Q2 2022 Fortive Corp Earnings Call
My name is Rob and I will be your conference facilitator of this afternoon.
At this time I would like to welcome everyone to Ford F Corporation's second 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.
I would like to ask a question. During this 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'd now like to turn the call over to MS. Elena Rosman, Vice President of Investor Relations Ms. Rosemont, you may begin your conference.
Thank you Rob and thank you everyone for joining us on today's earnings 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 afford a dotcom.
Statements on period to period increases or decreases refer to year over year comparisons on a continuing 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 statements that we make today.
Information regarding these 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 that they are made and we do not assume any obligation to update.
With that I'd like to turn the call over to Jim.
Thanks, Alina Hello, everyone and thank you for joining us I'll begin on slide three.
We had an excellent second quarter with strong broad based execution across the portfolio contributing to revenue margins and earnings all above the high end of our guidance, resulting in a raised outlook for the year.
Despite the effects of Covid related shutdowns in Shanghai significant FX headwinds and ongoing supply chain constraints. Our team was able to achieve 9% core revenue growth of 190 basis points adjusted operating margin expansion.
18% adjusted earnings per share growth and outstanding free cash flow generation in the second quarter.
Consistent with the first quarter demand for our leading workflow solutions remains robust year to date hardware orders in software.
Both increased low double digits, reflecting our more resilient and diversified product portfolio.
At the same time, our rigorous application of the Florida business system allowed us to deliver for customers in a challenging external environment and improve our profitability, despite higher inflation and rising FX headwinds.
Turning to slide four I wanted to provide an update on what we're seeing and what we expect in the second half of the year starting.
Starting on the left with the current environment demand and orders remained strong in the second quarter driven by accelerated innovation continued share gains and leverage the favorable secular drivers.
Hardware orders increased 9% in the second quarter, yielding a hardware backlog that ended the quarter, 21% higher than a year and year end 2021.
Our supply chain measures continued to gain traction while we expect that component constraints will persist for the rest of 2022 and into 2023.
While ongoing Covid lockdowns in China remain a risk we substantially mitigated the headwind from the Lockdowns that commenced in late March in Shanghai and continued through most of May should be most of the $60 million of risks. We previously highlighted in the first half. This is an excellent example of our team's ability to utilize FBS tools to navigate.
Unprecedented obstacles keep our employees safe and deliver for customers and shareholders.
Moving to the right side of the slide we expect higher core growth for the remainder of the year as our more resilient product portfolio positions us to benefit from continued customer demand.
We also continue to build momentum in our software businesses with upsell and cross sell bookings new logo generation and lower churn all contributing to double digit <unk> growth for the full year.
Given the strength of our first half performance, we are raising the outlook for the year. Our revised outlook also includes a foreign exchange headwind of approximately $100 million on revenue and eight on EPS that was not previously contemplated.
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.
Turning to slide five.
Work, we have done over the last six years to build a stronger collection of businesses has resulted in a more diversified end market mix and durable recurring revenue profile as demonstrated by the shading in all the end markets we serve today.
For example in 2016, a sizeable percentage of our revenue came from the retail fueling and vehicle repair market today, our largest end market by revenue is health care, which has very durable revenue characteristics and as you can see further in the slide there are recurring revenue opportunities across a range of end markets. We.
We have more than doubled the percentage of our total company revenue, which is recurring this includes the software and consumables business model additions, we have made to the portfolio and the services revenue that we have expanded our businesses like tektronix. When you look at our footprint today and the end markets to which we participate we have several opportunities to globalize, our leading brands.
And take advantage of the secular drivers, which are driving sustainable growth in these markets.
I'll now provide some more details on each of the three segments beginning with intelligent operating solutions on slide six.
<unk> continued its strong momentum with revenues up 16% and core revenue growth of 12% in the second quarter with strong double digit growth in North America, and Western Europe and high single digit growth in China.
The work the businesses have done to improve availability of supply and offset inflation is contributing to better than expected core growth with sequential improvements in shipments and stronger price realization driving 205 basis points of core operating margin expansion more than offsetting incremental FX headwinds.
Some other highlights in the quarter include <unk> product innovation, and new service offerings, including our recently launched Fluke Solar solutions. In addition to rigorous daily supply chain management drove mid teens core growth while their orders forecast has continued to move up throughout the year.
Industrial scientific saw strong bookings for <unk> up 55% year over year because of continued progress diversifying and globalizing the customer base.
Intellect SaaS revenues continued their double digit pace on tract of 10% plus <unk> growth for the year.
Moving to facilities and asset lifecycle management already in revenues were up double digits as several customers, including the New York City Department of Education, and the Pennsylvania Department of General services leveraged Guardians procurement platform to manage large infrastructure projects with city and state customers.
The quarter continued to build a strong foundation for second half growth with software bookings up more than 20% and an expectation of accelerated second half bookings. Their commercialization success is a reflection of the significant progress. They have made building FBS capabilities across their sales organization.
Finally service channel had another quarter of double digit revenue growth.
This channel is continuing to see strong customer demand for managed solutions with customers increasingly outsourcing their facilities maintenance work.
Turning now to slide seven and precision technologies.
Total revenue increased 6% with core revenue growth of 9%.
Demand remains strong with robust core revenue growth and another quarter of double digit orders growth across major geographies and end markets, particularly industrial semi medical power and energy raising backlogs to new record levels.
China revenues grew over 20% as tektronix mitigated the Shanghai Lockdowns and continued strength in sensing technologies.
<unk> continues to benefit from a number of secular drivers, including the expansion of power and precision devices going into the electronics innovation space and the expanded use of semiconductors broadly.
We achieved 90 basis points of adjusted operating margin expansion, driven by favorable pricing and disciplined cost management, partially offset by higher component costs and FX.
