Q2 2024 Fortive Corp Earnings Call
Greetings and welcome to the <unk> Corporation second quarter 2004 earnings call.
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It is now my pleasure to introduce your host Elena Rosman, Vice President Investor Relations. Thank you you may begin.
Okay.
Elena Rosman: Thank you Diego and thank you everyone for joining us on today's call.
Yesterday are Jim Lico, our president and Chief Executive Officer, and Chuck Mclaughlin, Our senior Vice President and Chief Financial Officer.
Speaker Change: Present, certain non-GAAP financial measures on to baseball.
Information required by regulation G is available on the investors section of our website at <unk> Dot com.
Our statements I'm curious, if you're either 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 will or may occur in the future.
These forward looking statements are subject to a number of risks and actual results might differ materially from any forward looking statements that we make today.
Information regarding these risk factors is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31st 2023.
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 Joe.
Thanks, Elena Hello, everyone and thank you for joining us I'll begin on slide three.
Our second quarter results showcase strong execution across our businesses.
Following us to deliver earnings and free cash flow at the high end of our guidance with 90 basis points of adjusted operating margin expansion and 9% adjusted earnings growth. Despite revenue at the low end of our guidance.
Our performance continues to reflect our ability to adapt to a low growth environment and deliver differentiated financial results enabled by FBS led innovation and productivity actions.
Our leadership positions across durable growth markets are reflected in upside performance and advanced healthcare solutions and continued momentum in intelligent operated solutions positioning afford them well for the future.
As we look ahead, we are excited to see the acceleration of our innovation and new product launches delivering more value for customers and sustained growth for Florida.
We are confident in our updated outlook for the year, reflecting strong growth in our recurring revenue businesses and continuing our track record of mid single digit through cycle core growth and compounding earnings and free cash flow by double digits in 2024.
Turning to slide four I'll provide an overview of our second quarter and year to date results as well as what we're seeing as we look ahead.
Second quarter revenues were up 2% with flat core growth acquisitions contributed three points to growth, partially offset by a foreign exchange headwind.
Strong operational execution contributed to record second quarter, adjusted gross and operating margins and earnings per share of <unk> 93.
Year to date, we achieved 100 basis points of adjusted operating margin expansion and double digit earnings and free cash flow growth on three.
3% revenue growth.
Turning to what we're seeing across our businesses.
Intelligent operating solutions and advanced healthcare solutions continued their momentum benefiting from durable and recurring revenue as well as new product introductions aligned to secular growth drivers.
This demonstrates the success of our capital deployment strategy in these segments, where we continue to focus our bolt on efforts to further enhance growth.
Cross border our recurring revenue is now 42% of our portfolio growing low double digits year to date, we expect that pace of growth to continue in the second half.
Government spending delays broadly contributed to revenue coming in at the low end of our second quarter guidance, primarily driven by delayed military and government R&D projects impacting tektronix as.
Funding continues to be prioritized to production related programs and slower job order contracting growth at Gordian as they lap the government stimulus funding in 2022 and 'twenty three.
Or does it precision technologies were down in the quarter as expected and book to Bill was stable at one point out.
<unk> with our prior outlook, we expect orders to return to low single digit growth in the third quarter.
However, our updated 2020 for revenue outlook does reflect a slower than expected recovery in certain end markets and P. T and the second half of the year.
We're offsetting lower revenue with new productivity actions and have reflected the delay in global minimum tax implementation and our tax rate guidance for the year.
Mark will cover the outlook for the rest of the year in more detail shortly.
Lastly, our free cash flow performance continues to differentiate with industry, leading free cash flow margins, allowing us to repurchase 2 million shares in the second quarter and continue that pace the remainder of the year.
Turning to slide five I will provide more detail on second quarter segment performance as well as our expectations for the full year.
<unk> operating solutions total revenue growth was 4% with core up 3%.
Acquisitions were favorable partially offset by an FX headwind.
Adjusted operating margins were down slightly versus the prior year, although off approximately 400 basis points on a two year stack with strong price realization and volume growth more than offset by growth investments.
Additional highlights include fluke revenues were up low single digit plus including mid single digit industrial products and double digit <unk> growth in the quarter strong proof point of our efforts to make the business more resilient.
It looks bolt on acquisitions saw metric and Azeem a D O I continue to outperform contributing to fluids growth in the quarter.
EHS grew low single digit pace by recurring revenue contributions, including strong SaaS and I net growth, partially offset by slower product sales at ISC.
Sales grew mid single digit or mid teens on a two year stack with continued normalizing growth at Gordian and lapping the wind down of pass through revenue ex service channel.
<unk> maintained its pace of high single digit SaaS growth and we expect to see that reflected in accelerated core growth in the second half for.
For the full year, we expect the iOS to deliver mid single digit core growth with approximately 100 basis points of adjusted operating margin expansion.
Precision technologies was down one 5% in the quarter with core decline of six 6% acquisitions net of divestitures contributed six points to growth partially offset by FX.
Speaker Change: Adjusted operating margins were down slightly year over year with lower core volumes, almost fully offset by productivity benefits favorable price and M&A.
Highlights include.
