Fortive Corporation ($FTV)

So we're going to launch into it be starting back up with Fortive Corporation. And very pleased to welcome back Olumide Soroye, CEO of Fortive. Olumide, I think you were here 3 years ago, if I'm not mistaken, when you were President of iOS maybe 2 years ago, so release you're back with us. and also Mark Okerstrom, CFO of Fortive as well. So Q&A, it is less to launch into it. So maybe a good place to start would be it's now been almost a year since the separation of Raliance. Maybe just talk about the first year of life as a public company, what's been achieved was still on the come?

Yes. Well, it's great to see thanks for having us. Always a pleasure to be here. And -- it's -- we're really pleased with the progress we've made on the 3 pillars of our Fortive strategy that we laid out almost a year ago now. And we -- the first pillar that we set out was that we could deliver in this portfolio of new Fortive faster profitable organic growth. . And we just are quite pleased that over the last year, we've shown sequential acceleration in core growth every single quarter. And the set of growth initiatives in innovation, commercial and recurring customer value that we've deployed are still ramping, which really sets us up nicely for continued acceleration. The second pillar we set out was this idea that are always going to be very disciplined with capital allocation. With complete focus on best relative returns and maximizing medium- to long-term shareholder value. And if you look at what we did in Q1, $500 million of share repurchases, which brought our total since the spin-off to $1.8 billion or 10% of our fully diluted share count. And our focus on capital allocation strategy that starts with investing in organic growth, really pursuing accretive bolt-on M&A where it provides the best returns, making sure that we return capital in the form of share repurchase and a modest growing dividend remains very clear. And then our thought pillar was this idea that we're going to actually intentionally build and maintain investor trust. And again, in Q1, we were pleased to deliver solid results that was above expectations for the third consecutive quarter as new Fortive. And we like that start, and we look forward to building on the momentum. So overall, our strategy remains in place and our confidence continues to build that it has a power to deliver the financial framework we laid out for '26, '27 and to unlock benchmark bidding shareholder returns in the medium to long term. So we're feeling quite good about the first year, and our team is excited.

Yes. Definitely. I want to come back to the first quarter performance because I think it's very important that you actually did slightly better than 5% organic growth in 1Q. But maybe just talk about aspiration to grow is fine, but it's not easy to do it. So maybe just talk about the investments you're making and the changes in the process to accelerate that growth and maybe other drivers to the markets.

So I mean, first, we started with the portfolio we now have in Fortive, which we feel puts us in in great markets with terrific brands like Fluke, which is just an incredible brand for that space. And I think every other 1 of our 10 operating brands have just a great story. So it starts from being in the right market with the right race horses. And we like what we have. And the place that we call to accelerate growth in this portfolio was to drive 3 things: one, innovation acceleration, so more new products we've talked about several examples of that over the last year, incredible momentum building in that. Second is commercial acceleration. This means being very agile with placing bets in markets where there's here and now opportunities to capture more share data centers for Fluke, ambulatory surgical centers for ASP, India and Latin America for Industrial Scientific. This is a specific market opportunities that we feel give us outsized opportunities for growth. So we're placing bets in those. And then the third is recurring customer value, which just means doing more for the 100,000 customers we have across new Fortive. We've completely aligned our team behind those 3 growth vectors. Every single 1 of our brands has a portfolio of initiatives behind those. Mark has done a terrific job with our resource allocation to move more resources from corporate cost centers to invest behind these things. And so we're just excited to see it continue to ramp.

So going back to 1Q, you put up 5 and change, 53%, I think it was organic growth. I actually put you very comfortably in the top half of my coverage. I think the first time in a very long time bet's been in the top half. So I know there was a small benefit from days, 1 of point of sale days. But maybe just unpack what we saw in 1Q, should we not get too excited by that because it was very broad-based across the portfolio is both segments -- why wouldn't that continue from here? Because obviously, your guidance assumes that doesn't continue.

