Fortive Corp (FTV) — Q2 2019 Earnings Call Transcript

Thank you, Jason. 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 is available on the Investors section of our website, www.fortive.com, under the heading Financial Information. A replay of the webcast will be archived on the Investors section of our website later today under the heading Events & Presentations and will remain archived until our next quarterly call. A replay of the conference call will be available shortly after the conclusion of this call until Friday, August 9, 2019. Instructions for accessing this replay are included in our second 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 adjusted diluted earnings per share of $0.90 for the second quarter of 2019, representing an increase of 18% year-over-year and hitting the high-end of our guide, despite evidence of slowing in our short cycle businesses as we progress through the quarter. In the face of these headwinds, which negatively impacted core growth in our professional instrumentation segment, the Fortive team delivered high-teens total revenue growth, including continued outperformance at the Varco Bitterroot and another quarter of strong free cash flow conversion, driven by disciplined execution and the strength of the Fortive business system. Our strong earnings and cash flow performance reflected the momentum of our capital deployment strategy as acquisitions continue to enhance the growth profile and reduce the cyclicality of our portfolio. Importantly, the integration of advanced sterilization products has gotten off to a solid start as it delivered a greater than expected earnings contribution during our first quarter of ownership. We look forward to providing additional updates as integration progresses and we exit the majority of our transition services agreement with Johnson & Johnson through the first half of 2020. At the same time, the earlier acquisitions of ISC and Landauer continue to deliver strong results, increasing the resilience of the portfolio as they generated high single-digit core growth and 360 basis points of core OMX on a combined basis. Gordian and Accruent also continue to perform well and will be additive to core growth in the Professional Instrumentation segment when they turn core during the third quarter. Consistent with the broader digital strategy that we highlighted during our May investor conference, we recently completed three additional acquisitions within field solutions. The acquisitions of Intellect and Safer Systems as well as Proof Technique demonstrate our ability to continue to find high-quality companies to accelerate our digital strategy and bring connected workflow solutions to our customers. With that, I’d like to turn to the details of the quarter, adjusted net earnings were $322.3 million, up 19.2% over the prior year and adjusted diluted net earnings per share were $0.90. Sales grew 16.4% to $1.9 billion, reflecting a core revenue increase of 2%. Core revenue growth was highlighted by strong performance in the Varco Bitterroot, EMC, and Industrial Scientific, which was partially offset by a flat quarter from Fluke and a decline in Tektronix. Acquisitions, including Gordian, Accruent, and ASP contributed 1,650 basis points of top-line growth, while unfavorable foreign exchange rates reduced growth by 210 basis points. Geographically, high-growth markets core revenue decreased low-single digits due to weaker market conditions in Asia and Latin America. In India, strong growth in Fluke was more than offset by timing on some large orders at GVR that pushed into the second half of the year. We continue to expect strong growth in India for the full year. China posted low-single digit growth with strong performances at ISC and sensing technologies, the more modest growth across Fluke, Tektronix, and GVR. Developed markets core revenue grew low-single digits as strength in North America was partially offset by weakness in Western Europe. Core revenue growth in North America was mid-single digits, led by GVR, EMC, and Industrial Scientific, while Western Europe decreased low-single digits with continued growth at GVR. Reported operating margin was 13.4%, reflecting 540 basis points of dilution from acquisitions and 180 basis points of dilution for deal-related costs. Core operating margins increased 30 basis points as continued strong volume at GVR and the disciplined application of FBS helped offset headwinds within professional instrumentation. During the second quarter, we generated $236 million of free cash flow and a conversion ratio of 134%. While we anticipate a continuation of the uncertain macroeconomic environment, we expect sustained strong free cash flow generation and conversion of greater than 125% for the full year. Turning to our segments, Professional Instrumentation posted sales growth of 27.5% on relatively flat core revenue. This growth performance reflected the continued transformation of Professional Instrumentation over the past few years, with acquisitions driving growth, contributing 2,930 basis points during the quarter. Unfavorable foreign exchange rates reduced growth by 190 basis points. Reported operating margin of 10.8% reflected 1,220 basis points of dilutive operating margin associated with acquisitions and deal-related costs, including purchase accounting adjustments and transaction expenses from the initial closing of ASP. Core operating margins decreased basis points, reflecting slower revenue performance, the impact of tariffs, and unfavorable foreign exchange. Advanced Instrumentation and Solutions core revenue was flat as strong performance at EMC and Industrial Scientific was offset by the slowing in Fluke and Tektronix. Field Solutions core revenue was flat with developed markets growing slightly paced by the continued strong performance of ISC. High growth markets decreased low-single digits as slightly positive growth at Fluke and strong performance from ISC in China were more than offset by the expected weakness at Qualitrol. While not yet core, we were very pleased with the continued performance of Accruent and Gordian. Accruent continues to see strong growth in North America across a variety of end markets, driven by demand for its lease management and space optimization offerings. Gordian’s growth continues to be paced by its procurement platform, driven by increased construction volumes for new customers, including the Hawaii Department of Education and the City of Atlanta. Fluke’s core revenue was flat, as low-single digit growth at Fluke industrial and calibration, and mid-single digit growth at Fluke Networks was offset by declines in tomography, process instruments, and Health Solutions. Fluke Digital Systems grew 30% as eMaint generated high-single digit net new customer growth and a greater than 20% increase in annual recurring revenue. Fluke generated low-single digit growth in China, and we remain watchful for more potential slowing in that market through the second half. As we highlighted at the investor conference in May, Fluke recently launched a new Sonic Industrial Imager, a revolutionary product that enables maintenance teams to quickly and accurately locate air, gas, and vacuum leaks, utilizing Fluke’s state-of-the-art sound site technology. Fluke also completed the bolt-on acquisition of Pruftechnik, a leader in vibration monitoring, alignment, and testing equipment and services. The acquisition of Pruftechnik accelerates Fluke’s asset, liability, and condition monitoring strategy, which now accounts for greater than $200 million in total revenue, with a combination of industry-leading measurement tools and best-in-class domain expertise. ISC delivered mid-single digit core revenue growth, this was led by North America and Asia Pacific, including strong performance in China, which more than offset some slowing in Western Europe. iNet registered another strong quarter with high-teens growth, while rental generated high-single digit growth against a tough compare from the prior year. ISC delivered 290 basis points of OMX in the quarter as strong mix and PPV execution through the application of the Fortive Business System continues to drive consistent operational improvement. Industrial Scientific recently completed the acquisition of Intellect, a leading provider of HNF