All right. I think we're ready to get going with the next fireside chat. We're excited to have Vontier here with us today. We have Anshooman Aga, who is the SVP and Chief Financial Officer, as well as Ryan Edelman, who runs investor relationships. Gentlemen, thank you for joining me today.
Sure. Thanks for having us.
Great. So, Anshooman, let's just start with the growth story here. You know, at a high level, like, there's, you know, we've now gotten through all of the EMV headwinds, and that was really a big discussion point last year. You know, this year, you know, the growth has been slower than probably you would've expected maybe 12 months ago. But maybe just kind of talk to us a little bit about like how growth has trajected this year and then some initial thoughts as we head into 2025.
Yeah. Thanks, Joe. So we're very pleased with the progress we've made since then, and we have a purpose-built portfolio that has market-leading positions and an attractive market that's supported by secular tailwinds and the mobility ecosystem. We did get past the EMV headwinds that we'd spun with, and we really serve three end markets if you want to break our portfolio in that aspect. The first is convenience, retail, and fueling, and that market is relatively healthy, and we've seen good growth, especially if you look at the amount of convenience stores that are being built out. That continues to be at a pretty attractive rate based on the economics for the convenience store operators, and they have multi-year plans. When you also think about our fleet business, where we serve our fleet customers, they're early in the journey of decarbonization.
But regardless of the fuel type they choose, whether it's traditional fuels or biodiesel or moving towards compressed natural gas, renewable natural gas, or even hydrogen, or thinking through EV charging, we have the leading position across all fuel types in the right profit pools. That business is again continuing to grow at a pretty healthy rate. The two businesses that have seen a slowdown this year are the Car Wash business and our Repair Solutions business. From a car wash perspective, this was an acquisition we did, and the first couple of years of the acquisitions, this business grew at very attractive growth rates of north of 20%. And we have seen a slowdown or normalization in that market, as the interest rates, high interest rates and the high cost of construction of new car washes caught up.
But we're starting to see some signs of stabilization sequentially in that business. The other business where we saw a little bit of a decline in Q2 and Q3 was our Repair Solutions business. The fundamentals of the business remain extremely attractive when you think about the miles driven. The age of the car parc is up to 12.6 years. The technician wages technician employment is at record high levels, but the technician is a U.S. consumer, and at that income level, you've seen the consumer get stretched with persistently high inflation, especially when you think about food and energy inflation, and its relationship to where wages were and also the higher interest rates. Again, in this business, we've started to see signs of stabilization sequentially, but overall, we're going to be growing 1%-2% this year. And that should pick up a little bit next year.
Okay. Yeah. Maybe we'll table 2025 for a second. Let's just stay at a higher level with the longer-term strategy. You guys have talked about expanding your portfolio both geographically and via just platform evolutions. Give us some examples of the strategy at play since you spun and what capabilities you think you need to build on in order to position your businesses for growth going forward.
Yeah. When, after we spun, we put in place a series of profitable growth initiatives, and we focus both on organic and inorganic growth. So one of the first things we did was deploy 80/20, which we call focus and prioritization. And part of that was strategic pricing, but part of it was product line simplification. What that allowed us to do was reduce complexity, standardize across platforms, and reduce sustaining engineering efforts, which we redeployed towards new product innovation, and that is really starting to pay off. We also had growth initiatives that were focused around aftermarket parts in our environmental and fueling business, which has grown double digits since that time. And we also, for example, moved from compressed natural gas with our customers into renewable natural gas and a little bit into hydrogen also, which is, has been leading to good growth in our ANGI business.
At the same time, we did a couple of acquisitions that are extremely attractive from a strategic perspective and also from a financial perspective. If you think of the DRB acquisitions and Invenco acquisitions, they are a central part to our connected mobility strategy where we have connected hardware application software and scaling in the cloud, and these play a central part to our strategy.
Makes sense. And, is it, is it kind of think through like what the margin implications are of these like growth markets that you've been honing in on and using 80/20 to drive a lot more focus? Maybe just kind of thought, talk about the 30%-35% incrementals that you've laid out and the 150 basis points in margin expansion by 2026.
Yeah. The pillar one of our strategic framework is optimize the core, which is really about operational excellence and continuous improvement powered by our Vontier Business System. Some examples of what we're doing out there is our product line simplification that I talked about. A couple of examples there on the dispenser side. When we spun, we had 32 different global dispenser platforms. We're down to 15 and on a journey to eight. What that means from standardized components, we started off with about 2% standardized components. We're a little over 15% on our way to about 50% standardized components. Not only does that reduce sustaining effort, it allows us to consolidate a real estate footprint. We've taken out 600,000 sq ft of manufacturing. We have another 400,000 sq ft of real estate that's going to come out over the next couple of years.
On the Invenco side, again, we had little north of 30 hardware and slash software platforms across the business. We're on a path to bring that down to single digit also. We've started standardizing, and have software factories. We've expanded our software factory in India, Argentina, so lower cost locations. Joe, I think one thing people always get surprised about, we have now over 1,000 software engineers at Vontier. We also are continuing to build out our shared service, capabilities and lower cost locations. So really, we are well positioned to continue to drive margin expansion, and we still feel comfortable with our three-year target of 150 basis points margin expansion.
I'm surprised you have 1,000 software engineers.
Yeah. People, people do get surprised when you really think about what we're doing as connected hardware application software and scaling it in the cloud. And the capabilities that and the unique solutions that we're bringing to our customers are allowing them to digitalize their footprint as they're dealing with challenges around increased site complexity, around labor challenges. All of these things, changing consumer preferences, all of these things, needs them to digitalize their footprint, which is what we're bringing to our customers.
How is that, I guess, when we talk about it in the context of driving more recurring revenues across your business?
Yeah. So if you really start looking at recurring revenue, we have, and especially in our EFS business and in our Mobility Technologies business, we have a decent amount of recurring revenue, and Environmental & F ueling Solutions, we have our aftermarket parts and our service business, which is just combined a little shy of $400 million of the $1.4 billion in revenue, that's recurring, but about 40% of Mobility Technologies is recurring. And when you think of a lot of the connected hardware application software solutions that we are driving, that has more and more recurring revenue attached to it. When you think of our latest payment technology, FlexPay 6, which is not only compliant with the latest payment card industry standard, which is PCI 6, it also has over-the-air updates, and over-the-air updates require a recurring fee subscription to get those.
When you think about our enterprise productivity solutions in Invenco, that has more software content and recurring revenue. Also, when you go to businesses like DRB, which already is 60% recurring this year in nature, a new cloud-based Patheon not only drives higher revenue for our customers and lower cost of operations for our customers, it also provides us with a higher recurring revenue base, so we are very focused around continuing to build out our capabilities, not only on connected hardware, but the application software, which drives higher recurring revenue for us.
Great. Look, I'd be remiss if I didn't mention the election that we just got through about a month ago, and the reason I mention it is because historically, regulations have been a pretty big growth driver for you guys, and so with the recent change in the administration, is there anything that you're either excited about or concerned about or too early to tell?
I'll start off with regulation at a higher level. I think what we're seeing is our business is more and more impacted with regulation, and the rate and pace of regulation is increasing. When you think about regulation, it's for our environmental portfolio, which is below the ground. When you start thinking of vapor recovery, and this is global vapor recovery in Mexico, India, and other countries around the world. When you start thinking of biofuels, for example, India is moving towards 20% ethanol, which is more corrosive. So the sensors and the gauges require different materials to deal with this corrosion, and then also regulation above the ground, when you start thinking of the forecourt and inside the convenience store with the payment card industry standards, those keep changing. There, countries have fiscal regulations to prevent tax fraud. That is all good for business.
In regard to the change in U.S. administration, I would say it's a little early to say, but when you really think about it, we have built leading market positions across all fuel types. We believe that the journey to decarbonization will be gradual and will require multiple fuel types, and we will have a multi-energy future, whether it's traditional fuels, which will continue to play an important part of the landscape, but also compressed natural gas, renewable natural gas, biogases, and potentially hydrogen and EV charging. We have the right, we play in the right profit pools across all of these energy types and are a market leader in the space.
That's helpful. I guess, just maybe the following question, just on tariffs. I think that they were relatively neutral last time around for you guys. Like, how are you thinking about that this time around? And then if you can layer in some thoughts around pricing for next year, that'd be helpful.
Yeah. So starting off with tariffs, we don't have any direct manufacturing exposure to China, Mexico, or Canada. We do buy from China. We buy about $100 million today, and we have active plans in place to reduce that exposure. We're working with our current suppliers that are moving, looking to move production out of China. We're looking at new suppliers. So we've reduced that to the $100 million level, and we're continuing to bring that down. In terms of pricing, we have been very disciplined around pricing. Even when inflation was high, we started early on raising prices, and we passed cost increases on to the market, to our customers, and we were price cost positive every quarter since then. So in case there are tariffs or higher inflation, we would look to pass that on to our customers.
That $100 million that you're sourcing from China today, you're already being imposed a tariff, the 25%? I know that it depends on like the.
A large part of it, Joe, is exempt from tariffs. It's based on the product categories, and a lot of them are today exempt from tariffs.
Okay. That's helpful. As we talked about pricing. As you kind of think about the overall growth environment, you touched on it earlier into 2025. Just help provide an initial framework and maybe talk about each of the different segments, and how you're thinking about it.
Yeah. So to start off with, if you take our environmental and fueling business, that business has been seeing good growth, and a healthy market backdrop. When we think of the convenience store buildout, we're continuing to see the buildout, especially with the large national and regional operators where we do have a higher market share, and they have multi-year plans that are continuing to go forward with. The retrofit refresh where they're just taking a current site and doing some minor upgrades to the site, that we did see a little bit of a slowdown in Q2, and that market did recover in Q3, especially on the back of new product innovation from us where, when we introduced FlexPay 6. The environmental business continues to grow. There's regulation that I talked about across the globe.
Even in the U.S., there's the tank replacement cycle, which is in the early stages. If you go back over 30 years, there used to be steel wall tanks in the ground that started corroding and leaking, and at that stage, EPA had mandated that everyone replace the tank and put in double-walled resin-based tanks, and you know, it's about 30+ years, and the useful life of a tank is about 30 years, after which the insurance costs start going up or it's harder to insure, so customers are starting to look at updating the tanks. While we don't do the tanks, we do the intelligence that goes with the tanks, sensors, etc., so you know, we've said the long-term growth rate of this business is low single digits. This year, it's going to grow mid-single digits.
So, maybe somewhere a little early to give guidance, but I think in that range of our long-term guidance is probably reasonable to think about.
Maybe before we go on to the other segment, so you've also announced a few awards from India. Can you maybe just talk about those awards, how those orders seem like relatively chunky and could provide some good support to growth in 2025? Maybe just talk about those awards and whether those are, you know, potentially longer cycle, and how much you expect to contribute to 2025.
Yeah. We did announce that we won in Q3. We'd announced we won $70 million worth of tenders in India, and we just won another tender that we announced in Q4, for about $15 million. We've been. We're very proud of our India team that worked really hard on product design, not only from a design to cost in terms of optimizing the cost, but also improving some product reliability, product security, that continues to build on our leading market share position that we already have in India. We've won all the tenders that happened in the market. These tenders have really two components to them. They have an original hardware component that gets delivered over 18 to 24 months, and then they're after the first two years of warranty, there's a long-term service agreement that's attached.
So the total contract value that I talked about was the combination of the hardware and the software. We typically book just 12 months of forward revenue into backlog, into our orders or backlog. So we did talk about the $70 million; we booked $26 million in Q3. So you can imagine there's about $26 million that will get delivered between Q4 to the first nine months of next year. It will be incremental growth to what we have this year in India, but again, the incremental growth will be less than 100 basis points to the environmental and fueling section, given the fact that we already have a market-leading position in India.
Helpful. Great. Do you want to touch on the other two segments? That'd be great.
Yeah. If we move to Mobility Technologies, where we are really building a lot of the integrated solutions, for our customers and digitalizing their footprint, with our Invenco product offering, there we've seen double-digit growth this year, both in orders and sales, and we expect we'll see good growth again, next year in that business, probably a little lower than double digits, but again, that business should be growing mid- to high-single digits next year, in line with our longer-term guidance that we have given. Also in that segment, we have the Car Wash business. When you really start thinking about the Car Wash business, this was a business that saw exceptional growth over the last two or three years. And this year, we've seen the normalization in that business of the number of new car washes that are being built.
This year, there'll be about 500, a little above 500 new car tunnel car washes being built. At the peak, there was over 800 car washes being built. We think that number is relatively flat next year. While interest rates have started coming down, there is a lag effect between when rates come down and the, you have to think about land acquisition. You have to think about permitting construction, and that's when we get our order. So there will be a lag effect. So we expect that business will be relatively flat next year. Our alternative energy business that's going to continue to grow, that over the last few years has doubled, and so we should see that business continuing to grow in line with our midterm targets.
So overall, good growth in most of the parts of our mobility technology segment with the exception of the Car Wash business, which will be flat. Our Repair Solutions business, which will be down low- to mid-single digits this year, we're expecting should be flattish next year. Again, the fundamentals of this market are strong when you think of the technician wages, technician employment, age of the car park. All of that remains strong. But again, as I mentioned earlier, the technician is a U.S. consumer and is stretched. Again, with inflation under control, with interest rates starting to come down, wages continuing to increase, we do expect things will start improving, but again, there will be a lag effect. There's a high correlation between real wages and technician spend, but there will be a lag effect. So I think next year will be relatively flat.
So in summary, about 70% of our portfolio growing in line with our midterm targets, about 30% of our portfolio relatively flat.
Super, super helpful. I'm going to turn it over to the audience in a second. But before I do, I just want to ask a question on Repair Solutions. So, this quarter, we talked a little bit about the bad debt reserves picking up. It's really kind of picked up the last couple quarters. How much is it impacting margins this year? And then what's the likelihood that that continues into 2025? And then the real, you know, part of the reason I'm asking this question is I'm wondering if there's a margin, a potential margin tailwind in 2025.
Yeah. So when you think of bad debt, we carry about a $400 million portfolio where we're financing $300 million roughly to the end technician, $100 million to our franchisees. And what we've seen is the bad debt has increased over the last two years, both in 2023 and in 2024. But if you go back, what had happened post-COVID when there was a lot of money that was flushed in and there was excess savings, what had happened was bad debts had gone to a historically low level. And then last year, they moved back to average, and this year they're at the higher end of the band that they've typically ranged between as a percentage of the portfolio. It's about an 80 basis point band, if you go back a few years to look at history.
And so we went from the low end of the band to where we are today at the high end of the band. The write-offs are relatively flat sequentially when you look at Q1, Q2, Q3, and what we expect in Q4. Again, I'm not expecting that that'll turn into a tailwind in 2025, given the fact that there is a lag effect between, some of the, interest rates coming down, wages going up, inflation coming down. But I think over time, as we move towards the midpoint of the band, which should be where we should average out, there should be some 100, 150 basis point margin tailwind. But probably next year at this stage, I'd say it should be neutral, in terms of headwind slash tailwind.
Helpful. I'll turn it over to the audience, see if there's any questions, or I'm happy to keep going. All right. I'll keep going. I want to go back to your comment around the expectation for roughly about 500 car washes, right? So is that what, when you look at a longer period, what's the right normalized number? Are we, is that below normal? Like what's the, how do you think about normal and when we start to see an improvement?
I think what we've seen is it's stabilized sequentially now. In over time, this is a very attractive space. When you look at the returns that car wash, well-run car washes generate, it's. They generate good cash returns, and I think we'll continue to see investment in this space. Really off this number, we should start seeing normal growth, as the market catches up. The interesting thing for us in this space, not only do we have a market leadership, from the sale of the point of sale hardware and the control software in the space, but we also 60% of the revenue is recurring in this business. That is growing at a low to mid-single digit pace, with our new product offering, Patheon, which is moving from our old solution, which was an on-prem solution, to a cloud-based solution.
It provides additional flexibility for our customers in terms of dynamic pricing, which allows them to optimize their revenue, run special promotions, but also helps them on their operational cost and productivity. But, on the flip side for us, the benefit is also that it comes with a higher recurring revenue. So while we think there will be a gradual increase in the number of car washes that's built, really what we're doing as there are more car washes coming into the market, we're increasing the installed base and driving that recurring revenue on that installed base.
Got it. And then look for this for this year. I think the margins in mobility tech are, I mean, I have them down like, let's just call it roughly 100 basis points this year. Is most of that driven by DRB and the fact that DRB is mixed accretive to the segment? Or just any thoughts around that? Because you did mention, you know, 40% of the business is recurring. There's a lot of software in the business. Just trying to understand exactly how DRB is impacting the profitability.
Yeah. DRB is accretive to the portfolio from a margin perspective, and obviously that being down this year does impact overall margins. The other thing that we've done very deliberately is we did increase our innovation, R&D in Invenco, which is, Invenco is about half of Mobility Technologies from a revenue perspective. And we've seen really good growth in Invenco this year, double-digit growth in both orders and sales through the first nine months. Really there when you look at our portfolio, we have two main sets of offerings, if you want to call it that. We have unified payments and we have enterprise productivity, and we have leading positions in both, and we're continuing to build out on that and really gain market share, which is on the backs of being innovative and bringing modern architecture products to market, which helps our customers digitalize.
Makes sense. Just moving on to capital priorities. So look, you've got a goal to deploy about $1.5 billion over the next three years. You've been in the market now buying back more shares the last couple quarters. Just help us understand how you're prioritizing that deployment, M&A versus buyback versus dividend, etc.?
Yeah. I'll start off with the easy part. Our dividend is pretty sticky and has been stable since then. So, you know, when you really start thinking about capital deployment of the $1.5 billion or so that we're going to generate over the next three years, our focus is always on the highest return option, and we compare buybacks versus M&A. And, you know, we're obviously cultivating our M&A pipeline. We start off with the market, really understand the market or the sub-markets that, how do they fit in with our strategy? How, how do we like the profile of the market, i.e., do we have a right to win in the place? Is, is the market consolidated? What are the barriers to entry? What's the financial profile? Can we deliver strong returns in the space?
If we like the market, then we start looking at the targets in the market and we cultivate opportunities in the market, and we're very patient because we're very disciplined. If you think back on Invenco, which was a great acquisition both strategically and financially, we could have bought it about a year before we did at a much higher price, but we were patient. We bought it at an attractive price and then really accelerated the growth of Invenco. We had committed to a return on invested capital of north of 20% or 20% at the end of three years. It's going to be north of 20% at the end of two years now, so we are disciplined. We continue to cultivate our pipeline, and we would expect some M&A over time for sure.
But at the same time, our value with our valuation, we believe buybacks remain extremely attractive. When you look at the multiple we trade at, given our financial profile, of growth, which should be approaching mid-single digits over the long term. When you look at our operating profit margins already above 20% and expanding cash conversion close to 100%, we believe we're trading at a discount that we shouldn't be trading at. When you look at our cash yield on our current share price, again, so buybacks remain attractive and we continue to deploy towards buybacks also. I'd expect a healthy blend of both, over the next two, three years.
I guess just in terms of M&A priorities, right? Are there areas? I mean, I don't expect you guys to be doing a lot of acquisitions in the repair solution space, but like, are there areas across the portfolio that you really kind of need to lean into or want to lean into?
There are areas that we would like to lean into that fit in with our strategy. There's no glaring hole in our portfolio, so there's nothing that we must do, but there are things that are very interesting for us to do. It's around, again, if you start thinking of our strategy, a connected mobility strategy of having connected hardware with application software and then scaling it and bringing this across the mobility ecosystem together in a differentiated way. That's areas we're focused around. You know, our customers are dealing with unique challenges, which we are positioned to solve in a competitively advantaged way. The amount of touch points we have across the mobility ecosystem doesn't compare. It's far superior to what others can provide. So just continue to build out on that.
Got it. And then conversely, you know, you did the divestiture. Are there areas within the portfolio that you're looking to continue to prune?
We continuously look at our portfolio. I think that's something that all companies do or should be doing, and we continue to evaluate our portfolio on a very regular basis. Having said that, we like everything in our portfolio, and it kind of fits in together with our portfolio, but again, we continuously evaluate our portfolio.
Anshooman, any other last thoughts that you'd like to leave the audience with?
Just that, you know, we're relatively new companies post-SPIN, but I think we've gone through a significant transformation and are in a continuous journey to continue to evolve, but are doing so in a very disciplined manner that is continuing to build on us strategically, but also having great financial metrics and profiles. The Vontier Business System is really a competitive advantage for us where it's all about continuous improvement and getting better every day. And you're seeing that in our results. And we're very proud of our teammates around the world.
Great. Thanks, Anshooman. Great to see you, Ryan. I really appreciate you guys coming.
Thanks, Joe.
Thanks.