Vontier Corporation (VNT) Earnings Call Transcript & Summary

Very good. Good afternoon. We'll go ahead and get started. I'm Rob Mason, the senior analyst that covers advanced industrial technology for Baird. Very glad to have Vontier up next. Vontier is driving leadership position in mobility technologies in the convenience retailing market, in particular, delivering a broad range of integrated solutions. We think that's resonating well with that customer base. That customer base is increasingly becoming larger and more sophisticated as well, and they've got a strong position there. I've got Anshooman Aga with us to discuss Vontier as well as Ryan Edelman with Investor Relations. Anshooman, of course, is CFO. We're going to just kind of dive right into Q&A if that works for everybody. We will take your questions if you have any, send those up. We'll work those into the conversation via -- either send those up via the iPad or you can just raise your hand. So we'll go ahead and get started. Anshooman, thanks again for being here.

Thanks for having us.

Maybe just to start, though, level set kind of post quarter, maybe if you could just do a quick tour around the larger portfolio. I think one thing that stood out to us really year-to-date is we've seen kind of core growth like 3% ex the Matco Tools business, is more like 6% or that's kind of our math. So maybe a tale of 2 halves or a tale of 2 cities there. But just kind of walk through what you're seeing as we got through the third quarter and into year-end.

Yes. Instead of talking about our segments to start off with, let's go at it slightly differently around our end markets. 2/3 of our revenue is focused around convenience retail. So that's basically our Environmental & Fueling segment, and a large part of our Mobility Tech segment serves the convenience retail end market. And that end market is continuing to perform really well. When you think of some of the dynamics in that space, whether it's the large national and regional players continuing to build out and expand the store front. Also, if you look at their economics, their economics continue to get better as convenience stores are adding fresh food, expanded formats, additional dispensers and also the gas margins are good. On top of that, when you look at the fact that we are really helping bringing digitalization to this industry through our innovation and digitalization, both for enabling higher productivity, asset uptime, but also consumer engagement and revenue steering, that part of our business is doing well, and you talked about the higher growth ex Matco, it's really off the backs of that. Our fleet business, again, this year has been pretty strong. We had a couple of big projects in the fleet business, fleet supported mainly by mobility technologies. And that's been a good driver for this year. And then repair, as you talked, while the long-term secular drivers are intact in that business, the buyers of our repair technologies tools are technicians, which have been impacted by the overall macro. But even there, we're starting to see signs of stabilization off the backs of a lot of initiatives that are under our control that we're driving.

And I commented earlier just around the core sales growth. I think year-to-date core orders maybe down a tick, flat to slightly down. That was our math. Correct me if I'm wrong. But I'm just curious if you've got any different perspective there if you exclude the Matco business on that order number, how does that look?

Yes. A couple of things on our bookings. One, our book-to-bill cycle is pretty short for most of our businesses. Additionally, if we do get a long-term contract, we only put 12 months of it in backlog or in bookings. So when you factor that in having a book-to-bill of roughly 1 keeps our backlog at healthy levels. Our book-to-bill is roughly 1 -- was 0.99 in the quarter, roughly 1 for the year. So bookings remain healthy. Our pipeline continues to be healthy. As I talked about convenience stores, customers in our convenience retail business, driving both point solutions but integrated hardware, integrated solutions with connectivity is really making a difference for us and our connected mobility strategy is really shining through out there.

Yes. Just to park there a moment, just on that convenience retail market. Again, I mentioned upfront, the industry structure there is shifting, favoring more consolidation, larger players, more sophisticated presumably in that process. Where are you striking on their pain points in some of your solutions?

