Fortive Corporation (FTV) Earnings Call Transcript & Summary

Welcome to the afternoon session. Next presenter is Fortive, which is actually one of our top picks for 2023. And it's always a pleasure to have Jim Lico, company's President and CEO. I think Jim will give some introductory remarks. I think you have a couple of slides maybe, and then we'll go to a fireside chat. Thank you for being here.

Great. Thanks, Andrew. Good afternoon, everyone. Thanks for joining our day here. Real quick, just to, maybe not everybody is familiar with the story, so I just want to level set everyone a little bit about Fortive and who we are today. I think it's pretty exciting to be here. I keep saying it's great to be in person, but we're -- that's starting to get old now. But I think the bigger thing for us is, I think, 2022 is a very, very strong year. I think it's a great opportunity here to talk about the future of Fortive, so let me do that quick. Key messages for today, I think what you'll hear, we've made a lot of changes over the last several years. We came -- we went public in 2016 out of Danaher. And I was with Danaher for about 20 years prior to that. I think the changes that we made around a higher quality portfolio, you really see that, a number of the metrics across the year. Continued differentiated performance. We feel really good about the financial metrics that we're putting up really on the backs of a really strong year. You see that in the numbers. I'll show that in a minute. We talk about continuous improvement as a way of life, as one of our core values. The Fortive Business System is really doing everything that we really wanted to do across the portfolio, both breadth and depth of excellence. And the fact that we're back in the office, in-person collaboration, really speaks to the power of FBS. But quite frankly, it speaks to the power of Fortive, and us getting back is really differentiating us in many ways. And finally, just the strong balance sheet, differentiated growth, I think, gives us an opportunity to hear a little bit about that. Real quick. We report in 3 segments. I think what you find across those 3 segments, 3 different names, but really, the similarities are really: Number one, durable growth drivers. We really try to position the business strategically around those secular growth drivers. We're really leading positions in critical connected workflows, whether it's a manufacturing plant or a commercial building or you're an engineering lab or a hospital, you're really looking for -- customers are looking for safety, quality and productivity solutions across our workflow and we're well positioned to take advantage of that in all 3 of our segments. A little bit on numbers. Just as a numbers-driven audience, I think we really put up some good growth, really considerably different than when we first came out. You see the real changes. Gross margins now at 58%, I think really speaks to the portfolio change. And the opportunity for continued growth and expansion of operating margins. Our adjusted operating margins continue to improve and '23 will be another good year in that regard. And then finally, just our free cash flow margins, I think you really see -- we're getting 50 -- almost 50% more free cash flow from $1 of revenue than we were 5 years ago. So I think it speaks to the ability of the portfolio to really deliver really strong free cash flow. And quite frankly, one of the few companies last year, I think, that really grew free cash flow really well. So we're really proud of those metrics. And -- but not only where we've been from in the last 5 years, but quite frankly, the acceleration that will come as we continue to build the portfolio over time. We reaffirmed our guide last week, so I won't spend a lot of time on this, but we're seeing things play out the way we thought. So I'm sure we'll talk about a little bit about that in detail here in a minute with Andrew. But we set a little bit better performance in places like Fluke and our Facility & Asset Lifecycle software makes us feel good about the start of the year and getting things kicked off here pretty well. So we feel like we're in a good place. Really coming back to our proven value formula, mid-single-digit growth through the cycle, and that's up from where we were. 75 basis points of margin expansion gives us the kind of margin profile not only today but into the future. That really allows for us to continue to fund our strategy through both organic and inorganic investments and ultimately using FBS to keep that flywheel moving over time. We think we're in a great place and I look forward to talking about it.

Fantastic. Thank you, Jim. So okay, so let's start backlog. So you said you have $350 million in excess backlog and you expect to end the year with about half that amount. If supply chain performance improves more than you planned, could that drive revenue upside in '23? Or are you perhaps more inclined to meet existing delivery dates and manage the improvement in your lead times?

