© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
About to begin. [Operator Instructions] My name is Britney and I will be your conference facilitator this morning. At this time I would like to welcome everyone to the Vontier Corporation's Fourth Quarter 2021 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 call over to Ms. Lisa Curran, Vice President of Investor Relations. Ms. Curran, you may begin your conference.
Thank you, Britney. Good morning, everyone. And thank you for joining us on the call. With me today are Mark Morelli, our President and Chief Executive Officer, and David Naemura, our Senior Vice President and Chief Financial Officer. 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 financial. Please note that unless otherwise noted, the presented financial measures reflect year-over-year increases or decreases relative to the supplemental normalized financial data also posted on the website under the heading Financials. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. All references to period-to-period increases or decreases in financial metrics are year-over-year. During the call, we will make forward-looking statements within the meeting 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 annual report on Form 10-K. These forward-looking statements speak only as of the date that 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, and good morning, everyone. The fourth quarter closed out a defining year for Vontier. Our team delivered another strong quarter ahead of earnings expectation. Continued focus and execution positions us well for long-term success. Before moving into the details of the quarter, I'd like to review the important progress we're making to drive portfolio diversification and unleashed earnings growth potential. I'm pleased to report that we've met or exceeded plan in 2021 expectations in all areas. The team delivered a strong finish to the year in the face of an exceptionally challenging environment and an EMV top-line headwind of roughly $100 million. Full year 2021 adjusted earnings per share of $2.88 grew 17% driven by 6% sales growth, which includes 7.4% core revenue growth and 160 basis points of adjusted core operating margin expansion. Excluding the EMV headwind, core growth for the full year was approximately 15%, a testament to the team's unyielding execution. In addition to delivering double-digit earnings and topline growth, we delivered adjusted free cash flow conversion of 96% for the year, or 102% when excluding the extra tax payment related to the spin. Our cash performance is one of the financial hallmarks of our portfolio and merits recognition for its mid-teens free cash flow margin. Rigorous application, and continuous improvement of the Vontier Business System is advancing our profitable growth initiatives and enhancing our competitive advantages. We improved our return on R&D investment more than doubling the gross margin contribution from new products. We gained share in core markets, drove continued Matco franchisee growth, and improved profitability by over 200 basis points at both Teletrac Navman and Hennessy. We successfully accelerated our portfolio diversification strategy and deployed $965 million with the successful acquisition of DRB. DRB's excellent performance will be highlighted later. We also established a $500 million retail solutions portfolio, which is accretive to our enterprise gross margin and software-enabled profile. As highlighted in the November [Indiscernible], this portfolio [Indiscernible] long runway of attractive adjacencies for future M&A piling secular growth drivers. Adding to our key achievements this year, our ESG program continues to progress rapidly, thanks to our recent commitments and accomplishments. In December, we commitment to reduce absolute scope one and scope two greenhouse gas emissions by 45% by 2030 from a 2020 base year. And a net zero goal by 2015 in support of the Paris Climate Agreement. We held our first energy Kaizen at Veeder-Root in Altoona, Pennsylvania, harnessing VBS to reduce emissions, drive cost savings, and develop and engage our employees. On the employee safety front, we held our first ever Vontier Safety Week and published our goals to achieve OSHA top core [Indiscernible] results in all of our businesses. We're also active throughout our communities. In addition to donations through the Vontier Foundation, the Vontier Scholarship Program awarded 10 new scholarships and six scholarship renewals in 2021 to the children of hardworking employees. Vontier also recently received a number of inclusion and diversity accolades. These include achieving a perfect score on the Human Rights Campaign Corporate Equality index, and earning our status as a 2022 military friendly employer. Our ESG efforts are critical to our corporate strategy and to the vitality of our organization and I could not be prouder of our progress here. Now I would like to spend a couple of moments highlighting last week's energy transition investment announcement. We're committed to tackling de - carbonization in transformative ways with our commitment to invest more than $500 million over the next five-years. Vontier is at the forefront of solving next-gen mobility and transportation challenges and this investment advances our industry-leading efforts to address the glow -- bolt -- low carbon energy transition. Part of this strategic pledge is the acquisition of Driivz, a leading provider of EV charging and energy management software. The acquisition accelerates our portfolio diversification and eMobility strategies. It also positions us well to capitalize on global EV charging long-term secular growth drivers. Driivz provides us with market-leading technologies within the highest growth, most profitable network management software market segment. While the transaction will be initially dilutive, we believe it provides a prudent opportunity to participate in an early-stage growth technology company. Business models in this sector are still developing and continue to evolve with significant capital, yet to be invested across the volume chain. To that end, given our focus on the software segment, we chose not to exercise our option to buy Tridium, but we remain supportive and expect them to realize their value proposition of