Q3 2022 Vontier Corp Earnings Call

Results Conference call all.

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 would like to ask a question at that time simply press Star then the number one on your telephone keypad.

To withdraw your question press the Star two keys I would now like to turn the call over to Ryan Edelman, Vice President of Investor Relations. Mr. Adelman, you may begin your conference.

Good morning, everyone and thank you for joining us on the call. This morning to discuss our third quarter results with me today are Mark Morelli, our president and Chief Executive Officer.

Our senior Vice.

Resident and Chief Financial Officer.

During today's call, we will present certain non-GAAP financial measures information relating to these non-GAAP financial measures is available on the investors section of our website at bunge near downtown.

Please note that unless otherwise noted the presented financial measures reflect year over year increases or decreases.

We will also make forward looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will or may occur in the future.

These forward looking statements are subject to a number of risks and uncertainties and actual results might differ materially from any forward looking statements that we make today.

Information regarding these factors that may cause actual results to differ materially from these forward looking statements.

We're well on our SEC filings and subsequent quarterly report on Form 10-Q.

These forward looking statements speak only as of the date. They are made and we do not assume any obligation to update any forward looking statements with that I'd like to turn the call over to Mark.

Thanks, Ryan Good morning, everyone and welcome to our third quarter earnings call I'd like to formally welcome our new CFO and Schuman to his first earnings call with volunteer.

I know many of you have had the chance to catch up with him already he has been in the seat now for about 60 days and he is already having a positive impact on the organization. We're excited to have him on board.

As we mark the two year anniversary of our separation I'd like to highlight the progress we've made and give a view of our path forward, but first I'd like to highlight the challenging third quarter, where we miss revenues, but delivered bottom line results.

Also we are lowering our full year guidance driven by an acceleration of the E&P roll off which we believe is prudent given the weakening macro environment.

We continue to actively shape, our post <unk> business. After an schuman walk you through the financials I'll leave you with a strategic framework that we will build upon and our future engagements.

You will see that we have significant momentum and reasons to be optimistic.

Let's get into the details of the quarter with a summary of our results. We delivered adjusted EPS of <unk> <unk> per share up 8% versus the prior year in spite of a revenue mix adjusted operating margin expanded 40 basis points year over year, reflecting strong operating leverage and positive price.

Cost as well as the benefit from ongoing cost actions.

Core revenue declined 2% in the quarter at the end of August one of our key suppliers of the printed circuit boards used in all of our U S. Fueling dispensers experienced a cyber attack, which shut down their production for three weeks late in the quarter.

This event was beyond the scope of the disruptions and already stretched supply chains.

Our teams responded actively to re plan our operations into the final days and hours of the quarter, but the timing of the disruption limited our ability to fully recover at the end of September .

The supplier has resumed normal production and we do not anticipate this supply disruption to impact our Q4.

Broader supply chain conditions continue to stabilize with modest sequential improvement and some components and logistics I'm incredibly proud of our team's performance in mitigating this anomaly.

Non AMD core revenues grew low single digits with solid performance in our fueling aftermarket and service business and sequential improvement at Mack Cali.

However, we also experienced pockets of softer demand related to slower capital spend from independent fueling operators and larger customer project delays in our environmental business due to extended industry lead times on underground equipment.

We continue to see momentum from strong price realization consistent with the trends we've seen year to date.

Our backlogs remain healthy and our lead times are beginning to normalize that said, while non E&P growth did not meet our expectations. In Q3, we are confident that non ENB core growth will return to the mid single digit range for Q4 and the full year.

Human will walk you through the details of our updated guidance.

As we are revising our full year outlook to reflect our more cautious assumptions for the adoption.

Option.

As the macro backdrop is weakening disproportionately impacting small drilling operators in the us we felt it prudent to proactively refresh our modeling assumptions.

The net result is the E&P headwind in 2022 will now be roughly $100 million and the 2023 headwind will be closer to the low end of our prior range or about $300 million.

There is no change in the peak to trough decline, which would put us at a base business and U S dispensers of approximately $250 million.

Given increased clarity on the timing of the <unk> wind down we're accelerating cost actions already in flight. We're also implementing a new set of actions with the intent of right sizing the fixed cost structure and ensuring the appropriate allocation of resources.

A benefit of this earlier than expected decline is that the ANV chapter will soon be behind us.

<unk> has been a great up cycle for us.

Bringing it to a close enhances our focus on profitable growth initiatives structural cost improvement and effectively deploying capital.

We're committed to returning capital to shareholders through a balanced plan over the long term. However at current valuation levels share repurchases unquestionably our top priority here.

Year to date, we've completed nearly $300 million in buybacks and have just shy of half a billion dollars remaining under our existing share repurchase authorization.

Our supply chain continue to stabilize the working capital headwinds, we've experienced year to date should improve and free cash flow conversion will begin to normalize beginning next year.

Over the next three years volunteer will generate roughly one 5 billion in cash providing us with significant strategic and financial flexibility.

Before I turn things over to instrument I'd like to take a moment to begin to set the foundation for the next phase in the journey of on tier.

