Good morning, ladies and gentlemen and welcome to the Vontier Third Quarter 2023 Earnings Call. [Operator Instructions] This call is being recorded on Thursday, November 2, 2023. And a replay will be made available shortly after. I would now like to turn the conference over to Ryan Edelman, Vontier’s Vice President of Investor Relations. Please go ahead.

Great. Thank you, operator. Good morning, 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 Anshooman Aga, our Senior Vice President and Chief Financial Officer. You can find both our press release as well as our slide presentation that we will 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 5. 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. I want 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 Vontier 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 EMV comparison. The fourth quarter marks the end and also the peak of the EMV headwind and we look forward to finally removing this comparison from our Lexicon beginning next year. Both Mobility Technologies and Environmental & Fueling reported low double-digit baseline growth in the quarter. Within Mobility Tech, sales in our alternative energy solutions business grew over 20%, with DRB up low double digits and Invenco by GVR also up low double-digit baseline. Environmental & 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 footprint. Our customers are enjoying strong fuel margins, in-store sales growth and healthy balance sheets. Year-to-date, retail fueling site refresh and rebuild activity has exceeded our expectations coupled with continued strength in new build activity driving higher equipment demand. The benefits of this broader reinvestment trend cut across many parts of our…

Thanks Mark and good morning everyone. I’ll start with a summary of our third quarter performance. Please turn to Slide 7. 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 EMV, baseline core growth was approximately 10%. Total adjusted operating profit was $169 million, down versus the prior year due to the expected headwind from the EMV sunset. Adjusted operating profit margin was 22.1% ahead of our Q3 guidance range. 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 $0.73 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% supported by continued improvements in working capital, including a $30 million reduction in inventory year-to-date. Given the strong ramp 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 rebalance the second half financial profile and derisk the fourth quarter. Our results in Q3 and updated outlook for Q4 and are a reflection of this 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 costs. This was further supported by the continuation of normalizing supply chain conditions. Turning to our segment performance, starting on Slide 8. Mobility Technologies top line increased over 8% with solid performance across the board. Core growth of the segment was 4% and baseline core growth was 12%. DRB, our carwash solutions business…

Thanks, Anshooman. Vontier is transforming and aligning our portfolio to deliver sustainable top line growth, industry-leading profitability double-digit earnings growth and significant free cash flow. Our connected mobility strategy and differentiated technologies continue to deliver wins propelled by leading market positions in productivity and automation, and with robust secular tailwinds sweeping the mobility ecosystem. We’re ideally positioned with our broad multi-energy portfolio to address the energy trilemma facing the world. The need for a 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 interoperability 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.

[Operator Instructions] Your first question comes from Julian Mitchell from Barclays. Please go ahead.

Hi, good morning. This is Matthew Pan on for Julie Mitchell. Just one question. You mentioned that you’re tracking above the $45 million of savings target. Is there any spillover of incremental savings you could size for 2024?

Yes. So we’re tracking slightly above the $45 million, closer to $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. The mobility 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 Vontier?

Yes. So Q3 was a strong quarter for Mobility Technologies. They were helped a little bit by mix, but also the Invenco profitability had been ramping up sequentially. If you remember, when we acquired Invenco, they were breakeven and their profitability increased to low single digits then high single digits in this quarter. They were in the mid-teens on a stand-alone basis and including all-in synergies they were 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 expect 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 Obin from Bank of America. Please go ahead.

Hi, this is David Ridley-Lane on for Andrew Obin. 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 rates and trying to have 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 benefit from fuel margins as well as in-sourced sales within convenience stores. We also see continued good ROIs on car wash, 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. One of the other areas that’s been pretty interesting is our environmental business, as you may have recognized saw high single-digit growth in the quarter. There is 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 also our distribution strength. So I think the fact that we’ve got really outstanding returns for folks that have money to spend. It is pretty outstanding. And we’ve – we also have a great lineup of products. If 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 new product introductions. And I think we’ve got a really great lineup going into 2024.

