Fortive Corp (FTV) — Q2 2016 Earnings Call Transcript

Thank you, Renée. Good afternoon, everyone, and thanks for joining us on the call. With us today are Jim Lico, our President and Chief Executive Officer; and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. Please note that our historical GAAP financial information is presented on a carveout basis. In addition, we present certain non-GAAP financial measures on today's call. Information required by SEC Regulation G relating to these non-GAAP financial measures are available on the Investors section of our website, www.fortive.com, under the heading Financial Information. A replay of the webcast will be archived on the Investors section of our website later today under the heading Events & Presentations, and will remain archived until our next quarterly call. A replay of the conference call only will be available shortly after the conclusion of this call until Tuesday, August 9, 2016. Once available, the link to this conference call replay will be posted under the Investors section of Fortive's website under Events & Presentations. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted year-over-year performance. Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics relate to the second quarter of 2016, and all references to period-to-period increases or decreases in financial metrics are year-over-year. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. And actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made and we do not assume any obligation to update any forward-looking statements. With that, I'd like to turn the call over to Jim.

Thanks, Lisa. Good afternoon, everyone, and welcome to our first earnings call as an independent public company. This is certainly an exciting time for Fortive. We're pleased with our results as we delivered outstanding free cash flow performance and margin expansion despite core revenues being down slightly, reflecting challenging economic conditions. On July 2, we successfully completed our separation from Danaher well ahead of schedule and with remarkable efficiency. We were able to achieve this outcome by leveraging the Fortive Business System tools and our deeply rooted institutional knowledge and results orientation. Given our decentralized operating model, the separation didn't change the day-to-day for the majority of our employees. What is clearly evident, however, is that a reinvigoration of our culture is installed across the organization. The separation provides Fortive with the capacity for disciplined acquisitions and growth investments to strengthen our businesses and market-leading positions. The Fortive Business System will continue to be the cornerstone of our competitive advantage by providing a playbook for accelerated innovation and superior customer satisfaction that will, in turn, drive improved core sales growth, operating margin expansion, and strong free cash flow conversions. We are committed to embracing our strong culture of continuous improvement and driving shareholder value for the long term. And now, turning to the quarter for a more detailed discussion of our results. Please note that the following results are presented on a stand-alone basis from Danaher's historical results. Adjusted net earnings of $219.8 million were up 40 basis points over the prior year. Both reported and core revenue declined 50 basis points. Geographically, high-growth market revenues were up low single digits and developed markets were down low single digits. High-growth market results were driven by high single-digit growth in China and strong double-digit growth in India, offset by continued weakness in Latin America. In developed markets, we continue to see soft industrial activity and weak distributor demand in our North American Professional Instrumentation businesses. While we continue to execute well, the economic environment remains challenging in some markets and geographies. We are encouraged as we enter the second half of the year with EMV starting to ramp up, key innovations launching across the portfolio, and continued strength in high-growth markets. We also have a favorable comparison in the fourth quarter. The power of the Fortive Business System was demonstrated by adjusted gross margin expansion of 53 basis points to 49.6%. The improvement was driven by pricing, procurement savings, and successful Lean initiatives across the portfolio that more than offset volume headwinds. Adjusted operating margins of 20.8% were essentially flat to the prior year, with core adjusted operating margin expansion of 9 basis points as gross margin improvement was mostly offset by onetime G&A costs. We were very pleased that despite core revenue being slightly down, 4 out of our 6 platforms had core operating margin expansion in the quarter. We generated approximately $278 million of free cash flow, up 6%, and delivered an outstanding conversion ratio of 116%. Free cash flow is one of the most important metrics at Fortive as it provides us with the agility to invest in both organic and inorganic growth initiatives across our entire portfolio. As we have indicated, our capital allocation bias is to deploy our strong free cash flow towards acquisitions. Our M&A funnel has expanded nicely, in part, due to the separation and the general choppiness of the markets over the first half of the year. Our experienced deal team is focused on the execution of our M&A strategy, and we are confident in the strength and diversity of our M&A funnel. Turning to our segments. Reported and core Professional Instrumentation revenue was down 5% relative to the prior year. Acquisitions contributed 50 basis points of growth, which was completely offset by unfavorable currency. Core adjusted operating margins were down 177 basis points for the quarter, reflecting reduced end-market demand, technology growth investments, and the timing of high contribution margin projects in our Pacific Scientific EMC business. Advanced Instrumentation & Solutions core revenue declined mid-single digits, primarily reflecting reduced demand in semiconductor, consumer electronic, and some industrial end markets. Field Solutions revenue declined low single digits, reflecting a mid-single-digit decline