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spk12: My name is Rob, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to the Fortiv Corporation's second 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 the star one. I would now like to turn the call over to Ms. Elena Rossman, Vice President of Investor. Ms. Rossman, you may begin your conference.
spk10: Thank you, Rob, 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 Investors section of our website at portive.com. Our statements on period-to-period increases or decreases refer to year-over-year comparisons unless otherwise specified. 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 that they are made, and we do not assume any obligation to update. With that, I'd like to turn the call over to Jim Lika.
spk03: Thanks, Elena. Hello, everyone, and thank you for joining us. I'll begin on slide three. Our second quarter results once again demonstrated the durability of our portfolio and the strength of our execution, allowing us to deliver higher core growth, margins, earnings, and free cash flow. Core revenue growth of 5.5% reinforces that our strategy is working, building leading positions across our customers' critical connected workflows with performance reinforcing the resilience of our transformed portfolio. We also delivered record margins in the second quarter, expanding adjusted gross margins by 250 basis points to 59.5% and adjusted operating margins by 190 basis points to 26%. We're converting more revenue to earnings and more earnings to cash, with 9% growth in adjusted earnings per share and free cash flow in the quarter. Our ability to consistently drive our performance is directly tied to our culture of continuous improvement and dedication to the Florida business system. Our mandate this year to unleash FBS, which is driving record productivity from Kaizen activity across the enterprise, and increasing our confidence in our raised outlook for the year that we believe further positions Fortis for accelerated compounding in 2024 and beyond. Turning to slide four, I wanted to provide an update on what we're seeing and what we're expecting over the course of the rest of the year. Starting with healthcare, industry recovery is on track as labor and productivity challenges continue to moderate. We are seeing traction on our pricing and productivity initiatives, yielding sequential growth and profitability in the second quarter. We expect further improvement in AHS in the second half with higher core growth and operating margins. We also continue to drive growth in our software and services businesses with SaaS revenue up mid-teens on strong enterprise growth and bookings. Hardware products have also been running ahead of expectations as traction on new product launches and leverage to secular drivers are helping to provide more backlog to buffer the normalization of industrial demand. As we sit here today, we now expect to have over $200 million of excess backlog heading into next year, while positioning us for 2024. Our strategy to create a more durable growth company is working. Our recurring revenue businesses are expected to accelerate first half to second, led by higher software and consumables growth. Mined with favorable pricing and discrete productivity initiatives, we now expect over 125 basis points of adjusted operating margin expansion for the year. Lastly, our robust free cash flow and low leverage profile provide further flexibility to accelerate compounding with an attractive funnel of M&A opportunities aligned to our workflow strategy. Turn to slide five. Our success in the quarter demonstrates our ability to leverage our domain expertise and hardware and accelerate software and data analytics across our five customer-connected workflows, where we are enabling progress in a number of high-impact fields, all benefiting from customer investments in automation and digitization, the energy transition, and the need for productivity solutions to address labor, manufacturing, inflation, and regulatory challenges globally. For example, solar energy is one of the fastest growing renewable energy sources worldwide. From the grid to hybrid and backup systems, connected reliability solutions are ensuring the maintenance and efficiency of critical infrastructure, enabling the energy transition and IoT expansion. Environmental health and safety solutions are safeguarding workers and enabling customers' ESG reporting and compliance. Our leading facility and asset lifecycle software applications are improving asset performance, optimizing workplaces, and accelerating customer productivity efforts. Our innovations in the product realization workflow are solving customers' toughest technical challenges to speed breakthroughs in a wide range of applications, including helping to increase the proliferation of electrified and connected devices, and advance the democratization of high-performance compute and AI-driven data analytics, as well as in the perioperative loop, where we're helping healthcare providers deliver exceptional patient care more efficiently with industry-leading clinical safety and productivity solutions. In summary, we are seeing strong customer success on new product launches, highly aligned to these secular trends, where our innovation funnels remain focused, which I'll take a moment to discuss further on slide six. As we highlighted at our Investor Day in May, our FBS growth tools are accelerating innovation cycles to drive share gains and maximize R&D returns to create and sustain our competitive advantage in a number of exciting new areas. For example, we highlighted new product launches at Flu to accelerate the distributed energy strategy and penetrate the high-growth EV storage equipment market with new testing tools that ensure technician safety and asset performance. At Gordian, our unique planning tools, RS means data, and technical expertise helped the California County optimize their infrastructure, resulting in millions of yearly cost savings and a significant reduction in project completion timelines. Tektronix is providing performance scopes and waveform generators to help customers develop quantum computing to advance AI applications, including a large aerospace and defense customer win in the quarter. Probation's latest cloud-based documentation software is saving physicians roughly 16 hours per month in documentation and reporting, which is why Probation continues to be the provider of choice with accelerated win rates and apex adoption. Lastly, Intellects leveraged lean portfolio management to expand its foothold in environmental accounting, compliance, and reporting, accelerating the launch of its new ESG corporate reporting solution. Portav is committed to innovation across all aspects of the company, In this quarter, we received two notable recognitions for our innovative sustainability efforts. In May, USA Today and Statista have named Fortiv one of America's climate leaders in 2023. This award recognizes us as a leader in greenhouse gas emissions reductions and singled out Fortiv as a top emissions reducer among more than 2,000 companies nationwide. And in June, Fortiv was selected as a finalist. for the 2023 World Sustainability Awards in the profit with a purpose category, which recognizes companies that link revenue generation to sustainability. We're incredibly proud of our culture of innovation and continuous improvement and how that not only shows up in the solutions we deliver for our customers, but also in the positive impact we are making around the world. I'll now provide more details on each of our three