Q4 2022 Vontier Corp Earnings Call
My name is Gretchen and I will be your conference facilitator. This morning at this time I would like to welcome everyone to Volunteer Corporation fourth quarter and full year 2022 earnings result conference call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
You'd like to ask a question during that time simply press Star then the number one on your telephone keypad, if you'd like to withdraw your question Press Star two.
I would now like to turn the call over to Ryan Edelman, Vice President of Investor Relations. Mr. Adelman, you may begin your conference.
Thank you Gretchen good morning, everyone and thank you for joining us on the call. This morning to discuss our fourth quarter results with.
With me today are Mark Morelli, our president and Chief Executive Officer, <unk>, <unk>, our senior Vice President 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 <unk> Dot com.
Please note that unless otherwise noted.
<unk> financial measures reflect the 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.
These forward looking statements are subject to a number of risks and uncertainties and actual results might differ materially from any forward looking statements that we make today.
Information regarding these factors that may cause actual results to differ materially from these forward looking statements is available in our SEC filings subsequent annual report on Form 10-K.
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 would like to turn the call over to Mark.
Thanks, Ryan Good morning, everyone and thanks for joining us on the call today.
Let's get started with a few highlights of the quarter and the year on slide four.
We're very encouraged by our strong finish to the year reporting 10% core top line growth for the fourth quarter, 11%, excluding the impact of the M D.
Our teams around the globe remain disciplined in their execution of our profitable growth initiatives and platform strategies, which continue to deliver results.
As we noted on the last quarter's call we are sunsetting ENV.
This upgrade cycle has impacted our U S fuel dispenser business over the last five plus years, and we are transitioning to a new normal in 2023.
Orders in the quarter were up 10%, excluding the impact of <unk> from the year over year comparison orders in Q4 were up in the high teens.
We continue to see good momentum at <unk>.
Demand environment remains constructive across most of our end markets and backlogs remain above pre pandemic levels.
Global supply chain conditions are normalizing shortening lead times and helping to reduce our past due backlogs.
The momentum we've seen in core topline growth underscores our teams' commitment to our customers along with the execution of our profitable growth initiatives and platform strategies.
We're building a portfolio of industry, leading technologies and solutions and higher growth verticals of the mobility ecosystem let.
Let me highlight a couple of notable examples of our profitable growth initiatives.
Our fueling aftermarket business grew top line more than 20% in 2022.
We have built an incredible installed base of dispensers globally and this is a solid example of profitable growth initiatives. We are executing with Bbs will monetize this growth opportunity for years to come.
Our environmental products business delivered high single digit growth driven by increased market demand for our innovative solutions that solve one of the most pressing needs of our fueling customers' environmental compliance.
Technologies like vapor recovery and leak detection are benefiting directly from increasing global regulation.
Our platform strategies are also making significant progress let me highlight a couple of examples.
CRB, which ended the year with pro forma core top line growth of over 30% was largely driven by strong market demand for tunnel Carwash and continued share gains.
We deployed DBS across this business, which helped drive a 400 basis point improvement in operating margins under our first year of ownership.
We see a clear path for sustainable growth in this platform over the next several years as we begin to leverage existing customer relationships to capitalize on upgrade and expansion opportunities.
The integration of <unk> is off to a great start and we're beginning to see early benefits of the investment thesis from the combined portfolio and our dispensers and payment business.
During the quarter, we successfully launched the new ion FX micro services software platform, which enables a more modular scalable and customizable solution for our convenience retail customers.
Our fuel or C store early adopters are already seeing the benefits of this technology.
Alternative energy grew more than 30% last year as our fleet and municipal customers continue to shift more fuel usage towards compressed natural gas and renewable natural gas or biofuels to support cost effective decarbonization efforts.
We are optimistic about the future of this business, particularly as we launch our new hydrogen dispensing technologies and can better serve our multi fuel future.
Lastly drives continues to scale commercially owing to its best in class hardware agnostic EV charging software.
Drive now manages over 35000 charge points and we continue to gain traction with key customers.
