Fortive Corporation (FTV) Earnings Call Transcript & Summary

Jim's at the podium. We got the guys from Fortive here, Jim Lico and Chuck McLaughlin, and I think Jim is going to give a little bit of a preamble, and then we'll jump right into the questions on [indiscernible] unless it's [indiscernible].

No, there's -- we'll be pretty quick here. Good morning, everyone. Good to see everyone. Just a couple of slides, just to reframe maybe a few that are new to the story. So I think what our key message is both, in the conversation Chuck and I have certainly in the slides, they're really around a couple of things. One is over the last -- since we came out in 2016, really endeavored to really continue to build a high-quality portfolio, leading positions, and we'll talk a lot about the attractive secular drivers that we've really moved the business to, that have really moved the numbers considerably over the last several years. We think differentiated performance. I think certainly in '22, you see the level of gross margin expansion when very few people expanded gross margins at a time of supply chain challenges. The fact that we had really strong free cash flow last year and continued margin expansion, something that's been a testament to the Fortive Business System over a long period of time. I think differentiates our performance in so many ways. You'll hear the power of FBS through what we talk about, continuous improvement. No matter what business we have in the portfolio today, continuous improvement is really a way of life for us. And we've really continued to use that -- use the continuous improvement and the results from that to continue to allocate capital towards creating real value in a formula that I'll share with you in a few minutes. The portfolio continues to evolve, but continues to evolve to the better, better secular drivers around the 3 segments. You'll be able to read the slides and be able to see them. But I call your attention to a couple of things. One is each segment, incredibly well positioned, strong brands, global positions with this idea of hardware and software together. The fact that our hardware positions give us a footprint and scale that allows for us to bring differentiated software into customers' value propositions and bring -- use that hardware and software to work in connected workflows. To simplify it, they're leading positions, but they're really -- if you think about it, if it's a factory, if it's an engineering lab, if it's a commercial building or a hospital, we may be in 3 different segments, but we're essentially bringing productivity and quality -- productivity and safety solutions to end users with that strategy. I think that differentiates our performance. I mentioned it. You can see the numbers here and real differences over the last 6 years for us in terms of continuous improvement. And we think we're in the very early days of this sort of kind of evolution. We're getting 50% more from $1 of cash flow, from $1 of sales than we were a few years ago. Our margins continue to grow. We're up 1,000 basis points in gross margins over the last 6 years. So I think you continue to see the numbers, continue to see that superior free cash flow margins, which is really a testament to us and continue to move that organic growth rate up, which I think is so important to everything we do. So we think we're seeing the benefits of that portfolio transformation, but we're continuing, as I said, still in the early days of that. To give just everybody a little bit of guidance about where we've been with our guidance, on Q1 and the full year, we're affirming today the Q1. So we'll have good performance, probably a little bit better on the top. We're seeing better performance out of Fluke. We're seeing better performance out of our facility and asset life cycle business, our software business. So we think we're in a good place there and certainly the year playing out the way we anticipate. So we think we're in a really good place here to continue to deliver another very, very strong year for Fortive. And then finally, just that value creation formula, continue to improve core revenue growth, expand on core revenue growth, drive margin expansion of about 75 basis points. So that mid-single-digit growth driving 75 basis points of margin expansion continue to be -- to deliver really strong free cash flow, which can fund acquisition growth, continue to build a really strong portfolio and use FBS to just keep that flywheel going in terms of continued improvement. So that's kind of where we're at. And that's the short story. Let's get to questions.

So let's just start generically speaking, for any large deal that you evaluate, you guys have ruled out. You've said you're not really willing to use equity, you're not willing to use -- I figure what the term we use, but can...

Mandatory.

Mandatory converts. So no equity. We've talked in our research about doing something if you were to do a large deal doing something a little more complex, whether it's RMT or teaming up or something like that? Maybe when you look at a larger deal and you think about funding that, what are the -- what's the framework we should be thinking about at a high level for you guys?

Well, for us, it starts with no equity and then also maintaining investment-grade. Those are really 2 pillars for us. And then really, when we look at any deal, it's about sort of strategy? How does it accelerate the strategy? How do we become [indiscernible] better margins? How does it fit there and create value for the shareholders?

Can you just talk about that a little bit, Jim, like just what you would target recurring revenue growth, like what do you want to get out of a large deal?

