Good morning. My name is Andrew Obin. I'm Bank of America's U.S. multi-industrial analyst, and I'm here introducing Vontier. With us we have Anshooman Aga, the company's CFO. We also have Ryan Edelman, the company's IR, in the audience. For those of you who are not familiar with Vontier, Vontier was once a core holding of Danaher. This was one of Danaher's best industrials businesses. Back then it was known as Gilbarco Veeder-Root, and then it became part of Fortive, and then it became a standalone company. The way to think about Vontier, the old Gilbarco Veeder-Root is still there. There is also a tools business, Matco, but the growth story is really driven by the company's recent growth initiatives, including investment in software and payment systems. We actually got excited about the stock. It's on the company's U.S.
Watch list, which is the list of our best ideas. So we are excited about Vontier. And with that, I'm going to go and I'm going to join Anshooman, and we're going to talk about we're just going to have a fireside chat and chat about what's new and the latest with Vontier. And thank you all for being here.
Thank you, Andrew. Even we're excited about Vontier. Maybe I'll give a quick short overview about Vontier to add to what Andrew said. We're a little over $3 billion company serving the mobility ecosystem. It's an attractive market with strong secular drivers. If you really think of the secular drivers, the top three secular drivers are around the energy transition. And when you think of the energy transition, it's not only about sustainability, but it's about the affordability and it's about the availability of energy. So the Energy Trilemma. It's about the increased complexity as the second secular driver that's coming into the assets that we help manage and drive productivity and automation through. And then the third secular driver is about labor challenges. Our customers are continuing to struggle with labor challenges.
Given these secular drivers, we're very uniquely positioned in the space to drive productivity and automation through the business, and that's leading to attractive mid-single digit growth. It's leading to attractive profit margin and free cash flow, and we're very well positioned to leverage on some of these drivers.
Yeah. So with that, I think my plan is just frankly to go over the key businesses and just to sort of see what's happening. So maybe we can start with retail solutions, which is the company's point of sale payments and automation software, which is 15% of revenue. Last year you announced contracts with 20,000 gas stations across two large chains. Are there other large chains that are looking for transition to the iNFX platform?
Yeah. We're very pleased with the two contracts, Shell and Chevron, that we won. Shell for 13,000 stores in the U.S. and Chevron for 8,000 stores in the U.S. What iNFX is, is a leading modular microservices-based platform, and there's a lot of interest around it because it's replacing monolithic software architecture, which added a lot of complexity and time for our customers. We are in discussions and pilots with additional customers. The sales cycle is a little bit long because you have to really work with the customers around not only the benefits, but testing it through pilots and tests before rollouts. We do expect that we'll have additional wins that we'll announce later this year based on some of the pilots that are ongoing right now.
Excellent. Just as we think about implementations, right, because it is a software and it is a SaaS business, right? So how quickly can you ramp implementations, and will it take like around two years to reach full revenue run rate on the existing contract wins?
For the initial contracts that we won, we've talked about 18 months as the rule of thumb for implementing these across our customers' network. Shell is going a little bit faster. We've deployed about 25% of Shell's network already. When you really think about deployment, it's rolling out an edge device to each of the customer sites before you start the recurring revenue as the sites get pulled on. Also, additionally, it's the first set of microservices that we've sold to these customers. As we bring on additional microservices, those deployments will be a lot faster. Just as a recap, about 20% of the contract value is hardware, which is the edge device upfront, and 80% of the revenue is recurring software, SaaS revenue that comes over the next 4-5 years of the contract duration.
Gotcha. Just thinking about it, does winning the payments software make it easier to win over point of sale, or are these two choices really different?
Over the long term, we definitely believe winning iNFX is going to help with point-of-sale. Today, while the decisions might be separated, if you really think of iNFX, you should think of it as a site management platform. It's a robust digital platform that allows and sets up the capabilities for integrated connected solutions that we offer our customers. Over time, we believe as the point-of-sale systems come up for consideration, our customers are going to see the inherent advantages of having one system and buying both the iNFX system and the point-of-sale from us.
Also, the edge device that I talked about that goes into place today at our customer sites, the point-of-sale could ultimately also be the edge device that the customer has, which makes it more cost-effective for them in the long term, also going with one solution from us.
