Fortive Corporation

Good day, my name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to Fortive Corporation's first quarter 2024 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 star one again. I would now like to turn the conference over to Ms. Elena Rossman, Vice President of Investor Relations. Ms. Rossman, you may begin your conference.

Thank you, Dennis, and thank you everyone for joining us on today's call. With us today are Jim Lika, 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 is available on the investor section of our website at fortive.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 may 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, 2023. These forward-looking statements speak only as the data that they are made, and we do not assume any obligation to update any forward-looking statements. With that, I'd like to turn the call over to Jim.

Thanks, Alana. Hello, everyone, and thank you for joining us. I'll begin on slide three. We have a strong start to the year, exceeding our expectations for core revenue growth, margin expansion, earnings, and free cash flow in the first quarter. Our strategy to enhance our customers' safety and productivity across a number of vital sectors, from manufacturing to healthcare, is delivering more value for customers and more durable growth for Fortis. We deliver better than expected performance in each of our three segments, reflecting enhanced portfolio positions, the benefit of innovative new products, and our dedication to the forwarded business system. By harnessing our unique competitive advantages and strong execution capabilities, we are confident in our raised outlook for the year, which includes anticipated double-digit adjusted earnings and free cash flow growth. As we look ahead, the success of our strategy is reflected in faster and more profitable through cycle growth, which combined with the rigorous application of a differentiated business system delivers the forwarded formula for value creation by compounding results year after year. Further evidence of our strategy to build a more durable collection of businesses and higher recurring revenue profile is shown on slide four. Today, forwarded revenues are split with approximately half derived from highly differentiated products businesses, helping customers harness the power of emerging technologies and embrace the energy transition. As a result, today roughly one-third of these revenues support customer investments in electrification and AI. Further, with the added benefit of diversification, approximately 60% of our product revenues have continued to grow despite select end-market slowing. Moving to the right side, the remaining 50% of our revenue includes approximately 600 million of recurring healthcare consumables, which are benefiting from the go-to-market changes we made last year and improved global healthcare markets, driving faster and more profitable growth in 2024 and beyond. It also includes approximately $1 billion in software revenues, which have grown high single-digit the last few years and will continue to be accretive to our growth and profitability. As our safety and productivity solutions across the enterprise continue to help solve customers' toughest challenges. We expect sustained outperformance going forward. Turn to slide five. The iOS segment is really a full manifestation of our strategic playbook. To evolve the company organically and inorganically, to reduce portfolio cyclicality, align investments to secular drivers, and increase through cycle core growth. With almost 2.8 billion of revenue, plan this year, iOS continues to build on its leadership positions in instrumentation, software, and data analytics, all benefiting from customer investments and key megatrends, keeping the world running safely, efficiently, and more sustainably. Over the past few years, we have expanded iOS's addressable market to $30 billion, adding companies that play in strong secular-driven markets, including the four bolt-ons last year. Within iOS are scalable software businesses, now over $800 million in revenue growing high single digit, helping customers streamline and digitize their workflows. Today, roughly one-third of this segment is now in recurring revenue models, and we have further built-in durability through the intentional diversification of end markets and customer use cases that we serve. As a result, Fluke has seen improved through-cycle resiliency with continued order and revenue growth despite contracting PMIs over the last 16 months. In facilities and asset lifecycle, new logo bookings have grown double digits the last few years, underpinning continued strong multi-year growth. And in environmental health and safety, we continue to accelerate innovation and geographic expansion, driving faster growth in this platform. As you can see from the chart, this has culminated in sustained strong performance at IOS, including over 700 basis points of adjusted operating margin expansion since 2019, providing an excellent blueprint for the future evolution of Fortis as we continue to execute our formula for value creation in AHS and PT. Turn to slide six. You can see how our portfolio is at the epicenter of the proliferation of electronics and sensors, enabling a more intelligent and sustainable future. Electronics is solving power efficiency challenges across new and diverse end markets, benefiting from growing demand for high performance computing systems, including academic and government institutions, defense agencies, energy companies, and the utility sector. These new investment cycles start with semiconductors, then shift to infrastructure, and finally the software and services. In addition to EA, the market leader for high-power electronic test solutions will drive faster through-cycle growth in precision technologies, increasing their exposure to energy storage, mobility, hydrogen, and renewable energy markets. EA is also benefiting from the rise in high-performance compute and deployment of AI in networks, which makes it an excellent complement to Tektronix. The transformation of the electrical grid is a long-term secular tailwind for both Faltrol and Fluke. Faltrol provides the world's energy grid with monitoring equipment and sensors to ensure the lights stay on, and customers are adding considerable capacity to support infrastructure investments and new sources of energy. Lastly, at Fluke, we are ensuring the power efficiency and reliability of these global infrastructure investments including tools to support the installation and maintenance of solar panels and the reliability and performance of EV storage equipment, including chargers and stations. Turning to slide seven, our increased innovation velocity is a direct result of our world-class business system and the work we've done to revamp our product development process to drive more consistent, differentiated results. For example, in the last year, our teams identified over $1 billion of new revenue opportunities through the dream stage of our lean portfolio management process. Leveraging benchmarking we did with other technology companies in our partnership with Pioneer Square Labs to incorporate best practices in early stage product development. As we prioritize new product development, we have reallocated roughly 25% of our R&D spend from the sustaining of legacy products to the funding of new product innovation. The Florida software system is improving our feature on time delivery as our operating companies are seeing a greater than 20% acceleration in software development time using GenAI, creating bandwidth for higher-value work and enabling faster innovation for our customers. FVF Lean tools are also driving continued adjusted gross margin and operating margin expansion and industry-leading working capital metrics. Over the last five years, we've expanded adjusted gross margins over 400 basis points, operating margins by more than 600 basis points, and reduce net working capital as a percent of sales by 550 basis points, with improvements in both our hardware and software business. In summary, FBS is fueling growth and innovation, driving differentiated operating performance, including higher free cash flow generation, our currency to further accelerate strategy and compound results through the four to fly wheel for value creation. I'll wrap up on slide A. We're off to a strong start to the year. A quarter of our success has been the groundwork we've laid over several years to create more durable growth in each of our strategic segments, including at iOS where we're seeing steady global demand for our products and technologies and continued high single-digit ARR growth. At PT, we knew coming into the year that the normalized demand in tectronics and sensing would result in declining core growth in the first half, lapping strong multi-year growth rates. In the quarter, we saw demand for electrification and AI hardware drive a return to a positive book to bill in Q1. At AHS, we are seeing continued momentum in growth and profitability, with continued consumables recovery and accretive software growth underpinning our outlook for the year. Turning to the right side, continued execution in 2024 sets us up well for the achievement of the long-term targets we laid out at Investor Day last May, driven by an acceleration of software and non-recurring products growth in 2025 underpinned by secular investment trends, continued strong margin expansion enabled by FBS-led innovation and operational improvement, and double-digit adjusted earnings and pre-cash flow growth consistent with our long-term track record since 2019. We remain focused on enhancing shareholder returns with ample firepower to fund attractive M&A opportunities that will continue to fuel the Florida formula for value creation. And with that, I'll turn it over to Chuck to take us through the details on the first quarter financials and updated outlook for the year.

