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 2023 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 unless otherwise specified. During the call, we will make forward-looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks, and actual results might differ materially from any forward-looking statements that we make today. Information regarding these risk factors is available in our SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2022. 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. Our second quarter results once again demonstrated the durability of our portfolio, and the strength of our execution, allowing us to deliver higher core growth, margins, earnings, and free cash flow. Core revenue growth of 5.5% reinforces that our strategy is working, building leading positions across our customers' critical connected workflows with performance reinforcing the resilience of our transformed portfolio. We also delivered record margins in the second quarter, expanding adjusted gross margins by 250 basis points to 59.5% and an adjusted operating margin by 190 basis points to 26%. We're converting more revenue to earnings and more earnings to cash, with 9% growth in adjusted earnings per share and free cash flow in the quarter. Our ability to consistently drive off performance is directly tied to our culture of continuous improvement and dedication to the port of business system. Our mandate this year to unleash FBS, which is driving record productivity from Kaizen activity across the enterprise, and increasing our confidence in our raised outlook for the year that we believe further positions Fortive for accelerated compounding in 2024 and beyond. Turning to Slide 4. I wanted to provide an update on what we are seeing and what we are expecting over the course of the rest of the year. Starting with health care, industry recovery is on track as labor and productivity challenges continue to moderate. We are seeing traction on our pricing and productivity initiatives, yielding sequential growth and profitability in the second quarter. We expect further improvement in AHS in the second half with higher core growth and operating margins. We also continue to drive growth in our software and services businesses with SaaS revenue up mid-teens on strong enterprise growth…

Thanks, Jim, and hello, everyone. I'll begin on Slide 10 with a quick recap of our second quarter revenue performance. We generated year-over-year revenue growth of 4% with core growth of 5.5%. FX was a 90 basis point headwind to growth. Turning to the geographies. North America revenue grew high single digits with growth in all three segments. Western Europe revenue was essentially flat in the quarter, following mid-teens growth the prior year. Asia revenue grew mid-single digits with over 20% growth in Japan and India and low single-digit growth in China. We saw strength in healthcare in China. As expected, however, growth was muted by COVID reopening tailwinds that benefited the hardware products revenue in the second quarter of 2022. Looking ahead, we continue to expect China growth to moderate in the second half as we lap outsized growth in prior years. Turning to Slide 11. We show operating performance highlights in the second quarter. As Jim mentioned earlier, adjusted gross margins increased 250 basis points to a record 59.5% driven by volume, FBS initiatives and strong price realizations, which more than offset higher inflation. Adjusted operating profit margins expanded 190 basis points to 26%, another Fortive record, reflecting higher gross margins and productivity initiatives that have started to gain track in the quarter. Adjusted earnings per share increased 9% to $0.85 despite higher year-over-year interest and tax expense. Free cash flow was $300 million, which reflects approximately 100% free cash flow conversion. A testament to our working capital efficiency enabled by the Fortive businesses. Turning now to the guidance on Slide 12. We are raising our previous 2023 guidance to reflect the outperformance in the second quarter. Starting with the third quarter, we expect core growth of 3.5% to 4.5% and with revenues reflecting our normal linear profile…

Thanks, Chuck. I'll start to wrap up on Slide 13. At our Investor Day in May, we highlighted our progress executing our strategy over the last several years, building on our strong foundation and enduring principles that underpin our unique and compelling culture. Talk about the operating rigor and leverage of FBS growth tools to innovate and enhance leading positions across our three segments and five connected workflows contributing to outstanding fundamental financial performance. Since 2019, we have doubled our core growth rate and delivered more than 100 basis points of adjusted operating margin expansion per year, driven predominantly by higher gross margins. We've driven double-digit earnings, annual earnings per share growth, converting working capital as a percent of sales, nearly in half, allowing for us to run our businesses more efficiently and contributing to more than double free cash flow generation over the period. We are now generating 50% more free cash flow per dollar of revenue, which is a testament to our portfolio transformation and the power of FBS, fueling our current and future success and with a $60 billion served market, we have substantial runway to accelerate growth organically and inorganically. Wrapping up on Slide 14, the combination of portfolio work we have done, the rigor of the Fortive Business System and the development of leadership capability around the world is driving better-than-expected growth and operating performance in 2023 despite a continued evolving macro environment. As a result, we've raised our outlook for the year. And as we look ahead to 2024 and beyond, we are confident in our ability to accelerate our progress. With a high-quality portfolio of desirable brands, segment strategies favorably aligned to sustainable secular trends, industry-leading margins and free cash flow and best-in-class execution. Fortive is poised to deliver exceptional earnings and free cash flow compounding in the years to come. Our attractive funnel of bolt-on and adjacent M&A opportunities across our three segments, five connected workflows drives upside, making Fortive a more durable, high-growth cash flow compounder and a premier company delivering exceptional value to shareholders. With that, I'll turn it back to Elena.

