Fortive Corporation (FTV) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to Day 3 of Citi's 2023 Industrial Tech and Mobility Conference. Very excited to have you. Very excited to have Fortive Corporation with us today. We've got Jim Lico, who is the President and CEO; and Chuck McLaughlin, who is the SVP and CFO. I'm going to turn it over to Jim, who's got some comments, and then we'll get right into the fireside. Jim, thanks for joining us.

Yes. Thanks, Andy. Good morning, everyone. The wanted third day 8 AM slot is always something of great value. So it's great to be here, and I know it's webcast as well. So we'll go through a few slides very quickly just to sort of set the stage for the Q&A. So maybe just a little bit about what we've been trying to convey here coming out of earnings and really excited to be here with everyone. I think 2022, we said was a show-me year. And what we really meant by that is we thought it would be a year where we'd have an opportunity to really demonstrate the value, the high-quality value of our portfolio. And I think you saw that amongst a number of ways, but you certainly saw some of the secular growth drivers, I'm sure, which we'll talk about that we tried to attach ourselves to over the last few years. It's been differentiated from a performance perspective. I'll talk about that in a slide or two -- we've also seen, I think, as we got back -- we are back to really doing what we do, which is utilizing the power of the Fortive Business System to really create real performance. And with COVID over the last few years, we've done a lot of things virtually. But 2022, as we got through the year, we started to do everything in person. And I think you saw that accelerated performance in a number of ways whether it be how we dealt with supply chain issues or how we really continue to drive free cash flow. I think it really shows the benefits of -- and the power of our business system. And then finally, just how we create value. We're in a great position from a balance sheet perspective. I'm sure we'll talk about M&A and how we can continue to utilize the balance sheet to continue to build a great business. Hopefully, you get a chance to really see our segments. We resegmented a few years ago after the Vontier transaction, and we're in a great position in all 3 segments. And in simplest form, Fortive is really about connected workflows and really a few different customer venues. Factories, commercial buildings, engineering labs and hospitals, really delivering safety and productivity and quality solutions with both hardware and software. It's really that simple. It's really everything we do today in each of those segments is really focused on bringing those connected solutions to a set of customers that really are specific to each segment. And we think it's built a differentiated performance. It's a way to create incredible value and franchises that are enduring in terms of customer value and a great way to continue to build a growth of your company over time. Just a slide around where we think our performance is, and I'll draw you to a couple of real key metrics for us, certainly, core growth, gross margin expansion operating margins as well as free cash flow margins. Those are really the 4 metrics that are really important to us, the numbers that we drive every day in what we do. And we think we've made a great progress over the last several years. I won't read the slide to you, but certainly, we continue to move our growth rate up in ways that are incredibly positive. We've made incredible progress around our gross margins today, which gives us a tremendous opportunity to continue to grow operating margins over time. And we think we're just starting our efforts towards continuing to build world-class operating margins. And then finally, our free cash flow. I think '22 really differentiated us. We've always had incredibly strong free cash flow. I think in '22, you really see that differentiated with the progress we made as well. I'm sure we'll talk about some of that. Finally, just -- or really just the power of the Fortive Business System, whether it be how we handle the supply chain issues and how we've utilized our tools and FBS to really drive gross margins in years where most people were trying to keep their gross margins maybe still year-on-year consistent. We grew gross margins last year. And I think that speaks to the power of FBS. From an innovation perspective, we've launched a number of great new products in '22, and I think '23 will probably be our best year for innovation since we've been public. And then finally, I think just the work we've done to continue to build new businesses to create differentiated performance, FBS means just as much today in a healthcare business or a software business as it does in a legacy industrial manufacturing business that we've had as part of the portfolio for 20 or 30 years. And finally, we think that creates a tremendous opportunity for double-digit earnings growth and free cash flow growth really to continue to accelerate that flywheel, which is so important to us of driving growth, expanding margins, using our free cash flow to acquire and then creating tremendous value through the Fortive Business System. So a few quick words. Andy, I promised 5 minutes, I got it done in 5 minutes. So we'll get going.

Yes. And that almost might have been faster than 5 minutes. Thanks, Jim. So look, I just want to address the near-term first briefly, and then we'll move on. So I think you had mentioned on your Q4 call an expectation that your customers might start the year in a wait-and-see mode. And so just kind of what are you seeing from customers? And then I know you had talked about your orders normalizing. I know you are at my peers' conference. So maybe you or Chuck can sort of clarify your commentary around orders normalizing what that means for Fortive.

Yes. Well, I think maybe number one, I would say, we saw -- after 2 years, it was such strong orders as an example, Tektronix being up 40% over 2 years. We expected things to normalize at some point in time. We really think our core growth is really mid-single digits through the cycle. So inevitably, we're going to come -- start to come back to that number over time. So with such strong orders and backlog, I'm sure we'll talk about that as well, we would expect, and that's what we saw. We saw it in the fourth quarter. And Q1 is -- the comps will make a difference first half to second half a little bit. Orders look a little bit better in the second half. But reality is from a -- just from a sequential perspective and what we're looking at in just in total dollars, there's no big escalation in the second half. So we think we're in a good position, relative to customers. We're seeing some slowing in sensing. Customers -- we expected Tektronix customers to maybe take a little bit of a pause, wait to see what the macro looks like in '23, we've seen some of that, but nothing different than what we expected.

Okay, kind of what you had talked about.

Yes, exactly. Pretty consistent.

Yes. Got it. And then let me ask you specifically about China. It was up 20% for Fortive in Q4, even despite COVID pressures. So now that we're done with Chinese New Year, sort of what are you seeing there? And I know you said COVID in China led to 50% elective procedures in AHS as a percent of 2019 in January like sort of where we are on that?

Yes, we had a great year. As you said, the fourth quarter was great, but the whole year was pretty strong, and our teams did a great job of dealing with a lot of the issues that were over there. What we've seen so far is strength in the 3 businesses that are -- 4 big businesses over there that make the biggest difference. Fluke, Tek and sensing very -- continue to be good over there. Point-of-sale is good. As you said, healthcare, electives were in 30% in December. They got to about 50% in January, and they're progressively getting a little bit better every month. So March is always a big month for us in China. So I wouldn't necessarily say we've seen everything that we'll see. But so far, so good.

And just 1 more question on the regions. Like you said, if there's going to be a weak point in Fortive it's going to be year of this year where you outperformed last year and we've not heard that from you guys before you know that -- are you worried about Europe. So maybe you can talk about that. And then here in North America do you expect this to be the sort of strong point.

Yes. Well, I think there's 2 things to play out. One is -- you're right. Western Europe is -- in particular, has been good. Overall, Europe will be a little bit challenged because of some Russian comps and things like that. But I think Western Europe will be a little slower. We also don't have the benefit of the software businesses in Europe like we do in North America. So that's the other component here is -- the durability that we have in the portfolio is a little bit more in North America than it is in Western Europe. So I think we'll see some slowing. But point-of-sale as an example, at Fluke is still remain pretty good. So -- but I think there's still an anticipation that maybe there might be some challenges there.

Yes. And I wanted to ask you about maybe longer-term growth, right? So your guidance for this year, 3% to 5.5% but you talked about mid-single-digit plus, like across the cycle, right? And I think when you had your Analyst Day, you talked about higher growth in AHS and iOS. Lower growth in decision, but that's not kind of what we've seen, right? So if you talk about the algorithm going forward, how should we think about those 3 segments, especially since Precision has been a bit stronger?

Yes. Well, yes, put a shameless plug in for our Investor Day in May, so that we'll have an opportunity to give you a little bit deeper dive in the segments of the businesses. But I think at the end of the day, we're that mid-single digit is what we think through the cycle. And you're right, Precision Tech is moving up. I think the work that the Tektronix team has done really gives us some confidence to move that growth rate from what was probably low single-digit to mid-single digit, and they're the biggest part of PT. Sensing still maybe is in that low single digit, but a lot of the good work that we've done at Tek, we're also doing in Sensing and I think that will continue to do. But I think PT will -- that will move the overall growth rate of PT, it will continue to move up and it's really about the secular drivers. We'll talk about it I'm sure, but it's really been the repositioning strategically that we've done with Tek over the last few years has been really powerful.

I mean I could just ask you about that now, Jim, like to sort of talk about Tek, right? You've got a lot more recurring revenue. We have the electrification of everything going on. So like how important is maybe the electrification of everything to Tek's because 10 years ago, people worried it's a very cyclical business to the point. Like what does it look like now you think over the next...

Yes. Well, intentionally, we've done a lot to make it less cyclical as you said, we put big service business into the portfolio. But I think the biggest thing we've done over the last few years is, as you said, it's all of this great software, data analytics and things that we can do now have to sit on hardware and that hardware needs upgrading, right? We've talked about the semiconductor infrastructure that's going to get invested in and things like that. Obviously, EVs, but everything needs a battery now. And when those batteries need to be designed into things into everything, they need oscilloscope. So -- and our solutions are really benefiting from the fact that the secular drivers are really causing big R&D spend into these kinds of opportunities with our customers. And that obviously were big beneficiaries of that work.

And Jim, like you've had a lot of new product intros on the oscilloscope side. So I guess I think that's really good, right? But then the concern is like do we lap a new product data or something like that. So how do we think about that as we go out over the next couple of years?

Well, the cadence has been, as you said, has been tremendous over the last several years. And part of the background work that was done a few years before that was really getting us on to platforms that will allow for more rapid introduction. We used to have a lot of different separate platforms and software architectures as part of the embedded software. And that led to a longer design cycle. This is probably 10 years ago. What we've done -- what we did first was try to consolidate a lot of those, and that's a great work that's been done. And now that allows for much more rapid introduction of product. So even the 6 Series that we launched a few years ago, we launched a new version of that a year later. So it's just the continued ability to sort of fast cycle product -- new product development has been a big part of their introduction phase of technology, and I wouldn't see that slowing anytime soon.

So I want to shift gears and ask you about recurring revenue, right? So you are 40% recurring revenue right now, give or take. And we know you've got a double-digit SaaS this year in licensing revenue in '23. So as these recurring revenues grow faster than the company average, how do you think about that affecting the company? I think you've talked about within 5 years, 45% to 50% recurring revenue, 20% software as a percent of sales. Are you ahead of schedule versus that '21 Analyst Day? Like how should we think about it? And I'm sure you tell us it may but give us a little preview of that.

Well, I think one of the things that's happened in the last couple of years is the hardware businesses have grown really well, right? So I think we would -- strategically, we would say, yes, we're ahead where the numbers are going to be at 100 basis points or 200 basis points, that going to move around from year-to-year depending on the revenue streams. But I think when you look at the franchises we built around recurring revenue, 1 being the healthcare businesses, 70%, recurring revenue in healthcare, great franchise, great customer value. The facility and asset life cycle, now incredibly sizable franchise and set of brands that's really strong in software, certainly what we've done on the EHS side as well, which is almost all recurring revenue, even if it's hardware. So I think we built these franchises that are incredibly strong strategically, and we're ahead of the game in that where that -- and we're intentional about recurring revenue, for sure. But the real goal is durability, durable growth, right, at the end of the day. More durable growth. We're still -- we saw some cyclical parts of the company, but much less than it was several years ago. And we'll continue to endeavor to make that less and less and make that revenue -- those revenue numbers more and more durable and go up over time like you saw on that slide.

