Q1 2021 Fortive Corp Earnings Call
The next facilitator of this afternoon at this time and I would like to welcome everyone to the board of corporations first quarter 2021 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 and people would like to ask the question. During this time simply press star and the number one on your telephone keypad.
If you would like to withdraw your question press the pound key.
And Mr Griffin Whitney.
Nice President of Investor Relations Mr. Whitney you May begin your conference.
Thank you Pasha and 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.
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 for it of Dot com under the heading investors quarterly results.
We completed the separation of our industrial technologies segment through the spinoff of Volunteer Corp. On October 19, 2020 and of Accordingly included the results of the industrial technologies segment as discontinued operations the.
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 and all references to period to period increases or decreases and financial metrics are year over year on of 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 informed.
And regarding these factors that may cause actual results to differ materially from these forward looking statements is available and our SEC filings, including our annual report on form 10-K for the year ended December 31 2020.
These forward looking statements speak only as of the day to day are made and we do not assume any obligation to update any forward looking statements with that I would like to turn the call over to Jim.
Thanks, Griffin and good afternoon, everyone.
On slide three our first quarter performance continued to highlight the benefits of our efforts to enhance the growth and resilience of our portfolio significantly expanding our positions and software and health care and adding substantial sources of higher growth recurring revenue as a result of our portfolio has been well positioned to drive rapid sequential improvement.
Over the past few quarters as markets have begun to reopen and Q1, we continued to see significant improvement not only across our short cycle businesses, primarily fluke instruments and tektronix, but also at many of the businesses that have faced COVID-19 related headwinds such as advanced sterilization products.
Turning to the results and the quarter, we generated total revenue growth of 13, 6% and core revenue growth of nine 1% above the high end of our guidance adjusted earnings per share was <unk> 63, representing.
Representing an increase of 37% year over year, the combined outperformance on core growth and earnings helped drive another strong quarter of free cash flow.
Our SaaS offerings at a current intellects sensus email and Gordian and <unk> continued to perform well generating double digit growth and the quarter with the current and Gordian Gordian and <unk> seen better top line momentum overall and the software offerings are an important part of our strategy to leverage leading hardware positions to provide broader software enabled.
And as to address pain points, and our customers' critical workflows and the ongoing digital transformation priorities.
Despite the challenges of the COVID-19 environment, we continued to leverage FBS tools to drive performance improvements across the portfolio.
The S. P is advancing the implementation of the Ford of business system more broadly driving strong improvements in working capital turns as well as progress accelerating commercial efforts as of delivered its fifth consecutive quarter of growth and its global installed base and <unk> also continues to see success from the application of FBS tools to improve its sales process.
Driving better lead generation improved customer win rates and stronger sales pipeline creation. While these are just a couple of examples we are highly focused on building up the S capability across our newer businesses in order to deliver accelerated growth innovation and market share gains.
Relative to organic growth, we continue to invest and strategic initiatives across our operating companies as well as build additional capacity to drive future innovation with the fourth we are continuing to scale, our data analytics capabilities, providing leverage to our operating companies to pursue key AI and machine learning applications.
And in 2020, we more than doubled the number of projects conducted and expect to do the same this year targeting more than $250 million of potential revenue opportunity are.
The acquisition of EHS AI significantly expanded our machine learning expertise to help grow our position within EHS workflows as well as generate learnings that can be applied more broadly within Florida.
We've also made a number of additional investments to expand our partnership with pioneer square of labs with three startup opportunities currently in different phases. I think your patient with these investments we are enhancing our ability to generate disruptive innovation that will deepen our competitive advantage and increase our customer value proposition.
In terms of performance across the major geographies core growth was led by low 20% growth in Asia. This included approximately 30% growth and China and low double digit growth and Japan elsewhere core revenue grew by low double digits, and western Europe and by low single digits and North America.
Taking a closer look at performance and the segments on slide seven and intelligent operating and solutions posted a total revenue increase of nine 5% with core revenue increase of five 5%. This included high teens growth and China high single digit growth and Western Europe and of flat top line and North America.
Fluke core revenue continued to improve and the first quarter increasing by high single digits. This performance was highlighted by low double low double digit growth at fluke industrial and high teens growth at fluke calibration for.
<unk> growth included the launch of the 377% and 378 fluke connect clamp meters for non contact voltage testing. These introductions incorporate flukes field sense technology and extend its leadership position and safer non contact measurement tools.
The fluke industrial point of sale and North America turned positive and the first quarter, increasing by low single digits. Meanwhile, point of sale and both Western Europe, and China continue to improve rising by mid single digits and mid teens, respectively strong performance at Fluke digital systems continued this quarter, increasing by mid single digits as he made saw strong demand with.
With mid teens growth and SaaS bookings.
Industrial scientific decline single digits, and the first quarter as a result of continued weakness and instrument sales the company's I net offering continued to demonstrate its resilience increasing by low single digits.
It also registered and 18% increase and bookings, while driving and more than 500 basis point improvement and net retention.
Strong bookings growth and Ifc's rental business provided a signal of improving stability and its end markets with customers beginning to restart maintenance project activity at the same time. We are seeing continued success from the application of FBS growth tools and intellect to accelerate sales pipeline creation driving of record revenue quarter with low double digit growth.
And the integration of EHS AI continues to go well, while the revenue contribution remains small product integration is on schedule and the influx of team has started to accelerate new customer acquisition.
Our current grew by low single digits and the first quarter highlighted by high single digit growth in SaaS and our current continued to see good momentum and its industrial and life Science segments. This included of recent win at Biomarin, which included a current meridian solution as a critical tool for management of their pharmaceutical manufacturing facilities, including communication with con.
Tractors and support for FDA validation of crew and is also seeing growing demand across the range of end markets for its facility planning and resource scheduling solutions with customers beginning to prepare the facilities for the future needs of their workforce as they emerge from the pandemic.
Our current growth and the quarter was aided by the resumption of some onsite service implementation and project related activities with further improvement expected as the year continues.
