Vontier Corporation (VNT) Earnings Call Transcript & Summary

[Audio Gap] The fourth quarter was 9% year-over-year bookings growth, building momentum.

What do you see from your customers and end markets?

So we saw a building momentum coming off the second half of last year. I think a good way to sort of follow that with sort of the booking rates that we were able to achieve and also our backlog increase. I think as we started this year, obviously, a lot looking forward into 2025 in terms of the new product introductions we were making some of the newer positionings that we've had in the market that we saw good uptake on really no change to that. Obviously, all eyes are on what's happening with tariffs and some of the macro-economic uncertainty that might be brewing based on reading the paper and the news cycle, but we're not seeing that showing up into our KPIs.

That's good. And you've already quantified the tariff risk, $50 million from China, $35 million from Mexico. Are you worried about potential indirect impact from tariffs or I think what we always when we go into the meetings, what investors bring up, what managements bring up, it's really the uncertainty potentially killing the animal spirits. That seems to be a broader concern because every company seems to have quantified what's happening. But just maybe, a, the impact, b, maybe explain like what percent of your production falls under USMCA and then, as I said, just this uncertainty and what are the conversations the customers are like?

Yes. As you mentioned, we've quantified our direct impact from Tier 1 supply chain. We buy about $50 million from China, which, by the way, used to be well north of $300 million in the first Trump administration. We have been systematically moving production and supply chain out of China to derisk what we've been doing. On Mexico, we have about $35 million that we buy directly from Mexico. Over 90% of that is already dual source, so we can move that around in short order. So we feel that, that a Tier 1 supply chain risk has been managed and mitigated. Overall, obviously, we are watching the macro and our order trends. There is a lot of uncertainty in the macro, but also the markets we compete in we feel we have pricing power, and we can price -- pass any cost inflation into the market. We did that the last time around. And again, what we can't mitigate through supply chain moves, et cetera, we would pass on through the market. We also have a significant part of our manufacturing in the U.S. for the U.S. and we have our largest factory for dispensers in the U.S. in Greensboro, North Carolina. We do the underground manufacturing in Altoona, Pennsylvania. So we are manufacturing regionally. We have regional manufacturing in the Latin America and Brazil for Latin America, Germany for Europe, India for Asia. So we are somewhat decentralized from a manufacturing perspective in region for region.

And it's a sort of thing statistic, how much you sort of derisk your China exposure? So maybe where did that go?

Well, I think real credit goes to the team, a lot of hard work over the years. So I don't think anybody should be surprised by what the Trump administration is doing from a tariff bit. We've been getting ready for this. And I think the world has been headed this way for a while. So I think it's just -- and we're maybe not like some of the other industries where we had so much work to do. I mean if you look at other industries where there's just heavy reliance on manufacturing and in Mexico for the U.S. or in China for the rest of the world. That -- we were up against some headwinds but maybe not so much headwinds from some of the other industries that are heavily dependent on it. So I think it was a medium-sized pot for us that we've been working on and not a long pot. So I think what we had to work with was pretty manageable. I think we were able to really take advantage of that.

And did the China exposure work mostly Southeast Asia or...

Blended Southeast Asia, some in the U.S., from U.S. suppliers, for example, for our repair solutions, Matco business, which expanded and put in more infrastructure. So they're providing us more, and they're doing it at a very cost competitive rates.

Excellent. And so at the '23 Analyst Day, you gave a target for 150 bps of margin expansion by '26 and given the macro headwinds, '24 margins were flattish at 21.4%. It's the 23-plus percent margin target by '26 still on the table?

Yes, we do see line of sight to our 150 basis points of margin expansion by 2026. Yes, last year was flat, but we're seeing margin expansion this year, a lot of it coming out of our Mobility Technologies business. The Mobility Technologies segment will expand margins over 100 basis points this year. We're in our relatively early stages of our Optimize the Core, which is Pillar 1 of our strategy, where we're structurally simplifying the business and taking cost out. Think of it very much like an 80-20 program, we call it focus and prioritization. A couple of examples. We had started our global dispenser platforms at 32 global dispensers where they cut that by more than half, and we're on our way to 8 global platforms. What that really does is it allows for standardized components, which went from low single digits will be well north of 20% relatively soon. It reduces the amount of manufacturing footprint that we have. We've taken out over 600,000 square feet of manufacturing and distribution. And it also reduces your sustainment engineering, which you can then reinvest in terms of new product development, but also improved margins. Same thing on the Invenco side, which is a part of Mobility Technologies, we started off with 34 different global software platforms. We've reduced that to about 18 and we're on a journey to less than 10. So structurally, there's significant headroom for improvement, and we continue to work on expanding our margins.

