Q1 2021 Vontier Corp Earnings Call
[music].
My name is Dorothy and I will be your conference facilitator. This morning at this time I would like to welcome everyone to the volunteer Corporation's first quarter 2021 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you'd like 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 MS. Lisa Curran, Vice President of Investor Relations Mascara, and you may begin.
Thank you Dorothy good morning, everyone and thank you for joining us on the call with me today are Mark Morelli, our President and Chief Executive Officer, and gave them on our 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 relating to these non-GAAP financial measures is available on the investors section of our website www.
Volunteer Dot com under the heading financials. Please note that unless and otherwise noted the presented financial measures reflect year over year increases or decreases.
During 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.
And debt, we expect or anticipate will or may occur in the future.
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 on our SEC filings and subsequent quarterly report on form 10-Q.
These forward looking statements speak only as of the day. They are made we do not assume any obligation to update any forward looking statements with that I'd like to turn the call over to Mark.
Thank you Lisa good morning, everyone and welcome to our first quarter earnings call. We had an outstanding start to 2021 and our team's strong execution drove double digit core revenue and earnings growth we.
We delivered adjusted earnings per share of <unk> 63, an increase of 43% year over year and eight cents above the high end of our guidance.
Our results this quarter are a clear demonstration that better prioritization and embracing our core values drive robust improvement.
I cannot underscore enough the importance of unlocking value by combining our cultural heritage with a greater focus and fresh perspective made possible by the separation of on tier.
Renewed discipline enable us to better prioritize our highest return opportunities and pursue strategies to transform our portfolio.
We're taking advantage of secular trends to win share with North American E&P solutions.
Importantly, we're also gaining momentum on initiatives to deliver growth beyond this regulatory driver.
I'd like to give additional color on our profitable growth initiatives and operational milestones and this is indicative of the significant runway of opportunities available to us.
We continue to drive deeper deployment of Bbs and build momentum, we revamped our performance and incentive programs to solidify accountability to our aggressive strategic and operational agenda.
The REIT linkage is in place to ensure emphasis on the critical few areas of growth innovation and simplification.
Accordingly, we are repositioning to streamline the business, while investing for more profitable growth.
Early wins and share gains and new product launches are driving this accelerated growth.
And the first quarter, we delivered mid teens core revenue growth and non <unk> sales, including greater than 25% core revenue growth and high growth markets.
We saw strong growth and retail solutions, driven by 30% growth and point of sale offerings.
Additionally, we continue to see accelerated growth and diagnostic and repair technologies with high teens core revenue growth.
And lastly, we're continuing to make important progress returning telecheck never meant to more profitable growth to.
To summarize we're advancing all of our priorities as we outlined last October and this is unleashing our earnings growth potential.
And so as I mentioned, we're off to a strong start to the year. However, we will be facing continued supply chain constraints and inflationary pressures going forward as the sourcing environment for steel and electrical components. Among other things is challenging.
But this is another area, where our team has executed exceptionally well and we're leveraging DBS to derisk, our supply chain, we were able to more than offset inflation and the quarter with price and I am confident.
And our team's ability to continue to manage these headwinds.
We remain vigilant as we expect to see increasing challenges with supply chain logistics inflation and COVID-19 related impacts centered on India and other parts of the world.
However, we always come back to the volunteer way as our guiding principle, our commitment to integrity and our people is the foundation of our success, we've escalated programs to support our employees and their families and the most impacted areas and that will remain our highest priority.
Moving to the outlook, given our strong performance and the first quarter and expectations for improved demand. We are raising our full year 2021, adjusted diluted net EPS guidance to $2 and 55 per share to $2 65 per share. This.
This includes raise assumptions for low to mid single digit core revenue growth and core adjusted operating margin expansion of 60 to 90 basis points.
We're also initiating our second quarter adjusted diluted net EPS guidance of 50 to 54.
Which includes assumptions of 23% to 25% core revenue growth and core adjusted operating margin expansion of greater than 200 basis points.
With that I'll turn the call over to Dave Dave.
Thanks Mark.
Adjusted net earnings for the first quarter were 108 million and increase of 44% from 75 million and the prior year period. This translated to an adjusted net earnings per share of <unk> 63.
