we are leaders in traditional fuel dispensing obviously, but we also have leading position in biodiesels, compressed natural gas, renewable natural gas, hydrogen, EV charging. So regardless of administration, regardless of the pace of which technology moves a little bit faster than the other, I think we have the right profit pools and clear leadership positions across all these technologies. We'll see how the policies play out, but we feel pretty comfortable in the position we are today.

I did want to dive deeper just in the Mobility Technologies segment. You've already touched on it some the Invenco business, seeing really good momentum. That was also an area and just in as a point of reference, I think in the last quarter, you talked about maybe the growth there being 20% or so. New products are influencing that business. Can you touch on just the traction that you're seeing? NFX and FlexPay 6 are the 2 that I was singling out. There may be more that you'd want to mention. But just as you go into next year, what you think the propensity for say, larger wins. We've seen a few in the past, but how that may look going forward as well?

Yes. If we step back to a higher level, as I mentioned earlier, that with the increased investment going into the convenience retail space, our customers are challenged with site complexities as they bring in more and more assets, but also as they make acquisitions, the complexity of all the systems they're managing is going up. The cost is going up. The labor challenges exist and aren't getting better. So what is very important for our customers is ways that we can drive automation and productivity, and we're doing that through our enterprise productivity solutions. We're doing that through unified payment solutions. And it's also about driving higher revenue for our customers through these solutions. We have a suite of connected hardware, application software and scaling in the cloud solutions that are end-to-end. And we are uniquely positioned across the convenience store footprint with all the touch points that we have, whether it's in the forecourt, above the ground, below the ground, whether it's in the carwash or whether it's inside the store, bringing that all together and managing that ecosystem of hardware and the payments is the unique position we are in. We have also gone through a journey of simplification, which has allowed us to divert spend from sustaining to new product innovation. And part of that is we've had a series of new products that we've launched. And one of them that we talked about is FlexPay 6, which is the first cloud connected payment solution in its base with over-the-air updates. And also, it's the latest payment card industry PCI-6-compliant. Along with that, we have NFX, which is a micro services-based architecture that modular, it's extensible and scalable and that's resonating very well with our customers. Our customers are starting to move from buying point solutions to looking at integrated solutions across their ecosystem and it's driving material efficiency for our customers. We've announced significant wins over the past 12 months with Shell and Chevron adopting NFX across all the U.S. sites. Last quarter, we announced Costco Canada is deploying our unified payment solution, which is the FlexPay 6 plus NFX. And really with the move towards this NFX architecture, which is open is an open architecture, we're seeing a lot of traction from our customers. Besides that, we also announced our vehicle identification system, VIS. We won a country full country deployment that's starting to get rolled out. So we're continuing to see significant traction in our Invenco business that's led to 20% orders growth in Q3, but also double-digit orders and sales growth for the first 9 months of this year, and we expect to see good momentum carry forward in that business.

Taking from that, it sounds like we should think Invenco within the Mobility Technology portfolio -- would be one of the -- at the upper end of your growth platforms as we go over the next 2, 3 years. Is that fair?

It's fair. Obviously, we can't expect 20% growth every quarter, but that business should be able to deliver high single-digit growth over the longer term as -- we're bringing digitalization to our customer base. Digitalization is not a new concept. If you look at the industrial footprint, we've gone to industry 4.0. We're bringing those technologies to the mobile ecosystem and allowing our customers to benefit from the same automation and productivity tools that exist, just don't exist in our ecosystem today.

Yes. To touch on DRB. The slowdown there has been notable this year. So you got to reset in new build activity this year. Are we -- to the extent we go from 800 to 500, is 500 a firm base to go forward? Or is that still in flux at this point?

Yes. I think the 500 is roughly a good base into next year. We've seen that business stabilize. We've done, obviously, market checks, full permit data talk to customers. And we believe plus or minus around the 500 slightly is a good number to really think about for next year. There are really 3 drivers for the IRR economics for our carwash operator. The first is construction cost. And post COVID, there was a pretty significant run-up in construction costs. The good news is inflation is under control, nonresidential construction starts have slowed down a little bit. So construction costs have stabilized and normalized. The second, obviously, is interest, both the interest rate that our customers have to pay, which has gone up significantly, but now is on the way down, but also the leverage that they can put on the site. So as those economic conditions around the interest environment improve, we'll see an uptake in the business. And finally, it's about revenue, how much revenue can they generate. So we've seen the good operators continue to invest and grow, but also with the solutions we provide our customers, it enables them to grow their revenue, grow their membership. So with our newer product, Patheon, which is a cloud connected solution gives them more flexibility on pricing. They can run A/B testing on different lanes to see real-time outcomes, make real-time decisions. So we see that being an element of growth for both us, but also for our customers. The good news for us from a carwash perspective, besides the market stabilizing, 60% of our revenue in the carwash space and our DRB business is recurring in nature, and that is growing even this year, and we would expect that to grow again next year.

