Fortive Corporation (FTV) Earnings Call Transcript & Summary

Everyone back. Again, I'm Andy Kaplowitz, cover multi-industry and E&C for Citigroup. We are really excited to have Fortive with us, Fortive's Jim Lico, President and CEO. Chuck McLaughlin is in the audience, SVP and CFO. Just a little bit of ground rules. You can ask us questions with the QR code, and just scan the QR code and ask us questions that way. And I'll look at the iPad, which is over there, which I'll go get. Just in terms of introducing Jim, Jim is the founding President and CEO of Fortive. He joined Veeder-Root in 1996 as VP of Operations. Jim holds a Master in Management from Northwestern. I hold one as well. So let me turn it over to you, though, Jim, because I know you have a few minutes of prepared remarks and then we'll get to Q&A.

Yes. Thanks, Andy. Good morning, everyone, and great to be in person. It's just great to be here. We thought we'd -- given the fact that we haven't had a chance to be in front of everyone for a little bit and certainly with this format, we thought we'd have -- just go through a couple of slides here real quick just to maybe get everybody squared away. Fortive today -- as Andy said, we celebrated our fifth anniversary this summer. So now 5.5 years old after our separation from Danaher. Now a little over $5 billion in revenue as we think about -- almost $6 billion of revenue, excuse me, for 2022. We've really -- I think the metrics on the business continue to improve whether it be the margins or now our gross margins approaching 60%. I think the things that have really driven that in part are certainly the Fortive Business System, but also the portfolio changes that we made really to higher recurring revenue, now almost 40% or now 40%. And certainly, it also demonstrates really strong free cash flow. Our free cash flow margin is here probably 20%. What continues to distinguish us, I think, is really, geographically, there's still a lot of opportunity. I'm sure we'll talk a little bit about it to globalize Fortive, still with North America sales here roughly in the 50% range, really still continues to be an opportunity to see growth not only in the U.S., but certainly outside of developed markets. We had very, very strong -- developing our high-growth market growth last year as an example. Our revenue by market continues to be a couple of places, largest part, but very, very well. I think a great segmentation across a range of great industries with great secular drivers, about $40 billion served market. Our biggest markets are industrial and manufacturing and health care, but certainly good, strong positions and great franchises through a variety of end markets. Our segments today, and this is about a year old after the Vontier separation, we went into 3 segments, incredibly excited about these 3 segments. I'm sure we'll go into them. I won't spend a ton of time here, but we really think about this as in -- our IOS segment, about 40% of our sales, mid-single-digit growth, great margin structure. This is where we have most of our software business as an example. But really great franchises at Fluke is sort of the founding member of IOS, if you will, but a lot of additional businesses that we've added over the years, Industrial Scientific, a number of great software businesses and the current Gordian and most recently, ServiceChannel. So we really think of ourselves in the workflows there, really around condition-based monitoring, thinking about facilities and asset life cycle management and environmental health and safety. So those 3 workflows, really great growth drivers. About $20 billion of served market is in that segment. Our Precision Technologies segment kind of what's been part of Fortive for a long time, certainly with Tek being our largest, Tektronix being our largest business in there, but really, really focused on the engineer and really bringing technology to market through a range of great businesses. A little bit lower core growth there, but great margin structure, great free cash flow. Opportunity to continue to grow, about a $10 billion served market. That's about 35% of our sales. And then finally, our newest segment, Advanced Healthcare Solutions. Our largest business there, Advanced Sterilization Products, which is a business that we bought from J&J a few years ago, great foundational business at Fluke Health. So we really have a great franchise here, great margin structure. We've continued, I think, across the range of the portfolio to continue to really add operating margin to all 3 of our segments, but it's been really strong in health care. And obviously, very strong recurring revenue here, our largest recurring revenue segment at close to 70%. So really, really great health care business, great long-term drivers. ASP really around -- when we think about it -- and obviously, COVID's impacted this a little bit, particularly around elective procedures. But our -- really, our mission in life here in this segment is really about helping the hospital deliver higher quality health care in a safer way at a best cost situation. So our solutions, whether they be hardware or software, really focused on the fact that the hospital is dealing with lots of challenges to bring in new things. And we certainly help them do that across a range of specialties. So all 3 segments can seem complicated, but I think at the end of the day, very focused on really helping our end customers with the workflows we participate in, really help our end customers deliver higher quality, safer whatever they're doing in a more productive way. So really solutions, whether it's hardware, software or services, that are really focused on that. Real quick. Our playbook for acquisitions, we've deployed a fair amount of capital over the last 5 years, but we think about it in really from a market company value creation methodology. You can see the slide, but really a focus is on really finding those markets where there's good secular drivers, really making sure that there's high barriers to entry whenever possible, good competitive positions, lots of candidate opportunities, if you will, markets that can be -- that are fragmented certainly give us an opportunity with a good market position in that company to continue to deliver value. We're really looking for continued revenue durability beyond growth but also revenue durability. And that's really the mantra for why we're now at 40% recurring revenue. And then finally, value creation. I mentioned the Fortive Business System a few minutes ago, but really around can we add value in the business? Can we continue to sort of accelerate the strategy within the business? Can we add value through continued investments, synergies within our current construct? And we're really looking for deals within those 3 segments that I mentioned. That really gets us to where we are today. You can see in the slide, but in a very good position from an organic growth perspective, continued recurring revenue increases, free cash flow margins that are very strong. And we'll continue to be able to add value and really create that flywheel through continuing to add free cash to the business and really invest that free cash flow into opportunities that accelerate our strategy. So that's a quick view of the world at Fortive, but I thought I'd -- with that, I'll sit down and have -- maybe answer a few questions.

