Fortive Corporation (FTV) Earnings Call Transcript & Summary

[Audio gap] Being here. Our next presenter is Fortive. We have Tami Newcombe. She is President and CEO of AHS and PT segments. And we also have Elena Rosman, the company's VP of Investor Relations. And I think Tami will kick it off with some slides. And then we'll go to our fireside chat. Thank you. Thank you very much for being here.

Thank you. Thanks for having us. Welcome, everyone. Thanks for being with us today. I'm thrilled to be here. Jim, unfortunately, had a personal situation unrelated to Fortive, he was not able to make it. So you have Elena and I this morning, both for an opening presentation, and then I think we'll have a few questions -- time for a few questions. So I have the opportunity, the pleasure of being able to talk about our strong performance in Q1. our winning strategy and how our Fortive Business Systems continues to differentiate our performance. And a strong performance for Q1. If you listen to our earnings call just recently, you saw that we were able to exceed expectations across all 3 segments in both revenue growth, operating margin and free cash flow. Our winning strategy continues. We focus on connected workflows where we can drive value in our customer and end markets. My responsibility, as Andrew shared, is the Advanced Healthcare Solutions segment and the Precision Technologies segment. I'll go a little bit deeper this morning in those 2 segments. And then my peer, Olumide, leads the Intelligent Operating Solutions segment. So our Fortive Business System is how we have been able to differentiate our performance now 14 consecutive quarters in a row of revenue growth and 15 quarters of adjusted expanded operating margins. The Fortive Business Systems, when I say it's how we do what we do, is part of our culture, where every one of the 17,000 associates wakes up every single day thinking about how do we get better. It's a set of tools and it's a language and a language that allows us to cross silos, silos functionally, geographically across the opcos to continue to deliver these phenomenal results. Our confidence, coming out of Q1, has allowed us to raise for 2024 and reflects double-digit earnings per share and free cash flow growth. We talk about the market opportunities, and we've been very purposeful in the portfolio to align to higher growth secular trends. And one example of this is what's happening in -- across the world in the transition to a more sustainable future, decarbonization. It's driving the electrification of everything and this power ecosystem is a tremendous opportunity across all of Fortive. And when you're in the business of selling a bunch of equipment that you see on this slide, you love technology changes. And what you're seeing in power generation is moving away from fossil fuels to wind and solar and hydrogen and new forms of greener energies. This changes how the power is stored. You no longer can put it in a barrel, you need to put it into a storage system, an electronic storage system. The movement, the transmission of power is changing. You're hearing about microgrids, EV infrastructure, the build-out of our infrastructure in electrical transmission. And then how we consume power. The consumption of power is changing. In the data center, just massive growth in compute and communications pushed by artificial intelligence, every industrial factory is going through an evolution. What used to -- they used to take AC power right off the grid, they're all moving to direct current, DC factories, which means the motor drives in that factory have to change. E-mobility. How we power cars, trucks, trains, buses, boats, that's all changing. And then even in our homes, our HVAC systems, our heat pumps or we're going to plug in our robots, all of that is changing in how we consume and we manage power. And you look at the well-known brands, the preferred brands across Fortive, I'll start with our Fluke and the technicians that are installing the wind farms and servicing these end devices, they need new equipment, and that's where Fluke enables our technicians that service this amazing power ecosystem. Then you have the Tektronix, Keithley family of products. Keithley, acquired back in 2010, experts in power, both low power, high power. And engineers now designing these new systems, they need new test and measurement equipment. There's new semiconductor technologies out there called wide bandgap that are being used in all of these different electronics, and it requires the upgrade of new test and measurement equipment. And the newest to the family, Tek and Fluke are 75 years young, newest to the family is EA who's only been around 50 years. They have -- they are a best-in-class DC power supply test solution. And you'll see the storage systems that live in the power generation, the uninterruptible power supplies that live in transmission, and the power supplies that live in data centers and the batteries across e-mobility, that's where EA comes in and adds to the Tektronix portfolio. And then Qualitrol. For decades, Qualitrol has been monitoring the critical assets within our electrical grid, and they build the sensors and monitoring systems that will continue to grow and expand in this power ecosystem. So it's a tremendous secular trend. It's got a 20- to 30-year life span, and it will continue to innovate and bring great products out here. About 1/3 of the portfolio today is aligned to this secular trend and where we're seeing a lot of growth. It's also very diversified in the end markets that you go after because it touches many, many end markets. So I want to give some proof points that our winning strategy is turning into business results. And I've got examples here of Precision Technologies and in the Advanced Healthcare Solutions segments. Very different approaches in these 2 segments. So if I start with Precision Technologies, largely the brands and the operating companies that we started with when Fortive was formed in 2016, we've done in Precision Technologies is really implored strategies that align to these higher-growth markets, leveraged our Fortive business systems and the tools we've created that are driving innovation velocity. We talked in 2017 about the innovation at Tektronix around a platform strategy for oscilloscopes that has allowed the flywheel of innovation to continue, and they're now taking that strategy to software into Keithley systems. This has opened up a market for us of about $20 billion, and we've grown our recurring revenues in both services and contractual revenues within this segment, and we're up over 25% now. So this has largely been a story of organic SBS in innovation and now we've added on top of that the acquisition of EA, which just closed here in the beginning of the year, January 4th. If I move to the Advanced Healthcare Solutions segment, a very different way that this segment was built. If you go back to the spin-out, we had $170 million of revenue here in Fluke Health and Invetech. And so this is a story of very disciplined acquisitions, and we've built out a segment, RaySafe, Landauer, ASP, Censis, Provation, a set of companies that, first, our 75% recurring revenues, either SaaS or consumables, they are brands that are beloved by physicians and technicians. I had a chance when I started about a year ago in this segment and got to visit some ASP customers, and I have a photo of a nurse hugging a STERRAD machine. These are machines that keep our patients safe and are beloved by many in that field. This is about a $10 billion market -- addressable market today, we'll continue to expand that. But you can see here that we're delivering tremendous top line growth in this segment, and we still have runway to improve our margins here and we're targeted at getting those to the 30% range in the coming years. So exciting. What we've been able to look back and show that we can do, which gives confidence in what we're going to do in the future. So as I think about closing here, I talked about the strong performance that we saw in Q1, the confidence that we have in the full year. We're a $6 billion company today with a $60 billion addressable market out there. We're continuing to focus on our connected workflows and where we can innovate to drive new customer value as well as value back to Fortive and we see a path here of continued earnings per share growth, double that in the coming years as well as earnings. Tremendous opportunity, excited to be a part of it and to share with all of you. Maybe open it up for questions now?

