Q3 2023 Vontier Corp Earnings Call

Good morning, ladies and gentlemen, and welcome to the <unk> third quarter earnings call at.

At this time all lines have been listen only mode.

Following the presentation, we will conduct a question and answer session.

At any time during these calls jewelry Grammys assistance. Please press star zero for the operator.

This call is being recorded on Thursday November 10 at <unk>.

A replay will be made available shortly after.

I will now like to turn the conference over to Ryan Edelman one.

<unk> <unk> Vice President of Investor Relations. Please go ahead.

Great. Thank you operator.

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, and on human AGA, Our senior Vice President and Chief Financial Officer.

You can find both our press release as well as our slide presentation that we'll refer to during today's call on the Investor Relations section of our website.

Please note that during today's call, we will present certain non-GAAP financial measures. 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 risks and uncertainties.

Actual results might differ materially from any forward looking statements that we make today and we do not assume any obligation to update them.

Information regarding these factors that may cause actual results to differ materially from these forward looking statements is available on our website and in our SEC filings with that I'd like to turn the call over to Mark.

Thanks, Ryan and good morning, everyone. Thank you for joining us to discuss our third quarter results.

I'll start with some of the highlights of the quarter beginning on slide five.

We're incredibly pleased with our performance in Q3, which reflects progress on our connected mobility strategy year to date and the strength of our differentiated portfolio.

Wanted to take a second to recognize our employees around the world for their continued dedication to driving operational execution delivering for our customers accelerating growth and demonstrating the power of the volunteer business system.

We delivered strong top line performance again this quarter ahead of expectations with baseline core revenue growth of 10% as a reminder, baseline core growth excludes the year over year impact of the <unk> comparison.

The fourth quarter marked the and also the peak of the E&P headwind and we look forward to finally, removing this comparison from our lexicon beginning next year.

Both mobility technology, and environmental and fueling reported low double digit baseline growth in the quarter.

Within mobility, Tac sales and our alternative energy solutions business grew over 20% with Darby up low double digits and in Banco by GB are also up low double digits baseline.

Environmental and fueling continues to benefit from the robust demand in our U S dispenser business, which has been consistent all year.

Our leading share with large national and regional C store and fueling operators puts us in a position of strength to capitalize on their strong reinvestment in expanding or modernizing their store footprints.

Our customers are enjoying strong fuel margins in store sales growth and healthy balance sheets year.

Year to date retail fueling site refresh and rebuild activity has exceeded our expectations coupled with continued strength in newbuild activity driving higher equipment demand.

The benefits of this broader reinvestment trends cut across many parts of our portfolio, including C store for corn and underground equipment as well as carwash.

Looking ahead, we're confident this will continue given our strong visibility into customer project pipelines.

Repair solutions delivered 5% growth this quarter supported by strong end market dynamics, including healthy technician employment and wage growth.

There are also benefiting from our strong product lineup.

And this is a result of our industry leading product vitality.

Our book to Bill ratio was stable in Q3 at $0 97.

<unk> consistent with the trends, we've seen year to date and in line with what we're anticipating.

Demand across the mobility ecosystem remains constructive supported by continued investment in connected solutions that deliver enhanced productivity and automation.

Leading indicators across the majority of our businesses remained healthy and our backlogs remain elevated versus historical levels.

Additionally, our customer channel checks have been encouraging.

<unk>, we conducted a survey in conjunction with <unk> The National Association for convenience stores, which showed that 85% of retailers are projecting flat to higher capex spend as a percentage of their net profits in 2024.

This reflects the underlying resiliency, we would expect of these end markets and gives us more confidence in our outlook.

Excluding the year over year E&P compare baseline operating margin expanded 40 basis points, demonstrating the power of DBS to deliver operational excellence through rigorous execution.

Additionally, we generated incremental savings from the restructuring actions taken earlier in the year and we're now tracking above the high end of our $45 million target for savings in the full year.

We're still in the early innings of our self help optimization initiatives as part of the pillar one of our strategy optimize the core.