segments, beginning with intelligent operating solutions on slide seven. IOS grew core revenue by 4%, driven by good growth in most regions. Strong FBS-driven execution resulted in 420 basis points of adjusted operating margin expansion, driving operating margins to a record 33%. Looking at our performance drivers by workflow and connected reliability, flute core revenues were up slightly, lapping the Shanghai recovery last year with mid-single-digit orders growth in the quarter. Fluke margins expanded by more than 300 basis points year-over-year, driven by productivity initiatives and solid price realization. E-Mate saw record quarterly bookings fueled by the continued success of the new X5 CMMS product launch. EHS revenues grew by high single digits with record INAC growth at ISC and strong SaaS momentum at Intellects. Further, Intellects saw strong bookings for its new ESG corporate reporting solution. Moving to facilities and asset lifecycle, we had low double-digit growth in the second quarter driven by mid-teen SaaS growth. Gordian had strong growth in operating margin expansion in the quarter as more customers utilized their job order contracting platform to procure and manage their large infrastructure projects. Accruin is seeing sustained improvements in win rates and good growth in their streamlined portfolio, supported by FBS-led innovation and pipeline generation efforts. Service Channel had an acceleration in growth and profitability as planned, driven by strong SaaS bookings and resulting take rate as customers leveraged the Service Channel network to maximize their cost savings. The large retail customer is already $2 million ahead of their $14 million cost savings goal in 2023 after taking advantage of the automation capabilities of the platform. Powerful testament to the secular drivers underpinning the foul workflow strategy. Turning now to slide eight. Precision Technologies continued its momentum with another strong quarter with 8% core revenue growth and 190 basis points of adjusted operating margin expansion, reflecting volume and price benefits more than offsetting inflation and FX. Some highlights in the quarter include record second quarter revenue at Tektronix with orders better than expectations and strong point of sale in all major regions. The team delivered mid-teens growth, which was over 20% on a two-year stack basis in the second quarter. Tektronix is executing on robust backlog and power in digital test and measurement solutions and delivering outstanding operating margin expansion. As orders continue to normalize, we anticipate Tektronix growth will moderate to mid-single-digit levels in the second half, and we expect we will end the year with elevated backlog levels again heading into 2024. Sensing technologies came in better than expected, up slightly, driven by strong price realization across all businesses and continued broad strength at Qualitron. Lastly, Pacific Scientific EMC reported a strong sales quarter with mid-teens growth as it benefits from strong customer demand and ties-in activity to improve manufacturing capacity and operational execution to deliver on record backlog. Moving now to slide 9 in Advanced Healthcare Solutions. Core revenues were up 4% in the second quarter as the industry continues its modest pace of recovery. Consistent with expectations, adjusted operating profit margins contracted by 60 basis points year over year. The benefits of sequential volume, price, and productivity drove operating margins higher by 180 basis points versus the first quarter. China elective procedures remained at normalized levels throughout the quarter, only slightly trailing global rates, allowing for double-digit growth. Our outlook continues to assume that elective procedures remain close to pre-COVID levels in all major regions. Some highlights in the quarter include ASP Census had mid-single-digit core growth, driven by capital expansion at ASP and double-digit SaaS growth at Census. ASP saw sequential growth in consumables as planned, and U.S. channel transition to direct is on track, contributing to sequential price benefits, driving margins higher, a trend we will expect will continue through the rest of the year. Supply chain constraints are largely resolved, yielding good growth at Fluke Health Solutions, and probation had another great quarter with mid-teens core revenue growth driven by Apex SaaS adoption and new logos. With that, I'll pass it over to Chuck, who will provide more color on our second quarter financials and our 2023 outlook.
spk16: Thanks, Jim, and hello, everyone. I'll begin on slide 10 with a quick recap of our second quarter revenue performance. We generated year-over-year revenue growth of 4%, with core growth of 5.5%. FX was a 90 basis point headwind to growth. Turning to the geographies, North America revenue grew high single digit with growth in all three segments. Western Europe revenue was essentially flat in the quarter following mid-teens growth the prior year. Asia revenue grew mid-single digits with over 20% growth in Japan and India and low single digit growth in China. We saw strength in healthcare in China. As expected, however, growth was muted by COVID reopening tailwinds that benefited the hardware products revenue in the second quarter of 2022. Looking ahead, we continue to expect China growth to moderate in the second half as we lap outsized growth in prior years. Turning to slide 11, we show operating performance highlights in the second quarter. As Jim mentioned earlier, Adjusted gross margins increased 250 basis points to a record 59.5%, driven by volume, FBS initiatives, and strong price realizations, which more than offset higher inflation. Adjusted operating profit margins expanded 190 basis points to 26%, another 40 record, reflecting higher gross margins and productivity initiatives that have started to gain traction in the quarter. Adjusted earnings per share increased 9% to 85 cents, despite higher year-over-year interest and tax expense. Free cash flow was $300 million, which reflects approximately 100% free cash flow conversion, a testament to our working capital efficiency enabled by the 40 businesses. Turning now to the guide on slide 12. We are raising our previous 2023 guidance to reflect the outperformance in the second quarter. Starting with the third quarter, We expect core growth of 3.5% to 4.5%, with revenues reflecting our normal linear profile and adjusted operating profit margins are estimated to be up over 100 basis points year over year. Adjusted earnings per share are expected to be in the range of $0.82 to $0.85 in Q3 and reflect a 17% estimated effective tax rate. Our fourth quarter guidance assumes a seasonal uplift in all segments. with core revenue growth at 3.5% to 4.5% year over year, and strong margin expansion reflecting the cumulative benefits of our productivity initiatives. Adjusted EPS is expected to be in the range of $0.94 to $0.97, up 7% to 10%. For the full year 2023, we have raised our core revenue growth to be in the range of 5% to 6%. Adjusted operating profit It's now expected to increase 10% to 11%, with margins higher in the range of 25.5% to 26%. We're increasing our adjusted diluted net EPS guidance to $3.36 to $3.42, which includes approximate $0.06 headwind from higher interest and tax expense versus the prior guidance. Free cash flow for the year is now expected to be approximately $1.26 billion. This represents conversion of 105% of adjusted net income and 21% free cash flow margin, as well as over 30% growth on a two-year stack base. With that, I'll pass it back to Jim to provide some closing remarks.
