My name is Ian, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporation's Fourth 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, Ian. Good afternoon, everyone, and thank you for joining us on the call. With me today are Jim Lico, our President and Chief Executive Officer; and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. We present certain non-GAAP financial measures on today’s call. Information required by SEC Regulation G relating to these non-GAAP financial measures are available on the Investors section of our website, www.fortive.com, under the heading Financial Information. A replay of the webcast will be archived on the Investors section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call. A replay of this conference call will be available shortly after the conclusion of this call until Friday, February 23, 2018. Instructions rather for accessing this replay are included in our fourth 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 Laws, 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 ended December 31, 2016. These forward-looking statements speak only as of the date they are made, and we do not assume any obligation to update any forward-looking statements. The Tax Cut and Jobs Act was enacted on December 22, 2017. The tax reform among other things reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transaction tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign-sourced earnings. As of December 31, 2017 we have not completed the accounting for the tax effects of tax reform. However pursuant to the guidance by the SEC, we have made a reasonable estimate as the effect of tax reform on our financial results for the period ended December 31, 2017. These estimated amounts are provisional and are subject to adjustment. In addition, certain of our historical non-GAAP financial measures for 2017 including adjusted EPS and free cash flow conversion ratio excludes the estimated provisional impact of the tax reform. With that, I'd like to turn the call over to Jim.

Thanks Lisa, and good afternoon everyone. The fourth quarter closed out a defining year with continued outperformance and strong execution by our team and positions us well for long-term success. The Fortive Business System continued to enhance our competitive advantage driving market share gains, strong core margin expansion, and robust free cash flow generation. 2017 adjusted earnings per share of $2.89 grew 15% driven by 4.5% core revenue growth and 110 basis points of core operating margin expansion or 55 points excluding the benefit from lower amortization. As a reminder, in early 2017 we outlined our strategic prior and I'm pleased to report that we have met or exceeded all of them. In addition to delivering double-digit earnings growth, accelerated core growth we delivered free cash flow conversion of 107% for the year. We launched game-changing technologies across the company including the Tektronix 5 Series mixed-signal oscilloscope and the Fluke T6 non-contact voltage electrical tester. We made important strides advancing Fluke and Salix, Gilbarco Veeder-Root Insite360 and telematics digital strategies. We grew market share at many of our businesses including Fluke, IFC, Tektronix, Qualitrol, Setra, Kollmorgen and Gilbarco Veeder-Root. We increased high-growth market sales as a percentage of total revenue by 150 basis points and delivered strong double-digit growth in the year. Lastly, we deployed $1.6 billion towards strategic acquisitions and we made successful strides towards enhancing our portfolio to having more recurring revenue, less cyclicality and higher exposure to quality end market and secular growth drivers. These important outcomes demonstrate that we're realizing our vision at Fortive as a diversified industrial growth company and that we remain focused on building a better stronger Fortive aligned with our portfolio goals. The Fortive formula is clearly delivering differentiated performance and we are well positioned to continue to post strong results in…

Ian, we're ready now for questions.

[Operator Instructions] Our first question is from the line of Steve Tusa from JPMorgan.

So just on kind of the way that first half should trend in transportation tech, can you just give us a little bit of an update on how you expect that will come through?

As we said in the prepared remarks the fourth came in around - how we’ve been predicting it. We see the first quarter of 2018 similar to the fourth quarter. So we think that will play out and then as we progressively get through the year we’ll continue to improve. We would expect growth in the second half. So as I mentioned in the prepared remarks we think CapEx will start to solidify at that point. I think we feel good about that right now and we’ll see where things go as obviously as the year plays out.

And I guess you guys said $5 billion in acquisition kick capacity. Can you - is that something you can like to do immediately or is that just a commentary around what you feel like you have over the next three years?

Steve that’s probably a max capacity if we want to do everything this year. Obviously there’re several assumptions built into that and you know that still with the assumption that we have a strong commitment to keep investment grade. So we just want to frame where we’re at and what we felt we could do.