software, and Safer Systems, whose leading cloud-based platform provides real-time hazard analysis and risk assessment to the chemical, oil and gas, and transportation sectors. These acquisitions significantly advance ISC’s safety as a service strategy to provide a comprehensive real-time connection between its customers' workforce and assets and the management of their environmental, health, and safety-related workflows. Qualitrol’s core revenue declined low-double digits in line with our expectations. Qualitrol continues to see early signs of more stable conditions in certain markets, as it generated positive bookings growth for the first time in eight quarters. While North America remains challenged due to lower retrofit project spending, the Middle East increased low-double digits, the first positive performance in the region in seven quarters, driven by the release of some previously delayed projects. Product realization core revenue was flat as strong double-digit growth at EMC was offset by weakness in Tektronix. EMC generated broad-based growth across its core aerospace and defense product lines, as well as its commercial satellite offering. A record backlog at the end of the quarter has EMC well positioned for continued growth, supported by the scaling up of key customer programs and market share gains. Tektronix registered a mid-single digit decrease in core revenue, much of this weakness was driven by continued slowing at KEITHLEY. Weakness in Western Europe and the negative impact associated with Huawei’s inclusion on the U.S. restricted entity list in May. The slowing macro conditions in Western Europe led to a high-teens decrease and had a broad-based impact across Tektronix’s product lines. We expect headwinds at KEITHLEY and in Western Europe to persist in the coming quarters, as will challenges from Huawei's status, pending any resolution of ongoing trade hostilities between the U.S. and China. Tektronix’s investments are driving growth in mid-range scopes, as its new offerings continue to perform well, growing high-single digits and marking 10 consecutive quarters of strong growth. The successful launch of the new three and four series MSOs added to the continued success of the five and six series, including several large deals with enterprise customers. Tektronix recently closed the previously announced transaction to contribute its video tasks and monitoring business to a new entity formed with Telestream and Genstar Capital. Core revenue for sensing technologies increased low-single digits, the platform saw solid growth across the medical and critical environment end markets, driven by new product introductions and continued share gains. However, headwinds from semiconductor equipment customers continued and sensing also saw broader slowing across its core industrial end markets towards the end of the quarter. China continues to perform well with greater than 20% growth but was partially offset by weakness in North America and Western Europe. We're also seeing good early traction in Sensing’s IoT offerings, including SBT’s AccuBin platform for supply chain applications and the oil condition monitoring system from Gems. Turning to Advanced Sterilization products, the company got off to a solid start in the second quarter and we’re pleased with how the integration is progressing. ASP grew low-single digits in line with our expectations led by strong performance in China. ASP also saw improved growth in Japan, led by strong performance in Terminal Sterilization, as well as growth in high-level disinfection, supported by the successful introduction of the ENDOCLENS cleanse, Neo D, our new automatic endoscope re-processor product for the Japanese market. North America was slightly positive and up sequentially from the first quarter, driven by Terminal Sterilization consumables. During the quarter, ASP saw several large orders from a range of new and existing integrated delivery network customers. Moving to Industrial Technologies, revenue grew 2.6%, including core revenue growth of 4.4%, acquisitions contributed 50 basis points, while unfavorable foreign exchange rates reduced growth by 230 basis points. Reported operating margin was 20.9% and core operating margin increased 210 basis points driven by continued strong volume at GVR and solid performance at Matco. Our Transportation Technologies platform core revenue grew mid-single digits, led by high-single digit growth in North America. GVR delivered high single-digit core revenue growth highlighted by a low-double digit increase in developed markets, strength in North America reflected the continuation of strong EMV-related sales, while Western Europe reflected share gains and strong spending by BP's subsidiary. Gilbarco also completed outdoor EMV capable software releases of its passport point of sale system on the Citgo and Shell Networks. Passport is now available on more than 70% of Gilbarco’s install base, well ahead of other point of sale competitors. In high growth markets, GVR posted a mid-single digit decline compared to greater than 30% growth in the prior year period, as the timing of tenders in China and India shifted volume into the second half of the year. GVR is up high-single digits year-to-date in high growth markets paced by momentum from Orpak’s leading automation offering with strong orders and a healthy backlog that will support strong growth in the coming quarters. GVR also launched its new high growth markets dispenser platform Latitude, which has been very well received by customers thus far and is expected to drive additional growth going forward. In line with expectations, TeletracNavman's core revenue decreased low-double digits in the second quarter and strong growth across Asia Pacific was more than offset by a decline in North America and Western Europe. While North America remains a significant headwind, the TeletracNavman teams' continued focus on stabilizing the businesses resulted in a reduction in customer churn. We expect to see continued improvement in the coming quarters for bookings in ACV and on the backs of new product launches as well as better performance across large enterprise customers and the SMB sales channel. Moving to franchise distribution, the platforms core revenue increased low-single digits during the second quarter, as mid-single digit growth at Matco was partially offset by a mid-single digit decline in Hennessy. Matco outperformed in the quarter, paced by strong growth in diagnostics and hardline tools. High-teens growth in diagnostics was due in part to new additions to Matco's Maximus family of diagnostic products. The Maximus Flash Plus provides OEM-level live diagnostics expertise, and the Max Flex is a full-featured diagnostic tablet offered with a highly customizable monthly subscription plan. Turning to the guide, we are updating our full year 2019 adjusted diluted net EPS guidance to $3.45 to $3.60, representing year-over-year growth of 13% to 18% on a continuing operations basis. The revised annual guidance has been reduced to reflect the short cycle slowing trends that emerged during the second quarter, which we expect to impact demand through the second half of the year. The revised guidance assumes 2.5% to 3.5% core revenue growth and an effective tax rate of 16.1% and free cash flow conversion of greater than 125% for the year. We are also initiating our third quarter adjusted diluted net EPS guidance of $0.83 to $0.88, representing year-over-year growth of 19% at the high-end. This includes assumptions of 2% to 4% core revenue growth, 25 basis points of core OMX, and an effective tax rate of 16.1%. To wrap up, we delivered another quarter of double-digit earnings growth and strong free cash flow conversion, despite some slowing across the short cycle elements of our portfolio. Disciplined execution and the application of FBS delivered 30 basis points of core OMX in the face of both the anticipated challenges from tariffs and foreign exchange, and the lower than expected volume from Fluke and Tektronix during the quarter. The strong performance of our acquisition from the past few years continues to enhance the growth and resilience of the overall portfolio, positioning us well to continue to deliver top quartile earnings growth. With that, I'd like to turn it over to Griffin.

