Vontier Corp Q2 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Vontier Second Quarter 2024 Earnings Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on August 1, 2024, and a replay will be made available shortly after. I would now like to turn the conference over to Ryan Edelman, Vontier's Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us on the call this morning to discuss our second-quarter results. With me today are Mark Morelli, our President and Chief Executive Officer; and Anshooman Aga, our Senior Vice President and Chief Financial Officer. You can find both our press release, as well as our slide presentation that we will refer to during today's call on the Investor Relations section of our website at investors.vontier.com. Please note that during today's call, we will present certain non-GAAP financial measures. We will also 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 risks and uncertainties. Actual results might differ materially from any forward-looking statements that we make today, and we do not assume any obligation to update them. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available on our website and in our SEC filings. With that, I'd like to turn the call over to Mark.

Thanks, Ryan, and good morning, everyone. Thank you for joining us. On today's call, I'll provide a high-level overview of our performance in Q2 and an update on strategy execution as we navigate the current dynamic environment. Anshooman will then provide a deeper dive into Q2 results and conclude with our 2024 outlook update before we move into Q&A. Let's get started with a summary of the quarter on slide three. Second-quarter results were below expectations in a challenging quarter. Elevated macro uncertainty delayed customers' project timing and discretionary spending, impacting orders and shipments at the tail end of the quarter. Our fueling and alternative energy businesses both declined mid-single-digits organically, driven by order delays, which pushed shipments into the third quarter. Through July, we've recovered over $20 million of our Q2 shortfall. We continue to see convenience retail operators grow their CapEx budgets. We're also seeing larger new-build projects take priority as the pace of the smaller refresh and retrofit activity slows near-term. Market activity continues to be healthy, as new site construction projects soak up resources and shorter-term refresh projects push out. Our repair solutions segment also declined mid-single-digits amid a larger-than-expected pullback in discretionary spending by service technicians. While technician wages and employment remain strong, prolonged inflation, macro and election uncertainty, and broadening consumer weakness in the U.S. are impacting buying decisions. We continue to perform well against industry benchmarks, but sales for discretionary product lines slowed more at the end of the quarter and will likely remain under pressure until interest rates move lower and we are through U.S. election uncertainties. Despite the headwind from order delays and lower book and turn business, core order growth was approximately 1%, and our book-to-bill remained above 1, consistent with the first quarter. Margins decreased on lower volumes. However, gross margins are up year-over-year as we delivered solid price/cost and productivity, and our new product launches are gaining traction with customers. We estimate the headwind from lower volumes equates to more than a 100-basis-point headwind relative to our guidance range. Given the incremental macro pressures we saw in a couple of our end markets at the end of Q2 impacting order timing, we're lowering our outlook for the full year. As you know, we are pursuing a business simplification program as part of our strategy. We are accelerating actions to optimize our cost structure and have identified $12 million of in-year savings. This is incremental to the $50 million run-rate savings we delivered in 2023. Our balance sheet remains strong, bolstered by a solid cash-flow generation profile. We paid down $100 million in debt year-to-date, reducing our net leverage to 2.7 times. We also repurchased roughly $38 million in shares in Q2. We will prioritize share buybacks in the second half of the year, including an expected accelerated share repurchase program. Anshooman will provide some more details in a moment. Turn to slide four. As we manage through near-term market dislocations, we remain focused on what is within our control and positioning Vontier for the future. To that end, we continue to execute our connected mobility strategy and driving value creation through our three pillars, which we outlined at our March 2023 Investor Day. Our strategy is about operational excellence and accelerating growth, capturing secular growth opportunities in our end markets as we deliver more connected, integrated solutions solving high-value customer problems. Pillar one, optimize our core is about further optimizing our cost structure to expand operating profit margin. We rely heavily on VBS and the 80/20 principles embedded in our focus and prioritization program. While we continue to reduce our global dispenser platforms, we're also focused on subsystem and component harmonization. As an example, we're reducing our hydraulic configurations by half. We've also reduced our manufacturing footprint by over 600,000 square feet with more opportunities for reductions. Recently, we've opened a new center of excellence in India, covering engineering, IT, and other support functions. While improving our capabilities, this is enabling us to reduce overall product development and support costs by nearly a third. Our incremental cost reductions are indicative of the runway of opportunities to continue to simplify our business. Pillar two, expanding our core is about leveraging our current market positions to accelerate growth with a focus on driving share gains through innovation and improving product vitality. We're seeing significant interest in our new FlexPay 6 offering, a fully-integrated connected and flexible payment solution that is uniquely positioned as it incorporates the most up-to-date payment card industry standard, PCI 6. As an example, we are currently deploying FlexPay 6 to an existing large global retailer to enable a fully-integrated personalized loyalty program designed to drive customer engagement and higher in-store traffic across their entire North American footprint. Further VIS or our vehicle identification system solution, which leverages smart hardware and cloud-connected technology to create an automated payment security offering, continues to gain traction. We were recently awarded a multi-year contract to supply this technology to fueling retailers in the Middle East, and we're currently rolling this out. And we have a strong pipeline of iNFX-based flexible retail solutions, which continues to build. We are currently in late-stage pilots with several leading retailers in North America. Customer interest in these pilots is strong and extends beyond our initial focus on payment to incorporate loyalty programs and site management applications. We are encouraged by our growing pipeline of opportunities. Pillar three is focused on pursuing opportunities to expand into adjacent markets with solutions leveraging new and existing offerings. We recently received our first sizable order for our new turnkey EV charging solution, Konect, which is targeted at supporting our large installed base of C-store customers. The pipeline is growing rapidly. The build-out of our EV charging infrastructure continues to accelerate, particularly across Europe. We continue to convert charge point operators to our Driivz platform. Through the first half of 2024, we doubled our ports under management year-over-year to over 85,000, and we're well on track to achieve over 100,000 ports under management by year-end. Although we are seeing some near-term weakness in our markets, we are well-positioned in durable attractive end markets with long-term profitable growth opportunities. Our leading market share positions, business simplification opportunities, and cash generation profile are bolstering our position and we expect to capture even greater operating leverage as demand accelerates. With that, let me turn the call over to Anshooman to walk you through the details of the quarter and our updated outlook.

Thanks, Mark, and good morning, everyone. I'll start off with a summary of our consolidated results for the quarter on slide five. For the second quarter, we reported $696 million in total sales for a core decline of approximately 3%. As Mark noted, sales were impacted by order timing at our environmental and fueling solutions segment and our alternative energy business, as well as lower discretionary spending impacting repair solutions. Book-to-bill was above one in all three of our segments, with each reporting low-single-digit order growth year-over-year. Adjusted operating profit margin declined by approximately 60 basis points year-over-year, as contributions from positive price/cost and productivity were more than offset by lower volume. This resulted in adjusted EPS of $0.63 for the quarter. Adjusted free cash flow was $26 million, reflecting higher inventory due to the shipment delays and unfavorable linearity of revenue. Turning to our segment results, starting on slide six. Environmental and fueling solutions core sales declined 5% year-over-year. Shipment delays negatively impacted sales by approximately $30 million, with over half recovered in July. Dispenser sales declined compared to the prior year. Large convenience store operators are prioritizing new-build projects, which have longer construction cycles. Some of this is at the expense of shorter-term refresh and retrofit projects, which is temporarily impacting volume growth, both in the quarter and second-half of the year. Aftermarket parts sales increased high-teens in the quarter. We continue to leverage a large and expanding installed base and focus on high-value components, accelerating growth in this high-margin offering. Sales of environmental solutions also grew during the quarter, with low-double-digit order growth benefiting from global regulatory tailwinds. Segment operating profit margins expanded 60 basis points, as we were able to offset lower volumes with positive price/cost, strong supply chain management, and operational productivity. Turning to slide seven, mobility technologies core sales increased 1% in the quarter, driven by strong demand for payment and enterprise productivity solutions in the convenience retail market, offset by ongoing weakness in our car wash business. Invenco delivered another strong quarter, reporting low-double-digit sales growth. Orders were up nearly 20% for the second consecutive quarter. Sales for alternative energy solutions declined mid-single-digits, as $6 million of shipments pushed from June and was recovered in July. Demand for our compressed and renewable natural gas solutions remains robust, with orders up 20% in Q2. We expect this business to return to mid-teens growth in the second half and deliver low-double-digit growth for the full year. Sales at our car wash technologies business, DRB declined mid-teens in the quarter, largely as anticipated, driven by continued lower demand in our point of sale and control systems tied to new tunnel car wash sites. This was partially offset by low-double-digit growth in recurring revenue, led by strength in service and aftermarket. Our DRB project pipeline continues to push to the right, given prolonged higher interest rates. Notably, our backlog for 2025 continues to build, exceeding our level for the back half of this year. Segment operating profit margin was down approximately 140 basis points versus the prior year, due primarily to unfavorable mix and ongoing R&D investments at Invenco. Finally, on slide eight, repair solutions core sales declined 5% in the quarter. There was a meaningful pullback in service tech discretionary spend in the month of June. As an example, tool storage sales declined just over 25% in the month. Sales within diagnostics were up low-single-digits, which is a testament to our new product vitality with last year's Max 5 launch continuing to capture market share. Segment operating profit margin declined approximately 500 basis points, driven by lower volumes as well as the timing of bad debt reserves year-over-year. Looking at our balance sheet and capital deployment on slide nine. During the quarter, we retired our 2024 maturity and ended the quarter with a net debt ratio of 2.7 times, in line with our target of 2.5 times to 3 times. We also completed approximately $38 million in share repurchases in the quarter and $60 million year-to-date. Our balance sheet is healthy with strong liquidity with over $300 million in cash on hand and an undrawn credit revolver. We continue to believe there is a significant valuation disconnect relative to our long-term growth, profitability, and cash generation potential. In the second half, we expect to deploy a significant amount of the free cash flow we generate to buybacks, including our near-term intent to enter into a $100 million accelerated share repurchase program. With that, let me provide an update on our thinking for the third quarter and full-year. We expect the macro-environment to remain challenged near term amid continued uncertainty and consumer weakness with higher rates and U.S. elections continuing to delay customer order decisions and discretionary spending. We anticipate top line performance to remain pressured under this scenario and now expect Q3 core growth to be in the range of minus 2% to plus 2% with margin down 80 basis points to 110 basis points equating to EPS in the range of $0.67 to $0.71. For the full year, we expect revenue in the range of $2.9 billion to $3 billion, which reflects a 1% core decline on the low-end and approximately 3% growth on the high-end. With more of our incremental cost actions to benefit the fourth quarter, we anticipate operating margin flat with the prior year to up 50 basis points. EPS would be in the range of $2.80 to $3.00. Recognizing this is below our prior guidance and with a wider range, we believe our current outlook reflects an appropriate level of conservativeness based on what we are seeing and hearing from customers and channel partners. We thought it would be helpful to provide more transparency into the moving pieces of the top line guide. We've included slide 11 to help bridge you from the prior sales guidance midpoint to our updated 2024 midpoint of $2.95 billion. Operationally, we're lowering our second-half outlook by $110 million, which we break down for you by segment on the slide. Turning to slide 12, we've bridged our EPS guidance in a similar manner. Dropping through the $120 million reduction in revenue at a standard gross margin equates to an EPS decline of around $0.29. The savings associated with our accelerated cost reductions equate to a $0.06 benefit. Collectively, a lower share count, lower interest, and lower tax and other expenses adds back another $0.05 for a net reduction of $0.18 versus our previous guidance midpoint.

With that, I'd like to pass the call back over to Mark. Thanks, Anshooman. We're continuing to transform our business. We're reshaping our portfolio and have executed a balanced capital allocation strategy at overall double-digit returns. With increasing software and aftermarket sales, we've increased our recurring revenue as a percentage of total sales by over 10 percentage points since spin. We are enabling the digital transformation of our customers. A great example of this is the traction we are seeing with our Invenco offerings in payments and enterprise productivity. As we connect, manage, and scale the mobility ecosystem, we expect our continued portfolio transformation will enable sustainable growth and allow us to deliver top-tier financial returns. Despite the slower-than-expected macro-environment near-term, we remain confident in our longer-term outlook. Our end markets are compelling, underpinned by durable secular drivers, and we're advantaged given our leading share positions and strong customer relationships. With that, operator, please turn the line over to questions.

Thank you. We will now begin the question-and-answer session. The first question comes from Julian Mitchell with Barclays. Please go ahead.

Hi, good morning. And...

Hi. Good morning, Julian.

Maybe just to start, it looks like your guidance on the top line embeds sort of a mid-single-digit type increase in sequential sales in the third quarter and the fourth quarter? And so, maybe just kind of help us understand which of the segments are leading or lagging those sequential moves and the sort of confidence in that sequential pickup.

Yes, I'll begin. Revenue is expected to rise from Q2 to Q3 and again in Q4, which is typical for this season. In terms of revenue growth, we anticipate growth in mobility technologies, with Invenco experiencing strong orders in Q2 and seeing nearly 20% growth for two consecutive quarters. We expect continued growth from Invenco. Additionally, our alternative energies business, ANGI, saw a 20% increase in orders in Q2, although $6 million of shipments were delayed from June to July. This business is expected to achieve solid growth in the high to mid-teens in the third quarter. On the other hand, the repair solutions segment may remain flat or slightly decline sequentially. We are still observing that U.S. consumers are facing challenges due to higher interest rates and inflation, which are affecting technicians. Even though technicians are employed at record levels and earning high wages, many are reducing their work hours due to the high cost of living, as revealed by our survey of over 1,000 technicians and franchisees. There is a sense that despite working the same or longer hours and earning more, they are cutting back. The fueling business is also expected to improve in both Q3 and Q4. We have conducted extensive channel checks and customer discussions, and while some clients are focusing on new industry locations, both greenfield and brownfield projects remain active. However, there has been a slight reduction in refresh and retrofit projects, yet we feel confident in our guidance based on these discussions.

Thank you very much. For my follow-up on operating profit, it seems you're indicating that for the third quarter, margins are down nearly 100 basis points year-on-year. However, it appears that for the fourth quarter, margins are expected to improve year-on-year along with a significant sequential margin increase as well. I understand that some of this sequential increase may be due to typical seasonality. I'm just trying to grasp that the Q4 margin guidance doesn't seem to include many tailwinds. Could you elaborate on whether this is primarily driven by volume or other factors?

Yes, Julian. Volumes do increase from Q3 to Q4, which is beneficial. Additionally, the $12 million in incremental costs we mentioned earlier is primarily attributed to the fourth quarter due to timing, which positively impacts our Q4 margins. Sequentially, our margins are expected to increase by about 90 basis points from Q2 to Q3, followed by another increase in Q4. It's worth noting that Q3 of last year was our highest margin quarter, making it a challenging year-on-year comparison.

Great. Thank you.

The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.

Hey. Good morning, guys.

Good morning, Joe.

Mark, my apologies if I missed it in your prepared comments. But can you elaborate a bit more on the timing of the order delays that impacted the quarter? What exactly happened? You mentioned a recovery of over $20 million in July. What is the expectation for the rest of the quarter? Are you anticipating more recoveries going forward? How do you plan to achieve that?

Yes, absolutely. I'm happy to elaborate, Joe. There was definitely some uncertainty from macro factors that impacted our end markets late in the quarter, particularly at GVR and Matco. Let me break it down for you. Inside GVR, we had a very strong first quarter with 10% organic growth. As we moved into April, we were closely monitoring our customers, conducting channel checks, and working with our construction distributors, who were significantly busier compared to last year in terms of construction and build-out. We have observed a strengthening in new construction, which is an important aspect of the convenience store market in North America, and that trend continues, which is promising for the medium and long term. However, we are seeing some softness due to uncertainty regarding the timing of the refresh retrofit market. This is separate from maintenance aftermarket parts, which are performing well. Smaller projects are being delayed, leading to a pacing issue that we misjudged as it developed late in the quarter. To update you on July, the order fulfillment rate was strong, primarily completed in July with a little spillover into August. Consequently, we are providing a more cautious forecast that we believe is responsible, taking into account the order rate and timing while noting the ongoing opportunities in new construction. On the macro front, our customers had a record expo in the first quarter with low-double-digit growth, and even high-ticket items were selling well, including the newly launched diagnostics referenced by Anshooman, along with toolboxes, which we monitor closely. Toolboxes saw a 15% increase in Q1, but then a 25% decline in June, reflecting macro uncertainty that has affected consumer confidence, particularly among service technicians in the medium to lower income brackets, who are facing challenges from rising inflation. The pressures on families are also impacting them. However, in the longer term, there are positive macro drivers, including a rising number of vehicle models on the road and the average age of the car parc at 12.6 years. We conducted a survey to validate our insights from channel checks, and we recognize that service technicians may buy fewer tools but will prioritize productivity items. Diagnostics saw continued growth during the quarter, and specialty tools also made modest gains. Therefore, even in this challenging environment, if we can provide more productivity offerings, we are prepared for the softness and uncertainty. After the election concerning Matco, I anticipate a reduction in some of this uncertainty. Additionally, interest rates may improve the situation as people manage their credit card expenses. We believe these are short-term issues reflected in our cautious guidance.

Thanks. Thanks, Mark. That was great and detailed. The one follow-up I would have for you is that like, look, I think the market is hoping for a few rate cuts potentially by year-end. I guess as you kind of think about the sensitivity of your business to rates and then ultimately what that means for getting back to that 4% to 6% organic growth range, is there any color that you can kind of give us on that specifically?

Yes. Certain aspects of our business are indeed affected by interest rates, particularly Matco, where our service technicians interact closely with U.S. consumers. The uncertainty around rates certainly plays a role. We have been communicating with our customers and are actively supporting them as they implement their projects. They remain very optimistic about new construction efforts, which are often long-term projects. This industry is not experiencing overcapacity; new venues typically perform better in the market and attract more consumers. Consequently, there is robust activity in new builds, and this growth continues at an accelerated pace with strong returns. However, interest rates may cause some hesitation in the market as people anticipate rate cuts. Smaller projects, like refresh retrofits, are undoubtedly impacted by timing. This is something we didn’t anticipate fully, but we are presenting this in our cautious guidance moving forward.

I'll also add that our DRB business is impacted by the higher interest rates from a new-build perspective. The economics of the car wash are impacted by the higher interest rates. And the pipeline of projects remains strong. People are really interested in this, and we're also starting to see some of this where the backlog for 2025 is already higher for DRB new systems versus the back half of this year with the expectations that interest rates are going to start coming down next year.

One thing, Joe, that's encouraging for us is when we are able to compare ourselves to industry benchmarks that are out there, whether it be on Matco where we think we have very favorable compares where we're gaining share. Also on GVR year-to-date, we feel like our leadership position will come our way, particularly because we are much better positioned than the major players out there in the marketplace and they're continuing to build out that strength there, which bodes well for growth. And so, we're very encouraged by that. And we think we're also able to demonstrate coming into the mid-part of the year that we're gaining share in environmental, which has some pretty obvious compares there. And environmental is early innings on a tank upgrade cycle, and we're looking at good growth in the back end of this year. So we also have some product launches that are coming that we're gaining traction on in Invenco. So that business is doing much better than it did in prior years and is actually posting double-digit growth, and we feel very encouraged by that build-out of that pipeline. So lots of things where our strategy is intact and we feel very encouraged by, but this soft sort of spot in the market and the pacing of the market were reflecting in our guidance.

Perfect. Thank you, guys.

Thanks, Joe.

The next question comes from Andy Kaplowitz with Citigroup. Please go ahead.

Hey. Good morning, guys. It's actually Jose here on for Andy.

Good morning, Jose.

So for my first question, from your updated sales guidance, it seems like you're expecting mobility to be kind of in the high low-single-digit, low mid-single-digit range for the year. Despite DRB sounding like it went more or less as you expected, when do you see mobility revenues really begin to inflect back to your longer-term high-single-digit range? Could you talk about the path you're seeing there?

Yes. I think where we see that's quite encouraging, Jose, is around the pipeline of activity, particularly around Invenco. We have this new payment kit called FlexPay 6 that we talked about that's building strength in the market and we are very encouraged by the uptake there. In effects, which is being piloted with a number of larger customers is also making great progress. And we have enterprise productivity that also includes what we referenced also in the earnings call called VIS. And so, that business we think demonstrates a really good growth driver in mobility technologies. The other thing is that in DRB, the backlog there is certainly being impacted by pushouts in the interest rate environment. But there's not building of inventory in the channels. We're able to take advantage of a lower interest rate environment fairly quickly in that business and it's a leadership position where we're launching new products this year, both to build out of Patheon, as well as a recent announcement of a product line called Catalyst that helps businesses be more productive in car wash. So that business is a great business. It's just going to take a step back from a very strong 20% to 25% growth rate that we've seen in the last couple of years, but it's a little bit of a digestion period with lower interest rates. So, we feel mobility technologies platform is great. If you look over the last couple of years, it's been making significant progress building out that platform, and it's not going to grow as much as we anticipated in the near term, but we do anticipate it coming back to growth based on the strategy that's in place.

I'll just add that if you look at the mobility technology business, the companies in that segment are aligned with our long-term projections, except for DRB, which is holding back growth this year. Going into next year, DRB will have an easier comparison for at least the last three quarters. Therefore, it should return to growth next year. Although DRB stepped back this year, it's still a strong business and a solid acquisition. Cumulatively, since we've owned it, it has contributed about $50 million to $60 million more in operating profit than our acquisition case, and it continues to track at or slightly above our acquisition case this year.

Yes, Jose, one other piece of that platform I'd like to highlight, it is a smaller piece, but it's made really good progress and we're pretty confident in it. It's ANGI. This is the compressed natural gas, renewable natural gas, also layering in some hydrogen orders and shipments there because we've launched that product line. That business, if you look back a couple of years ago, it's $50 million. It's going to be more than $100 million this year. And it's a longer-cycle business. So we're almost fully booked for the year. We're fully booked for Q3. And that business has been digesting a very strong growth rate of over 30% growth. So for us, that's managing a growth business. There's a bit of order timing in the quarter. But when you look at Q3, we're fully booked. We're clearly deploying VBS there with our growth capacity that needs to be put in place. But compressed natural gas and renewable natural gas and a couple of orders now coming in on hydrogen, meaning hydrogen is longer term, but a great position. But clearly, what we see here is very good build-out and uptake from customers and just ramping that growth.

Got it. I appreciate the color there. As a follow-up, I saw on one of the slides, you called out high growth in recurring revenue in the quarter for DRB. Could you take a moment and fill us in on where you're at in terms of recurring revenue now for the company? You guided 30% to 35% by 2026. I would surmise that recurring revenue is still very important to Vontier, not to mention it's usually higher margin. So a, are you on track on the near-term? And is that 30% to 35% still the right estimate to think about?

Yes. I'll provide some insights and see if Anshooman would like to add anything. Since then, recurring revenue has increased by about 10 points in our portfolio. It's significant to note that we have divested from some areas, such as the tower equipment business, which had limited recurring revenue, totaling about $150 million in asset shedding. However, we're also seeing growth in our SaaS businesses. For instance, iNFX has a strong pipeline, and our Invenco business is a clear example of that growth. Teletrac Navman is also improving. Specifically regarding DRB, we are launching our new Patheon product, which is transitioning to a SaaS-based recurring revenue model. Our business now has more than 1,000 software engineers, marking a significant change from a couple of years ago, and we are encouraged by this progress. The aftermarket parts business in GVR has been a major focus, with a 20% growth last quarter despite some inventory channel issues previously. We are actively targeting the aftermarket more effectively within GVR, and we are seeing advantages from a larger installed base as well as new initiatives like electronics refurbishment and entry into new distribution territories. Our management team is dedicated to increasing aftermarket sales in GVR, which is on the rise and shows strong potential. Anshooman, would you like to add anything?

