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.