Fortive Corporation

Q1 2023 Earnings Conference Call

4/26/2023

spk07: Thank you for standing by. My name is Brent and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortiv Corporation's first quarter 2023 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 star one. 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.
spk06: Thank you, Brent, 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. He presents certain non-GAAP 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 31st, 2022. These forward-looking statements speak only as of the date 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 Lieka.
spk03: Thanks, Elena. Hello, everyone, and thank you for joining us. I'll begin on slide three. We had a strong start to the year, delivering better than expected revenues, margins, and earnings in the first quarter. At 9% core growth, we're demonstrating strong execution of our strategy, building leading positions across our customers' critical connected workflows. Our ability to deliver strong growth and continued margin expansion is directly tied to our culture of continuous improvement and dedication to the Florida business system. As a result, we expanded adjusted gross and operating margins by 80 and 100 basis points respectively, taking margins to a first quarter record expectations for further margin expansion this year and into the future. Free cash flow in the quarter reflects our normal seasonality, as well as the timing of China collections that pushed into April. Overall, our teams have done an excellent job managing working capital in a more challenging supply chain environment, as seen by our outstanding performance in 2022. By harnessing our unique competitive advantages and strong execution capabilities, we are confident in our outlook and are raising and narrowing our full year 2023 guidance. Turning to slide four, I wanted to provide an update on what we're seeing and what we expect over the course of 2023. Starting on the left in the current environment, hardware product orders were better than expected. down mid-single-digit, and backlog was more resilient, with a book-to-bill of 1.0 in the first quarter. Our software businesses continue to see good growth, benefiting from strong customer value propositions driving double-digit growth in our SaaS revenue streams. While industry challenges remained in our healthcare segment due to China, consumables growth in March reaffirmed recovery is underway. We expect momentum to continue and accelerate growth and profitability throughout 2023. Moving to the right-hand side of the slide, we are seeing traction on our new product launches favorably aligned to secular drivers, including Fluke's latest family of solar tools and Tektronix's leading power and electronic test systems. Together with continued software strength and recovery in healthcare, we expect to sustain core growth in the second half. Combined with favorable pricing, cost savings, and discrete productivity initiatives that span all segments, we expect over 75 basis points of margin expansion in the year. Lastly, we expect robust free cash flow growth again in 2023, which together with our very strong balance sheet gives us confidence that our attractive M&A funnel will provide opportunities to enhance earnings and cash flow compounding in the future. Turning to slide five, we want to take a minute to remind you of all the work we've done to transform our portfolio and create focused segment strategies favorably aligned to a number of strong secular trends as resulted in a more resilient ford with enduring growth and further margin expansion opportunities. As a result, today we have a stronger collection of businesses with a more diversified end market mix and durable recurring revenue profile that includes leading healthcare and software franchises. Together with our enhanced innovation capabilities, we have focused our portfolio around multi-year megatrends. including automation, digitization, the electrification of everything, and improving healthcare trends, to name a few, all to reduce the overall cyclicality of our businesses and provide more tailwinds for growth by expanding into new markets. As a result of these megatrends, we see continued growth across our portfolio, including the more durable software and services businesses, as well as the non-recurring portion, given the sizable amount of backlog some of our product businesses are working through while continuing to see resilient demand. Finally, our portfolio quality is reinforced by the substantial improvements we've made in gross and operating profit, working capital, and free cash flows per cent of revenue, driven by the rigorous application of the Fordham business system. Turning to slide six, FBS is a powerful mindset that makes continuous improvement a way of life at Fordham. We drive deep engagement across our teams and hold them accountable for delivering on high expectations. With Kaizen activity accelerating, we saw significant results across the portfolio, including material improvement in delivery and past-due backlog reduction in our hardware products businesses by improving planning and reducing part shortages with the Ford of material system. Ford of software system deployment in our SaaS companies, including service channel and current probation, is accelerating delivery of software features to customers, driving customer value and resulting in higher renewal rates and pricing gains. Our record gross margins in the first quarter were driven by a significant expansion of Kaizen events in the quarter, approximately double the number the prior year, setting us up for improved performance throughout the year. Turn to slide seven. Florida has made sustainability a priority since its founding. It is inextricably linked to our company's shared purpose, values, and business strategy, which you'll read more about in our upcoming 2023 sustainability report to be published in May. This year's report will further highlight how our commitment to sustainability is grounded in our culture of Kaizen, leveraging the power of FBS to innovate products and services that enable more sustainable outcomes. We'll also hear how our team has strengthened our responsible sourcing initiatives, ensuring robust review of the labor and human rights practices across our supply chain, and how our strong and inclusive culture is creating a community where everyone belongs, which is positively reflected and our latest employee engagement and inclusion, diversity, and equity performance. In summary, we are accelerating progress towards a more sustainable future for Fordham and our customers, as well as the environment and the communities in which we operate. We invite you to review our report next month. I'll now provide more details on each of our three segments, beginning with Intelligent Operating Solutions on slide 8. IOS grew core revenue by 10%. as our connected workflow