Q3 2023 Fortive Corp Earnings Call

My name is Krista and I'll be your conference facilitator of this afternoon at this time I would like to welcome everyone to the Ford is Corporation third quarter 2023 earnings results Conference call. All lines have been placed on mute to prevent any background noise.

After 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 do you withdraw your question press the pound key.

I'd now like to turn the call over to MS. Elena Rosman, Vice President of Investor Relations Ms. Rosman, you may begin your conference.

Thank you Christa and thank you everyone for joining us on today's call with US today are Jim Lico, our President and Chief Executive Officer, and Chuck Mclaughlin, Our senior Vice President and Chief Financial Officer.

We present certain non-GAAP financial measures on today's call information required by regulation G are available on the investors section of our website at Florida 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 that we expect or anticipate well or may occur in the future. These forward looking statements are subject to a number of risks and actual results may 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 31 2022.

These forward looking statements speak only as of the date that they are made and we do not assume any obligation to update any forward looking statements.

With that I'd like to turn the call over to Jim.

Thanks, Elena Hello, everyone and thank you for joining us I'll begin on slide three.

Third quarter, we continued to see the benefits of our portfolio strategy with core growth and margin expansion in all segments.

Third quarter core revenue growth was 2.5% tempered by specific headwinds in health care and slowly and in parts of sensing in China.

Strong execution by our teams drove substantial improvement in gross and operating margins earnings and free cash flow.

Gross margins expanded by 160 basis points to 59, 7% adjusted operating margins increased by 150 basis points to 25, 9% and adjusted earnings per share grew 8% and free cash flow increased 25% to $384 million.

As you can see our strategy is delivering results with enhanced portfolio positions innovative new products and dedication to the Florida business system, allowing us to consistently performed despite a mixed macro environment as.

As we look ahead, our attractive funnel, a bolt on and adjacent M&A opportunities across our three segments and five connected workflows are expected to drive upside in 2024 as exemplified by the acquisition of.

Electro automatic as well as three other bolt ons in the quarter.

On to slide four we wanted to highlight how the year is playing out relative to our initial expectations and begin to frame our thinking for 2024.

Beginning on the left hardware product orders were stronger than the first half of the year as traction on new product launches and leveraged the secular drivers provided more backlog to buffer the normalization of supply chain.

Hardware product orders were down mid single digits, which we believe reflects continued solid demand with orders up over 20% on a three year stack basis in the third quarter.

Point of sale trends in North America, and Western Europe remained healthy even as channels normalized while we did see slowing specifically in China and parts of sensing in the quarter.

Software and services continued to demonstrate their resilience with high single digit growth across our facilities and asset lifecycle, environmental health and safety of perioperative customer workflows.

The health care environment continues to improve for growth in the third quarter was constrained by the clearing of channel inventory NASP and continued weakness in the bio processing market and then attack.

Turning to the right hand side of the slide we are delivering 2023 performance ahead of our initial expectations coming into the year with mid single digit core growth with adjusted operating profit margin incrementals over 60% delivering nearly to ask the margin expansion planned in the year and we are accelerating our capital deployment in the quarter with robust free.

Cash flow and ample firepower to fund attractive M&A opportunities.

Further evidence that our strategy to create a more durable growth company is working as highlighted on slide five.

Our innovation and portfolio strategy continues to build on our leadership positions in our connected workflows benefitting from customer investments in key megatrends, including automation and Digitization, the energy transition and the need for productivity solutions contributing to our improved through cycle performance.

We have several good examples across Florida, including providing customer software solutions to digitize and automate processes and deliver customer success and AI driven ecosystems probation is partnering to enable real time AI in the Gi workflow contributing to their strong win rates and accelerated mid teens growth in 'twenty three.

And in the third quarter Fluke added Zimmer deal what a bolt on acquisition accelerating their AI enabled predictive maintenance capabilities with vibration analytics and remote condition monitoring.

Or there is also helping to solve our customers' toughest energy transition challenges with breakthrough innovations fluke and volatile are both benefiting from strong demand in solar EV storage equipment, and the build out and modernization of electric grid infrastructure. In addition, fluke acquired sole metric to further solidify their leadership position.

And the fast growing distributed energy market with high precision solar test and measurement products.

In this environment, our customers are putting a premium on productivity.

<unk> is launching new sterilization monitoring products broadening their leading position in biological indicators, allowing customers to reprocess surgical instruments with greater speed and efficiency.

Further gordian acquired MSR, a natural extension of the Preconstruction workflow, which provides cost data that will allow them to expand job order contracting in the UK turning.

Turning to slide six we are pleased to announce our agreement to acquire <unk> electro automotive <unk> enhancing our leading position in advanced electronic test and measurement solutions Eas.

<unk> specializes in the high power segment of the market that serves a number of growing end markets, including data centers energy storage E mobility grid modernization and hydrogen power alternatives.

<unk> expands tektronix as addressable market and complements and diversify their offerings and the fastest growing areas of the power market solving for power density and efficiency challenges and creating a more sustainable and electrified world.

With an estimated $175 million of revenue and low <unk> operating margins in 2023, Eas is expected to be accretive to our growth in margins.

<unk> global scale, including a 10 X increase in go to market resources accelerates Ea's global market expansion.

Further the Florida business system will be a valuable tool in achieving commercial manufacturing and operational synergies, creating unparalleled value for customers and shareholders. As a result, we are targeting an attractive double digit return profile in year, five and earnings accretion that ramps as we delever, given our robust free cash flow and <unk>.

Summary, the acquisition of <unk> reflects our commitment to more durable and higher growth and ability to drive higher returns for Florida for years to come turning.

Turning to slide seven.

Florida business system continues to be a differentiator for us, enabling our business to drive innovation and profitable growth. We recently completed our annual CEO Kai daily this event as a hallmark for demonstrating our culture of continuous improvement and our ability to deliver outstanding results and our operating companies and one powerful week.

As always we bring together our most senior afforded leaders, including our segment leaders in many of our operating company presidents with a total of 41 teams and over 500 team members driving significant improvements in growth margins free cash flow and breakthrough innovations.

<unk> highlights include at ISC, and <unk> their events realized 100% to 125% improvements in productivity.

Service channel reduce their time to onboard new customers and probation had a two <unk> improvement in the conversion of our marketing leads both enabling more and faster growth.

Tektronix deployed a co pilot leveraging AI to bring technical expertise to customers and internal automation to significantly improve their efficiency and customer experience as fluke health solutions had breakthrough results in dosimetry reporting reducing customer response time by more than 50% in summary. This year's event continue to emphasize the power of the <unk>.

The business system, and the breadth of applications across our portfolio driving sustained results.

I will now provide more details on each of our three segments beginning with intelligent operating solutions on slide eight.

IOS grew core revenue by 4% with good growth in most regions.

Margins continued to benefit from our portfolio evolution with high margin software growth as well as price realization of productivity benefits driving 230 basis points of adjusted operating margin expansion.

Highlights in the quarter included Fluke core revenues were up low single digits as solid core demand in NPI traction buffered expected channel normalization EMEA continued its strong performance with another quarter of double digit revenue growth Luke.

<unk> secured a number of wins in secular growth markets, including a sizeable calibration order from an aerospace and defense customer.

<unk> also continues to see success with new product introductions with the recent launch of Mchugh are first the industry acoustic immature for diagnosing mechanical failures.

DHS revenues grew mid single digit with double digit <unk> growth at ISC and another strong quarter for SaaS and intellect with over 50% growth in ACB customer bookings in the quarter.

In addition marathon petroleum, our largest ina and safer systems customer recognized industrial scientific with their corporate exceptional partnership award.

Facility and asset lifecycle revenues grew high single digits, driven by continued strength in SaaS.

Gordian continues to drive market penetration as more customers utilize their job order contracting platform to procure and manage their large infrastructure projects.

The current secured an agreement with Xavier University provided facility management software, which included cross selling with Gordian and service channel launched several innovations for both subscriber and provider software releases contributing to strong overall growth.

Turning now to slide nine precision technologies reported 1% core revenue growth and adjusted operating margins of 26, 5%, expanding 60 basis points, reflecting strong price realization and productivity benefits from.

Some highlights for the quarter include electronics is executing on robust backlog in power and digital test and measurement solutions and delivering low single digit core growth and outstanding operating margin expansion.

This included over 20% revenue growth in North America, reflecting continued customer investments to solve the proliferation of new power design challenges for batteries Evs and industrial applications.

Tech orders continued to normalize off of 40% to your stack at the end of 2022 double digit order declines at Tech were greatest in China. However, we did see weekly patterns improve sequentially as we move through the quarter.

Further we expect continued lead time improvement in channel normalization with orders returning to growth in the coming months as customers continue to prioritize investments in semiconductor advancements AI enabled compute and electrification of everything.

Sensing technologies saw another quarter of strong orders and revenue growth in QUADRA. This included a meaningful deal in the quarter from a large U S utility customer for full transformer asset monitoring solutions.

Also our <unk> slowing in China was reflected in lower than expected orders and revenue.

Lastly, specific scientific AMC reported another quarter of double digit sales growth as it benefits from kaizen activity to improve manufacturing capacity and operational execution to deliver on record backlog.

Moving now to slide 10, and advanced Health care solutions core revenues were up 2%, reflecting improved underlying sterilization demand, partially offset by higher than expected U S channel inventory and ASP.

For the third quarter, the total impact resulted in $11 million and less revenue impacting EHS core growth by over 300 basis points and adjusted operating margins by almost 200 basis points.

Elsewhere, our high growth markets saw revenues up high single digits, driven by robust growth in Latin America as well as good growth in Asia.

Adjusted operating profit margins increased by 200 basis points year over year, we're seeing traction on pricing actions as well as the benefits of the productivity initiatives reflected in higher margins.

Additional highlights for the quarter include census continue to grow subscription revenue with expense attract SaaS business, increasing mid teens benefiting from continued traction in both new logo expansion and cross selling opportunities as customers standardize on their leading instrument tracking software solution.

Krista: My name is Krista and I'll be your conference facilitator this afternoon. At this time, I would like to welcome everyone to the Fortive Corporation Third Quarter 2023 earnings results conference call. All lines have been placed on mute to prevent any background noise.

Fluke health solutions revenue increased slightly as high single digit growth in its core dosimetry business was partially offset by project timing. We also saw continued market weakness in AMETEK accounting for approximately half of the slower than expected growth in the segment in the third quarter Lastly, probation had another quarter of excellent growth over 20% driven by.

Krista: After a speaker's remarks, there will be a question in answer session. If you would like to ask question during that time, simply press star then the number one on your telephone keypad. If you would like to draw your question, press the pound key.

Continued APAC SaaS adoption and new logos success.

Elena Rosman: I would now like to turn the call over to Ms. Elena Rosman, Vice President of Investor Relations Ms. Rosman, you may be getting your conference. Thank you, Krista, and thank you everyone for joining us on today's call. With us today are Jim Lico, our President and Chief Executive Officer, and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. We present certain non-gap financial measures on today's call. Information required by regulation G are available on the investor's section of our website at Fortive.com.

Reviewing the fourth quarter. The ASC channel transition is now complete and we expect growth to accelerate in EHS. This includes the initial ramp of Asps recently launched portfolio of steam sterilization monitoring products, which will further build over several quarters as they expand their global reach we continue to expect margins to ramp in Q4 of 2000.

24, driven by consumables growth price realization and productivity actions with that I'll pass it over to Chuck will provide more color on our third quarter financials, and our 2023 outlook starting on slide 11.

Thanks, Jim and Hello, everyone.

Elena Rosman: Our statements on periods of period increases or decreases refer to year-over-year comparisons unless otherwise specified. During the call, we will make four-looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These four-looking statements are subject to a number of risks and actual results might differ materially from any four-looking statements that we make today. Information regarding these risk factors is available on our FEC filings, including our annual report on Form 10K for the year ended December 31st, 2022. These four-looking statements speak only as of the date of their main, and we do not assume any obligation to update any four-looking statements.

We generated year over year core revenue growth two 5%, which included mid single digit growth in North America as.

