Vontier Corp

NYSE:VNT

Earnings Call Transcript 2022-Q3

[Operator]

My name is Britney, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to the Vontier Corporation's Third Quarter 2022 Earnings Results Conference Call.

[Operator Instructions]

I would now like to turn the call over to Ryan Edelman, Vice President of Investor Relations. Mr. Edelman, you may begin your conference.

[Ryan Edelman, VP, IR]

Good morning, everyone, and thank you for joining us on the call this morning to discuss our Third Quarter Results. With me today are Mark Morelli, our President and Chief Executive Officer; and Anshooman Aga, our Senior Vice President and Chief Financial Officer.

During today's call, we will present certain non-GAAP financial measures. Information relating to these non-GAAP financial measures is available on the Investors section of our website at vontier.com. Please note that, unless otherwise noted, the presented financial measures reflect year-over-year increases or decreases.

We will also make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate, will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward-looking statements that we make today.

Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available 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, and we do not assume any obligation to update any forward-looking statements.

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

[Mark Morelli, President and CEO]

Thanks, Ryan. Good morning, everyone, and welcome to our Third Quarter Earnings Call. I'd like to formally welcome our new CFO, Anshooman to his first earnings call with Vontier. I know many of you had the chance to catch up with him already. He's been in the seat now for about 60 days, and he's already having a positive impact on the organization. We're excited to have him on board.

As we mark the 2-year anniversary of our separation, I'd like to highlight the progress we've made and give a view of our path forward. But first, I'd like to highlight the challenging third quarter where we missed revenues, but delivered bottom line results. Also, we're lowering our full year guidance, driven by an acceleration of the EMV roll off, which we believe is prudent given the weakening macro environment. We continue to actively shape our post-EMV business. After Anshooman walks you through the financials, I'll leave you with the strategic framework that we will build upon in our future engagements. You will see that we have significant momentum and reasons to be optimistic.

Let's get into the details of the quarter with a summary of our results. We delivered adjusted EPS of $0.86 per share, up 8% versus the prior year in spite of a revenue miss. Adjusted operating margin expanded 40 basis points year-over-year, reflecting strong operating leverage and positive price cost as well as the benefit from ongoing cost actions.

Core revenue declined 2% in the quarter. At the end of August, one of our key suppliers of the printed circuit boards used in all of our U.S. fueling dispensers experienced a cyber attack, which shut down their production for 3 weeks late in the quarter. This event was beyond the scope of the disruptions in already stretched supply chains. Our teams responded actively to replan our operations into the final days and hours of the quarter, but the timing of the disruption limited our ability to fully recover at the end of September. The supplier has resumed normal production and we do not anticipate this supply disruption to impact our Q4.

Broader supply chain conditions continue to stabilize with modest sequential improvement in some components and logistics. I'm incredibly proud of our team's performance in mitigating this anomaly.

Non-EMV core revenues grew low single digits with solid performance in our fueling aftermarket and service business and sequential improvements at Matco. However, we also experienced pockets of softer demand related to slower capital spend from independent fueling operators and larger customer project delays in our environmental business due to extended industry lead times on underground equipment. We continue to see momentum from strong price realization, consistent with the trends we've seen year-to-date.

Our backlogs remain healthy and our lead times are beginning to normalize. That said, while non-EMV growth did not meet our expectations in Q3, we are confident that non-EMV core growth will return to the mid-single-digit range for Q4 and the full year. Anshooman will walk you through the details of our updated guidance, as we are revising our full year outlook to reflect our more cautious assumptions for EMV adoption.

As the macro backdrop is weakening, disproportionately impacting small fueling operators in the U.S., we felt it prudent to proactively refresh our modeling assumptions. The net result is the EMV headwind in 2022 will now be roughly $100 million and the 2023 headwind will be closer to the low end of our prior range or about $300 million. There is no change in the peak-to-trough decline, which would put us at a base business in U.S. dispensers of approximately $250 million.

Given increased clarity on the timing of the EMV wind-down, we're accelerating cost actions already in flight. We're also implementing a new set of actions with the intent of rightsizing the fixed cost structure and ensuring the appropriate allocation of resources. A benefit of this earlier-than-expected decline is that the EMV chapter will soon be behind us. U.S. EMV has been a great up-cycle for us. Bringing it to a close, enhances our focus on profitable growth initiatives, structural cost improvements and effectively deploying capital.