which we're beneficiaries. Given our 16% ownership position, this provides upside value to our stock and the potential to add further dry powder for capital deployment. These important outcomes demonstrate that we are realizing our vision of Vontier as an industrial technology company focused on smart sustainable solutions, and that we remain committed to building a better, stronger, more focused growth portfolio. The bottom tier value creation flywheel is taking effect and we are well-positioned to continue to post strong results in 2022 and beyond. With that said, we are initiating our full year 2022 adjusted diluted net EPS guidance range of $3.05 to $3.15, which includes our core revenue growth expectation of low to mid-single-digits, adjusted core operating margin expansion of 30 to 60 basis points, and free cash flow conversion of approximately 100%. Also included in our full year outlook is the accretive impact from the acquisition of DRB, which will contribute high-teen cents to EPS. Furthermore, driven by DRB's technology leadership and new side activity, we believe DRB will contribute more than 300 basis points to the top line or high single-digit total growth at the enterprise level. Our core growth outlook includes a more favorable view of the 2022 EMV headwind of $25 million to $50 million. Subsequently, we believe that 2023 will be the EMV sunset trough with a year-over-year headwind of $300 million to $350 million. We are confident in our ability to more than offset these headwinds and expect earnings and cash flow growth through this period. Lastly, as part of our continued focus on creating shareholder value, we expect that we will be in a position to opportunistically purchase our stock early this year under our previously announced share repurchase program. We are also initiating our first quarter adjusted diluted net EPS guidance of $0.64 to $0.67. In spite of the challenging comparison that resulted in a 14.3% core growth in the year-ago period, we expect first-quarter 2022, total growth of mid-single-digits or a flat to low single-digit decline on a core basis, and flat adjusted core operating margin. Our first quarter outlook reflects continued supply chain impacts to backlog and sales conversion, but we are encouraged that the supply demand imbalance improves in the second half of the year. With that, I'll turn it over to Dave to provide for the fourth-quarter results and financial detail. Dave.
Thanks, Mark. Adjusted net earnings for the fourth quarter were $141 million, a decrease of 4% from $147 million in the prior-year period. This translated to adjusted net earnings per share of $0.83. The decrease in earnings was driven by lower sales conversion as a result of the ongoing supply chain constraints and component shortages. Our strong price actions and better-than-expected bottom-line results from our acquisition of DRB partially offset the EMV and ongoing inflation headwinds during the quarter. Reported growth declined 3% and core revenue declined approximately 8% in the fourth quarter due to the expected decline of EMV, as well as the tough comparison to the strong recovery that we experienced in Q4 of 2020 which included not only a high point in quarterly shipments of EMV, but also benefited from the Mexico regulatory driver and overall high single-digit growth in our non-EMV revenues. On an [Indiscernible] basis, reported revenue grew high single-digits, and core revenue was about flat despite the otherwise difficult comparison. Adjusted operating profit for the fourth-quarter was $194 million, a decrease of 3% compared to the prior year period, primarily driven by the lower revenue volumes, which was partially [Indiscernible] that by a 140 basis points of adjusted gross margin expansion, largely resulting from the accretive addition of DRB. Adjusted core operating margin for the quarter decreased 70 basis points reflecting the impact of the core revenue decline. Adjusted operating margin was in line with the prior year at 24.6%. We continued to effectively offset the impact of raw material inflation with price actions, which was about net margin in the quarter. We did see some margin headwind per mix due to the size of the EMV decline and this was offset by the positive impact of DRB on our operating margin. In the fourth quarter, we generated adjusted free cash flow of a $148 million, a conversion of 105%, reflecting a slight decrease in working capital during the quarter. Working capital dollars at the end of Q4 were 6.1% of the last 12 months sales, an increase from 5.6% low point in Q1, but still very low historically. Our full year adjusted free cash flow conversion was 96%, which included the additional tax payment in Q2. Shifting to liquidity, we ended the quarter with a cash balance of $573 million, and had no borrowings under our $750 million credit facility. Our net leverage stands at 2.8 times adjusted EBITDA at the end of 2021. As Mark noted, we anticipate the deployment of some capital towards share repurchase as market conditions warrant and we will continue to assess this opportunity. Looking at the performance of our two platforms, eMobility Technology's core revenue declined 11%, which reflects a low double-digit decline in core revenue at TBR. Growth in environmental and services was more than offset by the decline in EMV, as well as lower sales conversion in both developed and high-growth markets given the impact from supply chain constraints and COVID. After including the revenue contribution from DRB, the mobility technologies, total revenue declined 4.5 [Indiscernible] Q5 was our first full quarter -- Q4 was our first full quarter with DRB in the portfolio. And we could not be more happy with the momentum and performance they have exhibited. DRB delivered high teens sales growth, primarily driven by double digit growth in point-of-sale control systems. Core revenue growth in our Diagnostics and Repair Technologies platform was 2% driven by low single-digit growth at Matco, reflecting the continued strong demand environment against the recovery compare from the prior year partially offset by a supply and labor-constrained environment across the platform. Diagnostics and repair bookings grew at a mid-single-digit rate, demonstrating the continued demand backdrop and also the