strategy drove better-than-expected performance in the quarter. The segment saw good growth in all regions, with mid-single-digit growth in North America and Western Europe and mid-40% growth in China, lapping prior-year shutdowns. Solid core growth in each workflow and strong FBS-driven execution resulted in 300 basis points of operating margin expansion, taking operating margins consistently above 30%. Looking at our performance drivers by workflow, In connected reliability, Fluke Core revenues grew by low double digits, with mid-single-digit orders growth in the quarter and point-of-sale remain positive in all regions. Fluke is benefiting from lean portfolio management, driving record revenue attainment in Fluke's new product launches, including the SMFT-1000 Solar Tester, which are benefiting from strong demand in the energy, renewables, and electric vehicle markets. Elsewhere at Fluke, E-Mate posted another record quarter with strong double-digit growth, We are seeing accelerated customer adoption of the X5 CMMS system with enhanced connected worker capability also close the largest deal on record with a strategic enterprise customer. EHS revenues grew by mid-single digit with both industrial scientific and intellects providing solid contributions. Industrial scientific saw strength across all product lines, including INET, and orders growth outpaced sales driven by new product launches and cross-sell activity. IntellX posted another quarter of strong SaaS growth, with low double-digit ARR growth. Moving to facilities and asset lifecycle, we had high single-digit growth in the first quarter driven by high single-digit SaaS revenue growth. Customers continued to shift larger projects to Gordian's job order contracting platform, while the wind down of end-of-life programs at Accruant and the business model change in Service Channel lowered core growth, revenues exceeded expectations and fell as customers continued to seek more productive and digitized solutions to optimize their facilities management. For example, a large worldwide retailer is migrating multiple manual processes to the Lucernex real estate management platform at Akron, and a large enterprise customer is leveraging Service Channel's automation services to save hundreds of thousands of dollars on mismatched invoices. Turning now to slide nine, precision technologies delivered another quarter of strong double-digit core revenue growth. Core revenues increased 14%, driven by high single-digit growth in North America, low double-digit growth in Western Europe, and high 30% growth in China. PT also delivered 190 basis points of adjusted operating margin expansion with higher volume and strong price realization, more than offsetting continued inflation and FX. Some highlights of the quarter include greater than 20% core revenue growth at Tektronix. Orders were better than expected, benefiting from Booking's growth and electric vehicle testing programs. This, and strong point of sale in all major regions, drove double-digit growth across its product businesses in the first quarter, which continued to see good demand for recently introduced entry-level and mainstream scopes. Sensing Technologies reported low single-digit growth, as expected, driven by another quarter of strong price realization across all businesses and continued broad strength in cultural. Pacific Scientific, EMC, reported a second consecutive quarter of greater than 20% growth as the business continued to deploy FBS to improve operational performance. Moving now to slide 10 in Advanced Healthcare Solutions. Core revenues were flat as the improvement in elective procedure volumes outside of China was offset by some supply chain challenges at Fluke Health Solutions and the expected headwinds in China elective procedures and the wind down in Russia. By major region, North America was up slightly and Western Europe grew mid-single digits, offsetting a high single-digit decline in China. China elective procedures recovered in March, exiting the month at approximately 90% of normalized levels. Our outlook continues to assume that China-elected procedures return to normalized levels in the second half of 2023. In the first quarter, AHS-adjusted operating margins declined 260 basis points as a result of FX headwinds, supply chain challenges at Fluke Health lowering contribution margins, and higher-than-expected inflation. Some highlights in the quarter include we exited March with stronger ASP consumables growth. reaffirming recovery post-COVID is underway, with sales outpacing the market in most regions. Double-digit growth at Census was driven by its Sensortrack SaaS offer. Census is also seeing strong demand for its AI2 productivity platform and continues to drive productivity and permits through the application of FBS tools, which have accelerated the time from bookings to revenue. FHS saw solid demand for equipment orders and dosimetry services, despite continued supply chain constraints that stalled equipment shipments. Lastly, probation continues to perform very well, with another quarter of double-digit growth driven by its APEX SaaS offering. APEX is seeing continued high customer demand with substantial Q1 orders and a greater than three times the average revenue uplift from licensed migrations. Following a strong start to the year, we continue to expect the probation's growth will accelerate through 2023, supported by customers looking to further standardize on probation across their health systems. In addition to our remarks on the first quarter performance, we thought it would be helpful to provide more detail on our expectations for the AHS segment for the remainder of this year. The headline is that we expect sequential improvement in both revenue and adjusted operating profit margin as we move through the year. Specifically on revenue, we expect favorable price in addition to the recovery of elective procedures in China, resolution of supply chain challenges at Fluke Health Solutions, and normal healthcare seasonality to drive higher volumes over the course of the year. As a result, we expect core growth will go from low single digit in Q2 to mid single digit in the second half of the year. On margins, in addition to the uplift from higher volumes and favorable price, we see compounding tailwinds from the benefits of the productivity initiatives taking second-half margins to approximately 25%. Go-to-market changes in ASP consumables in North America will improve performance and enable closer connection to our customers to better serve their needs, transitioning from a primarily distribution model to direct to the customer. All these actions will have carryover benefits in the years to come. positioning us for accelerated growth and profitability as the general health care environment continues to improve. With that, I'll pass it over to Chuck, who will provide more color on our first quarter financials and our 2023 outlook.
