Pay attention, please, everyone. Jim's at the podium. We got the guys from Fortive here, Jim Lico and Chuck McLaughlin. I think Jim's gonna give a little bit of a preamble, and then we'll jump right into the questions on NATI.
Yeah.
Unless there's a slide.
No, there's, we'll be pretty quick here. Good morning, everyone. Good to see everyone. Just a couple of slides just to reframe, maybe a few that are new to the story. You know, I think what our key message is, both in the conversation Chuck and I'll have, certainly in the slides, are really around a couple of things.
One is, over the last since we came out in 2016, endeavored to continue to build a high-quality portfolio, leading positions, and we'll talk a lot about the attractive secular drivers that we've moved the business to, that have moved the numbers considerably over the last several years.
We think differentiated performance, I think certainly in 2022 you see the level of gross margin expansion when very few people expanded gross margins in a time of supply chain challenges. The fact that we had really strong free
cash flow last year, and continued margin expansion, something that's been a testament to the Fortive Business System over a long period of time, I think differentiates our performance in so many ways. You'll hear the power of FBS through what we talk about, continuous improvement.
No matter what business we have in the portfolio today, continuous improvement is really a way of life for us, and we've really continued to use that, use the continuous improvement and the results from that to continue to allocate capital towards creating real value in a formula that I'll share with you in a few minutes.
The portfolio continues to evolve, but continues to evolve to the better. Better secular drivers around the three segments. You'll be able to read the slides and be able to see them, but I'd call your attention to a couple things.
One is each segment, incredibly well-positioned, strong brands, global positions, with this idea of hardware and software together, the fact that our hardware positions give us a footprint and scale that allows for us to bring differentiated software into customers' value propositions and use that hardware and software to work in connected workflows.
To simplify it, they're leading positions, but they're really, if you think about it, if it's a factory, if it's a engineering lab, if it's a commercial building or a hospital, we may be in three different segments, but we're essentially bringing productivity and safety solutions to end users with that strategy. I think that differentiates our performance. I mentioned it.
You can see the numbers here and real differences over the last six years for us in terms of continuous improvement. We think we're in the very early days of this sort of, kind of evolution. We're getting 50% more from $1 of cash flow from $1 of sales than we were a few years ago.
Our margins continue to grow. We're up 1,000 basis points in gross margins over the last six years. I think you continue to see the numbers, continue to see that superior free cash flow margins, which is really a testament to us, and continue to move that organic growth rate up, which I think is so important to everything we do.
We think, you know, and we're seeing the benefits of that portfolio transformation, you know, we're continuing, as I said, still in the early days of that. To give just everybody a little bit of guidance about where we've been with our guidance on Q1 and the full year, we're affirming today the Q1.
We'll have good performance, probably a little bit better on the top. We're seeing better performance out of Fluke. We're seeing better performance out of our Facility and Asset Lifecycle business, our software business. We think we're in a good place there, and certainly the year playing out the way we anticipate.
What we think we're in a really good place here to continue to deliver another very, very strong year for Fortive. Finally, just that value creation formula. Continue to improve core revenue growth, expand on core revenue growth, drive margin expansion of about 75 basis points.
That mid-single-digit growth, driving 75 basis points of margin expansion. Continue to deliver really strong free cash flow, which can fund acquisition growth, continue to build a really strong portfolio, and use FBS to just keep that flywheel going in terms of continued improvement. That's kinda where we're at, and that's the short story. Let's get to questions.
Let's just start, generically speaking, for any large deal that you evaluate, you guys have ruled out, you know, you've said you're not really willing to use equity, you're not willing to use, I forget what the term you used, but.
Like a mandatory convert.
A mandatory convert. No equity. You know, we've talked in our research about doing something, if you were to do a large deal, doing something a little more complex, you know, whether it's a RMT or teaming up or something like that. Maybe when you look at a larger deal and you think about funding that, what are the, what's the framework we should be thinking about at a high level for you guys?
Well, for us, you know, it starts with, you know, not, no equity, and then also maintaining investment grade. Those are really two pillars for us. Really when we look at any deal, it's about, it starts with strategy. How does it accelerate the strategy? How do we become growthier, better margins? How does it fit there and create value for the shareholders?
Can you just talk about that a little bit, Jim? Like, just the, you know, what you would target recurring revenue growth. Like, what do you wanna get out of a large deal, basically?
Yeah. I don't think it's. I think there's, you know, for us, every deal is gonna be a little bit different. You know, what we're trying to do is, you know, what I just saw in the numbers. We're gonna look at organic growth. Does it help us on the organic growth side? Does it make us more durable? Is it tied to those secular drivers?
Sometimes durability is more pronounced because of the secular drivers, the markets they're involved in. Sometimes it's more recurring revenue, but we're looking for those key components for organic growth. We want, we wanna continue to see gross margins that are good. We wanna continue to you know, accelerate within those workflows. That means hardware and software, so.
Then we want an opportunity to really drive margins and use FBS to drive margins and free cash flow. That's really that value creation aspect of what we do. If we can see, y ou know, we're not gonna be 100% or 110% of every one of those categories.
Some may have a little bit better organic growth, but maybe they don't have as much, you know, free cash flow opportunity 'cause they're already negative working capital or something like that, so. We're gonna look for those key components, and that's the success story that we've seen thus far, and we think it holds, it holds for all deals, but certainly in large deals.
That ROIC, we didn't talk about ROIC, but certainly the return on invested capital on a larger deal is probably gonna be in that 10% in five years kinda category. We wanna see accretion, right? We wanna see accretion pretty early in that five years in the two, three-year timeframe is really important.
A lot of the deals you've done recently have been software, pretty heavily recurring revenue businesses. I think you talk about 40% of your book now in total being recurring revenues. If we look at some of these more hybrid assets out there, is that recurring revenue percentage? You know, would you be willing to do something that's dilutive to that recurring revenue percentage? You know, how much of a lightning rod is that?
Well, I think growth is the story in these deals. As I said, in many cases, you get there from a durability perspective, like an ASP, where you have a high consumables content, and that's the recurring revenue factor. Like in Gordian, that isn't recurring revenue, but is really tied to strong. You know, we've had double-digit growth since we bought the business. That is reoccurring, not re-recurring in the sense of that business. That's been a great business for us. I think we wanna always be thinking about recurring revenue, but we really are looking for durability of growth. You can get there a couple different ways.
Are you willing to I mean, you've done an RMTs before, but, I mean, is that, is something like an RMT, like, pretty specific and episodic? Or, you know, are there certain instances where an RMT would be more preferable versus less? How do you think about the more complex type of strategies versus just, you know, going to where the ratings agencies allow you to go and then deleveraging?
You know, the value of an RMT, there's several great things about it, but it can be very tax efficient is the main thing. What it's not is it's not simple. It's complex. It works best only in very unique situations. See, it's a really narrow window and one that maybe you don't really have line of sight to how or when the completion date is.
It's really like when we did the Automation & Specialty, we didn't have a timeline when we needed to get something done, and that was an example where it worked out very well. That's pretty rare, to be honest with you.
That sounds like less, less preferable.
Less preferable, in if. Yes.
Particularly in a competitive environment. If there was a competitive environment.
If a competitive environment for a bid for a large.
Yeah. Typically, in the two RMTs we've done over the last several years, both of them were on an individual basis where it was really more of a partnership, get to an endpoint than anything else. That's one of the aspects that makes it so unique.
I think when it comes to some of these deals that have been done in the last couple of years, whether it's, you know, Emerson and AspenTech, like there's this kind of lingering stub that's out there. You own a percentage of a company. People don't really know how to, you know, do the math, not surprisingly. Like, is that, are you more biased towards a simplified portfolio, or would you be willing to kinda have this some sort of stub lingering out there as a result of, you know, the structure of a big deal or something like that?
For sure, our base case is we wanna own the whole thing. I think that's. Because accelerating strategy is ultimately where we're trying to get to, it's hard to accelerate strategy in some of those other structures as much as if you own the asset in whole. You never say never, but, you know, Our base case is always to try to own things 100%.
The ratings agency's threshold for investment grade is kind of the eye of the beholder. I mean, we've learned that over the years, with some of the companies we cover that can go to 10 x leverage and still be investment grade. For you guys, you, I think, extended to 3.5 x at certain periods. You haven't really said what your threshold is. Like, any kind of color on, you know, how far you'd be willing to go with the balance sheet for something sizable?
Well, I think the, you know, in some future scenario, if, like you said, 3.5 x where we've been before. It really depends on the market conditions and, you know, what's going on right then. It's also a discussion, I think, you know, you can go over that in certain scenarios. You know, with the commitment to delever, I think. Right now there's a little bit more volatility out there. It really, where we focus on is looking at our M&A, what's in front of us now, and, you know, how does that fit with focusing on strategy? Do we want to deal is most important versus some, the hypotheticals maybe we're talking about here.
Any questions on the kind of deal strategy? Over here? Yeah.
Thanks. I know you said no equity, but to what extent would you consider selling existing assets to help fund M&A?
Well, you never say never. I think we really like the portfolio today, and I think where we have those three segments, the slide I showed a few minutes ago, all three of those segments, we just reviewed all of our strategic plans with our board, about a month and a half ago.
Feel really good about those places and that kind of thing. If we were to do a very large deal where that suggested that maybe something made sense, you know, we wouldn't necessarily say no to that. I think our base strategy is taking forward what we have. In a large transaction where it might change the components of a particular segment or business, we might, you know, we might consider something.
I guess the bottom line is, and maybe we can go to the businesses after this, it seems to me like after, you know, that five-year period of ripping and tearing of the portfolio, kind of running very hard, but being in place, you now seem to be more in growth mode.
Yeah.
You know, you guys have committed to the 5% organic, the 75 basis points plus margin expansion, and you're on your front foot when it comes to, you know, accretive capital deployment. You wanna grow the company from here, is what it seems to me to be the narrative that you're gonna play into with anything you really do here in the near term.
We do. We're a compounder deploying our capital and getting bigger, and it's harder to tell that story as we've learned with big outs. You know, the transformation we've done, going into 2022, we're pretty quiet. You know, we're really happy with the performance there, particularly with free cash flow, but growth as well and how each one of the segments is performing. We think 2023 is going to be a really another great opportunity for us.
Great. That's fantastic, Tyler. I appreciate the comments on the deals. Just looking forward to the business, what are you seeing out there today? You guys have some short cycle businesses, some exposure to China, either geographically, and then we can walk into a couple of the businesses. You're like the only company that's actually put up a slide on guidance and reaffirmed official guidance. I think that's a good first step.
We believe in facts. That's kinda where we start with.
Facts are relative these days.
You know, I think what we said in the guide is China was gonna be good. It was gonna be a little slower in healthcare, but the other three businesses were gonna be strong. You know, what I just described is exactly that. You know, we've seen the other three businesses. We had a little bit easier comp because of last year in China, but we're seeing strength in those businesses in China. Europe has been I think continued to be pretty good, and US is.
You know, we got a couple places where, you know, as I said, Fluke's a little better than we thought, so I think we had mid-single digit plus in our guide for the quarter, and that'll be a little bit better than that. That's a good view of the economy and how things are going. I would say things are a little, you know, slightly better than we anticipated when we went into the guide.
Can we talk about the short cycle business a little bit? I mean, you guys built a nice backlog there, like a lot of other companies. You know, there's this dynamic where as orders normalize, you could have down orders, but your book to bill is still above 1, so you're building backlog. Maybe on the, on the two big movers, Fluke and Tektronix and whatever else you wanna throw in there, maybe talk about orders, sell through, you know, and then organic, you know.
Yeah.
Book to bill. That kind of dynamic.
What we call sometimes the product businesses.
Yeah.
You know, those three business, and if you throw Sensing into that, those are our three big product businesses. But again, as we said, looks like the book to bill is gonna be over one. Because of the dramatic growth that we've had in orders over the last couple of first quarters, the two-year stack, for example, at Tek, is up 40%.
So it's a little bit, a little bit of a head fake to look at the percent down because the orders still are pretty strong, and that's gonna deliver pretty good growth at Fluke and Tek for sure. A little bit less at Sensing because of a tough comp.
We, you know, we think, you know, point of sale in our businesses where we see point of sale is still pretty good. You know, the order situation, I think is what it is, but having a book to bill is better in the fourth quarter than it normally was. Now book to bill over one in the first quarter, I think is stability.
Right. You're not really seeing any, I mean, I guess it's a little bit of a destock on the order front, you know, or any distributors, you know, as supply chain heals a bit, perhaps. Maybe you could talk about supply chain and what you're seeing.
Yeah.
On the product side.
It's less destocking as much as it just is those big comps from a year ago.
Got it.
We built a good chunk of our backlog in a quarter like, first quarter of last year.
Right.
That's part of it. You know, as I said, point of sale is good. We never really got inventories out of hand in any way, shape, or form. You know, because we track every month inventory levels at our major channel partners, or we have a partnership with them where they share that with us, we've made sure that we've really not had inventories get out of hand.
From a supply chain or our supply chain perspective, turning to that, you know, I think we've seen more stability in the sense of the lead times. We're mostly electronic components. We don't bend a lot of metal. We don't do a lot of plastics or anything else. Most of our supply chain logistics is better. That's been better for several quarters now.
We're seeing those electronic supply chains be about the same in terms of lead time. We're seeing less inflation in terms of those things. Probably have less issues every month, but those lead times have not compressed dramatically. We're still longer lead times than we normally would. We would anticipate those to get better through the year.
When do you think it gets back to normal? Normal, I think, is a relative term.
Yeah.
When does it get back to normal?
I don't know if it'll be in 2023. I think if we're talking about the much shorter lead times to where we normally ran, I don't think it'll be in 2023. I think there's just a lot going on in the world that's gonna keep that from happening really soon.
Maybe on Tektronix.
It'll get better progressively through the year.
Maybe on Tektronix, I mean, you know, you obviously have a public competitor out there who's pretty good with their technology. How do you think you've competed well against them? You know, what's the what's your rate of growth versus the market, you think, over the last couple of years? It's been hard to tell with the differing comps. There's a debate whether Tektronix is a, you know, a good asset or a mediocre asset.
Yeah.
'Cause over time, it hasn't grown, and then you guys reinvested a couple of years ago. What are the KPIs there that you can convince people that, you know, you guys really have this thing now on a growth path?
Yeah. Well, I think, you know, I think it, we certainly put a fair amount of investment into a new platform for our scope technology. That's allowed for us to more rapidly innovate, particularly in what we call the mainstream category, which is probably almost twice as big as it was five or six years ago. It's the fastest-growing category, too.
That's where a lot of the secular drivers we describe is directed. You know, we're primarily a scope company today. When you think about the broad test and measurement market, we're in R&D, and we're mostly in a few workflows that are really centered around, you know, signal analysis and that kind of thing. We feel like we've done very well.
You know, we can look at win rates. We like our win rates. They've moved up. We have a good competitor. We have a few good competitors in the segment, so it's not it's not one of those things that we're gonna win everything. Our win rate has continued to improve.
The team's done a great job of positioning the business globally. We feel like we've really done well around the world as well. We feel like that business, which was, as you said, was a low single-digit grower. I think the proof in the pudding is that what we said is it's now, we think, a mid-single digit grower.
We've really positioned that business, made it more durable with a large service business, and then made it more growthy through the work on secular drivers. We think that that's sustainable. You know, it doesn't mean it won't have a point in time where maybe it has a little bit of volatility, but it's nowhere near what it has had in the past.