challenges of sales conversion. Matco demonstrated a strong year of net new franchisee additions which will be additive to the expected solid growth from same-store sales in 2022. Looking at total company sales regionally, the EMV and other compared dynamics read through quite clearly. Developed markets core revenue declined mid-single-digits as a result of the EMV impact in North America. In our high-growth markets, we declined about 20% compared to the mid-teen’s growth in the prior-year Q4, reflecting not only the challenging comparison, but also supply chain and COVID impacts sales conversion. High-growth markets will of course, remain lumpy, but we remain confident in areas such as India, Middle East, and Africa, and Latin America as long-term opportunities for outsized growth given future regulatory drivers, investment in fueling infrastructure and our physical presence in these strategically important markets. We remain committed to our profit improvement actions that will better position the company in 2022 and beyond. During the fourth quarter, we recognized restructuring charges of approximately 4 million, slightly lower than we previously planned as the timing of certain actions have now shifted into 2022. We now anticipate we will recognize 2022 charges of about $15 million, which is a continuation of post-spin actions to drive simplification globally and to align resources with our highest priority future growth opportunities. We continue to expect we will achieve our original savings objectives for 2022 from 2021 [Indiscernible]. Turning to the outlook assumptions for the full year 2022, we expect core revenue growth of low to mid-single-digits, which includes an expected EMV headwind, $25 million to $50 million. Our price actions have largely been priced into our backlog and so we expect to be price-cost positive in 2022. Our core operating margin expansion target is 30 to 60 basis points, reflecting continued execution on our profitable growth initiatives and cost management, partially offset by persistent inflationary pressures, supply chain and logistics constraints, [Indiscernible]. That said, we are establishing our full year outlook for adjusted earnings per share at a range of $3.05 to $3.15, reflecting continued momentum and execution in our core business as well as an expected high teen cents contribution from the full year impact of the DRB acquisition, partially offset by some dilution from drives in the high single-digit cents per share range. We anticipate our full year effective tax rate to be around 23% as we capture the benefits from our ongoing tax planning initiatives. We enjoy a CAPEX light business model with capital expenditures in 2021 of $48 million or about 1.6% of sales, and we expect CAPEX of about 1.5% of sales in 2022. As for free cash flow conversion after seen working capital increase. In the second and third quarters of 2021, working capital decreased to very low levels again in the fourth quarter. While we anticipate some normalization of working capital levels in 2022, we expect free cash flow conversion for the full year of 2022 to be approximately 100%. Moving on to the first quarter of 2022, we expect core revenue will be a decline of low single-digits to flat, as mid-single-digits core growth in our non-EMV businesses only partially offset to the ongoing sales conversion headwinds and reflects the difficult Mexico compare and the continued tough comp on EMV, which was strong in '21 ahead of the adoption deadline, adjusted core operating margin is expected to be flat, reflecting our continued execution and supply constrained environment. As Mark stated, this translates into a [Indiscernible] per share of 64 to $0.67 in the quarter. With that, I'll turn it back to Mark.
Thanks, Dave. To wrap up. As I said a year ago at this time, 2021 would be an important springboard to a multiyear transformation with a long runway of opportunities. I'm incredibly proud of our team's execution this past year and the progress made towards our strategic and financial priorities. But there still remains much to do. While we expect supply chain and COVID related headwinds to extend into early 2022, we're encouraged by the underlying demand for our solutions, order growth, and backlog trends. In fact, at the Matco sales expo, which was held just last week, results exceeded our expectations as orders per [Indiscernible], [Indiscernible] not record levels with double-digit growth versus pre -pandemic levels. And so we enter 2022 from a position of strength. We have strong steady demand, pricing power, and a track record of successfully navigating unprecedented headwinds, and we're leaning into what's ahead. We're positioning the portfolio for accelerated profitable growth and making incremental investments targeting high return growth opportunities. I'm confident in our ability to continue to successfully execute organically and inorganically, to deliver accelerated earnings and cash flow growth through the EMV sunset and beyond. We remain committed to unlocking shareholder value for the long-term. We will continue to compete for your investment through prudent and disciplined capital deployment, as well as continuing to deliver strong financial performance. One last item before we move to Q&A, I'm pleased to announce that our 2022 Investor Day will be held in September in New York. We look forward to sharing a more in-depth view of our portfolio strategy and key growth initiatives in addition to providing long-term targets, highlighting the power of the Vontier Value Creation Flywheel and compounding growth algorithm. With that, I'd like to turn the call over to Lisa. Lisa.
Thanks Mark. That concludes our formal comments. Britney, we are now ready for questions.
[Operator Instructions] And we will take our first question from Steve Tusa with JPMorgan. Your line is now open.
Hi, guys. Good morning.
Hey, good morning to you.
Can you just clarify a little bit around the sorry to -- sorry to kick it off with an EMV question, but can you just clarify Kind of the revenue trajectory here. I mean, you said three to 350 of headwind in 23 and then that will be the trough of that revenue base. What was that revenue base in '21 to just as a starting point, maybe if you could just like really clarify those statements?
