Fortive Corp (FTV) — Q2 2018 Earnings Call Transcript

Thank you, Philip. Good afternoon, everyone, and thank you for joining us on the call. With me 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 SEC Regulation G relating to these non-GAAP financial measures is 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 will be available shortly after the conclusion of this call until Friday, August 10, 2018. Instructions for accessing this replay are included in our second quarter 2018 earnings press release. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. All references to period-to-period increases or decreases and 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 expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties and actual results might differ materially from any forward-looking statements that we make today. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available on our SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2017. These forward-looking statements speak only as of the date they are made and we do not assume any obligation to update any forward-looking statements. With that, I’ll turn it over to Jim.

Thanks, Lisa, and good afternoon, everyone. Today we reported another quarter of double-digit adjusted earnings and sales growth. This strong performance reflects the vitality of our portfolio and the momentum created from our acquisition flywheel. With our strong free cash flow generation and balance sheet, we are well-positioned to continue deploying capital towards M&A. We are significantly advancing our portfolio enhancement work to accelerate growth and reduce cyclicality. Since last quarter we announced two acquisitions, the Advanced Sterilization Products business from Johnson & Johnson for $2.7 billion and Gordian for $775 million. Both acquisitions provide a meaningful entry into quality markets. ASP is clearly aligned with Fortive's strategy to help customers drive better safety compliance and productivity, and Gordian exemplifies our focus on investing in software-enabled workflows. We also issued 5% mandatory convertible preferred stock with net proceeds from the sale of the shares of $1.34 billion. With substantial M&A capacity, our funnel remains strong with a range of targeted sizes to address strategic growth priorities. Before I provide quarterly results, I'd like to share that we published our first CSR or corporate social responsibility report in June. I'm excited about the path we've chosen and the progress we have made on the issues that matter most to our employees, customers, communities, and investors. While I'm proud of the direction we have established, I'm aware that our work is evolving and we welcome your feedback to inform our CSR-related strategies and goals in the coming years. With that, I'd like to turn to the details of the quarter. Adjusted net earnings of $321.7 million were up 28.7% over the prior year. Adjusted diluted net earnings per share were $0.91 based on an adjusted effective tax rate of 17.7% for the quarter. Sales grew 13.9% to $1.9 billion reflecting a core revenue increase of 5.3% as all of our six platforms posted core growth and four out of our six platforms grew mid single-digits or better. The continued success of acquisitions contributed 700 basis points of top-line growth. We're excited to review with you today several examples of how FBS growth tools and industry-leading innovation are continuing to drive top line performance. Geographically, high-growth markets' core revenue grew mid single-digits with continued strength in Asia and Latin America. Low double-digit growth in China was led by Gilbarco Veeder Root Sensing Technologies and Automation & Specialty businesses. Developed markets' core revenue grew mid single-digits reflecting continued strength in North America. Core revenue growth in North America was mid single-digits and was driven by strong performances at Tektronix, Gilbarco Veeder Root, Fluke, and Jacobs Vehicle Systems. We delivered a third consecutive quarter of gross margins at or above 50%. In the second quarter, we posted a strong gross margin of 50.6% reflecting 120 basis points of expansion over the prior year. Five of our six platforms delivered positive price for a net contribution of 50 basis points. Operating profit margin was 20.6% with core operating margin expansion of 50 basis points driven by Professional Instrumentation favorable incrementals. During the second quarter, we generated $315 million of free cash flow with a conversion ratio of 107%. For the full year, we are tracking well to deliver our expected free cash flow conversion ratio of approximately 110%. Turning to our segments, Professional Instrumentation posted sales growth of 17.1% including core revenue growth of 3.4%. Acquisitions contributed 11.9% and favorable currency 1.8%. Reported operating margin of 24.7% reflected core margin expansion of 180 basis points as FBS drove strong price, innovation, and supply chain benefits. Advanced Instrumentation & Solutions core revenue increased low single-digits during the quarter driven by market outperformance at Fluke. Field Solutions core revenue grew mid single-digits in the quarter reflecting mid single-digit growth in both developed and high growth markets. Fluke delivered high single-digit core growth led by double-digit growth at Fluke Digital Systems, Fluke Networks, and our thermal imaging business within Fluke Industrial. At eMaint, net new customer growth was 15% and recurring revenue grew greater than 25%. The combination of hardware and software coupled with the safety and productivity value proposition offered by Fluke products continues to resonate with customers and drive market share gains. Increased growth investments in sales and marketing are clearly paying off as Fluke further outperforms its markets reflected by accelerated point of sale growth. Industrial Scientific Corporation delivered mid-teens revenue growth led by double-digit growth in the INET and rental businesses. For those of you that attended our recent Investor Day last month at ISC, you were able to see firsthand the strength of the ISC team and their enthusiasm for adopting the Fortive Business System to drive revenue growth and margin expansion while advancing ISC's digital strategy and continuous improvement culture. Qualitrol core sales declined low double digits as high-single-digit growth in North America was more than offset by declines in China, Europe, and the Middle East. The market softness is consistent with what we messaged last quarter and we are actively working to improve what we expect to be declining sales for the remainder of the year. Product Realization platform core revenues grew slightly for the quarter led by low single-digit growth at Tektronix. Excluding the large 3D sensing win we highlighted in the second quarter 2017, Tektronix core revenue growth was high single-digits. Results were driven by double-digit growth in developed markets and in industrial and automotive end markets reflecting the success of multiple new product introductions and our target market strategy. I'm excited to announce that Tek launched its 6 Series Mixed Signal Oscilloscope last week. Based on the same breakthrough platform as the popular 5 Series MSO, the 6 Series MSO is an industry first for this class of oscilloscope and provides higher performance up to eight gigahertz to target the substantial growth in applications that handle a vast amount of data. It also measures devices at the lowest noise level of any product in the market, a critical feature for power devices, IoT and connected car applications and leverages the ease of use and software of the 5 Series. With the 6 Series MSO, we're delivering a compelling combination of best-in-class performance and usability that will boost productivity and shorten time to market for our customers. Our sensing technologies platform delivered mid-single-digit core revenue growth in the quarter led by double-digit growth in China. New product introductions continue to deliver market share gains across the platform and our digital strategy is fueling progress towards launching additional IoT offerings. One of the most recent examples of this is Acumen Inventory Management. This technology enables customers to manage inventory remotely through a centralized and/or mobile user interface. By using a variety of sensing technologies, Acumen can continuously measure solid material and help customers manage inventory and rate of consumption trends in a number of applications. Moving to our Industrial Technologies segment, revenue grew 11.2% including core revenue growth of 6.9%. Acquisitions contributed 280 basis points of growth and currency 150 basis points. Reported operating margin of 20.8% including core operating margin expansion of 30 basis points offset by 40 basis points of dilutive operating margin associated with acquisitions. Our Transportation Technologies platform core revenue grew high single digits led by strong double-digit growth in high growth markets. Gilbarco Veeder-Root delivered high-single-digit core revenue growth reflecting a strong rebound in North America driven by backlog reduction and increased demand for EMV solutions. Strong double-digit core growth in China was led by continued demand at Veeder-Root for submersible pumps and automatic tank gauges related to double wall tank upgrades. We are pleased with the success of our previously announced exclusive programs with Chevron, Texaco, and Valero retailers to drive EMV compliance as sales across these programs are up double-digits. Additionally, we are seeing a strong pick up in EMV sales with mid-tier accounts and single site owners. These improved bookings along with key business wins continue to give us confidence in our expectation for GVR to grow core revenue mid-single-digits for the remainder of the year. TeletracNavman delivered mid-single-digit core growth led by double-digit sales growth in Asia Pacific and high-single-digit SaaS sales growth. As we noted last quarter, the industry was challenged with integration and support issues associated with the electronic logging device mandate. We now see these issues beginning to stabilize and expect moderated growth rates for the balance of the year in the U.S. Automation & Specialty posted another quarter of low double-digit core revenue growth led by high-teens growth in Asia. JVS delivered mid-teens core revenue growth, driven by increased Class A truck production in the U.S. and market share gains in China. Growth in our automation businesses was led by Kollmorgen, where low double-digit core revenue growth reflected continued robotic strength in Europe and China. The strong performance was also driven by automations focused on target verticals including medical and food and beverage end markets as well as new product innovations. Kollmorgen introduced barcode navigation technology for mobile robotics applications in smart warehouses and Portescap launched additions to the Ultra 22ECT Motor platform to provide higher torque capacity in the smallest footprint, allowing further miniaturization of customer applications including industrial and surgical power tools. A&S business combination with Altra, as previously announced in March, is advancing nicely, and we expect to close in the fourth quarter. Moving to Franchise Distribution, the platform grew core revenue low single-digits. Matco core revenue grew low single-digits reflecting double-digit growth in diagnostics software subscription sales and high single-digit growth in specialty tools driven by new product launches and market share gains. We believe market fundamentals are healthy, given a variety of metrics, including a positive sell-in to sell-out ratio and a strong franchisee applicant funnel. To wrap up, our team executed well during the second quarter, driving double-digit sales and adjusted earnings per share growth, 50 basis points of core operating margin expansion, and strong free cash flow performance. As we look to the second half of the year, we expect our core growth rate to accelerate versus the first half, driven by improving order trends and as the acquisitions of Orpak, ISC, and Landauer become part of our core revenue. The power of the Fortive Business System, the vitality of our portfolio, and the momentum created from our acquisition flywheel position us well for the remainder of 2018 and beyond. Turning to the guide, we are updating our full year 2018 adjusted diluted net EPS guidance to $3.42 to $3.50, which includes improved assumptions of 4% to 5% core revenue growth, core operating margin expansion of approximately 75 basis points, an effective tax rate of 18%, and free cash flow conversion of 110% for the year. The updated adjusted diluted net EPS guidance also reflects the dilutive impact from the mandatory convertible preferred stock offering, which we expect to offset with operational improvements. We are also initiating our third quarter adjusted diluted net EPS guidance of $0.83 to $0.87, which includes assumptions of mid-single-digit core revenue growth, core operating margin expansion of 30 to 50 basis points, and an effective tax rate of 18%. And with that, I'd like to turn it over to Lisa.

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

I wanted to just dive into some of the moving parts. First, Jim, on tariffs, the $0.06 headwind that you called out, can you maybe give us a sense of what's baked into that? You said it’s enacted. Is it the cost structure? Do you have any pricing? Also that 50 basis points, is any of that pulling through there yet? Is there any demand impact in that?

First I'll take the demand question. We don't think there's a demand impact on the tariffs side. So that one's fairly - I think - obviously we raised the core growth for the second half, so we feel good about the revenue profile. Relative to the cost infrastructure and some of the things that are going on Steve, first and foremost, I think the 232 stuff that we have pretty good clarity of has been fully counter-measured. It's ratable across most of the businesses and our team's done a nice job at offsetting it. On the 301 things, where it's really been a mix of cost pricing first, so establishing more price in the businesses. Second is supply chain strategies. As you can imagine a number of things we can do to offset that and then some manufacturing changes in strategy. We have some situations where we can - we have choices of where we produce product and so we're making some of those decisions as well. So that's only the sum total. It probably - it's really kind of a - probably number one is on the price side.

And then the second thing is, we're seeing all these prior M&A flywheel starting - acquisitions now starting to move to core growth and core operating margin expansion. And you mentioned that it was going to help in terms of core growth acceleration. And on my simple math on the operating margin as I go out to Q4 giving 30 or 50 in Q3 and 50 and 2 and 100 in Q1, I think it's around 110 or so or 100, 110 in Q4. Can you maybe talk about some of those dynamics? Is most of this now starting to come from the new acquisitions as well or that are anniversaring?

Yes, it's still a smaller percent. Our guide is mostly I would say in terms of increasing the guide and the strength in the second half is still coming from the core business. Obviously core Tek, Landauer and ISC all fall into different order there. And I didn't even do the order right. It's really Orpak ISC Landauer I think. But we think about 20 basis points in the second half growth rate is probably with those deals. So they're growing well and as we - they're still a small part of the portfolio but they're all doing exceptionally well and will start to add to the core growth rate here as we go forward.

And the OMX contribution from those, is it similar also in the fourth quarter as part of that 100 plus?

Well, I think it's not different than what we had been assuming. And I think that it's - yes, there's a little bit of tailwinds from the acquisitions. But as Jim said, they're not the biggest piece. But us raising our guide is really about our business strengthening because the - as well as these acquisitions are performing they're really in line with what we've been seeing all year long.

And if I could just sneak one more in at Qualitrol, is that decline still all just end market based on condition launching for the utility side? Or is there something else going on there?

We definitely think it's market. As I mentioned in the prepared remarks, the North American business is very good. Where it's really been - it's mostly focused in China and in the Middle East. Now some of the Middle East business gets transacted through Europe so we called out as Europe, Middle East and China, but it's really the European slowdown is really with OEMs we're servicing the Middle Eastern economy. So we definitely - it's a longer cycle business so the short cycle part of the business is doing okay. It's the project-based business that's longer cycle. And that's why we have while we're doing a lot to change the direction of the business the team's doing a good job to protect margins. But we think it's probably slow the rest of the year and slightly into the first quarter probably until we start to see things pop up. The good thing is the Field Solutions is doing so well. As we mentioned Fluke's doing very well, ISC is doing very well. So it's - the platform itself is in a good place right now.

You announced a couple interesting deals here. You did the J&J deal in June and then Gordian in July and financed with the convert. But is there a point where you have to slow down the M&A pace a little bit just more than anything else not because of financing limitations. That seems to be less of an issue now, but people issues. You don't have a huge corporate office. You have to integrate systems, and all kinds of back office stuff that I assume takes a fair amount of time. And then I would imagine you plant a fair amount of your own people in those organizations some juncture to help drive culture too. So are there some challenges that just require you to slow down the pace of it in that regard?

I believe that one positive aspect is our consistent approach to managing integrations and leveraging the capabilities of our acquisitions alongside their respective platforms. For both of these cases, we have appointed dedicated platform leaders overseeing the integration process, which gives us confidence. We continuously enhance our capacity to manage these deals from a talent standpoint. When discussing our FBS approach, we emphasize growth, efficiency, and effective leadership; the leadership element is focused on developing our talent pool to seize new opportunities. Our FBS team, led by Barb and her colleagues, is prepared to support the management of these acquisitions. We are pleased with the strong management teams we have in both the ASP and Gordian cases; they seem enthusiastic about joining Fortive. We have a competent organization that is performing well and will benefit from FBS and our platform leaders. While we will need to fill some positions, particularly more on the ASP side due to it being a carve-out, we feel positive about our current situation. We actually have additional capacity for further growth. We will be reviewing our leadership structure with our board soon, and we intend to communicate our ability to pursue the right types of transactions that will enhance our portfolio. We are not focused on making deals for the sake of it; rather, we aim to build strong businesses and we have the capacity to handle that.

Now that you mentioned Art's role, which is just one of her responsibilities, and considering the numerous companies you're acquiring, how long does it take to onboard someone to FBS? Specifically, how long does it take for them to reach a level where they are fully integrated into the Fortive culture, as opposed to the culture of the company being acquired?

Well, 22 years and I'm still learning, so I'm still trying to figure it out. But I think at the end of the day it - that the point at around, it takes a couple of years for the business to sort of - our sort of plan will be to sit down with the business leadership. We'll do our 100-day strategic plan. That will define kind of where the big opportunities are or maybe the gaps are in performance that we want to improve. And then from there that sort of leads us to what are the FBS tools that you want to use. And we really use the successes of those tools to build the culture. And as the organization sees those wins, ultimately the adoption rate becomes pretty fast. You saw that at ISC with our - at Investor Day. We're one year in and the leadership team is really using the tools, understands the culture. And while they would admit, I think, that they've got a lot to learn, they're certainly very proficient. So in a year they can make good progress. In a couple of years they'll make substantive progress and obviously we'll be with them for that whole journey.

So on China what's going on there? Maybe talk about what you're seeing and how this plays out in the second half. I know you guys have a bit of electronics exposure there, but it's different than perhaps some of the foreign players that sell into kind of directly into smartphones. Just curious as to what you guys are seeing in China as a start.

Yes. So we at the beginning of the year we said we thought China was low to high single-digit. We obviously just said that we'd be low double-digits in the second quarter. So we're a little ahead of where we thought we would be. So that's good. I would say we're seeing, as we mentioned in the prepared remarks, we're not only seeing obviously the Gilbarco Veeder-Root business, but we're seeing even sell-through in a short cycle business like Fluke. We're seeing mid-single-digit sellout at our distributor level in the quarter. So we're still seeing pretty good growth. We feel good about China for the remainder of the year. We're obviously watching for things. We read the headlines and obviously trying to understand to the extent that there's things that might change that. But in real discussions with real customers, they continue to have demand. And in Tek's performance if you take out the onetime 3D sensing situation there that we mentioned from a year ago, it actually had a pretty good quarter in China. So relatively broad-based. So I think we're still seeing good growth there. And as I said we always anticipated it would moderate a little bit from the really strong performance we've had the last two years and we've sort of been a little bit above that. So I feel pretty good about it of where we are right now.

Where do you expect China to grow in the second half?

We'll likely end up somewhere between low double digits and high single digits, with not much moderation.

When you consider all the actions you've taken regarding preferred ANS, ASP, Gordian, and whatever other initiatives I might be overlooking, what do you believe the overall net accretion for next year will be from all these efforts over the past four to five months?

Steve this is Chuck. So the way I think about that before we put FBS to work and drive business just the net of all these moving parts is slightly accretive into next year maybe less than $0.05. And then on top of that, you're going to see us do a normal earnings growth type of running FBS, our volume and OMX growth on top of that, and then whatever happens in the second half.

Maybe just a first question around the core margin expansion at industrial tech, there wasn't much in Q1 because of a tough comp on the margin. Q2, I guess the core margin growth wasn't that substantial either. So, just wondered if you could give a bit more color as to why that's the case and how you see that core OMX playing out in industrial tech in the second half.

We have experienced strong growth this quarter and have seen positive incremental progress. There are a few unique situations related to the strength of our business. Specifically, we have some one-time issues at Gilbarco concerning a customer in India and we have mentioned some churn situations in OMX. When we account for these, we observe nearly 100 basis points of margin expansion in the segment. We anticipate margin expansion in the range of 50 to 75 basis points and have a good outlook for the second half to fall within that range.

And my second question, just around the Product Realization sales softness. What do you see as the growth rate, the core growth rate for that business in the second half? And any big sort of moving parts in terms of regional mix, if you focus specifically on consumer electronics and also the energetic materials business that you called out?

So Julian this is Chuck. As Jim mentioned, we had the 3D sensing order last year. But if we take that out, what that would indicate for the second half is mid-single-digit growth for them, and that's what we expect. That's I think where they're going to end up at the end of the year.

Maybe start with Chuck. Just on the convert, we don't see a lot of this structure at least in our sector. But what's unique about Fortive's capital structure and financing needs in the situation that a convert made sense?

Well, that's a great question. Considering our interest in mergers and acquisitions, our aim to maintain a solid balance sheet, and the appealing rates we examined, we concluded that this was an ideal time to pursue the convertible option. Additionally, we mentioned our ultra field, where we plan to retire shares. In order to realize value from the separation, we needed to replace those shares, and this strategy is very close to achieving that.

And then, optically there are times where the buyers of these converts will short the common just as a way of hedging, and I haven't seen the latest update in short interest. But are you expecting to see this and people just have to understand it's related to hedging, not a bet against the stock?

I think, we don't expect that to be a big number. I mean, we didn't – it's not that big of a relative to our market cap that I expect that's going to be a big thing. But there'll be a little bit of that for sure.

What's the share's assumption and the dilution?

Well, I think, the dilution is about $0.04 a quarter. And the shares is somewhere around 14 million to 18 million, depending on what the stock price does. If stock price goes up, the dilution comes down.

And then just as a follow up, Jim, in the prepared remarks, five out of six businesses got price. Just the ranking of the pricing power on the portfolio today. And if push comes to shove and there's going to be more pricing – price increases, what room do you have?

Well, I think, we've had – as you know, we have good pricing power in most of the portfolio. Where we saw – where we historically have seen good price is probably been in – more in Professional Instrumentation. We tend to sell and the go-to-market there is not as much OEM, so it's a little easier to get price. The 301 stuff hits Professional Instrumentation a little bit more than it does industrial tech. So the idea of tariffs and some of those kinds of things line up well with where we typically get price. So we feel good about the countermeasures we got in place, Deane. There's a little bit of the effect where we'll get all of it in the fourth quarter. We'll get a little bit of – some of the – we don't have complete coverage in the third as some of the pricing actions take place. But we feel really good about our ability to countermeasure what we have, what we've seen thus far and if other things were to come out there, we feel good about our ability to countermeasure.

So just from the - just, I think on the tariff here. So I mean, I've done some basic divestments around this and so hovering right here. But it looks like about $500 million of - approach to this subject has - would be like an analyzed number. Is that about right Chuck? I mean, is my math correct there?

Did you say $500 million?

Yes.

For the tariffs? Is that...

No. About the growth purchases subject to tax. I mean just the $50 million of tax rate divided by share count is about $0.12. So that's how I did the math. I mean, would that be right?

I think that's – no, I think that's overweight quite a bit. We can get you - I think it's - for us we're seeing about $0.03 a quarter of gross headwind. And that's for our business.

Maybe just a bit more color in terms of, I mean, Jim, you alluded to the fact that some of the businesses impacted by the tariffs are where you think got better pricing power so there's almost like a hedge there. But maybe just talk about which businesses are most impacted. Any color in terms of what you're sourcing and producing in China, you bring into the U.S. would be helpful. And then in terms of the 3Q guidance, it looks like you're assuming $0.02 to $0.03 impact to offsets in 4Q. Is that sort of the right lay-up?

We are managing the situation carefully. The tariffs from section 232 are fairly distributed across our purchases since most companies use some steel, albeit in varying amounts. Generally, this impact is minor and more evenly spread. On the other hand, section 301 tariffs primarily affect electronics, particularly in areas where our electronics content is prominent. We expect to see more tariffs in those regions. Fortunately, we have a global supply chain and manufacturing capabilities, which enhance our ability to respond to these challenges. We plan to mitigate the impact of these tariffs throughout the year. There may be a minor effect in the third quarter, but we anticipate addressing it as the year progresses.

And then just a following question. Obviously lots of moving parts on - this quarter you said - growth in the second half of the year. Some of the forecast for next year - calling for semiconductor CapEx to be down next year in 2019, do you think you can still grow in that kind of mid-single digit zone if semiconductor CapEx is down next year?

I believe we will see a mid-single digit number compared to very strong comparisons from the second half of last year, indicating good performance. We still see opportunities ahead, although it might be too early to determine the overall impact of CapEx on our business. As you know, Tek is primarily focused on R&D rather than manufacturing CapEx, which tends to be the major variable in that figure. Some aspects may not relate directly to Tek's sales. We are continuing discussions with customers, and the recent six Series announcement will be integrated into various applications that we anticipate will offer significant potential next year, such as automotive, especially autonomous vehicles, data centers, low noise low power applications, and IoT. Thus, we don't expect a decline in these applications for next year. We have shifted our business focus towards these types of applications. While it's premature to forecast what 2019 will entail, we still see ample opportunities for growth.

Could you share any insights on the mix of kits in the quarter and the impact on margin? Additionally, are you anticipating growth in this business as we approach the MP deadline in the U.S. for the second half of the year and into next year?

I believe there was minimal margin impact on kits compared to dispensers. We'll provide you with the exact figure later. Overall, the mix of business was favorable, as we mentioned earlier. Our exclusive partnerships, such as with Valero, experienced double-digit growth. We also appreciated the recovery of the single retailer or single network owner segment, which has good margins. Overall, the trends we observed in the quarter suggest that the second half should also perform well. Was that helpful?

Can you give us a little more color on Gordian? Cyclically resistant, but obviously the underlying end market is building construction. We know it's high in recurring revenue and software; software it seems like underlying end markets would be cyclical though. So can you talk about the historical performance, especially during slowdown? And is there anything else that gives you confidence the business is really cyclically resilient?

Yes. So the business primarily - the core customer here is the public sector asset owner. So think of the VP facility at a public university and some contractors and architects as well. So that's first and foremost kind of who they sell into. State and local government, healthcare, universities are the principal customers. These are not for big CapEx projects. They're mostly used whether it's job order contracting or RS means or even sidelined, they're mostly used – they're mostly used for things like small projects that tend to not have – still be done in times of slowdowns and things like that. So I think that's first and foremost. I think we the business performed pretty well 08, 09 so we think it'll be fine. In the sort of end market capital project it's nearly not tied to commercial real estate in the sense of new – so much in commercial real estate tends to be in things that are big building related. This is much more tied to the maintenance of buildings which tends to be pretty stable.

And then can you give us a little bit more color on Franchise Distribution and Matco in particular? You mentioned a little better growth here in Q2 and high single-digit growth in your tools business. So have you turned the corner here and now you have a better visibility to growth moving forward?

Yes. So we were - I think versus the market they outperformed. When we look at the growth rate. As we said in the prepared remarks, I think on a small base, but the subscription revenue was up, which is good to see building more of a recurring revenue set. And the health metrics were good. That's probably the thing we felt good about maybe a little bit more optimism here is that the health metrics we're seeing more the franchisee applicant funnel, which is a good predictor of business down the road is getting - is becoming more full. So those are good things. We have still not seen the toolbox business come back. So I think we've – I would say I would call Matco right now stable. And I wouldn't necessarily suggest we've seen an inflection point yet. But I think we're in growth mode and we're in a stable growth mode. And so we'll continue to watch the metrics to see when that sort of moves the growth rate up, but I think right now I would say stability is really the right word to describe it the business.

Chuck just a quick one for you. Our tax rate keeps stretching down, which you have to commend your team on. But I guess at some point there's a low point to where it could go. 18% is pretty low already. So do you have more room there or is that kind of what we should expect going forward?

I believe 18% is a solid figure at this moment and I would likely carry that into next year as well. The potential for improvement really hinges on ongoing global changes. There are tax reforms taking place outside the U.S., and as we better understand U.S. tax reform, it opens up opportunities. When you consider everything alongside our mergers and acquisitions, it's hard to predict how much it could change. For now, 18% seems to be a reasonable expectation.

Wondering if we could just circle back to the guidance one more time. I guess, slide 8 would seem to suggest you're bluffing the top end of the range. I don't know if that's correct or not. But I guess whether that is correct or not what needs to happen to get you to the upper end that kind of - half of that is speared, I think of maybe one of the first questions that the implicit operating margins in the fourth quarter do need to step up very nicely. So is there something in cost structure or mix or something that you have visibility on that makes that fourth quarter come together?

No, I believe there were some investments we made in the fourth quarter of last year that likely improved the margin expansion slightly. However, we don't anticipate a significant change in the VCMs from Q3 to Q4 that would help us reach the high end of our expectations. I want to highlight that we do have a range, and while it may seem challenging to achieve the high end in a rising market, we wanted to present that reconciliation clearly so you can understand the different factors involved.

And then a quick modeling question. Corporate was a little bit higher than I was expecting. Is there some business development going on there or what and what should we expect for the year?

I believe we are seeing some deal-related expenses from the Altra deal and the ASP deal, along with some external spending related to the tax deal. This is primarily what is causing the increase in corporate expenses.

Is that a run rate now this Q2 number or is that elevated?

I think it's going to be elevated from here in Q3 and in Q4. But then coming into next year it'll drop back down into the low 20s.

Thanks, Jim. And Chuck and Lisa for the question. Jim, I have a question about Fluke Health Solutions, especially with Landauer joining the core later this year. With Fluke Biomedical, J&J, and the ASP deal being completed, I believe we can project over $1 billion in revenue for the health solutions segment. What is the strategy for these three businesses? Will they form the foundation of a new platform, or will they continue to operate as separate entities? How do you plan to integrate and manage them?

Yes, what we are planning is to explore how Altra and our automation business will integrate into our work in health with ASP, and this will shape our platform perspective. There are opportunities for synergies among some of our businesses. Your estimates are correct; we expect to generate over $1 billion in healthcare revenue from Fluke Biomedical, Landauer, and ASP. This is a significant revenue stream with strong growth potential and excellent margin expansion opportunities. We are evaluating various strategies that make sense from different angles. We will provide more updates on this. Our overarching strategy focuses on enhancing safety, productivity, and quality assurance in medical applications, and this has guided our recent portfolio additions. We believe it is exciting to offer these solutions to our customers. There are synergies between these businesses, and we don't necessarily have to reorganize significantly to realize these benefits. We will assess whether changes are appropriate as we finalize the organizational structure and provide more updates once we have a clearer picture of the portfolio dynamics.

So it would seem that greater than $1 billion maybe $1.2 billion or something like that would have probably some of your best FBS opportunity? I would think with..

Revenue is 12 months old. We just acquired Landauer a year ago. ASP will be integrated into our operations. Naturally, with them joining our team, they will have increased opportunities to enhance productivity, safety, quality, and growth. As we mentioned when we announced the ASP deal, we believe the innovation and growth tools will significantly benefit the ASP business as well.

And then just a quick one for Chuck. What's the FBS for number that you're using for the third quarter guide?

I'm sorry.

Because that will capture the convert correct?

Yes say 3.73.

I have two questions, one regarding pricing and the other about GVR. I was surprised that pricing only increased by 50 basis points. Can we expect that to rise in the second half of the year? Did you account for anything in that figure? We're noticing slightly higher prices in other areas.

Well, most of it is because when you think about some of the things related to tariffs and inflation it really hasn't impacted us until mid-July. So it's - the 232 stuff that a lot of other companies saw it early was a reason to go in and go into the marketplace with price. Because we had so little impact from 232, it's a little difficult to do from a marketplace. So when you look at the 50 bips that we had in the second quarter that's kind of our typical pure strength of the portfolio, strength of market position kind of price. And then the second half we'll see that accelerate as a number of our countermeasures start to play out.

And then along those same lines when we talk about inflation of the cost 232 less so 301 more so, when you say that you're throwing a lot of things under tariffs, but obviously there was inflation before the tariffs. And my sense here is that with the minimal impact on 232, you're essentially saying I don't want to put words in your mouth, but you're essentially saying that you weren't seeing a lot of inflation in front of the tariffs. That was just pure commodities inflation that we saw second half of last year for example?

Yes, we experience a significant amount of purchase price variance. Our supply chain organization is of high quality and does an excellent job, which has allowed us to effectively manage issues that have arisen. We've encountered challenges such as fuel surcharges related to rising oil prices, but generally, we've handled these as part of our regular operations. Our effectiveness in this regard is reflected in the strong gross margin expansion we have achieved over the past several quarters, even in a somewhat inflationary environment leading up to that point.

My GVR question is you've given us some information here for I think the first time that this mid-tier shrank double digit and you called those sort of I don't know how many stations per owner type thing. How much of the market for EMV is that? Let's say a potential $500 million yes?

The single site owners make up roughly 70 percent of the stations. However, they account for only about 30 percent of the revenue, which is close to the 80:20 ratio. While they do not spend as much as larger retailers, they do convert well. Over time, we have noticed significant engagement from the larger retailers as they adapt. Many single site owners are familiar with their customers, particularly if they are in smaller towns. So, while they represent the majority of stations, they do not dominate the revenue. On the other hand, multi-site owners represent a mid-tier segment of the market, which is a sweet spot for us. Although I don't have precise percentages, they likely account for about 30 percent of the market in terms of revenue. Seeing them engage in capital planning and start implementing strategies is a positive indicator for EMV.

Thanks for taking my questions here. I'm curious on Tek. How much - given the margin profile there like how sensitive would that would that segment be to movements there? Is that would that be one of the more like principal drivers on a given percentage move of margin in that business? Does that make sense?

You mean across the whole company right?

Well I like ordering just PR. Like does have the biggest move on a given percentage change of revenue change in FBI?

No, I think full price is the biggest piece of that on PI side. But Tek's got great margins and so when it goes up it does lift, and it's great fall through well over 50%. So yes, it's impactful but it just really depends on the size of the impact.

And as maybe just an add which is really good to see in the quarter Joe is even though Tek didn't have the growth rate that they had a year ago because of the comp this year they did an exceptional job on the gross margin side. And it really is on the back of their innovation. We talked about the five Series being a very strong margin product. They've done an exceptional job of really bringing out these new products with more software and a better value proposition which is obviously even in a lower growth environment allowing for them to really deliver better gross margins.

And then on the tariff side I know you guys are pretty niche in your business so maybe this isn't really applicable. But are you seeing any like competitors non-U.S. competitors being like opportunistically competitive, is that having any impact in those specific businesses that you operate?

Not yet. Every business is different because kind of depends on where the competitors are. We're certainly looking to watch some of that. And quite frankly we're looking to do some of that as well. So we'll see where those opportunities are available to us, but they'll be on a case-by-case basis. I think the biggest thing, it's really early right now. When you really think about most of these things really went live for sure just in the last few weeks it's pretty early to really tell if anything is - if there's a trend on anything yet.

Yes, thanks. Well, I missed a couple go quarter. So I'm catching up here. So just a quick clarification actually Chuck. You mentioned $0.05 net impact from M&A/Altra. I think that's what you gave in your response to Steve's question. Would that include the dilution from converts or is that separate?

Yes. Actually what I was trying to say is all the things that we've done this year with Altra, ASP, the mandatory convert and you net all that stuff out what - where will it land with after share retirement and ASP closing. So I think it's $0.05 accretive next year. And then on top of that will be our normal earnings growth that we get from the businesses and then whatever we do in the second half of the year.

Well, Philip thank you and thanks everybody for taking the time this evening. We couldn't be more excited about the performance in the second quarter. We're really - as we turn - as we close out the first half of the year and start it in July, we celebrated our second anniversary of being out. And we've gotten a lot done. We're really proud of the work we've done, the capital we've deployed, the ability to bring in great businesses, to take the opportunity to do the portfolio transformation. Two years has gone exceptionally fast and those of you know us you know that we're never satisfied and the highest expectations that we have are those of ourselves. So we're really excited. We appreciate the time and energy you put into learning more about us. Thanks for a great start last two years. We look forward to telling you more about what's going on. Lisa and team are available for follow-ups. So we'll look forward to talking to you all soon and have a great evening. Thank you.