We're now two years post separation and I couldnt be prouder of what we have accomplished or more excited about the path forward.

Over these past two years, we've focused a lot of our intention capitalizing on the inherent opportunities within our legacy operating companies and initiating our strategy led portfolio transformation designed to enhance profitable growth through delivering smart sustainable solutions with a tighter focus.

On the mobility ecosystem.

Since well before the spin we've been capitalizing on an accelerated replacement cycle in our U S fueling dispenser business driven by required in the upgrades.

<unk> gained considerable share we've expanded our U S installed base to nearly 450000 units across more than 90000, fueling sites and strengthened our relationship with key customers.

This provides a long tail of opportunity for aftermarket parts and service as well as upgrade and replacement equipment.

As we've been preparing for this tail end of the curve for the past two years, we proactively launched a new set of initiatives aimed at accelerating topline growth and profitability. We call. These our profitable growth initiatives and platform strategies, which are ultimately aimed at maximizing shareholder returns.

Through the end of this year, our profitable growth initiatives will have largely been responsible for driving non ENB core growth from low single digit decline pre spin to positive low double digits and 130 basis points of operating margin expansion in spite of.

<unk> headwinds.

We've also grown earnings 23% post spin.

We more deeply deployed the volunteer business system, introducing a program we refer to internally as the focus and prioritization process across the organization, that's enabling us to determine where best to focus for growth and where we should turn costs.

And early focus with strategic pricing, giving us a head start on addressing inflation and helping us to stay in front of price cost curve.

We recognized product line simplification as an opportunity and put in place a program to significantly reduce the number of fuel dispensers globally from 32, and so far this year, we've rationalized 10 dispenser lines.

We will have also achieved more than $25 million of cost savings to restructuring and other actions.

On the top line growth side by more efficiently leveraging our engineering investment, we've been able to accelerate innovation and our environmental business Veeder root, resulting in a two year revenue CAGR of more than 10% through the end of 2022.

We established a local sales and manufacturing presence in certain high growth markets and are better position with better product to benefit from increased regulation and investment and cost effective petroleum based infrastructure in the coming decade.

We created a designated team to drive aftermarket within <unk> to capitalize on our growing installed base of fueling equipment in the U S, resulting in revenue growth in the third quarter of 38%.

We've also made progress on turning around the <unk> business, which is now returning to growth and expanding operating margins.

And increased product vitality at macro which announced a new strategic supply relationship with Milwaukee tools in September that will contribute several points of growth next year.

Our platform strategy initiatives demonstrates success in the initial phase of our portfolio transformation, which includes both organic and inorganic actions to better position volunteer to compete in an attractive growth markets that are not ice dependent.

The acquisition of <unk>.

Which closed a year ago September have surpassed our original expectations growing their top line by over 30% and expanding operating margins by over 400 basis points.

<unk> industry, leading technology enhances our capabilities and deeply embedded point of sale systems, including productivity software and payment facilitation.

The dry acquisition earlier this year brings us best in class EV charging network software with tens of thousands of plugged under management and continues to gain traction with customers that have significant potential to scale.

We believe we have the premier asset to capitalize on the Buildout of the EV charging infrastructure globally with hardware agnostic solutions.

We're also making organic investments and other alternative fuel solutions in support of our vision for a multi fuel future for the car Park.

Our AMG energy business is a leading supplier of compressed natural gas dispensing technology with nearly $75 million in projected revenue. This year up about 40% from prior year levels and expected to remain a strong contributor in the next year in.

In addition to being a strong business in its own right and you've also provides us the domain expertise and channel presence to participate in the build out of hydrogen fuel infrastructures in.

In Q3, we received our first commercial orders for our hydrogen dispensers, which we'll expect to begin shipping next year.

With respect to capital allocation between acquisitions and share repurchase we deployed roughly $1 5 billion in capital and we are on pace to generate double digit returns over three years.

As we continue building our track record around capital deployment, we will remain disciplined on our fundamentals focusing on returns while we do have an attractive pipeline of bolt on M&A opportunities that priority near term will shift to share repurchase and deleveraging the balance sheet.

Our strategy is on track I'm very proud of the progress we've been able to demonstrate an accelerating topline growth and improving profitability.

We are at a pivotal stage in our journey and we have unique competitive advantages to lead in many market segments across the mobility ecosystem.

With that I'd like to turn the call over to instrument to provide the financial results in human.

Thanks Mark.

<unk> started with a summary of our performance in the quarter.

Adjusted net earnings for the third quarter were $136 million down slightly from the prior year period.

Inflated to adjusted net earnings per share of <unk> 86.

An 8% increase over the prior year.

Reported revenue grew two 5% driven by strong growth of DRP, and partially offset by a 3% headwind from FX.

But the core revenue declining one 9%.

Our non <unk> core growth was up low single digits.

Revenue was impacted by the anomalous cyber event, we discussed earlier some softness in demand from small independent fueling cooperators that impacted both E&P and non E&P and.

And environmental customers delaying projects in the quarter as industry lead times for underground fueling equipment extended.

