Alright. Good afternoon again to everyone. We're delighted to be joined by the volunteer team. With me, we have, Mark Morelli, CEO and Dave Nyamora, CFO. Lisa Kuran of Investor Relations is also here.
And what I'm going to do now is kick it over to Mark for a couple of prepared remarks, and then, we'll jump into Q and A.
Yes. Thank you, John, for having us. Really happy to be here. If, we've got a couple of slides that you can follow along with. You can also reference them on our website.
You can see our, safe harbor statement, which you can, certainly reference at your own, volition. And then go over to slide three because that's where we're gonna start off on. And, so you know, Frontier is an industrial technology company at scale with a portfolio of market leading brands and technology solutions. We have a large global installed base with low cyclicality. If you look at our revenue profile shown here in the lower right, about 30% of our revenue comes from retail fueling hardware, 20% from auto repair, and about a quarter of our revenues are recurring revenues.
And this is split between SaaS revenue and service revenue. And then the balance of our revenue predominantly comes from environmental solutions and retail solutions. Smaller contributions of our revenue come from smart cities and e mobility. We have an outstanding financial profile and strong margins and free cash flow shown through the right hand side of this slide. In fact, we're top quartile or in line with premium industrial technology peers.
We have an investment grade style balance sheet and strong free cash flows, and this gives us an ability to invest in our business and to accelerate growth through M and A. BBS or the Frontier Business System is the foundation of how we get things done. It's our business systems. It's also the basis for organic initiatives to enhance our growth as well as to continue to expand already strong margins. And we have a proven track record for strategic portfolio transformation.
If you go to Page four, we have two major platforms, Mobility Technologies or MT and Diagnostic and Repair Technologies or DT. And this represents an attractive $27,000,000,000 market that are fragmented and growthy markets. This is an excellent platform for long term growth and gives us the opportunity to move up the technology stack in each of these platforms. Let's take a look at MT or Mobility Technologies. This consists of three businesses, our largest of which is GVR or Gilbarco Viteroute.
We have smaller business in GTT or Global Traffic Technologies, and we have a fleet monitoring managing business called Teletrac Navman. This is an excellent installed base and it allows us to expand into attractive adjacencies such as e mobility, smart cities, and logistics and supply chain. Diagnostics and repair, DT, as I mentioned, consists of our Matco and Hennessy brands. And, you know, there's great drivers here, like increasing miles driven and aging car park and increasing complexity of repair. And all these are great backgrounds to drive our businesses.
And this this platform gives us opportunities to leverage into workflow solutions and diagnostic software. Let's turn to Page five. This is what we call our value creation flywheel. And we're well positioned with our business model to create value through reinvesting strong cash flows to compound earnings through M and A. Our longer term model here is for core revenue growth of GDP plus and to continue to expand already great margins, and we're looking at expansion of 25 to 50 basis points of OMX.
You know, through our separation from Fortive, we have an enhanced focus on these five operating companies I showed you on the previous page, and this gives us significant runway for profitable growth. Also, part of our business model is leveraging a strong balance sheet at separation. It's investment grade style that accelerates growth through m and a and compounded earnings, as I mentioned. You know, it's rightly represented here too because VBS is at the center. It is what we do.
It's how we get things done. And it's got roots in the Danaher business system and the Fortive business system, and it powers our business model. You know, this is a heritage that few other folks can really lay claim to. If you go to my last chart, in summary, Von Teer is a high quality, low cyclicality industrial technology company serving a large attractive market. VBS is our foundation.
It's the business system by which we enhance our organic growth profile and further expand already strong margins. And we have an excellent runway of improvement opportunities ahead. Capital deployment will be focused on strategic and financially disciplined M and A, and we have the experience and leadership to execute a transformational compounding strategy to unlock shareholder value. So thanks for your interest. We're excited to talk about our business today, and we're excited to mobilize the future to create a better world.
With that, John, we'd love to take some questions.
Great. And, thank you for that introduction there. It helps set the stage for sure. We've been asking everybody, and first, I'd like to say thank you for having a guidance frame out framework out there for Q4. But, Yunus, as we stand here in December, anything that you would either highlight, as it relates to the guidance you laid out on the last quarterly call, just want to give you an opportunity.