Yes. I don't think it's -- I think there's -- for us, every deal is going to be a little bit different. But what we're trying to do is what we -- what I just saw in the numbers. We're going to look at organic growth. Does it help us on the organic growth side? Does it make us more durable, is it tied to the secular drivers? Sometimes durability is more pronounced because of the secular drivers, the markets that they're involved in. Sometimes it's more recurring revenue, but we're looking for those key components of organic growth. We want to continue to see gross margins that are good. We want to continue to accelerate within those workflows. That means hardware and software. So -- and then we want the opportunity to really drive margins and use FBS to drive margins and free cash flow. And that's really that value creation aspect of what we do. And if we can see -- we're not going to be 100% or 110% in every one of those categories. Some may have a little bit better organic growth but maybe don't have as much -- maybe they don't have much free cash flow opportunity, because they're already negative working capital or something like that. So -- but we're going to look for those key components. And that's the success story that we've seen thus far, and we think it holds for all deals, but certainly in large deals. And then that ROI -- we didn't talk about ROIC, but certainly, the return on invested capital on a larger deal is probably going to be in that 10% in 5 years kind of category. And we'll see -- and we want to see accretion, right? We want to see accretion pretty early in that 5 years in the 2-, 3-year timeframe is really important.

And a lot of the deals you've done recently have been software pretty heavily recurring revenue businesses. I think you talked about 40% of your book now in total being recurring revenues. If we look at some of these more hybrid assets out there, is that recurring revenue percentage? Would you be willing to do something that's dilutive to that recurring revenue percentage? How much of a lightning rod is that?

Well, I think growth is the story in these deals. As I said, in many cases, you get there from a durability perspective like an ASP where you have a high consumables content, and that's the recurring revenue factor. But like in Gordian that isn't recurring revenue, but it's really tied to strong. We've had double-digit growth since we bought the business, that is [ reoccurring, ] not recurring in the sense of that business. but that's been a great business for us. So I think we want to always be thinking about recurring revenue, but we want -- we really are looking for durability of growth. You can get there a couple of different ways.

And are you willing to -- I mean, you've done RMTs before. But I mean, is that -- is something like an RMT like pretty specific and episodic? Or are there certain instances where an RMT would be more preferable versus less? How do you think about the more complex type of strategies versus just going to where the ratings agencies allow you to go and then deleveraging?

The value of an RMT, there's several great things about it, but it can be very tax efficient is the main thing. But what it's not, is it's not simple. It's complex. It works best only in very unique situation. So it's a really narrow window and one that maybe you don't really have line of sight to how -- when the completion date is. So it's really such like when we did the automation specialty. We didn't have a timeline where we needed to get something done. And that was an example where it worked out very well, but that's pretty rare, to be honest with you.

So that sounds like less preferable.

Less preferable -- yes.

Particularly in a competitive environment. There was a competitive environment.

It's a competitive or...

No, yes. Typically, it's -- in the 2 RMTs we've done over the last several years, in both of them, we're on an individual basis where it was really more of a partnership get to an endpoint than anything else. It's very -- that's one of the aspects that makes it so unique.

And I think when it comes to some of these deals that have been done in the last couple of years, whether it's [indiscernible] like, there's this kind of lingering stuff that's out there, you own a percentage of a company. People don't really know how to do the math, not surprisingly. But like -- is that -- are you more biased towards a simplified portfolio? Or would you be willing to kind of have this some sort of [ stumbling ] going out there as a result of the structure of a big deal or something like that?

I think our -- for sure, our base case is we want to own the whole thing. I think that's -- because accelerating strategy is ultimately where we're trying to get to, it's hard to accelerate strategy in some of those other structures as much as if you own only asset in whole. So you never say never, but I think we would -- our base case is always to try to own things 100%.

And the ratings agency's threshold for investment grade is kind of the eye of the beholder. I mean, we've learned that over the years with some of the companies we cover that can go to 10x leverage and still be investment grade. For you guys, you, I think, extended to 3.5x at certain periods. You haven't really said what your threshold is like. Any kind of color on how far you'd be willing to go with the balance sheet for something sizable?

Well, I think in some future scenario, like you said, 3.5x where we've been before. But it really depends on the market conditions and what's going on right then, and it's also a discussion, I think you can go over that in certain scenarios, but with the commitment to delever, I think. But right now, there's a little bit more volatility out there. So it really -- where we focus on is looking at our M&A, what's in front of us now? And how does that fit with focusing on strategy? Do we want to deal is most important versus some the hypotheticals maybe we're talking about here?

