Vontier Corporation Q1 2023 Earnings Call
My name is Travis and that'll be your conference facilitator. This morning at this time I'd like to welcome everyone to volunteer corporations first quarter 20 twenty-three earnings conference call.
You've been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.
To ask a question during that time simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question press Star too.
I would now like to turn the conference over to Brian Edelman, Vice President Investor Relations Mister Aleman, you may begin your conference.
Thank you.
Good morning, everyone and thank you for joining us on the call. This morning to discuss our first quarter results.
With me today are currently president and Chief Executive Officer.
Our senior Vice President and Chief Financial Officer.
Cause I felt our press release as well as our slide presentation that will refer to during today's call on the Investor Relations section of our website at <unk>.
<unk>.
Please note that during today's call will prevent certain non-GAAP financial measures.
They'll also make forward looking statements within the meaning of the federal Securities.
Securities laws.
Putting statements regarding events or developments.
Or anticipate well or may occur in the future.
These forward looking statements are subject to redfin uncertainty.
Actual results may differ materially from any forward looking statements that we made today and we should not assume any obligations to update them.
Information regarding these factors that may cause the actual results to differ materially from these forward looking statements.
On our website and in our SEC filings.
Oregon to call over tomorrow, So, let's take a moment to remind everyone that starting this quarter, we're recording and discussing a result in line with our update of segmentation.
Additional information regarding a segmentation is included in the appendix of today's presentation.
I'd like to turn the call over tomorrow.
Thanks, Ryan Good morning, everyone and thanks for joining us on today's call, let me kick things off with some high level commentary beginning on slide five.
We're off to a strong start in 2023, having delivered Q1 results that are above the guidance, we provided and raising our outlook for the full year.
We delivered another quarter of strong top line performance in Q1 with all three segments exceeding expectations.
Revenue grew 4% baseline core revenue, which excludes the year over year impact from the M B sunset over 11%.
Both of these four above the guidance, we provided and Sherman will provide more details later on the call, but at a high level upside was driven by better than expected demand in our U S dispenser business as well as continue to strengthen our environmental an aftermarket and are feeling segment.
Immobility technologies D or B continues to outperform along with another solid quarter at Angie R. C N G and hydrogen business and we're seeing a nice girl at macko, both on same store sales as well as next franchisee ads.
This strong performance reflects the execution of our connected mobility strategy, which incorporates are ongoing growth initiatives as well as incremental improvements and supply chain conditions, which allowed us to confer higher levels of backlog.
Our end markets remain constructed supported by strong secular drivers demonstrating the Brazilian C. A R portfolio are booked a bill ended the quarter at one despite strong sales growth this quarter.
Included nearly $20 million in incremental sales from higher backlog conversion.
Ah report, an operating profit declined versus prior year as expected due to the Sunset a V N V and I'm encouraged by the underlying performance of our businesses.
Baseline operating margin expansion of 80 basis points demonstrates solid execution the benefits of our strategic initiatives and the power of V. B S to deliver operational excellence.
We are in your early earnings of a longer term opportunity to optimize our cost structure, which gives us confidence in the ability to achieve our multi year margin expansion opportunity.
Cause actions, we began implementing last quarter continue to gain traction in Q1, and we will continue to ramp through the remainder of the year.
We continue to make progress on our multi year portfolio transformation as well.
In mid April we announced a sale of G T T for $107 million or about 10 times 2022 EBITDA.
We will redeploy these proceeds to further strengthen our balance sheet and returned capital to shareholders through additional share buybacks. These.
These actions are already underway as in human will highlight in a moment.
Turning try I'll look for the remainder of the year strong first quarter results solid and market demand and conviction in our strategic initiatives.
Increase confidence in our outlook and we are raising our adjusted EPS guidance for the full year.
While we remain vigilant and the current macroenvironment demand across our end markets is supported by the secular drivers we highlighted during a recent investor day.
This is reinforced by our recent channel checks and customer conversations we remain optimistic given our strong fundamentals the momentum with our strategy and our resiliency in our portfolio.
We continue to make great progress on our connected mobility strategy as we shared with you at our recent Investor day.
Our strategy is centered around driving operational excellence accelerating core growth and transforming our portfolio through greater leverage and adjacent markets.
We refer to these as our three pillars optimizing the core expand corp, and adjacent markets.
In addition to delivering annual margin improvement pillar, one optimize the core increases are focused on simplifying our business and expands margins.
And pillar to expand the core accelerates profitable growth by focusing on select opportunities, which we have referred to in the past as are profitable growth initiatives.
We're also redeploying investments and new product development and sales capabilities and support of expanding organic top line growth.
Longer term these two strategic pillars enhance our ability to leverage adjacent market pillar three through both organic and inorganic needs to further accelerate growth and transformation.
I'm just trying to sign six for a quick look at a few strategic developments in the quarter.
Two weeks ago, we held our annual <unk> event fielding eight teams with the intent of accelerating are connected mobility strategy.