Some highlights in the quarter include mid 20% bookings growth at Tektronix with new product launches, including the two series NSO, which continues to be strong globally and represents an example of another next generation platform that provides innovative and differentiated technology for customers.
Mid teens growth at sensing driven by pricing FBS countermeasures and continued growth in core end markets in the second quarter.
Innovation and vertical market strategies are gaining traction at gems et cetera, contributing to 20% plus growth in those businesses.
Moving now to slide eight and the advanced health care solutions.
Total revenue increased 9% in the second quarter with core revenue growth of 3% low.
Low single digit growth in North America, and low double digit growth in Western Europe was partially offset by high single digit decline in China related to the Covid, lockdowns, which reduced the number of elective surgeries in China.
Covid pressures associated staffing challenges along with supply chain constraints within capital equipment persisted as expected limiting revenue growth across the segment in the second quarter elective procedures improved in North America contributing to mid single digit growth in ASP consumables.
The team continues to implement FBS tools driving productivity savings, which in addition to the accretive benefits of the probation acquisition contributed to 300 basis points of adjusted operating margin expansion in the second quarter, including a 150 basis points of core <unk>.
Some other highlights in the quarter include census had another quarter of very strong performance from its sense attract SaaS offering which was more than offset by a difficult prior comp and marking hardware on a two year stack basis Sensus revenues grew 17, 5%.
Probation Gi business grew revenues and orders double digits. There are several competitive wins, including a 16 sites standardization order from essentially a health where half the sites are SaaS migrations and the other half are new apex wins.
Turning to slide nine the Florida business system continues to be a differentiator for us, enabling our businesses to enhance supply chain resilience drive innovation and profitable growth and build capabilities in our leaders to effectively deliver on our commitments and distinguish our performance in an otherwise very challenging environment.
Examples in the quarter include using kaizen to utilize closed loop production and operations in our Shanghai facilities accelerating the restart of production, ensuring availability of supply and creating new demand opportunities effectively mitigating the impact of Covid related lockdowns in the region in the first half.
Utilizing lean portfolio management at fluke to align new products to strategic growth areas similar to what we're doing at Tektronix. This has meaningfully improved our product vitality doubling the three year revenue potential for new products.
Probation is utilizing a bayer rooms to significantly accelerate SaaS migration bookings and daily visual management implementation at a current is driving a significant improvement in net working capital.
As you can see by all these examples and our performance in the quarter, we had tremendous success applying FBS.
And with that I'll pass it over to Chuck who will provide more color on our second quarter financials, and our second half 2022 outlook.
Thanks, Jim and Hello, everyone I.
I will begin on slide 10, with a quick recap of our second quarter performance, we generated year over year total revenue growth of 11% with core growth of 9% acquisitions contributed five points to total growth, partially offset by FX, which reduced total growth by three points in the quarter turning to the major regions on the right.
<unk> slide.
North America core revenues were up high single digits with contributions from each segment and strong double digit growth in software and services.
In Europe revenues grew mid teens again with favorable contributions from each segment, including a return to growth at AMETEK.
We had low double digit growth in Asia outside of China, While China revenues increased to mid teens as we mitigated the Shanghai Lockdowns that Jim highlighted earlier, we also continued to build backlog in China was approximately 20% order growth in the quarter as customers look to replenish inventories.
Assure access to supply heading into the second half and 2023.
Lastly, we had strong double digit revenue growth across our high growth markets.
On Slide 11, we show operating performance highlights in the second quarter adjusted gross margins were down 30 basis points, while adjusted operating margins expanded 190 basis points to 24, 1%.
Margin expansion and operating margin expansion were both negatively impacted by 70 basis points of transactional FX headwind in the quarter, which was more than offset by over 500 basis points of price in the quarter demonstrating the excellent job. Our teams are doing and planning price increases to offset higher end.
Put costs adjusted.
Adjusted earnings per share increased 18% to 78.
Reflecting strong fall through on higher volumes as well as lower share count, partially offset by higher interest and tax expense.
Free cash flow was another standout at 276 million, which reflects 98% free cash flow conversion in the quarter.
Turning now to the guidance slide 12, and the outlook for the remainder of the year, we expect core revenue growth of high single digit to low double digits with adjusted operating profit margins anticipated to be up at least 100 basis points year over year in both the third and fourth quarters adjusted.
Adjusted earnings per share are expected to be in the range of 74 to 77 in Q3 up 12% to 16% and in the range of 85 to 88 in Q4 up 8% to 11%.
For the full year 2022, we are narrowing the total revenue range to reflect incremental FX headwinds.
Racing core revenue growth to 8% to 95% with higher core growth in every segment adjusted operating margins are still expected to be up over 100 basis points for the year and we are raising the midpoint of our adjusted earnings per share outlook to $3 seven to $3 13.
Reflecting better operational performance in addition to lower taxes more than offsetting <unk> <unk> of incremental FX headwinds and <unk> of higher interest versus our prior guidance.
We expect free cash flow conversion to be seasonally strong in the second half and averaged approximately 105% for the full year.
Moving to slide 13, and the updated revenue walk for the year starting on the west.
First half revenues reflect our outperformance in Q2 more than offsetting incremental FX headwinds with stronger than expected performance in iOS.
The shift in Shanghai related revenues back to the first half as lockdown countermeasures allowed us to recover volumes that were previously expected to get pushed to the third quarter.
Looking at the right hand side of the chart. We've updated the first half to second half revenue Bridge. We showed you last quarter and now reflects a lower step up of approximately $110 million and volume supported by our robust backlog position and continued pace of recurring revenue growth across our portfolio. We also.
<unk> 10, bad favorable price in the second half versus the first.
On a net basis the second half core growth average is 10% at the midpoint and is roughly 16% on a two year stack.
Incremental margins on sequential volume are expected to fall through at attractive levels contributing to strengthening margin performance in the second half in.
In summary, our portfolio continues to show the benefit of the actions we've taken to build a more durable growth company with high recurring revenue profile mitigating the risk of slowing demand in the second half.
Turning to slide 14, as Jim highlighted supportive of today is delivering higher more profitable growth and there's nowhere that this shows up more than our free cash flow.
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 over.
Over the last few years, we've taken proactive steps to strengthen our balance sheet, which combined with higher free cash flow generation.
Ample capacity to invest for growth and compound returns through disciplined and accretive capital deployment.
As a reminder, we deployed $2 6 billion towards M&A in the second half of 2021 and continue to prioritize M&A as the primary driver of capital deployment.
In addition, we Opportunistically bought back shares in the second quarter totaling 4 million shares year to date.
At the current share price, we continue to see compelling returns consistent with the return criteria of all of our investment.
As we exit the year with relatively low leverage of approximately one five times net debt to EBITDA, giving us substantial M&A firepower to continue to invest in our businesses.
<unk> strategy and enhance total shareholder returns.
With that I'll pass it back to Jim for some closing remarks.
Thanks, Chuck we're now on slide 15, before we move to questions I want to spend a few minutes highlighting the positive impact we are having for customers employees suppliers and the communities as we advance our sustainability mission.
As many of you know we published our 2022 sustainability report in June and I'm incredibly proud of what we've accomplished the aspirational targets, we continue to set and the robustness of our reporting initiatives such as alignment with key ESG reporting frameworks, including <unk> SaaS Tcf.
And the UN global compact as a signatory.
This report serves as our communication of progress towards the principles and the UN sustainable development goals.
We also made significant progress across each of our sustainability strategic pillars, including achievement of our 50% greenhouse gas emissions intensity goal early reducing scope, one and scope two GHT emissions intensity by 51% between 2017 and 2021.
As a result of achieving that target early and in keeping with our continuous improvement culture, we have set a new and more aggressive target to reduce absolute scope, one and two GHT emissions, 50% by 2029 for 2019 levels. The goal, which is aligned with the science based targets initial.
Guidance.
We improved in each of our inclusion and diversity leadership goals, including gender inclusion and senior leader diversity and lastly, we exceeded our performance on our supplier diversity spend target in 2021 and completed 100% of our supplier audits as planned despite COVID-19.
There is much more on the report, including examples of our innovative and sustainable products and services and we encourage you to check it out on our website.
Lastly on slide 16, we are demonstrating successful execution of the Florida formula even in the most difficult of times to drive more resilient growth double digit earnings and free cash flow growth.
We said that 2022 is a show me year, we are on track to meet or exceed our commitments, including mid single digit annual core growth on a three year stack basis.
More than 300 basis points of operating margin expansion, 50% growth in earnings and 90% growth in free cash flow all while navigating unprecedented prolonged headwinds.
This differentiated growth and profitability amongst our industry peers is a testament to FBS driving innovation demand generation and profitable growth in 2022, and beyond and is helping to generate 50% more cash per dollar of revenue recognized.
As Chuck highlighted that creates more opportunities to deploy that cash to accelerate growth and compound returns through disciplined capital deployment.
As you've seen with our first half performance, we're incredibly proud of the contributions from our Florida team around the World. This July we celebrated our six year as a public company.
Since our inception, we have endeavored to build a truly special company, while net yields best in class performance.
As you can see in 2022, we have made considerable progress against this goal with strong growth through the strength of our highly desirable brands and technology outstanding margin performance and the quality of our portfolio and exceptional free cash flow through the power of our business system.
Look forward to your questions and with that I'll turn it back to Atlanta.
That concludes our formal comments, Rob we are now ready to take questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Our first question comes from the line of Julian Mitchell from Barclays. Your line is open.
Hi, good afternoon.
Maybe.
Jim and Chuck just a first question around the.
The IHS segment.
Yes, that's the one we're sort of pricing seems to have been.
A little bit at 1% in the first half versus.
<unk> was $7 600 points higher than the other two divisions and the overall core growth sort of 4% this year.
How are you thinking about that.
The main headwinds on the pricing and the volumes aside from the China impact in Q2.
And when we're thinking about say the out year 'twenty three.
There are some factors that could take that growth rate a little bit higher.
Yes, Julian how are you.
Number one.
If we really think about IHS in the second quarter really came in from a core growth perspective, as we anticipated a little bit of puts and takes with electric procedures, a little bit better in North America.
Versus and then obviously, China, a little obviously much worse in China, we would anticipate for electives, it's still going to come in the way we thought for the year.
I would say we feel good about the acceleration of core growth at IHS in the segment itself in the first half first quarter to the second quarter and we think it will continue to accelerate into the second half we did see some supply chain issues with equipment that was in our guide we anticipated that we will see those things get better in fact, we saw.
Sorry to see the kind of equipment production that we need to see in June .
We're already seeing that what we need for the second half. So so we take that step up in core growth will be there.
Relative to price.
We will continue to get a little bit more price in the second half than we did the second quarter, but.
Just a little bit more difficult to get pricing in this environment, but we are ahead of price cost. So I think in that sense.
Really we were.
We're in a great place with margins in the second quarter and IHS in fact, if it hadn't been for some current.
FX, we would have been right on the guide so I think where we stand with the segment is in a very good place.
Get a little bit more price will continue to work on price into next year, but I think relative to price cost. We're in a better we're fine we haven't seen as much inflation on the on the input side and health as we have in some other places. So we're good we're good in that segment, but it's going to take a little longer negotiating some of those longer term contracts to get more.
Price in the segment itself, particularly at Asps.
That's helpful. Thank you and then maybe one on.
Capital deployment.
Im going to ask you about the M&A pipeline, but.
If we look at say the buybacks that did step up in the second quarter.
Chuck had talked about one five times leverage ending the year. So I'm trying to figure out that current share prices, what kind of buyback spend are you planning on I think given the comment of sort of compelling returns right now and there are masses of guidance numbers in the deck, which makes our lives a lot easier.
Share count was may be one that I missed.
Just wanted to let you dialing in for the year on share count vis vis the buyback discussion.
Well Julien.
As you know M&A remains our priority here.
Where we're saying there is and where our leverage will finish the year without any capital deployment, we're not forecasting we don't we don't forecast.
Share buybacks.
As it's not really a program, it's just being opportunistic but as you note in the first half we did by $4 million in the first half over the first two quarters and will continue to be opportunistic.
As we move forward and Julian This is Elena we ended the quarter with 358 million shares outstanding so that would be the appropriate assumption going into the second half.
Great. Thanks very much.
Thanks, Julien Thank you.
Your next question comes from the line of Andrew <unk> from Bank of America. Your line is open.
Yes, good morning, I guess good afternoon. Good afternoon, now sorry, I have been here for a while.
Hi, how are you.
Actually will fall.
Off on the sort of M&A pipeline and more so there is a lot of talk about interest rates changing environment changing are you seeing fundamentally any change.
Maybe.
But equity exiting maybe more strategic buyers reset of buyers' expectation sellers' expectations or is it just too early to tell.
Yes, it's a complex question, but obviously private equity as a buyer and a seller. So there are obviously seeing it on both sides, but I would say what we've seen.
Really here at this point.
Andrew is really one where.
I don't think we've really seen reality set in and a number of places.
There've been some things transacted it still higher prices here in the last 90 days.
But I don't think that's reality going forward. So I think it takes a little while we've seen we've seen things take longer for sure. We will continue to remain busy, but but we're going to be disciplined here in this in this kind of time horizon. So I think that's where it's at right now as I said, a couple of quarters ago. It was a 12.
Month day, maybe even 18 months kind of time horizon. We're obviously six months into that kind of timeframe I suspect maybe we'll start to see some things here maybe later in the fall start to look.
What I'll call more normalized.
Yes, John that's another another question for you. This earnings season, one of the surprises I think sort of across the board just western Europe just on the margin.
Just looks okay.
Even for you it's.
Mid teens core.
<unk>.
Why is Europe , so good and why we're not seeing more of a headwind from.
Al.
What's actually happening there. Thank you.
Yes, I think I think western Europe has been a good story for us.
Certainly true as you said, if we look at kind of normalize it a little bit more in the quarter, but it sort of normalizes.
Paired to North America, if you look at the first half.
Orders are actually a little bit better in North America, So I would say, but we're seeing it probably is a function in the quarter a little bit more just of getting more backlog out.
We probably have a little bit more backlog in western Europe , just because of the location of our factories.
Many of them in the U S. So it's a little bit that and help it was really the <unk> that we called out in the prepared remarks, so, but but we are seeing good good business right now in Western Europe .
Now if you look at the entire European theater, including high growth market Eastern Europe , Russia, then you start to see a slightly different story, you'll start to obviously see the slowing because of some of the Russia impact So it's really.
It's a good story in Western Europe , if you step back and look more broadly it does tell a little bit slightly different story in that might fit a little bit more some of the headlines we're seeing but but I think as we look through the year, we're still going to do pretty well in western Europe .
Terrific. Thanks, a lot.
Thank you.
Your next question comes from the line of Steve Tusa from Jpmorgan. Your line is open.
Hey, guys good day.
Hi, Steve.
What do you what are you guys seeing in China.
And in particular, I guess outside of the healthcare stuff.
Just the the more industrial type of stuff.
Yes, I think I think one of the highlights of obviously the quarter was obviously, how China has come back.
I think one data point that Chuck and I look at Steve is our is our at fluke as our point of sale, which was high single digits and our shop channel, which is more broader view of the economy was actually double digit in the quarter. So so I think from that standpoint, we had good we had good business in sensing we had good business as you said other.
Then really our health businesses, China was was good in the quarter, obviously, a little slower in the first quarter. So when we look at the first half so decent and in those businesses and I suspect, we would plan and assume that thats going to continue here in the second half, it's pretty broad based it's with our Oems on the sensing side have been pretty good.
Good and again as I said, a number of places at Fluke and Tek, where we're seeing good good business. So we think health care, probably does continue to be a little challenged here for at least another quarter relative to what we're seeing in hospitals, but the remaining part of the businesses.
As in a good place.
And then one last one.
<unk> and accruing.
You have up low double digit in the quarter I think it was I saw on the slides.
Yeah.
I think that's better than you guys had been expecting.
What's going on at those businesses in <unk> and how are you.
Accelerating the growth there I recall, there being some question marks around the growth of it.
I think it was accruing overtime.
Yes.
As we increasingly think about the business, we're going to increasingly think about that is the combination of those businesses are probably service channel we've traded some product lines.
Between businesses and obviously, we are going after some things.
With with common.
<unk> channels and stuff so, but as you said gordian is very strong on the backs of.
Good state and local spend.
We think that continues certainly some of the things.
What we're seeing out of Washington are going be helpful to that business as well we mentioned some of the good wins that we have with current or increases in business that we have with some really strong customers like the city of New York.
I think we're just seeing good dynamics I think we've seen that we're starting to see the turnaround in our current that we've been talking about.
Eliminates a nice job there with the team and bookings are going to be we're going to continue to get better through the year. So.
I think in general a lot of our countermeasures <unk> put a lot of effort and energy into into really sort of optimizing gordian really helping that team they're great user of FBS accrual I think as we've said has been a fix it story starting to see some of the some of the results of some of that work and that will that will continue to play out through the year.
Great. Thanks, a lot.
Your next question comes from the line of Nigel Coe from Wolfe Research. Your line is open.
So.
Just to get into the into the guide for.
For OSP margins, we go flat margins in <unk>, and then go hundred basis points expansion in <unk> year over year. So just wondering what sort of the underlying assumption there is.
In terms of what needs to happen to drive that.
Improved operating leverage for the ESP.
The Hs.
So.
Nigel I'll take that Ed.
In the second half really yet not not much other than normal sequentially growing, particularly in the fourth quarter.
Alright.
Added to that so nothing super human there.
The levels that we're seeing there.
They are struggling off pretty well and showing that that good margin expansion. Despite FX. So we're really pleased about that and we saw it a little bit of that in.
Q2, as well, but actually saw.
So its quite nice core margin expansion in Q2 of this year. So when you look at Q3 and Q4.
Need some big step up its just normal fall through is based on where we sit right now I think we had a pretty decent head on one time FX in the quarter in the second quarter for Hs or margins would've been even better. So I think when you take that into account. Nigel. This is really kind of a normalization of what we have and as we set a great.
Margin story it in that segment.
Great.
Sounds like the transactional FX is heading EHS more than the other segments.
Wonder if you can just maybe just clarify why that is because im sure I understand why but.
On the free cash because I did want to touch on free cash flow and my follow up.
You're obviously very impressive, especially compared to some of your peers, but.
Are you absorbing the R&D tax credit headwinds this year.
Within that number because if you are even more impressive but just wondering.
How that's impacting things.
Yes.
Nigel Thanks for the question, Yes, we are we anticipated that when we put out a guide for this year.
We've got about $20 million in the first half of this year.
And probably looking at another $40 million next in the second half, but again thats already contemplated.
And the guidance.
So the question on the transactional FX, it's actually hitting all all of our segments.
Hey.
What youre seeing there in terms of different from what we guided is at IHS there revenues coming in really basically where we thought they would in Q2 and the other two are coming in a little stronger. So it's hiding what is actually hitting all three of them.
Alright, Thank you very much.
Your next question comes from the line of Jeffrey Sprague from vertical research. Your line is open.
Hello, everyone.
Hello.
I Wonder if we can get a little more color on.
Products.
Both kind of what's driving the order strength and just looking at the <unk>.
The book to Bill at that level I would assume there is still some issues getting so.
The door kind of impacting the backlog and book to Bill, but could you.
Please give us a little color on both sides of that equation.
Yeah sure I think we're really excited about the work that the team has done over the last several quarters from an orders perspective, a lot of innovation that we've really launched Jeff we talked a little bit about it in the prepared remarks.
The book to Bill I think in the in the second quarter was like one point.
<unk> almost one three so so they continue to see good orders even on the backs of mid single digit growth, they're going to be they're going to continue to do well, it's really an innovation story.
They're taking advantage of we launched the two series, which we mentioned in the prepared remarks, which which is obviously very good. We've also had enhanced five series launch and.
Some follow on scope follow on.
Probes and things like that that go with those products. So it's an innovation technology story.
Obviously the market is good we've talked we've talked about not only <unk>.
Getting some benefit you were certainly getting benefit from some of the semiconductor investments.
Folks, but we're really getting the benefit of of how just more digital technology being in everything from the power challenges of EV batteries to the power challenges that are in our small Iot sensor really everywhere, where we have got now more digital more digital transformation going on we've got more R&D.
<unk> needed.
More more investment needed in order to order to deal with some of those challenges, particularly around the power side. So they are taken advantage of those strategically that they've really.
Pattern their strategic plan over the last few years and that strategy is playing out well now.
<unk>.
See good order growth there.
They are now starting to get caught up on some of those orders as we said with mid single digit growth in the quarter that obviously means theyre starting to get things were starting to get we have very low inventory with channel partners, So pretty much where we're really hand to mouth on everything mostly in our channels. So so the opportunity now to really I think continue to build the business here is just.
Really strong in the second half as well.
Interesting and I think the last time, we talked you had mentioned.
Some of the activity that youre seeing.
Sort of showed a kind of a reassuring elements as people were kind of pivoting, where they were investing or where they were maybe preparing the capitalized.
Production.
Could you maybe elaborate on that a little bit more is that still going on in the business. Yes. We don't we don't play a lot in the production side of semiconductors, but obviously it is on ensuring occurs relative to semi is certainly what has been announced here out of Washington will benefit from that because those are going to be many times new.
<unk> of designs or are going to be.
Certainly going to be required from a from a keathley perspective, we do have some semiconductor opportunities. There. So they will benefit from that kind of investment and more broadly because there is if we think about the bill that's out there now also have the billions of dollars invested in technology investment to really bring all industries within the.
United States up from a technology perspective, and anything that goes into innovation and into any investment that goes into R&D budgets, particularly around hardware is going to benefit tektronix. So as we said that we've talked to you a little bit about the secular trend. There are some secular drivers around here and we certainly think.
Even even the latest headlines would suggest things might be even slightly better.
Okay.
Great. Thanks for the color.
Thanks Matthew.
Your next question comes from the line of Scott Davis from Melius Research. Your line is open.
Hey, Scott Hey, Jim Chuck.
Chuck Atlanta.
For the color here.
The order book up 12%.
The big number of us sometimes these things lack some context is the price in that order book consistent with the price that you are posting today kind of in that 5% ballpark or is a little bit higher.
No it's about the same Scott.
5%, what we saw in the third.
The second quarter, we would expect that in the second half as well.
Okay. So its strong.
And then just getting a little of a new sheer service channel. If you can help us kind of understand the sales cycle, a little bit better I mean, it's pretty big growth numbers.
This quarter are there are there any kind of variations in that sale.
I should say.
Updates or whatever they may cause people to buy ahead of price increases if people buy ahead of them are.
New product launches that people pile on industry.
Lumpiness to that business that we should be aware of.
Well, yes, there is a little bit of.
Yes, theres a little bit of there is a little bit of a bump in this in the sense of they do have some portion of managed service.
They run they run procurement of services through and that can that can get it can be a slightly heavier.
At certain points in time, and they did benefit from a little bit of that but when we look at the peers. The SaaS part of the business and the AI part of the business, it's very strong and in fact it is.
It's 20.
<unk> 20, plus percent kind of growth and so we feel very good about where their station from a growth perspective. So.
It's the sales cycle itself is pretty.
We don't really see the buying ahead or anything like that it's.
It's a pure SaaS model. So we don't we don't really have a license aspect to it.
So we've just but the sales cycle with a big retailer or big user.
Somebody who has a number of facilities.
Fairly long sales cycle, so we won't see anything dramatically move up or down from from the standpoint of that we secure a whole bunch of customers in 30 days or something like that work the funnel looks good for the second half we feel good about it. The team has done an excellent job of I think we're going to we're going to get into core here.
At the tail end of the third quarter, and we feel really good about where the business of station today, we're making some changes around the innovation aspects and offerings that will start to see in 'twenty. Three that we're excited about we just think in general the business is off to a very good start.
That's helpful color Big numbers, Thanks, Jim and good luck to you guys.
Thanks Catherine.
Your next question comes from the line of Andy Kaplowitz from Citigroup. Your line is open.
Good morning, guys.
Hi, Andy Jim You mentioned, the higher recurring footprint that Florida has along with a record backlog that you've continued to add to when you did also mention that your backlog should help you in 'twenty three in the presentation. So how much confidence to those metrics give you as you potentially enter slow growth environment and how likely is it that you could grow even if the world does monitor.
Really slow.
Well, we certainly as we sit here with the first half.
Knowing we would get some 23 questions.
I would say a couple of things around.
What we think.
Obviously every slowdown if there is one has a slightly different aspect to it. So no no. One is as perfectly predictable, but I would say a couple of things that we know to be true. We are probably going to end the year with twice as much backlog as we started.
2021 January of 'twenty, one so so while twice as much backlog starting the year as we did.
We're going to start with as you said the high recurring revenue.
Aspects of the business both on the software said on and on the healthcare side with strong consumables, we think Thats, obviously, a really good thing we're going to we're going to we're going to go into the.
The cycle.
Started the year as well with a number of efforts that have been multiyear around our organic efforts to attach all of our businesses to better secular drivers whether that's the service strategy that we've had at tektronix for some of the things you are playing a scene play out and some of the environmental work that we're doing within sensing all of those things are going to be less dependent on.
What the macro looks like so we think those three factors from a framework perspective.
Youre going to set us up well and I think depending on the scenario. We certainly think there is growth to be had for sure in 'twenty three.
And obviously, we'll get through the remaining part of the year and see what happens, but but those three factors are going to really be strong things going in and even and were building scenarios around what could happen.
And understand what that is and I would just remind everyone that in 2000, when we had some pretty significant COVID-19 challenges, we still grew earnings and free cash flow. So so our ability to apply FBS to these scenarios in a very difficult environment. We certainly have a track record of that but we set the portfolio up to be more resilient and.
And we'll see how things play out, but we're we're pretty confident we're going to be much more durable and resilient than we've ever been before.
And Jim I, just wanted to follow up on something you said earlier on this conversation I think you said.
Last quarter that channel inventory was a little elevated at fluke and tek, but youre generally feeling good about it and I think Jimmy just said that your channel on Tech actually it was pretty lean so am I hearing that right or maybe you could just clarify your channel commentary.
Yes, sure I think the tech it's pretty lean.
And because demand has continued to be good.
And so I think we're going to be we're pretty hand to mouth in a number of regions around inventory.
That's the tektronix.
<unk>, what I said last time was when we looked at we look at both the inventory in the channel and what they have on order and in backlog.
And what we saw in the second quarter as some of that order and backlog moved into inventory.
And so the number itself didn't change dramatically, but the but the makeup of it was a little bit less backlog a little bit more inventory, we actually think that's a good thing.
Because we've had mid single digit growth in Pos here, and we think without really hardly any demand generation. We've held off on the demand generation standpoint at fluke, because we didn't want to be out there with lots of demand generation. If we couldnt fulfill those orders. So we're going to turn that spigot on in fact, we've already turned it on we're going to we're going to go lean.
The end of the second half relative to demand generation investments now that we've got channel inventory in a better place where we can help our channel partners deliver on a more consistent basis. So we actually think that's a little bit more inventory and what we're seeing right now will help us drive a little higher Pos in the second happen, we think that overall, it's a good thing for us and our customers.
I appreciate all the color.
Thanks, Andy.
Your next question comes from the line of Amit.
Gary on any from Evercore. Your line is open.
Okay.
Yep.
Good afternoon, I guess, everyone I.
I guess two questions from me as well also from a free cash flow I was hoping you just talked about when I look at the free cash flow trajectory for the back half.
As a pretty big uptick in Q4 free cash flow both dollars and conversion rate, maybe just talk about what is driving that dynamic for you and then.
In aggregate when you look at your working capital metrics.
I think those are sort of peaked and as you get into 'twenty three more importantly does that become a source of free cash flow generation incrementally for you.
And it is Jack I'll take those two questions.
The second half is always seasonally stronger in the first half we payout.
Incentive comps and so when you compare first half second half is going to be stronger in Q4.
There is a little bit more in shipments.
And then when you look at Q1, there is a step down in <unk>.
What you see us.
Doing is relieving some of our working capital and that those are a couple of the dynamics that would drive that.
In the fourth quarter to be stronger.
Keep in mind, we are very pleased with up 11% of our free cash flow in the first half so feel really good about that and keeping that.
The biggest thing.
We were looking at is a backend loaded Q2 was that China with this while being locked down in April and May and so we think that we've got.
Strengthening even from what we normally would do over cash flow so super.
Positive about that the working capital trends.
I do think that maybe with supply chains, we would expect particularly inventory is more at peak levels and as inventory as the supply chain continues to get better. It's still a very tough environment. You could you can theorize in 2023 that we would.
We would expect to reclaim some of that ground in inventory, but having said that we've done a fantastic job with our working capital.
<unk> really been benefited from the working capital that you get with software.
Fair enough.
Just follow up on Europe , I know you've talked about this a bit earlier about the growth of mid teens is really impressive given all the macro worries people have in Europe .
I was wondering if you could talk about and maybe if you have a sense if your customers in Europe .
When they get the products from <unk>.
Flying it and.
And use cases are the holding it in inventory and I'm, just thinking out loud on a scenario where given all the fears of energy shortages that could happen in the winter in Europe .
Good customers logically just be building up inventory.
Due to offset those issues have been some that have a money if youre seeing any of that or any shift in patterns.
Direct to the OEM versus channel just anything you can talk about.
Yes, I think I think number one is we've seen pretty broad based.
Success, there as I was mentioning in two minutes ago, but I would say we've seen point of sale is good as well so.
Don't feel channel partners are stocking up or anything like that and for the most part when we look at the businesses.
Fluke is one of our larger European business as we don't typically see people stock up fluke products, they really take them to use them.
So from a from an end user perspective taxi is pretty much very much the same way. So so I feel pretty good about a good chunk of our revenue base is really not stacking up but they're really it's selling through the channel partners and it's being utilized I would say on the we are seeing some of our software businesses. Many of our software businesses that we purchased.
Have didn't have big European footprint, and we've been expanding some of that so we're seeing some growth in software there, which has a little bit of impact here and I don't I don't anticipate that to be an issue and as we mentioned.
We think the overall environment is has been on the sensing side, we might see a little bit of that we have a pretty good sense of that though we know when the orders are are out there and so we'll probably see a little bit possible, but I don't think it's meaningful and from.
From a standpoint of three or four quarter outlook of Europe , I don't think that's a meaningful number. So I think on balance we feel we feel good about Europe , but I think we like everyone. On this call probably looking at some of the macro factors some of the some of the.
Some of the things that might occur in the winter certainly looking at it and keeping a real real sharp eye on what my any trajectory changes that we might see over the next call.
Between now and the end of the year.
Perfect. Thanks lumpy insights.
Thank you. Thank you.
Your next question comes from the line of Deane Dray from RBC capital markets. Your line is open hi.
Everyone.
Hey, let me go back to page five I really like that.
David mix revenue mix and how.
How would you describe the target and the path or the 40% recurring revenue.
Is there a timeline where that.
Sure today, or where you think it begins to level out.
Okay.
Well I think number one.
We're continuing from an organic perspective across the businesses to seek out new business models that that even in our current businesses as you know while dean things like some of the things we're doing around our cloud offering at Tektronix, which is just very early today, but it's going to have a recurring theme to it in the next several years.
Organically, we are building on it and then of course, we're getting the software businesses are going to grow inevitably obviously, the growing well really really well right now along with our hardware businesses, but the long term growth rates of our software businesses are better and that compounding is going to continue to add to what we want to try to do what we are.
Trying to do relative to the business model. So you would see that number continue to tick up without any inorganic activity and then of course, no matter hardware or software I think one of the things thats been consistent with our acquisition strategy over the last six years has been that almost exclusively our acquisitions have had a had a recurring theme to them sometimes.
We're consumables like ASP landauer, sometimes their software.
But fundamentally they've had a recurring theme to them and while I wouldn't say it will be that will be exclusive it will certainly be the majority of capital that we deploy over time and so youll see that 40% continue to go up over time I suspect both organic with both organic and inorganic efforts.
And then.
Back on page four I, just want to make sure I have the mechanics of this right on the <unk>.
Covid lockdown being mitigated.
So does that $55 million does that constitute a pull in from what was expected to be in the second half and was that in your second quarter Guide.
So it would deem.
If you remember when we talked about second quarter, we talked about revenue shifting out because of the lockdown in China into the second half and so this is I think of it as a return to the second quarter.
And so we didn't have it.
We didn't expect to get this in Q2 the team did a fantastic job about.
As we said mitigating some of those things, but it's just a return to where we originally had forecast.
Thanks for clarifying.
Thanks, Dave.
Your next question comes from the line of John Walsh from Credit Suisse. Your line is open.
Hi, John Hi.
Hi, How's everyone doing.
Okay.
<unk>.
The first question was just if you were to think about your SaaS software assets.
<unk> had them for several quarters now have you seen any discernible change in the pace of new logo adds or customer retention or you're kind of accelerating has growth plateaued. There just any color around that you can provide.
Well I think I think when we think about our growth.
We talked about kind of the bookings level.
Our trailing 12 month number is around nine ish percent or almost 10%, it's going to be double digit by the end of the full year set by the end of the year. So we can really see SaaS accelerating.
We continue I think customers continue to look for cost savings and so many of our SaaS offerings are really cost savings driven but we've always said, we position the portfolio around safety quality and productivity and so a number of these offerings allow them to continue to do.
Do the things they need to do I would say the one place where we've seen a little bit of.
Maybe the funnel moving out a little bit is in health care software we're starting.
Starting to see a little bit on the new logo side, where some staffing shortages and it organizations and things like that have pushed a few things out a little bit but we are also on the other hand, when we've had the customer we mentioned in our prepared remarks. The probation example, where we have a customer where it was the SaaS upgrade and new logos new.
SaaS, we were able to close that relatively quickly. So the so the upselling and cross selling is happening at the same pace in healthcare the new logos may be slightly longer a little bit I think more broadly we havent seen much in the areas of really delays to much more broadly across the portfolio. So that's why we see SaaS continue.
To accelerate in the portfolio through the year.
Great and then maybe just a modeling question here you provide a lot of detail there.
The one if I look at iOS just based on the ranges you provided it looks like in Q4, that's the only one that might be down sequentially. I don't know if there is some mix there or its just theres a wide range on what the greater than symbol means on your guidance slide.
<unk>.
Well I think I think number one.
Wouldn't.
Theres, probably a little bit in the rounding there.
IRS margins are going to continue to be good.
I don't I don't think we have anything discernible changes relative to the to that we can get back down the specifics around modeling, but but I think what you saw in the quarter and iOS very strong margin expansion.
We will continue to do I think a good job of probably a little bit there might be a little bit.
On the comp side, but I think where we stand today with margins pretty much every business is getting better.
As we move through the year. So I think I think we're going to continue to see strong margins as we progress through the year.
A bit more of a rounding they just went to a solid number and we obviously have the impact from FX.
And the one time FX impact on the transaction component.
Broker into the full year.
Yeah.
Great. Thank you.
Thanks, Sean.
And your final question comes from the line of Joe Giordano from Cowen Your line is open.
Hey, guys. Thanks for squeezing me in.
I think some of the pricing dynamics for many companies are kind of skewing, though year on year comparisons a little bit if I was to think about the orders from your more industrial businesses on a sequential basis from here. How do you kind of see them going are those going up consistently on a sequential basis still or are they more like kind of.
Staying flattish at a high level.
Well first of all prices are pretty pretty good constant from the second quarter to end of the second half. So you can kind of think about that is a constant.
It's sort of it does depend on the business because of the amount of backlog.
And also we will start to see orders in in and sensing as an example, probably probably look to.
We will start to see 23 2023 dates on them. Because we are we are seeing a little bit of of sensing tech customers a little bit of buy ahead still strong growth on a two year stack, but that's how I would think about it. So that's number one we'll see we'll see continued strength in orders at tektronix through the year.
Luc will slow a little bit, but that's really a two year, that's really more of a.
Comp thing than it is anything so we really think when you look at both volume and price, we'll continue to see strength.
As we as we go through the year, obviously revenue is going to get a little bit better on the core side.
Hence our hence our upgrade our increased core, but I wouldn't I wouldn't say, there's any real change in dynamics.
Im assuming the base of your question is is there a big change in price versus volume in the second half I don't suspect there is at this point.
But we're going to continue to.
Really do things like the demand generation activities I talked about at fluke, and we'll see how that plays out through the year, but.
I think the good that we've been in a good place relative to price volume in the first half we like we like where that is that I suspect we will in the second half as well.
And just last thing for me when you talk about Gordian and <unk> and maybe even service channel starting to combine a little bit like what does that actually mean for those companies that does this ultimately become one single brand under for Dave or what logistically needs to happen for those businesses to move that way.
Well I think I think what we've tried to do from an IR perspective is give you the perspective of the performance because of some moving pieces between between the between them and it just makes sense.
What we do strategically branding product lines product portfolio still to be determined we certainly have a similar customer base in certain situations, we're managing that.
Credibly well, while we are separate companies, but.
Inevitably we will start to bring some things together probably from an architecture perspective, if you were to take a longer term view, but still early days on all of that the team is still bringing all that together I think the story, though is continued acceleration of performance margin expansion is very strong we mentioned that one thing we didn't talk about is is where.
Little ahead, both when we combined service channel and probation from an earnings perspective, and EPS perspective, a little ahead on the first half. So we're in a really good place not only on a growth standpoint book, where we stand in margins in those businesses. So we're going to end up with the combination of those businesses with an over half a billion dollar revenue base with very strong margin.
Capability strong margins today, and even stronger margins two of those businesses are rule of rule of 50 businesses.
Already and so real opportunity or almost <unk> 50 businesses, so that entire segment ought to be able to be that way in the future. So I just think we're really well positioned strategically no matter, how we sort of put them together don't put them together.
We're going to be in a good place we are in a good place long term to really build that franchise really well.
Thanks, guys.
Thank you Joe.
And this brings us to the end of our question and answer period I'll turn the call back over to you Jim for some closing remarks.
Well, thanks, Rob and thanks, everyone today for joining us we couldnt be more as we as we said in the prepared remarks hard to believe we just celebrated our <unk> anniversary.
With a lot going on we appreciate truly appreciate the support that all of you on the call have had for us over the last six years. We said 2022 was a show me year, we think the first half really demonstrates that in so many ways across the portfolio, both the breadth and depth of the quality.
Of what's going on in the business is just something to be incredibly excited about we're even more excited about the second half we think there's even more opportunity to do a number of those things. We'll continue to obviously have an opportunity in the follow up calls to give you a little bit more detail on that but we're set up well, obviously a lot of uncertainty out there, but we've weathered a lot.
A lot of the storm exceptionally well and I'm highly confident we'll continue to weather the uncertainty and things that might be in the outlook no matter, what the scenario and we look forward to continuing to share that if we don't talk to you between now and the end of the summer have a great rest of the summer and we will look forward to seeing you in person hopefully in the fall. Thanks, everyone have a great day.
And this concludes today's conference call. Thank you for your participation you may now disconnect.
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