Which over the next several years provides ample opportunity to expand margins in line with achieving our target of 150 plus basis points by 2026.

Based on the strong results in Q3, we are updating our full year adjusted EPS guide moving towards the top half of our previous range, which in human we will explain in more detail in a few minutes.

Let's turn to slide six for a couple of examples of how we're executing our connected mobility strategy.

Demonstrating our continued commitments to decarbonising fleets and mobility in general we continue to accelerate the rollout of our hydrogen technology offerings.

Last month, we unveiled the next evolution in our product roadmap with the first orders for our state of the art turnkey hydrogen refueling station.

This station is the first of its kind a modular solution that enables fleet operators to scale their stations as they grow and transition to zero emission vehicles.

We are leveraging our long standing partnership with the Trillium loves company, having provided them more than 40 compressed natural gas stations for fleet refueling with them, we announced the first order to deliver our hydrogen fueling station.

This includes a uniquely configurable solution of hydrogen dispensing and compression technology as well as integrated cloud based software.

This system is going to Santa Clarita transit in California to support the transition of their bus fleet to zero emission hydrogen fuel cell buses.

Cloud connectivity ensures best in class performance and uptime through remote monitoring and preventative maintenance further backed by our extensive network of service technicians.

Santa Clara is transits transition plan is further supported by the U S Department of Energy's commitment of $1 2 billion in federal funding to the state of California, as one of seven regional hydrogen hubs under the $7 billion bipartisan infrastructure law.

California is targeting 200 hydrogen stations across the state by 2025.

Our alternative energy solutions business Leverages, our leadership in compressed natural gas substation design and production, which positions us well to benefit from the build out of clean hydrogen infrastructure.

This is not only in the state of California, but elsewhere in the U S. In all parts of the world.

This build out is still in the early stages, and we see a multiyear opportunity for growth.

On the right hand side of the chart. We are excited to show you that we have announced the commercial launch of our first dispenser unit to integrate the in Banco payment terminal at the <unk> trade show in early October.

As you may recall part of the synergy opportunity with the <unk> acquisition last year related to vertically integrating our own payment technology into our dispensers.

Now the flex pay six lineup expands upon the industry's leading connected cloud managed payment systems capable of over the air updates to meet ongoing regulatory changes enhanced cyber protection and maximizing asset uptime.

It is also compliant with the latest payment card industry transaction security standard or PCI, six and offers a flexible solution for maximizing consumer engagement at the pump customizable user experiences and contactless payment.

The integration of the flex page six in terms of our energy delivery system is core to the <unk> thesis.

It is a significant milestone on our product roadmap as we deliver end to end cloud enabled payment and workflow solution to convenience retail for energy delivery and in store management.

We've already seen significant orders in just our first month.

The rollout of our NSX platform with both shell and Chevron is going extremely well through the end of October we deployed over 15% of shows 13000 planned sites and are on pace to reach 20% of their sites by year end.

As a reminder, these first two wins cover over 20 sites combined which equates to about 15% of all six stores in the U S. Illustrating the differentiation of this offering.

Additionally, the commercial pipeline for NSX continues to build with high levels of interest from our major customers across the mobility ecosystem globally.

We continue to capitalize on the secular trends across the mobility ecosystem. The most important themes underpinning all of these is the need for greater productivity and automation and the need for multi energy technologies to address the energy trilemma.

We see an unparalleled opportunity for us to not only meet the demands of today, but lead and shape the future of mobility.

Volunteer is enabling the way the world moves and that Couldnt be more evident in our continued strong financial performance and key customer wins year to date.

Now I would like to turn the call over to Ann Schuman to take you through the details of our financial performance and provide an update on our outlook for the remainder of the year.

Thanks, Mark and good morning, everyone.

I will start with a summary of our third quarter performance.

Please turn to slide seven.

Reported revenue for the third quarter was $765 million down approximately 3% from the prior year on both a reported and core basis.

Excluding the impact of <unk>.

Baseline core growth was approximately 10%.

