Fortive Corp (FTV) — Q3 2018 Earnings Call Transcript

Thank you, Brandon. 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 are available on the Investors section of our website, www.fortive.com, under the heading Financial Information. A replay of the webcast will be archived on the Investors section of our website later today under the heading Events & Presentations and will remain archived until our next quarterly call. A replay of the conference call will be available shortly after the conclusion of this call until Friday, November 09, 2018. Instructions for accessing this replay are included in our third 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 in 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.

Thanks, Lisa, and good afternoon everyone. Today, we reported strong high teens adjusted earnings growth for the third quarter reflecting the underlying strength of our core portfolio, the power of the Fortive business system, and the increasing momentum of our M&A flywheel. Given our strong free cash flow generation and a healthy balance sheet, we are in an advantaged position to continue driving organic growth while pursuing acquisitions to accelerate the achievement of our strategy. During the third quarter, we closed the $775 million acquisition of Gordian and the $2 billion acquisition of Accruent. Through the application of FPS, we were also able to close the divestiture of the automation and specialty businesses to Altra, well ahead of schedule on October 1. In total, we have now announced $8.2 billion of transactions in 2018, $5.5 billion of which have already been closed. We have done so while maintaining our commitment to a strong balance sheet based on our consistent free cash flow performance as well as the successful execution of our mandatory convertible preferred stock offering in the second quarter. Taken together, these transactions significantly advance our portfolio enhancement efforts aimed at increasing growth and reducing cyclicality across the portfolio. The Gordian and Accruent acquisitions provide entry into attractive markets characterized by strong long-term growth trends and limited cyclicality. They also represent the continued execution of our digital strategy to address a range of critical software-enabled workflows for our customers through the acquisition of quality software assets with high margins and significant recurring revenue. During the quarter, we also continued to make progress toward the closing of the previously announced acquisition of Advanced Sterilization Products. Based on close collaboration with our partners at Johnson & Johnson and our continued application of FPS, we successfully completed the requisite European Works Council consultations and cleared key regulatory hurdles paving the way for the formal acceptance of our binding offer on September 20. We continue to expect to close the transaction in early 2019. The third quarter represented the opportunity to demonstrate all that is special about the Fortive team as we responded to Hurricane Florence and other recent natural disasters around the world, showing our commitment to our local communities through our annual day of caring. Over the past two weeks, our employees participated in hundreds of events including working with food banks, improving children's shelters, and building houses for the low-income and homeless. Coming together to support our communities has never been more important for the long-term success of our company and the communities in which we work. With that I'd like to turn to the details of the quarter. Adjusted net earnings of $321.1 million were up 18.2% over the prior year. Adjusted diluted net earnings per share were $0.86 based on an adjusted effective tax rate of 17.2% for the quarter. Sales grew 9.2% to $1.8 billion, reflecting a core revenue increase of 3.2% driven by strong growth across industrial technologies as well as Fluke, Industrial Scientific, and Gems. Acquisitions including Gordian and Accruent contributed 720 basis points of top-line growth. Geographically, high growth markets core revenue grew mid-single digits with continued strength in Asia and Latin America. This growth was led by Gilbarco Veeder Root, Sensing Technologies, and Automation. Despite certain parts of the China market that are becoming more challenging, we performed well, generating high-single digit growth for the quarter. Developed markets core revenue grew low-single digits reflecting continued strength in North America. Core revenue growth in North America was mid-single digits and was driven by strong performance of Fluke, Matco, Industrial Scientific, and Jacobs Vehicle Systems. Western Europe declined low-single digits as high-single digit growth at Tektronix was offset by continued weakness at Qualitrol and JVS. In the third quarter, we posted a gross margin of 50.2%, reflecting 40 basis points of expansion over the prior year based on the strong contribution from our recent acquisitions, which was partially offset by the anticipated impact of tariffs and inflationary pressures. The third quarter represented our fourth consecutive quarter of gross margins at or above 50%. Pricing contributed 60 basis points, with four of our six platforms delivering positive price during the quarter. Operating profit margin was 17.5%, with core operating margin decreasing 25 basis points as strong price-per-value in productivity were more than offset by costs associated with lost production days at Gilbarco Veeder Root due to Hurricane Florence, as well as unfavorable mix dynamics within the portfolio. During the third quarter, we