Fortive Corporation (FTV) Earnings Call Transcript & Summary

Great. Ready to go? Okay. Start of the conference, we're going to end the conference, and I'm still Steve Tusa, still at JPMorgan, covering electrical equipment and multi-industry. And we're very happy to have here outgoing CEO, Jim Lico; and in-coming CEO of the new Precision Technologies business, Tami Newcombe. Guys, thanks so much for joining us here.

Thank you, Steve.

Obviously, Fortive had some big news 2 weeks ago, maybe?

Yes, 2 weeks ago, this afternoon.

That they're going to split the company to a degree, and Precision Technologies will be the NewCo and RemainCo Fortive will be the RemainCo. And so we're going to touch on that for a sec. But before that, let's just talk about what you're seeing throughout the world here on a macro basis. You have a bunch of different businesses that are exposed to many different trends, but a good global footprint. So maybe last stop here before a quiet period for all these companies that I cover. So you're going to be kind of the last voice. So what do you see out there on the macro?

I think, well, as part of our announcement, I can talk about that in a second. We obviously affirmed our guidance for both the quarter and the full year. So I would say that probably stands to reason that, that's steady as she goes. There's always puts and takes, and September is always a big month to sort of finalize all those puts and takes. But I think what it says is a little bit more of the same. I think there was some recognition in things like the PMI continuing, but I think that we've already seen some of that in our guide and that kind of thing. So I don't think that -- that doesn't represent a change. And what that really means, I think, when we think about it, places like health care remain really good. Where we have our recurring revenue businesses, those are sort of more of the same. Tami can certainly give you some color on what she's seen on the PT side of her responsibilities. But I think what we see today is if I think geographically, North America is going to be our best market. That's in part because we have -- that's where our software businesses are, which tend to be higher growth. It's where more of our recurring revenue business is. So -- but I would say North America tends to be pretty good. Europe, tough, particularly on the more industrial, more industrial automation, and maybe the broader part of Europe is just more consistent with some of the things we articulated. And then I think Asia, high-growth markets in general, pretty decent, but China is still tough. And we've talked, Steve, obviously, that we thought maybe back in March, April that some of the measures that China put in which have historically made -- improved demand over relatively quickly, we haven't demonstrated that. So those were embedded in affirming the guide, but those are pretty good view. I think the other thing is inventories, generally our channel partners are in pretty good shape. So I think they're going to be more a function of demand at this point than they are excess inventory levels.

And when you think about kind of reaffirming the guidance, is that really across the board on -- when it comes to sales, EPS? Is it some of these companies more recently have said you come in, EPS is good, margins are good, but sales may be a little bit weaker given the tough volume environment. Anything on those metrics at all that's worth noting?

No, I think some of the stuff that we waited for in the second quarter got pushed into the third that we talked about. We've seen that business get transacted. So assuming we can get next few weeks strong, I would anticipate all those metrics to be good.

Okay. And then as far as the -- just the PT side, in particular, Tektronix, [ Pac Sci ] the sensing businesses, maybe just -- what are you seeing there more specifically?

We talked about it earlier today after '22 and '23 of double-digit growth. We're seeing this year a negative low single-digit growth. The change here as we've come through the year is when we get to Q3, customer demand or orders will turn positive for PT. And specifically, Tektronix, we started to see some of that turn positive for the sensing companies last quarter. And we're seeing pretty close to what Jim talked about in some of the more -- the technology companies. We play into a lot of the large technology and semiconductor companies. We started to see some green shoots there and some orders start to come back around. The inventory levels are really good in our channel. The European business is still a little bit soft in the industrial space. And what hasn't come back yet is some of the modernization that China talked about the money flowing down to modernize equipment. We really haven't seen -- we haven't seen any of that get to the end customers yet.

And I guess when we think about the second half of the year, any of your customers mentioning, a couple months ago, we were all worried about the election, what kind of impact that would have other than talking politics, any customers -- which we all talk about. Any customers mentioning the election as an impact in their ordering style, you are keeping an eye on that.

