Q3 2021 Fortive Corp Earnings Call
My name is Alexander and I will be your conference facilitator. This afternoon.
At this time I would like to welcome everyone to the 14th corporations third quarter 'twenty to 'twenty One earnings results conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
If you would like to ask a question during that time simply press. The Star then the number one on your telephone keypad.
If you would like to withdraw your question press the bounty.
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 Alexander 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 are presenting 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 <unk> dot com under the heading investors quarterly results we.
We completed the separation of our prior industrial technology segment through the spinoff of Volunteer Corporation on October nine 2020 and have accordingly included the results of the industrial technologies segment as discontinued operations.
The results presented on this call are based on continuing operations.
During the presentation, we will describe certain of the more significant factors that impacted year over year performance.
All references to period to period increases or decreases and financial metrics are year over year on a continuing operations basis.
During the call we will make forward looking statements within the meaning of the federal Securities laws include.
Including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward looking statements are subject to a number of risks and uncertainties and actual results might differ materially from any forward looking statements that we make today.
Information regarding these factors that may cause actual results to differ materially from these forward looking statements is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31 2020.
These forward looking statements speak only as of the data. 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.
Early in the third quarter, Florida celebrated its fifth anniversary as an independent public company. This quarter. We continued to demonstrate the success of the strategy, we outlined in 2016 to enhance growth and margins across our businesses through the accessible execution of afforded business system the acceleration of innovation.
And the impact of disciplined capital allocation, our third quarter results were highlighted by 32% growth in adjusted earnings per share.
We continued to generate significant revenue momentum throughout the quarter, realizing nine 1% core revenue growth and order growth of just over 20% against the backdrop of strong broad based demand.
Strong execution and application of FBS helped to generate 325 basis points of core operating margin expansion.
Along with very strong free cash flow despite widespread supply chain disruption.
In the third quarter, our software businesses grew by low double digits supported by strong demand and improving net dollar retention in total we now have almost $750 million of annualized software revenue across the portfolio with double digit organic growth profile as well as the high share of recurring revenue and high operating margins.
In August we closed the acquisition of service channel, adding another differentiated high growth software asset to our intelligent operating solutions segment the.
The service channel acquisition significantly enhances our strategic position in the facility and asset lifecycle market, extending our leading suite of offerings for facility owners and operators and providing a variety of potential avenues to deliver unique value added solutions in combination with Gordian and <unk> correct.
As you can see on slide four across Florida, we continue to invest in product development to drive organic growth and enhance our competitive position many of our investments in organic innovation and are focused on enabling digital transformation across our customer base. This includes vertically tailored software offerings at Tektronix and fluke health emerging.
Iot solutions and sensing as well as early progress with new tools for improved workforce management team.
In addition, our investments in the fourth continue to drive data analytics and machine learning opportunities across all of our businesses. Our success in accelerating the pace of innovation across our portfolio as demonstrated by examples such as the fluke <unk> 900, a groundbreaking product, which was recently recognized as test measurement and inspection product.
For the year at the 2021 electronics industry Awards, we continue to build the strength of our talent base to accelerate progress across Florida.
This quarter, we announced a number of important additions and promotions to the senior leadership team, including the appointment of illuminate Sharia as president and CEO of intelligent operating solutions. The promotion of Tami Newcombe, President and CEO of precision technologies and promotions of Justin Mcelhatton and Bill Pollock to group president roles within <unk>.
These moves highlight how we are building leadership capacity through a combination of internal development and external hires aimed at adding differentiated skill sets and experiences to our senior team with Illumina and Tammy as well as Pat Murphy now leading advanced health care solutions, we have significantly increased the depth of our leadership within all three of our <unk>.
Turning to a quick summary of the results in the quarter on slide five we generated year over year total revenue growth of 12% core growth of nine 1% and orders growth of just over 20% with backlog increasing by 40% year over year. Adjusted operating margin was 22, 8% while adjusted earnings per share was <unk> six.
Six representing a year over year increase of 32% the strong adjusted operating margin performance helped us to deliver $252 million of free cash flow, which represented a 105% conversion of adjusted net earnings on.
On slide six we take a closer look at the intelligent operating solutions segment.
POS posted total revenue growth of 16, 6% in the third quarter with core growth of 13, 1%. This included low teens growth in North America high teens growth in Western Europe, and mid single digit growth in China.
<unk> core revenue increased by mid teens with very strong demand trends continuing across its end markets and major geographies fluids performance was highlighted by high teens revenue growth at fluke industrial which also generated order growth of greater than 20% Fluke industrial imaging business continues to perform well paced by momentum from innovation across its width.
<unk> imaging product line, which doubled year over year in the third quarter.
Fluke networks had a very strong quarter driven by innovations such as its link IQ product line flukes efforts to expand its recurring revenue base saw further progress in Q3, including strong performance across both the service offerings and an E mail, which generated high teens growth in revenue and SaaS bookings for the quarter, the combination of robust order growth and supply chain constraints.
In Q3 led to strong backlog that we're carrying into the fourth quarter and 2022.
Industrial scientific revenue increase by mid teens as its instruments and rental business continued their strong recovery the iOS.
<unk> team has done an excellent job using FBS tools to accelerate product redesign initiatives, which have helped alleviate components supply challenges and limit impact on delivery times to customers intellect grew by mid teens and posted another record revenue quarter INTL.
<unk> is seeing solid FBS driven improvements in its up sell process to support higher net dollar retention also in Q3 intellect signed an exclusive partnership deal with data Moran, which enables intellects customers to manage their full lifecycle of their ESG strategy, including materiality analysis and risk identification.
