Fortive - Q2 2023

Transcript

Operator (participant)

My name is Rob, and I'll be your conference facilitator this afternoon. At this time, I would like to welcome everyone to the Fortive Corporation's second quarter 2023 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during that time, simply press star, then one on your telephone keypad. If you would like to withdraw your question, again, press the star one. I would now like to turn the call over to Ms. Elena Rosman, Vice President of Investor Relations. Rosman, you may begin your conference.

Elena Rosman (VP of Investor Relations)

Thank you, Rob, 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 present certain non-GAAP financial measures on today's call. Information required by Regulation G are available on the investor 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 Lico.

Jim Lico (CEO)

Thanks, Elena. Hello, everyone, thank you for joining us. I'll begin on slide three. 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 adjusted operating margins 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 our performance is directly tied to our culture of continuous improvement and dedication to the Fortive 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 four. 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 healthcare, 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 and bookings. Hardware products have also been running ahead of expectations, as traction on new product launches and leverage to secular drivers are helping to provide more backlog to buffer the normalization of industrial demand. As we sit here today, we now expect to have over $200 million of excess backlog heading into next year, well positioning us for 2024. Our strategy to create a more durable growth company is working. Our recurring revenue businesses are expected to accelerate first half to second, led by higher software and consumables growth. Combined with favorable pricing and discrete productivity initiatives, we now expect over 125 basis points of adjusted operating margin expansion for the year.

Lastly, our robust free cash flow and low leverage profile provide further flexibility to accelerate compounding with an attractive funnel of M&A opportunities aligned to our workflow strategy. Turning to slide five. Our success in the quarter demonstrates our ability to leverage our domain expertise in hardware and accelerate software and data analytics across our five customer-connected workflows, where we are enabling progress in a number of high-impact fields, all benefiting from customer investments in automation and digitization, the energy transition, and the need for productivity solutions to address labor, manufacturing, inflation, and regulatory challenges globally. Solar energy is one of the fastest-growing renewable energy sources worldwide. From the grid to hybrid and backup systems, connected reliability solutions are ensuring the maintenance and efficiency of critical infrastructure, enabling the energy transition and IoT expansion.

Environmental health and safety solutions are safeguarding workers and enabling customers' ESG reporting and compliance. Our leading Facility and Asset Lifecycle software applications are improving asset performance, optimizing workplaces, and accelerating customer productivity efforts. Our innovations in the product realization workflow are solving customers' toughest technical challenges to speed breakthroughs in a wide range of applications, including helping to increase the proliferation of electrified and connected devices and advance the democratization of high-performance compute and AI-driven data analytics, as well as in the perioperative loop, where we're helping healthcare providers deliver exceptional patient care more efficiently. With industry-leading clinical safety and productivity solutions. In summary, we are seeing strong customer success on new product launches, highly aligned to these secular trends, where our innovation funnels remain focused, which I'll take a moment to discuss further on slide six.

As we highlighted at our Investor Day in May, our FBS growth tools are accelerating innovation cycles to drive share gains and maximize R&D returns, to create and sustain our competitive advantage in a number of exciting new areas. We highlighted new product launches at Fluke to accelerate the distributed energy strategy and penetrate the high-growth EV storage equipment market with new testing tools that ensure technician safety and asset performance. At Gordian, our unique planning tools, RSMeans data, and technical expertise helped a California county optimize their infrastructure, resulting in millions of yearly cost savings and a significant reduction in project completion timelines. Tektronix is providing performance scopes and waveform generators to help customers develop quantum computing to advance AI applications, including a large Aerospace and Defense customer win in the quarter.

Provation's latest cloud-based documentation software is saving physicians roughly 16 hours per month in documentation and reporting, which is why Provation continues to be the provider of choice with accelerated win rates and Apex adoption. Lastly, Intelex leveraged lean portfolio management to expand its foothold in environmental accounting, compliance, and reporting, accelerating the launch of its new ESG corporate reporting solution. Fortive is committed to innovation across all aspects of the company. This quarter, we received two notable recognitions for our innovative sustainability efforts. In May, USA TODAY and Statista have named Fortive one of America's climate leaders in 2023. This award recognizes us as a leader in greenhouse gas emissions reductions and singled out Fortive as a top emissions reducer among more than 2,000 companies nationwide.

