Great. Good afternoon, and thanks for joining us. We're gonna restart with the Volunteer Corporation. My name is Nigel Coe. I'm the Wolf's Wolf's multi industry analyst.
I'm very pleased to welcome Mark Morelli, CEO of Vontier and Dave Numero, CFO. Just as a reminder, this is an interactive forum. If you got questions, punch them into the text box, and I'll take questions as and when on an honest basis. Otherwise, I'll keep running with my questions. But with that said, let me hand it back to to Mark, and I think you got some opening remarks, and then we're good today.
Thanks, Mark.
Yeah. Thanks, Nigel. We're 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 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. Well, Vontier is an industrial technology company that's really, 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 on the lower right, about 30% of our revenue comes from retail hardware. And like I said, our recurring revenue is in the mid-twenty 5%, and about onethree of that is SaaS, and about twothree of that is service.
We have outstanding, financial profile, as shown here by the column on the right, strong margins and free cash flow and a penchant for M and A. The volunteer business system is the foundation of not only our organic growth initiatives, but also it enhances our growth profile and an ability to expand our already strong margins. And 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 2021 as VBS continues to be, a real driver for us to drive top tier performance. And we think this is evidenced by our double digit core revenue growth as well as our earnings growth. The separation from Fortive 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. And 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 Metco as well as Environmental Solutions. I'd like to note that our first quarter earnings call that we did update our guidance for 2021, and this reflected a stronger core revenue growth led by our non EMV business, including high growth markets. And 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. We're going to lapse 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 multiyear transformation, and 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 $27,000,000,000 market that we serve with two platforms, and we believe this sets us up for long term growth. On the top is our Mobility Technologies platform, which consists of our GVR, Gilbarco Veederoop business GTT, our Global Traffic Technologies, and Teletrek Navman, which is a telematics business. Our installed base and strong brands, and we serve customers today selling and solving high value problems, position us very well for market adjacencies and for growth.
And 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. And this is represented by our Matco and our Hennessy brands. And our businesses here leverage long term drivers, which includes increasing miles driven and aging car park and increasing complexity of auto repair.
And this gives us opportunities to leverage into diagnostics software as well as workflow software for shop management. So 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 and A and ample M and 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 volunteer value creation flywheel. And this all starts with having solid organic growth combined with margin expansion. We have an investment grade style balance sheet that we can leverage with strong free cash flows.
We plow that into M and 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. So thank you for your interest, and we're very excited to mobilize the future to create a better world.
So with that, Nigel, Dave and I are happy to take your questions.
Great. Thanks, Mark. Pretty good, foundation for our conversation. So I think it's fair to say that investors think of you as a retail gas fueling business with with hand tools and and you talk about retail solutions. You mentioned that a few times in in your bed marks, forcing some of your sales.
Maybe just discuss what exactly is retail sales Solutions and, you know, why you play within the actual retail, establishment on Orco.
Yeah. So 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. And 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. Because 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 two seller point of sale system in North America, that's a significant advantage for us. And 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 with inside the store and the retail solution. So 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 wanna come back to, you know, the opportunities to to grow that retail solutions business. But there's a lot of innovation around the, you know, the the point of sales, you know, in in terms of payments in general. I mean, what is the risk and reward of kind of the change that we're seeing on the POS side within the actual reseller establishment?
Yes. 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, but also through opportunities for loyalty programs, as an example, or or ways by which they wanna 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. And 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, and 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. And a lot of this is centered off technologies that are coming, from what we call automation that can also be managed through retail solutions. So we think that it is both a driver in developed and developing markets. So it's a really attractive space for us.
And 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?
Yes. I would say that people maybe view that as just linked straight to refueling or petrol based refueling. And 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. And, most of these convenience store operators it's very, by the way, geographic dependent as to how they make their money today. But a lot of them are pivoting for nonrefueling opportunities.
In fact, customers like Circle K on their website site, about twothree of their transactions are not fuel related. And by the way, most of the money that are made in convenience stores today is not made through refueling. So 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 gonna continue to grow out in the future.
Great. Do we have any more visibility at this point on how, the EMV, you know, the 100 to one fifty EMV headwind that you put out this year, how that looks beyond 2Q? I think you're optimistic that maybe at the low end, I think that was the commentary that you had last quarter. But any more visibility around that at this point?
Yes, Nigel. So 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 20, and see some of the behavior post deadline. So 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. We've it's been coming in as expected.
Demand is very strong. We do still believe that last year was a peak and that we'll it'll be a headwind this year and continuing into 2022, but not in a position to resize it yet. Okay. And then what
is that behavior? So clearly, we haven't seen just a complete you know, kind of clip event here. I'm seeing there's some slowdown perhaps, but what is that behavior you're referring to post post So
first of all, what do people buy? The mix. So do we see folks just changing out the payment system in the dispenser or changing out the full dispenser? We adoption time line, 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. So with our larger customer base, where we have probably more share, we it was very easy. We're directly talking to those customers. We really understand what their capital plans are. But 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. So we wanna see how folks behave, how compelled are people to do it as quickly as possible, or people you know, how many people kind of wait to adopt at a later time, and then what what do they ultimately how do they adopt this kind
of approach? So we'll wait to get more details on that next quarter. But you correctly mentioned, Mark, that, you know, EMV is a purely US phenomenon. There's plenty of business outside of The US. Maybe talk about what you're seeing in Europe and APAC, China, India in the retail fueling business.