Our current grew by low single digits in the third quarter, while seeing strong bookings of greater than 20%. This booking strength was paced by continued demand for occurrence Meridian engineering document management and maintenance connection CMS offerings. Our current also continues to see strong demand for its EMS event workspace and resource scheduling solution to.
Support emerging hybrid office models as customers execute their return to work plans among the notable new customer wins for the EMS solution in Q3 with several leading global financial services providers. Our current also continued to see improved performance in its professional services business, which generated low double digit growth.
Gordian increase by mid teens with strong growth in procurement and in estimating in the third quarter Gordian continued to see increasing project volume as well as higher average dollars per project. Gordian is also seeing success from its expansion into health care with significant demand for its facility solutions from hospital customers.
After completing the acquisition of service channel at the end of August. We're obviously early in our ownership, but we're very pleased with what we've seen thus far and are excited to have them joined Florida, specifically service channel continues to demonstrate strong momentum and its large enterprise retail business with several large customer wins in Q3, including Walgreens, which will rollout.
Automation software across their more than 10000 locations and the third largest mobile carrier in North America as they transform their facility management program.
Moving to slide seven the precision technology segment posted a total revenue increase of eight 9% in the third quarter with core growth of seven 7%. This included high single digit growth in North America, and high teens growth in Western Europe, China grew low single digits, but saw strong continued momentum in demand with double digit order growth in the quarter.
Yeah.
Tektronix grew high single digits with strong demand trends across its product portfolio and double digit order growth.
This was led by the performance of its mainstream a sole scopes with a greater than 30% increase supported by new extensions to the six series <unk> product line Tektronix.
Electronics continued to see traction from its efforts to expand in data centers and other related wired communications applications, delivering a number of key customer wins, including Lenovo and Ericsson throughout the third quarter Tektronix did an excellent job deploying FBS countermeasures to navigate sustained supply chain challenges while also.
Delivering significant price realization, even with this strong execution given the continued robust pace of demand from its customers tektronix increased its backlog by more than 70% versus a year ago.
Sensing technologies increased by low double digits in the third quarter sensing reported strong growth across each of its major regions with robust order momentum across key end markets et cetera registered additional market share gains with its <unk> offerings in Q3 and continues to generate strong growth across a range of critical environment applications.
Patients, including hospital isolation rooms, and pharmaceutical manufacturing.
<unk> had a very strong quarter by utilizing the FBS tool set to improve lead times and on time delivery to drive share gains with key OEM customers.
Pacific Scientific AMC grew by mid single digits, including improved momentum across its commercial customer base <unk> continues to see significant growth opportunities and its aircraft and space end markets with strong momentum across its critical safety technology offerings.
Moving to advanced Health care solutions on slide eight total revenue increased nine 3% while core revenue increased four 7%. This included mid single digit growth in North America, and low single digit growth in China, Western Europe saw high teens decline based on a difficult prior year comp at AMETEK, partially offset by strong growth at <unk>.
And fluke health.
ASP grew by low single digits in the third quarter highlighted by a strong capital equipment performance, including low double digit growth in terminal sterilization capital ASP continues to benefit from the solid sales execution driving the consistent expansion of its global installed base consumables revenue grew by low single digits led by high.
Single digit increase across all geographies outside of the United States in the U S. The spike in Covid related hospitalizations led to a notable decline in elective procedure volumes towards the end of the quarter, resulting in global electric procedures at approximately 88% of pre COVID-19 levels for the periods, while we expect only nominal improvement in <unk>.
Procedure volume in Q4 longer term, we expect Asp's consumable revenue will benefit from procedure volume normalization and growth in our global installed base.
Sensus increased in the low 40% range highlighted by very strong growth in professional services and related hardware. It sense attract SaaS offering grew mid teens as it continued to benefit from new customer additions as well as good momentum with up selling and cross selling to existing customers. Sensus continues to have open access to customer sites and saw strong sustained order growth.
Throughout the quarter.
Fluke health solutions increased by high single digits with continued strength in North America, and Western Europe tied to market share gains with OEM customers through the continued deployment of FBS growth tools.
<unk> executed very well throughout the quarter driving significant price realization and managing through supply chain constraints to open new market opportunities.
<unk> continues to benefit from partnership efforts with the Fort driving lower customer churn at landauer using the <unk> predictive modelling tools. The company continues to see good early traction from software innovation efforts with 30% growth year over year in Q3.
<unk> declined by mid single digits, which was better than expected against the tough prior year comp that included significant COVID-19 related tailwind. The company continues to see strong demand across the diagnostics and life science vertical and expect to end the year with significant order momentum and a healthy backlog to carry into 2022 with that.
I'll pass it over to Chuck who will take you through some additional details on our margins free cash flow and balance sheet. Thanks.
Thanks, Jim and good afternoon, everyone. We.
We delivered another quarter of strong margin performance in Q3, using FBS tools to deliver strong pricing and successful value engineering to implement components of institutions across a variety of hardware businesses.
This FBS execution and the continued strength of our software businesses helped deliver adjusted gross margins of 57, 3%. In Q3. This reflects 90 basis points of expansion on a year over year basis, as we accelerated to 220 basis points of total price realization Q.
Q3, adjusted operating profit was 22, 8%, reflecting solid execution across the portfolio, including countermeasures enacted in the face of ongoing supply chain challenges. We had strong margin performance across all of our segments, resulting in 325 basis points of core operating margin expansion.
On slide nine you can see that in the third quarter, we generated $252 million of free cash flow, representing a 105% conversion of adjusted net income.
