My name is Kristina and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporation's Fourth Quarter and Full Year 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, Kristina and thank you, everyone, for joining us on today's 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 represent 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 the 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 the actual results may differ materially from any forward-looking statements that we make here 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, 2023 [ph]. These forward-looking statements speak only as of the date that they are made and we do not assume any obligation to update any forward-looking statements. With that, I'll turn the call over to Jim Lico.

Thanks, Elena. Hello, everyone and thank you for joining us. I'll begin on Slide 3. Fortive delivered outstanding operating performance again in 2023 through our proven formula for value creation. Our transformed portfolio of businesses delivering consistent through-cycle performance reflecting a more durable company with mid-single-digit core growth in 2023 despite a mixed macro environment. Strong execution by our teams drove another year of record margins with adjusted gross margins now approaching 60% and adjusted operating margins nearing 26%. Throughout 2023, we focused on unleashing the full power of FBS, reflected by record participation in KAIZEN events, including our largest ever CEO KAIZEN week. The results of these KAIZEN's were tremendous, including an average of 50% productivity and 50% lead time conversion improvements. Our industry-leading free cash flow generation funded accretive capital deployment, including our best year executing on bolt-on acquisitions, accelerating our growth strategy across all 3 of our segments. We also opportunistically bought back shares and increased our dividend, enhancing shareholder returns. In summary, we remain committed to our strategy and its success is evident given the consistency of our results which I'll highlight on Slide 4. We built Fortive to drive growth, drive progress and drive value. Reflecting on our evolution, we made significant steps again in 2023 towards our vision of a premier company. This includes 5% core growth and 160 basis points adjusted operating margin expansion. The benefits of our portfolio transformation are reflected in our progress to date, averaging rule of 35 [ph] performance over the last 5 years. FBS is driving commercial success as we expand into new growth markets, speed innovation cycles and maximize investment returns across our 3 operating segments. For example, in 2023, we saw a 33% increase in our revenue attainment on new product launches. Many of these new…

Thanks, Jim and hello, everyone. We ended the year with a high level of performance, generating earnings growth of approximately 3x revenue. Core revenue growth of 3% in the quarter reflected an acceleration in IOS and Healthcare, partially offset by anticipated slowing in Precision Technologies. We achieved record margins in the quarter and full year, driven by the strength of our brands. Earnings per share of $0.98, reflecting operational beat at the midpoint with earnings up 11% year-over-year. And free cash flow was $413 million, down versus the prior year as expected and up 56% on a 2-year stack basis. For the year, core revenue growth was 5%, exceeding our initial outlook of 4%. Adjusted gross margins expanded by 180 basis points to 59.5%. Adjusted operating profit grew 11% and margins expanded by 160 basis points. Adjusted EPS of $3.43 grew 9% and we delivered on our free cash flow forecast of $1.25 billion which represents 32% growth on a 2-year stack. Turning to Slide 9; I'll now provide highlights on the fourth quarter performance of each of the 3 segments, beginning with Intelligent Operating Solutions. Q4 core growth was 6%, reflecting continued momentum across this segment. with stable POS trends in all regions and new logos and customer bookings contributing to strong ARR growth. Adjusted operating margins expanded 300 basis points to 34.2% driven by margin expansion in all businesses, accretive software mix and price realization and productivity initiatives. Overall, we have seen better durability in Fluke throughout the year. given the benefits of innovation and customer adoptions in key growth verticals. Environmental Health and Safety continues to see strong high net growth at ISC and double-digit SaaS growth at [indiscernible]. Facilities and asset life cycle at double-digit core growth throughout most of 2023 driven by continued strength in…

Thanks, Chuck. I'll start this wrap up on Slide 13. I am incredibly proud of the contributions of our 18,000 team members to make 2023 another record year for Fortive. Over the last couple of years, our success executing our strategy to build a more resilient company reflects our strong foundation and enduring principles that underpin our unique and compelling culture. We talked about the operating rigor and leverage of FBS tools to innovate and drive growth across our segments. In addition to higher core growth, the deals we have done are contributing to our multiyear track record, including strong performance again in 2024. Since 2019, we are sustaining 7% revenue growth, delivering 120 basis points of adjusted operating margin expansion per year, driven predominantly by higher gross margins compounding earnings and free cash flow double digits; we have cut net working capital as a percent of sales nearly in half, building 50% more free cash flow per dollar of revenue. This 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. This brings me to Slide 14 and how we drive differentiated performance and value creation for our shareholders. With a consistent and compelling 2024 outlook, including 6% to 8% total growth and over 100 basis points adjusted operating margin expansion in every segment. We are on track to our 2025 target of $4.50 of earnings and $1.6 billion of free cash flow. We are confident in our ability to differentiate our performance and believe our outlook is appropriately balanced, remaining agile to deliver for customers and shareholders should the environment differ dramatically. As we showed at our 2023 Investor Day by executing the Fortive Formula, we expect to roughly double our earnings per share and generate more than $8 billion of free cash flow over the next 5 years. Our M&A funnel remains strong and our acceleration of capital employment as demonstrated in 2023, further positions Fortive as a higher growth cash flow compounder and a premier company delivering exceptional value to shareholders. With that, I'll turn it back to you, Elena.

Thanks, Jim. That concludes our comments. Kristina, we are now ready for questions.

[Operator Instructions] Our first question comes from the line of Steve Tusa from JPMorgan.

Just the kind of trend in the shorter-cycle businesses, Tek and Fluke, maybe just an update on where you stand, book-to-bill how the revenue did this quarter and then how you're thinking about how the year plays out next year?

Yes, Steve, it's Jim. I think, number one; I would differentiate Fluke and Tek here. I think we certainly saw, we saw mid-single-digit growth at Fluke in the quarter. We saw growth in orders, point of sales in the mid-single digit around the world. So I think we're seeing the real benefits of the number of transformation things that we've done from an innovation perspective, also with some of the M&A work we've done and in good shape. And I would say Tek, Tek was low single digits in the quarter but quite frankly, off a 20% growth comp in Q4 '22. So still saw some good performance there. We felt really good about the quarter they produced as well. And certainly, the year that Tektronix had is unprecedented a record year, as we said in the prepared remarks. So as we go into the next year, I think it's -- I think, more of the same at Fluke. We've really seen some resilience and durability activity that we've talked a lot about over the years, playing out there. We probably have a quarter. They're about their fifth quarter of negative bookings. And obviously, we've been working off backlog there. And we would anticipate that book-to-bill there turns positive and probably Q2. So we feel good. North America was really good for tech, where a little bit of slowing that we saw within China as we talked a little bit about our China growth in total and Chuck's prepared remarks. But obviously, part of that Tek's one of our bigger businesses in China. Part of that story is the Tektronix there. So I'll pause there and you've got a follow-up, I'll certainly cover.

Yes. And then just how much price do you assume in the for the guide? For 2024?

We're thinking about 2% to 3%.

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

Good afternoon, just like on the reclass of Invetech to PT, it's a small business, it seems like margins are relatively depressed maybe 6% to 7% margin. Just wondering, I think, Chuck, you went through some of the logic about just maybe talk about what this achieves this class? And maybe just in terms of the importance of this ASP rather AHS acceleration, kind of like how is that benefiting sort of the outlook for AHS because were you assuming that Invetech recovers? Just trying to think about AHS on a like-to-like basis here?

Thanks for the question, Nigel. I'll take the margin question first. We're talking about the business expanding 125 basis points but that's on a like-for-like basis, if you really look at where we ended with Invetech and we're up probably 200,250 basis points but the business is generating margin expansion of 125 and that's what we've got in the guide. I think the rationale for switching it is the event design engineering piece just isn't as big as we thought it was going to be and it's not but not really moving forward. And so the part that is now the majority of this business really fits better in Sensing.

Yes. Nigel, I would just add, we called out in the slide materials that Invetech was a headwind in the quarter for health care to the tune of about 280 basis points. That's probably the largest year-over-year headwind that Invetech has seen. I wouldn't expect the size of that to continue but probably still in the 1% to 2% [indiscernible] continued to be in health care throughout 2024. But that's now reflected in PT.

Okay. That's helpful. And then maybe just on the transition ASP consumables. Just confirmed that's now fully behind us. There's no lingering impact there? It sounds like it is. But maybe I think we can see the clear sort of margin benefits that we should see coming through from capturing that distributor margin. But maybe talk about the opportunities to drive better growth and having that direct customer connection, what do you see as a potential for revenue benefits?

Well Nigel, I would say, number one, yes, we're definitely fully through it. So you saw the benefit of that. I think as we said in the prepared remarks, consumables in North America were up about 7%. Consumables around the world, we're up about 4%. So good performance there. We think mid-single-digit guide for ASP for the full year is a good number. Certainly opportunity to go and on the margin front which we're going after. We were just with the team last week. We actually had them with, we had our Board meeting there and we have the team there for an operating review, highlighting the level of innovation. I talked about in the prepared remarks. We now have a new set of consumables around steam sterilization that are going to now be in the U.S. and Asia that are certified. So a number of opportunities here to continue to improve the growth. Those are obviously all in Consumables which obviously have higher fall-through. So you like the guide here overall held up 125 basis points in margin expansion mid-single-digit growth. We think that's a great launch point. It certainly certifies I think a lot of the things we've been saying about the direct North American strategy and certainly more broadly around the strategy at ASP and how health will just be a real durable grower for Fortive in '24.

