Very pleased to introduce Vontier this morning. Vontier is a global provider of mobility technologies that deliver productivity and automation solutions throughout the ecosystem it serves. The company's portfolio has been overlaid with a proven business system, an experienced leadership team, and a culture of continuous improvement as well. And we're very pleased to have with us this morning Mark Morelli, who's President and CEO, and Anshooman Aga, who's the CFO. So, I think we're just gonna go right into our questions here. But I would encourage you, if you have any questions, you're supposed to send these up to the iPad, and hopefully, the Wi-Fi is now working, but if that doesn't work, we'll just do it manually. But, maybe just to start off, Mark, you know, just kind of rewind here just a few weeks.
You know, third quarter results were above guidance, above expectations. Most areas of the business seemed to show good strength. This baseline core growth that we're talking about was up double digits, seems fairly broad-based. I guess, you know, as we think about the areas where you have some momentum right now, and then maybe trying to look forward into 2024, what would you want to call out in terms of parts of Vontier that, you know, are firing on all cylinders right now?
So thanks for having us, Rob. We felt like we had a really healthy quarter, and to answer your question, all three of our platforms performed well. If you kind of peel it back a little bit on our mobility technologies, super happy to see continued progress in DRB, posting double-digit growth. The underlying drivers there is that, you know, the industry continues to appreciate our integrated solution there for deeply embedded point-of-sale for car wash application software. It's very much in the theme of providing productivity for folks that are consolidating the industry or having larger car wash footprints. So we're continuing to see good growth there, both on build-out of the car wash, as well as operators that are trying to run more efficient operations.
At the same time, in our retail solutions or our Invenco by GVR business, also, really good growth there, and that's off the backs of some of our recent launches. If you notice, we're bringing a lot more products to market than we have over the last couple of years, and I think we've got a pretty outstanding lineup. And that new innovation is showing itself with our iNFX platform. We had a recent win, as you may know, with Shell, with 13,000 storefronts and Chevron with 8,000 storefronts, and so those rollouts are going really well. And we're seeing good demand in the pipeline for that offering that I think bodes well for the future as well.
Same thematic, where folks that are trying to manage all these assets or convenience store, where they're having these very complex set of operations that are out there, our iNFX platform provides a great productivity and automation solution for them and for the larger folks that are also consolidating, managing large footprints. Our alternative energy business, or ANGI, you might reference it that way, grew at 20% too, and that's off the backs of strong compressed natural gas, renewable natural gas, dispensing, as well as we're beginning to launch our hydrogen, which I think bodes more for the future than showed up in the quarterly results. So I think mobility technology is really driven by that. Environmental fueling also did well.
Our build-out of dispensers in the United States continues at a same thematic that we've had, where folks that are mostly the leaders in the industry for dispensing fuel buy our solution because the total cost of ownership is better with that solution. So some of the largest folks in that in the industry continue to buy ours as they build out their footprint as well. So we saw a good growth there, as well as our underground business, our environmental business. We saw high single-digit growth there. We've had some destocking that folks are talking about in the industry that's mostly impacted our North American business, but international is strong, and we have an outstanding lineup. I think what bodes well for the future is that we're early stages of this underground tank upgrade cycle.
While there's still some destocking that will exist in the United States market, we think there's an excellent backdrop there. We've launched some new products that we think will make us even more competitive than we are with an outstanding set of offerings. And then on the Matco side, we also saw strength with that 5% organic growth. And I think what's really driving that is in two things. One is a great backdrop with the service technician, where the age of the fleet is up to 12.5 years. Complexity of repair is very high right now, and they're at an all-time high wage. And so the repair technicians are continuing to invest in the tools to make them more productive, and that's a great backdrop for that industry and for that market.
And so, that's one thing that we've got going for us, and that, that leads, I think, a bit into next year, as well as we have an outstanding product lineup. And I think we're seeing great demand when you have a, a great product lineup. Our toolboxes sold 20% growth, and our power tools are doing exceedingly well, and we're currently in, in process of launching a new diagnostics platform which will carry into next year. So I think we saw some really good health across our businesses with some really good bright spots that give us a, a really good setup for 2024.
Mark, one thing that we've—you know, clearly, the industrial space has observed over the last couple of quarters is just coming off these higher, longer lead times and normalization effect going on. We've seen that show up in the book-to-bill , as those, you know, go well below 1. You're below 1, but it's like 0.97. So is there really? Are we past the kind of lead time normalization effect at Vontier, or is that weighing on order rates? And you mentioned some destocking in one area, but that was, you know, somewhat isolated, I guess, across the portfolio.
