Fortive Corporation (FTV) Earnings Call Transcript & Summary

Okay. So it's great to have you folks here in London, and welcome to our next session, and we have Fortive here. And with us, we have Jim Lico, company's President and CEO. One of the best operators out there. So it's an honor and pleasure to have Jim here in London, and I think Jim has a couple of slides, and then we'll go into the fireside chat. Jim, welcome. Pleasure to have you here.

Thanks, Andrew. Great to be here. And I think I speak for everyone, it's just great to be in person since it was a couple of years ago. Since it was a couple of years ago since we were here and it's -- obviously, we haven't had a chance to be in front of a lot of folks here in the last couple of years, we thought it'd just be appropriate to get through a couple of slides just to equate you with our story and maybe just to level set, maybe even help maybe prepare for some questions. I got to always get through that. Fortive today, I think, is an incredibly exciting company. I would say we sort of -- from 2016, when we started, we've really made a really, really incredible progress towards our strategy. You see today our 2022 expectations, and I think what really stands out is obviously the financial profile of the company going forward. Growth, cash flow, our recurring revenue continues to -- continue to improve and really, I think, provides a more durable, resilient company for the future. We're a little bit more U.S. centric from a revenue base today than we were a few years ago, which I think really speaks to the opportunity to continue to globalize the company, both at the -- within all of our operating companies, a growth strategy for sure. And then finally, the durability and strength of our secular end markets. Diverse in nature, but lots of opportunity for us to continue to grow with strong -- with a set of very strong end markets. A little bit about how we've built this over time for those not familiar, over the last 5 years or 5.5 years. We went public in -- when we spun out of Danaher in 2016. We've really done a number of things to really continue to deploy capital, about a $7 billion worth of capital deployed, which has really added about $2.3 billion worth of new revenue to the company. And we've continued to really make incredible progress across that revenue with very strong margin expansion. You see in a number of things, making the business more durable, less cyclical over time with a number of acquisitions and established a strong position in environmental, health and safety, which is a great growth opportunity for us in a workflow that's really important to our businesses. We've exited some businesses as we continue to evaluate our strategy. We did the transaction with our automation business with Altra. Just recently, about a year ago, we separated a number of our automotive and mobility businesses in Vontier. So a number of ways to continue to deploy from an exit perspective to put those businesses into a position to be successful over the long term. We've built a health care segment, which is really in a great position for strength over time. And then finally, a facilities and asset management life cycle now with over $0.5 billion of software revenue really dedicated to helping facilities managers deal with the challenges that they have ahead of them. That equation of -- or really, that has resulted in really strong recurring revenue at about 40%. We continue to really significantly improve the growth rate of the company. Hardware that we acquired was really mid-single-digit growth. The software that we acquired was really low double-digit growth, which has really improved the growth rate of the company and a number of things. We'll end the year with about $950 million worth of software revenue, which really, I think, continues to deepen our relationship with customers. And the financial expression of that is obviously the ability to build a more recurring relationship with customers with a great financial profile. We go now in three segments. So maybe something new from the last time we were here with you is the -- what continues to be true, the strength of our brands, the operating company strategies that we have along three segments, really making the world really safer and smarter whether that's in our Intelligent Operating Solutions segment where we're doing that really with maintenance managers and engineers who are in manufacturing, or in our Precision Technologies segment where we're helping innovators, both with sensors and instrumentation to bring the next generation of technology together, or in our health segment where we're really helping hospitals really deliver higher quality health care at a lower cost. All those three segments are really positioned well from a financial perspective with really durable growth. As an example, our Healthcare segment is 70% recurring revenue. So both consumables and software in that sense. So really strong continued work that we've done organically and inorganically, our innovation strategies, our M&A strategies to really continue to build these segments and really take us -- this is really what propels us forward in the years to come. Where does that leave us? I think real quick from where we were in 2016, a better growth profile, as I said, more durable revenue stream, a big software profile, which we think is not a strategy in and of itself, but really helps us really build, as I said, a deeper relationship with customers. The profit margins are continuing to improve. What we said a few years ago was we probably would grow operating margins somewhere between 30 and 50 basis points a year. We're now at 75 basis points. So I really think when you think about the compounding of that plus the free cash flow now with free cash flow margins at 20%, I think really gives us the currency, if you will, to continue to build a great company. So I think we're in a great place. Certainly, a lot out there lately that's been challenges, COVID was no exception, but I think we're in a really good position. Look forward to talking more about it today.

