Vontier Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

Key Takeaways

  • Q2 organic sales declined ~3% as macro uncertainty delayed customer projects and discretionary spend, though ~$20 M of the shortfall was recovered in July.
  • Full-year guidance was lowered to $2.9–3.0 B in revenue (−1% to +3% core) and EPS of $2.80–3.00, reflecting added macro and timing pressures.
  • Cost-savings program accelerated with $12 M incremental in-year savings, on top of the $50 M run-rate savings delivered in 2023.
  • Net leverage fell to 2.7× following a $100 M debt pay-down and ~$38 M share repurchase in Q2, with a $100 M accelerated buyback planned in H2.
  • Progress on the Connected Mobility strategy continues: Invenco orders +20%, CNG orders +20%, and pilots of FlexPay 6 and EV charging solutions are expanding the pipeline.
AI Generated. May Contain Errors.
Earnings Conference Call
Vontier Q2 2024
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good morning, ladies and gentlemen, Welcome to the Von Tir 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, VonTeer's Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and thank you for joining us on the call this morning to discuss our Q2 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. Volunteer.com.

Speaker 1

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.

Speaker 1

With that, I'd like to turn the call over to Mark.

Speaker 2

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. And Shuman will then provide a deeper dive into Q2 results and conclude with our 2024 outlook update before we move into Q and A. Let's get started with a summary of the quarter on slide 3.

Speaker 2

2nd quarter results were below expectations and 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 push shipments into the 3rd quarter. Through July, we've recovered over $20,000,000 of our Q2 shortfall. We continue to see convenience retail operators grow their CapEx budgets.

Speaker 2

We're also seeing larger newbuild 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 remained strong, prolonged inflation, macro and election uncertainty and broadening consumer weakness in the U. S.

Speaker 2

Are impacting buying decisions. We continue to perform well against industry benchmarks, but sales for discretionary product lines slowed more at the end of quarter and will likely remain under pressure until interest rates move lower and were 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 Q1.

Speaker 2

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 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're pursuing a business simplification program as part of our strategy.

Speaker 2

We are accelerating actions to optimize our cost structure and have identified $12,000,000 of in year savings. This is incremental to the $50,000,000 run rate savings we delivered in 2023. Our balance sheet remains strong bolstered by a solid cash flow generation profile. We paid down $100,000,000 in debt year to date reducing our net leverage to 2.7 times. We also repurchased roughly $38,000,000 in shares in Q2.

Speaker 2

We will prioritize share buybacks in the second half of the year, including an expected accelerated share repurchase program. And Shooman will provide some more details in a moment. Turn to Slide 4. As we manage through near term market dislocations, we remain focused on what is within our control and positioning Frontier for the future. To that end, we continue to execute our connected mobility strategy and driving value creation through our 3 pillars, which we outlined at our March 2023 Investor Day.

Speaker 2

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 1, optimize our core, is about further optimizing our cost structure to expand operating profit margin. We rely heavily on VBS and the eightytwenty 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.

Speaker 2

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 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 cost reductions are indicative of the runway of opportunities to continue to simplify our business. Pillar 2, 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.

Speaker 2

As an example, we're currently deploying FlexBase 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, VIZ 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 multiyear 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 in FX based flexible retail solutions, which continues to build. We're currently in late stage pilots with several leading retailers in North America.

Speaker 2

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 3 is focused on pursuing opportunities to expand into adjacent markets with solutions leveraging new and existing offerings. We recently received our 1st sizable order for our new turnkey EV charging solution Connect, which is targeted at supporting our large installed base of C store customers. The pipeline is growing rapidly.

Speaker 2

The build out of our EV charging infrastructure continues to accelerate particularly across Europe. We continue to convert ChargePoint operators to our drive platform. Through the first half of twenty twenty four, 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.

Speaker 2

With that, let me turn the call over to Ann Schuman to walk you through the details of the quarter and our updated outlook.

Speaker 3

Thanks, Mark, and good morning, everyone. I'll start off with a summary of our consolidated results for the quarter on Slide 5. For the 2nd quarter, we reported $696,000,000 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 spend impacting repair solutions. Book to bill was above 1 in all 3 of our segments with each reporting low single digit order growth year over year.