Yes. So first of all, we agree. We really like the momentum in the first quarter. It was across the board. It was 1 of the things we liked especially about that. And it was across the P&L. We saw really strong growth on the top line and really good performance down the P&L, even though we made intentional investments in some areas, and we know that over time, we talked about year by year that we will continue to accelerate growth. But 1 of the things we've been intentional about is making sure we can make the right calls quarter-by-quarter. And I think for Q1, we benefited from the selling days at 3 extra selling days. Q4, we know we will pay back for that. So that's the biggest swing factor between the first half and the second half. But the true line of acceleration continues anyway. And again, '26 '27 were well within our 3% to 4% core growth financial framework. I would also point out that we do intentionally as a team, really being thoughtful about setting expectations at the right levels to give ourselves a chance to build our maintained trust.

Sure, sure. Maybe I don't know if you can give us a little hint of what you've seen during the second quarter your comp is actually a lot easier in 2Q. So I think that growth, organic growth should be quite attractive in 2Q as well? I mean, but you tell me if I'm wrong.

Yes. So I mean, we just had a Q1 earnings call just 18 days ago, I think like we said on the call, April, we really came out strong in April, like the trend nicely aligned with our expectations. And we remain kind of firmly on track with the guide we gave on our earnings call. But I think we're on track.

Okay. And the all the noise we see on the geopolitical fronts, Middle East, et cetera, that's not having a factor right now, not paying what we're trying to say is, are you seeing any negative impacts through the second quarter from the Middle East.

No, not at this point. I think from a direct point of view, just to put it in context, Middle East is a very small part of what we do. It's about 2% of total 40 revenues. So it's really small. Most of what we do is in Saudi and UAE and mostly Fluke and Industrial Scientific, where we actually are seeing really strong order growth in the Middle East right now. So from a direct market point of view, nothing significant. And we don't see any repercussion showing up outside the region at this point.

Okay. That's good. Maybe we could just dig into the end markets. And I think a Fortive as you've got the health care portfolio, AHS and then within iOS, you've got the the more industrial type businesses, ISC Fluke and then you've got the software businesses. So maybe just talk about, first of all, in health care. Again, very encouraging in what we saw in 1Q -- that business has been quite episodic. It's been a little bit to step 4 of 1 back, maybe 2 back on forwards. What changes are you making number one, to accelerate growth specifically within ASP, but secondly, to make it a bit more maybe a bit more consistency as well?

Yes. So first, we really liked what we saw in AHS and ASP in Q1. It was a bit better than our expectations. And it was better in terms of capital equipment customers beginning to place more orders, consumables on the low-temperature side, the demand patterns remained really strong. Services were strong. So across the board, we saw strength. And the work that we've been doing with that team, because this is a great business. differentiated technologies, deep customer service expertise, deep customer loyalty, and we've been driving really the same 3 things I talked about to elevate the performance in ASP and in the segment overall. One is innovation. So you saw us take the steroid ultra GI to Europe. We kind of launched that in Q1 and a lot of exciting other things coming. So 1 is just the pace of innovation. Second is commercial execution. That's a business for us that's still very heavy U.S.-based, but the needs for health care and sterilization is very global. So that team is now doing just great work to create local capacity in India and China and really drive growth in Latin America and also look for other health care centers like ambulatory surgical centers outside the hospitals that can use this instrument. So a lot of commercial execution and frankly, scrappiness to gain share in the market. And then the third 1 is recurring customer value, which is we're now going to our customers and selling add-on products to them at a pace that we've never done before. And those 3 things combined with the passion of the team and the foundation of the business, give us really good confidence about the track ahead for the business. We are intentionally investing for growth. So you see some quarters where the margins look lower because we're actually deliberately investing for growth that we believe will be exceptional payback in the medium term. And you see us continue to do that.

Okay. The headwinds in that space. You've got hospital CapEx is pretty anemic. You've got reimbursement pressure. -- federal funding is getting cuts. Is it -- would it be -- are you confident that AHS is a 3% to 4% grower in 2027 based on what you see right now? Do you think that the commercial initiatives can overcome some of those headwinds.