Non ENB core growth was led by mid single digit growth at <unk>, but strength in aftermarket and our CMG business in Mexico, which grew nearly mid single digits in the quarter.

ERP was acquired in Q3 of the prior year. So it will not be included in core growth until Q4, but continued to outperform revenue up 30% in the quarter.

Operating profit for the third quarter was $196 million, an increase of 4% year over year.

Adjusted gross margin expansion of 40 basis points reflected continued effective price cost management and the benefits of Derby and other higher margin solutions.

These favorable items helped offset continued production inefficiencies from another backend loaded quarter driven by the timing of supply.

The increase in operating profit and strong execution drove incremental margin of nearly 40% and 20 basis points of adjusted core operating margin expansion.

This includes the dilutive impact of our early stage energy transition investments, which impacted EPS by <unk>, <unk> and operating profit by $3 million to $4 million.

Looking at the top line performance of our two platforms.

Mobile mini technologies core revenue declined 3% driven by the factors I mentioned earlier.

Sales in our aftermarket parts business were up more than 30%.

<unk> business grew low double digits.

Total growth in mobility technologies was two 5% as DRP continues to benefit from strong end market demand for <unk> technology upgrades.

In our diagnostic and repair technologies platform core revenue grew one 5% in the quarter with micro growth of 3%, partially offset by a decline at Tennessee.

Sequential improvements at Moscow, including the improvement in net franchisee adds and solid growth in our same store sales.

During the quarter, we began an important strategic supply relationship with Milwaukee tools.

Will enable our franchisees to carry milwaukee's, leading cordless tools strengthening our offering in our key product category.

This will be an important growth driver for mapco in the upcoming quarters.

And market fundamentals remain very healthy with repair activity service technicians.

Mission wages strong.

As we are seeing supply chain for micro recover and we continue to add new skus to our mobile stores net franchisee had with turning positive for the health of company owned stores.

We believe we are well positioned within this market.

Adjusted free cash flow conversion in the quarter was 64% up sequentially, but below normal seasonality as we experienced another quarter that was significantly backend loaded.

Unfavorable linearity created by ongoing supply chain disruptions and isolated supplier impacts in Q3 has pressured working capital year to date.

While free cash flow conversion will improve materially in Q4, we are now expecting our full year conversion to be approximately 70% to 80%.

Moving onto the balance sheet.

We ended the quarter with a cash balance of about $120 million and had $50 million of borrowings under our $750 million credit facility. Our net leverage was three three times adjusted EBITDA consistent with the first half and temporarily elevated due to the timing of free cash flow generation.

We maintain our commitment to investment grade credit ratings and still expect our leverage will end the year at three times with our targeted range unchanged at two and a half to three times net.

To further enhance our liquidity profile, we executed a three year 600 million term loan, which replaces an expense on September 2023 maturity to as late as December 2025.

Our nearest debt maturity is now on a $400 million term loan maturing in October 2024.

In Q2.

<unk>, our repurchase authorization back up to $500 million and have deployed $31 million against that.

Our year to date share repurchases to $188 million.

Once closed we would expect to deploy proceeds from our previously announced divestitures to gross debt paydown and share repurchases.

Turning to the outlook assumptions.

Initiating Q4 guidance for adjusted EPS of <unk> 73 to 78.

Which assumes low single digit core growth.

Mid single digits, excluding the impact of <unk>.

We expect adjusted core operating margins to be flat to down 40 basis points.

But in line with our full year average.

As a reminder, we will have a full quarter of acquisition contribution from <unk>.

We are assuming an FX headwind similar to what we saw in the third quarter.

For the full year this translated to adjusted EPS guidance of $3 to $3 <unk>.

Which compares to our prior guide of $3 20 to $3 30.

We are now assuming core growth to be roughly flat for the full year and up mid single digits, excluding the impact of <unk>.

Taking a closer look at some of our other assumptions.

We expect full year 2022.

Average share count to be approximately $161 million.

Which reflects the impact of the share repurchase activity conducted to date in 2022.

Interest expense is anticipated to be $70 million, reflecting an increase in interest from the variable portion of our debt.

Our guidance also reflects modestly higher FX headwinds, which is roughly a three to four and dilutive impact relative to our last update including the headwind in Q3.

Let's turn to slide nine for a quick visual on our updated assumptions for the <unk> impact.

On our U S dispensing business.

As Mark mentioned.

We are taking a more cautious outlook and we are proactively refreshing our modeling assumptions for <unk> conversions to assumed lower adoption rates.

As part of this process, we continued extensive voice of customer and channel checks.

From the peak of 740 <unk> in U S expenses revenues.

We have communicated our expectations of a 450 to 500 million peak to trough decline to.

So our base business and the $250 million range.

Ultimately if that expectation has not changed.

What has changed the face of the drawdown in revenue.

Accelerated by roughly one quarter versus our prior assumption.

Given the changes we've discussed we now anticipate <unk> revenues to decline a little over $100 million year over year.

And materially in and two <unk> upgrade activity.

