Vontier Corporation (VNT) Earnings Call Transcript & Summary

Welcome back, everyone. We appreciate you joining us. We are very excited to have Vontier with us. We've got David Naemura, who is the CFO, who I know well. He worked at Gates for 5 years before becoming the CFO of Vontier, and he also was at Danaher for 8 years before that.

And so maybe I'll just start, Dave, with can you touch briefly on Vontier's journey over the last 18 months? Obviously, a lot going on. You've bought DRB, Driivz. We've talked a lot about EMV. What would you say is the biggest highlight versus your own expectations and what's been the biggest challenge?

Andy, that's a great question. I would say the biggest highlight has been really seeing the benefits from focus upon separation. These were good businesses that have performed well historically, that were well run obviously. And -- but the task was to come in and get the benefit of getting closer to the businesses. And I think we've seen that read through in the performance of the businesses, in the execution during some reasonably uncertain times, which the operating side of the business has performed really well. Around what's been kind of the biggest surprise or a challenge, there's obviously many to list. But I think I'd probably say trying to satisfy demand in this really robust demand environment, coupled with this unprecedented supply chain setback, which we all are dealing with in different forms and fashion. It's just been something unique that I think even some of the best operators haven't seen. And of course, we've leveraged VBS and probably one of the real world-class procurement organizations to manage through it and still be able to deliver. But it's been a unique set of challenges.

So I want to get EMV out of the way quickly so we can talk about other stuff. So it was obviously a big topic of conversation on your last earnings call a couple of weeks ago. So it's interesting, right? You guys have said for a while that peak to trough will be $400 million to $500 million in sales. But it seemed to take the market by surprise, that $300 million to $350 million headwind that you talked about in '23. So can you elaborate on the different moving pieces here? Because you did say that you could potentially even grow -- that you should grow earnings that year. So -- but the concern I think that we all have is that offsetting a 10% revenue headwind seems relatively steep. So how confident are you in growing earnings relative to '23?

Great. So a big topic over the last couple of days, obviously. And first of all, the dynamics around the number. Look, we have a -- we know the installed base. We have a history of selling dispensers and payment systems in the U.S. And we've seen this compression of an otherwise kind of ratable refresh cycle, create this bubble in the middle, that we were right, would peak in 2020 ahead of the 2021 deadline. So I think that worked out. It's fundamentally going to go back to something that was in the neighborhood of this recurring run rate. So that's how we measured the peak to trough. The challenge was always measuring the shape of the tail. And it's really easy for the larger customers. We know when they're going to adopt and on what schedule. But there are 6,000 to 8,000 remaining customers that make up 50% of the installed base that's much more difficult to tell. So we had said to folks, we want to get past the adoption deadline, see what the behavior of those smaller customers are. And what we saw was continued robust demand. So I think if you really rewound when we started talking about this, 2021 came in much better than we originally thought. Now it would have probably come in even better if not for supply chain challenges, which have pushed somewhat satisfying that demand out to 2022. 2022 is going to remain robust. But as you said, the absolute size of the variance isn't changing, so what we see is a sharper cliff as opposed to that playing out over maybe a couple more year period of time. If 2022 had been worse, which we had thought once upon a time, it would be as well, you would have seen this work out more slowly. I think once we got past the adoption deadline and the realities of having to satisfy the chargebacks as a small business, I think that, coupled with a really robust end market, has people adopting earlier and making those conversions. And frankly, we've been transparent, I believe, the whole way around what to expect. I think we've shared updates at least annually or a couple of times a year, as we've learned more and brought folks along for the ride. And once we had a feeling that we dimensionalized it within a certain tolerance, we were comfortable sharing that number with shareholders.

So one of the ways that you'll sort of offset the headwind, I think, is through profitable growth initiatives. So maybe talk about how that's helping you offset the headwinds. And you -- I think you mentioned specifically that you've doubled your operating profit target from simplification efforts. Talk about what that means.

