Fortive Corporation (FTV) Q1 2019 Earnings Report, Transcript and Summary

My name is Erica, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporate First Quarter 2019 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the call over to Mr. Griffin Whitney, Vice President of Investor Relations. Mr. Whitney, you may begin your conference.

Thank you, Erica. Good afternoon, everyone, and thank you for joining us on the call. With us today are Jim Lico, our President and Chief Executive Officer; and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. We present certain non-GAAP financial measures on today's call. Information required by SEC Regulation G relating to these non-GAAP financial measures are available on the Investors section of our website, www.fortive.com, under the heading Financial Information. A replay of the webcast will be archived on the Investors section of our website later today under the heading Events & Presentations and will remain archived until our next quarterly call. A replay of the conference call will be available shortly after the conclusion of this call until Friday, May 10, 2019. Instructions for accessing this replay are included in our first quarter 2019 earnings press release. We completed the divestiture of the Automation & Specialty business on October 1, 2018, and accordingly, have included the results of the A&S business as discontinued operations for current and historical periods. The results presented on this call are based on continuing operations. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. All references to period-to-period increases or decreases and financial metrics are year-over-year on a continuing operations basis. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will, or may, occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward-looking statements that we make today. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2018. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements. With that, I'd like to turn the call over to Jim.

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

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

[Operator Instructions]. And your first question comes from Steve Tusa.

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

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

Okay. And any -- on Gordian, is there any market dynamics there that are moving around relative to expectations?

No, in fact we had a good quarter at both, Steve, it’s Jim. We saw good strength in the construction spend through the platform. That's the job order contracting part of the business and what we call procurement solutions. That business was up double-digits. So -- and that’s roughly 60% of the business. So, no, at Gordian we saw good performance and we saw a good performance at Accruent as well. So as we said in the prepared remarks we're off to a very good start and I think one of the things we like the best about the business in addition to its secular drivers is we are really getting an outstanding team in both businesses.

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

Yes. So maybe sort of a little bit of the geographies in context Steve. I think what we saw in -- our overall North American growth was pretty good but obviously Gilbarco drives a lot of that because of the quarter they had. I think the good news in the quarter Gilbarco was really the high growth markets, now those specific to Gilbarco, so I don’t know if you get a macro read there as much, but good high growth market performance pretty much in every part of the world, a lot of that we said in the prepared remarks. What we did see is relative to you are pull in question or what we saw is we definitely -- I think we highlighted this is February that we thought there was somewhere around 70 to a 100 basis points of revenue in the fourth quarter that was probably came out of the first. We now think that number is closer to a 125 and that's a chunk of tariff avoidance and then I think the other thing is we definitely saw North America in a number of places sort of start-out slow and then get better through the quarter at point-of-sale Fluke as an example clearly got better through the quarter, Matco got better in March. So we did see some trends that were improving through the quarter, and I would say just in our distribution businesses mostly weaker in Professional Instrumentation clearly Europe was a weak point for our distribution in Europe.

And your next question comes from Scott Davis.

Just I don't think I’ve ever asked a question on Sensing Technologies business at all. But what -- does that business turn around 2019 or are we now kind of open for 2020?

No, well, it’s probably going to be a little -- we always thought it was a low single-digit in the year and that changed -- that point of view doesn't really change, a little bit different number but probably the lower part of low single-digit. They were negative in the quarter, but will continue to get a little bit better as -- and their comps get a little easier in the second half as well. One of the good things about the business is they've been obviously a very profitable part of the business and they did a good job in protecting free cash flow in the quarter. So, they'll move the growth here for the rest of the year and they'll continue to contribute better from an earnings perspective as they go to through the year.

