Conference Transcript - FTV 2026-09-15

Brandon Knutson, Analyst — Morgan Stanley

Good afternoon, everyone. My name is Brandon Knutson. I'm part of the multi-industrials team here at Morgan Stanley, and today we are going to be speaking with Elomide Soroye, President and CEO of Fortiv, and Mark Okerstrom, CFO. Before we get started, I need to read this disclaimer. For important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com slash research disclosures, and if you have any questions, please reach out to of your Morgan Stanley representative. All right, so to start, it's been a little over a year since you've been the leaner, new Fortiv. What have you, or what have been your biggest wins and biggest lessons over the last 15 months?

Olumide Soroye, CEO

Great, thanks for having us, it's great to be here. Over the last 15 months, our biggest win at Fortiv is really that our team has delivered terrific progress on each of the three pillars of our Fortiv Accelerator strategy. We started out, first of all, saying we're going to grow this company faster from an organic point of view. Over the last year, if you think about 2026, call growth is now tracking towards twice the level it was in 2025. In Q2, it was 6.7% call growth, 110 business points adjusted by margin expansion, 28% adjusted EPS growth. The set of initiatives that we're working on around innovation, commercial, recurring customer value are showing really encouraging evidence that they're gaining traction and continuing to ramp. And if you think about all of that, it just sets us up really well going into 2027. The second thing we set out to do was to really demonstrate excellent capital allocation discipline. And again, if you think about since the spin, we've done $2 billion of share repurchases, taking off about 11% of our outstanding shares on the market. And primarily that's because the return proposition from share buybacks have just been and continue to be exceptional. At the same time, we've honed our bolt-on M&A engine. We've completed several small acquisitions to strengthen core platforms at Fortiv. And we look forward to continuing to build just an excellent track record of capture allocation at new Fortiv. And then the final thing we said we're going to do was be intentional about building and maintaining investor trust. Really pleased that for the last four quarters consecutively, we've delivered results above expectations. We remain highly confident in the 2026-2027 financial framework we laid out at our investor day last year. Just as a reminder, that's 3% to 4% core revenue growth. It's 50% to 100% business points of adjusted EBITDA margin expansion every year. And it is a single-digit dollar plus adjusted EPS expansion. We also did say in Investor Day that our ambition is to deliver results that are even better than that framework after the 26, 27 time horizon. And we've continued to build confidence that that's attainable. And we're putting in place the pieces to make that happen, including making the right strategic decisions and investments today that will secure profitable growth for years to come. So, overall, Brian, I think our biggest lesson in this first 15 months is our 40 accelerator strategy is on track. It gives us a high-confidence path to deliver a financial framework with very meaningful upside potential. And we believe a strong likelihood of outperforming shareholder return benchmarks in the next several years, especially given the current valuation dislocation in the marketplace. So, we're feeling good.

Brandon Knutson, Analyst — Morgan Stanley

That's great. So you highlighted the four different accelerated strategy, faster profitable organic growth, capital allocation, build investor trust. Can you talk about some of the KPIs around new products or recurring revenue growth? Anything else to show that this initiative is really progressing post-spin outside of organic growth?

Olumide Soroye, CEO

Yeah, overall, just the evidence we're seeing in terms of traction and in terms of runway on our profitable growth initiatives, we feel really good about. And the three vectors that we've talked about, the first one is faster innovation. And we're incredibly, across all our companies, just doing a terrific job of launching new products that are aimed at high-growth vectors like data center and defense and robotic surgery and industrial capacity getting built out in just about every country around the world. and we're launching new things that tap into those tailwinds. We feel good about, to your point about KPIs, the revenue from recent product launches continue to ramp in a very exciting trajectory for us, so we feel good about that. The second vector was commercial acceleration, so think about this as placing specific additional resources in sales, marketing, and operations in areas, whether it's geos or it's end markets, that we see high growth and provide the best opportunities. And again we continue to see our performance in the growth for all the areas where we're making those incremental investment and that's a good KPI to see. And our recurring customer value we have a hundred thousand customers at Fortiv. They all have the chance for us to do more for them and expand our share of wallet with them and we're doing that on the hardware side. You see at Fluke as an example, which is our biggest hardware brand, the attach rate of specialized service plans and software that help our customers get more value from the hardware continues to get better with a long runway of continued growth ahead of us, which is terrific to have in a business like Fluke given our install base that we have to mine. And on the software side, we continue to upsell and cross-sell and expand with our current customers as we launch new valuable modules for them. And again, that's showing up in KPIs around the performance of all of those businesses. So we feel across all the three vectors for driving growth, great progress. And frankly, more importantly, from our point of view, just great runway to keep ramping the contribution from those initiatives to growth.

