Q4 2021 Vontier Corp Earnings Call
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My name is Britney and I will be your conference facilitator. This morning at this time I would like to welcome everyone to the volunteer corporations fourth quarter 'twenty 'twenty. One earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and Easter session.
If he would like to ask a question during that time simply press. The Star then the number one on your telephone keypad. If he would like to withdraw your question. Please press the pound key.
I would now like to turn the call over to MS. Lisa Curran, Vice President of Investor Relations. Ms. Curran you may begin your conference.
Thank you Britney good.
Everyone and thank you for joining us on the call with me today are Mark Morelli, our President and Chief Executive Officer, and Dave never 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 Dot volunteer dot com 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 data also posted on the website under the heading financials.
During the presentation really describe certain of the more significant factors that impacted year over year performance.
All references to period to period increases or decreases in financial metrics are year over year.
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 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.
Formation regarding these factors that may cause actual results to differ materially from these forward looking statements is available in our SEC filings subsequent annual report on Form 10-K .
These forward looking statements speak only as of the date that 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 and good morning, everyone. The.
The fourth quarter closed out a defining year for volunteer arc team delivered another strong quarter ahead of earnings expectations.
Continued focus and execution positions us well for long term success.
Before moving to the details of the quarter I'd like to review the important progress, we're making to drive portfolio of diversification and unleash earnings growth potential.
I'm pleased to report that we've met or exceeded plan in 2021 expectations in all areas.
The team delivered a strong finish to the year in the face of an exceptionally challenging environment and an M b topline headwind of roughly $100 million.
Full year 2021, adjusted earnings per share of $2.88 grew 17% driven by <unk>.
6% sales growth, which includes 7.4% core revenue growth and 160 basis points of adjusted core operating margin expansion.
Excluding the EZ headwind core growth for the full year was approximately 15% a testament to the team's unyielding execution.
In addition to delivering double digit earnings and top line growth, we delivered adjusted free cash flow conversion of 96% for the year or 102% when excluding the extra tax payment related to the spin.
Our cash performance is one of the financial hallmarks of our portfolio and merits recognition for its mid teens free cash flow margin.
Rigorous application and continuous improvement of the volunteer business system is advancing our profitable growth initiatives and enhancing our competitive advantages.
We improved our return on R&D investment more than doubling the gross margin contribution from new products.
We gained share in core markets drove continued macro franchisee growth and improve profitability by over 200 basis points at both <unk> and to a man in Tennessee.
We successfully accelerated our portfolio diversification strategy and deployed $965 million with the successful acquisition of DRP.
<unk> excellent performance will be highlighted later.
We also established a $500 million retail solutions portfolio, which is accretive to our enterprise gross margin and software enabled profile.
As highlighted in the November teach in this portfolio and just.
Oh runway of attractive adjacencies for future M&A.
Secular growth drivers.
Adding to our key achievements this year, our ESG program continues to progress rapidly thanks to our recent commitment and accomplishments indeed.
In December we.
Commitment to reduce absolute scope, one and scope two greenhouse gas emissions by 45% by 2030 from a 2020 base year and a net zero goal by 2050.
In support of the Paris climate agreement.
We held our first energy kaizen at Veeder root in Altoona, Pennsylvania, harnessing DBS to reduce emissions drive cost savings and develop and engage our employees.
On the employee safety front, we held our first ever volunteer safety week, and published our goals to achieve Osha top quartile results in all of our businesses.
We're also active throughout our communities.
In addition to donations to the volunteer Foundation.
One tier scholarship program awarded 10, new scholarships and sixth scholarship renewals in 2021 to the children of hard working employees.
Volunteer also recently received a number of inclusion and diversity accolades. These include achieving a perfect score on the human rights campaign, corporate equality index, and earning our status as a 2022 military friendly employer.
Our ESG efforts are critical to our corporate strategy and to the vitality of our organization and I could not be more proud of our progress here.
Now I'd like to spend a couple moments highlighting last week's energy transition investment announcements, we're committed to tackling decarbonization and transformative ways with our commitment to invest more than $500 million over the next five years.
On tier is at the forefront of solving nextgen mobility and transportation challenges and this investment advances our industry, leading efforts to address the global low carbon energy transition.
Part of this strategic pledge is the acquisition of drives.
A leading provider of EV charging and energy management software.
The acquisition accelerates our portfolio diversification and E mobility strategies.
It also positions us well to capitalize on global EV charging long term secular growth drivers.
Drives provides us with market leading technologies within the highest growth most profitable network management software market segment.
While the transaction will be initially dilutive.
We believe it provides a prudent opportunity to participate in an early stage growth technology company.
Business models in this sector are still developing and continue to evolve with significant capital you have to be invested across the value chain.
To that end given our focus on the software segment, we chose not to exercise our option to buy tritium, but we remain supportive and expect them to realize their value proposition of which we are beneficiaries.
Given our 16% ownership position this provide upside value to our stock and the potential to add further dry powder for capital deployment.
These important outcomes demonstrate that we are realizing our vision of volunteer as an industrial technology company focused on smart sustainable solutions and that we remain committed to building a better stronger more focused growth portfolio.