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

Hi, good afternoon. Maybe a first question just around some of the phasing of earnings in the second half. So just taking the midpoint of third quarter, midpoint of the full year guide. It looks like you have about a 25% EPS increase sequentially in Q4. So just wanted to check if that's roughly correct and what drives such a big uplift? I understand last Q4, you had a big sequential increase, but there was a lot of pre-buy helping that?

Yes. There are a few factors to consider. First, there's the typical seasonal increase from Q3 to Q4, which brings more volume. Additionally, we expect core growth year-on-year to be between 2% and 4%. Lastly, the year-on-year impact from Gordian, Accruent, and ASP also plays a role. These three elements contribute to the year-on-year change. Looking at last year, we finished at $0.91, and at the high end of our guidance, we're anticipating about a 15% to 18% increase in fourth quarter earnings.

Understood, thank you. And then maybe just following up on the free cash flow. That was under some pressure in the second quarter, it looked like the working capital for the half as a whole particularly on receivables was a bit of an outflow. So maybe talk through how quickly that free cash flow recovers.

Certainly, the main thing is that most of the businesses are performing very well and generating significant cash flow. However, the notable exception is ASP, which we recently acquired as part of the deal we signed. We currently do not have any net receivables, so there will be a one-time gap as we replenish those receivables that may impact our cash flow. Aside from that one-time issue, which should be resolved around the middle of Q3, we expect our ongoing free cash flow to grow in line with the growth we anticipate in adjusted earnings.

Great, thank you.

Thanks, Julian.

Hi. Good afternoon, guys.

Hi, Scott.