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

Yes. I think a couple of things. One, clearly the software businesses like Gordian and Accruent are going to require a little bit more R&D. Quite frankly, they were pretty tight on R&D being owned -- both being owned by private equity. We will probably add to their R&D spend as we look forward to opportunities to accelerate growth and to build out their platform of solutions. As you know, the great addition of these businesses, the continued additive features to current customers, which really delivers strong earnings potential over time. So we'll do that. But in many standpoint, the overall Fortive number may not move all that much because as we will look for productivity -- as we’re always looking for productivity in other places, we're through some of the big spend at Tektronix on their new platform as an example. So, there is clearly what we often call it dynamic resource allocation where we're really moving money into places where we have the highest growth opportunities.

And your next question comes from Julian Mitchell.

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

Well. I think the bigger thing is just as we move through the quarter, our volume steps up sequentially. We normally -- I think from Q1 to Q2, our revenues are going to go up by 20%. Obviously, our expenses don't -- the fix expenses don't see that piece. So, that creates a normal step up through the year. We generally think of our earnings growth, the EPS being contributive 20 in the first quarter, 25 in the second and third and 30 in the fourth quarter. And so that -- when you do that, it gives you this profile. And so I think that that's most of it -- the other thing -- last thing I’d point out is there's FX in the first half, it’s particularly I think there's $0.03 in Q2 or Q1 and then $0.01 or $0.02 in Q2, and then it really flattens out in the back half. So those are some of the dynamics that’s giving a little bit of a backend of a ramp through the year, but it's most of the revenue ramp.

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

Yes, I'll pick a last part first, Julian. We definitely think we saw destocking in some places at Fluke and Tek I would say definitely in Europe for both businesses and certainly some in the US. Tek had an interesting dynamic where their direct business was up significantly more either had like mid-single growth in the direct business, but their distribution business was down in the first quarter. So that really kind of -- we attribute a chunk of that to destocking, and a little bit of what we said before, which was kind of tariff avoidance, pricing avoidance that occurred in the fourth quarter, as I mentioned in answer a few minutes ago. So I think that provides a dynamic where we'll see that play out and improve the second quarter and through the rest of the year. I would also point out that Tek had a book-to-bill over 1 in the first quarter. I think Fluke did as well but -- so we certainly feel like we're seeing some solid performance. And I think in both cases, we're starting to see the point-of-sale number start to improve as we move through the quarter. So I think we started off a little slower than we thought. Obviously, Professional Instrumentation at just under 2% core growth certainly reflects that Tek being flat certainly reflects that. But we think we're not really expecting a big macro improvement here to deliver what we need to deliver. It's really more just kind of working through that inventory destocking and really just kind of seeing the current rate sort of play out.

And your next question comes from Deane Dray.

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

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

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

Hey, Deane, it’s Chuck. So for the most part we got price across all of our company -- operating companies. A little bit more -- we were a little more successful in IT where it starts with the two rather than one and we were a little bit lighter on the Professional Instrumentation side at 80 basis points. So -- but we -- I think we were successful across most places. We struggled at one -- a couple of places where we are struggled on price for some very specific reasons. At Tek they were down 50 basis points which is not what we were expecting and we're going to work to regain that but was a little bit different and also at EMC but unrelated to -- they have some contractual things that was mostly known about coming in, everywhere else, we’re really happy with 160 basis points in total, where we normally would get 40 or 50.

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

Probably more on the direct side as those are more -- as you can imagine those are more case-by-case decisions on the business. And so I would say at least more to the direct side. A little bit in distribution but some of it was quite not realized on the distribution side because of -- to think about it this way, we expected more price with January 1 price increases but because we had more pull into the fourth quarter from distribution, and we sort of -- that we sort of avoided the price metric if you will in the first quarter, if that makes sense Deane.

And our next question comes from Andrew Obin.

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

Great question. There is a couple of things. One is, they've been struggling for a couple quarters. Remember if tariffs are really a big impact to both Fluke and Tek. And so for Professional Instrumentation that really get's hammered there pretty well. So we will lap those tariffs that are in the majority of them in Q3. So we will start to get a lift there. Also Professional Instrumentation has high fall-through on their -- on shipments and so we need that pull in or that avoidance that maybe some of their distributors went for. We just need to get more volume out the door and get back growth. So that hurt us in Q1, so that’ll start to moderate. And one other factor is FX has really hurt us a little bit more than we expected and the fall-through on those things and again we're going to start when we get into the second half we should lap those as well. So if FX stays here there is some -- there is less impact in Q2 than Q1, but when we get to Q3 most of those should go away. So I would expect that we will see -- we will be back to normal margin expansion in the second half of this year.