Yeah, sure Steve. So obviously we still have significant revenue in the EMV, even though it's declining. So we were in the low $600 million, I would estimate for 2021. I think when you look at '21 and '22 combined, we had talked about previously '21 being 75 to 100 and '22 being a similar decline. What we saw be the high end of our decline range in '21, and part of that is due to supply and component problems we probably shipped a little EMV backlog into 2022, maybe 20 million to 25 million or so. I think we're still in the range of what we were thinking. When we think of the 10-23 decline, I think what we're trying to articulate is our current view of the shape of the tail. So the peak to trough is in the range of what we've always thought here, Steve. But I think what we see is little more robust activity falling off and adoption happening a little faster. There's a whole bunch of variables that go [Indiscernible] as obviously as you guys know, what people buy, any share shifts that happen. The ultimate rate of adoption amongst thousands of customers so it's tough to predict. But we've been pretty consistent here updating you folks with what we know when we know it and we'll exit the year, which is always a good time for updating our assumptions here. With this view to have the shape of the tale play out.
So when you say trough of the [Indiscernible], do you mean trough of the year-over-year revenue headwind? Or do you mean, that revenue base is now a floor level and then stable from there?
That's right, Steve. So, we've always thought that we had this compressed cycle as a result of the EMV turning to more of a not normalized run rate. Now one of the things that will impact that at the end of the day is getting back to this normalized refresh rate in the U.S. dispenser market, but ultimately what we're talking about is the year decline to get back to a baseline business for U.S. dispensers and payments systems?
Yes. You know, what's new here, Steve, because we've always said it's $400 million to $500 million, what's new is that we're defining the size and the shape of the tail. We're not changing the overall guidance we've given prior on the magnitude, it's just that's the largest year-over-year decline is going to be 2023, and then we move on from there because it's done.
Okay. So it's $600 million is what you said is this kind of revenue base? And then that will go down 25 to 50; then it will go down three to 350; and then as -- we move into 24, 25 but we'll basically stay at that level going forward? Is that what you're saying?
Then we get back more of a normalized market condition, I think we're a little over 600, so more like probably 640, okay. Then we get back to a normalized run rate in the U.S. market and then we wouldn't experience -- we don't think any material shift from EMV going forward and we get back to growth in that market. I think talking about the decline is also what Mark noted, that we have significant actions to offset here. We continue to have our ex - EMV or non-EMV portions of our business has historically been, and we believe will continue to be steady growers in that mid-single-digit range. And as we do deals like DRB, we tend to mix up that growth rate. So I think that fundamentally gets us to offsetting a significant amount of that year-over-year headwind in '23 that gets you to that low single-digit decline range, or maybe close to flat. From there it would take just a modest amount between now and then to see your way to flat or even growth. And that's why Mark noted, we would anticipate cash flow expansion to the extent we were able to completely offset the EMV headwind in that year. That's how we're thinking about it today.
Yeah, okay. One last quick one, what was the year-over-year revenue in that 640 for '21? What was that in [Indiscernible] year headwind this year?
Yeah. In '21, we came down roughly $100 million and then 2020 was the peak year.
Great. Thanks. I do say sorry for all the details, it's just that obviously, with the way your stock is behaving, it's the elephant in the room, that just as helpful to clarify. So sorry for all the focus, but just want to get these revenue numbers right.
No, Steve, I'm glad you're asking the question so we can make sure we're really clear on it. And I think what's happening in today's call is not only the size and the shape of it but it's also our confidence to offset that because we have conviction around our road map there, so that's awesome news.
Okay. Great thank you.
Thank you.
We will take our next question from Andrew Kaplowitz with Citibank, your line is not -- or Citigroup, your line is now open.
Good morning, everyone.
Good morning.
Morning.
Mark just focusing on '22 for a second. When you hosted your retail fueling day in November, I think you talked about expecting flattish organic growth for '22 and now you're talking about low-to-mid single-digit. So what's the difference here? What's the drivers? I know EMV headwinds a little bit less in '22 and have you seen any improvement yet in logistics related issues or omicron disruption that gives you more confidence in that second half ramp?
Yes. So first of all, I think we've got a lot of confidence in exiting the year and entering 2022 on what we call the Profitable Growth Initiatives. So very significant traction we made there. So just let me give me a minute so I can just talk about give a little color around it. First of all, we doubled our operating profit target based on simplification efforts, strategic pricing, better drop through on new products, as well as focus on high-growth markets. And keep in mind, we have underperforming assets in our portfolio like Hennessy and Teletrac Navman that improved 200 basis points of [Indiscernible] last year. So we're carrying a lot of momentum from our initiatives into 2022. Of course, there is some backlog, we left some revenue on the table in 20 -- in the end of fourth quarter, and so we've got certainly the benefit to that. But I'll tell you, it is getting better on the supply chain elements but it's still something that is -- as you've heard a lot about in earnings calls those folks continue to work through, it's mostly around electronic components, and semiconductors, printed circuit boards. We are seeing some improvement in that. But clearly, I think by second half of this year we're going to see a better improvement. Dave, you want to add any color there?
That was great, okay.
Thanks for that, guys. And then maybe just Mark if you could talk about your decision to invest the $500 million in energy transition over five-years, now that you bought out drives, could you talk about drives growth in margin profile and what kind of a foothold does the company give you in DEV infrastructure focused software, quickly as a grilling, I know you said it's dilutive, but you give us more color on the margin profile and where Vontier goes from here in the EV infrastructure?