Compared to <unk> 44, and the prior year period, the double digit increase and earnings was primarily driven by volume growth and strong fall through which led to 380 basis points of adjusted operating margin expansion and the quarter.
Core revenue growth and the first quarter was 14, 3% driven by broad based and non <unk> growth of approximately 15% in the quarter supplemented by the continued strength of the ENV rollout and North America.
And <unk> core revenue grew mid teens with bookings growth of high teens while.
And while macro had high teens core revenue growth and more than 20% bookings growth.
Growth markets were also a significant contributor and the first quarter growing more than 25% year over year and low teens growth sequentially.
But within the high growth markets, we saw particularly strong growth in India and in Latin America, driven by Mexico share gains.
Adjusted operating profit for the first quarter was $151 million.
Growth of 41% compared to the prior year period, primarily driven by strong core revenue growth and continued cost management and both cost of goods sold and operating expense.
To that and we drove 90 basis points of gross margin expansion and 380 basis points of adjusted operating margin expansion continuing the progress we've made in the back half of 2020, as we leverage Bbs to execute our profitable growth initiatives and manage through a very dynamic supply chain and inflationary environment.
Our earnings growth continues to translate through to very strong cash flow performance with adjusted free cash flow of 156 million and conversion of 145% in the quarter.
Q1 is historically the low point in the year for free cash flow conversion as we normally build working capital coming off the year and low and what is typically a seasonally lower volume quarter. However, this quarter. We further improved working capital through targeted receivables and payables actions, while also satisfying high volume.
<unk>.
And the first quarter, we closed on $1 6 billion of senior notes at an average interest rate under two 5% lengthening the maturity of our debt structure. We subsequently retired $1 4 billion of our temporary debt financing, including repaying our two year term loan which was.
And put in place to facilitate our October 2020 spin this had the impact of Opportunistically, increasing our growth and gross indebtedness by 200 million to approximately $2 billion better positioning the company to execute on M&A are.
Our growth and earnings along with our strong free cash flow generation resulted in our net leverage decreasing from one nine times from two two times at the end of 2020 and two six times at the time and spin and October of last year.
Looking at the top line performance of our two platforms.
Mobility technologies had core revenue growth of 12, 7%, primarily due to mid teens core growth and <unk>.
Actually offset by <unk> and the strength and <unk> was multifaceted, we saw strong demand and high teens growth and non <unk> sales driven by retail solutions point of sale aftermarket and environmental solutions, and 30% growth and high growth markets and we continued to see strong demand from.
On <unk> in North America ahead of the deadline as Mark mentioned <unk> continues to improve and we remain optimistic that the business will return to growth by the end of the year.
And our diagnostics and repair technologies platform core revenue growth was 18, 6% and driven primarily by accelerated strong demand at Mapco Mapco experienced high teens core growth as the demand environment remained strong with substantial same store sales growth, we continued to add to our distribution.
Base posted our third consecutive quarter of strong net franchisee additions following the pause that we saw during the height of the pandemic.
Looking at total company sales regionally the growth was truly broad based as I mentioned high growth markets grew more than 25% and our developed markets. In total grew low double digits with mid teens growth and North America, partially offset by softness in Western Europe.
In addition to executing on the growth opportunities and our markets. We also made progress on our profit improvement actions that will better position the company as we progress through the year, we recognized a restructuring charge of $4 million and Q1.
<unk> is part of the approximately $20 million charge that we continue to anticipate for the full year. This charge is excluded from our adjusted net operating profit as we discussed last quarter. We expect to have these actions substantially complete and the year positioning and our exit rate to achieve the benefits of these actions in 2000 22022, sorry.
Taking a closer look at our outlook assumptions, we now expect our weighted average share count to be approximately $170 million per the year down from $172 million and our prior view and.
And as a reminder, during the second quarter last year, we acted quickly and decisively to reduce our cost base by about $20 million and in line with the pandemic demand environment, given the V shaped recovery and the majority of our markets. We saw about $15 million of those costs return and the third quarter of 2020, we have.
Contemplated the return on these temporary cost actions and the impact from the supply chain constraints and inflationary pressures and our guidance for both <unk> and the full year.