Thanks, Jim, and hello, everyone. We're pleased with our Q1 performance, including 3% core growth, reflecting better than expected performance in all three segments. Total revenue growth of 4% included the benefits of acquisitions, partially offset by approximately one point of unfavorable FX. Highlights of our first quarter performance include record margins in the quarter, with 110 basis points of adjusted gross and operating margin expansion, reflecting outstanding operating performance. Adjusted earnings per share of 83 cents over the high end of our guidance, with adjusted earnings up 11% year over year. And free cash flow was 230 million, up 54% year over year, driven by strong execution across all three of our segments, and some favorable times. A trailing 12-month free cash flow is $1.33 billion, representing strong momentum towards our full-year guidance of $1.39 billion. Turning to slide 10 and the first quarter performance in each of our three segments, beginning with intelligent operating solutions. iOS core growth was 5% in Q1, with consistent mid-single-digit core growth across all three M&A contributed one point to total growth, partially offset by unfavorable FX. Adjusted operating margins expanded 160 basis points to 31.8%, driven by favorable price realization and volume increases across the segment. Additional highlights include stable growth at Fluke, driven by the benefits of innovation, customer adoption, and key growth vertical. Environmental health and safety had steady growth in the quarter with strong operating margin expansion enabled by pricing uptake and FBS-enabled efficiencies. Facility and asset life cycles continues its pace of double-digit SaaS growth, including multiple accruant cross-sell deals with Red Eye and service channel customers. Overall, iOS is benefiting from a strong innovation pipeline. with several new product launches in the first half ramping as we move through the year. Moving on to precision technologies, core revenue in the quarter was down 2%, driven by normalizing demand at Tektronix and Sensi. Total growth reflected the benefit of the EA acquisition, partially offset by FX headwinds and the divestiture of certain product lines of Inditech. We've completed our 100-day integration plan for EA, and we are more confident in the strategic value of the combined businesses, having identified significant opportunities in the sales funnel, some of which combine EA's power supply offering with Tektronix services to better serve customers. PT adjusted operating margins expanded 80 basis points to 24.4%, reflecting accretive EA margins and productivity initiatives. Additional color includes Tektronix declined mid-single-digit as expected, driven by normalizing demand in China and slower growth in the U.S. due to delayed customer RMD investments. Sensing Technologies was down mid-single-digit, with order trajectory improving as we move through the quarter, while utility and food and beverage markets remain strong. PacSci once again had double-digit growth in the quarter. Now on to advanced healthcare solutions. Q1 core growth was 6%, driven by improved market conditions and consumable growth. Adjusted operating margins expanded 200 basis points to 24.2%, driven by strong volume growth and price realization, more than offsetting FX headwinds. Additional highlights include ASP is benefiting from the North America channel transition completed last year. Further, as hospitals continue to focus on safety and compliance, and the increased need for energy efficiency, ASP is gaining share with their proprietary hydrogen gas plasma technology that consumes 70% less energy per year than steam sterilizers. Luke Health benefited from growth in biomedical quality assurance equipment, as well as supply chain and operational improvements. Our AHS software businesses continue their pace of double-digit SAS growth. Census is boosting sterile processing productivity with their next-gen AI squared instrument recovery platform with strong new logo bookings in the quarter. And new customer wins at probation were partially offset by lower year-over-year license revenue driven by a large customer order last year. Turning to slide 11, you can see total growth in the first quarter of 4% was driven by expansion in the core and positive M&A contributions. partially offset by an approximately one point of FX . By region, we have low single-digit core revenue growth in North America, with growth in all segments despite normalizing hardware product demand. Western Europe core revenue was up mid-single digit, driven by backlog conversions and secular investments supporting energy transition. Asia was up slightly, driven by low double-digit growth in India, partially offset by low single-digit decline in China, and growth in IOS and AHS was more than offset by expected slowing in PT. Turning now to slide 12 and our guidance for the second quarter and the full year. For the second quarter, we anticipate revenue growth of 2% to 3%, with core flat to 2%, driven by continued strength in IOS and AHS, partially offset by core mid-single-digit decline in PTs. consistent with our prior view of the first half performance. Adjusted operating profit margin is estimated at approximately 26.7% of 75 basis points year-over-year. Adjusted diluted EPS guidance of 90 to 93 cents, up 6 to 9%, and free cash flow of 270 mil, reflecting double-digit growth in the first half. For the full year, we continue to expect core growth of 2 to 4%. Total growth is now expected in the range of 4.5% to 6%, including an approximate $60 million FX headwind versus the prior guide and a partial MBITEC divestiture, reducing revenues by approximately $30 million. Adjusted operating profit is expected to increase 9% to 13%, with margins of 27% to 27.5%. We are raising adjusted diluted EPS guidance to $3.77 to $3.86 of 10% to 13% year over year to reflect the strength of the first quarter. Effective tax rate is expected to be in the range of 14% to 14.5% in line with the average of the last two years. Free cash flow is expected to be approximately $1.39 billion, representing 11% growth year over year and a 22% free cash flow margin. Before opening up for questions, I'll pass it back to Jim to provide some closing remarks.

