My name is Rob, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporation's Second Quarter 2022 Earnings Results Conference Call. [Operator Instructions]. I would now like to turn the call over to Ms. Elena Rosman, Vice President of Investor Relations. Ms. Rosman, you may begin your conference.

Thank you, Rob, and thank you, everyone, for joining us on today's earnings call. With us today are Jim Lico, our President and Chief Executive Officer; and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. We present certain non-GAAP financial measures on today's call. Information required by Regulation G are available on the Investors section of our website at fortive.com. Our statements on period-to-period increases or decreases refer to year-over-year comparisons on a continuing operations basis. During the call, we will make forward-looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks, and actual results might differ materially from any forward-looking statements that we make today. Information regarding these factors is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2021. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update. With that, I'd like to turn the call over to Jim.

Thanks, Elena. Hello, everyone, and thank you for joining us. I'll begin on Slide 3. We had an excellent second quarter with strong broad-based execution across the portfolio, contributing to revenue, margins and earnings all above the high end of our guidance, resulting in our raised outlook for the year. Despite the effects of COVID-related shutdowns in Shanghai, significant FX headwinds and ongoing supply chain constraints, our team was able to achieve 9% core revenue growth, 190 basis points adjusted operating margin expansion, 18% adjusted earnings per share growth and outstanding free cash flow generation in the second quarter. Consistent with the first quarter, demand for our leading workflow solutions remains robust. Year-to-date, hardware orders and software ARR both increased low double digits, reflecting our more resilient and diversified product portfolio. At the same time, our rigorous application of the Fortive Business System allowed us to deliver for customers in a challenging sterile environment and improved our profitability despite higher inflation and rising FX headwinds. Turning to Slide 4. I want to provide an update on what we're seeing and what we expect in the second half of the year. Starting on the left with the current environment, demand and orders remained strong in the second quarter, driven by accelerated innovation, continued share gains and leverage to favorable secular drivers. Hardware orders increased 9% in the second quarter, yielding a hardware backlog that ended the quarter 21% higher than year-end 2021. Our supply chain measures continue to gain traction while we expect that component constraints will persist for the rest of 2022 and into 2023. While ongoing COVID lockdowns in China remain a risk, we substantially mitigated the headwind from the lockdowns that commenced in late March in Shanghai and continued through most of May, shifting most of the $60…

Thanks, Jim, and hello, everyone. I will begin on Slide 10 with a quick recap of our second quarter performance. We generated year-over-year total revenue growth of 11% with core growth of 9%. Acquisitions contributed 5 points to total growth, partially offset by FX, which reduced total growth by 3 points in the quarter. Turning to the major regions on the right-hand side of this slide. North America core revenues were up high single digits, with contributions from each segment and strong double-digit growth in software and services. Western Europe revenues grew mid-teens, again with favorable contributions from these segments, including a return to growth in Invetech. We had low double-digit growth in Asia outside of China, while China revenues increased to mid-teens as we mitigated the Shanghai lockdowns that Jim highlighted earlier. We also continued to build backlog in China with approximately 20% order growth in the quarter as customers looked to replenish inventories and assure access to supply heading into the second half and 2023. Lastly, we had strong double-digit revenue growth across our high-growth markets. On Slide 11, we show operating performance highlights in the second quarter. Adjusted gross margins were down 30 basis points, while adjusted operating margins expanded 190 basis points to 24.1%. Gross margin expansion and operating margin expansion were both negatively impacted by 70 basis points of transactional FX headwind in the quarter, which was more than offset by over 500 basis points of price in the quarter, demonstrating the excellent job our teams are doing implementing price increases to offset higher input costs. Adjusted earnings per share increased 18% to $0.78, reflecting strong fall-through on higher volumes as well as lower share count, partially offset by higher interest and tax expense. Free cash flow was another standout at $276 million, which reflects…

