Conference Transcript - FTV 2026-05-19

Speaker 4

and very pleased to welcome back Olmide Soroy, CEO of Fortiv. Olmide, I think you were here three years ago, if I'm not mistaken, when you were president of iOS maybe two years ago, so really pleased that you're back with us. And also Marco Gorkstrom, CFO of Fortiv as well. So Q&A it is. Let's launch into it. So maybe a good place to start would be, you know, So it's now been almost a year since the separation of Ralliant. Maybe just talk about the first year of life as a public company, what's been achieved, what's still on the come.

Speaker 2

Yeah, well, it's great to see you. Thanks for having us. Always a pleasure to be here. And we're really pleased with the progress we've made on the three pillars of our 40 accelerator strategy that we laid out almost a year ago now. And, you know, the first pillar that we set out was that we could deliver in this portfolio of new 40 faster, profitable organic growth. And we just are quite pleased that over the last year we've shown sequential acceleration in core growth every single quarter. and the set of growth initiatives in innovation, commercial, and recurring customer value that we've deployed are still rampant, which really sets us up nicely for continued acceleration. The second pillar we set out was this idea that we're going to be very disciplined with capital allocation with complete focus on best relative returns and maximizing medium to long term share of the valley. And if you look at what we did in Q1, $500 million of share repurchases, which brought our total since the spin-off to $1.8 billion or 10% of our fully diluted share count. And our focus on a capital allocation strategy that starts with investing in organic growth, really pursuing creative bolts on M&A where it provides the best returns, making sure that we return capital in the form of shared purchase and a modest growing dividend remains very clear. And then our third pillar was this idea that we're going to actually intentionally build and maintain investor trust. And again, in Q1, we were pleased to deliver solid results that was above expectations for the third consecutive quarter as new 40th. And we like that start and we look forward to building on the momentum. So overall, You know, our strategy remains in place and our confidence continues to build that it has the power to deliver the financial framework we laid out for 26, 27 and to unlock benchmark beating and shield the returns in the medium to long term. So we're feeling quite good about the first year and our team's excited.

Speaker 4

Yeah, definitely. I want to come back to the first quarter performance because I think it's very important that you actually did 5% – slightly better than 5% organic growth in 1Q. But maybe just talk about, you know, aspiration to grow is fine, but it's not easy to do it. So maybe just talk about, you know, the investments you're making and the changes in the process to accelerate that growth and maybe overdrive this to the markets.

Speaker 2

so i mean first it started with the the portfolio we now have uh in in 40 which we feel puts us in in great markets with terrific brands like fluke uh which which is just an incredible brand for that space and i think every other one of our of our 10 operating brands have just a great story so it starts from being in the right market uh with the right race horses and we like what we have. And the plate that we called to accelerate growth in this portfolio was to drive three things. One, innovation acceleration, so more new products. And we've talked about several examples of that over the last year, incredible momentum building in that. Second is commercial acceleration. This means being very agile with placing bets in markets where there's here and now opportunities to capture more share, data centers for fluke, ambulatory surgical centers for ASP, India and Latin America for industrial scientific. These are specific market opportunities that we feel give us outsized opportunities for growth. So we're placing bets in those. And then the third is recurring customer value, which just means doing more for the 100,000 customers we have across new Fortive. We've completely aligned our team behind those three growth vectors. Every single one of our brands has a portfolio of initiatives behind those. Max done a terrific job with our resource allocation to move more resources from corporate cost centers to invest behind those things. And so we're just excited to see it continue to ramp.

Speaker 4

So going back to 1Q, you put up 5 and change, 5.3% I think it was organic growth. actually put you very comfortably in the top half of my coverage. I think for the first time in a very, very long time before it was being in the top half. So I know there was a small benefit from selling days, you know, one-and-a-half points from selling days, but maybe just unpack, you know, what we saw in 1Q. Should we not get too excited by that? Because it was very ball-based across both audios, both segments. Why wouldn't that continue from here? Because obviously your guidance assumes that doesn't continue.

