Fortive Corporation (FTV) Q2 2017 Earnings Report, Transcript and Summary

My name is Hope, and I will be your conference facilitator this afternoon. At this time I would like to welcome everyone to the Fortive Corporation Second Quarter 2017 Earnings Results Conference Call. [Operator Instructions] I would now like to turn the call over to Ms. Lisa Curran, Vice President of Investor Relations. Ms. Curran, you may begin your conference.

Thank you, Hope. Good afternoon, everyone, and thank you for joining us on the call. With us today are Jim Lico, our President and Chief Executive Officer; and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. We present certain non-GAAP financial measures on today's call. Information required by SEC Regulation G relating to these non-GAAP financial measures are available on the Investors section of our website, www.fortive.com, under the heading Financial Information. A replay of the webcast will be archived on the Investors section of our website later today under the heading Events and 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 Thursday, August 27, 2017. Instructions for accessing this replay are included in our second quarter 2017 earnings press release. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. All references to period-to-period increases or decreases in financial metrics are year-over-year. During the call, we will make forward-looking statements within the meaning of the federal securities law, including statements regarding events or developments that we believe 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 December -- year ended, rather, December 31, 2016. 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, Lisa, and good afternoon, everyone. We are pleased with our performance as we mark Fortive's first anniversary. One year ago, we launched Fortive with a greater strategic focus. Key to that was accelerating growth investments to strengthen our market leading positions and capital deployment for acquisitions. The Fortive Business System was highlighted as the cornerstone of our competitive advantage. FBS is our playbook for accelerated innovation and a superior customer satisfaction to drive improved core sales growth, operating margin expansion and strong free cash flow. We have consistently made meaningful progress towards all of our strategic and operational goals since the separation. I'm happy to announce that we have signed a definitive agreement to acquire Industrial Scientific Corporation, a leading provider of portable gas detection instrumentation and a safety-as-a-service pioneer in an all-cash transaction for a purchase price of approximately $600 million. The addition of Industrial Scientific accelerates our digital strategy and creates a stronger platform for connected solutions for critical applications in maintenance and safety. The business is a natural extension of our current field solutions portfolio and have highly complementary customer base. Consistent with both Fluke and Qualitrol growth strategies, Industrial Scientific generates recurring revenue from a subscription-based model, which combines hardware, monitoring software and consumables into a safety-as-a-service offering. We are assuming a second half close without a meaningful impact to 2017 results, but we do anticipate 2018 earnings accretion. Now I'd like to turn to the details of the quarter. Our adjusted net earnings of $249.9 million were up 13% over the prior year. Adjusted diluted net earnings per share were $0.71 with an effective tax rate of 26.3% for the quarter. Sales grew 4.7% to $1.6 billion, a core revenue increase of 5.4%. 5 out of 6 strategic platforms grew core sales mid-single digits or better, reflecting strong volume, market share gains and continued performance in high-growth markets. The favorable impact from acquisitions accelerated to 40 basis points of growth during the second quarter, partially offset by 110 basis points of unfavorable currency translation due to the strength of the U.S. dollar. Geographically, high-growth markets core revenue grew double digits with continued strength across Asia. High-teens growth in China was driven by increased demand for Tektronix, Qualitrol, Thomson and Kollmorgen. Excluding China, high-growth markets core revenue grew low double digits. Developed markets core revenue grew low single digits, reflecting continued strength in Western Europe and incrementally better industrial markets in North America. North American growth of low single digits reflected strong performance at Gilbarco Veeder-Root, Fluke and Kollmorgen, which were somewhat offset by Jacobs Vehicle Systems. We continue to outperform in Western Europe posting high single-digit growth as continued market share gains in key project wins were realized in Gilbarco Veeder-Root, Qualitrol and Kollmorgen. Gross margin was 49.4% as approximately 60 basis points of expansion and Professional Instrumentation was offset by nearly 45 basis points of contraction in Industrial Technologies. Notably, field solutions expanded gross margins 125 basis points in the quarter through the use of FBS lean tools driving supply chain and manufacturing efficiencies. We are pleased that, for the first half, we delivered strong gross margin expansion of 70 basis points. Operating profit margin was 21.4% with core operating margin expansion of 90 basis points in the quarter and 125 basis points year-to-date. Both periods benefited 65 basis points from lower amortization. During the second quarter, we generated $217 million of free cash flow and delivered a conversion ratio of 90%, which keeps us on track for greater than 100% for the full year. Using FBS tools across our operating companies, we were able to improve working capital turns by 0.5 turn led by strong improvements at Fluke, Tektronix and Gilbarco Veeder-Root. Turning to our segments. Professional Instrumentation posted sales growth of 4.8% with core revenue growth of 6.6% and operating margin of 24.4% with 240 basis points core expansion, which includes 140 basis points benefit from lower amortization. Advanced Instrumentation & Solutions core revenue increased high single digits during the quarter, driven by strong growth in product realization and field solutions. Field solutions core revenue was up mid-single digits in the quarter with both Fluke and Qualitrol posting strong core revenue growth. Fluke's mid-single-digit core growth was led by Fluke Industrial and Fluke Networks, which delivered mid-single-digit and high single-digit growth, respectively. As we highlighted last quarter, Fluke Networks' performance reflects the continued impact of the FBS growth room with sales conversions up 30% sequentially. Industrial growth was led in North America, where sales were up mid-single digits, with point-of-sale data trending better across all product categories. eMaint continues to grow sales double digits, leveraging the strength of Fluke's large installed base. In May, we launched Fluke Accelix, which is the platform brand