As Jim mentioned, we saw over 20% growth in tektronix and acceleration in our software and recurring revenue streams, which more than offset moderation in some of the sensing businesses.

Western Europe revenue was up slightly as growth in software was offset by normalizing growth in hardware products.

I just saw a continued strength in India up mid teens, and Japan of high single digit which was more than offset by low double digit decline in China.

We had anticipated growth in China would slow in the second half as we lapped outside growth in prior years.

Sample Tektronix was down over 20% in China in the quarter. However was still up 20% on a two year stack basis.

Jim Lico: With that, I'd like to turn the call over to Jim. Thanks, Elena. Hello, everyone, and thank you for joining us.

We also saw continued slowing incentives given the current macro environment.

Jim Lico: I'll begin on slide three. In the third quarter, we continue to see the benefits of our portfolio strategy with core growth and margin expansion in all segments. Third quarter, core revenue growth was 2.5 percent, tempered by specific headwinds and health care, and slowing in parts of sensing and China. Strong execution by our teams drove substantial improvement in growth in operating margins, earnings, and free cash flow. Adjusted growth margins expanded by 160 basis points to 59.7 percent.

Hs grew high single digit as electric procedure volumes improved in the quarter.

Turning to slide 12, we show operating performance highlights for the third quarter adjusted gross margins increased 160 basis points to a record 59, 7%.

On a two year stack basis, they are up an impressive 240 basis points driven by the benefits of our portfolio evolution. The continued application of FBS initiatives and strong price realizations.

Jim Lico: Adjusted operating margins increased by 150 basis points to 25.9 percent, and adjusted earnings for share grew 8 percent and free cash flow increased 25 percent to $384 million. As you can see, our strategy is delivering results with enhanced portfolio positions, innovative new products, and dedication to the Florida business system allowing us to consistently perform despite a mixed macro environment. As we look ahead, our attractive funnel of bolt-on and adjacent M&A opportunities across our three segments and five connected workflows are expected to drive upside in 2024, as exemplified by the acquisition of EA, Electro Automateek, as well as three other bolt-ons in the quarter.

Adjusted operating margins expanded 150 basis points to 25, 9% or 300 basis points over the last two years, reflecting higher gross margins and the benefits of the productivity initiatives, we executed earlier this year.

Adjusted earnings per share increased 8% to 85.

Despite higher year over year interest and tax expense.

Earnings are up 30% on a two year stack basis.

And free cash flow was $384 million, reflecting a 25% increase over the prior year and over 50% growth.

Last two years as we continue to grow earnings and effectively manage working capital.

Jim Lico: Turn to slide four. We wanted to highlight how the year is playing out relative to our initial expectations. To begin to frame our thinking for 2020. 4. Beginning on the last hardware product orders were stronger in the first half of the year, its traction on new product launches and leveraged to secular drivers provided more backlog to buffer the normalization of supply chains. Hardware product orders were down mid-single digit, which we believe reflects continued solid demand with orders up over 20% on a three-year stack basis in the third quarter.

Turning now to the guide on slide 13, and the outlook for the remainder of the year for.

For the fourth quarter, we are adjusting our range to reflect caution around the macro in China and delayed recovery and independent.

While revenue growth is expected to be in the range of one 5% to 3% adjusted.

Adjusted operating profit margins are anticipated to increase by approximately 150 basis points and adjusted diluted earnings per share are expected to be in the range of 92% to 95, representing 5% to 8% growth and includes $5 million of one time additional corporate expense related to the <unk>.

Jim Lico: Point of sale trends in North America and Western Europe have remained healthy even as channels normalize while we did see slowing specifically in China and parts of sensing in the quarter. Software and services continue to demonstrate their resilience with high single digit growth across our facilities and asset life cycle, environmental health and safety, and perioperative customer workflows. The healthcare environment continues to improve for growth in the third quarter was constrained by the clearing of channel inventory and ASP and continued weakness in the bioprocessing market and impact.

The Asian plans falling a cyber security incident in early October.

We also plan to proactively fund an incremental $35 million of productivity initiatives in the fourth quarter, which are excluded from our adjusted EPS outlook with accretive benefits expected in 2024.

Finally, we expect free cash flow of $415 million, representing conversion of approximately 125% of adjusted net income.

Jim Lico: Turning to the right hand side of the slide, we are delivering 2023 performance ahead of our initial expectations coming into the year with mid-single digit core growth with adjusted operating profit margin in criminals over 60%, delivering nearly two acts of the margin expansion planned in the year. And we are accelerating our capital deployment in the quarter, with robust free cash flow and ample firepower to front fund attractive M&A opportunities.

Turning to the full year recap.

We are reiterating the midpoint of our earnings guidance for 2023, which is coming in at the high end of the outlook, we set at the beginning of the year.

Things have largely played out as we expected with some upside driven by secular tailwind driving market expansion, new customer customer innovations resiliency of roughly 40% of recurring revenue.

Jim Lico: Further evidence that our strategy to create a more durable growth company is working is highlighted on slide five. Our innovation and portfolio strategy continues to build on leadership positions in our connected workflows benefiting from customer investments and key mega trends, including automation and digitization, the energy transition, and the need for productivity solutions contributing to our improved through cycle performance. We have several good examples across Florida, including providing customer software solutions to digitize and automate processes and deliver customer success in AI driven ecosystems.

Elevated backlogs and carryover pricing and our hardware products businesses buffering moderating demand as order rates normalized throughout the year.

As a result, we have core growth and margin expansion each of our segments.

Core growth for the year reported is now expected to be approximately 5% with adjusted profit margins are anticipated to increase approximately 150 basis points.

Jim Lico: Probation is partnering to enable real-time AI in the GI workflow, contributing to their strong wind rates, and accelerated mid-teens growth in 23. And in the third quarter, fluke added a ZIMA DLI, a bolt-on acquisition accelerating their AI enabled predictive maintenance capabilities with vibration analytics and remote condition monitoring. Florida is also helping to solve our customer's toughest energy transition challenges with breakthrough innovations. Fluke and ball troll are both benefiting from strong demand and solar, EV storage equipment, and the build-out and modernization of electric grid infrastructure.

Adjusted diluted earnings per share is now expected in the range of $3 37 to.

With $3 40.

Having raised our guidance twice in the year and we continue to expect free cash flow of $1 5 billion, representing a conversion of 105% of adjusted net income and 21% free cash flow margin with that I'll pass it back to Jim to provide some closing remarks.

Thanks, Chuck I'll start to wrap up on slide 14.

Consistent with 2023, we believe we will see sustained core growth and robust margin expansion and free cash flow growth in 2024, despite the evolving macro environment well continues to differentiate <unk> as our ability to deliver mid single digit through cycle growth reinforcing our portfolio durability and the power of FBS to deliver strong.

Jim Lico: In addition, fluke acquire a sole metric to further solidify their leadership position in the fast growing distributed energy market with high precision solar test and measurement products. In this environment, our customers are putting a premium on productivity. ASP is launching new sterilization monitoring products broadening their leading position in biological indicators allowing customers to reprocess surgical instruments with greater speed and efficiency. Further, Gordian acquired NFR, a natural extension of their pre-construction workflow, which provides cost data that will allow them to expand job order contracting in the UK.

Margin expansion.

The consistency of our execution reflects the strength of our product vitality and alignment to high growth secular trends continued solid customer demand and the buffer of excess backlog, adding to a resilient growth profile in healthcare, we expect a continued modest pace of industry recovery to drive stronger growth and incremental margins as we lap.

Discrete 2023 headwinds lastly.

Lastly in software and other recurring our efforts to increase demand generation and strengthen our go to market capabilities is expected to drive strong SaaS and license revenue growth in 2024.

Jim Lico: During the slide 6, we are pleased to announce our agreement to acquire EA Electro Automatee, enhancing our leading position in advanced electronic test and measurement solutions. E.A. Specializes in the high power segment of the market that serves a number of growing end markets, including data centers, energy storage, e-mobility, written modernization, and hydrogen power alternatives. E.A, expands tectronics' addressable market and complements and diversifies their offerings in the fastest growing areas of the power market, solving for power density and efficiency challenges and creating a more sustainable and electrified world.

This brings me to slide 15, and how we drive differentiated performance and value creation for our shareholders. As we finalized 2023, we are demonstrating another year of strong execution.

Levering record gross margins operating margins and free cash flow. These sustained results underscore the power of the Florida business system to relentlessly drive continuous improvement throughout our portfolio as.

As we showed at our Investor day in May by executing the Florida Formula We expect roughly double our earnings per share and generate more than $8 billion of free cash flow over the next five years.

Jim Lico: With an estimated $175 million of revenue and low 40s operating margins in 2023, E.A, is expected to be accretive to our growth and margins. Ectronics' global scale, including a 10X increase in go-to-market resources, accelerates E.A. 's global market expansion. Further, the Florida Business System will be a valuable tool in achieving commercial manufacturing and operational synergies, creating unparalleled value for customers and shareholders. As a result, we are targeting an interactive double-digit return profile in year five and earnings accretion that ramps as we de-lever given our robust free cash flow.

Our acceleration of capital deployment as demonstrated this quarter further position supportive as a higher 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, Chris that we are now ready to take questions.

As a reminder to.

To ask a question. Please press star one on the telephone keypad. Your first question comes from the line of Julian Mitchell from Barclays. Please go ahead.

Jim Lico: In summary, the acquisition of E.A, reflects our commitment to more durable and higher growth and ability to drive higher returns for fortive for years to come.

Hello, Hi, good morning.

Maybe.

Just wanted to start with the precision business just how the guidance sort of has moved around at tektronix.

Jim Lico: Turning to slide seven, Florida Business System continues to be a differentiator for us, enabling our business to drive innovation and profitable growth. We recently completed our annual CEO, Kaizan Week. This event is a hallmark for demonstrating our culture of continuous improvement and our abilities to deliver outstanding results in our operating companies in one powerful week. As always, we bring together our most senior-fortive leaders, including our segment leaders and many of our operating company presidents with a total of 41 teams and over 500 team members driving significant improvements in growth, margins, free cash flow, and breakthrough innovations.

So it seemed like the test and measurement market was getting worse, a few months ago and you raised the tektronix revenue guide for the year and that has come down.

So maybe just help us understand was it simply China suddenly getting very bad in late Q3 that caused such a resignation.

And maybe give us some context now with that PT segment being down.

<unk> in Q4, while it's sort of history tells us the duration of that.

Jim Lico: Some Kaizan highlights include that ISC and QualisRoll, their events realized 100 to 125% improvements in productivity. Service channel reduced their time to onboard new customers and probation had a 2X improvement in the conversion of marketing leads, both enabling more and faster ARR growth. Tectronics deployed a co-pilot, leveraging AI to bring technical expertise to customers and internal automation to significantly improve their efficiency and customer experience and fluke health solutions had breakthrough results in dose symmetry reporting, reducing customer response time by more than 50%.

Sales downturn should be for the Pts segment.

Yes, good morning, Julian it's Jim and I think when you look at it.

You are right when we look at kind of where we're at now we're back to where we were and I think that at high single digit I think for the year for Tac.

I think were really what we saw.

Sort of answered it and the question is probably a little bit more of a step down in China. We obviously have good strength in China on a two year basis I think in the third quarter I think were like 30% on a two year stack, but I think what we saw in China was a little bit of inventory.

Jim Lico: In summary, this year's event continued to emphasize the power of the Florida Business System and the breadth of applications across our portfolio driving sustained results.

Jim Lico: I will now provide more details on each of our three segments, beginning with intelligent operating solutions on slide 8, iOS grew core revenue by 4% with good growth in most regions, margins continued to benefit from our portfolio evolution with high margin software growth, as well as price realization and productivity benefits, driving 230 basis points of adjusted operating margin expansion. Highlights in the quarter included, look core revenues rubbed low single digit as solid core demand and MPI traction buffered expected channel normalization. EME continued its strong performance with another quarter of double digit revenue growth.

A little bit more cautiousness on our part.

