The following is excerpted from the question-and-answer section of the transcript.
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Question: Robert Mason - Robert W. Baird & Co. Incorporated - Analyst
: Yeah. I mean I think in 2016, we spun out, and I really think of our life cycle in sort of three phases. If you think about the early days
in which like the Altra transaction and some of the Vontier spin was really about building the durable growth model, changing to a
more durable, higher growth, we moved the growth rate up on the business. And then Phase 2 is really about some of the very, very
important acquisitions we did around facility and asset life cycle software and around ASP getting instant health. And the foundation
of -- it's really the foundation of -- along with Fluke will be the foundation of who Fortive will be going forward.
So I think that Phase 2 is really around the acquisitions and building the more durable growth, putting more recurring revenue into
the business. And now we're just in a really good position with those foundations in the two businesses, one being a 50% plus
recurring revenue business. It's got great growth profile, another through-cycle grower that's got good growth but has some cyclicality
to it.
And I think increasingly, Rob, as we really looked back last year and we did some of our strategic work early in the year, what we
really found is that these two businesses are really living within one. And unlocking the potential of both really is about unlocking
those growth profiles so that strategically, they can go after the kinds of things they're really going to do. And our capital allocation
strategy, because of the spade work we've done over the last eight years to build on these foundations, the capital allocation model
can be different. It can be less risky to some extent.
I think over the years, people have looked at some of the M&A deals we've done and some of these in new markets to us and in
places where we hadn't been and looked at that as more risky M&A. I think what you look going forward is now that we've built
those foundations, so we've got those great pieces for Fortive going forward. We've got an opportunity then to have a different
capital allocation, less risky, higher return profile that we're really excited about.
And subsequently, the new company has a great potential as well. It will have some cycles to it, but it's the engineers or engineering
company. It's really tied to the great technology transitions that are going into the world. They have some cycles to them, some
investment cycles to it, but that business will take advantage of those opportunities as they become available. They have taken
advantage of those opportunities as they become available over the last five years, as you've seen in the numbers. So we feel like
that independent path is going to be really strong for them as well.
Question: Robert Mason - Robert W. Baird & Co. Incorporated - Analyst
: Yeah, sure. And I think when you look at the durability, I think it starts with just stepping back and saying, the company going forward,
we've done a lot of the heavy lifting to get some of these businesses into a profile as you just described, right? Accruent, a little bit
more of a challenging deal that we did a few years ago is starting to really start to change in terms of its order profile should have
better -- had a better '24 than '23. It will have a better '25 than '24. That brings our facility and asset life cycle software business into
a really great set of businesses.
And I think in ASP, obviously, the pandemic wasn't helpful. The transition out of J&J was a little tough, but that business is really
performing over the last three years really well. And so I think that's a good setup.
And then maybe the last thing I would say is if you just step back and say 50% of the company going forward is going to be recurring
revenue. That's going to grow somewhere in around the high digit range. And the other part of the business, the other 50%, which
is really reoccurring great franchises growing in the mid-single digit also means that, that business will -- as we continue to invest
M&A capital and money into our organic revenue strategies, we're going to continue to mix that recurring revenue number up and
mix the growth profile of the company over a long period of time. And I think that's what really gets us excited about the new
business.
Question: Robert Mason - Robert W. Baird & Co. Incorporated - Analyst
: Yeah, it doesn't change, but it shifts. I mean I think when we think about new Fortive at about $1 billion of free cash flow. You think
about half of that is going to be deployed back to investors in forms of buybacks mostly. Then we got about $500 million roughly.
I think our sweet spot is going to be deals probably [50 million to $200 million]n range. So those are deals we've done. We just did
four of those in the fall of '23. So there'll be more emphasis on that.
But I don't think it requires any new muscle necessarily but certainly more emphasis. And the thing I really like about that as well is
when you -- if you think about the four bolt-ons that we did in the fall of '23, three of those were sourced from relationships and
because we're in the industry, we're in the market, people we've known for a long time. They weren't competitive.
And so I think the process of cultivating independent owners of businesses within the domains that we're so strong in really gives
us, I think, an advantage in a number of the bolt-on, the kinds of deals that we'll do. And we -- I think we demonstrated that muscle
a year ago, and it just means more of an emphasis in that kind of capability going forward.
Question: Robert Mason - Robert W. Baird & Co. Incorporated - Analyst
: Yeah. I think there's a couple. One, we learn from each one of those. And obviously, our own spin out of Danaher, probably another
one, right? So we've got a little bit of experience in doing this. So I would say that there's certainly a lot of learning in the process in
terms of the sort of mechanics of it, right, how you do the tax step plan, how you do the Form 10, some of those things.