And your next question comes from the line of Julian Mitchell of Barclays.

I just wanted to check on the sort of margins in the first quarter. So I realize it's not a big sequential decline in sales but you've got a very heavy sort of sequential step down in margins there in Q1, 100% or so kind of drop-through. So is that reflecting maybe something on mix in any of the businesses in the first quarter versus the fourth? I'm just trying to understand maybe on Precision, in particular, how their margins are starting out the year in Q1?

Nigel, the biggest thing is there's just a seasonal step down in revenue dollars from Q4 to Q1 and that's what gives you a normally seasonal step-down in the margins, pointing out that our Q1 guide is up 75 basis points. So that's a pretty good expansion there. So I think we're seeing pretty good performance across the segments in margin expansion, too.

Yes. And I would just say that guide represents record operating margins in the first quarter for Fortive. So I think when you just look at, we do have some expenses that start back up at the beginning of the year, obviously, salaries and some of those things. There's a little bit of that. But at the end of the day, if you just step back, record, that will be a record first quarter for, in the history of Fortive.

And then my follow-up would just be -- is typical, I suppose, you give guidance for year one and then someone asked about year two. But if I look at Slide 14, you do have that, I guess, it seemed medium-term when you gave it but you've got $450-ish million or maybe $430 million [ph], excluding capital deployment number for 2025 and obviously, a year from now, that will be a formal guide whatever you end up giving not a medium-term aspiration. So I guess I'm trying to ask kind of how, given it is only 11 months away now, that period how seriously should investors treat that number of $450 million [ph] does require a fair amount of M&A over this year. So any thoughts around the M&A market backdrop. One of your acquisitive peers were saying it's maybe looking a little bit better now.

Yes, a couple of things. I think when you look at our history in terms of double-digit EPS growth and the compounding free cash flow, I think, it's not an enormously to get to that $450 million. That's why we put those numbers out there a year ago and we reiterated them in the guide and on the presentation. So we obviously feel good long way away, a lot can happen but we feel good about it. I think relative to the M&A market; we just closed a quarter where we did basically 5 deals -- between including kind of closing in the early part of January. So it's across the board in every segment, a variety of different sources from private equity to private ownership, founder-led companies good breadth across a number of our workflows. So we feel really good about the M&A environment and we just demonstrated really good progress against the M&A environment. EA is starting off really well. And where we start -- we now think that's going to be accretive in the year, only right after closing it. So we've seen really good things there. So, I would say the -- what we've done, we're really proud of that work, good work that set us up well back to your comment about '25 would the EA and those other deals are going to be helpful in '25 for sure. And quite frankly, when you look at the environment that we're in right now, probably a little bit better. Certainly, we've demonstrated that and we want to continue to, as always, as you know, Julian, we're always busy and we're excited about the opportunities that are in front of us but we're also incredibly excited about the teams that have just joined Fortive.

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

Just a couple for me. Just back on ASP and the Consumables growth, 7% sounds pretty healthy. Is there some kind of I don't know, kind of channel fill in the direct model that had to happen, as you looked from distribution to direct, there something abnormal about that number? What are you expecting for consumables growth in the U.S. for 2024?

We'll be in the mid-single-digit range. There's probably a hint of catch-up from Q3 there but not a lot of inventory build we would expect it to be mid-single digit for them across the board. And obviously, I wouldn't want to be a predictor of 7% every quarter. But as we said, we validated the strategy, I think, in Q4 with what we want to do as I mentioned, with the team last week, they're incredibly optimistic about where they stand today and where they stand for the year and in the future years as well. So I think we're in a good place.

And then just on EA, obviously, then didn't own it in Q4 but any color on how it grew in Q4? And can you just be a little more specific on what you expect for growth in 2024, again, to be in M&A but kind of the underlying growth in the business in 2024?

