Fortive Corporation (FTV) Earnings Call Transcript & Summary

Welcome to the 2021 Annual Meeting of Shareholders of Fortive Corporation. Our host for today's call is Alan Spoon, Chairman of the Board. [Operator Instructions] I will now turn the call over to your host, Mr. Spoon. You may begin, sir.

Good afternoon, ladies and gentlemen, and welcome to the 2021 Annual Meeting of Shareholders of Fortive Corporation. I'm Alan Spoon, Chairman of the Board. While we had hoped to see you in person, we are holding our annual meeting in a virtual-only format this year to protect the health and safety of our employees, shareholders and our directors. Last year was the first time we held our annual meeting in a virtual meeting format due to the pandemic. Our ability to pivot to a new format in 2020 was a reflection of how all of us, including our shareholders came together and adapted in the face of extraordinary challenges presented by the pandemic. Despite the change in the format, we have strived to make the meeting as inclusive as possible by offering our shareholders substantially the same opportunities to participate as they had in our prior in-person meetings. Before we start, I would like to thank each of you for your investment and interest in our company and for working with us as we remain guided by the safety of our stakeholders as our first priority. We hope to conduct our future annual meetings in person. And I look forward to seeing you in person in future years. Now I would like to introduce the other directors of the company: Dan Comas, Feroz Dewan, Shar Dubey, Rejji Hayes, Jim Lico, Kate Mitchell, Mitch Rales, Steven Rales, Jeannine Sargent. I'd like to take a moment to recognize Mitch and Steve Rales who are retiring after this meeting and will not stand for reelection. Mitch and Steve have provided invaluable service to Fortive and to you, our stakeholders, and to me personally, as we served together since Fortive became a public company. So Mitch and Steve, a special thank you. We also have in attendance, Pete Underwood, our General Counsel; Griffin Whitney, our VP of Investor Relations; and Daniel Kim, our Corporate Secretary, who will be acting as secretary of the meeting. In addition, I would like to introduce Tim Tasker of the accounting firm of Ernst & Young LLP, the independent registered public accounting firm for the company. A list of shareholders entitled to vote at this meeting has been posted on this virtual platform. We've also posted the meeting agenda and rules and procedures. If you've not had a chance to review the rules and procedures, I ask that you take a minute to review them now. As you all note in the agenda, I will begin with the formal portion of the meeting. And then Jim Lico, our President and CEO, will give a brief presentation, and then we will end by answering some of your questions. This meeting is held pursuant to the notice that we began mailing on April 6, 2021, to our shareholders of record as of April 12, 2021. An affidavit showing the proper mailing of the notice of this meeting will be filed with the records of the meeting. With that, the 2021 Annual Meeting of Shareholders of Fortive Corporation will please come to order. The polls are now open for voting. The polls will close upon conclusion of the discussion on the last item being voted here today. As a reminder, shareholders can vote their shares online from now through the closing of the polls by clicking the Vote Here button on this virtual meeting platform. If you have previously voted by proxy and do not wish to change your vote, your vote will be cast as you previously instructed and no further action is required. Most shareholders have already voted by proxy, and those votes have been tallied. Following the formal portion of this meeting, we will have a few minutes to answer any questions submitted by our shareholders. Shareholders who would like to submit a question may do so in the designated field on this virtual meeting platform. As a reminder, only validated shareholders may ask questions. [Operator Instructions] Our Board of Directors has appointed Broadridge to act as inspector of election. Leah Grant from Broadridge is with us today, and she has taken the oath of office as required by law. The oath of office will be filed with the minutes. The inspector of election and our secretary have advised that we have a quorum. In the interest of time, we will waive a reading of the minutes of the last annual meeting. There are 5 items of business to be conducted at today's meeting. Each item is described more fully in the company's 2021 proxy statement. The company has not received notice from any of its shareholders of any other matter to be considered at today's meeting. Therefore, no other proposals may be properly introduced. The first item of business is the election of Dan Comas, Feroz Dewan, Shar Dubey, Rejji Hayes, Jim Lico, Kate Mitchell, Jeannine Sargent and Alan Spoon, each of whom has been nominated by the Board to serve as a director until the 2022 Annual Meeting. The second item of the business is the proposed ratification of the selection of Ernst & Young as the company's independent registered public accounting firm for fiscal year 2021. The third item of business is the approval on an advisory basis of the company's named executive officer compensation. The fourth item of business is the approval of the amendment to the company's certificate of incorporation to allow holders of at least 25% of Fortive's outstanding common stock to call a special meeting of the shareholders. Before we proceed to the fifth item, I would like to take a moment to note that the Board conducts an ongoing review of our corporate governance policies, and we consistently seek improvements that strike an appropriate balance between enhancing shareholder rights and adequately protecting shareholder interests. This requires us to be truly thoughtful, keeping in mind where we are in our journey, listening to our shareholders and bringing our collective experience to assess how we best protect the interest of our long-term shareholders and our other key stakeholders. As such, I am pleased to submit our proposal on the right of shareholders to call a special meeting. The fifth and final item of business is a shareholder proposal regarding shareholders' ability to act by written consent. Mr. John Chevedden, as a shareholder proponent, will have 3 minutes to read the proposal. I now ask the operator to open the line.