There's lots of experienced professionals who know how to do that work. I would say that things may be more related to getting
the company off and running. Number one is we like the -- we started to see PT transition with order growth in the back half of this
year. We think that starts to bode well for revenue later in maybe the second half of '25.
So we'll be spinning in the tailwinds, which we think is a good thing. Obviously, when we did the Vontier spin, as an example, that
was -- that business had some secular challenges. They've done a great job in dealing with those, but they -- we knew those were
going to be there. So I'd say some learning is if we can find an opportunity to do that into the tailwinds.
I think the second one is being clear about the capital allocation strategy. One of the things we found when we've done some of
this other work is people didn't know how we were going to spend our free cash flow between now and spin. And so because of
that, they couldn't guarantee the balance sheets. So by being more very prescriptive as to how our free cash flow, I think you get a
lot more certainty when we say we're going to have investment-grade balance sheets when we -- at the time of spin.
You can be unbelievably highly confident, I can't say that enough, about what the balance sheets and investment-grade profile is
going to look like for both companies going forward.
Question: Robert Mason - Robert W. Baird & Co. Incorporated - Analyst
: Yes. I mean I think two great leaders were -- we've -- my legacy with Danaher and obviously, of 20 years before Fortive, we've -- I
think we know how to get ready for CEO succession. It's been -- succession in general is a really important part of how we think about
leadership and successful leadership. So we're in a very fortunate place where we have two ready leaders for both of these businesses.
Olumide, as you said, is a little bit new to us. We brought him into the company because he had data analytics and software experience.
He had real experience in growing recurring revenue businesses. His CoreLogic experience prior to Fortive and even before that
with some real demonstrated success in that regard.
His fingerprints are all over Fortive, whether it be on FBS and how FBS can add value to these businesses. We're more successful --
more recently, some of the successes I described at Accruent, the building out of our FAL portfolio, the work we've done on durability
at Fluke. He's had real strategic fingerprints into those businesses, and he's a good operator so -- which is obviously important as
well.
So we feel really, really great about his new leadership. And this is eight years of work for me in Fortive is -- I mean, for me, handing
it over to somebody is handing something incredibly important to me. And I wouldn't do that without a strong confidence that
we've got two great leaders, and I'm really confident we do.
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NOVEMBER 13, 2024 / 8:55PM, FTV.N - Fortive Corp at Robert W Baird Global Industrial Conference
Question: Robert Mason - Robert W. Baird & Co. Incorporated - Analyst
: I'd just add, a number of folks have seen -- a chance to see Olumide and Tami here as they've been out recently, and we'll continue
to do that. So I think the ability to see them as segment leaders versus seeing them as CEO -- new CEOs is a little bit different. So
they'll certainly be out and about visiting with investors over time. And I think the feedback thus far when they've been out has been
incredibly strong.
Question: Robert Mason - Robert W. Baird & Co. Incorporated - Analyst
: Yeah. I think about this as really a 6-year effort. And I think everybody forgets that the 2018 tariffs have been in place ever since then.
So nothing has gone away, right? And on top of the tariffs, then we had supply chain inflation, and we had some of those challenges.
And so for those five or six years of time when all of those things have been enacted, our ability to counter measure those challenges
has meant that we've continued to grow gross margins throughout and operating margins, obviously, 125 basis points over the last
five years.
But we've also grown gross margins as some of those things have impacted COGS. And it really comes down to our ability, the
strength of our franchises, the quality of our teams to really do the things that are needed to counter measure some of those actions.
And what we've done over the last several years is continue to derisk the portfolio. We've continued to move manufacturing into
locations where the tariffs wouldn't be impacted. We've doubled -- we've dual-sourced our supply chain so we have options around
our supply chain. So we're much more resilient than we were a number of years ago.
And as you said, a number of years ago when we first started, which none of us have really had a lot of experience in tariffs at that
point. we did a great job of counter measuring those. So we're confident that we can do that. And we've already started to action
some things based on scenarios that we built prior to the election. But I think it's still jury still out as to what those are actually going
to look like.
But we're starting to prepare for what we might be able to do. I think the way I think about it is where we have pricing power, which
is pretty much the entire portfolio, we've got opportunity. We've got an opportunity to move sourcing. So if we're dual-sourced, we
can move to one source versus another.