That's really a great question, Rob. So when you really think of the industry, especially around the convenience stores, they're in North America roughly 150,000 convenience stores. More than 50% of them are owned by single-site operators or they might own a couple of sites here and there. What's happening in the dynamic is the large national and regional players are growing at a faster rate at the expense of the single-site operators. And we tend to have a higher market share with the large national and regional players. The other thing that's happening besides the large getting bigger, the formats are getting more modern and bigger. They have bigger -- inside the store formats, you have fresh food, where you have almost a cult-like following for some of the convenience stores like Wawa and Sheetz around their sandwiches. Casey's is the fourth or the fifth largest pizza seller in the country now. Also outside the store, the gas margins have been really attractive. Post COVID, they've gone up materially, and they're staying at a pretty attractive rate. So you have this phenomena of attractiveness of a site, sites getting bigger, big -- larger players getting larger. And then you have the secular tailwinds around digitalization. As they have more assets, they need to have higher uptime, better remote management of their assets. They need to drive consumer engagement. This is where our connected mobility strategy with digitalization comes in and fixing one of the pain points. Regulation is another big secular tailwind. There's significant regulation in our space. Fuel is regulated, both from an environmental perspective and then payments through the payment card industry perspective. The complexity and the velocity of regulation is always increasing. It's not becoming less. And this is a global phenomenon. And through our products, we're driving compliance with the latest certification, allowing connectivity so they can better remote monitor from a compliance perspective. And we're making sure we're meeting the latest payment card industry standards and driving better solutions for our customers there. And the final is energy expansion. While everyone can debate about what form of energy might exist in 15 years, what we can't debate is the need for energy for transportation is going up. And with Vontier, we provide multi-fuel options for our customers, whether they're looking at traditional gas or they're looking at biofuels, compressed natural gas, renewable natural gas or electric charging with us providing the leading EV charging software where we are the second highest plugs under management globally, we provide multi-energy solutions for our customers in the right profit pools. So we're uniquely positioned to solve our customers' pain points.

Yes. How would you describe the state of the capital decisions coming out of that convenience retail market right now? Have they been on a steady cadence? Have you noticed any shortening of capital decision, the extending of capital decision? I'm trying to get at maybe the kind of visibility that you have based on their plans that you can see right now.

Yes. So if you think of the market between the large national regional players, most of them are talking about 2027, 2028 CapEx right now. So pretty good visibility. They know what they're going to build. They're working on site permits. When you look at the lower end of the market from single site to few site operators, their decisions tend to be a little bit closer, especially around site refresh. But again, just because of healthy gas margins because of the fact that inside the store, business is healthy. They're adding fresh foods. They're renovating sites and people have to stay relevant. If you have 2 convenience stores at an intersection, where does the traffic go? Traffic goes to the one that has a modern format, new dispensers, better lighting, better signage, fresh food. So even if you're a single site or a few site operator to stay relevant, you're going to continue to invest. So that's what we're seeing in the space.

How do the -- those convenience store dynamics that we just talked about play across other geographic regions? Obviously, your revenue is more concentrated in North America, but you do serve other markets with those solutions. What's the state of the industry in those other regions? And what are you seeing?

Yes. So if you look and let's break out some of the developing markets versus the mature markets like Europe or Australia. Europe and Australia, a little more stable, flattish, I would say. Emerging markets do provide a growth opportunity. Let's take one, for example, India. There's a lot of investment going in. The car park is increasing, the need for fuel is increasing. They're going from, let's call them, kiosks, which were maybe 2 dispensers, unattended to more of a full-fledged U.S. format where you can go inside, buy food, et cetera. But India and even markets in the Middle East, which are growing on a longer-term basis, tend to be a little lumpy in the sense that there will be tenders in the market. Last year was a good year for tenders. We had some in the Middle East. We had quite a few tenders in India. And then this year has been a little light on tenders. Now usually, when you win a tender, delivery is over 12, 18 months. But this year has been a little light on tenders, but so far, discussion is more tenders coming into market next year. So international can be lumpy, but when you look through a cycle, there is good growth in international markets in developing markets.

Okay. I think some of the secular tailwinds that Anshooman walked through, whether it's digitalization or the evolving consumer preferences and things like that, there are a lot of similarities in some of the more mature like Europe or Australia, U.K. included, where you're seeing the build-out of these larger hubs, leveraging more food convenience, foodvenience as the industry term. So there's a lot more technology advancement going in the mature markets versus some of the international markets as well.

