Fortive Corporation (FTV) Earnings Call Transcript & Summary

Hi, everyone. We're going to keep moving here. We're really excited to have Fortive join us next. And we have SVP and General Counsel, Peter Underwood with us. Pete, I appreciate the time. Thank you very much, and we'll let you get started with your prepared remarks.

Fantastic. Well, thanks, Joe. And I appreciate the opportunity to be here and to tell folks about our sustainability program, particularly the evolution of the program, a little bit about our strategy and where we're headed. I'd like to start just with a time line -- I just -- I'll get the right slide in a second. Here we go. I'd like to start with a time line here. This time line shows, I think, at a high level, a little bit about the evolution of our program, where we've come from, where we are now and then I think, importantly, extrapolating you can see from that where we're heading in terms of level of ambition. Fortive entered the corporate world in 2016 as a spin-off from Danaher Corporation. And at that time, from a sustainability perspective, we were really a collection of operating companies that had their own sustainability programs, and we're doing really great things from a sustainability perspective, but we lacked the capability and we lacked the infrastructure at the corporate level to really drive an overall corporate strategy to find those common themes and common strategies that would make for a more cohesive story. If you look, I think, at our sustainability reports, particularly from 2017, 2018 in that time frame, I think that's what you're going to see. You're going to see us telling stories about what our operating companies are doing from a sustainability perspective. But not telling that story about what we want to do and what we want to become, not having that aspirational look at goals and objectives and how we want to proceed down the road. But we knew we had this really great story to tell. If we could just find the means internally to get that done. So around 2019, we started to go down the path of expanding our organizational capability. And that really started with people. So we brought in a sustainability professional. We enhanced our infrastructure. We added to our team. And what we really try to do is start pushing that sustainability culture that we had inside our operating companies, but pushing that to the forefront. And as we gain that internal capability, what we found is we started to find these commonalities and these common strategies for our operating companies around what we could be and what we wanted to be. And in particular, we started to also learn what do our constituents want, what do these stakeholders want and need to see? And so you see in this evolution, this sort of break in the spot where we started to gain this capacity in infrastructure, and we started to enhance these disclosures incrementally to make sure that not only were we doing the things we needed to do to bring value and to bring impact through our actions, but we are also telling the story in the way that we think the story needs to be told. And so that brings us sort of to where we are today. In 2020, we undertook -- we started a materiality analysis that brought us at the end of the day to these 5 pillars. This is sort of our -- the foundation of our sustainability strategy and our sustainability commitment. I recognize this is a bit of a busy slide, but we wanted to not only show you the pillars, but we wanted underneath that to show you some of the goals and some of the metrics that we're tracking so that you can see the commitments we're making relative to these pillars. Very briefly walking through them, empowering inclusive and diverse teams. This is something about -- this is ensuring an equitable and an inclusive workplace, and allowing people to come to work in an authentic fashion and do their best work. I'll talk a little bit more about that in a minute. Investing in our communities is another extremely important pillar for us. This is our license to do business. And we recognize that giving back to our communities as a way not only to have goodwill but to create stronger organization, stronger communities that can support us with employees and with strength in their ability to -- their economies and ability to purchase products. And so that is really primarily done through our Fortive Foundation, but we do a lot of giving at the OpCo level -- and we also do quite a bit of volunteer work, and you'll be able to read about that in our sustainability reports. Third is protecting the planet. And this is a place where we probably had the most success and the most visibility around our goals. I'll talk a little bit more about that here in a minute. Working and sourcing responsibly is the fourth pillar. This to us is all about employee safety and the safety and integrity of our supply chain. So we have lots of KPIs here. We have lots of really great goals, most -- some of which we talk about in our Sustainability Report. But we're very, very proud of the progress we've made, particularly on the supplier side in this pillar. And then lastly is operating with principle. And this is the things around having an effective ethics and compliance program, ensuring our business resilience and then making sure we are protecting the privacy of the data that we own, that we use and that we store and maintain on behalf of employees and customers. So let me do a little bit of a deeper dive here around inclusion and diversity. And I think before I talk about these goals, I wanted to make a point about the culture. Our culture is centered around FBS supported business system. FBS is embedded in all of our employees from the top down. And what FBS is, among other things, is it's a very collaborative way of working. It's a very collaborative business system that requires people to be together, what we try to do is to take advantage of the opportunity to have everyone have a voice. In fact, we have a rule in a Kaizen or in any other type of FBS activity that says there's no rank in the room. And what we mean by that is it doesn't matter if you're a VP or some other level of an employee, we want you all participating and we want the ideas that are discussed, embedded and become part of the ultimate solutions. To be those ideas that rise to the top based on the impact they can have not based on who's talking about them. And so I make that point because we are advantaged in this idea around inclusion because it's such a part of our culture already in terms of understanding the importance of various viewpoints and they're really driving the ability of those viewpoints to be heard. And so I think you see here some of the goals that we've laid out for ourselves in terms of gender by part representation, some fairly ambitious goals. These really start when you think about how are we going to tackle these. It really start with the culture. The culture not only of FBS, but a culture of inclusion and diversity that for us has been centered on inclusion and diversity pillars, 3 pillars of inclusion and diversity that we have for the last 3 years