Fortive Corporation

My name is Emma and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to the Fordham Corporation's first quarter 2022 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 one on your telephone keypad. If you would like to withdraw your question, again, press the star one. I would now like to turn the call over to Ms. Elena Rosman, Vice President of Investor Relations. Ms. Rosman, you may begin your conference.

Thank you, Emma, and thank you, everyone, for joining us on today's call. With us today are Jim Leco, 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 Investor section of our website at www.fordham.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 in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2021. 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.

Thanks, Elena. Hello, everyone, and thank you for joining us. I'll begin on slide three. I'm extremely proud of how our teams have come together to navigate the continued challenging environment and deliver an outstanding quarter with better than expected revenues, earnings, and cash flow. Our strong, purpose-driven culture supported our relentless focus on executing for customers, shareholders, and each other while facing unpredictable obstacles. Despite these challenges, we saw record orders growth across several of our businesses, reflecting continued demand for our leading connected workflow solutions. Hardware orders grew 14%, adding approximately $130 million to backlog. And our software-enabled businesses grew mid-teens, with double-digit growth in both our SaaS and licensed revenue streams. Through the rigorous application of the afforded business system, we continue to deliver improvement across our businesses, driving greater visibility and insurance of supply in the quarter. Our teams also worked hard to overcome higher inflation, which resulted in 60 and 30 basis points of growth and operating margin expansion, respectively, 11% EPS growth and 36% free cash flow growth in the quarter. Overall, the momentum across all three of our segments in the first quarter sets a strong foundation for the year ahead and reinforces our confidence in our full year 2022 outlook. Turning to slide four, I wanted to provide an update on what we are seeing and what we expect over the remainder of 2022. Starting on the left, in the current environment, strong orders growth was driven by accelerated innovation, continued share gains, and leverage to favorable secular drivers spanning all geographies and markets, yielding an 18% increase in hardware backlog in the quarter. Our continuity of supply is improving, driven by daily management and conversion OBAs, allowing us to ship more product in Q1 than initially planned. Our China teams did a great job mitigating the intermittent government-mandated COVID lockdowns across the region, starting in Tianjin in January. The Shanghai lockdown at the end of March impacted shipments by approximately $20 million a quarter, primarily at Tektronix. With operations restarting, we expect to face some bottlenecks in supply chains. However, our teams will be relentless and work to re-ramp quickly. Moving to the right-hand side of the slide, we expect sustained core growth driven by normal seasonality, continued strong customer demand, and record backlog, which gives us a tailwind for growth again in 2023. Combined with pricing and operational performance, we expect strong margin expansion and another year of double-digit earnings and cash flow growth. As Chuck will cover in more detail shortly, we are updating our outlook to reflect the strong start to the year, raising the low end of our guidance for the year. Lastly, our ability to convert more earnings to cash underpins our investment pieces and allows us to reinvest in our businesses, accelerate our strategy, and enhance our returns to shareholders. In the first quarter, we took the opportunity to buy back approximately 1 million shares, totaling $64 million. The M&A pipeline remains full with hardware and software opportunities across each of our segments, and we estimate M&A capacity of approximately $5 billion over the next three years. Moving to slide five, our leading connected workflow solutions facilitate transformation across high-impact fields like workplace safety, facilities management, product development, and healthcare. Our strategy across these segments is incredibly powerful. We serve customers ranging from technicians and facilities managers to engineers, product developers, and healthcare professionals to all work in challenging environments where afforded technologies provide higher quality instrumentation, better sensors, superior software, and real-time data analytics to empower them to do their jobs more safely and more efficiently. As you can see, each segment is well positioned to benefit from favorable secular tailwinds and durable business models that underpin our strategy and vision to build a stronger collection of businesses with industry-leading profitability and free cash flow margins. I'll now provide some details on each of the three segments, beginning with intelligent operating solutions on slide six. IOS had a terrific start to the year, as customer demand for maintenance, uptime insurance, environmental health and safety, and facility planning solutions all contributed to double-digit orders growth and strong revenue growth in the quarter. Total revenue was up 15%, with core growth of 8.7%. This included approximately mid-teens core growth in North America and high single-digit growth in Western Europe, more than offsetting a low 20% decline in China. Our FBS countermeasures to improve assurance of supply are making progress, mitigating the effects of the COVID lockdowns and driving better core growth in the quarter. We continue to see solid price realization, which we expect to further benefit performance in the second quarter and the remainder of the year. And while our countermeasures enabled us to ship more product, we also incurred additional costs from elevated freight and logistics expenses. As a result, core operating margins were flat year over year, despite price costs being positive on the dollar basis. IOS adjusted operating margins for 27.2%, down 145 basis points due to the dilutive impact of the service channel acquisition. As a reminder, service channels margins are ramping nicely in line with expectations, and IOS core margins are up over 200 basis points on a two-year stack basis. Some other highlights of the quarter