It's my pleasure to have up next Fortive Corporation, Jim Lico, President and CEO. Jim, I think a couple of prepared remarks, and then we'll go into Q&A.
Yeah, I'll keep them brief. Great to see everyone. Thanks for attending. Yeah, I would just say, you know, we're in a great place. We feel really good, I think, as we just come into today and having conversations with folks. I think the work we've done over the last several years to put us in a position, relative to maybe some of the heavy lifting on the portfolio, a lot of the innovation work we've done, really manifested itself, I think, so much in 2023, and we think a much more resilient, durable Fortive in 2024.
So, I think across the financials, you know, we've tried to, on the earnings call, lay out what our 2019 to 2024 performance looks like, and we think that stands up really well in terms of double-digit compounding on the EPS and free cash flow front. So, so we're in a good position to do that, and, you know, excited to talk about the details there.
Fantastic. Maybe starting with the short-term, you know, a lot of industrial companies have this sort of muted top line in the first half, year-on-year, better second half, Fortive no exception. But maybe talk about, you know, what drives that improvement. Is it just comps? Is there some degree of end-market recovery dialed in, just flesh that out a little bit?
Yeah. Well, I think number one, when you step back, Julian, we're at about a 48/52 ratio for the first half, second half. And that is our traditional sort of sequential number relative to a little bit lighter first half than second half. That's historical. It's kind of where we normally are. So not a big issue, the ramp-up is more the comp kind of situation than it is anything else. We obviously had a really strong first half as we last year, as we were really sort of shipping and, you know, some of our backlog and things like that. So, you know, there isn't a dramatic move if we just think about the dollars in traditional sense.
Yeah.
There are some things that are gonna get better through the course of the second half. Certainly, healthcare's gonna get a little bit better, as we said. You know, we'll start to see some of the in Precision Technologies where we've seen some order declines over the last several quarters, we certainly believe we'll see improvement in orders in the second half, and that helps a little bit strengthen the second half as well. But again, just stepping back, it's in our normal seasonality.
That's very clear. On the you mentioned the sort of product hardware orders, a mix of sort of precision and a couple of other businesses. I think they were down kind of mid-single-digit year-on-year last quarter. How do you see the slope of that orders playing out from here?
Yeah, so I would break it out. I think if we think about our big hardware businesses, we sort of think of Fluke within iOS, and then.
Yes.
Obviously Tek, sensing and PT. Fluke had a good growth quarter in the fourth quarter. They grew orders in the fourth quarter. They had good growth, and quite frankly, the projections for this year are good. I think that's a benefit of the resiliency and durability strategy we had both on the organic and inorganic front. I think Tek was down 1% in the quarter, in the fourth quarter.
Yep.
Orders have been down about five quarters. So, we think, you know, we're starting to hear funnels getting better, that kind of thing. And that is, as we said, we think towards the second quarter, or into the second quarter, orders start to turn positive.
Yeah.
Sensing's been down a little bit more, as you said, than that. And, we think we'll start two of the four sensing businesses. We think we'll start to grow orders here, and the remaining part of sensing probably in the back half of the second quarter. So as we sort of turn the switch on the calendar relative to the second half, we think we'll certainly. What we're hearing from customers, what we're seeing from order funnels, things are starting to progress towards what we anticipated, and we feel good about what we're hearing.
Clearly, in the product hardware side, there's a range of end markets there that you're selling into. You know, electronics, there's been a lot of destocking pressure, let's say.
Yeah.
Telecom, it's maybe more of a fundamental demand drop we've had. So maybe any, any color on the different verticals of, of businesses like Fluke and tech.
Yeah. I think it's somewhat different. You know, Fluke's really a field, field instrument business.
Yes.
Playing into a number of good secular drivers right now, whether that be solar, things around the energy transition, the grid. And that's been why their business has been more durable.
Mm-hmm.
