Good morning, and welcome to certainly welcome to the second day of Baird's fiftieth Annual Industrial Conference. Very pleased to have this session with Volunteer Corporation. Again, I'm Rick Eastman, Managing Director and Senior Equity Analyst here at Baird. And with my wingman, Rob Mason, I do head up the Advanced Industrial Equipment sector here for Baird. So let me introduce Volunteer very briefly.
Volunteer is a global industrial technology company focused on smart transportation and mobility. Their portfolio of five operating companies offer innovative solutions to advanced safety, security, efficiency and environmental compliance worldwide. Volunteer was 80% spun out from Fortive on October 9 and carries with it a proven business system, an experienced leadership team and a culture of continuous improvement from both Fortive and prior to that from Danaher. So with that, I'd like to introduce Mike Morelli, President and CEO, also Dave Nomura, SVP and Chief Financial Officer. Mark is going to lead us through some overview slides here and get us oriented.
We'll then have time for fireside chat questions from me. And if you have some question or two, please send it to reastman@rwbear.com, and I'll work it into the back end of the fireside chat. So with that, Mark, I'll hand off to you for the introduction. Mark, I don't think I'm not hearing any sound here. You may be muted.
Yeah. There we go. Okay.
Yeah. Thank you, Rick, for the introduction. We're certainly happy to be here. You can see here our safe harbor statements. I know folks will review them at their leisure.
And just as a reminder, our slides will be uploaded onto our website if you want to access them. So turning to Slide three. Volunteer is an industrial technology company with a portfolio of market leading brands and technologies. And we have a large global installed base with low cyclicality. As you can see here in the lower right hand portion of this slide in that pie, about 30% of our portfolio is tied to retail fueling hardware.
About 20% is for auto repair. And then about a quarter of our revenue is recurring revenue, and that's represented with a split between SaaS and service businesses. And then the balance of the the revenue comes from environmental and retail solutions with smaller contributions from e mobility offerings as well as smart cities. We have also excellent financial profile. And if you can see our strong margins here on the right and our strong free cash flow conversion, all of Bonnier's financial characteristics are top quartile or in line with industrial technology premium peers.
We have an investment grade style balance sheet and strong cash generation. And this gives our ability to an ability for us to drive both our growth and accelerate our growth as well as our ability to do M and A. And we have a volunteer business system, and that's something we call VBS. It's the foundation of our organic initiatives to enhance our growth profile and continue to expand already strong margins. And as you'll see, we have a proven track record of strategic portfolio transformation.
Turn to the next slide, please. This is Slide four. We have two major platforms, mobility technologies and diagnostic and repair technologies. And we serve an attractive $27,000,000,000 market TAM. These are excellent platforms for longer term growth, and the opportunity in each is to move off the technology stack.
Our mobility technologies platform, or MT, consists of Gilbarco Videroute or something we call GVR, Teletrac Navman in the telematics business, and GTT, which is Global Traffic Technologies, which is a toehold in smart cities. Our installed base positions us well to expand into attractive market adjacencies. This gives us the ability to leverage into e mobility, smart cities, and logistics and supply chains. Our diagnostic and repair technology platform, DT, it consists of Macko and Hennessy businesses. Our businesses leverages increasing miles driven, an aging car park, and increasing complexity of repair.
And this gives us the opportunity to leverage workflow solutions and diagnostic solutions. Turn to the next page, Slide five. This is something we call the value creation flywheel. We are 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 is for core growth of GDP plus in revenue as well as margin expansion.
As Rick said, the separation of our five operating companies really gives us an ability to enhance focus, and this gives us a significant runway for improving profitable growth. Our strong balance sheet at separation is investment grade style, and it sets us up to accelerate growth through M and A and compound earnings. And the volunteer business system, VBS, has its roots in the Danaher business system and the Fortive business system. And this is a heritage that few can lay claim to. Turn to my last chart, Page six.
In summary, Frontier is a high quality, low cyclicality, industrial technology company serving a large and attractive market. VBS is the foundation of what we do, and it enhances our organic growth profile and further expands industry leading margins. Our capital deployment will be focused on strategic and financially disciplined M and A, and we have an excellent runway of improvements ahead. We have the expertise and leadership to execute a transformational compounding strategy to unlock shareholder value. And we think we have a great business with lots of runway for improvement.