A number of distributor and customer and direct customers around all around China, not really necessarily industry base, maybe more broad base I would call that more caution than anything that's probably the single biggest aspect to it we did have some push outs a little bit from a couple a couple of large orders.

That we saw as well, but I would say the big credo borrowing on that conversation related to tech is really.

It's really what is really China.

The good news on it and what we've seen as you know over the last several quarters.

Jim Lico: Luke secured a number of wins and secular growth markets, including a sizable calibration order from an aerospace defense customer. Luke also continues to see success with new product introductions with a recent launch of a first-to-industry acoustic imager for diagnosing mechanical failure. EHS revenues grew mid single digit with double digit eye net growth at ISC and another strong quarter for SAS and intellect with over 50% growth in ACV customer bookings in the quarter.

With <unk>, where they've been semiconductor index down number of factors that would suggest that some that were coming in we were coming into what we've been calling normalization I think we've been consistent in that regard, we'll see <unk> get a little bit better in orders in the fourth quarter.

Then they were then they were in the third and.

Our 90 day funnel is actually look better now than they have been so.

Point of sale and a number of places Europe, North America and in Europe as an example.

Jim Lico: In addition, Marathon Petroleum, our largest eye net and safer systems customer recognized industrial scientific with their corporate exceptional partnership award. Facility and asset life cycle revenues grew high single digit driven by continued strength and SAS. Guardian continues to drive market penetration as more customers utilized their job order contracting platform to procure and manage their large infrastructure projects.

We're good and will probably continue to be pretty good we actually China Pos was actually decent in Q3 as well. So if I were just saying stay high centered on tech I would say high <unk> China.

Trend third quarter, probably the low point in many respects, we'll start to get a little bit better as we get towards the end of the year.

Jim Lico: The current secured agreement with Xavier University provided facility management software which included cross selling with Guardian and service channel launched several innovations for both subscriber and provider software releases contributing to strong overall growth.

Thanks, and then any broad thoughts on sort of PT overall, you've got an.

Organic sales this quarter, how quickly are you assuming that flips positive.

Yes, I think what we've been talking about strategically around PT is bad.

Jim Lico: Turning now to slide nine, precision technologies reported 1% core revenue growth and adjusted operating margins of 26.5%, spanning 60 basis points reflecting strong price realization and productivity benefits. From highlights in the quarter include, electronics is executing on robust backlog and power and digital test and measurement solutions and delivering low single digit core growth and outstanding operating margin expansion. This included over 20% revenue growth in North America. Reflecting continued customer investments to solve the proliferation of new power design challenges for batteries, EVs and industrial applications. Tech orders continued to normalize off of 40% to your stack at the end of 2022. Double digit order to clients at Tech were greatest in China.

We thought we've done we've done a lot of work in.

The impact to try to move that growth rate make it less cyclical our service business as an example in the third quarter was up 3%, which is I think a good good environment relative to sort of stabilizing the business a little bit.

We haven't done as much work intense thing we've called out a low single digit.

<unk>.

And as you know, we've we've had double digit growth there here for a couple of years. So we anticipated that a normalization there I think what we've seen over the last sort of 60 to 90 days is what I would call more slowing and so the PT number really in in Q4 is really around sensing some of that.

Jim Lico: However, we didn't see weekly patterns improved sequentially as we move through the quarter. Further, we expect continued lead time improvement and channel normalization with orders returning to growth in the coming months as customers continued to prioritize investments and semiconductor advancements. AI enabled compute and electrification of everything. Fencing technologies saw another quarter of strong orders in revenue growth and quality. This included a meaningful deal in the quarter from a large US utility customer for full transformer asset monitoring solutions.

China some of that some direct Oems that have sort of pushed out blanket orders into 'twenty. Four typically some of that is our lead times coming down some of that I think is a little bit of slowness.

<unk> talked about it in the second quarter call.

<unk> principally in Europe that continues HVA see U S and Europe also a little slower and then as I mentioned, China. So that really is the <unk> story in the fourth quarter.

Relative to kind of the change in the guide.

Jim Lico: Elsewhere in fencing, slowing in China was reflected in lower than expected orders in revenue. Lastly, Pacific Scientific EMC reported another quarter of double digit sales growth as it benefits from causing activity to improve manufacturing capacity and operational execution to deliver on record backlog.

Thanks, a lot and then just one very quick follow up health care.

It's been a sort of a litany of issues for a few years once we get through the channel transition, which it sounds like that's finished do we get back to sort of mid single digit plus growth in 'twenty four is that the sort of natural entitlement as you see it without any one time negatives.

Jim Lico: Moving now to slide 10 in advance health care solutions, core revenues were up 2%, reflecting improved underlying sterilization demand partially offset by higher than expected US channel inventory in ASP.

We'll get out of we will get out of guidance for 'twenty, four, but but I do think we will see mid single digit for sure maybe just to sort of characterize what we saw from an ASP perspective, obviously this channel transition, we called out about $10 million. It was about $6 million more than we anticipated in the third quarter.

Jim Lico: For the third quarter, the total impact resulted in $11 million in less revenue, impacting AHS core growth by over 300 basis points and adjusted operating margins by almost 200 basis points. Elsewhere, high growth markets saw revenues of high single digits driven by robust growth in Latin America as well as good growth in Asia. Adjusted operating profit margins increased by 200 basis points year-over-year. We are seeing traction on pricing actions as well as the benefits of the productivity initiatives reflected in higher margins.

Some of it is really why we have the strategy to go direct it was really about the lack of visibility we really had a natural demand when we take out those sort of adjustments for channel inventory in the second and the third what we see is on a two year stack mid single digit growth in the second third and fourth so we really see more consistency obviously some noise there we would prefer.

Jim Lico: Additional highlights in the quarter include census continue to grow its subscription revenue with its census track staff's business increasing mid-teens, benefiting from continued traction in both new logo expansion and cross-selling opportunities as customer standardized on their leading instrument tracking software solutions. Blue cow solutions revenue increased slightly as high single digit growth in its corduose symmetry business is partially offset by project timing. We also saw continued market weakness and imatech accounting for approximately half of the slower than expected growth in the segment in the third quarter.

Not to have as well, but I think where we stand into the fourth quarter. The channel situation behind us we feel good about that we feel good about the work. The team has done obviously, a little bit more we're not proud of a little bit more noise than anticipated will certainly will.

We will certainly take it.

Take that but where we stand today I think it is in a much better position strategically should set us up well for 'twenty four and quite frankly that when you see the margin expansion in health in the in the third 200 basis point, we've talked about that margin continued improvement I think even out a little bit less revenue. We had good margin expansion so really when you.

Jim Lico: Lastly, probation had another quarter of excellent growth over 20% driven by continued Apex SaaS adoption and new logo success.

A look at kind of a good walk into Q4, and certainly sets us up for what we think will be a much better 24.

Jim Lico: Previewing the fourth quarter the ASP channel transition is now complete. And we expect growth to accelerate the NHS. This includes the initial ramp of ASPs recently launched portfolio esteemed sterilization monitoring products which will further build over several quarters as they expand their global reach. We continue to expect margins to ramp a Q4 and 2024 driven by consumables growth price realization for activity actions.

Great. Thanks, so much.

Thank you Julien.

Your next question comes from the line of Steve Tusa from Jpmorgan. Please go ahead.

Hey, guys How's it going.

Great.

So just on the on the <unk>.

Hardware backlog you guys have talked about in the past where do we stand on all of that the one that was like 351 point, what's the what's the status of the hardware backlog.

Chuck Mclaughlin: With that, I pass it over to Chuck will provide more color on our third quarter financials and our 2023 outlook starting on slide 11.

Yes, I think you tried to take us up last quarter from $3 30 to $3 50, but I think Steve it's come down I think that's a fair statement.

Chuck Mclaughlin: Thanks Jim and hello everyone. We generated year over year core revenue growth to an a half percent which included a single digit growth in North America. As Jim mentioned, we saw over 20% growth in tech clinics and acceleration in our software and recurring revenue streams which more than offset moderation some of the sensing business Western Europe revenue was up slightly as growth and software was offset by normalizing growth and hardware products.

We sort of said we might end the year in the 200 range ish, we thought and that's what I said in the second quarter. We think that's maybe more between 100 150 ish.

<unk> on how the order rate some of that is just blanket orders that pushed into 'twenty four so it doesn't necessarily mean it's.

<unk> is that is that is that number but we will still work in note with the excess backlog of over $100 million. So not as much as we anticipated and thats principally in assessing a little bit of attack.

Chuck Mclaughlin: Asia saw continued strengthen India up mid teens in Japan of high single digit which was more than offset by low double digit decline in China. We had anticipated growth in China would flow in the second half as we laughed outside growth in prior years. For example, tech clinics was down over 20% in China in the quarter. However, it was still up 20% to your stack basis. We also saw continued slowing and sensing given the current macro environment while HS grew high single digit as electric procedure volumes improved in the court.

In China related to China, the conversation I just had around the answers to julians questions, but I think where we stand today is that still with with a 100 million plus a backlog that doesn't include EMC, which obviously has a very very high backlog. So so I think it's still have an insurance policy going into.

Going into 'twenty four.

And then what would happen at that in the Tech can you just maybe discuss a little more of the drivers of that business.

Chuck Mclaughlin: Turning to slide 12, we show operating performance highlights for the third quarter adjusted gross margins increased to 150 basis points to a record 59.7%. On a two year stack basis, they are often impressive 240 basis points driven by the benefits of our portfolio evolution, the continued application of FVS initiatives and strong price realization. The adjusted operating margins expanded 150 basis points to 25.9% or 300 basis points over the last two years reflecting higher gross margins and the benefits of the productivity initiatives we executed earlier this year.

For the quarter.

That business is really.

Mostly high centered on design engineering and manufacturing for the diagnostic and bio processing market certainly you've heard over certainly the last couple of days, how that's taken a step down to some extent, we thought what we thought our guide.

On this one we thought the second half guide was sort of bottom for us and I think as it turned out it was not bottom and a little bit more.

More we think now we've taken that down to where we think that is.

But certainly we're we're certainly a little bit overzealous, it's not our core health care market as you know the core health care market really centered around around hospital, but.

Chuck Mclaughlin: Adjusted earnings per share increased 8% to 85 cents despite higher year over year interest and tax expense earnings are up 30% on a two year stack basis and free cash flow was 384 million reflecting a 25% increase over the prior year and over 50% growth. The last two years as we continue to grow earnings and effectively manage working out.

I think where it stands today that the engineering resources, we've certainly seen some some customers sort of push projects into 2024, that's what the guide reflects.

One last one for you.

Does this feel recessionary to you and are you guys do you have a playbook for cost.

So, yes, I mean, I think Steve.

Steve Thanks for the question because I think at the end of the day it really.

Chuck Mclaughlin: Turning now to the guide on slide 13 and the outlook for the remainder of the year. For the fourth quarter, we are adjusting our range to reflect caution around the macro in China and delayed recovery in the Detective. Fort revenue growth is expected to be in the range of 1.5% to 3%. Adjusted operating profit margins are anticipated to increase by approximately 150 basis points. And adjusted doodled earnings per share are expected to be in the range of 92 to 95 cents, representing 5 to 8% growth, and includes $5 million of one time additional corporate expense related to the remediation plans following a cybersecurity incident in early October.

I don't know yet if this is recessionary in for I think four quarters of PMI being where it's been in a number of other indexes around industrial production and some of those things having having been slow as I think we've seen pockets of that and thats been reflected in some of the order rates that we've described over the last couple of quarters, but I think if we come back to the original guide.

The year, we're on that number.

<unk> for slowing in some places Thats why margin expansion was so good in the second and the third quarter.

Following on a little bit less revenue.

As we said in the prepared remarks, we've upped our productivity view of a little bit and again.

But maybe a little bit of abundance of caution but to be prepared for any environment and and we still think next year could be good I think.

Chuck Mclaughlin: We also plan to proactively fund an incremental 35 million of productivity initiatives in the fourth quarter, which are excluded from our adjusted EPS outlook with a creative benefits expected in 2024. Finally, we expect free cash flow of 415 minutes, representing conversion of approximately 125% of adjusted net income.