Brandon Knutson, Analyst — Morgan Stanley

Great. And growing recurring revenue is one of the pillars for driving growth. You talked about it in Investor Day as well. Can you talk about the opportunities here and where the upside is coming from in iOS versus AHS?

Olumide Soroye, CEO

Yeah, we've seen for the company overall just terrific growth performance on both the recurring and non-recurring part of the company. And just on your question, the 50% of a company that's recurring is really healthcare consumables and services. It's kind of hardware as a service type offerings that we have. and its software subscriptions. And we've continued to see the strong performance across those. To give you a few examples on iOS segment at Fluke, which is, again, our biggest brand, we've just had great success in attaching service plans and subscription software to some of our products at Fluke. And this is really taking the experience that our customers have with our advanced professional instruments and saying, how can we make that better beyond the time they're buying the device from us? And that's going really well and continues to provide outside. And then on the software side and the healthcare consumable side, it's really about driving utilization of equipment we have in healthcare and then attach for our software businesses. In healthcare, as an example, again, we have tens of thousands of equipments out there Everything we do to help our customers run more devices through those sterilization machines, that's recurring revenue growth. So we talked about the recent FDA approval of our 50-pound weight claim for our steroid machines. That means our customers can put more robotic equipment and devices through those machines, which means the utilization rate on those machines go up, which means more consumables have more services. So it's a very, very targeted approach at looking at all the 100,000 customers we have and ways to do more for them on the hardware side and on the recurring revenue side to deliver more value and the best place to grow is with the customers you already have.

Brandon Knutson, Analyst — Morgan Stanley

Yeah, that makes sense. and on fluke specifically you highlighted that you're offering now more software recurring revenue opportunities to products you have currently recurring revenue is 15 of fluke what now essentially the product portfolio what percentage now has some software or software option attached to it that you can now bring to the marketplace and how high can that go yeah so flukes just a terrific business for us with a lot of growth vectors and and one of them is this attaching service plans and software to our Fluke portfolio, we talked about the 50% of revenues at Fluke being recurring revenues, and that continues to grow at a really strong rate.

Olumide Soroye, CEO

So if you play that through over time, it's just an exciting frontier for us for growth. The power of that in the end is that as you get into higher value equipment, customers need more service plans to run them to calibrate them and to keep them functional and actually think about ai and what's possible with ai it gives us a chance to add more value that customers are actually willing to pay for as upsell on those devices so lots of runway ahead of us and speaking of ai how do how are you using ai to enhance product value on both the hardware and the software side yeah it's a great way to frame the question because it is on both the hardware and software side. And just as context again for everyone, we have the benefit of having started our AI journey with our Center of Excellence in AI launched seven years ago. And so we've had time to mature this capability and I didn't start it with Gen AI a few years ago. And what that's given us a chance to do is really be focused on real customer value, right? Because we were not trying to learn the technology. We were focused on use cases. And I'll just give you a few examples. On the hardware side, we took the approach of looking at every technician that uses our devices and trying to think through how we can leverage AI to help them do their job faster, make better decisions, better reliability, and uptime. And we're doing that systematically across our portfolio. A perfect example is our Fluke Optical automated visual calibration product that we released recently. Think about this as a way to take the activity that technicians do of checking measurements on multiple devices and having to interpret those measurements. We now have a computer vision system that can capture those measurements, and with AI can translate them into the implications and there's some agentic workflows for some of those who actually take the actions needed so it's gone from selling them a set of devices to now having this upgrade service that can actually instead of a new technician trying to figure it all out do 80% of the task and just help them get more done so that's an example of AI delivering real value for customers on the hardware side and on the software side we've we've talked on many of our earnings call about a range of ai enablement that we've put on top of this incredible data rich systems of record with with multi-sided networks around them uh service channel uh walker.ai intelligence platform continues to see great adoption at guardian a flash ai solution which can help People do estimates in minutes that used to take them days and weeks to do. And, you know, we've also talked about probation and our voice documentation capability that helps surgeons now not have to handwrite everything or dictate everything to a nurse practitioner, but they can actually, in an automated way, capture content with their voice rendering. So just a great set of real use cases, again, enabled by the fact that we've been advantaged because we built this capability a long time ago.