Gotcha. So maybe we can talk about Matco. It's automotive repair tools, 22% of revenue. Competitor Snap-on reported a 5% year-over-year decline in its tool segment in the fourth quarter 2023 as auto repair technicians pulled back on spending, particularly for higher ticket items. What are the demand trends you are seeing?
First of all, our competitor, we respect our competitor a lot. They're a good competitor. But before I answer the specific questions, if we step back to the macro or the secular drivers for this business, they are very robust. If you think of the average age of the car or the car park, that's increased to 12.5 years in the U.S. The miles driven is higher. And then there's continued increase of complexity in the car park. You have not only your regular ICE vehicles, the internal combustion engine vehicles, you have hybrids, and you have electric vehicles. You have additional sensors coming into the cars. And all of this is driving the complexity of the auto repair, which is increasing the size of the toolbox. The underlying health of the technicians is also at an all-time high, measured in terms of employment.
Employment is at record levels with over 1 million technicians employed. There's a continued shortage of technicians in the U.S. market, and also wages are at an all-time high. Having said that, we saw good growth in the large ticket items, mainly toolboxes and diagnostics, in our fourth quarter that just ended. So we had double-digit growth in both of those segments, and we had good growth across these segments across last year. Obviously, 2024 will be tougher comparison for these high-ticket items, but we continue to see robustness in the market. And part of that is driven by the strong product vitality that we drive in this business. Roughly 25% of what we bring to market every year is new that year. So 25% one-year product vitality, which also helps drive sales for us in the business.
Gotcha. Just to follow up a little bit, how should we think about cost of credit impacting that business? Because you do read about sort of consumers being hit by high cost of credit. It's not clear if it's actually impacting the consumer behavior. But how do you see sort of rising cost of credit impacts in that business?
We do have a financing book in that business, about $400 million, $300 million to the end technician, and about $100 million to our distributors. The yields on those portfolios have crept up as interest rates have gone up, and we have a pretty attractive yield. We haven't seen the higher interest rates really translate into declined sales because when you think of weekly payments, if a weekly payment goes up a little bit for tools of the trade, our technicians are still buying, and their wages have also been increasing. Also, the one question we often get about, does the higher interest rates impact the health of the technician and the health of our financing portfolio indirectly? Our financing portfolio is very healthy.
If you look at the long-term trends in terms of delinquencies, delinquencies over 60 days, they all remain very healthy, and they've actually, over the long term, traded in a very narrow band. With our solutions being the tools of the trade, our technicians being employed through recessions, given people keep their cars longer, it generally bodes well for our financing book.
So part of the way, I guess part of a way about thinking about it is that, yes, there is inflation, yes, there is high cost of capital, but you're here exposed to one of the segments of the economy that's probably driving the inflation with the sort of wages in the sector and what's happening there.
That's correct. While we aren't immune to it by any means, at the same time, the wages continue to rise for our technicians, which are our end customers at the end of the day. Given that the complexity of the car park is increasing, it means more training, it means harder repairs, which also means more tools. But also there's a shortage of technicians, which also has an upward pressure on wages, which is beneficial to us.
Just a follow-up question on Matco. So how can you accelerate your franchisee growth from the historical 2% to 3%?
Yeah. We've historically added low single digits in franchisees, and that's probably the right way to think about it from a growth perspective. We have 30% of the U.S. market unserved, and we continue to expand franchisees, but we want to make sure we're attracting and recruiting the right kind of franchisees. At the end of the day, these people have to be successful as being a small business owner, and we have to make sure we're putting the resources around them being successful, especially the first 12, 18 months, making sure they're planning out their business well, they're going out on the road, accounting for the business correctly, and thinking through it. So we are very deliberate in the way we add to make sure our franchisees are successful, which means we are successful. And so the low single digit adds is the right way to think about it.
Gotcha. So maybe we can switch to U.S. fuel dispensers, which I think used to dominate the discussion on Vontier, but I do want to point out that it's 10% of revenue these days. So based on customers' current plans, what is the range of potential outcomes for 2024 revenue?
