Q2 2021 Fortive Corp Earnings Call
Hello.
Hello My name.
And I will be your conference facilitator of this afternoon at this time I would like to welcome everyone to <unk> Corporation's second quarter 'twenty 'twenty..1 earnings results conference call. All lines have been placed on mute to prevent any background noise. After.
The speaker's remarks, there will be a question and answer session of you.
You would like to ask.
Ask the question during that time simply press Star then the number 1 on your telephone keypad. If you 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 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.
We present certain non-GAAP financial measures on today's call information required by SEC regulation G.
Each of these non-GAAP financial measures are available on the investors section of our website Www Dot 40 of dot com under the heading investors quarterly results.
We completed the separation of our prior industrial technologies segment through the spinoff of Volunteer Corp. On October 9th to 2020 and have accordingly included.
Related also 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.
Our year over year on of continuing operations basis.
During the call we will make certain 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.
The 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 on 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 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.
We were very pleased with our second quarter results as you can see on slide 3.
Our performance once again highlighted the benefits of our strategy to provide differentiated connected workflow solutions for our customers, creating a portfolio with enhanced resilience and long term earnings power during the quarter, we capitalized on and accelerating point of sale trends across a number of our larger businesses and continued growth from our software.
Earrings and improving conditions across our key end markets.
Against this backdrop, we delivered core revenue growth and adjusted operating profit margins that exceeded the high end of our guidance driving exceptional earnings growth and free cash flow conversion.
As we highlighted at our Investor day on May 19th we are building on the.
We're off of our advantaged hardware positions and expanding our software capabilities to address our customers' critical work flow needs and accelerate their ongoing digital transformation and the second quarter, our SaaS offerings delivered low double digit growth and we also drove significant improvement across our professional services offerings, we continued to see.
<unk> momentum and E mail, including increasing demand from its expansion into the food and beverage pharmaceutical and health care verticals Gordian.
Gordian and the current both had strong quarters as they executed on opportunities provided by increasing demand from facility owner operators and improvements and access to customer sites.
Both companies are well positioned to capitalize.
Strong list of customers focused on post Covid returned to work challenges and digital transformation priorities.
This also performed very well on the quarter as access to hospital customers improved executing on strong demand for SaaS offerings, among existing and new independent delivery network customers.
Looking across the portfolio we continued.
<unk> to be excited about our expanding offering of EHS work flow solutions solutions, which are well positioned to meet the significant long term sustainability requirements of our customers.
C and intellects performed well capitalizing on strong broad based growth across end markets and key geographies.
At the same time, we are excited.
With the early progress at EHS, AI, where the company closed its largest deal to date and its first joint marketing campaign with intellects and generated strong growth and its sales pipeline.
Throughout the second quarter, we continue to apply the Florida business system across the portfolio to drive innovation growth and share gains deployment of our lean portfolio management.
We'll set which significantly accelerates the efficiency and impact of R&D investments achieved of greater than 40% increase and our on time program delivery the application of FBS and digital analytics and search optimization generated 25% growth and digital traffic from pre pandemic levels across the portfolio.
Meanwhile, the use of FBS growth tools has accelerated innovation at fluke health solutions over the past 18 months and continues to drive excellent top line performance.
We have created good early momentum and our partnership with pioneer square labs, including the recent spin in of team sets of provider of innovative workflow solutions to streamline communicate.
Communications with hourly workers. This marks the first business incubated at pioneer square labs to be integrated into the Ford of portfolio. While still very early we are pleased with the progress thus far our team and are excited to develop additional technologies that accelerate safety and productivity solutions for customers within our core markets.
And early.
July we announced the acquisition of service channel the transaction brings a differentiated high growth software business with an integrated service provider network and significant proprietary data assets to the portfolio enhancing our ability to meet the evolving needs of facility owners around the world.
Following the expected closing of the acquisition and Q3, we will have significant.
Of sheet capacity supported by our strong and resilient free cash flow generation.
And as we highlighted at our Investor day, we see substantial runway across our $40 billion served market for disciplined capital allocation to accelerate our strategy.
Turning to a quick summary of the results on in the quarter on slide 4 we generated year over year total.
<unk> bound growth of 26, 7% as revenue strength exceeded the high end of our guidance and.
Adjusted operating margin was 22, 2% while adjusted earnings per share was <unk> 66, representing a year over year increase of 53, 5% given.
And given the outperformance for both top line and our adjusted operating margin.
The revenue delivered $282 million of free cash flow, which represented 118% conversion of adjusted net income.
On slide 5 we take a closer look at the intelligent operating solutions segment iOS posted total revenue growth of 31, 2% and the second quarter. This included mid 20% core growth and north.
We do a low 30% core growth and western Europe, and low 20% core growth and China.
Fluke core revenue increased in the mid 30% range Fluke also grew by mid single digits on a sequential basis as the continued to see robust demand across its businesses highlighted by growth at fluke industrial fluke.
Fluke industrial.
America organic gains across a range of key channel partners and retail accounts as point of sale accelerated through the quarter.
<unk> broader II and 900 acoustic imaging product line also continues to perform very well as revenue of approximately doubled in the quarter on strong growth across both Western Europe, and North America Fluke.
Fluke network.
<unk> shale performed well driven by the recent launch of its the link IQ product line, which continues to exceed initial expectations tied to office reopening and network modifications.
And fluke reliability of our efforts to accelerate performance of proof technic are gaining traction as we took advantage of increasing demand for alignment and other services while EMEA.
<unk> also delivered another strong quarter with the accelerated pace of orders at Fluke, we did see some backlog build due to supply chain responsiveness.
Industrial scientific increase by mid teens, driven by strong execution and instruments and rental as demand from oil and gas markets rebounded and the business continued its expansion into new end markets.
The Companys <unk> net offering remained resilient increasing by mid single digits with net retention solidly above 100% until.