And then just lastly an update on the again sorry I didn’t hear this in prepared remarks, an update on kind of the outlook for your business its related to semi CapEx, any signs of weakness there?

Yes, well I think the price of most exposure that would be tech and particularly strong, a strong year - that really affect their China business the most. And we quite see a little bit of slowdown after three years of double-digit growth. We probably see a high single-digit like growth and China for them next year, but we still think 2018 will be a good year for tax relative to the exposure they have in semi which again is mostly in China.

And our next question is from the line of Scott Davis from Melius Research.

I just want to clarify couple of things, when you said price was up 70 bps, was that net of cost or just that price of 70 and then your costs were up something comparable or how do you reconcile that?

So 70 I would say we have very minimal inflation so we look at price cost pretty closely in every business and we're really are not seeing much inflation here. We've been able to mitigate almost all of it. So it might be a couple of points off that Scott I’m not exactly sure what the number would be but it’s minimal compared to 70 that we got.

And how do you guys think about this EMV getting pushed out to 2020 I mean but we also have full 100% depreciation if guys spend the money now. Is there any chance if this stuff ends up getting pulled forward just because you guys can spend money now and our cash rich et cetera or does not matters as much in that market?

The tax rate does help a lot in that industry. So I suspect that as individual businesses start to think about what their tax rate will be and the opportunities available to them. I think that will - we really haven't heard that yet in customer conversations but I suspect that still a conversation we had. I don't think it will be a massive pull forward, but I suspect what it does do and why we said it is that it will solidify the second half of 2018.

And our next question is from the line of Andrew Obin from Bank of America.

The question goes to $5 billion in capacity, how do you guys think about your cost of capital in this environment where there are concerns about inflation. How do you think about what is your cost of capital in this environment and how will you adjust it over the year if we get inflation always going up.

Well Andrew the way we look at as we think about returns first and we liked it - we always talked about getting for bolt-ons 10% return on capital, return on invested capital and maybe taking five years for maybe a little bigger deployment. As far as the cost of capital the cost of debts going up, it doesn’t really change ever still in that 8 range of cost of capital. We didn’t change hurdle rates as interest rates went down and we’re not really going to look in many different ways they go up.

And just a follow up on China, you touched on semiconductor equipment. Can you also talk about the truck market in China particularly if it relates to Jacobs because I think that's the key growth component there as well?

I think it will be a little slow - it will certainly be slower in 2018 than it was in 2017 we had just a bang up year in 2017 for JVS. So it will slow a little bit for the business itself it will start to get made up by the U.S. so net-net it will still continue to be a good year for Jacobs. But yes China will slow a little bit for them. They’ll also grow in China in 2018 but they won't have the really high double-digit growth that they've had it will mute a little bit.

And your next question comes from the line of Dean Dray from RBC Capital Markets.

Maybe start with Chuck. Where there any surprises in the tax reform application, Lisa made that emphasis that this was provisional. Was there anything unique to Fortive that you would highlight?

No, we have the option the SEC gave us an unprecedented option to build or make it provisional and with the sheer complexity and volume of this it's just good sense to put up a provisional estimate. Having said that, we've done extensive work and we think we’ve got very good number - a number her but by putting up a provisional it keeps means that we could make minor adjustments.

And then just on tax reform as the potential second derivative changes. Do you have any sense that companies will be willing to divest non-core businesses now that tax leakage is less and so potential acquisitions for Fortive, but also within your own portfolio?

I think certainly that would be speculation because it's pretty early obviously as people start to start to think through these things Dean. I would say that on balance, generally divestitures whether it's us or someone else tend to always be related to more strategic – decisions. Certainly, with the tax rate being lower, it does make the financials look a little bit better. So I suspect on balance as we go through the year, we'll see others do that. And that will probably provide some additional opportunities. I think for us though – it's really about strategy, it's about our ability to grow the business long-term and what we can do with it. And those are really the real reasons for doing things, it’s not because we could get a little bit more money on the sale. It's really about what's the long-term potential for success in the business over time.