Thanks, Chuck. We're now on Slide 15. Before we move to questions, I want to spend a few minutes highlighting the positive impact we are having for customers, employees, suppliers and communities as we advance our sustainability mission. As many of you know, we published our 2022 sustainability report in June, and I'm incredibly proud of what we've accomplished, the aspirational targets we continue to set and the robustness of our reporting initiatives, such as alignment with key ESG reporting frameworks, including GRI, SASB, TCFD and the UN Global Compact as a signatory. This report serves as our communication of progress toward the principals and the UN Sustainable Development Goals. We also made significant progress across each of our sustainability strategic pillars, including: achievement of our 50% greenhouse gas emissions intensity goal early; reducing Scope 1 and Scope 2 GHG emissions intensity by 51% between 2017 and 2021. As a result of achieving that target early and in keeping with our continuous improvement culture, we have set a new and more aggressive target to reduce absolute Scope 1 and 2 GHG emissions 50% by 2029 from 2019 levels, a goal which is aligned with the Science Based Targets initiative guidance. We improved on each of our inclusion and diversity leadership goals, including gender inclusion and senior leader diversity. And lastly, we exceeded our performance on our supplier diversity spend target in 2021 and completed 100% of our supplier audits as planned despite COVID. There's much more in the report, including examples of our innovative and sustainable products and services, and we encourage you to check it out on our website. Lastly, on Slide 16, we are demonstrating successful execution of the Fortive formula, even in the most difficult of times to drive more resilient growth, double-digit earnings and free cash…

Thanks, Jim. That concludes our formal comments. Rob, we are now ready to take questions.

[Operator Instructions]. Your first question comes from the line of Julian Mitchell from Barclays.

Maybe, Jim and Chuck, just a first question around the AHS segment. That's the one where sort of pricing seems to have been stuck a little bit at 1% in the first half versus 700, 600 points higher at the other 2 divisions. And the overall core growth sort of 4% this year. How are you thinking about that, the main headwinds on the pricing and the volumes aside from the China impact in Q2? And when we're thinking about, say, the out year '23, there are some factors that could kick that growth rate a little bit higher.

Yes, Julian. I think, number one, if we really think about AHS in the second quarter, it really came in from a core growth perspective as we anticipated. A little bit of puts and takes with elective procedures, a little bit better in North America versus -- and then obviously, China a little -- obviously much worse in China. We would anticipate, for electives, it's still going to come in the way we thought for the year. I would say we feel good about the acceleration of core growth at AHS in the segment itself in the first half -- first quarter to the second quarter, and we think it will continue to accelerate into the second half. We did see some supply chain issues with equipment. That was in our guide. We anticipated that. We'll see those things get better. In fact, we've started to see the kind of equipment production that we need to see in June. We're already seeing that what we need for the second half. So we think the step-up in core growth will be there. Relative to price, we'll continue to get a little bit more price in the second half than we did in the second quarter, but it's just a little bit more difficult to get price in this environment, but we're ahead of price/cost. So I think in that sense, really, we were in a great place with margins in the second quarter in AHS. In fact, if it hadn't been for some current -- of FX, we would have been right on the guide. So I think where we stand with the segment is in a very good place. We'll get a little bit more price. We'll continue to work on price into next year. But I think relative to price/cost, we're in a better -- we're fine. We haven't seen as much inflation on the input side and health as we have in some other places. So we're good in that segment, but it's going to take a little longer negotiating some of those longer-term contracts to get more price in the segment itself, particularly at ASP.

That's helpful. And then maybe one on capital deployment. Not going to ask you about the M&A pipeline. But if we look at, say, the buybacks that did step up in the second quarter, Chuck had talked about 1.5x leverage ending the year. So trying to figure out at current share prices, what kind of buyback spend are you planning on, I think, given the comment of sort of compelling returns right now? And there are matters of guidance numbers in the deck, which makes our lives a lot easier. Share count was maybe 1 that I missed. Just wondered what you're dialing in for the year on share count vis-à-vis the buyback discussion.

Well, Julian, as you know, M&A remains our priority here. What we're saying there is where our leverage will finish the year without any capital deployment. We're not forecasting -- we don't forecast share buybacks as it's not really a program. It's just being opportunistic. But as you know, in the first half, we did buy 4 million in the first half over the first 2 quarters, and we'll continue to be opportunistic as we move forward.

And just, Julian, this is Elena. We ended the quarter with 358 million shares outstanding, so that would be the appropriate assumption going into the second half.

Next question comes from the line of Andrew Obin from Bank of America.

So I actually will follow up on the sort of M&A pipeline. And more so, there's a lot of talk about interest rates changing, environment changing. Are you seeing fundamentally any change, maybe private equity exiting, maybe more strategic buyers, buyers' expectation -- or sellers' expectations or is it just too early to tell?