spk09: Thanks, Jim, and hello, everyone. I'll begin on slide 11 with a quick recap of our first quarter revenue performance for 40. We generated year-over-year core revenue growth of 9%. FX was 230 basis points of headwind, to growth. Turning to the geographies, we saw another quarter of strong revenue growth in each of our major regions. North America revenue was up mid-single-digit with growth in all three segments. Western Europe revenue grew high single-digit with mid-single-digit growth at IOS and AHS and double-digit growth at PT. Asia revenue increased in the 20 percent range with low 30 percent growth in China driven by strength in both iOS and PT as we elapsed easier prior year comps. Growth in China was partially offset by a high single-digit decline in AHS related to lower elective procedures due to COVID as we expected. Lastly, our high-growth markets together posted strong core growth of almost 20%. Turning to slide 12, we show operating performance highlights for the first quarter. Adjusted gross margins increased 80 basis points to 58.4%. As Jim mentioned, FBS-driven productivity and price realization more than offset inflation, leading to record gross margins in the first quarter, which was complemented by higher volumes. Adjusted operating margins expanded to 100 basis points to 24%, while adjusted earnings per share increased 7% to 75 cents, reflecting strong volume conversions. partially offset by higher interest and tax expense. Free cash flow is $150 million. While first quarter is typically our lightest free cash flow quarter, receivables were negatively impacted by slower China collections in the quarter, which has since recovered in April. Turning now to the guide on slide 13, we are raising and narrowing our previous 2023 guidance to reflect outperformance in the first quarter. For the second quarter, we anticipate core revenue growth of 2.5% to 4.5%, with an FX headwind of approximately half a point. Adjusted operating profit margin is expected to increase 3% to 7%, with margins in the range of 24.5% to 25%. Adjusted diluted net earnings per share guidance of $0.78 to $0.82 flat of 5% includes higher year-over-year interest and tax expenses. And free cash flow of approximately $285 million reflects approximately 100% of cash conversion in the quarter. For the full year, we now expect core revenue in the range of 4% to 5.5%, which continues to reflect year-over-year foreign exchange headwinds of just under one point of revenue. Adjusted operating profit is expected to increase 6% to 10%, with margins in the range of 25% to 25.5%. We are increasing our adjusted diluted net EPS guidance to $3.29, $3.40, which represents an increase of 4% to 8% and includes higher year-over-year interest and tax expense as previously expected. Free cash flow is expected to be approximately $1.25 billion, representing conversion in the range of 100% to 105% of adjusted net income and 21% free cash flow Turning to slide 14, we've consistently said that the 40s of today is delivering a higher and more profitable growth. There is nowhere that this shows up more than in our free cash flow. Between 2019 and today, we have more than doubled our annual free cash flow, and we expect to continue to further enhance our compounding model with over $5 billion of capacity for M&A, enabling us to continue to invest appropriately in our businesses to further position 40 for long-term value creation. But that will pass it back to Jim to preview our upcoming Investor Day and provide some closing remarks. Thanks, Chuck.
spk03: I'll now start to wrap up on slide 15. Our team is thrilled to be back in New York for our first in-person Investor Day since 2019 to be held on May 25th. We are looking forward to highlighting our progress, executing our strategy, and the results it has yielded over the last seven years, building on our strong foundation and enduring principles that underpin our execution capabilities. We will showcase how our businesses have leveraged FBS tools to innovate, take advantage of the secular tailwinds, accelerating progress across our five critical customer workflows. This is translated into relevant product innovations, helping to solve our customers' toughest safety, quality, and productivity challenges, and contributing to sustained strong growth for Fordham. In the spirit of setting high expectations, we will set long-term targets, looking out three and five years, culminating with the evolution of our strong free cash flow, supporting us ample opportunities to further accelerate our strategy. We are actively fueling our future success by building on the transformation, progress, and learning that has taken place since our inception, unlocking future value for Fortis. Wrapping up on slide 16, the combination of portfolio work we have done and the productivity initiatives we are implementing in the first half of 2023 prepare us for the continuing evolving macro environment and set us up for differentiated performance again in 2024. As you saw in today's press release, we're also continuing to build on our exceptional leadership culture for the forward of the future by expanding Tammy Newcomb's responsibilities to include the advanced healthcare solution segment, in addition to her current role as segment leader of precision technologies, succeeding Pat Murphy, who will retire at the end of the year. As you heard today, FBS is more robust than ever, with powerful new capabilities to bring breakthrough innovations to market for our customers faster and drive enhanced business results. The evidence of this is reflected in our strong financial performance, including our free cash flow, the currency we use to measure our success. These factors culminate in a powerful formula for value creation, enabling Florida to make a real difference in the world and deliver exceptional value to shareholders. With that, I'll turn it back to Elena.
spk06: Thanks, Jim. That concludes our formal comments. Brent, we are now ready for questions.
spk07: At this time, I would like to remind everyone in order to ask a question, press star followed by the number one on your telephone keypad. Your first question is from the line of Julian Mitchell with Barclays. Your line is open. Good afternoon, Julian.
spk05: Hey, good afternoon. Thanks for taking my questions. Maybe the first one, and sorry to be boring and predictable, but the AHS You gave us some very good detail on that sequential improvement through the year. I guess a couple of things I just wanted to clarify on it. One was maybe the scale of the productivity savings in the second half. Is it sort of $15, $20 million, something like that, that you're getting in the AHS, even in the back half? And then... Just trying to make sure we understand the scale of the importance of China for AHS. Is it about sort of 10% of the business?
spk09: So, Julian, I'll take the first part of that. Productivity, we'd probably expect to do about $10 million in the first half, and that generally has a six-month payback. So you'll probably see a like amount in the second half there. Annualized is going to be obviously a little bit bigger.