This reflects $15 million worth of headwind accelerating into 2022.

In 2023.

We are now calling for a decline of about $300 million compared to our prior range of $300 million to $350 million.

It is important to note that we are getting visibility into core U S. Fueling dispenser demand for 2023, which is reflective of the convenience store national accounts, new sites built resulting from ongoing industry consolidation.

And the next wave of refreshing product upgrade activity, which will also drive growth in the years to follow.

Through the use of <unk> replacement cycle, we've taken share over the last several years and our dispenser business.

And those are formidable installed base.

We are well positioned for future upgrade activity.

Aftermarket parts and service.

And replacement equipment.

Moving to slide 10.

As we have provided a forced ENB framework for 2023 on previous calls.

Given the changing macro environment, we feel it's prudent to provide a preliminary update.

Starting on the left hand side of the bridge of this framework, we normalized our updated guidance for 2022 by removing the estimated earnings for Hennessey and GTT from the base.

Given the current interest rate environment, and allowing for additional increases to the federal funds rate to 5% next year.

We currently estimate interest expense being roughly a <unk> <unk> headwind to year over year.

I've mentioned earlier the headwind from <unk> is now at the low end of the prior range.

As Mark referenced.

Accelerating and increasing actions to right size the cost base in response to the wind down of <unk>.

Additionally, at this stage, we are anticipating non ENB core growth to be mid single digits.

Speaker 1: And the next wave of refresh product upgrade activity, which will also drive growth in the years to followthrough the U semb replacement cycle. We have taken share over the last several years in our dispense business and built a formidable installed basewe are well position for future upgrade activity after market POS and service and replacement equipmentmoving to Slide 10, as we have proved a forced V framework for 2023 on previous calls. Given the changing macro environment, we feel its prudent to provide a preliminary updatestarting on the left-hand side of the bridge of this framework. We normalize our updated guides for 2022 by removing the estimated earnings for hnesc and GT from the basegiven the current interest rate environment and allowing for additional increases to the federal funds rate to 5% next year. We currently estimate interest expense being roughly at two twenty-cent headwind to year-over-yearas mentioned earlier. The headwind from EMV is now at the low end of the prior rangeas Mark preferenced. We accelerating an increasing actions to rightitesize the cost base in response to the wind down of EMV. Additionally, at this stage we anticipating non-EMV core growth to be mid-single digits, driven by our profitable growth initiatives and platform strategies, which compares to high single-digits growth previously expectedwe would expect free cash flow to improve as asupply chain conditions E and demand patternents become more predictable, which will allow us to work down inventory levels.

Given by our profitable growth initiatives and platform strategies, which compares to high single digits growth previously expected.

We would expect free cash flow to improve our supply chain conditions ease and demand patterns become more predictable.

Will allow us to work down inventory levels and alleviate pressure on working capital.

From a capital deployment standpoint, we will carry over the impact of shares already purchased.

Future capital deployment and share repurchases and debt pay down from a strong cash generation and proceeds from the sale of pregnancy and GTT.

As we continue to work through our assumptions over the next few months.

We will come back to you with our formal guide on the Q4 call in February .

But that I will turn it back to Mark.

Thanks, Ann Chairman on Slide 11, I want to give you a bit of a preview of the future amount here.

We serve a diverse and growing set of mobility ecosystem customers such as car wash operators convenience store retailers auto repair shops fleet operators and EV charging operators. These customers look to us to solve their most pressing challenges labor and skill shortages increasing.

Our park complexity, increasing regulations, increasing focus on sustainability, and ESG and consumer demands for personalization and a frictionless experience.

Our strategy is underpinned by these secular drivers and positions us to win in a $28 billion market growing at an attractive mid single digit CAGR.

Volunteers smart sustainable solution strategy is focus on moving up the technology stack to solve high value customer problems drive profitable growth transform the portfolio and generate top tier shareholder returns.

Speaker 1: and alleviate pressure on working capital. From a capital deployment standpoint, we will carry over the impact of shares already purchased, future capital deployment and share repurchases, and debt pay down from our strong cash generation and proceeds from the sale of NSE and GTT.

The strategy has three pillars.

First optimize the core is a set of self help initiatives, where we are demonstrating significant momentum and have a long runway of opportunities ahead.

Speaker 1: As we continue to work through our assumptions over the next few months, we will come back to you with our formal guide on the Q4 call in February .

Next expand and diversify leverages, our significant installed base to grow where we have a legitimate right to win.

Speaker 1: With that, I will turn it back to Mark.

Speaker 2: Thanks, Anne Schumann. On slide 11, I want to give you a bit of a preview of the future of volunteer. We serve a diverse and growing set of mobility ecosystem customers such as carwash operators, convenience store retailers, auto repair shops, fleet operators, and EV charging operators. These customers look to us to solve their most pressing challenges, labor and skill shortages, increasing car park complexity.

Or B is an excellent example of this.

And finally accelerate growth by moving into adjacent markets increases our growth profile and further reduces our ice exposure.

Examples of this include our organic investments in hydrogen dispensing solutions and our drives.