Thanks, Chuck. I'll wrap it up on slide 13. With a strong start to the year and an enviable track record of improved through-cycle performance, our transformation execution and strategy to build a more durable company is playing out. The power of our strategy is reflected in the continued momentum of positive core growth over the last 14 consecutive quarters, even as demand slowed in select end markets. And the strength of our execution and dedication to FBS is reflected in 15 consecutive quarters of adjusted operating margin expansion delivering more value to customers. When taken together, we are confident in our raised outlook for the year, continuing our track record of compounding earnings and free cash flow growth double digits in 2024. By executing the Florida formula for value creation, we think the best is yet to come with an opportunity to roughly double our adjusted EPS and free cash flow over the next five years. With that, I'll turn it to Elena.

Thank you. Dennis, we'll now take our first question.

Your first question is from the line of Julian Mitchell with Barclays. Please go ahead.

Hi, good morning. Maybe just the first question around the precision tech revenue outlook. There's clearly some concerns from the commentary of one of your oscilloscope or instrument peers today. So I just wondered how you think about that precision tech revenue growth trajectory over the balance of the year and particularly in Q2. and maybe any broad color on how that product hardware orders, you know, and how those have been trending versus what you'd expected?

Yeah. Good morning, Julian. Thanks for the question. I would say a couple things. What we saw in the quarter was a book to bill. I'd start with the sort of high level. We saw a book to bill of about one, and we anticipate that book to bill uh as well in q2 so we're starting to see the orders come back um obviously shipments not not yet probably on a revenue basis probably pt's low you know lower q2 will probably be the low point we don't have a huge step up first half to second half the first half is really playing out the way we anticipated so in that sense We're seeing an order book building. We're seeing, you know, we said last call that we would start to see orders you know, start to move to growth at the tail end of the second quarter. Everything we've seen thus far would support that sort of trajectory. So, you know, we've seen some green shoots in some places. I can talk more about that. Things like at Tektronix, where our Keithley business, which has tended to lead the effort on the return and was the first to go down, is now going to be high single digits revenue growth in the first half. So we're starting to see the things that would certainly point to that trajectory change. I'll stop there and, you know, see if there's a follow-up.

Thanks very much. And I guess sort of broadly on the guidance adjustments, you know, you laid out your segment sort of core growth guides for the year last quarter. Just wondered if any of those had changed this time. And just trying to understand sort of in the P&L guide, the adjustment to the interest expense guidelines, guide? Is that sort of a redeployment of divestment proceeds or something? Just trying to understand that sort of net income raise with adjusted EBIT guide, slight reduction.

