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spk07: My name is Christina and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fordham Corporation's fourth quarter and full year 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, press the pound key. I would now like to turn the call over to Ms. Lena Rossman, Vice President of Investor Relations. Ms. Rossman, you may begin your conference.
spk08: Thank you, Christina, 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 represent certain non-GAAP financial measures on today's call. Information required by Regulation G are available on the Investors section of our website at fortiv.com. Our statements on period-to-period increases or decreases refer to the 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 the actual results may differ materially from any forward-looking statements that we make here today. Information regarding these risk factors is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2022. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements. With that, I'll turn the call over to Jim Plinko.
spk02: Thanks, Elena. Hello, everyone, and thank you for joining us. I'll begin on slide three. Ford has delivered outstanding operating performance again in 2023 for our proven formula for value creation. Our transformed portfolio of businesses is delivering consistent through-cycle performance, reflecting a more durable company with mid-single-digit core growth in 2023, despite a mixed macro environment. Strong execution by our teams drove another year of record margins, with adjusted gross margins now approaching 60% and adjusted operating margins nearing 26%. Throughout 2023, we focused on unleashing the full power of FBS, reflected by record participation in Kaizen events, including our largest ever CEO Kaizen Week. The results of these Kaizens were tremendous, including an average of 50% productivity and 50% lead time conversion improvements. Our industry-leading free cash flow generation funded a creative capital deployment, including our best year executing on bolt-on acquisitions, accelerating our growth strategy across all three of our segments. We also opportunistically bought back shares and increased our dividend, enhancing shareholder returns. In summary, we remain committed to our strategy, and its success is evident given the consistency of our results, which I'll highlight on slide four. We built forward to drive growth, drive progress, and drive value. Reflecting on our evolution, we made significant steps again in 2023 towards our vision of a premier company. This includes 5% core growth and 160 basis points, adjusted operating margin expansion. The benefits of our portfolio transformation are reflected in our progress today, averaging rule of 35 performance over the last five years. FBS is driving commercial success as we expand into new growth markets, speed innovation cycles, and maximize investment returns across our three operating segments. For example, in 2023, we saw a 33% increase in our revenue attainment on new product launches. Many of these new products are contributing to the approximately 60% of our revenues that positively impact climate, health, and safety concerns and align to the UN Sustainable Development Goals. Our operating companies are seeing a greater than 20% acceleration in software development time through the use of Gen AI, improving our ability to deliver more value to customers. Our culture of innovation, learning, and continuous improvement is contributing to gains in our industry-leading employee engagement scores, a critical component of our sustained success. Lastly, our acquisition performance contributed to our record-free cash flow in the year, underpinned by industry-leading networking capital performance and accelerated returns on invested capital. On slide five, you see how our portfolio is strategically positioned to increasingly benefit from secular growth trends. Every day, we are helping our customers harness the power of emerging automation and digitization technologies, streamline crucial workflows, and embrace the energy transition. Some highlights in the fourth quarter include, in iOS, Fluke's new family of multi-product calibrators are providing the broadest workload coverage across some of the fastest-growing markets. FAO's recent bolt-down of Red Hat is helping to transform customers' digital experience with a modern, centralized hub for engineering document management, solidifying your current leading position in that market. In PT, Tektronix is harnessing the power of open-source software with the first release of its Python-native drivers to help our customers automate their instruments and accelerate their testing times. Together with EA, which closed in early January, Tektronix is expanding its addressable market, adding complementary performance solutions to their best-in-class electronic test and measurement suite, serving the fastest-growing areas of the power market. In AHS, Landauer is helping customers reduce energy usage, waste, and carbon emissions with their new digital dosimetry solution. And ASP launched their new sterilization monitoring products in North America and Asia, helping customers achieve greater efficiency and assurance as they work to keep up with rising clinical demand. Turning to slide six and a spotlight on M&A performance, our two most recent large deals provide an excellent example of the Forded flywheel for value creation and action. In 2021, we accelerated our segment strategies with the acquisitions of service channel and probation. These two world-class software offerings are creating compelling value for our customers and Forded, having fully embraced the power of FBS to drive double-digit ARR growth and significant margin expansion. For example, Service Channel exited 2023 with adjusted operating margins in the mid-20s, up from break-even when it was acquired. And Probation delivered 112% net dollar retention in its GI solutions, up approximately 8 points since its acquisition. The execution of our disciplined acquisition strategy strengthened but the value FBS creates and is a critical component of how we achieve sustained results over time. You see that reflected in their industry-leading net dollar retention as our innovation and customer-centricity tools are helping them retain and grow their existing base. Turning to slide seven, our ability to deliver differentiated results is enabled by our world-class business system. Across Florida, we leverage FBS to better understand our customers, accelerate innovation, market share profitably, improve operations, and forge the leadership skills we need for the future. One of the best things about MBS is that we never stop improving it. As our portfolio evolves, we are expanding the tool set and capabilities that allow us to set and deliver on high expectations, as you just saw in the service channel and probation examples. In 2023, the fourth, our Center of Excellence for Software, Data, and AI expanded its capabilities, to further support digital transformation and drive innovation, next-gen products, and productivity across Fortiv. A quarter of our success is how our leaders immerse, teach, and lead from the front with FBS. Together, they make Kaizen the way of life for our 18,000 team members, reinforcing our strong culture of inclusion where everyone's contribution matters. Looking at the chart on the right, what is unique and differentiated about Fortiv is the breadth of results that are compounding over time. Since 2019, we have sustained our target of mid single-digit through cycle core growth. We have delivered outstanding margin expansion above our annual commitments. We have converted more revenue to income, growing adjusted EPS at 14% compounded rate, and converted more income to cash, compounding free cash flow at an average of 19% over time. With that, I'll turn it over to Chuck to provide more color on our fourth quarter financials and our 2024 outlook, starting on slide eight.
