Vontier - Earnings Call - Q4 2020
February 11, 2021
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by. My name is Maria, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Volunteer Corporation's Fourth Quarter twenty twenty Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer I would now like to turn the call over to Ms.
Lisa Kren, Vice President of Investor Relations. Ms. Kren, you may begin your conference.
Speaker 1
Thank you, Maria. Good morning, everyone, and thank you for joining us on the call. With me today are Mark Morelli, our President and Chief Executive Officer and Dave Mamura, our Senior Vice President and Chief Financial Officer. We will present certain non GAAP financial measures on today's call. Information required by SEC Regulation G relating to these non GAAP financial measures is available on the Investors section of our website, www.volunteer.com, under the heading Financials.
Please note that unless otherwise noted, the presented financial measures reflect year over year increases or decreases relative to the supplemental normalized financial data also posted on our website under the heading Financials. These supplemental normalized financials are adjusted for estimated standalone public company costs. During the presentation, we will describe certain of the more significant factors that impacted year over year performance. The supplemental materials describe additional factors that impacted year over year performance. References to period to period increases or decreases in financial metrics are year over year.
During the call, we will make forward looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward looking statements that we make today. Information regarding these factors that may cause actual results to differ materially from these forward looking statements is available in our SEC filings and subsequent annual report on Form 10 ks. These forward looking statements speak only as of the date they are made, and we do not assume any obligation to update any forward looking statements. With that, I'd like to turn the call over to Mark.
Speaker 2
Thanks, Lisa. Good morning, everyone, and welcome to our fourth quarter earnings call. Before we get to the results for the quarter, I want to recognize our team's extraordinary performance marking the end of a truly unprecedented year. The COVID-nineteen pandemic caused considerable economic, operational, and personal challenges. And so I want to first thank our employees and business partners who made it possible through their dedication and tireless actions and continue to do so with the ongoing pandemic.
Not only did the team work through significant headwinds, we are making the most of the opportunities in front of us as well as posting excellent results. Our team delivered another quarter of double digit earnings growth and a strong finish to 2020. Outstanding adjusted free cash flow conversion of greater than 140%, core revenue growth of 8.5%, and adjusted core operating margin expansion of two forty basis points. These top tier results underscore the resiliency of our portfolio as key secular drivers and market share gains drove outperformance. A proof point of the quality of our business and strategic focus is that even when excluding the benefit of EMV in the quarter, we still delivered high single digit core growth.
Furthermore, we ended the year with backlog growth of 40%, reflecting accelerated EMV adoption at Gilbarco Vita Root, as well as continued strong demand across the product lines at Metco. Importantly, we realized these results while continuing to position our portfolio for the future and investing ahead for profitable growth opportunities. Not only were we able deliver high single digit core revenue growth across the platforms, which exceeded our previous outlook, we also drove structural cost control and working capital productivity, which will continue to provide benefits into 2021. We're also making steady progress improving our innovation efforts by deploying lean portfolio management, launching growth accelerator sprint processes to gain market insights, and adding talent focused on growth and product development. Our portfolio is strategically positioned across attractive markets.
As secular drivers evolve towards increasing regulation and the growing need for clean, efficient mobility solutions, our enduring business model will provide even greater stability and growth through economic cycles. We remain focused on building a better, stronger volunteer by utilizing our balance sheet and deploying our significant acquisition capacity. With that, we are initiating our full year 2021 guide, which includes our core revenue growth expectation ranging from a decline of 1% to growth of 1% and adjusted core operating margin expansion of greater than 25 basis points. This core growth outlook includes a more favorable view of the 2021 EMV headwind of 100,000,000 to $150,000,000 Excluding the EMV impact, core revenue growth is expected to be mid single digits despite our more challenging comps in the second half. Additionally, we anticipate full year adjusted free cash flow conversion of approximately 95%, reflecting the timing of tax payments and working capital headwinds resulting from a very strong 2020 performance.
All this results in our full year 2021 adjusted adjusted diluted net earnings per share guidance range of $2.35 to $2.45 The guide amounts to a tale of two halves, reflecting the continued first half growth in demand for EMV ahead of the April adoption deadline in Q2, coupled with a favorable comparison due to the impact of the pandemic in the second quarter of last year. Where in the second half, we have basically the opposite dynamic, as we benefited from the V shape recovery and accelerated demand for EMV and Mexico regulatory solutions. In sum, this equates to expectations of first half adjusted earnings per share growth of greater than 20% and a second half decline in the mid teens range. As I outlined in October, we identified a number of profitable growth initiatives to help offset the anticipated impact of the EMV sunset. These include simplification and productivity actions, as well as further penetration in high growth markets, regulatory and innovation strategic imperatives, and continued improvements in businesses such as Hennessy and Teletrac Navman.