And then finally, given our sort of asset-light manufacturing, we can move manufacturing products into different regions of the
world relatively quickly. So all of those will be actions to take in if -- depending on the severity of what we see coming out of the
election.
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NOVEMBER 13, 2024 / 8:55PM, FTV.N - Fortive Corp at Robert W Baird Global Industrial Conference
Question: Robert Mason - Robert W. Baird & Co. Incorporated - Analyst
: Yeah. I mean, you always want to be careful, but I mean I think what we demonstrated during the last five years is these franchises
have tremendous value. We think of it more as our innovation capability, our customer value allows for us to get more value out of
the market. And when these things happen, we built -- we spent years building these franchises. We have deep relationships with
customers. And these things tend to be more understood by customers, quite frankly, than anything else, right? I mean there'll be
headlines for sure.
Question: Robert Mason - Robert W. Baird & Co. Incorporated - Analyst
: Yes. I think obviously, the revenue was 1% core, 3% overall growth in the third is a little bit lower than we had anticipated, a little bit
more noise. But we -- but as you said, the order growth was good. So we were starting to see some better reactions to orders. Orders
for precision technologies were double digit. In the quarter, Tek was high single digits. Fluke was high single digits.
So we started to see the third quarter dollars of orders for PT was higher than the second quarter, which I think is a good trend. So
I wouldn't say there's an inflection necessarily. I would call that more stabilization. We expect the same in the fourth. So we would
anticipate that stabilization is really where we're at right now. I wouldn't call an inflection at this point, dramatic inflection.
Some of that order growth is comps, but some of it is actually seeing -- starting to see some green shoots, some orders that were
delayed in the second quarter, we did see in the third at Tektronix as an example. So there's a few things out there that would suggest
things -- at least we feel good about the stabilization side of this.
Question: Robert Mason - Robert W. Baird & Co. Incorporated - Analyst
: Yes. I mean, certainly, if you were to look at PT, you'd look at our businesses tied to the utilities, it's principally at Qualitrol. But
anywhere we have sales into that, we've seen strong growth. Our defense business has been strong growth. Anything tied to data
center, I think that states the obvious. We've got a little bit of that in sensing. We've got -- we certainly see that on the Tektronix
front, a little bit at Fluke networks. So anywhere we're tied -- we're seeing some of those things just continue to accelerate.
But I think the other piece is the recurring revenue is really strong, right? Healthcare has been good. It's continued to be really strong.
Our software businesses, we had high single-digit ARR bookings growth in the quarter. So I would say our recurring revenue businesses,
principally in software and health care, are continuing to be strong.
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NOVEMBER 13, 2024 / 8:55PM, FTV.N - Fortive Corp at Robert W Baird Global Industrial Conference
Question: Robert Mason - Robert W. Baird & Co. Incorporated - Analyst
: Yeah, I think when you look at -- if you step back because, obviously, the North American channel aspect of the third quarter last
year, we'd still be in the mid-single-digit range for this year. And if you took a three-year look where you kind of look through that,
you'd be looking at solid mid-single-digit growth for healthcare. And we think that's a good number for the future as well.
Question: Robert Mason - Robert W. Baird & Co. Incorporated - Analyst
: Yeah. Well, we'll get to a guide. I would say some of the backdrop that we're thinking about is we'll see continued order growth in
precision technologies between now and the end of the year. So that should set up well for maybe a little bit more of a later -- there's
usually about a three- to six-month lag on that. So we should start to see things start to improve there in that time frame. We think
the recurring revenue businesses will continue, healthcare at a mid-single-digit, software probably in the mid- to high single-digit
range as well. So those are going to be -- I think those all be good strengthening pieces to the -- to '25.
I think China is -- we're down about [9] -- high single digit to low double digit in the year for China. I don't expect that to come back.
So we've had good order growth regionally around the world. The one place we haven't necessarily is China. So we don't think China
necessarily has a step down at this point, but we don't necessarily see it coming back. And so I think planning assumption for next
year is going to be that China probably doesn't add to the growth rate. Those are maybe the big pieces.
Question: Robert Mason - Robert W. Baird & Co. Incorporated - Analyst
: Yeah, it was a great story in the third quarter. I think one of the things you and I have talked about this, we've really revamped our
innovation process on a pretty consistent basis from the start of the -- but we really saw the benefit. And we've seen the pilot for
that new process was at Tektronix. And a lot of the revamping and success of Tektronix over the last four or five years has really been
that new product development process. It really leans on new innovation and breakthrough innovation and the heavy focus.