So let's talk about margins for a second. Again, longer-term target is 75 basis points a year. I think you're right on top of that for '23 in terms of the guidance. But you're coming off a relatively sticky supply chain year. So I mean it seems like price versus cost should be a pretty good tailwind for you guys. So what's holding you back from generating more than 75 basis points. And in particular, looking Precision Tech where your guidance of less margin improvement versus the other 2 divisions?

Yes, Andy, I think I'll take that. I think inflation is still out there. And the rate of inflation is going to slow, but we probably won't put as much price in. So we're probably matching that. But the biggest lever that we're looking for that we haven't seen yet is maybe around these spot buys for these electronic components. Those haven't yet many come back. When they do, you could see some upside. But until we see that, we probably won't put that into our forecast.

And do you mean, Chuck, like you're still paying extra for electronic components and like do you think that it's possible going down this year, but you haven't seen it yet, it's not in the guidance?

We definitely haven't seen it yet.

Okay. Got it. And then you mentioned last quarter about restructuring costs, $25 million to $30 million, that would significantly benefit the second half of the year and '24. It sounds like it's focused on AHS maybe. So could you elaborate on your actions on restructuring, how it could impact AHS margin? And again, AHS margin has been kind of pressured for reasons if I look at 2022, obviously, you've talked about elective procedure weakness and all that kind of stuff. So how much could restructuring help? Are we going to stop talking about AHS margins.

Well, we -- probably not because I see a lot of great things coming for AHS margins, so we're going to be probably highlighting that for some time to come. With restructuring, I think it's about 40% -- maybe 40% to AHS and then evenly split amongst the other 2 segments. So a little bit more weighted there. But -- and some of it has to do with -- it's really doing the carve-out. We always said that we were -- there was more things that we could do to streamline, especially around logistics and how we go to market. And I think you're going to see us do some of those things, realign some things. Just a small example, if you have -- we have a country that's -- we have a physical presence, is really just should be through a distributor. So we want to make that adjustment and that will improve profitability and margins. But there's a number of things, rooftops. Those things can be expensive as well. Talking about margins in 2022, specifically around health. We saw really good margin expansion sequentially from Q3 to Q4, up 400 basis points, but it came in a little short of where we thought it would be, while the company overall did what we thought. And that had to do with FX moving against us. Also, health margins, we did a great job for the company staying ahead of price cost, but it's harder to get price into healthcare. It doesn't mean it's not happening. We've accelerated the price that we got into health from the first half to the second half, and that's going to -- that will continue into this year. So we're going to get ahead on price cost, and that's going to be a tailwind. Health margins, it's a very global business, and we have inventories around the world. And so when -- as the dollar strengthened and it hit all of our segments, but with 4% growth the health didn't have as much room to cover that. And then as we talked about, elective procedures are coming back. I think that we've got a number of things that are going to flip from headwinds over the last 3 years to tailwinds when you think about inflation, price, elective procedures, FX, I like what's going to happen here.

Chuck, I think it's an important point, right, because most of those are industrial analysts, right? And so it's a little harder when you look at healthcare from the industrial lens. But like what we -- covering some other companies that have healthcare, like you mentioned pricing, like it just seems sometimes a little harder to push pricing in healthcare. So like what have you guys done to really sort of push that?

Well, a number of things with the carve-outs, we inherited some contracts and some of them didn't have the ability to do anything with price. So we've been changing that. We knew that when we did the deal, we didn't know we're going to run into hyperinflation. But as we rework those and then now you still are very measured in terms of what you can do each year, but you can do it over multiple years. And that's where you'll see play out in health. When you look at a longer period of time. And we're -- as I said, the price that we're able to put in will be a compounding effect and then you're going to see inflation moderate and then hopefully get back, and I don't know I'm not going to forecast what the Fed is saying, but that will become a tailwind as we move forward.

Are these like annual contracts. So we think like every year, a certain percentage should sort of readjust like that? Is that the way to think about it?