We're keeping eye on it. I think it's embedded in some of the uncertainty that we've talked about just in general in terms of investment. Over the last -- in the second quarter, we talked a little bit about things getting delayed a little bit. I think some of it's just embedded in the uncertainty and people deciding to sort of wait around. But no one is using the election as a reason. I think this just has to do with maybe it's the global macro uncertainty, and you would throw the election into maybe that's part of the story. The other thing we sort of missed is when we look at the businesses from an orders perspective, we are seeing order growth in the second half. So that was embedded in our guidance. We still continue to believe we'll see orders growth in PT. We said we would see that. We are seeing that.

Right. And so those orders though, I think there's a bit of a lag time to those? Or is that -- when does that translate into sales for PT?

Yes. Specifically for PT, it will be 3 quarters out that you'll start to see sales turn positive, both based on the increased customer demand in orders, and we've got soft comps to build on.

Got it. Before stepping back to the businesses, let's talk about the news of the day about the portfolio moves. In general, what drove the decision on timing -- from a timing perspective here? And how do you want people to think about this move and how we evaluate it for the next 18 months?

I mean I would think we really tried to -- our typical strategic and portfolio assessment process really is the starting point of this decision several months ago. It's what we do annually. That's in preparation for some strategic review that we have with Board. What really -- why now is that work has been deep for years. And one of the things we saw, Steve, was when we compare some of the thoughts from a year ago, we saw -- we've made PT much more durable, but it still is -- and it's a great business tied to -- set of businesses, tied to some great technology shifts in the world that are going to make the world a better place. However, those shifts have investment cycles to them. And so that cyclicality of PT was, in some respects, muting a lot of the durability that we've been building into Fortive. And we've done a lot of M&A to make that happen. And I think as we did the investigation, we continue -- we started to see that not only was that from a financial perspective, but also the fact that how we build these businesses long term, both organically and inorganically, was going to be different. And we really felt that the -- people start to ask, what am I underwriting when I'm underwriting Fortive and the spin really leads to a more definitive answer to that question for both businesses. So we're really confident that the spin unlocks value, short term and long term. We think the comps for the 2 businesses ultimately are much higher than what we're trading at today. So we unlock a lot of the good work we've done, as you know. Our financial performance over the last 5 years has been outstanding. When you look at EPS growth, the compounding at 14% or free cash flow at 17% as an example plus our growth rate organically has been good. So -- but we haven't necessarily seen the stock price move in that level of compounding. So we unlock some value short term. But more strategically, both Tami and Olumide Soroye, who's going to run Fortive post spin, I think that gives them the degrees of freedom to really invest in one, in a recurring revenue business that's really strong and has really, really great future and also a cyclical growth company that Tami will run. And those 2 businesses really strong. We think the story unlocks a ton of value, but it's not just short term. It's also the strategic value of just how to build those businesses long term. And we think we'll be really well positioned here when we get this done. In the interim, we're going to -- what we announced was really having some experience with spins. We announced that we would take our free cash flow and dedicate that to buybacks between now and the end -- between now and spin, and it really was twofold. One was to give investors certainty, both towards how we would use our free cash flow, but also what the balance sheets would look like when we spin the company so that when we say investment grade, no one can say, ask, well, what if you do some big M&A between now and then? No, we're not going to do that. It's about good certainty on what the balance sheets would look like. And I think secondly, people certainty as to what the return on our free cash flow will be between now and spin.

You talked about unlocking value in the near term. What is the valuation construct here? I mean you've mentioned the recurring business, the cyclical growth business. I would assume the recurring one, you would think has a bit higher multiple than the cyclical growth. What are the appropriate metrics than comps that we're using for each of these?

Well, I think first of all, when you think about our 5-year results, what I was talking about a minute ago, we think both companies will do better than that. We wouldn't -- as a Board and a management team, we wouldn't -- if we didn't think we were unlocking financial performance through better execution of strategy, we ultimately wouldn't have done it. So it starts with that. I think when you look at PT, the comps are pretty straightforward. And Invetech, a key site trading at 18, 19x, those are really straightforward comps. Maybe a little bit more challenging with new Fortive. But I think if you think about a recurring business of 50-plus percent recurring revenue business, 50-plus percent recurring revenue, gross margins in the mid- to high 60s, really strong operating margins, really strong free cash flow, growing at mid-single digits, your -- you can use Roper from a few years ago. Those metrics were very similar to Roper 3 or 4 years ago as an example. Veralto today, and that trades in 20-plus kind of range. So I think we could -- with that -- but it's -- I also don't want anyone to think that we just do that for the short-term bumping relative to the comps. It's really about the long-term strategic value of these 2 businesses and how they operate. And we think that really unlocks a ton of value long term as well.