Jim, that's great stuff. So while you're getting situated -- appreciate that. That helps me. So while you're getting situated, let me sort of respond to your presentation in one sense. Like you mentioned some people think Fortive is complicated. But at the same time, it's really a workflow solutions company. So maybe talk about the vision that you have for Fortive? And how do we -- how should we think about Fortive over the next few years?

Yes. I think with the addition of health care, maybe people will start to think about things different, maybe slightly differently with us. We're certainly still in a number -- in a few different markets. But at the end of the day, whether it's an engineering lab, a manufacturing facility, a commercial facility or a hospital, we're really looking for hardware and software solutions within a core set of workflows that fundamentally are really important to the end users. So I mentioned in the hospital, the perioperative loop, that sort of -- that operating loop between the sterilization lab and the OR. There's lots of opportunity within that to really see where the hospital could use software solutions, data analytics, along with hardware to sort of do things in a way that delivers higher-quality health care. So -- and across those segments, each of those workflows are really important. And they really -- there's a congruency amongst all 3 where hardware and software comes together in a way that I think we're advantaged and we can create new solutions through our innovation methodology that continues to deliver organic growth beyond the acquisition, which obviously is critical.

So another thing you talked about, you talked about the Fortive Business System a little bit. And I think this is a good way to sort of bridge into supply chain, which I'm going to ask you about. But how did the business system help you navigate or how is it helping you navigate? Because you're doing pretty well on the margin side, and it looks like you're continuing to want to expect mid-30% to 40% incrementals.

Yes. I think it helps tremendously, Andy. And I think we -- it's a challenging environment for sure. We can talk more about that. But I think there's really 2 ways. Number one is our sort of methodology in manufacturing around you make a day 1 hour at a time, you make a week 1 day at a time, and you make a month 1 week at a time, you carry that forward is really around daily management around visual management. So the ability to sort of respond faster to be able to deal with global supply chains in what we call Obeya rooms around the world and be able to do that in sort of what I would call a high-velocity manner has been in our DNA beyond the supply chain challenges. Now we had to morph some things and add some resources because of the challenges itself, but therein lies a process that already existed. And then as you said, secondarily, it really shows up in the margin structure. So we didn't hit 100% on-time delivery in the fourth quarter by any stretch of the imagination. But we were able to continue to deliver good margin structure on the backs of doing these things in the most cost-effective way, but also be able -- we also have FBS tools around pricing. And pricing is part of some of these inflationary mechanisms as well. And that allows us to continue to deliver the kind of margins, not only in '21, but in '22 that we described.

So FBS protected you well on the margin, maybe not as well in some delayed revenue, as you know. And so -- but your orders, up 14%; backlog -- hardware backlog was up 84%. So maybe you can give us an update on sort of has anything changed? Anything gone easier? That $50 million going to show up yesterday? What's happening in the...

