Public Storage Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2024

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Voltaire Third Quarter 2024 Earnings Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, October 21, 2024, and a replay will be available shortly after. I would now like to turn the call over to Ryan Edelman, Von Teer'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 Q3 results. With me today are Mark Corelli, 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 meanings 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 Q3 and a brief update on our end markets and the progress we're making on our strategy. And Shuman will then provide a deeper dive into our results and outlook for the full year. Let's get started with a summary of the quarter on slide 3.

Speaker 2

We delivered solid results in the Q3 as we continue to capitalize on strong momentum across our convenience retail and fueling end markets, supported by increased adoption of our market leading technologies. Core sales increased 3%, above the high end of our guidance range with upside from both our environmental and fueling and mobility technology segments. Disciplined operational performance drove operating margins toward the better end of our guidance and EPS above the high end of our range. Frontier has a unique competitive advantage within the mobility ecosystem with a purpose built portfolio of connected hardware and software solutions. We continue to make solid progress on our connected mobility strategy, which places us at the forefront of our customers' digital transformation journey.

Speaker 2

A great example of how we're delivering differentiated solutions is the traction we are seeing with our Invenco offerings in payment and enterprise productivity. Invenco sales increased more than 20% in the quarter, driven by higher adoption of our recently launched FlexPay 6 payment terminal as well as our vehicle identification system discussed on last quarter's call. As we connect, manage and scale the mobility ecosystem, our focus on reinvigorating R and D and new product introductions are delivering tangible results. Our environmental and fueling business improved sequentially and delivered nearly 9% core growth in the quarter with broad based demand across regions and product lines. Growth was particularly strong in North America across the entire product portfolio.

Speaker 2

The pipeline of new site build activity continues to expand and the increased adoption of FlexP6 is helping to reaccelerate retrofit and refresh activity. Notable volunteer orders were encouraging in the quarter, up 10% year over year organically and resulting in a book to bill over 1 for the 3rd consecutive quarter. Some of this reflects the benefit of Q2 order recovery, but the underlying booking trends were a positive indicator. We are still in the early innings of our simplification program under Pillar 1, Optimize the Core, and we will continue to execute against the pipeline of opportunities leveraging ZBS and the 80 20 principles embedded in our focus and prioritization program. Operating profit margins benefited from accelerated cost actions announced last quarter, delivering approximately $5,000,000 in savings.

Speaker 2

Let's turn to Slide 4. Looking across our primary end markets and the individual verticals within each, we continue to see momentum for most of the portfolio. Convenience, Retail and Fueling, our largest end market, has unmatched channel presence with leading share positions. Demand here remains robust, with the one exception being Car Wash, which accounts for about 7% to 8% of total tier sales. Successful C store operators continue to execute their multi year site expansion and modernization plans and the industry continues to consolidate.

Speaker 2

This favors the large national and regional operators where we have the higher market share and where we are focusing innovation. We're seeing more evidence that the organic and inorganic investments we've made to accelerate growth, executing on pillars 23 of our framework are paying off, giving us even stronger conviction around this end market. As you may recall, pillar 2, expanding the core, is about leveraging our current market positions to accelerate profitable growth with a focus on driving share gains through innovation and market leading product vitality. We're advancing our Invenco product strategy and we are seeing increased customer adoption of our innovative payment, point of sale and forecourt automation solutions. We are standardizing our convenience retail offerings around our NFX microservices architecture.

Speaker 2

This allows us to deliver a customizable, scalable platform that unlocks the ability to drive growth, reduce costs and enhance the consumer experience. As an example, we were recently selected by one of our long standing customers, Costco, to deploy our unified payment solution across their footprint in Canada. This includes our FlexPay 6 payment terminal and InnFX microservices software. With this solution, Costco will have the ability to seamlessly integrate their existing hardware, software and services while enabling over the air updates, optimizing payment security compliance and customizing loyalty programs. The critical value proposition we are offering customers like Costco is improved uptime, faster transaction times and lower cost to operate.

Speaker 2

The end result is improved productivity and throughput for our customers and a better user experience for the consumer. We also secured a contract with a major global C store operator in the Q3 with a total contract value of approximately $10,000,000 This project involves upgrading and converting legacy payment technology to FlexPay 6 across our acquired sites in North America. This serves as a clear example of how industry consolidation drives increased retrofit activity as operators standardize technology platforms following acquisitions. At Environmental Fueling, we won 3 large multi year tenders in India in Q3 with a total contract value of approximately $70,000,000 This was a direct result of our VBS initiatives to design out costs and improve the quality and security of our dispenser equipment as well as localized production. Just last week, we were awarded a 4th tender to install underground submersible tank pumps across their network, which is an incremental contract value of approximately $15,000,000 over the next 12 months to 18 months.