Yeah. We're seeing a mid-single-digit growth in the U.S. dispenser market, and the U.S. dispenser market is very healthy. Our consumers are continuing to or our customers are continuing to build out and expand. They're continuing to rebuild stores both from refresh of dispensers, but also tear down and rebuilds. Also, what's happening in the space, while the U.S. total count of convenience stores might be up about 1% a year, what we're seeing is the larger national and regional chains are building out at a faster rate at the expense of the single-site operators. And we have a stronger market share with these larger national and regional players, which bodes well for us as they continue to expand. Also going along with the buildout of convenience stores is on the underground side, our environmental business, there's a tank refresh cycle going on in the U.S.
30-35 years ago, there was EPA mandates to upgrade the tanks from steel to double-wall resin-based tanks because these steel tanks were leaking. While we don't do the tanks, we do the intelligence that goes with the tank in terms of monitoring and sensing. As these tanks are getting upgraded, that's pulling through our environmental product here in the U.S. also. We're in the early stages of a tank upgrade cycle, which will last over the next few years. Very healthy underlying business in the U.S.
Gotcha. And whatever happened, just sort of to think about it, the EMV cycle that people were obsessed so much, whatever happened to the tail of the EMV? Because I think there were questions, right, if people were going to replace it at the tail. So what happened to the tail?
The tail ended. The tail ended in 2022 and 2023. We just had a compare issue. For the most part, most of the customers upgraded their EMV or their dispensers to be EMV compliant. That's the Europay, Mastercard, Visa, or the chip that you know is in the credit card. What had happened was if the convenience stores didn't upgrade to the EMV standard or the chip, from a payment perspective, they would be liable for fraud. The majority of our customers upgraded by the time the cycle ended in 2022. Some of the people that might not have upgraded, either they just bore the risk or more likely than not, they were looking to sell out. If a large national regional chain bought that store, they would have done a site refresh, rebuild anyway. It took care of itself over that.
Just, Ryan, I did not start with U.S. fuel dispensers, right? Just want to make sure. But as we think about the replacement cycle, right, because I think what happened is that the EMV cycle ended up being so much longer than we thought. Can you remind us what's the expected life of one of these fuel dispensers and when does the replacement cycle for this cycle should kick in?
Yeah. So the EMV was a condensed cycle, right? So at the end of the day, what had happened during the EMV cycle or the super cycle was people replaced the dispensers in a much shorter duration. The average life of a dispenser, if you say, is 10 years, you're going to have all the dispensers replaced over time. And just the initial EMV dispensers were sold in 2014, 2015. So over time, you'll see all of these dispensers continuing to be refreshed and replaced.
Right. So that would suggest that we actually, at the beginning, just the simple math was, and look, I just want to remind people, less than 10%, but just average life and when the cycle started would suggest that we're at the bottom and maybe at the cost of the new cycle. That would be a logical conclusion, right?
It would. It's just going to be a regular upgrade. It's not going to be a super cycle, and it's not going to drive up and drive down like it did in the past. I think what we think or believe is we're going to have sustained growth in this business in the U.S. and around the world. As our dispensers age, they'll obviously be refreshed and renewed. But also at the same time, there's continued buildout and there's continued regulation around the world, which will continue to drive growth in our environmental and fueling business. It's a great business, which will continue to grow and continue to throw off a lot of profit and cash.
How should we think just about the manufacturing footprint for the business, given that we have gone through a pretty dramatic cycle? Have you fully right-sized the cost basis for U.S. fuel dispensers? Should we expect additional costs to come out in 2024?
Yeah. We have optimized our cost for the U.S. fuel dispensers and for the EMV cycle ending. If you really look at our profitability for the environmental and fueling segment last year, despite the EMV headwinds, profit actually, as a percentage, increased. But having said that, underpinning the Vontier Business System is a culture of continuous improvement. So at the end of the day, we're never done from driving productivity and driving efficiencies in our business. We're in the early stages of what we call focus on prioritization or FPP, where we're reducing the number of global dispensers from 32. We're already down to 16, and we're on a path to less than 10. That's going to continue to drive operational efficiencies.
When you think less dispenser platforms means less sustaining cost, less cost to roll out new features globally, but also improved manufacturing footprint and also improved leverage with suppliers to drive down supply chain costs. So we're continuing to drive productivity, and it's part of our DNA, and we'll continue to do that on a continuous cycle.
Just to summarize, in fuel dispensers, 10% or less of the revenue, cycle has bottomed, maybe poised for growth over the next 12-18 months, and you've taken costs out.
That's correct. The U.S. dispensers is about 10% of our revenue, and globally, it's a higher number. The cycle ended in 2022, and it's a growth business. We're going to see good mid-single digit growths in the U.S. dispenser this year, and we believe there's growth to come in this business over the next years.
Okay. So international fuel dispensers, can you just remind us what are the key end markets for you internationally, just for folks who may not be familiar with the company? And then I'll ask my question just.
We do have a good geographical footprint for international dispensers across large parts of the world, Europe being a good market, in the developed world, Australia also, but also some of the growth markets of the emerging markets. We have good market share in India, Middle East, Latin America, so a good global business.
So as we go around the world, are there any regulatory drivers or government tenders to highlight? Because I remember, right, for some of the emerging markets, the timing of the government tenders was also always an issue. Anything to highlight in terms of regulations or big tenders as potential demand drivers for 2024? Just international fuel dispensers, roughly 15% of revenue.
Yeah. So the amount of regulation globally is increasing, not reducing. The regulation really is around two major themes. It's around payment security, which is the dispensers, and it's around environmental, which is the underground. There are continuous drivers that are regional that are ongoing at any time. From a fiscalization or payment perspective, we're seeing drivers in countries like Turkey. We continue to see drivers in India. Brazil is on an early stage or before an early stage of this, and we expect that this new regulation will require all dispensers in Brazil to be replaced over the next 10 years. Then we're continuing to see regulation underground from a vapor recovery perspective. So when you think of Mexico and other parts of the world, continued regulation for vapor recovery, which is a growth driver for the underground equipment internationally also.
From a large tender perspective, we expect some tenders in India this year. The three large customers in India are government-owned entities, and we see some tenders coming out this year out there, which we have a good market share in India, so hope to do well in those. So good drivers across the international markets also.
Gotcha. Excellent. And anything on China?
We don't have much exposure to China. We aren't selling dispensers in China. It's a local market. We do sell some underground, but China is diminished in our overall volumes.
Excellent. Maybe we can switch to DRB, and that's car wash software and payments, 8% of revenue. Can you talk about the progress on your new SaaS offering, Patheon, and what portion of the installed base has upgraded?
Yeah. So we introduced Patheon, a new cloud-based solution last year, and it is doing well. It hit our plans for last year, but it's in the early stages. We're on the early stages of an upgrade cycle for some of those customers, which will take some time and a couple, three years before we see significant progress from an upgrade perspective. But customers are already talking to us about upgrades. There's some of the benefits of that moving to our latest cloud-based solution are across operational efficiency for our customers. It's across revenue management. They can run promotions, pricing, dynamic pricing, all of that a lot quicker, and it allows them to scale a lot easier being in the cloud versus an on-prem solution. So good traction, great product, and we continue to build out around it.
As we think about it, though, does this move a needle in terms of tailwind to revenue growth in 2024?
It does provide us some growth opportunities as customers are looking to upgrade their solutions. As we sell into tunnel customers, we expect the sales mix to move more towards Patheon than our traditional on-prem solution being SiteWatch, which will be the larger part of revenue coming from new customers. But we also expect some revenue to come from upgrades from existing customers.
Gotcha. So next question on DRB. So given higher interest rates, right, the pace of new car wash locations is set to slow. So how much of DRB's growth comes from new locations versus competitive wins, pricing, and upgrade?
So one way to look at our DRB business, about 40% of our revenue comes from what we would call recurring. That's around payments. It's around maintenance contracts, software licenses. So all of that's about 40%, and 60% comes from new tunnel car washes or rebuilds of existing car washes or an upgrade. The higher interest rates are having an impact on the new build activity. We've seen that slow down. There's still new tunnels being built, but at a much lower rate. And we've also seen that some of the M&A activity in the space, which is also good for us, has slowed down. Usually, what happens if private equity is doing a roll-up and they buy single-site operators, they're upgrading the point-of-sale system and control software with our solution. We have a leading market share.
We do see some impacts of the higher interest rate delaying projects in our space.
Gotcha. And how do you think about the long-term growth algorithm?
We feel very bullish about the long-term growth algorithm in this business. As a lot of you might be aware, the U.S. market for tunnel car wash is going to a subscription model where 60%-70% of the sites' revenue is coming from subscription. There's a lot of new tunnel car washes still being built, and we have a data analytics business which helps our customers decide where to put car washes, how to price these. We also have internally run models to see how much potential demand there is for car washes, and we think there's significant growth opportunity to continue to build out car washes.
Additionally, the Patheon product, the cloud-based product that we talked about, we're looking at adding functionality to make it also an in-bay, which is the convenience store car wash that you see where it's one car going through at a time versus a tunnel where multiple cars go through at the same time. Then there's additional functionality that you can think around what we already do that we can add that will continue to drive growth. We are very bullish about this over the long run.
What do you think would it take for sort of the cycle just apart from the fundamental strategy? What would it take? Because obviously, a lot of the upgrades were driven by introduction of sort of private equity capital into the industry. Based on your conversation, what would it take for the cycle to really come back and forth? Would it require interest rates? Is it sort of changing administration? What are you hearing from your customers? What would make them more positive?
I think it's really down to lower interest rates will stimulate some of the investment coming back in the demand because the underlying fundamentals of the business are really strong. The IRRs on these projects are very attractive. Just with the interest rates where they are, there's some delays in projects, also because there's an expectation that interest rates are going to come down. So I think a lot of our customers are talking about projects in the back half of the year. So with the interest rates coming down, that should stimulate good, attractive growth again in the second.
So actually, you do have some visibility into the second half.
We do. We have obviously backlog that's there, but also customers talking about projects. So again, there's a piece of the business that we need to still book and bill, but we also have backlog and visibility into the business.
Gotcha. Thank you. So maybe we can talk sort of in remaining time, we can talk about capital deployment and portfolio. So how do you see Vontier balancing M&A, buybacks? Because the stock is still relatively inexpensive and debt repayment over the next two, three years.
Yeah. I'll start off with the debt repayment. We paid down $300 million of debt last year. We've paid down another $50 million this year, and we have another $50 million to go, which will cover the term loan that matures this year in September. Also, our leverage is already at 2.8x, so within our target range. So we have a healthy balance sheet, so that covers the debt paydown. We generate a significant amount of cash. Our cash conversion rate is somewhere between 95%-100% long term. And our capital allocation policy is very return on invested capital driven. We compare buybacks with M&A based on an ROIC model, and we call our policy dynamic because we always shift to the highest return option for our shareholders. Just some examples of capital we've deployed in the past.
We bought Invenco, our last acquisition, which at the end of year one was already double-digit ROIC, and we said over three years, that's going to be a 20% ROIC business. The DRB acquisition, which we talked about, that we said would be double-digit ROIC by year five. It's definitely running slightly ahead of schedule and will lead to the double-digit ROIC in year five like we had promised. At the same time, we bought back 9% of the company's shares outstanding at an average price of $25 a share. So that's over a 60% return for our shareholders. As you mentioned, Andrew, we believe our stock is also undervalued at this stage. We trade at about 11.5x EBITDA. The whole sector and some of our peers traded at a much higher multiple. So buyback still looks attractive.
Also at the same time, we'll have money allocated towards acquisitions. Expect more of a balanced approach towards capital deployment.
How does the fact that you do have currently split debt rating, I think S&P and Fitch are investment grade and Moody's one notch below? So how does that figure into your calculations? How much of a priority is to get everybody sort of into investment grade?
Yeah. Obviously, we think about that and looking and modeling how do we drive down the cost of debt. Being investment grade with two of the rating agencies definitely has us straight as investment grade. Moody's does have us a notch below, but hopefully, with our leverage and balance sheet healthy and also us building our track record as a public company, we're three years in. So as we continue to build our track record and credibility, hopefully, we get them to upgrade us also to investment grade. But we feel very comfortable with where our balance sheet is at 2.8 times. We'll obviously be paying down some debt, as I mentioned, this year. Our EBITDA is going to grow, which is also naturally a deleveraging event. So a very healthy balance sheet, and we're well positioned to deploy capital.
When you think of M&A, we really think about a market-based approach. We start off with really analyzing the market, studying the market, having a high conviction on a market, how it connects into our strategy, how it could drive value for us with our strategy. If we like the market, then we start looking at targets and seeing is there a path to leadership in the market? Because if you look at most of our businesses, we're number one or number two in the market that we operate in.
As I just think about the business overall, right, I mean, you did have a cycle in Fuel & Dispenser. It looks like it's going to be quite a bit more stable going forward. Matco is stable, right? You have quite a bit of sort of SaaS software. It's a fairly stable portfolio that should generate steady cash flow over time. Within that framework, what's the right amount of leverage range that you as a CFO are comfortable running a company with? And how high are you willing to go?
We've publicly stated our leverage target as 2.5-3 times, and that reflects the fact that our businesses are very stable growers. They generate a significant amount of cash. Having said that, that's a target that we could go slightly below or slightly above based on a deal. I don't think we'll ever get to a point where we're highly levered to do an acquisition. We're committed to keeping our investment grade rating. If we increase leverage slightly above the 3 times, it would be with a very clear path to come down below the 3 times into our target range very, very quickly. I don't expect we'd get to a point where we'd be driving leverage significantly higher than the 3 times that is our target range.
Gotcha. Thank you. And as we think about the M&A, what are the areas of highest interest for acquisition, right? You already have a number of growth bets with Angie and Trilogy of Energy and EVolve Platform, EV charging software. So how should we think about it? And I think we talked about it, that the strategy is a lot more sort of platform-based these days as opposed to, let's get into more businesses, right? Maybe you can expand about sort of the theme that sort of ties the portfolio together and how you think about M&A going forward.
Yeah. So we operate in over a $30 billion TAMP, and there's continued to be opportunities to grow both organically and inorganically in this market. As I mentioned, we start off with the market or the submarkets and really study those markets to make sure we like the market characteristics in terms of growth profile, in terms of capital intensity of the market, in terms of profit pools in that market to be generated. We look at, is there a clear path to market leadership? We want to be number one or number two in each market that we operate. And once we get comfortable with the market and how it fits strategically with us, then we start looking at targets in that market space. We also are in no rush to deploy capital. We are very patient.
An example we often give is we waited to buy Invenco at the right price where we believed was the right return for the shareholders. We've said no to deals that were what we believed overpriced. So we have a lot of patience and a lot of discipline to deploy capital well at the right returns. Also, as we build across the mobility ecosystem, we're moving more and more towards integrated, connected solutions. So think of areas that could help connect the operating platforms that we have. We have the leading platform inside the convenience store with NFX. Think of it as the site management platform. We have the leading software platform for car wash. We have the leading software platform for EV. So how do we continue to integrate and offer integrated, connected solutions and application software and scale in the cloud?
Just generally, it's been such a rollercoaster ride with interest rates. What is the M&A environment like? Is there a change in terms of who you would compete with 12-18 months ago versus who you're competing with now?
Yeah. The M&A environment's, I'd say, dynamic. Obviously, there was a disconnect when interest rates went up from sellers' expectations to buyers. Obviously, we saw less activity from private equities as interest rates went up, and they couldn't leverage what they would typically leverage. But at the same time, not all seller expectations came down, and there was a disconnect. We walked away from a couple of deals last year. At that stage, neither of those two deals transacted just because of the disconnect between seller and buyer expectations. As I said, we'll be very disciplined. We're in no rush. We believe we have a lot of time. We have a great set of businesses. We have a great market position. We're uniquely positioned with the depth and breadth of our portfolio. We're growing organically at an attractive mid-single digit rate.
We have strong operating profit margins and strong cash flow generations, and we can leverage our strength to continue to grow organically and for the right assets growing organically.
I guess the last question for me, after the Global Traffic Technologies, which was divest April 23 and Coats January 2024, after these two divestitures, are you considering any other potential divestitures out of the portfolio?
Yeah. So our two divestitures, GTT and Hennessy/Coats that we did, we talked about them not fitting strategically with our portfolio. We like everything that we own. But having said that, we continuously are studying the market. We're continuously looking at the strategic fit of our portfolio. But it's an ongoing process. But at this time, we like everything we own, and we think they're great assets, and we continue to gain share and build out in our businesses.
In the remaining time, I don't know if there are any questions from the audience. Okay. I think I'll give you back a minute of your time.
Thank you, Andy. Thanks for having us.
This was great. It's such a pleasure having you here.
Thank you.
Thanks a lot.