Fortive Corporation (FTV) Earnings Call Transcript & Summary

All right. So we're going to get started again. We are really excited to have Fortive Corporation with us. We've got Jim Lico, who is the President and CEO. I see in the audience Chuck McLaughlin, who is SVP and CFO; and Elena Rosman, who's the VP of IR. As I walk over to you, Jim, let me just ask you, just to start with a quick update on sort of what you're seeing out there, particularly short-cycle businesses. Actually, like if you do have any prepared remarks, why don't you go ahead and say, I'm getting too excited.

Maybe I'll weave in maybe that question. Yes, I think as we tried to -- as we articulated on our earnings call, we really are excited about the position we're in right now relative to '24. We finished the year strong, but I think what you see in '24 for us is going to be the manifestation of the strategy that we've been -- we're really continuing to build over the last several years in terms of building a more -- a growthier company, more durable. And you see that play out in the different segments, and I'm sure we'll talk about that. But we feel really good about the position we're in. Relative to what we're seeing, we -- I would say, very consistent with what we talked about in the earnings call. We think this year, North America is probably going to be our best growth market. Europe, probably in the low single-digit range, a little bit less. And Asia will be depending on the parts of the world. China may be a little bit slower, we think probably down mid-single digit this year. But I think indicative of a very strong early part of last year in China, multiple year growth rates still look pretty good. So -- and that's -- what we were excited about in the fourth quarter was the fact that despite maybe some -- PMI being down for a while, things like Fluke point-of-sale around the world was still growing mid-single digits. So I think it's just emblematic of the things we've done strategically to reposition the businesses around some durable growth initiatives that sort of transcend what maybe happens in the broader macro.

Jim, do you still think that Tektronix book-to-bill could turn positive in Q2? And you mentioned enduring the strength in Fluke, that continues?

Yes. So what we've seen at Tek, if I step back in the segment at PT, right? Precision Technology segment, which will be our lowest growth segment for the year on the backs of really strong growth over the last several years in both Tektronix and in sensing. But both of those segments have seen 5-ish quarters of negative order growth. We've been working off backlog. And I would say in Tek, we -- in both businesses, we think, starts to turn in the second quarter, so to book-to-bill and one, and that's what we would see. In the case of sensing, 2 of the businesses are probably going to grow orders in the quarter. So it will be the other 2 parts of the Q1, yes. So we'll start to see some of that transformation in the sensing businesses. Tek, which has been on a roll, had a record 2023 in a good position relative to the business and needs to get through a little bit of, I think, a little bit of -- what we're seeing now there is customer funnels are starting to expand. Conversations are accelerating. So I think that speaks to the fact that we think the book-to-bill starts to change in the second quarter.

And as you've talked to customers, Jim, like any -- anybody worried about the elections this year or is just thing another in the North America?

We're getting used to -- well, I would say we're getting used to uncertainty. Last year had lots of uncertainty, too. So I think there's -- maybe the constant might be the uncertainty. And I would -- and Andy, I would just say we've got elections all over the world, right? Half of the world is going to have an election here this year. But no, I would say most people are thinking about their markets and their customers thinking about what they need to do to invest in the future. I wouldn't say the uncertainty of the election is feeling -- is dominating the conversations these days.

Right. And then on China, anything change as Chinese New Year ends here, like anything that you're seeing? And it's such a focus area for you? So maybe talk about how do you see it going forward?

Yes. It's about 10% of sales now. So that number is as North America -- our higher growth businesses from an acquisition perspective, most of our software businesses are in North America. So we're mixing up towards -- a little bit towards North America and Europe here over time. I think what we've heard -- it's still early. So to answer your question, we'll be with those teams next week in a number of conversations that we get out of the new year. As I always say, you got to get to March to really know where China is going to be for the year. We feel -- we said we think China is probably down mid-single digit. Now we've got a tough comp in the first quarter. I think we grew 30% last year in the first quarter. So the overall number is not going to tell us a lot. It's really going to be more about customer conversations. I would say on the ground business is actually decent. What we've seen is project delays. And so I think the conversations we'll be having with our team here next week and in the next few weeks is how are those projects progressing? And where do we see that landing as we get through the year?

And Jim, again, because high-growth regions are a good focus. I'm intrigued like at this conference, I'm hearing a lot about India to -- I know it's small for most companies, but it seems like it's the fastest-growing area. So maybe talk about what you...

Yes. We grew over 20% there last year. As you said, on a small number. I'm actually going there a week from tomorrow. And we'll be in the country. We've got a -- we've actually got a big continuous improvement Kaizen event that week. So it'll be exciting to be with all of our operating businesses there. We think the opportunity is really big. But it's off a small base. So it will -- but we do think -- and maybe more broadly, some of what will be to India's benefit probably means some China manufacturing, some China design work might be moving to India. I think one of the things we've tried to do is the world globalizes and thinks about where their supply chains might be, where the design efforts might be that we'll follow customers wherever they go. And we're seeing some customers wanting to invest more in India, and we're certainly responsive to those needs and feel good about our position there. We've got a great team there and we're well positioned to take advantage of the opportunity.

Jim, I wanted to ask you about maybe a little bit longer term, it looks like you're going to beat your margin target of 26.5% at your Investor Day of full year early. But you were asked on the call, you still need a pretty big jump next year to get to your sort of $4.50 target, right? And you said you're still very confident of that. Obviously, you're going to conduct incremental M&A. I know we'll talk about that. But maybe talk about sort of what's gone right on the margin side and what opportunities still are ahead of you there?

Well, when we get above that mid-single-digit growth rate, we tend to -- the incrementals tend to be a little higher, right? So I think it starts with the fact that growth has been a little bit better over the last few years, and that's led to better margin expansion. FBS, as you know, has always been about continuing to improve the quality of the business. And our innovation efforts tend to have higher -- almost absolutely have higher gross margins. So I think what's gone right, innovation has gone well. We've grown a little bit more. Our gross margin strategies, whether it be pricing or some of these others have gone well. That gets you to the '25 number. In '21, we put out some targets around free cash flow and margins, as you described, we're ahead of those targets. Last year, we sort of re-upped them with some EPS numbers. $4.50 million is the number that we've obviously discussed relative to your question. And when we look at mid-single-digit growth in '25, if we look at 75 basis points or maybe a little bit better margin expansion at health next year. We'll pay down some debt, which is going to have some headwinds or tailwinds as well. So we feel like when you sort of look at a number of those things, we're in a good position. It's not a guide. It's -- you know it's, in any way, shape or form, and we'll get to the end of the year. As I say, we've got a season to play before we get to the next season, but we wouldn't have put those out there if we didn't see a path and we'll work every day towards the exit rate. We think that when we look at the long-term growth, one of the things we did on the earnings call, as you know, is we tried to show the 5-year growth trajectory. The performance and EPS growth and free cash flow growth and what we've done from a core growth perspective and total growth perspective. And if you just -- you fast-forward those percentages in terms of improvement forward that you get to those numbers without any big leaps of anything. So...

Let me just follow up on the margin question in one different way, and that's you've been drifting up since you've been public, basically, right? And your algorithm now is 40%, but I think your guidance is 45% for '24. So I'm left to think with more recurring earnings, all that kind of stuff that 45% is new 40%, why shouldn't I think, like?

Well, if I think if you took a longer-term view, you probably start to -- that probably becomes even more. The interesting thing about our businesses is that we have a very profitable franchises. And our hardware franchises are incredibly well run and profitable as well. So it also just stands to reason that as we continue to -- if we grow a little bit more, we're probably going to be at that higher rate. So that's probably true. The incrementals is an example in iOS and in health this year, a little bit above that -- I think they're in the 50% range because of that. So if we beat the -- if we end up growing more organically, you might start to see that. And if you -- over time, given the strategies we've had and the organic growth rate moves up, you might start to see a 45 number. I don't think that's next year or anything like that. But we're in a great position, as you said, to be able to add to profitability. And I think the other thing, we want some degrees of freedom to continue to invest in the business, perpetuate the growth rate, continue to take advantage of the opportunities that are available. And sometimes, we could fall through at 50% or 60%, but we're going to take some of that money. We created our -- just as a side, you know our centralized machine learning and AI effort that we call The FORT was basically created out of those incrementals. So we could have fallen through at a little higher number, but we've accelerated the investments in building out that capability. I think we're well served 5 years ago to have done that. And so we want to also maintain some degrees of freedom to continue to invest in the business.

I'll just ask you about that, Jim, because like you don't get asked about that very often nowadays, like on The FORT, like how much is it helping sort of the algorithm whether it's margins or growth?

Yes. But certainly, a lot of the early effort was to build out the capability and to do some things internally. We're going to start to see some solutions. Generative AI is a next phase. We've got robotic process automation working in our back offices today to improve productivity and to, quite frankly, make work better for our team members around the world. We've had that for a few years. That's been accelerated by The Fort. We've -- our engineering -- a number of the things we talked about from an engineering acceleration in the call are really started with The FORT. And we're just starting to get to those solutions that we can monetize from a customer perspective. And we're in the early days of that, but feel like those opportunities are very much in front of us. And all of that is because we've built the scalable foundation of expertise at The FORT.

Jim, you're probably aware that a lot of your industrial peers have what I would call back-end loaded guides. So I think you suggested in your fourth quarter earnings call that you don't need a big uptick in second half sales and hardware nor do you need significant improvement in China to make your annual sales EPS forecast. But you signaled -- we talked about book-to-bill sort of improving in Q2 in Tek. Is there anything else that you sort of need to sort of make that 2% to 4% organic growth guidance that you have as an improvement?

Yes. I mean when we look first half, second half, we're 48-52, roughly. And that's really what we've been historically. Second half is always a little bit better than the first half. So we don't -- when we look at the traditional sequential move first half to second half. We're talking about what we've typically done. So that wouldn't -- that first gives me some comfort, gives us some comfort that there's nothing extravagant that needs to happen. As you mentioned, the book-to-bill, as I described, is certainly part of what we're confident will happen, but it needs to happen. And that's certainly out in the future. So -- but in terms of extravagant things or anything like that, nothing in particular that stands out there that is -- would say absolutely has to happen. I would say -- and as you said, China, we've moderated our expectations for China, and we'll see how, as I mentioned, in the China question, we'll see how that plays out.

Got it. And then you mentioned sensing. I want to talk about a couple of businesses that are starting to turn, but let me do it in a bigger form with just -- I think on the call, you mentioned some green shoots in the form of semiconductor customers at least beginning to have conversations. So -- maybe talk about that. Are these conversations ramping up at all? Or is it just conversations?

Well, conversations are sort of an aggregated discussion that we have with our segment leaders. But we are seeing the sales funnel start to move. So as we think about a 5-stage sales funnel, the first thing is sort of the first conversations around projects. What we're starting to see as things progress through the funnel. So I think those are the facts that would give us some confidence that things are progressing. And consistent with -- all of that consistent with how we anticipated. So I wouldn't say anything is necessarily accelerating or anything like that. I just think it's a conversation where we're consistent with what we've been talking about.

Got it. And then I want to shift to health care to AHS. So your ASP business really does seem to have turned a corner. You've transitioned now to the direct selling model here in North America. I think consumables were up 7% in Q4, 4% rest of the world. You're expecting ASP to grow mid-single digits in '24. So maybe update us on where you are in your efforts to transform AHS because that was a segment that you kind of struggled in a little bit over the last couple of years. So how do you look at it going forward? And do you anticipate a meaningful difference in the growth rate of consumables versus equipment in...

So number one, when you look sort of post 2020, the health care business has been -- in the time of pandemic, we've grown at about mid-single digits. And so just as a context, of that. But there have been some fits and starts as we know that we have to work through like the [ Elevate ] program that we did last year. We're in a really good position. I think when you look at where the year is going to play out, ASP, which is the largest part of the business, as you said, had good growth in consumables in its sort of its first peer quarter of selling direct in North America. We were with the business a month or so ago and they feel -- they're really playing -- really understanding the power of that direct model in North America and the opportunities that are available to them. So we feel good about the transition, and it's in a good place. I think more broadly around health, that roughly $1.4-ish billion in revenue, half of that revenue is consumables, whether it be at ASP or in Landauer. So we've got half the business is consumables. We -- consumables will grow more than -- we had a really good capital year last year at ASP. So capital will be a little slower this year. We -- at least that's how we're looking at it right now. But consumables will out grow -- will be the growth determinant for the -- and that's half the business, where the software business is obviously, will do well. So we feel like we said a few years ago that '23 -- '22 was the hardest year for hospitals, particularly in North America. '23 would be better than '22 and '24 would be better than '23 from a market perspective, electives and those kinds of things, and that's certainly what we're seeing.

And Jim, I think when you and I were together not so long ago, we talked about like you've done the heavy lifting in terms of restructuring in ASP. But is there anything still more to do there? What's in the future?

Well, for sure. Well, one think we would say we can always -- our continuous improvement philosophy would always say we always do better. So -- but what -- Andy, when we carved the business out of J&J, what sometimes gets lost is the fact that we carved it out during COVID. So some of the things that we did to carve it out may have been easier and convenient as opposed to the best most productive way or the best way. And so [ Elevate ] was a big part of that, the go-to-market piece, but there's still a number of productivity things, AI is going to play a role in this and back office processes that we can do. And we still see lots of opportunity in the business to continue to build productivity initiatives. And quite frankly, the business is very much on top of it. They're really driving their own future here.

Got it. And to that point, in terms of margins, business segment, you're still farthest from your '28 goal, right? But it seems like you've restructured and as we've talked about, you focus -- you're focusing on productivity, as you just said, you've got 125 basis points of margin from '24, which is what you said you'd do on an annual basis, but it seems like you're taking a step up this year. So why couldn't you do better than that?

Maybe we will. But I think at the end of the day, I think it's a good starting point in which to come from -- to come to. We think the margin structure that we've got for the business this year is a very good margin structure. I think, first of all, 30% certainly in scope for the future. We will have probably faster margin expansion in health, maybe than the greater portfolio, and we're just talking about 75 basis points for Fortive. But -- and let's see how the year plays out, real -- very good opportunities for continued margin expansion.

And so I want to open it up to the audience for questions in a second, but let me ask you about Intelligent Operating Solutions. That segment just doesn't look like once a cycle. So maybe a little bit of a slowdown versus the outsized growth in '21 and '22, but still mid-single-digit rates is not a slowdown at all. So you mentioned increased levels of innovation in Fluke, customer adoption of your technology and key verticals. Maybe elaborate on the sustainability of Fluke's outperformance going forward. And then we can talk about a couple of other things in that.

Well, certainly, when you look at the segment, I always think of it as -- 8 years ago when we talked about the strategic plan for the company and to build this business out, we really had some simple principles around durable growth, more recurring revenue. We had some principles around Safety and Productivity Solutions and hardware and software in growth platforms that would fundamentally allow for us to build -- build a growth of your company. Where that strategy is most evident is in iOS. We've deployed the most capital from an M&A perspective. And it really is the hard intentional work that we've done for a number of years. And that's why I think you see both within our traditional businesses like Fluke, as you pointed out, where we've repositioned around things like the energy transition to help the business grow differently or add recurring revenue and software to Fluke. But then more broadly, what we've built on with some of the other businesses in environmental, health and safety and facility and asset life cycle. So yes, I mean, what I like to think of is you see that play out fully, the strategy playing out fully. You see it in health care. We get post COVID, you'll see that play out in health care. And then with the EA acquisition, you're really going to start to see that in PT. And so I like to think of all 3 segments are in this evolution with iOS being the most -- most developed in that sort of intentional strategy around growth.

So I wanted to ask you about ARR because again, you're kind of alluding to it. So maybe give us more color on you've built this facility asset life cycle platform. You've got all these other good stuff. So like talk about sort of anything, how do I say this like the positives of having that platform now and the go-forward strategy?

Well, certainly, FAW, which is our largest software business and obviously in iOS, that's just coming together. We highlighted service channel on the earnings call and where they're at in their evolution for the last 2 years. We're starting to see Accruent start to change their growth rate. Gordian has been just an unbelievably star performer since we bought the company. So that set of businesses, we -- when you look at the number of facilities and assets that we monitor is in the billions, and the ability to monetize that sort of coverage, customers are looking for solutions that give them more productivity, understand their assets better. And that's an advantage even in maybe a little bit more challenging macro because people are really trying to understand their cost structure. So that -- the secular drivers around that business are in a good place, and FBS has really driven some real performance there. We made service channel dramatically more profitable. Net dollar retention across the Board is continuing to improve. And I think that speaks to how we think about software more broadly as to how do we continue to build. We did 2 bolt-ons for that business in the fourth quarter from a software standpoint to add either data or expansion of SaaS. And we're just going to see -- we saw -- we'll see high single-digit growth in that business this year. Software more broadly is going to continue to grow well. So we're -- I think it just speaks to the fact that our hardware/software strategy is working.

Any questions from the audience? Anybody have a question? So maybe we turn to cash flow, Jim. So working capital management has been a good contributor, solid free cash flow conversion. And you finished '23 with net working capital, 7.5% of revenue. So can you talk about how you see working capital evolving from here and whether you continue to see incremental opportunities for the capital improvement?

We have -- in the business -- in our operating businesses, and I think people know our operating model, we have 4 what we call core value drivers that we measure in every business: Organic growth, margin expansion, free cash flow and return on invested capital. And so every business is watching -- Chuck and I do an operating review with every business every month. We go through the working capital. It's in their incentive compensation. So the short-term compensation targets. And so working capital and free cash flow, I just think it's -- in many respects, it's the power of FBS. I always say if there's one metric that you can really look at from a working capital that really speaks to the quality and productivity of the business, it's working capital. I think Tektronix has improved working capital 12 years in a row as an example. So we think this is just an ongoing aspect of the business that responsible operators will continue to run their business more effectively. Now if you're growing 15% or 20% or something like that, then maybe you can't necessarily move working capital down, but that's where we'd look at free cash flow. So I think we're just in a great position to continue. I think we're at 7.5%, as you said, and a lot of people think that's all our software businesses. But the reality is our hardware businesses are in the 9-ish percent range. So I think if you took that number and compared it against peers, I think that number would stand out exceptionally well. So I think it speaks to the importance of free cash flow in the company. We find that is our currency for continued growth, and we've managed it incredibly effectively.

So I wanted to ask you, moving on to M&A, but let's start with EA, right? So EA has been part of the portfolio within PT for a couple of months now. So you can give us an update on the initial integration, how the early days are unfolding. You've got a 100-day plan, like how is it going through that? And you already told us it's going to be accretive -- told us it's going to be accretive versus nonaccretive. So that's good. So what's gone right so far?

Well, I think it starts with -- on January 3, when we closed the business and found out that the largest order in the history of the company, had happened in December. So that's pretty good. That's a good start. And so I would say 2 things that we really feel good about. We had our leadership conference last week, a number of the key EA leaders were with us. Had a chance to sit down and have dinner with the President, and he's incredibly excited. I was really excited that Fortive and Tektronix were the buyers. So the team is excited. That's a good starting point. We had our sales meetings at tech already, and our broader tech team is really excited about joining the EA team to sell these solutions into customers. So I would say those are 2 things that we're really excited about in the first 60 days. As you said, it's now accretive, given both the jumping off point from a margin perspective as well as the tax benefit now to the extent of about $0.08. So we're off to a good start. But a lot of work ahead. Probably most of the synergies on the sales side probably don't happen until the tail end of the year, given the sales cycle and things like that. We feel really good about the business. And as you said, it's accretive to growth and margins, and it's going to be, we think, a great addition to Fortive.

Jim, that's a huge part of the story, right? Scaling EA to leverage your sales for it, right? So how will that work? You mentioned it will happen -- start to happen as we look to the end of the year? But for instance, what would EA look like 3 years from now, like what's the vision for you guys?

Well, I mean, it's going to be very much an integrated solution with Tek. We'll sell independent EA solutions where customers want to do that. We'll see integrated solutions when possible. That business probably, given its growth rate in the sort of double-digit range is going to be increasingly a bigger part of Tek. If it were core this year, it would be about 200 basis points of core to Tek as an example, about 100 basis points of PT. So it's got a dramatic effect to terms of transitioning segment and Tek to even growth here. And the last thing I would just say is we really -- when we see the business the way it is, it's very complementary to the power strategy that we've had at Tek for a while. So that would be the other part of what's gone well is I think as we dug under the hood, now that you own the business, the consistency of what they're trying to do and what we're trying to do is really high.

And Jim, it's obviously pretty exposed in the EV space is Tektronix is like do you worry at all about sort of what's going on?

Well, that's why we tempered the growth number down. It was 40% for 3 years, we did take it to double digit. And so we sort of anticipated that EV wouldn't be as big a deal. But there's other pieces that are going to take over. Data centers and power storage and data centers and the efficiency of power in the data center is going to be a huge deal. There have been some estimates that 10% of energy in the world will go to AI data centers in the next 5 years or so. So the opportunity for us to be able to work with customers who are designing components and equipment for those places is really high. So it will -- EV is not going away by any stretch of the imagination. It's going to continue to grow. The order I described in December was from an EV player. So we're seeing the customers continue to invest, maybe not exactly at the rate of what we're seeing, but that's okay because these other aspects of the business are going to take over.

Can you remind me, Jim, just in terms of power supply, EA's market share? Like how -- because again, data centers are a huge deal. Basically, it's NVIDIA day after...

It is NVIDIA day, that's probably true. I think it's Fortive day too.

It's definitely Fortive day.

Every day is Fortive day. By and large, when we think about power supplies, where EA really is, is in that high power, bidirectional part of the market. It's probably the fastest-growing part of the market, but it's not the broader power supply market. There's lots of players who play within the broad range of power supplies. We like the place where our soloscopes play as well. That's really the power alley for us.

Got it. And then you seem very positive in the overall M&A environment during your Q4 call. So maybe talk about any changes you've seen with respect to the pipeline or valuations? Would you say you're just your normal optimistic self when it comes to getting M&A? Or is that more of a target-rich environment?

Wow, we just did 5 deals in the last few months. So it would be hard for me to sit not be optimistic, given 4 bolt-ons in the EA deal. So Andy, you know this well. We are always busy. What we found -- and we said -- Chuck and I were, I think, said a couple of years ago that we thought the M&A market needed 12 to 18 months for bid asks to get kind of in alignment, sellers start to and that's really was more about seller expectations coming down than anything else. We started to see more of that. I -- we're really busy, and I do think there's plenty of opportunity. That said, given what we've just done and the opportunity to integrate those businesses and do that well, we would be fine if we didn't do something for -- I wouldn't -- if we didn't do something for 12 months, that wouldn't make me feel bad at all either given the -- the number of things we've just consummated over the last several months.

And like as far as valuations go, PE, like what's going on?

Yes. I was talking to some folks over the last few weeks, who are speculating that with maybe the potential opportunity maybe to raise money that you might start to see some sales. We've seen some of that. So I think that's probably true. Still maybe the early days to find that as a trend. But I do think that prices -- people are starting to see things, most prognosticators think that this will be a better M&A market this year than next year or last year, excuse me, and that would suggest that I think that's more seller expectations than buyer expectations.

Got it. And then there's always a bit of a debate on how -- what type of deal you should or will do, right? So thinking about your 45% to 50% recurring revenue target, you're 40% today, you got a 20% software revenue target. I think you're at 16% today. How are you thinking about M&A and sort of achieving these targets?

It starts with accelerating strategy for us. And we talk about these 5 growth platforms, which are connected workflows. All of our M&A is going to go into that. When you look at what we just did, not to say past is always prologue. But if you look at what we just did and the deals we just did, we did 2 software deals. We did a data deal and we did 2 hardware deals. So a good mix, all in our connected workflows, all in those growth platforms that are at higher growth rates, great better margin potential in the future. For us, that feels like -- that is exactly right down the middle of our strategy. I think there's always sometimes when you do an EA deal and people say, "Oh, are you going to do hardware?" Then in the earnings call, I think we showed probation and service channel. And everybody said, "Wow, those deals -- those are great. You should do more of those." So I think what I would just say is when you look at what we just did, that really feels like it's right down the middle of what we want to try to do. And we feel we're advantaged to do that because it's within the construct of what we do well already today. We have great franchises from a brand perspective. We have deep domain expertise, relative to customers. And that really is how we get to higher returns and ultimately to really getting a better business over time.

Is there any difference in the valuation that you see out there? I mean, obviously, software is usually more expensive, but I'm talking about relative to sort of your targets and stuff?

There's always a mix. It would -- what's more important for us is can we get to the return hurdle? And does it accelerate strategy? Does it improve the metrics that are important to us around growth rates and margin expansion. Does it give us the returns we want. You're going to pay more for a recurring revenue software business. And I sort of heartened back to a business like eMaint, which we bought when it was making no money. So it was a small deal. So -- but that business is a 20-plus percent return invested capital now 8 years into the deal. So sometimes you pay a little bit more as an example for a software business, but ultimately, the returns in years 5, 6 and 7 are higher. Maybe they are in a hardware business where you're reinventing more of the revenue every year. So that's what -- we have to really be about value and return and the expected returns and the multiple, what we pay for, may move around a little bit based on that theory. But I think what we've demonstrated now and what you're starting to see, I think, now after being out 8 years and certainly doing a lot of things 4 or 5 years ago, we showed this at the Investor Day, but I think people are getting a better sense is that we're getting to those investment targets that we had said 3 or 4 years ago. And so as the ROICs keep moving up for the business, we're seeing those strong returns. You're seeing our ability to run the business as well. And I think investors get excited about that when they see those 2 things happen.

Pretty sure. So you mentioned at your recent earnings call that in the Fortive OpCo, you're using AI to accelerate software development and by 20% of the AI, it can have a greater impact on your all businesses as early as late '24. A lot of your peers, they talk about AI, but it's like more generic. You guys seem to actually, as we talked about a little bit with The Fort earlier, would be more focused. So maybe talk about how your OpCos are more able to quickly incorporate AI? And what could that really could mean for growth rate.

Well, I think it starts with what you said, which is given that we've had The Fort for so many years, we didn't start -- we're not jump starting any of this. We're sort of -- generative AI is relatively new. But the machine learning and other aspects of data analytics have been part of our workflow for a number of years. We've been doing machine learning as an example on churn in our software -- to look at customer churn in an effort to improve net dollar retention. So 3 years ago, we developed those models and then we applied that same model to our different software businesses. So our businesses are used to The Fort developing a model and then applying it broad in other businesses. That said, there is a new game in town with generative AI, and it's still very early days. Product development is one of the places, particularly in software development, where you can, a number of players have put out tools that can help accelerate those things. So we're probably earlier. But we think of it in the 4 blocks. We think about it in innovation acceleration through product development. We think about it in back office productivity. We think about it in deeper relationships with customers. So as an example, at Tektronix, we've got chat bots that are doing customer relationship work without a person involved, allows for our customer service people to be more focused on bigger customer improvements -- customer service improvements. And then finally, it's product acceleration, like how do we put it into products. That's where we're just starting, right? Censis has got a solution, Accruent's got a solution. We're helping customers use some of these tools and AI to really use our software better. That's where the growth is. The first 3 are more productivity and engagement. The fourth one is really more -- really growth-oriented. Very early days on that, but we're excited about it. We think there are real opportunities across the board to help Fortive become more -- give us more growth, but also help us give more innovation, deeper customer interaction and ultimately do that more productively.

Does it do it like in a way because you've had the same growth algorithm since you went public? Do you start seeing like that maybe can actually move the growth algorithm?

Well, I mean the growth algorithm was GDP plus to mid-single and 30 to 50 basis points of OMX to 75. I think I mean -- no, I mean, I think the one we've had has been around for a little bit. And I do think if you go out long enough, it is going to certainly start to have impact on those things as well. Too early days to sort of extrapolate what that might be, but it's certainly going to be positive for sure.

Okay. Last question for me. I asked this, I mean, last year in all companies. So what are the top 2 or 3 innovations and structural changes affecting your company over the next 5 years? And are there any emerging industry trends that are perhaps being overlooked in the current discourse?

Well, I would say we broadly -- the 5 growth platforms are really our way of trying to articulate to the market that these are the places where we think are going to drive growth for the business. And I won't go through all 5 because it's pretty well documented. The secular drivers that are attached to those, automation and digitization, labor shortages, productivity to deal with labor shortages, whether that's in the hospital, whether that's with electricians, broadly defined, and then the energy transition. And I think those 3 are really the 3 things that you combine that with the growth platforms, connected workflows we have, that is front and center where we're deploying our investments both organically and inorganically to build a premier company.

Awesome. Well, Jim, we very much appreciate your time. Thank you, take care.

Thanks.