Q4 2020 Fortive Corp Earnings Call
Good afternoon, ladies and gentlemen, my name is Jason and I will be your conference facilitator. This afternoon.
At this time I would like to welcome everyone to Porto Corporation's fourth quarter 2020 earnings results Conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time simply press Star then the number one on your telephone keypad.
Would like to withdraw your question press the pound key.
I would now like to turn the call over to Mr. Griffin Whitney Vice President of Investor Relations. Mr. Whitney You May begin your conference.
Thank you Jason Good afternoon, everyone and thank you for joining us on the call with US today are Jim Lico, our President and Chief Executive Officer, and Chuck Mclaughlin, Our senior Vice President and Chief Financial Officer.
We present certain non-GAAP financial measures on today's call information required by SEC regulation G relating to these non-GAAP financial measures are available on the investors section of our website Www Dot Ford of Dot com under the heading investors quarterly results.
We completed the divestiture of the automation and specialty business on October one 2018, and accordingly have included the results of the <unk> business as discontinued operations for historical periods. We completed the separation of our of our prior industrial technology segment through the spinoff of Volunteer Corp. On October 19 2020.
And have accordingly included the results of the industrial technologies segment as discontinued operations. The results presented on this call are based on continuing operations.
During the presentation, we will describe certain of the more significant factors that impacted year over year performance all references to period to period increases or decreases and financial metrics are year over year on a continuing operations basis.
During the call we will make forward looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward looking statements are subject to a number of risks and uncertainties and actual results might differ materially from any forward looking statements that we make.
Today information regarding these factors that may cause actual results to differ materially from these forward looking statements is available in our SEC filings, including our annual report on form 10-K for the year ended December 31, 2019, and subsequent quarterly reports on form 10-Q. These.
Forward looking statements speak only as of the day that they are made and we do not assume any obligation to update any forward looking statements with that I'd like to turn the call over to Jim.
Thanks, Griffin and good afternoon, everyone.
Today, we are pleased to announce our fourth quarter 2020 results, which reflect a strong finish to the year for the quarter. We delivered adjusted diluted net earnings per share of <unk> 70.
An increase of 19% year over year as well as total revenue growth of four 9%, which exceeded the high end of our guidance and included a return to positive core growth.
Quarter underlying the increased resilience of our portfolio and represented a continuation of the sequential improvement in top line performance that we have seen since late in Q2. Despite the continued challenges associated with the COVID-19 patient disciplined application of the Florida business system helped drive more than 100 basis points of core operating margin expansion.
And a 39% increase in free cash flow.
The better top line performance in Q4 reflected a combination of durability across the recurring revenue portions of our portfolio and clear improvement at fluke and tektronix.
The strength of our recurring revenue, which now accounts for approximately 39% of our total revenue provided an important source of stability throughout 2020 in.
In Q4. This was most notable among our SaaS offerings, which generated low teens growth. The application of FBS customer success tools also continued to deliver improvements in net revenue retention, which climbed a greater than 101% for the full year. Our SaaS performance helped to offset the challenges the software businesses are having with cut.
<unk> site access for the provision of services as well as extended timelines for contract renewals.
The fourth quarter also saw fluke and Tektronix returned to positive growth both have seen steady improvement since the middle of Q2, driven by better point of sale trends across major geographies and continued successful new product launches.
On January 19th we disposed of our remaining 19, 9% ownership stake in volunteer through a tax efficient debt for equity exchange. This transaction represents the final step in the volunteer separation with the combination of the volunteer spin proceeds the debt for equity exchange and our continued strong free cash flow, we have reduced our net debt.
Net by approximately $3 billion since the beginning of Q4 with a net leverage ratio currently at approximately one three times, we have significant capacity to pursue key capital allocation priorities.
With that let's turn to the details of the quarter on slide four.
Adjusted net earnings were $252 $9 million up 19, 3% from the prior year and adjusted diluted net earnings per share were <unk> 70.
Total sales increased four 9%.
To $1 3 billion with core revenue up 7%, reflecting continued sequential improvement from the prior quarter acquisitions contributed 260 basis points of growth and favorable foreign exchange rates increased growth by 160 basis points.
We are particularly pleased to deliver adjusted gross margins of 58, 5%, representing a new high for Fortis, which highlights the significant portfolio transformation accomplished over the last few years gross margins also benefited from our ongoing investment in innovation continued application of FBS growth tools and another quarter of strong pricing.
Adjusted operating profit margin was 23, 2% for the quarter. This reflected a 130 basis points of core margin operating margin expansion, including positive core O&M ex for each of the segments. This was the second consecutive quarter with greater than 100 basis points of core O&M ex the.
Q4 margin performance also contributed to 50 basis points of positive core <unk> for the full year 2020.
During the fourth quarter, we generated $313 million of free cash flow representing conversion of 124% of adjusted net earnings and an increase of 39% year over year, including this fourth quarter contribution our full year 2020 free cash flow was $902 million representing conversion of 120 <unk>.
Percentage of adjusted net earnings and an increase of 44% year over year, our 2020 free cash flow performance in particular showed the resilience of our portfolio and the power of the Florida business system to drive consistent strong increases in free cash flow.
On slide six today of today's presentation, we showed the region by region breakdown for the fourth quarter in which we continued to see sequential improvement across our major regions.
In Asia core revenue increased by low single digits highlighted by high single digit growth in China and mid single digit growth in India continued strength in China was broad based led by mid 20% growth in sensing mid teens growth at fluke and high teens growth at advanced sterilization products. This strength in China, and India was offset by declines in most of the rest of Asia.
Western Europe core revenue increased by high single digits in the fourth quarter with high teens growth at Fluke Health solutions high single digit growth at Tektronix and mid single digit growth in Asps.
North America core revenue was down slightly in the fourth quarter as low teens growth at Tektronix and high single digit growth in Sensus was primarily offset by declines in Asps and industrial scientific fluke improved to flat core growth in North America, driven by strong performance at Fluke calibration and a return to growth at fluke industrial.
