All right. Good afternoon again to everyone. We're delighted to be joined by the Vontier team. With me, we have Mark Morelli, CEO, and David Naemura, CFO. Lisa Curran of Investor Relations is also here. What I'm going to do now is kick it over to Mark for a couple of prepared remarks, then we'll jump into Q&A.
Yeah. Thank you, John, for having us. Really happy to be here. We've got a couple 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. Then go over to slide three, because that's where we're going to start off on. Vontier is an industrial technology company of 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. This is split between SaaS revenue and service revenue.
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, this gives us an ability to invest in our business and to accelerate growth through M&A. VBS, or the Vontier 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. 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. This represents an attractive $27 billion 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 Veeder-Root. 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 install base, and it allows us to expand into attractive adjacencies such as e-mobility, smart cities, and logistics and supply chain. Diagnostic and Repair, or DT, as I mentioned, consists of our Matco and Hennessy brands.
There's great drivers here, like increasing miles driven, an aging car park, and an increasing complexity of repair. All these are great backgrounds to drive our businesses. 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. We're well-positioned with our business model to create value through reinvesting strong cash flows to compound earnings through M&A. Our longer-term model here is for core revenue growth of GDP plus and to continue to expand already great margins. We're looking at expansion of 25-50 basis points of OMX. Through our separation from Fortive, we have an enhanced focus on these five operating companies that I showed you on the previous page. 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&A and compounded earnings, as I mentioned. It's rightly represented here too, because VBS is at the center. It is what we do. It's how we get things done. It's got roots in the Danaher Business System and the Fortive Business System, it powers our business model. This is a heritage that few other folks can really lay claim to. If you go to my last chart. In summary, Vontier 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. We have an excellent runway of improvement opportunities ahead.
Capital deployment will be focused on strategic and financially disciplined M&A, and we have the experience and leadership to execute a transformational compounding strategy to unlock shareholder value. 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, thank you for that introduction there. Helps set the stage for sure. We've been asking everybody, first I'd like to say thank you for having a guidance framework out there for Q4. Just 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.
Yeah. Well, we appreciate that. 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's served us exceedingly well, as you can see through our performance through last quarter. We're optimistic that we continue to pull the levers that we are able to manage accordingly. Just from a macro perspective, we believe that China continues to be soft and the national oil companies in the United States have continued to buy through the EMV cycle. These kinds of trends that we talked about are still in place today.
We continue to see healthy demand too, and serving that demand is our job to do in these difficult times. We're pretty happy with our performance so far and continue to be optimistic through the launch of Vontier.
Great. I guess as you think about the launch of Vontier, so you spun out from Fortive right here in the midst of COVID. Obviously, only a couple of months here under the belt, but what have you either had to accelerate or maybe push to the side as you're dealing with the pandemic, relative to that initial strategy you laid out for investors?
We're certainly living in interesting times. Separating a company in this environment brings its own challenges. At the same time, it also brings some unique opportunities. To launch a company in this kind of environment really brings the management team closer together. We've had to do a fair amount of hiring, bring the team closer, and dealing with some of these issues in the intensity of having to manage the business has really formed strong relationships. We think this is not only giving us a great ability to manage what we're able to do now, but also is going to set us up exceedingly well for the future. Managing through adversity is one way to form good teamwork, and we're kind of taking advantage of that opportunity, if you will.
I mentioned VBS now a couple times. It's an excellent time too, because we're able to deploy quickly. While part of Fortive, the business system, which was FBS, we've taken that directly into VBS and into daily and weekly KPIs and how to manage that and deploy around what we need to deliver on. That's served us exceedingly well. We've had to do some shifting of resources, we call that DRA or dynamic resource allocation. 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. It's worked really well online. We've deployed digitally many of these tools and capabilities. We're actually surprised on how well they've worked out for us.
I think some of the things is that we also have to work through too, is we're pretty happy with where we stand on the M&A front. As you know, the bid-ask spreads have widened kind of through this pandemic process. We're pretty happy with seeing where we are and look forward for good things to come.