Yes. No. Fortive is one of the companies we're actually very, very excited into 2022. So thank you for being here.

So maybe we can just start talking about some markets. So maybe we could start with on Tektronix. Tektronix publicly traded peers are seeing 20% plus order growth between 5G, semis and greater R&D budgets. It just seems like a robust demand picture. How do you see demand shaping up for '22? And what would you highlight as the best growth opportunities for Tek, both short and long term?

Well, I think -- Tektronix has been such a strong franchise for us. But I think what's really -- what we've really done, we saw a similar, I think, 20-plus percent kind of order growth as well. That's a business that's had some impact with supply chain. So the revenue has got some opportunity to catch up to that over time. But our innovation strategy from day 1 has really been around different vertical markets. Automotive with the transition from EV to AV, data centers, as you said, some of the work in 5G. And certainly, I think, two, continuing to build application -- products that are really more dedicated to some of those key applications that I think really provide good secular growth. And as you said, semiconductors and some of the supply chain issues that are happening around the world require companies to redesign their products. And when you redesign those products, you typically need Tektronix instrumentation.

Maybe we can talk about ASP, which I guess, stands for Advanced Sterilization Products.

That's right.

There we go. You've talked in the past about how a new product introduction takes longer in life sciences and med tech. Where are you in terms of product vitality for ASP? And outside of the U.S., what are you seeing in terms of growth rates? And are you making investments in these regions?

Yes. I'll take maybe the second one first. We've really done -- I think 2021 was a great expression of the work we did as -- for those who don't know, we spun that -- that business was spun out of Johnson & Johnson. In the international markets, we had to create that structure. And we've been incredibly successful at doing that and double-digit growth outside of the United States. We've been a little bit more hampered in the U.S. because of elective procedures. But I think we've seen great returns on the investments we've made commercially or outside the United States. We are just, I think, starting the innovation funnel. I was with the team last Thursday, we were going through their innovation funnel. They've got a lot of good ideas. But as you said, I think the vitality will be a down-the-road aspect of the business simply because it takes a lot of development product, but then obviously, FDA approval. You need to get FDA approval.

And how should we think just in terms of how is -- how are the elective procedures shaping up? Again, U.S. seems to be reopening. We're here in London, we're able to travel. So that's a big change.

Yes. It's -- well, I mean, I think it's a testament to where we're at right now, but it's kind of right now, last couple of weeks kind of thing, right? So what we said for the year was that we probably would see electives in the first quarter be lower than the fourth quarter. But for the year, would be about even with '21, which means it's going to get progressively a little bit better through the year. I think that's what we're on track to see. One of the things I thought -- because it's not just COVID, but it's also some of the labor -- nursing labor shortages. And we saw -- in some of the recent labor statistics, we saw some of the nursing numbers come back in the U.S. So that's a good sign for things. And hopefully, those trends will continue.

Well, that's good. So just going and hitting the big businesses, Fluke. And obviously, for those folks who don't know, Fluke, Fluke has been, right? It's probably one of the best businesses Danaher has ever had. And now you have. So it's one of the real pillars of the company. So what are you seeing in Fluke orders? They did decelerate from 20% in third quarter to high single digits in fourth quarter. Do you think demand is softening? Do you think it's reaccelerating? Just...

I think demand -- demand is good. So I think the order rates trends, a little bit to do with the fact that we were delivering at a higher rate. So orders came down a little bit. It has a little bit to do with comps. But I think the demand profile for Fluke right now is very good. There's a number of trends that are positive towards them. A number of the things they're doing on the innovation front, new segments of the business. So I think the business is in good shape. As you said, it's a pillar. It's an industrial brand second to none, global in every way. So the business is in a great position. Certainly, probably, more impacted by some of the supply chain challenges than most -- than probably any of our other businesses, but they certainly have the demand profile in which to have a very successful year.

Got you. So let's talk about price inflation.

Segue.