Well, yes, I mean, we -- first, we did -- even with the guide we have for the first, we still -- we would see some improvement just in core growth. But I would say the challenges, what I said on the call, which wasn't that long ago, was we don't expect these challenges to really get better in the first half of the year and probably later into the second half of the year. But it would be our countermeasures that would take and have more impact through the year because some of the countermeasures around supply chain are design-related. And so we have to design in these components, validate them into the products and then inevitably get those designs into the marketplace. So that just takes a little longer than some of the shorter-term countermeasures. So it's really our countermeasures that play out over the year than any anticipated big improvement in any supply chain challenges.

So let me ask you just -- because you're right, I mean, it hasn't been that long since you reported, but obviously, there's a little more geopolitical concern. Omicron has been out there, but hopefully waning. So have you seen sort of Omicron-related disruption get better? And you're pretty big in Europe and China. Any concerns around Russia, Ukraine?

Well, yes, I think we all wake up every morning looking at the news headlines to wonder what's the next move in Ukraine, for sure. I'm not sure we've seen anything business-wise yet. I would say this. Certainly, as Omicron has waned, that's going to be a good thing for us, and that will inevitably be helpful for sure. But I would say on a global basis, it continues to be fits and starts. And so that's why I say I don't think things improved. But we don't need them to improve. And as we said, what we have out there, I think, is what we feel very strongly is very strong performance, and we can deliver on that. And if things get a little better, I'd rather be surprised for the better than sort of plan on things getting dramatically better. So I think what '22 has played out -- what '22 has set already is that it's -- first couple of months is pretty noisy. But I think at the end of the day, we've just got to be in the best position to be able to deal with that. And I think the portfolio, given what you said, the backlog and the recurring revenue side really puts us in a more -- a position to be, I think, in a much better position to take advantage of it.

Jim, can you talk about your confidence in sort of the countermeasures that you talked about and then ramping up and give us maybe a couple of examples. And then I'd say one of the issues that you talked about is sort of staffing and labor interruptions in EHS. Naturally, I would think that maybe they get a little better if Omicron's going away.

Yes, I think we -- so let me break those 2. I think as we think about things through the year, the countermeasures, and we said when we used to talk about the $50 million in the fourth, we said that was -- a decent chunk of that was at Fluke and Tektronix. And really, what's going to play out through the remaining part of the year is product -- some component redesigns that are going to occur in some of their major platforms. And they're on track to deliver those through the remaining parts of the year. So that's how I say things get better through the year. Relative to hospitals, particularly U.S. hospitals, electives -- what we anticipated was electives would be about flattish with 2021, but the first quarter will be a little lower just given the run rate and given Omicron in January. I think what we've seen thus far, we're almost 2 months into the year, is that things are starting to get a little better in the hospitals. It depends on the hospital, it depends on the region of the United States. Staffing shortages probably get better through the year, but they don't dramatically get better from -- as soon as Omicron ends, right? It will take a little while for the workforces to sort of find their way to a happy medium. But we anticipate the business will continue to get better. We've done such a good job on the installed base and some of the other things we've done around the world, I think the strategy is playing out well. A little bit of opportunity with electives to sort of get better through the year is really going to be good for the business.

So I know, Jim, that we'll talk more about health care, but let me ask you about your comments on Fluke and Tek because I think what's interesting here, a lot of investors ask me about sort of the innovation cycle, particularly at Tek. Like I remember a couple of years ago, we talked about it even here, I think. So sort of where are you in the evolution? It seems like you're pretty bullish on maybe it's innovation-led growth at Tek, but also Fluke. Where are you in that? And then product redesigns, that's kind of something separate. Or is that kind of the same thing?

I would say, look, take them because they're a little bit different. Tektronix first. I think certainly what Tek has done over the last few years in the face of a number of things is really brought out a series of products on new architectures and platforms, which is fundamentally helping them go after new business in new applications. So it's not just the sort of -- it's not just the scope, for instance, itself, but it's the set of applications. It could be software. It could be probes, could be other parts of the solution set around things like automotive, power, power density, data centers, which are secular drivers that are really helping growth. So it's the innovation and the innovation towards fixing problems in segments of the market that are -- just have attractive aspects to them. We're certainly benefiting from some semiconductor investments that have occurred, particularly Keithley. So I would -- that's also part of it. But that probably has a few...

That's a tail.

