Fortive Corp (FTV) — Q1 2021 Earnings Call Transcript

Thank you, Pasha. Good afternoon, everyone, and thank you for joining us on the 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 SEC Regulation G relating to these non-GAAP financial measures is available on the Investors section of our website, www.fortive.com, under the heading, Investors Quarterly Results. We completed the separation of our Industrial Technologies segment through the spinoff of Vontier Corporation on October 9, 2020, and have accordingly included the results of the Industrial Technologies segment as discontinued operations. The results presented on this call are based on continuing operations. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. All references to period-to-period increases or decreases and financial metrics are year-over-year on a continuing operations basis. During the call, we will make forward-looking statements within the meaning of the federal securities laws, 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 uncertainties, and actual results might differ materially from any forward-looking statements that we make today. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2020. 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, Griffin, and good afternoon, everyone. Starting on Slide 3. Our first quarter performance continued to highlight the benefits of our efforts to enhance the growth and resilience of our portfolio, significantly expanding our positions in software and healthcare and adding substantial sources of higher growth recurring revenue. As a result, our portfolio has been well positioned to drive rapid sequential improvement over the past few quarters as markets have begun to reopen. In Q1, we continued to see significant improvement, not only across our short-cycle businesses, primarily Fluke Instruments and Tektronix, but also in many of the businesses that have faced COVID-related headwinds, such as Advanced Sterilization Products. Turning to the results in the quarter. We generated total revenue growth of 13.6% and core revenue growth of 9.1%, above the high end of our guidance. Adjusted earnings per share was $0.63, representing an increase of 37% year-over-year. The combined outperformance on core growth and earnings helped drive another strong quarter of free cash flow. Our SaaS offerings at Accruent, Intelex, Censis, eMaint, and Gordian continue to perform well, generating double-digit growth in the quarter, with the current Gordian seeing better top-line momentum overall. These software offerings are an important part of our strategy to leverage leading hardware positions to provide broader software-enabled solutions to address pain points in our customers' critical workflows and their ongoing digital transformation priorities. Despite the challenges of a COVID environment, we continue to leverage FBS tools to drive performance improvements across the portfolio. ASP is advancing the implementation of the Fortive Business System more broadly, driving strong improvements in working capital turns as well as progress accelerating commercial efforts as it delivered its fifth consecutive quarter of growth in its global installed base. Intelex also continues to see success from the application of FBS tools to improve its sales process, driving better lead generation, improved customer win rates and stronger sales pipeline creation. While these are just a couple of examples, we are highly focused on building FBS capability across our newer businesses in order to deliver accelerated growth, innovation and market share gains. Relative to organic growth, we continue to invest in strategic initiatives across our operating companies as well as build additional capacity to drive future innovation. With the FORT, we are continuing to scale our data analytics capabilities, providing leverage to our operating companies to pursue key AI and machine learning applications. In 2020, we more than doubled the number of projects conducted and expect to do the same this year, targeting more than $250 million of potential revenue opportunity. Our acquisition of ehsAI significantly expanded our machine learning expertise to help grow our position within EHS workflows as well as generate learnings that can be applied more broadly within Fortive. We've also made a number of additional investments to expand our partnership with Pioneer Square Labs with three startup opportunities currently in different phases of incubation. With these investments, we are enhancing our ability to generate disruptive innovation that will deepen our competitive advantage and increase our customer value proposition. In terms of performance across the major geographies, core growth was led by low 20% growth in Asia. This included approximately 30% growth in China and low double-digit growth in Japan. Elsewhere, our core revenue grew by low double digits in Western Europe and by low single digits in North America. Taking a closer look at performance in the segments on Slide 7. Intelligent Operating Solutions posted a total revenue increase of 9.5%, with core revenue increase of 5.5%. This included high-teens growth in China, high single-digit growth in Western Europe and a flat top line in North America. Fluke's core revenue continued to improve in the first quarter, increasing by high single digits. This performance was highlighted by low double-digit growth at Fluke Industrial and high-teens growth at Fluke Calibration. Fluke's growth included the launch of the 377 and 378 Fluke Connect clamp meters for noncontact voltage testing. These introductions incorporate Fluke's FieldSense technology and extend its leadership position in safer noncontact measurement tools. At Fluke Industrial, point-of-sale in North America turned positive in the first quarter, increasing by low single digits. Meanwhile, point-of-sale in both Western Europe and China continue to improve, rising by mid-single digits and mid-teens, respectively. Strong performance at Fluke Digital Systems continued this quarter, increasing by mid-single digits as eMaint saw strong demand with mid-teens growth in SaaS bookings. Industrial Scientific declined single digits in the first quarter as a result of