Understood. Do you think that just -- does that lumpiness come into play next year around some of the tenders or the revenue -- the shipments on that? And I only raised that question, but just as I looked at your -- at least as it is defined, as you report high-growth revenue, it had a tick up for several quarters and then in the third quarter, it maybe stepped down. I don't know if that's just the third quarter perturbation or if that's -- the tenders kind of cyclic.

Quarter-to-quarter, it's a little bit lumpy. I'd look at it in aggregate and I look at it over the year. I think for the year, the growth will be roughly in line with our fleet growth. And again, next year, I think there will be growth in international markets. Quarter-to-quarter, there might be some lumpiness, but I think we take that into account, we feel pretty good about the overall convenience retail market growing next year globally. And quarter-to-quarter, the noise in the international markets will -- won't be material to move the needle for Vontier as a whole.

Fair enough. The Invenco business, that's a key part of at least what goes in store as well as what goes on the pump. A couple of drivers there that we're focused on FlexPay 6 and iNFX. FlexPay 6, in particular, seems like that's given you some nice tailwinds. Why is that relevant? Why is that -- the unified payment aspect of that, why is that important to your customers?

Yes. If you think of our Invenco business, really, if you can -- the set of products that we call Invenco, you can really think of 2 things. They're driving either payment -- unified payment or they're driving enterprise productivity. So FlexPay 6 is part of the payment suite of offerings we have. And it's connected hardware with software, which is really driving both consumer engagement and driving productivity for our customers. So just starting off with productivity, better remote monitoring, remote management. While all of us are used to remote updates for our electronics in our space, every time you used to have a software update, you used to roll a truck to site. This is the first product that's brought remote software upgrades to our customers. Also, when you start thinking of a site which might have different payment technologies, every time you have a change in especially a monolithic architecture that a lot of our customers have where they've stitched together, think of a complex ERP for a large business. Every time you have a change, you have to go through certification. The more payment devices you have, whether it's on the pump, whether it's inside the store, whether it's on the car wash or on the EV charger, it all adds complexity. By having one payment, FlexPay 6, which we're the only one which provides all of these assets, you drive down complexity. Having iNFX on top of it, which is modular in architecture, if you're changing something like a loyalty, doesn't change the architecture of your system, so you don't have to get your payment recertified. So a lot of benefit from a productivity automation perspective out there. But really, also when you start thinking of consumer engagement, whether you're charging or you're getting your car gased up, you can put media on the dispenser and you can get media revenue by a third party or you can start looking at how do you improve conversion. We have a great customer of ours who experimented with free coffee on that screen. People, they saw the conversion rate increase and the average basket size increase and their profit increased. But when you also think about, let's say, you're going at lunchtime to get gas, that's one transaction. You go inside the store to buy a sandwich. You go up to the kiosk, it's probably 5 screens to configure your sandwich, then you have to go pay somewhere else. That's probably not the best consumer experience for you. What would be a nicer consumer experience could be you're at the dispenser, it recognizes you because of your loyalty. It comes -- preconfigured turkey sandwich comes up just the way you like it, one click to buy, one swipe fee instead of 2. By the time you're done getting gas, your sandwich is ready, either you go pick it up or they bring it out to the curb at the preassigned spot. That's what Flex -- the power of FlexPay 6 can bring. It's order at the pump. It's better loyalty. It's better engagement of the consumer. That's why we're pretty excited about what this can do for the industry.

Yes. How are customers adopting that? Is it just through new dispenser sales? Or is there a retrofit opportunity that you're attacking?

Yes. It's all -- it's both. So obviously, our customers [ at the ] dispenser is old, they're replacing the dispenser and a lot of them are buying FlexPay 6. But also, we sell payment kits where you don't have to replace the whole dispenser and you can just upgrade the payment from FlexPay 4 to FlexPay 6. So it's really an opportunity of both selling a new dispenser with payment embedded in there or upgrading your payment.