Great. Maybe we could talk about GVR first. Largest business. You are selling multiple different products into that retail fueling station, whether it's the dispenser, point of sale, et cetera. 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? A follow-on to that is, I think the dispenser is 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. First of all, it's different in the most sophisticated C-store format that you have out there, and typically the content is anywhere between $75,000-$100,000. It's not only the hardware in the forecourt, which is what you see as you refuel 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, which is the back office systems. There's lots of software that's also part of that. A lot of automation, if you will, of what you sort of see in that whole operation. Really a strong linkage to how that retailer makes money through the point-of-sale system, even including advertising.
That's a pretty sophisticated offering, which includes environmental regulation and compliance to safety compliance to obviously how they make more money. When you look at outside of the U.S., that content is very different. In a refueling kiosk in a high-growth market, it's mostly about refueling operations. That might only be $25,000 per footprint. What's happening is there's a trend for greater automation because of the need for greater security. One of the reasons is security of, are you making sure you're going to get a gallon or a liter of gas? How you do that through automation and more software. They are 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, and the developing countries want all these things, too.
That adds to a capability to move up the food chain, if you will, there, as they build out their refueling infrastructure as well. Part of what you asked for is the bundling question. It's a little bit different. In the United States, the smaller network folks, there's typically not a bundling. More in the national account type footprint in the United States, there might be a bundling of the product. It's interesting, while dispensers might represent 45% of the sales, we're actually using bundling with those national account folks more with the point-of-sale system. That's their point of actually reference for making money, where you can add the most value to them, and that actually can pull the rest of the sales, such as dispensers.
Great. That's a very helpful answer. I guess the follow-on question to that is, 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?
Yeah. 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 1.2 billion vehicles, is electrified. That will certainly grow at a rapid rate. Even by 2030, it's still going to be less than 10% of the global car park. 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 into Tritium and Driivz, because that really gives us a front-row seat there.
What we're pretty convinced about is that retailers are in it to make money, and 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 going to be pretty integral regardless of whether they're selling beer, making sandwiches, doing refueling operations, or doing electric charging. I think being part of that and being integral to that, predominantly where we do that in the U.S. today, and obviously look to expand that, is an area, I think, of interest pretty much for every retailer.
Yeah. Maybe shifting gears a little bit here. I think you guys have been very public about the EMV headwind that you see for next year in the U.S. I think you also noted a little bit of 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. What are the sizes of some of these offsets to that EMV headwind that you see today?
Yeah. John, I'll take that. Your point is right. First of all, EMV is just North America for GVR. Granted, it's been a great tailwind, and we will hit the adoption deadline in April of next year. How that exactly plays out is something we're going to 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 out of 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. 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 of both China and India.
Probably 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 oil prices. We'll see the degree to which that recovers. We do anticipate a return to growth of kind of mid- to high-single digits in emerging markets when we get into next year or in those areas. At this point, 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 we'll continue to see. Also, our Repair Solutions has historically been a very nice low-single-digit growth business.
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 change when things happen, depending on COVID availability and some of those things that historically have been a little more seasonal in nature. We anticipate that being a tailwind for us next year as well, kind of returning to that steady growth and aided a little bit by the easier compare. 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 franchisees.
John, aside from revenue, of course, we're leveraging VBS to pursue a number of activities to help operating profits, both in terms of simplification as EMV rolls off and not just from EMV volumes declining, but also we have a very large, very global business, and 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 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. Finally, you saw us announce the beginning of some restructuring here in the fourth. That is really restructuring that kind of facilitates some of these activities, but is a little more permanent cost takeout, whereas most of the actions we took in the midst of the pandemic were very temporary in nature.
The last thing I'd say, of course, all of that is before M&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, since you touched on, or both of you touched on M&A. 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. Anything around some of maybe the return metrics that you use as you evaluate potential transactions?
Let me talk to the return metrics, I'll let Mark maybe talk about pipeline. I think you'll hear from us return metrics and thresholds that sound very familiar from our predecessors. We use ROIC as our primary valuation return metric. 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. For things that are more adjacent, a little more strategic in nature, we would see maybe that 10% threshold pushing out to, say, a year five. We have a variety of deals that we'll look at, things that are adjacencies versus very much in the core in existing funnel today, and I would anticipate you'll see a wide variety of deals from us, probably a little closer down the middle of the fairway in the earlier days.
As far as markets and pipeline, I'll let maybe have Mark comment.
