Fortive Corporation

Hello, my name is Josh and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to 4DF Corporation's 4th Quarter 2021 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, again press star 1. I would now like to turn the call over to Ms. Elena Rossman, Vice President of Investor Relations. Ms. Rossman, you may begin your conference.

Thank you, Josh, and thank you, everyone, for joining us on today's call. With us today are Jim Leko, 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 are available on the Investors section of our website at sportive.com. Our statements on period-to-period increases or decreases refer to year-over-year comparisons on a continuing operations basis. 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 might differ materially from any forward-looking statements that we make today. Information regarding these risk factors is available on our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2020. 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 would like to turn the call over to Jim.

Thanks, Elena. Hello, everyone, and thank you for joining us. We delivered solid performance in the fourth quarter, closing out a very strong year as we focused on delivering for customers in an ongoing challenging environment. While we saw sequential growth and margin expansion across the portfolio, revenue in the quarter finished roughly $50 million below expectations as continued supply chain constraints and the impact from the Omicron surge hindered our ability to deliver on our robust orders and backlog. Our businesses performed well despite these challenges, generating 190 basis points of core margin expansion and 13% adjusted earnings growth in the quarter. Our tax rate was flat on a year-on-year basis at 9%, however lower than our expectations coming into the quarter. Pre-cash flow and conversion were lighter than expected as we invested in inventory to support customer demand and saw lower customer receipts at year-end. For the year, we delivered core revenue growth of 9.5% and expanded adjusted operating margins by 210 basis points, driving 32% year-over-year growth in adjusted earnings. Strong demand for software-enabled workflows yielded double-digit software growth in 2021 and the fourth quarter. These results are a testament to the higher growth, more resilient, higher margin portfolio that we have constructed through organic innovation and strategic M&A. With this portfolio and our team's disciplined and rigorous application of the Florida business system, we are well positioned to deliver long-term, sustainable value creation for all of our stakeholders. As you can see on slide four, all of our segments contributed to our solid fourth quarter results, including over 100 basis points core operating margin expansion in each. Supply chain constraints within both our supplier and logistics networks, as well as COVID-related challenges, suppressed core growth across a number of our businesses. Looking at the segments in more detail, Intelligent Operating Solutions posted total revenue growth of 6.4% in the fourth quarter, with core up 0.8%. This included low single-digit growth in North America and high teens in China, partially offset by high single-digit decline in Western Europe. Starting with Fluke, core revenue declined slightly as continued end market demand and order growth across its product portfolio were more than offset by supplier and logistics network challenges constraining revenue in the fourth quarter. Fluke Digital Systems performed well with 20% plus growth supported by strong demand for its E-Mate SaaS offering and capped the year with greater than 30% growth in ARR bookings in Q4. Fluke also continued to see momentum within its product innovation pipeline. They introduced a new market-leading power quality platform, the 1770 series power quality analyzer, and we're seeing continued strength in their acoustic imaging product line. Orders were up high single digit in the fourth quarter, up 20% for the year, contributing to significant backlog growth in 2021. The team remains highly focused on improving supply management, logistics, and factory throughput to deliver on the backlog in the year ahead. In EHS, industrial scientific revenue increased mid-single digits, led by the continued recovery of its rental business and improved net retention for its INET offering. Intellect grew by mid-teens, with the fourth quarter representing the strongest net dollar retention we've seen in the past two years. Strong customer service execution reduced churn, and the application of funnel management tools helped deliver a record year for customer upselling. In addition, Intellects and IFC continue to see success with their award-winning hazard IQ solution, connecting real-time field data with EHS management software from Intellects. As anticipated, a current decline in the single digit, although it was up sequentially despite less billing days in the fourth quarter. On a same-days basis, their SaaS sales would have been up mid-single digit. Accruant continued to capitalize on strong demand for its EMS product line due to continued momentum in return-to-workplace solutions, with bookings up greater than 20% for the quarter and almost 50% for the full year. Accruant also