Turning to our segments intelligent operating solutions posted a total revenue increase of three 2%. Despite a 3% decline in core revenue acquisitions increased growth by 170 basis points, while favorable foreign exchange rates increased growth by 180 basis points.
Core operating margin increased 280 basis points price realization improved mix and higher volumes of fluke resulted in segment level adjusted operating margin of 28, 7%.
Fluke core revenue returned to positive growth in the fourth quarter, increasing by low single digits.
Fluke saw another quarter of strong growth in China, which increased by mid teens. In addition to seeing continued improvements in North America, and Western Europe, which were flat and down low single digits respectively.
Point of sales showed improvement with North America still negative, but better sequentially Western Europe, turning positive in China, continuing at a positive high single digit rate fluke saw strong performance at fluke calibration and fluke digital as well as solid growth at fluke industrial Fluke digital was led by another strong quarter from email, including low double digit SaaS growth.
Fluke continues to see momentum from recent product launches, including <unk> II 910, Sonic Imager, which was launched in November.
Industrial scientific core revenue declined by mid single digits in the fourth quarter I net continued to see good growth, which is more than offset by continued oil and gas related pressure at isc's instrumentation and rental businesses.
Separately <unk> continued to perform well with revenues increasing by low double digits.
Fourth quarter also represented a record bookings quarter for <unk>, which has seen strong traction and its expansion into western Europe intellects is benefiting from the implementation of FBS, which contributed to the successful rollout of enhanced sales funnel management and digital marketing lead generation tools.
In November <unk> also completed the acquisition of EHS AI, a leading provider of artificial intelligence and machine learning for the automation of permit permitting and regulatory compliance management.
The addition of EHS AI significantly enhances intellects ability to deliver applied intelligence and advanced analytics to a broad range of customers.
At <unk>, we also saw significant sequential improvement driven primarily by strong growth in SaaS offerings.
<unk> declined by low single digits for the quarter. It SaaS business increased by mid teens current also continued to apply.
To drive improvement in churn in the quarter, bringing net retention for the year to greater than 100%.
Despite some continued pressure from customer site access issues are currently seeing good bookings for its meridian engineering and information management offering as we partner with customers on their digital transformations and highly regulated markets such as life science in pharma.
We also continue to bring new offerings to market to address weren't returned to work requirements, including a recent win for our current EMS space management software product for Cushman <unk> Wakefield.
Gordian declined by high single digits due to headwinds associated with budget challenges and uncertainty across state and local government and high higher education customers.
As well as continued site access issues.
Accordions Rs means business grew low single digits, driven by mid teens growth for SaaS offering supported by the successful implementation of virtual platforms for training and Onboarding.
Gordian also saw signs of improvement in project activity and its job order contracting business towards the end of the quarter.
Turning to our precision technology segment, we posted a total revenue increase of two 3% with a 17% increase in core revenue favorable foreign exchange rates increased growth by 160 basis points core operating margin increased 30 basis points, resulting in segment level adjusted operating margin of 22.
2%.
Tektronix delivered mid single digit core growth in the quarter with low teens growth in North America and high single digit growth in Western Europe, Tektronix continued to benefit from better point of sale trends in both regions with significant improvement from Q3.
China saw a low single digit decline due primarily to the negative impact of the expansion of trade restrictions, partially offset by good year over year point of sale growth and momentum from small and medium enterprise customers.
Looking across the product lines. The improved top line performance in Q4 was driven by low double digit growth in both keathley in the mainstream mixed a single sole scope mixed signal oscilloscope platforms.
Growth in mainstream as sole scopes continues to be led by the six series line of Scopes, which is which has seen strong demand for the new six and eight channel versions since they were introduced in Q3.
Sensing technologies declined low single digits in the fourth quarter <unk> performed well in China with mid 20% growth driven by gains in critical environment applications et cetera, and increased OEM demand for <unk> factory automation offerings.
North America revenue increased slightly while western Europe declined low single digits with both regions showing clear sequential improvement sensing improved top line performance was primarily due to continued strength in medical and semiconductor end markets cetera, cetera has recently launched air watch negative pressure machine for isolation room.
Patients has performed well generating strong initial orders since its launch early in the quarter with orders from a range of customers across medical offices long term care facilities and schools.
<unk> EMC declined low single digits as it continued to face COVID-19 related pressures across certain elements of its supply chain. The company did see sequential clear sequential top line improvement versus the third quarter as well as another quarter of strong bookings.
AMC entered 2021, and a strong backlog position as its leading technology and innovation capabilities continue to drive strong demand.
Moving to advance health care solutions total revenue increased 12% with a two 6% increase in core revenue <unk>.
Acquisitions added 830 basis points to growth, while favorable foreign exchange rates increased growth by 110 basis points.
Core operating margin increased 50 basis points, resulting in segment level adjusted operating margin of 24, 1% up significantly versus Q3, driven by strong margin lifted asps as we continued to exit the transition service agreements.
ASP declined mid single digits.
Pandemic related pressure on electric procedure volumes remained a headwind.
Elective procedure volumes averaged approximately 93% of pre COVID-19 levels across the company's major markets, but were lower than anticipated and did not see slowing and did see slowing towards the end of the quarter.
ASP continued to perform well in western Europe with mid single digit growth. In addition to high teens growth in China, and the U S. ASP declined low single digits as growth in capital placements from improved sales execution and funnel management, partially offset the weakness in consumables revenue.
Asp's service business continues to perform well with the ongoing deployment deployment of FBS tools, helping to drive service sales and optimize service delivery processes with additional day to closings in Q4 and early 2021, approximately 99% of Asp's Global revenue is now fully under our control and off of transition service.
<unk>.
Census grew by high single digits in the quarter site access of hospitals improved early in the quarter only to then reverse as the quarter progressed census top line performance was led by its SaaS based sensor track offering which grew low double digits driven by a combination of new customer acquisitions and successful upselling of existing customers.
This growth was partially offset by high single digit decline in professional services revenue tied directly to the ongoing challenges with customer site access.
Fluke health solutions generated mid single digit growth in Q4, Fhm's grew slightly in North America against a challenging comparison. This growth was led by strong performance across both fluke biomed and the landauer radiation monitoring business.