And then as kind of a quick follow-up. I mean how much of the growth in DRB are you getting from the natural upgrade cycle to Patheon 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 that you’re getting in DRB are?

So we’ve recognized some line in the industry. As you know, we grew more than 30%. It’s now in double digits. We see that coming down a bit as well. What’s essentially happened in the industry is that there is been a tremendous build-out. We had a recent conversation with a customer that had more than 100 car washes. And they are – the interesting thing about that dialogue is that they spend through 2022 really building out their infrastructure, building out the car washes. And 2023 has been a year where they have really been focused on building up, meaning making more operational efficiencies, sweating their assets more and answer really specifically about it. Patheon is a new offering to the market. It really is targeted and enabling carwash operators to be more effective with operational excellence, getting more throughput through which drops through to the bottom line, which is a good return on investment for them. And so I think that, 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 kind of question. In the repair solutions when do you lap the year-over-year reserve related adjustments and 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 Matco’s margins are going to be up materially in the fourth quarter or actually closer to 400 basis points up year-on-year for Q4. The whole decline in Q3 year-on-year was really between the reserve adjustments and about a $2.5 million tariff settlement. 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.

Thank you. [Operator Instructions] Your next question comes from Rob Mason from Baird. Please go ahead.

Hi, 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 or actually the fourth quarter a little bit. I inferred that some of the third quarter upside that we saw was related to that. Any particular areas that you would call out saw added strength due to that in the third quarter?

So let me start this off and I’ll let Anshooman 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 able to do with some of our supply chain and customers that freed up some labor, product availability both for convenience store build out from not only the build-out of the convenience store and dispensers, but also a bit on the car wash side, too. So that gave us an ability to pull, if you will, Q3 – the Q4 demand into Q3, which we’re still raising full year, but it really enabled us to de-risk Q4.

We saw that both in fueling and Mobility Technologies as our customer supply chains have eased with their project construction schedules, we were able to pull in some demand both on the fueling side above and below ground and then on the Mobilities Technology side. Also on the car wash side, as projects have continued to move, there is 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 and with the strong results for the quarter.

I might add, it gives us a really good setup for 2024. I think we feel like there is some healthy demand here. We’ve got a great product lineup. I think our price cost is not too out of balance here. So I think we 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, the commentary kind of referenced previously just around how you’re monitoring the impact of higher rates and thinking about the dispenser business, in particular, just given all the refreshes, the rebrands and new site builds, etcetera. I would think all the permitting involved, there is probably good lead time on that as well. How far out I guess, how much visibility forward visibility do you have into some of that activity? And yes, that’s the question.

Yes. Well, first of all, this is where we’re positioned really strong. We’re – 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 sheet. They have been making outstanding margins 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 footprints. And so the visibility is well into next year, as you can imagine, you don’t do a site approval, you don’t arrange these things they look out. In many cases, even more than a year they are working on building out and buying. The location is very important to them, too, and making sure they are 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 position and our setup. Now it’s hard to say what’s going to happen in the macroeconomic environment. But also this – the footprint that we have has been pretty resilient in prior downturns.

Just last question around the alternative fueling area, CNG was noted as a strength perhaps this quarter, but just how should we think about the timing and the influence of the hydrogen aspect of that business in terms of a ramp? And I’m curious as well how you think that mix would look over time from just the dispenser side versus maybe more of a 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 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 this. They have been asking us for this solution for a while, pull this into this space based on our high reliability and based on our ability to provide products 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. It’s 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, 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 more than 20% growth in the quarter, and it’s been doing pretty outstanding over the last year as well.

Okay, good. Thank you.

Thank you. Mr. Edelman, there are no further questions at this time. You may proceed.

Well, thanks, everybody, for joining us on today’s call. I’m super excited that we’re having ongoing operational execution and performance. And I’m 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.