Edited Transcript of FTV earnings conference call or presentation 25-Apr-19 9:30pm GMT

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.

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [3]

——————————————————————————–

Thanks, Griffin, and good afternoon, everyone. Today we reported first quarter results that reflected a solid start to 2019, setting us up 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 1, 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 were $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 market’s core revenue grew mid-single digits, led by 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 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 of 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 of 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 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 the continued strong performance of ISC.

High-growth markets grew slightly as solid growth from 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 new product front, Fluke Networks launched 2 new fiber testing 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 and 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 as high-teens growth at 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 it’s fully networked pyrotechnic release solution 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 America 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.

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, 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 margins associated with acquisitions. Core operating margin increased 130 basis points, driven by the strong volume in 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 a 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 an agreement with Shell to offer its EMV-ready passport edge point-of-sale solution 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. Tennessee’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 that’s been well received by the market and drove shop equipment growth during the quarter.

Turning to the guide. We are 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, an 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 some 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 the beginning of the second quarter, we also took another significant step forward in the ongoing transformation of the Fortive portfolio, greatly increasing our exposure to an attractive health care 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 the combination of a resilient core portfolio, the foundation of the Fortive Business System, the growing contribution of Gordian and Accruent, and the addition of ASP, we remain 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 16 where we will give you deeper insights into the digital strategy of Fortive as well as an update on our portfolio of transformation efforts.

With that, I’ll turn it back to Griffin.

——————————————————————————–

Griffin Whitney, Fortive Corporation – VP of IR [4]

——————————————————————————–

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

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions) And your first question comes from Steve Tusa.

——————————————————————————–

Charles Stephen Tusa, JP Morgan Chase & Co, Research Division – MD [2]

——————————————————————————–

On the revenue contribution from acquisitions for Gordian and Accruent, I think when I add them up, I get to something like — on a prorated basis, like $100 million a quarter. Yet the acquisition contribution in that segment was like $80 million I think or something like that. I mean is there seasonality in that business? Or am I doing the math wrong?

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [3]

——————————————————————————–

Yes. No, you’re 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 businesses, again where we think maybe we get 20% and 45% in the first 2 quarters of the year, and I think that it’s kind of like maybe a 40-60 weighting first half to second half.

——————————————————————————–

Charles Stephen Tusa, JP Morgan Chase & Co, Research Division – MD [4]

——————————————————————————–

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

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [5]

——————————————————————————–

No, 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 or 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 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 great secular drivers, is we really are getting an outstanding team in both businesses.

——————————————————————————–

Charles Stephen Tusa, JP Morgan Chase & Co, Research Division – MD [6]

——————————————————————————–

Okay. And then one last one for me, just from a macro perspective. And now that you’ve kind of had an opportunity to absorb the first quarter here, looking back, was there any sort of pull-in or prebuy in the fourth quarter of any of your products? And maybe just touch high level on what you’re 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, shall I say. Is there anything going on in the macro that kind of worries you for the second half?

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [7]

——————————————————————————–

Yes. So maybe put 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 were 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 your pull-in question or what we saw is we definitely — I think we highlighted this in February that we thought there was somewhere around 70 to 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 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. Point of sale at 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.

——————————————————————————–

Operator [8]

——————————————————————————–

And your next question comes from Scott Davis.

——————————————————————————–

Scott Reed Davis, Melius Research LLC – Founding Partner, Chairman, CEO & Research Analyst of Multi-Industry Research [9]

——————————————————————————–

I just — I don’t think I’ve ever asked a question on Sensing Technologies business at all, but what — does that business turnaround 2019? Or we now kind of hoping for 2020?

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [10]

——————————————————————————–

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 — probably 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 done a — they’re obviously a very profitable part of the business, and they did a good job in protecting free cash flow in the quarter. So they will move to growth here through the rest of the year, and they’ll continue to contribute better from an earnings perspective as they go through the year.

——————————————————————————–

Scott Reed Davis, Melius Research LLC – Founding Partner, Chairman, CEO & Research Analyst of Multi-Industry Research [11]

——————————————————————————–

Okay. And if I just look at Slide 4, and you just take a look at the R&D numbers as a percent of revenues, you bought a — a lot of businesses have spent a lot of money on R&D and Jim, what’s your early take on if you’re getting your bang 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 a little comment maybe on R&D.

