Vontier Corp Q2 FY2022 Earnings Call

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. 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 conference over to Ms. Lisa Curran, Vice President of Investor Relations. Ms. Curran, you may begin.

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.

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, 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 towards 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 towards 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 roadmap 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 towards 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 franchise 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, we are 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 roadmap for accelerated growth that we introduced last quarter. With that, I'll turn the call over to Dave to provide the financial results.

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, driven by timing of supply, which I will elaborate on further in a bit. The increase in operating profit and strong execution drove incremental margin of nearly 30% and modest adjusted core operating margin expansion. Excluding the $0.02 or $3 million dilutive impact of our energy transition investments, our incremental margin is high 30s. Looking at the top line performance of our two platforms. In our Mobility Technologies platform, core revenue was 3.5%, reflecting growth in GVR in developed and high-growth markets, particularly in North America, more than offsetting the sunsetting EMV impact of nearly $15 million in the quarter. Total growth in Mobility Technologies was 11% as DRB continues to increase market share and increase share of wallet, while benefiting from their industry-leading position and a very strong market backdrop. DRB has continued to outperform our expectations during this first year of ownership and will become core near the end of Q3. In our Diagnostic and Repair Technologies platform, core revenue declined 3.6% in the quarter as a result of both a difficult compare against the 57% growth in Q2 of the prior year and also normalization of Matco to a more typical growth and operating profile, but still above pre-pandemic levels. The demand backdrop remains healthy as technician employment and auto repair remain at high levels. As Mark referenced, we did experience some labor and other production challenges that prevented us from reducing backlog as much as we had anticipated, which remains an opportunity in the second half of the year. Looking at total company sales regionally, North America core revenue grew low single digits due to GVR growth in non-EMV applications more than offsetting a decline in EMV. Developed markets overall grew low single digits as strength in North America was partially offset by a mid-single-digit decline in Western Europe. High-growth markets, which are typically lumpy, grew low single digits with strong double-digit growth in India, being partially offset in other areas, including Eastern Europe and China. We anticipate increased lumpiness in high-growth markets due to the broader macroeconomic and geopolitical factors as well as timing of tender orders. That may impact growth rates some in the near-term, but overall, we remain confident in this profitable growth initiative in the middle and long-term, given the attractive long-term secular drivers. Moving on to the balance sheet. We ended the quarter with a cash balance of just under $130 million and had $14 million of borrowings under our $750 million credit facility. Our net leverage was 3.3x adjusted EBITDA at the end of the quarter and temporarily elevated due to the large cash outflow year-to-date related to share repurchase and acquisition activity and a temporary shift in the timing of free cash flow generation from first half to second half of the year. The quarter became significantly back-end loaded given supply chain issues and this lack of linearity shifted free cash flow from Q2 to Q3. Further, we saw additional working capital build in inventory. We maintain our commitment to investment-grade credit ratings and expect that our leverage will end the year below 3x net leverage, with our targeted range being between 2.5x and 3x net. We will also have capacity for further free cash flow deployment in 2022, which will fund the announced acquisition of Invenco and also additional share repurchase of approximately $100 million. These assumptions, of course, are influenced by market conditions and further M&A opportunity. In Q2, we refreshed our repurchase authorization back up to $500 million and subsequently have deployed $31 million against that. Our total year-to-date share repurchase stands at $288 million as of today. These assumptions on leverage and capital deployment capacity do not consider any additional capital raise through divestiture activities. Today, we disclosed assets for sale, and those being considered are the Hennessy and GTT operating company. These businesses comprise about $175 million of annual revenue at a combined growth rate that is below the non-EMV fleet average. The impact of selling these businesses will be accretive to enterprise gross margins and operating margins by greater than 60 and 40 basis points, respectively. We anticipate the proceeds from divestiture will be used for some debt reduction and then also providing further available capital for deployment on M&A and/or share repurchase, which would more than offset the reduction in EPS resulting from removing these businesses. In our full year 2022 guide, we have assumed approximately $0.12 to $0.13 of contribution from these combined businesses. Returning to adjusted free cash flow conversion. On a year-to-date basis, our conversion is 23%. We talked previously about the poor linearity we experienced in Q1, which is typically a low point for free cash flow generation, and we saw further deterioration in Q2. We anticipate that this dynamic will normalize over the second half of the year, but we also are seeing some upward pressure on our working capital levels, mostly in inventory as we build stock to satisfy demand. We anticipate that a combination of these factors will have some impact on our full-year free cash flow conversion, and we will more likely be around the 90% range rather than the typical 100% portfolio generates. Turning to the outlook assumptions. For the full year 2022, we are maintaining our core revenue guide of low to mid-single-digit growth, with non-EMV growth of high single digits, as EMV is still expected to be approximately a $50 million headwind. We also continue to expect core operating margin expansion of 30 to 60 basis points, reflecting our leveraging of VBS to dynamically adjust our cost structure to effectively adjust to demand levels and offset inflationary impacts. Our confidence in delivering these results reflects continued execution on our profitable growth initiatives and price-cost management and the resiliency of our portfolio through the cycle. The full year EPS guide is unchanged and adjusted earnings per share range from $3.20 to $3.30 and does not contemplate the impact of noted divestitures. We anticipate that the Invenco acquisition will close in Q3 and that it will be neutral to EPS in 2022 and accretive in 2023 by mid-single-digit cents per share. Taking a closer look at some of our other assumptions, we now expect full-year 2022 weighted average share count to be approximately 161.4 million, which reflects the impact of the share repurchase activity conducted to date in 2022, but not the additional $100 million that I previously referred to. Interest expense is anticipated to be $68 million, reflecting an increase in interest on the variable portion of our debt. Our guide also reflects the current foreign currency translation rates and the strengthening of the U.S. dollar since our last guide, which has had a $0.02 dilutive impact on the full year since our last update. Our assumption on the full year effective tax rate remains at 23%. Moving on to the third quarter of 2022. We expect core revenue growth of low single digits with non-EMV core growth of high single digits. This contemplates a supply environment similar to what we experienced in Q2, still not normal, but more stable than what we experienced in previous quarters. Adjusted core operating margin is expected to be 20 to 40 basis points. As Mark stated, this translates into adjusted earnings per share of $0.85 to $0.90 in the quarter. Before turning it back to Mark, I'd like to call your attention to Slide 8. We presented this slide last quarter to better dimensionalize our conviction in our ability to offset the impact of the EMV decline in 2023 and most importantly, how we expect to have a rebaseline core revenue growth rate of mid-single digits at accretive margins post the EMV sunset, which we continue to expect completes in 2023. Our conviction in accelerated growth and returns has not changed, and we continue to make progress on many fronts. The profitable growth initiatives and platform strategies continue to progress. We have deployed further capital to share repurchase and announced the acquisition of Invenco, demonstrating progress on the capital deployment section of this slide. Also, the disclosure of our plans to divest Hennessy and GTT demonstrates progress on the continuing evolution of our portfolio towards markets with attractive growth and margin profiles. With that, I will turn it back to Mark.

