Yahoo Finance Fortive Corporation (NYSE:FTV) Q1 2024 Earnings Call Transcript
Fortive Corporation (NYSE:FTV) Q1 2024 Earnings Call Transcript April 24, 2024
Fortive Corporation beats earnings expectations. Reported EPS is $0.83, expectations were $0.79. Fortive Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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 [Operator Instructions]. I would now like to turn the conference over to Ms. Elena Rosman, Vice President of Investor Relations. Ms. Rosman, you may begin your conference.
Elena Rosman: 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. We present certain non-GAAP financial measures on today's call. Information required by Regulation G is available on the Investors section of our Web site 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 31, 2023. These forward-looking statements speak only as of the date that they are made and we do not assume any obligation to update any forward-looking statements. With that, I'd like to turn the call over to Jim.
Jim Lico: Thanks, Elena. Hello, everyone, and thank you for joining us. I'll begin on Slide 3. We have 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 Fortive. We delivered 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 Fortive 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 supportive 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 4. Today, Fortive 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 markets 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 digits 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. Turning to Slide 5. 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 planned this year, IOS continues to build on its leadership positions in instrumentation, software and data analytics, all benefiting customer investments in key megatrends, keeping the world running safely, efficiently and more sustainably. Over the past few years, we have expanded IOS' addressable market to $30 billion, adding companies that play in strong secular driven markets, including the four bolt-ons last year. Within IOS, our 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 improved through cycle resiliency with continued order and revenue growth despite contracting PMIs over the last 16 months. In facilities and asset life cycle, new logo bookings have grown double digits the last few years, underpinning continued strong multiyear 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 Fortive as we continue to execute our formula for value creation in AHS and PT.
Turning to Slide 6. You can see how our portfolio is at the epicenter of the proliferation of electronics and sensors, enabling a more intelligent and sustainable future. Tektronix 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. The addition of 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 and networks, which makes it an excellent complement to Tektronix. The transformation of the electrical grid is a long-term secular tailwind for both Qualitrol and Fluke. Qualitrol provides the world's energy grid with monitoring equipment and sensors to ensure the life stand, 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 7. 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 bench working we did with other technology companies and our partnership with Pioneer Square Labs, to incorporate best practices and 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. Fortive software system is improving our future on time delivery as our operating companies are seeing a greater than 20% acceleration in software development time using Gen AI, creating bandwidth for higher value work and enabling faster innovation for our customers.
FBS 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 reduced 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 Fortive flywheel for value creation. I'll wrap up on Slide 8. We're off to a strong start to the year. Core to 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, we're seeing steady global demand for our products and technologies and continued high single digit ARR growth.
In PT, we knew coming into the year that the normalized demand in Tektronix and Sensing would result in declining core growth in the first half, lapping strong multiyear growth rates. In the quarter, we saw demand for electrification and AI hardware drive a return to 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 nonrecurring products growth in 2025 underpinned by secular investment trends, continued strong margin expansion enabled by FPS led innovation and operational improvement and double digit adjusted earnings and free 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 Fortive 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.
Chuck McLaughlin: 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 1 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 $0.83 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.
The 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 platforms. M&A contributed 1 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 and customer adoption in key growth verticals. Environmental Health and Safety had a 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 accruing cross sell deals with RedEye and ServiceChannel 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 Sensing. Total growth reflected the benefit of the EA acquisition, partially offset by FX headwinds and the divestiture of certain product lines of Invetech. 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 fund, 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 US due to delayed customer R&D 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. 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. Book Health benefited from growth in biomedical quality assurance equipment, as well as supply chain and operational improvements. Our AHS software businesses continued their pace of double digit SaaS growth. Censis 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 Provation 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 1 point of FX headwind. By [reach] 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 conversion and secular investments supporting energy transition. Asia was up slightly, driven by low double digit growth in India, partially offset by a 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 PT, consistent with our prior view of the first half performance. Adjusted operating profit margin is estimated at approximately 26.7%, up 75 basis points year-over-year. Adjusted diluted EPS guidance of $0.90 to $0.93, up 6% to 9% and free cash flow of $270 million, 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 the partial Invetech divestiture reducing revenues by approximately $30 million.
Adjusted operating profit is expected to increase 9% to 13% with margins at 27% to 27.5%. We are raising adjusted diluted EPS guidance to $3.77 to $3.86, up 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.
Jim Lico: 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 more durable company is playing out. However, our strategy is reflected in the continued momentum 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 FPS 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 Fortive 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.
Elena Rosman: Thank you. Dennis, we will now take our first question.
See also
12 Good Cheapest Cigarette Brands In 2024 and
11 Tips to Get Approved for a Mortgage.
To continue reading the Q&A session, please click here.