And our next question is from the line of Steve Winoker from UBS.

Could you maybe breakout that 3% to 4% core growth a bit across the businesses in terms of not just cadence, you talked that a little bit but between PI and IT, a little more detail?

I think you'll see PI in the mid-single digit range you’ll probably see IT in the low single-digit range. As far as the quarter, that'll probably even out more as we get longer through the year as Gilbarco turns to growth in the back half of year. But I just thought we’ll see a little bit better growth out of PI. As we've said in the prepared remarks in the quarter, Fluke did very well and maybe more broadly but the industrial macro economy in North America has improved. We've seen better point-of-sale in a number of our businesses that are more industrial related like Fluke and our sensors businesses and some of our automation businesses. So I suspect we'll see that certainly in the first part of the year which – we have a little bit of visibility to. So that gives you some sense. And as far as geographically, we think North America will be pretty good. If we take ex-Gilbarco and all the businesses in North America will be pretty good . And as I mentioned, we still think China is going to be good. It may not necessarily tip the double-digit range every quarter this year, but we think China will continue to be good. We think India will be good for the year. Latin America has done a nice improvement here over the last couple of quarters. And while it's a really small base, we think that might be. So I gave you a geography view too, but maybe too much information, but hopefully it gives some perspective how – we think the year will play out at least kind of early days.

Jim, never too much information for us, that's great. And by the way, on that seasonality Q4 to Q1, if I – back out kind of the tax impact in Q4 and Q1, it does seem like a little bit less of a drop than we've seen in some prior years. Is that how you guys are thinking about it too, or are you looking for about the same?

You're talking about the VCM?

Yes.

A little bit. I think we're looking for it will be a little bit stronger versus Q4 in Q1. That's how we have models as well.

And then just lastly Jim as I'm staring at this $5 billion available M&A capacity, and I'm also thinking about the EMV air pocket that you're talking about and the kind of longer term, retail fueling opportunity and challenge. Is your thought that that M&A flywheel might mean like, and that $6.5 billion company today, that retail fueling if you kind of fast forward through that become moves from less than a quarter the revenue base to something significantly lower?

Well, I don't know significant lower I think we've seen good, really good positions in the high growth markets. And so – a lot of talk about EVs we're seeing some of the largest tenders in the history of the company in places like India and other parts of Southeast Asia. So we're still seeing a lot of high growth market tender activity despite the conversations around electric vehicle. So I think high-growth market will be a bigger part of Gilbarco Veeder Root. Over time, I think the transportation technologies will continue to look for and take advantage of opportunities that exist in the secular growth drivers that are beyond just retail fueling, like telematics, like smart cities and smart transportation, lot of money going into logistics and supply chain and warehousing. We're certainly taking advantage of some of those kind of trend at telematics. So I think as a business is a platform, there will be changes going on – and I suspect we'll continue to look at opportunities to take advantages of some of those longer-term drivers as well. And so I feel really good about the platform in general. North America might be a little bit less in a pure dispenser perspective, but payment challenges will still be out there. I'm sure we're not going to get rid of credit card fraud anytime soon. Point-of-sale opportunities, those are still going to exist. So when you look around the portfolio, I think the revenue will probably change by product line and geography, but ultimately we still think there's opportunities there. And more broadly, as we look at EV and AV for the company, we think there's as many opportunities for the company as anything. So with the changes that are required for the grid, for all the challenges of putting some – that sort of high power into opportunities for fast charging, those are going to provide opportunities for Fluke and Qualitrol and a number of our other businesses as well. So on balance, we see more opportunities and threat both with the combination of EV and AV and EMV trends that are going on in the market.

And our next question is from the line of John Inch from Deutsche Bank.

Were there any gains in this quarter? I'm trying to bridge the $0.82 versus the way we had modeled it, and not quite getting there. I'm just curious were there any kind of gains in the quarter to any degree?

None in the adjusted earnings, you're talking about one-time gains?