spk03: Yeah, and on the China aspect, yeah, it's about 8% to 10% of the business overall. And as we said in the prepared remarks, maybe a little bit more color there is that, you know, we obviously started pretty low in electives in the first part of the quarter, January-ish, got better through the quarter. We exited around 90. So, you know, we'll see a little bit of continued improvement. I think at this point, it's fair to say we sort of see electives as kind of being back to normal going into the second quarter.
spk05: That's helpful. Thank you. And then just switching tack to the overall product hardware orders, you'd said those were down about mid-single digits in the first quarter. Is there any sort of interesting movement as you go sort of month to month and any clues on how you're thinking about the second quarter? And if we look at the precision tech business specifically, and I suppose Tektronix in it, You know, you've had one or two, you know, cautious comments perhaps from some companies who might be peers in recent weeks. Have you seen anything shift in the market outlook for Tektronix or product hardware within PT?
spk03: Yeah. First of all, I think, you know, as we said, the quarter orders for the product businesses came in better than expected. Book to build being one was better than we expected. So what we saw in the quarter was pretty consistent through the quarter. Obviously, you know, the numbers from a year on year perspective get a little bit better simply because of the way China affected those businesses last year. But I think when we look at point of sale, Julian, point of sale was good throughout the quarter and it was good on a global basis. At Fluke and Tech. So we think those things are good and feel really good about, you know, sort of the strength. I think maybe the other highlight is that Fluke grew amidst single digit orders. We said that in the prepared remarks, but I think that's a highlight for sure. A little bit of maybe that came out of the second quarter. which quite frankly I think just de-risked the second quarter for us. So I think we feel good about that. So we're certainly out there watching for things, but we feel good about the order trajectory right now. The two-year stacks are still very strong, and so sometimes we've got to be a little careful about that. I would say the last thing is that roughly $350 million of excess backlog that we talked about at the beginning of the year is still remains intact so uh you know that you know we tried to highlight that on one of the slides relative to the backlog protection so i think on the you know at fluke industrial which is kind of our typically the canary in the coal mine things look still pretty good and you know really still good and uh and we still maintain the backlog production that we went into the start of the year great thank you thanks julian
spk07: Your next question is from the line of Jeff Sprague with Vertical Research Partners. Your line is open. Hey, everyone.
spk10: Hey, how's it going, Jim? Just back on AHS, I'd just like to deconstruct a little bit more kind of what happened in the quarter. Obviously, it was a very large margin miss. And then just you addressed it a little bit to Julian's question. But if you think about the climb out into the back half, How much of that is really in your control? You mentioned favorable prices. I assume that's kind of the supply chain questions. I just wonder if you could give us a little comfort or confidence that that, in fact, is resolved, and anything else to just give us some visibility on how we get to those numbers in the back half.
spk09: Yeah, Jeff, I'll take the first part of that. There's three main things that happen in health in Q1. You mentioned about fluke health supply chain. That was a hit. FX, strengthening dollar, it shows up more here in one of our more global businesses. So that was a part of it. Uh, you know, also just thinking about the, the mix effect of lower consumables from China, because as we had, uh, COVID really hit maybe a little harder than we thought there in the first part of Q1. Those three things are the main reasons we came in short versus our guide, uh, for, uh, in the health sector?
spk03: Yeah, Jeff, I would just say as we move through the year, really, I think three things that are definitely in our control. Number one is the productivity. Chuck outlined that on Julian's question, I think is in hand in that regard and that we've got that. Number two is really around price. We've had three quarters now of better price. The trajectory on price continues to be good. And so I think in that sense, we're leaning into that and team's done a great job relative to that, principally at ASP, by the way, in that one. And then finally, a little bit better growth, as we said. Electives now normalizing here back to normal. And so, you know, we see that continuing to improve. We mentioned the go-to-market change that we're making at ASP in North America to go more direct, which really, I think, gives us closer to customer care and really, I think, really helps us from the standpoint of really making sure that that our sterilizers are running actively. So we think those are certainly things that are within our control. We're after it. I feel good about the team and the work they're doing. So in that sense, it'll get better in the second quarter. And then, as we said, it'll step in to the second half with continued improvement. So, you know, and I think the other thing that gets missed in AHS was the quality of the quarter in census and probation. Those businesses are obviously two of our higher margin businesses. You combine that with some of the supply chain fixes that we've got in place at Fluke Health, which is really our highest margin business within health. Those three things are going to continue. So you get the help at ASP, like I just described, you get the continued work at some of the other businesses. I think that really bodes well for continued improvement throughout the year.
spk10: And then totally shifting gears, just PT strategically, right? I don't know if you're going to end up commenting specifically on Natty, right? But it looks like you were there at or near the altar. You haven't deployed capital there, really, actually, since Danaher bought Tektronix, really, right? And maybe you were on the verge of doing your biggest deal ever by an order of magnitude. I just wonder if you could frame that up for us, what your thinking is or was, and maybe the strategic direction of that particular segment in business over time.
spk03: Yeah, we've had a couple of small bolt-ons in both sensing and in tech over the years, and those have been helpful to a lot of the success, quite frankly, that we're seeing as an example. Keithley probably being the biggest capital deployment that we did a number of years ago, and that is really, you know, obviously a real success for us at tech. But that was a little while ago. sense-forwardive, if you will, a couple of small bolt-ons in sensing, but not much. I would say, you know, just relative to, you know, the NATTY process, we won't comment on that, but the interest in that from others certainly, I think, speaks to the story that we've been telling at Tektronix. And you see it in the quarter, you see it in the back, quality of the backlog. It's just the attachment of our innovation capability to some of these secular drivers and auto ev principally as well as empower and those are i think speaks well to the organic strategy and the investment we've made there at tech in particular so i think it's uh you know as we as we look forward one of the things that i think i just remind everyone You know, we had said we'd move tech from a low single digit through the cycle grower to a mid single digit grower through the cycle. And I think we feel very good about that. To the extent that we can find ways to accelerate the capability throughout PT, we'll continue to look for those things.