Tektronix core revenue was down mid teens as revenues normalize to bookings we saw push outs of large mill got projects in the Americas and slower recovery in China, partially offset by mid single digit services growth.
He has seen large E mobility and battery expansion projects push out reducing its revenue outlook for the year to approximately $130 million.
While sales cycles are longer for these large projects EAA is seen a doubling of the sales funnel on smaller run rate projects across industries validating the go to market synergies with tektronix and positioning the business well for 2025 MBR.
Sensing was down mid single digits in the quarter with continued strength in utility grid, food and beverage and healthcare end markets more than fully offset by weaker industrial and factory automation demand.
And lastly specific scientific delivered another quarter of mid teens core revenue growth driven by robust demand.
We finished Q2 with a stable one to one book to Bill and are expecting revenue to return to growth in the second half.
For the full year, we now expect PT growth down low single digit with adjusted operating margins approximately flat.
Advanced healthcare solutions revenue growth was 3% with core growth of 5%, partially offset by unfavorable FX of approximately 2%.
Adjusted operating margins expanded 260 basis points with strong volume price realization and productivity benefits more than offsetting growth investments.
Highlights include.
Asps census grew mid single digits, driven by double digit consumables growth enabled by the successful North American channel transition that asps.
New doors and cross sell expansion that census.
Fluke Health solutions was up low single digits with double digit dosimetry services growth.
Pervasive grew low single digits lapping a large prior year licensing win while SaaS revenues up nearly 50% in the quarter.
Given the strong first half performance, we now expect Hs full year core growth to be at the high end of mid single digit with over 150 basis points of adjusted <unk> for the year.
Moving to slide six several short cycle industrial markets served by our precision technology segment faced headwinds in the second quarter we.
We saw continued customer caution weighing election, and macro uncertainty contributing to OEM and channel weakness and further capex related project delays.
North American revenues were up slightly benefiting from mid single digit growth in I O S driven by strong industrial and software growth mid teens growth and healthcare consumables and continued strength of pack size, partially offset by lower tektronix revenues.
In Europe, we saw revenues normalize to bookings with a mid teens decline at PT, partially offset by low single digit growth in iOS and low double digit growth in healthcare.
Core revenue in Asia was down low single digits, driven by slower government spending and distributor Destocking in China.
Japan was up mid single digit or better in all segments and in India, we saw slower growth given election uncertainty impacting project timing of tektronix.
Core growth for the quarter largely centered on our high growth markets. Excluding China. These regions have now eclipsed China in size and account for approximately 14% of sales.
Looking ahead, we expect improvement in core growth in the back half of the year driven by favorable order rates as well as continued strength in Hs and software with that I'll turn it over to Chuck to talk through our updated third quarter and full year guidance.
Thanks, Jim and Hello, everyone.
Turning to slide seven I will provide our Q3 outlook as well as an updated outlook for the full year.
The third quarter, we anticipate revenue growth of three to four 5% with core growth of two to three 5% driven by continued momentum in iOS and Hs and roughly flat core growth at PT. Adjusted operating profit margin is estimated at approximately 27% up over one <unk>.
Basis points year over year, adjusted diluted EPS guidance of <unk> 92 to 95 sets up 8% to 12% and free cash flow is expected to be approximately $360 million.
For the full year total growth is now expected in the range of 3% to 4% approximately one 5% lower than the prior guidance driven by the revised outlook at precision technologies and further FX headwinds.
Core growth is now expected to be in the range of 2% to 3% adjusted.
Adjusted operating profit margin is still expected to be in the range of 27 to 27, 5% up 100 to 150 basis points year over year.
Note, we have offset roughly half of the operating profit shortfall related to the lower revenue with productivity actions and as a result, we are still expecting to average 60% incremental margins given the proactive restructuring we did coming into the year. The other happy earnings offset is coming from a lower im.
<unk> tax rate now expected to be approximately 12% for the year.
As a result, we are raising our adjusted diluted EPS range to $3 80.
The $3 86.
Up 11% to 13% year over year.
Looking at the right side of the slide you can see the benefits of our portfolio transformation, improving the through cycle durability and growth rates of the portfolio.
<unk> continued growth is enhanced by increasing level of recurring revenue and our focus on innovation, which I'll highlight on the next slide.
Over the last eight years, we've been intentional about building a proven tool set around how we prioritize and develop new products, bringing them to market faster drive greater returns on R&D investments and deliver differentiated value for our customers.
We have several examples of how our increased innovation velocity is contributing to core growth with a pipeline of new products, including in Q2 Fluke launched its new EV charging station analyzer, which allows technicians to perform multiple test with a single tool.
Yes.
Recently launched the accordion cloud platform and integrated cloud based capital planning tool and the crew and space intelligence, a comprehensive real estate planning and space management optimization plan.
MPT Tektronix continues to enhance its oscilloscope platforms, bringing more power analysis tools to the engineers bench, a recently launched the four series B with more powerful processor system to speed up analysis for power converters being designed for abroad.
Speaker Change: Range and industrial.
Industrial applications.
That ESP new innovations are also enhancing core group.
They recently secured U S. FDA approval on a news team monitoring biological indicators, which allows them to ramp up sales on this product in the second half of the year.