We now serve over 60 premier customers like E V go shell, Merck Volvo and circle K to name a few and more than 30 countries and across a variety of verticals.
Drive scalability and track record of successful integrations has enabled leading market positions in places like the Nordics.
<unk> has among the highest penetration of evs anywhere in the world and were dry now manages 75% of the public fast charging networks.
These examples demonstrate that we are making meaningful progress on our strategy led portfolio transformation designed to enhance profitable growth through delivering smart sustainable solutions with a tighter focus on the mobility ecosystem.
We are bolstering our competitive advantages in markets with strong secular drivers by adding to our connected hardware and software capabilities and in turn creating offerings that leverage data analytics to solve increasingly high value customer problems.
Our strategy revolves around connecting smart hardware scaling through digitally enabled platforms and managing assets to deliver outcomes like improved operational efficiency enhance user experiences or frictionless payment transactions.
All of these lead to more growth and higher recurring revenues with more accretive margins.
Throughout 2022, we exercised a disciplined capital allocation approach as you may remember early last year, we committed to prioritizing share repurchase and for the full year, we completed over $325 million of share repurchase.
Share repurchase remains a key component of our capital deployment strategy and have been Schuman will share with you. We also plan to pay down debt in the coming quarters.
We also invested organically in new product development and technologies, along with nearly $300 million in strategic acquisitions that will drive sustainable long term growth and value creation.
Notably we published our first ESG report in November I am proud of the ambitious goals, we set for ourselves and the progress we have already made across a number of dimensions, including greenhouse gas emissions diversity and safety.
In 2022, we reduced our total recordable injury rate by 30% increase our percentage of global female leaders from 22% to 26% and increase our percentage of black and latinx employees from 10% to 15%.
It is imperative that we attract and retain world class talent and that we cultivate and inclusive and innovative culture.
Our ESG program is helping us do just that.
More recently, we received a b from CDP following our first climate disclosure.
This puts us in roughly the top 30% of all submitting companies right out of the gates, recognizing our programmatic rigor and commitment to transparency.
Sustainability is core to our business and strategy.
We are uniquely advantaged to drive sustainability impact that matter to our customers and key stakeholders, including helping our customers meet their own ESG commitments.
Before I turn the call over to <unk> I wanted to provide a few key thoughts on our progress and outlook.
I couldnt be more pleased with the way our colleagues around the globe responded to adversity and stayed focussed delivering for our customers and stakeholders. This past year. It is a true testament to the fundamentals of the volunteer business system or Bbs that underpins, our culture of innovation and continuous improvement.
Looking into 2023, while the macroeconomic backdrop remains dynamic historically, our businesses have proven to be resilient and we are seeing signs of healthy customer demand.
We remain agile and we'll continue to closely track order trends and monitor leading indicators for each of our businesses.
Regardless of the economic outcome, we are ready and we will continue to leverage our culture of excellence powered by Bbs to deliver strong operating results and enhanced core growth.
When coupled with disciplined capital deployment, we have an attractive framework for value creation.
I'd like to turn the call over to Ann Schuman to provide the financial results.
Thanks, Mark and Hello, everyone.
Let's start with a brief summary of our performance in the fourth quarter on slide five.
Sales of $872 million were up just over 10% on a core basis and 11% excluding the impact of E&P.
This performance is the result of disciplined execution.
Improving supply chain conditions, particularly when compared to the prior two quarters and strong momentum on our profitable growth initiatives and platform strategies.
Growth was broad based including another quarter of strong growth at DRP and continued strength across the <unk> portfolio.
Adjusted operating profit for the fourth quarter was $190 million down slightly versus the prior year with a corresponding decline in operating profit margin.
Impacted by anticipated product mix dynamics continued growth investments and a full quarter of <unk> revenue.
These impacts also had a drag on adjusted gross margin during the quarter.
Looking ahead, we anticipate and when Google at seven to 10 cents of EPS in 2023 with synergies ramping as the year progresses.
For the full year 2022, we delivered solid underlying profit improvement up low double digits, excluding the year over year impact of ENB.