generated $351.8 million of free cash flow, representing a 23% year-over-year increase and a free cash flow conversion ratio of 143%. For the full year, we are on track to deliver a free cash flow conversion ratio of greater than 110%. Turning to our segments, professional instrumentation posted sales growth of 13.6%, including core revenue growth of 1.4%. Acquisitions contributed 1,320 basis points while unfavorable currency reduced growth by 100 basis points. Reported operating margin of 20.1% reflected 270 basis points of dilutive operating margin associated with acquisitions and transaction expenses. Core margins were flat due to the impact of tariffs at Fluke and Tektronix, inflationary pressures, and customer-related delays at EMC. Advanced instrumentation and solutions core revenue increased low-single digits during the quarter, driven by continued outperformance at Fluke and Industrial Scientific. Field Solutions core revenue grew low-single digits reflecting mid-single digit growth in developed markets offset by some slowing in high-growth markets, which were slightly up in the quarter. Fluke delivered mid-single digit core growth led by double-digit growth at Fluke Digital Systems and Fluke Health Solutions and high-single digit growth in the Fluke Industrial Group and Fluke Calibration. We are pleased with the progress we made in the quarter to counteract the impact of tariffs through FBS and supply chain strategy and expect to be fully countered by the first quarter of 2019. At Fluke Digital Systems, we recently released the new Fluke 3561 vibration sensor, which has generated a very positive response from the market based on the pace of orders thus far, driving continued customer expansion including a large order from a prominent manufacturer. Annual recurring revenue from eMaint grew greater than 20% as growth investments in sales and marketing in the compelling value proposition of Fluke's combined hardware and software product offering continued to drive outperformance and market share gains. Industrial Scientific delivered mid-teens revenue growth led by continued double-digit growth for INA. The ISC team's ongoing implementation of the Fortive business system has continued to highlight opportunities to drive significant revenue growth and margin expansion in the coming quarters. ISC recently launched the RGX gateway, a ruggedized gateway device that transmits worker location, gas readings, and real-time alerts from connected devices to the INA Now platform, simplifying the process of delivering live monitoring data to the cloud for a variety of critical industrial applications. Qualitrol core sales declined high teens reflecting lower sales in China, Europe, and the Middle East. This represents a continuation of the market softness that we messaged in prior quarters and which we expect to remain a headwind into 2019. Product realization platform core revenues declined slightly for the quarter led by a low single-digit decline at Tektronix. EMC registered mid-single digit growth despite customer-related delays in North America, which we expect to reverse in the fourth quarter. The product realization platform registered a book-to-bill ratio greater than one for the quarter reflecting solid order momentum heading into the fourth quarter. Turning to Tektronix, excluding the large 3D and sensor order we highlighted previously, core revenue growth was low-single digits. Results were driven by strong growth in Western Europe and China offset by a decline in North America primarily reflecting delays with U.S. defense contractors. Tech industrial and automotive end markets continue to deliver double-digit growth reflecting the strong momentum created by the 5 Series and the recently introduced 6 Series mixed-signal oscilloscope. We were encouraged by positive order growth in the quarter including a strong double-digit increase in orders for the 5 Series and key new customer wins for the 6 Series from Smith and Nephew and a Fortune 100 Internet technology company. Our sensing technologies platform is up slightly in the quarter led by high single-digit core revenue growth at Gems, which included a large order from a leading manufacturer of heavy-duty buses in the U.S. Core revenue declined low single digits in North America reflecting headwinds due to Hurricane Florence and difficult comparables related to a large project for the naval sea systems command from the prior year. Double-digit core revenue growth in China more than offset the results in North America. Moving to our industrial technology segment, revenue grew 5.3% including core revenue growth of 4.8%. Acquisitions contributed 200 basis points of growth while unfavorable currency movements reduced growth by 150 basis points. Reported operating margin of 21.1%, reflecting a core operating margin decline of 40 basis points driven by increased material costs due to inflationary pressure in tariffs, as well as 40 basis points of dilutive operating margin associated with the Orpak acquisition. Our transportation technologies platform core revenue grew mid-single digits led by strong double-digit growth in high growth markets. Gilbarco Veeder Root delivered low single-digit core revenue growth driven by mid-teens increase in high growth markets. GVR generated low-single-digit growth in North America reflecting the negative impact from Hurricane Florence. Continued strong double-digit core growth in China was led by demand at Veeder Root for submersible pumps and automatic tank gauges related to double wall tank upgrades. As anticipated, we continue to see a pickup in EMV sales at Gilbarco, particularly