Q1 2023 Fortive Corp Earnings Call
Thank you for standing by my name is Brent and I will be your conference facilitator of this afternoon.
At this time I would like to welcome everyone to fortress corporations first quarter 2023 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 Star one.
I would now like to turn the call over to MS. Elena Rosman, Vice President of Investor Relations. MS. Rossman, you may begin your conference.
Thank you Brent.
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, you're presenting certain non-GAAP measures on today's call information.
<unk> required by regulation G are available on the investors section of our website at Www Dot, Florida Dot com.
Bateman from 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 to that information regarding these risk factors is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31st 2000 Twenty's.
Two.
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.
With that I'd like to turn the call over to Jim Lico.
Thanks Atlanta.
Everyone and thank you for joining us I'll begin on slide three.
We had a strong start to the year delivering better than expected revenues margins and earnings in the first quarter.
At 9% core growth, we're demonstrating strong execution of our strategy building leading positions across our customers' critical connected workflows.
Our ability to deliver strong growth and continued margin expansion is directly tied to our culture of continuous improvement and dedication to the Florida business system. As a result, we expanded adjusted gross and operating margins by 80, and 100 basis points, respectively, taking margins to a first quarter record expectations for further merger.
Expansion this year and into the future.
Free cash flow in the quarter reflects our normal seasonality as well as the timing of China collections that pushed into April overlay. Our teams have done an excellent job managing working capital and a more challenging supply chain environment as seen by our outstanding performance in 2022.
By harnessing our unique competitive advantages and strong execution capabilities. We are confident in our outlook and are raising and narrowing our full year 2023 guidance.
Turning to slide four.
I wanted to provide an update on what we're seeing and what we expect over the course of 2023.
Starting on the left in the current environment hardware product orders were better than expected down mid single digit and backlog was more resilient with a book to bill of 1.0 in the first quarter.
Our software businesses continue to see good growth benefiting from strong customer value propositions driving double digit growth in our SaaS revenue streams.
Industry challenges remained in our healthcare segment due to China consumables growth in March reaffirmed recovery is underway, we expect momentum to continue and accelerate growth and profitability throughout 2023.
Moving to the right hand side of the slide we are seeing traction on our new product launches favorably aligned to secular drivers, including fluke latest family of solar tools and Tektronix is leading power electronic test systems together with continued software strength and recovery in healthcare, we expect sustained core growth in the second half.
Combined with favorable pricing cost savings and discrete productivity initiatives span all segments, we expect over 75 basis points of margin expansion in the year.
Lastly, we expect robust free cash flow growth again in 2023, which together with our very strong balance sheet gives us confidence that our attractive M&A funnel will provide opportunities to enhance earnings and cash flow compounding in the future.
Turning to slide five we wanted to take a minute to remind you of all the work we've done to transform our portfolio and create focused segment strategies favorably aligned to a number of strong secular trends has resulted in a more resilient afforded with enduring growth and further margin expansion opportunities.
As a result today, we are a stronger collection of businesses with a more diversified end market mix and durable recurring revenue profile that includes leading healthcare and software franchises.
Together with our enhanced innovation capabilities, we have focused our portfolio around multiyear megatrends, including automation digitization electrification of everything and improving healthcare trends to name a few all to reduce the overall cyclicality of our businesses and provide more tailwind for growth by expanding into new.
Markets.
As a result of these megatrends, we see continued growth across our portfolio, including the more durable software and services businesses as well as the nonrecurring portion given the sizeable amount of backlog some of our product businesses are working through all continuing to see resilient demand.
Finally, our portfolio quality is reinforced by the substantial improvements we've made in gross and operating profit working capital and free cash flow as a percent of revenue driven by the rigorous application of the Florida business system.
Turning to slide six.
<unk> is a powerful mindset that makes continuous improvement a way of life at Florida, We drive deep engagement across our teams and hold them accountable for delivering on high expectations.
Kaizen activity accelerating we saw significant results across the portfolio, including material improvement in delivery of past due backlog reduction in our hardware products businesses by improving planning and reducing part shortages with supportive material system.
Florida software system deployment, and our SaaS companies, including service channel. Our current probation is accelerated delivery of software features to customers driving customer value and resulting in higher renewal rates and pricing gains.
Our record gross margins in the first quarter were driven by a significant expansion of kaizen events in the quarter approximately doubled the number the prior year.
Setting us up for improved performance throughout the year.
Turning to slide seven quarter was made sustainability of priority since its founding it is inextricably linked to our company's shared purpose values and business strategy, which you'll read more about in our upcoming 2023 sustainability report to be published in May.
This year's report will further highlight our commitment to sustainability is grounded in our culture of kaizen, leveraging the power of FBS innovate products and services that enable more sustainable outcomes.
You'll also hear how our team has strengthened our responsible sourcing initiatives, ensuring robust review of the labor and human rights practices across our supply chain.
And how are strong and inclusive culture is creating a community where everyone belongs which is positively reflected in our latest employee engagement and inclusion diversity and equity performance.
In summary, we are accelerating progress towards a more sustainable future for Florida, and our customers as well as the environment and the communities in which we operate we invite you to review our report next month.
I'll now provide more details on each of our three segments, beginning with intelligent operating solutions on slide eight.
IOS grew core revenue by 10% as our connected workflow strategy drove better than expected performance in the quarter.