Yes I don't know if you had a business sale or anything like that that might be…

In the GAAP numbers, yeah, we've had on the interest. And other line, there's a $8 million gain on the sale of the building related to the Cons unit that was part of the NetScout sale if you go back again in time. So that's in there, but not in the adjusted numbers.

It's not in the adjusted, okay. I'll pick it up offline. The PI core margins look pretty good, right the 120. The 10 basis points on the industrial technologies pressed a little wide, even though you did a percent of core growth. Was there anything else going on in that segment with respect to perhaps mix or something else? And where do you sort of see those VCMs trending, I guess, in the IT over the course of 2018?

So in Q4, IT was lighter than normal, mostly because of the topline. And there's a little bit of timing. You can look back to last year where they had a tough compare. But to your fundamental question about what should we expect with the VCM going forward, 30 to 35 is a good number. If you just back up and look at their whole year, that's right where they're trending and that's what we'd expect going forward.

For both segments, Chuck?

Yes.

Can I ask was there an FX impact on margins that you would call out that's noteworthy specific to say the fourth quarter that maybe run rates in a different cadence over the course of 2018?

I think, no not really and there was a slight favorable, but it wasn't material I think you'll see in our bridge in the first half of 2018 that we'll see a couple of cents a quarter in Q1 and Q2. And then it tapers off.

Just lastly, your software as a service, where did we end the year with respect to part of the revenue mix, and where you see it in 2018? Where would you like to end it based on new targets you had presented before?

We've said we'd be in 20 to 25 range which I think is where we were through the year. I think we ended closer to 25 at the end of the year. I would expect that probably ticks up 200 or 300 basis points as we go through the year.

Organically it ticks up like that?

Yes, well, just because you get the full year fact of all the businesses we bought, plus the growth and things like inside 360 and some of those businesses.

And our next question is from the line of Andrew Kaplowitz from Citi Group.

And so high growth markets have been growing double-digits for you over the last several quarters, but I think you mentioned it’s a bit low to mid single-digit. Some of the issue is, I'm sure, more difficult comparisons going to happen. Good to see China still growing double-digits. But was it just the Middle East that slowed down significantly in Q4? And do you think the high growth markets grow mid-single digits or higher in 2018?

So in the fourth quarter, you're exactly right. The Middle East was probably the big one. India too in the fourth was a little lower too because just some timing, tender timing that happens all the time. And so that we’ll look past that we'll have a good year in India in 2018 that will – it moves around a little bit by quarter there. But, overall we're confident a good year in 2018. So I think that's where in stand, I think the year will look as I said we’ll slow a little bit in China probably to high single digits but by enlarge I think we’ll continue to see good China, good India, Latin America will be good of a small base. So those - and I think Middle East as we noted in the prepared remarks a little bit at Qualitrol level we’ll move through some of their challenges with some backlog, but - we’ll be still slow in the Middle East I think in the first half.

You did mention strong backlog there in Qualitrol, does that help slip that business back to growth in the Middle East as you go in 2018?

Yes, I think by the end of the year it does I’m just thinking right now as they get through the year with some - obviously they are working off projected business that they have line of site too and right now that looks like they would be able to do that and be back to growth by the end of year.

And then last year you guys had I think $0.04 to $0.05 of productivity gains in your forecast for 2017 and obviously you don't have that in 2018, you have 30% to 35% of incremental. Is that because you just haven't done discrete restructuring here in 2017 and or could productivity gains actually be upside to your forecast or else equal?

So no, we definitely continue to expect productivity gains we just didn’t call it out on to the bridge and we kind of lump in to the other with interest and share price its actually it’s a productivity gain it just got - because that was getting too many bars on that graph.

And our next question is from line of Jeff Sprague from Vertical Research Group.

Just one question on business related items and then just a couple financial things. Just Jim your optimism or signs of optimism that you’re seeing in Matco in the tool business, can you elaborate a little bit on precisely what you're talking about, is it something in particular going or new products something?