Our adjusted free cash flow conversion of 145% this quarter was unseasonably high from our first quarter of the year. Historically, we have built working capital and Q1 and have seen this is the low point for conversion and the year.
And for 2021, we anticipate that Q1 will be the high point for conversion and Q2 will likely be the low point for the year, we expect to see conversion come down from Q1 levels from the remaining three quarters as we work to better align working capital with demand.
Furthermore, as we noted last quarter, we will have five federal tax payments and 2021 as compared to three and 2020 due to dynamics of the spin.
The extra payment will occur in Q2.
All that said, we still anticipate full year adjusted free cash flow conversion of around 95% importantly, we enjoy a healthy balance sheet with liquidity in excess of $1 billion and ample near term M&A capacity.
Overall, a robust start to the year operating from a strong financial position and with a meaningfully and with a meaningful raise to our full year expectations for core growth margin expansion and earnings growth with that I will turn it back to Mark.
Thanks, Dave Indeed, our team delivered another quarter of strong execution, resulting in top tier financial performance across all metrics I am extremely proud of our employees and encouraged by our ability to deliver against our most important priorities.
You may recall that last quarter I characterize 2021, as an important springboard to a multiyear transformation and it is imperative that we deliver on every step of this journey.
Since separation, we've more than delivered on our commitments and now with first quarter behind US we are even better positioned to navigate the growth and comparison dynamics ahead.
Our improved full year guide remains a tale of two halves.
The first half reflects broad based strong growth, including the continued demand for <unk>, coupled with a favorable comparison due to the impact of the pandemic and the second quarter of last year.
And the second half we have much more challenging comparisons because we benefited from the V shape recovery and accelerated demand for AMD, and Mexico regulatory solutions and the back half of 2020.
Given the improved growth outlook from environmental and point of sales solutions high growth market initiatives and macro we now see first half adjusted earnings per share growth of approximately 40%.
This is partially offset by more favorable expectations of a second half decline and the low double digit range.
To wrap up we had a strong start to the year as we build momentum and establish a successful track record as a standalone company.
I just want to reiterate how pleased I am with our team's execution this quarter to deliver top decile operating leverage and growth.
Greater focus and deeper deployment of the volunteer business system is the driving force behind our success today and tomorrow.
We are well positioned for capital deployment due to our strong free cash flow conversion.
We are confident and our organic and inorganic opportunities.
And we expect to drive compounding growth, thanks to our market, leading positions and compelling long term secular growth drivers.
With that I'd like to turn the call over to Lisa.
Thanks, Mark that concludes our formal comments.
And we're now ready for questions.
To ask a question press star followed by the number one on your Touchtone phone and remove yourself from the queue press the pound key.
And the interest of time, we ask that you. Please limit yourself to one question and you have more than one question press star one to get back into the queue and we will have debt address additional questions as time permits. Please hold while we compile the Q&A roster.
First question comes from the line of Andy Kaplowitz.
With Citigroup.
Hey, good morning, guys nice quarter.
Thanks, Andy.
Mark you adjusted your second half 'twenty, one expectations slightly higher.
Download teams versus down mid teens, what you had last quarter can you give us a little more color into that expected and prove it improvement is it more because of improved profitability youre delivering maybe reopening is positively impacting your businesses, whereas in the sunset and not as bad as expectations and on the last quarter you suggested he and the adoption would be in the mid.
The 80% range and the year whats your current expectations for that.
Yes, Andy Atlas and I think it's both.
Better top line visibility and Thats really on the backs of our <unk> growth initiatives. As you know, we've really down selected to a critical few priorities and one of those is driving some growth is coming not from the secular driver and <unk> and particularly I spoke about them on the call, but it is also important to reiterate here, we're getting better.
And our traction and high growth markets as you know that can be lumpy, but we're getting a really good backlog there and we've raised the outlook for full year. We have also got a lot better traction on some initiatives around retail solutions and that gives us a lot of confidence also macro is showing some strength and we're also care and a good backlog there. So a lot of really good initiatives.
That are paying off for us and we feel really good about it at the same time.
And by the way, where we will make comments on that but we are gaining share on <unk> and I think we feel pretty confident and that view the.
The drop through is been been great and I think the initiatives that we're doing on simplification and driving better margin improvement and our focus there is beginning to pay off as you can see so I think debt and a combination of both of those really give us.