Just as a big picture observation looking at slide four and the SG&A deltas. Are there any structural reasons, Jim and Chuck, why the newer assets once they get fully on boarded can have SG&A levels more traditional Fortive call 25% ballpark?

Scott, it's Charles, a couple of things that one, the increase you are seeing year-on-year is primarily about the amortization that was added as well as the deal cost that’s going on. So that's pretty close to 290 basis points.

And I think relative to the businesses we’re acquiring, I would look at the software businesses that are having a little bit more SG&A that typically goes with higher gross margins. And even in the G&A they tend to have a little bit more IT expense because we have IT expense related to some of the capability that we built to house the data and all those things. So probably a little bit more specifically driven by a little bit more engineering, a little bit more sales cost just because of direct selling, but the higher gross margin certainly pays for that. And if you're just purely looking at G&A in some of the new businesses, particularly, the software businesses, you tend to see a little bit more G&A because of a little bit more IT expense. But I think in general when you look at ASP, where businesses that look a little bit more like the business we have today, you see no reason why over time they would have a similar cost structure to what we've been able to achieve in other businesses.

Okay, I think that answers it. And then, just trying to get a sense of channel visibility, do you have particularly. I guess when you think about ISC and Landauer I guess to a lesser extent ASP, do you have a good sense of any given time where inventory levels are versus the sell through?

We have decent visibility on ASP, so as we get the business more in line, we get off of some of these transition service agreements. We will have a better ability to see into those channels with some of the key channel partners. In the neighborhood of how we see things in other parts of the portfolio. Some of the others, ISC we’re starting to achieve that as we continue to work with some of the similar channel partners that we have currently with other parts of Fortive. So ultimately, we’ll have a little bit more visibility than we do today, but it won't reside with the kind of visibility say that we get at Fluke where we get a pretty decent chunk of the U.S. and European distribution channel partners.

Okay. Super helpful, thank you guys.

Thanks, Scott.

Hey, guys. How's it going?

Good.

Just on the different deals, can you give us like the actual revenue numbers for ASP, ISC, and Gordian and Accruent?

So for ASP on an annualized basis, I’m going to give you the end market numbers, it’s a little over $800 million this year maybe call it $820 million. And I think that you asked about ISC, is it’s north of 200.

Yes, sorry, I was asking more about the quarter, the actual quarter. So how much in ASP contribute in a quarter and then Gordian and Accruent in the quarter?

Yes, those two are just a little over $100 million.

Okay. Are there any notable trends in the shorter cycle businesses through the quarter? Did you finish the quarter on a lower note compared to where you started? And have you observed anything in July that might alter your perspective on this?

Yes, I think when we discussed at EPG, we mentioned that North America was performing fairly well overall. However, it mainly reflected good results from Gilbarco with less contribution from Fluke and Tek. In June, we noticed a shift for both Fluke and Tek. As we consider the outlook for the second half for Fluke and Tek, we assessed inventory supply and point of sale, which contributed to the anticipated revenue decline. We believe this trend is likely to continue in the second half. Additionally, regarding Europe, I previously mentioned we expected flat growth, but we are actually seeing a decline in the low-single digits, particularly with Fluke and Tek experiencing more than a 2.5% drop. We observed a slowdown in Europe until point-of-sale improvement in June. Therefore, this is something we factored into our second half forecast. The most significant decline compared to two or three months ago relates to our outlook for Professional Instrumentation in Europe.

Okay. And then one last one third quarter operating margins, what where should that kind of range be for the segments? Because it feels like we have to hit some pretty hard to kind of get to where your guide is.

So I’d say one I don't think we have to hit them particularly hard. Are you talking about core operating margins, or you just want to…

Yes, segment margins for 3Q, however you want to talk about them?

In the 22-23 range.

Yes, okay, great. Thanks a lot.

Thanks.

Hi, good afternoon.

Hi, Andrew.

Hi, just a follow up on Steve questions, you did highlight that Fluke and Tek are driving sort of European weakness. So what exactly is happening in Fluke and Tek, any specific industry trends that are causing the slowdown? And how does it get better and why?

I'll address the second question first. The outlook for improvement is largely a macroeconomic issue. We opted to be cautious and not assume better conditions in the second half. Specifically regarding your first question, we noticed a significant decline at Tek, primarily due to channel destocking, but there was also a decrease in demand across all product lines. The automotive sector had some impact as well, particularly with our sales into R&D labs, which have slowed down. For Fluke, we experienced a drop in point-of-sale figures in June, which has influenced our expectations for the second half. The downturn appears to be broad-based, suggesting a more macroeconomic issue regarding end-user demand rather than just destocking. That's how we interpret the current situation and we'll be monitoring for any signs of improvement. As for July, we haven't observed anything yet that indicates a change from our current position, and it's still early in the month, especially in the U.S. due to the holiday week.

