Fortive Corp (FTV) 2016 Q3 法說會逐字稿

My name is David, and I will be your conference facilitator this afternoon. This conference is being recorded. At this time, I would like to welcome everyone to the Fortive Corporation's third-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, David. 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 related to these non-GAAP financial measures are available on the investor section of our website, www.Fortive.com, under the heading, Financial Information. I would like to highlight that we have posted updated supplemental financial data to our investor website to reflect immaterial corrections to the carve-out allocations of revenue, gross margins, and SG&A in the third and fourth quarters of 2015.

A replay of the webcast will be archived on the investor 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 Thursday, November 3, 2016. Once available, the link to this conference call replay will be posted under the investor section of Fortive's website under Events and 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 relate to the third 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 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, and good afternoon, everyone. We're very pleased with our performance this quarter. Our results reflect the strength and diversity of our portfolio, and our team's impressive execution to deliver solid core revenue growth, outstanding margin expansion, free cash flow well in excess of net income, and earnings outperformance. The Fortive Business System is the driving force behind our performance, and is the cornerstone of both Fortive's culture and operating model.

We recently held the first-ever Fortive CEO Kaizen focused on our key shareholder and customer-facing metrics of quality, delivery, cost, and innovation. Kaizen means continuous improvement, and our Kaizen events are one of the many ways we commit to this Fortive value as our way of life. What makes the CEO Kaizen unique is that more than 50 of our top leaders across the Company go shoulder to shoulder with our frontline operators, this year at four selected sites, to attack our highest priority initiatives.

The CEO Kaizen was an exciting milestone for me personally, and I'm energized by the breakthroughs and amazing results achieved during this event. With the launch of Fortive, we have a great opportunity to deepen our dedication to the Fortive Business System and show the power of 24,000 people devoted to our purpose of providing essential technology for the people who create, implement, and accelerate progress.

With that, I would like to turn to the quarter for a more detailed discussion of our results. The following information reflects year-over-year increases or decreases relative to the updated supplemental financial data that Lisa described at the top of the call. Adjusted net earnings of $233.1 million were up 22.2% over the prior year. Sales grew 2.8% to $1.6 billion with core revenue increase of 2.7%. Acquisitions contributed approximately 60 basis points of growth over the prior year, which was partially offset by approximately 50 basis points of currency.

Geographically, solid performance in high-growth markets drove revenues up mid-single digits, and developed markets improved to low single-digit growth. The high-growth market results were primarily driven by India and double-digit growth in China, partially offset by weakness in Latin America where we realized a double-digit decline, giving continued challenging market conditions.

In developed markets, we saw low single-digit growth in North America, primarily driven by the strength of EMV-related demand for our Gilbarco offerings, and strong growth at Matco and Qualitrol, at mid-single-digit growth in Western Europe. We expect the Western Europe growth to moderate in the fourth quarter.

The power of the Fortive Business System was clearly demonstrated with outstanding margin expansion. We were very pleased that four out of our six platforms had both gross and operating margin expansion in the quarter. Gross margins expanded 30 basis points to 49.3%. Operating margins of 20.6% were up 140 basis points versus the prior year, with core adjusted operating margin expansion of 150 basis points. The strong margin expansion represents above-average incremental fall-through of approximately 75%, reflecting favorable mix and sales growth weighted towards the end of the quarter.

During the third quarter, we generated $300 million of free cash flow, up 50% over the prior year, and delivered an outstanding conversion ratio of 134%. Cash generation was unusually strong this quarter, in part due to the timing of interest and tax payments. For the full year, we continue to expect free cash flow conversion to be above 100%.

Our M&A funnel continues to expand, and I remain confident regarding the growth opportunities presented, given the size and diversity of our pipeline. During the quarter, we closed two important bolt-on acquisitions for approximately $200 million that accelerate several of our key strategic initiatives which I will talk a little bit more about later. We expect to remain active on the deal front, with a continued disciplined focus on accelerating growth and returns through our M&A strategy.

The adjusted effective tax rate in the third quarter improved to 27.6% versus our previous outlook of 30%. We expect our adjusted rate going forward to be approximately 28%.

Turning to our segments, we were pleased to see improved performance in Professional Instrumentation, with revenue up slightly, reflecting 70 basis points of core growth, partially offset by 40 basis points of currency, and 10 basis points from the impact of acquisitions and the separation. Reported operating profit margin increased to 22.3%, and core operating margins were up 110 basis points for the quarter, primarily reflecting a favorable business mix to prior year, as well as successful price and productivity initiatives. During the quarter, Professional Instrumentation realized approximately 40 basis points of favorable price.

Advanced instrumentation and solutions core revenue increased low-single digits, led by demand for test applications and connected equipment monitoring solutions. In field solutions, core revenues were up low-single digits, led by mid-single-digit growth at Qualitrol and low single-digit growth at Fluke, reflecting good demand for handheld industrial products, as well as our thermography and network offerings.

Fluke delivered mid-single-digit growth in both Western Europe and China. This strong growth was partially offset by continued weakness in certain North American end markets. Fluke continued to demonstrate the strength of innovation through numerous awards, including two Electrical Construction and Maintenance Magazine Product of the Year awards for Fluke connected assets in the software maintenance management category and for Fluke TiX560 in the cameras and imaging equipment category.

