Q2 2023 Fortive Corp Earnings Call
My name is Rob and I'll be your conference facilitator of this afternoon at this time I would like to welcome everyone to the Ford F. Corporation's second 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 press. The star one I would now like to turn the call over to MS. Elena Rosman, Vice President of Investor.
The latest Rossman you may begin your conference.
Thank you Rob 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.
Certain non-GAAP financial measures on today's call information required by regulation G are available on the investors section of our website at <unk> Dot com.
Our statements on period to period increases or decreases refer to year over year comparisons unless otherwise specified.
During the call we will make forward looking statements, including statements regarding events or developments.
But 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 risk factors is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31st 2022.
These forward looking statements speak only as of the states 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 Lico.
Thank you Alina Hello, everyone and thank you for joining us.
On slide three our.
Our second quarter results once again demonstrated the durability of our portfolio and the strength of our execution, allowing us to deliver higher GOR growth margins earnings and free cash flow.
Revenue growth of five 5% reinforces that our strategy is working building leading positions across our customers' critical connected workflows with performance reinforcing the resilience of our transformed portfolio.
We also delivered record margins in the second quarter standing adjusted gross margins by 250 basis points to 59, 5% and adjusted operating margins by 190 basis points to 26%.
We're converting more revenue to earnings and more earnings to cash with 9% growth in adjusted earnings per share and free cash flow in the quarter.
Our ability to consistently drive outperformance is directly tied to our culture of continuous improvement and dedication to the Florida business system.
This year to unleash FBS, which is driving record productivity from kaizen activity across the enterprise and increasing our confidence and our raised outlook for the year that we believe further position supportive for accelerated compounding of 'twenty 'twenty four and beyond.
Turning to slide four.
I wanted to provide an update on what we're seeing and what we're expecting over the course of the rest of the year, starting with healthcare industry recovery is on track as labor and productivity challenges continue to moderate.
We're seeing traction on our pricing and productivity initiatives, yielding sequential growth and profitability in the second quarter. We expect further improvement in nature in the second half with higher core growth and operating margins.
We also continue to drive growth in our software and services businesses with SaaS revenue up mid teens on strong enterprise growth in bookings.
Hardware products have also been running ahead of expectations. This traction on new product launches and leveraged the secular drivers are helping to provide more backlog to buffer the normalization of industrial demand.
As we sit here today, we now expect to have over $200 million of excess backlog heading into next year, well positioning us for 2024.
Our strategy to create a more durable growth company is working our recurring revenue businesses are expected to accelerate first half the second led by higher software and consumables growth.
Combined with favorable pricing and discrete productivity initiatives, we now expect over 125 basis points of adjusted operating margin expansion for the year.
Lastly, our robust free cash flow and low leverage profile provide further flexibility to accelerate compounding with an attractive funnel of M&A opportunities aligned to our workflow strategy.
Turning to slide five our success in the quarter demonstrates our ability to leverage our domain expertise in hardware and accelerate software and data analytics across our five customer connected workflows, where we're enabling progress in a number of high impact fields, all benefiting from customer investments in automation and Digitization the energy transition in the knee.
Good for productivity solutions to address labor manufacturing inflation and regulatory challenges globally for.
For example, solar energy is one of the fastest growing renewable energy sources worldwide from the grid to hybrid and backup systems connected reliability solutions are ensuring the maintenance inefficiency of critical infrastructure, enabling the energy transition and Iot expansion.
Our mental health and safety solutions are safe guarding workers, and enabling customers ESG reporting and compliance.
Our leading facility and asset lifecycle software applications are improving asset performance, optimizing workplaces and accelerating customer productivity efforts.
Our innovations of the product realization workflow are solving customers' toughest technical challenges the speed breakthroughs in a wide range of applications, including helping to increase the proliferation of electrified and connected devices and advanced the democratization of high performance computing and AI driven data analytics as well as in the perioperative Blue where we're <unk>.
Helping healthcare providers deliver exceptional patient care more efficiently with industry, leading clinical safety and productivity solutions. In summary, we are seeing strong customer success on new product launches highly aligned to the secular trends, where our innovation funnel has remained focus which I'll take a moment to discuss further on slide six.
As we highlighted at our Investor day in May our FBS growth tools are accelerating innovation cycles to drive share gains and maximize R&D returns to create and sustain our competitive advantage and a number of exciting new areas. For example, we highlighted new product launches at fluke to accelerate the distributed energy strategy to penetrate the high growth <unk>.
George equipment market with new testing tools that ensure technicians safety and asset performance.
Gordian, our unique planning tools Rs means data and technical expertise of the California County, optimize their infrastructure, resulting in millions of yearly cost savings and a significant reduction in project completion timelines.
Tektronix is providing performance scopes and waveform generators to help customers develop quantum computing to advance AI applications, including a large aerospace and defense customer win in the quarter.
<unk> latest cloud based documentation software is saving physicians roughly 16 hours per month, the documentation and reporting which is why probation continues to be the provider of choice with accelerated win rates in apex adoption.
Lastly, intellects leveraged lean portfolio management to expand its foothold and environmental County compliance reporting accelerating the launch of its new ESG corporate reporting solution.
<unk> is committed to innovation across all aspects of the company and this quarter. We received two notable recognitions for our innovative sustainability efforts.
In May USA today and status stuff have named Florida, one of America's climate leaders in 2023.
This award recognizes us as a leader in greenhouse gas emissions reductions and singled out Florida is a top emissions reducer among more than 2000 companies nationwide.
In the June quarter was selected as a finalist for the 2023 worlds sustainability awards and the profit with a purpose category, which recognizes companies that link revenue generation to sustainability.
We're incredibly proud of our culture of innovation and continuous improvement and how that not only shows up in the solutions, we deliver for our customers, but also in the positive impact we are making around the world.
I'll now provide more details on each of our three segments, beginning with intelligent operating solutions on slide seven.
IOS grew core revenue by 4% driven by good growth in most regions.