Speaker 2

Yeah, so first of all, we agree. We really like the momentum in the first quarter. It was across the board was one of the things we liked especially about that. And it was across the P&L. We saw really strong growth on the top line and really good performance down the P&L, even though we made intentional investments in some areas. And, you know, we know that over time, we talked about year by year, that we will continue to accelerate growth. But one of the things we've been intentional about is making sure we can make the right calls quarter by quarter. And I think for Q1, we benefited from the selling days, the three extra selling days. Q4, we know we will pay back for that. So that's the biggest swing factor between the first half and the second half. But the true line of acceleration continues anyway. and, again, 26, 27, we're well within our 3% to 4% core growth financial framework. You know, I would also point out that we do intentionally as a team really being thoughtful about setting expectations at the right levels to give ourselves a chance to build and maintain trust.

Speaker 4

Sure, sure. Maybe I don't know if you can give us a little hint of what you've seen during the second quarter. your comp is actually a lot easier in 2Q so I think that organic growth should be quite attractive in 2Q as well but you tell me if I'm wrong

Speaker 2

yeah so I mean we just had a Q1 on this call just 18 days ago I think like we said on the call April we really came out strong in April like the trend nicely aligned with our expectations and we remained kind of firmly on track with the with the guide we gave on Orange Call. But I think we're on track.

Speaker 4

And all the noise we see on the geopolitical fronts, Middle East, et cetera, that's not having a factor right now. Not playing, not, what we're trying to say is, are you seeing any negative impacts through the second quarter from the Middle East?

Speaker 2

No, not at this point. I think from a direct point of view, just to put it in context, Middle East is a very small part of what we do. It's about 2% of total 40 revenues, so it's really small. Most of what we do is in Saudi and UAE and mostly fluke and industrial scientific, where we actually are seeing really strong auto growth in the Middle East right now. So from a direct market point of view, nothing significant. And we don't see any repercussions showing up outside the region at this point. Okay, that's good.

Speaker 4

Maybe if you just dig into the end markets, And, you know, I think affordable as you've got the healthcare portfolio, AHS, and then within, you know, within iOS, you've got the more industrial type businesses, ISC, Fluke, and then you've got the software businesses. So maybe just talk about, first of all, healthcare. Again, very encouraging what we saw in 1Q. That business has been quite episodic. It's been a little bit two steps forward, one back, maybe two back, one forward. What changes are you making, number one, to accelerate growth specifically within ASP, but secondly, to make it a bit more vivid, a bit more consistency as well?

Speaker 2

Yeah. So, first, we really liked what we saw in AHS and ASP in Q1. It was a bit better than our expectations, and it was better in terms of capital equipment, customers beginning to place more orders, consumables on the low-temperature sterile logistics side. The demand patterns remain really strong. services were strong. So across the board, we saw strength. And the work that we've been doing with that team, because these are great businesses, differentiated technologies, deep customer service expertise, deep customer loyalty. And we've been driving really the same three things I talked about to elevate the performance in ASP and in the segment overall. One is innovation. So you saw us take the steroid ultra GI to Europe. We kind of launched that in Q1 and a lot of exciting other things coming. So one is just the pace of innovation. Second is commercial execution. That's a business for us that's still very heavy US based, but the needs for healthcare and sterilization is very global. So that team is now doing just great work to create local capacity in India and China and really drive growth in Latin America. And also look for other healthcare centers like ambulatory surgical centers outside the hospitals that can use this instrument. So a lot of commercial execution and frankly scrappiness to gain share in the market. And then the third one is recurring customer value, which is we're now going to our customers and selling add-on products to them at a pace that we've never done before. And those three things combined with the passion of the team and the foundation of the business give us really good confidence about the track ahead for the business. We are intentionally investing for growth. So you see some quarters where the margins look lower because we're actually deliberately investing for growth that we believe will be exceptional payback in the medium term. And now you see us continue to do that.

Speaker 4

The headwinds in that space, you know, you've got hospital CapEx is pretty anemic. You've got reimbursement pressure. Federal funding is getting cuts. Are you confident that AHS is a 3% to 4% grower in 2027 based on what you see right now? Do you think that the commercial initiatives can overcome some of those headwinds?