The $4.50 target you guys have put out there, does the buyback kind of get you there now? Or is that like -- is that no longer really even relevant?

I would certainly say that the $4.50 was never meant to be a guide. It was meant to be a long-term target. In the effort of long-term targets, we put a number out there in the interim so that people could hold us to something beyond just 5 years out, right? And so I think maybe that led to oh, we would be guiding to $4.50 in '25, which we never would have been doing. So let's take that off the table and just say, "Hey, that was never the intention." We do think, for sure, we'll see when -- as we get closer to the end of the year and kind of come up with a guide, we'll have a better sense. We very much see double-digit earnings growth next year, and we think the buyback will only improve that.

Got it. Just for future reference, when you do put out an EPS number, it's like giving a dog a bone. So you have to be careful with the exact EPS numbers. We're going to obviously run with that. We have enough trouble coming up with one on our own, so we kind of lean on you guys. As far as the next steps for PT, is there a chance for if somebody came along and wanted to negotiate on some of these assets before the transaction. Is that -- are you guys picking up the phone? Or are we kind of sitting there waiting for this thing to go and...

Well, I think, number one, we evaluated lots of options to unlock value here. And we certainly have a good sense of what our business value are and that kind of thing. We're going to run full force to spin because through a lot of work, we determined that was the best way to unlock shareholder value. That said, the door is always open. And if somebody were to come in, we'd be looking at certainty, things like regulatory environment. We'd be looking at how long is it going to take, those kinds of things. Tax leakage is an enormous part. In some of the businesses is enormous. So the value that somebody would have to put in order to pay us for the tax leakage, these are big hurdles towards a very certain plan that we've got. And so fundamentally, we'll evaluate everything within that construct.

If I came along and gave you a big number for a big portion of PT, is there a potential for -- it's a big enough part of the portfolio that the company becomes too small to spin from a critical mass point of view?

I mean it's always how you would look at it is within the construct of decision-making, which we've really already created, we certainly would be thinking about scalable public companies and those kinds of things as well.

Okay. The breakup costs and stranded costs, anything new there just from a detailed perspective and the tax rate?

Early in the process, so I wouldn't give a number. We've done this a few times. I think there's 2 things. One, within the construct of what you normally see, both for onetime costs and that kind of thing. Secondly, we'll do the work. We'll get there. If there's some stranded costs, we'll work through it. Public company costs, I think, we said was somewhere in the $50 million range. That's -- we've taken a few companies in the public domain, so we kind of know those numbers relatively close. And nothing in the first look that would be big in terms of, hey, that's really hairy spin item. We're pretty good at identifying -- I think we're really good at identifying those kinds of things. Nothing stands out relative to that either.

Okay. Jumping into the businesses a little bit on the PT side. I think you've guided the Tek at a low double-digit decline. What does that imply for the second half for Tek? Just remind us of what that implies for the second half?

Yes. I think second half is around negative mid-single digits. Low double digit for the second half. Yes, you'll see a step-up in Q4 in the sales piece. And those are orders that we've got a quarter before that we'll be shipping in Q4. So we feel good about how we forecast the business there...

And you think that's been generally derisked with -- in this environment that you have good visibility into at least kind of a floor here of revenue?

Yes, we do. The Q4 forecast and guide is pretty similar to Q3 with the addition of some orders that we have that we're certain on.

Okay. And then you mentioned earlier today, China. What are you guys seeing there? I think you mentioned it's 15% of your sales. Which verticals are you seeing any signs of life there, and what are the weakest parts of business?

The good news about China is we've gotten inventories in the place that when we do sell, we get orders back in. Nothing has changed. All of that is baked into the guide that we have. We're still waiting to see some green shoots in China. And right now, it's -- we're not seeing a lot.

Got it. And as far as the growth algorithm for PT mid-single digits, I think, is what you guys have put out. It sounds like you can do that over the course of the cycle. When you look at your various platforms, I think, you broke down 4 earlier today. Which ones are kind of the above mid-single-digit growers, which ones are below? Or is everything kind of in the middle?