Yes. I think number one is, while we've seen the stability of supply chain lead times, they're still pretty long. And so I think with the -- if orders were to play out the way they are today, we probably don't have a ton of opportunity to move that up. We're really a little bit -- we can certainly have -- we certainly have the production capacity and the power of FBS gives us the ability to flex manufacturing to be able to deliver accelerated opportunities. But customers are going to -- customers want the product, so it's not a question of some sort of lever on things. But I think supply chain is going to be the lever. And in the supply chain things, we don't anticipate dramatic improvements in lead times this year. We mostly -- we don't bend a lot of metal. We don't do much other than things that have electronics and electronic components. And those lead times, while getting slightly better, are not -- I don't anticipate them getting dramatically better.

And did you see, just one of the things we actually anticipate and it's a broader question about your supply chain, we anticipated that as lead times get better, inventories should come down. But what the macro data showed, I think at the end of the year, is that people uncertain about China reopen. So it seems that the system has built in more buffer stock. Have you seen that in your own supply chain? And do you see that being unwound in any way, shape or form or if you can comment on that?

Yes. Well, you mean from a supplier perspective or a customer perspective? Maybe a little bit of both?

However you want to answer.

I would say from a customer standpoint, there's been this question over the last several months as this backlog is, what's the quality of the backlog? And we feel good about the quality of the backlog. Where we sell into distribution, we really work with our distribution partners very closely to not let the inventory levels get out of hand over the last several years. So we feel like we're in a good position relative to delivering and doing that in an environment where customers are going to want the product. And they want to deliver to their customers. On the supply chain perspective, I think we're still taking whatever we can get in a lot of places. So I don't think there's going to be some big bubble that comes to us in light of great supply anytime soon. We certainly haven't seen that.

Okay. Maybe we can talk about Fluke. Market share leader in handheld test and measurement tools. You expect orders to accelerate at Fluke in second half '23 and low single-digit organic revenue growth or better for the full year. Now given the short cycle nature of Fluke products, are you implicitly assuming a very mild economic downturn here?

Yes. I mean I wouldn't say a downturn. I'd say moderation. We've got a little bit easier comps in the second half. So some of that, what looks like a higher number maybe is a little bit of comp situation. But I think what we -- we've seen a little bit more strength than we anticipated in the first quarter at Fluke. We have good POS. It is a shorter cycle business. I think the strength of the portfolio at Fluke, though, is that the longer-term view of Fluke is over 25 years, as you know, is a great franchise. Always continues to grow, continues to grow margins. It's a Rule of 40 business today, as a hardware business, which is, I think, a great testament to the work that's been done over a long time. I think it's too soon to tell what the second half is going to look like explicitly. But I think we've got a little bit of backlog there, but I think what we're seeing so far is high single to double-digit point-of-sale around the world. So the demand environment still remains pretty good.

So Tektronix, Test and Measurement. Folks seem to be quite excited about that market these days. But I think you're all focused on R&D and manufacturing. So what are the areas of organic investment for Tek? I think you were sort of talking about adding software, that was one of the initiatives?

Yes. And I was with the Tek team here in Europe yesterday for the day going through their opportunities here, and they're doing a great job. I would say we've really made investments around vertical applications. First of all, we have a lot of platforming going on, you know this, a lot of platforming over the last several years for us to -- we had a number of hardware technology platforms that we offered through our product portfolio. We've reduced those number of platforms, reduced the number of embedded software app things that we had. So we've really been able to now fast cycle or innovate a lot better. And we're seeing the benefits of that, particularly in our mid-range. That mid-range set of solutions is really focused on, as you said, probes that hook up to circuit boards as an example, software that is really about the application. And those applications have great secular drivers. They're in things like power, where everybody is looking for a battery and they want that battery to be more efficient across including EVs, where EV batteries. There's R&D engineers who are looking to do those things across components that go into the grid, IoT devices around a variety of applications. So it's really the secular drivers that we've invested in, Andrew, that I think is -- really had us call the growth rate at Tek to move up from what was historically low single to we now think mid-single digit through the cycle.

