Q1 2022 Fortive Corp Earnings Call
Okay.
My name is Emma and I will be your conference facilitator. This afternoon at this time I would like to welcome everyone to the Florida Cott corporations first quarter 2022 earnings results conference call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question during that time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question again press the star one.
I would now like to turn the call over to MS. Elena Rosman, Vice President of Investor Relations. Ms. Rozman you may begin your conference.
Thank you Emma and thank you everyone for joining us.
On today's 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 regulation G are available on the investors section of our website at Www Dot, Florida Dot com or statements on period to period increases or decreases refer to year over year comparisons on a.
Anyway operations basis.
During the call we will make forward looking statements, 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 actual results might differ materially from any forward looking.
It means that we make today.
Formation regarding these risk factors is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31st 2021.
These forward looking statements speak only as of the date. They are made and we do not assume any obligation to update any forward looking statements.
That I'd like to turn the call over to Jim.
Thanks, Atlanta, Hello, Hello, everyone and thank you for joining us I'll begin on slide three.
I am extremely proud of how our teams have come together and navigate the continued challenging environment and deliver an outstanding quarter with better than expected revenues earnings and cash flow are strong purpose driven culture supported our relentless focus on executing for customers shareholders and each other while facing unpredictable.
Obstacles.
Despite these challenges we saw record orders growth across several of our businesses, reflecting continued demand for our leading connected workflow solutions.
Hardware orders grew 14%, adding approximately $130 million backlog in our software enabled businesses grew mid teens with double digit growth in both our SaaS and license revenue streams.
Through the rigorous application of the Florida business system, we continue to deliver improvement across our businesses driving greater visibility and insurance of supply in the quarter. Our teams also worked hard to overcome higher inflation, which resulted in 60 and 30 basis points of gross and operating margin expansion respectively 11.
Percent EPS growth and 36% free cash flow growth in the quarter.
Overall, the momentum across all three of our segments in the first quarter set a strong foundation for the year ahead and reinforces our confidence in our full year 2022 outlook.
Turning to slide four.
Wanted to provide an update on what we're seeing and what we expect over the remainder of 2022.
Starting on the left in the current environment strong orders growth was driven by accelerated innovation continued share gains and leveraging the favorable secular drivers spanning all geographies and in the end markets, yielding an 18% increase in hardware backlog in the quarter.
Our continuity of supply is improving driven by daily management and conversion obey is allowing us to ship more product in Q1 than initially planned our traffic teams did a great job mitigating the intermittent government mandated COVID-19 lockdowns across the region starting in Tien Tsin in January Shanghai locked down at the end of March impacted ship.
<unk> by approximately $20 million in the quarter, primarily at Tektronix with operations restarting, we expect to face some bottlenecks in supply chain. However, our teams will be relentless and work to re ramp quickly.
Moving to the right hand side of the slide we expect sustained core growth driven by normal seasonality continued strong customer demand and record backlog, which gives us a tailwind for growth again in 2023.
Combined with pricing and operational performance, we expect strong margin expansion and another year of double digit earnings and cash flow growth as Chuck will cover in more detail. Shortly we are updating our outlook to reflect the strong start to the year raising the low end of our guidance for the year.
Lastly, our ability to convert more earnings to cash underpins, our investment thesis and allows us to reinvest in our businesses accelerate our strategy and enhance our returns to shareholders.
In the first quarter, we took the opportunity to buy back approximately 1 million shares totaling $64 million. The M&A pipeline remains full with hardware and software opportunities across each of our segments and we estimate M&A capacity of approximately $5 billion.
Over the next three years.
Moving to slide five our leading connected workflow solutions facilitate transformation across high impact feel like workplace safety facilities management product development and healthcare our strategies across these segments is incredibly powerful we serve customers ranging from technicians and facilities managers to engineer.
Here's product developers and healthcare professionals, who all work in challenging environments, where fortis technologies provide higher quality instrumentation, better sensors superior software and real time data analytics to empower them to do their jobs more safely and more efficiently.
As you can see each segment is well positioned to benefit from favorable secular tailwind and durable business model that underpin our strategy and vision to build a stronger collection of businesses with industry, leading profitability and free cash flow margins.
I'll now provide some details on each of the three segments beginning with intelligent operating solutions on slide six.
IOS had a terrific start to the year as customer demand for maintenance uptime assurance, environmental health and safety and facility planning solutions, all contributed to double digit orders growth and strong revenue growth in the quarter.
Total revenue was up 15% with core growth of eight 7%. This included approximately mid teens core growth in North America and high single digit growth in western Europe more than offsetting a low 20% decline in China.
Our Fps countermeasures to improve assurance of supply are making progress mitigating the effects of the COVID-19 lockdowns in driving better core growth in the quarter.
We continue to see solid price realization, which we expect to further benefit performance in the second quarter and the remainder of the year and while our countermeasures enabled us to ship more product. We also incurred additional cost from elevated freight and logistics expenses.
As a result core operating margins were flat year over year, despite price cost being positive on a dollar basis.
IOS adjusted operating margins were 27, 2% down 145 basis points due to the dilutive impact of the service channel acquisition. As a reminder, service channels margins are ramping nicely in line with expectations and iOS core margins are up over 200 basis points on a two year stack basis.
Some other highlights in the quarter include record revenue and bookings of flu supported by strong point of sale, particularly in the U S where point of sale grew mid teens industrial scientific continues to make progress diversifying its business with nine out of the 10 largest Q1 deals book with new customers outside of oil and gas.
<unk> is also seeing strong demand for SaaS solutions, continuing to grow at a healthy double digit pace and likewise, we saw record core growth in facilities and asset lifecycle management in the quarter were currently had a solid start with mid single digit growth and is on track for sales acceleration in the second half Gordian generated strong.
