Rob welcomed everyone to the Fortive Corporation's Second Quarter 2023 Earnings Results Conference Call and introduced Elena Rosman, Vice President of Investor Relations. Elena outlined the non-GAAP financial measures and discussed the risks associated with making forward-looking statements. Jim Lico then took over the call and reported that the second quarter results demonstrated the durability of their portfolio and the strength of their execution, resulting in higher core growth, margins, earnings, and free cash flow.

Fortive experienced record margins in the second quarter, with an adjusted gross margin of 59.5% and an adjusted operating margin of 26%. They are expecting industry recovery to be on track in the second half of the year with higher core growth and operating margins. Additionally, their software and services businesses are growing with SaaS revenue up mid-teens and their hardware products are running ahead of expectations. Fortive now expects to have over $200 million of excess backlog heading into next year.

The company is succeeding in its strategy to create a more durable growth, with higher software and consumables growth and favorable pricing and discrete productivity initiatives leading to an expected 125 basis points of adjusted operating margin expansion for the year. The company is leveraging its domain expertise and hardware to accelerate software and data analytics across its five customer-connected workflows, which is benefiting from customer investments in automation and digitization, the energy transition, and the need for productivity solutions. These solutions are helping with the maintenance and efficiency of critical infrastructure, safeguarding workers, and optimizing workplaces and accelerating customer productivity efforts.

We are helping customers solve their toughest technical challenges through innovations in the product realization workflow, such as increasing the proliferation of electrified and connected devices, advancing the democratization of high-performance compute and AI-driven data analytics, and helping healthcare providers deliver better patient care with industry-leading clinical safety and productivity solutions. We have also seen customer success with new product launches that are aligned with these secular trends, such as Fluke's testing tools for EV storage equipment, Gordian's planning tools and RS means data to optimize infrastructure, Tektronix's performance scopes and wave form generators for quantum computing, and Provation's cloud-based documentation software to save physicians time.

Fortive received two awards for its sustainability efforts, USA Today and Statista's Climate Leaders award and the World Sustainability Awards Profit with a Purpose Finalist. This quarter, Intelligent Operating Solutions saw a 4% revenue growth and 420 basis points of adjusted operating margin expansion, driven by good growth in most regions. Fluke saw a slight revenue increase and eMaint had record quarterly bookings. EHS saw high single-digit revenue growth with record iNet growth at ISC and strong SaaS momentum in Intelex.

Intelex saw strong bookings for its ESG corporate reporting solution, while Gordian had strong growth and operating margin expansion. FBS-led innovation and pipeline generation efforts have improved win rates and growth in the streamlined portfolio for [Inaudible]. Service channel had an acceleration in growth and profitability, driven by strong SaaS bookings. Precision Technologies had 8% core revenue growth and 190 basis points of adjusted operating margin expansion, with record second quarter revenue at Tektronix and mid-teens growth. Tektronix is executing on robust backlog and power and digital test and measurement solutions, and is expected to moderate to mid-single-digit growth in the second half of the year.

In the second quarter, sensing technologies saw a slight increase driven by strong price realization and Qualitrol's broad strength. Pacific Scientific EMC reported mid-teens growth due to customer demand and Kaizen activity. Advanced Healthcare Solutions had a 4% core revenue increase with double-digit growth in China. ASP/Censis saw mid-single-digit growth, Fluke Health Solutions had good growth, and Provation had mid-teens core revenue growth. Supply chain constraints were largely resolved. Charles McLaughlin will provide more financial information and the 2023 outlook.

Fortive reported a record adjusted gross margin of 59.5% and a record adjusted operating profit margin of 26% in the second quarter, driven by volume, FBS initiatives, and strong price realizations. Free cash flow was $300 million. The company raised its 2023 guidance to reflect the outperformance in the second quarter. The third quarter guidance expects core growth of 3.5-4.5%, revenues reflecting a normal linear profile, and adjusted operating profit margins up over 100 basis points year-over-year.

