Fortive Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 24, 2024

There are 15 speakers on the call.

Operator

Good day. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to Fortive Corporation's First Quarter 2024 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the conference over to Ms. Elena Rossman, Vice President of Investor Relations. Ms. Rossman, you may begin your conference.

Speaker 1

Thank you, Dennis, and thank you, everyone, for joining us on today's call. With us today are Jim Lika, our President and Chief Executive Officer and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. We present certain non GAAP financial measures on today's call. Information required by Regulation G is available on the Investors section of our website at fortive.com. Our statements on period to period increases or decreases refer to year over year comparisons unless otherwise specified.

Speaker 1

During the call, we will make forward looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward looking statements are subject to a number of risks and actual results may differ materially from any forward looking statements that we make today. Information regarding these risk factors is available in our SEC filings, including our annual report on Form 10 ks for the year ended December 31, 2023. These forward looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward looking statements. With that, I'd like to turn the call over to Jim.

Speaker 2

Thanks, Elena. Hello, everyone, and thank you for joining us. I'll begin on Slide 3. We had a strong start to the year, exceeding our expectations for core revenue growth, margin expansion, earnings and free cash flow in the Q1. Our strategy to enhance our customer safety and productivity across a number of vital sectors from manufacturing to healthcare is delivering more value for customers and more durable growth for Fortive.

Speaker 2

We delivered better than expected performance in each of our 3 segments, reflecting enhanced portfolio positions, the benefit of innovative new products and our dedication to the Fortive Business System. By harnessing our unique competitive advantages and strong execution capabilities, we are confident in our raised outlook for the year, which includes anticipated double digit adjusted earnings and free cash flow growth. As we look ahead, the success of our strategy is reflected in faster and more profitable through cycle growth, which combined with the rigorous application of a differentiated business system delivers supportive formula for value creation by compounding results year after year. Further evidence of our strategy to build a more durable collection of businesses and higher recurring revenue profile is shown on Slide 4. Today, Fortive revenues are split with approximately half derived from highly differentiated products businesses, helping customers harness the power of emerging technologies and embrace the energy transition.

Speaker 2

As a result, today roughly 1 third of these revenues support customer investments in electrification and AI. Further with the added benefit of diversification, approximately 60% of our product revenues have continued to grow despite select end markets slowing. Moving to the right side, the remaining 50% of our revenue includes approximately $600,000,000 of recurring healthcare consumables, which are benefiting from the go to market changes we made last year and improved global healthcare markets, driving faster and more profitable growth in 2024 and beyond. It also includes approximately $1,000,000,000 in software revenues, which have grown high single digit the last few years and will continue to be accretive to our growth and profitability. As our safety and productivity solutions across the enterprise continue to help solve customers' toughest challenges, we expect sustained outperformance going forward.

Speaker 2

Turning to Slide 5. The iOS segment is really a full manifestation of our strategic playbook to evolve the company organically and inorganically, to reduce portfolio cyclicality, align investments to secular drivers and increase through cycle core growth. With almost $2,800,000,000 of revenue planned this year, iOS continues to build on its leadership positions in instrumentation, software and data analytics, all benefiting from customer investments and key megatrends, keeping the world running safely, efficiently and more sustainably. Over the past few years, we have expanded iOS's addressable market to $30,000,000,000 adding companies that play in strong secular driven markets, including the 4 bolt ons last year. Within iOS, our scalable software businesses, now over $800,000,000 in revenue growing high single digit, helping customers streamline and digitize their workflows.

Speaker 2

Today, roughly 1 third of the segment is now in recurring revenue models and we have further built in durability through the intentional diversification of end markets and customer use cases that we serve. As a result, Fluke has seen improved through cycle resiliency with continued order and revenue growth despite contracting PMIs over the last 16 months. In Facilities and Asset Lifecycle, new logo bookings have grown double digits the last few years, underpinning continued strong multiyear growth. And in Environmental Health and Safety, we continue to accelerate innovation and geographic expansion, driving faster growth in this platform. As you can see from the chart, this has culminated in sustained strong performance at iOS, including over 700 basis points of adjusted operating margin expansion since 2019, providing an excellent blueprint for the future evolution of Fortive as we continue to execute our formula for value creation in AHS and PT.

Speaker 2

Turning to Slide 6. You can see how our portfolio is at the epicenter of the proliferation of electronics and sensors, enabling a more intelligent and sustainable future. Tektronix is solving power efficiency challenges across new and diverse end markets, benefiting from growing demand for high performance computing systems, including academic and government institutions, defense agencies, energy companies and the utility sector. The new investment cycles start with semiconductors, then shift to infrastructure and finally the software and services. The addition of EA, the market leader for high electronic test solutions will drive faster through cycle growth in precision technologies, increasing their exposure to energy storage, mobility, hydrogen and renewable energy markets.

Speaker 2

EA is also benefiting from the rise in high performance compute and deployment of AI and networks, which makes it an excellent complement to Tektronix. The transformation of the electrical grid is a long term secular tailwind for both volatile and Fluke. Qualitrol provides the world's energy grid with monitoring equipment and sensors to assure the lights stay on and customers are adding considerable capacity to support infrastructure investments and new sources of energy. Lastly, at Fluke, we are ensuring the power efficiency and reliability of these global infrastructure investments, including tools to support the installation and maintenance of solar panels and the reliability and performance of EV storage equipment, including chargers and stations. Turning to Slide 7.