Yes, it's a complex question. But obviously, private equity is a buyer and a seller, so they're obviously seeing it on both sides. But I would say what we've seen really here at this point, Andrew, is really one where I don't think we've really seen reality set in, in a number of places. There have been some things transacted. It's still higher prices here in the last 90 days, but I don't think that's reality going forward. So I think it takes a little while. We've seen things take longer for sure. We would continue to remain busy. But we're going to be disciplined here in this kind of time horizon. So I think that's where it's at right now. I said a couple of quarters ago, it was a 12-month to maybe even 18-month kind of time horizon. We're obviously 6 months into that kind of time frame. I suspect maybe we'll start to see some things here maybe later in the fall, start to look what I'll call more normalized.

Got you. And then that's another question for you. This earnings season, one of the surprises, I think sort of across the board, just Western Europe, just on the margin, just looks okay. And even for you, it's mid-teens core. Why is Europe so good? And why we're not seeing more of a headwind from what's actually happening there?

Yes. I think Western Europe has been a good story for us. Certainly true as you said. And if we look -- it kind of normalized -- it's a little bit more in the quarter but it sort of normalizes compared to North America, if you look at the first half. Orders are actually a little bit better in North America. So I would say what we're seeing probably is a function, in the quarter, a little bit more just on getting more backlog out. We probably have a little bit more backlog in Western Europe just because of the location of our factories, many of them in the U.S. So it's a little bit that. In health, it was really the Invetech that we called out in the prepared remarks. But we are seeing good business right now in Western Europe. And now if you look at the entire European theater, including high-growth market, Eastern Europe, Russia, then you start to see a slightly different story. You start to obviously see the slowing because of some of the Russia impact. So it's really -- it's a good story in Western Europe. If you step back and look more broadly, it does tell a little bit slightly different story, and that might fit a little bit more on some of the headlines we're seeing. But I think as we look through the year, we're still going to do pretty well in Western Europe.

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

What are you guys seeing in China? And in particular, I guess, outside of the health care stuff, just the more industrial type of stuff?

Yes. I think one of the highlights of, obviously, the quarter was obviously how China has come back. I think one data point that Chuck and I look at, Steve, is our -- at Fluke is our point of sale, which was high single digit in our shop channel, which is a more broader view of the economy, was actually double digit in the quarter. So I think from that standpoint, we had a good business in Sensing. We had good business, as you said, other than really our health businesses, China was good in the quarter. Obviously, a little slower in the first quarter. So when we look at the first half, still decent in those businesses. And I suspect we would plan and assume that that's going to continue here in the second half. It's pretty broad-based. It's with -- our OEMs on the Sensing side have been pretty good. And again, as I said, a number of places at Fluke and Tek where we're seeing good business. So we think Healthcare probably does continue to be a little challenged here for at least another quarter relative to what we're seeing in hospitals, but the remaining part of the business is in a good place.

And then one last one. Gordian and Accruent, I think, you have up low double digit in the quarter, I think it was I saw on the slides. I think that's better than you guys had been expecting. What's going on at those businesses and how are you accelerating the growth there? I recall there being some question marks around the growth that I think it was Accruent over time.

Yes. We're -- I mean, as we increasingly think about the business, we're going to increasingly think about that as the combination of those businesses and probably ServiceChannel. We've traded some product lines in between businesses. And obviously, we're going after some things with common sales channels and stuff. But as you said, Gordian, very strong on the back of good state and local spend. We think that continues. Certainly, some of the things that we're seeing out of Washington are going to be helpful to that business as well. We mentioned some of the good wins that we have with current -- increases in business that we have with some really strong customers like the city of New York. So I think we're just seeing good dynamics. I think we've seen -- we're starting to see the turnaround in Accruent that we've been talking about. Olumide has done a nice job there with the team. And bookings are going to be -- are going to continue to get better through the year. So I think in general, a lot of our countermeasures. We put a lot of effort and energy into really sort of optimizing Gordian and really helping that team. They're a great user of FBS. Accruent, I think, as we've said, has been a fix-it story, starting to see some of the results of some of that work, and that will continue to play out through the year.