As we said a number of the things that have played out with strategy software and it was really good in the quarter. It continues to be strong our services businesses continued to be good you saw fluke in better shape I think that maybe if we were in a recession in their point of sale is pretty good. So so I wouldn't call it necessarily yet, but I think there is pockets of things.

Chuck Mclaughlin: Turning to the full year weekend, we are reiterating the midpoint of our earnings guidance for 2023, which is coming in at the high end of the outlook we said at the beginning of the year. Things are largely played out as we expected, with some upside driven by secular tailwinds driving market expansion, new customer innovations, resiliency of roughly 40% of recurring revenue. Elevated backlogs and carry over pricing in our hardware products businesses, buffering moderating demand as order rates normalized throughout the year.

And and we'll be prepared for it.

Great. Thanks, a lot.

Thank you Steve.

Your next question comes from the line of Jeff Sprague from vertical Research partners. Please go ahead.

Hey, Jonathan Thank you.

Hello, everyone.

Can we just kind of maybe come back to tech first so so orders are down in the quarter, but youre expecting them to inflect positively in Q4 can you just maybe elaborate on what's driving that or is that just the comps now moving the other way like what kind of visibility.

Chuck Mclaughlin: As a result, we have core growth and margin expansion in each of our segments. Core growth for the year for 40% is now expected to be approximately 5%, with adjusted profit margins anticipated to increase approximately 150 basis points. Adjusted deluded earnings per share is now expected in the range of $3.37 to $3.40. Having raised our guidance twice in the year, and we continue to expect free cash flow of 1.25 billion, representing a conversion of 105% of adjusted net income, and 21% free cash flow of margin.

Do you have an improving orders of tech.

Yes, it's a couple of things I think number one is we've seen slowing in tech orders.

For a few quarters now.

And so some of it is comp Youre right, we started to see some slowing.

The two and three year stacks are still really strong. So we're working off a level of order just raw order dollar numbers that are still very very good quite frankly unprecedented in the history of the company over the last few years. So in that sense. It really there is much of a comp issue. We started to slow in the fourth quarter of last year. So yes, that's it and then there is.

Jim Lico: With that, I'll pass it back to Jim to provide some closing remarks. Thanks, Sharp. I'll start the wrap-up on slide 14. Consistent with 2023, we believe we will see sustained core growth and robust margin expansion in free cash flow growth in 2024, despite the evolving macro-environment. What continues to differentiate forwardive is our ability to deliver mid-single digits through cycle growth, reinforcing our portfolio durability and the power of FBS to deliver strong margin expansion.

A little bit of we think China, maybe gets a slight slightly better it was pretty dramatic in the quarter, but even we've seen some early signs that maybe that gets a little bit better I wouldn't call. It good I'd just call it a little bit better. So we had some order push from Q3 to Q4, we think we will see those things as well so.

The majority of it is comp we're not we're not counting on a big step up improvement.

But we are seeing some things that might suggest things might be a little bit better and that's reflected in how we're talking about it.

Jim Lico: Consistency of our execution reflects the strength of our product vitality and alignment to high growth secular trends, continued solid customer demand and the buffer of exit backlog, adding to a resilient growth profile. In health care, we expect a continued modest pace of industry recovery to drive stronger growth and incremental margins as we lap discrete 2023 headlamps.

And on this.

Inventory realignment at Asps, So you misjudged it a bit in Q3 like what is your kind of visibility that.

Yes totally understand what's in the channel and we don't have some additional hangover into Q4 or maybe theres. Some hangover baked into your Q4 numbers still.

Jim Lico: Lastly, in software and other recurring, our efforts to increase demand generation and strengthen our go-to-market capabilities is expected to drive strong staff and license revenue growth in 2024.

Hey, Jeff This is Chuck.

Have anything baked into Q4, we're done shipping to the distributors and if there is some but we're confident that we've worked through everything it was bigger than we had visibility to which as Jim mentioned a few minutes ago is why we wanted to make this one of the reasons we wanted to make this change.

Jim Lico: To sprinkle me to slide 15 and how we drive differentiated performance and value creation for our shareholders. As we finalize 2023, we are demonstrating another year of strong execution, delivering record growth margins operating margins in free cash flow. He sustained results underscore the power of the Florida business system to relentlessly drive continuous improvement around a portfolio.

We wish we'd we'd.

The size of the property out of the gate, but.

That's why we make that change, but nothing in Q4.

And so what we're going to see us asps.

Jim Lico: As we showed at our investor day in May by executing the Florida formula, we expect to roughly double our earnings per share and generate more than $8 billion of free cash flow over the next five years. Our acceleration of capital deployment has demonstrated this quarter further positions as a higher growth cash flow compounder and a premier company delivering exceptional values shareholders.

Should be in mid single digit in Q4.

And maybe just a quick one this cyber issue is this.

Totally Russell to the ground or we do we have some kind of open ended issue we're dealing with there.

Yes, we experienced the network infrastructure disruption from what we're calling a cyber incident in the quarter, we talked about some cost to mitigate that roughly a penny around $5 million. That's in the guide Thats, what we called out we did have some downtime in some north American facilities those are back up and running.

Elena Rosman: With that, I'll turn it back to you, Elena. Thanks, Jim.

Unknown Executive: That concludes our formal comments.

Krista: For so, we are now ready to take questions. As a reminder, if you want to ask a question, please press star one on the telephone keypad.

Definitely think we can we can mitigate mitigate that we've mitigated the issues relative first contain the issues we've mitigated.

Julian Mitchell: Your first question comes from the line of julien Mitchell from Barclays. Please go ahead. Oh, hi, good morning.

We've completed the investigation.

Julian Mitchell: Maybe just wanted to start with the precision business, just how the guidance has moved around the pectronics. So it seemed like the test and measurement market was getting worse a few months ago and you raised the pectronics revenue guide for the year and now it's come down. So maybe just help us understand was it's simply China suddenly getting very bad in late Q3 that caused such a revision and maybe give us some context now with that pt segment being down organically in Q4. What sort of history tells us the duration of that sales downturn should be for the pt segment.

Implementing the final remediation measures. So we don't believe this incident has a material impact on the quarter. So.

That's where we stand right, that's where we stand.

Great. Thank you.

Thank you.

Your next question comes from the line of Deane Dray from RBC capital markets. Please go ahead. Thank you hi, everyone.

Can we start with the <unk> acquisition.

The things that struck me in the release you talked about how you want to leverage the tektronix franchise, and maybe just kind of elaborate on that is it distribution.

Looking at their products, there's a lot of kind of similarities in terms of bench top but it doesn't seem to me there's a lot of product application overlap, but maybe I'm wrong. There. So how does the leveraging the franchise play out here.

Jim Lico: Yeah, good morning, julien Jim. And I think when you look at it, you're right, when we look at kind of where we're at now, we're back to where we were. And I think that at high single digit, I think for the year for tech, you know, I think we're really what we saw and you sort of answered it in the question is probably a little bit more of a step down in China.

Yes, there's not a lot of product overlap Dean Youre right, but there is a bunch of application overlap we've talked about the power market at tech for.

For a number of and how thats really been driving growth even even in the quarters. We were just describing we've continued to see strength and that's really been on the backs of our our mainstream oscilloscope and probes.

Jim Lico: We obviously have good strength in China on a two year basis. I think in the third quarter, you know, I think we're like 30% on a two year stack. But I think what we saw in China was a little bit of inventory, a little bit cautiousness on a part of a number of distributor and direct customers all around China. Not really necessarily industry based, maybe more broad base. I would call that more caution than anything.

And our keathley source measuring units and almost in every one of those applications is also a.

An EAA type product if you will so we will connect their go to market. They were mostly direct in Germany and in parts of Europe, mostly with distributions and in countries around the world.

10 X that with our own go to market from a capability, both direct and channel capability, We think thats a tremendous leverage point is that the call point were at and we see a lot of those those those applications relative to saying seeing EAA right. There in many cases or in many cases.

Jim Lico: That's probably the single biggest aspect to it. We did have some push outs a little bit from a couple of a couple of large orders that, you know, that we saw as well. But I would say the big Pareto bar on that conversation related to tech is really is really what is really China. The good news on it and, you know, what we've seen as you know over the last several quarters with PMIs where they've been and semiconductor index down, a number of factors that would suggest that, you know, some that we're coming in, we were coming into what we've been calling normalization.

Seeing others and understanding that we can we can we can be a partner to EBITDA in that regard relative to the go to market. So we feel good about the synergies. It's obviously a very good business.

It's had very strong growth, it's got software like growth in software like margins and we think we can we can really help accelerate the continued market expansion of the product the product lines.

Jim Lico: I think we've been consistent in that regard. We'll see tech get a little bit better on orders in the fourth quarter than they were, than they were in the third. And our 90 day funnels actually look better now than they have been. So I think point of sale in a number of places in North America and in Europe as an example, we're good and we'll probably continue to be pretty good. We actually China POS was actually decent in Q3 as well.

Great Thats good to hear and then just as a follow up in some of the themes about what are you seeing that might be recessionary or not.

Two areas I'd be interested in hearing that.

Typical fluke sell in versus sell through how that is the cadence there and then broadly the cadence for the quarter.

Jim Lico: So if I were just say, stay high centered on tech, I'd say, high Pareto bars China. Friend, third quarter, probably the low point, many respects. We'll start to get a little bit better as we get towards the end of the year. Thanks.

You broke out.

Revenue growth or orders, how did it play out in the quarter by.

By month.

And did you exit and then more deteriorating fashion or not.

Yes, I mean, I think when we look at Fluke Pos as an example in North America is probably the best place to think about the U S economy. It played out pretty consistently although.

Julian Mitchell: And then any brothels on sort of PT overall, you've got down organic sales, this quarter, you know, how quickly are you assuming that flips positive? Yeah, I think what we've been talking about strategically around PT has been, you know, that we thought what we've done, we've done a lot of work and[inaudible] for. Great. Thanks so much. Thank you, Gilliam.

Sales came in pretty consistently we got to look at two year stacks because as we fulfill backlog over the last 12 months to 18 months. It does in some respects distorted a little bit.

But by and large were pretty consistent.

I think when we looked at China. It was probably a little slower as we got as we went through.

But I think we have a good understanding of where that was in that kind of thing and that's broadly China not just not just fluke. So I would say that's highly anticipated tech on the other hand was the order growth was actually better than the September than it was through the early part of the early part of the quarter I would say, though we did see a little bit later.

In the month and so there was maybe a little bit of a dynamic where a fee in a few places, but I think that's really what the biggest change in the in really how do we think about the second half, though is really coming back to.

Maybe it really specific OEM customers within sensing in those markets I described.

In China I think those are the two big changes that we really saw.

Great. Thank you.

Thank you.

Your next question comes from the line of Andrew <unk> from Bank of America. Please go ahead.

Hi, guys good morning.

Good morning, Hey, how are you.

Just just I guess the question on <unk>.

On PT.

The decision to sort of buy.

I think for years.

Hi.

A little off track, but.

It's like one of the acquisitions back of Danaher, the one that didn't go well.

There were questions on all of a sudden there is a lot of attention being paid to it right.

The press reported Natty, clearly, you're making a bet here was EMEA can.

Can you just talk about the evolution of the company is thinking.

About sort of tax.

And how are you thinking about the business overall, where this is all of a sudden a key area for capital deployment and what it is youre seeing two or three years down the road that gets you excited.

Yeah. Thanks, Andrew I would say number one when you look at the returns of tech from back a while ago. Those returns are good now, yes, we had a little bit of a challenge in the early days Thats exactly right, but thats a little bit of old tape. The returns now are good and I think we feel good about the business and I think the performance in the business over the last several years.

And the profitability that's come with that has been very good because of the strategy of getting out of some businesses that were much more volatile the video business being one of them, but a few others getting into more services, which gives us a higher attach rate and less volatility and <unk> seen that play out over the last couple of years.