Brandon Knutson, Analyst — Morgan Stanley

Very interesting. A little bit on the cost structure, now that you're sort of a leaner standalone company, how are you progressing on your structural cost-saving initiatives and how much progress is there left to make?

Mark Okerstrom, CFO

Yeah, great question. So, you know, we talked at the time of the spinoff of there being about $50 million of stranded costs. We were able to take that out between the second and fourth quarter, third and fourth quarter of last year. We also went beyond that and took out a fair bit of cost, particularly at the segment level and the corporate cost structure. And we used that capital essentially to reinvest in the initiatives backing the Ford of Accelerated Strategy. And it's early days, but we're seeing great progress. I would just say that we're not done, though. The Ford of business system is all about continuous improvement, always about looking at ways to do things more efficiently. We certainly see that in the operating companies, but also at corporate or on the hunt to do things, you know, with less. And even though the big chunk is behind us, I think we're going to continue to drive efficiency through the business.

Brandon Knutson, Analyst — Morgan Stanley

And can you talk a little bit more about those investments and where those dollars are going and how long you expect before you see the return on that investment and where that's going to show up?

Mark Okerstrom, CFO

Yeah, well, I mean, the good news is we're already starting to see returns flow in. And the investments have really been across the portfolio and across those three initiative groupings that Illumide mentioned, which is accelerated innovation, accelerated commercial activity, and recurring customer value. Just to give you a few examples, for Fluke, you know, we really beefed up their engineering resources. They've launched an industry-leading data center tool called the CertiFiber Max. Order volume is way ahead of our expectations. We can't keep up with it. And that wouldn't have happened but for the investments that we are making. On the commercial side, we've been putting more boots on the ground in places like Latin America, places in Europe, places like the Middle East, India. We're seeing the returns on those sales heads, again, across the portfolio. advanced sterilization products industrial scientific fluke and we've also put more specialty commercial expertise into fluke in both defense and data centers again we're starting to see the returns on that and then on the recurring customer value side of things we've been you know working on some of the innovations around the software products that Illuminae mentioned and then also working on making sure that our service center infrastructure for industrial scientific and fluke and advanced sterilization products in places like India or the Middle East is fully built out with the view of getting more of those those great service plan subscriptions that will help drive the recurring revenue even higher.

Brandon Knutson, Analyst — Morgan Stanley

Switching to capital allocation, you guys generate a lot of free cash which is a very positive piece of the business. How do you make capital allocation decisions between M&A and buybacks?

Mark Okerstrom, CFO

So we do generate a lot of free cash flow. We love that part of the business. It'll be about a billion dollars or more free cash flow this year, and it's growing very nicely. It's not a capital intensive business, and we've got a free cash flow conversion on net income, just a net income north of 100%, and we would expect that to continue. We really look at capital allocation across four primary categories, and we look at them, broadly speaking, based on best relative risk-adjusted returns. First and priority is organic investment and that would include things like building out the service center infrastructure that we mentioned. Second and third, which we look at interchangeably, are share repurchases and M&A. We've leaned in heavily into the share repurchase since the spinoff. Again, two billion dollars spent as the end of last quarter, 11% of our share capital retired and really that's just been on the basis of the attractiveness of the returns on a relative basis. But while we've been doing that, we've rebuilt our whole M&A engine, new leadership, new process, new analytical suite to assess relative returns of deals, and a focus on predominantly bolt-on acquisitions where we believe that we can buy companies and make them worth more under our ownership and have them make Ford be worth more as well. And we, again, we look at buybacks and M&A interchangeably based upon best relative returns. And then the last is our dividend. We've got a modest dividend and it's growing. We're very happy for payment in the third quarter here to announce an increase in our dividend of over 16%. And that's just going to be a recurring feature of the capital allocation palette, if you will, over the years to come as well.