So I mean it's interesting because we've actually seen for the hospital spending pressure and sort of pension ease since Q2 of last year and that that easing has continued, and that's showing up in hospitals. Now some of the deals in our funnel that's been there for a long time, they're now placing the orders. So we actually think we're on an improvement trajectory in terms of the the market conditions despite all the pressures on hospitals because in the end, the way hospitals make money is volume through the operating room. And that's where what we do plug in. So no matter the pressure they have to keep flowing through the operating room. So that's the first thing. But the second thing I'd say to your point is, we're not counting on the market getting better or worse. We're counting on the things that we control. And it's the innovation we're driving the commercial execution and those recurring customer value initiatives that our team is driving that. The team we have at ASP has never been more excited about what's possible. And again, Mark and team are doing a really good job of moving resources around, so we can actually invest in the right place.

We'll be coming to you, Mark.

I'm good. whenever you're ready. .

Yes. Maybe I'll shift up the question and say, is there some kind of demand in that segment? Maybe that this could be a good space to be in the next couple of years, if there is some pent-up demand. .

Yes. I mean I think it is the case that there are a lot of purchase decisions that were deferred, especially kind of Q2, Q3 last year in the midst of the 1 big beautiful act passing and people trying to understand the implications of that for the economics. So there's certainly some pent-up demand, there's new construction demand. And frankly, there is the fact that in the end, the underlying circular driver of demand for health care aging demographics around the world that's going to need more intervention. And most of them have 1 or 2 chronic conditions. So I think it is the case that the pent-up demand, the underlying drivers make this space want to watch over the next couple of years. And we're certainly trying now you're ready for that. .

Okay. Then moving to the non-software businesses in iOS, obviously, that's notably Fluke. There's definitely an industrial cycle aspect to that demand profile. Any views on short cycle demand right now and how that's progressing? .

We really liked what we saw in Q1 at Fluke. We do think some of that's the underlying short-cycle demand, some of it just a strength of fluke and some of it is the work we're doing to really drive growth in attractive arenas like data center and defense and some of these geos. But we certainly feel we've all seen with the PMI. So it does feel like there's a general lifting of all the boats that's happening a little bit. And from what we saw in April, like I mentioned, it was really strong trends and aligned with what we saw in Q1.

We always view that as a true focus business where not order business, a fortress business, where you are the dominant player across your product categories, -- is that still the case? Or are there pockets of competition in that business?

So Fluke is -- I can say this myself. It's an extraordinary business. It's a global brand, high-quality products -- we've been in business for 7, 8 years, but you wouldn't know it with the pace of innovation, the fastest it's ever been. The commercial scrappiness of that team to keep finding share going after data center use cases going after defense, going after early in Korea technicians. We're in the middle of this big shift in the workforce with your next generation coming into the profession and the team doing work to train them on Fluke. So that's what they know to do their jobs on. Just a terrific platform with incredible energy right now, and I think a lot of upside ahead.

Okay. That's good to hear. -- and then software. Obviously, a lot of concern out there around the sustainability of software business models in general. Maybe talk about what you're seeing right now in terms of customer engagements, pricing adoption rates, AI, pros and cons, how you're using AI to accelerate growth, maybe areas of potential threats down the road? Anything you can kind of enlighten us with would be great.

Yes. No, absolutely. And just to frame this up. So 80% of what we do, highly differentiated hardware products like Fluke, Industrial Scientific ASP, 20% software-related types of things. As we've talked about in the past, the software things we do are incredibly protected with certain competitive modes, proprietary data that are very deep, in some cases, regulatory lock in. So this is what you have to use for EHS. In some cases, 2-sided networks like in service channel. And then in some cases, frankly, you see it's not just software. It's a system of record in action. Each of our platforms have different combinations of these protections. And what we're actually finding is AI is an incredibly exciting acceleration for us in those businesses because they're so deeply entrenching the customers' workflow. And we've deployed AI in 2 ways. One, really just taking all the AI native tools, putting it in hand of all of our developers and now thinks that it can use to do in 9 months, they can do in weeks. And that's just increased our innovation velocity, but importantly, it's also given us a chance to bring in some AI enablements embedded into our workflow to customers. And what we're finding is because all customers want to do something with AI, what our business has given them a chance to do it at scale in the way they can actually get value, they can show their CFO and their Board. Just incredible engagement from customers around this new solutions that we're launching that's helping our retention rates. And frankly, it's given us incremental pricing power, which we're doing a whole range of things from kind of outcome-based pricing to add on app-based pricing to, in some cases, taking utilization-driven pricing to make sure that this high-value use cases are not just table stakes that keep us there, but actually get us incremental value. So we feel excited about how all of that is playing out for our specific software businesses, which, again, it's a smaller part of our surface area, but we feel good about the setup we have.