Wrong FBS driven execution resulted in 420 basis points of adjusted operating margin expansion.
Driving operating margins to a record 33%.
Looking at our performance drivers by workflow and connected reliability fluke core revenues were up slightly lapping the Shanghai recovery last year with mid single digit orders growth in the quarter look margins expanded by more than 300 basis points year over year, driven by productivity initiatives and solid price realization.
EMEA saw record quarterly bookings fueled by the continued success of the new X five CMS product launch.
<unk> revenues grew by high single digits with record iron at growth at AFC and strong SaaS momentum an influx.
Further intellect saw strong bookings for its new ESG corporate reporting solution.
Moving to facilities and asset lifecycle, we had low double digit growth in the second quarter, driven by mid teens SaaS growth.
Gordian had strong growth in operating margin expansion in the quarter as more customers utilize their job order contracting platform to procure and manage their larger infrastructure projects.
<unk> has seen sustained improvements in win rates and good growth in their streamlined portfolio supported by FBS led innovation and pipeline generation efforts.
This channel had an acceleration in growth and profitability as planned driven by strong SaaS bookings and resulting take rate as customers leverage the service channel network to maximize their cost savings large retail customer is already $2 million ahead of their $40 million cost savings goal in 2023 after taking advantage of the automation.
Capabilities of the platform powerful testament to the secular drivers underpinning the foul workflow strategy.
Turning now to slide eight precision technologies continued its momentum with another strong quarter with 8% core revenue growth and 190 basis points of adjusted operating margin expansion.
The volume and price benefits more than offsetting inflation and FX.
Highlights in the quarter include record second quarter revenue of Tektronix with orders better than expectations and strong point of sale in all major regions. The team delivered mid teens growth, which was over 20% on a two year stack basis in the second quarter.
Electronics is executing on our robust backlog empower digital test and measurement solutions and delivering outstanding margin operating margin expansion.
As orders continue to normalize we anticipate tektronix growth will moderate to mid single digit levels in the second half and we expect we will end the year with elevated backlog levels again heading into 2024.
Sensing technologies came in better than expected up slightly driven by strong price realization across all businesses and continued broad strength quality oil.
Lastly, specific scientific AMC reported a strong sales quarter with mid teens growth as it benefits from strong customer demand and kaizen activity to improve manufacturing capacity and operational execution to deliver on record backlog.
Moving now to slide nine and advanced health care solutions.
Core revenues were up 4% in the second quarter as the industry continues its modest pace of recovery.
With expectations adjusted operating profit margins contracted by 60 basis points year over year, the benefits of sequential volume price and productivity drove operating margins higher by 180 basis points versus the first quarter.
China electric procedures remained at normalized levels throughout the quarter, only slightly trailing global rates, allowing for double digit growth.
Our outlook continues to assume that elective procedures remain close to pre COVID-19 levels in all major regions.
Highlights in the quarter include AFP census had mid single digit core growth driven by capital expansion at Asps and double digit SaaS growth in sensus.
Asps saw sequential growth in consumables as planned and U S channel transition to direct is on track contributing to sequential price benefits driving margins higher a trend. We will expect will continue through the rest of the year.
Supply chain constraints are largely resolved yielding good growth at fluke health solutions and probation had another great quarter with mid teens core revenue growth driven by apex, SaaS adoption and new logos.
With that I'll pass it over to Chuck who will provide more color on our second quarter financials, and our 2023 outlook.
Thanks, Jim and Hello, everyone.
I'll begin on slide 10, with a quick recap of our second quarter revenue performance, we generated year over year revenue growth of 4% with core growth of five 5%.
Next was a 90 basis point headwind to growth turning to the geographies North America revenue grew high single digit with growth in all three segments.
Western Europe revenue was essentially flat in the quarter following mid teens growth the prior year.
Asia revenue grew mid single digits with over 20% growth in Japan, and India, and low single digit growth in China.
We saw strength in healthcare in China as expected. However growth was muted by Covid reopening tailwind that benefited the hardware products revenue in the second quarter of 2022. Looking ahead, we continue to expect China growth to moderate in the second half as we lap outsized growth in prior years.
Turning to slide 11.
We show our operating performance highlights in the second quarter as.
As Jim mentioned earlier, adjusted gross margins increased 250 basis points to a record 59, 5% driven by volume FBS initiatives and strong price realizations, which more than offset higher inflation.
Adjusted operating profit margin expanded 190 basis points to 26% another 40 record.
Reflecting higher gross margins and productivity initiatives that have started to gain traction in the court.
Adjusted earnings per share increased 9% to 80, <unk>, despite higher year over year interest and tax expense.
Free cash flow was 300 million, which reflects approximately 100% free cash flow conversion a testament to our working capital efficiency enabled by the <unk> 40 businesses.
Turning now to the guide on Slide 12.
We're raising our previous 2023 guidance to reflect the outperformance in the second quarter.
Starting with the third quarter, we expect core growth of three five to four 5% with revenues, reflecting our normal linear profile and adjusted operating profit margins are estimated to be up over 100 basis points year over year.
Adjusted earnings per share expected to be in the range of 82 to 85.
In Q3, and reflected a 17% estimated effective tax rate.
Our fourth quarter guidance assumes a seasonal uplift in all segments with core revenue growth of three five to four 5% year over year.
And strong margin expansion, reflecting the cumulative benefits of our productivity initiatives.
Adjusted EPS is expected to be in the range of <unk> 94, SaaS does 97 up 7% to 10%.
For the full year 2023, we've raised our core revenue growth to be in the range of 5% to 6%.
<unk> operating profit is now expected to increase 10% to 11% with margins higher in the range of 25, 5% 26%.
We are increasing our adjusted diluted net EPS guidance to $3 36 to $3 42.
Which includes approximate <unk> <unk> headwind from higher interest and tax expense versus the prior guidance.
Free cash flow for the year is now expected to be approximately $1 6 billion. This represents a conversion of 105% of adjusted net income and 21% free cash flow margin as well as over 30% growth on a two year stack base.