Thank you, sir. John Chevedden is on the line to present the shareholder proposal.

This is John Chevedden. Can you hear me okay?

Yes. Mr. Chevedden, we can.

Proposal 5, adopt a mainstream shareholder right to written consent. Shareholders request that our Board take the necessary steps to permit written consent by the shareholders entitled to cast the minimum number of votes that would be necessary to authorize an action at a meeting at which all shareholders entitled to vote thereon were present and voting. This proposal topic won 79% support at Xerox and 95% support at Dover Corporation. Shareholders should vote for this proposal because of the high-risk that the special meeting management proposal 4 will fail and shareholders may thus not even have a right to call for a special shareholder meeting. Jeannine Sargent, Chair of the Governance Committee, should be held accountable for not warning shareholders that management proposal 4 has a high-risk of failure because it needs 80% approval from all shares in existence and Fortive, historically, collects a lot of abstained votes. Management now suspiciously claims that it is more in favor of a special shareholder meeting at a time that shareholder meetings are losing their impact with the onslaught of online shareholder meetings. For instance, the 2021 Kohl's Annual Meeting was wrapped up in 9 minutes. Example of the dominance and control the management can now exert at online shareholder meeting is AT&T, which would not even let shareholders speak at 2 consecutive online shareholder meetings. The resistance of management to this written consent proposal is misplaced because management is apparently ignorant of the elementary fact that written consent can be structured so that all shareholders get advanced notice of a proposed action. Written consent is super democratic because if a shareholder does not support the written topic, the shareholders do not have to do anything and it accounts as it against vote. This is in contrast to a shareholder meeting where shareholder support or shareholders opposition counts for nothing unless the shareholders makes the effort to vote. The shareholders supporting written consent could only accomplish their objective if 56% of the shares that normally vote at annual meeting give approval. And resisting this proposal, management is opposed to listening to the voice of 56% of shares. It's important to have both a right to call a special shareholder meeting and to act by written consent to make up for the lack of a shareholder right to act by a majority vote. Apparently, Mr. Alan Spoon, Chairman of the Board and former Chairman of the Governance Committee, could not have cared less whether the overwhelming support for a simple majority vote proposal topic received the necessary 80% vote of all shares in existence in 2019 and 2020. Management brags about shareholder engagement, but fails to disclose the shareholder reaction to 2 consecutive failed votes on management proposals to improve management accountability to shareholders.

Mr. Chevedden, your allotted time has expired. Sir, please complete your presentation as the line will close shortly.

There was no special management effort to manage shareholders that every last vote mattered and, consequently, the management proposal to improve management accountability failed in inexcusable lockstep manner by narrow margins in both 2019 and 2020. It is impossible to obtain an 80% vote from all shares in existence when there are more than 35 million abstained votes for 2 years in a row. Shareholders were not happy with Mr. Spoon, and Mr. Spoon was rejected by 5...

Thank you, Mr. Chevedden. I think your 3 minutes and more have been taken and you've expressed your views. The Board opposes Mr. Chevedden's proposal for the reasons set forth in the proxy statement. In particular, the Board unanimously recommends the shareholders vote against the proposal because we believe that matters requiring shareholder approval should be presented to and voted on by all shareholders. We believe that unlike Mr. Chevedden's proposal, the right to call a special meeting proposed by the company sufficiently empowers all shareholders to participate and cast informed votes. The polls are now closed for voting, and we will now report the preliminary voting results. I call in the inspector of election for her report.

Thank you, Mr. Chairman. With respect to proposal 1 on the election of each of the 8 director nominees, a majority of the votes cast were voted in favor of election of each of the nominees. With respect to proposal 2 on the ratification of the selection of Ernst & Young LLP as Fortive's independent registered public accounting firm, a majority of the shares present or represented by proxy and entitled to vote were voted in favor. With respect to proposal 3, on the advisory vote on the company's named executive officer compensation, a majority of shares present or represented by proxy and entitled to vote voted in favor. With respect to proposal 4, on the approval of the amendment to the company's certificate of incorporation, to allow holders of at least 25% of Fortive's outstanding common stock to call a special meeting of the shareholders, more than 85% of the shares outstanding on April 12, 2021, and entitled to vote, voted in favor. And finally, with respect to proposal 5, on the shareholder proposal regarding shareholders' ability to act by written consent, 38.7% representing less than a majority of the shares present or represented by proxy and entitled to vote, voted in favor.

Thank you. In view of the results I declare that each of the nominees for director named in the proxy statement has been duly elected a director of the company. Proposals 2, 3 and 4 have been approved. And proposal 5 has not been approved. We will report the final voting results in the current report on Form 10-K within 4 business days from today. Ladies and gentlemen, that completes the business of the meeting, and I declare the formal portion of our meeting adjourned. I will now turn the meeting over to our President and Chief Executive Officer, Jim Lico. Following Jim's remarks, we'll have a few minutes to take questions from shareholders.

Thanks, Alan, and good afternoon, everyone. Thank you for joining us. I'll go briefly through the presentation that we have. And obviously, some very important things going on in Fortive. And I would also draw attention to our investor conference that we held less than 2 weeks ago for any additional detail to the slides that we'll cover today. I think it's important to continue to reinforce our shared purpose, essential technologies for the people who accelerate progress. And in 2021, we continue to demonstrate -- in 2020, we continue to demonstrate how our shared purpose binds together our companies in so many important ways. Forged on it through with our shared purpose and lived through our core values, Fortive had an excellent year and is well poised for future success. We're building a stronger Fortive. Driving in the Fortive business system and continuous improvement, we'll see a continued increase of focus and commitment to sustainability. You'll hear throughout our presentation, but more importantly, from us all throughout the year, how increasing diversity at all levels of our organization continues to be a critical part of who we are becoming. And we're enhancing our talent acquisition and development capabilities to make sure that we not only have the talent for today, but that we're well-positioned for the Fortive of the future. FBS is and always will be the cornerstone of our culture. It's not only the tools and processes that we talk about so often and living our core values, but it's the fundamental commitment that our culture has to continuous improvement. It's how we do what we do. Fortive business system is often thought of as a set of tools, but it's really much more than that. It's the deep belief by every one of our employees around the world that we can make every day better than the day before. And through that continuous improvement focus, we continue to build a stronger company. Our core value drivers are the metrics that we -- that drive us, though the metrics that make sure we continue to make progress, whether they are for all of our stakeholders, including our customers, our team and, of course, our shareholders. It is an inextricable part of who we are today and who we will become -- who we will continue to be in the future. But we're not just taking FBS for what it was over the last 20-plus years, we're also making sure that it continues to increase in impact. The Fortive Business System, we often think about it with 3 core tenets: leadership, growth and lean. Those are the tools of today that have made us so successful. But it's really -- we've added core capability in innovation, in order to make sure that we continue to build our companies and our businesses that will be part of -- that have become part of Fortive over the last 5 years and will be added to Fortive in the future. Our growth accelerated process is our principal process for early-stage innovation within our company. Our artificial intelligence capability is built in our corporate function in the FORT where we build data analytics and machine learning capabilities to be deployed throughout Fortive. Our partnership with PSL, Pioneer Square Labs, helps bring early-stage innovation practices into Fortive as well. And then finally, we continue to build better software businesses through the application of the Fortive digital systems. It's these new capabilities, forged with the capabilities that we've built over the last few years, that really continue to enhance the Fortive Business System to drive impact across our hardware, software and data analytics offerings. We continue to be firmly committed to sustainability. We've recently shared our sustainability report, articulating our vision of accelerating progress towards a sustainable future, while also articulating that through 5 sustainability pillars. It's these sustainability pillars that drive strategy and drive action towards making sure that we continue to drive meaningful, responsible and sustainable impact for areas that matter most to our stakeholders. And we're incredibly proud of the work we've done to bring this strategy to life. Part of that is in our strong and inclusive culture. And while I won't repeat all the numbers on the page, we continue to make unbelievably strong commitments to our employees with very high employee engagement. We received again 100% rating in the Human Rights Campaign Corporate Equality Index, and 100% of our employees have completed unconscious bias learning. Our Board of Directors represents strong diversity, brings diverse points of view to all of the decisions that the Board would handle. And our employee base continues to have diverse representation with 80% of our employees telling us that they feel like they continue to feel strongly towards our culture and that they are involved and have strong belonging to what we're trying to do. We continue to remain committed to strong increases in involvement and belonging as well as representation of women and 2x increase in the representation of black and Latinx populations in our company. Overall, we're incredibly committed to a strong and inclusive culture and making sure that we create an environment where people can bring the best of themselves and where they can do their best work. With the separation of Vontier, we now have 3 strong segments in which to go forward for Fortive. We're well-positioned for accelerated growth and compounding. All of our segments represent strong financial positions with market-leading brands and wonderful market positions in which to build off. And whether it's our gross margins or our recurring revenue or the operating margins, we continue to have the ability to apply FBS to improve those metrics while taking advantage of a great market position we have today to continue to be supported by these segments and the strong segment strategies that go with them. We bring all this together in what we believe is a proven flywheel, our flywheel for value creation. It's taking our sustainable competitive advantage, the leadership and market positions that we have, the durable financial profile as well as our deploying successful capital allocation track record, all built on the backs of the Fortive Business System, the cornerstone of our culture. It's taking that strong core revenue growth, continuing to drive margin expansion through the power of our -- of success and we continue to improve our portfolio, utilize acquisitions with -- through our strong free cash flow, using that free cash flow deployed to M&A to accelerate strategy in our businesses and fundamentally to provide -- utilize FBS to continually improve the businesses that become part of Fortive. The momentum that is created from that flywheel is strong. It's targeted. It's strategic, and has the ability to deliver strong double-digit earnings growth, which we feel is incredibly -- an incredible part of our future success. So I hope everyone has a chance to read more deeply our investor presentation -- from our investor presentations. We had in our investor conference where you can get a much deeper view of our strategies and the execution that we've had and the position that we're in going forward for success. I want to thank Alan and the Board for everything this year. During such a critical time, we had tremendous support from our Board of Directors in the work to make sure that we got all of our team members through the pandemic. We got out of that safe, healthy and we're well-positioned for future success. And with that, I'll hand it back -- we'll take questions. Alan?

Thanks, Jim. At this point, I would like to take a few minutes to answer questions we've received. Griffin, can you read the first question?

For the first question, it's about research and development. Jim, can you comment on R&D spending in 2021?

Yes. We have -- our R&D spending, it will move around quarter-to-quarter, but it's in the range of 6.5% to 7%. In our last earnings call, we articulated an increase in our R&D spend for strategic investments and future growth. These are some things that we think we can accelerate in places like the FORT, which, again, is our data analytics and machine learning capability. So we're well-positioned in our businesses from an R&D standpoint. We utilize FBS to get more out of every R&D dollar. And as we continue to see growth opportunities, we're not limited to the percent spend I just articulated. The more opportunity to have, the more we will go after future growth opportunities.

All right. And for the last question, we received a question about our vaccine policy. Jim, could you comment on that?

Yes. We do not require our employees to get a vaccine. We are highly encouraging. We have from day 1, led with science guidelines. The CDC guidelines is a principal backdrop to what we've done. That's allowed for us to be incredibly safe in our facilities throughout the pandemic. And we'll continue to utilize the guidelines from the CDC as well as our conversation with local authorities to make sure that we put first -- put safety first and foremost with our employees. So we're highly encouraging them to be vaccinated. And if they're not vaccinated, then they're obviously required to wear a mask.

Griffin, are there any more questions?

There are no more questions.

Thank you. And thank you, Jim. That concludes the 2021 Annual Meeting. Thank you for your support, and have a good afternoon and evening, depending on where you are. Good night.