Fortive Corporation (FTV) Q2 2019 Earnings Report, Transcript and Summary

Hello. My name is Jason, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporate Second 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, Jason. Good afternoon, everyone, and thank you for joining us on the call. With us today are Jim Lico, our President and Chief Executive Officer; and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. We present certain non-GAAP financial measures on today's call. Information required by SEC Regulation G relating to these non-GAAP financial measures 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, August 9, 2019. Instructions for accessing this replay are included in our second quarter 2019 earnings press release. We completed the divestiture of the Automation & Specialty business on October 1, 2018, and accordingly, have included the results of the A&S business as discontinued operations for current and historical periods. The results presented on this call are based on continuing operations. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. All references to period-to-period increases or decreases and financial metrics are year-over-year on a continuing operations basis. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will, or may, occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward-looking statements that we make today. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2018. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements. With that, I'd like to turn the call over to Jim.

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

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

Yes, sir. [Operator Instructions] Our first question comes from the line of Julian Mitchell of Barclays.

Hi, good afternoon.

Hi, Julian.

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

Yes. I think there's a few things when you look at the way you will get. One is there's normal seasonality between Q3 and Q4, so you get more volume there. There's also the year-on-year core growth that we got between 2% and 4%. And then there's the year-on-year whiffed of Gordian and Accruent and ASP. And I think those two things -- those three things get you to the year-on-year whiffed. The way I look at it is, when I look at it from year-on-year last year, I think we were at $0.91 at the -- I think the high-end of our guide we're talking about around 15% high-teens to 18% increase in the fourth quarter.

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

Certainly, so the main thing that -- first of all most the businesses are performing very well and delivering a lot of cash flow, but the big outlier here is ASP that we just recently acquired as part of the deal acquired deal that we signed. And we got no receivables NAP, so there is going to be this one-time hole as we refill that -- those receivables that can put us behind on cash flow, but except for that one time thing that will be roughly done halfway through Q3. I think that we see our ongoing free cash flow, growing roughly in line with the growth we see in adjusted earnings.

Great, thank you.

Thanks, Julian.

And your next question comes from Scott Davis from Melius Research.

Hi. Good afternoon, guys.

Hi, Scott.

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

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

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

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

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

Okay. Super helpful, thank you guys.

Thanks, Scott.

Our next question comes from Steve Tusa of JP Morgan.

Hey, guys. How's it going?

Good.

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

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

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

So nothing on core revenue, obviously. But I think the number -- I want to make sure you understand about the day two countries, that our distributors sets a little bit haircut from what we saw in our numbers. So I think that -- let me just get that number for you really quick now. And then I'll come right back to you.

So you are saying you guys have -- the distributors have changed buying patterns something in the near-term?

No, so outside the U.S., ASP is still being managed by J&J. And they're acting as the distributor. So therefore while you'd expect us to have a little over $200 million in this quarter, because ASP takes a haircut off of their portion of it, say maybe a third of the business. This quarter, we had $167 million hit our reported numbers.

Okay. Got it. And then what about Gordian and Accruent?

Yes they’re just a little bit about -- those two are about a little over $100 million.

Okay. And is there -- I guess, when it comes to the kind of shorter cycle businesses, any trends through the quarter that more notable? I mean, did you exit worse than you started? And are you seeing anything so far in July that changes your views on that at all?

Yes, I think Steve, when we talked at EPG, we talked about North America being pretty good. And I think in total that was true. Although it was more Gilbarco and less Fluke and Tek. And we saw June sort of changed it for both Fluke and Tek. So I would say, what we really think about when we think about the second half guide for Fluke and Tek, we really sort of looked at the weeks of supply of inventory, we looked at point of sale, and really reflected that in the revenue drop. So we really think that's probably what we'll see in a second half. I think the other thing that's probably the bigger change is Europe, we -- I think I said flattish for what we probably think in Europe, we are obviously down low-single digit. And again, that was principally at Fluke and Tek, and they were down more than 2.5, or low-single digits. So what we really ended up seeing is a slower Europe until a point-of-sale in June. So it's really what we try to account for in the second half forecast is that as well. And probably the more precipitous drop between say two, three months ago for the second half, is how -- is our view in Professional Instrumentation for Europe?

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

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

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

In the 22-23 range.

Yes. Okay, great. Thanks a lot.

Thanks.

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

Hi, good afternoon.