continued weakness in instrument sales. The company's iNet offering continued to demonstrate its resilience, increasing by low single digits. iNet also registered an 18% increase in bookings while driving a more than 500 basis point improvement in net retention. Stub's strong bookings growth in ISC's rental business provided a signal of improving stability in its end markets with customers beginning to restart maintenance project activity. At the same time, we are seeing continued success from the application of FBS growth tools at Intelex to accelerate sales pipeline creation, driving a record revenue quarter with low double-digit growth. The integration of ehsAI continues to go well. While the revenue contribution remains small, product integration is on schedule, and the Intelex team has started to accelerate new customer acquisition. Accruent grew by low single digits in the first quarter, highlighted by high single-digit growth in SaaS. Accruent continues to see good momentum in its industrial and life science segments. This included a recent win at BioMarin, which included Accruent's Meridian solution as a critical tool for management of their pharmaceutical manufacturing facilities, including communication with contractors and support for FDA validation. Accruent is also seeing growing demand across a range of end markets for its facility planning and resource scheduling solutions with customers beginning to prepare their facilities for the future needs of their workforce as they emerge from the pandemic. Accruent's growth in the quarter was aided by the resumption of some on-site service implementation and project-related activities with further improvement expected as the year continues. After facing headwinds during the second half of 2020, Gordian's top line improved to flat in the first quarter. Gordian's job order contracting procurement business grew by low single digits and is expected to accelerate as the ramp of recovery from COVID continues. The company's estimating business continued to perform well, increasing by high single digits and seeing strong renewal momentum and conversion rates for the SaaS version of its RSMeans product line. Gordian saw signs of improvement during the first quarter regarding site access issues. We expect this improvement will continue in the coming quarters. The Precision Technologies segment posted a total revenue increase of 14.3%, with a 12.1% increase in core revenue. This included mid-30s percent growth in China, mid-teens growth in Western Europe and mid-single-digit growth in North America. Tektronix generated high-teens growth, driven by strength in its general industrial and semiconductor markets. Point-of-sale continues to accelerate, up greater than 40% in China, greater than 20% in Western Europe, while North America turned positive with a mid-single-digit increase in the quarter. Tektronix has seen strong demand in China as economic recovery continues driven by government investment in 5G, electric vehicles and IoT solutions. Looking across the product lines at Tektronix, mainstream oscilloscope and Keithley both had an excellent first quarter. Mainstream oscilloscope posted high 30% growth, driven by strong demand trends across most of its key product segments, particularly our 6 series and 4 series scopes. Keithley grew mid-teens, while the Tektronix service business continued to show stability, reporting mid-single-digit growth in the first quarter. Tektronix also saw outperformance across a range of recent new product introductions, including its new IsoVu Probe solution for semiconductor and automotive market applications. Sensing Technologies grew by low double digits, driven by broad strengthening across end markets, including industrial and electronics customers. Sensing saw accelerating demand in China as it delivered a number of key wins with strong momentum among factory automation OEM customers. Sensing also generated strong growth from its critical environment products, et cetera, with mid-30% growth for the quarter. Pacific Scientific EMC returned to growth, increasing by low single digits in the first quarter. The business continued to see good order trends with a book-to-bill of 1.2 over the trailing 12 months and has a strong backlog that we expect to support improving growth in the coming quarters. Moving to Advanced Healthcare Solutions. Total revenue increased 20.3% with a 10.9% increase in core revenue. This included low 40% growth in China, low 20% growth in Western Europe and low single-digit growth in North America. ASP returned to growth in the first quarter, increasing by mid-single digits. Growth at ASP was driven by a greater than 40% increase in capital equipment sales as it continued to grow its global installed base. This momentum in capital sales more than offset the fact that electric procedures were 91% of pre-COVID levels globally and continue to weigh on ASP's consumable revenue. Stronger capital sales are an indication of the progress ASP is making in its FBS journey by driving better sales execution and improved funnel management at priority independent delivery network accounts. ASP continued to perform well in Western Europe with its fifth consecutive quarter of growth. ASP was also recently named the preferred supplier by the National Health Service in the UK and a large multi-year tender for terminal sterilization capital and services. Censis also had a strong first quarter, growing by low teens with low double-digit growth in its CensiTrac SaaS offering. Censis has seen improved upselling momentum across its business and is also seeing evidence of U.S. hospitals moving to post-COVID operations and faster purchasing decisions. Fluke Health Solutions increased by low teens in the first quarter with broad strength across its product lines. FHS continues to have success deploying FBS to drive growth and margin improvements at Landauer, leveraging global go-to-market scale and accelerating cross-selling and products and services. Landauer is now seeing an approximate 2.5x improvement in its operating margins since acquisition. Finally, Invetech reported mid-40% growth as it delivers against a strong backlog of 2020 orders for its diagnostic offerings.

