Good to go? Okay, great. All right. Good morning, everybody. Welcome to this session for Fortive. I'm Quinn Fredrickson, Senior Research Analyst at Baird, covering the advanced industrial technology sector. We're pleased to have Fortive with us today. Fortive is a diversified industrial technology company providing professional instrumentation and calibration equipment for maintenance, repair, measurement, and condition monitoring, gas detection, Facilities and Asset Lifecycle software, healthcare sterilization solutions, and consumables. We're very pleased to have from the company Olumide Soroye, who is the President and CEO, along with CFO Mark Okerstrom. I'm going to hand it off to Olumide for just some introductory remarks, and then we will go into Q&A.
Excellent. Thanks for having us, Quinn, and it's great to be here with you. Before we get started, just a few standard reminders. Over the course of the discussion, we'll talk about some forward-looking statements. As always, actual results are subject to risk and may differ materially, and you can see more information about our risk in our most recent 10-K.
Our general counsel's so happy right now.
I know. So excited to do that. Just for those of you that may be newer to the Fortive story, let me just share a few highlights, and then we'll go into Q&A. Really three things that you should know about Fortive. The first one is that we have a business portfolio that's been curated for durable, profitable growth. If you think about our Intelligent Operating Solutions segment, which is 70% of our revenues, it includes Fluke, which is more than half of the segment. Fluke's just a fantastic business. Its gross margin's north of 60%. We've seen core order growth at Fluke now for 17 quarters straight. The momentum we're seeing is broad-based across end markets, across geos, across product categories. If you look at our Advanced Healthcare Solutions segment, it's 30% of our revenues.
It's a set of trusted brands that serve customers in the most industrial-like workflows in healthcare operations, that's tied to the profit engines of these healthcare institutions. You think about our overall company revenues, 50% of it or so is in recurring revenue models, which speaks to durability and resiliency. We really just like the fact that across our two segments, there's strong favorable secular trends that support growth for the decade ahead of us. The second thing you should know about us is we have a really strong financial profile. Annual revenue is about $4.4 billion. Gross margin's around 63%. Adjusted EBITDA margins around 30%. We generate over $1 billion of free cash flow a year, with adjusted net income to free cash flow conversion north of 100%.
I think perhaps most importantly, what you should know about us is the Fortive Accelerated Strategy that we launched 18 months ago is onto a very strong start, and we feel really good about that. There are three priorities in the strategy. The first one is that we can drive faster, profitable organic growth in this portfolio that we have. If you think about the last five quarters, we've shown sequentially accelerating core growth, including 7.2% in Q3. That's been broad-based performance across all of our businesses. The second big priority we had in our Fortive Accelerated Strategy was that we're going to be disciplined with capital allocation. Over the last 18 months, reflecting the extremely attractive return proposition that we've seen and continue to see, we've repurchased $2.3 billion worth of our stock, or about 13% of our fully diluted shares when we started.
Then we said we were going to be intentional in building and maintaining investor trust as an explicit part of our strategy. We've had five quarters of delivering really strong execution and exceeding expectations every single quarter. So, you step back, we feel highly confident about the Fortive Accelerated Strategy. We feel very confident in our ability to deliver the medium-term financial framework that we laid out. We very much believe that we're in the early stages of a really compelling and exciting shareholder value creation story. So, that's just a few things for you to know in case you're new to the story, but Quinn, let's go to your questions.
Great. For the audience, if you have any questions, I think it's session4@rwbaird.com. So maybe, Olumide, we can start off just, you mentioned the acceleration in core growth in the quarter you just reported a couple weeks ago to 7%. You also raised your full-year core growth guidance to 5%. Can you just help unpack the areas of the business where you're seeing the strongest acceleration and growth momentum these last few quarters?
The most exciting part of it for us is the broad-based nature of the growth acceleration. For Q3 specifically, our IOS segment was the leader of the pack at about 9% core growth. The great news within that is all three elements of the IOS segment grew at about that same level. We think about the elements of IOS as Fluke, FAL, or Facilities and Asset Lifecycle Solutions, and then our gas detection business. They all grew around that same zone. Fluke was a little bit ahead of the other two, but all around the same zone. Our Advanced Healthcare Solutions segment also year-to-date showed acceleration to north of 4% year-to-date. We really like the setup in that business, given the work that our team's doing in that area.
It really reflected strength in our healthcare consumables, capital returning to growth, and strong performance from Provation and the rest of the segment. We really appreciate the fact that we're not betting on one piece of the company to deliver this growth, and it reflects the efficacy of the strategy that we're running.
Within the IOS segment, specifically on the Fluke business, I think part of the growth story has been diversifying into some faster-growing end markets, data center being one of those. C ould you just elaborate on what investments you're making to better capture the growth out of those markets, and whether that's primarily in new product development, commercial investments, or any capacity expansion?
That theme of finding high-growth vectors and mobilizing on them is one that is pervasive across the company. I'll use the Fluke data center one just as one example. What we've done, Quinn, on that is we started with the clarity that Fluke has had solutions in the tool belt for data centers for years. We have power quality monitoring analytics tools, we have high-density fiber testing tools, we have power calibration tools, earth ground fault detection tools. We've always been there. We've added two specific things to really accelerate progress. One was coming up with innovative new products that nobody else in the market had. An example of that is CertiFiber Max that's aimed at helping these hyperscaler data centers to get their data center live faster than before. That's been a terrific needle mover for us in terms of customer demand.
New product introduction that is aimed at data centers helps pull through everything else we have. The second thing that we have done distinctively for data centers is invest in our expert commercial sales capacity that can help us reach this global data center opportunity, including working with hyperscalers to get specced into their tool set for commissioning, operating, and maintaining data centers, which means you are specced in and you have decades of opportunity ahead of us. We have built our team and continue to build our team that has that expertise in data center go-to-market. Those two things combined with the product set we already have, we are just seeing pull through everything we do for data centers in a really exciting way. Again, the same playbook we are running in a lot of other high-growth vectors.
You have called out CertiFiber Max, the demand there being really strong. I think you have said it is actually sold out. Any perspective on what your ability to ramp capacity to meet the demand looks like for that product?
Yes. Just again, CertiFiber Max, great product for us. Think about it as a lot of these hyperscaler data centers have hundreds of thousands of miles of high-density fiber optic cabling in the data centers, and those have to be tested and certified before you turn on the data center, and then you have to maintain it going forward. This is a new tool that we came up with that sits on top of our existing platform that hundreds of thousands of technicians are already familiar with, but helps them do that certification and testing at the industry-leading throughput with the best quality and accuracy that is possible. What that means is you are a hyperscaler, you are a contractor, you are a technician, you can get your data center live way faster than without this tool. Not surprisingly, the demand has vastly exceeded estimates and our ability to deliver.
Our team with the Fortive Business System, to your point, Quinn, have done a terrific job of doubling output capacity year to date. Still not enough. We still need more. We will keep ramping up the capacity. That is just an example of what is possible when you solve real mission-critical problems for customers in a way that no one else can.
Because I would be remiss if I didn't ask, given some of what happened in the election, just if data center construction was to slow, could you talk through how that would impact the Fluke business? I mean, I tend to think of it as being more geared towards operations and maintenance. Is that still accurate?
Yeah. I think our business at Fluke in general, it has a durable and stable demand profile irrespective of the build stage, and there are a couple of reasons for that, Quinn. The first one is if you think about what we do at Fluke, it's not the brick and mortar chips and racks and infrastructure and systems that you put together as LEGO blocks to build a data center. It's the tool set that technicians use to actually put all those elements together to turn the data center on. So irrespective of how much data center is getting built, the key driver for us is how many technicians are needed to work on those data centers. So just the sensitivity is different than if you're a brick and mortar type company.
The second reason, to your point, Quinn, is the work that we do at Fluke runs through the life cycle of the data center. We do a little bit in the build and commission stage, but a lot of what we do is once the building is done, it's the operations, the maintenance, any upgrade and refresh cycle in the data center. That's where our solutions come in for customers. So once this exciting period of heavy build-out's done, there's now this inventory of data centers that we actually need to get value out of, and a big part of how you do that is using the best solutions to keep the uptime and the performance of those data centers at top notch, and that's where we come in. So we have a long, enduring demand profile that transcends the initial build stage.
Moving on to your Facilities and Asset Lifecycle software businesses, or FAL. FAL has had a strong year with growth either above or near the IOS segment levels all year. Have the real standouts been ServiceChannel and Gordian? Maybe if you could discuss as well some of the AI features that you've been rolling out this year and any successes you've had.
We really like the performance of the FAL platform for us. We've always believed there's a lot of potential still in that platform, and that's playing out for us. You're right, you think about our three brands within the platform, ServiceChannel and Gordian have been the standouts for us year to date. ServiceChannel, just a great business, a leader in multi-site maintenance management. The beauty of that business is that it's not just a software platform, it's also a two-sided network where facility owners in these multi-site properties get to find tens of thousands, 100,000 maintenance technicians that they need in specific zip codes. So it's a meeting place, a software platform, deep proprietary data, and that's just playing out beautifully for us in that business.
In addition to your point, that's one of our businesses that's done a terrific job of bringing in AI-powered enhancements on top of this platform that customers already trust and know in ways that are creating real value for us, in some cases with explicit upsell for customers, but in a lot of cases, they're just extending the term of their contract with us. So, it's been a great story. Gordian's had a terrific year as well. That's a story of a Fortive Accelerated Strategy. They've had a combination of innovation. We've talked about Flash AI as a tool that sits on top of our assets there and help customers do their estimates much faster. They've also done a terrific job of just investing in strategic customer account management that's yielding returns that we're quite excited about and will continue to scale.
A great story for us across the board. AI has been a booster shot for us, as we expected it would be based on the strength of those businesses, and that's playing out.
Accruent, you've described that business as being on a journey of improvement. What's the strategy to drive the improvement there, and when do you think we could start to see that showing up in the P&L?
Well, we are quite pleased with the progress at Accruent. That team has done a great job of starting with the most difficult part, which is getting the product set to a point where it is actually compelling and exciting for customers. There has been a lot of trimming and adding that has gone into that, but that team has now got us to a point where the product set is just terrific from a customer response point of view.
The focus for us now is the commercial engine. That is where we are investing to get that intensity on the commercial engine to match where the product now is. That is the easier problem to solve than the product. We certainly feel excited about the trajectory ahead of us at Accruent, and as part of the FAL platform, it is certainly playing a good role to deliver the outcomes we are seeing.
Since we are discussing software, maybe we can broaden this out to all of Fortive's software assets. Where do you think the greatest defenses and differentiation reside from a sustainability of your current software revenue models, or do you see them evolving over time?
Yeah, and we have talked about this a little bit over the last several months, obviously, given the interest around AI and software. I think I am going to repeat something I have said, which is not every software company is the same. Having been around the sector for a long time, you have to discern what you are dealing with. In our case, the 20% or so of our revenue is that software happens to be this set of assets that have a combination of a few attributes that make them incredibly defensible and incredibly advantaged in an AI world. The first one, and a lot of people say this, but you have to look in the details, is deep proprietary data that has been built over multiple decades. The second thing a lot of them have is compliance and regulatory lock-in, where you cannot just swap them out.
There are actual regulatory approvals needed before you can use them. The third thing a lot of them have is this system of record and system of action attributes. In other words, it is not just a workflow tool that I can vibe code with AI overnight and deploy. It is actually the fact that it is the workstation where tens of thousands of these marquee institutions have their employees spending their time every day to create work orders, to document cases, whatever they are doing. A lot of them have this two-sided network attribute to them, where I talked about for ServiceChannel, it is not just a software platform, it is also there are hundreds of thousands of service providers that are meeting tens of thousands of facility owners on the platform.
At Gordian, where you have the state and local government agencies, this is where they manage their projects with construction firms that do the work, and that is where they meet. Those make those businesses incredibly sticky. What we found is customers saying, "I trust you. You are my super freeway for getting my business to run every day. Could you please get these AI use cases actually activated on these platforms so I can get real impact right on day one?" That is what our teams have done at scale across all of those software platforms. We have seen, again, AI as a booster shot for us, and that is showing up in the performance of those businesses.
Maybe switch over to AHS, the healthcare side of the business. Just a bigger picture question. It has been more of a low single-digit grower in the recent years, obviously against a difficult hospital CapEx environment. Just given the investments that you are making in this market, would you expect to bend that growth curve up over time, similar to what you have been able to accomplish at IOS?
Yes. We are incredibly excited about both the core growth and the margin expansion upside ahead of us in the AHS segment. The reason for that is we are doing the work now to make that so. First of all, it starts from the fact that the thesis for us in the healthcare segment is, it is a sector that has a lot of secular trends over the next 10 years. That means demand for healthcare services will go up. Irrespective of the system that solves for that, the demand is going to go up. Demographics, increasing standards of care, new intervention possibilities. We have positioned ourselves in these businesses that frankly are the most industrial-like workflows in healthcare operations. They are the things that help you make sure the OR is running, and you can document your things, you can clean your instruments.
They are things that are in the profit engine flow of this hospital. We feel good about our positioning, and our teams are doing a great job of driving innovation that solve new problems for customers. They are doing a great job of investing in commercial capacity that is going to drive growth, and they are doing a great job of building our install base that is going to feed our engine for years to come. That is what gives us great confidence about the arc of improvement ahead for the segment. Frankly, the fact that it is slightly behind IOS just means there is more upside ahead of us, and we like that two-speed engine that we have.
Any questions from the audience? Keep going if not. Provation has a really outstanding reputation in GI case documentation and high market share. Just given the penetration, how do you think about continuing to deliver growth there?
We love the Provation business. The advantage we have there stems from the fact that we have deep workflow expertise in the specialties we play in. I talked about proprietary data earlier. We have 30 years of deep and extensive documentation and data about GI procedures that underpin that business, and then just incredible customer loyalty and passion for the business that's quite terrific. We've continued to invest in all of those things. The innovation pace at Provation has never been stronger. We've talked about the AI-powered voice documentation enhancements that we added to that platform, which means all this clinical staff that continue to be stretched now have an easier way to document things with voice. That's deployed now across Provation. Innovation's been one. Second is commercial investment. We've always had a strong position with ambulatory surgical centers and other outpatient locations with Provation.
We're investing more behind that in terms of our commercial capacity and innovation aimed at that particular segment as procedures shift from inpatient to more of these outpatient facilities. We really like what we're doing there. We're quite excited about what's possible in that business. We like that major hospital systems continue to bet on us and expand with us, and we continue to get new ones on board.
Is there any expansion efforts beyond just GI specialists as well in that business?
Yeah. One of the things we are also doing now is expanding to other specialties beyond GI. We have been strong in GI for a long time, but as you look at these ambulatory surgical centers, many of them are multi-specialty. We are getting into orthopedics and ENT and gynecology and a lot of other areas that give us an even more compelling proposition as a strategic partner for the hospitals and the ASCs. That is an exciting front for us as well.
Great. Let me turn to margin. Mark, you have got a framework for 50 to 100 basis points of annual adjusted, excuse me, annual adjusted EBITDA margin expansion. You have got it close to the midpoint of that range this year despite some investments.
Yeah.
What would be the factors that could push you to the higher end or even above it over time? Would it just be core growth sustaining above the 3%-4% algo?
Yeah. Well, I think first of all, that 50 to 100 basis points of margin expansion, think about that as guardrails. It is not something that happens to us. It is something we decide to do. Really, the playbook has been, let us take excess costs out of the business, let us reinvest that in things that are going to drive growth, and we are going to basically manage the business within these guardrails so that investors know what to expect. If we are wildly successful, then revenue growth will accelerate, and what you have seen recently is going to sustain. That will make it easier for us to drive operating leverage.
I think where we land in that range is going to be more a byproduct of a combination of what investments we see to drive even higher growth and what further room we can create using FBS, because at the core of all of this is the Fortive Business System that says we can drive pricing, we can basically continue to find ways to improve and be more productive in manufacturing, and we can always find ways to drive more operating leverage in the business. I think it's going to be a byproduct of our decisions and the opportunities we see as opposed to something that just happens to us.
You mentioned pricing. Is there any signs of pricing fatigue showing up across any areas of your portfolio?
No, not at all. I think historically, if you look at where Fortive has been able to drive price, it's been around a couple hundred basis points. There's been ups and moderations as we went through the supply chain crisis. This year, it's been running in that 200 basis point zone. We haven't seen fatigue. Actually, if we look out into the future, just looking at the pace of new product innovation that we're driving now, which is significantly faster than what we've seen historically, I think there's opportunities for us to even push price harder or at a minimum, be more intelligent around how we're thinking about price from a portfolio basis.
Just as we think about 2027, would you expect to continue to make incremental investment, or do you reach a point of starting to harvest some of the investments that you've been making recently?
I would think about it as a perpetual motion machine. It took us a bit upfront to actually take out corporate costs and make these investments. Now we have elevated the growth rate. That creates more envelope for investments, and we see a long runway of incremental opportunities ahead of us, whether it is doubling down on things that are working right now, or adjusting what we are doing and taking capital and putting into new opportunities. I think we see a lot of runways, but again, I think the key words here is we are always going to be disciplined on it, and we are always going to be balanced, and we are always driving within that 50 to 100 basis points EBITDA margin expansion guardrail.
Okay. Speaking of 2027, maybe we could just touch on how you are thinking about preliminary view on the macro or any of your key end markets at this stage.
Yeah. We really like the momentum that we are experiencing right now as we finish out 2026, and the broad-based nature of that, the fact that it is not just price, but we are getting a lot of growth in volume, the fact that it is across end markets and geos and product categories and all of our operating brands. That is just a great setup as we go into 2027, knowing that the things that we are doing on innovation, commercial, recurring customer value are still ramping as we go into the year. We really like the setup, and we will take any macro tailwinds on top of that, but the main thing we are banking on is the things we are doing. We are excited to talk at our earnings call next quarter about the setup for 2027.
On capital allocation, you have been a pretty aggressive buyer of your stock. It seems like your tone around M&A is a little more active than in the past, and you have done a few smaller-sized acquisitions. Should we think about the focus from here as mostly bolt-ons, and are there any particular parts of the business that would be more attractive for acquisitions?
Yeah. It is going to continue to be bolt-ons, and the reason for that is that we feel like we have a very good value creation algo behind us right now, where we can just accelerate core growth, be disciplined with capital allocation, rebuild investor trust, and we will be able to deliver, we think, exceptional benchmark-beating shareholder returns. Any deal that we do has a pretty high hurdle to beat, which is buying back our own stock, and where we see right now, that is a pretty attractive use of capital. We have rebuilt the M&A engine, and we have tuned it so that we can find great opportunities that we can bolt onto our existing platforms, that we can buy companies at disciplined prices and make them worth a lot more under our ownership.
The places we are looking, I would look at sort of the footprint of our platform, places like Fluke, places like Industrial Scientific, where we can actually bolt onto our existing platform and make these acquisition targets worth a lot more.
We touched on AI enhancements for your customers. I wonder if you could discuss how Fortive is internally implementing AI, how that has changed at your company versus last year in terms of use cases, outcomes, and spending.
Yeah. AI has been an exciting journey for us, and I have mentioned this before. We actually started our AI Center of Excellence seven years ago, which sounds like before AI was cool. We have been building this capability for a while. We did not need to start from scratch and have a big spike. What that has enabled us to do is to be really intentional about high-return use cases. The way I will describe what we have done is we have prioritized AI for our customer products. The first thing we did was where I did 10-20 areas where, on top of the product set we have, we can put something powered with AI that can deliver value to 100,000 customers, because that connects to our profitable growth acceleration. That was our first goal.
Terrific job by our teams to get a whole range of use cases out, including our hardware businesses, by the way, not just software. That was priority one. Priority two was we picked a couple of workflows internally that we felt had the best high-return, traceable value from AI. For us, those were R&D and customer experience. For those two functions, we deployed the best-in-class AI tool set, got our teams enabled. R&D was the first to go, and the impact on our output for the same number of people is tremendous. That is part of why we have been able to drive up innovation outcome without increasing our R&D spend substantially. So that has been great. Customer experience is just using the tool to deliver a better experience for our customers. That has paid out magnificently.
In addition, we make AI tools available for all of our employees to drive productivity. We like the return we are seeing. The investment is very controlled, and we are quite happy.
Great. Well, I see we are out of time, so thank you both for your time today.
Great.
Thank you.
Thanks, Quinn.