Wolfe Global Transportation and Industrials Conference 2021

May 25, 2021

Slides

Great. Good afternoon and thanks for joining us. We're going to restart with Vontier Corporation. My name is Nigel Coe. I'm the multi-industry analyst. I'm very pleased to welcome Mark Morelli, CEO of Vontier, and David Naemura, CFO. Just as a reminder, this is an interactive forum. If you've got questions, punch them into the text box, and I'll take questions as and when on a normal basis. Otherwise, I'll keep running with my questions. With that said, let me hand it back to Mark and let you guys go through your remarks, and then we're good. Okay? Thanks, Mark. Yeah. Thanks, Nigel. Both of us are really excited to be here and happy to walk you through a couple of prepared remarks just to help frame the conversation. If you take a look here, we've got a couple of slides, and of course, we start off with our safe harbor, and these are also on our website if you want to reference them. Please turn to slide four. Vontier is an industrial technology company that we believe is premium, and it's a portfolio of market-leading brands and technology serving the mobility, transportation, and sustainable infrastructure markets. We have a large global installed base with low recurring revenue. You can see in the pie chart in the lower right, about 30% of our revenue comes from retail hardware. Like I said, our recurring revenue is in the mid-25%, and about a third of that is SaaS, and about two-thirds of that is service. We have outstanding financial profiles shown here by the column on the right, strong margins and free cash flow, and a penchant for M&A. The Vontier Business System is the foundation of not only our organic growth initiatives, but also it enhances our growth profile and an ability to expand already strong margins. We have a long runway of opportunities ahead of us. Lastly, I'd like to highlight that we have a proven track record of substantial growth and portfolio transformation. Take a look at our next chart. We delivered a very strong first quarter of 2021 as VBS continues to be a real driver for us to drive top-tier performance. We think this is evidenced by our double-digit core revenue growth as well as our earnings growth. The separation from Fortive have allowed us a deeper deployment, and it allows us to drive greater margins and free cash flows. You can see that our profitable growth drivers are designed really to position us for the future. Our ability to combine both our heritage from the past as well as our greater focus and perspectives, we believe will unlock tremendous shareholder value. You're seeing this play out in a number of initiatives, including our high-growth market initiative where we delivered greater than 25% organic growth, as well as our retail solutions and our Matco, as well as environmental solutions. I'd like to note that our first quarter earnings call, that we did update our guidance for 2021, this reflected a stronger core revenue growth led by our non-EMV business, including high-growth markets. I'd also like to reiterate a tale of two halves. In the second half of last year, we had a very strong V-shaped recovery, but elapsed that this year, where in the second half of this year, we're going to have headwinds due to EMV roll-off, which is a North America phenomenon only. Well, taken together, we believe that this hard work that we've been able to put forward is a springboard into a multi-year transformation, it accelerates our profitable growth and our ability to invest in not only organic but also inorganic opportunities. Go to the next chart. We have an attractive $27 billion market that we serve with two platforms. We believe this sets us up for long-term growth. On the top is our mobility technologies platform, which consists of our GVR, Gilbarco Veeder-Root business, GTT, our Global Traffic Technologies, and Teletrac Navman, which is a telematics business. Our install base and strong brands. We serve customers today selling and solving high-value problems position us very well for market adjacencies and for growth. We believe that this opportunity gives us leverage into sustainable infrastructure and retail solutions as well as smart cities, e-mobility, logistics, and supply chain, all represent good growth opportunities for us. On the bottom half of the page, you can see our diagnostics and repair platform. This is represented by our Matco and our Hennessy brands. Our businesses here leverage long-term drivers, which includes increasing miles driven, an aging car park, and increasing complexity of auto repair. This gives us opportunities to leverage into diagnostics software as well as workflow software for shop management. We have a number of growth initiatives. These are on our critical few priorities, and they're targeting all of our operating companies. We believe these initiatives are taking hold. We believe that it positions our business for long-term sustainable growth. Additionally, we have best-in-class M&A and ample M&A capacity to both accelerate our initiatives and to be able to leverage into attractive adjacencies. Let's take a look at that on the next chart. This is all referenced for what we call the Vontier value creation flywheel, and this all starts with having solid organic growth combined with margin expansion. We have the investment-grade style balance sheet that we can leverage with strong free cash flows. We plow that into M&A, and then the cycle continues to compound earnings. We believe this is a proven model, and we believe that we're able to employ this over time. You go to my last chart. As we just said, we believe that Vontier is a compelling business opportunity, and we're well-positioned to drive substantial growth for the long term to create shareholder value. Thank you for your interest, and we're very excited to mobilize the future to create a better world. With that, Nigel, Dave, and I are happy to take your questions. Great. Thanks, Mark. Pretty good