During our last earnings call, I highlighted our Fluke Connect Condition Monitoring System as an example of customer-led innovation. I'm excited to report that the reception to this new product offering has been outstanding. This product is an important step in our connected device strategy, which was recently accelerated via the acquisition eMaint Enterprises, a global leader in SaaS-based computerized maintenance management software. The combination of Fluke Connect toolbox with eMaint's SaaS offering will allow for increased asset uptime via the seamless integration of maintenance devices, data, and systems. Fluke and eMaint have joined forces to usher in a new era of connectivity, and are set to deliver groundbreaking asset reliability platforms for multi-industrial customers around the world.

Qualitrol's mid-single-digit growth was primarily driven by the high-growth markets, where we saw solid asset protection growth and market share gains driven by the refinement of our go-to-market strategy. This quarter marked Qualitrol's 10th consecutive quarter of positive core growth, and we're excited about our position in this important condition-based monitoring sector.

In product realization, core revenues were slightly up, led by double-digit growth in our PacSci EMC business. The stronger-than-normal EMC growth reflected the timing of several projects that you will recall moved out of last quarter. Year to date, EMC delivered mid-single-digit core revenue growth.

As expected, Tektronix core revenues declined low-single digits and improved sequentially, reflecting sales improvements in nearly all regions and a return to positive growth in our high-growth markets. Tektronix is now our largest business in China, and it continued to outperform in the region by recognizing double-digit growth given strong demand for our solutions geared for new wafer technology in the semiconductor industry and data center applications. By leveraging our FBS growth and innovation tools, we have been able to upgrade our 70 gigahertz real-time oscilloscope with advanced software to target data centers where very high quality signal measurements are critical to ensure data center uptime and performance.

Our sensing technologies platform saw a low single-digit core revenue decline in the quarter, as declines in our control product lines were partially offset by solid growth in our sensing businesses, which was driven by exposure to the medical, and food and beverage, verticals. We were pleased to be awarded a multi-year contract with [NAMC] to supply electrical products to the US Navy with the potential to realize approximately $3 million in revenue over the next 12 months.

Moving to our Industrial Technology segment, we realized reported growth of 5.1%, with core revenue growth of 4.7% in the quarter. Acquisitions contributed 90 basis points of growth over prior year, which was offset by approximately 50 basis points of currency. Reported operating profit margin increased to 21.4%, and core operating margins were up 230 basis points for the quarter, primarily reflecting strong volume growth, productivity, as well as material cost and supply chain improvements.

Our transportation technologies platform saw high single-digit growth in the quarter with Gilbarco Veeder-Root delivering its 5th consecutive quarter of high single-digit core revenue growth driven by our best-in-class retail fueling portfolio. At Gilbarco, we're starting to see a deceleration in EMV-related demand for indoor point-of-sale solutions, as the liability transfer occurred in October 2015. However, demand associated with the pending outdoor liability shift in the US has increased for both dispenser and EMV payment kits. While we are in the early innings, growth is weighted towards kits this quarter.

On the innovation front, Gilbarco recently released contactless and 2D barcode scanner options on FlexPay IV, our market-leading EMV payment platform. We are winning not just in the US but in other international markets as well. Our new PCI IV payment platform continues to gain traction in the market since its launch in Q2, securing our market-leading position, which helped us to close a multi-million-dollar five-year contract with a leading major oil retailer in Italy.

Telematics realized core growth of low-single digits in the quarter, reflecting strong international growth. The recent launch of our new SaaS platform called Director has been well received, and the installed based transition will take approximately 18 to 24 months to complete.

In keeping with our transportation technologies platform evolution from retail fueling to smart transportation, we closed the acquisition of Global Traffic Technologies, or GTT, and entered an attractive market adjacency with mid-single-digit or better growth characteristics. GTT has a market-leading position in traffic management systems, and delivers advanced transportation solutions to help emergency, transit, and traffic personnel increase safety and minimize traffic congestion while maximizing resource efficiency and performance.

Moving to automation and specialty components, the platform is slightly down for the quarter as double-digit growth in high-growth markets was mostly offset by weakness at Jacobs Vehicle Systems. JVS saw strong growth in China, offset by continued weakness in the North American truck market.

The automation businesses of Kollmorgen and Thomson grew low-single digits. This was the 2nd consecutive quarter for positive growth at Kollmorgen, reflecting performance in high-growth markets and collaborative robotics, and a return to growth for Thomson, which was primarily driven by strength in their distribution channel and medical equipment sales growth.

Continued investment in innovation including robotics is driving key market share gains as we continue to outperform the market globally. Our franchise distribution platform posted mid-single-digit growth.

Once again, Matco grew revenue at high single-digit rate as we continue to gain share via both same-store sales and franchisee adds. Hardline and power tool sales growth was driven by demand generated at our second largest sales meeting of the year. Matco's mid-single-digit or better core revenue growth record is now at 25 out of the last 27 quarters. We are very proud that Matco is ranked as number 27 of the fastest-growing franchisees by Entrepreneur magazine.