in Fluke, partially offset by mid-single-digit growth in Qualitrol. Fluke core revenues were up mid-single digits in Western Europe, primarily due to double-digit biomedical and network sales growth, but offset by high single-digit declines in the U.S., reflecting weaker distributor demand. Our continued investments in customer-led innovation have resulted in a number of differentiated products, including our recently launched Fluke Connect condition monitoring offering. This is the industry's first system of portable sensors and network gateway and software that customers can access anywhere, anytime and use advanced analytics to make preventive maintenance decisions. We are very excited about this unique product offering in an important step forward with our connected devices strategy. As a result of our innovation, growth, and productivity initiatives at Fluke, year-on-year operating margins were up 50 basis points. Qualitrol's mid-single-digit growth was driven by strong OEM sales outside of the U.S., with end customer demand based primarily in the Middle East. We continue to see meaningful wins at Qualitrol and believe this business will continue to be a key growth contributor for Field Solutions. In Product Realization, a mid-single-digit core revenue decline, primarily reflecting reduced demand for Tektronix products, was partially offset by core revenue growth in Invetech. Despite double-digit growth in China and share gains from our optical solutions, Tektronix saw high single-digit core decline broadly reflecting weak semiconductor and consumer electronics activity outside of China. One final timely note on Tektronix: we were selected by NBC as the audio and video test equipment provider for its production of the 2016 Summer Olympic Games in Rio starting this Friday. Our Sensing Technologies platform saw high single-digit core revenue decline in the quarter as continued industrial softness was partially offset via growth in the medical, food and beverage, and aerospace and defense markets. The teams proactively managed costs to maintain core operating margins despite the volume shortfall. Moving to our Industrial Technologies segment, we realized both reported and core revenue growth of 3.5% in the quarter. Core adjusted operating margins improved 166 basis points, driven primarily by gross margin expansion and increased volume. Our Transportation Technologies platform saw high single-digit growth in the quarter. Gilbarco Veeder-Root delivered the fourth consecutive quarter with high single-digit core revenue growth. EMV-related demand in the U.S. spurred double-digit growth in point-of-sale solutions and dispensers. Many customers are still in the process of upgrading indoor payment systems from last October's liability shift, and we are well-positioned to benefit from the outdoor liability shift slated for October of 2017. In May, Gilbarco launched FlexPay IV as the next-generation industry-leading line of EMV-certified dispensers, reflecting continued innovation as our first major hardware product launch stemming from our partnership with Verifone. Also in May, Gilbarco released the industry's first multi-network credit and debit, EMV-certified petroleum retail point-of-sale solution. Support of multiple common payment types reduces consumer confusion around inserting versus swiping their card at the payment terminal. Multi-EMV card format support ensures that all EMV-capable cards are processed as a chip payment, reducing consumer ambiguity and increasing consumer satisfaction while maximizing the retailers' protection against fraud and liability. Telematics had a strong quarter with high single-digit growth led by strong double-digit core revenue gains in high-growth markets. As you may recall, we integrated Navman and Teletrac last year, bringing these two companies together to create one strong business for us from both a global market and technology perspective. This quarter, we drove solid installed base growth in our largest SaaS business in Fortive. We believe we are well-positioned to increase revenue into our subscription base and create stickiness given our offerings to help customers with safety and compliance. Automation & Specialty components posted low single-digit core growth decline for the quarter as growth in Kollmorgen was more than offset by declines in the rest of the businesses. Jacobs Vehicle Systems continue to be impacted by the weakness in the North American truck market, partially offset by strong double-digit growth in Europe. Our Franchise Distribution platform posted low single-digit growth. At Matco, we grew revenue at mid-single digits as we continue to gain share via both increased same-store sales and franchisee adds. Using FBS tools such as funnel management and digital marketing, Matco has posted mid-single-digit growth or better for 24 of the last 26 quarters. To summarize, we are encouraged by continued strength in our Industrial Technologies segment and stabilization in our Professional Instrumentation segment. Through the successful deployment of FBS, we were able to launch new products, take market share, and realize operating efficiencies across a number of businesses. Focused execution, combined with the strength and diversity of our portfolio, allowed us to deliver margin expansion and generate outstanding free cash flow despite challenging macro conditions. We are initiating adjusted diluted net EPS guidance for the third quarter of $0.56 to $0.60. For the second half of 2016, we are initiating adjusted diluted net EPS guidance of $1.21 to $1.29 and continuing to assume low single-digit core revenue growth. In closing, our value-creation strategy is focused on core revenue growth, operating margin expansion, and free cash flow deployment biased towards acquisitions. We will follow a strategic and financially disciplined approach to M&A with the goal of building market leadership positions and increasing returns on capital. We are committed to the principles of the Fortive Business System to deliver customer-driven innovation and shareholder value over the long term. We are very excited about the future in establishing our own independent record of strong performance for many years and decades to come.