Speaker 2

Our increased innovation velocity is a direct result of our world class business system and the work we've done to revamp our product development process to drive more consistent differentiated results. For example, in the last year, our teams identified over $1,000,000,000 of new revenue opportunities through the dream stage of our lean portfolio management process. Leveraging benchmarking we did with other technology companies that our partnership with Pioneers Grill Apps to incorporate best practices in early stage product development. As we prioritize new product development, we reallocated roughly 25% of our R and D spend from the sustaining of legacy products to the funding of new product innovation. Fortis software system is improving our feature on time delivery as our operating companies are seeing a greater than 20% acceleration in software development time using GenAI, creating bandwidth for higher value work and enabling faster innovation for our customers.

Speaker 2

FBS lead tools are also driving continued adjusted gross margin and operating margin expansion and industry leading working capital metrics. Over the last 5 years, we've expanded adjusted gross margins over 400 basis points, operating margins by more than 600 basis points and reduced net working capital as a percent of sales by 5.50 basis points with improvements in both our hardware and software business. In summary, FBS is fueling growth and innovation, driving differentiated operating performance, including higher free cash flow generation, our currency to further accelerate strategy and compound results through the Fortafly wheel for value creation. I'll wrap up on Slide 8. We're off to a strong start to the year.

Speaker 2

Quarter hour success has been the groundwork we've laid over several years to create more durable growth in each of our strategic segments, including at iOS we're seeing steady global demand for our products and technologies and continued high single digit ARR growth. PT we do coming into the year that the normalized demand in Tektronix and Sensing would result in declining core growth in the first half, lapping strong multi year growth rates. In the quarter, we saw demand for electrification and AI hardware drive a return to positive book to bill in Q1. At AHS, we are seeing continued momentum in growth and profitability with continued consumables recovery and accretive software growth underpinning our outlook for the year. Turning to the right side, continued execution in 2024 sets us up well for the achievement of the long term targets we laid out at Investor Day last May, driven by an acceleration of software and non recurring products growth in 2025 underpinned by secular investment trends, continued strong margin expansion enabled by FBS led innovation and operational improvement and double digit adjusted earnings and free cash flow growth consistent with our long term track record since 2019.

Speaker 2

We remain focused on enhancing shareholder returns with ample firepower to fund attractive M and A opportunities that will continue to feel the Fortive formula for value creation. And with that, I'll turn it over to Chuck to take us through the details on the Q1 financials and updated outlook for the year.

Speaker 3

Thanks Jim and hello everyone. We're pleased with our Q1 performance, including 3% core growth, reflecting better than expected performance in all three segments. Total revenue growth of 4% included the benefits of acquisitions, partially offset by approximately 1 point of unfavorable FX. Highlights of our Q1 performance include record margins in the quarter, with 110 basis points of adjusted gross and operating margin expansion, reflecting outstanding operating performance. Adjusted earnings per share of $0.83 over the high end of our guidance with adjusted earnings up 11% year over year and free cash flow was $230,000,000 up 54% year over year, driven by strong execution across all three of our segments and some favorable timing.

Speaker 3

Our trailing 12 month free cash flow is $1,330,000,000 representing strong momentum towards our full year guidance of 1,390,000,000 dollars Turning to Slide 10 and the 1st quarter performance in each of our 3 segments, beginning with Intelligent Operating Solutions. IOS core growth was 5% in Q1 with consistent mid single digit core growth across all three platforms. M and A contributed 1 point to total growth, partially offset by unfavorable FX. Adjusted operating margins expanded 160 basis points to 31.8 percent, driven by favorable price realization and volume increases across the segment. Additional highlights include stable growth at Fluke, driven by the benefits of innovation and customer adoption in key growth verticals.

Speaker 3

Environmental Health and Safety had steady growth in the quarter with strong operating margin expansion enabled by pricing uptake and FBS enabled efficiencies. Facility and asset life cycles continues its pace of double digit SaaS growth, including multiple accruent cross sell deals with Redeye and Service Jam customers. Overall, iOS is benefiting from a strong innovation pipeline, with several new product launches in the first half ramping as we move through the year. Moving on to Precision Technologies. Core revenue in the quarter was down 2%, driven by normalizing demand at Tektronix and Sensing.

Speaker 3

Total growth reflected the benefit of the EA acquisition, partially offset by FX headwinds and the divestiture of certain product lines of Invotec. We've completed our 100 day integration plan for EA and we are more confident in the strategic value of the combined businesses, having identified significant opportunities in the sales funnel, some of which combine EA's power supply offering with Tektronix services to better serve customers. PTE adjusted operating margins expanded 80 basis points to 24.4%, reflecting accretive EA margins and productivity initiatives. Additional color includes: Tektronix declined mid single digit as expected, driven by normalizing demand in China and slower growth in the U. S.

Speaker 3

Due to delayed customer R and D investments. Sensing Technologies was down mid single digit with order trajectory improving as we move through the quarter, while utility and food and beverage markets remained strong. PacSci once again had double digit growth in the quarter. Now on to Advanced Healthcare Solutions. Q1 core growth was 6%, driven by improved market conditions and consumable.

Speaker 3

Adjusted operating margins expanded 200 basis points to 24.2%, driven by strong volume growth and price realization, more than offsetting FX headwinds. Additional highlights include ASP is benefiting from the North America channel transition completed last year. Further, as hospitals continue to focus on safety and compliance and the increased need for energy efficiency, ASP is gaining share with their proprietary hydrogen gas plasma technology that consumed 70% less energy per year than steam sterilizers. Luke Health benefited from growth in biomedical quality assurance equipment as well as supply chain and operational improvements. Our AHS software businesses continued their pace of double digit SaaS growth.