spk13: Thanks, Jim, and hello, everyone. We ended the year with a high level of performance, generating earnings growth of approximately three times revenue growth. Core revenue growth of 3% in the quarter reflected an acceleration in iOS and healthcare, partially offset by anticipated slowing in precision technologies. We achieved record margins in the quarter and full year driven by the strength of our brands, accelerated innovation, and the benefits of our productivity initiatives. Highlights of our fourth quarter performance include 220 basis points of adjusted gross and operating margins expansion, adjusted earnings per share of 98 cents, reflecting 4 cents operational beat at the midpoint with earnings up 11% year over year, and free cash flow was $413 million, down versus the prior year as expected, and up 56% on a two-year stack basis. For the year, core revenue growth was 5%, exceeding our initial outlook of 4%. Adjusted gross margins expanded by 180 basis points to 59.5%. Adjusted operating profit grew 11%, margins expanded by 160 basis points. Adjusted EPS of $3.43 grew 9%, and we delivered on our free cash flow forecast of $1.25 billion, which represents 32% growth on a two-year stack. Turning to slide nine, I'll now provide highlights on the fourth quarter performance of each of the three segments, beginning with Intelligent Operating Solutions. Q4 core growth was 6%, reflecting continued momentum across the segment, with stable POS trends in all regions, and new logos and customer bookings contributing to strong ARR growth. Adjusted operating margins expanded 300 basis points to 34.2%, driven by margin expansion in all businesses, a creative software mix, and price realization and productivity initiatives. Overall, we have seen better durability in Fluke throughout the year, given the benefits of innovation and customer adoptions and key growth verticals. Environmental health and safety continues to see strong INET growth at ISC and double-digit SAS growth at Inlex. Facilities and asset lifecycle had double-digit core growth throughout most of 2023, driven by continued strength in SAS, contributing to record margin expansion. Moving on to precision technologies. Core revenues in the quarter were slightly ahead of expectations, down 1%, driven by lower sensing revenues. more than offsetting growth in power, food and beverage, and aerospace and defense markets. Adjusted operating margins expanded 270 basis points to 29%, enabled by favorable price and productivity benefits funded throughout the year. Additional highlights include Tektronix, which had a record year with 9% core growth, up 25% on a two-year stack basis, reflecting the benefits of our focused innovation and vertical markets growth initiatives. And while sensing technology revenues were down low single digit in 2023, they were up low double digit on a two-year stack and ended the year with a return to growth in two of our four businesses. Now on to advanced healthcare solutions. Q4 growth was 3%, driven by an acceleration to mid-single digit growth at ASP, excluding Invitech, AHS core growth would have been approximately 6%. Adjusted operating margins expanded 160 basis points, 25.7%, driven by flow through on consumables, price realization, and productivity. Additional highlights include at ASP, we are through the North American channel transition from indirect to direct, driving 7% consumables growth in the quarter. Our software businesses continue their pace of double-digit SaaS growth with new logo success at census and probation. We expect to sustain this momentum in 2024. Turning to slide 10, you can see total growth in the fourth quarter of 4% was driven by expansion in the core with minor contributions from FX and bolt-on acquisitions. By regions, we had mid single digit revenue growth in North America driven by growth in all segments, including stronger growth in consumables benefiting AHS. Western Europe revenue was up slightly as growth in software was offset by normalizing growth in hardware products. Asia saw continued strength in India and Japan, however, was more than offset by high single-digit decline in China. As a reminder, we anticipated growth in China would be down as we lap outside growth in prior years. Turning now to slide 11, we're introducing 2024 guidance, starting with the full year. We expect growth of 6% to 8% with core revenues up 2% to 4% and acquisition contributions of approximately $215 million. Adjusted operating profit is expected to increase 10% to 13% with margins of approximately 27%. Adjusted diluted EPS guidance of $3.73 and $3.85 of 9% to 12% include a $0.13 headwind from higher interest expense associated with funding the ea acquisition the effective tax rate is expected to be approximately 14 and a half to 15 in line with the average of the last two years and reflecting the benefits of the ea acquisition free cash flow is expected to be approximately 1.38 billion representing conversion in the range of 100 to 105 percent of adjusted net income and 21 percent free cash flow margin For the first quarter, we anticipate revenue growth of 3% to 5%, with core flat to up 2%, driven by the continued momentum in our IOS and AHS segments, partially offset by a low to mid-single-digit decline in PT. Adjusted operating profit is expected to increase 6% to 10%, with margins of approximately 24.8%. Adjusted diluted EPS guidance of 77 cents to $0.80, up 3% to 7%, includes a $0.04 headwind from higher year-over-year interest and free cash flow of approximately $180 million, reflecting normal series signal variation. Moving to slide 12 and the outlook for 2024 by segments, you can see we expect positive growth and operating margin expansion in each segment in 2024, supported by our alignment to secular tailwinds, new product introductions resulting from our robust innovation efforts, the continued resilience of our software and other recurring revenue businesses, the expected delivery of the remaining approximate $100 million of excess backlog in our hardware products businesses, another year of FPS-driven execution, and the carryover benefits of the productivity initiatives that we executed in 2023. By segment for the year, We are planning iOS to continue its momentum with mid-single-digit core growth and another 100 basis points of margin expansion. Key drivers include stable demand and NPI traction in the hardware products and continued ARR growth supported by strong 2023 SAS bookings. We are planning for PT revenues to be up 10% at the midpoint in 2024 with core growth up slightly, reflecting the benefits of the EEA acquisition and normalization of orders in hardware and products businesses in 2023. We expect the EEA to be accretive to adjusted operating margins in 2024. And together with the benefits of our productivity initiatives, we expect PT margin expansion of over 100 basis points. PT's outlook also reflects the realignment of Invitech into sensing technologies as we explore strategic alternatives for Invitex design and engineering business. The remainder of Invitex includes product revenues that align more closely to our automation businesses in sensing. For comparison purposes, we have provided pro forma segment results for 2023 in the appendix. In AHS, we are planning mid-single-digit core growth with operating margin expansion of over 125 basis points driven by volume, price realization, and productivity. We expect an acceleration in the growth at ASP driven by their improved channel position, NPIs, and procedure volumes. And new logos and SAS migrations are expected to drive continued software growth in healthcare. Before opening it up for questions, I'll pass it back to Jim for closing remarks.