<unk> double digit growth and secured a large data win with the U S Army Corps of engineers.
Their service channel had a strong double digit revenue growth and record bookings in the quarter as customers continued to outsource their fill facilities maintenance work.
Turning now to slide seven and precision technology, we saw record customer demand driving double digit order growth across major geographies and a broad set of end markets, including HVA see aerospace and defense automotive and electric vehicles in semiconductors.
PC revenues grew three 4% with core revenue growth of four 6%.
High single digit growth in North America, and Western Europe was partially offset by a low double digit decline in China, driven by Covid related Lockdowns in Shanghai at the end of the quarter.
As a reminder, tektronix operates a major manufacturing facility in Shanghai, which shut down the last week of March.
The impact was approximately $15 million to PT revenues or 350 basis points of growth, which also impacted their margin performance in the quarter.
<unk> operating margins expanded 30 basis points, reflecting over 50 basis points of gross margin expansion, partially offset by continued investments in new product development.
Highlights for the quarter include successful new product launches driving incredibly strong order growth at tektronix, including the refresh of the five series in the first quarter, which is tracking solidly above plan.
You also saw low double digit topline growth, reflecting solid share gains across its key markets and had over 100 basis points of operating margin expansion in the quarter staying well ahead of inflation.
Moving now to slide eight in advanced healthcare solutions.
<unk> continues to accelerate innovation and digitization in hospitals in afcs.
With custom and clinically superior workflow solutions Hs is well positioned for a multiyear recovery in healthcare.
Revenue increased eight 5% in the first quarter with core revenue growth of 6%.
Mid single digit growth in North America was largely offset by a low single digit decline in China due to the impact of Covid restrictions on ASP.
And a high single digit decline in western Europe as expected.
IHS operating profit margins benefited from Fps enabled productivity initiatives driving core margin expansion at ASP.
As well as the accretive benefit of the probation acquisition, partially offset by lower volumes at AMETEK com.
Some highlights for the quarter include elective procedures in North America were roughly in line with expectations in the first quarter. As a reminder, we expect <unk> to continue to improve and averaged 88% of pre COVID-19 levels for the year.
We saw approximately 20% growth in a sense attract SaaS offering expenses and an approximate doubling of subscription orders in the quarter and probation secured several significant orders in the first quarter, including four competitive Gi wins and a large 20 hospital network win for its eye procedures anesthesia solution.
Execution in an otherwise challenging and uncertain environment is one example of how FBS continues to be an important differentiator for Florida.
As shown on slide nine FBS enabled our businesses to enhance supply chain resilience drive innovation and profitable growth across the portfolio and build skills and capabilities that our leaders to effectively deliver on our commitments in the quarter. Examples include an improvement in unit output and reduction in supply chain risk at fluke.
Through the use of daily visual management, allowing them to outperform in the quarter the execution of lean portfolio management at Tektronix, driving several new customer driven product launches in the coming quarters.
<unk> pricing and price leakage tools driving strong price realization of sensing tech substantial margin expansion at ASP from broad cost reduction plan.
More than offsetting lower consumable volumes in the quarter Daily management and problem solving drove an improvement in working capital turns afford a China and several examples of our progress and our software businesses, including incremental growth realization of the current for improved uplift on renewals a 20% improvement in time to first revenue.
For procurement customers at Gordian, and an acceleration of growth opportunities the probation.
As you heard me say before I'm incredibly proud of the work we've done continuing our progress towards building a more sustainable future as you can see on slide 10.
<unk> commitment to sustainability started on day, one when we develop operational and actionable targets and subsequently invested significant time energy and talent to establish a performance driven program.
This timeline reflects the evolution of our program and commitments we have made since 2016.
In early June we will publish our fifth sustainability report, reflecting consistency and progressing levels of transparency, including adherence to the <unk> reporting framework and completing our first CDP climate change disclosure in 2020.
Adding the SaaS the reporting standard to enhance our climate related disclosure to investors in 2021 and new in 2022, we will provide our first UN global compact statement of progress define our status and plans for Tcf D aligned disclosure and offer initial scope three emissions.
<unk> data and scope to a market based emissions in our CDP climate change disclosure.
It is our shared purpose that also pushes us to create innovative and sustainable products and services for our customers trying to solve some of the world's biggest sustainability challenges for example, intellect, leading software solutions for EHS and sustainability managers serves leading fortune 500 companies across multiple industries.
In fact, our EHS and sustainability teams used the <unk> application to manage and drive continuous improvement of our greenhouse gas emissions accounting in accordance with the <unk> protocol and.
<unk> diverse range of products provide solutions and advanced workplace health and safety as well as optimization of renewable energy installations for our customers.
Consistent with our culture, we are driving incremental improvements and sustainability and we look forward to continued progress in the years to come.
With that I'll pass it over to Chuck who will provide more color on our first quarter financials, and our second quarter and full year 2022 outlook.
Thanks, Jim and Hello, everyone.
I'll begin on slide 11, with a quick recap of our first quarter performance, we generated year over year total revenue growth of nine 3% core growth of five 3% acquisitions net of FX, where as expected contributing four points to total growth.
Turning to the right side of this slide.
Jim covered the segment highlights earlier and I wanted to provide some additional color on the regions North America revenue was up high single digits, including low teens growth in software and related services, partially offset by lower consumable volumes at ASP.
Western Europe revenues grew mid single digits more than offsetting year over year declines in advanced healthcare solutions, driven by a difficult COVID-19 related or compare it in the tech that said, we had good growth at ASP, Despite capital install delays in the region.
