Fortive Corporation

My name is Julianne and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporation's fourth 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, please press star one again. 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, Julianne, and thank you, everyone, for joining us on today's call. With us today are Jim Liko, 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 fordiv.com. Our statements on period-to-period increases or decreases refer to year-over-year comparisons on a continuing operations basis. During a 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 31st, 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. Ford have had another quarter of outstanding operating performance in Q4, delivering 14% core revenue growth, 50 and 110 basis points of adjusted gross and operating margin expansion, respectively, 11% adjusted earnings per share growth, 62% free cash flow growth, all ahead of the guidance we gave in October. Our strong, purpose-driven culture is supported by our relentless focus on executing for customers and shareholders in 2022. The continued evolution of our portfolio within the markets we play is characterized by strong secular drivers, which power 9% ARR growth in our software businesses and backlog expansion in our hardware products businesses, contributing to record core revenue growth for the year. Our performance would not have been possible without the dedication of our 18,000 team members around the world. The team overcame continued supply chain and inflationary challenges, which will likely linger into 2023. We believe the power of the port of business system is a key differentiator, contributing to more profitable growth, record gross margins, and free cash flow generation. As we look forward, we're excited to update you on the progress we've made on our multi-year targets and strategies that are driving out performance at our upcoming Investor Day in May. Turning to slide four, even against the backdrop of a difficult macro in 2022, Board have continued to validate the investment thesis that we have pursued since 2016, delivering core growth of 10% and 20% on a two-year stack basis, accelerating over the last few years. Our portfolio transformation has also driven approximately 1,000 basis points of gross margin expansion since 2016. which has translated into higher operating margins and provides further opportunity to improve margins in the years to come. We also delivered free cash flow growth of $1.2 billion, with margins approaching 21%, underscoring our ability to compound cash flow off a higher base, a key form of differentiator and value creation driver. In summary, we had said that 2022 would be a show-me year, and we delivered strong results across all of our segments, which I will highlight in more detail on the next few slides, starting with Intelligent Operating Solutions on slide five. IOS grew core revenue by 13%, representing its third consecutive quarter of double-digit core revenue growth. We had good growth in all regions, with low double-digit growth in North America, mid-teens growth in Western Europe, and high 20s growth in China. Double-digit core growth in every workflow, combined with our rigorous application of FBS, drove 330 basis points of core operating margin expansion, more than offsetting inflation and FX headwinds. Looking at our performance drivers by workflow and connected reliability, look at low teens growth, supported by a strong backlog position and continued success with their new solar and calibration products, serving the energy, renewables, and electric vehicle markets. POS remains strong in every region. However, we expect to see some slowing as supply chains continue to normalize. Strong end market demand drove double-digit E-Mate SaaS revenue growth in the quarter, with a record net dollar retention of approximately 106%. In EHS, revenue grew by high teens, with strong contributions from both industrial scientific and intellect. Industrial scientific revenue grew approximately 20%, as strong demand was supplemented by record INET expansion and higher instrument shipments following the resolution of key supply chain issues at the end of the third quarter. Meanwhile, Intellects posted another quarter of low double-digit SaaS growth. They have successfully deployed FBS initiatives to accelerate software implementations and create upsell opportunities to customers. Moving to facilities and asset lifecycle, we had low double-digit growth in Q4. Gordian revenues once again increased double digits as customer labor shortages and deferred facility maintenance continued to drive higher volume through the company's job order contracting platform. Accurrent SaaS revenue grew by mid-single digits despite a sizable headwind from end-of-life products. Accurrent continues to see good success from its recent go-to-market focus in asset management and workplace solutions to enable mid-single-digit revenue growth in 2023. And Service Channel saw another quarter of double-digit revenue growth taking their full-year growth rate to just under 50%. As a reminder, we are transitioning from a largely pass-through revenue base to a better long-term business model that includes more recurring SAS revenue. This change will create a short-term revenue headwind in the first quarter. However, we expect Service Channel to remain a strong double-digit growth business in 2023 with above 20% adjusted operating margins. Turning now to slide six. Precision Technologies delivered another strong quarter of double-digit revenue growth in every business. Core revenues increased 20% driven by high teens growth in North America and greater than 20% growth in both Western Europe and China. PT also delivered 240 basis points of adjusted operating margin expansion with higher volume, price realization, and productivity more than offsetting inflation and FX. Some highlights of the quarter include record quarterly revenues, and operating profit at Tektronix, which continue to benefit robust backlog, driven by new product launches, share gains, and new entry in mainstream oscilloscopes. We saw orders slow in Q4, as expected, as demand normalizes following the 40% growth we've seen over the last two years. Sensing Technologies had another quarter of mid-teens growth, driven by strong price realization across all businesses, and continued demand in Qualtrol's utility and power business. offsetting industrial and semiconductor demand softening. Combination of GEMS and CETRA in 2022 also drove approximately 200 basis points of margin expansion and four working capital turns improvement. Pacific Scientific EMC saw high 20s growth in the quarter, facilitated by capacity expansion and improved materials availability. Moving now to slide seven, an advanced healthcare solution. As expected, core revenues increased 5% in the quarter, driven by broad improvement across all healthcare operating companies. By major region, mid-single-digit growth in North America reflected the benefit of our higher installed base and some improvement in hospitals, partially offset by low single-digit decline in Western Europe and a high single-digit decline in China. The exit rate on China electric procedures was the lowest we have seen post-COVID, at roughly 30% of normalized levels. January 2023 volumes were roughly half of prior year levels, which was reflected in our Q1 outlook for the segment. In the fourth quarter, AHS segment margins were down 260 basis points, driven primarily by higher inflation, partially offset by favorable M&A. Notably, margins were up approximately 400 basis points versus Q3. Versus our fourth quarter guidance, margins were unfavorably impacted by additional transactional effects and lower margins include health solutions. As we look ahead, the team is starting to see traction on their pricing and productivity initiatives, which we expect will deliver margin recovery in 2023. Some other highlights of the quarter include ASP finished the year with core revenue growth of 5% as capital share gains and consumable volumes more than offset COVID headwinds in China. Even with inflationary pressures, ASP ended Q4 with the strongest margins of the year and continued to deliver strong working capital improvements. While hospital profitability remains pressured due to labor and inflationary challenges, Census continues to drive robust growth in its census-tracked SAS offering in Q4 and for the year, with mid-teens net new ACV and record cross-sell opportunities. Lastly, probation is ahead on its return expectations. having contributed $0.10 to earnings in 2022. As customers continue to standardize on probation across their health systems, we are seeing accelerated SAS growth, setting them up for a strong 2023.