Free cash flow over the trailing 12 months increased 22% to $991 million. Our current net leverage was approximately one six times and we expect net leverage to be around one three times at year end, excluding any additional M&A.
Turning now to the guidance slide 10.
We are raising the low end of our full year 2021, adjusted diluted net EPS guidance to $2 70.
Resulting in a range of $2 70 to $2 75 for the year. This represents a year over year growth of 29% to 32% on a continuing operation basis. This assumes total revenue growth of 14% to 14, 5% adjusted operating profit margins of 23.
The 23, 5% and an effective tax rate of approximately 14%. We continue to expect free cash flow conversion to be approximately 105% of adjusted net income for the full year.
We are also initiating fourth quarter adjusted diluted net earnings per share guidance of 74.
$2 79.
Representing year over year growth of 6% to 13%. This assumes total revenue growth of six 5% to eight 5% adjusted operating profit margin of 23, 5% to 24, 5% and an effective tax rate of approximately 15% the adjusted <unk>.
Diluted net earnings per share guidance also excludes approximately $12 million of anticipated investments and strategic productivity initiatives that we expect to execute before the end of the year for the fourth quarter, we expect free cash flow conversion to be approximately 125% of adjusted net income with that I'll pass.
Back to Jim for some closing.
Thanks Chuck.
Very pleased with our performance in Q3, we worked diligently to countermeasure supply chain challenges that persisted throughout the quarter and which we expect to continue into 2022. Our teams are doing an excellent job deploying FBS to navigate those headwinds while also delivering strong margin performance and free cash flow generation looking across our end markets the day.
Manned backdrop, we're seeing is very strong with significant momentum in our order flow driving continued growth in our backlog and double digit growth across our software businesses, while continuing our focus on execution. We are investing in innovation expanding our base of leadership talent and pursuing additional capital deployment opportunities as we look to enhance our competitive advantage.
Paved the way for consistent double digit earnings and free cash flow growth in the years to come with that I'll turn it back to Griffin.
Thanks, Jim that concludes our formal comments Alexander we are now ready for questions.
Thank you at this time I would like to remind everyone in order to ask a question. Please press star one on your telephone keypad again that it is Paul wanted to ask a question. Please limit your question to one and one follow up question.
We have your first question from Scott Davis with Melius Research Your line is open.
Good afternoon, guys and good evening.
Thanks Scott.
It's.
Pretty pretty good quarter overall, I'm, just trying to nitpick, a little bit of price up 220 basis points.
Did that fully offset your cost Jim and his price still going up as you go into Q4 here to <unk>.
That kind of deltas as costs continue to rise.
Yes, Scott. Thanks, I think number one is we've been ahead as you know we've been in a really good position all year relative to price cost and hence our gross margins going up.
90 basis points in the quarter. So yes. We're ahead I think one of the things about prices. When you think about it we really think about it in the big hardware businesses as fluke Tech and sensing and in that those businesses. We were over 300 basis points. So yes, we will see improvement from there in the fourth quarter. So yes. So we're in good shape Youll see.
The price in the software businesses and the net dollar retention and so net dollar retention at 102 or so with some of our businesses. Even higher means. We're also we're getting that price in a number of the software businesses. It just doesn't show up in the metric the way you'd like it but we're I think in a very good shape relative to price cost and the hardware businesses relative to any.
Sherri pressure we might have.
Okay. Good and then service channel you made some positive comments on what what is it more specifically that you would like more perhaps today than when you close the deal.
Well I think number one the team I think we didn't we didn't have full access to the entire organization when I. When we were in the deal. So I mean, I think with the work we've done we've been in person with the team and I think we're excited about the quality of the organization Thats number one we always said the product was great. So I don't think theres any surprise.
There other than the product is great.
And the solution is good and as we articulate in the prepared remarks, the breadth of opportunity is really positive I would say the other thing is we're really starting to see how we can continue to expand the business and some of the levers that are out there. So we will do as you know we will do our 100 day plan here.
A month and we will certainly.
Codify the remaining rest of the year, but more importantly for next year relative to our plans and right now we're I think in a very good place relative to how we see the business.
Great I'll pass it on.
Thank you and good luck in <unk>.
Yes, Thanks, Scott good talk to you.
We have your next question from Deane Dray with RBC capital markets. Your line is open.
Thank you and good afternoon, everyone.
Good evening Steve.
Yes.
Just maybe start with fluke and in most circumstances something as knock on right. If you are building backlog and fluke My guess what that was.
Factor with the supply chain issues, maybe some color there would be helpful.
Yeah sure I think we had a very very strong quarter at fluke.
As we mentioned we did build backlog as you know any any product that has a range of electronic components here is going to be a little bit of a challenge. So.
Orders were in the high teens, so were really good shape on the order side, we built backlog as you mentioned.
Been with the team a couple of times on the shop floor and they're doing some really good work to get to get on with many of the component challenges they've had but where we are in a very good place with.
With backlog and with the position of the business I like where we're at as we mentioned from an innovation perspective in the prepared remarks, a number of examples of where I think where we're really handling things well and we're taking market share and of course all of that is also really driving strong margin margins there as well.
Okay and then.
A follow up.
I guess you should not be surprised this is really.
Page from your playbook to jump on the opportunity to do some discretionary restructuring.
In the fourth quarter to get a jumpstart on the coming year, so $12 million just to be clear that was not in your prior guidance is that correct.
Thats correct.
We've got some things going on with the ASP day, two countries that we plan to get after but hadn't been put into our guidance and then we've also got some things around facilities reductions.
We were looking at reducing their footprint.