And more confidence to raise our outlook and full year.
Mark and I, just ask you a follow up on high growth markets. Obviously, you guys are pretty big and India and given the unfortunate events. There. How are you guys thinking about from high growth markets and in general, including India have you sort of discount and any COVID-19 disruption and any of those regions.
Yes, that's a great question look the situation in India is tragic and it's still developing.
First and foremost where prioritize and our safety and health of our employees and we've contemplated some of the India risk and our guide, but as you know on to developing situations for full year.
When you look at other high growth market opportunities in Middle East and Africa represents good growth as well.
And some opportunities in Latin America as well so I think we're we feel good about our initiatives there and I think we feel good about our outlook, but obviously working through some some hotspots with COVID-19 that is.
And it's quite significant and very heartfelt for our team and our employees.
And I appreciate it and Marc.
Your next question comes from the line of John Walsh with Credit Suisse.
Hi, good morning, everyone.
Hey, John Good morning.
Hey, Juan.
On it too.
Ask about kind of the.
M&A priorities pipeline.
You can give us any metrics around that either the number of opportunities the size et cetera.
Right you did delever nicely on the free cash flow generation. This quarter, So just love to get a little bit color around the pipeline and the timing. Please.
Yes happy to do that John look the Delevering. It is absolutely part of this equation and generate strong free cash flow and a compound that into M&A and on the M&A question. Specifically, we have this healthy pipeline and by the way its focus on non ice targets and the cultivation is very active.
What I can say specifically about these opportunities is that they will accelerate our strategy and specifically the characteristics are focus on non ice they are accretive to growth and cash flow with a very disciplined process.
<unk> targets that we're looking at our near and we can think about them as retail solutions certain areas and smart cities and possibly telematics and of course, our pipeline is broader than that but I'm trying to add a little bit of color for you as to the areas that have particular interest for us.
And certainly it's a competitive dynamic out there on the markets, but we see deals getting done and deleveraging and like I said as part of it and just as a reminder, here John as you know it is.
It's difficult to predict.
Exactly when deals will happen because they're a bit episodic.
And then maybe that leads into the follow on <unk>.
Taking your share guidance down here by $2 million, maybe just a little bit of more thoughts around deploying some share repo to that.
Hey, John it's Dave.
Obviously, our capital deployment priority will remain will remain M&A.
But we are first and foremost focus on returns I think the adjustment you saw on the guide was just us kind of getting and the stream here and understanding the impacts of stock comp and other things is our first year as a public company, but I would I would steer you towards thinking about M&A as are our top priority continuing to be our top priority for capital deployment.
Makes a lot of sense nice quarter, again, and I'll pass it along.
Thank you John Thank you.
Next question comes from the line of Nigel Coe with Wolfe Research.
Thanks, and good morning, everyone.
Keep it to one question.
Can you, maybe just give us a bit more definition around what you've seen now we've passed the E&P deadline.
How does the backlog looking at this point.
Things that we are still working with US 100 to 150 headwinds for the year, how much of that hits <unk> and and how much on the second half of the year that'd be helpful. Thanks.
Yes, Thanks, Nigel it's Dave I'll answer that so we have not updated our point of view and we continue to.
To stay on that $100 million to $150 million range for the impact of the decline from the peak year of 2020.
We saw come in about as expected in Q1. The backlog is strong I think what we've always said is we want to get through the adoption deadline, which was past year, a few weeks ago and see some behavior through Q2 before we update that and then we'd come back with an update when we look at Q2.
We're still growing year over year, but sequentially the ear of the dollars that we ship will be lower than what we shipped in Q1. So so we do see sequentially a reduction but still growth year over year. So we would anticipate that.
The impact of the Euro.
Year over year decline being second half.
And second half dynamic.
Great I'll get back and Keith.
Yes, thanks Nigel.
Your next question comes from the line of Julian Mitchell with Barclays.
Hi, good morning.
My question is just around.
The margin outlook.
So I guess one aspect of that is.
And it looks like the guide is embedding our second half sort of down margin year on year, maybe 50 bps, but up.
Two to 300 bps half on half.
And maybe just help me understand if that math is roughly correct for the two H.