FCS is driving success as we identify and expand into new growth markets speed innovation cycles, and maximize investment returns across all three operating segments.
For example, we've reduced the amount of sustaining engineering spend as a percentage of the total by roughly 20% and redeploying the savings to fund future growth with new products and software features.
As a result, we have created a final of over $1 billion in new market and revenue opportunities roughly three excellent was just three years ago.
AI has also been a key enabler to our success, although we are still in the early innings we.
We created our vision several years ago with the establishment of the Port our incubation hub in center of excellence for AI and machine learning.
Coupled with our partnership with startups Studios I underscored labs, we test new AI ideas developed by our operating companies in Q2, our teams incubated seven new growth ideas, some of which are likely to become new 40 products, while others potentially new startups in summary, we view R&D is.
The return on investment and a critical driver of our improved through cycle growth operating leverage and return on invested capital.
That I will turn it back to Jim to provide an update on our long term target.
Thanks, Chuck I'll continue on slide nine.
Our revised full year outlook yields double digit adjusted EPS and free cash flow growth in 2024, and keeps us well on path to achieving our long term targets.
While we have seen both tailwind and headwinds since we first issued those targets you have also seen how we adapted to the lower growth environment in 2024, and still raised our earnings guidance through the year. This is a testament to our culture of continuous improvement and our relentless focus on delivering for shareholders in any environment. We are.
Also still expect to generate over $8 billion in free cash flow in the next five years, which allows us to further accelerate earnings growth and shareholder returns through disciplined and accretive capital deployment.
Our priority remains bolt on acquisitions to existing growth platforms in areas of demonstrated strength, while also enhancing returns to shareholders.
We continue to believe share repurchases are a good use of capital and we expect buybacks in the range of five to 6 million shares for the year consistent with our recent track record.
Further we announced our first dividend increase in 2023 and plan to continue to grow our dividends in line with earnings and free cash flow.
With a powerful combination of afford a business system and disciplined capital deployment. We think the best is yet to come with an opportunity to roughly double our adjusted EPS and free cash flow over the next five years.
I'll wrap up now on slide 10 with.
With a strong start to the year and track record of improved through cycle performance. Our continued strategy to build a more durable company is playing out as evidenced by our strong growth in recurring revenue businesses. We're confident in the achievement of our revised 2024 outlook, which demonstrates the benefits of durable growth drivers and tailwind from innovation.
While de risking the areas of protracted recovery.
Our free cash flow generation continues to be robust.
Underscoring the differentiation of the Florida business system, and the compounding capability of our portfolio.
By executing the 4% formula for value creation, we are poised for higher returns on invested capital the deals we've done since our inception.
To get better and we remained disciplined on further capital deployment to enhance value creation with that I'll turn it to Atlanta.
Thanks, Jim that concludes our formal comments Diego, we are now ready for questions.
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One moment, please while we poll for questions. Thank you.
Our first question comes from Scott Davis with <unk> Research. Please state your question.
Hey, good morning.
Good morning to you guys, Jim and Chuck and Elena.
Hey, Scott.
Okay.
Jim: Hey, Jim I wanted to dig in on R&D, a little bit is it fair to say youre seeing the impact of R&D on the margin line, but not on growth yet or is there any way to kind of tease that out a little bit.
Yeah, sure I think really both.
What we tried to highlight and obviously, we did last quarter as well as to give a sense of one how FBS is really moving a.
A portion of our sustaining engineering capability and innovation that obviously has a long term compounding effect, but we've been doing that for several years now and I think some of the examples that we talked about.
Chuck Cat in the prepared remarks, there is certainly evidence of better growth flukes durability here is certainly part of their their engagement in our new product development process.
We talked about that the FDA approval on a on a couple of product at an ASP.
It takes a little longer in healthcare to really see that so certainly on the gross margin front because were pretty pretty disciplined about making sure. The products that we launched if they're replacing products that replacement better gross margins better which is really the more value to the customer and then youre seeing also in a number of the places where we've got tailwind relative to growth part of that is certainly in <unk>.
Asian story.
Okay makes sense, Jim Im just looking at slide nine.
Im trying to.
Im trying to im trying to figure out what what's implied here on capital deployment.
Or five years with buybacks is that.
White part Thats capital deployment upside is that the buybacks plus M&A it could it be entirely buybacks is it possible to get there.
With the current plan.
Yes, Scott this is Chuck.
Well clearly we've already done some M&A, but we do include buybacks as part of our capital deployment. So we think that.
That with the debt the.
The bolt ons that we did in the fourth quarter and what we're likely to do going forward. We still think that we have line of sight to that.
Accretion 25.
Okay Best of luck guys. Thank you I'll pass it on.
Yes, Thanks Scott.
Our next question comes from Julian Mitchell with Barclays. Please state your question.
Okay.
Hey, Julien Hi, Hi, good morning, Jim.
Maybe just first off so just trying to understand the sort of revenue guide for third and fourth quarter.
Last year your sales were down.
Low single digits sequentially in Q3, and then up.
Mid single digit in Q4 sequentially.