Yeah, relative to the revenue guide, obviously what we saw in the quarter, a little bit stronger than we anticipated for Q1. We feel good about that. On the backs of health strengthening, we've had several good quarters now at health. That's a mid-single digit for the year, and we feel good about that. IOS Similarly, good strength there. We stood out in a number of places. Fluke has been very resilient, as we talked about. PT's down a little bit, so we're probably more down to the flattish, up slightly. So we'll be able to, with the other two segments being better. And I think the other thing, just on the absolute terms, is we absorbed, as we said, about $60 million worth of FX as well. So important to just kind of look at the total revenue growth here as the ability to absorb that, I think, really speaks to the strength that we've had. And certainly, as you see that in the cube, even with the weaker PT, we're up 80 basis points in margin expansion. So I think the power, we're certainly seeing good growth in the two segments. And we're managing exceptionally well the trajectory of PT right now with strong margin expansion. And with things that are occurring that are going to give us confidence that the second half improves a little bit. We don't need a big step up at PT in the second half in the total dollars perspective. And what we've seen thus far supports that. And I'll let Chuck talk a little bit about some of the other details.

Julian, the interest expense came down primarily because since the last time we guided, we went out and put a Euro bond in place. And so that came in at a better price. you know, like 3.7% coupon. So that's the major change. That roughly offsets the impact, OP impact of the FX.

And that's, just to put that in dollar terms, that's about $15 million of lower interest expense versus our previous forecast. About two of that was reflected in first quarter. And then to Chuck's point about the $15 million roughly of OP hits that we then have from FX. So that's really the offset.

Great. Thank you. Thanks, Julie.

Your next question is from the line of Jeff Sprigg with Vertical Research Partners. Please go ahead.

Hello. Good day, everyone. Hi, Jeff. Hey, how's it going? Hey, just a couple things. Just on the comment on the FAL businesses, I think you said group at single digit and kind of normalizing it. Is that basically the trajectory you're expecting then for kind of the balance of the year and you know, in that group of companies sort of mid single digit growth?

No, Jeff, we'll get, we'll get that. We'll be moving back to high single. We had a really big comp at Gordian in the first quarter. I think they were plus 25% a year ago. So, so ARR growth for that was, was about high single digits is roughly 9%. So good ARR growth that supports sort of high single digit growth for the year.

And then just on EA's performance actually in the quarter, right, the M&A impact I think is, you know, is influenced by the divestiture, right? But so I'm just trying to kind of understand how EA actually revenues performed in the quarter. You didn't own it last year, but maybe give us some sense of kind of what the growth trajectory was there.

yeah jeff um a couple of things fx uh it pushed ea's revenue down a couple million and divestiture about five million uh you know with the agreement to uh separate some of the invatec business shows up on that line so um i think he is you know impacted by those two things down about seven

So just the dollars from EA, obviously, were higher than the overall M&A dollars in aggregate for PT. So EA is roughly $35 million, offset by about $5 million for the tech.

Yeah. Yeah. Great. All right. Thank you.

Thanks, John. Your next question is from the line of Jamie Cook with Truist Securities. Please go ahead.

Hi, good morning. Thanks for the question. Just to follow up on the PT revenue guide, I know last quarter you specifically guided to the 2.42 to 2.465 billion. I'm wondering, you know, on slide four, you implied PT's 2.3 billion. So is that the actual revenue guide? And can you comment, given the lower revenue guides, how you're thinking about margins relative to your prior guidance? And then my last question is, Just on the M&A front, I think before you were saying top line, M&A would add, you'd get four points. Now you're saying three points. Is that just FX and Invitech? Thank you.

Yeah, so Jamie, just on the prior guide, yeah, so $30 million has come out of the PT revenues from Invitech. And then to your point, there's probably another 2% that's come out due to FX. Some of that is obviously for EA, as well as the core business. So that 2.3 is the midpoint of the PT revenue guide, as you pointed out.

Thanks. And then your margins on PT, can you give us an update there, given the lower RIP?

Yeah, no change to the expectation of margins for PT.

Yeah, Jamie, I think that's a reflection of Certainly, as we said, not a lot of, no real change here to our, you know, not much change in the outlook relative to that. The first half playing out pretty much like we saw. We saw we've seen some business move move into the second quarter or second half excuse me but uh but we've been able to manage the margin front exceptionally well based on you know a couple of scenarios that we thought the year would play out so number of places in pt that we've got strength at emc we talked about utilities our food and beverage businesses so we've got some good strength there in a number of places and obviously that's uh that's helpful to the margin front as well okay thank you thank you

Your next question is from the line of Scott Davis with Mellius Research. Please go ahead.

Scott? Hey, Jim and Chuck and Elena. A couple questions. So first, just if we want to start with M&A and kind of mark-to-market your pipeline, is there – should we or could we assume that the EA type of deal is – and valuation range is kind of the type of stuff that you guys are looking at in 24? I'm sure it's a wide range of properties, but trying to just narrow that down a little bit and perhaps just a little bit of a mark to market on how that pipeline looks.

Yeah, sure. I would say number one is there's probably a wide variation of valuations out there right now. You haven't seen a lot of things trade, but there have been fully valued trades that have gone on relative to various things in the marketplace, both things we'd be interested in, but also things that just have occurred I would certainly say that we're obviously going to stay very disciplined. I think what we tried to highlight on the iOS slide and the deck was the benefits of M&A and how that really has created that really durable segment with both from a standpoint of revenue growth, but also really strong profitability. And we're going to look for those kinds of things. I think the four deals that we did, the bolt-ons we did in the fourth quarter relative to iOS, EA is an example. Those are more than likely, but there's a wide spread of things we did, right? We did some software, we did some data, we did some hardware businesses. The funnel looks that way, but we'll remain disciplined right now around valuation. And I think we're We're well served to sort of continue to be active, but at the same time be selective around the opportunities. So I think we can get some things done for sure. But by the same token, I think we're going to remain disciplined. And we like the, well, the revenue for EAs come down a little bit for the year. We really feel good about that deal. We're still going to, the accretion on that's still going to be the same as it was relative to our original thought process. So it's still going to be a very creative deal and a really good deal into 25. So those are the kinds, certainly the kinds of things we'd be active in for sure.