spk10: Great. Thanks for the perspective.
spk03: Thank you, Jeff.
spk07: Your next question is from the line of Steve Tusa with JP Morgan. Your line is open.
spk11: Hey, guys. How are you? Great. Just on the management, you're shuffling a little bit here. Can you talk about how you came to that decision and a lot of responsibility for Tammy? And they're two kind of pretty different businesses. Is that a permanent solution or should we expect another step in that evolution?
spk03: Well, I think it's certainly the solution that we feel really good about. I mean, I think our talent development process, and, you know, if you go back a lot of years, you'd see us ebb and flow a little bit relative to those jobs as well as the jobs below that in group president and operating company presidents. Our talent development is, I think, in really a good place. Every one of our group presidents was internally promoted. 80% of our current operating company presidents were internally promoted. So I think when we really feel good about the structure, it's not just what we have at the segment level, but it's within those group presidents and operating company presidents. And we've, quite frankly, never been stronger in that regard. It gives us the degrees of freedom to do some things. throughout the leadership structure. I would also say that when you sort of look at it, it's pretty balanced from an operating profit perspective and from a just sort of served market standpoint. So if we look at the split of responsibilities, yes, two segments to one segment. But when we look at a served market, IOS has half the served market. Profitability is pretty close. That ebbs and flows with deals. So I think we're in a very good place relative to the structure that we came to. But in part, it's not just the most senior jobs. It's also the quality of folks that we have across the board. We had all of our presidents in last week for our quarterly leadership summit with them. And I couldn't be more proud of the work they're doing and, quite frankly, where we stand relative to the quality of leadership at the operating businesses.
spk11: And as far as the portfolio is concerned, I mean, you guys have done a lot of ring and tear over the years. Is there a constant, you seem to be, you know, subtract, I guess, from the portfolio, but are you in any way, shape, or form still kind of evaluating things there for maybe divestitures or spins or anything like that? I mean, I'm thinking really techtronics, especially in the context of what's just happened here in the last several weeks with Emerson and Natty.
spk03: Well, I think you broke off a little bit, but I think at the end, I think we got it. So I think when we look at the three segments we have today, the quality of of businesses we have, the execution that's going on. We feel good. So I think, you know, certainly the natty process, if you will, ending with Emerson doesn't really change the market structure. We feel good about what we're doing at Tech and we'll continue to run the play there that we think is really good. And that's obviously a part of our success right now is the strong execution that we've had at Tektronix over the last several years.
spk11: Great. Thanks a lot. Thanks, Steve.
spk07: Your next question is from the line of Scott Davis with Mellius Research. Your line is open.
spk12: Hey, good afternoon. Now it's afternoon, Jim and Chuck and Elena. Hi, Scott. I know there's just so much you can say about NADI, but it was, I think, as Greg said, kind of a pretty darn big deal versus kind of your history. Is there anything that we should be taking away as far as your willingness to make bigger bets? Was this kind of a one-off unique? I know the gross margin structure was pretty attractive, but I think historically you guys have generally looked at assets coming out of PE or pieces of assets coming out of bigger companies, but not necessarily looked at buying other public companies as really a big part of the M&A strategy. Has that changed at all? Jim and Chuck, or should we not read too much into this?
spk03: I think, you know, and we'll have a real opportunity as well to talk about this in May at the investor conference. But I think, you know, the $40 billion roughly of served market that we have today, you know, kind of when we look at the M&A opportunities funnel, if you will, we've always talked about breadth and depth. breadth meaning all three segments, operating companies, ability to accelerate strategy, depth meaning size. And you're exactly right. What we've done is the deals sort of in the middle and some bolt-ons on the lower part of that, if you were to think of that as a triangle. So with the bigger deals at the top and there's fewer of those. So that's always going to be the case. I won't speak specifically to any one company or process in any way, shape, or form. But what never changes is the fact that we're going to continue to scan the landscape for opportunity to accelerate strategy. We're going to be disciplined about what we do. We're going to look for outstanding financial opportunities. to continue to build the portfolio the way we have. And I think our 2022 performance speaks to the quality of that. And I think our first quarter speaks to that. So, you know, that's what we're going to continue to do. And I think that when we talk about breadth and depth, that means, you know, there's a variety of different kinds of opportunities. But, you know, most opportunities are always going to fall in those sort of bolt-on and mid-tier opportunities, just because, you know, simply because there's a lot more of them. And
spk12: you know we're looking to accelerate strategy in a few different businesses and that's where those opportunities are fair enough jim um hey just to clear something up what what was the fluke health supply chain issue i i don't recall hearing uh an explanation on that yeah it's
spk03: You know, one of the things that maybe more broadly, I think we handled our supply chain challenges. We've said we're kind of down to those sort of one-off issues that occurred through the portfolio. The fact that we did 50% more organic revenue in the quarter speaks to the quality of the teamwork we had around Fortiv to deal with those challenges really, really well. But we did get caught on a couple of what we call our quality assurance equipment business in Fluke Biomed. you know, literally one component that we were shorted at, and we'll clean that up in the second quarter. So, you know, we feel good about the work we're doing, quite frankly. Supply chain challenges are down to, you know, what often is called the golden screw, but there are a few of those. But I think we're doing an outstanding job more broadly when you look at the, when you not only look at the core growth beat in the quarter, but also the 80 basis points of gross margin expansion, which I think, quite frankly, I think is going to stand up well against most people.
