Hardware as a service type offerings that we have and it's software subscriptions. We've continued to see strong performance across those. To give you a few examples on IOS segment, at Fluke, which is again, our biggest brand, we've just had great success in attaching service plans and subscription software to some of our products at Fluke. This has really taken the experience that our customers have with our advanced professional instruments and saying, how can we make that better over beyond the time they're buying the device from us? That's going really well and continues to provide upside. Then on the software side, and the healthcare consumable side, it's really about driving utilization of equipment we have in healthcare and then attach, for our software businesses. In healthcare, as an example, again, we have tens of thousands of equipments out there.
Everything we do to help our customers run more devices through those sterilization machines, that's recurring revenue growth. We talked about the recent FDA approval of our 50-pound weight claim for our sterilization machines. That means our customers can put more robotic equipment and devices through those machines, which means the utilization rate on those machines go up, which means more consumables and more services. So those are, it's a very targeted approach at looking at all the 100,000 customers we have and ways to do more for them on a hardware side and on the recurring revenue side to deliver more value and the best place to grow is with the customers you already have.
Yeah, that makes sense. On Fluke specifically, you highlighted that you're offering now more software recurring revenue opportunities to products you have. Currently recurring revenue is 15% of Fluke. What now, essentially the product portfolio, what percentage now has some software or software option attached to it that you can now bring to the marketplace? How high can that go?
Yeah. So Fluke's just a terrific business for us with a lot of growth vectors, and one of them is this attaching service plans and software to our Fluke portfolio. We talk about a 50% of our revenues at Fluke being recurring revenues, and that continues to grow at a really strong rate. So if you play that through over time, it's just an exciting frontier for us for growth. The power of that in the end is that as you get into higher value equipment, customers need more service plans to run them, to calibrate them, and to keep them functional. As you think about AI and what's possible with AI, it gives us a chance to add more value that customers are actually willing to pay for, as upsell on those devices. So, lots of runway ahead of us.
And speaking of AI, how are you using AI to enhance product value on both the hardware and the software side?
Yeah, it's a great way to frame the question because it is on both the hardware and software side. Just as context again for everyone, we have the benefit of having started our AI journey, with our center of excellence in AI launched seven years ago. We've had time to mature this capability, and I didn't start it with GenAI a few years ago. What that's given us a chance to do is really be focused on real customer value, right? Because we're not trying to learn the technology, we're focused on use cases. I'll just give you a few examples. On the hardware side, we took the approach of looking at every technician that uses our devices and trying to think through how we can leverage AI to help them do their job faster, make better decisions, better reliability, and uptime.
We're doing that systematically across our portfolio. A perfect example is our Fluke OptiCal, automated visual calibration product that we released recently. Think about this as a way to take the activity that technicians do of checking measurements on multiple devices and having to interpret those measurements. We now have a computer vision system that can capture those measurements, and with AI, can translate them into the implications and then some agentic workflows for some of those who actually take the actions needed. So it's gone from selling them a set of devices to now having this upgrade service that can actually, instead of a new technician trying to figure it all out, do 80% of the task and just help them get more done. So that's an example of AI delivering real value for customers on the hardware side.
On the software side, we've talked on many of our earnings call about a range of AI enablement that we've put on top of this incredible data-rich systems of record with multi-sided networks around them. Our ServiceChannel, our Walker AI intelligence platform, continues to see great adoption. At Gordian, our Flash AI solution, which kind of help people do estimates in minutes that used to take them days and weeks to do. We've also talked about Provation and our voice documentation capability that helps surgeons now not have to handwrite everything or dictate everything to a nurse practitioner. But they can actually, in an automated way, capture content with their voice rendering. Just a great set of real use cases, again, enabled by the fact that we've been advantaged because we built this capability a long time ago.
Very interesting. A little bit on the cost structure now that you're a sort of a leaner standalone company, how are you progressing on your structural cost-saving initiatives, and how much progress is there left to make?
Yeah, great question. We talked at the time of the spinoff of there being about $50 million of stranded costs. We were able to take that out between the second and fourth quarter, third and fourth quarter of last year. We also went beyond that and took out a fair bit of cost, particularly at the segment level and in the corporate cost structure. We used that capital essentially to reinvest in the initiatives backing the Fortive Accelerated strategy, and it's early days, but we're seeing great progress. I would just say that we're not done, though. The Fortive Business System is all about continuous improvement, always about looking at ways to do things more efficiently. We certainly see that in the operating companies, but also at corporate. We're on the hunt to do things with less.
Even though the big chunk is behind us, I think we're going to continue to drive efficiency through the business.
Can you talk a little bit more about those investments and where those dollars are going, and how long you expect before you see the return on that investment, and where that's going to show up?
Yeah. Well, the good news is we're already starting to see returns flow in, and the investments have really been across the portfolio and across those three initiative groupings that Olumide mentioned, which is accelerated innovation, accelerated commercial activity, and recurring customer value. Just to give you a few examples, for Fluke, we really beefed up their engineering resources. They've launched an industry-leading data center tool called the CertiFiber Max. Order volume's way ahead of our expectations. We can't keep up with it. That wouldn't have happened but for the investments that we are making. On the commercial side, we've been putting more boots on the ground in places like Latin America, places in Europe, places like the Middle East, India.
We're seeing the returns on those sales heads, again, across the portfolio, Advanced Sterilization Products, Industrial Scientific, Fluke, and we've also put more specialty commercial expertise into Fluke in both defense and data centers. Again, we're starting to see the returns on that. On the recurring customer value side of things, we've been working on some of the innovations around the software products that Olumide mentioned, and also working on making sure that our service center infrastructure for Industrial Scientific and Fluke and Advanced Sterilization Products in places like India or the Middle East is fully built out with the view of getting more of those great service plan subscriptions that will help drive the recurring revenue even higher.
Switching to capital allocation, you guys generate a lot of free cash, which is a very positive piece of the business. How do you make capital allocation decisions between M&A and buybacks?
We do generate a lot of free cash flow. We love that part of the business. It'll be about $1 billion or more free cash flow this year, and it's growing very nicely. It's not a capital-intensive business, and we've got a free cash flow conversion on net income, adjusted net income of north of 100%, and we would expect that to continue. We really look at capital allocation across four primary categories, and we look at them, broadly speaking, based on best relative risk-adjusted returns. First in priority is organic investment, and that would include things like building out the service center infrastructure that we mentioned. Second and third, which we look at interchangeably, are share repurchases and M&A. We've leaned in heavily into the share repurchase since the spinoff.
Again, $2 billion spent as of the end of last quarter, 11% of our share capital retired, and really that's just been on the basis of the attractiveness of the returns on a relative basis. While we've been doing that, we've rebuilt our whole M&A engine, new leadership, new process, new analytical suite to assess relative returns of deals, and a focus on predominantly bolt-on acquisitions where we believe that we can buy companies and make them worth more under our ownership and have them make Fortive be worth more as well. Again, we look at buybacks and M&A interchangeably based upon best relative returns. The last is our dividend. We've got a modest dividend, and it's growing.
We were very happy for payment in the third quarter here to announce an increase in our dividend of over 16%, and that's just going to be a recurring feature of the capital allocation palette, if you will, over the years to come as well.
On the M&A piece, can you talk a little bit about some of your recent bolt-on acquisitions and what they bring to the product suite at Fortive?
Yeah. You want to take that?
Yeah. Bolt-on M&A has really been very focused, as Mark mentioned, on a few ideas. One, we only do things that are going to strengthen our existing platforms. Second, they have to bring in some differentiated technology. Third, they have to meet our rigorous strategic and financial criteria. Those are very clear gates that we've set in place that guide everything we do. You see that in the few examples that we've talked about over the last several months. One of those is UV Smart, which is this company based in the Netherlands, and we did that acquisition in our ASP business. You think about a few things there. One is that technology is very differentiated. It gives us an expansion in addressable market at ASP that's about $500 million in expanded market.
It gives us this ability to bring this ultra-fast chemical-free UVC technology that's really important for disinfecting some of the ultrasound probes and endoscopes that are going to be a growing market for years to come. We had, importantly, not only do we like the asset, we had a really clear value creation thesis. We knew this was a technology in the Netherlands that with the commercial and the global presence that ASP had, we could significantly speed up the growth rate and the adoption of the technology. We also knew that while it's been approved for some use cases by the FDA in the U.S., there are a lot more use cases that this technology can apply to.
We knew that our ASP team has the regulatory process to speed up that process of getting more and more categories approved, which will further expand the addressable market. We knew that we could significantly improve the manufacturing efficiency of the operation and drive cost productivity with our Fortive Business System. So really clear, really solid value creation thesis that's tracking very well right now. The same thing at Aeroqual. That's another of the small bolt-on acquisitions. This one for Industrial Scientific, brought in a differentiated technology around air and environmental monitoring, something that connects really well with our worker safety solutions at Industrial Scientific. We had a clear value creation thesis. In this case, we knew we could take out the entire manufacturing operation facilities footprint of this company and just replicate it within our existing factory at Industrial Scientific.