Yeah, so we have definitely seen an improvement in lead times, which a lot of folks have managed their supply chains better with what's going on. So we still have an elevated backlog. It's about 60% over where it was in 2019. But we're not running into, you know, some of the challenges that we've had in our backlog and serving our customers' needs and demands. So we've definitely seen a normalization of that and anticipate, you know, continuing to have very good supply chain going forward. But we think, you know, the important thing to think about here is that our businesses are, we think, are in good, resilient markets with probably minimal exposure to destocking.
In areas that we have, we've been able to offset with our, our pockets of growth, mostly based on our positions in the market that we serve, which I think is differentiated, as well as our product lineups are much better than they used to be.
And we are-- you will see, as we go into the fourth quarter, you know, comparisons do start to stiffen up. If we look at, you know, kind of the baseline level, and we're seeing some of the deceleration there, I guess, in your, your guided core growth. Does that... Does tough comps, you know, present some of a challenge because you're-- as you move into 2024, or do you think that is, is manageable? Again, trying to... Luckily, once we get into 2024, we'll maybe no longer talk about baseline or non-EMV, and-- we'll be talking about a consolidated core growth. But, trying to, you know, tease out, maybe what the go-forward momentum is in the business, as we go into-
Yeah, I'll answer it, and I'll let Anshooman chime in here as well. So first of all, we think splitting out baseline growth in ex-EMV is perhaps helpful to folks, so they can see a bit of the progress that we've been making with our portfolio transformation and our growth initiatives. But we are very, very happy to tell you that we are not gonna be using baseline numbers next year. We're not gonna be adjusting revenue. We understand that can be unnatural at some level, but we do think that it is indicative of some of the growth that we see based on... And the best way to show that to folks is to indicate that. But next year, you know, once we report our fourth quarter, that'll be done. EMV is done.
I couldn't be more happy and excited to say that again, again, and again, so that we won't have to be telling the EMV story. But I think that's in our rearview mirror, and I think that we'll be able to see, you know, that underlying growth in ex-EMV that we keep talking about read through in our top line in ex-EMV.
Yeah, and the tough compare for the fourth quarter, there's a couple of phenomena. One, Q3, we saw the benefit of easing supply chains, not for our products, our supply chains have normalized, but our customers' projects. Take the tank, underground tanks, for example. We don't build those tanks, but we supply probe sensors that go with these tanks. The lead time for those was over 40 weeks. That's come down materially. So some of our customer projects moved faster, which allowed us to deliver some of the backlog faster. Also, remember in Q3 last year, we had a supplier that had a supply chain issue, where they had to shut down manufacturing for 3 weeks, which pushed some of our volume into the fourth quarter last year. And last year, we had a 10% core growth number in the fourth quarter.
So that was the compare issue we had. Our underlying markets remain healthy. We feel pretty good going into next year. Now, this year, we've had some early seasonality benefit during the year from normalizing supply chains. Obviously, next year will be more of a normal seasonality from a quarter-to-quarter basis, with Q1 being our lowest quarter and ramping up sequentially to the fourth quarter being our strongest quarter. So back to more normal seasonality starting next year, but our end markets do remain healthy.
Yep. Yep. Maybe just shifting more broadly to, or specifically on the mobility technology segment. You know, when I think about this push to automate and deliver more productivity via the solutions, this segment seems to contain more of those type businesses explicitly. It's also where you expect the highest growth over the long term. You know, maybe just start on the Invenco business, which, you know, is your—You've rebranded part of your preexisting retail solutions staff, but that Invenco was an acquisition as well that's come in about 15 months ago. It seems like it's already proven to be, you know, a big unlock for, you know, opportunity that you talked about, just, you know, in point of sale and store operations. I guess, where have you been most surprised positively? It seems like it's gone well.
Is there anything, you know, any other opportunities that you're looking at to drive out of Invenco?
Yeah, I think Invenco has been a great acquisition. I think, you saw the first quarter we owned it. It was a break-even business. It had two pieces that were quite relevant. One was a connected, smart hardware piece of the business, and the other was a microservices software platform. And so we've launched that microservices software platform, and what's so important about that is that if you think about what's happening in convenience stores and what is needed, there is a huge amount of investment that is going in with the leaders in the space. They're trying to help consolidate the industry. They're trying to manage a bunch of disparate assets. There's investments going in. There's regulatory changes that are happening all the time, like regulatory payment type applications or even things related to vapor recovery and more sustainability.
