Good afternoon. My name is Pasha, and I'll be your conference facilitator this afternoon. At this time, I would like to welcome everyone to the Fortive Corporation's First Quarter 2021 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. [Operator Instructions] I would now like to turn the call over to Mr. Griffin Whitney, Vice President of Investor Relations. Mr. Whitney, you may begin your conference..

Thank you, Pasha. Good afternoon, everyone, and thank you for joining us on the call. With us today are Jim Lico, our President and Chief Executive Officer; and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. We present certain non-GAAP financial measures on today's call.

Information required by SEC Regulation G relating to these non-GAAP financial measures are available on the Investors section of our website, www.fortive.com, under the heading, Investors Quarterly Results.

We completed the separation of our Industrial Technologies segment through the spinoff of Vontier Corporation on October 9, 2020, and have accordingly included the results of the Industrial Technologies segment as discontinued operations. The results presented on this call are based on continuing operations.

During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. All references to period-to-period increases or decreases and financial metrics are year-over-year on a continuing operations basis.

During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will or may occur in the future.

These forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward-looking statements that we make today.

Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2020.

These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements. With that, I'd like to turn the call over to Jim..

Thanks, Griffin, and good afternoon, everyone. Starting on Slide 3. Our first quarter performance continued to highlight the benefits of our efforts to enhance the growth and resilience of our portfolio, significantly expanding our positions in software and healthcare and adding substantial sources of higher growth recurring revenue.

As a result, our portfolio has been well positioned to drive rapid sequential improvement over the past few quarters as markets have begun to reopen.

In Q1, we continue to see significant improvement, not only across our short-cycle businesses, primarily Fluke Instruments and Tektronix, but also in many of the businesses that have faced COVID-related headwinds, such as Advanced Sterilization Products. Turning to the results in the quarter.

We generated total revenue growth of 13.6% and core revenue growth of 9.1%, above the high end of our guidance. Adjusted earnings per share was $0.63, representing an increase of 37% year-over-year. The combined outperformance on core growth and earnings helped drive another strong quarter of free cash flow.

Our SaaS offerings at Accruent, Intelex, Censis, eMaint and Gordian continue to perform well, generating double-digit growth in the quarter, with the current Gordian seeing better top line momentum overall.

These software offerings are an important part of our strategy to leverage leading hardware positions to provide broader software-enabled solutions to address pain points in our customers' critical workflows and their ongoing digital transformation priorities.

Despite the challenges of a COVID environment, we continue to leverage FBS tools to drive performance improvements across the portfolio.

ASP is advancing the implementation of the Fortive Business System more broadly, driving strong improvements in working capital turns as well as progress accelerating commercial efforts as it delivered its fifth consecutive quarter of growth in its global installed base.

Intelex also continues to see success from the application of FBS tools to improve its sales process, driving better lead generation, improved customer win rates and stronger sales pipeline creation.

While these are just a couple of examples, we are highly focused on building FBS capability across our newer businesses in order to deliver accelerated growth, innovation and market share gains.

Relative to organic growth, we continue to invest in strategic initiatives across our operating companies as well as build additional capacity to drive future innovation. With the FORT, we are continuing to scale our data analytics capabilities, providing leverage to our operating companies to pursue key AI and machine learning applications.

In 2020, we more than doubled the number of projects conducted and expect to do the same this year, targeting more than $250 million of potential revenue opportunity.

Our acquisition of ehsAI significantly expanded our machine learning expertise to help grow our position within EHS workflows as well as generate learnings that can be applied more broadly within Fortive.

We've also made a number of additional investments to expand our partnership with Pioneer Square Labs with three start-up opportunities currently in different phases of incubation.

With these investments, we are enhancing our ability to generate disruptive innovation that will deepen our competitive advantage and increase our customer value proposition. In terms of performance across the major geographies, core growth was led by a low 20% growth in Asia.

This included approximately 30% growth in China and low double-digit growth in Japan. Elsewhere, our core revenue grew by low double digits in Western Europe and by low single digits in North America. Taking a closer look at performance in the segments on Slide 7.

Intelligent Operating Solutions posted a total revenue increase of 9.5%, with core revenue increase of 5.5%. This included high-teens growth in China, high single-digit growth in Western Europe and a flat top line in North America. Fluke's core revenue continued to improve in the first quarter, increasing by high single digits.

This performance was highlighted by low double-digit growth at Fluke Industrial and high-teens growth at Fluke Calibration. Fluke's growth included the launch of the 377 and 378 Fluke Connect clamp meters for noncontact voltage testing.

These introductions incorporate Fluke's FieldSense technology and extend its leadership position in safer noncontact measurement tools. At Fluke Industrial, point-of-sale in North America turned positive in the first quarter, increasing by low single digits.

Meanwhile, point-of-sale in both Western Europe and China continue to improve, rising by mid-single digits and mid-teens, respectively. Strong performance at Fluke Digital Systems continued this quarter, increasing by mid-single digits as eMaint saw strong demand with mid-teens growth in SaaS bookings.

Industrial Scientific declined single digits in the first quarter as a result of continued weakness in instrument sales. The company's iNet offering continued to demonstrate its resilience, increasing by low single digits. iNet also registered an 18% increase in bookings while driving a more than 500 basis point improvement in net retention.

Stub's strong bookings growth in ISC's rental business provided a signal of improving stability in its end markets with customers beginning to restart maintenance project activity.

At the same time, we are seeing continued success from the application of FBS growth tools at Intelex to accelerate sales pipeline creation, driving a record revenue quarter with low double-digit growth. The integration of ehsAI continues to go well.

While the revenue contribution remains small, product integration is on schedule, and the Intelex team has started to accelerate new customer acquisition. Accruent grew by low single digits in the first quarter, highlighted by high single-digit growth in SaaS. Accruent continue to see good momentum in its industrial and life science segments.

This included a recent win at BioMarin, which included Accruent's Meridian solution as a critical tool for management of their pharmaceutical manufacturing facilities, including communication with contractors and support for FDA validation.