Speaker 2

These wins are reflective of the significant effort by our teams and another example of how we are growing market share and improving market leading margins in our EFS segment. Pillar 3 is about delivering profitable growth from adjacent markets. We are pursuing opportunities that expand into adjacent end markets with solutions leveraging new and existing offerings in channels to market. We continue to see strong evidence that convenience stores will be a big beneficiary of the build out of EV charging infrastructure as a preferred stop for on the go charging. Our Konnect turnkey EV solution launched in May specifically targets this market and continues to gain momentum.

Speaker 2

We were recently awarded a $2,000,000 contract by a large regional convenience store chain to begin deploying Konnect at its sites across the U. S. Connect includes EV chargers, network software management and leverages our extensive channel and service network from GVR. It also incorporates our FlexPay 6 payment terminal to deliver the same reliability and integrated payment capability used across convenience retail sites. The first sites go live this month and we are managing everything from site selection and nevi funding applications to installation and technical support.

Speaker 2

Drive is now a leading software offering for ChargePoint operators to manage their growing network of EV chargers. We are accelerating our plugs under management further now sitting at over 100,000 more than doubling year over year. 80% of these are located in Western Europe, which is the leader in the world for EV adoption. In October, we signed 1 of the largest global fleet operators with 1,500,000 vehicles under management to support their fleet electrification efforts. DRiV's revenue is up nearly 50% year to date and contributing to overall volunteer growth for 2024 and beyond.

Speaker 2

While we're seeing healthy demand across most of our end markets, there are 2 primary areas that are experiencing some pressure near term, car wash and auto repair. The car wash industry continues to transition from a multi year hyper growth phase for tunnel car wash systems to more normalized growth rate. After rising significantly, construction costs for tunnel systems have now stabilized and interest rates are beginning to move in the right direction. However, we anticipate there will be a lag between these developments and an inflection in demand for greenfield tunnel systems. Turning to the auto repair end market, as we noted previously, headwinds at repair solutions are related to slower discretionary spending by service technicians resulting from persistent inflation and general uncertainty regarding the U.

Speaker 2

S. Economic and political environment. While the volume declines in Q3 played out largely as we anticipated, order rates and distributors sell through volumes are showing improvement. The backdrop for auto repair remains strong. Technician wages and employment are healthy and the age and complexity of the car part is increasing providing demand for auto repair.

Speaker 2

A similar transformation to convenience stores is happening in the commercial and industrial fleet market. As the industry looks to modernize and decarbonize, managing fleets is a major challenge and requires multiple technologies, fuel types and the integration of traditionally disparate systems and data. Our cross business solutions optimize fleet depot management with the lowest total cost of ownership while achieving sustainability and compliance goals. Turning to slide 5, earlier this month, our teams gathered at the annual MAX trade show in Las Vegas, the convenience store industry's largest trade show of the year, where we were able to showcase the full breadth and depth of the volunteer portfolio. This was a great opportunity to highlight the outcomes of our connected mobility strategy with a best in class suite of end to end solutions that deliver enhanced consumer engagement and productivity while lowering the cost to operate.

Speaker 2

At Nax, we introduced the Hub, a great example of the unique capabilities of our portfolio. The Hub is built on the InnFX microservices architecture and seamlessly integrates all existing devices at a retail site onto a single cloud based platform to manage their infrastructure remotely and more efficiently. We also introduced several differentiated solutions and feature sets that expand our existing portfolio of productivity and revenue generation capabilities. Feedback from customers at the show validates our strategy around delivering best in class end to end open architecture solutions. I'm confident we're on the right trajectory.

Speaker 2

We are well positioned in durable, attractive end markets with long term profitable growth opportunities. Our leading market share position, 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.

Speaker 3

Thanks, Mark, and good morning, everyone. I'll start on Slide 6 with a summary of our consolidated results for the Q3. Reported sales were $750,000,000 with core growth of approximately 3% led by solid growth from our Environmental and Fueling and Mobility Technologies segment. Adjusted operating profit margin declined 80 basis points at the better end of our guide as contributions from positive price cost and accelerated cost actions were more than offset by lower volume and unfavorable mix associated with lower sales at DRB and repair solutions. This resulted in adjusted EPS of $0.73 for the quarter, ahead of our expectations.