And there's just sort of also margin you had good pricing in PI this quarter, I think 1.3%, PI core was down 140 bps. So how does core margin and pricing trend in the second half in PI?

Hey Andrew, this is Chuck. You're correct that the pricing was favorable, but it was somewhat countered by the slowing volume. While core OMX was down 140 basis points in Q2, it has shown sequential improvement from Q1. I believe that without the slowdown, we would have seen an improvement of around 100 basis points in Q2 on OMX at PI. Looking ahead, as we begin to navigate past some of the tariffs and maintain discipline in FDS while improving margins, I anticipate we will see continued sequential improvements from Q2 to Q3 and then from Q3 to Q4. I don't expect it to be positive in Q3, but I think PI has a strong chance to improve by Q4.

And pricing is sustainable?

I think we implemented a lot of price increases last year. Therefore, the price metric may be slightly lower in the first half compared to the second half due to the pricing adjustments made last year in response to tariffs, but this will be balanced by the tariffs being included in the comparison. So, I believe the difference between the first half and the second half will likely be minimal.

Thanks a lot. Appreciate it.

Thanks, Andrew.

Thank you. Good afternoon, everyone.

Good evening, Deane.

Hey. I would assume that you all follow the same practice that was established at Danaher, which is to reevaluate after the first 100 days of an acquisition to assess how the integration is progressing. Could you share what you've learned regarding ASP, including the positives, negatives, what has gone well, and any surprises you encountered along the way? I also have a couple of follow-up questions.

Well, a couple of things. We're about 100 days, about 100 and some days, so we haven't quite finished it. But I've been pretty close to what we've seen and what we've been doing. So I think I've either been with the ASP team, either with customers or with them, pretty much every week over the last several weeks. We’ll see their 100 day here shortly. But I think at the end of the day, what we've seen is, is in some of it we really felt we saw in the quarter we really like the market position, it's very clear that the Terminal Sterilization aspects of the market are really important to the hospital, and our ability to sort of expand on that I think we see some real opportunities for FBS, particularly in sales force management, funnel management. We've put in a number of those tools here recently. I think we see a lot of supply chain opportunities which is consistent with how we saw some of the value creation. So I think strategically, the growth in China was something that we saw in the quarter. And we also think we have a good opportunity in China. That's an important part of how we'll see the future. So I think when you think about it, our U.S. position is good, our Terminal Sterilization position globally is good. And the high growth markets represent some opportunities are three important strategic priorities. But also the opportunity for FBS to add value is, I think, very consistent, probably even more than we thought. Although it's really early days, we have a lot of work, as we said in the prepared remarks, Deane, around getting through some of these transitions service agreements. So that's going to take us a little while, but we're really excited about the team there and our opportunity to work together with them to really create a really great business over time.

That's helpful. Just can you comment on those transition services that in answering Steve's question, Chuck talked about the J&J services outside the U.S. when will that end? And then maybe I missed this in the deal closing, but the receivables were not part of the acquisition, was that reflected in the purchase price was that a post-closing adjustment?

We can approach this collaboratively, as there is a significant amount of work to be done on the transition services agreement before the year ends. This will involve many smaller tasks leading up to the end of the year. We expect to see the takeover of several countries accelerating as we move into 2020. As mentioned in our prepared remarks, we anticipate completing most of these tasks by the end of the first half of 2020. There is a lot of groundwork to cover in the meantime, especially since we recently added Canada to our operations. Much of the remaining work this year will focus on laying the foundation and setting up necessary systems. It's going to be an exciting time in 2020 as we begin to see many of these developments take shape.

About the receivables?

Yes, that was contemplated in the deal. So we knew about that I think everybody there were happy with the deal we struck with them that was very fair, but that wasn’t a post-closing adjustment.

Got it. Why don’t you do it with the payables instead?

To be clear, it was receivables and then payables. So it is both of those.

Good to hear. Thank you.

Good afternoon, guys.

Hi, Andy.

As we think about the walk to go from $3.06 in 2018 to the new guide of $3.45 to $3.60, the big piece of that change from last quarter’s guide just the lowering of the $0.30 in core revenue growth contribution and maybe some FX. Was there any lowering of Gordian and Accruent under ASP and then how much did Pruftechnik add if anything into the core EPS growth?

The only reduction we've made is related to the slowdown in our short cycle, mainly in PI. The acquisitions are performing at or above our expectations, and we are not making any changes to our guidance regarding that, nor do we anticipate doing so. I believe that addresses the main point of your question.

Yes, it is and did Pruftechnik did they add anything into the EPS?

Not this year, we have five months to go and there are some deal costs associated with that, but no meaningful earnings impact for those deals.

That’s helpful. And then, Jim, you mentioned GVR in high growth markets slowed down a bit it looks like it’s just push outs as we talked about, did you guys expecting push outs and we know there is going to be some difficult comps at some points there had to be in the growth markets. Did you see any slowing in the business other than you saw the push outs which have been happening in the second half of the year?