<unk> grew by high single digits, and Q2 reporting a record revenue quarter Intellects continues to leverage FBS and has driven improvements and lead generation and funnel conversion and also in the second quarter Intellects closed <unk>.
<unk> deals for its enhanced ESG platform to help customers launch scale and optimize their sustainability programs and meet increasing demand for transparency and a growing set of critical non financial reporting metrics.
Our current grew by mid single digits, and the second quarter with low double digit growth and and SaaS business.
Current.
With strong sales and bookings for its meridian solution for engineering document management and its maintenance connection CMS offerings. The.
And the business also capitalized on the strong demand for its EMS event workspace and resource scheduling offerings as companies plan and execute their return to work strategies. The company continues to generate new.
Generate of wins and improving growth and recurring bookings.
Importantly of current also delivered improved performance and its professional service business, which generated mid single digit growth as customer site access continued to improve.
Gordian and <unk> increased by mid teens, driven by low 20% growth and the procurement business and high teens growth and estimating.
Gordian generated a record month for procurement revenue in June with accelerating timelines for key projects across the number of large customers. This included increased project spend by the New York City Department of Education and school construction authority.
Moving to slide 6 the precision technologies segment posted a total revenue increase.
<unk> low volume, 1% in the second quarter. This included low 20% growth and North America, mid 20% growth and Western Europe, and mid teens growth and China.
The tektronix increased by approximately 30% with another quarter of strong demand across its product businesses, including accelerating point of sale trends and each of its major regions.
Of 2000, and mainstream and performance of <unk> had a strong quarter with high demand for semiconductor industrial manufacturing and communications applications Tektronix service business again showed its stability and resilience increasing by low teens.
<unk> continues to benefit from the accelerated focus on driving innovation with Q2, new product introductions.
But let me very well, including its family of automated test solutions for high speed data transfer.
And the second quarter Tektronix held 6 regional innovation form events, which stimulated the adoption of its tech scope platform, resulting accelerated funnel creation for the company's broader hardware and software offerings.
<unk> technologies.
<unk> increased by low teens, and the second quarter with growth driven by continuation of the broad market recovery.
<unk> performed very well and China with another quarter of mid teens growth driven by demand for factory automation solutions.
<unk> Anderson Negley continues to make progress with its approval of its paperless process per quarter Iot solution aimed at the dairy industry.
With broader commercial rollout of expected in the second half of the year.
<unk> also continues to drive market share gains across elsewhere across the portfolio, particularly et cetera led by its differentiated critical environment solution and strong demand across its HVAC customers.
<unk> Si EMC grew and the low 20% range with the business.
Seen some alleviation of the Covid related shutdowns and approval delays that impacted shipments and previous quarters.
<unk> continues to see good growth and the commercial space market with the resumption of launches by 1 web providing recurring revenue for smart controllers and initiators.
And so on July 20th we were excited to watch the company's.
Business critical technology ensure safe and reliable separation of Blue origins, New Shepherd capsule from its booster during its maiden voyage.
Moving to advanced Health care solutions on slide 7 and total revenue increased 21, 8%, including 11% core growth. This included high single digit core growth and each of North America.
Michigan, Western Europe, and China markets.
ASP grew by high single digits, and the second quarter led by strong growth and Western Europe, and China Asps also realized improved growth and North America highlighted by high single digit growth and the U S. Overall ASP grew its consumable revenue high teens as the rate of elective procedures across most geographies.
And you'd to improve while elective procedure volumes increased on a year over year basis, Q2 volumes came in a bit lower than expected at approximately 93% of pre COVID-19 levels, which was consistent with the Q1 exit rate.
<unk> also continued to expand its global installed base of terminal sterilization capital equipment, which grew at a 3.
And can type percent annualized rate in Q2, we expect this continued installed base expansion to provide an additional tailwind to consumable revenue as procedure volumes normalize going forward.
Census increased and the mid 20% range with mid teens growth and its sense of track SaaS offering as well as strong growth and its professional services business.
And many hospital customers are now, allowing access to vendors, which resulted in a significant increase in activity and the second quarter, particularly with integrated delivery networks.
Fluke health solutions increased by low double digits, even as it lapped the sizeable COVID-19 related revenue tailwind of the prior year.
As a high teens growth from its optimized.
<unk> and <unk> software solutions, which benefited from accelerated growth of investments over the last 18 months.
With that I'll pass it over to Chuck will take you through some additional details on our margins free cash flow and balance sheet.
Thanks, Jim and good afternoon, everyone.
We delivered solid margin performance in Q2, driven primarily.
By strong fall through on our revenue outperformance adjusted gross margins were 57, 3% up 100 basis points on a year over year basis.
This increase reflected of 130 basis points of price realization as we delivered another quarter of solid performance managing price cost across the port.
Portfolio.
Q2, adjusted operating profit margin was 22, 2% of 170 basis points above the high end of our guidance also driven by stronger volume and high associated fall through we.
We reported 240 basis points of core operating margin expansion, including 570.
Merrily basis points of coral IMAX at the Iot segment.
Both fluke and Tektronix delivered strong core operating margin expansion through disciplined application of FBS to drive sales conversion as demand accelerated across their end markets.
At the same time strong contributions from some of the acquired.
<unk> pieces of our portfolio, including ISC Gordian Sensus and Landauer also contributed to the margin outperformance across the segments.
On slide 8 you can see that and the second quarter, we generated $282 million of free cash flow, representing a 118% conversion.
And of adjusted net income of <unk>.
Free cash flow over the trailing 12 months increased 15% to $943 million today, our net leverage was approximately 1 times and we expect net leverage to be around 1.2 times at year and including the funding of the acquisition of the service channel, but excluding any.
Additional M&A.
And this gives us significant capacity to continue to deploy towards our key capital allocation priorities.