Olumide Soroye, CEO

On the M&A piece, can you talk a little bit about some of your recent bolt-on acquisitions and what they brought to the or they bring to the product suite afforded yeah so i mean a bolt on m&a has really been very focused as matt mentioned on few ideas one we we only do things that are going to strengthen our existing platforms second they have to bring in some differentiated technology and third they have to meet our rigorous strategic and financial criteria, and those are very clear gates that we've set in place that guide everything we do, and you see that in the few examples that we've talked about over the last several months, and one of those is UV Smart, which is this company based in the Netherlands, and we did that acquisition in our ASP business, and you think about a few things there. One is that technology is very differentiated. It gives us an expansion in addressable market at ASP that's about half a billion dollars in expanded market. And it gives us this ability to bring this ultra fast chemical-free UVC technology that's really important for disinfecting some of the ultrasound probes and endoscopes that are going to be a growing market for years to come and we had importantly not only do we like the asset we had a really clear value creation thesis we knew this was a technology in the Netherlands that with the commercial and the global presence that ASP had we could significantly speed up the growth rate and the adoption of the technology we also knew that while it's been approved for some use cases by the FDA in the US, there are a lot more use cases that this technology can apply to. And we knew that our ASP team has the regulatory process to speed up that process of getting more and more categories approved, which will further expand the addressable market. And we knew that we could significantly improve the manufacturing efficiency of the operation and drive cost productivity with our 40 business system. So really clear, really solid value creation thesis that's tracking very well right now. And the same thing at Aeroqual. That's another of the small bulletin acquisitions. This one for Industrial Scientific brought in a differentiated technology around air and environmental monitoring, something that connects really well with our worker safety solutions at industrial scientific we had a clear value creation thesis in this case we knew we could take out the entire manufacturing operation facilities footprint of this company and just replicate it within our existing factory at industrial scientific and i was a big part of the value creation thesis and at the same time we could take the product they had, improve the distribution with our industrial scientific channel and customer relationships, and drive faster top-line growth while you're taking costs down. Strong, clear value creation thesis, and the team's off to just a terrific start on making that happen. So you see us do those types of focus bolt-on deals. They're not large in magnitude, but they play a really important role in giving a booster shot to our existing businesses at 40.

Brandon Knutson, Analyst — Morgan Stanley

That's great. Shifting to some more near-term dynamics, like you said, growth has been strong to start the year, 6.7% core growth in Q2. What are you seeing across your end markets today?

Olumide Soroye, CEO

We feel really good. We talked on our Q2 call about what we describe as kind of broad-based strength across all of our platforms and end markets that led to that 6.7 percent call growth in in q2 and you know we we continue to see the year play out as we as we expected and feel really good across across all end markets we talked about north america being the strongest region uh that's i mean that's held up really well the other regions are holding up nicely but North America continues to to lead the pack and then across all the pieces of of both segments we talked about the broad based strength in terms of product categories and that that trend continues as well into the second half.

Brandon Knutson, Analyst — Morgan Stanley

Okay and at the investor day you outlined a framework of three to four percent organic growth 50 to 100 basis points of margin expansion. The year is expected to be close to the high end of the organic growth, but then the margin expansion is expected to be close to the low end of that growth. Can you talk about the low end of the guidance there? Can you talk about what's driving those dynamics and that disconnect a little bit?