spk02: Thanks, Chuck. I'll start this wrap up on slide 13. I am incredibly proud of the contributions of our 18,000 team members to make 2023 another record year for Fordham. Over the last couple of years, our success executing our strategy to build a more resilient company reflects our strong foundation and enduring principles that underpin our unique and compelling culture. Talk about the operating rigor and leverage of FBS tools to innovate and drive growth across our segments. In addition to higher core growth, the deals we have done are contributing to our multi-year track record, including strong performance again in 2024. Since 2019, we are sustaining 7% revenue growth, delivering 120 basis points for adjusted operating market expansion per year, driven predominantly by higher gross margins. Compounding earnings and free cash flow double digits, we have cut networking capital's percent of sales nearly in half, building 50% more free cash flow per dollar of revenue. This 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. This brings me to slide 14 and how we drive differentiated performance and value creation for our shareholders. With a consistent and compelling 2024 outlook, including 6% to 8% total growth and over 100 basis points adjusted operating margin expansion in every segment, we are on track to our 2025 targets of $4.50 of earnings and $1.6 billion of free cash flow. We are confident in our ability to differentiate our performance and believe our outlook is appropriately balanced, remaining agile to deliver for customers and shareholders should the environment differ dramatically. As we showed at our 2023 Investor Day, by executing the forwarded formula, we expect to roughly double our earnings per share and generate more than $8 billion of free cash flow over the next five years. Our M&A funnel remains strong, and our acceleration of capital employment, as demonstrated in 2023, further positions Ford as a higher-growth cash flow compounder and a premier company delivering exceptional value to shareholders. With that, I'll turn it back to Elena.
spk08: Thanks, Jim. That concludes our comments. Christina, we are now ready for questions.
spk07: Thank you. 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. And we'll pause for just a moment to compile the Q&A roster. Thank you. Our first question comes from the line of Steve Tusa from JP Morgan. Your line is open.
spk10: morning guys how's it going um so just uh the the the kind of trend in the in the shorter cycle businesses tech and fluke um maybe just an update on where you stand uh book to bill how the revenue did this quarter and then you know how you're thinking about how the year plays out next year yeah steve it's jim um i think number one
spk02: I would differentiate Luke and tech here. I think I think we certainly saw, you know, we saw mid single digit growth at fluke. In the quarter, we saw growth in orders point of sales in the mid single digit around the world. So, I think we're seeing the real benefits of the number of transformation things that we've done from an innovation perspective also with some of the work we've done. um and in good shape and i would say you know tech um tech was low single digits in the quarter but quite frankly off a 20 growth comp in q4 22 so still saw some good performance there we felt really good about the quarter they produced as well and certainly the year that techtronics had is unprecedented the record year as we said in the prepared remarks so um as we go into the next year i think it's it's um i think more of the same at fluke We've really seen the resilience and durability activity that we've talked a lot about over the years playing out there. Tech will probably have a quarter. They're in about their fifth quarter of negative bookings. And obviously, we've been working off backlog there. And we would anticipate that that book to bill there turns positive in probably Q2. So we feel good. North America was really good for tech. where a little bit of flowing that we saw was in China. We talked a little bit about our China growth in total in Chuck's prepared remarks, but obviously part of that tech is one of our bigger businesses in China. Part of that story is the Tektronix there. So I'll pause there, and if you've got any follow-up, I'll certainly cover it.
spk10: Yeah, and then just how much price do you assume for the guide for 2024? We're thinking about 2% to 3%.
spk03: Okay, great. Thanks a lot. Thanks, Steve. Thanks, Steve.
spk07: And your next question comes from the line of Nigel Koh of Wolf Research. Your line is open.
spk11: Thanks. Good morning. Actually, good afternoon from my side. Let's not get into that conversation. Just like on the reclass of Inditech to PT, it's a small business. It seems like margins are relatively depressed, maybe 6% to 7% margin. Just wondering, I think, Chuck, you went through some of the logic of that. Just maybe talk about what this achieves, this reclass. And maybe just in terms of the importance of this ASP, or rather, AHS acceleration, how is that benefiting the outlook for AHS? Because were you assuming that Invitek recovers? I'm just trying to think about AHS on a like-for-like basis here.
spk13: Thanks for the question, Nigel. I'll take the margin question first. We're talking about the business expanding 125 basis points, but that's on a like-for-like basis. If you really look at where we ended with Imatek and up, we're up probably 250 basis points. But the business is generating margin expansion of 125, and that's what we've got in the guide. I think the rationale for switching it is the end Design engineering piece just isn't as big as we thought it was going to be, and it's not really moving forward. And so the part that is now the majority of this business really fits better in sensing.
spk08: Yeah, Nigel, I would just add, we called out in the slide materials that in the tech was a headwind in the quarter for healthcare to the tune of about 280 basis points. That's probably the largest year-over-year headwind that Invitec had seen. It wouldn't expect the size of that to continue, but probably still in the 1% to 2% range had it continued to be in healthcare throughout 2024. But that's now reflected in PT.
spk11: Okay, that's helpful. And then maybe just on the transition ASP consumables, just confirm, that's now fully behind us? There's no lingering impact there? Sounds like it is. But maybe, you know, I think we can see the clear sort of margin benefits that we should see coming through from capturing that distributive margin. But maybe talk about the opportunities to drive better growth and, you know, having that direct customer connection. You know, what do you see as a potential for revenue benefits?