posted its second-highest quarter on record for SaaS bookings and drove another quarter of improvement in net dollar retention as it continues to deploy FBS tools to deliver on a higher on-time renewal rate across its growing SaaS customer base. We expect to see this result in higher growth in accrued in 2022. Gordian increased mid-single digit driven by another strong quarter in procurement. Gordian also secured some notable wins in the fourth quarter, including the capture of two new state and local education customers, Clark County in Nevada and the Dallas Independent School District. Both are expected to begin generating revenue in the second half of 2022. Service Channel is off to a good start following its acquisition in August. Revenue grew substantially in the fourth quarter, with SaaS increasing low double digits and SaaS bookings more than doubling on a year-on-year basis. Service Channel is successfully expanding its new logo pipeline with some notable wins in the fourth quarter, including the leading health and beauty retailer in the UK, and is leveraging FBS tools and implementing lean portfolio management to position the company for additional innovation and growth. Moving to the middle of slide four, The precision technology segment posted a total revenue increase of 2.1%, with core growth of 2.6%. This included mid-teens growth in China, while Western Europe was up slightly, partially offset by a low single-digit decline in North America. Tektronix grew low single-digit despite strong customer demand driving double-digit order growth across its major regions, resulting in a book-to-bill of 1.2 in the fourth quarter. Orders for mainstream scopes and momentum in new product introductions are driving backlog levels to all-time highs as customers continue to invest in new capabilities across a range of end markets. Tekt continues to benefit from FBS, which helps to reduce supply chain risk and improve price realization across the business. Sensing technologies increased high single-digit in the fourth quarter, with good growth in its industrial, semiconductor, HVAC, and medical end markets, despite continued supply chain challenges. Similarly, Pacific Scientific EMC built further backlog in the quarter as supply chain constraints persisted. PacSci continued to see strong bookings growth in its core market, including aircraft and space, while revenues declined mid-teens, resulting in a book-to-bill of 1.13 for the year. Moving to advanced healthcare solutions on the right side of slide four. Total revenue increased 1.5% despite a core revenue decline of 0.8%. This included high single-digit growth in China, flat performance in North America, and a mid-20% decline in Western Europe. Starting with ASP, revenue declined no single digit in the fourth quarter. While we have grown the install base, consumables continue to be impacted by lower elective procedure rates, especially as the Omicron variant surged in the U.S. in December, adding to existing skilled staffing shortages at hospitals and ambulatory surgical centers. These challenges primarily impacted revenue in the U.S., while our high-growth regions grew double digits. We are also pleased with the continued evolution of FBS with significant progress in operating margin expansion in the business. Census revenues increased mid-single-digit, highlighted by another quarter of strong growth in its core CensusTrack SaaS offering, which increased in the low 20% range. As in prior quarters, CensusTrack continued to see good momentum, adding new customers and improved upselling and cross-selling to existing customers. Cook Health Solutions increased mid-single-digit as revenue and margins benefited from growth investments made throughout the year, driving strong double-digit growth in its biomedical test equipment business. And Invitec declined low single-digit as it lapped a top prior year comparison that included strong COVID-related revenues in 2020. Our strong margin performance in 2021 is just one example of how FBS continued to be an important differentiator for Fortis. As shown on slide five, FBS is enabling our businesses to improve operations in our plants, tackle mounting supply chain and inflation headwinds, drive innovation and profitable growth across the portfolio, and build skills and capabilities in our leaders to effectively drive sustainable business. Examples in the corridor include the reduction in supply chain risk at Fluke, ISC, SensiTech, and Tektronix through significant use of OBEA and daily management to manage the complexity and uncertainty associated with part shortages. ASP significantly reduced freight expense by over 100 basis points of revenue, contributing to their margin expansion in the quarter. Through the deployment of lean portfolio management, our newest FBS innovation tool, Tektronix overdrove revenue achievement on recent new products, including the just-launched next generation of its 5-series MSO offering. We are also making meaningful improvements in net dollar retention in our software businesses, allowing us to deliver more profitable and accelerated growth in eMate, which finished the year at 108% net dollar retention, while the current also increased monthly on-time renewal rate over 15 points from the beginning of the year.