Speaker 3

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 $26,000,000 reflecting higher inventory due to the shipment delays and unfavorable linearity of revenue. Turning to our segment results starting on Slide 6. Environmental and Fueling Solutions core sales declined 5% year over year.

Speaker 3

Shipment delays negatively impacted sales by approximately $30,000,000 with over half recovered in July. Dispenser sales declined compared to the prior year. Large convenience store operators are prioritizing newbuild 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

Speaker 4

the year. Aftermarket

Speaker 3

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 7.

Speaker 3

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 2nd consecutive quarter. Sales for alternative energy solutions declined mid single digits as $6,000,000 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.

Speaker 3

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 a 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.

Speaker 3

Segment operating profit margin was down approximately 140 basis points versus the prior year due primarily to unfavorable mix and ongoing R and D investments at Invenco. Finally, on Slide 8. Repair Solutions core sales declined 5% in the quarter. There was a meaningful pullback in service tech's discretionary spend in the month of June. As an example, tool storage sales declined just over 25% in the month.

Speaker 3

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 Looking at our balance sheet and capital deployment on Slide 9. During the quarter, we retired our 2024 maturity and ended the quarter with a net debt ratio of 2.7x, in line with our target of 2.5x to 3x. We also completed approximately $38,000,000 in share repurchases in the quarter $60,000,000 year to date. Our balance sheet is healthy with strong liquidity with over $300,000,000 in cash on hand and an undrawn credit revolver.

Speaker 3

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 $100,000,000 accelerated share repurchase program. With that, let me provide an update on our thinking for the Q3 and full year. I'm on Slide 10. We expect the macro environment to remain challenged near term amid continued uncertainty and consumer weakness with higher rates and U.

Speaker 3

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 to 110 basis points equating to EPS in the range of $0.67 to 0 point 7 $1 For the full year, we expect revenue in the range of $2,900,000,000 to $3,000,000,000 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 4th 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 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.

Speaker 3

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 $2,950,000,000 Operationally, we're lowering our second half outlook by $110,000,000 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 $120,000,000 reduction in revenue at 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.

Speaker 3

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.

Speaker 2

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.

Speaker 2

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 terms. 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.

Operator

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

Speaker 5

Hi, good morning. Hey,

Speaker 2

good morning, Julian.

Speaker 5

Maybe just to start, so it looks like your guidance on the top line, I think it embeds sort of a mid single digit type increase in sequential sales in the Q3 and the Q4. So maybe just kind of help us understand which of the segments kind of leading or lagging those sequential moves and the sort of confidence in that sequential pickup?

Speaker 3

Yes, Julien, maybe I'll get started. Yes, sequentially revenue will increase from Q2 to Q3 and then again in Q4. Also that's a little bit of a typical seasonality. When you look at revenue growth, we will have revenue growth in Mobility Technologies, both Invenco had strong orders in Q2, but they've been up close to 20% now 2 quarters in a row. So we should see continued growth in our Invenco business.

Speaker 3

Also ANGI, our alternative energies business, orders were up 20% in Q2. They did have $6,000,000 of shipments that pushed out of June into July. So that business should have good high teens to mid teens to high teens growth in the 2nd in the 3rd quarter. Repair Solutions will probably be flat, maybe slightly down sequentially in Q3. We continue to see the U.

Speaker 3

S. Consumers stretched. The higher interest rates, higher inflation is impacting technicians even though technicians are at record employment, record wages. We've seen them scale back and we ran as part of our diligence a survey with multiple over 1,000 technicians and also with our because of the high because of the high cost of living. And then the fueling business should also step up both in Q3 and Q4.

Speaker 3

Again, spend a lot of time doing channel checks and voice of the customers, while some people are prioritizing new to industry and new to industry locations both greenfield and brownfield continue at a high rate. They have scaled back a little bit on the refresh and retrofit projects, but customer discussions have led to us believing in our guidance.