This paragraph discusses the company's expectations for Q3 and full year 2023, including core revenue growth of 3.5-4.5% year-over-year in Q3 and 5-6% for the full year. Adjusted operating profit is expected to increase 10-11% with margins higher in the range of 25.5-26%, and adjusted diluted net EPS guidance is expected to be $3.36-3.42. Free cash flow for the year is expected to be $1.26 billion, representing conversion of 105% of adjusted net income and 21% free cash flow margin.

Jim discussed how Fortive has driven double-digit earnings, annual earnings per share growth, and converted working capital as a percent of sales, nearly in half. This has allowed them to generate 50% more free cash flow per dollar of revenue. Despite the evolving macro environment, they have raised their outlook for the year and are confident in their ability to accelerate their progress in the future. They have an attractive funnel of bolt-on and adjacent M&A opportunities to drive upside and make Fortive a more durable, high-growth cash flow compounder. Jeff Sprague asked to drill deeper into tech and clarify the orders.

Jim Lico and Jeff Sprague are discussing the second quarter orders, which were down 10%, but still up 30% from three years ago. The backlog was higher than expected, and the ASP had strong capital placements which bodes well for the rest of the year. The Elevate project was a headwind, but it was planned for, resulting in mid-single-digit growth, even better when Russia is excluded.

The company reported strong growth in the quarter and expects to see continued performance for the rest of the year. In response to a question from Steve Tusa from JPMorgan, Charles McLaughlin noted that the change in guidance for the year was due to Invetech being lower than expected in Q2. Looking forward into next year, the company expects to have tailwinds from COVID and pricing, resulting in sequentially higher margin expansion than what is normally expected.

Steve Tusa asked if the next year should be viewed as a step towards the 30% operating profit target or if it is more back-end loaded. Charles McLaughlin responded that it is not back-end loaded and that the trajectory of ASPs will be key. He also mentioned that the second quarter had seen good progress in margins for health. Steve Tusa then asked where the $350 million of excess was at the end of the second quarter and Charles McLaughlin responded that there was still about $330 million of excess.

Jim Lico explains that the 400 basis point improvement in IOS margins is due to acquisitions made in the past few years, such as FAL and EH&F, as well as Fluke's consistent margin improvement. He then goes on to address Scott Davis' question about pockets of industrial slowing, noting that the book-to-bill for PT is at 1.0 for the year, which is better than expected.

Jim Lico provides an update on the backlog of orders for Sensing and other industrial businesses. He states that the excess backlog is higher than anticipated and is around $330 million. He also notes that parts of Sensing are doing well, while there is some slowing in industrial businesses in Europe, HVAC, and semiconductor business. He concludes that this is in line with what was originally predicted and is expected to continue through the second half of the year.

The backlog of orders is seen as an insurance policy against slowing and is being managed to prevent near-term challenges. There is no destocking or de-booking occurring, only some rescheduling of backlog on the OEM side for Sensing. There is a little bit of a compensation issue in Japan, but the company still expects to see high single-digit growth in the country for the rest of the year.

Jim Lico from Fluke and Tek discusses the growth in India, which has been benefiting from foreign direct investments. He believes that India will be about 20% of the business for the rest of the year. Andrew Obin from Bank of America asked about inventory levels among distributors, and Lico believes that inventory is a function of demand and that they don't see any major changes in inventory levels.

Jim Lico discusses the channel inventory relative to what is seen in ASP and Sensing, and states that POS is still strong and mid-single digit growth was seen in the US, China, and Europe in the second quarter. He also states that there are a number of product launches planned for the second half of the year, which could help with demand creation. Andrew Obin then asks about Fluke and Tek, and visibility related to these projects, to which Jim Lico responds that they are starting to get visibility on the tech side.

Fluke is seeing good secular drivers in power, solar, and sustainable investments, which is providing an opportunity for them. They are a few years away from the manufacturing plant build cycle, but when the facilities are up and running, there will be an opportunity for Fluke to provide maintenance staff and build out those opportunities. There may be some mix divergence in the construction market, with more manufacturing and less commercial or warehouse verticals.

Jim Lico notes that FAL does not have a lot of exposure to commercial buildings, but instead has seen growth from deferred maintenance and taking advantage of it. He also notes that customers are looking to understand their investments and use FAL's solutions to bring down their facilities costs.

