Welcome back, everyone. We're really excited to have you join us again. We've got Vontier Corporation with us, Dave Nomura and Lisa Curran, who is VP of Investor Relations. Dave is CFO, and I've known Dave for a long time now. Very excited to have you guys on.
Vontier, I think, a very, very interesting story here, very interesting in terms of potential growth over the long term. I think it's definitely under recognized and underappreciated. And so with that, Dave, I'll turn it over to you because I know you have some prepared remarks, and then we'll get right into Q and A.
Yes. Thanks, Andy. Really appreciate it. We'll just go through a few slides for people that may not be familiar with Volunteer. First, we'll point you to our forward looking statements disclaimer, Safe Harbor as well as our disclosure on non GAAP financial measures.
We'll let you look at those at your leisure. Jumping into the first slide here. Look, at Volunteer, we have launched an industrial technology company of scale with a portfolio of market leading brands and technology serving attractive mobility and transportation markets. We have a large global installed base with historically low cyclicality and high recurring sales. From the Solutions sales pie chart that you see on the right, the lower one, you can see our recurring revenue breaks into two components, with about onethree of it being SaaS revenue and about twothree being service.
And also, only 30% of our total revenues come from retail fueling hardware. We have an outstanding financial profile, as you can see down the column on the right, strong margins and free cash flow with a pension for M and A. The Volunteer Business System will be the foundation of organic initiatives to enhance our growth profile and continue to expand our already strong margin profile. We have a large runway of opportunities ahead, and we have a proven track record of substantial growth and strategic transformation. Moving to the next slide.
We delivered a strong finish to 2020 as VBS continued to help us deliver top tier performance with another quarter of double digits earning growth and impressive free cash flow conversion, revenue growth and margin expansion. We continue to position the portfolio for the future and invest ahead for profitable growth opportunities. We initiated a guide last week that reflects a tale of two halves compared as we move into 2020 with, first of all, the comparison dynamic from our strong V shaped recovery in the 2020 being a second half compare issue in 2021. And also, this is going to be exaggerated with EMV, which has been a tailwind for us for a long time, beginning to fall off in the 2021 as we move into the new year here. That said, we view 2021 as a springboard for a multiyear transformation as we accelerate profitable growth and continue to invest in both organic and inorganic opportunities.
Moving to the next slide, talking a bit about the markets we play platform for long term growth and the opportunity in each of these markets is really opportunity to move up the technology stack. You see above what we call the mobilities technology platform within Volunteer. Our installed base here positions us well to expand in these attractive markets and attractive adjacencies, gives us an opportunity to leverage e mobility, smart cities, logistics and supply chain as well. On the bottom portion of this graph is our Diagnostics and Repair platform, which consists of Matco and Hennessy. Our businesses levered increasing miles driven and aging car park and increasing complexity of repair for the car park.
This gives us the opportunity to leverage workforce flow solutions and diagnostic solutions for the customers we serve. Finally, turning to the next slide. This is really where it all comes together in the growth algorithm that we call the Value Creation flywheel. We are confident in our ability to transform our portfolio and continue to deploy this proven model for delivering compounding earnings growth over time. Finally, looking at the last slide, some of the investment the compelling investment opportunity before us with Volunteer.
As we outlined earlier, we believe Volunteer is a very compelling investment opportunity. We play in a large $27,000,000,000 TAM. We have strong performance with historically limited cyclicality supported by recurring sales. We generate robust free cash flow. We have an investment grade style balance sheet to fund our M and A aspirations.
We have a runway of opportunities to provide profitable growth. We have an experienced and proven leadership team with a track record of driving substantial growth and strategic portfolio transformation. The volunteer business system is at the core of what we do from a culture, and it provides us a competitive advantage. With that, Andy, we'd like to move into Q and A, if you're ready.
I'm ready. So Dave, you already coming out of the box, beat expectations pretty handily. And you talked a little bit about the MB headwind, but you also talked about the focus that DBS can bring. So maybe you can sort of talk about the simplification efforts, the greater focus, the offsets to the $0.38 that you've talked about as the headwind that you sort of have to overcome. What has been the sort of things that you've found as you've separated that maybe you didn't expect to find?