With that I'll pass it back to Jim provide some closing remarks.
Thanks, Chuck I'll start to wrap up on slide 13.
At our Investor day in May we highlighted our progress executing our strategy over the last several years building on our strong foundation and enduring principles that underpin our unique and compelling culture.
Talk about the operating rigor and leverage of FBS growth tools to innovate and enhance leading positions across our three segments and five connected workflows contributing to outstanding fundamental financial performance.
Since 2019, we have doubled our core growth rate and delivered more than 100 basis points of adjusted operating margin expansion per year, driven predominantly by higher gross margins.
We have driven double digit earnings annual earnings per share growth cut working capital as a percent of sales nearly in half, allowing for us to run our businesses more efficiently and contributing to more than double free cash flow generation over the period.
We are now generating 50% more free cash flow per dollar of revenue, which is a testament to our portfolio transformation and the power of FBS fueling our current and future success and with a $60 billion served market, we have substantial runway to accelerate growth organically and inorganically.
Wrapping up on slide 14, the combination of portfolio work, we have done the rigor of the Florida business system and the development of leadership capability around the world is driving better than expected growth and operating performance in 2023. Despite a continued evolving macro environment. As a result, we've raised our outlook for the year and as we look ahead to 2020.
Four and beyond we are confident in our ability to accelerate our progress with.
With a high quality portfolio of desirable brands segment strategies favorably aligned sustainable secular trends industry, leading margins and free cash flow and best in class execution quarter is poised to deliver exceptional earnings and free cash flow compounding in the years to come.
Our attractive funnel, a bolt on and adjacent M&A opportunities across our three segments five connected workflows drives upside, making Florida, a more durable high growth cash flow compound or in a premier company delivering exceptional value to shareholders with that I'll turn it back to Atlanta.
Thanks, Jim that concludes our formal comments Rob.
Probably you 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. We ask that you. Please limit yourself to one question and one follow up your first question comes from the line of Jeff Sprague from vertical research. Your line is open.
Hey, Thanks, and good day everyone.
Alright.
Alright, Chuck has gone.
Hey, can we just drill a little deeper into into tech.
Just wanted to clarify what you said about orders so orders D cell, but were stronger than expected and I guess youre talking about backlog being pretty healthy so you're actually running at a at a book to bill above one in tech.
Hey, Jeff It's Jim a couple of things one I think.
Better than expected we.
As we mentioned in the prepared remarks, we've seen some.
We've seen some slowing in some places obviously, maybe more moderating for sure.
Places like China as an example, but we are.
Seeing some acceleration in investments from places like aerospace and defense customers. So the book to Bill I think orders were down about 10% in the second quarter.
But to put it in some context.
Orange is still up 30% from three years ago. So we're still seeing good demand here and the backlog is actually above our expectations, we've talked about that excess backlog and that backlog today is above expectations, what we thought going into the going into the year. So anyway I'll stop there.
If you have any follow up.
No I'll just switch gears to IHS then on the.
On the channel distribution shift sounds like.
I don't know if you viewed it as a hump but.
Maybe kind of the risk of any kind of leakage during the transition would have happened in this quarter or is that does that fair and then you've got.
Kind of a bit clearer sailing on how things play out over the balance of the year.
Yes, we're really pleased with the performance of ASP in the quarter.
As we said, we had really strong capital placements, which.
Bodes well for the rest of the year and obviously into the future given the consumables.
Project, what we call elevate is on track and it certainly was a headwind in the second quarter.
But nothing nothing that we didn't plan for so I think when you look at it mid single digit growth, even better than that ex Russia, and our exit out of Russia. So really a strong performance from a growth perspective in the quarter and we think really as we kind of play out the rest of the year, we're going to see continued performance. There just given the work we've done in <unk>.
That headwind from elevate really.
There is a little bit in the third and then it really goes away completely in the fourth.
Great. Thanks, I'll pass it along.
Thank you.
Your next question comes from the line of Steve Tusa from Jpmorgan. Your line is open.
Hey, guys just wanted to follow up on <unk>.
The Hs question.
It looks like the margin was tweaked lower.
Adding up the quarters.
I think like maybe 50 basis points below that 24% you had talked about at the Investor day, maybe just a little bit of a more shallow recovery in the second half, but still ending strong in the fourth quarter. Just curious as we kind of look out to next year.
On the way to that 30% margin just wonder obviously reaffirm that and do you like step up to more of a of a linear move from what you thought this year would be in <unk>.
Kind of capture that next year and the margin or are we just kind of like a little bit of.
Shallower inflection on the way to that that 30% I'm just trying to figure out at 24 is kind of like a more linear year.
Considering 23 is a little bit below expectations.
Yes, Steve This is Chuck I think.
The change this year in terms of the guide is.
In protecting a little bit lower.
Than we expected in Q2.
As far as moving forward. We note the sequential improvements that you talked about here.
With as Covid comes off in our self help with some of the productivity initiatives and also seeing more price as you look into next year, while we're not calling next year, but we expect to still have those tailwind around COVID-19.
And pricing and I think sequentially it would be above the margin expansion that we normally would expect.
We talked about mid single digits and five basis points. It would be elevated from that but we're not going to get to 30% next year, but we're going to continue to make progress and have good margin expansion.
Through next year, and you'll see it be as the electric procedures recover we will expect that to continue to be a tailwind for quite a while.
Yeah I guess my question was more along the lines of like is next year should we view <unk> as kind of a.
What on a on a linear from a linear perspective on the way to that 30 or is it does what happened this year kind of.
Make that target more backend loaded in there maybe.
'twenty five 'twenty six 'twenty seven type time period that was my question is 24 or more of.
A nice recovery year early on or is it more backend loaded to that 30%.
I don't think the backend loaded.
March it's not back end loaded I think youre going to see good progress.
Towards that.
Because I think we're going to see stronger topline.
Okay.
That yes, I would just add I mean, when you look at when you look at the trajectory now we already have when you look at probation. We look at Fluke health. When you look at the census, part of our sterilization business. Those are already plus 30% operating profit businesses. So the growth trajectory of <unk>.
Asps is really what we're talking about and when you think about it I mean, the fact that what we did in the quarter relative to placements can accelerate consumables in 'twenty four consumables coming back and I think our launch pad here I don't want to get too ahead of our skis, but we we.
We took a good step forward in the second quarter relative to margins for health, Yes, Yes, totally and then just one last one whereas the $350 million. Today, you had you had $3 $50 million of excess you're saying, it's going to be $200 million or something at the end of the year, whereas the three where is that number today at the end of the <unk>.
So about 300, we still have about $330 million of excess at this.
Alright, I'll round that up to $3 50, thanks guys.
Okay. Thanks.
Thanks, Steve.
Your next question comes from the line of Scott Davis from Melius Research. Your line is open.
Good good good morning out there chairman Chuck in Atlanta.
Good morning, good morning.
The.
The iOS margins up 400 basis points on pretty limited volume is impressive course, but yes.
Yes.
Is that sustainable I mean, it sounds like it's sustainable given your guidance and such but is there any risk that some of that price cost spread that you are capturing right now.
Perhaps goes the other direction on you in the next 12 months or so.
No I think I think it was a couple of things going on as you said I think we had really I think it speaks to the power of what we've been trying to do on iOS as we continue to accelerate.
Obviously acquisitions that we made several years ago Val did exceptionally well our EHS, so youre seeing the margin.
<unk> from those businesses fluke, while a little slower in the quarter still very strong in the year and has obviously been a perennial good margin improver. So I think you probably won't see 400 basis points every quarter, that's probably a little strong, but I think it just speaks to the fact of the work we've been doing over the last few years to really get into.
[noise] tire segment up and I think the second quarter was a good a good view of what the potential is in the entire segment.
Okay that makes sense Jim now.
Wanted to just follow up on.
Steve a little bit here on this one but the comment on the slide.
I.
Just last the slide but that said pockets of industrial slowing can you parse out what part of that might be inventory destock versus kind of real sell through demand that could be leaking a bit.
Yeah, I think what we a couple of things maybe.
If pte as we think about the entire segment.
The book to Bill is about one O for the year, that's better than we thought so year to date, we thought we'd be about <unk> nine where at one O. So I think what we've seen is better orders in the year than we anticipated obviously on stronger growth on the revenue side.
What we have seen in sensing in particular is parts of sensing are doing really well volatile executing very well, we think Anderson nickel is going to be good through the year parts of the rest of sensing, but we are seeing some slowing in and.
Industrial businesses, particularly in Europe , with some automation customers.
We're seeing some slowing in places like Hec with some OEM customers, mostly on the OEM side and sensing is what that comment really has to do and also some of the semiconductor business parts of the business and sensing so that's the slowing and.
We would anticipate this is kind of nothing nothing different than we originally thought would happen.
But thats kind of what we're seeing right now and what we anticipate will continue through the second half of the year.
Okay Super helpful. Thank you best of luck the rest of the year.
Alright, Thanks Scott.
Your next question comes from the line of Deane Dray from RBC capital markets. Your line is open. Thank you good day everybody.
Hi, Deane.
Wanted to circle back on this concept of the excess backlog.
And I know you just sized it but just be interested I know, there's the implied earnings visibility that you get from.
Elevated backlog, but can you share with us some thoughts about the flexibility within the backlog like let's say something happens, whether it's supply chain or a customer readiness how much flexibility do you have to immediately just draw down. The next in line on the backlog and have that kind of seamlessly flow through to the pn.
Now because when you hear access backlog, we immediately think there's flexibility, but sometimes it may not be as flexible based upon customer timing and so forth, but any color there would be helpful.
Yeah, a couple of things Deane so as Chuck said, we got about the access backlog is higher than we anticipated at the start of the year, it's about $330 million, we'll probably.
Get that down in the 200 range by the end of the year.
And it's I would call it.
It kind of depends but if we were to think about about half of that excesses at tektronix, that's relatively flexible and has been.
I wouldn't say within a month's it's necessarily flexible because it does have some supply chain aspects to it but it's.
In the sort of 90 days kind of timeframe are pretty flexible assessing a little bit less depends on <unk>.
Some of the OEM customers so pretty.
Pretty flexible so I would say that's kind of where it stands and that's why we think it is a good insurance policy relative to slowing and Thats. What you saw in the second quarter right. You saw you saw it get a little bit more backlog out EMC was a little stronger as well than we anticipated and so those are places where we think we can use the backlog in a way that sort.
Prevents any near term challenges.
And also maybe just to add onto the Scott question, because I didn't answer the Destocking piece, we're really not seeing a lot of destocking or de booking very little pretty much.
Round, our normal numbers, which is pretty small we.
We see some rescheduling of backlog and on the OEM side and sensing that's what I sense is a little.
As I was a little slower in the second half that maybe the rest of the portfolio, but we really haven't seen destocking, we haven't asked.
There is really not asking to cancel orders or anything like that there has been pretty pretty minimal to the point and that's why we think the backlog remains flexible.
Alright on behalf of Scott I'll. Thank you for the Destocking.
And then my follow up just any color on the.
Up.
Excess of 20% in India, and Japan is that a comp issue was there anything specific on the business side you'd call out.
Yes, it's a little bit of a comp thing on the Japan side, we won't we'll still see I think high single digit growth in Japan. The remaining part of the year, but certainly a little bit of a comp set of Japan, India. No. We've seen good growth in India. We're seeing I think we're getting some benefit of some of the re shoring and some of the investments that are going sort of foreign direct investments that have been going into.
India here over the last 12 months, we benefit from that are big companies like fluke and Tek and Asps are seeing the benefits of that but even more broadly and some of the rest of the portfolio. So we think it is going to be probably 20% the rest of the year.
Those are smaller regions and some like western Europe . So they can move a little bit more on a on a big chunk of business, but we like to we like the demand dynamics right now in India in particular.
That's great. Thank you.
Thanks Dean.
Your next question comes from the line of Andrew <unk> from Bank of America. Your line is open.
Hey, how are you guys.
Good Andrew.
I was going to ask can I ask a question, but I was made final so I am going to ask something else I'm going to keep beating down this dead horse was inventories.
And the revenue breakout and maybe this is not the best way of looking at those but I think our revenue through distribution was down 13% year over year this quarter.
So how do you think.
Inventory levels, among your distributors, but because I think our data shows that actually people continue to build inventory in the channel and I know you've sort of talked about it quite a bit.
I would think of demand I always think of inventory in the channel as a function of demand and so as demand moderates a little bit.
Just the big numbers, we've had over the last couple of years, there are pockets of inventory, where we might see some some some increased inventory.
But as I said on the previous couple of questions.
We don't see any of that in a major way.
We do get it, particularly in the U S and Europe around fluke and Tek, we get pretty good we get pretty good visibility too.
The inventories and so I think the places we don't obviously those channel numbers that are in the queue. In the filing represents also channel inventory relative to what we see in Asps, what we see incentive so it's a broader view of of channels in many cases international partner. So I think we're really matters relative to how we think about demand.
<unk>, we see still strong we still see strong point of sale attack and so.
That's really fulfilling the backlog and customers are really hanging around for those orders and they are getting them and so we're still seeing strong Pos.
It's a little bit more mixed but but it's still.
It's really more of a moderation than it is anything we still saw mid single digit Pos growth at fluke in the second quarter in the United States, We saw even better growth in China, and even Europe was pretty good for Pos. So so as those things moderate there'll be some verticals that probably we will get a little bit of channel inventory, but.
We really have a strong process for understanding that and putting out demand creation vehicles for that I would say the other thing is we have a number of we probably have we have a very good second half for innovation and product launches and so I think that's also an opportunity for us to continue to to really help the demand creation side, where we might have some excess inventory.
No I. Appreciate this just a question on fluke and Tek I remember being in China in 2018, when sort of Chinese Capex hit a wall.
These businesses were hit.
In reverse was all these mega projects in the U S right.
How much visibility do you have related to specifically fluke and tek to these projects when would you expect to get orders.
And does that structurally change the growth rate for these businesses over the next couple of years. Thanks.
Well I think on the tech side, we are starting to get visibility in fact, even in some semiconductor businesses, where the businesses, obviously slowed a little bit we have already had conversations with customers along a number of product lines about 2024 investments and I think what's been good about <unk>.
They've taken that that part is they've taken advantage of some other opportunities in power and in and in the aerospace and defense customers to continue to offset some of that so thats a good story and will hopefully be a good story in 'twenty four although still too early to tell on the fluke side, it's really going to be less around when those facilities are getting built.
So as much as it is going to be keeping those facilities up and running so we're probably a few years out from some of that when a manufacturing plant gets bill obviously, there's some advantage to what we do through the build cycle.
Electrical contractors buying more fluke equipment to build some of these facilities, but the real opportunity is going to be once those facilities are up and running and the maintenance staffs in those facilities or building out all of those opportunities, we're probably a little off from that opportunity.
But I think until then we're seeing good the secular drivers that we've got at fluke in power and solar and some of the sustainable investments that we talked about in the prepared remarks are remain a good opportunity for us.
Alright, great answer thanks, so much.
Alright, Thanks, Andrew.
Your next question comes from the line of Josh <unk> Lewinsky from Morgan Stanley . Your line is open.
Hi folks.
Hey, Josh.
Just wanted to follow up on.
And some of the.
Changes going on in the construction markets, maybe a little bit of mixed Virgin Sam Moore manufacturing, a little less some of these commercial or warehouse verticals.
Anything that you guys are seeing across customer base that gives you any kind of cyclical impulse, whether this business is countercyclical and more pro cyclical like I guess this is maybe one of the first real construction cycles. Since you guys have owned some of these assets like anything that you would just point out cyclically that you guys are noticing it seems like the business.
Doing well, but anything would be helpful.
Yes.
We don't have a lot of exposure to commission commercial buildings.
Really in the in the sense of traditional in South. So I think maybe we have commercial customers are maybe 5% of sales or something like that so it's not a big driver.
What we are seeing is quite frankly on the on the positive side at Gordian is a lot of deferred maintenance and what Gordian solutions and quite frankly, what we see in <unk> is taking advantage of deferred maintenance and seeing the opportunity for deferred maintenance improving project timeline. So that's really been a big growth driver for <unk> and I think it really.
Played out in the quarter and we think it plays out certainly in the second half. So so I think that leads to some of the infrastructure improvements that.
Not only is growing on state and local but also on the commercial lenders.
More broadly we.
What we're seeing from customers really in <unk> also is the fact that people want to understand their capital in this time of return to work and how are my real estate assets, working particularly with things like retail customers, they really want to understand their investments.
And we really do our solutions are really oriented towards understanding how to bring facilities costs down so really in some respects. The reassessment that people are doing around their commercial infrastructure to some extent as a growth driver for us and that we sell software that really helps them bring that together and really helps them understand their expense, what they are spending and where the spa.
Ending it and how they might take opportunities to save money, we talked about in the prepared remarks about a customer that is ahead of schedule on our $14 million cost savings because of our solutions. So quite frankly, I think a number of the sort of noise. That's in the commercial real estate market that I think your question is really oriented oriented at in many respects is to some extent a driver for us because of the.
Solutions, we have.
Got it makes sense it seems what the numbers say as well and then maybe just shifting gears, we've seen a few folks thus far this earning season have maybe.
Maybe a bit more of a reaction from customers from lead times normalizing, so not necessarily a destocking or a change in point of sale point of sale, but.
Are your lead times across some of the hardware businesses improving more materially here in <unk> and is there sort of a customer impulse reaction to that.
Yes, I think we received a little bit of that is at Tektronix, where our lead times have come down and it does create a little bit of a pause that was embedded in our guide that's why we thought orders would be the way. They were so yes to some extent, we're seeing that as lead times moderate and you don't need.
You don't need to order something 18 20 weeks in advance you can now order at six to eight weeks in advance there is some moderation, but that's really what's been embedded in our guidance from the first places we've made some assumptions around that and by and large that's come into play the way we thought at.
It flipped a little bit less so because our lead times have been always pretty good so.
So I think to the extent were seeing any of that it's really a tektronix and as I said, we've embedded that was we give you sort of the book to Bill dynamics that we give you some of the order growth rate, it's really embedded in those kinds of numbers.
Understood. Thanks, a lot.
Thank you.
Your next question comes from the line of Julian Mitchell from Barclays. Your line is open.
Thanks, a lot good morning.
Maybe just wanted to circle back to <unk>.
IHS is people seem very focused on that one given the history and so forth. So if I look at the second half.
It looks like you're assuming sort of $30 million to $40 million of profit step up I think half on half in IHS.
And maybe sort of $50 million also step up from the topline there.
And obviously last year, we had our most stable half on half performance. So is the delta on the top line. This year a lot of that see elective procedures.
And then when we look at the profit step up with that is it sort of just normal leverage plus some of that distribution channel shift and maybe some cost savings or any sort of color as to that half on half move.
Julian This is Chuck a couple of things going on there.
I think you've got the numbers roughly right.
So the first half second half.
<unk> things going on in the second half basically normal seasonality takes it takes into account a lot of that especially in the fourth quarter, but also coming out of Q1 in the first half China was obviously really low.
The COVID-19.
Electric procedures, there that was that made Q1 lower but.
Elevate dealer shift is going to give us more revenue than in Q4 as we were when we as we work through that and also more profit and then we're getting more pricing as we go through the year.
So I think those are.
Three things that really helped and then.
Yes.
Self help that we've put in and the productivity things that we announced earlier in the year also hill.
Helping us our incrementals going from first half to second half on that step up to 65%.
That's that's all of the things I mentioned and including seeing more consumables in the second half, let me stop there and see if I can read the basis here.
That's very clear. Thank you and then maybe switching tack I don't think capital deployment has come up much on the call yet.
I think the buyback did.
Sort of get going again in the second quarter after a quiet.
Six months or so.
And clearly on M&A, it's been quiet.
<unk> months, given the partly given the tough M&A backdrop.
But I think as we get lots of questions around whether there's been any change.
Change in view fundamentally about M&A or some of the types of deals and then also.
Is there more of an effort now to balance M&A with buybacks in terms of cash usage. So just any sort of thoughts on that given that buyback spend in Q2.
Julian let me take the buyback and then opportunity to Jim talked about M&A.
We remain opportunistic with our buyback.
Q1 is our lowest cash flow quarter, and we didn't do any there but.
But we'll be opportunistic.
As we move forward when we think that we're undervalued and see an opportunity.
I think thats going to continue.
Continue to be the case.
I think from a capacity standpoint, what we're doing here it doesn't change anything about when you look out three to five years, what are actual capacity. So we've got plenty of capacity.
Yes, Julian I would say we've been we've been very busy this year.
As you pointed out it's been prevailed since we did probation, but I think where we stand today as activity is actually.
Pretty good.
We've seen some things transact in the market lately that wouldn't suggest prices have come down necessarily but there are some pockets of that and our bolt on activity is very very busy right now and but we remain disciplined there is a number of processes that have failed given given some sellers lack of desire to sort of get price.
<unk> into what we think is the appropriate frame. So we'll remain disciplined in around the opportunities, but we do think there is a number of things out there that are possible and we'll continue to work through them in with with.
With the work we do in the diligence we do in.
We will look forward to when those things get done where we don't have a burning time clock of getting something done for the sake of getting something done as you well know where we will remain disciplined and there are opportunities for us I think in the back half of the year to do that.
Great. Thank you.
Thanks Julien.
Your next question comes from the line of Andy Kaplowitz from Citi. Your line is open hey, good.
Morning, everyone.
Hi, Andy Jim can you give us more color by region, and especially what's going on in China, and Europe , Obviously, China has become more of a concern recently in midyear, but I think you already did say China was one of those pockets of industrial weakness and that will continue to decelerate moving forward, but could you give us more details regarding how China and Europe and reflect in your guidance.
Going forward, yes sure.
We've obviously had a we've got a strong North America view and that will continue.
Second half probably in that mid single digit range and quite frankly, when you look at the two year stack in North America, very very good kind of mid teens kind of numbers. So we feel good about where we're at North America, and obviously as you know Andy.
A majority of our software businesses are we're getting the benefit of obviously that in our north American growth rate, we're getting the benefit of a lot of the great work that our AFP team is doing as well. So that's kind of North America, I think relative to western Europe .
Probably roughly flattish.
Europe has been so strong for a while now.
It'll be mid teens on a.
Mid teens in a two year stack for the second quarter. So we think it will be more flattish around the around the second half of the year, maybe up a little bit.
We're seeing some good traction in some places, but we're also seeing some as I mentioned in sensing, where we're seeing some industrial Oems slowdown and that'll be that's reflected in our second half guide.
Relative to China as you mentioned I think we've been consistent from really all six months of the year is that we've had for really really strong quarters of growth in China stands up exceptionally well against many almost everyone.
We did think that market would take a little bit of a breather in the second half and we said that back in February .
And Thats really we really still believe that so embedded in our guide is really more kind of low single digit growth in China for this.
For the second half.
And thats more like high teens.
Excuse me accelerating kind of low twenties on a two year stack. So we're really accelerating in China on a two year stack. So if the business is still there pretty good it's just off a very large base from the second half.
And then high growth markets as I mentioned on the India conversation, we still think Theres a number of opportunities in the second half to take advantage of some opportunities, but those are those kind of go there a little bit smaller so they tend to have the growth rates tend to move around a little bit, but we do feel like we've got some opportunities in some of the high growth markets in the second half.
Got it so you can make fun of me I'm going to ask an AI related question, but im going to ask it in the context of <unk>.
<unk> you talked about some of the verticals.
By geopolitical geopolitics and investment in AI, and computer and I think tax I see.
You had guided much lower for the quarter. Then you actually reported so I think you talked about <unk>, maybe you can talk about the inflection you saw impact Si was it AI related and you know what's going on there and what does it mean for the future.
Yes, I think Theres, probably two places that we are seeing from a customer perspective, I would say number one.
As we're seeing investments in quantum computing and R&D organizations that are really working towards opportunities for AI. So obviously, you've got to get the hardware in order to get the benefits of AI and Tektronix is really playing strongly in that in that regard and we mentioned that we obviously mentioned that order of the prepared remarks Ian.
It's really more geopolitical aspect of.
Less AI related just more in general of what they've historically done they've got a tremendous backlog of the business really extends we don't even include that backlog in our hardware backlog because of the numbers.
Very positive, but we've had some supply chain capacity challenges, we got more out in the second quarter than we anticipated as you said and we're continuing to work through that but in the second half, we probably have some opportunity in the second half to do better than that but.
We will see where that goes and some of the improvements. We've made are really good but we want to see those more sustainable, particularly with our supply base at EMC, but but the demand the demand for EMC right now is at an all time high.
Appreciate the color.
Thank you.
Your next question comes from the line of Nigel Coe from Wolfe Research. Your line is open.
Oh, hi, guys good morning.
So I think that code.
I think we could AI, so, let's let's move to price.
So you wanted a few companies actually seen better price <unk> I think.
50 basis points, better if I'm not mistaken maybe a bit more than that so just keep at.
It seems like Youre still pushing price, especially in Asia. So what is your perspective on how pricing looks in the back half of the year, especially with NHS is there still more runway.
In health care, and then I'm just also curious as well.
How pricing looks across software and services.
Yes, so I would say a couple of things in the quarter, a little bit better than we anticipated really around sensing we as we said we over delivered in sensing and I think that brings it brings the number up where we probably are getting the most price.
If you will.
The health care, it will accelerate a little bit in the second half just because of of elevate in the channel mix change that we have that will probably be more true in the fourth and the third but we will see that and yes. We are continuing to see price and Upselling cross selling our net dollar retention as an example has continued to improve and we are.
Getting we're getting some opportunities to really push more pricing.
Some of the story of the margin improvements in <unk> and iOS is really the good work we've done.
The leader in the clubhouse that net dollar retention of service channel I think we had almost 115% now and I think it just gives you. An example of us continuing to push the opportunity for really value I think it's.
On the software side, it's really about value and the value, bringing if we can continue to have those features that we can go cross sell and up sell we didn't talk much about it on the question around AI, but AI does present us an opportunity over time to create more feature features and opportunities within our software business to improve net dollar retention, we've seen that a census example, with.
AI launch that we have with them in the second quarter. So we do think theres plenty of opportunity for net dollar retention to really continue to go up Nigel and Thats really where we will see the price component of what we do in our software businesses.
Okay, that's great and then moving onto sleek.
The flat revenues it sounds like units down mid single digits.
So China comp as being quite tough there, but are there any other pockets of.
You called out just curious because this is the clearing of the coal mine.
Yes, I think we probably if anything youre always such a strong first quarter. There when we look at the mid single digit growth in the first half.
Fluke.
We really feel good about that number and yes. There is a I would say the industrial business has got a little bit a little bit of slowing there, but the calibration business and other components of the business are accelerating so all up I think the mid single digit number on the backs of such a good first half last year.
I really think speaks to the strength of fluke the second half will look similarly.
In terms of about mid single digit for the second half and that's really on the backs of EBIT higher growth last year in the second half so.
In many respects kind of an acceleration from a two year stack. So overall, we like the trajectory in the business Youre right Theres a couple of places pockets of things. We're continuing to watch we continue to watch the PMI and industrial production, but I think the team's been executing well number of good technology launches, we had the EMEA business is performing really well.
So we built some things that are the end of the portfolio over time as you well know trying to make fluke less cyclical more tied the secular drivers and we believe that will continue to play out here in the second quarter. We've got a number of new product launches that could take advantage of those opportunities as well. So if there is some slowing in the marketplace, we think that can.
A number we've got a number of actions out there that we think can counter measure some of the some of the potential slowness.
Okay, that's great. Thanks, Jim.
And your next question comes from the line of Joe Giordano from TD Cowen Your line is open.
Hey, good morning, guys.
Yes, I wanted to just on the short cycle stuff one I just want to make sure I understand look flattish this quarter and accelerate in two half and the second half and I'll make sure I understood that and then.
On tax you mentioned earlier.
Orders were down 10%, but still up 30 from three years ago like that's obviously very positive but at the same time does it like are you in a way that like what's the right amount of a normal level for a business like that because if we're talking about 350 ish of excess backlog going into 200 and half of that is tax.
$75 million of excess revenue delivery versus orders in the second half alone, which is pretty significant so just wanted to understand like where these businesses exit the year and what it means for comps into next year for my <unk> starting point.
Yeah. So let me clarify the fluke comment what I said.
Well I think look as we were mid single digit in the first half this year will be mid single digit in the second half so from that standpoint, no acceleration the quarters might move a little bit, but but just if we think about first half second half also say however, because we grew more in the second half of last year. The two year stack does access.
Right, a little bit so hopefully that clarifies the fluke cabinet.
I think relative to attack, we always knew that there were a number of parts of the business that we're.
We're really fulfilling over time.
And as I mentioned, plus lead times going down would ultimately impact orders, what's been nice to see it's been the strength of point of sale attack, which are around the world has continued to be good and then I think it continues to solidify our belief that the demand is real and that the demand can be played out over time and thats why that we believe that demand.
The excess backlog if you will remains an insurance policy against anything that might occur relative to some slowing that's going on so I think I'll stop there and hopefully that clarifies the two points.
And then just a follow up on margins if I look at your slide 16, obviously, a big ramp in all three segments from <unk> to <unk> and I just wanted to kind of if you can frame out maybe how much of that variance from <unk> to <unk> is like normal seasonal and how much is like a new jumping off point from the fourth quarter level into next year.
Okay.
I think the.
Rob its normal seasonal it's just it's more.
Oh, I'm sorry, Joe.
This is this is normal seasonality step up from Q3 to Q4, when you're talking about.
What's going on there at the fall through margins I do think that.
But embedded in there some of the self help we did in the first half and that will carryover and b and the.
Certainly the first half of next year and the pricing that we've been putting in so to certain extent it is a better jumping off point.
Going into next year.
But keep in mind those.
Q4 to Q1 step down, but when you look year on year I think those things are going to be tailwind.
With pricing sell felt.
And then the elevate that helps margins.
Give us a great step.
Stepping off into the first half of next year.
Thanks, guys.
Thanks, Joe Thanks, Joe.
And your next question comes from the line of Joe O'dea from Wells Fargo. Your line is open.
Hi, everyone. Thanks for taking my questions.
Hi.
First just one related to a comment around channel distribution.
Hs and I think you talked about how sort of a headwind in the third quarter headwind goes away in the fourth quarter I guess I'm curious about the tailwind associated with this and kind of what what.
What that looks like and I don't know any framing around kind of the cost headwinds you've seen so far but then as you sort of reach that transition point.
How long you think it takes to then sort of sort of reach the.
More elevated margin target opportunity that you have there.
Well I would say relative to the just the transition itself. The biggest impact I think we ought to think about the biggest impact is in the second quarter with some impact in the third and that sort of equates itself out of the out of the number by the fourth quarter. So that's kind of the sort of the.
The sequential aspects of the impact of it we think that benefits I think we've talked about this a benefits margins from the perspective.
We get better price.
And so in that sense. It has a margin impact as well I also think it has a growth impact and this will probably be more a.
Late Q4 in the <unk> 24 impact and we still need we still need to see it but but the direct aspects of our terminal sterilization, which is R. A really strong business for us allows for us to accelerate.
The sterilization cycles that go on in our equipment, meaning that we can now that were direct we have much more contact with customers and our application engineers will be more directly working with customers on the sort of efficacy of accelerating sterilization into other products that might be in the sterilization lab and that should have.
Impact on growth over time, so not only are in terminal sterilization, but theyre also in our biological indicator business. So so we feel that theres a real there is a growth impetus to this as well we think there is a customer satisfaction impetus as this is wild I think to some extent the reason why our capital numbers were better in the second quarter was because customer.
They are starting to understand that they're going to have a better a better opportunity to really have.
Asps salespeople ASP application engineers in their hospitals every day, helping them out and so I think I think it's a margin and growth story of certainly it's going to or has already started to play out I believe on the capital side plays out on the consumable side in the second happened and certainly into 'twenty four.
And then I wanted to ask one.
Just on orders I think you talked about.
Precision Tech book to Bill at one better than the <unk> nine you were anticipating.
Not sure about fluke, but orders up mid single digit I guess, if anything maybe a little bit better than expected.
And so I don't know if theres sort of anything overarching about it but what you would sort of most attribute to seeing some of these order trends kind of better better than anticipated out there.
Yes, I think I think well here's what I, here's what we're seeing I mean, I really if we as we started the year, we thought there'd be some slowing in the year just because of the moderating aspects of some of our businesses and maybe some economic impact in pockets, we really have seen.
We really haven't seen much of that in the first half of the year, but.
But embedded in our guide is still some some aspects of thinking that theres going to be some economic impact obviously PMI in the world. Some of the portfolio will still have some ties to industrial production, we have been able to mitigate all of that because of the strong strategy around secular drivers and the recurring revenue parts of the business that have played out exceptionally well. So we'll continue to.
We will continue to that was a book to bill of one O which included by the way.
Fluke fluke the orders as well on that overall book to Bill So.
So I think where we stand today is in a much better position as we said that excess backlog number is is more robust than we anticipated as we go into the second half and I think that bodes well for the three things we talked about going into the year, we'd have heart. If there was some concerns around the macro that we would have the strong strong.
Backlog excess backlog as I described software and recurring revenue and the self help work that's going on at HFF and I think what you saw in the second quarter is all that manifesting well.
Thank you.
Thank you.
And our final question comes from the line of Brett Linzey from Mizuho Americas. Your line is open.
Hi, good morning, Thanks for taking the question.
A lot of Ground's been covered but just wanted to come back to price clearly advanced here and the industrial cycle and seeing some softness in some of those hardware businesses. How are you thinking about the ability to take more price or hold the ground on price.
Should the macro develop more weekly here, particularly within sensing.
I think number one our ability to hold price and feel very good about I think in the quality of our franchises the kind of value and investments we've made in innovation.
I really speak to our ability to hold price and probably we think of it as value creation and our ability to create more value for customers and get paid for it and I think you see that across the and.
A number of the things we're talking about I think we see that so we think strongly we could hold price and we feel we can continue to get it probably not at the rates we got in in.
In 'twenty one as an example in 'twenty two but we've always been a good price leader relative to I think a number of companies and I think we there's no reason why we wouldn't continue to be as we go into 'twenty four 'twenty five.
Okay, Great I appreciate the color I'll leave it there.
Right.
And this concludes our question and answer session I will now turn the call back over to you Jim for some final closing remarks.
Thanks, Rob and thanks, everyone for the time today.
You get a sense of of the excitement in the in the second quarter and the conversations we had I think as we look into the second half.
The raise of our guide really speaks to the confidence that we have out there. Despite probably some noisy things our strategy is playing out the way we anticipated and we're excited about that and we'll look forward to sharing some of the details with you as we get through the <unk>.
The follow up calls and a number of things that we'll be doing here in the third quarter between now and then have a great summer. Thanks. Thanks for everyone. We look forward to your follow up questions and take care. Thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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