Speaker 3

Sensus is boosting sterile processing productivity with their next gen AI Squared instrument recovery platform, with strong new logo bookings in the quarter. And new customer wins at Provation were partially offset by lower year over year license revenue driven by a large customer order last year. Turning to Slide 11. You can see total growth in the Q1 of 4% was driven by expansion in the core and positive M and A contributions, partially offset by an approximately one point of FX headwind. By region, we had low single digit core revenue growth in North America with growth in all segments despite normalizing hardware product demand.

Speaker 3

Western Europe core revenue was up mid single digit driven by backlog conversion and secular investments supporting energy transition. Asia was up slightly, driven by low double digit growth in India, partially offset by low single digit decline in China and growth in iOS and AHS was more than offset by expected slowing in PT. Turning now to Slide 12 and our guidance for the second quarter and the full year. For the Q2, we anticipate revenue growth of 2% to 3% with core flat to 2%, driven by continued strength in iOS and AHS, partially offset by core mid single digit decline in PT, consistent with our prior view of the first half performance. Adjusted operating profit margin is estimated at approximately 26.7%, up 75 basis points year over year.

Speaker 3

Adjusted diluted EPS guidance of $0.90 to $0.93 up 6% to 9% and free cash flow of 270,000,000 dollars reflecting double digit growth in the first half. For the full year, we continue to expect core growth of 2% to 4%. Total growth is now expected in the range of 4.5% to 6%, including an approximate $60,000,000 FX headwind versus the prior guide and a partial Emtek divestiture reducing revenues by approximately 30,000,000 dollars 1,000,000 Adjusted operating profit is expected to increase 9% to 13% with margins of 27% to 27.5%. We are raising adjusted diluted EPS guidance to $3.77 to $3.86 up 10% to 13% year over year to reflect the strength of the Q1. Effective tax rate is expected to be in the range of 14% to 14.5%, in line with the average of the last 2 years.

Speaker 3

Free cash flow is expected to be approximately $1,390,000,000 representing 11% growth year over year and a 22% free cash flow margin. Before opening up for questions, I'll pass it back to Jim to provide some closing remarks.

Speaker 2

Thanks Chuck. I'll wrap it up on Slide 13. The strong start to the year and an enviable track record of improved through cycle performance, our transformation execution and strategy to build more durable company is playing out. However, our strategy is reflected in the continued momentum of positive core growth over the last 14 consecutive quarters, even as demand slowed in select end markets. And the strength of our execution and dedication to FBS is reflected in 15 consecutive quarters of adjusted operating margin expansion delivering more value to customers.

Speaker 2

When taken together, we are confident in our raised outlook for the year, continuing our track record of compounding earnings and free cash flow growth double digits in 2024. By executing the Fortive formula for value creation, we think the best is yet to come with an opportunity to roughly double our adjusted EPS and free cash flow over the next 5 years. With that, I'll turn it to Elena.

Speaker 1

Thank you. Dennis, we'll now take our first question.

Operator

Your first question is from the line of Julian Mitchell with Barclays. Please go ahead.

Speaker 4

Hi, good morning. Maybe just the first question around the Precision Tech revenue outlook. There's clearly some concerns from the commentary of 1 of your oscilloscope or instrument peers today. So I just wondered how you're thinking about that Precision Tech revenue growth trajectory over the balance of the year and particularly in Q2? And maybe any broad color on how that product hardware orders and how those have been trending versus what you'd expected?

Speaker 2

Yes. Good morning, Julien. Thanks for the question. I would say a couple of things. We saw the quarter was a book to bill.

Speaker 2

I'd start with the sort of high level. We saw book to bill of about 1 and we anticipate that book to bill as well in Q2. So we're starting to see the orders come back. Obviously, shipments not yet. Probably on a revenue basis, probably PT is lower Q2 will probably be the low point.

Speaker 2

We don't have a huge step up first half to second half. The first half is really playing out the way we anticipated. So in that sense, we're seeing an order book building. We're seeing we said last call that we would start to see orders start to move to growth at the tail end of the Q2. Everything we've seen thus far would support that sort of trajectory.

Speaker 2

So, we've seen some green shoots in some places, I can talk more about that. Things like at Tektronix where our Keithley business, which has tended to lead the effort on the return and was the first to go down is now going to be high single digits revenue growth in the first half. So we're starting to see the things that would certainly point to that trajectory change. I'll stop there and see if there's a follow-up.

Speaker 4

Thanks very much. And I guess, sort of broadly on the guidance adjustments. You'd laid out your segment sort of core growth guides for the year last quarter. Just wondered if any of those had changed this time. And I was trying to understand sort of in the P and L guide, the adjustment to the interest expense guide, is that sort of a redeployment of divestment proceeds or something?

Speaker 4

Just trying to understand that sort of net income raise with adjusted EBIT guide, slight reduction.

Speaker 2

Yes. Relative to the revenue guide, obviously, what we saw in the quarter, little bit stronger than we anticipated for Q1. We feel good about that. On the backs of Health strengthening, we've had several good quarters now at Health. That's a mid single digit for the year and we feel good about that.

Speaker 2

IOS similarly good strength there. We stood out in a number of places. Fluke has been very resilient as we talked about. PT is down a little bit, so we probably are more down to the flattish up slightly for so we'll be able to with the other two segments being better. And I think the other thing just on the absolute terms is we absorbed, as we said, about $60,000,000 worth of FX as well.