So this software platform enables them to do a microservices application base, very easy upgrade to the latest regulatory environment, or if they're consolidating assets and buying or acquiring small mom and pops, they have a more ability to do that more easily, where they don't have to throw as much labor in managing that more effectively. At the same time, with the integrated smart hardware, you can now do over-the-air updates for your dispenser. So you can imagine the ability to manage that service offering a lot more contemporarily, making it much more easy to use for consumers, 'cause you can provide them the latest software, and as well as any regulatory change you can do over-the-air and try to address some of those issues.
So I think you see the power in that, based on the uptake we're having from some of our very large customers. And I think it's indicative of mobility technologies in the sense of what we're doing is we're providing an integrated solution for convenience stores. We're providing an integrated solution and a platform for car wash. We're providing an integrated solution for fleets and fleet management with the multi-energy future on compressed natural gas and going into hydrogen. We're providing an integrated solution around electric charging and, and electric charging networks. And, and then we have the opportunity to also cross-fertilize, because when you get them to a microservices-based platform for each platform, then you can look across payment, you can look across loyalty, you can look across applications. And I think what we're seeing happening is equivalent to the mobility ecosystem 1.0.
There's really no other player that has the depth and breadth that we have and is focused on these integrated solutions and tools for productivity and automation, and I think there's no better embodiment of that than the mobility technology segment that we're disclosing. You're seeing the profitability, you're seeing the growth, and I think that's where we target our M&A, which with DRB is continuing to perform quite well. We couldn't be more pleased to show investors the progress that we're making.
Well, just to put it into context, those two wins that we've talked about with the new platform, Shell, Chevron, I think you've said that's about 15% of c-store sites in the U.S. How should we think about on a go-forward basis, how long... I would imagine you know, those are pretty involved sales cycles to convert an entire footprint over like that. You know, how should we think on a go-forward basis, sales cycles for new opportunities, and also just on those Shell and Chevron wins, are they taking the full suite, or do you have more upsell opportunity for those?
So, there's two parts to that question. So the first one is, you know, those orders are representative of four- to five-year contracts. About 20% is that upfront hardware, and about 80% is recurring revenue, so it's a large recurring revenue business. And I think, and we're ramping that technology really well, and I think we're pleasing our customers so far with the rollouts, so we're quite optimistic on that. I think there's a lot of other customers that are watching that. We're continuing to build the pipeline for other folks that are in similar situations that manage large parts of that infrastructure, and I think that bodes really well for that platform. But the other part of that question was, you know, how do we build out?
'Cause if you think of a headless commerce platform or a microservices-based software, this is one application that's around payment, and you can build in onto that with other applications related to car wash, as an example, or other aspects that need to be managed. And right now, the way that people manage it is through a monolithic software system that has to be stitched together by whoever owns that, whether that be, you know, Circle K, as an example, or Shell or Chevron. And this gives them a very contemporary architecture, where they can pick different applications, and they can integrate it onto that platform. So there's a build-out opportunity based on our, the footprint that we're establishing.
Competitively speaking, the traditional—the other approaches your competitors are taking to offer those type of platforms-
I think the competitive solution is what the owner of these assets, let's say, Shell, has to do internally to stitch them all together. The fact that this is also an open system architecture means that we can incorporate best-of-breed or even custom-built solutions for that operator. Let's suppose on the loyalty side, they wanna have their own homegrown loyalty, or they want to adopt somebody's loyalty system; this being an open system architecture means that you can incorporate that. It's a very flexible, very contemporary architecture that enables them to be competitive in the marketplace and very fast to market anytime they do an upgrade to that system, or incorporate new aspects to it. So we have the footprint to continue building that out, and I think it's on a great path, a great trajectory.
Yep. I wanted to touch on the DRB, vehicle wash business, car wash business as well. The... You know, it's clearly been, maybe growing ahead of where we would've expected when you announced that transaction. It's had some nice tailwinds, and doing well in the marketplace as well. Just to address some of the concerns investors have, and they pick up just from some of the public commentary, there's not a lot of public car wash commentary, the market's largely private, around new builds, around just M&A in the space, and how you're insulated or, you know, where you would see, you know, shifts in your business related to what, you know, we're picking up from the public sector and-... maybe how that differs from what you're seeing in the totality?
