Good morning, ladies and gentlemen, and welcome to the Vontier Fourth Quarter 2023 Earnings Call. [Operator Instructions] This call is being recorded on Thursday, February 15, 2024, and the 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.

Thank you. Good morning, everyone, and thank you for joining us on the call this morning to discuss our fourth 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 at investors.vontier.com. 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 fourth quarter results. I'll start with some of the highlights of the quarter, beginning on Slide 5. Our teams delivered a solid finish to a year marked by strong operational execution and significant progress on our strategic initiatives and portfolio transformation. Overall, Q4 played out largely as we anticipated. We delivered baseline core sales growth of 5% toward the higher end of our guidance range and strong performance on top of the 10% growth in the prior year. We saw continued momentum across the portfolio, including strength within our alternative energy, DRB, Matco, U.S. dispenser and fueling aftermarket businesses. End market demand remains constructive, supported by continued investment in the mobility ecosystem, especially for solutions that deliver enhanced productivity and automation and multi-energy solutions that enable decarbonization. We continue to see evidence of these demand trends in our order funnel and in direct conversations with our customers, distributors and channel partners. Encouraging signs as we now move past the EMV comparison issues and channel inventories continue to normalize, our book-to-bill will inflect above one. We delivered another quarter of strong underlying margin performance, reflecting the power of VBS and our culture of continuous improvement to drive increased productivity savings and execute on our restructuring initiatives as well as favorable price cost. As Anshooman will share with you in a few minutes, we are initiating our 2024 guidance, which is the first time post spin, we will be free from any EMV-related adjustments. After three full years of headwinds, we are thrilled to have this comparison issue behind us and eager to demonstrate the strength of the Vontier portfolio and tangible shareholder value creation potential. We are confident in our outlook not only for 2024, but also…

Thanks, Mark, and hello, everyone. Let's start off with a summary of the fourth quarter results on Slide 9. Sales of $789 million in the quarter declined 7% on a core basis against the peak headwind related to the year-over-year EMV compare. On a baseline core basis, excluding the EMV compare, sales increased approximately 5% for the quarter towards the higher end of our guidance range, led by low double-digit baseline growth at Mobility Technologies. For full year 2023, total company baseline core sales grew approximately 9% and as our teams capitalized on solid end market demand, leveraging our leadership positions and robust new product pipeline to deliver value for our customers. Price contributed a little above three points of that growth, demonstrating solid underlying volume performance as well. Adjusted operating profit for the fourth quarter was $174 million, down versus the prior year as anticipated given the EMV-related headwinds. Adjusted operating profit margin in the quarter was 22%, up about 20 basis points as a result of our ongoing restructuring and productivity savings as well as positive price costs, offset in part by EMV headwinds. Additionally, Q4 was negatively impacted by iNFX transaction impact related mainly to hyperinflationary economies, which equated to a headwind of about $6 million or about 80 basis points of margin for Vontier in total. On a year-over-year basis, iNFX transaction impact was about a $5 million or a 60 basis point headwind. Baseline core margins expanded 380 basis points during the quarter and for the full year 2023 improved over 180 basis points. Adjusted EPS at $0.80 was slightly above the high end of our guidance range. Operationally, results were in line. The approximate $0.03 FX impact, I mentioned, was more than offset by a pickup below the line from lower tax expense. The…

Thanks, Anshooman. I'll wrap up with a few quick comments on Slide 15. We made significant progress on our strategic initiatives in 2023, and I couldn't be more proud of what our teams have been able to accomplish. We delivered on our financial commitments, exceeding many of the original guidance targets provided in February of last year, drove incremental operational and commercial success through VBS, remained disciplined on capital allocation and continued to transform our portfolio. We enter 2024 in a position of strength and with significant momentum given the progress we made last year. Our markets are constructive, underpinned by strong secular drivers, and we're advantaged by our leading share positions with the largest players in the mobility ecosystem. The investments being deployed across our end markets are verification of the value being placed on improving productivity enabled by our integrated solutions. This is a unique advantage for Vontier as the build-out and consolidation of end markets continues. This puts us in a solid position for sustainable above-market growth and top quartile free cash flow as a percentage of sales. Our guidance for 2024 puts us squarely on the path to achieving our long-term targets. I'm confident we have the right strategy in place to deliver differentiated solutions for our customers and unlock value for our shareholders. With that, operator, we're ready to open the line for questions.