Speaker 2

So important to just kind of look at the total revenue growth here as the ability to absorb that I think really speaks to the strength that we've had. And certainly as you see that in the Q, even with the weaker PT, we were up 80 basis points in margin expansion. So I think the power we're certainly seeing good growth in the 2 segments and we're managing exceptionally well the trajectory of PT right now with strong margin expansion and with things that are occurring that are going to give us confidence that the second half improves a little bit. We don't need a big step up at PT in the second half in the total dollars perspective and what we've seen thus far supports that. And I'll let Chuck talk a little bit about some of the other details.

Speaker 3

Julien, the interest expense came down primarily because since the last time we guided, we went out and put a euro bond in place. And so that came in at better like 3.7% coupon. So that's the major change that roughly offsets the impact OP impact of the FX.

Speaker 1

And that's just to put that in dollar terms, that's about $15,000,000 of lower interest expense versus our previous forecast, about 2 of that was reflected in the Q1. And then, to Chuck's point about the $15,000,000 roughly of OP hit that we then have from FX. So that's really the offset.

Speaker 5

Great. Thank you.

Speaker 3

Thanks, Julian. Your

Operator

next question is from the line of Jeff Sprague with Vertical Research Partners.

Speaker 6

Just a couple of things. Just on the comment on the FAL businesses, I think you said group at single digit and kind of normalizing it. Is that basically the trajectory you're expecting then for kind of the balance of the year and that group of companies sort of mid single digit growth?

Speaker 2

No, Jeff, we'll get that we'll be moving back to high single. We had a really big comp at Gordian in the Q1. I think they were plus 25% a year ago. So ARR growth for that was about high single digits, it was roughly 9%. So good ARR growth that supports sort of high single digit growth for the year.

Speaker 6

And then just on EA's performance actually in the quarter, right? The M and A impact, I think, is influenced by the divestiture, right? But so I'm just trying to kind of understand how EA actually revenues performed in the quarter. You didn't own it last year, but maybe give us some sense of kind of what the growth trajectory was there?

Speaker 3

Yes, Jeff, a couple of things. FX, it pushed EAs revenue down a couple of 1,000,000 and divestiture about $5,000,000 with the agreement to separate some of the Impetech business shows up on that line. So I think EA is impacted by those two things down about 7%.

Speaker 1

So just the dollars from EA, obviously, were higher than the overall M and A dollars in aggregate for PT. So EA is roughly $35,000,000 offset by about 5,000,000

Speaker 2

dollars Yes. Yes. Okay.

Speaker 6

All right. Thank you.

Operator

Thanks, next question is from the line of Jamie Cook with Truist Securities. Please go ahead.

Speaker 7

Hi, good morning. Thanks for the question. Just to follow-up on the PT revenue guide. I know last quarter you specifically guided to the $2,420,000,000 to $2,465,000,000 I'm wondering on Slide 4, you implied PT is $2,300,000,000 So is that the actual revenue guide? And can you comment, given the lower revenue guides, how you're thinking about margins relative to your prior guidance?

Speaker 7

And then my last question, just on the M and A front, I think before you were saying top line M and A would add, you'd get 4 points, now you're saying 3 points. Is that just FX in Invitec? Thank you.

Speaker 1

Yes. So Jamie, just on the prior guide, yes, the $30,000,000 has come out of the PT revenues from Invitec. And then to your point, there's probably another 2% that's come out due to FX. Some of that is obviously for EA as well as the core business. So that 2.3% is the midpoint of the PT revenue guide, as you pointed out.

Speaker 7

Thanks. And then did your margins on PDT, can you give us an update there given the lower rip?

Speaker 1

Yes. No change to the expectation of margins for Yes.

Speaker 2

And Jamie, I think that's the reflection of certainly as we said, not a lot of no real change here to our not much change in the outlook relative to that. The first half playing out pretty much like we saw. We saw we've seen some business move into the second quarter or second half, excuse me, but we've been able to manage the margin front exceptionally well based on a couple of scenarios that we thought the year would play out. So number of places in PT that we've got strength at EMC, we talked about utilities, our food and beverage businesses. So we got some good strength there in a number of places and obviously that's helpful to the margin front as well.

Speaker 1

Okay. Thank you.

Speaker 8

Thank you.

Operator

Your next question is from the line of Scott Davis with Melius Research. Please go ahead.

Speaker 9

Hi, Scott.

Speaker 8

Hey, Jim and Chuck and Elena. Couple of questions. So first, just if we want to start with M and A and mark to market your pipeline. Is there should we or could we assume that the EA type of deal is in valuation range is kind of the type of stuff that you guys are looking at in 2024? I'm sure it's a wide range of properties, but trying to just narrow that down a little bit and perhaps just a little bit of a mark to market on how that pipeline looks.

Speaker 2

Yes, sure. I would say number 1 is there's probably a wide variation of valuations out there right now. You haven't seen a lot of things trade, but there have been fully valued trades that have gone on relative to various things in the marketplace, both things we'd be interested in, but also things that just have occurred. I would certainly say that we're obviously going to stay very disciplined. I think what we tried to highlight on the iOS slide in the deck was the benefits of M and A and how that really has created that really durable segment with both from a standpoint of revenue growth, but also really strong profitability.

Speaker 2

And we're going to look for those kinds of things. I think the 4 deals that we did, the bolt ons we did in the Q4 relative to iOS, EA as an example, those are more than likely, but there's a wide spread of things we did, right? We did some software, we did some data, we did some hardware businesses. The funnel looks that way, but we'll remain disciplined right now around valuation and I think we're well served to sort of continue to be active, but at the same time be selective around the opportunities. So I think we can get some things done for sure.