Thanks, Dave. As Dave highlighted, we are continuing to evolve the portfolio towards attractive markets and growth characteristics. And as we potentially enter a slower growth macroeconomic environment, I think it's worth reminding you of our portfolio's low cyclicality as best demonstrated in 2008, 2009, where sales were down only mid-single digits. We have a highly resilient portfolio of businesses, not correlated to PMI, but rather tied to a steady wave of regulatory drivers. The economy of convenience, expansion of digital workflows, modernization and build-out of retail fueling infrastructure, and increasing complexity of the car park are attractive secular drivers of sustainable growth. And as the 2023 growth roadmap in Slide 8 also illustrates, we are taking advantage of the resiliency and strategic optionality inherent in our businesses to build a better, stronger, more focused growth portfolio. I want to underscore once again that while we believe continued M&A will be a part of our strategy to continue our multiyear portfolios transformation, we are not dogmatic in our approach. Given the strength of our cash generation, we will balance investing in organic and inorganic opportunities along with returning capital to shareholders. They are not mutually exclusive. We will continue to align our capital allocation priorities to the benefit of our shareholders, as we execute on the initiatives underway to drive further portfolio diversification, profitable growth, and increased returns. We are driving a value-creating growth agenda. We are making meaningful progress on our most important priorities and shareholder commitments. We are demonstrating strong execution and successfully delivering our profitable growth initiatives. We're showing we will make acquisitions and carry only assets that maximize value even at the expense of near-term earnings. Bottom line, we are focused on long-term shareholder value, and we're accelerating returns. And lastly, before turning it over to Lisa, I'd like to thank her for her important role in the successful launch of Vontier as a public company, especially for her professionalism, intellect, and Investor Relations expertise. We are fortunate to have Lisa staying on long enough to help ensure a smooth transition. With that, I'd like to welcome Ryan Edelman to the team. I believe many of you already know Ryan from his prior roles in both IR and the sell-side. Ryan brings deep experience in our sector and a clear understanding of market dynamics. We are very excited to have him aboard. With that, Lisa, I wish you all the best in your next chapter, and I'll turn the call back over to you.