spk03: Thanks, Chuck. I'll start the wrap-up on slide 13. At our Investor Day in May, we highlighted our progress executing our strategy over the last several years, building on our strong foundation and enduring principles that underpin our unique and compelling culture. Talk about the operating rigor and leverage of FBS growth tools to innovate and enhance leading positions across our three segments and five connected workflows, contributing to outstanding fundamental financial performance. Since 2019, we have doubled our core growth rate and delivered more than 100 basis points of adjusted operating margin expansion per year, driven predominantly by higher gross margins. We've driven double-digit annual earnings per share growth, cut working capital as a percent of sales nearly in half, allowing for us to run our businesses more efficiently and contributing to more than double free cash flow generation over the period. We are now generating 50% more free cash flow per dollar of revenue, which is a testament to our portfolio transformation and the power of FBS, fueling our current and future success. And with a $60 billion served market, we have substantial runway to accelerate growth organically and inorganically. Wrapping up on slide 14, the combination of portfolio work we have done, the rigor of the Florida business system, and the development of leadership capability around the world is driving better than expected growth and operating performance in 2023, despite a continued evolving macro environment. As a result, we've raised our outlook for the year, and as we look ahead to 2024 and beyond, we are confident in our ability to accelerate our progress. With a high-quality portfolio of desirable brands, segment strategies favorably aligned to sustainable secular trends, industry-leading margins and free cash flow, and best-in-class execution, Fordham is poised to deliver exceptional earnings and free cash flow compounding in the years to come. Our attractive funnel of bolt-on and adjacent M&A opportunities across our three segments, five connected workflows, drives Upside, making Ford a more durable, high-growth cash flow compounder and a premier company delivering exceptional value to shareholders. With that, I'll turn it back to Elena.
spk10: Thanks, Jim. That concludes our formal comments. Rob, we are now ready to take questions.
spk12: at this time i would like to remind everyone in order to ask a question press star then the number one on your telephone keypad we ask that you please limit yourself to one question and one follow-up your first question comes from the line of jeff sprague from vertical research your line is open hey thank you good day everyone uh all right hi um hey check us going um hey can we just drill a little deeper into uh into tech
spk04: I just want to clarify what you said about orders. So orders de-selled, but were stronger than expected. And I guess you're talking about backlog being pretty healthy. So are you actually running at a book to bill above one in tech?
spk05: Hey, Jeff, it's Jim. A couple things.
spk03: One, I think it was better than expected. As we mentioned on the prepared remarks, we've seen some slowing in some places, obviously, or maybe more moderating for sure, places like China as an example. But we're seeing some acceleration in investments from places like aerospace and defense customers. So the book to bill, I think our orders were down about 10% in the second quarter. um but you know to put it some context it's up those those orders are still up 30 percent from from three years ago so you know we're still seeing good demand here and the backlog is actually above our expectations we've talked about that excess backlog and that backlog today is above expectations what we thought going into the going into the year so anyway i'll stop there and let and if you have any follow-up no i'll just switch gears to ahs then on the uh
spk04: On the channel distribution shift, that sounds like, you know, I don't know if you viewed it as a hump, but maybe kind of the risk of any kind of leakage during the transition would have happened in this quarter. Is that fair? And then you've got kind of a bit clearer sailing on how things play out over the balance of the year.
spk03: Yeah, we're really pleased with the performance of ASP in the quarter. As we said, we had really strong capital placements, which bodes well for the rest of the year and obviously into the future, given the consumables. Our project, what we call Elevate, is on track. And it certainly was a headwind in the second quarter, but nothing that we didn't plan for. So I think when you look at it, mid-single-digit growth, even better than that, ex-Russia, our exit out of Russia. So, you know, really a strong performance from a growth perspective in the quarter. And we think really as we kind of play out the rest of the year, We're going to see continued performance there just given the work we've done and given that headwind from Elevate. There's a little bit in the third, and then it really goes away completely in the fourth.
spk05: Great. Thanks. I'll pass it along. Thank you.
spk12: Your next question comes from a line of Steve Tusa from J.P. Morgan. Your line is open.
spk11: Hey, guys. Just wanted to follow up on the AHS questions. it looks like the margin was tweaked lower just adding up the quarters. I think, you know, like maybe 50 basis points below that 24% you had talked about at the investor day, maybe just a little bit of a, of a more shallow recovery in the second half, but still ending strong in the fourth quarter. Just curious as we kind of look out to next year on the way to that 30% margin, just want to obviously reaffirm that. And do you like step up to more of a, of a linear move from what you thought this year would be and, and, you know, kind of capture that next year in the margin, or, or are we just kind of like a little bit of a shallower inflection on the way to that, that 30%. I'm just trying to figure out if 24 is kind of like a more linear year, you know, considering 23 is a little bit below expectations.
spk16: Yeah, Steve, this is Chuck. I think, you know, the, the change this year in terms of, you know, and the guide is, it's, it's, In the tech being a little bit lower than we expected in Q2. As far as moving forward, we note the sequential improvements that you talk about here. And that's with as COVID comes off and self-help with some of the productivity initiatives and also seeing more price. If you look into next year, well, we're not calling next year, but we expect to still have those tailwinds around COVID and pricing. And I think sequentially, it'd be above the margin expansion that we normally would expect. You know, we talked about that single digit and the 75 basis points. It's going to be elevated from that, but we're not going to get to 30% next year, but we're going to continue to make progress and have good margin expansion through next year. And you'll see it as the electric procedures recover, we will expect that to continue to be a tailwind for quite a while.
spk11: Yeah, I guess my question was more along the lines of like, is next year, should we view next year as kind of a plot on a, you know, on a linear, from a linear perspective on the way to that 30? Or is it, you know, does what happened this year kind of, you know, make that target more back and loaded into maybe, you know, 25, 26, 27 type time period? That was my question is 24 more of a, you know, a nice recovery year early on, or is it more back-end loaded to that, you know, 30%?
spk16: I don't think that the back-end loaded, you know, March, it's not back-end loaded. I think you're going to see good progress towards that. And because I think we're going to see stronger top playing.
spk05: Okay.