The volunteer value creation flywheel is taking effect and we are well positioned to continue to post strong results in 2022 and beyond.
With that said we are initiating our full year 2022, adjusted diluted net EPS guidance range of $3 five to $3.15, which includes our core revenue growth expectation of low to mid single digits adjusted core operating margin expansion of <unk>.
30 to 60 basis points and free cash flow conversion of approximately 100%.
Also included in our full year outlook is the accretive impact from the acquisition of D. R B, which will contribute high teen cents to EPS.
They're more driven by D. R B's technology leadership, and new site activity, we believe D or b will contribute more than 300 basis points to the top line or high single digit total growth at the enterprise level.
Our core growth outlook includes a more favorable view of the 2022 and the headwind of $25 million to $50 million. Subsequently, we believe that 2023 will be the envy sunset trough with a year over year headwind of $300 million to $350 million.
We are confident in our ability to more than offset these headwinds and expect earnings and cash flow growth through this period.
Lastly, as part of our continued focus on creating shareholder value. We expect that we will be in a position to opportunistically purchase our stock early this year under our previously announced share repurchase program.
We are also initiating our first quarter adjusted diluted net EPS guidance of 64 to 67 cents.
In spite of the challenging comparison that resulted in a 14, 3% core growth in the year ago period, We expect first quarter 2022 total growth of mid single digits or a flat to low single digit decline on a core basis and flat adjusted core operating margin.
Our first quarter outlook reflects continued supply chain impacts to backlog and sales conversion, but we are encouraged that the supply demand imbalance improves in the second half of the year.
With that I'll turn it over to Dave to provide for the fourth quarter results and financial detail, Dave. Thanks, Mark adjusted net earnings for the fourth quarter were $141 million, a decrease of 4% from $147 million in the prior year period. This translated to adjusted net earnings per share of <unk> 83.
Resets the decrease in earnings was driven by lower sales conversion as a result of the ongoing supply chain constraints and component shortages.
Our strong price actions and better than expected bottom line results from our acquisition of DRP, partially offset the empty and ongoing inflation headwinds during the quarter.
Reported growth declined 3% and core revenue declined approximately 8% in the fourth quarter due to the expected decline of <unk> as well.
As a tough comparison to the strong recovery than we experienced in Q4 of 2020, which included not only a high point in quarterly shipments of DMV, but also benefited from the Mexico regulatory driver and overall high single digit growth in our non E&P revenues.
On an ex <unk> basis reported revenue grew high single digits and core revenue was about flat despite the otherwise difficult comparison.
Adjusted operating profit for the fourth quarter was $194 million, a decrease of 3% compared to the prior year good.
Primarily driven by the lower revenue volumes, which was partially.
By 140 basis points of adjusted gross margin expansion, largely resulting from the accretive addition of Derby.
Adjusted core operating margin for the quarter decreased 70 basis points, reflecting the impact of the core revenue decline.
Adjusted operating margin was in line with the prior year at 24, 6%, we continued to effectively offset the impact of raw material inflation with price actions, which was about net margin in the quarter.
We did see some margin headwind from mix due to the size of the V decline and this was offset by the positive impact of DRP on our operating margin.
In the fourth quarter, we generated adjusted free cash flow of 148 million a conversion of 105%, reflecting a slight decrease in working capital during the quarter working capital dollars at the end of Q4 were six 1% of the last 12 months sales an increase from $5 six.
Percent low point in Q1, but still very low historically, our full year adjusted free cash flow conversion was 96%, which included the additional tax payment in Q2.
Shifting to liquidity, we ended the quarter with a cash balance of $573 million and had no borrowings under our $750 million credit facility. Our net leverage stands at two eight times adjusted EBITDA at the end of 2021.
As Mark noted, we anticipate the deployment of some capital towards share repurchase as market conditions warrant and we will continue to assess this opportunity.
Looking at the performance of our two platforms mobility technologies core revenue declined 11%, which reflects a low double digit decline in core revenue at <unk>.
Growth in environmental and services was more than offset by the decline in <unk> as well as lower sales conversion in both developed and high growth markets, given the impact from supply chain constraints and Covid.
After including the revenue contribution from TRP the mobility technologies total revenue declined four five.
Q five was our first full quarter.
Q4 was our first full quarter with the RV in the portfolio.
We could not be more happy with the momentum and performance they have exhibited.
CRB delivered high teen sales growth, primarily driven by double digit growth in point of sale control systems.
Core revenue growth in our diagnostics and repair technologies platform was 2% driven by low single digit growth in mapco, reflecting the continued strong demand environment against the recovery compare from the prior year, partially offset by the supply and labor constrained environment across the platform.
Diagnostics and repair bookings grew at a mid single digit rate demonstrating the continued demand backdrop and also the challenges of sales conversion.
Mapco demonstrated a strong year of net new franchisee additions, which will be additive to the expected solid growth from same store sales in 2022.
Looking at total company sales regionally, the ENB and other compare dynamics read-through quite clearly.
Developed markets core revenue declined mid single digits as a result of the <unk> impact in North America.
In our high growth markets, we declined about 20% compared to the mid teens growth in the prior year Q4, reflecting not only the challenging comparison, but also supply chain and COVID-19 impacts sales conversion.