Speaker 2

So, I mean, it's interesting because we've actually seen for the hospital spending pressure and sort of tension ease since Q2 of last year. And that easing is continuing. And that's showing up in hospitals now. Some of the deals in our funnel that's been there for a long time, they're now placing the orders. So we actually think we're on an improvement trajectory in terms of the market conditions, despite all the pressures in hospitals. Because in the end, the way hospitals make money is volume through the operating room. And that's where what we do plug in. So no matter the pressure, they have to keep flowing through the operating room. So that's the first thing. But the second thing I'll say to your point is, you know, we're not counting on the market getting better or worse. We're counting on the things that we control. And it's the innovation we're driving, the commercial execution, and those recurring customer value initiatives that our team's driving that. The team we have at ASP has never been more excited about what's possible. And, again, Mark and team are doing a really good job of moving resources around so we can actually invest in the right places.

Speaker 4

I will be coming to you, Mark.

Speaker 2

Oh, I'm good.

Speaker 4

Whenever you're ready. He's enjoying this. Yeah. Maybe I should flip the question and say, is there some kind of demand in that segment? I mean, maybe this could be a good space to be for the next couple of years, if there is some kind of demand.

Speaker 2

Yeah, I mean, I think it is the case that there are a lot of purchase decisions that were deferred, especially kind of, you know, kind of Q2, Q3 last year in the midst of the one big, beautiful act passing and people trying to understand the implications of that for the economics. So there's certainly some pent-up demand. There's new construction demand. And frankly, there is the fact that in the end, the underlying circular driver of demand for health care is aging demographics around the world. That's going to need more intervention, and most of them have one or two chronic conditions. So I think it is the case that the pent-up demand, the underlying drivers, make this space one to watch over the next couple of years. And we're certainly trying to be ready for that.

Speaker 4

Then moving to the non-software businesses in iOS, obviously most notably Fluke. There's definitely an industrial cycle aspect to that demand profile. Any views on short cycle demand right now and how that's progressing?

Speaker 2

We really liked what we saw in Q1 at Fluke. We do think some of that's the underlying short cycle demand. Some of it's just a strength of Fluke, and some of it's the work we're doing to really drive growth in attractive arenas like data center and defense and some of these geos. But we certainly feel, as we've all seen with the PMIs, it does feel like there's a general lifting of all the boats that's happening a little bit. And from what we saw in April, like I mentioned, it was really strong trends and aligned with what we saw in Q1.

Speaker 4

We always viewed that as a true fortress business, where you're the dominant player across your product categories. Is that still the case, or are there pockets of competition in that business?

Speaker 2

Fluke is, I can say this myself, it's an extraordinary business. It's a global brand, high-quality products. We've been in business for 78 years, but you wouldn't know it with the pace of innovation, the fastest it's ever been, the commercial scrappiness of that team to keep finding share, going after data center use cases, going after defense, going after early in career technicians. We're in the middle of this big shift in the workforce with newer next generation coming into the profession and the team doing work to train them on fluke. so that's what they know to do their jobs on. Just a terrific platform with incredible energy right now and I think a lot of upside ahead.

Speaker 4

Okay, that's good to hear. And then software. Obviously, a lot of concern out there around the sustainability of software business models in general. Maybe talk about what you're seeing right now in terms of customer engagement, pricing, adoption rates, um ai pros and cons how you're using ai to accelerate growth maybe areas of potential threats down the road anything you can kind of enlighten us with would be great yeah no absolutely

Speaker 2

and just uh just to frame this up so 40 80 of what we do highly differentiated hardware products like fluke industrial scientific asp 20 software related types of things as we've talked about in the past, the software things we do are incredibly protected with certain competitive modes, proprietary data that are very deep. In some cases, regulatory lock-in, so this is what you have to use for EHS. In some cases, two-sided networks like in service channel. And then in some cases, frankly, it's not just software, it's a system of record and action. Each of our platforms have different combinations of these protections. And what we're actually finding is AI is an incredibly exciting accelerator for us in those businesses because they're so deeply entrenched in the customer's workflow. And we've deployed AI in two ways. One, really just taking all the AI native tools, putting it in the hand of all our developers, and now things that they're used to do in nine months, they can't do in weeks. And that's just increased innovation velocity. But importantly, it's also giving us a chance to bring in some AI enablements embedded into our workflow to customers. And what we're finding is because all customers want to do something with AI, but our businesses give them a chance to do it at scale in a way they can actually get value, they can show their CFO and their board. Just incredible engagement from customers around this new solutions that we're launching that's helping our retention rates. And frankly, it's given us incremental pricing power, which we're doing a whole range of things from outcome-based pricing to add-on app-based pricing to, in some cases, token utilization-driven pricing to make sure that there's high-value use cases, not just table stakes that keep us there, but actually get us incremental value. So, you know, we feel excited about how all of that is playing out for our specific software businesses, which, again, it's a smaller part of our surface area, but we feel good about the setup we have.