Thanks, Jim, and good afternoon, everyone. Our effective execution across the portfolio allowed us to achieve strong margin performance in the first quarter. Adjusted gross margins reached 57%, increasing by 90 basis points, driven by significant growth at Fluke and Tektronix, along with an improvement in ASP’s gross margins following the transition service agreements. This also demonstrated effective execution with FBS across the portfolio, including a continued price realization of 90 basis points during the quarter. Our adjusted operating profit margin for Q1 was 22.7%, slightly above our guidance, aided by the stronger volume we experienced. We generated 40% of adjusted incremental operating margins and achieved 240 basis points of core operating margin expansion, with more than 200 basis points of core operating margin growth in each of our three segments. In the first quarter, we produced $144 million in free cash flow, which is a 50% increase compared to last year. We are pleased with the consistent growth in free cash flow over the past year, with the first quarter bringing our trailing 12-month total to $950 million. Alongside significant earnings growth, disciplined management of working capital at ASP, Fluke, and Tektronix contributed to our free cash flow performance. Early in Q1, we executed a tax-efficient sale of our remaining 19.9% stake in Vontier, generating about $1.1 billion in proceeds, which were allocated for debt repayment. After this transaction and our Q1 free cash flow, we concluded the first quarter with a net leverage ratio of 1.2 times. With strong free cash flow and substantial balance sheet capacity, we are well-prepared to pursue our key capital allocation priorities and maintain an active pipeline of deal opportunities. We continue to recognize numerous opportunities to deploy capital to strengthen our core hardware and instrumentation positions while leveraging our deep domain and workflow expertise into adjacent high-value software and data-driven opportunities. Turning now to the guide on Slide 11. As a result of the strong first quarter performance and given some improvement in our outlook for the rest of the year, we are raising our 2021 guidance. For the full year, we now expect adjusted diluted net earnings per share to be $2.50 to $2.60, representing year-over-year growth of 20% to 24% on a continuing operations basis. This assumes total revenue growth of 10% to 13%, core revenue growth of 7% to 10%, adjusted operating profit margins of 22% to 23% and an effective tax rate of approximately 14%. It also assumes core revenue growth of 5% to 7% in the second half of 2021. We also continue to expect free cash flow conversion to be approximately 105% of adjusted net income for the year. We are initiating second quarter adjusted diluted net earnings per share guidance of $0.56 to $0.60, representing year-over-year growth of 30% to 40%. This assumes total revenue growth of 20% to 23%, core revenue growth of 16% to 19%, adjusted operating profit margins of 19.5% to 20.5% and an effective tax rate of approximately 14%. For the second quarter, we expect free cash flow conversion to be approximately 85% of adjusted net income. The full year guidance incorporates $35 million of additional investments that we are making to drive innovation and enhance our capabilities to support higher growth in the years ahead with $15 million in the second quarter. This includes funding for the FORT to expand our analytic capabilities and talent base as well as to accelerate the development of AI machine learning offerings for our customers. It also includes funding for investments in our partnership with Pioneer Square Labs, where we have seen good early progress thus far.