Okay, helpful. And then just to go back to the guide, and honestly, I never ask about a specific guide in this way, but If you look at your comps, if you look at the commentary or just think about what you've said over the last hour and then think about where ASP is at, I would think that that guide for the rest of the year seems a bit on the conservative side. Would you characterize that as perhaps just being a little bit cautious on China or just general global macro? Or am I in the right ballpark that maybe this is, you know, this is you guys just being a little bit conservative and, you know, if nothing changes, perhaps you'd probably at the higher end of that, if not higher.

Well, you know, we just beat our first quarter, guys. So that's the first thing. And there was an operational beat there of about a penny. And, you know, they're really two cents. When you look at we offset the FX. and then a penny of corporate costs. So I think it was a good start, a very good start to the year. I said that in our prepared remarks. I think if you said, hey, Jim, would you like to get out of the gate at 110 basis points of gross margin and operating margin expansion? Would you like to drive EPS at 11%? I'd say that's a really good start. And I'd say our full year looks a lot like that, too. So we like the guy. And what we tried to highlight is, yeah, there is some uncertainty. I would tell you, I was with the China team a week ago, and they're feeling better about where they were versus call it eight weeks ago when I was with them the first time in the year. They were much more optimistic. You know, we talked to some of the quality productive forces investments that China's talking about. So we still have a, you know, we still sit right now in our guide, embedded in our guide is China being down. But, you know, at the same time, there's probably some opportunity of some of the Chinese government active investments occur because those are in places that are very subsequent important to us. Our other high growth markets are already growing. Interestingly enough, our other high growth markets, which are bigger than China. are growing mid single digit probably some opportunity there so it's still early and certainly there's a lot of things out there that you could say could go another way but boy have we we really got out of the gate really well and feel really good about it and you know we're working we'll work every day to make it better for sure let's see where we get through in the second quarter But, yeah, there's certainly some opportunities. We tried to highlight, like, energy transition AI. The percent in product revenue is, you know, in some places where there's certainly opportunity for us to continue to do well.

Okay. Best of luck, Jim. Thank you for the color. Thanks, Scott. Great talking to you.

Your next question is from the line of Dean Dre with RBC Capital Markets. Please go ahead.

Thank you. Good day, everyone. Hi, Dean. Hey, just following up there, I heard yet another AI reference, a lot of references in the prepared remarks. So where would you rank order? You don't have to go through them all, but what are the most important exposures where you have near-term, real-time leverage to the AI buildup?

Well, yeah, I think where we showed on the slide in high-performance compute and in data center expansion, the chips that are going to go into data centers, as an example, next generation, we got an eight-digit order from Keithley as an example for that in the quarter that will ship later in the year with some semiconductor manufacturers in Taiwan. So I would say, first and foremost, we're seeing it on the chip build-out. We're certainly seeing that. We're certainly seeing it again with utility infrastructure and grid infrastructure growth at Qualtrol and Fluke. Those would certainly stand out as direct investments relative to the preparation of AI in the future of the world. And then on the flip side, we're starting to launch AI solutions. Dean, so when we think about what we're doing at Census, Probation, Gordian, we just announced the Gordian platform, which allows for us to integrate all of our data and solutions together. So we'll start to see some of those in our revenue bases selling AI solutions as well. So on the front end, we're seeing the early stages of that investment. And primarily in PT, we'll start to see that play out. We're starting to see that play out in Keithley. We'll start to see that play out at Tech in the second half. And then obviously with Qualtrol and Fluke, certainly as those data centers and things get built, we're going to certainly participate in that relative to both the electrical grid infrastructure needed to support that, as well as the tools needed to sort of build those data centers and and maintain them as well.

Great. Those are real specific data points, so I appreciate your sharing. And then as a follow-up, and I might have missed it in your answer to Julian's question, but the weakness in Tektronix you referenced, what was the delayed customer R&D in the U.S.? Is it product cycle related? Is there anything related to Worries about the election that's starting to read through some hesitation and orders.

Yeah, you know, Dean, I think, well, you know, the first half is going to play out at Tech close to almost identically to exact, you know, how we thought it would play out. So I don't want to I don't want to I want I should say that first. I would certainly what we see is some delay on what I would call mil gov investments that we typically start to see early in the year. They're still in the funnel. They're now showing up maybe later in the year. um that's both you know direct government customers as well as some of the primes so that's a that's a that's a movement of that um the good news on that is we're seeing we're seeing them in the funnel and they're growing in the funnel so you know and we're all we're starting to see some of those orders hence the book to bill is over one so so we're certainly starting to see those things Generally, we would have been able to convert them to revenue maybe a little sooner, but because the funnels moved and because some of those things have come a little bit later in the end of the second quarter, then that really presents it for more of a second half opportunity. At this point, we wouldn't see those canceled. And I don't think we tie those to the election. I think we probably tie that more to just investment decisions that people have made with some uncertainty as the year started out, maybe delaying some of those investments. As you well know, sometimes those investments can get delayed for a quarter or two. But ultimately, I think if you said, are our customer base or the leading technology companies in the world, are they going to not invest in technology and innovation? I think it's a good bet they're going to do that.