Yes. And different from Fortive, we'll be a through-cycle grower, which means there's probably not a year we'll hit 5. We'll have the years that are 10 and the years that are flat. Hopefully, more as we continue to make more durability in the business. But we're seeing double-digit type growth in some of the production, aerospace and defense business. And the utilities business is really strong. A part of the business that we've worked on for a couple of years here at Tek is the services business. And that's a very stable business and running at the mid-single-digit kind of range. And then stable but slow is Europe industrials for our sensing companies, and China as we've already talked about.

And as far as sensing is concerned, that's a business that people don't really know a lot about. What are the key drivers there? And what are you seeing for that business over time?

Yes. So we make sensors that are specialized for application. A lot of the reason that technologists choose one of our sensors is the application know-how that we have. So the end markets, whether it's utilities, it could be critical environments, which could be health care or semiconductor or the food and beverage industry, those are the places where we get a premium for the products, and we've seen continued growth. The sensing businesses that are more general purpose, more factory industrial automation, those are the ones that are -- there's more competition in that space. And that's more in that low single-digit growth.

And that business is like an $800 million business, the sensing? Is that about right?

Yes.

And then just lastly or maybe second to last. Tektronix. Just talk about the drivers there, what you see longer term? What are some of the key areas of growth that you're focused on for Tektronix?

Yes, we strategically positioned the portfolio around electrification and power. And a piece of that started back more than a decade ago with the acquisition of Keithley Instruments, which took us into this space. We've built upon that with the acquisition of the EA. So think all the way from power semiconductor, which there's a lot of new technologies coming out in the semiconductor space, which drives new test and measurement equipment through all the electronics. When I say the electronics is everything, you just look around, and you can see that we're electrifying almost everything in our world. It used to be just mobile phones and computers, but now it's gone to vehicles. And that's leading into batteries and storage, which the last piece of this is the change to the power grid and utilities. And that's a place that we have a play with one of our sensing companies that does sensors and solutions -- software solutions for that space. So I kind of crossed over Tek and went into Qualitrol, but that's the whole electrification space that it's a 10-year trend.

And then EA, you bought that business in late last year. We're just getting to know it, EVs, batteries. Maybe talk about what drives that business and what you're seeing currently? And just remind us what the revenue base is for you today?

So we closed the business in January of this year. And the business will be about $130 million this year. When we put together the thesis for the purchase of EA, it really followed how we think in this segment about where we make investments. Do we like the secular trends that are happening? And this not only EV and battery but energy in general, energy storage, we see as a really big opportunity. The second thing, this portfolio is full of premier brands, so best-in-class products that engineers love, and EA is absolutely that. And the more I talk to customers, the more I've gotten to know it, just reinforces the road maps and what they have. The last part was the growth drivers that they saw in '22 and '23, which were phenomenal. They run a real uptick in growth. And what happened kind of November to February is that really slowed. I'd say at that point, we were saying tap the brakes, pushing out projects to as we got here coming into the second half, we really saw that, that business is the large project business, the multimillion dollar deals that EA had been doing has really slowed. Now the good news is one of the reasons that we thought we were the right owner for this business is they only had about a 60-person sales organization that covers the globe. And we 10x that with the Tektronix sales. So they go up to 600 people that can now sell, and we predominantly sell Tek that is into the R&D space. So although the project business has been tough, still seems to be out there. We just don't have the timing. The kind of run rate R&D business, we've seen the funnels go up 20% in that space and feel really good about that part of the business. So if we can get both of those cylinders cranking together, the business will get back to what our expectations were.

In the R&D side, you're talking about Tektronix or you're talking about EA?

Tektronix. Taking the EA product into where Tektronix is really strong in the R&D lab.

Got it. I see.

That's where we have -- that's where we can give them access.

And would you think Tektronix is going to kind of lead EA here when it comes to sales recovery? Or will both be a big -- it will be coincident?

Think of the Tektronix team as the overall opening the doors for all of the access we have with engineers in the R&D labs. Think of EA as a specialist team that knows that product inside and out, but also calls on a lot of the energy, battery ecosystem that Tektronix had not called on. So we've got 2 sales forces.