<unk> continues to see good initial momentum across the two software platforms introduced over the past 12 months.
<unk>, which enhances workflow efficiency and test automation for biomedical customers and optimized which provides tracking and optimization of radiation dose management for radiology departments. Both platforms reflect fhl's his focus on bringing forward software and AI enabled revenue models to build on its strong existing recurring.
Revenue base.
AMETEK had another strong quarter with greater than 50% growth. The company saw significant sales and order momentum throughout the year, including a strong finish in December.
This growth was led by <unk> design, and engineering, offering which more than doubled on a year over year basis. In Q4. The company saw strong growth in the diagnostics market driven by near term projects to develop rapid testing capabilities for COVID-19, as well as strong demand from the cell therapy market tied to the production.
From next generation Therapeutics.
On slide 11, we highlight the progress made in 2020 with respect to our corporate social responsibility efforts, which is one of our key strategic initiatives.
Throughout the year, we enhanced the rigor and integrity of our data collection by transitioning our EHS sustainability and risk assessment processes to the intellect platform.
Our enhanced data analytics improve insights to accelerate our sustainability efforts and give greater transparency to key stakeholders.
To support inclusion and diversity are employee and friends resource groups focused focused on improving employee connections across the organization, while utilizing FBS to enhance their impact. We also expanded our commitment to the CEO inaction pledge by participating in the 2021.
Racial equity fellowship aimed at promoting corporate best practices to address systemic racism and social justice.
We are using FBS tools to develop standard work for greenhouse gas accounting and reporting and scaling energy kaizen efforts more broadly of course the profit across the portfolio. This has resulted in making substantial progress toward our greenhouse gas reduction goals, which we expect to achieve ahead of schedule. Finally forward of employees around the world continue to support our local communities.
Through our efforts and our annual day of caring with over 35000 hours of service and 60 worldwide communities. We are living our values to achieve our Crs CSR goals and we're excited to continue driving progress in the years ahead.
Turning to guidance on slide 12, we're instituting formal earnings guidance for the full year and the first quarter of 2021 for the full year, we expect adjusted diluted net earnings per share to be $2 40.
The $2 55.
Representing year over year growth of 15% to 22% on a continuing operations basis.
The annual guidance assumes core revenue growth of 4% to 7% and an adjusted operating profit margin of 22% to 23% and an effective tax rate of approximately 14% we.
We also expect free cash conversion to be approximately 105% of adjusted net income.
We are also initiating our first quarter adjusted diluted net earnings per share guidance of 56 to 60.
Representing year over year growth of 22% to 30%.
This includes assumptions of 5% to 8% core revenue growth and adjusted operating profit margin of 21, 5% to 22, 5% and an effective tax rate of 14%. We also expect free cash conversion to be approximately 75% of adjusted net income.
Before we wrap up I'd like to thank the <unk> team for their efforts in 2020.
I'm tremendously proud of how our teams rose to meet the many challenges posed by the COVID-19 pandemic.
With a focus on keeping our employees safe, helping frontline workers combat the virus and.
And continuing to provide our customers with our essential technologies.
Despite these challenges we made substantial progress across a range of strategic imperatives over the course of the year.
The focus and dedication of our team around the world enabled us to significantly transform the portfolio, while transitioning to a work from home environment and ensuring continued execution across the portfolio to deliver strong margin performance and consistent free cash flow growth as.
As a result of that hard work and a significant progress enabled we're in a strong position as we turn our focus to 2021, while navigating some of the continued challenges in the near term.
With a portfolio comprised of leading businesses that are well positioned in attractive markets considerable opportunity to accelerate our growth through continued investments in organic innovation and acquisitions and the support of a strong culture rooted in the Florida business system. We're very excited about the road ahead with that I'd like to turn it back to Griffin.
Thanks, Jim that concludes our formal comments, Jason we are now ready for questions.
Certainly at this time as a reminder, in order to ask a question. Please press Star then the number one on your telephone keypad.
We ask that you. Please limit yourself to one question and one follow up we will pause from just a moment to compile the Q&A roster.
Your first question comes from the line of Nigel Coe from Wolfe Research. Your line is open.
Thanks, Good morning.
Good morning, good afternoon.
When they book.
Some strength out of a translate in the book.
So.
Maybe Chuck.
The margin framework looks reasonable, obviously very strong execution and flow.
Okay.
And when we should expect true.
Yes, we still are we still kind of adding back cost.
Organic revenue in a way to manage to income.
Margin.
And we'll be pushing out of Ohio and incremental.
Thanks Nigel.
We're still thinking for the year, 35%, but maybe if I.
It would help you to understand that we're really thinking about some of our temporary costs coming springing back more.
Impactful in Q2, so that will probably be in 'twenty five, but if you look at the other quarters like likely be 40% in Qs, one and three and four and maybe that's a better margin profile for us going forward.
Is that helpful for what Youre looking for.
That's great. Okay, and then just homing in on the NHS.
Three 6% in both <unk> and 'twenty and 'twenty one.
But maybe the growth rate might accelerate.
Beyond <unk>, especially in AFP, maybe normalize against easier comps.
Thanks, Amit.
And then maybe infotech sounds like Thats got from real life Sciences.
Biopharma applications I was wondering what sort of revenue base, we have for AMETEK right now.
Yes.
It's interesting because we normally don't talk about AMETEK now that it's in a smaller segment.
Obviously, a little bit more material, but I think the more important thing is given the strength of the business and the work they did a little bit of an opportunity to talk about the good work they're doing.
That business that we were talking about in the prepared remarks, Nigel is really focused on.
Really design and engineering resources for our diagnostic companies as an example, so think of it as outsourced engineering capability.
And as we said in the prepared remarks, a number of opportunities around.
Testing companies that we're looking at COVID-19, and also maybe more broadly and more longer term in cell therapeutics. So number of opportunities. The business is a little bit lumpy because of the nature of the business model. We're working to change that over time. The leadership team has done a nice job of that but I think first and foremost they've done a nice job of growing the business. They were up I think.