Thank you.

Thank you.

Your next question is from the line of Steve Tusa with JP Morgan. Please go ahead.

Hey, guys. How are you? Good, Steve. Can you just delve a little bit more into Tektronix and the book-to-bill there? I know you guys mentioned the hardware in total book-to-bills, but maybe – Just give us an update on, you know, maybe where the, I guess, excess backlog, if that's even a thing still, kind of where the excess backlog sits, and then Tektronix book to bill, and then what you'd expect for growth, you know, for the rest of the year there at this stage.

Yeah, so Steve, Tektronix book to bill was 0.95 in the quarter. So for PT, sensing and tech combined was 1.0, and for hardware products overall was 1.0. And then we talked about Tektronix revenue being down mid-single digit in the quarter. Our expectation would be that Tektronix revenue for the year will be down mid-single digit, but that's always been reflected in our outlook for the year.

Okay, so no change there. And then maybe just sticking on book-to-bill, I think it's a little bit hard to calibrate these EA revenues, I guess. We had expected something a little bit more than where it was, and I'm not sure we've quite bridged the gap on that, but What's, I guess, the book to build for that business just to kind of help us understand what kind of run rate they're going at on the EA side, that new acquisition?

Yes. I'll just really quick on the numbers for EA, and then I'll let Jim comment on the acquisition overall. We had expected revenues for EA for the year to be $190, $195. That's come down. It's probably closer to 180 to 185. Part of that is foreign exchange, and part of that is some push out of larger projects in the year. Specifically in Q1, right, the revenue, we talked about the 35 million. Again, we had planned for something in the low 40s for the quarter. There is a seasonal component to that. And maybe, Jim, you want to talk a little bit more about, you know, certainly we've had the 100-day you know, review and get some color on the acquisition?

Yeah, Steve, I would say a couple things. One, as we said in the prepared remarks, one of the things that's really evident and certainly have been around the world, not only with the U.S. view of this, but China, India, a number of other places, we clearly see a great product that customers really like. So I think, you know, as we start out, we really affirm the fact that the product and the technology is really, really strong. As Elena said, a little bit less revenue in the first quarter. I mentioned this in a couple of places in the first quarter that getting the backlog out in that business has been a little bit more challenging than anticipated in terms of that. So book to bill, I think, was over one in the first quarter. But our opportunity to sort of continue to work FBS and make the factory a little bit more flexible is certainly work we're in the process of doing. We've come down a little bit on what we think the revenue will be for the year. We still think the accretion is the same, so we're still going to deliver from an earnings perspective in a very good place. And we feel good about the business. So mobility is a little bit slower. We anticipated that mobility would be slow this year. That was certainly in our view. And so that's played out. But the data center opportunities are very good. And quite frankly, the funnel with Tektronix is building well. So we said we were going to build that funnel in the first half. We would start to see that revenue in the second half. And we feel good about the funnel build thus far. We mentioned one of the opportunities on the prepared remarks around how now we're linking their sales with our services with a large-scale order that we'll get here shortly. We feel really good about the synergy opportunity as well. So maybe taking a little longer to get started simply because of maybe some of the things in the marketplace, but feel really good about it right now. And we're in a good position for that business as it stands today. Finish the year and move into 25.

And where's the excess backlog stand today? That's my last one. Thanks.

Yeah, I'm not sure what that number is, but it's probably in the, you know, I guess in the, you know, 10 million ish range or something like that.

Okay. So normalized. All right. Thank you.

Your next question is from the line of Andy Kaplowitz with Citigroup. Please go ahead.

Good afternoon, everyone. Jim, just in AHS, I know you did well in the quarter, and maybe you talked about some potential upside there. You did mention maybe some probation headwinds still. Is there anything that's still holding you back at all from even better performance with the understanding that it was quite good in the quarter?

Yeah, I mean, we're really happy about the quarter. And, you know, if you think about the number of quarters here, obviously we had the transition in North America last year. But if you look at what we've done, multi-year and high-growth markets, exceptionally well. The strategic nature of what we wanted to do is really playing out well. So we feel very good about where ASP is at. We feel good about the broader segment. Relative to probation, in the first half of last year, we had a large-scale licensed software business order that we're going to work through in the first and second quarter. That business will still grow well this year. SAS is growing double-digit in the business, so we really feel good about where probation is. But we do have to work through that large licensed customer that plays out a little bit more of a one-time opportunity. The good news about that is it's a very large licensed deal that we're going to be able to convert to SAS. over the next several years um so uh so in terms of opportunity there's still great opportunity of probation so so we feel good about where the segments at should you know we mentioned in some of the prepared remarks about some of the what things we're seeing around our plasma strategy and the efficiency and and efficacy of of how we do hydrogen peroxide and all that so the product and innovation wheel that we started to talk about steam sterilization bi bi uh biological indicators number of the things that we're really we're trying to work through over the last couple of years we're starting to see the innovations why we'll get get started at asp and so we uh we feel good about where the segment's at and where it's going to go through the year great and then i know you reiterated it but like when i think about the 450 for next year like

There's a fair amount of moving pieces nowadays, you know, FX, 7A, as we talked about. You know, so what's your confidence level, Jim, at this point? And what do you need to do to sort of get there?