So thank you for your interest. We're excited to mobilize the future and create a better world. With that, Rick, we're really happy to take your questions.
Okay. Excellent. And, as mentioned, if you have any questions and you're listening in, please, email to r eastmanrwbaird dot com, and, we'll definitely work those in. Mark, I wanted to just kind of lead. We're just kind of polling all of our companies here at the conference.
But given the recent transition here in the administration, I think we can call it that, at the in The U. S. Any thoughts around any impacts that might be hanging out there, either maybe easing of tariffs as a positive? Or just any should we at Vontier, are we kind of leaning into this change in administration or leaning back? Yes.
Well, I would definitely say we're leaning into it. But the tariff aspect you brought up was not a big impact on us. We used VBS, and we've kind of mitigated that impact a long time ago. So that really won't necessarily, break our way either because I think we've already mitigated it. However, when you talk about things that we love, it's about, regulation because that drives many of our industries.
And if you see what's going on in terms of a possible $2,000,000,000,000 investment in clean energy and also infrastructure build out. You know, these kind of things can help in smart cities. So these are great things for our business. And so we we look forward to seeing that. And that by the way, that that kind of regulation drives our business today.
So more regulation in terms of, you know, where we're headed can can definitely provide some stimulus and help.
Okay. Yeah. No. No. Good points.
Yeah. We in the financial services industry don't like regulation. So I'll put you in I'll put you over there as a as a beneficiary of more regulation. You you could be my my trade. Chart the financials.
We'll take that. Yeah. Hey. Hey. So, Mark, I mean, now, you know, you were recruited in as as as President of Vontier back in January 2020 and have been really shepherding Vontier through the spin off process.
Lots of work, I'm sure, your part to get up the curve on the businesses themselves. As you sit here now largely spun off, what would you define as maybe your three top, I'm going to say, twelve month priorities here right through the spin?
Yeah. So I think it's a great question because it really gives me an opportunity to talk about where we're focused. So as you may know, our business has been benefiting from one regulation, which is the Euro MasterCard and Visa chip reading technology in The U. S, and that's something called EMV. And that tailwind will abate as we go into next year.
So the key is that we get other engines of growth up, both in terms of organic growth as well as also start working on M and A as well. And also, there's an excellent runway for us to improve the profits on that. I think the second one is working on the portfolio strategy. We talk about transforming this portfolio. So very attractive spaces, but working out exactly the portfolio transformation over the next twelve months will certainly fare prominently.
And then, of course, leadership development. Part of standing up a company is is to a unique opportunity to launch a purpose driven, value driven organization where we can leverage from the past but also build into our future. And so part of this leadership development, it's a really unique opportunity. And I'm very excited about that because I think we can derive a lot of value from that.
And does the structure here, as you see it, emerging around Volunteer, is the do you have all the leadership in place that you need for the various businesses? Is that pretty much done at this point? You're comfortable there?
I've been here ten months, and the team has worked very hard from sort of the announcement of the separation, by Fortive more than a year ago. So we've definitely had time to work on that. We've built out our management team. I couldn't be more pleased with the talent that we've been able to attract to the company, both the folks joining us with a Fortive and Danaher background, and there's many executives that have that as well as we were staying at our headquarters up in Raleigh. It's been a great place to also hire and attract new talent too.
So, very happy. I'll tell you one of things that I've also learned here, Rick, in my last ten months is I couldn't be more impressed with the folks that we have here in the business. You're always sort of surprised by certain things, and this is one real pleasant surprise. Hardworking, performance culture people with a deep rich heritage, particularly in the Danaher businesses, because many these businesses came from Danaher as well as Fortive as well. So that's that's deeply rooted in our culture, and it's an excellent thing for us to be able to carry forward.
Okay. Okay. Fair enough. And then I I did wanna just touch on this issue. You know, Over the next and I kind of preface that a little bit with twelve month priorities here given that you're now independent.
But when you think about Volunteer's portfolio, do you think in terms of portfolio transformation? Or do you think more in terms of migration? I mean we've got our balance sheet. We've got our we've got capacity. But over the next couple of years, is this a function of kind of migrating the portfolio towards more interesting areas or and taking care of short term issues?