Accruent is also seeing growing demand across a range of end markets for its facility planning and resource scheduling solutions with customers beginning to prepare their facilities for the future needs of their workforce as they emerged from the pandemic.

Accruent's growth in the quarter was aided by the resumption of some on-site service implementation and project-related activities with further improvement expected as the year continues. After facing headwinds during the second half of 2020, Gordian's top line improved to flat in the first quarter.

Gordian's job order contracting procurement business grew by low single digits and is expected to accelerate as the ramp of recovery from COVID continues.

The company's estimating business continued to perform well, increasing by high single digits and seeing strong renewal momentum and conversion rates for the SaaS version of its RSMeans product line. Gordian saw signs of improvement during the first quarter regarding site access issues. We expect this improvement will continue in the coming quarters.

The Precision Technologies segment posted a total revenue increase of 14.3%, with a 12.1% increase in core revenue. This included mid-30s percent growth in China, mid-teens growth in Western Europe and mid-single-digit growth in North America.

Tektronix generated high-teens growth, driven by strength in its general industrial and semiconductor markets. Point-of-sale continue to accelerate, up greater than 40% in China, greater than 20% in Western Europe, while North America turned positive with a mid-single-digit increase in the quarter.

Tektronix has seen strong demand in China as economic recovery continues driven by government investment in 5G, electric vehicles and IoT solutions. Looking across the product lines at Tektronix, mainstream oscilloscope and Keithley both had an excellent first quarter.

Mainstream oscilloscope posted high 30% growth, driven by strong demand trends across most of its key product segments, particularly our 6 series and 4 series scopes. Keithley grew mid-teens, while the Tektronix service business continued to show stability, reporting mid-single-digit growth in the first quarter.

Tektronix also saw outperformance across a range of recent new product introductions, including its new IsoVu Probe solution for semiconductor and automotive market applications. Sensing Technologies grew by low double digits, driven by broad strengthening across end markets, including industrial and electronics customers.

Sensing saw accelerating demand in China as it delivered a number of key wins with strong momentum among factory automation OEM customers. Sensing also generated strong growth from its critical environment products, et cetera, with mid-30% growth for the quarter.

Pacific Scientific EMC returned to growth, increasing by low single digits in the first quarter. The business continued to see good order trends with a book-to-bill of 1.2 over the trailing 12 months and has a strong backlog that we expect to support improving growth in the coming quarters. Moving to Advanced Healthcare Solutions.

Total revenue increased 20.3% with a 10.9% increase in core revenue. This included low 40% growth in China, low 20% growth in Western Europe and low single-digit growth in North America. ASP returned to growth in the first quarter, increasing by mid-single digits.

Growth at ASP was driven by a greater than 40% increase in capital equipment sales as it continued to grow its global installed base. This momentum in capital sales more than offset the fact that electric procedures were 91% of pre-COVID levels globally and continue to weigh on ASP's consumable revenue.

Stronger capital sales are an indication of the progress ASP is making in its FBS journey by driving better sales execution and improved funnel management at priority independent delivery network accounts. ASP continued to perform well in Western Europe with its fifth consecutive quarter of growth.

ASP was also recently named the preferred supplier by the National Health Service in the UK and a large multi-year tender for terminal sterilization capital and services. Censis also had a strong first quarter, growing by low teens with low double-digit growth in its CensiTrac SaaS offering.

Censis has seen improved upselling momentum across its business and is also seeing evidence of U.S. hospitals moving to post-COVID operations and faster purchasing decisions. Fluke Health Solutions increased by low teens in the first quarter with broad strength across its product lines.

FHS continues to have success deploying FBS to drive growth and margin improvements at Landauer, leveraging global go-to-market scale and accelerating cross-selling and products and services. Landauer is now seeing an approximate 2.5x improvement in its operating margins since acquisition.

Finally, Invetech reported mid-40% growth as it delivers against a strong backlog of 2020 orders for its diagnostic offerings. With that, I'll pass it over to Chuck, who will take you through additional details on our margins and free cash flow for the quarter..

Thanks, Jim, and good afternoon, everyone. Solid execution across the portfolio enabled us to deliver strong margin performance in Q1.

Adjusted gross margins were 57% in the first quarter, up 90 basis points, driven by the fall-through on the strong growth at Fluke and Tektronix as well as the year-over-year gross margin improvement at ASP coming off the transition service agreements.

It also reflected solid execution with FBS throughout the portfolio, including continued price realization of 90 basis points in the quarter. Our Q1 adjusted operating profit margin was 22.7%, a bit higher than we had guided, helped in part by the stronger volume we saw in the quarter.

We generated 40% of adjusted incremental operating margins and 240 basis points of core operating margin expansion and also generated more than 200 basis points of core operating margin expansion in each of our three segments. During the first quarter, we generated $144 million of free cash flow, representing an increase of 50% year-over-year.

We continue to be pleased with the consistent growth in free cash flow and have delivered -- that we've delivered over the past year, with the first quarter taking our trailing 12 months free cash flow to $950 million.

Along with significant growth in earnings, disciplined working capital management at ASP, Fluke and Tektronix contributed to this free cash flow performance. Early in Q1, we executed the tax-efficient monetization of our remaining 19.9% stake in Vontier, generating approximately $1.1 billion in proceeds, which were used for debt repayment.

On the basis of that transaction and our free cash flow from Q1, we ended up the first quarter with a net leverage ratio of 1.2x.

Supported by a continued strong free cash flow and significant balance sheet capacity, we are well positioned to pursue our key capital allocation priorities and are maintaining an active pipeline of deal-cultivation efforts.

We continue to see a broad range of opportunities to deploy capital to build on our core hardware and instrumentation positions as we also leverage deep domain and workflow expertise into adjacent high-value software data-driven opportunities. Turning now to the guide on Slide 11.

As a result of the strong first quarter performance and given some improvement in our outlook for the rest of the year, we are raising our 2021 guidance. For the full year, we now expect adjusted diluted net earnings per share to be $2.50 to $2.60, representing year-over-year growth of 20% to 24% on a continuing operations basis.