Haven't seen pockets of inventory destocking, but not a lot. I think on the tech side, certainly, what we've seen is pumps flowing amongst some customers, as I mentioned, on the order front. But some of that is just so many years of strong orders.
Yeah.
that we're just seeing the customers take a breath. A little bit of destocking, in a couple of regions. I think we called that out on the earnings call in the fourth quarter, a little bit in North America, a little bit in China. But I think that's mostly behind us at this point. And so I think as we look forward, the natural demand will start to take over. As you mentioned a couple of the verticals, the power market at Tektronix has been really good. That's really anything that has a battery, whether that's.
Yeah.
Chipsets that are required to go into data centers and go into products that are trying to conserve power or batteries themselves and everything. That margin that business has been good. Our Mil-Gov business has continued to be good. We've seen some, as you said, you know, we do have some exposure to semiconductor in tech, with our Keithley business, and that's been slower. But customer conversations are actually quite positive right now.
I think from the outside, it can be difficult for people to sort of contrast Fluke versus Tektronix.
Yeah.
In terms of markets and cyclicality and business models. I don't know if there's any quick synopsis of that that you could provide. Like.
Yeah.
Why does Fluke behave differently to Tektronix? Why is the cyclicality different?
Yeah, I think number one is Fluke has always been a much broader set of businesses, both vertical-wise and geographically. You know, anywhere where you need to measure electricity in a home, in a manufacturing plant, in a commercial building, in a school, whatever.
Mm-hmm.
Across the board. That's every country of the world, and it.
Yeah.
So it just has, it doesn't have one vertical that plays strongly. Tech is really about innovation centers. It's really about the top 1,000 innovation companies in the world and the design and engineering we're selling to the engineers who are designing the next generation of future technologies. That tends to be not every country of the world, right? That's more predominantly in countries that tend to have.
Mm-hmm.
You know, more innovation spend and investment. Like.
Yeah.
And so that's, so it's not as geographically dispersed. It's, it's a little bit more focused on certain verticals as well, so it's not as broad. Still a great business, though. I think when we look at the transition we've really had at Tektronix, I mentioned a second ago around power, we've, you know, we've gotten out of a number of the businesses. You mentioned comms. We've gotten out of the comms business.
Yes.
We're not in that business anymore. We've sort of smaller on the semi side than we used to be. We got out of the video business at Tek. So we've really oriented the business towards a number of these sort of secular drivers of tech, which allowed for us, as you know well, from a low single-digit grower maybe a decade ago to now, going forward, more of a mid-single-digit grower. So we think we've really done a nice job of improving the growth rate of tech, making it more durable. My last point just between the two differences.
Yeah.
We do have a pretty sizable software business in Fluke, right, our, our eMaint business, which is pretty sizable. That certainly helps on the durability front as well.
That's helpful. And Tektronix, as you said, more of a push perhaps into some applications, power, data center.
Mm-hmm.
Maybe help us understand kind of, you know, how have you got there? How satisfied are you with your penetration in those businesses.
Yeah.
And kind of the market leadership?
Well, we think the opportunity is great.
Yeah.
We feel like we're getting a very good share of those opportunities for sure. We look at win-loss that's informed by win-loss rates. That the tech today is very global, so we have a great global footprint, which to take advantage of those opportunities. So I, you know, I think we believe deeply in the success of the business. That and, and, you know, that's a business that's really applied the core business system really well into their innovation process. So to your point of what's been deliberate around the change, it's really about making our R&D investments. We've gone to more platforms that allowed for us to really innovate more quickly.
Mm-hmm.
We're seeing the benefits of those innovation cycles now delivering solutions faster to the marketplace. We'll see more of that in 2024 and 2025.
That's interesting. And when you think about, you know, across Fluke and Tek, historically, maybe investments for you, them is more like, you know, through cycle, low single-digit. Now it feels like it's more.
Yeah.
Mid-single. You know, how is to what extent is that a function of maybe some secular drivers in the end markets versus, you know, the past? And then also how those businesses have kind of moved into different niches that might.
Yeah.