After facing headwinds during the second half of 2020, Gordian and top line improved to flat and the first quarter Guardians job order contracting procurement business grew by low single digits and as expected expected to accelerate as the ramp of recovery from COVID-19 continues. The company is estimating business continued to perform well increasing by high single digits and seeing strong renewal.
And our momentum and conversion rates for the SaaS version of its Rs means product line.
Gordian saw signs of improvement during the first quarter regarding regarding site access issues. We expect this improvement will continue in the coming quarters.
The precision technologies segment posted a total revenue increase of 14, 3% with the 12, 1% increase and core revenue. This included mid 30% growth and China mid teens growth and Western Europe, and mid single digit growth and North America.
Tektronix generated high teens growth driven by strength in the general industrial and semiconductor markets point of sale continued to accelerate up greater than 40% and China greater than 20% Western Europe, while North America turned positive with the mid single digit increase and the quarter.
The Tektronix has seen strong demand in China as economic recovery continues driven by government investment and <unk> electric vehicles, and Iot solutions looking across the product lines of tektronix mainstream of solar scopes and Keathley, both had an excellent first quarter mainstream of sole scopes of posted high 30% growth driven by strong demand trends across <unk>.
<unk> of its key product segments, particularly our six series and for Sally for series Scopes.
Keathley grew mid teens, whilst the Tektronix service business continued to show stability reported mid single digit growth and the first quarter. Tektronix also saw outperformance across a range of recent new product introduction deductions, including its new ISO view probe solution for semiconductor and automotive market applications.
Sensing technologies grew by low double digits, driven by broad strengthening across the end markets, including industrial and electronics customers.
The saw accelerating demand in China as of delivered a number of key wins with strong momentum among factory automation OEM customers.
And also generated strong growth from its critical environment products et cetera, with mid 30% growth for the quarter.
Specific scientific AMC returned to growth increasing by low single digits for the first quarter. The business continued to see good order trends with the book to Bill of one two over the trailing 12 months and has a strong backlog that we expect to support improving growth in the coming quarters.
Moving to advanced Health care solutions total revenue increased 23% with of 10, 9% increase and core revenue. This included low 40% growth and China, low, 20% growth and Western Europe, and low single digit growth and North America Asps.
Asps returned to growth and the first quarter, increasing by mid single digits growth at ASP was driven by of greater than 40% increase and capital equipment sales as it continued to grow its global installed base this momentum and capital sales more than offset the fact that electric procedures, where 91% of pre COVID-19 levels globally and continue to weigh on the ASP.
Consumable revenue stronger capital sales are an indication of the progress Asps is making and its FBS journey.
And by driving better sales execution, and improve funnel management and priority independent delivery network accounts Asps continue to perform well and western Europe with its fifth consecutive quarter of growth. ASP was also recently named the preferred supplier by the National Health service and the U K and of large multi year tender for terminal sterilization capital and services.
Census, also had a strong first quarter growing by low teens with low double digit growth and its sense of track SaaS offering.
Sensus has seen improved up selling momentum across the business and is also seeing evidence of U S hospitals, moving to post COVID-19 operations and faster purchasing decisions for.
Health solutions increased by low teens, and the first quarter with broad strength across the product lines. FHA continues to have success deploying FBS to drive growth and margin improvements at landauer, leveraging global go to market scale and accelerating cross selling of products and services Landauer has now seen and approximate $2 five times improvement and as the operating margins since <unk>.
Acquisition.
Finally in the Tech reported mid 40% growth as it delivers against the strong backlog of 2020 orders for its diagnostic offerings with that I'll pass it over to Chuck who will take you through additional details on our margins and free cash flow for the quarter.
Thanks, Jim and good afternoon, everyone.
Solid execution across the portfolio enabled us to deliver deliver strong margin performance in Q1, adjusted gross margins were 57% and the first quarter up 90 basis points driven by the fall through on the strong growth at fluke and tektronix as well as the year over year gross margin improvement at ASP coming off of.
The transition service agreements. It also reflected solid execution with Fps throughout the portfolio, including continued price realization of 90 basis points and the quarter.
Our Q1 adjusted operating profit margin was 22, 7% a bit higher than we had guided helped in part by the stronger volume we saw in the quarter, we generated 40% adjusted incremental operating margins and 240 basis points of core operating margin expansion and also generated more than 200 basis points of core operating.
Margin expansion and each of our three segments.
During the first quarter, we generated $144 million of free cash flow, representing an increase of 50% year over year.
We continue to be pleased with the consistent growth and free cash flow and have delivered that we've delivered over the past year with the first quarter, taking our trailing 12 months of free cash flow to $950 million.
Along with significant growth and earnings disciplined working capital management at AOSP Fluke and Tektronix contributed to this free cash flow performance.
Early in Q1, we executed the tax efficient monetization of our remaining 19, 9% stake and volunteer generating approximately $1 1 billion of proceeds which were used for debt repayment.
On the basis of that transaction and our free cash flow from Q1, we ended up the first quarter with a net leverage ratio of one two times.
Supported by continued strong free cash flow and significant balance sheet capacity, we are well positioned to pursue our key capital allocation priorities and are maintaining an active pipe pipeline of deal cultivation efforts.
We continue to see a broad range of opportunities to deploy capital to build on our core hardware and instrumentation position positions as we also leverage deep domain and workflow expertise.
Into adjacent high value software data driven opportunities.
Turning now to the guide on Slide 11.
As a result of the strong first quarter performance and given some improvement and our outlook for the rest of the year, we are raising our 2021 guidance.
For the full year, we now expect adjusted diluted net earnings per share to be $2 50 to $2 60 rep.
Representing year over year growth of 24, 20% to 24% on and continuing operations basis.
This assumes total revenue growth of 10% to 13% core revenue growth of 7% to 10% adjusted weighted adjusted operating profit margins of 22% to 23% and and effective tax rate of approximately 14%.
It also assumes core revenue growth of 5% to 7% and the second half of 2021.
We also continue to expect free cash flow conversion to be approximately of 105% of adjusted net income for the year.
We are initiating second quarter adjusted diluted net earnings per share guidance of 56 to 60.
Representing year over year growth of 30% to 40% the.
This assumes total revenue growth of <unk>.