Yes, happy to talk about that. We're really excited because this announcement of these investments, we're placing meaningful dollars to diversify our portfolio away from ice, and I think it's providing a compelling opportunity. Let me talk about what you just brought up here about drives. First of all, it's a sub $10 million sales today. It's expected to grow high double-digits over the next five years. And I think when you look at what drives provides, it is really a very compelling opportunity because it's an intelligent, cloud-based software subscription business that is supporting the EV charging infrastructure. And the question that you ask is, what are the margins? This is a very high margin segment of the business. It's very attractive. Because they provide this operating system. Its software, it provides operations management, energy optimization, billing enrollment capabilities, and driver self-service apps. And so think of this as a white-label software business. They're a leader in this space with 20% market share. It's not profitable on the bottom line because we're investing for growth but on a gross margin, this is a very attractive place to play and it positions us in the highest segment of the market. Dave, do you want to add color?
Yeah Andy. You can imagine this is an early-stage technology business so we're not managing it, like we say, would a normal business that we might acquire in our normal operating company structure. It's not profitable. And frankly, that's okay. That's where it should be. What we're focused on is capturing the market and investing for growth. So I think more to come over the coming years, but good soft -- it should have a good software margin profile. It scales, growing significantly at that early stage, high double-digit type rates. So we're really excited about the opportunity here for what this -- as kind of an anchor asset here around the EV charging infrastructure space.
Appreciate it, guys.
We will take our next question from Andrew Obin with Bank of America. Your line is now open.
Good morning, Andrew. Can you hear us?
[Operator Instructions].
Can you hear me now? Sorry about that.
Yeah, we can.
Yeah. Apologies. I still haven't figured out how to do the mute function. Yeah. So the question on pricing, can you just give more details as to what pricing was specifically in the fourth quarter. And what are your expectations for '22. Or if you don't want to go there, what's the annualized benefit you'll get in '22 for pricing actions year-to-date?
Yeah. So in the fourth quarter, we continued to see good price. We round trip a little bit of the early price that we took coming into '21, but we continue to see good price in the -- probably close to 3% range as we were -- as I noted in my remarks, price costs favorable in the fourth quarter. We did continue to see the gap close, but we were [Indiscernible] to -- on the dollars in the margin standpoint from a price cost perspective. As we look to '22, we're carrying good price. We'll continue to price for inflation and we anticipate that contributing to the year. We've talked about the full-year, low-to-mid-single. If you think about it from an ex EMV perspective, probably, maybe more like mid to high single growth perspective, and revenue contributing a decent amount of that growth. And being price cost positive again -- price being priced cost positive again in 2022.
And then just a philosophical question, managing this downturn in EMV for the next two years. If you look at industries with decent structure, if you look at [Indiscernible], what [Indiscernible] is doing in the channel, if you look at the scope of price increases as that HVAC industry is able to achieve. Given a favorable industry structure in North America, how do you think about potentially pushing the pricing further in the EMV space? I doubt that your competitors would have jagged. So how do you balance volume versus price in EMV as volumes continue to go down? Why not accelerate it? Why not push pricing harder and just accelerate the decline and be over with it? How do you think about it? Thank you.
Andrew, the way that we think about price is we first of all, started last year with strategic pricing and then get it turned into structural pricing. And it is a really great underlying benefit that we started early last year, that we're always going to price for this market and this opportunity. I think we've been in my view, a leader on the pricing front, and I think we're going to take advantage of that going forward, particularly as EMV rolls off. And we are a market leader in the space, and so I think there's a lot of good things that have been happening on price. And we anticipate we're going to press that opportunity to the fullest.
Thank you. I appreciate the insight.
[Indiscernible]
We'll take our next question from David Raso with Evercore, your line is now open.
Hi. Good morning. Thank you for the time. I was just curious, the conversations that are being heard at the board level, as well as top management level regarding capital redeployment. Just given the way the stock's been acting really since the spin. And you've made some fairly attractive acquisitions from DRB that drives your commitment to where you're going to invest. The streets view of your earnings in 22 have gone up 24% since you spot on the stocks down 10%. So just looking at your evaluation 9 times EBITDA, roughly 9 times the new EPS guide, how are we balancing -- clearly a story the street is not least appreciating when you look at how some of your peer’s trade. Some of the parts would suggest stocks to be significantly above where it's trading. So I'm just curious, I understand the portfolio transition needs. But what is the conversation right now about share repo and the significance of it versus some of these M&A opportunities that you're contemplating?
Hi David, thanks for the question. I guess what I would share is that we've talked about M&A being a priority for us historically because of the portfolio transfer [Indiscernible] that we're undergoing, which will take significant period of time but also that we're focused on returning shareholder value, and that share repo and M&A are not mutually exclusive. We agree with you. There has been kind of a dislocation of value, especially in recent months here, we've seen stock trade as a significant discount to the intrinsic value of the stock. And that's why you heard us come out on this call and say we would opportunistically be looking to buy depending on market conditions. In our own stock back. So again, not mutually exclusive. I think you've heard a little bit of a change in our direction here when it comes to the capital allocation. So we'll see what market conditions bear here. But I think we're aligned with the sentiment. Mark does you add anything?