Speaker 5

And then just my follow-up on the operating profit level. So I think you're guiding Q3, you've got the margins down year on year close to 100 bps. It looks like the 4th quarter is back up year on year on the margin front and with a pretty big sequential margin increase in Q4 as well. So I realize on the sequential side, there's some typical seasonality element there. But maybe just trying to understand, it doesn't look like Q4 margin has a lot of tailwinds sort of built into it in the guide.

Speaker 5

Maybe just flesh those out a bit if it's simply volumes or anything else in there?

Speaker 3

Yes, Julien. So yes, volumes do step up from Q3 to Q4, which definitely helps. But also the $12,000,000 of incremental cost that we talked about in the prepared remarks, that's heavily weighted towards the 4th quarter just from a timing perspective. Points and then the step up again in Q4. It's also from a compare perspective, Q3 last year was our highest margin quarter.

Speaker 3

So there is Q3 is a tough year on year compare.

Speaker 1

Great. Thank you.

Operator

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

Speaker 1

Hey, good morning guys. Good morning, Joe. Hey, Mark, my apologies if I missed it in your prepared comments, but can you just double click a little bit more on this, like the timing of the order delays that impacted the quarter? What exactly was going on there? And then you referenced this recovery of greater than $20,000,000 in July.

Speaker 1

What's the expectation for the rest of the quarter? Are you expecting more recoveries going forward? And how do you expect to get that?

Speaker 2

Yes, absolutely. Happy to elaborate there, Joe. Look, there's no question we saw some uncertainty in some of the macro that affected some of our end markets late in the quarter. So essentially this was at GVR and it was also at Matco. And so let me kind of break it down for you.

Speaker 2

So inside GVR, we had, as you may remember, a very strong Q1, 10% organic growth. And when we rolled into April in all of our we're very close to our customers, a lot of our channel checks and also working with our distributors who do construction in the industry, they were very busy, very significantly year over year in terms of the construction and the build out. So we've seen actually a strengthening in the new construction, which is an appreciable part of the medium and longer term. But what's happening in the softness is there's uncertainty and sort of the pacing of the refresh retrofit market, not to be confused with maintenance aftermarket parts which is very much up. But these smaller projects folks are pushing out a bit.

Speaker 2

And so it's really a pacing issue and we were sort of wrong on that timing on the pacing that developed late in the quarter. So just on that point, what happened in July, it's just a rate issue. Those were all fulfilled in July, most of them and a little bit now in August. And so what we're doing with our forecast is we're offering a more prudent outlook that I think is more responsible given that order rate and timing while we see the new construction build and there's lots of opportunities for convenience store operators to continue there. On the Matco front, they came off a record expo in Q1.

Speaker 2

They were up low double digits. They saw kind of across the board even high ticket items were selling quite well. The new launch of diagnostics that Anshooman made reference to, as well as toolboxes, which we watch very closely was up 15% in Q1. Kind of heading into Q2 and kind of tailed off at the very end of the quarter, mostly on discretionary items that service technicians are not buying as much at a rate. So June actually dropped off 25% on toolboxes.

Speaker 2

And so that is one of the areas where there's macro uncertainty that is impacting the consumer confidence that service technicians are more on the medium to lower end of the income range in the United States and they're being impacted by higher inflation costs. Certainly, the cost that is impacting the family is impacting them. But longer term, there's great drivers on MatCo and we're watching those as well. Vehicle miles traveled are up. Also, the total age of the car park at 12.6 years.

Speaker 2

And we did a survey. We're very close to our customers there, but we also did a survey to help corroborate some of the information we get from channel checks. And we know that service technicians are going to buy less tools, but they're going to preference productivity items. We saw actually diagnostics continue to increase in the quarter and specialty tools also eked out a gain. So we know that even in this kind of backdrop if you can offer more but we've reflected more of this softness, more of this uncertainty.

Speaker 2

And once we get past the election on MatCo, I think that's going to be a release some of the uncertainty there. Certainly interest rates are going to help because folks are living off some of their credit card expenses. So we think both these are near term issues that we're reflecting with a prudent guide.

