Vontier Corp

NYSE:VNT

Earnings Call Transcript 2021-Q1

[Operator]

My name is Dorothy, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to the Vontier Corporation's First Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Ms. Lisa Curran, Vice President of Investor Relations. Ms. Curran, you may begin.

[Lisa Curran, executive]

Thank you, Dorothy. Good morning, everyone, and thank you for joining us on the call. With me today are Mark Morelli, our President and Chief Executive Officer; and Dave Naemura, our Senior Vice President and Chief Financial Officer.

We will present certain non-GAAP financial measures on today's call. Information required by SEC Regulation G relating to these non-GAAP financial measures is available on the Investors section of our website, www.vontier.com, under the heading Financials.

Please note that, unless and otherwise noted, the presented financial measures reflect year-over-year increases or decreases. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward-looking statements that we make today. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available on our SEC filings and subsequent quarterly report on Form 10-Q. These forward-looking statements speak only as of the date they are made. 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, executive]

Thank you, Lisa. Good morning, everyone, and welcome to our first quarter earnings call. We had an outstanding start to 2021. Our team's strong execution drove double-digit core revenue and earnings growth. We delivered adjusted earnings per share of $0.63, an increase of 43% year-over-year and $0.08 above the high end of our guide. Our results this quarter are a clear demonstration that better prioritization and embracing our core values drive robust improvements.

I cannot underscore enough the importance of unlocking value by combining our heritage with a greater focus and fresh perspective made possible by the separation of Vontier. Our renewed discipline enabled us to better prioritize our highest-return opportunities and pursue strategies to transform our portfolio. We are taking advantage of secular trends to win share with North American EMV solutions. Importantly, we're also gaining momentum on initiatives to deliver growth beyond this regulatory driver.

I'd like to give additional color on our profitable growth initiatives and operational milestones as this is indicative of the significant runway of opportunities available to us. We continue to drive deeper deployment of VBS and build momentum. We revamped our performance and incentive programs to solidify accountability through our aggressive strategic and operational agenda.

The right linkage is in place to ensure emphasis on the critical few areas of growth, innovation and simplification. Accordingly, we are repositioning to streamline the business while investing for more profitable growth. Early wins, share gains and new product launches are driving this accelerated growth. In the first quarter, we delivered mid-teens core revenue growth in non-EMV sales, including greater than 25% core revenue growth in high-growth markets. We saw strong growth in retail solutions, driven by 30% growth in point-of-sale offerings. Additionally, we continue to see accelerated growth in diagnostic and repair technologies with high-teens core revenue growth.

Lastly, we're continuing to make important progress returning Teletrac Navman to more profitable growth. To summarize, we're advancing all of our priorities as we outlined last October, and this is unleashing our earnings growth potential.

And so as I mentioned, we're off to a strong start to the year. However, we will be facing continued supply chain constraints and inflationary pressures going forward as the sourcing environment for steel and electrical components, among other things, is challenging.

But this is another area where our team has executed exceptionally well. We're leveraging VBS to derisk our supply chain. We were able to more than offset inflation in the quarter with price. And I'm confident in our team's ability to continue to manage these headwinds. We remain vigilant as we expect to see increasing challenges with supply chain, logistics, inflation and COVID-related impacts centered on India and other parts of the world.

However, we always come back to the Vontier way as our guiding principle. Our commitment to integrity and our people is the foundation of our success. We've escalated programs to support our employees and their families in the most impacted areas, and that will remain our highest priority.

Moving to the outlook. Given our strong performance in the first quarter and expectations for improved demand, we are raising our full year 2021 adjusted diluted net EPS guidance to $2.55 per share to $2.65 per share. This includes raise assumptions for low to mid-single-digit core revenue growth and core adjusted operating margin expansion of 60 to 90 basis points. We're also initiating our second quarter adjusted diluted net EPS guidance of $0.50 to $0.54, which includes assumptions of 23% to 25% core revenue growth and core adjusted operating margin expansion of greater than 200 basis points.

With that, I'll turn the call over to Dave. Dave?

[David Naemura, executive]

Thanks, Mark. Adjusted net earnings for the first quarter were $108 million, an increase of 44% from $75 million in the prior year period. This translated to an adjusted net earnings per share of $0.63 compared to $0.44 in the prior year period. The double-digit increase in earnings was primarily driven by volume growth and strong fall-through, which led to 380 basis points of adjusted operating margin expansion in the quarter.

Core revenue growth in the first quarter was 14.3%, driven by broad-based non-EMV growth of approximately 15% in the quarter, supplemented by the continued strength of the EMV rollout in North America. In GVR, core revenue grew mid-teens with bookings growth of high teens, while Matco had high-teens core revenue growth and more than 20% bookings growth. High-growth markets were also a significant contributor in the first quarter, growing more than 25% year-over-year and low teens growth sequentially.