spk03: I would just add, I mean, when you look at, when you look at the trajectory now, you know, we already have, you know, when you look at probation, when you look at fluke health, when you look at, the census part of our sterilization business, those are already plus 30% operating profit businesses. So the growth trajectory of ASP is really what we're talking about. And when you think about it, I mean, the fact that what we did in the quarter relative to placements, going to accelerate consumables in 24, consumables coming back. I think our launch pad here, I don't want to get too ahead of our skis, but we took a good step forward in the second quarter relative to margins for health.
spk11: Yeah, yeah, totally. And then just one last one. Where is the $350 million today? You had $350 million of excess. You say it's going to be $200 million or something at the end of the year. Where is that number today at the end of the 2Q?
spk16: So about $300 million. We still have about $330 million of excess at this point.
spk05: All right. I'll round that up to $350 million. Thanks, guys. Okay. Thanks, Steve.
spk12: Your next question comes from a line of Scott Davis from Milius Research. Your line is open.
spk13: Good morning out there, Jim and Chuck and Elena.
spk05: Good morning.
spk13: Good morning. The iOS margins up 400 basis points on pretty limited volume is impressive, of course, but Is that sustainable? I mean, it sounds like it's sustainable given your guidance and such, but is there any risk that some of that price cost spread that you're capturing right now perhaps goes the other direction on you in the next 12 months or so?
spk03: No, I think there's a couple of things going on, as you said. Really, I think it speaks to the power of what we've been trying to do in IOS as we continue to accelerate the, obviously, acquisitions that we made several years ago. FAO did exceptionally well. Our EH&F, so you're seeing the margin, you know, improvements from those businesses. Fluke, while a little slower in the quarter, still very strong in the year and and it you know has obviously been a perennial good margin improver so i think you probably won't see 400 basis points every quarter that's probably a little strong but i think it just speaks to the fact of the work we've been doing over the last few years to really get the entire segment up and i think the second quarter was a good a good view of what the potential uh is in the entire segment okay that makes sense uh jim now i i want to just follow up on
spk13: on Steve a little bit here on this one, but the comment on the slide, I just lost the slide, but that said pockets of industrial slowing, can you parse out what part of that might be inventory destock versus kind of real sell-through demand that could be leaking a bit?
spk03: Yeah, I think what we, a couple things maybe. In PT, as we think about the entire segment, The book to bill is about 1-0 for the year. That's better than we thought. So year to date, we thought we'd be about 0.9. We're at 1-0. So I think what we've seen is better orders in the year than we anticipated, obviously on stronger growth on the revenue side. What we have seen in sensing in particular is Parts of sensing are doing really well. Qualitable is executing very well. We think Anderson-Negel is going to be good through the year. Parts of the rest of sensing. But we are seeing some slowing in industrial businesses, particularly in Europe with some automation customers. We're seeing some slowing in places like HVAC with some OEM customers. Mostly on the OEM side in sensing is what that comment really has to do, and also in some of the semiconductor business, parts of the business in sensing. So that's the slowing. And, you know, we would anticipate, you know, this is kind of nothing different than we originally thought would happen. But that's kind of what we're seeing right now and what we anticipate will continue through the sort of second half of the year.
spk13: Okay. Super helpful. Thank you. Best of luck the rest of the year.
spk05: All right. Thanks, Scott.
spk12: Your next question comes from a line of Dean Dre from RBC Capital Markets. Your line is open.
spk06: Thank you. Good day, everybody. Hi, Dean. I wanted to circle back on this concept of the excess backlog, and I know you just sized it, but just be interested. I know there's the implied earnings visibility that you get from elevated backlog, but can you share with us some of the thoughts about the flexibility within the backlog? Let's say something happens, whether it's a supply chain or a customer readiness issue, How much flexibility do you have to immediately just draw down the next in line on the backlog and have that kind of seamlessly flow through to the P&L? Because when we hear access backlog, we immediately think there's flexibility, but sometimes it may not be as flexible based upon customer timing and so forth. But any color there would be helpful.
spk05: Yeah, a couple things Dean.
spk03: So, as Chuck said, we've got about, you know, the access backlog is higher than we anticipated at the start of the year. It's about 330 million dollars. We'll probably get that down in the 200 range by the end of the year. And it's, I would call it, it kind of depends. But if we were to think about half of that excess is at Tektronix, that's relatively flexible and has been, you know, I wouldn't say within a month it's necessarily flexible because it does have some supply chain aspects to it. But it's in the sort of 90 days kind of time frame, pretty flexible. Sensing a little bit less depends on some of the OEM customers, and it flew pretty flexible. So I would say that's kind of where it stands. And that's why we think it is a good insurance policy relative to slowing. And that's what you saw in the second quarter, right? You saw us get a little bit more backlog out. EMC was a little stronger as well than we anticipated. And so those are places where we think we can use the backlog in a way that sort of prevents any near-term challenges. And also maybe just to add on to the Scott question, because I didn't answer the destocking piece, we're really not seeing a lot of destocking or de-booking, very little, pretty much around our normal numbers, which is pretty small. We see some rescheduling of backlog on the OEM side and sensing. That's why sensing is a little slower in the second half than maybe the rest of the portfolio. But we really haven't seen destocking. We haven't asked distributors really not asking to cancel orders or anything like that. There's been pretty minimal to the point. That's why we think the backlog remains flexible.
spk06: All right. On behalf of Scott, I'll thank you for the destocking answer. And then my follow-up, just any color on the excess of 20% in India and Japan. Is that a comp issue? Is there anything specific on the business side you'd call out?
spk03: Yeah, it's a little bit of a comp thing on the Japan side. We'll still see, I think, high single-digit growth in Japan the remaining part of the year, but certainly a little bit of a comp side on Japan. India, no. We've seen good growth in India. We're seeing – I think we're getting some benefit of some of the reshoring and some of the investments that are going – the sort of foreign direct investments that have been going into India here over the last 12 months. We benefit from that. Our big companies like Fluke and Tech and ASP are seeing – the benefits of that, but even more broadly in some of the rest of the portfolio. So we think India is going to be probably 20% the rest of the year. Those are smaller regions like Western Europe, so they can move a little bit more on a big chunk of business, but we like the demand dynamics right now in India in particular. That's great. Thank you. Thanks, Dean.