Turning now to the guide on slide 9.
Given the strong performance and the second quarter and the improvement and our outlook for the rest of the year. We are once again, raising our 2021 guidance.
With the full year, we now expect adjusted diluted net earnings per share to be $2.65 to $2 and 75.
And representing a year over year growth of 27% to 32% on of continuing operations basis.
This assumes total revenue growth of 13, 5% to 15%.
Adjusted operating profit margins of 22, 5% to 23, and 5% and and effective tax rate of 14% to 14, 5%. It also assumes total revenue growth of 8.5% to 11% and the second half of 2021.
We continue to expect free cash flow convert.
<unk> and to be approximately of 105% of adjusted net income for the full year.
We are initiating third quarter adjusted diluted net earnings per share guidance of 62 to 66.
Representing year over year growth of 24% to 32%.
This assumes.
Total revenue growth of 11, 5% to 14, 5% adjusted operating profit margin of 21, 5% to 22, 5% and and effective tax rate of 14% to 14, 5%.
For the third quarter, we expect free cash flow conversion to be approximately 100.
And 5% of adjusted net income.
I'll pass it back to Jim for some closing remarks. Thanks.
Thanks, Chuck before I move to questions I want to provide a quick update on our sustainability and inclusion and diversity efforts, which is shown on slide 11.
During our Investor Day program on May 19th we introduced and accelerated green.
The gas reduction goal, which now targets of reduction of 50% and greenhouse gas intensity per scope, 1 and scope 2 emissions by 2025 relative to our 2017 base here during.
During the second quarter. We also issued our 2021 sustainability report, which included for the second annual <unk>.
The index first annual SaaS, B index, and the 2017 to 2020 greenhouse gas emissions profile.
During the quarter. We also became a signatory to the UN global compact committed to alignment with the task force on climate related financial disclosure by 2022 and announced our 2020.
5 aspirational inclusion and diversity goals, we continue to make significant strides and are highly committed to accelerating our sustainability and inclusion and diversity progress and the coming years.
I'd also like to take the opportunity to thank our team and all of our stakeholders for your support over the first 5 years of our journey as an independent company across all 3 of our.
Strategic segments, we are expanding on strong established positions with offerings that address the critical work flow needs of our customers and markets with attractive long term growth drivers.
<unk> earnings and free cash flow performance and the first half of this year clearly demonstrated the benefits of the strategic focus and the momentum building and our portfolio.
We look ahead, we will continue to invest and expanding the capabilities of the afforded business system as we accelerate operating improvements and innovation to increase the value we offer to our customers.
With strong free cash flow and significant M&A capacity, we are well positioned to pursue the key organic and inorganic growth initiatives that will.
And consistent double digit earnings and free cash flow growth and the years to come with that I'll turn it back to growth.
Thanks, Jim that concludes our formal comments Pasha, we're now ready for questions.
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star followed by the number 1 on your telephone.
We'll drive the pad the <unk>.
Thank you please limit your questions to 1 and the follow up well pause for just a moment to compile the Q&A roster.
Our first question is from the line of Steve Tusa with J P. Morgan.
Good afternoon, Steve.
Hey, guys How's it going on.
Telephone.
Just a question on the.
H.
The margin I think the fourth quarter, just backing into kind of the fourth quarter guidance shows.
Margins that are kind of into the like beyond the mid twenty's and the kind of even the high <unk> and.
And then maybe just some rounding going on there, but at the kind of the high end of the range of what's implied.
Am I looking at that the right way and.
What's the what's kind of the source of that strength itself.
Thanks, Steve and Thats, a good question and I think you are calculating it right.
Above the mid mid 'twenty.
<unk>.
The pushing.
1020 around 27.26, 27% I think is the right zone, what's pushing it as that is as we move through time, we're starting to see we will see acceleration and our revenue.
Elective surgeries get better, but also seasonally there is more revenue and the fourth quarter.
And when you put those 2 things together and that's what really drives the the.
The health margins at the segment level up.
Is that is that any read I guess is that any read into next year or is it like.
Highly unusual seasonality like the.
The fourth quarter or is it just way stronger than the rest of the mean is.
Is there a reason why that like why that seasonality is so acute or can.
Can we think about that as maybe.
A bit of a jumping off point at some stage.
I don't think from just where the <unk> going to be as the jumping off point, but I do think in terms of every year you should expect the fourth quarter to be to be stronger.
<unk>.
We of the back half of the year going up by a couple of hundred basis points and each of the quarters and.
And I don't think that there is.
Anything anomalous about this Q4 going forward, but I wouldn't take that and multiply. It by 4 I think we've kind of go back to a couple of hundred basis points of growth.
Both in Q1, and Q2 and what we posted this year, Steve I would just add that.
Just to add that like last year, we sort of have that 25% as an exit rate not saying it was going to be the right for every quarter, but that would be of good jumping off point, and which should take margins and the next level I think youre seeing that the same thing I think it's it's a combination of the EPS.
The work the full year effect of the EPS work before the full year effect of all of the work that we're doing the continued to integrate the business drive margins and as Chuck said consumable revenue coming up too as well. So I just think the businesses and is in a good trajectory right now overall and.
Obviously, a big part of that is ASP.
Right that makes.
A lot of sense and just 1 follow up on the margin for the total company.
Did you ultimately have some of that cost come back I think we were thinking of it and kind of the $75 million range like temporary costs and then some of those investments.
That hit this quarter year over year, I mean did you guys ultimately see that stuff come.
Come through.
We did.
There is 2 things going on for Q2, there was the year over year, we had $60 million of snapback cost. We did that and then plus we did another $15 million and.
The investments and that did show up in Q2 for sure yes.
So that's like a core incremental on EBIT.
And a of like I don't know I can back into something like 65, 70% kind of core incremental.
I mean is that is that the right kind of math.
It is so the.
