Fortive Corporation ($FTV)

All right. We're moving along with Mark Okerstrom from CFO of Fortive. Thank you so much for joining us here in lovely Washington, D.C.

Yes, thanks. Great to be here.

Yes. Just wanted to start off with a basic kind of background on what's happening out in the world today, I kind of have to ask the question about exposures and anything that's going on in the world that is a concern or impact for Fortive. Middle East wise?

Yes. Listen, I'd say we're on track on the Fortive accelerated strategy, on track in terms of our strategic initiatives. The Middle East for us is a small portion of our revenue. It's low single digits percentage of our revenue. We are seeing strong demand for products into the Middle East. So Fluke Industrial Scientific that does gas sensors, again, seen strong demand, some challenges getting shipments into the Middle East. But again, generally, it's a pretty small portion, and it's -- for better, for worse, it seems like it's an opportunity as opposed to a risk for us.

And how are you guys putting the Middle East and what's happening over there aside. How are things kind of trending over the course of the quarter, kind of quarter-to-date, point-of-sale trends, software sales, anything like that?

Well, I would just reiterate again, we're on track. I think we -- if you looked at the cadence of 2025, we delivered acceleration in the back half, we were growing 2.6% core growth. We continue to see strength through January. And the teams continue to execute well. So again, I think overall, we're on track.

As far as the Investor Day is concerned, the longer-term growth algorithm, how do you guys think about the building blocks there? Any changes so far? I mean I know it was recent, but any changes in how you think about maybe what's better, what's worse kind of how all nets out on the long-term organic?

Yes. We feel good about it. Again, the framework was 3% to 4% core growth 50 to 100 basis points of adjusted EBITDA margin expansion and high single digit, high single-digit plus adjusted EPS growth, and we're on track. The core drivers to organic acceleration were commercial acceleration. So think about more boots on the ground, more specialized sales teams. That has been put in place more salespeople in India, for example, for ASP and Fluke, more specialized salespeople in Fluke to address data center and defense, for example, the second lever was product innovation. We're seeing the faster pace of innovation across the portfolio. Another Fluke example, the CertiFiber Max, which is now the fastest and highest bandwidth data center fiber testing device and then driving more recurring revenue and our ARR continues to grow faster than the overall business. So the levers are in place, the framework is set, and we feel good about our ability to deliver on it and our aspirations are to do much better.

Can you talk about the recurring revenue in your portfolio? Just remind us how big that is? And then by the businesses, what you're seeing in each of those?

So recurring revenue is about 50% of revenue right now. Generally, it is growing faster than the overall business has been for some time. The biggest piece of recurring revenue is probably subscription businesses. We've got a software business in the FAL division we talk about as well as a couple of software businesses in health care. Those are roughly 20% or so of revenue, excluding transactional revenue. They continue to grow very nicely. We've also got consumable businesses in ASP, which is essentially the razor blade model, the razor blades. And then at Fluke, we've also got a number of other businesses, service plan subscriptions kind of like Apple Care as well as some hardware as a service business. And all of those recurring revenue streams are areas of investment for us, and we continue to like the trends we're seeing.

So probably under the one that we recognized mostly software wise would be FAL. Maybe just walk through those businesses and what you're seeing there and touch on perhaps why this software is more defensive than some of their software may be against any kind of disruption from AI. But first of all, just what kind of the various business there and then what drives those? And what are you seeing in those markets?