Thank you, sir. [Operator Instructions] Our first question comes from the line of Andrew Kaplowitz from Citi Group. Please go ahead.

Good morning, everyone. Mark, you mentioned your book-to-bill could inflect above 1x and that your sales funnel is improving, but maybe you could talk a little bit more about that. Are you already seeing that order inflection as you go through Q1? Where do you expect the biggest inflection in order growth in the portfolio? What's baked into your 4% to 6% core revenue growth guidance for the year?

Yes. So first of all, we've been pretty encouraged that our book-to-bill has hung in there through 2023. It's just been hovering just below one fairly steadily. And that's been encouraging because we've obviously had the face reducing lead times, some minor destocking issues. But -- so that -- I think the demand has been there. I think as we work through those further headwinds into 2024, I think the secular drivers are still at work. I think we've got a lot of momentum coming out of the year. I think it's pretty hard to exactly call when the book-to-bill will inflect above one. But we're seeing sort of the legs of the work that we've been doing with the backdrop of these secular drivers and these integrated solutions that we're having in the marketplace, we're getting good traction with our customers based on serving the market and the secular drivers and some of the larger players in the industry that are consolidating. So all these are really good signs. Our channel checks are going well, where we're looking at the build out and the demand of the infrastructure, it certainly seems to be there. Keep in mind, most of our customers are also not necessarily dependent on the interest rate environment. They've got really strong balance sheet, really flush with cash, and these folks are continue to build out, and they're looking a little bit further down the road with that infrastructure build-out and the decisions they're making to do that. And these are the folks that we have leading share with. So we feel pretty encouraged on what we see into 2024, of course, a lot of 2024 in front of us. So it's hard to tell everything that will happen. But for what we see right now, I think it's pretty encouraging.

That's helpful, Mark. And then I just want to focus on Environmental & Fueling Solutions for a second. I think you said baseline core growth was fine better than you thought. But could you give us a little more color regarding the trade-off between sort of the destocking in environmental in North America versus the international strength? I assume you expect continued muted overall core growth for that segment through the first half of the year and then it gets better in the second half. Is that the way to think about it?

Yes. So first of all, '23 was a really strong year for that platform. I think it really shows that the secular drivers are at work and I think the product launches we've done there have served us well through '23. As we get into the 2024 cycle, we did indicate there was a small portion of our business exposed to destock about 15% of revenue. And we're working through that pretty well. I mean the aftermarket parts was one area that we saw destocking last year. And we think we're through that, we saw Q4 with double-digit growth in aftermarket parts, which is a great -- been a great business for us. I think it's benefiting the fact that we gained share during the EMV cycle. We have a great installed base, and we've really focused on that as one of our profitable growth initiatives. And so through the destocking there, I think it bodes well for 2024. And then on the underground side, which also experienced some destocking there, we're mostly through that. I think we performed well in the quarter. International markets were really strong on environmental offset, some of the destocking, some of the weakness in North America. So overall, a really good performance on environmental. But more to your question, as we get into 2024, most of that destocking is through some still pockets of it on the West Coast, and we should be through that in the first half. So kind of getting to your point here, we see a good backdrop. Anshooman, do you want to add anything there?

Yes. Just from a seasonality perspective for Environmental & Fueling, Q1 should be a good growth quarter for them. They should be growing mid-single digits for the quarter. So I think the business is performing well and a lot of the innovation on the environmental side is supporting our business also.

Our next question comes from the line of David Ridley-Lane from Bank of America. Please go ahead.

Good morning. You have a competitor in Matco that had year-over-year declines in sales this quarter and they called out particularly the higher priced items. Look, your results very steady growth. So what do you see kind of in the market? Any difference between your sell-in to the franchisees versus the sell-through? Obviously, you're expecting continued growth in 2024. What are you seeing that kind of gives you that confidence?

