Thank you, everybody. You know, super excited to have Fortive here with us today. We have President and CEO, Jim Lico, and then Olumide Soroye, President and CEO of the IOS segment, and recently named CEO of Fortive RemainCo. So congratulations on that.
Thank you.
Before we get into the Q&A, Jim's gonna start off with some prepared remarks.
Yeah, maybe real quick, just given the news of the day or the news of a week ago. We obviously announced some big news with the separation, and we're really excited about it. You're certainly gonna hear that in the words, I'm sure. I think it really does a couple of things for us, which is, one, when we get to the spin, maybe a year from now, we really have two really great investable companies, and the growth story of both of those, which we'll talk a little bit about, I think is really exciting, and you'll hear from Olumide today more on the IOS and PT or IOS and health front, which is gonna be New Fortive.
But our our excitement around these two great growth stories is really high. And I would say the second thing is, we we continue to believe that the company's undervalued, and we think this unlocks a lot of value, both medium term, but also long term. And the strategic clarity that this gives us, I know you'll hear a lot about today, is really exciting news for us. So, as you mentioned, Olumide will be the new CEO going forward. Tami Newcombe will become the new CEO who runs our PT segment today, will become the new CEO of the new company. So also really, really excited about the new leadership going forward.
I'll be around until the spin, but, but I think going forward, we've got really a great, exciting two leaders to really run these businesses that is gonna unlock a ton of value, so.
Yeah, no, I mean, I guess kind of just following up on that, on the value, the value unlock, you know, do you believe that this move, you know, is primarily just a driver of, you know, value, value accretion, in that, you know, you're separating the two businesses, have two cleaner stories, and, you know, kind of unlock that sum of the parts? Or do you think that, you know, separating the two companies could, you know, you know, enhance the focus and, and the strategic, you know, views of each?
I think both, Chris. Really, when you look at it, as you said, where we're trading today, and then you look at comps for the two, certainly unlocks value, without a doubt, and we can talk about comps and things like that, but certainly, that's number one. We really see that the two independent growth stories. We've got great investors, but some investors are looking for that more durable story. Some of our investors are okay with the more cyclical growth story, and I think what we give now as an opportunity is two wonderful assets to invest in. Well, and we also think there's tremendous long-term clarity. I'll speak to the NewCo side, and then Olumide can talk about the future of Fortive.
But on the SpinCo side, we've got a business that's tied to great technology markets that are gonna grow over time: data center, electrification, defense modernization, semiconductors. Those are really great growth stories, but they have some cycles to them. And so I think people now can understand we're gonna have a mid-single-digit growth through the cycle company, that is a good foundational with great margins, a great financial profile, and a capital allocation story that's really clean. So I think the new company will definitely maybe talk about New Fortive.
Yeah, and I think for New Fortive, we kind of start with a much simpler and focused agenda for what we do for the world and for our customers, and it's this idea of bringing safety and productivity to the places where people walk and where they get healthcare. And everything we do in New Fortive is about that. It's about safety and productivity. We have a real focus on multiyear enduring customer value, which means recurring revenues. So we, we don't tend to do things that are sell a widget and leave. We wanna do things that add value to customer over multiple years. That could be software, it could be consumables, it could be subscription services, it could be differentiated technologies.
That's why we're gonna start off with this $4 billion company, with 50% of that in recurring revenue models, and we expect that to expand over time. Importantly, we also will have a much more focused capital allocation strategy going forward. That's gonna be more balanced, between meaningful share buyback whenever we see a dislocation, and then accretive M&A, that's really, again, focused on recurring revenue and assets, things that really tie to our domain expertise in IOS and AHS, and things where we have clear FBS value creation opportunities, which means it, it just helps us buy assets at reasonable multiples.
It's a much lower risk capital allocation strategy that we can now do because we have this, you know, consistent, mid-single-digit, growing company with very high margins, turning the revenue since we're earning some free cash flows, which on its own just compounds so nicely. You can be a lot lower risk in your capital allocation strategy.
No, appreciate that. You know, Jim, you talked about, you know, the sum of the parts story, you know, some attractive comps that are out there. You know, from my conversations with investors the last few days, I think people feel comfortable on, you know, Precision Tech comps, you know, generally being industrial investors
Yeah
at this conference. I think there's, you know, some maybe more uncertainty around the RemainCo. So can you maybe just talk about, you know, and Olumide, you too, what do you think is, you know, underappreciated in New Fortive or RemainCo? And, you know, to the extent you do wanna talk about, you know, comps you guys see out there, we'd love to hear that.
Yeah, we can tag team that a little bit. I'll take the comp one. We think. You know, if you think about the financial profile that Olumide just articulated, which is gonna be 50% recurring revenue, high gross margins, high operating margins, and mid-single-digit growth, and the biggest piece of the business growing at high single digits, which means the growth rate's mixing up over time you'd think about companies that have a much higher multiple. You might think about a Roper from a few years ago. You might think about Veralto today as two good examples. Down the road, as software becomes an increasingly part of the portfolio, you start to think about some of the industrial software folks. So we think there's a good set of comps out there.
A little, little bit more complicated, but as he just articulated this, the safety and productivity story, I think the clarity of that story and how we build the company over time, and the fact that recurring revenue number is gonna continue to get higher, I think you get to a really admirable comp set that's really good.
And then, you know, on capital deployment, you know, you guys announced that, you know, at least until the separation, I think 75%
Yeah.
of your cash is going to buybacks. All in all, it sounded like, you know, even after this, maybe the allocation will be more balanced between, you know, M&A and buybacks. So yeah, like, is this, you know, focus on maybe more, cash return to shareholders, you know, gonna continue beyond the separation?
Yeah, it will, and I describe it as really a progression, right? So for the first eight years of Fortive, that's behind us now, we've followed a model where incredible free cash flow generation, and we've done a lot of M&A to create the advantage positions we have today, and we love the positions in IOS, in AHS, and in PT. Between now and the completion of the spin, we wanted to give investors kind of certainty on the path to return, and frankly, confidence that we believe in the value unlock that Jim talked about. So we are gonna put 75% of our free cash flow until spin in share buybacks, because we believe that's a really great investment, right now. After the spin, the two companies will have their own capital allocation strategy.
Both of them will be more balanced, but obviously, the new company will form its own board and come up with that. So I'm gonna focus on Fortive going forward. We will be balanced going forward, and that means that you will see us, at any point in time, look at what delivers the best risk-adjusted returns. There will be times when meaningful share buybacks make sense, and we will do that consistently when we see a dislocation between the stock price and the intrinsic value of the company, and it's the best deployment amongst the alternatives. We would also continue to do accretive M&A, but be a lot more focused and disciplined. We have a magnificent process for looking at assets, but our filter will have a few things.
First, we would focus on assets that have a higher recurring revenue content, because like I mentioned, we're at 50%, we wanna work that up, because we believe fundamentally, your question on comps, we want to stand for this idea of enduring recurring revenues. So that would be one filter, assets that help our recurring revenue journey. The second filter will be assets that are close to our domain expertise. So we have strong positions in IOS and AHS that we've worked hard over the last eight years to create. We're going to build on that strength. So assets that we acquire, you will find are really close to what we do and they strengthen our positions. We've done four bolt-on acquisitions in IOS over the last two years. We really like those assets, incredible returns. They come in, they land, we scale them on our existing platform.
We'll do more things like that. And then we'll look for things that have clear, kind of, advantaged ownership in our hands, okay? If there's no reason to own other than five other players, you probably would find us backing away, because those tend to drive you into multiples that are, that are really not that attractive for us. So I think that balance between share buyback and M&A will be an important piece. Of course, we'll have a modest dividend that will grow with earnings and free cash flow, and we feel enough room for the investment in organic growth. That will be an important part of Fortive going forward. We really believe that the top-line growth opportunity ahead of us will come from the innovation vitality that our teams have been working on over the last three years that will begin to unfold here.
