Fortive Corp (FTV) — Q1 2019 Earnings Call Transcript

Thank you, Erica. Good afternoon, everyone, and thank you for joining us on the call. With us today are Jim Lico, our President and Chief Executive Officer; and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. We 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, May 10, 2019. Instructions for accessing this replay are included in our first quarter 2019 earnings press release. We completed the divestiture of the Automation & Specialty business on October 1, 2018, and accordingly, have included the results of the A&S business as discontinued operations for current and historical periods. The results presented on this call are based on continuing operations. 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 on a continuing operations basis. 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, 2018. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements. With that, I'd like to turn the call over to Jim.

Thanks, Griffin, and good afternoon, everyone. Today we reported first-quarter results that reflected a solid start to 2019, setting us off to deliver another year of strong double-digit earnings growth. Our first-quarter adjusted earnings per share was in line with our expectations, as the performance of Industrial Technologies, led by strong growth from Gilbarco Veeder-Root, was partially offset by near-term headwinds within Professional Instrumentation. We also generated strong free cash flow growth of greater than 30% in the quarter, reflecting the vitality of our businesses as we continue to invest in organic innovation and pursue acquisitions that will accelerate our strategy. On April 1st, we closed the acquisition of the Advanced Sterilization Products business from Johnson & Johnson, welcoming the business and its employees to the Fortive family. We're very pleased that we closed this complex carve-out on schedule in just under 10 months. The $2.7 billion transaction represents our largest acquisition to date and provides Fortive with a strong position in the attractive $4 billion mid-single-digit growth medical sterilization and disinfection market. With a strong global installed base and leading brand, ASP brings growth, high recurring revenue, and significant earnings potential to the Fortive portfolio. While ASP is our most recent acquisition, we are excited about the progress being made by the other acquisitions closed over the past couple of years. Gordian and Accruent have continued their early momentum, generating strong growth through the first quarter of 2019. Likewise, ISC, Landauer, and Orpak are performing well as they embrace the Fortive business system in order to deliver enhanced go-to-market execution, innovation, and improvements in free cash flow. The growth of these businesses continues to drive the evolution of the Fortive portfolio toward a higher growth, less cyclical profile. We look forward to sharing more detail about our progress when we're together at our Investor Conference in May. With that, I'd like to turn to the details of the quarter. Adjusted net earnings were $245.6 million, up 6.7% over the prior year, and adjusted diluted net earnings per share was $0.69. Sales grew 6.7% to $1.6 billion, reflecting a core revenue increase of 3.7%. Core revenue growth was highlighted by the strong performance of GVR as well as Industrial Scientific and EMC. Acquisitions, including Gordian and Accruent, contributed 580 basis points of top-line growth, while unfavorable foreign exchange rates reduced growth by 280 basis points. Geographically, high-growth markets’ core revenue grew mid-single digits, led by Asia and the Middle East. China posted another strong quarter with high single-digit growth, led by GVR, Fluke, and Tektronix. Developed markets’ core revenue grew low single-digit, reflecting continued strength in North America and strong performance in Japan. Core revenue growth in North America was mid-single digits, led by GVR, Tektronix, EMC, and Industrial Scientific. Western Europe was relatively flat, as strong growth at GVR and Qualitrol was offset by slower growth at Fluke and weakness at Tektronix. In the first quarter, we posted a gross margin of 51%, including 160 basis points of pricing. Reported operating profit margin was 13.6%, reflecting 240 basis points of dilution from acquisitions and 190 basis points of dilution from deal-related costs. Core operating margins were down 70 basis points, as stronger volume at GVR was offset by lower-than-expected growth at Tektronix and Fluke and unfavorable foreign exchange rates across the company. During the first quarter, we generated $137 million of free cash flow and a seasonally strong conversion ratio of 84%. Free cash flow generated in the quarter represented a 31% increase year-over-year. For the full year, we continue to expect free cash flow conversion of greater than 120%. Turning to our segments. Professional Instrumentation posted sales growth of 8.7%, including core revenue growth of 1.8%. Acquisitions contributed 950 basis points, while unfavorable foreign exchange rates reduced growth by 260 basis points. Reported operating margin of 14.4% reflected 740 basis points of dilutive operating margin associated with acquisitions and deal-related costs. Core operating margins decreased by 190 basis points, reflecting the weaker-than-expected revenue growth at Tektronix and Sensing, the impact of tariffs, and unfavorable foreign exchange. Advanced Instrumentation and Solutions core revenue increased low single digits as strong performance in Industrial Scientific and EMC was offset by lower growth for Fluke and Tektronix during the quarter. Field Solutions core revenue grew low single digits, with low single-digit growth in developed markets and a continued strong performance from ISC. High-growth markets grew slightly, with solid growth at Fluke and ISC largely offset by continued weakness at Qualitrol. China posted another strong quarter with mid-single-digit core growth. Fluke generated low single-digit core growth, led by double-digit growth at Fluke Calibration. Fluke’s industrial growth in the first quarter was impacted by slower point-of-sale trends in Western Europe and the United States and a stronger finish in 2018. We did however see improvement in point-of-sale growth in North America over the back half of the quarter. Fluke Digital Systems grew greater than 30%, led by eMaint, which added more than 50 new customers and generated a greater than 20% increase in annual recurring revenue. Fluke continued its strong broad-based growth in China with point-of-sale increases reflecting the enhanced strength of Fluke's competitive position and healthy momentum as it ended the quarter. On the product front, Fluke Networks launched two new fiber testing and inspection products during the quarter, which have gotten off to a strong start. ISC delivered high-teens core growth led by North America. iNet saw another quarter of greater than 20% growth while rental had a particularly strong quarter driven by several large project wins. The ISC team is very excited about continuing to pursue the emerging revenue opportunity from bundled solutions that combine iNet with the company's rental offering in