Thanks, Jim. That concludes our formal comments. Renée, we're now ready for questions.

Congrats on your first quarter out of the gate. I just want to talk a little bit about the M&A backlog and how that's changed. I mean, a lot of your management team and development team, I guess, really came together in the last few months. So where are you, if you had to put in terms of kind of what inning? Or where are you, as far as you think, capability to be able to go out and execute a transaction right now? And maybe just give us a sense of where you are in the pipeline, whether it's a full pipe, and how you feel, the confidence you have and what you see in being able to deliver something maybe even in 2016.

Thank you, Scott. As you pointed out, our team has really united over the past few months, and we have a seasoned group. With my two decades of experience in this industry, I know that predicting the timing of deals is challenging. However, we are quite busy at the moment, and our pipeline looks strong. Both Chuck and I are excited about the range and diversity within the pipeline. We have several valuable deals lined up, along with some promising growth opportunities that may offer higher valuations while still providing solid long-term returns. The key for us is to maintain discipline. The current environment is favorable, and the pipeline is expanding. I anticipate that we will continue to develop the pipeline and complete transactions. While I can't predict exact timing, I feel confident that we are in a great position right now.

And just as a quick follow-up, I mean, where do you in your underlying businesses, where do you feel better or where do you feel worse from the Analyst Day and outlook?

I would say that when we evaluate the situation, I'm not sure there's any area where we feel worse. The North American market has been somewhat more volatile, but in the past month or two, we've seen it stabilize a bit. However, the conditions remain mixed depending on the vertical. We did observe strength, particularly in Transportation Technologies, which continues to perform well. We have also seen positive developments in Qualitrol and Matco, as mentioned earlier. Kollmorgen's growth in the second quarter is also encouraging. Overall, this gives us confidence in our guidance for low single-digit growth in the second half. Looking at high-growth markets, aside from Latin America, conditions appear favorable. Across different regions and businesses, we have noted various areas of improvement or stabilization. I believe we will be in a strong position for the second half.

Congratulations on a strong start to the first quarter. I have a follow-up question regarding your M&A strategy. Can you remind us what your targeted financial hurdle is? Is it similar to Danaher’s past approach of around 10%, or is it more complex? Additionally, I understand you believe you have the potential to achieve somewhere between $2 billion and $3 billion in M&A over the next three years, with a significant portion expected in the upcoming year.

So, yes, this is Chuck. I'll address those points in reverse order. We believe we can deploy $3 billion in M&A over the next 2 to 3 years, so you've got that right. Regarding our traditional hurdles, both Jim and I have strong roots at Danaher, where discipline means aiming for a 10% return over 3 years and 5 years for larger platform deals. There may be instances where we stretch beyond that for smaller deals if we see significant value creation potential in the future. However, most of our focus will align with those 3- and 5-year metrics.

Okay. And then I think you said low single digit for the second half. What do you expect for the third quarter for organic?

We are starting from a flat position in Q2, and we expect low single-digit growth that will likely accelerate. We will face easier comparisons in the fourth quarter, but not in the third quarter. Nevertheless, we anticipate low single-digit core growth in Q3.

Congratulations on your first quarter out of the gates. Yes, so there's obviously a lot of debate about the sustainability of the EMV upgrade cycle. Maybe Jim, could you offer some perspective on where we are in that penetration curve? Are we maybe 20% through, halfway through? I mean, how sustainable do you think this upgrade cycle is?

Well I think if I break EMV into two places, one, the indoor and the outdoor, we still are seeing growth on the indoor side, as we mentioned in the prepared remarks. So we think that will continue. As we've talked out there a little bit, industry experts would put that penetration in around 50 in the marketplace. I don't suspect we'll ever get to 100. On the outdoor side, we're very early stages. If I were to do a baseball analogy, I'd feel like we're in the first or second inning here. So I'm not sure what that is on a percentage basis. We will see some acceleration though in the second half due to EMV, both on the indoor and a little bit on the outdoor side. So you'll see that. As we mentioned before, we still believe it's a $500 million incremental opportunity over the next several years. And we're still not calling the timeframe in that other than the next 2 to 3 years just given how early we are in the outdoor penetration cycle, Nigel.

Okay, that's very helpful. I have a follow-up about Tektronix. It's been somewhat disappointing for the last four years. What do you think it will take to return this business to growth in the coming years? Is there an upgrade cycle or a new product introduction cycle that will help achieve this growth?

I believe we will observe some stabilization in the second half of the year, partly due to comp-related factors and also because of the initiatives they have been implementing which will begin to yield results. In terms of their performance in China, they are capitalizing on favorable macro trends, and the double-digit growth in that region reflects their strength in several areas. We have continued to invest in China. In the second quarter, they showed significant gross margin expansion, but we also prioritized technology investments. The advantage of our robust portfolio is the opportunity for such investments. I anticipate we will witness some of this progress in the latter part of 2017. Overall, I expect ongoing stabilization throughout this year. While global macro trends are challenging, especially in the U.S. and Western Europe, I believe we are in a relatively better position as we move into 2017.

I'll repeat my congratulations on a strong first quarter. That's great. Can we focus on the Professional Instrumentation segment for a moment? You just mentioned Tektronix. I believe this is also the third consecutive quarter of decline for Fluke. Last quarter saw a drop in the mid-single digits, and the one before that was down in the high singles, and now it's mid-single again, correct? Can you provide some insight into what's really happening? You have a solid business, but what are the broader macro challenges affecting it?

I believe we are experiencing some slowdowns in the U.S. Fluke is likely where we see some secondary effects related to oil and gas. While we don't have significant direct exposure to oil and gas, we do feel some indirect impact. In the U.S., we observe strong growth with distributor sales along the coasts, but growth is slightly slower in the central part of the country. This trend is expected to continue for a while. We're pleased with the growth in high-growth markets, especially in India and China. Additionally, the margin expansion in the second quarter, despite the decline of Fluke, indicates that we are still achieving good pricing and highlights the strength of our business. With the launch of Fluke Connect condition monitoring and several other innovations planned for the second half of the year, I anticipate we will begin to see some acceleration. Looking beyond the comparisons in the fourth quarter, we expect to see an uptick as we move into 2017.

So Jim, since you're mentioning the oil and gas impact there as well, so if oil sort of stays at these levels, does that affect your view of growth in that segment then?

I don't believe it has any additional impact. What we are observing is that we are wrapping up many of those activities. We can see some effects in the publicly traded distributor customers we have, and we expect to notice more as we approach the end of the year. As I mentioned, our exposure to oil and gas is limited within the portfolio. Fluke North America may have some exposure, but most of it is more indirect, particularly in the sensors process. However, we do not anticipate that the current oil prices will lead to a significant decline in our performance at this stage.

Can you talk about the Verizon acquisition of Fleetmatics for $2.5 billion and how that affects the industry from your perspective?

It's interesting that we are familiar with Fleetmatics since we've competed against them. We don't believe this will significantly change the competitive dynamics. Telogis and Fleetmatics operate differently, so we feel confident in our position. This acquisition highlights the strength of the market and suggests that if you have a large subscriber base like ours, it underscores the value of such assets. These acquisitions really demonstrate the robustness of our portfolio. We had a strong quarter in terms of both revenue and subscriber growth, which is crucial in a fast-moving business like this. We believe we're in a good situation. While I can't comment on the specifics of competitors' acquisitions until they're finalized, we believe our position is strong, and the second quarter has reinforced that outlook.

Jim, can you just remind us where we are in Fluke Connect at this point, and what your expectations are there? What's the reception been like so far, et cetera?

The condition monitoring offering we are launching is very exciting. It's a combination of software and various components we've demonstrated, along with a set of sensors and a network gateway that ensures easy installation. Our significant breakthrough in Fluke Connect comes with this condition monitoring launch in the third quarter. Although its impact will be small in the second half of the year, we believe it will contribute positively to our portfolio, including some hardware sales. We expect to see acceleration into the fourth quarter, but the real significant impact will be seen in 2017 and 2018.

Okay. And then given the tough end markets out there, I was a little surprised about the growth at Kollmorgen. I mean, is that a particular market or a particular initiative that's driving that business to grow at this point?

Well, they had good high-growth market performance. That was certainly part of it. I think that really shows to the technology offerings. Some of the work they've been trying to take the business into nontraditional applications like robotics has really been a big helper in some of the robotic initiatives they got in the China market. But across high-growth markets and even in Western Europe, they had good performance. So I think it really speaks to the power of FBS, the strategy that we've had to take us into different markets, and you're starting to see some benefit there. Obviously, they do have some tougher markets as well. We've seen that in some other players in the industry. But I think it's really been the work that we've done to try to make that business less cyclical. And really, a little growth here by some other segments is really starting to pay off a little bit.

Just on the low single-digit organic sales growth guide for the second half and the acceleration within that. So when we're looking at the two segments, are you expecting a similar rate of acceleration at both in the second half? Or is it more weighted to PI because its trends are weaker right now?

Julian, it's Chuck. I think that it's really similar. What we're seeing is we've got some of our good growth drivers in Industrial Technologies. That business is a little bit ahead in the recovery and the growth. But it's really about the acceleration of references running into an easier compare in Q4. But I don't see it differentiated. They're both improving going forward sequentially.

Understood. And then, I guess maybe talk a little bit about the sensing business. So I guess on the face of it, the end markets and what it does, it's playing to a number of very favorable trends. It's been actually pretty weak for sort of 18 months or so. So how much sort of reinvestment do you think is needed by Fortive to get that business sort of back on its feet? And is it essential, I guess, to have acquisitions on top? Maybe organic investment isn't enough.

I believe that looking ahead, we will notice strong end market opportunities. Our Anderson business is a prime example, with solid exposure to the sanitary market within the food and beverage sector. There are positive macro trends that should support growth in the latter half of this year and into 2017. However, I anticipate that for the rest of the business, it will take some time to build on the progress we've achieved thus far. M&A activity could significantly expedite our efforts in key strategic areas. As we discussed in the spring, this will be a focus for Chuck and me as we refine our strategic planning later this summer and into the fall. We will gain a clearer understanding of the business's needs considering the different landscape. These are strong businesses, and they performed exceptionally well in the second quarter by protecting margins. They are well-versed in DBS and FBS. I believe we will encounter good opportunities as we advance in 2017 and 2018 by focusing on their strategic plan this year. And Julian, you can collect $5 for getting me to mention DBS for the first time on this call, so remind me to do so next time we meet.

I guess, Jim, with Verizon acquiring Fleetmatics, I guess two questions come to mind. One is, how do you see the competitive landscape changing, I guess, given the scale Verizon will have from both the Fleetmatics and recent Telogis acquisitions? And then also given the Verizon multiple paid, would Fortive potentially look to monetize its competing Teletrac business? Or is this business very core to Fortive's portfolio?

I believe that in terms of scale, they will definitely have a larger business. However, ours will still rank among the largest Telematics businesses with subscriber accounts globally. We believe we have a strong position in this sector. Fleetmatics has been a solid competitor, and I don’t anticipate that changing in the next 12 to 24 months. They will likely remain a strong competitor, and we will need to continue executing our successful strategy focused on subscriber growth. Regarding monetization, we value this segment of our portfolio. The prices currently seen in the industry reflect specific companies and their needs. We have also explored M&A opportunities in that space, and there is a variety of deals available. We are confident we can develop our strategy and continue to operate effectively within our current portfolio.

Great. And then I guess just as a follow-up, kind of digging into the M&A conversation, you did talk about a growing pipeline in the prepared remarks. And as we kind of think here about timing and think about geographically, from a timing perspective, is it reasonable to think that we should, given the growing portfolio, see something announced perhaps before year-end? And then given the dollar strength and higher contribution of revenue from North America, would it be reasonable to assume that you're more willing to prioritize overseas acquisition?

The timing of deals can be challenging to predict, as I've experienced over the years. However, considering how busy we are, we aim to complete something before the year concludes. It's important to focus on returns rather than any single area. Our pipeline is global, with opportunities from all regions, particularly Europe. We can't say exactly where outcomes will arise, but we are committed to a disciplined return strategy. Any temporary currency fluctuations will not influence our long-term decision-making. While deals are likely to lower our tax rate over time, our primary motivation is to advance our business strategically. Achieving a financial return, which may include reducing the tax rate, is secondary to our strategic goals. This is why we are optimistic about the strength of our pipeline.

Jim, can you talk a little bit about the margin decline that we saw in Professional Instrumentation in the quarter? I mean, it was slightly bigger than we expected. And if you look at your guidance for the year of 30 to 50 basis points, at least for the second half, of 30 to 50 basis points of core operating margin expansion, I think that compares to 9 basis points for the quarter. So is it just the investments coming down that you mentioned, the technology investments that's going to help you? Is there anything else going on in the business that should get you to your guidance?

I'll take the PI aspect, and then Chuck can elaborate on the future outlook. In this quarter, we certainly seized the chance to make some investments. What stands out about PI is the 50 basis points improvement in gross margin, which highlights the effectiveness of FBS. We observed this at Fluke and also noted significant improvement at Qualitrol. Our sensors showed positive gains, compensating for their volume decline. However, we faced some difficulties in Product Realization. As we indicated, the volume decrease in tech was a slight setback, along with some high contribution margin opportunities at Pacific Scientific EMC being deferred to the second half. Overall, when we review the portfolio, the fact that five out of our six platforms maintained or improved their gross margins is a testament to FBS’s effectiveness. Although Professional Instrumentation experienced a slight decline, a closer look reveals strong performances across several platforms.

And then, Andrew, regarding the anticipated margin expansion in the second half, we are expecting low single-digit core growth. We anticipate about 50 basis points in the second half of OMX, with a bit more in Q4 compared to Q1, as we believe we are gaining momentum. I thought I heard you mention 9 in Q3, so I would expect slightly more than that.

Yes, I think it was 9 in Q2.

I understand that it was 9 in Q2, which reflects a steady performance, slightly below flat, but showing good acceleration compared to Q1.

Okay, that's helpful. And then can you guys talk about the inventory situation that you see at Fluke right now? You mentioned weak demand from distributors. But are they still in destocking mode where inventories at this point relatively low in the channel?

We have very good visibility into inventories globally at Fluke, and our inventory position is strong. We don't anticipate any issues, although there may be one or two instances of slightly higher levels. Overall, our visibility is excellent, and we maintain strong relationships with our top 20 channel partners worldwide, placing us in a favorable position.

We mentioned it a few times, but if you consider your overall business in China, I know it's challenging due to the scale of operations involved. Most of the commentary this earnings season regarding China has been largely negative. However, you seem to have a more optimistic outlook. What specific observations are you making there? Is there something unique to Fortive that is contributing to this view, or how does your performance in China compare to the broader environment there?

Yes, I believe our diverse portfolio has been beneficial because we are not overly reliant on any single sector in China. The growth in semiconductors and electronics in China has positively impacted Tektronix and, to some extent, Fluke. Additionally, Gilbarco has seen some good developments in the Chinese market, and Kollmorgen is also performing well there. Some of our businesses started from a lower baseline, and their innovative efforts and focus on FBS have been advantageous. Overall, this has allowed us to maintain mid- to high single-digit growth in China over several quarters, and we expect this trend to continue as outlined in our guidance.

I believe we will face a slightly tougher comparison at Gilbarco in the fourth quarter. However, we think we can maintain our current performance due to a strong pipeline and several initiatives we have underway. The FlexPay launch, which we mentioned earlier, is a prime example of how we're introducing more innovation to capture market share. Based on our projections, we don't expect to achieve 100% penetration in the next 2 to 3 years; we consider that around 80% penetration may be achievable within the next 3 to 4 years. That said, as we just began monitoring outdoor penetration, we update our models monthly based on actual sales, orders, and customer feedback. We expect these models to become more precise as we progress through 2016 and into 2017 with a more engaged customer base. While we can make some forecasts about that, we believe we are about 5 to 6 months away from having a clearer picture to determine whether it's a 2 or 3 year timeline or a 3 to 4 year timeline at this point.

And then if I can just sneak one in for Chuck real quick. What was the effective adjusted tax rate for the quarter? And what should we be thinking for the full year?

The effective tax rate for Q2 was around 32%.

Okay. And that's...

Going forward, I believe 30% is a reasonable target for the second half of the year. We anticipate that we will achieve a rate in the 20s in 2017. We have several plans to implement, and it’s possible we could reach that goal in the second half. However, I think 30% for the second half is a solid estimate.

Well, we appreciate all the time that everybody had for us today. Obviously, we're unbelievably excited about the future at Fortive. We're looking forward to continued conversations with everybody around all the good things that are going on and, really, what the opportunity is for us. Lisa and Josh are available for calls today and tomorrow. So we look forward to talking to you, and we'll see you real soon. Thanks, everybody.