In June, Fortive was selected as a finalist for the 2023 World Sustainability Awards in the Profit with a Purpose category, which recognizes companies that link revenue generation to sustainability. We're incredibly proud of our culture of innovation and continuous improvement, and how that not only shows up in the solutions we deliver for our customers, but also in the positive impact we are making around the world. I'll now provide more details on each of our three segments, beginning with Intelligent Operating Solutions on slide seven. IOS grew core revenue by 4%, driven by good growth in most regions. Strong FBS-driven execution resulted in 420 basis points of adjusted operating margin expansion, driving operating margins to a record 33%.

Looking at our performance drivers by workflow and connected reliability, Fluke core revenues were up slightly, lapping the Shanghai recovery last year with mid-single-digit orders growth in the quarter. Fluke margins expanded by more than 300 basis points year-over-year, driven by productivity initiatives and solid price realization. eMaint saw record quarterly bookings, fueled by the continued success of the new X5 CMMS product launch. EHS revenues grew by high single digits, with record iNet growth at ISC and strong SaaS momentum at Intelex. Further, Intelex saw strong bookings for its new ESG corporate reporting solution. Moving to Facilities and Asset Lifecycle, we had low double-digit growth in the second quarter, driven by mid-teen SaaS growth. Gordian had strong growth and operating margin expansion in the quarter as more customers utilized their job order contracting platform to procure and manage their large infrastructure projects.

Accruent has seen sustained improvements in win rates and good growth in their streamlined portfolio, supported by FBS-led innovation and pipeline generation efforts. ServiceChannel had an acceleration in growth and profitability as planned, driven by strong SaaS bookings and resulting take rate as customers leveraged the ServiceChannel network to maximize their cost savings. A large retail customer is already $2 million ahead of their $14 million cost savings goal in 2023 after taking advantage of the automation capabilities of the platform. Powerful testament to the secular drivers underpinning the FAL workflow strategy. Turning now to slide eight. Precision Technologies continued its momentum with another strong quarter, with 8% core revenue growth and 190 basis points of adjusted operating margin expansion, collecting volume and price benefits more than offsetting inflation in FX.

Some highlights in the quarter include: record second quarter revenue at Tektronix, with orders better than expectations and strong point of sale in all major regions. The team delivered mid-teens growth, which was over 20% on a 2-year stack basis in the second quarter. Tektronix is executing on robust backlog and power and digital test and measurement solutions, and delivering outstanding margin, operating margin expansion. As orders continue to normalize, we anticipate Tektronix growth will moderate to mid-single-digit levels in the second half, and we expect we will end the year with elevated backlog levels again heading into 2024. Sensing Technologies came in better than expected, up slightly, driven by strong price realization across all businesses and continued broad strength at Qualitrol.

Pacific Scientific EMC reported a strong sales quarter with mid-teens growth as it benefits from strong customer demand and Kaizen activity to improve manufacturing capacity and operational execution to deliver on record backlog. Moving now to slide nine in Advanced Healthcare Solutions. Core revenues were up 4% in the 2Q as the industry continues its modest pace of recovery. Consistent with expectations, adjusted operating profit margins contracted by 60 basis points year-over-year. The benefits of sequential volume, price, and productivity drove operating margins higher by 180 basis points versus the 1Q. China elective procedures remained at normalized levels throughout the quarter, only slightly trailing global rates, allowing for double-digit growth. Our outlook continues to assume that elective procedures remain close to pre-COVID levels in all major regions.

Some highlights of the quarter include: ASP Censis had mid-single-digit core growth, driven by capital expansion at ASP and double-digit SaaS growth at Censis. ASP saw sequential growth in consumables as planned, and U.S. channel transition to direct is on track, contributing to sequential price benefits, driving margins higher, a trend we will expect will continue through the rest of the year. Supply chain constraints are largely resolved, yielding good growth at Fluke Health Solutions. Provation had another great quarter, with mid-teens core revenue growth, driven by Apex SaaS adoption and new logos. With that, I'll pass it over to Chuck, who will provide more color on our second quarter financials and our 2023 outlook.

Chuck McLaughlin (CFO)

Thanks, Jim. 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-digit, 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 traction 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 guide 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%-4.5%, with revenues reflecting our normal linear profile and adjusted operating profit margins are estimated to be up over 100 basis points year-over-year. Adjusted earnings per share are expected to be in the range of $0.82-$0.85 in Q3 and reflect that a 17% estimated effective tax rate. Our fourth quarter guidance assumes a seasonal uplift in all segments, with core revenue growth of 3.5%-4.5% year-over-year, and strong margin expansion, reflecting the cumulative benefits of our productivity initiatives. Adjusted EPS is expected to be in the range of $0.94-$0.97, up 7%-10%.

For the full year, 2023, we have raised our core revenue growth to be in the range of 5%-6%. Adjusted operating profit is now expected to increase 10%-11%, with margins higher in the range of 25.5%-26%. We are increasing our adjusted diluted net EPS guidance to $3.36-$3.42, which includes approximate six cent headwind from higher interest and tax expense versus the prior guidance. Free cash flow for the year is now expected to be approximately $1.26 billion. This represents conversion of 105% of adjusted net income and 21% free cash flow margin, as well as over 30% growth on a 2-year stack base. I'll pass it back to Jim to provide some closing remarks.

Jim Lico (CEO)

Thanks, Chuck. I'll start the 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. Talked 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, cut working capital as a % 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. 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.

Elena Rosman (VP of Investor Relations)

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

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, press Star, then the number one on your telephone keypad. We ask that you please limit yourself to one question and one follow-up. Your first question comes from the line of Jeff Sprague from Vertical Research. Your line is open.

Jeff Sprague (Founder and Managing Partner)

Hey, thank you. Good day, everyone.

Jim Lico (CEO)

Hey, Jeff.

Jeff Sprague (Founder and Managing Partner)

Hey. Hi.

Jim Lico (CEO)

Hey, Jeff.

Jeff Sprague (Founder and Managing Partner)

Hey, Chuck, how's it going?

Jim Lico (CEO)

Yes

Jeff Sprague (Founder and Managing Partner)

Drill a little deeper into tech? Just wanna clarify what you said about orders. Orders decelled, but were stronger than expected, and I guess you're talking about backlog being pretty healthy. Are you actually running at a, at a book to bill above one in tech?

Jim Lico (CEO)

Hey, Jeff, it's Jim. A couple things. One, I think, it was better than expected. We, as we mentioned on the prepared remarks, we've seen some slowing in some places, obviously, or maybe more moderating for sure, places like China, as an example. We're seeing some acceleration in investments from places like Aerospace & Defense customers. The book to bill, I think our orders were down about 10% in the second quarter. You know, to put it in some context, it's up those orders are still up 30% from three years ago. You know, 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, what we thought going into the year. Anyway, I'll stop there and, if you have any follow-up.

Jeff Sprague (Founder and Managing Partner)

No, I'll just switch gears to AHS then. On the channel, distribution shift, that sounds like, you know, 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? Then you've got kind of a bit, you know, clearer sailing on how things play out over the balance of the year.

Jim Lico (CEO)

Yeah, 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 as nothing that we didn't plan for. I think when you look at it, mid-single-digit growth, even better than that, ex-Russia, exit out of Russia. you know, 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 gonna 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.

Jeff Sprague (Founder and Managing Partner)

Great, thanks. I'll pass it along.

Jim Lico (CEO)

Thank you.

Operator (participant)

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

Steve Tusa (Managing Director)

Hey, 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, you know, 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 the second half, but still ending strong in the fourth quarter. Just curious, as we kinda look out to next year, on the way to that 30% margin, just want to obviously reaffirm that. Do you, like, step up to more of a linear move from what you thought this year would be and, you know, kinda capture that next year in the margin?

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 2024 is kind of like a more linear year, you know, considering 2023 is a little bit below expectations.

Chuck McLaughlin (CFO)

Yeah, Steve, this is Chuck. I think, you know, the change this year in terms of, you know, and the guide is just, it's in the tech 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 that's with as COVID comes off and the self-help with some of the productivity initiatives, and also seeing more price. If you look into next year, well, we're not calling next year, but we expect to still have, you know, those tailwinds around COVID and pricing. I think sequentially, it'd be above the margin expansion that we normally would expect. You know, we talked about mid-single digit and 75 basis points.

It'd 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, in, through next year, and you'll see it be as the elective procedures recover, we will expect that to continue to be a tailwind for quite a while.

Steve Tusa (Managing Director)

Yeah, I guess my question was more along the lines of, like, is next year should we view next year as kind of a plot on a, you know, from a linear perspective on the way to that 30? Is it, you know, does what happen this year kind of, you know, make that target more back-end loaded into maybe, you know, 2025-... 2026, 2027 type time period. That was my question, is 2024 more of a, you know, a nice recovery year early on, or is it more back-end loaded to that, you know, 30%?

Chuck McLaughlin (CFO)

I don't think that the back-end loaded, you know, March, it's not back-end loaded. I think you're gonna see good progress.

Steve Tusa (Managing Director)

Okay.

Chuck McLaughlin (CFO)

Towards that, and because I think we're gonna see stronger, top line.

Steve Tusa (Managing Director)

Okay. Wait, wait-

Jim Lico (CEO)

If I could just add-

Steve Tusa (Managing Director)

Yeah.

Jim Lico (CEO)

I would just add, 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 Censis part of our sterilization business, those are already +30% operating profit businesses. The growth trajectory of ASP is really what we're talking about. When you think about it, the fact that what we did in the quarter relative to placements, gonna accelerate consumables in 2024. It's consumables coming back, 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.

Steve Tusa (Managing Director)

Yeah, yeah, totally. Just one last one: Where is the $350 million today? You had $350 million of excess. You say it's gonna be $200 million or something at the end of the year. Where is that number today at the end of the 2Q?

Chuck McLaughlin (CFO)

We still have about $330 million of excess at this.

Steve Tusa (Managing Director)

All right, I'll round that up to $350. Thanks, guys.

Chuck McLaughlin (CFO)

Okay.

Jim Lico (CEO)

Thanks, Steve.

Operator (participant)

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

Scott Davis (Chairman and CEO)

Good-

Jim Lico (CEO)

Hi, Scott

Scott Davis (Chairman and CEO)

Good morning, out there, Jim and Chuck, and Elena.

Elena Rosman (VP of Investor Relations)

Good morning.

Jim Lico (CEO)

Good morning.

Scott Davis (Chairman and CEO)

The IOS margin's up 400 basis points on pretty limited volume is impressive, of course. Is that sustainable? I mean, it sounds like it's sustainable, given your guidance and such, but, well, is there any risk that some of that price cost spread that you're capturing right now, you know, perhaps goes the other direction on you in the next 12 months or so?

Jim Lico (CEO)

No, I think, I think there's a couple of things going on. As, as you said, I think really, I think it speaks to the power of what we've been trying to do in IOS as we continue to accelerate the, the obviously acquisitions that we made several years ago. FAL did exceptionally well, our EHS. You're seeing the margin of, you know, improvements from those businesses. Fluke, while a little slower in the quarter, still very strong in the year, and it, you know, has obviously been a perennial good margin improver. 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.

Scott Davis (Chairman and CEO)

Okay, that makes sense, Jim. 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?

Jim Lico (CEO)

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. Year to date, we thought we'd be about 0.9. We're at 1.0. 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's executing very well. We think Anderson-Negele is gonna be good through the year, parts of the rest of Sensing. 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 in sensing is what that comment really has to do, and also in some of the semiconductor business, parts of the business in sensing. That's the slowing. You know, we would anticipate, you know, 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.

Scott Davis (Chairman and CEO)

Super helpful. Thank you. Best of luck the rest of the year.

Jim Lico (CEO)

All right. Thanks, Scott.

Operator (participant)

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

Deane Dray (Managing Director)

Thank you. Good day, everybody.

Jim Lico (CEO)

Hi, Deane.

Deane Dray (Managing Director)

Wanted to circle back on this concept of the excess backlog. I know you just sized it, just be interested. I know there's the implied earnings visibility that you get from elevated backlog. 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 a 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? When we hear excess backlog, we immediately think there's flexibility. Sometimes it may not be as flexible based upon, you know, customer timing and so forth. Any color there would be helpful.

Jim Lico (CEO)

Yeah, a couple of things, Deane. As Chuck said, we've got about, you know, 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 range by the end of the year. It's I would call 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, you know, I wouldn't say within a month it's necessarily flexible, because it does have some supply chain aspects to it. It's in the, in the sort of 90 days kind of for timeframe, pretty flexible. Sensing a little bit less, depends on some of the OEM customers. And Fluke's pretty flexible.

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. Those are places where we think we can use the backlog in a way that sort of prevents any, you know, near-term challenges. 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 debooking. Very, 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, you know, as obviously a little slower in the second half than maybe the rest of the portfolio. But we really haven't seen destocking. We haven't distributors really not asking to cancel orders or anything like that. There's been pretty minimal to the point, and that's why we think the backlog remains flexible.

Deane Dray (Managing Director)

All right. On behalf of Scott, I'll thank you for the destocking answer. 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'd call out?

Jim Lico (CEO)

Yeah, 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 set in Japan. India, no. We've seen good growth in India. We're getting, you know, I think we're getting some benefit of some of the, you know, reshoring and some of the investments that are going, you know, the sort of foreign direct investments that have been going into India here over the last 12 months. We benefit from that. You know, our big companies like Fluke and Tech and ASP are seeing the benefits of that, but even more broadly in some of the rest of the portfolio. We think India is gonna be, you know, probably 20% the rest of the year.

It you know, those are smaller regions than something else like Western Europe, so they can move a little bit more on a big chunk of business. We like the demand dynamics right now in India in particular.

Deane Dray (Managing Director)

That's great. Thank you.

Jim Lico (CEO)

Thanks, Deane.

Operator (participant)

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

Andrew Obin (Managing Director)

Hey, how are you guys?

Jim Lico (CEO)

Good. Hi, Andrew.

Andrew Obin (Managing Director)

I was gonna ask an AI question, but I was made fun of, so I'm gonna ask something else. I'm gonna keep beating down this dead horse with inventories. You know, in the revenue breakout, and, you know, 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. 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.

Jim Lico (CEO)

I always think of inventory in the channel as a function of demand. you know, as demand moderates a little bit, around, you know, 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 in the previous 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 Tech, we get pretty good visibility to the inventories.

I think the places that, you know, we don't obviously those channel numbers that are in the queue and the filing represent also channel inventory relative to what we see in ASP, what we see in sensing. It's a broader view of channels, and in many cases, international partners. I think what really matters relative to how we think about demand creation, we've seen, you know, we've still seen strong point-of-sale attack, and so the, you know, 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. At Fluke, it's 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. 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 very good second half for innovation and product launches, 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.

Andrew Obin (Managing Director)

No, I appreciate this. Just a question on Fluke and Tech. 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 Tech 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.

Jim Lico (CEO)

I think on the Tech side, we are starting to get visibility. In fact, even in some semiconductor businesses, where the business has obviously slowed a little bit, we have already had conversations with customers along a number of product lines about 2024 investments. I think what's been good about Tech is that they've taken that, you know, they've taken advantage of some other opportunities in power and in and in the aerospace and defense customers to continue to offset some of that. That's a good story, and will hopefully be a good story in 2024, although still too early to tell. On the Fluke side, it's really gonna be less around when those facilities are getting built, as much as it is gonna be keeping those facilities up and running.

We're probably a few years out from some of that. You know, 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. The real opportunity is gonna be once those facilities are up and running, and the maintenance staffs in those facilities are building out those opportunities. We're probably a little off from that opportunity. I think until then, we're seeing good. The secular drivers that we've got at Fluke, and power, and solar, and some of the sustainable investments that we talked about in the prepared remarks remain a good opportunity for us.

Andrew Obin (Managing Director)

Great answer. Thanks so much.

Jim Lico (CEO)

All right, thanks, Andrew.

Operator (participant)

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

Josh Pokrzywinski (Executive Director)

Hi, folks.

Jim Lico (CEO)

Hey, Josh.

Josh Pokrzywinski (Executive Director)

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

Jim Lico (CEO)

Yeah, I, you know, we don't, we don't have a lot of exposure to commercial buildings, you know, really in the sense of traditional in FAL. You know, I think maybe we have commercial customers or maybe 5% of sales or something like that. 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. 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 timelines. 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.

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, you know, just more broadly. You know, what we're seeing from customers, really in FAL also, is the fact that people wanna understand their capital in this time of return to work, and how are my real estate assets working, particularly with things like retail customers. They really wanna understand their investments, and we really do. Our solutions are really oriented towards understanding that and how to bring facilities costs down.

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. 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 oriented at, in many respects, is to some extent, a driver for us because of the solutions we have.

Josh Pokrzywinski (Executive Director)

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

Jim Lico (CEO)

I think where we see that, 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. To some extent, we're seeing that as lead times moderate, and you don't need, you know, you don't need to order something, you know, 18, 20 weeks in advance. You can now order it six to eight weeks in advance. There is some moderation, but that's really what's been embedded in our guide from the first place. 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.

I think to the extent we're seeing any of that, it's really at Tektronix, and as I said, we've embedded that. As we give you sort of the book-to-bill dynamics, we give you some of the order growth rates. It's really embedded in those kinds of numbers.

Josh Pokrzywinski (Executive Director)

Understood. Thanks a lot. Best of luck.

Jim Lico (CEO)

Thank you.

Operator (participant)

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

Julian Mitchell (Equity Research Analyst)

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. If I look at the second half, you know, it looks like you're assuming sort of $30 million-$40 million of profits step up, I think half on half in AHS, and maybe sort of $50 million or so step up from the top line there. Obviously, last year, we had a more stable half-on-half performance. Is the delta on the top line this year, a lot of that's the elective procedures element? 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?

Chuck McLaughlin (CFO)

Hey, Julian, this is Chuck. A couple of things going on there. yeah, I think you've got the numbers, roughly right, and, you know, 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, you know, in the fourth quarter. Also, you know, coming out of Q1 in the first half, China was obviously really low with, you know, the COVID and the elective procedures there. That made Q1 lower. Project Elevate, the dealer shift, is gonna give us more revenue in Q4, as we work through that, and also, more profit. Then we're getting more price in as we go through the year.

I think those are, you know, three things that really help. The, you know, the self-help that we put in, the productivity things that we announced early in the year are also help, helping us. Our incrementals going from first half to second half on that step up to 65%, you know, if that's all the things I mentioned, including, you know, seeing more consumables in the second half. Let me stop there and see if I covered the bases there.

Julian Mitchell (Equity Research Analyst)

That's very clear, Chuck. Thank you. Then maybe, switching tack, 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. Clearly on M&A, it's been, you know, quiet for 18 months, partly given the tough M&A backdrop. But I suppose we get lots of questions around, you know, whether there's been any, you know, change in view fundamentally about M&A or some of the types of deals. Then also, you know, is there more of an effort now to balance M&A with buybacks in terms of cash usage? Just, you know, any sort of thoughts on that, given that buyback spend in Q2?

Chuck McLaughlin (CFO)

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. You know, Q1 is our lowest cash flow of the quarter, and we didn't do any there. We'll be opportunistic as we move forward when we think that we're undervalued and see an opportunity. I think that's gonna keep me continue to be the case. I think from a capacity standpoint, what we're doing here doesn't change anything about the when you look out three and five years, what are actual capacity. We've got plenty of capacity at this.

Jim Lico (CEO)

Yeah, Julian, I would just say we've been very busy this year. As you point out, it's been Provation since we did Provation. I think where we stand today is activity is actually pretty good. You know, we've seen some things transact in the market lately that wouldn't suggest prices have come down necessarily, but there's some pockets of that. Our bolt-on activity is very busy right now, but we remain disciplined. There's a number of processes that have failed, given, you know, some sellers lack of desire to sort of get pricing into what we think is the appropriate frame. We'll remain disciplined and around the opportunities.

We do think there is a number of things out there that are possible. You know, we'll continue to work through them. With the work we do and the diligence we do, you know, we'll 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.

Julian Mitchell (Equity Research Analyst)

Great. Thank you.

Jim Lico (CEO)

Thanks, Julian.

Operator (participant)

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

Andy Kaplowitz (Managing Director)

Hey, good morning, everyone.

Jim Lico (CEO)

Hi, Andy.

Andy Kaplowitz (Managing Director)

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

Jim Lico (CEO)

Yeah, sure. You know, we've obviously had a, we've had a strong North America view, that'll continue, you know, second half, probably in the, that mid-single digit range. Quite frankly, when you look at the two-year stack in North America, very, very good, kind of mid-teens kinda numbers. We feel good about where we're at in North America. 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. That's kind of North America. I think relative to Western Europe, you know, probably roughly flattish. Europe has been so strong for a while now.

It'll be mid-teens, and, you know, it was mid-teens in a 2-year stack for the 2Q. We think it'll be more flattish around the 2H 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, slow down, and that's reflected in our 2H guide. Relative to China, as you mentioned, you know, I think we've been consistent from really all six 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. Embedded in our guide is really more kind of low double-digit growth in China for the second half. And that's more like high teens- excuse me, accelerating kind of low twenties on a two-year stack. We're really accelerating China on a two-year stack. 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.

Those kind of go, they're a little bit smaller, so they tend to the growth rates tend to move around a little bit. We do feel like we've got some opportunities in some of the high-growth markets in the second half.

Andy Kaplowitz (Managing Director)

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

Jim Lico (CEO)

I think there's probably two places that we've start seeing from a customer investment perspective. I would say number one is we're seeing investments in quantum computing, in R&D organizations that are really working towards opportunities for, you know, AI. 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 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 and of the business. It really extends. We don't even include that backlog in our hardware backlog because the number's very positive. 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. We in the second half, we probably have some opportunity in the second half to do better than that, but we'll see where that goes. 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. We the demand for EMC right now is at an all-time high.

Andy Kaplowitz (Managing Director)

Appreciate the color.

Jim Lico (CEO)

Thank you.

Operator (participant)

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

Nigel Coe (Managing Director)

Oh, hi, guys. Good morning.

Jim Lico (CEO)

Hi, Nigel.

Nigel Coe (Managing Director)

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

Jim Lico (CEO)

I would say a couple of things. In the quarter, a little bit better than we anticipated, really around Sensing. We, as we said, we over-delivered in Sensing, and I think that brings the number up where we probably are getting the most price, if you will. Relative to healthcare, we'll accelerate a little bit in the second half just because of Elevate and the channel mix change that we have. That'll probably be more true in the fourth and then the third, but we will see that. We're continuing to see price and upselling, cross-selling. Our net dollar retention, as an example, is continuing to improve, and we're getting, you know, we're getting some opportunities to really push more price.

That's some of the story of the margin improvements in 2Q and IOS is really the good work we've done. You know, the leader in the clubhouse, that dollar retention and ServiceChannel, I think we're at almost 115% now, and I think it just gives you an example of us continuing to push the opportunity for really value. I think it's, and on the software side, it's really about value and the value you bring. 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 at Censis, an example with the AI launch that we had with them in the second quarter. 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.

Nigel Coe (Managing Director)

Okay, that's great. Then moving on to Fluke. The flat revenues, it sounds like, units down mid-single digits. I think you called out China comp as being quite tough there. Are there any other pockets of headwind you call out? Just curious, because you know, this is the canary in the coal mine.

Jim Lico (CEO)

Yeah, I think, you know, when we probably, if anything, you know, it's 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. Yeah, there's 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. All up, I think the mid-single digit number on the backs 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 digit for the second half, and that's really on the backs of even higher growth last year in the second half.

In many respects, kind of an acceleration from a two-year stack. Overall, we like the trajectory in the business. You're right, there's a couple of places, pockets of things we continue to watch. We continue to watch the PMI and industrial production, but I think the team's been executing well. Number of good technology launches. We had the eMaint business is performing really well. You know, we've built some things that are the end of the portfolio over time, as you well know, trying to make Fluke less cyclical, more tied to secular drivers, and we believe that'll 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.

If there is some slowing in the marketplace, we think that we've got a number of actions out there that we think can countermeasure some of the potential slowness.

Nigel Coe (Managing Director)

That's great. Thanks, Jim.

Operator (participant)

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

Joe Giordano (Managing Director)

Hey, good morning, guys. Again, I want to just on the short cycle stuff. I just want to make sure I understand, Fluke, you know, flattish this quarter, it accelerates in two half, in the second half. I want to make sure I understood that. On Tektronix, you know, you mentioned earlier, you know, orders are 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 amount of like the normal level for a business like that? Because if we're talking about 350-ish of excess backlog going to 200, and half of that is Tektronix, you know, that's like $75 million of excess revenue delivery versus orders in the second half alone, which is pretty significant.

Just wanna understand, like, where these businesses exit the year and what it means for comps into next year from, like, a 4Q starting point.

Jim Lico (CEO)

Yeah. Let me clarify the Fluke comment. What I said on Fluke is, we were mid-single-digit in the first half this year. We'll be mid-single-digit in the second half. From that standpoint, no acceleration. You know, 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. Hopefully that clarifies the Fluke comment. I think relative to tech, we always knew that there were a number of parts of the business that were, you know, that were really fulfilling over time, as I mentioned, plus lead times going down, would ultimately impact orders.

What's been nice to see has been the strength of Point-of-sale at tech, which around the world, has continued to be good. I think it continues to solidify our belief that the demand is real and that the demand can be played out over time. 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. I think that. I'll stop there, and hopefully, that clarifies these two points.

Joe Giordano (Managing Director)

Then just a follow-up on margins. Like, if I look at your slide 16, obviously, you know, a big ramp in all three segments from 1Q to 4Q. I just wanna 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?

Chuck McLaughlin (CFO)

I think the Rob, it's normal seasonal. I'm sorry, Joe. Sorry. This is normal seasonality step up from Q3 to Q4 when you're talking about, you know, what's going on there at the fall through margins. I do think that, embedded in there is some of the self-help we did in the first half, and that will carry over and be a help certainly the first half of next year, and the pricing that we've been putting in. Those to a certain extent, it is a better jumping off point going into next year. You know, keep in mind, that was, you know, Q4 to Q1, step down.

When you look year-on-year, I think those things are going to be tailwinds, with pricing, self-help, and then the Elevate helps margins. You know, it gives a great stepping off into the first half of next year.

Joe Giordano (Managing Director)

Thanks, guys.

Jim Lico (CEO)

Thanks, Joe.

Chuck McLaughlin (CFO)

Thanks, Joe.

Operator (participant)

Your next question comes from the line of Joe O'Dea from Wells Fargo. Your line is open.

Joe O'Dea (Managing Director)

Hi, everyone. Thanks for taking my questions.

Jim Lico (CEO)

Hey, Joe.

Joe O'Dea (Managing Director)

Hi.

Jim Lico (CEO)

Yes.

Joe O'Dea (Managing Director)

First, just one related to a comment around channel distribution in ASP. I think you know, you talked about how you saw the headwind in the third quarter, headwind goes away in the fourth quarter. I guess I'm curious about the tailwinds associated with this, and, you know, what that looks like. 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?

Jim Lico (CEO)

Well, I would say, relative to the transition itself. 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. That's kind of the sort of the sequential aspects of the impact of it. We think that benefits, I think we've talked about this, it benefits margins from the perspective of we think we get better price. 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 you know, late Q4 into 2024 impact.

We still need, you know, 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 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. Not only on in terminal sterilization, but also in our biological indicator business. We feel that there is a growth impetus to this as well. We think there's a customer satisfaction for this as well.

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 gonna have a better opportunity to, you know, to really have, you know, ASP salespeople, ASP application engineers in their hospitals every day helping them out. I think it's a margin and growth story. It certainly 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 2024.

Joe O'Dea (Managing Director)

Then I wanted to ask one, just on orders. I think you talked about Precision Tech book to bill at 1 better than the 0.9 you were anticipating. I'm not sure about Fluke, but orders up mid-single digit. You know, I guess, if anything, maybe a little bit better than expected. 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?

Jim Lico (CEO)

I think, Well, here's what we're seeing. I mean, as we started the year, you know, we thought there'd be some slowing in the year just because of, you know, the moderating aspects of some of our businesses and maybe some economic impact in pockets. We really haven't seen much of that in the first half of the year. Embedded in our guide is still some aspects of thinking that there's gonna 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.

You know, that was a book to bill of 1.0, which included, by the way, Fluke orders as well on that overall book to bill. I think where we stand today is in a much better position. As we said, that excess backlog number is more robust than we anticipated as we go into the second half. I think that bodes well for, you know, the three things we talked about going into the year. You know, if there was 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 at AHS. I think what you saw in the second quarter is all that manifesting well.

Joe O'Dea (Managing Director)

Thank you.

Jim Lico (CEO)

Thank you.

Operator (participant)

Our final question comes from the line of Brett Linzey from Mizuho Americas. Your line is open.

Brett Linzey (Managing Director)

Hi, good morning, all. Yeah, thanks for taking the question. A lot of ground has been covered. Just want to come back to price. Clearly, you know, advanced here in the industrial cycle and, you know, 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, you know, should the macro develop more weakly here, particularly within sensing?

Jim Lico (CEO)

I think, number one, our ability to hold price, we feel very good about. I think of the quality of our franchises, the kind of value and investments we've made in innovation, I really speak to our ability to hold price. We think of it as value creation and our ability to create more value for customers and get paid for it. I think you see that across the, in a number of the things we were talking about. I think we see that. All right, we think strongly we can hold price, and we feel we can continue to get it. Probably not at the rates we got in 2021, as an example, in 2022, but we've always been a good price leader relative to, I think, a number of companies.

I think we there's no reason why we wouldn't continue to be as we go into 2024 and 2025.

Brett Linzey (Managing Director)

Okay, great. Appreciate the color. I'll leave it there.

Operator (participant)

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

Jim Lico (CEO)

Thanks, Rob, 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, we, 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, we're excited about that. We'll 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, take care. Thank you.

Operator (participant)

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