High growth markets will of course remain lumpy, but we remain confident in areas, such as India, Middle East and Africa, and Latin America as long term opportunities for outsized growth given future regulatory drivers investment in fueling infrastructure and our physical presence in these strategically important markets.
We remain committed to our profit improvement actions that will better position the company in 2022 and beyond during.
During the fourth quarter, we recognized restructuring charges of approximately $4 million slightly lower than we previously planned as the timing of certain actions have now shifted into 2022.
We now anticipate we will recognize 2022 charges of about $15 million, which is a continuation of post spin actions to drive simplification globally and to align resources with our highest priority future growth opportunities. We continue to expect we will achieve our original savings objectives for 2022.
From 2021.
Turning to the outlook assumptions for the full year 2022, we expect core revenue growth of low to mid single digits, which includes an expected <unk> <unk> headwind $25 million to $50 million.
Price actions have largely been priced into our backlog and so we expect to be price cost positive in 2022.
Our core operating margin expansion target is 30 to 60 basis points, reflecting continued execution on our profitable growth initiatives and cost management, partially offset by persistent inflationary pressures supply chain and logistics constraints and mix.
That said, we are establishing our full year outlook for adjusted earnings per share at a range of $3 five to $3 15.
Reflecting continued momentum and execution in our core business as well as an expected high teens contribution from the full year impact of the <unk> acquisition, partially offset by some dilution from drives in the high single digit cents per share range.
We anticipate our full year effective tax rate to be around 23% as we capture the benefits from our ongoing tax planning initiatives.
We enjoy a capex light business model with capital expenditures in 2021, a $48 million or about one 6% of sales and we expect capex of about one 5% of sales in 2022.
As for free cash flow conversion after seeing working capital increase in the second and third quarters of 2021, working capital decreased to very low levels again in the fourth quarter.
While we anticipate some normalization of working capital levels in 2022, we expect free cash flow conversion for the full year of 2022 to be approximately 100%.
Moving on to the first quarter of 2022, we expect core revenue will be a decline of low single digits to flat as mid single digit core growth in our non <unk> businesses only partially offsets the ongoing sales conversion headwinds and reflects the difficult Mexico compare.
And the continued tough comp on E M B, which was strong in 'twenty. One ahead of the adoption deadline.
Adjusted core operating margin is expected to be flat, reflecting our continued execution in a supply constrained environment.
As Mark stated this translates into it.
Per share of <unk> 64 to 67.
In the quarter with that I'll turn it back to Mark.
Thanks, Dave to wrap up as I said, a year ago. At this time 2021 would be an important springboard to our multiyear transformation with a long runway of opportunities.
I'm incredibly proud of our team's execution this past year and the progress made towards our strategic and financial priorities.
But there still remains much to do.
While we expect supply chain and COVID-19 related headwinds to extend into early 2022, we're encouraged by the underlying demand for our solutions order growth and backlog trends.
In fact at the Mac coach sales Expo, which was held just last week results exceeded our expectations as orders per franchise.
I mean at record levels with double digit growth versus pre pandemic levels.
And so we enter 2022 from a position of strength.
We have strong steady demand pricing power and a track record of successfully navigating unprecedented headwinds and we're leaning into what's ahead, we're positioning the portfolio for accelerated profitable growth and making incremental investments targeting high return growth opportunities.
I'm confident in our ability to continue to successfully execute organically and inorganically to deliver accelerated earnings and cash flow growth through the <unk> sunset and beyond.
We remain committed to unlocking shareholder value for the long term, we will continue to compete for your investment through prudent and disciplined capital deployment as well as continuing to deliver strong financial performance.
One last item before we move to Q&A I'm pleased to announce that.
Our 2022 Investor day will be held in September in New York, We look forward to sharing a more in depth view of our portfolio strategy and key growth initiatives. In addition to providing long term targets highlighting the power of the volunteer value creation flywheel and compounding growth algorithm.
With that I'd like to turn the call over to Lisa Lisa.
Thanks, Mark that concludes our formal comments Britney we are now ready for questions.
At this time, if you would like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue at any time by a question. The pound key once again that is star one if you would like to ask a question. Then we will take our first question from Steve Tusa with Jpmorgan. Your line is now open.
Hey, guys good morning.
Good morning can you just clarify a little bit around the.
Sorry to sort of kick it off with an E&P question, but can.
Can you just clarify.
Kind of the revenue trajectory here I mean, you said.
Three to $3 50 of headwind in 'twenty, three and then that'll be kind of.
I guess the trough of that revenue base.
What was that revenue base in.
In 'twenty, one just as a starting point, maybe if you could just kind of like really clarify.
Those statements.
Sure Steve Yes, so obviously, we still have significant revenues in the b, even though it's declining so we were in the <unk>.
<unk> 600 millions I would estimate for 2021 I think when you look at 'twenty, one and 'twenty. Two combined we had talked about kind of previously 21 being 75 to 122 been a similar decline I think what we saw be the high end of our decline range in 'twenty, one and part of that is.
Due to supply and component problems, we probably shipped a little more ENB backlog into 2022, maybe two.
2025 millions worse, so I think we're still in the range of what we were thinking when we think of the <unk> 23 decline I think what we're trying to articulate is our current view of the shape of the tail.
So the peak to trough.
In the range of what we've always thought here, Steve, but I think what we see is a little more robust activity.
Falling off in adoption happening a little faster there is a whole bunch of variables that go because obviously as you guys know what people will buy any share shifts that happen.
The ultimate rate of adoption amongst thousands of customers. So it's tough to predict but we've been pretty consistent here updating you folks with what we know when we know it and we exit the year, which is always a good time for updating our assumptions here with with this view to how the shape of the tail play out.
So when you say trough of the rat do you mean.
Do you mean trough of the of the year over year revenue headwind or do you mean like that actually that revenue base.
It is now it kind of a.
Floor level and then.
Just kind of like a stable from there yes.
Right, Steve So we've always thought that we had this compressed cycle as a result of DMV.
Turning to more of a normalized run rate now one of the one of the.
Things that will impact that at the end of the day is kind of getting back to that normalized refresh rate in the U S dispenser market, but ultimately what we're talking about as the year decline to get back to a baseline business for U S dispensers in payments.
Yes.
The what's new here, Steve because we've always said, it's 400 or $500 million, what's new is that we're defining the size and the shape of the tail, we're not changing the overall guidance we've given prior.
On the magnitude. It's just that's the largest year over year decline is going to be 2023, and then we move on from there because it's done.
Okay. So.
It's $600 million is what you said is this kind of revenue base and then that will go down 25% to 50, then it will go down three to $3 50 and then.
We move into 'twenty, four 'twenty, five or basically stay at that level going forward.
That what you are saying.
Then we get back to more of a normalized market condition I think we're a little over 600 so.
More like 60 40, Okay, then we get back to a normalized run rate in the U S market and then we wouldn't experience. We don't think any material shift from <unk> going forward and we get back to growth in that market.
Talking about the decline it's also.
Mark noted we have significant actions to offset here, we continue to have.
Our <unk> non E&P portions of our business have historically been and we believe will continue to be steady growers in that mid single digit range.
<unk>.
As we do deals like the ERP, we tend to mix up that growth rate. So I think that fundamentally gets us to offsetting a significant amount of that year over year headwind in 'twenty three that gets you to that low single digit decline range or maybe close to flat from there.
It would take just a modest amount.
Between now and then to see your way to to flat or even growth and that's why Mark noted we would anticipate.
Earnings and free cash flow expansion to the extent, we were able to completely offset the NV headwind in that year. That's how we're thinking about it today, yes, okay. Sorry, one last quick one what was the what was the year over year revenue in that.
640.
For 'twenty, one what was that in 2000 and so it was a year over year.
Headwind this year.
Yes in 'twenty, one we came down roughly $100 million.
And so and then 2020 was the peak year.
Great. Thanks, Andy So you sorry for all the details it just it's just obviously with the way you.
Your stock is behaving.
The elephant in the room that kind of.
Just as helpful to clarify so sorry for all the focus but just want to get these revenue numbers right now.
Steve I'm glad you're asking the question. So we can make sure we're really clear on it and I think what's happening in today's call as not only the size and the shape of it but it's also our confidence to offset that because we have conviction around our roadmap. There. So that's also news okay. Great. Thank you.
Thank you.
Okay.
We'll take our next question from anti capitalists with Citibank. Your line is now Citigroup. Your line is now open.
Good morning, everyone.
Good morning, good morning.
Mike just focusing on 22 for a second when you hosted your retail fueling day in November I think you'd talked about expecting flattish organic growth for 'twenty, two and now you're talking about low to mid single digits. So what's the difference here whats the drivers I know in the headwinds are a little bit less in 'twenty, two and have you seen any improvement yet in.
<unk> related issues or what kind of disruption that gives you more confidence in that second half ramp.
Yeah. So first of all I think we've got a lot of confidence in and exiting the year and entering 2022 on what we call the profitable growth initiatives. So very significant traction we made there. So just let me give me a minute. So I can just talk about that I'll give a little color around it first of all we doubled our operating profit target based.
On our simplification efforts strategic pricing better drop through on new product.
<unk> as well as focus on high growth markets and keep in mind, we have underperforming assets in our portfolio like Hennessy Telephonic NAV man that improved 200 basis points of all Max last year. So we're carrying a lot of momentum from our initiatives into 2022 of course, there is some backlog we left some revenue on the table.
In 2000 and the in the end of the first fourth quarter and so we've got certainly the benefit of that but I will tell you. It is getting better on the supply chain elements, but it's still something that is as you've heard a lot about in earnings calls that folks continue to work through its mostly around.
Electronic components and semiconductors printed circuit boards, we are seeing some improvement in that but clearly I think by second half of this year, we're going to see a better improvement Dave do you want to add any color there that's great.
Thanks for that guys and then maybe just Mark if you could talk about your decision to invest $500 million in energy transition over five years now that you brought out drives could you talk about drives growth and margin profile and what kind of a foothold as the company give you into EV infrastructure focused software.
It's the grilling I know you said, it's dilutive, but you'll give us more color on the margin profile and where volunteered goes from here and EV infrastructure.
Yeah happy to talk about that look we're really excited because this announcement of these investments is replacing meaningful dollars dollars to diversify our portfolio away from ice and I think it is providing a compelling opportunity. So let me let me talk about what you just brought up here about drive first of all.
If it's a sub $10 million sales today. It is expected to grow high double digits over the next five years and I think when you look at what drives provides it is really a very compelling opportunity because it's an intelligent cloud based software subscription business that is <unk>.
Reporting the EV charging infrastructure in the question that you ask.
Is what are the margins. These are very high margin segment of the business, it's very attractive because they provide this operating system. It's software. It provides operations management energy optimization billing the roaming capabilities and driver self service apps and so think of this as a white label software.
<unk>, they're a leader in this space with 20% market share, it's not profitable on the bottom line because we're investing for growth, but on a gross margin. This is a very attractive place to play and it positions us in the highest segment of the market. David you want to add any color yeah. Andy you can imagine this is.
As an early stage technology business right. So we're not managing it like we say would a normal business that we might acquire in our normal kind of operating company structure.
Not profitable and frankly, that's okay, that's where it should be what we're focused on is capturing the market and investing for growth. So I think more to come over the over the coming years, but good socket should have a good software margin profile as it scales growing significantly at that early stage.
High double digit type rates. So we're really excited about the opportunity here for.
What this is kind of an anchor asset here around the EV charging infrastructure space.
I appreciate it guys.
And we will take our next question from Andrew <unk> with Bank of America. Your line is now open.
Okay.
Good morning, Andrew can you hear us.
Okay.
Andrew Please check your mute function on your phone please.
Can you hear me now sorry about that yes.
We can yeah apologies I still haven't figured out how to do the mute function.
Yes. So the question on pricing can you just give more details as to what.
Pricing was specifically in the fourth quarter.
And what are your expectations for 'twenty two.
Don't want to go there, what's the annualized benefits you'd get in 'twenty two for pricing actions year to date.
Yes, so in the fourth quarter, we continued to see good price we've round trip a little bit of the early price that we took coming into 'twenty, one, but we continue to see good price in the.
Probably close to 3% range as we were as I noted in my remarks price cost favorable.
In the fourth quarter, we did continue to see the gap close, but we were accretive on the dollars and the margin standpoint from a price cost perspective, as we look to 'twenty two.
We carry and good price, we'll continue to price for inflation.
And we anticipate that contributing to the year, we've talked about kind of the full year of low to mid single.
Think about it from an <unk> perspective, probably maybe more like mid to high single growth perspective and revenue contributing.
Decent amount of that growth.
And being price cost positive again.
Price.
Being price cost positive again in 2022.
And then just a philosophical question sort of managing this downturn in M be it for the next two years.
If you look at sort of industries was different structure.
It kind of electrical what Eaton is doing in the channel. If you look at the scope of price increases that HVA C industry is able to achieve.
How are you.
Given our favorable industry structure in North America.
Do you think about potentially pushing the pricing.
Further.
In the <unk> space I I doubt that your competitors would object.
So how do you balance volume versus price in ENB as volumes continue to go down why not accelerated why not push pricing harder than just accelerated the decline and be over with it just how do you think about it. Thank you.
Well Andrew.
The way that we think about price is we first of all started last year with strategic pricing and I think it turned into structural pricing.
And it is a really great underlying benefit that we started early last year that we're always going to price for this market and this opportunity I think we've been in my view a leader on the pricing front and I think we're we're going to take advantage of that going forward.
Particularly as <unk> rolls off and we are a market leader in the space and so I think there's a lot of good things that have been happening on price and we anticipate we're going to press that opportunity to the fullest.
Thank you I appreciate the insight.
The sender.
We will take our next question from David Raso with Evercore. Your line is now open.
Good morning, Thank you for the time.
Just curious the conversations are being had at the board level as.
As well as top management level regarding capital redeployment.
Just given the way the stocks been acting really since the spin.
You've made some fairly attractive acquisitions from TR beta drives your commitment to where you're going to invest.
I mean, the Street's view of your earnings in 'twenty, two have gone up 24% since since you spun and the stock's down 10%.
So just looking at your valuation you know nine times EBITDA roughly nine times, the new EPS guide.
How are we balancing.
Clearly a story of the street is not.
At least appreciating when you look at how some of your peers trade I mean, the sum of the parts would suggest.
To be significantly above where its trading so I'm just curious I understand the portfolio transition needs, but what is the conversation right now about share repo and the significance of it.
Versus some of these M&A opportunities that you're contemplating.
Hi, David Thanks for the question I guess, what I, what I would share is that.
We've talked about M&A being a priority for us historically because of the portfolio transformation.
We're undergoing which will take significant period of time, but also that we're focused on returning shareholder value and that.
That share repo and M&A are not mutually exclusive.
We agree with you there has been kind of a dislocation of value and especially in recent recent months here, we've seen stock trade it feels to us like a significant discount to intrinsic value of the stock and that's why you heard us come out on this call and say, we would opportunistically be looking to buy depending on market conditions.
In our own stock back.
So again not mutually exclusive I think you've heard a little bit of a change in our direction here when it comes to the capital allocation. So we'll see we'll see what market conditions Merit here.
But I think we're aligned with the sediment Mark would you add anything.
Important thing to say.
I said in my remarks is that we compete for investment and we're focused on shareholder value and we don't see this as a as an or but certainly an opportunity at the current stock prices for excellent returns.
No I appreciate that just the term opportunistic I mean, where the stocks has been for a while now and especially now.
The opportunity seems readily available so I'm, just making sure we understand this.
Some understanding at the board level of the frustration with some shareholders since the spin because you're executing well the M&A Smith.
Very logical and clearly value, creating but there's some mismatch with how the street's perceiving.
The portfolio. So I appreciate the comments and if we can just one more time clarify the twenty-three E. M. B decline the three to $3 50 is a one year decline that's not cumulative from the 21 level.
Alright, 'twenty correct that would be the decline 22 to 23 one year.
But your comment that you can offset it where you expect earnings to grow the ideas you can offset roughly half of the revenue decline, but from cost outs mix I assume some M&A. Some repo you would still expect EPS to grow in 'twenty three.
Yeah, terrific, which is which is based on an assumption that we offset more than half of the revenue decline as you've noted so I would I would see us offsetting.
More than half a significant amount of the revenue decline, which would get the annual kind of all up decline down to say a low single digit maybe a little bit better decline to be flat and fully offset if we saw some modest M&A between now and then we think that would put us into that flat or better territory and really thats.
If we were in that zone, given the activities we have already commenced upon.
Would anticipate expanding earnings and free cash flow.
Terrific. Thank you very much I appreciate the time.
Oh, Thank you for your feedback David.
And we will take our next question from Brian Lau with Wolfe Research. Your line is now open.
Hey, good morning, everybody I just wanted to touch on tritium briefly can you remind us the.
Status of the commercial agreement, there and when that lock up is over.
Yeah absolutely.
I said in my prepared remarks, we had 16% of outstanding shares a lockup ends in July .
And I just comment about tritium, we're very supportive of.
Tritium and as they fulfill their value proposition.
But keep in mind, whether we choose to remain a long term shareholder at some level or monetize all or a portion of our stake. We believe there is value upside to volunteer from the possible gains as well as additional dry powder. So we're really happy with our position here.
Great and then regarding <unk>.
<unk> can you just talk a little bit about what drove the 200 bps of margin expansion and kind of what you're baking into the guide.
For 2022, and then also on the guide is there any of that repo baked into the three five to 315 number just given the share count of about $171 million on your slides.
Yes, let me take the second part first and then turn to Mark for some of those details on the improvement.
It's tough to know because we're going to be looking at market conditions here, but I think at a baseline.
The minimum we're offsetting the impact of.
Dilution as a result of stock comp, which is kind of call. It a penny and a half two sets.
Yes, let me take the <unk> question look as you know, it's a turnaround story and we've been making really solid progress on it.
We were essentially applied DBS, and we really reframe the opportunity.
Some more of the profitable growth segments.
As we understood the business model more also with new management in the business then we could really reframe it in a way to position it more for profitable growth I think the other thing there is really paid off for US is we've talked about churn in North America and churn has been.
A tough thing for us to Russell, but we've made really solid progress on that of course that helps pretty significantly I think more importantly, with this turnaround story that in Q4 and for the full fiscal year of 2021, we posted positive low single digit.
Our growth our annual recurring revenue growth and that's a really solid step in the right direction. We haven't had positive growth in that business in a long time, so clearly with the repositioning with the new platform <unk> hundred 60.
The reducing churn that that this is a step in the right direction I think it really sets us up for accelerating.
Into this into this fiscal year. So I think the issue when you look at organic revenue growth. It takes a bit for <unk> to drop through to the P&L because of the SaaS model and the length of the contract, but clearly, making really solid traction in the business.
Okay.
Yeah.
And so if we will take our next question from Julian Mitchell with Barclays. Your line is now open.
Thanks, a lot good morning.
So just.
Maybe one last time on the NV, so youre sort of revenue in the year in 2023 from ENB is saying, it's about 300 million is that fair and that compares with the sort of 740 million number back in 2020.
I just wanted to make sure I understood that and what you then saying is all set 300 ish base, yeah than flat or slightly down thereafter.
And also I wanted to double check all of that in year 300 to 350 million drop should we assume a sort of 50% or so decremental margins still.
Yeah, Julian I think you've Directionally got it all correct, we returned to that base.
We'll see where we end up 275 to 300 ish by the time we.
Get through the decline hit the trough, we wouldnt expect large moves up and down and then as a result of DMV.
And this is this is kind of above fleet average margin I think 50%.
What kind of decremental is a reasonable thought obviously, we're looking to realign those resources and do other things and some of the revenue that comes on.
To offset some of this growth comes on it actually rates around there or better also so those are things we're focused on as we worked through the offsets that mark talked about.
That's helpful. Thank you and then I just wanted to clarify in the free cash flow guidance, because David mentioned sort of some of the working capital moving parts for this year. So maybe put a finer point on how you see working capital.
Playing out.
Just wanted to double check is that 100% conversion guide relative to the.
Adjusted net income.
Sort of.
The 310 or so of EPS, so relative to the GAAP net income of $2 70 ish per share.
Adjusted free cash flow conversion against adjusted.
Net income.
And to.
To your point on working capital Julien look we've run it we're really at unprecedented levels.
Last year at levels, we haven't seen any.
When we entered this year and even improved levels from that I personally given some of the activities that we have endeavored upon that I think will help us hold on to some of the benefits we've seen through the pandemic as well as some of the structural improvements from doing acquisitions like <unk>, which is a.
As a really nice free cash flow profile I would anticipate that we would not return to pre pandemic levels of working capital in the business, having said that you know.
There'll be headwind to the levels, we are operating at today.
Inventory.
Some inventory and safety stock back into the system, where maybe today, we are dissatisfied with the level, it's at but even with that we anticipate being able to achieve that 100% conversion.
Ratio.
Perfect. Thank you thank.
Thank you Julien.
And we will take our next question from Seth from Jeff.
Great with vertical research your line is now open.
Thank you and good morning, everyone, Jeff Sprague here.
Just coming back to drives if we could.
Just kind of interested in the level of investment this might take.
This obviously is going to be a very competitive space.
To the earlier point, I think maybe where Dave Raso was right buying an expensive software business. When you trade at this sort of multiple and taking losses on investments.
A lot of friction in the P&L as you do that.
So when we think when we think about this.
And our earnings headwind that we're dealing with in 2022 on drives do you think that moderates from here or does this business require kind of a substantial level of additional investment to get it to scale.
And make it competitively viable.
Good question, Jeff I'll, just make a couple of quick points. So.
We see this maybe at the LP level kind of starting out here being dilutive in the teens millions of dollars.
Yes.
Yes, it's dilutive to our business model for sure, but we do believe there's a real opportunity here for value creation. In this early stage asset we were very fortunate to be in the position.
The auction that we entered into really two years prior and given given the development that I've had over the last couple of years, we felt pretty fortunate. So yes, it's a headwind, but we really do believe it's a real opportunity for overall value creation for the broader volunteer here.
It will take some investment, but we're really focused on the growth side of that investment and we think the longer term value creation opportunity here is very good I would I would make one more point that we have talked historically about a range of types and sizes of deals and where most of the M&A, we look to prosecute in our in our fun.
Holes in our day to day work is much more aligned with something like a DRP. We've said that these types of deals earlier stage more strategic higher growth opportunity could.
To be out there and this is surely one of those Mark do you want to add anything yeah. I think when you look at how we've made decisions on capital deployment that it's very disciplined it's very much strategy led this is something that we've been very close to in terms of this market time, you see us we did not.
Buy into tritium.
<unk> actually made that decision based on our strategy with our capital, but where we are stepping forward in this space because because of our what we think is our ability not only add value but to win in this space and it will position us great for the mid and long term, but going back to the capital allocation kind of coming up in the near term because that's.
A long term play and we announced $500 million of both inorganic as well as organic investment over five years, but I think when you think of capital allocation may be more in the near term, it's really middle of the fairway deals like the ERP that you should think of.
Great.
Maybe just totally switching gears to a different topic.
Looking at the auto aftermarket with what's going on with the shortage of new vehicles, and what it's done to used car prices and alike.
Wonder if you see any kind of discernible change in behavior in the auto aftermarket pricing power on tools.
Kind of Big picture, if you could put a little bit of a bow on that question for us that would be helpful.
Just one thought.
Clearly, we're seeing a really healthy end market continue in mapco.
A lot of that is tied to the health of the end customer which is the.
Professional auto mechanics, so that remains a very healthy environment, we see that read through in <unk>.
Credit profiles and demand levels.
So it remains a very strong environment.
I think we just had a recent Mac co Expo Mark you want to chuckle about but really strong demand there.
Continue to see.
Things like diagnostic scan tools, where we launched Maximus for <unk> last year, we're making great progress.
<unk>.
I think that backdrop being such a strong market as well as.
Toolboxes. So there is a pretty wide range of things that are being sold into the aftermarket and we anticipate this will continue theres legs to it will it continue for some time.
Great. Thank you.
Thank you.
And once again that is star Antoine if you prefer to ask a question.
And we'll take our next question from Andrew Scott This.
Scalia, sorry, with Barrick Berg.
Hey, good morning, guys.
Good morning, Andrew.
So yes, one last answer your question.
Please don't shoot me.
But obviously it's a.
It seems like a little bit of new news and I'm wondering why I guess why is.
2023.
Item kind of new like I guess why is it is it something new to you that.
You weren't expecting.
I guess I guess, all the confusion of the stake I.
I guess the street was not set up for kind of modeling that and I've got to ask.
All of that and now it seems like a little bit bigger hole to fill than we were initially anticipating.
Wondering what change on your end that.
You didn't have that visibility before.
Well.
It's always been I would say, it's really been about the shape of the tail. So we knew 2020 was going to be a peak and we would return at some level to more historical levels of <unk>.
Performance in our U S dispenser market.
But it was kind of at what pace, we got there a lot of.
We really have always understood what the larger customers, we're going to do but there is over half of this market that's made up of.
506, 7000 smaller customers that we service through distribution. So it was really getting through.
The adoption deadline seen how demand behaved.