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [12]

——————————————————————————–

Yes. I think a couple things. One, clearly, the software businesses like Gordian and Accruent are going to require a little bit more R&D. And 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 is the continued add of 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’ll 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’s clearly what we often call dynamic research allocation where we’re really moving money into places where we have the highest growth opportunities.

——————————————————————————–

Operator [13]

——————————————————————————–

And your next question comes from Julian Mitchell.

——————————————————————————–

Julian C.H. Mitchell, Barclays Bank PLC, Research Division – Research Analyst [14]

——————————————————————————–

Maybe 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’s 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?

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [15]

——————————————————————————–

Well, I think the bigger thing is just, as we move through the quarter, our volume steps up sequentially. We normally, like, I think, from Q1 to Q2, our revenues is going to go up by 20%. Obviously, our expenses don’t — the fixed expenses don’t see that. So that creates a normal step-up through the year. We generally think of our earnings growth — the EPS being contributive $0.20 in the first quarter; $0.25, $0.25, in the second and third, and $0.30 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 — the last thing I’d point out is there’s FX in the first half, 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 back end, of a ramp through the year. But it’s mostly the revenue ramp.

——————————————————————————–

Julian C.H. Mitchell, Barclays Bank PLC, Research Division – Research Analyst [16]

——————————————————————————–

Understood. 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?

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [17]

——————————————————————————–

Yes. I’ll take the 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 probably — and certainly some in the U.S. Tek had on interesting dynamic where their direct business was up significantly more. They 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 an answer a few minutes ago. So I think that provides the 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 numbers start to improve as we move through the quarter. So I think we started off a little slower than we thought. Obviously, the Professional Instrumentation had just under 2% core growth. It certainly reflects that. Tek being flat certainly reflects that. But we think it — 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 rates sort of play out.

——————————————————————————–

Operator [18]

——————————————————————————–

And your next question comes from Deane Dray.

——————————————————————————–

Deane Michael Dray, RBC Capital Markets, Research Division – MD of Multi-Industry & Electrical Equipment [19]

——————————————————————————–

Could you take us through the Tektronix video transaction? What’s the — what are the economics? What’s the opportunity here?

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [20]

——————————————————————————–

Yes. The — strategically, Deane, you know us well, so we’ve always been looking, from a portfolio perspective, to always put our businesses in the best position for success. We also ask our operating companies to do that as well. And I think the Tektronix team really came back with this understanding that, hey, by combining with the Telestream business, not — the video business not as core to what we do with 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 Gemstar’s 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.

——————————————————————————–

Deane Michael Dray, RBC Capital Markets, Research Division – MD of Multi-Industry & Electrical Equipment [21]

——————————————————————————–

Got it. And then on the 160 basis points of price, how does that spread across the businesses? Where did you get the most price? And was there any give-up?

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [22]

——————————————————————————–

Deane, this is Chuck. So for the most part, we got price across all of our operating companies a little bit more. We’re a little more successful in IT, where it starts with a 2 rather than a 1. And we’re 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 for one — couple places where we 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 that was a little bit different. And also at EMC but unrelated to — they have some contractual things that was mostly known about coming in. But everywhere else, we’re really happy with 160 basis points in total where we normally would get 40 or 50.

——————————————————————————–

Deane Michael Dray, RBC Capital Markets, Research Division – MD of Multi-Industry & Electrical Equipment [23]

——————————————————————————–

That’s great. And just on Tek on the pricing, was that give-up on the direct side or through just distribution?

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [24]

——————————————————————————–

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 I lean more to the direct side. A little bit in distribution but some of it was price not realized on the distribution side because of — if you think about it this way, we expected more price with the January 1 price increases, but because we had more pull-in to the fourth quarter from distribution, we sort of avoided the price metric, if you will, in the first quarter, if that makes sense, Deane?

——————————————————————————–

Operator [25]

——————————————————————————–

And your next question comes from Andrew Obin.

——————————————————————————–

Andrew Burris Obin, BofA Merrill Lynch, Research Division – MD [26]

——————————————————————————–

Just a question on Professional Instrumentation margins. They’ve sort of been negative for a couple quarters now. What would it take operationally for the margins to inflect back up?

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [27]

——————————————————————————–

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

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [28]

——————————————————————————–

Andrew, the other thing that it’s just maybe important to keep an eye on is we had our best quarter in the history of the company last — first quarter of ’18 on margin expansion in PI. We had 300 basis points of margin expansion in the first quarter last year, so when we look on a 2-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’ll get better as we work through the year.