And just a couple of questions on Tek. Am I correct to understand that you're sort of white label software from a competitor now, that's part of the strategy right now?

No. I mean most of our software is developed. On occasion, we've got some partnerships where we do some things. But by and large, it's mostly our own stuff.

And just thinking, I remember being in China, in Shanghai in 2018, as sort of CapEx in China really started to slow. And I think both Fluke and Tek, that hit pretty hard because it is tied to CapEx actually, I think both. So from the angle of U.S. reshoring, how are these businesses sort of positioned for the U.S. reshoring and what's the impact on these businesses?

Well, I would say China was a little bit of a -- some of that's CapEx at Tek but also some of it is just the export controls, trying to get through.

Both businesses [ all in ].

Yes, exactly. So we've kind of moved through that and both businesses are in a good place. You know on a reshoring perspective, Fluke's going to play in the manufacturing. People use our devices to troubleshoot just about anything that goes wrong in the factory. More factories in the U.S., more factories in Europe, investments into that, not really a CapEx cycle, more in the maintenance budgets, but that -- we're going to benefit from that. On the reshoring side, particularly around semiconductors, those are new semiconductor designs. They are around the secular drivers I just described. And I think we do some very specific things in Tek, but there's going to be more of that going on in a reshoring environment. And we've had -- we've built great businesses in China. Those businesses are going to continue to do well in China, we anticipate.

So for Fluke, if we see, and I think latest data shows U.S. industrial manufacturing is up by 40% year-over-year, so that means more factories, so every one of these factors will have Fluke...

More factories generally means more downtime. And when electricians and maintenance professionals get -- go out to a piece of equipment, generally, they're troubleshooting that device with a variety of Fluke products.

So maybe China, and I think I touched on it a little bit, but you do have one of the highest exposures to China in our coverage. So what's your perspective on the pace of reopening? And I assume that for you, COVID-related absences was a big Q4 phenomenon. We are over it, but just to confirm?

Yes, for sure. And we had a great fourth quarter despite those challenges anyway. Speaks to the testament and quality of our teams, who really, in the face of some of that adversity, I think at one point, we had 80% of our employees had COVID at one point in time, so in our factory. So it was, I think, just a testament to the work we did. We're through that. We're going to have a good -- we had a very good year in China last year. Our success, and you know because you've been there a few times, our success is we're local for the local market. We manufacture there. We design there. Our 3 -- our health care business a little slow. We started the year at about 30% on the elective procedures. We're up to the high 50s, low 60s now. We believe that will continue to improve through the year.

And that's in line with expectations?

Yes, it's very much what we thought. So we think by the start of the second half, we'll start to see back to normal. But the other businesses there are doing well. I was -- the other thing about China is, and we talked about this over the years, you really don't know China and how it's going to look until you finish the first quarter, because January and February, the new year, where it is, comps, all that stuff, how customers play the new year in terms of when they buy. March gives you the first real sense of how the year is going to play out. So far, that looks pretty good.

Excellent. So incrementals, I think at the midpoint, '23 guidance implies a 50% incremental margin versus your traditional 40%. What drives the high incrementals this year? And what are the sort of top 1 to 2 factors that give you confidence to deliver on this, even with a fair amount of macro uncertainty?

Well, I think somewhere in the 45% to 50% range, as you pointed out, a couple of things there. One is, we do have a little bit of additional investment in our typical productivity initiatives. So it's $20 million to $25 million in the first half. Those savings will play out in the second half, so there's a little bit of that. It gives us a little bit of an insurance policy in maybe a revenue environment if it were to get a little sloppy. And second, I think we're seeing some of our businesses come back with a little bit slightly better supply. It's a few things. It's a little bit better supply chain. It's a little bit better health business. And obviously, our software businesses are going to be growing at double digit, and that's going to be helpful as well.

