Fortive Corp (FTV) — Q1 2024 Earnings Call Transcript

Thank you, Dennis, and thank you, everyone, for joining us on today's call. With us today are Jim Lico, our President and Chief Executive Officer; and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. We present certain non-GAAP financial measures on today's call. Information required by Regulation G is available on the Investors section of our website at fortive.com. Our statements on period-to-period increases or decreases refer to year-over-year comparisons, unless otherwise specified. During the call, we will make forward-looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks, and actual results may differ materially from any forward-looking statements that we make today. Information regarding these risk factors is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 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 Jim.

Thanks, Elena. Hello, everyone, and thank you for joining us. I'll begin on Slide 3. We have a strong start to the year, exceeding our expectations for core revenue growth, margin expansion, earnings, and free cash flow in the first quarter. Our strategy to enhance our customers' safety and productivity across a number of vital sectors, from manufacturing to health care, is delivering more value for customers and more durable growth for Fortive. We delivered better-than-expected performance in each of our 3 segments, reflecting enhanced portfolio positions, the benefit of innovative new products, and our dedication to the Fortive Business System. By harnessing our unique competitive advantages and strong execution capabilities, we are confident in our raised outlook for the year, which includes anticipated double-digit adjusted earnings and free cash flow growth. As we look ahead, the success of our strategy is reflected in faster and more profitable through-cycle growth, which, combined with the rigorous application of a differentiated business system, delivers a supportive formula for value creation by compounding results year after year. Further evidence of our strategy to build a more durable collection of businesses and higher recurring revenue profile is shown on Slide 4. Today, Fortive revenues are split with approximately half derived from highly differentiated product businesses, helping customers harness the power of emerging technologies and embrace the energy transition. As a result, today, roughly 1/3 of these revenues support customer investments in electrification and AI. Further, with the added benefit of diversification, approximately 60% of our product revenues have continued to grow despite select end markets slowing. Moving to the right side, the remaining 50% of our revenue includes approximately $600 million of recurring health care consumables, which are benefiting from the go-to-market changes we made last year and improved global health care markets driving faster and more profitable growth in 2024 and beyond. It also includes approximately $1 billion in software revenues, which have grown high single digits over the last few years and will continue to be accretive to our growth and profitability. As our safety and productivity solutions across the enterprise continue to help solve customers' toughest challenges, we expect sustained outperformance going forward. Turning to Slide 5. The IOS segment is really a full manifestation of our strategic playbook to evolve the company organically and inorganically, to reduce portfolio cyclicality, align investments to secular drivers, and increase through-cycle core growth. With almost $2.8 billion of revenue planned this year, IOS continued to build on its leadership positions in instrumentation, software, and data analytics, all benefiting from customer investments in key megatrends, keeping the world running safely, efficiently, and more sustainably. Over the past few years, we have expanded IOS' addressable market to $30 billion, adding companies that play in strong secular-driven markets, including the 4 bolt-ons last year. Within IOS, our scalable software business is now over $800 million in revenue, growing high single digits, helping customers streamline and digitize their workflows. Today, roughly 1/3 of this segment is now in recurring revenue models, and we have further built-in durability through the intentional diversification of end markets and customer use cases that we serve. As a result, Fluke has improved through-cycle resiliency with continued order and revenue growth despite contracting PMIs over the last 16 months. In facilities and asset life cycle, new logo bookings have grown double digits the last few years, underpinning continued strong multiyear growth. And in environmental health and safety, we continue to accelerate innovation and geographic expansion, driving faster growth in this platform. As you can see from the chart, this has culminated in sustained strong performance at IOS, including over 700 basis points of adjusted operating