Well, I think number one, I think the first quarter affirms, you know, what we're able to do, right? With the growth rate that we have in the quarter, we still throw, you know, strong EPS growth and strong free cash flow growth. Our guide demonstrates that. So we get to the end of the year. double-digit earnings growth, double-digit free cash flow growth, really strong operating margin expansion, a great setup for, you know, on a little bit, you know, on a not mid-single-digit growth yet. So as we move into mid-single-digit growth and our track record of earnings growth, free cash flow growth, and margin expansion, I think those are the things that give us confidence. Now, again, it's April of 24, and we're talking about a 2025, I guess it's May, But at the end of the day, or we'll be May here shortly. So I think at the end of the day, we're in a very good place to talk about 25. But obviously, we're very focused on 24 here. So and I think what we'll see through the quarters is the demonstration of that, you know, the kinds of numbers that I think really support our multi-year past, which has been very good, and also our multi-year future.

Appreciate the color.

Your next question is from the line of Nigel Coe with Wolf Research. Please go ahead.

Hi, good morning, everyone. Good afternoon, even. So, hey, guys. I hate to, like, retread. You know, ground has been trodden on already. But, Elena, you mentioned, you know, tech down mid-single digits. That was in the plan from day one. Down mid-signals in one queue. I'm just curious why things wouldn't get better in the second half of the year, just given the comps. And therefore, my question really is, in the second quarter, is tech down sort of high singles, maybe a bit worse than that, and PT down maybe mid-singles? Just thinking about how we should think about the way that this comes through the year.

Yes, that's right, Nigel. And we said in our prepared remarks that we expected PT to be down mid-single digit for the quarter. That would include tech to be down slightly more than that. So probably in that mid to high single-digit range for tech in Q2.

Okay. And then I would say, you know, your point around inflecting, getting a little bit better, that's the book to build that we talked about that continues to get good. Keithley's a good leading indicator. The PMIs are a good leading indicator. Our sales funders are a good leading indicator. And so we'll step through a little bit better performance as we get through the second half.

I think the other thing to consider is that tech did continue to grow revenues throughout all of last year.

Right. Okay. That's clear. And then the pricing of PT, I think, was about one change, one percent or so, for the quarter. It's been a bit of a decel versus the run rate. Is there a risk that that could go negative or flatten out completely, you know, given the weakness in volumes?

Nigel, this is Chuck. I wouldn't expect that to be the case. I think there's a little bit of timing here, but as we move through the year, we expect enough

probably in pt i think one to two percent um and and you know gradually going up as we we move through the quarters and nigel just to add you know price cost is in a good place so you know when you look at the margin expansion that we did in pt in the first quarter um and you know the anticipated margin expansion through the year we probably get a little bit less price when the top line's like that you know it's not unnatural to maybe not maybe give a little bit up but but the price costs stance is really good. So we're in a good position to be able to do that and still grow margins.

That's great. I'm sorry, a quick one on EA. The 1Q seasonality is for kind of the full year. Is this a business that typically has a week 1Q and then a back offloading in the plan?

Yeah, you know, we're new to it, so we've got some multi-year history, but, you know, you have the numbers. You don't always have the history. It's certainly a business that has historically been back in the weed, that's for sure. And, you know, so that, you know, private companies sometimes don't necessarily push everything until, you know, make sure the end of the year. So that's not unusual. And, you know, we'll get the cadence here improved every quarter as we work through the integration.

Great. Thanks, Jim.

Your next question is from the line of Joe O'Day with Wells Fargo. Please go ahead. Joe, your line's open. Please go ahead.

Hi. Thank you for taking my questions. I wanted to start on the 60% of revenue you talked about growing through the industrial slowdown and the PMI, I think primarily related to fluke. But the question really around the ability to grow through PMI slowing and to what degree you attribute that to outgrowing end markets or or other factors that were at play for Fluke to post more kind of stable trends through some of those headwinds?

Well, I definitely think we're performing the market. And I think Fluke's done a great job when you look at a number of things. Obviously, you know, an outstanding global franchise, the presence in pretty much every country in the world. Team does a great job on the innovation front. We had four new product launches just in the first quarter alone. Our E-Mate business is doing really well. So our fluke reliability growth, E-Mate was up 17% in the quarter. So just as we look over the last several quarters, our ability to outgrow PMIs has really been the long-term work we've done to make the business more durable. And that really is an end market story. Our solar and EV bit product lines grew over 30%. So it's really been redirecting. We talked about it in one of the prepared slides about our lean portfolio management or our product development process and how we're really designating those R&D investments towards more secular drivers. Fluke is certainly a good example of that. in terms of what they've been trying to do over the last few years and the two bolt-on deals that they did in the fall, which really has supported and helped around those same secular drivers. So I think we're in a really good position in the business because we've been intentional about the innovation investments. We've been intentional about our commercial investments, and that's playing out. And certainly, share is always a tough thing because most of their competitors are regional companies in various countries. So we don't have great numbers on market share. But as we look with our, as you know, a good chunk of that business is with channels. And our channel partners are certainly excited about our partnership and what we can do together. That's usually a good sign of how we're performing.