Talk about maybe the growth, but also what regulatory drivers you're seeing outside of The US.
Yes. So we continue to see a good regulatory drivers that have been the underpinning of this business, for a long period of time. By the way, I mean, 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.
But 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 kind of played through. So 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, you know, 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. And, so we're still and we remain, very bullish on that opportunity. When you look at North America, North America has a couple of things. First of all, it's recovering, faster from the pandemic. But then, as we know and as I said in my prepared remarks, the EMV is going to start impacting North America only in the second half of this year.
But you also mentioned Europe. In the case of Europe, it hasn't really recovered as fast from the pandemic. And we're a little bit concerned that, some 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. But at the same time, that said, we believe there's gonna be, low double digit plus growth this quarter or Q2. So we anticipate, some recovery there.
So 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.
And Matco has been a nice surprise in terms of the strength we've seen through the back half of twenty twenty and so far this year as well. Maybe just talk about your confidence that that can continue. I mean, obviously, you're running tough comps in you know, you know, certainly fourth quarter and then also third quarter too. But what are the drivers that you're seeing? I mean, clearly, you know, we we would expect you talk about, you know, aging, you know, kind of car park, you know, lack of availability in new cars, you know, similar as well.
But what do you think is driving this market? And how do you think this looks over the medium term?
Yes. And 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. And 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. And so that's not been the driver. And 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. So we try to be very responsive to what the service technicians need in any given year.
And so we were able to alter that portfolio and picked up some real estate. At the same time, I don't think, you know, it's going to continue forever at these growth rates. I think this is well above the historical growth rates. And 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 franchisee distribution, which is an advantage we have over our major competitor. So these things are basic artifacts that will play out over time. It's a very financially strong business, throwing off really strong cash flows, will return to a low single digit, mid single digit growth rate at some point. Now we've guided above that this year. We're pretty confident in our guide for this year.
But 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. But I did want to touch on supply chain because that Matt Cosby business has been impacted by supply chain challenges. So maybe just update us on that. And then secondly, maybe broaden the discussion to broader supply chain challenges you may be seeing right now.
Yes. So 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 there's very strong vitality where we leverage that supply chain with a lot of new product offerings. But 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. And so while our bookings might, be quite attractive, our ability to kind of manage through that, you know, there's a little bit of a lag effect.
We keep getting better at it, but it's still something that, you know, it 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. And so hard work. It's thankless work these days, for sure, for the teams, but and more work to do, but we're encouraged by what we're seeing in our ability to deliver in this environment.
Well, as as a company, I expect you to manage these issues well. But I do want to come back on to on to say your business system and and, you know, your opportunity to continue to see improve in in a moment. But I wanted just to to finish off on the portfolio and talk about TetrackNaplin, a business where there has been some challenges. It seems to turning the corner, just give us an update in terms of that transition back to growth. And you mentioned this is a $5,000,000,000 TAM.
You're a fraction of that. What is your appetite to grow in this market?
Yes. Well, first of all, the market is a great market. It's growing high single digits. It's, or low double digits, depending on what book you're reading on this. But it's an attractive market, very fragmented market, different dynamics.
We're we have a footprint, about onethree of our revenues in The United States, about onethree in The U. K. And onethree in Australia and New Zealand. So 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 aged director platform. We've launched the TN360, and we're building that out to be able to meet the unique requirements of each of these geographic markets. So 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. And at the same time, we've been able to moderate churn, which was abnormally high and is still higher than we'd like. We're being able to moderate that.
So 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. And obviously, our objective here is intercept more of the market growth rates. And I think that's going to take a little bit more work in building out our TM360 to be able to do that. But step by step, we're on amend, and, we're encouraged by what we see. But I'll tell you, it's hard work and more work to do.
I think you talked about this being a breakeven business right now. Give or take, where do you think margins can be? Because I think some of your competitors are solely in the 20%, 30% EBITDA range. I mean, is that where you think you can get to over time?
Yes, there's no reason why we can't. And that's our objective, and it's well below our fleet margins as well. So I think what this shows is there's lots of runway opportunities inside of Frontier, and this is one of those. Right.
So execution has obviously been pretty darn good since you've become a public company. We've seen the margins expanding very nicely in the last three last three quarters you've reported. I'd like to take a step back and just think about, you know, you you you know, you come in just over a year ago into this company. What were your observations? How does the business system operations compare to Connors McKinnon and Brooks?
And when do you think there's opportunities to further improve, you know, the performance?