I think.

Large business within the company, we've been very specific and we I think we've been very deliberate in terms of our narrative that the power market was a very good market for us that had good trajectory relative to secular drivers around electrification. That's not just evs, sometimes people think of that as mobility, that's much more around storage as much.

Steve Tusa: Your next question comes from the line of Steve Tusa from JP Morgan. Please go ahead. Hey guys, how've it going? Great. So just on the, you know, hardware backlog. You guys have talked about in the past. Where do we stand on all that? The one that was like, you know, 351 point. What's the, what's the status of the hardware back? Look, yeah, I think you tried to take it out last quarter from 330 to 350, but, you know, I think, Steve, it's come down.

More around the use of renewable energy and the challenges of that brings to the grid. The challenge. It brings the data centers. The challenge it brings on storage and we've got a exceptionally we've had exceptional success in those markets over the last few years, we talk about that relative to our own success as the mainstream <unk>.

Line in that platform and the success that that path. So a natural extension of that is what we see at EBITDA and Thats an opportunity for us to have a high value bolt on.

Steve Tusa: I think that's a, that's a fair statement. You know, we sort of said we might end the year in the 200 range ish. We thought, and that's what I said in the second quarter, we think that's maybe more between 100 and 150 ish. Depends on how the order rate. Some of that is just blanket orders that pushed into 24. So it doesn't necessarily mean, you know, is dramatic is that is that.

Is it accretive immediately to tektronix is growth rate and profitability and I think I think investors hopefully will I think and we've had good it's interesting I've had industry people.

I've known for decades tell me over the last 48 hours, what a great deal of that as.

We obviously got to continue to talk to folks about it.

Help them understand the company, but I think when you when you see it for what it is financially and what it is strategically and the fact that we can get the kind of returns that we've described I think it's a very good addition, very good addition to tech and we're excited about it and we're excited about not only what it happens in 'twenty four but quite frankly, what it really brings to the business.

Steve Tusa: Number, but we'll still walk into with the excess backlog of over 100 million dollars. So not as much as we anticipated. And that's principally sensing a little bit attack. Really in China related to China. The conversation I just had around those answers to Julian's questions, but I think where we stand today is still with with 100 million plus the backlog. That doesn't include EMC, which obviously has a very, very high backlog. So so I think, you know, still have an insurance policy. Going into going into 24.

Talked a little bit about this but as we highlighted our 2028.

Targets for EPS and free cash flow.

It gets us about 30% to 35 about 40% actually of the M&A EPS.

Steve Tusa: And then what what happened at in the tech?

Target. So when you look at that at a multiple that we're trading at today. So we feel really good about the deal and we feel good about the opportunity to to really to bring that team on its an outstanding team and we think it'll be a great addition to tektronix and pizza.

Jim Lico: Can you just maybe discuss a little more of of the drivers of that business. You know, we that business is really mostly a rat, you know, high centered on design, engineering, and manufacturing for the diagnostic and bioprocessing market. Certainly you've heard. Over the certainly the last couple days. Now that's taken a step down to some extent. We thought we, we thought our. Our guide, you know, I would own this one. We thought the second half guide was sort of bottom for us.

And just a follow up on just software, but specifically I guess facility and asset lifecycle, right sort of slow down to high single digit growth and I apologize if I missed it but what were the key headwinds that sort of took it down from double digits to high single digits and how much visibility do we have on this business.

Jim Lico: And I think as it turned out, it was not bottom and a little bit more, you know, more we think now we've taken that down to where we think that is. But certainly we were, you know, we're certainly a little bit over salad.

Re accelerating in Sierra and took 24. Thank you.

Jim Lico: It's not a core healthcare market, as you know, the core healthcare market really centered around around hospitals. But but I think we're at stance today that the engineering resources, we've certainly seen some, some customers sort of push projects into 2024. That's what the guide reflects. One last one for you. Did this feel recessionary to you and are you guys give a, you know, playbook for costs? If so. Yeah, I mean, I think, you know, Steve, thanks for the question because I think at the end of the day, it really.

Yes, I think <unk> is in great shape.

It's a great story relative to the iOS margin expansion that we had obviously we had a we've had a great year to date and iOS margin expansion and follows a great part of that story.

We had a little I would call it a little bit of slowing of gordian, but that.

That is really not slowing its just really we had an exceptional first half and and so it's a little bit of moderation more than anything, but I wouldn't read anything into it that business has never been as good a shape as it is right now so I think at the end of the day, we service channels on a great trajectory, we talked about a number of the good things are going on in the current.

Jim Lico: I don't know yet if this is recessionary and in full. I think four quarters of PMI being where it's been in a number of other indexes around, you know, industrial production and some of those things. Having, having been slow. I think we've seen pockets of that and that's been reflected in some of the order rates that we've described over the last couple of quarters. But I think if we come back to the original guide of the year or on that number, we prepared for flowing in some places.

Read anything into fall other than we feel really good about it.

We are in.

We're in a good place it's going to be a good setup for 'twenty for the businesses.

Is really humming along.

So at 10% plus is still a good placeholder for this business long term, yes, I think we've said sort of high single to low double and it might move around you do have a little bit of nonrecurring service business in that a little bit that plays out every once in a while you get a little bit on the comps, but yes, I mean, it's going to it's going to be that way in the.

Jim Lico: That's why margin expansion was so good in the second and the third quarter. Following on, you know, a little bit less revenue. We, as we said in the prepared remarks, we've opt our productivity view of a little bit. And again, in a, maybe a little bit of abundance of caution, but to be prepared for any environment. And, and we still think next year can be good. I think it, you know, as we, as we said, a number of the things that have played out in strategy.

910, 11%, probably you can dial that infer for strong success in the years to come.

Thanks, so much.

Your next question comes from the line of Scott Davis from Melius Research. Please go ahead.

Jim Lico: The software was really good in the quarter. It continues to be strong. Our services businesses continue to be good. You saw fluke and better shape, I think, that maybe if we were in a recession and their point of sale is pretty good. So, so I wouldn't call it necessarily yet, but I think there's pockets of things and will be prepared for. Great. Thanks a lot. Thank you, Steve.

Good.

Good good morning, I should say everybody Jim Chuck in Atlanta.

Good morning can you guys hear okay. Good.

Correct.

Yes, I got disconnected earlier, so if someone asked this question I apologize, but can you be.

Jeff Sprague: Your next question comes from the line of Jeff Sprague from Vertical Research Partners. Please go ahead. Hey, John, thank you. Hey, hello, everyone. Hey, can we just kind of maybe come back to tech for so, so orders are down in the quarter, but you're expecting them to inflect positively in Q4? It just may be elaborate on what's driving that, or is that just, you know, the comps now moving the other way, like what kind of visibility do you have on improving orders at tech?

Can you clarify on this channel adjustment going direct.

Is there a margin payback I would imagine you capture some of that margin that distributors were getting but are we going to see that in the numbers or did you have to add cost.

Proportionally to that to that change.

Scott This is Chuck yes, there is a margin.

Ponant to that is that 7% on the on the revenue that was going through the North American distributor.

We'll start to see that show up in price in Q Q4.

Jeff Sprague: Yeah, it's a couple of things. I think number one is, you know, we've seen slowing in tech orders, you know, for a few quarters now. And so some of it is comp. You're right. We started to see some slowing. The two and three year stacks are still really strong. So, you know, we're working off a level of order, you know, just raw order dollar numbers that are still very, very good, but frankly unprecedented in the history of the company over the last few years.

Okay. Good.

Jeff Sprague: So in that sense, it really, there is much of a comp issue. We started to slow in the fourth quarter of last year. So yeah, that's it. And then there's a little bit of, we think, you know, training maybe gets a slightly, slightly better. It was pretty dramatic in the quarter, but we, you know, even in, you know, we've seen some early signs that maybe that gets a little bit better. I wouldn't call it good.

And when you guys think about kind of.

Your pricing strategy and I imagine this dynamic by.

By SKU, but.

It.

Is this new world we live in one where you can go out every January one do you think with some sort of.

Placeholder price increase and capture it in the marketplace or is that not.

How to think about it.

No I think whether it's we probably have several dates if I were to think about the hardware businesses, which have obviously had unprecedented price over the last few years.

But we will continue to have good price, we always when we think about it as value capture more so than price, we think about our innovation capability and if we can bring on.

Jeff Sprague: I'd just call it a little bit better. So we had some order push from Q3 to Q4. We think we'll see those things as well. So the majority of it, you know, is comp. We're not, we're not counting on a big step up improvement. And, but, but we're seeing some things that might suggest things might be a little bit better. And that's reflected in how we're talking about it. And on this inventory realignment and ASP, so you misjudged it a bit in Q3.

Higher innovation ultimately will be rewarded for that from a gross margin perspective.

I think our gross margin trajectory over the last few years is really is not only a good testament to FBS, but it's also a good testament to innovation and our ability to launch products that have tremendous value. So I think the pricing environment is going to be better going in 'twenty four.

Than normal, but I would say I wouldn't say, it's better than 'twenty three I would just say, it's better than normal and we would anticipate continuing to look for those pricing opportunities.

Jeff Sprague: Like what is your kind of visibility that, you know, you totally understand what's in the channel. And we don't have some additional hangover and the Q4 or maybe there's some hangover baked into your Q4 numbers still.

You'll see that a little bit on the software side of built into net dollar retention.

And then our pricing metric that we often talk about is really more related to the <unk>.

Chuck Mclaughlin: Hey, Jeff, this is Chuck.

Chuck Mclaughlin: And no, we don't have anything baked into Q4. We're done shipping to the distributors. And if there's some, we're confident that we work through everything.

Hardware businesses, but as Chuck mentioned, we will get a little bit more price in health care, we've been getting more price in health care over the last few quarters. We think that will continue as well into 24. So a number of things that will be that we feel optimistic about we're not in a guide scenario just yet for 'twenty four but we are optimistic we can continue to get price.

Chuck Mclaughlin: It was bigger than we had this ability to, which is, Jim mentioned a few minutes ago is why we want to make this one of the reasons we want to make this change. We wish we'd been all the size and property out of the gate, but as I said, that's why we make them change.

Super helpful. Best of luck for the rest of your guys.

Chuck Mclaughlin: But nothing in Q4. And so what we're going to see is ASP should be in then single digit in Q4.

Yes, Thanks Scott.

Unknown Executive: And maybe just a quick one.

Your next question comes from the line of Nigel Coe from Wolfe Research. Please go ahead.

Chuck Mclaughlin: This cyber issue is this totally rustled to the ground or we do we have some kind of open-ended issue or dealing with there. Yeah, you know, we experienced the network infrastructure disruption, you know, from what we're calling us, you know, with a cyber incident in the quarter. We talked about some costs to mitigate that roughly a penny, around $5 million that's in the guide that's what we called out. We did have some downtime in some North American facilities.

Alright, Thanks, guys. Good morning, gentlemen, good morning.

Just.

<unk> just mathematics here look up your opinion corporate with the fiber.

Chuck Mclaughlin: Those are backup and running. We definitely think we can mitigate that. We've mitigated the issues relative and we first contained the issues we've mitigated. We've completed the investigation. We're implementing the final remediation measures. You know, we don't believe this incident has a material impact on the quarter.

Seems like if I can maybe a penny or two on FX, just maybe just confirm that that move in FX.

But opinion.

But I'm just curious on Texas instruments.

Obviously pretty weak for guidance from them and I think we're trying to figure out whether this is deterioration in short cycle demand.

Whether consumers of chips like yourself.

Just destocking.

<unk> been obviously holding buffer inventory and destocking. So any perspective, you have on that Jim would be would be helpful.

Nigel I'll take the first one I think there is a little bit I wouldn't say <unk> impact on FX in the fourth quarter I think.

Chuck Mclaughlin: But before we stand, right, you know, that's where we stand.

Unknown Executive: Thank you.

It's probably a little less than one but there is there is some FX.

Deane Dray: Your next question comes from the line of Deane Drays from RBC Capital markets.

Just to close out went up and you did note there is a penny in corporate cost.