<unk>.
For us to get a little better view as to how the shape of the tail would play out I think what we see this see happening now is <unk>.
Adoption by folks not extending has long been pulled in.
<unk> completed here by the end of by the end of 2023. So I think the new news is dimensionalize the shape of the tail and over the last couple of years I think we've tried to share what what the view was as contemporaneous as weak as we've had it and theres. So many assumptions that go into this with.
Tried to be as transparent as we could when we had conviction around something that I think you hear us doing that again.
Let me just jump in here too I think the other thing that is new is clearly that the lens that we're bringing that okay. Finally know the shape of the magnitude didn't change, but we know the shapes of articulating that but were also articulating the confidence around this I mean look at the underlying growth rate for.
<unk> bookings at mid to high single digits and it is averaging higher with the acquisition of businesses like the RB and and the progress we're making on the profitable growth initiatives and the momentum that we have so we thought long and hard about how do we figure.
Route this tail and also the offsets to it and I think you see the evidence of those offsets at work, particularly with that underlying ex CMV book.
Bookings growth driver and so that's the confidence that we're also bringing in today's call.
Okay.
Okay.
And maybe just one one last one.
In a different area that telematics is that.
It seems to be progressing well, we've got some new information with.
Tim Sarah that some public and.
There's obviously a couple of bigger players in the space horizon.
Just kind of what is your.
How do you expect to compete with kind of these powerhouses in telematics or what makes you guys feel like youre different in.
We continue to hold their own with with a lot of the impressive.
The competition Thats out there.
Look it's a great market, it's a high growth market its very fragmented there's lots of different ways to play that market.
Truth be told we had to get our feet under ourselves and recover from the technology that I think we're positioned well for that but we have a strong global presence. We're number one in Australia, and New Zealand very strong presence in the UK.
And the offerings that we have now are very contemporary and very reliable, but there is there is a niche ways of playing this market because it is so big so grassy frothy and so fragmented. So I don't think you go and play head to head with some of the bigger players in the market, but theres lots of niche areas around that for us to further dip.
Floy, our capabilities and strategy around so keep in mind. This is a $180 million business, 95% SaaS, So theres, a little better breadth to it and a really great position to move in this market so excellent market.
Yeah.
Okay. Thanks.
And Senator.
And we will take our next question from Rob Mason with Baird. Your line is now open.
Yes, good morning, guys.
Backlog in the year.
Yes.
Claude.
Reasonably well on an apples to apples basis about 25% year over year.
What.
What does your your 'twenty two guide low single to mid single digit core growth what does that assume in terms of backlog reduction within that I can't give you the exact percentage here, but clearly we anticipate some backlog reduction of that continuing as <unk>.
It comes off but.
As we think ex.
CMV, we talked about.
Look we talked about the year being low to mid single digit core growth as we think ex CMV for 2022, that's more of a mid to maybe to maybe high.
For the year and I would say, we would anticipate seeing similar performance on the order side, so, but I think the punch line is I would frame it is that solid.
Solid mid single digit plus demand environment is what we expect from the order side, continuing once you kind of sort through the E&P and other compare noise here.
Okay. Okay. That's helpful.
And then last question just.
You mentioned, you're still on track with your repositioning restructuring effort just remind us again.
What the savings expectation was for 'twenty, two and any thoughts on the cadence of that how that phases in.
Yes. So look we spent just a little under $15 million this year sorry.
I'm sorry in 2021.
We had anticipated spending a little more than that we're seeing some actions push into 2022, that's really us timing things and phasing things with things like <unk>, where we're taking some corresponding actions and we'll have a better than one times payback on that spend that we had in 2021, So I think closer to 20.
Savings.
Thats the exit rate, we would exit the year at and the benefits we'll get in 2022, then we talked about some additional spend and really these things relate to this multi year positioning around the simplification profitable growth initiatives and repositioning some resources to.
Take advantage of <unk>, and then repositioned to other areas of growth as we made kind of this large multiyear.
I see.
Thank you I'll pass back thanks Beth.
Got it.
And we will take a follow up question from Steve Tusa with Jpmorgan. Your line is now open.
Hey, sorry, guys just one last quick one here.
On the.
The acquisition.
Said, a 3% contribution.
That's what's that kind of annual run rate now for for DRP that that's a little bit lower than that I think what we had in our model.
What's kind of that business, what do you expect for annual revenues for that business in 'twenty two.
Yes. So this was 170 ish million dollars business last year, maybe came in a little better we saw really good growth in the fourth growing growing kind of double digit mid teens here in 2022.
Okay. So 170 million it will grow mid teens and 22 got it okay. Thanks, a lot appreciate it.
Thanks.
Okay.
We have reached our allotted time for questions I will now turn the program back over to Mark Morelli for any additional or closing remarks.
Thanks, Brittany look I'd like to take a moment just to thank the volunteer team for their ability to focus and execute and deliver a really strong year in the face of significant headwinds. We also made really important steps on our portfolio diversification and the progress and momentum positions us very well into 2022.
Beyond to accelerate profitable growth. So thanks for joining on today's call have a good day.
Okay.
This does conclude today's program. Thank you for your participation you may disconnect at anytime and have a wonderful day.
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