foundation for our conversation. I think it's fair to say that investors think of you as a retail gas fueling business with pencils. You talk about retail solutions, you mentioned it a few times in your remarks, 14% of your sales. Maybe just discuss what exactly is retail sales solutions and where you play within the actual retail establishment on the forecourt. Yeah. Retail solutions is about 15% of our revenue, and it's a specific reference to our ability to work with convenience store customers inside the store with how they make money. It's an ability that we've been able to push forward in the marketplace and a strategic advantage for us vis-a-vis the competition. When you're in with the convenience store on how they make money and you're let's say the point-of-sale system, and we're the number 2 seller point-of-sale system in North America, that's a significant advantage for us. It used to be that you would sell into the forecourt, which is your refueling pump, and that would pull the rest of the opportunities of sales in the convenience store. Now, more and more, we believe that that sale is initiated through our presence within inside the store and a retail solution. Not only is it great margins, not only is it software-oriented, but it represents long-term growth for this format, and it gives us an ability to springboard into other avenues of growth that the convenience store is building out on as well. I want to come back to the opportunities to grow that retail solutions business. There's a lot of innovation around the point of sale, in terms of payments in general. What is the risk and reward of the change that we're seeing on the POS side within the actual retail establishment? Yeah. Well, I think the real reward opportunity that we see is not only can we build this out in developed markets when they're very interested in things on not only security of payments that can be managed through the inside of the store. Also through opportunities for loyalty programs, as an example, or ways by which they want to build out their format, whether they're in food service, as an example, or getting into auto services. There's lots of different avenues that we can expand on in developing markets. Then when you look at high-growth markets, this is a format that is fairly nascent in many geographies, and you might think of them as fueling kiosks. That infrastructure will grow out in the longer term, and they're also very interested in having better control over security of payments, environmental solutions. A lot of this is centered off technologies that are coming from what we call automation that can also be managed through retail solutions. We think that it is both a driver in developed and developing markets, so it's a really attractive space for us. Would you say that within your portfolio today, that retail solutions is probably the most unappreciated part of your portfolio in terms of its growth potential? Yeah. I would say that people maybe view that as just linked straight to refueling or petrol-based refueling. This is a very strong format in terms of convenience stores, where we believe what might be misunderstood is that these convenience store operators are going to continue to make money and continue to grow, even when electrification or other forms of refueling occur. Most of these convenience store operators, it's very, by the way, geographic dependent as to how they make their money today. A lot of them are pivoting for non-refueling opportunities. In fact, customers like Circle K on their website cite about two-thirds of their transactions are not fuel-related. By the way, most of the money that are made in convenience stores today is not made through refueling. These are the areas of interest where they're part of our local fabric. They're part of where we stop on the highway, and this is going to continue to grow out in the future. Great. Do we have any more visibility at this point on how the EMV, the $100-$150 EMV headwind that you put out this year, how that looks beyond Q2? I think you're optimistic that maybe at the low end, I think that was the commentary that you had last quarter. Any more visibility around that at this point? Yeah, Nigel. We haven't updated our view from last quarter and no update at this time, I would say. We've always said that we wanted to get past the deadline, which we have, April 20th, and see some of the behavior post-deadline. We're going to take another look at it here at the end of the second quarter, provide an update if we think we have a meaningful update. It's been coming in as expected. Demand is very strong. We do still believe that last year was the peak and that it'll be a headwind this year and continue into 2022, but not in a position to resize it yet. Okay. What is that behavior? Clearly we haven't seen just a complete cliff event here. I'm seeing there's some slowdown perhaps, but what is that behavior you're referring to post the deadline? First of all, what do people buy? The mix. Do we see folks just changing out the payment system in the dispenser or changing out the full dispenser? Adoption timeline. How compelling of event is the liability shift at the time of the deadline? As we move past the deadline here, I'd say the average adoption size of customer is coming down. We serve those folks mostly through distribution as opposed to direct. With our larger customer base where we have Buy more share. It was very easy. We're directly talking to those customers. We really understand what their capital plans are. As we move to smaller retailers, it gets more challenging. We don't have the direct access, and there's thousands and thousands of these customers. We want to see how folks behave, how compelled are people to do it as quickly as possible, or how many people wait to adopt at a later time, and then how do they adopt this kind of approach? We'll wait to get more details on that next quarter. You correctly mentioned, Mark Morelli, EMV is a purely