We effectively navigated difficult inflation and supply chain conditions and ended the year with positive price cost.
Our performance reflects the power of the <unk> business system.
Including the deeper deployment of our focus on privatization process across the organization.
Adjusted earnings per share for the quarter were <unk> 81.
Baird to 83 in the prior year period.
Higher interest expense was mostly offset by a positive contribution from lower share count year over year.
Turning to the top line performance of our two platforms on slide six.
Core revenues for mobility technologies increased approximately 13% with robust growth across much of the portfolio.
Due to solid execution improved supply chain conditions.
February on backlogs.
And increased bookings.
CRB had another quarter of strong growth driven primarily by continued strength and share gains in the tunnel car wash segment.
Fueling after market and alternative fuels businesses, each posted 30% topline growth with environmental up high teens.
Retail solutions was up mid single digits in the quarter.
As expected the <unk> month business posted its first quarter of core growth.
Low single digits with strong momentum as we exited the year at ACP ended 2022 up low double digits.
Core revenue in our diagnostic and repair technologies was up 3%.
With a 4% increase in Moscow.
<unk> experienced higher backlog conversion enabled by an improving supply chain environment, leading to same store sales growth of mid single digits by product category.
Strong demand for power tools up 30% and tool storage up low double digits.
I'll, let growth in same store sales was partially offset by normalization in net franchisees after exceptional growth in 2021.
Moving on to free cash flow and the balance sheet on slide seven.
Fourth quarter adjusted free cash flow was $175 million up 15% year over year with conversion of 137%.
For the full year adjusted free cash flow was 314 million with adjusted free cash flow conversion of 63%.
Capital expenditures were $17 million in the quarter and $60 million for the year alright.
Or an increase of 14% for Q4, as we continue to invest in growth productivity and sustainability.
This was short of our full year target range due primarily to higher than anticipated working capital in Q4, given strong sales growth, including a higher balance.
For the full year working capital as a percentage of sales returned to pre pandemic levels.
Net leverage ended the year at three two times down sequentially, but still above our target of around three times.
Our longer term target range for net leverage remains two and a half to three times and we expect to be within that range in 2023.
We repurchased approximately $40 million in shares in the fourth quarter.
Which brought us to just over $325 million for the full year are nearly 14 million shares.
Following the end of the quarter through the month of January we repurchased an incremental $18 million.
Turning to our guidance for 2023 on slide eight.
We are initiating a Q1 2023 guide of adjusted EPS of <unk> 57 to 62.
Which assumes a core revenue decline in the low to mid single digits and adjusted operating profit margins down in the range of 100 to 140 basis points.
But standing the impacts of ENV, we anticipate baseline core sales will increase low single digits.
And adjusted margin to expand 130 to 170 basis points.
At the midpoint.
As a percentage of full year. This represents a relatively normal start to the year at around 22, 5%.
The guidance for the full year 2023 slightly above the framework, we provided on our Q3 call in November .
I want to point out that this guidance as previously communicated assumes a $300 million revenue headwind from the year over year decline in ENB, which translates to about $150 million on an operating profit pressure are around 250 basis points of margin.
Adjusted EPS is expected to be in the range of $2 73 to $2 83.
Which is based on a mid single digit decline in core revenue and margin compression of 60 to 80 basis points.
Again.
If we strip out the impacts of ENB.
For the full year, we anticipate baseline sales to increase mid single digits on a core basis and adjusted margin expansion of 180 to 200 basis points.
Relative to the previous framework, our outlook assumes restructuring savings at the high end of the previously communicated band of 40% to $45 million.
We expect free cash flow conversion in the range of 90% to 100% returning to normalized levels.
Although we began to see improvements in working capital in Q4 inventory turns remained below normal.
We are proactively working on reducing our safety stock.
And resetting a min Max levels at a part number level allow.
Allowing us to carry less inventory and still meet anticipated demand.
Longer term continued progress on our product line simplification will enable us to further rationalize skus and create additional runway for inventory turns to improve.
We have provided you with some other P&L assumptions relative to our guide on the right hand side of the slide.
