Fortive Corporation (FTV) Earnings Call Transcript & Summary

Hello. My name is Kevin and I'll be your conference facilitator this afternoon. [Operator Instructions] I'd now like to turn the conference over to Ms. Elena Rosman, Vice President of Investor Relations. Please go ahead, Elena.

Thank you, Kevin, and thank you for joining us on today's call. With us today are Jim Lico, our President and Chief Executive Officer; and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. We'll spend about 15 minutes discussing details of yesterday's announcements, which are posted to our website. We'll then conduct a question-and-answer session. We have prepared slides to supplement our remarks, which are posted on Fortive's Investor Relations website. Our presentation contains certain non-GAAP financial measures. Information required by Regulation G is available on the Investors section of the website at fortive.com. During the call, we will make forward-looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and actual results may differ materially from any forward-looking statements that we make today. Information regarding these risk factors is available on the forward-looking statements page of the presentation as well as in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2023. The -- these forward-looking statements speak only as of the date they are made, and we do not assume any obligation to update any forward-looking statements. With that, I'd like to turn the call over to Jim Lico.

Thank you, Elena. Good morning, everyone. I'll start on Slide 3 of our presentation. As you know, yesterday afternoon, we announced a number of deliberate steps to further accelerate our strategy and ensure consistent value creation. First, we announced our intention to separate our Precision Technologies business into a stand-alone publicly traded company through a planned tax-free spin-off. The spin-off would position Fortive and the new PT company as 2 separate scaled companies, each with a focused business model and its own clear growth and capital allocation priorities, offering distinct and compelling investment profiles. Second, in connection with the spin-off, we also announced exciting leadership changes aligned with our internal talent development and succession plans. And third, in line with our commitment to driving consistent value creation we announced that Fortive is prioritizing return of capital during the transition period before the spin-off and intends to deploy the majority of our free cash flow during that period to share buybacks. We -- we have strong underlying financial performance in our businesses, and we're confident in our outlook for the remainder of the year and most recent guidance. We have deep conviction that the separation into 2 independent publicly traded companies is the right next step in Fortive's evolution. I'd like to spend our time this morning providing additional context on each of these announcements, and then we'll open the call up for your questions. Turning to Slide 4. Over the last 8 years, we've invested in our key growth platforms to create a more durable, higher-growth company, with an intense commitment to innovation, delivering continuous value for our customers and sustainable growth across Fortive. Our consistent execution has resulted in strong double-digit adjusted earnings and free cash flow compounding, demonstrating our ability to profitably evolve our portfolio of businesses. However, the value inherent in Fortive has not been reflected in our share price. Further, we also recognize reducing complexity of our portfolio allows for focused execution and clarity of strategy. Following the spin-off, Fortive now with 50% recurring revenue and 25% software business is even better positioned to accelerate growth and consistently grow earnings and free cash flow. The spin-off of PT will allow the new company to focus on key secular trends, including power and electrification and aerospace and defense, driving strong through-cycle growth. Each company will thrive focused on its strengths with robust financial profiles and strong investment-grade balance sheet, allowing for differentiated investment opportunities and tailored capital allocation strategies that are based on the objectives and business needs of each individual company. We are confident that this plan will position each company for the future and to deliver enhanced value for all of our stakeholders. Turning to Slide 5. We also announced planned leadership changes aligned to this transition, advancing 2 strong internally developed executives to lead the new companies. The Board and I have always had a strong focus on developing the next generation of leaders at Fortive. Our long-standing succession process ensures a relentless dedication and commitment to continuous improvement, which is inherent in our strong culture and proven business system. This is a terrific moment in time to share that succession process. Included in our announcements is my planned retirement upon the completion of the spin. At that time, Olumide Soroye, currently President and CEO of our IOS segment will take over as Fortive's next President and CEO. Olumide brings more than 30 years of experience and expertise in the development of market-leading software and workflow solutions across multiple industries and has driven impressive results at IOS, enhancing the financial profile of the segment. Tami Newcombe, President and CEO of our PT and AHS segment will assume the role of President and CEO of NewCo in connection with the separation. With over 30 years of experience, Tami has demonstrated a bold vision and rigorous customer-centric approach, contributing to extraordinary results in Precision Technologies and more recently in Advanced Healthcare Solutions. Given their expertise, strategic and operational achievements and passion for FBS, the board and I have the utmost confidence that Olumide and Tami's continued leadership at each company will result in significant and consistent value creation for the