Speaker 1

Thanks, Mark. That was great and detailed. The one follow-up I would have for you is it 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?

Speaker 2

Yes. I think there are certain elements of our business that are certainly impacted by rates. Certainly, Matco, the service technicians are linked to U. S. Consumer there.

Speaker 2

The uncertainty on rates, no question plays into it. We know that talking with our customers and by the way, we're helping our and working very closely with our customers as they roll out their projects. They're very confident in the new construction build outs. By the way, these are multiyear projects. This is not an industry that's overcapacity.

Speaker 2

New venues work much better in the market. They tend to gain more consumers that come to their sites. And so there's very successful new build out activity and that continues to go at an enhanced rate and there are good returns there. But interest rates might be some of the apprehension in the market anticipating rate cuts. If you're able to throttle maybe more of the smaller refresh retrofit ones, there's no question being affected by the timing.

Speaker 2

And that was something that we didn't foresee as much as maybe perhaps we should have. But I think we're offering that in

Speaker 3

a prudent guide going forward. I'll also add that our DRV 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?

Speaker 2

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 here will come our way, particularly because we are much better positioned in the major players out there in the marketplace and they're continuing to build out that strength there bodes well for growth. And so we're very encouraged by that and we think we're also able to demonstrate coming into this mid part of the year that we're gaining share in environmental, which is some pretty obvious compares there. And environmental is early innings on a tank upgrade cycle and we're looking at good growth at the back end of this year. So we also have some product launches that are coming that we're gaining traction on in Evenco.

Speaker 2

So that business is doing much better than it did in prior years and it's 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 we're reflecting in our guidance.

Speaker 1

Perfect. Thank you, guys. Thanks, Joe.

Operator

The next question comes from Andy Kaplowitz with Citigroup. Please go ahead. Hey, good morning, guys. It's actually Jose here on for Andy.

Speaker 2

Good morning, Jose.

Speaker 1

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?

Speaker 2

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 FlexBase 6 that we talked about that's building strength in the market and we're 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 this what we referenced also in the earnings call called Vids.

Speaker 2

And so that business we think demonstrates a really good growth driver in mobility technology. The other thing is that in DRB, the backlog there is certainly being impacted by push outs 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 PATHION as well as a recent announcement of a product line called Catalyst that helps businesses be more productive in car wash.

Speaker 2

So that business is a great business. It's just going to take a step back from a very strong 20% to 30%, 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 anticipate in the near term, but we do anticipate it coming back to growth based on the strategy that's in place.

Speaker 3

I'll just add, Thad, if you look at that Mobility Technology business, the businesses in that segment are on track with our longer term projections except for DRB, which this year is holding back to growth. DRB going into next year, it will be an easier compare at least for the 3 first last three quarters of the year. So that should inflect back to a growth next year. And DRB, yes, it stepped back this year, but it's still a great business and a good acquisition. When you think about it, cumulative for the time we've owned it, it's about $50,000,000 to $60,000,000 above from operating profit perspective to our acquisition case.

Speaker 3

And it's still tracking at or slightly above our acquisition case this year.

Speaker 2

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.

Speaker 2

That business, if you look back a couple of years ago, is $50,000,000 It's going to be more than $100,000,000 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.

Speaker 2

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 VBF there with our growth capacity that needs to be put in place. But compressed natural gas, renewable natural gas and a couple of orders now coming in on hydrogen, meaning hydrogen is longer term, but a great position.

Speaker 2

But clearly what we see here is very good build out and uptake from customers and just ramping that growth.

Speaker 1

Got it. Appreciate the color there. As a follow-up, I saw in 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.

Speaker 1

I would surmise that recurring revenue is still very important to volunteer, not to mention it's usually higher margin.

Speaker 2

So, hey, are you one track on the new I'm sorry, Jose, cut you out there at the end. Can you repeat that end?

Speaker 1

Ann? Yes, sure. I was just saying, no worries. I was just saying, are you still on track for that in the near term? And is that 30% to 35% still the right estimate to think about?