Speaker 4

So net retention, for example, would that be tracking better than it has been? I think 105% was sort of the metric. Is that now tracking better?

Speaker 2

Well, I think one of the good things, if you look at all the quantitative metrics from just the overall growth of the software businesses, we've said it's faster than overall fleet. That's continued to be the case. If you look at all the underlying metrics from GDR to NDR elements, that's continued to trend in a way that's exciting as well. So we, and again, I say all this, but we stay paranoid because the space is changing so quickly. But everything we're seeing in terms of our engagement with customers and the metrics we're looking at for the specific software businesses we have is actually quite exciting.

Speaker 4

Yeah. Recognizing that 80% of your business is hardware, you'd swear to God that there's 80% the other way around, the way the market views sometimes. But it sounds like the two-sided business models, so Gordian, Service Channel, the regulatory aspects of EHS are really important wall gardens. What about accruance and probation?

Speaker 2

Yeah, so probation I would describe as the decades of data on GI procedures that's very deeply proprietary. and the fact that there are physicians that won't practice in the hospital if you don't have that software solution for GI procedures. And so that provides an incredible level of protection for that business. So think about it as data and the cost of loyalty. On the accruent side, it's interesting, we have really a business that's very deeply vertical solutions that are assembled. So there's a solution that is the solution for electronic document management system in manufacturing plants, and a solution that is the solution for kind of real estate kind of contract management in retail. And for each of this, there are systems of record and systems of action in the fields there. And they're not broad horizontals. They're very deep and very specialized, which means, frankly, the addressable market is small, and we have a pretty big chunk of it and it's just not worthwhile for most players to come after yeah that's what it comes down to okay thanks um any questions from the audience

Speaker 1

yeah one here just to follow on from nigel's question um interested in how you guys are thinking about software m&a at this point um and what framework would you use to assess the viability of that type of business given the concerns around the ecosystem today

Speaker 2

Yeah, thanks for the question. So, I mean, I think for us, M&A is a piece of a capital allocation strategy, and we'll only do M&A if the risk adjuster returns are better than other uses of capital. And as we're building our funnel, it starts with the surface area of the company. So if 80% of our surface area is highly differentiated hardware, our M&A funnel will skew towards that because that's where our surface area is. software is part of our portfolio, but I'll say the bar is really high on a software deal because first, it's got to meet rigorous strategic and financial criteria. So that's the first huddle to pass. Second, it has to be durable in an AI native world, right? That's the second. So all those things I talked about that we like about our current software businesses, It has to have proprietary data, two-sided networks, and all of those things. And then thirdly, it has to be a price point that fits with our return criteria. So that's a really narrow path to get a software deal through right now. So I wouldn't say we wouldn't do a software bolt-on, but if you take all those things I talked about, our surface area, the criteria you've got to pass through, it's a high bar.

Speaker 4

Any other questions? no let's mark let's turn to uh to margins um uh you've been dealing with quite a few headwinds trying to cost from the spin uh tariffs um and yet your margin expansion margin performance has been really attractive so maybe talk about the path ahead you know where are we on those those headwinds and you know as growth picks up you know why wouldn't margin expansion improve Thanks for the question.

Speaker 3

You know, I just reiterate our overall framework is 50 to 100 basis points of margin expansion. You know, for the next couple of years, we feel really good about that. You know, there have been various puts and takes on the margin picture, but the overall story has been that we have taken deliberate action, not only to just take out the stranded costs, which were roughly $50 million, but to go above and beyond and flatten segment structures, look for opportunities across our GNA. functions to actually streamline and reduce costs, all with the goal of being able to redeploy that spend towards strategic initiatives across commercial acceleration, innovation, acceleration, and recurring customer value. And I think I would just expect more of the same going forward. Again, we look at that 50 to 100 basis points of margin expansion as a guideline for us to operate the business under. And so to the extent that, you know, like we saw in the first quarter, we see upside to that. We will look for ways to deploy it to the extent that it can further, you know, accelerate and drive profitable growth. It sounds like you're prepared to have a