I won't walk through each of those but I would call your attention to our assumption for an outstanding share count of approximately 156 million shares.
Which reflects the share repurchase completed in Q4 and in January .
But does not assume additional share repurchase that we would complete in the remainder of the year.
We have a returns driven.
Disciplined and balanced capital allocation program aimed at creating long term value.
We remain focused on investing for long term growth and we still view share repurchase as a key priority.
We also remain committed to maintaining a healthy balance sheet.
Our investment grade credit rating.
To that end, we anticipate paying down between $150 million and $200 million and gross debt this year.
With that I will turn the call back over to Mark.
Thanks, Ann Chairman, we're extremely proud of the progress we've made since our spin in 2020, we became a public company and built our foundation.
In 2021, and 2022 as part of volunteer to point out we assembled an incredible leadership team began our portfolio transformation focusing on non E&P growth and executed on self help initiatives that continue today.
Now van Tier three point all are smart sustainable solution strategy built on this foundation and moves up the technology stack solving high value customer problems driving profitable growth transforming the portfolio and generating top tier shareholder returns.
The three point strategy has three pillars pillar, one optimize the core expands margins through profitable growth initiatives like strategic pricing and product line simplification.
We are still in the early innings here with tremendous runway ahead to optimize margins and drive growth.
Our progress and continued focus on optimizing the core.
Puts us in an athletic stance heading into an uncertain macro environment.
Pillar two expand the core leverages, our core platform positions to expand and grow.
Prime examples of this includes our alternative energy and fueling aftermarket businesses growing over 20% in 2022.
Pillar three adjacent markets expands into near Adjacencies, where we have a right to play and win examples include expansion opportunities at Derby, and our new hydrogen dispensing technologies.
On tier has unparalleled portfolio breadth across the mobile ecosystem.
We believe we are the only company capable of providing a full suite of connected hardware and software solutions to connect manage and scale assets across this $30 billion plus addressable market.
We have a diverse and growing set of customers across the carwash convenience retail auto repair fleet operators and EV charging verticals.
These customers are facing common secular trends and common challenges that they trust us to solve.
Labor and skill shortages, increasing car Parc complexity, increasing regulation, increasing focus on de carbonization and sustainability and consumer demands for more personal frictionless experiences are all forcing evolution of the mobility ecosystem.
We operate at the center of this ecosystem and are poised to enable the way the world moves for years to come.
We are uniquely positioned to benefit from the energy transition regardless of the pace of this transition as we are winning positions across the multi fuel landscape.
Our team is energized by the opportunity to be a leader in the global energy transition and to help ensure a safe affordable secure and sustainable.
We are galvanized around the bond tier three point of smart sustainable solution strategy and our corporate purpose of mobilized in the future to create a better world.
We are excited about the road ahead as we take advantage of the resiliency and strategic Optionality inherent in our businesses to build a better stronger and growth of your portfolio.
I look forward to sharing more about our progress and this strategy to accelerate growth at our Investor Day next month with that Gretchen, we're ready to open the lines for questions.
At this time, we will open the floor for questions if you'd like to ask a question. Please press the star key followed by the one key on your Touchtone phone.
If at any time, you would like to remove yourself from the question queue Press Star two.
Our first question comes from Andy Kaplowitz from Citigroup.
Everyone.
Hey, good morning.
So you mentioned that orders were up 10% in high teens, I think ex <unk> and improved sequentially. So what does that translate into for instance, only low single digit core revenue growth in Q1 versus the 10% you did in Q4 and then just focusing on orders has your non ENB related order strength continues into the first quarter have you seen any hints.
The slowdown from your customers.
Thanks Sandy.
We did see good strength in our orders in the fourth quarter underlying businesses are strong when we look at it from a book to Bill perspective, our book to Bill <unk> for the full year 2023 was one point or <unk> III or little above one.
We see good growth in our businesses based on our discussions with our customers.
Convenience store operators, the larger national chains, the regional larger regional players continue with new site builds.