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

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

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

And your next question is from Richard Eastman.

Jim or Chuck, could you just speak to the video that you’re contributing -- Tek’s video business that you are contributing to this venture, what revenue did it have? What kind of profits? And just, when do you expect that to be completed?

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

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

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

Okay. Very good. Thank you.

I just want to make sure I called that headwind.

The headwind, yes, yes, understood.

All coming up 18% earnings per share growth.

And your next question is from Andy Kaplowitz.

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

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

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

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

And then Jim just focusing on China for a second, you mentioned last quarter that you're seeing some slowing in Tek order book in China, but doesn't look like you saw any real slowdown in that business. So when you focus on China, I mean you mentioned maybe it can be resilient here as a lot of that resilient in GVR, Tek actually outperformed in China and then what's going on in the rest of Asia, because you mentioned that looks up creating a little weak?

Yes. So on Tek specifically, we saw -- as you said, we saw a little bit better China than we thought. I think some of that -- we still expected that to moderate a little bit as I said, it's high-single-digits in the quarter but probably mid-single in the full year. So I think that's still going to be a good year after, I think four years in a row of either double-digit or high-single-digit growth for Tek in China. And it's been relatively resilient as you said, I think we saw most customers in most segments of the market pretty good. And the other thing I would call and just relative to China macro is that Fluke's point-of-sale in its shops, which is a pretty good bellwether for the market was good, and Fluke's growth was pretty broad based in China as well. So I think China is holding in there. I wouldn't -- I'm not going to be appending to say that everything's great and it's going to turn wonderful, but I think it's it was certainly solid, and our -- it was a little better than we thought it would be overall. And as you mentioned GVR’s continued regulatory performance, but that'll wane a little bit in the second half. Relative to Tek in the rest of Asia, very -- a lot of our business in South Korea is 3D sensing related and it’s field related, we probably have more semiconductor process if you will or manufacturing exposure in Korea. And so while that's not a big issue for Fortive, it does impact the Asia business as we sight it and so we saw that in Korea and in other parts of Asia. So, that was probably the -- one of the headwinds that we saw at Tektronix in the quarter for sure. That moderates a little bit through the year just because we have some easier comps.

Your next question comes from Jeffrey Sprague.

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

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

And are you -- so that sounds like net 5% growth or so, may be a little bit more than that, is that?

Mid-single-digit in '18 so.

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

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

And I think also there was -- obviously had to do a lot of prep work to kind of accept the carve-out in the year on the price. But I think after ownership you’re looking at some pretty heavy work on their metrics management structure and alike. Is that still in front of you, is that embedded in the guide or is that something that I don’t know maybe gets capitalized in acquisition accounting or something?

No I think if you're talking about and the standing up the -- the team is going to run this. I think that we've done quite a bit of that. I think the thing that's in front of us really is basically outside of the US we've got these TSAs that we're going to have to bring them under into our IT platform and that's going to go on for probably four quarters. And as we do your profitably will accelerate every time we move off of one of those.

I think everything that we we've seen thus far, we've done a lot of work in this regard Jeff is that the cost structure that led to the returns for the business is every bit in play. So we feel very good about that. We think we still believe in the opportunity to improve the gross margins as well. And then finally when you look at the -- so we -- a lot of the tenants of -- the core tenants of the value creation there and we did this at a much lower interest rate cost and at a much different tax rate and so the returns -- the return profile has improved pretty a great deal since we announced the deal 12 months ago -- 10 months ago.

And your next question is from John Inch.