That has a tail right now. So I think we -- the business is in very good shape. We're really, really excited about the work the team has done to position the business going forward. On Fluke, that's just such an outstanding franchise. Innovation has always been part of their set. They just came out with a new set of power quality products. But I think acoustic imaging last year, there's just always a cadence of innovation there. And again, designated towards some end markets that probably have some runway. Industry 4.0 is really now starting to really happen. And I think the idea that we can sell connected instruments as well as our CMMS software with eMaint, that's a recipe for continued strength we think.

So let me back up, Jim, and ask you this question, like, so Fluke and Tek were kind of historically viewed as your more cyclical businesses. Like how do I ask this? Like how much better or less cyclical are those businesses?

Yes. Well, they've historically been our most cyclical and quite frankly, probably still are, but we've dramatically improved the cyclicality of the business. We think somewhere in the neighborhood of 60% to 70% from where it was, say, a decade ago. So in that position, we've added services to Tektronix. Tek has also just launched a set of software tools, Tek drive and Tek cloud, which will pay dividends in a few years. So we're continuing to add innovation that's in a more recurring cycle -- less cyclical aspect of it. Fluke, the same way with what we've done with Fluke Digital. So we haven't -- those businesses aren't big enough to make it not cyclical at all. But I think where we stand today in the cycle and sort of the secular drivers really minimizes that. And then when you look at the rest of the portfolio, what we've done in health, what we've done around software, then that's the other mitigating factor here that really, I think, makes the business less cyclical and quite frankly, makes it even better growth over time.

So let me ask you about price in this context. Like you talked about 2% pricing. It doesn't seem like -- I mean, it's double sort of what you usually do, but it doesn't seem like a lot in this inflationary environment. So maybe you can talk about your confidence level in staying ahead of price versus cost because, again, your margins have not been the issue.

Right, right. Well, like you said, I think we were 210 basis points of margin expansion last year. So in the face of all this what I would call new inflation last year, right? I would say this. One, you're probably looking at closer to over 300 basis points in the hardware businesses where most of the inflation is. The truth is we sort of look at price in the software businesses differently. It's built into the net dollar retention number. And in health care, it's a little harder to get price, but quite frankly, we don't have the inflation there that we know. But if we look at the hardware businesses where we're seeing predominantly the inflation, we're closer to over probably 300 bps. And I think sometimes that number gets -- I think everybody uses that number slightly different in the fact that we really think about that as net, net price. So we're putting more price into the marketplace, but we're netting out. And that's why I think when you see that net price, it's very -- that's why the margin -- to me, the margin expansion is the real metric here at the end of the day. And that I think it really demonstrates the fact that, one, we have great franchises; two, that we're still partnering with customers. They understand some of these challenges. And that allows for us, I think, to stay ahead of it through the year. Quarters can bounce around slightly a little bit in that metric. But I think at the end of the day, we're in a -- from a price cost perspective, it's something that Chuck and I look at in every operating business every month because it's so important. And I think our teams have done an outstanding job of managing ahead of the game.

So let me ask you, you mentioned briefly geographical sort of differences in the business. And so like China, very strong growth. Europe, tough comparison, more supply chains. So I mean, it's tough to model. I assume it is tough for you. So like how do you look at it sort of going forward? And again, one of your big goals is to continue to be strong in developing markets. So what are you doing in places like China to continue to grow?

Yes. Well, we've certainly -- you're right. And we benefited probably a little bit in the fourth where because some of the supply chains are in Asia, they were able to get things out a little quicker where -- versus putting stuff on the water and maybe not arriving on time. So a little bit there. North America was actually pretty good with the exception of ASP due to electives. So I think going forward, if you look at our backlog, our backlog is strong regionally across the board. Our software businesses are mostly U.S.-centric. So in that sense, they will drive growth in the U.S. So I think I feel good about the U.S. and where the U.S. can go. Asia will continue to be a place where we invest. We've demonstrated that. We've seen really nice growth at ASP across outside of the United States in the last year as we've invested in that capability. I think our strategy is really playing out. That was a key part of the thesis for acquiring ASP. So I think Europe is maybe a little slower and a little bit harder to read right now given maybe not only the near term -- some of the near-term things. But I think at the end of the day, I think we're -- our core growth for last year was 9.5. As we go into the guide for this year, I think the regions will play out. But I think North America and probably Asia probably will lead the pack here. Still early days, but...

Got it. So I'll take a couple of questions from the audience in a second. But maybe to your point on ASP, maybe you could give us sort of your progress report on ASP. How is it going? Because you mentioned strong growth in developing markets. U.S., obviously, it's a little tougher to tell given sort of the virus issue. So where are you in the process? And then how does Provation help you in overall EHS build out the business?

