Hello. My name is Katie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Vontier Corporation's Second Quarter 2022 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Ms. Lisa Curran, Vice President of Investor Relations. Ms. Curran, you may begin.

Thank you, Katie. Good morning, everyone, and thank you for joining us on the call. With me today are Mark Morelli, our President and Chief Executive Officer; Dave Naemura, our Senior Vice President and Chief Financial Officer; and Ryan Edelman, our incoming Vice President of Investor Relations. We will present certain non-GAAP financial measures on today's call. Information required by SEC Regulation G relating to these non-GAAP financial measures is available on the Investors section of our website, www.vontier.com under the heading Financials. Please note that unless otherwise noted, the presented financial measures reflect year-over-year increases or decreases. During the call, we will 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 a number of risks and uncertainties and actual results might differ materially from any forward-looking statements that we make today. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings and subsequent quarterly report on Form 10-Q. These forward-looking statements speak only as of the date they are made, and we do not assume any obligation to update any forward-looking statements. With that, I'd like to turn the call over to Mark.

Thanks, Lisa. Good morning, everyone, and welcome to our second quarter earnings call. Once again, our strong execution, price cost performance and capital allocation drove double-digit earnings growth, more than offsetting supply chain inflation and other headwinds. We delivered adjusted earnings per share of $0.72 or an increase of 18%, despite a challenging comparison year-over-year. These strong results reflected positive operating leverage and a top line beat. The beat was driven by double-digit growth at DRB and Environmental, more than offsetting underperformance in Diagnostics and Repair Technologies, which I'll come back to. DRB delivered yet another quarter of robust growth highlighting the strength of our capital deployment and portfolio strategy to accelerate non-ICE business growth. Furthermore, we leveraged the strength of our portfolio's cash generation and balance sheet by deploying $14 million of capital in the quarter towards share repurchase and followed with an additional $17 million in early July. Today's announcement of our bolt-on acquisition of Invenco, and further actions on the planned divestitures that Dave will discuss in more detail are important milestones towards building a better stronger, more focused growth portfolio. We're excited to acquire industry leader Invenco and expand our software-enabled workflow solutions and subscription business model. Invenco is a leading global provider of open platform retailing and payment hardware and software solutions. Its disruptive edge computing technology road map and modular solutions offer extensibility across other retailing verticals. This acquisition accelerates our digital strategy and better positions us to serve our customers' growing demand for digitally agile software systems. Invenco is one of the top suppliers of retailing and payment solutions to the convenience retail industry worldwide. Invenco's innovative, secure solutions are well-positioned to enable retailers to customize digital payments and consumer services as the energy markets evolve. Invenco's expected 2022 revenue of $80 million…

Thanks Mark. I'll get started with a brief summary of our performance in the quarter. Adjusted net earnings for the second quarter were $116 million, an increase of 11.5% from $104 million in the prior year period. This translated to adjusted net earnings per share of $0.72, an 18% increase compared to $0.61 in the prior year period. Revenue grew 7.2%, with core revenue up 1.6%. Our non-EMV core growth was mid-single digits on a difficult compare, particularly for our Diagnostics and Repair businesses, where prior year core growth was over 50%. Growth was primarily driven by GVR, which grew mid-single digits on an overall core basis with growth in both developed and high-growth markets. GVR growth was driven by environmental, aftermarket and our CNG business. Our compressed natural gas business has grown greater than 65% year-to-date off a relatively small base. And although not core yet, DRB continued to demonstrate strong growth of high 20s. Adjusted operating profit for the second quarter was [$167 million], an increase of 10% compared to the prior year period. Gross margin expansion of almost 100 basis points reflected continued effective price cost management and the benefits of DRB and other higher-margin solutions. These favorable items helped offset production inefficiencies from a very back-end loaded quarter, driven by timing of supply, which I will elaborate on further in a bit. The increase in operating profit and strong execution drove incremental margin of nearly 30% and modest adjusted core operating margin expansion. Excluding the $0.02 or $3 million dilutive impact of our energy transition investments, our incremental margin is high 30s. Looking at the top line performance of our two platforms. In our Mobility Technologies platform, core revenue was 3.5%, reflecting growth in GVR in developed and high-growth markets, particularly in North America, more than…