Low double digit growth in Asia outside of China, While China revenues declined low teens, driven by the impact of the Covid related lockdowns.
Note that we continued to build backlog in China with high teens order growth in the first quarter, thus reinforcing our outlook for double digit revenue growth for the remainder of the year.
On Slide 12, we show operating performance highlights for the first quarter adjusted gross margins were 57, 6%, increasing by 60 basis points year over year, while adjusted operating margins increased to 23% in line with our guidance, we realized over 300 basis points of <unk>.
In the quarter more than offsetting inflation, yielding 30 basis points of core operating margin expansion and 250 basis points on a two year stack.
Adjusted earnings per share increased 11% to 70, while free cash flow generation of $196 million represented a stronger than normal conversion of adjusted net income in the first quarter.
The strong free cash flow performance included an improvement in the timing of receivables collections, representing a normalization of the trends we saw in the fourth quarter.
Turning now to the guide on slide 13, and starting with the second quarter, we expect low to mid single digit core revenue growth, which includes a headwind of approximately $40 million from the COVID-19 related government shutdowns in Shanghai, which we expect to subside in mid May.
Adjusted operating profit margins are expected to be up at least 80 basis points year over year adjusted earnings per share of <unk> 70 to 73 assumes a 15% tax rate in the quarter and free cash flow conversion of adjusted net income is expected to increase to approximately 100%.
For the full year 2022, we are raising the low end of our revenue guidance by $40 million.
To reflect a strong start to our year.
We continue to expect adjusted operating profit margins for the full year to be up over 100 basis points.
Adjusted EPS is now in the range of $3 <unk> to $3 13 up 11% to 14% and free cash flow conversion of approximately 105% for the full year.
Moving to slide 14, we are expecting a 48 52 split of revenue first half to second half.
Which represents a step up of approximately $255 million of revenue and includes favorable price and FX first half second half. In addition to higher volumes supported by our robust backlog position and the work we've done to mitigate supply chain constraints across our portfolio.
We also expect to recover whilst China volumes as a result of government mandated lockdowns in the first half shifting more revenue to the second half.
Incremental margins on a sequential volume are expected to flow through at attractive levels levels contributing to strong margin performance in the second half.
In summary, our portfolio continues to show the benefits of the actions we have taken to build a more durable growth company with high recurring revenue profile mitigating the risk of slowing demand in the second half.
With that I'll pass it back to Jim for some closing remarks.
Thanks, Scott I'll now start to wrap up on slide 15.
Over the last six years, we have articulated a portfolio strategy to build a more resilient and less cyclical business capable of outperforming in even the most difficult of times, the Florida portfolio. Today is a reflection of how well we've executed that playbook, our acquisitions have added approximately $2 $3 billion of revenue to Florida as of two.
'twenty, two which is expected to grow low double digits. This year and in doing so we've doubled the through cycle core growth of the company versus the time of the spin off from Danaher in 2016.
We have also more than doubled recurring revenue as a percentage of our total revenue to approximately 40% and built a portfolio of software enabled workflow solutions, which is approaching $1 billion of revenue and continues to enhance our long term competitive advantage.
In addition, the businesses we have added reported have been an important contributor to the more than 1000 basis points of gross margin expansion that we have driven since 2016 and sharp affordable today is delivering higher and more profitable growth and there's nowhere that this shows up more than in our free cash flow.
Lastly, on slide 16 that strong free cash flow, which has nearly doubled since 2019 continues to be a hallmark of our investment thesis compounding faster than revenue and earnings and allowing us to accelerate growth and compound returns through disciplined capital deployment.
2022 is off to a great start as the outperformance in Q1 reinforces our focus on sustained growth and execution.
Averaging the power of FBS, which will always be a part of who we are and how we do what we do we expect another year of double digit earnings and free cash flow growth on track to deliver on the multi year target set last year with differentiated growth and profitability amongst our industry peers.
As a result, we're confident the work we do to create long term sustainable competitive advantages for our operating companies the strategic segments <unk> best in class returns for Florida for a long time to come.
With that I'll turn it back to Atlanta.
That concludes our formal comments.
We are now ready to take questions.
At this time I would like to remind everyone in order to ask a question press the number one press star and the number one on your telephone keypad.
In a matter of time, we please ask that you limit yourself to one question and one follow up thank you.
Your first question today comes from the line of Steve Tusa with Jpmorgan. Your line is now open.
Hey, good morning.
Whenever I see over here, yes, it's kind of afternoon over here.
So.
Within kind of the the businesses that are most exposed to China.
What are you seeing there and kind of the.
Just to ground level economy, not necessarily like the shutdown dynamic, but what are you seeing outside of the of the shack App shutdowns and what is your kind of order pace and backlog look like over there.
Yes, David It's Jim first of all I think commercially we think the business was had a very good quarter orders were up double digit in the quarter.
Despite the shutdown that started in various cities at the beginning of the quarter, we really didn't see a lot of impact relative to our commercial activities.
Point of sales so still good.
Throughout the quarter. So so from a commercial perspective, we've always we pivoted like as an example, when we had to have folks work from home. We did that in 2020. So that was an easy process. So the real impact was really just to the manufacturing facility in Shanghai that we described in the prepared remarks was really.
Not really a commercial issue relative to commercial activities really just a function of the fact that that our factory the tech factor in as well as our industrial scientific factory.
We're shut down and our logistics providers will shut down as well.
Right and.
And I guess.
Can you maybe talk about as you guys done any.
Analysis around.
If we went into kind of a mild global recession.
What would be kind of the algorithm for you guys. What you think your core would do.
How you would defend earnings I mean.