For the year up over over 20%. So so a good a good roughly think of it as a.
Under $100 million business so.
That kind of number.
Relative to ASP.
I think your question was around the IHS and the growth rate at IHS, if I had it right.
I will talk about EHS NASP.
In terms of the growth rate, we certainly have good growth. If we were to think about the guide we've got out there.
<unk> will probably be one of our better growers they'll run into a couple a couple of comp issues at FHA as an example in the <unk> in the second half, but I think if we were to look on a two year stack basis, you would see progressively better growth through the year.
At IHS and that's on the backs of really Asps continuing to be good. There is there is an assumption there that we get vaccinated here that hospitals get elective procedures back on track by the second half.
That's a comfortable assumption at this point.
Okay.
Thank you.
Your next question comes from the line from.
From Barclays. Your line is open.
Hi, good afternoon, and thanks for giving all of that day.
In the slides.
Maybe.
The first question around the free cash flow guidance, clearly had an exceptional 2020, but about 120% adjusted conversion.
It's guided to motivate maybe to 105% I think this year.
So maybe in absolute dollars growing level mid single digit.
Is that high teens earnings increase.
Maybe help us understand how much of that is just kind of conservatism.
Thing happening with working capital.
Or are those prepaid expenses or capex coming back or something.
Hey, good evening Julian this is Chuck thanks for the question.
Yes, there's a couple of things I want to point out in the free cash flow, we're very proud of how we manage through the year in 2020.
Going forward, though keep in mind there is some tailwind that came in through through the year relative to the cares Act and not only did we get a moratorium on some of those taxes that we have to pay back over the next two years, but we also have to reinstate that so we need to.
We're a little overstated in.
Not overstated.
2020 came in stronger because of that but that's about a $50 million headwind in 2021, and then the second part would be around working capital as we start to Reengage.
Seat growth here.
It prudent to put to say that.
Our turns may not go down, but it will probably be a little bit of a use of cash as we grow those businesses. So I've got another $50 million per that those are the two biggest things that's going on there.
Thank you and then my second question really on that revenue guidance.
The PK.
Segment, starting out in Q1.
With low double digit.
Even coal growth perhaps.
The year's guided mid single digit.
Second quarter.
Should have an easy comp so it looks like you're dialing in a fairly steep slowdown.
In the back half of the year is that based on sort of the experience of price.
Tons and how quickly you can get that surge and then a fade again.
Just trying to understand some of the main assumptions in that core sales guy to PC.
Yeah sure. So you really got you've got a couple of pieces there to get the sensing business intact are the two big pieces there Julien.
I think number one is if you look on a two year stack, we'd see the business continuing to do pretty well. So some of it has a little bit to just to do with the comps the growth rates will look a little bit a little bit lower in the second half, but but but fundamentally if we look over a two year period, we will see the business kind of continue I don't think we have a plan for it.
To jump, though either so I think right.
Right now I think with the visibility, particularly on the sensing side, we're probably a little bit more prudent just to dial in what we think will happen without any extensive situations. So as I mentioned before on the question you know as we look at the guide we see Hs probably being that if we think about on a two year stacked basis, hff's probably being better.
IOS being better and then PT being maybe a little bit less from the other two so I think that's the right way to be but again strength of the business and we will see how the remaining part of the year plays out relative to some of the economic situations that obviously, we're tracking.
Great. Thank you.
Thanks Julien.
Your next question comes from the line of Josh <unk> from Morgan Stanley. Your line is open.
Hey, good afternoon guys.
Hey, Josh.
Jim and Chuck just relative to the full year guide here for the 7% obviously you have some easy comps along the way.
Aches and pains in terms of site access for some of the businesses, but it seems a reason to believe that this is not.
The new portfolio kind of within the steady state growth algorithm.
For for the business as it stands today given all the changes.
Well I certainly think its reasonable.
We wouldn't have put an unreasonable guide out there and I think it's based on a couple of things.
One is I would say again this is where the lot going on in 2020, as you mentioned region different regional comps and things like that but I think as we looked at on a two year stack, we continue to improve sequentially through the year without any unreasonable need for the economy to come back but on the same token we are still at a level of uncertainty here.
We're still it we really don't know the exact date in which Covid will open up offices and get customers back up and fully running so I think when we look at it continuing to get better through the year, we make a bunch of our own luck locked like we did in 2020, where as you know we were basically over 1% overall in the year.
So I think we will continue to make our own luck.
And if things play out a little bit better economically than certainly fundamentally you'd probably see a bigger number but I think for now with the level of uncertainty out there and the trajectory that we ended on I think this is this is a strong guide.
Got it that's helpful. And then just think if you wouldn't mind spending a moment on the M&A environment, Obviously, it's fact city out there.
Multiples are high I think a lot of the things that maybe some of these.
Emerging folks in the market are going out to look an awful lot like what could be afforded business maybe at the right multiple.
How do you view the competition for assets.
Or scarcity value for that matter given that there's still maybe some reluctance to sell four for better businesses, who are still feeling COVID-19 effects.
Yes, great.
<unk> question very timely obviously.
I think we've been very busy.
In the last six months, if I would characterize our efforts. We certainly I think continue to believe in the strength of our funnels, we've been active and looked at some things that that with it quite.
Quite frankly, we feel we feel very disciplined and responsible relative to the environment, but so I think the real question is are there opportunities out there for us and we think that we definitely think there are we think there are great businesses that can become part of <unk>.
We're active in the cultivation. Despite the virtual nature of that as you may have noted we hired a new VP of strategy that we announced on Monday, So we're resourcing our capability.
There's hardware and software opportunities. So I think the breadth of opportunities out there, but you have to you are right. We have to be selective we have to understand our markets, we have to be able to be in a position to understand and be.
Where we can win and not have to pay unreasonable prices and quite frankly, we've seen some things transacted things, we wouldn't do but but fundamentally I think if we think over the next 12 to 18 months, while M&A is unpredictable I feel pretty confident we can put some cash to work that will bring in great businesses for fourth.
Great. Thanks, Tim Best of luck.