We've made important progress advancing these initiatives, and I'm confident we will deliver. As such, our guide reflects our ability to more than offset the top line and earnings impact from ENV and expectations of inflation. Dave will walk you through the key drivers and assumptions of our full year 2021 guide in his remarks. We're also initiating our first quarter adjusted diluted net earnings per share guidance of $0.52 to $0.55 which includes assumptions of high single digit core revenue growth and adjusted core OMX of greater than 200 basis points. With that, I'll turn it over to Dave to provide the financial results.
Dave, take it away.
Speaker 3
Thanks, Mark. Our adjusted net earnings for the fourth quarter were $147,000,000 an increase of 22% from $121,000,000 in the prior year period. This translated to adjusted net earnings per share of $0.87 compared to $0.72 in the prior year period. The double digit increase in earnings was primarily driven by volume growth with strong fall through, which led to two forty basis points of adjusted operating margin expansion in the quarter. Core growth in the fourth quarter was 8.5%, driven by the continued strength of the EMV rollout in North America, regulatory driven demand in Mexico and continued strong demand at Matco.
The strong recovery that we experienced in the third quarter continued through the fourth quarter with both GVR and Matco experiencing double digit core growth in Q4. And we also saw high growth markets return to growth posting mid teens core growth. For the full year, we had core growth of minus 1.2%. However, we still continue to expand gross and operating margin margins for the full year, underscoring the power of VBS. The sharp recovery that we experienced in the full 2020 reflects the resilient nature of our businesses in the markets they serve.
Our adjusted operating profit for the fourth quarter was $2.00 $1,000,000 compared to $165,000,000 in the prior year period, primarily driven by strong core growth and continued cost management in both cost of sales and operating expenses. We delivered gross margin expansion of 70 basis points, which contributed to the strong operating margin expansion, similar to the performance that we demonstrated in Q3, and a function of the team's continued application of VBS in what remains a dynamic environment. And although we have demonstrated prudent cost actions in this environment through the year, we have continued to fund our highest priorities to enable us to exit 2020 well positioned for more profitable growth. Our earnings growth continued to translate through to strong cash flow performance with adjusted free cash flow of $2.00 $7,000,000 a conversion of 141% in the quarter. And while our performance in Q4 was strong, it is in line with normal seasonality.
For the full year 2020, we generated adjusted free cash flow of $616,000,000 or conversion of 147% of adjusted net earnings. A key underlying factor driving this outstanding full year free cash flow performance was how well our teams executed in this pandemic environment. Ultimately, the biggest lever in driving the free cash flow performance throughout 2020 was exceptional working capital management. We exited 2020 with working capital levels at a historic low, and while we anticipate maintaining top tier working capital metrics, we expect to see some increase in inventory levels to pace with demand, which will likely increase working capital needs in 2021. Further, I will remind you that 2020 free cash flow benefited from only three federal income tax withholding payments, whereby 2021 will have five payments.
This is a function of the timing of our spin and will create a headwind to free cash flow on a year over year basis. Nonetheless, we are extremely pleased with the work performed by many folks at the operating companies to leverage VBS to drive this cash flow performance. Looking at the top line performance of our two platforms, mobility technologies had core revenue growth of 8.3% led by low double digit growth in GVR, where we continued to see strong momentum from EMV demand and high growth markets. As anticipated, we saw strong demand out of Mexico, driven by the fiscal security regulations we had previously mentioned, and continued sequential improvements more broadly in other parts of the business, including a return to strong growth in high growth markets. Overall, our high growth markets, which are historically rather lumpy, grew mid teens with India and Mexico being the main drivers.
In our diagnostics and repair technologies platform, core growth was 9.2% and driven by the continued strong demand of Matco. Matco experienced low double digit growth as we saw demand continue to accelerate from the strong performance that we saw in Q3. The technician employment environment remains healthy, and with new products coming online and having record net additions to our franchise base in Q4, we feel we are well positioned for 2021. We also exit the year with strong backlog in both platforms. Order growth exceeded revenue growth for the second quarter in a row, with Matco orders growing in the low teens and GVR orders growing in the mid teens.