Yes. Sure. So maybe the way we'll do it, Elena, we do have you, so maybe because we do have Tami here. The plan is I'll focus on PT and AHS and then maybe we'll go to a bigger picture. So maybe...

Maybe you can go big picture. We can do everything.

So why don't we start -- look, I think 1 area that sort of -- we've spent a lot of time talking about is software, right? It's now up to $1 billion in revenue, growing high single digit this year. So how do you think about the M&A strategy from here for this platform?

Yes. I'll give a couple of thoughts. Nothing's changed in our strategy around software. We -- the Fortive Business Systems is a dynamic set of tools, and we've created the Fortive Software Systems. So a big part of our software strategy is how do we grow that organically within the businesses that we have. And you think of the businesses that are pure software often forgot is Tektronix has the largest software development team, and they are also delivering innovation to the Fortive Software Systems. If you look at our funnel, if I were to open up the funnel at Fortive, you would see a really nice mix of software, hardware and data type companies that we're looking at. Last year, we had a good mix of acquisitions. We had 2 software, 2 hardware and 1 data. And our M&A strategy, it stays the same. I mean we look at companies where we like the market. We like what's happening in the market, the growth trends, like I talked about in power. We -- the company is best-in-class in the industry. It's accretive to us in our financials. And we think that as the owner, we're the best owner for that business.

If you look post-COVID, there was a spike in software valuations and they seemingly have come down sort of pre-COVID levels. But another problem we've heard is that a lot of these platforms have gotten a lot bigger during COVID because people sort of added to them. So do you guys feel -- one of the commentaries we've heard that some of the software deals have gotten sort of beyond these bolt-on sizes where they become so big that it's becoming a lot tougher to sort of consider them, all of a sudden they become a lot more strategic in nature. I don't know if you have any thoughts there.

Maybe I could just start. So the 2 software acquisitions that we did in the last 6 months were both bolt-ons and really niche applications that fit very nicely, one in -- Azima DLI into Fluke and the other RedEye into Accruent, where they had leading technologies that could be literally bolted on to our existing platforms. I think those obviously are smaller, Andrew and very much deliver on the return on invested capital targets that we have for smaller bolt-ons to get to a double-digit return on invested capital before 5 years. So typically, those smaller deals hit that target by around year 3. Larger deals, I think we've seen some of the software deals have certainly higher valuations that would probably push beyond our preference from a discipline perspective to stay within the return targets that we typically would target.

Excellent. So maybe we can go to PT, so not that much of a diversion. So on recent demand trends, book-to-bill of 1x in first quarter, expecting similar in second quarter, what are the areas where demand has already turned up and what are you still expecting to improve in the second half?

Specific to Precision Technologies?

Yes, that's right. Yes.

Yes, we did see the book-to-bill get back to 1:1. I think I'd start with what's been really stable in PT, and we've been purposeful about continuing to work our strategy here is our services. I mentioned 25% of the business is now services, and that stayed at very stable mid-single-digit growth for us, which gives us a great foundation. In the sensing technology group, we expect the orders picture to be back positive this quarter in Q2. And it's mixed in the sensing technology group. We're seeing great demand in the electrification space and also in safety. So we've got sensors that go into critical care environments. We've got sensors that go into the food and beverage kind of safety space, that has remained strong. We're still getting back to normalization, especially Europe industrial sensors. But overall, they'll go positive in Q2. And then Tektronix, we're expecting to go positive in Q3 from an order standpoint. And for Tektronix, it's -- I mentioned service, really strong. We've had the green shoots in the Keithley and Sonix business. These are systems that go into the build-out of the new memory that is -- it's called high-bandwidth memory, HBM, that is needed with the NVIDIA chips as we build out all of this compute. So we had really strong demand there in Q1. This quarter, Q2 and Q3 are kind of mil/gov quarters for tech. So we need to see the spend come. We've just got budgets approved. We're starting to get word that budgets are moving now in the mil/gov space, which is a big Q2, Q3 for us. And then after that, it's the broad base of business, so our channel is normalized as they're selling through, and we're seeing good point of sale, they're replacing orders. And then the last piece to come back is the big R&D projects, big projects, EA has a lot of very large capital projects that we've got to see that come back as we get through the year.

And can you just remind us on Keithley because I think Jim was talking about an 8-figure order. How sustainable, how excited should we get about Keithley and semiconductors and their exposure?

Yes. There's 2 parts to Keithley. So when we talked about that order, it's specific to the piece of Keithley that systems that goes into production. Overall, in our business, it's a relatively small part of the business. The piece of Keithley that is the R&D engineer and sits on the bench. That part of Keithley is tied directly to the power wave that we're seeing and very, very strong in the instrumentation space.

And is it -- do you feel that these trends are just -- and I appreciate [indiscernible] could be choppy, but do you feel there is a good runway for Keithley?

There's an excellent runway for Keithley. The production piece of -- so Tektronix is predominantly playing in the R&D. This production space, it does get to the build-out and...

Yes. And just thanks for bringing it up. So as I said, just it's sort of hard for us looking from the outside. So I think outlooks from some of the Tektronix competitors vary a bit. I think Keysight is saying, sequential orders improvement in the second half; National Instruments, orders to turn up year-over-year in December '24 at the earliest. Can you just remind us about how is Tektronix different? Because I think that's -- these are the 2 companies everybody brings up and maybe you can throw [indiscernible] there as well.

Yes, it makes sense. So all 4 companies play in test and measurement, so it makes sense that we talk about them together. Tektronix shifted a strategy back in 2017 and moved more towards this power ecosystem and the communications piece in wired communications, which is high-performance compute, driven by AI. That is a very different profile in end market than if you were one of our peers who has a large investment in wireless. And there, you're waiting for significant infrastructure upgrades. We're in 5G, you're waiting for 6G, 7G. Those are -- and we consciously decided not to do that. Then in the span of product realization, you start in sort of research, development, you go into some validation phases and then you go into production. We are weighted much heavier in the research and R&D and into validation. We have partnered closely with National Instruments over decades. They play more in the production, the production space. So different parts of the workflow, different end markets.

No, this is just terrific. I really appreciate it. And can you just sort of add Tek through tariffs and we're back to sort of seemingly trade wars. How has supply chain and manufacturing footprint of the business evolved in the past, I guess, 6 years?

For past 6 years, yes, we're -- and you said specific to Tek, but this is sort of broader than the sort of the industry.

Yes, yes. I just remember Tek was always I remember going Shanghai, and I know that this was like the crown jewel for manufacturing for both Danaher and Fortive over the years. So...

Yes. Correct. Yes, it's still remarkable...

That's where my anchoring come from.