Thanks for the kind words, Mark. After the pleasure of working with Ryan in the last month, I'm confident that you all are in the best of hands with him. Katie, we are now ready for questions.

Our first question will come from Andrew Obin with Bank of America.

Lisa, thanks so much. We'll definitely miss you. And Ryan, welcome, look forward to working with you. First question on working capital. And you guys are considered to be some of the better operators out there. And I appreciate the shift in the free cash flow story. What are you looking for to sort of what signposts should we look for, for the industry, for your supply chain to normalize? And this is a bigger picture question, right? I'm sort of taking it beyond Vontier. What's your best guess as to one thing to normal? And if they don't, what structural countermeasures can you take? Do you need to carry sort of more buffer stock going forward? Do you need to rethink your supply chains in 12 to 24 months? Just more of a 30,000, 40,000-foot view on supply chain.

Yes, Andrew, thank you for the question. It's clear that we have been dealing with supply chain challenges for some time now. I want to emphasize that we have already taken steps anticipating these changes in the supply chain. One of the initiatives we have implemented is a simplification program that directly impacts our suppliers. This initiative is crucial as it helps us consolidate and understand which regions we source our materials from. However, I want to reiterate that the situation remains challenging. I'm extremely proud of our team's efforts in addressing significant issues while fulfilling our commitments. Nevertheless, I expect these challenges to persist for a while longer. I hope that by 2023, we will see improvements. We are already noticing some progress, particularly with semiconductors and electronic components, but these areas still present considerable difficulties. Dave, would you like to add any comments?

Yes, Andrew made an excellent point about the linearity. In Q2, we really saw VBS at its best. The way supply affected production was notable. Typically, we would ship around 40% of the quarter’s output in the last month, but this time it exceeded 50%. In our largest factory where EMV is produced, nearly half of the quarter's shipments occurred in the latter part of June. This exemplified VBS at its peak, but it also highlights some of the challenges we faced. Additionally, this affected our shorter collection regions, impacting receivables and free cash flow for the quarter. Just wanted to emphasize that.

Yes. And another question I have just a follow-up on M&A. I think your recent acquisition is sort of more middle of the fairway type of acquisition for you, but would you say that the M&A funnel is skewed more towards software solution? Drivz was early stage, high growth. Invenco, they've scaled through a decent level of profitability. Do you have a philosophy on what's the better time to acquire software firms, because it seems that's where the Company is going?

Yes. I definitely wouldn't say that we're looking for software companies to acquire. I think there's a mix of things that are in our pipeline and that you can expect us to execute and cultivate our pipeline accordingly because I think there are great returns. They can have some embedded hardware into it as well as software. And if you look at companies like Invenco, you look at companies like DRB, it has a combination of those. They are not just software. Now granted some of the alternative energy stuff that we did earlier in the year with Drivz with an embedded technology, Sparkion. Those can be more software-oriented, but once again, a mix.

Our next question will come from Nigel Coe with Wolfe Research.

This is Ryan Cooke on for Nigel Coe. I just wanted to ask about gas station investments. And if you could provide some color on how you typically see that tracking with higher gas prices?

The industry is currently experiencing a significant transformation, driven not only by investments in energy transition but also by the increasing sophistication of the retail environment. We're witnessing the emergence of innovative formats in local neighborhood stores and truck stops. Recently, I returned from Norway, where I observed a company that has made considerable advancements in electrification and home charging. Additionally, as gas prices rise, multinational oil companies or those integrated into gas supply can enjoy higher profit margins, evident in the energy sector. Hence, firms like 7-Eleven, equipped with a sophisticated range of offerings, are likely to invest in energy transition and retail development. This trend presents an exciting opportunity for building mobility infrastructure. We are optimistic about our position to leverage these investments effectively.

Great. That's very helpful. And then I also wanted to ask about the e-mobility space and see if you could provide some details surrounding the Drivz investment. And I guess just how we should be thinking about those sort of investments moving forward?