And I think your -- the thought around how does the market come back are a little bit more mobility driven today. So probably they lag a little bit. The Tektronix team has done a fantastic job of going after this power segment with products and oscilloscopes and probes and software and solutions. And I think we just built a really good, strong ecosystem. The run rate -- they've been building the run rate business. So we're going to -- they'll -- Tek has a broader business. So they'll probably lead a little bit before that before some of these larger projects fall into. And then -- but I think the beauty of what we've done thus far, the industrial logic, as Tami said, is -- remains the same. We've built this run rate. We're starting to build the run rate business. So as the project business comes back, it's not going to replace the run rate business. It will be on top of it.

Got it. And I guess so they can both -- you would expect both of them to grow next year like...

Both Tek and EA.

Yes, both Tek and EA...

Correct.

One last one, sorry, for you on the margin. Fortive's kind of the company where you just put in 75 basis points and like you don't really think about it because you guys are really good at execution on the margins historically. Is there anything to that algorithm above 75 that you guys have given? I think you gave that in your -- in the Investor Day. Anything unique in that algorithm? Or is it just the gross margin falls through with some productivity?

Is this specific to PT?

PT, correct.

Yes, I think we have very well-run businesses in PT. I think the upside on that opportunity is how we apply FBS to the EA business and be able to drive a little more operating margin there, but that's the target we have for next year.

And is that the -- are there any investments beyond EA maybe that you need to make that will be a bit of a headwind to that 75? Anything that you want to get off on the right foot around?

Right now as we think of the priorities, maybe like day 1 priorities, first is just continuing that great execution, very strong operating -- the companies in this core portfolio, at great at operating, productivity, lean manufacturing. That's number one. We're going to make sure that we do that really well. Number two is the innovation engine that we started with. Back in 2019, we started to build out a different set of tools in the FBS toolbox around innovation. A lot of that flywheel, we start with one operating company in 2019. It goes to the next and the next. So as we come into '24 second half here and into '25, we've got a really nice pipeline of NPIs that we'll continue to launch to drive growth. And then the third piece is, yes, we'll continue to have acquisition as a piece of the -- of our portfolio. But we're going to balance that a little bit more with, as you've seen, share buybacks, potentially a modest dividend. That will be a decision for our Board, but it's another opportunity for us too.

It doesn't sound like anything unusual about the NPI, because there -- it doesn't really sound like you need to step up R&D or anything like that. This seems pretty steady state.

I would say that.

Okay. Right, you're off the clock. Turning to IOS. Can you just talk about the midterm, mid-single-digit 75 bps? First of all, I would assume those are still intact as far as our mindset around what these businesses can do for the next few years? Or are we going to kind of reset everything?

I think we should give the management team the opportunity when we get to Capital Markets Day to sort of go through that with you. So what I don't want to do is take off the table that option, and I probably would say for both businesses. But it will -- certainly, you would say with the gross margin profile that the business has and the sort of solid mid-single-digit growth, this business is going to be a really strong EPS and free cash flow machine. That said, the margins are going to be pretty high. And as you get margins higher, the trade-off of -- is how important is margin expansion. It will always be important. But I think there's -- they'll at least be -- so I don't want to take it off the table, but I also want to cast the opportunity that EPS growth and free cash flow growth and organic growth are going to be really, really solid in these businesses and how that manifests itself relative to accelerating organic growth. I think, increasingly, investors will see the benefits of more recurring revenue and a higher organic growth rate. And we'll see where that takes the decisions around what that might look like. But I really feel good. I think the biggest thing is that sort of -- when you look at the gross margin profile, 65-plus percent, it's hard to think you're not going to have accretive margins here over time. And the best margins, the ability for businesses that, quite frankly, have been -- are still on that growth journey with us from an FBS perspective are still in the early days, right? The software businesses have -- we haven't owned for very long. Health care is going to have real margin opportunity. So there's plenty of opportunity for margin expansion beyond just the organic growth piece.

So one business that we all know is great, tremendous brand, is Fluke. It's a little bit -- it's been a little bit tough to analyze. In the end markets you think it will be weak, it flows right through. Like what are the end markets that have been growing the most at Fluke? What have we as analysts missed as far as that business definitely being stronger than we would have expected in a sustainable way here in the cycle?