——————————————————————————–

Andrew Burris Obin, BofA Merrill Lynch, Research Division – MD [29]

——————————————————————————–

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 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?

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [30]

——————————————————————————–

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 digits in the month — in the quarter. We’ve said for a while now that China was likely to be more mid-single digit for the year. So if China held in there, maybe got a little better and Western Europe got better, I think we more would be at the high end of the range. And also — we also have some easier comps in some places like at sensing and at Fluke. So if we get to the higher end of their businesses as well there’s some opportunity. So we’ll 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 of the year in that kind of 3% growth, and we’re going to deliver double — high-teens earnings growth through the year. So even in that range of growth rates, I think the earnings growth is going to be substantial, and that’s pretty much why you saw the strong free cash flow in the quarter despite the fact that we missed 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.

——————————————————————————–

Operator [31]

——————————————————————————–

And your next question is from Richard Eastman.

——————————————————————————–

Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [32]

——————————————————————————–

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

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [33]

——————————————————————————–

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

——————————————————————————–

Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [34]

——————————————————————————–

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 have thought — so $0.86 to $0.90, and I’m kind of referencing your 25%, so I guess, Chuck, your 25%. So I guess $0.90 kind of fits. But I would think with the ASP acquisition, I mean, shouldn’t that add approximately $0.05 to the quarter? It sounds like this video business doesn’t come out till Q3. So what’s the drag there on the EPS for the second quarter?

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [35]

——————————————————————————–

Actually, I think the — there’s only 2 things that you might be missing. I agree with the $0.05 and 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% is 80. You build it up with $0.05 of ASP, as you noted, and there’s I think we’ve got $0.06 in for Gordian and Accruent. And so that comes in. Probably the one thing is there’s still $0.01, $0.02 of tailwind on FX.

——————————————————————————–

Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [36]

——————————————————————————–

Okay. Okay. Okay. Very good.

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [37]

——————————————————————————–

I just want to make sure I called it headwind.

——————————————————————————–

Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [38]

——————————————————————————–

Headwind. The headwind, yes, yes. No, I understood.

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [39]

——————————————————————————–

All coming up to 18% earnings per share growth.

——————————————————————————–

Operator [40]

——————————————————————————–

And your next question is from Andy Kaplowitz.

——————————————————————————–

Andrew Alec Kaplowitz, Citigroup Inc, Research Division – MD and U.S. Industrial Sector Head [41]

——————————————————————————–

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

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [42]

——————————————————————————–

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 cost. That’s actually the main step-up there.

——————————————————————————–

Andrew Alec Kaplowitz, Citigroup Inc, Research Division – MD and U.S. Industrial Sector Head [43]

——————————————————————————–

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

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [44]

——————————————————————————–

It’s just — 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 2 things I talked about is 90% of it.

——————————————————————————–

Andrew Alec Kaplowitz, Citigroup Inc, Research Division – MD and U.S. Industrial Sector Head [45]

——————————————————————————–

Got it. And then Jim just focusing on China for a second, you mentioned last quarter that you’re seeing some slowing in the Tek order book in China, but it 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. Is a lot of that resilient within GVR? Did Tek actually outperform in China? And then, what’s going on in the rest of Asia? Could you mention places like South Korea being a little weak?

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [46]

——————————————————————————–

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 — I’m still — 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 4 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 on just relative to China macro is that Fluke’s point of sale and 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 a — I’m not going to be a pundit that says everything is great and it’s going to turn wonderful. But I think, it was certainly solid in 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 Keithley 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 cite 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.

——————————————————————————–

Operator [47]

——————————————————————————–

And your next question comes from Jeffrey Sprague.

——————————————————————————–

Jeffrey Todd Sprague, Vertical Research Partners, LLC – Founder & Managing Partner [48]

——————————————————————————–

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

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [49]

——————————————————————————–

It’s probably about $825 million, $820s million somewhere around there.

——————————————————————————–

Jeffrey Todd Sprague, Vertical Research Partners, LLC – Founder & Managing Partner [50]

——————————————————————————–

And are you — so that sounds like it’s, off the top of my head, 5% growth or so, maybe a little bit more than that. Is that…

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [51]

——————————————————————————–

They are mid-single digit in ’18.