Yes, great. Well, it's -- really the second part of the first question is the offsets, right? So let me get that. So we talk about this variance but that's a portion of our business, right? That's dispenser and kind of payment retrofit kits in the U.S. market. So when we think about the rest of the business, we've seen the non-EMV portion of the business improve to really a mid-single digit to mid-single digit, almost a high single digit -- mid- to high single-digit growth rate. That's driven by a number of factors. Obviously, DRB growing mid-teens, we've talked about that. The rest of our Retail Solutions business, also a double-digit growth area. Both of those businesses accretive to the margins of not just Vontier but margins that -- a fall-through rate that is better than the EMV business that we'd see coming off. Things like our environmental business, which is some of the highest-margin products that we have inside Vontier, continues to grow at high single digits. High-growth markets, not as accretive from a margin standpoint, but we've historically gotten kind of that high single, low double-digit growth rate out of those businesses. And Matco, we talked about Matco being kind of mid-single-digit growth in 2022. We believe we continue to see a nice runway there. And so we think that end market remains robust. And again, Matco is a very good fall-through business. So when you collectively look at the rest of the business, you end up with offsetting a significant portion, maybe not all organically, but that leaves an inorganic portion than even if you were reasonably conservative about the organic contribution that we think would be offset normally with our -- how we typically think about deploying capital towards M&A.

So I want to get into supply chain questions in a second, which I think you've done a good job on, but you talked about high-growth markets. So let me just ask you in the context of the geopolitical concerns that are out there, like do you worry at all about your HGRs, given sort of the news today or...

Yes. I mean, I think we all do. And we're not as directly exposed to some of the Russia or Eastern Europe. Those are smaller parts of the business, but more broadly speaking, I think the uncertainty kind of reads through. But we have great exposure in a couple of big markets. India, we're very bullish on. We've seen good performance there. It's very lumpy. But we've historically seen good double-digit growth out of India. And although the lumpiness, we're seeing some of that now with the phase of how it came back, timing of how it came back post pandemic, we continue to be long believers in that market, and we're very well positioned for the build-out of the fueling infrastructure there. Latin America, South America, also markets where we have physical presence, we entered a long time ago and we've been coming on for this emerging market ride. And as -- not just the fueling infrastructure gets built out but as then the technology advances and you go from a gas station to what we have in the U.S., which isn't a gas station but a convenience retailing format that enhances our offering, enhances the value per site and ultimately will the margin profile in the end.

Can I follow up with you on India? Because I think India has become bigger for you than China. And it seems like there's durability to the cycle for you. So maybe talk about sort of why there's durability for you and the competitive environment there.

Yes, India is much bigger than us. It's more than twice the size of our China business today and structurally far more attractive with the investment that's coming in. There's regulatory drivers around both the fiscal payment security side as well as environmental that -- as well as just the sheer build-out of fueling infrastructure that plays in the sweet spot of what we do. I think the other thing is our physical presence there. Manufacturing and service network that we've established in-country positions us well, and we've taken a bit of a pole position there from a competitive standpoint. We have deeper relationships with the largest customers. And so we're very well positioned to participate in the build-out there.

Let me ask you 1 more question in the context of that sort of '23 EMV sort of headwind. Like you guys do restructure occasionally. I think you've got $20 million of savings here for '22 dialed in. Is there a way to sort of help with restructuring to offset that headwind? And I think a lot of people ask about EMV being high-margin business. So I remember you telling me that you can sort of simplify the way you go to market. As you're selling sales, can that help you a little bit, too?

Yes. Well, I think that's what you've seen us doing over the last couple of years. The -- we've been planning towards this eventuality. It isn't something that we're going to start when we see 2022 or 2023 here. This is something we've been working towards. It's a gradual decline. An example would be, look, as volumes come off, there's things that we need to do to the supporting infrastructure that we'll do. We have a lot of kind of fixed manufacturing overhead that needs to be repurposed. As an example, a year ago, we closed 1 subscale rooftop and moved it into that capacity to help absorb that. We'll do more of those things over time, we just worked this very, very well in our wheelhouse. More broadly, we see a number of opportunities to -- through simplification and focus to down-select on a critical few and really put more wood behind the arrow. We talk about the profitable growth initiatives, which are part of that simplification. So things like getting more fall-through on our R&D dollars. And I think we've seen that read through in the OP contribution from new products. And again, leveraging VBS to down-select on the critical few, driving it and executing like we're capable of doing, leveraging our business system. Matco and the contributions there, kind of well documented, growing franchisee growth, high-growth markets is -- will continually be a profitable growth initiative for us as well as a couple of underperforming assets that are well documented. We've talked early on about Teletrac Navman and Hennessy, which were 2 assets that collectively were $300 million of revenue that had very low OP contribution. We've made good progress in both of those businesses, and we've seen top line improvement and more significantly, a disproportionate bottom line improvement as we have simplified and got more focused on how and where we make money with those businesses.