with mid-tier counts and single-site owners, and expect this trend to accelerate in the fourth quarter reflecting a strong North American order book. During the third quarter, GVR also made a minority investment at Tritium, a leading manufacturer of fast-charging solutions for electric vehicles, providing an early entry into the EV market. GVR had a very successful showing at the recent MAX conference, highlighted by a positive reception to the Tritium announcement as well as a number of new product launches such as GVR’s new passport edge tablet-based point of sale solution. Teletrac Navman grew mid-single digits led by double-digit core growth in Asia Pacific and mid-single digits in Western Europe. In North America, we've continued to experience ELD implementation challenges causing accelerated customer churn. Due to the recurring revenue nature of the business, changes to the North American installed base will continue to have an unfavorable impact on Teletrac Navman’s performance into 2019. Automation and specialty posted high single-digit core revenue growth for the quarter led by high single-digit increases in both North America and Western Europe. JVS delivered mid-single digit core revenue growth driven by increased class A truck production in the U.S. Results in our automation business were led by continued strong double-digit growth in robotics. The strong performance was also driven by automation’s focus on high growth markets led by double-digit growth in China. We wish our entire A&S team all the best as they join the Altra team in the fourth quarter. Moving to franchise distribution, the platform grew core revenue mid-single digits. Matco returned to mid-single digit growth reflecting mid-teens growth in hard line and high single-digit growth in both tool storage and power tools driven by new product launches and market share gain. Matco recently launched Maximus 3.0, a unique full-featured diagnostic scan tool which automatically links to vehicle make, model, and year information and provides diagnostic reporting to a proprietary subscription-based automotive repair database called Maximus Fix. Maximus 3.0 is expected to be a key growth driver in the coming quarters while Maximus Fix provides the diagnostic platform with a meaningful new recurring revenue opportunity. To wrap up, during the third quarter, we delivered double-digit adjusted earnings per share growth and strong free cash flow despite some headwinds associated with Hurricane Florence and tariffs. We also made significant progress in our long-term portfolio transformation efforts, positioning Fortive in markets with faster top-line growth, reduced cyclicality, and enhanced opportunities to grow recurring revenue. Throughout the year, we have continued to generate strong core operating results consistent with the Fortive formula driving year to date adjusted earnings growth of 23% and a 29% increase in free cash flow while also implementing a number of complex capital allocation strategies. With the power of the Fortive business system and the demonstrated momentum of our acquisition flywheel, we'll continue to enhance all aspects of our portfolio and our drive to deliver sustained top-quality earnings growth. Turning to the guide, we are updating our full-year 2018 adjusted diluted net EPS guidance to $2.98 to $3.02 on a continuing operations basis, which excludes the 2018 results of the divested A&S business. The guide assumes approximately 4% core revenue growth, core operating margin expansion of approximately 50 basis points, an effective tax rate of 17.2%, and a free cash flow conversion ratio of greater than 110% for the year excluding the impact of the gain from the divestiture of the A&S business. The updated adjusted diluted net EPS guidance also reflects the dilutive impact from the preferred stock offering on an if-converted basis. We are also initiating our fourth quarter adjusted diluted net EPS guidance of $0.83 to $0.87, which includes assumptions of 5% to 6% core revenue growth, core operating margin expansion of 75 to 100 basis points, and an effective tax rate of 17.5%. Before moving to questions, we want to provide an early view on 2019 given the extensive portfolio transformation and complex capital transactions which we successfully executed in 2018. We expect closed acquisitions to collectively contribute $0.20 to $0.25 of earnings per share reflecting the addition of high-margin high-growth software assets. Our enhanced portfolio profile of greater than 30% recurring revenue should generate strong annuity free cash flows with gross margins exceeding 50%. The fundamentals of our core portfolio remain strong, particularly in North America, with the EMV continuing to ramp, while we monitor conditions in China and pockets of Europe and the Middle East. Through solid execution and the application of the Fortive business system, we expect to fully offset the unfavorable impact from announced tariffs. Assuming a stable macro environment, our remaining preliminary modeling assumptions include approximately fifty basis points of core operating margin expansion, free cash flow conversion ratio of greater than 115%, and an effective tax rate in the high teens. We anticipate deleveraging quickly after the closing of ASP enabling us to maintain our investment-grade rating. And lastly, we plan to offset A&S stranded cost of $0.01 to $0.02 of earnings per share with the savings generated by our 2018 restructuring efforts. In summary, it is our expectation to deliver another year of double-digit adjusted earnings growth in 2019. And with that, I’d like to turn it over to Lisa.