<unk> charging and smart energy management platform.

Which was selected by shell this quarter to build out new charging locations and more than 10 European countries.

Speaker 2: increasing regulations, increasing focus on sustainability and ESG, and consumer demands for personalization and a frictionless experience.

Our team is galvanized around our smart sustainable solution strategy and our purpose of mobilized in the future to create a better world.

Speaker 2: Our strategy is underpinned by these secular drivers and positions us to win in a $28 billion market growing at an attractive mid-single-digit CAGR.

We're excited about the road ahead, as we harnessed, the resiliency and strategic Optionality inherent in our businesses to build a better stronger and growth of our portfolio.

Speaker 2: Vontier's smart sustainable solution strategy is focused on moving up the technology stack to solve high value customer problems, drive profitable growth, transform the portfolio and generate top tier shareholder returns.

We look forward to sharing additional perspectives and details during our future engagements and our 2023 Investor day.

With that operator, we're ready to open the line for questions.

Speaker 2: The strategy has three pillars.

At this time, if you would like to ask a question. Please press star one on your Touchtone phone.

Speaker 2: First, optimize the core is a set of self-help initiatives where we are demonstrating significant momentum and have a long runway of opportunities ahead.

You may remove yourself from the queue at any time by pressing star to once again that is fair and Brian If you would like to ask a question.

Speaker 2: Next, expand and diversify leverages our significant install base to grow where we have a legitimate right to win. DRB is an excellent example of this.

I'll take our first question from <unk> <unk> with Bank of America.

Good morning. This is David Ridley Lane on for Andrew.

Could you maybe just bridge the change in the 2022 guidance, there's $50 million of lower E&P revenue, but are there some other items as well and then.

Speaker 2: And finally, accelerate growth by moving into adjacent markets increases our growth profile and further reduces our ice exposure.

A follow up to that is there possibility of getting catch up revenue.

Speaker 2: Examples of this include our organic investments in hydrogen dispensing solutions and are drives, EV charging and smart energy management platform, which was selected by Shell this quarter to build out new charging locations in more than 10 European countries.

Here in the fourth quarter from the printed circuit board supplier disruptions.

Yes, so I'll start off the answer and I'll turn it over.

And chairman.

Essentially the main major change.

Speaker 2: Our team is galvanized around our smart, sustainable solution strategy and our purpose of mobilizing the future to create better our world.

What we're trying to provide by the way we are trying to add better transparency into 2023.

Even though we don't consider it a guidance, but essentially what we're doing is we're sunsetting <unk> earlier. So we're pulling forward that $50 million of impact into this year, which next year, our peak to trough will essentially be the same within our range.

Speaker 2: We're excited about the road ahead as we harness the resiliency and strategic optionality inherent in our businesses to build a better, stronger, and growthier portfolio.

Speaker 2: We look forward to sharing additional perspectives and details during our future engagements and our 2023 Investor Day.

Of what we provided for a little bit on the higher end of that range.

And then the.

The carryover impact into Q4 of that the supplier issue that we mentioned in our prepared remarks are essentially being absorbed in sort of this <unk>.

Speaker 2: With that operator, we're ready to open the line for questions.

Speaker 3: At this time if you would like to ask a question please press the star and 1 on your touch tone phone. You may remove yourself from the queue at any time by pressing star 2. Once again that is star and 1 if you would like to ask a question. We will take our first question from Andrew Open with Bank of America.

In pull in into Q4 do you want to comment on that in June yes.

When you think of Q4 guide.

Really the impact the ENV, obviously, the 50 million Poland that Mark mentioned.

Speaker 4: Good morning. This is David Ridley Lane on for Andrew. Could you maybe just bridge the change in the 2022 guidance? I know there's $50 million of lower EMV revenue, but are there some other items as well? And then, you know, follow up to that. Is there, you know, a possibility of getting catch-up revenue here in the fourth quarter from the printed circuit board supplier disruption?

Also FX impacting US guide to guide, which is $15 million for the second half from a revenue perspective about <unk> from a EPS perspective.

Interest off a little bit and then just a little bit.

Other revenue jump back to a couple of cents from an EPS perspective.

Understood and then I wanted to check in on the <unk> acquisition.

Speaker 2: Yeah, so I'll start off answer and I'll turn it over to Anne Schumann. So essentially, the main major change in what we're trying to provide, by the way, we're trying to add better transparency into 2023, even though we don't consider it a guidance, but essentially what we're doing is we're sunsetting EMB earlier, so we're pulling forward that 50 million of impact into this year, which next year.

What have you learned I guess in the.

Kind of first month of ownership here.

Any thoughts on EPS accretion for 2023.

Because as youre, giving more color on.

On that.

Yes, I'll make a comment on.

The <unk> acquisition all in human also jump in on that too.

Look we're pretty pleased with what we have we know that this gives us two aspects one of which is it enables us to advance our software initiative with what are called micro services. These are it's a modular based approach that has got tremendous interest with some of our larger customers, which we think will.