When you when we looked at the other pieces of our portfolio like might go we see mid single digit growth visibility out there <unk> should continue to grow high single digits. Despite a very strong compare from the previous year. So when you put it all together, we feel comfortable with the mid single digit growth for next year, Yes. Andy. This is mark I'll just jump in on that too I think.
The outlook for Q1 is impacted by timing.
We know the construction cycle has been impact a little bit by weather too. So while we're pretty confident on the outlook. There also is an impact in Q1 due to timing.
I appreciate the color guys and then maybe just a little more color regarding your margin performance in Q4, why was mix worse than you thought and what about the other items that pressured margin could you talk about the additional growth investments, you're making I know you didn't change your 23 operating framework from what you gave us but how do you think about any incremental margin pressure impacting 'twenty three.
Ralph.
Sure.
Higher year perspective, our guide did include the <unk> revenue of just over $20 million, but no operating profit in the fourth quarter.
And it included the incremental investments for drives however for the fourth quarter, we did have about 80 bps.
Mr Award, our operating profit margin guide was and that was really tied to the amounts and timing of some year end expenses and then just a very slight impact from incremental mix.
From a perspective of next year, we feel pretty comfortable with our margins we have margin expansion.
Outside of the <unk> impacts of the baseline margins are improving that's supported by a significant restructuring program that we are executing.
And also driven by the mix of higher margin growth businesses like <unk> in the aftermarket business.
And some of them were those expenses like labor related or something else supply chain related just any more color there.
No a little bit labor related in the sense that for example, one of the bigger ones was the Diamond healthcare claims came in a little hotter.
In December than we had been running all year, but those are controlled because you have stopped losses et cetera, but it did impact us for example, $3 million more than what we were expecting.
I appreciate the color.
Yes.
Our next question comes from Nigel Coe from Wolfe Research.
Some of that.
But thanks for the question good morning, everyone.
So just.
The <unk> headwind the $3 million of no change there, but I think the math is $25 million to $50 million.
Headwinds in the first quarter based on the guidance points. So just wondering if you could maybe just get out of the kind.
Kind of comp issues, but maybe just talk about the dollar number so if we could take that.
250 expectation for the full year would you expect the dollar sales to be relatively stable quarter to quarter or do you expect it to deteriorate through the through the year just any color there would be helpful.
The 250 baseline sales for dispensers in the U S.
Relatively linear over the four quarters, there is some seasonality, but youre talking plus or minus 5 million based on the timing of some of the construction of our customers' projects, but tip.
Okay. Good.
And then.
Just thinking about the <unk> guide.
102 to $1 50, I think in the past you've talked about core margin not absolute margins I'm. Just wondering is that 100 to 150 is that.
All in EBITDA margins down year over year, with a cool and M&A impact, we should think about as well.
I think we're trying to simplify some of our reporting and make it easier for our the analyst community in both buy side and sell side to model us. So we did not include the core.
Operating margins as we did in the past just the reported operating margins yes.
Definitely makes it a little bit easier and then just my final question is on components, obviously very strong growth in 'twenty two.
After market businesses don't tend to grow that much I'm just wondering how much of this is maybe supply chain.
Related perhaps and when it all shakes out and what proportion of your sales and GPO will be components.
Yes, Nigel this is Marc look I think this is Ben.
Initiative, we really tackled as part of our profitable growth initiatives I think all of our revenue generally speaking has been helped by the easing of supply chain. So we're definitely getting an uplift there.
But this is a very specific very concerted effort I think we pushed really hard to gain share with the ENV upswing cycle that we we did that really well and I think we're also prosecuting a very good lay up for 2023 based on U S. Dispensers, you know the the large region.
Players are definitely making investments with new build out and construction as well as rebuilds as well as underground and environmental but all of this leads to a better capability to capture aftermarket and I think it was just an area that was some I would say a relative opportunity that we saw.
More than a year ago, and we started really focusing on that with our profitable growth and yes. There is no question supply chain has helped but this has got a lot of legs to it in the future.
That's great. Thanks, a lot guys.
Our next question comes from Jeff Sprague from vertical research partners.
Thank you good morning, everyone.