Total adjusted operating profit was 169 million downloads of the prior year due to the expected headwind from the E&P Sunset.

Adjusted operating profit margin was 22, 1% ahead of our Q3 guidance range.

Yeah.

Baseline margin expanded 40 basis points led by higher productivity and restructuring savings as well as continued price cost performance.

Adjusted earnings per share of <unk> 73.

It was above the high end of our guidance range supported by higher revenue and improved profitability.

Adjusted free cash flow for the third quarter was $128 million up over 47% from the prior year and representing conversion of 113%.

Reported by continued improvements in working capital, including a $30 million.

<unk> and inventory year to date.

Given the strong bond between the third and fourth quarter and the guidance we provided on our last call.

Our teams worked diligently through the third quarter to proactively rebalanced, the second follow up financial profile and Derisk the fourth quarter.

Our results in Q3 and updated outlook for Q4 are a reflection of the operational success.

As we were able to capitalize on strong demand for our industry, leading solutions and deliver solid execution on restructuring savings and price cost.

This was further supported by the continuation of normalizing supply chain conditions.

Turning to our segment performance starting on slide eight.

Mobility technologies topline increased over 8% with solid performance across the board.

Core growth for the segment was 4% and baseline core growth was 12%.

CRB, our <unk> solutions business posted low double digit core sales growth for the quarter. As this business continues to gain share and demand for our tunnel cargo solutions remains healthy.

<unk> has had an impressive track record of growth since joining the wound care portfolio and we believe this business is well positioned for above market growth into 2024.

This growth will be fueled by demand for its core controlled software point of sale systems and data analytic applications as well as the recent launch of <unk>.

<unk> is a transformational cloud based point of sale software platform for the tunnel car wash market designed to maximize our customers' operational efficiency and revenue growth through data driven insights.

Customer adoption and feedback has been very positive directly benefiting operators, who are focused on building a loyal customer in membership base and want a strong return on their investment.

Our alternative energy solutions business continues to outperform with sales up over 20% driven by strong demand for compressed natural gas refueling equipment and systems as well as the initial shipments of hydrogen dispensers.

<unk> also had a solid third quarter.

In addition to the ongoing deployment of our <unk> platform, which is running ahead of schedule. We also announced an agreement with Portugal based scalp energia to deploy our passport point of sale system across its network of over 1300 service stations in Iberia.

<unk> X represents a modern cloud based software platform purpose built for fuel and convenience retailers.

In addition to an advanced point of sale. It also incorporates integrated back office and head office workflow automation solutions to help retailers reduced site management complexity and address ongoing labor constraints.

It also offers increased cyber security protection and improved customer experiences supported by Omnichannel and contactless purchase options as well as personalized loyalty programs. We are proud to partner with <unk> as we continue to ramp this offering.

Segment operating profit at $51 million was ahead of our expectations given the strong performance from <unk> and <unk> and contributions from FX transaction gain and Winco profitability accelerated further as anticipated with margins on the base business now tracking in the mid teens.

In Q3, and over 20%, including synergies across the portfolio.

Turning to repair solutions on slide nine.

<unk> revenues increased 5% led by over 20% growth in tool storage as well as continued strength in our power tools lineup.

<unk> continues to benefit from a strong demand environment as technician employment wage growth and auto repair demand remains at high levels.

As lead times in several key product categories have improved year to date, we have capitalized on this environment with a steady cadence of new product launches.

Operating profit, while up sequentially was down versus the prior year as anticipated.

Due to year over year reserve adjustments related to the receivables portfolio and a favorable tariff settlement recorded in the third quarter of 2022 as we previously communicated.

As we close out the year, we still expect <unk> operating profit margin to improve year over year in Q4 as comparisons ease.

And finally on slide 10, environmental in fueling solutions.

Reported revenues at <unk> declined 10% due.

Due to the impact of the E&P sunset, excluding this impact baseline core sales growth with 13% led by continued strength in our U S dispenser business as well as strong demand for environmental equipment.

As Mark referenced.