spk02: Well, Nigel, I would say, number one, yeah, we're definitely fully through it. So you saw the benefit of that, I think. uh you know as we said the prepared remarks consumables in north america were up about seven percent consumables in around the world were up about four percent so so good performance there we think mid single digit guys for asp for the full year is a good number certainly opportunity to go and uh on the margin front which we're going after we were just with the team last week uh we actually had them uh with uh we had a board meeting there and we had the team there for an operating review highlighting the level of innovation talked about the prepared remarks we now have a new set of consumables around steam sterilization that are going to now be in the u.s and asia that are certified so a number of opportunities here to continue to improve the growth those are obviously all in consumables which obviously have higher falters. So we like the guide here, overall health up 125 basis points in margin expansion, mid-single-digit growth. We think that's a great launch point. It certainly certifies, I think, a lot of the things we've been saying about the direct North American strategy and certainly more broadly around the strategy at ASP and how health will just be a real durable grower for Florida in 24.
spk11: That's great. Thanks, Jim.
spk03: Thanks, Nigel.
spk07: And your next question comes from the line of Julian Mitchell of Barclays. Your line is open.
spk01: Hi, good morning. I just wanted to check on the sort of margins in the first quarter. So I realize it's not a big sequential decline in sales, but you've got a very heavy sort of sequential step down in margins there in Q1, you know, 100% or so kind of drop through. Is that reflecting maybe something on mix in any of the businesses in first quarter versus the fourth? I'm just trying to understand maybe on precision in particular, how their margins are starting out the year in Q1.
spk13: Nigel, the biggest thing is there's just a seasonal step down in revenue dollars from Q4 to Q1, and that's what Gives you a normally seasonal step down in the margins, pointing out that our Q1 guide is up 75 basis points. So that's a pretty good expansion there. So I think we're seeing pretty good performance across the segments in margin expansions.
spk02: Yeah, and I would just say, you know, that guide represents record operating margins in the first quarter for Florida. So I think when you just look at – you know, we do have some expenses that start back up at the beginning of the year, obviously, salaries and some of those things. There's a little bit of that. But at the end of the day, if you just step back, that will be a record first quarter in the history of Florida.
spk01: Thanks very much. And then my follow-up would just be – You know, it's typical, I suppose, you give guidance for year one and then someone asks about year two. But if I look at slide 14, you know, you do have that, I guess it seemed medium term, you know, when you gave it, but you've got that 450-ish or maybe it's, you know, 430 excluding capital deployment number for 2025. And obviously a year from now, that will be a formal guide, whatever you end up giving, not a medium term aspiration. I guess I'm trying to ask kind of how, given it is only 11 months away now, that period, how seriously should investors treat that number of 450? It does require a fair amount of M&A over this year. So any thoughts around the M&A market backdrop? One of your acquisitive peers was saying it's maybe looking a little bit better now.
spk02: Yeah, a couple things. I think when you look at our history in terms of double-digit EPS growth and the compounding of free cash flow, I think it's not an enormous lead to get to that 450. That's why we put those numbers out there a year ago and we reiterated them in the guide and on the presentation. So we obviously feel good. Long way away. A lot can happen, but we feel good about it. I think relative to the M&A market, We just closed a quarter where we did basically five deals, including kind of closing in the early part of January. So it's across the board in every segment, variety of different sources from private equity to private ownership, founder-led companies, good breadth across a number of our workflows. So we feel really good about the M&A environment, and we just demonstrated really good progress against the M&A environment. EA is starting off really well with And where we start, we now think that's going to be accreted in the year, only right after closing it. So we've seen really good things there. So I would say the environment, what we've done, we're really proud of that work. Good work. Going to set us up well back to your comment about 25. Both EA and those other deals are going to be helpful in 25 for sure. And quite frankly, when you look at the environment that we're in right now, probably a little bit better. Certainly we've demonstrated that. And, you know, we want to continue to, as always, as you know, Julian, we're always busy and we're excited about the opportunities that are in front of us. But we're also incredibly excited about the teams that have just joined Portable.
spk03: That's great. Thank you. Thank you.
spk07: Your next question comes from the line of Jeff Sprague of Vertical Research. Your line is open.
spk03: Hi, Jeff.
spk14: Hello, everyone. Hope you're doing well. Just a couple from me. Just back on ASP and the consumables growth, 7% sounds pretty healthy. Is there some kind of, I don't know, kind of channel fill in the direct model that had to happen? You know, if you flipped from distribution to direct, is there something abnormal about that number? What are you expecting for consumables growth in the U.S. for 2024?
spk02: We'll be in the mid single digit range. There's probably a hint of catch up from Q3 there, but not a lot of inventory build. We would expect it to be mid single digit for them across the board. And obviously, I wouldn't want to be a predictor of 7% every quarter. But as we said, we validated the strategy, I think, in Q4 with what we want to do. As I mentioned, you know, with the team last week, they're incredibly optimistic about where they stand today and where they stand for the year and in the future years as well. So I think we're in a good place.
spk14: And then just on EA, obviously you didn't own it in Q4, but any color on how it grew in Q4? And can you just be a little more specific on what you expect for growth in 2024? Again, does it be in M&A, but kind of the underlying growth in the business in 2024? Yeah.
spk02: First of all, we closed the first week of January. We're off to a good start. 108 plan is scheduled. We've got our OBEA room set up with integration. Our teams are really excited about the work we can do together. As you remember, Jeff, when we announced the deal, we said we'd have the opportunity to take our big Tektronix sales force and sell those solutions. We started our annual sales kickoffs over the last couple weeks. A lot of excitement about that. Relative specifically to your question, December was a record order month for the business. So they ended the year strong. And there's a tremendous amount of growth opportunities there in front of us. They've got a good backlog situation. So we feel good. We feel good about the revenue base for the year and what that can grow. Obviously, it won't be in our core until 25, but we feel good about the growth. Relatively, we now think this is probably a mid-single-digit break in 24, which is off from the original thesis around the deal, so we're already ahead of the game. Growth should be good, and we think the business is probably in the 190 to 195 range. 195 million range, that's probably where it'll be for the year. So we're in a really good place with the business. It's a good team, as I mentioned before. And it's going to, you know, that's why I think when you step back and look at the deals we did to the previous question, we feel good about the year, 6% to 8% overall growth for the year. Stands up, obviously, EA being one of the big parts of that, but the other acquisitions adding some as well.