years to come. Additionally, Chuck McLaughlin announced that he will retire as Chief Financial Officer by the end of the first quarter of 2025 after a successful 9 years at the company. As we transition to new leadership, and the separation, we will continue to operate as 1 Fortive with our strong values and inclusive culture. Between now and the spin, Chuck and I will be dedicated to ensuring a smooth transition to new leadership. Let's now take a few minutes to focus on key investment and financial highlights for each company following the expected separation starting with Fortive on Slide 6. We -- Fortive will consist of the portfolio brands currently operating under Fortive's Intelligent Operating Solutions and Advanced Healthcare Solutions business segments. Its market-leading portfolio, which includes strong software content and capabilities, delivers productivity, safety and reliability value for customers across industrial and health care operating environments. After the separation, Fortive is expected to be a consistent mid-single-digit grower with more resiliency and less complexity and a balanced capital allocation approach using both organic and inorganic investments to leverage its domain expertise to accelerate its growth and enhance its already attractive base of 50% recurring revenues. Given the demonstrated resilience of both IOS and AHS portfolios and proven ability of FBS to drive innovation, Fortive will be well positioned to shift its focus from accelerating through cycle growth to driving consistent total growth, all while consistently growing earnings and free cash flow. Importantly, Fortive's scale and strong free cash flow generating profile allow for a disciplined and balanced approach to capital allocation between M&A and return enhancing share repurchases, which I'll cover in more detail shortly. Turning to Slide 7. PT NewCo will comprise the same leading brands that currently operate under the Precision Technologies segment and will continue to benefit from FBS' ability to drive growth, innovation and value. As a stand-alone company, it will be poised to capitalize on powerful secular trends across key end markets by leveraging its mission-critical technologies in test and measurement, specialty sensors and aerospace and defense subsystems. With a focus on key growth areas, including electrification, AI and data centers and aerospace and defense spending, PT will be positioned to deliver mid-single-digit through cycle growth. NewCo will benefit from seasoned FBS leadership and innovation that will power its earnings flywheel. While capital allocation policies will be approved by the NewCo board, the business will be able to leverage its industry-leading free cash flow generation to focus on returning cash to shareholders, while pursuing selective M&A opportunities aligned to its core expertise and secular growth drivers. Turning to Slide 8. As I mentioned earlier, between now and the completion of the tax-free spin-off Fortive expects to utilize approximately 75% of our available free cash flow to fund additional share repurchases. We believe proactively repurchasing shares is the most disciplined and highest value enhancing deployment of capital we can do as we work to execute the spin. Going forward, following the spin, Fortive will take a balanced approach. Its prioritizing M&A strategy will leverage Fortive's existing domain expertise across leading growth platforms to accelerate strategy and deliver superior returns. The focus will be on enhancing recurring revenue growth and free cash flow, leveraging FBS to drive accretive cash returns. Share repurchases will also be consistently utilized to help drive returns with a particular preference for action when there is dislocation in our valuation. Finally, it's expected that Fortive will continue to pay a modest dividend that grows in line with earnings and free cash flow over time. Regarding the transaction overview on Slide 9. I'll highlight that our intent is for the separation to be affected through a pro rata distribution of the shares of a newly formed entity holding the company's existing PT businesses to Fortive shareholders. The transaction is intended to qualify as a tax-free spin-off for U.S. federal income tax purposes. We expect to complete the spin-off in the fourth quarter of 2025, subject to the satisfaction of certain conditions as outlined in the presentation and our press release. Over the coming months, we'll be providing additional financial and transaction details. In addition, we are planning to present the strategic and financial outlooks for both companies and investor conferences next year. Before we open the line for questions, I'll summarize the information on Slide 10. Our outlook for the third quarter and full year 2024 remains unchanged from what we communicated in our second quarter earnings call. I couldn't be prouder of what our team has accomplished, since Fortive's launch in 2016. We are delivering differentiated multiyear financial results as you see reflected in our track record for the last 5 years. At the same time, we believe the opportunity to create 2 separate public companies with distinct focused business models, provides the strategic clarity necessary to unlock the long-term value for our stakeholders and the time to do that is now. And finally, the impactful contributions of Olumide and TAMI have set both companies on a path to success, which gives me great confidence in the future. With that, we will go to questions.

Thank you, Kevin. We will now open the line for questions.

[Operator Instructions] Our first question today is coming from Julian Mitchell from Barclays.

And congrats on getting all this news out there yesterday. Maybe just a first question would be around when we're thinking about the spin-out of the NewCo, I suppose, to what degree should we use the Vontier spin as a kind of template or placeholder in terms of elements like the scale of stranded and stand-up costs and also the leverage profile of Vontier at the time of its spin?

