Fortive Corp (FTV) 2016 Q1 法說會逐字稿

My name is Renee and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporation second-quarter 2016 earnings results conference call.

(Operator Instructions)

I would now like to turn the call over to Ms. Lisa Curran, Vice President of Investor Relations. Ms. Curran, you may begin your conference.

Thank you, Renee. Good afternoon, everyone, and thanks for joining us on the call. With us today are Jim Limco, our President and Chief Executive Officer; and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer.

Please note that our historical GAAP financial information is presented on a carve-out basis. In addition, we present certain non-GAAP financial measures on today's call. Information required by SEC Regulation G related 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 Investor section of our website later today under the heading, Presentations, and will remain archived until our next quarterly call. A replay of the conference call only will be available shortly after the conclusion of this call until Tuesday, August 9, 2016.

Once available, the link to this conference call replay will be posted under the Investor section of Fortive's website under Events & Presentations. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance.

The supplemental materials describe additional factors that impacted year-over-year performance. Unless otherwise noted, all references in these remarks and supplemental materials to Company specific financial metrics relates to the second quarter of 2016 and all references to period-to-period increases or decreases and financial metrics are year over year.

During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate, will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings and actual results might differ materially from any forward-looking statements that we make today.

These forward-looking statements speak only as of the date that they are made and we do not assume any obligation to update any forward-looking statements. With that, I'd like to turn the call over to Jim.

Thanks, Lisa. Good afternoon, everyone, and welcome to our first earnings call as an independent public company. This is certainly an exciting time for Fortive. We're pleased with our results, as we delivered outstanding free cash flow performance and margin expansion despite quarter revenues being down slightly, reflecting challenging economic conditions.

On July 2, we successfully completed our separation from Danaher, well ahead of schedule and with remarkable efficiency. We were able to achieve this outcome by leveraging the Fortive Business System tools and our deeply rooted institutional knowledge and results orientation.

Given our decentralized operating model, the separation didn't change the day-to-day for the majority of our employees. What is clearly evident, however, is that a reinvigoration of our culture has been felt across the organization. The separation provides Fortive with the capacity for disciplined acquisitions and growth investments to strengthen our businesses and market-leading positions.

The Fortive Business System will continue to be the cornerstone of our competitive advantage, by providing a playbook for accelerated innovation and superior customer satisfaction that will, in turn, drive improved core sales growth, operating margin expansion and strong free cash flow conversion. We are committed to embracing our strong culture of continuous improvement and driving shareholder value for the long term.

And now turning to the quarter for a more detailed discussion of our results. Please note that the following results are presented on a standalone basis from Danaher's historical results. Adjusted net earnings of $219.8 million were up 40 basis points over the prior year. Both reported and core revenue declined 50 basis points.

Geographically, high-growth market revenues were up low-single digits and developed markets were down low-single digits. High growth market results were driven by high-single digit growth in China and strong double digit growth in India, offset by continued weakness in Latin America.

In developed markets, we continue to see soft industrial activity and weak distributor demand in our North American Professional Instrumentation businesses. While we continue to execute well, the economic environment remains challenging in some markets and geographies.

We are encouraged as we enter the second half of the year, with EMV starting to ramp up key innovations launching across the portfolio and continued strength in high-growth markets. We also have a favorable comparison in the fourth quarter.

The power of the Fortive Business System was demonstrated by adjusted gross margin expansion of 53 basis points to 49.6%. The improvement was driven by pricing, procurement savings, and successful lean initiatives across the portfolio that more than offset volume headwinds.

Adjusted operating margins of 20.8% were essentially flat to the prior year with core adjusted operating margin expansion of 9 basis points, as gross margin improvement was mostly offset by one-time G&A costs. We were very pleased that despite core revenue being slightly down four out of our six platforms had core operating margin expansion in the quarter.

We generated approximately $278 million free cash flow, up 6% and delivered an outstanding conversion ratio of 116%. Free cash flow is one of the most important metrics at Fortive, as it provides us with the agility to invest in both organic and inorganic growth initiatives across our entire portfolio. As we have indicated, our capital allocation bias to deploy our strong free cash flow towards acquisitions.

Our M&A funnel has expanded nicely, in part, due to the separation and the general choppiness in the markets over the first half of the year. Our experienced deal team is focused on the execution of our M&A strategy, and we are confident in the strength and diversity of our M&A funnel.

Turning to our segments, reported and core Professional Instrumentation revenue was down 5% relative to prior year. Acquisitions contributed 50 basis points of growth, which was completely offset by unfavorable currency. Core adjusted operating margins were down 177 basis points for the quarter, reflecting reduced end market demand, technology growth investments, and the timing of high contribution margin projects and our Pacific Scientific EMC business.

Advanced Instrumentation and Solutions core revenue declined mid-single-digits, primarily reflecting reduced demand in semiconductor, consumer electronics, and some industrial end markets. Field Solutions revenue declined to low-single digits, reflecting a mid-single-digit decline in Fluke, partially offset by mid-single digit growth in Qualitrol.

Fluke core revenues were up mid-single-digit s in Western Europe, primarily due to double-digit biomedical and network sales growth, but offset by high-single digit declines in the US, reflecting weaker distributor demand. Our continued investments in customer-led innovation have resulted in a number of differentiated products, including our recently launched Fluke Connect Condition Monitoring offering.

This is the industry's first system of portable sensors and network gateway and software that customers can access anywhere, anytime, and use advanced analytics to make preventive maintenance decisions. We are very excited about this unique product offering and an important step forward with our Connected Devices strategy.

As a result of our innovation, growth, and productivity initiatives at Fluke, year-over-year operating margins were up 50 basis points. Qualitrol's mid-single-digit growth was driven by strong OEM sales outside of the US with end customer demand, based primarily in the Middle East. We continue to see meaningful wins at Qualitrol and believe this business will continue to be a key growth contributor for Field Solutions.

In product realization, a mid-single-digit core revenue decline, primarily reflecting reduced demand for Tektronix Products was partially offset by quarter revenue growth in Invetech. Despite double-digit growth in China and share gains from our Optical Solutions, Tektronix saw high single-digit core decline, broadly reflecting weak semiconductor and consumer electronics activity outside of China.

One final and timely note on Tektronix, we were selected by NBC as the audio and video test equipment provider for its production of the 2016 Summer Olympic Games in Rio starting this Friday. Our Sensing Technologies platform saw high single-digit core revenue decline in the quarter, as continued industrial softness was partially offset via growth in the medical, food & beverage, and aerospace & defense markets. The teams proactively managed cost to maintain core operating margins despite the volume shortfall.

Moving to our Industrial Technology segment, we realized both reported and core revenue growth of 3.5% in the quarter. Core adjusted operating margins improved 166 basis points, driven primarily by gross margin expansion and increased volume.

Our Transportation and Technologies platform saw high-single-digit growth in the quarter. Gilbarco Veeder-Root delivered the fourth consecutive quarter with high-single-digit core revenue growth. EMV-related demand in the US spurred double digit growth in point-of-sale solutions and dispensers.

Many customers are still in the process of upgrading indoor payment systems from last October's liability shift, and we are well-positioned to benefit from the outdoor liability shift slated for October 2017. In May, Gilbarco launched FlexPay IV as the next-generation of its industry-leading line of EMV-certified dispensers, reflecting continued innovation as our first major hardware product launch stemming from our partnership with [Verathol].

Also in May, Gilbarco released the industry's first multi-network credit and debit EMV-certified Petroleum Retail Point-Of-Sale Solution. Support of multiple common payment types reduces consumer confusion around inserting versus swiping the card at the payment terminal. Multi-EMV card format support ensures that all EMV-capable cards are processed as a chip payment, reducing consumer ambiguity and increasing consumer satisfaction while maximizing the retailers' protection against fraud and liability.

Telematics had a strong quarter with high-single-digit growth, led by strong double digit core revenue gains in high-growth markets. As you may recall, we integrated Navman and Teletrac last year, bringing these two companies together, to create one strong business for us from both a global market and technology perspective.

This quarter, we drove solid installed base growth in our largest SaaS business in Fortive. We believe we are well-positioned to increase revenue into our subscription base and create stickiness given our offerings to help customers with safety and compliance.

Automation and Specialty Components posted low single-digit core growth decline for the quarter, as growth in Kollmorgen was more than offset by declines in the rest of the businesses. Jacobs Vehicle Systems continued to be impacted by the weakness in the North American truck market, partially offset by strong double-digit growth in Europe.

Our Franchise Distribution Platform posted low-single-digit growth. At Matco, we grew revenue at mid-single-digit s as we continued to gain share via both increase same-store sales and franchisee ads. Using FBS tools, such as funnel management and digital marketing, Matco posted mid-single-digit growth or better for 24 of the last 26 quarters.

To summarize, we are encouraged by continued strength in our industrial technology segment and stabilization in our Professional Instrumentation segment. Through the successful deployment of FBS, we were able to launch new products, take market share, and realize operating efficiencies across a number of businesses.

Focused execution combined with the strength and diversity of our portfolio allowed us to deliver margin expansion and generate outstanding free cash flow despite challenging macro conditions. We are initiating adjusted diluted net EPS guidance for the third quarter of $0.56 to $0.60.

For the second half of 2016, we are initiating adjusted diluted net EPS guidance of $1.21 to $1.29, and continuing to assume low-single-digit core revenue growth.

In closing, our value creation strategy is focused on core revenue growth, operating margin expansion and free cash flow deployment biased towards acquisitions. We will follow a strategic and financially disciplined approach to M&A with the goal of building market leadership positions and increasing returns on capital.

We are committed to the principles of the Fortive Business System to deliver customer-driven innovation and shareholder value over the long term. We are very excited about the future and establishing our own independent record with strong performance for many years and decades to come.

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

(Operator Instructions)

Scott Davis, Barclays.

Good afternoon and congrats on your first quarter out of the gate. You didn't spill anything on yourself, Jim, when you were talking, did you?

No. I didn't, Scott.

Okay, good, good, because I actually just spilled tea all over myself. So you're ahead of me. I just want to talk a little bit about the M&A backlog and how that's changed. I mean, a lot of your management team and development team, I guess, really came together in the last few months.

So where are you, and if you had to put in terms of what inning or where are you as far as your thinking capability to be able to go out and execute a transaction right now and maybe just give us a sense of where you are in the pipeline, whether there's a full pipe? And how you feel -- the confidence you have in what you see and being able to deliver something, maybe even in 2016?

Thanks, Scott. I think, as you mentioned, our team has come together in the last 90 or 120 days, an experienced team. As you know, and having spent 20 years in this game, you can never predict when a deal will happen. But we're very busy right now; the funnel is a very good shape. I think in terms of both the breadth and diversity of the funnel is what really excites Chuck and I.

We have a good set of value deals that we think but also some good deals on the growth side that might be slightly higher valuation but would still give us a solid return over time. I think the most important thing is we will continue to be disciplined, and we think the funnel is -- this environment is pretty good. The funnel is growing and I would expect us to continue to build the funnel and transact something. You can never predict timing but I think we're in a very good place right now.

And just as a quick follow-up, I mean where -- in your underlying businesses, where do you feel better and when do you feel worse from the Analyst Day and outlook?

I would say that when we look across -- I'm not sure there's any place we would say we look worse. I think the North American market has been slightly more noisy, and so in that place, in the last maybe month or two, we've seen that firm up a little bit. But it's still mixed depending on the vertical.

Strength, I think we saw certainly Transportation Technologies continues to be in a strong position. We've seen some good improvement in Qualitrol, Matco as we described in the prepared remarks. And then Kollmorgen having growth in the second quarter, I think is a nice place to be.

So I think, on balance, that's what gives us confidence in the guide here to be low single-digit growth in the second half. And I think right now, if you look at high-growth markets, we would say other than Latin America, pretty good. So as you look across regions, you look across businesses, there's a number of places where we saw either firming up or improvement, and I think we'll be in a good place for the second half here.

Great. Thank you very much, guys.

Thank you, Scott.

Thanks, Scott.

Steve Tusa, JPMorgan.

Good afternoon. Congrats on the first quarter out of the gate here. So just a quick question on the follow-up on the M&A stuff, just remind us what your targeted financial hurdle is. Is it the old Danaher 10% thing or is it more nuanced than that? And also, I think the messaging was you think you have the capability to kind of do, I think you said $2 billion to $3 billion over a three-year period, but that would be weighted towards the next year or so?

So yes, Steve. This is Chuck. I will take those in reverse order. The M&A that we think that the capital we can deploy is representing $3 billion over the next two to three years, so I think you've got that exactly right. The hurdles, I think going back to what Danaher is traditionally, both Jim and I come from a strong Danaher roots.