Appreciate that. You know, I guess kind of staying on the bigger picture topics, AI. You know, what does AI mean for Fortive? You know, you guys sell tools that help develop AI, but you know, AI is a workforce productivity solution. You guys generally sell workforce productivity solutions, and you know, I get questions on, you know, is there an AI risk here? It even, I think, came up on the last conference call. So you know, really, just be interested in what your view on that is.
I would say, starting with how we've thought about machine learning and AI for over half a decade now, you know, we've invested considerably in what we call the Fort, you know, six years ago, which was our centralized activity around building capability around machine learning and AI. Much like we have an FBS, Fortive Business System office to make sure that everybody in the organization understands the tools of the Fortive Business System, the Fort's responsibility is to really sort of, you know, incubate AI ideas throughout the company. We've had a lot of progress in that regard. We think about it in a few different ways. We think about the acceleration of product, maybe two in the productivity camp. How do we accelerate product development, principally through software development and using AI tools?
We think about it, just productivity in general, more broadly, and by the way, we've had about a 20% to 30% improvement in software development over the last, what? 12 to 18 months. We think about it on the productivity front, just everywhere we have people, and how do we accelerate productivity combined with FBS? And we've seen some really strong results there. The other two are maybe on the growth front. How do we interact with customers better, and then finally, how do we think about AI solutions better? So I'll let Olumide talk about the AI solutions because they're mostly in his world. I would take the AI competitive thought front. We've invested, you know, one of the aspects of investing in the software businesses we've invested in.
First of all, one of the reasons why we built the AI capability was. I think we definitely had some foresight as to how AI could be. You know, we've been talking about workflow solutions for, you know, more than six years now, and those workflow solutions were hardware to software, software to AI. And so we always looked for places where we had data, the data assets that we could leverage AI into, not that AI could attack. And so we really sit in these places where our data capability and the data assets we have are our own, and we have an ability to monetize it. So we always ask ourselves, as part of why we do strategic plans, how can we be disrupted?
Today's topic du jour is AI, but we're always asking ourselves, can we be disrupted? So the strategic planning process that we have also sort of makes sure that we continue to ask ourselves those questions. I'll, you know, if there's
Yeah, no, I think Jim covered it really well. I would just add that we actually are excited about the AI use cases. Our teams right now across all our companies have a plethora of use cases that build on the proprietary data assets that are in our businesses and the domain expertise that we have to bring new solutions to customers powered by AI. Because to Jim's point, we had the foresight to start building this capability five years ago, before the current sort of spike in interest around AI. So we actually feel like this is an advantage for us. You know, one of the bolt-on acquisitions we did last year was an AI company that's building a model that we thought was interesting and we could scale.
So as part of our recurring revenue for cost-effective M&A, we'd look for chances like that. 'Cause ultimately, you can have the best models, but you have to deliver it to customers at the moment they need to make decisions. And we find our domain expertise and our software deployment actually give us a pretty big advantage.
Yeah. Chris, maybe the last thing I'd add is, one of the reasons why we hired Olumide. He won't say this, so. You know, one of the reasons why we hired Olumide a number of years ago was his background in data analytics, his recurring revenue experience, and a lot of what Fortive is is really why we hired him, really. I mean, lots of reasons. He's a great guy, too. But he brought a set of expertise and leadership to our leadership team that we didn't have. You know, people always say, "When do you go outside versus inside?" And one of the reasons why we went outside and hired Olumide into IOS was to bring that expertise into the company, and he's been a thought leader on this ever since.
So I think New Fortive's in really good hands relative to this, because we've got a leader who's been playing in these circles for over, well over, almost two decades now.
Yeah. No, maybe turning over to margins, which have really been a standout positive for the company. You know, even through this period of lower growth with Precision Tech cycling down, you know, the company continued to generate 50% plus incremental margins. Obviously, the great gross margin, you know, helps with that. But, you know, can you just talk about some of the drivers of margin expansion the company's been able to put through, and then looking forward, you know, what opportunities do you see on the margin front?
I would say there's really two pillars to our margin expansion. The first one is really FBS, and it's finding how we are better in everything we do on a consistent basis, whether it's the 20% to 30% I talked about on software development or anything that we do. FBS has a set of tools that helps our professionals around the world drive productivity, which ultimately drives margins. And, you know, that's just not Olumide and I, it's everyone in the company, because our culture of continuous improvement is so foundational to what we do. I think that's number one. I think number two, slightly, is the business, and maybe within FBS is also the innovation front.
You know, as we innovate and bring more innovation and accelerate innovation, we're doing that with deeper customer relationships, and we're obviously able to do that at a higher margin aspect, because the recurring revenue strategy is a margin-enhancing strategy, and that really gets to the second point, which is the business model. The business model just is also a huge accelerator. More software, more recurring revenue. How we've really built the business model going forward, in and of itself, is an accretive mechanism to both our gross margins and ultimately our margin expansion. You know, one of our great stories is our gross margins, right?
I mean, I think one of the things that people have seen from us over, you know, really the history of the company is the continued commitment, dedication, and success of gross margin expansion, and you know, it's almost religion in our company because we ultimately know that when you have great continued gross margin expansion, it gives you the degrees of freedom to invest in the business, while at the same time delivering earnings.
Yeah. No better way to generate operating leverage than getting gross margin high.
Exactly right.
Yeah. You know, maybe turning to the markets and starting with Precision Tech , that's really where we're seeing rate of change.
Yeah.
You know, Q2 kind of got the Book-to-Bill back to 1.0. You know, it sounds like the end markets haven't fully turned the corner yet. You know, what are you seeing, and what's the outlook on Precision Tech ?
Yeah, you know, as we've firmed last week, so, you know, what we've seen is, I would say, consistency for the most part, puts and takes. I wouldn't say we've seen a necessarily a broad inflection, positive, and by any stretch. We're gonna see orders growth in PT in the second half. Some of that'll be comp, some of that'll be, you know, some of that'll be relative to some things getting better. Some of the order delays that we talked about in the second quarter, we've now seen. So I would just say it's a sustained
We really didn't expect a big inflection up to begin with, and I think what we talked about or what we've been talking about is the fact that we're seeing sort of the sustained aspects of the markets at this point.
Yeah, I mean, the short-cycle, every short-cycle industrial end market I cover, you know, has the destocking dragged on or the softness has dragged on longer than I think anyone really expected coming into the year. You know, what do you think is driving that, you know, weakness on some of these short-cycle categories?
I think if I could predict that to great certainty, I would probably be doing something else. I would say, number one, what and maybe this is speaks to what we see. Most of the destocking is probably through, for the most part, maybe a little bit with some of our OEM customers, specifically in our sensing world, where. But that's probably, in the end of the day, it's probably more a demand challenge than a inventory issue. As I always like to say, you know, inventory issues, inevitably, demand problems become inventory issues, right? So, there's a little bit of a chicken and the egg there. But I think it comes in pockets.
We've got some markets, you know, I'll use our sensing business as a good example. Electrification continues to be really strong. On the other hand, we're seeing things like maybe some of our industrial automation customers and stuff like that, maybe extending a little bit of slowness more into maybe later in the year, maybe even into 2025. So I think it's a vertical-by-vertical story, and I think the beauty of kind of how we've been able to continue to be so successful this year financially is because, one, we've got a number of businesses that are really continuing to do really well, and I think we've gotten ahead of a lot of the challenges we've had in some of the businesses. So we continue to have margin accretion in most of those places, while despite maybe a lower
A tougher top line. So I think just the way we're gonna think about the rest of the year relative to PT and Fortive in general is probably not as big an inflection point. But I think what we said when we affirmed was basically a statement that says, you know, we believe we'll continue to deliver on our commitments and with the environment we're seeing.
Yeah. I mean, you know, you touched on sensing, maybe hopping over to Tektronix. You know, Q2 felt the impact of some of the delayed government and military spending.
Yeah.
It sounded like, you know, before maybe some of that has got going. So, you know, what do you see there into the back half? And then, you know, particularly on government and military, you know, into 2025 and beyond, how does that outlook look?
We think good. Certainly on the part of our business that's maybe more around you know programs and things like that that are ongoing is more production like our EMC business. That business continues to be very good and is gonna grow really well and has a you know completely booked out backlog for next year already and beyond, so we feel really good about that. You know the investment cycle, but one of the other sides to that is that as people invest as maybe those same customers invest in innovation primarily Tektronix they can delay from a quarter or two their program right? And so what we're really seeing is we're not seeing the
what we're trying to say in the second quarter is, we're not seeing that business go away, we're just seeing a little bit of delay. But it can't be delayed indefinitely because those same customers are investing in innovation, they're investing in technology change, and we know that's gonna continue to occur. So, the business that we saw, we've seen we pretty much now have, so, we feel good about that. We'll continue to probably see, and maybe this gets to your broader point, you know, the, I think the uncertainty, certainly some of the uncertainty we see around the world right now, just more broadly, I think leads some of our customers to the, maybe delay a spend for a quarter or two.
So I don't think it's necessarily the business is going down as much as the variability of the business, and that's what we were trying to articulate in the second quarter. So we're just seeing more of that variability. You just maybe don't count on the order as much as you did in a sales funnel, maybe, that you did a few years ago. And until we see more certainty in that, we're gonna continue to manage the business accordingly, and that's what we've got in the guide for the year.
Yeah, I mean, the big projects moving slowly is something we've pretty consistently heard
Yeah
throughout. You know, it's also, you know, weighed on EA Elektro, and some of the project pushouts there. But I guess under the surface on EA Elektro, you know, how are the selling synergies going, you know
Mm-hmm
with Tektronix, and what do you see under the surface there that gets you, you know, optimistic about 2025 and beyond?
Yeah, the strategic thesis around EA was really around. We believe deeply in electrification and in the engineering, R&D development, and validation process, which is the development of all things known to batteries, as well as semiconductors and chips that need lower power in order to play in lots of markets. We believe deeply in that trend, and I think everything we've seen thus far would suggest that demand is there. It's more cyclical than we anticipated, and so particularly around EV mobility, and so that's why we said these projects have moved out. But the technology, the innovation capability of the business, the customer relationships, have been better than we even anticipated in that sense. It's just that some of the customers have decided to move their investment cycles out a little bit, as we've talked about.
But relative to, you know, how we think about the business, relative to synergies, we're actually ahead of the game. So the T ech team, in creating a run rate business, because the business is mostly project-related, the ability for the team to build a run rate business is on track. So, you know, unfortunately, it's not the biggest part of the business. If it were, we wouldn't have had as many issues with the business this year as we described. We've now taken the revenue down, but I think the long-term view of the products, the technology, and the synergy with Tech, very much intact.
Yeah. No, I appreciate it. Maybe, maybe hopping over to IOS, and facility asset lifecycle. You know, you guys are calling for better growth here in the back half of the year. You know, what's driving this? And then more broadly on, you know, that business line, who do you guys compete against, and why do you win?
Yeah, so that business for us over the last two years has grown mid-teens on a two-year stack. So it really, the acceleration in the second half is just returning to the path we've been on, which is, you know, high single digits, sometimes low double digits. So the Q2 was a little bit lower in mid-single digits, mostly comp, 'cause we had a massive recurring kind of revenue quarter last year. So it's really returning to the path we've been on. Now, what's driving the success in that growth platform for us is the work we've done on really improving the innovation vitality of those businesses, 'cause a bunch of them are software data businesses.
The work we've done on the go-to-market effectiveness, that's what we started with two and a half years ago, and that's, as you know, that continues to yield results for us, and the fact that we've picked really advantaged positions in this key workflow around facilities and asset lifecycle, which goes to your point about who we compete with. The positions we've created are really unique, and there are few players that do what we do, so in the plan stage, we have data that's the industry standard in RSMeans, for how you plan construction of buildings. No one else really has that same industry currency-type data, and then we play in a lot of kind of procurement-type for government agencies, operations with our JOC program. Nobody else really does that at the scale that we do.
