Earnings Call Transcript - VNT Q4 2022

Operator, Operator

My name is Gretchen, and I will be your conference facilitator this morning. I would like to welcome everyone to Vontier Corporation's Fourth Quarter and Full Year 2022 Earnings Results Conference Call. All lines have been muted to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the call over to Ryan Edelman, Vice President of Investor Relations. Mr. Edelman, you may begin your conference.

Ryan Edelman, Vice President of Investor Relations

Thank you, Gretchen. Good morning everyone and thank you for joining us on the call this morning to discuss our fourth 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. During today's call, we will present certain non-GAAP financial measures. Information relating to these non-GAAP financial measures is available on the investors section of our website at vontier.com. Please note that unless otherwise noted, the presented financial measures reflect the year-over-year increases or decreases. 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 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 they are made and we do not assume any obligation to update any forward-looking statements. With that, I'd like to turn the call over to Mark.

Mark Morelli, CEO

Thanks, Ryan. Good morning everyone, and thanks for joining us on the call today. Let's get started with a few highlights of the quarter, and the year on slide 4. We're very encouraged by our strong finish to the year, reporting 10% core top line growth for the fourth quarter, 11% excluding the impact of EMV. Our teams around the globe remain disciplined in their execution of our profitable growth initiatives and platform strategies, which continue to deliver results. As we noted on the last quarter's call, we are sunsetting EMV. This upgrade cycle has impacted our US fuel dispenser business over the last five-plus years and we are transitioning to a new normal in 2023. We are confident in our outlook for our growth in this business going forward, as well as in our strategic vision to accelerate profitable growth across the portfolio. Orders in the quarter were up 10%. Excluding the impact of EMV from the year-over-year comparison, orders in Q4 were up in the high teens. We continue to see good momentum as the demand environment remains constructive across most of our end markets and backlogs remain above pre-pandemic levels. Global supply chain conditions are normalizing, shortening lead times and helping to reduce our past due backlogs. The momentum we've seen in core top line growth underscores our team's commitment to our customers, along with the execution of our profitable growth initiatives and platform strategies. We're building a portfolio of industry-leading technologies and solutions and higher growth verticals of the mobility ecosystem. Let me highlight a couple of notable examples of our profitable growth initiatives. Our fueling aftermarket business grew top line more than 20% in 2022. We have built an incredible installed base of dispensers globally and this is a solid example of the profitable growth initiatives we are executing with VBS. We'll monetize this growth opportunity for years to come. Our environmental products business delivered high single-digit growth, driven by increased market demand for our innovative solutions that solve one of the most pressing needs of our fueling customers' environmental compliance. Technologies like vapor recovery and leak detection are benefiting directly from increasing global regulation. Our platform strategies are also making significant progress. Let me highlight a couple of examples. DRB, which ended the year with pro forma core top line growth of over 30%, was largely driven by strong market demand for tunnel car wash and continued share gain. We deployed VBS across this business, which helped drive a 400 basis point improvement in operating margins under our first year of ownership. We see a clear path for sustainable growth in this platform over the next several years as we begin to leverage existing customer relationships to capitalize on upgrade and expansion opportunities. The integration of Invenco is off to a great start, and we're beginning to see early benefits of the investment thesis from the combined portfolio in our dispensers and payment business. During the quarter, we successfully launched the new INFX microservices software platform, which enables a more modular, scalable, and customizable solution for our convenience retail customers. Our fuel or c-store early adopters are already seeing the benefits of this technology. Alternative energy grew more than 30% last year, as our fleet and municipal customers continue to shift more fuel usage towards compressed natural gas and renewable natural gas or biofuels to support cost-effective decarbonization efforts. We are optimistic about the future of this business, particularly as we launch our new hydrogen dispensing technologies and can better serve a multi-fuel future. Lastly, Driivz continues to scale commercially owing to its best-in-class hardware-agnostic EV charging software. Driivz now manages over 35,000 charge points and we continue to gain traction with key customers. We now serve over 60 premier customers like EVgo, Shell, Mer, Volvo, and Circle K to name a few in more than 30 countries and across a variety of verticals. Driivz' scalability and track record of successful integrations has enabled leading market positions in places like the Nordics, which has among the highest penetration of EVs anywhere in the world, and where Driivz now manages 75% of the public fast charging networks. These examples demonstrate that we are making meaningful progress on our strategy-led portfolio transformation designed to enhance profitable growth through delivering smart, sustainable solutions with a tighter focus on the mobility ecosystem. We are bolstering our competitive advantages in markets with strong secular drivers by adding to our connected hardware and software capabilities and in turn creating offerings that leverage data analytics to solve increasingly high-value customer problems. Our strategy revolves around connecting smart hardware scaling through digitally-enabled platforms and managing assets to deliver outcomes like improved operational efficiency, enhanced user experiences, or frictionless payment transactions. All of these lead to more growth and higher recurring revenues with more accretive margins. Throughout 2022, we exercised a disciplined capital allocation approach. As you may remember early last year, we committed to prioritizing share repurchase, and for the full year, we completed over $325 million of share repurchase. Share repurchase remains a key component of our capital deployment strategy. And as Anshooman will share with you, we also plan to pay down debt in the coming quarters. We also invested organically in new product developments and technologies along with nearly $300 million in strategic acquisitions that will drive sustainable long-term growth and value creation. Notably, we published our first ESG report in November. I am proud of the ambitious goals we've set for ourselves and the progress we have already made across a number of dimensions, including greenhouse gas emissions, diversity, and safety. In 2022, we reduced our total recordable injury rate by 30%, increased our percentage of global female leaders from 22% to 26%, and increased our percentage of black and Latinx employees from 10% to 15%. It's imperative that we attract and retain world-class talent and that we cultivate an inclusive and innovative culture. Our ESG program is helping us do just that. More recently, we received a B from CDP following our first climate disclosure. This puts us in roughly the top 30% of all submitting companies right out of the gates, recognizing our programmatic rigor and commitment to transparency. Sustainability is core to our business and strategy. We are uniquely advantaged to drive sustainability impacts that matter to our customers and key stakeholders, including helping our customers meet their own ESG commitments. Before I turn the call over to Anshooman, I wanted to provide a few key thoughts on our progress and outlook. I couldn't be more pleased with the way our colleagues around the globe responded to adversity and stayed focused delivering for our customers and stakeholders this past year. It's a true testament to the fundamentals of the Vontier Business System, or VBS that underpins our culture of innovation and continuous improvement. Looking into 2023, while the macroeconomic backdrop remains dynamic, historically our businesses have proven to be resilient and we are seeing signs of healthy customer demand. We remain agile and we will continue to closely track order trends and monitor leading indicators for each of our businesses. Regardless of the economic outcome, we are ready and we will continue to leverage our culture of excellence powered by VBS to deliver strong operating results and enhance core growth. When coupled with disciplined capital deployment we have an attractive framework for value creation. I'd like to turn the call over to Anshooman to provide the financial results.

Anshooman Aga, CFO

Thanks Mark, and hello everyone. Let's start with a brief summary of our performance in the fourth quarter on Slide 5. Sales of $872 million were up just over 10% on a core basis and 11% excluding the impact of EMV. This performance is a result of disciplined execution, improving supply chain conditions particularly when compared to the prior two quarters, and strong momentum on our profitable growth initiatives and platform strategies. Growth was broad-based including another quarter of strong growth at DRB and continued strength across the GVR portfolio. Adjusted operating profit for the fourth quarter was $190 million, down slightly versus the prior year with a corresponding decline in operating profit margin impacted by anticipated product mix dynamics, continued growth investments, and a full quarter of Invenco revenue. These impacts also had a drag on adjusted gross margin during the quarter. Looking ahead, we anticipate Invenco will add $0.07 to $0.10 of EPS in 2023 with synergies ramping as the year progresses. For the full year 2022, we delivered solid underlying profit improvement, up low double digits excluding the year-over-year impact of EMV. We effectively navigated difficult inflation and supply chain conditions and ended the year with positive price/cost. Our performance reflects the power of the Vontier Business System, including the deeper deployment of a focus and prioritization process across the organization. Adjusted earnings per share for the quarter were $0.81 compared to $0.83 in the prior year period. Higher interest expense was mostly offset by a positive contribution from lower share count year-over-year. Turning to the top line performance of our two platforms on Slide 6. Core revenues for Mobility Technologies increased approximately 13% with robust growth across much of the portfolio due to solid execution, improved supply chain conditions, delivery on backlogs, and increased bookings. DRB had another quarter of strong growth driven primarily by continued strength and share gains in the tunnel car wash segment. Our fueling aftermarket and alternative fuels businesses each posted 30% top line growth with environmental up high teens. Retail Solutions was up mid single digits in the quarter. As expected, the Teletrac Navman business posted its first quarter of core growth, up low single digits with strong momentum as we exited the year as ACV ended 2022 up low double digits. Core revenue in our Diagnostic and Repair Technologies was up 3%, with a 4% increase in Matco. Matco experienced higher backlog conversion enabled by an improved supply chain environment, leading to same-store sales growth of mid-single digits. By product category, we saw strong demand for power tools up 30% and tool storage up low double-digits. Solid growth in same-store sales was partially offset by normalization in net franchisees after exceptional growth in 2021. Moving on to free cash flow and the balance sheet on slide 7. Fourth quarter adjusted free cash flow was $175 million, up 15% year-over-year with conversion of 137%. For the full year, adjusted free cash flow was $314 million, with adjusted free cash flow conversion of 63%. Capital expenditures were $17 million in the quarter and $60 million for the year or an increase of 14% for Q4 as we continue to invest in growth productivity and sustainability. This was short of our full year target range due primarily to higher than anticipated working capital in Q4 given strong sales growth, including a higher AR balance. For the full year, working capital as a percentage of sales returned to pre-pandemic levels. Net leverage ended the year at 3.2 times, down sequentially but still above our target of around three times. Our longer-term target range for net leverage remains 2.5 to 3 times and we expect to be within that range in 2023. We repurchased approximately $40 million in shares in the fourth quarter, which brought us to just over $325 million for the full year or nearly 14 million shares. Following the end of the quarter through the month of January, we repurchased an incremental $18 million. Turning to our guidance for 2023 on slide 8. We are initiating a Q1 2023 guide of adjusted EPS of $0.57 to $0.62, which assumes a core revenue decline in the low to mid-single-digits and adjusted operating profit margins down in the range of 100 to 140 basis points. Withstanding the impact of EMV, we anticipate baseline core sales will increase low-single-digits and adjusted margin to expand 130 to 170 basis points. At the midpoint, as a percentage of full-year, this represents a relatively normal start to the year at around 22.5%. The guidance for the full year 2023 is slightly above the framework we provided on our Q3 call in November. I want to point out that this guidance, as previously communicated, assumes a $300 million revenue headwind from the year-over-year decline in EMV, which translates to about $150 million in operating profit pressure or around 250 basis points of margin. Adjusted EPS is expected to be in the range of $2.73 to $2.83, which is based on a mid-single-digit decline in core revenue and margin compression of 60 to 80 basis points. Again, if we strip out the impacts of EMV, for the full year we anticipate baseline sales to increase mid-single-digits on a core basis and adjusted margin expansion of 180 to 200 basis points. Relative to the previous framework, our outlook assumes restructuring savings at the high end of the previously communicated band of $40 million to $45 million. We expect free cash flow conversion in the range of 90% to 100% returning to normalized levels. Although we began to see improvements in working capital in Q4, our inventory turns remain below normal. We are proactively working on reducing our safety stock and resetting our min-max levels at a part number level, allowing us to carry less inventory and still meet anticipated demand. Longer term, continued progress on our product line simplification will enable us to further rationalize SKUs and create additional runway for inventory turns to improve. We have provided you with some other P&L assumptions relative to our guide on the right-hand side of the slide. I won't walk through each of those, but I would call your attention to our assumption for an outstanding share count of approximately 156 million shares, which reflects the share repurchase completed in Q4 and in January, but does not assume the additional share repurchase that we would complete in the remainder of the year. We have a returns-driven, disciplined, and balanced capital allocation program aimed at creating long-term value. We remain focused on investing for long-term growth and we still view share repurchase as a key priority. We also remain committed to maintaining a healthy balance sheet and our investment-grade credit rating. To that end, we anticipate paying down between $150 million and $200 million in gross debt this year. With that I will turn the call back over to Mark.

Mark Morelli, CEO

Thanks Anshooman. We're extremely proud of the progress we've made since our spin. In 2020, we became a public company and built our foundation. In 2021 and 2022, as part of Vontier 2.0, we assembled an incredible leadership team, began our portfolio transformation focusing on non-EMV growth, and executed on self-help initiatives that continue today. Now, Vontier 3.0, our smart sustainable solution strategy built on this foundation and moves up the technology stack, solving high-value customer problems, driving profitable growth, transforming the portfolio, and generating top-tier shareholder returns. The 3.0 strategy has three pillars. Pillar 1: optimize the core, expands margins through profitable growth initiatives like strategic pricing and product line simplification. We are still in the early innings here with tremendous runway ahead to optimize margins and drive growth. Our progress and continued focus on optimizing the core puts us in an athletic stance heading into an uncertain macro environment. Pillar 2: expand the core, leverages our core platform positions to expand and grow. Prime examples of this include our alternative energy and fueling aftermarket businesses growing over 20% in 2022. Pillar 3: adjacent markets expands into near adjacencies where we have a right to play and win. Examples include expansion opportunities at DRB and our new hydrogen dispensing technologies. Vontier has unparalleled portfolio breadth across the mobility ecosystem. We believe we are the only company capable of providing a full suite of connected hardware and software solutions to connect, manage, and scale assets across this $30 billion plus addressable market. We have a diverse and growing set of customers across the car wash, convenience retail, auto repair, fleet operators, and EV charging verticals. These customers are facing common secular trends and common challenges that they trust us to solve. Labor and skill shortages, increasing car part complexity, increasing regulation, increasing focus on decarbonization and sustainability, and consumer demands for more personal frictionless experiences are all forcing the evolution of the mobility ecosystem. We operate at the center of this ecosystem and are poised to enable the way the world moves for years to come. We are uniquely positioned to benefit from the energy transition regardless of the pace of this transition as we have winning positions across the multi-fuel landscape. Our team is energized by the opportunity to be a leader in the global energy transition and to help ensure it is safe, affordable, secure, and sustainable. We are galvanized around the Vontier 3.0 smart sustainable solution strategy and our corporate purpose of mobilizing the future to create a better world. We are excited about the road ahead as we take advantage of the resiliency and strategic optionality inherent in our businesses to build a better stronger and grow our portfolio. I look forward to sharing more about our progress in this strategy to accelerate growth at our Investor Day next month. With that, Gretchen, we are ready to open lines for questions.

Operator, Operator

At this time, we will open the floor for questions. Our first question comes from Andy Kaplowitz from Citigroup.

Andy Kaplowitz, Analyst

Hey good morning. So, you mentioned that orders were up 10% in high-teens I think ex-EMV and improved sequentially. What does that translate into for instance only low single-digit core revenue growth in Q1 with 10% you did in Q4? And then just focusing on orders. Has your non-EMV related order strength continued into the first quarter? Have you seen any hints of the slowdown from your customers?

Anshooman Aga, CFO

Thanks, Andy. We did see good strength in our orders in the fourth quarter. Underlying businesses are strong. When we look at it from a book-to-bill perspective, our book-to-bill ex-EMV for the full year 2023 was 1.03 so a little above 1. We see good growth in our businesses based on our discussions with our customers, the convenience store operators, the larger national chains, and the regional players continue with new site builds. When we look to the other pieces of our portfolio like Matco, we see the mid-single-digit growth visibility out there. DRB should continue to grow high-single digits, despite a very strong compare from the previous year. So when you put it all together we feel comfortable with the mid-single-digit growth for next year.