Looks like this year, you're assuming sort of flat sequentially Q3, and then up mid single Q4, but I guess versus last year, you have a smaller backlog today and is more macro uncertainty I think it's fair to say.
Maybe help us understand sort of the confidence in that revenue.
Please.
So Julien it made a couple of comments first.
What we've got in here is basically normal seasonality, maybe even a little bit less.
When you just look at the percentage in the first half versus second half.
Yes.
Also as you go forward from Q3 into Q4, obviously, we've got a couple.
IOS in Hs really.
<unk> up as we would expect and then.
De risked PT going through there, but we think that we've got a pretty reasonable breakout between both of those quarters in terms of the revenue Hey, Joanne I would just say on a two year stacked basis, they look pretty similar.
From where we've been so that gets into the comp question. We do think we will see orders grow here MPT in the second half. So I think its important distinction is that we will see some of the comps obviously.
Jim: So we will see a little bit of order growth in the second half.
We're confident in that happening.
That's helpful. Thank you and then just.
A follow up.
Looking out to the fourth quarter on slide 12. So you have that very hefty margin increase dialed in that sequentially going from 27%.
29, plus.
Yes, when we look at sort of last year's fourth quarter I think the PC margin was flat.
If we're looking at sort of the.
Some of those sequential moves I guess, what gives us that confidence on that very large sequential increases at all top line or is there something coming in around cost savings.
Anything else, perhaps thats really pushing up that that margin so much sequentially.
So when we look when I look at it from going from Q3 to Q4, we've got about the same dollar step up going there and that's falling through sequentially, usually don't love sequential margins, but about 60%.
Falling through from Q3 to Q4 to get to those margins and Thats really the approximately the same dynamic that we demonstrated last year in terms of going up.
That sequential Incrementals from Q3 to Q4 and that's what we've got built in here. So nothing other than that it's really about the top line a little different but if you go by segment, but I think you can see it's really just the top plant step up.
The biggest piece of it and that overall yearly incrementals at 60%, we think shows pretty well I think it speaks to and as we've said in the prepared remarks, the proactive restructuring that we did at the beginning of the year. The continued productivity actions that we've taken throughout the year as we've seen things I think gives us confidence in that sort of margin expansion. If you think about first half of the year.
There are about 100 basis points of margin expansion in the first half so a really good launch point in which to get to and as Chuck described the incremental is very similar to what we've seen in previous years.
Great. Thank you.
Thank you.
Speaker Change: Our next question comes from Nigel Coe with Wolfe Research. Please state your question.
Thanks, Good morning, everyone.
Well good morning, good afternoon.
So Chuck I think you mentioned PT flat organically and <unk>.
In <unk>.
Obviously, a big improvement from down seven.
I understand the two year stack, but when we look at the sequential it's I think it's up 3% P T.
<unk>, which again is unusual so im just wondering.
Some of these delays you called out to military and government. So are you assuming that comes back in the third quarter.
And then maybe on top of that just talk about what we've seen in the channel sell in versus sell out or are we seeing some big impact right now.
So.
And I think Youre right Theres theirs.
Bit of a step up.
Mostly from a probably a big deal that moved from Q2 to Q3, otherwise I think you'd see PT revenue about flat and that's that's the single biggest difference.
As Jim mentioned, we expect bookings to return to positive growth in Q3, and I think that also helps and then you've got some quick down and we've got a couple of businesses in PT cultural Andrew.
Henderson.
Seasoning, three that are actually helping with that step up as well.
I would just add Nigel that the.
Inventory level I mean, do you see distributor inventories are largely a pretty normalized across all the regions, which does give us confidence in our order rates returning to breath in the second half.
Okay. That's helpful color. Thanks, guys.
And then a quick quick one on AA.
The $1 30.
I don't think were shocked by the E beam battery project delays, but I think the impact on revenues.
So I think the second half is lower than the first half Im just wondering to what extent do you think you've now de risked that that I would look in and sort of how much battery EV.
<unk> remaining right now and Uh huh.
Yes, we don't have a lot really derisk VA at this point I think we've seen.
Few quarter, we had always come into the year, knowing that EV in particular would be low, but we did have a number of projects in the funnel that customers were fairly confident.
Those would happen in the year as we progress through the year those have gotten pushed and pushed and so we've decided to just mostly de risk all of that out of the year. So.
So we really unfortunately that's.
Not going to be in the year, but we still have those orders have not disappeared.
What we're really seeing is we haven't seen the step up in some of the other aspects.
Battery broader of battery storage as an example.
So we're really we're really on track record. We're actually ahead of the game on our synergy opportunities in the funnel.
So we'll see a little bit.
Certainly that's probably going to be a 25 aspect too. So so I think the net net on all of that is Nigel is we've derisked of the year. We continue to see the industrial logic of the deal strategically product technology all of those things, but certainly we're putting in a little bit of a pause from our customer in vascular perspective and.
We continue to believe those will happen sometime in 'twenty five.
Okay very helpful. Thanks, Jim.
Thanks Nigel.
Our next question comes from Stephen Tusa with Jpmorgan Chase. Please state your question.
Hey, guys How's it going.
Hi, Steve.
Can you just talk about the just the industrial more of the industrial software parts of the portfolio putting probation aside.