Yes. I'd just add that we are definitely on track for our 2026 targets that we put out at Investor Day from a recurring revenue perspective. And as we innovate and we drive productivity for our customers, that also leads to higher recurring revenue. Simple example is over-the-air updates with FlexPay 6. So that really is a big driver of productivity for our customers, but also a good source of recurring revenue in the future. iNFX has recurring revenue. So we're well on track and we're making good progress, and recurring revenue continues to grow.

Got it. Thanks for the time, guys. Appreciate the detail.

Thanks, Jose.

The next question comes from Nigel Coe with Wolfe Research. Please go ahead.

Thanks. Good morning, guys. Hope all is well. Thanks for the question. Just a couple of quick ones on some of the details. I apologize if you already covered these. On the environmental delays, and I understand you've recovered some of those in Q3, was weather a factor there? Was it labor availability? Maybe just some comments on that? And then on Matco margins, I think you mentioned timing of reserves. So I'm just wondering how the credit quality is tracking at Matco and whether some of the declines you're seeing, is it demand-driven or maybe you're being a bit more selective perhaps in light of credit quality? So any comments there would be helpful as well.

Yes. So let me comment on the first one. The weather actually did impact ANGI in the quarter. We were pretty constrained with the capacity for growth there. So, we're constantly pushing on growth. So, we got back-end loaded and unfortunately had six tornadoes in Janesville, Wisconsin that where we have our manufacturing facility there. Thankfully, nobody got hurt, but it took labor out of our equation for the last week of the quarter. We're using more VBS to pull in that capacity more and we're in exercising more outsourcing, so that we don't get as back-end loaded, not subjective to that. So we're pretty happy on that activity, but unfortunately was susceptible to that. And then on the Matco side, we really see volume here and more bad debt coming through back to maybe more some of the lows we've seen historically. But overall, the margins are holding up quite well inside Matco. There's no question there's been some discounting, but we're also going back to our supply chain and we're getting some more costs out of our supply chain accordingly. Did you want to add anything there, Anshooman?

Yes. On a couple of your other parts of your questions, from an environmental and fueling perspective, it wasn't tied to weather or labor constraints. It was just, as we mentioned on the prepared remarks, we had order timing slip out as some of our larger customers have prioritized new-to-industry greenfield, brownfield projects. It's at the expense of retrofit and refresh projects, and these shorter-term projects slipped out from a timing perspective. And then on Matco margins, yes, we are impacted by bad debt reserves. And as I've said in the past, our write-offs have typically created in a somewhat narrow band. And post-COVID when there was a lot of money flushed into the economy, we were actually trading at the low-end of the band. Last year, we kind of moved to the mid-part of the band that we trade in and now we're at the high-end of the band that we've typically had from a write-offs perspective. We're averaging about $2 million of higher write-offs a quarter versus last year. It really started turning towards Q4 last year, but we did see a step-up this year. And that overall credit quality is pretty good over the last couple of years. We've been working to move up the credit quality. When we look at 60-day past-due balances, they are up versus what they were a year or two ago, but they're still below the credit card industry average, which has traded up to about 2.6 times and a 12-year high for the credit card industry. So, we are trading below that from a 60-day past-due. And that's something we continue to manage. The yields on the portfolio are pretty healthy. We yield about 20% interest on the portfolio. So, it's still a profitable piece of our portfolio.

Great. Thanks, Anshooman. That's great color. And then just a quick one on the ASR, the $100 million. Any sense on when you might pull the trigger on that?

Our intent is to move forward in the near term, which is why we are discussing it. We believe this is the right approach to deploy capital with a favorable return environment. Therefore, we are confident that this positioning will allow us to benefit from the current near-term softening.

And Nigel, we have to wait for the trading window to also open.

Right. Yes, thanks. Thanks, guys.

The next question comes from Andrew Obin with Bank of America. Please go ahead.

Hi. This is David Ridley-Lane on for Andrew. And I very much appreciate the transparency here. Just a clarification question. On the $12 million of in-year savings on this restructuring actions, about what portion is sort of temporary versus structural? And what I'm really trying to get at is, what do you think is the full-year savings in '25?