the coming quarters. ISC delivered over 500 basis points of operating margin expansion in the first quarter as the application of FBS continues to drive consistent operational improvements. Qualitrol's core revenue declined low double digits during the quarter in line with our expectations. While the company has started to see some early signs of more stable conditions in certain markets, we continue to expect the headwinds from soft market conditions to remain a challenge throughout 2019. Product realization core revenue increased low single digits. This high-teens growth in the EMC was moderated by a flat quarter from Tektronix. EMC saw strong base business growth along with the continued progress of its product offering for commercial satellites with the first launches of satellites employing its fully networked pyrotechnical lead solutions during the quarter. Flat growth at Tektronix was a result of contrasting performance across developed and high-growth markets during the quarter. Developed markets grew low single digits, led by strong growth in North America and Japan, which was partially offset by a decrease in Western Europe. High growth markets were down mid-single digits as a strong quarter in China was more than offset by declines in South Korea and the rest of Asia. The Tektronix oscilloscope offering continues to drive growth benefiting from the momentum behind the 6 Series MSO which was introduced in the third quarter of 2018. As part of the ongoing effort to reshape and focus the Tektronix's portfolio, the company also recently signed an agreement to contribute its video test and monitoring business to a new entity, formed with Telestream and Genstar Capital, Telestream's private equity owner. We expect the transaction to close at the beginning of the third quarter. Core revenue for the Sensing Technologies platform decreased low single digits in the quarter. Sensing had a slow start to the year, experiencing headwinds across certain parts of its core industrial end markets, including slower demand trends from electronics and semiconductor OEM customers. Growth remained solid across the platform’s medical and defense end markets while recent new product launches continue to drive strong growth in critical environment applications. The platform performed well in China, registering high-single-digit growth and was offset by low-single-digit declines in North America and Western Europe. Moving to our Industrial Technologies segment, revenue grew 4%, including core revenue growth of 6.4%. Acquisitions contributed 80 basis points, while unfavorable foreign exchange rates reduced growth by 320 basis points. Reporting operating margin of 16.3% reflected 20 basis points of dilutive operating margin associated with acquisitions. Core operating margin increased 130 basis points driven by the strong volume at GVR in the quarter. Our Transportation Technologies platform core revenue grew low double digits, led by greater than 20% in high growth markets and high single-digit growth in developed markets. GVR delivered mid-teens core revenue growth highlighted by a low double-digit increase in developed markets and a greater than 20% increase in high growth markets. Developed markets were led by North America, reflecting a combination of accelerating EMV sales and the lapping of ERP implementation issues that affected performance in the first quarter of 2018. Gilbarco continued to generate strong growth from EMV sales, driven by programs with major oil company partners. Phillips 66 recently announced the release of outdoor EMV capability for its sites running the Gilbarco Passport point-of-sale system. Gilbarco also reached an agreement with Shell to offer EMV-ready Passport EDGE point-of-sale solutions to Shell’s dealer network on a monthly subscription basis. China saw greater than 30% growth, driven by the continued regulatory tailwind at Veeder-Root from ongoing double-walled tank upgrades. GVR’s strong results in high-growth markets included significant growth in India as GVR's comprehensive product and service capability, including recent innovation within Orpak automation offering led to a number of large tender wins during the quarter. As expected, TeletracNavman declined high single digits in the first quarter as strong growth across Asia Pacific was more than offset by a decline in North America. The TeletracNavman team remains focused on stabilizing the North American business where the high level of customer churn that emerged in 2018 remains a headwind despite some improvement during the quarter. TeletracNavman was recently awarded a FedRAMP provisional authority to operate, making its Director product eligible for procurement by all federal agencies based on its security and reliability as a third-party cloud solution. Moving to franchise distribution, the platform declined low single digits during the first quarter. Hennessy’s performance was impacted by significant customer inventory reductions, while Matco was up slightly. At the company's Annual Tool Expo, Matco launched an exclusive mobile AC recycler line optimized for uptime and service reliability, which has been well received by the market and drove shop equipment growth during the quarter. Turning to the guide, we're updating our full-year 2019 adjusted diluted net EPS guidance to $3.55 to $3.65, representing year-over-year growth of 16% to 19% on a continuing operations basis. The revised annual guide includes $0.20 for the addition of ASP and a reduction of $0.05 due to the Tektronix video transaction. The guide also assumes 3% to 5% core revenue growth, 25 to 50 basis points of core operating margin expansion, an effective tax rate of 17%, and free cash flow conversion of greater than 120% for the year. We are also initiating our second quarter adjusted diluted net EPS guidance of $0.86 to $0.90, representing year-over-year growth of 18% at the high end. This includes assumptions of 3% to 4% core revenue growth and an effective tax rate of 17%. To wrap up, our first-quarter results came in as we expected despite the near-term challenges that impacted our shorter-cycle businesses as well as headwinds from tariffs and foreign exchange. For the quarter, we delivered high single-digit total revenue growth, mid-single-digit core revenue growth, and greater than 30% growth in free cash flow. With the closing of ASP at the beginning of the second quarter, we also took another significant step forward in the ongoing transformation of the Fortive portfolio, greatly increasing our exposure to an attractive healthcare market, tied to long-term secular growth drivers and adding another source of high recurring revenue and consistently robust free cash flow. Looking ahead, with a combination of a resilient core portfolio, the foundation of the Fortive Business System, and growing contributions from Gordian and Accruent and the addition of ASP, we've remained well-positioned to deliver another year of top quartile earnings growth. We look forward to seeing many of you at our upcoming Investor Day in New York on May 16th, where we will give you deeper insights into the digital strategy of Fortive as well as an update on our portfolio transformation efforts. With that, I'll turn it back to Griffin.