To summarize, we are very pleased with the quarter. We allocated capital, launched new products, gained market share, and realized operating efficiencies across our businesses to deliver great results. We are initiating our fourth-quarter adjusted diluted net EPS guidance of $0.63 to $0.67, which includes assumptions for low single-digit core revenue growth, and incremental growth investments and restructuring. For the second half of 2016, we are increasing our adjusted diluted net EPS guidance to $1.30 to $1.34.

The third quarter of 2016 was a great example of the strength of our portfolio through the cycle, how FBS drives both growth and cost efficiencies, and how accelerated revenue growth of high-margin businesses translates to strong operating margin expansion that delivers free cash flow for organic and inorganic investments, and superior shareholder returns.

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

(Operator Instructions)

Scott Davis from Barclays.

Hi. Good afternoon, guys

Hello, Scott.

I'm used to saying good morning. Most of our companies report in the morning. I think you're our only West Coast company so we'll have to get used to the time difference. Anyways, I've got a bunch of questions but I'm just trying to figure out -- I always thought of Fluke as being a bit of a canary in a coal mine from a macro perspective. A, tell me whether you agree with that, but B, do you get a sense that we've seen a bottom in the industrial macro? It sounds like emerging markets perked up for sure, or but the US hasn't come back yet. So maybe just a little bit of color on Fluke specifically and what you see there.

I think first to your question, I do think that the [Purdue] in the Fluke industrial business is probably more that canary in a coal mine, to use the metaphor. I think if you looked at Fluke, we were very happy about their performance. The Fluke industrial business had a good quarter. We mentioned in the prepared remarks that Western Europe and China was very good. But I think on balance, what we saw in the quarter was stability, a little bit of improvement through some of the product innovations that going on at Fluke.

We talked about Fluke Connect and some of that, so some of that is helpful, some other products that they have launched here this year. So I think on balance, we've said stabilization. We saw a little bit of a pick up at Fluke as we said and we think that should continue. It's really not around easier comps, so this is we do think is really a little bit of improvement here.

Okay.

And maybe one other, Scott, maybe just to finish that thought. I'm sorry. The other thing we look at is their point-of-sale information. Obviously, with a number of publicly traded distributors that you know well, and we saw a little bit of improvement in point-of-sale through the quarter.

Okay. That's helpful. And then I was surprised when I -- you guys have actually done a fair amount of transactions this quarter. Most of them were really too small to do a release on, and you talked a bit about GTT which is something I don't really know anything about. But how do you think about given the size of Fortive, the balance between the smaller deals. Some companies say, hey, the small deals take just as much time and you don't get as much bang for your buck. Other companies say that's where the valuation and values make the most sense. So when you guys look at your opportunity set of transactions, how do you think about the pros and cons of the two different ways to think about it?

I think what Chuck and I are really pleased with the diversity of the pipeline right now. As you mentioned, we're really excited about bringing on eMaint and GTT into the portfolio into the Fortive family this quarter. They are great additions to our strategy around positioning our businesses around secular trends. In the case of eMaint really around SaaS-based business, it's 100% SaaS business. In the case of GTT, we're really reframing transportation technologies around some of the new trends in urbanization and safety because of traffic congestion. So I think you'd see our deals continue to be those kinds of deals.

But we do have a diverse pipeline right now. You can never time when deals will occur, but both diversity across platforms and size, we're seeing both of those right now. It's hard to predict when things would occur. We would certainly like to do some more sizable transactions. It's not that we won't -- we'll just be doing small bolt-on deals. You're right in your comments. These are probably -- the returns on these are in a lower -- in a fewer years than maybe a larger scale more platform-like deal, but we think a balance of that is good for us both short term and long term.

Makes sense. Okay. Thank you, guys. I appreciate it. Good luck.

Thanks, Scott. Have a good evening.

You too.

Steven Winoker from Bernstein.

Thanks, and good afternoon, everybody. I just wanted to start with the thinking behind the cadence of organic growth through the second half that we have already seen and into the rest of the year. That, obviously, up almost 3% core was I think better than anticipated, and as you sort of had talked about fourth-quarter originally, you talked about the easier comps. You talked about a better set up, an acceleration through the end of the year. What I'm hearing now is a little bit more stabilization at that level. Maybe give us a little color for the puts and takes around your thinking as you head through the rest of the year?

Steve, this is Chuck. Really, we are not seeing the second half all that much different than we thought of maybe three months ago. We've got two things going on here and post what we consider we are very happy with the core growth we've got as we've talked and Jim talked on the call about the -- taking some backlog down out of our EMC business, which is not accretive. We already had that in the second half and we got it in the third quarter.

We saw some real strength in our portfolios across Western Europe, at least where we had four out of our six of them really posted mid-single digits. We think we're taking share there. We really don't think that going forward that's really going to be that strong of an organic grower. So without those two things, we think that in the third quarter we would have been 1.5% core growth, and so therefore when we look forward we still see low-single digit, probably about the same maybe a little better than we just printed in Q4.

That's really helpful. Thanks, and then another question on restructuring and the investments headed into the fourth quarter. So I mean certainly one of Danaher's practices historically was to only call out separate restructuring when it was very large, and they absorbed restructuring every quarter. That was just part of the current business reporting.