spk14: And just, I'm sorry, a little quick housekeeping one, too. Just this design piece of Invitech, Is that a divestible business, or are you just winding it down? And how big is that piece?
spk02: It's in the $20 million range of revenue. It's break-even. So, you know, we're going to look at a number of options. I think we've got – there are buyers out there for sure. The team's working on some different things. So the other part of that business is called Dover Motion. So, you know, as you can imagine, it really was originally in our sensing and automation businesses – It's really, it has life science and customers, but like our other sensing businesses, quite frankly, it has more of an industrial aspect to, from an OEM perspective. That business has done pretty well over the last few years. So we'll anticipate keeping that as part of the portfolio, but we're going to look for options on the other part.
spk03: Thank you. Thank you very much. Thanks, Jeff.
spk07: Your next question comes from the line of Dean Drake. from RBC Capital Markets. Your line is open.
spk15: Thank you. Good day, everybody. Hey, the word destocking didn't crop up in any of your prepared remarks, which is a relief. Any color there in terms of inventory in the channel, fluke, sell-in, sell-through, any issues there?
spk02: Yeah, I think to the second part of your question, mid single digit POS growth at Fluke around the world in the fourth quarter. So good solid growth, you know, down from the double digit we've seen for a while. But still, I think that would be that we take that number pretty solidly. A little bit of destocking in tech. in the U.S., single-digit millions, but a little bit, and some in China maybe more broadly. I would say that we now think China is likely to probably not grow in the year that's embedded in our guide, and some of that is going to be just, I would say, less de-stocking than it is just conservativeness on the part of Chinese distributors and Chinese channel partners. to sort of see how the macro evolves out there over the year. But again, that's embedded in our guide.
spk15: So just to clarify on China, that's flat for the year is the expectation?
spk02: Probably down low single for the year. So that would be our anticipation at this point. A couple things there. Just, you know, starting what we've seen thus far is, you know, customers, you know, a little bit more conservative, as I mentioned. As you know, Dean, we've talked about this over the years. You really don't know China until you see March. You get to after the Chinese New Year, see how channel partners and customers are going to going to unfold for their year. We've seen more conservativeness up to this point in the year, so our anticipation is that the year sort of progresses. We had a really tough comp in the first quarter in China. We had great growth in China last year in the first quarter, but we would anticipate for the full year that China would probably be down about most single digits.
spk15: Great. And just one clarification for EA. I believe you said that you were targeting 100 basis points of margin improvement for this year and that it would be the tech sales force would be selling. Did they come with a sales force at all? And where is that 100 basis points? Is there any kind of manufacturing efficiencies? What are the drivers around the improved margins?
spk13: So, Dean, a couple of things to unpack there. got EA and they come with 40% incremental margin. I think the 100 basis points is about core growth that it adds to tech is what we called out. We would expect the volume growth that there's, you know, do they go from 40 to 41? Yeah, that wouldn't be super surprising for them. But I think that was more about the impact on core growth. for everyone for EdTech. And then on the Salesforce, I think Jim can give it.
spk02: Yeah, I mean, if they came with about a Salesforce of roughly 40 folks, we 10x that with Tektronix. We have the ability to sell that solution across the board. The teams are working through their cross-selling strategies. And one of the things we said when we announced the deal was that we thought a real opportunity, primarily outside of Europe, to really accelerate the business through through the addition of the Tektronix Salesforce. So, yeah, so as Chuck mentioned, already a very profitable company. They had great growth to the, they're a good growth company, great growth company. And even with their size, they add growth to Tektronix and PT. So we're excited about that opportunity. Obviously, that's not the core for the year. That'll be in 25. But so far, we really feel excited. We're really excited about the business joining Ford.
spk03: Thank you. Thank you.
spk07: And your next question comes from the line of Andy Kaplowitz of Citigroup. Your line is open.
spk09: Hey, good afternoon, everyone. Hi, Andy. Jim or Chuck, maybe just a little more color on the expected AHS improvement in 24. Could you talk about Fluke Health? They were discontinuing product lines in 23, as you know, which is causing some noise. Are they over the hump here in 24? And when you look at ASP, I know you're still building out your overall international infrastructure and supply chain. Are you over the hump there in terms of progress and how much restructuring is helping your margin in 24?
spk02: Well, I take the first part of that. Yeah, Fluke Health would probably be in the mid single-digit range for the year, so pretty close to the segment growth. Maybe a little bit less in the first quarter and a little bit better, or first half and a little bit more in the second half. But they are through some of the things that you described as well.
spk13: You know, with regards to the margin expansion, you know, probably the bigger issue, bigger driver behind the margin expansion at health is the growth at ASP and the top line growth, getting through that distribution, you know, and having consumables in North America show up like they did in Q4. I think that's probably, I had to score 80% of what's driving the margins there.
spk09: It's helpful, guys. And then maybe just a little more color on price versus cost expectation 24. I know you said price, Chuck, but one of your industrial peers reported today and reported quite rocky results in terms of its handling of the global supply chain. It seems like Florida is handling supply chain quite well. Pricing obviously remains sticky, but could you elaborate on what you're baking in for price versus cost and how you would rate the predictability at this point of the global supply chain?
spk13: Well, I think there's a couple of things. In terms of the inflation we're seeing, we're seeing that come down, and that's why you're seeing the price we're putting into the market come down. But we will expect to stay ahead, as we always do, on the price cost. To supply chains, they continue to get incrementally better every quarter, but that doesn't mean they're back to what we would call normal and problems can crop up from time to time. But we think that – know incrementally better is is what we what we see there remember we're not open to big commodity uh exposures um that can cause maybe some of our peers or other other companies that um we have a pretty good line of sight and great um you know every every month jim and i are meeting with the opco teams hearing hearing what we're seeing on inflation but it's it's trending the right way in the meaning the rate of inflation is coming down yeah and i was just i would just add the proof points
spk02: You know, our gross margin expansion over the last several years has been very consistent. I think that speaks to our ability to manage the situation, not just on the price side, but on the cost side. And our working capital continues to get better, as we noted, as a percent of sales. So, you know, we're doing that while not having to have significant increases in working capital. In fact, our working capital is getting better. So I think what we'll see this year, Andy, just to add on to that, is that our teams have done a really nice job. We were just with all of our teams a couple weeks ago, and they're doing a really nice job on design savings as well. So not only on the negotiated savings, but also looking at our designs and what we call our value engineering effort. I think right now our plans for value engineering would be our cost reductions out of value engineering will be at a record in 24 years. when we deliver on that through the year. So a number of things we're doing to continue to stay ahead of price cost, knowing that probably price wasn't going to be able to stay at those levels that we had over the last few years. We've always been a good price company, so we'll continue to get our fair share. But I think what we're also trying to do is really push our teams hard on the opportunities on the cost side as well.