So I'm going to go fairly granular into the businesses that you have. But before I do, Mark, I know that you have sort of an overarching vision for the company, which I think it would be helpful if you framed your vision before I'm going to go fairly granular because I think it would really help us to bring together sort of top down was bottom up, which I think will we spend a lot of time.

Yes, I appreciate the opportunity to do that. Look, if you look at the business since spin, we've repositioned ourselves pretty significantly. And the best way to think about it is what we call serving the mobility ecosystem. It's the movement of data, goods, people along the roadway and things that are connected by the roadway. And that mobility ecosystem is a very vibrant $35-plus billion industry quite growthy and a lot of pretty significant trends there related to the fundamentals around digital transformation, more sustainability from options and fueling, whether it be petrol and the choice is there to be more sustainable right through the electrification and gaseous fuels. Our 2 major customers there are convenience store operators. It's the stop in your local neighborhood, it's the stop along the roadway as a major vertical where we're selling a lot of products into. So when you get into these granular questions you're going to ask us, we're #1 or #2 of all critical technology selling into that mobility ecosystem. The other major customer there is the fleet operator and how they manage their fleets through their fleet depots by being more sustainable, but also managing their assets and their cost. So I think when you look at the backdrop there, quite relevant. And then the third major customer is around repair and repair technicians, which we sell mostly in the United States given the artifacts of repair technicians work for both OEMs as well as small mom-and-pops, and they buy their own tools, and that's who we sell to. So the transformation under foot has positioned us quite well for what we see as longer-term secular drivers where investment is going in and the profit pools that we've put in place are really good profit pools and provide us that optionality on fueling and fueling infrastructure as well as that digital transformation.

Having laid the solution, so why don't we talk about retail solutions and for the folks listening in or here, it's point-of-sale payments and automation software, roughly maybe 50% of revenue. So you have generally 6% market share of U.S. fuel dispensers, but maybe 15% share for your software platform. You continue to win over some larger chains. I think Chevron, Shell. So how does the client pipeline work? Because I think that's sort of getting a fair share, that's a big part of that story. Can you just talk about that?

Yes. I think what we started laying some breadcrumbs around was the real opportunity for these convenience store operators to manage their infrastructure better both from a productivity perspective, but also how they attract consumers on to their site. And a great examples of that are which you just referenced was Shell 13,000 site rollout of iNFX which is that site management software that starts with also managing their fueling, but also can expand into their other operations and then followed on by 8,000 site United States rollout with Chevron and by the way, those rollouts are going pretty well, about halfway through the Shell rollout now and about 1/4 of the way through the Chevron rollout. We also followed that up last year with an announcement with Costco in Canada, which obviously Costco has been a great customer of ours, but also looking for some of those productivity benefits through their fueling operations. And so I think what that's really indicative of is the opportunity for us to serve the industry with new-to-the-market offering where they're able to manage things more effectively on the cloud. It's a recurring revenue business for us. It's a great business model. But folks would not be doing that if it didn't offer a pretty significant savings for them and return on investment. And I think it's just indicative of the runway ahead that we have with bringing these new products to market and where we can serve not only the U.S. market but also other markets worldwide.

Excellent. And just maybe just going back to what's your fair share. Is there anything that would prevent you from getting your market share in retail and software up towards your hardware market share over time?

No, there's nothing. In fact, if you look at one of the artifacts to the industry that's also in our favor is that we have the majority share with the largest convenience store operators, both globally as well as regionally and these are the folks that are making the investments in the industry. These are the folks that need the tools to manage these assets. These are the folks that are also consolidating the industry. When these regulatory drivers hit, whether it be new security of payment. By the way, you're happy to know, Andrew, that we're now advancing Payment Card Industry 6 standard, which will obsolete in April of 2026. So once again, a new security of payments.

Yes, we're going to talk about that, yes.

