Vontier Corp Q4 FY2021 Earnings Call

About to begin. 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. 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 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 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 expectations. 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 unleash 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 Conference, this portfolio represents a 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 committed 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 safety 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 decarbonization 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 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 value 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.

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 adjusted 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 offset 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 $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%. Q4 was our first full quarter with DRB in the portfolio. And we could not be happier 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. 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 of $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. 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 seeing 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 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 per share guidance of $0.64 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 dealer hit 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.

Thanks Mark. That concludes our formal comments. Britney, we are now ready for questions.

We will now take our first question from Steve Tusa with JPMorgan. Your line is open.

Hi, guys. Good morning.

Hey, good morning to you.

Can you clarify the revenue trajectory? You mentioned a headwind of three to 350 in '23, which you indicated would be the low point of that revenue base. What was that revenue base in '21 as a starting point, and could you 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 '22 to '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 a little more robust activity falling off and adoption happening a little faster. There's a whole bunch of variables that go into this 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 tail play out.

So when you refer to the lowest point, are you talking about the year-over-year revenue challenges or indicating that the current revenue level serves as a stable base moving forward?

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 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 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?

Once we return to more normalized market conditions, I believe we're slightly above 600, likely around 640. As we transition back to a normalized run rate in the U.S. market, we don’t foresee any significant changes from EMV moving forward and expect to see growth in that market. Additionally, as Mark mentioned, we have substantial measures in place to counteract the decline. Our non-EMV segments have historically shown steady growth in the mid-single-digit range, and transactions like DRB tend to influence that growth rate. This approach should help us mitigate a considerable part of the year-over-year challenges in 2023, potentially bringing us to a decline in the low single digits, or even close to flat. From that point, it would require only a small improvement to achieve flat revenue or even growth by then. As Mark indicated, we expect cash flow to expand as we aim to fully counter the EMV impact this year. This reflects our current outlook.

What was the year-over-year revenue in that $640 for '21? What was that in terms of 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 roadmap there, so that's awesome news.

Thank you.

We will take our next question from Andrew Kaplowitz with Citibank; 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. First of all, we are very confident as we exit the year and enter 2022 with our Profitable Growth Initiatives. We've made significant progress in this area. Let me take a moment to provide some details. We have doubled our operating profit target thanks to our simplification efforts, strategic pricing, improved drop-through from new products, and a strong focus on high-growth markets. Additionally, we have seen improvements in underperforming assets in our portfolio like Hennessy and Teletrac Navman, which boosted our adjusted operating margin by 200 basis points last year. We are carrying substantial momentum from our initiatives into 2022. While we did leave some revenue on the table at the end of the fourth quarter, we will benefit from that. The supply chain situation is improving, primarily with electronic components, semiconductors, and printed circuit boards, but there are still challenges that many others have discussed in their earnings calls. We expect further improvements in the second half of this year. Dave, would you like to add anything?

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 DRB, 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 DRB. 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 DRB 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 it provides 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?

Yes, Andy. You can understand this as an early-stage technology business; we’re not managing it like a typical business we would acquire in our standard operating structure. It’s not profitable, and that’s perfectly fine. Our focus is on capturing the market and investing for growth. I anticipate more developments in the coming years, but it should have a strong software margin profile. It’s scalable, growing significantly at that early stage with high double-digit growth rates. We’re really excited about the opportunities this represents as a key asset in the EV charging infrastructure sector.

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?

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 as an anchor asset around the EV charging infrastructure space. Good morning, Andrew. Can you hear us?

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?

In the fourth quarter, we observed strong pricing. Although we did pull back slightly on the early pricing from 2021, we maintained good pricing, likely around a 3% increase. As I mentioned, pricing remained favorable in the fourth quarter. While we saw the gap close, we successfully mitigated some downward pressure on margins from a pricing perspective. Looking ahead to 2022, we are maintaining solid pricing. We plan to continue adjusting our prices to account for inflation, which we expect to positively impact the year. We have previously discussed projections for the full year being low to mid-single digits. If we consider it from an excluding EMV perspective, the growth may lean more toward mid to high single digits, with revenue significantly contributing to that growth, and we expect to remain price cost positive again in 2022.

And then just a philosophical question about managing the downturn in EMV over the next two years. If you look at industries with solid structure, like what some companies are doing in the channel and the extent of price increases in the HVAC industry, considering the favorable industry structure in North America, how do you view the possibility of pushing pricing further in the EMV space? I'm not sure your competitors would have the same level of response. How do you balance volume versus price in EMV as volumes continue to decrease? Why not accelerate pricing? Why not push harder and just speed up the decline and get it over with? How do you think about this? 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.

Good morning. Thank you for your time. I’m interested in the discussions taking place at both the board and management levels regarding capital redeployment. Given the stock performance since the spin-off and the attractive acquisitions like DRB that support your investment strategy, there has been a 24% increase in the street's earnings expectations for 2022, even though your stock is down 10%. With your valuation at about 9 times EBITDA and approximately 9 times the new EPS guidance, how are you balancing the situation? It seems like the market isn't fully recognizing the potential, especially when comparing to how some peers are trading. While I understand the need for portfolio transition, what are the current discussions surrounding share repurchase and its importance compared to the M&A opportunities you are considering?

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 initiatives that we're undergoing, which will take a significant period of time but also that we're focused on returning shareholder value, and that share repurchase 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 back our own stock depending on market conditions. Again, not mutually exclusive. I think you've heard a little bit of a change in our direction here when it comes to 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 is that we 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 or, 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 street perceiving the portfolio. So I appreciate the comments and I'm putting just one more time clarify the '23 EMV decline. The $300 million to $350 million is a one-year decline.

So that would be the decline from '22 to '23. One year.

You mentioned that you can offset the revenue decline where you anticipate earnings to grow. The expectation is that you could offset about half of the revenue decline through cost reductions, changes in mix, some mergers and acquisitions, and some repurchases, which would still lead you to expect EPS to grow in 2023.

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.

Yes. Good morning, guys. Where did backlog in the year?

Backlog remained 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 provide the exact percentage, but we expect some reduction in backlog as EMV decreases. In terms of XEMB, we mentioned European core growth in the low to mid-single digits, but for XEMB in 2022, we're looking at more mid to possibly high growth for the year. I believe we'll see a similar performance in terms of orders. In summary, I would frame it as expecting a solid mid-single-digit demand environment from orders once we account for the EMV and other related factors.

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. We spent a total of $15 million this year in 2021, slightly below our initial expectation. Some expenses have shifted to 2022 due to timing and actions related to EMV. We expect a return on this spending in 2021, estimating around $20 million in savings. This will be our exit rate for the year, with additional benefits expected in 2022. We also plan for further spending related to our long-term strategies for simplification and profitable growth, as well as reallocating resources for EMV and other growth opportunities in our multi-year plan.

Thanks Mark. That concludes our formal comments. Britney, we are now ready for questions.

We will take our next question from Steve Tusa with JPMorgan. Your line is now open.

Sorry, just one last quick question here. Regarding the acquisition, you mentioned a 3% contribution. What is the current annual run rate for DRB? It seems a bit lower than what we had in our model. What are your expectations for annual revenues for that business in 2022?

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 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 and 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.