So I want to shift gears and talk about Driivz for a second, if we could, Dave. Maybe in the context of -- it's interesting, right, your M&A and D&A historically has been to focus on profitable growth businesses, right? So Driivz is a little bit different for you. It's obviously got high gross margin but like a lot of investment need, all that kind of stuff. So maybe you can talk about sort of why you decided to do Driivz. And maybe step back and talk about your positioning in the EV infrastructure space. Are you happy with where you are? Because even the market seems to discount you guys as someone that could be an electrification play or EV play over time?

Yes, great question. So we've always talked about doing a range of types and sizes of deals. I think when we think of kind of what's our sweet spot and the top of the bell-shaped curve here, it's more like DRB. That's right down the middle of the fairway, enhances the growth profile, enhances the margin profile of the business, a little more recurring revenue, asset-light, great free cash flow profile. We'll do some things that are closer to the core, probably around bolt-ons and things that are higher return in a shorter period of time. But then the other end of the spectrum would be something like Driivz, right, where earlier-stage technology, small today, nascent, but has -- is a leader in the place they play, amongst the leaders, and is a pretty high-profile asset in doing what they do. So as always, we're accelerating strategy, we're market-led and then we focus on the company. We were fortunate to have made an investment in Driivz 2 years ago, as we did Tritium 3 years ago. And we were able to come along, have a front row seat to see the development of some of these markets. Ultimately, we decided not to option on Tritium and waived our option. We're happy to participate with that business. It was 1 of the early charger companies pursuing DC fast charging. Where we were interested from an ownership perspective was really in the network management software layer of the EV charging infrastructure. So when you think of a charge point operator, right, there are certain software functionalities that tie together, energy management, customer relationships and other factors of operating that network, which is where Driivz plays? And we see that as a high growth, high profitability segment and the place that we wanted to play. Driivz is a white-label software provider so they'll be kind of the engine inside, that if people don't want to develop their own in-house solution, which some people will do, but we think people will migrate more towards a white label solution and Driivz just position themselves well in what is an early-stage market. To your point, it's different. We need to run it differently. It's a different DNA. I think in some venues, you may have heard me say, "We will operate it outside of our normal operating company structure." The way we run an operating company and our DNA is different than what we need to do here. We'll adjust to that in this early-stage entrepreneurial type business that provides us a lot of optionality as this market develops.

Interesting, Dave. So what's interesting is loss in the whole shuffle of EMV was actually good performance in Q4 in terms of margins. I think you had guided to decrementals of 30% and you came in, in the mid-20s. And for this year, you're guiding to a 30% incremental margin, which is pretty good when I look at my universe. So maybe flesh out the margin potential that Vontier has when you think about sort of the medium to longer term. I think you've talked about you could grow 40% in normal times, but who knows when we're getting back to normal. So talk about your confidence in returning to that level of performance if supply chain headwinds kind of continue with us for a while.

Yes, look, we've talked about the incrementals kind of being in that 35% to 40% range, right? There's something every quarter or a comp, but I think we've, in recent years, delivered around those levels. And what we should see is really it's -- first of all, as our -- as all performance, it's dependent on continuing to drive gross margin. That comes through both operating improvements and what we add to the portfolio. And I think as you see us move up in software content, a little further up the technology stack, we add gross margin. That will only help get it leveraged and drive incrementals. So once we kind of sort through the noise and you kind of back away and we operate, assuming we operate at the business we are, which we think is a mid-single-digit plus type business kind of through the cycle here, that should support that 35% to 40% that we can average up over time as we continue to drive higher software and technology content in the revenue base.