Yeah I think an important thing to say as I also said in my remarks is that we compete for investment and we're focused on shareholder value. And we don't see this as an ore, but certainly an opportunity at the current stock prices for excellent returns.
I appreciate that just the term opportunistic. I mean, where the stock has been for a while down, especially now, the opportunity seems readily available. So, I'm just making sure we understand there's some understanding at the board level of the frustration with some shareholders since the spin. Because you're executing well, the M&A seems very logical and clearly value creating, but there's some mismatch with how the streets perceiving the portfolio. So I appreciate the comments and I'm putting just one more time clarify the 23 EMV decline. The 3 to 350 is a one-year decline. That's not a cumulative from the 21 level.
So that would be the decline '22 to '23. One year.
But your comment that you can offset it where you expect earnings to grow, the idea is you can offset roughly half of the revenue decline, but from cost-outs, mix, I assume some M&A, some repo, you would've still expected EPS to grow in '23. So I --
Yeah.
Terrific.
Which is based on an assumption that we offset more than half of the revenue decline, as you've noted. So I would see us offsetting more than half is significant amount of the revenue decline, which would get the annual all-up decline down to say, a low-single-digit, maybe in a little bit better decline. To be flat and fully offset, if we saw some modest M&A between now and then, that would put us into that flat or better territory. And really if we're in that zone, given the activities we've already commenced upon, we would anticipate expanding earnings and free cash flow.
Terrific. Thank you very much. I appreciate the time.
No. Thank you for your feedback David.
And will take our next question from Brian Lau with Wolfe Research, your line is now open.
Hey, good morning, everybody. I'm trying to touch on Tridium briefly. Could you remind us the status with a commercial agreement there? And when that lock-up is over?
Yeah, absolutely. I said in my prepared remarks, we had 16% of outstanding shares, the lock-up ends in July. And I comment about Tridium, we're very supportive of Tridium and as they fulfill their value proposition. But keep in mind whether we choose to remain a long-term shareholder at some level or monetize all or a portion of our stake. We believe there is value upside to Vontier from the possible gains, as well as additional dry powder. So we're really happy with our position here.
Great. And then regarding Teletrac Navman, can you just talk a little bit about what drove the 200 bps of margin expansion and what you're baking into the guide for 2022? And then also on the guide, is there any of that report baked into the 305 to 315 number, just given the share count of about a $171 million on your slides? Thanks.
Yeah. Let me take the second part first and then turn to Mark for some of those details on the improvement. It's tough to know because we're going to be looking at market conditions here, but I think at a baseline I would [Indiscernible] minimum we're offsetting the impact of dilution as a result of stock comp, just kind of call it $0.15 -- $0.2
Let me take the Teletrac Navman question. As you know, it's a turnaround story and we've been making really solid progress on it. We would essentially apply VBS, and we really re-frame the opportunity on some more of the profitable growth segments and let -- as we understood the business model more, also with new management in the business then we could really re-frame it in a way to position it more for profitable growth. I think the other thing that is really paid off for us is that we've talked about churn in North America. And churn has been a tough thing for us to rustle, but we've made really solid progress on that. Of course, that helps pretty significantly. I think more importantly, with this turnaround story that in Q4 and for the full fiscal year of 2021, we posted positive low-single-digit in ARR growth or annual recurring revenue growth. And that's a really solid step in the right direction. We haven't had positive ARR growth in that business in a long time. So clearly with the reposition with the new platform TM 360, the reducing churn that this is a step in the right direction. And I think it really sets us up for accelerating into this fiscal year. So I think the issue when you look at organic revenue growth, it takes a bit for ARR to drop through to the P&L because of the SaaS model and the length of the contract, but clearly making a really solid traction in the business.
And we will take our next question from Julian Mitchell with Barclays. Your line is now open.
Good morning. So just -- maybe one last time on EMV. So your revenue in-year in 2023 from EMV is saying is about $300 million. Is that fair? And that compares with the sort of $740 million number back in 2020. I just wanted to make sure I understood that. And what you're then saying is off that $300 million - ish base, then flat, or slightly down thereafter. And also wanted to double check of that India $300 million to $350 million drop. Could we assume a 50% or so decremental margin still?
Julian, I think you've directionally got are all correct. We returned to that base, we'll see where we end up to 75, 300ish by the time we get through the decline, hit the trough, we wouldn't expect large moves up and down then as a result of EMV. And this is above [Indiscernible] average margin, I think 50% for decremental is a reasonable thought. Obviously, we're looking to realign those resources and do other things and some of the revenue that comes on to offset some of this growth comes on at actually rates around there, or better also so, those are things we're focused on as we work through the offsets that Mark talked about.