With the -- within the high-growth markets, we saw particularly strong growth in India and in Latin America, driven by Mexico share gains.

Adjusted operating profit for the first quarter was $151 million, growth of 41% compared to the prior year period, primarily driven by strong core revenue growth and continued cost management in both cost of goods sold and operating expense. To that end, we drove 90 basis points of gross margin expansion and 380 basis points of adjusted operating margin expansion, continuing the progress we made in the back half of 2020 as we leverage VBS to execute our profitable growth initiatives and manage through a very dynamic supply chain and inflationary environment.

Our earnings growth continued to translate through to very strong cash flow performance, with adjusted free cash flow of $156 million, a conversion of 145% in the quarter. Q1 is historically the low point in the year for free cash flow conversion as we normally build working capital coming off the year-end low in what is typically a seasonally lower volume quarter. However, this quarter, we further improved working capital through targeted receivables and payables actions while also satisfying high volumes.

In the first quarter, we closed on $1.6 billion of senior notes at an average interest rate under 2.5%, lengthening the maturity of our debt structure. We subsequently retired $1.4 billion of our temporary debt financing, including repaying our 2-year term loan, which was put in place to facilitate our October 2020 spin. This had the impact of opportunistically increasing our gross indebtedness by $200 million to approximately $2 billion, better positioning the company to execute on M&A.

Our growth in earnings, along with our strong free cash flow generation resulted in our net leverage decreasing to 1.9x from 2.2x at the end of 2020 and 2.6x at the time of the spin in October of last year.

Looking at the top line performance of our 2 platforms. Mobility Technologies had core revenue growth, 12.7%, primarily due to mid-teens core growth in GVR, partially offset by Teletrac Navman. The strength in GVR was multifaceted. We saw strong demand and high teens growth in non-EMV sales driven by retail solutions point-of-sale, aftermarket and environmental solutions and 30% growth in high-growth markets. And we continue to see strong demand from EMV in North America ahead of the deadline. As Mark mentioned, Teletrac Navman continues to improve, and we remain optimistic that the business will return to growth by the end of the year.

In our diagnostics and repair technologies platform, core revenue growth was 18.6% and driven primarily by accelerated strong demand at Matco. Matco experienced high-teens core growth as the demand environment remains strong with substantial same-store sales growth. We continue to add to our distribution base, posting our third consecutive quarter of strong net franchisee additions following the pause that we saw during the height of the pandemic.

Looking at total company sales regionally, the growth was truly broad-based. As I mentioned, high-growth markets grew more than 25%, and our developed markets in total grew low double digits with mid-teens growth in North America, partially offset by softness in Western Europe. In addition to executing on the growth opportunities in our markets, we also made progress on our profit improvement actions that will better position the company as we progress through the year. We recognized a restructuring charge of $4 million in Q1, which is part of the approximately $20 million charge that we continue to anticipate for the full year. This charge is excluded from our adjusted net operating profit, as we discussed last quarter. We expect to have these actions substantially complete in the year, positioning our exit rate to achieve the benefits of these actions in 2020 -- 2022, sorry.

Taking a closer look at our outlook assumptions. We now expect our weighted average share count to be approximately 170 million for the year, down from 172 million in our prior review. And as a reminder, during the second quarter last year, we acted quickly and decisively to reduce our cost base by about $20 million and in line with the pandemic demand environment. Given the V-shaped recovery in the majority of our markets, we saw about $15 million of those costs return in the third quarter of 2020. We have contemplated the return of these temporary cost actions and the impact from the supply chain constraints and inflationary pressures in our guidance for both 2Q and the full year.

Our adjusted free cash flow conversion of 145% this quarter was unseasonably high for a first quarter of the year. Historically, we have built working capital in Q1 and have seen this as the low point for conversion in the year. For 2021, we anticipate that Q1 will be the high point for conversion and Q2 will likely be the low point for the year. We expect to see conversion from -- down from Q1 levels for the remaining 3 quarters as we work to better align working capital with demand. Furthermore, as we noted last quarter, we will have 5 federal tax payments in 2021 as compared to 3 in 2020 due to the dynamics of the spin. The actual payment will occur in Q2. All that said, we still anticipate full year adjusted free cash flow conversion of around 95%.

Importantly, we enjoy a healthy balance sheet with liquidity in excess of $1 billion and ample near-term M&A capacity. Overall, a robust start to the year, operating from a strong financial position and with a meaningfully -- and with a meaningful raise to our full year expectations for core growth, margin expansion and earnings growth.

With that, I will turn it back to Mark.

[Mark Morelli, executive]

Thanks, Dave. Indeed, our team delivered another quarter of strong execution resulting in top-tier financial performance across all metrics. I'm extremely proud of our employees and encouraged by our ability to deliver against our most important priorities. You may recall that last quarter I characterized 2021 as an important springboard to a multiyear transformation, and it's imperative that we deliver on every step of this journey. Since separation, we've more than delivered on our commitments. And now with first quarter behind us, we are even better positioned to navigate the growth and comparison dynamics ahead.

