Little late here, we're gonna launch straight into it. To be starting back up with Fortive Corporation, very pleased to welcome back Olumide Soroye, CEO of Fortive. Olumide, I think you were here three years ago, if I'm not mistaken, when you were President of IOS maybe two years ago. Very pleased you're back with us. Also Mark Okerstrom , CFO of Fortive as well. Q&A it is. Let's launch into it. Maybe a good place to start would be, you know, it's now been almost a year since the separation of Ralliant. Maybe just talk about the first year of life as a public company, what's been achieved, what's still on the come.
Yeah. Well, it's great to see you. Thanks for having us. Always a pleasure to be here. It's, we're really pleased with the progress we've made on the three pillars of our Fortive Accelerated strategy that we laid out almost a year ago now. You know, the first pillar that we set out was that we could deliver in this portfolio of new Fortive, faster, profitable organic growth. We just are quite pleased that over the last year we've shown sequential acceleration in core growth every single quarter. The set of growth initiatives in innovation, commercial, and recurring customer value that we've deployed are still ramping, which really sets us up nicely for continued acceleration.
The second pillar we set out was this idea that we're going to be very disciplined with capital allocation, with complete focus on best relative returns and maximizing medium to long-term shareholder value. If you look at what we did in Q1, $500 million of share repurchases, which brought our total since the spin-off to $1.8 billion, or 10% of our fully diluted share count. Our focus on a capital allocation strategy that starts with investing in organic growth, you know, really pursuing accretive bolt- on M&A where it provides the best returns, making sure that we return capital in the form of share repurchase and a modest growing dividend remains very clear. Our third pillar was this idea that we're going to actually intentionally build and maintain investor trust.
Again, in Q1 we were pleased to deliver solid results that was above expectations for the third consecutive quarter as new Fortive. We like that start, and we look forward to building on the momentum. Overall, you know, our strategy remains in place, and our confidence continues to build that it has the power to deliver the financial framework we laid out for 2026, 2027, and to unlock benchmark leading shareholder returns in the medium to long term. We're feeling quite good about the first year, and our team's excited.
Yeah. Definitely. I wanna come back to the first quarter performance 'cause I think it is very important that you actually did 5%, slightly better than 5% organic growth in 1Q. Maybe just talk about, you know, aspiration to grow is fine, but it's not easy to do it. Maybe just talk about, you know, the investments you're making and the changes in the process to accelerate that growth and maybe overdrive versus the markets.
I mean, first just starting with the portfolio we now have in Fortive, which we feel puts us in great markets with terrific brands like Fluke, which is just an incredible brand for that space. I think every other one of our 10 operating brands have just a great story. It starts from being in the right market with the right resources, and we like what we have. The play that we called to accelerate growth in this portfolio was to drive three things. One, innovation acceleration, so more new products, and we've talked about several examples of that over the last year. Incredible momentum building in that. Second is commercial acceleration. This means being very agile with placing bets in markets where there's here and now opportunities to capture more share.
Data centers for Fluke, ambulatory surgical centers for ASP, India and Latin America for Industrial Scientific. These are specific market opportunities that we feel give us outsized opportunities for growth. We're placing bets in those. The third is recurring customer value, which just means doing more for the 100,000 customers we have across new Fortive. We've completely aligned our team behind those three growth vectors. Every single one of our brands has a portfolio of initiatives behind those. Mark's done a terrific job with our resource allocation to move more resources from corporate cost centers to invest behind those things. We're just excited to see it continue to ramp.
Okay. going back to 1Q, you put up five and change, 5.3%, I think it was organic growth. actually put you very comfortably in the top half of my coverage, I think for the first time in a very, very long time Fortive's been in the top half. I know there was a small benefit from sell days, you know, 1.5 points from sell days. maybe just unpack, you know, what we saw in 1Q. Should we not get too excited by that? Because it was very broad-based across the portfolio. It's both segments. why wouldn't that continue from here? Because obviously your guidance assumes that doesn't continue.
Yeah. First of all, we agree. We really like the momentum in the first quarter. It was across the board, was one of the things we liked especially about that. It was across the P&L. We saw really strong growth on the top line and really good performance down the P&L, even though we made intentional investments in some areas. You know, we know that over time, we talked about year by year that we will continue to accelerate growth. One of the things we've been intentional about is making sure we can make the right calls quarter by quarter. I think for Q1, we benefited from the selling days, the three extra selling days. Q4, we know we will pay back for that.
That's the biggest swing factor between the first half and the second half. The true line of acceleration continues anyway. Again, 2026, 2027, we're well within our 3%-4% core growth financial framework. You know, I would also point out that we do intentionally as a team, really being thoughtful about setting expectations at the right levels to give ourselves a chance to build and maintain trust.
Sure. Sure. Maybe, I don't know if you can give us a little hint of what you're seeing during the second quarter, how Your comp is actually a lot easier in 2 Q, I would think that growth, organic growth should be quite attractive in 2 Q as well. I mean, you tell me if I'm wrong.
Yeah. I mean, we just had our Q1 earnings call, just 18 days ago. I think like we said on the call, April, we really came out strong in April, liked the trend, nicely aligned with our expectations, and we remain kind of firmly on track with the guide we gave on our earnings call. I think we're on track.
Okay. All the noise we're seeing on the geopolitical fronts, Middle East, et cetera, that's not having a factor right now? Well, what we're trying to say is, are you seeing any negative impacts through the second quarter from the Middle East?
No, not at this point. I think from a direct point of view, just to put it in context, Middle East is a very small part of what we do. It's about 2% of total Fortive revenues. It's really small. Most of what we do is in Saudi and UAE and mostly Fluke and Industrial Scientific, where we actually are seeing really strong order growth in the Middle East right now. From a direct market point of view, nothing significant. We don't see any repercussions showing up outside the region at this point.
Okay. That's good. Maybe if you just dig into the end markets, you know, I think Fortive as you've got the healthcare portfolio, AHS, and then within IOS, you've got the more industrial- type businesses, ASP, Fluke, and then you've got the software businesses. Maybe just talk about, first of all, in healthcare. Again, very encouraging what we saw in 1Q. That business has been quite episodic. It's been a little bit two steps forward, one back, maybe two back, one forwards. What changes are you making, number one, to accelerate growth specifically within ASP, but secondly, to make it a bit more consistency as well?
First, we really liked what we saw in AHS and ASP in Q1. It was a bit better than our expectations, and it was better in terms of capital equipment, customers beginning to place more orders, consumables. On the low- temperature sterilization side, the demand patterns remained really strong. Services were strong. Across the board, we saw strength. The work that we've been doing with that team, 'cause these are great businesses, differentiated technologies, deep customer service expertise, deep customer loyalty. We've been driving really the same three things I talked about to elevate the performance in ASP and in the segment overall. One is innovation. You saw us take the STERRAD Ultra GI to Europe. We kinda launched that in Q1, a lot of exciting other things coming.
One is just the pace of innovation. Second is commercial execution. That's a business for us that's still very heavy, U.S.-based, but the needs for healthcare and sterilization is very global. That team is now doing just great work to create local capacity in India and China and really drive growth in Latin America and also look for other healthcare centers like ambulatory surgical centers outside the hospitals that can use these instruments. A lot of commercial execution and frankly scrappiness to gain share in the market. The third one is recurring customer value, which is, we're now going to our customers and selling add-on products to them at a pace that we've never done before.
Those three things combined with the passion of the team and the foundation of the business give us really good confidence about the track ahead for the business. We are intentionally investing for growth, you see some quarters where the margins look lower because we're actually deliberately investing for growth that we believe will be exceptional payback in the medium term, and you'll see us continue to do that.
The headwinds in that space, you know, if you've got hospital CapEx is pretty anemic. You've got reimbursement pressure, federal funding is getting cuts. Are you confident that AHS is a 3%- 4% grower in 2027 based on what you see right now? Do you think that the commercial initiatives can overcome some of those headwinds?
I mean, it's interesting because we've actually seen for the hospital spending pressure and sort of tension ease—
Okay.
Since Q2 of last year. That easing is continuing. That's showing up in hospitals now. Some of the deals in our funnel that's been there for a long time, they're now placing the orders. We actually think we're on an improvement trajectory in terms of the market conditions despite all the pressures in hospitals. Because in the end, the way hospitals make money is volume through the operating room. That's where what we do plug in. No matter the pressure, they have to keep flowing through the operating room. That's the first thing. The second thing I'll say to your point is, you know, we're not counting on the market getting better or worse.
We're counting on the things that we control, it's just the innovation we're driving, the commercial execution, and those recurring customer value initiatives that our team's driving. The team we have at ASP has never been more excited about what's possible and again, you know, Mark and team are doing a really good job of moving resources around so we can actually invest in the right places.
Okay. I will be coming to you, Mark.
Oh, I'm good.
Yeah.
Whenever you're ready.
He's enjoying this.
Yeah. maybe I should flip the question and say, is there some pent-up demand in that segment? maybe this could be a good space to be the next two years if there is some pent-up demands.
Yeah, I mean, I think it is the case that there are a lot of purchase decisions that were deferred, especially kind of, you know, kind of Q2, Q3 last year in the midst of the One Big Beautiful Bill Act passing and people trying to understand the implications of that for the economics. There's certainly some pent-up demand. There's new construction demand. And frankly, there is the fact that in the end, the underlying circular driver of demand for healthcare is aging demographics around the world that's gonna need more intervention and, you know, and most of them have one or two chronic conditions.
I think it is the case that the pent-up demand, the underlying drivers make this space one to watch over the next couple years, and we're certainly trying to be ready for that.
Okay. Moving to the non-software businesses in IOS, obviously, most notably Fluke. There's definitely an industrial cycle aspect to that demand profile. Any views on short- cycle demand right now and how that's progressing?
We really liked what we saw in Q1 at Fluke. We do think some of that's the underlying short- cycle demand. Some of it's just the strength of Fluke, and some of it's the work we're doing to really drive growth in attractive arenas like data center and defense and some of these geos. We certainly feel, you know, as we've all seen with the PMI, it does feel like there's a general lifting of all the boats that's happening a little bit. From what we saw in April, like I mentioned, it was really strong trends and aligned with what we saw in Q1.
We always viewed that as a true fortress business not a border business, a fortress business. you know, where you're the dominant player across your product categories. Is that still the case, or are there pockets of competition in that business?
Fluke is an extraordinary business. It's a global brand, high-quality products. We've been in business for 78 years, but you wouldn't know it with the pace of innovation, the fastest it's ever been. The commercial scrappiness of that team to keep finding share, going after data center use cases, going after defense, going after early-in-career technicians who are in the middle of this big shift in the workforce, with newer next generation coming into the profession and the team doing work to train them on Fluke, that's what they know to do their jobs on. Just a terrific platform with incredible energy right now and I think a lot of upside ahead.
Okay. That's good to hear. Then software. Obviously a lot of concern out there around the sustainability of software business models in general. Maybe talk about what you're seeing right now in terms of customer engagements, pricing, adoption rates, AI pros and cons, how you're using AI to accelerate growth, maybe areas of potential threats down the road. Anything you can kind of enlighten us with would be great.
Yeah, no, absolutely. Just to frame this up, Fortive, 80% of what we do, highly differentiated hardware products like Fluke, Industrial Scientific, ASP, 20% software-related types of things. As we've talked about in the past, the software things we do are incredibly protected with certain competitive modes, proprietary data that are very deep, in some cases, regulatory lock-in, so this is what you have to use for AHS. In some cases, two-sided networks like in ServiceChannel. In some cases, frankly, it's not just software, it's a system of record and action. Each of our platforms have different combinations of these protections. What we're actually finding is AI is an incredibly exciting accelerator for us in those businesses because they're so deeply entrenched in the customer's workflow.
We've deployed AI in two ways. One, really just taking all the AI native tools, putting it in the hand of all of our developers, and now things that they used to do in nine months, they can do in weeks. That's just increased our innovation velocity. Importantly, it's also given us a chance to bring in some AI enablements embedded into our workflow to customers. What we're finding is because all customers wanna do something with AI, but our businesses give them a chance to do it at scale in a way they can actually get value, they can show their CFO and their board. Just incredible engagement from customers around these new solutions that we're launching that's helping our retention rates.
Frankly, it's given us incremental pricing power, which we're doing a whole range of things from, you know, kind of outcome-based pricing to add-on app-based pricing to, in some cases, token utilization-driven pricing, to make sure that these high-value use cases are not just table stakes that keep us there, but actually get us incremental value. You know, we feel excited about how all of that is playing out for our specific software businesses, which again, it's a, it's a smaller part of our surface area, but we feel good about the setup we have.
Net retention, for example, would that be tracking better than it has been? I think 105% was sort of the metric. Is that now tracking better?
Well, I think one of the good things, if you look at all the quantitative metrics from just the overall growth of the software businesses, we've said is faster than overall fleet. That's continued to be the case. If you look at all the underlying metrics from GDR to NDR elements, that's continued to trend in a way that's exciting as well. Again, I say all this, we stay paranoid 'cause the space is changing so quickly. Everything we're seeing in terms of our engagement with customers and the metrics we're looking at, for the specific software businesses we have, is actually quite exciting.
Yeah. Recognizing that 80% of your business is hardware, you'd swear to God that it's 80% the other way around, so the way the market views you sometimes. It sounds like the two-way, the two-sided business models, so Gordian, ServiceChannel, the regulatory aspects of AHS are really important to wall gardens. What about Accruent and Provation?
Yeah. Provation I would describe as the, you know, decades of data on GI procedures that's very deeply proprietary. The fact that there are physicians that won't practice in a hospital if you don't have that software solution for GI procedures. That provides an incredible level of protection for that business. Think about it as data and the customer loyalty. On the Accruent side, it's interesting. We have really a business that's very deeply vertical solutions that are assembled. There's a solution that is the solution for electronic document management system in manufacturing plants, and a solution that is the solution for kinda real estate, kinda, contract management in retail. For each of this, there are systems of record and systems of action in the fields they're in.
They're not broad horizontals, they're very deep and very specialized, which means, frankly, the addressable market is small, and we have a pretty big chunk of it, and it's just not worthwhile for most players to come after.
Yeah.
That's what it comes down to.
Okay. Thanks. Thanks for that. Any questions from the audience? Yeah. One here, Isabel.
Just to follow on from Nigel's question, interested in how you guys are thinking about software M&A at this point, and what framework would you use to assess the viability of that type of business given the concerns around the ecosystem today?
Yeah. Thanks for the question. I mean, I think for us, M&A is a piece of our capital allocation strategy, and we only do M&A if the risk-adjusted returns are better than other uses of capital. As we're building our funnel, it starts with the surface area of the company. If 80% of our surface area is highly differentiated hardware, our M&A funnel will skew towards that because that's where our surface area is. Software is part of our portfolio, but I'll say the bar is really high on a software deal because first, it's gotta meet our rigorous strategic and financial criteria. That's the first hurdle to pass. Second, it has to be durable in an AI native world, right? That's the second.
All those things I talked about that we like about our current software businesses, it has to have proprietary data, two-sided networks, and all of those things. Thirdly, it has to be a price point that fits with our return criteria. That's a really narrow path to get a software deal through right now. I wouldn't say we wouldn't do a software bolt-on, but if you take all those things I talked about, our surface area, the criteria you gotta pass through, it's just, it's a high bar.
Yeah. Yeah. Any other questions? No. Mark, let's turn to margins. You've been dealing with quite a few headwinds, stranded costs from the spin, tariffs, yet your margin expansion, margin performance has been really attractive. Maybe talk about the path ahead, you know, where are we on those headwinds and, you know, as growth picks up, you know, why wouldn't margin expansion improve?
Yeah. Thanks for the question. You know, I'd just reiterate our overall framework is 50-100 basis points of margin expansion, you know, over the next couple of years. We feel really good about that. You know, there have been various puts and takes on the margin picture, but the overall story has been that we have taken deliberate action, not only to just take out the stranded costs, which were roughly $50 million, but to go above and beyond and flatten segment structures, look for opportunities across our G&A functions to actually streamline and reduce costs, all with the goal of being able to redeploy that spend towards strategic initiatives across commercial acceleration, innovation acceleration, and recurring customer value. I think I would just expect more of the same going forward.
Again, we look at that 50- 100 basis points of margin expansion as a guideline for us to operate the business under. To the extent that, you know, like we saw in the first quarter, we see upside to that, we will look for ways to deploy it to the extent that it can further, you know, accelerate and drive profitable growth.
It sounds like you're prepared to have a bit of volatility, you know, around the quarters in terms of investment spending at AHS. I'm just wondering if you were to overdrive to, you know, if you have exceptionally strong volume quarter where you're running, you know, 150 basis points, let's say, would you be more biased to investing that away? I just wonder how you think about that?
Yeah, I mean, we definitely think about things on an annual or multi-year basis.
Yeah.
We're not looking to do things that would be suboptimal from a capital allocation perspective, you know, at any time to produce an optimal outcome. If we didn't have good use for the capital, we would absolutely let it flow through. I do think, if you look at the structural aspects of this business, all of the businesses, as Olumide mentioned, are leaders in their space. They've got pricing power. The margin structure is very attractive, which allows us to have strong operating leverage through the P&L. The Fortive Business System is alive and well, we're grinding out optimization opportunities. I do think there is opportunities for us to overdrive, and I think the more successful we are in accelerating growth, we'll see more of that.
The bias will be to reinvest it in and actually drive, you know, better performance, and that may result in quarterly movements here and there, and we're fine with that.
Yep. Obviously the most visible aspect of operational efficiency is the corporate line.
Yeah.
Okay, the corporate. That seems to be running a little bit below the $125 million, $130 million, I think is, was the guide.
Yep.
Is that now sustainably lower going forward, or is
I would think so.
Yeah.
I mean, we're in the, you know, $27 million a quarter zone, so, you know, call it, you know, call it $110 million or so. I mean, there will be inflation moves. There's little puts and takes in it, but I think that's a good spot. We have deliberately taken down our teams to reinvest into the business, and I think, you know, we'll continue to look for ways to do that.
Yeah, I apologize for the corporate expense line item. Not a classic fireside chat question. Again, I apologize for the tax rate question now coming up, but the tax rate has been running low for a very long time for Fortive. I think some of the global tax regime changes have been pushed, you know, out. Are you confident you can maintain this level of tax rate going forward, or is there a bias towards 20% longer term?
I don't know about 20%. I think we feel good about the mid-teen zone. I think if the global minimum tax regime, the, you know, rules There's still some uncertainty around the U.S.'s, you know, the applicability to the U.S. I think that's generally gonna put upwards pressure on the tax rate. I probably think about that in the 200- 300 basis points zone. We don't see 20% as the place that we're headed.
That's great. Then capital allocation would be a good place to sign off on. You mentioned bolt-on acquisitions, Olumide, rebuilding the M&A pipeline. Where do we sit right now on Obviously, you've been very heavily levering on buybacks since the spin. Is the MO still to, you know, buy back as much as you can at this stock price, or are we getting a bit more balanced in terms of the philosophy going forward?
I think the philosophy remains the same, which is that we've got four primary uses of capital: invest in organic growth. We think about M&A and share repurchases as interchangeable with a bias to bolt-ons. We've got a modest and growing dividend. Really, it's all about the relative returns across those. I don't see right now the relative returns having dramatically changed. I mean, our free cash flow yield, you know, continues to be in the 5.5%-6% zone. We generate $1 billion of free cash flow a year, give or take. I think at some point when we've got a longer track record of delivering strong performance, where growth acceleration starts to really show up as a pattern, not an anomaly, then we may see some multiple expansion.
At that point, the relative math, you know, might start to change. I mean, we have taken our leverage up a bit. You know, we did that in the back half of the year. We did that again in the first quarter to shift some repurchases forward, you know, given the value we saw. I wouldn't expect what we did in the first quarter, which was $0.5 billion, to be the recurring quarterly pattern. I do think we continue to have a bias to share repurchases in the overall mix, given what we see today.
That's great to hear. We're out of time, so, Olumide, any last closing remarks?
Well, thanks for having us. We feel really great about the first year here. We're firmly on track with the financial framework we laid out. We, you know, to Mark's point, really believe we have a chance to unlock benchmark-beating shareholder returns here in the medium and long term. That's what we're gonna stay focused on doing. Thank you.
No, thank you. That was a great discussion. Thank you.
Thanks.
Thanks, Mark.
My pleasure.
That was great.