<unk> has benefited from strong industrial capex trends year to date, which has led to healthy demand tied to site expansion and refresh activity, especially in our U S dispensing business.

GFS segment operating profit margin expanded 60 basis points.

Merrily driven by the successful execution of the restructuring actions and continued performance on price cost.

Turning to slide 11.

Over our balance sheet and free cash flow details for the quarter.

We had strong cash performance in the third quarter with 113% conversion on adjusted net income and 17% of sales.

Year to date, we generated just over $280 million with conversion at 87%, putting us well within reach of our full year target as we enter our seasonally strong cash generation quarter in Q4, which typically delivers over 100% conversion.

We repaid another $75 million of debt in the third quarter further reducing our 2020 for maturity to $160 million.

We also completed $12 million in share repurchases, bringing our total year to date repurchases to $62 million.

We are maintaining our full year outlook for adjusted free cash flow conversion of 90% to 100%, which equates to over $400 million.

Turning to the outlook assumptions on slide 12, starting with our updated guidance for the full year.

Given our progress on the top line year to date, we now anticipate a low single digit decline in core sales, which implies total revenues in the range of three point.

<unk> 75 to 3.085 billion.

This includes an approximate $10 million headwind from FX versus our previous guidance.

As Mark noted earlier, there is no change to our assumptions for the headwind related to the E&P Sunset as a reminder, this headwind ramp sequentially and peaks in the fourth quarter and then we will finally move on from this comparison issue beginning in Q1 of next year.

We are narrowing our adjusted EPS range to the top end of our prior range to $2 83 to $2 87.

The implied fourth quarter guidance for adjusted EPS is <unk> 75 to.

To 79.

With revenues in the range of $770 million to $780 million.

We will have a tougher topline comparison in Q4.

It was up 10% on a core basis last year and includes the Beacon <unk> shipments the initial benefits from normalizing supply chain and revenue recovery. Following a supplier shutdown late in Q3 of the prior year.

No material changes to our other planning assumptions for the full year, which I included as a slide in the appendix.

The one call out as I mentioned is that FX is approximately a $10 million topline headwinds relative to our prior guidance and is embedded into the outlook I just provided.

With that I will turn the call back over to Mark.

Thanks, Ann Human volunteer is transforming and aligning our portfolio to deliver sustainable topline growth industry, leading profitability double digit earnings growth and significant free cash flow.

Our connected mobility strategy and differentiated technologies continue to deliver wins propel by leading market positions in productivity and automation and with robust secular tailwind sweeping the mobility ecosystem.

We are ideally positioned with our broad multi energy portfolio to address the energy trilemma facing the world the need for sustainable secure and affordable energy.

Our differentiated software platforms for C stores car washes fleets and EV networks are solving high value customer problems, including increasing regulatory requirements labor challenges evolving consumer preferences and network in our Operability and uptime.

Across all of our segments, we are positioned for future growth with a robust and growing pipeline of opportunities.

Through our clear vision, leading edge technological capabilities and unmatched touch points across the mobility ecosystem, we're enabling the way the world moves driving smart safe sustainable solutions for our customers employees shareholders and the world.

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

Thank you.

Ladies and gentlemen, we will now begin the question and answer session.

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One moment. Please for your first question.

Your first question comes from Julian Mitchell from Barclays. Please go ahead.

Hi, Good morning. This is Matthew Pan on for Julian Mitchell. Just one question you mentioned that you are tracking above the $45 million of savings target is there any spillover of incremental savings you could size for 2024.

Yes. Good morning, so were tracking slightly above the 45 million closer to <unk> $47 million to $48 million and then the full year synergies is going to be about $56 million to $58 million. So the incremental piece goes into next year.

Perfect. Thank you and just a follow up on the mobility side.

Segment saw some pretty good margins in Q3 is that just typical seasonality and then is there any color you could give for Q4 for the segments or for total volunteer.

Yes so.

Q3 was a strong quarter for mobility technologies.

They were helped a little bit by mix, but also the <unk> profitability has been ramping up sequentially. If you remember when we acquired <unk>. They have a breakeven and profitability include increased low single digits and high single digits in this quarter that will in the mid teens on a standalone basis and including all in synergies that we are.