include, Record revenue in bookings has flew, supported by strong point of sale, particularly in the U.S., where point of sales grew mid-teens. Industrial Scientific continues to make progress diversifying its business, with nine out of the ten largest Q1 deals booked with new customers outside of oil and gas. Intellect has also seen strong demand for its SaaS solutions. continuing to grow at a healthy double-digit pace. And likewise, he saw record core growth in facilities and asset lifecycle management in the quarter, where current had a solid start with mid-single-digit growth and is on track for sales acceleration in the second half. Gordian generated strong double-digit growth and secured a large data win with the U.S. Army Corps of Engineers. Further, service channel had a strong double-digit revenue growth and record bookings in the quarter as customers continued to outsource their facilities maintenance work. Turning now to slide seven in precision technologies, we saw record customer demand driving double-digit order growth across major geographies and a broad set of end markets, including HVAC, aerospace and defense, automotive and electric vehicles, and semiconductors. PT revenues grew 3.4%, with core revenue growth of 4.6%. High single-digit growth in North America and Western Europe was partially offset by a low double-digit decline in China, driven by COVID-related lockdowns in Shanghai at the end of the quarter. As a reminder, Tektronix operates a major manufacturing facility in Shanghai, which shut down in the last week of March. The impact was approximately $15 million to PT revenues or 350 basis points of growth, which also impacted their margin performance in the quarter. That said, PT operating margins expanded 30 basis points, reflecting over 50 basis points of gross margin expansion, partially offset by continued investments in new product development. Some highlights of the quarter include successful new product launches, driving incredibly strong order growth at Tektronix, including the refresh of the 5 Series in the first quarter, which is tracking solidly above plan. Sensing also saw low double-digit top-line growth, reflecting solid share gains across its key markets, and had over 100 basis points of operating margin expansion in the quarter, staying well ahead of inflation. Moving now to slide 8 in Advanced Healthcare Solutions. AHS continues to accelerate innovation and digitization in hospitals and AFCs. With custom and clinically superior workflow solutions, AHS is well positioned for a multi-year recovery in healthcare. Revenue increased 8.5% in the first quarter, with core revenue growth of 0.6%. Mid-single-digit growth in North America was largely offset by a low single-digit decline in China due to the impact of COVID restrictions on ASP and a high single-digit decline in Western Europe, as expected. AHS operating profit margins benefited from FBS-enabled productivity initiatives driving core margin expansion at ASP, as well as the accretive benefit of the probation acquisition, partially offset by lower volumes at Imatek. Some highlights of the quarter include elective procedures in North America were roughly in line with expectations in the first quarter. As a reminder, we expect electives to continue to improve and average 88% of pre-COVID levels for the year. We saw approximately 20% growth in the census tract SAS offering at census and an approximate doubling of subscription orders in the quarter. And Torvation secured several significant orders in the first quarter, including four competitive GI wins and a large 20-hospital network win for its eye procedures anesthesia solution. Execution in an otherwise challenging and uncertain environment is one example of how FBS continues to be an important differentiator for Florida. As shown on slide 9, FBS enabled our businesses to enhance supply chain resilience, drive innovation and profitable growth across the portfolio, and build skills and capabilities in our leaders to effectively deliver on our commitments in the quarter. Examples include... An improvement in unit output and reduction in supply chain risk at Fluke through the use of daily digital management, allowing them to outperform in the quarter. The execution of lean portfolio management at Tektronix, driving several new customer-driven product launches in the coming quarters. Value pricing and price leakage tools, driving strong price realization at Sensing Tech. Substantial margin expansion at ASP from broad cost reduction campaigns, more than offsetting lower consumable volumes in the quarter. Daily management and problem solving drove an improvement in working capital turns at Port of China. And several examples of our progress in our software businesses, including incremental growth realization and occurrence from improved uplift on renewals, a 20% improvement in time to first revenue for procurement customers at Gordian, and an acceleration of growth opportunities at Probation. As you heard me say before, I'm incredibly proud of the work we've done continuing our progress towards building a more sustainable future, as you can see on slide 10. Borden's commitment to sustainability started on day one when we developed aspirational and actionable targets and subsequently invested significant time, energy, and talent to establish a performance-driven program. This timeline reflects the evolution of our program and commitments we have made since 2016. In early June, we will publish our fifth sustainability report, reflecting consistency and progressing levels of transparency, including adherence to the GRI reporting framework and completing our first CDP climate change disclosure in 2020. adding the SASB reporting standard to enhance our climate-related disclosure to investors in 2021. And new in 2022, we will provide our first UN Global Compact Statement of Progress to find our status and plans for TCFD-aligned disclosure and offer initial Scope 3 emissions data and Scope 2 market-based emissions in our CDP climate change disclosure. It is our shared purpose that also pushes us to create innovative and sustainable products and services for our customers, trying to solve some of the world's biggest sustainability challenges. For example, Intellect, leading software solutions for EHS and sustainability managers, serves leading Fortune 500 companies across multiple industries. In fact, our EHS and sustainability teams use the IntellX application to manage and drive continuous improvement of our greenhouse gas emissions accounting in accordance with the GHG protocol. And Solut's diverse range of products provide solutions that advance workplace health and safety, as well as optimization of renewable energy installations for our customers. Consistent with our culture, we are driving incremental improvements in sustainability, and we look forward to continued progress from the years to come. With that, I'll pass it over to Chuck, who'll provide more color on our first quarter financials and our second quarter and full year 2022 outlook. Thanks, Jim, and hello, everyone. I will begin on slide 11 with a quick recap of our first quarter performance. We generated year-over-year total revenue growth of 9.3%, core growth of 5.3%. Acquisitions net of FX were as expected, contributing four points to total growth. Turning to the right side of the slide, Jim covered the segment highlights earlier, and I wanted to provide some additional color on the regions. North America revenue was up high single digit, including low teens growth in software and related services, partially offset by lower consumable volumes at ASP. Western Europe revenues grew mid-single digit, more than offsetting year-over-year declines in advanced healthcare solutions driven by a difficult COVID-related compare at Inditech. That said, we had good growth at ASP despite capital install delays in the region. We had low double-digit growth in Asia outside of China, while China revenues declined low teens driven by the impact of the COVID-related lockdowns. Note that we continue to build backlog in China with high teams order growth in the first quarter, thus reinforcing our outlook for double-digit revenue growth for the remainder of the year. On slide 12, we show operating performance highlights for the first quarter. Adjusted gross margins were 57.6%, increasing by 60 basis points year over year, while adjusted operating margins increased to 23% in line with our guidance. We realized over 300 basis points of price in the quarter, more than offsetting inflation, yielding 30 basis points of core operating margin expansion and 250 basis points on a two-year stack. Adjusted earnings per share increased 11% to $0.70, while free cash flow generation of $196 million represented a stronger than normal conversion of adjusted net income in the first quarter. The strong free cash flow performance included an improvement in the timing of receivables collections, representing a normalization of the trends we saw in the fourth quarter. Turning now to the guide on slide 13 and starting with the second quarter, we expect low to mid single-digit core revenue growth, which includes a headwind of approximately $40 million from the COVID-related government shutdowns in Shanghai, which we expect to subside in mid-May. Adjusted operating profit margins are expected to be up at least 80 basis points year over year. Adjusted earnings per share of 70 cents to 73 cents assumes a 15% tax rate in the quarter. And pre-cash flow conversion of adjusted net income is expected to increase to approximately 100%. For the full year 2022, we're raising the low end of our revenue guidance by 40 million to reflect a strong start to our year. We continue to expect adjusted operating profit margins for the full year to be up over 100 basis points. Adjusted EPS is now in the range of $3.04 to $3.13, up 11% to 14%, and free cash flow conversion of approximately 105% for the full year. Moving to slide 14, we are expecting a 48-52 split of revenue, first half to second half. which represents a step-up of approximately $255 million of revenue and includes favorable price in FX first half to second half, in addition to higher volumes supported by a robust backlog position and the work we've done to mitigate supply chain constraints across our portfolio. We also expect to recover lost China volumes as a result of the government-mandated lockdowns in the first half, shifting more revenue to the second half. Incremental margins on sequential volume are expected to flow through at attractive levels, contributing to strong margin performance in the second half. In summary, our portfolio continues to show the benefits of the actions we have taken to build a more durable growth company with high recurring revenue profile, mitigating the risk of slowing demand in the second half. With that, I'll pass it back to Jim for some closing remarks. Thanks, Chuck. I'll now start to wrap up on slide 15. Over the last six years, we have articulated a portfolio strategy to build a more resilient, less cyclical business capable of outperforming in even the most difficult of times. The Fordham portfolio today is a reflection of how well we've executed that playbook. Our acquisitions have added approximately $2.3 billion of revenue to Fordham as of 2022, which is expected to grow low double digits this year. And in doing so, we've doubled the through-cycle core growth of the company versus the time of the spinoff from Danaher in 2016. We have also more than doubled recurring revenue as a percentage of our total revenue to approximately 40% and built a portfolio of software-enabled workflow solutions, which is approaching $1 billion of revenue and continues to enhance our long-term competitive advantage. In addition, the businesses we have added to Fortive have been an important contributor to the more than 1,000 basis points of gross margin expansion that we have driven since 2016. In short, Fortive of today is delivering higher and more profitable growth, and there's nowhere that this shows up more than in our free cash flow. Last plan, slide 16, that strong free cash flow, which has nearly doubled since 2019, continues to be a hallmark of our investment thesis, compounding faster than revenue and earnings and allowing us to accelerate growth and compound returns through disciplined capital deployment. 2022 is off to a great start as the outperformance of Q1 reinforces our focus on sustained growth and execution. Leveraging the power of FBS, which will always be a part of who we are and how we do what we do, we expect another year of double-digit earnings and free cash flow growth on track to deliver on the multi-year targets set last year with differentiated growth and profitability amongst our industry peers. As a result, we're confident the work we do to create long-term, sustainable, competitive advantages for our operating companies and strategic segments will yield best-in-class returns for Fortis for a long time to come. With that, I'll turn it back to Elena.