U.S. phenomenon. There's plenty of business outside of the U.S. Maybe talk about what you're seeing in Europe and APAC, China, India, in the retail fueling business, and talk about maybe the growth, but also what regulatory drivers you're seeing outside of the U.S. Yeah. We continue to see good regulatory drivers that have been the underpinning of this business for a long period of time. By the way, U.S. EMV, which we talk a lot about and just got finished talking about, is one of those regulatory drivers. It just happens to be a big one. These come all the time. We spoke about one in Mexico that occurred, and it impacted us in Q4 and Q1 of this year, and that played through. We anticipate there will be more of these drivers coming forward. When you look at some of the growth when you walk around the world, India has represented a strong growth opportunity for us. I think we remain bullish on India as a high-growth market. We raised our outlook for high-growth markets to high single digit plus from a mid-single digit. We remain very bullish on that opportunity. When you look at North America, North America has a couple things. First of all, it's recovering faster from the pandemic. As we know, and I said in my prepared remarks, the EMV's going to start impacting North America only in the second half of this year. You also mentioned Europe. In the case of Europe, it hasn't really recovered as fast from the pandemic. We're a little bit concerned that there could be some signs that the pandemic and access to vaccinations is not necessarily going as well in Europe as it is in other regions of the world. That said, we believe there's going to be low double-digit plus growth this quarter for Q2. We anticipate some recovery there. Kind of a real mixed bag, Nigel, but we're taking advantage of the opportunities that are in front of us, and we're exercising the growth opportunities that we see. That code's been a nice surprise in terms of the strength we've seen for the back half of 2020 and so far this year as well. Maybe just talk about your confidence that can continue. I mean, obviously you're running into tough comps in certainly fourth quarter, but also third quarter too. What are the drivers that you're seeing? I mean, clearly, we would expect you to talk about aging car park, lack of availability of new cars, similar stores as well. What do you think is driving this market, and how do you think this looks over the medium term? Yeah, that's a really good question because the typical drivers there, one of those major drivers is miles driven. It's something that's been really good at predicting this market, and it's actually been a really poor predictor of this market when you look back since COVID impacted us a year ago. In fact, this time a year ago, sales were in a very rapid decline for Matco, but they sprung back quite rapidly in Q3 with a strong V-shaped recovery. What that was really correlated to was the service technicians went out of work, and then when they came back to work, they started buying a lot, even though miles driven was significantly down. We're still down almost 10% miles driven year-over-year. That's not been the driver. What's been the driver is pretty broad-based, where folks initially had some disposable income. The service technicians were not spending money elsewhere. They had some access to some incentives in the U.S. government, which we facilitated. We also brought some products to market that could be quite relevant. By the way, our vitality in this business is about 25% a year. We try to be very responsive to what the service technicians need in any given year. We were able to alter that portfolio and picked up some. At the same time, I don't think it's going to continue forever at these growth rates. I think this is well above the historical growth rates. We're pretty bullish because we believe that we have things that are unique to us. Our vitality rate is very high. We also have about 30% of our territories in North America that are not penetrated with franchise distribution, which is an advantage we have over our major competitor. These things are basic artifacts that'll play out over time. It's a very financially strong business throwing off really strong cash flows, but will return to a low single digit, mid-single digit growth rate at some point. We've guided above that this year. We're pretty confident in our guide for this year. At some point it will return to that kind of normal rate. Great. I do want to get on to the diagnostics and software opportunities in this business when we talk about capital allocation. I did want to touch on supply chain, because the Matco business has been impacted by supply chain challenges. Maybe just update us on that. Then secondly, maybe broaden the discussion to broader supply chain challenges you may be seeing right now. Yeah. One of the advantages that we've had in this business is that we do manage the Matco distribution through supply chain, because you can see this very strong vitality where we leverage that supply chain with a lot of new product offerings. Truth be told, it's also a headwind in this kind of market. It's really difficult to manage an extended supply chain in this market environment. While our bookings might be quite attractive, our ability to manage through that, there's a little bit of a lag effect. We keep getting better at it, but it's still something that requires a lot of work on our part, and we'll continue to get better at it as well. Broadly speaking, supply chain is something I'm very proud of our teams. We've done admirably well in a very difficult environment. At the same time, we're not out of the woods yet. There's lots of areas that represent challenges on supply chain, and I think we've got a best-in-class business system here where our supply chain operators are actually, folks from the outside are seeking advice on how to do this kind of work. Hard work, thankless work these days for sure for the teams, and more work to