Yes. Well, it's a great question, Andy. I think these are all benefits of focus and the ability of Mark and I to get closer to the businesses where we're dealing with, frankly, just a set of five operating companies as opposed to a much larger set. We think there's opportunities to work, frankly, on fewer, more higher impact initiatives across the portfolio. In a lot of cases, we've been chasing growth drivers like EMV, which have been great drivers for us, but have taken a lot of effort.
And I think as we see EMV begin to kind of crest as we come out of 2020 and into 2021, can we now turn some of that effort to getting after some productivity opportunities that hadn't been addressed in the past. We've talked about a couple of operating companies that performed well below the company fleet average, and we think we have good plans of both of those businesses to get them closer to the fleet average. And generally speaking, we've also talked about R and D fall through and efficiency of R and D. We spend about 5% on R and D, which should be enough for this type of company and industries or end markets that we play in. Having said that, we'd like to see greater fall through on that.
And I think that translates to the velocity of new products, as well as gross margin enhancement. So I'd say these things come as a benefit of focus. And as we move away from this big regulatory driver in EMV, I think the organization have a better opportunity to manage these.
Yes. So Dave, there's so many places to follow-up. I almost don't know where to start. But let me ask you about sort of the tale of two halves that you mentioned, And like for all these sort of initiatives you have, it seems like there's a lot of potential for upside. But of course, we don't want to talk about that right now, right?
So like when we think about sort of this more focus and the efforts around sort of now these five platforms, where are some of the opportunities to maybe surprise the upside? And I'd also throw in there, you have some relatively large markets like China, for instance, that have been sort of laggards for one reason or another that could improve. So is it a region? Is it a particular focus that can help you out in that sort of second half in that tale of two halves?
Yes, good question. So let me first click on the tail of two halves, because I think lots of folks other than us will have an compare an easy compare in the first half and a more difficult compare in the second half of twenty twenty one, given what happened last year. Having said that, I think that's a little more exaggerated from us because we saw such a V shaped recovery in the business going from down over 20% in Q2 of last year to recovering to growth of 5.5, 5.6% in Q3 and then high single digits in Q4. So we saw some of that pent up demand shift. We saw our end markets really recover, frankly, faster than we had even anticipated.
So that in of itself creates an issue. Secondly, as EMV as we pass the EMV deadline or adoption deadline in April, we anticipate seeing a decline in those revenues as compared to very strong EMV quarters in the prior year second half twenty twenty. So not only do we have the same comparisons that we probably see in other places, it's exaggerated because of the V shaped recovery and then further accentuated because of EMV. And honestly, I think some of that is reading through its conservatism that isn't necessarily there. I think we've been pretty middle of the fairway with the guide.
But to the extent we surprise to the upside, it will be continuation of the momentum we see in our Diagnostics and Repair business, where we continue to we're seeing growth rates out of that business that are much higher than the usual steady kind of low single digits or low single digit plus growth rates that we tend to see. We talked about Matco growing high single digits in the fourth quarter, which is great. It could be driven by the markets continuing if we see continuation of this market momentum in the second half and also success in adding new franchises, where we've got 30% of our territories open and we continue to add. That continues to be a growth driver for us every year. We've talked about emerging markets returning to growth in the fourth quarter and that continuing into next year.
China has been a little bit of a laggard in relation to some of the others, particularly India and The Middle East, where we've seen good recovery. That those are always lumpy and surprise to the upside. Also, have a number of initiatives around some of the other businesses like Hennessy and Teletrac Navman, where we're working on a number of efforts to improve the profitability of those businesses. Teletrac Navman moves more slowly, so that isn't that dynamic. But in Hennessy, I think we could see a little bit of surprise to the upside as well.
And then outside of in North America, outside of V and V, which tends to kind of cast a shadow over North America, we have a great retail business that as we see that retail format continue to grow, had a little bit of a tough 2020, I think we could see momentum in kind of the nonfuel dispensing applications that we sell into that retail format.
Yes. So I wanted to follow-up on that because I interviewed your competitor in retail fueling earlier today. And they're pretty bullish on retail fueling if you go past 2021 actually. And obviously, they have a little bit of a different footprint than you have. But mid single digit growth is something that you guys have done in the past in retail fueling on a very consistent basis.
So when you think about 'twenty two and beyond, like maybe there's still a little bit of drag from E and B, you tell me. But like why wouldn't the business start to resume that growth? I mean, I understand the craziness over electric vehicles as I know you do. But as you guys have said many times, the car park is not translating into electric vehicles very quickly. So I don't know, like, why is it that the market is so bearish on retail fueling in 'twenty two and beyond?