The segment saw good growth in all regions with mid single digit growth in North America, and Western Europe , and mid 40% growth in China lapping prior year shutdowns.
Solid core growth in each workflow and strong FBS driven execution resulted in 300 basis points of operating margin expansion.
<unk> operating margins consistently above 30%.
Looking at our performance drivers by workflow it could actually reliability fluke core revenues grew by low double digits with mid single digit orders growth in the quarter and point of sale remained positive in all regions.
Lukas benefiting from lean portfolio management, driving record revenue attainment, and flukes, new product launches, including the <unk> ft, 1000, solar tester, which are benefiting from strong demand in the energy renewables and electric vehicle markets.
Elsewhere at Fluke EMEA posted another record quarter with strong double digit growth, we are seeing accelerated customer adoption of the X five CMS system with enhanced connected worker capability also closed the largest deal on record with a strategic enterprise customer.
EHS revenues grew by mid single digit with both industrial scientific and intellect, providing solid contributions.
Industrial scientific saw strength across all product lines, including <unk> and orders growth outpaced sales driven by new product launches and cross sell activity.
<unk> posted another quarter of strong SaaS growth with low double digit <unk> growth.
Moving to facilities and asset lifecycle, we had high single digit growth in the first quarter driven by high single digit SaaS revenue growth.
Customers continue to shift larger projects, the guardian's job order contracting platform.
The wind down of end of life programs that are current and the business model change in service channel lowered core growth revenues exceeded expectations and Val as customers continue to seek more productive and digitized solutions to optimize their facilities management for.
For example, a large worldwide retailer is migrating multiple manual processes. The Lewis <unk> real estate management platform at a current and a large enterprise customers leveraging service channels automation services to save hundreds of thousands of dollars a mismatched invoices.
Turning now to slide nine.
<unk> technologies delivered another quarter of strong double digit core revenue growth core revenues increased 14% driven by a high single digit growth in North America, low double digit growth in western Europe , and high 30% growth in China.
<unk> also delivered a 190 basis points of adjusted operating margin expansion with higher volume and strong price realization more than offsetting continued inflation and FX.
Some highlights for the quarter include greater than 20% core revenue growth at Tektronix orders were better than expected benefiting for bookings growth in electric vehicle testing programs. This and strong point of sale in all major regions drove double digit growth across its product businesses in the first quarter, which continued to see good demand for recently introduced entry.
Evel in mainstream scopes.
<unk> technologies reported low single digit growth as expected driven by another quarter of strong price realization across all businesses and continued broad strength the cultural.
Specific scientific EMC reported a second consecutive quarter of greater than 20% growth as the business continued to deploy FBS to improve operational performance.
Moving now to slide 10, and advanced healthcare solutions.
Revenues were flat as the improvement in electric procedure volumes outside of China was offset by some supply chain challenges at Fluke health solutions and the expected headwinds in China electric procedures, and the wind down in Russia.
By major region, North America was up slightly in Western Europe grew mid single digits offsetting a high single digit decline in China.
China elective procedures recovered in March exiting the month that approximately 90% of normalized levels.
Our outlook continues to assume the China electric procedures returned to normalized levels in the second half of 2023.
In the first quarter Hff's adjusted operating margins declined 260 basis points as a result of FX headwinds supply chain challenges at fluke health lowering contribution margins and higher than expected inflation.
Some highlights in the quarter include we exited March with stronger ASP consumables growth reaffirming recovery post COVID-19 is underway with sales outpacing the market in most regions.
Double digit growth in sensus was driven by a sense attract SaaS offering.
This is also seeing strong demand for its AI to productivity platform and continues to drive productivity and permits through the application of FBS tools, which have accelerated the time from bookings to revenue.
Fhl's saw solid demand for equipment orders in dosimetry services. Despite continued supply chain constraints that stalled equipment shipments.
Lastly, probation continues to perform very well with another quarter of double digit growth driven by its apex SaaS offerings.
<unk> seen continued high customer demand with substantial Q1 orders and a greater than three times. The average revenue uplift from licensed migrations. Following a strong start to the year. We continue to expect the provisions growth will accelerate through 2023 supported by customers looking to further standardize on probation across their health systems.
In addition to our remarks on our first quarter performance, we thought it would be helpful to provide more detail on our expectations for the IHS segment for the remainder of this year.
Headline is that we expect sequential improvement in both revenue and adjusted operating profit margin as we move through the year.
Specifically on revenue, we expect favorable price. In addition to the recovery of electric procedures in China resolution of supply chain challenges at Fluke health solutions and normal healthcare seasonality to drive higher volumes over the course of the year as.
As a result, we expect core growth will go from low single digit in Q2 to mid single digit in the second half of the year.
Margins. In addition to the uplift from higher volumes and favorable price, we see compounding tailwind from the benefits of the productivity initiatives, taking second half margins to approximately 25%.
Go to market changes in AFP consumables in North America will improve performance and enable closer connection to our customers to better serve their needs transitioning from a primarily distribution model to direct to the customer.
All of these actions will have carryover benefits in the years to come positioning us for accelerated growth and profitability as the general healthcare environment continues to improve with that I'll pass it over to Chuck who will provide more color on our first quarter financials, and our 2023 outlook.
Thanks, Jim and Hello, everyone.
I will begin on slide 11, with a quick recap of our first quarter revenue performance reporting.
We generated year over year core revenue growth of 9%.
<unk> was 230 basis points of headwind to growth.