Thanks, Dave. As Dave highlighted, we are continuing to evolve the portfolio towards attractive markets and growth characteristics. And as we potentially enter a slower growth macroeconomic environment, I think it's worth reminding you of our portfolio's low cyclicality as best demonstrated in 2008, 2009, where sales were down only mid-single digits. We have a highly resilient portfolio of businesses, not correlated to PMI, but rather tied to a steady wave of regulatory drivers. The economy of convenience, expansion of digital workflows, modernization and build-out of retail fueling infrastructure, and increasing complexity of the car park are attractive secular drivers of sustainable growth. And as the 2023 growth road map in Slide 8 also illustrates we are taking advantage of the resiliency and strategic optionality inherent in our businesses to build a better, stronger, more focused growth portfolio. I want to underscore once again that while we believe continued M&A will be a part of our strategy to continue our multiyear portfolios transformation, we are not dogmatic in our approach. Given the strength of our cash generation, we will balance investing in organic and inorganic opportunities along with returning capital to shareholders. They are not mutually exclusive. We will continue to align our capital allocation priorities to the benefit of our shareholders, as we execute on the initiatives underway to drive further portfolio diversification, profitable growth and increased returns. We are driving a value-creating growth agenda. We are making meaningful progress on our most important priorities and shareholder commitments. We are demonstrating strong execution and successfully delivering our profitable growth initiatives. We're showing we will make acquisitions and carry only assets that maximize value even at the expense of near-term earnings. Bottom line, we are focused on long-term shareholder value, and we're accelerating returns. And lastly, before turning it over to Lisa, I'd like to thank her for her important role in the successful launch of Vontier as a public company, especially for her professionalism, intellect and Investor Relations expertise. We are fortunate to have Lisa staying on long enough to help ensure a smooth transition. With that, I'd like to welcome Ryan Edelman to the team. I believe many of you already know Ryan from his prior roles in both IR and the sell side. Ryan brings deep experience in our sector and a clear understanding of market dynamics. We are very excited to have him aboard. With that, Lisa, I wish you all the best in your next chapter, and I'll turn the call back over to you.

Thanks for the kind words, Mark. After the pleasure of working with Ryan in the last month, I'm confident that you all are in the best of hands with him. Katie, we are now ready for questions.

[Operator Instructions] Our first question will come from Andrew Obin with Bank of America.

Lisa, thanks so much. We'll definitely miss you. And Ryan, welcome, look forward to working with you. First question on working capital. And you guys are considered to be some of the better operators out there. And I appreciate the shift in free cash flow story. What are you looking for to sort of what signposts should we look for, for the industry, for your supply chain to normalize? And this is a bigger picture question, right? I'm sort of taking it beyond Vontier. What's your best guess as to one thing to normal? And if they don't, what structural countermeasures can you take? Do you need to carry sort of more buffer stock going forward? Do you need to rethink your supply chains in 12 to 24 months? Just more of a 30,000, 40,000-foot view on supply chain.

Yes, Andrew, thanks for the question. Look, there's no question we've all been wrestling with the supply chain issues now for a while. And I'll absolutely say that we have taken measures already anticipating the supply chain just to be different. One of the things that we've talked about is a simplification program that we've engaged in that will flow right through to your suppliers. So I think that's really the starting point, because if you can kind of consolidate and figure out and particularly figure out what region you get supply chain from. But going back to sort of the first part of your question there, it's continuing to be challenging. There's no question about it. I couldn't be more proud of what our team has done to be able to once again face some pretty significant issues and deliver on our commitments. But at the same time, I anticipate we will be in this situation for a little bit longer. And hopefully, into 2023, we'll be able to see some of these things get better. Clearly, we are seeing some things getting better on the semiconductor side and the electronic component side, but that's actually where most of the stuff still resides. So Dave, do you want to -- any comments there?

Yes. I'd just add, Andrew, you made a great point about the linearity. When we look at what happened in Q2, it was really VBS at its finest. When we look at the -- how supply pushed production to the back end. Usually, as overall, we'd ship maybe 40% of the quarter in the third month, that was well up over 50%. When we look at our biggest factory where EMV comes out of, actually half the quarter was shipped in about the second half of June, a little under half the quarter was shipped in the second half of June. And that was really VBS at its finest, but I think it puts a sharp point on some of the challenges that we fielded. And when you roll through in our shorter collection type region to push in receivables and free cash flow out of the quarter. So just to put a highlight on that.