Well, I think the strategy, I really think we saw the strategy play out last year. When we bought ASP, what we really said was we saw good secular drivers around things like advanced procedures, robotic surgery, things like that, which were going to continue to be a driver. And we would see opportunity there because terminal sterilization or low-temp sterilization is where our strength is, which is really used in what I'll call higher technology surgeries. We also look at the demographic. We're getting older, right? I'm living proof of procedures here. I didn't -- this isn't a prop. So I think at the end of the day, as we get older, we see more procedures. And then around the world, health care just continues to get better. So the secular drivers for the business are good. We knew that carving that out of J&J, if we brought that organization together and focused it, it would perform. That's what we've seen outside the United States, tremendous growth. We've grown the installed base despite COVID. So we've grown the installed base about 3 percentage points each year since we're on the business. And the margin structure is in great shape. So we obviously didn't predict the pandemic. So electives, particularly in the U.S., where we have a little bit more -- we're a little bit more subject to those procedures with the revenue growth. We -- I think the strategy is playing out very well. COVID hopefully is behind us here. We started to see electives pick up over the next couple of years. And I think the rest of that all comes together in a way that we're really excited about the business. I often say, if I compare it and Andy, I was at Fluke -- in the early days at Fluke back a couple of decades ago. We're -- ASP is ahead of the game of where Fluke was 3 years into a financial -- from almost every financial metric, including 80 -- 70%, 75% recurring revenue. So a really great franchise and opportunity. To your point, we closed our Provation at the end of the year, really a leading software company around the workflow that exists, and it really helps us in a couple of places. One, they have a great position in ambulatory surgical centers, which I think the combined sort of girth, if you will, throughout that plus what we already have, a huge driver in the United States, and I think really well positions us there. We've got some good -- also some good collaborative efforts going on with Censis and Provation around the perioperative loop, where we track surgical instruments at Censis. And we think those are some opportunities, too. So we'll keep the business separate. They'll go after the unique opportunities. Provation's a great grower, very strong margin structure. So in and of itself is a great business. It does bring, I would say, some great skills to the segment as well.

So the other significant acquisition you made over the last year's ServiceChannel. And ServiceChannel provides you said cross and upsell opportunities across your facilities and asset life cycle management business. But what I'm interested in is in your prepared comments, you talked about sort of making an asset life cycle management business like a platform, right? And so how does ServiceChannel accelerate that vision?

Well, I think they do it in a couple of ways. One is they bring a differentiated business model to the market. What they do today is more of a -- if a large-scale owner of facilities wants to sort of have someone else manage those facilities, we mirror that with folks. We have a -- we've built a network. So we have a network of providers, and we have the software to connect those providers. So if you want to do all that yourself, you can do that yourself, but it's a SaaS solution. So we've got a bevy of opportunities with what we do at Accruent and what we do with ServiceChannel to give the facilities manager a degree of choice as to how they want to manage their facilities network. And I think that's just a tremendous opportunity for us going forward. Gordian pretty much plays in the public markets, right, mostly state and local, federal government. So that will be a slightly different vertical. The set of those 3 solutions, though, around the ability to offer data solutions, aggregate the network, those kinds of things are very much synergistic amongst the 3 businesses. And quite frankly, a really unique opportunity. So that set of businesses is over $0.5 billion now. And I think really, when we go forward, it really gives us a number of degrees of freedom to really build solutions not only in the U.S., but also to globalize the business for sure.

So Jim, as you know, Accruent's been maybe more inconsistent is the word than Gordian. And so maybe you can talk about that. I know you were excited that you said there was the second highest quarter on record for SaaS bookings at Accruent. So that sounds good to me. But when is it going to become more consistent. Is '22 the year?

Yes. Well, I think -- we always said it was -- when we think about all the acquisitions we've done, roughly 11 deals of size, 9 of those deals are in great shape. ASP is on track as well. So Accruent's kind of that one standout that really took us longer than we anticipated to sort of make some of the changes in the business. But I think what we've seen lately is some nice signals towards improvement, you mentioned that. We had a little bit of a days difference in the fourth that has impacted some of the core numbers. But I think as we come out this year, we talked about maybe mid- to high kind of single-digit growth this year. I think we could -- with what we have in plan, still early, but we feel good about the plan. We feel good about the leadership team there to really go execute against that. I think '22 is -- it will be a good year to demonstrate a number of those strategies playing out.