And what's driving that big half on half.
Uplift is the envy roles.
And also tied to that and it looked like fuel and restructuring charges and guidance at least on a per share basis has gone up from seven.
And the 12 cents.
Maybe help us understand kind of what's driving that and what the in year savings will be next year.
Yeah. Thanks Julien.
I think Youll look Directionally I think you're reading the first half second half dynamic correctly.
Good step up in second half profitability and margin from what we're experiencing and the first half and that's about what you. Historically you would see from these businesses what makes it a little bit challenging is the compare obviously, we saw a dramatic improvement last year, some demand shifting out of the second second quarter and getting satisfied and the second half immediately.
Coming back to mid single digit growth and Q3 of 2020 and high single digit growth and Q4, so that skews the year over year compare dynamic but sequentially I think you're I think you are in the zone why do you see the margin improvement well it will be we anticipate on a little bit higher volumes and also this is where a lot of the profit improvement actions that we've talked.
About come into play part of that as you note is the restructuring we're still on $20 million per the year, we talked about $20 million previously and we're still on.
On the $20 million, so we haven't changed our restructuring assumption.
We believe that that will happen throughout the year, probably a little more weighted towards the back half of the year the goal being well see some and your savings kind of partial year, obviously as they happen throughout the year, but positioning ourselves for.
For the exit rate and regarding also the impact of <unk> on the first half second half dynamic I think what we talked about on the last call was at the EBIT level will be and about 38 cents call. It 28, the EPS net earnings level, and we said we felt good about offsetting that given that we've brought the guide up and we haven't changed and <unk> assumption I would say our.
<unk> continues to be high and our ability to offset the impact of <unk>, which includes the mix impact as well.
Great. Thank you.
Thank you.
Next question comes from the line of Andrew <unk> with Bank of America.
Good morning, This is David Ridley Lane on <unk> and.
Can you talk about the.
Incremental margin assumption and second quarter are you, assuming the full $20 million and temporary costs come back as price cost positive.
Just give us a little bit more of the pieces.
Around the margin assumption to queue.
Sure. Thanks, David.
And.
As you know $20 million last year.
<unk> already have that is back in this year and the run rate maybe not quite all the way up to the 20, because theres some maybe some travel and other things and are back in.
And that for sure is back in the number and that impacts the year over year.
Incrementals.
Also we have kind of a different dynamic and opex associated with what we call. The Expo event matched mapco, our big annual sales event is a Q1 item and it was in Q1 and 2020. This year, we kind of switched the sales side of that too.
Two a big virtual event, but will still hold Expo will be and Q2. So I think we captured a reasonable amount of those sales in Q1, but the event cost itself, which is which is significant moves to Q2. So there is dynamics such as that as well also with a strong backlog that we have we got pretty good line of sight into what we're going to ship.
And and and we have between kind of product and Geo mix, we see some some mix sequential headwinds when we look at Q1 versus Q2.
So that goes into the calculus as well as far as price cost, we would anticipate that being positive.
For Q2, but as we said its a tough dynamic environment.
Got it and just as a quick follow up what was pricing and the.
The first quarter, what was cost inflation and.
Are you planning to take further pricing actions and the and this year.
Yes, just to frame it up for your price was greater than cost price was about a point, maybe a little bit more we would anticipate positive price for the full year and we think that point of positive price even comes up a little bit over the course of the year and we ended up maybe closer to a point and a half dynamic environment, but thats, how I would color reported.
Thank you very much.
You bet index.
Your next question comes from the line of David Raso with Evercore ISI.
Hi, Good morning, My question relates to your comment about the M&A landscape and your vision.
The areas, you're focusing on you mentioned and retail solutions just big picture question I'm curious how you see.
Retail solutions fitting in with the current refueling stations and maybe a change how folks shoes refueling and and the future just to give us a better sense of how youre thinking about retail solutions going forward.
Look there's a number of areas, where the retail solutions, which by the way we absolutely believe is non ice retailers.
A growing format for many years and these are profitable growing venues that are part of our local fabric that will continue to grow even as we get into electrification.
The things that are really interesting here is that we're pretty uniquely positioned and the market because we penetrated into the point of sales systems. The head office back on back of sales solutions here that really helped manage how these retailers make money and by the way they make money.