Yes. And another question I have just a follow-up on M&A. I think your recent acquisition is sort of more middle of the fairway type of acquisition for you, but would you say that the M&A funnel is skewed more towards software solution? Drivz was early stage, high growth. Invenco, they've scaled through a decent level of profitability. Do you have a philosophy on what's the better time to acquire software firms, because it seems that's where the Company is going?

Yes. I definitely wouldn't say that we're looking for software companies to acquire. I think there's a mix of things that are in our pipeline and that you can expect us to execute and cultivate our pipeline accordingly, because I think there are great returns. They can have some embedded hardware into it as well as software. And if you look at companies like Invenco, you look at companies like DRB, it has a combination of those. They're not just software. Now granted some of the alternative energy stuff that we did earlier in the year with Drivz with an embedded technology, [Sparkion]. Those can be more software oriented, but once again, a mix.

Our next question will come from Nigel Coe with Wolfe Research.

This is Ryan Cooke on for Nigel Coe. I just wanted to ask about gas station investments. And if you could provide some color on how you typically see that tracking with higher gas prices?

Yes. So the industry is actually going through a very interesting, not only investment from an energy transition perspective, but also the sophistication of the retailing environment. And so you do see some really interesting formats being advanced on your local neighborhood store as well as your truck stop. And so we are -- there's no question that we're seeing that. I've just come back from Norway, where we're kind of looking at a company that has electrified a lot and they do a lot of home charging. But at the same time, you see those investments going into that format. And with higher gas prices, if they're a multinational oil company or they're backward integrated into the supply of gas, then they're going to have more margins here, and you certainly see the energy companies with higher margins. So I think the key thing is that companies like 7-Eleven that have a very sophisticated set of offerings, you're going to see them making those investments in that energy transition and that retail environment. So I think it's a really good growthy and forward-looking way of building out the mobility infrastructure. So we're pretty pleased on the position that we're in to be able to take advantage of those investments.

Great. That's very helpful. And then I also wanted to ask about the e-mobility space and see if you could provide some details surrounding the Drivz investment. And I guess just how we should be thinking about those sort of investments moving forward?

Yes. I'll turn it over to Dave, but let me just give an opening on that. The bigger picture here is that we can play in and opportunity. We believe in the petrol-based infrastructure, particularly in high-growth markets growing out, but at the same time, if you look at the energy transition, we're actually very well-positioned to take advantage of that. And investments like Drivz with embedded technologies like Sparkion give us a great platform for investment, because it's the operating system for the electric charging network that needs to be managed. And if you think about the bigger issues here about range anxiety, this is a huge growth space, and we're exactly at the right part of the value chain to not only grow but to grow profitably. Once again, I'll go back to my Norway visit, all the major players out there in the market doing electric charging have subscribed and are subscribing to that Drivz operating system, I think it's a real testament to how we position ourselves for growth. And so it's a great position to be in right now.

Yes. I'd just point out to folks, too, that we have some new disclosures sizing the dilutive impact of those investments in our supplemental slides in Slide 15 and 16 of the presentation. We heard you asking for that information, and so we provided that this quarter, right. Thanks, Katie. Back to you.

Our next question will come from Andy Kaplowitz with Citi.

This is Piyush on behalf of Andy. So DRB is growing nicely. Can you talk about the visibility through the remainder of the year at this business? And I think when you guys announced DRB, you've talked about high single-digit growth over longer-term. So maybe provide some additional color on what's driving the double-digit growth you saw in the quarter and how being part of Vontier helps DRB achieve these growth rates?

Yes. So I think you broke it a little bit at the beginning of that question. I think what you asked was what's driving the growth rates for DRB. Is that correct?

Yes.

Okay. So I think, first of all, we've -- it goes back to the strategy around M&A. We've picked the right property and we carefully did this. I think it shows the discipline around our M&A. This is by far the market leader in the space. It's a combination of hardware and software. It's a deeply embedded end-to-end point-of-sale system where we layer on top of that workflow software solutions that really are high demand for customers. And inherently, it's in a growth space. And so that's the first reason. The second reason is just our integration plan, I think, just hit the right level. This is not a hard integration, because it's a growthy type thing. We've done a significant amount of high-level changeover management there. I think we've executed really well on that, too, taking advantage of a lot of the expertise already in the business. So I think the overall -- the strategic path and the execution path has worked incredibly well.