Yes. Just a simple question. How lasting do you think inflation will prove to be in your markets? And why don't we start with that again and sort of going to talk about where pricing is going to shake out longer term?

Yes. I think -- well, I think we're certainly seeing that inflation come to play -- continue to play out. So I think from our perspective, we certainly believe that the pricing that we put -- we've historically had good price. Yes, I think maybe generally in the 100 basis points a year kind of number anyway. I think as we go forward, the price -- we've obviously put in more price to take care of some of the inflation issues, I suspect that will hold pretty well.

So you think -- so just exactly that would be my follow-up question, but when supply chains finally clear up, whenever that is, do you see pricing going back to historical levels? Or do you think some of this will just stick going forward because you can train the customer?

Yes. I think it -- I definitely believe it will stick. We've been very thoughtful around price and not just saying it's 3% across the board or 4 -- whatever the number is, we've been much more thoughtful about making sure that we do it strategically. Our FBS tool, our Fortive Business System tool on pricing is called smart pricing. And it's -- that term is really directed towards making sure we make the right decisions in the right segments of the market and understanding kind of where -- what we want to do strategically within those product lines and within those operating businesses. I think that should, by design, mean we get more price sticks. And we probably go back to that 100 basis points kind of per year number when things normalize out, as you said, whenever that is.

Got you. That's very good. So maybe we can talk about your margin. And folks just feel free to ask questions. So as we think about sort of margin expansion algorithm, pre-COVID, Fortive Business System could deliver, right, 1% to 2% procurement productivity benefits; 1% to 2%, pricing; and that yielded solid margin expansion on mid-single-digit top line. So how do you see this algorithm? And I actually think it's probably -- I will actually love your answer because I think it's one of the biggest debates for me in the industry. Like how do you see this algorithm over the next 3 years? What happens?

Well, we had 210 basis points of margin expansion last year with pretty significant challenges around inflation. I would say that formula probably is less -- I think it's pretty obvious, it's going to be a little bit less material cost reduction than typically. We'll continue to have the kind of labor productivity. There's no reason why we wouldn't continue to apply the Fortive Business System in manufacturing. We're going to get lift from the software businesses growing faster than the other businesses. So I think that's the new part of the ingredient here a little bit, Andrew, is our -- is that $1 billion -- almost $1 billion of software revenue grows at a higher rate than the rest of the portfolio, that's going to obviously continue to move the margin structure up. So I think what might replace that over the next 3 years is a little bit less material cost reduction. We're still going to get gross margin expansion from innovation. So we'll continue to develop new products. We'll get a little bit more price and we'll probably get a little bit of -- we'll continue to have that ability to really do operating margin expansion because we're going to have the quality of the business structure continues.

And software given its size, right? And you said it grows low double digits, and probably has very robust, shall we say, incrementals, probably 60% to 70%. Is that a fair way of thinking about it?

Yes. That's probably a good number. I mean, gross margins on software are really high.

Right. So given its scale, it's really going to start moving the needle.

I think -- and probably the other one would be the consumables part of the business on the Healthcare side, which is obviously a good -- very good gross margin piece of Healthcare, the best part of it, and that being suppressed from COVID over the last couple of years. As that bounces back, that's going to be a help as well.

And you said 70% for Healthcare, and it was depressed by COVID, right?

70% recurring revenue in Healthcare, of which roughly 50 of those 70 points are COVID [indiscernible].

Yes. So that's great to hear. So maybe we can talk about supply chain strategy and reengineering products. Fortive is reengineering products to avoid sole source or hard to source components. Can you give us a sense of size and speed of this initiative? You and I spoke about it. For example, could you reengineer 5% of revenue by year-end? Or -- because this is clearly, I think, sort of in your DNA, this operating excellence. So would love for you to sort of expand on this.

Well, as you and I have talked, it's probably more than 5 -- if we look at our hardware revenue, it's probably more than 5%. Now the degree of which you do, it could be a major design versus a couple of component design. It's going to -- our work really falls into the buckets of, number one is finding another source with minimal validation work to redesigning a system. And that work is happening every day in our companies around the world will continue, really something we started in the summer. But it's -- I would sure it's well over the 5% revenue. I don't know what the exact number is but it's safe to say that probably every major product line that we have in -- at Fluke, at Tek and in sensing probably is getting some level of component redesign over the next 12 to 18 months.