We're committed to returning capital to shareholders through a balanced plan over the long term. However, at current valuation levels, share repurchase is unquestionably our top priority. Year-to-date, we've completed nearly $300 million in buybacks and have just shy of $0.5 billion remaining under our existing share repurchase authorization.

As supply chains continue to stabilize, the working capital headwinds we've experienced year-to-date should improve and free cash flow conversion will begin to normalize beginning next year. Over the next 3 years, Vontier will generate roughly $1.5 billion in cash, providing us with significant strategic and financial flexibility.

Before I turn things over to Anshooman, I'd like to take a moment to begin to set the foundation for the next phase in the journey of Vontier. We're now 2 years post-separation, and I couldn't be prouder of what we have accomplished or more excited about the path forward. Over these past 2 years, we focused a lot of our attention capitalizing on the inherent opportunities within our legacy operating companies and initiating a strategy-led portfolio transformation designed to enhance profitable growth through delivering smart, sustainable solutions with a tighter focus on the mobility ecosystem.

Since well before the spin, we've been capitalizing on an accelerated replacement cycle in our U.S. fueling dispenser business, driven by required EMV upgrades. Having gained considerable share, we've expanded our U.S. installed base to nearly 450,000 units across more than 90,000 fueling sites and strengthened our relationship with key customers.

This provides a long tail of opportunity for aftermarket parts and service as well as upgrade and replacement equipment. As we've been preparing for this tail end of the curve for the past 2 years, we proactively launched a new set of initiatives aimed at accelerating topline growth and profitability. We call these our profitable growth initiatives and platform strategies, which are ultimately aimed at maximizing shareholder returns.

Through the end of this year, our profitable growth initiatives will have largely been responsible for driving non-EMV core growth from low single-digit decline, pre-spin, to positive low double digits and 130 basis points of operating margin expansion in spite of significant EMV headwinds. We've also grown earnings 23%, post-spin.

We more have deeply deployed the Vontier business system, introducing a program we refer to internally as the focus and prioritization process across the organization. That's enabling us to determine where best to focus for growth and where we should turn costs. An early focus was strategic pricing, giving us a head start on addressing inflation and helping us to stay in front of price cost curve.

We recognize product line simplification as an opportunity and put in place a program to significantly reduce the number of fuel dispensers globally from 32. And so far this year, we've rationalized 10 dispenser lines. We will have also achieved more than $25 million in cost savings through restructuring and other actions.

On the topline growth side, by more efficiently leveraging our engineering investment, we've been able to accelerate innovation in our environmental business, Veeder-Root, resulting in a 2-year revenue CAGR of more than 10% through the end of 2022. We established a local sales and manufacturing presence in certain high-growth markets and are better positioned with better product to benefit from increased regulation and investment in cost-effective petroleum-based infrastructure in the coming decade.

We created a designated team to drive aftermarket within GVR to capitalize on our growing installed base of fueling equipment in the U.S., resulting in revenue growth in the third quarter of 38%. We've also made progress on turning around the Teletrac Navman business, which is now returning to growth and expanding operating margins, and increase product vitality at Matco, which announced a new strategic supplier relationship with Milwaukee Tools in September that will contribute several points of growth next year.

Our platform strategy initiatives demonstrate success in the initial phase of our portfolio transformation, which includes, both organic and inorganic actions, to better position Vontier to compete in an attractive growth markets that are not ICE-dependent. The acquisition of DRB, which closed a year ago September, has surpassed our original expectations, growing their topline by over 30% and expanding operating margins by over 400 basis points. DRB's industry-leading technology enhances our capabilities and deeply embedded point-of-sale systems, including productivity software and payment facilitation.

The DRB's acquisition earlier this year brings us best-in-class EV charging network software with tens of thousands of plugs under management and continues to gain traction with customers that have significant potential to scale. We believe we have a premier asset to capitalize on the build-out of the EV charging infrastructure globally with hardware-agnostic solutions.