This assumes total revenue growth of 10% to 13%, core revenue growth of 7% to 10%, adjusted operating profit margins of 22% to 23% and an effective tax rate of approximately 14%. It also assumes core revenue growth of 5% to 7% in the second half of 2021.

We also continue to expect free cash flow conversion to be approximately 105% of adjusted net income for the year. We are initiating second quarter adjusted diluted net earnings per share guidance of $0.56 to $0.60, representing year-over-year growth of 30% to 40%.

This assumes total revenue growth of 20% to 23%, core revenue growth of 16% to 19%, adjusted operating profit margins of 19.5% to 20.5% and an effective tax rate of approximately 14%. For the second quarter, we expect free cash flow conversion to be approximately 85% of adjusted net income.

The full year guidance incorporates $35 million of additional investments that we are making to drive innovation and enhance our capabilities to support higher growth in the years ahead with $15 million in the second quarter.

This includes funding for the FORT to expand our analytic capabilities and talent base as well as to accelerate the development of AI machine learning offerings for our customers. It also includes funding for investments in our partnership with Pioneer Square Labs, where we have seen good early progress thus far.

With that, I'll pass it back to Jim for some closing remarks..

Thanks, Chuck. Before we move to questions on Slide 13, I wanted to highlight the continued progress we're making with respect to our key sustainability goals. In Q1, we completed an updated materiality analysis, yielding valuable insights that we use to define the new pillars of our sustainability strategy, which will guide our efforts going forward.

We've also made significant progress implementing the Intelex sustainability performance indicators platform across the portfolio, which we used to complete the collection of 2020 emissions data with new, more aggressive carbon emissions targets.

We look forward to discussing our progress and our evolving sustainability goals at our upcoming Investor Day. I'd also like to take a minute to thank our employees for their continued adaptability and strong FBS -- and strong execution of FBS throughout the first quarter.

The results that we announced today are a testament to the depth and dedication of our teams and the relentless focus on the continuous improvement principles that power our culture.

As we look forward, we are excited about the strength of our portfolio, the quality of the market opportunities we address and the significant organic and inorganic growth opportunities ahead of us.

As macro indicators continue to recover from the COVID-19 pandemic, our focus will remain on driving strong core growth, margin expansion and free cash flow generation, while investing in innovation and deploying our capital to acquisitions that accelerate our strategy and increase the value we bring to customers.

We are also excited to share more details with you about our road ahead when we speak on May 19 at our Investor Day. In the almost five years since our spin, we have positioned the portfolio to be higher growth, more profitable and a more powerful generator of free cash flow.

This sets us up well for accelerated compounding across our businesses, which we look forward to discussing with you. With that, I'll turn it back to Griffin..

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

[Operator Instructions] Your first question is from the line of Scott Davis with Melius Research..

Hi, good afternoon..

Hey, Scott..

The margin guide, it seems -- is this all because of additional growth investments that you're talking about? Or is there some supply chain or price cost or timing issues? Is there anything else related to kind of the, what I'd consider kind of a more conservative incremental margin guide?.

Are you -- Scott, this is Chuck.

Are you talking for the year or for the Q2?.

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

Well, I think that the -- for the full year, we talked about the incremental investment. There's probably $0.03 of headwinds and also the year for FX. I'd probably point that out a little bit. And further, I'd say that there are -- we've seen some things that are inflationary that are in this.

But we called out the bigger things that are different than what we maybe were thinking just a couple of months ago. And....

Okay. Go ahead..

And in Q2, go ahead..

[indiscernible].

Sorry, go ahead, Scott. No, I just was going to talk mostly -- the Q2 is about the investment that we kicked off for the investment in growth as we're seeing the second half of the year accelerate versus our previous guide..

Okay.

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

Yes..

Okay. And just second, just a follow-up, do you have a sense of whether -- and I know it's hard because your portfolio is really broad, but sense of whether inventories are kind of normal, below average, above average, I know it's hard to generalize, but….

Yes. I would say where we get -- hey, Scott, it's Jim. I think number one, I would say, we feel pretty good about where inventories are at. You know, we get good point-of-sale data at Fluke Industrial, at Tektronix, and to some extent, we get decent data on consumables in North America at ASP.

So it's a decent chunk of our portfolio where we see things where we have channel partners. And I would say we're as good -- we're at reasonable inventory levels. Nothing is elevated. There's always a couple of situations. You saw the strong consistent improvements in POS that we highlighted in the prepared remarks.

And I think we've certainly seen sequential improvement from Q1 -- from Q4 last year to Q1 in all of our regions relative to point of sale. So I think we've seen that improving even on a two-year stack. So we've seen an improvement in point of sale. We've not seen a big inventory lift.

So we feel pretty good about where inventories are at going into the second quarter. And one other thing, maybe just to clean up on -- just on that margin question.

Just the $15 million of organic investments in the second quarter, $35 million in the full year, the other part of maybe the margin part in the second quarter is obviously those one-time costs that come back from a year ago that we've talked about several times..

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

Thanks, Scott..

Your next question is from the line of Julian Mitchell with Barclays..

Hi, good afternoon. Just wanted to try and circle back on that Q2 margin question, maybe from a different angle. So if I just look sequentially, the revenues are sort of flattish, I think, Q1 to Q2. You're guiding that margin down about 250 bps sequentially. Understand there's 100 bps or so headwind from the extra growth investments.

But maybe help me understand, is there something on mix that's also getting worse? Because I understand the temporary cost year-on-year, but sequentially, there shouldn't be a huge delta, I would guess..

Hey, Julian, this is Chuck. I think you got most of -- there's a little bit of FX. I would say about the temporary costs, as things open up, there is actually some sequential from Q1 to Q2, where -- I'd give a small example. As things open up, we're going to see more travel than we saw in Q1, that's just one small example.

So there is some incremental spending that we would expect there..

Thank you. And then maybe homing in on the Advanced Healthcare Solutions segment and a couple of points on that. I think your incremental margin there year-on-year in the first quarter was about 30-ish, and then Q2, there wasn't much at all because of the factors you mentioned. And then it looks like a big step-up in the second half.