So I think DRB has been a great acquisition for us. I think it performed better than our investment case. So when you looked at when we paid essentially, not including the tax, or including the tax benefit, you know, high teens multiple, and you rolled that forward after our first year of ownership, we essentially paid 10x because of more than 30% top line growth and 400 basis points of margin expansion in our first year. So I think it, the industry obviously wasn't growing that fast.
I think it showed the leadership position of a deeply embedded point-of-sale system with application software, and the ability for folks that are making investments in the car wash to be able to sweat their assets better, to get better throughput, as an example, through the car wash, operate it better. And if you look back over maybe five years ago, you know, the industry has really grown up a lot. Not as sexy as launching a new electric vehicle, mind you, but incredibly, margin accretive business that is going through, we think, a pretty outstanding growth cycle. But the industry is still in its infancy. There is still a lot of mom-and-pops that are out there.
There's still a lot of industry consolidation, and one of our operators that we spoke with recently that has more than 100 car wash, has said that through 2022, it was a big effort with building out their footprint. But I think what you see happening is that folks are now focused on not only there is M&A that is continuing, but also managing their assets better. And that operational productivity, you start seeing that read through, maybe some of the folks that are talking about that in the industry, and that's exactly what our product does. That's exactly what the DRB platform does, and our launch of Patheon, which is a SaaS-based cloud software, that helps folks manage our assets and be more productive with that. So I think we are also positioned for growth. Now, we've never promised 30% growth would continue perpetually.
We've said that it would slow, so there's no surprise to us to see, you know, that relative slowing to the industry. But it's still a great industry, still very growthy, with a very high margin platform that we continue to offer and we, we think has still good uptake opportunities for it.
When you say, you know, slow down from that level, is it at a level that's consistent with or accretive to high single digit for mobile technologies, you think?
Yes, it is. Go ahead.
Accretive to?
It is high single digits.
Yeah.
Okay.
That's what we're expecting that business to grow, and we continue to see investments in greenfield. Our customers continue to grow, as Mark said, and there's also investments in productivity, which our solution helps drive them at scale.
Mm-hmm. Real quick, just sticking still within mobility technologies, your ANGI business, the you know, serving some alternative energy applications, how should investors think about the growth rate there? Because it has been high, but is... And granted, it's a smaller business, but it's seeing some really good growth. Over the intermediate term, what's reasonable as hydrogen starts to, you know, maybe filter into that business in the next year or two?
Yeah, so it's been growing at 20%, about a $100 million business now. It's mostly on the backs of compressed natural gas. Renewable natural gas now is where we're getting that growth out of. But I think you see some of the announcement that we've made. We've launched a hydrogen dispenser. We're selling a hydrogen dispenser in the market. Folks have pulled us into the hydrogen space because of our position with our leading position with compressed natural gas. It's very difficult to provide a highly reliable, safe refueling experience, and so that's exactly what is needed in the hydrogen space. Also, it's at higher pressures, which is hard to do. Compressed natural gas is at higher pressures, hydrogen is at higher pressure.
So I think we have a lot of the engineering design capability, and so we've launched what we think is a great product line there. But more importantly, we're also doing substation. Like we do in compressed natural gas, renewable natural gas, we do substation design and installation, and we've announced that on our last earnings call as well, that we've sold our first substation. We feel like what we can bring to the party here is not only great hardware and solutions, it's a regulatory-driven environment. But at the same time, you can have the application software, and you can have the cloud-based software to also scale this and manage this more effectively. And I think that's the same theme that you see in our other businesses that we're able to provide, particularly for that hydrogen business going forward.
So it's hard to tell what will happen with hydrogen in terms of the rate and pace. You know, the U.S. government has done a $7 billion hydrogen hub infrastructure. We're not a direct beneficiary of that funding, but, you know, folks that need to dispense it at some point will need to make those investments. So, that $1.2 billion of that for California means they have to build out 200 stations in California, and that's a great opportunity for us to do. So we've been here before, where we've seen, you know, this great hydrogen economy that might happen, so it's hard to know the rate and pace that hydrogen might take.
But we believe in what we call the energy trilemma, where the energy transition is about, of course, sustainability, but it's also about affordability and security of energy, which is the access to energy and things like the electric grid or components to electric vehicles. And so that's gonna mean a multi-energy future. We believe that petrol-based dispensing will play a role in certain markets for quite a long time. Electrification, but also hydrogen, we believe, has a role as well, particularly for long-haul fleets in some markets. And so we are well-positioned with our portfolio to serve this multi-energy future.