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

Well, I think in terms of the guide -- first thank you, we’d like the deal with the convertible notes. But as we came out this year, while we didn't know the exact terms of that, we had most of that factored in when we set the original guide. So it's not accretive to the guide but we like the deal that we did. Are there other things around the balance sheet? It isn’t just because on this one is a convertible note, I mean it is treated as debt not equity. And so I don't think it gives us any more debt financing for M&A around that. But are other things around the balance sheet? There is -- we're continuing to look and see what our optionality is and as we said for a while we'll consider what the best fit at the time is for financing and raising capital.

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

Yes. I would rarely be described as someone who sits back and waits on anything. So I feel obligated to that as we're certainly leaning in to opportunities. John, we have been pretty busy. I think we have been as busy as we have been over a time period. So we will continue to look for opportunities. As you said, we just closed 24 days ago the largest acquisition in history of the company, and so we certainly are digesting that and spending a considerable amount of time to make sure we do that right and that's important. So, I don't want in any way shape and form suggest that that's not a first priority because it is. But we also want to make sure we just between Gordian and Accruent and also with ASP we have not bought, call it, almost $10 billion of served market opportunity and with that comes more opportunity. So, we feel good about the opportunities in front of us, but again I think we now have the -- we certainly have the ability to be disciplined like we always have been and we will return focus as well. Almost sun-setting our three year anniversary here pretty soon. As you know well, the deals have ebbed and flowed and I suspect that will continue to be true.

And your next question is from Josh Pokrzywinski

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

Well, I would say that the environment hasn't changed a lot in the last several months, but certainly for the last few years it’s been competitive in the sense of the two major deals that we've done were in private equity hands and private equity showing up increasingly in a lot of these transactions. So I would say I wouldn't necessarily say we want to play where we're advantaged, where we have a proprietary view of the business, where -- and certainly now with some of the additions where we have synergy. And so I think those -- we're going to play in places where I think we're more likely to win. But I think the most important part is first having a strategic view of how to build a workflow and to really understand what you can do with the business, not only with the business you have but also with additional things and building more scale. And as you point out now, with Gordian and Accruent, eMaint alone and sort of that facilities maintenance -- facilities management software space, we're almost at a $0.5 billion. That gives us a tremendous amount of scale in which to do things. And then in some of our other businesses, where we have strategic positions, we're adding on to things to make them -- just make the workflow more competitive. And that builds on the strength of the brands whether it be Gilbarco or Tektronix or whatever. So, we're continuing to do those things as well. And I would say the other thing I would say is that while maybe the follow up question might be pricing, I don't think we're -- for great assets, I don't think we're really seeing differences in pricing over the last year or two. I think the crummy assets maybe have prices decreased. And so everything in the bottom end has moved up. But I think when you look at what great growth, great margin profiles with good high recurring revenue, those really strong assets with differentiated market positions, fundamentally, that pricing really hasn't changed in the last year or two.

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

Yes. So I think Chuck can talk in a little bit. I think, strategically we're certainly looking within Gilbarco within transportation tech and within Fortive to countermeasure these things. So, within Gilbarco, we're building out our high growth market positions. We've done two -- really almost three acquisitions over the last several years, in India as an example, to build our positions in high growth markets. We just launched a new dispenser for high growth markets. That's I think, a really great product. So build out our positions in markets where we're -- that are non-EMV, that's number one. I think number two is to continue to take advantage of opportunities, like in electric vehicles, where our Tritium investment is doing some things and we'll certainly continue to do that. So that's what we're doing within Gilbarco. And then certainly in the platform, we're looking for new opportunities. And certainly, as you mentioned, the breadth of opportunities that we have throughout Fortive to also do these things, are going to be all opportunities for us to countermeasure, if you will, the EMV shortfall, which inevitably will happen. I think, I don't think I think we've been consistent well over for at least couple of years to say that inevitably, there will be a step down at some point in time that’s I would say somewhat predictable, probably not within a specific quarter but certainly within a couple of quarters we have a pretty good sense for that.

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

And your next questing is from Scott Graham.