Actually over 20%. So some of that benefit obviously continues we also had a one time transaction.

FX transaction gain in the third quarter, which obviously doesn't repeat itself in the fourth quarter. So.

<unk> Q4 margins for mobility technologies to be down about 50 basis points sequentially, but up materially from last fiscal year.

Great. Thank you very much.

Thank you.

Your next question comes from Andrew <unk> from Bank of America. Please go ahead.

Hi, This is David Ridley Lane on for Andrew.

For your more Capex related sales have you seen any impact on customers' willingness to fund projects given the higher interest rates.

Yes, David this is mark.

We see a pretty healthy backdrop.

One of the areas that we're obviously quite diligent on is watching the increase in interest rate 18th China, a good sense on how that might play out, particularly as we get into next year and I can tell you that our leading indicators all look good so far one of the biggest areas for us is that folks get a lot of bench.

<unk> from fuel fuel margins as well as in store sales within convenience stores. We also see continued good rois on.

On Carwash, even though the M&A activity certainly has slowed with higher interest rates and so I think our setup for 2024 is a good setup.

The other areas, it's been pretty interesting is our environmental environmental business. As you may have recognized saw high single digit growth in the quarter Theres been some destocking talked about in the industry, we certainly see that destocking, but we've been able to offset that with strength internationally based on our product lineup and I'll start.

Distribution strength, so I think the fact that we.

We've got really outstanding returns for folks that have money to spend.

At least pretty outstanding and we also have a great lineup of products and you sort of look at our history here, we're offering a lot more new products to market than we ever have in fact, we've quadrupled our our new product introductions and I think we've got a really great lineup going into 2024.

And then as a.

Kind of a quick follow up.

How much of.

The growth in DRP are you getting from the natural upgrade cycle <unk> pantheon and the revenue lift that you get there.

I guess said another way.

How sustainable do you think these growth rates double digit growth rates for the year and youre getting into Europe.

So we've recognized some slowing in the industry as you know we grew more than 30%. It's now on in double digits, we see that coming down a bit as well.

What's essentially happened in the industry is that there has been a tremendous build out we had a recent conversation with a customer that had more than 100 car washes in there.

The interesting thing about that dialogue is that they spent through 2022 really building out their infrastructure and building out the car washes.

And 2023 has been a year, where they really been focused on.

Building up meaning making more operational efficiency sweating their assets more than answered really specifically about at Patheon is a new offering to the market and really is targeted at enabling car wash operators to be more effective with operational excellence getting more throughput through which <unk>.

Through to the bottom line, which is a good return on investment for them and so I think that positions us well for the market dynamics heading into 2024, and we anticipate further growth as a market leader here.

Got it. Thank you and then just one quick numbers.

Question in the repair solutions.

When do you lap the year over year reserve related adjustments.

And.

Did you did you quantify the impact in the quarter I may have missed it.

Taking the first part of your question the reserve related adjustments.

The headwind ended in Q3 Q4 is actually an easier compare in <unk> margins are going to be up materially in the fourth quarter are actually closer to 400 basis points up year on year for Q4.

Bob.

The whole decline in Q3 year on year was greatly between the reserve adjustments and about a two and a half million dollars tariff.

Moment that those were the two drivers for the year on year decline in Q3.

Okay. Thank you very much.

And congratulations on the quarter.

Thank you.

Thank you.

Ladies and gentlemen, as a reminder showed kind of a question. Please press star one.

Your next question comes from broken Mason from Baird. Please go ahead.

Yes, good morning.

I joined a little late so I may not have caught this entirely but I thought.

You talked about Derisking, the second half of actually the fourth quarter a little bit.

<unk> heard that some of the third quarter upside that we saw was related to that any particular areas that you would call out.

So added strength due to that in the third quarter.

So let me.