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

So just digging into the guide for ASP margins. We got flat margins in 3Q and then we've got 100 basis points of expansion in 4Q year-over-year. So just wondering what sort of the underlying assumption there is in terms of what needs to happen to drive that improved operating leverage at ASP -- sorry, AHS.

So Nigel, I'll take that is in the second half, really not much other than normal sequentially growing, particularly in the fourth quarter, for us to achieve that, so nothing superhuman there, given the levels that we're seeing. They're shrugging off pretty well and showing that good margin expansion despite FX, so we're really pleased about that. We saw a little bit of that in Q2 as well. But I actually saw quite nice core margin expansion in Q2 of this year. So when you look at Q3 and Q4, you don't need some big step-up. It's just normal flow-through based on where we sit right now.

I think we had a pretty decent hit on onetime FX in the quarter and the second quarter for AHS or margins would have been even better. So I think when you take that into account, Nigel, this is really kind of a normalization of what we see, and as we said, a great margin story in that segment.

Great. I mean, it sounds like the transactional FX is heading AHS more than the other segments. Just I wonder if you could just maybe just clarify why that is because I don't sure I understand why. But on the free cash flow conversion, I did want to touch on free cash flow in my follow-up. You're obviously very impressive, especially compared to some of your peers. But are you absorbing the R&D tax credit headwinds this year within that number? Because if you are, it's even more impressive, but just wondering how that's impacting things.

Yes. Nigel, thanks for the question. Yes, we are. We anticipated that when we put out our guide for this year. And we've got about $20 million in the first half of this year and probably looking at another $40 million next in the second half. But again, that's already contemplated in the guidance. To the question on the transactional FX, it's actually hitting all of our segments. But what you're seeing there in terms of different from what we guided is at AHS, there are revenues coming really basically where we thought they would in Q2, and the other 2 are coming in a little stronger so it's hiding what is actually hitting all 3 of them.

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

I wonder if you could give a little more color on Tektronix, both kind of what's driving the order strength. I'm just looking at the book-to-bill at that level. I would assume there's still some issues getting yourself out the door kind of impacting the backlog and book-to-bill. But can you give us a little color on both sides of that equation?

Yes, sure. I think we're really excited about the work that the team has done over the last several quarters from an orders perspective, a lot of innovation that we've really launched, Jeff, we talked a little bit about it in the prepared remarks. Their book-to-bill, I think, in the second quarter was like 1.3, almost 1.3. So they continue to see good orders even on the backs of mid-single-digit growth. They're going to be -- they're going to continue to do well. It's really an innovation story. They're taking advantage of -- we launched the 2 Series, which we mentioned in the prepared remarks, which is obviously very good. We've also had an enhanced 5 Series launch, and some follow-on scope -- follow-on probes and things like that, that go with those products. So it's an innovation technology story. Obviously, the market's good. We talked about not only getting some -- we're certainly getting benefit from some of the semiconductor investments. But we're really getting the benefit of how just more digital technology being in everything from the power challenges of EV batteries to the power challenges that are in a small IoT sensor, really everywhere where we've got now more digital transformation going on, we've got more R&D needed and more investment needed in order to deal with some of those challenges, particularly around the power side. So they're taking advantage of those strategically that they've really had in their strategic plan over the last few years, and that strategy is playing out well. They'll continue to see good order growth. They're now starting to get caught up on some of those orders, as we said, with mid-single-digit growth in the quarter. That obviously means they're starting to get things -- we're starting to get -- we have very low inventory with channel partners. So pretty much we're really hand-to-mouth on everything mostly in our channels. So the opportunity now to really, I think, continue to build the business here is just really strong in the second half as well.

Interesting. And I think the last time we talked, you had mentioned some of the activity that you're seeing in Tek sort of show the kind of a reshoring element as people were kind of pivoting where they were investing or where they were maybe preparing to capitalize production. Could you maybe elaborate on that a little bit more? Is that still going on in the business?

Yes. We don't play a lot in the production side of semiconductors. But obviously, as onshoring occurs relative to semis, certainly, what has been announced here out of Washington, we'll benefit from that because those are going to be, many times, new generation of designs or are going to be certainly going to be required from a key fleet perspective. We do have some semiconductor opportunities there. So they will benefit from that kind of investment. And more broadly, because there's -- if we think about the bill that's out there now, also has billions of dollars invested in technology investment to really bring all industries within the United States up from a technology perspective. And anything that goes into innovation and into any investment that goes into R&D budgets, particularly around hardware, is going to benefit Tektronix. So as we said and we talked to you a little bit about the secular -- there are some secular drivers around here, and we certainly think even the latest headlines would suggest things might be even slightly better.