And we continue to work through both the momentum and Matco and ordering for EMV ahead of the upcoming deadline in April 2021. I mentioned the return to growth in high growth markets, and we generally saw sequential improvement in most of our significant operating regions. North America grew high single digits, as did our developed markets in total, and high growth markets grew mid teens after declining mid single digits in Q3. Last quarter, we noted that we would begin a series of restructuring actions in Q4 aligned with driving targeted operational improvements. We recognized a charge of $4,800,000 during Q4, which is excluded from our adjusted net operating profit.
We anticipate additional actions over the course of 2021, a total full year charge of around $20,000,000 which we will exclude from adjusted operating profit. Before turning it back to Mark, I will walk you through our 2021 EPS bridge. As Mark mentioned, our profitable growth initiatives are a key driver of earnings growth. At the midpoint of our guidance, we'd expect these initiatives combined with an easier compare and price actions will more than offset an EMV headwind of about $0.38 Also, the impact of the return of the temporary costs that we took out in Q2 of last year is expected to be offset by the benefits of the restructuring actions in Q4 of twenty twenty, and those that will be completed during the course of 2021, along with other cost measures. We expect currency to be approximately $05 favorable.
Lastly, below the line and other items are expected to be a headwind of about $0.12 to $0.13 primarily reflecting a higher tax rate. With that, I'll turn it back to Mark.
Speaker 2
Thanks, Dave. There's no question that 2020 was a historic year that presented many challenges. I'm proud of our team for rising to the occasion and delivering safe working environments for our employees, substantial working capital productivity, operational execution and growth as we continue to invest in our future. The durability of our business model through economic cycles was certainly proven out this past year. We realized sequential improvement since last quarter in nearly all metrics, creating not only momentum, but also a high jumping off point as we head into 2021.
I'm excited about our path forward, including the progress we've made since separation towards building out and resourcing our ESG programmatic initiatives and strategy. We're putting a lot of energy into this, and we welcome the opportunity to engage with all of our stakeholders on these efforts and to partner with you as stewards of your capital. To wrap up, 2021 is an important springboard to a multiyear transformation with a long runway of opportunities. As Dave highlighted, we are well positioned for the growth and comparison dynamics as we progress through the year. And while there is much work to be done, our teams are battle tested, ready, and believe that the best defense is a good offense.
We will continue to invest in organic and inorganic opportunities and remain prudent and disciplined in our approach. We're also well aware of the evolving secular drivers in our markets and recognize the value of optionality, rapid decision making, and creative capital structures in this environment. And we remain hyper focused on unlocking shareholder value for the long term. With that, I'd like to turn the call back over to Lisa.
Speaker 1
Thanks, Mark. That concludes our formal comments. Maria, we are now ready for questions.
Speaker 0
Thank you. The floor is now open for questions. If you wish to ask a question at this time, simply press Our first question comes from the line of Nigel Coe of Wolfe Research.
Speaker 2
Good morning everybody. This is Brian on for Nigel. If we could just maybe talk about GVR in the quarter specifically in India, what drove that growth? Was it the new product introductions or just an improving macro backdrop and access to sites and things like that? And then also how are you thinking about the outlook by geography into 2021?
That'd be great. Thanks. Yeah. Happy to do so, Brian. Yeah.
India returned to growth. As you know, it's been a lumpy business. There's it's been impinged by a number of things, COVID being one of them for sure. And, certainly, the access to the customer sites, as you mentioned, is is kind of a big deal so we can do installations. But I think that will even out.
But more importantly, we've got a great product there called Latitude that's well positioned into the marketplace. It's doing really well. We've responded very well to the tenders in the market, and we picked up tenders. And so we've got a good backlog there to serve off as well. So I think our position in India is kind of unique, and I think we're beginning to capitalize on that, which is great to see.
To get to the second part of your question about, the geography, when you walk around the world, if you look at the developed markets, we're looking at high single digits. The Matco and, GVR in North America grew high single digits, as well as Western Europe had, mid single digit growth, and that was a sequential improvement. And then, when you look kind of at the developing markets, as David said, that also had sequential improvement, mid teens growth. Mexico also grew because there was a great secular driver there that's played through, that's continuing to play through in Q1. India was up sequentially, and China was a little bit down.