223% core revenue growth of 16% to 19% adjusted operating profit margins of 19, 5% to 25% and and an effective tax rate of approximately 14%.
For the second quarter, we expect free cash flow conversion to be approximately 85% of adjusted net income.
The full year guidance incorporates $35 million of additional investments that we're making to drive innovation and enhance our capabilities to support higher growth and the years ahead with $15 million and the second quarter. This includes funding for the for it to expand our analytics and analytic capabilities and talent base.
As well as to accelerate the development of AI and machine learning offerings for our customers. It also includes funding for investments and our partnership with Pioneer Square Labs, where we have seen good early progress thus far with that I'll pass it back to Jim for some closing remarks.
Thanks, Chuck before I move to questions on Slide 13, I wanted to highlight the continued progress we're making with respect to our key sustainability goals and Q1, we completed and updated materiality analysis, yielding valuable insights that we use to define the new pillars of our sustainability strategy, which will guide our efforts going forward. We've also made.
Significant progress implementing the intellects sustainability performance indicators platform across the portfolio, which we used to complete the collection of 2020 emissions data with new more aggressive carbon emissions targets, we look forward to discussing our progress and our evolving sustainability goals and our upcoming Investor day.
I'd also like to take a minute to thank our employees for their continued adaptability and strong FBS strong execution of FBS throughout the first quarter. The results that we announced today are a testament to the depth and dedication of our teams and the relentless focus on the continuous improvement principles the power of our culture.
As we look forward, we are excited about the strength of our portfolio the quality of the market opportunities, we address and the significant organic and inorganic growth opportunities ahead of us as macro indicators continue to recover from the COVID-19 pandemic. Our focus will remain on driving strong core growth margin expansion and free cash flow generation, while investing in innovation.
<unk> and deploying our capital to acquisitions that accelerate our strategy and increase the value we bring to customers.
We are also excited to share more details with you about our road ahead, when we speak on May 19th at our Investor day, and the almost five years since our spin we have positioned the portfolio to be higher growth more profitable and a more powerful generator of free cash flow. This sets us up well for accelerated compound and across our businesses, which we look forward to discussing with you with.
That I will turn it back the Griffith.
Thanks, Jim that concludes our formal comments Pasha, we're now ready for questions.
Ladies and gentlemen, and.
As a reminder, if you would like to cash.
The question. Please press star followed by the number one of your telephone keypad.
Since you. Please keep your questions to one and one.
One follow up.
Please standby, while we compile the queue.
And a roster.
And your price question is from the line of Scott Davis with Melius research.
Hi, good afternoon.
Thanks Scott.
The margin guide.
And it seems.
Is this all because of additional growth investments that you're.
Youre talking about or is there some supply chain, our price cost or timing issues is there anything else related to kind of the.
What I would consider kind of a more conservative of incremental margin guidance.
Scott. This is Chuck can you talk them through the year for the Q2.
For but honestly you could you could answer for both of us.
Specifically talking about <unk> of your line is of all speak to the full year.
Well I think that the.
For the full year.
We talked about the incremental investment.
The <unk> of headwinds and also of the year for FX I'd, probably point that out a little bit and then further I'd say that there are.
We've seen some things.
Things that are inflationary that are in this but we called out the bigger things that are different than what we maybe for.
Thinking just a couple of months ago.
Okay.
And then Keith and.
Q do you think of go ahead.
Sorry go ahead and go ahead.
No. It's just kind of talk mostly the.
The Q the Q2 is about the investment.
And that we kicked off for the investment and growth as we are seeing that the second half of the year accelerate.
Versus our previous guidance.
Okay that 35 million of <unk> that you call out.
Yes, typically right.
Okay and.
Second just a follow up do you have a sense of whether.
And I know, it's hard because your portfolio is it really broad but sense of whether inventories are.
Kind of normal below average or above average.
And again I know, it's hard to generalize, but.
Yes, I would say, where we get hey, Scott, Jim and I think number one I would say.
And we feel pretty good about where inventories are at you know we get good we get good point of sale data at fluke industrial at Tektronix and to some extent, we get decent data and consumables in North America and Asps. So that's a decent chunk of our portfolio, where we see things, where we of channel partners and I would say we're at good.
Reasonable inventory levels and nothing is elevated there's always there's always a couple of situations you saw the strong consistent improvements in Pos and we highlighted in the prepared remarks, and I think we've certainly seen sequential improvement from Q1 from Q4 last year to Q1, and all of our regions relative to the point of sale. So.
And I think we've seen that and prove even on a two year stack. So we've seen improvement and point of sale, we've not seen the big inventory left so we feel pretty good about where inventories are at going into the second quarter and and one other thing maybe just to clean up on the just on that margin question, just the $15 million of.
And of organic investments and the second quarter $35 million and the full year. The other part of maybe the margin part and the second quarter is obviously those one time costs that come back from a year ago that we've talked about several times.
Okay. Good good color and clarity, thank you, Jim and Chuck I'll pass it on.
Thanks, Scott your.
And your next question is from the line of Julian Mitchell with Barclays.
Hi, good afternoon.
Just.
I wanted to try and circle back on that Q2 margin question, maybe for a different angle. So if I just look sequentially.
The revenue the sort of flattish I think Q1 for Q2, you're guiding that margin down about 250 bps sequentially.
Understand is the 100 bps headwind from the extra growth investments.
But maybe help me understand is there something on the mix. That's also getting worse, because I understand that the the temporary cost year on year, but sequentially there shouldnt be a huge delta line with gas.
Hi, Julian this is Chuck I think you got most of it there's a little bit of FX I would say about the temporary cost as things open up there is actually some sequential from Q1 to Q2, where it gives you a small example, as things open up we're going to see more travel than we saw in Q1.
It's just one small example, so if there is some incremental and <unk>.
Spending that we would expect there.
Thank you and then maybe.
Homing in on the advanced healthcare solutions segments.
And a couple of points on that I think your incremental margin the year on year and the first quarter was about 30 ish and.
And then Q2.
Much at all because of the factors you mentioned and then it looks like a big step up in the second half so maybe.