Deane Dray: Please go ahead. Thank you. Hi, everyone.

Or the <unk>.

Aviation or efforts on the site.

Deane Dray: We start with the EA acquisition. One of the things that struck me in the release is you talked about how you want to leverage the tectronics franchise. And maybe you've just kind of elaborated on that. Is it distribution? You're looking at their products. There's a lot of kind of similarity in terms of bench top. But it doesn't seem to me there's a lot of product application overlap and maybe I'm wrong there.

Hey.

So a little bit I think I caught your question on Ti in a little bit about inventory in the channel and things like that I.

Deane Dray: So how does the leveraging the franchise play out here? Yeah, there's not a lot of product overlap being your right, but there is a bunch of application overlap. We've talked about the power market at tech, you know, for a number of how that's really been driving growth, even even in the quarters we were just describing, we've continued to see strength. And that's really been on the backs of our mainstream of stilloscopes and probes and our Keith Lee source measuring units.

I didn't care part there.

Theyre everything they said, but I did read a little bit about it I would just say from a tektronix perspective broadly around maybe components.

And kind of the market. If you will I think the biggest place we saw some level of inventory correction was in China.

We do track inventory levels.

Embedded in our guide is some lowering of inventory in China over the next couple of quarters.

We are I wouldn't say, we are at elevated inventory levels as demand comes down a little bit lead times come down we are managing with individual channel partners relative to inventory.

But I think in general we feel like we're in a pretty good place with the guide of where that all sets up obviously the biggest the biggest decision and that is really where the demand goes.

Deane Dray: And almost in every one of those applications is also a, you know, an EA type product, if you will. So we will 10X their go to market. They were mostly direct in Germany and parts of Europe, mostly with distributions and countries around the world. We'll 10X that with our own go to market from a capability both direct and channel capability. We think that's a tremendous leverage point. It is at the call point we're at.

But we think we've dialed in the kind of demand to order projections that I was describing earlier in the call really embedded number of those things into those complex regional complexities and to how we are talking about tektronix. So if that's the answer.

Let me now, but if I missed it let me know.

No.

I'm just curious if you would like taken.

<unk> taken down chip inventories in particular, but.

Higher inventories.

Deane Dray: And we see a lot of those, those, those applications relative to seeing, seeing EA right there. And in many cases, or in many cases seeing others and understanding that we can, we can, we can be a partner to EA in that regard relative to the go to market. So we feel good synergies. It's obviously a very good business. You know, it's had very strong growth. It's got software like growth and software like margins. And we think we can, we can, you know, really help accelerate the continued market expansion of the product, the product lines.

Yes.

Yes the.

The one thing I would ask that you know.

This because of our working capital performance has been so good we really didn't build a lot of inventory into the company.

Deane Dray: Great. That's good to hear.

We certainly will be taken actions on inventory given our revenue guide for the fourth quarter is a little different than it was so we're certainly working on that but in terms of having big inventories on our own.

We haven't necessarily been building big inventories.

That's the benefit of lean manufacturing, but frankly so.

Alright.

Good question.

That's right yes.

Jim Lico: And then just as a follow-up in some of the themes about what are you seeing? That might be recession area or not. Two areas, I'd be interested in hearing the typical fluke cell and versus cell through how that is the cadence there.

And then my follow up question that I think this is a quick one for 14.

<unk> 14 was.

Good with good slides showing the variability in revenue growth, but ultimately.

Around a mid single digit type of growth rate.

In 2024 was still recovering to that so I'm. Just curious does the same thing as we frame 24 does the same apply to incremental margins.

Jim Lico: And then broadly the cadence for the quarter, you know, if you broke out revenue growth or orders, how, how did it play out in the quarter by months? And, you know, did you exit in a more deteriorating fashion or not? Yeah. I mean, I think when we look at fluke PLS as an example, in North America, it's probably the best place to think about the US economy. It played out pretty consistently.

Part of the question is but coming off a really big year of incremental so I think we're north of 50%.

Does that mean that 24 might be sort of below natural levels, though you're confident you can build on 'twenty three margins in the 40% to 50% range perhaps.

Nigel a couple of things to think about 'twenty three margins are very good and normally we would think about 40% Incrementals and I think it's been 60 that has to do with more with the productivity.

Jim Lico: Although we're, when a sale came in pretty consistently, we got to look at two-year stacks because, you know, as we fulfill backlog over the last 12 to 18 months, it does in some respects distort it a little bit. But by and large, pretty consistent. I think when we looked at China, it was probably a little slower as we got, as we went through. But I think we have a good understanding of where that was and that kind of thing.

Things that we did earlier in the year and then you saw us do some more so no we would always expect 40% incrementals.

Moving forward and then it'll be a little bit more elevated because of the actions that we're taking right now so we will build on what we've done here and we would expect them to be elevated from what there would be because of.

Jim Lico: And that's broadly China, not just fluke. So I would say that's how anticipated. Tech, on the other hand, was, you know, their order growth was actually better in the September than it was through the early part of the quarter. I would say, though, we did see a little bit later in the month. And so there was maybe a little bit of a dynamic where a few places. But I think, you know, that's really what the biggest change in the, in really how we think about the second half, though, is really coming back to less, you know, maybe really specific OEM customers within sensing and those markets I described and China. I think those are the two big changes that we really saw.

Deane Dray: Great. Thank you.

The actions that we're taking here.

Second half and Nigel relative to core growth I think hopefully that slide is helpful. Because what we're trying to articulate is.

What we've really said is mid single digit through the cycle. So after a couple of years of 10% like growth, we would anticipate having a little bit of normal we've been talking about this for three quarters. We are a little bit of normalization, we've talked about that consistently about that in the second half of the year, we're seeing yes, we're seeing that.

Mostly very very consistent with what we've talked about I think a little bit of difference in sensing a little bit of difference in China relative to what we talked about but again I think we're seeing that normalization here in the second half of the year end.

Andrew Obin: Your next question comes from the line of Andrew Obin from Bank of America. Please go ahead. I guess. Hey, how are you? Yeah, just I guess a question on on PT and the decision to sort of buy EA. You know, I think for years. And I, you know, we'll go off tech. But, you know, it's like one of the acquisitions back at Dan I heard this the one that didn't go well. And, you know, there were questions and all of a sudden there's a lot of attention being paced to it, right? You know, press reported natty, you know, clearly you're making a bet here with EA.

That's very consistent with how we would look at a mid single digit grower through the cycle and as Chuck just mentioned the fact that we've been prepared for things means we've been able to drive really good margin expansion even with the.

Even with some slowing in the second half of the year because of our preparation and because of how we run the business.

That's great. Thank you.

Thank you.

Your next question comes from the line of Andy Kaplowitz from Citigroup. Please go ahead.

Good morning, everyone.

Hey, Andy.

So I think one of the keys for Asps as you go into Q4 'twenty three 'twenty four is consumables coming back and being relatively strong I think you've talked about underlying elective procedures, improving I would surmise. That's the case in the U S and I guess in China at this point, but what is your visibility into the consumables ramp up and if anything would stop.

Jim Lico: Can you just talk about the evolution of the companies thinking about sort of tech and how you're thinking about the business overall where this is all of a sudden a key area for capital deployment. And what it is you're seeing two, three years down the road that gets you excited? Yeah, thanks, Andrew. I would say number one, when you look at the returns of tech from back, you know, a while ago, those returns are good.

From recording the stronger consumables demand.

So Andy a couple of things.

Just from electric procedures generally exiting.

Jim Lico: Now, yeah, we had a little bit of challenge in the early days. That's exactly right. But that's a little bit of old tape. The returns now are good. And I think we feel good about the business. And I think the performance and the business over the last several years. And the, and the profitability that's come with that is has been very good because of the strategy of getting out of some businesses that were much more volatile, the video business being one of them, but a few others.

Q2, we thought we were at 95% around the world.

A little bit slow in China, because of the anti corruption stuff probably to 90%, but definitely improving.

Around the world we.

We do have this inventory adjustment transition in North America, but when you look through that the actual consumables growth is already there. It's there in Q2 and Q3.

Jim Lico: Getting into more services, which gives us the higher a catch rate and less volatility. And you've seen that play out of the last couple of years. I think, you know, as a large business within the company, we've been very specific. And we think we've been very deliberate in terms of our narrative that the power market was a very good market for us that had good trajectories relative to secular drivers around electrification.

We understand how the customers are using our products and that's where when Jim talks about the two year stack.

Eight 9% from Q2, Q3 Q4, rather consistently.

You just take that one thing out so we think we're already seeing that.

What's actually getting used at the hospitals, let me stop there and see if that made sense.

Jim Lico: [inaudible] Target, so when you look at that at a multiple that we were trading at today, so we feel really good about the deal and we feel good about the opportunity to really to bring that team on. It's an outstanding team and we think it'll be a great addition to Tectrona and Peter.

Yes, no that totally makes sense. Thanks, and then maybe just shifting gears, Jim could you talk a little bit more how you're thinking about M&A now after the announcement of VA and you had the three small bolt ons. How are you balancing thinking about the higher rates environment in terms of your own M&A strategy and should we expect a higher tempo of M&A from sort of over the short to medium term.

Well I think it's really.

When we were in when we had our Investor day in May while we tried to outline was the opportunities in front of us and what I think what I tried to really try to communicate that and consistently is really around the fact that we were active.

I think I said in the second quarter call I thought we'd get some things done in the second half.

But maybe I had I probably had four of the five <unk> already drawn at that point, but.

I think we've been busy we've been active we've been looking for unique situations.

Everybody was looking for a step down in massive price differences, we've seen a number of peer companies.

<unk> robust prices I think what we've been able to do is find those unique situations. Those three bolt ons were unique situations places like zama, where we've had a long term relationship with them and a little bit of a partnership.

<unk> metric, which is.

<unk>.

Solar tool company. These are unique things that we're able to do that are really product extensions with high ROIC.

And as I was mentioning earlier in the call.

Is really.

Very similar it's a business we've known for a while we've known it in the market.

They actually are.

Our well known amongst all custom measurement players.

For their technology and their ability to sort of play and they're really good high growth applications and so I think we will continue to look for those opportunities that are there and we think they are we'll continue to do that but we will also do that within the context of looking for strong returns and Thats, what youll see and I think what makes us.

Jim Lico: And just to follow up on just software but specific, I guess, facility and asset life cycle, right? We sort of slow down to high single digit growth and I apologize if I missed it, but what were the key headwinds that sort of took it down from double digits to high single digits, and how much visibility do we have on this business re-accelerating into year and into 24? Thank you. Yeah, I think foul is in great shape.

We've been trying to talk about is that we would demonstrate these things they are hard to plan out so sometimes they come in bunches like they did this quarter, but we will remain active but we will be looking for those opportunities that are I think very similar to what we've seen this quarter, which is unique situations, where we really have an opportunity to get high returns.

Jim Lico: It's a great story relative to the iOS margin expansion that we had. We've had a great year to date in iOS margin expansion and foul is a great part of that story. You know, we had a little, I would call it a little bit of slowing accordion, but that is really not slowing. It's just really, we had an exceptional first half and so it's a little bit of moderation more than anything, but I wouldn't read anything into it.

That's great Jim and Chuck just to sort of follow up on my first question you don't need a consumables ramp up to make your Q4 margin rate you already have it. It's just the other thing getting better.

Yes, that's exactly right.

Got it thanks guys.

Thanks, Andy.

Your next question comes from the line of Joe Giordano from TD Cowen. Please go ahead.

Jim Lico: That business has never been as good a shape as it is right now. So I think at the end of the day, we service channels on a great trajectory. We talked about a number of the good things are going on in the current. I wouldn't read anything into foul other than we feel really good about it. We're in a good place. It's going to be a good setup for 24. The business is really humming along.

Hey, guys. Thanks for taking my question here Hey, Joe.

I wanted to start on the IHS like.

If I look back going back to 2018, the average growth is something like <unk>.

High 2% range and this year is going to be kind of maybe a little bit below that so.

I know theres, a lot of different things and you're certainly not the only people to get kind of surprised by what's going on in health care now I mean, thats pretty much everybody.

Jim Lico: So 10% process still a good place holder for this business long term? Yeah, I think we've said hot, you know, sort of high single to level and you know, it might move around a little, you know, you do have a little bit of non-recurring service business in that a little bit that plays out every once in a while. You get a little bit on the comps, but yeah, I mean, it's going to be that way in the, you know, the 9, 10, 11 kind of percent probably you can dial that in for strong success in the years to come.

Andrew Obin: Thanks so much.

I think what makes us really confident modeling forward at the entitlement is like mid single digit plus one thats really only happened one time since 18, despite portfolio changes there.

Well I think embedded in what the comment Chuck just had about consumables is number one.

Obviously, a little bit of noise, but we had COVID-19 for several years and that certainly created a lot of noise. Given the fact that it was a regional situation, we were kind of behind it in the U S for a while and then China and all that I won't reiterate all of that you know it I think where we stand today and what Chuck just described it is as you sort of look through.

Scott Davis: Your next question comes from the line of Scott Davis from Malia's research.

Scott Davis: Please go ahead. Good morning. I should say everybody. Jim, Chuck, and Elena. Good morning. Can you guys hear? Oh, okay, good.

It's kind of these onetime channels situation, which we really believe was the right thing to do strategically.

Scott Davis: I got disconnected or yeah, I got disconnected lower earlier. So someone asked this question I apologize, but can you be, can you clarify on this channel adjustment, you know, going direct? Is there a margin payback? I would imagine you capture some of that margin that distributors were getting, but are we going to see that in the numbers? Or did you have to add costs in proportionally to that change?

We're seeing that growth now and I think the 200 basis points of margin expansion in the third quarter in the segment.

Really speaks to the fact that Asp's margins are starting to get up better.

Because the rest of the margins in the segment are very strong so.

We feel good about the launch point relative to how we've just described it.

24, as I said earlier in the year 23 of the healthcare market would be a little bit better.

Chuck Mclaughlin: Scott, it is Chuck. Yeah, there's a margin component to that is about 7 percent on the revenue that was going through the North American distributor. And you will start to see that show up in price in Q4. Okay, good. And when you guys think about kind of your pricing strategy and I imagine it's dynamic by SKU, but is this new world we live in one where you can go out every January one, you think, with some sort of... You know, placeholder price increase and capture it in the market place, or is that not, not how to think about it?

It wouldn't be great, but it would be better in 'twenty four would be better than 23, and 25 would be better than 24. So.

We continue to think that we continue to see that so thats what gives us the confidence again I understand given.

And the fact that this inventory situation in the third quarter was a little bit more than we anticipated but.

Obviously that puts some skepticism in the nature of the question, but I think as we stand here today.

What we've got going we.

We saw good equipment growth high growth market growth in the quarter was 10% so.

I think we've got other parts of the world and in better shape, but now we've got to weave it needed to get North America in a better shape, that's really been the drag on the business in the last few years and we feel that we needed to do the channel change in order to make that happen and thats that.

Chuck Mclaughlin: No, I think, you know, whether it's, you know, we probably have several dates. If I were to think about the hardware businesses, which we've obviously had unprecedented price over the last few years, but we will continue to have good price. We always, we think about it as value capture more so than price. We think about our innovation capability and if we can bring on higher innovation, ultimately will be rewarded for that from a gross margin perspective.

That's now behind Us and we walk into the fourth quarter net 24 with a number of those things behind us.

Fair enough and then just last from me on on hardware backlog that you've talked about and as you said like what it was $3 50, or so last quarter, probably ending around 150 ish give or take at the end of the year. So.

Chuck Mclaughlin: You know, I think our gross margin trajectory over the last few years is really is not only a good testament to FBS, but it's also a good testament to innovation and our ability to launch products that have tremendous value. So I think the pricing environment is going to be better going it, you know, in 24, then normal, but I would say I wouldn't say it's better than 23. I would just say it's better than normal.

I guess rough numbers, we're talking like.

Orders under our revenue by like $100 million a quarter right now and we exited the year is a pretty small percentage of the total business. There. So we.

We need to see.

When does the dollars have to like dollars of orders rather than percentage of orders I'm, just starting to selecting before like the revenue catches catches down to the orders, yes, yes, a couple of things number. One is just remember we created about we've created $300 million over that $3 30 is an excess backlog number not a backlog number so.

Chuck Mclaughlin: And we would anticipate continuing to look for those pricing opportunities. You'll see that a little bit on the software side and built into net dollar retention. And then, you know, our pricing metric that we often talk about is really more related to the hardware businesses, but as Chuck mentioned, we'll get a little bit more price and healthcare. We've been getting more price and healthcare over the last few quarters. We think that will continue as well into 24. So a number of things that will be that that we feel optimistic about. We're not in a guide scenario just yet for 24, but we are optimistic we can continue to get price.

For years, we created $3 30, just just to and we said, we then we naturally deplete under normal circumstances.

We would deplete backlog in the second half of the year, that's pretty natural we had said that was likely to get us from $3 30 to 200. We now think that's about 125 ish call. It 100 to 150, maybe because I don't think we can be super precise here.

And so its call it called out about <unk>.

Scott Davis: Super helpful best of luck for the rest of your guys. Yeah, thanks Scott.

We're in the neighborhood of 50 to 100 difference, we think some of that already got pushed into 'twenty four.

Nigel Coe: Your next question comes from the line of Nigel Coe from worth wolf research. Please go ahead. Thanks guys. Good morning. So just look on this four q just mathematics here. Look up to your penny on corporate with the fiber. Seems like I'm like a maybe a penny or two on fx. Just maybe just confirm that that move and fx. But a penny or two on four q, but I'm just curious on text instruments, you know, there's obviously pretty weak forward guidance from them.

Some of it probably is inventory corrections, mostly in China, and it's really the sensing story that I talked about earlier in the call. So hopefully that reconciles a little bit of that for you from a numbers perspective.

Thank you.

Thank you.

Your next question comes from the line of Joe O'dea from Wells Fargo. Please go ahead.

Hi, Thanks for taking my questions.

Hey, Jeff I wanted to start on the kind of inventory rationalization and could you explain a little bit more kind of the differences between fluke versus tech and sensing.

Nigel Coe: And I think we're trying to all figure out, you know, whether this is deterioration in social demands, or whether, you know, consumers of chips like yourself are just destocking. You know, you've been obviously holding buffing mentoring and destocking so any perspective you have on that gym would be able to help. And I don't want to take the first one. I think there is a little bit. I wouldn't say two cents impact on effects in the fourth quarter.

And so wood.

I think youre seeing it in fluke as well, but it seems like youre seeing it in ways, which it isn't surprising.

And so whether that's a function of there were longer lead times in <unk> sensing that led to more forward buying whether that's more tied to the end markets. They're serving just trying to understand why they might be marching down a little bit of different paths in terms of managing through some of the destock effect.

Nigel Coe: I think, you know, it's probably a little less than one, but there is there is some effects. Just close that one off and you didn't know if there is a penny in corporate cost for the remediation or efforts on the cycle. Hey, Nigel, a little bit. I think I caught your question on TI and a little bit about inventory in the channel and things like that. I didn't care about their everything they said, but I did read a little bit about it.

Yes January time on inventory or backlog.

I am talking about inventory.

Okay, well I don't think we are at a big inventory correction here.

If I, if I might've missed communicated that but I think what we're really saying the backlog. The answer I. Just had is really the story relative to our order rate and.

Nigel Coe: I would just say from a tectronics perspective, broadly around maybe components and kind of the market, if you will, I think the biggest place we saw some level of inventory correction was in China. We do track inventory levels embedded in our guide is some lowering of inventory in China over the next couple quarters. We are, I wouldn't say we're at elevated inventory levels as demand comes down a little bit lead times come down.

And I would say most of that incentive is not really inventory as much as it is it could be inventory, but it's really it really is much more Oems really pushing out I think it's much more of a demand issue than an excess and in specific verticals. The majority of that backlog reduction, which you could think of that as the order kind of orders changing is really.

Three specific verticals as we talked about one being in sort of a into automation industrial automation, mostly with Europe Oems.

Nigel Coe: We are managing with individual channel partners relative to inventory. But I think in general, we feel like we're in a pretty good place with the guide of where that all sets up. Obviously, the biggest, the biggest decision in that is really where the demand goes. But we think we've dialed in the kind of demand to order projections that I was describing earlier in the call really embedded number of those things into those complex regional complexities into how we're talking about tectronics.

Semiconductor really to equipment companies that we supply HVAC kind of on a global basis in China, and a little bit of medical with some specific customers. So that's really the big change in our back our excess backlog number that I was just suggesting to Joe and that's really mostly at sensing little bit attacks a little.

At fluke, but not but really a big story and relative to inventory in channels.

Nigel Coe: So if that's the answer, let me know, but if I miss it, let me know. No, I'm just curious if you were like, taking down chip inventories in particular, but, um, I was thinking about our inventories. Yeah. Yeah, okay. We, you know, the one thing about us and you know this because our working capital performance has been so good. We really didn't build a lot of inventory into the company. We certainly will be taking, you know, actions on inventory given we, you know, our revenue guide for the fourth quarter is a little different than it was, so we're certainly working on that.

What I was trying to suggest is yes, a little bit little bit attack relative to China, but in North America and Europe, we still have pretty good Pos and I would anticipate that.

Demand demands really normalizing a little bit more so if we continue to see that we'll see some normal changes in inventory as lead times come down, but nothing we don't anticipate at this point anything dramatic.

That's helpful. And then I wanted to ask on EAA and just how to think about the revenue growth potential and incrementals. There over the next five years, what youre thinking about to get to that.

Nigel Coe: But in terms of, you know, having big inventories on our own, we, we haven't necessarily been building big inventories. You know, that's, that's the benefit of lean manufacturing with frankly. Sorry about that really good question. No, that's right. Yeah.

The ROIC target it seems like we're looking at maybe solid double digit revenue growth and some really strong incrementals in the Tenex go to market is pretty compelling, but maybe any details there in terms of kind of what you see for that revenue growth over the next number of years.

Nigel Coe: I mean, and my follow up question, I think this is a quick one. Yeah, I thought 514 was a good, was a good slide showing the variability in revenue growth, but, you know, ultimately around a mid single digit type of growth rate. And 2024 was sort of recovering to that.

Yes, Joe we think it's going to be low double digit now for over the next five years really strong incrementals here like.

Jim Lico: So, I'm just curious, you know, there's the same thing, you know, as we frame 24, does the same apply to incremental margins. And so the question is becoming off a really big year for incremental, so I think we were north of 6%. You know, does that mean that 24 might be sort of below natural levels or you can build on 23 margins in a 40%, 50% range perhaps. Not a couple of things to think about as 23 margins are very good and normally we'd think about 40% incremental and I think it's been 60.

We've got some other examples.

About 60% bulk bulk.

It gets us I think we talked about or Jim mentioned earlier.

20% of our next five year free cash flow, we're going to get 40.

Of EPS in.

In 2020, that's the math that we've given out.

I would just add.

That's obviously, a lower growth rate than they had anticipated and we think there is there is there is upside opportunity as well given given the synergies and the go to market expansion. So we like the business and we will look forward to continuing to talk about it in the near term.

Jim Lico: That has to do with more with the productivity things that we did early in the year and then you just have to do some more. So, no, we would always expect 40% incremental moving forward and then it'll be a little bit more elevated because the actions that we're taking right now. So, we will build on what we've done here and we would expect them to be elevated from what they would be because of the actions that we're taking here in the second half.

Thank you.

Thank you.

Thank you I will now turn the call over to Jim Lico for closing remarks.

Well, thanks, Christine and thanks, everyone for taking the call and we appreciate the time and energy and enthusiasm of the questions.

We obviously have some we'll have some follow up with many of you and we'll look forward to that I think what you saw in the quarter obviously.

Jim Lico: And that is a relative to core growth. I think hopefully that side is helpful because what we were trying to articulate is, you know, what we really said is mid single digits through the cycle. So, after a couple of years of 10% like growth, we would anticipate having a little bit of normal. We've been talking about this for three quarters. We have a little bit of normalization. We talked about that consistently about that in the second half of the year.

A few changes on the revenue line, but I think what we've tried to say from day. One is that we'd see some normalization in the second half we saw that maybe a little bit more in the third than we anticipated, but what we also said is that we will continue to drive margins and continue to set the business up for long term sustained its sustainability and success and I think the margin expansion.

You saw the free cash flow the number of deals that we did that's very consistent with the strategy we've outlined.

Jim Lico: We're seeing, you know, we're seeing that mostly very, very consistent with what we talked about. I think a little bit of difference in sensing, a little bit of difference in China relative to what we talked about. But again, I think, you know, we're seeing that normalization here in the second half of the year. And, you know, I think that that's very consistent with how we would look at a mid single digit grower through the cycle.

We think we continue to set up for 24.

We'll obviously get to a guide here in the next few months, we look forward to finishing the year out here strongly we will see you on the road and we will look forward to taking your follow up thanks, everyone have a great day.

This concludes today's conference call. Thank you for your participation and you may now disconnect.

Jim Lico: And as Chuck just mentioned, the fact that we've been prepared for things means we've been able to drive, you know, really good margin expansion, even with even with some slowing in the second half of the year because of our preparation and because of the how we run the business.

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Jim Lico: That's great. Thank you.

Okay.

Andy Kaplowitz: Your next question comes from the line of Andy Kaplowitz from city group. Please go ahead.

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Andy Kaplowitz: Good morning, everyone. Hey, I think one of the keys for ASP is you go into Q423 and 24 is consumed both coming back and being relatively strong. I think you've talked about underlying elective procedures improving. I would surmise that's the case in the U.S. And I guess in China at this point, but what is your visibility into the consumables ramp up? And if anything would stop ASP from recording the stronger consumables demand?

Okay.

Okay.

Andy Kaplowitz: Well, so any couple of things, you know, just from electric procedures, generally X and Q2, we thought we were 95% around the world, a little bit slow in China because of the anti-corruption stuff, probably 90%, but definitely improving around the world. So we do have this inventory adjustment transition in the North America, but when you look through that, the actual consumables and growth is already there. It's there in Q2 and Q3 when you understand how the customers are using our products, and that's where when Jim talks about the two-year stack, you know, we're up eight, nine percent from Q2, Q3, Q4 rather consistently when you just take that one thing out. So we think we're already seeing that and what's actually getting used at the Austin.

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Okay.

Chuck Mclaughlin: Let me stop there and see if that made sense.

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Okay.

Jim Lico: You know, that till we make sense, Chuck, thanks for, and then maybe just shifting gears, Jim, could you talk a little more how you're thinking about M&A now? You know, after the announcement of VA and you had the three small bolt-ons, how are you bouncing thinking about the higher rates environment in terms of your own M&A strategy? And do we expect the higher temple of M&A from Fortive over the short to medium term?

Andy Kaplowitz: Well, I think, you know, it's really, you know, when we were in our, when we had our investor day in May, what we tried to outline was the opportunities in front of us. And what I think what I tried to really try to communicate then and consistently is really around the fact that we were active that we, you know, I think I said the second quarter call. I thought we'd get some things done in the second half, but maybe I had, you know, I probably had four of the five cards already drawn at that point.

Andy Kaplowitz: But, you know, I think we've been busy. We've been active. We've been looking for unique situations. I think everybody was looking for a step down and, you know, massive price differences. We've seen a number of peer companies pay robust prices. I think what we've been able to do is find those unique situations. Those three bolt-ons were, you know, unique situations, places like Azema, where we've had a long term relationship with them, and a little bit of a partnership.

Andy Kaplowitz: So metric, which is a, you know, a tool company, solar tool company. These are unique things that we're able to do that are really product extensions with high ROICs. And as I was mentioning earlier in the call, EA is really, you know, very similar. It's the business we've known for a while. We've known it in the market. They actually are well known amongst all test or measurement players for their technology and their ability to sort of play and the really good high growth applications.

Andy Kaplowitz: And so I think we'll continue to look for those opportunities that are there. And we think they are. We'll continue to do that, but we'll also do that within the context of looking for strong returns. And that's what you'll see. And I think what makes us, I think what, you know, we've been trying to talk about is that we would demonstrate these things. They're hard to plan out. So sometimes they come in bunches like they didn't this quarter, but we will remain active.

Andy Kaplowitz: But we'll be looking for those opportunities that are, I think, very similar to what we've seen this quarter, which is unique situations where we really have an opportunity to get high returns. That's great. Jim, just to sort of follow up on my first question, you don't need a consumables ramp up to make your Q4 margin, right? You already have it. It's just the others. I think getting better. Yes, that's exactly right. Got it. Thanks, guys. Thanks, Annie.

Joe Giordano: Your next question comes from the line of Joe Giordano from TD Cowan.

Joe Giordano: Please go ahead. Hey, guys, I should take my questions here.

Joe Giordano: Hey, Joe. I want to start on the AHS. Like, you know, if I look back, right, like going back to 2018, the average growth is something like, you know, high 2% range, and this year's going to be kind of maybe a little bit below that. So I know there's a lot of different things, and you're certainly not the only people to get kind of surprised, though what's going on in health care now.

Joe Giordano: I mean, that's pretty much everybody. But like, what makes us really confident modeling forward that the entitlement is like mid single digits plus one that's really only happened one time since 2018 despite portfolio changes there. Well, I think it better than what the comment truck just had about consumables is number one. You know, we've obviously a little bit of noise, but you know, we had probably for several years, and that certainly created a lot of noise given the fact that it was a regional situation.

Joe Giordano: We were kind of behind in the US for a while, and then China and all that. I won't reiterate all that. You know it. I think where we stand today, and what truck just described is you sort of look through kind of these one time channels situation, which we really believe was the right thing to do strategically. We're seeing that growth now. And I think the 200 basis points of margin expansion in the third quarter in the segment really speaks to the fact that ASP's margins are starting to get up better because the rest of the margins in the second are very strong.

Joe Giordano: So we feel good about the launch point relative to how we've just described it. And you know, 24, as I said earlier in the year, 23, the healthcare market would be a little bit better. It wouldn't be great, but it would be better and 24 would be better than 23, and 25 would be better than 24. So we continue to think that we continue to see that. So that's what gives us the confidence.

Joe Giordano: And again, I understand given the fact that this inventory situation in the third quarter was a little bit more than we anticipated. And so obviously that puts some skepticism in the nature of the question. But I think as we stand here today, with what we've got going, we saw good equipment growth, high growth markets growth in the quarter was 10%. So I think we've got other parts of the world in better shape, but now we've needed to get North America in a better shape.

Joe Giordano: That's really been the drag on the business in the last few years. And we feel that we needed to do the channel change in order to make that happen. And that's now behind us. And we walk into the fourth quarter and in 24 with a number of those things behind us. Fair enough. And then just last for me on the hardware backlog that you talked about. I think you said like what, it was 350 or so last quarter, probably ending around 150-ish give or take at the end of the year.

Joe Giordano: So, you know, I guess wealth numbers were talking like orders under revenue by like 100 million of quarter right now. And then we exit the year. That's a pretty small percentage of like the total business there. So like we need to see, when does dollars have to like dollars of orders rather than percentage of orders have to start inflecting before like the revenue catches to the catches down to the orders. Yeah.

Joe Giordano: A couple of things. Number one is just remember we created about, we've created $300 million over $330 is an excess backlog number, not a backlog number. So in a couple of years, we created $330 just to, and you know, we said we'd end the, we naturally deplete under normal circumstances. You know, we would deplete backlog in the second half of the year. That's pretty natural. We had said that was likely to get us from $330 to $200.

Joe Giordano: We now think that's about 125-ish, call it 100-150 maybe because I don't think we can be super precise here. I, and so it's, call it, call that about, you know, somewhere in the neighborhood of 50 to 100 difference. We think some of that could already got pushed into 24, and some of it probably is, is inventory corrections mostly in China. And it's, it's really the sensing story that I talked about earlier in the call.

Joe Giordano: So I reckon that was a little bit of that for you from numbers perspective. Thank you. Your next question comes from the line of Joe Odia from Wells Fargo. Please go ahead. Hi, thanks for taking my questions. Thank you. I wanted to start on the kind of inventory rationalization and could you explain a little bit more kind of the differences between flu versus tech and sensing. And so what would it, you know, I think you're seeing it in fluke as well, but it seems like you're seeing it in ways which it isn't surprising.

Joe Giordano: And, and so, you know, whether that's the function of there were longer lead times and tech and sensing that led to more forward buying, whether that's more tied to the end markets they're serving, just trying to understand why they might be marching down a little bit of different paths in terms of managing through some of the destock effect. Yeah, I generally talk about inventory or backlog. I'm talking about inventory. Okay, well, I don't think we have a big inventory correction here.

Joe Giordano: If I might have miscommunicated that, but I think what we're really saying the backlog answer I just had is really the story relative to our order rate. And I would say most of that is sensing is not really inventory as much as it is. It could be inventory, but it's really, it really is much more OEMs really pushing out. I think it's much more of a demand issue than an excess in specific verticals.

Joe Giordano: The majority of that backlog reduction, which you could think of that as the order kind of orders changing is really in three specific verticals as we talked about. One being in sort of an automation industrial automation, mostly with Europe, OEMs, semiconductor, really two equipment companies that we supply HVAC kind of on a global basis in China in a little bit of medical with some specific customer. So that's really the big change in our back our access backlog number that I was just suggesting to Joe.

Joe Giordano: And that's really mostly a sensing, a little bit of tax, a little bit of fluke, but not, but really a big story and and relative to inventory in channels. What I was trying to suggest is yeah, a little bit a little bit attack relative to China, but in North American Europe, we still have pretty good POS and I would anticipate that if if demand, you know, demands really normalizing a little bit more.

Joe Giordano: So if we continue to see that, we'll see some normal changes in inventory as lead times come down, but nothing we don't anticipate at this point anything dramatic. That's helpful. And then I wanted to ask on EA and just have to think about the revenue growth potential and incrementals there over the next kind of five years, what you're thinking about. To get to that kind of ROIC target, I mean, it seems like we're looking at maybe solid double digit revenue growth and some really strong incrementals and, you know, the 10X go to market is pretty compelling, but maybe any details there in terms of kind of what you see for that revenue growth over the next number of years.

Joe Giordano: So we think it's it's going to be, you know, low double digit, you know, for over the next five years, really strong incrementals here, like we've got some other examples of that about 50% fall through. That gets us, I think we talked about Jim mentioned earlier, you know, with 20% of our next five year free cash flow, we're going to get 40 cents, you know, a VPS had in 2020. That's the math that we've given up.

Joe Giordano: And I would just add, you know, that's obviously a lower growth rate than they've anticipated. We think there's there's there's upside opportunity as well given given the synergy and the go to market expansion. So we like the business and we'll look forward to continue to talk about it in the near term. Thank you. I will now turn the call over to Jim Lico for closing remarks. Well, thanks, Chris. Thanks everyone for taking the call.

Joe Giordano: We appreciate the time and energy and enthusiasm of the questions. We obviously have some will have some follow up with many of you will look forward to that. I think what you saw in the quarter, obviously a few changes on the revenue line, but I think what we've tried to say from from day one is that we've seen normalization in the second half. We saw that maybe a little bit more in the third than we anticipated, but what we also said is that we've continued to drive margins and continue to step the business up for long term sustain it.

Joe Giordano: Sustainability and success. And I think the margin expansion you saw the free cash flow, the number of deals that we did does very consistent with the strategy. We've outlined. We we think we continue to set up for 24. Well, obviously get to a guide here in the in the next few months. We look forward to finishing the year out here strongly. We'll see you on the road and we'll look forward to taking your follow up. Thanks everyone. Have a great day. This concludes today's conference call. Thank you for your participation and you may now disconnect.