So, with that, Dave, you want to talk about 2021? Yeah, that's great.
Speaker 3
We talked about some of the dynamics with EMV and frankly some of the compare issues that we'll have next year or this year 2021 compared to 2020. And those really are North America driven with both EMV and some of the strength we saw out of Matco. And so when we look forward, we think most of the growth in next year will be driven outside The US, and we'll see some of those headwinds, offset, but, more of the growth comes from outside The US from those the headwind to VMB and the compare being North America centric. With that, you know, we do anticipate growth in high growth markets and continue to see recoveries in other areas, including developed markets outside The U. S.
As well.
Speaker 2
Great. Thanks everybody.
Speaker 0
Our next question comes from the line of Andy Kovlitz of Citigroup.
Speaker 4
Good morning guys. Hi Andy.
Speaker 0
Mark or Dave, could you update us on your work on business simplification using VBS and what's baked into your 2021 guidance? You obviously reported strong incrementals in Q4 and it looked like they were closer to 50%, which seems like you're guiding to again in Q1. I think you've told us before to think more about 30%. So are you finding more opportunity than you thought to increase productivity as you reduce complexity? Have you increased profitability faster in some of your smaller businesses?
And does that mean we can start thinking about higher inherent incrementals going forward?
Speaker 2
Yeah. Andy, I love that question. You know, what we really found through digging into our portfolio here is that we we have more opportunities. And this simplification initiative really is about how we kind of ferret out the areas where we can do better. And I think the separation really shows that focus works.
And the deeper application of VBS here and the tools that we're using is really uncovering. I think you're beginning to see some of that coming through. I think I'm very encouraged, by what we see into next year as we get our backs fully behind some of these opportunities. In terms of the total guidance, I think I'll leave it to the guide numbers we put out there. But net net, I just am very encouraged in what we're seeing, and I think there's an excellent runway of opportunities ahead.
Speaker 0
Easy enough. Thanks, Mark. Our next question comes from the line of Julian Mitchell of Barclays.
Speaker 5
Hi, good morning. Maybe just a question around the narrowing of that EMV headwind versus what you'd said before. What drove that? And do we just assume a sort of bigger headwind in 2022? And also, I think you'd said you had a high $0.30 headwind from EMV this year in 2021.
That implies, I think, a very, very high decremental margin, maybe 50% plus. Just wanted to double check if I misheard that.
Speaker 2
Yeah. Let me, I'll start with the question and I'll turn it over to Dave too. So first of all, I think we'll get a little better visibility. So for us to kind of, narrow that range on a bit of an improved outlook to 150 is certainly good news. But I think this is the difficulty that we're up against.
One is the adoption rate is really hard for us to tell. So the other two is we had a better jumping off point. It was a lower number in terms of jumping off point. I think we had built a better backlog. And part of that too is we were gaining share.
And then the other thing that's kind of difficult here is that you've got a mix between what's called EMV kits and dispensers, and that's also hard to call. And then you've got the smaller network retailers, and there's thousands of these folks that sell through two step distribution. And so it's a bit of a call in terms of the total adoption rate on it. So I think what we're doing as we we're working through this problem, we're we're as much transparency as we can, we're updating you on where we are and what has changed in terms of what we're seeing and then what our outlook is. So it's it's pretty hard to call even what happens after April.
But I think we're doing the best we can. I think we're confident in what we see. But as we get smarter, as some of these dimensions become better known, then we'll certainly update you as we go through it. Dave, do you want to add anything on that?
Speaker 3
Yeah, I think on the decremental margin piece, Julian, I think you're right around it there, about 50%. These products in The US with a reasonably higher technology component tend to come off at a little bit higher rate. But also as we said in the guide, our profitability actions, our growth initiatives, and collectively are offsetting that impact. So we feel pretty good about that.
Speaker 5
Thanks. And maybe just a follow-up around sort of broader portfolio thoughts, I guess, in two respects. One is maybe some of the markets you're looking to buy in EVs or telematics, very, very frothy valuations. So are you kind of changing at all how you think about acquisitions? And also then on that point on electric vehicle related valuations in the market, does that change how you think about the stakes and things like Tritium and and drives and and how to crystallize that value?