And then another sort of business with a lot of momentum is ISC, right? And so you've talked about energy getting better there, but also really the EHS platform that you're developing. So it feels to me, first of all -- and we'll talk about acquisitions I'm sure, but you can still build that platform out, both organically and inorganically. And what do you want that platform to be sort of when it grows up?

Yes. Well, I mean, we have a great position with Industrial Scientific, with our iNet platform and a recurring revenue platform around gas detection. And that really isn't a gas detection platform as much as it is sort of a safety platform for a variety of industries. Historically, it was more oil and gas-oriented. We've sort of tried to build that more into industrial utilities and some other verticals. So that business, I think, is in a very good place. It really brought the expertise of environmental health and safety to our company. I mean, we've always sort of been in electrical safety with Fluke, but this sort of comprehensive view -- Industrial Scientific's goal in life was to reduce deaths in the workplace by 2050. And I think that sort of vision has crystallized us around a variety of views of things we could do with environmental health and safety. And that's led us to a number of deals, Intelex being the biggest one, which really is the predominant mechanism for most companies managing their sustainability efforts now. We use it across Fortive to manage our carbon footprint, to do all the things, to manage our action plans around how we're improving sustainability. So if you think about that as a secular driver, it's an outstanding secular driver. We've got a great data platform there. So just a variety of organic opportunities. And as you said, there's also a number of inorganic opportunities as well to continue to add value. And we think that can be a tremendous growth business over a long period of time. I don't know if there is a growth industry today like sustainability, like helping Fortune 1000 companies help understand their environmental footprint and then determine how to best improve that.

So sort of building off that, you still have a strong balance sheet, net leverage 2.4x. You mentioned $5 billion of liquidity over the next few years. But you also just announced a share repurchase authority, 20 million shares. So that's a little -- I don't know, maybe a little different for you guys. So talk about sort of why you did that, m&A environment this year? Like valuation is coming down a little bit, but it seems like a pretty volatile environment. So what can you tell us?

There's a lot there. I would say, number one, we still believe that our primary capital allocation strategy is around M&A. We think that FBS is oriented towards finding great businesses strategically that are aligned with our values, and we can drive tremendous long-term value creation through doing that. That said, we never had an authorization. So there was sort of a missing gap in our governance, if you will, that just said we ought to have an authorization out there. And so obviously, that's what we announced the other day. But I think there's also an idea that if there are -- we want to also demonstrate that if there were opportunities just in our past lives, where there might be opportunities in situations where we think there's -- it's a good investment, we would -- we could, on occasion, look to do that. And quite frankly, I think it just speaks to the strength of our belief and our strategy if we were to do that. So we want to have the degrees of freedom. We continue to talk with the Board about all that, but I think we want to look at a number of ways to add value. And if there were opportunities to do that in a different way, we would certainly -- we've always said we would certainly consider some of those things.

So one of the things that I have talked about with you before is sort of the software business. And I think last year, when you had your Analyst Day, you talked about getting to 20% software as a percent of sales. I think it's 16. So it seems like you're well on track. But sort of where do you go from here? Do you think you're on track? Are you ahead of the game a little bit? And what do you need to sort of do to have software grow double digits consistent moving forward?

I think the -- well, 2 parts to that, right? I mean, the identification of software businesses is very much around accelerating our strategy, looking at a workflow where we can add value. And if there's opportunities where we can -- maybe where we have a hardware presence and we can add software that just fundamentally deepens our relationship with customers, gives us new degrees of freedom, which can drive growth. And as customers are trying to sort through their digital transformational needs, we find that there's degrees of growth that would exist in there. So software as a strategy is more of software as a continued view of workflows and how we add value into the workflow. Once we buy the business, though, it's great to buy a great software business, and we bought several. But then you've got to continue to add value. And that was that third part of what I talked about in the slides right around value creation. And I think it's very much what we've tuned FBS to be is as much a tool for a software business leader today to really drive value than what we'd see in a hardware business. We just had our leadership conference last week for 3 days. And a number of that -- those sessions tend to have a lot of benchmarks. We had every bit as many examples of how FBS is adding value in software businesses as we did in hardware businesses. So I think what we've tried to do is continue to grow our capability in FBS to meet the needs of the portfolio. And quite frankly, we're also learning from the businesses we buy. So those folks are bringing tools. They're bringing capability, and that's how we're continuing to try to make sure we can continue to add value over a long period of time.