So net retention, for example, would that be tracking better than has been, I think, 1 of 5% was sort of the metric. Is that now tracking better?

Well, I think 1 of the good things, if you look at all the quantitative metrics from just the overall growth of the software businesses, we've said is faster than overall fleet. That's continued to be the case -- if you look at all the underlying metrics from GDR to NDR elements, that's continued to trend in a way that's exciting as well. So we -- and again, I say all this, but we stay paranoid because this space is changing so quickly. But everything we've seen in terms of our engagement with customers and the metrics we're looking at for the specific software businesses we have is actually quite exciting.

Yes. Recognizing that 80% of your business is hardware. You set a guard that is 8% the other way around, the way market views sometimes. But it's -- so it sounds like the 2-sided business models, so Gordian, service channel, the regulatory aspects of EHS are really important wall gardens. What about Accruent and probation.

Yes. So provision, I would describe as the decades of data on GI procedures, that's very deeply proprietary. And the fact that there are physicians that wouldn't practice in a hospital if you don't have that software solution for GI procedures. And so that provides an incredible level of protection for that business. So think about it as data and the customer loyalty. On the Accruent side, it's interesting. We have really a business that's very deeply vertical solutions that are assembled. So there is a solution that is a key solution for electronic document management system in manufacturing plants and a solution that is this solution for kind of real estate, kind of contract management in retail. And for each of this, their systems of record and systems of action in the field there and they're not broad horizontal they're very deep and very specialized, which means, frankly, the addressable market is small, and we have a pretty big chunk of it. And it's just not worthwhile for most players to come after. That's what it comes out.

Any questions from the audience? Yes, 1 here.

Just a follow on from Nigel's question. Interested how you guys are thinking about software M&A at this point? And what framework would you use to assess the viability of that type of business, given the concerns around the ecosystem today?

Yes. Thanks for the question. So I mean, I think for us, M&A is a piece of our capital allocation strategy, and we'll only do M&A if it the risk adjusted returns are better than other uses of capital. And as we're building our funnel, it starts with the software series of the company. So if 80% of our service area is highly differentiated hardware, our M&A funnel will skew towards that because that's where our surface area is. Software is part of our portfolio -- but I'll say that buy is really high on a software deal because first, it's got to meet our rigorous strategic and financial criteria. So that's the first hurdle to pass. Second, it has to be durable in an AI-native wall right? That's the second. So all those things I talked about that we like about our current software businesses, it has to have proprietary data to site networks and all of those things. And then thirdly, it has to be a price point that fits with our return criteria. So that's a really narrow path to get a software deal through right now. So I wouldn't say we wouldn't do a software bolt-on -- but if you take all those things I talked about our surface area, the criteria you've got to pass through, it's just it's a high bar.

Yes. Any other questions? No. Mark, let's turn to margins. You've been dealing with quite a few headwinds going across from the spin -- tariffs and yet your margin expansion, margin performance has been really attractive. So maybe talk about the path ahead, where are we on those headwinds? And as growth picks up, why wouldn't margin expansion improve?

Yes. Thanks for the question. I'd just reiterate our overall framework is 50 to 100 basis points of margin expansion over the next couple of years. We feel really good about that. There have been various puts and takes on the margin picture. But the overall story has been that we have taken deliberate action not only to just take out the stranded costs, which were roughly $50 million, but to go above and beyond and flattened segment structures, look for opportunities across our G&A functions to actually streamline and reduce costs, all with the goal of being able to redeploy that spend towards strategic initiatives across commercial acceleration, innovation, acceleration of recurring customer value. And I think I would just expect more of the same going forward. Again, we look at that 50 to 100 basis points of margin expansion as a guideline for us to operate the business under. And so to the extent that like we saw in the first quarter, we see upside to that. We will look for ways to deploy it to the extent that it can further accelerate and drive profitable growth.

And it sounds like you're prepared to have a bit of volatility around the quarters in terms of investment spending at AHS. I'm just wondering if you were to overdrive to if you have an exceptional strong volume quarter where you're running 150 basis points, let's say, would you be more biased to investing that way -- just wondering how you think think about that.

Yes. I mean we definitely think about things on an annual or multiyear basis. So we're not looking to do things that would be suboptimal from a capital allocation perspective at any time to produce an optical outcome. So if we didn't have good use for the capital, we would absolutely let it flow through. And I do think just if you look at the structural aspects of this business, all of the businesses, as Olumide mentioned, are leaders in their space. They've got pricing power -- the margin structure is very attractive, which allows us to have strong operating leverage through the P&L. The Fortive Business System is alive and well, and so we're grinding out optimization opportunities. So I do think there is opportunities for us to overdrive. And I think the more successful we are in accelerating growth, we'll see more of that, but the bias will be to reinvest it in and actually drive better performance. And that may result in quarterly movements here and there, and we're fine with that.

Yes. And then obviously, the most visible aspect of operational efficiency is the corporate line, the corporate -- that seems to be running a little bit below the 125, 130 , I think, was the guide. Is that now sustainably lower going forward? Or?

I would think so. I mean we're in the $27 million a quarter zone. So call it, $110 million or so. I mean there will be inflation moves, there's little puts and takes in it. But I think that's a good spot, and we have deliberately taken down our teams to reinvest into the business. And I think we'll continue to look for ways to do that.

Yes. I apologize for the corporate expense line. I mean classic side that the question -- and again, I apologize for the tax rate question to coming up, but the tax rate has been running very long time for Fortive. I think some of the global tax regime changes have been pushed out -- are you confident you can maintain this level of tax rate going forward? Or is there a bias towards 20% longer term? .

I don't know about 20%. I think we feel good about the mid-teen zone -- and I think if the global minimum tax regime, the rules, there's still some uncertainty around the U.S. as the applicability to the U.S. I think it's generally going to put upward pressure on the tax rate. I'd probably think about that in the 200 to 300 basis point zone. But I don't -- we don't see 20% as the place that we're headed. .

That's great. And then capital allocation will be a good place to start off on. You mentioned bolt-on acquisitions or rebuilding the M&A pipeline. Where do we sit right now on -- obviously, you've been very heavy level on buybacks since the spin. Is the MO still to buy back as much as you can at the stock price? Or are we getting a bit more balanced in terms of the philosophy going forward?

I think the philosophy remains the same. -- which is that we've got 4 primary uses of capital, invest in organic growth. We think about M&A and share repurchases as interchangeable with a bias to bolt-ons. We've got a modest and growing dividend. And really, it's all about the relative returns across those. I don't see right now the relative returns having dramatically changed. I mean our free cash flow yield continues to be then a 5.5% to 6% zone. We generate $1 billion of free cash flow a year, give or take. But I think at some point, when we've got a longer track record of delivering strong performance where growth acceleration starts to really show up as a pattern, not an anomaly that we may see some multiple expansion. At that point, the relative math might start to change. But we have taken our leverage up a bit. We did that in the back half of the year. We did that again in the first quarter to shift some repurchases forward, given the value we saw. So I wouldn't expect what we did in the first quarter, which was $0.5 billion to be the recurring quarterly pattern. But I do think we continue to have a bias to share repurchases in the overall mix, given what we see .

Today. That's great to hear. We're out of time. So Olumide any closing remarks. .

Well, thanks for having us. We feel really great about the first year here. We're firmly on track with the financial framework we laid out and we -- to Mark's point, I really believe we have a chance to unlock benchmark being shareholder returns in the medium and long term. And that's what we're going to stay focused on doing. So thank you.

Thank you, and that was a great discussion. Thank you Mark .

Thank you.