Fortive Corporation (FTV) Q2 2021 Earnings Report, Transcript and Summary

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 Second 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 prior 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. We were very pleased with our second quarter results. As you can see on Slide 3, our performance once again highlighted the benefits of our strategy to provide differentiated connected workflow solutions for our customers, creating a portfolio with enhanced resilience and long-term earnings power. During the quarter, we capitalized on accelerating point of sale trends across a number of our larger businesses, continued growth from our software offerings and improving conditions across our key end markets. Against this backdrop, we delivered core revenue growth and adjusted operating profit margins that exceeded the high end of our guidance driving exceptional earnings growth and free cash flow conversion. As we highlighted at our Investor Day on May 19, we are building on the foundation of our advantaged hardware positions and expanding our software capabilities to address our customers' critical workflow needs and accelerate their ongoing digital transformation. In the second quarter, our SaaS offerings delivered low double-digit growth and we also drove significant improvement across our professional services offerings. We continue to see strong momentum at EMA including increasing demand from its expansion into the food and beverage, pharmaceutical and healthcare verticals. Gordian and Accruent both had strong quarters as they executed on opportunities provided by increasing demand from facility owner operators and improvements in access to customer sites. Both companies are well positioned to capitalize as customers focused on post COVID return to work challenges and digital transformation priorities. Censis, also performed very well in the quarter as access to hospital customers improved executing on strong demand for its SaaS offerings among existing and new independent delivery network customers. Looking across the portfolio, we continue to be excited about our expanding offering of EHR workflow solutions, which are well positioned to meet the significant long-term sustainability requirements of our customers. ISC and Intelex performed well, capitalizing on strong broad based growth across end markets in key geographies. At the same time, we are excited with the early progress at EH [ph] FAI where the Company closed its largest deal to date and its first joint marketing campaign with Intelex and generated strong growth in the sales pipeline. Throughout the second quarter, we continue to apply the Fortive Business System across the portfolio to drive innovation, growth and share gains. Deployment of our lean portfolio management tool set, which significantly accelerates the efficiency and impact of R&D investments achieved a greater than 40% increase in our on-time program delivery, the application of FBS and digital analytics in search, optimization generated 25% growth in digital traffic from pre-pandemic levels across the portfolio. Meanwhile, the use of FBS growth tools has accelerate innovation at Fluke Health Solutions. Over the past 18 months and continues to drive excellent top line performance. We have created good early momentum in our partnership with Pioneer Square labs, including the recent spin in of TeamSense a provider of innovative workflow solutions to streamline communications with hourly workers. This marks the first business incubated Pioneer Square labs to be integrated into the Fortive portfolio while still very early, we are pleased with the progress of our TeamSense and are excited to develop additional technologies that accelerates Safety and Productivity solutions for customers within our core markets. In early July, we announced the acquisition of service channel. The transaction brings a differentiated high growth software business with an integrated service provider network and significant proprietary data assets to the portfolio, enhancing our ability to meet the evolving needs of facility owners around the world. Following the expected closing of the acquisition in Q3, we will have significant balance sheet capacity supported by our strong and resilient free cash flow generation. As we highlighted at our Investor Day we see substantial runway across our $40 billion served market for disciplined capital allocation to accelerate our strategy. Turning to a quick summary of the results in the quarter on Slide 4, we generated, year-over-year total revenue growth of 26.7% as revenue strength exceeded the high end of our guidance. Adjusted operating margin was 22.2%, while adjusted earnings per share was $0.66, representing a year-over-year increase of 53.5% given the outperformance for both top line and our adjusted operating margin, we delivered $282 million of free cash flow, which represented 118% conversion of adjusted net income. On Slide 5, we take a closer look at the Intelligent Operating Solutions segment. IOS posted total revenue growth of 31.2% in the second quarter. This included mid-20% core growth in North America, low 30% core quarter growth in Western Europe and low 20% core growth in China. Fluke core revenue increased in the mid-30% range. Fluke also grew by mid-single digits on a sequential basis as a continue to see robust demand across its businesses, highlighted by growth at Fluke Industrial. Fluke Industrial generated share gains across a range of key channel partners and retail counts as point of sale accelerated through the quarter. Fluke’s broader II900 acoustic imaging product line also continues to perform very well as revenue approximately doubled in the quarter and strong growth across both Western Europe in North America. Fluke Networks also performed well driven by the recent launch of its link IQ product line, which continues to exceed initial expectations tied to office reopenings and network modifications. The Fluke reliability, our efforts to accelerate performance improved of PRUFTECHNIK are gaining traction as we took advantage of increasing demand for alignment and other services. While EMAY [ph] also delivered another strong quarter. With the accelerated pace of orders at Fluke, we did see some backlog build due to supply chain responsiveness. Industrial Scientific increased by Mid-teens driven by strong execution and instruments and rental as demand from oil and gas markets rebounded and the business continued its expansion into new end markets. The company's INET offering remained resilient increasing by mid-single digits with net retention solidly above 100%. Intelex grew by high single digits in Q2 reporting a record revenue quarter. Intelex continues to leverage FBS and has driven improvements in lead generation and funnel conversion. Also in the second quarter Intelex closed multiple deals for its enhanced ESG platform to help customers launch scale and optimize their sustainability programs and meet increasing demand for transparency on a growing set of critical non-financial reporting metrics. Accruent grew by mid-single digits in the second quarter with low double-digit growth in its SaaS business. Accruent generated strong sales and bookings for its Meridian solution for engineering document management and its maintenance connection CMS offering. The business also capitalize on the strong demand for its EMS, Event workspace and resource scheduling offerings as Company's plan and execute their return to work strategies. The company continues to generate new customer logo wins and improving growth in recurring bookings. Importantly Accruent also delivered improved performance and its professional service business which generated mid-single-digit growth as customer site access continue to improve. Gordian increased by Mid-teens driven by low 20% growth in the procurement business and high-teens growth in estimating. Gordian generated a record month for procurement revenue in June with accelerating timelines for key projects across a number of large customers. This included increased project spend by the New York City Department of Education and school construction authority. Moving to Slide 6, Precision Technologies segment posted a total revenue increase of 25.1% in the second quarter. This included low 20% growth in North America, mid 20% growth in Western Europe and mid-teens growth in China. Tektronix increased by approximately 30% with another quarter of strong demand across its product businesses including accelerating point of sale trends in each of its major regions. Both mainstream and performance of scopes had a strong quarter with high demand for semiconductor industrial manufacturing and communications applications. Tektronix service business again showed its stability and resilience increasing by low teens. Tektronix continues to benefit from the accelerated focus on driving innovation Q2 new product introductions performing very well, including its family of automated test solutions for high-speed data transfer. In the second quarter Tektronix held 6 regional innovation form events which stimulated the adoption of it's TechSo [ph] platform resulting accelerated funnel creation for the company's broader hardware and software offerings. Sensing Technologies increased by low teens in the second quarter with growth driven by continuation of the broad market recovery. Sensing performed very well in China, with another quarter of mid-teens growth driven by demand for factory automation solutions. Elsewhere Anderson Negele continues to make progress with its approval of its paperless process recorder IoT solution aimed at the dairy industry with broader commercial rollout expected in the second half of the year. Sensing also continues to drive market share gains across elsewhere across the portfolio, particularly cetera led by its differentiated Critical Environments solution and strong demand across its HVAC customers. PacSci EMC grew in the low 20% range with the business seen some alleviation of the COVID related shutdowns and approval delays that impacted shipments in previous quarters. PacSci EMC continue to see good growth in the commercial space market with the resumption of launches by OneWeb providing recurring revenue for smart controllers and initiators. Also on July 20, we were excited to watch the company's mission critical technology ensures safe and reliable separation of Blue Origin's New Shepard capsule from its booster during its maiden voyage. Moving to Advanced Healthcare Solutions on Slide 7. Total revenue increased 21.8% including 11% core growth. This included high single-digit core growth in each of North America, Western Europe and China markets. ASP grew by high single digits in the second quarter, led by strong growth in Western Europe and China. ASP also realized improved growth in North America, highlighted by high single-digit growth in the US. Overall ASP consumable revenue high teens as the rate of elective procedures across most geographies continue to improve. Our elective procedure volumes increased on a year-over-year basis. Q2 volumes came in a bit lower than expected at approximately 93% of pre-COVID levels which was consistent with the Q1 exit rate. ASP also continue to expand its global installed base of terminal sterilization capital equipment which grew at a 3.5% annualized rate in Q2, we expect to continue to installed base expansion to provide an additional tailwind to consumable revenue as procedure volumes normalize going forward. Sensus increased in the mid-20% range with mid-teens growth in sense attract SaaS offering as well as strong growth in its professional services business. Many hospital customers are now allowing access to vendors, which resulted in a significant increase in activity in the second quarter, particularly with integrated delivery networks. Fluke Health Solutions increased by low-double digits, even at that lapped the sizable COVID related revenue tailwind in the prior year, FHS the high-teens growth from its optimized in 1QA, software solutions, which benefited from accelerated growth investments over the last 18 months. With that, I'll pass it over to Chuck, who will take you through some additional details on our margins, free cash flow and balance sheet.

