Fortive Q1 2022 Earnings Call Transcript

Key Takeaways

  • Record order growth drove better-than-expected Q1 results, with hardware orders up 14% and software businesses growing mid-teens, adding ~$130 million to backlog.
  • Rigorous application of the Fortive Business System helped overcome supply-chain and China COVID disruptions, delivering 60 bps gross margin and 30 bps operating margin expansion while boosting EPS by 11% and free cash flow by 36%.
  • All three segments posted strong core revenue growth—Intelligent Operating Solutions +15%, Precision Technologies +4.6%, and Advanced Healthcare Solutions +0.6%—driven by innovation, share gains and secular tailwinds.
  • Fortive raised its full-year guidance, lifting the low end of revenue forecasts by $40 million and targeting $3.04–$3.13 in adjusted EPS (+11–14%) with >100 bps margin improvement and ~105% free cash flow conversion.
  • The company repurchased 1 million shares for $64 million in Q1, retains ~$5 billion of M&A capacity over the next three years, and is expanding sustainability reporting to include Scope 3 emissions and TCFD alignment.
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Earnings Conference Call
Fortive Q1 2022
00:00 / 00:00

There are 10 speakers on the call.

Operator

My name is Emma, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to the Fortive Corporation's Q1 2022 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Conference Call.

Operator

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

Speaker 1

Thank you, Emma, and thank you, everyone, for joining us on today's call. With us today are Jim Leko, our President and Chief Executive Officer and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. Conference call. Information required by Regulation G are available on the Investors section of our website atwww.fortive.com. Our statements on period to period increases or decreases conference call.

Speaker 1

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. Release from any forward looking statements that we make today. Information regarding these risk factors is available in our SEC filings, 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.

Speaker 2

Conference call.

Operator

With that,

Speaker 1

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

Speaker 2

Thanks, Elena. Hello, everyone, and thank you for joining us. I'll begin on Slide 3. I'm extremely proud of how our teams have come together to navigate the continued challenging environment and deliver an outstanding quarter with better than expected revenues, earnings and cash flow. Our strong purpose driven culture supported our relentless focus on executing for customers, shareholders and each other while facing unpredictable obstacles.

Speaker 2

Despite these challenges, we saw record orders growth across several of our businesses, Reflecting continued demand for our leading connected workflow solutions. Hardware orders grew 14%, adding approximately $130,000,000 to backlog and our software enabled businesses grew mid teens with double digit growth in both our SaaS and license revenue streams. Through the rigorous application of the Fortive business system, we continue to deliver improvement across our businesses, driving greater visibility in insurance of supply in the quarter. Our teams also worked hard to overcome higher inflation, which resulted in 60 basis points and 30 basis points of growth and operating margin expansion respectively, 11% EPS growth and 36% free cash flow growth in the quarter. Overall, the momentum across all three of our segments in the Q1 sets a strong foundation for the year ahead compact over the remainder of 2022.

Speaker 2

Starting on the left, in the current environment, strong orders growth was driven by accelerated innovation, Continued share gains and leverage to favorable secular drivers spanning all geographies and end markets, yielding an 18% increase Our continuity of supply is improving, driven by daily management and conversion OBS, allowing us to ship more product in Q1 that initially planned. Our China teams did a great job mitigating the intermittent government mandated COVID lockdowns across the region Starting in Tianjin in January, the Shanghai lockdown at the end of March impacted shipments by approximately $20,000,000 in the quarter, primarily at Tektronix. With operations restarting, we expect to face some bottlenecks in supply chain. However, our teams will be relentless and work to re ramp quickly. Moving to the right hand of the slide, we expect sustained core growth driven by normal seasonality, continued strong customer demand and record backlog, which gives us a tailwind for growth again in 2023.

Speaker 2

Combined with pricing and operational performance, we CapEx strong margin expansion and another year of double digit earnings and cash flow growth. As Chuck will cover in more detail shortly, We are updating our outlook to reflect the strong start to the year, raising the low end of our guidance for the year. Lastly, our ability to convert more earnings to cash underpins our investment thesis and allows us to reinvest in our businesses, Accelerate our strategy and enhance our returns to shareholders. In the Q1, we took the opportunity to buy back approximately 1,000,000 shares, totaling $64,000,000 the M and A pipeline remains full with hardware and software opportunities across each of our segments, and we estimate M and A capacity of approximately $5,000,000,000 over the next 3 years. Moving to Slide 5, our leading connected workflow solutions facilitate transformation across high impact fields Conference Call.

Speaker 2

Our strategies across these segments is incredibly powerful. We serve customers ranging from Technicians and Facilities Managers to Engineers, Product Developers and Healthcare Professionals who all work in challenging environments Where Fortive Technologies provide higher quality instrumentation, better sensors, superior software and real time data analytics to empower them to do their jobs more safely and more efficiently. As you can see, each segment is well positioned to benefit from favorable secular tailwinds and durable business models that underpin our strategy and vision to build a stronger collection of businesses with industry leading profitability and free cash flow margins.

Speaker 3

I'll now provide some details on each of the

Speaker 2

3 segments, beginning with Intelligent Operating Solutions on Slide 6. IOS had a terrific start to the year as customer demand for maintenance, Uptime Insurance, Environmental Health and Safety and Facility Planning Solutions all contributed to double digit orders growth and strong revenue growth in the quarter. Total revenue was up 15% with core growth of 8.7%. This included approximately mid teens core growth in North America and high single digit growth in Western Europe, more than offsetting a low 20% decline in China. Our FBS countermeasures to improve assurance of which we expect to further benefit performance in the Q2 and the remainder of the year.