Any questions on the kind of deal strategy over here?

I know you said no equity, but to what extent would you consider selling existing assets to help fund M&A?

Well, you never say never. I think we really like the portfolio today. And I think where we have those 3 segments, the slide I showed a few minutes ago, all 3 of those segments, we just reviewed all of our strategic plans with our Board about 1.5 months ago, feel really good about those places and that kind of thing. If we were to do a very large deal where that suggested that maybe something made sense, we wouldn't necessarily say no to that. But I think our base strategy is taking forward what we have. But in a large transaction where it might change the components of a particular segment or business, we might consider something.

But I guess the bottom line is, and maybe we can go to the businesses after this. It seems to me like after that 5-year period of ripping and tearing of the portfolio, kind of running very hard, but being in place. You now seem to be more in growth mode. You guys have committed to the 5% organic, the 75 bps plus margin expansion in your -- on your front foot when it comes to accretive capital deployment. So you want to grow the company from here is what it seems to me to be the narrative that you're going to play into with anything you really do here in the near term.

We do. We were a compounder, deploying our capital and getting bigger, and it's harder to tell that story as we weren't with big outs. And the transformation we've done looking in 2022, we're pretty quiet. We're really happy with the performance there, particularly with free cash flow but growth as well and how each one of the segments is performing. And we think '23 is another -- going to be really another great opportunity for us.

Great. That's fantastic color. I appreciate the comments on the deals. Just looking forward in the business, what are you seeing out there today? You guys have some short-cycle businesses, some exposure to China, either geographically, and then we can walk into a couple of businesses. What's the -- you're like the only company that's actually put up a slide on guidance and reaffirmed the official guidance. So I think that's a good first step.

We believe in facts. So it's kind of where we start with the relative. I think what we said in the guide is China was going to be good, is going to be a little slower in health care, but the other 3 businesses were going to be strong. And what I just described is exactly that. So we've seen the other 3 businesses. Now we had a little bit easier comp because of last year in China, but we're seeing strength in those businesses in China. Europe has been, I think, continue to be pretty good and U.S. So we got a couple of places where -- we said -- as I said, Fluke's a little better than we thought. So I think we had mid-single-digit plus in our guide for the quarter, and that will be a little bit better than that. So -- and that's has a good view of the economy and how things are going. So I would say things are all slightly better than we anticipated when we went into the guide.

So can we talk about the Shore Cycle business a little bit? I mean you guys built a nice backlog there like a lot of other companies. There's this dynamic where as orders normalize, you could have down orders, but your book-to-bill is still above 1, so you're building backlog. Maybe on the 2 big movers. Fluke and Tektronix and whatever else you want to throw in there? Maybe talk about orders, sell-through and then organic, that kind of -- and book-to-bill, that kind of...

Yes. What we call sometimes the product businesses. Those 3 business -- and you throw sensing into that, those are our 3 big product businesses. We said orders will probably be down in the quarter. But again, as we said, it looks like the book-to-bill is going to be over 1. So because of the dramatic growth that we've had in orders over the last couple of first quarters, the 2-year stack, for example, a tech is up 40%. So it's a little bit of a head fake to look at the percent down, because the orders still are pretty strong, and that's going to deliver pretty good growth at Fluke and tech for sure, a little bit less at sensing because of a tough comp. So we think point of sale in our businesses that -- where we see point of sale is still pretty good. So we -- the order situation, I think, is what it is, but having a -- book-to-bill was better in the fourth quarter than it normally was. And now book-to-bill over 1 in the first quarter, I think, is stability.

Right. So you're not really seeing any -- I mean, I guess it's a little bit of a destock on the order front. Are any distributors as supply chain heels a bit perhaps? Maybe you could talk about supply chain and what you're seeing on the product side.