And it just the mix moving around a lot more capital equipment Q1 huge consumables bounce and the second half.
And it's something to do the TSA roll off and then kind of moving parts and IHS margins for the year.
Well first of all I think that we had thought we had good margin expansion year on year and Hs.
A couple of hundred basis points, and all three of our segments.
I think there is versus maybe our guide we were a little bit light and that has to do with elective surgeries being down in Q1 versus where we thought but also really the mix of really having a great.
The capital placement of hardware placement growing our installed base there and.
I would say that is.
And in the future, but that's probably what's going on and the first half and then as elective surgeries improved from where they are at right now at probably 91% and Q1 you will see.
Further margin lift I have.
We have a.
The ASP.
It was most of those comments were talking about as we move through there I have good margin expansion for the year.
Well over 100 of pushing 200 basis points.
Great. Thank you.
Thanks.
Your next question comes from the line of Jeff Sprague with vertical research.
Hey, Thanks, good evening everybody.
Hey, James.
Two for me just back on the investments.
One of the kind of think about the payback side of the adequate and Jim.
You mentioned $250 million opportunity.
That of the spend we're talking about this year or does that encompass some of the accelerated spending you were talking about.
That's sort of of the happened last year, maybe you could just frame that up for us and is that the.
And I'm kind of three years or for your outnumber just some perspective there for starters. Thanks, yes.
Yes, sure I think number one is the $2 50 is the combination of some of the things we did last year and this year some of the projects. If we think about it really specific to the for <unk>.
Jeff when we think about before we're really talking about a combination of projects that I would say of more.
About 50, 50, right now, but moving more of a customer focus but about 50 of internal productivity projects that are really driving better better digital transformation within our own operations and then the other half of really commercial offerings that are going to result, so the revenue opportunity is all tied to those commercial opportunities. There are a couple of years out.
We will start to see some of that revenue.
In terms of opportunity that's the market opportunity by the way. So we think we think we start to get some of that and the back half of this year I would think all and all when you think more broadly about the $35 million.
And there is a combination of investments that are certainly multi year I can talk more about that but I think when we think about some of the investments with pioneer square and labs and those are really those are early stage innovation that are really probably three or four years out so the port investments a little bit more near term next year or two maybe three PSL investments maybe.
Three four years out where they make where they make meaningful impact.
And just sort of fully understand so there's 250 million of of revenue.
You believe that obviously would have some profit drop through but then there's on top of that some pure profit productivity for.
And all through from what what Youre working on right.
Can you size that at all.
Yes.
It's pretty tough the size right now because some of it is just inherent and and and.
And kind of how we just think about productivity on a regular basis. So I would say if we were to think about it and it.
It could be as much as $5 million to $10 million and and the next 12 to 18 months, probably on the productivity side the.
The $250 million by the way, it's kind of sort of market opportunity. So we ought to think about that is we're putting ourselves into an opportunity to gain share and a new new part of the served market of $250 million.
Got it.
Just one more for me.
Yes.
The M&A impact of the bigger than I was expecting and the quarter and the little bit bigger than I was expecting and the Q2 guide.
And I missed something.
Or is there something going on with the TSA is rolling on that Youre counting is M&A.
And if you could just elaborate on the composition of the acquisition contribution and IHS.
Yes, Jeff.
And what Youre seeing there of where we're counting as M&A growth.
It's really just what your.
The rise as the roll off of the day two countries from the TSA.
We don't count those as core growth and so that's just.
And as we completed that largely at the end of the fourth quarter Youre going to see that step up is top line growth and it falls through roughly at the of.
Fleet average of of operating margin.
Great. Thank you.
Thanks, Jeff.
Your next question comes from the line of Steve Tusa with Jpmorgan.
Hey, Scott, Hey, guys How's it going.
Can you maybe just talk about how much of your portfolio.
Rich.
Just to remind us how much of the leverage to kind of.
Semiconductor capex.
Well, we're probably all up in the total company is about 5% of our sales of semiconductor and I would say.
Probably.
And 80% of that is sort of what I would say not.
And I'll call it non capex and the sense that you don't needed to build of manufacturing plant.
Some of our performance scopes that are used and design are obviously expensive and so they would be of capital project, but the but if your question is more along the lines of as we see new Fabs, maybe coming on line typically not and that sort of capex. The most of the capex that we have and the company is related to either what we havent sensing tech or what we have the keys.
And within Tektronix.
Right, Okay and then.
The other thing is just on the on the acquisition.
Pipeline.
What's the flavor of that or is it still kind of is.
Is it small smaller software deals as it is.
Are there different kind of types of business models, you can go into on the hardware side.
What are you seeing out there that's kind of our most pressing.
Yes.
I would say the broth is pretty good right now I mean, we said 2020 was mostly going to be of bolt on the air anyway, because of the kind of what we had to do relative to the volunteer separation and what we had to do with.
With getting the ASP up and running with that behind us and the balance sheet and really good shape I think we've got far more degrees of freedom to really pursue a range of opportunities within hardware and software.
So I think we love the EHS AI deal that we did we mentioned in the prepared remarks provides small and it's really given us great maturity of machine learning capability, you certainly could see more of those kinds of things to really extend ourselves from a feature perspective within our software and data analytics portfolio, but hardware is still certainly.
Lots of places from a hardware perspective for an Iot standpoint that we would we would also take within our opportunity set. So I think it's pretty broad you can never predict which one is going to happen, but I think at the end of the day, there's a number of things out there that could be potentially exciting can't predict when when deals get done but feel good about where we're at right now.
Alright, Thanks, a lot guys I appreciate it thanks, Thanks, Steve.
Your next question is from the line of Andrew Open with Bank of America.
Yes, good afternoon.
Hey, Andrew.
Can I just ask a question it seems that nobody has asked for details around the growth investments can you just expand on what exactly it is and why did you pull the trigger right now.
Yes, I think I think number one and I'll take the second one we pulled the trigger right now because we saw the opportunity with the revenue line coming up and seeing seeing probably be more.
<unk> the year, obviously, we start.
Last year, we're a little bit more conservative, but with another quarter of seeing some trends we feel good of where the top line is at and feel like we're and environment here, where we want to make sure that we lean in to some of these opportunities. So that's number one.
