Fortive Corp (FTV) — Q3 2016 Earnings Call Transcript

Thank you, David. Good afternoon, everyone, and thank you 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. We will discuss certain non-GAAP financial measures during today’s call. The information required by SEC Regulation G regarding these non-GAAP financial measures can be found in the Investors section of our website, www.fortive.com, under Financial Information. I would like to point out that we have updated supplemental financial data on our investor website to reflect minor corrections to the carveout allocations of revenue, gross margins, and SG&A for the third and fourth quarters of 2015. A replay of the webcast will be archived on the Investors section of our website later today under Events & Presentations, and it will remain accessible until our next quarterly call. A replay of the conference call will be available shortly after we conclude until Thursday, November 3, 2016. Once available, the link to the conference call replay will be posted in the Investors section of Fortive's website under Events & Presentations. During the presentation, we will outline some of the significant factors that affected year-over-year performance. The supplemental materials provide additional details on factors influencing year-over-year performance. Unless specified otherwise, all references in these remarks and supplemental materials to company-specific financial metrics relate to the third quarter of 2016, and all comparisons of financial metrics are year-over-year. During the call, we will make forward-looking statements as defined by federal securities laws, including comments about events or developments we believe may occur in the future. These forward-looking statements are subject to several risks and uncertainties, including those described in our SEC filings, and actual results may differ significantly from any forward-looking statements we make today. These statements are made only as of the date they are delivered, and we do not take responsibility for updating any forward-looking statements. With that, I'd like to turn the call over to Jim.