spk09: Appreciate all the color, guys.
spk02: Thanks, Andy.
spk07: And once again, if you do have a question, you may press star one to enter the queue. Again, if you do have a question, please press star one at this time to enter the queue. And your next question comes from Scott Davis of Milius Research. Please go ahead.
spk12: Thanks, Jim and Chuck and Elena. I'm not very good at the star one thing. It's a skill, I guess. But anyways, A lot of questions have been answered, but I'm kind of curious on service channel and probation. If you combine those deals, you know, combined, they're pretty darn important to the long-term growth story, but, you know, pretty dilutive the first, you know, year and change. But where do you think you'll be in 2024 versus a deal model and those things combined? Will you be back, you know, in the positive on those things? And I would imagine they compound, right? I mean, the growth is so...
spk13: it should be high enough the margins high enough that the returns on capital kind of go through you know kind of hockey stick at some point are we there yet and you think about 2024 um it's scott a number of things first of all from a top line standpoint and and really the bottom line we we think we're on track to running ahead so um but i think when you're talking about diluting as the roiks come from you know low single digits they're in mid single digit territory and it's and accelerated going forward. So we think those two are right on. But Accredi, now that they've, to the top point, growth. So let me stop there and see if I understood that part of the question.
spk12: Kind of. I guess kind of my point, and perhaps we can do this after, is that when he announced those deals, it was, I think, the language Jim used at the time is you'll be really happy we we own these assets someday, you know, just given the growth rates. I'm just kind of curious if you feel the same way. Yeah, maybe just to give you a little bit.
spk02: I think we anticipated, if I remember correctly, in the first year, $0.10 of accretion. We ended up with $0.12 of accretion. So in the first year, we over-delivered on the accretion side. As Chuck mentioned, we're incredibly happy with these businesses, maybe just to take your point. You can see, and that's why we really put them on the chart. When you look at the growth rates in the businesses, They're very strong. Probation was already a very high-margin business, one of the highest in Fordham already. Service Channel obviously was a break-even business. So there was some concern. Could we get that business into the sort of accretive margin rate that we see that's so strong in Fordham and obviously in IOS? And we're obviously there on the Fordham side, and they're approaching the IOS side. So we feel really good in that regard. And the other part of it, we were trying to really make a point in that – in the prepared remarks, Scott. I know you understand this, but it's really how FBS has really made a difference here. You see the net dollar retention, where that's at now, the ARR growth, the really FBS has really made it. Both teams have really embraced FBS on the growth and innovation front. They've done a nice job in that in a short period of time. And that's how you see these net dollar retention numbers, which are obviously extremely good. And the business is well positioned for the future. And to your point also, they don't stop at 10% ROICs, right? They're going to continue. And if you've got 110 to 100 plus percent net dollar retention margins in this structure and growing at this rate, obviously the ROICs are going to go above 10% in the out years.
spk12: Yeah, that makes a lot of sense. Just real quick, guys, does InVetTech get worse before it gets better? Just partially just given Sprague's question on kind of the wind down or the sale of of the design business. But these things are selling into some pretty tough markets. But does that end up getting a little bit worse before it gets better in 24? Or are we already there?
spk13: I think we're going to run into some easier comparison in the second half. And so it'll stop being this. a tough compare for us. And I think that, you know, we need some of the dynamics of those markets to recover. Keep in mind, this is a business less than $100 billion in total. And so it's not quite as impactful as, you know, bringing some of these other movers like EA and, you know, ASP right now.
spk08: I would say, Scott, embedded in the PT core growth outlook, You know, for Q1, there's about a 1% headwind to core growth in PT due to Invitap.
spk12: Okay.
spk08: A little bit more defined.
spk12: It's a statement that you've had a good quarter when we have to pick on a $100 million business, right? So good job. Well, I'll pass it on. Thank you.
spk03: Thanks, Scott.
spk07: Thank you. And your next question comes from the line of Rob Mason from Baird. Your line is open.
spk16: Thank you. Hello. I may have missed this, Jim, but how do you think about your overall software growth in 24 relative to the 2% to 4% core growth? How does that roll up?
spk02: Yeah, we feel really good about it, Rob. I think when you look at not only maybe starting with 23, we have really good Really good growth in 23. We'll have high single-digit software growth in 24. So when we look at the ARR numbers, they're good. Obviously, we're just talking about service channel probation in the previous question. But I think across the board, FAL is going to have high single-digit growth. So we feel good about where it's at, and I think it's a testament to the strength of how FBS is really adding value. And it's a testament to those businesses and the work they're doing. We didn't talk a lot about AI, but we'll start to see as we get into late 24 and 25 how some of our data analytics and AI solutions are also going to help the growth rates there. So we're in a very good place, and I think the strategy is playing out the way we anticipated, which is those businesses would have more durable businesses. Higher growth rates and ultimately that would that would benefit Ford of not only on the growth side, but on the margin front certainly saw that in 23. You absolutely see that with our double digit EPS kind of kind of numbers that will will show in 24.
spk16: Very good, just as a follow up specific to sensing. How do you how some of your semi cap customers you know are certainly starting to tee up expectations around a better 25? I assume that's, you know, you didn't mention that in-market, specifically aerospace defense, food and beverage, maybe do better this year. But how are you thinking about that market turning in that business for you, semi-cap equipment?