Straight year over year Incrementals for Q2 was 31% stronger than the mid Twenty's, we talked about but yes.
With the.
And our incremental gross margins are going to be in that 65% range. So yes that is the right math I wouldn't expect that flow through at that every quarter and the second half we would expect as we've been talking about 40%. The right thing for this the second half way of going forward, yes.
Yeah, right got you okay. Thanks, a lot.
Thanks, Steve.
Your next question is 1 of line of Jeff's Brog with vertical research.
Hey, Jonathan Thanks, Good afternoon, everyone.
Hey.
Jim and Chuck could you follow up a little bit on the.
Just kind of the P O S comments and.
I don't know if you have to kind of break.
It down the fluke and a couple of other businesses, but.
Are the sales were observing here in the quarter.
Trailing her or outpacing Pos and.
And I just wonder if you have any color on what's going on with channel inventories of the channels and any way caught up or.
This is a pretty.
The good indication of what and demand is yes, we saw 1 of the things Jeff.
And obviously with the with the beat and revenue and the strength that we saw particularly the accelerated through the quarter point of sales and important target as Youre asking you Youre exactly right. We saw good Pos of continued to improve through the quarter I think it will continue to.
And improve obviously little bit of and easier comp in the quarter by both at Fluke and Tek we size. The an example on the Pos and the Americas, we saw on the 30% range, so better than our even and are our sales total sales and some cases. So so very good position. We're starting to we're also obviously, making sure given.
Given given the supply chain discussions around the world, we're making sure that inventories arent up that we're not seeing accelerated buying were doing it you are using a new metric, where we not only look at point of sale.
But we also look at the end orders on hand to sort of understand are we are we seeing a leading and situation or not and we're certainly seeing things continue to be good. So.
Hence we took the revenue guide up both fluke and Tek are performing well and I think we're on a good place and we're certainly.
And particularly in the U S and Europe, where we have the best data, we're certainly and a good place from an inventory position, we don't feel like we're in any situation building excess of inventory.
And I Wonder if you could just take a moment.
On tech in particular.
And discuss what's going on in some of the new verticals. You are trying to pursue I think thats going to be and important part of making sure tech puts up the kind of growth you want to see over time not just in the cyclical rebound so.
Like where are we at on that push some of these new verticals.
And on some color on what percentage of Tech sales. These are now and how you see those progressing yes, I think it because because we're.
We're feeling as we said and the first quarter commentary and again. This time, we are seeing automotive data centers has 2 particular verticals that I've continued to inch.
Kris I think on a percentage basis. They are about the same simply because of the rest of the total revenues coming up and obviously and places like Keathley, we still continue to see revenue and semiconductors. So I don't think we've necessarily move the needle as a percent of sales, but on a total basis in terms of total dollars were certainly up and as we mentioned in the prepared remarks.
<unk> the advent of tech scope, which is sort of of software offering is also I think helps helps users connect multiple scopes and multiple channels and really bring more data together.
Also accelerated and some new verticals as well so I think just to answer your question, specifically I don't I don't think we've seen.
Sponsorship of difference necessarily in the percent of sales, but we have seen substantially greater sales and those verticals over time and that should bode well for other free for the futures too great.
Thanks, I appreciate the color thanks, Jeff.
The next question is from the.
The line of Scott Davis with Melius research.
Hi, Scott.
Good good afternoon slash the evening to everyone.
Couple of things here I mean first of all I mean.
And obviously youre getting operating leverage but it is price.
Kind of in line with your cost increases are you.
Still catching up a little bit on that or.
And the other way to say it is we're 130 bps up on price is that accelerating.
And through the through the year here, Yeah, we're in a great shape on price cost.
Scott first.
First of all as you said 130 bps in the quarter will and.
On the hardware businesses in particular.
And we'll double that number and the second half so we're and we're in a very good position relative to price as you know we've gotten good price over the year. So this is the compounding effect you saw the group you saw those price read through as well on the gross margin improvement and the second quarter. So we feel very good and really quite frankly, even though we are seeing a little bit of cost inflation.
Is there going to be net it's significantly net.
And of good shape relative to material cost reductions for the year. So so material cost reductions will still be a profit improver for the year, even though we've seen a little bit more inflation than typical we still are in a very good shape relative to price cost not only because of price, but also because.
Because we've done a nice job on the cost reduction side as well.
Okay. That's super helpful. And then this is a little nitty gritty, but just following up on Jeff's question on the on the on Tech and kind.
So of scopes overall I mean the.
The new markets that you're entering is it with the same exact product, meaning kind of standardized.
We're just different channel or.
Do they have different problems of trying to solve and and.
And electric vehicle facility or data center of that that perhaps you've modified or changing or creating new products for yes, I would say on balance through the same base of civil scope. The 6 series of the 4 series, but then there's a set.
Ms product, where the specific to that vertical application and there might be a set of probes that is also different and ultimately the theres really a solution around the challenges that they might have as an example power usage is a huge issue and data centers, it's a big problem and.
The electric vehicles and a variety of places so it might be of power consumption challenge might be.
Trying to do some different different troubleshooting aspects of of particular applications as well. So there's a suite of software and and probes that typically go with that oscilloscope that is very much vertical specific.
Okay and encouraging thankful. Thank you good luck guys. Thanks, Steve Scott.
Sort of your next question is from the line of Andrew Open with Bank of America.
Hey, guys good afternoon, Hi, Andrew.
And I guess I'll just continue to ask questions about tuck it does sound like very broad based demand and tektronix, how durable do you think the demand this year versus sort of more bounce back from Covid.
While there is certainly an aspect of of the bounce back of Covid. So I wouldn't in any way shape or form take away from that but I think when you look at where the business has been.
Historically, we're at an accelerated growth rate here over the last couple of years. So I think in that sense, we feel good about the overall growth rate.