We've done this over time and I think with with the kind of financial results, we posted relative to earnings growth and what we still have even with that spend in terms of earnings growth and cash flow. We're in a very good position and which to play significant offense and a number of our businesses I would say that I would say the the range of investments is really sort of 50% of it is really.
Giving the our operating companies several of our operating.
Operating companies more latitude to raise their R&D spend around the innovation ideas that they've got and.
And we can and will certainly give you more color around that and our investor day as well that's about half of the spend and the other half is and the Fort and in pioneer Square labs. So the for it is really about expanding our data analytics capability, we talked a little bit about that of a second ago and Jeff's question relative to pioneer square labs Andrew.
I always thought that that investment.
The investments would be we would do a bunch of ideas.
As it turns out the first three ideas. We've had are actually getting accelerated funding because they've been pretty good I'll give you a couple of ideas of what that means one of them is our team.
The investment, which is really around connected worker communications technology, and how and really helping hourly workers be more connected and the work that they do every day and the other one is and condition based monitoring communications think of it as a nuance for the industrial market. If you know the deal that Microsoft did so so those of the kinds of investments that were made.
And we're just accelerating those investments because we're seeing the the opportunity of that those might might play out here over time as I mentioned on the answer with Jeff. These are longer term deals. So they arent necessarily that's going to give us a lot of revenue next year, but but but most of those investments. We've already made so it's really about accelerating the investments for the years to come.
Got you and my follow up question can you just talk collectively about how the SaaS businesses of doing so bookings churn pipeline of deals whatever you want to share with us.
Yes, we had a very good we had a very good SaaS quarter. So that's in the prepared remarks across the board every one of our SaaS businesses grew double digit.
And in total grew double digits, but I think every one of them grew the SaaS business at double digits. So so very good position and which to do that and we expect to grow SaaS. This year double digit. So so we want to continue to invest and those businesses. You also heard several examples in the prepared remarks of how FBS is really generate.
Value and those businesses today, I think as well so so I think thats, how we feel like the performing bookings were good as well so.
We feel like we're in a very good position relative to software and general we're starting to see.
Some of the remote some of the onsite services start to come back and a more accelerated rate of although still a long way to go but as we said and that.
And then a current actually grew all up and the quarter I think thats a good a good.
Showing if you will gordian and flat both of those on the backs of service getting better still not great, but but we like the trends. So I think overall were and are very good position across the board.
And we're kind of some of the investments, we just talked about our investments and those businesses as well and Patrick. Thank you so much.
Thanks, Andrew.
Your next question is from the line of Nigel Coe with Wolfe Research.
Good evening non yielding.
Hi, guys hopeful as well.
I wanted to come back to the.
For the temporary costs coming through in Q2 and.
Many of the sequential impact because subsea margins stepping down.
Folks of Woody talked about the <unk>.
$60 million view of the impact to SG&A and last year and it looks like youre pointing to SG&A, but for <unk>.
75 of the TQ sort.
The step up Q1, Q2 would be and the range of about 45 to 50 is that does that even close to be and right.
Yes, I think that sounds approximately right and keep in mind and.
And a normal year. There is there's the step up between Q1 and Q2. So it's not all some of Thats normal seasonality that you see here as you can imagine some spending and.
It gets off to a slower start in January than the.
And you are in April and then I also talked about how as we open up.
There's going to be more activity.
As you move through the year.
And I don't think we've talked about supply chain.
And the low depth here.
Is that having any impact whatsoever in terms of the deal planning for Q2 Q3.
Nigel.
I think first I think the quick answer to that is it's in our it's in our guidance. So we.
We've done a nice job I think historically, such an important part of FBS over time, it's been a side of the supply chain and tools to mitigate the kinds of issues that are out there today. They are well documented and so I won't get into them, but I think theres two they come in two ways, though they come in the form of supplier issues and then the other is global logistics challenges we've mitigated.
<unk> those challenges for the most part of the quarter and of continued to mitigate those and have mitigation strategies. So I think on the on the backs of that we feel good about the guide.
We obviously beat revenue and the quarter, despite having those challenges what I think is of great demonstration of how well we mitigated those we continue to believe we can mitigate those through.
And the quarters to come and I don't think they necessarily go away. So I think.
And all of this is from an old supply chain Guy from 30 years ago, but but I think at the end of the day I think I think there'll be there for the remainder of the year, but we feel good about the work we're doing daily management, Chuck and I review of those things every month and our operating review. So we are yes, we are on top of them and we're continuing to watch them, but but I think at the end of the day, we feel good about our mitigation.
And strategies.
Thanks, Jim and leave at that.
Thanks.
Yes, Thanks Angela.
And your next question comes from the line of Andy Kaplowitz with Citigroup.
Good afternoon guys.
Jim maybe you could give us an update on your expectations by region and for 'twenty, one and the sense that China and you said had really strong growth Europe continues to look better than North America, but how much of those results are just easier comparisons given the progress of COVID-19 and then are you seeing the material inflection at this point and sales rates in North America.
And there are any portions of the world that where are you in terms of COVID-19 hotspots.
Yes, I think the China will be probably our best grower of the year Youre right comps did have something to do with it and the quarter, but we were much better even on a two year stack. So we feel good about the work we've done in China to build the businesses there and we think that we'll have a good growth year there.
I think western Europe, and North America will continue North America Western Europe was obviously pretty good we like the trends in Pos.
Talked about and a number of our newer businesses like like intellect, and accrue and have had good European growth because it really didnt have a European business, and we really invested and that growth. So I think a lot of of what youre hearing and the western Europe numbers as well as really are our new investments and.
Some of the acquisitions that didn't have as much of a presence in Europe. So I think so I think western Europe, it's hard to tell given kind of the hotspots that are going on right now, but we still think of all of a pretty good year and Western Europe, I think North America will continue to get better. It will it will approach our best geography, probably we saw we started off a little slower in and <unk>.
With America and January, but we progressively got a little bit better each month some of it and I think had to do with some of the COVID-19 issues that existed you heard us talk about the the overall COVID-19 number.