Nigel, I think every business has its own set of levers, and and I'm not here to kind of apply what was applied in the past. I mean, I think you take advantage of some of your experience in the past, no question. But 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. And 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. And 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. And 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. And 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. So 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 through M and A. And the combination of those two, we think, is an excellent value proposition.
Great. I do want come on to M and A. It's sort of shocking, I know. But what what levers can you pull to you know, it you know, as the EMV, you know, volume headwinds off the bikes in the second half of this year into 2022, what levers can you pull to limit the damage to margins and and maintain profitability? And I'm thinking here about restructuring actions, just general cost reduction and some perhaps some moderation in investment spending.
Any what levers can you pull out to make any profit?
Well, I significant think there levers that we can pull. And I think you're seeing us pull some. So Dave has talked about restructuring. He can talk about that and elaborate on that, too. And keep in mind that this business has been chasing this strong secular driver for many years now.
And and so it's a really different dynamic that's needed, and and that affords a lot of productivity type initiatives where you can reframe the business opportunities and relook at how where are the customers that you really wanna 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, and then how do you eliminate some bleeding parts of the business through a reorganization, and how do you prosecute sort of product line simplification or customer list simplification. So 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, do want 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. And we've put in place a number of actions to help offset that mix impact.
So we'll see how the timing of the implementation of the restructuring actions come through as we kind of get a better feel for the some of the volumes coming off. But 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 kind of profit improvement activities and growth improvement activities in places outside of EMV.
Okay. So I think the you know, your sort of m and a ambitions are, Willems, that the the biggest question we get is, you know, what where do you think is gonna land? You know, what what what will they buy? We have no idea. So any help there would be would be would be great.
But maybe this this EV versus non EV, transitioning the business towards EV from fueling, where do you stand on that? Do you have to own EV infrastructure, or can you achieve this through partnerships? I mean, any color there?
Yes. I'll open it up, I'll 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 and A, to diversify away from a more unbalanced exposure over time in internal combustion engines. And so we talked about a number of those: retailing solutions, smart cities, logistics, supply chain, and so and sustainable, infrastructure as well.
But at the same time, we think that EV is a net opportunity for us. And 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 and A. But M and A has to fit the financial hurdles for M and A, and it has to compete with capital for other opportunities for M and A to get good returns.
David, anything to add?
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 in the early stage while it's still developing in a nascent stage. Those have benefited us well. We like the positions we have.
Mark mentioned partnerships and there's other alternative structures. So we'll continue to determine how to best play what's a very early stage market as it develops. But 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. And then, obviously, your your partnership with Tridium, you know, I don't know how that's gonna evolve in the infrastructure, etcetera. But is it important to have some skin in the game to be a partner with that business longer term?
Well, I think the, terms of that is, confidential, so we can't really acknowledge, you know, sort of the nature of that relationship. But, you know, 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 drives, which is a software play as well. And what this really provides us with, Nigel, is a front row seat because it's so early inning 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 gonna be a lot of learning going forward. Look what's going on with valuations right now. Lots of things are gonna change. So it's really important that we stay nimble, we stay agile, we're creative with our solutions, and and we're smart about how we deploy capital as we figure out how to provide solutions for our customers.
So it's something we're committed to and we'll continue working on.
Great. Thanks, Manav. So congratulations on the dividend announcement yesterday, zero two five this quarter. And then obviously, the buyback announcement, so buyback authorization primary dollar program. What what is the framework for buyback stock here?
I mean, I I think the preference would still be for acquisitions, all things being equal. But what what 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 and A. But ultimately, of course, we're trying to develop shareholder return. And as opportunistically as the world develops, we wanted to have the repurchase authorization in place in the event we needed it opportunistically.
But I wouldn't read that as any change to how we've talked about our priorities. We continue to be focused on M and A as kind of our one capital allocation priority, but we thought it was proper to put the plan in place. And if at such time we need it, it will be there. These can and frankly, could do both, right? These could be mutually exclusive.
There could be some need to or some reason to repurchase shares at a point in time without without altering our M and A aspirations.
It's a tough one because your buyback stock with your multiple at this point in time makes a lot of sense. But, equally, I think investors wanna see you diversify the portfolio. So it's it's a it's a it's a balance for sure. No question about it. Again, finally, on on the on the acquisition front, I know there's not a whole lot can say, but degrees of confidence in deploying some capital and acquisitions this year?
Yes. Look, Nigel, as you know, these things are episodic. It's truly our intent, but we have reasonable reasonably defined approach that we think serves us well. It's adapted to returns and multiples in the environment. And we're doing we're putting in 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 of thirds.
So 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 kind of setting ourselves up. But but, ultimately, you know, it's our objective. We'll see see how see how we get it done.
Well, great. I think we're out of time, guys. So thanks for the time. Appreciate that the you know, you you've been part of this conference. Good luck with the second quarter and beyond, so we'll catch up soon.
Thanks, Mark. Thanks, Davis. Thank you.
Thank you for having us, Nigel. Have a good day.
Thanks, Mark.