Hi, Andrew.

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

Well, I'll answer the second one, how does it get better I think is much a macro question probably as any right. That's a -- we really decided to put it to be prudent and not assume that it will get better in the second half, Andrew. More specifically, to your first question, I think we saw a more precipitous drop at Tek. Definitely it was channel destocking, but we also saw demand go down. We saw -- so I think from that standpoint, it was across all the product lines, there was certainly an automotive component to that. While that's -- so that's not an enormous exposure to us, but we do sell into the R&D labs of automotive and that was slower for sure. Just as one example of what we saw. Relative to Fluke, I think it was -- we saw June drop in point-of-sale. And, to be honest with you, that's also reflected in how we think about the second half as well. So, and it was relatively broad based as well. So I think from that standpoint, it feels more macroeconomic, end user demand, if you will, then it feels just destocking. And, so I think that's how we're going to reflect that's what's reflected and how we see everything right now and we'll look for signs for improvement. And, Steve asked how -- and how July looks and that kind of thing, and we're seeing nothing in July at this point that would tell us any different than where we're at right now. It's very early days in July as you know particularly in the U.S. because of the holiday week.

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

Hey Andrew, this is Chuck. So, you're right, the pricing was good, but it was a little bit more it was offset by the slowing volume. Although down 140 basis points of core OMX in Q2 has sequentially improved from Q1, I would expect that -- if we -- first of all, if we hadn't had the slowdown, we probably would have been 100 basis points better in Q2 on OMX at PI. I would expect because we're going to start lapping some of the tariffs and continued discipline in FDS [ph] and improving margins that will continue to see sequential improvements from Q2 to Q3 and then again from Q3 to Q4. But I don't think it has -- it will get positive in Q3, but in Q4, I believe that PI has a good chance too.

And pricing is sustainable?

I think I think we put in a lot of price last year. So I think we'll -- the price metric might be a little bit less first half to second half because of all the price we put in last year for the tariffs, but that'll be offset by the tariffs being in the comp. So I think you'll see, the difference between those two things probably isn't much, first half to second half.

Thanks a lot. Appreciate it.

Thanks, Andrew.

And our next question comes from Deane Dray of RBC Capital Markets.

Thank you. Good afternoon, everyone.

Good evening, Deane.

Hey. I would assume that you all follow the same practice that was established at Danaher, that after the 100 days of an acquisition, you reevaluate there -- assess how the integration is going and maybe for ASP you could share what you've learned, positives, negatives, what's gone well, any kind of surprises along the way? And then I've got a couple of follow-ups there.

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

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

We can tag team this one, I think the transition services agreement, we’ve got a lot of work between now and the end of the year. So I would say a big number -- while a lot of little things will occur between now and the end of the year. What we will start to see is that the takeover of a lot of those countries really starting to occur more accelerating into 2020. And as we said in the prepared remarks toward the end of the first half of 2020 is kind when we get this -- get that most of those things completed. So a lot of work between now and then, we took on Canada as a country that was just recently, but I think a lot of the work from here to the end of the year is really about to doing the spadework the foundational work to be set up systems and things like that. So, it's really good to be in 2020, where you start to see a number of those things occurring.

About the receivables?

Yes, that was contemplated in the deal from the 0:37:39. So we knew about that I think everybody there were happy with the deal we struck with them that was very fair but that wasn’t a port deal adjustment.

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

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

Good to hear. Thank you.

And our next question comes from Andy Kaplowitz of Citi Bank.

Good afternoon, guys.

Hi, Andy.

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

And so Andy, the only lowering that we done is really about the slowing in our short cycle, primarily in PI. The acquisitions are all performing at or above what we expected. And there has been no change -- we’re not changing anything in our guide about that nor do we expect to. So I think that's the main point of your question.

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

Not this year, they are -- we -- five months to go there is some deal costs associated with that, but no meaningful earnings up or down for those deals.

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

Well I think it’s really two countries. And I think GVR -- the India story I think is very much one -- we won a significant number of tenders and it's just getting things through the contract process and really getting things installed and all that. So we have a very good color on the backlog and feel very good, I wouldn't read anything into the India thing and high growth markets growth year-to-date for Gilbarco is still growing. So it's really the second quarter dynamics of some things in India that are pushing. There is probably a little bit of slowing in China but that really has to do with just really substantial growth last year through the double wall tank upgrades and we’re still seeing some wins that will be in the second half. So we still see growth in China for Gilbarco for the year, but again a tender or two pushed into the quarter and that’s not unusual in this business quite frankly, for it happen in India and China at the same time maybe that's a little bit unusual. But we feel really confident about high-growth market growth for GVR in the year.

Thanks, guys. Appreciate it.

Thanks, Andy.

And our next question is from John Inch of Gordon Hasket.

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

I think when we get to the fourth quarter, some of our acquisitions, particularly, Gordian and Accruent are going to turn core and so that does help us against a more difficult comp for sure. And I think that in the third quarter, I think that there is easier comp to last year. But, we've got a little bit wider range than we normally talked about. So I think you can figure out how that might go up from -- we expected at this point from Q3 to Q4. But we're watching what's going on here pretty intently.

So there's no presumption of any kind of natural pickup or order trends that come in or something like that. It's just -- just takeaway the way that chips fall, right?

Yes, there's a little bit there -- as I was just answering Andy's questions, where the India tenders falling, could help a little bit here and there. And so there's a little bit of where those fall. But I think as Chuck mentioned, as you said, a little bit tougher comp in the fourth quarter, but we really get a full quarter of Gordian and Accruent in the fourth quarter. So that sort of makes up for a little bit of that slightly tougher comp. But there's really no expectation regionally or by business of any big pickup within the year relative to core grow.

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

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

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

Yes, you have a good memory. So March, it's really the -- particularly the Fluke point-of-sale trends. The Fluke point-of-sale trends turned up in March, and that made us feel pretty good about things and even in first part of April, they were pretty good. And they held in there a little bit through May. But they did slow a little bit, particularly in the U.S., or particularly in Europe, they slowed in June for sure a big time. And what we also saw was just a more days' supply of inventory starting to change and channel partners starting to make some decisions around slowing sell in and even in cases where we might have had consistent sales out. We still saw people -- we typically see an inventory build first quarter to second quarter. So days' supply this is in Fluke days' supply typically goes up a little bit in the second quarter. And then -- and what we saw this year was not that at all. So clearly people were managing inventory tighter and I suspect it had a lot to do with the uncertainty. So in the case of Europe, we definitely saw sales out go pretty down pretty quickly in June. And in the case of U.S., we started down a little bit, but we saw sell in go slow down and weeks of supply pop-up. So we've put all of those assumptions into the second half.

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

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

Yes, particularly when most of it was in June, John. Just a little bit more on that, we're really -- particularly in Fluke, we're really consistent around the world relative to margin structure. So when that stuff happens in the short run. We're obviously working very hard in June and right now to make sure that we improve those as we go through the year.

Awesome. Thanks, guys. Appreciate it.

Thank you.

And our next question comes from Richard Eastman of Baird.

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

Yeah so, what I would say first and foremost is you're right around the KEITHLEY really is, as you as you well know. KEITHLEY is very much -- has more semiconductor exposure than the tech as whole, and it has more electronics, manufacturing exposure, as well and More Asia exposure. And so I think the slowing at KEITHLEY was more broad based than just China and more than just semiconductors, but very much, I would say an Asia story. And the Asia, sort of electronics manufacturing story where we saw the slowing. And exactly right it was Huawei, it's mostly R&D tools, and mostly scope. So our check go through the math. I think the one thing we were very pleased with, as I said in the prepared remarks was the strength of scopes, particularly in the midrange. We continue to grow our sole scope platform, if you will particularly the new platform very well.

And I think that when you will put numbers to that, I think Huawei was a little over $10 million, let’s called 1.25%. And then I think that -- and roughly KEITHLEY was down about twice that.

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

Okay. And then just a really quick question around the IT margins op margins, when I look at that the incremental was literally 100% there. And is that largely just -- is that GVR volume absorption? Is that pretty much which delivering that or?

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

Okay, fair enough.

And if you look at the segment of Matco had a good quarter as well. And obviously that's a good business for us. So I think the other part of the story probably is we saw some nice -- saw some good things in Matco this quarter as well.

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

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

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

Perfect. Okay, thank you.

Thanks, Rick.

And our next question comes from John Walsh of Credit Suisse.

Hey, John.

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

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

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

Yeah, well, I hate to comment anything in the near-term, and quite frankly, we commented on near-term, because some of the deals we were talking about, we've obviously closed in the last 30 days. We're really -- and maybe I'll use the last few as an example, we're incredibly pleased at the deals we got done. The -- this quarter, I mean, when you look at, obviously ASP is a transformational business for us in many respects. And we're really excited about that. You look at the two businesses, two years ago, we bought ISC, because we're really excited about this, the workflows around safety, and now we close two deals that one is a bolt-on safer systems. It really helps them really gives us a new set of modules to sell on top of the iNet platform and then Intellects really gives us a great new adjacent market for EH&F [ph] software. So we’re really well positioned in the workflows one with a bolt-on the other with an adjacency. And then obviously proof technique, a classic bolt-on for Fluke significantly raises our game and condition monitoring and gives us a team that's incredibly experienced at understanding condition monitoring particularly around vibration. So that's -- those are those are the kinds of deals that are still in the funnel and I think what we've done in the second quarter and early in the third is really when I talk about is a great example of when I talk about breath of the funnel John, we're really -- and that funnel continues to have good breath. Obviously very much in field solutions this quarter, in particular the last three I just mentioned, but we feel good about the funnel and the breadth of the funnel.

All right, thank you.

Thank you

And our next question comes from Nigel Coe of Wolf Research.

Hey, Nigel.

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

Well there’ll be -- so couple of things, I'm not sure I caught the last part about the teams of ASP on EBITDA, but I think when we get to the other side, which is the nature of your question, in the starting out in the mid-20s is a good place for us to be mid to upper 20s is I think where we're going to go. I think that there’ll be some accretion from TSAs in the back half of the year. I think we closed Canada, but that's not a -- they're going to start slow and then they're going to pick up speed. Fourth quarter, there'll be a little bit of whiffed and then continue to accelerate closing more of those in Q1 and Q2 of next year. So that's the day two country TSAs and then there's an IT system that stand up, and that's not a gradual, that's more of a cut over, that'll happen sometime in the first half of next year.

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

We're really carving a business right out of ASP. So with that we're recreating more than just the RA QA systems but also several of the other systems in the business, like the financial system, ERP, a lot of those things we already have, but in other places we're adding -- we're creating those things. We're re-creating what they have. So, that's a good part of it, but it's spadework we’ve got to get done.

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

I think when we look at -- as I said that the changes that we saw and really we’re talking about PI here. We saw a little bit slowly in the U.S. it's probably too early to tell whether or not the first couple of weeks of July have really seen a difference. I would say we've seen consistently in Europe and what we saw in June we’re still seeing so that's probably color and China probably similar story. We haven't seen anything that would tell us that the things are moving around to the good or that are getting more negative at this point. But I caveat that with July is generally the first part -- first two weeks, first three weeks of the quarter aren’t always the best view of things. Certainly, as we have a few more weeks here we’ll have a better sense.

Thanks guys. Appreciate it.

Thanks, Nigel.

And our next question comes from Jo Giordano of Cowen.

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

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

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

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

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

No, I think we were slightly -- I think for the year at 16% for 2019. So in 2020 16%, so probably pretty good -- is a good number to use. What's happened in the first half as some discrete items that are unique to Q1 and Q2 that drove it a little bit lower, but ongoing for a year 2020 is 16%.

Okay, thanks guys.

Thanks, Jo.

And there are no further questions at this time, I'd like to turn the call back over to Mr. Jim Lico.

Thanks, Jason. And thanks, everyone, for taking the time today. We appreciate all your support. And the time you take to understand our story. As we highlighted in May, we are incredibly proud of the work we're doing to change the portfolio. And I think we saw a lot of great transformation really play out in the quarter for us. And we're certainly excited about some of the new things we've done around the capital allocation front with several of the new companies that will join the Fortive family. We realized that the second quarter was a lower macroeconomic environment for us, I would call it a little bit of higher uncertainty, and some slowdown that we talked about. And so we've been prudent we believe in the second half to really make sure we're managing the business both for the long-term, and also continuing to deliver outstanding EPS growth and free cash flow. So we thanks -- we think we're in a very good position right now. And while we're not trying to predict the outcome of what the next couple of quarters will be from an economic standpoint, we think we're well prepared for what's out there. We'll obviously continue to have conversations around that and obviously, Griffin and Chuck and our team are available for questions after the call. Thank you and have a great rest of the summer. Thanks, Jason.

Thank you. Ladies and gentlemen, this does conclude today's call. Thank you for your participation. You may now disconnect.