spk12: Fair enough. Best of luck. Thanks. See you guys at the analyst day.
spk09: Yeah, look forward to it.
spk07: Your next question is from the line of Andrew Obin with Bank of America. Your line is open.
spk04: Hi, Andrew. Good afternoon. Good afternoon. Can you guys hear me? We can, we can, yeah. Excellent, excellent. Just a question, as I'm sort of looking at the sequential guidance for iOS and PT growth and looking at the comps, just trying to figure out, you know, it seems there is a step change down. And I apologize if I missed it, but I was just wondering, you also commented that the order book looks good, March looks good. So why this step down? And I was wondering specifically, if there was some sort of clearing out of things in the backlog with sort of, you know, the golden proverbial golden screw becoming available? Or is there something else happening? Because you guys certainly don't sound particularly more pessimistic about the macro into the second quarter. Thank you.
spk09: Andrew, I'll take that. You know, the biggest thing is really what happened last year. It's really the comp. If you remember, Shanghai was shut down at the end of Q1, and a lot of that revenue showed up in q2 so when when you if you adjust that comp actually q1 and q2 look pretty similar uh you know from what we're doing this year if you interrogate that you know the two-year stacks you actually start seeing some acceleration even into the second half here so we you're right we we things uh uh came in uh on balance better than we expected in in q1 um and we're optimistic moving forward
spk04: I got you, but you're sort of saying take a look at a two-year stack as opposed to one-year stack.
spk09: Well, I'm also saying look at the first half this year versus the first half last year. There was a lot of revenue missing in Q1 that showed up in Q2, so it's really a tough comp. But if you look at that, you'll really see that shutdown that happened in the last week of Q1 of last year is really what explains most of what you're talking about.
spk04: Okay, I'll take it offline. But can I just ask a question on probation? Did we hear that right, that the SAS version is three times revenue uplift? And how fast is the SAS conversion going? And what's the SAS versus license mix? Thank you.
spk03: Yeah, we, as you did hear it right, we're at about 3x right now. We would expect the early migrations to be maybe slightly a little bit higher. than maybe what the downstream ones. But we're actually ahead of the game on new bookings relative to SAS, so that's good. So we, you know, all up, just probation, things are, you know, better. We thought 22 was better than expected, and we started the year off well. So we are seeing a little bit of extended discussions with customers, I would say, and maybe more broadly. You know, there are certainly in the software world, there's a little bit more funnel activity, things sitting in the funnel a little bit longer. just given maybe how typical start of the year, but we still have good confidence in the projections we have for what we have in software. We had a very good ARR quarter and we feel good more broadly about software in general.
spk01: Okay, thanks so much.
spk03: Thanks, Andrew.
spk07: Your next question is from the line of Josh Pokrasinski with Morgan Stanley. Your line is open.
spk01: Hey, good afternoon, guys.
spk03: Just wanted to dig in a little bit on implied second half for PT, especially with the backlog holding up really well here in the first quarter. Looks like volumes would be kind of flat, maybe even down. Now, I know the comp gets a little wonkier there, but just trying to triangulate, you know, the book to bill still being good with, you know, with the basically kind of, you know, no growth second half. Yeah, it's really about the two-year stacks. We had really accelerated growth in PT in the second half of last year, Josh. So it's, you know, I think we, as we said, you know, the book to bill coming in the quarter is better. So you might say maybe that slightly de-risks the second half a little bit. But it really is, you know, we will see a little bit lower growth in the second half in PT on absolute terms. But it's really the comps we, you know, we really see continued growth. really continued performance relative to the market going, you know, first half to second half for sure. Got it. That's helpful. And then just on the order intake, again, I know you're surprised that, you know, the book to bill was one in the quarter, but any sort of right sizing of the order book as lead times start to improve a little bit, you know, customers basically just saying, look, I still want everything, but now that it's not as urgent? You know, was there any kind of air pocket push out, you know, that you see as a function of that? No. I mean, I think what we've seen is point of sales remain strong. Some of that, particularly at Tektronix, is probably the backlog coming down, but we still have excess, you know, that excess backlog, which is really customer demand. It's not inventory. It's still very much, you know, very much in demand. from customers. So at tech in particular, we have very little distributor inventory or channel inventory, if you will. So we feel good about the demand being actual demand or the backlog having actual demand to it. So we haven't seen those air pockets yet. And we continue to have a watchful eye just given what we see in the macro and those kinds of things. But so far, the demand is real and point of sale stayed strong. And that point of sale stayed strong on a global basis. Got it. That's helpful.
spk02: See you guys next month.
spk03: Thank you.
spk07: Your next question is from the line of Dean Dre with RBC Capital Markets. Your line is open.
spk13: Thank you. Good day, everyone.
spk07: Hi, Dean.
spk13: Hey, I want to circle back on the page five, the concept about backlog protected, and it came up in Julian's question, too. Is It was my sense that some of this backlog build, the excess or outsized backlog, like fluke, short cycle wouldn't typically see much in the way of backlog, but you've got it now. To me, that seems it's more transitory. As supply chains heal, that'll come down. So how much of this backlog protected would be transitory by definition, or you just think there's a certain amount that carries through each year on a book and ship over a couple quarters? Thanks.