Give higher growth.
Yeah.
Because that seems to be some more secular discussion around drivers in test and measurement.
Yeah.
That's driven some of the M&A in recent years.
Yeah. Well, it's a great point. I mean, when you look at the, going off your last point, you know, the M&A we did in the fourth quarter, two deals for Fluke, really around solar and around condition-based monitoring, really good growth drivers. Accelerates our, you know, obviously, small bolt-on, good, high return, but also accelerates our strategy in power and or in, in, in renewables, in, in sort of the energy transition at Fluke. So it's been a deliberate attempt over years of both organic and inorganic acquisition. And I would say Fluke's really been more of a mid-single-digit grower through cycle over the last, you know, couple of decades. So we feel that that business is in a great place. And I would just step back before we compare with tech. I think that's indicative of where iOS sits today.
When we think about the iOS segment, intelligent operating solutions, where Fluke is, that's where a lot of our transition work to really make this segment better, growthier, more durable, and you really see that play out. We talk about healthcare, I'm sure. I'll leave that to the side. In PT, we're, you know, just moving into as much transition. We've had a lot of transition in iOS, and you see that in the results. Now with the EA acquisition, we really have an opportunity now to make PT growthier, make Tektronix growthier. So I think both it's a good example of one segment that's, you know, done a lot of great work to make that segment, I think, really strong. PT, we're still in it. We've done a lot of great inorganic work to make that segment better.
Now we, you know, we add inorganic work to that to make it even better. EA will make PT and Tek much growth in Tek in particular, more growth over time.
I think, you know, one driver of that, development of the business model at iOS is obviously that, Facilities and Asset Lifecycle.
Mm-hmm.
Or FAL, selection of businesses. Maybe talk about the growth rates in that FAL subset. You know, what's the profitability level like?
Yeah.
Do you need to do something like that in PT to bring it to where iOS is, or no, it's a different path of transformation? Let's talk about.
Yeah.
FAL first.
I think that that's a really scalable, incredibly strong rule-according plus group of businesses today. Great opportunity. We did a couple of small acquisitions in the fourth quarter, one to give us some SaaS capability in one of our product lines, the other to give us some data capability in, in a region. So good bolt-ons, high returns, opportunities to continue to do that in FAL. We think that's a, you know, long-term is a billion-dollar set of software businesses with really strong profiles across the board. Those opportunities do exist in PT. Whether or not we go down that path or not, you know, you always have to time acquisitions. But when we think about the $10 billion for the served market that sits in PT, roughly 10, 10, maybe 10 or 15. My, my math might be a little off.
There's plenty of opportunity for more durable businesses, whether that's in software, whether that's in services, or it's a business like EA that just is really dedicated to a secular driver that has really good long-term profiles. So we'll certainly, you know, our, our M&A strategy is really around that growth platform or the or the connected workflow. We think that's a good strategy for hardware, software, and services based on our domain expertise. And we have that in PT as much as we do anywhere else. And, you know, we certainly have the capital and the balance sheet to be able to do that over the next, you know, five years or so, for sure.
Switching maybe to healthcare. You know, that's been more like a sort of low single-digit CAGR, your own business, the last five years. A lot of that is because of maybe portfolio moves you've made within it, stepping back in some areas, and probably the end market's grown a little bit faster. You know, from here, how do you see that healthcare segment growing and the end markets for this?
Well, we think it's a mid-single-digit grower. I think when you think about COVID and some of those things, there certainly were some, you know, setbacks, some headwinds relative to curtailing elective procedures. But I think when you look at ASP, you sort of think about, you know, COVID impacting elective procedures. And also sometimes what gets missed is that was our largest business in Russia. So, you know, we had to, like I said, a good chunk of that business. So, you know, those things are behind us. When you look at ASP since COVID, I think it's grown mid-single digit. So, a little bit of noise because of the channel transition we made last year in the go-to-market.
Yeah.
Which was incredibly important towards long-term growth and strategy. So that's behind us. We feel really good about where the health segment's gonna be this year relative to its growth rate. It's gonna grow, you know, margin it's gonna span margins, 125 basis points, a little bit above the average. We, we feel good about where that segment is at. And, you know, I might just step back.
Mm-hmm.
When you look at health today in that $1.4 billion of revenue, 50% of that is consumables. So half of that business is consumables. We also have software and services too. So the durables, as we move through the pandemic and move through into a more what I'll call normalized healthcare market where the secular drivers of more procedures, more technology and procedures, demographics moving our way, we'll see those, those drivers of the market will start to take over, and the growth rate of the market will continue to really be the growth rate. You know, we'll be good, and we'll certainly participate well in it.
You know, it sounds like things are pretty well set for, you know, steady to accelerating top-line growth across the company. You know, when you think about that kind of $420-$450 earnings.
Yeah.
Goal number for next year that you put out at the investor day, you know, what's kind of the conviction on that? Does it require a big uplift in the macro environment or several huge acquisitions on your part? Like.
Yeah.
Maybe help us understand the path to get to that rate.
Well, nothing, you know, nothing's ever on a glide path, right?
Yeah.
We're sure it's that easy. But I think when you look at it, and using kind of a $3.80-$3.85 kinda jump-off point for this year, right, I mean, when you look at a mid-single-digit growth next year, you look at the typical fall-through that you'd see and the margin expansion, you get pretty close to those numbers. You get EA, you know, adding more value next year, and you sort of see the benefit of delevering relative to the balance sheet. And you get pretty close to those numbers. So, our future success is never guaranteed. But we feel, you know, I would step back. You know, in 2021, we put out free cash flow target for 2025.
Yeah.
And we re-up that in 2023. We've put out margins that we've exceeded.
Yeah.
So y ou know we feel good about the long-term targets that we have. You know, we feel good about our ability to achieve it. That said, it's nothing's guaranteed. Those are at this point, that's not a guide for 2025 by any stretch of the imagination. And as I also pointed out earlier that you asked is the step-up from first half to second half is not dramatic either. It's pretty typical. So, I think.
Yeah.
As we start to think about the components of getting to that number, not a big step-out, step-up first half to second half, and sort of a number, you know, we're gonna delever the balance sheet over time. We just did a debt deal that frankly solidified a really nice interest rate on a eurobond. So we're, I think, the balance sheet's in a really good place. We'll delever through the year. And, you know, tax rate, the, the I on the EA deal's better than we anticipated. So just a number of things that give us confidence relative to next year.
On the you mentioned the drop-through of mid-single-digit core growth. Is sort of 40% leverage the right figure?
Yeah.
Now, as Fortive keeps you know, you mentioned iOS has sort of graduated to kind of where you want it. PT's on the way. Does that leverage increase potentially over time?
Yeah. Well, first, I would say.
Yeah.
We don't tell the iOS team that they're where they need to be. So let's keep that between friends. We think there's plenty of opportunity for iOS to continue to get better. I think if we just really step back to where we're at now, we're in a good place relative to where we're going. I think the questions around the delevering aspect of it, you know, we're generating a lot of cash. And so I think our opportunity to continue to do those things. That said, we think there's plenty of opportunity for M&A. So.
Yeah.
We've got lots of paths to 2025. And again, we don't wanna get into a guide or anything like that.
Sure.
No guarantee, but we do think there's opportunity. That's why we put out the long-term target.
Yeah.
We wanted people to be able have an opportunity to sleep, sleep those.
That 40% operating leverage kind of drop-through, you know, that's realistic.
Yeah.
For the current business.
Well, if you think about 40%, we, we sort of think about it as I'm getting into your prior question. We wanna make sure we continue to have the ability to invest.
Yeah.
You'll probably see higher fall-through if the revenue goes up, right? So you saw.
Yeah.