And we think it's it's certainly durable and the sense of services as we recognized services had a good a good quarter. We're doing some good strategic work to add to services the.
Things were just mentioning around new vertical so the team has really got the the mantra and the strategy to.
Considered to continue to make the business.
This year and less volatile.
Cyclical and and really work towards some secular drivers that have more durable growth rate and and I think were and are very good position relative to how we will do that over time.
And my follow up so how should we think about the implications around the uptick and professional services and improving site access.
This free of SaaS businesses.
<unk> was 1 of the hurdles for new logos right, but just trying to get a sense. If now you are able to close deals on the start onboarding new clients yes.
We're still not where we'd like to be so and obviously.
And even the recent news is over the last 24 hours is going to have.
<unk>.
And we will have to look into but I think we feel confident and sort of double digit professional services growth and our SaaS businesses and the second half. So we see continued improvement in our insight access we're starting to see customers start to to really make decisions here at an accelerated rate talk a little bit about that and the prepared remarks on.
All of the software businesses. So, yes, I think you'd say the second half where and we're in a much better place relative to services and that's not just on site services. It's also getting customers to accept remote services. So it's a combination of the good work. The team has done to be able to deliver things more remotely as well as customer site access.
Thanks, so much.
Your next question is from the line of Nigel Coe with Wolfe Research.
Good evening and agile.
Good evening and good afternoon.
Thank you guys.
So just the.
And also on Jeff's question I'm not sure if you actually had growth.
The <unk>.
The level of channel the ministries.
Best of.
Knowledge and the.
Sure. The question is that obviously a lot of channels.
And the empty at this point so.
Any sense on where channel inventories are.
Flotek and.
And the other products.
And then kind of the on top of that.
And it sounds like a dumb question and given the kind of core you just put up but did supply chain constraints gate your ability to supply during the quarter.
Yes, so first of all of I think we're in a we're in a good place and channel inventories and I think in some cases, given the revenue numbers both both what we delivered in the quarter over delivered and the quarter plus raised and the guide.
As of year you.
You'd say well, we're definitely seeing better demand and in the back against that backdrop, we're not seeing an increase and channel inventories no nor would we see an increase and channel inventories at least and the next 90 days through delivering the revenue that we have relative to the POS numbers. We're seeing so I think we feel good about and user demand and we feel good about the fact.
For the fab building inventory and some sort of over over saturation situations. So I think there is real demand out there and I think we are fulfilling it.
Nigel we're not oblivious.
And any way shape or form like our peers and other and pretty much all of the companies and the world relative to the supply chain constraints. We've seen those for sure I think the fact that we've been building.
Fact that when great lean manufacturing capability over decades, and our businesses our ability to respond to those and those things relative to the FBS tools like daily management and problem solving means were.
We're fighting every day to secure secure material and our ability to beat the revenue and the second quarters of good demonstration of our success.
SaaS and that and that way, but I would also say we continue to see those challenges every day and I would expect to see those challenges probably through the year at least so I think we're and we've been very successful thus far but it is of daily battle, but given the work we've done over decades to build the kind of capability within our factories.
Like our chances and continuing to be successful.
Building on <unk>, and then I wanted to go back quickly to Asps and margins.
Okay.
<unk>.
<unk>.
The licensure and in the quarter <unk>.
Is that simply the mix of Asps.
On the ASP carry a high contribution margin relative to the.
Average the and then the 27% margin guidance of a full Q does that represent.
On quote normal mix and that segment.
Thanks for the question Nigel So, it's we really werent lighter than what we expected were over the high end of our guide for Q2.
On the IHS margins, but I think.
If youre looking at the comparison to last year and.
And so there's a couple of things going on there..1 is we have been building out our supply chain coming off the TSA. That's incrementally put in starting last year at this time of more costs. So when you come back to the margins.
That.
It's a headwind on year over year margins with that there is a little bit higher freight.
As well, but theres more revenue and to go along with it. So we're still driving O. P. Also we had a 1 timer last year that inflated margins.
Isn't repeat this this year the related to just the transition off the TSA.
But again I think that we're right, where we expect it to be and Q2 and going forward, we're going to see us.
And.
The start expanding again doubled.
Double the 2.
200 basis points from Q2 to Q3, and then Q3 to Q4, maybe even a little bit more on that so consistent margin expansion.
That gives us and yes the.
On the consumables have very high margin and so as recovery.
And that really helps part of that story for sure.
Okay Alright.
Alright.
Your next question is from the line of Julian Mitchell with Barclays.
Hi.
And then.
Maybe.
Just the first question around the I think the IHS margins have been.
Cost of fair amount, but just wanted to touch on the the revenue side of things.
Down the high end of the core growth guide for IHS for this year.
<unk> kept the margin.
Good afternoon.
Ted.
So maybe help us understand what the.
And what's driving that revenue reduction and.
And how good you feel about the overall state.
The other businesses such as ISP in terms of their market share.
And then the winning sort of their fair share of business.
And yes, Julian I'll take the second 1 first I think were installed base is up 3.5% year on year.
And we're in a very good place relative to equipment placements, we had another good equipment quarter. After several 4.5 quarters in a row of continued increases and the installed base. So we feel very good about where we stand relative to the installed base I think what we're really.
And for the second half of the year.
And I think if you look consistent revenue growth through the remaining part of the year ASP will actually accelerate and growth through the remaining part of the year, but we did see a little bit of of electric procedures coming down a little bit then than we anticipated as we said we thought maybe.
And we would end the quarter around 95, we ended around 93, so theres a little bit of an assumption that we will probably not get to 100% by the end of the year that has a little bit of impact, but I think we come back of the fact that we're taking share and if things come back we certainly would see and associated improvement, but I think we're just trying to be a little bit more consistent with what we've seen here.