What just broadly you are seeing there I mean, you mentioned a couple of businesses in our growth rates.
Speaker Change: What is the total growth rate for those businesses in any.
Theme, you're seeing there on customer budgets.
Perhaps going to more.
Direct AI applications as opposed to.
Speaker Change: The ones that are going to weave it in over time.
Yeah, Steve we are very good very good quarter for FERC for software. So if we were to think about <unk>. As an example, mid single digit in the quarter, but <unk> was up high single digits growth. So we still believe <unk> will be high single digits for the year, we had a little bit of a different probation. After a couple of years.
As of what we would call accelerated growth.
More on the reoccurring part of the business.
Generally we've seen a lot of budget flush relative because of stimulus in 'twenty, two and 'twenty three we didn't see as much of that flush in this year, but we continue we have a number of new customers starting in the second half of the year, particularly in the federal World. So we really feel good about gordian in particular as we get in a crude continues to improve.
The order growth rate has been very good for the first half of the year and service channels very good as well. So so we see that impacting in the second half of the year really a couple of points because we were good and we were high single digit in the first quarter. So if we just take fallow in general.
Gross dollar retention is at 99% very strong our net dollar retention is a 100 to 103, we're seeing some really we're probably not seeing as to your question, maybe a little bit of new logo distancing.
Then much normal, but we've got as we mentioned in the prepared remarks, both gordian cloud in our space intelligence that are correct. We've now got even better innovation into the market in both of those businesses. So we think the demand environment for the for those opportunities is really good as well. So we feel good about that on the intellect side or EHS side we.
To see good SaaS growth at <unk>.
<unk> as well so so we're not getting into high single digit range, So where we.
In a good place here and quite frankly, where I think we're making we're making some great created some great opportunities for us into the future with with with a number of innovations that we're excited about both in the second half and into 'twenty five.
And then lastly, you guys are doing a pretty good.
Pretty good job of delivering on expectations.
But.
It looks like Theres, a bit of upside needed in consensus to hit that your long term target.
Next year when would you kind of reevaluate that.
The 450 number or act.
Get there, whether it's paying down debt or like when would we kind of reevaluate that EPS target because the street right now is obviously comfortably below that not moving very much.
Speaker Change: I think we've always thought $4 50 is both aspirational and but achievable we talked about the confidence in our prepared remarks, we certainly got some tailwind and headwinds.
Remember the tailwind as we talked about like healthcare and the new product innovation and certainly some of the software businesses that just described a little bit of headwind, but there's a couple of weeks.
<unk> talked for a couple of quarters now that there's a few ways to get there the buyback on hold maybe a little bit of accelerated on the buyback front.
Obviously, M&A is going to be a little bit of a headwind, but but our bolt on the other four bolt ons. We did last year are all accelerated and are over delivering as well. So yes, we will certainly update that number but.
But.
As we said and we've said continuously if I think about the starting point of the year, we're going to beat our EPS. This year, but we're going to get there a little differently than we anticipated in January but what what we know to be true as we're still going to beat that original EPS target number of way, we will always have tailwind and headwinds it will certainly give us an update on that as we get closer to $25.
Sure.
Thanks, a lot.
Yes.
Thank you.
Our next question comes from Jeffrey Sprague with vertical Research partners. Please go ahead with your question.
Yes, Hello, everyone, Hey, Hello, Hello, everybody is doing well, hey, I just wanted to put a finer point on tech specifically make sure.
I have it dialed right maybe for the benefit of others also just.
Speaker Change: Can you just clarify what is the expected performance for tech specifically for the year and what was it previously in terms of year over year revenue decline.
Just on the on our core breath attack, we now expect it to be down low double digits in terms of.
Revenue in previously.
We had expected it to be down mid single digit mid single digit part.
Yes, Jeff Im just a little bit of color on that probably I would say the two things that have really changed one we described some of that no golf business moving out and then after moving a few times, we've decided to take some of that out. The second piece is China, China is not we're not giving we're not seeing the recovery in China, we had anticipated.
The Chinese government has put a number of incentives into.
On the play in the back half of the right.
First quarter, one of the surround replacement investments, we thought would get more traction in the economy and it hasnt. So so it's really those two things that are the big changes relative to what we've seen so it's Atlanta, just said, we're going to be down low double digits. Just if we step back for three years that's still.
And on average a mid single digit growth over a three year CAGR will still be even with that number at mid single digits.
And then.
Maybe just and.
I don't have all the comps in front of me I'll dig it out after the call, but just on the the progression into the remainder of the year for Tech you said orders are expected to be up will that convert relatively quickly. The revenues how would you expect the revenues.
To kind of play a sequentially off this Q2 level.
I would say on a year over year basis, our expectation.
Cat quarter year over year, it's going to be down and Oh.
Speaker Change: Im sorry in that low double digit range for Q3 and Q4.
A slight uptick.
There's obviously some of the orders that we've already seen in fact, well turn to revenue.
But it's really still.
Alright.
Q3 and Q4.
We are seeing some longer cycle aspects of the business.
That are that are setting up for sorry, im setting up for order rates.
Our shipments in the late part of the year and early part of 'twenty five.