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

On the revenue contribution from acquisitions for Gordian and Accruent, I think the amount is something like on a pro-rata basis like $100 million a quarter; the acquisition contribution in that segment was like $80 million, I think, or somewhat that. I mean, is there seasonality to that business, or am I doing the math wrong?

Yes. No, you are not doing the math wrong. There is a seasonality to Gordian and Accruent; it's a little bit different than what our traditional or core business has been, where we think maybe we get 20% in the first quarter and 45% in the second quarter of the year, and I think that it's going to have like maybe a 40% to 60% rate in the first half to second half.

Okay. Is there any market dynamics with Gordian that are changing compared to expectations?

No, in fact we had a good quarter at both. We saw strong construction spending through the platform, particularly in job order contracting and what we refer to as procurement solutions. That area of the business grew by double digits, making up roughly 60% of our operations. So at Gordian, we experienced solid performance, and Accruent performed well too. As mentioned in our prepared remarks, we're off to a very good start, and one of the aspects we appreciate most about the business, aside from its fundamental growth drivers, is the outstanding teams we have in both companies.

Okay. And then one last one for you. Just from a macro perspective, and now that you kind of had an opportunity to draw the first quarter here looking back, was there any sort of pull-in or pre-buy in the fourth quarter in any of your products and maybe just touch high level on what you are seeing in the macro out there? It seems like there are a lot of different businesses moving around on you, some negative, some positive, relatively inconsistent performance I’d say. Is there anything out on the macro that kind of worries you for the second half?

Yes. In terms of geography, our overall growth in North America was solid, largely driven by Gilbarco's strong quarter. The positive aspect for Gilbarco was the high growth markets, which are specific to them, so it's hard to generalize, but we saw good performance in high growth markets globally, as noted in our prepared remarks. Regarding your inquiry about pull-ins, we estimated that about 70 to 100 basis points of revenue shifted from the fourth quarter to the first, but now we believe that number is closer to 125, influenced by tariff avoidance. Additionally, we observed that North America started slow but improved throughout the quarter at the point of sale. For instance, Fluke showed improvement as the quarter progressed, and Matco's performance improved in March. We did see some positive trends, though our distribution businesses, particularly in Professional Instrumentation, faced challenges, with Europe being a weak spot for our distribution there.

I don’t think I’ve ever asked about the Sensing Technologies business. Does that business turn around in 2019 or are we looking towards 2020?

No, we always expected it to be a low single digit growth for the year, and that perspective remains the same. The number is slightly different, but it will likely be at the lower end of the low single digits. They faced negative performance in the quarter, but there should be some improvement as their comparisons improve in the second half. A positive aspect of the business is that it has consistently been a profitable segment, and they managed to protect free cash flow during the quarter. This will support their growth for the remainder of the year, and they are expected to contribute positively to earnings as the year progresses.

Okay. And if I just look at Slide 4, and you just take a look at the R&D numbers as a percent of revenues, you bought a lot of businesses, spent a lot of money on R&D. And Jim, what's your early take on if you’re getting your bang for your buck on that spend, or is there any way to get any efficiency on it or productivity? I know it's tough to scale it because they're very different companies that you own, but just to look how that may be on R&D?

Yes. I think there are a couple of points to consider. Firstly, the software businesses like Gordian and Accruent will need increased research and development investment. They were somewhat constrained on R&D while under private equity ownership. We plan to increase their R&D budget as we seek opportunities for growth and to enhance their solution platforms. The integration of these businesses and the continuous addition of features for existing customers provide significant earnings potential over time. However, the overall Fortive numbers may not change significantly, as we are constantly seeking productivity in other areas. For instance, we've completed substantial spending at Tektronix on their new platform. This is an example of what we refer to as dynamic resource allocation, where we strategically invest in areas with the greatest growth potential.

Just looking at slides 8 and 9, if we just look at the core revenue growth contribution to EPS, you did about $0.05 or you're expecting to do about $0.05 in the first half; the year you’ve guided at about $0.25, so a big sort of step up in that contribution from first half to second half. Maybe just walk through some of the biggest moving parts in terms of that step up please?

As we progress through the quarter, we anticipate a sequential increase in our volume. Typically, we expect our revenues to rise by 20% from the first quarter to the second. Our fixed expenses do not increase at that rate, which results in a consistent growth pattern throughout the year. We project our earnings per share growth to be around 20 in the first quarter, 25 in the second and third quarters, and 30 in the fourth quarter. This pattern shapes our overall profile. Additionally, I want to highlight the impact of foreign exchange rates. In the first half, particularly in the second quarter, we expect around $0.03 in the first quarter and $0.01 or $0.02 in the second quarter, after which it levels off in the second half. These factors contribute to a gradual increase in growth throughout the year, primarily driven by revenue.

Understood, thanks. And then my second question maybe around Professional Instruments specifically. You talked about the sensing assumptions there. Any color maybe on what you're seeing on the order intake in Fluke and Tektronix, how quickly you think those accelerate maybe in the rest of the year? And whether you thought you suffered from much destocking in the distribution-facing businesses in PI in Q1?

Yes, I'll address the last part first, Julian. We definitely observed destocking in certain areas at Fluke and Tek, particularly in Europe for both businesses and to some extent in the US. Tek experienced an interesting trend where its direct business grew significantly, with mid-single-digit growth, while its distribution business declined in the first quarter. We attribute a portion of this to destocking and some to tariff and pricing avoidance that occurred in the fourth quarter. I believe this sets the stage for improvement in the second quarter and throughout the year. Additionally, Tek had a book-to-bill ratio over 1 in the first quarter, and I think Fluke did as well, which indicates solid performance. We're beginning to see the point-of-sale numbers improve as we progress through the quarter. Although we started off slower than anticipated, Professional Instrumentation with just under 2% core growth reflects Tek's flat performance. However, we do not expect a significant macro improvement to achieve our goals; it's primarily about working through the inventory destocking and observing the current rate unfold.

Hey. Could you take us through the Tektronix video transaction, what are the economics, what's the opportunity here?

Yes, strategically, Deane, you know as well. So, we've always been looking from a portfolio perspective to always put our businesses in the best position for success. We also help our operating companies to do that as well. And I think that Tektronix team really came back with this understanding that by combining with the Telestream business, the video business is not as core to what we do at Tek obviously. And increasingly, I think the combination of those businesses was looking better and better. So we'll combine the businesses; we'll have a minority interest in the combined entity, and we'll really benefit from the success of the synergies in the business and what Genstar is looking to do with the business over time. So we think the economics over time are going to be good because we think the synergies are strong.

And then on the 160 basis points of price, how does that spread across the businesses, where did you get the most pricing and was there any give-up?

Hey, Deane, it’s Chuck. Overall, we achieved price increases across all of our operating companies. We saw better success in IT, where we had increases starting at two percent rather than one percent, while we experienced a smaller increase of 80 basis points in Professional Instrumentation. However, we were fairly successful in most areas. There were a few places where we faced challenges with pricing due to specific reasons. At Tek, we saw a decrease of 50 basis points, which was unexpected, and we are working to address that. Additionally, at EMC, there were some contractual issues that were mostly anticipated; aside from those, we are pleased with a total of 160 basis points, especially since we typically see increases of 40 or 50 basis points.

And just on Tek on the pricing, was that give-up on the direct side or through distribution?

The decisions are generally more case-by-case for the business. I would say it leans more toward the direct side. There's a bit in distribution, but some of it wasn't realized there because we anticipated price increases on January 1; however, we had more demand in the fourth quarter from distribution, which shifted our focus away from pricing in the first quarter, if that makes sense, Deane.