These events are critical part of the DBS culture, and bring together dozens of cross functional and business leaders to collaborate on the company's actionable opportunities.
Just as an example of some of the actions we focus on this year pertinent to the optimize the core pillar, we accelerated our product lines simplification and S. K U rationalization program.
We are reducing our number of dispenser platforms from 20 to 15 this year, having already come down from 32.
We're also implementing dynamic combine across the Vita route factory identifying a path to reduce several million dollars worth of inventory over the remainder of the year.
Under expand the core the macro team work through accelerating initiatives to drive higher franchisee <expletive> by materially improving the conversion rate and reducing time to conversion.
The retail solutions team implemented process improvements to streamline the setup time for the N F X software platform by 75% per site.
This frees up more capacity internally to scale more effectively to meet our large and growing backlog.
As many of you will remember we acquired Banco last September to augment our payment solution through both vertical integration and building a star offering microservices.
Importantly, we formally lodged NSX Microservices software platform late last year.
<unk> is revolutionizing the way our convenience retail customers operate enabling them to consolidate major for court systems into a set of lightweight microservices.
It also provides customers with an easily configurable cloud based solution with standard based API that enable faster deployment on site.
Significantly improve transaction speeds and differentiated customer offerings address key secular trend with inconvenient stores, the need for enhanced and user experiences to drive engagement traffic and loyalty.
Convenience retail isn't attractive growth vertical for us and we are leading positions.
Nonfuel retail sales have grown at a 5% tagger over nearly 20 years and retailers have seen a 20% plus increase in foot traffic with investments in Newark larger format enhanced amenities expanded offerings, and foodservice and fresh and less experiences.
All of this is enabled by automation and digitalization, which are our two core competencies.
These trends are sustainable even through the energy transition.
Industry data shows that C store retailers with an onsite E V charging capability or seeing a 50% increase in foot traffic into the store to make a purchase.
There is real value to be generated for the convenience retailer and we are competitively advantaged to solve their high value problems.
As an example, we are excited to announce a substantial win for the effects software platform, where we are deploying the platform across all of the U S sites for a major C store operator.
We also have an attractive pipeline of opportunities going forward to continue rolling out in effects.
At <unk> to have man, we've launched nine new feature sets our programs in the first quarter across multiple industries and geographies. This includes Canadian <unk> solutions for the transportation industry asset tracking and management tools for the construction industry and expand its E V vehicle.
Library across all industries.
We have notable momentum around tell attracts new electric vehicle readiness tool that integrates seamlessly with the <unk> 360 platform.
AI power tools shows fleet operators, the feasibility of switching to <unk> calculates the total cost of ownership calculates the total C O two and fuel savings and facilitate easy carbon reporting.
The tool also recommend the ideal electric vehicles to switch to an advises on the number type an ideal location for Chargers.
And some we have solved one of our fleet customers biggest pain points by significantly reducing the complexity and the energy transition planning process and we now have a comprehensive end to end solution for managing sustainable fleece.
Lastly, while not listed on this page were equally excited have received SB ti validation of our near term greenhouse gas emission targets.
We are targeting a reduction in absolute scope, one and scope two emissions by 45%.
Duction of absolute scope three emissions by 25% both by 2030.
As our chief legal on sustainability Officer key Rowan shared with you at our Investor Day, our strategy is inextricably bound to sustainability.
It's about providing smarter more sustainable solutions to our mobility ecosystem customers, helping them achieve their own sustainability goals and doing our part to ensure healthy planet.
Now I'd like to turn the call over to inhuman to provide financial results.
Thanks, Mark and good morning, everyone.
As Ryan mentioned at the start beginning this quarter. We are reporting results for a three operating segments mobility technologies prepare solutions and environmental and fuelling solutions.
Please turn to slide seven.
Reported revenue of 776 million increased 4% on our core basis, or an 11% baseline increase excluding the impact of the E M B sunset.
All of our operating segments are the benefits of healthy and market demand and improving supply chain conditions.
Driving the solid year over year performance.
Suggested operating profit of $161 million declined slightly versus the prior year and adjusted operating profit margin of 20.8% declined approximately 100 basis points.
The better end of a previous guidance range.
Baseline margin improved 80 basis points led by a productivity initiatives and continued cost price performance.
Adjusted earnings per share of 68 cents was above our guidance range and relatively flat with the prior year. Despite an 11 cent headwind from M V.
A year over year benefit from share repurchase was offset by higher interest in effects.
Adjusted free cash flow in the quarter was $78 million, representing 73% conversion.
Head of a normal seasonality and well above prior year levels, resulting from solid working capital management.
Turning to the segment performance, starting with mobility technologies on slide it.
Sales increased over 18%, including a full quarter contribution from the <unk> acquisition.
For growth of 12% was broad based demand for a market leading carwash technologies remains robust.
But dr be growing over 20 per cent as we continue to expand sure and an attractive market for tunnel Carwash.
Sales at Angie alternative energy solutions business, we're up over 30%.
<unk> continues to benefit from the increase adoption of lower emission.