I assume that you are pursuing the same approach, and this is sort of an extraordinary amount of restructuring but you have a regular approach to it. And also on that same point, Danaher seemed to time the restructuring spend very well relative to [lack] for demand. So maybe just give us a little color on your thinking and incentive behind this special restructuring being called out.

Hi, Steve. It's Jim. A couple of things maybe. First, I think what we tried to call out is both restructuring and growth investment either incremental to what we were already planning, as you mentioned. Our history here is to do maybe what we would call some quiet restructuring around businesses as we see fit. We think with some of the overage in the quarter that we had, obviously, I think demonstrates the strong earnings potential we have when we get a little bit of core growth.

We made the decision I think that [commands the business] both for the long and short term, a little bit of incremental growth investment to double down on a number of things that we think are really important. You heard about a couple of those on the call like condition monitoring at Fluke and in Gilbarco's EMV portfolio, so we're doing a little bit of that.

Certainly, as Chuck mentioned, some of our markets are a little noisy, and so there are some product lines in businesses where things are not maybe as good as they need to be and so we'll take the opportunity to do some things to make sure that those businesses continue to invest next year through taking some costs out. So a good balance of things. Because it's incremental to our prior guide, we thought it was important to highlight it. I think on balance, we are exceptionally excited about the quarter, and I think the degrees of freedom that we have in order to invest in the business is really the take-away for everyone.

Okay, I'll pass it on. Thanks.

Thank you.

Nigel Coe, Morgan Stanley.

Thanks, good afternoon.

Hi, Nigel.

Did you -- I'm sorry if I missed it, did you quantify the mix between cost reduction initiatives and growth initiatives in 4Q?

We think it's likely to be evenly split between those two things. And in the range of $0.04.

Okay, that's great. Makes a ton of sense. And then you just mentioned that the core growth was somewhat similar our maybe a little bit better than 3Q. The comp obviously plus 3% in 3Q 2015, minus 3% in 4Q 2015, so an easier comp. So would we expect maybe a slight sequential deterioration? How do we think about that comp effect I guess is my question.

I think when we think about the four, as Chuck mentioned, I think when you take into the backlog that we were able -- that really was shipped in 3Q, we don't anticipate Western Europe to be as good as the third quarter. We'll probably be a little bit better against that 1% or 2% that we might have had when you take those out of 3Q. So I think we'll sequentially be a little better. But again, I think given the environment, I think we're cautiously optimistic. But against the backdrop of what we are seeing with other peers in other markets, we think it's appropriate to be cautious and make sure that given the external environment we manage the business appropriately.

Absolutely. And then a quick one on tax rates. Chuck, twenty -- you said 28% going forward, just to clarify that's 28% for 4Q and 2017?

It's 28% in the fourth quarter and into 2017. What we've been able to do is accelerate some of the tax work that we were confident we were going to get done in 2017, and we're going to get -- and been able to bring that forward into 2016.

Great. Thanks a lot, guys.

Thank you, Nigel.

Jeffrey Sprague, Vertical Research.

Hello, there. Good day, everyone.

Good day, Jeff.

Just on the M&A front, Jim, perhaps you don't want to talk about the two deals individually, but collectively, can you give us a sense of the multiple paid and what you do think the return profile of those deals are?

Yes, I'd certainly give you a little bit more color on the deals. The two in the quarter were eMaint Enterprises for Fluke and GTT, which is within our transportation technologies platform. Both great businesses and both directed toward secular trends with a good growth profile, but small. The multiples on revenue would probably be higher than normal given the smaller nature of the deals. They are probably closer in the 3 to 4 range on a revenue multiple.

But I think the most important thing is around return and given the nature of how these businesses are consistent with what we are trying to do within those platforms, the return profile is very good. It's certainly within the 10% in three years. So I think you'll from time to time, probably see us pay a little bit more, pay up a little bit for growth here kinds of things for the platform but they'll probably more than likely in many cases be smaller and more adjacent so we can get to the return profile pretty quickly.

Great, and then on Tektronix, good to see a little bit of a turn there. Can you speak a little bit more broadly about what's going on with new product launches and how that business might be setting up into the -- especially the early part of next year but maybe all of 2017?

Yes. We were very pleased in the quarter given -- while they still declined in the third, they were sequentially better from the second quarter so that standpoint we were pleased with performance. As I noted in the highlighted remarks, the high-growth markets turned to growth so I think it's a really good trend for us and we think that probably continues. China continues to lead the way there. That's really a few years of spade work that we've done both on the product side and the go-to-market side to be prepared to take advantage of the opportunities there. So I think the team is executing very well there.

The North American and Western European markets are still pretty noisy and many of the vertical markets we play in are just outright slow. I don't expect that to improve anytime soon. While we don't have a lot of business in the semiconductor industry in North America, you do see a lot of consolidation there. So I think on balance, we think the next couple of quarters continue to be rough. We think as we get into maybe the back half of 2017, we've got some new platform technologies and products coming out that we think can help us make a little bit more of our own luck. But at this point in terms of just kind of we're not expecting any big macro tailwind to help us there. I think on balance, we're trying to make our own luck and the team is executing well.

Great. Thank you.

Thank you.

Shannon O'Callaghan, UBS.

Afternoon, guys

Hello, Shannon.

Just on EMV, you talked about the indoor slowing and you talked about some of the growth being more pit driven. Maybe just a little more color on that and how would you say things are tracking versus your expectations, better or worse or just different.

As we noted, we still getting indoor revenue so we need to be clear on that. It's just that at this point it's now starting to decelerate. We're just starting to see the EMV product lines, if you will, EMV dispensers and kits start to sell now. I think as we look at the funnel, Chuck and I were with the team a couple of weeks ago for the strategic plan, had an opportunity to go through the funnels, and I think from that standpoint, the funnels look very good. We're starting to see some of the business transact. As we noted in the remarks, we did see more kits this quarter and so I think it's not -- I wouldn't draw any trend into that yet. We'll continue to update you as we go through.

We continue to believe this is a $500 million incremental market opportunity for the players in the market, but it's still very early days and while we like the progress we have made, I certainly think that trying to determine what that mix between kits and dispensers will be, probably need a few more quarters here before we really see that. But we do see customer enthusiasm, and I still maintain that this thing is going to draw out well beyond the -- I think everything we've seen. We have the National Association of Convenience Store trade show last week and I think what we saw there was with customers there is we heard that not everybody is going to go during 2017.

Right. Okay. Thanks. And just in terms of the acquisition pipeline, it makes sense that your first couple would be in Fluke and transportation. Is that still where the most developed acquisition pipelines are or do some of these other platforms have things that are visible now?

Shannon, this is Chuck. As Jim was saying earlier, we really like the funnel but it's not focused on any one business. I think the only things you can really read about these two acquisitions is it's not really -- it's just where the first two happen to be. When you look at our first 5 to 10, you are going to see there is a spread in where they go across our businesses and also in size and scale.

Okay, great. Thanks.

Thanks, Shannon.

Andrew Obin, Bank of America.

Hi, guys. Good afternoon

Good afternoon, Andrew.

Just a follow-up question on EMV. You sort of noted that you see indoor EMV deceleration, so what's the adoption rate that you can estimate it at which it started to decelerate significantly?

You know, I think most of -- we don't see -- in the point of sale business, we don't see all the markets. We have to sometimes take some of the other -- we have to combine what all the other industry players. We have a little bit better view of payment on the outdoor because we sell a dispenser in that market. But we think probably we're in the 70% range probably right now. I think that's what prognosticators are probably at, and quite frankly, we don't think it will get to 100%. The tail off probably now is -- I don't think we can estimate when the next 10 points come but certainly the slowing rate right now means that we're starting to see probably relatively close to saturation.

Thank you so much. And just a broader question just going back to your commentary about macro just being soft, during the analyst day in the summer, you thought you could hit this rate of GDP, GDP plus growth. Given the overall weakness in the industrial market, and I guess 4Q you do have easy comps, do you think it's still a reasonable expectation into next year?

Yes, I do. I think when you look where we have been, we think we're in the range of GDP certainly with -- we're not completely tied to that because we're tied to some good secular trends like what we've got going at Gilbarco but also with EMV, but also at Qualitrol where condition monitoring becomes a real important thing for utilities around the world. So I think you see the acquisitions that we had this quarter as well trying to tie to things that even in a tougher industrial environment are going to resonate with customers who are trying for better productivity and safety in their operations. So we think that's still achievable, and as I think we mentioned over time as we get the M&A cycle moving a little bit to accelerate core growth within the platforms, GDP plus is probably achievable as well.

Terrific. Thank you so much.

Thanks, Andrew.

Julian Mitchell, Credit Suisse.

Hi. This is Lee Sandquist on for Julian Mitchell. After a very strong Q3 margin expansion, how do you think about the potential going into Q4 keeping in mind that longer-term 30 to 50 bps of core operating margin expansion target?

Hi, Lee. Thanks for joining. This is Chuck. Looking forward that the 30 to 50 bps, we feel very good about that. I think that we will continue to show margin expansion, especially when you look over multiple quarters, but we obviously overshot the market this quarter and it's going to be like that. Sometimes it's little stronger, a little less, but when you look forward over three or four quarters I think you're going to see 30 to 50 bps is exactly where we think we should be.

Makes sense. And then in terms of organic growth, it sounded like that picked up throughout the quarter and towards the end of the quarter. Which businesses saw the biggest progression throughout that period? Thank you.

I don't know that it actually picked up. I think by month is actually pretty stable although I would say we had a probably a big September last year, and we had some strength here. But I think the PacSci EMC business was an area where we got a big order out the door and then we saw the Western Europe, as we noted, were probably some areas of strength that maybe we didn't see at the beginning of the quarter.

Lee, maybe I just add as we said before, I think what we said in the earnings call in August was things were pretty stable but September was a big month and so I think that's what we really always see is September is always a big month. It's hard to make a macro read in August until you've seen September play out. We were very pleased to see how September played. As I mentioned and I think Chuck is exactly right in his comments around what we saw. I think if you were just sort of -- we think -- we're not calling any macro tailwind here at any point in time. We saw stability through the quarter. We saw a little bit of stability at end of the second quarter, so a few quarters in a row of stability is our base plan of how we think about things right now.

Great. Thank you very much.

Thank you.

Richard Eastman, Robert W. Baird.

Yes, thank you. Hi, Jim, Chuck.

Hi, Rich.

Quick question, can I just broaden out -- there's been a number of questions around the Professional Instrumentation segment of the business, and again, we've got an easier compare in the fourth quarter which you kind of addressed, but as you get into that being the more cyclical piece of the business, when you get into 2017, which pieces of the business here could drive PI to a core growth rate of GDP?

Well, I think for sure we'd start with field solutions. I think as I mentioned in the prepared remarks, Qualitrol, while not the biggest business in Professional Instrumentation, the 10 consecutive quarters of core growth in several of their new offerings I think will continue to drive growth there. We think that what we're doing with Fluke Connect and Connected Devices and the combination with eMaint will also be something that can create a little bit of our own luck as well. So I think those are two places. I already mentioned a little bit about tech in the second half.

Our sensors businesses should start to come back to growth. As I mentioned in the prepared remarks, some good business with the Navy. There's a number of other situations that we think play out that could potentially give us a little bit better performance here going forward. Obviously, we haven't given a 2017 update yet, but that's where we're sort of -- Chuck and I will go into the budgets here shortly. We'll sit with all of our businesses here in our budget season and we will have a better sense of how they are thinking about the lay of the quarter as they lay in a number of their growth initiatives.

Okay, and then when I look at the core up profit in each PI and IT, in the PI segment it was plus 110 bps and in IT it was up 230, the core. Is that, Chuck, maybe this question is directed at Chuck, but is that mix in both of these segments or was there some cost take-out pre-split? How do we think about the magnitude of the core increases in profit?

I think first thing it starts with FBS and everything we do across all the portfolios, including price. That helps but it's not just price, it's -- we are continuing -- our procurement teams do a wonderful job of finding ways and leveraging our scale and what we do. That's the number one [pin bar] on the priority chart. I think that when you look in industrial technologies, it's a little easier to see with the core growth that we're seeing there, but on relatively -- just into positive territory, it's not a big tailwind from any cost take-out. It's really the deployment of [FBS].

Okay. And last question. On GTT, again just searching around a little bit for that business and maybe trying to size it. Given their technology, it seems like a fairly small revenue business given how that technology can apply to so many markets. Is that kind of safety market -- telematics safety market if you will, is that quite fragmented? Why is that company not bigger relative to the benefits that their technology bring to the marketplace?

I think first, they are mostly a US-based business so I think that's first and foremost. They are a business, not a huge scale. I think one of the things we always bring to the party on these small bolt-on deals is the ability to scale the business, and I think entrepreneurs and folks around the world always look for us to be a scaler of their business. That's certainly true with both the deals in the quarter. I think it starts with that. And as we mentioned, these businesses are under $50 million in revenue, so we think they are great businesses. We can scale them.

In the case of GTT, they really are helping municipalities. If you think about it quickly, they started with a business that helped fire trucks and other first responders change the signal in order to go through streets but they've moved into urbanization through a number of things with municipal buses and things like that. So they're really very much in the forefront of helping traffic move through cities and as you can imagine, a pretty big problem not just in Seattle where we live but everywhere around the world. So an opportunity to globalize the business for sure.

Okay. All right. Thank you.

Thank you. Have a great day.

Andrew Kaplowitz from Citigroup.

Good evening, guys.

Hello, Andrew.

Chuck, you mentioned 40 bps of price in PI. Maybe you could talk about what price versus cost looks like moving forward in both segments. You mentioned that was a decent contribution to the improvement in margin with PI. But maybe you can talk about a broad base for the Company. Is 40 bps kind of what we could see here or could that get worse a little bit if [steel] comes up again? How do we look at it?

I think that year to date and for the year, we think we're going to average 50 basis points so I don't think that 40 is really out of line at all and it's pretty much what we've seen the last couple of years. I do think that price is something that we've -- with our strong positions and you look at our gross margins and that we've been able to get. Versus cost take-out, in terms of material cost take-out is I think what we're talking about here. That's a big lever as well, maybe even bigger than price. Price sometimes we talk about it more but our procurement teams do a great job at taking out 2% to 3% annually, and that's just a huge tailwind for us.

Okay, thanks for that. And then, Jim, in China, double-digit growth in China, it seems particularly strong. I think it's even better than it's been. Can you talk about where you've seen the incremental strength? I know you mentioned Tektronix improving, but is it broad-based across the Company that you are seeing more strength in China? How much of it is the market versus the self-help that you are working on?

Yes, thanks, Andrew. I think China, as I mentioned, just to go with finish the Tek thought, for sure Tek is doing a good job and they had several quarters in a row of good performance in China. I think it goes back to last year. And they are certainly tapping into several trends on investment and doing exceptional job there, doing better even than the market. I think if you look more broad-based, and we do a pretty good broad-based growth, we are seeing growth in our automation businesses and while our sensor businesses are not growing overall, they are growing in China.