Julian, this is Chuck. Vontier is probably not a bad starting point for the scale like the stranded cost, although we'll work hard to minimize those even more than we did in Vontier. From the leverage point of view, not the same Vontier came out more leverage. We expect to set both of these companies up with roughly the same leverage profile, somewhere around 1.4x to 1.7x turn net leverage coming out. So they both have investment grade coming up. So that's a little bit different in that regard.

Julian, I would -- the only add I would have is maybe more -- if you think about Vontier, great business, great, a lot of similarities in terms of great brands and such great capability. But they did have the EMV headwind that they had to sort of address within the business at that time. I think the opposite here with PT, we've got real strength in electrification. We've got real strength from the investments that are being made to modernize in the defense industry. Those are real tailwinds. And we should expect that much of the technology markets that have been a little slower here at Tek and within sensing, should start to -- I think every anticipation is they're going to improve by the tail second half of '25. So I also think, just as Chuck said, relative to the cost, but also the business should be seeing some tailwinds as well as they spin out into their public life.

That's helpful. And then just my follow-up would be Jim, you talked at the beginning around the -- one of the big rationales for this move being increased simplicity and reduced complexity at Fortive. But I suppose investors often would say looking at the RemainCo, FAL, AHS and then the Fluke and associated brands. That still looks sort of relatively, I suppose, complex from the outside without obvious overlaps perhaps between those 3. Just wondered sort of how we think about the scope for that portfolio evolution at the RemainCo and why you would characterize that RemainCo business mix of kind of noncomplex.

Yes. Well, I would say it starts with strategic clarity around capital allocation. Obviously, we've said in the public remarks, we would certainly have a more balanced approach on the M&A front, very focused on recurring revenue. So I think from a strategic clarity perspective, their ability to sort of articulate exactly how they're going to build the company going forward, is really around the business model and the business model around recurring revenue. So I think that's #1. I think #2, is where they play. If you think about -- I mean, sometimes I think when people think of Fortive, they want to take all the operating businesses, but if you just step back and say, what is Fortive going to do when we spin out? It's -- the logic there is really -- their growth strategy is around durable streams of revenue, software, consumables, subscription services, the recurring revenue and the capability to build recurring revenue businesses is a common capability. And then more broadly, where they play, they really deliver productivity, safety and reliability solutions to industrial and health care companies in operating interest -- in an operating environment. So whether it's -- no matter where it's at, you're really talking about -- I've always said our health care business is more industrial health care. We're helping the hospital deliver greater value through safety and productivity and reliability. That's no different than what we're doing in the other pieces of the business as well. So I think the strategic clarity, the simplicity of the business and the business structure is really as well as just a common set of solutions that go after customers, all of those lead to that comment around, I think, simplicity, Julian. And we feel -- I know Olumide and the team are really excited about the ability to do that in a more common way. And I think that really gives them the strategic clarity that I think is going to be really exciting for investors. And when you start with the financial profile of the business with 50% recurring revenue, the gross margin is over 65% in the earnings capability of the business, I think you get even more excited about what that business can do.

Your next question is coming from Andy Kaplowitz from Citigroup.

Jim and Chuck congrats on your eventual retirement.

Thanks, Andy.

Thanks, Andy.

Can you give us a little more color on how you might deploy capital before this spin-off? Is there a thought process to accelerate the timing of repurchases? Do you have any plans to maybe frontloaded? And then any further commentary regarding the potential for that $450 million in '25. The Street is obviously lower, but is that kind of number still on the table, if you accelerate your purchases with the obvious understanding that by the end of '25 the company and its current form wouldn't exist.

Andy, we've talked about or signaling 75% of our free cash flow is going to go towards share repurchase. I think the front-loading of that would if we see some dislocation that's something we might consider and look at. So we'll look at all those options. But we've given you a lot to think about today. And so let us just get through this and we'll move forward. But when you look out over the next year, we're committed to 75% of the cash flows going to repurchases.

And Andy, I would just say on relative to -- we'll provide an update as we're closer to the start of '25 on what the guide might look like from an EPS perspective. But what we can say, I know for sure is that we'll grow adjusted earnings on a double-digit basis and the share repurchases will only -- will certainly be -- will help that as well.

Helpful. And then, Jim, the pause on M&A until the transaction timing late next year in your commentary in the release, regarding balanced capital deployment between M&A and repurchases, it seems like a relatively significant change in deployment strategy. Is that really the intent even after this transaction to be relatively more balanced between M&A and repurchase?

