The operator, Kristina, welcomes everyone to Fortive Corporation's conference call for their fourth quarter and full year 2023 earnings. Ms. Elena Rosman, Vice President of Investor Relations, introduces the speakers and mentions the use of non-GAAP financial measures. She also reminds listeners of the risks involved in forward-looking statements. CEO Jim Lico then begins by thanking everyone for joining and highlights the company's strong operating performance in 2023.

In 2023, Fortive's portfolio of businesses displayed consistent performance despite a mixed macro environment, with mid-single-digit core growth projected for 2023. The company's strong execution and focus on FBS led to record margins and productivity improvements. Fortive's strategy of growth, progress, and value creation has resulted in a 5-year average rule of 35 performance. FBS has also contributed to the company's success, with a 33% increase in revenue attainment on new product launches and a focus on addressing climate, health, and safety concerns.

The company's use of Gen AI has led to a 20% increase in software development time and improved employee engagement. Their strategic portfolio is positioned to benefit from emerging technologies and market trends. Recent acquisitions and product releases in various sectors have contributed to the company's success, such as Fluke's Multi-product Calibrators and Tektronix's Python Native Drivers. Landauer's Digital Dosimetry Solution is also helping customers reduce energy usage and waste.

Fortive has recently launched new sterilization monitoring products in North America and Asia, helping customers keep up with increasing clinical demand. The company's recent acquisitions of ServiceChannel and proVation have demonstrated the power of their FBS system in driving double-digit ARR growth and significant margin expansion. This system is constantly evolving and improving, allowing Fortive to better understand their customers, accelerate innovation, and improve operations.

Fortive's center of excellence for software data and AI has expanded its capabilities in 2023 to support digital transformation and drive innovation. The company's leaders use FBS to reinforce a culture of inclusion and make KAIZEN a way of life for their 18,000 team members. Since 2019, Fortive has sustained its target of mid-single-digit through cycle core growth, delivered outstanding margin expansion, and converted more revenue to income and income to cash. In the fourth quarter, the company achieved record margins and earnings growth of 3x revenue. For the full year, core revenue growth exceeded initial outlook and adjusted gross margins and operating profit both saw significant expansion.

In the fourth quarter, the company saw strong growth in its Intelligent Operating Solutions segment, with a 6% increase in core growth and expanding operating margins. Fluke, Environmental Health and Safety, and Facilities and Asset Life Cycle all contributed to this growth. Precision Technologies saw a slight decline in core revenues, but still saw record margins due to price and productivity benefits. Tektronix had a record year with 9% core growth, while Sensing Technology saw a return to growth in two of its four businesses. Advanced Healthcare Solutions also had a strong performance in the quarter.

In the fourth quarter, Q4 growth was 3%, driven by an acceleration of mid-single-digit growth at ASP. Adjusted operating margins also expanded by 160 basis points to 25.7%, thanks to flow-through on consumables, price realization, and product highlights. In North America, consumables growth was 7% due to the transition from indirect to direct channels. The Software businesses also saw double-digit SaaS growth and are expected to sustain this momentum in 2024. For the full year, the company expects growth of 6% to 8%, with core revenues up 2% to 4% and an increase in adjusted operating profit and EPS. The effective tax rate is expected to be around 14.5% to 15%.

In 2024, the company expects to have a free cash flow of $1.38 billion, representing a conversion rate of 100-105% of adjusted net income and a 21% margin. For the first quarter, they anticipate revenue growth of 3-5%, with core growth driven by IOS and AHS segments and a decline in PT. Adjusted operating profit is expected to increase and margins to be around 24.8%. In 2024, the company expects positive growth and margin expansion in each segment, supported by secular tailwinds, new product introductions, and productivity initiatives. IOS is expected to have mid-single-digit core growth and PT is expected to have a 10% revenue increase and margin expansion of over 100 basis points. The EA acquisition is expected to be accretive to adjusted operating margins.

