My name is Emma, and I will be your call facilitator this morning. At this time, I would like to welcome everyone to the Vontier Corporation's Third Quarter 2021 Earnings Results Conference Call. I would now like to turn the call over to Ms. Lisa Curran, Vice President of Investor Relations. Ms. Curran, you may begin.

Thank you, Emma. 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 Dave 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 Financials. Please note that, unless otherwise noted, the presented financial measures reflect year-over-year increases or decreases. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward-looking statements that we make today. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings and subsequent quarterly report on Form 10-Q. These forward-looking statements speak only as of the date they are made, and we do not assume any obligation to update any forward-looking statements. With that, I'd like to turn the call over to Mark.

Thanks, Lisa, and good morning, everyone. I'm very proud of our third quarter performance. The team is making significant progress towards our profitable growth initiatives and portfolio diversification through the course of 2021. The team's exceptional execution features continuous improvement and deeper deployment of the Vontier Business System. We delivered another quarter exceeding our guidance on all metrics despite a very challenging backdrop. We achieved nearly 1 point of core revenue growth and nearly 10% core revenue growth, excluding EMV. Given the supply chain headwinds that every other company is also encountering, I believe the real standout measure for Vontier this quarter is our margin performance. We drove 90 basis points of adjusted gross margin expansion and 70 basis points of adjusted core operating margin. This strong performance driving our earnings growth reflects the efforts by our world-class supply chain team and swift price and specific actions taken across the businesses to counter persistent inflation and worsening material availability as well as labor shortages. Demand for our solutions is solid, with order growth, excluding EMV, up mid-single digits. And our ability to price continues to outpace inflation. We've managed positive price costs even in the face of dramatic cost increases associated with expedited freight, but it's becoming more and more challenging given the pace and rate of the inflationary and logistics headwinds. And while we were able to reduce backlog during the quarter, levels remained elevated. And so at the end of the day, our ability to deliver growth really comes down to the availability of materials. As many of you know, the Vontier businesses are short-cycled and we are continuing to derisk our supply chain through our simplification initiatives and by leveraging local partners with a diverse network. We are hyper-focused on securing this supply base. Daily management, one of the hallmark fundamentals of our business system, is critical to our success in this environment. Global cross functional teams are collaborating virtually in real time to navigate a multitude of issues, for example, procurement and R&D engineers dynamically problem-solve and rewrite software to accommodate alternative components. We are shipping by air when necessary. We operate with long-term value creation as our highest priority and that's why our mantra is delivery ahead of cost. To that end, we remain diligent in our efforts to capitalize on growth opportunities. This was clearly evident at our recent VBS Growth and Innovation conference. We had nearly 70 of our senior commercial and engineering leaders together to share best practices. Teams shared lessons learned ranging from simplification to improve focus and lean portfolio management to experimentation and digital transformation. TBR leaders shared how they utilize an agile development process to collaborate closely with customers and to accelerate new product time to market. The recently launched Vontier Data and Analytics Hub helped automate complex analytics to reduce costs and respond to customers much more quickly at GTT. There are many more examples like these to illustrate how we're building better innovation capabilities. Importantly, our efforts to improve return on every R&D dollar invested are gaining traction, and I look forward to keeping you updated on our progress. In September, we completed our annual strategic reviews for the first time as a stand-alone company. I've never been more excited about our organic and inorganic growth and portfolio diversification opportunities as these reviews highlight the strength of our positions and the runway potential in our markets. Our recently closed acquisition of DRB exemplifies the playbook importance of focusing on attractive markets and company characteristics that deliver value. The DRB team is making an immediate difference. I'm excited about the depth of experience they bring with predictive analytics and behavioral economics. They uniquely engage and understand the consumer and deliver solutions to their customers solving high-value problems. They've invested wisely for growth, and you will learn more about their high-value workflow solutions and innovative business model in just a couple of weeks during the Retail Solutions Virtual Teach-in. Moving to the outlook. We're raising our full year 2021 adjusted diluted net EPS guidance to $2.82 per share to $2.86 per share to include the impact of DRB. This represents year-over-year growth of 14% to 16% or greater than 20% excluding the expected impact from EMV. This includes continued assumptions for high single-digit core revenue growth and core adjusted operating margin expansion of more than 125 basis points. We expect free cash flow conversion of approximately 90% to 95%, reflecting the lack of linearity due to the supply chain pressures on working capital. And just as we communicated at the beginning of the year, the tale of two halves comparison dynamics provide the best perspective for the second half growth rates. With that backdrop as a reminder, we are initiating our fourth quarter adjusted diluted net EPS guidance of $0.77 to $0.81. This assumes a mid-single-digit core revenue decline and 50 to 75 basis points of adjusted core operating margin contraction as we look to manage the decremental in the 30% range. We believe the unprecedented supply chain constraints limit upside opportunity, making the middle of the EPS range the highest probability outcome.

Thanks, Mark. Adjusted net earnings for the third quarter were $137 million, an increase of 2% from $134 million in the prior year period. This translated to adjusted net earnings per share of $0.80. The increase in earnings was primarily driven by continued growth in our non-EMV businesses and strong pricing, which offset the impact of material inflation, resulting in strong fall-through and approximately 70 basis points of core adjusted operating margin expansion in the quarter. Core revenue growth in the third quarter was approximately 1% amidst strong demand and against the prior year Q3, which benefited from a sharp recovery from the pandemic lows as well as regulatory-driven demand in North America and in the high-growth markets. The tale of two halves as we referred to it. Sequentially, revenue grew mid-single digits, directionally consistent with our historical seasonality. In the third quarter, core revenue growth was driven by our non-EMV businesses, which grew approximately 10% and was mostly offset by the anticipated roll-off of EMV and the regulatory driver in Mexico, which benefited the second half of last year. Adjusted operating profit for the third quarter was $188 million, a growth of 4% compared to the prior year period, primarily driven by revenue growth and solid operational execution as we managed through persistent inflationary pressures and supply chain disruptions across our operating companies. As Mark stated, through broad pricing actions and the team's continued focus on executing on our profitable growth initiatives, we drove approximately 90 basis points of adjusted gross margin expansion and 70 basis points of adjusted core operating margin expansion, more than offsetting a headwind of approximately $10 million from raw material inflation and logistics. In the third quarter, we generated adjusted free cash flow of $119 million, a conversion of 87%, reflecting some build of working capital during the quarter, which remains at very low levels. Importantly, year-to-date, our free cash flow conversion is more than 90% and approximately 100% after excluding the incremental federal tax payment paid in the second quarter of this year relating to our 2020 spend. Additionally, our net leverage stands at 2.9x adjusted EBITDA, up 1.2 turns from the prior quarter, reflecting the completion of the DRB acquisition, which was successfully closed in September. Looking at the performance of our 2 platforms. Mobility Technologies core revenue declined 1% as GVR declined slightly due to the roll-off of EMV in North America and the fiscal regulation in Mexico. Excluding the impact of EMV, GVR core revenue and bookings grew low teens and high single-digits, respectively, which highlights the continued demand momentum, especially in retail solutions, environmental solutions and further progress in high-growth markets. In the high-growth markets, revenue grew low single-digits in the third quarter as continued momentum in India and Middle East and Africa was partially offset by the compare against the prior year Mexico fiscal regulation. On a year-to-date basis, core growth in our high-growth markets is up high teens. Core revenue growth in our Diagnostics and Repair Technologies platform was 7%, driven by high single-digit demand at Matco and compares with the third quarter of 2020 which saw a strong recovery from the pandemic impacts. Matco continues to experience a strong demand environment and a growing distribution base, reflecting our fifth consecutive quarter of strong net franchisee additions following the pause during the height of the pandemic. Diagnostics and Repair Technologies backlog continues to remain elevated as we work through supply chain challenges in this robust demand environment. Looking at total company sales regionally. As I mentioned, high-growth markets revenue grew low single-digits as a result of the tough Mexico compare, and we continue to make progress in strategically important markets, including India, the Middle East and Africa and Latin America. Growth in the developed markets in total was up slightly in the third quarter as growth in Western Europe and in the non-EMV portions of our North America business was offset by the impact of EMV on our GVR North America business. We also continued to make progress on our profit improvement actions that will better position the company for the remainder of 2021 and beyond. We recognized a restructuring charge of approximately $3 million in the third quarter. We now anticipate that we will recognize a charge of around $15 million in 2021, a bit lower than we were previously planning as we continue to align the pace of actions relative to the strong demand environment. This means a remaining charge of approximately $5 million would be shifted from Q4 to the first quarter of next year, and we anticipate that we will still achieve our original savings objectives for 2022. Turning to the outlook assumptions. For the full year 2021, we are maintaining our core revenue guide of high single-digit growth and our core operating margin expansion target of greater than 125 basis points in 2021, reflecting continued execution on our profitable growth initiatives and cost management and partially offset by persistent inflationary pressures, supply chain and logistics constraints and mix. That said, we are raising our outlook for adjusted earnings per share to a range of $2.82 to $2.86, growth of approximately 14% to 16% year-over-year, reflecting continued momentum and execution in our core business, combined with about $0.04 to $0.05 contribution for the in-year impact of the acquisition of DRB. We anticipate our full year effective tax rate to be around 23%, reflecting some benefit from tax planning initiatives that were implemented in the third quarter. And on free cash flow conversion, we have seen working capital increase for 2 consecutive quarters while still being at historically very low levels. We believe this will put some pressure on our free cash flow conversion and see that being around 90% to 95% for the full year. This, of course, includes the additional federal tax payment that we had in Q2. And excluding this, our conversion would be around 100%