Our improved full year guide remains a tale of 2 halves. The first half reflects broad-based strong growth, including continued demand for EMV, coupled with a favorable comparison due to the impact of the pandemic in the second quarter of last year. In the second half, we have much more challenging comparisons because we benefited from the V-shaped recovery and accelerated demand for EMV and Mexico regulatory solutions in the back half of 2020.

Given the improved growth outlook from environmental and point-of-sale solutions, high-growth market initiatives and Matco, we now see first half adjusted earnings per share growth of approximately 40%. This is partially offset by more favorable expectations of a second half decline in the low double-digit range.

To wrap up, we had a strong start to the year as we build momentum and establish a successful track record as a stand-alone company. I just want to reiterate how pleased I am with our team's execution this quarter to deliver top decile operating leverage and growth.

A greater focus and deeper deployment of the Vontier Business System is the driving force behind our success today and tomorrow. We are well positioned for capital deployment due to our strong free cash flow conversion. We are confident in our organic and inorganic opportunities. And we expect to drive compounding growth, thanks to our market-leading positions and compelling long-term secular growth drivers.

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

[Lisa Curran, executive]

Thanks, Mark. That concludes our formal comments. Dorothy, we are now ready for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Andy Kaplowitz with Citigroup.

[Andrew Kaplowitz, analyst]

Nice quarter.

[Mark Morelli, executive]

Thanks, Andy.

[Andrew Kaplowitz, analyst]

Mark, you adjusted your second half '21 expectations slightly higher, down low teens versus down mid-teens what you had last quarter. Can you give us a little more color into that expected improvement? Is it more because of improved profitability you're delivering?

Maybe reopening is positively impacting your businesses? Or is EMV sunset not as bad as expectations? And I know last quarter you suggested EMV adoption would be in the mid-80% range by the end of the year. What's your current expectations for that?

[Mark Morelli, executive]

Yes. Andy, listen, I think it's both better top line visibility, and that's really on the backs of our ex EMV growth initiatives. As you know, we've really down-selected to a critical few priorities. And one of those is driving some growth that's coming not from the secular driver in EMV. And particularly, I spoke about them on the call, but it's also important to reiterate here, we're getting better traction in high-growth markets. As you know, they can be lumpy. Where we're getting a really good backlog there, and we've raised the outlook for full year.

We've also got a lot better traction on some initiatives around retail solutions, and that gives us a lot of confidence. Also, Matco is showing some strength, and we're also carrying a good backlog there. So a lot of really good initiatives that are paying off for us, and we feel really good about it.

At the same time, EMV, by the way, while we won't make comments on that, but we are gaining share in EMV. And I think we feel pretty confident in that view. The drop-through has been great. And I think the initiatives that we're doing on simplification and driving better margin improvement and our focus there is beginning to pay off, as you can see. So I think that the combination of both those really give us more confidence to raise our outlook in full year.

[Andrew Kaplowitz, analyst]

Mark, can I just ask you a follow-up on high-growth markets? Obviously, you guys are pretty big in India. And given the unfortunate events there, how are you guys thinking about from high-growth markets in general, including India? Have you sort of discounted any COVID disruption in any of those regions?

[Mark Morelli, executive]

Yes. That's a great question. Look, the situation in India is tragic and it's still developing. First and foremost, we're prioritizing our safety and the health of our employees. And we've contemplated some of the India risk in our guide. But as you know, it's a developing situation for full year. When you look at other high-growth market opportunities, Middle East and Africa represents good growth as well as some opportunities in Latin America as well. So I think we're -- we feel good about our initiatives there. And I think we feel good about our outlook, but obviously working through some hotspots with COVID that is -- it's quite significant and very heartfelt for our team and our employees.

[Operator]

Your next question comes from the line of John Walsh with Credit Suisse.

[John Walsh, analyst]

I wanted to ask about kind of the M&A priorities pipeline, if you can give us any metrics around that, either the number of opportunities, the size et cetera. Because, right, you did delever nicely on the free cash flow generation this quarter. So just love to get a little bit color around the pipeline and the timing, please.

[Mark Morelli, executive]

Yes. Happy to do that, John. Look, the delevering is absolutely a part of this equation to generate strong free cash flow and to compound that into M&A. And on the M&A question, specifically, we have this healthy pipeline. And by the way, it's focused on non-ICE targets, and the cultivation is very active.

What I can say specifically about these opportunities is that they will accelerate our strategy. And specifically, the characteristics are focused on non-ICE. They're accretive to growth and cash flow. It's a very disciplined process. The targets that we're looking at are near end. We can think about them as retail solutions, certain areas in smart cities and possibly telematics. And of course, our pipeline is broader than that, but these are -- I'm trying to add a little bit of color for you as to the areas that have particular interest for us.