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 Jeff Sprague from Vertical Research.

Hey, thank you. Good day, everyone. Can we just drill a little deeper into tech? Just want to clarify what you said about orders. So orders decel but were stronger than expected. And I guess you're talking about backlog being pretty healthy. So are you actually running at a book-to-bill above 1 in tech?

Hey, Jeff, it's Jim. A couple of things. One, I think it was better than expected. As we mentioned in the prepared remarks, we've seen some slowing in some places, obviously, or maybe more moderating for sure, places like China as an example, but we're seeing some acceleration in investments from places like aerospace to defense customers. So the book-to-bill -- I think our orders were down about 10% in the second quarter. But to put it in some context, it's up, those orders are still up 30% from three years ago. So we're still seeing good demand here. And the backlog is actually above our expectations. We've talked about that excess backlog, and that backlog today is above expectations to what we thought going into the year. So anyway, I'll stop there and if you have any follow-up.

No, I'll just switch gears to AHS then. On the channel distribution shift that sounds like -- I don't know if you viewed it as a hump, but maybe kind of the risk of any kind of leakage during the transition would have happened in this quarter. Is that fair? And then you've got kind of a bit clearer sailing on how things play out over the balance of the year?

Yes. We're really pleased with the performance of ASP in the quarter. As we said, we had really strong capital placements which bodes well for the rest of the year and obviously into the future given the consumables. Our project, what we call Elevate is on track, and it certainly was a headwind in the second quarter, but nothing that we didn't plan for. So I think when you look at it mid-single-digit growth, even better than that ex Russia, exit out of Russia. So really a strong performance from a growth perspective in the quarter, and we think really as we kind of play out the rest of the year, we're going to see continued performance there just given the work we've done and given that headwind from elevate ], really, there's a little bit in the third, and then it really goes away completely in the fourth.

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

Hye, guys. Just wanted to follow up on the AHS question. It looks like the margin was tweaked lower just adding up the quarters. I think like maybe 50 basis points below that 24% you had talked about at your Investor Day. Maybe just a little bit of a more shallow recovery in second half, but still earning strong in the fourth quarter. Just curious, as we kind of look out to next year, on the way to that 30% margin, I just wonder obviously reaffirm that. And do you like step up to more of a linear move from what you thought this year would be and kind of capture that next year in the margin? Or are we just kind of like a little bit of a shallower inflection on the way to that 30%? I'm just trying to figure out if '24 is kind of like a more linear year considering '23 is a little bit below expectations?

Yes, Steve, this is Chuck. I think the change this year in terms of the guidance is it's Invetech being a little bit lower than we expected in Q2. As far as moving forward, we note the sequential improvements that you talk about here and then that's with -- as COVID comes off and self-help with some of the productivity initiatives and also seeing more price. As you look into next year, well, we're not calling next year, but we expect to still have those tailwinds around COVID and pricing. And I think sequentially, it'd be above the margin expansion that we normally would expect. We talked about mid-single digit and 75 basis points, it will be elevated from that, but we're not going to get to 30% next year, but we're going to continue to make progress and have good margin expansion through next year, and you'll see it as the electric procedures recover, we will expect that to continue to be a tailwind for quite a while.

Yes. I guess my question was more along the lines of like is next year -- should we view next year as kind of a plot in a linear, from a linear perspective on the way to that 30%? Or is it -- does what happen this year kind of make that target more back-end loaded to maybe '25, '26, '27 type time period. That was my question is '24 more of a nice recovery year early on? Or is it more back-end loaded to that 30%?

I don't think the back-end loaded much, it's not back-end loaded. I think you're going to see good progress towards that. And because I think we're going to see stronger top line. I would just add, I mean, when you look at the trajectory now, we already have -- when you look at Provation, when you look at Fluke health, when you look at the Censis part of our sterilization business. Those are already plus 30% operating profit businesses. So the growth trajectory of ASP is really what we're talking about. And when you think about it, I mean the fact that we -- what we did in the quarter relative to placements going to accelerate consumables in '24, consumables coming back. And I think our launch pad here, I don't want to get too ahead of our skis, but we took a good step forward in the second quarter relative to margins for health.

Yes, totally. And then just one last one. Where is the $350 million today? You had $350 million of excess you say it's going to be $200 million or something at the end of the year. Where is the 3 -- where is that number today at the end of the 2Q?

So about 300 -- we still have about $330 million of excess at this point.