Let me ask you some '22 specific questions for a second. So like you talked about some imbalances in the first half of the year, whether it's in GVR and supply chain or high-growth markets, maybe still some tough compares there. So can you elaborate on sort of what you're seeing as Omicron-related interruption done a little better, confidence level and the imbalances will improve in the second half of the year.

Yes. Expect the unexpected. But we think we've seen -- been through the Omicron surge, as I think others have talked about as well. We saw -- we lost some capacity early on in January as we had some absenteeism. We think we've worked through that and contemplated that in the Q1 view that we put forward. Supply chain, I'm sure everyone has a different experience. We're developing our view on supply chain, really based on the work that our world-class procurement team is doing on a day-to-day basis. And I think things have gotten better. I think, of course, we see issues across the board, but it's really been down to electrical components and primarily chips. And I think we've got at least line of sight to some solutions. In some cases, a that's supply. In other cases, that's progress we're making on developing a new board to get away from an existing component that we don't have confidence in supply. So all of those things are happening. There's -- we're all surprised by the number of chips that go into some of these products, including the liquid field dispenser. But I think based on our view that we see today, working weekly with procurement organization, we think we're seeing some underlying improvement. We have little better hope that we can work through that by the end of the second half or the first half year and moving into the second.

How much of that is your own self-help, Dave, in the context of VBS should really -- that's one of its core competencies, right, is procurement. So what are you doing there?

Yes. This has been a ton of self-help. This has been hand-to-hand combat since the spring of last year, really, and it continued to get worse. So I think we are very fortunate to have the team working on it that we have and that's not just the procurement team, but that's the R&D team and people Kaizen-ing solutions in short periods of time and shortening development cycles and doing things at a pace and speed that we've probably previously not done before but to adjust to what needed to happen in this environment. So as always, VBS has been a large contributing factor to our success in this area.

So maybe 1 more question on '22. So like you do have strong backlog sort of exiting the year up 25%. You're only forecasting low to mid-single-digit core growth. So maybe talk about the visibility to sort of convert that. Is that somewhat conservative, given the backlog you have? You already talked about Matco being relatively strong. India, we talked about being relatively strong. But what are the good stronger businesses that you have and what's holding you back, if anything?

Yes, we have seen good demand, and that's manifested itself in probably carrying some more backlog in than we would have thought. We came in a little light on sales in the fourth, even though we delivered at the bottom line. And some of that's moved particularly some EMV revenues from '22 into -- or from '21 into '22 and it's creating part of that bubble we're seeing. Some of the backlog we've added is also kind of structural recurring revenue, things like that. But we have considered that in the guide for the year, but we also think it gives us more confidence in our ability to deliver it.

So maybe I can ask you about DRB. You mentioned it briefly. It looks like you came into the fold relatively strongly, like high teens revenue growth in Q4, mid-teens expectations for '22. I think when you originally presented to us, you talked about high single-digit long-term growth. So can you elaborate on what's driving DRB's growth now maybe versus your original expectations?

Yes. Well, DRB is enjoying a really robust end market environment. And the number of new site builds for more advanced tunnel washes is a great driver for them. They're the #1 player in this control space as it relates to that. They've got great technology, in our opinion, great technology leadership. And so not only are we seeing great new site builds but also consolidation in the market, and they tend to be aligned with the consolidators, which is helpful. They have new products coming out. They've been very good on the innovation side. So we've got a really great player in that market and a really good end market backdrop. And we think those things are conspiring to deliver a set of numbers that I wouldn't say we're surprised by it because we knew it was possible but we probably had a more conservative view. But we could not be more pleased with the performance that we're seeing out of DRB and how it just fits hand-in-glove into our mobility technologies and retail solutions component of that portfolio.

[Operator Instructions] But let me ask you a follow-up on that. I asked your peer, who was here today, about vehicle wash because seems like that market has been pretty strong for both of you. And he mentioned like evaluations are higher now, a little bit harder to sort of find things. So I'd ask you the sort of same question. Do you want to continue to pursue, seems like DRB to your point, is kind of a good sweet spot for you guys. Are there other things to buy out there in that space? And are they reasonable?