It's less destocking as much as just as those big comps from a year ago. We built a good chunk of our backlog in a quarter like the first quarter of last year. So that's part of it. As I said, point-of-sale is good. We never really got inventories out of hand in any way, shape or form. So we -- because we track every month inventory levels at our major channel partners or we have a partnership with them where they share that with us, we've made sure that we've really not had inventories get out of hand. So from a supply chain or our supply chain perspective, turning to that, I think seeing more stability in the sense of the lead times, we're mostly electronic components. We don't bend a lot of metal. We don't do a lot of plastics or anything else. So most of our supply chain logistics is better. So that's been better for several quarters now. But we're seeing those electronic supply chains be about the same in terms of lead time. We're seeing less inflation in terms of those things, probably have less issues every month, but those lead times have not compressed dramatically. So we're still longer lead times than we normally would. We would anticipate those to get better through the year.

When do you think it gets back to normal? And normal I think is a relative term but...

Yes, I don't know if it will be in '23, I think. If we're talking about the much shorter lead times to where we normally ran, I don't think it will be in '23. I think there's just a lag going on in the world that's going to keep that from happening really soon.

And then maybe on tech...

It [ could ] be better progressively through the year.

And then maybe on Tektronix, I mean there's -- you obviously have a public competitor out there who's pretty good with their technology. How do you think you've competed well against them, what's your rate of growth versus the market you think over the last couple of years? It's been hard to tell with the differing comps. There's a debate whether Tektronix is a good asset or a mediocre asset, because over time, it hasn't grown. And then you guys reinvested a couple of years ago. What are you -- how do you -- what are the KPIs there that you can convince people that you guys really have this thing now on a growth...

Yes. Well, I think it -- when we certainly put a fair amount of investment into a new platform for our scope technology, that's allowed for us to more rapidly innovate, particularly in what we call the mainstream category, which is probably almost twice as big as it was 5 or 6 years ago. It's the fastest-growing category too. That's where a lot of the secular drivers we described is directed. But we're primarily a scope company today. So when you think about the broad test and measurement market, we're in R&D, and we're mostly in a few workflows that are really centered around signal analysis and that kind of thing. So we feel like we've done very well. We can look at win rates. We like our win rates. They've moved up. We have a good competitor. We have a few good competitors in the segment. So it's not one of those things that we're going to win everything. But we -- our win rate has continued to improve. The team has done a great job of positioning the business globally. So we feel like we've really done well around the world as well. So we feel like that business which was, as you said, was a low single-digit grower. I think the proof in the pudding is that what we said is it's now we think a mid-single-digit grower. So we've really positioned that business, made it more durable with a large service business, and then made it more growthy through the work on secular drivers. And we think that's sustainable. It doesn't mean it won't have a point in time or maybe it has a little bit of volatility, but it's nowhere near what it has had in the past.

Yes. I mean I think everybody has been waiting for the -- was doing the work on the 2-year stacks on that and affected it to slow, it actually grew pretty nicely in the second half of last year.

And it's going to have good growth this year. It will slow a little bit in the second half from the growth rates we'll see in the first half. But we will -- we talked about $350 million worth of excess backlog through the supply chain challenges. We said about half of that was a tech, and we won't deplete that in this year. We will go into '24 with that excess backlog -- some of that excess backlog.

So it slows, but it still grows in the second half of the year.

Yes. That's right.

What are the 1 or 2 end markets there that you'd highlight as being particularly strong and where you've won the most?

We talked about power, which is basically anything that has a battery. So just the leading technology companies in the world, whether you're a semiconductor company and you're trying to get more power efficient with your chips, whether it's an EV company that's trying to get more power out of both, the battery and the battery system, or you're somebody that's putting a battery into something that normally had a cord, I always like to tell the story of my battery-powered chainsaw. All of that is -- people need our solutions to do those designs. And if you don't -- if you think there's going to be more batteries in 5 years, I think most of us think they're going to be a lot more batteries and no way you can get to a lot of the sustainability goals that every company and every country in the world has and that's going to be more efficient power, both in the grid but also in devices, and that's right where we play.

How often do you use the chainsaw?

More frequently than Chuck wants me to. They've been injuries, they've been injuries.

Yes. As far as Fluke is concerned, I think you talked about it last night, it's a rule of 40 business, a hardware business. It's a rule of 40. That's obviously phenomenal performance. I mean talk about the competitive landscape there a little bit. That business has just been a barn burner for 20 years, probably an underappreciated asset in your portfolio.

I -- maybe it has because my roots are -- were there a long time ago. But over almost 25 years now, we're going to celebrate our 75th anniversary this summer in the company. We've owned it for 25 and it's been mid-single-digit grower. It's grown margins. It's one of our best working capital companies that we have. Their innovation, their brand is consumer-like in terms of strength. The competition is really regional. You'd find that the competitor that we might have in Europe isn't in the U.S., the competitors we have in the U.S. -- we really don't have 1 global competitor in part because we play in a lot of different product lines. That's one of the beauties of the portfolio, I think. So we think it's good. It's much more durable than it's ever been given the fact that our connected reliability strategy is more of a recurring revenue strategy. People always forget we moved a fairly sizable health care business within Fluke over to our Healthcare segment. And so when you look at the segments, you might think about Fluke, but we've built more durability in it, so much so that we created a -- an over $0.25 billion health care company. So which started with basically a product that we had, which was on a soloscope that we sold into medical device companies. And from there, we've created that kind of company. So that's the brand, that's the franchise that we have, and we think it's -- we certainly think it's underappreciated.

As far as the software businesses, the facility and asset life cycle solutions businesses are concerned, how does that business play through a tougher commercial real estate environment?

Well, it doesn't -- we kind of think of it as having a lot of exposure to commercial real estate. But the reality is 1/3 of the -- over 1/3 of the business is really state and local, governments and federal government. It's probably even more than that as we look around.

And it's software.

And it's software. That's right, and services and solutions. So in that sense, -- and it's a variety of verticals. So -- but the bigger point and the broader point is really about saving money. And so we've seen uptake as an example, with some large retail customers who want to understand what are their most productive assets and what are their most productive facilities where their lease rates may be uncompetitive relative to market, they're using our solutions to do that. They're saving millions of dollars in facilities costs, they're doing that. So we think even in maybe a slightly tougher time even in commercial real estate market, people are going to be assessing their footprints. They're going to understand the traffic and things like that. A lot of the things that our solutions bring them and fundamentally going to be used probably even more so than they would in a time where maybe things are maybe a little bit more normal.

And this is a rule of like 40 to 45 business today. But I think you guys have said you can get it.

We think it goes to rule of 50.

Rule of 50, which is the vast majority of that is really on the margin side, because the growth is...

The growth is going to be double digits.

Maintained. So that's $600 million of revenues or so that you have really company-specific margin expansion opportunity with visibility on revenue, which is pretty unique in this environment.

Yes. And we -- I think we've -- as I said, quarter is going to be a little bit better than we anticipated. We had a couple of changes going on in the quarter. Service channel, we're changing the business model a little bit, which was going to be a little bit of a headwind. We took a little bit more into life revenue at [ current ] to kind of get them and we're still positioning the business at a higher growth level. So that's going to be -- that's going to benefit our exit rate, quite frankly, as we go through the year.

On the health care side, I know there was some dip in China elective. Maybe just talk about electives in general, what -- how that business is progressing here early on in the year in total. Talk about China as well, you can.

Yes. I mean it's -- the health care market, what we said about '23 for the health care market is it would be better than '22. '22 was a rough year. '24 would be better than '23. So we weren't calling normal, if you will, in '23. We're seeing elective procedures, which is a driver of the revenue base, particularly in sterilization and about back to normal in Europe, in the mid- to high 90s in the U.S. China is the place where it's -- and then a little bit between that and the rest of the world, except for China, where we start off the year in the 30s. We're now in the high 50s, low 60s. So we've seen really big improvement in the last couple of months, and we think it will continue to improve through the year. We think we're roughly back to normal by -- in the second half.

That business has been -- obviously, COVID just kind of screwed up the trend line there. But is that still a business that is core and that you like and you want to grow and add to ASP specifically, and we'll talk a bit about probation, but -- and then what's the margin improvement potential there?

Maybe we tag team that. We like the business. We think the segment has been incredibly durable. I think if any other industry had -- whether they've gone through what health care has gone through in the last couple of years, you wouldn't even see growth, and we've seen mid-single-digit growth in the last couple of years. So I think the durability is incredible. Hospitals are going through transformation, but to some extent, that provides incredible opportunity for solutions that save money and bring them -- if our mission is deliver help, deliver higher quality health care at lower cost for hospitals, I think these times are why our solutions have been pretty strong. We think we can add to sterilization. We have software already in that with census and what we do in terms of monitoring the sterilization process through census, but there are opportunities in the business. And there's other -- we're in other parts of the -- we're started in the industry -- it's almost industrial health care, right? We're in the parts of the hospital that are delivering health care as opposed to actually doing the things. But we think there's lots of opportunity to continue to grow the health segment in the -- with that same mantra.