Yes. Well, we appreciate that. You know, there's no update from our third quarter remarks that we made. As you may remember, third quarter outlook already contemplated some uncertainty in the market related to the pandemic. At the same time, what we've also talked about is leveraging VBS, which I talked about in my prepared remarks as well, and that served us exceedingly well, as you can see through our performance through the last quarter.
And we're optimistic that we continue to pull the levers that we are able to, to manage accordingly. And, you know, just from a macro perspective, you know, we believe that, you know, China continues to be soft, and the national oil companies in The United States have had, you know you know, continue to to buy through the EMV cycle. And these kind of trends that we talked about are still in place today. And then we continue to see, you know, healthy demand too, and serving that demand is is, our job to do in these difficult times. But we're pretty happy with our performance so far and continue to be optimistic through the launch of Vontier.
Great. And then I guess as you think about the launch of Vontier, right, so you spun out from Fortive right here in the midst of COVID. Obviously, only a couple of months here under the belt. But you know, what have you either had to accelerate or maybe, you know, push to the side as you're dealing with the pandemic, you know, relative to that initial strategy you laid out for investors?
You know, it's, you know, we're certainly living in interesting times and separating a company in this environment, you know, brings its own challenges. At the same time, it it also brings some unique opportunities. And, you know, to launch a company in this kind of environment really brings the management team closer together. You know, we've had to do a firm amount of hiring, bringing the team closer in dealing with some of these issues, in the intensity of half having to manage the business. It's really formed strong relationships.
And we think this is not only, you know, given us a great ability to manage what we're able to do now, but also it's gonna set us up exceedingly well for the future. So managing through adversity is is one way to form good teamwork, and we're kind of taking advantage of that opportunity, if you will. At the same time, you know, I mentioned VBS now a couple times, but, you know, it's a it's an excellent time too because we're able to deploy quickly. You know, while part of Fortive, you know, the business system, which was, you know, FBS, and we we've taken that directly into VBS and, you know, into, daily and weekly KPIs and how to manage that and deploy around what we need to deliver on. And that's that's served us exceedingly well.
We've had to do some, you know, shifting of resources. We call that DRA or dynamic resource allocation, and we've obviously taken advantage of that as well. We've had to deploy online Kaizens. Those of you that are familiar with that, it's typically an in person, pretty intense process. And but it's worked really well online.
And so we've deployed digitally many of these tools and capabilities, and we're we're actually surprised on how well they've worked out for us. So, you know, I think some of the thing is that that we also have to work through too is, you know, we're we're pretty happy with where we stand on the m and a front. But as you know, you know, this you know, the bid ask spreads have widened, kind of, you know, through this pandemic process. But we're we're pretty happy with, seeing where we are and and look forward for good things to come.
Great. So maybe we could talk about, GVR first. Right? Largest business. You know, you are selling multiple different products into that retail fueling station, whether it's the dispenser, point of sale, etcetera.
One, I don't know if you could put a number around what is that actual opportunity per retail fueling station as you see it if somebody took all your complete solution. And then, you know, a follow on to that is I think the dispenser's the largest part of that number as I understand it. Does that pull through other stuff, or is it a bundle, I guess, is kind of another way of asking the question. But just trying to understand a little bit better about how your customer buys your solutions.
Yeah. Let me describe that to you. So first of all, in the it's it's different reads different or the most sophisticated, C store format that you have out there. And typically, the content is anywhere between 75,000 to a 100,000. And it's not only the hardware, you know, in the four court, which is what you see as you refuel your your car or your truck, and then also below ground equipment, as well as the point of sale system inside their retailer, the head office system, how the fuel might be managed and delivered to the site, you know, which is the back office systems.
So there's lots of software that's also part of that. So a lot of automation, if you will, of what you sort of see in in that whole operation. And and really a a strong linkage to how that retailer makes money through the pure point of sale, including advertising. And so that's a pretty sophisticated offering, which includes environmental regulation and compliance to safety compliance to, you know, obviously, how they make more money. When you when you look at, you know, outside of The United States, that content is very different.
And a refueling kiosk in a high growth market is mostly about refueling operations. That might only be $25,000, you know, per footprint. But what's happening is there's a trend for greater automation because of the need for greater security. And one of the reasons is security of are you making sure you're gonna get a gallon or a liter of gas? And so how you do that through automation and more software.