Look, I think the way we're thinking about '22 is a strong setup, but we'll give you more color on that in February as we normally do. But the backdrop there is strong, great demand environment as well as this tremendous momentum from these profitable growth initiatives. So I think the setup is good.

I would add, Brian, that we'll probably enter '22 with more backlog than we entered '21. But again, like the fourth quarter, it's going to come down to the supply environment. So we really want to see how that develops, and that will go a lot towards our visibility.

No, it's a fairly short answer. I understand the labor-constrained markets out there, and we're managing through those ourselves. However, I believe there are ways to find solutions, and we've been quite effective at doing that.

Well, look, year-to-date price/cost, and we anticipate through the end of the year has been pretty favorable. And as you know, this is always a big focus area for us. I think we're going to have to get a read on the inflationary environment for next year. As I said earlier, Steve, I think we're assuming the worst as we make our plans for next year, but we have to see how that develops.

Look, Steve, I think the key is that this environment is not going to change quickly. In other words, there's a lot of headwinds that are in this. And we feel really good the way that we've worked through it so far. We have a really strong set of initiatives that are paying off.

On the EMV point, I think we're going to see how the fourth comes together where we exit the year. But as of today, no update to our EMV outlook for 2022 that we previously provided which is that the impact could be similar to what we see happening in 2021, which is $75 million to $100 million year-over-year decline.

Thank you, Emma. Look, I want to take this opportunity to thank the supply chain team for their outstanding work and for the entire Vontier team for embracing our core values for more than a year now and particularly the driven of core value because I believe that's been important establishing Vontier as a company that achieves results. Thanks for joining us on today's call, and have a good day.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.

Mark or Dave, could you give us more color into the puts and takes of your margin performance? Obviously, good performance in Q3 with the incrementals greater than 40%. And the swing to 30% decrementals in Q4 isn't overly surprising. But as we think about that Q4 decremental, you mentioned a big part of the issue is the tough comparison for EMV strength and Matco. But can you update us on how you're thinking about price versus material and logistics costs in Q4 and really into '22, if possible? I know you mentioned price risk cost is positive in Q3, but does that swing to negative in Q4?

Thanks, Andy. This is Dave. As we look into fourth, we anticipate that we will still be price/cost positive as we have been year-to-date. Obviously, it's a pretty dynamic environment. We want to see where we exit the year before giving you guys an update or steer towards 2022. What I can tell you, as we look towards the end of the year, we'll see where we exit. But as we sit here today, we don't anticipate any improvement next year in a meaningful manner, so we're going to position ourselves for that accordingly.

Yes. Thank you for that question. Look, I feel really good about the initiatives we're taking that are really driving that ex-EMV growth there. I think you're seeing it show up continually. And what gives me some confidence there is that we have a set of profitable growth initiatives that are really taking hold and they're reading through.

This is Brian Lau on for Nigel. Maybe I just wanted to talk about Matco quick. So 5 strong quarters in a row of franchisee adds. Backlog remains elevated. Just could you provide an update on the amount of geographies still available for franchisee adds? And then how are you thinking about all these franchisee adds ramping into 2022 perhaps driving some growth?

Yes. Thanks, Brian, for the question. Look, I understand why you're asking that. The business is performing really well. To be really concise on your answer, we've got about 30% of our territories that are open and available to us, which is kind of unique to compared to the higher-quality peers in that space. And we've been building that out, and we feel really good about the progress they've been making. Look, I think the key here is to continue that vitality, particularly as we go into next year, which I'm very confident we can because we're providing solutions that technicians want and will continue them buying. So we're going to take advantage of the strong backdrop, and we're going to keep pushing it forward. Yes, we implemented several price increases this year that were not planned. Typically, we have a pricing increase at the end of the year to prepare for the start of the next year, and we've done well in that regard historically. Last year, we began conducting thorough analytics on strategic pricing. We were unaware that the 2021 environment would be as inflationary as it has been, but we were proactive because we identified a strategic pricing opportunity stemming from our simplification efforts.