Thanks, Jim, and good afternoon everyone. We delivered solid margin performance in Q2, driven primarily by strong fall through on our revenue outperformance. Adjusted gross margins were 57.3%, up 100 basis points on a year-over-year basis. This increase reflected 130 basis points of price realization as we delivered another quarter of solid performance, managing price cost across the portfolio. Q2 adjusted operating profit margin was 22.2%, a 170 basis points above the high end of our guidance also driven by stronger volume and high associated fall through. We reported 240 basis points of core operating margin expansion, including 570 basis points of core OMX at the IOS segment. Both Fluke and Tektronix delivered strong core operating margin expansion through disciplined outpatient of FBS to drive sales conversion as demand accelerated across their end markets. At the same time strong contributions from some of the acquired pieces of our portfolio including IOC, Gordian, Censis and Landauer also contributed to the margin outperformance across the segments. On Slide 8, you can see that in the second quarter, we generated $282 million of free cash flow, representing a 118% conversion of adjusted net income. Free cash flow over the trailing 12 months increased 15% to $943 million. Today, our net leverage is approximately 1 times and we expect net leverage to be around 1.2 times at year-end including the funding of the acquisition of service channel but excluding any additional M&A. This gives us significant capacity to continue to deploy towards our key capital allocation priorities. Turning now to the guidance on Slide 9, given the strong performance in the second quarter and the improvement in our outlook for the rest of the year we are once again raising our 2021 guidance. For the full year we now expect adjusted diluted net earnings per share to be $2.65 to $2.75, representing a year-over-year growth of 27% to 32% on a continuing operations basis. This assumes total revenue growth of 13.5% to 15%, adjusted operating profit margins of 22.5% to 23.5% and an effective tax rate of 14% to 14.5%. It also assumes total revenue growth of 8.5% to 11% in the second half of 2021. We continue to expect free cash flow conversion to be approximately 105% of adjusted net income for the full year. We are initiating third quarter adjusted diluted net earnings per share guidance of $0.62 to $0.66, representing year-over-year growth of 24% to 32%. This assumes total revenue growth of 11.5% to 14.5%, adjusted operating profit margin of 21.5% to 22.5% and an effective tax rate of 14% to 14.5%. For the third quarter we expect free cash flow conversion to be approximately 105% of adjusted net income. With that I'll pass it back to Jim for some closing remarks.