So maybe just the mix moving around a lot more capital equipment, Q1, huge consumables bounce in the second half has something to do with TSA roll off.

Any kind of moving parts in AHS margins through the year?.

Well, first of all, I think that we had -- I thought we had a good margin expansion year-on-year in AHS. I think a couple of hundred basis points in all three of our segments. But I think there is, versus maybe our guide, we were a little bit light.

And that has to do with elective surgeries being down in Q1 versus where we thought, but also really the mix of really having a great capital placement, hardware placement, growing our installed base there. And that's -- I see that as an investment in the future. But that's probably what's going on in the first half.

And then as elective surgeries improved from where they're at right now at probably 91% in Q1, we'll see a further margin lift. But I have -- we have ASP, which where most of those comments we're talking about as we move through there, I have good margin expansion for the year, well over 100, pushing 200 basis points..

Great. Thank you..

Thanks..

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

Hey, thanks. Good evening, everybody..

Hey, Jeff..

Hey, two for me. Just back on the investments, I want to kind of think about the payback side of that equation. Jim, you mentioned a $250 million opportunity.

Is that off the spend we're talking about this year? Or does that encompass some of the accelerated spending you were talking about that sort of happened last year? Maybe you could just frame that up for us. And is that kind of a three or four year out number? Just some perspective there for starters. Thanks..

Yes. Sure. I think, number one, is the $250 million is a combination of some of the things we did last year and this year, some of the projects.

If we think about really specific to the FORT, Jeff, when we think about the FORT, we're really talking about a combination of projects that I would say are more about 50-50 right now, but moving more to customer focus, but about 50 of internal productivity projects that are really driving better -- better digital transformation within our own operations.

And then the other half are really commercial offerings that are going to result. So the revenue opportunity is all tied to those commercial opportunities. There are a couple of years out. So we'll start to see some of that revenue in terms of opportunity. That's the market opportunity, by the way.

So we think we start to get some of that in the back half of this year. I would think, all in all, when you think more broadly about the $35 million, there's a combination of investments that are certainly multi-year. I can talk more about that.

But I think when we think about some of the investments with Pioneer Square Labs, those are really -- those are early-stage innovation that are really probably three or four years out. So the four investments are a little bit more near term, next year or two, maybe three.

PSL investments maybe four, four years out, where they make a meaningful impact..

And just so I fully understand. So there's $250 million of revenue, you believe, that obviously would have some profit drop through.

But then there's, on top of that, some pure profit productivity fall through from what you're working on, right? Can you size that at all?.

Yes. It's pretty tough to size right now because some of it is just inherent in kind of how we just think about productivity on a regular basis. So I would say if we were to think about it, it could be as much as $5 million to $10 million in the next 12 to 18 months, probably on the productivity side.

The $250 million, by the way, is kind of sort of market opportunity. So we ought to think about that as we're putting ourselves into an opportunity to gain share in a new part of the served market of $250 million..

Got it. And just one more for me. On AHS, the M&A impact was bigger than I was expecting in the quarter and a little bit bigger than I was expecting in the Q2 guide. I don't know if I missed something.

Or is there something going on with TSAs rolling on that you're counting as M&A? Maybe you could just elaborate on the composition of the acquisition contribution in AHS..

Yes. Jeff, what you're seeing there, what we're counting is M&A growth is really just what you theorize. It's the roll-off of the day two countries from the TSA. We don't count those as core growth. And so that's just -- and now as we completed that largely at the end of the fourth quarter, you're going to see that step up as top line growth.

And it falls through roughly at the fleet average of operating margin..

Great. Thank you..

Thanks, Jeff..

Your next question comes from the line of Steve Tusa with JPMorgan..

Hi, Steve..

Hey, guys, how are you doing?.

Good..

Can you maybe just talk about how much of your portfolio is leveraged to -- just remind us how much is leverage to kind of semiconductor CapEx?.

Well, we're probably, all up, in the total company, it's about 5% of our sales is semiconductor. And I would say probably 80% of that is sort of what I would say, not -- it's -- I'll call it, non-CapEx in the sense that you don't need it to build a manufacturing plant.

Some of our performance scopes that are used in design are obviously expensive, and so they would be a capital project. But the -- but if your question is more along the lines of, as we see new fabs may be coming online, typically not in that sort of CapEx.

The most of the CapEx that we have in the company is related to either what we have in Sensing Tech or what we have at Keithley within Tektronix..

Right. Okay. And then the other thing is just on the acquisition pipeline.

What's the flavor of that? Is it still kind of -- is it smaller software deals? Is it -- are there different kind of types of business models you can go into on the hardware side? What are you seeing out there that's kind of most pressing?.

Yes. I think I would say the breadth is pretty good right now. I mean, we said 2020 was mostly going to be a bolt-on year anyway because of kind of what we had to do relative to the Vontier separation and what we had to do with getting ASP up and running.

With that behind us and the balance sheet in really good shape, I think, we've got far more degrees of freedom to really pursue a range of opportunities within hardware and software. So I think we love the ehsAI deal that we did. We mentioned it in the prepared remarks, while it's small, it's really given us great machine learning capability.

You certainly could see more of those kinds of things to really extend ourselves from a feature perspective within our software and data analytics portfolio. But hardware is still – certainly, lots of places are from a hardware perspective, from an IoT standpoint that we would also take within our opportunity set. So I think it's pretty broad.

You can never predict which one is going to happen, but I think at the end of the day, there's a number of things out there that could be potentially exciting. Can't predict when deals get done, but feel good about where we're at right now..

All right. Thanks a lot, guys. I appreciate it..

Thanks, Steve..

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

Hi. Yes, good afternoon..

Hi, Andrew..

Can I just ask a question? It seems that nobody has asked for details around the growth investment.

Can you just expand on what exactly it is? And why did you pull the trigger right now?.

Yes. I think, number one, I'll take the second one. We pulled the trigger right now because we saw the opportunity with the revenue line coming up and seeing probably be more -- starting the year, obviously, we start -- last year, we're a little bit more conservative.