spk02: Yeah, well, you know, in sensing, we're about six quarters down. of negative order rates. So we would anticipate to see the overall order rate start to change. The book to build there probably in around one in the second half for sure, probably starting in sometime in the second quarter. So we start to see things move. We didn't talk about it, but A number, maybe more broadly about sensing, one of the things we saw in the fourth quarter was rather than get 12 month blanket orders, which we would typically get with OEMs, we got three month blanket orders. So we will see that those orders pick up probably in the second half. So that's the state of the world. Relative to the semi-index and where it's at, we're starting to see the green shoots of customers that are starting to talk about orders in our businesses that are maybe in the earlier stages there, a little bit of Jet, a little bit of Cetra, a little bit in our Keithley business at Tektronix. We're starting to see customers talking about, you know, the second half of this year. So we think that, you know, just overall we'll start to see some things We're not anticipating a big step up there. We'll let the fact patterns determine that, but we do anticipate at least seeing some of that turn in the second half of the year.
spk03: Very good. Thank you. Thanks, Rob.
spk07: Your next question comes from the line of Andrew Obin from Bank of America. Your line is open.
spk06: Yes. Hi, how are you? Good afternoon. Hi, Andrew. Yeah, just maybe, and I don't know if when you were talking before sensing, you were specifically referring to sensing or tech, but maybe just confirm, you know, what's happening with tech book to bill and what kind of exit rate are we at tech, right? Just sort of, you know, if you look at the peer orders, you know, Keysight, Natty, you know, you still have orders down, you know, let's call it mid-teens. So to understand correctly, we're thinking that based on the feedback we're getting on the comps, revenues will be up low to mid single digits next year, right? Is that the right framework?
spk02: For Tektronix, we think business will be about low single digits for the year. So just from a revenue perspective, we've had five quarters of negative orders there. We probably see that in the first quarter. We'll start to see things turn. The book-to-bill starts to turn in and around the second quarter there. So just to kind of give you a sense. And that's, you know, we've had aerospace defense has been good. It's continued to be good. But it's mostly broadly around electronics and things like that. So some semiconductor customers as well. So in the comments I made around sensing, semi, I also made the comment about Keithley, which is the, you know, most of the exposure we have in tectronics relative to semiconductors. So we think the business is a good place. Obviously, low single digits in the fourth quarter against a 20% comp from a year prior. So still in a good place, record year for tectronics from a revenue perspective. And you put probably, you know, a quarter or two here of absorbing, continue to absorb some of the market value. dynamics we described and put the business in a good shape and an exit rate into 25 probably in a good place.
spk06: And where are we on book to bill? Sorry.
spk02: Well, I think in fourth quarter probably 0.85 probably, but we're always below one in the fourth quarter.
spk06: Gotcha. And just a broader question because it's certainly been a weird 23 and it seems like 24 is going to be strange as well. But, you know, I think if you analyze it, and it's just sort of going back to Julian's question, you did outline the 25 target, but you also outlined longer-term targets, right? And if you look at 25 target, we sort of, I think CAGR is 12.5%. Longer-term targets, 13.5%, right? We printed 9% EPS growth last year. This year, target is 9% to 12%. I totally get there's cushion here. Right, Invitech is out of the way. We're probably going to do some M&A. But from your perspective, what needs to sort of go back to normal change from a macro standpoint? What's the biggest lever that needs to change, right, to sort of get back to quote unquote normal, where you guys can sort of accelerate EPS growth from what we've seen last year?
spk02: and uh what we sort of got into this year or is it all just m a sorry for an extensive question but yeah well i think when you look at our track record over four years and you know what we try to do is not take any one particular year um because when you average them out when we're talking about the out years here we're talking about you know the average right and when you look at the average they're not two different future versus prior history. So I think what passed is a bit prolonged here. If you look at the success we've had over the last four years relative to EPS growth, and you sort of fast forward, you know, we've continued to use our free cash flow. Obviously, we had interest expense a little higher last year than we anticipated, which is why that number with single digit will de-lever through the year, as you know, so that has some improvements as well. But, you know, I think at the end of the day, we're in a very good place relative to those targets, and I think this reflects it. So, There's obviously the macro and geopolitical situation is probably always one of those things you think about, but that's why we said in the prepared remarks that we've got some scenarios to continue to be agile and dynamic based on what the economic situation looks like is the best way to say it. Software and healthcare is going to continue to compound at higher rates of growth and higher rates rates of margin expansion, and that's going to continue to mix up the portfolio, particularly if you take a longer period of time, like in 28. So I would say those are the dynamics. You've got to continue to see those businesses continue to get better, like they will this year and like they've been doing, and then continue to do the things that we've been doing relative to productivity and innovation that will continue to help us work through the various markets, secular drivers that we've attached ourselves to, broaden the workflow. And I think the last thing I'd say, Andrew, is the five deals that we did over the last 30 or three months or so, they all have an opportunity to continue to accelerate our compounding. They're all attached to good growth drivers. They're additive growthier from a margin perspective, from a bolt-on standpoint. They're all making their associated businesses better over time. And when you take a few years out, they're going to become a bigger part of that. So some of them are small, but if you take a two-year or three-year out period, they'll be additive as well. And then as I said, the M&A environment still looks like it continues to get better here, and we're excited about that.
spk06: And if I could just quiz in one more, should we start to think about Fortiva's increasing dividends angle and some framework around share buybacks, maybe offsetting share issuance as long as we're there?
spk13: Well, in terms of the dividends, what we tried to signal is that as our free cash flow and earnings share increase, you'll see our dividends increase on the same trajectory. With share buybacks, what we did is we restocked to where we had, you know, over the last two years, we've been opportunistic on buying some shares back, and we just went back to the level we had two years ago. M&A is still the priority here.
spk06: Thanks so much.
spk03: Thanks, Andrew.
spk07: Thank you. Your next question comes from the line of Joe Giordano from TD Cohen. Your line is open.