Speaker 2

And while our countermeasures enabled us to ship more product, We also incurred additional costs from elevated freight and logistics expenses. As a result, core operating margins were flat year over year despite price cost being positive on a dollar basis. IOS adjusted operating margins were 27.2%, down 145 basis points due to the dilutive impact of the Service Channel acquisition. As a reminder, Service Channel's margins are ramping nicely in line with expectations and iOS core margins are up over 200 basis points on a 2 year stack basis. Some other highlights in the quarter include record revenue and bookings at Fluke, supported by strong point of sale for Trimble in the U.

Speaker 2

S. Where point of sales grew mid teens. Industrial Scientific continues to make progress diversifying its business with 9 out of the 10 largest Q1 deals booked with new customers outside of oil and gas. Intellix is also seeing strong demand for its SaaS solutions, continuing to grow at a healthy double digit pace. And likewise, we saw record core growth and Facilities and Asset Lifecycle Management in the quarter, where Accruent had a solid start with mid single digit growth and is on track for sales acceleration in the second half.

Speaker 2

Gordian generated strong double digit growth and secured a large data win with the U. S. Army Corps of Engineers. Further, Service Channel had a strong double digit revenue growth and record bookings in the quarter as customers continue to outsource their facilities maintenance work. Turning now to Slide 7 and Precision Technologies.

Speaker 2

We saw record customer demand driving double digit order growth across major geographies and a broad set of end markets, including HVAC, Aerospace and Defense, Automotive and Electric Vehicles and Semiconductors. PT revenues grew 3.4 percent with core revenue growth of 4.6%. High single digit growth in North America and Western Europe Partially offset by a low double digit decline in China, driven by COVID related lockdowns in Shanghai at the end of the quarter. As a reminder, Tektronix operates a major manufacturing facility in Shanghai, which shut down in the last week of March. The impact was approximately $15,000,000 of PT revenues or 3.50 basis points of growth, which also impacted their margin performance in the quarter.

Speaker 2

That said, PTE operating margins expanded 30 basis points, reflecting over 50 basis points of gross margin expansion, partially offset by continued investments new product development. Some highlights of the quarter include successful new product launches driving incredibly strong order growth at Tektronix, including the refresh of the 5 series in the Q1, which is tracking solidly above plan. Sensing also saw low double digit top line growth, reflecting solid share gains across his key markets and had over 100 basis points of operating margin expansion in the quarter, staying well ahead of inflation. Moving now to Slide 8 and Advanced Healthcare Solutions. AHS continues to accelerate innovation and digitization in hospitals and ASCs.

Speaker 2

With custom and clinically superior workflow solutions, AHS is well positioned for a multiyear recovery in healthcare. Revenue increased 8.5% in the Q1 with core revenue growth of 0.6%. Mid single digit growth in North America Largely offset by a low single digit decline in China due to the impact of COVID restrictions on ASP and a high single digit decline in Western Europe as expected. AHS operating profit margins benefited from FBS enabled productivity initiatives driving core margin expansion at ASP as well as the accretive benefit of the Pravation acquisition, Partially offset by lower volumes at Imetec. Some highlights of the quarter include, elective procedures in North America were roughly in line with expectations in the Q1.

Speaker 2

As a reminder, we expect electives to continue to improve and average 88% of pre COVID levels for the year. We saw approximately 20% growth in the Censitrack SaaS offering at Sensus and an approximate doubling of subscription orders in the quarter. And probation secured several significant orders in the Q1, including 4 competitive GI wins and a large 20 hospital network wins for its eye anesthesia solution. Execution in an otherwise challenging and uncertain environment is one example of how FBS continues to be an important differentiator for Fortive. As shown on Slide 9, SPS enabled our businesses to enhance supply chain resilience, drive innovation and profitable growth across the portfolio And build skills and capabilities in our leaders to effectively deliver on our commitments in the quarter.

Speaker 2

Examples include An improvement in unit output and reduction in supply chain risk at Fluke through the use of daily digital management, allowing them to outperform in the quarter. The execution of lean portfolio management at Tektronix, driving several new customer driven product launches in the coming quarters. Value pricing and price leakage tools driving strong price realization at SensingTac. Substantial margin expansion at ASP from broad cost reduction more than offsetting lower consumable volumes in the quarter. Daily management and problem solving drove an improvement in working capital turns at Fortive China.

Speaker 2

And several examples of our progress in our software businesses, including incremental growth realization at Accruent from improved uplift on renewals, a 20% improvement in time to first revenue for procurement customers at Gordian and an acceleration of growth opportunities at Probation. As you heard me say before, I'm incredibly proud of the work we've done continuing our progress towards building a more sustainable future, as you can see on Slide 10. Commitment to sustainability started on day 1 when we developed aspirational and actionable targets and subsequently invested significant time, Energy and Talent to establish a performance driven program. This timeline reflects the evolution of our program and commitments we have made since 2016. In early June, we will publish our 5th sustainability report, reflecting consistency and progressing levels of transparency, including adherence to the GRI reporting framework and completing our first CDP climate change disclosure in 2020, Adding the SaaS B reporting standard to enhance our climate related disclosure to investors in 2021 and new in 2022, We will provide our 1st UN Global Compact statement of progress to find our status and plan for TCFD aligned disclosure and offer initial scope 3 emission data and scope 2 market based emissions in our CDP climate change disclosure.

Speaker 2

It is our shared purpose that also pushes us to create innovative and sustainable products and services for our customers, company managers serve leading Fortune 500 Companies across multiple industries. In fact, our EHS Accounting in accordance with the GHG protocol. Fintoulite's diverse range of products provide solutions that advance workplace health and safety, as well as optimization of renewable energy installations for our customers. Consistent with our culture, we are driving incremental improvements in sustainability And we look forward to continued progress in the years to come. With that, I'll pass it over to Chuck, who'll provide more color on our Q1 financials and our Q2 and full year 2022 outlook.