Speaker 2

Yes. So I'll add some color and see if and Shuman also wants to jump in. If you look back at our portfolio since then, recurrent revenue is up about 10 points. And what's really important there is not only did we shed some of the business that the tire equipment business as an example, not a lot of recurring revenue in it. So about $150,000,000 of shedding of those type portfolio assets.

Speaker 2

But we've also built our SaaS businesses are certainly growing. The ones that we just talked about here in FX, which has a very strong pipeline and build out inside of our Invenco business is a clear example. Telstraq Navman is certainly doing better. And inside of DRB and which is specifically you add to that color, where we've been in the process of launching our new PATHION product which is fundamentally turning that into a SaaS based recurring revenue. And we have more than 1,000 software engineers in our business now, which is a big departure from where we were a couple of years ago.

Speaker 2

So we're pretty encouraged on that. I will also say the aftermarket parts business in GVR has been a big focus. And that 20% growth last quarter, there was some inventory channel issues in the prior quarter, but this has been a major initiative for us to really attack the aftermarket much more concerted in the GVR business. And we're benefiting from a larger installed base there based on the build out which is clearly advantaged here. But we also have new programs like refurbishment of electronics and we're also penetrating new distribution territories.

Speaker 2

So we have a very focused management team on aftermarket and percent of our sales were GVR. That's definitely on an upswing and we see real life there as well. And Shooman, did you want to add any color?

Speaker 3

Yes. I'd just add that we're definitely on track for our 2026 targets that we put out at Investor Day from a recurring revenue perspective. 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 Flexpace 6. So that really is a big driver of productivity for our customers, but also a good source of recurring revenue in the future.

Speaker 3

NFX has recurring revenue. So we're well on track and we're making good progress and recurring revenue continues to grow.

Speaker 1

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

Speaker 3

Thanks Jose.

Operator

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

Speaker 6

Thanks. Good morning, guys. Hope was well. Thanks for the question. Just a couple of quick ones on some of the details, and I apologize if you already covered these.

Speaker 6

On the environmental delays, and I understand you've recovered some of those in 3Q. 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.

Speaker 6

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 with in light of credit quality? So any comments there would

Speaker 3

be helpful as well.

Speaker 2

Yes. So let me comment on the first one. The weather actually did impact ANGI in the quarter. We're pretty constrained with the capacity for growth there. So we're constantly pushing on growth.

Speaker 2

So we got back end loaded and unfortunately had 6 tornadoes in Janesville, Wisconsin that where we have our manufacturing facility. Thankfully nobody got hurt, but it took labor out of our equation for the last week of quarter. We're using more VBS to pull in that capacity more and exercising more outsourcing so that we don't get as back end loaded, not subjected to that. So we're pretty happy on that activity, but unfortunately was susceptible to that. And then on the macro side, we really see a volume here and more bad debt coming through back to maybe more some of the lows we've seen historically.

Speaker 2

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 cost out of our supply chain accordingly. Did you want to add anything there, Shruti?

Speaker 3

Yes. On a couple of your other parts of your questions, from a GVR or 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 due to industry greenfieldbrownfield 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.

Speaker 3

And as I've said in the past, our write offs have typically traded 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 $2,000,000 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.

Speaker 3

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 2 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.

Speaker 3

So it's still a profitable piece of our portfolio.

Speaker 6

Great. Thanks, Anshoom. And that's great color. And then just a quick one on the ASR, the $100,000,000 Any sense on when you might pull the trigger on that?

Speaker 2

Well, our intent is to go forward obviously in the near term, otherwise we wouldn't be talking about it. We believe that this is the right way to deploy capital with a good return backdrop for it. So we're confident that's the right positioning that will take advantage of this near term softening.

Speaker 3

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

Speaker 6

Right. Yes. Thanks. Thanks, guys.

Operator

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

Speaker 4

Hi, this is David Ridley Lane on for Andrew. Very much appreciate the transparency here. Just a clarification question. On the $12,000,000 of end 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 2025?

Speaker 3

Yes. About 2 thirds of those savings are structural and permanent, and then there's some temporary savings in there, obviously.

Speaker 4

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

Speaker 2

Yes, David. They're progressing quite well. It's something we're pretty close to. They're 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.

Speaker 2

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.

Speaker 4

Excellent. Thank you.

Speaker 7

Thanks, Dave.

Operator

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

Speaker 8

Hi, thank you. My question is on DRB. I think you made the comment return to growth in 2025. And I recall you mentioned earlier in the call about backlog being up. Can you remind us the size of the backlog roughly to sales in that type of business?

Speaker 8

And I know it depends 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?

Speaker 3

Yes. So really if you look at the backlog, there are 2 pieces to the backlog. 1 is the recurring revenue piece of the backlog, where we basically for at least 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.

Speaker 3

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.

Speaker 8

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 scaled car washes?

Speaker 2

Yes. So the backdrop on race coming down has clearly causes some uncertainty. If you step back and sort of understand the trend that has occurred here, we have a leadership position. The go forward 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 is also that industry will consolidate maybe not the same rate of build out of new sites as it did because that was pretty frothy.

Speaker 2

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 it because they're looking at better productivity.

Speaker 2

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. You're going to want better productivity. And this comes our way as we're the leader in the industry and we have the tools that enable them to do that.

Speaker 8

I appreciate the color. Thank you.

Speaker 6

Thanks, Tim.

Operator

The next question comes from Robert Mason with B. A. I. R. T.

Operator

Please go ahead.

Speaker 7

Yes. Good morning. Yes. Rob Mason with Baird. Again, appreciate the added detail.

Speaker 7

It's helpful. Just some of the bridge on your sales guidance. I just wanted to be clear. Mobility Technologies, you seem to be apportioning all of the delta in outlook to DRB. I just wanted to make sure that was the case.

Speaker 7

And is that kind of a net outlook? Had you made any changes to any of the other businesses? It even sound like Invenco, I'm not sure if it's trending better than expected or not, but some positive commentary there. So is all of the change just within DRB?

Speaker 3

Rob, that's correct. All the changes in DRB. The other businesses are tracking as expected. Invenco should be up high single digits this year. Our ANGI business should be up low double digits.

Speaker 3

EVOLVE continues to grow at a pretty good clip rate. And then Telekrack business, the turnaround continues to progress well and they should be up low single digits this year. So all the other businesses are tracking as expected.

Speaker 7

And then just within Matco, I think you also commented just franchisee growth was flat sequentially. How is the backdrop impacting your ability to bring on new franchisees as well? Any impact there and what the expectations are for the year on that component?

Speaker 2

Yes, Rob. What we've done with our approach on franchisees and really the end of last quarter into this quarter is we started to make a more discerning look that if franchisees were not contributing as much in sort of that lower end that we were actually going to focus more on taking them out of the network. And we've had more of a fresh approach on how we attract folks in this market. I think there's no question that there's a little bit of trepidation with folks stepping into a new business with some of this interest rate macro uncertainty that we hope will clear up post election regardless of who gets elected. But we do feel like we have a new program underway for the back half of this year that we can hopefully gain traction with.

Speaker 2

And hopefully, we'll get the benefits of some improving interest rates and some clear up on the election uncertainty.

Speaker 7

Does that result in net growth this year, Mark, in franchisee year over year

Speaker 1

for the full year?

Speaker 7

Or where do we end up?

Speaker 2

We're looking at growth in the second half of the year in terms of how that grows up. Q1 was down. We're flat in Q2. So in terms of its total netting out the positive growth, not quite sure, but it's definitely a flattish outlook for full year. What that means, there is recovery in second half on franchisees.

Speaker 3

I see. Okay. Thank you. Thanks, Rob.

Operator

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.

Speaker 2

Thanks, Kenneth. We continue to make solid progress in delivering differentiated solutions for our customers as they expand, modernize and de carbonize their footprint. Frontier 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 their multi energy infrastructure needs.

Speaker 2

And finally, I do want to make comment that we continue to allocate capital in a responsible way, favoring 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 thanks to our teams as their dedication and their focus of delivering on customers and their incredible efforts to incredibly 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 Von Tir. Have a good day.

Operator

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

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