Thank you, Jim. That concludes our formal comments. Brandon, we are now ready for questions.

Maybe if you could just start by helping us understand why the core sales growth accelerates quickly in Q4, I think you said 5% to 6% after just doing around 3%. So what are the biggest two or three moving pieces that get you there?

It's Jim, thanks. As we mentioned a few months ago, we expected to be in the 4% range for the second half, targeting mid-single digit growth. This is unfolding with a slightly different timing. Some backlog we discussed from the hurricane has shifted into the fourth quarter, resulting in an increase in backlog. This applies not only to Gilbarco but also to Tech and Fluke. We are entering a favorable backlog situation. Additionally, some orders at EMC have also moved to the fourth quarter. While there is movement, it does not alter our overall outlook or revenue expectations; it simply reflects a different timing between the third and fourth quarters.

And then my second question would just be around the earnings sort of base and coupling that $3 base you gave for 2018 with the initial comments on 2019. So just to be clear, is the right way to think about it, you have the $3 base high-single digit core EBIT growth from that $0.20, $0.25 from closed deals, $0.30 for ASP. And so, if you round all of that together, we get up to sort of $3.80 or something for the next year, is that a good sort of template?

Hey Julian, this is Chuck. That's directly correct. The one thing that obviously isn't closed is ASP but I think that’s consistent with what we've said before, so it depends a little bit on the timing of that, but everything else I agree with.

So just to let a bit more color on what happened in Tektronix. I know you highlighted key fleet, but maybe give a sense of what's happening by geography outside of Q3, we've been getting a lot of questions on Chinese semis, that seems to be okay, but whatever color you can give within Tektronix would be greatly appreciated.

As we mentioned, we have wrapped up our discussion on 3D sensing with the close of the third quarter, which had a noticeable impact. Overall, Western Europe performed well for Tek, especially as a highlight for all of Fortive, and China continued to show mid-single digit growth, particularly in the semiconductor sector. We felt positive about our performance in that area. On the other hand, the slight decline we experienced this quarter was primarily due to some sluggishness in North America, coupled with certain orders shifting to the fourth quarter. We are confident we will see improvements in that area moving forward, especially as we approach the fourth quarter. In terms of our order perspective, despite any negative headlines, we are observing ongoing business growth in China for Tektronix. We’re monitoring all developments closely to see if any headlines materialize, but at this moment, the order book for the fourth quarter in China for Tektronix appears strong.

And I just to follow up you sort of highlight Fluke Digital doing well, it seems to have accelerated recently. You did bring up some new products, but in a big picture, what has changed to accelerate growth in that business?

It’s a great question. First, I think we're starting to see some of the hardware sales that took a little longer. We talked about the vibe sensor we launched this quarter, which is an excellent product with a three-year life and ease of use that addresses a core challenge in condition monitoring. The standout hardware solution is releasing as eMaint has consistently shown good double-digit growth since we acquired the business. We're gaining scale in that area as well. We added 131 customers in the quarter, so the influx of new customers, alongside upselling to existing customers and the progress with the hardware, is creating some strong positive momentum for the business.

Hey Jim, I know you hit it a couple of times but just in good kind of FDS fashion, could you maybe give us a better sense on the why behind that simple comment you had around backlog getting pushed sequentially to Q4. When you dig into all the little pieces of what is driving this. I know you're saying it's not macro-related, but what are kind of the whys behind some of that to give us confidence like we would worry with some other companies that they may not actually see that push or get another quarter after that.

One of the key observations regarding the cadence at GVR was that it turned out to be a somewhat back-end loaded quarter. Unfortunately, the hurricane impacted many employees who had to manage personal issues, leading to a loss of production days. This not only deferred some revenue to the fourth quarter but also increased costs due to premium freight and other measures we took to support the customers we could. Overall, the quarter was less predictable than we had anticipated. On a positive note, several small network owners did engage during the quarter, albeit later than expected, which shifted a significant portion of the backlog to the fourth quarter. The backlog increase was also due to large orders, with each customer having its unique circumstances. After Chuck and I reviewed the forecasts, we felt confident; much of the backlog was not overdue but simply due soon. The delays were a result of some orders being postponed and others being pushed out by customers. As we approach the end of the quarter, most of those delayed orders have already been recognized as revenue, and we are pleased with the improvements we've seen. As mentioned in our prepared remarks, some government orders took longer than anticipated, but many have now been accounted for in our revenue.

And then, I'd like to just shift gears to Tritium. That investment on, that you announced, I think, October 8 and mentioned just earlier in this call that seems to me like it could be a rather significant move for Gilbarco Veeder Root over time, could you maybe just expand a little bit on that in terms of how that sort of affects your thinking about the footprint and utilizing the footprint over the long term.

We're really excited about this investment as it provides us with the technology we need. We have a strong presence globally with gas station owners. As we engage with large-scale network owners, they are increasingly considering fast charging electric vehicle solutions, since charging at gas stations needs to be efficient. Our IP-protected fast charging technology offers us a significant advantage, and we can scale this business with a partner like Tritium. In the U.S., our focus will primarily be on large network owners; in Europe, we will collaborate with some oil and gas companies and utilities, leading to a diverse range of partners for business expansion. We believe we can significantly contribute to globalizing this technology. Additionally, we have the right to purchase the company, which could play a crucial role in our strategy. While the timing of electric vehicle adoption and investment from our customers is still uncertain, we are moving forward. At the recent National Association of Convenience Stores trade show, we announced our offering, and many large-scale customers expressed enthusiasm about it.

Trying to get my arms around a couple of things; it’s quarters when you have these big spin-offs are always a little hard. When I look at kind of the color of the call, I’m trying to get some granularity on if your price was up 60 basis points, are you now caught up to price cost or are you still a little behind?

Hey Scott, this is Chuck. So I think that we're ahead of price cost because of the great work our procurement team does and the pricing, but I think inherent in your question here is what we see is that we should accelerate from here.

Be at least neutral to the rising prices that are coming or costs that are coming?

I think rather than 60 basis points, what I'm saying is I'd expect it to be greater than that going forward. As tariffs happened to not all but some of our countermeasures are supply chain in nature but some of them are priced, but they haven't even hit yet really. So, that’s going to be tailwind. And we think we're in an inflationary environment and we think that we expect to get more price than normal but then historic.

Scott, maybe just one thought. We'll see it accelerate in the fourth quarter as Chuck said. So, a lot of our countermeasures early in the third quarter were an attempt to kind of, what I call short-term in nature, and as Chuck mentioned, the supply chain and pricing things are really going to carry the water in the fourth quarter and into 2019. We've been pretty deep into this, trying to make sure that we're appropriately covered and we feel pretty good about that. The fact that we expanded gross margins in part because of the business model change in the quarter, I think also reflects that we started to get some traction in some of those efforts relative to how we go into the fourth quarter.

Okay, that's fair enough. And then, just back up a little bit, Gordian and Accruent. How long do you think it takes to get the margin structure of businesses like that up to your segment average?

Gordian is pretty close already, so I think by probably relatively quickly in both businesses, really, I think we're probably in the range of that by 2019 and into 2020. So maybe the second half of 2019 and into 2020 will be in the zone. And they are great businesses. One of the caveats of that though is as we get into it and we do 100-day strategic plans, I think the question we're going to ask ourselves is can we accelerate the growth rate. So some of that might require additional investment and we've seen that benefit at eMaint; to take it back to the question we had before, we're starting to see some of that accelerated growth at eMaint because we didn't necessarily put all the money to the bottom line early at eMaint; we decided to invest in sales and marketing. So we haven't necessarily done that yet. We'll wait to sort of go through the 100-day strategic plan, but we certainly are going to look for opportunities to accelerate the growth rate with the kind of gross margins that are in those businesses and the recurring revenue, we think that would be a prudent thing to do.

And just really quick, I've never asked three questions and I'm going to this time because I’m just trying to figure out. When you have a hurricane impact like you had, say it knocks your point of the top line or something on industrial technologies. Can you measure with any precision what kind of a margin impact that has?

I believe the margin impact from volume is calculated at greater than 50%. We have a solid understanding of this, but the operating margin we are discussing in PI is also influenced by the increasing volume at Gilbarco, which is causing us to be less efficient than usual. However, we anticipate IT to deliver a 50 basis points improvement in the overall business for the entire year. We’ll be fine.

Can you talk about, you said you're watching China, what exactly specifically are you watching in China for 2019, what kind of makes you most cautious I guess, not that you are cautious, but what worries you the most out of China specifically for your business?

In our prepared remarks, we mentioned that there were some challenging aspects, particularly concerning utilities sales at Qualitrol and a smaller segment at Fluke. We observed a decline in investment in these areas, but despite that, we achieved high-single digit growth, so the impact wasn't significant. However, we will monitor specific verticals for emerging trends. At Fluke, our point of sale is still robust, and we’ll keep an eye on that as it reflects the daily economy. Additionally, we will continue to observe the semiconductor and electronics markets in China due to their implications for Tektronix. These factors are likely to influence our business. Furthermore, the gas station business, specifically the GVR Veeder Root segment, is experiencing steady growth driven by investments in double-walled tanks, which is a positive trend we will continue to follow within the GVR business.

And just on the tariff stuff, can you give us some color as to how you went about coming to that number? Almost all of our companies are kind of coming up with some reasonably sizable numbers and they're a simple way to look at it which is amount sourced from China and then applying like anywhere from 10% to 25% on that, maybe give us some color on how you came to the math that you're getting to or you think you can offset it entirely with price on a tariff side and what are you including in that, you know which tariffs are you including?

Steve, we are utilizing price as one strategy, but it's not the only one. We are also addressing our supply chain by sourcing from different locations and in some cases shifting our production sites. All these efforts are aimed at mitigating the impact of tariffs from the 232 and 301 lists. Our teams are diligently working on this, and the duty team has been very specific about the necessary measures. We have a clear understanding of the exact amounts involved. While shipping more can lead to additional duties, we are well-prepared to implement countermeasures. There is typically a delay when new tariffs are introduced, which usually takes about a quarter or a couple of months to fully adjust to. Since our last discussion, new lists have been released, which is why we're experiencing some additional impact on the backend, but we are managing it effectively and have offset these issues for 2019.

In the range of $50 million to $70 million.

I want to go back to the price question again and if I heard it correctly, you said you had 4 out of 6 businesses had positive price. So who didn't get price and any kind of calibration in terms of the ranges of price you're getting, any pushback from customers and what more you can do there?

I think when we look at the pricing metrics, as we mentioned, we're aiming for 60 basis points. In each quarter, there may be a few businesses that don't meet that target. We didn't reach our product realization goal partly due to some contracts in the third quarter with new U.S. military clients that include price reductions. However, overall, we are focused on the full year. I believe we'll find ourselves in a favorable position in the second half, where most of the platforms will have adjusted their prices accordingly. As Chuck pointed out in response to an earlier question, we anticipate an increase in pricing. Most of the price adjustments are already accounted for, so from this standpoint, we expect to effectively counter any inflation in pricing or costs, whether from tariffs or other sources, while also benefiting from margin expansion opportunities in 2019.

And then just separate topic, with the welcoming of Gordian and Accruent, it just becomes increasingly obvious that your current segmentation doesn't quite fit the new look for Fortive. So what kind of thought have you given to re-segmenting and what might that look like?

Well, I think that we’ve noticed similar things as we’re really excited with Gordian and Accruent and our acquisitions to come on board, but our current thinking is that we’ll wait till we get to the other side of the ASP business. And then that sets the timing, that will make sense, probably looking at a platform level, of course, that's what's going to make the most sense, and it will be after that. That's what I'd expect.

This is Nigel Coe for Michael Coe. So, you're making us work pretty hard late at night here. So, maybe a little bit of help on the 5% to 6% for 4Q. I guess, would you expect both segments to be in that range or are we seeing IT about that range with the GVR ramp-up and maybe PI is still seeing some of these headwinds? Any color there, in particular on some of the three or four major businesses will be helpful?

I believe we should see fairly even distribution in those numbers, so it's likely they will be in a similar range. I don't anticipate a significant difference between the two, to be honest, Nigel. You'll notice the ongoing performance from businesses like Fluke, as well as some growth at Gilbarco and solid progress at Tektronix. It's challenging for us to move overall performance significantly without the larger businesses improving. You'll start to observe this; part of it will be due to backlog and some from the demand we're experiencing. Regionally, we believe the U.S. market will remain strong. As we noted, Western Europe, broadly speaking, including EMEA, might experience some decline, particularly in parts of Western Europe, Russia, and the Middle East. We expect those trends to persist while China and Asia should continue to perform well. This is our regional outlook, and we feel the larger businesses, particularly Fluke, Midco, Gilbarco, and Tektronix, will generally maintain or improve performance.

And then looking at the IT segment ex-automation, I think the number are working, it is about a 20% margin for the new segments. You mentioned China costs, are all the China costs from the automation divestment in that segment and how does that look? And then as you start to weigh those China costs, any qualification on the cost would be helpful?

Yeah. They're not really that big a cost, but you’re right, they’re in the IT segment, and we'll get after them in the fourth quarter. We've got some opportunity here with some acquisitions to redeploy these people. So it's not necessarily needing that much restructuring dollars to get them out, though there could be some, but we'll get after that and it is in the IT section.

I wanted to quickly ask about the average selling price and whether the situation in China is related to it not meeting the sales threshold there.

Sure, that's a straightforward way to look at it. Considering the regulatory challenges we discussed earlier, we've successfully navigated the European Works Council consultations, which was a positive development. We don't anticipate any significant issues with China, mainly because there isn’t any anti-trust work involved. The focus is on establishing subsidiaries and related tasks, which, while they are more complex, are certainly less involved than waiting for anti-trust approvals.

The core margin declined by 25 basis points this quarter. Jim, you and Chuck expected margins would increase by 30 to 50 basis points. Can you clarify if the difference is due to lost production days or lower volume, and how we can break that down?

Yes, John, there are two factors. One is that we had a distribution between the production and volume which yielded over a 50% margin. The second factor is our accelerated focus on the Gilbarco business, where we experienced some growing pains and an increase in volume. We anticipate improvement in Q4, but these are the two main reasons we fell short of our expected core OIM for Q3.

Does this stuff kind of play out Jim toward the end of the quarter in terms of say September, the weaker volumes and stuff or was this kind of a trend that you noticed that was relatively consistent?

Well, I think there were two things. There's the EMB wave that came in that was maybe towards the end, but there's other things that happened during the quarter that got pushed down, that really are unrelated to that. And some one-time customer pushouts that just moved things into October.

Field solutions, I think, it was up to low single versus mid-single last quarter and the compares looked about the same. It does sounded pretty upbeat on Fluke basement commentary. Was it all qualified that drove that lower realized growth rate or was Fluke also a little bit softer?

Fluke's performance was slightly weaker, possibly about 100 basis points, but the significant issue lies with Qualitrol. We've been collaborating with that business to navigate a challenging market, and they experienced a particularly tough quarter globally, as mentioned in our prepared comments. ISC and Fluke both performed well, and we expect this trend to continue. We're also actively working on solutions for the challenges at Qualitrol. Fortunately, since it is one of our smaller businesses, its difficulties are not as impactful, but we anticipate that these issues may persist into 2019 based on what we know at this time.

Jim, how confident are you regarding the performance of major businesses like Fluke and Tektronix in light of the current global economic situation? It seems that you've done well in China and Europe, but not every company has managed to do the same. Having experienced similar conditions in the past, how would you approach this? Are you intensifying certain efforts or considering other strategies in response to potential global downturns? What does your strategy look like?

Unfortunately, I have experienced similar situations many times before. Ultimately, Chuck and I will be going through the budget cycle with our business units in the coming weeks. We'll sit down individually to understand their revenue expectations. Certain businesses might have opportunities, but it still feels a bit early to gauge. We're trying to manage and discern the difference between headlines and reality, especially regarding China. While we've noticed some shifts in demand in certain areas, others remain unchanged. We'll maintain a realistic perspective as we continue to monitor the situation. We've heard many peers discuss this global growth issue, and several CEOs have shared their insights. It's clear that broad global growth isn't occurring at the moment, making it crucial for us to make informed decisions. At the same time, we see opportunities, like the North American EMV, which we expect will benefit us next year. We want to ensure we capitalize on those prospects.

Currency in this quarter I think has been a fair amount of headwind. How should we think about currency going forward for you guys? Look, just in a few emerging markets that you saw where currency really moved, and was the impact really containing the Q3, could you see any in Q4 and beyond?

Andy, it’s Chuck. We observed minor currency fluctuations which likely cost us about a penny this quarter. Regarding hedging, we don’t hedge for these movements. We acknowledge that currencies fluctuate and we have to manage those changes. Generally, if the fluctuations are significant enough, we will need to modify our cost structure. However, we are not experiencing significant financial impacts from this in our businesses during the third quarter.

Andy, we do spend a lot of time with our teams on street price within each country. So, where we've seen currency movement, we want to make sure that our street prices are impacted, we're taking prices up or dealing with that. So that's a pretty common piece of work that our operating company leaders do on a regular basis.

Can you mention the strong order book, given in North America and obviously there was a hurricane impact in the quarter? I think you said these are good low single digits in North America. What would it have grown it? And then as you look into next year, have you gotten good visibility toward that acceleration that you've been talking about?

A few months ago, we mentioned that we expected GBR to be in the mid-single digits in the second half, and we still hold that view. However, it will likely be slightly higher in the fourth quarter and low single digits in the third. The timing of this has shifted a bit due to shipment movements, but our overall perspective on the business remains largely unchanged. We anticipate that larger customers will start placing orders in the fourth quarter, and we are optimistic about the current forecast based on the order book.

I want to revisit EMEA for a moment. We're seeing a low single-digit growth rate, and we discussed Qualitrol. You mentioned that JVS was weak. Is the trend concerning as we approach 2019? Can you provide more insight into the differences between Western Europe and the Middle East regarding this low single-digit growth rate? Also, can you discuss any potential turning points in that region?

We don't have a significant business presence in Russia, so it isn't a major factor for us. However, many discussions about EMEA involve how businesses are managed, often with a leader overseeing multiple regions. In terms of Western Europe, we've seen positive performance, as exemplified by the Fluke point of sale. Our business in Italy, particularly with GVR, experienced challenges, including the Qualitrol situation. At this stage, it's too early to predict what Europe will look like in 2019. Nevertheless, we've enjoyed three strong years in Western Europe, and while we've seen consistent mid-single-digit growth in recent years, we're now shifting to low single-digit growth. This quarter showed a decline, and while I wouldn't categorize next year as a decline yet, we are observing a general slowdown.

I have a quick question regarding Fluke Health Solutions. You mentioned earlier that it was experiencing double-digit growth, primarily from Fluke Biomedical. How did Landauer perform during the quarter, and what are its future prospects?

Yeah. They were mid-single digits in the quarter. Fluke Health had a very good quarter. In fact, we were with the team yesterday for their strategic plan, really excited about how they're bringing the integration together, how they're really thinking more broadly about a broader set of solutions now that they've got all these different customer sets. So, they certainly outperformed in the quarter for sure, but we’re ahead of where we wanted to be with Landauer at this point and now the team is really working on some strategies to stay ahead, and I think we're very excited about what that team is doing.

Two things for me. First, just on EMV. Can you give us a sense of now what you're actually expecting in 2019 as a growth rate of this modestly rebased 2018?

I think we think right now is probably looking; I mean, it's crystal ball would say probably mid-single-digits for next year.

And then secondarily just trying to sort through actually the margins and kind of the deal accounting noise. Just a little confused on the transaction costs, kind of the 90 bps or so that's in PI, that’s only roughly $8 million. So, Chuck, is the rest of that $56 million that we see in the bridge, is that just in other?

Yes. That's in other because you don't really have ASP in one of those segments appropriately and ANS is not going to be there going forward.

And then other looks like it's then kind of inherently low if we pull that out; is there something else going on there?

No, I don't think so. I didn't think he’d picked that was well, we've got normal corporate costs in that as well.

This $58 million, if I take out close to $50 million, it seems like a low number, but I’ll follow up.

Yeah, we can follow that, but I think of the total amount there's some of it's in to the businesses; Gordian and Accruent did get in there. So you're missing about $18 million I think relative to the deal costs, social security, but we can follow up on that.

Just I'm looking at the slide 9, the bridge, the initial thinking on 2019. And the closed acquisitions, when we throw ASP in there, we consider ANS, it looks kind of like largely a push, correct me if I'm wrong, and I'm sure when you transact in the amount that you have and still will with ASP that I guess that's kind of not what you're thinking that you would want sort of net accretion there. So how does the pipeline look right now and could you give us an idea of what your capacity is at this moment and do the acquisitions that have closed and with ASP coming, is that going to slow you down a bit?

We'll work together on this one. I believe the sales funnel looks promising at the moment. As we've discussed over the past couple of years, we continue to see various opportunities. The acquisitions of Gordian and Accruent introduce new aspects to our funnel, which is beneficial as they come with new market opportunities that we can explore. Since they were private equity firms, they were quite active in the mergers and acquisitions space, so they bring established funnels with them. We also have opportunities related to ASP, but we will wait to finalize that deal. Overall, we are satisfied with the current funnel and our situation. We've been quite busy over the last 90 days, but we are not slowing down our market and cultivation efforts, so opportunities still exist. The current market situation has been a bit turbulent over the last few weeks, but we haven't noticed any significant impacts yet.

Scott, regarding your other questions, we have $2 billion to $2.5 billion of capacity that maintains our investment grade in 2019. With our strong cash flow, as mentioned, we will continue to de-lever going forward. On slide 9, if you’re referring to a push from this year, it's important to add in what's currently missing, which includes the organic margin expansion or the average selling price; you may not have accounted for that.

Actually what I meant was on the acquisitions that looks like the closed acquisitions plus ASP minus ANS is roughly a push, is that a fair estimate.

No. It’s complicated and it’s easier to come pass line, but you're missing the retired shares that come with the ultra-deal, which is understandable and how the mentor convert plays into that. So let's walk you through that, but I think that there is not an exact push track.

The other question is along this same page is, I didn't hear you talk about organic at all, but and I know that at the investor meeting, I think you were kind of being pushed to move up your long-term target of GDP, GDP plus, but with things a little bit weaker in Europe and some concerns in China, but then you add in a little faster growth acquisitions, can we still stay at that GDP, GDP plus level for organic for next year?

We aim to provide you with early insights before our budget, so I want to avoid sharing any specific numbers right now until we see how the quarter unfolds. Our ending results will influence this as well, but we definitely consider that as an option. As we approach that timeframe, we will offer more in-depth insights. Our intention with the early projections for 2019 was simply to give you a glimpse into our thinking, considering all the factors at play that you and Chuck just discussed. We wanted to ensure you had some understanding of our perspective, and we will share more details as they become available.

Yeah. This is Tristan in for Joe. Thanks for taking the question. Just a quick question here, what's the share count that you’re using for your 4Q guide?

I guess 356 million.

Okay. Well, thanks everybody for the time this evening on the East Coast. We really appreciate all the time and energy you put into really help and really listen to our discussion. We're exceptionally excited; I think the third quarter, to use the word transformational, would be an understatement with everything we were able to accomplish in the quarter. We're incredibly pleased with where we sit today, and we're even more excited about what we can do with these businesses here in the coming months and in years. So thanks for your time, we'll look forward to seeing many of you in various places here throughout the fall, but thanks for your time and certainly Lisa and the IR team are available for questions and follow-up. Thanks everybody. Have a great night.