Well I think we saw something in the fourth quarter that led us to believe that things might be starting to get better. I wouldn’t try to highlight that things are going to turn over right in the first quarter anything like that. We start Expo here in a couple days which is our large franchisee event every year. We've got good attendance this year which is good to see, but we still think some of the data points that we typically look at around predicting the business are starting to get a little bit better and will get better into the summer. What we did see in the fourth was we saw some order growth which was good, we saw something strengthening with in terms of our franchisee headcount. So a lot of those forward-looking things are starting to get better. I wouldn't call them really good yet, but we have a little bit more optimism obviously the team is doing a great job executing as I mentioned in the prepared remarks in diagnostics and in places where they have opportunity. They've done a very good job and we think a lot of that effort plus a little bit better market we’ll start to happen as we progress through the year. I think they’ll be in the growth mode probably this quarter, but I think that number will get better through the year.

Then I just want to clarify on the acquisition related cost that you disclosed in your bridge, I think it was 11 million in the quarter. Those were running through your segment operating profit numbers as they reported right, more than just pick them out the bottom of the bridge is that correct?

Yes that’s correct.

And then finally on tax Chuck I think 20% might be the lowest number I've seen except for the Irish domicile firms that I cover. Are you confident that’s a long-term number, is there something shorter-term that - you burn off say in a year or two and you drift higher or can we think about that as a pretty solid long-term rate?

We've spent a lot of time it’s likely maybe we’ll run more as there is more pronounces coming up. But we feel very good about the 20%. We don't think that's going to drift higher unless there some change in the code going forward and we're very pleased with the work our tech team has done and there's been some incremental spend to get there. But we’re pretty happy with all the work and I think you can use that going forward.

Indeed I'm jealous congrats good luck.

Thank you.

Thanks Jeff. And our hardest working tech team in Fortive in the last 30 days is probably been our tech team, so they do a great job.

And our next question is from the line of Scott Graham from BMO Capital Markets.

I too have a question similar to Jeff but maybe we'll take it offline if you want on the PI margin and how the transaction costs are being taken out. I'll just say it in brief maybe you can help me out if not after we can talk out offline. The transaction costs have been taken out of the adjusted EPS yet here they are in this margin. Can you kind of walk-through and we shouldn’t then essentially the adjusted margin be shown here as 120 basis points higher or am I misunderstanding?

No, I think if we adjusted the margins for transaction costs out that's correct, but we just adjusted out one place on the EPS, but you’re not wrong about that.

The other question is the dilution from the acquisitions looks like a ton of that was due to the kick up in amortization. Where do we go from here on those acquisitions in terms of kicking out cost to eliminate that margin dilution. And on a go forward basis should we see this type of amortization kick up on future acquisitions?

But I think what we try to focus on is the core segment margins which I had pointed to for just that kind of reason until we get to a year. But that's a multilayered question - I rather when we take it offline and we’ll walk you through each one of those things, but that's the reason we try to focus on the core and give you that on the presentation.

But this is something that did run through the margin on an adjusted basis this quarter, and I guess what I'm saying is on go forward basis, is this something that you're comfortable with this type of hit to margin?

We think that it helps grow earnings per share and so yes we are.

And our next question is from the line of Joe Ritchie from Goldman Sachs.

So maybe just touching on tech for a second the growth rates all year we’re really impressive clearly the products and introductions are working. I guess maybe talk a little bit about the go forward around what you're doing from a product perspective. And then how you guys are thinking about this business from a longer-term growth rate perspective.

So as you said they had a very strong year really a number of things that they have done exceptionally well from an execution standpoint. I think we highlighted last year we had a large order from a large mobile phone manufacturer in the first part of the year that helped and in the second half of the year we really did - a really strong, really great job with the new product introduction of the 5 Series that we talked about in the prepared remarks. That 5 Series is the first generation of a new platform of product that will continue to come out in a series of things over the next several years. So not only will the product itself have some runway in the next year, but the platform itself will also deliver some runway. We've always said that tech is somewhere in the low single-digit grower over a long period of time and during when things are a little bit better they’ll popup above that that’s around a little bit better than market growth they tend to perform better than market growth. So that's how we think about it and what we’ve been trying to do with the business is continue to build less cyclicality out of it with extending our service business which is a pretty substitute part of Tektronix now. So those are things we’re doing long-term to not only solidify the growth rate but also make it less cyclical and the number of our actions have been working and you saw that cloud in 2017 and you’ll see that cloud in 2018.