What is the revenue, when you talk about a hydrogen station, what is the revenue pull through per station versus just the dispenser?
So a dispenser, you know, it depends on how many dispensers you put on site. But you are definitely less than $100,000 for, you know, a couple dispensers. And north of, you know, $500,000 to a couple million dollars for a substation. And we think we're uniquely prepared to compete there based on what's available right now in the industry. And this is. It's been a great offering that we have in the compressed natural gas business, renewable natural gas. As an example, like UPS or Waste Management, we provide substations for them, as well as dispensing technology. So I think we have a leading offering there, and we think this represents a good growth opportunity for us going forward.
Mm-hmm. Real quick, just to discuss a few elements in the environmental fueling business. Just your North American dispenser business, topic of a lot of conversation a year ago as we were ramping off EMV. You set out a baseline of around $250 million you thought that would settle out. I think it's done better than that this year. Any sense as how much you've been able to outperform that?
Yeah, we've said it, it's north of $300 million this year. I think the thing that's been really great for that industry is you see folks in convenience store or that also dispense fuel, continue to build their footprints out. You look at companies like Costco, Wawa, Sheetz, Kwik Trip, Love's, Pilot, you know, these folks are operating very successful footprints, where they're making great margins off their business and really strong cash flows, and they're using their very strong balance sheets to continue to invest. You know, Buc-ee's is another example of that. And these are primary customers that we've enjoyed really healthy business relationships with.
As they are continuing to build out their footprint, sometimes they're looking more than a year out, year to two years out, and they don't have to leverage the capital markets on that. So they're putting their strong cash flows to work with very successful footprint build-out, and we're a strong beneficiary of that. So I think you see that in our dispenser business, you also see that in our underground business. You also see markets, international markets like Brazil, which is going through a regulatory change. We're gonna have to change out every dispenser in the market. See the Middle East building out its footprint as well. In India, a little bit more lumpy, you know, this year compared to last year, and there's a couple reasons for that.
But at the same time, we think bodes well for a long-term build-out. So that business is obviously quite a profitable, strong cash flow business for us. We're continuing to make investments to consolidate the product line for best-of-breed offerings and and simplify that product line, and I think you're seeing the benefit of that.
I'll pause here real quick just to see if there's any questions... Yes, up front. Or Steve, or-
Microphone?
No. We don't-
If you take a step back, when you guys came out of Fortive, then a very stable business, above average margin, great cash flow, good secular trends in the business. But at the end of the day, it's a $30 stock that's down to $2. Why not be more aggressive on share buybacks, given the-
Yeah, I think that what you've seen us do is we're very returns-focused for investors, so we did pivot to a stock buyback program. And I think, and Anshooman can talk about, you know, the returns that we've gotten there. We still look at buybacks as an important way to deploy capital. We're gonna generate $2 billion of cash with a $5 billion market cap company over the next couple years. And out of that, you know, I think the buybacks at the kind of stock prices that we've at, we think is a great return. You wanna talk about the returns?
Yeah, in the last 18 months or so, we've, we did pivot to buybacks. We bought back 9% of the shares outstanding at average price just north of $24 a share, and we continue to do buybacks. This year, we've also started deleveraging a little bit, making our balance sheet healthier. We brought leverage down from 3.3 times, net to 2.9 times. So our capital allocation this year has been focused around deleveraging and buybacks also. Buybacks will continue given the current stock price and the returns to our investors. That it'll be part of our playbook, and we'll continue to do buybacks.
Where does M&A fit into the calculus at the-
You know, we continue to look at our pipeline of opportunities there. We're strategy-led. We're extremely picky. I think you can see the discipline that we've exercised so far and the execution that we've had. We are, you know, open at the right time and pace to do both. It's always difficult to judge timing on those kind of things, but we've been, I think, incredibly disciplined on our M&A, and I think you can expect the same.
We've said our capital allocation policy is dynamic, i.e., we go to the highest return option for our shareholders. We were doing buybacks, but we also did the Invenco acquisition, which we said would be a 20% return on invested capital for our shareholders in three years. We always look at what's the best return option for our shareholders, and we're going to continue to do that.
Very good.
Thank you, Rob.
Excellent. We're at time. We'll break there. There is a breakout session for Vontier upstairs in the Chestnut Room.