Certainly relative to elective procedures, and so theres a little bit of a change average we took the guide up and total up for the overall company, but a little bit maybe a little bit more conservative relative to where we think of elective procedures might come in and as you said continued very strong margin.
The increases like Chuck was just describing through the remaining part of the year through Hs and Asps.
Sorry for all of the acronyms.
No worries, thank you for that and just on China.
The growth went from close to 30% and Q1 sort of mid teens and the second quarter, so pretty consistent.
A lot of the other indicators short cycle wise in recent months there.
But when you're looking at sort of fluke and tektronix in China, both have a very good presence there.
How are you thinking about the growth and the second half and China, specifically, yes, I think.
Very good I think the answer is to.
To be quick we Chuck and I did a review with all of the China team's here.
To go and feel very good about the second half, particularly at fluke and Tek the comps play a little bit of a role here and and so but I think as we look on a 2 year stack.
As an example, we continue to grow well in China through the remaining part of the year. So I think we've got mid teens or something like that for for the for the full year and China and.
Few days, we feel good that we can continue to maintain good growth rates and.
And really good market positions as we get into 2022 as well.
Great. Thank you.
And your next question is from the line of markets many of my.
With UBS.
Good evening and good afternoon, Hi.
And the thing.
Very quick follow up on price and the 1.
130 basis points that.
You said the targeted to double that and the second half just to be clear that's part of the guide versus the.
And that on top.
Yes, Marcus I was the.
The 200, and some basis points is really and our hardware businesses.
Particularly sort of fluke tax sensing tech in particular that I was associated with that number. So that's that's really a comparison of where really relative to price cost I think our overall sort of our overall pricing.
For all of Florida of and core incorporating everything is probably closer to.
From the second quarter, probably up about 140 or excuse me about 40, or 50 basis points up from where we've been thus far and the first half. So so the 200 is really to address the price cost question and.
But the overall pricing is a little bit less on that and we have said it and other.
Yes, and that's built into the guidance. Thanks.
Okay, no that makes sense. Because then the follow up would have been sort of if you see any sort of issues around price elasticity of but that doesn't sound like it.
David.
Go ahead sorry.
Yes, and then the second question of onto the balance sheet.
After the service channel model I think.
The change and priorities I know the last few months ago, you said, obviously relative size between the various businesses matters and you sort of new thinking here about the prior.
What you saw here for the for the second half of the year.
No I think as we said and the.
Prepared remarks.
<unk> the balance sheet remains and very good shape and will be and very good shape to do other deals if when those opportunities become available so.
Obviously, we're going to continue to be.
Focused on making sure we get good strong financial returns I think service channel deal is a good example of that both accretive.
And 12 months, but also with the 10% ROIC and 5 years. So I think theres lots of those kinds of situations available to us and and the second half and so you never know if you're going to get a deal done, but I think we both have the capacity financially as well as the capability to pull off another deal if an opportunity becomes available so it's hard to predict those things and and.
And what happens, but we but we are busy and we feel confident that we could put we could get a deal done and if we had the opportunity.
Great. Thank you very much.
The next question is from the line of Andy Kaplowitz with Citigroup.
Good afternoon, Randy Hi.
Hi, Andy.
So just focusing on the bigger picture on going and the crew and again you mentioned there is still a bit of noise in terms of the varying pace of returning to work, especially lately, but you did mention and clients are accelerating work on key projects within Gordian and so does that give you better visibility into growth continuing to accelerate within the businesses and can be improvement we've seen.
And the state and local budgets and the stimulus and give you an additional boost.
Yes.
So first of all of Gordian had a very good quarter, what we did see in June and we mentioned this a little bit is there was a little bit of budget clearing at the end of <unk> at the end of the fiscal year and I think between stimulus and what's already.
Already we are seeing and projects I think we're going to have and we feel confident we'll have a good a good year and at Gordian for sure. So so I think.
As we look forward, the gordian and not only and job order contracting, but estimating and even facility assessments, we're seeing good business and I think on the current side Youre seeing.
And as we said, we're starting to see those those back to work projects come back.
Who are looking for hotels solutions, we mentioned in the prepared remarks, our event and hotels and planning solutions is sort of leads the way as people start to think about bringing people back to the office. So we saw that accelerate we really liked the professional services.
Because of lot of and a lot of those situations. That's the first part of the current before we see the SaaS revenue, we see those projects come in where we where we go in and help clients get started so I think a number of places where we're seeing real opportunity and I think I think we will we really believe that those will continue and as I said and.
His question professional services being up double digits and the second half.
And it's going to be real helpful to us sort of building that business here for not only this year, but obviously into next year.
And it's helpful. Jim and then you mentioned and a nice rebound and industrial and oil and gas and mindful of ISC and selected as the recovery more of a function.
And of easy comparisons or are you starting to see a relatively significant rebound at this point in the energy related markets and what do you see going forward for that business. Yeah. I think we see continued improvement I would say there was some easy comp aspect to the ISC number and the quarter, but 1 of the things I was I was I think we're really excited about is the work they've.
And over the last year, and a half to sort of move the business and a new markets outside of oil and gas and we saw some success on that in the quarter as well. So so theyre building the business around different end markets at the same time, they are starting to see instrument revenue and rental revenue come up.
Which is really I think consistent with people coming back to work.
And oil and gas and projects coming back into those those customers. So we continue we think that continues to accelerate through the remaining part of the year.
Thanks, Kevin appreciate it thanks Andy.
Your next question is from the line of Deane Dray with RBC capital markets and.
And good afternoon, everyone.
1 <unk> how are you.
Doing real well thanks.
Can we just get updated there was a plan that you would start these growth investments $35 million in the second quarter and I think early and the call you called out of $15 million of investment is that part of it and what's the plan for.
The balance of these investments are they going into Fort and Pioneer Square lab also.
