Q3 2020 Vontier Corp Earnings Call
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All lines have been placed on mute to prevent any background noise. After.
After the speakers remarks, there will be a question and answer session. If he likes to ask a question during that time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound key.
I would now like to turn the call over to Mr. Li secured Vice President of Investor Relations Ms., Karen you May begin your conference.
Thanks Pasha, good morning, everyone and thank you for joining us on the call with me today are Mark earlier, President and Chief Executive Officer, and taking her senior Vice President and Chief Financial Officer, We will present certain non-GAAP financial measures on today's call information required by SEC regulation G.
Moving to these non-GAAP financial measures are available on the Investor section of our website Www Dot volunteer dotcom under the heading financials. Please note that unless otherwise noted the presented financial measures reflect year over year increases or decreases relative to the supplemental normalized financial day.
Data also posted on our website under the headings financial.
These supplemental normalized financials are adjusted for estimated Standalone public company costs.
During the presentation, we will describe certain of the more significant factors that impacted year over year performance. The supplemental materials describe additional factors that impacted year over year performance all references to period to period increases or decreases in financial metrics are year over year on a continuing operations basis during.
On the call we will make forward looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward looking statements are subject to a number of risks and uncertainties and actual results might differ materially from any forward looking statements that we make today.
Information regarding these factors that may cause actual results to differ materially from these forward looking statements is available in our SEC filings and subsequent quarterly report on form 10-Q before.
These forward looking statements speak only as of the date. They are made and we do not assume any obligation to update any forward looking statements with that I'd like to turn the call over to Mark.
Thanks, Lisa Good morning, everyone and welcome to our third quarter earnings call and our first as an independent public company.
We're excited to launch the next generation of our business as volunteer.
And while we have taken our first steps to gather amid unprecedented global circumstances. It's important to note that we do so with a strong diverse and experienced team.
We also have market leading positions in essential mobility technologies, and a strong balance sheet.
[noise] as you'll see as we take you through the results we enjoy the benefit of a resilient portfolio that generates high levels of cash.
Before getting into our third quarter results I want to outline what we will cover today.
I'll start by giving you my perspective on our performance, including how the pandemic has affected our businesses and key market indicators for continued recovery.
Dave will then go into more detail on the financial results, which as a reminder are presented on a normalized standalone basis from Ford is historical results.
Finally, I'd also like to highlight the unique opportunity we have to capitalize on the attractive $27 billion mobility market in which we operate.
We have strong secular drivers in our core markets and we have attractive adjacent fees and logistics and supply chain smart cities and E. Mobility that offers significant runway for just disciplined M&A.
I'll close by sharing some brief thoughts on what I've experienced since joining the volunteer team and providing a framework for our longer term strategic direction.
With that as a backdrop, let's move to some of the highlights of our third quarter results.
Today, we reported adjusted diluted net earnings per share of 80 cents, an increase of 25% driven by strong follow through on mid single digit core revenue growth.
I am pleased with our double digit earnings growth, which reflects the strength and durability of our portfolio.
With a goal of continuing to maximize cash and liquidity, we leveraged the volunteer business system to drive substantial working capital productivity delivering third quarter free cash flow conversion of greater than 160% of adjusted net earnings.
Our teams maintain the discipline actions that we took in Q2 and continued to adjust accordingly in a rapidly changing environment.
Additionally, adjusted operating margins expanded more by more than 200 basis points to approximately 24%, reflecting gross margin expansion of 130 basis points to 44% and a reduction in operating expenses.
Our guiding principle has been to manage the short term and a way that positions us to maximize long term benefit as we pace ourselves to the market recovery.
Since the beginning of the Cove in 19 pandemic. We have remained focused on the health and safety of our employees and this continues to be our highest priority along with providing business interruption for our customers.
I'm incredibly proud of how the volunteer team continues to effectively address the challenges and opportunities in front of us.
We rapidly embrace online collaboration and successfully converted to effective digital daily management virtual cards, and and online sales meetings we.
We have successfully address significant supply chain and product related issues as global supply chains have been disrupted.