Got it and.
Which segments would benefit from those.
From that spending about half of it half of it's in iOS and the other half and the other two almost split evenly between PT and health Alright, Thats good to say thank you.
Alright, Thanks, Steve.
We have your next question from Jeff Sprague with vertical research your line is open.
Thank you good afternoon, everyone.
Hey, Jeff its interesting to answer to the prior question absorbing that also.
Is there some dilution from service channel in Q4 is your bad debt down and any.
Any change your view of kind of at year, one accretion I think in the four to five range.
So Jeff as Chuck No no change to the year, one accretion in that around that four <unk> range.
And actually it's coming in as we expected, but in the fourth quarter, we're going to get revenue with really not a lot of operating profit as it moves into profitability really in next year. So that's not different and so inherently there is a little bit of dilution there in Q4.
Great margins look good.
Part of that.
And then.
Just on this Walgreens deal was that something in the pipeline already or.
Is there some synergy probably occurring with the guardian, our CRO and or some other part of afford us.
Yes, Jeff I'd love to take credit for it but it was in their funnel and and the team did a great job executing on it so I won't.
We will take credit for when the synergies happen, maybe next year, but but right now the team is.
We obviously, we saw it in the funnel when we did our due diligence so we knew and.
I think Theyre say do ratio of things they've said they were going to do during due diligence versus what they've completed during our short time period with them has been really high that happens to be one of the things that they've executed extremely well.
And is the answer to the tech backlog the same as the answer to the fluke backlog essentially.
On the supply backing up a little bit.
Yes, I mean, it's.
But we're not the first company to talk about it what I understand so I think at the end of the day electronic components. What we said at the beginning of the quarter was it would be more of an availability issue than a than an inflationary issue. We've seen some inflation for sure but a lot of that is temporary because were just given the given the <unk>.
Demand has continued to accelerate and it's a good news story here. This isn't just a supply constraint issue, it's really a demand acceleration standpoint, and with demand ex out the combination of demand accelerating really has our team is working diligently on these things but just.
It just puts us in a really good position at the end of the year I think to start 2022 off well. In addition to I think just having a good backlog in the fourth quarter.
Great. Thanks, I'll leave it there have a good one thanks, Jeff.
We have your next question from Andrew <unk> with Bank of America, You May ask your question.
Yes, good evening good afternoon.
Good evening Andrew.
Just a question on pricing.
Just going back to the tariffs I, just remember that putting in pricing price cost was an issue and we have a lot more cost and all of a sudden price is not an issue.
What has changed.
And inside Florida to enable this kind of pricing power.
I just recall like three years ago was more of a drag.
So I think a couple of things.
One we've been working at pricing all year long and I think what you're remembering as we offset the tariffs, but on a one for one basis and so that created an operating margin drag.
<unk>.
Equal amounts of price and cost we'll do that in this case, what we've what we've been doing is staying ahead of that and getting.
Jim mentioned it in our hardware business is up to 300 basis points.
Our price and we still are getting PPV and taking it out of the business, but we are seeing that getting chipped away at but we've been able to stay ahead and thats why we are delivering margin expansion.
Thanks, and just a follow up question.
But looking back.
You turn out to be a prudently conservative on your view on electric procedures relative to everybody else.
Frankly, us, but what do you see elective procedures sort of going over the next three to six months, what's the pace of improvement as you see it globally. Thank you, yes, yes. Thanks, Andrew what we saw I think we ended Q3 at about 88%, obviously, the Delta Varian had impact in the quarter as we.
As the quarter progressed, we were assuming for the fourth quarter about the same no real uptick I suspect when we get.
The federal vaccine mandate in the United States continue to get hopefully we start to get kids vaccinated here hopefully we will start to see in the first quarter starting to see some of those procedures coming back and and we'll get to the first quarter. Once we finished the fourth but but specifically for the fourth quarter our assumption is.
<unk> stay about the same as they are today. So we're in a good we're in a really good place at ASP as.
As we mentioned we had.
Just to follow on your question a very good quarter at ASP equipment came in better than we anticipated to offset some of the some of the headwinds from what we had on on consumables. We had very good margin expansion in ASP in the quarter. So we like where that business is at in electives come back.
On a continuous basis in 2022 will be in a really good position.
To take advantage of that I'll leave it there. Thanks so much.
Thanks, Andrew.
We have your next question from Julian Mitchell with Barclays. Your line is open.
Hi, good afternoon.
Maybe you Julien.
Hey, maybe just the first question around the coal growth.
Guidance for Q4, so I think it's sort of plus five at the midpoint.
You've probably got around three points of price in there.
So it's sort of two points of volume growth.
Is that reflecting.
I guess, the big slowdown in the sort of short cycle hardware businesses.
The recovery has matured.
Maybe is there something going on in China I saw there was a big slowdown is that may be going negative in Q4, maybe just any context around the sort of volume growth assumption for Q4. Please.
Sure. There is a couple of things I think.
The way you are looking at it 200 basis points as the price increased 300 is specific to the hardware businesses, but so 200 overall, but you've got that about right, but when you look at it on a two year stack, we actually think we are still.
Expanding our growing increasing our growth rates in Q4 versus in Q3.
So I think that's important also I think as we noted our bookings are actually very strong here. So.
The.
What's implied in the growth of what we're able to get out the door right now isn't really reflective of the underlying demand of the businesses and Julian I would just say a couple of things one is.
As Chuck said the underlying demand on the orders for the second half is double digit so.
Very good order from a demand perspective, we're seeing good demand relative to your China question in the quarter, we had good growth at fluke in ASP.