With margins, we've got some businesses already in there that are above 30%, and we would expect ASP to continue to expand margins. For the whole company, we're seeing mid-single-digit growth, 75 bps of margin expansion. I think that when you focus on the near term on ASP, you'd probably expect to be a little better than the 75 basis points, maybe push 100 basis points as we continue to deploy FBS into maybe some of the supply chain -- not issues like supply chain we've been talking about, just how logistically we with the products around the world, and I think that's -- we see some great opportunities there. And we're starting to get more price in there. It's slow to get price into the health care market, but it's been -- it accelerated all through last year, and we think that we'll have elevated versus last year, more price into at ASP. All those have got margins going the right way. We've been growing margins over the last couple of years at ASP. And so we expect going up towards 30% over the next 3 to 4 years. I think that's very reasonable.

How much of a kicker would mix be if I told you procedures were going to go back to 100% over the next 12 months, would that help at all from a mix perspective on the consumable side?

Yes. It definitely helped. Consumables as -- are the highest margin, very high margin from a gross margin north of 75% -- more software-like that. So that would accelerate then, of course, as Jim talked about, I think in China, we're a little constrained because of what's going on with COVID in the hospitals there. But we think '23 is going to be better than '22, not all the way back. But if you told me, it gets all the way back as it does, that's going to have an outsized impact.

On ProVation, I think a year ago when we were here, we were -- everybody was debating how much share you're going to lose in that business right after buying it. How has that played out so far? And what's the outlook for ProVation this year?

Great business. We said '22 was going to -- we were at about $0.08 of accretion. We got [ $0.10. ] So we had a good improvement at a starting point. So a good strong first year. ProVation, one of the FBS awards at our leadership conference. And so I think it's a good testament to how they've adopted the Fortive Business System for their business. We feel good about it. I think it's -- we are seeing -- we've seen new logos extend a little bit, but we've seen the SaaS conversion be pretty good. The team really applied a lot of FBS tools to helping accelerate conversion. So if there's a challenge in that business, it's not on the -- it's not necessarily anything more than the fact that we've got to -- we want to do a lot of things in that business, and we've really seen the opportunity to do what we're seeing. We always said that the growth was really going to come from 2 things. The majority of the growth is going to come from the expansion of ambulatory surgical centers in the U.S. and it's mostly a U.S. business. So that dynamic would require their solution more pervasively. Second thing was SaaS conversion. We would take the license software and we would convert to SaaS. And those 2 would be roughly 3/4 of the growth that we would see over the next 5 years. The second was the new procedures. And so we have technologies for other procedures other than GI where we typically -- where most of our revenue is in today. And we've seen some nice -- we knew we needed to do some technology and investment in innovation to do that. And we see -- we've done those innovations. We should see those play out this year or we're doing them, I should say. So we think there's a lot of opportunity in the business to continue to build on what we bought. And there was some concern about whether or not we would lose any share. We haven't lost an order this year or in '22. So I think this standpoint, our win rates are exceptional, maybe the highest win rates we have throughout Fortive.

Have you lost any so far in '23, just want to make sure I check the box?

Not that I know of.

Okay. Great. And does margin expansion opportunity there as well, probation, or is that kind of a run rate?

I think there's margin expansion, but they're starting from a high number -- already started high numbers. So when with service channel more because starting from more base, you'll see more absolute [ OMX ] year-on-year, but both of them are performing very well, and we're excited about the first year, how that win. Looking to do another one.

So with the state of your portfolio today, I mean COVID is not really that great of a comparison because, obviously, you had a business that went down during COVID. But the state of your portfolio today with the recurring revenue with the margin expansion opportunity, if we had a down mid-single-digit IP type of recession, what -- how would you think your portfolio revenue-wise would be able to play through that. And given the margin expansion opportunity, it's not really related to the macro, would you be able to maybe even like expand margins in an environment like that?

Well, every slowdown has its own dynamics, right? And length probably matters. I think if we were to see a slowdown in the short run, we probably -- as an example, backlog is going to give us a strong insurance policy. And we're confident in that backlog. It's not a backlog that's necessarily going to be canceled.