Started this off I'll, let <unk> jump in as well, yes, I think what we you may have seen our setup in the second half for Q3 had a really strong ramp also in Q4 and so what we are essentially enable to do with some of our supply chain and customers that freed up some labor product availability both.

For convenience store.

Build out from now.

Not only.

The build out of the convenience store and dispensers, but also a bit on the <unk> side too. So that gave us an ability to pull if you will Q3 Q4 demand into Q3, which.

We're still raising full year, but it really enabled us to Derisk Q4.

Okay.

We saw that both in fueling on mobility technologies.

Customer supply chains of ease, but their project construction schedules, we were able to pull in some demand.

On the fueling side above and below ground and then on the mobile <unk> technology side also on the <unk> side as project.

To move there's still a lot of demand for greenfields and as their construction schedules of these some we saw some upside out there. So overall, we're very pleased with derisking the second half of the year.

With the strong results for the quarter.

I might add it gives us a really good set up for 2024 I think we feel like there is some healthy demand here, we've got a great product line up.

I think our price cost is not too out of balance here. So I think we just feel like we're in a good position, bringing inventory down as well so we feel optimistic entering the new year.

Understood.

Mark just.

Around that commentary.

Kind of referenced previously just around how you are monitoring the impact of higher rates.

And thinking about the dispenser business in particular, just given all the.

The refresh is the re brands on new site builds et cetera.

I would think all the permitting involved theres, probably good lead time on that as well how far out.

How much visibility forward visibility do you have into some of that activity.

And.

Yes.

That's the question yes.

Yeah, well first of all this is where we're positioned really strong where we lead with the leading players in the market. The large regional national players are really in our sweet spot and so we have very regular conversations with them as you can imagine they have a lot of cash to put to work from their balance sheets that maiden, making outstanding margins.

On on.

On fuel as well as in store sales are going up and so they are a very successful business models and they continue to build out their footprint and so the visibility is well into next year. As you can imagine you don't you don't do a site approval you don't want a range of things they look out and in many cases, even more than a year.

They're working on building out and buying the location is very important to them too and making sure they're buying the right locations and supply chains have certainly eased, but their activity continues to go forward and this is where we base some of our visibility on.

Where we feel really good about our positioning and are set up now it's hard to say, what's going to happen in the macroeconomic environment, but also the footprint that we have has been pretty resilient in prior downturns.

Okay.

Just last question.

Around the alternative fueling area.

<unk> was noted as a strength, perhaps this quarter, but just.

How should we think about the.

The timing and the influence of the hydrogen aspect of that business in terms of a ramp in.

I'm curious as well how do you think that mix would look over time from just the dispenser side versus maybe more of that.

Total turnkey solution that you also highlighted.

So it's mostly as you can imagine compressed natural gas renewable natural gas today, we're just launching the hydrogen offerings I think it's.

Early to market with we view as a leading offering that focuses on high reliability on the dispenser side, but also the turnkey solution is also pretty innovative and folks need that they have been asking us for this solution for while Polish into this space based on our high reliability and based on our ability to provide products.

<unk> that address safety and regulatory challenges that are very similar to compressed natural gas. So it's really in our sweet spot. So we feel.

Pretty good about that going into next year a lot of.

Government funding behind this bipartisan support to also internationally, it's not just in the U S. So there seems to be quite some legs. It's interesting when folks look at our business. They should really think about this energy trilemma, we talk about and the sustainability theme means not just electrification, but certainly there.

We think there is a lot of legs to renewable natural gas also to the hydrogen and we're very well positioned here to lead so we're optimistic that you're going to see.

More of a growth on the hydrogen as we get into next year, it's been up more than 20% growth in the quarter and its been been doing pretty outstanding over the last year as well.

Very good thank you.

Yes.

Thank you.

Mr. Arizona There are no further questions at this time you May proceed.

Well, thanks, everybody for joining us on today's call I am Super excited that we're having ongoing operational execution and performance.

Im excited about our outlook our setup for 2024, and we've made significant progress on our portfolio transformation I think that's reading through as well. So we look forward to meeting and seeing many of you on the road have a great day.

Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.

Thank you.