And certainly, it's a competitive dynamic out there in the markets, but we see deals getting done. And deleveraging, like I said, is part of it. And just as a reminder here, John, as you know, it is -- it's difficult to predict exactly when deals will happen because they're a bit episodic.

[John Walsh, analyst]

And then maybe that leads into the follow-on. You've taken your share guidance down here by $2 million. Maybe just a little bit of more thoughts around deploying some share repo to that.

[David Naemura, executive]

John, it's Dave. Obviously, our capital deployment priority will remain M&A. But we're, first and foremost, focused on returns. I think the adjustment you saw in the guide was just us kind of getting in the stream here and understanding the impacts of stock comp and other things as it's our first year as a public company. But I would steer you towards thinking about M&A as our top priority -- continuing to be our top priority for capital employment.

[John Walsh, analyst]

Makes a lot of sense. Nice quarter again, and I'll pass it along.

[Operator]

Your next question comes from the line of Nigel Coe with Wolfe Research.

[Nigel Coe, analyst]

I'll keep this to one question. Can you maybe just give us a bit more definition around what you've seen? Now we've passed the EMV deadline, how is the backlog looking at this point? It seems that we're still working with this $100 million to $150 million headwinds for the year. How much of that hits in 2Q? And how much in the second half of the year? That would be helpful.

[David Naemura, executive]

Yes. thanks, Nigel. It's Dave. I'll answer that. So we have not updated our point of view, and we continue to stay in that $100 million to $150 million range for the impact of the decline from the peak year of 2020. We saw EMV come in about as expected in Q1. The backlog is strong. I think what we've always said is we want to get through the adoption deadline, which is past here a few weeks ago and see some behavior through Q2 before we update that, then we'd come back with an update.

When we look at Q2, we're still growing year-over-year. But sequentially, the EMV dollars that we ship will be lower than what we shipped in Q1. And so we do see sequentially a reduction, but still growth year-over-year. So we would anticipate the back -- or the impact of the year-over-year decline being a second half dynamic.

[Operator]

Your next question comes from the line of Julian Mitchell with Barclays.

[Julian Mitchell, analyst]

Maybe my question is just around the margin outlook. So I guess one aspect of that is, it looks like the guide is embedding a second half sort of down margin year-on-year, maybe 50 bps, but up 200, 300 bps half-on-half. So maybe just help me understand if that math is roughly correct for the 2H. And what's driving that big half-on-half uplift as the EMV rolls?

And also tied to that, it looked like your restructuring charges guidance, at least on a per share basis, has gone up from $0.07 to $0.12. Maybe help us understand kind of what's driving that and what the in-year savings will be next year?

[David Naemura, executive]

Yes. Thanks, Julian. I think -- if you'll look directionally, I think you're reading the first half, second half dynamic correctly. Pretty good step-up in second half, profitability and margin from what we're experiencing in the first half. And that's about what you historically would see from these businesses.

What makes it a little bit challenging is the compare. Obviously, we saw a dramatic improvement last year, some demand shifting out of the second quarter and getting satisfied in the second half, immediately coming back to mid-single-digit growth in Q3 of 2020 and high single-digit growth in Q4. So that skews the year-over-year compare dynamic. But sequentially, I think you're in the zone.

Why do we see the margin improvement? Well, it will be -- we anticipate on a little bit higher volumes. And also, this is where a lot of the profit improvement actions that we've talked about come into play. Part of that, as you know, is the restructuring, where we're still on $20 million for the year. We talked about $20 million previously, and we're still on the $20 million. So we haven't changed our restructuring assumption. We believe that, that will happen throughout the year, probably a little more weighted towards the back half of the year. The goal being, we'll see some in-year savings kind of partial year obviously, as they happen throughout the year, but positioning ourselves for the exit rate.

And regarding also the impact of EMV on the first half, second half dynamic, I think what we talked about on the last call was the EBIT level being about $0.38, call it, $0.28 at the EPS net earnings level. And we said we felt good about offsetting that. Given that we've brought the guide up and we haven't changed the EMV assumption, I'd say our confidence continues to be high in our ability to offset the impact of EMV, which includes the mix impact as well.

[Operator]

Your next question comes from the line of Andrew Obin with Bank of America.

[David Ridley-Lane, analyst]

This is David Ridley-Lane on for Andrew Obin. Could you tell us about the incremental margin assumption in the second quarter? Are you assuming the full $20 million of temporary costs come back? Is price/cost still positive? Just give us a little bit more of the pieces around the margin assumption in 2Q.

[David Naemura, executive]

Sure. Thanks, David. As you know, $20 million out last year, I think the majority of that is back in this year in the run rate, maybe not quite all the way up to the $20 million because there's some -- maybe some travel and other things that aren't back in, but that, for sure, is back in the number, and that impacts the year-over-year incrementals.