I think there's obviously a lot of concern around recession out there you guys get bucket in this kind of short cycle industrial camp for some reason maybe talk about what you. What you would kind of put any levers you can pull to mitigate the cyclicality that's inherent in the business.
Yes, well I think I think number one in the short run, but our backlog position, we would be in very good shape. As an example, if we saw a a sort of a slowdown that some businesses saw 19.
Good weather that storm with the backlog without an issue of just dip into the backlog.
More than we anticipated in this guide so in that sense, we've got much more of an insurance policy going into the second half more broadly as you remember I think or even when we see something more dramatic like we did in Q2 of 2020.
We had outstanding free cash flow then we had obviously protected our gross margins extremely well and with a high gross margin number. We can we can flex expenses pretty well in the medium term, which we demonstrated in 'twenty. So I think those are some of the levers and then the last thing would just be we've leaned on the 40% of recurring revenue in the <unk>.
Care side of the business, which we're going to be in a healthcare resurgence here I think because of COVID-19 .
And it's really not going to be economically impacted it's really going to be all of the things. We've described and I'm sure we'll talk a little bit more about so I think we certainly don't want a recession in any way shape or form, but I think we've built the portfolio for the last five or six years with anticipation that inevitably something like that might happen and we'd be far more resilient relative to our busy.
This model in which to be able to handle a situation like that alright, great. Thanks a lot.
Thanks, Steve.
Your next question comes from the line of Julian Mitchell with Barclays. Your line is now open.
Hi, good afternoon, Hi.
Maybe just a first question trying to drill into the adjusted operating margin. So.
I guess looking sequentially revenues were flattish in Q1, you had a big margin dip sequentially.
You were assuming at pick up sequentially in Q2, even with the China headwinds getting worse.
Looking at it year on year.
We're looking for a bigger acceleration year on year in Q2 than Q1 again, even with that China headwinds. So maybe help me understand sort of the confidence on margins, particularly as I think you only came in in line with the initial guide for Q1.
Yeah, So Julien a couple of things first of all the revenues were flat from Q4 to Q1, but really there was.
We've brought on service channel.
Didn't have the same.
I am sorry probation.
Into that that mix, but when you look at Q1 to Q2, I think that there is merits and things that come in but Q2 s margins are up 80 basis points over the prior year and really showing those 40% Incrementals in Q2, and then as we move through the year.
We see.
We see more revenue coming through.
Not even having it.
Having it come through probably around 50% incremental margins on the step up in volume plus things like the service channel and.
And margins will increase as we go through the year and also probably get a little bit more consumables.
To have more consumables in the second half all of these things build towards that margin expansion.
Having said that in a tough environment, 23% in line operating profit margins for Q1 is up 30 basis points.
Given everything that went on.
We feel we feel very good about the start to the year.
Thank you and then just.
I wanted to discuss sort of how youre thinking about your orders in the current.
Quarter, I think you called out Jim.
Hardware orders overall at 44 up 14% in Q1.
Even including strength in China, there, so wondering how youre thinking about the resilience of that order intake in the current quarter and whether you've seen anything change for example in terms of European demand yet.
It's interesting Julian as European orders were good we I would say.
So I think as we look around the world.
And I will stick in the orders or order question.
Obviously continued continuing to permanent orders I like the fact that when we look at things like U S. Pos for Fluke and Tek as an example that those numbers were in line with Pos of our order growth was pretty close to our to our sale of <unk>.
I think we feel very good about the durability of the order patterns at this point.
There is a slow on a real a real basis simply in the second half simply because of the two year stack and things like that but I think if you look at the progression of strength that remains there we saw a little bit of advanced buying at fluke for some some ahead of a price increase so there is a little bit of that but thats all inherent in our guide and I think we.
We built a as we said $130 million backlog. So I think when you really look at is the durability is good somewhat some of the order strength that <unk> sensing is was advanced ordering for the second half we saw some large customers are putting their orders for the second half. So I think we have a good sense of what's advanced ordering and what's really real time demand and we base.
Set against a number of the things that we're looking at channel inventories are in pretty good shape, a little bit of elevation, but not that anything that wouldn't be alarm certainly within the band of what they typically be at so I think on balance we.
When we look at the hardware businesses, we're certainly looking for signs of things that might suggest a slowdown or anything like that I think thus far we've yet to see that and feel good about the backlog situations that we're in and our ability to sort of deliver on that so if the order rate were to go down in an example, like I said on Steve's question. If the order rate were to go down on the second.
Half that we would just dip into the backlog, which in the current guidance, we're not planning to June do much up.
Great. Thank you.
Thank you.
Your next question comes from the line of Andrew <unk> with Bank of America. Your line is now open yes. Good morning.
Hi, Andrew.
Hey, just looking at the slide 14.
You seem to be embedding higher throughput and volume just shipping more hardware.
Looking at the progress from Q4 to Q1 can you just talk about some tangible steps.
That enables you to achieve this if you could share on this is it just more supply chain clearing or the counter measures that you're taking.
Just maybe dig in a little bit more as to what is allowing you to sort of actually finally get the volume out of the system. Thank you.
Yeah. So thanks, Andrew I think number one is.
What we saw in the quarter were some nice examples of getting after a number of the things.
Relative to some of the supply chain constraints that we've described obviously for a few quarters here and it'll be just consistent with what I've said pretty much for the last nine months, we really never anticipated the supply chain issues would go away in 2022, while we anticipated and wise with what we saw in the quarter and will continue to see is the impact of our countermeasures and so.
You saw that at fluke with their growth rate is as one example, certainly sensing tech performance in the quarter, which was outstanding bolt on the topline and Bottomline is another. Good example of that and quite frankly, we would have seen more of that at tektronix if it hadn't been for the shutdown in Shanghai in the last week. So a number of examples of progress in the <unk>.
Quarter relative to those challenges so not not from a lack of challenges, but just the power of FBS to countermeasure. Those challenges will continue to see that as the year progresses.
You mentioned, the what some of the things that I'll provide that volume in the second half. Some of that is just kind of normal normal seasonality. We just tend to see things go out a little bit more in the second half some of that is U S government buying in the third quarter. Some of it is year end stuff. So some of it is inherent in that we're going to see consumables get better as elective procedures.
Yours get better we'll see ACB growth continue to sequentially improve in our software businesses and then as I described we will see some some continued improvement absolute tech and our sensing Tech, which I think we've demonstrated in the first quarter and we will continue to demonstrate through the remaining part of the year and into 'twenty three.
And then just a follow up question.
Perhaps it's a conjecture on our part, but we would have thought the tech has the most advanced chips.
Once again conjecture, but probably the tougher supply chain situation. So what gives you the confidence youll be able to catch up on the $60 million of volume that was shifted out of first half into the second half. Thanks a lot.
Yeah sure I think I think number one is if we if we look at tax performance in the quarter.
I'd like to say, a China had hadn't happened, but the reality is that we.
And unanticipated shutdown of our manufacturing facility in the last week of the quarter.
We shipped some of that volume roughly $15 million you're into a good growth rate for tax and I think that just represents the progress, we're making but youre right a sophisticated supply chain for sure. We've got good partnerships with a number of large scale semiconductor manufacturers, who supply a number of key components were.
Redesigning some things that are going to occur in the second and third quarter. So so I think we look at the tangible actions that are in place the progress that we've made thus far and the confidence in us and that progress going forward. So those are really and this is not in a theoretical level. This is really we talked about the conversion of <unk> and some of the daily visual management, a part of that.
This is literally walking into those bands and having a sense for the actions pressure testing.
We would under any kind of operating review that we do every month and I'm really what comes out of that is a higher degree of confidence as we progress through the year, Chuck and I were with the tech team down at Beaver 10, a few weeks ago I guess it was more than that now and literally walk you through the factories seeing the actions and what the team's doing and Thats where they are.
Confidence comes from having.
Fabulous thanks, so much.
Thanks, Andrew.
Your next question comes from the line of Nigel Coe with Wolfe Research. Your line is now open.
Thanks, Good afternoon.
Yes, how things.
A couple as well.
By the way I love the new format for the slides, it's so much easier read much more formative.
So.
Thinking about the <unk> and Gordian.
Full months double digits.
I think maybe mid teens in <unk>.
I want to make sure I heard this current grew mid single digits, which I think is the first quarter growth in some time and so number one just maybe talk about that transition back to growth that accrual and then look into <unk> you guided to mid single digit growth from <unk> and gordian that the detail from <unk>, just wondering what you're seeing there. Thanks.
Yes, I think.
We have a.
First of all we had a good quarters and both businesses I think we mentioned in the in the fourth quarter call about we were starting to see traction with some of the countermeasures and actions that were happening in the current I think we've just seen we continue to see those things as a consistent message from what we said in our last call alumina is doing a really really good.
Right job with with him and the team I think are making progress and so that's a.
Multi quarter continued improvement, but we are starting to see the green shoots of their efforts and obviously you see that in the quarter Gordian had a fabulous quarter across many many ways Theyre Jack solution was up over 20% I think so just a very good quarter in really across their product line.
That's just I think just a continued strength of that business that we've seen for some time and the combination of those two businesses is really performing well right now as you know we've moved some product lines between businesses. So it'll slow a little bit in the second quarter because of the comp that we had a gordian last year, where they had some.
Finishing up.
Contracts that.
Jamba in their job order contracting that was some upside in the in the second quarter last year, but in the base business and kind of on a two year stack. We're seeing good performance Q1 to Q2 sequentially with the comment in those businesses for sure.
Great. Thanks, and then just on price I think you.
<unk> called out two <unk> price in the quarter.
Can you just remind us what you expect to expectations off of the for the full year and how that shakes out between first half into the second half.
Okay.
Well I think we had about I think we have roughly about 300 basis points of price if I remember.
In the quarter I think if I remember that number right.
And I think it was we had good price across the board.
Part of you obviously saw it in the bridge there is I think $20 million more a price in the bridge first half of second half. So so youre, saying youre going to see a little bit more price in the bridge. So I think on balance we're continuing to see good traction with price and in a good balance between price and volume as well. So I think we're certainly getting price.
And price cost I think.
The idea that we grew gross margins by 60 basis points in the quarter I don't know a lot of companies that grew gross margins in this environment and for us to grow gross margins in the quarter I think it's just a real testament to the high quality work, we mentioned on the slide the price realization work and the prices price <unk> that we do really continuing to do.
Demonstrates our ability to get price, but also quite frankly, our ability to still maintain and deliver value to customers.
Great. Thanks.
Thanks, Nigel and I didn't answer your second question the <unk>.
Part of that question, which is.
That will improve as I said $20 million in the second half we would we would believe that there is that just demonstrates I think the continued success that we would have relative to those cases. So we're going to continue to do a lot of those events through the remaining part of the year not assuming that inflation does anything but either stay the same or maybe even get.
Worse, we want to be ahead of the game and proactive on the price game.
Vin.
And we'll go ahead.
Your next question comes from the line of Dan Dray with RBC. Your line is now open.
Hey, good day everyone.
Eddie.
First question just to clarify the expectation or how you land on that $40 million impact from China.
That a bottom up analysis of the front log customer discussions and so forth or is it a kind of a top down swag on a percent of the business that you'd be expecting.
So deane, it's really not a customer issue at all as we mentioned, we've got really strong backlog.
Just about.
The work Rolling Lockdowns in Shanghai, particularly and having the factory open and being able to produce that and we've done a great job of getting material in and available and improving supply chain, but but we need those lockdowns to and it's a function of how many days of lockdown.
That's how we're calculating the impact and customer specific orders to your question around detail Deane. This is Matt.
This is this is really looking at orders that are on hand on the books in some cases products that are already sitting in the factory just need to go out.
Understood is there if you think about potential sales that could not be realized in the second quarter.
You've quantified China are there any other either areas regions or product lines that of sales that will be either passed do you just can't ship component shortages or is it all China.
Well I think the story of <unk>.
Finally, the 40, we talked about into the China story, certainly inherent in the way we've talked about our backlog is that we continue to have a very robust backlog, but of course that means that customers are always getting the product in the timeframe that they necessarily want them.
In some cases, where its distribution.
That might be going into the distributor inventory I think the stat. We look at in that case as we look at the amount of time to fill meaning what is our if we're if we're missing an order from an on time perspective, how much time it to take for us to fill it out to the time that the customer requested and those numbers are getting better so I think first.
First thing we look at at that time to fill after that then we look at the on time delivery. So with those numbers are starting to get better we're in customer conversations all the time and situations. So throughout the conversation around backlog, we're having conversations with customers about are we how do we how do we help them be more successful.
And I think what's been good about that as I think we continue to see share gain opportunities and have seen share gains across the portfolio in a number of those cases. So I think that suggests that we're we're doing a nice job of managing those challenges.
That's helpful. And then just as a follow up on the commentary about M&A and the capacity.
<unk> said <unk> got both hardware software candidates there do you have a bias between the two.
Is there a bias on deal size.
And then lastly, what inning you think Florida is in in terms of the portfolio pivot has started a couple of years ago. Because if you think about 2016, you had a set of businesses and it's been dramatically changed in terms of a higher gross margin and higher recurring revenues more software.
Think of that as a journey.
What point what inning do you think your rent today and when would you see that there'll be a stabilization of our.
Maybe a landing point I know there'll be continuous tweaking from there, but just some context would be helpful.
Yes, Great question, I think number one I.
I think.
Our biases are balanced.
We're going to be deal dependent in the sense of what comes available that's hard to say with it relative to the funnel hardware software balancing act versus what becomes available what we've been working towards and that kind of thing. So I would say at any point in time. It is going to look like we have a biased, but I think over a longer period of time you see that.
Balanced how to come out so I'll stay away from committing to that balance because some of it is it's very much asset dependent.
Probably a bias more towards bolt on kinds of deals right now I would say.
I think given given where we just did two great deals on probation and service channel as we missed that in the prepared remarks, there are out of the gate.
Really well and we certainly see an opportunity to do a number of kinds of deals the breadth and depth of the funnel, but if you had to sort of think about it was probably a slight bias towards the bolt on or two here.
In the near term at least relative to the transformation.
I think it's interesting and Chuck and I have talked a lot about vessel with.
If you look at the segment structure today, we're only 12 months into that segment structure and I think when you look at it and you look at the power of what segments have delivered this quarter I think you could only look at that and say we must be in the final final innings of a transformation because because.
<unk> is so strong across the board and the opportunity is so great with $40 billion worth of served market. So you never say never that's why we do strategic plans every year. That's why we sit down with the board on a regular basis to talk about performance, but I think where we stand right now we feel very good about where we're at and.
It's spring so we're always optimistic baseball fans, but I think at the end of the day, we feel really good about the portfolio right now and I think as you look at the guide for the remaining part of the year and you start to see how the full year stacks up segment to segment strong growth strong margin expansion with great free cash flow performance I mean, all three segments are going to be strong contributors.
Accordingly.
That's really helpful. Thank you.
Thanks Pete.
Your next question comes from the line of Scott Davis with Melius Research. Your line is now open.
Good good.
Good morning afternoon, whatever it is guys.
I was interested in just getting an update on probation I mean, where are you versus kind of the deal model was pretty big growth rates that you were expecting good growth rates are we ahead of the deal model are in line behind.
That'd be helpful.
Yes, we did a 100 day plan with the team actually last week and could not have been more excited about the work that they did the quality of the business and the degree of growth opportunities. There are there is certainly out of the gateway all I had.
See where they end up the year, it's still early but we feel really good about where the business is that we mentioned in the prepared remarks about <unk>.
The number of Gi wins, and as well as their extension one of the largest orders in the history of the company with an anesthesia solution. So we're seeing those additional piece, we're seeing the strength of the clinical superiority.
Feel really good about the business and the ability for that business to grow.
In the short run like we thought in the long run I'm starting to think maybe even better just given the number the strength of the strategic plan, but our strategies are just powerpoint slides, you've got to go out and execute and I like our chances with the team we have.
And then on slide four there is a little.
Sure.
Quote there that just says M&A returns nearly double next five years, what what's the context on that that you mean deals done in the last year double in the next five years done in the last five years or little color you can put on that and what does that mean double from five to 10 or four to eight or three to six.
So Scott we're talking about the ROIC returns and I think that for.
It may be doubling.
Let's say four to eight is probably a good way to think about that that doesn't mean, we think most of our deals are getting to the 10% ROIC in five years, and we're very pleased with the progress but coming out of.
With the last couple of years, we feel like we're inflection here and we're going to start seeing more from these deals and Thats what were trying to talk about.
Okay.
We saw in the quarter and what Youll see maybe just add Chuck spot on here I think.
The legacy deals the ones. We did early right. He made an ISC and landauer doing outstanding eastern similar some of that medium term youre starting to see Gordian trajectory just take off your intellect had a strong quarter.
Our current as I mentioned in.
And the question around continuing to improve and ASP with really strong margins and ready for consumables to come back as healthcare changes so and certainly the last two deals we've done as I described so I think we're in a great place relative to returns.
This inflection is is is obviously, we're excited about I think it put a lot of hard work into it I think we're in a really good place relative to those doesn't mean, we won't have an issue or two but but I think what we've seen certainly in the last several quarters as well as these inflections that started to happen in the businesses.
Well good luck guys. Thank you.
Thanks Scott.
Your next question comes from the line of Jeff Sprague with vertical research. Your line is now open.
Hey, good day everyone.
Hi, John .
Hey, two from me just first on back on price cost Jim you noted.
IOS was price cost on a positive on a dollar basis.
Was that true for the other segments and <unk>.
And also if you could maybe put it in the context of margins as you noted.
Gross margins did improve nicely with that.
Was that in spite of negative friction on price cost right you can be positive on dollars and still negative on margins.
And so the question.
So Jeff this is Chuck.
For Q1 core operating margin expansion is up 30 basis points, so as a percentage basis, we've talked about the dollars being up.
But certainly.
We saw real margin expansion, we've continued to see that accelerate as we go through the year.
And so that.
It was a true for everyone.
<unk> and <unk>, but we were down a little bit and.
H.
Yes.
Down I think about 40 basis points is what's on the slide there.
An encore.
Okay, and then on IHS.
I think you gave us the 88% recovery on procedures for the year, what was it actually in Q1 and what's the magnitude of improvement you're expecting in Q2.
So 80 85 with Q2 Q2, Q1, excuse me and obviously Thats got progressively better through the quarter. So I think we're probably in the couple of basis points better.
In the second quarter, and then obviously probably starts to approach 90, as we get through the second half of the year. So it's still early Amazon wasn't influenced in January and February , particularly in the U S.
We expect that really to see gradual improvement and we're seeing some green shoots we are starting to see some hospitals that are now over 100% from their 2019 levels. So.
It's a combination of sort of confidence gets built on the overall number but also kind of looking through the detail to understand what hospital networks from where they're at and we're starting to see some of those numbers where hospitals are getting in much better shape as we as they progressed through the quarter.
Okay, great. Thanks for the color.
Thanks, Jeff.
Your next question comes from the line of Andy Kaplowitz with Citigroup. Your line is now open.
Good morning, everyone.
And Jimmy you mentioned, the new five series and Tech times, and you've been talking about a significant product refresh I think in tech and fluid for some time now. So maybe you can give us a little more perspective on how much new product growth should help you in 'twenty two how might this new product cycle compared to previous cycles, you've had and then I think you said last quarter.
That you expect minimal backlog reduction in fluke and Tek for the year is that still the case.
Yes, so let's talk about let's break them up I think tech certainly has a refresh coming in.
And a couple of product lines, you mentioned, the five series I don't want to I don't want to ruin their announcements here, but we'll start to see in the second and third quarter, some announcements around things that theyre coming out with so.
Inherent in that sort of step up from the first half to the second half probably of some new product introductions.
At Tektronix, it's hard to sort of say, what's backlog reduction, what's new product demand.
Put those but we will see.
Good good good product refresh some of that refreshing because quite frankly comes with some.
Some changes in chips as we were doing some things relative to component.
Changes and so decided to make some improvements of the product as well. So I think a tech we're going to see nice.
We don't anticipate much by way of backlog reduction of tax in the year consistent with what we've been saying before and but I think the business is going to be in very good shape. We said as we said China situation very very much an independent.
Situated relative to just Shanghai overall growth in the rest of the World was very it was good and should continue to improve through the year relative to flu looked kind of always a little bit above that.
It is a pretty broad product line, so theres really no one product that necessarily moves the needle.
They will they do have some things that are going on.
In terms of new clamps, and some acoustic imaging and things like that that are that are coming through.
That will probably be more back half, but unlike tech where one product category can make a difference typically at fluke.
It takes us.
They just have a broader product line, it's the nature of the business. So, but we do we will get a little bit of backlog reduction that flipped this year I suspect.
But again that will end the year as well and a good situated in a good position for 'twenty three so.
Both businesses showed demonstrated success against their countermeasures relative to challenges in the quarter.
Inherent in what we think about the year will be the continued those continued countermeasures, we'll continue to have impact for the business.
Thanks for that and then Jim maybe just talking a little bit more about the M&A market. You, obviously haven't kind of capacity you mentioned the big pipeline of opportunities at sellers have come down yet a bit given lower market valuations or do you think it might take some time to get buyers and sellers on the same page here given the volatility in the markets.
While every every deal has its story, but I would say typically it takes longer or conversations here recently in a couple of situations probably would suggest that an anthem transactions that we've watched occur which suggests that things are still.
I would say things haven't changed much so I would anticipate that more of a second half early 'twenty three real impact.
Some deals will have different situations.
Certainly be situational dependent, but but I think at the end of the day just more broadly about how we think about things I would say is we're probably still awaiting a little bit more until some of the maybe some of the uncertainties that we've seen recently sort of find their way to kind of knowing the natural direction of what that might be interest rates being one of them the macro some of those things.
I appreciate it Jim.
Thanks, Andy.
Your next question comes from Josh Paul Kravinsky with Morgan Stanley . Your line is now open.
Hi, Good morning, guys Hi, Josh.
Just a quick question on the backlog Jimmy mentioned that several times in this call and I think.
For cost.
Across kind of the shorter cycle industrial World. This has been a bit of a talking point like what is backlog really mean in this environment.
Any historical context for what happened to backlog if incoming orders soften like do you see cancellations is there any kind of context for something like a double ordering or channel.
Dynamic, but it doesn't sound like anything's happening today, just trying to get my arms around like what is backlog look like if the environment were to change.
Yes, I think it's something we spent a lot of time on Josh obviously, when you build another $130 million backlog like we did in the first quarter, obviously, a topic of conversation every month with our operating reviews with the president and CFO I would say I'd break it into a few places within within Florida and are assessing tech businesses, we have.
A real sense of what it looks like and what we're seeing is we are seeing some orders being placed for like November shipments and things like that that double ordering that's just somebody wanting to say, hey, I want to get into queue for deliveries for that kind of thing and so in the case of sensing Tac I think we have a good sense of the backlog, we don't see double order.
Little bit of people trying to get around some pricing, but at the end of the day that backlog will flow and it will flow out where we're confident with that on the tech side, 50% of the business is direct and we can very much see those customers and their use cases and their needs and we've tested that pretty profusely feel very good about that the channel inventory.
And that's about a little little bit less than half of tektronix revenue and close to 75% or 80% of fluids revenue, that's where we get into looking at point of sale data where are those trends going what our inventory positions look like what do they have on order and we have we have a sort of methodology and calculation that we use from an <unk>.
Analytical perspective to test that and what we see today is in those we don't see anything getting out or out of range and so point of sale remains remains good inventories remained in a good place and there is no natural increases that if you sort of play around with Yodlee analytics, where things would things would go hey.
Why are quickly and Thats, what we watch and we watch it consistently we get.
We get a little bit better and more refined data in the us and Europe and some of those things that we do in the rest of the world, but but that's how we test the portfolio and I think when you step back and say what does that all talia, we'd say the natural demand patterns are good inventory levels or not.
Substantive relative to natural numbers and what's on order doesn't significantly increase their inventory at anytime soon so that's what makes us feel pretty good about the near term and I would say that's informed our guide it gives us the confidence will start the second half with with good backlog and so if we saw some changes in some of those demand patterns.
You might see you might see a little cancellations, although and I would say historically, we haven't seen a lot of that.
Yeah.
Got it that's helpful. And then I guess just on some of the more facilities facing <unk>.
Platforms.
The software side, yes.
Return to work and maybe even a more of a hybrid model that promote folks would have expected six months ago. It seems like it's well on order anything that kind of permeated through that organization or customer behavior that tracks alongside some of those changes good or bad.
Well I think it's great to be in facilities and asset lifecycle management from a software perspective, because its really the combination of what we're doing in service channel in our current and to some extent Gordian supports hybrid work supports the kinds of changes they are going to occur in facilities overtime to support collaboration and the kinds of things that people want to do.
As people come back into the offices not full time, but from time to time, so I think that trend and that secular driver is going to be out there for years, it's well documented that we're very in the early innings of those transformations.
So I think in our bag.
We're back our customers are in many cases backward back in hospitals were.
There's times when our service revenue.
To get customers on site to get things service can take a little bit longer but as we mentioned in a couple of places we're starting to see the opportunity to compress those timelines from when we come on site to help us start up a customer as an example, whether it be in hardware and software business and the time to value. So we're starting to see those come down as people come back to work back into the.
<unk> come back into the facilities. So I think on balance inherent in some of our natural trajectory of the business is in some of these things happening and being helpful to two.
So how we how we conduct business.
I appreciate the color guys best of luck. Thanks, Josh.
Your final question today comes from the line of John Walsh with Credit Suisse. Your line is now open.
Hey, John .
Hey, there good day and thanks for squeezing me in.
Kind of following along those lines I was just curious if you could talk to for the software businesses kind of what Youre seeing.
In terms of maybe a net add as it relates to subscribers or if you have more granularity around churn and an absolute adds and then just as I'll do my follow on right now.
The pricing are you seeing anything different between the ability to get the price on the software side.
<unk> versus the hardware side.
Thank you.
Yes, great great questions I think on basis, we announced a lot of the prepared remarks.
We tried to highlight a number of places where new logos are occurring and I think quite frankly, we had I think we had our largest I think we're one of our largest <unk> deals in the history of the company at ISC. We have one of our largest I think we are the largest anesthesia procedures I procedures order. It probation. So a number of places where new logos.
We're in a good place relative to new logo growth in the quarter and I think when you look at.
Where our software growth was I think are our low double digit teens low double digit growth in SaaS and our teams growth in software that's going to standup I think against a lot of software players looked at a few folks that reported today, even in and feel really good about where that double digit number is going to stand up relative to others. That's also.
Helpful. Because our net dollar retention continues to improve on the backs of churn reduction and so I think we're in a really good place to continue to improve net dollar retention Rps efforts are making a difference there and I think and I think that some of that is also getting a little bit more price. So we're still getting more price in the hardware businesses to the second part.
To your question John We think we think we're in a good place relative to that and I think the balance we didnt talk about this but our and our hardware businesses that good balance of probably about 50% price, 50% volume in our growth I think has an outstanding balance it really demonstrates the strength of our brands the strength of our value propositions. So we think that is.
To play out this year and obviously, we're getting the price that's inherent in some of the inflationary challenges that we've we've documented but we're also driving tremendous value with customers that ultimately driving our volume. So anyway, I think I think I'll end. It there. Thanks, everybody for a great call today I think we're incredibly proud of the quarter, we had we're incredibly.
Excited about 2022, we've said this was a show me year and I think we just did that so we will look forward to your follow up questions. We'll talk to you soon and we'll see on the road. Thanks.
This concludes today's conference call. Thank you for attending you may now disconnect.
Okay.
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Yes.
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