With that, I'll pass it back to Jim for some closing remarks. Thanks, Chuck. Before we move to questions on Slide 13, I wanted to highlight the continued progress we're making with respect to our key sustainability goals. In Q1, we completed an updated materiality analysis, yielding valuable insights that we use to define the new pillars of our sustainability strategy, which will guide our efforts going forward. We've also made significant progress implementing the Intelex sustainability performance indicators platform across the portfolio, which we used to complete the collection of 2020 emissions data with new, more aggressive carbon emissions targets. We look forward to discussing our progress and our evolving sustainability goals at our upcoming Investor Day. I'd also like to take a minute to thank our employees for their continued adaptability and strong execution of FBS throughout the first quarter. The results that we announced today are a testament to the depth and dedication of our teams and the relentless focus on the continuous improvement principles that power our culture. As we look forward, we are excited about the strength of our portfolio, the quality of the market opportunities we address and the significant organic and inorganic growth opportunities ahead of us. As macro indicators continue to recover from the COVID-19 pandemic, our focus will remain on driving strong core growth, margin expansion and free cash flow generation, while investing in innovation and deploying our capital to acquisitions that accelerate our strategy and increase the value we bring to customers. We are also excited to share more details with you about our road ahead when we speak on May 19 at our Investor Day. In the almost five years since our spin, we have positioned the portfolio to be higher growth, more profitable and a more powerful generator of free cash flow. This sets us up well for accelerated compounding across our businesses, which we look forward to discussing with you. With that, I'll turn it back to Griffin.

Thanks, Jim. That concludes our formal comments. Pasha, we're now ready for questions.

Hi, good afternoon.

Hey, Scott.

Is the margin guidance entirely due to the additional growth investments you're referring to? Or are there issues related to the supply chain, pricing costs, or timing? Is there anything else that contributes to what I would view as a more cautious incremental margin guidance?

Are you talking for the year or for Q2?

Honestly, you could answer for both, yes. I was specifically talking about 2Q, but you might as well speak to the full year.

I believe that for the full year, we mentioned the additional investment. There may be about $0.03 of headwinds as well as some impact from foreign exchange. I would like to highlight that. Additionally, we have observed some inflationary pressures in this area. However, we noted the more significant factors that differ from what we anticipated just a couple of months ago.

Okay. Go ahead.

And in Q2, go ahead.

Well, I think that for the full year, we talked about the incremental investment. There's probably $0.03 of headwinds and also the year for FX. I'd probably point that out a little bit. Further, I'd say that we've seen some inflationary pressures here. But we highlighted the bigger issues that are different from what we might have considered just a couple of months ago.

Sorry, go ahead, Scott. I was just going to mention that Q2 is primarily focused on the investment we started for growth, as we are observing an acceleration in the second half of the year compared to our previous guidance.

Okay. The $35 million in 2Q that you call out?

Yes.

Do you have an idea if inventories are normal, below average, or above average? I understand it’s difficult to generalize due to the broad nature of your portfolio.

Yes, I think we feel quite confident about our current inventory levels. We have reliable point-of-sale data from Fluke Industrial and Tektronix, and we also get some useful data on consumables in North America at ASP. For a significant part of our portfolio, especially with channel partners, our inventory levels are reasonable and not elevated, although there are a few exceptions. We observed consistent improvements in point of sale, which we mentioned earlier. Sequentially, we have seen improvements from Q4 of last year to Q1 across all our regions in terms of point of sale. Additionally, there's been an enhancement in point of sale even on a two-year comparison. We haven't experienced a significant inventory increase, so we feel positive about our inventory situation as we head into the second quarter. Regarding margins, there will be $15 million in organic investments in the second quarter and $35 million for the full year, along with some one-time costs reappearing from last year that we've discussed previously.

Okay. Good color and clarity. Thank you, Jim and Chuck. I’ll pass it on.

Thanks, Scott.

Hi, good afternoon. Just wanted to try and circle back on that Q2 margin question, maybe from a different angle. So if I just look sequentially, the revenues are sort of flattish, I think, Q1 to Q2. You're guiding that margin down about 250 bps sequentially. Understand there's 100 bps or so headwind from the extra growth investments. But maybe help me understand, is there something on mix that's also getting worse? Because I understand the temporary cost year-on-year, but sequentially, there shouldn't be a huge delta, I would guess.

Hey, Julian, this is Chuck. I think you got most of it. There's a little bit of foreign exchange. Regarding the temporary costs, as things open up, we actually see some sequential changes from Q1 to Q2. For instance, as things open up, we expect more travel than we experienced in Q1. This indicates some additional spending that we anticipate.

Thank you. And then maybe homing in on the Advanced Healthcare Solutions segment and a couple of points on that. I think your incremental margin there year-on-year in the first quarter was about 30-ish, and then Q2, there wasn't much at all because of the factors you mentioned. And then it looks like a big step-up in the second half. So maybe just the mix moving around a lot more capital equipment, Q1, huge consumables bounce in the second half has something to do with TSA roll off. Any kind of moving parts in AHS margins through the year?