Well, I do think there's some people maybe are accelerating some of these secular drivers that I think are real, but might hit over a longer period of time. The car park is less than 1% electrified today. And I think Bloomberg New Energy Finance would say that internal combustion engines will continue to grow for a significant period of time and will remain probably over 90% of the car park a decade from now. But having said that, I think the growth drivers might shift. I think we've seen through EMV, the refresh cycle in the large market, The U.
S, be accelerated. And so I think that will continue to come down, and it will be a headwind, not just in 2021, but in a couple of years to come after that as well. So I think that continues to be a headwind. Having said that, there's other opportunities other than retail fueling hardware in the retail fueling market, including underground and including inside the C store, which I think have good drivers. And then expansion of high growth markets, where the number of fueling sites in India is projected to double over the next five years.
And we have made a concerted effort over the past decade plus to position ourselves in those markets to take advantage of infrastructure build out that we believe we're well positioned from a product and a presence standpoint to do that. So I think a couple of things are kind of these overlays around EMV and around kind of a secular trend to electrification. But I think you point out, you make a good point that beyond kind of the headline, there are good drivers for this market, mostly regulatory driven in the area of environmental and fiscal regulations, like we saw with the DMV, a fiscal regulation around chip and PIN cards. Well, that's kind of the mother of all drivers. But like in Q4, the Barco Vita route within our portfolio experienced good demand out of Mexico because of the fiscal regulatory driver.
And we see a number of other drivers that are quite large on the horizon, particularly around environmental and emerging markets, not too dissimilar to some of the activity we've historically seen in China. We see those being good drivers that individually, none of them are as material as EMV, but collectively are very significant approach EMV over a period over a longer period of time.
And so Dave, correct me if I'm wrong, but if 30% of your business is retail fueling hardware, that means that there's a bigger chunk that's everything else in retail fueling, modestly bigger chunk. So when you put that together and you look at that as you go over the long term, are you telling us that, okay, fine, maybe there's a little bit of a headwind still on the retail fueling hardware, but everything else is going to grow pretty decently, maybe strongly. So ultimately, as we look into 'twenty two and 'twenty three, we can forecast decent growth. Like I is that sort of the message you think at this point?
Yes. I think what's ignoring EMV for a moment, when we look below EMV, this business has historically been a mid single digit growth business through time. And we think those drivers around regulatory drivers, the build out of infrastructure exists beyond EMV and will help offset that roll off of this U. S.-centric EMV dynamic. We think those trends continue through time, definitely.
And just to finish that discussion, I think you've said that EMV hits mid-80s maybe by the end of next by the end of this year in meeting the standard. Is that sort of where it I mean I don't think 100% will convert, you tell me. I guess theoretically, they could. But how much more converts in 'twenty two, do you think?
Yes. You're talking about one of the primary variables here. So when we there's probably four or five variables we have to consider. One, what is the ultimate adoption rate, something less than 100%. And the adoption rate for large customers will be very high.
But as we get into smaller customers, which is the demand we're primarily satisfying now, that is a lower number than it is for very large customers. What do they buy? Or how do they adopt, if you will? Do they just change out the payment system? Or do they buy a new dispenser enabled with a new payment system?
And that mix results in a different level of purchase and obviously influences the demand level as well. And then not just if they adopt or how they adopt, but when they adopt is meaningful here as well. So in that, it could be shortly after in the second half of twenty twenty one, but it could be in 2022 or 2023. So overall, for our installed base, see today kind of mid-80s, but it's very difficult to predict. I think there were a couple of demarcation points we wanted to see.
What was the activity we saw as we see these little customers, smaller customers begin to buy? And I began to get a feel for that as we came through the fourth. But also, we need we would now probably need to get through the deadline and see some of the activity post deadline. And so coming out of Q2 might have a better idea more so than say what we'll learn in the next few months. So it's pretty dynamic.
And I would say, from our perspective, we've tried to be as transparent about what we see as we can be frankly based on the data we have at the time. We talked about 150 to 200 when we came out of the spin in October. That was the best data we had at the time. We also said, we want to see what happens in Q4. Part of it is we want see what our jumping off point would be going into next year.
