Fortive Corporation

My name is Brock and I'll be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fordham Corporation's third 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 the star then the number one on your telephone keypad. If you would like to withdraw your question, please press the star key, then the number two. I would now like to turn the call over to Ms. Elena Rosman, Vice President of Investor Relations. Ms. Rosman, you may begin.

Thank you, Brock, and thank you, everyone, for joining us on today's call. With us today are Jim Liko, our President and Chief Executive Officer, and Shaka 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 fordiv.com. Our statements on period-to-period increases or decreases refer to year-over-year comparisons unless otherwise specified. During the call, we will make forward-looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks, and actual results might differ materially from any forward-looking statements 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 31, 2023, and quarterly report on Form 10-Q for the quarter ended September 27, 2024. These forward-looking statements speak only as of the date that they are made, and we do not assume an obligation to update any forward-looking statements. With that, I'd like to turn the call over to Jim.

Thanks, Elena. Hello, everyone, and thank you for joining us. I'll begin on slide three. Our third quarter results showcase strong execution across our businesses, allowing us to deliver earnings and free cash flow at the high end of our guidance with 14% adjusted EPS and 12% free cash flow growth on 3% revenue growth. Our profitable growth reflects our dedication to building a high-quality portfolio, innovative new products delivering more value to customers, and our dedication to the forwarded business system and culture of continuous improvement. Our leadership positions across durable growth markets are reflected in upside performance in advanced healthcare solutions and continued growth in intelligent operating solutions. We are pleased with the positive momentum and double-digit orders growth at Precision Technologies. Our updated outlook continues our track record of compounding earnings and free cash flow growth by double digits in 2024, while maintaining a balanced perspective on our end markets as stabilizing demand trends drive sequential improvement as we move through the remainder of the year. Looking forward to 2025, we are poised to accelerate our strategy and ensure consistent value creation as we progress toward the spinoff of the precision technology segment. The separation remains on track, and as previously disclosed, we accelerated the pace of share repurchases in the third quarter, reflecting our commitment to value-enhancing capital deployment. So with that, let's take a closer look at our third quarter and year-to-date results on slide four and give you some color on what we're seeing in our businesses. Strong operational execution contributed to record third quarter adjusted gross and operating margins with 60% incrementals in the third quarter on 1% core growth. These results extend our strong year-to-date operating performance with adjusted EPS up 11% and free cash flow up 13%. Turning to what we are seeing across our businesses in the quarter, our software businesses once again posted high single-digit ARR growth. Hardware orders returned to growth up high single-digit with strong contributions from Fluke and Tektronix. While we continue to leverage FBS to mature our supply chain and increase production capacity to support accelerated demand, at Qualitro and PacSci, we shifted approximately $15 million in shipments out of the quarter. We also saw customers delay spending, including select Gordian State and local customers, navigating budget and macro uncertainty. Lastly, consistent with our intent to deploy the majority of our free cash flow to share repurchases, Between now and the completion of the SPIN, we bought back approximately 4 million shares in the quarter, bringing the year-to-date total to approximately 6 million. Turning to slide five, I will provide more detail on our segment performance and expectations for the remainder of the year, starting with IOS and AHS. On a combined basis, revenues grew 4%, with adjusted operating margins up 130 basis points to over 30%, representing another quarter of consistent mid-single-digit growth and robust margin expansion. Moving to the right, Intelligent Operating Solutions expanded adjusted operating margins 50 basis points on 3% revenue growth, approximately 2% core. Acquisitions and FX were both favorable. Additional highlights include, Fluke revenue was up low single-digit in the quarter, driven by new product innovations and continued success of recent bolt-on acquisitions partially offset by customer shipment delays. Leveraging FBS innovation tools, Fluke launched five major new products in September, a record month for MPIs, extending their leadership position in solar and energy storage tools. Orzit Fluke grew up high single-digit, with improving trends in most regions. Segment ARR growth was high single-digit, driven by mid-teens growth at EMA, as well as traction on upsell and cross-sell revenues in FAFSA. driving an acceleration in SaaS growth and meaningful improvements in net dollar retention. For example, the Accruant and Red Eye product