Also, we have kind of a different dynamic in OpEx associated with what we call the expo event at Matco, our big annual sales event is a Q1 item. It was in Q1 of 2020. This year, we kind of switched the sales side of that to a big virtual event, but we'll still hold expo. It will be in Q2. So I think we captured a reasonable amount of sales in Q1, but the event cost itself, which is significant, moves to Q2. So there's dynamics such as that as well. Also, with the strong backlog that we have, we get pretty good line of sight into what we're going to ship. And we have -- between kind of product and geo mix, we see some mixed sequential headwinds when we look at Q1 versus Q2. So that goes into the calculus as well. As far as price/cost, we would anticipate that being positive for Q2. But as we said, it's a tough dynamic environment.

[David Ridley-Lane, analyst]

Got it. And just as a quick follow-up, what was pricing in the first quarter? What was cost inflation? And are you planning to take further pricing actions in this year?

[David Naemura, executive]

Yes. Just to frame it up for you, price was greater than cost. Price was about a point, maybe a little bit more. We would anticipate positive price for the full year. And we think that point of positive price even comes up a little bit over the course of the year, and we end up maybe closer to 1.5 points, again, dynamic environment, but that's how I'll color it for you.

[Operator]

Your next question comes from the line of David Raso with Evercore ISI.

[David Raso, analyst]

My question relates to your comment about the M&A landscape and your vision of what the areas you're focusing on. You mentioned retail solutions. Just a big-picture question. I'm curious how you see retail solutions fitting in with the current refueling stations and maybe a change how folks use refueling in the future just to give us a better sense of how you're thinking about retail solutions going forward.

[Mark Morelli, executive]

Look, there's a number of areas where the retail solutions, which, by the way, we absolutely believe is non-ICE. Retailers have had a growing format for many years, and these are profitable growing venues that are part of our local fabric that will continue to grow even as we get into electrification. The things that are really interesting here is that we're pretty uniquely positioned in the market because we penetrated into the point-of-sale systems, the head office, back-of-sales solutions here that really help manage how these retailers make money.

And by the way, they make money, in many points, actual -- most of the money they make is not through pumping gas. It's through all of the other retailing aspects. And so this is really their focus.

Of course, they want to make money and they want to grow. And we are -- have embedded ourselves into how they do that, and we're part of that making money. So as we build that out on security of payments, as we build that out on financial or fintech, as we build that out on services that are being done there and point-of-sale systems, we think that's a robust area for growth.

[David Raso, analyst]

And the geographic focus right now, would you say the opportunities are as prevalent in North America as they are internationally?

[Mark Morelli, executive]

Yes. Listen, I think it's -- when you look at the buying dynamic of the convenience store by country, there's a lot of evolution to this. And even if you look in the Nordic countries in Europe, there's pretty strong evolution of these formats in the areas that I'm talking about. And so this is absolutely an important area for growth in Europe, North America.

And then high-growth markets, well, high-growth markets are going to build out the petrol refueling infrastructure for sure. Countries like India have a lot there. But they're also moving up in their sophistication on automation and in the areas that I'm exactly talking about. Not only that, there is a big opportunity on environmental solutions, things like vapor recovery. I mean these are big areas for growth. And that infrastructure is going to be in the ground for a long period of time. So there's lots of solutions there that are quite relevant to us based on our position.

[Operator]

Your next question comes the line of Jeff Sprague with Vertical Research.

[Jeffrey Sprague, analyst]

Two for me, if I could squeeze 2 in. First, just on Matco. Can you elaborate a little bit more of just kind of what you're seeing kind of underpinning the demand? Would you view it as just kind of a bit of a pent-up recovery? I would not suspect that maybe the shortage of new vehicles or anything is impacting aftermarket demand yet. But if you have any thoughts about that, that would be kind of an interesting footnote maybe to the main question.

[Mark Morelli, executive]

Yes. Matco is up. It's been a great business for us for a long period of time. And if you see what happened in third quarter with this really strong V-shape recovery, it shows the resiliency of serving the last mile. And it's one of our more profitable businesses, as you know.

What's really interesting there is that where we're seeing growth come from is really strong same-store sales. Now what's happened to this industry historically is that miles driven has typically been the major driver. But miles driven is actually down year-over-year. So it's not the major driver right now. And the technician count is actually down a little bit as well. But what's happening is these...

[Audio Gap]

[Operator]

Ladies and gentlemen, we are currently experiencing technical difficulties. Please stand by while we reconnect our speakers. One moment.

[Technical Difficulty]

You may proceed.

[Mark Morelli, executive]

Jeff, this is Mark Morelli. It's never happened to me before over the years I've done this, but we actually lost our line, so I apologize for that. But Jeff, did you hear the answer to the question on Matco? Or is there anything you want me to reframe?