do, but we're encouraged by what we're seeing in our ability to deliver in this environment. Well, as an ex-Danaher company, I expect you to manage these issues well. I do want to come back onto your business systems and the opportunities to continue to see improve in a moment. I wanted just to finish off on the portfolio and talk about Teletrac Navman, a business where there has been some challenges. Things seem to be turning the corner, but just give us an update in terms of that transition back to growth. You mentioned this is a $5 billion TAM. You're a fraction of that, what is your appetite to grow in this market? Well, first of all, the market is a great market. It's growing high single digits. Low double digits, depending on what book you're reading on this. It's attractive market, very fragmented market, different dynamics, where we have a footprint, about a third of our revenue is in the U.S., about a third in the U.K., and a third in Australia and New Zealand. Very different dynamics to compete in each of those markets. I think we've been very encouraged by the progress we're making. We had to pay down a pretty heavy technology debt with getting out of this DIRECTOR platform. We've launched the TN360. Okay. We're building that out to be able to meet the unique requirements of each of these geographic markets. It's a real-time AI updated system that we think has a great camera offering, lots of things that we can leverage that customers find quite attractive. At the same time, we've been able to moderate churn, which was abnormally high, and it's still higher than we'd like. We're being able to moderate that. I think the first step is to get positive annual recurring revenue, and we've been able to do that now for five months in a row. Obviously, our objective here is to intercept more of the market growth rates, and I think that's going to take a little bit more work and building out of TN360 to be able to do that. Step by step, we're on the mend, and we're encouraged by what we see. I'll tell you, it's hard work and more work to do. I think you talk about this as being a breaking business right now. Where do you think margins can be? I think some of your competitors are solely in the 20%, 30% EBITDA range. Is that where you think you can get to over time? Yeah, there's no reason why we can't. That's our objective, and it's well below our fleet margins as well. I think what this shows is there's lots of runway opportunities inside of Vontier, and this is one of those. Right. Execution's obviously been pretty darn good since you've become a public company. We've seen the margins expanding very nicely in the last three quarters you've reported. I'd like to take a step back and just think about you coming in just over a year ago into this company. What were your observations? How does the business system operations compare to Commerce, McKinnon and Brooks? Where do you think there's opportunities to further improve the performance? Nigel, I think every business has its own set of levers, and I'm not here to apply what was applied in the past. I think you take advantage of some of your experience in the past, no question. What I really find very compelling about this opportunity is we're in some great markets with some great brands that we're able to serve customers and serving high-value problems. The culture of the business system and the legacy coming from Danaher and Fortive is deep and rich, and that's a real passion to win. It's more of a cultural impact on things than necessarily a tool impact. At the same time, separating from Fortive, and these are five operating company out of scores of operating companies. I think what it really represents is that focus works, and that when we're able to really have a fresh look at what are we doing, how are we doing it, how is it being applied, that we can dig a lot deeper, and we can make a lot of improvements. I think both Dave and I feel very passionate about the runway of opportunities here. I think you see us beginning to pick that up, and we think there's a good stream of opportunities ahead as we transform the portfolio. I think it's step by step. We want to demonstrate we can execute with strong quarters and that we've got a good balance sheet, and we can put that to work for M&A, and the combination of those two, we think, is an excellent value proposition. Great. As you work towards M&A, which is going to shock you, I know. What levers can you pull to, at the EMV, volume headwinds like the spikes in the second half of this year into 2022? What levers can you pull to limit the damage to margins and maintain profitability? I'm thinking here about restructuring actions, just general cost reduction and perhaps some moderation in investment spending. What levers can you pull to maintain profitability? I think there are significant levers that we can pull, and I think you're seeing us pull some. David Naemura has talked about restructuring. He can talk about that and elaborate on that, too. Keep in mind that this business has been chasing this strong secular driver for many years now. It's a really different dynamic that's needed, and that affords a lot of productivity type initiatives where you can reframe the business opportunities and relook at where are the customers that you really want to serve, where do you want to get growth out of, where do you want to raise price accordingly that is more strategic, not just inflation oriented. How do you eliminate some bleeding parts of the business through a reorganization, and how do you prosecute product line simplification or customer list simplification. Lots of opportunities, and we're very encouraged by not only what we think we're picking up today, but what we can pick up. Dave, you want to add any color there? I think that's right. Nigel, we've talked about EMV being a mixed headwind here in the second half as we see the decline. In the first half, EMV continues to grow. We'll see the decline in the second half of