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

I was just -- the order book up 12%, it's a big number but sometimes these things lack some context. I mean, is the price in that order book consistent with the price that you are posting today, kind of in that 5% ballpark or is it a little bit higher?

No, it's about the same, Scott, at around 5% of what we saw in the third -- the second quarter. We do expect that in the second half as well.

Okay, so it's strong. And then just to get a little of minutiae here, ServiceChannel, if you can help us kind of understand the sales cycle a little bit better. I mean, pretty big growth numbers this quarter. Are there any kind of variations in that sale? If there's kind of, I should say, updates or whatever that may cause people to buy ahead of them or price increases that people buy ahead of them or new product launches that people pile on. Is there kind of any lumpiness to that business that we should be aware of?

Well, yes, there's a little bit of bumpiness in the sense of they do have some portion of managed service that they run procurement of services through. And that can get -- it can be slightly heavier at certain points in time. And they did benefit from a little bit of that. But when we look at the SaaS part of the business and the AI part of the business, it's very strong. And in fact, it's 20-plus percent kind of growth. And so we feel very good about where they're stationed from a growth perspective. So it's -- the sales cycle itself is pretty -- we don't really see the buy-in ahead or anything like that. It's a pure SaaS model so we don't really have a license aspect to it. So we've just -- but the sales cycle with a big retailer or a big user, somebody who has a number of facilities, that's a fairly long sales cycle. So we won't see anything dramatically move up or down from the standpoint of that. We secure a whole bunch of customers in 30 days or something like that. The funnel looks good for the second half. We feel good about it. The team has done an excellent job of -- I think we're going to get into core here at the tail end of the third quarter. And we feel really good about where the business is stationed today. We're making some changes around the innovation aspects and offerings that we'll start to see in '23 that we're excited about. We just think in general, the business is off to a very good start.

That's helpful color. Big numbers. Thanks, Jim, and good luck to you guys.

Your next question comes from the line of Andy Kaplowitz from Citigroup.

Jim, you mentioned the higher recurring footprint that Fortive has, along with the record backlog that you have continued to add to. And you did also mention that your backlog should help you in '23 in the presentation. So how much confidence do those metrics give you as you potentially enter a slow growth environment? How likely is it that you could grow even if the world does moderately slow?

Well, we certainly -- as we sit here with the first half, it's not only we would get some '23 questions. I would say a couple of things around what we think. Obviously, every slowdown, if there is one, has a slightly different aspect to it, so no one is perfectly predictable. But I would say a couple of things that we know to be true. We're probably going to end the year with twice as much backlog as we started 2021, January of '21. So we'll have twice as much backlog starting the year as we did. We're going to start with, as you said, a high recurring revenue and aspects of the business, both on the software side and on the health care side with strong consumables. We think that's obviously a really good thing. We're going to go into the start of the year as well with a number of efforts that have been multiyear around our organic efforts to attach all of our businesses to better secular drivers, whether that's the service strategy that we've had at Tektronix or some of the things you're seeing play out and some of the environmental work that we're doing within Sensing. All of those things are going to be less dependent on what the macro looks like. So we think that those 3 factors, from a framework perspective, Andy, are going to set us up well. And I think depending on the scenario, we certainly think there is growth to be had for sure in '23. And obviously, we'll get through the remaining part of the year and see what happens. But those 3 factors are going to really be strong things going in. And even -- and we're building scenarios around what could happen and understand what that is. And I'd just remind everyone that in '20, when we had some pretty significant COVID challenges, we still grew earnings and free cash flow. So our ability to apply FBS to these scenarios in a very difficult environment, we certainly have a track record of that. But we set the portfolio up to be more resilient, and we'll see how things play out, but we're pretty confident we're going to be much more durable and resilient than we've ever been before.

Jim, I just want to follow up on something you said earlier in this conversation. I think you said last quarter that channel inventory was a little elevated at Fluke and Tek, but you're generally feeling good about it. And I think, Jim, you just said that your channel in Tek actually was pretty lean. So am I hearing that right or maybe you could just clarify your channel commentary?