Yes. We, first of all, we closed the first week of January; we're off to a good start. 100-day plan is scheduled. We've got our [indiscernible] room set up with integration. Our teams are really excited about the work we can do together. As you remember, Jeff, when we announced the deal, we said we'd have the opportunity to take our big Tektronix sales force and sell those solutions. We started our annual sales kick-off over the last couple of weeks. A lot of excitement about that. Relative to, specifically to your question, December was a record order month for the business. So they ended the year strong and there's a tremendous amount of growth opportunities there, in front of us. They've got a good backlog situation. So we feel good. We feel good about the revenue base for the year and what that can grow. Obviously, it won't be in our core but until '25 but we feel good about the growth. Relative to we now think this is probably a mid-single-digit ROIC in '24 which is up from the original thesis around the deal. So we're already ahead of the game. Growth should be good. And we think the business is probably in the $190 million to $195 million -- $195 million range, that's probably where it will be for the year. So. So we're in a really good place with the business. It's a good team. As I mentioned before and it's going to, that's why I think when you step back and look at the deals we did, the previous question, we feel good about the year. 6% to 8% overall growth for the year stands up, obviously, EA being one of the big parts of that but the other acquisition is adding some as well.

And just I'm sorry, a little quick housekeeping one, too. Just the design piece of Invetech, is that a divestible business? Or are you just winding it down? And how big is that piece?

It's in the $20 million range of revenue breakeven. So it's, we'll look at a number of options. I think we've got, there are buyers out there for sure. The team is working on some different things. So the other part of that business is called [indiscernible] motion. So as you can imagine, it really was originally in our Sensing and Automation businesses. It's really -- it helps Life Science and customers but it's but like our other Sensing businesses, quite frankly, it has more of an industrial aspect to, from an OEM perspective. That business has done pretty well over the last few years. So we'll anticipate keeping that as part of the portfolio but we're going to look for options on the other time.

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

The word destocking didn't prop up in any of your prepared remarks which is a relief. Any color there in terms of inventory in the channel, Fluke, sell-in, sell-through, any issues there?

Yes. I think to the second part of your question, mid-single-digit POS growth at Fluke around the world in the fourth quarter. So, good solid growth. Down from the double digit we've seen for a while. But still, I think that would be, that we take that number pretty solidly. A little bit of destocking at Tek in the U.S. Single-digit millions but a little bit and some in China, maybe more broadly. I would say that that's, we now think China is likely to probably not grow in the year that's embedded in our guide and some of that is going to be just, I would say, less destocking than it is just conservativeness on the part of the Chinese distributor and Chinese channel partners to sort of see how the macro evolves out there over the year. But again, that's embedded in our guidance.

So just to clarify on China, that's flat for the year. Is the expectation?

Probably down low single for the year. So that would be our anticipation at this point. A couple of things there. Just starting what we've seen thus far is customers -- a little bit more conservative, as I mentioned. As you know, Deane, we've talked about this over the years. You really don't know China until you see March, you get out, you get to after the Chinese New Year, see how channel partners and customers are going to unfold for the year. We've seen more conservativeness up to this point, in the year. So our anticipation is that the year sort of progresses. We had a really tough comp in the first quarter in China. We had great growth in China last year in the first quarter but we would anticipate for the full year that China would probably be down about low single digit.

Great. And just one clarification for EA. I believe you said that you were targeting 100 basis points of margin improvement for this year and that it would be the Tek sales force would be selling. Did they come with a sales force at all? And where is that 100 basis points? Is there any kind of manufacturing efficiencies? What are the drivers around the improved margins?

So Dean, a couple of things to unpack there. When we got EA and they just come with 40% incremental margin. I think the 100 basis points is about core growth that it adds to Tek, is what we called out. We would expect the volume growth that there's, do they go from 40% to 41%? Yes, that wouldn't be super surprising for them. But I think that was more about the impact on core growth for everyone for at Tek. And then on the sales force, I think Jim can give a...

Yes. I mean if they came with about a sales force of roughly 40 folks. We 10x that with Tektronix. We have the ability to sell that solution across the board. The teams are working through their cross-selling strategies. And one of the things we said when we announced the deal was that we thought a real opportunity primarily outside of Europe to really accelerate the business through the addition of the Tektronix sales force. So yes, so as Chuck mentioned, already a very profitable company. They had great growth too; they're a good growth company, a great growth company. And even with their size, they had growth at Tektronix and PT. So we're excited about that opportunity. Obviously, that's not the core for the year. That'll be in '25. So far, we really, we're really excited about the business joining Fortive.

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

Good afternoon, everyone. Chuck, maybe just a little more color on the expected AHS improvement in '24. Could you talk about Fluke Health, they were discontinuing product lines in '23, as you know, causing you some noise are they over the hump here in '24? And when you look at ASP, I know you're still building out your overall international infrastructure and supply chain. Are you over the hump there in terms of progress and how much restructuring is helping your margin in '24?