Well, I certainly think between now and spin, I think what we want to really do, Andy, is to make sure that we give investors certainty as to what Fortive is, how we're going to allocate capital between now and -- now and the spin. And as Chuck said before, we believe that both businesses -- we believe deeply both businesses should have investment-grade balance sheets going forward. So we really want to provide that certainty as to how we're going to deploy cash between now and the spin. So I think that's #1 and certainly a primary use of free cash flow, really the use of free cash flow, beyond the dividend and maybe some debt repayment. So that's #1. Relative to how we think about Fortive going forward, it is more balanced. I think when you think about compounding, our ability now with the growth rate that we'll have, the organic and total growth rate, our ability to compound off that with the high gross margins and high EBITDA margins. plus some M&A plus share repurchases really is a more balanced and we believe more effective way to deploy capital going forward. So we will see a change from where -- what you've seen, although I would say over the last couple of years, while we've been opportunistic, we have bought back a decent amount of -- we've done a fair amount of share repurchases. But we definitely think a balance here is something that's really important. And I think we definitely are excited about the fact that, we think this strategy unlocks the value that we believe we've built inherently in Fortive, and we think that can be reflected in the share price with a more balanced approach to M&A here at Fortive -- or excuse me, a more balanced approach to capital allocation.

Appreciate all the color.

Your next question is coming from Steve Tusa from JPMorgan.

Congrats on a lot of heavy lifting in the last 8 years or so. It's been -- the portfolio is definitely in better shape than it was back then. So congrats on that run for sure. The -- just the technicalities around the SpinCo, does the structure preclude you from doing anything strategic with that business or that business doing anything strategic for itself, whether it's a merger or asset sales or things like that, from a tax rate perspective?

Well, I think first of all, if you're -- if the question is more deeper, we certainly would -- we are very intentional about the spin with NewCo for sure, we deeply believe in the strategy, and we can talk more about that, Steve. But I think at the end of the day, we believe deeply in the spin. We would expect some people to sort of want to discuss other options there. We're always about getting really optimizing shareholder value here. So we'll certainly listen to those things. But there's lots of impediments to that, for sure. We certainly -- as you can imagine, in a decision like we took and announced yesterday in a variety of ways, there's been a lot of thought and process gone into that, a lot of our advisers as well. So we feel very good about the strategy we outlined yesterday in our press release and certainly with you all today. So we feel very good about the direction and we're going to run really fast and really hard down that direction. But I wouldn't be surprised if somebody did come in and say some -- offer some things, and we'll listen to it. But at the end of the day, we won't be distracted by what we believe is the best course of action, and let's see where that goes.

What are the impediments that you're talking about?

I think sometimes you think about -- we've got a -- just as an example, we've got a really low tax bases in some of our businesses. And so we would need to get paid for that. So -- and so this tax-free spin is a really good way to unlock value, and we feel really good about, where that business can trade at. And so there's a tremendous amount of value to be unlocked at PT, and we would expect that anyone who wanted to come in and do something differently would have to pay well beyond that unlock value, and we'll see if anyone does that.

And is the tax rate for PT consistent with current -- Fortive's current tax rate? And is that transferable to any buyer if they want to merge or anything like that?

Steve, I think the -- from a tax planning standpoint, there's a lot of complexity to that. There's no change to 2025. And I think when -- so it's early. And so exactly -- do they end up exactly the same unlikely. But I think the sum of the parts, I would expect the same tax liability. Is it transferable? Every entity does tax planning differently, and it would -- that would depend. But I think that speaks to the impediments that Jim is talking about really just the tax leakage is to be pretty big on some of these businesses.

Okay. One final one. Most importantly, where is Elena going? To which business?

The organizations going forward have not necessarily been determined, but I would -- I suspect if Elena will be at Fortive. So...

Your next question is coming from Nigel Coe from Wolfe Research.

So yes, congrats on all the moves here. So look, Jim, I just wanted to kind of -- you just is -- with [ you in ] some degree, but there are some out there the kind of puzzle why Fluke and Tek don't belong together as more sort of an industrial cluster. And it sounds like it's more a case of recurring revenue software makes sense to be together, Tek a bit more cytical, different profile. I just want to make sure that's the answer. And then just to kind of put a finer point on the SpinCo. Is this a clean spin of PT as it is today? Could there be some assets transferred from IOS and maybe AHS into or wherever that vehicle. Just -- just curious if it's a straight PT spin. And have you considered alternatives? I mean, you please seem to have shut down RMT, but splits versus the spin was that also in consideration as well?

Yes. A lot to unpack there. Let me take them in both. #1, I think from -- from we spent a considerable amount of time over the last several months evaluating opportunities and options for what we do. And I think at one point, we had 10 different scenarios that we work through. So these situations always have that. When you look into Fluke and Teck, I think it's really more important to sort of think about one is Tektronix is a wonderful brand, great technology, but plays in markets that are not as geographically diverse. They're really the innovation centers of the world and very focused on the R&D engineer for the most part. So a more focused business, and this is traditionally and historically not been as durable as Fluke. When you look at Fluke, a great business, superior free cash flow. And in many respects, it looks like our recurring businesses, right, high gross margins, high operating margins, Rule of 40 business plus. So the character of the 2 businesses, both great businesses, but different. And I think they fit well with the future of both businesses. So when we think about Fluke's presence, it's free cash flow, and really, when you think about the geographic -- geographic expansion of the business, when you think about the markets that Fluke plays in, they've been the sort of starting point of almost all of our recurring revenue. It was from Fluke that we've got eMaint. It's from Fluke, we started with [ IFC ] and Intelex. It's from Fluke that we started in FAW. In Fluke Health, it's where we started with Landauer. So the breadth and depth of Fluke's business around the world and in so many different markets, gives us tremendous domain expertise in which to build our recurring revenue platform. So that's the strategic capability of Fluke, and it plays in a very important role going forward. And it financially fits extremely well with the businesses that are in new Fortive. Relative to transaction and Tek is a great business, and I really think when you think about PT going forward, more of a through-cycle grower, the markets they play in are outstanding. They just have a little bit of cyclicality to them, right? We plan electrification. We plan mobility. We plan AI and data centers. These are great markets, but they do -- because their technology investments, customers tend to make those investments at a slightly more volatile way. And we think where PT is going relative to the direction of the markets, it's going to be a very investable business for folks who really will get excited about that. And there will be a lot of them. Relative to the transaction, the spin versus split. We really think the spin is the best direction here. It provides more certainty. It gets us to a destination faster. So we really chose to spin. We have obviously a lot of advisers on this. We ourselves have been to these decisions. We feel really good about the spin decision here relative to the best way to unlock value here. So -- and again, it doesn't preclude anything coming in that people want to talk to us about. We expect those conversations to happen, but we really like the spin to unlock value here. And that's where our effort and energy is going to be over the next several months.

And Nigel, just to be clear, it is a straight spin of the PT segment. We don't expect anything in and out.

Yes. Chuck, maybe -- I know it's early days, but -- can you put some boundaries around public company costs, maybe the one-off transaction costs we should expect and the tax kind of structure does breaking apart the company sort of damage the sort of the tax efficiencies you've created?

I expect the tax efficiencies to remain largely intact. I think that's the easiest one. I think Julian asked about similarities to Vontier. That's probably not a bad place to start, although we like to do better. And so I'd expect us to try and have aimed for West stranded costs than what we saw in Vontier and which were minimal. And from the onetime cost, not really, there's a lot of things, early days to put a number on that. But it will be consistent with what we saw in there or what other companies see and we would expect to look through that, although we're always trying to minimize cost and maximize cash flow, so you can count on us to do that.

Your next question is coming from Joe Giordano from TD Cowen.

So I think like if you hold investors, like a lot of the reason for the some of the lack of an unlock of value is more like strategic and on a perception of M&A. So I'm just curious when you thought through this, like would the outcome have been tremendously different if you just kept the business the same? Announced the leadership transition and said that, hey, the next $2 billion of our -- of our free cash flow is going to go to buyback space. Like we -- there's a lot of examples of companies out there that have businesses that don't necessarily have like operational synergies, but the stocks have different valuations. So just curious as the thought of like, could we just keep the business together and announce kind of the same changes without bringing the company up?

Well, obviously, we evaluated all kinds of options, including what I would call the option you described or maybe more like a status quo option with some slight changes to it. We got to the through intense assessment and dialogue and debate with our Board and with advisers, we got to the conclusion of this being the best I would say the 2 principal ways to think about that are we're unlocking the value of the growth capability of the 2 businesses, 1 being a very strong growth company, high recurring revenue and the other being a through-cycle growth company. And I think as we've had not only our own evaluation, but conversations with investors, we always get into the conversation of why isn't the recurring revenue making you more durable? Or where is the cyclicality. And now you have 2 choices. You have very investable, great businesses, great financial profile, wonderful opportunities for capital allocation in ways that unlock value. And you have those 2 choices. And I think that that's certainly what it comes down to and where we got to. And we're really excited about it. And we happen to have 2 outstanding leaders who know how to run those kinds of businesses, right? Tami has come up through the ranks at Tektronix. She's run PT for several years. She understands those businesses. She's accelerated innovation in those businesses and knows how to unlock value the way I just described. Olumide comes from the world of recurring revenue. He knows how to drive at -- those levels. And so we also have 2 leaders perfectly fit for the spin. So the stars are absolutely in alignment relative to the strategic intentions here and -- or the strategic rationale rather as well as the leadership to be able to run those things to maximize value. That's, I think, what -- when we get to the final assessment of everything with us and the Board and everybody, we're incredibly excited about what the future can hold for both businesses.