Turn into fueling solutions like compressed and renewable natural gas.
As well as hydrogen systems for large and medium duty commercial vehicles.
The turnaround of <unk> mind continues to gain speed with annual recurring revenue up high single digits.
And Gore sales up low single digits in the quarter.
Segment operating profit $48 million increased 17% versus the prior year translating to an operating margin of 19.5%, which is down 30 basis points versus the prior year.
And when called profitability is still in the early stages of scaling up creating a year over year mixed headwind for us in the first half.
Additionally, we continue to invest for growth within the segment, including a full.
First quarter of drives and our results.
Excluding the impact from the <unk> acquisition, and a full quarter of drives investments a margin percentage would have increased year over year.
Turning to repair solutions on slide nine.
Revenue increased over 10% to $181 million in Q1.
During the quarter Maczko hosted its annual Expo event.
Which is traditionally the most significant stocking event of the year for our franchisees.
Record sales at this event, coupled with easing supply chain conditions allowed our teams to convert backlogs at a faster rate.
An increase in net franchisee ads in the quarter further supported our top line growth.
Operating profit of 47 million is in line with the prior year results in operating profit margin declined 250 basis points due to timing of year over year reserve adjustments.
<unk> to the finance portfolio.
And finally, environmental and fuelling solutions on slide 10.
Reported revenues declined approximately 4% to $314 million.
Baseline for revenues increased 10%, excluding the year over year impact from the sunset of ENB.
As noted U S dispenser demand distracting ahead of our initial expectations, primarily the result of robust new site belt.
And site refresh activity.
Sales in both our environmental solutions and aftermarket parts businesses increased low double digits in the quarter.
Demand for environmental solutions continues to benefit from regulations across multiple regions as.
As well as our industry leading product offerings.
And an aftermarket parts, we continue to leverage a large installed base to drive growth.
Additionally.
Improved supply chain conditions enabled G. B R to continue converting backlog at higher levels.
Supporting sales outperformance in the quarter.
Segment operating profit of $81 million is in line with the prior year results.
While operating profit margin expanded 70 basis points to $25, 7%.
Execution on a previously announced restructuring actions price cost disciplined.
And proactive supply chain management gross margin expansion.
Just a quick note.
As you May recall, one of the key initiatives from last year <unk> event included.
Focusing our engineering resources to expedite board Redesigns ahead of component obsolescence.
Putting us on a much stronger footing as the broader supply chain conditions continue to recover.
I'll know for it to the balance sheet and free cash flow detail on slight 11.
During the quarter, we repaid $65 million in debt, reducing our 2024 maturity.
As you can see at the bottom right hand side of the slide.
Leverage ratio continues to decline sequentially.
Ending Q1 at 3.1 times.
We maintain our commitment to an investment grade credit rating and still expect that of leverage will end the year within a targeted range of 2.5 to three times on a net basis.
With over 100 million and proceeds from the divestiture of GTT in April we know anticipate being down $200 million to $250 million in debt for the full year.
An increase of 50 million compared to prior assumption announced last quarter.
We have already redeployed 50 million of those proceeds to incremental debt pay down over the last two weeks.
Additionally.
We also completed approximately $18 million in share repurchases in Q1.
Which we mentioned on the fourth quarter call.
We have our clients are modeling assumptions for GTT on slide 12.
Which includes and approximately $35 million in fact to revenue.
10 million of adjusted operating profit.
Our five cents of adjusted diluted EPS.
Through return driven redeployment of proceeds for that and share repurchases.
We anticipate mitigating at least three cents of this impact by year end.
Over a 12 month period, we expect to fully offset EPS dilution related to this transaction.
Turning to our outlook assumptions and slide 13.
We initiating Q2 guidance for adjusted EPS up 61 cents to 66 cents.
Which assumes a lower to mid single digit decline in core sales.
And baseline for growth of mid single digits.
We expect adjusted operating margins to decline between 65, and 105 basis points with baseline operating margin expansion of 172 220 basis points.
I would also remind everyone. But Q2 is typically are seasonally low quarter for free cash flow.
Due to the timing of cash tax and interest payments. Therefore, we expect conversion to be less than 50% in the quarter.
For the full year as Mark mentioned, while we remain vigilant.
And markets remain constructive.
Leading indicators.
Fuel margins technician.
Technician felt return on investment on car wash projects.
Main positive.
And the view is supported by our customer conversations.
Based on this and a strong first quarter performance and.
Increasing our adjusted EPS guidance range to $2.77 to $2.87.
Adjusting our prior guidance for the <unk> contribution of GTT.
Ah new guidance increases by nine at the mid point, which flows through the upside in Q1 and incorporates the benefit from lower interest expense from our debt repayment.
We are now assuming a four sales decline of low to mid single digits slightly ahead of our original guidance for a mid single digit decline.
Just however at the same time as our portfolio continues to shape up some of the higher margin elements like D. R. B after market parts continue to grow at about fleet average rates.
Thank you.
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