The outlook for PT reflects the realignment of INV into Sensing Technologies Group and the exploration of strategic alternatives for INV's design and engineering business. AHS is expected to have mid-single-digit core growth and operating margin expansion, driven by volume, price realization, and productivity. There is also expected growth in ASP, driven by improved channel position, NPIs, and software growth in Healthcare. The success of Fortive is attributed to their strong foundation, enduring principles, and unique culture, as well as their operating rigor and leverage of FBS tools. They have sustained 7% revenue growth, 120 basis points of adjusted operating margin expansion per year, and have cut net working capital in half since 2019.

The paragraph discusses the success of FBS and the potential for future growth in the market. It also mentions the company's 2024 outlook and their goal to double earnings per share and generate more cash flow over the next five years. The question from an analyst asks for an update on the shorter-cycle businesses, Tek and Fluke, and how they performed in the quarter and their outlook for next year. The speaker differentiates between the two businesses and mentions mid-single digit growth and orders for Fluke.

The speaker discusses the recent reclassification of Invetech to PT, a small business with relatively low margins. They explain the reasoning behind this decision and how it will benefit the company.

During a recent conference call, Charles McLaughlin and James Lico discussed the impact of the ASP rather AHS acceleration on AHS's outlook. McLaughlin stated that the business is expected to expand by 125 basis points on a like-for-like basis, but if the impact of Invetech is taken into account, it would be closer to 200-250 basis points. Lico added that Invetech was a significant headwind for health care in the quarter, but they expect it to continue to be a headwind throughout 2024. The transition to direct sales for ASP consumables is now fully behind them, and they anticipate seeing margin benefits from capturing distributor margins. They also see potential for revenue growth from having a direct connection with customers.

The company saw a 7% increase in consumables in North America and 4% increase globally. They expect mid-single-digit growth for the full year and are focused on improving margins. The team recently had an operating review and highlighted new consumable products for steam sterilization. The company is confident in their strategy and sees health as a strong growth driver in the future. In the first quarter, there was a sequential decline in margins, possibly due to changes in mix. Precision's margins in Q1 were not specified.

Charles McLaughlin and James Lico discuss Fortive's first quarter performance, noting a seasonal step down in revenue and expenses. They also mention that their Q1 guide represents record operating margins for the company. Julian Mitchell asks about the medium-term guidance for 2025, which Lico says is achievable through their history of double-digit EPS growth and compounding free cash flow. They also mention the potential for M&A opportunities.

Fortive is optimistic about their future growth, especially in the M&A market where they have recently closed five deals. They are also excited about the potential impact of their recent acquisitions, including EA, in 2025. The company expects consumables growth to be in the mid-single digit range for 2024.

The speaker discusses the success of the company's strategy in Q4 and expresses optimism for the future. They also mention the recent acquisition of EA and the potential for growth in the business. The company had a record order month in December and expects mid-single-digit ROIC in 2024. They anticipate the business to be in the range of $190-195 million for the year. Overall, the speaker is pleased with the progress and potential of the company.

The speaker is discussing the company's performance for the year, mentioning their satisfaction with the deals they made and the overall growth of 6-8%. They also mention a business called Invetech which they are considering selling, and another business called [indiscernible] motion which they plan to keep. The speaker also addresses the issue of destocking, stating that there was some in the U.S. and China but overall, Fluke had solid growth in the fourth quarter.

The speaker states that China is expected to have flat or slightly decreased growth for the year, due to conservative behavior from distributors and channel partners. They also clarify that the target for margin improvement is 100 basis points from core growth, not from EA's sales force. The incremental margin for EA is 40%.

The speaker is discussing expected improvements in AHS in 2024. They mention Fluke Health discontinuing product lines in 2023 and causing some noise, but expect them to be over the hump in 2024. They also mention that Fluke Health will likely see mid-single-digit growth for the year and that they are through some of the challenges they faced.

Charles McLaughlin and Andy Kaplowitz discuss the margin expansion at Health in relation to the growth of ASP and top line growth, with Consumables in North America showing strong performance in Q4. McLaughlin estimates that 80% of the margin expansion is driven by this growth. Kaplowitz asks for more information on the expectations for price versus cost in 2024, given the unpredictable global supply chain. McLaughlin explains that while inflation is coming down, they will continue to stay ahead on price cost. James Lico adds that their consistent gross margin expansion over the years is a proof of their success in managing supply chain challenges.