Our teams instituted daily and weekly performance measurements and develop new data driven demand scenarios.
Standout example of the team's ability to monitor end market health is that Matco, where we utilized our maximum diagnostics vehicle scan data to measure end user service activity in the repair shop.
These actions across the portfolio enabled us to adjust our supply levels and other resource needs to the rapidly changing environment.
In this difficult environment. We also continued to execute on innovation.
At Matco, we introduced numerous products through our distribution network to promote personal safety and protection due to the urgent need for PE.
The power of our model serving the last mile to the service technician has shown its relevance and resiliency through such a robust recovery.
And a JV are we launched several new products focused on meeting environmental regulations, including a central vapor recovery solution targeted to address India emission standards, including sensors to help customers comply with regulations.
We prioritize investments in launching TN threesixty, the new technology platform at Tel attract NAV man feedback.
Feedback from our early adopter program has been overwhelmingly positive sighting speed ease of use and differentiation with our AI features.
However, unlike the 2008 2009 recession, where our businesses were down only mid single digits. This market environment is far different.
At peak impact in April the shelter in place mandate drastically and rapidly reduce miles driven by greater than 40% and severely restricted access to our end user customers.
Since then we've continued to see improving demand dynamics play out within our mobility technologies and diagnostic and repair technologies platforms.
In the third quarter mobility technologies or empty continues to benefit from MB in JV, our North American business.
We also benefit from mandatory security regulations in Mexico, which we believe are driving market share gains.
The initial impact of co bid was more intense in our diagnostic and repair technologies platform or DT given the severely limited access to mechanics. However, matco sales recovered quicker than we had anticipated as virus control measures east, allowing increased franchise.
The activity.
We believe we also benefited from the government stimulus programs.
We exited the third quarter with positive markers for demand, including global miles driven rebounding to approximately 80% of pre cobot levels.
We experienced a V shape recovery matco on robust technician employment levels and with continued regulatory drivers impacting GBR. We ended the quarter with a strong backlog across the portfolio.
While the longer term outlook depends on the phased approach in which global economy stay open or experience setbacks. We will continue to focus on managing what is in our control.
We will maintain appropriate measures to adjust to the demand levels that we see while still investing in our highest growth priorities.
With all that said, we expect fourth quarter core revenue growth of mid single digits adjusted core operating margin expansion of greater than 200 basis points and an effective tax rate of approximately 23%.
For the full year 2020, we expect core revenue to decline low single digits adjusted core operating margin expansion of more than 125 basis points and an effective tax rate of approximately 23%.
We also expect adjusted free cash flow conversion of 130% to 140% of adjusted net earnings.
With that I will turn the call over to Dave to provide the financial results Dave Thanks, Mark.
Our adjusted net earnings for the third quarter were $134 million, an increase of 25% from $108 million in the prior year period.
This translates to adjusted net earnings per share of 80 cents compared to 64 cents in the prior year period. The double digit increase in earnings was primarily driven by volume growth with strong fall through which led to 290 basis points of adjusted operating margin expansion in the quarter.
Or 220 basis points on a core basis.
Core revenue growth in the third quarter was 5.6% driven by the continued strength of the ERP rollout in North America regulatory driven demand in Mexico and strong demand as Matco from the April lows. We saw continued improvement in the demand environment through the second quarter and that trend has continued.
You'd exiting the third quarter, our adjusted operating profit for the third quarter was $180 million compared to $152 million.
In the prior year period, primarily driven by strong core growth and continued cost management in both Cogs and Opex. We delivered gross margin expansion of 130 basis points, which continued which contributed to the strong operating margin expansion a testament to the businesses rapid deployment of.
Yes to effectively adjust costs to the demand environment, although most of the cost actions that were implemented in response to the uncertainty caused by the pandemic were specific to Q2, we did maintain a lower level of spending in areas like travel, which remains limited in this environment.
All the while we continue to fund our highest priority is to enable us to exit 2020 in a strong position.