Or is there this is this a portfolio transformation on the horizon? Is that the right way to think Yes. About
I think when you think about a three- to five year horizon, I do think that, first of all, we have some great near in adjacencies. These are not far adjacencies, the ones that I talked about in my remarks here. They're all pretty near represent a good opportunity for us to, over that longer term horizon, to be able to transform our portfolio. And I think you've seen other companies that we have a real penchant for this in our own business. If you look at the acquisitions and transformation that we've done through this portfolio over the last ten, fifteen years, through M and A and also through organic growth.
And I think it with the age of mobility is changing more in the next ten years than it is has in our entire lifetime. And so I think it represents really great growthy near end adjacencies for us to be able to pick through and to, over a longer period of time, transform the portfolio.
Yes. Yes. Yes, that's fair thoughts. And when we sit here now as a public company and we're going to push into 2021 here, talk a little bit about your incentive programs for your senior management, also the operating management and maybe what those metrics start to look like for 'twenty one. I mean, are they profit focused, growth focused?
Maybe you could kind of speak to where the emphasis is for 'twenty one.
Yes. Well, I think you should expect something pretty similar to what you've seen in terms of Danaher and Ford. There's a very regimented way with annual reviews. And when you look at each of these operating companies, there's an element of core growth as part of the incentive. There's an element of driving profits, and there's an element of driving strong free cash flow through working capital management.
And I think there's a real ability here. I think you see that in our numbers that we've been able to take outsized growth opportunities in EMV. We position ourselves exceedingly well for this. I think you're seeing that flow through our P and L now. And then as we continue to work forward into the next year, I don't view that you'll see very dramatic changes there.
It will be more of the same.
Yes. Okay. Okay. Fair enough. And then I'm going to start I usually like to start with the big time positives here, and I guess we can make this into a positive here perhaps on the cost side.
But I'm going to just kind of start where I have to start when I pitch Pitchmonteer. But when we talk about this, the EMV sunset at Gilbarco, maybe I think what's out there in the marketplace is kind of this 150,000,000 to maybe $200,000,000 revenue decline off of kind of a peak number. But maybe just define what's out there and then speak to me about is not what's the bull bear case around the revenue falloff on the Sunset side on the backside of this?
Rick, it's Dave. I'll take that one for us. So the 150,000,000 to 200,000,000 that's out there was, frankly, what we put out is our best view at a point in time when we went through the road show associated with the spin transaction. And we see that as the not a peak to trough number, but the 2021 decline over 2020 from what we kind of know now. Now we also present that with the caveat and the understanding that q four is an incredibly important time for us to continue to get visibility.
We have a lot of a little more market share, I should say, at the larger customers. And as EMV adoption continues to progress, as you know, it's been, you know, evolving for the last five years or so or six years. And and so we see we see some of the larger customers adopting earlier, and then we see the average size of adopting customer, we believe, will continue to come down over the coming quarters. Very important for us to see what the behavior is in the fourth and also get a feel for people's capital plans for next year. So we think as we move through the fourth quarter, understanding people's capital plan spend and really get towards the deadline, we'll continue to refine our view of what next year could look like.
It's all about the shape of the tail. We think the tail goes well beyond the adoption deadline, but it's harder to predict for the smaller customers, of which we have thousands and and thousands. So much easier to predict, you know, a few 100 larger customers, but much more difficult to predict thousands of smaller customers. So we would anticipate getting through this, updating our point of view. We've tried to be very transparent.
That's where that was the reason for putting the number out there. We want people to understand what we're seeing, and we'll continue to do that when we have better information. And then really, based on that understanding we have today, that's a serious top line headwind for next year. We wanted people to understand that. But also then working to build a path towards how do we hold maybe not OP, but operating margin next year.
And that's what we're working on trying to build a path towards right now.
Yep. Yep. And so in your context, Dave, again, as we annualize on that sunset, one could expect at this point to pick up second half might be this 150 to 200, '2 until we annualize, there's a number there to to to think about as well.
Yeah. I I think, look, inherent in in that is, ultimately, we gotta see what the shape of next year is, and it really comes down to this adoption time line behavior. But, you know, I think it's logical to conclude that the deadline in q two remains a bit of an event out there, so we'll see. And when you roll through to 2022, that the first half compare will be more difficult than the second half compare in 2022 until we get to a little more normalized state.
Yes, yes. No, I think that's fair. And for what it's worth, I mean, we have about $400,000,000 in, with half of that in the '1 and half of that in the '2. And again, that's our approach on this thing, but it does capture the lack of growth split over two years is kind of what captures and kind of creates this as a priority question with people. But anyway, that's why I kind of raised it early in the conversation here.