All right. I'll round that up to $350 million.

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

Good morning out there, Jim and Chuck and Elena. The IOS margins up 400 basis points on pretty limited volume is impressive, of course. But -- what -- is that sustainable? I mean, it sounds like it's sustainable given your guidance and such, but will -- is there any risk that some of that price cost spread that you're capturing right now perhaps goes the other direction on you in the next 12 months or so?

No, I think there's a couple of things going on. As you said, I think we had really -- I think it speaks to the power of what we've been trying to do in IOS as we continue to accelerate, obviously, acquisitions that we made several years ago, FAL did exceptionally well, our EH&F. So you're seeing the margin improvements from those businesses, Fluke while little slower in the quarter, still very strong in the year and it's obviously been a perennial good margin improver. So I think you probably won't see 400 basis points every quarter. That's probably a little strong. But I think it just speaks to the fact that the work we've been doing over the last few years to really get the entire segment up. And I think the second quarter was a good view of what the potential is in the entire segment.

Okay. That makes sense, Jim. Now I want to just follow up on Steve a little bit here on this one. But the comment on the Slide, I just lost the Slide, but that said pockets of industrial slowing. Can you parse out what part of that might be inventory destock versus kind of real sell-through demand that could be leaking a bit?

Yes. I think what we -- a couple of things maybe. In PT, as we think about the entire segment, the book-to-bill is about 1.0 for the year. That's better than we thought. So year-to-date, we thought we'd be about 0.9, we're at 1.0. So I think what we've seen is better orders in the year than we anticipated, obviously, on stronger growth on the revenue side. What we have seen in Sensing in particular is parts of Sensing are doing really well. Qualitrol is executing very well. We think Anderson-Negele is going to be good through the year, parts of the rest of Sensing. But we are seeing some slowing in industrial businesses, particularly in Europe with some automation customers. We're seeing some slowing in places like HVAC with some OEM customers, mostly on the OEM side and Sensing is what that comment really has to do and also in some of the semiconductor business, parts of the business are Sensing. So that's the slowing. And we would anticipate -- this is kind of nothing different than we originally thought would happen. But that's kind of what we're seeing right now and what we anticipate will continue through the sort of second half of the year.

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

Thank you. Good day, everybody. Wanted to circle back on this concept of the excess backlog, and I know you just sized it. But just be interested, I know there's the implied earnings visibility that you get from elevated backlog, but can you share with us some thoughts about the flexibility within the backlog? Like let's say, something happens, whether it's supply chain or customer readiness, how much flexibility do you have to immediately just draw down the next in line on the backlog and have that kind of seamlessly flow through to the P&L? Because when we hear excess backlog, we immediately think there's flexibility, but sometimes it may not be as flexible based upon customer timing and so forth. But any color there would be helpful.

Yes. A couple of things, Deane. So as Chuck said, we've got about -- the excess backlog is higher than we anticipated at the start of the year. It's about $330 million. We'll probably get that down in the $200 million range by the end of the year. And it's -- I would call it, it kind of depends. But if we were to think about half of that excess is at Tektronix, that's relatively flexible and has been -- I wouldn't say within a month, it's necessarily flexible because it does have some supply chain aspects to it. But it's -- in the sort of 90 days kind of time frame pretty flexible. Sensing a little bit less, depends on some of the OEM customers, so and Fluke pretty flexible. So I would say that's kind of where it stands. And that's why we think it is a good insurance policy relative to slowing, and that's what you saw in the second quarter, right? You saw us get a little bit more backlog out. EMC was a little stronger as well than we anticipated. And so those are places where we think we can use the backlog in a way that sort of prevents any near-term challenges. And also maybe just to add on to the Scott question because I didn't answer the destocking piece. We're really not seeing a lot of destocking or de-booking, very little, pretty much around our normal numbers, which is pretty small. We see some rescheduling of backlog on the OEM side in Sensing. That's why Sensing is a little slower in the second half than maybe the rest of the portfolio but we really haven't seen destocking. We haven't asked distributors really not asking to cancel orders or anything like that. That's been pretty minimal to the point. That's why we think the backlog remains flexible.

All right. On behalf of Scott, I'll thank you for the destocking answer. And then my follow-up, just any color on the excess of 20% in India and Japan. Is that a comp issue? Is there anything specific on the business side you call out?

Yes, it's a little bit of a comp thing on the Japan side. We'll still see, I think, high single-digit growth in Japan, the remaining part of the year, but certainly a little bit of a comp side in Japan. India, no, we've seen good growth in India. We're seeing I think we're getting some benefit of some of the reshoring and some of the investments that are going -- the sort of foreign direct investments that have been going into India here over the last 12 months. We benefit from that. Our big companies like Fluke and Tek and ASP are seeing the benefits of that, but even more broadly in some of the rest of the portfolio. So we think India is going to be probably 20% the rest of the year. Those are smaller regions in some like Western Europe, so they can move a little bit more on a big chunk of business, but we like the demand dynamics right now in India in particular.