And so Deane and we called out that we'd have $35 million Youre correct, we had $15 million and Q2, which we did kickoff and invest in Q2, and then you think of about $10 million and each of Q3 and Q4.
And then relative to maybe what we saw I think and the other thing I'd just call on and Theres a couple of examples on the call the <unk>.
900 that we called out at Fluke and the <unk>. The <unk> at Fluke health. Those are both examples of investments that we did 18 months ago that are now really paying off so I think it's a good example of hey.
Hey, we give the operating companies money to accelerate product development for accelerated growth and that's a good example of we're seeing the payback of some of those investments that we did roughly a year and a half ago relative to pioneer square labs, as we said in the in the Q2 call about half of that $15 million of half and half of that 35 would be at the fort and of <unk>.
We mentioned the spin and of team and the quarter or in early July that's part of that investment is the fun team sense here as we spin that into the business. We're really excited about that opportunity and then obviously the Ford investments, which we said, we're probably more like 3 or 4 years 2.
2 or 3 years out.
Relative to payback and return and is just to bring those numbers back we thought it was about a $250 million growth opportunity for all of that work and we still believe that that's true probably hopefully planning to get 30 to 50 of that.
And as we continue to build out the product lines and build out some of the ideas will have.
Granularity of that but we're really excited about the work that we got done in the quarter, which is really going to be good work for us and next year and then of the years to follow.
Got it and that.
The nice lead and for the second question about how do the spin and work.
And with team sense are there more on the pipeline and what are the condition.
The greater that a startup is ready to be brought into Florida.
So each 1 has its own sort of particular set of metrics. We are of a board. That's that's made up of team members from reported and team members from PSL, They sort of advocate for the business through a period of time prior.
And to the spin and we fund that and then we make a decision whether the business out of be spun and if its good strategically.
It really is helpful to us strategically there might be situations, where we actually go and get external funding and and then there are situations, where we may be wouldn't go forward right. Now we have 3 that we're funding the 1 that we spun and team.
And as we have 2 others, we'll make some decisions here and those decision criteria are individual to the to the.
The businesses based on what they're trying to accomplish strategically generally has the number of and customers. They have to solidify the theres certain goals around what they're doing with those customers from a product perspective is the product ready and.
<unk> and achieve those milestones and then we start to SaaS and the potential opportunity Pioneer square labs is really good obviously with their experience of bringing to us. How we think the if we were to go for and external investment as an example, how would that business do in that regard. So so I think it's a it's been of great experience.
Celebrating 12 months of partnership here.
If we and I was just with the with the senior team there PSL of couple of weeks ago to talk about the partnership and make sure it's really on.
Good footing and I think without a doubt we're in a very good place from Eze, and organizationally and which to continue to fund. Some of these things. We think we've got great ideas, where we will fund them, but the I V.
They.
And the bringing the process of killing ideas and we've killed several ideas as well.
That's real helpful. Thank you.
Thanks Dean.
Your next question is from the line of Josh Wilkinson and ski with Morgan Stanley.
Hey, Josh Hi, good evening guys.
Great.
Excellent.
It also Jimmy on the mix of the cyclical seasonal and I guess on more stable businesses. So maybe the constants whole lot here, but where do you think there's still room for I guess, the sequential growth that sort of ignores the comps obviously, it's we're still coming off the bottom of it sounds like maybe ASP is 1 of those.
Given that.
And it's still kind of lifting off the bottom and maybe <unk> of those electric procedures didn't show as much progress as you hope, but is there anything else, where we should still kind of keep an eye on sequential progression, maybe relative to comps or seasonality, yeah, well I think obviously with what happened last year with Covid and you've got to consider that and I think you'd see as an example at fluke on.
And so and tech as an example on a 2 year basis, they are accelerating through the year.
So I think in that sense, we will so what we have implied in the guide is those businesses getting better over 2 year basis. So I think we feel good.
And maybe and that same boat. So I think we still see some good progress here.
And a number of places and as you mentioned, we see we will see Asps, you get a little bit better our SaaS businesses with 40% recurring revenue we have a large part of the portfolio of that did exceptionally well through through 2020 and is continuing to do well and we called that out mostly the SaaS businesses that we have but obviously, we continue to build on a portfolio that continues.
Continues to grow while we will have double digit <unk> growth at the end of the year for the full year. So I think we are accelerating the businesses that have been stable and I think what you're starting to see some of the business. They have a little bit more cyclicality still have some room with them and what we've seen is I think good margin progression with those businesses as we've seen the revenue come back.
Got it and then just on that.
That strengthening oriented and current you have I think adds a lot of liquidity to the service channel.
Deal that day.
The announced anything else that either.
Sort of of shifts as a function of COVID-19 or something else.
Over the last couple of years, you said, hey, we like this before but gosh the seems to even have more legs now and maybe we.
We should look for more externally.
And anything else that sticks out in the portfolio.
Well I think the the obvious 1 and is just everything we're doing and EHS and I think sustainability is becoming such an important topic for companies around the world and not just large cap I mean, just about every company and the world now is trying to understand.
And <unk>.
Of the carbon footprint of trying to understand how to action sustainability work and we're just so well positioned with intellects EHS AI and.
Round those trends I think it's hard to it's hard to call out anything better than that just given the massive amount of work and effort that's been going into sustainability.
Everywhere and the world. So I think that's certainly a secular driver of that we knew was good a few years ago. When we bought into intellect, but I think it every quarter, we own that business, we realize we have an even bigger opportunity.
Yes can't argue with that thanks a lot.
Thanks.
The next question is from the line.
<unk> that's right.
And with Ransom research.
Good afternoon folks.
After all of these wonderful Nitty gritty question and so I wanted to get back up to 35000 and take for a second.
You've talked and maintenance.
And so pulse and the behaviors of lean that are important.
And those rules don't really change.
Can you talk a little bit about.
Quite lean and taught you I'm sorry, what Covid taught you about lane and.