And as well as <unk> sensing, we will see China get better in the fourth quarter simply because while tech had a little bit lower growth in the quarter. They had over 20% order growth and so we will see we will see trying to get back to mid single digit like growth in in the fourth quarter. So.
We've seen good point of sale in China. So we're watching it carefully certainly because of a lot of the headlines, but but we had a good quarter Chuck and I were on with the team last week doing an operating review they are optimistic about what what's happening on the ground there and in the fourth quarter should improve.
Sequentially from the third to the fourth.
That's very helpful. And then just a quick follow up around operating margin. So you had very strong incrementals in Q3 year on year companywide.
It looks like for the fourth quarter, maybe you're assuming.
Something in the maybe mid currencies operating leverage so very good but a little bit lower is that just the sort of the run rate going forward for where we are with the current sort of volume growth outlook in price cost and service channels coming in.
Was there anything sort of specific moving around in Q4.
Great.
Our underlying assumption is 40% Incrementals and I think when we print Q4, I think thats what were seeing.
Maybe when we get to the follow up call. We can talk about service channel and if thats confusing your model, but we have the incrementals in Q4 around that 40% as well.
And not seeing any slowing there.
Perfect. Thank you.
Thanks Julien.
We have your next question from Nigel Coe with Wolfe Research Your line is open.
Hi, good.
Good afternoon guys.
So just going back to the restructuring I think you said $12 million Chuck.
Half of that in iOS I think.
It does.
A decision to do that was that was that just because you have coming in ahead of plan and so you just decided that.
Good idea to maybe do some of it in.
<unk> here.
And how should we think about this.
Assuming that we can consider to be sort of.
Put unquote onetime.
Or would the intention be reduced.
Quite restructuring of this sort of magnitude.
In 'twenty, two 'twenty three as well.
Well.
First of all I think we always had an intention knowing that we bring on these day two countries and we will need to continue to make some adjustments as we go forward to them on the ASP.
Realm, and I would also say that as we come out of Covid, we're going to continue to evaluate our footprints here and see what what we need going forward, then that's probably going to be an evolving thing. So you could theorize that we could see that going forward, but it sounds like we have a plan, we're going to do a certain amount each quarter, it's as we see it.
The situation is and we need to make a change then youre getting and then we'll tell you about it and Joe.
Sorry, Nigel the other the other part of it is we did we did some in the third with within the business and sensing to to do some.
Some factory relocation as well so really in the second half. These early ideas around the second half.
And quite frankly, I think puts us in a good position as we.
As we come together with our return to work plans that really says that in certain some of the businesses. We have we can we can take our footprint down and so we're obviously going to take advantage of those opportunities as they come at us.
Great and then on the crew and low single digit growth.
Yes. This is mid twenties bookings, so obviously a big disconnect there and maybe just update us on how you see the revenue momentum at a crew and so I think there is a SaaS transition going on there and maybe just touch on as well as the net retention of 102.
That's a year to date metric is that changing at all through the quarters.
What's your target around net retention.
Yeah, so relative to our current Youre right, we had a little bit slower revenue growth there but.
But we did have good bookings really strong bookings in a in a couple of several what we would call the growth businesses, we called those out in the prepared remarks, but but really strong bookings relative to the performance in those businesses. So I think we're set up well for mid single digit.
In 2022, but you're right we had a one time hit on revenue that that occurred in the quarter couple of other things a couple of little churn events are many churn events that that we didn't anticipate so certainly slowed it down a little bit in the quarter, but we think because of the order strength, particularly around new logos. We are we're in a good position for next.
Year relative to the 102, we're always going to have some businesses.
And down relative to where that number is that.
Service channel in EMEA would be be our best performers on that metric as an example, intellects would be pretty high.
I would suspect we will get to we will get to sort of thinking about budgets as we go through the business, but I would suspect that you would expect 100 basis points of improvement 100 to 200 basis points of improvement somewhere in that range each year at least for the next few years as we continue to while these businesses are still new to afford it.
Thank you.
Thank you.
We have your next question from Josh <unk> with Morgan Stanley. Your line is open.
Hi, Good evening, guys Hi, Josh.
So just a follow up question not to nitpick on some of the like the margin difference this year with the restructuring and service channel coming in but I just want to make sure I'm understanding this right.
In intelligent operating solutions that we sort of add back in the half of a slug of restructuring that goes there it doesn't look like.
Service channel, there's really much of a difference in margins in <unk>.
There something seasonal there are supply chain sort of interrupting that or am I, just sort of putting this under a microscope on necessarily.
Well I think I think they are.
Their margins are very good and they've got good margin expansion. So I think that there is just.
We're talking about some.
Some of the highest margins we've got in the company so happy to get through.
Sure.
Youre planning sheet with you in detail and Delta I understand that but we're seeing sequentially margin expansion I think in all of our businesses.
Got it and then.
Just in terms of your specific Florida flavor of supply chain.
When you talk about like the one or two things would be particularly helpful. Lino.
Some folks are really focused on chips. Other I'll, just have like freight and air freight or labor issues like what would sort of be kind of your top one or two things Jim that.
That would be best to see.
Yes, well I can take you through a lot of detail because I think I've been more involved in these kinds of things over the last 60 days than than than I typically would take you back to some routes.
Yes.
Josh I would say a couple of things one certainly in our businesses, but think of it as the more electronic content.
More likely to have a challenge. So you can think about a circuit board at Tektronix, which is incredibly complicated has multiple semiconductors on it has multiple all kinds of chip technology on a board like that.
Youre going to just have higher variability because of that fluke will be as true as well.