And then just, correct me if I'm wrong, it sounds like the strategy at RemainCo is fairly similar to the strategy of current iteration of Fortive. One like, is that a fair statement? And if so, like what gives you confidence that, that strategy works better in this iteration of the asset base? And then, Chuck, I don't know if you mentioned, but any thoughts on the capital structure and the debt allocation to either of those vehicles?

So first of all, I would say it is different. I would say there's 2 things. One is you're at 50% recurring revenue here and the domain expertise that we have in those businesses is going to accelerate recurring revenue and the focus organically and inorganically, as we said in the prepared remarks, would be focused on recurring revenue. The capital allocation strategy for Fortive going forward is really a more balanced approach and we think we can unlock tremendous value with that balance. And you get the compounding of EPS and free cash flow, which, quite frankly, we've done an excellent job of doing already. We'll be able to unlock that at an even better pace. As you know, we've averaged 14% EPS growth over the last 5 years. We've averaged 17% compound annual growth rate on free cash flow and we think this new Fortive can do those kinds of things and better with a higher organic growth rate with a higher total growth rate. So strategy -- certainly, a lot of the things as part of the strategy are going to stay the same. We're going to accelerate innovation. We're going to continue to apply FBS to drive our commercial capability. But there's some new here, too, and that's really important. And I think on the PT side, as I said, they're going to return more cash to shareholders, most likely, and have a through-cycle growth rate and investment that plays with that. And I think we've got 2 great very investable businesses to do that. And there are differences from where we've been in the past. Chuck?

And on the capital structure, as I said before, both are going to -- we're aiming for investment grade, Unlike the Vontier spin, we're not going to lever up on the NewCo. We were targeting with the share buybacks some delevering between now and spin. So the company should come out with net leverage around 1.4x to 1.7x. So that's what we're expecting for both companies.

Your next question is coming from Andrew Obin from Bank of America.

Congratulations on all the hard work getting done. Just a question. How do you think about the Board composition for Fortive and the SpinCo and specifically for Fortive, a lot more health care, a lot more software. Do you think the existing Board is up to the task? Or do you need -- do you think because the weighting of the business has changed quite a bit. It's sort of less industrial, you do need new Board to sort of think about strategy differently?

Well, I think we've got some -- we have a great Board, and we'll -- but we're always evaluating new opportunities. We're going to lose the Board member in a year, that would be me and add Olumide. So I think you'll get more software and experience in Olumide. So that's a net add for sure. And we'll have -- we'll always evaluate where we have new opportunities for board members. We do that on a regular basis. Relative to NewCo cohort, we've got through that process. Tami and myself and will recruit a chair and then the 2 of them and with some help from our current Board members, we'll help them recruit a Board. And that -- we've been through that process. I think it's an exciting company. I wouldn't anticipate any challenges finding folks, who want to be a part of that -- part of the Board. So we've got 2 really exciting companies here. And I think the clarity of strategy here is going to give us even better opportunities to bring great Board members. But I would just -- Andrew, we have built a board who has tremendous software experience. A number of folks have a good health care experience as well. Dan and Alan, obviously, from the Danaher days and Wright Lassiter. So we've got good health care experience as well on the Board. And if I'm speaking for the Board, I would say we're always looking to see where we -- that's why we do a Board assessment every year to see what new skills we'll need. And over time, we'll always think about adding folks who can be additive to our strategy.

And then just a follow-up question. And I appreciate your frustration with the stock valuation given the growth parameters and gross margin of the businesses. But some of your peers have gone a route of sort of unlocking value through sale of businesses. Why not do that, why break up the company?

As I said previously in a couple of versions of the same question is we evaluated a number of ways to unlock value. We think this is a great way to do it. And we -- a lot of those things have lots of implications that having the experience of 20-some years of buying and selling and spending and those kinds of things. We know the pitfalls of some of those things. And so we will run very hard towards the spin, as I said before. That doesn't preclude anyone from doing something, and that's always a possibility, Andrew. But we really believe that we've got a very investable business with great brands and the strength of the strategy, as I've articulated already, and we think that's got tremendous ability to unlock value.

And I appreciate how much thought and hard work in to making this decision. Congratulations.

Thanks, Andrew.

Next question is coming from Jamie Cook from Truist Securities.