Yes. I think the part of the market that we're most interested in, Andy, for us has some fragmentation to it. But ultimately is -- we have the largest player in DRB. So I think it's more, there's some ancillary smaller adjacencies, but I think for that core market and that control side of that market, I think we've got the piece. They bring some great payment technology and things like that, which are actually horizontal capabilities that we're going to be able to leverage across a broader part of the portfolio. And so maybe in some of those aspects, but that's not specific to carwash, I think that's specific to kind of payment capabilities. That's more of the area I think we'll see us focusing on there.

So while we're on cash deployment, I should ask you about the accelerated share repurchase that you announced. So why did you announce it? Is it the first of a different sort of balancing act for you guys and how you look at your shares versus M&A? Like maybe talk about the rationale for that.

Yes, we tried to communicate on the call that you were seeing a shift in focus for us as we've seen, I think, a dislocation of value in stock over the recent months. We were signaling that, that's the direction we were headed. Obviously, with a further dislocation in stock provides us a really good opportunity for return, and we're taking advantage of that. What the future holds depends on multiple variables. Obviously, we still have room under our previous authorization. But for now, this was a decent deployment of capital. It gets us well into the second quarter, probably with the time it will take to deploy it and we'll see how it goes from there. Most importantly, we've also talked about capacity, capital to deploy of a couple of billion over the next 2 to 3 years. And so even at the ASR that we announced, we still have plenty of firepower to do the transformational M&A that this business that we think we want to do over this period of time well within our investment-grade kind of aspirations, so on our aspiration's thresholds.

I mean, recent volatility is -- well, it's more volatile than it's been. So -- but how does it impact sort of the M&A environment for you guys? Like are there targets out there? Do you think that sellers are going to come down at all? Or it seems like it'd almost be a tougher market, given the volatility.

Yes. I've had times where I thought that in the past and really haven't seen it. It's hard for me to imagine that valuations and the competitiveness in the market is -- increases in '22 from what we've seen in the last year or 2. But we're not -- we're less focused -- we're focused on returns, right? And we don't get too hung up on kind of multiple differential but it's really meeting our return thresholds. We have a good track record of being disciplined around those. And we'll stick to our knitting here, I think. And we're confident that we'll -- we should find some good opportunities. I would say that what to expect from us on the M&A front is more kind of down the middle of the fairway, more like what you would have seen with DRB. There is a lot out there. We are always active, not just cultivating but spending time talking with a lot of folks about a lot of things. But it's very infrequent that you pull the trigger, you got to do a lot of work. So that work continues.

I should ask you the related question about cash flow because your cash flow, while good, has been sort of lumpy quarterly. So maybe sort of talk about that. It's just been hard for me to predict. It seems like you still want to -- you still think you can be 100% converter. And so -- but it's still a kind of more difficult environment to sort of deliver those kind of results. So talk about that.

Yes. Well, there's been some kind of puts and takes noise-wise. But historically speaking, our free cash flow conversion builds, if you look at history as the year progresses, we tend to have -- end the year at a low point in working capital relative to the other quarters of the year. And I think if you look through some of the noise that still exists, albeit at much lower levels of working capital than we've historically operated at. Last year, in 2021, we had the fifth -- we had 5 federal tax payments, that kind of an artifact of the spin, and that extra payment happened in the second quarter, so that was an overlay. Once you look at our free cash flow conversion at 96% for 2021, you adjust for that extra tax payment, it would have been 102%. So we think we continue to run in that vein. Deals like DRB will be helpful. It's got a great cash profile to it. It's asset-light. It's got a really good business model that doesn't have a big working capital burden to it at all. So as it continues to grow at above-fleet averages in a very profitable manner with their business model and cash flow profile, that will actually -- things like that will be accretive.

So we've got about 10 minutes left so I want to ask you about a couple of specific questions about the businesses. So Retail Solutions, you had that Investor Day. You talked about being at $3.6 billion TAM, mid-single-digit plus growth. That sounds good to me. But at the same time, there seems to be investor skepticism, given some of it is the c-store, concerns that as EV penetrates, maybe c-store growth will go down. So like talk about sort of the confidence that you have and the different avenues of growth to do mid-single-digit growth in Retail Solutions.