Yes. There's 2 things to go on is you have these contracts that spend multiple years and you don't get to renegotiate and say, "Hey, we have to have the ability to raise price, depending on what inflation does. " And we've been working on that. But there's also -- it's healthcare, they don't -- you can't put as much price in, in any 1 year, there's typically a cap, so you -- but you can keep going after it for multiple years, and that's what we'll do.

And just while we're on healthcare. I ask you 1 more on this, like -- so you look at a business like I think it's Invetech, right? Like where you had some pandemic tailwinds and stuff. So like how should we think about '23 as a more normalized year for a business like Invetech, how do we think about pandemic headwinds in terms of comparisons, ending things like that.

I think Invetech, you're right. That was 1 of the few places where we actually had a COVID tailwind, and that shows up in Q1 but I think as you certainly get into the back half of the year, that won't show up, and it will be -- that won't be a headwind for us going forward.

Helpful. And 1 more on that, just like consumables, like part of the ASP story is really the consumable part. So how do you feel about that as you go into.

Well, in Q3, we talked about what health was going to do from growth rate and a return to mid-single-digit growth in Q4. And consumables were actually up 7% in Q4, and that was driven more by North America, Western Europe, COVID receding. We're going to have an issue with -- in China, as we talked about slowing because how they changed their policy. So now in Q1, January, particularly their hospitals were overrun. There's not a lot of elective procedures. But that's a way, much like probably we saw last year with the Omicron variant. And so exiting Q1, it won't be back to normal, but it's going to start becoming sequentially better. And we're -- I think we're looking forward to seeing what's -- China is a big market for us in healthcare, seeing that play out as it did with what we're seeing in North America as well.

Yes. Got it. And Jim, let me ask you about, look, I asked you about Tektronix. Let me ask you about Fluke. In the sense that also it's your largest business in iOS, right? Like -- and again, in the past, I think investors have thought about it as relatively cyclical, but I think you've done a lot to it over time. So maybe talk about what you've done? How do you think it sort of develops? If we do have a more significant economic downturn, like how would it act?

Yes. Well, they've had a very strong couple of years not just because of the macro, but because of the work they've done. Probably the biggest thing we did to put more stability and durability in the business was built a very large healthcare business, which we then moved in the health segment. So you don't see that in the health numbers today, but -- or in the Fluke numbers today. But I think at the end of the day, '23 -- we've not seen the sort of negative POS in any way, shape or form. We've had double-digit point-of-sale pretty much across the world for several quarters now, going back even into '21 so we've seen some of that point-of-sale moderate into the high single-digit range but still pretty good. We're seeing a little weakness in smaller distributors, but some of the public folks that many of you know and that kind of thing are still very good and they're big customers of ours. So point-of-sale remains good, and inventory levels are not real high. So we feel pretty good about our ability to have still a good year there. But there'll be some inevitable weakness that will happen in some places. It is -- that business still has some correlation to PMIs. And so we saw a little bit of order -- a little bit of order weakness there, a little bit less. We don't have the -- the Tektronix backlog position is very, very strong. Fluke's is good, but not as good. So we'll see a little bit of that play out. But I think at the end of the day, the things they've done, this is going to be their best year for innovation. So we feel like a lot of the things that we can do to really make the year better or certainly in place.

And Jim, let me just ask you 1 follow-up there. Like what things going on like PMIs obviously are down a bit, Fluke is still pretty good. What do you think is behind that to a certain extent?

Well, I do think there's a long -- there's a tail of customers who are still not have -- don't have the solutions. But I think the other thing -- and this is maybe more broadly for us, almost everything we do today is designated towards saving labor. And in many respects, when you think about the connected workflow, the advantage to a customer of the connected workflow is using -- is being able to utilize hardware and software to do things that predict labor to make it things more productive. And inevitably, those are solutions that are even more important if things start to slow a little bit. Now I'll give 1 example, it's not with Fluke, but with health, we have a new productivity suite that we call Censis AI, which helps the sterilization organizations predict labor and understand what they have ahead of them and get ahead of any labor shortages they might have. Well, in this labor environment in hospitals, that tool is absolutely critical. So I think what we've tried to do from a solutions perspective, is really try to get ahead of that. And Fluke certainly has a number of solutions that are focused on that. And the other part of it is they're focused on things like solar and a lot of the electricity grid modernization things that are occurring. And fundamentally, those aren't going to change in a slow economy.

So I think it's a really good segue into sort of your facility and asset life cycle business because it's kind of the same story, right? So you're guiding to low double-digit growth. You did that kind of last year. I think that's the highest growth that you're guiding to at the company. So can you talk about your level of visibility of that growth and sort of what gives you the confidence for the strong momentum, I think it's going to be very similar to your last answer. But then within that, Accruent, has it really turned the corner towards higher growth now and maybe conviction level around SaaS-based revenue ramping and ServiceChannel, if you could?

Yes. I mean we had as you said, great growth in '22, we'll have a great year in '23. And it does start with the fact that organizations are looking at their facilities footprint. They're looking at their facilities costs and they're trying to reduce it if they think things are going to be a little tighter. And that's a lever they'll go to before labor cost reductions, right? So when you manage leases, when you manage facilities, when you look at fields -- when you look at contractor costs on things, those are going to be places where our customers really want to go look, and that's what that segment does. So certainly, they're benefiting from that trend, that secular driver, which I think continues. Gordian has been an outstanding part of that story more in the state and local and federal government level, but I think we've seen really, really strong growth there in part because of the -- they provide cost savings to their customers. So in the sense of what we've got as a set of solutions, I think we're well positioned for this year and really into the future. Relative to current, you're exactly right, Andy. I mean we've been a little bit -- we've been -- we've talked about this a little bit -- it's been a self-help story. We've seen -- we've continued to see green shoots, and we think we'll continue to see that through the year. One of the things that there's been a challenge in that business is just getting not necessarily SaaS conversion, but with so many product lines, getting the top product lines to continue to grow well, while we sort of sunset some of the product lines that inevitably aren't as valuable to customers. And we did some of that in the fourth quarter and we're through most of that. So as that headwind starts to be a smaller part of the revenue base, the really strong growth that we've had in some of the top places where we've been investing, will overtake the growth rate and we'll inevitably continue to improve it.

So I forgot when I was talking to Chuck about AHS, I forgot to ask you guys about ProVation. Like it sounds like it's got pretty good momentum now, but maybe you can talk to us it's been a lot about a year.

Yes, a little over a year now.

So what have you done in a year? How does it look?

Yes, it's a great business. I mean at the end of the day, organic but not -- sorry to repeat myself so much, but in the GI suite, the productivity that it really has and the value that it has is an easy sell to organizations. So -- in that sense, we said we were going to drive growth in that business over time in 3 ways. The expansion of ambulatory surgical centers was going to drive growth. That was really a secular driver that they were well positioned to take advantage of. Number 2 was going to be the SaaS conversion. And number 3 was going to be the other specialties that they were involved in. The year came in, we continue to see that secular driver of ASCs and we did well in those. The GI SaaS growth was very good, and it was on the back of the fact that our SaaS conversions were ahead of plan for the year. And we didn't really have a lot in the new specialties. So that's really a story probably for the future years. But again, we didn't build much into it. So that's really not a story. So we feel really good. That business was always very profitable. So this -- they grew margins in the year. So it's really continuing to position it for growth. They've been a good practitioner of FBS and we think '23 will be a strong year for them.

Jim, it doesn't seem like hospitals in North America are really affecting that business in terms of staffing and all that kind of stuff.

Yes. What we've seen a little bit is we've seen new business has taken a little longer. The sales funnels have taken a little longer. Maybe the IT organization has 20 projects. And even though we might be 1 or 2 on the list, they may not have enough labor. So we've seen a little bit of that. But I think in the grand scheme of things, that sort of works its way through over the sort of -- after several quarters. And our sales funnels are very, very strong.

So I think there's going to be another Investor Day thing, but I'm going to ask you anyway, like so you've got a few key initiatives, right, like the FORT, Pioneer Square Labs, like maybe just update us on how they're helping medium -- short, medium, long-term growth.

So Pioneer Square Labs is an incubator and just for everybody's benefit. And we had a partnership with them, we've had for a couple of years now where we codevelop ideas and then inevitably, we come up with -- we have a methodology of whether or not we take that business and maybe we funded for a while, and then we decide what we'll do with it. But the other part of it was we really wanted to take some of their practices for really, what I'll call, breakthrough innovation that they were incredibly good at and apply that to our own product development process. And in that process, we are winning big time. Like a lot of the innovation that you're seeing that we've launched actually comes from some of the things that we adapted from what we've learned from them. And then on the front of investing, we've not spun anything in, but we spun some things out where we end up being investors in that's -- the intention is to really be more of a spin-in thing, but we've had some great ideas, and we feel very strongly that it's been a great win-win partnership for us. The FORT is our centralized activity for data analytics and machine learning and AI. And that was -- and really, we do that centrally as a way to sort of -- 1 is to build critical mass and number 2 is to -- I think we can -- the resources are a little bit fungible by business. And we've seen some really success. I think we've had 40 projects that range from internal projects to automate internal processes and reduce labor and drive productivity. Those savings are probably into the millions now. But we've also had a number of solutions that we've launched. I mentioned the Censis solution that was done in concert with the FORT. We've got another set of solutions that we're doing between -- with Censis as well in the perioperative loop that the work between -- the workflow between OR, the operating room and the sterilization lab and these are really strong foundational work. So the FORT is really adding value. If you've played around with things like ChatGPT and things like that, you know that AI is just going to accelerate and I think it will probably mostly in our software businesses because we already have the data platforms in which to monetize that. But I think we're in a -- both of those activities and endeavors that we had have been incredibly successful.

Soon some AI is going to be asking you these fireside chat questions. I hope not, but never know. So I want to...

I'm answering them to.

Yes, exactly. And so I want to open it up to the audience in a second but let me ask you about free cash flow first. And just in the sense that I think you mentioned it, sometimes I don't think you get enough credit for your free cash flow over 20% free cash flow margin as a percent of sales, very good and 100% to 105% conversion for '23. So maybe talk about how FBS was able to protect your cash flow in such a difficult supply chain environment. And is there even more you can do? I mean I know mix probably helps to and stuff. So what more can you do there? Because we always want more as you guys know.

Yes. So do we.

Well, we did have a great year as we expected. And the consistency of it, I think, is showing up because of FBS and how we go about it. It doesn't mean we didn't leave some opportunity on the table -- it's a tough environment out there. Our inventories are above where we want them to be. But we found some other things that we could counter measure. For example, at ASP, getting FBS in there and the daily management of their working capital -- over $50 million of working capital has been reduced, maybe it's closer -- well over $50 million. And over half of that number was this year. And so part of that free cash flow is getting after in a tough environment, how we manage some of these new acquisitions. Also, the -- obviously, the software businesses with negative working capital, faster they grow, the more they help us there. So those are a couple of areas where we have won by design with the software businesses. But the FBS, the biggest single one was at ASP, although I think Tek could be remiss if I didn't point out that they had their 11th straight year of improving working capital turns in that business. So there's just -- there's numerous places that FBS comes to help.

Any questions on the audience? Question. It's early, so we'll give them time -- so let me ask you about capital deployment. Then -- so maybe just reconcile sort of what's going on from you, Jim, in the sense that you mentioned being in a good place when it comes to your M&A funnel on the Q4 call, but I think you've also said that it's going to take sort of 18 months or so to sort of I don't know, get buyers and sellers together. It's just a tough market in that sense. And so kind of those 2 things seem different to me. So where is your guys head in terms of doing M&A right now?