Got it thanks I'll leave it there I appreciate it.
Thank you.
Our next question comes from Deane Dray with RBC capital markets. Please state your question.
Thank you good day everyone.
Hey, Deane.
Hey, I wanted to circle back.
It's related to Steve's earlier question, but we're hearing more issues in the software side about risk of churn and disintermediation by some cheaper AI enabled products.
This has come up on other calls are you seeing any issues and maybe specifically for our crew and and service channel. Thanks.
We're not and in fact, both our current service channel are going to accelerate through the year from a core growth perspective. So.
This is always David back to our workflow strategy Dean in many respects.
Where we really were working really hard at all.
Assessments are businesses that we wanted ones that had real vertical expertise some of which was built on our hardware our hardware expense and so we've got real opportunity to provide some AI solutions into our workflows as well, we mentioned Guardian and cloud is a good example, we now bring together olive garden's solutions into one.
And the one filed offerings. So we felt really good about the position of those businesses. We are always looking for competitive threats no matter, whether it's AI or or any other competitive threat. I also think the scale positions and we got some of those places while they're niche there theyre good position style. We're the number one player in the market as an example, a probation with me.
So moving to the healthcare side of the house. So I think one of them in place to take advantage of as we mentioned in the prepared remarks seven new.
Ideas that we're working through in the business relative to just this last quarter with our partnership with pioneer square lap. So we're going to continue.
We really look for a solution set but to your specific question, we have not seen any disintermediation of competitive threat at this point.
Great that's really helpful.
And then one for Chuck.
Maybe just give us some color and context around the lower tax guide for the second half what's driving that is that mix is there anything one off like a reversal of an accrual just.
You could share that well theres always a lot of things going on in tax team, but the big thing by far here is to move out of the pillar two for us.
Minimum global tax rate.
Isn't going to impact us this year.
And so that pushed out that's the single biggest thing.
Yes.
Okay.
Thank you.
Thank you and our next question comes from Joe Giordano with TD Cowen. Please state your question.
Hey, guys. Thanks for taking my questions.
Im.
How would you respond to someone who says that you guys are being a little bit late to the party in some of these cuts to some of the cyclical markets like when I see Tac as this is two quarters in a row.
Like some of your competitors has had been that I think you are arriving at the right place I guess are you getting there a little bit slowly and then like with E.
I believe we were talking almost 200 at the beginning of the year right now we're at $1 30.
So how would you respond to that kind of comment.
Yes, they were closer to 185 190 ish I think but that's probably close some of Thats FX I wouldn't say relate to the party.
But obviously, what we've seen is.
Some things that are REIT abnormal.
Speaker Change: We have seen in the past.
As an example, even last year when orders were top 1000 Gov segment was really was really strong.
We've got a multibillion dollar or repeat order that move that we did in the second quarter of last year that has moved into the second half and we've cut in half. So thats an unusual we have real good line of sight to that.
The piece of the move the other is we've typically seen I think over 20 years, the Chinese government's actions get traction so.
I think those things maybe were a little unique to us, but maybe not.
So so I think.
We we certainly been prepared for it from a cost perspective, and Thats why you still continue to see strong margin and EPS growth for the year.
But I think at this point, it's appropriate to getting into the year with six months left to take stock of where we're at and that's our story.
So and if im thinking on M&A now.
Im guessing you guys you just did a big deal and Youre buying back some stock, but if you. If your M&A from here is going to be a little bit closer to home closer to their existing assets like how are you thinking about where you want to go.
Near term is it more about like Hey, this is something thats under pressure, we can get a good deal, but there might be downside or are you more inclined to pay higher for something that is moving in the right direction and you feel more confident with near term growth outlook by kind of what's that calculus like internally.
Well I take stock of what we've done over the last several years and we typically do one or two deals a year from a bolt on perspective, but when you think about the recurring revenue that we have now 42% of sales growing at low double digit all of that is that is acquired assets. So we're really seeing the benefit and the resiliency of the.
The strategy that we've had.
And now that we built these foundations those four bolt ons that we did last year all into the workflows and growth platforms that we have today. We think we just see that we are seeing the benefit of that.
Those are real strong opportunities for us, we'll continue to do that.
But again, we're going to be selective in and while we remain busy on things.
We're not seeing a lot of deals transacted. This year, thus far and I think thats because you continue to see seller interest very often not aligned with buyer interest and so well continue to be disciplined and we're in a great position given the number of deals we did in 'twenty three to continue to work on those and makes them a great partner like we have.
The deals that we're in 19 in 2020, one im saying the benefit up play out in 'twenty four for us.
Thanks, guys.
Thank you.
And our next question comes from Jamie Cook with Truest. Please state your question.
Hi, good morning, Thanks for the questions one just on.
Your guide for Europe, and for Asia, You maintained your core growth guide for both of those geographies. However sales.
Growth deteriorated in the second quarter relative to the first quarter for both of those regions or just trying to understand.
Confidence level or is there a recovery expected in the back half of the Air and then my second question Im not.
Not to be Nit, Nit picky, but the iOS margins were down 20 basis points year over year, you still had core growth you had positive pricing you are maintaining your guide for the year, but was there any nuance in the second quarter that drove the margins down year over year. Thank you.