Turning to the geographies, we saw another quarter of strong revenue growth at each of our major regions.
North America revenue was up mid single digits with growth in all three segments.
Stern Europe revenue grew high single digit with mid single digit growth at iOS, and Hs and double digit growth in PT.
Asia revenue increased in the 20% range with low 30% growth in China, driven by strength in both iOS and PT as we lapped easier prior year comps.
And China was partially offset by a high single digit decline in Hs related to lower elective procedures due to COVID-19 as we expect.
Lastly, our high growth markets together posted strong core growth of almost 20%.
Turning to slide 12, we show operating performance highlights for the first quarter.
Adjusted gross margins increased 80 basis points to 58, 4%.
As Jim mentioned.
Driven productivity and price realization more than offset inflation, leading to record gross margins in the first quarter.
Which was complemented by higher volumes.
Adjusted operating margins expanded to 100 basis points to 24%, while adjusted earnings per share increased 7% to 75.
Strong volume conversion, partially offset by higher interest and tax expense.
Free cash flow was $150 million.
While first quarter is typically our lightest free cash flow quarter receivables were negatively impacted by slower China collections in the quarter, which has since recovered to Nathan.
Turning now to the guidance slide 13.
We are raising and narrowing our previous 2023 guidance to reflect the outperformance in the first quarter.
For the second quarter, we anticipate core revenue growth of two 5% to four 5% with an FX headwind of approximately half a point.
Adjusted operating profit margin is expected to increase 3% to 7% with margins in the range of 24, 5% to 25%.
Adjusted diluted net earnings per share guidance of 78 to 82.
<unk> up 5% includes higher year over year interest and tax expense.
Free cash flow of approximately $285 million reflects approximately a 100% of cash conversion in the quarter.
For the full year, we now expect core revenue in the range of four to five 5%.
Which continues to reflect year over year foreign exchange headwind of just under a one point of revenue.
Adjusted operating profit is expected to increase 6% to 10% with margins in the range of 25 to 25, 5%.
We are increasing our adjusted diluted net EPS guidance to $3 29 three.
$3 40.
Which represents an increase of 4% to 8% and includes higher year over year interest and tax expense as previously expected.
Free cash flow is expected to be approximately 125 billion representing conversion in the range of 100% to 105% of adjusted net income and 21% free cash flow.
Turning to slide 14.
We've consistently said that 40% of today is delivering a higher and more profitable growth. There is nowhere that this shows up more than half of our free cash flow between 2019 and today, we have more than doubled our annual free cash flow and we expect to continue to further enhance our compounding model with over $5 billion of capacity.
For M&A.
Enabling us to continue to invest appropriately in our businesses to further position <unk> for long term value creation.
With that I'll pass back to Jim to preview, our upcoming Investor day, and provide some closing remarks.
Thanks Chuck.
Now start to wrap up on slide 15.
Our team is thrilled to be back in New York for our first in person Investor day since 2019 to be held on May 25.
We are looking forward to highlighting our progress executing our strategy and the results that has yielded over the last seven years building on our strong foundation and enduring principles that underpin our execution capabilities, we will showcase how our businesses have leveraged FBS tools to innovate take advantage of the secular tailwind accelerating progress across our five.
Critical customer workflows. This has translated into relevant product innovation, helping to solve our customers' toughest safety quality and productivity challenges and contributing to sustained strong growth for Florida.
In the spirit of setting high expectations, we will set long term targets looking out three and five years, culminating with the evolution of our strong free cash flow reporting us ample opportunities to further accelerate our strategy.
We are actively fueling our future success by building on the transformation progress and learning that has taken place since our inception unlocking future value reported.
Wrapping up on slide 16, the combination of portfolio work, we have done and the productivity initiatives. We are implementing in the first half of 2023 prepares for the continuing evolving macro environment and set us up for differentiated performance again in 2024.
As you saw in today's press release, we're also continuing to build on our exceptional leadership culture for the affordable future by expanding Tami Newcombe. His responsibilities to include the advanced Healthcare solutions segment. In addition to her current role as segment leader of precision technologies, succeeding Pat Murphy, who will retire at the end of the year.
As you heard today FBS is more robust than ever with powerful new capabilities to bring breakthrough innovations to market for our customers faster and drive enhanced business results.
Evidence of this is reflected in our strong financial performance, including our free cash flow the currency, we use to measure our success.
These factors culminate the powerful formula for value creation, enabling forward it to make a real difference in the world and deliver exceptional value to shareholders with that I'll turn it back to Atlanta.
Thanks, Jim that concludes our formal comments, Brad we're now ready for questions.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad.
Your first question is from the line of Julian Mitchell with Barclays. Your line is open.
Good afternoon, Julien Hi, good afternoon.
Thanks for taking my questions maybe.
The first one and sorry to be boring and predictable, but the IHS you gave us some very good detail on that sequential improvement through the year I guess, a couple of things I just wanted to clarify on it one was maybe the scale of the productivity savings in the second half is it sort of <unk>.
$20 million something like that that you're getting in the IHS EBIT in the back half and then just trying to make sure we understand the scale of the importance of China IHS.
Is it about sort of 10% of the business.
So Julian I'll take the.
The first part of that productivity, we'd probably expect to do about 10 $10 million in the first half and that generally has a six month payback so probably seek.
Why come out.
In the second half their annualized is going to be obviously, a little bit bigger.
And on the China on the <unk> aspect, that's about 8% to 10% of the business overall and as we said in the prepared remarks, but maybe a little bit more color there is that.
We obviously started pretty low in <unk> in the first part of the quarter January has got better through the quarter we exited.
Around 90% so.
We'll see a little bit of continued improvement I think at this point, it's fair to say, we sort of see electives as kind of being back to normal going into the second going into the second quarter.
That's helpful. Thank you and then just switching tack to the.
The overall product hardware orders you had said those were down about mid single digits in the first quarter.
Is there any sort of interesting movement as you go sort of month to month and any clues on how youre thinking about the second quarter and if we look at the precision Tech.
Business, specifically and I suppose tektronix <unk>.
<unk> had one or two.
Cautious comment as perhaps from some companies who might be peers. In recent weeks have you seen anything shift in the market outlook for tektronix or product hardware within PT.
Yeah first of all I think as we said the quarter for orders for the product for the product businesses came in better than expected.
Book to Bill being one was better than we expected so.
What we saw in the quarter was pretty consistent through the quarter, obviously the numbers from a year on year perspective get a little bit better simply because of the way China affected those businesses last year, but I think when we look at point of sale Julien point of sale was good throughout the quarter and it was good on a global basis at <unk>.
You can tack. So we think those things are good.
And feel really good about sort of the strength I think maybe the other highlight is the fluke grew mid single digit orders, we said that in the prepared remarks, but I think that's the highlight for sure a little bit of maybe that came out of the second quarter.
Quite frankly, I think just derisk the second quarter for us. So I think we feel we feel good about that so we're we're certainly.
Out there watching for things, but we feel good about the order trajectory right now.
The two year stacks are still very strong and so sometimes we've got to be a little careful about that and I would say the last thing is that roughly $350 million of excess backlog that we talked about at the beginning of year is still remains intact. So.
That we tried to highlight that on one of the slides relative to the backlog protection. So I think on the.
At Fluke industrial which is kind of typically the Canary in the coal mine things look still pretty good.
It really is still good and we still maintain the backlog protection that we went into the start of the year.
Great. Thank you.
Thanks Julien.
Your next question is from the line of Jeff Sprague with vertical research partners. Your line is open.
Hey, good morning, everyone, Hey, How's it going Jim.
Just back on IHS I'd, just like to deconstruct, a little bit more kind of what happened in the quarter. Obviously it was a very large margin Miss and then.
You addressed it a little bit to Julians question, but if you think about the decline out into the back half.
How much of that is really.
In your control.
You mentioned favorable price I assume thats kind of in hand, the supply chain questions. I, just wonder if you could give us a little comfort or confidence that that in fact is resolved.
Anything else to just give us some visibility on how we get to those numbers in the back half.
Yeah, Jeff I'll take the first part of that.
Three main things that happen in health in Q1.
<unk> about fluke fluke health supply chain.
That that was the hit FX strengthening dollar.
It shows up more here in one of our more global businesses. So that that was a part of it.
And then.
Also just thinking about the mix effect of lower consumables from China.
As we had COVID-19 really hit maybe a little harder than we thought there and the first part of Q1. Those three things are the main reasons, we came in short versus our guide.
Sure.
In the health segment, Yes, Jeff I would just say as we as we move through the year.
I think three things that are definitely in our control number one is the productivity Chuck outlined that on Julians question. I think is is in hand in that regard and that we've got that number two is really around price. We've had three quarters now of better price the trajectory and price continues to be good and so I think in that sense, we're leaning into that and see.
<unk> done a great job relative to that's principally at ASP by the way on that one and then finally, a little bit better growth as we said electives now normalizing here back to back to normal and so we see that continuing to improve we mentioned the go to market change that we're making at ASP in North America to go more direct which really I think.
Gives us closer to customer care and really I think really helps us from the standpoint of really making sure that that our sterilizers are running running actively. So so we think those are certainly things that are within our control. We're accurate I feel good about the team and the work they're doing so in that sense that it will get better in the second quarter and then as we said it'll it'll.
Step in to the second half with continued improvement so.
I think the other thing that gets missed in IHS was the quality of the quarter and sensus.
<unk>.
Those businesses are obviously two of our higher margin businesses, you combine that with some of the supply chain fixes that we've got in place at Fluke health, which is really our highest margin business within health. Those three things are going to continue so you get the help it ASP like I just described you'll get the continued work at some of the other businesses I think that moat.
It really bodes well for continued improvement throughout the year.
And then totally shifting gears just.
Peaky strategically right.
I don't know if youre going to end up commenting commenting specifically on natty right, but it looks like you were there at or near the altar.
You haven't deployed capital there really actually since Danaher bought tektronix really right. So.
And maybe you were on the verge of doing your biggest deal ever by an order of magnitude so.
Just wonder if you could frame that up for us what youre thinking is or was.
And maybe the strategic direction of that particular segment in business over time.
Yes, we've had a couple of small bolt ons in both sensing and in tech over the years and those have been helpful to a lot of the success quite frankly that we're seeing as an example, keithley probably being the biggest capital deployment that we did number of years ago and that is really obviously a real success for us attack that was that was a little while ago since <unk>.
Sort of if you will a couple of small bolt ons and sensing, but not much I would say just relative to.
The natty process, we won't comment on that but once the interest in that from others. Certainly I think speaks to the the story that we've been telling at tektronix.
You see it in the quarter you see it in the bag quality of the backlog is just the attachment of our innovation capability to some of the secular drivers in auto EV, principally as well as empower and those are I think speaks well to the organic strategy and the investment we've made there at tech in particular, so I think it is.
As we look forward one of the things that I think I'd just remind everyone.
We had said we'd move tech from a low single digit through the cycle grower to a mid single digit grower through the cycle and I think we feel very good about that to the extent that we can find ways to accelerate the capability throughout PT will continue to look for those things.
Great. Thanks for the perspective.
Thank you Jeff.
Your next question is from the line of Steve Tusa with Jpmorgan. Your line is open.
Hey, guys how are you.
Great.
Just on the the manage.
Reshuffling.
Can you talk about how.
Came to that.
Asian.
A lot of its ability for Tammy so.
And there are two kind of pretty different businesses is that is that a permanent solution or should we expect another step in that evolution.
Well I think I think it is certainly the solution that.
We feel really good about it I mean, I think our talent development process and if you go back a lot of years, you'd see the ebb and flow a little bit relative to those jobs as well as the jobs below that and group President and operating company Presidents. Our talent development is and I think it really a good place every one of our group President.
What was internally promoted 80% of our current operating company presidents were internally promoted so I think when we when we really feel good about the structure. It's not just what we have at the segment level, but it's within those group presidents and operating company Presidents and we've quite frankly never been stronger in that regard. It gives us the degrees of freedom to do some things throughout.
Throughout the leadership structure I would also say that when you sort of look at it it's pretty balanced from an operating profit perspective and from a and from a just sort of served market standpoint. So if we look at the split of responsibilities, yes, two segments to one segment, but when we look at our served market iOS has half the served market profitability.
Pretty close that ebbs and flows with deals. So I think we're in a very good place relative to the structure that we came to but in part it's not just the most senior jobs. It's also the quality of folks that we have across the board. We had all of our presidents in last week for our quarterly leadership summit with them and I couldnt be more proud than.
The work Theyre doing and quite frankly, where we stand relative to the quality of leadership at the operating businesses.
And in terms of.
The portfolio is current I mean, you guys have done a lot of reentering over the years.
Yes.
It is Eric.
I'm not sure where.
You seem to be.
And then.
Subtract I guess from the portfolio, but.
Are you in any way shape or form still kind of evaluating things are for maybe divestitures or spins or anything like that I mean im thinking really.
Tektronix, especially in the context of what's just happened here in the last several weeks with with Emerson Natty.
Well I think you broke up a little bit, but I think at the end I think we got it. So I think when we look at the three segments. We have today the quality of.
Businesses, we have the execution that's going on.
Feel good so I think certainly the.
The natty process, if you will ending with Emerson doesn't really change the market structure, we feel good about what we're doing a tech and we will continue to run the play there that we think is really good and that's obviously a part of our success right. Now is the strong execution that we've had at tektronix over the last several years.
Great. Thanks, a lot.
Great. Thanks, a lot.
Thanks, Steve.
Your next question is from the line of Scott Davis with <unk> Research. Your line is open.
Hey, good good afternoon, now this afternoon, Jim and Chuck in Atlanta.
Thanks Scott.
I know theres just so much you can say about that but it was I think as Greg said in kind of a pretty darn big deal versus kind of your history.
Is there anything that we should be taking away as far as your willingness to make bigger bets was this kind of a one off unique I know the gross margin structure was pretty attractive but.
I think historically you guys have generally looked at assets coming out of PE or pieces of assets coming out of bigger companies, but not necessarily looked at buying other public companies is really.
A big part of the M&A strategy has that changed at all.
Jim and Chuck or is this.
Should we not read too much into this.
I think.
A real opportunity as well to talk about this in may at the Investor Conference, but I think the 40 billion roughly of served market that we have today.
When we look at the M&A opportunities funnel, if you will we've always talked about breadth and depth.
<unk>, meaning all three segments operating companies' ability to accelerate strategy depth, meaning size and you're exactly right. What we've done what we've done is the deals sort of in the middle in the middle and some bolt ons in the lower part of that if you were to think of that as a as a triangle so with the bigger deals.
At the top and there's fewer of those so that's always going to be the case.
I won't speak specifically to any one company or process in any way shape or form.
But what's not what never changes is the fact that we're going to continue to scan the landscape for opportunity to accelerate strategy, we're going to be disciplined about what we do we're going to look for outstanding financial opportunities.
We continue to build the portfolio the way, we have and I think our 'twenty. Two 2022 performance speaks to the quality of that and I think our first quarter speaks to that so.
That's what we're going to continue to do and I think when we talk about breadth adapt that means.
Theres, a variety of different kinds of opportunities, but but.
The most most opportunities are always going to fall and those sort of bolt on in mid tier opportunities, just because simply because theres a lot more of them in.
To accelerate strategy in a few different businesses and thats, where those opportunities are.
Fair enough, Jim and just to clear something up what was the fluke health supply chain issue I don't recall hearing it.
Explanations.
Yeah.
One of the things so maybe more broadly I think we are.
We handled us look quite chain challenges, we've said, we're kind of down to those sort of one off issues that occurred through the portfolio. The fact that we did 50% more organic revenue in the quarter speaks to the quality of the team work, we had around Florida to deal with those challenges really really well, but we did get caught on a couple of quality and what we call.
Our our quality assurance equipment business and fluke biomed.
Literally one component that we were we were shorted, yet and we'll clean that up in the second quarter. So we feel we feel good about the work we're doing quite frankly.
Supply chain challenges are down to what often is called the golden screw.
But there are a few of those but I think we're doing an outstanding job more broadly when you look at the when you not only look at the core growth beat in the quarter, but also the 80 basis points of gross margin expansion, which quite.
Quite frankly, I think stand up well against.
Most people.
Fair enough best of luck. Thanks see you guys at the analyst day.
Yes look forward to it.
Your next question is from the line of Andrew <unk> with Bank of America. Your line is open.
Hi, yes.
Good afternoon.
Good afternoon can you guys hear me.
We can we can yeah excellent excellent just a question.
I'm sort of looking at the sequential guidance for iOS and PT growth I'm looking at the comps.
Just trying to figure out.
It seems there is a step change down.
And I apologize if I missed it but I was just wondering.
You also commented that the order book looks good March looks good so why the step down and I was wondering specifically if there was some sort of clearing out of things and the backlog was sort of the Goldman proverbial Golden screw, becoming available or is there something else happening because you guys certainly don't sound.
Particularly more pessimistic about the macro into the second quarter. Thank you.
Yes.
Andrew.
The biggest thing is really what happened last year, it's really the comp.
If you remember the Shanghai was shut down at the end of Q1.
Of that revenue.
Showed up in Q2, so when you if you adjust to that comp actually Q1, and Q2 look pretty similar.
From what we're doing this year, if you interrogate the two year stacks actually start seeing some acceleration even into the second half.
Youre right.
Thanks.
It came in on balance better than we expected in Q1, and we're optimistic moving forward.
Alright got it sure, but you're sort of saying take a look at a two year stack as opposed to one year of stock.
I am also saying look at the first half this year versus the first half last year.
There is there was there was a lot of revenue missing in Q1 that showed up in Q2, so it's really a tough comp, but if you look at that Youre really.
See that shutdown that happened in the last week of Q1 of last year is really what explains most of what you are talking about okay. I'll take it offline, but can I just had a question on probation did.
Did we hear that right that the SaaS version of three times revenue uplift.
And how fast is the SaaS conversion going and what's the SaaS versus license mix. Thank you.
Yeah.
You did hear it right. We're at about <unk> right now we would expect the early migrations to be maybe slightly a little bit higher.
And then maybe what the downstream ones, but we're actually ahead.
The game on.
Our new bookings relative to SaaS, so thats good.
Sure.
All up just probation things are things are better better without 22 was better than expected and we started the year off well. So we are seeing a little bit of extended discussions with customers I would say.
It may be more broadly there are certainly in the software world Theres, a little bit more funnel activity things sitting in the funnel a little bit longer.
Just given maybe.
Typical start of the year, but we still have good confidence in.
The projections, we have for for what we have in software we had a very good.
Quarter, and we feel good more broadly about software in general.
Great. Thanks, so much.
Thanks Anna.
Your next question is from the line of Josh <unk> with Morgan Stanley . Your line is open.
Hey, good afternoon guys.
Okay.
To dig in a little bit on implied second half for PC.
Actually with the backlog holding up really well here in the first quarter. It looks like volumes would be kind of flat, maybe even down now I know the comp gets a little wonky here or there, but just trying to triangulate.
The book to Bill is still being good with.
With the basically kind of no growth second half.
Yes, it's really about the two year stacks.
We have really accelerated growth in <unk> in the second half of last year, Josh So it's.
I think we as we said the book to Bill coming in the quarter is better. So you might say, maybe thats slightly derisked, the second half a little bit, but but it really is we will see a little bit lower growth in the second half and PT on in absolute terms, but it's really it's really the comps.
We really see continued.
Really continued performance relative to the market going first half to second half for sure.
Got it that's helpful. And then just on the order intake again, I know youre surprised that the book to Bill was.
<unk> was one in the quarter, but any sort of right sizing of the order book as lead times start to improve a little bit customers basically just saying look I still want everything but now that it is not as urgent was there any kind of.
Air Pocket Pushout that you see as a function of that.
No I mean, I think what we've seen as point of sales remained strong some of that particularly at tektronix is probably the backlog coming down, but we still have excess that excess backlog, which is really customer demand. It's not inventory is still very much is very much in demand from customers. So at tech.
In particular, we have very little distributor inventory or channel inventory, if you will.
So we feel good about the demand being actual demand for the backlog, having actual demand to it. So we haven't seen those air pockets yet.
And we continue to watch have a watchful eye just given what we see in the macro and those kinds of things, but so far the demand demand is real and point of sale stayed strong and that point of sales stay strong on a global basis.
Got it that's helpful to you guys next month. Thank you.
Your next question is from the line of Deane Dray with RBC capital markets. Your line is open.
Thank you good day everybody.
Hey, I wanted to circle back on the page five the concept about backlog protected and it came up in Julians question too is it was my sense that some of this backlog build the excess.
Outsides backlog like Fluke short cycle wouldn't typically see much in the way of backlog, but you've got it now to me that seems that's more transitory or supply chain heel that'll come down so how much of this backlog protected would be transitory by definition or you just think there's a certain of.
That carries through each year on the kind of book and ship over a couple of quarters.
Yes, it's a great question I think I think number one is if we take fluke in the industrial.
Business, we don't have a huge amount of excess backlog in that business point of sale remains strong and I think what we're seeing is it's just continued good execution from the <unk> team.
Back to sort of backlog protected on that slide is mostly a tech and in sensing and then tech I think it's we don't anticipate that excess EBIT burning down this year Dean. So so I would say in some respects, we're probably going to run with excess backlog in perpetuity and I think in both cases.
It's really about the secular drivers that exist that we've really tried to build the business around we're seeing better performance as an example in western Europe , and I think thats really because of the sustainability electric vehicles.
Power a lot of the grid upgrade some of those things those investments are very much happening in Europe .
And we're taking advantage of those opportunities. So we like the durability. If you will of the backlog some of it is excess and Thats why we call it that way.
And some of it's a little bit of in precision relative to what it'll be like long term, but we do see when we interrogate that backlog on a pretty regular basis, we like the durability of it and the resiliency of our pretty because of the secular drivers that we listed on the right side of that page. So so we think we're in a better position for the year because.
The strategic moves we've made over the last few years relative to those secular drivers.
Great.
It was really helpful. And then just as a follow up and I Might've missed this did you comment on.
Carryover pricing benefits and whether you plan any further pricing actions over the near term.
Yes, Deane. This is Chuck we had about one 5% pricing in Q1.
Much of that is as carryover, but we continue to be active.
We've still got inflation coming at us so maybe it won't be as high.
We would expect that inflation is going to moderate.
From the rates, we increases from last year, but there is still inflation coming at us and so we'll still be deploying price as we go through the year. The other the other thing that we we continue to see opportunity for US is the FBS tools related to price, we still see even the price that we put into the marketplace still opportunities there.
Realize that price at a higher rate deemed so so we're going to continue to do the things Chuck just described and as we mentioned earlier health will continue to improve price, which we feel good about so but it's also the realization and I think this is we've always had good realization as you know knowing us for a long time, but I think our.
Ability to continue to do that and apply FBS to that is something that we'll continue to do throughout the year, even in places where maybe we don't put as much into the marketplace. We're going to continue to work on the price realization.
Thank you.
Thank you.
Your next question is from the line of Nigel Coe with Wolfe Research. Your line is open.
Hi, Thanks, Good morning, good afternoon, everyone. Thanks for the question.
So let me go back to Tammy.
Alicia.
Yes.
Jim are you looking for a change in the way that Hs is managed and then I have no idea what that means is picking up in question, but if.
If you think about exhibit Saturday.
<unk> growth or improving the consistency of the market performance supply chain et cetera, all the things that Tammy can bring to bear from that.
I'm running tektronix.
Can actually improve Hs.
Yes, I think anytime we get a new leadership into a into a role like that Nigel we see a new set of eyes and that's always that always is a good thing when we hired illuminate a few years ago. I think we got new set of eyes on iOS and Youre seeing that quality of performance play out an iOS right. Now he is he's brought some new skill sets to the.
So the role <unk> done some things over the last year that <unk> had health that that that that are.
Definitely sticky and intangible will bring the same thing we expect to the expectation and I think we benefit from the from sometimes those new prospectus.
Okay, and then just going back to the whole kind of nappy situation.
If you think about what <unk> might have given you.
If you look at you had bought that business.
Other things you can do organically to accomplish those things maybe on a longer term basis, but you've done obviously, you've done a good job of extending the.
The vertical markets of Tech plays another time, but other things you can do to extend down into the more of the validation maybe the production phases.
Have your customers.
I think the bulk of it.
Bolt ons you can do.
I would say regardless of the process.
Our strategic thinking around tech has been very focused on the secular drivers not to be not to bear too much repeating on that but it's been around changing the vertical focus as you know well and that's played out and some of that has been.
<unk>.
Innovation efforts.
That we would we would certainly look to add too.
If the opportunities.
Become available so.
We would never say never too, but that doesn't really change anything that relative to what's been going on in the external environment. That's why we do strategic plans every year that's why we.
That's why we really kind of come with a different emphasis every year and we feel good about the strategy of tech and to the extent that we've got bolt on opportunities there as well as any of the other businesses that we have we're always going to be looking at those opportunities to accelerate strategy into the markets. As an example, we would powers.
A good example, we would love to do more in power. If we found an M&A opportunity that did that we would certainly look at it carefully as a good example of that was a few years ago, it's really extended our ability to do some things relative to power and.
We were bearing the benefits the fruits of that work today.
Okay. Thanks, Jim.
Thanks, Adam.
Your next question is from the line of Andy Kaplowitz with Citigroup. Your line is open.
Afternoon, everyone.
Andy can.
Can you talk a little bit more ability you're seeing by region. I know you mentioned, you expect China to slow a bit but it's been it's continuing to be really strong reported I think last quarter, you said western Europe might grow a little more slowly, but you just mentioned some secular trends holding up well in Europe . So would you say these trends are proving more durable than you originally thought in D C.
Extended capex cycle in the U S from trends such as electrification and on jewelry.
Yeah.
I definitely think China will slow we've had so many good years of China, and obviously, we just posted up 30% kind of kind of quarter or if it was probably going to stand up pretty well.
So I think in that sense, we got we'll digest some of that growth here through the year, but I would expect China to slow in the second half a little bit, particularly because of the tough as well as tough comps, it's part of that tougher comp conversation, we had relative to the segments.
I think western Europe is holding up that further.
For the reasons I said broader Europe has slowed a little bit.
So that's in the context of everything that we've got in the guide is the expectation that <unk>.
Probably central and Eastern Europe is a little slower some of that having to do with the war. Some of it obviously has to do with us getting out of Russia, but it's also just a little bit of slowing but the western European investment and a number in a few countries has held up pretty well I still expect North America to be a good region for us.
Partly because our software and a lot of our durability is is in North America.
I think when we.
It's probably still too early to tell to be very specific but my expectation probably when we get to the end of the year is that North America, probably is the most durable of all the regions.
Helpful. Jim and I wanted to ask in Hs question, maybe in a different way and you mentioned, China led to procedures at 90% in March.
It's a little bit faster improvement from where you started the quarter and you did mention overall consumables better in March I know you've been tech is still somewhat weak, which I think is still somewhat difficult comparisons versus during the pandemic, but do you think by the second half of 'twenty three that maybe normalization from the pandemic actually happens whether it's.
Improved staffing into customers that are consumables for you were improved in the tech. So just the market surround you change.
Yes, we do I mean, we even saw some green shoots in March quite frankly in the U S consumables, as an example, which which had which had good growth. So.
Yes, we think you met your.
Right, we think the second.
You start to get a little weird still comparing to 2019 here by the time, So I think as we get into the second half I think we'd probably say are our bet right. Now is that its normalized there'll still be labor shortages. If you recall back in or started the year call. We said Hey, we saw 23 would be better than 'twenty to 'twenty four would be better than 'twenty three.
And I think some of that continues.
Is going to continue through the year and our self help is going to get better as well as as I said earlier on the call. So I think the combination of things getting a little better in the marketplace as well as our self help start to see the traction of that.
I'm confident we'll start to see the benefits of those things playing out in the second quarter and then into the second half.
I appreciate the color.
Your final question comes from the line of Joe Giordano with TD Cowen Your line is open.
Hey, guys. Thanks for sneaking me in here.
Sure.
The Pie chart that you have for revenue, where you have like a backlog protected that Deane was referencing earlier.
Just curious like the biggest piece of that is recurring ex software and just like if we go into like a more.
That's a real recession, how like how recurring is that business in a good time versus how recurring is it in the bad debt is there a slippage as customers get tighter with their wallets.
I think it holds up pretty well I think number one there's a couple of big pieces in there right consumables at ASP is a big piece.
<unk>.
Our EMC businesses in there, which is long term contracts. So we've got we've got.
We've got.
We've got a number of and of course broadly defined services.
It should hold up well and we feel good about it held up very well in the first quarter as an example.
With with really good growth. So you combine that with that with software and then even the healthcare hardware. We've got a good portion of the portfolio that we think is really resilient you combine that with the roughly 25%.
Our hardware nonrecurring, which is backlog protected we feel pretty good at it.
As mentioned earlier the secular drivers in.
<unk>.
Entire product side also provides some another good insurance policy here so.
No.
We really run the playbook that we've talked about so many times, we're prepared for a number of scenarios. We took some restructuring earlier productivity initiatives earlier in the year as you know we bought that as well. So we feel like were building scenarios around what could happen, it's hard to predict the future, but the portfolio was built.
Over the years too.
In most cases to deal with a lot of these challenges and we think we're well prepared for them.
Fair enough and then just to follow up on the discussion about the cyclical businesses and so like iOS NP NPD. Both came in quarter ahead pretty pretty solidly ahead of what you suggested in your guidance for <unk> and our full year guidance on the growth side are pretty much the same a little bit bump in one but pretty much the same.
How should we think about that is is it kind of a lower lower view of the second half or like you mentioned the backlog is normally high so just curious how that how we should interpret that.
Yes, I think I think the first half doesn't change all that much Chuck kind of talked about that a little bit, but I think I would think about derisking. The second half, it's a little bit of Derisking and if and if things play continue to play out as positive as they have there.
There might be some opportunity, but I think right now, let's see how things play out, but as we said on a two year stack the hardware business the product businesses do you get a little bit better given the given the tougher comps in the second half, but where we stand today I think we'd like I think most people would be envious of the start that we have for the year and we feel good about that.
Thanks, guys.
Thank you. Thank you.
There are no further questions at this time I will turn the call back over to Mr. Jim Lico.
Thanks, Brian and thanks, everyone for taking the time today, we know it's a busy schedule for all of you. We appreciate we appreciate the questions. We certainly appreciate the interest.
I hope from from the words from trucking you heard as well as the prepared remarks and hopefully the presentation was helpful was helpful as well.
We're off to a good start we feel good about it there is certainly some uncertainty out there in a number of ways, we feel well prepared for it we will look forward to the follow up questions that can give you more color on that to the extent.
We can be helpful.
We're really looking forward to sharing our story more longer term at our Investor Conference. We think it's an opportunity for us to really demonstrate a lot of the things we've talked about today relative to how that plays out the strength of that in addition to not only the strength of the the financials, but also the strength of the strategy, which really continues to help us we had a great.
2022, we think it's also going to help us posted good 'twenty three we will look forward to senior soon thanks, everyone take care.
Ladies and gentlemen, thank you for participating. This concludes today's conference call you may now disconnect.
[music].
Okay.
[music].
Yeah.
[music].
Okay.
[music].
Okay.
Okay.
[music].
Okay.
[music].
Yes.
[music].
Yes.
[music].
Okay.
Okay.
[music].
Thank you.
[music].
Okay.
[music].