Speaker 2: our peak to trough will essentially be the same within our range of what we provided for a little bit on the higher end of that range.

Speaker 2: And then the carryover impact into Q4 of the supplier issue that we mentioned in our prepared remarks are essentially being absorbed in sort of this emthe.

When over the longer run.

And this module based approach gives them the flexibility of choice at.

Speaker 1: pull-in into Q4. Do you wanna comment on that, Anjumma? Yeah, and when you think of Q4 guide, really the few impacts, the EMV obviously, the 50 million pull-in that Mark mentioned. We also have FX impacting us, guide to guide, which is 15 million for the second half from a revenue perspective, about four cents from an EPS perspective. Interest up a little bit, and then just a little bit of...

At the same time, there is a significant cost out element here, because we can essentially collapse the cost on our payment hardware and software and we can also advancing fill some of our gas, particularly for high growth markets to offer a better offerings. So we can leverage our existing.

Channel to sell these offerings battery cell a lot of synergies with this deal. So I think it's really a classic bolt on that we're very excited about integrating assuming you want to jump in here on the <unk> and the impact yes.

As you remember when we did this acquisition we had talked about a five to seven for next year, we actually feel more comfortable now given everything we've learned.

Post ownership and we think the numbers close to 7% to 10 for next year.

If you look at the framework for 2023 that we've provided those results are split between the restructuring savings, which is the synergy and then the growth.

Speaker 5: on that.

Speaker 2: I will make a comment on the Invenco acquisition. I will let Inshuman also jump in on that too. Look, we are pretty pleased with what we have. We know that this gives us two aspects, one of which is it enables us to advance our software initiative with what are called microservices.

We also see good potential, but <unk> is part of our portfolio next year. So we feel very good about the acquisition of <unk>.

Capital well deployed.

Thank you very much.

We will take our next question from Julian Mitchell with Barclays.

Speaker 2: And this module-based approach gives them the flexibility of choice.

Cash flow conversion CFO guiding at 70% to 80% of adjusted net income could you help us better understand the past normalization here.

Speaker 2: At the same time, there is a significant cost out element here because we can essentially collapse the cost on our payment hardware and software. We can also advance and fill some of our gaps, particularly for high growth markets to offer a better offering. We can leverage our existing channel to sell these offerings better. A lot of synergies with this deal. I think it's really a classic bolt-on.

Yes, sorry about that could you repeat the question year that began essentials cutoff.

Sorry about that yeah free cash flow conversion is now guided at 70% to 80% of adjusted net income. So can you just help us better understand the path to normalization here.

So there is a.

Couple of dynamics that impacted our cash flow the first dynamic is.

Speaker 1: that we're very excited about integrating. Shumin, you want to drop in here on the impact? Yeah, as you remember when we did this acquisition, we talked about a five to seven cents for next year. We actually feel more comfortable now, given everything we've learned post-ownership, and we think the numbers close to seven to 10 cents for next year. If you look at the framework for 2023 that we've provided, those results are split between the restructuring savings, which is the synergy.

The linearity of our sales. So if you really think <unk> what that means is roughly half of our sales for the third quarter for <unk> in the month of September and even in September little bit backend weighted.

So that pushes a lot of the receivables.

<unk> capital buildup towards the receivables are a real focus for the fourth quarter is to drive better linearity manage week by week 13 weeks and we're starting to see progress, which helps with the cash conversion in the fourth quarter. The other aspect.

Speaker 1: And then the growth where we also see good potential with Invenco as part of our portfolio next year. So we feel very good about the acquisition and it was.

Uses of working capital has been the inventory levels are elevated and part of that is because of the supply chain disruptions that we had it leads to having higher safety stock for example on some of our hydraulics our safety stock pre pandemic used to be 45 days were up to 90 days we are starting.

Speaker 1: capital well deployed.

Speaker 4: Thank you very much.

Speaker 3: We'll take our next question from Julian Mitchell with Barclays.

To work the safety stocks back down and we have concrete actions to bring down our inventory levels. So youll see some of that start translating into Q4, but really when you start thinking of our business.

Speaker 6: cash flow conversion, CFO guided at 70 to 80% of adjusted net income. Could you help us better understand the path to normalization here?

Todd has not changed we're still roughly a 100% cash conversion business and we see a lot of this is working back to more normal times by next year.

Speaker 2: Yes, sorry about that. Could you repeat the question? The beginning of the sentence was cut off.

Speaker 6: Sorry about that. Yeah, free cash flow conversion is now guided at 70 to 80% of adjusted net income. So, can you just help us better understand the path to normalization here?

Okay. Thank you that's very helpful. And then just my follow up.

Can you help us better understand some of the additional cost actions, we need to potentially reach the 20% restructuring savings tailwind for 2023 shown on slide 10.

Speaker 1: Yes So there's a couple of dynamics that's impacted our cash flow. The first dynamic is the linearity of our sales. So if you really think gbr, what that means is roughly half our sales for the third quarter. For gbr came in the month of September and even in September little bit back end weighted.

<unk> spend guide for 'twenty two is unchanged at 11% so does that need to step up here in 2023.