Speaker 3

Adjusted free cash flow was $109,000,000 with conversion of 98%. Let's review our segment results starting on Slide 7. Environmental and Fueling Solutions achieved core growth of 9% in the quarter, driven by broad based strength across the portfolio. Total dispenser sales increased high single digits with U. S.

Speaker 3

Dispensers contributing mid single digit growth. Aftermarket parts sales increased over 20% in the quarter, bringing year to date growth into the high teens. We continue to leverage our large and expanding installed base and focus on higher value components, accelerating growth in this higher margin offering. Environmental Solutions grew low single digits with strong growth in North America supported by new product launches earlier in the year, partially offset by a strong 30% prior year comparison in international markets. Segment operating profit margin expanded 50 basis points in the quarter on positive price cost and continued execution on our ongoing simplification efforts.

Speaker 3

Year to date, segment operating profit margins at EFS are up 160 basis points over the prior year. The team has done an incredible job executing, leveraging VBF and Pillar 1 initiatives. Turning to Slide 8. Mobility Technologies reported a core sales increase of over 4% in the quarter, driven by robust demand for payment and enterprise productivity solutions, partially offset by our car wash business. Invenco achieved impressive double digit orders and sales growth for Q3 and year to date, demonstrating the effectiveness of our investments in new product development.

Speaker 3

Sales at DRB declined as expected in the quarter with revenue stabilizing sequentially on a dollar basis. Mobility Technologies operating profit margin declined approximately 2 70 basis points versus the prior year due primarily to ongoing R and D investments at Invenco and unfavorable mix. Moving to our repair solutions segment on Slide 9. Core sales declined 5% as expected due to ongoing macro uncertainty pressuring technician spending particularly for more discretionary larger ticket items. However, we're seeing signs of improvement.

Speaker 3

Tool storage sales declined just over 10%, which is a significant improvement from Q2's exit rate. As demand for most product lines has come under pressure, we have leveraged our agile business model to pivot product vitality towards the tools that service technicians need most, lower price point tools that add value and productivity in the day to day workloads. From our most recent technician survey, we know they continue to prioritize power tools, hard line hand tools and diagnostics. Segment operating profit margins declined 5.60 basis points driven by lower volumes and mix as well as timing of bad debt reserves year over year. Sequentially, margins are up 10 basis points in line with what we were anticipating.

Speaker 3

Looking at our balance sheet and cash flow on Slide 10. Our net leverage ratio remained flat sequentially at 2.7 times, but improving from 2.9 times a year ago. We completed $105,000,000 in share repurchases in the quarter through both an accelerated share repurchase plan and open market transactions. Year to date through September, we have repurchased $165,000,000 or approximately 4,700,000 shares. Our balance sheet remains healthy with strong liquidity, 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. As a result, we expect to continue to deploy free cash flow to buybacks in the Q4 and plan to repay a small amount of debt. With that, let me provide an update on our thinking for the Q4 full year. I'm on Slide 11. For the full year, we are narrowing our guidance ranges around the midpoint of our prior guide and now expect revenue of approximately $2,970,000,000 which reflects core growth of slightly above 1%.

Speaker 3

Operating margin will be relatively flat year over year. We are maintaining our prior adjusted EPS midpoint of approximately $2.90 This translates to 1.5% core growth at the midpoint for the 4th quarter with operating profit margins down approximately 20 basis points equating to EPS of roughly $0.79 Before I turn the call back over to Mark, I wanted to provide some early thoughts on 2025. While it is too early to provide guidance, as you start to fine tune your models, there are a few things to consider. We expect demand for majority of our end markets to remain healthy next year, supporting overall growth and margin expansion. Although we are seeing early signs of recovery in repair solutions and car wash markets, the timing of the eventual inflection is difficult to predict.

Speaker 3

That said, expectations are that both markets likely trend flattish next year. Additionally for Q1, we will have a tough compare at EFS, which grew 10% and expanded margins nearly 400 basis points this year. Also, our annual Matco Expo event will move from Q1 to Q2 in 2025, shifting approximately $30,000,000 between the two quarters. With that, I'd like to pass the call back over to Mark.

Speaker 2

Thanks, Anshooman. I'm encouraged by our progress year to date as we're gaining traction in our end markets that are strong, offsetting some weaker segments with innovation and beginning to see signs of stabilization and recovery in the businesses that have softened earlier this year. We're executing on our connected mobility strategy and our focus on innovation is delivering critical new product introductions at a faster pace. We have a good setup for 2025 to continue to accelerate growth and profitability. Frontier is uniquely positioned to lead the digital transformation of the mobility ecosystem, which is still in the early innings.

Speaker 2

We're enabling our customers to manage an increasingly complex infrastructure through best in class technology and a portfolio of multi energy solutions. 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. I'd like to thank our teams around the world for their commitment to execution and dedication to delivering for our customers. Our performance is directly attributable to our culture of continuous improvement, which our employees demonstrate every day. With that, operator, please open the line for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. And we have questions that came in. And the first question comes from the line of Nigel Coe from Wolfe. Your line is now open.

Operator

Please go ahead.

Speaker 4

Thanks. Good morning, everyone. Thanks for the question. Anshooma, I just wonder maybe you can just kick off with just any additional color on how you see 4Q, so that 1.5% organic growth breaking out between the segments? And then the I think you're guiding for 50 bps of sequential margin expansion, which would be obviously very normal with the 4Q seasonality.

Speaker 4

But again, any color on the

Speaker 3

segments would be helpful. Yes. Good morning, Nigel. So from an environmental and fueling perspective, that business should continue to have good growth in the 4th quarter. We're expecting high single digit growth for EFS.

Speaker 3

They're coming off a really strong quarter of bookings and good book to bill. Mobility Technologies also book to bill was above 1 and actually all our businesses, but Mobility The car The car wash market, as we talked about, we're seeing sequentially it's stabilized, but from a year on year perspective that would be a headwind for us. So that leads to a flattish number for Mobility Technologies. And then Repair Solutions, again, while the market is stabilizing, we expect it still to be down on a year to date basis year over year basis of about mid single digits.

Speaker 4

Okay, that's helpful. And then just wanted to dig into the aftermarket strength within the EFS segments. I mean 20% growth for parts and aftermarket is extraordinary number. Is there anything here is there sort of dilapidated in the salt base? Are there some growth initiatives coming to bear here, share gains?

Speaker 4

I know that you've been showing double digit growth here, but I just wanted to just dig into that and just remind us how big is that portion of the segment?

Speaker 2

So Nigel, I'll take that question. It's Mark. Look, this is a beneficiary of the EMV cycle that we all had to live through, but the installed base went up and I think we demonstrated we gained share during that cycle. And at the same time, it was one of our earlier profitable growth initiatives that we launched post spin to resegment this as a separate business inside of Von Teer and then have that business run with a strong focus on VBS and putting in place some of these eightytwenty principles to try to, 1, clean up some of the offerings. A great example of that is we do some refurb manufacturing of boards was one of the new launch efforts and then we took out some of the SKUs so that we could try to get some more acceleration on that.

Speaker 2

So you've seen a great trend on that business and I think it continues to show that this is going to be a business for a long time where we get that. And then the total revenue for the business is over $200,000,000 Ed above lead margins by the way.

Speaker 4

Great. Thanks, Mark. Appreciate it.

Operator

Thank you. And the next question comes from the line of Julian Mitchell from Barclays. Your line is now open. Please go ahead.

Speaker 5

Thanks very much and good morning. Maybe just coming off the back of some of the initial comments on 2025, if I'm thinking organic sales, you're exiting this year up low single digits with the headwinds at auto repair and car wash. So it says low single digits for next year, at least the first half looks reasonable for now. And then anything on operating leverage or below the line to emphasize? I think operating leverage, you have the low 30s placeholder from the Investor Day.

Speaker 5

Any reason that would not apply in 2025? And then anything sort of below the line to emphasize if you look at it today?

Speaker 2

So, Nigel excuse me, Jillian, this is, I think a great setup for 2025 for us. I think the areas that we're really encouraged about is, 1, we're seeing stabilization in some of the markets that we talked about that were choppy. We're seeing some really great innovation read through. And we're of course bringing on the call some really specific examples where there is uptake on this integrated network that is getting a lot of favorability with our customers. So we think we're going to get uplift in the markets that have been stronger and the self help issues in our Pillar 1 are going to help buoy the margins.

Speaker 2

So the setup for 2025 looks pretty positive from us. Of course, mix has not been our friend with some of our profitable businesses being weighed down. But I think we've got the right actions in place regardless of what the markets bring next year. It's a little bit too early to give guidance specifically on that, but really encouraged by the setup we see. Shooman, did you want to jump in there?

Speaker 3

Yes, Julien. So the incrementals that you mentioned, the 30% to 35% should play out. We're in the early innings of our Pillar 1 and with the power of VBS around continuous improvement. So we feel confident that we should drive margin expansion next year. Also below the line, obviously, with the buybacks we've done, the share count of about 152,000,000 is where we stand right now.

Speaker 3

For the Q4, that will continue. So it should be some benefit into next year when we look at the year on year. And then your point on the low single digit growth, just I will point out, which I also said during the prepared remarks, Q1, we have a difficult compare for EFS, but also the Matco Expo, which is our largest sales event is moving from Q1 to Q2, which moves about $30,000,000 out of Matco's revenue orders and sales for Q1 into Q2. No change for the first half, but just a shift between quarters.

Speaker 5

That's helpful. Thank you. And just wanted to make sure on the sort of margins for the Q4, you have that sequential uplift with normal seasonality firm wide. Is there any points of emphasis on which segment might lead or lag in terms of the sequential margin increase in Q4?

Speaker 3

Julien, some of the fall through from the incremental revenue obviously will play out. For EFS, we expect margins to be relatively flat to potentially slightly down year on year. They had a good Q4 last year from a margin perspective. Repair Solutions should be sequentially flat, again, to potentially slightly up. So that's we've seen the margin stabilize out there from Q2 to Q3 and we should see that continue into Q4.

Speaker 5

That's great. Thank you.

Speaker 3

Thanks, Julian. Thanks, Julian.

Operator

Thank you. And the next question comes from Andrew Obin from Bank of America. Your line is now open. Please go ahead.

Speaker 6

Good morning. This is David Ridley Lane on for Andrew. On the India tenders, we think that close in over 2 to 3 years. I heard that the just to confirm, it's 15, 15, for the underground stuff is coming 12 to 18 months. What about the other portion?

Speaker 3

Yes. So of the $70,000,000 that we called out in terms of bookings, there's 2 components of it. There's the hardware that goes over the next 18 months or so. And then we have the services that goes over multiple years. Just from a bookings perspective, our policy is to book the next 12 months.

Speaker 3

So we booked about $25,000,000 off the $70,000,000 in the Q3. So what you can expect over the next 12 months, dollars 25,000,000 of that hardware revenue will flow through of the $70,000,000 that we called out for the Q3.

Speaker 6

Got it. Thank you. And then on the $12,000,000 cost cutting benefit here in 2024, that would imply you have a kind of $12,000,000 carryover benefit next year. Wanted to get a sense, I know you're doing R and D investments in Invenco and other places to accelerate the NPI. How much of that do you think would be used for reinvestment versus flowing through?

Speaker 3

Of the $12,000,000 what we said last quarter, about 2 thirds of it is permanent and there's a little bit that is temporary. So you could expect about $8,000,000 of it to carry forward into next year. It's a little early to give guidance, but and early to have finalized plans, but should we expect R and D as a percentage of sales to stay relatively stable going into next year?

Speaker 6

And if I could squeeze one more in. On the Matco bad debt reserves, do you just mathematically lap those next year or could there still

Speaker 3

be We

Speaker 6

do. Okay.

Speaker 3

Yes, we lap them next year. And the market for the financial portfolio isn't getting worse. It's stabilized. So when we look at our actual bad debt expense for Q1, Q2, Q3, it's relatively flat every quarter over those 3 years. It's just a compare issue.

Speaker 3

The market stabilized. Our portfolio is relatively healthy. And especially when you compare it to some of the credit card industry data, we're doing actually better and it's stable.

Speaker 6

Thank you. Thank you very much.

Operator

Thank you. And it seems like no further questions have came through. I would now like to hand back the call over to Mark. Please go ahead, sir.

Speaker 2

Yes. Thanks, John. We appreciate folks joining us on today's call and we appreciate the interest in Von Tier and look forward to engaging many of you on the road in the next several weeks. Have a good day.

Operator

Thank you. This concludes our conference for today. Thank you all for participating. You may now disconnect your lines.

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