Yes, sure. I think in Tek, it's pretty lean. And because demands continue to be good. And so I think we're going to be -- we're pretty hand-to-mouth in a number of regions around inventory. That's at Tektronix. On the Fluke side, what I said last time was when we looked at -- we look at both the inventory in the channel and what they have on order and in backlog. And what we saw in the second quarter is some of that order and backlog moved into inventory. And so the number itself didn't change dramatically, but the makeup of it was a little bit less backlog, a little bit more inventory. We actually think that's a good thing because we've had mid-single-digit growth in POS here. And we think without really hardly any demand generation, we've held off on the demand generation standpoint at Fluke because we didn't want to be out there with lots of demand generation if we couldn't fulfill those orders. So we're going to turn that spigot on. In fact, we've already turned it on. We're going to go lean into the second half relative to demand generation investments, now that we've got channel inventory in a better place where we can help our channel partners deliver on a more consistent basis. So we actually think that's a little bit more inventory and what we're seeing right now will help us drive a little higher POS in the second half. And we think that overall is a good thing for us and our customers.

Your next question comes from the line of Amit Daryanani from Evercore.

I guess two questions for me as well. First off, on the free cash flow, I was hoping you just talked about, when I look at the free cash flow projection for the back half, there's a pretty big uptick in Q4 free cash flow, both dollars and conversion rate. Maybe just talk about what is driving that dynamic for you? And then as we look and when you look at your working capital metrics, do you think those have sort of peaked and as you go into '23, more importantly, does that become a source of free cash flow generation incrementally for you?

Amit, this is Chuck. I'll take those 2 questions. The second half is always seasonally stronger. In the first half, we paid out incentive comps and so when you compare first half to second half, it's going to be stronger. In Q4, we -- there's a little bit more in shipments. And then when you look at Q1, there is a step-down. And so what you see us doing is relieving some of our working capital and that -- those are a couple of the dynamics that would drive the fourth quarter to be stronger. Keep in mind, we're very pleased with up 11% of our free cash flow in the first half, so I feel really good about that. And keeping -- the biggest thing that we were looking at is a back-end load in Q2 was out of China with this being locked down in April and May. And so we think that we've got strengthening even from what we normally would do over cash flow, so feel super positive about that. The working capital trends, I do think that maybe with supply chains, we would expect, particularly inventory, is more at peak levels. And as the supply chain continues to get better, it's still a very tough environment. You could theorize in 2023 that we would expect to reclaim some of that ground in inventory. But having said that, we've done a fantastic job with our working capital and really benefited from the working capital that you get with software business.

Fair enough. And then if I just follow up on Europe, I know you talked about this a bit earlier, but the growth of mid-teens is really impressive, given all the macro worries people have in Europe. I was wondering if you could talk about and maybe if you have a sense if your customers in Europe, are they -- when they get the products imported, are they deploying it in use cases or are they holding it as inventory? And I'm just thinking out loud on a scenario where given all the of energy shortages that could happen in the winter in Europe, could customers largely just be building up inventory to offset those issues that they seem to have? I'm wondering if you're seeing any of that or any shift in patterns from direct to the OEM versus channel, if there's anything you can talk about?

Yes. I think number one is we've seen pretty broad-based success there as I was mentioning a few minutes ago. But I would say we've seen point of sale is good as well. So I don't feel channel partners are stocking up or anything like that. And for the most part, when we look at the businesses, Fluke is one of our larger European businesses. We don't typically see people stock up Fluke products. They really take them to use them. So from an end user perspective, Tek is pretty very much the same way. So I feel pretty good about it. A good chunk of our revenue base is really not stocking up, but they're really -- it's selling through the channel partners and it's being utilized. I would say on the -- we are seeing some of our software businesses, many of our software businesses that we purchased have -- didn't have big European footprints, and we've been expanding some of that. So we're seeing some growth in software there, which has a little bit of impact here, and I don't anticipate that to be an issue but as we mentioned, we think the overall environment has been. On the Sensing side, we might see a little bit of that. We have a pretty good sense of that, though. We know when the orders are out there. And so we'll probably see a little bit possible, but I don't think it's meaningful in the -- from a standpoint of 3- or 4-quarter outlook of Europe, I don't think that's a meaningful number. So I think on balance, we feel good about Europe. But I think we, like everyone on this call probably, looking at some of the macro factors, some of the things that might occur in the winter, certainly looking at it and keeping a real sharp eye on what might -- any trajectory changes that we might see over the next, call it, between now and the end of the year.

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

If we go back to Page 5, I really like that updated mix, revenue mix. And how would you describe the target and the path for the 40% recurring revenue? Is there a time line that you can share today where you think it begins to level out?

Well, I think number one, we're continuing from an organic perspective across the businesses to seek out new business models that even in our current businesses, as you know, while Dean, things like some of the things we're doing around our cloud offering at Tektronix, which is just very early today but it's going to have a recurring theme to it in the next several years. So organically, we're building on it. And then, of course, we're getting -- the software businesses are going to grow inevitably. Obviously, they're growing well -- really well right now, along with our hardware businesses. But the long-term growth rates of our software businesses are better, and that compounding is going to continue to add to what we want to try to do -- what we're trying to do relative to the business model. So you'd see that number continue to tick up without any inorganic activity. And then, of course, no matter hardware or software, I think one of the things that's been consistent with our acquisition strategy over the last 6 years has been that almost exclusively, our acquisitions have had a recurring theme to them. Sometimes they were consumables like ASP or Landauer. Sometimes, they're software. But fundamentally, they've had a recurring theme to them. And while I wouldn't say we'll be at -- that will be exclusive, it will certainly be the majority of capital that we deploy over time. And so you'll see that 40% continue to go up over time, I suspect, both organic -- with both organic and inorganic efforts.

Okay. And then back on Page 4, I just want to make sure I have the mechanics of this right on the COVID lockdown being mitigated. So does that $55 million, does that constitute a pull-in from what was expected to be in the second half? And was that in your second quarter guide?

So it would -- Deane, if you remember when we talked about second quarter, we talked about revenue shifting out because of the lockdown in China into the second half. And so this is -- I think of it as a return to the second quarter. And so we didn't have it in our -- we didn't expect to get this in Q2. Team did a fantastic job about, as we said, mitigating some of those things. But it's just a return to where we originally had it forecast.

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

First question was just, if you were to think about your SaaS software assets, you've had them for several quarters now. Have you seen any discernible change in the pace of new logo adds or customer retention? Are you kind of accelerating? Has growth plateaued there? Just any color around that you can provide.

Well, I think when we think about our growth in our ARR, we talked about kind of the bookings level, where I think our trailing 12-month number is around 9-ish percent or almost 10%. It's going to be double digit by the end of the full year -- by the end of the year. So we really see SaaS accelerating. We continue -- I think customers continue to look for cost savings and so many of our SaaS offerings are really cost savings-driven. We've always said we positioned the portfolio around safety, quality and productivity. And so a number of these offerings allow them to continue to do the things they need to do. I would say the one place where we've seen a little bit of maybe the funnel moving out a little bit is in health care software, where we've started to see a little bit on the new logo side where some staffing shortages and IT organizations and things like that have pushed a few things out a little bit. But we've also -- on the other hand, when we've had the customer, we mentioned in our prepared remarks the Provation example, where we have a customer where it was a SaaS upgrade and new logo, new SaaS. We were able to close that relatively quickly. So the upselling and cross-selling is happening at the same pace in health care. The new logos will be slightly longer a little bit. I think more broadly, we haven't seen much in the areas of really delays too much more broadly across the portfolio. So that's why we see SaaS continuing to accelerate in the portfolio through the year.

Great. And then maybe just a modeling question here. You provide a lot of detail there. The one -- if I look at IOS, just based on the ranges you provided, it looks like in Q4, that's the only one that might be down sequentially. I don't know if there's some mix there or it's just there's a wide range on what the greater than symbol means on your guidance slide.

Well, I think number one, I wouldn't -- there's probably a little bit in the rounding there. IOS margins are going to continue to be good. I don't think we have any discernible changes relative to that. We can get back to you on the specifics around modeling. But I think what you saw in the quarter in IOS, very strong margin expansion. We will continue to do, I think, a good job with probably a little bit on -- there might be a little bit on the comp side. But I think where we stand today with margins, pretty much every business is getting better as we move through the year. So I think we're going to continue to see strong margins as we progress through the year.

A bit more of a rounding. So we just went to a solid number and we obviously did have the impact from FX and the one-time FX impact on the transaction component roll through into the full year. But there's really nothing else.

And your final question comes from the line of Joe Giordano from Cowen.

I think some of the pricing dynamics for many companies are kind of skewing their year-on-year comparisons a little bit. If I was to think about the orders from your more industrial businesses on a sequential basis from here, how do you kind of see them going? Are those going up consistently on a sequential basis still, or are they more like kind of staying flattish at a high level?

Well, first of all, prices are a pretty good constant from the second quarter into the second half, so you can kind of think about that as a constant. It sort of does depend on the business because of the amount of backlog. And also, we'll start to see orders in Sensing as an example. Probably look to -- we'll start to see 2023 dates on them because we are seeing a little bit of Sensing/Tek customers, a little bit of buy-ahead. Still strong growth on a 2-year stack but that's how I think about it. So that's number one. We'll see continued strength in orders at Tektronix through the year. Fluke will slow a little bit but that's really a 2-year -- that's really more of a comp thing than it is anything. So we really think when you look at both volume and price, we'll continue to see strength as we go through the year. Obviously, revenue is going to get a little bit better on the core side. Hence, our upgrade or our increased core. But I wouldn't say there's any real change in dynamics if the -- I'm assuming the base of your question is, is there a big change in price versus volume in the second half? I don't suspect there is at this point. But we're going to continue to really do things like the demand generation activities I talked about at Fluke, and we'll see how that plays out through the year. But I think the good -- we've been in a good place relative to price volume in the first half. We like where that's at. I suspect we will in the second half as well.

And just last thing for me. When you talk about Gordian and Accruent and maybe even ServiceChannel starting to combine a little bit, like what does that actually mean for those companies? Does this ultimately become one single brand under Fortive? Or like what logistically needs to happen for those businesses to move that way?

Well, I think what we try to do from an IR perspective is give you the perspective of the performance because of some moving pieces between them. And it just makes sense. What we do strategically, branding, product lines, product portfolio, is still to be determined. We certainly have a similar customer base in certain situations. We're managing that incredibly well while we're separate companies. But inevitably, we'll start to bring some things together probably from an architecture perspective, if you were to take a longer-term view. But still early days on all that. The team is still bringing all that together. I think the story though is continued acceleration of performance. Margin expansion is very strong. We mentioned that one thing we didn't talk about is we're a little ahead of both when we combine ServiceChannel and Provation from an earnings perspective and EPS perspective, a little ahead on the first half. So we're in a really good place, not only on a growth standpoint but where we stand in margins in those businesses. So we're going to end up with the combination of those businesses with an over $0.5 billion revenue base with very strong margin capability, strong margins today and even stronger margins. Two of those businesses are Rule of 50 businesses already, and so a real opportunity -- or almost Rule of 50 businesses. So that entire segment ought to be able to be that way in the future. So I just think we're really well positioned strategically, no matter how we sort of put them together, don't put them together, we're going to be in a good place. We are in a good place long term to really build that franchise really well.

And this brings us to the end of our question-and-answer period. I'll turn the call back over to you, Jim, for some closing remarks.

Well, thanks, Rob, and thanks, everyone, today for joining us. We couldn't be more -- as we said in the prepared remarks, hard to believe we just celebrated our sixth anniversary with a lot going on. We appreciate -- truly appreciate the support that all of you on the call have had for us over the last 6 years. We said 2022 was a show-me year. We think the first half really demonstrates that in so many ways across the portfolio, both the breadth and depth of the quality of what's going on in the business. It's just something to be incredibly excited about. We're even more excited about the second half. We think there's even more opportunity to do a number of those things. We'll continue to obviously have an opportunity in the follow-up call to give you a little bit more detail on that, but we're set up well. Obviously, a lot of uncertainty out there but we've weathered a lot of a lot of the storm exceptionally well. And I'm highly confident we'll continue to weather the uncertainty and things that might be in the outlook no matter what the scenario and we look forward to continuing to share that. If we don't talk to you between now and the end of the summer, have a great rest of the summer. And we'll look forward to seeing you in person, hopefully in the fall. Thanks, everyone. Have a great day.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.