for our digital and condition-based monitoring offerings. Additionally in late June, we acquired SCHAD, a small technology company based in Germany. The SCHAD technology adds a suite of software products that simplify data integration and mobile work management for our customers. We have also reached an important early phase milestone for Fluke Accelix by starting key pilots with several large customers. Qualitrol delivered high single-digit growth led by further penetration of conditions-based monitoring solutions for European and Chinese OEMs as well as utilities in the Middle East. Good growth in North American retrofits was driven by FBS as we focused on improving funnel visibility and identifying adjacent market opportunities. In China, we gained share with transformer OEMs via new product penetration and ultra-high voltage transmission. In June, the Qualitrol team closed the key order for comprehensive monitoring system for a Middle Eastern national electrical utility. We are pleased with our high-growth market expansion strategy as our go-to-market investments in targeted geographies continue to pay off. Moving to product realization. The platform core revenues were up low double digits for the quarter led by growth in Tektronix. Tektronix low double-digit core revenue growth continues to be driven by high-growth markets where sales grew strong double digits this quarter. This performance reflected in part Keithley 3D sensing sales in Korea and China. China continued to deliver low double-digit growth, driven by increased demand for our leading technology targeting the optical and semiconductor end markets. We see encouraging signs entering the second half of this year as the China semiconductor market build-out is only in the middle of what we estimate to be a 5-year opportunity. We launched the Tektronix 5 Series mixed-signal oscilloscope in June, which is the first in a series of hardware and software launches. We are pleased with the performance to date and the strong positive reaction and technology reviews received from the market. This groundbreaking technology favorably positions us in our targeted automotive and power segments, which is consistent with the strategy we discussed at Investor Day. As we previously noted, this new platform will have a more meaningful impact starting in 2018. Our sensing technologies platform delivered mid-single-digit core revenue growth in the quarter led by double-digit growth in high-growth markets and improved stabilization in the U.S. Growth was primarily driven by China and general industrial end market improvement in the U.S. Our sensing technology teams continue to see accelerating progress on our strategy of broadening our system development capability. As an example of this, we saw greater than 30% sequential improvement in our target vertical funnels at Gems. Moving to our Industrial Technologies segment. Revenue grew 4.7% with core revenue growth of 4.5% and delivered operating margin of 20.9%. The favorable impact to operating margins from increased demand for our products overall was offset by greater R&D investments and a decline in franchise distribution core revenue. Year-to-date, strong volume and improved productivity drove 90 basis points of core operating margin expansion. Our Transportation Technologies platform posted mid-single-digit core revenue growth in the quarter led by mid-single-digit growth in Gilbarco Veeder-Root. The performance at Gilbarco Veeder-Root came in better than expected on share gains in Europe and Brazil and with several large North American retailers who continue to upgrade to EMV-capable dispensers. Global dispenser sales were up high single digits, reflecting the preference of our products around the world. We were excited to announce last month that Gilbarco Veeder-Root successfully processed the industry's first U.S. EMV chip transaction at a fuel retail site using our passport point-of-sale solution in Encore fuel dispensers. We also launched [ Ligo ], our new fuel point-of-sale system from Orpak in high-growth markets. This technology is a key building block to future Insite360 services and to advancing our systems strategy in high-growth markets. We are on track to close on the previously announced acquisition of Orpak in the third quarter of 2017. Telematics realized core revenue growth of low single digits in the quarter led by strong SaaS sales growth in Australia and New Zealand and increased installed base in Europe. These results were partially offset by a sales decline in North America despite improvements across key metrics in the U.S. Given this positive trend, we expect to return to growth next quarter in the U.S. with an acceleration to exit the year at mid- to high single-digit growth at telematics. Automation and specialty grew core sales mid-single digits driven by double-digit growth in high-growth markets and robotics, both of which are aligned with our high-growth market and IoT growth initiatives. Growth was partially offset by flattish sales at Jacobs Vehicle Systems. Kollmorgen posted low double-digit core revenue growth, reflecting strong demand across our global industrial automation product line, which is driven by continued robotic strength in Europe, China and Japan. Comau, a leading European player in mobile robotics, recently launched its new mobile robotics solution, Agile1500, utilizing Kollmorgen's guidance control system. Thomson delivered low single-digit core revenue growth driven by double-digit growth in high-growth markets, reflecting key project wins for factory automation applications in Asia. Jacobs Vehicle Systems is continuing to see strong sales in China and an improvement in North America, reflecting an increase in heavy-duty truck orders. Franchise distribution core sales declined low single digits, reflecting a low single-digit decline in core revenue at Matco. For the first half, hardline core revenue grow -- grew high single digits, and the Maximus family of diagnostic products grew core revenue double digits. Despite the strength in these product lines, we have seen a pause in demand for tool storage. To wrap up, we took important steps towards accelerating growth with both organic and inorganic strategies. Progress towards our EMV, high-growth market, digital and portfolio enhancement growth initiatives, including $1 billion of announced acquisitions since the separation, positions us well going into the second half of 2017 and into 2018. We are raising our full year 2017 adjusted diluted net EPS guidance range to $2.72 to $2.80, which includes our updated core revenue growth expectation of mid-single digits and an effective tax rate of 26.5%. We continue to anticipate core margin expansion in excess -- in and around 50 to 70 basis points for the year. We are also initiating our third quarter adjusted diluted net EPS guidance of $0.69 to $0.73, which includes assumptions of mid-single-digit core revenue growth and an effective tax rate of 26.5%. And with that, I'd like to turn it over to Lisa.

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

[Operator Instructions] Your first question comes from the line of Steve Tusa with JPMorgan.

So the deal, $600 million I think. Can you just remind us, just break down the billing you spend and then on this specific deal, a little more color on sales margins to the extent you can give us?

Yes. So I'll start with the second one on the $600 million. We're really excited about ISC. It's a business that we've been known for a long time. We've been friends with the McElhattan family for a long time. It's been a long-term cultivation. They'll do probably in the range of $170 million to $180 million of revenue this year. This will fit our return profile of 10% in 3 years on the ROIC model. So we feel really good about the returns here and how we think the business will do. It's very consistent with our strategy that we've talked about relative to digital initiatives, the fact that these are connected instrumentations. They're deep into the customer workflow and in critical technology, which is essentially like our shared purpose essential technology. And the revenue -- it's a recurring revenue subscription-based model for a good portion of the revenue as well, so the financials and the strategic aspects of the business are really good. We -- this is in around -- for 2018, around 10 to 12x EBITDA so I think a great opportunity for us to create value over the long time at a price that, quite frankly, we can get to a return profile in the time frames that we've been disciplined about.

So like $0.10 of accretion next year-ish?

Well, I think we'll wait till we get the deal inked and closed and then wait for the guidance next year. But we expect to be accretive next year for sure.

Okay. And then the other deal, just remind us of what else makes up the $1 billion?

So the first couple of hundred million, we acquired eMaint and GTT in Q4 of last year, and then earlier this year, there was Orpak for around a similar amount. And then we did a small technology deal called SCHAD. It's single digits acquisition, but we got some technology that'll help us with our connected solutions.

Okay. So then one last question on the second half. You're growing mid-singles. It doesn't look like that much of a slowing relative to the first half, but EMV is obviously kind of staring us in the face. So what's getting better in the second half to offset the -- what is kind of an unexpected EMV slowdown to get to kind of back to the mid-singles?

Yes. So first, I think I would say that the third quarter for EMV looks pretty good. So we had a couple of orders that came in that'll keep us maybe a little bit better for the third. I would suggest that the other part is really the North American industrial market broadly, Steve. We've seen an uptick through the quarters here in places like Fluke. As we mentioned on the prepared remarks, our sensor businesses in automation all saw improvements in North America. So it's really the combination of a little bit better EMV than we originally thought and probably to some extent, the North American industrial market sort of solidifying a little bit as well.

Your next question comes from the line of Nigel Coe with Morgan Stanley.

Yes. Just to follow on, on ISC. Does this kind of [ sort of the ] kind of affected your product line for -- within the [ sig ] umbrella? Or do you intend to run this as a stand-alone business? And what kind of proportion of revenues would you describe as SaaS?

Well, first, we would run it -- we really see this as the third leg of the field solutions platform. So there's certainly some synergy with Fluke and the core customers with Fluke. The -- we see some real opportunities with -- if you think about in a variety of industrial environments where a maintenance worker is also using safety technologies. We've seen a real opportunity to link what we're doing with connected solutions both with Fluke and with ISC. But ISC will be a, we think, a stand-alone business that has a great growth profile in and of itself. I think the recurring revenues in the business today are around -- right around 40% or something like that, but there -- but it's the high-growth part of the business. So if you sort of compound that over time, it becomes a very good recurring revenue business over a longer period of time.

Okay, that's great. And then just turning to industrial. You called out R&D as a headwind to margins this quarter. Obviously, margins were pretty flat year-over-year. Anything else in there? Is there any mix impacts, [ price roles ] to think about as well? And then you called out the franchise as a pause in the storage solutions. I think we saw some weakness from Stanley in auto, Snap-on, too. So I'm just wondering, any perspective you have on what's causing this pause?

Yes. So on the margin compression and looking at Industrial Technologies, it has to do with Matco. That's slowing. It's one of our highest-margin businesses. That just gives a little bit of a mix. But we think that even with that, that slowing that we're seeing there, as we -- when we look year-to-date, we're seeing good margin expansion. We think by the end of the -- as we move forward into the second half, we're going to continue to see that. But at this point in time versus a tough compare, that's the main reason.

On the franchise distribution, we noted in the prepared remarks we see some product lines that are pretty good. We had a 10% increase in our expo participation from a year ago, so that metric was pretty good. A lot of the forward-looking metrics around health are good. And number of the product lines are very good, we've mentioned, in diagnostics and some of our hardline tools. It really is -- the slowness really is in tool storage. As you mentioned, I think a number the other folks in the market have also denoted the same thing. We get a lot of good data off the truck in terms of what we see from a sales out perspective, and we do see some slowing. So I don't necessarily think -- we've had 4 or 5 years of really strong mid- to high single-digit growth here, so I think this is more a pause than anything. Certainly, when we go back to other times when we saw a long-term slowing, we didn't -- we saw changes in some of those health metrics that we typically see. So we'll probably see a little bit, maybe another quarter or so as we work our way through some of this, but I think on balance, we feel the business is still good. And we think we can do some things that might make a little bit of our own luck here as we get later into the year.

Your next question comes from the line of Julian Mitchell with Crédit Suisse.

Just focusing again on the Industrial Tech segment, is there any impact you're seeing right now from input costs there? And I guess was the -- the assumption was that the gross margin decline was a blip simply from mix? Or should we see, for example, better pricing in the second half in IT that will help that gross margin rebound?

Yes. We feel that -- in terms of the margin profile, as we mentioned -- Chuck mentioned a minute ago, we had a couple of things on the mix away from Matco and into any other business within the segment is obviously a mix challenge. But we had a few onetime things that occurred. But as we look year-to-date, both gross margins and operating margins are good for the segment. So we really see this as more of a onetime thing. As we go into the second half, we're highly confident we can continue to get good margin improvement in Industrial Technologies. Relative to input costs, we really don't see -- this really is not driven by input costs. Our PPV numbers, our purchasing cut price reductions that we get are very good. It's something that Chuck and I look at every month. We look at our input costs pretty detailed as well, and we're in pretty good shape in that regard. Price has been good across the portfolio. I think 5 of our 6 platforms got at least 20 basis points of price or more, so -- and many in the 30 to 50 range. So we still think we can be in the 30 to 50 point range on price for the year. So I think, really, the gross -- some of the gross margin things that occurred we really think are more of a onetime nature, and we feel very good about what we're going to have going into the second half.

And then my second question would just still be within Industrial Tech but on the sort of turnaround effort within telematics. Just give us an update with that reorganization underway, how you're thinking about the progress there. And also, I guess, it sounds as if you are going to see an improvement in sales trends. How much is that sort of end market-driven versus your own reorganization?

Yes. I think -- well, I think the end market's been pretty good, and I don't think the end market is necessarily picking up. There's a little bit of help with ELD, but that's not a huge percentage of the market. So we really think that the improvement is what we've been doing. We're obviously very focused, as we talked on many calls, around the fact that we wanted to improve the business there. We started with the integrated platform. We've changed our go to market in some respects and changed some of our go-to-market investments to take advantage of that. We have the highest number of gross adds in North America than we've ever had, I think, in a quarter in the past quarters. So our churn numbers are looking good. Our gross add numbers are looking good. Our -- what we look at in terms of how we look at average prices is improving. So all of the long-term go-forward metrics that we look at are all very good for the quarter. But obviously, in a SaaS business, it takes a little while for all that to sort of churn through into a revenue projection. So we think by -- as we said in the prepared remarks, we think mid- to high single digit exiting the year, and there's no reason why we can't see that kind of growth into 2018. So we think we'd be at least at market at that point but still working really hard to do better than market as we push into the following years from there.

Nigel, as you remember, what we're talking about here is mostly a North America challenge. Outside the U.S., we continue to do well.

Your next question comes from the line of Jeff Sprague with Vertical Research.

Just on the point-of-sale color, Jim, I know you pointed to industrial kind of being better in the back half, offsetting maybe EMV. Could you just elaborate a little bit more on the point-of-sale strength that you're seeing, how broad it is? It sounds like it's mostly centered in Fluke, but perhaps, it's broader than that.

Yes. We've talked the last 2 quarters that the U.S. was stable. We certainly would suggest now that it's starting to get a little bit better. As you know as well as anybody, we've got -- we get pretty good visibility at Fluke in terms of point of sale, and we really see all of that in the point-of-sale data. So the mid-single-digit kind of growth that we've seen in North America at Fluke, as an example, is really consistent with what we're seeing in point of sale. So we're not seeing any inventory build or anything like that. We also get pretty good point-of-sale information at places like Kollmorgen as well, so we've seen some similar trends there in Thompson. So we feel pretty good that the trend is -- right now is occurring.

I was also just wondering on the deal pipeline, the notion that this is someone you've known for a long time and cultivated. But maybe as part of Danaher, maybe that got pushed on the back burner and wasn't even a live prospect if they were even prepared to sell. Just kind of comment on that. I mean, is there stuff that -- where the trail maybe got cold, where you're kind of warming it back up? And does that in any way influence your pipeline here as you look into '18?

I think what has influenced the pipeline, I talked a little bit about this over the last 12 months. A little bit of what has influenced the pipeline more broadly is the fact that it's a more focused industrial company with a strategy similar to like ISC around connected devices, taking advantage of digitization and kind of the mobile workforce. You start to see more of the kinds of strategies that we're thinking about and certainly, in ISC's case, very consistent with how they were thinking about where the world's going. So there are those situations, for sure, in the funnel where we could definitely point to businesses that had been more interested in talking with us. I think, in this case, maybe a little bit less true this had -- this also had to do with the family's timing and how they wanted to think about things. So I wouldn't necessarily jump to the conclusion that this wouldn't have happened in a prior life. But we're really excited to have them as part of the team. We see the world very similarly. And I would also say that, really, when you think about field solutions and what the Wes and the team have done, they've really gotten ISC done, as we've articulated, the consistency with the strategy, the small deal that we did with SCHAD, which gives us some great technology around -- it would really integrate and facilitate industrial sites with data facilitation amongst multiple kinds of applications. And just large and small, I really think that articulates the breadth of the funnel. We've been talking for a while that the breadth of the funnel's pretty good, and I think this quarter is a great example, accelerating strategy in field solutions with the -- both a large deal and a very tiny technology deal that accelerates strategy as well as finalizing Orpak. So I think this is a -- I think why we're excited about this quarter in many respects is that all of these things that we've been talking about as we celebrate our 1-year anniversary come together in a very similar way.

Your next question comes from the line of John Inch with Deutsche Bank.

So Jim, just to put a finer point around your commentary on Industrial Technologies profitability, I mean, do you expect, as part of your third quarter guide, year-over-year op margins to be up? Or do you -- I'm just trying to understand. Are you expecting kind of the trajectory of margins to get back to up by the year-end? Or what would you say to that?

We would expect that both segments will have good operating margin expansion in the third quarter and the fourth quarter.

All right. All right. So that clears that up. Can I ask you about the ISC for a sec? So what kind of growth do you expect out of this business as you apply your tools to it? What sort of a growth rate on the top line would you expect? And I don't know if you said there were revenue synergies. But if there are, could you maybe talk a little bit to what those might be and how significant that could be?

Yes. So when we think about the value creation, clearly, we're buying a great business with a great team. And as a stand-alone business, this business will do well. It's been a mid-single-digit grower through the cycle for a number of years. And the iNet platform, which is really that safety-as-a-service platform, has been growing even better than that. So as that becomes more of the part of the business, the growth trajectory of the business should improve to high single digits over -- in the not-too-distant future. So that kind of gives you the growth profile of the business. We see for -- from a synergy perspective, one, obviously, we can help them with global reach. Fluke in our field solutions platform is our most global platform with -- both Fluke and Qualitrol have tremendous growth in and around the world. We'll certainly help them invest in more technology. They'll help us with some things. We can help them. Certainly, M&A is going to be an aspect of this. We'll be able to bring capital to them with many of the ideas they have. So that's really -- those 3 things are really focused on growing the ISC business and accelerating with the team that's there. I think, certainly, FBS is a wonderful opportunity as we met with Justin McElhattan, who's the CEO of the business and will stay with us. Justin was most excited. They made some good progress on FBS on the lean side, and I'm really excited about some of the growth and leadership tools that come -- that we can bear to the business. So those are all good synergies. Specifically though around where there's an opportunity, we've coined this term [ safetenance ], which is the combination of safety and maintenance. And what that really is, is when maintenance professionals go into environments wherein many of them regulated, where they need gas detection equipment, that they're using Fluke tools. And so this combination of being able to work within the maintenance workflow like we do with eMaint, being able to apply Fluke connected tools along with their tools and bring that about is also a growth opportunity. So it's not the biggest driver of the model, but we certainly think that's a good growth opportunity for the platform over time.

[ Safetenance ], huh, I like that.

I haven't trademarked it, so hopefully, the team has.

And in that [ safetenance ], I think you're -- the conference call operator was Hope. Now you got hope, so you're on track here. Maybe one more for me. You raised prices by what appear to be a pretty significant amount in the PI business. Is that -- what was that? Was that Tektronix new product? Or how did you accomplish that? And can it be sustained?

Well, I think, yes, I think it can be sustained. I think We've had good price over our -- we're working off even good price comps quite frankly. I think, if I recall, last year, the second quarter was a really a good price comp for us last year, tough comp if you will. So I think we can maintain it. It speaks to the -- we talk a lot about the strength of our market positions. And part of that is the differentiated technology that we have. And part of that is the brand and the strength of the market -- the relationship we have with customers that ultimately gives us some pricing power. We don't -- certainly don't use that to an advantage, but we certainly see creating more value allows for us to take more price. On the new products, we won't see price because that -- we take that out of our price calculation. So on the new products, you might see better gross margin, but we don't creep that in our price calculation. So...

Yes. I think it said it was like up 0.3 for the first half but up 0.6 for the second quarter, which that's a pretty big difference. So what -- are you -- you're suggesting that -- I'm assuming that, that wasn't all compare. There were other things going or [indiscernible].

No, that's right. Yes we did improve a little bit. I think at Fluke, we had a much better second quarter. I think we had moved some price increases around the world. I think we had moved them from the first quarter to the second quarter. So I think we started to get traction on that in the second quarter.

Your next question comes from the line of Andy Kaplowitz with Citigroup.

Jim, you just mentioned price in PI. When I look at incremental margins in that business, I mean, they were very strong in the quarter. When you gave us your initial FY '17 walk at the beginning of the year, you highlighted that you expected $0.04 to $0.05 of productivity and restructuring benefits in '17 versus '16, but I think a lot of that in PI. So are you getting more EPS than you expected so far from these benefits? And what would that updated number be versus that $0.04 to $0.05 that you talked about at the beginning of the year?

Andy, it's Chuck. So no, I don't think we're getting more than what we expected out of restructuring. We're getting exactly what we thought we would. I think what you're seeing, especially in PI, is the core growth has been trending up since maybe Jim talked about those comments and at the [ DCMs ] that we -- the incremental margins we generate out of that business. That's really what's going to [ hit the WIP ].

Okay, that's fine. And then you guys have continued to sort of outperform expectations in Western Europe, high single digits, again, which I think is above most of the peers that have reported this quarter. We know you've been doing well in share growth. But how sustainable do you think this kind of growth is moving forward? And where would you say it's mostly coming from?

No. I think I've been proven wrong a couple of different times. I keep telling our Europe team that they keep making a liar out of me with the work they're doing. But I think the reality is, is that we probably see that moderating a little bit. We have some key project wins that we're driving accelerated performance here over the last quarter or 2. We mentioned in prepared remarks, particularly in Kollmorgen and Gilbarco. So we have seen that, but I think this moderates probably in the second half to mid-single digits. Some of that is just not -- maybe a little bit tougher comps because we're comping now. We're off of high single-digit growth in the second half of last year. So there's a little bit of comp in there and then I think just a little bit of what I would say is a slight slowdown in a couple of places just in the core business, just the base business [ if you will ].

Jim, just following up on that, Kollmorgen, I think you said it was up below teens this quarter, and I think it was [ up ] in mid-single digits last quarter. So is that business actually accelerating based on the robotics offering that you have? Or how's that business doing?

Yes, it is. We're really -- the Kollmorgen team's done a great job. It's really been work we've been working on. As you know, we have to get the project wins from a few years that happened maybe a year or 2 ago and start to get some traction. We're seeing that. It's also a little bit of better North American and just based core industrial market. I think one of the places I mentioned a few minutes ago, when we start to see a little bit -- we're seeing a little bit of tailwind now in North America in the industrial business, and we're probably seeing that more in -- at Kollmorgen and Fluke maybe than in other places. So we think that's sustainable from what we see in point of sale at this point, so -- but we do -- but -- so some of it -- to bring it back to the specific question on Kollmorgen, it's really a combination of both share gain but also a little bit of lift in North America.

Your next question comes from the line of Deane Dray with RBC Capital Markets.

Like to go back to the ISC deal with the question of why gas detection. This is a fairly crowded space. Honeywell's got a big presence there with Zellweger and First Technology. And then that -- it's not -- I guess, it's not a coincidence, but Danaher tried to buy First Technology in gas detection and got into a bidding war with Honeywell like 10 years ago. So has this been on your wish list all this time? And so what is it about gas detection that makes sense now?

Well, I would say, first, if we go back 10 years, I'd prefer to not to do that, although I was probably the one involved. I think it's...

I think you were.

It's -- it really has to do with the fact that we really -- we see this convergence of technology. There's clearly large-scale safety players. You mentioned Honeywell. Obviously, people like MSA and 3M are in those markets as well. But what we really see is this core advantage around the safety-as-a-service pioneer that they've really put in. We really think it's that business model, the core relationship that they have with the workflow and what we can do with the combination of our other field solutions businesses, gives us a unique and differentiated position. And in many cases, they'll probably have multiple players in one facility. But we think we have a very sustainable position based on the strength of the business that they've really built as well as the huge strength that we have with Fluke.

So just on that point, Jim, on the idea you're going to run this business as a third leg, but might you consider migrating some of the subscription-based model into your other instrument businesses?

Yes. I think there is certainly an opportunity. We -- the team there at ISC is really thoughtful and has done a lot of great things. They're really, as I mentioned, the pioneer in thinking through this kind of business model. We obviously have some skill sets from our SaaS-based businesses at telematics and at Insite360. But we really bring a core industrial recurring revenue expertise at ISC that, quite frankly, is applicable across all of our industrial businesses. So yes, the answer to -- the quick answer to that question is we think it's an opportunity to leverage. And also their presence in Pittsburgh, they have a great relationship with Carnegie Mellon. And obviously, Carnegie Mellon is really, really great at artificial intelligence, robotics and just broadly in software. So they bring a whole bunch of expertise and relationships, quite frankly, that we haven't had as well. So we're ecstatic about the opportunity to have them join the team, and we think this is great for us for a long period of time.

Your next question comes from the line of Patrick Newton with Stifel.

I guess I'll lay off the ISC questions. I think we've hit most of the key points there. I wanted to pivot back to GVR. You talked about some strength in the quarter and that 3Q orders for EMV are better than expected. I'm just wondering if you could comment on whether the recent announcement from Exxon that it's incentivizing upgrades across its branded stations contributed to the EMV order flow and then maybe how these incentives could impact trends through the duration of 2017.

Yes. So we -- obviously, we announced our position with Exxon, great relationship with them. We didn't see much impact to that in the second quarter, and we don't think there's a tremendous impact in the third. It solidifies things a little bit but still to be determined. We just think more broadly with some -- we really saw a little bit of strength with specifically with 2 large retailers that we have a great relationship with. They bought a little earlier than we thought and a little bit more than we thought, which solidifies the third quarter. And that's why we think the full -- the first -- the second half is going to be better than we originally thought. But we still think there's probably -- there's still the potential of an air pocket out there in the fourth or the first quarter. So I still think, at some point in time, people will take a little bit of a pause, but we just had a couple. The strength of Gilbarco in general in the quarter has much to do with outside of the U.S. as it did anything, but we did get a little bit more business in North America than we originally planned.

Okay. And then, I guess, shifting gears to Keithley. You again mentioned 3D sensing. I think Pat Byrne, at your Analyst Day, highlighted 3D sensing being a more than $20 million opportunity. We've seen several suppliers in this market provide pretty darn aggressive guidance for the September quarter. So could you comment on how that business is faring beyond your prepared remarks? And then pertaining to the $20 million market opportunity comment from your Analyst Day, can you help us understand the time frame to recognize that opportunity?

Yes. So our -- I think our opportunity -- as you noted, there's a lot of folks talking about 3D sensing certainly on the sensor side and a number of places where it's a huge opportunity for them. I think, for us, we're still trying to gauge the overall broad opportunity for us. We've challenged Pat and the team to really help us think through that in this year's strategic plan. What we really saw at Keithley first was very good performance even outside of 3D sensing. If you take 3D sensing out, they still had mid-single-digit growth in the quarter. So the Keithley team continues to execute very well. I think we're -- what we really saw, we saw most of that $20 million in the second quarter, probably saw all of it in the first half, and that was really a specific couple of customers in Korea and China that bought. So at this point, that opportunity likely is broader, but we haven't seen that yet. So we executed against the opportunities that were available to us, and we'll evaluate how big an opportunity that is for us over a longer period of time.

Your next question comes from the line of Charley Brady with SunTrust Robinson Humphrey.

This is actually Patrick Wu standing in for Charley. Just wanted to touch on the very last question that you guys had with 3D sensing. Obviously, the $20 million opportunity, can you size for us that market just in terms of what the addressable market possibly could be out there?

It will be tough for us to do at this point. I think that's probably something we'll gauge here by the end of the year. As I mentioned, we, Chuck and I, will start here shortly after this call, in fact, next week, going through strategic plans with some of the businesses. That'll carry throughout the third quarter in August and September. So we'll get a sense of when the tech team walks us through that, what that looks like, but at this point, we don't really have a gauge. So we had specific market opportunity with some customers and some design wins that we got that are very centered on the Keithley technology that's really flexible for manufacturing lines. So they really took advantage of the flexibility of that technology. But I think more broadly, how our whole offering really pertains to 3D sensing is still work to be done for us.

Okay. And as we look at the robustness of your M&A pipeline, I mean, what should -- what is the management team thinking about in terms of a focus, maybe even region? Can you help us sort of -- can you give us a little more color on your thoughts around where you guys are looking at next, both regionally and as well as a product category?

Well, I think, yes, maybe looking back 12 months helps us look forward into the future. And I think what you've seen from us over the last 12 months, as Chuck articulated, is roughly $1 billion of spend. A number of those deals are really focused on accelerating our digital strategies, taking advantage of software, buying businesses that are deeply embedded in the workflow where we can extend solutions over time, leveraging our current business structure in most cases. We focus mostly on field solutions and transportation technology. It's the 2 platforms that are our largest 2 platforms and probably have the most serve-to-market opportunities. So certainly, I think we'll continue to do that and build on the strength of presence and strength of market positions we have in those businesses. And those businesses are almost 2/3 of the company. So that is certainly something we will continue to do. We will continue to look globally. We think that there are opportunities outside the U.S. Obviously, the Orpak acquisition is headquartered in Israel. It's a great example of how we're trying to globalize the business, build on technology capability in other parts of the world. You'll see us continue to do that. And then I suspect, as we noted in our Investor Day, that we'll continue to look for new platforms where there's opportunity. And we've highlighted a few places and secular trends that we'd like to think about going forward to do that, and we'll continue to think about those. I think we're now gaining more expertise into how to buy and integrate the software businesses, and quite frankly, I think that'll be part of it. And I think this quarter's example of being able to do that and create a lot the value and hit our return hurdles has been demonstrated.

There are no further questions at this time. I would now like to turn the floor back over to management for any further or closing remarks.

Well, thanks, everybody, for taking the call on what is a rainy day here in Seattle, unusual in the summertime. We -- we're exceptionally excited to start our second year here at Fortive. We feel really good about our start. A lot of the strategic opportunities and the operational targets that we set for ourselves, we feel really good about the progress we made. And I think Chuck and I and the rest of the leadership team really look forward to seeing even more opportunity as we turn the clock on 12 months and start our second year here. We look forward to seeing you all soon. And if we don't have a chance to talk to you before the end of the summer, have a great summer, and we'll certainly -- Lisa's available and the team to answer any questions if you have them. Thanks, everybody.

This concludes today's Fortive Corporation Second Quarter 2017 Earnings Call. You may now disconnect.