And maybe my follow on here just touching base, you had some pretty positive comments on IFC, I think I heard growing double digits. Just can you give us a little bit more of an update on Landauer I think you said integration was going well but just curious to see how that that business is growing?

So we had just maybe a little bit we were with the ISC team last week, we’re really impressed with the work that they've done to take the Fortive business system and really do a lot with it. They were already had a pretty strong continuous improvement culture and have really done a great job with it. Landauer a little bit later into the process because obviously we closed and then after the IFC deal, we’ll see them in about a month and have an opportunity to see their progress. We did a short review with the team here last week and really, really happy with the progress they have made on a number of action that they need to get after. I mentioned in the prepared remarks about we’re using their channel now. We've rebranded the entirety of the portfolio Fluke health solutions. And we've been seeing some real good synergy on the revenue side. So we feel good early days - it's still very early days but it’s good to be in a good place in the early days then in alternative to that.

And our next question is from the line of Brian Drab from William Blair.

So I was just - as I'm listening here and thinking about the comments that you made on the 5 billion. Are you - I was looking back at the notes that I have the most recent comments that you made were 5 billion to 7 billion through 2021 I think. And I'm just wondering if you’re warming us up to the idea of - larger acquisitions coming sooner versus more of a bolt-ons with the potential for a large one. There is obviously a lot of M&A activity expected post clarity on the tax policy so that just what I'm thinking, are you warming us up to the idea of maybe a larger acquisition here in the near-term?

Well Brian I think we've always tried to clear about two things. One is that we would look for strategic opportunities to accelerate our businesses. And two we try to give you sense of what our spending capacity could be at a point in time. Sometimes we give you a longer cycle that, I think what we'll try to do this time is to be really transparent about the opportunities we have in front of us. I'm not trying to telegraph anything. The funnel we have today is very good, the breadth of the funnel and the strength of the funnel meaning good businesses, the breadth of the funnel meaning across platforms and geographies. So we feel good that there's opportunity to deploy that. We never know how to predict those things, but we feel good about it and we didn't want it - we're really not trying to warm anybody up but rather just be very transparent and give you real sense of what kind of opportunities we could take advantage of should they avail themselves to us.

And I just have one follow up and by one I don’t mean four, is there anything in the pipeline that is larger than say 2 billion or 3 billion?

Well I think it’s hard to call anything - there are lot of things in the pipeline from a variety of sizes even some things we probably couldn’t do today but would love to do down the road. So I think that’s the way we think about it and that’s why the breadth of the things are the things we could do today and things we can do tomorrow. I think our success has always been about making sure that we don't just have an eye on the thing - on the next bank book to drop but rather have a real strategic vision of what we can do and cultivate the funnel that way. And so there is a great breadth of opportunity for us and hopefully with the work we do we’ll make some of those reality over time.

And at this time, I’m showing that we have no further questions. Presenters, I turn it back to you.

Thanks everybody. As I said in the prepared remarks, we're really proud of the year we had. We really wanted to thank our employees around the world but we also want to thank all of you who spent the time with us, who really allowed us to give you a sense of our vision for the company and for the strength of the feedback you've given us. We’re incredibly proud of 2017, but even more excited about 2018. So we'll look forward seeing you all soon in a number of conferences and things like that. Lisa and the team are around for questions and follow-up and we’ll see you real soon. Have a great night. Thank you.

Ladies and gentlemen, we thank you greatly for joining us for the Fortive Corporation fourth quarter 2017 earnings call. You may now disconnect.