And part of it we want to see what's the adoption rate, what are these other factors and frankly, how my share be shifting a little bit. So as we work through that, we gave an update, and I think probably mid year is the next time we'll look to update with new information if we have that. Today, it's a little tough to tell how things are going to behave. It's all about predicting the shape of the tail, which is where your question is going.
Great. So if I think about some of the things you've said in terms of where other growth drivers come from, right? High growth markets seem to upturned and you did talk about sort of maybe increasing new product intros. So maybe as we go into later this year and next year and one thing, David, I'm still a bit confused by is the comments around new regulations on the retail fueling side globally, it's just hard to keep track of them all because they're all sort of small to midsize, kind of like Mexico, right? They're in sort of bigger chunks as you go out over the next couple of years that we should pay attention to that can really help on the regulatory side as well.
Yes.
So look, emerging markets and high growth markets remains a really good opportunity for us. And part of that is new products. So we have an emerging market dispenser product that has had good success in The Middle East. And we have a business that we acquired a few years ago, Orpak, that we're actually running out of The Middle East. It's done very well serving the Indian market with what we call automation, tying together the various pieces.
And it's really kind of anti fraud protection, gives people insight into how much fuel is being charged for, how much fuel is in the ground, how much fuel has been dispensed and helps them manage all aspects of their business. So those have been very good products for the emerging markets given the dynamics around fraud and the level of dispenser in that. So that's really helped in Middle East, it's helped in India. But from a regulatory perspective, are fiscal is a big deal around fraud. That's what drove Mexico.
We anticipate more of that in other parts of the world and large emerging markets. And I'd say, environmental, including vapor capture is another big one. We saw double wall pipe, which we didn't participate that much in, impact China before 2020 over 2018 and 2019. And we just didn't make as much of that componentry. Some of it we did, some of the underground, and we benefited from that as well.
That's part of why we haven't seen China come back as fast because it's fighting a little against that double wall pipe compare. But those environmental and fiscal regulations, which will take on various forms in these kind of smaller opportunities, will be collectively very significant, we think, over time.
Okay. And I think you got a lot of questions on the call around the margin side, right? You obviously had very good performance on incrementals in Q4. In Q1, it should be reasonably strong also on sort of the incremental margin side. But then as you sort of said, like EMV tends to be high margin stuff that's sort of going away.
So I think we're also trying to grapple with what is sort of the underlying margin entitlement, if you may. I think you guys said sort of when you're going through your road show 30%, but your gross margins are quite a bit higher than that. So I guess we look sort of medium to longer term. I know you don't want to create new guidance with me today, Dave, around incremental margin, maybe you do. But like, ultimately, why can't you do gross margins or better for the business?
Well, look, I think over time, especially if we're successful with some of the efforts we're making around R and D, hallmark of these businesses is seeing gross margin expansion. So I think you could see us improve that over time, particularly as we continue to migrate the portfolio. But as the portfolio sits today, we continue to think that around 30% is the right incremental, decremental margin. Now it's different if you sell an extra $10,000,000 in the quarter versus you build in a year over year additional $10,000,000 with some infrastructure around that. So these things do tend to kind of move around a little bit.
But we have a couple of big headwinds heading into the year. We have EMV coming off at higher than the fleet average margins, and we have some costs that will come back from last year, where there were temporary cost actions of about $20,000,000 in the second quarter of twenty twenty, that those costs will be back into the P and L for the second quarter of twenty twenty one. At the same time, even with the EMV roll off at $125,000,000 at the midpoint of our guide, we have guided to operating margin expansion. And so the offsets that you're seeing here are the simplification efforts that we talked to on the front end of the call. Frankly, to some degree, as we work through that EMV revenue, we have to take out some costs associated with that, redirect some of that fixed factory overhead and really be successful on some of these other activities.
And you see those manifest themselves in the restructuring charge we talked about. We won't recurrently take restructuring, but I think in this near term environment, this is the kind of time when we do.
The
pandemic of twenty twenty was not the most fun time to manage through, but as new managers of the business with Mark and I coming on board, if you want to get assimilated into running your businesses, have a pandemic, right, when you get there. And with the lower water level, you can see a lot of rocks. It was actually very beneficial for us to immediately get involved with the continuity of business and understanding many of the drivers keeping plants open, understanding supply chain constraints and other things and working the problem solving of those is very enlightening in a lot of ways. So I would say, we have to be very successful to do that in the near term to maintain the margin expansion that we're talking about for next year, given some of the headwinds we see. So it's a tough year from a comparison standpoint.