Got it. Very helpful. And my follow-up question is we talked leverage here. Like I think you expect leverage to be under three turns by the end of the year. Can you talk about how you're planning to balance continued deleveraging versus driving incremental capital deployment in the second half and maybe into 2023?

Yes, sure. I mean I think we have a targeted range of below 3x kind of that 2.5 to 3x net leverage that I talked about. And our free cash flow generation profile and EBITDA growth should facilitate that with additional capital to deploy. So it's always dynamic. M&A opportunities, we don't always get to pick when those come. We've talked about deploying additional capital $100 million over the second half of the year into share repurchase and the timing of which will depend on market conditions. But when conditions are right, we'll be more aggressive. So we have throughout the year develop. And we also said, I would remind you that at times would be above 3x with line of sight to coming back below that in a reasonable period of time. So I think our current profile reflects that. And frankly, the 3.3x net leverage is a reflection of the opportunities we've taken to date over, well, $288 million of capital deployed to share repurchase and the deals we did in the first and then funding the Invenco deal that we just announced.

Our next question will come from Julian Mitchell with Barclays.

Thanks, Lisa, for all the help down the years. Just wanted to follow up on the Invenco deal. Maybe help us understand recent organic sales growth rates in that business, what you're thinking about the top line growth outlook there? And then when we're looking at earnings accretion for perhaps next year, are we thinking sort of single digits sense of EPS accretion is the right sort of ballpark for that?

Yes. So let me jump in on this one. So their organic growth profile is something that -- it's kind of flattish, but it's something that we can really take advantage of. So let me just describe that, give a little bit color on it and then I'll turn it over to Dave on the accretion side. So first of all, this is an excellent strategic fit for us, and it really fits our portfolio diversification. And particularly the nature of this agile software that customers are really looking for, it really enhances our workflow solutions. And the key thing here is that not only is it a platform that is building out with some of our key customers, we have excellent leverage with our sales force, particularly it adds feature-rich environment for our high-growth market and we can leverage our existing sales force to be able to do that. And so we think that on the growth side, this is a -- really it's a rare opportunity for us to be able to leverage what we've got and what they've got to really have growth. And then there's also a cost synergy side, too. It wasn't where your question went. But there was also costs included happy to go there. Go ahead, Dave, you want to talk about accretion.

Yes. So I would first highlight what Mark said. Very synergy-rich deal, great channel synergies, but cost synergies as well. And the newer stage product they have on the software side fits hand in glove into our existing channel. So we're really excited about that. So it's an interesting deal in that it has attributes of the bolt-on, which helps us drive returns. They're very synergy-rich but also on point strategy with their newer product on the software side. As far as accretion, we're looking at kind of mid-single digits cents per share next year and beyond that, moving up to high single digits cents per share.

That's very helpful. And then maybe just my second question would be around the -- any update on sort of that EMV outlook. I see you've got maybe a bigger headwind kind of third quarter than we thought and then a bigger step-up perhaps into the fourth quarter with that $30 million number. Maybe help us understand kind of where are we on the overall transition and kind of penetration of the installed base amidst the sort of quarterly moving parts and maybe supply chain disruption. Any change in perspectives on that EMV waiting next year or over the next 12 months?

Yes, Julian. Look, great question. So really, I would say nothing overall in the big picture has changed. I think what we're feeling the most here is that we actually satisfied more EMV demand in the second than we had anticipated. So if you think of an additional $10 million to $15 million that was part of that late June push got satisfied, and that really pulled in from the third, which kind of adds to that step-up. We're still satisfying a lot of demand in a pretty uncertain environment. So it will move around some, and we try to keep you guys updated as we can. We'll probably get to year-end before we update the penetration numbers, but as far as we think of -- we talked about still being at that $50 million headwind for the year and our view to next year. No update to that.

Our next question comes from Rob Mason with Baird.

I wanted to see if you could just elaborate, Mark, on some of the challenges you talked about at Matco and how you see those playing out in the second half? And then specific to -- I thought I heard a comment around investment in company-owned stores, whether -- how new of a dynamic is that? What level of investment are you talking about and perhaps the time frame that we would see that materialize?