Mark Okerstrom, CFO

Yeah, I think first of all, I would say that the financial framework we laid out is perfectly intact. And, you know, deliberately we laid out that framework such that we would have the levers necessary for us to make the investments required to drive the Ford of Accelerated strategy, and so far it's working. I would also just say that the margin discipline that is inherent in Fordiv's culture and its history is 100% intact. The differentiated nature of our products, their high brand value and innovative features gives us very strong pricing power, And we've got great operating leverage through the business. So we're really looking to make a step change in growth in adjusted earnings per share and adjusted free cash flow per share. The first stop on that is to accelerate core growth. We're on the right track here. And where we land within that 50 to 100 basis points range is really a decision. It's not going to happen to us. It's a byproduct of the decisions we're making to drive the most optimal shareholder return and benchmark-beating returns profile over a multi-year period.

Brandon Knutson, Analyst — Morgan Stanley

Got it. Thank you. Shifting a little bit to Fluke and Data Center, that business has been performing really well, strong order growth, strong point-of-sales growth. It sounds like a lot of this is coming from Data Center. Can you just talk about what the Data Center opportunity is there and how meaningful that could be to Fluke?

Olumide Soroye, CEO

Yeah, so Fluke's just a terrific business overall. And just to be clear, data center is an exciting driver of the growth, but our success at Fluke is really broad-based. And if you think about it, for the last five years, Fluke's grown orders just about every single quarter except for one, maybe. And that's way beyond the data center story. So we like the broad-based trend at Fluke. The data center opportunity is an important one for us at Fluke. And as we've talked about a few times, we really think about it as we participate in the build-out and commissioning stage of a data center. But even more importantly, and in a more enduring way, we participate a lot in the ongoing operations and maintenance of data centers. So if you think about the focus on CapEx activity right now, it's exciting. Fluke plays a bit of a role in that. But the more exciting thing is the next 10 years plus when you turn on the data center, who is running it and who is making sure it stays up and running. And that's where Fluke really comes in. We have a range of existing product solutions at Fluke from power calibration to power monitoring and analytics to high voltage diagnostics to electrical ground fault monitoring to high density fiber testing. There's a lot of products that has always been important for data center operations and maintenance. And as you build more data centers, you're going to pull through more of those. But importantly, we've also enabled our team at Fluke, to Mark's point, to drive more innovation, aimed at solving new problems in data centers. And that's the Certified Fiber Max is a good example of that, where the density of fibers in the center and the complexity and the speed with which they needed to certify and commission those was just unprecedented. So you needed a tool with the fastest throughput in the industry for optical loss test sets. And that's where we created in a way that uniquely Flu can do the leading product in the industry to do that. And what that does is not just sell that product, but it pulls through the full suite of all the other things that FluCore does for data centers. So it's an important opportunity for us. It's going to endure. You're not going to see a spike in the CAPEX stage because that's not really the sweet spot for us. But as you add more data center capacity in the world, that's a lot more data centers that need to be run and maintained for the next 10 plus years. And we love that enduring aspect of how Fluke plays in the data center.

Brandon Knutson, Analyst — Morgan Stanley

And to expand kind of the TAM within the data center opportunity, is M&A going to be a piece of that, or is this more going to be organic, looking at where you can repurpose products and things like Certified or Max?

Olumide Soroye, CEO

You know, we like the organic runway that we have to really address more and more of the data center opportunity, including coming up with new products as the architecture shifts around on the power side and other subsystems within the data center. So we like that organic vector. If we see an M&A asset, we'll look at it. But one of the things that Mark mentioned this, but an important part of M&A discipline is price is part of a strategy. And I think this day is the valuation on a lot of these data center assets. you really have to make sure that that meets your return threshold as exciting as the market is. So we really like the organic vector, and we expect that gives us a good runway.

Brandon Knutson, Analyst — Morgan Stanley

And on the new technologies and architectures around data center, like 800 volt is part of the conversation that's coming for future data centers. Is this something that could drive a potential upgrade cycle for electricians in terms of, like, does new product need to be used to be able to service that, or can it be done with what's already out there?