The speaker discusses the impact of the ServiceChannel and proVation deals on the company's long-term growth story. They mention that while the deals were dilutive in the first year, they expect to see positive growth in 2024 and beyond.

The speaker is discussing the growth and returns on capital for the company. They mention that they are on track for top line and bottom line growth, and that the returns on capital will accelerate in the future. They also mention the accretion of two recent acquisitions and how they have exceeded expectations in terms of accretion and margin rates. The speaker expresses satisfaction with these businesses and their strong growth rates and high margins.

The speaker discusses how FBS has positively impacted the company's net dollar retention and ARR growth. They also mention how both teams have embraced FBS and have done a good job in a short period of time. The speaker believes that the net dollar retention will continue to increase and the business is well positioned for the future. They also mention the potential challenges in the Invetech business, but believe that the second half of the year will have easier comparisons and it is not as impactful as other areas of the business. The company expects a 1% headwind to core growth in Q1 due to Invetech.

James Lico, CEO of Fortive, discusses the company's projected software growth for 2024, which is expected to be in the high single digits. This growth is attributed to the strength of FBS and its subsidiary businesses, as well as the potential impact of Data Analytics and AI solutions. Lico also mentions the potential for a turnaround in the sensing market, which has experienced negative order rates for the past 6 quarters. The company expects to see a change in the book-to-bill ratio in the second half of 2024.

The company is starting to see an increase in orders in the Sensing division, with customers talking about orders for the second half of the year. This is also true for the Tektronix division, which is expected to see low single digit revenue growth for the year. Although orders have been down for the past 5 quarters, the company expects to see a turnaround in the first quarter.

The book-to-bill ratio is expected to improve in the second quarter, with strong performance in aerospace, defense, and electronics. The company's exposure to the semiconductor market is mostly through its subsidiary KEITHLEY. The business is in a good place, but market dynamics may impact performance in the next quarter or two. The book-to-bill ratio is expected to be around 0.85 in the fourth quarter. The company has outlined long-term targets for 2025 and beyond, with an expected CAGR of 12.5% and 13.5%, respectively. To achieve these targets, the company may rely on M&A and needs macro conditions to return to normal.

James Lico discusses the company's track record over the past 4 years and how they plan to continue using their free cash flow to drive growth. He mentions the potential impact of macroeconomic situations but states that they have scenarios in place to remain agile and dynamic. He also highlights the success of their Software and Healthcare divisions and their focus on productivity and innovation to navigate various market drivers.

The speaker discusses the five recent deals that the company has made in the past 3 months, stating that they all have potential to accelerate compounding and contribute to growth and margins in the future. The speaker also mentions that the M&A environment is improving and the company is focused on using capital for M&A rather than share buybacks. A question is asked about the company's plans for increasing dividends and the speaker explains that they will increase in line with free cash flow and earnings per share. Another question is asked about the return on invested capital (ROIC) of recent acquisitions and the speaker does not provide a specific answer.

The speaker discusses the performance of two companies, proVation and ServiceChannel, which were acquired by the company. He mentions that the revenue and margins for both companies are ahead of expectations, and they are on track to meet their targets. He also notes that there were skeptics who doubted the success of these acquisitions, but the company has proven them wrong. The success of these deals is consistent with the overall durability of the company's portfolio.

The speaker discusses how M&A is improving Fortive's return on invested capital (ROIC) and adding durability and capability to the organization. The combined ROIC for proVation is already in the mid-single digit range for 2024. The speaker also mentions that the company has built strong capabilities in both hardware and software deals, with a focus on improving free cash returns and utilizing FBS tools, including AI, to drive innovation and commercial activities. Overall, FBS is a key factor in the success of Fortive's diverse portfolio.

The speaker is answering a question about the volume and productivity of the company. They state that while there may not be a significant increase in volume, there is potential for restocking in the second half of the year. They also mention that they expect a 40% incremental margin and a 45% margin for the year.

The company has seen some ups and downs in the earlier part of the year, but expects to see an increase in productivity of $0.07 to $0.08 in 2024 due to actions taken in the past. The company is not taking any more actions and is satisfied with the current state of the portfolio. The CEO thanks everyone for their support and invites them to reach out for any questions or follow-up.

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