Just a question on Professional Instrumentation margins; they sort of have been negative for a couple of quarters now. What would it take operationally for the margins to inflect back up?

Great question. There are a couple of points to consider. They have been facing challenges for several quarters, particularly due to the impact of tariffs on both Fluke and Tek. This has significantly affected Professional Instrumentation. However, we expect to see some improvement as we move past the tariffs that primarily affected us in Q3. Additionally, Professional Instrumentation typically experiences significant growth based on shipment volume, so we need to increase our outbound volume to return to growth. This was a challenge for us in Q1, but we anticipate it will begin to improve. Another issue has been that foreign exchange rates have impacted us more than we anticipated, but we expect this to stabilize in the second half of the year. I believe we will see a return to normal margin expansion later this year.

Andrew, the other thing that it’s just maybe important to keep an eye on is we had our best in the history of the company last first quarter of '18 on margin expansion in PI; we had 300 basis points of margin in the first quarter last year. So when we look on a two-year stack there, we still feel pretty good about the margin expansion in the core business. Obviously, the tariffs, as Chuck mentioned, have some impact there. But I think when we look at sort of the core work that we typically do, we feel pretty good about that; and that will get better as we work through the year.

And just a follow-up question on growth; so Q1 core growth was 3.7, I think; in the second quarter, we're guiding 3 to 4. For the year, the range is still future 3 to 5. So what would it take for you guys to hit the 5% organic core growth for the year with acceleration in the second half, particularly as the comps get tougher in the second half? Thanks.

Yes. No problem. First of all, we probably want to see Western Europe get better, China to continue; we were high single-digit in the month during the quarter. We've said for a while now that China was likely to be more mid-single-digit for the year. So if China held in there, maybe got a little better, and Western Europe got better, I think we'll more be at the high-end of the range. We also have some easier comps in some places like in Sensing and at Fluke. So if we get to the higher end of their businesses as well, there's some opportunity. So we will build the business model around that range; and what we feel really good about is we're going to deliver double-digit earnings growth in the first half, 3% growth, and we're going to deliver high-teens earnings growth through the year. So, even in that range of growth rates, the earnings growth is going to be substantial. That’s pretty much like the strong free cash flow in the quarter, despite the fact that we missed the PI revenue number by a little bit; the free cash flow up 31% I think was a good testament of our operational ability to continue to deliver.

Jim or Chuck, can you discuss the video business that Tek is contributing to this venture? What was its revenue and profit? Also, when do you expect that to be completed?

So I'll take the second part first. We expect to be completed early in the third quarter is what we're looking at, and the business in terms of size is $55 million or $60 million in revenue for us, it probably around 18% to 20% operating profit.

Okay. So pretty decent. And then I just have a question on the EPS guide for the second quarter. I'm a little bit curious; I would've thought so $0.86 to $0.90 I'm kind of referencing your 25%. So I guess Chuck, at 25%, so I guess $0.90 kind of fits, but I would think with the ASP acquisition, I mean shouldn't that add approximately a nickel to the quarter? It sounds like this video business sort of come out till Q3. So what's the drag there on the EPS for the second quarter?

Actually, I think there's only two things that you might be missing. I agree with the nickel on ASP. If you look at our core business without the benefit of Gordian and Accruent, ASP, and FX, you get a number that’s around for the quarter 25% to $0.80. You've buildup of $0.05 ASP, as you noted, and I think we've got $0.06 in for Gordian and Accruent. And so that fits in. Probably one thing is there's still $0.02 to $0.02 of tailwind on FX.

Okay. Very good. Thank you.

I just want to make sure I called that headwind. All coming up, 18% earnings per share growth.

For Chuck, SG&A was up 450 basis points over 30% of sales; it’s not really surprising, it's a lighter quarter in sales and given the acquisition-related activity you’ve had, but is it up simply because of that, and would you expect just to come down now versus relatively and seasonally high Q1?

So if you're just talking about the total SG&A, actually it's up quite a bit because of the amortization and also the purchase accounting related to the deals and the deal costs. That's actually the main step up there.

Nothing unusual on there other than just the increased M&A activity, correct?

There's a little bit with Gordian and Accruent where they've got really high gross margins, and so they're above the fleet average. But the first two things I talked about are 90% of them.

And then Jim, just focusing on China for a second, you mentioned last quarter that you're seeing some slowing in Tek order book in China, but doesn't look like you saw any real slowdown in that business. So when you focus on China, I mean you mentioned maybe it can be resilient here as a lot of that resilient in GVR, Tek actually outperformed in China.

Yes. Regarding Tek, we observed slightly better performance in China than anticipated. While we expected some moderation, it came in at high-single digits for the quarter but we project mid-single digits for the full year. Overall, it should still be a solid year following four consecutive years of either double-digit or high-single-digit growth for Tek in China. The market has remained relatively resilient, with most customers across various segments performing well. It's worth noting that Fluke's point-of-sale in its shops, which serves as a good indicator for the market, performed well, and Fluke's growth in China was quite broad-based. While I'm not claiming that everything is fantastic or will drastically improve, the performance was certainly solid and slightly better than we expected. As for GVR, its regulatory performance will taper a bit in the second half. In terms of Tek's presence in the rest of Asia, a significant portion of our business in South Korea is related to 3D sensing and field activities, with a stronger focus on semiconductor processes. Although this isn't a major concern for Fortive, it does affect our operations in Asia, particularly in Korea, which posed certain headwinds for Tektronix this quarter. However, we expect this moderation to ease as the year progresses due to easier comparisons.

Maybe just for me on ASP. Just curious how the business performed during this carve-out period; I think the 2017 revenues were $775 million or so. What’s the revenue base here as it enters the Fortive empire?

Probably about $825 million, $820 million; somewhere around there.

And that sounds like net 5% growth or so; maybe a little bit more than that, is it?

Mid-single-digit in '18, so.

And is that basically what's implicit in the guide for the year here, or is that going to be organic, obviously, for you this year, but did you see that type of growth continuing over the balance of ‘18?

We’d probably be in the low to mid-range right now. I think we’re still getting a sense of what the business can be like. There are a couple of one-time things that were last year that I would say maybe their natural growth rate over the last few years has been low single-digit in that range, kind of 3 to 4. But we think we know the market is growing mid-single-digit. So I think as we said a year ago when we announced the signing of the deal, that we felt good about over a time period we could turn the business into a mid-single-digit grower. But I think it's implicit in the guide with about 12 months of TSAs, Jeff, and working through Johnson & Johnson and some of the revenue profile for a time period; it's probably going to be more like low single-digit. And so we've got every aspect of them under our ownership.

I believe there was significant preparation needed to accept the carve-out this year regarding the price. However, after taking ownership, it seems there may be substantial work required on their metrics management structure and similar areas. Is that still something we need to address, is it included in the guidance, or could it potentially be recorded in acquisition accounting?

No, I think if you're discussing the team that will manage this, we've already made significant progress. The main challenge ahead of us is the TSAs outside of the US that we need to integrate into our IT platform, which will likely take about four quarters. As we complete this integration, your profits will improve each time we transition from one of those agreements.

I believe that everything we've observed so far indicates that the cost structure contributing to the business's returns is fully intact. We feel optimistic about this and still see potential for enhancing gross margins. Additionally, when you consider the core principles of value creation that we implemented at significantly lower interest rates and different tax rates, the return profile has seen considerable improvement since we announced the deal about ten months ago.

Can you talk to the convertible senior notes you've just issued; seems to have been done at very favorable terms. I'm not sure if that’s incrementally additive even by a penny or two to sort of the thought process that you have. And I was wondering about just the balance sheet in general given if you can do that with that tranche; are there other things you could perhaps be doing or thought process around the balance sheet or is pretty well locked in?

Thank you for your question. Regarding the guidance, we appreciate the favorable terms of the convertible notes deal. While we didn't know the exact terms when we set the original guidance, we had most of it accounted for. Therefore, it does not positively impact the guidance, but we are pleased with the arrangement. As for the balance sheet, it's important to note that this convertible note is considered debt, not equity, so it doesn't really provide additional debt financing for acquisitions. We're still exploring our options and will evaluate the best approach for financing and raising capital as we move forward.

But it sounds like it’s going to be tied to probably future M&A. It sort of brings up the question, Jim, how are you thinking at this stage in late April about no additional portfolio moves in 2019? And you guys have done a ton over the couple of years; probably a lot of digestion work I'm assuming, but you obviously want to be opportunistic. Is there an early read in terms of how are you thinking about these opportunities today or are you intend to sit back and wait?

Yes, I am not someone who typically sits back and waits. I feel a strong obligation to pursue opportunities. We have been quite active lately, possibly as busy as ever. We will keep seeking out opportunities. As you mentioned, we recently completed the largest acquisition in our company's history just 24 days ago, and we are focused on integrating that successfully, which is very important. I want to emphasize that this is a top priority for us. However, we also recognize that between Gordian, Accruent, and ASP, we have acquired nearly $10 billion worth of market potential, which presents additional opportunities. We feel optimistic about what lies ahead, and we are confident in our ability to maintain our disciplined approach, just as we always have. We will refocus our efforts as we approach the close of our three-year milestone. As you know, the pace of deals has varied, and I expect that pattern to continue.

So, just let me follow up on Gordian and Accruent; you had them under your belt for a while now, and I think obviously some differentiated assets in the software space, but it seems like every company out there is coming out with kind of a software add-on for everything they're doing; and obviously, the big software guys are still everywhere. When you think about your total software exposure, including those to iNet, eMaint, you’re kind of putting all in one big basket. How would you characterize the competitive landscape? Are you seeing more folks show up? Do you feel like the niches are well protected, and how does that make you feel about kind of more activity in those spaces?

The environment hasn't shifted significantly in recent months, though it has been competitive over the last few years. We've seen two major deals in the hands of private equity, which is increasingly involved in these transactions. We aim to operate where we have an advantage and a unique perspective on the business, particularly with recent additions that create synergies. We're focusing on areas where our chances of success are higher. A crucial aspect is having a strategic approach to building workflows and understanding how to leverage both our existing business and potential growth opportunities to scale up. With the acquisitions of Gordian and Accruent, along with eMaint in the facilities management software sector, we're approaching half a billion in that space, enhancing our scale and capabilities. In other areas where we hold strategic positions, we're enhancing our offerings to improve competitiveness in our workflows, which strengthens our brands like Gilbarco and Tektronix. It's also worth noting that while there may be questions around pricing, we're not observing significant changes in pricing for high-quality assets over the past year or two. Some lower-quality assets have seen price drops, but overall, strong assets with solid growth, margins, and recurring revenue remain stable in terms of pricing.

That’s helpful, Jim. And then just one, shifting gears a little bit, thinking about the second half, or even maybe beyond the second half, at some point before too long you're going to run into some pretty tough comps on GVR; and I think orchestrating the handoff between that business and some of the PI stuff where it's just kind of the higher quality businesses over time are the ones that are getting more of the focus. Do you anticipate that being a smooth handoff i.e. some of the headwinds today or end market shuffling today, times itself to where it goes away by the time GVR has tougher comps?

Yes. I believe Chuck will provide more details shortly. Strategically, we are looking within Gilbarco, transportation technology, and Fortive to address these challenges. Within Gilbarco, we are expanding our presence in high growth markets. Over the last few years, we have made nearly three acquisitions in India to strengthen our foothold in these markets. We recently launched a new dispenser specifically designed for high growth markets, which I think is an excellent product. Our focus is on enhancing our position in markets that are not EMV. Additionally, we aim to capitalize on opportunities in sectors like electric vehicles, where our Tritium investment is making progress, and we plan to continue this approach. Within the platform, we are also exploring new opportunities. As you highlighted, the variety of prospects throughout Fortive presents us with many chances to counteract the EMV shortfall that we anticipate will occur. We have been consistent in conveying that there will be a decline at some point, which we can somewhat predict, likely not within a particular quarter but certainly within a few quarters where we have a fairly clear understanding of the timing.

Yes, Josh, if I could add on it, if you want to size that, when you start looking at in '20, beyond 2021, 2022, and 2023, it's probably a $100 million to $200 million step down over a quarter period; which is probably about $0.10 to $0.20. And if you think about $0.10 a year, I think we can handle that in terms of an earnings power. Also worth noting, 1.7 billion of acquired assets growing at high single digits is also part of, and given mentioned some of those in the GVR platform.

I was hoping you could give us a little bit more color on what the PI impact from acquisitions; it looks like on a full-year basis it was minus 410 this quarter. What does that look like on a full year basis?

Are you talking about on the SG&A there or on the…

I'm talking about on your exhibit on Page 6, the operating margin on a bundle.

I see. I have to think about that, and I prefer to not to just pitfall here because we got the ASP coming in here with its amortization; but it's likely to be in the same size as what we just saw with Gordian and Accruent for the full-year, if you think about $2.8 billion spent on Gordian and Accruent and $2.7 billion on ASP. It's going to look about the similar impact on our total operating margins, but I think that anyways that's what I would expect to see.

And so when you are talking earlier about the upward inflection in the PI margin you were just talking about the core?

Yes, that's right, for sure.

I also notice that when you talked about OMX not only did that number come down from plus 50 to plus 25 to 50 on a full-year basis. where you talked a lot about mix; I was hoping if you could tell us a little bit more maybe size that for us, what is that, 30, 40, is that 25 basis points of takedown, what happened with OMX both the guidance and what's going on with the mix within that?

Well most of what happened with the guide for the year is the first quarter. And so our first quarter had negative 70; it didn’t make the second half go up anymore and it's really not much more complicated than that. I do think that we will see sequential improvement from Q1 to probably flat, a little bit positive to back to normal because the big headwinds of that we called out in order of mix and tariffs, and FX are really a first half problem and they normalize into the second half; and we’re very focused on continuing to countermeasure all those things. I think the idea that I think Chuck and I have spent a considerable amount of time making sure that we've got the actions in the businesses to go after this. And that's why that even though you see a little bit of a lower OMX, you see the continued strength in EPS, and you see the continued strength in free cash flow. So the metric itself is a little bit influenced by the way you measure tariffs and things like that. But at the end of the day, what we don’t change is you see the incredibly strong high-teens EPS growth and a continued focus on 120% free cash flow conversion.

We covered a lot of points, but I want to revisit Gordian and Accruent, which will be integrated into our core operations in Q4. Can you discuss their performance in the first quarter on a like-for-like basis? How did they fare in the current market conditions? Also, regarding EBITDA margins, the additional disclosure is helpful. It seems that the margin for Gordian and Accruent was around 23% to 24%. Is that accurate, considering we're looking at low 30s for those two companies?

Yes. You’re talking about the EBITDA for Gordian and Accruent? This is what you said?

I think for this year, yes, it starts probably a little under that but not much and ramps through the year. So yes, that's correct.

Okay. And then the like-for-like growth ...

Nigel, your first question was I think around durability of Gordian and Accruent, is that?

No, no. It's really more about how they perform in the quarter, Jim.

Got it. Got it. And I would also say just to that point is; and maybe just it's a small but important caveat that we've spent a bunch of time with the businesses and we may choose to invest in the business through the year and in fact for sure we have had already approved some additional investments to accelerate the growth in the business too, which may not necessarily pay out in any particular quarter, but gives us a much more durable revenue stream in the years to come. So, you know us, you know from time to time we will make those decisions, and that could impact that percentage by a few hundred basis points on when and how we do it.

Okay. And the growth check, what was the growth at Gordian and Accruent?

High single-digit in Q1, and that's what we expected, that's what we're seeing, and we expect that as that comes into Q4 this year, it's probably a 30 point lift to our core growth.

The saving of the accretion looks like a nickel in Q2, obviously, like a $0.07 to $0.09 in Q3, 4Q. Is that the TSA's roll off you alluded to, is that contributing to the better accretion in the back half of the year? And are we still looking at $0.30, $0.35 for the first 12 months? So, $0.30, $0.35 for the first 12, that's still the range. And yes, for the most part, and while it's stepping up as it goes through time, there is also a little bit of seasonality; it’s like many businesses, the fourth quarters can be stronger than the first and what not. But I think those are major levers.

A lot of ground covered so just a quick one here. Just looking at the language in your press release around the headwinds on Professional Instrumentation. I just wanted to make sure I understood clearly, I mean, that's really a way to call out what you were talking about with the distribution channel or is there anything else that that language alludes to, I guess?

No. It’s mainly in our short cycle businesses, specifically Fluke and Tek. They performed better in the fourth quarter than we initially anticipated, which we believe is largely due to tariff avoidance. Additionally, there was a slowdown in point-of-sale activity at the beginning of the quarter. Therefore, I think these two factors contributed to the destocking, partly due to point-of-sale issues and also because of the increased inventory levels at the end of the year.

So Chuck, could you give the specific number for Fluke? I think you said Fluke Digital, the growth was in the quarter, and did you give like the legacy Fluke growth in the quarter?

I don't believe I did. Total Fluke was low single digits, yes.

Low single-digit, okay. And was there a management change going on there this quarter?

Yes, we announced a couple of changes. Many of our senior leaders have been owner/operators since our inception. We hired someone from outside who was in immersion for a while and placed Marc Tremblay in the Fluke position, while promoting Tami Newcombe to the Tektronix role. These two organizational announcements are significant, and we are excited to have such strong leaders in these new positions. Additionally, Pat and West have taken on a lot with the new acquisitions, and Pat has been leading the effort in ASP. This shift allows them more time to focus on building out the platforms and similar initiatives.

I just want to confirm the projections for Gordian and Accruent; if I understand the calculations correctly, it's $0.06 in Q2 with expectations of approximately four in the first quarter.

I think we're saying $0.05.

Okay. And then, we're having that into core in Q4, right? So the incremental on top of that in your full year, that's just in from the third quarter, right?

Yes. It’s in core in the fourth quarter.

So I think that’s it. Thanks, everybody, for a great interaction and the time today. Obviously a busy day for everyone and so we appreciate the time you've taken to be with us. We are really proud of the work we did in the quarter. Certainly some things affect. But as I think mentioned, we’re very focused on that; but at the same time, the ability to sort of do what we believe is going to be a strong year. We’re off to a good start. We look forward to seeing all of you in New York in May and we will give you more detail on ASP, on Gordian, or Accruent. We will certainly outline our digital strategy and certainly give you a better perspective on a number of the strategies that we are utilizing to drive growth this year, but more importantly to build a better Fortive over time. Thanks, and Griffin and team and Chuck are around for questions tonight, tomorrow, and next week. Take care, everybody. Have a great week.