And is there a path again, on the backside of this, we're going to have, in theory, a structurally smaller business, maybe we have an elongated replacement cycle for dispensers. Does how much of the is there a path to perhaps manage the decremental on this business to a 30%? If I assume a 30% incremental on this business, the E and B business at Gilbarco, is there a path to managing the decremental to 30% or less? I mean is that conceptually the process that you're thinking through? Or
Conceptually, that is the process we're thinking through. So when we've always talked about this business as being kind of a 30%, around 30% incremental, decremental business. In fact, in the second, which was a very tough quarter, you saw us hold on to a decremental that I think was right around 30%, maybe 32%. Now that included a number of temporary actions, which will come back at us next year. We'll also have significantly better compare in that second quarter where we had where those temporary costs were taken out and fundamentally came back into the business.
This business has a reasonable amount of variable cost. So I think the idea of being better than that 30% is, you know, of course, possible, but I would say not probable. The EMV revenue is pretty strong margin revenue given what it is and where it is and has a higher kind of electronics kinda component to it. And so, you know, it it comes off at a little better mix. But the work we're going through and some of the things Mark outlined on the roadshow around look.
As volume comes out, you know, we gotta make sure that some associated cost comes out as well, and that's kind of inherent in the way we go about kind of running the business, if you will, Rick. Beyond that, as we have been pursuing this revenue for the last number of years, we we believe there's also a number of productivity opportunities that we've foregone to make sure that we captured our fair share of this, you know, regulatory super cycle, and we'll get we'll get back to those items, as well. Also, we've talked about a couple of businesses that we think have opportunity for that that are operating right now well below kind of the the fleet average here, and we think there's opportunity to improve that. And and so we talked about Teletrac Navman. We'll talk about Hennessy as well.
We think we've got a good path from both of those businesses. And and finally, you know, we we run a large global business, and the opportunity of focus, kind of the basis of the separation, allows us to get that much closer to it, and we think there's opportunities in the business to continue to drive simplification that should accrue through to productivity. So those are the types of things we'll pursue to make sure we try to manage the decrementals to our expectations.
Yes. Fair enough. And not to stick on this one point, but again, we will come through this with a leading share in terms of EMV upgrades. We do come through this with a large install base, I mean, pretty impressive install base. And other services that can be sold into that install base, could you just, you know, speak to that opportunity?
Yeah.
Yeah. And that's that's exactly right. And that's how we think about it. We think of continuing to gain share of wallet with with customers. And so both inside and outside.
So from our point of sale systems inside to SaaS offerings and service offerings that tie together multiple components, we play inside the c the c store, outside on the forecourt, underground in the environmental and and above the c store with SaaS offerings. And those all offer us an opportunity to gain expanded share of wallet from what, as you know, is a very strong in US and global footprint.
Yes. Yes. Okay. Yes. No, fair enough.
And then just, Mark, within the existing portfolio, beyond the GVR business domestically, speak to some of the other opportunities for growth within the existing portfolio. GVR, Rest of World, just maybe speak to a couple others here that we can look at the existing portfolio and speak to, look, this is pretty exciting opportunities.
Yes. I think I'd be really happy to talk to that because outside of The United States also represents growth in terms of high growth markets. And we also talked about that on the road show. And there was a slide that we specifically showed where it showed, just as an example, in India, about 35,000 service stations are going to be built out over the next five years. And if you think of a service station in The United States being about 75,000 to 100,000, whereas one today in India is about 20,000.
And they're moving up in terms of sophistication because regulation is driving more electronics for security of payment, as an example, or as well as vapor recovery type technologies. This builds in more opportunities for automation of the C store and more content to move up the value chain, if you will, because we provide more content there. So we think that that's an excellent leverage point for us. And if you look at our presence and capability in a market like India, it's an excellent, market. Now we know it can be a little bit lumpy.
You know, the ebb and flow, we've certainly seen that through COVID. They tend to be large tender driven, but, you know, an excellent longer term opportunity for us nonetheless. At the same time, too, high growth markets represents good margin uplift for us. We talked about VBS. VBS has an excellent capability, our business system, and we've been making really strong traction on margin.
And there's a lot more runway that we have to go.