Olumide Soroye, CEO

Yeah, well, I think any time there is a shift in the requirements in the data center, and whether it's the power architecture with this high-density power requirements in the rack, or whether something is changing around the scale and the configuration of the data centers, it creates new needs for customers. And every time there is that, especially on the measurement and metrology side, that's where Fluke shines. That's when Fluke can come up with a new product that does something for 800-volt DC data centers in a way that nobody else can. And so we really like what that opens up for us. Having said that, whether it's a 480-volt free-phase AC data center from a power point of view or it's 800-volt DC data center, there's a lot of things that still need to run in that data center because there's a lot of subsystems beyond power. And that's what Fluke does. So the beauty of what we do is we will, at Fluke, be relevant for whatever configuration, whatever scale, and whatever power architecture, and we'll grow from that. And then whenever there's a new thing, we have a chance to innovate. So it's not a wholesale refresh cycle because there's 800-level DC. There's an enduring part of the demand for Fluke. But then that new architecture opens up the lane to do something like we did with CertiFiberMax for high-density fiber from the point of view of the kind of high power density in the racks and all the sub-racks that have to be created. and a new way power flows, which means you need more advanced power diagnostics, tools that maybe don't exist today. You need really disciplined ways of monitoring what's going on in these high power density racks because there's a lot of safety things that come with that that flu can help address and so on.

Brandon Knutson, Analyst — Morgan Stanley

Okay, shifting back to capital allocation once more, in terms of where you see the most opportunity to add to portfolio, Leo, what's the preference between hardware and software?

Olumide Soroye, CEO

Well, so our posture on both on M&A, which again, as we talked about in the four layers that Mark talked about, M&A has to compete with the share reportage value, you know, return proposition. That's one step. So when you get to the M&A piece, then we really don't start with a predetermined mix idea. We will focus on, is this an asset that makes our existing platform stronger? Does it add differentiated technology? And does it meet our strategic and financial criteria? Whether that's hardware or software, it has to pass those tests. Having said that, because the bolt on M&A we're doing is strengthening our existing business, the composition of our existing business is instructive in terms of what to expect. So, over 70% of 40 of today is now really this incredible, highly differentiated hardware brands in Fluke, in ASP, Industrial Scientific. That's over 70% of our surface area, which means the Bolton M&A funnel we're looking at, if they're going to make our existing business stronger, they're going to skew towards those. So, you're going to see them more towards those kind of hardware businesses. Hence, the examples that I talked about are really more, they're all on that hardware side of the company. From a software point of view, while we wouldn't rule it out at the gate, I would just say that the bar is really high, right? Because if you're looking at a software asset from an M&A point of view, it has to have the attributes we love about our existing software businesses. Deep proprietary data, system of record and action, multi-sided networks, compliance and regulatory lockings around the asset. then it has to be those advantages are going to get stronger or at least endure in an AI enabled world so you feel they're secure. And if they pass that, then the valuation has to be at a level that meets our return threshold. So it's just a pretty narrow path to land a software M&A deal and we just have a rich set of opportunities that are surgical and can really help us on the hardware side but we don't we don't rule it out appreciate it and looking out to 2027 and beyond what needs to happen to maintain growth at the high end of that three to four percent organic range in terms of what you can control and in terms of the macro as well so i mean we really like our setup here i mean if you think about it we we for 2026 now modeling four percent core growth for the year. We started the year providing 2% to 3% as our call. We just came out of Q2 with 6.7% call growth, and margin expansion, and terrific, I just said, EPS growth. The set of initiatives we're working on that we've talked about on innovation, commercial, recurring customer value have tremendous runway, and they're still in the early stages of ramping, and they continue to ramp their contribution. And so, frankly, at this point, our backlog in the company is higher than it's been for several years. So, we really just like our setup going into 2027. And I think from our point of view, the key is not what happens in the market. The key is the ramp rate of those initiatives that we're working on and you know we like the odds of having having the the the main tools in our hands versus uh versus what happens in the market so it's really it's also executing on those initiatives and make sure they continue to run appreciate it well that pretty much marks time for us thank you lima day thank you mark appreciate the time and thanks for coming of the conference. Thank you. Great to be here. Thanks for being here.