That's helpful, thank you. And then I just wanted to clarify on the free cash flow guidance, because Dave, you've mentioned some of the working capital moving parts for this year, so maybe put a finer point on how you see working capital playing out. And just wanted to double check, is that a 100% conversion guide relative to the adjusted net income, for the 310 or so of EPS? Or relative to the big GAAP net income of 278 - ish per share?
Adjusted free cash flow, conversion against adjusted net income. And to your point on working capital, Julian we've run it. We're really on unprecedented levels. We entered last year at levels we hadn't seen and then we entered this year at even improved levels from that. I personally, given some of the activities that we have endeavored upon that I think will help us hold onto some of the benefits we've seen through the pandemic, as well as some of the structural improvements from doing acquisitions like DRB, which is a -- has a really nice free cash flow profile, I would anticipate that we would not return to pre -pandemic levels of working capital in the business. Having said that, there will be headwind to the levels we're operating at today as inventory [Indiscernible] some inventory and safety stock back into the system where maybe today we are dissatisfied with the level it's at. But even with that, we anticipate being able to achieve that 100% conversion ratio.
Thank you.
Thank you, Julian.
Our next question from Steph -- from Jeff Sprague with Vertical Research. Your line is now open.
Thank you. Good morning, everyone. Jeff Sprague here. Just -- coming back to Driivz, if we could. Just interested in the level of investment this might take. Now this obviously is going to be a very competitive space and I had to the earlier point, I think maybe where David Raso was, buying an expensive software business when you trade at this [Indiscernible] and taking losses on investment, or just a lot of friction in the P&L as you do that. So when we think about this earnings headwind that we're dealing with in 2022 on drives, do you think that moderates from here? Or does this business require a substantial level of additional investment to get it to scale and make it competitively viable?
Good question, Jeff. I'll just make a couple of quick points. So we see that's maybe it's the OP level kind of starting out here, being dilutive in the tens, millions of dollars and yes, dilutive to our business model for sure, but we do believe there's a real opportunity here for value creation in this early-stage asset. We were very fortunate to be in the position and have the option that we entered into really two years prior. And given the development that had over the last couple of years, we felt pretty fortunate. So, yes, it's a headwind, but we really do believe it's a real opportunity for overall value creation for the broader bond tier here. It'll take some investment, but we're really focused on the growth side of that investment, and we think the longer-term value creation opportunity here is very good. I would make one more point that we have talked historically about a range of types and sizes of deals and where most of the M&A we look to prosecute in our funnels and our day-to-day work is much more aligned with something like a DRB. We've said that these types of deals earlier stage, more strategic, higher-growth opportunity could be out there, and this is surely one of those. Mark, do you want to add anything?
Yeah. I think when you look at how we've made decision on capital deployment, that it's very disciplined. It's very much strategy-led. This is something that we've been very close to in terms of this market term. When you see us, we did not buy into Tridium. We actually made that decision based on our strategy with our capital, but we are stepping forward in this space because of our -- what we think is our ability not only add value, but to win in this space, and it will position us great for the mid and long term. But going back to the capital allocation coming up in the near-term, because that's a long-term play. And we announced $500 million of both inorganic as well as organic investment over 5 years. But I think when you think of capital allocation, maybe more in the near term, it's really middle of fairway deals like DRB that you should think of.
Great. And maybe just totally switching gears to a different topic. Just looking at the auto aftermarket with what's going on with the shortage of new vehicles and what it's done to used car prices and the like. I just wonder if you see any discernible change in behavior in the auto aftermarket pricing power on tools, kind of big picture if you could put a little bit of a bow on that question for us would be helpful.
Just one thought. Clearly, we're seeing a really healthy end market continue in Matco. And a lot of that is tied to the health of the end customer, which is the professional auto mechanics, so that remains a very healthy environment. We see that read through and credit profiles and demand levels, so it remains a very strong environment. I think we just had our recent Matco Expo. Mark, you want to talk a little bit about.
Yeah, really strong demand there. We continue to see things like diagnostics scan tools, where we launched a maximus at full point at last year making great progress as of, I think that backdrop being such a strong market, as well as toolboxes. So there is a pretty wide range of things that are being sold into the aftermarket and we anticipate this will -- there's lengths to it. It will continue for some time.
Great. Thank you.
Thank you.
[Operator Instructions] And we will take our next question from Andrew Buscaglia with Berenberg.
Hey, good morning, guys.
Good morning, Andrew.
One last EMV question. I don't -- please don't shoot me. But obviously it seems like a little bit of new news, and I'm wondering why I guess why is that 2023 item new? I guess, why -- is it something new to you that you weren't expecting? I guess all the confusion is just like -- I guess the street was not set up for modeling that in, and we're going to have to model that in now. And it seems like a little bit bigger hole to fill than we were initially anticipating. So just wondering what change on year-end that didn't have that visibility before?