We're also making organic investments and other alternative fuel solutions in support of our vision for our multi-fuel future for the car park. Our ANGI Energy business is a leading supplier of compressed natural gas dispensing technology with nearly $75 million in projected revenue this year, up about 40% from prior year levels and expected to remain a strong contributor in the next year. In addition to being a strong business in its own right, ANGI also provides us the domain expertise and channel presence to participate in the build-out of hydrogen fuel infrastructures.

In Q3, we received our first commercial orders for our hydrogen dispensers, which we'll expect to begin shipping next year.

With respect to capital allocation, between acquisitions and share repurchase, we've deployed roughly $1.5 billion in capital, and we are on pace to generate double-digit returns over 3 years. As we continue building our track record around capital deployment, we will remain disciplined on our fundamentals, focusing on returns. While we do have an attractive pipeline of bolt-on M&A opportunities, the priority, near term, will shift to share repurchase and deleveraging the balance sheet.

Our strategy is on track. I'm very proud of the progress we've been able to demonstrate on accelerating topline growth and improving profitability. We are at a pivotal stage in our journey, and we have unique competitive advantages to lead in many market segments across the mobility ecosystem.

With that, I'd like to turn the call over to Anshooman to provide the financial results. Anshooman?

[Anshooman Aga, SVP and CFO]

Thanks, Mark. I'll get started with a summary of our performance in the quarter.

Adjusted net earnings for the third quarter were $136 million, down slightly from the prior year period. This translated to adjusted net earnings per share of $0.86, an 8% increase over the prior year. Reported revenue grew 2.5%, driven by strong growth at DRB and partially offset by a 3% headwind from FX, with the core revenue declining 1.9%.

Our non-EMV core growth was up low single digits. Revenue was impacted by the cyber event we discussed earlier, some softness in demand from small independent fueling operators that impacted both EMV and non-EMV, and environmental customers delaying projects in the quarter as industry lead times for underground fueling equipment extended.

Non-EMV core growth was led by mid-single-digit growth at GVR with strength in aftermarket and our CNG business, and Matco, which grew nearly mid-single digits in the quarter.

DRB was acquired in Q3 of the prior year, so it will not be included in core growth until Q4, but continue to outperform revenue, up 30% in the quarter.

Adjusted operating profit for the third quarter was $196 million, an increase of 4% year-over-year. Adjusted gross margin expansion of 40 basis points reflected continued effective price cost management and the benefits of DRB, and other higher-margin solutions. These favorable items helped offset continued production inefficiencies from another back-end loaded quarter, driven by timing of supply.

The increase in operating profit and strong execution drove incremental margin of nearly 40% and 20 basis points of adjusted core operating margin expansion. This includes the dilutive impact of our early-stage energy transition investments, which impacted EPS by $0.02 and operating profit by $3 million to $4 million.

Looking at the topline performance of our 2 platforms. Mobility Technologies' core revenue declined 3%, driven by the factors I mentioned earlier. Sales in our aftermarket parts business were up more than 30% and our CNG business grew low double digits. Total growth in Mobility Technologies was 2.5%, as DRB continues to benefit from strong end market demand for car wash technology upgrades.

In our Diagnostic and Repair Technologies platform, core revenue grew 1.5% in the quarter with Matco growth of 3%, partially offset by a decline at Hennessy. We saw sequential improvements at Matco, including the improvement in net franchisee adds and solid growth in our same-store sales.

During the quarter, we began an important strategic supply relationship with Milwaukee Tools that will enable our franchisees to carry Milwaukee's leading cordless tools, strengthening our offering in a key product category. This will be an important growth driver for Matco in the upcoming quarters.

End market fundamentals remain very healthy, with repair activity, service technicians and technician wages strong. As we are seeing supply chain for Matco recover and we continue to add new SKUs to our mobile stores, net franchisee adds are turning positive with the help of company-owned stores. We believe we are well positioned within this market.

Adjusted free cash flow conversion in the quarter was 64%, up sequentially, but below normal seasonality, as we experienced another quarter that was significantly back-end loaded. Unfavorable linearity created by ongoing supply chain disruptions and the isolated supplier impact in Q3 has pressured working capital year-to-date. While free cash flow conversion will improve materially in Q4, we are now expecting our full year conversion to be approximately 70% to 80%.