Mark Morelli, CEO

Yes. Andy, this is Mark. I'll just jump in on that too. I think the outlook for Q1 is impacted by timing. We know the construction cycles have been impacted a little bit by weather too. So while we're pretty confident on the outlook, there also is an impact in Q1 due to timing.

Andy Kaplowitz, Analyst

Appreciate the color, guys. And then maybe just a little more color regarding your margin performance in Q4. Why was mix worse than you thought? And what about the other items that pressured margin? Could you talk about the additional growth investments you're making. I know you didn't change your 2023 operating framework from what you gave us but how do you think about any incremental margin pressure impacting 2023 results?

Anshooman Aga, CFO

Sure. From a prior year perspective, our guide did include Invenco revenue of just over $20 million with no operating profit in the fourth quarter. And it included the incremental investments for Driivz. However, for the fourth quarter, we did have about an 80 basis point miss to what our operating profit margin guide was. And that was really tied to the amounts and timing of some year-end expenses and then just a very slight impact from incremental mix. From a perspective of next year, we feel pretty comfortable with our margins. We have margin expansion outside of the EMV impact so the baseline margins are improving. That's supported by a significant restructuring program that we are executing and also driven by the mix of higher-margin growth businesses like DRB and aftermarket business.

Andy Kaplowitz, Analyst

Anshooman, were those expenses like labor-related or something else supply chain related? Just any more color there?

Anshooman Aga, CFO

No, a little bit labor-related in the sense that for example, one of the bigger ones was the timing of health care claims came in a little hotter in December than we had been running all the year but those are controlled because you have to stop losses, et cetera, but it did impact us for example $3 million more than what we were expecting.

Andy Kaplowitz, Analyst

Appreciate the color.

Nigel Coe, Analyst

Good morning, everyone. Regarding the EMV headwind, there is no change to the $3 million figure, but I estimate that the year-over-year headwinds in the first quarter will range from $25 million to $50 million based on our guidance. I'm curious if you could move past the comparison issues and provide some insights on the dollar figures. Given the expectation of $250 million for the full year, should we anticipate that dollar sales will remain relatively stable from quarter to quarter, or do you foresee a decline as the year progresses? Any additional information would be greatly appreciated.

Anshooman Aga, CFO

The 250 baseline sales for dispensers in the US are relatively linear over the four quarters. There is some seasonality but you're talking plus/minus $5 million based on the timing of some of the construction of our customers' projects. But typically the range is plus or minus $5 million to $7 million in the quarter.

Nigel Coe, Analyst

Okay. Good. And then just thinking about the 1Q guide, the down 100 to 150. I think in the past you talked about core margin not active margins. So I'm just wondering is that – 100 to 150 is that all-in EBITA margins down year-over-year, or is there a core and M&A impact we should think as well?

Anshooman Aga, CFO

These are all in operating profit margins. We did not guide to core operating profit margins just I think we're trying to simplify some of our reporting and make it easier for our analyst community both buy-side and sell-side to model us. So we did not include the core operating margins as we did in the past just reported operating margins.

Nigel Coe, Analyst

Yeah. Definitely makes it a little bit easier. And then just my final question is on components. Obviously very strong growth in 2022, aftermarket business don't tend to grow that much. I'm just wondering how much of this is maybe supply chain related perhaps. And when this all shakes out what proportion of your sales in GVR will be components?

Mark Morelli, CEO

Yeah, Nigel, this is Mark. I believe we have actively pursued this as part of our profitable growth strategy. Overall, our revenue has benefited from the easing of the supply chain, which has provided a boost. However, this initiative is very specific and deliberate. We made significant efforts to gain market share during the EMV upswing cycle, which was successful. Looking ahead to 2023, we are also well-positioned based on US dispensers. Large regional players are investing in new construction, rebuilding, as well as underground and environmental projects. This all contributes to better capabilities in capturing aftermarket opportunities. We identified this as a relative opportunity over a year ago and began focusing on it as part of our profitable growth strategy. While the supply chain has indeed helped, there is still significant potential for the future.

Nigel Coe, Analyst

That’s great. Thanks for the color.