I believe we experienced a solid year-on-year margin expansion in AHS, with a few hundred basis points across all three segments. However, we were slightly below our expected guidance primarily due to lower elective surgeries in Q1 compared to our projections. Additionally, we had a strong capital and hardware placement, which contributed to growing our installed base, and I view this as an investment in our future. This scenario likely impacted the first half. As elective surgeries improve from around 91% in Q1, we anticipate further margin growth. I am optimistic about our average selling price and foresee good margin expansion for the year, exceeding 100 basis points and approaching 200 basis points.

Great. Thank you.

Thanks.

Hey, thanks. Good evening, everybody.

Hey, Jeff.

Hey, two for me. Just back on the investments, I want to kind of think about the payback side of that equation. Jim, you mentioned a $250 million opportunity. Is that off the spend we're talking about this year? Or does that encompass some of the accelerated spending you were talking about that sort of happened last year? Maybe you could just frame that up for us. And is that kind of a three or four year out number? Just some perspective there for starters. Thanks.

Yes. I think the $250 million represents a mix of projects from last year and this year. Specifically regarding the FORT, it's currently a balance of about 50% internal productivity projects aimed at improving our operations through digital transformation and 50% commercial offerings that will create revenue opportunities. While these initiatives are a few years away from generating revenue, we anticipate seeing some results by the latter half of this year. Overall, when considering the $35 million, there are several multi-year investments involved. For instance, investments with Pioneer Square Labs are more focused on early-stage innovation and are projected to have a significant impact in around three to four years, while other investments may yield results in the next one to three years.

And just so I fully understand. So there's $250 million of revenue, you believe, that obviously would have some profit drop through. But then there's, on top of that, some pure profit productivity fall through from what you're working on, right? Can you size that at all?

Yes. It's pretty tough to size right now because some of it is just inherent in kind of how we just think about productivity on a regular basis. So I would say if we were to think about it, it could be as much as $5 million to $10 million in the next 12 to 18 months, probably on the productivity side. The $250 million, by the way, is kind of sort of market opportunity. So we ought to think about that as we're putting ourselves into an opportunity to gain share in a new part of the served market of $250 million.

Got it. And just one more for me. On AHS, the M&A impact was bigger than I was expecting in the quarter and a little bit bigger than I was expecting in the Q2 guide. I don't know if I missed something. Or is there something going on with TSAs rolling on that you're counting as M&A? Maybe you could just elaborate on the composition of the acquisition contribution in AHS.

Yes, Jeff, the growth from M&A that you’re observing is primarily due to the roll-off of the day two countries from the TSA, which we don’t include in our core growth. Since we completed that largely at the end of the fourth quarter, you will see that reflected as an increase in top-line growth, which aligns with the average operating margin for the fleet.

Hi, guys, how are you doing?

Good.

Can you just talk about how much of your portfolio is dependent on semiconductor capital expenditures?

Our total sales in the semiconductor sector represent about 5% of the company. I would estimate that approximately 80% of this is not related to capital expenditures, meaning it is not necessary for building a manufacturing plant. Some of the advanced performance scopes utilized in design can indeed be costly, and those would be part of capital projects. However, if your inquiry pertains to new fabrication plants potentially becoming operational, these are typically not tied to capital expenditures. The majority of our capital expenses are associated with our Sensing Technology division or the Keithley segment within Tektronix.

Sure. What is the current status of the acquisition pipeline? Are we still focusing on smaller software deals, or are there various types of business models we might explore on the hardware side? What pressing opportunities are you observing in that area?

Yes. I think I would say the breadth is pretty good right now. I mean, we said 2020 was mostly going to be a bolt-on year anyway because of kind of what we had to do relative to the Vontier separation and what we had to do with getting ASP up and running. With that behind us and the balance sheet in really good shape, I think we've got far more degrees of freedom to really pursue a range of opportunities within hardware and software. So I think we love the ehsAI deal that we did. We mentioned it in the prepared remarks, while it's small, it's really given us great machine learning capability. You certainly could see more of those kinds of things to really extend ourselves from a feature perspective within our software and data analytics portfolio. But hardware is still – certainly, lots of places are from a hardware perspective, from an IoT standpoint that we would also take within our opportunity set. So I think it's pretty broad. You can never predict which one is going to happen, but I think at the end of the day, there's a number of things out there that could be potentially exciting. Can't predict when deals get done, but feel good about where we're at right now.