Yes. So I'm going to make some comments, also turn it over to Anshooman. So first of all, to specifically answer your question, the market backdrop is pretty strong for the auto technician today. I don't think it's any secret that employment is at an all-time high, and the wage rates are also at an all-time high. I think the thing that might weigh on the service technician is just sort of the backdrop with overall raising prices as a consumer. And certainly, if they're buying other things that they're paying more for it, certainly with higher interest rates as well. And so that could certainly impact some of the buying behavior. So we've been very carefully looking at that and watching that. And I think the thing that has boded well for our growth is that we just kind of a really strong product lineup. One of the areas we differentiate ourselves on is that vitality, bringing new products to market. I think we just had an excellent lineup this year. We've launched a new diagnostics platform that's selling well. Our power tool line up has been doing outstanding through 2023. And then our toolbox factory has been on the mend, so we are actually seeing movement of higher-priced items in this market environment, which I think has been encouraging to us. It's hard to say exactly what 2024 will bring in this regard. So we're watching it carefully. But at the same time, we've been pretty darn encouraged with the results that we've been getting in the marketplace. Anshooman, you want to add anything there.

Yes, I'll just add to your question about sell-through. So when you look at the fourth quarter, we were up about 5%. But when you look at the completed business of our franchisees, really the sell-through on a year-on-year basis, the average weekly completed business was up about 6%. So good sell-through, so it's not an inventory issue that's building up. So overall, a solid quarter, as Mark talked about, good product vitality that helped drive it with a healthy technician, but we continue to monitor the space.

And just a quick follow-up. I know that divestitures are going to throw off incremental margin calculations. But can you sort of bridge in from kind of 2023, how much restructuring cost savings are in that bridge versus kind of the core organic profit growth?

There's about $8 million of restructuring benefit in 2024, which is a carryforward from 2023. Yes, the portfolio shift does help roughly 50 basis points. But if you look at our drop-through on the ex divestiture part of the business on the growth, we're doing about a 30% drop-through despite some higher R&D expenses as we continue to build out our leading position in Invenco and carwash business and Evolve.

[Operator Instructions] We have our next question coming from the line of Julian Mitchell from Barclays. Please go ahead.

Hi, good morning. Maybe just wanted to try and understand sort of higher thinking about organic sales growth for the year and margin expansion across the three segments. -- which ones do you think kind of lead growth or have the lowest margin expansion? Any sort of color around that, please?

Julian. So I'll start with that. So when you think of the three segments, let's start off with Mobility Technologies. Mobility Technologies, we should have mid-single-digit to high single-digit growth in that segment. Operating margins will be flat to slightly up despite the higher R&D, this business has good drop-through and as it expands and grows that really helps us. The Repair segment, that should be a low single-digit to mid-single-digit growth. The operating profit margin is roughly in line with the previous year. And then our Environmental & Fueling business should grow about mid-single digits with higher margins and some margin expansion out there.

That's very helpful. And then just my second question would be around thoughts on capital deployment. How much leverage do you think or how much firepower do you have available for the year ahead? What's the appeal of sort of M&A versus buybacks at you current price. And I think you have about $100 million or so of debt reduction dialed in for that interest guide. Is that the sort of maximum debt reduction? Or could there be more?

Yes. Maybe I'll start off, and then Mark will also chime in. So the debt reduction will probably be limited to the $100 million. As of now, we have a maturity of a term loan with $100 million left on it. So we'll pay that off. From a leverage perspective, we said we'd have a leverage ratio of 2.5x to 3x at 2.8x. We're squarely in that. So just maintaining our leverage in that range and then from a firepower perspective, obviously, we are a good cash flow generator and 90% to 100% free cash flow generation. We also did have the Hennessy sales proceeds, which came in, in January, little over $70 million. From a capital allocation perspective, we will be very disciplined as we have demonstrated in the past. We are very returns-driven. And we have -- and we are patient, so just expect returns-driven focused capital allocation from us. Mark, do you want to add something?

Yes. I'll just reiterate that, Julian, that we feel that we've really demonstrated a very disciplined approach on the capital allocation. And it's something I think we think about a lot. We spend a lot of time thinking through the different avenues for this, and we're extremely disciplined, very patient, with how we figure these things out. So we don't feel in a rush to do M&A if that's maybe where people might think. But we will have M&A part of the equation and bolt-ons when the right hurdle rates are met and the right strategy kind of plays out for us. So very strategy led on that. And then I think more of what we've done in the prior year. I think, has worked really well. So we continue to spend time on this, and I think you're just going to see a very disciplined approach.