Thanks, Jamie.
Maybe we can tag team this with charter.
I mean, we bought Europe down a little bit it's a little bit within the low single digit framework. So it's down a little bit from where we're at we feel we see healthcare has been really good in Europe as we see a continued so there's some pieces of Europe.
It remains pretty good so on a core perspective, we brought it down a little bit North America will be our highest growth region. This year for sure.
And that just speaks to all the parts of the business within North America were up greater chunk of our recurring revenues, but on the iOS margins.
Well I always smart margins are.
Speaker Change: And.
Like 34% or so down nominally with a little bit of mix, but on a two year stack I think there are 300 basis points.
So.
We're very happy with those margins and I would expect that you will continue to see that.
That margin expansion.
Speaker Change: Continue.
At the normal rate in Q3 and Q4.
Im sorry, just a follow up you don't answer on Asia The guide.
And even though he's got worse it doesn't sound like China's getting better.
China got worse within the guide for sure the rest of Asia is a little bit better so.
I think where we stand now China's now.
Just about 10% of our sales in our high growth markets ex China are now 14% of our sales. So we've really got a we're seeing good growth. We mentioned in the prepared remarks that India was a little slow in the quarter, but we see good India growth the rest of the year.
One example, so we just think that the other parts of Asia. We mentioned in the prepared remarks that Japan was pretty good. So we think the other parts of Asia will hold off on that.
As they have in China, but we did we did as part of our de risking, particularly in PT, we didn't take China down for the year.
Thank you.
Thank you Jim.
Thank you and our next question comes from Rob Mason with Baird. Please state your question.
Yes. Good morning, just wanted to see if you could comment on your pricing outlook for the balance of the year on a couple of your segments saw a step up.
Hs and iOS, so, let's step up in pricing during the quarter and just how you're thinking.
Thinking about pricing for the balance of the year.
Hi, Yes, Hey, Rob.
We're thinking overall, 2% to 3% a pretty good number.
And that's been coming down the amount of price.
Or versus.
Last year and the year before but that's what we're seeing about now is what I'd expect to see in the second half you mind that healthcare, we worked very hard to be able to get price into our contracts and you're starting to see that so I think that that's pretty pretty much holds going forward, but it's in that 2% to 3% range in the second half.
And then just a follow up around AA.
Im curious Jim or Chuck just how are you thinking about what's possible the potential in terms of capturing synergies.
Some of the commercial synergies you've talked about as you go into 'twenty five against a if we ended up at 130 in revenue this year.
And you talked about that funnel, maybe doubling in smaller orders.
What kind of contribution maybe we'd be thinking about.
Well.
We'll see what the number ends up being because some of it will have the what we end up transacting here at the end of the year.
But that number is we think somewhere in the neighborhood of $10 million to $20 million right now and growing so that's the funnel. So as we we've got we won't we won't collect collect all of that funnel.
That funnel is starting to build here. So we feel good about it. We're ahead of the game, let's see where we can transact the remaining part of the year and as we get into next year, but I think what we've seen and as I mentioned before as the technology is good customers like the business, we haven't seen very little cancellations from orders. It's just as we know a number of the customers are just delays or investment cycle.
But we still believe new battery Chemistries are critical to battery storage.
Data Center battery storage is still going to be really important.
<unk> mobility eventually will come back so a number of the long term growth drivers are still there, but we certainly have seen a momentary lapse in some of the customer investments for sure.
I see.
<unk>.
Thank you.
And our next question comes from Andy Kaplowitz with Citigroup. Please state your question.
Hello, everyone.
Okay.
Jim You mentioned, the 60% Incrementals for the year, which obviously quite good and partially based on the restructuring you did coming into the year, but what does that kind of performance to tell you for how you might be able to bridge towards that $4 50 next year do you still see a good likelihood of above average Incrementals next year's healthcare for instance, continuing to recover in your short cycle.
Businesses do start to come back.
And as Chuck.
We see first of all we've got to.
Two segments iOS in Hs that are really on a good path into what we wanted them to be in 2025.
And then as you noted book, where we did productivity.
And cost savings out of last year, and what we'll be doing more of that.
In the back half of this year.
Not as dramatic, but but to get onto the REIT glide path into that 2025 number.
So, we'll we'll alter spend less.
And slow the rate of the spending in there and then take a little bit of cost out of particularly in PT.
Got it and it's interesting no questions in Hs they must be doing something right. So let me just ask you then consumables up double digits hospitals syndrome carrier in the U S. Does this seem like an extended period now of good growth for Hs and how you are performing in terms of improving the ESP business in China.
Yeah.
ASP the.
The ASC business has been a good run for several quarters.
Honestly, we had some noise with the North American channel transition and the exit of Russia, and a number of things when you look across the now the last several years, that's a good growth and we believe strongly that that's the benefit of the business. We're just now getting the innovation funnel going right, we mentioned that the <unk>.
Speaker Change: Steam sterilization product that we just launched which is a seven second b I wonder.
We're in a really good place from an innovation front will start to we'll start to get that innovation flywheel moving the team has done a great job from a commercial success perspective.