Hi. Yes, good afternoon.

Hi, Andrew.

Can I just ask a question? It seems that nobody has asked for details around the growth investment. Can you just expand on what exactly it is? And why did you pull the trigger right now?

Yes. I'll address the second question first. We decided to move forward now because we recognized a promising opportunity with the revenue outlook and, likely, increased growth compared to last year when we were more cautious. After another quarter of observing trends, we feel confident about our top-line performance and want to capitalize on these opportunities. This approach has been our strategy over time, and considering our financial results in relation to earnings growth, we believe we are in a strong position to make bold investments across various sectors of our business. Approximately 58% of our investment is aimed at granting several of our operating companies more flexibility to increase their R&D spending on innovative ideas. We will provide more details at our upcoming Investor Day. The remaining portion of the investment is focused on the FORT and Pioneer Square Labs. The FORT is dedicated to enhancing our data analytics capabilities, which we briefly discussed in response to Jeff's question. Concerning Pioneer Square Labs, we anticipated that our investments in certain ideas would lead to multiple projects, and it turns out that the first three concepts we developed are now receiving accelerated funding due to their potential. For instance, one of our investments is in TeamSense, which focuses on connected worker communications technology, enhancing connectivity for hourly workers in their daily tasks. Another investment involves condition-based monitoring communications, akin to what Microsoft pursued with Nuance in the industrial sector. We are doubling down on these investments as we see potential for growth in the future. As I mentioned in my earlier response to Jeff, these opportunities are longer-term commitments, so they may not significantly contribute to revenue next year. However, most of the necessary investments have already been made, and our focus now is on accelerating those for upcoming years.

Gotcha. And my follow-up question. Can you just talk collectively about how the SaaS businesses are doing? So bookings, churn, pipeline of deals, whatever you want to share with us.

We had a very strong quarter for our SaaS business, with all areas showing double-digit growth. Overall, we expect to continue this trend and achieve double-digit growth in SaaS throughout the year. It's important for us to keep investing in these businesses. Additionally, we highlighted how FBS is adding value to our operations. Overall, we believe our bookings have performed well, placing us in a strong position. The investments we've discussed are aimed at supporting these businesses further.

Hi, guys. Hope both well. I want to come back to the temporary costs coming through in Q2 and really the sequential impact because, obviously, margins stepping down as folks have already talked about. If I add the $60 million year-over-year impact to SG&A from last year, it looks like your point to SG&A about 4 75 for 2Q. So the step up Q1, Q2 has been in the range of about 45 to 50. Is that even close to being right?

Yes, that sounds about correct. It's important to remember that in a typical year, we usually see an increase from Q1 to Q2. There is some normal seasonality at play here. As you can imagine, spending starts off slower in January compared to April. Additionally, as we progress in the year, we anticipate increased activity as we continue to open up.

And I don't think we've talked about supply chain in a lot of depth here. Is that having any impact whatsoever in terms of your planning for Q2 or Q3?

Nigel, the quick answer to that is it's included in our guidance. We've done a solid job historically, as supply chain tools have always been a crucial part of our operations over time to address the current challenges. While they are well documented, I will not go into details. The challenges can be grouped into two categories: supplier issues and global logistics challenges. We've mostly mitigated those challenges this quarter and have ongoing strategies in place. We feel confident about our guidance as we exceeded revenue expectations this quarter despite these difficulties, which demonstrates our effective mitigation efforts. We believe we can continue to manage these challenges in the coming quarters. I don't expect these issues to disappear. Drawing from my experience in supply chain spanning 30 years, I think these challenges will persist throughout the year, but we are pleased with the progress we are making. Chuck and I review these elements monthly in our operating review, so we are closely monitoring the situation. Ultimately, we are optimistic about our mitigation strategies.

Good afternoon, guys. Jim, maybe you could give us an update on your expectations by region for 2021 in the sense that China, as you said, had really strong growth here, continuing to look better than North America. But how much of those results are just easier comparisons given the progress of COVID? And then are you seeing a material inflection at this point in sales rates in North America? Are there any portions of the world that worry you in terms of COVID hotspots?