Speaker 4

bit of volatility, you know, around the quarters in terms of investment spending at AHS. I'm just wondering if you were to overdrive to, you know, if you have an exceptionally strong volume quarter where you're running, you know, 150 base points, let's say, would you be more biased to investing that way. I just wonder how you think about that. Yeah, I mean, we definitely think about things on

Speaker 3

an annual or multi-year basis. So we're not looking to do things that would be suboptimal from a capital allocation perspective, you know, at any time to produce an optical outcome. So if we didn't have good use for the capital, we would absolutely let it flow through. You know, and I do think just, you know, if you look at the structural aspects of this business, all of the businesses, as Lumide mentioned, are leaders in their space. They've got pricing power. The margin structure is very attractive, which allows us to have strong operating leverage through the P&L. The Ford of business system is alive and well. And so we're grinding out optimization opportunities. So I do think there is opportunities for us to overdrive. And I think the more successful we are and accelerating growth, we'll see more of that. But the bias will be to reinvest it in and actually drive better performance. And that may result in quarterly movements here and there, and we're fine with that.

Speaker 4

And then obviously the most visible aspect of operational efficiency is the corporate line. Yeah, I'll get a corporate. That seems to be running a little bit below the 125, 130, I think, was the guide. Is that now sustainably lower going forward? I would think so.

Speaker 3

I mean, we're in the $27 million a quarter zone, so call it $110 million or so. I mean, there will be inflation moves. There's little puts and takes in it, but I think that's a good spot. And we have deliberately taken down our teams to reinvest into the business, and I think we'll continue to look for ways to do that.

Speaker 4

I apologize for the corporate expense line. Not a classic five-side chat there. question. And again, I apologize for the tax rate question now coming up, but the tax rate has been running low for a very long time. I think some of the global tax regime changes have been pushed out. Are you confident you can maintain this level of tax rate going forward, or is there a

Speaker 3

bias towards 20% longer term? I don't know about 20%. I think we feel good about the mid-teen zone. And I think if the global minimum tax regime rules that there's still some uncertainty around the U.S.'s applicability to the U.S., I think that's generally going to put upwards pressure on the tax rate. I'd probably think about that in the 200 to 300 basis point zone. But we don't see 20 percent as the place that we're headed.

Speaker 4

That's great. And then capital allocation would be a good place to sign off on. You mentioned Bolton Acquisitions, Olimide, rebuilding the M&A pipeline. Where do we sit right now? Obviously, you've been very heavy Lebanon buybacks since the spin. Is the MO still to buy back as much as you can at this stock price, or are we getting a bit more balanced in terms of the philosophy going forward?

Speaker 3

I think the philosophy remains the same, which is that we've got four primary uses of capital, invest in organic growth. We think about M&A and share repurchases as interchangeable with a bias to bolt-ons. We've got a modest and growing dividend. And really, it's all about the relative returns across those. I don't see right now the relative returns having dramatically changed. I mean, our free cash flow yield continues to be than a 5.5% to 6% zone. We generate a billion dollars of free cash flow a year, give or take. But I think at some point when we've got a longer track record of delivering strong performance, where growth acceleration starts to really show up as a pattern, not an anomaly, that we may see some multiple expansion. At that point, the relative math might start to change. I mean, we have taken our leverage up a bit. We did that in the back half of the year. We did that again in the first quarter to shift some repurchases forward, you know, given the value we saw. So I wouldn't expect what we did in the first quarter, which was half a billion dollars to be the recurring quarterly pattern. But I do think we continue to have a bias to share repurchases in the overall mix, given what we see today. It's great to hear.

Speaker 4

We're out of time. So Alameda, any last close remarks? Well, thanks for having us. We feel

Speaker 2

really great about the first year here. We're firmly on track with the financial framework we laid out. And we, you know, to Mark's point, really believe we have a chance to unlock benchmark beating shareholder returns in the medium and long term. And that's what we're going to stay focused on doing. So thank you. Thank you. And that was a great discussion. Thank you. Thanks, Mark. That was great.