Thanks, Chuck. Before we move to questions, I want to provide a quick update on our sustainability and inclusion and diversity efforts, which is shown on Slide 11. During our Investor Day program on May 19, we introduced an accelerated greenhouse gas reduction goal. It's now targets a reduction of 50% and greenhouse gas intensity for Scope 1 and Scope 2 emissions by 2025 relative to our 2017 base here. During the second quarter, we also issued our 2021 sustainability report, which included Fortive second annual GRI Index, first annual SaaS be index in the 2017-2020 greenhouse gas emissions profile. During the quarter we also became a signatory to the UN Global Compact committed to alignment with the task force and climate related financial disclosure by 2022 and announced our 2025 aspirational inclusion diversity goals. We continue to make significant strides in our highly committed to accelerating our sustainability and inclusion and diversity progress in the coming years. I'd also like to take the opportunity to thank our team and all of our stakeholders for your support over the first five years of our journey as an independent company. Across all three of our strategic segments, we are expanding on strong established positions with offerings will address the critical work needs of our customers in markets with attractive long-term growth drivers, our strong earnings and free cash flow performance in the first half of this year clearly demonstrated the benefits of the strategic focus and the momentum building in our portfolio. As we look ahead, we will continue to invest and expanding the capabilities of the Fortive Business System as we accelerate operating improvements and innovation to increase the value we offer to our customers. With strong free cash flow and significant M&A capacity, we are well positioned to pursue the key organic and inorganic growth initiatives that will drive consistent double-digit earnings and free cash flow growth in the years to come. 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] Our first question is from the line of Steve Tusa with JPMorgan.

Good afternoon. Hey guys, how are you doing?

Good.

Just a question on the AHS margin. I think the fourth quarter, just backing into kind of the fourth quarter guidance shows margins that are kind of ended like beyond the mid '20s into kind of even a high '20s. And then maybe to some rounding going on there, but at kind of the high end of the range what's implied. Am I looking at that the right way and what's kind of the source of that strength itself?

Thanks, Steve. That's a good question and I think you're calculating it right above the mid '20s pushing 26% to 27% I think is the right zone. What's pushing is that as we move through time, we're starting to see we'll see acceleration in our revenue as elective surgeries get better, but also seasonally, there is more revenue in the fourth quarter and you put those two things together and that's what really drives the health margins at the segment level up.

So is that any read into next year, or is it like, highly unusual seasonality like the fourth quarter is just a way stronger than the rest. I mean, is there a reason why that seasonality is so acute or can we think about that as maybe a bit of a jumping-off point at some stage.

I don't think from just where the OP is going to be is that jumping-off point, but I do think in terms of every year. You should expect the fourth quarter to be stronger and we have the back half of the year going up by a couple of hundred basis points in each of the quarters and I think, I don't think that there anything anomalous about this Q4 going forward, but I wouldn't take that multiplied by four. I think we're going to go back to a couple of hundred basis points of growth in Q1 and Q2 on what we posted this year.

Steve, I would just add that just add that, like last year, we sort of have that 25% is an exit rate not saying it was going to be the rate for every quarter, but that would be a good jumping-off point and which to take margins to the next level. I think you're seeing that the same thing, I think it's, it's a combination of the FBS work. The full year effect of the FBS work, the full full-year effect of all the work that we're doing to continue to integrate the business, drive margins and as Chuck said consumable revenue coming up to as well. So the businesses is in a good trajectory right now overall and obviously a big part of that is ASP.

Right, that makes a lot of sense. And just one follow-up on the margin for the total company. Did you ultimately have some of that cost come back, I think we were thinking of it didn't kind of the $75 million range like temporary costs and then some of those investments that hit this quarter year-over-year. I mean, did you guys ultimately see that stuff come through.

We did there is two things going on for Q2, there was the year-over-year, we had $60 million of snapback cost. We did that and then plus we did another $15 million investments in that did show up in Q2 for sure.

Yes. So that's like a core incremental on EBIT a of like, I don't know I can back into something like 65% to 70% kind of core incremental. I mean is that the right kind of math?

Well, it is. So the straight year over year incremental for Q2 is 31% stronger than the mid '20s we talked about but yes with our incremental gross margins are going to be in that 65% range. So, yes, that is the right math. I wouldn't expect that flow through at that every quarter in the second half, we would expect, as we've been talking about 40% rating for this, the second half, we have going forward.

Yes. Right. Got you.

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

Hey, thanks, good afternoon, everyone. Hey Jim or Chuck could you follow up a little bit on the, TOS comments and then know if you have to kind of break it down Fluke and a couple of the businesses. But of the sales, we're observing here in the quarter trailing or outpacing POS and I just wonder if you have any color on what's going on with channel inventories. As for the channels and anyway caught up or this is a pretty good indication of what demand is?

We saw one of the things Jeff as obviously with the beat in revenue and the strength that we saw particularly they accelerated through the quarter point of sales an important target is you're asking. You're exactly right, we saw good POS to continue to improve through the quarter. I think it will continue to improve. Obviously, little bit of an easier comp in the quarter by both at Fluke and at Tek we saw as an example in POS in the Americas, we saw in the 30% range, so better than our even in our sales total sales in some cases. So very good position, we're also obviously making sure given supply chain discussions around the world, we're making sure that inventories aren't, not that we're not seeing accelerated buying, we're doing, you were using a new metric where we not only look at point of sale, but we also look at orders on hand to sort of understand are we seeing a leading situation or not. And we're certainly seeing things continue to be good. So hence, we took the revenue guide up both Fluke and Tek are performing well and I think we're in a good place and we're certainly it prudently the US and Europe will be the best data. We're certainly in a good place from an inventory position. We don't feel like we're in any situation building excess of inventory.

And I wonder if you could just take a moment on in particular in discuss, what's going on in some of the new verticals you are trying to pursue. I think that's going to be an important part of making sure Tek puts up the kind of growth you want to see over time, not just in the cyclical rebound. So where are we have on that push some of these new verticals, maybe some color on what percent of tech sales these are now and how you see those progressing?

I think because we're feeling as we said in the first quarter commentary and again, this time we are seeing automotive data centers is two particular verticals that have continue to increase. I think on a percentage basis, they are about the same, simply because the revenue. The total revenues coming up and obviously in places like Keithley we still continue to see revenue in semiconductor. So I don't think we've necessarily move the needle as a percent of sales, but on a total basis in terms of total dollars we're certainly up. And as we mentioned in the prepared remarks, the advent of tech scope which is sort of a software offering is also I think helps users connect multiple scopes and multiple channels and really bring more data together is also accelerated into new verticals as well. So, I think it just to answer your question specifically, I don't think we've seen a demand strategic difference necessarily in the percent of sales, but we have seen substantially greater sales in those verticals over time and that should bode well for the futures.

Great. I appreciate the color.

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

Hi, good afternoon/evening to everyone. But couple of things here. I mean, first of all, I mean obviously you're getting operating leverage, but is price kind of in line with your cost increases, are you still catching up a little bit on that. Or I mean another way to say it is, 130 bps up on price is that accelerating through the year here.

Yes, we're in a great shape on price cost, Scott. First of all, as you said 130 bps in the quarter in the hardware businesses in particular we'll double that number in the second half. So we're in a very good position relative to price, as you know we've gotten good price over the year. So this is a compounding effect. You saw this price read through as well on the gross margin improvement in the second quarter. So we feel very good and really quite frankly, even though we are seeing a little bit of cost inflation, we're still going to be net, significantly net in a good shape relative to material cost reductions for the year. So, material cost reductions will still be a profit improver for the year. Even though we've seen a little bit more inflation than typical, we still are in a very good shape relative to price cost, not only because of price but also because we've done a nice job on the cost reduction side as well.

Okay, that's super helpful. And then this is a little nitty-gritty but just following-up on Jeff's question on the on-tech and kind of it oscilloscope overall, I mean the new markets that you're entering it with the same exact product meaning going to standardize product just different channel or do they have different problems are trying to solve in electric vehicle facility or data center that perhaps you've modified or changing or creating new products?

Yes, I would say, on balance through the same base oscilloscope the 6 series or the 4th series but then there's a set of software that's specific to that vertical application there might be a set of probes that is also different and ultimately there is really a solution around the challenges that they might have. As an example, power usage is a huge issue in data centers. It's a big problem and in electric vehicles in a variety of places. So it might be a power consumption challenge, might be trying to do some different troubleshooting aspects of particular applications as well. So there is a suite of software and probes that typically go with that oscilloscope that is very much vertical specific.

Okay. Encouraging. Thank you. Good luck, guys.

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

Yes, good afternoon. I guess I'll just continue to ask questions about tech. It does sound like very broad-based demand in Tektronix. How durable, do you think the demand this year versus sort of more bounce back from COVID?

While certainly an aspect of the bounce back at COVID. So, I wouldn't in any way, shape or form take away from that, but I think when you look at where the business has been historically, we're at an accelerated growth rate here over the last couple of years. So I think in that sense, we feel good about the overall growth rate this year and we think it's certainly durable in the sense of recognized services had a good, a good quarter. We're doing some good strategic work to add to services, the things we were just mentioning around new verticals. So the team is really got the mantra and the strategy to continue to make the business less volatile and less cyclical and really work towards and secular drivers that have more durable growth rate, and I think we're in a very good position relative to how we'll do that over time.

And my follow-up. So how should we think about the implications around the uptick in professional services and improving site access for your SaaS businesses. Site access was the hurdle for new logos but just trying to get a sense if now you're able to close deals and thoughts on-boarding new clients.

Yes, we were still not where we'd like to be. So, and obviously even the recent news over the last 24 hours is going to, how we will have to look into. But I think we feel confident in sort of double-digit professional services growth in our SaaS businesses in the second half. So we see continued improvement insight access. We're starting to see customers start to really make decisions here at an accelerated rate. Talk a little about that in the prepared remarks, almost all the software businesses. So yes, I think you'd say the second half, we're in a much better place relative to services and that's not just on site services, it's also getting customers to accept remote services. So it's a combination of the good work. The team has done to be able to deliver things more remotely as well as customer site access.

Thanks so much.

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

Good evening, good afternoon. So just, on Jeff's question, I'm not sure if you actually address the absolute level of [indiscernible] to your best knowledge and the sort of the question is that obviously lot of channels pretty empty at this point. So, any sense on where challenges are for the Tek and Fluke and other products and then kind of on top of that sounds like a dumb question, given the kind of core we just put out but did supply chain constraints date your ability to supply during the quarter.

Yes, so first of all, I think we're in a good place and channel inventories. I think in some cases given the revenue numbers, both what we delivered in the quarter over delivered in the quarter. Plus, raising the guide for the full year, you'd say, well, we definitely seeing better demand and in the back against that backdrop, we're not seeing an increase in channel inventories nor would we see an increase in channel inventory at least in the next 90 days through delivering the revenue that we have relative to the POS numbers we're seeing. So I think we feel good about end user demand and we feel good about the fact that we're not building inventory in some sort of over oversaturation situation. So I think there is real demand out there and I think we're fulfilling it. Nigel, we're not oblivious in any way, shape or form like our peers and other come in pretty much all the companies in the world relative to supply chain constraints, we've seen those for sure. I think the fact that we've been building great lean manufacturing capability over decades in our businesses, our ability to respond to those things relative to the FBS tools like daily management and problem solving means we're where we're fighting every day to secure material and our ability to beat the revenue in the second quarter is a good demonstration of our success in that way. But I would also say, we continue to see those challenges every day and I would expect to see those challenges, probably through the year at least. So I think we're in a, we've been very successful. Thus far, but it is a daily battle, but I guess given the work we've done over decades to build the kind of capability within our factories. I like our chances and continue to be successful.

Right. And then I wanted to go back quickly to ASP [ph] margins that later in the quarter 2Q. Is that simply the mix of ASP, does ASP carry a high contribution margin relative to the average there and then that 27% margin you're guiding for 4Q, does that represent quote unquote normal mix in that segment.

Thanks for the question. Nigel. So it's, we really weren't lighter than what we expected. We're over the high end of our guide for Q2 on AHS margins, but I think you're looking at the comparison to last year. And I think, and so there is a couple of things going on there. One, as we have been building out our supply chain coming off to TSAs that's incrementally put in starting last year at this time, more cost. So when you come back to the margins that gives us a headwind on year-over-year margins with that there is a little bit higher freight as well, but there is more revenue to go along with it; so we're still driving OP. Also we had a one-timers last year that inflated margins that obviously that doesn't repeat this year that related to just the transition off the TSAs. But again, I think that we're right where we expected to be in Q2. And going forward, we're going to see us start expanding again double digit, 200 basis points from Q2 to Q3 and then Q3 to Q4, maybe even a little bit more than that. So consistent margin expansion and yes the consumables have very high margin is so as recovery that really helps part of that that story for sure.

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

Hi, good afternoon. And maybe just a first question around the AHS margins have been discussed a fair amount, but just wanted to touch on the revenue side of things, you took down the high end of the core growth guide for AHS for this year, kept the margins, as you said. So maybe help us understand what's driving that revenue reduction and how good you feel about the overall state of businesses such as ASP. In terms of their market share and winning sort of their fair share of business?

Yes, Julian, I think the second one first. I think were installed base is up 3.5% year-on-year. We're in a very good place relative to equipment placements. We had another good equipment quarter after several 4, 5 quarters in a row of continued increases in the installed base. So we feel very good about where we stand relative to the installed base. I think what we're really saying for the second half of the year. And I think if you look consistent revenue growth through the remaining part of the year. ASP will actually accelerate in growth through the remaining part of the year, but we did see a little bit of elective procedures coming down a little bit than we anticipated. As we said we thought maybe we would end the quarter around 95. We ended around 93. So there's a little bit of an assumption that will probably not get to 100% by the end of the year that has a little bit of impact, but I think we come back to the fact that we're taking share and if things come back, we certainly would see an associated improvement, but I think we're just trying to be a little bit more consistent with what we've seen here recently relative to electric procedures and so there's a little bit of a change. Obviously, we took the guide up in total up for the overall company, but a little bit, maybe a little bit more conservative relative to where we think elective procedures might come in and as you said, continued very strong margin increases like Chuck was just describing through the remaining part of the year through AHS and at ASP. Sorry for all the acronyms.

Thank you for that. And just on China, your growth went from close to 30% in Q1 to sort of mid-teens in the second quarter. So pretty consistent with a lot of the other indicators short cycle wise in recent months there but when you're looking at sort of Fluke and Tektronix in China both have a very good presence there. How are you thinking about the growth in the second half in China, specifically?

Yes, I think very good. I think the answer is going to be to be quick. I did a review with all the China here a few days ago and feel very good about the second half, particularly at Fluke and Tek. The comps play a little bit of a role here and so, but I think as we look at a two year stack, as an example, we continue to grow well in China through the remaining part of the year. So I think we've got mid-teens or something like that for the full year in China and we feel good that we can continue to maintain good growth rates and really good market positions as we get into 2022 as well.

Great, thank you.

And your next question is from the line of Markus Mittermaier with UBS.

Hi, good evening, very quick follow-up on pricing, the 130 basis points that you have, you said the targeted to double that in the second half, just to be clear, part of the guy it also the asset on top.

Markus, the hundred and some basis points is really in our hardware businesses, particularly sort of Fluke Tech, Sensing [ph] Tech in particular that I was associated with that number. So that's, that's really a comparison of where really relative to price cost, I think our overall sort of our overall pricing for all of Fortive incorporating everything is probably closer to from the second quarter, probably up about 140 or excuse me, about 40 or 50 basis points up from where we've been thus far in the first half. So, the 200 is really to address the price cost question. And so, but the overall pricing is a little bit less than that.

And we have to set historic guidance.

Yes, and that's built into the guidance. Yes, thanks.

Okay. No, that makes sense, because then the follow-up but if you see any issues on price elasticity, but it doesn't sound like it?

Go ahead.

And then, the second question of just the balance sheet, our service channel. Now, I think any change in priorities. I know that's a few months ago, you said of relative size between the various business is matters any sort of new thinking here about their priorities are hit for the second half of the year.

No, I think it's, as we said in the prepared remarks, the balance sheet remains in very good shape and we'll be in very good shape to do other deals if when those opportunities become available. So obviously, we're going to continue to be focused on making sure we get good strong financial returns. I think service channel deal is a good example of that both accretive in 12 months, but also with a 10% ROIC in five years. So I think there's lots of those kinds of situations available to us in the second half. And so, you never know if you're going to get a deal done, but I think we both have the capacity financially, as well as the capability to pull off another deal if an opportunity becomes available. So it's hard to predict those things. And what happens, but we are busy and we feel confident that we could put, we could get a deal done. If we have the opportunity.

Thank you very much.

The next question is from the line of Andy Kaplowitz with Citigroup.

So just focusing on the bigger picture with Gordian and Accruent again you mentioned there is still a bit of noise in terms of the varying pace of return to work especially lately. But you did mention that clients accelerating work on key projects within Gordian. So does that give you better visibility into growth continuing to accelerate within the businesses and can you improvement we've seen in state and local budgets and stimulus giving you an additional boost?

So first of all, you're Gordian had a very good quarter. What we did see in June and we mentioned this a little bit is, there was a little bit of budget clearing at the end of the fiscal year and I think between stimulus and what's already, we're seeing and projects. I think we feel confident; we'll have a good a good year at Gordian for sure. So I think you know as we look forward, the Gordian not only in job order contracting but estimating and even facility assessments. We're seeing good business and I think on the current side, you're seeing, as we said, we're starting to see those back to work projects come back, people who are looking for hoteling solutions. We mentioned in the prepared remarks, our event and hoteling planning solution is sort of leads the way as people start to think about is, the fact of the office. So we saw that accelerate. We really like the professional services because in a lot of those situations. That's the first part of the current before we see the SaaS revenue, we see those projects come in where we, where we go in and help clients get started. So, I think a number of places where we're seeing real opportunity and I think. We really believe that those will continue. And as I said in previous question professional services being up double digits in the second half is going to be real helpful to us sort of building that business here for not only this year, but obviously into next year.

It's helpful Jim. And then you mentioned a nice rebound in industrial and oil and gas end markets guys seems like that is the recovery more a function of easy comparisons are you starting to see a relatively significant rebound at this point in energy related markets and what do you see going forward for that business.

Yes, I think we see continued improvement. I would say there some easy comp aspect to the ISC number in the quarter. But one of the things I was, I think we're really excited about is the work they've been doing over the last year and a half to sort of move the business into new markets outside of oil and gas and we saw some success in that in the quarters. Building the business around different end markets at the same time they are starting to see instrument revenue and rental revenue come up, which is really I think consistent with people coming back to work in oil and gas and projects coming back into those customers. So we think that continues to accelerate through the remaining part of the year.

Thanks, Jim. Appreciate it.

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

Hey, good afternoon, everyone.

Hi, Deane. How are you?

Doing real well. Thanks. Can we just get updated. There was a plan that you would start these growth investments, $35 million in the second quarter and I think early in the call, you called out a $15 million investment. Is that part of it. And what's the plan for the balance of these investments and going into four [ph] and Pioneer Square Labs also.

So, Deane, we called out that we'd have $35 million. You're correct, we had $15 million in Q2 which we did kick off and invest in Q2 and then you think about $10 million in each of Q3 and Q4.

And then relative to maybe what we saw. I think and the other thing I'd just call on there's a couple of examples, in the call. The II900 that we called out at Fluke in the 1QA at Fluke Health. Those are both examples of investments that we did 18 months ago that are now really paying off. So I think it's a good example of, hey, we give the operating companies money to accelerate product development for accelerated growth and that's a good example we're seeing the payback of some of those investments that we did it roughly a year and a half ago. Relative to Pioneer Square labs as we said in the Q2 call, about half of that $15 million or how and half of that $35 would be at the four [ph] and a PSL we mentioned the spin in $0.15 in the quarter or in early July. That's part of that investment is to fund TeamSense here as we spin that into the business, we're really excited about that opportunity, and then obviously the forward investments which we said we're probably more like two or three years out relative to payback and return just bring those numbers back, we thought it was about a $250 million growth opportunity for all of that work. And we still believe that that's true. Probably hopefully planning to get 30 to 50 that and as we continue to build out the product lines and build out some of the ideas will have greater granularity of that, but we're really excited about the work that we got done in the quarter, which is really going to be good work for us and next year and in the years to follow.

Got it. And that's what nice lead into for the second question about how do the spin in work. With TeamSense are there more in the pipeline and what are the conditions that a start-up is ready to be brought into Fortive?

Yes. So each one has its own sort of particular set of metrics, we have a Board that's made up of team members from Fortive and team members from PSL they sort of advocates for the business through a period of time. Prior to the spin in we fund that and then we make a decision whether the business out of the spun in if it's good strategically are really helpful to our strategically there might be situations where we actually go and get external funding and then situation where we maybe wouldn't go forward. Right now, we have three that we're funding, the one that we spun and team sense we have two others we'll make some decisions here based and those decision criteria, our individual to the businesses based on what they're trying to accomplish strategically, generally has the number of end customers, they have to solidify there are certain goals around what they're doing with those customers from a product perspective is the product ready and if we achieve those milestones. Then we start to assess the potential opportunity. Pioneer Square Labs is really good obviously with their experience a bringing to us, how we think that if we were to go for an external investment is an example how would that business do in that regard. So I think it's been a great experience. And we're really celebrating 12 months of partnership here and I was just with the senior team there PSL couple of weeks ago to talk about the partnership and make sure it's really good footing. And I think without a doubt, we're in a very good place from as a organizationally in which to continue to fund some of these things. We think, we've got great ideas where we'll fund them, but I think they also bring bringing the process of killing ideas and we've held several ideas as well.

That's really helpful. Thank you.

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

Hi, good evening guys. Excellent. So Jim, you have a mix of the cyclical seasonal. And I guess some more stable businesses. So maybe the constant how lot here, but where do you think there's still room for, I guess, sequential growth, but sort of ignores the comps. Obviously, we're still coming off the bottom. It sounds like maybe ASP is one of those given that it's still kind of lifting off the bottom and maybe 2Q those elective procedures didn't show as much progress as we hope, but is there anything else where we should still kind of keep an eye on sequential progression, maybe relative to comps or seasonality.

Yes, I think obviously with what happened last year with COVID you've got to consider that. And I think you'd see as an example of Fluke and Tek as an example, on a two-year basis. They're accelerating through the year. So I think in that sense will still what we have implied in the guide is those businesses getting better over two-year basis. So I think we feel good Sensing, it may be in that same boat. So I think we still see some good progress here in a number of places. And as you mentioned we see we'll see ASP, get a little bit better. Our SaaS business is on value [ph] with 40% recurring revenue. We have a large part of the portfolio that did exceptionally well through 2020 and is continuing to do well in the call that out, mostly the SaaS businesses that we have, but obviously we continue to build our ARR portfolio that continues to grow well will have double-digit ARR growth at the end of the year for the full year. So, I think we're accelerating the businesses that have been stable and I think what you're starting to see some of the business that had a little bit more cyclicality, still have some room with them and what we've seen is I think good margin progression with those businesses as we've seen the revenue come back.

Got it. And then, just on that strength on Gordian and Accruent I think adds a lot of it be to the service channel deal that you already announced. Anything else that either sort of a shift is a function of cold weather or something else, where over the last couple of years, hey, we like this before but gosh that seems even have more ways now and maybe we should look for more externally anything of that sticks out in the portfolio?

Well, I think the obvious one and is just everything we're doing in ehsAI [ph]. I think sustainability is becoming such an important topic for companies around the world and not just large cap. I mean, just about every company in the world now is trying to understand their carbon footprint, they are trying to understand how to action sustainability work and we're just so well positioned with Intelex, ehsAI [ph] around those trends, I think it's hard to call out anything better than that, just given the massive amount of work and effort that's been going into sustainability everywhere in the world. So I think that's certainly a secular driver that we knew was good a few years ago when we bought into Intellect. But I think it every quarter we own that business. We realize we have an even bigger opportunity?

Yes, carry with that. Thanks a lot.

Your next question is from the line of [indiscernible].

Good afternoon folks. After all this wonderful very good questions, I want to get back up to 35,000 feet for a second. You've talked me into -- it's the principles and the behaviors of lean that are important and those rules don't really change, but can you talk a little bit about what COVID culture about lean and what's your experience from the last couple of years with SaaS models has taught you about lean. And then I have a quick follow-up?

Well, I think Cliff, I wouldn't have thought that we could have virtualize some of our resources and still maintained a lot of the daily management things that we've done. It's just been incredible. And certainly with some of the supply chain things I was describing our team's ability to collaborate continue to do kaizen events in many cases certainly problem solving events in some cases virtually. I would have never thought we could have done those at the level of quality that we're doing them today. So I think, kudos to our FBS team that virtualized all of our tools and I think that's certainly a great example of probably my own learning that these things can be virtualized. And we've seen some great efforts here over the last year, so a year and a half in that regard. Relative to SaaS, I think there's really a couple of things, you know this better than anyone. Problem solving is problem solving, value stream mapping is value stream mapping. Every SaaS business has processes that are inefficient sometimes customer success, sometimes the customer, sometimes product development, but I think fundamentally we find that those processes can be improved. And I think in SaaS business is no different than any other business in terms of a culture of continuous improvement on everything you do is a winning culture. So I think those are certainly things that we're seeing and obviously, what we're trying to show in our Investor Day is so many examples of where that's really playing out thus far.

How about you held my hand kind of when I was trying to apply lean principles to transactional processes, traditional transactional processes, when you took over Fortive, you said look, we've got all the original divisions where the great pushes in lean came in the '80s and the '90s and you said, I haven't got a business, and I can add another 250 basis points to, how do you feel about your progress of taking these same principles and putting it into SI/NOP [ph] and new product development and accounting and accounting for lean as opposed to lean accounting.

I mean it's a lot of the same stuff we applied value stream mapping into the current business and significantly impacted DSO right away and that was already a negative working capital business that we just made. I think we made better. So I think these transactional processes exist just as much in software businesses and our teams, our Gordian we called out Gordian several places is applied these things all across the board and made great improvement. And we certainly seen that, Intelex operating profit is significantly above where it was when we bought the company that could say that about all the software businesses. So we found those pools of opportunity, they are sometimes in different places, but ultimately if we can teach the principal to the leadership teams of these businesses and encourage them and quite frankly support them. We tend to have real good success.

Thank you so much.

Your next question is from the line of Joe Giordano with Cowen and Company.

Hey guys, this is actually Rock [ph] come in for Joe, thanks for taking my questions. Hey, I just wanted to go back to ASP, real quick, I know you, we've talked a lot about that but the elective procedures. Just wondered, kind of what regions maybe underperformed versus your expectations. In the quarter and what regions might provide some upside in the second half that you kind of called out?

It's mostly the US now part of that because it's our biggest business, so is our biggest region. So I would say most of it was in the US, a little bit in Europe, but, but I think for the most part most markets outside of the United States. We're actually pretty stable. So we're because of the share that we have in the US and we're probably a little bit more receptive to the COVID change the electric procedure change that we are. Elsewhere, we can make a little bit more of our own luck in the other parts of the world and that's what we did. So I think that really is where we stand relative to going forward, as we said, we probably thought that we are getting closer to 100% by the end of the year, we're probably a couple of hundred basis points different than that now where we stand for the second half.

That helps. And then just another one, and I know it might be a bit early for this question but because service channel hasn't had closed yet, but you know as you think about that rolling into the business and you talked a lot about Fortive AI initiatives that you have at Investor Day. Just wondering like it looks like a good overlay for some of the services they provide as well from the matching service providers and customers. And then the back-end on the analytical side, is that something that you're thinking about enhancing and then I guess on the flip side too. When you think about those AI technology have inheriting from like service now for me a little side, is that something you might be able to leverage across the rest of the organization through the initiatives do.

So number one, they have a Scout product, which is really their data analytics product. We definitely think we have an opportunity to accelerate some of the great things they were already planning to do with the port [ph], so answer to that is absolutely that will be a real opportunity for us going forward. It's a very small part of service channel today, but we think it can be a real important part not only the revenue stream but of the customer capture and the ability to accelerate the network flywheel that we talk about between enterprise customers in the service network. Relative to algorithms, the answer is yes. One of the principals roles of the port [ph] is to, is actually to re-task algorithms is to create algorithms that we can apply to the same business problems or the same growth opportunities within the business. Probably the place we're doing that the most is in our software businesses around customer churn predictive models. Once we get those models up and running, we can apply them to different customer sets within different operating businesses. So, we absolutely recast those algorithms and that's a big part of the port [ph] job is to maintain those algorithms and continue to make them better as we get more and more data running through them.

That does conclude our Q&A session, I would like to turn the call back over for any closing remarks.

Thanks Pasha and thanks everyone for taking the time today. I think what you saw today or when with earnings was a really strong quarter. We continue I think to really work hard and diligent to really take advantage of the opportunities of a better market, I think you saw that with the guidance, certainly saw that in the margin profile, and we're really excited about the work going on. A lot of hard work going on with our team every day, so I want to thank our team for all the hard work in the quarter and all the hard work is going to continue through the year as we continue to take advantage of the opportunities of a growing market here. We're in a great place. Thanks for your time. Thanks for your support. We'll look forward to the follow-up calls and conversations that we have. Have a great rest of the summer for those who you haven't taken a vacation yet and we look forward to seeing you soon. Stay safe. Thank you.

This concludes today's conference call. We thank you for participating and ask that you now disconnect your lines.