Yes. I'll turn it over to Dave, but let me just give an opening on that. The bigger picture here is that we can play in and opportunity. We believe in the petrol-based infrastructure, particularly in high-growth markets growing out, but at the same time, if you look at the energy transition, we're actually very well-positioned to take advantage of that. And investments like Drivz with embedded technologies like Sparkion give us a great platform for investment because it's the operating system for the electric charging network that needs to be managed. And if you think about the bigger issues here about range anxiety, this is a huge growth space, and we're exactly at the right part of the value chain to not only grow but to grow profitably. Once again, I'll go back to my Norway visit, all the major players out there in the market doing electric charging have subscribed and are subscribing to that Drivz operating system, I think it's a real testament to how we position ourselves for growth. And so it's a great position to be in right now.

Yes. I'd just point out to folks, too, that we have some new disclosures sizing the dilutive impact of those investments in our supplemental slides in Slide 15 and 16 of the presentation. We heard you asking for that information, and so we provided that this quarter, right. Thanks, Katie. Back to you.

Our next question will come from Andy Kaplowitz with Citi.

This is Piyush on behalf of Andy. So DRB is growing nicely. Can you talk about the visibility through the remainder of the year at this business? And I think when you guys announced DRB, you've talked about high single-digit growth over the longer term. So maybe provide some additional color on what's driving the double-digit growth you saw in the quarter and how being part of Vontier helps DRB achieve these growth rates?

Yes. So I think you broke it a little bit at the beginning of that question. I think what you asked was what's driving the growth rates for DRB. Is that correct?

Yes.

I believe our approach to mergers and acquisitions has been effective. We have selected the right asset and executed it thoughtfully, demonstrating our discipline in M&A. This entity is clearly the leader in the market, combining hardware and software into a comprehensive end-to-end point-of-sale system. We enhance this with workflow software solutions that are in high demand from customers, placing us in a growing sector. Additionally, our integration plan is well-aligned and straightforward due to the nature of the business. We have successfully managed significant changes and leveraged the existing expertise within the company. Overall, both our strategic direction and execution have been highly successful.

Got it. Very helpful. And my follow-up question is we talked leverage here. Like I think you expect leverage to be under three turns by the end of the year. Can you talk about how you're planning to balance continued deleveraging versus driving incremental capital deployment in the second half and maybe into 2023?

Yes, sure. I mean I think we have a targeted range of below 3x kind of that 2.5 to 3x net leverage that I talked about. And our free cash flow generation profile and EBITDA growth should facilitate that with additional capital to deploy. So it's always dynamic. M&A opportunities, we don't always get to pick when those come. We've talked about deploying additional capital of $100 million over the second half of the year into share repurchase and the timing of which will depend on market conditions. But when conditions are right, we'll be more aggressive. So we have throughout the year developed. And we also said, I would remind you that at times we would be above 3x with line of sight to coming back below that in a reasonable period of time. So I think our current profile reflects that. And frankly, the 3.3x net leverage is a reflection of the opportunities we've taken to date over, well, $288 million of capital deployed to share repurchase and the deals we did in the first and then funding the Invenco deal that we just announced.

Our next question will come from Julian Mitchell with Barclays.

Thanks, Lisa, for all the help down the years. Just wanted to follow up on the Invenco deal. Maybe help us understand recent organic sales growth rates in that business, what you're thinking about the top line growth outlook there? And then when we're looking at earnings accretion for perhaps next year, are we thinking sort of single digits cents of EPS accretion is the right sort of ballpark for that?

Yes. Let me address this. Their organic growth profile is somewhat flat, but it's an area where we can truly capitalize. I’ll explain that a bit more before handing it over to Dave regarding the accretion aspect. First and foremost, this acquisition is a fantastic strategic fit for us and enhances our portfolio diversification. The agile software that customers are increasingly seeking significantly improves our workflow solutions. The important point is that this platform is being developed with some of our key clients, and we have strong leverage with our salesforce. It adds a feature-rich environment for our high-growth market, and we can utilize our existing salesforce effectively. Therefore, we view this as a unique opportunity for growth by combining our strengths with what they offer. Additionally, there are cost synergies to consider here as well. Although that wasn't the focus of your question, I'm happy to discuss it. Go ahead, Dave, please share your thoughts on accretion.

Yes. So I would first highlight what Mark said. Very synergy-rich deal, great channel synergies, but cost synergies as well. And the newer stage product they have on the software side fits hand in glove into our existing channel. So we're really excited about that. So it's an interesting deal in that it has attributes of the bolt-on, which helps us drive returns. They're very synergy-rich but also on point strategy with their newer product on the software side. As far as accretion, we're looking at kind of mid-single digits cents per share next year and beyond that, moving up to high single digits cents per share.