Jeff Sprague, Analyst

Thank you. Good morning, everyone. Just on EMV it's, obviously, nice to see that number not moving anymore. I just wonder though if you could elaborate a little bit on your actual visibility on the $250 million in 2023, and then obviously this is a US discussion, I wonder if you could give us a little bit of color on what you're seeing in non-US fueling markets?

Mark Morelli, CEO

Yeah. Jeff, we're very happy that we have sunset the EMV cycle that's played through. Obviously, 2023 will be a trough year-on-year-on-year compares. But we're also very confident in the number that we're putting out there. We've done some recent conversations with customers that indicate there are the large national players, as well as regional players in the United States that are continuing to build out their footprint and they're also doing rebuilds on existing sites. So there's healthy investment that's going into convenience retailing right now. And there is no question that we have good visibility there on that $250 million. So I think that's a very good number. And we're feeling better and better about that. So I think it's a number that we've put out there. And as we get more into the year we're feeling very comfortable about that number. And then there's regulatory drivers that are also helping us. In the US there's a tank upgrade cycle that's going on for below ground. And so we're early innings on that tank upgrade cycle and that's been driving our environmental business. It's been one of our profitable growth initiatives to get better on that. And then your question was on the international side and we definitely see a good growth opportunity on international and predominantly regulatory drivers here. Latin America is a good one. Brazil is going into security of payment cycle. We have tax fraud issues in India. We've got vapor recovery in Mexico and Brazil. The Middle East also represents a good growth opportunity for us as they're getting more environmental on their regulation. So we love these regulations. They are certainly popping up not only in the US, but around the world and these are things that drive good secular growth for us.

Jeff Sprague, Analyst

Great. Thanks for that. And just an update on the process on Hennessy and GTT, what's going on there? And any update on timing, expected timing?

Mark Morelli, CEO

Yeah. So the GTT process is moving along well. So we're working through that as we speak. On Hennessy, we took a two-piece approach to that process. We had a piece of the business that wasn't profitable. We shut that down the previous quarter and we are in the process of selling those assets. The remaining of Hennessy, which is a profitable business we expect to launch that process later this year when the timing is right.

Julian Mitchell, Analyst

Hi. Good morning. Could you provide more detail on the baseline revenue guidance of mid-single digit growth in 2023? Specifically, how much of that is attributed to volume versus price? Additionally, could you share any insights on organic sales, particularly regarding Teletrac, DRT, and DRB expectations? Are there significant differences compared to the mid-single digit growth?

Mark Morelli, CEO

Let me start with a strategic overview, and then I'll hand it over to Anshooman for more details. Our profitable growth initiatives are definitely making progress. We've seen good traction in businesses like DRB, and we expect it to perform well throughout 2023 and beyond. The driving force behind this business is the car wash site build-out, which is quite resilient during downturns. Customers are still seeing good returns on their investments despite higher costs and interest expenses. Therefore, we believe there is strong visibility moving forward. Last year was exceptional, and while it may not be as strong this year, there is still significant potential. Additionally, when considering our revenue growth, some strategic areas, including alternative energy, continue to show promise. Invenco is also expected to contribute positively this year. These initiatives are gaining momentum and are translating into good visibility for growth. Anshooman, could you provide some details on that?

Anshooman Aga, CFO

Yes. Regarding your question about pricing, we anticipate it to provide a slight benefit, likely in the low single digits, but it's important to note that pricing can change. We are very disciplined in ensuring that the price-cost balance remains positive. We were proactive in raising prices as part of our strategic pricing initiative, which is aimed at driving profitable growth. Some areas are projected to grow at rates exceeding the mid-single digits; Mark mentioned our aftermarket business is performing exceptionally well, and we are focusing on that. Our CNG business, ANGI, is also expected to outpace the fleet average. DRB will continue to grow above the fleet average, despite facing a challenging comparison as we head into 2023. Overall, there are definitely strong areas throughout the business, and we have a positive outlook on our portfolio.