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

Hey, how are you guys? I was going to ask AI question, but I was made fun of. So I'm going to ask something else. I'm going to keep beating down this dead horse with inventories. In the revenue breakout, and maybe this is not the best way of looking at this, but I think revenue through distribution was down 13% year-over-year this quarter. So how do you think just inventory levels among your distributors because I think our data shows that actually people continue to build inventory in the channel. And I know you've sort of talked about it quite a bit.

I would think demand -- I always think of inventory in the channel is a function of demand. And so as demand moderates a little bit around just the big numbers we've had over the last couple of years, there are pockets of inventory where we might see some increased inventory. But as I said on the previous sub couple of questions. We don't see any of that in a major way. We do get, particularly in the U.S. and Europe around Fluke and Tek, we get pretty good visibility to the inventories. And so I think the places that we don't -- obviously, those channel numbers that are in the Q and the filing represent also channel inventory relative to what we see in ASP, what we see in Sensing. So it's a broader view of channels, and in many cases, international partners. So I think we really managed relative to how we think about demand creation. We're still seeing strong point-of-sale attack. And so that's really fulfilling the backlog and customers are really hanging around for those orders, and they're getting them. And so we're still seeing strong POS. And Fluke gets a little bit more mixed, but it's still -- it's really more of a moderation than it is anything. We still saw mid-single-digit POS growth at Fluke in the second quarter in the United States. We saw even better growth in China and even Europe was pretty good for POS. So as those things moderate, there'll be some verticals that probably will get a little bit of channel inventory but we really have a strong process for understanding that and putting out demand creation vehicles for that. I would say the other thing is, we have a number of -- we probably have -- we have a very good second half for innovation and product launches. And so I think that's also an opportunity for us to continue to really help the demand creation side where we might have some excess inventory.

No, I appreciate this. And just a question on Fluke and Tek. I remember being in China in 2018 when sort of Chinese CapEx hit a wall and that these businesses were hit in reverse with all these mega projects in the U.S., right, how much visibility do you have related to specifically Fluke and Tek to these projects? When would you expect to get orders and does it structurally change the growth rate for these businesses over the next couple of years? Thanks.

Well, I think on the tech side, we are starting to get visibility. In fact, even in some semiconductor businesses where the business is obviously slowed a little bit. We have already had conversations with customers along a number of product lines about 2024 investments. And I think what's been good about tech is that they've taken that part of -- they've taken advantage of some other opportunities in power and in the aerospace and defense customers to continue to offset some of that. So that's a good story and will hopefully be a good story in '24, although still too early to tell. On the Fluke side, it's really going to be less around when those facilities are getting built as much as it is going to be keeping those facilities up and running. So we're probably a few years out from some of that. When a manufacturing plant gets built, obviously, there's some advantage to what we do through the build cycle electrical contractors buying more Fluke equipment to build some of these facilities. But the real opportunity is going to be once those facilities are up and running and the maintenance staff and those facilities are building out those opportunities. I think we're probably a little off from that opportunity. But I think until then, we're seeing good -- the secular drivers that we've got at Fluke in power and solar and some of the sustainable investments that we talked about in the prepared remarks are remain a good opportunity for us.

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

Hi, folks. Just wanted to follow up on FAL and with some of the, I guess, changes going on in the construction markets, so maybe a little bit of mix divergence, more manufacturing, a little less in some of these commercial or warehouse verticals. Anything that you guys are seeing across customer base that gives you any kind of cyclical impulse, whether this business is countercyclical, more procyclical, like I guess this is maybe one of the first real construction cycles since you guys have owned some of these assets. Like anything that you would just point out cyclically that you guys are noticing it seems like your business is doing well, but anything would be helpful.