Yes, happy to, Rob. So first of all, I think the backdrop here for Matco is a pretty strong macro environment for them. The technician continues to be at high employment. They're getting paid well. There's robust shop activity. So that -- all those things bear really well. And then the backdrop for complexity to repair is also really good, too. So I think that's great. I think one of the biggest issues we're running up against is, first of all, year-over-year compare is pretty significant. Matco had more than 50% organic growth in the prior year period. And we knew that the quarter was going to be challenging, because of the timing of the Matco Expo was in Q1 this year instead of Q2, and so we did a lot of bookings according to that. But at the same time, we experienced supply chain disruptions and some -- had some labor issues associated mostly with our Jamestown factory that we build toolboxes on. And so we currently have a remedy plan in place for that, that I feel confident in. And at the same time, I think the build-out of the franchisee, which is a real opportunity for us and goes back to your question on company-owned stores as well, is that it's not something that we have focused on a lot historically, but I think some of these underserved geographies and territories, where we have a real advantage, because about 30% of our territories are not yet penetrated. But sometimes you have to jump start that a bit with a company-owned store, you might get that route started. And then it's easier to hire somebody into that area that would be able to take that on. So it's kind of a transition plan for us. Not necessarily a permanent plan. But we think that we've got to be creative to -- particularly in these rather underserved geographies with how to build that out, particularly with the labor constraints. It's harder to attract maybe labor in some of these opportunities. So I think we've got an excellent value proposition, and it's just our effort here to be more creative.

I see. And Dave, could you just give a little bit of color on how you see growth in the second half -- core growth in the second half of the year between the two platforms?

Yes. So we -- I think we continue to track after a reasonably slower start in the DT side of the business. we'll continue to track in the second to get to more of a low -- kind of a low single-digit core growth for the full year. And then I would say, overall, in the empty side of the house, we're still tracking to that mid-single digit to get to the full year guide that we articulated.

[Operator Instructions] Our next question will come from Ty Hardwick with Credit Suisse.

I want to ask a question about Invenco. Is it correct -- understanding it correctly that it takes GVR a little bit beyond the gasoline forecourt and into the broader convenience store market? And also if you give the background as to what the contingent consideration is based on?

Yes. So if I understood your question, you're trying to understand how that's positioned. And I think it's a great question, because the key thing here is it is -- it does take us beyond the traditional C-store with our retail solutions platform. So if you think about what's happening here, this is a micro services software offering that offers a lot of modularity and customer choice, and you're seeing this in other type of retailing venues that have not shown up into the verticals around the retailing spaces that we serve. And so not only is this great for the convenience store, there's other things part of the mobility infrastructure that we're very interested in, namely car washes as another thing, the repair solution side. So it's a very contemporary modular technology that customers are very interested in, because it drops out cost as well as lead time with offering solutions that they can pick and choose from. So it's a really big step up. If we were to do this development ourselves, it would take us a couple of years, and there's nothing available in the space that you can actually go out and develop. So it's a great position for us to pick up.

But to just build on that a little bit. Making sure -- I'm not sure I got your words right, but you talked about moving from the forecourt into the C-store. And I would just point out, we're already well into the C-Store with our existing retail solutions. And as Mark pointed out, this really fits in the globe with that and could take us into other verticals as well. And the contingent consideration is based around revenue performance in the first kind of year, 1.5 years.

And just as a follow-up, can you tell us what pricing was in Q2? And how you expect price cost to progress through the rest of the year?

Yes. So look, we again had pretty strong price. We were price cost positive, and we offset the margin impact from costs as well. So in other words, it was margin neutral. So we did more than offset it just on a dollar basis. We've been running really well on a year-to-date basis, got off to an early start last year, as most people know. But -- the -- for the year, we still anticipate in the second half being price cost positive as well and also offsetting the margin impact. And so for the full year, we would anticipate being margin-neutral as well.

And we did come in almost six points of price in the quarter and still on track for kind of that mid-single-digit range for the year.

It appears we have no further questions at this time. I would now like to turn the program back over to Mark Morelli for any additional or closing remarks.

Yes. Thank you, Katie. Look, I couldn't be more encouraged in the track record that we're establishing and the runway of opportunities in front of us at Vontier. I'm particularly thankful of the team for continuing to step up and work through challenges in this dynamic market environment. And I think our work is resulting in a stronger, more growth-oriented portfolio. I couldn't be more encouraged by all this. So thanks for joining us on today's call, and have a nice day.

Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect.