Jim Lico
President and Chief Executive Officer at Fortive
Thanks, Elena. Hello, everyone, and thank you for joining us. I'll begin on Slide 3. We had a strong start to the year delivering better-than-expected revenues, margins, and earnings in the first quarter. At 9% core growth, we're demonstrating strong execution of our strategy, building leading positions across our customers' critical connected workflows. Our ability to deliver strong growth and continued margin expansion is directly tied to our culture of continuous improvement and dedication to the Fortive Business System. As a result, we expanded adjusted gross and operating margins by 80 basis points and 100 basis points respectively, taking margins to a first-quarter record expectations for further margin expansion this year and into the future. Free cash flow in the quarter reflects our normal seasonality as well as the timing of China collections that pushed into April. Overall, our teams have done an excellent job managing working capital in a more challenging supply chain environment as seen by our outstanding performance in 2022. By harnessing our unique competitive advantages, strong execution capabilities, we're confident in our outlook and are raising and narrowing our full-year 2023 guidance.
Turning to Slide 4. I wanted to provide an update on what we're seeing and what we expect over the course of 2023. Starting on the left in the current environment, hardware product orders were better than expected, down mid-single-digits, and backlog was more resilient with a book-to-bill of 1.0 in the first quarter. Our software businesses continued to see good growth, benefiting from strong customer value propositions, driving double-digit growth in our SaaS revenue streams. While industry challenges remained in our healthcare segment due to China, consumables growth in March reaffirmed that recovery is underway. We expect momentum to continue and accelerate growth and profitability throughout 2023.
Moving to the right-hand side of the slide. We are seeing traction on our new product launches favorably aligned to secular drivers including Fluke's latest family of solar tools and Tektronix's leading power and electronic test systems. Together with continued software strength and recovery in healthcare, we expect to sustain core growth in the second half. Combined with favorable pricing, cost savings, and discrete productivity initiatives that span all segments, we expect over 75 basis points of margin expansion in the year. Lastly, we expect robust free cash flow growth again in 2023, which together with our very strong balance sheet, gives us confidence that are attractive M&A funnel will provide opportunities to enhance earnings and cash flow compounding in the future.
Turning to Slide 5. I want to take a minute to remind you about the work we've done to transform our portfolio and create focused segment strategies favorably aligned to a number of strong secular trends as resulted in a more resilient Fortive with enduring growth and further margin expansion opportunities. As a result, today we have a stronger collection of businesses with a more diversified end market mix and durable recurring revenue profile that includes leading healthcare and software franchises. Together with our enhanced innovation capabilities, we have focused our portfolio around multi-year mega trends, including automation, digitalization, the electrification of everything, and improving healthcare trends to name a few, all to reduce the overall cyclicality of our businesses and provide more tailwinds for growth by expanding into new markets. As a result of these mega trends, we see continued growth across our portfolio, including the more durable software and services businesses, as well as the nonrecurring portion given the sizable amount of backlog some of our product businesses are working through while continuing to see resilient demand. Finally, our portfolio quality is reinforced by the substantial improvements we've made in gross and operating profit, working capital and free cash flow as a percent of revenue, driven by the rigorous application of the Fortive Business System.
Turning to Slide 6. FBS is a powerful mindset that makes continuous improvement a way of life at Fortive. We drive deep engagement across our teams and hold them accountable for delivering on high expectations. With Kaizen activity accelerating, we saw significant results across the portfolio, including material improvement in delivery and past-due backlog reduction in our hardware products businesses by improving planning and reducing part shortages with the Fortive material system. Fortive software system deployment in our SaaS companies including ServiceChannel, Accruent, and Provation is accelerating delivery of software features to customers, driving customer value and resulting in higher renewal rates and pricing gains. Our record gross margins in the first quarter were driven by a significant expansion of Kaizen events in the quarter, approximately double the number the prior year, setting us up for improved performance throughout the year.
Turning to Slide 7. Fortive has made sustainability a priority since its founding. It is inextricably linked to our company's shared purpose, values, and business strategy which you'll read more about in our upcoming 2023 sustainability report to be published in May. This year's report will further highlight how our commitment to sustainability is grounded in our culture of Kaizen, leveraging the power of FBS, innovate products and services that enable more sustainable outcomes. You'll also hear how our team has strengthened our responsible sourcing initiatives, ensuring robust review of the labor and human rights practices across our supply chain, and how our strong and inclusive culture is creating a community where everyone valence [Phonetic] which is positively reflected in our latest employee engagement and inclusion, diversity, and equity performance.
In summary, we are accelerating progress towards a more sustainable future for Fortive and our customers as well as the environment and the communities in which we operate. We invite you to review our report next month.
I'll now provide more details on each of our three segments, beginning with Intelligent Operating Solutions on Slide 8. IOS grew core revenue by 10% as our connected workflow strategy drove better-than-expected performance in the quarter. The segment saw a good growth in all regions, with mid-single-digit growth in North America and Western Europe, and mid-40% growth in China, lapping prior-year shutdowns. Solid core growth in each workflow and strong FBS-driven execution resulted in 300 basis points of operating margin expansion, taking operating margins consistently above 30%. Looking at our performance drivers by workflow, in connected reliability, Fluke core revenues grew by low-double-digits with mid-single-digit orders growth in the quarter and point-of-sale remain positive in all regions. Fluke is benefiting from lean portfolio management, driving record revenue attainment, and Fluke's new product launches including SMFT-1000 solar tester, which are benefiting from strong demand in the energy, renewables, and electric vehicle markets. Elsewhere at Fluke, eMaint posted another record quarter with strong double-digit growth. We're seeing accelerating customer adoption of the X5 CMMS system with enhanced connected worker capability also closed the largest deal on record with a strategic enterprise customer.
EHS revenues grew by mid-single-digit with both Industrial Scientific and Intelex providing solid contributions. Industrial Scientific saw strength across all product lines, including iNet and orders growth outpaced sales driven by new product launches and cross-sell activity. Intelex posted another quarter of strong SaaS growth with low-double-digit ARR growth.
Moving to facilities and asset life cycle. We had high-single-digit growth in the first quarter, driven by high-single-digit SaaS revenue growth. Customers continued to ship larger projects the Gordian's Job Order Contracting platform. While the wind-down of end-of-life programs at Accruent and the business model change in service channel lowered core growth, revenues exceeded expectations [Indecipherable] as customers continued to seek more productive and digitize solutions to optimize their facilities management. For example, a large worldwide retailer is migrating multiple manual processes with Lucernex real estate management platform at Accruent, and a large enterprise customer is leveraging ServiceChannel's automation services to save hundreds of thousands of dollars on mismatched invoices.
Turning now to Slide 9. Precision Technologies delivered another quarter of strong double-digit core revenue growth. Core revenues increased 14% driven by a high-single-digit growth in North America, low-double-digit growth in Western Europe, and high-30% growth in China. PT also delivered 190 basis points of adjusted operating margin expansion with higher volume and strong price realization more than offsetting continued inflation and FX. Some highlights in the quarter include greater than 20% core revenue growth in Tektronix orders and better-than-expected benefiting from bookings growth in electric vehicle testing programs. This and strong point-of-sale in all major regions drove double-digit growth across its product businesses in the first quarter, which continued to see good demand for recently introduced entry-level and mainstream scopes. Sensing technologies reported low-single-digit growth as expected, driven by another quarter of strong price realization across all businesses, and continued broad strength at Qualitrol. Pacific Scientific EMC reported a second consecutive quarter of greater than 20% growth as the business continued to deploy FBS to improve operational performance.
Moving now to Slide 10 in Advanced Healthcare Solutions. Core revenues were flat as the improvement in electric procedure volumes outside of China was offset by some supply chain challenges at Fluke Health Solutions and the expected headwinds in China electric procedures and the wind-down in Russia. By major region, North America was up slightly and Western Europe grew mid-single-digits, offsetting a high-single-digit decline in China. China elective procedures recovered in March, exiting the month at approximately 90% of normalized levels. Our outlook continues to assume that China elective procedures return to normalized levels in the second half of 2023. In the first quarter, AHS adjusted operating margins declined 260 basis points as a result of FX headwinds, supply chain challenges at Fluke Health, lowering contribution margins, and higher-than-expected inflation. Some highlights in the quarter include: we exited March with stronger ASP consumables growth, reaffirming recovery post-COVID is underway with sales outpacing the market in most regions. Double-digit growth of Censis was driven by a CensiTrac Saas of. Censis is also seeing strong demand with AI2 Productivity platform and continues to drive productivity improvements through the application of FBS tools which have accelerated the time from bookings to revenue.
FHS saw solid demand for equipment orders and dosimetry services despite continued supply chain constraints that stalled equipment shipping. Lastly, Provation continues to perform very well with another quarter of double-digit growth, driven by its Apex SaaS offering. Apex is seeing continued high customer demand with substantial Q1 orders and a greater-than-three times average revenue uplift from license migrations. Following a strong start to the year, we continue to expect that Provation's growth will accelerate through 2023, supported by customers looking to further standardize on Provation across their health systems.
In addition to our remarks on the first quarter performance, we thought it would be helpful to provide more detail on our expectations for the AHS segment for the remainder of this year. The headline is that we expect sequential improvement in both revenue and adjusted operating profit margin as we move through the year. Specifically on revenue, we expect favorable price in addition to the recovery of electric procedures in China, resolution of supply chain challenges at Fluke Health Solutions, and normal healthcare seasonality to drive higher volumes over the course of the year. As a result, we expect core growth will go from low-single-digit in Q2 to mid-single-digit in the second half of the year. On margins, in addition to the uplift from higher volumes and favorable price, we see compounding tailwinds from the benefits of the productivity initiatives taking second half margins to approximately 25%. Go-to-market changes in ASP consumables in North America will improve performance and enable closer connection to our customers to better serve their need, transitioning from a primarily distribution model to direct to the customer. All these actions will have carryover benefits in the years to come, positioning us for accelerated growth and profitability as the general healthcare environment continues to improve.
With that, I'll pass it over to Chuck, who will provide more color on our first quarter financials and our 2023 outlook.