I'd say, Jim, it's an interesting situation, right, because you're good and lean as a company. That's what FBS sort of does, right? But how do you lean a software company? I don't know. I'm just an industrial analyst, what do I know? But you also sort of announced this within R&D, lean portfolio management and all that kind of stuff. So as you know, there's a high bar for your expected growth. How do you meet that bar in what you're doing?

Well, I think we've -- for a couple of decades, we've had this framework of FBS as lean leadership and growth. And that's kind of been our 3 -- sets of tools within all 3 of those. And I think that's just continuing to be built upon whether that's no matter what the business model is. And so I think that's -- that to me is the way we continue to add value. I think if we were to think about like specific examples of where we see that, it isn't just in the sort of making things more efficient. It's things like lean portfolio management, which is really the entire product development process. And what you find very often in a product development process, particularly when we buy a company, is there's a lot of effort that's really focused on just keeping the current stuff going, right? And what we try to do is really sort of look at that from a productivity perspective. We bring tools to that and then devote more of our engineering resources, our engineering time to more breakthrough innovation. And we can do that. You see that playing out of Tek right now. Some of those application-specific solutions I was talking about, those are very much a product of the LPM effort that Tek was really a pilot of. And what they've really tried to do is continue to develop more of the resources to things that are additive to their growth rate as opposed to the next generation of something. And I think what you'll see from Fortive over time, whether it be hardware or software, is more innovation that's sort of not -- certainly we'll continue to remain competitive in the products we have today. But there'll certainly be new markets, new applications that we'll continue to add that will be additive to our growth rate over time.

And I think you've talked about the Ford and Pioneer labs before, but maybe update us on how that's helping you with innovation.

Well, I think our relationship with Pioneer Square Labs, which is an incubator in Seattle. And they've done -- they're kind of well known for their very early stage breakthrough innovation work. We've really modeled a lot of our -- the lean portfolio management, the dream phase of that, if you will, right after our experience with Pioneer Square Labs in our partnership. We've had 3 businesses that we've incubated. One that we've rolled back into Fortive called TeamSense, but another one we're still working, one we've since killed. And we're continuing to work on new ideas. And that learning isn't just a great model for creating companies within Fortive or outside of Fortive. But it's also the learning we get, which is very much all about what we've done with lean portfolio management. Relative to the Ford, that's really a -- I would call that the FBS office of data analytics and machine learning for Fortive. And so just like the FBS office is a small group of people, but it's really dedicated toward and committed to making sure FBS in everything we do at Fortive, the Ford is very much trying to do that with things related to data analytics and machine learning. 41 projects have been completed so far, mostly over the last couple of years, though, Andy, have been mostly on internal stuff, making us more productive or -- and now what we're turning to is returning that sort of effort towards more outbound customer-related things. Some of that is partnering with businesses we bought, like Provation and ServiceChannel to accelerate some of their efforts. We'll start to see those solutions go out in the next year or 2.

So maybe last question. You mentioned maybe at a previous earnings call, but you -- at some point, you mentioned that Fortive is working toward a sustainable future. Maybe you could elaborate on what Fortive is doing with that? And how do you get more acute focus on ESG for investors?

Yes. I think it's been a part of who we are in terms of reducing our footprint. We've had solution. So I think there's -- I think of this in 2 ways. One is we're going to be a great citizen of the planet. We're going to do everything within our internal businesses to reduce our carbon footprint and to make sure that we work in a more sustainable way, tons of strategies around that. And we've continued to update our goals as an example on our carbon footprint reductions. We'll probably reassess those here in the next year or 2 because we're on track to hit those early. We're continuing to do, I think, a number of other things around our solutions that are also we can sell. And I mentioned it in the EHS front. But pretty much all of our businesses, certainly within our segments, are really going after opportunities to help customers deal with their own sustainability challenges. And so it's not just what we do internally, but it's also today what we do relative to how we sell solutions to help our customers do some of these things. And I think you'll see that revenue play out dramatically over the next decade or so.

Got it. So I think that chime means we're out of time. So very much appreciate your time, Jim.

Thanks, Andy.

Thanks for joining us.

Thanks, everyone. Thanks for your time.