It's a little noisy, but I still think that 30% incremental, decremental holds. And as we continue to improve business, to your point, can move up over time as we continue to improve gross margins.
It's helpful, Dave. So one could argue that Matco doesn't get enough love considering the performance it's had over the last few quarters. So maybe let's talk about in the context of it's usually not a backlog business, but you've created backlog here. And it was really just a function of the current environment, maybe there was some pent up demand, but it does seem, you know, whether it's maybe people driving more than they haven't or maybe it's the sort of penetration of Matco itself that something's changed. So maybe it's not a low single digit growth company anymore.
I don't know. What do you think?
Well, first of all, I agree with your first statement. Matco doesn't get enough love. It's a great business. What we saw was that business be dramatically impacted coming out of March and into April 2020 with the pandemic. It lost access to customers.
No use calling on a shop that's closed. We saw some improvement as the second quarter developed. What we didn't see coming and by the way, there's what we didn't see coming was the nature of the V shaped recovery. So why is that difficult? It's not a vertically integrated business.
The only thing we manufacture, we sell at Matco is our luxury toolbox line. Everything else we source with hundreds of suppliers. And as we saw things turned down, we had to make some tough calls on long lead time items. And frankly, we under called the snapback at some level. And what happened with the snapback?
I think a few things were evident. The end market drivers are pretty healthy. We tend to look at the employment health for the professional mechanic. That remained very healthy. We didn't see delinquencies increase.
It seemed like people had money in their pockets. And I think what happened was, place other spend for Disneyland, whatever got diverted into fine tools. Secondly, as we came through the second half, although miles driven didn't increase that much, we did see an increase a greater increase in repair activity. And we can see some level in repair activity through data in our scan tools. And everyone's got a little bit different theory, but I do believe that the cars become a little more important to folks.
Maybe you don't want to fly, maybe you don't want to take mass transportation. People are getting back in their cars at some level. The automobile is being seen as PPE. And and people have a little bit of money in their pocket. That's when we talked earlier about, could the second could macro surprise up to the upside in the second half?
Maybe, but I think we're working through a period of time, very high demand that is almost unprecedented historically. And so we built backlog in what is typically not at all a backlog business, to your point. And it's rather book ship, short cycle. But it had to do with the fact that we've had to reenergize the supply chain here a little bit. We're doing that.
It's part of why we ended with just such incredible working capital levels at the end of the year. We'll get some of that inventory back in and get it turned around quickly. But I do think that we have good growth drivers there in that business, particularly since such significant amount of our available territories are underpenetrated, and that gives us the opportunity to take share into the future. But do I think it's a double digit growth business on a sustained basis? I don't.
It's always been a little bit low single digits plus. And that plus being it kind of grows at GDP. It's maybe 50% of the algorithm in same store sales and then maybe the other 50% of the growth coming from the ability to add new franchisees. And it's never perfectly like that, but I think through time, that's kind of proven itself out in varying degrees. And I think we're we've got pretty good end market driver for that business right now.
So Dave, we've always sort of known about the business, but we never really asked that many questions on it, obviously, because it was a smaller part of Fortive and even smaller part of Danaher. So like why didn't that extra 30% get built out very simply, like and why now, basically?
It has been being built out over time. So there was a period in there where we tried to find the optimal kind of territory size for folks. But if we looked at a historical if we looked historically at the franchise growth, it's been pretty steady growth over time. So we continue to add franchisees. There's been years where we've added 100.
Most years, we've had less. But we have about a little over 1,800, call it eighteen fifty right now, which represents about 70% coverage. And we continue to work through that remaining 30%. And on a net basis, you lose some every year, you gain some. But I think it accrues to a pretty good opportunity for years, probably the better part of the decade to come for that business.
So before I go into the exciting world of M and A, let me just ask you something that's sort of related. One thing that I found interesting that you mentioned, I think, on the call was you suggested that you have 25,000,000 of revenue in Western Europe associated with electric charging. And so maybe talk about what that is actually because I don't think that you tell me, but I don't think that's associated with Tridium. So, you know, what that is and you keep talking about your learning, you know, in EV. Like, that's how you respond when I ask you about, you know, Tritium and drive, which is fine.