Speaker 2
Yeah. So first of all, we couldn't be more excited about these, very growthy markets fragmented. As As many of you know, it's about a $27,000,000,000 TAM that we operate in. And we are excited about the portfolio opportunities around smart cities, around telematics and adjacencies and logistics and supply chain, And building out the portfolio around the convenience store and truck stops because as many of you know, we're not just a fuel dispensing business. We've gotten into kind of the retailing side with point of sale and with SaaS opportunities there, as well as in the e mobility, I think, represents an opportunity.
So I don't think there's any sort of new updates there. We're we're certainly in the market doing strategy work. We've got a full strategy team now engaged and working on that stuff and, very exciting to kind of peel the onion on that. And then as we kind of move forward, it's the continued cultivation and the M and A is pretty much the same. And we're looking at bolt ons near in adjacencies, strategic acquisitions and we've got a great balance sheet to be able to untap that.
I think the thing that you mentioned there about EV and the valuations, I mean certainly we're seeing valuations and we're obviously paying attention to what's happening in the marketplace. The great thing is that we've got these two minority investments. One in Tridium, which as many of you may know is a DC fast charging company there, and the other is in Drives, which is a software company around energy management in the space too. And so that provides us really a front row seat where we're able to really learn. And keep in mind, it's very early innings in the market.
Speaker 4
Great. Thank you.
Speaker 0
Our next question comes from the line of Jeff Sprague of Vertical Research.
Speaker 2
Thank you. Good morning, everyone.
Speaker 6
Good morning. Hey. Just two from me, please. Just first back to EMV, understand the whole kind of riddle or question on where adoption ends up. But based on where you ended the year and what you have on backlog in backlog, which we would assume would obviously be delivered, where does that roughly leave adoption, assuming nothing else happens?
Speaker 3
When we look at our installed base, we converted about a little over 70%, about 71% of our installed base. We would then count the backlog in next year's activity, so we'd be over 80, probably the mid-80s exiting 2021 based on kind of the midpoint of the range we put out today.
Speaker 6
Great. And just to follow-up on the minority stakes, and again, it's nice to have kind of a little play there. But what are the dynamics around those businesses you know, if the majority owner wants to kinda go elsewhere, you know, the risk of these things may be, like, trading away from you, so to speak. You know, it's unclear if your ambition is to ultimately buy these things outright or they're channel and partner plays, right? But back to the earlier question, some of this stuff is super hot.
You could potentially just see this going elsewhere at some frothy valuation.
Speaker 3
Yeah, it's difficult to hypothesize here, Jeff. The terms, the actual terms of these agreements are confidential. But we also have you know, commercial arrangements with these folks that are outside of the existing terms of our ownership. So it's hard to hypothesize, particularly in a market that's this early stage and frankly this kind of exciting. But, having said that, I understand that I think we all agree on the dynamic that we're seeing.
We're seeing a lot of activity in this space. And ultimately, we like our optionality and we like our position being in these assets.
Speaker 2
You know, the other thing there I'll just throw in that is our revenue that we actually sell, for, what we call e mobility, which is mostly electric charging of trading and products today, it's mostly Center Europe, is is about 25,000,000. So it's grown a lot this past year, and it really represents excellent learning. I think that's kind of the best way to describe at this stage, is that we're learning a ton. The market's evolving quickly. It's an exciting market, and we're looking for the best ways to untap that.
Speaker 6
Great. Thank you for that color. Appreciate it.
Speaker 0
Our next question comes from the line of John Walsh of Credit Suisse.
Speaker 7
Hi, good morning.
Speaker 2
Good morning.
Speaker 7
Maybe circling back to the question around capital allocation, just wanted to get your sense on how you're balancing kind of being able to find these deals where you can kind of hit that 10% ROIC threshold versus share repurchase. It looks like you are guiding for some dilution in the share count in 2021 relative to at least what you did here in q four on a on an average diluted basis?
Speaker 3
Yeah. We we are. And part of that's a little more impacted by the spin where now we're seeing the impact of stock based compensation come in just beginning from the spin date. That's the dynamic that you see there. But when we think about capital allocation, I think it's fair to say that M and A definitely remains our highest priority.
Ultimately, John, we're focused on shareholder return, and we think M and A is our preferred vehicle to get there. Having said that, there could be times when share repurchase makes sense. But I think the right way to think about us is M and A definitely remaining our priority in terms of adding shareholder value.