——————————————————————————–

Jeffrey Todd Sprague, Vertical Research Partners, LLC – Founder & Managing Partner [52]

——————————————————————————–

They did. Okay? And is that basically what’s implicit in the guide then for the year here for it’s not going to be organic obviously for you this year, but you see that type of growth continuing over the balance of ’18?

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [53]

——————————————————————————–

Yes, we got a — we’ll probably be in the low- to mid-range right now. I think we’re still getting a sense of what the business is going to be like that. They had a couple of onetime 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 the — we know the market is growing mid-single digits. 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 can turn the business into a mid-single digit grower. But I think implicit in the guide, with about 12 months of TSAs, Jeff, and working through Johnson & Johnson on some of the revenue profile for a time period, it’s probably going to be a more like low single-digit until we’ve got every aspect of the business under our ownership.

——————————————————————————–

Jeffrey Todd Sprague, Vertical Research Partners, LLC – Founder & Managing Partner [54]

——————————————————————————–

And I think also, there was — obviously, you had to do a lot of prep work to kind of accept the carve-out into your enterprise. But I think after ownership, you were looking at some pretty heavy work on their matrix management structure and the like. 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?

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [55]

——————————————————————————–

No, I think if you’re talking about the standing up the team that’s 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 U.S., 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 4 quarters. And as we do, your profitability will accelerate every time we move off of one of those.

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [56]

——————————————————————————–

I think everything that 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 place. 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 a lot of the tenets of — the core tenets of the value creation are 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.

——————————————————————————–

Operator [57]

——————————————————————————–

And our next question is from John Inch.

——————————————————————————–

John George Inch, Gordon Haskett Research Advisors – MD & Senior Analyst of Multi-Industrials [58]

——————————————————————————–

Chuck, the convertible senior notes you just issued seemed to have been done at very favorable terms. I’m not sure if that’s incrementally additive even by $0.01 or $0.02 to sort of the thought process this year? 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 it pretty well locked in?

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [59]

——————————————————————————–

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

——————————————————————————–

John George Inch, Gordon Haskett Research Advisors – MD & Senior Analyst of Multi-Industrials [60]

——————————————————————————–

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 additional portfolio moves in 2019? You guys have done a ton for the last 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 kind of how you thinking about these opportunities today? Or are you content to sort of sit back and wait?

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [61]

——————————————————————————–

Yes, I would rarely be described as someone who sits back and waits on anything. But — so I feel obligated to answer that as we’re certainly leaning in to opportunities. I think — John, we have been pretty busy. I think we’ve been as busy as we’ve been over a time period. So we’ll continue to look for opportunities. As you said, we just closed 24 days ago the largest acquisition in the 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 or 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’ve now bought, call it, almost $10 billion of served market opportunity with it, and with that comes more opportunity. So we feel good about the opportunities in front of us, but again, I think, we have — we now have the — we certainly have the ability to be disciplined like we always have been and we’re return focused as well. So it’s almost sunsetting our 3-year anniversary here pretty soon, as you know well, the deals ebbed and flowed, and I suspect that’ll continue to be true.

——————————————————————————–

Operator [62]

——————————————————————————–

And your next question is from Josh Pokrzywinski.

——————————————————————————–

Joshua Charles Pokrzywinski, Morgan Stanley, Research Division – Equity Analyst [63]

——————————————————————————–

So just one follow-up on Gordian and Accruent. You’ve 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 2, and 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?

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [64]

——————————————————————————–

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 we’ve just — the 2 major deals that we’ve done were in private equity hands. And private equity is 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 in sort of that facilities maintenance — facilities management software space, we’re almost to $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, well, 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 2. I think the crummy assets maybe have — prices have increased. And so everything in the bottom end has moved up, but I think when you look at what great growth, great margin profiles with high recurring revenue, those really strong assets with differentiated market positions, fundamentally, that pricing really hasn’t changed in the last year or 2.

——————————————————————————–

Joshua Charles Pokrzywinski, Morgan Stanley, Research Division – Equity Analyst [65]

——————————————————————————–

Got it. 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 that handoff between that business and some of the PI stuff where it’s 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 — and market shuffling today times itself to where it goes away by the time GVR has tougher comps?

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [66]

——————————————————————————–

Yes. So I think Chuck and I can tag-team just a little bit. I think strategically, we’re certainly looking within Gilbarco, within transportation Tek and within Fortive to countermeasure these things. So within Gilbarco, we’re building out our high-growth market positions. We’ve done 2 — really almost 3 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 is I think a really great product. So built out our positions in markets where we — that are non-EMV. That’s #1. I think #2 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 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.

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [67]

——————————————————————————–

Yes. And Josh, if I could add on, if you want to size that when you start looking at in — beyond 2021. 2022 and 2023, it’s probably $100 million to $200 million step-down over any 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 noting, $1.7 billion of acquired assets growing at high-single digits is also part of — and Jim mentioned some of those in the GVR platform.

——————————————————————————–

Operator [68]

——————————————————————————–

And your next question is from Scott Graham.

——————————————————————————–

Scott Graham, BMO Capital Markets Equity Research – Former Analyst [69]

——————————————————————————–

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

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [70]

——————————————————————————–

Are you talking about on the SG&A there? Or on the…

——————————————————————————–

Scott Graham, BMO Capital Markets Equity Research – Former Analyst [71]

——————————————————————————–

I’m talking about on your exhibit on Page 6. Yes, for the margin on bundle.

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [72]

——————————————————————————–

I see. I have to think about that. And I prefer not to just spitball here because we’ve got the ASP coming in here with that’s — it’s amortization. But it’s likely to be in the same size as what we just saw with Gordian and Accruent for the full year because they’re rough — if you think about $2.8 billion spend on Gordian and Accruent, $2.7 billion on ASP, it’s going to look about the similar impact on our total operating margins. But I think that — anyway, so I think that’s what I would expect to see.

——————————————————————————–

Scott Graham, BMO Capital Markets Equity Research – Former Analyst [73]

——————————————————————————–

That’s fair. And so when you were talking earlier about the [operating] inflection in the PI margin, you were just talking about the core?

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [74]

——————————————————————————–

Yes, that’s right. For sure.

——————————————————————————–

Scott Graham, BMO Capital Markets Equity Research – Former Analyst [75]

——————————————————————————–

Okay. I also noticed 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, but you talked a lot about mix. I was hoping you could tell us a little bit more maybe size that for us. Is that 30, 40 — is that, that 25 basis points of takedown? What happened with OMX, both the guidance and what’s going on with mix within that?

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [76]

——————————————————————————–

Well, most of what happened with the guide for the year is the first quarter. And so our first quarter coming in at negative 70 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 to a little 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 then they normalize when we get to the second half.

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [77]

——————————————————————————–

And Scott, 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 I think, even though you see a little bit of a lower OMX, you see the continued strength in EPS, and you see the continued strength of 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.

——————————————————————————–

Operator [78]

——————————————————————————–

And your next question comes from Nigel Coe.

——————————————————————————–

Nigel Edward Coe, Wolfe Research, LLC – MD & Senior Research Analyst [79]

——————————————————————————–

So we covered a lot of grounds, but I do want to go back to Gordian and Accruent, and that they’re rolled into core come September and 4Q. So maybe just speak to how those performed in 1Q core on a like-for-like basis? How did they hold up in this slower environment? And the second part on that is just stripping that in terms to do the math on EBITDA margins. By the way, the additional exposure is great. So it looks like the margins came in about 23%, 24% for Gordian and Accruent. Is that math correct because we’re working with low 30s for those 2 companies?

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [80]

——————————————————————————–

Yes, you’re talking about the EBITDA for Gordian and Accruent, what you see…

——————————————————————————–

Nigel Edward Coe, Wolfe Research, LLC – MD & Senior Research Analyst [81]

——————————————————————————–

Yes, that’s right. That’s right.

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [82]

——————————————————————————–

That’s — 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…

——————————————————————————–

Nigel Edward Coe, Wolfe Research, LLC – MD & Senior Research Analyst [83]

——————————————————————————–

Okay. And then like…

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [84]

——————————————————————————–

Nigel, your first question was a little bit of I think, around durability of Gordian and Accruent. Is that…

——————————————————————————–

Nigel Edward Coe, Wolfe Research, LLC – MD & Senior Research Analyst [85]

——————————————————————————–

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

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [86]

——————————————————————————–

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

——————————————————————————–

Nigel Edward Coe, Wolfe Research, LLC – MD & Senior Research Analyst [87]

——————————————————————————–

And the growth, Chuck? What was the growth in Gordian and Accruent?

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [88]

——————————————————————————–

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

——————————————————————————–

Nigel Edward Coe, Wolfe Research, LLC – MD & Senior Research Analyst [89]

——————————————————————————–

Okay. Great. And then just quickly on the ASP accretion, the phasing of the accretion, it looks like $0.05 in 2Q. Obviously, it looks like a $0.07, $0.09 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 $0.325 for the first 12 months?

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [90]

——————————————————————————–

So $0.30, $0.35 for the first 12 is — that’s still the range. And yes, for the most part, on why it’s stepping up as it goes through time. There’s also a little bit of seasonality as — like many businesses, the fourth quarter is going to be stronger than the first and whatnot. But yes, those are the major levers.

——————————————————————————–

Operator [91]

——————————————————————————–

And your next question comes from John Walsh.

——————————————————————————–

John Fred Walsh, Crédit Suisse AG, Research Division – Director [92]

——————————————————————————–

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 you alluded to, I guess?

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [93]

——————————————————————————–

No, it’s really kind of in our short-cycle businesses, primarily at Fluke and Tek. The — probably greater fourth quarter than we originally expected, which led to some — and we’ll call most of that probably tariff avoidance. So it’s that. There is a little bit of point of sale starting slower, too, in the first part of quarter as well, John. So I wouldn’t — and I think it’s those 2 things, the destocking some of it is because of the point of sale, it’s also some of it because of the increase in inventory that they had at the end of the year.

——————————————————————————–

John Fred Walsh, Crédit Suisse AG, Research Division – Director [94]

——————————————————————————–

Okay. Great. And then I guess looking at the Q you guys call out Germany as a country. Obviously, there has been a lot of concerns around Germany given what we’ve seen from some of the macro data there. Your sales were 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 macro scares?

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [95]

——————————————————————————–

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 and 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 — while 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, 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.

——————————————————————————–

Operator [96]

——————————————————————————–

Your last question comes from Joe Giordano.

——————————————————————————–

Joseph Craig Giordano, Cowen and Company, LLC, Research Division – MD [97]

——————————————————————————–

So Chuck, did you give the specific number for Fluke, like I think you said Fluke digital, what the growth was in the quarter? Did you give like the legacy Fluke growth in the quarter?

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [98]

——————————————————————————–

I don’t believe I did. Total Fluke was low single digits, basically, yes.

——————————————————————————–

Joseph Craig Giordano, Cowen and Company, LLC, Research Division – MD [99]

——————————————————————————–

Low single digits? Okay. And was there management changes going on there this quarter?

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [100]

——————————————————————————–

Yes. So I think we’re — it’s interesting, but we did — we announced a couple of changes. We put in — many of our senior leaders have been sort of owner operators in businesses since we — 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 2 organizational announcements have been out there and are — we’re really excited about having 2 really strong leaders into new positions. Also, frees Pat and Wes up. Wes obviously has picked up a lot with all the new acquisitions. Pat certainly has been the lead role on ASP. So it gives us the opportunity for the 2 of them to spend more time on building out the platforms and that kind of thing.

——————————————————————————–

Joseph Craig Giordano, Cowen and Company, LLC, Research Division – MD [101]

——————————————————————————–

And then, what the — I just want to make sure on the build-up here for Gordian and Accruent, I’m getting the math right. So I think we had $0.06 in 2Q is the expectation. Was it something like $0.04 in the first quarter here?

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [102]

——————————————————————————–

I think we’re saying $0.05.

——————————————————————————–

Joseph Craig Giordano, Cowen and Company, LLC, Research Division – MD [103]

——————————————————————————–

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?

——————————————————————————–

Charles E. McLaughlin, Fortive Corporation – Senior VP, CFO & Interim Principal Accounting Officer [104]

——————————————————————————–

Yes, in terms of core, in the fourth quarter.

——————————————————————————–

Joseph Craig Giordano, Cowen and Company, LLC, Research Division – MD [105]

——————————————————————————–

Okay. Just wanted to confirm that we’re looking at apples-to-apples.

——————————————————————————–

James A. Lico, Fortive Corporation – President, CEO & Director [106]

——————————————————————————–

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’re really proud of the work we did in the quarter. Certainly, some things to fix, as I think we 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’ll give you more detail on ASP on Gordian and Accruent. We’ll certainly outline our digital strategy and certainly give you a better perspective on a number of the strategies that we’re utilizing to drive growth this year but, more importantly, to build a better Fortive over time. Thanks. And our — Griffin and team and Chuck are around for questions tonight, tomorrow and next week. Take care, everybody. Have a great week.

——————————————————————————–

Operator [107]

——————————————————————————–

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