Jim Lico states that the reassessment of commercial infrastructure is driving growth for their software solutions and that they have a customer that is ahead of schedule on a $14 million cost savings. He then shifts to discussing lead times normalizing in the hardware businesses, noting that Tektronix lead times have come down and that this was embedded in their guide. Fluke lead times have been good and they have seen less of this reaction.

Charles McLaughlin from AHS explains that the increase in profits and revenue from the second half of the year compared to the first is due to normal seasonality, the dealer shift Project Elevate, higher prices, and self-help productivity initiatives. China's lower revenue due to COVID in the first quarter will also factor into the increase.

Charles McLaughlin and Jim Lico discuss their view on capital deployment, including buybacks and M&A. McLaughlin states that they remain opportunistic with their buyback and have plenty of capacity. Lico adds that they have been busy with activity this year, but remain disciplined in their approach to M&A by not overpaying for acquisitions.

Jim Lico provides an update on the company's performance in different regions. He states that North America is doing well, with mid-single digit growth in the second half of the year and mid-teens growth in the two-year stack. Western Europe is expected to remain flattish, with mid-teens growth in the second quarter. The company is benefiting from its software businesses and the work of the ASP team in North America.

PacSci reported higher than expected results due to an inflection in the A&D sector, which was likely driven by increased investment in AI and computing. Jim Lico believes that there are still opportunities in high-growth markets in the second half of the year, although the growth rate may be lower than expected. Additionally, he believes that AI-related investments will continue to fuel growth in PacSci in the future.

Tektronix and EMC are both investing in quantum computing and AI research, and Tektronix is playing a strong role in the hardware side of AI. EMC has a large backlog of business, but there have been supply chain capacity challenges. Jim Lico states that the demand for EMC is at an all-time high. Price is 50 basis points higher than the previous quarter, and Tektronix is still pushing price in AHS. Lico also provides an outlook on pricing for software and services.

Jim Lico discusses the second quarter performance of Sensing, health care, and software businesses. He states that net dollar retention has improved, and AI presents opportunities to create more features and opportunities to improve net dollar retention. He also mentions the headwinds in the Fluke business, with units down mid-single digits and tough China comps.

Fluke experienced mid-single-digit growth in the first half of the year and is expecting similar growth in the second half. The team has been executing well and introducing new products to make the company less cyclical and more tied to secular drivers. The company has taken actions to countermeasure potential slowing in the marketplace.

Jim Lico clarifies his comment about Fluke being mid-single digits in the first and second halves of the year, but with a two-year stack that accelerates a little bit. He then goes on to explain that Tek's strength in point-of-sale attack around the world is a sign that the demand is real and that the excess backlog is an insurance policy against any slowing. Finally, Joe Giordano follows up with a question about margins, referencing Slide 16, which shows a big ramp in all three segments from 1Q to 4Q.

Charles McLaughlin and Jim Lico discuss the normal seasonal step-up in margins from Q3 to Q4 and the tailwinds associated with transitioning to a new channel distribution in AHS. They note that the biggest impact of the transition will be seen in the second quarter, with some impact in the third quarter, and that the transition should be complete by the fourth quarter.

The terminal sterilization business has been a strong business for the company and now that they are direct, they can accelerate the sterilization cycles and have more contact with customers. This should have an impact on both growth and margins, as well as customer satisfaction. The capital numbers were better in the second quarter because customers understand that they will have better access to ASP salespeople and application engineers. Precision Tech had a book-to-bill of 1.0 and orders were up mid-single digits, which was better than expected.

Jim Lico discusses the strong strategy around secular drivers, recurring revenue, and self-help work that has allowed the company to mitigate any economic impact from the moderating aspects of some of their businesses. He reports that the book-to-bill of 1.0, which includes Fluke orders, is in a much better position than anticipated and the excess backlog is more robust than expected. He believes that these factors will bode well for the company's performance in the second half of the year.

Jim Lico expresses his confidence in the company's ability to hold prices and maintain its status as a price leader, despite any potential macroeconomic challenges. He believes that their investments in innovation and value creation will help them continue to do so in the future. He then thanks the participants for their time and looks forward to sharing more details with them in the future.

This summary was generated with AI and may contain some inaccuracies.