Congratulations. I guess just 2 questions. One, understanding over the next sort of 18 months, the priority is going to be buying back stock. I'm just wondering, being on the sideline for -- sorry, the next 15 months or so, what that sort of means about your view on sort of the M&A pipeline? Did it disappoint relative to your expectations? And just how some of the larger acquisitions like EA are performing relative to your expectations? And then my second question is, obviously, a nice positive that you guys reiterated your guide today given the macro still seems to be fairly mixed or challenged. Understanding you reiterated your guide, is there anything different in terms of how things are performing, even though you're reiterating your guide some businesses performing better or worse relative to expectations, understanding you're still getting to the same point.

Well, thanks, Jamie. I think, #1. We -- maybe the -- maybe on the second part, just relative to where we think things are at. Obviously, we reiterate our guide. I won't get into too much detail. September is always a big month, but we obviously reiterated, I wouldn't say we're seeing too much different than what we've seen. So consistent conversation from our Q2 call, is probably where I would leave that. And as we said, we reiterated both the quarter and the full year. On the M&A pause, first of all, I think the time frame will go quickly. I think my experience of doing this is that when we say a certain amount of time in 12 or 15 months, whatever, it seems like a long time, but it's here before. And in M&A terms, that's not as -- with things that typically take 3 to 4 to 5 months anyway, that's not a tremendous amount of time at the end of the day. And we know the pipeline, quite frankly, while it's been full, the transaction activity is still -- in terms of numbers is still remain pretty slow. And I think that has to do with buyer and seller expectations still that we've talked about over the last couple of years here, remaining different in a number of markets. So there's been some ramp-up of M&A activity. But there's no -- there's been no ground swell. So we'll continue to cultivate. We'll continue to talk to folks. We won't shut down, but we will take a pause here for sure, and we feel fine with that. And relative to EA, I think consistency is what we talked about and very consistent with maybe the conversation around technology markets, we think these markets are really strong long term. I think we believe in electrification. We believe in mobility, but they are taking a pause. And I think you've seen some of that certainly from some of our peer companies as well. But we think the long-term nature of where EA plays, the strategic rationale of its importance, it's strength of technology, it's breadth of solutions and its ability to link with Tektronix. All of the strategic rationale is absolutely there. And when these markets come back, we'll be well positioned to take advantage of them.

Next question today is coming from Joe O'Dea from Wells Fargo.

I wanted to ask about the recurring revenue in sort of RemainCo Fortive. And just as you think about the growth profile of the business, can you elaborate a little bit more on how you think about the recurring portion versus the nonrecurring portion? And then any details around that recurring portion, it looks like roughly half software, half non-software. But if you can explain that non-software piece a little bit and growth there versus the software side?

Yes. The -- the biggest remaining part of the recurring revenue is consumables, and that's principally in health care, right? So that's an ASP and at Fluke Health, those are the 2 principal areas of consumables. And they're growing. I would say the software by and large, is high single-to-low double-digit growth and the consumables is in the mid- to- high-single-digit growth, so both very good. So you take that sort of recurring revenue number and think of it as a high-single-digit growth part of the portfolio going forward. And -- we feel really good about our ability to continue to build on that, too. So I think when we look at the overall recurring revenue, as we've said for Fortive since we started getting into recurring revenue, half a decade ago, it would always pull up the growth rate of the overall company. And the advantage of that is it's now 50% of the business rather than 35% of the business. So the ability to make meaningful impact in Fortive in terms of its overall growth rate is 30-plus percent higher than it is in today's Fortive structure.

That makes sense. That's helpful detail. And then also just in terms of leadership plans, can you talk about the logic around when AHS leadership moved to Tami now that will eventually be under Olumide, what your thinking is around the timing of that transition and giving him some runway with sort of oversight of that business before the spin takes effect?

Yes. Well, we have -- obviously, we have a great transition plan with Tami, Olumide and myself. And we'll transition the health business to Olumide at the start of the year. And he and Tami will work the transition. We found in our -- over time that it's clear that the opportunity for them to sort of -- for Olumide to learn the business, while Tami continues to run it as a good transition. And Tami will be full-time sort of PT starting at the beginning of the year and focused on getting PT ready for public life.

Your next question is coming from Deane Dray from RBC Capital Markets.

I just want to make sure I understand what the messaging was here on Page 6. And I don't know, if it's a nuance or not, but you say for RemainCo, the shift to focus from through cycle growth to total growth. Just like what are the implications and maybe kind of put some context around that?

Yes. I think it's very much around the fact that with that true cycle comment has mostly to do with the businesses that are in PT, with the elimination of that, we'll just talk about our growth rate and not through cycle, it won't be that. It will really about what the growth rate is going forward. So the implication or the -- is really less of an implication than a direct statement that we're just going to look at the growth of the company because we think this is a really strong growth company and with recurring revenue, it becomes more durable. So it's really that. The consistency is there in a way that we can take through that -- take out that through-cycle commentary. You noticed on Slide 7 that with PT, we still use that through cycle comment because it's going to -- as we said, over the last I think 5 years, we've had about a 5% growth rate in PT. If you look back 5 years, -- but that's been through cycle, right? So obviously, a year like this year is less than that. So that's really the determination and the difference between the 2 slides and the commentary on the slides, Deane.