Speaker 2

Thanks, Jim, and hello, everyone. I will begin on Slide 11 for the quick recap of our Q1 performance. We generated year over year total revenue growth of 9.3%, core growth of 5.3%. Acquisitions net of FX were as expected contributing 4 points to total growth. Turning to the right side of the slide.

Speaker 2

Jim covered the segment highlights earlier, and I wanted to provide some additional color on the regions. Capital installed ways in the region. We have low double digit growth in Asia outside of China, while China revenues declined low teens driven by the impact of the COVID related lockdowns. Note that we continue to build backlog in China with high teens order growth in the Q1, thus reinforcing our outlook for double digit revenue growth for the remainder of the year. On Slide 12, we show operating performance highlights Q1.

Speaker 2

Adjusted gross margins were 57.6%, increasing by 60 basis points year over year, points of price in the quarter more than offsetting inflation yielding 30 basis points of core operating margin expansion conference. While free cash flow generation of $196,000,000 represented a stronger than normal conversion of adjusted net income in the Q1, The strong free cash flow performance included an improvement in the timing of receivables collections, representing a normalization of the trends we saw in the 4th quarter. Turning now to the guide on Slide 13 and starting with the 2nd quarter. We expect low to mid single digit core revenue growth, which includes a headwind of approximately $40,000,000 from the COVID related government shutdowns in Shanghai, which we expect to subside in mid May. Adjusted operating profit margins are expected to be up And free cash flow conversion of adjusted net income is expected to increase to approximately 100%.

Speaker 2

For the full year 2022, we are raising the low end of our revenue guidance by $40,000,000 to reflect a strong start to our year. We continue to expect adjusted operating profit margins for the full year to be up over 100 basis points. Adjusted EPS is now in the range of $3.04 to $3.13 up 11% to 14% and free cash flow conversion of approximately 105% for the full year. Moving to Slide 14, We are expecting a 48-fifty 2 split of revenue first half to second half, which represents a step up of approximately $255,000,000 of revenue and includes favorable price and FX first half to second In addition to higher volumes supported by a robust backlog position and the work we've done to mitigate supply chain constraints across our portfolio. We also expect to recover lost China volumes as a result of the government mandated lockdowns in the first half, shifting more revenue to the second half.

Speaker 2

Incremental margins on sequential volume are expected to flow through at attractive levels, contributing to strong margin performance in the second half. In summary, our portfolio continues to show the benefits of the actions we have taken to build a more company with high recurring revenue profile mitigating the risk of slowing demand in the second half. With that, I'll pass it back to Jim for some closing remarks. Thanks, Chuck. I'll now start to wrap up on Slide 15.

Speaker 2

Over the last 6 years, we have articulated a portfolio strategy to build a more resilient, less cyclical business capable of outperforming in even the most difficult of times. The Fortive portfolio today is a reflection of how well we've executed that playbook. Our acquisitions have added approximately $2,300,000,000 of revenue to Fortive as of 2022, which is expected to grow low double digits this year. And in doing so, we've doubled the through cycle core growth of the company versus the time of the spin off from Danaher in 2016. We have also more than doubled recurring revenue as a percentage of our total revenue to approximately 40% and In addition, the businesses we have added to Fortive have been an important contributor to the more than 1,000 basis points of gross margin expansion that we have driven since 2016.

Speaker 2

The Fortive of today is delivering higher and more profitable growth, and there's nowhere that this shows up more than in our free cash flow. Lastly on Slide 16, that strong free cash flow, which has nearly doubled since 2019, continues to be a hallmark of our investment thesis, compounding faster than revenue and earnings and allowing us to accelerate growth and compound returns through disciplined capital deployment. 2022 is off to a great start as the outperformance in Q1 reinforces our focus on sustained growth and execution, Leveraging the power of FBS, which will always be a part of who we are and how we do what we do, we expect another year of double digit earnings and free cash flow growth on track to deliver on the multi year targets set last year with differentiated growth and profitability amongst our industry peers. As a result, we're confident the work we do to create long term sustainable competitive advantages for our operating companies and strategic segments We yield best in class returns for Fortive for a long time to come. With that, I'll turn it back to Elena.

Speaker 1

Thanks, Jim. That concludes our formal comments.

Operator

Thank you. Your first question today comes from the line of Steve Tusa with JPMorgan. Your line is now open.

Speaker 4

Hey, good morning or whatever it is over here.

Speaker 5

Yes, it's

Speaker 4

kind of afternoon over here. So within kind of the businesses that are most exposed to China, What are you seeing there in kind of the just the ground level economy, not necessarily like the shutdown dynamic, but what are you seeing outside Of the shutdown and what is your kind of order pace and backlog look like over there?

Speaker 2

Yes, Steve, it's Jim. First of all, I think commercially, We think the business was had a very good quarter. Orders were up double digit in the quarter. And despite the shutdowns That started in the various cities at the beginning of the quarter, we really didn't see a lot of impact relative to our commercial activity. Point of sale still good throughout the quarter.

Speaker 2

So from a commercial perspective, we pivoted Like as an example, when we had to have folks work from home, we did that in 2020. So that was an easy process. So the real impact It was really just to the manufacturing facility in Shanghai that we described in the prepared remarks and was really not really a commercial issue relative commercial activity, really just a function of the fact that our factory, the tech factory and as well as our industrial scientific factory We're shut down and our logistics providers were shut down as well.

Speaker 4

Right. And I guess Can you maybe talk about have you guys done any analysis around what if We went into kind of a mild global recession, what would be kind of the algorithm for you guys? What you think your core would How you would defend earnings? I mean, I think there's obviously a lot of concern around recession out there. You guys get bucketed in this kind of short cycle industrial camp for some reason.