And then just with respect to Patheon, can you give us a feel for what the take rate has been there on that product. And to the extent that you've been able -- the mix between existing customers versus new conversions on that product?

Yes. Patheon sales are ramping up as we would expect. Obviously, when there's a new technology, there are a few early adopters and then the curve starts. We have both new sites coming on, on Patheon. And also, we're seeing some of our customers upgrade. We actually are in the middle of one of our larger customers upgrading to Patheon, and that's going really well. And their whole footprint will be converted to Patheon over the next few months. It is a more compelling technology, more modern architecture. It's cloud-based, gives greater flexibility and optionality for our customers and definitely benefits to moving from our old site watch technology to Patheon for our customer base.

Maybe flip to the environmental fueling business, dispensers being the largest business within that segment. That has been a pretty healthy -- certainly on the new build side that's been a pretty healthy segment for you. The refresh side slowed down. You mentioned that it did restart. Just your sense as to both the sustainability on the new build side as well as how sustainable is this kind of resurgence that we've seen on the refresh?

Yes, we are very lucky to serve industry that has been pretty resilient. This convenience store industry has grown through recessions. If you look at the in-store sales for the convenience store industry, they've grown about a 5% CAGR over the last 2 decades. The economics for convenience stores remain pretty attractive, not only our same-store sales increasing inside the store, they have fresh food offerings, but also gas margins are up materially since pre-COVID days and are remaining at an attractive level. So there is continued investment going in. Also, what we're seeing is this convenience store space in the U.S. or North America is pretty fragmented. About 50% of the stores are owned by small operators, and the large national and regional chains are continuing to consolidate. We have a stronger market share with the large national and regional players, which bodes well for us from a consolidation perspective. The other thing is when we went through this EMV cycle in the past, we not only gained share, which helps our repair business, but also the installed base today is probably at the younger end of what it's historically been, but we are starting to see as that age, there will be a continued natural replacement cycle because there is useful life of a dispenser after which they replace it. So we see the replacement demand will continue. Also, there is all this technology change both in dispensers above the ground from a payment perspective. For example, payment card industry, PCI standard version 2 is going to be sunset by 2027. So all our customers who are on PCI2 will be upgrading to our latest technology, which is Payment Card Industry 6, PCI 6. Also, I touched briefly with the installed base. We've seen good growth in our aftermarket business. That's been a business that we've been very focused on. But also, we are seeing good uptick in our environmental business or below the ground business. That business is a very attractive piece of our portfolio, and it's really -- not only are we seeing significant tailwinds from a regulation perspective. In the U.S., there's the tank upgrade cycle that we're going through. But when you look at around the world, there's regulatory tailwind. There's vapor recovery standards in Middle East, Latin America and India that are benefiting us. India, for example, has moved towards 20% ethanol in the fuel, which is more corrosive. So we have a new pump, which deals with the higher corrosive nature, and we've seen some good wins with the India tender awards out there. And also, we continue to innovate. We've launched new products, for example, the TLS 450, which has -- which is a connected hardware product, has additional functionality and features that support our customers, better cybersecurity, and we're seeing good take rates of that. So we continue to invest in innovation. We're supported by secular tailwinds like regulation, good economics in the industry that is supporting growth in that business.

So maybe just stepping back around just the domestic dispenser business is -- just given the rate of again, a new site activity, the activity with the consolidators, if you will. It feels like it's at a high level, like what's -- what do you feel like is a sustainable growth from here off this higher level?

Our midterm guidance for the segment is low single digits, I think near term, low single digits to mid-single digits is possible. This year, we'll end at about mid-single digits in that business of low single digits is probably a responsible number.

Yes. And then you touched on as well just the tank replacement cycle. What -- how would you characterize where we are in that -- what inning are we in that dynamic?

Yes. It's in the early innings. And just to step back for people who might not be familiar with the tank upgrade cycle, little over 30 years ago, a lot of the tanks underground, which store the gas, were steel walled and there was corrosion and there was leaking into the groundwater. And the EPA mandated we go to resin-based tanks and double-wall tanks. The useful life of a tank is about 30 years after which it's harder to get insurance or insurance is higher. And so what we're seeing is we're up on that 30 years and people are starting to upgrade the tanks. As we talk to our channel partners who also do construction for C-stores, they're sold out for the next 6 to 8 months on tank replacement. So if your average size operator that wants to replace a tank, you're 6, 8 months out. So that's in the early innings, and that's going to continue. But around that tank upgrade cycle is also we have our TLS-450 PLUS offering, which is a new automatic tankage offering that we're seeing good take rates for that. And then as I mentioned, around the world, there's regulatory drivers around vapor recovery, et cetera, that continue to provide good growth. We are an innovative leader in the space. The innovation is definitely paying off, and it's good for -- our customers is good for the environment, and it's also good for business.

I have a longer discussion on margins in a minute, but maybe just while we're on the segment, that's the environmental fueling segment has been a focal point for some of your simplification efforts reducing SKU counts to drive cost savings and efficiencies there. Where are you in terms of -- you've often talked about it in terms of dispenser platform, so it's much broader than that, I'm sure. But just where is Vontier and its progress on that effort?

Yes. We're probably third or fourth innings in some of this journey. We started off with 32 global dispenser platforms. We're down to 15. We're going to end up between 8 and 10 dispenser platforms. What does that really mean as we started off with about 2% common parts, we were up to 15%, and we're going to end up by 2027, 2028 with 50% commonality between parts. That translates into about 1 million square foot of real estate savings. That translates into lower inventory levels, better procurement leverage, but also lower sustaining costs as we've been able to lower the sustaining cost of all of these platforms, we've been able to redeploy that towards new product development, drive innovation, which is starting to pay off. So we're early in the journey of simplification across our portfolio, not only in environmental and fueling, it has a lot of tailwinds. And it's really the power of the one-tier business system, which is a culture of continuous improvement. It's a culture of breakthrough performance and a culture of winning that we're very proud of.

The Matco business, you've already touched on it to some degree, what some of the headwinds have been this year really just within the -- has more to do with the overall consumer sentiment and those impacts. Is that what we're essentially waiting for? Is there any other dynamics that could be at play just getting past elections. Does that change sentiment in any way with that customer base?

It is mainly around the technician spend and technician sentiment, but also technician being stretched with the past inflation. All the fundamentals, as I described earlier in the business are really strong. Technician employment, technician wages are really strong. There's still a shortage of technicians in this country. So as inflation is now in check, real wages are growing. We'll start seeing a gradual improvement in that business. There's a very high correlation between technician, real wages and growth in that business, along with the fact that we can continue to grow our franchisee count. We have over 1,900 franchisees, but we have 30% of the territory unserved. So we can systematically add 1% to 2% franchisees every year to continue to help with that growth. The elections, given our franchisee base and our technician base, I should say, there might be some improvement in sentiment, but at the same time, needs to read through and drill wage growth for these people. So they feel stronger so they can continue to buy. Having said that, they're continuing to buy their buying lower price point items that have a quicker payback. And given our business model, the agility of the business model, we've been able to continue to focus on launching projects and delivering products that are at the lower price point that have a quick payback for our technicians.

Yes. So if I hear you, as maybe you mentioned earlier, it sounds like, okay, you roll into 2025, maybe 30% of the portfolio is trending at a flat level and then there's growth in the remaining 70%. What -- how would you frame risk of any kind of another leg down? You worked through -- you've been book-to-bill positive as you've come through this all this year. How would you frame any downside risk to that?

Yes. So 70% of our portfolio is growing in line with our midterm targets from a market perspective. Obviously, we spend a lot of time with our customers, with our channel partners, understanding the drivers of the business modeling it outside and inside out. And we feel relatively comfortable bearing a major geopolitical event or a major recession in the 70% of our business growing. At the same time, we are very focused on controlling the controllables, which is really pillar 1 of our strategy, which has optimized the core and it's about improving margins regardless of the growth in the markets that we serve. It's about product line simplification. Our focus and prioritization process incorporates 80/20, and we have significant runway to continue to work on self-help and really grow margins.

So in a growing Vontier organic growth scenario, the typical fall-through we would expect would be in the 30% to 35% range. Is that still the case?

That is the case. 30% to 35% drop through is attainable by us even in a lower growth environment because of the self-help runway that we have in terms of driving margins, and we'll continue to focus on that.

Yes. Real quickly in the time we have left, just again, capital deployment is really important here. It's been important part of the activity, just given your level of free cash flow, you have delevered, you're now down in -- within your target range. But where should we think that leverage goes from here. I know M&A is always an option for you, but absent any kind of M&A activity, the trade-off between debt reduction and what has been share repurchases?

Yes. We've brought our leverage down from 3.2% to 2.7%, naturally as EBITDA grows, it will come down a little bit further. We remain very committed to a return-based deployment of capital. And given the disconnect in our valuation to the intrinsic value given our cash flow profile, given our operating margin profile and a growth profile, buybacks remain pretty attractive, and we continue to do buybacks just in Q3, we bought back 2% of our shares outstanding. And in the mid-30s, we've bought back about 12.5% of all shares outstanding since spin. But at the same time, we've done responsible M&A. Invenco was an acquisition we did when we were still doing buybacks, and we did it with a commitment to 20% return on invested capital within 3 years of the acquisition. We're a year early and will deliver over 20% return on invested capital this year. So we remain very committed to disciplined capital allocation, whether it's bolt-on acquisitions or share buybacks. We have good opportunities to deploy capital at high returns for our shareholders.

Perfect. Well, we are at time. We'll end it there. Thank you, Anshooman.

Thank you. Rob. Thank you, everyone, for joining.