integration teams are accelerating customer transitions to our cloud-based engineering document management solution. Val is also seeing good traction on the recently launched Gordian Cloud platform, driving new logo velocity in K-12 and higher ed growth markets. For the full year, we expect iOS to deliver mid- to single-digit core growth, with approximately 100 basis points of adjusted operating margin expansion. Advanced healthcare solutions expanded adjusted operating margins by over 300 basis points on 8% revenue growth or 9% core, partially offset by unfavorable effects. Key growth drivers include double-digit consumables growth, as expected. We had upside from strong capital and equipment sales at ASP and Fluke Health, with share gains in select markets. and almost 20% SAS growth driven by probation. We also had several examples of how our increased innovation velocity is contributing to core growth with a pipeline of new products, including ASP's release of their new Ultra-GI cycle designed to reprocess duodenoscopes using hydrogen peroxide gas plasma sterilization, which significantly improves the safety of patients and technicians, as well as the environment. Ultra GI Cycle was developed in partnership with Pentax Medical and will be ramping sales in Q4. ASP is also expanding the launch of its steam monitoring biological indicator, making it now available in over 30 countries. Looking ahead, Provation just launched the next phase of Apex Insights, their proprietary data analytics tool that features real-time data visualization to drive informed decision making and boost provider productivity. Based on the strength of their year-to-date execution, we now expect AHS to grow mid to high single digits and expand margins by over 200 basis points for the full year. Turning to the precision technologies on slide six. Revenue is flat in the quarter, with a core decline of almost 4%. Acquisitions net of divestitures contributed over three points to growth. Adjusted operating margins were up 70 basis points year-over-year to 26.4%, with lower core volumes more than offset by productivity benefits and accretive M&A. Core revenues at Tektronix were down high single digit, slightly better than expected. However, orders were up high single digit after several quarters of decline. Recovery is being led by investments supporting AI applications, particularly from customers like NVIDIA and TSMC. Tektronix is also using FBS innovation tools to expand its addressable market. adding complementary performance solutions to their best-in-class electronic tested measurement suite, serving their fastest-growing markets. Next month at Electronica, TEC will launch a first-of-its-kind oscilloscope probing technology to enable next-generation power application. And EA will release an industry-first triple-channel bidirectional power supply, supporting new markets with higher test capacity, density, and efficiencies. We had double-digit growth in Qualtrough and PacSci EMC, despite some shipment delays I previously mentioned. Customers are contained to ramp grid capacity to support the demands for electricity and new sources of energy. And rising defense spending globally in advanced systems development drove another quarter of robust demand at PacSci. Overall, sensing technologies revenues declined low single-digit, however, had good orders growth as demand in certain industrial markets stabilized. As a reminder, we expect PT revenue to be down low single digit on a core basis for the full year, with adjusted operating margins approximately flat. Moving to the right-hand side of the slide, you can see the precision technologies orders and revenue trends since 2020, which historically were highly correlated. This chart reflects the divergence we have experienced the last three years as orders outpaced revenues post-pandemic. With bookings at record levels, we began to burn through excess backlog in late 2022 as order rates declined. Since then, revenue has been normalizing to orders and stabilizing demand trends overall are driving a return of orders growth in Q3 and Q4 2024, positioning PT for a gradual recovery in the year ahead. Moving to slide seven and a look at the regions. We saw continued strength in select end markets and stabilizing market conditions broadly. driving an improvement in order rates, as shown in our major regions. For example, at Flu, September POS was positive in all regions, as daily run rates in U.S. and China have been trending upwards all year, and rates in Europe started to stabilize. Regional revenue growth in the quarter continues to be driven by our recurring software services and consumables businesses in North America, as well as double-digit growth in Paxai. We saw sequential improvement in Western Europe, partially driven by easier industrial comps and strong growth at ASP, as sales investments in new products in select markets grow share gains. Growth in Asia continues to be impacted by weak demand in China. DOS remains stable as customers and partners hold out investment decisions and inventory replenishment. The rest of Asia accelerated to high single-digit growth in the quarter, driven by recovery and semiconductor investments benefiting PT, and India continued to benefit from double-digit growth in iOS and healthcare. With that, I'll turn it over to Chuck to talk through our updated fourth quarter and full-year guidance.