Yes. So one of the things that hopefully read through in the retail solutions teaching that we did was our belief in the C-store as a retailing format. We think it's embedded in the fabric of our communities, it's got the word "convenience" in its title for a reason. I mean, that is what it is and it serves that purpose. You see diversification of offerings at the C-store from food to car wash. These are now big categories for these folks, someday I anticipate electric charging as well. But it isn't a gas station, it's a C-store, right? And so the retail solutions aspect has grown from our heritage on the forecourt moving into the C-store where in the U.S., we're the #2 point-of-sale provider today, but we're embedded with the workflows of that reasonably unique retailing format. And we think that gives us a lens on the ability to continue to add value for both operational efficiency and enhance customer experience with those partners that we have a rich history with. So we believe in the retail format, it has shown a long period of growth that we think will continue, and we want to be along that ride in that diversification. And DRB will play a role there, too. I think car wash, in-bay carwashes at the C-store are probably a top 3 category. It's a great place to drive profitability, and obviously, we'll be there to take advantage of that.

I think we have an audience question so let's take a look at this. So ex EMV, it looks like sales grew close to 20% in '21 and EBITDA likely up in the 30s. What drove this impressive performance? Are there portions that may not recur?

Yes. There was clearly an easy comp in the second quarter, okay. At the same time, it was clearly a tough comp in the third and fourth, but on par 2020, we declined 1 point on a core basis, 1.2% or something in that nature. So I do believe that the comp enhanced it, but we think underlying that was a good mid- to high single-digit underlying growth rate that's underpinning the business. Those things will mix up with adding a DRB over time and hopefully something like DRB, but we think that is kind of that underlying momentum that we're carrying forward.

So let me ask you about Matco. On the earnings call, you highlighted the Matco Sales Expo, got strong orders. But you've also talked about sort of new products driving those orders. So I think you've talked about the Maximus 4.0. So maybe give us an update on sort of what's going on at Matco? How much are new products driving it? I think you've talked about 30% of franchisees still to penetrate. Have you continued to move that way? What's the expectations for '22?

Yes. Well, Matco is enjoying a really strong market backdrop right now. We've historically -- it's maybe historically a low single-digit growth market, but it's performing much better than that. And our ability to outperform that, which we've proven historically at times as well is by adding franchisees, penetrating more customers and really putting in the store what the customer wants. So you've got a very healthy customer in that professional mechanic who when -- has a little extra disposable income, likes to spend it with their favorite tool provider. We're seeing the distributors buy a lot right now to sell to those folks. We held a live expo event, which is our annual big sales event in Q1. Last year, it was kind of -- that demand was really kind of split between Q1 and Q2. We saw that event this year in Q1 and record sales, not record attendance, but record sales.

More important.

It is, and we think that positive backdrop continues. We're very focused on vitality at Matco. So when you go on a Matco store, 25% or more of what you see on the store is new within the last year. We sell a lot of things on that store that people don't expect, but it's really having what that person wants to buy and that high vitality is an important part of the business model and then expanding into new territories. So we had -- it's come down as we've continued to add franchisees, but probably high 20% range of open territories, we added 86 net franchisees last year. We always want to be above 50 We think that's kind of the target zone and we want to be above that. We want to add franchisees at the rate that we can make them successful in the business model. Every year, you're going to have retirees or some other people coming out of the business, so you want to add on a net basis. And we think, given the success of the end market right now, we think we should have another reasonably good year and would look to be over 50% again this year. So all those things conspired to help us grow faster than end market. For 2022, we see Matco as a mid-single-digit growth business, which remember, is quite a profitable piece of our portfolio.

So I already asked you about margin. I want to ask you 1 thing about pricing. Like You guys really are focused on strategic pricing. You have been -- talk about how that helps you in 2022. I think you said you would stay ahead on price versus cost, like that's hard to do in this market. So confidence level in doing that?

Yes. Confidence level was pretty good. What you saw in 2021, we performed, in my opinion, very well. And it was really that we were taking strategic price coming into 2021. So I think we're broadly -- everyone was responding to inflation with price. We were building structural price as were many others, but we were building structural price, would be tame in pricing and then really added an inflationary pricing to that, not in the form of surcharges but in the form of structural price we're adding to the market. We've had to do things differently. We had to operate in different ways than we had historically. We did see that gap between price cost narrow a little as the year progressed, but we didn't just offset dollar for dollar, we protect the margin, this accretive to margin. We think we can hold margin in 2022. And a lot of that price we carry in. So it's something you have some visibility, too, as well. Obviously, inflation, with the events of recent times here, who knows what will happen with inflation? But we want to leverage VBS. Respond quickly. We've demonstrated the ability to do that, and we're confident we'll be able to offset the inflationary impact again this year.