spk03: Yeah, it's a great question. I think number one is if we take Fluke and the industrial business, we don't have a huge amount of excess backlog in that business. Point of sale remains strong. And I think what we're seeing is just continued good execution from the Fluke team. The sort of backlog protected on that slide is mostly at tech and in sensing. And in tech, I think we don't anticipate that excess even burning down this year, Dean. So I would say in some respects, we're probably going to run with excess backlog in perpetuity. And I think in both cases, it's really about the secular drivers that exist that we've really tried to build the business around. We're seeing better performance as an example in Western Europe. And I think that's really because of the sustainability, electric vehicles, you know the power a lot of the grid upgrades some of those things those investments are very much happening in europe uh and and we're taking advantage of those opportunities so we we like the the durability if you will of the backlog some of it is excess and that's why we call it that way and and some of it's a little bit of imprecision relative to what it will be like long term but we do see when we interrogate that backlog on a pretty regular basis We like the durability of it and the resiliency of it pretty because of the secular drivers that we listed on the right side of that page. So we think, you know, we're in a better position for the year because of the strategic moves we've made over the last few years relative to those secular drivers.
spk13: Great. That was really helpful. And then just as a follow-up, and I might have missed this, did you comment on carryover pricing benefits and whether you plan any further pricing actions over the near term?
spk09: Yeah, Dean, this is Chuck. We had about 4.5% price in Q1. Much of that is carryover, but we continue to be active. We've still got inflation coming at us, so maybe it won't be as high. I would expect that inflation is going to moderate from the rates increases from last year, but there's still inflation coming at us.
spk03: And so we'll still be deploying price as we go through the year. The other thing that we continue to see opportunity for is the FBS tools related to price. We still see even the price that we put into the marketplace still opportunities to realize that price at a higher rate, Dean. So we're going to continue to do the things Chuck just described. And as we mentioned earlier, health will continue to improve price, which we feel good about. But it's also the realization. And I think we've always had good realization, as you know, knowing us for a long time. But I think our ability to continue to do that and apply FBS to that is something that we'll continue to do throughout the year, even in places where maybe we don't put as much into the marketplace. We're going to continue to work on the price realization. Thank you. Thank you.
spk07: Your next question is from the line of Nigel Cole with Wolf Research. Your line is open.
spk08: Hi, Nigel. Thanks. Good morning. Good afternoon, everyone. Yeah, thanks for the question. So I want to go back to Tammy taking leadership at AHS. Jim, are you looking for a change in the way that HS is managed? I have no idea what that means. It's a bit of an open question. But if you think about accelerating growth or improving the consistency of the market performance, supply chain, et cetera, are there things that Tami can bring to bear from her time running Tektronik that can actually improve HS?
spk03: Yeah, I think anytime we get a new leadership into a role like that, Nigel, we see a new set of eyes. And that always is a good thing. You know, when we hired Illumiday a few years ago, I think we got a new set of eyes on iOS. And you're seeing that quality of performance play out in iOS right now. He's brought some new skill sets to the role. Pat's done some things over the last year that he's had help that are definitely sticking. And Tam will bring the same thing. That's an expectation. And I think, you know, we benefit from sometimes those new perspectives.
spk08: Okay. And then just going back to the whole kind of NAFI situation, if you think about what NAFI might have given you if you had bought that business, are there things you can do organically to accomplish those things, maybe on a longer-term basis? But obviously, you've done a good job of extending the kind of the vertical markets that tech plays in over time. But are there things you can do to extend down into more the validation and maybe the production phases? of your customers? Or are there both ones you can do?
spk03: I would say, regardless of the process, our strategic thinking around tech has been very focused on the secular drivers, not to bear too much repeating on that, but it's been around changing the vertical focus, as you know. well and that's played out and some of that has been um you know innovation efforts uh that we would we would certainly look to add to um if the opportunities you know become available so um we would never say never to but that doesn't really change anything that relative to what's been going on in the external environment you know that's why we do strategic plans every year that's why we You know, that's why we really kind of come with a different emphasis every year, and we feel good about the strategy of tech. And to the extent that we've got bolt-on opportunities there, as well as any of the other businesses that we have, we're always going to be looking at those opportunities to accelerate strategy into the markets. As an example, power is a good example. We would love to do more in power. If we found an M&A opportunity that did that, we would certainly look at it. Keithley is a good example, although it was a few years ago. It's really extended our ability to do some things relative to power. And we're bearing the benefits, the fruits of that work today.
spk08: Okay. Thanks, Jim.
spk03: Thanks, Nigel.
spk07: Your next question is from the line of Andy Kaplowitz with Citigroup. Your line is open.
spk00: Good afternoon, everyone.
spk07: Hey, Andy.
spk00: Jim, can you talk a little bit more about what you're seeing by region? I know you mentioned you expect China to slow a bit, but it's continued to be really strong, Last quarter, you said Western Europe might grow a little more slowly, but you just mentioned some secular trends holding up well in Europe. So would you say these trends are proving more durable than you originally thought? And do you see an extended capex cycle in the U.S. from trends such as electrification and on-shoring?