I think it's really two countries. The situation in India is significant for us; we've won a considerable number of tenders, and now it's about navigating the contract process and getting everything installed. We have a clear understanding of the backlog and feel positive about it. I wouldn't interpret the situation in India negatively, as high growth markets for Gilbarco are still expanding year-to-date. It's more about second quarter dynamics in India that are causing some shifts. There might be a slight slowdown in China, but that's understandable given the substantial growth we saw last year with the double wall tank upgrades. We're still securing wins that will reflect in the second half. We expect growth in China for Gilbarco this year, although a tender or two got moved into the quarter, which is typical in this industry. While it is somewhat unusual for both India and China to have similar timing issues, we remain confident about the growth in high-growth markets for GVR this year.

Thanks, guys. Appreciate it.

Thanks, Andy.

Hey, guys. By the way I was thinking considering recent events, you should be congratulated again on the ANF deal. So I'm just going to throw that out there. Hey, just in terms of the quarterly growth, organic growth forecast kind of the two to four for the second half, and I think you're assuming two to four for the third quarter and implicitly two to four for fourth quarter. Third quarter has a lot easier comparisons, if I recollect right, because fourth quarter, you had the pre-buy, you had the deferral of Gilbarco Veeder-Root from third quarter to fourth quarter. Is there any sort of assumption you're making that fourth quarter is somehow going to get better or what's really sort of baked into the assumptions here?

I believe that by the fourth quarter, some of our acquisitions, especially Gordian and Accruent, will become core components, which will assist us in dealing with a more challenging comparison. In the third quarter, the comparison to last year is more favorable. However, we are anticipating a broader range of outcomes than usual. You can assess how that might shift going from the third quarter to the fourth quarter. We are closely monitoring the situation.

There are no assumptions about any natural improvements or trends in orders; it's just the way things unfold.

Yes, there’s a bit of a factor there, as I was discussing earlier. The India tenders could provide some assistance, but it really depends on how those tenders perform. However, as Chuck mentioned, we anticipate a tougher comparison in the fourth quarter. On the upside, we will fully integrate Gordian and Accruent during that period, which should balance out the tougher comparison somewhat. Overall, we do not expect any significant regional or business-related increase in core growth for the year.

And those businesses are doing well Gordian and Accruent so that's just kind of makes sense.

Yes, as we said in the prepared remarks, we're really happy with the take rate and things that are going on there. And, were so far so good.

In last quarter, I think you said point of sale trends kind of began to improve as the quarter progressed and into March, did that all of a sudden just kind of hit a wall and sort of drop and hold or what actually kind of happen from first quarter to second quarter, that might give us kind of a little thought processes as to how we kind of move through the rest of the year?

Yes, you remember correctly. In March, we noticed a positive trend in Fluke point-of-sale metrics, which gave us confidence, and this continued into early April as well. There was a slight decline in May, but it was not significant. However, in June, we experienced a more noticeable slowdown, particularly in Europe, while the U.S. also saw a slight drop. We observed changes in inventory levels, with channel partners making decisions to reduce sell-in. Typically, we expect days' supply of inventory to increase from the first to the second quarter, but this year was different. Inventory was managed more tightly, likely due to market uncertainty. As for Europe, sales declined sharply in June, and in the U.S., sell-in slowed down, resulting in increased weeks of supply. We have factored these insights into our planning for the second half of the year.

Just last detrimental margins and Fluke and Tek I think they are down in some regions globally, right that you guys have called out. What sort of detrimental are you seeing in those businesses? Again, where there is a little bit of softness today?

Well, in the short run when it goes down as a detrimental. They're pretty consistent across around the world. There's not one margin that’s really that much different than the others. But they will in the short run go down over 50%.

Yes, especially since most of it occurred in June. To elaborate, we are maintaining consistent margin structures globally in Fluke. During short-term fluctuations, we are actively working in June and currently to ensure we enhance those margins as we progress through the year.

Awesome. Thanks, guys. Appreciate it.

Thank you.

Yes. Thank you. Hey, Jim, could you just follow up on the question once around tech. I'm curious, I presume KEITHLEY softness is due to the semi-market. But you did reference Huawei’s impact there. Can you just kind of parse that out a little bit I would think there were their R&D tools at tech are probably what's a problem for the Huawei entity list? But could you just kind of parse out the growth rate? I think you said tech was down mid-single digit. And what piece was maybe KEITHLEY, and there half and half or is Huawei outweighted there over weighted.

What I want to emphasize first is that KEITHLEY indeed has greater exposure to the semiconductor market compared to Tek overall, along with more presence in electronics manufacturing and in Asia. I believe the slowdown at KEITHLEY is a broader issue that extends beyond just China and semiconductors; it’s primarily an Asia-related challenge in electronics manufacturing. Specifically, the slowdown was influenced by Huawei, mainly concerning R&D tools and particularly in the scope area. After reviewing the details, I am pleased to report, as mentioned in the prepared remarks, that our midrange scopes, especially our new scope platform, continue to perform strongly.

I believe that when you assign numbers to it, Huawei was just over $10 million, which is about 1.25%. Additionally, KEITHLEY was approximately down by double that amount.

So two thirds and three quarters of the miss is those two. And then the other rest of it is really Western Europe, kind of broadly defined.

Okay. I have a quick question about the IT margins and operational margins. I noticed that the incremental was actually 100%. Is this mainly due to GVR volume absorption driving that?

Well, I think there is certainly volume always helps and can contribute. But also, what's in there is there's always one-timers, both good and bad last year was probably a little easier compared to the ebbs and flows. Try until it get to focus on any one quarter and back it up and just say, that business when it's growing well, 50 basis points is a good OMX number, but that can do just what they did this quarter. You see something stronger, I just remember that when goes to zero, one quarter doesn't mean anything either. So…

Okay, fair enough.

The Matco segment had a strong quarter, which is encouraging for our business. Additionally, we observed some positive developments in Matco this quarter.

Okay. And then just real quick, Jim, did you say Gordian accruing their core growth, I know it's not included in yours, but their core growth was high-single digits did it hold that both?

Yes. The combined number is probably high-single digits. That's right.

And that’s tracking that this year is why we're very excited. Yeah, we're encouraged it does play out like we expected.

Perfect. Okay, thank you.

Thanks, Rick.

Hi, good afternoon and evening. Actually, following up on that question, one of the things when you got it you talked about macro uncertainty of the short-cycle businesses. We always think of CapEx projects. But as you think about some of these more software businesses, Gordian and Accruent, for example. What are the factors you're tracking, whether it's leads or coding activity to have confidence that they can sustain this kind of high-single digit growth rate, when there is kind of this industrial uncertainty out there. But that's not to say you can't spill into other parts of the economy.

Yes, so I would say we look at a couple things. And Gordian and Accruent a little bit different. And maybe we'll talk about eMaint as well. And eMaint would have a little bit more industrial exposure. But as you know with these high recurring revenue businesses, they're not going to necessarily move tomorrow kind of stuff. And so, what we're really looking is the new order bookings, the new customer bookings, to see as we said on the case of eMaint, we had very significant new customer bookings. So we're really looking at new customer bookings, because that's going to move the needle down the road. We're looking at churn to see if customers are canceling. Sometimes in an economic slowdown, you might start to see people say, well, I don't need all of this, I'll maybe use less seats or whatever, for lack of a better term. So we're looking at those metrics very closely. And quite frankly the people in those businesses are looking at them every day. So when you look at those metrics, and that's why we mentioned some of the things like iNet new bookings are really good. So, we’re really looking for these high recurring revenue businesses, we're really looking at those annual bookings numbers, and we're looking at the average contract value, what we call ACV, and we're looking at churn. And we look at those three metrics to really understand what is it really gives us a good view of how the business is going to be in a couple quarters.

Okay. And then I think the capacity number as it stands right now north of $1.4 billion, maybe just kind of talk us through the pipeline, and if there's kind of anything do you expect in the near-term?

I prefer not to comment on the near-term outlook, but we have discussed it previously. We've successfully closed several deals in the last 30 days, and we're very pleased with the outcomes. This quarter has been significant for us, especially with ASP's transformative impact on our business. Two years ago, we acquired ISC because we were enthusiastic about enhancing safety workflows, and now we've secured two additional deals. One involves a bolt-on acquisition of safer systems, which adds new modules to the iNet platform, while Intellect opens up a new market for EH&F software. This places us in a strong position with both a bolt-on and an adjacent opportunity. Additionally, Proof Technique is a classic bolt-on for Fluke that significantly enhances our capabilities in condition monitoring, particularly in vibration analysis. These types of deals are still in our pipeline, and the dealings in the second quarter and early third quarter exemplify the robustness of our sales funnel. We maintain a broad funnel with solid opportunities, especially in field solutions, which is reflected in the last three deals we've completed. Overall, we are optimistic about the breadth and strength of our sales pipeline.

All right, thank you.

Thank you.

Good afternoon, James. Hey guys. Just want to revisit ASP, we've added that one a fair bit so far, but I do want to talk about the EBITDA contribution. I think Chuck this might be to you. I'm calculating EBITDA margin on acquisitions about 24%. That's similar to last quarter, I'm guessing Gordian and Accruent stepped up on higher revenues to maybe the upper 20s, with ASP in the teens, is that sort of the right math? And my real question is, if that's the case, given that the TSA don’t really roll off until 2020, should we expect higher EBITDA from ASP through the back half of the year, or that now more of a 2020 story?

There are a couple of things I want to address. I'm not entirely sure I understood the last part about the ASP on EBITDA. However, I believe that starting out in the mid-20s is a favorable position for us, with the potential to reach the mid to upper 20s. I expect there will be some gains from TSAs in the latter half of the year. We have closed Canada, but the initial performance will be slow as they gain momentum. In the fourth quarter, we can anticipate a slight impact, followed by an increase as we close more of those in the first and second quarters of next year. This relates to the day-two country TSAs. Additionally, there will be an IT system that we will implement, which is not a gradual process but a more direct transition happening sometime in the first half of next year.

And this is all to do with making sure that you're crossing the checking the boxes on the regulatory side to more than anything else, is that correct?

We are developing a business from ASP. In this effort, we are not only recreating the RA QA systems but also several other systems within the company, such as the financial system and ERP. While we already have some of these systems in other locations, we are building them anew in others. This work is essential but requires significant effort to complete.

Yes. And then just a quick follow on, Jim, you mentioned that trend got kind of progressing well through the quarter, I’m not sure if you address whether it seem elements of stabilization in Q3. And maybe just characterize what you seen in China right now and how is the behavior from your customers in China?

I think when we look at the changes we observed, specifically in PI, we noticed a slight slowdown in the U.S. It's likely too early to determine if the first couple of weeks of July indicate a significant difference. In Europe, we continue to see consistent trends similar to what we observed in June, and I expect a similar situation in China. Currently, there’s nothing indicating that conditions are improving or worsening. However, I want to add that the early weeks of July are not usually the best indicators of overall trends. As we progress further into the month, we should gain a clearer understanding.

Thanks guys. Appreciate it.

Thanks, Nigel.

Hey, guys. Thanks for taking my question. One thing I am trying to figure out is kind of reconcile commentary for the Tektronix scope type business across some of your competitors. And I’m not sure if it’s end market variance or geographic, but it seems to be consistent kind of different commentaries at different times for the three major players within that oscilloscope business. And curious to see your take on that and anything you’d highlight as to what might be causing different trends at different times for you guys?

I would say end market exposure generally is some folks have more 5G exposures, as an example and they maybe more tied to the 5G market, but I think we were pretty consistent with our business over the last two or three years at least in our case, we’ve been growing. So it’s been on the backs of the investments we made on the new platform and we just launched the three and four series. And so that's now I think two years of launches that we had this was our third launch we did the five series two years ago around this time, we did the six series about a year ago. Now the three and four. And those product lines are all growing and are continuing to deliver growth. So end market exposure will maybe push those numbers up a little bit more, certain customers that kind of things. So I don't dive into the details of what others say in this case, I can only tell you with great confidence what's happening in our business.

Fair enough. There is also some news recently your main competitor on the GVR side, making a deal with ADD and EV charging and I know you guys have made some ventures into EV as well, just curious as to an update on how those two markets will meld over time and what the outlook is there for further investment into that avenue?

Yes, I think we're really happy with the Tritium investment that we made. I was actually out in Europe a couple of months ago with our sales team making calls on customers in Europe. We announced in May our relationship with Identity where I had met with them, which is I think a great relationship and a great partnership for fast charging. We just got a very large order in the UK to be the largest supplier of chargers in the UK to Box Energy over the next several years. We’ve announced 2,500 charging locations over the next several years. So we’re really happy with the relationship and exposure we’re certainly learning the market from them, they’re a great team, we’re also exposing them to new customer base and at the same time, our investment is helping fund some of the operational improvements that are going to be helpful to building the business long-term. So, we feel very good about position. I think we all know EV is probably aren’t going to happen as fast as maybe we thought a few years ago, but I think the position we’re in and the place were in right now, we’re certainly seeing accelerated growth and accelerated position through the partnership with Tritium.

And then, Chuck, just real quick on the lower tax rate guide is there anything structural there or anything specific cause that and how should we think about that going forward into 2020?

No, I think we were slightly off. I believe for the year at 16% for 2019, and for 2020, 16% is probably a good number to use. What's occurred in the first half involves some specific items that are unique to Q1 and Q2, leading to a slightly lower figure. However, for the duration of 2020, the rate is expected to be 16%.

Okay, thanks guys.

Thanks, Jo.

Thank you, Jason. I appreciate everyone taking the time today and your support in understanding our story. As we mentioned in May, we are extremely proud of the changes we're making to our portfolio, and we've seen significant transformation in the last quarter. We're excited about the new initiatives we've undertaken concerning capital allocation with several companies joining the Fortive family. We recognize that the macroeconomic environment in the second quarter was more challenging, with increased uncertainty and some slowdown as we previously discussed. Therefore, we have been cautious and believe we are well-positioned for the second half, focusing on long-term management while also ensuring strong EPS growth and free cash flow. We feel confident about our current standing, and while we won't speculate on the economic outlook for the next few quarters, we believe we're well-prepared for whatever comes our way. We will continue these discussions, and our team, including Griffin and Chuck, are available for questions after the call. Thank you, and enjoy the rest of the summer. Thank you, Jason.