Speaker 7
Great. And then maybe as a follow-up, a lot of focus on EMV. I'm sorry if I missed it. How what did the point of sale business do within GVR in the quarter? And then how are you thinking about the growth for that part of the business into '21?
Speaker 3
Yeah. We didn't talk specifically about point of sale. As you know, we have a good position in The US, and I think we did well there. I don't have the exact percentage growth on that product. But when we were talking EMV, just to be clear, we're talking about the dispenser and the payment system embedded in the dispenser.
So outside the thing you put your credit card We like our point of sale position. We like our position in The US, which is strong, and I knew we grew well there. And outside The US we have some new products coming online, so it's an exciting space for us. But I think to the heart of your question, point of sale is not considered part of this EMV dynamic.
Speaker 7
Great, thank you.
Speaker 0
Our next question comes from the line of David Russo of Evercore ISI.
Speaker 8
Hi, good morning. My questions are about the guide. The backlog is up 40%, you mentioned, at the end of the year. Do you have a backlog growth rate for ex EMV? Really, I'm trying to figure out the growth for non EMV.
It was up high single digit in the fourth quarter, but you're expecting it to slow to mid single. And I'm just trying to figure out that dynamic. And then second, on the guide for EPS, it seems like you're implying the back half of the year is about 1.4 which means the first half of the year is $1 And given you gave first quarter EPS, you're implying the second quarter EPS is
Speaker 3
below the first quarter.
Speaker 8
And I'm just trying to make sure that's what you're trying to imply. And then lastly, the balance sheet usage cash flow. Is any balance sheet usage cash flow really in the guide?
Speaker 2
Thank you.
Speaker 3
Going back to these components, maybe starting with your point around the guide, David. So look, talked about the tale of two halves. And the first half is going to be quite a bit stronger here, both on the easier compare, but also because we're seeing the EMV volumes come through. Note that we'll see some permanent costs come back in the second quarter. So there's still some puts and takes, and we're not guiding EPS by quarter beyond the first.
But there are some dynamics that probably impact the second a little worse than that aren't necessarily there in the first. And the volumes coming out of your backlog kind of tying it to your first point, are ultimately we'll see a lot of that strength coming through the first quarter. So the first quarter is definitely going to be very strong, to your point. Now the point about backlog that you point out, EMV was a big driver of the significant growth in backlog. But we had good growth in Matco, and we had good growth on other parts of GVR as well that were not US related.
So I think that without having the exact number parsed out in front of me, think it's pretty fair to say that we're seeing growth in backlog, albeit not at that rate. So there's also some other timing effects here happening in the first half that's really a little bit due to the pandemic. Historically, we would have our expo at Matco, which is frankly a big driver of demand and cost. We would have that in the first quarter, and we're moving that to the second. I don't think all of the revenue will necessarily move to the second because we'll still do a lot of that online.
But it's a very important event for that organization that pulls along a lot of cost, and that will be in the second quarter as well. So I think directionally, you're correct without trying to necessarily put a dollar on it.
Speaker 8
I'm just trying to and also the third question about the balance sheet cash flow use, What's implied in the guide? Or is it more just no usage implied and with your lower net debt in your model? I'm just trying to figure out what's in the guide for the balance sheet usage.
Speaker 3
Yeah. So we talked about Mark talked about conversion, free cash flow conversion of about 95% next year. And we had a big working capital tailwind this year, and we anticipate, as I was saying, a little bit of a headwind next year. So we anticipate a little lower well, significantly lower free cash flow conversion year over year. But as you know, we tend to point people towards about 100% conversion.
So we'll be around that, so we see things kind of normalizing with some trade offs from some of the benefits in '20. As far as capital allocation for M and A, we are not implying anything in our guide around doing any deals. So this would be, you know, kind of a purely organic guide. M and A would be upside to this like it like it always is for us.
Speaker 8
So no repo, no m and a, just simply the 95% cash flow conversion, and whatever that cash would bring on interest income or, you know, whatever short term debt reduction. There's no active use of the cash flow or balance sheet for m and a or repo.
Speaker 3
That's right. That's right.
Speaker 8
All right. I appreciate it. Thank you so much.
Speaker 3
Yes, sure, David. Thank you.
Speaker 0
Our next question comes from the line of John Inch of Gordon Haskett.