And at 91 in the U S. It was it was back to the <unk> and January in terms of elective procedures. So so that got back into the into 90 over 90 and in March. So I think when we look at North America of lot of conditions.
And then relative to the hotspots, we don't have a lot of revenue and India or Latin America, but those.
And those are certainly going to be big big challenges for for for the world for any global business, I think particularly in the days and weeks and months to come.
We don't have a lot of exposure there.
Day, and so we will continue to do what we can and mitigate but I don't anticipate that has much impact to our overall business through the year and.
And Jim I wanted to focus for a second on intellects and the sense that you. It seems like you've built the pretty big EHS platform and intellects is continuing to have very strong growth. So I would imagine it can actually accelerate further given the stimulus funding and greater focus on sustainability and Youre working on it would the SBS for me you could talk about the growth potential.
Of this platform going forward.
Yes, I mean, I think we've had.
And we love the team.
We started and really our big investment and EHS started with with the work we did at ISC and are on our overall EHS effort now with the safer systems acquisition. The EHS AI acquisition now as you say, we've really built out.
A portfolio that really can take advantage of the secular drivers around sustainability and quite frankly worker safety and so we feel good about that I think the intellects platform itself adds tremendous value.
As I mentioned in the prepared remarks, we use it for our own sustainability assessment and it is a wonderful tool to help us understand how to how to think about goal setting and how to drive action to really improve not just not just report on sustainability, but more importantly take action to take action. So I think we feel very good about the platform. We think there is investment.
Opportunities and the future that we can make so I think relative to specifically to your question and <unk> as had been the double digit grower for us it's mostly been in the teens I think as we continue to build on it really as we hit the accelerator with some of the machine learning opportunities that we've really got with EHS AI will start to see some of those things and the back half of the year.
And I think we can continue to move that growth rate I would like to think it can go beyond that but I think in the near term. We certainly think it's a double digit grower for sure.
And I appreciate the color Jim.
Thanks, Andy.
Your next question is from the line of Dean <unk> with RBC capital markets.
Thank you Dan for him.
Good afternoon.
I wanted to circle back on the implications of getting more site access if you give us a sense of.
And maybe on a percent basis, how much is opened up but more importantly, what are the implications is there pent up business that really has been depending on being able to get back and.
Should we think about of catch up here.
Yes look I think I think site access comes and the way of too and it comes and the form of two ways number one I think on our on our anywhere where we have service businesses, but let's call it non healthcare.
And we certainly we have gone to remote capability, but it takes longer to turn customers on and software as an example.
And so I think there is some pent up demand, but I think to be honest with the team we've had such little access here over the last several several months that it's hard to predict how quickly. It will open up, particularly when you think about that on a global basis. So we certainly believe it is going to continue to improve but I wouldn't say necessarily that we think.
It's going to all be better by the end of the year, we just don't have enough visibility yet.
<unk>.
Most customers aren't really opening up here. So maybe the third quarter. So I think it's still a little early to predict it but I think the predictions that we have of really based on some of the trends, we've seen which we feel good about but I think they could get better if we can see vaccinations get more and more prolific here and start to see more opening up of businesses. So that's on.
That's it that's everywhere for Gordian and the current to EMEA to those of you see even like our tektronix calibration business, which some of it is on site on the healthcare side. We certainly think that we can continue to have access we're in hospitals today doing service for the most part, but but but everything is a little slower we mentioned in the sense.
His prepared remarks, though that we are starting to see purchasing decisions free up a little faster and again, that's all built into our guide as well that we think we continue to get better but I think at the end of the day. It is because pockets and the United States plus the nations, it's really too hard and it's still a little difficult to necessarily predict exactly how that opens up and of <unk>.
Sense of any of the pent up demand if you will.
And then just for a follow up.
I think I heard and Chuck's prepared remarks that there was 90 basis points of price realization was that for the company as a whole was it a particular product or business and then just broadly how are you thinking about price at this stage.
Every conference call. We're hearing people are putting through pricing mostly to combat material cost inflation, which you said is not that big of an issue for you. But is there is this the time to will pricing power.
So Deane this is Chuck at the <unk>.
The 90 basis points, you heard that correctly for Q1 that was across the company, but fairly uniformly and there wasn't it wasn't one company and not a bunch of others.
I think that <unk>.
<unk> costs, we've been able to stay ahead of.
It's something we look at every month and we're going to continue its evolving situation and we'll continue to work.
And look at that and expect to one of the levers it's not the only lever, but as one of the levers at this point is looking to.
And to push on price and this environment.
Great. Thank you.
Thanks, Steve.
Okay.
Line of Josh.
And with Morgan Stanley.
Hey, John Hey, good evening guys.
And so we'll follow up on <unk> question on sort of this reopening and.
And those kind of the band and the the four buckets of kind of COVID-19 sensitivity.
And if you think about what sort of coming on line now versus what's been.
Kind of normalize for a while and how do we think about mix within that is that positive mix kind of fleet average.
How does that evolve.
Yes, I would say mix is probably positive.
Probably the short answer Josh when you think about our search for the most part of our software service businesses are pretty profitable so there might be a little bit less and SaaS, but but on balance there is still pretty good and then the other part of consumables and our consumable revenue as we said and the first quarter with all with with the tremendous success that we had on the equipment side.
And we didn't have and we didn't have as much on the consumable side as consumables come back Thats of margin as Chuck articulated a few questions ago.
The good thing for IHS. So I think on balance if I were to take the corporation as a whole getting on site is is probably of margin enhancer and quite frankly on.
And the software side, we need to do the installation to get to the SaaS software. So so in some respects if it can accelerate the move to software and then it probably.
Most of all margin upside.
Got it that's helpful. And then I guess just in terms of the second half outlook.
We pencil out kind of 4% I think implied organic growth.
That sounds like sort of a through the cycle number rather than still kind of in recovery mode.
Is that sort of assuming that there is some kind of tough.
Tough comps from things that got pent up and <unk> and the release or is that really what this portfolio given all of the advancement of changes you've made over the past five years should be growing at.
And that was kind of most so of mid innings version of the the recovery.