<unk> sensing a little bit less so from a from a just how that goes with that is how it would be we're seeing mostly electronics shortages and as I said in a previous comment mostly around availability, we're paying a little bit more to get things. So theres. Some premium freight involved in inflation very not a lot of labor.
Have pretty low labor content in the company simply because of our decades of productivity initiatives. So we're seeing some labor inflation, but at the end of the day doesn't move the needle as much it's really about the material material availability first and foremost.
And given our gross margins on those products it makes sense to even if even though we spend a.
A few pennies more to get something in faster given the demand given the high demand we have right now and just just given the momentum in orders right now it makes sense to sometimes pay those things because ultimately the margins. So it just makes sense to do that and obviously, our first and foremost we're taking care of customers. So hopefully that gives you a window everyday.
We're well set up to deal with this because we are daily management, while we called visual management, you've seen it in our factories. During tours are businesses manage every cell in every factory by the hour and so we're well set up to just sort of put that on steroids, a little bit in order to amplify the challenges and just get after it and so.
It doesn't mean, we don't have issues, it's how well we countermeasure that really makes the difference here.
Got it appreciate it thanks, a lot guys.
Thanks.
Yes.
We have your next question from Markus Mayer Mayer with UBS. Your line is open.
Hi, Mark Hi, Good afternoon, Hey, Hi.
I Wonder how agile pricing is in your backlog I mean, 40% backlog increase year over year sounds great on the one hand, but it's a double edged sword obviously.
So once things hit your backlog for the how flexible are you to price for that.
Sure.
Well number one I think what we what we do is in the in the big businesses, where we sell into distribution or.
We certainly limit the amount of buying that can occur at pricing. So if we have a price increase stated we obviously have contractual terms markets and we will we will contractually make sure we work with our channel partners as part of their contractual obligations to to not necessarily by like six months.
Ahead or something like that so so that's a partnership and certainly part of how we work with channel partners.
We've been able and many OEM cases to re price orders.
As well so I think it really speaks to I think others have talked about having problems in their backlog with pricing. We have really good granularity around what that looks like and Thats. What gives us confidence to know that we will continue to get the price here going forward and to know that our price cost will continue to improve.
That's good to hear.
And then maybe one.
Follow up on the ESP, you talk both a bit on electric.
With features that that's trending but in your opening remarks. You also commented on broad based growth. So if I look into 2020 two.
What's potentially the bigger driver here because it seems like the trip and placing trend will actually quite positive as well.
So if it gets up and they get.
With future recovery sort of what sort of growth should we be dialing in here.
Let's say in markets I think that.
Youre right, our underlying business and placing units is starting to is continuing to accelerate and we're very proud about that I think I'll actually surgeries coming back.
It could be half of it quite a bit of the growth of it all springs back in one year, but I think we need to get closer to next year to really see what they actually do in what month, but I do think that it's a.
Just to answer your question if it all came back at once that would be the bigger driver of the year for ASP.
And be quite quite a tailwind coming forward, but we're not calling that out coming back at once in 2022, it will probably ramp.
It's over some period of time and I think Mark is one thing we know to be true over the last certainly over the last two years, but certainly in the last six months.
Is that something has occurred.
Three months relative to elective that's caused causes it to go a little bit sideways. So so I think it's premature to call next year, but but it's safe to say that when we get to a more normalized sort of event in our hospitals will be in that business is certainly laying the groundwork laying the foundation for for good growth I was with a.
Major hospital network about a month ago in their facility they are placing equipment and they're looking forward to adding more elective procedures.
As they get forward and maybe just one other comment on elective it's not only COVID-19. It's also particularly in the United States. It is also the nursing shortage. So so it probably doesn't snap back, but it certainly comes back over time, which which which which we.
We really are looking forward to obviously.
Thank you very much.
We have your next question from Andy Kaplowitz with Citigroup. Your line is open.
Hey, good afternoon guys.
Hey, Andy.
So obviously affordable continues to have a really strong balance sheet. I think you said 1.3 times leverage at the at year end. So could you talk about the M&A environment out there. We've obviously seen a flurry of software filters acquisitions after year service channel acquisition, and I know valuations continue to be on the rich side, but do you see sort of remaining active.
The next few quarters on the acquisition front and would you lean towards.
<unk> focus on recurring revenue and doors software related assets such as service channel.
Well Andy are as we said over the last few years we've.
As we've talked to you we remain very busy and I think the opportunities are certainly out there.
We're working on some hardware things, we're working on some software things.
Really it's really about accelerating strategy, it's about adding technology to advance our.
What we do within workflows with customers. So I think we have a balanced approach to things.
We see lots of opportunities to deploy capital in ways that really not only accelerates our strategy, but gets us. Good returns is additive from a growth perspective, we're certainly going to lean in on recurring revenue. We think that's a good way to we really think thats the strategy towards building a more durable resilient <unk> over time, and so I would say we're <unk>.
Leaning towards those kinds of opportunities as we know even even our hardware deals whether they were industrial scientific or landauer or or certainly ASP. We had a heavy amount of recurring revenue in those deals even even when they were hardware. So we're going to continue to look for those opportunities not exclusively but probably the majority of the <unk>.
We are doing is really going to have a passion for growth, but also with that idea that we can continue to build a more durable resilient growth rate.
Thanks for that and then maybe if I could follow up with asking you about tech and sort of a different way.
You've obviously had good momentum there and you talked about new product introductions. This quarter I know you've mentioned the tech continuing strategy of focusing on data centers Evs.