margin expansion since 2019, providing an excellent blueprint for the future evolution of Fortive as we continue to execute our formula for value creation in AHS and PT. Turning to Slide 6. You can see how our portfolio is at the epicenter of the proliferation of electronics and sensors, enabling a more intelligent and sustainable future. Tektronix is solving our efficiency challenges across new and diverse end markets, benefiting from growing demand for high-performance computing systems, including academic and government institutions, defense agencies, energy companies, and the utility sector. These new investment cycles start with semiconductors, then shift to infrastructure, and finally to software and services. The addition of VA, the market leader for high-power electronic test solutions, will drive faster through-cycle growth in precision technologies, increasing their exposure to energy storage, mobility, hydrogen and renewable energy markets. EA is also benefiting from the rise in high-performance computing and deployment of AI and networks, which makes it an excellent complement to Tektronix. The transformation of the electrical grid is a long-term secular tailwind for both Qualitrol and Fluke. Qualitrol provides the world's energy grid with monitoring equipment and sensors to ensure the life stand and customers are adding considerable capacity to support infrastructure investments and new sources of energy. Lastly, at Fluke, we are ensuring the power efficiency and reliability of these global infrastructure investments, including tools to support the installation and maintenance of solar panels and the reliability and performance of EV storage equipment, including chargers and stations. Turning to Slide 7. Our increased innovation velocity is a direct result of our world-class business system and the work we've done to revamp our product development process to drive more consistent differentiated results. For example, in the last year, our teams identified over $1 billion of new revenue opportunities through the dream stage of our lean portfolio management process, leveraging benchmarking we did with other technology companies in our partnership with Pioneer Square Labs, to incorporate best practices and early-stage product development. As we prioritize new product development, we have reallocated roughly 25% of our R&D spend from the sustaining of legacy products to the funding of new product innovation. Fortive Software System is improving our feature on-time delivery as our operating companies are seeing a greater than 20% acceleration in software development time using Gen AI, creating bandwidth for higher value work and enabling faster innovation for our customers. FBS lean tools are also driving continued adjusted gross margin and operating margin expansion and industry-leading working capital metrics. Over the last 5 years, we've expanded adjusted gross margins over 400 basis points, operating margins by more than 600 basis points and reduced net working capital as a percent of sales by 550 basis points, with improvements in both our hardware and software businesses. In summary, FBS is fueling growth and innovation, driving differentiated operating performance, including higher free cash flow generation, our currency to further accelerate strategy and compound results through the Fortive flywheel for value creation. I'll wrap up on Slide 8. We're off to a strong start to the year. Core to our success has been the groundwork we've laid over several years to create more durable growth in each of our strategic segments, including at IOS, where we're seeing steady global demand for our products and technologies and continued high single-digit ARR growth. In PT, we knew coming into the year that the normalized demand in Tektronix and Sensing would result in declining core growth in the first half, lapping strong multiyear growth rates. In the quarter, we saw demand for electrification and AI hardware drive a return to positive book to bill in Q1. At AHS, we are seeing continued momentum in growth and profitability with continued consumables recovery and accretive software growth underpinning our outlook for the year. Turning to the right side. Continued execution in 2024 sets us up well for the achievement of the long-term targets we laid out at Investor Day last May, driven by an acceleration of software and nonrecurring products growth in 2025 and underpinned by secular investment trends; continued strong margin expansion, enabled by FBS-led innovation and operational improvement; and double-digit adjusted earnings and free cash flow growth, consistent with our long-term track record since 2019. We remain focused on enhancing shareholder returns with ample firepower to fund attractive M&A opportunities that will continue to fuel the Fortive formula for value creation. And with that, I'll turn it over to Chuck to take us through the details on the first quarter financials and updated outlook for the year.

Thanks, Jim, and hello, everyone. We're pleased with our Q1 performance, including 3% core growth, reflecting better-than-expected performance in all 3 segments. Total revenue growth of 4% included the benefits of acquisitions, partially offset by approximately 1 point of unfavorable FX. Highlights of our first quarter performance include record margins in the quarter, with 110 basis points of adjusted gross and operating margin expansion, reflecting outstanding operating performance. Adjusted earnings per share of $0.83, over the high end of our guidance, with adjusted earnings up 11% year-over-year; and free cash flow was $230 million, up 54% year-over-year, driven by strong execution across all 3 of our segments and some favorable trends. The trailing 12-month free cash flow is $1.33 billion, representing strong momentum towards our full-year guidance of $1.39 billion. Turning to Slide 10 and the first quarter performance in each of our 3 segments, beginning with Intelligent Operating Solutions. IOS core growth was 5% in Q1, with consistent mid-single-digit core growth across all 3 platforms. M&A contributed 1 point to total growth, partially offset by unfavorable FX. Adjusted operating margins expanded 160 basis points to 31.8%, driven by favorable price realization and volume increases across the segment. Additional highlights include stable growth at Fluke, driven by the benefits of innovation and customer adoption in key growth verticals. Environmental Health and Safety had steady growth in the quarter, with strong operating margin expansion enabled by pricing uptake and FBS-enabled efficiencies. Facility and asset life cycles continues its pace of double-digit SaaS growth, including multiple-accruing cross-sell deals with Red Eye and service channel customers. Overall, IOS is benefiting from a strong innovation pipeline, with several new product launches in the first half ramping as we move through the year. Moving on to Precision Technologies. Core revenue in the quarter was down 2%, driven by normalizing demand at Tektronix and Sensing. Total growth reflected the benefit of the EA acquisition, partially offset by FX headwinds and the divestiture of certain product lines of the Invetech. We've completed our 100-day integration plan for EA, and we are more confident in the strategic value of the combined businesses, having identified significant opportunities in the sales funnel, some of which combine EA's power supply offering with Tektronix services to better serve customers. PT adjusted operating margins expanded 80 basis points to 24.4%, reflecting accretive EA margins and productivity initiatives. Additional color includes Tektronix declined mid-single digit, as expected, driven by normalizing demand in China and slower growth in the U.S. due to delayed customer R&D investments. Sensing Technologies was down mid-single digit, with order trajectory improving as we move through the quarter, while utility and food and beverage markets remain strong. PacSci once again had double-digit growth in the quarter. Now on to Advanced Healthcare Solutions. Q1 core growth was 6%, driven by improved market conditions and consumables. Adjusted operating margins expanded 200 basis points to 24.2%, driven by strong volume growth and price realization, more than offsetting FX headwinds. Additional highlights include ASP is benefiting from the North America channel transition completed last year. Further, as hospitals continue to focus on safety and compliance and the increasing need for energy efficiency, ASP is gaining share with their proprietary hydrogen gas plasma technology that consumes 70% less energy per year than steam sterilizers. Book health benefited from growth in biomedical quality assurance equipment as well as supply chain and operational improvements. Our AHS software businesses continued their pace of double-digit SaaS growth. Censis is boosting sterile processing productivity with their next-gen AI² instrument recovery platform, with strong new logo bookings in the quarter. And new customer wins at Provation were partially offset by lower year-over-year license revenue, driven by a large customer order last year. Turning to Slide 11. You can see total growth in the first quarter of 4% was driven by expansion in the core and positive M&A contributions, partially offset by an approximately 1 point of FX headwind. By region, we have low single-digit core revenue growth in North America, with growth in all segments despite normalizing hardware product demand. Western Europe core revenue was up mid-single digit, driven by backlog conversions and secular investments supporting energy transition. Asia was up slightly, driven by low double-digit growth in India, partially offset by a low single-digit decline in China. And growth in IOS and AHS was more than offset by expected slowing in PT. Turning now to Slide 12 and our guidance for the second quarter and the full year. For the second quarter, we anticipate revenue growth of 2% to 3%, with core flat to 2%, driven by continued strength in IOS and AHS, partially offset by core mid-single-digit decline in PT, consistent with our prior view of the first half performance; adjusted operating profit margin is estimated at approximately 26.7%, up 75 basis points year-over-year; adjusted diluted EPS guidance of $0.90 to $0.93, up 6% to 9%; and free cash flow of $270 million, reflecting double-digit growth in the first half. For the full year, we continue to expect core growth of 2% to 4%. Total growth is now expected in the range of 4.5% to 6%, including an approximate $60 million FX headwind versus the prior guide and the partial Invetech divestiture reducing revenues by approximately $30 million. Adjusted operating profit is expected to increase 9% to 13%, with margins at 27% to 27.5%. We are raising adjusted diluted EPS guidance to $3.77 to $3.86, up 10% to 13% year-over-year to reflect the strength of the first quarter. The effective tax rate is expected to be in the range of 14% to 14.5%, in line with the average of the last 2 years. Free cash flow is expected to be approximately $1.39 billion, representing 11% growth year-over-year and a 22% free cash flow margin. Before opening up for questions, I'll pass it back to Jim to provide some closing remarks.

Thanks, Chuck. I'll wrap it up on Slide 13. The strong start to the year and an enviable track record of improved through-cycle performance; our transformation execution and strategy to build a more durable company is playing out. However, our strategy is reflected in the continued momentum of positive core growth over the last 14 consecutive quarters, even as demand slowed in select end markets. And the strength of our execution and dedication to FBS is reflected in 15 consecutive quarters of adjusted operating margin expansion, delivering more value to customers. When taken together, we are confident in our raised outlook for the year, continuing our track record of compounding earnings and free cash flow growth double digits in 2024. By executing the Fortive formula for value creation, we think the best is yet to come, with an opportunity to roughly double our adjusted EPS and free cash flow over the next 5 years.

Thank you. Dennis, we'll now take our first question.

Maybe just a first question around the Precision Tech revenue outlook. There's clearly some concerns from the commentary of one of your peers today. So I just wondered how you're thinking about that Precision Tech revenue growth trajectory over the balance of the year and particularly in Q2. And maybe any broad color on how that product hardware orders and how those have been trending versus what you'd expected?

Yes, Julian, thank you for your question. Regarding the quarter, we observed a book-to-bill ratio of about 1 and expect to see similar trends in Q2. Orders are beginning to return, although shipments haven't picked up yet. Revenue from Precision Tech will likely be lower, with Q2 expected to be the lowest point this year. The first half is unfolding as we predicted, with our order book building. As we mentioned in the last call, we anticipate orders will start moving towards growth by the end of the second quarter, and current indicators support that outlook. We're noticing some positive signs in certain areas, such as Tektronix, where our Keithley division, which historically led the downturn, is now projected to achieve high single-digit revenue growth in the first half. This shift points to a potential change in trajectory. I'll pause here to see if there's a follow-up.

And I guess, sort of broadly on the guidance adjustments, you'd laid out your segment sort of core growth guide for the year last quarter. Just wondering if any of those had changed this time? And just trying to understand sort of in the P&L guide, the adjustment to the interest expense guide. Is that sort of a redeployment of divestment proceeds or something? Just trying to understand that sort of net income raise, with adjusted EBIT guide slight reduction?

Yes. Regarding the revenue guidance, we experienced somewhat stronger results than expected in Q1. We're optimistic about this, particularly due to the improvement in Health. We've seen several strong quarters in Health, which is projected to grow in the mid-single digits for the year, and we're confident about that. IOS is also showing good strength with notable performance in several areas. Fluke has remained resilient as we mentioned before. PT has seen a slight decline, so we expect it to be roughly flat or slightly up. This is manageable since the other two segments are performing better. Additionally, we have absorbed around $60 million in foreign exchange impacts, which is crucial to consider when evaluating total revenue growth. This ability to absorb such impacts highlights our overall strength. Even with the weaker performance in PT, we achieved an 80 basis points expansion in our margins. We're witnessing solid growth in the two segments and effectively managing PT's trajectory, which includes strong margin expansion. We're also optimistic that conditions in the second half will improve slightly. We do not require a significant increase in PT revenue in the latter half to support our overall financial perspective, and the data we've gathered thus far backs that up.

Julian, the interest expense decreased mainly because we issued a euro bond since our last guidance, which came in at a favorable 3.7% coupon. This change roughly balances out the negative impact from the foreign exchange.

And just to put that in dollar terms, that's about $15 million of lower interest expense versus our previous forecast. About $2 million of that was reflected in the first quarter. And then to Chuck's point, about the $50 million roughly of OP hit that we do have from FX. So that's really the offset.

Just a couple of things. Just on the comment on the FAL businesses, it grew mid-single digits and kind of normalizing. Is that basically the trajectory you're expecting then for kind of the balance of the year in that group of companies sort of mid-single-digit growth?

No, Jeff, we will be moving back to high single digits. We had a really significant comparison at Gordian in the first quarter, as they grew by about 25% a year ago. Therefore, the ARR growth was around high single digits, approximately 9%. This is positive ARR growth that supports our expectation of high single-digit growth for the year.

And then just on EA's performance actually in the quarter, right? The M&A impact, I think, is influenced by the divestiture, right? But so just trying to kind of understand how EA, actually, revenues performed in the quarter? You didn't own it last year, but maybe give us some sense of kind of what the growth trajectory was there?

Yes, Jeff, a couple of things. FX, it pushed EA's revenue down a couple of million. And then the divestiture, about $5 million, with the agreement to separate some of the Invetech business that shows up on that line. So I think he is impacted by those 2 things, down about $7 million.

So Jeff, the dollars from EA, obviously, were higher than the overall M&A dollars in aggregate for PT. So EA is roughly $35 million, offset by about $5 million worth of tax.

Just a follow-up on the PT revenue guide. I know last quarter, you specifically guided to the $2.42 billion to $2.465 billion. I'm wondering, on Slide 4, you implied PT is $2.3 billion. So is that the actual revenue guide? And can you comment given the lower revenue guide, how you're thinking about margins relative to your prior guidance? And then my last question, on the M&A front, I think before you were saying top line M&A would add, you'd get 4 points. Now you're saying 3 points. Is that just FX and Invetech?

Yes. So Jamie, just on the prior guide, yes, the $30 million has come out of the PT revenue from Invetech. And then to your point, there's probably another 2% that's come out due to FX. Some of that is obviously for EA as well as the core business. So that $2.3 million is the midpoint of the PT revenue guide, as you pointed out. And then your margins on PT, can you give us an update there given the lower rev? Yes. No change to the expectation of margins for PT.

Yes, Jamie, I think that's a reflection of not much change in the outlook. The first half has played out similar to what we anticipated, with some business shifting into the second half. However, we've managed the margins exceptionally well based on a couple of scenarios we expected for the year. We've seen strength in several areas of PT, particularly at EMC, as well as in utilities and our food and beverage businesses. This strength is beneficial for our margins as well.

I have a couple of questions. First, regarding M&A and your pipeline, can we assume that the EA type of deal and valuation range are representative of what you are considering for 2024? I understand there are various properties, but I’d like to narrow that down a bit. Additionally, could you provide some insight into how that pipeline looks?

Yes, I think there is a significant variation in valuations currently. While not a lot of transactions have occurred, there have been fully valued deals relative to various assets in the market. We are definitely going to remain disciplined in our approach. We highlighted on the IOS slide the advantages of mergers and acquisitions, which have contributed to a strong segment with both revenue growth and solid profitability. We are looking for similar opportunities. In the fourth quarter, we completed four bolt-on deals related to IOS and EA, which exemplify the type of transactions we might pursue. Our activity has spanned software, data, and hardware sectors. Although the funnel continues to show diverse opportunities, we will remain disciplined concerning valuations. We believe there are opportunities to be active but will be selective. The revenue for EA has slightly decreased for the year, yet we are confident in that deal; its financial benefits will remain consistent with our initial expectations. It will still be a highly accretive deal and advantageous for 2025. These are certainly the types of opportunities we will actively pursue.

I appreciate your insights. Regarding the guidance, I typically don't ask about it in this manner, but when considering your comparisons and the commentary from the past hour, along with the current average selling price, your guidance for the remainder of the year seems somewhat conservative. Would you agree with that assessment? Is it simply a cautious approach regarding China or the broader global economy, or could it be that you are being a bit more conservative than necessary? If conditions remain unchanged, it seems likely you might perform at the upper end of that guidance or even exceed it.

We just surpassed our first quarter guidance, and there was an operational improvement of about $0.01, which becomes $0.02 when accounting for foreign exchange adjustments and $0.01 in corporate costs. This is a strong start to the year. If you asked me whether I'd prefer to begin the year with a 110 basis points expansion in gross and operating margins or an 11% increase in EPS, I would say that’s an excellent beginning. I believe the full year will resemble this positive trend. We are satisfied with the guidance provided. While there is some uncertainty, I recently met with our team in China, and they are feeling more optimistic than they were eight weeks ago. We discussed potential investments in quality production supported by the Chinese government, which could present opportunities for us, although our current guidance accounts for a decline in China. Meanwhile, our other high-growth markets, which are larger than China, are growing at mid-single digits, indicating additional potential. It’s still early, and while there are uncertainties, we've made a strong start and feel positive about our progress. We will continue to strive for improvement as we move into the second quarter. We also see opportunities in areas such as energy transition and AI, where product revenue growth is promising.

I noticed several mentions of AI in the prepared remarks, and I’d like to ask where you would prioritize the key areas where you have immediate leverage for the AI development.

I think we highlighted high-performance computing and data center expansion, particularly regarding next-generation chips for data centers. For instance, we received an eight-digit order from Keithley in the quarter, which is set to ship later this year with some semiconductor manufacturers in Taiwan. Firstly, we’re clearly observing growth in chip production. Additionally, we’re witnessing growth in utility infrastructure and grid development at Qualitrol and Fluke, which are significant investments in preparation for AI and the future. On the other hand, we are beginning to launch AI solutions. For example, at Censis, Provation, and Gordian, we recently announced the Gordian platform, designed to integrate our data and solutions. We expect these AI solutions to start contributing to our revenue. We're in the early stages of that investment, particularly within PT, and we're seeing this emerging in Keithley and anticipate its growth at Tek in the second half of the year. Furthermore, with Qualitrol and Fluke, as data centers are constructed, we will participate in this growth by providing the necessary electrical grid infrastructure and tools for building and maintaining those data centers.

Great. Those are very specific data points, so I appreciate you sharing. As a follow-up, I might have missed it in your answer to Julian's question, but regarding the weakness in Tektronix you mentioned, what was the delay in customer R&D in the U.S.? Is it related to the product cycle, or are there concerns about the election that are causing some hesitation in orders?

Yes, Deane, the first half will play out at Tek just as we anticipated. I want to clarify that we are experiencing some delays in military government investments that usually start early in the year. These are still in the pipeline but are now expected to materialize later in the year. This affects both direct government customers and some prime contractors. The positive aspect is that these opportunities are growing in the pipeline, and we are beginning to see some orders; as a result, our book-to-bill ratio is above 1. Typically, we would convert these to revenue a bit sooner, but due to the movement in the pipeline and the timing of these orders at the end of the second quarter, they now represent more of a second-half opportunity. At this stage, we do not expect any cancellations, and I don't think this is tied to the election. It seems more related to investment decisions influenced by uncertainty at the start of the year, which may have caused delays in these investments. As you know, such delays can extend for a quarter or two. Ultimately, our customer base consists of leading technology companies that will continue to invest in technology and innovation. I believe this will be a significant test for them.

Can you just delve a little bit more into Tektronix and the book to bill there? I know you guys mentioned the hardware in total. Book to bill, but maybe just give us an update on maybe where the, I guess, excess backlog, if that's even a thing still. Kind of where the excess backlog sits and then Tektronix' book to bill, and then what you'd expect for growth for the rest of the year there at this stage.

Yes. Steve, Tektronix' book to bill was 0.95 in the quarter. For PT, Sensing and Tek combined is 1.0, and for hardware products overall was 1.0. And then we talked about Tektronix revenue being down mid-single digit in the quarter. Our expectation would be that Tektronix revenue for the year will be down mid-single digit, but that's always been reflected in our outlook for the year.

Okay. So no change there. And then maybe sticking on book to bill. I think it's like a little bit hard to like calibrate these EA revenues, I guess. We had expected something a little bit more than where it was, and I'm not sure we've quite bridged the gap on that. But what's, I guess, the book to bill for that business just to kind of help us understand what kind of run rate they're going at on the EA side, that new acquisition?

Yes. I'll just really quick on the numbers for EA, and I'll let Jim comment on the acquisition overall. We had expected revenues for EA for the year to be, call it, $190 million, $195 million. That's come down. It's probably closer to $180 million to $185 million. Part of that is foreign exchange, and part of that is some push out of larger projects in the year. Specifically, in Q1, right, the revenue, we talked about the $35 million; again, we have planned for something in the low 40s for the quarter. There is a seasonal component to that. And maybe, Jim, you want to talk a little bit more about, certainly, the kind of 100-day review and give some color on the acquisition.

Yes, Steve. I want to highlight a few points. First, as mentioned in our prepared remarks, it's clear from our global overview, including perspectives from the U.S., China, and India, that we have a strong product that resonates well with customers. We want to emphasize that our technology remains robust. As Elena noted, we experienced slightly lower revenue in the first quarter. I've highlighted that the challenges in clearing the backlog in this business have been more significant than we initially thought. While the book-to-bill ratio exceeded 1 in the first quarter, we're working on improving the flexibility of our factory operations. Consequently, we've adjusted our revenue expectations for the year, but our earnings outlook remains positive. We're still in a strong position regarding earnings. Mobility has been slower than expected, which we anticipated. However, we see promising opportunities in the data center sector, and the pipeline with Tektronix is developing well. We projected that building this pipeline in the first half would result in revenue growth in the second half, and we’re encouraged by this progress. We also mentioned how we are integrating sales with our services through a large upcoming order, and we view this synergy positively. Although it may have taken a bit longer to gain momentum due to market conditions, we feel optimistic about our current position for the remainder of the year and into 2025.

And where do the excess backlog stand today? That's my last one.

Yes, I'm not sure what that number is, but it's probably in the $10 million range or something like that.

Jim, just in AHS. I know you did well in the quarter, and maybe you talked about some potential upside there. You did mention maybe some Provation headwinds still. Is there anything that's still holding you back at all from even better performance, with the understanding that it was quite good in the quarter?

We are very pleased with the quarter. Looking at our performance over several quarters, we navigated the transition in North America last year well, and we've excelled in high-growth markets. The strategic initiatives we set are yielding positive results. We are optimistic about the current state of Provation. In the first half of last year, we managed a significant software licensing order that will be addressed in the upcoming quarters. Despite that, the business is expected to grow this year, with SaaS seeing double-digit growth. While we need to manage that large licensing client, it's a substantial deal that we can transition effectively over the next few years. There's significant potential for Provation moving forward. We highlighted in our prepared remarks our advancements in our plasma strategy and the efficiency of our hydrogen peroxide processes. The innovation initiatives we have implemented, such as steam sterilization and biological indicators, are beginning to gain momentum at ASP. Overall, we are optimistic about the current position and future trajectory of the segment throughout the year.

Great. And then I know you reiterated it, but like when I think about the 450 for next year, like there's a fair amount of moving pieces nowadays, FX, M&A, as we talked about. So what's your confidence level, Jim, at this point? And what do you need to do to sort of get there?

I believe the first quarter confirms our capabilities. Despite the challenges, we achieved a strong growth rate, which translated into significant earnings per share and free cash flow growth. Our guidance reflects this. By the end of the year, we expect double-digit earnings growth, double-digit free cash flow growth, and notable operating margin expansion. This sets us up well, even though we haven't yet reached mid-single-digit growth. As we transition into that phase, our proven history of earnings, free cash flow growth, and margin expansion gives us confidence. Although it's only April 2024 and we're discussing 2025, I feel we are in an excellent position regarding our future plans. However, our primary focus remains on 2024. Throughout the upcoming quarters, we will showcase numbers that reinforce our strong multiyear trajectory and future potential.

I don't want to repeat what has already been said. However, Elena, you mentioned that Tek is down in the mid-single digits, which was anticipated from the beginning for the first quarter. I'm curious why we wouldn’t expect improvements in the second half of the year, especially considering the comparisons. Therefore, my question is, in the second quarter, are we looking at Tek being down in the high singles, possibly a bit worse, with some PT down around the mid-singles? I'm trying to understand how we should view this trend as the year progresses.

Yes, that's correct, Nigel. As we mentioned in our prepared remarks, we anticipated PT to decline in the mid-single digits for the quarter, which means Tek is likely to drop slightly more than that, possibly in the mid- to high single-digit range for Q2.

So then I would say, Nigel, that your point around inflecting getting a little bit better, that's the book to bill that we talked about. That continues to do good. Keithley is a good leading indicator. The PMIs are a good leading indicator. Our sales funnels are a good leading indicator. And so we'll step through a little bit better performance as we get through the second half.

I think the other thing to consider, right, is that Tek did continue to grow revenues throughout all of last year.

Nigel, this is Chuck. I wouldn't expect that to be the case. I think there's a little bit of timing here. But as we move through the year, we expect that probably in PT, we had, I think, 1% to 2% and gradually going up as we move through the quarters.

And Nigel, just to add, price/cost is in a good place. So when you look at the margin expansion that we did in PT in the first quarter and the anticipated margin expansion through the year, we'd probably get a little bit less price when the top line is like that. It's not unnatural to maybe not maybe give a little bit up. But the price/cost stance is really good. So we're in a good position to be able to do that and still grow margins.

Yes, we are new to this area. While we have some multi-year data, having numbers doesn't always equate to having a comprehensive history. This business has traditionally been weighted towards the end of the year. Private companies sometimes hold back until the year's end, which is not unusual. We expect to improve our quarterly cadence as we continue to work through the integration.

I wanted to start on the 60% of revenue you talked about growing through the industrial slowdown and the PMI, I think primarily related to Fluke. But drill the question really around the ability to grow through PMI slowing. And to what degree you attribute that to outgrowing end markets or other factors that were at play for Fluke to post more kind of stable trends through some of those headwinds?

I definitely believe we are outperforming the market, and Fluke has done an impressive job. When assessing our presence, we have a strong global franchise in almost every country. The team excels in innovation, having launched four new products in just the first quarter. Our eMaint business is performing exceptionally well, with growth of 17% in the quarter. Over the last several quarters, our capacity to outpace the PMI has been a result of our long-term efforts to enhance the durability of the business. This is closely tied to our end markets, as our solar and EV product lines experienced over 30% growth. We've focused our R&D investments on more sustainable trends, as noted in our prepared materials regarding lean portfolio management and product development. Fluke is a prime example of this strategy, particularly with the two bolt-on acquisitions made last fall that have bolstered our alignment with these key trends. We are well-positioned because of our deliberate focus on innovation and commercial investments, which is reflected in our performance. While sharing market share statistics is challenging due to the presence of regional competitors, we maintain strong partnerships with our channel partners, who are enthusiastic about our collaboration and what we can achieve together. This is a positive indicator of our performance.

Yes. For ASP, specifically, in Q1, I think we were up 11% in Q1, just pretty much right where we expected to be here. Now as we move through the year because that transition happened over the year, that's going to moderate some of that. But right on track and delivering the growth we expected and pleased to see, as well as, importantly, the margin expansion.

On Fluke, that business has shown significant resilience. Regarding the solar sector, is there a potential risk related to elections if policy changes occur? Or could that be counterbalanced by positive trends in data center electrification and similar areas? How would you assess that risk in the event of an administration change?

I believe our focus is primarily on maintaining existing systems rather than constructing new ones. This leads us to concentrate on current installations. Additionally, from a global perspective, there are significant opportunities in solar and electrification. Our main emphasis is on the ongoing maintenance of these systems rather than their construction. Overall, we feel optimistic about these opportunities, and if you consider the longer term, these areas are likely to remain strong. Thus, our commitment is definitely more aligned with the maintenance of these systems.

Yes. It came out very strong. And actually, it's also why we're seeing that margin expansion at PT. That's part of the story.

You mentioned some positive insights regarding the performance for the remainder of the year, and your margin guidance suggests a significant improvement in the latter half. What additional factors, particularly in AHS, might contribute to that? Also, regarding IOS, your incremental performance has been impressive. What would a normalized incremental look like as we move into 2024?

I think there are a couple of things to consider. We typically expect incrementals to be around 40% in our base case, which is a good starting point. As we progress through the year, we've observed that 48% of our revenue comes in the first half and 52% in the second half. This indicates a general upward trend in seasonality from the first to the second half, driving more volume and ultimately helping to expand margins. Year-over-year, we experienced a 100 basis point increase in Q1, and this is expected to rise throughout the year due to volume and normal seasonal patterns. We have guided for a 75 basis point increase for the year, potentially more due to productivity initiatives. Health has started strong with a 200 basis point increase. Overall, we have many factors working in our favor, but volume plays a crucial role in this growth.

Okay. Staying on the topic of AHS, the distributor transition is definitely benefiting you. Can you provide more insights into that business as we move through the year? It seems that your incrementals have been strong there. How does that continue to develop in terms of sustainability?

Yes. We've got that for health care. Keep in mind, it's early in the year, but 125 basis points for the year. But in Q1, you're seeing the full benefit show up with the dealer transition here in Q1. If you remember Q4 last year, it also saw the full benefit. And as we move through the year, there's going to be a little bit of stuff that we're getting into tougher margin expansion, but we expect to be over the $125 million margin expansion for the year at AHS. Very pleased with another strong quarter of really strong margin expansion and growth here, and we expect to continue that through the quarter or through the year's.

Thank you all for the opportunity to spend some time today. We feel very positive about the first quarter and the full year ahead. There are certainly some variables to consider, but our guidance remains intact and has even increased. Operationally, we are performing well, particularly in margin expansion, earnings per share, and free cash flow. We are pleased with the progress in our Health segment after several quarters and are excited about the opportunities we have ahead. We hope this message is clear, and we look forward to follow-up calls. Our team will be available, and we will see you on the road soon. Thank you.