Yes.
And Josh This is Chuck I'll try the first part of that and the second half keeping in mind. When you look at our first half second half were down 11% and the first half last year and almost flat and the second half last year. So we have and the second half I think we send the prepared remarks, 5% to 7% core growth and we think Thats and.
Acceleration, but the math youre doing about how the portfolio is going to perform.
I think yes.
Not saying, we're all the way back or that we're into the massive recovery were just saying.
We see continued sequential improvement as we go through the year.
Got it okay. Thanks, guys.
Thanks, John.
Your next question is from the line of John Walsh with Credit Suisse.
Hi, John Hi, there.
I guess, maybe following up on that question, a little bit thinking about the fluke portfolio.
If I remember couple of analyst days ago, you were very excited about not kind of just selling the tool, but also selling some recurring data solutions associated with it.
Talk about if customers are taking that up as they're reopening their facilities does that and opportunity to drive that kind of penetration higher.
Yes, John and number one.
I think we've seen some of that.
And quite frankly, resiliency and the EMEA sales that we've had and some of the work we've done on fluke connect.
And I mentioned in the prepared remarks of new line of client meters that comes out that's connected so we still continue to launch connected devices, which I think gives us even in the tough environment gives us market share opportunity and we do think that we're still in the very early stages of customers really collecting that data in order to put it to use so we've got some.
As you probably remember of the proof technique acquisition was to give us more of a vibration capability vibration data analysis capability. So we can provide better answers to customers relative to the vibration, how vibration works and predictive and preventive maintenance. So very early days, but we are starting to see some adoption of that and I would suspect as we start to get into an environment.
And we're manufacturing gets in better shape, we will start to see acceleration of that and what's great is we're building a platform for that with E. Mails and we've been building that business very well over the last couple of years, while customers still are adopting some of these other solutions.
Great and then maybe just as a follow on you brought up the analyst day youll be hosting.
Should we expect kind of deeper dive into the businesses or should we expect some kind of potential longer term targets being.
Put out and are updated.
Yes.
Think that you can do probably you should expect both of those things will certainly want to continue to we have re segmented here. So we're going to want and give more visibility and greater understanding of the great things that we think we are doing with the portfolio of and so you were going to see some of that among other things.
And then if you remember two years ago and firm support works, we gave some forward look metrics.
I think that stood up pretty well and you can expect for us to do something similar to that.
And don't want to give away of everything and when we make sure that we leave something for the Investor day, but the.
Those things are going to be there.
Great. Thank you very much.
Thanks, John.
Your next question is from the line of Scott Graham with Florida.
Hey.
Good afternoon, I guess St work, it sort of now so.
The.
I think that's what she said identifying and myself firm. Thank you and I appreciate it.
Very nice trends I have just two questions for you at the Stillwater mix numbers were really strong this quarter up 200 basis points for each segment of Chuck and Jan bundle that force of lit about now use of price cost is positive, but what are some of the other things that were driving that number.
Well.
Strong growth.
<unk> is something that.
And as we talked about and it's across all our segments, so and when we when we of growth we have really strong gross margins and that's that's probably first and foremost.
And that I would point to.
I think that Asps is really starting to hit their stride here with.
As they come off the TSA is that gave us the lift but the.
But across the board growth and price leads to a good outcome here.
Is that a number that you think you can sustain for the rest of the year.
I think well.
With over 200 basis points of Boeing Max and I remember that.
We're looking at and pandemic last year I wouldn't want to get things and that's what we're going to do every every year, but I do think that as we go through the year.
100 to 200 basis points of ROE and mix for the year is something that's well within our grasp.
That's great. Thanks, and then the other question was simply.
From back when you bought <unk> and then your board of accrue it just seem like.
Really large field for M&A and.
Whether it was site access or or otherwise just looked like it needs a little bit of time to operate the businesses and.
And what have you is now of time with both of these businesses are looking really much better and each of the last couple of quarters is this the time now where we can start to look for you guys to do something more in that area those areas.
Yes, Scott and Jim I think number one we.
And we've never stopped looking so I would say.
Both businesses Gordian and <unk> and has been just a benchmark for Fps and of <unk>.
Business and an acquisition in the short period of time and the team. There has done an outstanding job of crude has also done a very good job.
And I think from a standpoint of positioned.
Certainly had to get through last year, given some of the some of the things that were going on and the business and just make COVID-19 was not was not easy to try to get on site and do some of those things, but we're proud of where we're at today and I think we're certainly always active and looking for things.
And that that can accelerate I think on the Gordian side, we have we have.
Very underpenetrated market.
Real opportunity to continue to to really live do that accelerate our data we are of great data business there.
Globalizing Gordian and great opportunity, it's almost exclusively in North American business. So on the current side is the breadth of products within the current occurrence of a broader portfolio given the way. It was built by private equity. So a variety of different areas from from CMS to facilities management asset management to as people come back.
Two of the workplace.
Tools and technologies to help companies bring people back into the office and do that safely. So yes, I think there is a wide range of opportunities. Those are those are very good secular and popular great secular drivers and popular secular drivers. So certainly certainly will there are there's plenty of opportunities for us to do things, we'll be disciplined and that approach to.
Do things that we really think and leverage the growth opportunities and futuristic Lee and really accelerate strategy and I think those businesses are and a good position to do that and the right now.
Well. Thank you appreciate it.
Thanks, Scott and the next question.
The next question is from the line of Amit <unk> with Evercore.
Good afternoon, and thanks for taking my call.
And I guess, let me ask.
What's your perspective on 252 dynamics, one of just paused infrastructure of stimulus Buildout and the president of proposed just maybe talk about what sort of impact of the essentially half we accompany and.
Specifically I guess within for the vet.
And it fits with the stock up.
And then secondly related to this and there's also from what's the tax increase of of cooperating operations. How do you think that plays out for you folks.
Yes, I think I mean, I think on the on the infrastructure side, certainly and infrastructure Bill that puts money in.
Into facilities.
And what we call general infrastructure is going to help fluke and it's certainly going to help our current and gordian business for us.
For sure certainly probably as we as we think about our sensing businesses as well so good.