spk12: Your next question comes from the line of Andrew Obin from Bank of America. Your line is open.
spk14: Hey, how are you guys?
spk12: Good.
spk14: Hi, Andrew. I was going to ask an AI question, but I was made fun of, so I'm going to ask something else. I'm going to keep beating down this dead horse with inventories. In the revenue breakout, and maybe this is not the best way of looking at this, but I think revenue through distribution was down 13% year-over-year this quarter. How do you think just inventory levels among your distributors, because I think our data shows that actually people continue to build inventory in the channel. And I know you've sort of talked about it quite a bit.
spk03: I always think of demand, I always think of inventory in the channel as a function of demand. And so, you know, as demand moderates a little bit around, you know, just the big numbers we've had over the last couple of years, there are pockets of inventory where we might see some increased inventory. But as I said on the previous couple of questions, we don't see any of that in a major way. We do get, particularly in the US and Europe around Fluke and TAC, we get pretty good visibility to inventories. And so I think the places that we don't, obviously those channel numbers that are in the queue and the filing represent also channel inventory relative to what we see in ASP, what we see in sensing. So it's a broader view of channels and in many cases international partners. I think where it really matters relative to how we think about demand creation, we've seen, you know, we've still seen strong point of sale at tech. And so, you know, that's really fulfilling the backlog and customers are really hanging around for those orders and they're getting them. And so we're still seeing strong POS. At Fluke, it's a little bit more mixed, but it's still, it's really more of a moderation than it is anything. We still saw mid single digit POS growth at Fluke. in the second quarter in the United States. We saw even better growth in China, and even Europe was pretty good for POS. So as those things moderate, there'll be some verticals that probably will get a little bit of channel inventory, but we really have a strong process for understanding that and putting out demand creation vehicles for that. I would say the other thing is, We have a number of, we probably have, we have a very good second half for innovation and product launches. And so I think that's also an opportunity for us to continue to really help the demand creation side where we might have some excess inventory.
spk14: No, I appreciate this. And just a question on Fluke and tech. I remember being in China in 2018 when sort of Chinese CapEx hit a wall and that these businesses were hit. In reverse was all these mega projects in the U.S., right? How much visibility do you have related to specifically Fluke and Tech to these projects? When would you expect to get orders? And does it structurally change the growth rate for these businesses over the next couple of years? Thanks.
spk03: Well, I think on the tech side, we are starting to get visibility. In fact, even in some semiconductor businesses where the business has obviously slowed a little bit, we have already had conversations with customers along a number of product lines about 2024 investments. And I think what's been good about tech is that they've taken that part of, you know, they've taken advantage of some other opportunities in power and in the aerospace and defense customers to continue to offset some of that. So that's a good story and will hopefully be a good story in 24, although still too early to tell. On the fluke side, it's really going to be less around when those facilities are getting built as much as it is going to be keeping those facilities up and running. So we're probably a few years out from some of that. You know, when a manufacturing plant gets built, obviously there's some advantage to what we do through the build cycle. Electrical contractors buying more Fluke equipment to build some of these facilities. But the real opportunity is going to be once those facilities are up and running and the maintenance staffs in those facilities are building out those opportunities. We're probably a little off from that opportunity. But I think until then, we're seeing good – the secular drivers that we've got at Fluke in power and solar and some of the sustainable investments that we talked about in the prepared remarks remain a good opportunity for us.
spk14: Great answer. Thanks so much.
spk03: All right.
spk05: Thanks, Andrew.
spk12: Your next question comes from the line of Josh Poskowinski from Morgan Stanley. Your line is open.
spk05: Hi, folks.
spk16: Hey, Josh.
spk17: Just want to follow up on FAL and some of the, I guess, changes going on in the construction markets, maybe a little bit of mixed divergence, more manufacturing, a little less, some of these commercial or warehouse verticals. Anything that you guys are seeing across customer base that gives you any kind of cyclical impulse, whether this business is counter-cyclical, more pro-cyclical, like i guess this is maybe you know one of the first real construction cycles since you guys have owned some of these assets like anything that you would just point out you know cyclically that you guys are noticing it seems like the business is doing well but you know anything would be helpful yeah i i don't you know we don't have a lot of exposure to commission commercial buildings
spk03: Um, you know, really in the, uh, in the sense of traditional in foul. So, you know, I think maybe we have commercial customers or maybe 5% of sales or something like that. So it's not a big driver. Um, what we are seeing is quite frankly, on the, on the positive side at Gordian is a lot of deferred maintenance and, and. what gordian solutions and quite frankly what we see in foul is uh taking advantage of deferred maintenance and and seeing the opportunity for deferred maintenance improving project timelines so that's really been a big growth driver for foul and i think it really played out in the quarter and we think it plays out certainly in the second half so so i think that leads to some of the infrastructure improvements that uh that not only is going on state and local but also in the commercial industry you know just more broadly What we're seeing from customers really in FAO also is the fact that people want to understand their capital in this time of return to work and how are my real estate assets working, particularly with things like retail customers. They really want to understand their investments and we really do, our solutions are really oriented towards understanding that and how to bring facilities costs down. So really, in some respects, the reassessment that people are doing around their commercial infrastructure to some extent is a growth driver for us, and that we sell software that really helps them bring that together and really helps them understand their expense, what they're spending and where they're spending it, and how they might take opportunities to save money. We talked about in the prepared remarks about a customer that is ahead of schedule on a $14 million cost savings because of our solution. Quite frankly, I think a number of the sort of noise that's in the commercial real estate market that I think your question is really oriented at, in many respects, is to some extent a driver for us because of the solutions we have.
spk17: Got it. Makes sense, seems what the numbers say as well. And then maybe just shifting gears, you know, we've seen a few folks thus far this earnings season, you know, have maybe a bit more of a reaction from customers from lead times normalizing, so not necessarily a destocking or a change in point of sale, but Are your lead times across some of the hardware businesses improving more materially here in 2Q, and is there sort of a customer impulse reaction to that?