Got you. And software businesses do have high incrementals.

They do have high incrementals. It's one of the nice things about them, that's for sure.

So maybe we can talk about ServiceChannel. That acquisition has been a success story. $150 million of revenue last year, up 45% year over year, and you expect to reach, I think, 20% operating margins here in '23, $0.14 accretive to adjusted EPS in '22 versus $0.12 in the original plan, right? So what's driving the growth? And how has being part of Fortive helped ServiceChannel on new sales?

Yes. So we were with what we call our Facility & Asset Lifecycle software businesses, Gordian, Accruent and ServiceChannel, we were with them last week or 2 weeks ago, I guess now. ServiceChannel has had a great year. I think the $0.14 versus $0.12 is the combination of ServiceChannel and Provation. But -- so ServiceChannel came in around where we thought. Really strong growth, as you pointed out, and on track for their margin targets. So the business is on track. The little bit of -- we're going to change the business model a little bit and we'll see more of that in the first quarter, where we take a little bit less pass-through revenue that didn't make a lot of money, move that to a SaaS solution. So we feel good about that. That was -- that part of the business -- FAL is going to be a little bit better in the first quarter than we anticipated, because that's going pretty well. But it's a very good business. We had super high NPS scores when we bought the company and that certainly played out last year with the growth rate that it had. It will be double digit this year.

And one of the big lessons, just sort of thinking about software, because you were early to the whole SaaS story. Finally, seems the business as you sort of talked about double-digit growth, strong incrementals. What are the biggest lessons you sort of learned in adapting FBS to software? And what are the big sort of philosophical tweaks that you have made? I mean clearly, it helps that we're sort of back in person. A lot of your businesses rely on people being around facilities. But it also seems operationally, you sort of figured a lot of things out. Can you expand on that?

Well, it's funny, because our first acquisition was a software acquisition, eMaint, which we bought for Fluke. And it, today, is our clear leader in the clubhouse in terms of a great business. It's a Rule of 60 business almost. It's been a great business for us and a great acquisition. And what we learned from that was -- and we've known this from our Danaher days where we had some software businesses. And we've always had a lot of software product development but it was embedded software. I would say the simple answer is, we knew and we're confident that FBS would apply into these businesses. And all we've done over the last few years is prove that in. And what we do is every time we buy a new software company, we have the -- a proven track record in the other ones that makes it more and more apparent to the current new company that this works. And so our best execution of FBS, our fastest execution of FBS in a software company, is ServiceChannel and Provation and because they see all the track record. And so we don't go through that convincing thing that maybe we did 5 years ago, maybe -- we had to spend a little time. And we have leadership that we put into the businesses that helps those businesses as well. So I would say we're highly confident that we can demonstrate success with the tools. The levers, certainly, growth is a lever, so that's first and foremost, if you can get the growth rate up. Second is we have a number of -- our growth set of tools in FBS is very much focused on productivity in the go-to-market motion and we do that first. The second piece is on the product development side, where we can take a lot of the activities that are going on relative to generally sustaining engineering, dealing with technical debt, do that really fast, tools to make that better, convert that activity into higher innovation that drives higher growth. You build that flywheel over time, Gordian is a great example of that. We build a business for long-term success.

Excellent. So Advanced Healthcare Solutions, maybe a bit of a nuance, but maybe worth talking about. Pricing in Advanced Healthcare Solutions, I think, is more difficult than your other segments. So can you talk about what realized pricing was in '22 and what you expect in '23?

Yes. I think we're in the 100 to 150 basis points last year with it getting better in the second half. We think it will be close to -- all the segments will be pretty close this year in the 250 range. So we'll -- it will be better as we move through the year, although taking the fourth quarter exit rate starts to make that improvement stick. It's tougher because of a couple of things. One is we have a high consumable rate. Those tend to be on longer-term contracts. So just getting through the cycle of contract terms, you don't do all that in 1 year, whereas maybe in a hardware business, you're -- in a Fluke or a Tek, you're on those contracts every year. So it just takes a little while. And then, of course, you've got health care organizations that are -- whether it's tendered business maybe in Europe or it's GPOs in the United States, can fight these things.