Speaker 2

But by the same token, I think we're going to remain disciplined and we like the revenue for EA has come down a little bit for the year. We really feel good about that deal. We're still going to the accretion on that still going to be the same as it was relative to our original thought process. So it's still going to be accretive deal and a really good deal into 2025. So those are the kind of certainly the kinds of things we'd be active in for sure.

Speaker 8

Okay, helpful. And then just to go back to the guide and honestly, I never talk I never ask about a specific guide in this way. But if you look at your comps, if you look at the commentary or just think about what you've said over the last hour and then think about where ASP is at, I would think that, that guide for the year, rest of the year seems a bit on the conservative side. Is that would you characterize that as it perhaps just being a little bit cautious on China or just general global macro? Or am I in the right ballpark that maybe this is you guys just being a little bit conservative?

Speaker 8

And if nothing changes perhaps you'd probably at the

Speaker 10

higher end of that if not higher?

Speaker 2

Well, we just beat our Q1 guide. So that's the first thing and there was an operational beat there of about $0.01 And they're really $0.02 when you look at we offset the FX and then a $0.01 of corporate costs. So it's a good I think it was a good start to a very good start to the year. I said that in our prepared remarks. I think if you said, hey, Jim, would you like to get out of the gate at 110 basis points of gross margin and operating margin expansion?

Speaker 2

Would you like to drive EPS at 11%, I'd say that's a really good start. And I'd say our full year looks a lot like that too. So we like the guide. And what we tried to highlight is, yes, there is some uncertainty. I would tell you, I was with the China team a week ago and they're feeling better about where they were versus call it 8 weeks ago when I was with them the first time in the year.

Speaker 2

They were much more optimistic. We would talk to some of the quality productive forces investments that China is talking about. So we still have a we still sit right now in our guide, embedded in our guide is China being down. But at the same time, there's probably some opportunity of some of the Chinese government active investments occur because those are in places that are very subsequent important to us. Our other high growth markets are already growing.

Speaker 2

Interestingly enough, our other high growth markets, which are bigger than China, are growing mid single digit. There's probably some opportunity there. So it's still early and certainly there's a lot of things out there that you could say could go another way. But boy, we really got out of the gate really well and feel really good about it. And we're working we'll work every day to make it better for sure.

Speaker 2

Let's see where we get through in the Q2. But yes, there's certainly some opportunities. We tried to highlight like energy transition AI, the percent in product revenue is in some places where there's certainly opportunity for us to continue to do well.

Speaker 8

Okay. Best of luck, Jim. Thank you for the color.

Speaker 2

Thanks, guys. Great talking to you.

Operator

Your next question is from the line of Deane Dray with RBC Capital Markets. Please go ahead.

Speaker 11

Thank you. Good day, everyone.

Speaker 9

Hi, Deane.

Speaker 11

Hey, just following up there, I heard yet another AI reference, a lot of references in the prepared remarks. So where would you rank order? You don't have to go through them all, but what are the most important exposures where you have near term real time leverage to the AI build out?

Speaker 2

Well, yes, I think where we showed on the slide in high performance compute and in data center expansion, the chips that are going to go into data centers as an example next generation, We got an 8 digit order from Keithley as an example for that in the quarter that will ship later in the year with some semiconductor manufacturers in Taiwan. So I would say 1st and foremost, we're seeing it on the chip build out. We're certainly seeing that. We're certainly seeing it again with utility infrastructure and grid infrastructure growth at Qualitrol and Flute. Those would certainly stand out as direct investments relative to the preparation of AI in the future of the world.

Speaker 2

So, and then on the flip side, we're starting to launch AI solutions, Dean. So when we think about what we're doing at Sensus, Probation, Gordian, Gordian, we just announced the Gordian platform, which allows for us to integrate all of our data and solutions together. So we'll start to see some of those in our revenue base as selling AI solutions as well. So on the front end, we're seeing the early stages of that investment. And with primarily with it in PT, we'll start to see that play out.

Speaker 2

We're starting to see that play out in Keithley. We'll start to see that play out in Teck in the second half. And then obviously with Qualitrol and Fluke, certainly with as those data centers and things get built, we're going to certainly participate in that relative to both the electrical grid infrastructure needed to support that as well as the tools needed to sort of build those data centers and maintain them as well.

Speaker 11

Great. Those are real specific data points. So I appreciate your sharing. And then as a follow-up and I might have missed it in your answer to Julian's question, but the weakness in Tektronix you referenced, what was the delayed customer R and D in the U. S?

Speaker 11

Is that just is it product cycle related? Is there anything related to worries about the election that's starting to read through some hesitation in orders?

Speaker 2

Yes. Dean, I think the first half is going to play out at Tek, close to almost identically to exact how we thought it would play out. So I don't want to I should say that first. I would certainly what we see is some delay on what I would call milk of investments that we typically start to see early in the year. They're still in the funnel.

Speaker 2

They're now showing up maybe later in the year. That's both direct government customers as well as some of the primes. So that's a movement of that. The good news on that is we're seeing them in the funnel and they're growing in the funnel. So and we're starting to see some of those orders, hence the book to bill is over 1.

Speaker 2

So we're certainly starting to see those things. Generally, we would have been able to convert them to revenue maybe a little sooner, but because the funnels moved and because some of those things have come a little bit later in the end of the second quarter, then that really presents it for more of a second half opportunity. But at this point, we wouldn't see those canceled. And I don't think we tie those to the election. I think we probably tie that more to just investment decisions that people have made with some uncertainty as the year started out, maybe delaying some of those investments.

Speaker 2

As you well know, sometimes those investments can get delayed for a quarter or 2. But ultimately, I think if you said, our customer base or the leading technology companies in the world, are they going to not invest in technology and innovation? I think it's a good bet they're going to do that. Thank you.

Speaker 8

Thank you.

Operator

Your next question is from the line of Steve Tusa with JPMorgan. Please go ahead.

Speaker 10

Hey guys, how are you?

Speaker 2

Good, Steve.

Speaker 10

Can you just delve a little bit more into Tektronix and the book to bill there? I know you guys mentioned the hardware in total book to bill, but maybe just give us an update on maybe where the I guess excess backlog if that's even a thing still kind of where the excess backlog sits and then Tektronix book to bill and then what you'd expect for growth for the rest of the year there at this stage?

Speaker 1

Yes. So Steve, Tektron book to bill was 0.95 in the quarter. So for PT, Sensing and Tech Compine, it's 1.0 and for hardware products overall, it was 1.0. And then we talked about Tektronix revenue being down mid single digit in the quarter. Our expectation would be that Tektronix revenue for the year will be down mid single digit, but that's always been reflected in our outlook for the year.

Speaker 10

Okay. So no change there. And then maybe just sticking on book to bill, I think it's like a little bit hard to like calibrate these EA revenues, I guess. We had expected something a little bit more than where it was. And I'm not sure we've quite bridged the gap on that.

Speaker 10

But what's, I guess, the book to bill for that business just to kind of help us understand what kind of run rate they're going at on the EA side, that new acquisition?

Speaker 1

Yes. Well, I'll just really quick on the numbers for EA and then I'll let Jim comment on the acquisition overall. We had expected revenues for EA for the year to be, call it, $190,000,000 $185,000,000 That's come down, it's probably closer to $180,000,000 to $185,000,000 Part of that is foreign exchange and part of that is some push out of larger projects in the year. Specifically in Q1, right, the revenue we talked about the $35,000,000 Again, we had planned for something in the low 40s for the quarter. There is a seasonal component to that.

Speaker 1

And maybe Jim, you want to talk a little bit more about certainly the we've had the 100 day review and give some color on the acquisition.

Speaker 2

Yes. Steve, I would say a couple of things. 1, as we said in the prepared remarks, we one of the things that's really evident and certainly have been around the world, not only with the U. S. View of this, but China, India, a number of other places, we clearly see a great product that customers really like.

Speaker 2

So I think as we start out, we really affirm the fact that the product and the technology is really, really strong. As Elena said, little bit less revenue in the Q1. I mentioned this in a couple of places in the Q1 that getting the backlog out in that business has been a little bit more challenging than anticipated in terms of that. So book to bill, I think was over 1 in the Q1. But our opportunity to sort of continue to work FBS and make the factory a little bit more flexible is certainly work we're in the process of doing.

Speaker 2

We've come down a little bit on what we think the revenue will be for the year. We still think the accretion is the same. So we're still going to deliver from an earnings perspective in a very good place and we feel good about the business. So mobility is a little bit slower. We anticipated that mobility would be slow this year.

Speaker 2

That was certainly in our view. And so that's played out. But the data center opportunities are very good. And quite frankly, the funnel with Tektronix is building well. So we said we need we were going to build that funnel in the first half.

Speaker 2

We would would start to see that revenue in the second half and we feel good about the funnel build thus far. We mentioned one of the opportunities on the prepared remarks around how now we're linking their sales with our services, with a large scale order that we'll get here shortly. We feel really good about the synergy opportunity as well. So maybe taking a little longer to get started simply because of maybe some of the things in the marketplace, but feel really good about it right now. And we're in a good position for that business as it stands to finish the year and move into 2025.

Speaker 10

And where is the excess backlog stand today? That's my last one. Thanks.

Speaker 2

Yes. I'm not for EA, I'm not sure what that number is, but it's probably in the I guess, in the $10,000,000 ish range or something like that.

Speaker 12

Okay. So normalized.

Speaker 10

All right. Thank you.

Operator

Your next question is from the line of Andy Kaplowitz with Citigroup. Please go ahead.

Speaker 5

Good afternoon, everyone.

Speaker 2

Hey, Andy.

Speaker 5

Jim, just in AHS, I know you did well in the quarter and maybe you talked about some potential upside there. You did mention maybe some probation headwinds still. Is there anything that's still holding you back at all from even better performance with the understanding that it was quite good

Speaker 2

in the quarter? Yes. I mean, we're really happy about the quarter. And if you think about the number of quarters here, obviously, we had the transition in North America last year. But if you look at what we've done multi year and high growth markets exceptionally well, the strategic nature of what we wanted to do is really playing out well.

Speaker 2

So we feel very good about where ASP is at. We feel good about the broader segment. Relative information, we had a in the first half of last year, we had a large scale licensed software business, order that we're going to work through in the 1st and second quarter. That business will still grow well this year. SaaS is growing double digit in the business.

Speaker 2

So we really feel good about where Pravation is, but we do have to work through that large licensed customer that is kind of plays out a little bit more of a one time opportunity. Good news about that is the very large license deal that we're going to be able to convert SaaS over the next several years. So in terms of opportunity, there's still great opportunity to probation. So we feel good about where the segments at. We mentioned in some of the prepared remarks about some of the things we're seeing around our plasma strategy and the efficiency and efficacy of how we do hydrogen peroxide and all that.