Speaker 4

Maybe talk about what you would kind of any leverage you could pull To mitigate the cyclicality that's inherent in the business.

Speaker 2

Yes. Well, I think number 1, in the short run, given In our backlog position, we would be in very good shape. As an example, if we saw the sort of slowdown that some businesses saw in 2019, We wouldn't weather that storm in the backlog without an issue. We would just dip into the backlog more than we anticipate in this guide. So in We've got much more of an insurance policy going into the second half.

Speaker 2

More broadly, as you remember, I think, even when we see something more dramatic, Like we did in Q2 of 2020, our we had outstanding free cash flow then. We had obviously protected Our gross margin is extremely well and with a high gross margin number, we can flex expenses pretty well in the medium term, Which we demonstrated in 2020. So I think those are some of the levers. And then the last thing would just be, we lean on the 40% of recurring revenue in the healthcare side of the business, which We're going to be in a healthcare resurgence here I think because of COVID and it's really not going to be economically impacted. It's really going to be All the things we've described that I'm sure we'll talk a little bit more about.

Speaker 2

So I think we certainly don't want the recession in any way shape or form, but I think we've built the portfolio The last 5 or 6 years with anticipation that inevitably something like that might happen and we'd be far more resilient relative to our business model in which to

Operator

of Julian Mitchell with Barclays. Your line is now open.

Speaker 3

Hi, good afternoon. Maybe just the first question, trying to drill into the adjusted operating margin. I guess looking sequentially, revenues were flattish in Q1. You had a big margin dip Sequentially, you're assuming a pickup sequentially in Q2, even with the China headwinds getting worse. We're looking at it year on year, you're looking for a bigger acceleration year on year in Q2 than Q1, Again, even with that China headwind.

Speaker 3

So maybe help me understand the sort of the confidence on margins, particularly as I think you only came in, in line with the initial guide for Q1.

Speaker 2

Yes. So Julien, a couple of things. First, revenues were flat from Q4 to Q1, but really there was We've brought on service channel that didn't have the same I'm sorry, probation, I mean, Into that mix. But when you look at Q1 to Q2, I think that there's merits and things that come in, but Q2's margins are up 80 basis points over the prior year And really showing those 40% incrementals in Q2. And then as we move through the year, We see more revenue coming through, not even having it come through probably around 50% incremental margins on the step up in volume plus things like the service channel and margins will increase as we go through the year and also probably get a little bit more consumables.

Speaker 2

We expect to have more consumables in the second half. All these things build towards that margin expansion. Having said that, a tough environment, 23% in line operating profit margins for Q1 is up 30 basis points and given everything that went on, We feel very good about where the start to the year.

Speaker 3

Thank you. And then just I wanted to discuss sort of how you're thinking about your orders in the current quarter. I think you called out, Jim, Hardware orders overall at Fortive were up 14% in Q1, even including strength In China there. So I wonder how you're thinking about the resilience of that order intake in the current quarter and whether you've seen anything change, For example, in terms of European demand yet.

Speaker 2

You know what's interesting, Jillian, is European orders were good. We I would say, so I think as we look around the world, and I'll stick to the order question, Obviously, continued improvement in orders. I like the fact that when we look at things like U. S. POS for Fluke and Tek as an example, Those numbers were in line with POS, so our order growth was pretty close to our sales out.

Speaker 2

So I think we feel very good about the durability of the order The numbers are slow on a real basis simply in the second half simply because of the 2 year stack and things like that. But I think if you look at the progression of strength, it remains there. We saw a little bit of advanced buying that flew for some ahead of the price increase. So it's a little bit of that, That's all inherent in our guide and I think we built as we said $130,000,000 in backlog. So I think when you really look at it, the durability is good.

Speaker 2

Some of the order strength is sensing is real with advanced ordering for the second half. We saw some large customers are putting their orders for the second half. So I think we have a good sense of what's advanced ordering and what's really real time demand and we base that against A number of the things that we're looking at channel inventories are in pretty good shape, a little bit of elevation, but not anything that we would be alarmed certainly within the band of what they typically be at. I think on balance, when we look at the hardware businesses, we're certainly looking for signs of things that might suggest slowdown or anything like that. I think thus far we've yet to see that and feel good about the backlog situation that we're in and our ability To sort of deliver on that.

Speaker 2

So if the order rate were to go down in the example, like I said on Steve's question, if the order rate were to go down in the second half, Then we would just dip into the backlog, which in the current guidance, we're not planning to do much of.

Speaker 3

Great. Thank you.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Andrew Obin with Bank of America. Your line is now open.

Speaker 6

Yes, good morning.

Speaker 2

Hi, Andrew.

Speaker 6

Hey, just looking at the Slide 14, you Seemed to be embedding high throughput in volume, just shipping more hardware. And looking at the progress from Q4 to Q1, can you just talk about some tangible steps that enables you to achieve this that you could share on this. Is it just more supply chain clearing or the countermeasures that you are taking, but just maybe dig in a little bit more as to What is allowing you to sort of actually finally get the volume out of the system? Thank you.

Speaker 2

Yes. So thanks, Andrew. I think number 1 is, What we saw in the quarter were some nice examples of getting after a number of the things relative to some of the supply chain strength that we've described obviously for a few quarters here. And to be just consistent with what I've said pretty much for the last 9 months, we really never anticipated The supply chain issues would go away in 2022. What we anticipated and what I think what we saw in the quarter and we'll continue to see is the impact of our countermeasures.

Speaker 2

And so You saw that at Fluke with their growth rate as one example. Certainly Sensing Tech's performance in the quarter, which was outstanding Both on the top line and bottom line is another good example of that. And quite frankly, we would have seen more of that at Tektronix if it hadn't been for the shutdown in Shanghai in the last week. So a number of examples of progress in the quarter relative to those challenges. So not from a lack of challenges, but just the power of FBS to countermeasure those challenges.