Moving on to the balance sheet. We ended the quarter with a cash balance of about $120 million and had $50 million of borrowings under our $750 million credit facility. Our net leverage was 3.3x adjusted EBITDA, consistent with the first half and temporarily elevated due to the timing of free cash flow generation. We maintain our commitment to investment-grade credit ratings and still expect our leverage will end the year at 3x with our targeted range unchanged at 2.5 to 3x net.

To further enhance our liquidity profile, we executed a 3-year $600 million term loan, which replaces and extends our September 2023 maturity to as late as December 2025. Our nearest debt maturity is now a $400 million term loan, maturing in October 2024.

In Q2, we refreshed our repurchase authorization back up to $500 million and have deployed $31 million against that. Our year-to-date share repurchase stands at $288 million. Once closed, we would expect to deploy proceeds from our previously announced divestitures to gross debt pay down and share repurchases.

Turning to the outlook assumptions. We're initiating Q4 guidance for adjusted EPS of $0.73 to $0.78, which assumes low single-digit core growth or mid-single digits excluding the impact of EMV. We expect adjusted core operating margins to be flat to down 40 basis points, but in line with our full year average. As a reminder, we will have a full quarter of acquisition contribution from Invenco.

We are assuming an FX headwind similar to what we saw in the third quarter. For the full year, this translates to adjusted EPS guidance of $3 to $3.05, which compares to our prior guide of $3.20 to $3.30.

We are now assuming core growth to be roughly flat for the full year and up mid-single digits, excluding the impact of EMV. Taking a closer look at some of our other assumptions. We expect full year 2022 weighted average share count to be approximately 161 million, which reflects the impact of the share repurchase activity conducted to date in 2022. Interest expense is anticipated to be $70 million, reflecting an increase in interest on the variable portion of our debt. Our guide also reflects modestly higher FX headwinds, which is roughly a $0.03 to $0.04 dilutive impact relative to our last update, including the headwind in Q3.

Let's turn to Slide 9 for a quick visual on our updated assumptions for the EMV impact on our U.S. dispenser business. As Mark mentioned, we are taking a more cautious outlook and we are proactively refreshing our modeling assumptions for EMV conversions to assume lower adoption rates. As part of this process, we continued extensive voice of customer and channel checks.

From the peak of $740 million in U.S. dispenser revenues, we have communicated our expectations of a $450 million to $500 million peak-to-trough decline to a base business in the $250 million range. Ultimately, that expectation has not changed. What has changed is the pace of the drawdown in revenue, which accelerated by roughly 1 quarter versus our prior assumption. Given the changes we've discussed, we now anticipate EMV revenues to decline a little over $100 million year-over-year and materially an end to EMV upgrade activity. This reflects $50 million worth of headwind accelerating into 2022.

In 2023, we are now calling for a decline of about $300 million compared to our prior range of $300 million to $350 million.

It is important to note that we are getting visibility into core U.S. fueling dispenser demand for 2023, which is reflective of the convenience store national accounts, new site builds, resulting from ongoing industry consolidation and the next wave of refresh and product upgrade activity, which will also drive growth in the years to follow. Through the U.S. EMV replacement cycle, we have taken share over the last several years in our dispenser business and built a formidable installed base. We are well positioned for future upgrade activity, aftermarket parts and service, and replacement equipment.

Moving to Slide 10. As we have provided a post-EMV framework for 2023 on previous calls, given the changing macro environment, we feel it's prudent to provide a preliminary update. Starting on the left-hand side of the bridge of this framework, we normalized our updated guide for 2022 by removing the estimated earnings for Hennessy and GTT from the base. Given the current interest rate environment and allowing for additional increases to the federal funds rates to 5% next year, we currently estimate interest expense being roughly a $0.20 headwind year-over-year.

As mentioned earlier, the headwind from EMV is now at the low end of the prior range. As Mark referenced, we are accelerating and increasing actions to rightsize the cost base in response to the wind-down of EMV. Additionally, at this stage, we're anticipating non-EMV core growth to be mid-single digits, driven by our profitable growth initiatives and platform strategies, which compares to high single-digits growth previously expected. We would expect free cash flow to improve as supply chain conditions ease and demand patterns become more predictable, which will allow us to work down inventory levels and alleviate pressure on working capital.

From a capital deployment standpoint, we will carry over the impact of shares already purchased, future capital deployment and share repurchases and debt pay down from our strong cash generation and proceeds from the sale of Hennessy and GTT.

As we continue to work through our assumptions over the next few months, we will come back to you with our formal guide on the Q4 call in February.

With that, I will turn it back to Mark.

[Mark Morelli, President and CEO]

Thanks, Anshooman. On Slide 11, I want to give you a bit of a preview of the future of Vontier.

We serve a diverse and growing set of mobility ecosystem customers, such as car wash operators, convenience store retailers, auto repair shops, fleet operators, and EV charging operators. These customers look to us to solve their most pressing challenges, labor and skill shortages, increasing car park complexity, increasing regulations, increasing focus on sustainability and ESG, and consumer demands for personalization and a frictionless experience.

Our strategy is underpinned by these secular drivers and positions us to win in a $28 billion market, growing at an attractive mid-single-digit CAGR. Vontier's smart, sustainable solution strategy is focused on moving up the technology stack to solve high-value customer problems, drive profitable growth, transform the portfolio and generate top-tier shareholder returns.

The strategy has 3 pillars. First, optimize the core, is a set of self-help initiatives where we are demonstrating significant momentum and have a long runway of opportunities ahead. Next, expand and diversify, leverages our significant installed base to grow where we have a legitimate right to win. DRB is an excellent example of this. And finally, accelerate growth by moving into adjacent markets, increases our growth profile and further reduces our ICE exposure. Examples of this include our organic investments in hydrogen dispensing solutions and our drives EV charging and smart energy management platform, which was selected by Shell this quarter to build out new charging locations in more than 10 European countries.

Our team is galvanized around our smart, sustainable solution strategy and our purpose of mobilizing the future to create a better world. We're excited about the road ahead, as we harness the resiliency and strategic optionality inherent in our businesses to build a better, stronger and growthier portfolio. We look forward to sharing additional perspectives and details during our future engagements in our 2023 Investor Day.

With that, operator, we're ready to open the line for questions.

[Operator]

And we will take our first question from Andrew Obin with Bank of America.

[David Ridley-Lane, Bank of America]

This is David Ridley-Lane on for Andrew. Could you maybe just bridge the change in the 2022 guidance, I know there's $50 million of lower EMV revenue, but are there some other items as well? And then as a follow-up to that. Is there a possibility of getting catch-up revenue here in the fourth quarter from the printed circuit board supplier disruptions?

[Mark Morelli, President and CEO]

Yes. So I'll start off the answer and I'll turn it over to Anshooman. So the -- essentially, the major change in what we're trying to provide, by the way, we're trying to add better transparency into 2023, even though we don't consider it a guidance. But essentially, what we're doing is, we're sunsetting EMV earlier. So we're pulling forward that $50 million of impact into this year, which next year, our peak to trough will essentially be the same within our range of what we provided before, a little bit on the higher end of that range.

And then the carryover impact into Q4 of that, the supplier issue that we mentioned in our prepared remarks, are essentially being absorbed in sort of this EMV pull in into Q4. Do you want to comment on that, Anshooman?

[Anshooman Aga, SVP and CFO]

Yes. And when you think of Q4 guide, really the few impacts, the EMV, obviously, the $50 million pull-in that Mark mentioned, we also have FX impacting us guide to guide, which is $15 million for the second half from a revenue perspective, about $0.04 from an EPS perspective, interest up a little bit, and then just a little bit of other revenue, which impacts us a couple of cents from an EPS perspective.

[David Ridley-Lane, Bank of America]

Understood. And then wanted to check in on the Invenco acquisition. What have you learned, I guess, in the kind of first month of ownership here? And any thoughts on EPS accretion for 2023? As you're giving more color on that?

[Mark Morelli, President and CEO]

Yes. So I'll make a comment on the Invenco acquisition. I'll let Anshooman also jump in on that, too.

Look, we're pretty pleased with what we have. We know that this gives us 2 aspects, one of which is, it enables us to advance our software initiative with what are called micro services. These are -- it's a modular-based approach that got tremendous interest with some of our larger customers, which we think will win over the longer run. And this module-based approach gives them the flexibility of choice.

At the same time, there is a significant cost out element here because we can essentially collapse the cost on our payment hardware and software, and we can also advance and fill some of our gaps, particularly for high-growth markets to offer a better offering. So we can leverage our existing channels to sell these offerings better. So a lot of synergies with this deal. So I think it's really a classic bolt-on that we're very excited about integrating. Anshooman, you want to drop in here, on the impact?

[Anshooman Aga, SVP and CFO]

Yes. As you remember, when we did this acquisition, we had talked about a $0.05 to $0.07 for next year, we actually feel more comfortable now, given everything we've learned, post-ownership, and we think the number is close to $0.07 to $0.10 for next year. If you look at the framework for 2023 that we provided, those results are split between the restructuring savings, which is the synergy, and then the growth where we also see good potential with Invenco as part of our portfolio next year. So we feel very good about the acquisition, and it was capital well deployed.

[Operator]

We will take our next question from Julian Mitchell with Barclays.

[Julian Mitchell, Barclays]

Cash flow conversion, CSL guided at 70% to 80% of adjusted net income. Could you help us better understand the path to normalization here?

[Mark Morelli, President and CEO]

Yes. Sorry about that. Could you repeat the question? You're -- the beginning the sentence was cut off?

[Julian Mitchell, Barclays]

Sorry about that. Yes, free cash flow conversion is now guided at 70% to 80% of adjusted net income. So can you just help us better understand the path to normalization here?

[Anshooman Aga, SVP and CFO]

Yes. So there's a couple of dynamics that impacted our cash flow. The first dynamic is the linearity of our sales. So if you really think GVR, what that means is roughly half our sales for the third quarter for GVR came in the month of September and even in September, a little bit back-end weighted. So that pushes a lot of the receivables -- working capital build up towards the receivables. Our real focus for the fourth quarter is to drive that linearity, manage it week by week, 13 weeks, and we're starting to see progress, which helps with the cash conversion in the fourth quarter.

The other aspect of uses of working capital has been the inventory levels are elevated. And part of that is because of the supply chain disruptions that we had. It leads to having higher safety stock, for example, on some of our hydraulics, our safety stock, pre-pandemic, used to be 45 days, we're up to 90 days. We are starting to work a lot of the safety stocks back down and we have concrete actions to bring down our inventory levels.

So you'll see some of that start translating into Q4. But really, when you start thinking of our business, the thought has not changed. We're still roughly 100% cash conversion business, and we see a lot of this converting back to more normal times by next year.

[Julian Mitchell, Barclays]

Okay. That's very helpful. And then just my follow-up. Can you help us better understand some of the additional cost actions needed to potentially reach to $0.20 restructuring savings tailwind for 2023 shown on Slide 10. So like the restructuring spend guide for '22 is unchanged at $0.11. So does that need to step up here in 2023?

[Mark Morelli, President and CEO]

Yes. So let me give some color on this. We have a really strong set of activities that have been enabled by this self-help program, is focus and prioritization process that we've been working on really for some time. I've discussed the product line simplification, which is a great enabler of this. One great example is the dispenser line. There are other activities that have been underway. And so this is not new for us. We've been knowing this EMV was going to roll off and we've been sending these up.

Now it's coming up a quarter earlier. So there are sets of actions here that we're looking to accelerate. So Anshooman, you can certainly jump in here with some additional color. But we've got a lot of momentum behind the cost out, and it's enabled through a lot of sort of fundamental things that we're rethinking and doing differently in the business to pull those costs out.

[Anshooman Aga, SVP and CFO]

Yes. I'll just add. When you really think of the cost-out program, think of $50 million to $55 million, starting in this fiscal year. Obviously, we've been doing stuff prior to this year also. Of that, about $10 million in-year benefit for 2022, just under $10 million. Then jumping to 2023, roughly $40 million of benefit and then the remaining tailwind coming into 2024. So really, our focus is about rightsizing our cost to reflect the realities of EMV. But all of this had been in place, we just accelerated it and then enhanced it a little bit.

[Operator]

We will take our next question from Pat Baumann with JPMorgan.

[Pat Baumann, JPMorgan]

Maybe just focusing on Slide 9. Thanks for the color and depiction here. I just wanted to follow up on the baseline, the $250 million number. Just curious if you can give color on -- if this is an accelerated replacement cycle, why is $250 million the right run rate for the U.S. in 2023. Is there a potential that it could be lower than that for a period of time since you were kind of well above the baseline for a long period of time? Curious any color on that?

[Mark Morelli, President and CEO]

So look, I think this baseline business is something that we're getting visibility into now. One of the things that gives us encouragement on this is the national accounts business in the U.S., which we have a very strong position on. They're continuing to consolidate in the industry, and they're also making investments to continue to build out this infrastructure. There's no question that the super cycle we've just been through with EMV has accelerated the replacements. And that's already in this rebaseline number for $250 million.

So prior to the EMV big up cycle, which has been great for us over the last couple of years, there was that business there. This $250 million number is sort of down from what it was prior to EMV already, it's sort of estimating it, and it will grow from that $250 million base because we believe that there will be continued regulatory cycles here that will continue to drive growth in that industry. So we're -- we feel really good about that $250 million baseline number.

[Pat Baumann, JPMorgan]

Got it. And the -- what was the pre -- the pre-EMV, sorry, base. Was it $300 million? Was it more than that? Just curious.

[Mark Morelli, President and CEO]

It's about $300 million, but keep in mind that was many years ago because this has been a pretty significant up cycle. So it's about $300 million number.

[Operator]

We will take our next question from Andrew Buscaglia with Berenberg.

[Andrew Buscaglia, Berenberg]

So just piggybacking on that question. You guys have talked about -- just trying to understand why things would grow after that once you reach that $250 million level. I guess there's like a steady repair and replacement story there. But as you -- now like we have a little bit more visibility in '23, what are some of those regulatory drivers which are you looking out for? I know -- I do thing as you think one was around emissions. But are we -- do we have more concrete understanding of like when those will hit or when those will start to come into play?

[Mark Morelli, President and CEO]

Yes. So there's no question that there is evidence that these national accounts are continuing to build out. I think you can certainly see this in your local infrastructure where people are making investments to make these more attractive. The issue what's happening with these small network operators is they're not really able to keep pace on some of the investments for new sites. And so the consolidation is the major part of it. And when they're doing the consolidation, they definitely want an upgrade. So that's definitely in the near term that we're seeing into 2023. So more attractive.

And also the dispensers that we're launching are certainly more attractive, more convenient and incorporate all of the security features that you would expect in there. Longer term, these regulatory cycles will continue. I'll just give you an example about a regulatory cycle that is happening right now in Canada. And that regulatory cycle is driving more demand based on payment security.

So these regulatory cycles don't end. And so we'll certainly see more to come in the U.S., as we're seeing them roll through. And of course, you're seeing some in high-growth markets based on emissions. Vapor recovery is a big one in high-growth markets. There's a strong regulatory cycle there.

So these have always been there, they kind of ebb and flow by certain markets. Mexico is an excellent example that played through about a year ago. And so they come up, they kind of provide a wave, and then we ride that wave based on our strong installed base and our ability to have a leading position here to capitalize on that. And those regulatory drivers have what's driven this business for a long period of time, and will continue to drive this business going forward.

[Andrew Buscaglia, Berenberg]

Yes. Okay. Okay. And then just kind of a high-level sort of strategic question. With your valuation continuing to decline, you're sort of in a conundrum with M&A in that your multiple can -- is it less likely to be used as sort of currency to make some bigger deals or find accretion on those deals. So why not just be fully deploying to share repurchase at this point?

[Mark Morelli, President and CEO]

Well, go ahead, Anshooman, you can jump in. I think we said in our prepared remarks, that's certainly our posture right now.

[Anshooman Aga, SVP and CFO]

Yes. Our capital allocation is based on driving returns with the dislocation in our valuation, M&A is going to be hard to compete with buybacks, just the buybacks provide a strong double-digit return. And as we said in our prepared remarks, buybacks are our priority right now, while maintaining a healthy balance sheet.

[Operator]

We will take our next question from Guy Hardwick with Credit Suisse.

[Guy Hardwick, Credit Suisse]

Anshooman, I think you said in your preamble to the 2023 framework that you're expecting non-EMV core revenue growth of mid-single digits in 2023 versus the previous expectation of high single digits. Can you give us a little bit of background to that because 2023, you'll have DRB in there as well. So is that telling us something that your channel checks are telling you that there's going to be a fairly muted independent gas station CapEx outlook, excluding EMV?

[Anshooman Aga, SVP and CFO]

Yes. So if you go back to our prepared remarks, one of the key things is we're being cautious given that the small independent fueling network, operators are being impacted by the macroeconomic environment. Having said that, we have very strong areas of growth. DRB should be growing double digits. Matco with the Milwaukee launch with our net franchisee adds, the aftermarkets business, ANGI is already selling into half 2 of next year. Teletrac, we've had a great turnaround story at there. Their ARR has been really strong, and that's going to start translating to growth.

So ex-EMV, we feel comfortable talking about mid-single-digit growth next year even in a potentially muted environment that's impacting the small independent retailers.

[Guy Hardwick, Credit Suisse]

Okay. Just a follow-up. Can you just talk us through the timing of the working down the inventory and what potential margin that could have impact that kind of on margins?

[Anshooman Aga, SVP and CFO]

Well, the inventory, we're managing that down -- expected to be managed down over the next 2, 3 quarters. We should not have a negative impact to margins because of managing inventory. We're managing it in a gradual manner. We still have very strong demand out of our factories, and we can redeploy production to areas of high demand and bring down inventory levels at the same time. And also, if you remember our cost-out program is going to help protect our margins. So bringing down inventory will not be as margin dilutive to us.

[Operator]

[Operator Instructions]

We'll take our next question from Rob Mason with Baird.

[Rob Mason, Baird]

I wanted to see if you could just update us on what you're seeing from your high-growth markets and what kind of contribution from a growth standpoint or even detraction, just what you're expecting for the fourth quarter and how that may play into the 2023 growth component as well?

[Mark Morelli, President and CEO]

Look, our high-growth markets have positioned us really well for growth. I think over the, I would say, more of the medium term, it has been ebbing and flowing quite a bit. And so when you look at what our outlook has been, it's not as strong coming into Q4 because of some of the pushouts in orders that we have predominantly in India. China is not a big market for us. It's a very small business at this point. So we have a bit of a muted impact on that into this year. And as we go into next year, I'll turn it over to Anshooman here in a bit in terms of what we have in our model, but it is something we feel very good about because it will pay off, like I said, over the more the medium term.

But at the same time, I think this year, we're certainly in a little bit of an ebb period at the moment. Do you want to comment on 2023?

[Anshooman Aga, SVP and CFO]

Yes. Just to build on what Mark said, it has been lumpy. A simple example is in Q2, India had very significant growth year-on-year and then Q3 was slightly down. But when you start averaging these things out, they are very attractive markets for us. For 2023, we expect some growth in the high-growth markets for us next year.

[Rob Mason, Baird]

I see. This -- there was mention as well, I think, earlier around just environmental, some projects getting pushed out. When do you have line of sight on when that project activity may resume? And is there a seasonal aspect that we need to get on the other side of as well if they get pushed too far over the next couple of quarters. I'm just curious what your visibility is there?

[Mark Morelli, President and CEO]

Yes. First of all, this is a great business for us. I think we've done outstanding with new product launches in the recent past. And I think we've got just an outstanding position there at a very profitable business. But this underground equipment supply issue is no question impacting this. And it's definitely a push, we think, more into next year, but supply chains are getting better kind of across the board. They're getting better, and I think we're providing you the visibility we have in our guide.

[Anshooman Aga, SVP and CFO]

I'll just add, this is not our equipment that's delayed. It's -- the projects are delayed because of tanks, pipes that the customers have to buy, and it's really driven by the resin shortage that's going on and the economies. So as that resin shortage gets better, the tanks, pipes lead time will come in, which will help us ultimately.

[Operator]

It appears we have no further questions on the line at this time. I will turn the program back over to Mark Morelli for any additional or closing remarks.

[Mark Morelli, President and CEO]

Yes. Thank you, Britney. Look, thanks for joining us on today's call. I'm really encouraged by this track record that we're establishing in our business. I think we're making significant progress on our multiyear transformation, and our work is resulting in a stronger more growth on profile.

So thank you all for joining, and have a good day.

[Operator]

This does conclude today's program. Thank you for your participation. You may disconnect at any time.