Thanks, Josh.
Your next question comes from the line of Richard Eastman from Baird. Your line is open.
Hi, just a couple of quick questions and thank you for your time.
Just first of all when I look at the full year 'twenty one.
Adjusted Op profit margin guide the 'twenty two to 'twenty three if I look at it and break it down by business groups. It looks like maybe at the mid point of some of these numbers that maybe we're looking for 50 basis point improvement at iOS and 50 at PT.
The Hs business has about two if I'm doing the math right here about 200 basis points of margin improvement a year over year.
Is that mix or exiting the TSA or what's is that just pure leverage per.
You just come back.
Hey, good evening, a Ric this is Chuck I'll take that.
The biggest issue is really exiting the TSA is as we get into 2021.
A step up there obviously there is a lot of things going going on that business with good good.
<unk> on margin, but I think what youre seeing.
As the TSA is rolling off.
And then just as that business recovers.
Net.
Likely to be the highest adjusted operating profit margin business.
Within Florida.
Business group within <unk>, if you go out a year or two.
I think that there's there's room certainly to grow as electric procedures are down and Thats. Some high margin business that we're missing right now so we will see it but as you can see we've got it.
I think theres, a three horse race here so.
I wouldn't bet against anyone.
One of our groups, but I do think there's good margin expansion at it held for sure.
I would just I would just add I would just add on the on the margin front one of the things that's really important and maybe gets mis isn't seen as you know as we continue to add innovation and technology capability into the software businesses part of that move to SaaS is a move of lab services and we are able to do installations at a lower cost so.
If you look over the long term the margin profile in the software businesses, we get real leverage through the technology, we work and Thats not something that necessarily maybe see in 'twenty 'twenty, one you'll see it in some of the businesses, but I think over a long period of time.
IOS is obviously, an incredibly profitable segment, but the opportunity there to continue to do the work apply FBS into into our services business to make our applications easier for customers to install fundamentally is a big margin opportunity as well.
Okay and then just maybe my last question just around pricing.
You view pricing as we roll or for 'twenty, one and maybe what kind of net price capture do you suspect you'll get.
Relative to some of the inflation, we're seeing in electronics and other things.
While we had a very good year in price.
As we noted on the call or in the prepared remarks, I think we had a good fourth quarter. We had a good year on price we expect to have another good year on price. So I would say first.
First and foremost we're.
Probably.
For sure and probably close to 100 basis points, we don't we don't we.
We do not have a lot of one of the things about.
Sort of inflation is maybe something just to level set now with 40% recurring revenue in the portfolio and most of that being software or very little material costs. We now have a big portion of our revenue profile that really isn't it doesn't it doesn't have supply chain cost inflation pressure. So the portfolio has really shifted in that rig.
So while we see some of the supply chain stuff, maybe a little bit on the freight side, but I think fundamentally we have done a great job over the years of really pushing on that.
While at the same time really looking for.
The price opportunities from what we call price realization from an EPS perspective through a combination of innovation and better commercial practices. So on the backs of a very good 2020, we expect to have another good year in 'twenty one from the <unk>.
Okay, great. Thank you.
Thanks, Rick.
Your next question comes from line of.
Jeff Sprague from vertical research your line is open.
Thank you good evening, everyone I hope, you're doing well Hey, Jeff.
And just to pick up a little bit on the M&A topic.
Kind of.
Leverage at I guess, no pun intended over to thinking about the balance sheet.
Adjusted anyway, your view of kind of comfort level on financial leverage here.
Where are you comfortable to go in this environment.
Any other.
There would be interesting.
Good evening, Jeff This is Chuck.
Yes.
I don't think our view on leverage has changed I think that what we've been talking about it is that we deploy our free cash flow as you go through time, but like you saw US do in 2019 will stretch take it up even up over three and a half, but then we will work to bring it back down.
<unk>.
We feel very.
Comfortable anything under two two times net leverage.
I think what Youll see is what <unk> seen over the last few years there'll be periods, where we will elevate but then you'll see us take steps to delever.
And on.
Unrelated just kind of channel dynamics I think on.
Luke you said.
I think mid teens growth in China, but high single digit Pos or are you seeing kind.
Significant channel still refill in other businesses or other markets was that.
A significant part of the top line equation here in the fourth quarter.
Yes, Jeff no. It was not I think as you know we do we do a good job, where we have a principal channel business as being fluke and Tek. We had good sales out info at most in most regions of the world. We get good inventory levels no precipitous change really on the inventory side inventories have been low and.
Really nothing from a macro perspective that would suggest we've seen any any inventory build or any magnitude some of the China dynamic is.
On the point of sales side versus the revenue side is a little bit you typically see a little bit of a difference in China in the fourth quarter as people sort of get prepared for the Chinese new year and so it isn't unusual for us to Outgain, a few basis points of point of sale in the fourth quarter, that's not an unusual situation, but I think as we look at where we're at right now as we sit.
And in January we're in a pretty good we're in pretty good shape relative on a global basis relative to channel inventory.
Great I'm, sorry can I sneak one more in just on advanced healthcare.
It almost doesn't seem mathematically possible that korlym ex would only be up 50 bps.
ASP was up 300 bps is there.
Some oddity in the way you're kind of accounting for the TSA or something there in that description.
Yes, So we had really strong margin performance at Asps.
But it was offset by as I mentioned AMETEK grew 50% in the quarter and they're a lower margin business as I mentioned, the design and engineering part of that is more of a people business. So it doesn't it doesn't have the same margin profile. So it's really a mix issue. If we really look at kind of the core ongoing margin profile of the business, which is made up of mostly asps.
And and at Fluke Health, we are in a very good shape in the fourth quarter and we're going to exit while as Chuck mentioned some of the TSA fall off a lot of the good integration work, we've done at ESP well have a good 2021, and IHS, but about 50% growth rate in one quarter and a business does tend to mix it down a little bit.
Sure. Thanks for the color of Goodnight.
You too thanks, Ed.
Your next question comes from the line of Scott Davis from Melius Research. Your line is open.
Good.
Hi, guys.
