Fortive Corporation — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
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.
Thank you, Dennis, and thank you, everyone, for joining us on today's call. With us today are Jim Lico, our President and Chief Executive Officer; and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer.
Thanks, Elena. Hello, everyone, and thank you for joining us. I'll begin on Slide 3. 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 health care, is delivering more value for customers and more durable growth for Fortive.
Thanks, Jim, and hello, everyone. We're pleased with our Q1 performance, including 3% core growth, reflecting better-than-expected performance in all 3 segments. Total revenue growth of 4% included the benefits of acquisitions, partially offset by approximately 1 point of unfavorable FX.
Thanks, Chuck. I'll wrap it up on Slide 13. The 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. However, 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.
Thank you. Dennis, we'll now take our first question.
Your first question is from the line of Julian Mitchell with Barclays.
Maybe just a 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're thinking 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 and how those have been trending versus what you'd expected?
Yes. Julian, thanks for the question. I would say a couple of things. What we saw in the quarter was a book to bill -- I'd start with the sort of high-level. We saw book to bill of about 1, and we anticipate that book to bill as well in Q2. So we're starting to see the orders come back. Obviously, shipments, not yet. Probably on a revenue basis, probably PT is lower, Q2 will probably be the low point.
And I guess, sort of broadly on the guidance adjustments, you'd laid out your segment sort of core growth guide for the year last quarter. Just wondering 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 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?
Yes. 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 is down a little bit.
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 better, like 3.7% coupon. So that's the major change. That roughly offsets the impact -- OP impact of the FX.
And just to put that in dollar terms, that's about $15 million of lower interest expense versus our previous forecast. About $2 million of that was reflected in first quarter. And then to Chuck's point, about the $50 million roughly of OP hit that we do have from FX. So that's really the offset.
Your next question is from the line of Jeff Sprague with Vertical Research Partners.
Just a couple of things. Just on the comment on the FAL businesses, this grew mid-single digit and kind of normalizing. Is that basically the trajectory you're expecting then for kind of the balance of the year in that group of companies sort of mid-single-digit growth?
No, Jeff, 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 ARR growth for that was about high single digits, it was 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 influenced by the divestiture, right? But so 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?
Yes, Jeff, a couple of things. FX, it pushed EA's revenue down a couple of million. And then divestiture, about $5 million, with the agreement to separate some of the Invetech business that shows up on that line. So I think he is impacted by those 2 things, down about $7 million.
So Jeff, 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 [ worth ] of tax.
Your next question is from the line of Jamie Cook with Truist Securities.
Just a follow-up on the PT revenue guide. I know last quarter, you specifically guided to the $2.42 billion to $2.465 billion. I'm wondering, on Slide 4, you implied PT is $2.3 billion. So is that the actual revenue guide? And can you comment given the lower revenue guide, how you're thinking about margins relative to your prior guidance? And then my last question, on the M&A front, I think before you were saying top line M&A would add, you'd get 4 points. Now you're saying 3 points. Is that just FX and Invetech?
Yes. So Jamie, just on the prior guide, yes, the $30 million has come out of the PT revenue from Invetech. 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 million is the midpoint of the PT revenue guide as you pointed out.
And then your margins on PT, can you give us an update there given the lower rev?
Yes. No change to the expectation of margins for PT.
Yes. Jamie, I think that's a reflection of -- and certainly, as we said, not a lot of -- no real change here to not much change in the outlook relative to that. The first half playing out pretty much like we saw so -- we've seen some business move into the second quarter or second half, excuse me, but we've been able to manage the margin front exceptionally well based on a couple of scenarios that we thought the year would play out.
Your next question is from the line of Scott Davis with Melius Research.
A couple of 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.
Yes, sure. I would say, number one, is there's probably a wide variation of valuations out there right now. You've seen some -- 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.
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 year -- rest of the year, seems a bit on the conservative side.
Well, we just beat our first quarter guide. So that's the first thing. And there was an operational beat there of about $0.01. And they're really $0.02 when you look at we offset the FX and then $0.01 of corporate cost. So it's a good -- I think it was a good start, a very good start to the year. I said that in our prepared remarks.
Your next question is from the line of Deane Dray with RBC Capital Markets.
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 build-out?
Well, yes, 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 8-digit order from a Keithley as an example for that in the quarter that will ship later in the year, with some semiconductor manufacturers in Taiwan.
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 that just -- is it product cycle related? Is there anything related to worries about the election that's starting to read through some hesitation in orders?
Yes. Deane, I think, well, the first half is going to play out at Tek almost identically to exactly how we thought it would play out. So I don't want to -- I want -- I should say that first. I would -- well, certainly, what we see is some delay on what I would call [ MilGov ] 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. That's both direct government customers as well as some of the primes. So that's a movement of that.
Your next question is from the line of Steve Tusa with JPMorgan.
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 bill, but maybe just give us an update on 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 for the rest of the year there at this stage.
Yes. Steve, Tektronix' book to bill was 0.95 in the quarter. For PT, Sensing and Tek combined is 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 like a little bit hard to like 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 bill 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 I'll let Jim comment on the acquisition overall. We had expected revenues for EA for the year to be, call it, $190 million, $195 million. That's come down. It's probably closer to $180 million to $185 million. Part of that is foreign exchange, and part of that is some push out of larger projects in the year.