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

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

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

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

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

Yes, that's right, for sure.

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

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

And your next question comes from Nigel Coe.

So we covered a lot of ground. But I do want to go back to Gordian and Accruent and they’d be rolled into core in 4Q. So may be just speak to how those performed in 1Q core on a like-for-like basis? How did they hold up in the current environment? And then the second part on that is just stripping out -- kind of to do the math on EBITDA margins, by the way the additional disclosure is great. It looks like the margin came in at about 23% to 24% for Gordian and Accruent. Is that math correct as we're working with low 30s for those two companies?

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

That's right.

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

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

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

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

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

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

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

Okay. Great. And then quickly on ASP accretion. The saving of the accretion, looks like a nickle in 2Q, obviously like a $0.07 to $0.09 in 3Q, 4Q. Is that the TSA's roll off you alluded to, is that contributing to the better accretion in the back half of the year? And are we still looking at $0.30, $0.35 for the first 12 months?

So, $0.30, $0.35 for first 12, that's still the range. And yes, for the most part and while it's stepping up as it goes through time, there is also a little bit seasonality, it’s like many businesses the fourth quarters can be stronger than the first and what not. But I think those are major levers.

And your next question comes from the John Walsh.

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

No. It’s really kind of in our short cycle businesses primarily it’s Fluke and Tek. They’d probably greater fourth quarter than we originally expected, which led to some -- and we will call most of that probably tariff avoidance. So there is a little bit of point-of-sale starting slower too in the first part of the quarter as well John. So, I think it's those two things. The destocking some of it is because of the point-of-sale, it's also some of the because of the increase in inventory that they had at the end of the year.

Okay, great. And then I guess I'm looking at the Q you guys call out Germany as a country. Obviously, there's been a lot of concerns around Germany, given what we've seen from some of the macro data there, your sales are actually down very modestly. Maybe just help us understand really what drives your business there and maybe even broaden it out to Europe, because actually thought the European performance was a little bit better given some of the macros there?

Yes, I think, as we said, I would -- I'm still -- I still think Europe is a challenge for us. So, in the quarter Qualitrol and GVR which -- Qualitrol was one -- was a project, GVR was more secular, typically not a good read on the macro. That's a broader Europe comment, John. When you look at, Tek was down in Europe and a chunk of that was in Germany. Fluke had a weaker, but they weren't down in Europe, they were weaker than normal. So I think those are maybe a little bit more of a telltale sign of the macro. And so we don't have a big belief that that's going to significantly improve. For the rest of the year we'll sunset some easier comps, but I think we're watching. We're reading a lot of the same macro stuff. Everyone's reading. We're certainly looking through a lot of the other peer company filings to get a read on that. And I think it seems like it kind of depends. So, the good news is like some of our software businesses have been pretty resilient. I think Accruent was up high-single-digits in Europe as an example. So the places where we have good resiliency within the business model are still doing pretty well.

And your last question comes from Joe Giordano.

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

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

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

Yes. So I think we were introducing -- but we did -- we announced a couple of changes. We put in many of our senior leaders have been sort of owner operators and businesses since our inception. We've hired somebody from the outside that was in immersion for a while, and put him -- Marc Tremblay into the Fluke job and we promoted Tami Newcombe into the Tektronix job. So those two organizational announcements have been out there and we're really excited about having two really strong leaders in the new positions also Pat and [West] obviously picked up a lot with all the new acquisitions. Pat certainly has been the lead role in ASP. So gives us the opportunity for the two of them to spend more time on building out the platforms and that kind of thing.

And then what the -- I just want to make sure on the build up here for Gordian and Accruent, if I am getting the math right. So I think it's $0.06 in 2Q with the expectations. Was it something like four in the first quarter here?

I think we're saying $0.05.

Okay. And then, we're having that into core in 4Q right, so the incremental on top of that in your full year, that's just in from the third quarter, right?

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

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

Thank you. This does conclude today's conference call. You may now disconnect.