Vontier Corporation (VNT -6.03%)
Q2 2022 Earnings Call
Aug 04, 2022, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Hello. My name is Katie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Vontier Corporation’s second quarter 2022 earnings results Conference Call. [Operator instructions] I would now like to turn the conference over to Ms.
Lisa Curran, vice president of investor relations. Ms. Curran, you may begin.
Lisa Curran — Vice President, Investor Relations
Thank you, Katie. Good morning, everyone, and thank you for joining us on the call. With me today are Mark Morelli, our president and chief executive officer; Dave Naemura, our senior vice president and chief financial officer; and Ryan Edelman, our incoming vice president of investor relations. We will present certain non-GAAP financial measures on today’s call.
Information required by SEC Regulation G relating to these non-GAAP financial measures is available on the Investors section of our website, www.vontier.com under the heading Financials. Please note that unless otherwise noted, the presented financial measures reflect year-over-year increases or decreases. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties and actual results might differ materially from any forward-looking statements that we make today.
Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings and subsequent quarterly report on Form 10-Q. These forward-looking statements speak only as of the date they are made, and we do not assume any obligation to update any forward-looking statements. With that, I’d like to turn the call over to Mark.
Mark Morelli — President and Chief Executive Officer
Thanks, Lisa. Good morning, everyone, and welcome to our second quarter earnings call. Once again, our strong execution, price cost performance and capital allocation drove double-digit earnings growth, more than offsetting supply chain inflation and other headwinds. We delivered adjusted earnings per share of $0.72 or an increase of 18%, despite a challenging comparison year over year.
These strong results reflected positive operating leverage and a top-line beat. The beat was driven by double-digit growth at DRB and Environmental, more than offsetting underperformance in diagnostics and repair technologies, which I’ll come back to. DRB delivered yet another quarter of robust growth highlighting the strength of our capital deployment and portfolio strategy to accelerate non-ICE business growth. Furthermore, we leveraged the strength of our portfolio’s cash generation and balance sheet by deploying $14 million of capital in the quarter toward share repurchase and followed with an additional $17 million in early July.
Today’s announcement of our bolt-on acquisition of Invenco, and further actions on the planned divestitures that Dave will discuss in more detail are important milestones toward building a better stronger, more focused growth portfolio. We’re excited to acquire industry leader Invenco and expand our software-enabled workflow solutions and subscription business model. Invenco is a leading global provider of open platform retailing and payment hardware and software solutions. Its disruptive edge computing technology road map and modular solutions offer extensibility across other retailing verticals.
This acquisition accelerates our digital strategy and better positions us to serve our customers’ growing demand for digitally agile software systems. Invenco is one of the top suppliers of retailing and payment solutions to the convenience retail industry worldwide. Invenco’s innovative, secure solutions are well-positioned to enable retailers to customize digital payments and consumer services as the energy markets evolve. Invenco’s expected 2022 revenue of $80 million with mid-40s gross margin, enhances Vontier’s growth and recurring revenue profile.
The acquisition purchase price is $80 million and is expected to achieve a very attractive 20% return on invested capital in three years. While we are still in the early stages of developing our M&A track record as a stand-alone company, I’m very pleased with our results and return profile. DRB is pacing nicely toward delivering 10% ROIC within five years. And collectively, our $1.5 billion of capital deployed since separation is delivering double-digit returns in approximately three years.
We’re also continuing to advance our profitable growth initiatives, and I’m encouraged by the progress and earnings potential in front of us, but we have more work to do. We have a strong runway of opportunities where we’ve made important early strides with strategic pricing and product line simplification, which is beginning to take hold. As an example, in GVR, we’re on a multiyear journey to reduce our global dispenser platforms from 32 to 8. So far this year, we’ve eliminated six dispenser lines.
This is indicative of the cost structure opportunities we have to improve our efficiency, cost position and follow-on improvements to working capital. Before moving to the outlook, I’d like to provide more color on the supply and demand environment, and broader backdrop. I’m incredibly pleased with our team’s ability to deliver on profitable growth initiatives, leveraging VBS. Strong price cost execution and DRB performance resulted in an adjusted gross margin expansion of 100 basis points in the quarter.
Strong execution rigor enabled us to deliver nearly 30% incrementals in the face of supply chain and inflationary headwinds. We expect supply to remain tight, but not get worse through the back half of the year. And while we are seeing deflation in some inputs like steel and aluminum, we’re also forecasting higher freight. Net-net, we have taken cost measures to protect our margin expansion outlook for the full year.
Reflecting the strength and resiliency of our portfolio, the overall demand environment remains solid despite some pockets of softening at Hennessy. And while we always expected a decline in order rates this quarter given peak growth of over 50% for non-EMV orders in the prior-year period, underlying quarter trends and elevated backlog levels position us well for accelerated growth into the back half of this year and into 2023. That said, the DP businesses did underperform against our expectations in the second quarter, even though demand remains above pre-pandemic levels. We did not reduce backlog or growth or macro franchisee count as planned, primarily due to labor challenges and higher separations.
Importantly, we’ve developed countermeasures to address the challenges within DT, including ramping up company-owned stores. And looking into the back half of the year, we subsequently lowered our assumptions for DT and also high-growth markets due to timing of large tender orders shifting out. That said, we are still maintaining our full year core revenue growth outlook primarily due to continued outperformance by DRB and expectations of improving backlog. Moving to the outlook.
We are holding our full year 2022 adjusted diluted net EPS guidance to $3.20 to $3.30 per share. Our core growth and adjusted core operating margin expansion assumptions remain the same at low to mid-single digits and 30 to 60 basis points, respectively. Reflecting continued poor sales linearity and assumptions for increased working capital or expecting adjusted free cash flow conversion of approximately 90%. We’re also initiating our third quarter adjusted diluted net EPS guidance of $0.85 to $0.90, which includes assumptions of low single-digit core revenue growth and 20 to 40 basis points of adjusted core operating margin expansion.
Looking beyond this year, I continue to have strong conviction in our ability to offset the peak EMV headwind and deliver earnings growth and strong free cash flow conversion in 2023. Dave will be walking you through a more detailed view of our assumptions to achieve this performance and our road map for accelerated growth that we introduced last quarter. With that, I’ll turn the call over to Dave to provide the financial results. Dave?
Dave Naemura — Senior Vice President and Chief Financial Officer
Thanks, Mark. I’ll get started with a brief summary of our performance in the quarter. Adjusted net earnings for the second quarter were $116 million, an increase of 11.5% from $104 million in the prior-year period. This translated to adjusted net earnings per share of $0.72, an 18% increase compared to $0.61 in the prior-year period.
Revenue grew 7.2%, with core revenue up 1.6%. Our non-EMV core growth was mid-single digits on a difficult compare, particularly for our Diagnostics and Repair businesses, where prior-year core growth was over 50%. Growth was primarily driven by GVR, which grew mid-single digits on an overall core basis with growth in both developed and high-growth markets. GVR growth was driven by environmental, aftermarket and our CNG business.
Our compressed natural gas business has grown greater than 65% year to date off a relatively small base. And although not core yet, DRB continued to demonstrate strong growth of high 20s. Adjusted operating profit for the second quarter was $167 million, an increase of 10% compared to the prior-year period. Gross margin expansion of almost 100 basis points reflected continued effective price cost management and the benefits of DRB and other higher-margin solutions.
These favorable items helped offset production inefficiencies from a very back-end loaded quarter,…
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