Why don't I take the first part of that. Yes, Fluke help will probably be in the mid-single-digit range for the year, so pretty close to the segment growth, maybe a little bit less in the first quarter and a little bit better, or first half and a little bit more in the second half. So but they are through some of the things that you described as well.

With regards to the margin expansion, probably the bigger issue bigger driver behind the margin expansion at Health is the growth at ASP and the top line growth, getting through that just distribution and having Consumables in North America show up like they did in Q4. I think that's probably I had to score 80% of what's driving the margins there.

That's helpful, guys. And then maybe just a little more color on price versus cost expectation in '24? I know you said price Chuck but one of your industrial peers report today and reported quite rocky results in terms of its handling of the global supply chain. It seems like Fortive is handling supply chain quite well. Pricing obviously remains sticky. But could you elaborate a little bit what you're baking in for price versus cost and how you would rate the predictability at this point of the global supply chain?

Well, I think there's a couple of things. In terms of the inflation we're seeing, we're seeing that come down and that's why you're seeing, the price we're putting into the market come down. But we will expect to stay ahead as we always do on the price cost. To supply chains, that continue to get incrementally better every quarter but that doesn't mean they're back to what we would call normal and problems can crop up from time to time. But we think that incrementally better is what we see there. Remember, we're not open to big commodity exposures that can cause maybe some of our peers or other companies that, we have a pretty good line of sight and great, every month, Jim and I are meeting with the OPCO teams hearing what we're seeing on inflation but it's trending the right way, meaning the rate of inflation is coming down.

Yes. And I would just add the proof points. Our gross margin expansion over the last several years has been very consistent. I think that speaks to our ability to manage the situation, not just on the price side but on the cost side and our working capital continues to get better and as we noted, as a percent of sales. So we're doing that while not having to have significant increases in working capital. In fact, our working capital is getting better. So we, I think what we'll see this year Andy, just to add on to that is that our teams have done a really nice job. We were just with all of our teams, a couple of weeks ago and they're doing a really nice job on design savings as well. So not only on the negotiated savings but also looking at design, what we call our value engineering effort. And our value, I think we'll have a, right now, our plans for value engineering would be, our cost reductions out of value engineering will be at a record in '24 when we deliver on that through the year. So a number of things we're doing to continue to stay ahead of price cost knowing that probably price wasn't going to be able to stay at those levels that we had over the last few years. We've always been a good price company. So we'll continue to get our fair share. But I think what we're also trying to do is really push our teams hard on the opportunities on the cost side as well.

[Operator Instructions] And your next question comes from Scott Davis of Melius Research.

I'm not very good at the Star 1 thing. It's a skill, I guess. But anyways, the, a lot of questions have been answered but I'm kind of curious on ServiceChannel and proVation. If you combine those deals, combined, they're pretty darn important to the kind of long-term growth story. But pretty dilutive the first year and change. But where do you think you'll be in 2024 versus a deal model and those things combined, will you be back in the positive on those things? And I would imagine the compound, right? I mean the growth is so -- it should be high enough, the margin is high enough that the returns on capital kind of go through kind of hockey stick at some point. Are we there yet when you think about 2024?

Scott, a number of things. First of all, from a top line standpoint and really the bottom line, we think we're on track to running ahead. So but I think when you're talking about dilutive as the ROICs come from low single digits, they're in mid-single-digit territory and accelerate going forward. So we think those two are right on. But accretive now that the, to the top line growth, so let me stop there and see if I understood that part of the question.

Kind of I guess kind of my point and perhaps you can do this after is that when you announced those deals, it was, I think that the language Jim used at the time is you'll be really happy we own these assets someday just given the growth rates. So I'm just kind of curious if you feel the same way?

Maybe just to give you a little bit. I think we were, we anticipated, if I remember correctly in the first year, $0.10 of accretion we ended up with $0.12 of accretion. So in the first year, we delivered on the accretion side. As Chuck mentioned, we're incredibly happy with these businesses, maybe just to take your point. You could see and that's why we really put them on the chart. When you look at the growth rates in the businesses, they're very strong. proVation was already a very high-margin business. One of the highest in Fortive already. ServiceChannel, obviously, was a breakeven business. So there were some concern, could we get that business into the sort of accretive margin rate that we see that's so strong and in Fortive and obviously in IOS and we're obviously there on the Fortive side and they're approaching the IOS side. So we feel really good in that regard. And the other part of it, we're trying to really make a point in that -- in the prepared remarks, Scott. I know you understand this but it's really how FBS has really made a difference here. You see the net dollar retention, where that's at, now, the ARR growth. The really FBS has really made it both teams, really embraced FBS on the growth and innovation front. They've done a nice job in that in a short period of time. And that's where, that's how you see the net dollar retention numbers which are obviously extremely good and the business is well positioned for the future. And to your point, also, they don't stop at 10% rights, right? They're going to continue. And if you've got 110% to a 112% plus net dollar retention margins in the structure and growing at this rate? Obviously, the [indiscernible] are going to go above 10% in the out years.

Yes, that makes a lot of sense. Just real quick guys. Does Invetech get worse before it gets better? Just partially just given Sprague's question on kind of the wind down or the sale of the design business but put these things you're selling into some pretty tough markets. But does that end up getting a little bit worse before it gets better in '24? Are we already there?

I think we're going to run into some easier comparison in the second half and so it will stop being a tough compare for us. And I think that we need some of the dynamics of those markets to recover. Keep in mind, this is a business that's less than $100 million in total. And so it's not it's not quite as impactful as bringing some of these other movers like EA and ASP right now.

I would say, Scott, embedded in the PT core growth outlook for Q1, there's about a 1% headwind to core growth in PT due to Invetech.

It's a statement that you've had a good quarter when we have to pick on a $100 million business, right? So, good job.

And your next question comes from the line of Rob Mason from Baird.

I may have missed this, Jim. But how do you think about your overall software growth in '24 relative to the 2% to 4% core growth? How does that roll up?

Yes. We feel really good about it, Rob. I think when you look at not only maybe starting with '23, we had really good growth in '23. We'll have high single-digit software growth in '24. So when we look at the ARR numbers, they're good. Obviously, we're just talking about ServiceChannel and proVation in the previous question. But I think across the board, [indiscernible] going to have high single-digit growth. So we feel good about where it's at. I think it's a testament to the strength of how FBS is really adding value and it's a testament to those businesses. and the work they're doing. We didn't talk a lot about AI but we'll start to see as we get into late '24 and '25, so some of our Data Analytics and AI solutions are also going to help the growth rates there. So we're in a very good place. And I think the strategy is playing out the way we anticipated which is those businesses would have more durable, higher growth rates and ultimately, that would benefit Fortive not only on the growth side but on the margin front. We certainly saw that in '23, you absolutely see that with our double-digit EPS kind of numbers that we'll show in '24.

Very good. Just as a follow-up, specific to Sensing. How do you, some of your semi cap customers are certainly starting to tee up expectations around a better '25I assume that's, you didn't mention that end market, specifically aerospace, defense, food and beverage, maybe do better this year. But how are you thinking about that market turning in that business for you, semi-cap equipment?

Yes. Well, in Sensing, we're about 6 quarters of negative order rates. So we don't anticipate to see the overall over rate start to change the book-to-bill there probably in and around 1, in the second half, for sure, probably starting in sometime in the second quarter. So we start to see things move. We didn't talk about it but number, maybe more broadly about Sensing. One of the things we saw in the fourth quarter was rather than get 12-month blanket orders which we would typically get with OEMs. We got 3-month [indiscernible] orders. So we will see that those orders pick up probably in the second half. So that's the state of the world. Relative to the semi index and where it's at, we're starting to see the green shoots of customers that are starting to talk about orders and our businesses that are maybe in the earlier stages there, a little bit of Setra, a little bit in our KEITHLEY business at Tektronix. they're starting to see customers talking about the second half of this year. So, we would -- I would think that just overall, we'll start to see some things. We're not anticipating a big step up there. We'll let the [indiscernible] patterns determine that. But we do anticipate at least seeing some of that turn in the second half of the year.

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

Yes. Just maybe and I don't know if, when you were talking before Sensing, you were specifically referring to Sensing or Tek. But maybe just to confirm, what's happening with Tek book-to-bill? And what kind of exit rate are we at a Tek right? Just sort of if you look at the peer orders, Keysight, NATI, you still have orders down, let's call it, mid-teens. So to understand correctly, we're thinking that based on the feedback we're getting on the comps, revenues will be up low to mid-single digits next year, right? Is that the right framework?

For Tektronix, we think business will be about low single digits for the year. So just from a revenue perspective, we've had 5 quarters of negative orders there. We'd probably see that in the first quarter. We'll start to see things turn. The book-to-bill starts to turn in and around the second quarter there; so just to kind of give you a sense. And that's -- we've had aerospace and defense has been good. It continues to be good. but it's mostly broadly around electronics and things like that. So some semiconductor customers as well. So and the comments I made around Sensing, semi, I also made a comment about KEITHLEY which is the most of the exposure we have in Tektronix relative the semiconductor. So we think the business is a good place. Obviously, low single digits in the fourth quarter against a 20% comp from a year prior. So still in a good place, record year for Tektronix from a revenue perspective. But probably a quarter or 2 here of absorbing, continuing to absorb some of the market dynamics we described and but the business is in a good shape and exit rate into '25 probably in a good place.

And where are we on book-to-bill, sorry?

Well, I think in fourth quarter, probably 0.85, probably but we're always below 1 in the fourth quarter.

Got you. And just a broader question because it's certainly been a weird '23 and it seems like '24 is going to be strange as well. But I think at your Analyst Day and it's just sort of going back to Julian's question, you did outline the '25 target but you also outlined longer-term targets, right? And if you look at '25 target with sort of, I think, CAGR is 12.5% and longer-term targets, 13.5%, right? We printed 9% EPS growth last year. This year, target is 9% to 12%. I told to get there, there's cushion here, right? Invetech is out of the way. We're probably going to do some M&A. But from your perspective, what needs to sort of go back to normal change from a macro standpoint, what's the biggest lever that needs to change, right, to sort of get back "normal" where you guys can sort of accelerate EPS growth from what we've seen last year. And what we're sort of guiding to this year? Or is that all just M&A? Sorry for an extensive question but yes.

Well, I think when you look at our track record over 4 years and what we try to do is not take any one particular year because when you average them out, when we're talking about the out years here, we're talking about the average, right? And when you look at the average, they're not too different future versus prior history. So I think what passes a bit pull-off here. If you look at the success we've had over the last 4 years relative to EPS growth and you sort of fast forward, we continue to use our free cash flow. Obviously, we had interest expense a little higher last year than we anticipated which is why that number would single digit will delever through the year, as you know. So that has some improvements as well. But I think at the end of the day, we're in a very good place relative to those targets and I think this reflects it. So, there's obviously the macro is always a geopolitical situation. It's probably always one of those things you think about but that's why we said in the prepared remarks, that we've got some scenarios to continue to be agile and dynamic based on what the economic situation looks like it's the best way to say it. So Software and Healthcare is going to continue to compound at higher rates of growth and higher rates of margin expansion and that's going to continue to mix up the portfolio, particularly if you take a longer period of time, like in 2018. So I would say those are the dynamics. You've got to see continue to see those businesses continue to get better, like they will this year, like they've been doing and then continue to do the things that we've been doing relative to productivity and innovation that will continue to help us work through the various markets, secular drivers that we've attached ourselves to broaden the workflow. And I think the last thing I'd say Andrew, is the 5 deals that we did over the last 30 or 3 months or so, they all have an opportunity to continue to accelerate our compounding. They're all attached to good growth drivers. They're additive growth year and, from a margin perspective, from a bolt-on standpoint, they're all making their associated businesses better over time. And when you take a few years out, they're going to become a bigger part of that. So some of them are small. But if you take a 2-year or 3-year out period, you're in a, they'll be additive as well. So and then as I said, the M&A environment is still, looks like it continues to get better here and we're excited about that.

And if I could just squeeze in one more. Should we start to think about Fortive as increasing dividends annually and some framework around share buybacks, maybe offsetting share issuance as long as we're there?

Well, in terms of the dividends, what we've tried to signal is that as our free cash flow and earnings per share increase, our, you'll see our dividends increase on the same trajectory. With share buybacks, what we did is we restock to where we had, over the last 2 years, we've been opportunistic on buying some shares back. And we just went back to the level we had 2 years ago. M&A is still the priority.

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

Just a couple on the M&A side and capital deployment kind of piggybacking on what Scott was talking about. So I mean, you highlighted proVation and you highlighted ServiceChannel. And I think it's pretty clear as to how companies like that can lever up growth and they can accrete to EPS and what they can do to margins. I'm just curious on like the ROIC of these things. Because I think like on proVation, the math was something like it needed to grow 15% a year and have margins expand to like almost to mid-50s from the mid-30s or something like that to hit like a 7.5% return in year 5, like, it looks like at least that slide suggests it's under those targets. So like how do you evaluate where you are in ROIC on deals like that?

First of all, we look at our ROICs and go back to looking at where the revenue needs to be. Margins start to upgrade on probation as talked about and we're running ahead of where we thought we'd be on the top line. So maybe talk off-line exactly what the original assumptions were. But that's where we know we're at for both of those deals. And so we're on track or ahead of where we thought we'd be a couple of years in. I think the, so I think that's as simple as I can put it.

Joe, I would just maybe just add on is the reason why we highlighted these two companies two years out is because when we bought the companies, there were some skeptics, quite frankly, people didn't think we could get ServiceChannel margins into the 20s as quickly as we did. People didn't think that proVation would grow during COVID the way it did. So yes, I wouldn't necessarily say [indiscernible] these were slammed up because there were some doubters out there. And I think what we tried to do in, with two years in, it suggests, or to demonstrate that that, hey, we're exactly where we thought we were in case we're ahead of the game. We were ahead of the game first year out, as I mentioned in the previous call relative to EPS. So these businesses are in good shape. And as we highlighted back in May, these are, this is consistent with a number of the other deals and that's really what you see in '24 is the portfolio durability based on the success of those deals. So I would just add that into the broader the broader view of M&A and how it's continuing to add ROIC continue to get better and it's adding more durability and capability of the organization.

And just to clarify, this came up earlier but the combined ROIC and certainly for proVation is already in the mid-single digit for '24-range.

Maybe to piggyback on that, like, you've done deals now across like SaaS type deals and you've done hardware-centric deals as you kind of run FBS through these businesses, I mean, it flexes different muscles that you need to use depending on these. Are you finding like one type of deal somewhat easier to accomplish the goals that you set up at the outset?

Well, I would say, certainly, hardware deals is something we've been doing for 20 years in there's, to use your muscle framework. There's a lot of muscle around that. You saw that in, even with some of the COVID challenges in ASP, our continued ability to do things like really improve the free cash returns on the business because of working capital. So I would certainly say that that's, those are things that we've done for a long time. But I think and this is really one of the reasons why we put it on the slide, is that we've really built tremendous capability around software, FBS for Software. And we didn't talk about it but we've now got an FBS suite of AI tools which are really helping drive innovation drive commercial activities for the Software broadly but also for the Software businesses. So we've really, I'm really proud. I said it in the prepared remarks around how the FBS in and of itself is getting better. And that really means more broadly. It's really, it is, I think what we're really proud of is the fact that if you look at the Fortive's portfolio today, FBS needs as much to a Software business or a Healthcare business or a Traditional Industrial business. FBS may mean different tools. It may mean different applications but the rigor and discipline is exactly the same.

And we do have time for one last question. Again, this will be our last question of the day. The line comes, I'm sorry, the question comes from Joe O'Dea from Wells Fargo.

First question just related to the price volume composition of organic and implying volumes kind of flat to up 1% for the year. And I'm trying to understand where kind of the upside risk might sit on the volume side and whether the embedded assumptions are more sort of moving sideways and there can be some upside risk on maybe easier short-cycle comps in the back half of the year? Or just how you've thought about that volume piece of the equation and if there's anything embedded within that as things getting better over the course of '24.

I think when you look at and I'll take the hardware business here. When you look at the hardware businesses, there's not a big inflection point as we go through the year. So probably I would say we don't see a big volume, we don't need a big volume inflection as we go through the year simply because of that. I would say, secondly, we're not really expecting a lot of restocking here. So I would say there's probably some volume upside to restocking if we were to see that. But I would say we're certainly not counting on that; and if it was probably more a second half dynamic.

Okay, makes sense. And then on the productivity front, can you just talk about the margin contribution you anticipate from productivity in '24 and the degree to which that's kind of carryover from '23 actions or additional actions to drive kind of more productivity gains in 2024?

Yes. I think that normally, we would expect 40% incremental margins. And for the year, we're going to end up at 45%. There's some puts and takes earlier in the year that that we've seen but we're seeing probably if you think about probably $0.07 or $0.08 of productivity coming into, from those actions that are selling into 2024.

Meaning actions you've already taken and so that's just carrying into '24.

We're done with the productivity actions, just the benefits are coming in, not that we're taking any more. Sorry about that.

And I'll now turn the floor back over to Jim Lico for closing remarks.

Thanks, Kristina and thanks, everyone, for taking the time today. I know it's a busy day for all of you. Hopefully, what you heard today was our really the benefits of the work we've been doing for several years, both in '23 and how we anticipate '24 to play out. So we're, we feel very, very comfortable with where we stand today. Lots going on in the world, as many of you know but I think how we built constructed the portfolio over the last several years, post-Vontier, is we feel and expect to have a good setup for this year. We're certainly around for any questions. We want to thank everyone, for your support for '23. We know we'll probably see a lot of you out on the road here over the next few weeks. We look forward to that. And obviously, our team is available for questions and follow-up and then over the next several days. So, thanks. Have a great day. Have a great earnings season and we'll see you on the road.

Thanks. Thank you. And this does conclude today's conference call. You may now disconnect.