Our earnings growth translated through to strong cash flow performance with adjusted free cash flow of $218 million a conversion of 162% Q3 is typically a seasonally stronger quarter for free cash flow conversion, but this result is well above historical conversion.
Rates.
First our working capital performance for the last two quarters is really at levels. We have not previously experienced a testament to the team's continued application of VBS. Our HR management has resulted in improved collections performance and the inventory we took swift action heading into Q2 to adjust supply chain.
Again and that discipline has carried through the third quarter.
In payables, we continue to negotiate more favorable terms and to convert more customers to our peikar proof.
Our operating cash flows can also be impacted by a number of other area by a number of other items and those trended favorably for us as well.
All of these factors had the impact of a bolstering Q3 free cash flow well above the traditional conversion levels our year to date adjusted free cash flow is $409 million and reflects a 151% conversion of adjusted net earnings, which is which again is well above our historical.
Coal conversion rates of closer to 100%.
Looking at the top line performance of the two platforms empty had core growth of 5.4% led by high single digit growth in JV are where we continued to benefit from the strong demand. Despite the deadline for the liability shift being delayed until April of next year us.
He was the largest growth driver, but we also saw strong demand out of Mexico, driven by fiscal security regulations and continued sequential improvement in other parts of the business as access to sites and other COVID-19 related constraints improved.
In our DTC platform core growth was 6% and driven by the sharp V shaped recovery that we experienced at Matco as koby 19 restrictions east.
We attribute the sharp sequential recovery in part to healthy technician employee employment environment, which is also evident in how our loan portfolio is performing with no increase in delinquencies noted from the pre pandemic environment.
We also believe an element of pent up demand is driving the strong results as reflected by increased demand spread broadly across product lines, including a healthy order backlog in tool storage.
Orders grew double digits, and we ended the quarter with very high levels of backlog, given some pandemic related supply chain and other constraints.
Looking at our business by geography developed markets grew core revenue high single digits. This performance was led by approximately 10% growth in North America, reflecting strong SMB demand and the macro recovery driving topline growth and strong margins western.
In Europe improved sequentially from Q2 decline greater than 20% to a high single digit decline in Q3, driven by several key competitive wins at GE, VR and increased demand for environmental solutions and E mobility offerings.
Hi growth markets are still unfavorably impacted by COVID-19, as primarily reflected by continuation of reduced capex spend and order delays by national oil companies in China and India.
Core revenues declined by mid single digits in high growth markets, but this represents a sequential improvement from being down in the mid Twentys during Q2.
Aside from the impacts of COVID-19, we do also continued to be impacted by the compare against the double walled regulatory driver in China that benefited the prior year.
As Mark noted the evolution of the recovery remains difficult to predict but we are focused on what we can control and we are assuming that we continue to operate in an environment consistent with what we are currently experiencing we continue to monitor key indicators on a daily basis, and we are prepared to respond to the dynamic environment.
Should it be necessary.
During this year, we took a number of cost actions in response to the environment, which were mostly temporary in nature. These temporary savings primarily fleet impacted Q2, but we continued to see some positive impacts from lower spending in Q3, as we manage through the uncertainty of the environment.
Now as we look to where more normalized business levels may be upon exiting the year, we anticipate implementing some level of permanent cost restructuring beginning.
Beginning in Q4.
We anticipate earning incurring a restructuring charge of about $4 million to $8 million in Q4, which is excluded from our outlook of adjusted operating profit margin expansion for the rest of the year with that I'll turn it back to Mark.
Thanks, Dave as I mentioned previously I want to close by sharing some observations and thoughts on vision.
I joined volunteer because of the growth and portfolio transformation opportunity and the best in class business system culture that lives in the many hardworking men and women of volunteer.
I want to thank our employees for rising to the unprecedented challenge presented by this pandemic and acknowledge each and every one of their dedication during these challenging times.
After nine months here I'm, even more convinced about the quality of people we have at frontier.
The strength and resiliency I've witnessed can only come from a United culture like the one we are forging with our volunteer business system.
At connected with both across our operating companies and spent time with customers.
I can tell you we are trusted leaders in our markets.