Is that where the momentum continues to come from and it's tech skills, just maybe on a higher plane versus past cycles, given the sort of change in focus.
Well I think number one is it's a little it's more resilient because we had we had I think low digit growth in our service business, but just a resilient durable <unk>.
Based on a foundation of revenue that we built over time. So so number one I think we've got a more resilient durable growth rate just because of that service business that we've built into the into into the revenue stream. We've got some software offerings. There that we started with we mentioned that in the prepared remarks. So we're building a more durable revenue stream while at the same time as you mentioned we've taken.
Advantage of a number of.
A real real opportunities relative.
Relative to what I would call higher growth.
Situations and quite frankly, when we think about going forward. Obviously, the semiconductor cycle is going to extend as people continue to invest in and the kinds of things that we've talked about but also the supply chain issues and constraints fundamentally require a lot of folks who have electronics in there and their products to redesign those products for different.
Chip or different components and quite frankly, one of the things they need to do that as an oscilloscope. So we think theres also.
Not only the sort of long term secular trends that the business has been going after but also some shorter term opportunities is as people start to continue to have to deal with some of these supply chain challenges and fundamentally that can often end up in a redesign and certainly we have the products and solutions to help people do that so we're very bullish on.
On the business, obviously, it still has a component of volatility to it but I think the team has done a nice job of continuing to drive technology and innovation towards higher growth more durable revenue streams.
I appreciate it Jim.
Thanks, Andy.
We have your next question from John Walsh with Credit Suisse. Your line is open.
Hi, John Hi.
Hi, everybody how are you.
Good.
Maybe just a first question going back to the gross profit margin improvement in the quarter.
Obviously very nice in the face of inflation, you called out the price cost benefits in kind of.
The hardware businesses, but wondering if you're also getting a lift from kind of this portfolio mix that you've been doing towards more software more SaaS revenue, where if that's not yet showing up just curious how you would parse out that growth.
No I think that's a good question.
Especially when you take a look at our software businesses, you or Jim mentioned, a little bit ago about the net retention.
Another where we also see price and great margin expansion and we got those businesses with their great gross margins growing faster than fleet average.
That's going to give you a lift as well so it's certainly of our software businesses, but also the.
Staying ahead on the price cost is very important.
And offsetting.
It's a challenging environment.
Great and then you obviously highlighted both the internal and external promotions here was.
I was wondering if you could just give us a look kind of the next layer down in kind of your ability to keep the talent from the acquisitions that you've made.
Any color there. Please yeah sure well, we're incredibly excited to have eliminate join US, we obviously announced that earlier in the quarter and he is he is off and running.
Running iOS and really we're excited to have him join the team. He brings a real view on on on software. It's really all of these experiences and software and he created an enormous digital data analytics capability at Corelogic. So he really brings data data centric approach to these businesses, which I think is.
<unk> is a wonderful part of his leadership style, obviously Tammy promotion.
He has a great view on our internal development capability in a window on how we develop internal talent. So we're in a very good place with her promotion relative to the next layer down we announced two internal promotions both of whom came with acquisitions just in Anvil. We're both both came to us with acquisitions, Justin with IFC, Bill with Gordian and so the promotions that.
We announced in the prepared remarks is a good example of how we continue to retain folks from acquisitions and how they are additive to our leadership capability. So we have a very rigorous internal development process, we announced several internal president appointments here recently as well to backfill for people like Bill and Justin and we're in.
We're in a very good place relative to adding talent on the healthcare side, we brought in some new real new new talent from a healthcare standpoint at ASP to really give us.
Even be additive to our health care experience. So I think we've not only have been able to retain people through a very rigorous development process, but we've been kind of a destination for talent and we've certainly been able to recruit some top notch talent, we mentioned Reed Simmons as our head of strategy in the second quarter, we've continued to take opportunities to bring in folks who bring new approaches and were.
We've been very successful in being able to do that.
Great I'll leave it there thank you.
Thanks, Jeff.
Yes.
We have your next question from Joe Giordano with Cowen Your line is open.
Hey, guys. Thanks for taking my questions.
Hey, Joe.
Okay. So one of your competitors was talking one of your competitors to tech was talking about having success in integrating like protocol analyzer capability into their scopes.
So like connected devices is that something that youre doing or.
Is it something you think is worthwhile just curious.
If it's an offering yet.
Well I think I think at the end of the day, we have some protocol capability, but but but I think it depends on the use of the scope.
And the range of the scope, where that's appropriate so.
I would say that's our direction has been more.
Rather than adding additional measurement capability to some of the scopes, we've been really adding more solutions focus to really different probes different software around the application to really help folks. That's why we've been really successful in in automotive and in data centers are really bringing forward call. It the post scope.
Work that really helps really helps the <unk>.
Engineer in the application specific application that they're moving forward with.
Okay, and then Jim going into well when you guys gave guidance last time, you knew electric you're appropriately cautious on elective surgery.
Supply chain was bad then I'm just curious like what are the big one or two single biggest like topline variances that will end up being realized versus what you thought last time.
In the third quarter.
Versus when you gave.
Yes, I mean, I think I think <unk> certainly we're part of it we thought electives, we're going to be we were conservative on <unk>, but we were they were they were lower than we anticipated. So you could probably probably think about maybe $10 million of revenue that was there just just there and then certainly on the <unk>.
We could easily hitting the upper end of our guide.
Relative to revenue, which is roughly 300 basis points. If I, if we hadn't had some of the supply chain constraints.
Ended up we always said the September is a big month, and we added several things that hit us in September.
That that we didn't anticipate so.