And then for the things we do in maintaining and operating buildings, there are other players, but they don't have the marketplace that we have. And so the thing we like about our position is they're really, really unique, and there are few players that do what we do. I'll tell you who we don't compete with, kind of the building controls players, we really do something totally different. In many cases, some of them are partners of ours, 'cause they pull through our solutions. And the facility management companies, we don't really compete with them because, again, they need the tools we provide to do what we do, so most of them are partners of ours.
So most of the players we compete with are either non-existent in some of the places we're in, or really kind of small, you know, kind of players in most of the other areas. So that's one of the great things about the position we have in that workflow. And back to your original question, that's what's driving the growth, it's because we have this really strong positions.
You know, maybe hopping over to Fluke. You know, why has Fluke been able to avoid the downturn that we are currently seeing in tech? Is it just a function of, you know, the multi-year comps, you know, tech cycled up a lot harder coming out of the pandemic, or are there, you know, specific secular drivers that Fluke's attached to that is just, you know, allowing it to remain, more resilient?
Yeah, I mean, this, Fluke and Tech are really different businesses. I think Jim touched on this. So Fluke is not just kinda tools for process engineers and maintenance technicians. In Fluke, we've got advanced calibrators that are over $100,000 per unit, and we've got digital multimeters. So it's really just a wide range of products. It's a much more global business. It's tied more to the operating rhythm of companies than CapEx cycles. And Tech, on the other hand, is a lot more about the R&D, to Jim's point, and the CapEx investment cycle around that. It's a lot less global in terms of the market, and to your point, it's cycled up and down a lot more for that reason.
What we've seen at Fluke is it's really a really resilient business that's been created, both as a result of that composition of the business, but the work the team's been doing around NPI over the last three, four years. The fact that we've now been growing the recurring revenue component of Fluke, that's still at just 10%, but it's been growing low double digits now for the last four years. And so, you know, Fluke very much. And that's part of why it fits in Fortive going forward, because it has this durability to it that feels recurring, and we believe there's a chance to keep expanding the recurring portion of Fluke. It's really just very different types of businesses, both fantastic.
You know, Tech will ride up a lot more the technology trends, but then there's a downside on the other side of the slope. I think Fluke has got more of a strong, sustainable growth.
Yeah, no, I'm, you know, starting to see that in the-
And Chris, I would just add, you know, I think when we think about it, what we're really part of this decision to separate is, we've made Tech a lot more durable-
Yeah.
but it's not necessarily completely durable. Whereas the work we've done at Fluke to expand markets, expand geographies, go into different places, including most of the recurring revenue that we have in the company today, emanated out of ideas that came from Fluke. We got into FAL because of Fluke. We got into Fluke Health because of Fluke. So that, that breadth of customers, that breadth of applications, that geographic diversity, has always been an idea generation for recurring revenue and another re- and, and as well as fantastic free cash flow. And so it not only, you know, it's got more durability, but also it just, it, it plays a special role in what Fortive will look like going forward.
I appreciate that. Maybe just one last one on AHS. You know, a good durable, mid-single-digit growth business. You know, what should investors be looking for as potential drivers that would, you know, take the growth above mid-single digits or potentially, you know, take the growth below mid-single digits?
Yeah.
What drives it?
I would really think of growth as, you know, it's 1% to 2% expanding the, you know, sort of elective procedures going up every year around the world. 1% to 2% on continued capital expansion, and 1% to 2% of price, and you sort of get to a mid-single-digit growth rate. In years where maybe electives bump up a little bit for, you know, catch up with COVID, new technologies that maybe come up, then maybe it goes up a little bit more. But I think that's a really strong recurring model, and I think what we've demonstrated over the last few years is that mid-single-digit growth. You get a little noisy because of the channel change, but I think when you look at it, just through the time we've had, it's been really strong.
Yeah, well
Yeah. And I would just add, the new product velocity
Yeah
the team is driving, that's the upside, 'cause we're, we're seeing those businesses really pick up their vitality, and that's what creates the upside.
Yeah, absolutely. Well, we're up on the thirty minutes. You know, thank you guys both for your time. I love the conversation.
All right, thanks, Chris.
Thanks.
Have a great rest of your day.
Thanks, everyone.
Thank you.