I think we've been through -- number one, the team has really built -- because I think you're right. And this kind of went into the logic of live Fluke and RemainCo versus going into PT. Fluke has become much more than a test measurement business historically. When you look at the global breadth and the market breadth, they've built a business that's sold in every country. It's used in every country. When you think about things like the challenges of EV charging networks and keeping them up and running, the renewable energy network, whether it's wind, whether -- but certainly solar, keeping panels up and running, all of these things have just been additive to their wonderful brand strength that they've had, the investment in utilities that's going to be a decade forever. Every lineman has Fluke tools, right, around the world. So it's just -- those would be 3 markets that I would say around energy. I certainly think that the move towards reshoring, we've captured. As foreign direct investment has moved around the world to move manufacturing to be more local. We certainly are -- in manufacturing plants around the world, we continue to be the tool of choice for anything electrical. And then just the diversity of instruments as they continue to really leverage and accelerate their innovation engine. Tami mentioned the work that they started at Tektronix in 2019, but Fluke was sort of a fast follower in that regard. And so you're just now seeing a lot of that NPI pieces, too. So they've got some parts of the market that have slowed a little bit, but they may be able to grow through that. And then, of course, they have an eMaint software business that's been growing really, really strongly as well.

How big is that now, eMaint?

It's probably close to 7% -- 5%, 6% of Fluke now. I'm doing the math quickly, in that range.

And if you look at those markets that you talked about, how big are those as a percentage of Fluke? I mean is that like now 30% of Fluke?

Probably in the 1/3 -- 25% to 30% of the company today, yes.

That's pretty impressive because I mean those were kind of not big markets for them.

Yes, those markets have become more important, right? It's really been an opportunity. And so the easy question is, well, solar installation has slowed a little bit maybe. But when you look at solar maintenance, it hasn't even gotten started, right, because the network itself is so much bigger and the need to continue to -- we did a couple of bolt-on acquisitions for them in the fall of last year that are doing fantastic. And I think it just speaks to the ability of those businesses to know their end markets and position the business here.

Any of those markets you're particularly worried about? Like what have been the ones that have fallen off a bit?

If we were in solar production, I'd certainly be -- we'd be more worried about that. But I think given...

These are growing, and they're now 30%. What are the markets that you've seen pull back?

I think there's -- certainly, China, Europe, maybe just general manufacturing, PMI. There is a part of the business that saw a little bit of -- it's tied to PMIs and industrial production. So the slowness in Germany, as an example, in industrial production in some of those places. We've seen some slowing with customers there.

Who are the key public comps here? I mean...

For all of -- for Fluke?

For Fluke, yes.

I think that's what makes it such an interesting company. It's really an industrial technology company. It has a consumer-like brand, a consumer-like reach. I think we have well over 1 million unique end users come to their website every month. So they've got this unique set of presence with customers. They've got a really, really strong innovation engine. So it's tough. It's a financial profile that almost looks like a software company in terms of -- it's a Rule of 40 business. So it's a very special company. And quite frankly, it's an important part of Fortive going forward, not only because of the -- it's the biggest business within Fortive, but it's also been the idea generation for almost all of our recurring revenue. When we think about now we're in facility software, and now we're in environmental health and safety, all of those ideas really were rooted out of our presence and domain expertise out of Fluke.

It's amazing whenever we go to a convention, no matter what convention it is, there's always like Fluke booth, no matter what it is. It could be anything, and there's always that yellow...

That's right.

Thermal imaging...

That's the breadth of industries and the breadth of geography, which is if you contrast it with maybe Tektronix, which is a great global franchise, but Tek with the R&D engineer, those R&D centers aren't in every country, right? We're going to sell a lot in the places where R&D is really big. But we don't have the breadth of use cases that exist like we do at Fluke.

FAL and software, they are growing high single digits still. And are there any above or below that range and any kind of movement in those businesses as we evaluate a bit of a more challenging IT spending environment?

No. We had a little bit of a comp thing in the second quarter, so that was more like in the mid-single-digit range. But I think as we look forward, we're going to be high single for the year. And the value -- I was just with those teams yesterday for strategic plans, and they feel really good about the future. So I think we're going to be -- we're seeing the current get better. They moved up their net dollar retention number. So we feel like we're bringing the -- Gordian was kind of the great grower in the group, ServiceChannel pretty close. We're seeing, I think, as Gordian's market normalizes back to where we thought it was, which is less than -- was a 20% grower for a few years here. Now it's in the teens. But what we're doing is current is getting better. So we feel like the combination of all that just makes for a great business here going forward.