Well, I think, number one, we've been busy. I mean we want to be busy on all the time. And the busy falls into the category of managing the funnels that are in there, cultivating companies, talking to them, being engaged in processes that might be out there. What I said though, mostly through '22 is we saw a lot of those processes not go anywhere. They ended up inevitably not consummating anything. And that's the sort of signals you get that, say, 12 to 18 months where those processes inevitably go somewhere because now buyers and sellers are closer to the point where they can come to a deal. But I still think we're in the middle of that time frame. We're not finished in any way. So we'll -- the balance sheet is in great shape. We feel very good about the opportunities we have, but we're disciplined and patient, where we've got some great businesses. We've just spent the last 35 minutes talking about the great opportunities that we have to deliver in '23 and we feel very strongly that, that can deliver differentiated performance. But we also feel that we'll be active in working on things, and hopefully, we'll consummate some things. But I'm not -- I don't worry -- we don't worry 1 month or another, 1 quarter or another, even half a year because inevitably, we know those things will be out there.

And so, Jim, you said -- you just said like you've been involved in processes that are out there. So obviously, I'm going to ask you about [indiscernible] in one sense. And that is you said on the Q4 call, you mentioned partnerships with them. How do you think about potential synergies under -- overlap with [indiscernible] if you were to pursue a deal?

Well, the great thing about being involved in processes that we don't talk about them. So it's a...

[indiscernible] ask.

You got to ask. But -- and -- the reason for that is obviously whether we are involved or not involved, we want to maintain the level of civility and things in these processes that -- and respect those processes. So we just wouldn't comment on anyone's process.

Okay. Fair enough. Questions?

Can you just talk to what you're willing to do with the capital structure to get stuff done? I mean you talked about the great shape of the balance sheet, but are you willing to go beyond and what are the limitations? Because I'm going to say, for example, there was a big debate at a dinner last night on what your willingness and potentials were. So [indiscernible] would be helpful.

Sure. What I think that if you're asking about equity, for example, that's -- we said that's a nonstarter for us. We're not willing to do that in any large even a hypothetical deal and so I want to make sure we're clear on that. And we want to maintain investment-grade rating solidly and that put that in jeopardy. And so I think those, those are clear guardrails in our point of view. And I think that's -- we think -- we know we have over the next 3 years, $5 billion of capacity and that can be deployed towards driving double-digit earnings growth in that. I think that's what we're focused on.

And -- but it's fair to say that you've done RMTs in the past, things like that, you can do -- how do I say this, exotic is the wrong word, but does not do more in exotic deals or whatever you want?

Well, we certainly have done different things. But I think those are -- those always end up being very unique situations. And I wouldn't want anyone to think that, that those unique situations necessarily dictate how we think about things going forward.

Fair. So let me ask you 1 more question. I asked this question of all companies. So what are the top 2 or 3 innovations, megatrends or structural changes affecting your company over the next 5 years? Are there any emerging industry trends that are perhaps being overlooked, you think?

Well, I would say the 2 things that come to mind around really -- what we really think about from a mega trend perspective, certainly the labor shortage, particularly around essential workers, whether that's in the factory, whether that's in contractors, whether that's in the hospitals, that labor shortage is a tremendous opportunity for a workflow focused company. I think that's number one. I think number 2 is the energy transition. when you look across the portfolio, whether it's what we're doing in solar and Fluke or what we're doing from an R&D perspective around all things, batteries, what Qualitrol is involved in relative to grid modernization. That's probably the #2 thing that we really look at and say across the portfolio, we're really seeing tremendous opportunity. And what we're tracking, we wouldn't tell you because then everybody would know. So -- but we certainly -- in our strategic plan process and when we talk with the Board, we certainly keep an eye on those things. And -- but we're really excited about the 2 I just mentioned.

Great. Jim, Chuck, thank you very much. I appreciate you guys being here.

Great seeing you. Thanks, everyone.

Thank you.