made conscious efforts to spread across the organization. And that's visibility and that's training. That's also on making sure that our talent acquisition team has made changes in the way they do things to enhance diversity. We have a -- every year, we do a -- or I'm sorry, every quarter now, we do a Pulse survey that tries to gauge our employees' perceptions on how we're doing on inclusion and diversity. So we have an inclusion and diversity engagement index. So through all of these things, we're trying to drive that workplace that builds on this FBS culture of allowing people to be open, to share their viewpoints and to do it without rank or without any other sort of anything else other than the ideas that they're bringing to the table. I would close on this slide by pointing out as I think it should be, inclusion and diversity starts at the top of every organization. Our Board of Directors is a tremendous Board of Directors. We have built it over the course of the past 5 years, but we are from a gender and BIPOC diversity perspective. Our Board is at 63%. So we have not only extremely effective Board, but we have fantastic diverse viewpoints on our Board. And I really think it shows the commitment from the top level down to what it is that we're trying to accomplish. So I'll go quickly to protecting the planet and some of the actions that we're taking there. Back in 2019, when we were still sort of a little bit nascent in our program, we announced our first carbon emissions reduction goal. And that goal was to reduce our carbon emissions by 40% on an intensity basis. So it was not an absolute goal. It was an intensity goal from the year 2017 as a baseline to the year 2030. We wanted to reduce by 40%. As we started to build and develop that capacity and capability, and we started to free up capital for our operating companies to pursue projects, and we started to provide guidance to them on where to look and what to do. We made really too fast progress on this goal. And so last year, we announced that we were going to accelerate the time frame of that goal. We were no longer shooting for 2030. We were going to shoot for 2025. And then -- and not only that, but the target was going to go from 40% intensity to 50% intensity. So -- and you'll see this in our sustainability report that publishes next week but I'm sharing this with you today, we have already achieved that goal of 2025. We did it in 2021. From our 2017 baseline, we are 51% down on an intensity basis in our Scope 1 and Scope 2 emissions. I'm very, very proud of that. But of course, like anything else in a continuous improvement-oriented culture like Fortive, that's not the end of the story. Far from it. We have done a lot of work to look at and establish yet another goal, a new goal on our carbon emissions that we think is going to be aggressive but we're going to try extremely hard to make it. And that is to reduce on an absolute basis now, no longer intensity. On an absolute basis, our Scope 1 and Scope 2 emissions by 50% by the year 2029 measured off of our 2019 base level. So you'll be able to read more about this in our next sustainability report, which, as I said, will drop next week. This new goal that we're setting is aligned with the science-based targets initiative guidance. We use that guidance to help us set the target, and we are in the process as well of conducting a Scope 3 relevance and materiality assessment. So that we can understand where we are from a Scope 3 perspective and what it is that we need to do if we really want to make a science-based target reality for Fortive. In addition to that, from protecting the planet perspective, we are focused on renewable energy, understanding and evaluating our positions there. And then water and waste have both become on the radar this year something that we are working hard to understand, again, what is the intensity and materiality there? And will those subject matters make good places for us to try to establish goals to move the ball forward. So now I want to talk a little bit about what I think is the most important part of what we do here from a sustainability perspective. And frankly, the part that's tied, I think, mostly to strategy here. And that is our products and services. I love talking about this because as Fortive, we have such an organic link between sustainability and our business strategy. If you think about our shared purpose. The reason we exist, it's essential technology for the people who accelerate progress. What that means is that our goal is to help our customers solve their most complex problems by using technologically-innovative solutions. And to do that, of course, in today's world, so many of these problems that they're trying to solve are sustainability-related or seeking sustainability outcomes. And so for us, that gives us this great organic link because we're using a lot of ESG secular drivers to help us in the businesses that we're investing in. Probably no better example of this than if you look at our EHS platform. We have a company called Industrial Scientific. Industrial Scientific has a mission to end [ debt ] in the workplace by the year 2050. ISC provides gas detection hardware and SaaS software solutions to keep employees in the most critical environments safe. ISC -- part of ISC is a company called Intelex. Intelex is one of the world leaders in EHS software and expanding their capabilities in ESG and sustainability software as well. Examples abound of this in terms of the products that we are using that have the secular ESG-oriented, sustainability-oriented drivers behind them, they're across all 3 of our segments. You can read about a lot of these in our sustainability -- upcoming sustainability report. I would encourage you to do it because it's really a tremendous story that we have to tell here, I think, relative to the strategic length that we have to look out of sustainability goals. And then I'll wrap with a quick word about that sustainability report coming next week. As I mentioned upfront, we've been evolving our ability, our capability and our understanding of what our constituents want to see, our stakeholders want to see. And so new for this year in this 2022 report, we will have our first alignment to a TCFD index that will build upon the work we've done in the past 2 years and adding a SASB index, and a GRI index to the report so that we can make that information accessible on an apples-to-apples basis for our stakeholders and constituents who are interested in seeing our progress and what we're doing relative to others. We did join the UN Global Compact last year, and so this will be our first progress report from the UN Global Compact. We are also aligning to UN sustainability goals and the sustainable development goals. You'll see that in the report as well. And then as I mentioned, I think this fantastic new emissions reduction target that we've put out there. And again, lots of good new information about the products and services that we offer and how our strategy ties to those products and services. So that's the end of the prepared remarks, Joe, and I'm happy to take questions.

Thanks, Pete. Anyone watching has any questions, feel free to drop them into the chat function or you can e-mail me at [email protected], that I'll kick it off here. You mentioned FBS off the top -- how has something like that had to evolve as sustainability kind of became a bigger part of how you had to think through all of your businesses?

Yes. It's really an important question because, as I mentioned, FBS is the -- it is the lifeblood of our organization. It's the culture of our organization. It's how we get work done. It is our competitive advantage. And so what's really important when you try to evolve a program like that is to make sure that we understand not just what is FBS, but how are OpCos using FBS because to dig deep, if you really want to embed sustainability in those important places, we've got to understand how that's actually happening. And what's come out of that for us through a lot of work and effort is we're seeing FBS tools like our EHS risk score, which is an FBS -- proprietary FBS tool that allows us to measure the risks inside of each of our facilities in a very robust way. We added a sustainability module to that risk score this year for the first time, and that is a great example of sort of understanding the use of those FBS tools and how can we put sustainability in there in a way that will drive impact because everybody around the organization uses those tools and understand them. I think another great example of the evolution here is around our Energy Kaizen. We've had Energy Kaizen as a tool and our FBS toolkit for quite a long time. But what happens when you free up -- it's interesting, you free up the operating companies with some additional capital to go and make projects happen in an effort to reduce your emissions. Those Energy Kaizens change. They become more robust. They're no longer about where do we need to put new LED lighting and they're now broader and expansive. The tools get more expansive to help us understand where can we really attack things that will make a significant difference for us. And then there's the FBS evolution around just participation in our newest tool called LPM, lead portfolio management, making sure that sustainability concepts and ideas are embedded at the green phase, very early phase of that tool, so that people are thinking about sustainability impacts, design for sustainability and other sustainability-related initiatives at the very, very front end of new product introductions. So it's been a great journey so far with FBS. We have a long way we can go to continue to embed sustainability concepts throughout that system.

So before since its inception, has been very active in terms of portfolio change. So when we think about sustainability in a lens of an acquisitive company, how does it inform what you're targeting and how do you kind of bring new companies into the fold and push them towards your new targets? Are you like having to rebenchmark as you go?

Yes. So I think about that, I think, in 2 ways. First, as I mentioned earlier, that there are secular drivers that are informing a lot of our strategy. And so some of the targets that we pursue are square down the middle of sustainability-oriented. Sustainability is their business is, I guess, the best way to say it. We think about Intelex as an example, ISC, ASP, which is all about ensuring the safety of patients in hospitals, free from infection through disinfecting equipment. When we are in the midst of acquiring a business that is square down the middle of that strategy, then that is actually -- it's the key driver. It's the strategic driver. It's the business driver. And so sustainability plays a super important role in the evaluation of that organization. We also have organizations that are more tangentially where sustainability and that sustainability secular driver is not the overriding reason to buy the business. And in that case, I think it's a little bit more the standard due diligence processes, for example. We have a pretty robust look at sustainability. We'll look at the profile, the emissions profile, for example, of an organization. We'll look at what are the opportunities to improve. We'll look at their track record because we do look at sustainability as a proxy for good management in other areas. We also look at sustainability as will they fit into the culture that we're trying to establish, what's their view on community involvement, for example. And then in terms of what do we have to do is sort of re-benchmarking? A lot of the most important part of that is, again, around our carbon emissions goals because especially when you're on an absolute reduction basis, an acquisition or a divestiture for that matter, it's not as simple as just taking them out or adding them in, right? You've got a think of it as pro forma for the impacts that, that organizations had over the period you're measuring. And there's the GHG protocol, which I'm sure a lot of the audience is familiar with is how you do that. So trying to understand on the front end for businesses like that, how will they impact our goals is something that we try to do. It's never the driver around whether or not we're going to make that acquisition. But it is definitely something we look at so that we're prepared to understand what's the lift going to look like as we fit those kinds of companies into the goals we've already established.

Yes, I just want to -- you mentioned divestments, I did want to ask, like, I guess there's some mathematics around divesting product businesses and acquiring SaaS businesses essentially like meet the target in a way anyway because of just the nature of the businesses themselves. Did that have a major impact like the spin of Vontier and the sale of the transportation businesses and all these things. Did that -- was that a major contributor to hitting some of these targets that early?

I don't think it was a mutual to that because, again, the way the GHG protocol works is you got to pro forma this whole stuff anyway. What's really more, I think, more impactful from that perspective, you could have a high emitting business, for example, that you acquire that's made tremendous progress over the last 3 years in reducing their carbon emissions. And that's actually not a bad thing when you pro forma that back into your original goals. Certainly, the risk profile and some of the opportunities around reducing emissions and some of the levers we're able to pull are greater in some businesses and less than others. So you buy an Accruent, for example, it's a bunch of software, people in office buildings, your opportunities to find improvements there are less. It's not that they don't exist, but they're less. And -- but the good news around that is particularly for a company like ours where we do have sort of a broader base of businesses is that we're able to kind of look at it and accrue it and say, okay, what's accrue and capable of doing here? And how does that fit into the broader picture of the corporate goals? We don't do things like, say, okay, every single operating company must reduce by x amount of metric tons carbon equivalent. We wouldn't do that because there's opportunities in different places and different profiles for those companies.

Yes. That was my next question kind of how do you apply some of this -- how do you apply this to a company that has so many different operating entities, like and you get buy-in across the company and accountability across the company when it's much easier for 1 business to make improvements versus another?

Yes, it's important. Buy-in hasn't been too much of an issue, typically because of the things that we're trying to accomplish are -- everyone sees the good in what we're doing both again from -- and I emphasize this, impact and value, because I think they're both super important here. People tend to see this. But again, what we can't do is say, we're all must reduce equally. What we can do and what we do is we apply percentages to that. So that sort of -- that denominator helps normalize that. Whether that's an intensity goal where you have a lower base of revenue, for example, or whether it's as simple as saying, hey, we're looking for a 6% reduction across the board. If you're starting from a really small place, it takes less to move that needle. If you're starting from a big place, there's a lot of opportunity there that you have to do the 6% or more. In the case of our -- in case of what we've actually done, we set that sort of corporate goal on the emissions at the top level. We said this is the corporate we want to achieve at Fortive [ writ large ] across this period. And then we dove down into the operating companies and analyze what are these -- what are the opportunities and who is capable of doing what. And so out of the 16-ish operating companies that we had at the time, we gave targets to our 6 highest emitters. We said, "You're going to have the target of 6% or whatever percent." And then the rest of the organization, we said, "We want to participate in looking for opportunities, we'll free up capital for you to do it, but we're not going to give you a set target because your opportunity to really move the needle is a lot less than these other things."

Sorry, I was looking for the mute button there. How far down does this go in the organization in terms of like where it gets into compensation metrics and KPIs that they're evaluated against?

Yes. So from a compensation perspective, at the executive level, we have 60% of our compensation is based on company performance. 40% is based on achievement of personal objectives that are laid out at the start of the year. And so objectives, those folks like myself who have more involvement in running the program or more accountability for sustainability outcomes. That -- there's a big part of that 40%. For me, the personal objectives that tie directly to achievement of our sustainability goals. Same with our CEO, who's got similar goals on his personal financial -- personal performance factor. As you go down lower in the organization, similar concept, but you start to see it a little bit more in the places you would expect. So for example, the EHS organization is going to have a lot of their personal goals set on achievement of DART rate, TRIR rates, which is which are 2 of the metric to the KPIs that we measure on employee safety. And the folks who are in charge of the energy reduction projects, they'll have some of their performance factor rated on achievement of KPIs there, whether that's return on investment from a financial perspective or return on investment in terms of reducing metric tons equivalent of carbon coming out of those projects. So it's fairly ubiquitous, but as you get it at lower levels, it's much more centered around the people in the organization that you would think it would really drive behavior.

So there's always this like ongoing debate with ESG of like, do you reward the companies that are doing like doing well? Or do you want to like companies that are doing poorly, but have the opportunity to do really well? Like so when you're looking at new targets, are you -- are companies that are currently performing poorly on this almost attractive to you because you feel like this is what Fortive does well, we can take a company and kind of change the way that they're doing things and make it a good ESG player? Or are you targeting someone that's already doing well and kind of fits more cleanly into the organization now?

Yes. So Joe, you are you saying that from an acquisition context or like existing?

Yes. I think more like when you're evaluating new companies potentially.

Yes. I think -- I mean, to be honest about it, I think the profiles -- the ESG-oriented, sustainability-oriented profiles of the organizations are -- it's a little bit of -- it's not the driver unless, as I said, we're in one of these spaces where it's actually literally our business strategy, and that's -- and that is several different places. But if it's -- if we're not in one of those spaces, we want to understand as much as we can about the profile. So we know what we're getting as we're going in, but it's usually going to be the financial characteristics that are going to make the ultimate determination there. It is something that we definitely look at because -- and we do make judgments upfront about how will this help or hurt relative to the -- to what we're trying to accomplish on some of these goals. But absolutely, when we see -- because of the nature of our culture, which is continuous improvement and the nature of FBS, which is very, very data-driven and specific, I think when we see those organizations that aren't performing as well, we see more opportunity than we see problem, I think, because we've been able to do this inside of a lot of our own operating companies. And I think we feel like we can bring that skill set there to make those organizations better from the standpoint of ESG goals we're trying to accomplish.

I think one of the things you guys do is interesting is like kind of these internal incubators that you have with like the FORT and things like this? And is there anything going on there that's kind of pet projects tied to these types of topics that you kind of put some people in the room and tell them to go try to figure something cool out that you're not thinking of and you kind of -- you can house that inside?

Yes. Actually, it's -- the FORT is a really -- is a fun thing to talk about. So it's a collection of data scientists and machine learning experts that work for our organization centered -- center in Pittsburgh and they have been able to do some really interesting and profitable things for us and for our operating companies. A couple of examples, they worked with ISC to bring analytics to the ISC's iNet customers so that those customers can better understand regulatory requirements and better predict maintenance issues for their gas detection equipment. They did something similar in the U.K. for a grocery chain customer in the U.K. where the Ford came up with an algorithm to help that chain predict refrigeration failures before they happen, and so reducing downtime on refrigeration. Similar story at Qualitrol, which is one of our businesses that deals with electricity transmission and transformers and before it was able to help, again, on a sort of a predictive fault model there. So we see that a lot of the predictive analytics coming out of the FORT are making a difference for the customer offerings. We're also seeing it on things like predicting net retention, predicting customer failures, those sorts of things ahead of time so that we can get out in front and make sure we're paying attention as an organization to those highest risk customers, so we don't lose them. So a lot of really neat stuff coming out of the FORT. I would also say because it's dear to my heart is that the FORT is helping us internally also quite a bit. The best example for me as a General Counsel is we have been working with the FORT to develop a trade, we call it a trade tool called FORT trade analytics but it's a proprietary tool that gives us access to a massive amount of our trade and trade compliance data that we used to have to spend a long time going and trying to find. And so that's giving us -- you can imagine in this day tariffs and counter-tariff tariffs and all that stuff. The ability to sort of push a button and see your profile and your footprint through this data lake and this tool that FORT has given to us, it makes us so much more efficient. So they're doing -- they're helping on the inside, too, and not just with the customers.

Very cool. I think we have to leave it there, unfortunately, because we're out of time, but I feel like this could go on a lot longer pretty easily. But Pete, I really appreciate the time. It's a good story to tell us and thanks for doing it.

Yes. Thanks, Joe. I really appreciate the opportunity to talk to you and the group.