And just just on <unk>, obviously nice to see that number not moving anymore. Just wonder, though if you could elaborate a little bit on your on your actual visibility on the $2 50 in 2023 and then obviously this is a U S discussion I Wonder if you could.
Give us a little bit of color on what youre seeing in non U S fueling markets.
Yes, Jeff we're very happy that we have sunset the <unk> <unk>.
Cycle. That's played through obviously 2023 will be a trough year on a year on year compares.
But we're also very confident in the number that we're putting out there and we've done some recent conversations with customers that indicate.
There is the large national players as well as regional players in the United States that are continuing to to build out their footprint and Theyre also doing rebuilds on existing sites. So there is a healthy investment that's going into convenience retailing right now.
There's no question that that we have good visibility there on that $2 50. So I think that's a very good number and we're feeling better and better about that so I think it's a number that we've kind of put out there and as we get more into the year, we're feeling very comfortable about that number and then there's regulatory drivers.
That are also helping us in the U S. Theres a tank upgrade cycle, that's going on for below ground and so we're kind of early innings on that tank upgrade cycle and that's been driving our environmental business. It's been one of our profitable growth initiatives to get better on that and then your question was on the international side and we definitely see a good growth opportunity.
International in Parc predominantly regulatory drivers here Latin America is a good one Brazil is going into security of payment cycle, we have tax fraud issues in India, We've got vapor recovery in Mexico, and Brazil, and Middle East is also represents a good growth opportunity.
For us as Theyre getting more environmental in their regulation. So we loved these regulations. They are certainly popping up not only in U S, but around the world and these are things that drive good secular growth for us.
Great. Thanks for that and just an update on the process on.
Hennessy and GTT.
What's going on there and any update on timing expected timing.
Yes, so the GTT process is moving along well.
So we're working through that as we speak on Hennessy, we took a two piece of parts or approach does that process. We had a piece of the business that was unprofitable we shut that down.
The previous quarter and we are in the process of selling those assets the remaining of Tennessee, which is a profitable business we expect.
To launch that process later this year when the timing is right.
Alright, thank you.
Hi.
Our next question comes from Julian Mitchell from Barclays.
Hi, good morning.
Just wondering if you could flesh out that.
Baseline revenue guide of mid single digit growth in 2023 a bit more.
Maybe kind of why do you know how much is volume versus price.
Then I.
Organic sales wise any color around picked some pieces like pilot track DRP DRP expectations, if there's any major difference versus the plus mid single.
Yes, let me, let me just start off with a bit more of a strategic overview Julien and then I'll let.
And chairman walk you through some more of the nuts and bolts looked our profitable growth initiatives no question have legs.
<unk> talked about.
Good traction in businesses like DRP, and we fully expect <unk> to be a really good performer into 2023 and beyond.
Driving that business is certainly the site buildout on car wash. It's a very resilient also in downturns and folks are continuing to see good returns on their build outs, even with elevated costs and elevated.
Interest expenses and so we do believe there's very good visibility, obviously, a really strong year last year won't be as strong this year, but still there is no question. There was like for that so I think when you look at how we build up the revenue some of the strategic pieces, including alternative energy.
<unk>, which we also continue to have good legs invesco is going to be a good contributor to us this year as well. So I think these initiatives are really have momentum I think there are paying off for us and translate into decent visibility into the year for growth do you want to give some of the details on that instrument.
Yes from to your question on pricing, we do expect price to be <unk>.
Ill, then probably in the low single digits.
But keep in mind pricing is dynamic.
Our very disciplined in making sure our price cost remains positive we were early to the game with increasing pricing as part of our strategic pricing initiative.
As one of our profitable growth initiatives.
Some of the areas that will grow above the mid single digits, Mark talked about our aftermarket business being extremely strong.
And I was having a focus around that our CMG business Angie thats expected to grow above the fleet average DRP will continue to grow above the fleet average despite a very hard.
Coming into 2023 that business should grow high single digits, so definitely pockets of strength across the business and we feel very good about our portfolio.
That's helpful. Thank you and then just maybe on the <unk>.