spk04: Hi, guys. Thanks for taking my questions. Just a couple on the M&A side and capital deployment, kind of piggybacking on what Scott was talking about. So, I mean, you highlighted probation and you highlighted service channel, and I think it's pretty clear as to how companies like that can lever up growth and they can accrete to EPS and what they can do to margins. I'm just curious in like the ROICs of these things, but I think like on probation, the math was something like it needed to grow 15% a year and have margins expand to like, you know, almost into the mid fifties from the mid thirties or something like that to hit like a seven and a half percent return in year five. Like it looks like at least that slide suggests it's under those targets. So like, how do you evaluate where you are in ROIC on deals like that?
spk13: So first of all, we look at our ROICs and go back to looking at where the revenue needs to be. March has started off great on probation, as talked about, and we're running ahead of where we thought we'd be on the top line. So we maybe talked offline exactly what the original assumptions were, but that's where we know we're at for both of those deals. And so we're on track or ahead of where we thought we'd be a couple of years in. think that so i think that's that's as simple as i can put it joe i would maybe just add on is
spk02: The reason why we highlighted these two companies two years out is because when we bought the companies, there were some skeptics, quite frankly. People didn't think we could get service channel margins into the 20s as quickly as we did. People didn't think that probation would grow during COVID the way it did. So, yeah, I wouldn't necessarily say these were slam dunks because there were some doubters out there. And I think what we tried to do with two years in is to demonstrate that that, hey, we're exactly where we thought we were in case we're ahead of the game. We were ahead of the game first year out, as I mentioned in the previous call relative to EPS. So these businesses are in good shape. And as we highlighted back in May, this is consistent with a number of the other deals. And that's really what you see in 24 is the portfolio durability based on the success of those deals. So I would just add that into the broader view of M&A and how it's continuing to add ROICs continue to get better, and it's adding more durability and capability to the organization.
spk08: And just to clarify, this came up earlier, but the combined ROIC, and certainly for probation, is already in the mid-single-digit for 24 range.
spk03: Thanks, Lynn.
spk04: Just maybe to piggyback on that, like, you've done deals now across, like, SaaS-type deals, and you've done hardware-centric deals. As you kind of run FBS through these businesses, I mean, it flexes different muscles that you need to use depending on these. Are you finding, like, one type of deal somewhat easier to accomplish the goals that you set out at the outset?
spk02: Well, I would say certainly hardware deals is something we've been doing for 20 years. And to use your muscle framework, there's a lot of muscle around that. You saw that in even with some of the COVID challenges in ASP, our continued ability to do things like really improve the free cash returns on the business because of working capital. So I would certainly say that those are things that we've done for a long time. But I think this is really one of the reasons why we put it on the slide. is that we've really built tremendous capability around software, FPS for software. And we didn't talk about it, but we've now got an FPS suite of AI tools, which are really helping drive innovation drive commercial activities for the software broadly, but also for the software businesses. So I'm really proud. I said it in the prepared remarks around how the FBS in and of itself is getting better. And that really means more broadly. I think what we're really proud of is the fact that if you look at the Ford portfolio today, FBS means as much to a software business or a healthcare business or a traditional industrial business. FBS may mean different tools. It may mean different applications, but the rigor and discipline is exactly the same.
spk03: Thank you. Thanks.
spk07: Thank you. And we do have time for one last question. Again, this will be our last question of the day. The line comes I'm sorry, the question comes from Joe O'Day from Wells Fargo. Your line is open.
spk05: Hi, thanks for fitting me in. First question is just related to the price volume composition of organic and implying volumes kind of flat up 1% for the year. And I'm trying to understand where kind of the upside risk might sit on the volume side and whether the embedded assumptions are more sort of moving sideways and there can be some upside risk on, you know, maybe easier short cycle comps in the back half of the year or just, you know, how you've thought about that volume piece of the equation and if there's anything embedded within that as things getting better over the course of 24.
spk02: I think when you look at, and I'll take the hardware businesses here, when you look at the hardware businesses, there's not a big inflection point as we go through the year. So probably I would say we don't see a big volume, we don't need a big volume inflection as we go through the year simply because of that. I would say secondly, we're not really expecting a lot of restocking here. So I would say there's probably some volume upside to restocking if we were to see that. But I would say, you know, we're certainly not counting on that. And if it was, probably more second half dynamics.
spk05: Okay. Makes sense. And then on the productivity front, can you just talk about the margin contribution you anticipate from productivity in 2024 and the degree to which that's kind of carryover from 23 actions or additional actions to drive more productivity gains in 2024? Yeah.
spk13: I think that normally we would expect 40% of incremental margins, and for the year we're going to end up at 45. There's some puts and takes earlier in the year that we've seen, but we're seeing probably, if you think about it, probably seven or eight cents of productivity coming into from those actions that are spilling into 2024.
spk05: Meaning actions you've already taken, and so that's just carrying into 2024. Yeah, we're done with the
spk13: the productivity actions, just the, you know, the benefits are coming in, not that we're taking any more. Sorry about that.
spk03: Understood. Thanks a lot.
spk07: Thank you. And I'll now turn the floor back over to Jim Leeko for closing remarks.
spk02: Thanks, Christina, and thanks, everyone, for taking the time today. I know it's a busy, busy day for all of you. Hopefully what you heard today was our, you know, really the benefits of the work we've been doing for several years, both in 23 and how we anticipate 24 to play out. So we feel very, very comfortable with where we stand today. Lots going on in the world, as many of you know. But I think how we've built and constructed the portfolio over the last several years, post-vontaire, we feel comfortable. and expect to have a good setup for this year. We're certainly around for any questions. We want to thank everyone for your support in 23. We know we'll probably see a lot of you out on the road here over the next few weeks. We'll look forward to that. And obviously, our team is available for questions and follow-up over the next several days. So thanks. Have a great day. Have a great earnings season. And we'll see you on the road. Thanks.
spk07: Thank you. And this does conclude today's conference call. You may now disconnect.
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