On tier enjoys abroad installed base that is poised to take advantage of trends in our $27 billion market.
We have a proven track record of substantial and strategic portfolio transformation and we are privileged to claim the danaher and Fortive heritage.
I'd like to personally take this opportunity to thank the volunteer board and Fortive for Trc me to lead at a point, where we see more value being created a volunteer with a focus on mobility infrastructure.
In my previous roles and the opportunity to navigate strategic and necessary portfolio pivots drive improvements in innovation and deployed business improvement systems to deliver greater earnings growth.
Excited about integrating lessons from my past and applying them at volunteer the first steps involved engaging the team on key priorities, while facing significant market uncertainties.
This is something many of us at volunteer face in our prior working lives we have shifted priorities through policy deployment, a process embracing VBS and one I've used previously to engage teens to achieve outstanding results.
We believe there will be evolving opportunities within our portfolio and around SG.
The next 10 years of mobility will bring more change in the way that people and products move than any other decade since the invention of the automobile.
Over the remainder of this year, we will double down on our strategic planning efforts because positioning for the long term is our way forward.
We have a strong legacy of moving ahead of secular shifts and we are uniquely positioned to capitalize within the mobility arena.
We couldn't be more excited about the journey ahead of us and establishing our own independent record of strong performance and shareholder returns for many years and decades to come.
United by our shared purpose volunteer is mobilized in the future to create a better world with that let me turn the call over to Lisa.
Thank you Mark.
That concludes our formal comments pasta, we are now ready for questions.
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star followed by the number one on your telephone keypad and please limit your questions to only one thank you.
Your first question is from the line of Nigel Coe with Wolfe Research.
Relations on getting the first quarter into the the books.
The marketing performances was so it was really sort of caught my eye and I.
I think gross losses of 50 basis points on that.
So maybe talk about.
So in terms of price across the portfolio.
Raw material benefit sense kind of how that plays out.
Over the next couple of quarters, and maybe just given the pulse check as well on the tuchman, how that how thats tracking as well.
Hi, Nigel it's Dave I'll jump in on the first part and then pass it to Mark So price was about flat in the quarter I think that was more a function of kind of what people bought off.
Obviously price remains a strategic lever for us and we would anticipate that continuing to be that way into the future, but about flat in the third quarter. We also saw a lot of productivity from the perspective of raw material pricing and those things are PPV actions and the actions and those really helped drive gross margin expand.
And then of course, we remain very diligent on cost.
We took a lot of the actions that we experienced in the third quarter continued continued maybe some of the temporary actions came back a lot of debt. We will continue to be very diligent around cost given the environment that we saw so those things, obviously transpired well to drive margin expansion as far as total track now man pest Mark Yep, Thanks, Dave Nigel we.
Continue to see good progress with Tele track NAV man as we said in our road show Weve been pretty encouraged by the reduction in churn as you saw remind our churn was most in the north North American issue, we have pretty good churn in Australia, New Zealand and UK, but.
Had spiked up over the last couple of years in the USA and so moderating that churn is a big step forward and of course, another big step forward is the launch of our 10 360 platform that I also mentioned on our prepared remarks, and we like the response, we're getting from customers right. Now you add the SaaS business. It does take a while for that to flow.
Through into revenue, but we do like the market it's Exxon.
Excellent high single digit market growth opportunity and as we also said it was a breakeven business so getting that to return to profitability could be a good uplift for us.
Great. Thanks, Mark Thanks.
Okay. Thanks.
Your next question is from the line of Julian Mitchell with Barclays.
Hi, good morning.
Maybe my question will be around margins and cost control so you've guided for that.
Big Envy revenue headwind next year.
Just wondered if you could give us some more insight as to what cost actions, you're taking to offset that headwind.
And how you're thinking about margins over the next 12 months and also related to that.
I saw the fixed costs still restructuring actions. We took during Q4 two am I looking at next year should we expect the fixed cost out and the temporary cost perhaps return could.
Could be fairly balanced or neutral.
Yes, Hi, Julien, it's Dave I'll make a couple of comments and Mark can talk about some of the actions that he sees for next year, but.