Speaker 2

We'll continue to see that as the year progresses. As you mentioned, the one that some of the things that will provide that volume in the second half, Some of that is just kind of normal seasonality. We just tend to see things go out a little bit more in the second half. Some of that is U. S.

Speaker 2

Government buying in the 3rd quarter, So some of it's inherent in that. We're going to see consumables get better as elective procedures get better. We'll see ACV growth continue to sequentially improve in our software businesses. And then as I described, we'll see some continued improvement at FlukeTech and SensingTech, which I think we demonstrated in the Q1 and we'll continue to demonstrate through the remaining part of the year and into 'twenty three.

Speaker 6

And then just a follow-up question and perhaps It's a conjecture on our part, but we would have thought that Teck has the most advanced chips and once again conjecture, but probably the

Speaker 2

I think number 1 is, if we look at tax performance in the quarter, You never like to say China hasn't happened, but the reality is that we had an unanticipated shutdown of a manufacturing facility in the last week of the quarter. If we That volume roughly $15,000,000 you're into a good growth rate for TAC. And I think that just represents the progress we're making. You're right, a sophisticated supply chain for sure. We've got good partnerships with a number of large scale semiconductor manufacturers We supply a number of key components.

Speaker 2

We're redesigning some things that are going to occur in the second and third quarters. So I think we tangible actions that are in place, the progress that we've made thus far and the confidence in that progress going forward. So those are really and this is not in a Theoretical level, this is really we talked about the conversion of Beyers and some of the big daily visual management in the part of FBS. This is literally walking into those Beyers And having a sense for the actions, pressure testing them like we would under any kind of operating review that we do every month. And really what comes out of that is a higher degree of confidence as we progress through the year.

Speaker 2

Chuck and I were with the tech team down at Beaverton a few weeks ago. I more than that now and literally walking through the factory and seeing the actions and what the team is doing and that's where that confidence comes from.

Speaker 6

Fabulous. Thanks so much.

Speaker 2

Thanks, Andrew.

Operator

Your next question comes from the line of Nigel Coe with Wolfe Research. Your line is now open.

Speaker 2

Thanks. Good afternoon.

Speaker 5

Yes, how are things? It's helpful as well. By the way, I love the new format of the slides. It's so much easier read, much more informative. So Just thinking about the Accruent and Gordian performance, double digits, I think maybe mid teens in 1Q.

Speaker 5

And I want to make sure I heard this right, Accruent grew mid single digits there, which I think is the Q1 growth And so number 1, just maybe talk about that transition back to growth at Accruent. And then looking into 2Q, you guided some mid single digit growth from Accruent and Gordian. That's a detail from 1Q. Just wondering what you see in there. Thanks.

Speaker 2

Yes, I think we have a good quarters in both businesses. I think we mentioned in the Q4 call about We were starting to see traction with some of the countermeasures and actions that were happening in the current I think we've just seen we continue to see those things. It's a consistent message from what we said in our last call. Illuminae is doing a really great job with him and the team. I think in making progress.

Speaker 2

And so that's This is multi quarter continued improvement, but we're starting to see the green shoots of their efforts and obviously you see that in the quarter. Gordian had a fabulous quarter across many, many ways. Their JOC solution was up over 20%, I think. So just a very good quarter and really across their product line. That's just I think just a continued So it was a little bit in the second quarter because of the comp that we had at Gordian last year, Where they had some finishing of contracts with job order contracting that was some upside in the Q2 last year.

Speaker 2

But as a base business and kind of on a 2 year stack, we're seeing good performance Q1 to Q2 sequentially with the comment in those businesses for sure.

Speaker 5

Great. Thanks, Jim. And then just on price, I think you the Q called out $0.02 price in the quarter. Can you just remind us what your expectations are for the full year and how that shakes out between first

Speaker 2

half versus second half? Thanks. I think we had probably about 300 basis points of price if I remember in the quarter, I think if I remember that number right. And I think it was we had good price across the board. We'll probably see a part of we obviously saw it in the bridge.

Speaker 2

There's I think $20,000,000 more price in the bridge first half to second half. So you're going to see a little bit more price in the bridge. I think on balance we're continuing to see good traction with price and a good balance between price and volume as well. So I think we're certainly getting price and price cost. I think the idea that we grew gross margins by 60 basis points in the I don't know a lot of companies that grew gross margins in this environment and for us to grow gross margins in the quarter, I think it's just a real testament to the high quality work we mentioned on the slide the price realization work and the price ties in that we do really continuing to demonstrate our ability to get But also quite frankly, our ability to still maintain and deliver value to customers.

Speaker 5

Great. Thanks, Tim.

Speaker 2

Thanks, Nigel. Nigel, I didn't answer your second question, the second part of that question, which is that will improve as I said $20,000,000 in the second half. We would believe that there's that just demonstrates that there's a continued success that we would have relative to those high end. So we're going to continue to do a lot of those events Through the remaining part of the year, not assuming that inflation does anything, but either stay the same or

Operator

Your next question comes from the line of Deane Dray with RBC. Your line is now open.

Speaker 7

Hey, good day everyone. PAC from China. Is that a bottom up analysis of the front log, customer discussions and so forth? Or is it a kind of a top down swag on a percent of the business that you'd be expecting.

Speaker 2

So, Deane, it's really not a customer issue at all, as we mentioned, we've got really strong backlog. It's just about the rolling lockdowns in Shanghai, particularly And having the factory open and being able to produce that. We've done a great job of getting material in and available and improving supply chains, We need those lockdowns to end and it's a function of how many days it's locked down. That's how we're calculating the impact. And customer specific orders to your question around details, Dean.

Speaker 2

This is not this is really looking at orders that are on hand on the books. In some cases, Products that are already sitting in the factory just need to go out.

Speaker 7

Understood. Is there if you think about potential sales that could not be realized In the Q2, you've quantified China. Are there any other either areas, regions or product lines that of sales that will be either past due, you just can't ship component shortages or is it all China?

Speaker 2

Well, I think the story of certainly the Fortive we talked about is the China story. Certainly, inherent in the way we talked about our backlog We continue to have a very robust backlog, but of course that means the customers are always getting the product in the timeframe that they necessarily want them. In some cases where it's distribution, that might be going into distributor inventory. I think the stat we look at in that case is we look at the amount of time to fill, meaning what is our if we're missing an order from an on time perspective, How much time does it take for us to fill it on to the time that the customer requested. And those numbers are getting better.

Speaker 2

So I think First thing we look at is that time to fill. After that, then we look at the on time delivery. So those numbers are starting to get better. We're in customer conversations all the time and situations. So throughout the conversation around backlog, we're having conversations with customers about How do we help them be more successful?

Speaker 2

And I think what's been good about that is I think we continue to see share gain opportunities And have seen share gains across the portfolio in a number of those cases. So I think that suggests that we're doing a nice job of managing those challenges.

Speaker 7

That's helpful. And then just as a follow-up on the commentary about M and A and the capacity, You said you've got both hardware, software candidates there. Do you have a bias between the 2? Is there a bias on deal size? And then lastly, what inning you think Fortive is in, in terms of the portfolio pivot that has started couple of years ago because if you think back 2016, you had a set of businesses and it's been dramatically changed in terms of higher gross margin, higher recurring revenues, more software.

Speaker 7

If we think of that as a journey, at what point What inning do you think you're in today and when would you see that there be a stabilization or maybe a landing point? I know there'll be continuous Tweaking from there, but just some context would be helpful.

Speaker 2

Yes, great question. I think number 1, we don't I think Our bias is balanced and I think we're going to be deal dependent in the sense of what comes available. It's hard to say with relative to the funnel Hardware and Software Balancing Act versus what becomes available, what we've been working towards and that kind of thing. So I would say at any point in time, It's going to look like we have a bias, but I think over a longer period of time, you see that balance kind of coming out. So I'll stay away from committing to that balance because some of it It's very much asset dependent.

Speaker 2

I think we probably are biased more towards bolt on kinds of deals right now, I would say. I think given where we just did Two great deals in probation and service channel. As we said in the prepared remarks, they're out of the gate and are doing really well. And we certainly see an opportunity to do a number of kinds of deals, the breadth and depth of the funnel. But If you had to sort of think about, we probably have slight bias towards the bolt on or 2 here in the near term at least.

Speaker 2

Relative to the transformation, I think it's interesting and Chuck and I have talked a lot about this with if you look at the segment structure today, We're only 12 months into that segment structure. And I think when you look at it and you look at the power of what the segments have delivered this quarter, I think you could only look at that and say we must be in the final innings of a transformation because the That's why we do strategic plans every year. That's why we sit down with the Board on a regular basis to talk about performance. But I think where we stand right now, we feel very good about where we're at. And it's spring, so we're always optimistic as baseball fans.

Speaker 2

But I think at the end of the day, we feel really good about the portfolio right now. And I think as you look at the guide for the remaining part of the year and you start to see how the full year stacks up segment to segment, strong growth, strong margin expansion with great free cash

Operator

Your next question comes from the line of Scott Davis with Melius Research. Your line is now open.

Speaker 2

Good morning, afternoon, whatever it is, guys. I was interested in just Getting an update on probation. I mean, where are you versus kind of the deal model? I mean, pretty big growth rates, but you are expecting good growth rates. Are we Ahead of the deal model or in line, behind?

Speaker 2

An update there would be helpful. Yes, we did a 100 day plan with the team actually last week And could not have been more excited about the work that they did, the quality of the business and the degree of growth opportunity. They're certainly out of the gate well ahead. We'll see where they end up the year. It's still early, but we feel really good about where the business is at.

Speaker 2

We mentioned in the prepared remarks about the number of GI wins and as well as their extension, one of the largest orders in the history of the company with and anesthesia solutions. So we're seeing those additional studies. We're seeing the strength of the clinical superiority. We feel really good about business and the ability for that business to grow. I think in the short run, like we thought, in the long run, I'm starting to think maybe even better just given the number, the The strength of the strategic plan, but strategies are just PowerPoint slides.

Speaker 2

We got to go out and execute. And I like our chances with the team we have. Okay. And then on Slide 4, there's a little quote there that just says M and A returns nearly double next 5 years. What's the context on that?

Speaker 2

You mean deals done in the last year double in the next 5 years done in the last 5? Is there a little color you can put on that? And what does that mean, double from 5 to 10 or 4 to 8 or 3 to 6? So Scott, we're talking about the ROIC returns and I think that for it would be doubling, say, 4 to 8 is probably a good way to think about that. That doesn't mean we think most of our deals are getting to the 10% ROICs in 5 years and we're very pleased with the progress.

Speaker 2

But coming out With the last couple of years, we feel like we're inflecting here and we're going to start seeing more from these deals and that's what we're trying to talk about.

Speaker 7

Okay. I

Speaker 2

think what we saw in the quarter and what you'll see maybe just add on and Chuck's spot on here. I think the legacy deals, the ones we did early, right, e IFC and Landau are doing outstanding, some of that medium term. You're starting to see Gordian's trajectory just take off here. Intellect had a strong quarter. Accruent, as I mentioned in the question around continuing to improve And ASP was really strong margins and ready for consumables to come back as healthcare changes.

Speaker 2

So and certainly the last two deals we've done as I described. So I think we're in a great place relative to returns and this inflection As obviously we're excited about, I think it put a lot of hard work into it. I think we're in a really good place relative to those doesn't mean we won't have an issue or 2, But I think what we've seen certainly in the last several quarters as well is these inflections have started to happen in the business. Well, good luck guys. Thank you.

Speaker 2

Thanks, Scott.

Operator

Your next question comes from the line of Jeff Sprague with Vertical Research. Your line is now open.

Speaker 2

Good day, everyone. Hi, John.

Speaker 8

Hi. Hank, 2 from me. Just first on Back on price cost, Jim, you noted iOS was price cost on a positive on a dollar basis. Was that true for the other segments? And also if you could maybe put it in the context of margins.

Speaker 8

As you noted, Gross margins did improve nicely. Was that in spite of negative friction on price cost, right? You can be Positive on dollars and still negative on margins, kind of the essence of the question.

Speaker 2

So Jeff, this is Chuck. For Q1, our core operating margin expansion is up 30 basis points. So as a percentage basis, we've talked about the dollars being up. But certainly, we saw real margin expansion. We continue to see that accelerate as we go through the year.

Speaker 2

And so that the was it true for everyone? It's true in PT, but we're down a little bit in AHS, down I think about 40 basis points is what's on the slide there. 4.

Speaker 8

Okay. And then on AHS, I think you gave us the 88% recovery on procedures What was it actually in Q1 and what's the magnitude of improvement you're expecting in Q2?

Speaker 2

So $85,000,000 was Q2 or Q1, excuse me. And obviously, that's got progressively better than the quarter. So I think we're probably in the couple of basis points better in the second quarter and then Probably starts to approach 90 as we get

Speaker 5

through the second half of

Speaker 2

the year. So still early, Amazon was an influence in January February, particularly in the U. S. But we expect now to really to see gradual improvement and we're seeing some green shoots. We're starting to see some hospitals That are now over 100% from their 2019 level.

Speaker 2

So it's a combination of sort of confidence gets built On the overall number, but also kind of looking through the detail to understand what hospital networks and where they're at. And We're starting to see some of those numbers where hospitals are getting in much better shape as they progress through the quarter.

Speaker 8

Okay, great. Thanks for the color.

Speaker 5

Thanks, Jeff.

Operator

Your next question comes from the line of Andy Kaplowitz with Citigroup. Your line is now open.

Speaker 9

Good morning, everyone. Andy. Jim, you mentioned the new 5 Series in Tektronix and you've been talking about a significant product refresh, I think in tech and fluke for some time now. So maybe you can give us a little more perspective on how much new product growth should help you in 2022? How might this product cycle compared to previous cycles you've had.

Speaker 9

And then I think you said last quarter that you expect minimal backlog reduction in Flipping Tech for the year. Is that still the case?

Speaker 2

Yes, so let's talk about let's break them up. I think PAC certainly has a refresh coming couple of product lines. We mentioned the 5 series. I don't want to ruin their announcements here, but we'll start to see in the second and third quarter Some announcements around things that they're coming out with. So we'll they'll inherent in that sort of step up in From the first half to the second half, probably it's some new product introductions in the business at Tektronix.

Speaker 2

It's hard to sort of say What's backlog reduction, what's new product? I mean, I sort of put those, but we will see good product refresh. Some of that refreshing, make some improvements to the product as well. So I think in tech, we're going to see nice we don't anticipate much by way of backlog reduction in tech In the year, consistent with what we've been saying before. And but I think the business is going to be in very good shape.

Speaker 2

We said, as we said, China situation very much an independent situation relative to Shanghai. Overall growth in the rest of the world was good And should continue to improve through the year. Relative to Fluke, Fluke is kind of always a little bit of a has a pretty broad product line. So There's really no one product that necessarily moves the needle, but they will they do have some things that are going on in terms of new clamps and some acoustic Imaging, things like that that are coming through that will probably be more back half. But unlike TAC where one product category to make a difference.

Speaker 2

Typically, it's Fluke.

Speaker 3

It takes a that is they just have

Speaker 2

a broader product line, it's the nature of the So we do we will get a little bit of backlog reduction at Fluke this year, I suspect. But again, they'll end the year as well in a good situation good position for 20 20 Both businesses showed demonstrated success against their countermeasures relative to challenges in the quarter and inherent in what we Think about the year will be the continued those continued countermeasures will continue to have impact for the business.

Speaker 9

Thanks for that. And then Jim, maybe just talking a little bit more about the M and A market. You We have a ton of capacity. You mentioned a big pipeline of opportunities. Have sellers' asks come down yet a bit given lower market valuations?

Speaker 9

Or do you think it might take time to get buyers and sellers on the same page here given the volatility in the markets.

Speaker 2

Well, every deal has its story, but I would say typically it Our conversations here recently in a couple of situations probably would suggest that and some transactions that we watched occur Would suggest that things are still I would say things haven't changed much. So I would anticipate that's more of a second half early twenty twenty three real impact. Some deals will have different situations and be Certainly be situational dependent, but I think at the end of the day, just more broadly about how we think about things, I would say, we're probably still awaiting a little bit more until some of the maybe some of the uncertainties that we've seen recently sort of Find their way to kind of knowing the natural direction of what that might be, interest rates being one of them, the macro, some of those things.

Speaker 9

Appreciate it, Jim.

Speaker 2

Thanks, Andy.

Operator

Your next question comes from Josh Pokrzywinski with Morgan Stanley. Your line is now open.

Speaker 5

Hi, good morning, guys. Hi, Josh.

Speaker 2

Just a quick question on the backlog, Jamie. You mentioned it several times with this call. And I think For across kind of the shorter cycle industrial world, this

Speaker 3

has been a bit of

Speaker 2

a talking point. Like what does backlog really mean in this environment? Any historical context for what happens to backlog if incoming orders soften? Like do you see cancellations? Is there any kind of context for something like a double ordering or channel dynamic?

Speaker 2

Like, it doesn't sound like anything's happening today. Just Trying to get my arms around like what does backlog look like if the environment would change? Yes, I think it's something we spend a lot of time on, Obviously, when you build another $130,000,000 in backlog like we did in the Q1, obviously a topic of conversation every month with our operating reviews with the Presidents and CFOs. I would say I'd break it into a few places within Fortive. In our Sensing Tech businesses, We have a real sense of what it looks like.

Speaker 2

And what we're seeing is, we are seeing some orders being placed for like November shipments and things like that. That's not double ordering. That's just somebody wanting to say, hey, I want to get into queue for deliveries for those that kind of thing. And so In the case of Sensing Tech, I think we have a good sense of the backlog. We don't see double ordering, little bit of people trying to get around to pricing.

Speaker 2

At the end of the day, that backlog will flow and it will flow out. We're confident with that. On the tech side, 50% of the business is direct and we can very much see those customers and their use cases and their needs and we've tested that pretty profusely, feel very good about that. The channel inventory then and that's about A little bit less than half of Tektronix revenue and close to 75% or 80% of Fluke's revenue. That's where we get into looking at point of sale data, Where are those trends going?

Speaker 2

What do inventory positions look like? What do they have on order? And we have a sort of methodology and calculation that we use from an analytical perspective to test that. And what we see today is in those we don't see anything getting out of range. And so Point of sale remains good, inventories remain in a good place and there's no natural increases that if you sort of Play around with the analytics where things would go haywire quickly.

Speaker 2

And that's what we watch and we watch it consistently. We get a little bit better, more refined data in the U. S. And Europe and some of those things that we do in the rest of the world. But that's how we test the portfolio.

Speaker 2

And I think when you step back and say, what does it all tell you? We'd say the natural demand patterns are good. The inventory levels are not Cooperative. Relative to natural numbers and what's on order doesn't significantly increase their inventory at anytime soon. So that's That's what makes us feel pretty good about the near term.

Speaker 2

And I would say that informs our guide. It gives us the confidence. We'll start the second half with good backlog. And so if we saw some changes in some of those demand patterns, you might see a little cancellation, Although and I would say historically, we haven't seen a lot of that. Got it.

Speaker 2

That's helpful. And then I guess just on Some of the more facility spacing platforms on the software side. Return to work and maybe even a more of a hybrid model than remote than folks would have expected 6 months ago. It seems like it's well in order. Anything that's Kind of permeated through that organization or customer behavior that attracts alongside some of those changes, good or bad?

Speaker 2

Well, I think it's great to be in Facilities and Asset Lifecycle Management from a software perspective because it's really the combination of what we're doing in service channel and the current and to some extent Gordian. I mean, it supports hybrid work and supports the kinds of changes that are going to occur in facilities over time To support collaboration and the kinds of things that people want to do as people come back into the offices, not full time, but from time to time. So I think that trend and that secular driver is going to be out there for years. It's well documented as we're very in the early innings of those transformations. And so I think on balance, we're back.

Speaker 2

Our customers are in many cases back. We're back at hospitals. There's times when our service revenue trying to get customers on-site to get things service can take a little bit longer. But as we mentioned in a couple of places, we're starting to see the opportunity to compress those timelines from when we come on-site to help start up a customer as an example, Whether it be in a hardware or software business and the time to value. So we're starting to see those come down as people come back to work, come back into the office, come back into the facility.

Speaker 2

So I think on balance inherent in sort of our natural trajectory of the business is some of these things happening and being helpful

Operator

Your final question today comes from the line of John Walsh with Credit Suisse. Your line is now open.

Speaker 2

Hey, John. Curious if you could talk to for the software businesses, kind of what you're seeing in terms of maybe a net add As it relates to subscribers or if you have more granularity around churn and absolute adds. And then just as I'll do my follow on right now. The pricing, are you seeing anything different between the ability to get the price on the software side versus the hardware side? Thank you.

Speaker 2

Yes, great questions. I think on basis we announced a lot of the prepared remarks, We tried to highlight a number of places where new logos are occurring. And I think quite frankly, we had I think we had I think we have one of our largest Inet deals in the history of the company at ISC. We have one of our largest I think we have the largest anesthesia procedures, eye procedures order and probation. So a number of places where new logos we're in a good place relative to new logo growth In the quarter and I think when you look at where our software growth was, I think our low double digit teams In low double digit growth in SaaS and our teams growth in software, that's going to stand up I think against a lot Software Players.

Speaker 2

Looked at a few folks that reported today even and feel really good about where that double digit number is going to stand up relative to others. That's also helpful because our net dollar retention continues to improve on the backs of churn reduction. And so I think we're in a really good place to continue to improve net dollar retention. Our FBS efforts are making a difference there. And I think that Some of that is also getting a little bit more price.

Speaker 2

So we're still getting more price in the hardware businesses to the second part of your question, John. We think we're in a good place Relative to that, and I think the balance, we didn't talk about this, but in our hardware business has had a good balance of probably about 50 50% volume in our growth, I think is an outstanding balance. It really demonstrates the strength of our brand, the strength of our value propositions. So we think that's going to play out this year and obviously we're getting the price that's inherent in some of the inflationary challenges that we've documented, but we're also driving tremendous value with customers that ultimately is driving our volume. So anyway, I think Cup 2020.

Speaker 2

We've said this was a show me year and I think we just did that. So we'll look forward to your follow-up questions. We'll talk to you soon and we'll see you on the road. Thanks.