Great. And then just as a follow-up, can you just provide some further color on the why now? And just some thoughts that come to mind, did missing out on National Instruments did that factor into this? I know that's a hypothetical how much did the Board weigh the ongoing stock underperformance? And was there an activist involved and [ riding ] and moving this decision?

Yes, a lot to unpack there. I would say the process was very much really internally started by us. The Board was hand-in-hand with us relative to how we thought about this. We really continue to look at, as I sort of said the fact that when you really look at it, we know that we've had tremendous financial success over the last 5 years, but that inherent value hasn't showed up in the stock price. And we always ask our questions -- I -- always ask the question, what can we be doing differently? And I think we really saw in '24, maybe the new news is, we definitely started to see the cycle within PT. And so that, I think, gave us further confidence that this commentary relative to your first question, meant that we could really -- we really were getting 2 businesses and the ability to sort of set that up that way, the way we've got it was really, really going to be an exciting way to think about how we build 2 great growth companies. And it's -- I would say, on the activist question, no activist that simple answer there. So we -- this is very much an internal process. We've always said we're deep believers in continuous improvement. Anything we can do to make the portfolio better, that's why we have a portfolio and strategic assessment of the business every year. I think the one thing you can say consistently about us over the last 8 years is that we've always asked ourselves how can we be better. And I think this is a manifestation of that, and we're really excited about it.

Our final question today is coming from Andrew Buscaglia from BNP Paribas.

So just piggybacking on what Deane asked, last year, you made 1 of your biggest deals ever with EA, seem very committed to that space. And I'm wondering what changed in the -- in terms of -- is something -- do you see something structurally challenging in that test and measurement market where you don't want to play anymore is more competition than you anticipated? Just wondering like what changed so quickly in the last, I don't know, 3, 6 months?

Well, it's really -- really a year, right? We started working on EA earlier over a year ago. So I'd say -- just for context, I would say the change is exactly what we've been talking about, which is it's not really as much of a change is that we love these markets. our ability to compete and take market share has never been better. Our strategic offering, the breadth of what we're doing is really good, but it's got some volatility to it because these markets have a little bit more volatility to it. That doesn't mean they're bad markets. We know electrification, we know mobility. We know a number of these markets are going to be great growth over a decade, but they are going to have some volatility to it. As I mentioned, they have little bit less geographic diversity. They're more related to technology investments, they go into semiconductors that go into batteries, those kinds of things. And those have a little bit of cyclicality to it. I think the recognition is a great business, as I mentioned, in Jamie's question, it's a great -- it's really -- it's got great technology. It's the center -- we're ahead on the synergies, but the market has taken a pause, maybe more so than we thought when we originally bought the company. We've always been into -- the strategic rationale for EA remains intact, and it will be a great part of PT going forward. So we've always said we would take opportunities over the last several years to make all of our businesses better. EA is all about that. But I think as we step back and look at those markets and where they're at, we also look at the ability to be durable on the other side of the house, relative to where our quarter is going. And we really got to this fact that we're really in a great position here to create 2 great growth companies, 1 with more -- maybe more durability, but it doesn't mean that they're not great growth companies in totality.

We reached the end of our question-and-answer session. I'd like to turn the floor back over to Jim for any further closing comments.

Well, thanks, Kevin, and thanks, everyone, for taking the time. I know this is a little bit of a short notice call. We appreciate the questions, and I appreciate the -- all of your support as we move forward here. We're in a great place. I couldn't be more excited at the Board -- on behalf of the Board, we're really excited as unanimous decision around how to take these businesses forward. As I mentioned, we've got 2 great leaders that I know all of you know, but we'll have more of an opportunity to see here in the coming weeks and months. And I think the more you get to know both of them, the more excited you're going to be about their leadership capability and their ability to lead these 2 great businesses into the future. FBS will be an important component of both companies. We've got 2 leaders that deeply understand our continuous improvement culture and we'll take that forward as well. And we're really excited. Chuck and I appreciate all the time and -- we've spent with all of you over the last 8 years. We're not going anywhere. We're going to continue to work seriously every day for you and all that you need. So I feel confident that we're not going anywhere for any period of time, and we look forward to seeing on the road. So thanks. Have a great day. We'll talk to you soon.

Thank you. That does conclude today's webcast and teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.