Scott you mentioned.
Can you guys hear me okay.
Yes, we can.
Okay. Good sorry.
Jim You mentioned the new hire I think his name is reached Simmons can you just.
It seems like kind of a pretty darn good resume.
What's the.
What are you looking for and why Werent, you able to fill that seat internally.
Well I think couple of things.
We had filled the seat internally for a while and we decided that I think as we continue Scott ex sort of think of it. This way and you know we have a 10 year plan. We just updated the Florida over the next five years, we've got a lot of skills around the things we've done over the last five years, but as we think forward, having somebody with reeds resume who understands soft.
Sure, who understands the continuous improvement tools of software as well as private equity that's a combination of skills quite frankly.
That is really a great opportunity and from time to time, we're going to look outside to supplement and complement the great team. We have and this was a very unique situation where marine opportunity to do that.
Yeah. It seems so.
In that spirit, I mean is there any meaningful change to R&D spend capex anything.
Growth related that.
Now that we're kind of on our way to being post COVID-19 at least you can pay a little bit more offense.
Well I would say.
Chuck can talk about the Capex side I think in general the answer is yes, we're I mean, our R&D spend has gone up a little bit as we.
<unk>.
As we have more software businesses, which tend to have a little bit more R&D.
We're investing a lot more into the fore we actually invested a lot last year, but we are doubling down in that in our data analytics and machine learning is as we as we noted in the in the in the <unk>.
Commentary, we talked about the EHS AI acquisition, which is really an aqua hire very little revenue, but really it's just a really smart group of data scientists, who can help accelerate our <unk> work. So I think those are good and that's a situation where we're really just hiring a big R&D team and a great capability and leadership, So I think.
We have a number of those investments we talked about our pioneer square labs, we've doubled down in that so yes. There's a number of places where we are playing offense you saw some of that you heard some of that in the fourth quarter right.
The hardware Sonic imager, the scope suffered attack, but also things like at a current we had.
Launched our latest analytics.
Product with maintenance connected occurrence. So a number of places where we're playing off playing offense and we feel pretty good about how how we can drive that in 2021 as you said as we start to see sort of COVID-19 start to slow down here hopefully.
Scott I would just add with post separation of non tier two things. One is we will be pushing 7% R&D from maybe.
Born closer to 6%.
So thats, reflecting that Jim's comments as well and then on Capex I think we've always been pretty capex light, but as the.
Our software business has become 10% of the total year going to expect to see that.
The Capex certainly not go up here and we will maintain.
Remaining capex light going forward, and maybe even start to trend down a little bit.
Helpful. Thank you and good luck guys.
Thanks Scott.
Your next question comes from the line of Andy Kaplowitz from Citigroup. Your line is open.
Good afternoon got Andy.
Jim maybe you could give us a little more color on how youre thinking about the rate of recovery of Gordian and <unk> talked for a couple of quarters now about constrained state and local spend but also that these businesses should be relatively solid going forward given the focus on workplace space buildings management. So how much visibility do you have in these kinds of businesses for better performance from 'twenty one.
<unk>.
Well, yes.
I mean, we definitely think the business are going to get better in 'twenty. One we saw we saw a couple of good evidence points in Q4, I mentioned, the SaaS growth in double digits.
A good time, we we won twice as many logos in Q4 as we did in Q3.
So I think those are those are really good signs for how we entered the year.
We do need customer access to do some things, but we do have some wonderful opportunities as you mentioned, we talked about the EMS space planning. When we think we have a number of applications that will be launching around employee experience. So our number is.
Companies start to think about bringing T.
Teams back to the office for periods of time. So I think we've got a number of things that will help us make our own luck, but we do need to see some of that office access. So I think you'll see the business progressively get better through the year on Gordian Gordon's been been in great shape. There, we're growing double digit before COVID-19 really been a been a really strong performer for us.
We have some visibility into how things are changing at this point as I mentioned in the prepared remarks around job order contracting we start to see the projects get loaded even though they might not be purchasing through through the system. Yet. So that's starting to improve I suspect, we see that improving as state and local budgets start to get.
Get approved into the second half of the year, we would see we would expect to see things continuing we know higher if you think about the second half of the year, it's logical to think that.
The state local offices are going to start to want to bring people back and theyre going to need they're going to need to change the work workplace and that's where not all but we're not about new buildings were about changing the buildings you have changing structures you have and I think I think a number of those things are going to start to characterize themselves as we get further into the year. So I think thats the visibility we have and we feel.
Good about the work the teams our teams are doing to put them in place for success.
Thanks for that and then I'm curious about your semiconductor business within sensing, there's obviously a lot of cross currents.
Still out there and geopolitical global semiconductor shortage. It looks like you are still seeing good growth. There. So maybe talk about that business for 2021, if you could.
Yes, it's pretty much with Oems, we call it semiconductor, but it's mostly coming conductor equipment manufacturers.
And that business is he has turned pretty well. So we still we think it's good for at least another quarter.
There are two so right now thats about the visibility we have so I think that's probably where we stand right now.
You didn't ask it but we saw good growth in keathley on the semiconductor side as well.
At Tektronix I think some of that was pent up demand that we saw but it would be logical to think that there's supply chain issues occur and so more money may get spent there that would be.
Would be some benefit, but we haven't dialed that into our forecast at this point.
Thanks, Tim.
Thanks, Andy.
Our next question comes from the line of Andrew <unk> from Bank of America. Your line is open.
Yes, good afternoon.
Andrew.
Yes so.
Just a question on Tektronix you highlighted.
I think from sort of a trade related issues in China, and just wanted to understand.
One of the trade restrictions, which are true.
<unk> in China, and do you expect them to be a drag.
For the rest of the year.
And then just given what's happened in giving your exposure from a tech segment in China, How do you grow in China from sort of the reset based on that.
Well I think.
I think first of all we had about first of all we had about.
$2 million worth of Huawei in there. So I think first if you step back.
We call that out because it has an impact of tektronix in China, but in the big scheme of things relative to Florida. These arent big impact I think the last of the Huawei impact as an example, with a couple of million Bucks of tax in the quarter. We do have some additional restrictions around military end use that that we're seeing but again.