Let's say, it's a '24 event. Let's say, you get through '23, backlog normalized, kind of a like-for-like, how does this car manage it? So how does it drive through and went down?

We would probably be maybe flattish, maybe up low single digits.

In those -- maybe those hardware product business. But keep in mind, we've got the software businesses in health care, that maybe slows a little bit, but I wouldn't see half the portfolio with the clients. So very different than 2016 or 2009, where we talked about how we've made some of the businesses very much less cyclical, but then to that, now they're half the portfolio and not the whole portfolio. We think it behaves...

And it seems to me some of this margin expansion is not really -- it's kind of company specific and visible as opposed to dependent on growth. Obviously, if the hardware business is delever, you're going to -- you'll delever with those. But there's so much else going on in the portfolio that perhaps people...

Yes. I mean if you think about -- '20 gives us a little bit of a window in it. It was -- we had some slowing there for a few quarters. And we didn't have -- we didn't have a bunch of the portfolio we have today in '20, right? We didn't have ProVation, we didn't have a service channel. Facility and asset life cycle wasn't running as effectively as it is. So -- and in that year, we grew earnings and cash flow despite those challenges. So I feel like -- again, it's really hard to sort of describe every slowdown because they happen differently, but we feel -- we really like the hand we'd be playing going into a slowdown.

What do you think is for products or a hardware business? What do you think is world-class working capital as a percentage of sales. Obviously, the software businesses are different, because they're inherently working capital negative and [ working ] capital light. On a hardware business, what do you think is kind of world-class percentage of sales, working capital?

I have to -- we'd have to do the math in our head. But I think...

You're [indiscernible] guys. I feel like you've been working on this math for 20-plus years.

Yes. Well, the challenges we go to offshore [indiscernible] and we don't let -- we don't want to give that a number because, but whatever the number is, we want to be better than last year. [indiscernible] So we focus on what we can do to get better. But we think we're -- we stand up very well in our peer set where we're at right now. And one thing on -- if you were talking about the cyclicality thing is, keep in mind, on our hardware businesses, if they -- when they do slow, free cash flow actually holds up better on those businesses. So where even -- we think the resiliency on free cash flow is even better with the portfolio, it's just now constructive.

And maybe not to completely dodge the question on the percentage, but I think when we look at every business every year, we expect them to improve their working capital pretty significantly. And that's part of the operating plan of every business. And so -- and we review it every month. So it's ingrained in sort of our cadence of things that we need to work on every year.

But can we just take the software business to assume kind of a moderately negative working capital and then back into what the hardware businesses would be for you guys at present? Is that a rough kind of [indiscernible]?

We can come back to the number. Typically, we're thinking about working capital turns and double-digit working capital turns in our hardware business. You're not even in the top quartile of our businesses if you're not going to talk about that.

Right. We've got about 2 minutes left here. Any questions for these guys? Okay. I guess when it comes to the software acquisition pipeline, any movement at all in valuations there over the last few months?

I would say the -- there's -- on the private market, there's a lot of software opportunities in the private market. I would definitely say processes are occurring. A lot of them are not going forward. So there -- that's -- I always think of that as price testing that people aren't getting their prices. You have to go through that cycle a few times. I don't know if we've gone through that cycle long enough, just also given some of the uncertainty that's occurred over the last month or so. So I would expect that it will happen, but we haven't seen a big change there. Private equity is a buyer and a seller, so they see both sides of this. You haven't seen a lot of buying and selling within private equity. I think it's a good sign that -- it's good evidence that this is an environment where those things haven't necessarily changed enough. I would still anticipate too. I think what's happened over the weekend and certainly with what's happening in venture-backed businesses, there's going to be a time of evaluation, it's going to happen for sure, given that [ SCB ] was a lot of Series D -- CD&E companies were in that portfolio. So I would expect in an evaluation of things that will happen and hopefully, there's a number of things that might be opportunities for us. Hopefully, we'll see some of those as well.

Yes, I think the most interesting chart from that deck last week was their customers' cash -- negative cash outflow kind of on a run rate position how much economic activity that was going on out there. Doesn't get enough airtime.

If you had a high burn rate and everything that's just happened. You're reevaluating right now, and we think there's opportunity there.

Yes. Well, you guys do not have a high burn rate. So congrats on that. That's it. Thanks, guys.

Thanks, everyone.