But with another quarter of seeing some trends, we feel good where the top line is at and feel like we're in an environment here where we want to make sure that we lean into some of these opportunities. So that's number one. We've done this over time.

And I think with the kind of financial results we posted relative to earnings growth and what we still have, even with that spend in terms of earnings growth and cash flow, we're in a very good position in which to play significant offense in a number of our businesses.

I would say the range of investments is really sort of 58% of it is really giving our operating companies, several of our operating companies, more latitude to raise their R&D spend around the innovation ideas that they've got. And we can -- we'll certainly give you more color around that at our Investor Day as well. That's about half of the spend.

The other half is in the FORT and in Pioneer Square Labs. So the FORT is really about expanding our data analytics capability. We talked a little bit about that a second ago in Jeff's question. Relative to Pioneer Square Labs, Andrew, we always thought that, that investment -- those investments would be -- we would do a bunch of ideas.

As it turns out, the first three ideas we've had are actually getting accelerated funding because they've been pretty good. I'll give you a couple of ideas of what that means.

One of them is our TeamSense investment, which is really around connected worker communications technology and how -- and really helping hourly workers be more connected in the work that they do every day. The other one is in condition-based monitoring communications.

Think of it as a Nuance for the industrial market, if you know the deal that Microsoft did. So those are the kinds of investments that we're making, and we're just accelerating those investments because we're seeing the opportunity that those might play out here over time.

As I mentioned on the answer with Jeff, these are longer-term deals, so they aren't necessarily that's going to give us a lot of revenue next year. But most of those investments we've already made, so it's really about accelerating the investments for the years to come..

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

Yes. We had a very good SaaS quarter, so that's in the prepared remarks. Across the board, every one of our SaaS businesses grew double digit -- in total, grew double digits, but I think every one of them grew their SaaS business at double digits. So very good position in which to do that and we expect to grow SaaS this year double digits.

So we want to continue to invest in those businesses. You also heard several examples in the prepared remarks of how FBS is really generating value in those business today, I think, as well. So I think that's how we feel like the performing bookings were good as well. So we feel like we're in a very good position.

Relative to software, in general, we're starting to see some of the remote -- some of the on-site services start to come back at a more accelerated rate, although still a long way to go. But as we said in the - that Accruent actually grew all up in the quarter. I think that's a good showing, if you will. Gordian, flat.

Both of those on the back of service getting better, still not great, but we like the trend. So I think overall, we're in a very good position across the board. And we're -- some of the investments we just talked about are our investments in those businesses as well..

Fantastic. Thank you so much..

Thanks, Andrew..

Thanks, Andrew..

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

Hi, guys. Hope both well. I want to come back to the temporary costs coming through in Q2 and really the sequential impact because, obviously, margins stepping down as folks have already talked about. If I add the $60 million year-over-year impact to SG&A from last year, it looks like your point to SG&A about 4 75 for 2Q.

So the step up Q1, Q2 has been in the range of about 45 to 50.

Is that even close to being right?.

Yes. I think that sounds approximately right. Keep in mind that in a normal year, there's a step up between Q1 and Q2. So it's not all -- some of that's normal seasonality that you see here. As you can imagine, some spending and -- gets off to a slower start in January than you are in April.

And then I also talked about how, as we open up, there's going to be more activity as you move through the year..

And I don't think we've talked about supply chain in a lot of depth here.

Is that having any impact whatsoever in terms of your planning for Q2 or Q3?.

Nigel, we -- I think, first -- I think the quick answer to that is it's in our guide. So we -- we've done a nice job. I think, historically, it's such an important part of FBS over time has been a set of supply chain tools to mitigate the kinds of issues that are out there today. They're well documented, so I won't get into them.

But I think there's two -- they come in two ways, though. They come in the form of supplier issues and then the other is global logistics challenges. We've mitigated those challenges for the most part in the quarter and have continued to mitigate those and have mitigation strategies. So I think on the backs of that, we feel good about the guide.

We obviously beat revenue in the quarter despite having those challenges, what I think is a great demonstration of how well we mitigated those. We continue to believe we can mitigate those through in the quarters to come. And I don't think they necessarily go away.

So I think an old -- this is from an old supply chain guy from 30 years ago, but I think at the end of the day, I think they'll be there for the remainder of the year, but we feel good about the work we're doing. Daily management, Chuck and I review those things every month in our operating review.

So we're on top of them, and we're continuing to watch them. But I think at the end of the day, we feel good about our mitigation strategies..

Thanks, Jim. I’ll leave it there. Thanks..

Yes. Thanks, Nigel..

And your next question comes from the line of Andy Kaplowitz with Citigroup..

Good afternoon, guys. Jim, maybe you could give us an update on your expectations by region for 2021 in the sense that China, as you said, had really strong growth here, continuing to look better than North America.

But how much of those results are just easier comparisons given the progress of COVID? And then are you seeing a material inflection at this point in sales rates in North America? Are there any portions of the world that worry you in terms of COVID hotspots?.

Yes. I think China will be probably our best grower of the year. You're right, comps did have something to do with it in the quarter, but we were much better even on a two-year stack. So we feel good about the work we've done in China to build the businesses there, and we think that's -- we'll have a good growth year there.

I think Western Europe was -- and North America will continue. North America -- Western Europe was obviously pretty good. We like the trends in POS that we talked about.

And a number of our newer businesses, like Intelex and Accruent have had good European growth because they really didn't have a European business, and we really invested in that growth.

So I think a lot of what you're hearing in the Western Europe are good numbers as well as really our new investments in some of the acquisitions that didn't have as much of a presence in Europe. So I think -- so I think Western Europe, hard to tell, given kind of the hotspots that are going on right now.

But we still think we'll have a pretty good year in Western Europe. I think North America will continue to get better. It will broach our best geography probably. We saw -- we started off a little slower in North America in January, but we progressively got a little bit better each month.

Some of that, I think, had to do with some of the COVID issues that existed. You heard us talk about the overall COVID number at 91. In the U.S., it was back to the 80s in January in terms of elective procedures. So that got back in the 90, over 90 in March.

So I think when we look at North America, a lot of conditions for growth really continued to progress through the quarter. We would expect North America to continue to get better for the year. And then relative to the hotspots, we don't have a lot of revenue in India or Latin America.

But those are certainly going to be big challenges for the world for any global business, I think, particularly in the days and weeks and months to come. We don't have a lot of exposure there today. And so we'll continue to do what we can to mitigate, but I don't anticipate that has much impact to our overall business through the year..

And Jim, I wanted to focus for a second on Intelex in the sense that you -- it seems like you've built this pretty big EHS platform, and Intelex has continued to have very strong growth. So I would imagine it can actually accelerate further given stimulus funding, greater focus on sustainability, and you're working on it with FBS.

But maybe you could talk about the growth potential of this platform going forward..

Yes. I mean, I think we've had -- we love the team. We started and really our big investment in EHS started with the work we did at ISC and our overall EHS effort now with the SAFER Systems acquisition, the ehsAI acquisition now.

As you say, we've really built out a portfolio that really can take advantage of the secular drivers around sustainability and, quite frankly, worker safety. And so we feel good about that. I think the Intelex platform itself adds tremendous value.

As I mentioned in the prepared remarks, we use it for our own sustainability assessment, and it's a wonderful tool to help us understand how to think about goal setting and how to drive action to really improve, not just report on sustainability, but more importantly, take action. So I think we feel very good about the platform.

We think there's investment opportunities in the future that we can make. So I think relative specifically to your question, Intelex has been a double-digit grower for us. It's mostly been in the teens.

I think as we continue to build on it, really, as we hit the accelerator with some of the machine learning opportunities that we've really got with ehsAI, we'll start to see some of those things in the back half of the year. I think we can continue to move that growth rate. I'd like to think we can go beyond that.

But I think in the near-term, we certainly think it's a double-digit grower for sure..

Appreciate the color, Jim..

Thanks, Andy..

Your next question is from the line of Deane Dray with RBC Capital Markets..

Hi, Deane..

Thank you. Good afternoon..

Good afternoon..

Hey, I want to circle back on the implications of getting more site access.

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

Yes. Look, I think site access comes in the way of two -- it comes in the form of two ways. Number one, I think on our -- anywhere where we have service businesses, but let's call it, non-healthcare. We certainly -- we've gone remote capability, but it takes longer to turn customers on and software as an example.

And so I think there is some pent-up demand. But I think, to be honest with you, Deane, we've had such little access here over the last several months that it's hard to predict how quickly it will open up, particularly when you think about that on a global basis.

So we certainly believe it's going to continue to improve, but I wouldn't say necessarily that we think it's going to all be better by the end of the year. We just don't have enough visibility yet to -- I think most customers aren't really opening up here until maybe the third quarter. So I think it's still a little early to predict it.

But I think the predictions that we have are really based on some of the trends we've seen, which we feel good about. But I think they could get better if we could see vaccinations get more prolific here and start to see more opening up of businesses.

So that's on -- that's everywhere from Gordian and Accruent to eMaint to those -- even like our Tektronix Calibration business, which some of it is on site. On the healthcare side, we certainly think that we can continue to have access. We're in hospitals today doing service for the most part, but everything is a little slower.

We mentioned in the Censis prepared remarks, though, that we are starting to see purchasing decisions free up a little faster. And again, that's all built into our guide as well that we think we continue to get better.

But I think at the end of the day, it is because pockets in the United States plus the nations, it's really too hard -- it's still a little difficult to necessarily predict exactly how that opens up in a sense of any of the pent-up demand, if you will..

Great. And then just for a follow-up. I think I heard in Chuck's prepared remarks that there was 90 basis points of price realization.

Was that for the company as a whole? Was it a particular product or business? And then just broadly, how are you thinking about price at this stage? I mean, every conference call we're hearing, people are putting through pricing mostly to combat material cost inflation, which you said is not that big of an issue for you, but is there – is this a time to wield pricing power?.

So Dean, this is Chuck. The 90 basis points, you heard that correctly for Q1. That was across the company, but fairly uniformly. I mean, there wasn't -- it wasn't 1 company and not a bunch of others. I think that price cost, we've been able to stay ahead of.

But we -- it's something we look at every month, and we're going to continue -- it's an evolving situation. We'll continue to look at that and expect to -- one of the levers, it's not the only lever, but it's one of the levers at this point is looking to continue to push on price in this environment..

Great. Thank you..

Thanks, Steve..

Your next question is from the line of Josh Pokrzywinski with Morgan Stanley..

Hey, Josh..

Hi. Good evening, guys. Just a follow-up on Deane's question on stores that's reopening. I noticed you kind of abandoned the four buckets of kind of COVID sensitivity.

But if you think about what's sort of coming online now versus what's been kind of normalized for a while, how do we think about mix within that? Is that positive mix? Kind of fleet average? How does that evolve?.

Yes. I would say mix is probably positive, probably the short answer, Josh. When you think about our -- for the most part, our software service businesses are pretty profitable. So they might be a little bit less than SaaS, but on balance, they're still pretty good. And then the other part is consumables.

And our consumable revenue is, as we said in the first quarter, with all – with the tremendous success that we had on the equipment side, we had -- we didn't have -- and we didn't have as much on the consumable side. As consumables come back, that's a margin, as Chuck articulated a few questions ago, that's a good thing for AHS.

So I think on balance, if I were to take the corporation as a whole, getting on site is probably a margin enhancer. And quite frankly, on the software side, we need to do the installation to get to the SaaS software. So in some respects, if it can accelerate the move to software, then it's probably almost all margin upside..

Got it. That's helpful. And then I guess, just in terms of the second half outlook, we pencil out kind of 4%, I think, implied organic growth. That sounds like sort of through the cycle number rather than still kind of in the recovery mode.

Is that sort of assuming that there's some kind of stealth tough comps from things that got pent-up in 2Q and release? Or is that really what this portfolio, given all the advancement changes you made over the past five years, should be growing at, I don't know, still a mid-innings version of the recovery?.

Josh, this is Chuck. I'll try the first part of that. In the second half, keep in mind, when you look at our first half, second half, we were down 11% in the first half last year and almost flat in the second half last year. So we have, in the second half, I think we said in the prepared remarks, 5% to 7% core growth. So we think that's an acceleration.

But the math you're doing about how the portfolio is going to perform, I think -- we're not saying we're all the way back or that we're into the -- a massive recovery. We're just saying we see continued sequential improvement as we go through the year..

Got it. Okay. Thanks, guys..

Thanks, Josh..

Your next question is from the line of John Walsh with Credit Suisse..

Hi, John..

Hi there. I guess maybe following up on that question a little bit, thinking about the Fluke portfolio. If I remember a couple of analyst days ago, you were very excited about not kind of just selling the tool, but also selling some recurring data solutions associated with it.

Can you talk about if customers are taking that up as they're reopening their facilities, is that an opportunity to drive that kind of penetration higher?.

Yes, John. Number one, we -- I think we've seen some of that growth and, quite frankly, resiliency in the eMaint sales that we've had and some of the work we've done on Fluke Connect. I mentioned in the prepared remarks a new line of clamp meters that comes out that's connected.

So we still continue to launch connected devices, which I think gives us, even in a tough environment, gives us market share opportunity. And we do think that we're still in the very early stages of customers really collecting that data in order to put it to use.

So we've got some -- as you probably remember, the PRUFTECHNIK acquisition was to give us more vibration capability, vibration data analysis capability, so we can provide better answers to customers relative to their vibration -- how vibration works in predictive and preventive maintenance.

So very early days, but we are starting to see some adoption of that. And I would suspect, as we start to get into an environment where manufacturing gets in better shape, we'll start to see acceleration of that.

And what's great is we're building a platform for that with eMaint, and we've been building that business very well over the last couple of years, while customers still are adopting some of these other solutions..

Great. And then maybe just as a follow-on.

You brought up the Analyst Day you'll be hosting, should we expect kind of a deeper dive into the businesses? Or should we expect some kind of potential longer-term targets being put out and/or updated?.

Yes. I think that you could probably -- you should expect both of those things. We certainly want to continue to -- we've resegmented here, so we're going to want to give more visibility and greater understanding of the great things that we think we're doing with the portfolio. And so you're going to see some of that, among other things.

And then if you remember two years ago in terms of forward looks, we gave some forward-look metrics that I think that stood up pretty well. And you can expect for us to do something similar to that. Don't want to give away everything. I want to make sure that we leave something for the Investor Day. But those things are going to be there..

Great. Thank you very much..

Thanks, John..

Your next question is from the line of Scott Graham with Fortive..

Hey, good afternoon. I guess I work at Fortive now. So the -- I think that's what she said, identifying [Multiple Speakers] my firm. Thank you. I appreciate it. Very nice trend. I have just two questions for you. The OMX numbers were really strong this quarter, up 200 basis points each segment.

Chuck, can you unbundle that for us a little bit? I know you said price cost is positive, but what are some of the other things that were driving that number?.

Well, strong growth also -- is something that, as we talked about -- and it's across all our segments. So when we have growth, we have really strong gross margins, and that's probably, first and foremost, the thing that I'd point to. I think that ASP is really starting to hit their stride here with -- as they come off the TSAs, that gave us a lift.

But across the board, growth and price, it leads to a good outcome here..

Is that a number that you think you can sustain for the rest of the year?.

I think -- well, with over 200 basis points of OMX, yes, remember, we're coming in -- we're looking at a pandemic last year. I wouldn't want to get thinking that's what we're going to do every year. But I do think that as we go through the year, 100 to 200 basis points of OMX for the year is something that's well within our grasp..

That's great. Thanks. And then the other question was simply from back when you bought Gordian and then you bought Accruent, it just seemed like a really large field for M&A. And whether with site access or otherwise, just look like you need a little bit of time to operate the businesses and what have you.

Is now a time -- with both of these businesses are looking really much better in each of the last couple of quarters, is this a time now where we can start to look for you guys to do something more in that area -- those areas?.

Yes. Scott, it's Jim. I think, number one, we've never stopped looking. So I would say both businesses, Gordian has been just a benchmark for FBS in a business and in an acquisition in a short period of time. The team there has done an outstanding job. Accruent has also done a very good job.

And I think you're -- from a standpoint of positions, we certainly had to get through last year given some of the things that were going on in the business and just make -- COVID was not easy to try to get on site and do some of those things. But we're proud of where we are today.

And I think we're certainly always active in looking for things that can accelerate. I think on the Gordian side, we have a very under-penetrated market. Real opportunity to continue to really live -- do that, accelerate our data. We have a great data business there. Globalizing Gordian, great opportunities.

It's almost exclusively a North American business. So on the current side, there's a breadth of products within occurrence of a broader portfolio given the way it was built by private equity.

So a variety of different areas from CMMS to facilities management to asset management to -- as people come back to the workplace, tools and technologies to help companies bring people back into the office and do that safely. So yes, I think there's a wide range of opportunities.

Those are very good secular and popular -- great secular drivers and popular secular drivers. So certainly, we'll -- there's plenty of opportunities for us to do things. We'll be disciplined in that approach to do things that we really think can leverage the growth opportunities futuristically and really accelerate strategy.

And I think those businesses are in a good position to do that in -- right now..

Well, thank you. Appreciate it..

Thanks, Scott..

Your next question is from the line of Amit Daryanani with Evercore..

Good afternoon. Thanks for taking my question. I guess, love to just get your perspective on two dynamics up there. One is just for the proposed infrastructure listing that's build that the SMEs proposed.

Could you just maybe talk about what sort of impact that could potentially have for your company? And specifically, I guess, where do you think those benefits would stack up? And then secondly, related to this, there's also proposed tax increase from corporations.

How do you think that plays out to you folks?.

Yes. I think -- I mean, I think on the infrastructure side, certainly an infrastructure build that puts money into facilities and what we call general infrastructure is going to help Fluke and it's certainly going to help our Accruent and Gordian business for sure. Certainly, probably, as we think about our Sensing businesses as well.

So a good -- as we think about investments in EV and AV, Tektronix has got a good automotive offering that will help. So we certainly think that there are opportunities. How quickly that occurs? I think is still a question as we think about some of -- how the stimulus gets spent. As we often talk about the term shovel-ready and how shovel-ready.

But certainly, a good portion of the portfolio is exposed to some of those opportunities.

Nearer term, to the extent that these investments go into healthcare and helping hospitals deal with some of the challenges they've had, that certainly is probably a near-term opportunity for us as we continue to sell into hospitals through all of our AHS businesses.

So I think in that sense, lots of opportunity for us, but obviously, it's still very early days. We'll look forward to seeing some of those things play out. But I -- and obviously, get into law and then get spent. So still early days, but we do feel the portfolio is well exposed to some of that additional spending.

And I'll let Chuck comment on the tax part..

On taxes, at this point, we don't expect any changes for this year, although there's still months to go in the year, but we don't expect that to happen. But we note -- we note the direction that everything is going and that there would likely be upward pressure.

But we're going to need to the details of what really gets agreed upon because that's what really matter here. But given the global nature of our business and how we're set up, I'd like -- what I'd like to believe is that we're going to maintain a relative position to our tax rate relative to our peers.

So there'll be upward pressure, but I still think we'll be advantaged given our structure..

Perfect. Thank you..

Thank you..

Our final question comes from the line of Joe Giordano with Cowen..

Hey, Joe..

Hey. Good evening, guys. You might have touched on this when you were talking about Accruent earlier, I just went out of my office for a second, so my apologies. But I'm just curious like you bought -- you really stepped up your investment in kind of these SaaS platforms and these software platforms a couple of years ago.

We've had some time with them now.

Like as we're looking at the balance sheet ready to deploy, what have you learned from how to invest into those types of businesses? Like where do you think you did really well, maybe you've learned over the last three years there?.

Well, yes. I think we -- in some of the prepared remarks, I think we tried to give some examples of how FBS is really applying to some of the businesses. We'll give a deeper view of that as we get to the Investor Day.

But I think, Joe, for sure, what we've learned is the FBS tools were, I would say, somewhat tuned to software when we bought the businesses, but what we've really adapted and really built now is a set of tools that is very specific to helping businesses drive commercial activity, drive digital engagement and improve net retention, net dollar retention, which is such an important metric within software businesses.

So I think not -- we always had the tools for software R&D development. So I think those tools we could put into the business, but I think our commercial tools have just been built exceptionally well now to accelerate the capability of the organizations that come into Fortive. So that's -- I think that's what we've learned.

I think we also understand what good looks like. Obviously, the multiples that we paid at the time, people looked at it. But I think as we now know that investments in things like property, tech and other places, EHS are -- and today, look like bargains from what we -- what we paid a few years ago compared to multiples now.

So I think we were advanced in understanding that. But we also understand what good looks like at a deeper level, in terms of customer engagement, the kinds of metrics that you want to understand when you look at and do due diligence in the business.

And I think we've just then continued to improve our due diligence capability to really understand what good looks like, and I think that really helps long term in terms of getting financial returns. So I think a lot of learning, for sure, I wouldn't, any way, shape or form, say anything about that.

But -- and I think that leads to us feeling very good about our ability to get to create value and to really get good returns from our investments as we move forward. And I would add that -- try to also say is that we're not just talking about spending our capital here in the future around software.

We continue to look for hardware and service opportunities as well where we think we can add value and accelerate our strategy..

That's really helpful color. One quick follow-up, but not really a follow-up, totally different, I guess.

But when I think about ASP, how do you characterize kind of like the roll off of COVID-specific opportunities that you guys picked up during this time like -- as like a negative offset just obviously picking up your regular business?.

Well, I think the question is -- it's hard to think about pent-up demand when you start to think about surgical centers and ORs doubling the number of surgeries in a particular month, that feels a little scary.

So I think at the end of the day, we think that one of the things that I think was really stellar in the quarter was the fact that despite COVID being at 91%, and COVID, quite frankly, relative to pre-COVID levels of elective procedures, it was a decel from Q4, and yet our consumables was flat in the quarter.

And that really is about our growth in installed base. So Chuck used the word hitting our stride. I think we've done some really good commercial work to build the installed base, so that our consumables and service revenue will accelerate when we come back and get above COVID rates -- so COVID, pre-COVID rates – so – on elective procedures.

So we can't predict that that -- particularly on a global basis, where that's going to be here in the coming months, but we've been certainly building the infrastructure, building the customer base to be able to take advantage of that opportunity when things normalize within hospitals.

And we really hope that, that happens quickly for all -- for reasons well beyond our financial success, but much more about the communities in which we serve and the hospitals and customers in which we work with every day. So I think at the end of the day, we feel very good about where that business is positioned.

And we do think there'll be opportunities. And as we mentioned in the prepared remarks, along with Censis, we're seeing -- we're starting to see some things open up, but I think we're still a long way from getting to pre-COVID levels on a global basis..

Thanks, guys..

Thank you..

Thank you. That concludes our Q&A session. I will now turn the call back over for closing remarks..

Thanks, Pasha, and thank you, everyone, for today, and thanks for taking the time to spend with us. We know this is a busy week and a busy season for all of you. I think as you heard Chuck and I talk through the quarter in terms of the prepared remarks as well as some of the Q&A, we feel we're incredibly proud of the work that went into Q1.

We feel like we're incredibly well positioned from an organic perspective. The work we did in 2020 to really stabilize and have -- what we did in the first -- second half of last year is just really showing up in the first quarter and showing up in the remaining part of the year.

We're excited about having the opportunity to share with you all of what we see every day more deeply with our people and our team as well as our strategies at our Investor Day in May. We look forward to seeing you then. We hope you're all safe and healthy, and we look forward to answering any questions and follow up.

Griffin and Chuck and Ross are available for follow-ups as you see fit. Have a great evening, have a great -- and have great rest of the earnings season. Thank you..

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect..