Fortive Corp (FTV) — Q3 2019 Earnings Call Transcript

Thank you, Philip. 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. We completed the divestiture of the automation and 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 $0.87 for the third quarter of 2019, reflecting an 18% increase year-over-year despite a slowdown in short-cycle business that worsened throughout the quarter. Although these challenges affected growth in some areas of our Professional Instrumentation segment, the significant rise in earnings and robust cash flow indicated both the impact of our recent acquisitions and the effectiveness of the Fortive Business System in enhancing our portfolio's resilience. As we deal with the short-term slowing, we will continue to invest in our businesses to promote organic innovation, support further compounding, and implement our capital allocation strategy to reinforce our long-term competitive edge across the portfolio. Over the past three years, we have completed significant deal activities, and our capital allocation strategy is being effectively executed. We have owned Advanced Sterilization Products for just over two quarters and are pleased with its performance so far, as well as the progress in its integration. In the coming weeks, we will finalize our operations in China, which will mark an important advancement as we bring the remaining ASP geographies under our management. As we transition from service agreements and incorporate essential elements of the Fortive Business System in the upcoming quarters, we will be setting the stage for enhanced innovation and growth in the future. We are making headway with the planned separation of NewCo, which we announced on September 4. Using the Fortive Business System, we have made significant progress in our preparations, staying on track to complete the transaction in the latter part of 2020. We look forward to sharing more details about the transaction and updates on further milestones for NewCo in the weeks and months ahead. Now, let’s dive into the quarter's specifics. Adjusted net earnings stood at $311 million, a 13% increase from the previous year, with adjusted diluted net earnings per share at $0.87. Sales grew by 16.2% to reach $1.9 billion, which includes a 2.1% rise in core revenue and contributions from recent acquisitions. Core revenue growth was driven by strong performances at Gilbarco Veeder-Root and PacSci EMC, partially offset by downturns in short-cycle businesses within Professional Instrumentation, such as Fluke, Tektronix, and certain segments of Sensing Technologies. Adverse foreign currency exchange rates reduced growth by 120 basis points. Regionally, core revenue growth in developed markets was in the low single digits, reflecting the sluggish macro conditions in both North America and Western Europe. North American core revenue increased in the low single digits, led by GVR, EMC, and Industrial Scientific, while Western Europe showed slight growth. Core revenue in high-growth markets dropped in low single digits, attributed to losses of Huawei-related revenue at Tektronix and poor market conditions in the Middle East. China experienced minor growth, with strong performances by Fluke and Qualitrol being largely countered by Tektronix's decline due to the Huawei effect, alongside flat performance at GVR. In India, growth was stagnant as increases at Fluke and Qualitrol were canceled out by delays in launching major projects at GVR, now expected to commence in the fourth quarter. The adjusted operating profit margin was 21.3%, a year-over-year decline of 80 basis points, which includes 55 basis points of dilutive operating margin associated with acquisitions. Core operating margins fell by 25 basis points, as ongoing slowdowns in Professional Instrumentation outweighed strengths at GVR and another solid quarter of operating margin growth in Matco. During the third quarter, we generated $348 million of free cash flow, marking a sequential increase of $111 million from the second quarter, representing a conversion ratio of 168%. Regarding our segments, Professional Instrumentation achieved sales growth of 24.8% despite a slight decrease in core revenue. The robust contribution from recent acquisitions, notably ASP, was key to driving overall growth within this segment. Negative foreign currency rates decreased growth by 110 basis points. The segment's adjusted operating margin stood at 22.2%, reflecting a year-over-year decrease of 300 basis points, which included 120 basis points of dilutive operating margin due to acquisitions. Core operating margins decreased by 180 basis points, resulting from a combination of sluggish revenue performance, tariff impacts, and unfavourable foreign currency exchange. Advanced Instrumentation & Solutions experienced a slight drop in core revenue, as gains at EMC were more than offset by ongoing declines in Fluke and Tektronix. Field solutions’ core revenue also fell slightly, including a low single-digit drop in developed markets, primarily due to slowing at Fluke in North America. High-growth markets increased in low single digits, led by Fluke and robust performance from Qualitrol in China. Fluke's core revenue dipped in the mid-single digits due to a significant decline at Fluke Industrial. Fluke Digital Systems saw growth exceeding 20%, bolstered by strong results at eMaint, which achieved a 10% rise in new customer acquisitions and over 20% growth in annual recurring revenue. Geographically, the slowdown noted at the end of the second quarter became more pronounced in North America during the third quarter, which saw a high single-digit revenue decrease alongside sagging point-of-sale trends. Fluke attained mid-single-digit growth in China, driven by strong performances across Fluke Industrial, process instruments, and food networks. Fluke Health secured a significant order for RadWatch, a product created in partnership with the U.S. Army for radiation monitoring. The PRÜFTECHNIK acquisition was completed at the start of the quarter and has begun positively. We are enthusiastic about how integrating PRÜFTECHNIK will enhance Fluke's offerings and capabilities in asset reliability and condition monitoring. ISC experienced low single-digit core growth, as declines in Western Europe and China were partially compensated for by stronger performance in North America. ISC’s lower core growth this quarter was due to a dip in instrument sales, which are generally more sensitive to macroeconomic slowdowns. ISC's iNET offering performed strongly again, achieving mid-teens growth as ISC expands its share of subscription-based recurring revenue. ISC also recently launched the WiFi-enabled Ventis Pro5 Multi-Gas Monitor, marking ISC's first direct-to-cloud product and a significant advancement in its connected worker safety initiative. The integrations of Intelex and SAFER Systems are progressing well, positioning ISC to move forward with its safety-as-a-service strategy aimed at delivering real-time solutions for environmental, health, and safety-related workflows. Qualitrol's core revenue dropped slightly as challenges in North America, Western Europe, and the Middle East were somewhat offset by over 20% growth in China and more than 30% growth in Latin America. Qualitrol experienced mid-teens growth in their basic sensors product line due to market share gains and has begun to see early signs of a more positive bookings trend as we approach the fourth quarter. Our facilities and asset management sectors, Gordian and Accruent, both maintained core performance during the third quarter, having a relatively minor effect on Professional Instrumentation's core performance due to the short period of ownership. These sectors continued to perform strongly, achieving high single-digit core growth. Gordian's procurement platform, specifically, continues to see significant growth, supported by increased construction volume with large enterprise clients, including the New York City Department of Education. Gordian also recently finalized its largest facility planning project to date with CommonSpirit Health to conduct a facility condition assessment throughout its entire network. Accruent reported slower growth this quarter, attributed to declining licensing revenue as it transitions clients from older products to its higher-growth SaaS solutions. However, the company consistently generates strong SaaS bookings, with its sales team increasingly guiding enterprise clients toward long-term subscription contracts with greater total value. In the third quarter, Accruent added over 70 new customers and significantly expanded its existing contract with Cushman & Wakefield to cover more offerings in Accruent's software suite. Product realization core revenue dropped slightly, as strong performance at both EMC and Invetech was offset by ongoing challenges at Tektronix. EMC recorded another quarter of broad double-digit sales growth across both its core defense product lines and commercial satellite offering. EMC maintains a solid backlog with recent large customer acquisitions and growing momentum among commercial satellite operators, giving the company excellent revenue visibility for next year. Tektronix experienced a high single-digit decrease in core revenue as it continues to face challenges from slowing activity at Keithley, widespread weakness in Western Europe, and the loss of its Huawei business due to U.S. government restrictions imposed earlier this year. While Tektronix achieved strong growth from its high-performance oscilloscopes supported by the 5G expansion in China, it experienced further slowdowns in North America, highlighted by a low double-digit decline in core mid-range scopes. Ongoing negative point-of-sale trends remain a challenge heading into the fourth quarter. Despite these macro obstacles, which we anticipate will continue into next year, Tektronix is committed to focusing on business execution, achieving gains in its strategic growth areas, including significant wins in data center and automotive sectors during the quarter. Core revenue for Sensing Technologies decreased in low single digits as growth in North America and China was outweighed by declines in Western Europe. Anderson-Negele had a strong quarter leveraging Fortive Business System tools to gain share in adjacent segments of the food and beverage market. Setra recently launched its Setra Lite product line, which delivers a straightforward, cost-effective solution for pressure monitoring needs in hospital settings, and it has been well-received. In terms of Advanced Sterilization Products, the company achieved low single-digit growth, aligning with our expectations as we continue to finalize the transition service agreements. ASP's growth was largely driven by impressive performances in China and Japan, maintaining momentum in terminal sterilization and experiencing substantial growth in high-level disinfection, attributed to the new automatic endoscope reprocessor product line launched for the Japanese market. ASP also secured key victories in North America, enhancing its presence and portfolio in strategic integrated delivery networks in both Texas and Illinois. The ASP team has begun implementing the Fortive Business System to streamline its innovation initiatives and expedite the rollout of new products set to launch in 2020. In line with our strategy to strengthen connected workflows, we have signed an agreement to acquire Sensus, a leading provider of instrument tracking software, which will enhance our sterilization offerings. Sensus equips central sterilization departments with essential error prevention tools and analytics aimed at improving efficiency and productivity in sterilization processes, optimizing compliance reporting, and minimizing the risk of hospital-acquired infections. We expect to finalize the acquisition by the end of the year. Moving to Industrial Technologies, revenue grew by 5.2%, including core revenue growth of 6.5%. Acquisitions provided 10 basis points of growth, while unfavorable foreign exchange rates affected growth negatively by 140 basis points. The segment's adjusted operating margin was 23%, reflecting a rise of 190 basis points in core operating margin, fueled by strong volume at GVR and solid performance at Matco. Our Transportation Technologies platform's core revenue saw high single-digit growth, led by mid-teens growth in North America. GVR achieved low double-digit core revenue growth, supported by mid-teens increases in developed markets. GVR's performance in North America was strengthened by sustained momentum from EMV-related sales, while growth in Western Europe was a result of ongoing share gains and notable service rollouts with Costco during the quarter. GVR's growth remained flat in high-growth markets, as strong outcomes in Latin America were countered by delays in automation project rollouts in India and a large dispenser tender whose delivery has moved into the fourth quarter. Nonetheless, GVR is continuing to solidify its strong position in high-growth markets, particularly in India, where robust order momentum and a healthy backlog indicate sustained growth moving forward. GVR recently unveiled the Passport Express Lane, a self-checkout system optimized for convenience stores, adding to its suite of solutions. Additionally, GVR launched a new product family for Insite360, known as HALO, significantly enhancing the system's fuel logistics capabilities. During the third quarter, we made a follow-on investment in Tritium to support the company’s rapid expansion. GVR also integrated a credit card reader into Tritium’s high-speed EV charging stations to enhance payment functionality by including credit card, debit card, and contactless payment options. TeletracNavman met expectations with a low-teens core revenue decline in the third quarter, as continued strong growth in Asia Pacific was offset by performance issues in North America and Western Europe. The TeletracNavman team’s primary focus remains stabilizing its business in North America to address customer churn experienced over the past year and to return to a sustainable growth path. We are seeing improvements in customer-related metrics, notably in customer churn rates. For Franchise Distribution, core revenue grew in low single digits during the third quarter, driven by low single-digit growth at Matco, which was partially offset by a low single-digit decline at Hennessy. Matco benefitted from another strong quarter in hardline tools, although there was some softening in tool storage. Matco continues to gain traction with new product launches, including a recent introduction of a new half-inch air impact wrench that combines power and control with a lightweight design, making it much easier for technicians to handle. Before we present the guidance, as we look toward 2020, we are aware of the tough macroeconomic conditions and plan to increase our investment in various strategic productivity initiatives by approximately $45 million in the fourth quarter. This approach will help us deliver sustained earnings growth while continuing investments in innovation and future growth. We are updating our full-year 2019 adjusted diluted net EPS guidance to $3.42 to $3.47, which signifies a 12% to 13% year-over-year growth on a continuing operations basis. The revised annual guidance accounts for the challenges faced by our Professional Instrumentation segment due to the pronounced short-cycle slowdown noted in the third quarter, which we anticipate will continue at year-end. This guidance assumes core revenue growth of 1% to 2% and an effective tax rate of around 15%. We are also initiating our fourth-quarter adjusted diluted net EPS guidance of $0.96 to $1.01, which indicates year-over-year growth of 5% to 11%. This includes expectations of flat core revenue growth, static core operating margins, and an effective tax rate of about 15%. To conclude, during the third quarter, we achieved high-teens earnings growth alongside robust free cash flow, even amid a challenging macroeconomic backdrop. This quarter highlighted the substantial earnings contributions from the acquisitions completed in recent years, enhancing the resilience of our portfolio as they continue to grow and represent a greater share of our overall revenue. Despite the ongoing short-cycle slowdowns and anticipated headwinds extending into next year, we remain committed to executing our capital allocation strategy, driving further transformation within our portfolio, building a better, stronger Fortive, and creating greater long-term value for our employees, customers, and shareholders. Now, I will turn it over to Griffin.

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

So can you just help us a little bit with parsing out the acquisition? How much of an impact on margin and then maybe easier, just like what was the negative earnings impact from stuff that ran through from the deal that you closed in the third quarter, if there was any?

In the third quarter, the deal expenses, on our adjusted earnings side, there's nothing in there that ran through there. And there really wasn't any headwinds related to the acquisitions. And the headwinds we faced were largely about the slowing of the top line as we progressed through the quarter.

Okay. And then when it comes to the deal that you were planning to contribute this year like Gordian and Accruent, I think ASP is kind of a bit of a standout. That seems to be on track. Just remind us what you said they were going to contribute at the beginning of the year. And is that still the case here that they're going to contribute the same amount? Or is the Accruent comment that you made, I think it was Accruent you made a comment around, is that slowing having an impact on what those were ultimately going to contribute?

So I think that the average selling price continues to be on track at $0.20. What we indicated at the beginning of the year was between $0.24 to $0.28 for the year. I believe we are still on target to reach that. It's important to note that about one-third of the operating profit from those contributions is expected in the fourth quarter. Therefore, I think we are still within that range.

Maybe we could start with the market conditions. And I know you picked your words carefully in the prepared remarks, but you said the short-cycle slowing intensified. And then if I heard you correctly, did you say that you expect some of the slowness to persist into next year? So take us through the cadence of the quarter and then what this means in terms of outlook for 2020. I know you're not giving specific guidance, but just in terms of how long this persists.

Yes. Thanks, Deane. It's Jim here. Let me clarify a couple of things. First, let's revisit our situation from July. We observed what we believed to be an inventory correction at our point-of-sale in locations like Fluke and Pac, where we have the best visibility. The point-of-sale was performing relatively well in June, but our sales to those channel partners were generally slower, which we regarded primarily as destocking. As we moved through the quarter, we noticed an increasing decline in point-of-sale performance. This has led us to the conclusion that we expect this trend to continue. Our guidance for the year reflects the observed decline in point-of-sale. We've also started to see similar issues in our direct business, not just in the channels. It's worth noting that smaller channel partners often tend to experience more significant downturns than larger ones, so we typically anticipate a more prolonged slowdown rather than just a quarter or two. Regarding our outlook for next year, we've taken a comprehensive view of our situation, and the productivity initiatives we announced amounting to $45 million will likely continue to play a role next year. I don't have a precise forecast for the entire year, nor would I want to make any predictions. However, it's reasonable to assume that when we transition into the new year, conditions are unlikely to change significantly; it's probably most accurate to say that we expect these trends to persist at least into the first quarter and likely into the second quarter as well. That's where our thinking stands at this time.

Great. I appreciate that color in terms of the expectations. And could you flesh out a bit on this restructuring initiative? This is right out of the Danaher playbook. Year-end restructuring, set yourself up for a stronger, leaner, coming year. The $45 million, what, in terms of cash, might that be? How much is headcount? Is there rooftops? And just some color there would be helpful.

Hey Deane, this is Chuck. I believe the returns we anticipate on that $45 million investment would come in under a year. There are several areas where we've observed a slowdown in the quarter, particularly regarding initiatives across the businesses. Our primary focus is on the PI. Additionally, as we are just beginning to implement these changes at the operating companies, I think we should save the specifics for another time.

Maybe just a question around the sort of the Q3 performance and the Q4 guidance. So in the third quarter, you had 2% core growth and a slight decline in core margins. Q4, you're guiding for flat core sales and a flat core margin. So I just wondered, with that slowdown in the top line that you've talked about, why don't we see that core margin pressure increase in Q4? Is it something to do with mix within the two segments or something around the tariff timing impact a year ago? Maybe just help us understand that margin dynamic. And maybe to put a point on it, the adjusted margin in Q3 was 21.3%. Just to clarify, if you can, what's the number for Q4?

Sure. First, I'll take the adjusted margin percentage in Q4 raises to 22.1% for the full company. I think the main thing, mix plays certainly a part of it and can give you some variations on the flat OMX. But I think when you look back to last year, in Q4, we had some one-time things that aren't repeating, and so that gets us to a little bit better than what we saw in Q3. But if you look back over Q2 to Q3, it's been flat.

Julian, I believe this reflects what you observed in the third quarter regarding the slowdown throughout that period. We are much better prepared for that slowdown as we approach the fourth quarter. Additionally, you can see that we are taking action and those actions are having a significant impact this quarter. We also benefit from somewhat easier comparisons regarding tariffs, as you correctly mentioned, but we are also able to address the situation. The free cash flow was very strong in the third quarter, enabling us to be well-prepared on the working capital side. I think we are also better equipped on the profit and loss side in the fourth quarter compared to the third quarter.

Understood. And then maybe just my follow-up around capital deployment. You've announced the split will happen 9 to 12 months from now. You've also got some restructuring underway today because of the slowing top line. Given those two aspects, do you think it's plausible that you would have much M&A activity in the coming two or three quarters? Or the view is you have a lot on your plate and so maybe M&A takes a backseat for a while.

We certainly agree that we are focused on several important initiatives. As mentioned in our prepared remarks, both the ASP integration and the separation into NewCo are progressing well, which requires time, resources, and energy. These priorities are top of mind for Chuck, myself, and the entire management team, and we address them daily. In the past 90 days, we have completed four deals: closing ASP, SAFER, Intelex, and PRÜFTECHNIK, with the Sensus deal announced today. We have been quite active and are dedicated to integrating these acquisitions. Sensus is a prime example, as it aligns closely with our Sterilization offerings, similar to how Intelex relates to ISC and ASP. We intend to focus on transactions that fit strategically and are in our wheelhouse. While we are not ignoring M&A, it's important to note that our recent activities in this area have been significant.

So you did highlight North American slowdown in PI. And I was just wondering what specific end markets would you attribute the slowdown to.

Yes, in terms of location, we noted a slowdown in North America, particularly within our Fluke Industrial and Fluke Networks businesses. This downturn was fairly widespread, although industrial customers exhibited more reluctance. While our exposure to the automotive sector is limited, we have seen manufacturing figures reflect some slowdowns in specific areas. Electronics have also been a contributing factor, as we observed slower markets related to assembling or designing electronics. This is influenced by channel dynamics. However, we have performed well where we introduced innovation, such as with the II900 Sonic Imager that we launched last quarter at Fluke, and our thermal imaging product line also did well. Identifying opportunities in these areas is essential for us, and we intend to apply dynamic resource allocation to target these markets. In sectors like our software conversions to SaaS, we continue to see positive performance, with eMaint growing over 20% for several consecutive quarters. In these cases, the performance in the end market is less of a concern, as we are still experiencing success.

I have a follow-up question regarding Tektronix. There have been some reports indicating stabilization in the semiconductor markets specifically. Has your perspective on this changed as we look toward the fourth quarter of next year? Are you observing any signs of stabilization? Does the current market situation impact Tektronix?

I think it's still a little early for us to declare stabilization. On the capital front, smaller transactions might continue, but for larger projects like our Keithley business, we haven't observed a significant increase or even a plateau yet. So, I believe we still have at least a quarter to go. While I have heard some of the same sentiments, we are certainly not planning for any changes for the remainder of the year.

Jim or Chuck, you said you had 150 basis points of price this quarter, which seems like a good deal on price. But could you talk about the trade-off between price versus cost across the company? I know you lapped tariff in Q3, but did you have positive prices for cost in Fluke and Tektronix in particular? And if you didn't, how quickly could the thing catch up with cost in those segments? And what should it look like for the company moving forward?

Yes, I think both at Fluke and at Tek in the quarter, we beat the corporate average from a price standpoint. I think we're still a little behind on the price-cost dynamic at both those places. We've got some cost reductions that have offset some of those. But from just a pure price tariff, Andy, we're still lagging a little bit relative to that. And I think as we go into the year, that obviously tapers a little bit because we've sort of started to sunset some of the tariffs in the fourth quarter. Because even though the tariffs were announced last year in the third, they really hit in the fourth and in the first. So we'll start to see a little bit of that. That could be a better. But unfortunately, the volume reductions sort of wipe out a lot of that as well. So on the one hand, we've got the right price-cost, but that's sort of a static metric. It doesn't really have a volume dynamic to it. If you were to kind of look at it on a volume basis, we probably lost a little bit more on the gross margin front from just the volume reduction.

Jim, that information is helpful. Please continue.

No, I was going to say, and so if volume comes back, then we'd start to see things maybe ramp a little bit better. But right now, we're not anticipating any big volume comeback here in at least the rest of the year.

Got it. That's helpful. And then Western Europe, I think you said grew slightly, which was better than last quarter's low single-digit decline. You were watching Western Europe then carefully. So some of your peers have mentioned maybe even some stabilization in Europe as the quarter went on. Is this just GVR doing well in Europe for you guys, and we should still kind of watch the PI businesses there, the short-cycle businesses there? Or did you see any stabilization?

Yes, Andy. I think we did see some stabilization across the businesses. It's beyond just EVR. But I think that we remain watchful of everything that's going on in Europe, and this was a slightly bigger quarter than maybe we saw it coming in. But we're still watching it pretty carefully.

Could you just remind us, Jim, on Gordian and Accruent, just because these are kind of going organic more recently? I guess specifically for Gordian on some of these larger projects, is that revenue cycle tied more toward when these projects kick off or when they ramp up? And I guess where the question's going is if some of that underlying activity slows a little bit more, is there still kind of an extensive backlog where projects wrap up and they still get paid? Or is that more of kind of the leading edge of the project cycle?

Yes, there is definitely a component related to how the cost structure is managed through the job order contracting mechanism. You're correct that initially, the performance might not be as strong as it will become over time; the first third may not see as much improvement, but there is a gradual increase as more costs are processed. It’s likely that the results will be better at the end of the cycle than at the beginning. An interesting aspect of our business is that we don’t primarily participate in large construction projects; instead, we focus on repairs, renovations, and maintenance work. In fact, during slower periods, there tends to be an increase in repair activity, which is beneficial for us. This underpenetration in the market presents us with significant opportunities moving forward, regardless of how the economic cycle trends.

Understood. And then, I guess, just a second question on GVR, obviously heading into a tougher comp here into the fourth quarter. EMV though is kind of reaching its time to shine in that whole adoption cycle. Can you help us kind of calibrate what the push and pull of those two dynamics are, the tough comp versus closer to the transition period?

Yes, we had a strong third quarter as mentioned. In North America, we are anticipating a more challenging comparison in the fourth quarter, so growth may align more with high single digits. Regarding India, we noted earlier that several projects have been deferred to the fourth quarter. Therefore, we expect better performance from our high-growth markets in that timeframe, while our North America figures may vary due to the tougher comparison, although overall demand remains positive.

Maybe just following up on that last question. Could you actually help us with the organics you're expecting in Q4? Obviously, you gave us the total company. But there is that comp and the India dynamic. I mean maybe asked differently, I mean, can IT actually grow in Q4 '19?

Yes, IT will grow and probably in the mid single-digit ranges if we were to sort of think about that. And I think what we'll see in PI is probably still down a little bit. So pretty close, maybe because of the tougher comp, a little bit lower than what we've seen in the third quarter.

Great. Referring back to the prepared remarks, for Accruent, you mentioned that you gained 70 new customers in the quarter. Could you provide some context around that number and how to interpret it? Additionally, building on Josh's question, when the market slows, there's a potential story regarding penetration rates for both Accruent and Gordian. How do you view the penetration rates of those solutions in the market and what does signing up 70 customers mean for understanding that business?

Yes, that makes sense. John, I would like to discuss the Gordian situation first. I believe the market is quite underpenetrated. This is not a SaaS business; it's more about a new business model related to job order contracting. There is significant growth potential, and we need to invest in that growth by hiring additional salespeople and enhancing our capabilities. We have made extra investments in the business this year to facilitate this. We are observing growth in the business and receiving positive returns on those investments. Accruent currently has a larger installed base and is transitioning from a license revenue model to SaaS. Although SaaS constitutes a significant part of current sales, they are still in the process of conversion. One of the challenges we faced this quarter with Accruent, which we do not see in some of our other software businesses, is this transition to SaaS. The addition of 70 new customers is encouraging as it indicates that we are successfully bringing in new clients. Furthermore, the increase in average contract value, or ACV, reflects our progress in converting customers to SaaS, with these conversions resulting in longer-term contracts. Both of these factors are positive indicators for the long-term growth of the business. However, converting to SaaS within a specific quarter, especially when there are just a few months left in the year, may not yield immediate benefits compared to securing a large license contract. Nonetheless, it is far more advantageous over time, particularly from a margin perspective. Overall, we are seeing good progress, and a figure of 70 new customers is satisfactory. If we consistently add over 50 new customers each quarter, we are pleased with that performance. As the customer base expands, we will need to adjust expectations, but I anticipate that the team will raise those expectations even before we do.

I have a question regarding the PI businesses, specifically the short-cycle, short-turn businesses. If I had to estimate, what is the revenue in that space? Is it around $2 billion between Tek and Fluke Industrial? There seem to be different definitions at play. I'm also interested in your insights on how the POS has slowed during the quarter. Do you have a clear understanding of the channel for those two businesses?

I believe there are two questions here. If we consider Fluke and exclude Fluke Health, Fluke Networks, Fluke Industrial, and Fluke Calibration, combining what remains with Tektronix gives us a revenue of just over $2 billion. This is a solid figure, around $2 to $2.1 billion seems reasonable. In terms of visibility, we obtain point-of-sale data from the U.S., Europe, and China for both businesses, and we have better detail in North America. As you move further from the U.S., the numbers represent a smaller portion of total sales and are a bit less accurate. However, North America data is quite good. Fluke provides the best insights because we have a comprehensive view across various industries, often referred to as the "canary in the coal mine." This allows for decent visibility. In June, we noted that the point-of-sale data appeared reasonably strong. However, in the third quarter, we began to observe increasing destocking activities starting in June. While we still saw some destocking in the third quarter, there was also a notable decline in actual demand.

Whenever we discuss a new product launch with ASP, it will include the necessary FDA approvals. When we refer to 2020, we mean the actual launch of products. Whether it's the FDA or another relevant organization globally, we always include the necessary approvals in our discussions about product launches. Therefore, when we provide a launch date, it implies that we have those approvals in place. This is our priority. We have also managed to accelerate some initiatives, beginning work prior to launches to educate on our tools for new product development. Additionally, they have been advancing their own innovations. We believe we are expediting some of these processes, and we expect to see the results next year.

I would like to better understand the pathway to PI margin stability, I guess. Chuck, I think you called out FX and tariffs as two headwinds. And of course, we've got some pretty big decremental margins at Tektronix and Fluke. The tax, you mentioned that they're kind of lapping 4Q. So are these largely List 2 tariffs, List 3, as that's important? It seems like FX is starting to stabilize, right? So perhaps, there's some good news there. I'm just curious, how do we sort of bend the curve on margins at PI in the absence of any good news on volumes? And maybe kind of like what I'm trying to get at here is, is most of the restructuring you're doing centered around PI?

Yes, there are a couple of quick points to consider. The tariffs increased throughout last year as they were implemented. Although we are now comparing to the initial tariffs, the comparison becomes clearer at the start of the year, which should provide some stabilization. While there is still a bit of foreign exchange headwind this year, we hope it will stabilize. Additionally, some of the restructuring we just announced is mainly focused on Professional Instrumentation, not solely due to slowing in various areas, but I believe it will be beneficial. It’s important to remember that average selling price is also a factor in Professional Instrumentation, and that should provide some uplift as well.

I believe that once we are completely off the TSAs, it will reflect in our quarterly results. I wouldn't describe it as a problem since it's developing according to our expectations. Instead, I see it as an opportunity that we plan to pursue, so I feel optimistic about it.

I think you both said Tektronix and Fluke Industrial were down high single digits, and obviously, the shift has been much more at the point-of-sale. I'm not sure if you know or can kind of granularly or more granularly comment on the degree of destock, like is destock getting better. And do you guys think that Tek and Fluke have hit sort of low watermarks in terms of their core growth degradation? Or based on sort of the cadence of end markets, it seems like this is just kind of beginning to hit in North America. Are things potentially going to get worse here in the short run?

In North America, Fluke Industrial experienced high single-digit growth in the quarter. There are many scenarios that could arise from the current economic situation. However, based on the progress we observed throughout the quarter, we believe that this growth will continue for a while, which is why we initiated our productivity measures. We do not anticipate a return to previous levels, and currently, the sales coming in are matching the sales going out. Although we will eventually see some inventory increase, we are not planning for any immediate rise, and I wouldn't expect that until well into next year. We are being cautious in our current approach. While it's possible for conditions to worsen, everything we're currently observing suggests that the growth will carry on into next year, which seems to align with what we’re hearing from other companies in the industry. We're using that information to inform our decisions as well.