So they tick they're typically going more higher end. And as they go more higher end and offer more automation there as well as for compliance reasons for environmental issues and for safety, The developing countries want all these things too. So that adds to a capability to move up the food chain, if you will, there as they build out their their refueling infrastructure as well. Part of you what you asked for is is the bundling question. And it's a little bit different.
In the smaller in United States, the smaller network folks, there's typically not a bundling. But in the more in the national account type, footprint in United States, there might be a bundling of the product. Interesting. While dispensers might represent, you know, 45% of the sales, we're actually using bundling what those national national account folks more with the point of sale system. Because that's their point of actually reference for making money where you can add the most value to them, and that actually actually can pull the rest of the sales, such as dispensers.
Great. That's a very helpful answer. So then I guess the follow on question to that is if we and maybe it's too soon, but if we were to look into the future more around an EV type station, or maybe you can answer this today, does that dynamic change versus a liquid pump dispenser versus an EV dispenser?
Yes. So I think you answered a little bit there yourself. It's pretty early innings. Keep in mind, the car park itself, less than 1% of the global car park or 1,200,000,000 vehicles is electrified. And, you know, that will certainly grow at a rapid rate.
But even by 02/1930, it's still going to be less than 10% of the global car park. But as that builds out, we're currently very involved with how decisions are being made and how that might play out. In fact, that's why we've done two investments in the Tritium and Drives because that really gives us a front row seat there. But what we're pretty you know, convinced about is that retailers are in it to make money and to we're we're in it to help them do exactly that. And through things like our point of sale system, our head office system, our software solutions, it's something that's gonna be pretty integral regardless of whether, you know, they're selling beer, making sandwiches, doing refueling operations, or doing electric charging.
So, you know, I think being part of that and being integral to that predominantly where we do that in The United States today and and obviously look to expand that is is an area, I think, of interest, you know, pretty much for every retailer.
Yeah.
Maybe shifting gears a little bit here, but I I think you guys have been very public about the EMV headwind that you see for next year, in The US. I think you also noted a little bit of a potential headwind out of Mexico. There are some things to offset that, right? You have, I think, some growth maybe in India coming depending on COVID. But what are the sizes of some of these offsets to that EMV headwind that you see today?
Yeah. John, I'll take that. Your your point is right. So first of all, EMV is just North America for GVR. Granted, it's been a great tailwind, and we will we will hit the adoption deadline in April.
And how that exactly plays out, you know, it's something we're gonna continue to update folks on. We've taken our best estimate and shared that with folks at the time. We've also got a little bit of a headwind down in Mexico. There's been a strong fiscal regulatory driver down in Mexico that we've seen some benefit from beginning in the third and kind of continuing through the fourth. But we would anticipate seeing recovery for the rest of GVR, not as well as kind of North America, non EMV, but more rest of world as well, including high growth markets.
We expect to see a rebound in both China and India. Quite a little more confident with India on the back of some secured orders. A little more uncertain environment in China as the national oil companies have profitability that gets impacted by lower lower oil prices. So we'll see the degree to which that recovers, but we do anticipate, return to growth of, you know, kind of mid to high single digits in emerging markets when we get into next year or in those areas. At this point, you know, we'll see how COVID plays, but we don't think COVID will be a big impact, around year end or pushing demand out of the year.
We've talked about strong EMV as we come through the back half of this year and continuing, into next year, and we anticipate that's what that's what we'll continue to see. Also, our diagnostics and repair platform has historically been a very nice low single digit growth business. And I would add that this year, there will be a bit of an easier compare, particularly in the second for that business. Now some of their events might might change, you know, when things happen depending on COVID availability and some of those things that historically have been a little more seasonal in nature, but we anticipate that being a tailwind for us next year as well, kind of returning to that steady growth and aided aided a little bit by by the easier compare. And that would also include continued franchise growth at Matco, where we've talked also very publicly about having about 30% of our territories unpenetrated in that business and continuing to sign up new new franchisees.
And then, you know, John, aside from revenue, of course, we're pursuing leveraging VBS to pursue a number of activities to help operating profits, both in terms of simplification, as EMV rolls off and, you know, not just from EMV volumes declining, but also we have a very large, very global business, I think we have opportunity to drive some simplification there. We have a couple operating companies we've been public about saying, hey. They're they're below the fleet average OP levels, and we think there's an opportunity to bring those up. So we'll be concentrating activities on those as well. And then finally, you saw us announce the beginning of some restructuring here in the fourth.