Margin and earnings cadence through the year should.
Should we think about sort of operating margins.
Year on year, but down again, Q2, and then sort of flattish in the second half of the year on year.
And EPS is at the fed.
First half was maybe a high forty's share of the full year EPS, you've got the right way to think about it.
Yes, as we've moved past Covid and now the <unk> upgrade cycle has sunset, we're moving into a more normal seasonality I would think of about 42% to 44% of the year coming in the first half from <unk>.
Operating profit and EPS perspective, but operating profit margins expanding in the back half of the year given the timing of revenue some of the timing of restructuring savings and then the ramp up of <unk> synergies.
That's helpful. Thank you.
Our next question comes from David Raso from Evercore ISI.
Hi, Good morning. My question is on the free cash flow after the 63% conversion in 'twenty two.
The improvement to 95% next year I'm, just curious the bridge and that improvement and then secondarily. If you can achieve that you've got about $200 million extra of cash flow after the dividend and debt reduction target how should we think about your prioritization of utilizing that extra $200 million.
<unk>.
And thanks for the question.
In 2022, we dealt with a very difficult supply chain environment, and our inventory policy was focused on meeting customer demand and satisfying our customer and win mindshare with our customer.
As the supply chain conditions have improved we have instituted concrete measures to lower our inventory and improve our inventory turns for example, we've reduced our safety stock.
Reduce the min Max level at a part number level the product line simplification helped significantly reduce the number of Skus with Gary. So all of these it takes time to work through over the next few months and reduce inventory levels, which gives us a lot of comfort in the fact that inventory turns will improve.
From.
DSO perspective.
In 2022, it by Q4, we have gone to the pre pandemic levels, which is probably a better reflection because during cold when money was free a lot of people were taking the early pay discounts. So I think we feel very comfortable of the 90% to 100% free cash flow conversion target that we've put out there.
Talking about the capital deployment, yes, youre right.
Basically in our guidance committed to about 200 million after a little over $400 million in free cash flow that we would generate.
We have a very focused returns driven capital allocation policy and focus on driving shareholder value.
Given where we are from a stock price perspective, it's hard for M&A to compete with.
On a returns basis with stock buybacks, so I would expect Q.
For you to see more share repurchase as we go through the year.
That's good to hear thank you.
Yes.
Our next question comes from Andrew <unk> from Bank of America.
Good morning. This is David Ridley Lane on for Andrew.
I was just wondering what are the in year benefits from restructuring that are embedded in the 2023 guidance and also what are your expected energy transition and the investments in.
In the year.
Yes, so the in year benefit as the high end of the 40% to $45 million range that I talked about in the prepared remarks, we feel pretty comfortable that we're going to deliver in year benefit of $45 million.
At the high end of what I previously said last quarter.
Impacts off.
The energy transition I would view them in the low $20 million range, so somewhere between 22 and $25 million.
And then on an <unk>.
$7 million to $10 million or 7% to 10% accretion was better than we expected.
Are you seeing more opportunities on the cost synergy side are you seeing stronger demand just sort of.
Update on what Youre seeing it in.
Yes, I think the cost synergies are tracking to plan and we feel pretty comfortable about it.
From the upside perspective, this adds tremendous value to our portfolio. It's a very strategic acquisition that we did and bought from a payments side with our current portfolio, but from the new platform that we just launched this quarter, we feel very excited about where this business is positioned and how it integrates into our overall portfolio.
Yes, I'll just jump in there real quick it not only adds to our our retail presence from a more strategic.
<unk> with some of the large national players that also fill some of our payment gaps excuse me product gaps on the payment system side. So you've got a twofold benefit there obviously as we get into owning this for a little bit we have more confidence.
<unk> and what we're able to articulate.
Around our hypothesis when we initially acquired it but were incrementally feeling better.
Perfect. Thank you very much.
Our next question comes from Joe Ritchie from Goldman Sachs.
Thanks, everyone.
Okay.
It's human in your in your prepared comments, you mentioned, having more confidence in kind of a preliminary framework that you provided last quarter for 2023, and just looking at that framework the high end.