Yes. So there's 3 main businesses within the FAL group facilities and asset life cycle management. The first is Accruent, they do property maintenance and asset management software. In many cases, for higher education, some retail, other end markets. The second one is Gordian. Gordian does and actually invented something called job order contracting. It's legislated in, in many states and jurisdictions that government buildings need to be maintained or repaired. They have to use the Gordian software and this job order contracting model. And then the third is service channel. Service channel is the leader in building maintenance software for multi-site retail. So I think Walmart, all the way up to Louis Vuitton, those stores run the software that service channel provides, and they create a marketplace. So contractors are checking service channel every day for work, and it creates this great sort of marketplace effects. So if you run through those businesses and you think about kind of their competitive moats, I would start with -- Fortive is a child of Danaher and the whole thesis was buy high-quality businesses that are in attractive markets where they have competitive moats. So the byproduct of the sort of Danaher, Fortive legacy is that these are going to be businesses with those moats. And they do have those moats. So each of these businesses are deeply integrated into daily workflow. Technicians are using the applications of Accruent, for example, is the walk around higher education systems and entering data and taking pictures. Same thing with Gordian, same thing with service channel. And these are really niche custom workflows that they run that have been built essentially over time. Secondly is they've got proprietary data, not just the data of any particular customer, but importantly, horizontal data. So the data set for public building maintenance and an infrastructure for costing as RS means, and that's owned by Gordian. It is sort of the standard. And if you look across service channel and Accruent again, they've got these horizontal data sets that are hugely, hugely valuable. In the case of a few of the software businesses like Gordian, they've got regulatory moats. And then as I mentioned, there's also these network effects, these marketplace effects that we see at both Gordian and service channels. So we feel really good about these businesses. And I wouldn't just take my word for it. I mean, ARR growth continues to grow faster than the fleet. Net dollar retention is around 100%. We feel great about the trends that we see there. We think AI is really an accelerant for these businesses, both in terms of new feature development, but also efficiency. And we feel pretty good about the positioning of these businesses. And we were just down in Austin with the teams. And I think we came away, Olumide and I are feeling really good about where we are and really good about these businesses' ability to contribute to the acceleration story over time.

And when you look at the actual revenue growth rate here of FAL, I know -- back in the day, we were talking about it as kind of a, I don't know, a rule of 50 or a rule of 60 type business. Where are we now on that in that calculation in that, whatever the rule out is now how fast we're growing and where can the margins go?

I think it's -- rule of X is getting better across the board. I think service channel has just been an incredible business for us, growing incredibly strongly, both top and bottom line. And we see that continuing for a long way. I mean, those -- that business is expanding verticals, they're expanding geographies, all signs go. Gordian has been a little bit more up and down. Because it's been exposed to state and local government spending. It seems like the deferred maintenance backlog and at some point, they have to do it. There was a bunch of ripples in 2025. Things seem to have normalized. So we feel pretty good about Gordian's prospects going forward. And then Accruent has been a story of kind of revamping the product portfolio and then up-leveling the commercial efforts and 2026, portfolio has been largely done and commercial efforts are underway. So we feel pretty good across all 3 of those platforms that acceleration and profitable acceleration is possible and in most cases, likely.

Just remind us of what's the long-term growth algo for the FAL kind of portfolio? Is that a mid-single digit, like 5%-ish or..

I think it depends dramatically on which business we're talking about. I think overall, you're in the zone. I think there are end markets that are growing significantly faster. Service channel is growing significantly faster than that. And our aspiration is to continue to take share in those markets. But I think you're in the zone, and we hope to do better.

Okay. And if you look at any of those businesses, which is the one that you're kind of most bullish about? And is there an opportunity to add to any of those businesses with recent valuations coming down on software.

I'm probably most bullish on service channel because of their track record. They're not as susceptible to ups and downs in end market spending. Gordian is an incredible business, but they can be ups and downs. In terms of add-ons, I think we're open-minded, but we don't need to do any deals to actually deliver on our framework and hopefully more, we'll be opportunistic. But again, they've got to be great businesses that can be integrated and that we can buy at a fair price and ultimately be accretive to growth and hit our financial and strategic hurdles. And those are pretty high hurdles. And particularly when we've got such great organic growth prospects, we probably skew a little bit more to the hardware side of things right now in terms of where our M&A pipeline is focused.

How do you look at price in these businesses, the FAL businesses? How much of an annual benefit is priced for the software businesses?

Well, it's been mixed. Overall, price for Fortive has been in around 200 basis points. FAL has been a contributor to that. And what we're really having the FAL teams focus on is as opposed to pushing price, pushing recurring revenue. So transitioning businesses that may be license and maintenance over to SaaS-based continue to find new features and functionality that create more stickiness for the business. So that's mostly the focus. And I think as we do that, we launch new features, we move to SaaS. There is some opportunities for price. But price isn't the primary driver for those businesses, it's going to be volume.

If you look at the total pie, how much of that now is that SaaS and how much more conversion do you have to go? I mean some of the revenues, obviously, may not convert but how we already have to go on that?

The majority of it is SaaS at this point. We're going to continue to push it higher and higher.

And then in the other businesses, from a software perspective, the AHS, the Provation business, what's -- how is that trending? And what are you guys seeing there?

Provation is doing really well. And Provation again, does workflow tools and AI assistant soon, voice translation for GI docs. I think the ambulatory surgery center blowout or expansion has been helpful for them. Physician burnout has been super helpful for them. They've got a lot of tailwinds. The team is innovating well. They're expanding outside of GI into other verticals like anesthesia. So not only like service channel, it's a team that's executing well. It's a market leader, and they've got multiple vectors for growth that they're executing against.

And is that a mid-single digit or high single digit? Or how do we think about that growth rate?

It's been growing well ahead of that.

Well ahead of that.

Yes.

Okay. And then lastly, on the Fluke side, talk about the connected offerings there and how fast that's been growing and just the profile of that. Is that also -- it's recurring? Is it SaaS? Do you look at it that way because it's kind of an add-on, obviously, to the hardware?

Yes. So Fluke's recurring revenue is about 15% of the total and has been growing nicely. There's a few pieces to that. eMaint, which is software, and then they've got essentially service plans they're selling. And then they've got Fluke Connect, which is the sort of one of the connected solutions to help connect all of these devices together, investing in all of those pieces business is core to the Fortive accelerated strategy. And as Fluke goes, so does Fortive because it's our biggest business, and I think they're very much going to be a driver of the acceleration as opposed to a laggard. So we're optimistic.

The growth Fluke has been a phenomenal growth story over time, really solidly mid-single digit. Even though you guys kind of define the market as a low single-digit grower. What do you think you guys are doing there that's differentiated and maybe explain why this moat on growth is just perpetually so strong?

Yes. Well, Fluke is just a great business. It's got great brand recognition. It's got a track record for the best of the best in terms of instrument precision, incredible customer loyalty. People get Fluke tattooed on their arms. It's -- you can't really walk through an airport wearing a Fluke vest without some electrician stopping you and telling you about his latest Fluke device. It is the highest end of product that is out there. So if you think about all the trends that are happening around the world, whether it's data center, whether it's electrification, defense spending, Fluke is positioned across each of these end markets very well. And the Fluke device generally sits in the hand of a technician. And there is a shortage of technicians. So when there's a short of technicians, that means that, ultimately, the demand for technicians is higher. They're going to get paid more. There's going to be more of them coming when more of them come, that drives volume. And when they get paid more, they're going to upgrade their $100 device from Home Depot to the $400 or $600 device for Fluke. And I think that just creates tailwinds for the business. And I think when you add on the velocity with which we are starting now to develop new products and the commercial efforts we put in place for more boots on the ground and more specialized selling, we feel really good about Fluke's prospects going forward.

1 Maybe what's one of the most exciting applications I know in data centers? Like what exactly are they doing in data centers that's new or differentiated? I know a couple of years ago, there was a solar product that was like really, really good and grew a lot. What's kind of their main new product in data center?

Yes. Well, the latest is something called the CertiFiber Max and what the CertiFiber Max does is allow data center technicians to test dramatically more strands of fiber at once faster, we're getting readings faster than once. We launched it really in the back half of Q4 and really started rolling it out. The order book is well in excess of what we expected. We're not able to meet demand at this point. And I think it's just a good sign of what's possible because given the Fluke reputation, these technicians already have Fluke devices in their belt when you launch a product into a market that is growing, that is best in class, the demand is going to be there, and that's what we're seeing.

And that's kind of a -- that's not a handheld. That's probably something a little bit more of like a yet portable machine that would plug into the rack or like...

Yes, these data center technicians will basically have a tool belt and on that tool belt there's basically a console that has a bunch of readings and the CertiFiber Max is a new attachment for this console. So...

And it's a Fluke console.

Yes. So it's really cool. And it just gives you an example of kind of the breadth of different devices that we can build. It's almost like I think about a gaming console and you can buy all the different steering wheels and guns and all these things, the CertiFiber Max is like that.

That's pretty cool. Every convention we go to, there's no matter what convention it is, there's always a Fluke booth. It just shows you how kind of ubiquitous they are across industrial and commercial landscape. Anything on a point-of-sale or inventory basis quarter-to-date that you want to call out on Fluke, I mean, the economy is -- industrial economy is getting a little bit better, I guess, before all this happened in the Middle East, but anything on point-of-sale or Fluke growth that's of interest?

Nothing since our last earnings call. And the message there was things are really looking solid across the board. North America our strongest market continues to go really well. We did see some pretty significant improvement in Latin America, which was nice. Pockets of Asia, India have been a real bright spot for us. In Europe, which had been challenged for a while, looked like it was starting to moderate and starting to show some signs of acceleration. So we feel pretty good about the geo trends we're seeing so far.

Okay. On ASP or AHS, anything on the core business, just talk about the trends there on whether it's instrument placements, the consumable stream, what's the outlook there?

Well, we feel good about the macro and sort of secular backdrops that face ASP. You did see some impact from health care spending, particularly in the U.S., federal pullbacks which caused people to really delay capital purchases. Again, these are large machines that cost over $100,000 each that go into the sterilization processing departments of large hospital systems and ambulatory surgery centers. And so in 2025, we saw some of that pause. It's early, but we think some of that is normalized and surgical volumes continue to be pretty healthy. So we're optimistic that the base backdrop for ASP is, I think, in a better spot at 2026 than it was in 2025. But we got to execute and ASP has got the same 3 levers they're executing against accelerate commercial. They're putting more boots on the ground, in emerging markets, for example, and in other verticals continue to increase the pace of new product innovation and then continue to push recurring revenue, and they're executing on all three.

And as far as pricing that business, if software is maybe just above Fluke is on a price basis in and around that 2%?

Yes. 100%.

And then -- so ASP with the instrument shipments, it's a little bit probably tougher, not negative, but tougher to get price, but the consumables you can get price on it's a good way to think about it?

I think it's a good way to think about it. The consumables are often governed on multiyear contracts through GPOs. And so you don't always get the annual price increases as consistently. But I think are thinking about it the right way.

And is there anything technology-wise that's coming into that area of the world that we need to keep an eye on, whether it's different ways to sterilize or regulations or anything like that, that we should keep an eye on?

I think the biggest move is really to automation. The da Vinci machines, for example, these cannot go into steam sterilizers, it will erect them. So they go into the low-temperature sterilization machines, which we have and we're the industry leader on. So I think this trend toward automation, I think, plays into ASP. ASP has been working with a lot of the scope manufacturers who do endoscopes and other high-end scopes to make sure that they're certified and the coding of those scopes does not get eroded by sterilization and have done a number of partnership deals to open the waste that you don't reck your scope when you actually sterilize it. So yes, there's a number of new innovations and trends. And I think again, they all lend to be more tailwinds than anything.

Okay. So that business is -- all these businesses seem like they're pretty much on track. Is there any part of that portfolio maybe to ASP? I mean I know you guys are really focused on buyback right now. But are there any parts of these segments that you would look to do bolt-ons? You mentioned software, probably a bit of a higher hurdle there. Fluke, there's probably not too many assets you really want to plug in there because it's just got a great brand, and it's an organic story. But maybe an ASP, anything you want to plug into that the AHS portfolio?

Yes, potentially. I would say 2 things. I mean, across the board, we do not need to do M&A to create a very exciting equity story here. The Fortive accelerated strategy of accelerated organic growth, be disciplined stewards of capital, build and maintain investor trust, I think, can deliver great returns over time. But M&A could be an accelerant to it. We have rigorous financial and strategic criteria. As I said, software businesses may have a harder time right now meeting those criteria. I think in ASP as well as in the iOS segments, I think there might be opportunities, but they got to make sense for us. And price is absolutely part of the strategy and you got to beat the buyback. Right now, the buyback looks really good.

Yes. And your buyback trend and activity that kind of goes through the course of this year? What are you guys exhausted on what you've currently put out there?

Well, we've got flexibility. We've got flexibility. Our Board is incredibly supportive of our capital allocation strategy. And so when we have an authorization when we exhausted, it's not a big issue to get it replenished. We bought back about 8% of our share capital since the spin-off as of the end of last year at under $50 a share free cash flow yield at 6%. So we're going to continue to be opportunistic and allocate capital to the best relative returns. And that so far has really been to the buyback.

You guys have talked -- you talked about at Investor Day this NPI funnel being up 3x. You mentioned some of the Fluke new products. Maybe what certain products have hit out of that funnel? And how would you describe the NPI funnel today?

Yes. I'd say the NPI funnel across the whole portfolio is stronger than it's ever been. We mentioned the Fluke CertiFiber Max. I mean they've got a long list of product innovations that they're going to launch this year. And I think they'd probably tell you that if they get them all done, it's going to be a record breaker in terms of new product innovation. CertiFiber Max was one, they launched a ground fault detector is another. They're just going to continue to roll things out. Industrial Scientific, our gas detection business doing really well, again launching 3 or 4 new products here over the course of the next several months. Our software businesses are really leveraging AI, not in terms -- not only in terms of launching new features and functionality, but just increasing the pace of innovation. Gordian, for example, is in the middle of launching called something called flash. And flash will take tens or hundreds of pages of architectural drawings and actually translate them into the list of all of the quantities and materials that you need to actually construct the project, something that would take people 10, 20 days to do. They're now doing it in 15 minutes. So there's just a host of new innovations across the board. ASP is no exception. They're launching new products to help them be better able to handle the large da Vinci scopes to make them more attractive to ambulatory surgery centers, and we're putting the commercial might behind all of these innovations as well.

So how do you look at NPI as maybe a percentage of revenues or percentage of growth going forward? I mean, it must be a pretty significant percentage of the growth going forward is from these new products.

We hope so. We hope so. Again, the framework was 3% to 4% core growth over '26 and '27. Our ambitions are to do much higher. There were 3 big levers to organic growth, innovation acceleration, commercial acceleration and recurring customer value. Based on what we see right now, we think the commercial lever is a pretty quick lever to flip and we're investing behind that. The innovation acceleration can take a little bit longer, but we've been super pleased with what we've seen from the teams and we think it can be a meaningful contributor to growth going forward.

Okay. On that -- also a bit on that front, you mentioned AI and for one of the businesses. Any other ways AI is making its way into the new products.

Yes. I mean it's -- honestly, it's everywhere. And as you know, Fortive has been doing AI for a long time. They set up the 4 to 6 or 7 years ago with machine learning and AI folks that were really helping to sort of get things going in terms of having that capability internally. Last year, we digested the FORT into the Fortive Business System and the operating companies themselves are not only building AI talent within them, particularly the software companies, but are also leveraging the innovation studio that we put -- we opened up last year to help accelerate their growth. So anywhere from our marketing efforts, these are aided by AI. The generative AI search engine optimization is sort of key to everyone. Customer service helped by AI engineering efficiency helped by AI. Finance, investor relations, all helped by AI. And then the new products, I mentioned a few of them. I mean those just keep on coming. And in most cases, the customers for our products, if you think about FAL, for example, these are real estate facilities managers. Their bosses are saying, what are you doing in AI, I hear it's important. And so when we launch new features like work AI features that actually examine all of your work orders and make sure you're not missing anything, you've got a mistake. The demand is insatiable, because people like, wow, this is better, and I can tell my boss, I'm leveraging AI.

Right, right. And on -- internally, are there any use cases you're seeing where the productivity is notable and where are you when it comes to that journey?

I'll give you an anecdote. So the Head of Product and Technology for Accruent, which is one of the FAL businesses, used to be one of the top engineering leaders at VRBO HomeAway, which was part of Expedia when I was there. And he said, Mark, the AI applications we were doing in 2019, we'd run 30 or 40 models in AWS. They cost us a ton of money. He's like 90% of that now is off the shelf. It just comes out of these foundational models. We don't need to do it ourselves. And he said, "Where is before we may have had a ratio of 1 engineering manager to 6 or 8 software development engineers. Because we're going to move to 1 to 2. pretty quickly. One manager, 2 software engineers, a bunch of agents to do a lot of the groundwork, it's really remarkable. So I think for us, I think you'll just see that show up in the pace of innovation and hopefully having revenue go like this and costs flat to down.

And anywhere where you're able to take cost out in a big way from a structural cost perspective?

Yes. We -- yes, and we have. I mean if -- I mean you know this, but in the back half of 2025, we took a lot of cost out, particularly corporate costs. Our IR team is half the size it was. A lot of the work, sorry, Christina. A lot of the work that we're doing right now used to be done by analysts is now being done by AI, just summarization of all of the notes, key messages, spreading financials is just so much easier. Our M&A team is probably 1/3 the size it was. We see it across the board, and we've definitely taken out costs as a result of it.

Any other structural changes or the way you're doing business under Olumide versus under Jim?

I'd say that the top word spoken around Fortive now is growth. And I'd say the top words spoken before were probably operating margin expansion. And both of those things are great, and we plan to do both of them. But the mindset of the leaders of all of the operating companies and at corporate is -- it's all about Fortive accelerated. It's all about our 3-pillar growth strategy. We say it to investors, we say it to the board, we say it too internally to the teams internally. And I think it's just a much, much more growth-oriented culture and business now. And we talk internally that we've actually just breathed growth oxygen into the room, and these operating companies are they're breathing it in and they're investing, and we're seeing early signs that's paying off.

And as far as the margin algorithm is concerned, the 50 to 100 basis points, just remind us of what the building blocks of that are -- is it coming from SG&A leverage, gross margin, price cost, all the above, mix? What are some of the moving parts there?

I'd say over a multiyear period, probably all of the above. We're we're really focused, though, on using that 50 to 100 basis points as a framework. It's not something that we have to go get. Operating leverage in these businesses are really good. So the question is like how much can you invest to drive growth acceleration that then starts spinning the flywheel? And again, we're in the early days of it, but we really think we can have our cake and eat it too, particularly doing what we have been doing, which is taking cost out of G&A. The fourth quarter G&A was down, I think, 10% and reinvesting it in sales and marketing and R&D, those were both up. And that formula, we think we can continue to push maybe not to that degree, but I think just reallocating capital to the things that are going to drive growth is a great formula. I think it's a repeated formula. And I think, again, we can deliver accelerated growth and the margin expansion that we've laid out and maybe even a bit more.

What's the right R&D as a percentage of sales for you guys going forward?

I think where it's at right now, which is mid-single digits, I think, is probably a decent zone. I mean, some businesses are higher, some are...

Software is going to be a bit higher than the other stuff, the hardware stuff. Any questions out there? No. Anything that's not being discussed out there that you wanted to address or any questions you heard that people are asking you that you thought were interesting.

Well, I think people are quite rightly asking questions about Fluke and the tailwinds that business could be seen. We feel really good about Fluke. I think in prior conferences, there was a lot of talk about software and AI I think I won't reiterate what everyone on CNBC iterates all the time, but you really got to look at each of these businesses independently and assess them on their merits. I mean -- not all manufacturing businesses are made the same and not all software businesses are made the same. But I think the biggest message is that 7 months ago, we -- 8 months ago now, we spun off Reliant and we embarked on a new strategy, the Fortive accelerated strategy. And it's early days, but we're on track, and we feel really good about the prospects going ahead.

We've got a question here.

[indiscernible]

Yes. So it's a great question. So I would think about it as broad categories of investment in the sales and marketing. One would just be increasing the number of feet on the ground. So across our health care businesses as well as a lot of our hardware businesses, we've really made a push into India and increased our presence there as well as certain places in Latin America. That's just more coverage essentially. And when we do that, we can track what are we paying this new salesperson? How long does it take them to ramp up once they're fully productive, what do they produce and what are the returns on that head count that we hired. The second bucket is sort of more deep technical expertise. So Fluke, for example, has got a team that is solution selling into the data centers. They go into the data centers, they talk to the hyperscalers, they speak the same language. And when they're doing that, they're much able -- much more able to think about the existing Fluke portfolio, which has brought applications into the data center and also sell some of the new products like CertiFiber Max. So those are the 2 places and again, we can track the investment and we can track the incremental revenue we get from it.

Yes. Go ahead.

[indiscernible]

Well, I would say the launch of the CertiFiber Max that Fluke just launched, which again is high bandwidth, many fibers at once, instant testing. That's probably the closest thing to a drive up that we've seen. The demand was there. The order book is way larger than we thought. We can't keep up with the demand. So I think as we have increased the pace of new product innovation, given the strength of the Fluke business, particularly, I think we may be surprised again at just how much demand is there for the taking with just a little bit of turning the dials.

Thank you very much. Thanks for coming, appreciate it.

Pleasure to be here.