spk03: Yeah, I definitely think China will slow. We've had so many good years of China, and obviously we just posted a 30% kind of quarter. It's probably going to stand up pretty well. uh so i think in that sense we gotta we'll digest some of that growth here through the year but i would expect china to slow in the second half a little bit particularly because of the tough as well as tough comps it's part of that tougher comp conversation we had relative to the segments um i think western europe is holding up that for the reasons i said broader europe is is slowed a little bit um and so that's in the context of everything that we've got in the guide is is the expectation that Probably Central and Eastern Europe is a little slower. Some of that has to having to do with the war. Some of it obviously has to do with us getting out of Russia, but it's also just a little bit of slowing, but the Western European investment. In a number in a few countries is held up pretty well. I still expect North America to be a good region for us. You know, partly because our software and a lot of our durability is is in North America. I think when we, you know, it's probably still too early to tell to be very specific. But, you know, my expectation probably when we get to the end of the year is that North America probably is the most durable of all the regions.
spk00: Helpful, Jim. And I want to ask an AHS question in a different way. You mentioned China elected procedures at 90% in March. Maybe a little bit faster improvement from where you started the quarter. And you did mention overall consumables better in March. I know Invitek is still somewhat weak, which I think is still somewhat difficult comparisons versus during the pandemic. But do you think by the second half of 23 that maybe normalization from the pandemic actually happens, whether it's improved staffing at your customers, better consumables for you, or improved Invitek? So just the markets around you change.
spk03: Yeah, we do. I mean, we even saw some green shoots in March, quite frankly, in U.S. consumables as an example, which had good growth. So, yeah, we think you're exactly right. We think the second, you know, it's going to start to get a little weird still comparing to 2019 here by the time so i think as we get into the second half i think we probably say our our bet right now is that it's normalized there'll still be labor shortages if you recall back in in our uh start of the year call we said hey we thought 23 would be better than 22 24 would be better than 23 and i think some of that uh continues um you know that's going to continue through the year and our self-help is going to get better as well as i as i said earlier in the call so i think the combination of things getting a little better in the marketplace as well as our self-help, start to see the traction of that. I'm confident we'll start to see the benefits of those things playing out in the second quarter and then into the second half.
spk00: Appreciate the color.
spk07: Your final question comes from the line of Joe Giordano with TD Cowan. Your line is open.
spk01: Hey, guys.
spk02: Nice to see you in here. Sure. So on the The pie chart that you have for revenue where you have the backlog protected that Dean was referencing earlier, I'm just curious. The biggest piece of that is recurring X software. If we go into a real recession, how recurring is that business in a good time versus how recurring is it in a bad time? Is there slippage as customers get tighter with their wallets?
spk03: I think it holds up pretty well. I think number one, there's a couple of big pieces in there, right? Consumables at ASP is a big piece. INET, our EMC business is in there, which is long-term contracts. So we've got a number of, and of course, broadly defined services. So it should hold up well, and we feel good about, you know, it held up very well in the first quarter, as an example, with really good growth. So you combine that with software and then even the healthcare hardware. We've got a good portion of the portfolio that we think is really resilient. You combine that with roughly 25% of our hardware non-recurring, which is backlog-protected, We feel pretty good. And as I mentioned earlier, the secular drivers in the entire product side also provides another good insurance policy here. So we've really run the playbook that we've talked about so many times. We're prepared for a number of scenarios. We took some restructuring earlier, productivity initiatives earlier in the year, as you know. We've upped that as well. So we feel like we're building scenarios around what could happen. It's hard to predict the future. But the portfolio was built many, you know, over the years to, in most cases, to deal with a lot of these challenges. And we think we're well prepared for them.
spk02: Fair enough. And then just to follow up on the discussion about the cyclical businesses, and so like iOS and PT both, came in quarter ahead, you know, pretty solidly ahead of what you suggested in your guidance for 1Q. And the four-year guides on the growth side are pretty much the same. A little bit bump in one, but pretty much the same. Now, how should we think about that? Is it kind of a lower view of the second half? Or like you mentioned, the backlog is still really high. So I'm just curious how we should interpret that.
spk03: Yeah, I think the first half doesn't change all that much. Chuck kind of talked about that a little bit. But I think the other thing about de-risking the second half, it's a little bit of de-risking. And if things continue to play out as positively as they have, there might be some opportunity. But I think right now, let's see how things play out. But as we said, on a two-year stack, the hardware business, the product businesses do get a little bit better given the tougher comps in the second half. But where we stand today, I think most people would be envious of the start that we have for the year, and we feel good about that.
spk01: Thanks, guys.
spk03: Thank you. Thank you.
spk07: If there are no further questions at this time, I will turn the call back over to Mr. Jim Lico.
spk03: Thanks, Brett, and thanks everyone for taking the time today. We know it's a busy schedule for all of you. We appreciate we appreciate the questions. We certainly appreciate the interest. I hope from from the words from Chuck and I you heard as well as the prepared remarks. And hopefully the presentation was helpful as well. We're off to a good start. We feel good about it. There is certainly some uncertainty out there in a number of ways. We feel well prepared for it. We'll look forward to the more follow-up questions that can give you more color on that to the extent we can be helpful. We're really looking forward to sharing our story more longer term at our investor conference. We think it's an opportunity for us to really demonstrate a lot of the things we've talked about today relative to how that plays out, in addition to not only the strength of the financials, but also the strength of the strategy, which really continues to help us. We had a great 2022. We think it's also going to help us post a good 23. We'll look forward to seeing you soon. Thanks, everyone. Take care.
spk07: Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-