Thank you. And then I also wanted to ask on ASP. I think consumables in North America was up 7% in the fourth quarter. Just looking for what you saw in the first quarter and as you're sort of on the other side of the transition through go-to-market, how that's coming together to drive some of the consumables demand.

Yeah, for ASP specifically in Q1, I think we were up 11% in Q1, just pretty much right where we expected to be here. Now, as we move through the year, because that transition happened over the year, that's going to moderate some of that, but right on track and delivering the growth we expected, as well as, importantly, the margin expansion.

Got it. Thank you.

Thank you.

Your next question is from the line of Joe Giordano with TD Cowan. Please go ahead.

Joe Giordano Hi, Joe. Joe Giordano Hey, guys. Hey, thanks for taking my questions. On fluke, obviously that business has been remarkably resilient. Is that business, like you mentioned solar, is there a risk on a, you know, an election risk there if policy changes shift or is that just, can that just be offset by more positive trends within data center electrification, things like that? kind of handicap that into an election if the administration changes?

Well, I think number one is we're more tied to the maintenance of those than we are to the construction of them. So in many respects, it's what's out there today. And so that's number one. Number two is I think when you look around the world, you certainly take a global view of solar too. And and you have a very good global opportunity i would say the same thing about electrification so and and it's really more the maintenance of those systems than the construction of those statements uh those situations so much more tied to the maintenance you know the field maintenance of of all of that. So I would say we feel very good about the opportunity. And I think if you think longer term over the next few years, you'd probably bet on those things continuing to be pretty good. So yeah, I think we're much more tied to the, I think the bottom line is we're much more tied to the maintenance of those, the field maintenance of all of that.

Okay. And then just curious with the numbers on on EA and lowering the top line a little bit. Is that business still like 40 plus EBITDA margins at the lower revenue rate? Yeah.

Yes. Came out very strong and actually it's also why we're seeing that margin expansion of PT. That's part of the story. Great.

Thanks, guys. Thanks, Jeff.

Today's final question will come from the line of Andrew Biscaglia with BNP Paribas. Please go ahead.

Hey, guys. So, you know, you talked to, you know, gave some good color on PT getting through the rest of the year. You know, and your margins really, your margin guidance really implies quite a step up in the back half. You know, what are some other contributors specifically with an AHS that might help that? And then specifically in iOS, your incrementals have been outstanding, but what's like a normalized incremental as we get through 2024.

Andrew, I think a couple of things to think about. We generally think about incrementals around 40% in the base case, so that's probably a good place to start. When you're talking about the step up as we move through the year, we've got the top line with 48% of the revenue in the first half and 52% in the second half. So there's always this upward you know, trajectory in terms of seasonality from the first half to the second half. And that drives through, you know, more volume. And that's the biggest key to expanding the margins. When you look year over year, you know, the 100 basis points that we saw in Q1, you know, it steps up through the year because of volume and normal seasonality. We guided to, you know, 75 basis points for the year. And I think, or more, with the productivity initiatives, health is off to a great start with 200 basis points. So we've got a lot of things going the right way, but it's really the volume flowing through those things.

Yeah, okay. And same with, you know, just touching on AHF, you know, the distributor transition is definitely helping you guys. Can you talk a little bit more about, you know, that business as we progress through the year? Yeah, I think with the way that your incrementals have been strong there, can you talk a little bit more about how that continues or sustainability there?

We've got for healthcare, keep in mind it's early in the year, but 125 basis points for the year. But in Q1, you're seeing the full benefit show up with the dealer transition here in Q1. If you remember Q4 last year, it also saw the full benefit. And as we move through the year, there's going to be a little bit of stuff that we're getting into tougher margin expansion. But we expect to be over the 125 margin expansion for the year at AHS. Very pleased with another strong quarter of really strong margin expansion and growth here. We expect to continue that through the quarter. Or through the years.

All right. All right. Thanks, Chuck.

This concludes the question-and-answer session. I will now turn the call back over to Jim Leeko for closing remarks.

Well, thanks, everybody, for the opportunity to spend some time today. We, hopefully, you hear from us, feel really good about the first quarter. We feel really good about the full year. Obviously, some puts and takes relative to everything, but the guide holds and it is raised. And so we feel operationally we're executing very well. From a margin expansion, from an EPS perspective, free cash flow, we're executing really well. We love the fact that the trajectory on health now after several quarters is in such a good position. And we've got a number of opportunities here that are really playing out. We're excited about. So hopefully that comes through. We look forward to the follow-up calls. I know our team will be available and we'll see you on the road here shortly. Thanks, everyone.

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