And so we're starting to see a lot of -- really the green shoots of that throughout the portfolio. I was most pleased in health. We saw
it at ASP. We saw it in Provation. But we also saw that Fluke is a sort of perennial innovator. But even Fluke had, I think, the best
quarter it's had for platform new product launches than in time since we can remember, and my memory goes back a long time. So
we really feel like we'll have even more of that in '25.
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NOVEMBER 13, 2024 / 8:55PM, FTV.N - Fortive Corp at Robert W Baird Global Industrial Conference
So some of those are coming into a little bit of a more difficult market, like Fluke, as an example. So I think even the ones we've just
recently launched will give us some traction next year as well. And then we've got a new realm of things as well. So I think we're
really seeing the benefit. And I think that's probably the third piece of things that can add to some tailwind next year as we launch
things throughout the year. All of those won't be launched in the first part of the year. They'll be launched throughout the year.
Question: Robert Mason - Robert W. Baird & Co. Incorporated - Analyst
: Yeah. I think what we said was we would probably put even more marketing dollars into some of these things if -- but we mostly
sell through channels. And so if the channels are seeing the kind of growth environment we're seeing right now, we might not get
the uptick of those programs or we might not see the channel traction.
Historically, the Fluke product launch, we might get a buy-in that really allows for a more expansive launch, if you will. We didn't get
that in the quarter. We're not anticipating that this year. That's why I say I think some of the tailwinds we'll see in '25 will come from
what we had anticipated might happen in '24 but will now move into '25.
Question: Robert Mason - Robert W. Baird & Co. Incorporated - Analyst
: Well, we have gotten is the why Fluke and NewCo question sometimes gets asked. And I think it really boils down to a couple of
things. It's a tremendous global franchise, with the largest installed base by far of any company we have within Fortive is the Fluke
installed base. And it really somewhat acts like a recurring -- I would call it more reoccurring.
But when you have over 20 million instruments around the world and completely satisfied customers who are always looking for
the next thing, we sort of think it fits our sort of land, expand, endure business model that we're really creating in new Fortive. That
fits the software models.
Everybody understands that in health care, right? You land the equipment, sterilization equipment. You then have consumables
that expand the market, and then you continue to build on that. We think we can do that with Fluke, and we've had some success
from new product launches, which is really expanding the share wallet.
When -- most Fluke customers don't buy the entire portfolio. A lot of times, weirdly, they don't even know about it. So the marketing
effort and the new product efforts have really been focused on trying to expand that share of wallet. We think we're in the early days
of that sort of strategy, and we think that will build a growth year, Fluke.
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NOVEMBER 13, 2024 / 8:55PM, FTV.N - Fortive Corp at Robert W Baird Global Industrial Conference
And when you think about a number of the places where we sit today in new Fortive, they've come out of strategies at Fluke, right?
Fluke wanted to get into maintenance software, which led us into a facility and asset life cycle software. Fluke is really a safety
company, electrical safety company that led us to gas detection and ultimately into EH&S.
Fluke Health was a business that had us in the hospital and gave us a lot of understanding of what was sort of industrial healthcare,
which led to some of our thought processes around things like advanced sterilization products or ASP. So it's really been at the
forethought of a lot of the ideas we've had because of the global reach and expansive nature of the business. And it certainly provides
a tremendous amount of free cash flow in which to give us more degrees of freedom as well.
So we think it's a great franchise. It's a wonderful business. Its a financial profile looks more like a software company than anything.
And we think it's a great -- one of the great building blocks that we'll have in new Fortive.
Question: Robert Mason - Robert W. Baird & Co. Incorporated - Analyst
: Yeah. I think there's certainly the part of -- the business has some tie to semiconductors and when it's been semiconductors or
investments tied to data centers, that business has been really good. We saw some really good order growth in the quarter relative
to that, primarily in our Keithley business as an example, within Tek.
We anticipate the broader semiconductor market in multiple technologies will start to inflect a little bit better into '25. Certainly, the
industrial production and PMI improvement will help some parts of Tek as well. Some of the onshoring that's happening in the US
will be helpful to Tek as well. So -- because that's a lot around the electronic supply chain, which is really their customers.
I mean their customers of the global 1,000 technology companies. And so there's been some perennial delays in some of those
places and investments, we also think that starts to come back as well. So we've seen some of those green shoots in the quarter, and
we'll certainly see that in the second half led to some of that order growth, and we think that will continue to get a little bit better
in '25.
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