Yes, So let me let me give some color on this we have.

Speaker 1: So that pushes a lot of the receivables, working capital build up towards the receivables. Our real focus for the fourth quarter is to drive that linearity, manage week by week, 13 weeks, and we're starting to see progress which helps with the cash conversion in the fourth quarter. The other aspect of uses of working capital has been the inventory levels are elevated. And part of that is because of the supply chain disruptions that we had leads to having.

A really strong set of activities that have been enabled by the self help program and its focus and prioritization process that we've been working on really for some time I discuss the product line simplification, which is a great enabler of this one great example is the dispenser line. There are other activities that have been underway and so this is not new.

New for US we've been knowing this E&P was going to roll off and we've been sending these off now its coming a quarter earlier. So there are sets of actions here that we're looking to accelerate.

Speaker 1: Higher safety stock, for example, and some of our hydraulics. Our safety stock prepandemic used to be 45 days. We're up to 90 days. We are starting to work a lot of the safety stocks back down and we have concrete actions to bring down our inventory levels. So you'll see some of that startck translating into Q4. But really when you start thinking of our business, the thought has not changed. We're still roughly 100% cash conversion business.

You mentioned that you can certainly jump in here with some additional color, but we've got a lot of momentum behind the cost out.

And it's enabled through a lot of sort of fundamental things that we are rethinking and doing differently in the business to pull those costs out.

Yeah, I'll just add when you really think of the cost out program think of 50% to 55 million starting in this fiscal year. Obviously, we had been doing stuff. Prior to this year also offset about $10 million in year benefit for 2022, just under $10 million then jump into 2023 roughly 40.

The benefit and then the remaining tailwind coming into 2024, so really our focus is about right sizing our cost to reflect the realities of CMV, but all of this had been in place. We just accelerated it and then enhance that a little bit.

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Great. Thank you guys for the detail.

Okay, we'll take our next question from Pavel <unk> with J P. Morgan.

Hi, good morning, Thanks for taking my questions.

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Maybe just focusing on slide nine thanks for the.

Coloring depiction here.

Just wanted to follow up on the baseline the $2 50 number.

Just curious if you can give color on if this is an accelerated replacement cycle wise.

250 of the right run rate for the U S. In 2023 is there is there a potential that it could be lower than that for a period of time since you were kind of well above the baseline for it.

Long period of time Im curious any color on that.

So look I think that this baseline business is something that we're getting visibility into now one of the things that gives us encouragement on this is the national accounts business in the U S, which we have a very strong position on their continuing to consolidate in the industry and there also.

We're making investments to continue to build out this infrastructure. There is no question that the Super cycle, we've just been through with <unk>.

Has accelerated the replacements and Thats already in this re baseline number for $2 50, so prior to the E&E big up cycle, which has been great for us over the last couple of years. There was that business. There. This $2 50 number is sort of down from what it was prior to the AMD already.

Sort of estimating it and it will grow from that $2 50 base, because we believe that there that there will be continued regulatory cycles here that will continue to drive growth in that industry. So we feel really good about that 250 baseline number.

Got it and then what was the pre pre COVID-19.

<unk> sorry.

Was it 300 was it more than that just curious.

It's about 300, but keep in mind that was.

Many years ago, because this has been a pretty significant up cycle. So it's about 300 number.

Well take our next question from <unk>. Please go ahead Rick.

Your line is now open.

Hey, good morning, guys.

Good morning.

So.

Just piggybacking on that question.

You guys have talked about.

Just trying to trying to understand why.

So I think we'll grow.

After.

So once you reach that $250 million level, I guess, everybody are steady repair and replacement story there but.

As you know, we have a little bit more visibility and play three what are some of those regulatory drivers.

Here Youre looking at for I know I do think one was around.

Emissions, but we can.

We have more concrete understanding of when those will hit.

When those bull.

Got to come into play.

Yes, so there is.

No question that there are there is evidence that these national accounts are continuing to build out I think you can certainly see this in your local infrastructure.

Where people are making investments to make these more attractive.

The issue what's happening with the small network operators as they are not really able to keep pace on some of the investments for new sites and solve the consolidation is the major part of it and when they when they're doing the consolidation they definitely want to upgrade so that's definitely in the near term that we're seeing.

Into 2023, so more attractive.

And also the dispensers that we're that we're launching are are certainly more attractive more convenient and incorporate all of the security features that you would expect in there longer term. These regulatory cycles will continue I'll just give you. An example about a regulatory cycle that is <unk>.

Turning right now in Canada.

And that regulatory cycle is driving more demand based on payment security. So.

These regulatory cycles don't and.

And so we will certainly see more to come in the U S. As we're seeing them roll through and of course, you are seeing some in high growth markets based on emissions and of April recovery is a big one in high growth markets is a strong regulatory cycle there. So.

<unk> always been there at that kind of ebb and flow by certain markets. Mexico is an excellent example that play through about a year ago and so they come up they kind of provide a wave and then and then we ride that wave based on our strong installed base and our ability to have a leading position here to capitalize on that and those regulatory drivers.