Okay, and then high growth markets well high growth markets are gonna build out the petrary showing infrastructure for sure countries like India have a lot there, but they're also moving up and their sophistication on automation and and the air is it on exactly talking about not only that there is a big opportunity on environmental solutions things like vapor recovery and.
And these are are big areas for growth and that infrastructure is gonna be and the ground for a long period of time. So there's lots of solutions there that are quite relevant to us based on our position.
Thank you very much.
Your next question comes from the on line.
Like with vertical research.
Thank you good morning, everybody and.
Two for me, if I could squeeze too and.
First just on Matt co can you elaborate a little bit more of.
And what you're seeing kind of underpinning the demand.
Would you view it is just kind of a bit of you know pent-up recovery I I would not suspect that maybe the shortage of new vehicles or anything it's impacting aftermarket demand yet, but if you have any thoughts about that that would be kind of and interesting footnote maybe to the main question.
Yeah, and that goes up and it's been a great business for us for a long period of time, and if you see what happened and third quarter with this really strong V shaped recovery.
Shows and resilience of serving the last mile and and it's one of our more profitable businesses is you know what's really interesting. There is that what we're seeing growth come from is really strong same source sales now what's happened to this industry. Historically is that miles driven has typically been the major.
Driver, but miles driven has actually down year over year. So it's not the major driver right now and then and the technician count and is actually down a little bit as well, but what's happening is these techniques.
[noise].
And by.
Down and Tech Count is down and you were going to get to the year, but we're driving because and I are the we're growing because and I did not get that okay. Well that was the punch line you missed it so let me reiterate that and I apologize.
And so what's driving it is the strong same store sales and the technicians have more disposable income so they're actually spending more on tools and the second aspect that is also really important to US is the net franchisees adds are up for us we've deployed to a virtual way of adding our franchisees and and we have and.
Net positive and by the way this is kind of unique to us we've got about 30% of our territory and North America and Canada that is not yet served by our distribution network that we continue to build out as you know this is one of our more profitable businesses and we think it's a steady grower for quite some time.
And then just as a.
And so it's kind of a big follow up and a sense, but just coming back.
The kind of some of the point of sale opportunities and the low I'm. Just curious do you is there any decent information or do you have a sense yourself.
How much in store traffic at <unk> stores.
Is driven by or stopped to fuel up.
And.
Gilbarco and the dispenser business and it sounds like that.
Revenue dynamic is still in place so.
On the decline of 100 per $150 million so.
Quick question around this three point bump in guide is that highly.
Weighted towards the diagnostics and repair business and if so.
Is the price components that you are getting and diagnostics and repair it and <unk>.
Much better than the 1%.
Overall.
<unk>. Thanks for the question Ricketts day, I would say first of all the increase and the guide is balance between the two platforms. We are definitely continuing to see strong demand and <unk> and that's helped out.
But more broadly across the jvr business as well from the non aspects of that business and.
Is a big driver as well I would say from a price standpoint look we're seeing price across the board.
We have.
It's important and disinflationary environment, but as it relates to the guide the price assumption that we brought into the year that we started the year with us about the same.
We're at we are at now so we anticipated inflationary environment and kind of built and our ability to take price, which would historically proven ability to do into the guide and we've kind of stayed with that.
Mmm, Okay. Okay very good and then just a just a follow up question on on the telematics business could you just maybe sift through and.
Again, we have another decline here, which I think is kind of bad plan for the first part of this year, but how much of this decline now would you attribute to the hangover from El D.
Is there still a lot of churn going on here or that settled down and then again you have this dynamic around subscription growth and obviously the impact that can have on growth revenue growth. So maybe just sift through that a little bit and is this telematics expected to be.
And.
What platform for you are smart city growth rate.
Peak too on M&a's on.
Low out there, but if you could just speak to that.
Yeah, Let me, let me check about that so first of all as you know we've been working on turn this business around and I am very encouraged on the steps that were making.
This is the first quarter that we actually have positive annual recurring revenue, which is an important step to making organic growth and the business, which of course and given that 95 per cent of this business SaaS and.
And you amortize.
Investment and that business is that is that running at breakeven issue is that still losing losing a bit of money and that.
Mental.
Tip to profitable.
Okay, Okay, let's not I think there's a lot more profit opportunity there when you look at some of these businesses like telematics. It's obviously has a big runway in front of it we got out of the business is like hennessey well below flee flee.
Fleet margins as well so I think what we're doing is we're we're really trying to bottom out these opportunities to bring up those those below well below fleet margin businesses and where we've got line of sight. We're we're beginning to get on the mend on these and we think that's going to give us some.
Meaningful uplift over the longer term.
Got it okay, great. Thank you.
Your next question comes from the line of John and with Gordon.
Thank you good morning, everybody.
The morning, when it start good morning, you are working capital is really impressive and.
And to no one.
And when how and how are you accomplishing this and how do you guys think about kind of normal working capital to sales sort of what sort of investments do you have to make as the business continues to expand because I'm not to the.
To the naked eye, it's questionable whether this is sustainable but maybe it is if you could comment on that that would be great.
Hey, John Thank you it's day.
We are in clearly and unprecedented situation relative to working capital I mean, I. When we exited last year, we exited kind of and a high single digit percent of LTM sales, which was frankly better performance that we had seen and a long time, well I think that that we have and kind of recorded history here and and and it was still <unk>.
Sort of 2020, we saw a significant reduction from where we ended the year. So as we came into 2021 and I've always talked about needing to add working capital and I would have anticipated frankly entering the year that we would have added working capital and Q1, but again unprecedented situation and we and we actually saw further decline and working capital. So look we have a real constant improvement.
Culture around here, so I'm not going to say that that we can achieve these levels, but but I would say that we don't think in the near term at least this is sustainable and I anticipate still in our free cash flow guide for the year that we would add back.
And to have at least and working capital here and that's that's that's some of what we've factored into our into our thinking here. So we'll see how it we'll see how it develops how are we doing it and we.
Have significant playbooks on uncle through all the pieces, but I will tell you that.
We're seeing.
A lot of cash receipt.
Easier than we had in the past I think I have some theory around work at home environment I have some theory around constrained and supply where people want to want to get what I want to pay you and ensure they are getting delivery.
And also inventories low as some of the supply chain areas are constrained. So I think we do see working capital normalize somewhat with demand and not back to historic levels, but I think we'll come up from here, but again unprecedented situation, where there's not there's not a lot of not a lot of past to look on so we'll see how we work it.
Well you guys are continuous improvement company as sales continue to climb for lots of different reasons right does inventory can you cold that the inventory and in particular to sales at a constant rate or does that have to kind of get built back up and maybe maybe more so because of the environment and I just with the various various pinch points around.
Supply chain and so forth.
Yeah, I think that's the right characterization and I think given the environment, we want to see some more inventory come into the system right. Now, yes, we'll we'll always look to get more productive from a working capital standpoint, but right now I would like the summers are there are some areas of course, where we don't but there are some areas, where we'd like to see a little more inventory come into the system.
The follow up here is just on the day T order growth slide seven of 20 per cent. David I think you mentioned the technicians have a lot of money which is.
A curious.
Comment what would that number like and a good way what would that number look like if you were to compare the <unk> and growth on a per head basis or per franchisee basis, and it's sort of understand and what's really going on here and I heard a little bit of Mark's answer, but I'm still not quite sure I appreciate what the dynamic is that <unk>.
Diving this.
Is it is it sort of pandemic related is that is it new product driven is it a combination and wonder maybe you could rank ordered and things I don't know any color that would be great. Thank you yeah.
So we are first of all at the <unk>.
And we are seeing the spend per.
Tech come up or the average sales per distribute per distributor come up and combined with more distributors on the road and that's not just from the new ads, but.
And we have delinquencies and and all time low where scene.
Fewer people on credit hold so and.
And to your theory, what is driving that well yeah, you Gotta have new products you gotta have desirable products for for people to buy of course, but I also think the competition for sure a wallet with the rest of life here has gotten a little bit easier, we're not competing with.
And the Disney cruise, maybe and people are deciding to not spend money on that vacation and buy tools and do other things so.
It's tough to tell exactly and we'd spend a lot of time with distributors trying to understand but and is cleared and to a point mark was making that people aren't spending money somewhere else and the technician environment is healthy day of money in their pockets and they're choosing to spend it on tools.
Yeah very impressive. Thank you both appreciate it.
Thank you have on.
Follow up questions on the on line.
For free.
Thanks have a follow up here.
Maybe dig into the supply chain and constraints that you've been referring to now for the past three.
Three four months.
It sounds like you Wanna rebuild inventory and a little bit and maybe that helps but maybe they get into the deep in terms of where you're seeing the real pressure points and the degree to which it's sterling sales growth. So maybe clothes on some <expletive> shift around a little bit here and it and it chemotherapy very helpful.
Yeah. So look this is.
Supply chain and managing that logistics and.
And I fight on a daily basis. It is no question a lot of hard work that's been put in for the team and I do want to thank the teams because and many times. It's thankless work I mean, that's how may I hear about it is when it's not going on as well as it should.
And what's.
And what's really the color behind driving it clearly.
Chips around electronics.
For dispensers.
That's clearly and area that is hard to manage obviously thinking that through having a plan for every part being able to forecast high and manager suppliers appropriately. That's all just hard work that that is part of our Bbs and I couldn't be more proud of the their ability to do that at the <unk>.
Same time on macko, a little bit of a different supply chain dynamic because as you know we source a lot of our products and there was a long time on the water for much of this and so on managing that quite honestly, if we could if we had had work down 50% more of our backlog we would have had hundreds of <unk>.
And some basis points of higher growth and the quarter.
And that's just a different dynamic all together and I think we're doing admirably well, but I wish we could be doing better on Mac co supply chain and it's just it's a little bit different dynamics and some of our competitors and the market, where they built things and they can control it more and house and given and sort of the extended supply chains by the way, we're introducing new products all the time there.
And we have a vitality about 30%, which means it 30% of those products or new.
And that we're bringing a market and so you've got established that supply chain, where and it's all done through supplier. So it's it's a it's a different beast.
I think we're getting through and we're management much better quarter over quarter.
I'm pretty confident with our ability share I think we're doing better than most and I think we're going to continue to lean into that but we're not out of the woods. There's no question about it there's more calm there's more inflation income will be raising price. All these things are part of managing that but thank you for the caution.
Thanks, Mark Labs, Great and then just quickly on tritium I think at the end of this year you got a decision to make regarding that option.
I know you are bound by confidentiality clauses, but.
Is the is the cost to take control is that and market value and kind of market price based there was some.
Option price, so any price already and negotiated and.
And any color that would be helpful.
Yeah, Hey, Nigel Yeah, I understand I think those aspects.
Of the mechanisms and things are I would say are kind of captured and that confidence reality is agreement. So we wouldn't we wouldn't be able to go there.
That's understandable.
Thanks, guys.
Thanks Angel.
And your last question comes from the on line of Richard and then with that.
Yeah. Thanks for the thanks for the follow up and.
Could you just speak to the.
EMEA as.
As a region you referenced softness I don't know if that was a reference to to western Europe being down or if it just grew with Ah.
Amid single digit rate, but just speak to the softness that you were saying there obviously on the.
Mobility side of the business, but.
Yeah, so are and.
And business or I would say 90 me and I would say Europe.
To be more specific that was down and low double digit but that was also impacted a lot by shutdowns and COVID-19 impact. So that that was the issue that kind of came up and and Q1, but middle East and Africa is also growth opportunity for us So I would definitely separate a very different.
Dynamic there that's happening hopefully that's helpful color and.
And that's and that's slowdown on the the COVID-19 side does that does that businesses and up and backlog men.
I mean or is it just wasn't there just wasn't any orders day.
Because of that yeah.
No I think there is there is clearly a backlog that can be.
Served.
Okay, Okay fair enough. Thank you.
And.
At this time I'll turn the conference back on for Tomorrow for clothes and remarked.
Yes, Thank you Dorothy book or greater focus on a critical few items growth both taken advantage of ENV to gain share as well as Exine V growth our focus on innovation, our focus on simplification and drive greater margin I think all these things are gaining traction and and couldn't be more proud.
Of our team to have a strong started the year to build momentum so more to come folks. Thank you for Jordan and on today's call.
And thank you, ladies and gentlemen that does.
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