Speaker 4
Thank you. Good morning, everybody. I'm wondering if we could talk a little bit about just m and a process. I know you've talked about this in the past and you've talked about this, kind of as as Volunteer was going public. But I just want to maybe maybe you could lay out a little bit more on the process and how this is working.
I know you have a couple of senior folks driving this. And I mentioned I know one of you mentioned, you know, the smart cities initiative. But, you know, how are you if you think about X and obviously you can get into some adjacencies into C Suite or C stores and, you know, other things with respect to gas stations. But how are you thinking about the world of like, you guys have a pretty blank canvas. Right?
I mean, strikes me that you have a very wide opportunity to look at a number of different things and criteria, possibly even a little overwhelming. How are you how are you narrowing this? Just maybe you could talk about that, please. Thanks.
Speaker 2
Yeah. So it is a pretty exciting field. And if you think about our penetration in some of these, you know, GTP, a small business, it still puts us into 90,000 intersections in The United States. You know, in terms of fleet monitoring management, we're on half a million vehicles that are being monitored. And, you know, then if you you spoke about the the convenience store with, about 260,000 refueling sites globally with on the average of every three to four dispensers per fueling site.
So there's a lot of data coming in, and the ability to sort of monetize that is also pretty exciting. But I think you you brought it up right. I mean, it's it's growthy. These are fragmented. They're all very excited.
And then how do we narrow the field? It's something that we wrestle with a lot. We've got a team of folks working on this, bubbling up priorities. And as you know, both you wanna be convinced of the strategy in this space as well as you wanna be looking at what's in those spaces in terms of properties, and m and a can be quite episodic. So there's a number of factors that we look at.
The good news is that they're all relatively near end. Like, we have a reason to be in these places. We have something to leverage in these places. And we have something to leverage across these spaces too, which is also very exciting. So I think that does give us optionality.
I will absolutely say that we have a disciplined, rigorous approach when we think through these things and through capital allocation as well. It's a bit of the heritage that we get, both through the cultivation aspect as well as the executives that we have on board that really think through these kind of things. And we like to say no a lot in this process, too. That means we're just firing out the best of the best opportunities at this given time.
Speaker 4
Mark, what would you say are volunteers' core competencies that would lend themselves to you targeting future acquisitions that are not immediate or obvious adjacencies to both Matco and GVR? Yeah. We have an excellent core competency in solving high value problems with customers in this space.
Speaker 2
Our brands are well recognized. We've got a lot of depth in how we serve our customers there. And then when you look across the businesses, there's pretty significant scale that we can also leverage. And then the other confidence we have also is on this sort of m and a allocating capability, that is deeply entrenched in the business and also the application of VBS and how we can apply that to to new acquisitions. So we've got a lot to work with here, and so I'm excited to, leverage it.
Speaker 4
Thank you.
Speaker 0
Our next question comes from the line of Julian Mitchell of Barclays.
Speaker 5
Thanks a lot. Sorry, just one follow-up. I didn't hear much mention of telematics. Maybe I missed it, but just wanted to check how did that perform in Q4? And also, what's embedded in that guide for this year relative to the mid single digit growth ex CMV?
Speaker 3
Julian, it's Dave. In the fourth quarter, I think we saw the progress we were looking for, and we remain on track. As you know, it's a SaaS business, and it was down in the fourth quarter. But that was more a function of kind of flushing through some churn revenue in the prior year. And as we've talked about earlier, we've seen churn moderate.
It's a SaaS business. It takes time to change. But what we're looking at is the forward indicators of the rate of churn and some of the operational priorities we're looking to make. We've talked about really starting to see that flow through the P and L more in the second half of next year. So it doesn't have a big effect on the guide next year because it moves slowly.
But I would say, you know, we're definitely still focused on the operational priorities we've talked about and feel like we're on track with those.
Speaker 5
Thank you.
Speaker 3
Thanks, Julie.
Speaker 0
Ladies and gentlemen, that was our final question. I'd like to turn the floor back over to Mark Morelli for any additional or closing remarks.
Speaker 2
Yeah, thank you, Maria. I'm incredibly proud of this team's ability to come together and execute with these headwinds, and more importantly, take advantage of these opportunities that have been in front of us. And I'm also very excited about this road ahead. This ability for us to springboard into this multiyear transformation is very compelling to us as a management team. We're very engaged on it and couldn't be more excited to see what happens on the road ahead.
Thanks, folks, for joining us today in today's call, and have a good day. Bye now.