Maybe a little bit of headwind for tax, but not a not a major issue for the rest of the company not impactful relative to the overall afford it but.
In terms of transparency in giving you color on what we're seeing the good news as we said in the prepared remarks is we continue to see point of sale in good place and we also saw good demand among medium small and medium customers. So Chuck and I did China reviews, a couple of weeks ago, and we're really pleased with the work the China's team.
The <unk>, China team has done to extend themselves more with digital and they're just doing a great job of really doing expanding into new customer sets, which I think is going to bode well for us in the future.
And just a question on <unk>.
Software and also a question from five one.
Overall software growth.
For 2020, and whats your fast IRR at this point.
So I am thinking here, our SaaS growth in the year was probably probably close to high single digits, probably maybe maybe yes, so I think thats probably right.
We have an IRR number for the year. So we can get back to you on that.
I think what we what we saw relative to.
Overall software was probably a little down because of the.
Low low to mid single digits, if we look through the year just based on the soft the services issues.
In terms of performance Sensus and <unk> led the way in terms of growth. It grew through the year as well as EMEA. So we had good growth in those places the places where we saw maybe a little bit greater impact relative to some of the services was at Gordian and <unk>. So hopefully that gives you a little color and we can get back to you on the overall air number but from a just a follow up on this question.
If you sort of fight budgets and education on state budgets.
<unk> four I think education state budgets are in good shape, so that actually given what has already happened in 2021 that should actually improve right.
Yes for sure I think I think when you look at the situation of what educational and this is mostly higher education by the way higher education and state and local buildings inevitably when they bring people back to the office. They are fundamentally going to have to change the social distancing and make changes to the facilities and fundamentally thats the core part of.
What we see in Gordian. So so in that case and then from a facilities management space planning. That's also in the wheelhouse of our current so we should see those things come back for sure.
Again don't can't pick a particular date, but I think if I were if I were to make a bet, it's going to get better.
Through every quarter of the year fantastic. Thank you so much.
Thanks, Andrew.
Your next question comes from the line of Deane Dray from RBC capital markets. Your line is open.
Thank you and good afternoon, everyone.
Good afternoon day, I'd like to stay right on that topic.
Andrew left off on the.
On the software side, where you've had.
Site access issues and not being able to provide on site services is would there be a catch up or.
Or will any of those services be lost.
This is very.
It's a very temporary or I think it is a temporary situation. So by nature of that we'd probably see a catch up whether that's a catch up in the year and if people.
There is also part of this is people reevaluating budgets a little bit so.
We classify all of that as as a delay, but I think where practical in the sense that maybe some of that as customers.
Reassessing, how many seats they want how many licenses they wanted to know on the license software side, but but we've seen a little bit of that compression. So I would expect there'll be a little bit of that but to the broader question Deane I would expect there will be a catch up at some point in the year maybe.
Things get back what I would call back to normal.
What's the mix look like now is it like two thirds SaaS, one third transactional and how do you expect that to.
To evolve.
Yes Deane.
Yes, that's about right two thirds to maybe 70%.
Got it.
Thanks.
Okay, and then just a quick question or a clarification on SP. So.
The high teens growth in China, I would imagine that there was a benefit there were more elective procedures have started.
But is that 93% elective procedure you cited is that a global number and what does that look like in China.
Yes, its a global number.
It's probably it's probably it's not at 100% yet in China, and we think about the fourth quarter.
But it's moving up I would say part of our China growth as well was equipment. We we did we've been.
Doing well on the equipment side, so I think as we look across and quite frankly across the board maybe stepping back on Asps. We did an excellent job in equipment sales in the year, we're going to start with a with a bigger installed base than we did from a year ago, and obviously that bodes well for when consumables come back. So so two specific questions.
It was a combination of it was also a big improvement in services one of the things that we've really been doing Deane in China was that for.
First bought the business and we were lucky that that this was a business that we took control of early one of the things. We noticed was that the service revenue was a lower percentage of our sales in China. There was anywhere else in the world. So we applied a number of FBS tools, including policy deployment to make service revenue a big push for us in the business.
And we've really really increased the percentage.
Sticky the stickiness or the connection rate with our equipment and increased service contracts with current customers. So so the growth was very very much a story of not only elective is coming back, but also equipment and the big story with service.
That was real helpful. Thank you.
Thank you.
Your next question comes from Amit.
Amit.
From Evercore your line is open.
Yes.
Thanks, a lot for taking my questions I have two as well.
I guess first off.
Any discussion and I'd love to understand given.
One tier sale and the addition to your core Dev team is the focus going to be just to bolster the software that we are winning business across segments.
Is there a desire to sort of add a fourth leg to the stool stool.
Stool hospital, but a fourth leg to the portfolio.
Think about those dynamics.
I think we're incredibly clients right now to be in an area, where all three segments I think we have incredible opportunities.
The 30 plus billion dollars' worth of served market.
We've just completed our next five year, our update to our 10 year plan that we did five years ago with the board.
And we feel very excited and.
Really I think I would say if I were a betting person I would say.
Most of our capital deployed in the current segments is probably the winning back we have a lot of opportunity. We see we see the breadth and depth within book hardware software and services within all three so I think when I really think about I'd never say never because you never know when an opportunity becomes available, but I think the focus we're blessed with a focus.
That we have and I think we can take advantage of that as we move forward.
Got it.
That was just asked.
You talked about the impact from Covid to calendar 'twenty.
Talked about the revenue impact.
Elective surgery and buybacks aside and you also have an appreciable impact from day, one to think about how much revenues you have left on the table this year and how much cost you got to take on because of Covid and then how did those two numbers stacked up in calendar 'twenty one.
Well I don't know if I can put a revenue number to it but if I think about us being.
Maybe the easy thing to do would be to say, if we were down 6% core and the year end and we should be.
This portfolio can grow mid single digits, you can apply that number to our total portfolio and say over a 12 to 24 month period, you would think that that would come back over time, that's a big number, but but I would I would expect that some of it is that.