And maybe on health care, sort of health care reminds me a little bit, just looking across my coverage, reminds me a little bit of Aerospace. It was like sort of the most obvious recovery story post-COVID that has yet to sort of fully materialize. Yet you can see why it should materialize eventually. Can you just talk where we are in terms of recovery and maybe you -- so you gave us some stats on China, but where are we in Europe? Where are we in the U.S.?

So from -- a lot of our growth is -- or a lot of our business is driven by elective procedures that drives our ASP business, which is the largest piece of health. And elective is getting back to normal and even now starting to grow, is really all part of it. We saw that in the fourth quarter, and as an example in North America, which was good in consumables. We'll see -- I think Europe is pretty much at back to normal in terms of electives. U.S. is in the mid- to high 90s. China, I talked about. So we're starting to get back to normal. We think -- but we saw some of the labor shortages, so that's going to be -- particularly in the U.S., that's going to be a little bit of a hindrance. We don't need perfection in '23. We need '23 to be better than '22. I think we see that, a lot of good external information that would support that. '24 will be better than '23. So I think we'll just see progressive improvement from here and that will certainly help the business for sure.

And do you think -- I mean there was this view, which never materialized, that there was going to be this catch-up, right, because people postpone their procedures. And we're still sort of, we're not there, but will there be one, or what happened?

Well, it's defined by labor, right? Your doctors are probably not going to work Saturdays and Sundays or go on to a second shift to do that. Nursing shortage in the U.S. is well documented. So there's a huge incentive for hospitals to do that. From a hospital financial perspective, money is made in elective procedures. So there's a definite financial incentive, but some of it is this labor challenge that is playing out in hospitals and that will get better over time.

Interesting. So maybe we can talk about AHS margins. Last year, you had some onetime items around bad debt and FX transactional issues that dragged margins along with like price/cost. So how much of the guidance for 150 bps of segment margin expansion is from the non-repeat of these items versus better price/cost and volume leverage?

Yes. So if you sort of take those out of '22, you'd have about 24% operating margin. So that's about 100 basis points of improvement in '22. And now we're -- the guide is 24.5% to 25%, so now you're 50 to 100 normalized for some of those onetimes and you're obviously in the 100 to -- 150 to 200 over 2 years.

Yes. Maybe we can talk about Provation, because we've been getting a lot of pushback on that, but actually seems like another success story, software M&A. So I think we have $0.10 accretive last year versus $0.08 in the original plan.

That's right. That's the right number.

There we go. So can we talk about sort of operating performance there? And what gives you the confidence in the mid-teens revenue guidance in '23?

Yes. So I think there's a couple of things. One, off to a great start. The business, I think, a year ago when we were talking, people were concerned about Epic as a potential -- Epic had a solution. We were talking about the fact that we didn't see it in due diligence. I think over a year now, we've seen very strong, super high win rates, never -- haven't lost a documented case. Our win rates in Epic hospitals are actually higher than our win rate in -- or we have more Epic hospitals than we do Cerner hospitals, not win rate, but just presence. So we feel really good about the competitive positioning of the business. There's been a little bit of delay in sort of some new business in hospitals, more of an IT resource issue. The orders are on the books, they're just taking a little longer to put in. But we think double-digit growth. We see the business. It's on the books. We just got to get it into place and we feel that, that's going to continue to get better. The good thing about Provation, or the great thing about Provation, is that the business case, the financial business case, is rock solid. We don't ever go into a client where the customer is debating the value proposition. The GI doc -- we have documented cases of GI doctors moving to hospitals. And the first question that's asked, I actually got a president of a hospital network told me this, he said, "Every time we hire new GI doctors, the first question they have is, do you have Provation in place?" Because it helps the doctor be more effective and efficient and they get to spend more time with clients -- with patients. And so it's -- the value proposition is rock solid. A little bit of noise on time to implement, but you know what, over time, that won't be an issue.

Maybe we can talk about sort of price inflation and I think there are multiple layers. So how lasting do you think inflation will prove to be in your markets?

We don't have anything temporary, so we didn't put in temporary procedures or temporary policies or anything where things would be dialed back. So number one is, I think, from a contractual perspective, it's very, very durable. I think secondly, it's reemphasized the importance of value proposition. So I think to some extent, price is more -- it's price in our markets is more a function of the value we're providing to customers than it is because we had some inflation on material costs. And we found it incredibly durable. And that's why I think after a record year of price last year, we're going to still get another 250 basis points of durable price this year.

I think it's a question I've been asking, but I think part of the inflation is this built-in expectation from your customer base, from your suppliers, that there will be inflation. As you talk to folks, do you see now there's built-in expectation that perhaps there will be structural and more pricing going forward?

I think it's too early to tell. But I would say, certainly, people are accustomed to a different pricing scenario. For sure, we've conditioned people to understand that. I think more than anything, it's interesting, because we've always had more price than peers, I think historically, because we don't have a lot of commodity pricing going up and down. It's really been true price. And we change the mindset of, well, we're going to raise prices 1% every year. That was kind of a sales prep -- organizations thing. We've changed that paradigm and so I think the opportunity for us to -- it's really a value equation. We had our leadership conference a month ago. Several of our leaders got up to talk about this very topic and really try to break the paradigm of this, this isn't about catching our inflation. This is about the innovation that we put into the market, getting paid for it and making sure that our value proposition is such that customers understand that they're getting more for what we're doing. And if we can do that well across the portfolio, we'll continue to get more price.

So even as supply chains improve, there is a chance that pricing could stay above the 0% to 2% range you've guided?

Yes, I think that's right. I think that's right. But again, it's still early. Let's see where things play out over the next 12 months.

So this is sort of -- I think we have stronger views there than most, but sort of software mix and margins. So as Fortive software mix continues to increase, should we think about the algorithm for margin expansion changing? Just because, right, it has high incremental margins. It's becoming a higher percent of your business. It grows at a higher rate, right? So does 40% incremental margin become an easier target when you have double-digit software growth?

I don't think we've ever been a company that's been accustomed to easy targets. So I think the first thing would be, let's let it continue to be a bigger part of the portfolio. We didn't really move the mix last year because our hardware businesses grew so well. It will definitely mix up over time. It will have more higher gross margins for sure. I suspect at some point in time, we'll be talking about a different incremental, but I don't see that in the near term. And the other thing is we're -- we want to fund growth. And the more -- the reason why there's a difference between our incrementals and our gross margins is because we leave some capability. We did this at Danaher for a long time, is we leave that opportunity to take some of that money that we -- that comes in incrementally, to fund and accelerate and perpetuate the strength of our market positions and the ability for us to continue to grow.

So maybe we can touch on some areas of weakness. Last quarter, you called out lower demand in industrial and semiconductor within your Sensing platform. I think Keysight noted a pullback among wireless communication clients. Have you seen any other end markets soften so far in '23?

Yes. I mean we're certainly -- and certainly, the news in the last couple of weeks has us being even more diligent. For several quarters now, we've been very attentive to things like point-of-sale, to our funnels, sales funnels, where we have direct businesses. First thing is you start to see in a macro is you don't see sales or orders go down. You see point-of-sale go down in channel partners and you see sales funnels elongate. We haven't seen a lot of that yet. So what we said -- we're going to have a book-to-bill over 1 in the first quarter now. So that's pretty good strength. And we've called out some markets in Sensing, as you pointed out. But we've directed the businesses towards secular drivers that should be -- that we anticipate to be a lot more durable. And we're seeing the strength of those drivers play out in a number of places. Depending on what happens with the macro and there are certainly more questions, probably hear from many folks over the last few weeks, we're prepared for that. We've really built the company to really handle durability. We grew free cash flow and earnings in 2020, when very few people did, because of the durability and because of the business model and our playbook for dealing with the times. We haven't completely eradicated some of the cyclicality out of Fluke and Tek as an example and in Sensing. But we've built much more growthier streams in those businesses to weather the storm. And we've built a lot more recurring revenue in all of Fortive to be able to do that. One of the things Fluke doesn't get any credit for is they built such a great durable health care business that we moved into the health care segment. So it's -- and so now -- and they don't even get credit for it, although they ask for it every once in a while.

And we have been getting questions on read-across from Keysight, what we should be thinking, it's sort of 5G exposure which drove outgrowth versus it's just the business composition?

Yes. We really were -- we didn't have necessarily the technologies we provide versus -- obviously, Keysight is a much broader player. And they certainly have a product line that was more attentive to some of those things, for sure. We weren't really directing our -- our strategy. We were really directing our strategies around this, where we really had competitive advantage in power, these power challenges that exist. And we think that if anybody doesn't think there's going to be more batteries and need for more efficient batteries over the next 10 years, I'll certainly take the bet that there's going to be a lot more. And we're well positioned to take advantage of that opportunity.

And how do you think -- so I guess you guys in Europe, it's like you're in the real economy. All of a sudden, we talk to some people, people who have more conservative forecast. People who are like, oh, why are you so conservative? All of a sudden, there are some, I guess, some clouds gathering. Have you had any conversations with the customers, with suppliers, that makes you think that people are more conservative, in fact? Or is it too early to tell? What's your read?

I -- unfortunately, I've been through a lot of cycles over the years, right? And what I've always found is that every one of them is different. You have to be really attentive to what's going on to understand things. That's why, I mean we were talking before, I'm going to go out and visit a whole bunch of places in Europe and some customers and stuff to sort of get a sense for what people are hearing here. We think Europe has actually been more enduring than we thought. I think a year ago, with the energy issues last summer, we thought Europe would be hugely challenged in the wintertime and obviously, a warmer -- a lot of reasons why it wasn't. But we're certainly keeping our ear close to the railroad to see how this will all play out. But I think we're well prepared for whatever happens.

And another big theme, I think, is reshoring is another big theme. So can you just talk about how you guys think about your own manufacturing footprint? And what are your suppliers sort of telling you about their decisions about their manufacturing footprint?

Well, I think without a doubt, one of the ramifications, if you will, for these supply chain issues that have occurred is really that we've relooked at the overreliance in certain parts of the world for supply chains and manufacturing. Quite frankly, we took it upon ourselves back in '18, when we -- in '19, when we started to see some of these export issues, to sort of reevaluate some of our strategies that have been a big part of our time for 20 years of moving manufacturing a lot to China. And we've been endeavoring over the last 4 years or so to rebalance that around more than just -- and there's a lot of reasons for that. There's obviously freight lanes. We've had end of years where we're really wondering about Long Beach -- the port in Long Beach and whether or not we're going to be able to get all our stuff through the port in time to get it out in the fourth quarter. So we've taken a lot of action over the last few years to derisk those kinds of things, moving manufacturing to different parts of the world, and we'll continue to do that. China, we're really well positioned in China. We're very local in China for the local market. We'll never -- we won't lose that. But we will look through -- look at opportunities to move manufacturing in some places that's more appropriate.

Do you need more manufacturing in North America over the...

Well, I think broadly defined, North America, that might mean Mexico.

That's right.

That might be -- it might be we move some things to the U.S. Sometimes when you look at freight costs, when you look at total landed costs and you look at some of the arbitrage -- labor arbitrage that occurred a while ago, that isn't always true on every product anyway.

Yes, you were one of the first people, I think last year, to talk about, when everybody was talking about chips.

Yes.

You, I think, were one of the first people to call actually the timing on chips actually.

Yes, I said it wasn't going to get good, very quickly, unfortunately.

So maybe we can talk about capital allocation. I know it's sort of a hot topic. I'll tread carefully. So we always ask this question, sort of balance between software and hardware. This is the bigger picture. So how do you think about sort of the balance, capital allocation, software versus hardware for Fortive?

That's why I love that slide around our segments because I think when we think about connected workflows, we really see opportunities for hardware and software. And to some extent, the nexus of those two is actually a bit of a sweet spot for us. Censis is doing great because of the sterilization capability we have at ASP. And ASP is better because of Censis. We're going to find those opportunities because those are places -- those 5 connected workflows that make up the majority of our revenue base today are really the places where we see opportunity for both. And we're going to do both. We're going to be creative and we'll be rigorous and disciplined about it, but I think there's opportunities in both. So if you look at our past, we've done hardware and software. We -- some of the people say, all you do are software deals. Well, the last 2 deals we did were software. But if you take a longer-term view, it's really about acquisitions that are driving better value around some secular drivers. Those are going to be hardware, software. A lot of them are going to be recurring revenue. Most of them maybe are recurring revenue in both cases, but some won't be and they'll be adding to technology and innovation as well.

And you've been recently, I think in public, been asked about sort of the size of the deal you're willing to do. I think you're definitely, I think have stated that you're committed to investment-grade rating. I think a couple of weeks ago, you said no equity issuance. When you say investment-grade rating, would you be open to a one-notch downgrade? Would that be part of investment-grade rating, as we sort of try to size the opportunity or...

Yes. Well, I think we've got a lot of flexibility within the construct that we have today. We've gone to 3.5x.

Yes, that's what David -- that's David's argument.

And so I think in many respects, it's about the asset that you're buying. It's not just pure numbers game, right? It's what's the free cash flow of the company you're buying? What's the -- what are the synergies? What's the profitability trajectory? So all of those things are going to come into mind. So even saying, well, 3.5x is, what does that look like? It's within -- there's flexibility within those constructs. And so I never want us to draw ourselves into one particular thing, because the rating agencies are going to take all those things into account. What's true though, as you said, we committed to investment-grade. We're committed to strong returns. We're committed to accelerating strategy. And when you accelerate strategy, you end up increasing the probability of success and that's ultimately what we're looking to do.

And from a rating agencies' perspective, I would imagine that you have a track record of delevering. So if you were to do something and if you had a very sort of concrete plan, the rating agencies would probably listen to that.

That's exactly right. I mean that's part of the conversation. It's not just what you get to. It's how quickly you're going to come back. And that's where, hey, what's the free cash flow of the organization? What's the EBITDA that's coming into the deal? And those give you the degrees of freedom to kind of get to the place where you want to go.

So maybe we have a couple of minutes left. We have a fairly full room, so maybe folks want to -- I don't know if there are questions from the audience.

I thought Ross was going to ask a question. I was going to say that's kind of a -- a little bit kind of easy.

Well, we have a minute left, so I'll give you back your minute.

Okay. Well, all I would say is, first, thanks everybody for coming to join us. We're -- we have an Investor Day on -- coming in May in New York, so we look forward to as many people as we can get into the room. We think it's going to be a great opportunity to lay out not only what we've been doing. Our last in-person event was in 2019, so I think lots of opportunity to see our team, see our products and innovations. I think the best way to see Fortive is to sort of see our products. We're such a product-led company, hardware, software doesn't matter. Innovation is really what we try to demonstrate there. And of course, we're going to talk about the long-term strategy and where we see it. And I think you're going to see the progress we've made over the last several years. But I think more importantly, you're going to see the opportunity ahead of us and I think that's what's going to be most exciting about the day.

Fantastic. Thanks so much for being here.

All right. Thanks, everyone. Thanks, Andrew.