How quickly can you guys get to $1 billion in revenue in those businesses?

Now if you do the math, it's probably high single-digit to low double-digit growth. So that's just math there. But we also have -- we did 2 bolt-ons for those businesses. And I think when Olumide talks about some of the bolt-on capability, it's really about features and things that they can bring to that capability that they have today and the selling infrastructure they have today. So there are bolt-on opportunities. And as we get into '26 and beyond, it certainly it would be a strong consideration for creating value.

How much of that business is now SaaS versus license and...

About half, 55%.

55%, great. And I guess when you think about the margin drivers, I am not going to pin you to 75, but when it comes down to Fluke and then the software businesses, what are -- are any of those expanding at a faster rate? I know there was a lot of opportunity to...

I think you'll see probably the software businesses just because of where they started from, they'll probably be a little bit better. But that will be a balance. And this is a little bit to your margin expansion question. That will be a balance of like any software company, you always balance how much do you want to take to the bottom line versus accelerating the upsell and cross-sell. The real core capability of what we'll have in new Fortive is this really unique ability to monetize customer value because we'll have this high recurring revenue. And not only will the M&A capability but also the innovation capability will be really around making sure that we continue to build on that installed base, moving net dollar retention up from a commercial perspective but also from an innovation standpoint. And the trade-off of margin expansion will be how much faster can we grow the company because we now got this continued expansion of a customer base.

And then lastly, just on AHS. That business seems to be now hitting its stride after the distribution channel restructuring. What do you expect for growth? What are the drivers there in the next year?

Yes.

I know the margin here has been a big debate. 30% is the target. Should we similarly think that you're going to give Olumide an opportunity to give his own view on that?

Absolutely. I mean, I think that's -- but as you know, we've done -- that will be the leader in the clubhouse this year for margin expansion in terms of health. Tami's done a great job in that business. She's going to hand it to Olumide here over the next 90 days. And I would say, really, as we go forward, the ASP is going to be a big part of that. It's biggest part of the business. It's -- and it will continue to have strong margin expansion. The growth dynamic for ASP, our sterilization business is really kind of 1% to 2% price, sort of 1%, 2% increase in elective procedures on a global basis and 1% to 2% equipment expansion. And when you put that, it's a solid mid-single-digit grower. And you build on that with more consumables, you mix the business up over time. So we think that's a great growth model for ASP. And you combine that with the software businesses that are already very profitable in the segment, you have an opportunity to just continue to -- which are growing well, you continue to mix that business up beyond just the typical productivity things that we would normally do in a business.

What's the difference between like STERIS, which seems to always be growing like double digit in some ways? What's the difference between you guys and those guys?

I think the segment that we compare to at STERIS is $3.5 billion. So when you compare it against our sterilization business, which is roughly $800 million, you've got a lot of different products in there.

Got it.

And so you've got everything from OR tables to cabinets and things like that, GI equipment and stuff we do in sterilization, but we don't do a lot of disinfection. So it's a big difference in terms of business model. Tough to compare those 2. We think in our -- we really take a different strategy. Our strategy is really around focus in terminal sterilization and really trying to make sure that we're the sort of collective genius for sterilization professionals who are really trying to make the world safer for patients.

And then one last question for you, AI. You guys were kind of ahead of this game several years ago. Obviously, things have changed from a technology hardware perspective. What do you -- how do you comment on what you're seeing out there, whether it's the hype, the reality? Like where do you come down in the AI debate as far as what you're using...

