Fortive Corporation (FTV) Earnings Call Transcript & Summary

All right. Good morning, everybody. We're going to keep things moving on day 2 here with the team from Fortive. We have CEO, Chairman and CEO, Jim Lico. We have Tami Newcombe joining us as well. Folks, really appreciate you guys making the time. Good to see you, as always, looking forward to the discussion here. Jim, maybe just to start us off here with a little bit of what you're seeing, what you guys are focused on. Obviously, a pretty rich environment right now, a lot of moving pieces, and you guys obviously touched the economy in a lot of different ways. So maybe just give us a brief overview of what you're thinking. We'll dive into some questions.

Yes. So good morning, everyone. Great to be here. For us, great to be on our coast, too, as we're at West Coast here.

The only one saving money. I've got fuel for this one.

And the time zone is helpful as well. But I would say, Josh, it's great to have Tami here. Tami is one [indiscernible] 2 of our segments, health and precision technology. So great to have Tami with me as well. She'll take all the hard questions, I think. I think at the end of the day, there is certainly a lot of noise, but I think [indiscernible] by the real thought a lot about over the last several years about our strategy and how to perform and quite frankly, I think the portfolio we've built and the evolution of our strategy has just has been -- just been really strong. As you know, we showed it at our Investor Day kind of the 4-year numbers of what's going on in our performance. And quite frankly, we're really proud of that performance, and we think that's going to continue, I would say for the quarter and the year, we feel good about it and where we stand. Some moving pieces, but I think at the end of the day, and September is a big month. But I think we feel really good about where we're at right now in the quarter and in the full year. I think what we said in our earnings call was really 3 things that we had to see. One was health care continuing to improve first half to second half. That's on the backs of an improving health care environment. As we said, '22 would be -- '23 would be better than '22, '24 would be better than '23, and I think that's what we're seeing in the second half. Electives are normalizing around that pre-COVID level Our efforts are sort of self-help work that we've talked about, things like our channel transformation going on in North America at ASP by and large, on track and by the end of the quarter and the start of the fourth quarter, we should have all of our customers on a direct basis. So I think both from a market improving and our own self-help work things working well. On the peak, on the sort of hardware side as we often talk about our hardware businesses, backlog continuing to really buffer any slowness. And as we know, we've seen some -- we've seen PMIs be down several quarters now, and we've continued to have great growth of second half for Precision Technologies second quarter. Precision Technologies was very strong. And we -- as we've guided, we continue to believe things are -- our hardware is buffering any slowness -- pockets of slowness or pockets of change that we've seen. We feel good about that. And then finally, really, the hallmark of our software and services strategy has really been to continue to build on these secular drivers and that continues to be good. I'm sure we'll dive into that, but we feel very good about where those businesses are relative to our plan. And quite frankly, their performance is really a great affirmation of our strategy relative to hardware and software and connected workflows. So I think we're built for this environment from a cultural perspective in terms of tough decisions or the rigor and discipline. I think our way of running is -- doesn't really matter the environment because our expectations are always high anyway. So fundamentally, we're delivering against those expectations in any environment. And so to some extent, while there might be some changes in the environment for us, it feels a lot -- pretty similar.

Got it. And Jim, I think you just came back from China, obviously, very topical at this point in time, a decent amount of volatility, although I guess it depends on the end markets. What are you seeing on the ground there? And what's sort of top of your list as you surveyed your businesses there?

Yes. We had a great opportunity. We did operating reviews with every one of our businesses. We visited every one of our manufacturing sites some customers stuff as well. And I think what we found in our strategy is really playing out well. We've had tremendous growth in China over the last several years on the backs of really building more local businesses. And that is working, i think our strategy is affirmed. We always said we were going to see some slowing in the second half. Some of that was our belief that the market there might slow a little bit. It was also our belief that after 4 quarters of really, really strong growth, the market would maybe take a little bit of a pause or some breathing to take on some of the technology. We're pretty -- we're very local there. So I think our ability to sort of be China for China in most of our businesses and to the extent, always improving that aspect in our businesses that maybe aren't as local. We feel good about our ability to deliver our strategy there, and I think our strategy is working. We'll probably see some pockets of things for sure. I think sensing and health are both going to grow in the second half even amongst all those things. So Fluke and Tek will be a little bit slower. But again, they had such dramatic growth that on a 2- and 3-year stack on those numbers are still very good.

Understood. I guess maybe just thinking about high-growth regions in general, including China. We've seen a lot of shifting take place. Folks try to realign their supply chains, maybe find some other countries to partner with in there. India, in particular, seems to be so in a lot of investment. How do you think about your sort of investment shift, or how do you reprioritize as some of those changes take place? Or you are even seeing the changes?

Yes. So one, maybe I'll talk a little bit about Fortive. Tami runs India for Fortive, so I'll have her speak specifically to India. But I think what we've seen -- what we've always said is we have a very deliberate high-growth market strategy for all of our businesses. We're going to continue to look for opportunities. We've derisked -- from a supply chain perspective, we've derisked a lot of our supply chain by moving to other parts of the world. That process will -- has been pretty aggressive, really ever since some of the tariff activity back several years ago. And so we've made a lot of progress in that regard. We'll continue to make progress over time. And we'll continue from a commercial perspective to continue to invest in opportunities. You mentioned India, Latin America has some opportunities. Middle East continues to be a good market for a number of our businesses. We -- many of our businesses are global. And so as an example, in Qualitrol, our -- that's really benefiting from a lot of things relative to energy transition, growing very well around the world. So I think we've got a number of deliberate strategies. We're about halfway through our strategic plans this year. And certainly, a number of our businesses are talking about how they can continue to globalize the business. Maybe talk about India a little bit.

Yes, Josh, I had the opportunity to be there in the last month or so. So there's definitely a buzz and an energy there. For us, revenue-wise, is a pretty small piece of our revenue today. It began as a software development center, a large software development center where a good portion of Tektronix software team is, as well as Fluke. But you can see through the strat planning cycle that we've been through that there's an appetite and there is a lot of awareness around the market that will be growing the commercial teams there.

Understood. Maybe sort of sticking with some of the same thread, but less on regions more on end markets. Now that supply chains have sort of healed enough, I think a lot of the secular growth areas that folks have been talking about the last couple of years, certainly that we've been talking about starting to show up. And we've been hearing it yesterday as well that trends around electrification, digitization, folks wanting to reorient their supply chain through things like reshoring, all sort of happening. I guess you're in Fortive's businesses, do you see these to be particularly powerful. I suspect between attacking some of the sensing, piece of the Tami's views on this as well. But where are you guys seeing the mega trends show up? What are you exciting? Where are the areas do you feel like you need to feed a little bit more?

Yes. I think tek's some good examples there. But I think at a high level, from a Fortive perspective, we really think about 3 things. Automation and digitization, that's both a deliberate attempt to get into workflows, which is we saw customers wanting to digitize and automate processes. And a number of our businesses are taking advantage of that. We can talk about that in specifics. The energy in transition, I mentioned Qualitrol but a number of our businesses. Tek's got some great examples in power that is really part of that. And then finally, really productivity. As you look around the world, particularly in the -- we think of productivity in a few ways. One is just sheer productivity in a lot of our end markets, people are just looking for more productivity and how to get more from the assets that they have. People that they have and some of its labor shortages and the opportunity. So I think those 3 dynamics are really the things that drive our business. We've got about a $60 billion served market of opportunity for Fortive. And I would say 70% to 80% of the served markets have those attributes of at least one of those 3 things, but many of them have 2 or 3 as well.

Yes. Many may know that I joined Fortis as part of Tektronix. So about 2017, we saw the secular trend of electrification. And if you're a instrument company that measures currents and voltages, electrification is a good thing. And that power applications that we were able to really add value to the customer has just exploded for Tektronix and the good part is you see it across a number of end markets. It's not just one end market, it's energy, it's automotive, it's IoT, it's every place that's shifting from diesel or gas powered, which doesn't need any of the test and measurement equipment to everything electrified. And I was just -- I just bought a new leaf blower and weedeater that are all electric in batteries. And so you see it everywhere.

So I think that's something that, particularly with tek that folks on the outside and the investment community struggle with, right? You see a lot of historical relationship with semiconductor cycles and consumer electronics and sort of driving some of that cyclical wave. How much of Tek is really pivoted over to more of these secular areas? Or I guess how would you maybe more open-ended talk about the reliance on kind of historical tek markets versus the new ones?

I think there's 3 fundamental differences in tek today. Then tek of maybe 2007 to 2017. The first is the innovation flywheel. So instead of launches coming every 3 to 4 years, Tektronix took a platform strategy and that platform strategy allowed for a flywheel of innovation every 6 to 8 months. It was first made a big deal about the mainstream part of the oscilloscope family. It led to over the last 5 years, we announced the 3 and 4 series, the 6 series came back with low profiles, and just last year, a big breakthrough with the 2 series. So 2 series, you take the scope 2. It's about the size of a purse. You take it where you want to do your testing, you don't have to bring everything to the lab. Partnered with that in the portfolio was this continuous delivery of value creation to the customer through software. And these box cars are released every 4 to 6 months that brings new value to that piece of equipment. So that's a new Tektronix and an innovation story that's really fueled by FBS and some of the innovation we've been doing at Fortive. The second piece is the end markets we picked. And we had choices to make there, and we picked end markets that are more diversified. And there's other markets that are very cyclical and we are trying to steer away from those. Power is a great example and electrification going everywhere. And then I just close it with the go-to-market. We really doubled down 2017 or so on large enterprise customers. And you're seeing through some of the significant orders we're getting in, whether it's semi-buildout or some of the AI-led data center build-out that we're seeing are much larger orders than we were getting in the past.

Understood. And maybe sticking with that same thought and this also falls under your purview, Tami. So a question for both of you. Sensing is an area that I think a lot of folks, including folks on the stage this week have expressed more interest in for reasons that make a lot of sense, kind of piggybacking off of what you just said, what's the appetite to grow in that business inorganically? And then just because sensing is kind of a ubiquitous concept, how do you distinguish good sensing versus something that's maybe a bit more commoditized or runs that risk in the not so distant future?

So for us, the places that we like sensing is where we're really differentiated, so we go very deep in an application, whether that's a dairy application or it's the grid where we put sensors on distribution systems. Those are the spots that we bring the most customer value from, not only the technology itself, but the deep expertise we have and decades of years of expertise we bring there. The places that are more industrial and more widespread, those are the areas that we've seen a little bit of slowing in the market, and I think that's pretty widespread.

And I think if we just think long term about our inorganic investments, as Tami just mentioned, we've got some good positions in some niche markets and continue to find those would be -- I think we would certainly look for those opportunities. And they're in our M&A funnel for sure. But I think the markets where, and I really think gross margins are a good example of this. If you look at our gross margins of our sensing platform, they're probably 1,000 basis points or more higher than most typical sensing businesses. And that's really because we've stayed out of the sort of the larger markets, automotive, aerospace, where maybe they're a little bit more commoditized and a little bit harder to differentiate yourself. And quite frankly, we don't bring the scale that others might bring to those markets. So those are not necessarily bad markets. They're just not the right markets for us as we think about our strategy.

Got it. I want to pivot over to this broader concept of kind of workflow productivity or workflow solutions that I think has captured across multiple aspects of the portfolio. I thought the Investor Day did a really good job of spelling that out and conceptualize that for folks maybe for the first time. But how do you really measure and sell that? I mean all the things kind of make sense conceptually, but there's a customer that needs to do underwriting to support that. So I guess, how do you measure that? How does a customer measure that? Like are they able to come back and show the returns on it anything that you could put some examples or numbers around with respect to that would be helpful.

Yes. I mean I think what we really have, maybe stepping back a little bit, to simplify it, at the end of the day, if you look at our 3 segments and the workflows within those segments, we're really bringing the sort of connected workflow hardware, software services to really 5 workflows. But at the end of the day, those 5 really serve factories, buildings engineering labs, hospitals. And those solutions themselves look, while the products are different, they look somewhat similar in terms of how we can build architecture. So I think in that respect, our strategy is pretty focused and our ability to deliver value to customers really sits in those individual segments of our business that are focused on a set of customers. And I think we really feel like the M&A strategy that we've had over the last several years to build on these really strong positions in hardware, really help us bring expertise to customers, to your point, a couple of examples. I think what we do in facility and asset life cycle today is a great example of bringing value to customers. That's according to a current service channel. Gordian really focused on an end market around state and local governments. And their ability today, if you think about all the state and local buildings that are going through the energy transition, they're not rebuilding those buildings. They're changing them, right? They're putting in new windows, they're putting in whatever. And our Gordian solution really helps them do that at lowest cost. And they can really put a savings number to that because our cost data and our construction data gives them an example of how they're doing that and they're sourcing that at best cost. So that's just a good example. And I go over to health care and say, Provation is a great example. We talked about this in our earnings call. Typically in a GI suite, we're giving doctors 16 hours a month of time to do more procedures because of the solution that we have that really, from start to finish, in a GI suite from the time you have that procedure. From the time you check in until the time you sit down with a doctor for them to sort of review the results. That time frame is compressed significantly. And there's really no one, and you've been to a bunch of customer visits, you know this. There's really no doctor that doesn't recognize that value. It's really a -- it's almost, I think we've said this when we did the Provation deal, it was amazing the sort of customer feedback that we got, particularly around the doctors, around how much they appreciated the solution and anecdotes that we had from our voice of customer, if I'm going to move hospitals if I'm only going to do it if they're using the solution, [ PDMD ], which is the licensed software solution that provation provides, and we're moving them to apex, which is the SaaS model.

So I remember that example from the Investor Day. It struck me as sort of wild that anyone would do that because that would take every doctor [indiscernible] hours of their life back. certainly, patients would. Anything else in the portfolio across the segments that has that sort of order of magnitude. I would imagine that's the higher profile ones, but other things that are kind of similar scale?

Yes. Well, we can talk certainly are intact in a number of places, maybe I'll give one more and then we can -- I think what we're doing in connected reliability with eMaint is another example. We're really giving up time and information. We're now giving people more direct information around their assets what they do in manufacturing to improve uptime. We've had tremendous growth at eMaint over the -- I think our compound annual growth rate there for now 6 years is 20-plus percent. And I think it really stems from the fact that we can put pencil to paper with maintenance professionals around how we're improving uptime, tek from a design perspective.

And you were making me think about the Perioperative Loop. And the combination of -- so it's clear to me the time we've been spending with customers the value that we bring in the perioperative loop, and that's really the combination of ASP and sensing. You've got the pioneer in sterilization, combined with an AI-driven software tracking system for surgical instruments. And the mileage varies, but it is a productivity play as well as a patient safety, quality play there. And customers -- if you talk to a customer, the loyalty comes from the service technicians, and the clinicians we have in the field because we're a very focused portfolio. Those that are broad tend to be less deep, but we we're very focused on what we do, what we do very well in the perioperative loop and drive a lot of customer value, a lot of customer loyalty there.

So I guess that brings me to my next question. We talked about a lot of the opportunities in front of you. How do you prioritize, I mean diversity in the portfolio, a lot of different end markets, secular trends that you can tap into. Not everything can be first. How do you sort of rank order or prioritize within that?

I think quite frankly, that's in our secret sauce around FBS and just our cadence of the company. We're dearly involved in the strategy of each business. Tami and I just -- I've just finished a number of strategic plans in her business. We'll go back and finish the rest of them, I think, next week. So we're in that process right now. We're with the businesses We're understanding their opportunities. We'll get through that process. We'll come back from -- with an M&A lens, and we'll say how do we accelerate that strategy through M&A. And then at that point, it's -- the rank order to some extent, is the biggest opportunities win. The best ideas win. And I think that we've been able to balance -- I think it's not -- I don't think it's as complex as sometimes people think about all the operating companies, they sometimes think of that from a complexity perspective. But we cut that number almost by 2/3 when we start to get to the workflows. And so now we start to say these 5 workflows and how do we continue to prioritize around the workflows. And I think all 5 of those are important. And so -- and the opportunities have become available. And to some extent, it's a balance of timing and strategy and what's available and we do have a fairly lengthy process that we've had for a long time that we use to do that. And certainly, we engaged the Board pretty frequently on this topic as well. So we're able to move fast because the board is deeply engaged in those priorities as well.

Understood. So we spent a little time talking about tek from this perspective, but maybe more broadly on the hardware and excess backlog and sort of how that fares I think it's puzzle for a lot of folks, myself included, that you look at PMIs or look at IP and you would say, "Oh, here are a few businesses with maybe a target on their back." That hasn't happened. Clearly, the backlog was still very healthy through 2Q. It sounds like you haven't cut that necessarily in half overnight. How do you see that playing out? I mean, you mentioned that you'd probably have half of that gone to year-end. That might have happened. I mean, does this take 2 years to resolve at this point? Like how do you see that cycle?

Well, I think, number one, COVID, obviously, was in the supply chains in particular. We're a unique situation in the history of our markets. If we think about Fortive and we just stepped back from Fortive over the last, since 2019, we've grown mid-single digit. And so we think we're a mid-single-digit grower. We think that rate will go up over time as our higher growth businesses take -- become a larger part of the portfolio. As an example, FALs growing at double-digit rates as an example. So I think number one, what we're doing is we're moderating back to that rate. And so we had 20%, 30% order growth in a number of those businesses for a couple of years. And that backlog, in fact, we were looking at this yesterday, I think one of our business -- I mean, the can -- we've had almost no -- the number is so small from a cancellation perspective, it's de minimis. And so we're not seeing it canceled. We're seeing a little bit of inventory correction. So there's a little bit of some customers, particularly OEM customers are starting to say, okay, I've got a little bit of inventory. natural demand is still pretty good, but I'm going to take a little inventory out of the system. So that will be a little bouncing around as that. And we've been going through for a quarter or so. But I think it still enriches us from the standpoint of giving us the degrees of freedom as order rates have moderated, natural demand remains good. As an example, we talked about the canary and the coal mine of being Fluke. Fluke's point of sale in North America is still mid-single digits. And that's off a really tough comp from a year ago. So demand for our solutions, and this has been intentional from a strategic perspective, is still very good. We'll -- as I said, there's a few things bouncing around, but that backlog allows for us to kind of work through because customers still want those solutions. They're not they're not canceling them. There's not double ordering. This was really a situation where customers wanted to get ahead of the game, but they still wanted those solutions, and we're seeing that play out.

Understood. I'd like to get an update, if we could, on some of the, I guess, more turnaround stories or a few businesses that needed some course correction. I'm thinking ASP and censis in AHS, Accruent and service channel within FAL. How do you see the progress on that? How would you sort of score yourselves on those things today?

Yes, let me take FAL first. I think we just finished their strategic review about a couple of weeks ago, great review with the team. And we're really seeing that strategy play out. We're starting to cross-sell in a number of places. We announced that we just did a very small bolt-on acquisition for Gordian for U.K. construction data to continue to expand our business from a European perspective. So I think we're seeing some nice bolt-ons. Gordian continues to perform very well. We've seen some really great strategic work, and we're really getting some traction at service channel. We're seeing some good synergies between service channel and Accruent that we've described. So we're in a really good position. That business more and more will look similar in terms of the 3 businesses. Well, really -- really, it's all because we've got cross. We've moved product lines. We continue to move product lines across. We're now cross-selling. As an example, we're cross-selling our Lucernex, current solution and with service channel customers. So continuing to talk about those businesses as one and they'll continue to evolve. Lumina has talked about that publicly around his vision for that, which I think is really strong. So I think we're in a very good place. And -- and we're continuing -- that doesn't mean the work isn't over. But when you look at the margin structure, the growth structure of that work, it's very, very strong.

I'll speak again to ASP and censis and I mean it's clear that the customer value proposition is there. We like the secular drivers, but more important to the customer is the productivity that we drive in the health care environment today. It's normalizing from getting through COVID, labor shortages. So that's the lift for us and getting the innovation cranking, just like we did in PT. So as we look forward to later this year, we'll have some expansion in the consumables portfolio for the ASP team, and it's already a large global team and you put something else in their bag, and that gives us more growth, more profitability.

Understood. I want to spend the last couple of minutes here talking about more inside of Fortive and FBS. I think maybe first is that between FBS and some of its predecessors that there's a view that it's a pretty well-oiled machine. A lot of the changes are more at the margin that step function. But anything you see inside the organization where there is sort of a bigger effort or bigger opportunity to be made. It's sort of a different way of saying, I know the journey never really ends. But Is there some place where you're kind of more excited for the fork in the road.

Well, I would say, number one, we'll tag team this, I think. Number one is, I was with a number of our new leaders yesterday in our new leader simulation process, which is a week long of FBS training. I was with about 20 new leaders of the company yesterday. What I told him is this, it's about culture first. And you can't replicate 18,000, 19,000 people who are really learning on a continuous basis, making FBS better and the tenacity and enthusiasm around it is our secret sauce. And it is -- it starts at the top, quite frankly, but it doesn't -- but it doesn't end, even at the bottom. It's -- it is just a flywheel of enthusiasm and a flywheel momentum and learning which really drives everything but it's culture first. And I would say the second thing is, and what we've talked about is, so many examples now across the portfolio. not only in our additional businesses, but also in our software businesses and our health care businesses of how FBS is making an enormous difference in the business, and that continues to create the flywheel as well because people come to the company and they say, "Hey, I saw this work at this business." As an example, one of our best software companies for FBS is Gordian. Well, the individual that runs service channel today came from Gordian. And Nome is bringing that level of capability and expertise into the service channel business, and that's how we continue to do it. I think the thing we're most excited about is the work we're doing on innovation, and Tami's led that effort. So I'll have her talk about that.

Yes. I've spent my career in technology. I love the innovation side and the way that FBS has really brought some process and structure. The innovation in companies that aren't start-ups. They've been around decades and decades and they need that mentality and culture of continuous innovation starting with the opCo strategies. And as Jim said, we just went through the opCo strategies, you come out of there, and we have a process for ideation and then customer-centric, very metered gates as we decide what goes into the development pipelines. This crosses software and hardware companies. It's a process that's been used. Tektronix, I talked about the platform strategy. But coupled with that platform strategy was all of the FBS tools in the growth accelerator process to make sure that we are delivering the right value to the customer.

Understood. I see we're out of time. Thank you both for your time. I really appreciate it. Thank you.