Welcome to the afternoon session. Next presenter is Fortive, which is actually one of our top picks for 2023. It's always a pleasure to have Jim Lico, company's President and CEO. I think Jim will give some introductory remarks. I think you have a couple of slides maybe.
Yeah.
Then we'll go to a fireside chat. Thank you for being here.
Great. Thanks, Andrew. Good afternoon, everyone. Thanks for joining our day here. Real quick, just to maybe not everybody's familiar with the story, so I just wanna level set everyone a little bit about Fortive and who we are today. I think it's pretty exciting to be here for. I keep saying it's great to be in person, but that's starting to get old now. I think the bigger thing for us is I think 2022 was a very, very strong year. I think it's a great opportunity here to talk about the future of Fortive. Let me do that quick. Key messages for today, I think what you'll hear, we've made a lot of changes over the last several years.
We went public in 2016 out of Danaher. I was with Danaher for about 20 years prior to that. I think the change that we made around a higher core quality portfolio, you really see that in a number of the metrics across the year. Continued differentiated performance. We feel really good about the financial metrics that we're putting up really on the backs of a really strong year. You see that in the numbers. I'll show that in a minute. We talk about continuous improvement as a way of life as one of our core values. The Fortive Business System is really doing everything that we really want it to do across the portfolio, both breadth and depth of excellence.
The fact that we're back in the office, in-person collaboration really speaks to the power of FBS, but quite frankly, it speaks to the power of Fortive. Us getting back is really differentiating us in many ways. Finally, just the strong balance sheet, differentiated growth, I think gives us an opportunity to, you'll hear a little bit about that. Real quick, we report in 3 segments. I think what you find across those 3 segments, 3 different names, but really the similarities are really, number one, durable growth drivers. We really try to position the business strategically around those secular growth drivers. We're really leading positions in critical connected workflows, whether it's a manufacturing plant or a commercial building, or you're an engineering lab or a hospital, you're really looking for...
customers are looking for safety, quality and productivity solutions across their workflow, and we're well-positioned to take advantage of that in all three of our segments. Little bit on numbers, just as a, as a numbers-driven audience, I think we really put up some good growth, really and considerably different than when we first came out. You see the real changes. Gross margins now at 58%, I think really speaks to the portfolio change and the opportunity for continued growth and expansion of operating margins. Our adjusted operating margins continue to improve, 2023 will be another good year in that regard. Finally, just our free cash flow margins. I think you really see we're getting 50%, almost 50% more free cash flow from a dollar of revenue than we were 5 years ago.
I think it speaks to the ability of the portfolio to really deliver really strong free cash flow. Quite frankly, one of the few companies last year, I think, that really grew free cash flow really well. We're really proud of those metrics and not only where we've been from in the last 5 years, but quite frankly, the acceleration that'll come as we continue to build the portfolio over time. We affirmed our guide last week, so I won't spend a lot of time on this, but we're seeing we're seeing things play out the way we thought. I'm sure we'll talk about, a little bit about that in detail here in a minute with Andrew.
We set a little bit better performance in places like Fluke and our Facility and Asset Lifecycle software, makes us feel good about the start of the year and getting things kicked off here pretty well. We feel like we're in a good place. Really coming back to our proven value formula, mid-single-digit growth through the cycle, and that's up from where we were. 75 basis points of margin expansion gives us the kind of margin profile, not only today but into the future. That really allows for us to continue to fund our strategy through both organic and inorganic investments, and ultimately using FBS to keep that flywheel moving over time. We think we're in a great place, and I look forward to talking about it.
Fantastic. Thank you, Jim. Okay, let's start backlog. You know, you said you have $350 million in excess backlog, and you expect to end the year with about half that amount. If supply chain performance improves more than you plan, could that drive revenue upside in 2023 or are you perhaps more inclined to meet existing delivery dates and manage the improvement in your lead times?
Yeah. I think number one is, you know, while we've seen the stability of supply chain lead times, they're still pretty long. I think, if orders were to play out the way they are today, we probably don't have a ton of opportunity to move that up. We're really We can certainly have the production capacity, and the power of FBS gives us the ability to flex manufacturing to be able to deliver accelerated opportunities. Customers want the product, so it's not a question of some sort of lever on things, but I think the supply chain is gonna be the lever. The supply chain things, we don't anticipate dramatic improvements in lead times this year.
You know, we mostly, we don't, you know, we don't bend a lot of metal. We don't do much other than than things that have electronics and electronic components. Those lead times, while getting slightly better or not, I don't anticipate them getting dramatically better.
Did you see just one of the things we actually anticipated, and it's a broader question about your supply chain. We anticipated that, as lead times get better, you know, the inventories you know, should come down. You know, what the macro data showed, I think at the end of the year, is that people were uncertain about China reopen. It seems that the system has built in more buffer stock? Have you seen that in your own supply chain? Do you see that being unwound in any way, shape, or form, or if you can comment on that?
Yeah. Well, you mean from a supplier perspective or customer perspective?
However you wanna answer.
Maybe a little bit of both.
Yeah.
I would say, you know, from a customer standpoint, there's been this question over the last several months as this backlog is what's the quality of the backlog? We feel good about the quality of the backlog. Where we sell into distribution, we really work with our distribution partners very closely to not let the inventory levels get out of hand over the last.
Yeah
... several years. We feel like we're in a good position relative to delivering and doing that in an environment where customers are gonna want the product, and they're gonna wanna deliver it to their customers. On the supply chain perspective, I think we're still taking whatever we can get in a lot of places. I don't think there's gonna be some big bubble that comes to us in light of great supply anytime soon. We certainly haven't seen that.
Maybe we can talk about Fluke, market share leader in handheld test and measurement tools. You expect orders to accelerate at Fluke in second half 2023 and low single-digit organic revenue growth or better for the full year. Given the short cycle nature of Fluke products, are you implicitly assuming a very mild economic downturn here?
Yeah. That, I mean, I wouldn't say a downturn. I'd say moderation. We've got a little bit easier comps in the second half, so some of that, what looks like a higher number maybe is a little bit of comp situation. I think we've seen a little bit more strength than we anticipated in the first quarter at Fluke. We have good POS. It is a shorter cycle business. I think the strength of the portfolio at Fluke though is that, you know, the longer term view of Fluke is, you know, over 25 years, as you know, is a great franchise.
Right.
Always continues to grow, continues to grow margins. It's a Rule of 40 business today as a hardware business, which is, you know, I think a great testament to the work that's been done over a long time. you know, I think it's too soon to tell what the second half is going to look like explicitly, but I think, you know, we've got a little bit of backlog there, but I think, you know, what we're saying so far is high single to double digit point of sale around the world.
Yeah
the demand environment still remains pretty good.
To Tektronix, test and measurement, folks seem to be quite excited about that market these days. You know, I think you're all focused on R&D and manufacturing. What are the areas of organic investment for tech? I think you were sort of talking about adding software.
Yeah.
That was one of the initiatives.
Yeah. I was with the tech team here in Europe yesterday for the day, going through their opportunities here, and they're doing a great job. I would say, you know, we've really made investments around vertical applications. First of all, a lot of platforming going on. You know, you know this. A lot of platforming over the last several years for us to. We had a number of hardware, you know, technology platforms that we offered through our product portfolio. We reduced those number of platforms, reduced the number of embedded software app things that we had. We've really been able to now fast cycle or innovate a lot better, and we're seeing the benefits of that in, particularly in our mid-range.
That mid-range set of solutions is really focused on, as you said, probes that hook up to circuit boards as an example, software that is really about the application, and those applications have great secular drivers. They're in things like power where everybody's looking for a battery, and they want that battery to be more efficient across, including EVs, where EV batteries. There's R&D engineers who are looking to do those things across components that go into the grid, IoT devices around a variety of applications. It's really the secular drivers that we've invested in, Andrew, that I think has had us call the growth rate of tech to move up from.
Right
... what was historically low single to we now think mid-single-digit through the cycle.
Just a couple of questions on tech. Am I correct to understand that you sort of, white label software from a competitor now that's part of the strategy right now?
no. I mean, Most of our software is developed.
Okay.
On occasion we've got some partnerships where we do some things, but by and large, it's mostly our own stuff.
Just thinking, I remember being in China, in Shanghai in 2018 as sort of CapEx in China really started to slow, I think both Fluke and tech, that hit pretty hard because it is tied to CapEx, actually, I think both. From the angle of US reshoring.
Yeah
... how are these businesses sort of positioned for the U.S. reshoring? What's the impact on these businesses?
Well, I would say, you know, China was a little bit of some of that's CapEx at tech, but also some of it was just the export controls.
Yeah. Yeah.
trying to get through both businesses.
Wall in.
Yeah, exactly. We've kind of moved through that, and both businesses are in a good place. You know, on a reshoring perspective, Fluke's gonna play in the manufacturing.
Right.
You know, people use our devices to troubleshoot just about anything that goes wrong in a factory. More factories in the U.S., more factories in Europe, investments into that, not really a CapEx cycle, more in the maintenance budgets.
Right.
That, we're gonna benefit from that. On the reshoring side, particularly around semiconductors, you know, those are new semiconductor designs. They're around the secular drivers I just described.
Right.
I think, you know, we do some very specific things, in tech, but, you know, there's gonna be more of that going on in a reshoring environment. You know, we've had, we've built great businesses in China. Those businesses are gonna continue to do well in China, we anticipate.
For Fluke, if we see, you know, I think latest data shows US industrial manufacturing is up, like, 40% year-over-year, so that means more factories.
Yeah.
Every one of these factories will have Fluke.
More, you know, more factories generally means more downtime, and when electricians and maintenance professionals go out to a piece of equipment, generally they're troubleshooting that device with a variety of Fluke products.
Maybe China, and I think I touched on it a little bit, but you do have one of the highest exposures to China in our coverage. What's your perspective on the pace of reopening? You know, I assume that for you, COVID-related absences was a big Q4 phenomenon. We're over it, but just to confirm.
Yeah, for sure. We had a great fourth quarter despite those challenges anyway. It speaks to the testament of quality of our teams who really, you know, in the face of some of that adversity, I think at one point we had 80% of our employees had COVID at one point in time.
Yeah.
And in our factory. It was, I think just a testament to the work we did. We're through that. We had a very good year in China last year. You know, our success, and, you know, 'cause you've been there a few times, our success is, you know, we're local for the local market. We manufacture there, we design there. Our three, you know, our healthcare business a little slow. You know, we started the year at about 30% on the elective procedures. We're up to the high 50s, low 60s now. We believe that'll continue to improve through the year.
That's in line with expectation?
Yeah, it's very much what we thought. We think by the start of the second half we'll start to see back to normal. The other businesses there are doing well. You know, the other thing about China is, and we've talked about this over the years, you know, you really don't know China and how it's gonna look until you finish the first quarter. You know, because the January and February, the New Year.
Right.
Where it is, comps, all that stuff. How customers play the new year in terms of when they buy. March gives you the first real sense of how the year's gonna play out. Far that looks pretty good.
Excellent. Incrementals, I think at the midpoint, 2023 guidance implies a 50% incremental margin versus your traditional 40%. What drives the high incrementals this year, and what are the sort of top 1-2 factors that give you confidence to deliver on this, even with a fair amount of macro uncertainty?
Well, I think somewhere in the 45-50 range, as you pointed out. Couple things there. One is, we do have a little bit of, you know, additional investment in our typical productivity initiatives, so it's $20 million-$25 million in the first half. Those savings will play out in the second half, so there's a little bit of that. Gives us a little bit of insurance policy to maybe a revenue environment if it were to get a little sloppy. Second, you know, I think we've seen some of our businesses come back with, you know, a little bit slightly better supply. It's a few things. It's a little bit better supply chain. It's a little bit better health business.
Obviously, our software businesses are gonna be growing at double-digit, and that's gonna be helpful as well.
Gotcha. Software businesses do have high incrementals.
They do have high incrementals. It's one of the nice things about them, that's for sure.
Maybe we can talk about ServiceChannel. You know, that acquisition has been a success story. $150 million in revenue last year, up 45% year-over-year, and you expect to reach, I think, 10% operating margins here in 2023. $0.14 accretive to adjusted EPS in 2022 versus $0.12 in the original plan, right? What's driving the growth, and how has being part of Fortive helped ServiceChannel on new sales?
We were with what we call our Facility and Asset Lifecycle software businesses, Gordian, Accruent and ServiceChannel. We were with them last week or 2 weeks ago, I guess now. ServiceChannel had a great year. I think the 14 versus 12 is the combination of ServiceChannel and Provation.
Oh, gotcha.
ServiceChannel came in around where we thought. Really strong growth, as you pointed out, and on track for their margin targets. The business is on track. The little bit of we're gonna change the business model a little bit, and we'll see more of that in the first quarter, where we take a little bit less passthrough revenue that didn't make a lot of money, move that to a SaaS solution, so we feel good about that. FX's gonna be a little bit better in the first quarter than we anticipated 'cause that's going pretty well. You know, it's a very good business.
You know, we had super high NPS scores when we bought the company, and that certainly played out last year with the growth rate that it had. It'll be double digit this year.
One of the big lessons, you know, just sort of thinking about software, because you went early to the whole SaaS story, you know, finally seems the business, as you sort of talked about, double digit growth, strong incrementals. What are the biggest lessons you sort of learned in adapting?
Yeah.
FBS to software? What are the big sort of philosophical tweaks that you have made? I mean?
Yeah.
Clearly it helps that, you know, we're sort of back in person. A lot of your businesses.
Yeah, yeah.
Rely on people being around facilities.
Yeah.
It also seems operationally you sort of...
Yeah.
Figured a lot of things out. Can you expand on that?
Well, you know, it's funny because our first acquisition was a software acquisition, eMaint, which we bought for Fluke, and it today is our clear leader in the clubhouse in terms of a great business. It's a Rule of 60 business almost. It's, it's been a great business for us and a great acquisition. We'd known this from our Danaher days, where we had some software businesses, and we've always had a lot of software product development, but it was embedded software. I would say the simple answer is we knew and we're confident that FBS would apply into these businesses. All we've done over the last few years is prove that in.
what we do is every time we buy a new software company, we have a proven track record in the other ones that makes it more and more apparent to the current new company.
Right.
That this works.
Right.
Our best execution of FBS, our fastest execution of FBS in a software company is ServiceChannel and Provation.
Right.
Because they see all the track record, and so we don't go through that convincing thing that maybe we did five years ago. Maybe we had to spend a little time, and we have leadership that we put into the businesses that helps those businesses as well. I would say we're highly confident that we can demonstrate success with the tools. The levers, you know, certainly growth is a lever, so that's first and foremost, if you can get the growth rate up. Second is, you know, we have a number of...
You know, our growth set of tools in FBS is very much focused on productivity in the go-to-market motion, and we do that first. The second piece is on the product development side, where we can take a lot of the activities that are going on relative to generally sustaining engineering, dealing with technical debt, do that really fast, tools to make that better, convert that activity into higher innovation that drives higher growth. You build that flywheel over time. Gordian's a great example of that. We build a business for long-term success.
Excellent. Advanced Healthcare Solutions, you know, maybe a bit of a nuance, but maybe worth talking about. Pricing in Advanced Healthcare Solutions, I think, is more difficult than your other segments. Can you talk about what realized pricing was in 2022 and what you expect in 2023?
I think we're in the 100 to 150 basis points last year, with it getting better in the second half. We think it'll be close to all the segments will be pretty close this year in the 250 range. It'll be better as we move through the year, although taking the fourth quarter exit rate starts to make that improvement stick. It's tougher because a couple things. One is we have a high consumable rate. Those tend to be on longer term contracts, so just getting through the cycle of contract terms, you don't do all that in one year.
Right
maybe in a hardware business, you're, you know, in a Fluke or Tektronix, you're on those contracts every year. It just takes a little while. Then, of course, you've got healthcare organizations that are, you know, whether it's tendered business maybe in Europe or it's GPOs in the United States that can fight these things.
Maybe on healthcare, sort of healthcare reminds me a little bit, just looking across my coverage, reminds me a little bit of aerospace. That was, like, sort of the most obvious recovery story post-COVID that is yet to.
Yeah
... fully materialize. You can see why it should materialize eventually.
Yeah.
Can you just talk where we are in terms of recovery and maybe? You know, you gave us some stats on China, but where are we in Europe?
Yeah.
Where are we in the U.S.?
You know, a lot of our business is driven by elective procedures. That drives our ASP business-
Right
which is the largest piece of health. Electives getting back to normal and even now starting to grow is really all part of it. We saw that in the fourth quarter and as an example in North America, which was good in consumables. We'll see. I think Europe's pretty much at back to normal in terms of electives. U.S. is in the mid to high 90s%. China, I talked about. We're starting to get back to normal. We think. We still have some of the labor shortages, that's gonna be, particularly in the U.S., that's gonna be a little bit of a hindrance. We don't need perfection in 2023. We need 2023 to be better than 2022. I think we see that. A lot of good external information that would support that.
2024 will be better than 2023. I think we'll just see progressive improvement from here. You know, that will certainly help the business for sure.
Do you think? I mean, there was this view which never materialized, that there was gonna be this catch-up.
Yeah.
Right? You know, people postponed their procedures, and we're still sort of, we're not there, but will there be one, or what happened?
Well, it's defined by labor, right? Your doctors are probably not gonna work Saturdays and Sundays or go onto a second shift to do that. Nursing shortage in the U.S.-
Yeah
... is well documented. You know, there's a huge incentive for hospitals to do that from a hospital financial perspective.
Mm-hmm.
Money is made in elective procedures. There's a definite financial incentive, but, you know, it's some of it is this labor challenge that is.
Yeah
... playing out in hospitals, and that'll get better over time.
Interesting. Maybe we can talk about AHS margins. Last year you had some one-time items around bad debt and FX transactional issues that dragged margins along with like price cost. How much of the guidance for 150 basis points of segment margin expansion is from the non-repeat of these items versus better price cost and volume leverage?
Yeah. If you sort of take those out at 2022, you'd have about a 24% operating margin.
Mm-hmm.
That's about 100 basis points of improvement in 2022.
Gotcha.
The guide's $24.5-$25, so now you're $50-$100.
Okay
... normalized for some of those one times. You're obviously in the $150-$200 over 2 years.
Yeah. Maybe we can talk about Provation because we've been getting a lot of pushback on that, but actually seems like another success story-
Yeah
... software M&A. I think we have $0.10 accretive last year versus $0.08 in the original plan.
That's right.
Oh.
That's the right number.
There we go. Can we talk about sort of operating performance there, and what gives you the confidence in the mid-teens revenue guidance in 2023?
Yeah. I think there's a couple things. One, off to a great start. The business, I think a year ago when we were talking, people were concerned about Epic as a potential... Epic had a solution.
Right.
We were talking about the fact that, you know, we didn't see it in due diligence. I think over a year now, we've seen very strong, you know, super high win rates. Never haven't lost a documented case.
Mm-hmm.
Our win rates in Epic hospitals are actually higher than our win rate in Cerner, or we have more Epic hospitals than we do Cerner hospitals, not win rate, but just presence.
Yeah.
We feel really good about the competitive positioning of the business. You know, there's been a little bit of delay in sort of some new business in hospitals, more of an IT resource issue. The, you know, the orders are on the books. They're just taking a little longer to put in, but we think double-digit growth. We see the business. It's, you know, it's on the books. We just gotta get it into place, and we feel that that's gonna continue to get better. The good thing about Provation. The great thing about Provation is that the business case, the financial business case is rock solid. We don't ever go into a client where the customer's debating the value proposition.
The GI doc. We have documented cases of GI doctors moving to hospitals and the first question they ask. I actually got the president of a hospital network told me this. He said, "Every time we hire new GI doctors, the first question they have is, 'Do you have Provation in place?'" Because it helps the doctor be more effective and efficient, and they get to spend more time with clients or with patients. It's the value proposition is rock solid. A little bit of noise on time to implement, but you know what? Over time, that won't be an issue.
Maybe we can talk about sort of, price inflation.
Yeah.
I think there are multiple layers. How lasting do you think inflation will prove to be in your markets?
you know, we don't have anything temporary. you know, we didn't put in temporary procedures or temporary policies or anything where things would be dialed back. Number one is I think from a contractual perspective, it's very, very durable. I think secondly, it's re-emphasized the importance of value propositions. I think to some extent, price is more. It's price in our markets is more a function of the value we're providing to customers than it is because we had some inflation on material costs.
Right.
We found it incredibly durable. That's why I think after, you know, a record year of price last year, we're gonna still get another 250 basis points of durable price this year.
I think it's a question I've been asking, but I think part of the inflation is this built-in expectation from your customer base.
Yeah
from your suppliers that there will be inflation. As you talk to folks, do you see now this built-in expectation that perhaps there will be structurally more pricing going forward?
I think it's too early to tell. But I would say certainly people are accustomed to a different pricing scenario. For sure, we've conditioned people to understand that. I think more than anything, it's interesting because we've always had more price than peers, I think historically, because we don't have a lot of commodity pricing going up and down. It's really been true price. And, you know, we changed the mindset of, well, we're gonna raise prices 1% every year. That was kind of a sales rep, you know, organization's thing. We've changed that paradigm, I think the opportunity for us to... It's really a value equation. We had our leadership conference a month ago.
Several of our leaders got up to talk about this very topic and really try to break the paradigm of this isn't about catching or inflation. This is about the innovation that we put into the market, getting paid for it, and making sure that our value proposition is such that customers understand that they're getting more for what we're doing. If we can do that well across the portfolio, we'll continue to get more price.
Even as supply chains improve, you know, there's a chance that pricing could stay above the 0%-2% range?
Yeah, I think that's right.
Yeah.
I think that's right. Again, it's still early. Let's see where things play out over the next 12 months.
This is sort of, I think we have stronger views there than most, but, you know, sort of software mix and margins. As for if software mix continues to increase, should we think about the algorithm for margin expansion changing, just because, right, it has high incremental margins?
Mm-hmm.
It's becoming high % of your business. It grows at a higher rate, right? Does 40% incremental margin become an easier target when you have double-digit software growth?
I don't think we've ever been a company that's been accustomed to easy targets. I think the first thing would be. You know, let's let it continue to be a bigger part of the portfolio. You know, we didn't really move the mix last year because our hardware businesses grew so well. It will definitely mix up over time. It will have more higher gross margins for sure. I suspect at some point in time we'll be talking about a different incremental, but I don't see that in the near term. The other thing is we're all, you know, we wanna fund growth. The more... You know, the reason why the, there's a difference between our incrementals and our gross margins is because we leave some capability.
We, you know, we did this at Danaher for a long time, is we leave that opportunity to take some of that money that we that comes in incrementally to fund and accelerate and perpetuate the strength of our market positions and the ability for us to continue to grow.
Maybe we can touch on some areas of weakness. Last quarter, you called out lower demand in industrial and semiconductor within your Sensing platform. I think Keysight noted a pullback among wireless communication clients. Have you seen any other end markets soften so far in 2023?
Yeah. I mean, we're certainly, and certainly the news the last couple weeks just has us being even more diligent. You know, for several quarters now, we've been very attentive to things like point of sale, to our funnels, sales funnels, where we have direct businesses. First things you start to see in a macro is you don't see sales or orders go down. You see point of sale go down in channel partners, and you see sales funnels elongate. We haven't seen a lot of that yet. You know, what we said, you know, we're gonna have a book-to-bill over 1 in the first quarter now, so that's pretty good strength. You know, we've called out some markets in Sensing, as you pointed out.
You know, we've directed the businesses towards secular drivers that should be, you know, that we anticipate to be a lot more durable, and we're seeing the strength of those drivers play out in a number of places. Depending on what happens with the macro, and there's certainly more questions probably here for many folks over the last few weeks, we're prepared for that. We've, you know, we've really built the company to really handle durability. We grew free cash flow and earnings in 2020 when very few people did because of the durability and because of the business model and our playbook for dealing with times.
You know, we haven't completely eradicated some of the cyclicality out of Fluke in tech, as an example, and in Sensing. We've built much more growthier streams in those businesses to weather the storm, and we've built a lot more recurring revenue in all of Fortive to be able to do that. You know, one of the things Fluke doesn't get any credit for is they built such a great durable healthcare business that we moved into the healthcare segment.
Right, right.
you know, it's. Now they don't even get credit for it, although they ask for it every once in a while.
We have been getting questions on Read Across from Keysight.
Yeah.
that, which we should be thinking as sort of 5G exposure-
Yeah.
which drove out growth versus it's just the business composition.
Yeah. You know, We didn't have necessarily the technologies we provide versus obviously Keysight's a much broader player.
Right.
They certainly have a product line that was more attentive to some of those things is for sure. We weren't really directing our strategy. We were really directing our strategies around this, where we really had competitive advantage and power, these power challenges that exist. We think that, you know, if anybody doesn't think there's gonna be more batteries and need for more efficient batteries over the next 10 years, I'll certainly take the bet that there's gonna be a lot more. We're well-positioned to take advantage of that opportunity.
How do you think, you know, so I guess you guys in Europe, it's like you're in the real economy. You know, all of a sudden we talk to some people, you know, people have more conservative forecasts.
Yeah.
「Oh, why are you so conservative？」You know, all of a sudden there were some, I guess, some clouds gathering.
Yeah.
Have you had any conversations with the customers, with suppliers that makes you think that people are more conservative in fact, or is it too early to tell? What's your read?
I, unfortunately have been through a lot of cycles over the years, right?
Right.
What I've always found is that every one of them is different. You have to be really attentive to what's going on to understand things. That's why, I mean, we were talking before, you know, I'm gonna go out and visit a whole bunch of places in Europe and some customers and stuff to sort of get a sense for what people are hearing here. We thought, you know, Europe's actually been more enduring than we thought.
Right.
I think a year ago.
That was-
with the energy issues.
Yeah.
You know, last summer, we thought Europe would be hugely challenged in the wintertime, and obviously a warmer, you know, lot of reasons why it wasn't. We're certainly leaving, keeping our ear close to the railroad to see how this will all play out. I think we're well prepared for whatever happens.
Another big theme, I think, is reshoring is another big theme.
Yeah.
Can you just talk about how you guys think about your own manufacturing footprint?
Yeah.
What are your suppliers sort of telling you about their decisions about their manufacturing footprint?
Well, I think without a doubt, one of the ramifications, if you will, for these supply chain issues that have occurred is really that we've relooked at the overreliance in certain parts of the world for supply chains and manufacturing. Quite frankly, we took it upon ourselves back in 2018 when 2019, when we started to see some of these export issues, to sort of reevaluate some of our strategies that have been a big part of our time for 20 years of moving manufacturing a lot to China. We've been endeavoring over the last, you know, 4 years or so to rebalance that around more than just... There's a lot of reasons for that. There's obviously freight lanes.
You know, we've had end of years where we're really, you know, wondering about Long Beach, the port in Long Beach, and whether or not we're gonna be able to get all our stuff.
Right.
through the port in time to get it out in the fourth quarter. We've taken a lot of action over the last few years to de-risk those kinds of things, moving manufacturing to different parts of the world, and we'll continue to do that. You know, we're really well-positioned in China. We're very local in China for the local market. We won't lose that. We will look through, look at opportunities to move manufacturing in some places that's more appropriate.
Do you need more manufacturing in North America over the-
Well, I think broadly defined North America, that might mean Mexico.
That's right. Yeah.
You know, that might be, you know, it might be we move some things to the U.S. Sometimes when you look at freight costs, when you look at total landed costs, and you look at some of the labor arbitrage that occurred a while ago, that isn't always true on every product anymore.
No, you're one of the first people, I think, last year to talk about when everybody was talking about chips.
Yeah.
You, I think, were one of the first people to call actually the timing.
Yeah, I said it wasn't gonna get very quickly.
But, uh-
Unfortunately.
Maybe we can talk about capital allocation.
Yeah.
I know it's sort of a hot topic. I'll tread carefully. you know, we always ask this question, sort of balance between software and hardware.
Yeah.
This is a bigger picture. How do you think about sort of the balance, capital allocation software versus hardware for Fortive?
Well, that's why I love that slide around our segments, because I think when we think about connected workflows, we really see opportunities for hardware and software. To some extent, the nexus of those two is actually a bit of a sweet spot for us.
Right.
You know, Censis is doing great because of the sterilization capability we have at ASP. ASP is better because of Censis.
Right.
We're gonna find those opportunities because those are places, those five connected workflows that make up the majority of our revenue base today are really the places where we see opportunity for both. We're gonna do both. We're gonna be creative and, you know, we'll be rigorous and disciplined about it, but I think there's opportunities in both. You know, if you look at our past, we've done hardware and software. The, some of the soft... You know, people say, "Well, all you do is software deals." Well, the last two soft deals we did were software. If you take a longer-term view, it's really about acquisitions that are driving, better value around some secular drivers. Those are gonna be hardware, software.
A lot of them are gonna be recurring revenue. Most of them maybe are recurring revenue in both cases. But some won't be, and they'll be adding to technology and innovation as well.
you've been recently, I think, in public, been asked about sort of the size of the deal.
Yeah.
you're willing to do. I think you're definitely, I think you've stated you're committed to investment-grade rating.
Sure.
I think a couple of weeks ago you said no equity issuance.
Yeah.
When you say investment grade rating, would you be open to a one-notch downgrade? Would that be part of investment grade rating as we sort of try to size the opportunity or?
Yeah. Well, I think we've got a lot of flexibility within the construct that we have today. You know, we've gone to 3.5 times.
Yep.
And so-
That's David's argument.
I think in many respects, it's about the asset that you're buying. It's not just pure numbers game, right? It's what's the free cash flow of the company you're buying? What are the synergies? What's the profitability trajectory? All of those things are gonna come into mind. Even saying, well, three and a half is a, you know, what does that look like? It's, you know, there's flexibility within those constructs. I never wanna draw ourselves into one particular thing because the, you know, the rating agencies are gonna take all those things into account.
Right.
What's true, though, as you said, we committed to investment grade, we're committed to strong returns, we're committed to accelerating strategy. When you accelerate strategy, you end up increasing the probability of success. That's ultimately what we're looking to do.
From a rating agency's perspective, I would imagine that you have a track record of delevering.
Yeah.
If you were to do something, and if you had a very sort of concrete plan, the rating agencies would probably listen to that.
That's exactly right. I mean, that's part of the conversation. It's not just what you get to, it's how quickly you're gonna come back. That's where, okay, what's the free cash flow of the organization? What's the EBITDA that's coming into the deal? Those give you the degrees of freedom to kind of get to the place where you wanna go.
Maybe, we have a couple of minutes left. We have a fairly full room, so maybe folks wanna... I don't know if there are questions from the audience.
I thought Ross was gonna ask a question. I was gonna say would be kind of easy.
Well, we have a minute left, so I'll give you back your minute. How about that?
Okay. All I would say is, first, thanks for everybody for coming to join us. We have an investor day coming in May in New York.
Yeah.
We look forward to as many people as we can get into the room. We think it's gonna be a great opportunity to lay out not only what we've been doing. Our last in-person event was in 2019. I think, you know, lots of opportunity to see our team, see our products and innovations. I think the best way to see Fortive is to sort of see our products. We're such a product-led company, hardware, software, doesn't matter. Innovation is really what we try to demonstrate there. Of course, we're gonna talk about the long-term strategy and where we see it. I think you're gonna see the progress we've made over the last several years. I think more importantly, you're gonna see the opportunity ahead of us.
You know, I think that's what's gonna be most exciting about the day.
Fantastic. Thanks so much for being here.
All right. Thanks, everyone. Thanks, Andrew.