Thanks, Lisa, and good afternoon, everyone. We're very pleased with our performance this quarter. Our results reflect the strength and diversity of our portfolio and our team's impressive execution to deliver solid core revenue growth, outstanding margin expansion, free cash flow, well in excess of net income; and earnings outperformance. The Fortive Business System is the driving force behind our performance and is the cornerstone of both Fortive's culture and operating model. We recently held the first-ever Fortive CEO kaizen, focused on our key shareholder and customer-facing metrics of quality, delivery, cost and innovation. Kaizen means continuous improvement, and our kaizen events are one of the many ways we commit to this Fortive value as our way of life. What makes the CEO kaizen unique is that more than 50 of our top leaders across the company go shoulder to shoulder with our front-line operators this year at 4 selected sites to attack our highest priority initiatives. The CEO kaizen was an exciting milestone for me personally, and I'm energized by the breakthroughs and amazing results achieved during this event. With the launch of Fortive, we have a great opportunity to deepen our dedication to the Fortive Business System and show the power of 24,000 people devoted to our purpose of providing essential technology for the people who create, implement and accelerate progress. With that, I would like to turn to the quarter for a more detailed discussion of our results. The following information reflects year-over-year increases or decreases relative to the updated supplemental financial data that Lisa described at the top of the call. Adjusted net earnings of $233.1 million were up 22.2% over the prior year. Sales grew 2.8% to $1.6 billion, with core revenue increase of 2.7%. Acquisitions contributed approximately 60 basis points of growth over the prior year, which was partially offset by approximately 50 basis points of currency. Geographically, solid performance in high-growth markets drove revenues up mid-single digits, and developed markets improved to low single-digit growth. The high-growth market results were primarily driven by India and double-digit growth in China, partially offset by weakness in Latin America, where we realized a double-digit decline, given continued challenging market conditions. In developed markets, we saw low single-digit growth in North America, primarily driven by the strength of EMV-related demand for our Gilbarco offerings and strong growth at Matco and Qualitrol, and mid-single-digit growth in Western Europe. We expect the Western Europe growth to moderate in the fourth quarter. The power of the Fortive Business System was clearly demonstrated with outstanding margin expansion. We were very pleased that 4 out of our 6 platforms had both growth and operating margin expansion in the quarter. Gross margins expanded 30 basis points to 49.3%. Operating margins of 20.6% were up 140 basis points versus the prior year, with core adjusted operating margin expansion of 150 basis points. The strong margin expansion represents above-average incremental fall-through of approximately 75%, reflecting favorable mix and sales growth weighted towards the end of the quarter. During the third quarter, we generated $300 million of free cash flow, up 50% over the prior year and delivered an outstanding conversion ratio of 134%. Cash generation was unusually strong this quarter in part due to the timing of interest and tax payments. For the full year, we continue to expect free cash flow conversion to be above 100%. Our M&A funnel continues to expand, and I remain confident regarding the growth opportunities presented, given the size and diversity of our pipeline. During the quarter, we closed 2 important bolt-on acquisitions for approximately $200 million that accelerates several of our key strategic initiatives, which I will talk a little bit more about later. We expect to remain active on the deal front, with a continued disciplined focus on accelerating growth and returns through our M&A strategy. The adjusted effective tax rate in the third quarter improved to 27.6% versus our previous outlook of 30%. We expect our adjusted rate going forward to be approximately 28%. Turning to our segments. We were pleased to see improved performance in Professional Instrumentation, with revenue up slightly, reflecting 70 basis points of core growth, partially offset by 40 basis points of currency and 10 basis points from the impact of acquisitions in the separation. Reported operating profit margin increased to 22.3%, and core operating margins were up 110 basis points for the quarter, primarily reflecting a favorable business mix to the prior year as well as successful price and productivity initiatives. During the quarter, Professional Instrumentation realized approximately 40 basis points of favorable price. Advanced Instrumentation and Solutions core revenue increased low single digits, led by demand for test applications and connected equipment monitoring solutions. In field solutions, core revenues were up low single digits, led by mid-single-digit growth at Qualitrol and low single-digit growth at Fluke, reflecting good demand for handheld industrial products as well as our thermography and network offerings. Fluke delivered mid-single-digit growth in both Western Europe and China. This strong growth was partially offset by continued weakness in certain North American end markets. Fluke continued to demonstrate the strength of innovation through numerous awards, including 2 Electrical Construction and Maintenance Magazine Product of the Year awards for Fluke Connected assets in the software maintenance management category and for Fluke TiX560 in the cameras and imaging equipment category. During our last earnings call, I highlighted our Fluke Connect, Condition Monitoring System as an example of customer-led innovation. I'm excited to report that the reception to this new product offering has been outstanding. This product is an important step in our connected device strategy, which was recently accelerated via the acquisition of eMaint Enterprises, a global leader in SaaS-based computerized maintenance management software. The combination of Fluke Connect toolbox with eMaint's SaaS offering will allow for increased asset uptime via the seamless integration of maintenance devices' data and systems. Fluke and eMaint have joined forces to usher in a new era of connectivity and are set to deliver groundbreaking asset reliability platforms for multi-industrial customers around the world. Qualitrol's mid-single-digit growth was primarily driven by the high-growth markets, where we saw solid asset protection growth and market share gains, driven by the refinement of our go-to-market strategy. This quarter marked Qualitrol's 10th consecutive quarter of positive core growth, and we're excited about our position in this important condition-based monitoring sector. In Product Realization, core revenues were slightly up, led by double-digit growth in our PacSci EMC business. The stronger-than-normal EMC growth reflected the timing of several projects that you will recall moved out of last quarter. Year-to-date, EMC delivered mid-single-digit core revenue growth. As expected, Tektronix core revenues declined low single digits and improved sequentially, reflecting sales improvements in nearly all regions and a return to positive growth in our high-growth markets. Tektronix is now our largest business in China, and it continued to outperform in the region by recognizing double-digit growth, given strong demand for our solutions, geared for new wafer technology in the semiconductor industry and data center applications. By leveraging our FBS growth and innovation tools, we've been able to upgrade our 70-gigahertz real-time oscilloscope with advanced software to target data centers where high-quality signal measurements are critical to ensure data center uptime and performance. Our Sensing Technologies platform saw a low single-digit core revenue decline in the quarter, as declines in our control product lines were partially offset by solid growth in our sensing businesses, which was driven by exposure to the medical and food and beverage verticals. We were pleased to be awarded a multi-year contract with NAVSEA to supply electrical products to the U.S. Navy, with the potential to realize approximately $3 million in revenue over the next 12 months. Moving to our Industrial Technologies segment. We realized reported growth of 5.1%, with core revenue growth of 4.7% in the quarter. Acquisitions contributed 90 basis points of growth over the prior year, which was offset by approximately 50 basis points of currency. Reported operating profit margin increased to 21.4%, and core operating margins were up 230 basis points for the quarter, primarily reflecting strong volume growth, productivity as well as material cost and supply chain improvements. Our Transportation Technologies platform saw high single-digit growth in the quarter, with Gilbarco Veeder-Root delivering its fifth consecutive quarter of high single-digit core revenue growth, driven by our best-in-class retail fueling portfolio. At Gilbarco, we're starting to see a deceleration in EMV-related demand for indoor point-of-sale solutions as the liability transfer occurred in October 2015. However, demand associated with the pending outdoor liability shift in the U.S. has increased for both dispenser and EMV payment kits. While we are in the early innings, growth is weighted towards kits this quarter. On the innovation front, Gilbarco recently released contactless and 2D barcode scanner options on FlexPay IV, our market-leading EMV payment platform. We are winning not just in the U.S. but in other international markets as well. Our new PCI 4 payment platform continues to gain traction in the market since its launch in Q2, securing our market-leading position, which helped us to close a multimillion-dollar 5-year contract with a leading major oil retailer in Italy. Telematics realized core growth of low single digits in the quarter, reflecting strong international growth. The recent launch of our new SaaS platform called Director has been well received, and the installed base transition will take approximately 18 to 24 months to complete. In keeping with our Transportation Technologies platform evolution from retail fueling to smart transportation, we closed the acquisition of Global Traffic Technologies or GTT and entered an attractive market adjacency with mid-single-digit or better growth characteristics. GTT has a market-leading position in traffic management systems and delivers advanced transportation solutions to help emergency, transit, and traffic personnel increase safety and minimize traffic congestion while maximizing resource efficiency and performance. Moving to Automation & Specialty components. The platform was slightly down for the quarter as double-digit growth in high-growth markets was mostly offset by weakness at Jacobs Vehicle Systems. JVS saw strong growth in China, offset by continued weakness in the North American truck market. The automation businesses of Kollmorgen and Thomson grew low single digits. This was the second consecutive quarter for positive growth at Kollmorgen, reflecting performance in high-growth markets and collaborative robotics and a return to growth for Thomson, which was primarily driven by strength in their distribution channel and medical equipment sales growth. Continued investment and innovation, including robotics, is driving key market share gains as we continue to outperform the market globally. Our Franchise Distribution platform experienced mid-single-digit growth. Matco again saw high single-digit revenue growth as we gained market share through both same-store sales and new franchisee additions. The growth in hard-line and power tool sales was fueled by demand from our second-largest sales meeting of the year. Matco's record of mid-single-digit or better core revenue growth now stands at 25 out of the last 27 quarters. We take pride in Matco being ranked #27 among the fastest-growing franchisees by an entrepreneur magazine. In summary, we are very satisfied with the quarter. We allocated capital, introduced new products, expanded our market share, and achieved operating efficiencies across our businesses to produce excellent results. We are starting our fourth quarter adjusted diluted net EPS guidance at $0.63 to $0.67, which anticipates low single-digit core revenue growth along with additional growth investments and restructuring. For the second half of 2016, we are raising our adjusted diluted net EPS guidance to $1.30 to $1.34. The third quarter of 2016 illustrated the resilience of our portfolio throughout the cycle, how FBS fuels both growth and cost efficiencies, and how the accelerated revenue growth of high-margin businesses leads to significant operating margin expansion that generates free cash flow for both organic and inorganic investments, as well as outstanding shareholder returns.

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

I have several questions, but I'm trying to understand something. I have always viewed Fluke as a leading indicator from a macroeconomic standpoint. First, do you agree with that perspective? Secondly, do you think we've reached a low point in the industrial sector? It seems like emerging markets are improving, but the U.S. has not yet rebounded. Could you provide some insight on Fluke specifically and what your observations are?

Yes, I believe that the Fluke industrial business serves as an early indicator for broader market conditions. We were pleased with its performance this past quarter, especially in Western Europe and China. Overall, we observed stability with some improvement driven by recent product innovations at Fluke, including Fluke Connect and other new products launched this year. We noted some stabilization and a slight increase at Fluke, which we expect to continue. This improvement isn't just due to easier comparisons; it's a genuine uptick in performance.

Okay. That's...

And maybe, just to conclude that thought, I'm sorry. The other thing we look at is the point-of-sale information. Obviously, with the number of publicly traded distributors that you know well, we saw a little bit of improvement in point-of-sale through the quarter.

That's helpful. I was surprised to see that you guys have completed a fair number of transactions this quarter. Most of them are too small to warrant a release, but you mentioned GTT, which I am not very familiar with. How do you consider the balance between smaller deals, especially given Fortive’s size? Some companies argue that small deals consume too much time with limited return, while others believe that’s where the true valuation and value lie. When you review your opportunities for transactions, what are your thoughts on the advantages and disadvantages of these two approaches?

I think Chuck and I are really pleased with the diversity of the pipeline right now. We're excited about bringing eMaint and GTT into the Fortive family this quarter. They are excellent additions to our strategy focused on aligning our businesses with secular trends. eMaint is entirely SaaS-based, while GTT allows us to reframe Transportation Technologies in light of new trends related to urbanization and safety due to traffic congestion. You'll notice that our deals tend to follow this pattern. Although it’s difficult to predict when deals will happen, we're currently seeing a diverse pipeline in terms of platforms and sizes. We would certainly prefer to execute larger transactions, rather than only small bolt-on deals. You're right that the returns on smaller deals tend to materialize in a shorter timeframe than those of larger, more platform-like transactions, but we believe maintaining a balance is beneficial for us in both the short and long term.

I wanted to begin by discussing our approach to organic growth through the second half of the year that we've already observed and what we expect moving forward. The nearly 3% core growth was better than we anticipated. As you mentioned regarding the fourth quarter, initially, you pointed to easier comparisons and a favorable setup for acceleration as we close out the year. What I’m hearing now suggests a bit more stabilization at that level. Could you provide some insights into the factors influencing your perspective as we progress through the rest of the year?

Steve, this is Chuck. We aren't seeing the second half much differently than we anticipated about three months ago. There are two factors to consider, and we are pleased with the core growth. Jim mentioned during the call that we are reducing some backlog from our EMC business, which is not particularly beneficial. We had already factored that into the second half, and it just came in during the third quarter. We experienced solid performance in our portfolios across Western Europe, where four of our six had mid-single-digit growth. We believe we are gaining market share there, but we don't expect strong organic growth going forward. Without those two factors, we estimate that our core growth for the third quarter would have been around 1.5%. Looking ahead, we still anticipate low single-digit growth, likely similar to or slightly better than what we reported in Q4.

It's really helpful. Another question on restructuring and the investments headed into the fourth quarter. Historically, Danaher only highlighted separate restructuring when it was significant, while they integrated restructuring costs into their quarterly reports as part of regular business operations. I assume you are following a similar strategy, and although this level of restructuring is notable, you have a consistent approach as well. Moreover, Danaher seemed to effectively align restructuring expenditures with anticipated demand fluctuations. Could you provide some insight into your rationale and motivations for highlighting this specific restructuring?

Well, I think that we have a couple of points to consider. First, we want to highlight that both restructuring and growth investment are additional to our existing plans. Historically, we have engaged in quiet restructuring of certain businesses when necessary. We believe that the overage we experienced this quarter clearly illustrates the significant earnings potential we have when we achieve some core growth. We decided to manage the business with both long-term and short-term perspectives in mind, making some incremental growth investments in critical areas. As mentioned during the call, this includes initiatives like Condition Monitoring at Fluke and Gilbarco's EMV portfolio. We are engaging in some of that investment. It's worth noting that, as Chuck pointed out, certain markets are a bit challenging, which means there are product lines and sectors that are underperforming. We plan to take the necessary steps to ensure those areas continue to invest next year by streamlining some costs. Overall, this reflects a good balance of actions. Since this is supplemental to our earlier guidance, we felt it was important to bring it to your attention. Overall, we are very enthusiastic about the quarter, and the flexibility we have to invest in the business is an important takeaway for everyone.

Did you quantify the mix between cost reduction initiatives and growth initiatives in the fourth quarter?

We think it's likely to be evenly split between those 2 things and in the range of $0.04.

Yes. Okay. That's sounds great. Makes kind of sense. And then you just mentioned that the core growth saw somewhat similar or maybe a little bit better than 3Q. The comp, obviously, plus 3% in 3Q '15, minus 3% in 4Q '15, so you've got easier comps. So would we expect maybe a slight kind of sequential deterioration? How do we think about that comp effect, I guess, is my question.

When we consider Q4, we expect that, as Chuck mentioned, the backlog that was shipped in Q3 will influence our performance. We don't foresee Western Europe performing as well as it did in the third quarter, although we anticipate being slightly better than the 1% or 2% decline we may have experienced in Q3. So, we expect to see a slight sequential improvement. However, given the current environment, we remain cautiously optimistic. In light of what we're observing with our peers in other markets, we believe it is necessary to be prudent and ensure we manage the business appropriately in response to external conditions.

Absolutely. Just to clarify, Chuck, you mentioned a tax rate of 28% going forward. Is that rate for the fourth quarter and for 2017?

So it's 28% in the fourth quarter and into 2017. What we've been able to do is accelerate some of the tax work that we were confident we were going to get done in 2017. And we're going to get and been able to bring that forward into 2016.

Just on the M&A front. Jim, perhaps you don't want to talk about the 2 deals individually, but collectively. Can you give us a sense of the multiple paid and what you do think the return profile of those deals are?

Certainly. I'll provide more detail about the deal. In the quarter, we acquired eMaint Enterprises for Fluke and GTT, which are part of our Transportation Technologies platform. Both are strong companies aligned with positive long-term trends and have good growth potential, although they are relatively small. The revenue multiples for these deals are likely higher than usual due to their size, probably in the range of three to four times revenue. However, the most important aspect is the return. Given how these businesses fit within our strategic goals, the return profile is very favorable, expected to be at least 10% within three years. Occasionally, you may see us invest a bit more for growth in these platforms, but they will likely be smaller and more closely aligned, allowing us to achieve the desired return profile quickly.

Right. And then on Tektronix, it's good to see some positive developments there. Could you provide more information about the new product launches and how that business might be positioned for the early part of next year, as well as the full year of 2017?

We were very pleased with the quarter, as despite a decline in the third quarter compared to the previous one, the performance showed improvement. Notably, the high-growth markets have shifted to growth, which is a positive trend for us, and we expect this to continue. China remains a leader in this area, due to several years of preparation on both the product and go-to-market strategies, allowing us to seize opportunities effectively. The team is performing well there. However, the North American and Western European markets remain quite challenging, with many of our targeted verticals experiencing sluggishness. I do not anticipate significant improvement in the near future. While our exposure to the semiconductor industry in North America is limited, we are observing considerable consolidation in that sector. Overall, we expect the next few quarters to be difficult. However, as we approach the latter half of 2017, we have new platform technologies and products on the way, which we believe will help create new opportunities for us. That said, we do not foresee any major macroeconomic benefits impacting our situation, so we are focusing on generating our own success, and the team is executing effectively.

Just on EMV. I mean, you talked about the indoor slowing and you talked about some of the growth being more kit-driven. Maybe just a little more color on that and how would you say things are tracking versus your expectations, better, worse, or just different?

I think we are still receiving indoor revenues, but at this point, we are beginning to see a slowdown. The EMV product lines, including dispensers and kits, are just starting to sell. Looking at the funnel, Chuck and I had the chance to review it with the team recently, and I believe the funnels look promising. We are starting to see some transactions occurring. This quarter, we noticed an increase in kits, but I wouldn't read too much into that just yet. We will provide updates as we progress. We still believe there is a $500 million incremental market opportunity for participants in this space. However, it's still very early, and while we are pleased with the advancements we've made, I think it will take a few more quarters to determine the balance between kits and dispensers. We do see customer enthusiasm, and I remain confident that this will extend well beyond our current observations. At the recent National Association of Convenience Store trade show, we saw many customers and learned that not everyone will transition quickly.

Right, okay. And then just in terms of the acquisition pipeline, I mean, it makes sense that your first couple would be in Fluke and Transportation. Is that still where the most kind of developed acquisition pipelines are or do some of these other platforms have things that are visible now?

Shannon, this is Chuck. As Jim mentioned earlier, we really like the funnel, but it's not concentrated in any single business. The key takeaway from these two acquisitions is simply about their initial locations. When you consider our first five to ten, you'll notice a distribution across our various businesses as well as variations in size and scale.

Just a follow-up question on EMV. You sort of noted that you see indoor EMV deceleration. So what's the adoption rate that you can estimate at which it started to decelerate significantly?

I believe that in the point-of-sale market, we don't have visibility into all the sectors. Therefore, we sometimes need to combine information with other industry participants. We have a clearer perspective on outdoor payments because we provide a dispenser in that area. Currently, we estimate our market penetration to be around 70%, which aligns with what analysts are suggesting. Honestly, we don't anticipate reaching full saturation. The recent slowdown suggests we're nearing a point of saturation, and it's difficult to predict when we'll achieve the next significant increase in the market.

And just a broader question, just going back to your commentary about macro just being soft. During the Analyst Day in the summer, you thought you could sort of hit those rates of GDP+, GDP+ growth, given the overall weakness in the industrial market. And, I guess, 4Q, you do have easy comps. Do you think it's still a reasonable expectation into next year?

Yes, I do. Looking at our current position, we believe we are in line with GDP. However, we are not entirely dependent on that as we are benefiting from strong secular trends, such as those at Gilbarco and Qualitrol, where condition monitoring is becoming increasingly important for utilities globally. The acquisitions we made this quarter are aimed at addressing customer needs for improved productivity and safety, even in a challenging industrial environment. We believe that remains attainable. As we mentioned, as the M&A cycle picks up, we expect to accelerate core growth within our platforms, making GDP+ growth likely achievable over time.

This is Lee Sandquist on for Julian Mitchell. After a very strong Q3 margin expansion, how do you think about the potential going into Q4, keeping in mind that longer-term 30 to 50 bps of core operating margin expansion target?

I appreciate you joining us, Lee. This is Chuck. Looking ahead, we feel confident about achieving 30 to 50 basis points of margin expansion. We believe this trend will be evident over multiple quarters. However, we acknowledge that we exceeded expectations this quarter. Fluctuations are to be expected; sometimes it’s a bit stronger, sometimes a bit weaker. Nevertheless, when we look at the next three or four quarters, we believe that 30 to 50 basis points will accurately reflect our targets.

It makes sense. And then in terms of organic growth, it sounded like that picked up throughout the quarter and towards the end of the quarter. Which businesses saw the biggest progression throughout that period?

I don't think it actually increased much. From my perspective, it seems pretty stable for the month, although I would note we had a strong September last year and we're seeing some strength now. The PacSci EMC business was an area where we managed to fulfill some large orders, and we've also observed that Western Europe is showing strength in areas that we may not have anticipated at the start of the quarter.

Lee, I’ll add that as we mentioned before, we observed stability previously, but September turned out to be a significant month. Typically, September is always noteworthy, making it difficult to assess the macro situation in August until we see how September unfolds. We were very satisfied with September's performance. As I noted, I believe Chuck accurately reflected our observations. While we’re not anticipating any macro tailwinds at this time, we experienced stability throughout the quarter and noticed some stability at the end of the second quarter. Having several consecutive quarters of stability is currently our foundational perspective.

I have a quick question. Can I expand on this? There have been several inquiries about the Professional Instrumentation segment of the business. We have an easier comparison in the fourth quarter, which you touched on. However, as we look ahead to 2017, what elements of the business could help PI achieve a core growth rate in line with GDP?

I believe we should start with field solutions. As mentioned earlier, Qualitrol may not be the largest segment in Professional Instrumentation, but it has shown 10 consecutive quarters of core growth, and several new offerings are expected to sustain that growth. We're optimistic about our efforts with Fluke Connect, connected devices, and the combination with eMaint potentially creating favorable outcomes. Additionally, I've touched on Tek for the second half. Our sensors business is anticipated to return to growth, partly due to promising developments with the Navy. There are several other situations we believe could enhance our performance moving forward. While we haven’t provided an update for 2017 yet, Chuck and I will engage in budgeting shortly and will collaborate with all our businesses to gain a clearer understanding of their perspectives as they plan their growth initiatives for the upcoming quarters.

Okay. When I look at the core operating profit in each of the PI and IT segments, the PI segment showed an increase of 110 basis points, while IT was up 230 basis points. Chuck, is this due to mix in both segments, or were there some cost reductions implemented before the split? How should we view the scale of the core increases in operating profit?

I believe the key factor is FBS, along with everything we do across all portfolios, including pricing. However, it’s not just about price. Our procurement teams excel at finding ways to leverage our scale. This is the top priority on the Pareto chart. In terms of Industrial Technologies, it's clearer to see the core growth we're experiencing there. Overall, we're in a relatively positive position, but it’s not significantly driven by cost reductions; it really stems from the implementation of FBS.

Okay. And just one last question. Regarding GTT, I'm trying to understand the scale of that business. Given their technology, it appears to generate relatively small revenue, especially considering its potential applications across various markets. Is the telematics safety market quite fragmented? What is the reason that this company hasn't grown larger compared to the advantages their technology could offer in the market?

They primarily operate as a U.S.-based business, which is the most significant aspect. They are not a large-scale company. One of the advantages we offer in these small acquisitions is our capacity to develop the business further. Entrepreneurs globally see us as a means to expand their operations, which is certainly applicable to both deals this quarter. The businesses are generating under $50 million in revenue, and we believe they have great potential for scaling. In the case of GTT, their focus is on aiding municipalities. They initially began by assisting firetrucks and first responders in changing signals to navigate streets more effectively. They've since expanded into urban transportation solutions, including municipal buses. They are at the forefront of improving traffic flow in cities, which is a significant challenge not only in Seattle but globally. This presents an opportunity to grow their business on a larger scale.

Chuck, you mentioned 40 bps of price in PI. Maybe you can talk about what price versus cost looks like moving forward in both segments. You mentioned that was a decent contribution to the improvement in margin with PI, but maybe you can talk about broad base for the company. Is 40 bps kind of what we could see here or could that get worse a little bit if steel comes up again? How do we look at it?

I believe that for the year, we expect to average 50 basis points. Therefore, I don't consider 40 to be unreasonable at all; it's similar to what we've experienced over the last few years. I do think pricing is significant, especially given our strong positions. When you look at our gross margins, I believe that the cost reductions in material are equally important, possibly even more so than price. While we often discuss price more, our procurement teams are effectively managing to reduce costs by 2% to 3% annually, which is a substantial advantage for us.

Okay. And then, Jim, China, double-digit growth in China, it seems particularly strong. I think it's even better than it's been. Can you talk about where you've seen the incremental strength? I know you mentioned Tektronix improving, but is it broad-based across the company that you're seeing more strength in China? How much of it is the market versus sort of the own self-help that you're working on?

Thank you, Andrew. Regarding China, Tektronix has been performing exceptionally well, with several consecutive quarters of positive results. This goes back to last year, and they are capitalizing on various investment trends, outperforming the market. Overall, we are experiencing solid growth across our operations, particularly in automation, while our sensor business, although not growing overall, is seeing positive results in China. Fluke is also performing well. Our success in China can be attributed to our long-standing presence in the region, as we continuously seek new growth opportunities. We have significant capabilities in manufacturing and engineering tailored for this market. I believe our effective performance is linked to our ability to harness numerous growth drivers in China, similar to how a local company would, due to our long-term establishment there.

I just want to clarify, is the fourth-quarter organic growth you mentioned of 1.5% to 2% more of a guideline, or are you suggesting it's more firmly in the 2% range?

No, it's firmly. I think what we're saying is that for the fourth quarter, it's better than what we reported in the third quarter but still in the low single digits.

Okay. It's better than the 2.7% that was reported.

Yes, so 2.5% to 3% core.

Okay. Got it. Sorry. I know there's going to be some questions about that tomorrow. And then just to be clear on this EMV stuff. So how much of the growth from the high single-digit growth at GVR or Transportation Tech, however you want to talk about it, is coming from EMV? And then you talked about it decelerating in the fourth quarter. What is the kind of step-down in that growth rate for the fourth quarter? I would assume that it's all related to EMV. And is there any risk that at any time in the next several quarters there's kind of a tough comp that would create a negative result at GVR?

So, Steve, first, let me apologize. Let me clarify that we do not anticipate a decline at Gilbarco in the fourth quarter. We expect continued strong performance. While no one can predict the future, we have seen five consecutive quarters of good growth, and we believe that will continue for the foreseeable future. There will be no slowdown at Gilbarco in the fourth quarter, and I want to emphasize that. What I meant to convey is that the point-of-sale segment of EMV is expected to decelerate, while the outdoor segment is accelerating. The outdoor opportunity is significantly larger than the indoor one since there are typically only one or two payment devices inside the store, but there can be up to ten dispensers outside. We're just beginning to see that opportunity. Thus, we anticipate strong performance in the fourth quarter at Gilbarco despite a challenging comparison. We feel very confident about that. Regarding the sources of growth, the U.S. is contributing a substantial part of it, and they are still growing. Gilbarco is also gaining market share in Europe, especially with a major oil retailer in Italy, as well as with several significant customers across various high-growth markets. However, not all high-growth markets are performing well for them; for instance, Latin America has posed challenges. They have seen good growth in the Middle East. So, this is their current situation. EMV will be a key driver of their performance, but it won't be the only factor contributing to it.

Okay, that's very clear. It seemed like you were downplaying it a bit more. So that's...

Yes, I apologize for that.

No, not at all. That's why I asked the question. Great clarity on that. The $200 million or the acquisitions you've done year-to-date, just remind us how much they will add to earnings next year. What is the 2017 accretion from what you've just booked mathematically?

Yes, Steve, this is Chuck. We're not anticipating significant accretion. They are definitely not dilutive, but they will have a strong impact in years 2 and 3.

First question, regarding margins. You experienced a nice 150 basis points of core expansion in the third quarter. It seems there was some timing involved, as you mentioned that some revenues booked near the end of the quarter benefited from favorable drop-through. Given this, does this imply that gross margin and/or operating margin might decrease slightly sequentially into the fourth quarter?

No, I wouldn't say that gross margins had come down sequentially at all in Q4. I think what we're trying to convey is that some of the revenue in the fourth quarter, primarily from the PacSci EMC segment, may have been moved into the third quarter. But that's all we were trying to indicate there.

Okay. And then on GTT, this is interesting because it's within your highest growth subsegment, I guess, within the telematics, high single-digit core growth. Can you talk about what this does to the $3 billion approximate TAM that you have in that subsegment? How large is the TAM for GTT? And what has the growth rate been at GTT? And what would you expect it to be going forward?

We believe the market is likely to grow at least in the mid-single digits. While I'm considering the specifics, I estimate the available market for those segments might be around $0.25 billion. More broadly, we see an opportunity to expand beyond just retail petroleum into telematics revenue and smart transportation innovations. We have the potential to increase the available market on our platform over time. This is a promising beginning, but we recognize it is just the initial phase. We have previously enhanced the platform with telematics and have now expanded it with GTT, and we will continue to make improvements in the future.

I wanted to talk a little bit about commercial markets. There's been some talk about some of those markets getting a little bit weaker, and I was wondering what you're seeing there, maybe from some takeaways from Fluke.

We don’t have a significant presence in the retail commercial sector. On the whole, stability seems to be the best way to describe our position. When we consider the entire construction industry, residential construction represents a very small portion of our business. Facilities maintenance is a major focus for us, while commercial construction does not form a large part of our operations either. Therefore, when we analyze these segments, Fluke primarily revolves around facilities maintenance, which often involves dealing with existing buildings.

Yes, we sell to utilities, and our value proposition is to be OEM-agnostic. This means that when utilities have multiple OEM equipment, like specialty transformers, we provide an OEM-agnostic condition monitoring system. Utilities are focused on the aging infrastructure in developed markets, ensuring that their current equipment is functioning properly. In high-growth markets, there is also potential for expanded infrastructure. These factors are key drivers for our business. The team is effectively growing the business on a global scale and made some changes to their go-to-market strategy this year, resulting in positive outcomes. It's not only the market conditions but also their proactive efforts through the implementation of effective FBS tools that contribute to their success. I was recently in the Middle East, and they are experiencing good growth there, despite tough competition. In China, they are also seeing growth and doing well. The growth in China is not heavily dependent on power plant construction, but rather on the infrastructure needed to deliver power to cities. Overall, they have seen significant growth this year.

I guess, first, a clarification on EMV. I believe in an earlier answer, you said that you're seeing it draw out a little bit longer. So should we think of 100 bps of organic growth related to EMV in 2017 as maybe being a little bit slower? And then just with commentary on kits outweighing dispenser demand at this point, should we think about, all else equal, a little bit lower revenue contribution but a higher margin?

Thank you for the question, Patrick. I don't think we can determine the growth for 2017 just yet. We still maintain our perspective of a 5-year timeline, with about 4 years remaining. We'll likely include this year in that period. We've been consistent in this view, anticipating that it will continue to unfold around 2020. Regarding growth for next year, we are still analyzing our funnels and are actively closing business. This will give us a clearer understanding of the growth that will contribute to our portfolio. Our base case remains that we expect a 100 basis points increase for Fortive, and there's currently no indication that this won't hold true. Additionally, regarding kits versus dispensers, we've seen more kits this quarter. Our market estimate of $500 million over the coming years factors in both the kit and dispenser models, and nothing from this quarter has led us to revise that estimate significantly. And I think that's exactly what we're going to do around the portfolio and a real opportunity to add a SaaS-based revenue to the portfolio over time. Thanks, Patrick. Great to talk to you. And thanks, everybody, for joining us. We really appreciate your time this evening, most of you on the East Coast. Have a great evening, and we'll look forward to catching up with you. And I'll give it back to Lisa.

All right. Thank you. Thank you, David. That's it for the call.