And -- but when you look around the world, there's all these security payment standards and also sustainability issues around vapor recovery. So we'll talk about that, too. But folks have to address those issues. And as they're addressing those issues, the larger players are very good at deploying capital. They're flushed with investment ability from a balance sheet perspective. And this absolutely gives us that higher share market opportunity to go after with our new offerings as well because folks are really interested in investing in that with our infrastructure. So we like the setup that we're sitting at.

And -- but should we expect something? Because I think Chevron and Shell, that really showed the power of your installed base, Costco Canada over the next 12 to 24 months, is it reasonable to expect another sizable customer come on board?

Absolutely, our pipeline is growing, and we're doing pilots with other customers, we're not disclosing them at this point. But I think as those pilots continue to advance, as the industry can look at these other proof points that are out there that also greases the skid for other larger...

So a relatively high degree of confidence that we should see some in the next 24 months?

100%.

I'll take that. That's a good number. So I think you launched a new FlexPay 6 hardware payment terminal. You just explained to us why there's the pin pad at the fuel dispenser. So what's the key selling point here and what's the biggest differentiation versus competitors?

So there's a couple of things, 1 of which is we just talked about security of payment and the sunsetting of that in the United States. That's a great driver, and we think those drivers don't stop. The second 1 is that this -- it's all in the cloud. So think about your phone and how many security or software upgrades that you get to your phone that is just done over the air. Well, a payment technology on a dispenser every time there is a new software update, historically, you would have to roll a truck on site to be able to do that. This is really the -- now the leading technology out there, where now you can do over-the-air update for any number of software updates that we see that are coming out, including media and enhancements for how you bring consumers into the store, not only security. So there's a plethora of opportunities for us to be able to leverage off that structure. So it's a real game changer for the industry. When you think about it, including transaction speeds that are much faster and we're improving the quality of the experience by our direct customers as well. So it's a very significant upgrade for the industry and we're really happy to be advancing it. And as a consequence, we're seeing really good uptake around it.

Excellent. So maybe we're going to talk about environmental, 10% of revenue. You tank gauges and pumps are about $300 million, $350 million revenue business. You have an installed base of 350,000 tank gauges. We are now entering a replacement cycle for this above-average margin business. So maybe can you talk about the length of this cycle and what type of an uplift we're expecting because I think when we were talking about above ground, we were waiting for this for a while, and it seems to be happening. So just maybe how excited should we get?

Well, I think there's nothing like the EMV upcycle that we saw and we actually like that because that provided a very lumpy set of returns over a couple of years. But it is a good steady driver for us. So what we're talking about is our environmental business, it's below ground, it's also Veeder-Root brand. That's the [ Kleenex ] brand for the industry worldwide. And there's a number of regulatory drivers that are impacting markets around the world, both Brazil, India, we got some real strong uptake there in India as well. And then the United States, but one of the advancements we're doing around this is new tankage called the TLS-450PLUS where we're advancing the state of the art for vapor recovery and we're obsoleting our 350, which is a real driver. We've also been adding to our product line with a new 3-horsepower pump, which is below the ground. What's happening actually is when new tanks are going in, they're going in with larger tanks. So instead of multiple offerings of multiple pumps, you can put 1 larger pump in there that saves them money. And so that's a real benefit. But 1 of the other drivers that we've been talking with you about, Andrew, is that 30 years ago, there was in the United States, sort of a lock stock and barrel change out regulated by the EPA because these were steel-based tanks that were leaking and leaching into groundwater in your local neighborhoods. Horrific newspaper stories that were written about that in the day. And so folks replace them with resin-based tanks that were not susceptible to rust, which was a real benefit. But now 30 years on, that infrastructure is aging. And as a consequence, they might be prone to leaking and insurance rates go up after ownership for 30 years. And so that provides a tank upgrade cycle, which we're in early innings on in the United States. And we don't make tanks. We have partnerships on the tank installations but we make all the smart sensors, pumps, technology that go on it. And so we're pretty early innings on a pretty steady upgrade cycle over the next foreseeable future for underground in United...

So as we think about in $350 million revenue. So what's the good growth rate? And how long do you think it's going to be sustainable for?

I think the growth rate in this environmental business is low to mid-single digits over the next few years. It's going to be a steady growth across the world because of some of the regulatory drivers that Mark talked about, not a super cycle like we had with the EMV, but steady progress and steady growth over the next few years.

And this is not political football, Andrew, in the United States. There are a number of things that are, but clean water and drinking water has never come into the sites of saying that's not good regulation.

But Canada likes clean water.

I think everybody likes clean water. And I think the administration in the United States has been behind regulation that also protects these type of things as well.

Got you. But I should assume that this is -- if things go well, this could be mid-single-digit growth. We're dropping in a very nice incremental given where the profitability is.

Yes. This -- the environmental portfolio is definitely incremental to our margin accretive. So it is margin accretive and a great business.

Excellent. So maybe we can talk about fuel dispensers. And you're so closely associated with fuel dispensers and it's just only -- at this point, it's 22% and North America is even less. So maybe we can start. Can you just tell us where you are just in terms of geographies? Just help us zoom out and just talk about the fuel dispenser business because there is absolutely this association with Gilbarco Veeder-Root equals fuel -- the company is so much bigger. And I think North American fuel dispenser at this point, are just not that big, but maybe help us just put it in perspective. Where was it? Where is it now? And what are the other key geographies we should be thinking about?

Yes, I'm going to let Anshooman sort of give you some more detailed color. But I think if you just sort of step back from the time that we spun hard for folks to unpack that, but we've resegmented the business as we wanted to offer more transparency to investors about where we're actually making our money, where the growth opportunities are. And we love the dispenser business, and we think that it's going to grow probably more than what people have expected, and we know that.

And that's a near-term comment or longer-term comment?

It's actually a longer-term comment. And we think there's a lot of reasons for why that infrastructure is quite important and that even the sustainability of some of the petro-based fuels is going to be around a lot longer than what people think. But at the same time, we offer a lot of great options for fuel optionality, and I think we can say today that we're extremely well positioned in the right profit pools for the options that people look at for refueling. And that's something we couldn't have said at the time of the spin either. But to unpack the dispenser question, maybe Anshooman can do that.

Yes. So our Environmental & Fueling segment, which is about a $1.4 billion segment. So if we disaggregate that, about $200 million plus is environmental below the ground business. We have about $200 million -- a little north of $200 million in aftermarket parts, about $200 million in service. So now you're talking about just dispensers being somewhere around $600 million, $700 million of revenue. North America being the larger part of that. And people go back to the EMV days where this business was because of the super cycle was about -- the peak to trough was about $500 million. But now that the peak to trough is gone, its more steady state. The underlying fundamentals of this business remain very healthy. There's -- we're continuing to see build-out of new C-store sites, more modern sites with more dispensers and the underlying market in North America is growing low single digits. We believe we continue to gain share because we structurally advantage as we have a higher share with the large national and regional players that are growing faster at the expense of the mom and pops but also, we continue to innovate in this space, which differentiates us. Mark talked about the benefits of FlexPay 6 and unified payment, which not only is on the dispenser, but it started bringing the whole footprint together because you could have the same payment device not only at the dispenser but at the car wash, where we are the leading provider of the point-of-sale and control software for carwash. Inside the convenience store, where we have a strong market position with the point of sale but also with EV charging where we provide the EV charging software, network management software, but we can put our charger on -- our payment on a third-party charger. So as unified payment comes together across the mobility ecosystem. That's where we continue to innovate and win, and that also bodes well for our dispenser business.

And on the dispenser business, just maybe sort of last year, I think your dispenser sales were up low single digits. Can I ask you why is it not doing better? And the reason I'm asking because the EMV cycle took so long that if you just think about the replacement cycle, we are about a point where all these beautiful above ground dispenser, you should start...

Actually, they are -- we have a histogram, if you will, that looks at that population and we actually just lapped it last year, where you're now beginning to replace some of the first-generation EV that went in from a population perspective. And then aftermarket parts, which we gained share of dispensers during the EMV up cycle, you can see our aftermarket has been growing higher than that and a very healthy growth rate. But I'll let Anshooman comment on our growth rates.

And just on aftermarket, just to go back. So aftermarket is just -- it's the structural share gain, and that is just going to be structured. It's just going to be better going forward, right?

Well, it is a structural benefit that we have. And we took the lumps, if you will when we were taking share in EMV and that rolled off. So that was a bit painful but we knew that the long term benefit of having that installed would pay for itself. And then we really focus on the aftermarket because we didn't feel like we were getting our fair share -- very intentional about our share gains for us to be able to go mine this aftermarket for many decades to come. And I think you're seeing that flow through in some of it.

Yes. And I'm sure, maybe about the growth like as we lap EMV, why not better than low single digits?

Yes. This year, we've guided to low to mid-single digit. Some of it is market share gains. But over time, I think, as Mark mentioned, the first EMV dispensers are starting to get to a point where the replacement cycle is starting. I think last year was about the low point in terms of the newness of the dispenser parts, so to speak, and it's starting to age now. And as it ages over the next few years, it will create a better opportunity for the replacement and refresh cycle also -- again, we don't expected to be a compressed cycle like it was with EMV. This will be just a natural extension and part of that upgrade cycle is going to be the regulatory changes, for example, Mark talked about the Payment Card Industry, PCI 4, which is the standard -- fourth generation standard. That's being end of life from a sales perspective in April of 2026. So a lot of those customers that had dispensers with -- or FlexPay 4, PCI 4 product, they'll start upgrading their dispensers with our latest payment technologies. So this is just a gradual upgrade cycle that will benefit for many years to come.

And just on the international side, I think you signed for large tenders in India in '24. We used to watch that -- watch those. I think maybe as you've got more diversified, maybe a little bit less focus on that. But just I think it will be additive to growth. Can you quantify the contribution in '25 and more broadly, how is the international fueling business trending?

Yes. India is a good market for us and an important market for us because they're continuing to invest and grow their infrastructure. They're looking to modernize their infrastructure and there's also a lot of regulation out there, for example, they're bringing a higher content of ethanol into the petrol mix, which is more corrosive, which means they need a new set of product offerings out there. They had issues with fuel theft, which required innovation to provide new technologies to prevent fuel theft. So we're very proud of our team in India. They have done a phenomenal job, not only in terms of innovation and bringing new features to market, but also from a design to cost perspective. We've localized more of our supply chain. We have an important factory in India. And not only that they really work on innovation and bringing important technologies to market, for example, dealing with the more corrosive ethanol content, dealing with security of payment, but they did it in a very cost-effective manner, which allows us to serve the Indian market with attractive margins. And we're very proud of the wins that had both above the ground and below the ground where we won all the major tenders that we participated in last year in India.

And maybe let's just sort of hit the high-growth area. So first, maybe let's start with Driivz software. I think you sort of commented that I think it's grown over 50%. I think you've commented that we're better than breakeven now. So what kind of growth -- this is the right number, right?

It's not breakeven yet. We said it's going to exit 2026 at breakeven.

Okay. So it's '26. Got you.

Yes. We're continuing to invest forward in that business. And the reason why is margins are outstanding, the business model is a full SaaS business. And the plugs under management are at the rate of doubling every year. We're now #2 in the market with plugs under management with over 100,000 plugs being managed with that infrastructure. And I think it's a great example of getting it to the right profit pool, so it's an asset-light business model. And it's also a business model that can grow or does grow based on a per transaction fee with per charge. So very attractive. I think...

And how big is it now?

So last year, it was just under $20 million.

Okay. I was not all about -- I'm thinking -- so '26, $40 million breakeven?

$50 million.

We'll exit 2026 at a $50 million...

Okay. Got you. And after that, the incrementals are sort of SaaS-like incrementals?

Yes, the gross margins in this business are north of 70%. Obviously, you won't scale operating cost as revenue scales at the same rate. So very attractive margins as this business...

Sorry, I had my time line off. Okay, that makes sense. And then ANGI, right? I think, largely a supply of natural gas and hydrogen, $100 million in revenue in '24. So last year, you expanded that into Europe, and there is significant government support for the European Union Green Deal, RePowerEU. So how quickly do you think you can ramp up in Europe given where we are?

No. I think here's a business that is done really well since spin and I think has the right legs to continue to grow. ANGI sells to fleet operators so think of the customers being in the United States, Waste Management, GFL, UPS, these are folks that have work to decarbonize their fleets and they need a technology partner like ourselves. So we're the leader in doing that. We thought that there's -- when you look at the fueling options, compressed natural gas, biogas, leverages the same technology, decarbonization. Going into hydrogen, there are spots where hydrogen infrastructure is making sense. You mentioned Europe. So we thought that leveraging our leadership position there, plus also our channel presence with Gilbarco Veeder-Root in Europe, which is a strong channel presence and country presence, we can also leverage that for growth. We are seeing some uptake. It will be interesting to see how it goes, but we are also quite bullish on our opportunities in the United States with this multifuel future. So I think that the positioning there is good for fleet operators because if you look at the backdrop, fleet operators largely have not decarbonized. I mean the vast majority of fleet operators worldwide, 98% are still based on like high-flow diesel and there are ways to decarbonize that. But these other technologies that are available. By the way, we love selling high-flow diesel pumps as well. We're the leader in doing that worldwide. But at the same time, decarbonization through ANGI offerings, we think represents a strong business opportunity.

So let me hit on Matco because it is sort of the way people think about it economically sensitive part of the business. So arguably, unarguably a tough environment from Matco last year as other technicians feel the pinch of high inflation and tighter to budgets, competitor Snap-on and Matco Tools saw similar revenue declines. So how do you think about the upside risk and downside risk to your outlook of relatively flattish?

So we've guided to a flat Matco this year, even though we're going to be running into the back end of this year, some easier compares.

Is that margin of safety?

Well, I don't know about margin of safety per se, but I think it's a guide that we're pretty comfortable with right now. And we're just facing the Matco Expo in April which is -- that's a major selling event for us that occurs once a year. We do have other selling events, but none at the size of that. It will be quite telling how we get through that event. But so far, the management hanging in there. Keep in mind, the backdrop for repair is pretty good.

Right. Well, that you would think because the age of the cars keeps going up and up.

100% correct. And so the time from a 5-year-old vehicle to the end of its life is what Andrew just described is the sweet spot of repair, so that is representative of the repair market and that goes up as the age of the car park continues to get longer. People are not buying as many new cars as they once did under some of the economic pressures. But also the complexity of repair keeps going up, whether it be an ICE vehicle, electric vehicle, hybrid vehicle, this all adds to the complexity of repair of the car park and so that's also a backdrop. So we think that this franchise model is very sticky. The brand is sticky. They are buying tools mostly related to productivity, and they've dropped it in terms of the price point.

The mix, it's mixing down, right, new way that we -- so what would it take for it to mix? Because that's the question, right? Like what does it take for them to get mix up? Do the interest rates have come down? Like what's the magic thing for the mix to go back?

It's not really an interest rate story. It's more of a consumer confidence story. The U.S. is more related -- this is part of the working class and repair technicians are fully at work, but they've had a period of inflation, that's been hard for them to be able to recover from. But they're still -- one of the major drivers that we take control of this is offering product vitality, 25% of what we offer every year and Matco is new that year. So part of the Matco Expo is launching our products and getting some vitality out of that. We did really well versus competition by introducing Milwaukee brand in the last couple of years, which has served us really well from a gain share perspective. And so I think as we look at this Matco Expo, we're going to be looking at more product vitality, more fit to purpose in this kind of market which we hope will bode well for us with Matco this year. And this is a base of workers in the United States that are also fond of the new administration. And so hopefully, they'll be looking at this as opportunities.

Matco Expo would be a big tell as to what...

It will be.

And will it happen before you report or after?

It's in April.

Before we report.

So when you report, you'll know what's happened?

Right.

That would be useful. And just maybe we're a little bit overtime last question, capital allocation. What do you think about buybacks, M&A? How do you balance that?

Yes. We were dynamic in our approach, i.e., we always go towards the highest return option for our shareholders. If you look past 3 years, we did the Invenco acquisition, which was north of 20% ROIC by year 2. We grew the business, improve profitability significantly. But also during the time we bought back 14% of the shares outstanding at about $28 a share and we also delevered. So we always compete buybacks with M&A, with internal investments. And at the end of the day, at the share price, we believe buybacks are a very attractive use of our capital. And while our guide embeds $75 million of buybacks at this price, you could expect it's going to be more than the $75 million. And we'll have done a significant part of the $75 million in Q1.

This is terrific. Thanks so much. Thank you, Mark and the team.

Thank you, Andrew.