But, like, what does that mean? Like, does it mean that in three to five years, you will have learned and volunteer will be an EV or not?
Well, it's a challenging question because of how nascent electric charging market is. And it's a super expensive space. We're very happy to own a minority interest in two meaningful assets in the space. I think you won't hear us complain about the fact that we had moved into these minority interests given what's happened in the space. But what we say we've learned is, I think how EV charging is going to roll out, what technology is going to work in what locations, where the value how the value chain develops and where the profit pools develop within that is what we're learning.
And being close to a couple of businesses, one on the software side, one more so on the hardware side, provides us a bit of a front row seat to that. We've got to decide over time how exactly we play this, right? And it's meaningful to our customers, so it's meaningful to us. People get in United States, want fuel, only 99 percent go to a gas station, right? Charging will be a little bit different.
So when we see more EVs on the road, some people charge at home, some fleets will charge overnight, some people charge at work. But there's an over the road aspect to this that we think is very relevant to where we play today, both in on highway and in the city, convenience stores and refueling stations. And we think that infrastructure that's built out today will be meaningful to that. Now what we're seeing in Europe is our presence provides us the opportunity to be a distributor. And so the $25,000,000 you talked about roughly is our distribution of products into our existing customer base.
So where a customer wants has a site, it's a customer of ours and say, hey, you're good at doing all this different stuff on our site, can you also add charging to that? We can we do that and we distribute products manufactured by others. And in most cases, that's manufactured by Tridium. So we have a distribution arrangement with them for our most meaningful customer base, which is the retail fueling side.
Interesting. So that business just again, it's really small. So I don't know even how much time is worth talking about. But at the same time, I would imagine that's a business that you could theoretically scale if you wanted to. And maybe it's a more profitable business than sort of core EV charging because you know how to do it and its distribution?
Just out of curiosity.
Yes, I'd say it's still developing. I mean, it isn't a place where there's a lot of margin capture at this stage, I think anywhere along the supply chain, to be frank with you, because of how early stage the market is. I think those questions are it's meaningful. So we know we want to be there. Right now, we're doing it as a distributor.
But it is a way we can play it. I think that commercial arrangement is very meaningful to us. And we can source there or other people's hardware for that matter. But that's the development and the learning, Andy, that I think we're working through exactly how the role we want to play. There's aspects of service, there's aspects of service installation, tying it together with the other components that we help provide an overview of that site.
And there's a lot of software applications that are coming out. And every day you wake up, there's a new business with a new application. That's pretty interesting. So it's very dynamic space. And if I sat here and told you we thought we had it figured out, you should question that.
I don't think anybody does it this way.
No, that is for sure. So like without I mean, I understand that these agreements are confidential. So I will tiptoe around this question and just say, like when I think about 2021, like on our side, we know that in 2021, you have this option to buy the rest of Tridium, I guess. But I'm just as we go through the year, are we going to is it possible do we have to know? Or could we go through the year and we just don't find anything and you guys are quiet about it?
And you understand what I'm saying? Like is there some trigger that something has to happen in 2021?
Well, I you hit the high point, which is the terms of those agreements are confidential. I think what we are focused on is how do we want to move into the space at the right pace given the market development, the early stage nature of the market, both from a profit and cost standpoint too for that matter. So we need to work our way further into it. But what we do like is the optionality of these agreements that we've entered into. They provide us some optionality option value in what are proving to be a pretty good set of assets.
So more to come. I wouldn't want to get too far ahead of a decision we hadn't made, frankly.
Got it. So I will go away from that and ask you about cash flow for a second, and then we'll get into a little bit more on M and A. So look, I mean, you mentioned, I guess, just tough comparisons as you go into 'twenty one as you're growing 95% cash conversion. But like as you've really gotten your hands on the business, Dave, you came from, obviously, a company that we also knew. And you've looked at this business.
Do you see still low hanging fruit on things like inventory that you sort of could go after and improve to help versus the current expectations?
Yes. So first of all, one of the challenges, let's just talk about 2020 free cash flow versus 2021, Andy, to everyone's baseline. In 2020, we exited the year with working capital as a percent of sales, about 8.5% of last twelve months sales. And that's about a 300 basis point improvement where we exited the prior year, which was a pretty good number. So that was a big tailwind.