Our next question comes from the line of Rob Jamieson from UBS. Please go ahead.

Good morning, congrats on the results this morning. I just want to focus a little bit on [indiscernible] Invenco. It sounds like the iNFX deployments for Shell are progressing. I wonder if you could just talk about the pilot programs that you mentioned. How does this play out from a timing perspective? Are these with like larger chains that are testing a few sites? And then how long does this pilot program last before it might convert into a win?

So thank you for that question. We've been super excited about the progress we've been making with iNFX platform. And Shell is going really well. We've deployed pretty significant amount, almost maybe 25% of that very large order. If you may remember, we accepted orders from Shell and Chevron that represents about 15% of the USC store installed base. So some really big orders there. And so the fact that we're progressing through them really nicely in the rollout, I think bodes well. I think there is other large names that are out there that are piloting it. They're taking a very close interest in some of the productivity gains they get from this platform, which is really one of the central issues that they are facing is how do they manage that infrastructure in a more productive way. And this platform really fits exactly into that need. So a lot of attention on it, and I think we'll keep you posted and we've done press releases in the past, and we keep you posted as we continue to get wins. Our pipeline is no question growing for this offering. And keep in mind that that's just for the payment aspect, we also have, think of iNFX more as a site management platform. And so we have a lot more buildout around the iNFX platform on site management related productivity and automation, which is an outstanding theme with some great secular drivers behind that for the mobility ecosystem. So we're excited about it, and there will be more to come.

That's great. Thank you for the color there. And then solid free cash flow generation in the quarter and conversion. Can you just talk about some of the opportunities in 2024 and how you might drive higher conversion?

Yes. I think 90% to 100% free cash flow conversion is the hallmark of our business. So we'll continue to drive that we have strong working capital management initiatives in place, which span all aspects of our balance sheet. We continue to look at inventory, how we can optimize inventory while meeting customer demand and lead times down. Obviously, we're very focused around collections and payables also. And there's a lot of talk around some of the R&D from a tax perspective, whether the Senate passes that, that's definitely some potential upside if that happens about $20 million upside from that if that happens.

That's great. And sorry, can I sneak one more in on Matco. Just on product vitality, I mean I know that's something that you called out besides, can you just talk a little bit about that process? Like are you kind of reaching out proactively to mechanics and trying to figure out what attributes they're willing to pay for when you're developing these products. But just curious kind of how you approach that? Thank you.

Yes. It's a long-standing part of our business model in Matco, where we're pretty nimble with our supply chain and through our suppliers. So we heavily engage our supply chain with the team that focuses on the market and on the high-value problems that service technicians are facing. One of the biggest issue for a service technician is how do they how can they be more productive in the shop? How can they make sure they're not running into problems. They have the right tools and capabilities. And if they can do things that drop their time and have higher efficiency, in the shop, then that's a major boom for them, and they're certainly willing to pay for that and they don't ever want to approach a situation where they might buy -- bog down the shop or bog down their productivity. As you know, if you've ever had your car repaired recently, you know it's just difficult, just the overall labor challenges and the complexity of repair is going up with new monitor vehicles, including electric vehicles, things are more complex. And so that is a great backdrop for our business model, which really focuses on this productivity aspect within the shop. And I think what you're seeing is our product lineup this year has been just great. I think we've identified the right issues that can help the service technician and they're certainly willing to spend in that environment.

There are no further questions at this time. I'd now like to turn the call back over to Mr. Morelli for final closing comments.

Yes. Thanks for joining us today. I'm really excited about our operational performance for '23. Our outlook for 2024 also is reflective of the significant progress of our portfolio transformation and the momentum that we have. I can tell you, I'm not more thrilled to have the EMV cycle behind us and look forward to a clean core growth in 2024. I'm incredibly proud of our team, and I look forward to further executing on our Connected Mobility strategy. So, we look forward to seeing folks on the road in the coming weeks. Have a great day.

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating in and ask that you please disconnect your lines. Have a lovely day.