I would say we think of AI in really 2 senses. One, what can we do internally? And second, what can we do with customers? I would say harnessing the power of generative -- so as you said, we built before our AI central lab, if you will, half a decade ago. And that's been working and building capability and hiring people and putting them in the operating companies and hiring more people and putting -- so we're not only building the centralized capability, but making that more pervasive than all the operating businesses. I would say we've had really good success in using generative AI in software development, which is when you think about it, obviously, that is in our software businesses. But most of our hardware businesses today have a huge software component. So we're getting tremendous productivity through that work, and we're just getting started. So I would say we're really high in that. The second thing is in productivity. Think of that as just how can we help professionals throughout the enterprise use AI in their daily jobs. And I would say we're starting to get to that. Some of it -- there's a lot of work you need to do on the data model in order to -- data models in order to make those things really helpful to people, and we're just getting started on that. And then on the customer side, we're using a lot of AI to interact with customers and customer success and marketing and things like that. And I would say that's been -- we've got some really good stories there. On the customer front, we've just launched a couple of different AI solutions within our software businesses. That's super early days. So collectively, we just had this review with the Board a little while ago last month. And I would say we continue to do a lot. But I -- and I'm -- so I'm a -- I think we're, as a leadership team, are believers. But I think when we think about that model because we have a few different operating companies, you can't apply that sort of model framework that we have to every business and say every business will have that opportunity. And I think the mistake you can make is to say, AI everything for everything and everywhere. That might be true down the road. Right now, getting use cases that can really add value because we see those and accelerating those is really where our focus is right now.

Yes, I'm one of the top users in research apparently. And I'm trying to like have it do the morning meeting and like travel for me and like do all the research, and it's not working out like that.

Yes. I mean I've got about 3 different applications I use things for, and some are -- one is great. Two are maybe could be user error but not as helpful yet.

Yes. That was a joke, by the way.

AI for CEOs isn't quite out yet.

Yes, yes, yes. That will be coming. Cheaper, definitely cheaper. Any questions for these guys?

You see a lot of investors today as people digest what you guys are working on, what comes [indiscernible]. People struggle with [indiscernible]. Just wondering if you can parse through that.

Yes. I would say number one is we put a lot out on one day. So from the spin, leadership changes over time, a little bit of change in the capital allocation strategy, both short term but also reconsidering some of the long-term aspects of capital allocation. And so I think just getting through those individual decisions and collectively, how those all came together as one decision, I think, is the biggest thing. And why would we -- and I think what I said is we did a lot of work, came to a conclusion. And it really just made sense to do these things at the same time. And we feel really, really good about the fact that when you look at the comps, you've got a short-term clear, hey, would you want to buy 18 to 20x companies at 15, 16 right now times multiple free cash flow the same way, trade on free cash flow. So you see the short-term value creation. And when we walk everybody through that math, think everybody sees the real value. And then it's getting to the long term. Like why does the strategic logic really makes sense. And that's what we've been going through over the last couple of weeks. I've been on the road pretty much every day since we announced, and we announced that we were actually on the road. So I think as we've done that, we've got -- we've created a lot of excitement. And what it really is, because in Fortive today, you have a lot of different investors. Some of them just remnants from our Danaher spin that have sort of been and stayed in. Other people want that recurring revenue model and have been really excited about that language. Other people have really said, hey, we really -- we benefit from some of the cyclical story. And so I think this independent investment model, what you're underwriting and understanding that and a simpler story, and we'll get that simpler story out over time as well, I think, that's what's really resonated.

And I think to your credit, since you guys came out as a public company, I mean you've moved incredibly fast. I think we were thinking about this transformation is kind of almost like every couple -- 3 years, there would be a big move. And like you guys were like right out of the gate moving pretty quickly, which I think also hurt to a degree because the underlying business was getting better, but if the common idiot pulls up Bloomberg, they see like flat reported results and -- but I give you full credit for coming out, having a vision like going after it. Because most guys would kind of sit there, the 10-year kind of CEO run, collect the paycheck for 3 years, restructure, then come out with something else. I've seen it before.

I would -- but, thanks. I think that was a compliment somewhere, I'm trying to figure that out. But maybe some times...

Sorry, trying to show the clock.

But I think it just kind of gets to the logic of why we have so much conviction about what we announced. We really deeply believe in this. So I said, well, was this move planned 8 years ago? And the answer is, I was at Danaher for 20 years and I know that -- I never saw the 20-year plan. Things evolved as markets evolved and that kind of thing. And this is a great next step forward. And I just -- I think we have deep conviction. We've got 2 outstanding leaders who are ready to be CEOs. And I think the combination of great leadership going forward along with the strategic logic here is going to create a tremendous amount of value. We would not have done this if we didn't think that the 2 are going to be worth a lot more than the whole today. We wouldn't have done it if we didn't think that and we have deep conviction around it.

Great. Well, thanks so much. Congrats again. Congrats to Tami, you as well. And congrats to JPMorgan for pulling off another great event.

Thank you. Great to be here.

Thanks, guys.