spk03: Yeah, I think where we see a little bit of that is at Tektronix where our lead times have come down, and it does create a little bit of a pause. That was embedded in our guide. That's why we thought orders would be the way they were. So, yeah, to some extent we're seeing that. As lead times moderate and you don't need to order something 18, 20 weeks in advance, you can now order it six to eight weeks in advance, there is some moderation. But that's really what's been embedded in our guide from the first place is we've made some assumptions around that. And by and large, that's come into play the way we thought. It flew a little bit less so because our lead times have been always pretty good. So I think to the extent we're seeing any of that, it's really a Tektronix. And as I said, we've embedded that as we give you sort of the book to build dynamics and we give you some of the order growth rate. It's really embedded in those kinds of numbers.
spk05: Understood. Thanks a lot. Best of luck.
spk03: Thank you.
spk12: Your next question comes from a line of Julian Mitchell from Barclays. Your line is open.
spk01: Thanks a lot. Good morning. Maybe just wanted to circle back to AHS as people seem very focused on that one given the history and so forth. So if I look at the second half, you know, it looks like you're assuming sort of 30, 40 million of profits step up I think half on half in AHS and maybe sort of 50 million or so step up from the top line there. And obviously last year we had a more stable half-on-half performance. So is the delta on the top line this year? A lot of that's the elective procedures element. And then when we look at the profit step up with that, is it sort of just normal leverage plus some of that distribution channel shift and maybe some cost savings? Any sort of color as to that half-on-half move?
spk16: Julian is a couple of things going on there. Yeah, I think you've got the numbers roughly right and you know in terms of the first half second half step up things going on the second half. Basically normal seasonality takes takes into account a lot of that, especially in the fourth quarter. But also, you know, coming out Q1 in the first half, China was obviously really low with the COVID and the electric procedures there that was that made Q1 lower. Project Elevate, the dealership, is going to give us more revenue in Q4 as we work through that, and also more profit. And then we're getting more price in as we go through the year. So I think those are three things that really help. And then the self-help that we put in, the productivity things that we announced early in the year are also helping us. Our incrementals going from first half to second half on that step up is 65%. That's all the things I mentioned, including seeing more consumables in the second half. Let me stop there and see if I covered the basis there.
spk01: That's very clear, Chuck. Thank you. And then maybe switching tack, I don't think capital deployment has come up much on the call yet. I think the buyback did – sort of get going again in the second quarter after a quiet six months or so. And clearly on M&A, it's been quiet for 18 months, partly given the tough M&A backdrop. But I think we get lots of questions around whether there's been any change in view fundamentally about M&A or some of the types of deals. And then also, is there more of an effort now to balance M&A with buybacks in terms of cash usage. So just, you know, any sort of thoughts on that given that buyback spend in Q2?
spk16: Julian, let me take the buyback and then I'll pitch it over to Jim to talk about M&A. We remain opportunistic with our buyback. I think we, you know, Q1 is our lowest cash flow of the quarter and we didn't do any there. But we'll be opportunistic as we move forward. when we think that we're undervalued and see an opportunity. So I think that's going to continue to be the case. I think from a capacity standpoint, what we're doing here doesn't change anything about when you look at three and five years, what are actual capacities. So we've got plenty of capacity.
spk03: Yeah, Julian, I would say we've been very busy this year. As you point out, it's been since we did probation. But I think where we stand today is activity is actually pretty good. And, you know, we've seen some things transact in the market lately that wouldn't suggest prices have come down necessarily. But there's some pockets of that. And our bolt-on activity is very, very busy right now. But we remain disciplined. There's a number of processes that have failed. given some sellers' lack of desire to sort of get pricing into what we think is the appropriate frame. So we'll remain disciplined around the opportunities, but we do think there is a number of things out there that are possible, and you know we'll we'll continue to work through them and and with uh with the work we do and the diligence we do and you know uh we'll look forward to when those things get done we're we don't have a burning time clock of getting something done for the sake of getting something done as you well know we're we'll remain disciplined and there are opportunities for us i think in the back half of the year to do that great thank you thanks julian
spk12: Your next question comes from a line of Andy Kaplowitz from Citi. Your line is open.
spk00: Hey, good morning, everyone. Hi, Andy. Jim, can you give us more color by region and especially what's going on in China and Europe? Obviously, China has become more of a concern recently and maybe Europe. I think you already did say China was one of those pockets of industrial weakness and that will continue to decelerate moving forward. But can you give us more details regarding how China and Europe are reflecting your guidance moving forward?
spk03: Yeah, sure. You know, we've obviously had a we've had a strong North America view and that'll continue, you know, second half, probably in that mid single digit range. And quite frankly, when you look at the two year stack in North America, very, very good kind of mid teens kind of numbers. so we feel good about where we're at north america and obviously as you know andy that's where a majority of our software businesses are we're getting the benefit of obviously that in our north american growth rate we're getting the benefit of a lot of the great work that our asp team is doing as well so that's kind of north america i think relative to western europe you know probably roughly flattish europe has been so strong for for a while now It'll be mid-teens in a two-year stack for the second quarter. So we think it'll be more flattish around the second half of the year, maybe up a little bit. We're seeing some good traction in some places, but we're also seeing some, as I mentioned in sensing, where we're seeing some industrial OEMs slow down, and that's reflected in our second half guide. Relative to China, as you mentioned, you know, I think we've been consistent from really all six months of the year is that we've had four really, really strong quarters of growth in China. Stands up exceptionally well against many, almost everyone. but we we did think the market would take a little bit of a a breather in the second half and we said that back in february and and uh and that's really conti we really still believe that so embedded in our guide is really more kind of low single digit growth in china for the um for the for the second half and uh and that's more like high teens excuse me accelerating kind of low 20s on a two-year stack so we're really accelerating china on a two-year stack So business is still there pretty good. It's just off a very large base from the second half. And then high growth markets, as I mentioned on the India conversation, we still think there's a number of opportunities in the second half to take advantage of some opportunities. But those kind of go, they're a little bit smaller, so the growth rates tend to move around a little bit. But we do feel like we've got some opportunities in some of the high growth markets in the second half.
spk00: Got it. So you can make fun of me. I am going to ask an AI-related question, but I'm going to ask it in the context of you know, precision, you talked about, you know, some of the verticals, you know, fueled by geopolitics and investment in AI and compute. And I think PACSI, you know, you had gotten much lower for the quarter than you actually reported. So I think you talked about A&D inflecting. Maybe you can talk about the inflection you saw in PACSI. Was it AI related? And, you know, what's going on there? And what does it mean for the future?
spk03: Yeah, I think there's probably two places that we've seen from a customer investment perspective. I would say number one is we're seeing investments in quantum computing and R&D organizations that are really working towards opportunities for AI. So obviously, you've got to get the hardware in order to get the benefits of AI. And Tektronix is really playing strongly in that regard. And we obviously mentioned that order in the prepared remarks. EMC is really more a geopolitical aspect of less AI related, just more in general of what they've historically done. They've got a tremendous backlog of the business. It really extends. We don't even include that backlog in our hardware backlog because the numbers very positive. But we've had some supply chain capacity challenges. We got more out in the second quarter than we anticipated, as you said, and we're continuing to work through that. But we, in the second half, we probably have some opportunity in the second half to do better than that, but we'll see where that goes. And some of the improvements we've made are really good, but we want to see those more sustainable, particularly with our supply base at EMC. But the demand for EMC right now is at an all-time high.
spk00: Appreciate the color. Thank you.
spk12: Your next question comes from a line of Nigel Coe from Wolf Research. Your line is open.
spk15: Oh, hi, guys. Good morning. Hi. I think we've covered AI. So let's move to price. So you're one of the few companies actually seeing better price QQ. I think 50 basis points better, if I'm not mistaken, maybe a bit more than that. Just curious, you know, it seems like you're still pushing price, especially in an AHS. So what is your perspective on how pricing looks in the back half of the year, especially with an AHS? This is still more runway in healthcare. And then I'm just also quite curious as well how pricing looks across software and services.
spk05: Yeah, so I would say a couple things.
spk03: In the quarter, a little bit better than we anticipated really around sensing. As we said, we over-delivered in sensing, and I think that brings the number up where we're probably getting the most price, if you will. Relative to healthcare, it will accelerate a little bit in the second half just because of of elevate and and the channel mix change that we have that will probably be more true in the fourth and then the third but uh we will see that and um yeah we're continuing to see uh price and upselling cross-selling our net dollar retention as an example is continuing to improve And we're getting, you know, we're getting some opportunities to really push more price. And that's some of the story of the margin improvements in 2Q and iOS is really the good work we've done. You know, the leader in the clubhouse, that net dollar retention and service channel, I think we're at almost 115% now. I think it just gives you an example of us continuing to push the opportunity for really value. I think on the software side, it's really about value and the value you bring. And if we can continue to have those features that we can go cross-sell and up-sell, we didn't talk much about it on the question around AI, but AI does present us an opportunity over time to create more features and opportunities within our software business to improve net dollar retention. We've seen that, in a sense, as an example with the AI launch that we had with them in the second quarter. So we do think there's plenty of opportunity for net dollar retention to really continue to go up, Nigel. And that's really where we'll see the price component of what we do in our software businesses.
spk15: Okay, that's great. And then moving on to Fluke, the flat revenues, it sounds like units down mid-single digits. I think you called out China Comp as being quite tough there. But are there any other pockets of headwinds that you call out? Just curious because, you know, this is the clear in the coal mines.
spk03: yeah i think you know when we we probably if anything you're always such a strong first quarter there when we look at the mid single digit growth in the first half at fluke um we really feel good about that number and yeah there's a i would say the industrial business has got a little bit little bit of slowing there but the calibration business and other components of the business are accelerating so all up i think the mid single digit number on the backs of such a good first half last year I really think speaks to the strength of fluke. The second half will look similarly in terms of about mid single digit for the second half. And that's really on the backs of even higher growth last year in the second half. So in many respects, kind of an acceleration from a two year stack. So overall, we like the trajectory in the business you're right there's a there's a couple of places pockets of things we're continuing to watch we continue to watch the pmi and industrial production but i think the team's been executing well number of good technology launches we had the e-made businesses performing really well so so you know we've built some things that are the end of the portfolio over time as you well know trying to make fluke less cyclical more tied to secular drivers and we we believe that will continue to play out here in the second quarter we've got a number of new product launches that could take advantage of those opportunities as well so if there is some slowing in the marketplace we think that can a number we've got a number of actions out there that we think can countermeasure some of some of the potential slowness okay that's great thank you and your next question comes from a line of joe giordano from td cowan your line is open hey good morning guys um again i want to just
spk07: on the short cycle stuff. One, I just want to make sure I understand fluke, you know, flattish this quarter, it accelerates in two half and the second half. I want to make sure I understood that. And then on, on tech, you know, you mentioned earlier, um, you know, orders are down 10%, but still up 30 from three years ago. Like that's obviously very positive, but at the same time, does it like scare you in a way that like, what's the right amount of like the normal level for a business like that? Cause if we're talking about 350 ish of excess backlog going to 200, And half of that is tax, you know, it's like 75Million of excess revenue delivery versus orders in the second half alone, which is pretty significant. So just want to understand, like, where these businesses exit the year and what it means for constant to next year from, like, a 4Q starting point.
spk03: Yeah, so let me clarify the Fluke comment. What I said on Fluke is we were mid single digit in the first half this year. We'll be mid single digit in the second half. from that standpoint no acceleration you know the quarters might move a little bit but but just if we think about first half the second half about the same however because we grew more in the second half of last year the two-year stack does accelerate a little bit so hopefully that clarifies the flu comment i think relative to tech we always knew that there were a number of parts of the business that were um you know that were really fulfilling over time and as I mentioned, plus lead times going down would ultimately impact orders. What's been nice to see has been the strength of point of sale at tech, which around the world has continued to be good. And I think it continues to solidify our belief that the demand is real and that the demand can be played out over time. And that's why we believe that demand, the excess backlog, if you will, remains an insurance policy against anything that might occur relative to some slowing that's going on. So I think that I'll stop there, and hopefully that clarifies these two points.
spk07: And then just to follow up on margins, like if I look at your slide 16, obviously a big ramp in all three segments from 1Q to 4Q. And I just want to kind of, if you can frame out maybe how much of that variance from 1Q to 4Q is like normal seasonal, and how much is like a new jumping off point from the fourth quarter level into next year?
spk16: I think the, Rob, it's normal seasonal. It's just, it's more, oh, I'm sorry, Joe, sorry. This is normal seasonality step up from Q3 to Q4 when you're talking about what's going on there at the fall through margins. I do think that, but embedded in there is some of the self-help we did in the first half, and that will carry over and be a help in the certainly the first half of next year, and the pricing that we've been putting in. So to a certain extent, it is a better jumping off point going into next year. But keep in mind that Q4 to Q1 step down. But when you look year on year, I think those things are going to be tailwinds with pricing, self-help, and then the elevate at health margins. It gives us a great stepping off into the first half of next year.
spk05: Thanks, guys. Thanks, Joe. Thanks, Joe.
spk12: And your next question comes from a line of Joe O'Day from Wells Fargo. Your line is open.
spk08: Hi, everyone. Thanks for taking my questions. Hi. First, just one related to a comment around channel distribution in AHS. And I think you talked about how So the headwind in the third quarter, headwind goes away in the fourth quarter. I guess I'm curious about the tailwinds associated with this and what that looks like. And I don't know any framing around kind of the cost headwinds you've seen so far. But then as you sort of reach that transition point, how long you think it takes to then sort of reach the more elevated margin target opportunity that you have there?
spk03: Well, I would say relative to just the transition itself, the biggest impact, I think we ought to think about the biggest impact is in the second quarter. There's some impact in the third. And that sort of equates itself out of the number by the fourth quarter. So that's kind of the sort of the sequential aspects of the impact of it. We think that benefits, I think we've talked about this, it benefits margins from the perspective of we think we get better price. And so in that sense, it has a margin impact as well. I also think it has a growth impact, and this will probably be more a late Q4 into 24 impact. And we still need to see it, but the direct aspects of our terminal sterilization, which is a really strong business for us, allows for us to accelerate the sterilization cycles that go on in our equipment, meaning that we can, now that we're direct, we have much more contact with customers, and our application engineers will be more directly working with customers on the sort of efficacy of accelerating sterilization into other products that might be in the sterilization lab. And that should have impact on growth over time. So not only in terminal sterilization, but also in our biological indicator business. So we feel that there is a growth impetus to this as well. We think there's a customer satisfaction impetus to this as well. And I think to some extent, the reason why our capital numbers were better in the second quarter was because customers are starting to understand that they're going to have a better opportunity to really have ASP salespeople, ASP application engineers in their hospitals every day helping them out. And so I think it's a margin and growth story. It certainly has already started to play out, I believe, on the capital side, plays out on the consumable side in the second half and certainly into 24.
spk08: And then I wanted to ask one just on orders. I think you talked about Precision Tech booked a bill at one better than the 0.9 you were anticipating. I'm not sure about Fluke, but orders up mid-single digit, I guess, if anything, maybe a little bit better than expected. And so I don't know if there's sort of anything overarching about it, but what you would sort of most attribute to seeing some of these order trends kind of better than anticipated out there.
spk05: Yeah, I think, well, here's what we're seeing.
spk03: I mean, I really, as we started the year, we thought there'd be some slowing in the year just because of the moderating aspects of some of our businesses and maybe some economic impact in pockets. We really haven't seen much of that in the first half of the year. But embedded in our guide is still some aspects of thinking that there's going to be some economic impact. Obviously, PMIs in the world, some of the portfolios still have some ties to industrial production. We've been able to mitigate all that because of the strong strategy around secular drivers and the recurring revenue parts of the business that have played out exceptionally well. So we'll continue to, you know, that was a book to bill of 1.0, which included, by the way, uh fluke fluke orders as well on that overall book to bill so um so i think where we stand today is in a much better position as we said that excess backlog number is is uh is more robust than we anticipated as we go into the second half and uh i think that bodes well for you know the three things we talked about going into the year we'd have hard you know if there was some concerns around the the macro that we would have the strong strong backlog excess backlog as i described software and recurring revenue, and the self-help work that's going in AHF.
spk05: And I think what you saw in the second quarter is all that manifesting well. Thank you. Thank you.
spk12: And our final question comes from the line of Brett Lindsey from Mizuho Americas. Your line is open.
spk02: Hi, good morning all. Yeah, thanks for taking the question. A lot of ground's been covered, but I just want to come back to price. Clearly, you know, advanced here in the industrial cycle and you know, seeing some softness in some of those hardware businesses. How are you thinking about the ability to take more price or hold the ground on price? You know, should the macro develop more weakly here, particularly within sensing?
spk03: I think, number one, our ability to hold price we feel very good about. I think the quality of our franchises, the kind of value and investments we've made in innovation, I really speak to our ability to hold price. And we think of it as value creation and our ability to create more value for customers and get paid for it. And I think you see that across in a number of the things we were talking about. I think we see that. So we think strongly we can hold price. And we feel we can continue to get it, probably not at the rates we got in 21, as an example, in 22. But we've always been a good price leader relative to, I think, a number of companies. And I think there's no reason why we wouldn't continue to be as we go into 24 and 25.
spk02: Okay, great. Appreciate the color. I'll leave it there.
spk12: And this concludes our question and answer session. I will now turn the call back over to you, Jim, for some final closing remarks.
spk03: Thanks, Rob, and thanks, everyone, for the time today. Hopefully you get a sense of the excitement in the second quarter and the conversations we had. I think as we look into the second half, the raise of our guide really speaks to the confidence that we have out there, despite probably some noisy things. Our strategy is playing out the way we anticipated, and we're excited about that. And we'll look forward to sharing some of the details with you as we get through the follow-up calls and a number of things that we'll be doing here in the third quarter. Between now and then, have a great summer. Thanks for everyone. We'll look forward to your follow-up questions, and take care. Thank you.
spk12: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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