Fortive Corporation

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.

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.

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.