I mean, I think, everybody's been waiting for was doing the work on the two-year stacks on that and expected it to slow, and it actually grew pretty nicely.
Yeah
I n the second half of last year.
It's gonna have good growth this year. It'll slow a little bit in the second half from the growth rates we'll see in the first half. We will. You know, we talked about $350 million worth of excess backlog through the supply chain challenges. We said about half of that was at Tek, and we won't deplete that in this year. We will go into 2024 with that excess backlog some of that excess backlog.
It slows, but it still grows in the second half of the year.
Yeah. That's right.
What are the one or two end markets there that you'd highlight as being, you know, particularly strong and where you've won.
Yeah
W here you've won the most?
We talk about power, which is basically anything that has a battery. you know, just the leading technology companies in the world, whether you're a semiconductor company and you're trying to get more power efficient with your chips, whether it's an EV company that's trying to get more power out of both the battery and the battery system, or you're somebody that's, you know, putting a battery into something that normally had a cord.
I always like to tell the story of my chain, you know, my battery-powered chainsaw. All of that is, you know, people need our solutions to do those designs. If you, if you don't if you think there's gonna be more batteries in five years, I think most of us think there are gonna be a lot more batteries, and no one no way you can get to a lot of the sustainability goals that every company in every country in the world has, and that's gonna be more efficient power, both in the grid, but also in devices. You know, that's right where we play.
How often do you use the chainsaw?
More frequently than Chuck wants me to.
Cut a few decks.
There have been injuries.
Yeah. As far as Fluke is concerned, you know, I think you talked about it last night. It's a rule of, a rule of forty business.
Yeah.
A hardware business, that's a rule of forty. That's obviously phenomenal performance. I mean, talk about the competitive landscape there a little bit.
Yeah.
That business has just been a barn burner for 20 years, probably an underappreciated asset in your portfolio.
I You know, maybe it has 'cause my roots were there a long time ago. You know, over almost 25 years now, we're gonna celebrate our 75th anniversary this summer in the company. We've owned it for 25, and it's been mid-single-digit grower. It's grown margins. It's one of our best working capital companies that we have.
Their innovation, their brand is consumer-like in terms of strength. The competition is really regional. You know, you'd find that the competitor that we might have in Europe isn't in the U.S., the competitors we have in the U.S. We really don't have one global competitor, in part because we play in a lot of different product lines. That's one of the beauties of the portfolio, I think. You know, we think it's good.
It's much more durable than it's ever been, given the fact that our connected reliability strategy is more of a recurring revenue strategy. People always forget we moved a fairly sizable healthcare business within Fluke over to our healthcare segment.
When you look at the segments, you might think about Fluke, but we've built more durability in it, so much so that we created a, you know, an over a quarter of a billion-dollar healthcare company. Which started with basically a product that we had, which was an oscilloscope that we sold into medical device companies. From there, we've created that kind of company. You know, that's the brand, that's the franchise that we have, and we think it's, we certainly think it's underappreciated.
As far as the software businesses, the Facility and Asset Lifecycle solutions businesses, are concerned, how does that business play through, you know, a tougher commercial real estate environment?
Well, it doesn't. We kinda think of it as having a lot of exposure to commercial real estate, but the reality is, you know, over a third of the business, is Gordian is really state and local governments and federal governments, probably even more than that, as we look around.
It's software.
It's software.
Yeah.
That's right. Services and solutions. In that sense, and it's a variety of verticals. The bigger point and the broader point is they're really about saving money. We've seen uptake as an example with some large retail customers who wanna understand what are their most productive assets and what are their most productive facilities, where their lease rates may be uncompetitive relative to market.
They're using our solutions to do that. They're saving millions of dollars in facilities costs through doing that. We think even in a, maybe a slightly tougher time, even in a commercial real estate market, people are gonna be assessing their footprints.
They're gonna understand the traffic and things like that, a lot of the things that our solutions bring them, and fundamentally gonna be used probably even more so than they would in a time where maybe things are, you know, a little bit more normal.
This is a Rule of like 40-45 business today.
Yeah.
I think you guys have said you can get it.
We think it goes to a Rule of 50.
Rule of 50, which is the vast majority of that is really on the margin side 'cause the growth is maintained.
Yeah, growth's gonna be double digits.
Growth is maintained. That's $600 million of revenues or so that you have really company-specific margin expansion opportunity with visibility on revenue, which is pretty unique.
Yeah
I n this environment.
As I said, quarter's gonna be a little bit better than we anticipated. We had a couple changes going on in the quarter. ServiceChannel, we're changing the business model a little bit, which was gonna be a little bit of a headwind. We took a little bit more end-of-life revenue at Accruent to kinda get them, and we're still positioning the business at a higher growth level. That's gonna benefit our exit rate, quite frankly, as we go through the year.
On the healthcare side, I know there was some, you know, a dip in China electives. Maybe just talk about electives in general, how that business is progressing here early on in the year in total. Talk about China as well, if you can.
Yeah. I mean, it's, you know, the healthcare market, what we said about 2023 for the healthcare market is it would be, it would be better than 2022. 2022 was a rough year. 2024 would be better than 2023. We weren't calling normal, if you will, in 2023.
We're seeing elective procedures, which is a driver of the revenue base, particularly in sterilization, at about back to normal in Europe, in the high, you know, mid to high 90s in the U.S. China's the place where it's a little bit between that and the rest of the world, except for China, where we started off the year in the 30s. We're now in the high 50s, low 60s. We've seen really big improvement in the last couple months, and we think it'll continue to improve through the year. We think we're roughly back to normal by, you know, in the second half.
That business has been, you know, obviously COVID kinda screwed up the trend line there. Is that still a business that, you know, is core and that you like and you wanna grow and add to, ASP specifically?
Yeah.
We'll talk a bit about Provation. What's the margin improvement potential there?
Maybe we tag team that. We like the business. We think the segment has been incredibly durable. I think if any other industry had weathered, had gone through what healthcare has gone through in the last two years, you wouldn't even see growth. We've seen mid-single digit growth in the last two years. I think, you know, the durability is incredible.
Hospitals are going through transformation, but to some extent, that provides incredible opportunity for solutions that save money and bring them high, you know. If our mission is help deliver higher quality healthcare at lower costs for hospitals, you know, I think these times are why our solutions have been pretty strong. We think we can add to sterilization.
We, you know, we have software already in that with Censis and what we do in terms of monitoring the sterilization process through Censis. You know, there are opportunities in the business and there's other, you know, we're in other parts of the, w e're sort of in the It's almost industrial healthcare, right? We're in the parts of the hospital that are delivering healthcare as opposed to actually doing the things. We think there's lots of opportunity to continue to grow the health segment in the-- with that same mantra.
You know, with margins, we've got some businesses already in there that are above 30%, and we would expect ASP to continue to expand margins. For the whole company, we're seeing mid-single digit growth, 75 bips of margin expansion.
I think that when you focus in the near term on ASP, you'd probably expect to be a little better than the 75 basis points, maybe push 100 basis points as we continue to deploy FBS into maybe, you know, some of the supply chain, not issues like supply chain we've been talking about, just how logistically we move the products around the world. We see some great opportunities there, and we're starting to get more price in there. It's slow to get price into the healthcare market.
It accelerated all through last year. We think that we'll have elevated versus last year, more price into at ASP. Got margins going the right way. We've been growing margins over the last couple of years at ASP. We expect, you know, going up towards 30% over the next three to four years. I think that's very reasonable.
How much of a kicker would mix be? If I told you procedures were gonna go back to 100% over the next 12 months, would that help at all from a mix perspective on the consumable side?
Yep, it'd definitely help. Consumables are the highest margin. They're a very high margin, you know, from a gross margin, you know, north of 75%, more software-like.
Yeah
That would accelerate then, of course. You know, as Jim talked about, I think in China, we're a little constrained 'cause what's going on with COVID and the hospitals there. We think 2023 is gonna be better than 2022, not all the way back. If you told me gets all the way back
When as it does, that's gonna have an outsized impact, yeah.
On Provation, I think a year ago when we were here, everybody was debating, you know, how much share you were gonna lose.
Yeah
I n that business right after buying it. How has that played out so far, and what's the outlook for Provation this year?
You know, great business. We, you know, we said 2022 was gonna hit about $0.08 of accretion. We got $0.10. We had a good improvement off at a starting point. Good, strong first year. Provation won one of the FBS awards at our leadership conference.
I think it's a good testament to how they've adopted the Fortive Business System for their business. We feel good about it. I think it's. We are seeing, we've seen new logos extend a little bit, but we've seen the SaaS conversion be pretty good. The team really applied a lot of FBS tools to helping accelerate conversion.
If there's a challenge in that business, it's not necessarily anything more than the fact that we wanna do a lot of things in that business, and we've really seen the opportunity to do it. We're seeing, you know, we always said that the growth was really gonna come from two things.
The majority of the growth was gonna come from the expansion of ambulatory surgical centers in the U.S., and it's mostly a U.S. business. That dynamic would require their solution more pervasively. Second thing was SaaS conversion. We would take the licensed software, and we would convert it to SaaS. Those two would be roughly 3/4 of the growth that we would see over the next five years. The second was the new procedures.
You know, we have technologies for other procedures other than GI, where most of our revenue is in today. We've seen some nice. We knew we needed to do some technology and investment and innovation to do that.
We see we've done those innovations. We should see those play out this year, or we're doing them, I should say. We think, there's a lot of opportunity in the business to continue to build on what we bought. You know, there was some concern about whether or not we would lose any share. We haven't lost a, you know, we haven't lost an order this year in or in 2022.
You know, I think this standpoint, our win rates are exceptional, maybe the highest win rates we have throughout Fortive.
Have you lost any so far in 2023? Just wanna make sure I check the box.
Not that I know of.
Okay, great. Does margin expansion opportunity there as well, the Provation, or is that kind of at a run rate?
Well, I think there's margin expansion, but they're starting from a high.
Yeah. Really high number. Yeah.
T hey already start at high numbers, when it, you know. With ServiceChannel more because starting from a lower base, you'll see more absolute OpEx year-on-year. Both of them performing very well, and we're excited about first year, how that went, and looking to do another one.
With the state of your portfolio today, I mean, COVID is not really that great of a comparison because obviously you had a business that, you know, went down during COVID. But the state of your portfolio today with the recurring revenue, with the margin expansion opportunity, you know, if we had a down, you know, mid-single digit IP type of recession, how would you think your portfolio revenue-wise would be able to, you know, play through that? And given the margin expansion opportunity, it's not really related to the macro, would you be able to maybe even, like, expand margins in an environment like that?
Well, you know, every slowdown has its own dynamics, right? Length probably matters. I think if we were to see a slowdown in the short run, we you know, as an example, backlog's gonna give us a strong insurance policy. We're confident in that backlog. It's not a backlog that's necessarily gonna be canceled.
Let's say it's a 2024 event. Let's say you get through 2023, backlog normalizes.
Yeah. Yeah.
You know, kind of a like for like, how does this car manage . How does it drive through.
Yeah, I think if IP went down.
An environment like that?
W e would probably be, you know, maybe flattish, you know, maybe up low single digit.
Yeah
H ardware or hardware product business. Keep in mind, you know, we've got these software businesses in healthcare that maybe slows a little bit, but I wouldn't see h alf the portfolio that would decline. Very different than, you know, 2016 or 2009, where, you know, we talk about how we've made, you know, some of our businesses very much less cyclical. To that, now they're half the portfolio, not the whole portfolio. We think it behaves differently.
It seems to me some of this margin expansion is not real. It's kind of company specific and visible as opposed to dependent on growth. Obviously, if the hardware businesses de-lever, you're gonna, you know, you'll de-lever with those. There's so much else going on in the portfolio that perhaps people don't appreciate.
Yeah. I mean, if you think about if, you know, 2020 gives us a little bit of a window, and it was, you know. We had some slowing there for a few quarters, and we didn't have a bunch of the portfolio we have today in 2020, right?
We didn't have Provation, we didn't have ServiceChannel. Facility and Asset Lifecycle wasn't running, you know, as effectively as it is. In that year, we grew earnings and cash flow despite those challenges. I, you know, I feel like, again, I don't, you know, it's really hard to sort of describe every slowdown because they happen differently. We like, we really like the hand we'd be playing going into a slowdown.
What do you think is for products or a hardware business, what do you think is world-class, you know, working capital as a % of sales? Obviously, the software businesses are different 'cause they're inherently working capital, you know, negative and working capital light. On a hardware business, what do you think is kind of world-class, the percentage of sales working capital?
We'd have to do the math in our head. I think.
You're Danaher guys. I feel like, you've been working on this math for 20-plus years.
Yeah.
Well, the challenge is we go to officer reviews, and we don't let, we don't wanna give that number because whatever the number is, we wanna be better than that.
We don't want any of our operating businesses to say, "We're already at that number.
We focus on what we can do to get better, but we think we stand up very well in our peer set where we're at right now. One, you know, one thing on you were talking about the cyclicality thing is keep in mind on our hardware businesses, when they do slow, free cash flow actually holds up better on those businesses. We think the resiliency on free cash flow is even better, you know, with the portfolio as it's now constructed.
Maybe not to not to completely dodge the question on the percentage, I think, you know, when we look at every business every year, we expect them to improve their working capital pretty significantly.
Yeah.
That's part of the operating plan of every business. We review it every month. It's ingrained in sort of our cadence of things that we, you know, we need to work on every year.
Can we just take the software business to assume kind of a moderately negative working capital and then back into what the hardware businesses would be for you guys at present? Is that a rough kind of?
Yeah, We can come back to the number. Typically, you know, the word we're thinking about working capital turns.
Yeah.
Double-digit working capital turns in our hardware business.
Yeah. Yeah.
You're not even in the top quartile for our businesses if you're not gonna talk about that.
Right. Got about two minutes left here. Any questions for these guys? Okay. I guess when it comes to the software acquisition pipeline, any movement at all in valuations there?
Yeah
Over the last, you know, few months?
I would say, you know, On the private market, you know, there's a lot of software opportunities in the private market. I would definitely say, you know, processes are occurring. A lot of them are not going forward, so that's I always think of that as price testing, that people aren't getting their prices. You have to go through that cycle a few times.
I, you know, I don't know if we've gone through that cycle long enough, just, and also given some of the uncertainty that's occurred over the last month or so. I, you know, I would expect that it will happen, but we haven't seen a big change there. Private equity is a buyer and a seller, so they see both sides of this.
You haven't seen a lot of buying and selling within private equity. I think it's a good sign that, you know, it's good evidence that this is, this is an environment where those things haven't necessarily changed enough. I would still anticipate to. I think what's happened over the weekend and certainly with what's happening in venture-backed businesses, there's gonna be a time of evaluation.
It's gonna happen for sure, given that SVB was, you know, in, you know, a lot of, you know, Series D, C, D, and E companies were in that portfolio. I would expect an evaluation of things that'll happen, and hopefully there's a number of things that might be opportunities for us. Hopefully, we'll see some of those as well.
Yeah. I think the most interesting chart from that deck, last week was, their customers', negative cash outflow, kind of on a run rate position.
Yeah
how much uneconomic economic activity is going on out there.
Yeah, and if you're.
It doesn't get enough airtime.
If you had a high burn rate and everything that's just happened, you're reevaluating right now, and we think there's opportunity there.
Yeah. Well, you guys do not have a high burn rate.
Yeah.
Congrats on that. That's it. Thanks, guys.
All right. Thanks, everyone. Great to see you.
You got it.