the year. We've put in place a number of actions to help offset that mixed impact. We'll see how the timing of the implementation of the restructuring actions come through as we get a better feel for some of the volumes coming off. That's probably less than half of what we have planned. The other half is really around simplification of the broader business, as Mark noted, and this broader concept and these profit improvement activities and growth improvement activities in places outside of EMV. Okay. I think your M&A ambitions are well known, but the biggest question we get is where do you think Vontier is going to land? What will they buy? We have no idea. Any help there would be great. Maybe this EV versus non-EV, transition of business towards EV from fueling, where do you stand on this? Do you have to own EV infrastructure or can you achieve this through partnerships? Any color there. Yeah, I'll throw it out, but I'm going to turn it over to Dave as well. Look, I think first and foremost, we need to think about this as ICE versus non-ICE, not EV versus EV. There's lots of opportunities for us to do M&A to diversify away from a more unbalanced exposure over time in internal combustion engines. We talked about a number of those, retailing solutions, smart cities, logistics, supply chain, and sustainable infrastructure as well. At the same time, we think that EV is a net opportunity for us. How we bottom that out when we think about both organic opportunities for growth as well as partnerships is going to be key, and possibly M&A. M&A has to fit the financial hurdles for M&A, and it has to compete with capital for other opportunities for M&A to get good returns. Dave, any thoughts? No, I think that summed it up well. I mean, we have these minority interests. I think those are a good example of how to play some of this space at an early stage while it's still developing in a nascent stage. Those have benefited as well. We like the positions we have. Mark mentioned partnerships and there's other alternative structures. We'll continue to determine how to best play what's a very early stage market as it develops. I think you hit the main point, which I think some people hear non-ICE as EV, and that's just not necessarily the case. I see. Okay. Obviously, your partnership with Tritium, I don't know how that's going to evolve and the infrastructure et cetera. Is it important to have some skin in the game to be a partner with that business longer term? I think the terms of that is confidential, so we can't really acknowledge the nature of that relationship. I think this is really indicative on how we like to play the space. Not only do we have a minority interest there, we have a minority interest in Driivz, which is a software play as well. What this really provides us with, Nigel, is a front row seat, because it's so early in this, that if you can participate with these businesses, you have a tremendous learning opportunity. We're learning a lot from our customers, what they're asking us for. Keep in mind, the penetration of electric vehicles is less than 1% of the car park today. There is going to be a lot of learning going forward. Look what's going on with valuations right now. Lots of things are going to change. It's really important that we stay nimble, we stay agile, we're creative with our solutions, and we're smart about how we deploy capital as we figure out how to provide solutions for our customers. It's something we're committed to and we'll continue working on. Great. Thanks, Mark. Congratulations on the dividend announcement yesterday, $2.10 this quarter. Obviously the buyback announcement, buyback authorization announcement, $500 million program. What is the framework for buying back stock here? I think the preference would still be for acquisitions, all things being equal. How and when would you think about pulling the trigger on your buybacks? Well, we didn't put the authorization in place because we had a plan to put forward, engage in repurchase activity. Our priorities haven't changed. It's M&A. Ultimately, of course, we're trying to develop shareholder return. As opportunistically as the world developed, we wanted to have the repurchase authorization in place in the event we needed it opportunistically. I wouldn't read that as any change to how we've talked about our priorities. We continue to be focused on M&A as our number one capital allocation priority, but we thought it was proper to put the plan in place. If at such time we need it would be there. Frankly, we could do both, right? These could be mutually exclusive. There could be some need to, for some reason, to repurchase shares at a point in time without altering our M&A aspirations. It's a tough one because buying back stock with your multiple at this point in time makes a lot of sense. Equally, I think investors want to see you diversify the portfolio. It's a balance for sure. No question about it. Again, finally, on the acquisition front, I know there's not a lot you can say, but degrees of confidence in deploying some capital and acquisitions this year? Yeah. Look, Nigel, as you know, these things are episodic. It's truly our intent, we have reasonably defined approach that we think serves us well. It's adapted to returns and multiples in the environment. We're putting a lot of work both on the cultivation front and interrogating items in our funnel, starting with market work, moving on to properties within those markets, and ultimately valuation third. We'll continue to do the work. We'll see how it plays out. I think if we tried to put too much prediction into it, we'd be setting ourselves up. Ultimately, it's our objective. We'll see how we get it done. Well, great. I think we're out of time, guys. Thanks for the time. Appreciate that you've been part of this conference. Good luck with the second quarter and beyond, and we'll catch up soon. Thanks, Mark. Thanks, Dave. Thank you. Thank you for having us, Nigel. Have a good day. Thanks, Mark