I believe China will likely be our strongest performer this year. While the comparisons did play a role this quarter, our performance is significantly improved even when looking at a two-year period. We're optimistic about our efforts in China to strengthen our business there, and we anticipate strong growth. Western Europe and North America are also expected to perform well. Western Europe has shown good results, and we are pleased with the trends in point of sale that we've discussed. Our newer businesses, like Intelex and Accruent, have experienced solid growth in Europe as we invested in that market. It's challenging to predict Western Europe's performance given current hotspots, but we still expect a strong year there. North America appears to be improving and could become our top region. We experienced a slow start in North America in January, but conditions have gradually improved each month. This was partly due to COVID-related factors, with the overall COVID numbers at 91, and in the U.S., elective procedures dropped to the 80s in January but rose above 90 in March. As we assess North America, several growth conditions have continued to advance throughout the quarter, and we anticipate further improvement this year. Regarding hotspots, we currently have minimal revenue exposure in India or Latin America, but these areas pose potential challenges for global businesses in the near future. We will do what we can to manage those risks, but I don't expect them to significantly affect our overall business this year.

Jim, I wanted to focus for a moment on Intelex, as it appears you have developed a significant EHS platform, and Intelex has shown continuous strong growth. Given the stimulus funding and heightened emphasis on sustainability, along with your collaboration with FBS, it seems likely that this growth could accelerate further. Could you discuss the growth potential of this platform moving forward?

Yes, we really appreciate the team. Our significant investment in EHS began with the work at ISC, and our overall EHS efforts have expanded with the acquisitions of SAFER Systems and ehsAI. We've developed a portfolio that can leverage the ongoing trends in sustainability and worker safety, which makes us optimistic. The Intelex platform adds substantial value; we use it for our own sustainability assessments, and it’s an excellent tool for setting goals and driving actions to enhance sustainability rather than just reporting on it. We're confident in the platform and believe there are future investment opportunities. Specifically regarding your question, Intelex has shown double-digit growth for us, primarily in the teens. As we ramp up our efforts, particularly with the machine learning capabilities we have through ehsAI, we expect to see further growth in the latter half of the year. We aim to continue increasing that growth rate, and I believe we can exceed current levels, but in the near term, we are confident it will remain a double-digit grower.

Thank you. Good afternoon.

Good afternoon.

Hey, I want to circle back on the implications of getting more site access. Could you give us a sense of maybe on a percent basis, how much has opened up? But more importantly, what are the implications? Is there a pent-up business that really has been depending on being able to get back in? Should we think about a catch-up here?

Yes. I believe site access can be viewed in two ways. First, for our service businesses outside of healthcare, we have adapted to remote capabilities, but getting customers onboard and implementing software takes time. There is definitely some pent-up demand. However, I must say, Deane, that our access over the past few months has been quite limited, making it challenging to predict how quickly access will improve, especially on a global scale. We do expect things to get better, but I wouldn't say that everything will be resolved by the end of the year. We still lack sufficient visibility. Most customers likely won't be opening up until the third quarter. It’s a bit early for accurate predictions. Our forecasts are based on emerging trends that we feel positive about, but conditions could improve further if vaccination rates increase and more businesses begin to reopen. This applies to various segments, including Gordian, Accruent, and eMaint, as well as our Tektronix Calibration business, which requires on-site work. Regarding healthcare, we are able to continue service in hospitals, but it is progressing slowly. We noted in the Censis prepared remarks that purchasing decisions are starting to accelerate, which is reflected in our guidance as well. Ultimately, in both the U.S. and other countries, it's still too uncertain to predict precisely how the pent-up demand will unfold.

Great. And then just for a follow-up. I think I heard in Chuck's prepared remarks that there was 90 basis points of price realization. Was that for the company as a whole? Was it a particular product or business? And then just broadly, how are you thinking about price at this stage? I mean, every conference call we're hearing, people are putting through pricing mostly to combat material cost inflation, which you said is not that big of an issue for you, but is there – is this a time to wield pricing power?

So Deane, this is Chuck. You heard correctly that there was 90 basis points for Q1 across the company in a fairly uniform way. It wasn't just one division experiencing that. We have managed to stay ahead of price costs. We review this every month and will continue to do so as it's an evolving situation. One of the strategies we are considering is to push on price in this environment, though it's not the only strategy we have.

Thanks, Steve.

Hi. Good evening, guys. Just a follow-up on Deane's question on stores that's reopening. I noticed you kind of abandoned the four buckets of kind of COVID sensitivity. But if you think about what's sort of coming online now versus what's been kind of normalized for a while, how do we think about mix within that? Is that positive mix? Kind of fleet average? How does that evolve?

Yes, I would say the mix is likely positive. When you consider that most of our software service businesses are quite profitable, they may be slightly below SaaS, but overall, they are still performing well. On the consumables side, as we mentioned in the first quarter, although we had significant success with our equipment, we didn't see as much on the consumable revenue. As consumables start to recover, it will positively impact margins, which Chuck mentioned earlier. Taking the corporation as a whole, being on-site is probably a margin booster. Additionally, in terms of software, we need to complete the installation to transition to SaaS. So, if this can speed up our movement to software, it may lead to substantial margin improvements.

Got it. That's helpful. And then I guess, just in terms of the second half outlook, we pencil out kind of 4%, I think, implied organic growth. That sounds like sort of through the cycle number rather than still kind of in the recovery mode. Is that sort of assuming that there's some kind of stealth tough comps from things that got pent-up in 2Q and release? Or is that really what this portfolio, given all the advancement changes you made over the past five years, should be growing at, I don't know, still a mid-innings version of the recovery?

Josh, this is Chuck. I'll address the first part of your question. Looking at our performance, we were down 11% in the first half of last year, but nearly flat in the second half. As we mentioned in our prepared remarks, we anticipate 5% to 7% core growth in the second half, which we view as an acceleration. However, regarding the performance of the portfolio, we’re not claiming that we are fully back or experiencing a significant recovery. We are simply noting that we expect ongoing sequential improvement as the year progresses.

Hi there. I guess maybe following up on that question a little bit, thinking about the Fluke portfolio. If I remember a couple of analyst days ago, you were very excited about not just selling the tool, but also selling some recurring data solutions associated with it. Can you talk about if customers are taking that up as they're reopening their facilities, is that an opportunity to drive that kind of penetration higher?

Yes, John. First of all, we have noticed some growth and resilience in eMaint sales along with our efforts on Fluke Connect. I previously mentioned a new line of connected clamp meters that we are launching. We continue to introduce connected devices, which, even in a challenging environment, presents an opportunity for us to gain market share. We believe we are still in the early stages of customers beginning to collect data to leverage it effectively. You may recall that the PRUFTECHNIK acquisition was aimed at enhancing our vibration analysis capabilities, allowing us to deliver better insights to our customers regarding vibration in predictive and preventive maintenance. While it's still early, we are beginning to see some adoption of this. I expect that as manufacturing conditions improve, we will start to see an acceleration in this area. Additionally, we are establishing a solid platform with eMaint, and we have been successfully growing that business over the past couple of years while customers continue to adopt these other solutions. Yes. In some of the prepared remarks, we provided examples of how FBS is being applied to various businesses. We will offer a more detailed view of that during the Investor Day. However, what we've learned is that the FBS tools were initially somewhat focused on software when we acquired the businesses, but we have since adapted and developed a set of tools specifically designed to help businesses enhance commercial activity, increase digital engagement, and improve net retention, which is a crucial metric for software companies. We're really looking forward to sharing with you the overall roadmap we have ahead of us. You've heard us reference the FORT and the hallmarks of the Fortive Business System across our portfolio. The principles of FBS are foundational in terms of framework, accountability, and governance, and we continue to evolve and refine as we see how things apply more effectively to each of our businesses that have their own unique needs. We're consistently looking for ways to improve upon our roadmap so that we can create even more value for our customers, our associates, and our shareholders.

Thank you for your interest and questions. We appreciate the partnership we get with all of you, and we're looking forward to our next call and delivering valuable insights along the way.

Thank you, Pasha, and thank you to everyone for joining us today. We appreciate your time, especially during this busy week and season. As Chuck and I discussed in our prepared remarks and the Q&A, we are very proud of the efforts that went into Q1. We believe we are well positioned from an organic perspective. The work we did in 2020 to stabilize and what we accomplished in the second half of last year is really showing in the first quarter and will continue throughout the year. We are eager to share more insights into our people, our team, and our strategies at our Investor Day in May. We look forward to seeing you there. We hope you are all safe and healthy and are ready to answer any questions you may have afterward. Griffin, Chuck, and Ross are available for any follow-ups as needed. Enjoy your evening and the rest of the earnings season. Thank you.