Yes. And again, if there's any questions, feel free to raise your hands, and we'll keep going here. Just around -- maybe it's iNFX. I mean you've kind of referenced some larger deployments may occur in 2026, maybe second half of '26. What's kind of the cycle there in terms of the sales cycle, the pilots that may be going? I don't know if you can give us a sense of how much activity is underneath that, expectations.

Yes. Just stepping back on iNFX, our iNFX wins so far, we did Shell and Chevron for all the U.S. sites, and we did Costco Canada, which was Unified Payments, which was both FlexPay 6 plus iNFX. We have a pipeline of opportunities, which include some pilots ongoing. These are a little longer sales cycles because you're dealing with payment. If payment isn't working, their site is down and they aren't generating revenue and profit. So typically, it goes into a lab for a while, they'll evaluate it. You're going through testing with then you might roll it out for 1 or 2 sites if it's -- if they're moving from FlexPay 4 to FlexPay 6 at the same time, you're going through your payment certifications with your payment processor. After you've done a few sites, you'll do a smaller district, maybe 20 sites and then you'll go into a rollout with us. So we continue on our pilots with our customers. The pipeline is good. We think we have good potential for growth in this for a few years to come.

Yes. DRB, the vehicle wash system is the other bigger piece that's in the mobility tech segment. The newbuild activity, I think we've deduced has stabilized now, maybe that stabilized going forward. How do we think about the growth profile of the DRB business if, say, newbuilds are at a flattish level for the next few years? What's driving the growth on that side?

Yes. I think where we've seen a significant uptick recently has been on the Patheon conversions. Patheon is our new point-of-sale automation software that we offer in car wash. And we've had that out for about a little more than a year or so. And that conversion rate was slow to start, slow to adopt, but we've seen a big ramp in that recently. And I think that will be a big driver of growth for us going forward. As you mentioned, the newbuild side has stabilized, still probably down a little bit this year versus 2024 levels, but should continue to stabilize through next year. And as you said, 60% of this portfolio is recurring. So that's been growing sort of low single-digit rates and the system side is the other 40%. We'll get some benefit from Patheon into next year. So something mid-single-digit-esque is probably the right growth rate for this business longer term, most likely including next year as well. Still working through the final plans on that, but...

Ryan talked about Patheon, some of what I was talking about on the convenience store side from a technology perspective, that plays out. Patheon's our cloud connected, moving from on-prem to the cloud drives higher automation and productivity for our customers, but also higher revenue. You're incorporating things like loyalty, customer relationship management, where you can do targeted marketing and drive and steer higher revenue. So a lot of the same themes from a technology perspective playing out. Yes.

Maybe just real quickly, just to touch on the Matco, the tools business. You said some kind of self-directed efforts to drive -- stimulate demand there. Can you touch on what you're doing there?

Yes. While the backdrop secular drivers are intact in that business, if you think miles driven is up, age of the car park is up, size of the car park is up, complexity of the car park is up. In the shorter term, technicians are impacted by the macro conditions, but we're very focused on stimulating demand in this environment. When you think the focus is around higher productivity, lower price point items from an innovation perspective and product vitality perspective, we also have some initiatives. We do have 30% of the territory unserved through franchisees, so potential to add. We're being more targeted on the persona of people to target, where to target, how to target. We're also looking at stuff like store layout versus what's selling. So obviously, as the mix of what's selling changes, how do you design the stores better to dynamically and to help improve sales. So the team is working extremely hard on initiatives to try and stimulate demand and try and stabilize the business and turn it around even in this environment.

Yes. I mean, to the extent our administration has introduced plans to try to improve spending, capital spending, tax incentives, et cetera, maybe that flows to Matco, maybe it doesn't. Any areas of the business, though, that you would identify that you might expect to see some benefit from stimulative measures?