Okay. Yes,
yes. And within GVR, the ownership interest in Tridium and drives, do you view that as true growth vector? Or is that kind of an option on the dynamics around mobility these days? And perhaps EVs kind of long, long term displacing ICE vehicles. But how do you think So of that
first of all, we love our position in eMobility. As you know, we have a minority investment in a company called Tridium, which is electric chargers, and we have a minority investment in a company called Drives, which is on the software management side for energy management. And both of those, I think, are quite relevant. And the fact that we have that gives us really a front row seat because the industry, there's a lot of hype on it, but it's still in its early innings on how it's going to develop. Specifically, the terms of any relationship that we have here with Tritium are certainly confidential as well as our financials.
But we really like the vantage point that this gives us, a tremendous amount of learning. And as you may know, we're also selling electric chargers in Europe that's representing strong growth for us, not below base, albeit. But these are all I think we like the e mobility space.
Yep. Yep. Fair enough. Yep. Yep.
And then the other thing I wanted to just touch on for a minute or two, the smart cities kind of telematics, when you look at Navman, Teletrac or Teletrac Navman and then GTT, I look at those businesses, and it feels like those are core businesses around a much, much larger strategy to kind of around smart cities and around telematics, not defined just specifically on a vehicle. But is that a fair assessment that, that smaller piece of your business today has some pretty significant growth opportunities depending on how you define those?
Yes. Well, we appreciate you pointing that out because we like both their markets. Respectively, you're looking at either a mid single digit market growth in smart cities or high single digit growth in terms of telematics. And so they also there's these secular drivers that we also alluded to at the beginning of our conversation, and they continue to drive those industries as well. We think they also represent excellent margin opportunities as well as recurring revenues, which, of course, people are certainly very interested in these days.
And when you talk about digital transformation, there's all that element of software, SaaS and digital transformation that is pretty significant for both these opportunities. So yes, the short answer to that is we find those spaces quite attractive.
Okay. And then this dovetails in, but here's a question from a listener here. But just the question is how has the hurdle and strategy for M and A changed since the separation?
Yes. Certainly, the separation was about thirty days ago. So we've been it doesn't feel like thirty days ago because we've been working hard at this for almost a year. And so there's really no like, okay, now we're separated. Now we've been running this business.
We've been building out the management team. We've been doing the launch. We've been working on sort of a horizon on how we can improve the business and as well as portfolio transformation. So I don't think there's anything magical in the last thirty days that's occurred. It's more been a continuum on how we've been running the business.
Of course, there's much more of an outreach for investors in this period of time. So it's taken, you know, our investment, our IR team, Dave and myself, to to be able to do that. But other than that, you know, there's really been no change.
And I
would tell you, I would think about how we're going to think about returns and hurdles in the approach, very similar to what you've seen in the past from Affordable or Danaher, where things that are nearer end, we'll look for returns in a shorter period of time, ROICs of double digit, call it, 10%, maybe that three year time frame versus something that maybe is a little more strategic, accelerate strategy more maybe is in an adjacent market where maybe that double digit return is a five year type payback. But not to ROIC will continue to be our valuation metric that we use and approach very similar and frankly, a process very similar from what you've seen in the past.
I got you. Okay. And one last question here. I'm running over here. But there is one from, again, a listener just asked, is FLEETCOR a direct competitor of Vontier?
I've not heard that name come up, so I'm going to ask you. That's
the Yes. I think they compete in some aspects of what we do. But the issue with Vontier is that we have some competitors that compete in some portions of our business, but there's not a really good comp to compete with us worldwide. That's why we view ourselves as sort of our peer groups are the premium industrial technology companies that we are part of and aspire to be part of going forward, but not a direct comp frontier.
Yes, Rick, this is Lisa. I'd just step in and say they're they're not. They're more of a payment program. Really good company. Really like the the you know, it's attractive company.
Like it, but not a competitor, not not in our space
this day. Yeah. Fair enough. I was trying to look this up as I was trying to read the question to you.
Absolutely. Interesting company.
Yes, yes. Okay. We are a bit over here, but I do want to just thank you very much, Mark and Dave, for participating in the conference for sure, but also for your time here in this group presentation. So thank you very much, and much appreciate your contribution.
Yes. Thank you, Rick. We really appreciate being here. Have a good day.
Thank you.
Thanks, Rick. Bye now.