That's very helpful. And then maybe just my second question would be around any update on sort of that EMV outlook. I see you've got maybe a bigger headwind kind of third quarter than we thought and then a bigger step-up perhaps into the fourth quarter with that $30 million number. Maybe help us understand kind of where are we on the overall transition and kind of penetration of the installed base amidst the sort of quarterly moving parts and maybe supply chain disruption. Any change in perspectives on that EMV waiting next year or over the next 12 months?

Yes, Julian. That's a great question. Overall, nothing has really changed in the big picture. What we're experiencing the most is that we fulfilled more EMV demand in the second quarter than we initially expected. An additional $10 million to $15 million of that late June demand got fulfilled, which pulled in from the third quarter and contributed to that step-up. We are still meeting a lot of demand in a quite uncertain environment, so things will fluctuate, and we will do our best to keep you updated. We likely won't provide updates on the penetration numbers until year-end, but we still anticipate a $50 million headwind for the year and our outlook for next year remains unchanged.

Our next question comes from Rob Mason with Baird.

I wanted to see if you could elaborate on some of the challenges you mentioned at Matco and how you anticipate those evolving in the second half. Additionally, I thought I heard a comment regarding investment in company-owned stores. How new is this dynamic, what level of investment are you referring to, and when might we expect to see this come to fruition?

Yes, happy to, Rob. First of all, the macro environment for Matco is quite strong. Technicians are enjoying high employment and good wages, and shop activity is robust. All these factors are very positive. Additionally, the conditions for complex repairs are favorable. However, one of the main challenges we face is a significant year-over-year comparison, as Matco experienced over 50% organic growth in the previous year. We anticipated that this quarter would be difficult because the timing of the Matco Expo shifted to Q1 instead of Q2, which impacted our bookings. At the same time, we dealt with supply chain disruptions and some labor issues primarily at our Jamestown factory, where we manufacture toolboxes. We have a remedy plan for that, which I'm confident in. Furthermore, the development of franchisee opportunities is an area of potential growth for us. Historically, we haven't focused much on company-owned stores, but there are underserved regions where we have an advantage, as about 30% of our territories remain unpenetrated. Sometimes, establishing a company-owned store can help jumpstart a route and make it easier to hire someone to manage that area. This is more of a transitional strategy rather than a permanent one, as we aim to be creative in building out these underserved regions, especially given the labor constraints, which make attracting talent more challenging. We have a strong value proposition, and we're working to be more innovative in our approach.

Yes. We continue to track after a somewhat slower start in the DT side of the business. We expect to achieve low single-digit core growth for the full year. Overall, in the empty side of the house, we are still on track for mid-single-digit growth to meet the full-year guidance we provided.

Our next question will come from Ty Hardwick with Credit Suisse.

I want to ask a question about Invenco. Is my understanding correct that it takes GVR a bit beyond the gasoline forecourt and into the wider convenience store market? Also, could you provide some background on what the contingent consideration is based on?

Yes, if I understood your question correctly, you are inquiring about how this is positioned. This is an important question because it extends our offerings beyond the traditional convenience store with our retail solutions platform. What we're seeing here is a microservices software offering that provides significant modularity and customer choice, which we've observed in other retail venues that haven't yet emerged in the sectors we serve. This is not only beneficial for convenience stores but also for other components of mobility infrastructure, such as car washes and repair solutions. It's a modern, modular technology that excites customers because it reduces costs and lead times, allowing them to select solutions that suit their needs. This is a substantial advancement; if we were to develop this ourselves, it would take a couple of years, and right now there isn’t anything available in this space that can be developed. Therefore, we are in an excellent position to capitalize on this opportunity.

To expand on that, I believe you mentioned transitioning from the forecourt to the convenience store. It's worth noting that we are already established in the convenience store sector with our current retail solutions. As Mark highlighted, this aligns well with our broader strategy and could lead us into additional sectors. Additionally, the contingent consideration is linked to revenue performance over the first year and a half.

It appears we have no further questions at this time. I would now like to turn the program back over to Mark Morelli for any additional or closing remarks.

Yes. Thank you, Katie. Look, I couldn't be more encouraged in the track record that we're establishing and the runway of opportunities in front of us at Vontier. I'm particularly thankful to the team for continuing to step up and work through challenges in this dynamic market environment. And I think our work is resulting in a stronger, more growth-oriented portfolio. I couldn't be more encouraged by all this. So thanks for joining us on today's call, and have a nice day.

Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect.