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

Q2 2019 Fortive Corp Earnings Call

EVERETT Jul 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Fortive Corp earnings conference call or presentation Thursday, July 25, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles E. McLaughlin

Fortive Corporation - Senior VP & CFO

* Griffin Whitney

Fortive Corporation - IR Officer

* James A. Lico

Fortive Corporation - President, CEO & Director

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Conference Call Participants

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* Andrew Alec Kaplowitz

Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head

* Andrew Burris Obin

BofA Merrill Lynch, Research Division - MD

* Charles Stephen Tusa

JP Morgan Chase & Co, Research Division - MD

* Deane Michael Dray

RBC Capital Markets, LLC, Research Division - Analyst

* John Fred Walsh

Crédit Suisse AG, Research Division - Director

* John George Inch

Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials

* Joseph Craig Giordano

Cowen and Company, LLC, Research Division - MD and Senior Analyst

* Julian C.H. Mitchell

Barclays Bank PLC, Research Division - Research Analyst

* Nigel Edward Coe

Wolfe Research, LLC - MD & Senior Research Analyst

* Richard Charles Eastman

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Scott Reed Davis

Melius Research LLC - Founding Partner, Chairman, CEO & Research Analyst of Multi-Industry Research

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Presentation

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Operator [1]

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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 Corporation's Second Quarter 2019 Earnings Results Conference Call. (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.

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Griffin Whitney, Fortive Corporation - IR Officer [2]

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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 and Presentations and will remain archived until our next quarterly call. A replay of the conference call will be available shortly after the conclusion of this call until 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.

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

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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 progressed 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 Gilbarco Veeder-Root 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 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 agreements 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 3 additional acquisitions within field solutions. The acquisitions of Intelex and SAFER Systems as well as PRÜFTECHNIK 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 at Gilbarco Veeder-Root, EMC and Industrial Scientific, which was partially offset by a flat quarter from Fluke and a decline at 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 at Fluke was more than offset by a 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 but 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 from deal-related costs. Core operating margins increased 30 basis points as continued strong volume at GVR and the disciplined application of FBS helped 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 140 basis points, reflecting slower revenue performance, the impact of tariffs and unfavorable foreign exchange.

Advanced Instrumentation & 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 decreased low single digits as slightly positive growth at 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 from 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 at Fluke Networks was offset by declines in thermography, 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 SoundSight technology. Fluke also completed the bolt-on acquisition of PRÜFTECHNIK, a leader in vibration monitoring, alignment and testing equipment and services.

The acquisition of PRÜFTECHNIK accelerates Fluke's asset reliability 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 the 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 Intelex, a leading provider of EH&S software and SAFER Systems, whose leading cloud-based platform provides real-time hazard analysis and risk assessment to the chemical, oil and gas and transportation sectors. These acquisitions significantly advance 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 more stable conditions in certain markets as it generated positive bookings growth for the first time in 8 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 7 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 at Tektronix. EMC generated broad-based growth, of course -- across its core airspace and defense product lines as well as its commercial satellite offering. A record backlog at the end of the quarter has 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' product lines. We expect headwinds at Keithley and in Western Europe to persist in the coming quarters as will challenges from Huawei's status, pending any resolution of ongoing trade hostilities between the U.S. and China.

Tektronix' investments are driving growth in 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 3 and 4 Series MSOs added to the continued success of the 5 and 6 Series, including several large deals with enterprise customers. Tektronix recently closed the previously announced transaction to contribute its video test and monitoring business to a new entity formed 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 toward the end of the quarter. China continued to perform well with greater than 20% growth, but was partially offset by weakness in North America and Western Europe. We are also seeing good early traction in Sensing's IoT offerings, including SPT'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 we're 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 at high-level disinfection supported by the successful introduction of the ENDOCLENS Neo-D, our new automatic endoscope reprocessor 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 Aral 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 installed 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 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 forward.

In line with expectations, TeletracNavman's core revenue decreased low double digits in the second quarter. Its 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 team's continued focus on stabilizing the business has resulted in a reduction in customer churn. We expect to see continued improvement in the coming quarters for bookings and 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 platform's core revenue increased low double -- low single digits during the second quarter as mid-single-digit growth at Matco was partially offset by a mid-single-digit decline at Hennessy. Matco outperformed in the quarter, paced by strong growth in diagnostics and hardline tools. High teens growth at diagnostics was due in part to 2 new additions: the Matco's Maximus family of diagnostic products, the Maximus Flash+, which provides OEM-level live diagnostics expertise; and the MaxFlex, a full-featured diagnostic tablet offered with a highly customizable monthly subscription plan.

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 trend 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, an 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 acquisitions from the past few years continues to enhance the growth and resilience of the overall portfolio, position us well to deliver -- continue to deliver top-quartile earnings growth.

With that, I'd like to turn it over to Griffin.

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Griffin Whitney, Fortive Corporation - IR Officer [4]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Julian Mitchell of Barclays.

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Julian C.H. Mitchell, Barclays Bank PLC, Research Division - Research Analyst [2]

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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 uplift? I understand last Q4, you had a big sequential increase, but there was a lot of prebuy helping that.

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [3]

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Yes. I think there's a few things when you look at -- the way you look at it. One is there's normal seasonality between Q3 and Q4, so you get more volume there. There's also the core -- year-on-year core growth that we got between 2% and 4%. And then there's the year-on-year lift of Gordian, Accruent and ASP. And I think those 2 things -- or those 3 things get you to the year-on-year lift . The way I look at it is when I look at from year-on-year, last year, I think we were at $0.91. At the, I think, high end of our guide, we're talking about a -- around a 15% high teens to 18% increase in the fourth quarter.

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Julian C.H. Mitchell, Barclays Bank PLC, Research Division - Research Analyst [4]

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Understood. And then maybe just following up on the free cash flow. That was under some pressure in the second quarter. It looked like 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.

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [5]

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Certainly. So the main thing that -- first of all, most of the business is performing very well and delivering a lot of cash flow. But the big outlier here is ASP that we recently acquired as part of the deal -- acquired deal that we signed, we got no receivables and AP. So there's going to be this onetime hole as we refill that -- those receivables that kind of puts us behind on cash flow. But except for that onetime 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.

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Operator [6]

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

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Scott Reed Davis, Melius Research LLC - Founding Partner, Chairman, CEO & Research Analyst of Multi-Industry Research [7]

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Just as a big-picture observation looking at Slide 4 and the SG&A deltas, are there any structural reasons, Jim and Chuck, why the newer assets, once they get fully onboarded, can have SG&A levels more traditional Fortive, call it, 25% ballpark?

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [8]

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Well, Scott, it's Chuck. A couple of things there. One, the lift you're 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.

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James A. Lico, Fortive Corporation - President, CEO & Director [9]

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And I think relative to the businesses we're acquiring, I would look at the software businesses having a little bit more SG&A that typically goes with the 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 it's probably a little bit more SG&A driven by a little bit more engineering, a little bit more sales costs just because of direct selling, but the higher gross margin certainly pay for that. And if you're just purely looking 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 on -- in general when you look at in ASP or businesses that look a little bit more like the businesses we have today, you'd see no reason why, over time, they would have a similar cost structure to what we've been able to achieve in other businesses.

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Scott Reed Davis, Melius Research LLC - Founding Partner, Chairman, CEO & Research Analyst of Multi-Industry Research [10]

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Okay. I think that answers it. And then just trying to get a sense, on channel visibility, do you have -- and particularly I guess when you think 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?

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James A. Lico, Fortive Corporation - President, CEO & Director [11]

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We don't -- not as much. 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'll 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, particularly 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 necessarily reside with the kind of visibility, say, that we get at a Fluke where we get a pretty decent chunk of the U.S. and European distribution channel partners.

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Operator [12]

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Our next question comes from Steve Tusa of JPMorgan.

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [13]

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

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [14]

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So for ASP, on an annualized 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 north of $200 million?

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [15]

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

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [16]

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Well, so nothing on core revenue obviously, but I think the number -- I want to make sure you understand about the Day 2 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, and then I'll come right back to you.

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [17]

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

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [18]

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No, no. So outside the U.S., ASP is still being managed by J&J, and they're acting as a -- the distributor. So therefore, while you would expect us to have a little over $200 million in this quarter, because ASP takes a haircut off of their portion of it, roughly, say, maybe 1/3 of the business, this quarter, we had $167 million hit our reported numbers.

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [19]

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

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [20]

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Yes, they're just a little -- about a -- those 2 are about a little over $100 million.

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [21]

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Okay. And is there -- I guess when it comes to the kind of shorter cycle businesses, any trends through the quarter that were 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?

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James A. Lico, Fortive Corporation - President, CEO & Director [22]

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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 does more Gilbarco and less at Fluke and Tek. And we saw June sort of change 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, the revenue drop. So we really think that, that's probably what we'll see in the 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 were obviously down low single digit. And again, that was principally at Fluke and Tek, and they were down more than 2.5 or 2, low single digits. So what we really ended up seeing is a slower Europe, particularly 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, 2, 3 months ago for the second half is our view in Professional Instrumentation for Europe.

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [23]

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

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [24]

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So one, I don't think we have to hit them particularly hard. Are you talking about core operating margins? Or you just want to...

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [25]

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

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [26]

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Okay. In the 22%, 23% range.

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Operator [27]

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

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [28]

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Just a follow-up on Steve's question. 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 when?

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James A. Lico, Fortive Corporation - President, CEO & Director [29]

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Well, I'll answer the second one. How does it get better, I think is as much a macro question probably as anything.

That's a -- we've really decided to be prudent and to 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 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 a -- we saw a June drop at 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, than it feels just destocking. And so I think that's how we're going to reflect -- that's what's reflected in 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. 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 weekend.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [30]

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And just the 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?

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [31]

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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 is 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 and improving margins that we'll continue to see sequential improvements from Q2 to Q3 and then again from Q3 to Q4. But I don't think it'll -- has -- it will get positive in Q3, but in Q4, I believe that PI has a good chance still.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [32]

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And pricing is sustainable?

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James A. Lico, Fortive Corporation - President, CEO & Director [33]

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I think we -- 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 will be offset by the tariffs being in the comp. So I think you'll see the difference between those 2 things probably isn't much first half to second half.

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Operator [34]

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

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [35]

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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 or assess how the integration's 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.

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James A. Lico, Fortive Corporation - President, CEO & Director [36]

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Well, a couple of things, we -- our 100 day's about 100-some days, so we haven't quite finished yet but I've been pretty close to what we've seen and what we've been doing. So I think I have either been with the 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're seeing is 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 3 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 transition 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.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [37]

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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?

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James A. Lico, Fortive Corporation - President, CEO & Director [38]

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So we could 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 -- well, a lot of little things will occur between now and the end of the year. What we'll start to see is the takeover of a lot of those countries really starting to occur more, accelerating into 2020. And as we said in the prepared remarks, towards the end of the first half of 2020 is kind of when we get this -- get 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 doing the spadework, the foundational work to be set up, systems and things like that. So it's really going to be in 2020 where you start to see a number of those things occurring.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [39]

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Good. And then the receivables?

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [40]

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Yes, that was contemplated in the deal at -- from the get-go, so we knew about that. I think everybody did. We're very happy with the deal we struck with them. That was very fair, but that wasn't a post-deal adjustment.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [41]

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Got it. Why didn't you do it with the payables instead?

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [42]

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Well, it was -- to be fair -- to be clear, it was receivables and payables. So it is both of those.

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Operator [43]

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And our next question comes from Andy Kaplowitz of Citibank.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [44]

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As you think about the walk to go from $3.06 in '18 to your new guide of $3.45 to $3.60, is a big piece of the change from last quarter's guide just the lowering of the $0.20 to $0.30 of core revenue growth contribution and maybe some FX? Or is there any lowering of Gordian and Accruent and/or ASP? And then how much did Intelex and PRÜFTECHNIK add, if anything, into the core EPS growth -- I mean to the EPS growth?

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [45]

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Yes. So Andy, I think the only lowering that we've 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's been no -- 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.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [46]

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Yes, it is. And Intelex and PRÜFTECHNIK, do they add anything into the EPS?

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [47]

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No. yes -- not this year, no. They're -- we -- 5 months ago, there were some deal costs associated with that but no meaningful earnings, up or down, for those deals in 2019.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [48]

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That's helpful. And then, Jim, you mentioned GVR in high-growth markets slowed down a bit. It looks like it's just pushouts as you talked about. Did you guys expect these pushouts? And we know there's going to be some difficult comps at some point. There had to be in the high-growth markets. Did you see any slowing in the business other than these sort of pushouts, which you think will happen? Will you get to growth in the second half of the year?

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James A. Lico, Fortive Corporation - President, CEO & Director [49]

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Yes. Well, I think it's really 2 countries. And I think GVR, the India story I think is very much one of 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 don't -- 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 a second quarter dynamic of some things in India that are pushing. There's probably a little bit of slowing in China, but that really has to do with just really substantial growth last year through the double-walled tank upgrades. And we're still seeing some wins that'll be in the second half, so we still see growth in China for Gilbarco for the year. But again, a tender or 2 pushed into the quarter.

That's not unusual in this business quite frankly. For it to 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.

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Operator [50]

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

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John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [51]

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By the way, I was thinking, considering recent events, you should be congratulated again on the A&S deal. I'm just going to throw that out there. Just in terms of the quarterly growth, organic growth forecast kind of the 2% to 4% for the second half, and I think you're assuming 2% to 4% for the third and implicitly 2% to 4% for fourth quarter. Third quarter has a lot easier comparisons if I recollect, right? Because fourth quarter, you had the prebuy. You had the deferral of Gilbarco Veeder-Root from third quarter to fourth quarter.

Is there any sort of assumption you are making that fourth quarter is somehow going to get better? Or what's really sort of baked into the assumptions here?

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [52]

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I think when we get to the fourth quarter, some of the -- 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's -- there is an easier comp to last year. But we've got a little bit wider range than we normally talk about, so I think you can figure out how that might go out from -- we expected at this point from Q3 to Q4. But we're watching what's going on here pretty intently.

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John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [53]

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

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James A. Lico, Fortive Corporation - President, CEO & Director [54]

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Yes, there's a little bit -- as I was just answering Andy's question, where the India tenders fall could help a little bit here, there -- here and there, and so there's a little bit of where those fall. But I think, as Chuck mentioned, we get, as you said, little bit tougher comp in the fourth quarter, but we get -- 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 in the year relative to core growth.

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John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [55]

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And those businesses are doing well, Gordian and Accruent, so that kind of makes sense.

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

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They are, yes, yes. As we said in the prepared remarks, we're really happy with take rate and things that are going on there. And we're -- so far, so good.

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John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [57]

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Jim, 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 happened 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?

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James A. Lico, Fortive Corporation - President, CEO & Director [58]

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Yes, you have a good memory. So March is really the -- that'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 big time. And what we also saw was just a more days of supply of inventory starting to change and channel partners starting to make some decisions around slowing sell-in 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 of supply -- this is at 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 that 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 saw it go 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.

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John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [59]

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

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [60]

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Well, in the short run, when it goes down as decrementals, 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%.

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

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Yes, particularly most of it was in June, John. Just a little bit more on that. We really -- practically at fluke, we're really consistent around the world relative to margin structures. 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.

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Operator [62]

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And our next question comes from Richard Eastman of Baird.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [63]

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Jim, could you just follow up on the question once around Tek? I'm curious. I presume Keithley's softness is due to the semi market. But you did reference Huawei's impact there. Is -- can you just kind of parse that out a little bit? How -- I would think their R&D tools at Tek are probably what's the problem for the Huawei entity list. But could you just kind of parse out the growth rate? I think you said Tek was down mid-single digit. And what piece was maybe Keithley and the half-and-half? Or is Huawei out-weighted there -- overweighted?

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

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Yes. So what I would say, first and foremost, is you're right around the -- Keithley really is -- as you well know, Keithley is very much -- has more semiconductor exposure than all -- than the whole Tek as a whole, and it has more electronics manufacturing exposure as well so -- 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 Asia sort of electronics manufacturing story where we saw the slowing. And exactly right, with Huawei, it's mostly R&D tools and mostly scope.

So I'll let Chuck 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 mid-range. We continue to grow our oscilloscope platform, if you will, particularly the new platform very well.

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [65]

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And I think that when you put numbers to that, I think Huawei was a little over 10 million, let's call it, 1% -- 1.25%. And then I think that -- and roughly Keithley was down about twice that.

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

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So 2/3 and 3/4 of the miss is those 2. And then the rest of it is really Western Europe kind of broadly defined.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [67]

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I see. Okay. 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 what's delivering that or...

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [68]

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Well, I think there, certainly volume always helps and can surge and -- but also, what's in there is there's always onetimers, both good and bad, last year probably a little easier to compare the ebbs and flows. Try not to get too focused on any one quarter and back it up and just say this -- that business, when it's growing well, 50 basis points is a good OMX number. But that can do just what they did this quarter and you see something stronger. And just remember, when it goes to 0 at 1 quarter, it doesn't mean anything either so...

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James A. Lico, Fortive Corporation - President, CEO & Director [69]

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If you look at the segment, 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 at Matco this quarter as well.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [70]

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

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [71]

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Yes.

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James A. Lico, Fortive Corporation - President, CEO & Director [72]

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Yes, the combined number's probably high single digits. That's right.

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [73]

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And that's tracking to that this year as well. We're very excited -- we're encouraged that's playing out like we expected.

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Operator [74]

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

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John Fred Walsh, Crédit Suisse AG, Research Division - Director [75]

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Actually, following up on that question. One of the things, when you talked about macro uncertainty in the short-cycle businesses, we always think of CapEx projects. But as you think about some of these more software businesses, Gordian, Accruent, for example, what are the factors you're tracking whether it's leads or quoting activity to have confidence that they can sustain this kind of high single-digit growth rate when there's kind of this industrial uncertainty out there? But that's not to say you can't spill into other parts of the economy.

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James A. Lico, Fortive Corporation - President, CEO & Director [76]

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Yes. So I would say we look at a couple of things, and Gordian and Accruent are 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, 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 the iNet new bookings are really good. So we're really looking for these higher recurring revenue businesses. We're really looking at those annual bookings numbers, and we are looking at the average contract value, what we call ACV, and we're looking at churn. And we look at those 3 metrics to really understand what is it that really gives us a good view of how the business is going to be in a couple quarters.

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John Fred Walsh, Crédit Suisse AG, Research Division - Director [77]

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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 to expect in the near term.

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James A. Lico, Fortive Corporation - President, CEO & Director [78]

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Yes. Well, I hate to comment on anything in the near term, and quite frankly, we commented on the 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 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. If you look at the 2 businesses, 2 years ago, we bought ISC because we're really excited about the workflows around safety and now we closed 2 deals that 1 is a bolt-on, SAFER Systems, which really helps them, really gives us a new set of modules to sell on top of the iNet platform. And then Intelex really gives us a great new adjacent market for EH&S software.

So we're really well positioned in the workflows. One with the bolt-on, the other was an adjacency. And then obviously, PRÜFTECHNIK, a classic bolt-on for Fluke, significantly raises our game in condition monitoring and gives us a team that's incredibly experienced at understanding condition monitoring particularly around vibration.

So that's -- those are the kind 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 the breadth of the funnel, John. We're really -- we -- and that funnel continues to have good breadth. Obviously, very much in field solutions this quarter, in particular the last 3 I just mentioned. But we feel good about the funnel and the breadth of the funnel.

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Operator [79]

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

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Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [80]

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Just want to revisit ASP. We vetted that one a fair bit so far, but I do want to talk about the EBITDA contribution. I think, Chuck, this might be for you. I'm calculating the EBITDA margin on acquisitions of 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 TSAs don't really roll off until 2020, should we expect higher EBITDA from ASP through the back half of the year? Or is that now more of a 2020 story?

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [81]

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Well, that'll be -- so couple of things. I'm not sure I caught the last part about the teens of ASP but -- 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 will 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 slowing and they're going to pick up speed. Fourth quarter, there'll be a little bit of lift and then it'll continue to accelerate closing more of those in Q1 and Q2 of next year. So that's the Day 2 country TSAs. And then there is that IT system that stand-up. And that's not a gradual. That's more of a cutover that will happen sometime in the first half of next year.

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Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [82]

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

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James A. Lico, Fortive Corporation - President, CEO & Director [83]

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No, we're really carving a business right out of ASP. So with that, we're recreating more than just the RAQA systems but also several of the other systems in the business like the financial system, ERP, a lot of those things we -- they already have, but in other places, we're adding -- we're creating those things. We're recreating what they have. So that's the good part of it, but it's paid work we've got to get done.

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Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [84]

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Yes. And then just a quick follow-on. Jim, you mentioned that trends got kind of progressively worse through the quarter. I don't -- I'm not sure you addressed whether you'd seen some elements of stabilization in early 3Q. Maybe just characterize what you've seen in China right now. I mean how is the behavior from your customers in China?

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James A. Lico, Fortive Corporation - President, CEO & Director [85]

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Yes. I don't -- I think when we look at -- as I said, the changes that we saw in -- and really we're talking about PI here. We saw a little bit of slowing 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. In China, probably similar story. We haven't seen anything that would tell us that things are moving around to the good or that are getting more negative at this point. But I'd caveat that with July is generally -- the first part -- first 2 weeks -- first 3 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.

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Operator [86]

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And our next question comes from Joe Giordano of Cowen.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [87]

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One thing I'm trying to figure out is trying to reconcile a commentary for like the Tektronix scope type business across some of your competitors. And I'm not sure if it's end-market variance or geographic, but there seems to be consistent like kind of different commentaries at different times for the 3 major players within that oscilloscope business. So -- and then curious as to your take on that. And is there anything you'd highlight as to what might be causing different trends at different times for you guys?

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James A. Lico, Fortive Corporation - President, CEO & Director [88]

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Well, I would say, one, end-market exposure generally is -- some folks have more 5G exposure, as an example, and may be more tied to the 5G market. But I think we were pretty consistent with our oscilloscope business over the last 2 or 3 years. At least in our case, we've been growing. So that -- it's been on the back of the investments we've made on the new platform, and we just launched the 3 and 4 Series. And so that's now I think 2 years of launches that we've had. This was our third launch. We did the 5 Series 2 years ago around this time. We did the 6 Series about a year ago and now the 3 and 4. And that's -- 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 thing. 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.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [89]

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Fair enough. There's also some news recently, your main competitor on the GVR side making a deal with the ABB on EV charging, and I know you guys have made some ventures into EV as well. Just curious as to an update on how those 2 markets will meld over time and what the outlook is there for further investment into that avenue.

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James A. Lico, Fortive Corporation - President, CEO & Director [90]

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Yes. I think we're really happy with the Tritium investment that we made. We've -- I was out -- I was actually out in Europe a couple of months ago with our sales team calling on customers in Europe. We announced in May with our relationship IONITY 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 U.K. to be the largest supplier of chargers in the U.K. to Boxed 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 the exposure. We're certainly learning the market from them. They're a great team. We're also exposing them to a 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 the position.

I think we all know EVs 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 we're in right now, we're certainly seeing accelerated growth and accelerated position through the partnership with Tritium.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [91]

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And then, Chuck, just real quick on the lower tax rate guide. Is there anything structural there? Or anything specific that caused that? How should we think about that going forward into 2020?

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Charles E. McLaughlin, Fortive Corporation - Senior VP & CFO [92]

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

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Operator [93]

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

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James A. Lico, Fortive Corporation - President, CEO & Director [94]

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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're 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'll 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 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.

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Griffin Whitney, Fortive Corporation - IR Officer [95]

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Thanks, Jason.

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Operator [96]

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