Speaker 2

So the product and innovation wheel that we started to talk about steam sterilization, BI biological indicators, number of the things that we're really trying to work through over the last couple of years, we're starting to see the innovation flywheel get started at ASP. And so we feel good about where the segment is at and where it's going to go through the year.

Speaker 5

Great. And then I know you reiterated it, but like when I think about the $450,000,000 for next year, like there's a fair amount of moving pieces nowadays, FX, 7A as we talked about. So what's your confidence level, Jim, at this point? And what do you need to do to sort of get there?

Speaker 2

Well, I think number 1, I think the Q1 affirms what we're able to do, right? With the growth rate that we have in the quarter, we still drove strong EPS growth and strong free cash flow growth. Our guide demonstrates that. So we get to the end of the year, double digit earnings growth, double digit free cash flow growth, really strong operating margin expansion, a great setup for on a little bit on a not mid single digit growth yet. So as we move into mid single digit growth and our track record of earnings growth, free cash flow growth and margin expansion, I think those are the things that give us confidence.

Speaker 2

Now again, it's April of 'twenty four, we're talking about a 2025, I guess it's May.

Speaker 3

But at the end

Speaker 2

of the day, or will be May here shortly. So I think at the end of the day, we're in a very good place to talk about 25, but obviously we're very focused on 24 here. So and I think what we'll see through the quarters is the demonstration of that, the kinds of numbers that I think really support our multi year past, which has been very good and also our multi year future.

Speaker 5

Appreciate the color.

Operator

Your next question is from the line of Nigel Coe with Wolfe Research. Please go ahead.

Speaker 13

Hi, good morning, everyone. Good afternoon, evening.

Speaker 9

Good, Nigel.

Speaker 13

So, hey, guys. I hate to like retread your ground has been trodden on already, but Elena, you mentioned tech down mid single digits. That was in the plan from day 1. Down mid singles in 1Q. I'm just curious why things wouldn't get better in the second half of the year just given the comps.

Speaker 13

And therefore, my question really is in the Q2 is tech down sort of high singles, maybe a bit worse than that and PT down maybe mid singles. Just thinking about how we should think about the way that this comes through the year?

Speaker 1

Yes. That's right, Nigel. And we said in our prepared remarks that we expected PT to be down mid single digit for the quarter. That would include tech to be down slightly more than that. So in the probably in that mid to high single digit range for tech in Q2.

Speaker 8

Okay.

Speaker 2

And then I would say that your point around inflecting, getting a little bit better, that's the book to bill that we talked about that continues to get good. Keithley is a good leading indicator. The PMIs are a good leading indicator. Our sales funders are a good leading indicator. And so we'll step through a little bit better performance as we get through the second half.

Speaker 1

I think the other thing to consider, right, is that tech did continue to grow revenues throughout all of last year.

Speaker 13

Right. Okay. That's clear. And then the pricing at PT, I think, was about 1 change, 1% or so for the quarter. It's been a bit of a decel versus the run rates.

Speaker 13

Is there a risk that, that could go negative for flatten out completely given the weakness in volumes?

Speaker 3

Nigel, this is Chuck. We wouldn't expect that to be the case. I think there's a little bit of timing here. But as we move through the year, we expect probably in PT, we add, I think, 1% to 2%, and gradually going up as we move through the quarters.

Speaker 2

And Nigel, just to add, price cost is in a good place. When you look at the margin expansion that we did in PT in the Q1, and the anticipated margin expansion through the year, we probably get a little bit less price when the top line is like that. It's not unnatural to maybe not maybe give a little bit up, but the price cost stance is really good. So we're in a good position to be able to do that and still grow margins.

Speaker 13

That's great. And sorry, a quick one on EA. The 1Q seasonality is for kind of the full year. Is this a business that typically has a weak 1Q and then a back out floating in the plan?

Speaker 2

Yes. We're new to it. So we've got some multi year history, but you have the numbers, you don't always have the history. It's certainly a business that has historically been back end weighted, that's for sure. And so that private companies sometimes don't necessarily push everything until make sure the end of the year.

Speaker 2

So that's not unusual and we'll get the cadence here improved every quarter as we work through the integration.

Speaker 13

Great. Thanks, Tim.

Operator

Your next question is from the line of Joe O'Dea with Wells Fargo. Please go ahead.

Speaker 2

Hey, Joe.

Operator

Joe, your line is open. Please go ahead.

Speaker 14

Hi. Thank you for taking my questions. I wanted to start on the 60% of revenue you talked about growing through the industrial slowdown in the PMI, I think primarily related to Fluke. But Drew, the question really around the ability to grow through PMI slowing and to what degree you attribute that to outgrowing end markets or other factors that were at play for Fluke to post more kind of stable trends through some of those headwinds?

Speaker 2

Well, I definitely think we're performing the market. And I think Fluke's done a great job. And when you look at a number of things, obviously, an outstanding global franchise presence in every pretty much every country in the world. Team does a great job on the innovation front. We had 4 new product launches just in the Q1 alone.

Speaker 2

Our eMate business is doing really well. So our Fluke reliability growth, Emate was up 17% in the quarter. So just as we look over the last several quarters, our ability to outgrow PMI has really been the long term work we've done to make the business more durable. And that really is an end market story. Our solar and EV business product lines grew over 30%.