Julian Mitchell, Analyst

That's helpful. Thank you. And then, just maybe on the margin and earnings cadence through the year. Should we think about sort of operating margins year-on-year they're down again in Q2 and then sort of flattish in the second half year-on-year? And on EPS, is the first half worth maybe high-40s share of the full year EPS? Is that the right way to think about it?

Anshooman Aga, CFO

Yeah. As we've moved past COVID and now the EMV upgrade cycle has sunset we're moving into a more normal seasonality. I would think of about 42% to 44% of the year are coming in the first half from an operating profit and an EPS perspective with operating profit margins expanding in the back half of the year given the timing of revenue, some of the timing of restructuring savings and then the ramp-up of Invenco synergies.

David Raso, Analyst

Hi. Good morning. My question is on the free cash flow. After the 63% conversion in 2022 the improvement to 95% next year, I'm just curious, of the bridge in that improvement. And then secondarily, if you can achieve that you've got about $200 million extra of cash flow after the dividends and debt reduction target. How should we think about your prioritization of utilizing that extra $200 million? Thank you.

Anshooman Aga, CFO

Thanks for the question. In 2022, we faced a tough supply chain situation. Our inventory strategy focused on meeting customer demand and gaining their loyalty. With the supply chain conditions getting better, we have taken specific steps to reduce our inventory and enhance our inventory turnover. For instance, we have lowered our safety stock and adjusted the min-max levels for parts. Simplifying our product line has significantly reduced the number of SKUs we manage, and these changes will take time to fully impact our inventory levels, giving us confidence that our inventory turnover will improve. In terms of days sales outstanding, by Q4 2022, we returned to pre-pandemic levels, which is a more accurate reflection given that during COVID, many took advantage of early payment discounts. We are comfortable with our target of 90% to 100% free cash flow conversion. Regarding capital deployment, we've committed to around $200 million and anticipate generating just over $400 million in free cash flow. Our capital allocation policy is focused on returns and enhancing shareholder value. Given our stock price situation, M&A opportunities may not provide returns as attractive as stock buybacks, so we expect to see more share repurchase throughout the year.

David Ridley-Lane, Analyst

Good morning. This is David Ridley-Lane on for Andrew. Just wondering, what are the in-year benefits from restructuring that are embedded in the 2023 guidance? And also, what are your expected energy transition investments in the year?

Anshooman Aga, CFO

Yes. So, the in-year benefit is the high end of the $40 million to $45 million range that I talked about in the prepared remarks. We feel pretty comfortable that we're going to deliver a new benefit of $45 million at the high end of what I previously said last quarter. The impacts of the energy transition, I would view them in the low $20 million range, so somewhere between $22 million and $25 million. Yes. I think the cost synergies are tracking to plan and we feel pretty comfortable about it. From the upside perspective, this adds tremendous value to our portfolio. It's a very strategic acquisition that we did. And both from a payments side with our current portfolio, but from the new platform that we just launched this quarter, we feel very excited about where this business is positioned and how it integrates into our overall portfolio.

Mark Morelli, CEO

I will quickly add that this not only enhances our retail presence through strategic partnerships with major national players but also addresses some of our product gaps in the payment system. This provides a dual benefit. With more time in ownership, we are gaining confidence in articulating our initial hypothesis from the acquisition, and we are increasingly optimistic about it.

Joe Ritchie, Analyst

Thanks. Good morning, everyone.

Anshooman Aga, CFO

Good morning.

Mark Morelli, CEO

Good morning, Joe.

Joe Ritchie, Analyst

Anshooman, in your prepared comments, you mentioned having more confidence in the kind of preliminary framework that you provided last quarter for 2023 and just looking at that framework, the high-end, you can assume is around $3. And so, maybe just talk through a little bit about what's driving that confidence? And are you now talking about a potential framework that could be above $3 for the year?