Discipline means for us, 10% in three years, five years for more of a platform-type deal. There's going to be certain situations where it will stretch beyond that, and there will be either small deals that maybe we see a great opportunity for value creation down the line, but most of the time it's really going to be around those three- and five-year metrics.

Okay and then I think you said low single digit for the second half. What do you expect for the third quarter for organics?

So we're coming from a flattish in Q2, and it will be low single digits, but probably accelerating. We run into an easier compare when we get to the fourth quarter, but not in the third quarter, but we're still moving into low single-digit core growth in Q3.

Okay, great. Thanks a lot.

Thank you, Steve.

Thanks Steve.

Nigel Coe, Morgan Stanley.

Thanks and good afternoon. Congratulations on your first quarter out of the gate. So there's obviously a lot of debate about the sustainability of the EMV upgrade cycle. Maybe, Jim, can you offer some perspective on where we are in that penetration curve? Are we maybe 20% through? Halfway through? How sustainable do you think this upgrade cycle is?

Well, I think if I break EMV into two places, one, the indoor and the outdoor. We still are seeing growth on the indoor side as we mentioned in the prepared remarks. So we think that will continue.

As we've talked out there, a little bit industry experts would put that penetration in and around 50% in the marketplace. I don't suspect we'll ever get to 100%. On the outdoor side, we are very early stages. If I were to do a baseball analogy, I would feel like we were in the first or second inning here.

I'm not sure what that is on a percentage basis. We will see some acceleration though in the second half due to EMV, both on the indoor and a little bit on the outdoor side. So you'll see that. As we mentioned before, we still believe it's a $500 million incremental opportunity over the next several years, and we're still not calling the timeframe in that other than the next two to three years just given how early we are in the outdoor penetration cycle, Nigel.

Okay, no, that's very helpful. Thanks Jim. And then the follow-up on Tektronix. It's been somewhat disappointing for the last four years or so. What do you think it's going to take to get this business back to growth over the next couple of years? Is there an upgrade cycle? Is there an MPI cycle? What will it take to get back to growth?

Well, I think when we look at we'll see some stabilization there in the second half, as we -- some of that will be comp related but also, some of that is really some of the things they have been doing that will start to see some traction. I think when you look at the strength that they have had in China as well, what you really see is when there is a good macro trend, they are taking advantage of that and double-digit growth in China, I think, is representative of the strength of their position in some places.

We certainly been investing there. In the second quarter, they had strong healthy gross margin expansion, but we took the opportunity to continue our technology investments. I think that's the beauty of the strength of our portfolio is the opportunity to do that.

And we will see some of that in part of 2017, and the second half of 2017. So I think you'll see continued stabilization through this year, and we think that while the macro trends there are a little tough right now, on a global basis, particularly in the US and Western Europe, we think we're in a better position, if you will, in starting in 2017.

Okay, I will leave it there. Good luck.

All right. Thank you.

Steven Whittaker, Bernstein.

Thanks and I will echo my congrats for this first quarter out of the gate. That's great. Can we just stick on the Professional Instrumentation segment for a little bit? You just talked about Tektronix.

I guess it's also the third quarter for Fluke where we're down, last quarter was down mid singles, high singles, down before that in the fourth quarter, and this one is mid single, right? So what -- just give us a sense for what's going on there. You've got a good business but what on the macro front is really hurting there?

I think what we're seeing is some slowness in the US. Fluke is probably the one place where we get a little bit of second derivative situation relative to oil & gas. While we don't have a lot of the direct oil & gas exposure, we do have some second derivative and we see that geographically in the US, where we're growing pretty well with distributor sales out on the coast, but in the middle of the US, we're slightly slower.

So that will continue for a little bit. We were happy with the high growth market growth there, particularly in India and China. So I think and also continuing to get margin expansion in the second quarter despite the decline of Fluke, I think really means we are continuing to get good price.

It really shows the strength of the business. With the Fluke Connect Condition Monitoring launch and a number of other innovations in the second half, I think we'll start to see some acceleration beyond the comps in the fourth quarter. We'll start to see some acceleration as we get into 2017.

So, Jim, since you're mentioning the oil & gas impact there as well, if oil stays at these levels, does that affect your view of growth in that segment then?

I don't think it does anything more. I think what we saw is we're sunsetting a lot of that and we're seeing some of that in some of the publicly traded distributor customers that we have is that we'll start to see that as we get through the end of the year. As I said, we don't have a lot of oil & gas exposure in the portfolio. Fluke North America might be a little bit, but most of it's really more second derivative, as I mentioned a little bit in the Sensors business but we don't think where oil is at today means any precipitous drop, even where we're at right now is really much more of an impact at this point.

Okay, can you just speak also, the whole Verizon acquisition of Fleetmatics for $2.5 billion, how does that impact the industry for you guys as far, as your perspective is concerned?

Well, it's interesting. It isn't necessarily, we've obviously known Fleetmatics, in particular, because we have competed against them. We don't think that necessarily changes the competitive dynamics. Telogis and Fleetmatics are slightly different properties. So we think we're in a good position. I think what it does is it establishes the strength of the market, both long-term growth and if you're a large subscriber count like we are, it just shows the value of those kinds of properties.

So I think, really, what you've seen with those acquisitions is really established the strength of our portfolio. We had a very good quarter relative to not only revenue growth but also subscriber growth. And that's really ultimately in a SaaS business like that; that's what it's all about. So we think we're in a good place; obviously, I never comment on what happens until acquisitions from the competitors is finalized, but we think we're in a good position and I think the second quarter just amplified that position.

Great, thanks.

Shannon O'Callaghan, UBS.

Good afternoon, guys. Jim, can you just remind us where we are in Fluke Connect at this point and what your expectations are there? What has the reception been like so far, et cetera?

Well, I think the Condition Monitoring offering that we're launching here right now is a very exciting offering. It's a combination of not just software and some of the things that we've demonstrated, but it's also a set of sensors, a network gateway that really gives you ease of installation.

This is really our real breakthrough in Fluke Connect is really with the Connection Monitoring launch that we will have coming out right now in the third quarter. It will still be a small impact in the second half of this year. Part of it is the SaaS offering around the analytics offering.

So I think we'll start to see, obviously, good additions to the portfolio. There are some hardware sales as well. So we think that will start to accelerate into the fourth, but it's really a 2017 and 2018 story when it starts to have meaningful impact in the business.

Okay. And then, given the up end-markets out there, I was a little surprised about the growth at Kollmorgen; is that a particular market or a particular initiative that's driving that business to grow at this point?

Well, we had good high-growth market performance. That was certainly part of it. I think that really shows to the technology offerings. Some of the work they've been trying to take the business into non-traditional applications, like robotics, has really been a big helper and some of the robotic initiatives they got in the China market.

But across high-growth markets and even in Western Europe, they had good performance. So I think it really speaks to the power of FBS, the strategy that we've had to take us into different markets and you're starting to see some benefit there.

Obviously, they do have some tougher markets as well. We've seen that in some other players in the industry. But I think it's really been the work that we've done to try to make that business less cyclical and really a little growth here by some other segments is really starting to pay off a little bit.

Makes sense. Thanks.

Julian Mitchell, Credit Suisse.

Hi, thank you. Just on the low single-digit organic sales growth guide for the second half and the acceleration within that. So when we're looking at the two segments, are you expecting a similar rate of acceleration at both in the second half or is it more weighted to PI because its trends are weaker right now?

Hi Julian. This is Chuck. I think that it's really similar. What we're seeing is we've got some of our good growth drivers in industrial technologies. That business is a little bit ahead in the recovery and the growth. But it's really about the acceleration I reference is running into an easier compare in Q4. But I don't see them differentiated. They're both improving and going forward sequentially.

Understood. And then, I guess maybe talk a little bit about the Sensing business. So I guess on the face of it, the end-markets and what it does, it's playing to a number of very favorable trends.

It's been actually pretty weak for 18 months or so. So how much reinvestment do you think is needed by Fortive to get that business back on its feet and is it essentially, I guess, to have acquisitions on top? Maybe organic investment isn't enough.

I think as we look forward, we'll see some good end-market exposure. Our Anderson business is an example, has good exposure into the sanitary end-market in the food & beverage industry. So they have some good macro trends that will deliver growth in the second half and into 2017.

I do think it's going to take for the remainder of the business some time for us to continue to build on some of the good work that's already been done. M&A activity would certainly help accelerate in some key strategic areas. As we mentioned, I think when we were out over the Spring that this is a place, where Chuck and I, as we go through our strategic plan efforts here in the late Summer/early Fall, we'll certainly get a better sense of some of the needs that the business will have given the different framework.

But these are good businesses. As we mentioned they did an outstanding job in the second quarter of protecting margins. They are steeped in FBS and I think we'll have some good opportunities as we get into 2017 and 2018 as we build on their strategic plan this year.

Great.

Julian, you get $5 for drawing out DBS out of me for the first time on the call. So remind me next time I see you.

Patrick Newton, Stifel.

Thank you. Good afternoon. Thank you for taking my questions. I guess, Jim, with Verizon acquiring Fleetmatics, I guess two questions come to mind. One is, how do you see the competitive landscape changing, I guess given the scale Verizon will have for both the Fleetmatics and recent Telogis acquisitions?

And then also given the Verizon multiple paid, would Fortive potentially look to monetize its competing Teletrac business or is business very core to Fortive's portfolio?

Well, I think on the scale question for sure, they will have a larger business but this will still put us as one of the larger subscriber count telematics businesses in the world. So we still think we have scale in this business and certainly from our perspective, we think we're in a good position so I think Fleetmatics has been a good competitor.

I don't suspect that in the next 12 to 24 months, that will change. I think they will continue to be a good competitor, and we will have to continue to run the play that's been successful for us around driving subscriber growth. I think as we think about monetizing it, we like this part of the portfolio.

I think the prices that are being paid in the industry are very representative of certain companies and the needs for them to do things, but we've looked at M&A activity in that space as well and I think there's a mix of deals out there. So we think we can continue to build our own strategy here and we will run our own play. We like the business as part of the portfolio we have today.

Great and then I guess just as a follow-up, digging into the M&A conversation, you did talk about a growing pipeline in the prepared remarks. As we think here about timing and think about geographically, from a timing perspective, is it reasonable to think that we should, given the growing portfolio, see something announced perhaps before year end? And then given the dollar strength and higher contribution of revenue from North America, would it be reasonable to assume that you're more willing to prioritize overseas acquisition?

Well, I think on the first one, the timing of deals is always hard to do. Having done this for awhile, it's always hard to predict. But I would think as busy as we are, we would hope to get something done before the end of the year. Returns are really more important than any one individual area.

So I think when we look at our funnel, it's certainly global. It has representative opportunities throughout all geographies. Certainly, Europe is very representative of our funnel. And you never know where things will happen. But we are focused on a disciplined approach to returns and any one-time currency situation or whatever is not necessarily going to be something that would drive us to do one thing over another over the long term.

We have said that deals would probably bring our tax rate down over time, but again, that's another example of we wouldn't do anything necessarily for the tax rate. We would do it because it accelerates our business strategically and ultimately, that also gives us the financial return, part of which might be lowering the tax rate but we're always strategy first, return first, and that's why we're excited about the funnel being strong.

All right. Thank you for taking my questions. Good luck.

Thanks, Patrick.

Andrew Kapowitz, Citi.

Good afternoon, guys. Can you talk a little bit about the margin decline that we saw in Professional Instrumentation in the quarter? I think it was slightly bigger than we expected, and if you look at your guidance for the year of 30 to 50 basis points, at least for the second half of 30 to 50 basis points of core operating margin expansion.

I think that compares to 9 basis points for the quarter. So is it just the investments coming down that you mentioned, the Technology Investments that's going to help you? Is there anything else going on in the business that should get you to your guidance?

I'll take the PI thing and then Chuck can comment on the go forward. I think when you look in the quarter, we definitely took the opportunity to take some investments. I think what we liked about PI is the fact that we were up 50 basis points in gross margin improvement.

I think that really speaks to the power of FBS. You saw that at Fluke. You saw good improvement in Qualitrol. We had good improvement at Sensors where we offset their volume decline. We did have some challenges in product realization. As we mentioned, the volume decline in Tech hurt us a little bit, and some high contribution margin opportunities at Pacific Scientific EMC, which moved out into the second half.

So those, I think on balance, when you looked across the portfolio, the fact that five of our six platforms had gross margin in flat to up, really speaks to the power of FBS and I think that really speaks to what we can do here. So while Professional Instrumentation was down a little bit, when you peek below the numbers, we had some good performance in several platforms.

And then Andrew, on the go-forward, looking at the operating margin expansion in the second half, as we've been talking about, low single-digit core growth, we have it around 50 basis points I do expect in the second half of OMX. A little bit more in Q4 than in Q1 because I think we're accelerating through those things. But I thought I heard you say 9 basis points in Q3. I would expect a little bit more than that.

Yes, I think it was 9 basis points in Q2, right, guys? (inaudible)

Definitely 9 -- so I understand 9 basis points in Q2. That's just a function of being flat, it's just a little under flat, but good acceleration from Q1.

Okay, that's helpful. And then can you guys talk about the inventory situation that you see at Fluke right now? You mentioned weak demand from distributors, but are they still in destocking mode or inventory is at this point relatively low in the channel?

We have good, very good visibility to inventories on a global basis throughout Fluke. We're in a very good inventory position. We don't see any issues there.

There's always maybe one or two people that might be a little bit higher but on balance, we've got very good visibility. We have great relationships with our top 20 channel partners around the world and we feel we're in a good position here.

Thanks, guys.

Thanks, Andrew. Have a good day.

Joe Giordano, Cowen.

Hi, guys. Good afternoon. We touched on it a couple of times, but if you look at your China business, like, in aggregate, I know it's hard given the amount of business that you touch. Most of the commentary on -- I feel like this earnings season has been pretty negative on China. You guys sound incrementally more positive. So what are you seeing there specifically? Anything Fortive-specific that's driving that or is that a kind of -- how would you compare what you're doing in China to like the current environment, broadly speaking, in China, I guess is maybe how I will ask it?

Well, I think as we said, this is probably a place where the breath of our portfolio helps us pretty well because we don't have exposure to any one vertical in China. You're seeing the semiconductor expansion and electronics expansion that's occurring in China benefits Tektronix and to some extent, Fluke.

Gilbarco has some good additions in the China market as well. So, we mentioned Kollmorgen as doing well in China. So I think some of our businesses are off a lower basis and so the power of what they've done from an innovation perspective and from an FBS perspective is helping them.

And that really, when you add that all up broadly means that we've been mid to high single digits here in China over several quarters, and think that can, at least, continue into what's in the guide.

All right. And then, when you look at GVR, good growth this quarter, what do the comps look like in the second half for that business versus the first half? And maybe if you had to flush out how you get to the $500 million like in broad strokes, what major assumptions are within that number in terms of terminal rate of adoption and things like that?

I think we will run against a slightly tougher comp at Gilbarco, I believe in the fourth quarter. So a little bit tougher comp there but we think we can continue to sustain what we've got with a good active funnel in a number of things that we've got going.

The FlexPay launch that we talked about in the prepared remarks is just a good example of bringing more innovation and helping us take share in the market. Relative to our assumptions, we don't think we'll ever get to 100% penetration in two to three years.

So we sort of assume that an 80% penetration might be achievable in the next three to four years, but to be honest with you, when we look at the outdoor penetration, we just started. We revised those models every month based on what we've seen, both in terms of actual sales and orders but also on what we're hearing from customers.

And I think those models will really get more refined as we turn the table on 2016 and into 2017 as we see a more active customer base and so while we can make some predictions around what that looks like, I think we're really probably five to six months away from really knowing what that might look like to hard code that into whether that's two or three years, or three to four years at this point.

If I could just sneak one in for Chuck real quick. What was the effective adjusted tax rate for the quarter what should we be thinking for the full year?

The effective tax rate for Q2?

Yes.

Q2 was the 60% -- let's see, the -- because we had a good guide, it's around 60% -- doing the math in my head, 32%.

Okay. (Multiple speakers).

Going forward, I think 30% is a good number for the second half of the year. We think we have a chance -- we expect to get down in 2017 into the 20%s, and we've got a few things to put in place. We might even get there yet in this second half. But I think 30% for the second half is a good number.

Good. Thanks, guys.

Thank you. It appears there are no further questions at this time. I would like to turn the conference back to our presenters for any additional or closing remarks.

Well, we appreciate all the time that everybody had for us today. Obviously, we're unbelievably excited about the future of Fortive.

We're looking forward to continued conversations with everybody around all the good things that are going on and really what the opportunity is for us. Lisa and Josh are available for calls today and tomorrow so we'll look forward to talking to you and we'll see you real soon. Thanks, everybody.

This does conclude today's presentation. We thank you for your participation.