You can you can assume that.
It was around $3 and so.
Maybe just talk through a little bit about what's driving that confidence and.
Now talking about a potential framework that could be above $3.
For the year.
I'll stick to our guidance for the year that you already provided from a franchisee.
Effective, but let me talk about why we are feeling more confident.
When you look at the different pieces, one <unk> has sunset the numbers are as we expected we've moved past <unk>.
Second the base business, the $250 million as Marc elaborated, we feel very comfortable about it it's not just internal analysis at speaking to our customers looking at our customers' plans and we feel really strongly about it.
Our <unk> growth, we have a lot of drivers are orders in Q4 proof that the markets remain healthy and so we feel comfortable about that piece of the framework. Our restructuring is at the high end.
Now what I will say is different from the framework. We provided in that framework, we basically assumed that all or free cash flow would be redeployed either debt paydown or share buybacks.
Our policy is to provide a guide with the current share count based on share repurchase as we already did that's what we have provided but as we pointed out there is another couple hundred million dollars of free cash flow that we expect to generate this year that we can redeploy which would ultimately lead to higher EPS. So that's why in my prepared remarks, I said, we're slightly above the fray.
What we provided last quarter hopefully that was helpful.
Super.
I guess my just my one follow on there and I know we've talked about this.
<unk> sunsetting quite a bit already today and fully recognize that you're confident in the $2 50 number but if you take a look at the fourth quarter really was only one a one point difference between your core growth.
<unk> growth, which is like roughly 8 million Bucks.
And so I.
It does feel like the $300 million 10 number that you have for 2023 I mean, it does really appear conservative at this point.
So just maybe help elaborate on like the conversations with customers and why that number should really uptick alive.
Through 2023.
Yes, so a couple of points out there.
The Q4 numbers did benefit from the fact that supply chain conditions eased significantly lead times came down and we could ship more.
The second part of the phenomenon was when you really look at the core use dispenser market. Excluding the <unk> upgrade that remains very healthy we saw good order activity for above the ground equipment coming in from a large national and regional customers as they continue to spend money on new site built and refresh.
<unk>.
We have spoken to our large customers we've looked at their site plan build outs keep in mind construction of new sites, which is roughly.
75%, 80% of the $250 million number of that cycle that starts with the acquisition of land getting the permits and then working through the construction. So as we talk to our customers we get visibility into the plans.
And that makes us comfortable with the $250 million number for the year. So let me let me add maybe one thing we haven't said before as I feel like we're trying to get this message through one area.
Also gives us confidence is when you look at the large and regional players in the US we absolutely have majority share here already. So this is the part of the market.
That is experiencing growth and it's not like we're having a gain share here.
We already own a very very large percentage of that market already and so I think it's kind of already in our wheelhouse.
Perfect. Thanks, guys.
And our last question comes from Steve Tusa from Jpmorgan.
Hi, This is Sam yellen on for Steve Tusa in terms of pricing for next year, how much of the low single digit growth is carryover price or are there any new quite crazy and expect next year.
Okay.
Both.
And we do have price increases for next year built in but keeping my.
The environment is dynamic as we stay focused on being price cost positive. If there is incremental inflation, we are going to pass that to the market.
Okay, and then going to spread and price loss in the quarter.
In Q4.
We benefited just under mid single digits from a price perspective.
Okay got it with great positive.
Thank you.
And it appears we have no further questions at this time I will now turn the program back over to Mark for any closing or additional remarks, yes. Thank you Gretchen.
Before I close I just wanted to say a couple of comments here I really want to take this opportunity to thank the teams across volunteer whose performance and dedication really allow us to continue to perform and gained momentum in our business I am very confident in our business model and our ability to remain agile and execute by leveraging our culture of excellence led.
<unk> Bbs I think we're making excellent progress in our execution on our multiyear growth strategy is intact and we're positioned to unlock value for our shareholders for quarters to come. Thank you for joining us on today's call I look forward to engaging with many of you over the next several weeks as well as in our Investor day in person.
In New York, Thank you very much and have great day.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
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