So you mentioned a couple of businesses that you're trying to sort of transform in Teletrac Navman and Hennessy. I think you talked about 200 basis points of margin improvement for those 2 segments in Q4. So maybe just talk about where these segments are and their turnaround now, Dave. How much more margin improvement can you get out of them? And then specifically on Teletrac Navman, I think you said annual recurring revenue turned for the first time in a long time in the quarter, up low single digits. So could that accelerate given sort of penetration of the new platform they have there?

Yes. So Teletrac Navman, I would say it remains early and that's partially the nature of a SaaS business. That telematics market backdrop is a good market. There's some technology debt we need to pay off. There's a number of other things we needed to do. And the increased focus, again, is an area that's paid off. I think we're making good progress but it takes time to change the top line trajectory of a SaaS business. But we had a breakeven business that now has improved to have positive OP. That positive ARR contribution will work its way through revenue in the GAAP P&L there and contribute to growth. And again, it's one of the other offsetting factors that we think will help in 2023, offset some of the MD headwind. But we think it's early days. We'll see where that gets to. It's going to take time, but that's a high single-digit growth type market. And there's teens level of profitability you would typically see there, and I think that's what we'd aspire to, but it will take more time than say, Hennessy, where we've made -- just because of the nature of the business, more rapid progress. It's been a place where we've deployed a lot of the profitable growth initiatives early. There were some things we were doing, discontinued, some small product lines, some places where we weren't making money, some places where we needed to value price a lot better, frankly, and we have. So we were able to take that business from kind of a low-ish single-digit operating margin to really high single-digit operating margin this year. It's not structurally the most profitable business in the portfolio but it should work its way into the teens. So I'd say we're midway on Hennessy with good line of sight to progress.

So in your background, obviously, you worked at Danaher for a long time. And so when we talk about annual recurring revenue at Teletrac, like you guys talk about it at Vontier but maybe not as much as Fortive does for instance. So if you think about your sort of goals on the ARR side, where do you want to be over the next few years? Do you want to continue to grow that business? Is that a key goal?

Well, you mean at the volunteer level?

Yes.

Yes, at the volunteer level, look, we like recurring revenue, like everybody else. But I don't think it is kind of a top priority filter for us. Rather, we're looking to enhance the growth rate of the business and the types of businesses and markets that we tend to be successful in, and within that, increasing our overall percentage of recurring revenue is helpful. So we did that with ERV, which had a higher percent of recurring revenue than the fleet average. But it's not just ARR SaaS-type revenue, right? There's other subscription models that include hardware, and frankly, aftermarket type businesses are very consistent. That's a recurring revenue stream or reoccurring revenue stream that comes along with that, that we think a little more broadly about that. But this is already a noncyclical business so we're not in the need to dampen cyclicality, which I think can be helpful with recurring revenue. But nonetheless, of course, we like it.

Right. And so I've got about a minute left so I'll just ask you, like for other sort of potential targets, you've talked about telematics, maybe infrastructure side, software. Where are the white spaces that you'd still want to focus on?

Yes. Look, there's a number of places we're spending an awful lot of time. We can't go meaningfully into all of them so we have to select appropriately. I think being a little closer to the core means a little down the fairway here, not a bolt-on, but again, DRB was what I would call a near adjacency, and I think we have a number of attractive areas in that space. We use the word smart city as a lot of people do. It's an incredibly broad space. But within that are some attractive markets that we have some interest in and leveraging our point-of-sale capabilities and some of the new payment capabilities that DRB has brought to the portfolio. So more to come, a lot of work going on but I think a lot of opportunity in our large addressable markets.

Awesome, Dave. Well, I think we're out of time. We very much appreciate you joining us today. Thank you.

Yes. Thanks, Andy. Really appreciate it.