Got you. So the next question is on supply chain strategy. We are seeing some reshoring, particularly in electronics as well and regionalization of supply chains. Well, hope of shoring [indiscernible]. Let's talk about it this way. But how has Fortive supply chain planning evolved? And what are the limits to change, right? For example, it is difficult to regionalize on certain electronics components, right? I mean, you can sort of want to reshore electronics all you want as long as new plants are not coming up in the U.S. That's not going to happen.

That's right. I think it's obviously a major policy initiative on the part of the Biden administration to sort of sort that out. What our strategy has really been since a number of our businesses were impacted by some of the tariffs with China 5 years ago, we've been moving our supply chain to a more regional structure over time over a number of years. And so we're going to continue to do that where it makes sense. And the other dynamic change is that freight has gotten more expensive. So the cost -- sometimes you're saving money moving to different geographies that maybe weren't 5 years ago based on the logistics costs. So I think the framework now is to look at total landing costs and to see where those opportunities are and to make sure we're aligned in a way that's more protective of what's happened over time.

And if you could share what's the industry chatter on sort of a, possibility; b, timing, of actually having some sort of viable electronic supply chain in North America, be it Mexico, be it U.S. We've heard some companies are -- there's talk about Texas Instruments intel, bring capacity back in the U.S., take a couple of years. We've heard they want capacity commitments from some of the customers. Maybe you can just talk about what is happening and what has been the industry? Because clearly also big strategic -- particularly given the recent events seems big strategic focus as well for the country and for the U.S.

I think we're a few years out, probably we're seeing major impact. But I think we'll start to see impact in '23 in some cases. But it's still going to be complex. It's still going to be complex because, where do the base materials come from? It's still going to be a question, right? So it's still -- we've got a good number of years here to sorting through this and what it's going to be like. But I think there's -- I think there is a fair amount of momentum to moving forward on all this stuff. The timing is the question. I wish I had a -- I'm not sure my crystal ball is any better than anyone.

Yes. No, no, no. Well, right. So maybe we can talk on time delivery and lead times. What was the time delivered in the fourth quarter versus historical norms? And how are you managing customer relations and expectations given what's happening out there?

Yes, daily. We were always historically in the high 90s for delivery. What we've seen is probably numbers that are more in the 80s and 70s, and lead time's a little longer as well. So on that number. So I think the managing of customer relations has actually gone pretty well. I think everybody knows the situation that everybody's in. So I think there's a lot more patience. And quite frankly, I think we've done -- I'm really proud of the work our team has done to really try to protect customers. And so I think that part of it has gone very well. It's an anomaly for us to deliver at some of the rates we've delivered over the last couple of months, but we'll get back to it. We'll get back to better numbers here hopefully in the -- by the second half.

So we do have a sort of follow-up question on supply chain may be, I think, more structural and a little bit sort of near-term tactical. How is the China supply chain components issues that you and other companies may be facing? How are you managing issues in China, but probably, I think for you also in the region as well? And what are your thoughts about potential disruptions in March? And how would you go about mitigating it?

A lot there. I would say, certainly, we're continuing to -- we put a lot of effort on things we're doing in China. We do a lot of China for China. So a lot of what we're doing in China is for our Chinese -- our business -- our revenue in China. But there is some export out of the country. I would say, coming out of the Chinese New Year, we certainly probably see -- if I were to maybe characterize it, I would say the second half of '21 was probably more Southeast Asia challenge, and I would say right now, it's probably more China challenge. So it was well documented what happened in Shenzhen the other day. Tianjin was about a month ago. So certainly, as they're trying to manage COVID over there, we're going to continue to manage it on a daily basis and deal with the challenges. But we were -- that's the daily work. As I said, I didn't expect when we had our call in February, I didn't say that I thought supply chain issues were going to get better. What I said was I think our countermeasures are going to get better. The work we're going to do towards this is going to be more of an improvement. But I didn't, in any way, shape or form anticipate things were going to get better and unfortunately, that played out.