So we think that ASP.
And important part of the transition and health.
On the backs of census is SaaS revenue growth I mentioned on the prepared remarks, a probation SaaS business was up over 50%. So so we've got a number of good things and obviously, we continue to improve the margins of the faults are you as you described in the previous question is good. There. So we are we think we're on a good run here they'll always be some puts and <unk>.
But we feel good about it we feel good about where we're at and and the team is doing a really nice job from an execution perspective.
I appreciate the color.
Yeah. Thanks, Andy.
Our next question comes from Joe O'dea with Wells Fargo. Please state your question.
Hi, Thanks for taking my question.
Can you just sort of characterize a little bit what you've seen over the past three months when we talk about it.
I think on the on that.
Sensing side within PT you also noted some softer trends in industrial and factory automation demand really you're trying to understand the degree to which there were expectations for things to get a little bit better than that just hasn't happened. This things pushed to the REIT or the degree to which things kind of softened some.
<unk> over the course of the quarter and then what.
What you attribute that too so any color there would be helpful.
Please standby.
We would need to just reconnected the speakers standby please.
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Thank you for your patience, ladies and gentlemen, we will continue with the question and answer session go ahead, Mr. Dan.
Hi, Thanks, a lot.
I hated my question, but I'll try again.
So.
Yeah no worries.
Speaker Change: Basically I just wanted to understand trends over the course of the quarter I think we see kind of the.
Im reset on expectations of EMEA I think in prepared remarks, you talked about within PT in the sensing side, a little bit of softer activity in industrial and factory automation and so I wanted to understand whether you know what.
You saw over the course of the quarter was with sequential softening or if it was more a matter of earlier expectations for things to get better and that's just kind of pushing out to the REIT.
So overall, just how you would characterize those trends over the course of the quarter.
Yes, obviously.
I would I would say healthcare was good throughout the quarter iOS, obviously with the software businesses those are pretty consistent throughout the quarter.
Fluke on the PFS front actually got better in June So that was we haven't talked about but we had a very good quarter with fluke.
Have a good year with flu our industrial business the industrial group business at Fluke was actually up mid single digits in the corner. So so we feel good about some of the trends there.
That's a decent fronts on the non capex side of our business, what we really saw in most cases was.
Really the larger projects moving so we tend to close those later in the quarter the nature of some of the Windows business Transact 1000 Gov.
A little later in the quarter and we just saw those things pushed to the right now some of those things have been pushing for a few.
As an example on the EBITDA front some of those projects were being pushed from previous quarters. So the de risking really came out of really three things number one was seeing those projects continue to get pushed.
Speaker Change: And now maybe being out of the shipment window.
Attack.
Maybe more broadly a little bit more.
Lower Oems and some of the sensing businesses.
And I would say finally, as just the China recovery being pushed out of those three things.
So I would say that what falls into your expectation versus just what we saw most of it was things. We saw maybe there's one expectation front probably is the China aspect, where we thought China might might get better here in the quarter and it Hasnt and now we anticipate that recovery slightly slower through the year.
That's helpful cover color and then just just related and the conversations you are having with customers and us.
Im sort of push things to the REIT, a little bit what youre hearing from them in terms of why are they doing that what are they waiting for how much of it is kind of macro and election in interest rates or other things that they are paying attention to and waiting on some spending as a result.
Yes, I would I would call it a combination of uncertainty related to maybe geopolitical a little bit.
That's kind of a global global point, not as much a U S point, but certainly around the world.
Yes, that's probably part of it and I think some of it is macro uncertainty obviously PMI is starting to recover but maybe not around the world as quickly as possible and so I think people.
Im certainly decided to hold off a little bit and certainly on the 1000 Gov front, that's kind of government spending aspect to it uncertainty.
Defense budget is going to be obviously.
The defense spending is going towards production type things and not and one thing you can delay is the R&D investments and so a lot of that pushing out of the 1000 Gov pieces that R&D investment that is much more easy to easy to push and obviously the production side of things.
That's helpful. Thank you.
Thank you.
Thank you and there are no further questions at this time I'll hand, the floor back over to Jim Lico for final comments. Thank you.
James A. Lico: Diego, Thank you and thanks, everyone for being on the call.
Speaker Change: We appreciate your patience as we as.
As we switch phone lines here and we will try to figure out what's happened there.
But obviously, we've got plenty of time for follow up calls and opportunities to catch up to us to give you more clarity as to what what what we're talking about today.
As we said in the prepared remarks, we feel.
The portfolio we built.
A lot of resiliency you see that as I mentioned on the recurring revenue growing at low double digits. We feel we feel strongly about the importance of de risking the ear, but by the same time.
Really being able to drive double digit EPS growth double digit free cash flow on a little bit lower revenue than we anticipated. So good about where we're at right now strategically.
As we've talked to a number number of points, we made on the call.
We are seeing some market things, but obviously our share position and our continued ability to innovate has never been greater and so we feel the portfolio is in good shape to do that on a continuous basis, we look forward to talking to everyone and follow ups.
We don't see them before the fall have great. Thank you.
Thank you and this concludes today's conference all parties may disconnect have a good day.