And what you experienced in the last couple of years of SaaS models.
Much of about lean and I know I have a quick follow up yes, sure well I think.
Cliff I wouldn't have thought that we could of virtualized some of our resources and still maintained a lot of the daily management things that we've done and it's just been incredible and certainly with some of the supply chain things I was describing our team's ability to collaborate continue to do kaizen events and many cases certainly problem solving events.
And in some cases virtually I would've never thought we could have done those at the level of quality that we're doing them today, So I think <unk>.
<unk> 2 our FBS team that Virtualized all of our tools and I think that's certainly a great example of probably my own learning that these things can be virtualized and we've seen some great efforts here over the last year or so.
So year and a half in that regard relative to SaaS I think there's really a couple of things.
It's better than anyone problem solving as problem solving value stream mapping is value stream mapping every SaaS business has processes that are inefficient, sometimes the customer success, sometimes the customer sometimes of product development, but I think fundamentally we find that those processes.
It can be improved and I think and Ah.
The SaaS business is no different than any other business in terms of a culture of continuous improvement on everything you do is of course is a winning culture. So I think those are those are certainly things that we're seeing and obviously, our what we're trying to show and our Investor day of so many examples of where that's really playing out thus far.
Hum.
Hmm.
How about.
You held my hand true.
And I was trying to apply lean principles to transactional processes.
Traditional transactional processes. When you took over Florida of you said look we've got all of the original divisions, where the.
The great pushes and lean came and.
And the eighties and the nineties and he said I don't haven't got of business and I can't add another 102 hundred 50 basis points too.
How do you feel about your progress of taking the lean principles and putting it into.
S I and O P and new product development and.
Putting and accounting for lean as opposed to lean accounting.
Yeah, I mean, it's a lot of the same stuff.
We applied value stream mapping into the of current business and significantly impact impacted DSO right away and and that was already of negative working capital business that we just made I think we've made better so.
I think these transactional processes exist, just as much and software businesses and.
Our teams are gordian, and we called out of Gordian and several places who's applied these things all across the board and made great improvement. So I and we certainly seen that intellects is operating profit is significantly above where it was when we bought the company that can say that about all of the software.
Software businesses. So we've we've found we found those pools of of opportunity, there's sometimes in different places, but ultimately the if we can teach the principles to the leadership teams of these businesses and encourage them and quite frankly support them, we tend to have real good success.
Thank you so much.
Cliff.
Your next question is from the line of Joe Giordano with Cowen and company.
Hey, Joe.
Hey, guys. This is actually Rob James and then for Joe Thanks for taking my questions.
Hey, just wanted to go back to the Asps real quick I know you.
And we've talked a lot about that but the electric procedures.
And just.
And wondering kind of what regions, maybe underperformed versus your expectations and the quarter and what regions might provide some upside and the second half that you kind of called out.
As most of the US now part of that because it's our biggest business. So.
Our biggest region. So I would say most of it was in the U S a little bit and Europe, but but I think for the most part.
Most markets outside of the United States, where we're actually pretty stable. So.
And because of the share that we have and the U S and.
We're probably a little bit more receptive to the Covid changed the electric procedure changes and we are elsewhere, we can make a little bit more of our own luck and the other parts of the world and that's what we did so I think that really is where.
And we stand.
Relative to going forward.
We said, we probably thought that we were getting closer to a 100% by the end of the year, we're probably a couple hundred basis points different and that now.
Where we stand for the second half.
Okay that helps and then.
And then just another 1 and I know it might be a bit early for this question but.
And the good service.
The channel hasn't closed yet, but as you think about that rolling into the business and you talked a lot about for it and the AI.
And I am initiatives that you have at Investor Day, I was just wondering like it looks like and good overlay.
For some of the services they provide as well from the matching service providers and customers.
And the back and on the analytical side is that something that you're thinking about enhancing and then.
And I guess on the flip side too when you think about those AI technologies that you have.
The inheriting from like service now from the analytical side is that something you might be able to leverage across the rest of the organization through the Ford initiatives too.
Yeah. So.
<unk> and the number 1 they are of scout product, which is really their data analytics product. We definitely think we have an opportunity to accelerate some of the great things. They were already planning to do with the Fort So answer to that is absolutely the that'll be a real opportunity for us going forward. It's a very small part of service channel today, but we think it can be a real important part not only of the revenue stream, but.
So customer capture and the ability to accelerate the the network flywheel that we talk about between enterprise customers and the service network relative to algorithms and the answer is yes, 1 of the principal roles of the fourth is to re is actually the re task algorithms is to create algorithms that we can apply to the same business problems.
But of the kind of same growth opportunities within the business probably the place we're doing that the most is and our software businesses around customer churn and predictive models. Once we get those models up and running we can apply them to different different customer sets within different different different operating businesses. So we absolutely recast those those algorithms and that's a big part.
Of the <unk> job is to maintain those algorithms and the continue to make them better as we get more and more data and running through them.
At this time that does conclude our Q&A session and I would like to turn the call back over for any closing remarks.
Thanks Pasha and thanks.
And everyone for taking the time today I think what you saw today are when with the earnings was the was a really strong quarter. We continue I think to really work hard and diligently diligent to really take advantage of the opportunities of a better market. I think you saw that with the guide and certainly saw that and the margin profile and we're really excited about the work going.
A lot of hard work going on with our team every day, so I want to thank our team for all of the hard work and the quarter and all of the hard work that's going to continue through the year as we continue to take advantage of the opportunities of our growing market here. We're in a great place. Thanks for your time. Thanks for your support and we'll look forward to the follow up calls and conversations that we have have a great rest of the summer.
And on those of you havent taken of vacation, yet and we'll look forward to seeing as soon stay safe. Thank you.
This concludes today's conference call. We thank you for participating and exits and now disconnect your lines.
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