Higher fall-through when revenue was above mid-single digits. So I think it's fair to say that if, you know, if revenue's up, you might see things fall through at a little bit better pace. On the other hand, we also are gonna take the opportunity to take some of that overage and accelerate our strategy. Obviously, all of our investments are tempered over time. To the extent that we maybe are in a little bit better shape than we anticipated, we might pull in some of those investments in order to get to end points faster. And I think our history has been to try to get to advanced targets faster. And we do that by taking the opportunity when maybe we have a little bit of upside to sort of deploy that.
We'll obviously fall through at a little higher rate, but then the 40% sort of always assumes that we'll have an opportunity to reinvest some.
Perfect. With that, maybe we'll start some audience response survey questions. So first one, do you currently own Fortive stock? So please use those gray boxes. Okay. So very sort of polarized.
Good opportunity.
Yeah. It's a lot of.
Don't sell every day.
Number two, aside from ownership, what's your general bias or impression right now? Positive, negative, neutral? Okay. So not many negatives. Number three, through-cycle earnings growth for Fortive versus the, let's say, just multi-industry average? So generally above. Number four is around excess cash usage. So it should be some balance between one and two probably or six. So generally bolt-on acquisitions. Number five is around what sort of P/E should Fortive trade at? Okay. So generally a premium to the index. And last question is around, this is for Fortive, not for Emerson. Don't worry about them here. This is around what's the major share price headwind or reason not to own the stock. And again, this is for Fortive clearly. I won't tell you why. Okay. So organic growth, the main, the main concern or question mark.
Maybe, Jim, you know, with that in mind, acquisitions, you know, a couple of years without much, then the EA deal, which I think the market.
Yeah.
Reception has been pretty positive towards. If we're thinking about, I don't know, use of cash for hardware versus software acquisitions, or is that just not the right way to. It's not how you think about it, I'm sure, but just how would you sort of characterize that in your mind? Particularly, again, trying to mix up PT.
Yeah.
Does that lend itself to one or the other or the type of business you're looking to buy?
I think our strategy has been, I think, certainly very consistent over the years. And that is, in these growth platforms, we see opportunity for hardware, software, and services. And.
Yeah.
The reason why, so I think it's all the above.
Yeah.
Some will have more than others. FAL is an example.
Mm-hmm.
It sort of is mostly a software. It's almost all software. So that's probably gonna be.
Yeah.
If we expand, you know, the two deals we did in bolt-ons, one was a SaaS solution for one of our product lines. The other was data, as I mentioned before. So in FAL, it's probably gonna be mostly software. But where we have domain expertise that we've forged over time, whether that's in Connected Reliability in iOS or it's, which is primarily Fluke, again, or in product realization where you have Tek, we certainly, and certainly in health, we have real opportunities for hardware as well. And so that domain expertise that we've forged over time gives us really unique capability to get synergy, to do more for customers. And so we wanna leverage those advantages. It makes us more competitive on deals. It gives us an opportunity, you know, a real opportunity to globalize the business.
What you see with EA is, you know, because those products are ubiquitous to our customer set throughout the world, our ability to leverage that around the world is pretty awesome. So I think we certainly deeply believe in this connective workflow or growth platform strategy. We think it gives us more synergy. We're gonna be disciplined around returns and all that goes with it. But we, you know, to maybe to that bolt-on question.
Yeah.
That's where the most bolt-ons are too. So, we see, but we certainly see the value for customers and ultimately the value to us by, by being broad in our thought that hardware, software, and services, the combination of all that is, is all in the M&A mindset.
In terms of, I guess, sort of size of transaction, you know, M&A market's been tough for two years. Do you think that naturally, you might go back to doing larger acquisitions soon if the broader market picks up or not necessarily?
Well, there's always more opportunity in bolt-ons. So, yeah. You know, whether that's a bias or not, really, the reality is, as you move up to larger deals, there's fewer. We certainly have a scope of larger deals that we like a lot. EA was one of them.
Yeah.