Yes. I don't -- we don't have a lot of exposure to commercial buildings really in the sense of traditional in FAL. So I think maybe we have commercial customers or maybe 5% of sales or something like that. So it's not a big driver. What we are seeing is, quite frankly, on the positive side, at Gordian is a lot of deferred maintenance. And what Gordian Solutions and quite frankly, what we see in FAL is taking advantage of deferred maintenance and seeing the opportunity for deferred maintenance, improving project time line. So that's really been a big growth driver for FAL, and I think it really played out in the quarter, and we think it plays out certainly in the second half. So I think that leads to some of the infrastructure improvements that not only is going on in state and local, but also in the commercial industry, just more broadly. What we're seeing from customers really in FAL also is the fact that people want to understand the capital in this time of return to work and how are my real estate assets working, particularly with things like retail customers, they really want to understand their investments, and we really do -- our solutions are really oriented towards understanding that how to bring facilities costs down. So really, in some respects, the reassessment that people are doing around their commercial infrastructure, to some extent, is a growth driver for us and that we sell software that really helps them bring that together and really helps them understand their expense, what they're spending and where they're spending it and how they might take opportunities to save money. We talked about in the prepared remarks about a customer that is ahead of schedule on a $14 million cost savings because of our solutions. So quite frankly, I think a number of the sort of noise that's in the commercial real estate market that I think your question is really orient at in many respects is, to some extent, a driver for us because of the solutions we have.

Got it. Makes sense, seems what the numbers say as well. And then maybe just shifting gears. We've seen a few folks thus far this earnings season have maybe a bit more of a reaction from customers from lead times normalizing, so not necessarily a destocking or a change in point of sale. But are your lead times across some of the hardware businesses improving more materially here in 2Q? And is there sort of a customer impulse reaction to that?

Yes. I think when we see a little bit of that is at Tektronix, where our lead times have come down and it does create a little bit of a pause. That was embedded in our guide. That's why we thought orders would be the way they were. So yes, to some extent, we're seeing that as lead times moderate and you don't need to order something 18, 20 weeks in advance, you can now order at 6 to 8 weeks in advance. There is some moderation. But that's really what's been embedded in our guide from the first places. We've made some assumptions around that. And by and large, that's come into play the way we thought. At Fluke, a little bit less so because our lead times have been always pretty good. So I think to the extent we're seeing any of that, it's really a Tektronix. And as I said, we've embedded that as we give you sort of the book-to-bill dynamics and we give you some of the order growth rate, it's really embedded in those kinds of numbers.

Your next question comes from the line of Julian Mitchell from Barclays.

Thanks a lot. Good morning. Maybe just wanted to circle back to AHS as people seem very focused on that one given the history and so forth. So if I look at the second half it looks like you're assuming sort of $30 million, $40 million of profit step up, I think, half-on-half in AHS and maybe sort of $50 million or so step up from the top line there. And obviously, last year, we had a more stable half-on-half performance. So is the delta on the top line this year, a lot of that is the elective procedures element? And then when we look at the profit step-up with that, is it sort of just normal leverage plus some of that distribution channel shift and maybe some cost savings? Any sort of color as to that half-on-half move.

Hi, Julian, this is Chuck. A couple of things going on there. Yes, I think you've got the numbers roughly right in terms of the first half, second half step-up, things going on in the second half. Basically, normal seasonality takes into account a lot of that, especially in the fourth quarter. But also coming out of Q1 in the first half, China was obviously really low with the COVID and the electric procedures there. That was -- that made Q1 lower. But Project Elevate, the dealer shift is going to give us more revenue in Q4 as we work through that and also more profit. And then we're getting more price in as we go through the year. So I think those are three things that really help. And then the self-help that we put in, the productivity things that we announced earlier in the year also helping us. Our incremental going from first half to second half on that step up to 65%. And that's all the things I mentioned and including seeing more consumables in the Tek now. Let me stop there and see if I covered the basis here.

That's very clear, Chuck. Thank you. And then maybe switching Tek. I don't think capital deployment has come up much on the call yet. I think the buyback did sort of get going again in the second quarter after a quiet six months or so. And clearly, on M&A, it's been quiet for 18 months given the -- partly given the tough M&A backdrop. But we get lots of questions around whether there's been any change in view fundamentally about M&A or some of the types of deals? And then also, is there more of an effort now to balance M&A with buybacks in terms of cash usage. So just any sort of thoughts on that given that buyback spend in Q2.

Julian, let me take the buyback, and then I'll pitch it over to Jim to talk about M&A. We remain opportunistic with our buyback. I think we, Q1 is our lowest cash flow in the quarter, and we didn't do any there. But we'll be opportunistic as we move forward when we think that we're undervalued and see an opportunity. So I think that's going to continue to be the case. I think from a capacity standpoint, what we're doing here doesn't change anything about when you look at 3 to 5 years where actual capacity. So we've got plenty of capacity.

Yes, Julian, I would say we've been very busy this year. As you point out, it's been Provation, since we did Provation. But I think where we stand today its activity is actually pretty good. And we've seen some things transact in the market lately that wouldn't suggest prices have come down necessarily. But there are some pockets of that. And our bolt-on activity is very busy right now. But we remain disciplined, there's a number of processes that have failed given some sellers lack of desire to sort of get pricing into what we think is the appropriate frame. So we'll remain disciplined around the opportunities. But we do think there's a number of things out there that are possible. And we'll continue to work through them. And with the work we do and the diligence we do and we look forward to when those things get done. We don't have a burning time clock of getting something done for the sake of getting something done as you well know, we'll remain disciplined and there are opportunities for us, I think, in the back half of the year to do that.

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

Hey, good morning, everyone. Jim, can you give us more color by region and especially what's going on China and Europe. Obviously, China has become more of a concern recently and maybe your, but I think you already did say China is one of those pockets of industrial weakness, and that will continue to decelerate moving forward. But Could you give us more details regarding how China and Europe are reflecting your guidance moving forward?

Yes, sure. We've obviously had a -- we've had a strong North America view, and that will continue second half, probably in that mid-single-digit range. And quite frankly, when you look at the two-year stack in North America, very, very good, kind of mid-teens kind of numbers. So we feel good about where we're at in North America. And obviously, as you know, Andy, that's where a majority of our software businesses are. We're getting the benefit of obviously that in our North American growth rate. We're getting the benefit of a lot of the great work that our ASP team is doing as well. So that's kind of North America. I think relative to Western Europe, probably roughly flattish. Europe has been so strong for a while now. It will be mid-teens and, it was mid-teens in a two-year stack for the second quarter. So we think it will be more flattish around the second half of the year, maybe up a little bit. We're seeing some good traction in some places, but we're also seeing some, as I mentioned, in Sensing, where we're seeing some industrial OEMs slowdown, and that will be -- that's reflected in our second half guide. Relative to China, as you mentioned, I think we've been consistent from really all 6 months of the year and is that we've had four really, really strong quarters of growth in China, stands up exceptionally well against many, almost everyone. We did think the market would take a little bit of a breather in the second half, and we said that back in February, and that's really -- we really still believe that. So embedded in our guide is really more kind of low single-digit growth in China for the second half. And that's more like high teens -- accelerating kind of low 20s on a two-year stack. So we're really accelerating in China on a two-year stack. So business is still there pretty good. It's just off a very large base from the second half. And then high-growth markets, as I mentioned, on the India conversation, we still think there's a number of opportunities in the second half to take advantage of some opportunities. But those are -- those kinds of go -- they're a little bit smaller, so they tend to -- the growth rates tend to move around a little bit, but we do feel like we've got some opportunities in some of the high-growth markets in the second half.

Got it. So you can make fun of me, I'm going to ask an AI-related question, but I'm going to ask it in the context of precision you talked about some of the verticals fueled by geopolitics and investment in AI and compute. And I think PacSci you had guided much lower for the quarter than you actually reported. So I think you talked about A&D inflecting. Maybe you can talk about the inflection you saw in PacSci. Was it AI-related? What's going on there? And what does it mean for the future?

Yes. I think there's probably two places that we've seen from a customer investment perspective. I would say, number one is we're seeing investments in quantum computing and R&D organizations that are really working towards opportunities for AI. So obviously, you got to get the hardware in order to get the benefits of AI. And Tektronix is really playing strongly in that regard. And we mentioned -- we obviously mentioned that order in the prepared remarks. EMC is really more a geopolitical aspect of less AI-related, just more in general of what they've historically done. They've got a tremendous backlog of the business. It really extends. We don't even include that backlog in our hardware backlog because the number is very positive. But we've had some supply chain capacity challenges. We got more out in the second quarter than we anticipated, as you said, and we're continuing to work through that. But we, in the second half, we probably have some opportunity in the second half to do better than that, but we've -- we'll see where that goes and some of the improvements, we've made are really good, but we want to see those more sustainable, particularly with our supply base at EMC. But we -- the demand for EMC right now is at an all-time high.

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

Hi, guys, good morning. So I think we've covered AI. So let's move to price. So you're one of the few companies actually seeing better price Q-o-Q, I think, 50 basis points better, if I'm not mistaken, maybe a bit more than that. So just curious, it seems like you're still pushing price, especially in AHS. So what is your perspective on how pricing looks in the back half of the year, especially within AHS, is there still more runway in health care? And then I'm just also quite curious as well, how pricing looks across software and services?

Yes. So I would say a couple of things. In the quarter, a little bit better than we anticipated, really around Sensing. As we said, we overdelivered in Sensing, and I think that brings the number up where we probably are getting the most price, if you will. Relative to health care, it will accelerate a little bit in the second half just because of Elevate and the channel mix change that we have, that will probably be more true in the fourth and then third, but we will see that. And yes, we're continuing to see price and upselling, cross-selling, our net dollar retention, as an example, has continued to improve, and we're getting some opportunities to really push more price and that sum of the story of the margin improvements in 2Q and IOS is really the good work we've done. The leader in the clubhouse that net dollar retention is service channel, I think we're at almost 115% now. I think it just gives you an example of us continuing to push the opportunity for really value. I think it's -- on the software side, it's really about value and the value you bring. And if we can continue to have those features that we can go cross-sell and upsell, we didn't talk much about it on the question around AI, but AI does present us an opportunity over time to create more features and opportunities within our software business to improve net dollar retention. We've seen that in Censis as an example with the AI launch that we had with them in the second quarter. So we do think there's plenty of opportunity for net dollar retention to really continue to go up, Nigel. And that's really where we'll see the price component of what we do in our software businesses.

Okay. That's great. And then moving on to Fluke. The flat revenues, it sounds like units down mid-single digits. I think you called out China comp has been quite tough there. But are there any other pockets of headwind that you call out? Just curious because this is to canary in a coalmine.

Yes. I think when we, we probably, if anything, such a strong first quarter there. When we look at the mid-single-digit growth in the first half, at Fluke, we really feel good about that number. And yes, there's a -- I would say the industrial business has got a little bit of slowing there, but the calibration business and other components of the business are accelerating. So all up, I think the mid-single-digit number on the back of such a good first half last year, I really think speaks to the strength of Fluke. The second half will look similarly in terms of about mid-single digits for the second half, and that's really on the backs of even higher growth last year in the second half. So in many respects, kind of an acceleration from a two-year stack. So overall, we like the trajectory in the business. You're right. There's a couple of places pockets of things we're continuing to watch. We continue to watch the PMI and industrial production. But I think the team has been executing well, a number of good technology launches. We had -- the eMaint business is performing really well so. So we've built some things that are into the portfolio over time, as you well know, trying to make Fluke less cyclical, more tied to secular drivers, and we believe that will continue to play out here in the second quarter. We've got a number of new product launches that could take advantage of those opportunities as well. So if there is some slowing in the marketplace, we think that can be -- we've got a number of actions out there that we think can countermeasure some of the potential slowness.

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

Hey, good morning, guys. Again, I want to just on the short cycle stuff. One, I just want to make sure I understand, Fluke flattish this quarter, it accelerates in Q half in the second half? I just want to make sure I understood that. And then on Tek, you mentioned earlier, orders were down 10%, but still up 30% from three years ago. Like that's obviously very positive. But at the same time, does it like scare you in a way that like what's the right or not like the normal level for a business like that? Because if we're talking about 350-ish of excess backlog going to $200 million and half of that is Tek, it's like $75 million of excess revenue delivery versus orders in the second half alone, which is pretty significant. So I just want to understand like where these businesses exit the year and what it means for comps into next year from like a 4Q starting point?

Yes. So let me clarify the Fluke comment. What I said -- what I say Fluke is, we were mid-single digits in the first half this year, will be mid-single digits in the second half. So from that standpoint, no acceleration. The quarters might move a little bit, but just if we think about first half to second half, about the same. However, because we grew more in the second half of last year, the two-year stack does accelerate a little bit. So hopefully, that clarifies the Fluke comment. I think relative Tek, we always knew that there were a number of parts of the business that we're really fulfilling over time. And as I mentioned, plus lead times going down would ultimately impact orders. What's been nice to see is in the strength of point-of-sale attack which around the world has continued to be good. And I think it continues to solidify our belief that the demand is real and that the demand can be played out over time. And that's why that we believe that demand, the excess backlog, if you will, remains an insurance policy against anything that might occur relative to some slowing that's going on. So I think that I'll stop there, and hopefully, that clarifies your two points.

And then just a follow-up on margins. Like if I look at your Slide 16, obviously, a big ramp in all three segments from 1Q to 4Q. And I just want to kind of -- if you can frame out maybe how much of that variance from 1Q to 4Q is like normal seasonal? And how much is like a new jumping off point from the fourth quarter level into next year?

I think the -- Rob, it's normal seasonal. It's just it's more -- I'm sorry, Joe, sorry. This is normal seasonality step-up from Q3 to Q4 when you're talking about what's going on there at the fall-through margins. I do think that but embedded in there is some of the self-help we did in the first half, and that will carry over and be held in the certainly in the first half of next year and then the pricing that we've been putting in. So to a certain extent, it is a better jumping off point going into next year. But keep in mind that Q4 to Q1 step down. But when you look year-on-year, I think those things are going to be tailwinds with pricing self-help and then the Elevate and health margins perhaps give us a great stepping up into the first half of next year.

And your next question comes from the line of Joe O'Dea from Wells Fargo.