Yeah. We were talking about sort of a Danaher heritage a little bit earlier. Danaher and Fortive have always said it's difficult to predict the timing. Also one of the legacies here is that 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. While the bid-ask spreads have been widening, we're not surprised by that, but we're 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 and adjacencies for sure are very attractive. As well as many of these folks are in the hands of private equity companies today. Obviously, I think our approach there is probably not going to surprise people a lot.
Our M&A capacity, I think is significant, about $1.5 billion in cash over the next two-three years, driven by also strong free cash flow generation. Just keep in mind that our approach is 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 also spending time on, as you can imagine, to make sure that it's strategy-led and that we'll get to the right decisions based on that being out front for us. 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 to have a very strong free cash flow quarter here in Q4. It's what we're all anticipating. I guess the question is, as we look forward, is there anything just to be mindful of in, I would say, more near term headwinds or tailwinds? I think over the longer period, you've demonstrated a very strong, consistent free cash flow margin. 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. They've really been on the backs of, through the third quarter of a really unprecedented, historically unprecedented working capital performance. We leveraged VBS early and often here to really get out in front of some of the potential headwinds. 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. I think, of course, we'll manage it, I think, as well as it can be managed. Ultimately, being so far below historic levels, I think things will normalize when we come out of the pandemic and kind of business activities normalize.
I think that could be a headwind next year, $50 million-$70 million, depending. Maybe 2%-3% of LTM sales. 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. By the time we get to year-end, our free cash flow will represent three payments in 2020, whereas next year we'll have five. Two more next year will be about a $60 million year-over-year headwind. Obviously, this year we're looking at conversion rates that are well above the 100% kind of rate we talk about as kind of more of a long-term normalized rate for this business that we think will normalize back once we get to a more normalized environment and also through some of the dynamics impacted by the spin.
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. As we look forward, right? You have these investments in Tritium and Driivz, which you noted earlier. I think you've highlighted they have pretty strong positions, but how should we, or when should we think that we're going to know who is really positioned for this transition to EV when it eventually happens, right? Do we know who's going to win today yet? Do we need more time because there are still people entering the market potentially?
It's a great question, John, because the ICE car park is going to continue to grow, and will continue to give us strong free cash flows for a good time to come here. At the same time, this is a really interesting evolving trend, and we consider this an and opportunity, not an or opportunity, which is obviously why we've done investments in companies like Tritium and Driivz. We've really done that because it is so difficult to figure out this changing landscape and how is it going to play out, and who are the players going to be, and where are the legitimate places for e-mobility should we play that not only capture growth but also capture margins. 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. It's a pretty dynamic situation. It's early innings, so 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. Of course, our customers are asking us questions as they're beginning to figure things out. I think a lot to come as this market evolves. There's many players that are obviously involved in it too.
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 half a million vehicles that we monitor. There's a lot that we have out there already in this space that we can combine with these investments and continue to learn.
Great. I think we've covered a lot around Teletrac Navman in the last couple of earnings quarters. Maybe one company that doesn't get as much air time is GTT. I would say smart cities is kind of a really big word, right? It catches a lot of different opportunities. What should we be excited about with that business, and what are you thinking you can do longer term in that space?
Yeah. GTT or Global Traffic Technologies is really a toehold in that space. It's a small business in a very large market, a $7 billion market with really good growth rates at mid-single digits. We think they're pretty attractive from many dimensions. The secular drivers there I think are pretty significant, but they drive some very different things. 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 GTT. An example of that might be in the tolling area or parking areas could have interest as well. 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.
It's attractive to build off that platform, but it's, I think, a generally attractive space with a lot of dynamics that we think could give some growth-y margin leverage to opportunities. Yeah, we're happy about continuing to explore the depth of what smart cities might offer.
Great. I'm going to be mindful of the clock sneaking in this question here. 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. 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, 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. 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. We usually carry very little backlogs. We wouldn't carry a lot of backlog in if that's what we mean by line of sight. We like the runway of opportunity.
I talked about it as one of the EMV offsetting growth items for next year. I think, especially on the easy compare, I think we like the position we're taking into the year, plus the opportunity to add new franchisees in the unpenetrated territory. 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. 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.