Anshooman Aga, CFO

I'll stick to our guide for the year that we already provided from a framework perspective. But let me talk about why we're feeling more confident. When you look at the different pieces, one EMV has sunset, the numbers are as we expected. We've moved past EMV. Second, the base business, the $250 million as Mark elaborated, we feel very comfortable about it. It's not just internal analysis, it's speaking to our customers, looking at our customers' plans, and we feel really strongly about it. Our ex-EMV growth, we have a lot of drivers. Our orders in Q4 proved that the markets remain healthy. And so, we feel comfortable about that piece of the framework. Our restructuring is at the high end. Now, what I will say is different from the framework we provided. In that framework, we basically assumed that all our free cash flow would be redeployed in either debt paydown or share buybacks as our policy is to provide a guide with the current share count based on share purchases we already did, that's what we've provided. But as we pointed out, there's another couple of hundred million of free cash flow that we expect to generate this year, that we can redeploy, which would ultimately lead to higher EPS. So that's why in my prepared remarks, I said, we're slightly above the framework we provided last quarter. Hopefully, that was helpful.

Joe Ritchie, Analyst

Yes, super. And I guess just my one follow-on there, and I know we've talked about this the EMV sunsetting quite a bit already today, and fully recognize that you're confident in the $250 million number. But if you take a look at the fourth quarter, there really was only a one-point difference between your core growth and ex-EMV growth, which is roughly $8 million. And so I mean it does feel like the $300 million, 10-point number that you have for 2023, I mean it does really appear conservative at this point. And so, could you just maybe help elaborate on the conversations with customers and why that number should really uptick a lot as you progress through 2023?

Anshooman Aga, CFO

Yes. So, a couple of points out there. First, the Q4 number did benefit from the fact that supply chain conditions eased significantly, lead times came down and we could ship more. The second part of the phenomenon was, when you really look at the core US dispenser market excluding, the EMV upgrade that remained very healthy. We saw good order activity for above-the-ground equipment coming in from large national and regional customers as they continue to spend money on new site builds and refreshes. We have spoken to large customers. We've looked at their site plan build-outs. Keep in mind, construction of new sites, which is roughly 75% to 80% of this $250 million number. That cycle starts with acquisition of land, getting the permits, and then working through the construction. So as we talk to our customers, we get visibility into the plans and that makes us comfortable with the $250 million number for the year.

Mark Morelli, CEO

So, let me add in, maybe one thing we haven't said before, as I feel like we're trying to get this message through. One area that also gives us confidence is when you look at the large and regional players in the US, we absolutely have majority share here already. So this is the part of the market that is experiencing growth. And it's not like we're having to gain share here. We already own a very, very large percentage of that market already. And so I think it's kind of already in our wheelhouse.

Joe Ritchie, Analyst

Perfect. Thanks, guys.

Operator, Operator

Our last question comes from Steve Tusa from JPMorgan.

Unidentified Analyst, Analyst

Hi, this is Simeon on for Steve Tusa. In terms of pricing for next year, how much of the low-single-digit growth is carryover price, or are there any new price increases expected next year?

Anshooman Aga, CFO

There's a blend of both, and we do have price increases for next year built in. But keep in mind, the environment is dynamic. As we stay focused on being price/cost positive, if there are incremental inflation, we are going to pass that to the market.

Unidentified Analyst, Analyst

Okay. And then what was the spread on price cost in the quarter?

Anshooman Aga, CFO

In Q4, we benefited just under mid-single digits from a price perspective and we were price/cost positive.

Unidentified Analyst, Analyst

Okay, got it. Thanks – Thank you.

Operator, Operator

And it appears we have no further questions at this time. I will now turn the program back over to Mark for any closing or additional remarks.

Mark Morelli, CEO

Yes. Thank you, Gretchen. Look before we close, I just want to say a couple of comments here. I really want to take this opportunity to thank the teams across Vontier, whose performance and dedication really allow us to continue to perform and gain momentum in our business. I'm very confident in our business model and our ability to remain agile and execute by leveraging our culture of excellence led by VBS. I think we're making excellent progress in our execution on our multi-year growth strategy is intact and we're positioned to unlock value for our shareholders for quarters to come. Thank you for joining us on today's call. I look forward to engaging with many of you over the next several weeks as well as in our Investor Day in person in New York. Thank you very much and have a great day.

Operator, Operator

Thank you ladies and gentlemen, this concludes today's conference. You may now disconnect.