Halfway driven this business for a long period of time, and we will continue to drive this business going forward.

Okay. Okay. Okay.

Okay and then.

Got it.

High level strategic question.

With your.

Hi, Mason continuing to decline and you're sort of in a conundrum with M&A and that youre multiple okay.

Is it likely means that the current needed. Thanks.

Some bigger deals.

Or buying the accretion on those deals so why not why not being fully deploying to share repurchase at this point.

I'll go ahead and change and you can jump in I think we said in our prepared remarks that that's certainly our posture right now.

Our capital allocation is based on driving returns with.

With the dislocation in our valuation M&A is going to be hard to compete with buybacks just.

Buybacks provides a strong double digit return on that as we said in our prepared remarks buybacks are our priority right now while maintaining a healthy balance sheet.

Yes, okay.

Alright, thank you.

We will take our next question from Guy Hardwick with Credit Suisse. Your line is open.

Hello, Good morning, good morning.

<unk>.

I assume and I think you said in your preamble to the 2023 framework that you use.

Expect a non E&P core revenue growth of mid single digits in 2023 versus the previous expectation of high single digits. It goes a little background is that because.

2023, Youll have DRP in there as well so.

Is that timing is something Youll channel checks are telling you that it's going to be a fairly muted independent gas station capex outlook, excluding ANV.

Yes. So if you go back to our prepared remarks, one of the key things is we're being cautious given that the small independent fueling network.

Operators are being impacted by the macroeconomic environment.

Having said that we.

We have very strong areas of growth for <unk> should be growing double digits Moscow with Milwaukee.

Launch with a net franchisee ads the after market business.

<unk> is already selling into half two of next year <unk> product with.

A great turnaround story out there.

<unk> has been really strong and thats going to start translating to growth. So <unk>, we feel comfortable talking about mid single digit.

Next year even.

Potential a muted environment, that's impacting the small independent retailers.

Okay. Just a follow up can you just talk us through the timing of the working down the inventory and what potential margin that could have impact that kind of margins.

Well the inventory, we are managing that down to expect it to be managed down over the next two to three quarters.

We should not have a negative impact to margins because of managing inventory managing it in a gradual manner.

We still have very strong demand out of our factories and we can redeploy production.

Two areas of high demand then bring down inventory levels at the same time and also if you remember our cost out program is going to help protect our margins, so bringing down inventory will not be margin dilutive to us.

Okay. Thank you.

And once again that is star one if you remember to ask a question we will take our next question from Rob Mason with Baird. Your line is open.

Hi, yes, good morning.

I wanted to see if you.

You can just update us on what Youre seeing from your high growth markets and what kind of contribution from a growth standpoint or even detraction.

What youre expecting for the fourth quarter and how that May play into the 2023 growth component as well.

Our high growth markets.

Position us.

Really well for growth I think over the I would say more of the medium term it has been ebbing and flowing.

A bit and so when you look at.

Our outlook has been is not as strong coming into Q4 because of some push outs in orders that we have predominantly in India and China is not a big market for us it's a very small business at this point.

So we have a bit of a muted impact on that into this year and as we go into next year I will turn it over to instrument here a bit.

In terms of what we have in our model but.

It is something we feel very good about because it will pay off like I said over the more the medium term.

At the same time I think this year, we're certainly in a little bit of an ebb period at the moment do you want to comment on 2023.

Yes, just to build on what Mark said it has been lumpy. A simple example is in Q2, India.

Very significant growth year on year, and then Q3, it was slightly down but when you start averaging these things out they're very attractive markets for us for 2023, we expect some growth in the high growth markets for Us next year.

I see.

Yes.

There was mentioned as well I think youre really around just environmental some projects getting pushed out.

When do you have line of sight on win that.

Project activity may resume.

Our seasonal aspect that we need to get on the other side of it as well if they get pushed too far.

So over the next couple of quarters.

Just curious what your visibility is there.

Yeah.

First of all it is a great business for US I think we've done outstanding with new product launches.

In the recent past and I think we've got just an outstanding position narrowed a very profitable business, but this under ground equipment supply issue has no question impacting this.

And it's definitely a push we think more into next year, but supply chains are getting better.

Across the board, they're getting better and I think we're providing you the visibility we have in our guide.

I'll just add this is not our equipment that delayed the projects are delayed because of banks pipes. The customers have to buy and it's really driven by the resin shortage that's going on in the economy.

So as that resin shortage gets better with time like sleep tangible common which will help us ultimately.

Yes, yes understood okay. Thank you.

Okay.

And it appears we have no further questions from the line at this time I will turn the program back over to Mark Morelli for any additional or closing remarks, yes. Thank you Brittany and I'll look thanks.

Thanks for joining us on today's call I'm really encouraged by this track record that we're establishing on our business I think we're making significant progress on our multiyear transformation and our work is resulting in a stronger more growth oriented profile. So thank you all for joining and have a good day.

This does conclude today's program. Thank you for your participation you may disconnect at any time.

Okay.

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