Yes. So first of all, the depreciation -- sorry, the R&D capitalization versus expense helps us from a cash tax basis. So we definitely benefited from higher cash flow because cash taxes are going down. We'll probably see the benefit split between this year and next year a little bit. Accelerated depreciation going to that, for the large national regional operators, whether they're on the convenience store side or on the car wash side, their plans remain intact. I don't think it makes a huge difference. But really, when you start looking at some of the smaller operators, where they're more focused on cash-on-cash returns, quicker paybacks, accelerated depreciation definitely helps. Now if you're planning a new site, you're looking 12, 18 months out before it translates into an order for dispensers or our point-of-sale system on the car wash. So if we start seeing some benefit from it, I'd expect we'd start seeing it later next year in 2026 and 2027, but it definitely helps us accelerated depreciation. Also, there's talk about tax payments or tax refunds being a lot higher, Rob, I think we were discussing it last night. As there's more discretionary money or if there's more discretionary money, that should help the technicians and hopefully help Matco a little bit also.

Yes. Just on the fueling business, Environmental & Fueling segment, does the growth profile, do you think that looks next year? Would that look much different to the demand dynamics, I guess, I'm not asking for guidance specifically, but do you see anything different in the demand dynamics next year that would be different than this year?

No. It's -- I think if you look, demand is pretty healthy and constructive in the C-store convenience retail space. On top of that, our innovation is reading through. And also, if you think what we've been doing with our 80/20 program around simplification, it enables us to focus on the areas where there is growth with the customers that are growing, the products that are growing. So really simplifying our portfolio through 80/20 is also an enabler of growth for us.

Yes. Just on that point, you've talked about a lot of confidence just in terms of being able to deliver some margin expansion next year. Could you dig a little deeper into what's driving that to the extent it would be over and above maybe a normal incremental margin level?

Yes. Our Vontier business system is built around a culture of continuous improvement. And part of that is our 80/20 process. Internally, we call it focus and prioritization effort. And we're still in the earlier innings of the 80/20 effort. If you really think we started off with 32 global dispenser platforms, we're down to 15, and we'll be down in the high single-digit range, 8 to 10 range. What it's allowed us to do is improve our standardized components from 2% to 30%. It's allowed us to take out about 20% of our square foot from a manufacturing perspective. It's lowered our sustaining costs, allowing us to invest more in new product development and to return to the bottom line. We're doing similar things with our software platforms. We're simplifying the organization. So all of that, along with strategic pricing gives us significant runway for improving our margins. Also from an R&D perspective, we feel we'll have better leverage as we continue to grow. R&D is not going to grow at the same rate as sales will probably be helped constant. And we're also seeing benefits in R&D from the deployment of AI, where code generation of code -- 80% of our Invenco product engineers are using AI for code generation. We're doing a lot of automated testing with AI, which reduced or improves the cost of quality by 15% or so. We continue to optimize. We went from 18 R&D centers to 9. So we have over 1,000 software engineers now as a business. But the average cost of engineering has come down materially as we've gone to these engineering centers. So a lot of work already done, but a lot of work ahead of us to continue to expand margins, and we feel pretty good about it.

Yes. One thing I want to touch on real quick. You made an announcement, I think it was last month, just around sales force kind of commercial go-to-market unification, I guess, is the term I use. How impactful do you think that can be? How quickly? It seems like a big deal, but it's -- I know it's early days as well.

Yes. It's something I'll start off with what really matters is the customers. And our customers are extremely happy and positive about the change. In the old model when we went to market as each business, you could have 4 different people calling on the customer in the matter of a week with 4 different products. To some extent, our customers might buy siloed, but as you start thinking of integrated technologies and digitalization, all of these assets do need to come together. An individual buyer might not be thinking of it at an aggregate level, but I can assure you for larger customers, the C-suite is thinking about it that way. The CIO, the CTO is thinking about it that way. So really, what we're doing is bringing our sales together, our go-to-market together, which allows for key account management, trying to drive better share of the wallet, but also at the same time -- as you're talking about our whole portfolio, you're also learning and getting that constant feedback on what the customers' pain points are across the portfolio, across their integrated set of products or assets, which allows us to be better and solving the high-value problems for our customers.

Yes. We need to break there. We're at time. There is a breakout session in Lavante. So if you have any questions to direct to the team, be just there.

Thank you, Rob.

Thanks, Rob.