So I think that's first and foremost I'll, let Chuck talk about some of the costs coming back, but I think maybe the maybe the point to us.
Theres also COVID-19 Covid has been a challenge for the year for all of US everybody on this call, but it's also created a number of opportunities.
Particularly in our in whether it's the focus more on EHS at every company in the World and we have an outstanding portfolio of the <unk> businesses and now Inc. Continued increase in people wanting to focus on sustainability.
Or is it facilities management challenges that come with bringing people back to the office into manufacturing site and the importance of data as it relates to workers and those things all of those speak to all of the solutions that we've made.
Made part of Florida over the last four years. So I think we also have to think about when we get into a what I'll call. It normal environment that fundamentally there's going to be tremendous opportunity for us to harness around a number of these new challenges that we're all going to have to deal with as business leaders and we have the solutions to ultimately deal with helped.
The deal with those challenges, so I think and that doesn't even talk about the sterilization and infection control challenges that hospitals are thinking about as well and the solutions. We have on the HFF side. So I think when you add that and you'll come up with some pretty big numbers of opportunity.
Yes, I'm really quick on the cost I think what we saw last year. So we took some costs out and its coming back in and we've rebalanced at an operating margin idea, but in the COVID-19 environment going forward, there's going to be some incremental cost associated with that but I think what we've seen in 2021 more opportunities to be more efficient.
Not having to go beyond site all the time in things around travel and I think theres more opportunity for us to create more leverage that way in total day there'll be puts and takes there as we go forward.
Perfect. Thanks luck anytime.
Thank you.
Your next question comes from the line of John Walsh from Credit Suisse. Your line is open.
Hi, good afternoon, everyone.
Hey, John.
So maybe going back to the SaaS business.
Curious if you've seen any discernible change in kind of the growth that's coming from the risk retention and churn side of the equation versus maybe the upselling and normal kind of price escalators you have there any any GAAP.
And what's driving the growth.
Well I think this is bad I mean, we don't talk a lot about it but to have net retention over 100.
When customers are reevaluating things and looking for cost reductions I think it is an outstanding effort on the part of our commercial teams.
So we've seen we've not seen customer churn, we may have seen maybe people wanting to reduce their spend or something like that but we've been able to maintain a lot of that keep that net retention number over 100, and I think that's true we have a number of FBS tools that are in and quite frankly data analytics solutions that we apply to those types of thing to predict what are the <unk>.
Characteristics of a customer that might potentially churn. So I think John we've done it we've done good work to mitigate some of that I think in a normal year, you would think that our net retention might be a little it would be higher than that number so I think.
That's a little bit of a little bit less upselling, and maybe and maybe in this environment and maybe a slight little bit of churn depends on the business. Several of our businesses have actually decreased churn occurring as an example, so I <unk>.
That's the environment, we come into this year and from here I think we're definitely through the toughest days in that regard.
Got you and then maybe just one on the tax rate.
Kind of the sustainability of that going forward.
Yes, I think John what we put in here is the tax rate.
14% going forward and that reflects our businesses as it is and the tax rules as we understand them going forward, but we haven't done is try to factor in any potential changes around biden.
Ministration might do.
We'd expect that those would changes if if and when they come would be 2022.
But if they do something interim we'll of course react to that so right now we think it.
<unk> changed which never happens by the way but.
This would be the right range. So we're going to watch very carefully about what Gibbs proposed and understand the impact keep in mind with the acquisitions. We've done we've got a really global footprint, which gives us maybe more opportunities.
Four.
Maintaining an advantage in tax going forward, but we'll have to see what they do.
Great I.
Appreciate you taking the questions. Thank you.
Thank you.
Your final question comes from the line of Joe Giordano from Cowen Your line is open.
Hey, guys, Hey, Joe Man here.
Sure.
You kind of stole my question on tax there, but hopefully youre accruing a nice bonus share does seem to doing a heck of a job.
Do you feel like there's almost like somewhat some sort of a target on the new administration for a company like set up this way like a large U S company that had significant declines in tax rate.
Or is it something like you feel like.
Very defensible.
Well, we think it is very defensible and what we are doing is interpreting the tax laws as as written.
What gives us maybe an advantage over some.
Other companies is one.
Post separation, we've got a high R&D.
<unk> investment or R&D investment and that gives us an advantage in the R&D tax credit and also.
As you do acquisitions.
Right.
In foreign countries. It just creates a fact pattern that.
We're just following the tax line.
As it is written so but those are two big factors, especially the AOSP acquisition in Europe.
Few years back that helps us out quite a bit.
And then last from me.
Core <unk> in the quarter.
Strong growth.
Unlike on the lightest revenue there so.
Is there some kind of like one offs, there that allowed that kind of magnitude on EBITDA.
Accompanying mostly or how do we think about that.
It has continued its the volume coming back so I think thats first and foremost.
We see business like fluke coming back Thats, a high margin business you saw a 280 basis points of Korlym ex and iOS. It's the it's the strength of the SaaS growth in the software businesses, but you know it was across the board. So certainly led the led the pack as you know on a quarterly basis. There's always one segment that leads the pack a little bit more than the others.
But I think what we saw was the breadth of all Max and I think as we sit here looking at looking into 2021.
50 basis points that we grew on ex despite all the issues in 2020. It gives us tremendous confidence that we can continue to do that in 'twenty, one and the only thing to add to that is this is what can happen.
End of your range with high <unk> gross margins.
It's a happy problem net.
Thanks, guys.
Thank you.
That concludes Q&A I'll turn the call back to management for closing remarks.
Well thanks, everyone for today.
We appreciate your time, we went a little over but we knew we had a few a little bit longer prepared remarks. So glad we can get to everyone. Thanks. So much for your support this year.
In 2020, and certainly into 'twenty. One we're all hoping you are safe and healthy and look forward to hopefully seeing everybody in person sometime this year until then we will take all your questions by phone and virtually we look forward to seeing you there and have a great day, and obviously Griffin and team are available for questions. Thanks, everyone have a great night.
That concludes today's conference call you may now disconnect.
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