[Jeffrey Sprague, analyst]

No. Where we -- and interestingly, I think there's 8 or 10 conference calls that have blew out this season. Maybe our telecom infrastructure in the country has fallen apart or something. It's very strange.

[Mark Morelli, executive]

Yes.

[Jeffrey Sprague, analyst]

But what I said was driven -- down and tech count is down. And you were going to get to the, yes, but we're driving because and I -- or the -- we're growing because, and I did not get that.

[Mark Morelli, executive]

Okay. Well, that was the punchline. You missed it. So let me reiterate that, I apologize. Look, it -- so what's driving it is the strong same-store sales and the technicians have more disposable income, so they're actually spending more on tools. The second aspect that is also really important to us is the net franchisees adds are up for us.

We've deployed to a virtual way of adding franchisees. And we have a net positive. And by the way, this is kind of unique to us. We've got about 30% of our territory in North America and Canada that is not yet served by our distribution network that we continue to build out. As you know, this is one of our more profitable businesses, and we think it's a steady grower for quite some time.

[Jeffrey Sprague, analyst]

And then just as a -- I mean, I guess it's kind of a big follow-up in a sense. But just coming back to kind of some of the point-of-sale opportunities and the like. I'm just curious, do you -- is there any decent information? Or do you have a sense yourself of how much in-store traffic at DC stores is driven by a stop to fuel up? I'm sure they're highly correlated, but I'm wondering if it's 90% of sales, 80% of sales or if you have any data around that question.

[Mark Morelli, executive]

Yes. Actually, we do have some data. First of all, it depends quite significantly by country. So there's a lot of spread there by country. So I know a lot of people make an opinion on their own personal experience, but you think about this $650 billion market for convenience worldwide. That's -- it's a big market with a lot of variation that happens globally. But if you start looking at that data, you actually see the numbers of transactions that are actually occurring.

And the number of transactions is a little bit of a different story than actually where the revenue comes from and where the profit is made. So there indicates that there is a lot of pull actually for numbers of transactions that are actually beyond just refueling. And also, like I said, most of the money is made beyond refilling. So if you look at people like 7-Eleven, Circle K, Wawa, Sheetz, Buc-ee's, how they're building out their franchises and retailing. It's a very interesting part of our local fabric that we think has growth opportunities.

[Operator]

Your next question comes from the line of Richard Eastman with Baird.

[Richard Eastman, analyst]

Just a quick question. In the guidance for the full year, you raised the core guide -- core revenue guide by about 3 points. And given your commentary around Gilbarco and the dispenser business, it sounds like that revenue dynamic is still in place, so a decline of $100 million to $150 million. So a question around this 3-point bump in guide. Is that highly weighted towards the diagnostics and repair business? And if so, is the price component that you're getting in Diagnostics & Repair at Matco much than the 1% overall?

[David Naemura, executive]

Rick, it's -- thanks for the question, Rick. It's Dave. I would say, first of all, the increase in the guide is balanced between the 2 platforms. We are definitely continuing to see strong demand in Matco, and that's helped out. But more broadly across the GVR business as well from the non-EMV aspects of that business is a big driver as well.

I would say, from a price standpoint, look, we're seeing price across the board. We've -- it's important in this inflationary environment. But as it relates to the guide, the price assumption that we brought into the year that we started the year with is about the same we're at now. So we anticipate an inflationary environment and kind of built in our ability to take price, which we've historically proven the ability to do into the guide, and we've kind of stayed with that.

[Richard Eastman, analyst]

Okay, okay. Very good. And then just a follow-up question. On the telematics business, could you just maybe sift through -- again, we have another decline here, which I think is kind of at-plan for the first part of this year. But how much of this decline now would you attribute to the hangover from ELD? Is there still a lot of churn going on here? Or has that settled down?

And then again, you have this dynamic around subscription growth and obviously the impact that can have on growth -- revenue growth. So maybe just sift through that a little bit. And is this telematics expected to be what platform for your smart city growth rate that you speak to on the M&A side. A lot there, but maybe you could just speak to that.

[Mark Morelli, executive]

Yes. Let me chat about that. So first of all, as you know, we've been working on turning this business around, and I'm very encouraged on the steps that we're making. This is the first quarter that we actually have positive annual recurring revenue, which is an important step to making organic growth in the business, which, of course, given that 95% of this business is SaaS, you amortize the sale over the life of the contract. So it takes a while for that to begin to catch up to actual organic growth. So the real metric here is to watch annual recurring revenue and make sure we're growing it.

So the first -- so first of all, that's a big step in the right direction to be able to achieve that. That's also a function of annual contract value as well as it's netted against churn. So we're seeing -- we're starting to see some growth on ARR, which is important.

And then to your question, we're continuing to see moderation in churn. The director platform, as you mentioned, had ELD problems actually for many years. And we worked a lot last year to be able to stem some of those problems. And more importantly, we have launched a new platform called TN360, which is a real-time AI-based platform. We're actually launching our ELD offering in that here shortly, which will be an important aspect in North America. And so as we continue to work through that and build that out, that gives us opportunities for growth.

And then you mentioned sort of smart city. Because telematics touches a lot of things. It's a big market. There's a lot of niche areas to grow in. One of the interesting areas that we have or we're beginning to untap is actually combining our technology with TN360, this telematics real-time operating system that includes AI, as I said, with our presence in cities through our GTT business or Global Traffic Technologies. And as you know, we have a market-leading brand in GTT called Opticom, it controls stoplight. So when we incorporated telematics with the control of stoplights in a very contemporary sense, we call that Opticom 360. We just launched that product. We got an IoT award for 2021, actually fairly recently for that offering. So I think there's lots of areas for us to be able to uncover to tap into growth niche markets where we have a unique area to play that we're going to continue to build out in.

[Richard Eastman, analyst]

And with the investment in that business, is that running at breakeven-ish? Or is that still a losing a bit of money and not meant to...

[Mark Morelli, executive]

No, it's tipped to profitable. But it's not -- I think there's a lot more profit opportunity there. When you look at some of these businesses like telematics, it's -- obviously it has a big runway in front of it. We've got other businesses like Hennessy. They're well below fleet margins as well. So I think what we're doing is we're really trying to bottom out these opportunities to bring up those below -- well-below fleet margin businesses. And we've got line of sight where we're beginning to get on the mend on these, and we think that's going to give us some meaningful uplift over the longer term.

[Operator]

Your next question comes from the line of John Inch with Gordon Haskett.

[John Inch, analyst]

I want to start -- your working capital is really impressive. And I want to know on how are you accomplishing this. And how do you guys think about kind of normal working capital to sales? Sort of -- what sort of investments do you have to make as the business continues to expand? Because I'm not -- to this -- to the naked eye, it's questionable whether this is sustainable, but maybe it is. If you could comment on that, that would be great.

[David Naemura, executive]

John, thank you. It's Dave. We are in clearly an unprecedented situation relative to working capital. I mean, I -- when we exited last year, we exited kind of in a high single-digit percent of LTM sales, which was, frankly, better performance that we had seen in a long time. Well, I think that we have an -- kind of recorded history here. And it was -- in result of 2020, we saw a significant reduction from where we ended the year. So as we came into 2021, I've always talked about needing to add working capital. And I would have anticipated, frankly, entering the year that we would have added working capital in Q1. But again, unprecedented situation, and we actually saw further decline in working capital.

So look, we have a real cost improvement culture around here, so I'm not going to say that we can't achieve these levels. But I would say that we don't think in the near term, at least, this is sustainable. And I anticipate still in our free cash flow guide for the year that we would add back 1 point, 1.5 points at least of working capital here. And that's some of what we've factored into our thinking here. So we'll see how it -- we'll see how it develops.

How are we doing it? We have significant playbooks. I won't go through all the pieces. But I will tell you that we're seeing a lot of cash receipt easier than we had in the past. I think I have some theory around work-at-home environment. I have some theory around constraint of supply where people wanting -- want to get -- want to pay you and ensure they're getting delivery. And also inventory is low as some of the supply chain areas are constrained. So I think we do see working capital normalize somewhat with demand, not back to historic levels, but I think we'll come up from here. But again, unprecedented situation where there's not a lot of past to look on. So we'll see how we work it.

[John Inch, analyst]

Well, you guys are a continuous improvement company as sales continue to climb for lots of different reasons, right? Does inventory, can you call that, the inventory, in particular, to sales at a constant rate? Or does that have to kind of get built back up and maybe more so because of the environment, right, just with various pinch points around supply chain and so forth?

[David Naemura, executive]

Yes. I think that's the right characterization. I think, the -- given the environment, we want to see some more inventory come into the system right now. Yes, we'll always look to get more productive from a working capital standpoint. But right now, we'd like -- there are some areas -- or there are some areas, of course, where we don't, but there's some areas where we'd like to see a little more inventory come into the system.

[John Inch, analyst]

The follow-up here is just on the DT order growth, Slide 7, of 20%. Dave, I think you mentioned that technicians have a lot of money, which is a curious comment. What was that number -- like in a good way, what would that number look like if you were to compare the DT order growth on a per head basis or per franchisee basis?

Trying to sort of understand what's really going on here. And I heard a little bit of Mark's answer, but I'm still not quite sure. I appreciate what the dynamic is that's driving this. Is it sort of pandemic-related? Is it new product-driven? Is it a combination? Is there one -- or maybe you could rank order the things. I don't know. Any color there would be great.

[David Naemura, executive]

Yes. So we are -- first of all, at the -- we are seeing the spend per tech come up or the average sales per distributor to come up, combined with more distributors on the road. And that's not just from the new ads, but we're -- we have delinquencies at an all-time low. We're seeing fewer people on credit hold. So -- and to your theory, what is driving that? Well, yes, there -- you've got to have new products. You got to have desirable products for people to buy, of course.

But I also think the competition for share of wallet with the rest of life here has gotten a little bit easier. We're not competing with a Disney cruise maybe, and people are deciding to not spend money on that vacation and buy tools and do other things. So it's tough to tell exactly, and we spend a lot of time with distributors trying to understand. But it is clear, and the point Mark was making that people aren't spending money somewhere else. And the technician environment is healthy. They have money in their pockets and they're choosing to spend it on tools.

[John Inch, analyst]

Yes. Very impressive. Appreciate it.

[Operator]

You have a follow-up question from the line of Nigel Coe with Wolfe Research.

[Nigel Coe, analyst]

I just want to maybe dig into the supply chain constraints that you've been referring to now for the past 3 or 4 months. It sounds it like you want to rebuild inventory a little bit, maybe that helps, but maybe just dig in a little bit deeper in terms of where you're seeing the real pressure points and the degree to which it's strolling your sales growth or maybe causing some share to shift around a little bit here. Any idea there would be helpful.

[Mark Morelli, executive]

Yes. So look, this is supply chain, managing that logistics. It's a knife fight on a daily basis. It is, no question, a lot of hard work that's being put in for the team. And I do want to thank the teams because in many times, it's thankless work. I mean, the time I hear about it is when it's not going as well as it should. And it's -- what's really the color behind driving it, clearly, chips around electronics for dispensers, that's clearly an area that is hard to manage. Obviously, thinking that through, having a plan for every part, being able to forecast on manager suppliers appropriately. That's all just hard work that is part of our VBS. And I couldn't be more proud of the -- their ability to do that.

At the same time, on Matco, a little bit of a different supply chain dynamic because, as you know, we source a lot of our products, and there's a long time on the water for much of this. And so managing that, quite honestly, if we could -- if we had worked down 50% more of our backlog, we would have hundreds of points -- of basis points of higher growth in the quarter. And that's just a different dynamic altogether. And I think we're doing admirably well.

But I wish we could be doing better on Matco supply chain. It's just it's a little bit different dynamic than some of our competitors in the market where they build things and they can control it more in-house. And given sort of the extended supply chains -- by the way, we're introducing new products all the time there. We have a vitality of about 30%, which means that 30% of those products are new that we're bringing to market. And so you've got to establish that supply chain, and it's all done through suppliers.

So it's a different beast. I think we're getting through. We're managing it much better quarter-over-quarter. But I'm pretty confident with our abilities here. I think we're doing better than most. And I think we're going to continue to lean into that. But we're not out of the woods. There's no question about it. There's more to come. There's more inflation to come. We'll be raising price. All these things are part of managing that. But thank you for the question.

[Nigel Coe, analyst]

That's great. And then just quickly on Tritium. I think at the end of this year, you got a decision to make regarding that option. I know you're bound by confidentiality clauses, but is the cost to take control, is that market value kind of market price-based? Or was there some option price already priced -- already negotiated there? Any color there would be helpful.

[David Naemura, executive]

Nigel, yes, I understand. I think those aspects of the mechanisms and things are, I would say, are kind of captured in that confidentiality of the agreement, so we wouldn't be able to go there.

[Nigel Coe, analyst]

Okay. I understand. Yes, all right.

[Operator]

And your last question comes from the line of Richard Eastman with Baird.

[Richard Eastman, analyst]

Yes. Mark, could you just speak to EMEA as a region? I think you referenced softness. I don't know if that was to Western Europe being down or if it just grew at a mid-single-digit rate. But just speak to the softness that you were seeing there, obviously, on mobility side of the business, but...

[Mark Morelli, executive]

Yes. So our EMEA business were -- I would say, not EMEA, I would say Europe to be more specific. That was down low double digit, but that was also impacted a lot by shutdowns and COVID impact. So that was the issue that kind of came up in Q1. But Middle East and Africa is also a growth opportunity for us. So I would definitely separate a very different dynamic there that's happening. Hopefully, that's helpful color.

[Richard Eastman, analyst]

And that slowdown on the COVID side, is that -- does that business just end up in backlog then? I mean -- or this wasn't -- there just wasn't any orders there because of that?

[Mark Morelli, executive]

Yes. No, I think there's clearly a backlog that can be served.

[Operator]

At this time, I'll turn the conference back over to Mark for closing remarks.

[Mark Morelli, executive]

Yes. Thank you, Dorothy. Look, our greater focus on a critical few items, growth, both taking advantage of EMV to gain share as well as ex EMV growth, our focus on innovation, our focus on simplification to drive greater margins, I think all these things are gaining traction. And I couldn't be more proud of our team to have a strong start of the year to build momentum. So more to come, folks. Thank you for joining on today's call.

[Operator]

Thank you, ladies and gentlemen. That does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.