Yes. About two-thirds of those savings are structural and permanent and then there's some temporary savings in there, obviously.

Got it. Thank you. And then just to check back up on the pipeline of Invenco prospects, how those pilot projects are progressing? Thank you.

Yes, David, they're progressing quite well. It's something we're pretty close to their large players that see not only the advantages in payment, but also in some of their enterprise productivity more of a site management capability that incorporates loyalty into that as well. So, we're really happy with the progress we're making on Invenco. I think it's a great platform with fitting the needs that the market really has right now. So I don't think we're coming up with technology that is needed that is out there, that is sort of pie in the sky. This is absolutely solving their high-value problems of running their enterprises better. And so hopefully, we'll be able to update you with that with some press releases here.

Excellent. Thank you.

Thanks, David.

Next question comes from David Raso with Evercore ISI. Please go ahead.

Hi. Thank you. My question is on DRB. I think you made the comment return to growth in '25. And I recall you mentioned earlier in the call about backlog being up. Can you remind us the size of the backlog roughly the sales in that type of business? And I know it depends on if projects being delayed, maybe it's higher than normal. But just trying to get a comfort level with '25 returns to growth in part on the backlog, while of course, I appreciate if rates get lowered, hopefully it releases a few projects to get going. But can you help us a bit with the backlog comment?

Yes. So really, if you look at the backlog, there are two pieces to the backlog. One is the recurring revenue piece of the backlog, where we basically for at least a lot of the long-term service agreements and software support agreements, we have 12 months that we put in backlog. And that part of the business remains strong. The recurring revenue grew low-double-digits again in this quarter. So that business is still growing. Now from the new systems perspective, this is a shorter book-and-turn kind of a business for us, but we have about 20% of the new systems revenue for next year, I would say, in backlog already.

All right. That's helpful. And rates coming down in your mind, is that simply the projects that have been pushed to the right or just to get across the finish line to go ahead and execute the project? Or do you also foresee from conversations in the channel as rates come down, we go back to private equity consolidating the industry, helping your cause for more professional skilled car washes?

Yes. So the backdrop on rates coming down is clearly causing some uncertainty. If you step back and sort of understand the trend that has occurred here, we have a leadership position. The industry is being built-out, but also consolidating. And as you mentioned here, David, that's clearly being impacted. Why would people go forward at that same rate or pace, particularly with rates beginning to come down sometime here in the future? And so what we believe happens as the interest rates improve is that there’s also that industry will consolidate maybe not the same rate of build-out of new sites as it did because that was pretty frothy. And in fact, that was something we didn't anticipate how frothy it would get. But we think that it will go back to kind of a normal growth rate, but also the industry consolidation benefits us. We have the leading point-of-sale system out there with all the major players. And as they buy up smaller players, they're going to want to consolidate this because they're looking at better productivity. The key that this softness in the market has really shown in the car wash industry is that the benefit accrues to the folks that run a good car wash because that can make a big difference on how much cash flow you generate in a year if you operate a good car wash. So, you're going to want to consolidate your platform, and you're going to want better productivity and this comes our way because we're the leader in the industry and we have the tools that enable them to do that.

I appreciate the color. Thank you.

Thanks, David.

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Mark for any closing remarks. Please go ahead.

Thanks, Kenneth. We continue to make solid progress in delivering differentiated solutions for our customers as they expand, modernize and decarbonize our footprint. Vontier has a unique competitive advantage within the mobility ecosystem. It is purpose-built, and it is a portfolio of connected hardware and software solutions. We call this our connected mobility strategy, and it places us at the forefront of our customers' digital transformation and it also supports our multi-energy infrastructure needs. And finally, I do want to make comment that we continue to allocate capital in a responsible way, delivering high-return options that deliver value to our shareholders. And I'd be remiss without talking about the efforts of our teams across the world. I'd like to extend a thanks to our teams for their dedication and their focus on delivering to our customers and their incredible efforts to improve our business, as well as it's important to recognize their hard work every day. So with that, we appreciate your continued interest in Vontier. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.