Got you. So maybe we can talk about software, right? So it's -- and as I said, it seems to be one of the most underappreciated parts of Fortive. I remember when some of my competitors were bashing you for paying 5x revenue on SaaS business, I remember that. But now it's up to nearly $1 billion of revenue, 16% of total Fortive. One of the key themes from the last Analyst Day was that FBS works for software companies, and FBS tools for lead generation, retention and product development, all work. But what about core software architecture, what portion of software revenue today comes from true multi-tenant SaaS platforms? What have you been able to do? Do software engineers work better inside Fortive? And just maybe a little bit -- two separate questions here, but maybe we can talk about this.

Well, I think on the architecture side, what we said is we've got some businesses that are software revenue, but they're not in the SaaS sense. And they're still great businesses. So I think this idea that software not -- that if it is a SaaS isn't great, is a bit of a misnomer. I think we've got some great businesses that are -- like Gordian, that are not -- that won't be -- don't have a lot of SaaS revenue, but are still incredibly strong franchises. Our revenue in total, probably about half is SaaS, so when we think about it, and it's continuing to move towards that, in part because customers want them -- that's where customers want to go. So that's the architecture side. And I think as we've looked at different deals over time, Provation, the last deal we did has a SaaS conversion coming towards it. But I think we really understand what that's like and quite frankly, a number of FBS tools to sort of help with that conversion, like teams together this week working on that. So kind of a temporary comment. But I think that we've really tailored the tools. Some tools didn't need to be tailored at all. The things we do around problem-solving and value stream mapping are very appropriate for lots of parts of a software business just as they are a hardware business. And those are some of the things we lead with because the change management aspect of the business is seeing improvements. They can see those things pretty quickly. But our tools now are adapted on the product development side for software. They're adapted commercially. We've used our machine learning and data analytics capability that we call the FORT, which is our centralized activity to really focus on things like churn and helping reduce -- and improve net dollar retention. We talked a little bit about that at the investor conference in May. So I think we're really starting to see some of these benefits of what I'd say, contemporary FBS tools in the software businesses. And I think they're great opportunities. And that's why you've seen things like margin expand in the software business, as an example. You're seeing that dollar retention improve. You're seeing growth improve. So those are all demonstrating the power of FBS in those businesses.

And how should we think about sort of the relative size, absolute size of the software business in 3 to 5 years? And what percent of it do you think is going to be SaaS?

Well, yes, I would say the majority of it will be SaaS. I think most of our businesses are moving towards that as a product category and an architecture, and customers want to buy that way and that's the value they want to see over time. It allows to -- it's an easier upsell when you have things on the architecture, net dollar retention improves. So I think that's probably it. I think certainly, if you just did the math and said we don't buy anything else, we buy -- and the software is growing, let's call it, high single to low double digit and the rest of the portfolio is mid, that's going to just take that number to be 20-plus percent in the not-too-distant future. We will acquire hardware and software businesses. So one of the things we're not saying is we're only going to buy software businesses. We're probably always as relevant to the last business we bought. And so people think, well, the last two businesses you bought were software. So that's all you're buying. But we draw back to ASP as the largest acquisition we did in the hardware business. So I think we'll continue to do the things that will accelerate our strategies within the segments. That will be hardware and software. So that's why that percentage is hard to nail down. But clearly, our ability to take hardware and software to a customer base is a demonstrated capability and it creates long-term value and has a great financial profile. That will be our strategy going forward for sure.

Got you. And from that perspective, because you started talking about M&A. So this is, once again, we can probably spend a lot of time. But can you describe -- so this is a question, can you describe your M&A process, philosophy and return targets? And looking forward over the next 5 years, what areas the company is targeting from a portfolio perspective? You can probably spend an hour talking about it.

We always say our strategy is we want to like markets first, we want to like companies, we want to be able to create value. So we want to do market work around markets that we like and that are the kinds of markets that can be part of Fortive. We want to identify the great companies that are potential targets within that. And then once we've identified those, can we add value? And we're cultivating continuously a lot of different companies through that in our funnel process. That's kind of where we would start. I think number two is -- so I think that's how we think about it. And within those three segments, there is roughly $40 billion of -- I'm looking at Ross and Elena, $40 billion of served market, I think, in those. So plenty of opportunity from where we are today. We don't really need to do anything new when you look at what we have today and that kind of thing. We said our return hurdles are for a kind of bolt-on like deal, 10% return on invested capital in 3 years for something that's a little bit further out from what we do today, maybe 10% in 5 years. We've pushed that a little bit in certain deals at times. So that's a bright line, but it's not a never go past it. When we see a business that's got a great return profile, and in the case of the -- the first one we did, Landauer, we said it was going to be in 6. It will be in 5 now. So we've been able to beat that number. So I think in that sense, we want to continue to be focused on returns. If we think about the next 5 years, those segments are good setups for what we're doing today. The workflows we talked about, EHS facilities and asset life cycle management, what we do from the perioperative loop within Healthcare. Those are all just a couple of a few examples of places where we really like those businesses. We've got scale in them today. And so the opportunity to do more in those would certainly be opportunities we would jump on.

And then can I just think sort of to build on this question because you are sort of looking at more growthy end markets. And I remember back at Danaher when they were sort of starting to look at Paul, one of the messages was, look, if you look at return on capital, and I think Fluke and -- I think Fluke specifically was brought up as an example. And I think sort of echo's, I think, Peter Field was talking about PayPal, like if you look where the value was created, right, the value was created beyond year 5, beyond year 10, just how much value was created in outer years. At the same time, you are guys very, very disciplined and you are focused on absolute returns. So how do you balance as you look at the deals, right, how do you balance this understanding that gets a lot of value in these growth businesses, and given your experience, is created in these outer years versus the need like to be disciplined or not to get overexcited in the near term?

Yes. Well, we do have to remain disciplined. So I think we're always going to walk away from more things than we do. That's just going to be the nature of what we do. We're engaged on a lot of things. And there's a lot of things that we look at and say, we don't necessarily see the return profile or lots of reasons for walking away. The deals we do are ones in which we're not buying and selling these things. So we want to keep them for the long term. So we are looking at years' 5 through 10. And I think it's important to note that when you have a rule of 40 business and software that's going to a rule of 50 and maybe even gets to beyond that in those out years, that's an incredible amount of value that you can have in a business over time. And so we want to balance the near term and long term. We don't want to just say, well, everything is about the 5 through 10 years. I think we've tried to balance that. I think we've seen now those deals are somewhere in the mid-single-digit return about where they need to be in the 2- or 3-year time frame. So pretty close to being on track. 9 of our 11 deals are on track. We've talked about a current ASP and why they aren't. But I think that batting average is a good batting average. And I think we're continuing to focus on getting better every year in those businesses. So I think that -- and we'll start to see that play out. We're only in year 5 of Fortive. So now you're going to start to see these play out in the outer years as we get a little bit longer in our own gestation period as a company.

And just in terms of -- given the swoon in the markets right now, is it changing? Is it too early to see any change of behavior by the sellers?

Yes. I was with somebody yesterday who I said, how long who's a -- who maybe is a seller and a buyer and I said, how long do you think it will take? And they said, it takes a while, right? So I think at the end of the day, I always -- I've said it 6 months at least before the seller expectations sort of get reframed and I suspect that's right. We're in a great position. We've just done two great deals. We're we feel very good about the -- we'll add $0.12 of accretion between ServiceChannel and Provation this year. I think we're in a great place. And we're patient and we're doing these things over a long period of time. So if -- we can certainly wait that out, for sure.

And maybe we can sort of touch on Accruent because you brought it up, as you said, most software acquisitions are outperforming on plan, but you have been in public about there being more work to do at Accruent with margins being a bit behind original expectations. So maybe you can unpack the specific case. And so as a case study, a, what were the problems? B, what are the countermeasures? And c, what gives you confidence in the mid-single-digit growth outlook for '22?

Yes. I think number one, a, Accruent was always a multiproduct company. Number of products within it that needed to be. Some were growing well. So a little bit of a invest in the A products, maintain the Bs and transition the Cs. What we found is the As are growing better than we anticipated, which is great. The Cs are probably not transitioning to SaaS as quickly as possible. And so it's just taken us longer to do that work. COVID wasn't -- didn't help, but we're not using that as an excuse. I think at the end of the day, what we've done in '21, we've made some, I would say, accelerated progress. And I think that's what sets up with some with confidence to grow this year. So we've got some new leadership in the business too, which I think will be helpful, but we've simplified it a little bit. We moved some product lines over to Gordian as well. So we simplified the business around some really great growth opportunities in CMMS, a real great growth opportunity around workspace planning. Obviously, as we all come back into the office, they've got a number of solutions that are helpful to organizations that are bringing people back into the office. Hoteling is an example for conference rooms and offices as one solution. So I think they're well positioned from a product perspective. The work's not over, but we made some progress in '21. I think you see that manifest itself in results this year.

And maybe sort of Provation acquisition, right? It's -- and once again, there are a lot of logos in your slide deck, but it's a clinical documentation management software, and this was a $1.4 billion acquisition closed in December. So maybe you can talk, what attracted you to the market? The majority of revenue is in hospitals where you have a presence with ASP and Censis. But the growth opportunity here actually seems to be more with ambulatory surgery centers and private physician groups where Fortive does not have a major presence. So just maybe you can just...

Yes. I mean that's -- number one is it's a great business. Probably, one of the places where when we did the due diligence on the product, the product due diligence was outstanding. So very clear value proposition relative to the entire workflow, primarily in the GI specializations, but in other specialties as well. As you said, it has a presence in ASCs in the United States. That's a tremendous growth opportunity as those expand. I think the U.S. health care network is finding ASCs as a way that specialization is a way to deliver lower-cost health care. So that position in ASC is advantageous to the rest of the segment and will give us a presence in pretty much all the large -- the largest hospitals in the United States and the largest ASCs in the United States. So there's good synergy there. And we think the opportunities in new specialties as I mentioned before, the SaaS migration just really builds for a great business. And it was a great business already. It was very profitable. As I said, it's going -- $.08 of accretion this year. It's going to -- it's just an outstanding business, and we'll continue to just be a better business over time.

And maybe we can talk a little bit about SaaS migration because once again, I think it's such a great example. So they do have scale SaaS offering, but the majority of revenue today does come from license and maintenance. So how are you planning this license to SaaS migration? How do you envision this?

Well, it's mostly maintenance -- it's mostly a big maintenance pool, and that's a pretty straightforward place. We've got a great SaaS product that is, over time, 3 years ago, it probably wasn't as good. Today, it's a very good SaaS product, meets all the needs of the customers. We're not going to convince customers to do that migration. Hospitals are going to do that when they're doing other cloud investments. So that will happen over the course of 5 to 7 years probably. We won't drive that migration. It will just occur. We're set up well to do it. We've started to see it. And it will add growth because we'll -- there's a savings to the ASC or the hospital because they don't have to invest in new hardware. And so sort of the cost savings on the other side, but they'll markup that maintenance structure over time, which is going to provide growth to the business.

And also, I think another -- once again, I think it's a great case study as to how you approach M&A. But Provation is strong in gastrointestinal but has plans to expand to other specialties. So how are you approaching this? And how do you sort of model this, right, because there seems to be a lot of growth investment, a lot of shift. So how do you sort of -- how do you balance this expansion to these growth adjacencies with growing the margins in the business?

Yes. We will always look at as we -- like we do in any business, we'll look at the hypothesis for how we want to grow the business when we make the investment thesis. And sometimes that will be maybe a little bit slower margin improvement but the desire to want to invest. Intelex is a good example of switching gears on you. But in the EHS software where we saw the growth opportunity, we decided to invest more in that business rather than take all the margin structure. So we got the margins quite frankly, from 0 to 20 pretty quickly, but the 20 to above 20 is going to be a little slower. It's a rule -- it can be a rule of 40 or 50 business. We want to get that more on the growth side in the early stages. So it's going to be an individual decision by business. On the probation front, we'll do a 100-day plan here shortly after -- 100 days after the acquisition, and we'll determine what those balancing act. And then we'll always make decisions over time as we see the opportunities available to us.

This is great. We're almost out of time. So I'll give you back 15 seconds.

Well, yes, we have no more questions? so this has been great. Hopefully, everybody had -- we're looking forward to the sessions later this morning, and great to be here.

No. It's also a pleasure. Thank you so much.

Good to see you, Andrew. Thanks.