If those become available, they're hard to predict when they'll become available. That's why we do a lot of funnel management. That's why we're cultivating EA for a long period of time. We're doing that in other companies. And if they become available, we'll certainly look at them. And if there's opportunity to have good returns and accept the strategy the way we want to, then we certainly would do something. And the good news is the balance sheet's gonna be in a good place to do what we need to do this year. And we feel really good about our projections in terms of what we can do with businesses from a strategic perspective over the long term. So that, you know, the confidence in which to build on those things has never been greater.
If we think about AHS, does that need to kind of prove higher organic growth from here before getting a lot of M&A capital or not necessarily?
Well, we sort of say we have to prove ourselves every day to some extent.
Yeah.
So, I think we get permission the better we execute gives us more permission to do things. I think what you've seen is really solid execution out of health here, certainly over the last in 2023.
Yes.
You know, a little bit of challenge. As I said, you know, we've seen mid-single digit growth there. Got a couple you know, the Invetech situation is something that, you know, moving that into PT makes some sense for a bunch of reasons. I think where we stand today, we did a small partnership agreement with for ASP in the fourth quarter.
Yeah.
We think that's a good organic opportunity. We certainly would have a landscape that's meaningful if there's an opportunity to become available. Healthcare's an M&A market that, on a broad basis, for what we do, which is really industrial healthcare.
Yeah.
You know, at the end of the day, what we're really doing is we're really making hospitals safer and more productive, which isn't that different than what we do in a manufacturing facility or an engineering lab to some extent. Our healthcare.
Yeah.
Is really very similar. In many respects.
Yeah.
Our healthcare segment is much of vertical conversation about doing a lot of the same things as to what we do in other places. And we think that market is that M&A market, which has been a little slower last year simply because of COVID. I think a lot of we think probably opens up a little bit in the second half. So that might be one place where it might be as much the opportunities might become more available in the future. But I think when you look at what the guide that we have for the year, the growth rate, the margin expansion, the quality of the business that we have, there's certainly I would hope we have you know, I'd hope we have more opportunity there because we're executing well.
You mentioned, at the very beginning, you know, it's been a public company for almost eight years now, standalone. There has been a lot of portfolio-heavy listing already that's taken place. Should we read into that that the, you know, you, you kind of have a lot of the, you're in a lot of the markets you want to be in today? So future acquisitions or organic investment will be in the existing areas? Or no, there's still the scope perhaps to maybe push somewhere else that you're not large in right now?
I think we like the segments we're in. We have $60 billion worth of surf market. There's plenty of opportunity for us going forward. We'll continue to do a little bit of portfolio pruning like we talked about. But, you know, I think when you really look forward what we have you know, we reevaluate this every year.
Sure.
We look at the portfolio on a regular basis with the board. But when you look forward with the SaaS market we have and the positions we have in this market, we've never been in a better position.
When you think about the kind of some of the parts-type valuation 'cause there are some disparate.
Mm-hmm.
Verticals, disparate business models as well: software, services, hardware. You know, how do you think about the sort of when you look at that where Fortive is today, you know, do you see a big gap? You know, if so.
Yeah.
You know, what do you think you can or are doing to narrow it?
Well, we certainly think we're undervalued.
Yeah.
Everybody would agree based on the survey. So, we, we think you know, no matter the any way you analyze it.
Yeah.
We think we're undervalued. So that's the opportunity that we have.
Yeah.
We go out executing every day. I think what we tried to put in our earnings presentation back a few weeks ago was the power of what we've done over the five years.
Yeah.
2019 to 2024. And I, I'd take that EPS, free cash flow compounding that you've seen, core growth, and the revenue total revenue growth, those numbers stack up really well. And I think if you apply those in any way, shape, or form, you'd say we're undervalued against any analysis. And that's the exciting part. That's what gets us excited every day to move up to that and ultimately bring the company up to a valuation that we think is appropriate.
Fantastic. Well, on that note, thanks very much, everyone. And thank you, James.
Thanks, Tony.
Good to see everyone. Thanks, James.