We still managed as we noted to have tremendous margins and tremendous free cash flow. Despite those challenges and I think thats really.
That really speaks to the power of FBS in terms of facing challenges being able to countermeasure through through those things and.
This isn't a story of the absence of challenges, but rather the ability to deal with them and that's what we'll continue to do in the fourth quarter and you didn't ask it but I would anticipate that we'll be dealing with a number of the supply chain issues well into 2022.
Can I just clarify one thing.
The stuff that you couldnt get out from supply chain.
Is that.
Because you couldnt.
I guess can you break it down between stuff that you were able to manufacturer and the customer wasn't worthy to take delivery and it's now sitting in inventory or it stuff that you just couldn't get the components on your side too.
This is all not us not getting components, we have dimmed.
<unk> picked up tremendously through the quarter as we said we had very strong orders.
And we will have strong orders through the rest of the year. So our demand our demand profile is very good customers are taking.
Taking things as soon as we can get them to them in most cases. So this is not an inventory situation or anything like that this is.
This is purely a component shortage challenge that we're dealing with.
I think it's been well documented by a lot of other other companies.
Thanks, guys.
Thank you.
We have your next question from Andrew Buscaglia with Bergen Berg Your line is open.
Hey, guys I, just wanted to ask on Adventist health care as well.
It doesn't seem like it is.
Well exactly be a snapback situation, you're facing some tough comps in the first half of the year. So I guess the question is where were.
Yes.
FBS, but where we're at.
Where we see some margin leverage I guess what needs to happen to.
Yes, it really see those margins pickup.
And kind of more muted.
First half maybe.
Well I think first in Q3, we saw some outstanding margin expansion.
And.
<unk>.
Advanced healthcare segment going from I think around 20% in Q2 to 23% of adjusted operating profit. So we're seeing good good margin expansion and Thats not just just today ASP sensus had a really good quarter. So did fluke health. So we've got in our.
Hardware placements, there and so youre seeing that already what we're saying is it could've been better with elective surgery, and thats going to be a future.
Advantaged.
Be clear we had good step up between Q2, and Q3 and health and from Q3 to Q4, we expect to do another 100 to 200 basis, even with elective surgeries to staying where they're at right now.
Okay fair enough.
Chuck maybe maybe you can comment I know M&A separately.
On the top of your mind with given where leverages, but stocks is kind of getting cheaper here.
And kind of that's on a whole lot in the last year.
What's your what are your thoughts on a buyback or.
Maybe choosing that as a different avenue for the cash.
We remain very optimistic about the opportunity to deploy capital.
We've said that.
We laid out that we had probably $5 billion in the first three years post separation with volunteer we've done one two it sounds like we're running way behind there. So we think we've got.
Ample opportunity for that and so we're not changing our.
Our priority being M&A.
Okay. Thanks Chuck.
Okay.
We have your next question from Steve Tusa with Jpmorgan. Your line is open.
Hey, guys How's it going.
Hey, Steve how are you.
Alright.
Just a question on the <unk> margins.
I think if we kind of back into a number.
Last quarter, there were a little bit higher exiting <unk>.
I don't know.
You did a better job on margins this quarter.
Is there anything going on there or is there a <unk>.
Like is that elective procedures.
Yes.
And can we think they can we still kind of think about potentially kind of high <unk> margin as we look out into kind of next year.
I think first of all I think the margins, we expect margins to expand for a number of years and health as we discussed.
Yes.
Sure in Q4, and it's all about electric procedures being around 90% and rather than the high Ninety's that's.
Somewhere around $12 million to $14 million of 75% to 80%.
Margin business and so when you do that that clipped off about 200 basis points margin expansion, but we're still expanding margins from Q3 to Q4, and we know that sooner.
Sure.
Electric procedures are going to come back so that today's headwind there is tomorrow's tailwind so, but we don't the destination are going into those high <unk>. That's still what we think is very possible and nothing's changed about that.
Got it.
And then just heading into next year.
Kind of mid I guess mid to eyes on organic I mean, and think about the comps next year that would make that exit rate kind of unreasonable.
Organic perspective should next year be more in line with your longer term guidance of mid singles or can you, maybe a little bit better than that given the headwinds youre kind of year three.
III and <unk> with the supply constraints.
Well, it's safe to say that we're going to end the year and our backlog position, we never had before Steve that would certainly suggests.
Some great opportunity for Us next year al.
I'll hold my.
The enthusiasm.
Until we get to the full year guide, but things are setting up pretty well orders are very strong. They are going to continue to be good in the fourth there's a lot of variables out there, obviously theres still still to be considered as we as we play out the rest of the quarter.
To give consideration to but as Chuck just said relative to how how EHS is setting up we certainly talk about the software business is even where we had a little bit less growth at a current we had good orders so.
We think we can continue to build on our net retention. So I think we're we're certainly setting up for some good things, but let's get to let's get through this quarter I'm pretty focused on the things we got to do right now to deliver October so, but we'll get there pretty soon and obviously I think if if it plays out the way. We think we'll certainly have will be in our best backlog position.
That we've ever that we've ever been in.
Great Alright, thanks for the color guys I appreciate it thanks, Steve Thank you.
I'm showing no further questions at this time I will turn the call back over to Mr. <unk> for any closing remarks.
Well I think I'll take it from Griffin, but thank you Alexandra and thanks, everyone for your time Tonight.
We appreciate it as always we benefited from the hard work and determination of our 17000 employees all around the world. We appreciate all your support and we look forward to continuing to follow up with any questions you might have around the corner as we as we get into the finish of the year. Thanks have a great day and have a great earning season bye bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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