Speaker 2

So it's really been redirecting. We talked about at one of the prepared slides about our lean portfolio management or our product development process and how we're really designating those R and D investments towards more secular drivers. Luke is certainly a good example of that, in terms of what they've been trying to do over the last few years and the 2 bolt on deals that they did in the fall, which really has supported and helped around those same secular drivers. So I think we're in a really good position in the business because we've been intentional about the innovation investments, we've been intentional about our commercial investments and that's playing out. And certainly share is always a tough thing because most of their competitors are regional companies in various countries.

Speaker 2

So we don't have great numbers on market share, but as we look with our as you know, a good chunk of that business is with channels and our channel partners are certainly excited about our partnership and what we can do together. That's usually a good sign of how we're performing.

Speaker 9

Thank you. And then, also wanted

Speaker 14

to ask on ASP. I think consumables in North America was up 7% in the Q4. Just looking for what you saw in the Q1 and as you're sort of on the other side of the transition through go to market, how that's coming together to drive some of the consumables demand?

Speaker 3

Yes. For ASP specifically in Q1, I think we were up 11% in Q1, just pretty much right where we expected to be here. Now as we move through the year because that transition happened over the year that's going to moderate some of that, but right on track and delivering the growth we expected and are pleased to see as well as importantly the margin expansion.

Speaker 2

Got it. Thank you. Thank you.

Operator

Your next question is from the line of Joe Giordano with TD Cowen. Please go ahead.

Speaker 9

Hi, Joe. Hey, guys. Hey, thanks for taking my questions. On Fluke, obviously, that business has been remarkably resilient. Is that business, like you mentioned solar, is there a risk on an election risk there if policy changes shift or is that just cannot just be offset by more positive trends within data center electrification, things like that?

Speaker 9

How would you kind of handicap that into an election if the administration changes?

Speaker 2

Well, I think number 1 is we're more tied to the maintenance of those than we are to the construction of them. So in many respects, it's what's out there today. And so that's number 1. Number 2 is, I think when you look around the world, certainly take a global view of solar too. And you have a very good global opportunity.

Speaker 2

I would say the same thing about electrification. So, and it's really more of the maintenance of those systems than the construction of those statements, those situations. So much more tied to the maintenance, the field maintenance of all of that. So I would say feel very good about the opportunity. And I think if you think longer term over the next few years, you'd probably bet on those things continue to be pretty good.

Speaker 2

So, yes, I think we're much more tied to the I think the bottom line is we're much more tied to the maintenance of those the field maintenance of all of that.

Speaker 9

Okay. And then just curious with the numbers on EA lowering the top line a little bit, is that business still like 40 plus EBITDA margins at the lower revenue rate?

Speaker 3

Yes. Came out very strong and actually that's also why we're seeing that margin expansion at PT. That's part of the story. Great.

Speaker 9

Thanks, guys.

Speaker 2

Thanks, Jeff.

Operator

Today's final question will come from the line of Andrew with BNP Paribas. Please go ahead.

Speaker 12

Hey, guys. So you talked to you gave some good color on PT getting through the rest of the year. And your margins really your margin guidance really implies quite a step up in the back half. What are some other contributors specifically within AHS that might help that? And then specifically in iOS, your incrementals have been outstanding, but what's like a normalized incremental as we get through 2024?

Speaker 3

Andrew, I think the couple of things to think about. We generally think about incrementals around 40% in the base case. So that's probably a good place to start. When you're talking about the step up as we move through the year, we've got the top line with 48% of the revenue in the first half and 52% in the second half. So there's always this upward trajectory in terms of seasonality from the first half to second half and that drives through more volume.

Speaker 3

And that's the biggest key to expanding the margins. When you look year over year, the 100 basis points that we saw in Q1, it steps up through the year because of volume and normal seasonality. We guided to 75 basis points for the year and I think or more with the productivity initiatives. Health is off to a great start with 200 basis points. So we got a lot of things going the right way, but it's really the volume flowing through those things.

Speaker 12

Yes, okay. And same with just touching on AHS, the distributor transition definitely helping you guys. Can you talk a little bit more about that business as we progress through the year? I think I think with the way that your incrementals have been strong there, can you talk a little bit more about how that continues or sustainability there?

Speaker 3

Yes. We've got for Healthcare, keep in mind, it's early in the year, but 125 basis points for the year. But in Q1, you're seeing the full benefit show up with the dealer transition here in Q1. If you remember Q4 last year, it also saw the full benefit. And as we move through the year, there's going to be a little bit of stuff that we're getting into tougher margin expansion.

Speaker 3

But we expect to be over the 125% margin expansion for the year at AHS. Very pleased with another strong quarter of really strong margin expansion and growth here. We expect to continue that through

Speaker 2

the quarter

Speaker 3

or through the year, sir.

Speaker 6

All right.

Speaker 12

Thanks, Chuck.

Operator

This concludes the question and answer session. I will now turn the call back over to Jim Leko for closing remarks.

Speaker 2

Well, thanks everybody for the opportunity to spend some time today. We hopefully you hear from us, So really good about the Q1. We feel really good about the full year. Obviously, some puts and takes relative to everything, but the guide holds and it is raised. And so we feel operationally, we're executing very well.

Speaker 2

From a margin expansion, from an EPS perspective, free cash flow, we're executing really well. We love the fact that the trajectory on Health now after several quarters is in such a good position. And we've got a number of opportunities here that are really playing out we're excited about. So hopefully that comes through. We look forward to the follow-up calls.

Speaker 2

I know our team will be available and we'll see you on the road here shortly. Thanks everyone.

Operator

This concludes Fortive Corporation's Q1 2024 earnings results conference call. Thank you for joining. You may now disconnect.

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Fortive Q1 2024
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