Yes. Steve, I would say a couple of things. One, as we said in the prepared remarks, we -- 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, as we start out, we really affirmed the fact that the product and the technology is really, really strong.
And where do the excess backlog stand today? That's my last one.
Yes, I'm not -- forgive me, I'm not sure what that number is, but it's probably in the, I guess, in the $10 million-ish range or something like that.
Okay. So normalized.
Yes.
Your next question is from the line of Andy Kaplowitz with Citigroup.
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 Provation 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?
Yes. I mean we're really happy about the quarter. And 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 multiyear and high-growth markets exceptionally well. The strength of 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.
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, FX, M&A, as we talked about. 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 what we're able to do, right? With the growth rate that we had in the quarter, we still drove strong EPS growth and strong free cash flow growth. Our guide demonstrates that.
Your next question is from the line of Nigel Coe with Wolfe Research.
So I hate to like retread. Ground has been trod on already. But -- so Elena, you mentioned Tek down mid-single digits. That was in the plan from day 1, down mid singles in 1Q. 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 second quarter, is Tek down sort of high singles, maybe a bit worse than that, some PT down maybe mid-singles? Just thinking about how we should think about the way this comes through the year?
Yes. That's right, Nigel. And as we said in our prepared remarks that we expected PT to be down mid-single digit for the quarter. That would include Tek to be down slightly more than that. So in -- probably in that mid- to high single-digit range for Tek in Q2.
Okay.
So then I would say, Nigel, that your point around inflecting getting a little bit better, that's the book to bill that we talked about. That continues to do good. Keithley is a good leading indicator. The PMIs are a good leading indicator. Our sales funnels 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, right, is that Tek 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 1 change, 1% or so for the year -- 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, 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 that probably in PT, we had, I think, 1% to 2% and gradually going up as we move through the quarters.
And Nigel, just to add, price/cost is in a good place. So when you look at the margin expansion that we did in PT in the first quarter and the anticipated margin expansion through the year, we'd probably get a little bit less price when the top line is like that. It's not unnatural to maybe not maybe give a little bit up. But the price/cost stance is really good. So we're in a good position to be able to do that and still grow margins.
That's great. And sorry, a quick one on EA. The 1Q seasonality for kind of the full year, is this a business that typically has a weak 1Q and then a back half loading in the plan?
Yes. It's -- we're new to it. So we've got some multiyear history, but you have the numbers, you don't always have the history. It's certainly a business that has historically been back end weighted, that's for sure. So that private companies sometimes don't necessarily push everything until -- make sure the end of the year. So that's not unusual. And we'll get the cadence here improved every quarter as we work through the integration.
Your next question is from the line of Joe O'Dea with Wells Fargo.
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 drill the question really around the ability to grow through PMI slowing. And to what degree you attribute that to outgrowing end markets 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 outperforming the market. And I think Fluke's done a great job. When you look at a number of things, obviously, an outstanding global franchise presence in every -- pretty much every country of the world. Team does a great job on the innovation front. We had 4 new product launches just in the first quarter alone. Our eMaint business is doing really well. So our Fluke reliability growth -- eMaint was up 17% in the quarter.
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?
Yes. 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 and please see, as well as, importantly, the margin expansion.
Your next question is from the line of Joe Giordano with TD Cowen.
On Fluke, obviously, that business has been remarkably resilient. Is that business, like you mentioned solar, is there a risk on -- an election risk there if policy changes shift? Or is that just -- could that just be offset by more positive trends within data center electrification, things like that? How would you 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 2 is, I think when you look around the world, certainly take a global view of solar, too, and you have a very good global opportunity. I would say the same thing about electrification.
Okay. And then just curious, with the numbers on EA lowering the top line a little bit, is that business still like 40-plus EBITDA margins at the lower revenue rate?
Yes. Yes. It came out very strong. And actually, it's also why we're seeing that margin expansion at PT. That's part of the story.
Today's final question will come from the line of Andrew Buscaglia with BNP Paribas.
So you talked to -- gave some good color around PT getting through the rest of the year, your margins really -- your margin guidance really implies quite a step-up in the back half. What are some other contributors, specifically within 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 the -- a couple of things to think about. We generally think about incrementals at 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 trajectory in terms of seasonality from the first half to second half, and that drives through more volume. And that's the biggest key to expanding the margins.
Okay. And staying with -- just touching on AHS. The distributor transition is definitely helping you guys. Can you talk a little bit more about that business as we progress through the year? I think -- yes -- I think with the way that your incrementals have been strong there. Can you talk a little bit more about how that continues there -- as sustainability there?
Yes. We've got that for health care. 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 million margin expansion for the year at AHS. Very pleased with another strong quarter of really strong margin expansion and growth here, and we expect to continue that through the quarter or through the years.
This concludes the question-and-answer session. I will now turn the call back over to Jim Lico 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.
This concludes Fortive Corporation's First Quarter 2024 Earnings Results Conference Call. Thank you for joining. You may now disconnect.