We think about investments and EV and EV.
Tektronix has got a good automotive operating offering that will help so we certainly think that there are opportunities.
How quickly that occurs I think is still a question as we think about some of how the stimulus gets spent.
As we often talk about the term shovel ready how shovel ready, but certainly a good portion of the portfolio is exposed to some of those opportunities nearer term to the extent that these investments go into health care and and helping hospitals deal with some of the challenges they've had that certainly is probably of near term opportunity for us as we continue to sell into hospitals through.
All of our EHS businesses, so I think in that sense.
Lots of opportunity for us, but obviously, it's still very early days, we will look forward to seeing some of those things play out, but but as it is and obviously.
Get into law and.
And then gets spent so still early days, but we do feel of the portfolio is well exposed to some of that additional spending and I'll, let Jack I'll, let Chuck to comment on the tax part.
And taxes at this point, we don't expect any changes for this year, although there is still months to go and the.
And the year, but we don't expect that to happen, but we note.
We note the direction that everything is going and that they were just likely to be upward pressure, but we are going to need to see the details.
Of what really gets the agreed upon and because that will really matter here, but.
Given the global nature of our business and.
And we're set up.
And what I'd like to believe is that we're going to maintain our relative position to our tax rate.
<unk> of our peers, so there'll be upward pressure, but I still think will be advantaged given our structure.
Perfect. Thank you.
Thank you.
Okay.
Our final question comes from the line of Joe Giordano with Cowen.
Hey, Joe.
Hey, Nathan.
And.
And you might have.
When you were talking about accurate and earlier I don't run out of my office for a second.
Apologies, but I'm just curious like you bought you.
Really stepped up.
And.
And of these SaaS platforms and the software platform for a couple of years ago, you had some time with them now.
As we're looking at the balance sheet ready to deploy and like what have you learned from how to invest into those types of businesses like what do you think you did really well maybe you've learned over those last three years there.
Well, yes, I think we and some of the prepared remarks, I think we tried to give some examples of how FBS is really applying to some of the businesses will give a deeper view of that as we get to the Investor day, but I think Joe for sure of what we've learned is.
And the FBS tools, we're I would say somewhat tuned to software when we bought the businesses, but what we've really adapted and really built now is the set of tools that is.
Very specific to helping businesses drive commercial activity drive digital engagement and improve net retention net dollar retention, which is such an important metric within the software businesses. So I think not.
And we always had the tools for software R&D development. So so I think those tools, we could put into the business, but I think the commercial tools have just been built exceptionally well now to accelerate the capability of the organizations that come into afford it and so that's I think that's what we've learned I think we also understand what good looks like obviously the multiples that we paid at the time.
People looked at it but I think as we now know that investments and things like property tax and other places EHS.
And today look like bargains from what we what we paid a few years ago compared to multiples now. So I think we were advanced and understanding that but we also understand what good looks like.
The deeper level in terms of customer engagement the.
Kinds of metrics that you want to understand when you look at and do due diligence and of business.
And I think we've just and continue to improve our our due diligence capability to really understand what good looks like and.
And I think that really helps long term and in terms of getting financial returns. So so I think a lot of learning for sure I wouldn't any way shape or form say say anything about that but.
And I think that leads to us feeling very good about our ability to get to create value and to really get good returns from our investments as we move forward and I would add that tried to also say is that we're not just talking about spending our capital here and the future around software and we continue to look for hardware and service opportunities as well, where where we think we can add.
<unk> and accelerate our strategy.
And that's really helpful color, one quick follow up not really totally different I guess, but when I think about asps. How do you characterize kind of like the roll up of COVID-19 specific opportunities that you guys picked up during this time line.
As like a negative offset just obviously, you're taking up your regular business.
Well I think if the question is the.
It's hard to think about pent up demand when you start to think about.
Surgical centers and <unk> doubling the number of surgeries and of particular month that feels a little scary. So I think I think at the end of the day, we think that.
One of the things that I think it was really stellar and the and the quarter was the fact that despite COVID-19 being at 91% and Colby quite frankly the.
Relative to pre COVID-19 levels of elective procedures. It was of diesel from Q4, and yet our consumables was flat and the quarter and that really is about our growth and installed base.
Chuck use the we're hitting our stride I think we've done some really good commercial work to build the installed base. So that our consumables and service revenue will accelerate when we come back and get above COVID-19 rates. So COVID-19 pre COVID-19 rates. So on the elective procedures. So we can't predict it that particularly on the global basis, where that's going to be.
Here in the coming months, but we've been certainly building the infrastructure building the customer base to be able to take advantage of that opportunity when things normalize within hospitals, and we really hope that that happens quickly for.
For all for reasons, well beyond our financial success, but much more about the communities and which we serve and the hospitals and customers and which we work with every day. So I think at the end of the day, we feel very good about where that business is positioned and we do think there'll be opportunities and as we mentioned in the prepared remarks, along with Sensus, we're seeing we're starting to see some things.
Open up but I think we're still a long way from getting to pre COVID-19 levels on a global basis.
Thanks, guys.
Thank you.
Thank you that concludes our Q&A session and I will now turn the call back over for closing remarks.
Thanks, Josh and thank you everyone for today and thanks for thanks for taking the time to spend with US. We know this is a busy week and a busy season for for all of you.
I think as you heard Chuck and I talked through the quarter in terms of the prepared remarks as well as some of the Q&A. We feel we're incredibly proud of the work that the went into Q1, we feel like we're incredibly well positioned from an organic perspective. The work we did in 2020 to really stabilize and and have what.
And what we did and the first and second half of last year is just really showing up and the first quarter and showing up and the remaining part of the year. We're excited about having the opportunity to share with you all of all of what we see every day more deeply with our people and our team as well as our strategies.
And at our Investor Day, and May well look forward to see any of them, we hope you're all safe and healthy and we look forward to answering any questions and follow up Griffin and Chuck and and Ross are available for follow ups as you see fit and have a great evening have a great and have a great have a great rest of the earning season. Thank you.
Thank you ladies and gentlemen. This concludes today's conference call you may now disconnect.
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