That was a big part of the value creation thesis. At the same time, we could take the product they had, improve the distribution with our Industrial Scientific channel and customer relationships, and drive faster top-line growth while you're taking costs down. Strong, clear value creation thesis, and the team's off to just a terrific start on making that happen. You'll see us do those types of focused bolt-on deals. They're not large in magnitude, but they play a really important role in giving a booster shot to our existing businesses at Fortive.
That is great. Shifting to some more near-term dynamics. Like you said, growth has been strong to start the year, 6.7% core growth in Q2. What are you seeing across your end markets today?
We feel really good. We talked on our Q2 call about what we describe as kind of broad-based strength across all of our platforms and end markets that led to that 6.7% core growth in Q2. We continue to see the year play out as we expected and feel really good across all end markets. We talked about North America being the strongest region. That has held up really well. The other regions are holding up nicely, but North America continues to lead the pack. Across all the pieces of both segments, we talked about the broad-based strength in terms of product categories, and that trend continues as well into the second half.
Okay. At the Investor Day, you outlined a framework of 3%-4% organic growth, 50-100 basis points of margin expansion. The year is expected to be closer to the high end of the organic growth, but then the margin expansion is expected to be closer to the low end of the guidance there. Can you talk about what is driving those dynamics and that disconnect a little bit?
Yeah, I think first of all, I would say that the financial framework we laid out is perfectly intact. Deliberately, we laid out that framework such that we would have the levers necessary for us to make the investments required to drive the Fortive Accelerated strategy. So far, it is working. I would also just say that the margin discipline that is inherent in Fortive's culture and its history is 100% intact. The differentiated nature of our products, their high brand value, and innovative features gives us very strong pricing power. We have great operating leverage through the business. So we are really looking to make a step change in growth in Adjusted EPS and adjusted free cash flow per share. The first stop on that is to accelerate core growth.
We're on the right track here, and where we land within that 50- 100 basis points range is really a decision. It's not going to happen to us. It's a byproduct of the decisions we're making to drive the most optimal shareholder return and benchmark-beating returns profile over a multi-year period.
Got it. Thank you. Shifting a little bit to Fluke in Data Center. That business has been performing really well, strong order growth, strong point of sales growth. It sounds like a lot of this is coming from Data Center. Can you just talk about what the Data Center opportunity is there and how meaningful that could be to Fluke?
Yeah. Fluke's just a terrific business overall. Just to be clear, Data Center is an exciting driver of the growth, but our success at Fluke is really broad-based. If you think about it, for the last five years, Fluke's grown orders just about every single quarter except for one, maybe, and that's way beyond the data center story. We like the broad-based trend at Fluke. The data center opportunity is an important one for us at Fluke. As we've talked about a few times, we really think about it as we participate in the build-out and commissioning stage of a data center. Even more importantly, and in a more enduring way, we participate a lot in the ongoing operations and maintenance of data centers. If you think about the focus on CapEx activity right now, it's exciting.
Fluke plays a bit of a role in that, but the more exciting thing is the next 10 years plus, when you turn on the data center, who is running it and who is making sure it stays up and running? That's where Fluke really comes in. We have a range of existing product solutions at Fluke, from power calibration to power monitoring analytics, to high voltage diagnostics, to electrical ground fault monitoring, to high-density fiber testing. There's a lot of products that has always been important for data center operations and maintenance, and as you build more data centers, you're going to pull through more of those. Importantly, we've also enabled our team at Fluke, to Mark's point, to drive more innovation aimed at solving new problems in data centers.
The CertiFiber Max is a good example of that, where the density of fibers in a data center and the complexity and the speed with which they needed to certify and commission those was just unprecedented. You needed a tool with the fastest throughput in the industry, optical loss test sets. That's where we created, in a way that uniquely Fluke can do, the leading product in the industry to do that. What that does is not just sell that product, but it pulls through the full suite of all the other things that Fluke really does for data centers. It's an important opportunity for us. It's going to endure. You're not going to see a spike in the CapEx stage, because that's not really the sweet spot for us.
As you add more data center capacity in the world, that's a lot more data centers that need to be run and maintained for the next 10-plus years. We love that enduring aspect of how Fluke plays in the data center.
To expand kind of the TAM within the data center opportunity, is M&A going to be a piece of that, or is this more going to be organic, looking at where you can repurpose products and things like CertiFiber Max?
We like the organic runway that we have to really address more and more of the data center opportunity, including coming up with new products as the architecture shifts around on the power side and other subsystems within data centers. So we like that organic vector. If we see an M&A asset, we'll look at it. But one of the things that, Mark mentioned this, but an important part of our M&A discipline is that price is part of a strategy. I think these days, the valuation on a lot of these data center assets, you really have to make sure that that meets your return threshold, as exciting as the market is. So we really like the organic vector, and we expect that gives us a good runway.
And on the new technologies and architectures around data center, 800 V is part of the conversation that is coming for future data centers. Is this something that could drive a potential upgrade cycle for electricians in terms of the new product need to be used to be able to service that, or can it be done with what is already out there?
Yeah. Well, I think any time there is a shift in the requirements in the data center, and whether it is the power architecture with this high-density power requirements in the rack, or whether something is changing around the scale and the configuration of data centers, it creates new needs for customers. And every time there is that, especially on the measurement and metrology side, that is where Fluke shines. That is when Fluke can come up with a new product that does something for 800 V DC data centers in a way that nobody else can. So we really like what that opens up for us.
Having said that, whether it is a 480 V three-phase AC data center from a power point of view, or it is 800 V DC data center, there is a lot of things that still need to run in that data center, because there is a lot of subsystems beyond power, and that is what Fluke does. So the beauty of what we do is we will, at Fluke, be relevant for whatever configuration, whatever scale, and whatever power architecture, and we will grow from that. Then whenever there is a new thing, we have a chance to innovate. So it is not a wholesale refresh cycle because there is 800 V DC, there is an enduring part of the demand for Fluke.
But then that new architecture opens up the lane to do something like we did with CertiFiber Max for high-density fiber from the point of view of the kind of high power density in the racks and all the sub-racks that have to be created, and the new way power flows, which means you need more advanced power diagnostics, tools that maybe do not exist today. And you need really disciplined ways of monitoring what is going on in these high-power-density racks, because there is a lot of safety things that come with that Fluke can help address, and so on.
Okay. Shifting back to capital allocation once more. In terms of where you see the most opportunity to add to portfolio, what's the preference between hardware and software?
Well, so our posture on bolt-on M&A, which again, as we talked about in the four layers that Mark talked about, M&A has to compete with the share repurchase value return proposition. That's one step. When you get to the M&A piece, then we really don't start with a predetermined mix idea. We focus on, is this an asset that makes our existing platform stronger? Does it add differentiated technology, and does it meet our strategic and financial criteria? Whether that's hardware or software, it has to pass those tests. Having said that, because the bolt-on M&A we're doing is strengthening our existing business, the composition of our existing business is instructive in terms of what to expect. So over 70% of Fortive today is now really this incredible, highly differentiated hardware brands in Fluke, in ASP, in Industrial Scientific.
That's over 70% of our surface area, which means the bolt-on M&A funnel we're looking at, if they're going to make our existing business stronger, they're going to skew towards those. So you're going to see them more towards those kind of hardware businesses. Hence, the examples that I talked about, they're all on that hardware side of the company. From a software point of view, while we wouldn't rule it out at the gate, I would just say that the bar is really high, right? Because if you're looking at a software asset from an M&A point of view, it has to have the attributes we love about our existing software businesses, deep proprietary data, system of record and action, multi-sided networks, compliance and regulatory lock-ins around the asset.
Then it has to be those advantages are going to get stronger or at least endure in an AI-enabled world, so you feel they're secure. And if they pass that, then the valuation has to be at a level that meets our returns threshold. So it's a pretty narrow path to land a software M&A deal, and we just have a rich set of opportunities that are surgical and can really help us on the hardware side. But we don't rule it out.
Appreciate it. Looking out to 2027 and beyond, what needs to happen to maintain growth at the high end of that 3%-4% organic range in terms of what you can control, and then in terms of the macro as well?
I mean, we really like our setup here. If you think about it, for 2026, now modeling 4% core growth for the year. We started the year providing 2%-3% as our call. We just came out of Q2 with 6.7% core growth and margin expansion and terrific Adjusted EPS growth. The set of initiatives we're working on that we've talked about on innovation, commercial, recurring customer value, have tremendous runway, and they're still in the early stages of ramping, and they continue to ramp their contribution. So frankly, at this point, our backlog in the company is higher than it's been for several years. So we really just like our set up going into 2027. I think from our point of view, the key is not what happens in the market.
The key is the ramp rate of those initiatives that we're working on, and we like the odds of having the main tools in our hands versus what happens in the market. So it's us executing on those initiatives and making sure they continue to ramp.
Appreciate it. Well, that pretty much marks time for us. Thank you, Olumide. Thank you, Mark. Appreciate the time, and thanks for coming to the conference.
Thank you. Thank you. Great to be here. Thanks for having us.