And then Fluke continues to do well. It actually is fairly broad-based, but I do think that this really is -- part of our success has to do with the fact that we've been in China for a long time. Our businesses have continued to look for new areas of growth. We have a lot of capability over there in terms of manufacturing, engineering, so a product designed for the market, and I'd like to think that part of our performance is the fact that we -- we're very much tapping into a number of the drivers that go on in China as a Chinese company would because of our long-term establishment of being over there for quite a long time.

All right. Thanks, guys.

Steve Tusa, JPMorgan.

Hi, guys. Good afternoon

Hello, Steve.

So just to make it clear, the fourth quarter organic 1.5% to 2%, is that kind of what you were saying or is it kind of firmly in that 2% range?

It's firmly. I think what we are saying is for the fourth quarter is better than what we printed than just in the third quarter but still low single-digit.

Okay. Better than what you printed, like the 2.7%?

2.5% to 3% growth.

Okay, got it, sorry. I know there is going to be some questions about that tomorrow. And then just to be clear on this EMV stuff, how much of the growth from the high-single-digit growth at GVR or transportation tech, however you want to talk about it, is coming from EMV and then you talked about it decelerating in the fourth quarter. What is the step down in that growth rate for the fourth quarter? I would assume that it's all related to EMV. And is there any risk that at any time in the next several quarters there is a kind of a tough comp that would create a negative result at GVR?

So, Steve, first let me apologize. Let me make sure that I'm clear. We do not see a step down in all at Gilbarco in the fourth quarter. We will see continued strong performance, and while no one has a crystal ball, certainly, I think it's five consecutive quarters of growth there, of very good growth. We see that continuing for as long as we can see out there right now. There will be no deceleration in Gilbarco in the fourth. I just want to make sure that's clear.

What I was trying to say is that the point-of-sale part of EMV will start to decelerate and the outdoor side of EMV is accelerating. So that's the plus and the minus. Just to characterize that, the outdoor opportunity is much bigger than the indoor because as you can imagine, there's only one or two payment devices inside the store but there might be as many as 10 dispensers on the outdoor, so the opportunity is much bigger and we're just starting to see that. We'll see good performance in the fourth quarter at Gilbarco against a tough comp, so we feel very strongly.

To your question about where the growth there is coming from, certainly the US is driving a good chunk of their growth but they are still growing and so Gilbarco -- I mentioned the share gains they have been having in Europe, particularly with a major oil retailer in Italy. But a number of share gains across a number of big customers in Europe and around in many of the high-growth markets.

Not every high-growth market is growing for them. Latin America has been a challenge. A couple other markets have been challenges. They have had good growth in the Middle East. I think that's where they stand and we continue to see EMV will be a driver of their performance, but it won't be the only place where they perform.

Okay. That's great clarity. You guys were kind of -- it sounded like you were talking it down a little more so that's --.

I apologize for that.

Not at all. That's why I asked the question. Great clarity on that. Thanks. The $200 million or the acquisitions you've done year to date, just remind us will they add -- how much will they add to earnings next year? What's the 2017 accretion from what you just spoke mathematically?

Steve, this is Chuck. We are not expecting a big accretion. They are certainly not dilutive but they're going to really hit hard in years two and three.

Okay. Thanks a lot, guys. Appreciate it.

Thanks, Steve. Have a great evening.

Brian Drab with William Blair.

Hi. Thanks for taking my questions. First question just on the margin. You have this nice 150 bps of expansion -- core expansion in the third quarter. It sounded like there was some timing involved in that. I think you said given that some of the revenues booked close to the end of the quarter, you had some favorable drop through. And I also have the guide in front of me now, so I'm just trying to triangulate in on this. Does this mean that gross margin and/or operating margin is down a touch sequentially into the fourth quarter?

No, I wouldn't say that gross margins could came down sequentially at all in Q4. So no, I wouldn't say that. I think that from a -- what we were saying, trying to say is some of the revenue in the fourth quarter, mostly the impacts PacSci [EMC] stuff may be moved into the third quarter but that's all we were trying to signal there.

Okay, and then on GTT. This is interesting because it's within your highest growth subsegment, I guess, within the telematics high-single-digit core growth. Can you talk about what this does to the $3 billion approximate TAM that you have in that subsegment? How large is the TAM for GTT, and what has the growth rate been at GTT and what would you expect it to be going forward?

We think the market is at least a mid-single-digit grower. I have to think about it but I think the available market there is maybe $0.25 billion or something like that for their specific segment. I think the broader thing that we have the opportunity to do, as we mentioned, is we move from retail petroleum to more telematics revenue as well as new things around smart transportation. We do have an opportunity to add a bigger available market to the platform over time. This is a good start but we've evolved the platform with telematics a few years ago. We've evolved it again with GTT, and we will continue to evolve it over time.

Okay, thank you.

Thank you.

Thanks, Brian.

Joe Giordano with Cowen.

Hello, guys. Thanks for taking my question here.

Thanks, Joe.

I wanted to talk a little bit about commercial markets. There's been some talk about some of those markets getting a little bit weaker, and I was wondering what you are seeing there from some takeaways from Fluke?

In the sense of commercial retail, we don't have a lot of exposure to that but I would say mostly I'm just thinking as I'm talking, I think on balance probably stable would be the best way to think about it for us. When we think about the whole construction industry in that respect, residential is a very small part of our business. Facilities maintenance, a big part of our business. Commercial construction, not a real big piece either. So I think when we look at those segments when we really think about Fluke, it's mostly facilities maintenance so in many cases, it's the buildings that are already built, if you will.

Okay, fair enough. And then the strength at Qualitrol, can you maybe dig into that a little bit? Anything specific you would call out as to what's driving that versus generally more weak power markets?

Well, we sell to utilities and generally our value proposition, if you will, is to be OEM agnostic meaning that when utilities have multiple OEM equipment, especially transformers, we are going to be the OEM agnostic condition monitoring system that goes in. So utilities are trying to get -- in the developed world you've got the growth around the aging infrastructure and utilities needing to make sure that the equipment they have today is working. And obviously in the high-growth markets, you've got the opportunity of expanded infrastructure.

Those are really the drivers. They are doing a wonderful job of really growing the business, very global business. They did some changes to their go-to-market strategy this year that had some good results as well. So it's not just market but also they are making a lot of their own luck through some implementation of some good FBS tools.

When you talk about that in the emerging in places like China when they talk about new build capacity slowing, and I'm sure I'm guessing that business is more of like a new capacity additions in those kind of markets. How are you seeing that there?

First I would say is, I was in the Middle East, obviously you asked a China question, but I was in the Middle East with them a couple of weeks ago, and they've got good growth in the Middle East even against a tough Middle East comp, but China, they are seeing growth. They are doing well there. Again, while we continue to see maybe some of the big power plants, they are not really tied to the power plant construction as much as they are tied to the infrastructure in terms of getting power to cities, so in that respect we're seeing growth. I think for the year, they've grown very well

Thanks, guys.

Thank you.

Patrick Newton, Stifel.

Yes, Jim, Chuck. Thank you for squeezing me in here. I guess, first a clarification on EMV. I believe in an earlier answer, you said that you were seeing it draw out a little bit longer, so should we think of 100 bps of organic growth related to EMV in 2017 as maybe being a little bit slower? And then just with the commentary on kits outweighing dispenser demand at this point, should we think about all else equal a little bit lower revenue contribution but a higher margin?

Hello, Patrick. Thanks for the question. I don't think we will call what the growth will be for 2017 just yet. Relative to the timeframe, we still stand by a five-year timeframe with probably four years left. We'll probably put this year into that five years. I think that's what we said. We've been consistent around that. We think in 2020-ish kind of timeframe, it will continue to play out. So that's how we feel.

As I mentioned, relative to growth for next year, we're still looking at funnels. We're obviously still closing business. So we'll really have a better sense of how much growth that will add to the portfolio. But 100 bps to Fortive is our base case of what we've been talking about. There's nothing to suggest to us at least at this point that wouldn't be true. And then finally on the kits versus dispensers, certainly more kits in the quarter. Our $500 million market sizing over the next several years takes into account a kit versus dispenser model, and nothing in the quarter would necessarily put us off anything material off that model.

Great, and just one more, if I may. Jim, just a big picture question. You clearly have an increased focus on software that was highlighted at your analyst day and you've touched on this somewhat in your remarks today. But could you highlight some progress in the quarter across the entire Fortive portfolio and maybe help us understand the software contribution to overall Fortive revenue?

Yes, I'll maybe take the last question first. It's still a small part of our revenue, but it's important part of our revenue. I think it's important part of our story strategically. Chuck and I just finished all the strategic plans with our businesses, and clearly software is finding its way into the strategy and the value proposition of our customers across the portfolio.

In terms of highlights, we certainly talked about it with Fluke Connect and the launch of their condition monitoring solution, which gives them a SaaS-based solution that they are selling today. We combine that with eMaint. We now have some revenue of SaaS-based. We start now with a SaaS-based revenue base at Fluke and we'll move from there. It probably won't be material for a couple of years but the growth rate will be exceptional.

Inside 360, which is our offering at Gilbarco Veeder-Root, is doing exceptionally well. We've talked about our telematics business. A little bit less revenue growth in telematics this quarter but a very good subscriptions and with almost half a million users of telematics solutions around the world with a SaaS-based revenue solution, I think we're in very good position to grow the business. But as I mentioned over time, that really means that it will have a material impact in several years. We'll continue to invest like we did with eMaint when we find opportunities to accelerate our positions.

I think that's what the wonderful part of our ability to deploy capital is Fluke had a computerized maintenance management software addition to their software portfolio, and we accelerated that strategy by four years with the addition of eMaint. So I think that's exactly what we are going to do around the portfolio and a real opportunity to add SaaS-based revenue to the portfolio over time.

Thank you for taking my questions. Good luck.

Thanks, Patrick. Great to talk to you and thanks, everybody, for joining us. We really appreciate your time this evening. Most of you on the East Coast. Have a great evening and we look forward to catching up with you and I'll give it back to Lisa.

All right. Thank you. Thank you, David. That's it for the call.

Thank you. This does conclude today's program. I thank all of you for your participation and you may disconnect at any time.