And and that is really restructuring that kind of facilitates some of these activities, but it's a little more permanent cost takeout, whereas most of the actions we took in this pandemic were very temporary in nature. And then I the last thing I'd say, of course, all of that is before m and a, which remains a capital allocation priority for us and a lever which, of course, will be episodic in nature, but something that we see as a growth opportunity in the future as well.
Very helpful. I guess, you touched on or both of you touched on M and A, you know, always difficult to know the timing of anything, but how are you feeling about the pipeline? You did comment on the bid ask spread earlier. You know? And then anything around some of the, the maybe the return metrics that you use as you evaluate, potential transactions.
Let me talk to the return metrics. Let let, Mark maybe talk about pipeline. You know, I think you'll hear from us, return metrics and thresholds that you've that we sound very familiar from from our predecessors. You know, we use ROIC as our primary valuation return metric. And, you know, we think of a 10% ROIC in year three for things that are a little more in the core.
Definitely for a bolt on, we would hope to exceed that. And for things that are more adjacent, a little more strategic in nature, we would see maybe that 10
You know, we're talking about sort of the Danaher heritage a little bit earlier. And, you know, Danaher and Ford have always said it's difficult to predict the timing. But also one of the legacies here is that, you know, we do have a process in our operating companies where we have a robust pipeline and cultivation is sort of key to what they do. And so, while the bid ask spreads are have been widening, we're we're, you know, pretty we're not surprised by that, but we're, you know, pretty happy with the position that we're in. As Dave said too, we're looking at a variety of things, both bolt ons, larger acquisitions, near in adjacencies for sure, are very attractive as well as many of these folks are in the hands of private equity companies, today.
So, obviously, I think our approach there is probably not going to surprise people a lot. But our M and A capacity, I think, is significant, about $1,500,000,000 in cash over the next two to three years, driven by also strong free cash flow generation. And just keep in mind that our approach is that a disciplined approach, as I said in my prepared remarks, that it's led by doing our strategy, how can we accelerate our strategy. It's something we're we're also spending time on, as you can imagine, to make sure that it's strategy led and that, you know, we'll get to the right decisions, you know, based on that, you know, being, out front for us. So happy to engage further and update you as we make progress.
You touched on earlier about the strong free cash flow margin of the business. We can clearly see that in what you've reported thus far as an independent company. I think you're going have a very strong free cash flow quarter here in Q4. It's what we're all anticipating. I guess the question question is, as we look forward, is there anything just to be mindful of in, you know, I would say, more near term headwinds or tailwinds?
Because I think you've, over the longer period, you've demonstrated a very strong, consistent free cash flow margin. So just I guess the question really is, is there anything to be aware of near term in terms of the absolute free cash flow generation of the company and then kind of the confidence that over the long term, you can maintain that strong free cash flow margin we've seen.
Great. You're spot on. The conversion ratios we've seen on a year to date basis have been extremely strong, and they've really been on the backs of you know, through the third quarter of really unprecedented historically unprecedented working capital performance. And we leveraged DBS early and often here to really get out in front of some of potential headwinds. And the teams at the operating companies have done an incredible job in, managing working capital.
We see some of that normalizing here, in the fourth, but we'll still be at historically low levels that we hadn't seen. So I think, you know, of course, we'll manage it, I think, as well as it as well as it can be managed. But ultimately, being so far below historic levels, I think things will normalize when we come out of the pandemic and and, you know, kind of business activities normalize. So I think that could be a headwind next year, you know, 50 to $70,000,000 depending, you know, maybe 2% to 3% of LTM sales. We'll we'll see how that goes.
Also, there's a little bit of noise in the year around federal income tax payments as a nature as a function of the split. So by by the time we get to year end, we will our our free cash flow represent three payments in 2020, whereas next year, we'll have five. And so two more next year will be about a $60,000,000 year over year headwind. But, you know, obviously, this year, we're looking at conversion rates that are, you know, well above the 100% kind of rate we we talk about as kind of more of a long term normalized rate for this business, and we think we'll normalize back once we get to more normalized environment and also do some of the dynamics impacted by the spin. But I'm glad you brought that up.
Thank you. I guess, maybe this is a kind of a capital allocation and an end market question wrapped into one, but 100% appreciate your comments around the car park. You know, as we look forward, right, you have these investments in, you know, Tridium and Drive, which you noted earlier. I think they've they've you you've highlighted they have pretty strong positions. But how should we or when should we think that we're gonna know who is really positioned for this transition to EV when it eventually happens?
Right? Do we know who's gonna win today yet, or do we need more time because there are still people entering the market potentially?
Yeah. You know, it's a great question, John, because, you know, the ice car park is gonna continue to grow and will continue to give us strong free cash flows for for a good time to come here. But at the same time, this is a really interesting evolving trend, and and we consider this an and opportunity, not an or opportunity, which is obviously why we've done investments in in companies like Tritium and Drives. And we've really done that because it is so difficult to figure out this changing landscape and how is it gonna play out and who are the players gonna be and where are the legitimate place for e mobility should we play that not only capture growth but also capture margins. And so these investments, it's not just about studying the market and doing strategy work and doing VOC.
It's about how you can participate in it through these minority investments. It gives us that front row seat, which is an excellent opportunity for us to engage also in the business as it's beginning to evolve and develop. And it was a pretty dynamic situation, and it's early innings. So we're we're really happy with our position that we're in right now, so we can continue to learn and continue to pick through that. And, of course, you know, our customers are asking us questions as they're beginning to figure things out.
So I think a lot to come as this market evolves. And there's many players that are obviously involved in it too. But we're really excited about what we have to leverage too, which is an excellent installed base already in terms of either the footprint, in terms of the number of intersections we're on or the number of refueling stations that we're at, to the amount of 5,000,000 vehicles that we monitor. So there's a lot that we have out there already in this space that we combine with these investments and continue to learn. Great.
So I think we've covered a lot around Teletrac, Navman in the last couple of earnings quarters, but maybe one company that doesn't get as much airtime is is GTT. And, you know, I would say smart cities is a kind of a really big word. Right? It catches a lot of different opportunities. But, you know, what what what should we be excited about with that with that business?
And what are you thinking you can do longer term in that space?
Yes. You know, GTT or Global Traffic Technologies is really a toehold, you know, in that space. You know, it's a small business in a very large market, you know, $7,000,000,000 market, you know, with really good growth rates at mid single digits. You know, we think pretty attractive for many dimensions. So the secular drivers there are I think are pretty significant, but they drive some pretty different things.
So it's conceivable we could build out around GTT or it's conceivable we can even operate in that space with not a lot of connectivity to DTT. And an example of that might be in the tolling area or parking areas, could have interest as well. So I think as we pick through that market opportunity, I don't think we're constrained by our investment there. It's been a great learning as well. But it's attractive, to build off that platform, but it's, I think, generally attractive space with a lot of dynamics that we think could give some growthy margin leveraged opportunity.
So, yes, we're happy about continuing to explore the depth of what Smart Cities might offer.
Great. I'm just I'm going to be mindful of the clock sneaking in this question here. But obviously, you talked earlier about Matco. I think as we look into next year, given your backlog, I think there was a little bit of supply chain disruption. Are we should we feel very confident that you have line of sight probably pretty good already for 2021 or at least the first half of that for that business?
Yeah. John, I'll you know, we we talked in the third quarter about having some supply chain constraints there, which I think we've pretty much gotten through. It should be a very short cycle business. We don't carry backlog there. We've been carrying backlog.
As far as the market we've seen, we talked about how that came back very well in the third, and we anticipated that environment kind of continuing on for the foreseeable future. So we'll see how next year looks. I think we want to get through the quarter before we think we have line of sight. It's a very short cycle business, but it's a great steady growing business. And I don't you know, we usually carry very little backlogs.
We wouldn't carry a lot of backlog in if if if that's what we mean by line of sight. But we like the runway of opportunity. You know, I talked about it as one of the EMV offsetting growth items for I think, you know, especially on the easy compare, I think we, we like we like the position we're taking taking in into the year, plus the opportunity to add new franchisees in the unpenetrated territory. So we really like the hand we're playing there.
Great. Well, just looking at the time, and I think this is the point where I'd like to thank, Mark and Dave and the team for joining us here virtually. We do hope that next year we can be live, and in person. But, I hope that everyone stays well and safe. And once again, thank you for the time and for being candid with your answers.
Yeah. Thanks for having us, John.
Great. Take care, everybody.