As far as the costs out we saw about $20 million of cost out in the second quarter. Some of that was kind of what I'll call hybrid and so we saw some continued savings from that in the third maybe $5 million of that so but the preponderance of that that second quarter will come back next year I think some things like travel will remain limited, but also we.
Would see some volume offsets on year over year basis, particularly in the second quarter next year, just given the ease of the the ease of the compare.
As far as further cost actions I think we see a number of opportunities I'll, let mark kind of explain most yep. So Julian as you know the TMB has been a strong tailwind for us and the reason why start there is that we've been we've been doing a great job chasing revenue and we believe we are gaining share also with my comments on the prepared remarks.
At the same time, we have an opportunity to reduce cost as that rolls off and we have a lot of complexity in the business. So there is a simplification effort, where we're doing analytics on right now that we think can absolutely in form that and are very sensible way for us at the same time, we have a few businesses where there are operating profit is below.
So where we think they can be and we're driving actions. Accordingly, one of those is hennessy that we spoke about and so we have a similar kind of activity there, where we think we can our return that business to higher levels of profitability. So as you look at sort of the simplification.
Opportunities like Dave said on the restructuring side that we think that not only does VBS offer as ways to focus on growth. It also offers ways to wring out a better cross measures as we go through the use of MZ dislocation.
Great. Thank you.
Your next question is from the line of Andy Kaplowitz with Citigroup.
Okay.
Mark and Dave can you give us perspective regarding your backlog being up 30% and obviously seems like very strong number or is it just mostly on the related work in the US is it macro strength is it is it across the board or do you have the most visibility and does that give you confidence in being able to offset some.
Mark all of that and the related headwind that you will have as you go through 2021.
Yes, so our backlog is pretty healthy right now it's up about 30%. It's a combination of certainly the the work that we've been doing around taking advantage of this U.S. CMV opportunity also in Mexico.
But I think at the same time, the sort of surprised that we saw in our macro business. We have a pretty strong backlog there grew double digits and we're sitting on a a strong backlog had we shipped all that backlog, we would have clearly been in the mid.
Mid double digits on that in terms of revenue as well so having a healthy backlog a time like this is probably a good thing.
You want to ask a follow on to that.
Yeah, and then ill again as you go into 21, obviously, you've mentioned before the the headwind that you expect from SMB. It seems like you have relatively balanced backlog as you just said Mark So does that help you to maybe grow or.
Can the other businesses helped offset that 150 200 million headwind that you've said before.
Yes, so the the MV issue that we're talking about is really use CMV and yes. The other businesses can absolutely help upset that offset that excuse me a couple of things that we sat around that is the growth potentials in high growth markets, where the build out of the footprint also the sophist.
Location of what Theyre looking for in terms of automation for regulatory drivers such as security vapor recovery, which also talked about on our earnings call. These regulatory drivers globally offer really good opportunities for us to continue to grow that.
I think at the same time when you look at the portfolio of opportunities that we're in we're in a 27 billion dollar market opportunity and as a consequence, there is lots of areas for growth one of the other things that I also we also talked about was on the DTV platform side that has that returns to growth to that's really easy.
Compare next year compared to this year, obviously because of the cobot drop off where that that platform dropped pretty significantly in the April may timeframe.
Appreciate it Mike.
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And your next question is from the line of Richard Eastman with Baird.
Our creatures.
Perhaps just kind of characterize the China and India markets.
And maybe just the tone of business kind of as you tracking along into and through October here.
But just kind of characterize that as part of the growth strategy run high high growth markets.
Yes, so we definitely see both those markets, representing a fair amount of growth opportunity for us because the fact that regulation there, particularly like I just said on vapor recovery and also on the security side. These are big themes for those governments as they continue to rollout.
And infrastructure builds and so we take advantage of that in the case of India.
There, we see pretty significant growth.
The issue of course is it can be lumpy and of course also impacted by the Cove. It we don't really know the rate that installs will go into the ground.
That being said, we have an excellent position there in the market. We are one of the few people that can really offer a complete automated solution there, including the servicing network. So we're we're very pleased with the position we are in India, and we're positioned well to capitalize on that growth as it rolls out China of course has been.
In affected by double wall pipe us less so than some of our competitors and at the same time some of the national oil companies have been impacted by reduced margins. So some of the backlog has been pushed out but once again, we also think that represents a good growth opportunity.
As you would think Ric it's really it was more driven by productivity actions and of course, the volume helped as well.
Okay very good thank you.
Okay. Next question is from the line on staff, John Walsh with credit Suisse.
[noise] morning.
Hi, good morning.
I guess a question around the deployment of cash.
Obviously cash was very strong this quarter.
I wanted to actually ask about two business in particular, you talked a little bit about tell attract NAV man in an earlier response, but curious if you think that businesses at a point, where they're kind of entitled to you know have capital allocated to them in the terms for bolt ons and then also a little bit more color. If you can.
Could on G T Ts performance and kind of their entitlement to do bolt ons as well because there seems to be some interesting things developing in that space.
Yeah. John This is mark I'm really happy with the portfolio that we have we're position well for this 27 million dollar market that we operate in and we think that there's a lot of near in kind of growth spaces. You spoke about two and we like alot about logistics and supply chain themed if there's one thing.
Covid in the economic impact of that is showing it is the importance of the supply chain the efficacy of it and obviously tell tech Naff man has an operating there that can help could clearly be expanded on.
The market's our growth eat there fragmented we think there's lots of opportunities.
We're clearly evaluating that as a as an option.
And it's a strong 7 billion dollar high single digit market grow so I think that represents a good possible area.
At the same time, GTT, a toehold and smart cities, which we think is also pretty relevant once again.
Good growth opportunity very fragmented near in Adjacencies for us.
But when you look kind of across the field here I think it's one of our biggest questions that we're asking ourselves is is it's like there's so many good opportunities for us to deploy into how do we pick through this is Dan her in Florida have always said that deals can be episodic and that strategy will inform exactly.
Disciplined approach for M&A, which I think we've got a really good model for cultivation.
Is initiated by the way into the operating companies, where they do cultivation as well is is clearly a part of what they do is the business and as we've assembled an excellent team with Elizabeth Cheever on M&A and Rupert unique Krishnan on strategy.
I think we're we're well positioned to be able to answer some of these questions and we've got the right processes in place to move it forward. So I'm pretty excited about our ability transformed the portfolio.
Okay, maybe just as a follow up to that you kind of what the businesses did in Q3, I don't know if I heard that and prepared remarks, and then what the expectations for those businesses would be embedded in your queue for guide. Thank you.
Yeah, I'll try to address that John necessarily go into the.
To the pop co level with everything we've talked about mobility technologies.
Having core growth five 4% and that was primarily driven mostly by Jvr, which was high single digits. The other businesses.
We're we're a loss told truck Nab men more because of some of the turn we're in the middle of making an GTT more just volume related and deliveries kind of mid single digits.
The diagnostics and repair side grew 6% that was really driven by by Matt Coe and Hennessy again at large sequential recovery, but really about kind of more flattish in the quarter as far as the fourth goes we weren't breaking down.
The guy beyond the color, we gave him the remarks.
Great. Thank you.
Thank you.
Ladies and gentlemen, as a reminder, even like to ask a question. Please press star follow.
But by the number one on your telephone keypad.
Again that starling.
At this time on that show on it there any more questions I would like to try and call back over to Mike for closing remarks.
Yeah. Thank you Pasha I appreciate it couldn't be more passionate about the opportunities we have the leverage V. B S can only improve our business today, but also to take advantage of this 27 billion dollar market that we operate in and I'd be remiss not to mention and thank the volunteer teen further incredible work through pretty unprecedented.
And at times to stand up the company I think for a successfully as well as Jim legal and afford a team for their tireless support in helping us optimize what's in front of us. So thank you for joining us on today's call and I couldn't be more excited about our future ahead have a good day.
Thank you, ladies and gentlemen for participating in today's conference call set you know disconnect your lines.
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