And as we moved into this year, 2021, I've said, I don't know that that's sustainable. We don't necessarily want that to be sustainable from an inventory perspective in particular. Now having said that, so we are running at all time best working capital levels entering the year. That is just absolute. And I think it's more of a headwind than not.
Having said that, within that, some things will be headwinds and we will continue to prosecute some opportunities that we think in certain select sites. But on par, in total, we want to build back some inventory in a number of cases, get some safety stock levels back, derisk supply chain some that's still at risk in a pandemic environment where things can crop up. But all in all, I mean, these are levels that this business hasn't seen and at least I haven't been able to find a period where they've performed at this level. And then there's some other uniqueness around the spin, I would add too. And mostly that's had the effect of deferring some tax payments out of 2020 into 2021.
So those are both fundamental headwinds we move into 2021. I think even when you look at the two years together, it's going to be great free cash flow generation, and that results from sustained improvements to working capital. And on par, I still guide people to, in normalized times, think about us as 100% free cash flow conversion and net earnings.
Yes. So when we think about M and A now, are there any end markets that maybe from a valuation perspective at least seem manageable that you could go after that, you know because again, as you know, we all are trying to figure out there's so many different ways a volunteer can go. Right? So like, I don't know any sort of direction to help us think about the ways you could go. I guess I would just ask you, is there any sort of end markets where valuation appears like reasonable based on all these end markets that you're in?
Yes. Well, I'm with you. Things are more expensive. Money is incredibly cheap. At the same time, our cost of capital is helped by that as well.
So I think we'll continue to look at our own return metrics in this period of time and when we see getting to double digits. So what we want to provide is returns that are good spread over our cost of capital. Having said that, you've got like on one end of the spectrum, what we're seeing in the SPAC market in the EV world. At the other end, though, closer to where we play around our retail environment, retail fueling. I think there's still some things where we add value, we get synergy that are good opportunities for us, and then a lot in between.
In the telematics and smart city space, it's a spectrum. But as you know, valuations may be high, and we will remain focused on returns and creating shareholder value. We believe that M and A remains the best opportunity to do that. We've talked about being a little more middle of a fairway. So maybe not exactly a core bolt on, but maybe something that touches a place we play today.
So valuations aren't helping. I think it's a challenging valuation market, but I wouldn't I don't think that necessarily means we can't get returns at the level we're looking for. And especially as we focus down the middle of the fairway, which is maybe a little closer home, at least in the early days here.
Would you be surprised if you don't close a couple of small deals at least in 'twenty one?
This stuff's so episodic, it's tough to say. So I don't know if I'd be surprised, but I will tell you, we'd like to. I think we have both balance sheet in place. We've got the team to do it. And we've got the foundation of businesses that we can acquire either into or next to that provide us that opportunity.
So we the cultivation efforts didn't stop as part of the spin. There's a lot of this activities run at the operating company level. And those people at the operating companies are doing the same things they did under volunteers they were previously doing on the Fortive pre spin. So funnels remain, cultivation activity remains. So we'll see, right, I'd be careful not to get too far over my own skis hey, this is when something will happen.
But we when we have conviction around the right asset, we'll be ready to go.
I got one more minute. So let me ask you one more question. So recurring revenue is something that Ford have talked about a lot and dialed it up over time. And you mentioned Teletrack and Admin, for example, and they have SaaS based business. You guys are in sort of the mid-twenty percent range in recurring.
Do you guys I mean, is that a focus to increase recurring revenue at Volunteer over time? Because obviously, sort of worked for Fortive to help their multiple, I think. Is that something that you guys think about?
Well, I think what we've said to date is, look, we like software, but we tend to talk more about technology. We like recurring revenue, but we're not as deterministic around that, I would say. So we like it. We think it's a component of the places we're looking to we're spending more time investigating. But I think we're less viewing that as the metric and more helping to bolster the future growth profile of the businesses and find things that are complementary in this kind of more defined set of markets that we operate within.
So we like that stuff. I wouldn't be surprised if we see more of it, particularly on the recurring revenue side. But it isn't the goal, if you will. I would say it's a byproduct of the goal.
Excellent. Well, Dave, Lisa, very much appreciate you guys joining us. Hopefully, we'll see you very soon. Stay safe and thanks again.
Thank you, Andy. Appreciate it. Good to talk to you.