Well, it's always been -- I would say it's really bet about the shape of the tale. So we knew 2020 was going to be a peak, and we would return at some level to more historical levels of performance in our U.S. dispenser market. But it was kind of at what pace we got there. A lot of -- we really have always understood what the larger customers we're going to do, but there's over half of this market that's made up of 5, 6, 7 thousand smaller customers that we service through distribution. So it's really getting through the adoption deadline, seeing how demand behaved, and for us to get a little better view as to how the shape of the tale would
play out. I think what we see this -- see happening now is adoption by folks not extending as long, being pulled in and ostensibly completed here by the end of 2023. So I think the new news is dimensionalizing the shape of the tail and over the last couple of years, I think we've tried to share what the view was as contemporaneous as we've had it. And there's so many assumptions that go into this. We've tried to be as transparent as we could when we had conviction around something that I think years doing that again.
Let me just jump in here too. I think the other thing that is new is clearly the lens that we're bringing that, okay, fine, we know the shape of it. The magnitude didn't change, but we know the shape, so we are articulating that. But we're also articulating the confidence around that. I mean, look at the underlying growth rate for ex - EMV bookings that made the high single-digits. And it is averaging higher with the acquisition of businesses like DRB and in the progress we're making on the profitable growth initiatives and the momentum that we have. So we've thought long and hard about how do we figure out this tail and also the offsets to it. And I think you see the evidence of those offsets at work, particularly with that underlying ex - EMV bookings growth driver. And so that's the confidence that we're also bringing in today's call.
Okay. And maybe just one last one in a different area. The telematic business seems to be progressing well. We heard some new information with Stem Sara that's [Indiscernible] public and there's obviously a couple of bigger players in the phase, Verizon's. What is your -- how do you expect to compete with these powerhouses and telematics or what makes you guys feel like you're different to continue to hold their own with a lot of the impressive step-up competition that's out there?
Well, it's a great market. It's a high-growth market. It's very fragmented. There's lots of different ways to play that market. Truth be told, we had to get our feet under ourselves and recover from the technology debt. I think we're positioned well for that. But we have a strong global presence. We're number one in Australia, New Zealand, very strong presence in the UK. And the offerings that we have now are very contemporary and very reliable, but there's niche ways of playing this market because it is so big, so frothy, and so fragmented. So I don't think you go and play head-to-head with some of the bigger players in the market, but there's lots of niche-y areas around that for us to further deploy our capabilities and strategy around. So keep in mind, this is a $180 million business, 95% SaaS. So there's a little bit of breadth to it, and really great positions to move in this market. So excellent market.
Okay, thanks
Thanks, Andrew.
And we'll take our next question from Robert Mason with Baird. Your line is now open.
Yes. Good morning, guys. Where did backlog in the year?
Backlog [Indiscernible] reasonably well on an apples-to-apples basis, about 25% year-over-year.
What does your '22 guide, the low-single, the mid-single-digits core growth? What does that assume in terms of backlog reduction within that?
I can't give you the exact percentage here, but clearly we anticipate some backlog reduction and that continuing as EMV comes off. But as we think, XEMB, we talked about the European low-to-mid-single digit core growth, as we think, XEMB for 2022, that's more of mid to maybe high for the year. And I would say we would anticipate seems similar performance on the order side. So the -- I think the punch line is, I would frame it is that that solid mid-single-digit plus demand environment is what we expect from the order side continuing once you sort through the EMV and other compared noise here.
Okay. Okay. That's helpful, Dave. And then last question, you mentioned you're still on track with your repositioning-restructuring effort. Just remind us again what the savings expectation was for '22 and any thoughts on the cadence of that, how that phases in.
Yes. So we -- look, we spent a total of $15 million this year -- sorry, in 2021, we had anticipated spending a little more than that. We're seeing some actions push into 2022. That's really us timing things in facing things with things like EMV, or we're taking some corresponding actions, and we'll have a better than one-times payback on that spend that we had in 2021, so think closer to $20 million of savings. And that's the exit rate with exit the year at and the benefits we'll get in 2022, then we talked about some additional spend. And really, these things relate to the multi-year positioning around the simplification, profitable growth initiatives, and repositioning some resources to take advantage of EMV, and then repositioned to other areas of growth as we make this large multiyear.
I see. Thank you. I'll pass back. Thanks.
And we will take a follow-up question from Steve Tusa with JPMorgan. Your line is now open.
Sorry, guys. Just one last quick one here. On the acquisition, you'd said a 3% contribution. That's -- what's that annual run rate now for DRB? That's a little bit lower than I think what we had in our model. What's kind of that business -- what do you expect for annual revenues for that business in '22?
Yes. This was a $170 - ish million business last year, maybe came in a little better. We saw really good growth in the fourth, growing -- growing double digit mid-teens here in 2022.
Okay. $170 and it'll grow mid-teens in '22. Got it. Okay. Thanks a lot. Appreciate it.
Steve, thanks.
We have reached our allotted time for questions. I will now turn the program back over to Mark Morelli for any additional or closing remarks.
Thanks, Britney. Look, I'd like to take a moment just to thank the Vontier team for their ability to focus and execute and deliver a really strong year in the face of significant headwinds. We also made really important steps on our portfolio diversification. And the progress in momentum positions us very well into 2022 and beyond to accelerate profitable growth. So thanks for joining on today's call. Have a good day.
This does conclude today's program. Thank you for your participation. You may disconnect at any time. And have a wonderful day.