Hi, everyone. Thanks for taking my questions. First, just one related to a comment around channel distribution in AHS. And I think you talked about how still have a headwind in the third quarter, headwind goes away in the fourth quarter. I guess I'm curious about the tailwinds associated with this and what that looks like. And I don't know any framing around kind of the cost headwinds you've seen so far, but then as you sort of reach that transition point, how long you think it takes to then sort of reach the more elevated margin target opportunity that you have there?

Well, I would say relative to just the transition itself, the biggest impact, I think we ought to think about the biggest impact is in the second quarter. There's some impact in the third and that sort of equates itself out of the number by the fourth quarter. So that's kind of the sort of the sequential aspects of the impact of it. We think that benefits -- I think we talked about this, it benefits margins from the perspective of, we think we get better price. And so in that sense, it has a margin impact as well. I also think it has a growth impact, and this will probably be more a late Q4 in the '24 impact. And we still need to see it, but the direct aspects of our terminal sterilization, which is our a really strong business for us allows for us to accelerate the sterilization cycles that go on in our equipment, meaning that we can, now that we're direct, we have much more contact with customers and our application engineers will be more directly working with customers on the sort of efficacy of accelerating sterilization into other products that might be in the sterilization lab. That should have impact on growth over time. So not only in terminal sterilization, but also in our biological indicator business. So we feel that there's a real -- there is a growth in this as well. We think there's a customer satisfaction in this as well. And I think to some extent, the reason why our capital numbers were better in the second quarter was because customers are starting to understand that they're going to have a better opportunity to really have ASP salespeople, ASP application engineers in their hospitals every day helping them out. And so I think it's a margin and growth story. It certainly is going to -- has already started to play out, I believe, on the capital side, plays out on the consumable side in the second half and certainly into '24.

And then I wanted to ask one just on orders. I think you talked about Precision Tech book-to-bill at 1.0 better than the 0.9 you were anticipating. I'm not sure about Fluke, but orders up mid-single digit, I guess, if anything, maybe a little bit better than expected. And so I don't know if there's sort of anything overarching about it, but what you would sort of most attribute to seeing some of these order trends kind of better than anticipated out there.

Yes, I think, well, here's what we're seeing. I mean I really if we, as we started the year, we thought there'd be some slowing in the year just because of the moderating aspects of some of our businesses and maybe some economic impact in pocket. We really have seen -- we really haven't seen much of that in the first half of the year. But embedded in our guide is still some aspects of thinking that there's going to be some economic impact. Obviously, PMIs in the world, some of the portfolios still have some ties to industrial production. We've been able to mitigate all that because of the strong strategy around secular drivers and the recurring revenue parts of the business that have played out exceptionally well. So we'll continue to -- that was a book-to-bill of 1.0, which included, by the way, Fluke orders as well on that overall book-to-bill. So I think where we stand today is in a much better position. As we said, the excess backlog number is more robust than we anticipated as we go into the second half. And I think that bodes well for the three things we talk about going into the year. If there were some concerns around the macro that we would have the strong backlog, excess backlog, as I described, software and recurring revenue and the self-help work that's going in AHS. And I think what you saw in the second quarter is all that manifesting well.

And our final question comes from the line of Brett Linzey from Mizuho Americas.

Hi, good morning, all. Yes, thanks for taking the question. A lot of ground has been covered, but I just want to come back to price. Clearly, advanced here in the industrial cycle and seeing some softness in some of those hardware businesses, how are you thinking about the ability to take more price or hold the ground on price should the macro develop more weekly here, particularly within Sensing.

I think, number one, our ability to hold price, we feel very good about it. I think the quality of our franchises, the kind of value and investments we've made in innovation, are really speak to our ability to hold price. And we think of it as value creation and our ability to create more value for customers and get paid for it. And I think you see that across in a number of the things we were talk about, I think we see that. So we think strongly, we can hold price and we feel we can continue to get it, probably not at the rates we got in '21 as an example in '22 but we've always been a good price leader relative to, I think, a number of companies. And I think we -- there's no reason why we wouldn't continue to be as we go into '24 and '25.

And this concludes our question-and-answer session. I will now turn the call back over to you, Jim, for some final closing remarks.

Thanks, Rob, and thanks, everyone, for the time today. Hopefully, you get a sense of the excitement in the second quarter and the conversations we had. I think as we look into the second half, the raise of our guide really speaks to the confidence that we have out there despite probably some noisy things. Our strategy is playing out the way we anticipated, and we're excited about that and we look forward to sharing some of the details with you as we get through the follow-up calls and a number of things that we'll be doing here in the third quarter. Between now and then, have a great summer. Thanks for everyone. We look forward to your follow-up questions and take care. Thank you.

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