Fortive Corp (FTV) 2016 Q4 法說會逐字稿

My name is David, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporation's fourth quarter 2016 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session.

(Operator Instructions)

I would now like to turn the call over to Ms. Lisa Curran, Vice President of Investor Relations. Ms. Curran, you may now 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 relating to these non-GAAP financial measures are available on the Investors section of our website, www.fortive.com, under the heading, Financial Information.

A replay of the webcast will be archived on the Investors section of the 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 Tuesday, February 14, 2017. Once available, the link to this conference replay will be posted under the Investors section of Fortive website under Events and Presentations.

During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. All references to period-to-period increases or decreases and financial metrics are year-over-year. 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, and actual results might differ materially from any forward-looking statements that we make today.

Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings, including the information statement we furnished with the current report on Form 8-K, filed on June 15, 2016. 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, and good afternoon everyone. We closed 2016 on a positive note, delivering outperformance from both a core sales and earnings growth perspective, as our outstanding team of 24,000 employees around the world leverage the power of the Fortive business system. 2016 was a remarkable year as we not only launch Fortive, but seamlessly served our customers, accelerated product innovation, maintained or expanded leading market positions in all of our businesses, and lived their values by holding over 700 Kaizens, including the CEO Kaizen we highlighted last quarter.

In our first two quarters as a standalone company, Fortive delivered over 3% core revenue growth, expanded core adjusted operating margin 90 basis points and gross margin 60 basis points, delivered free cash flow conversion of 129%, and grew adjusted earnings 12% all while continuing to invest in both growth in productivity initiatives and M&A, that will allow Fortive to deliver long-term value to our shareholders. Living our values, helping our customers accelerate progress, and leveraging the power of the Fortive business system, positions us well for 2017 and beyond.

Turning to the fourth quarter of 2016, for a more detailed discussion of our results, let me first remind you that the following information reflects year-over-year increases or decreases, relative to the supplemental financial data posted to our website. Adjusted net earnings of $237.7 million were up 3.6% over the prior year. Adjusted diluted net earnings per share were $0.68. If not for the $0.04 of additional investments we guided last quarter, adjusted net earnings per share would have grown 9%.

Currency was an additional $0.01 headwind to adjusted EPS. Sales grew 3.3% to $1.6 billion, or a core revenue increase of 3.5%, reflecting growth in five at six platforms. Acquisitions contributed approximately 90 basis points of growth during the fourth quarter, which was more than offset by approximately 110 basis points of unfavorable currency translation, due to the strengthening US dollar.

Geographically, for the second quarter in a row, North America and Western Europe drove low single-digit revenue growth in developed markets. High-growth markets accelerated to high single-digit growth in the quarter, driven primarily by China and improved results in Latin America, partially offset by challenging Middle East markets.

North American growth, of low single-digits, was driven primarily by strong performance at Gilbarco Veeder Root, Matco, Fluke, and Kollmorgen. Western Europe growth of high single-digits continues to reflect outperformance to the general macro environment, as market share gains were realized across both Professional Instrumentation and Industrial Technology segments.

As we guided last quarter, we used the outperformance in third quarter of 2016 to invest opportunistically back in our businesses, in the form of both long-term growth and productivity investments. Even with those additional investments, we delivered solid margin performance in the quarter, demonstrating the value of FBS and focused execution. Gross margin was 49%, reflecting 90 basis points of expansion over the prior year.

Operating profit margin was 20.8%, which reflects core adjusted operating margin expansion of 20 basis points. During the fourth quarter, we generated approximately $278 million of free cash flow and delivered an outstanding conversion ratio of 124%. For the full-year free cash flow conversion was 115%.

Turning to our segments, Professional Instrumentation posted core revenue growth of 1.2%, an acceleration of almost 50 basis points over the third quarter of 2016, reflecting continued stabilization in North American industrial markets. FX was a significant headwind in the quarter, of approximately 130 basis points, partially offset by growth from acquisitions of 40 basis points. Professional Instrumentation operating profit margin was 23.1%, reflecting a core operating margin decline of 30 basis points, driven primarily by long-term growth investments undertaken in the quarter, partially offset by decreased amortization.

Advanced Instrumentation & Solutions' core revenue increased low single-digits, primarily led by good performance in both Fluke and Qualitrol, which comprise our Field Solutions platform. Field Solutions core revenue was up low single-digits and the quarter, with Fluke and Qualitrol posting low single-digit and high single-digit growth respectively.

The growth at Fluke reflected solid demand for handheld industrial products in North America as well as Western Europe. Sell-through data continues to improve in both regions.

The integration of eMaint Enterprises continues to go well, and we've seen positive customer reaction as we launch combine offerings to provide our Fluke Condition Monitoring solution. eMaint held a customer conference in November, where customers had the ability to preview the new integrated solutions, to improve productivity of labor resources, increase equipment uptime, and increase asset life via a shift to predictive maintenance.

We were overwhelmed with the number of customers eager to be early adopters. And while it's still early days on the commercialization front, the sales funnel expanded approximately 30% in January versus December. We will continue to keep you updated on this important growth driver for both Fluke and Fortive.

The Fluke team continues to innovate and expand the Fluke Connected Toolbox as evidenced by the recent release of the Ti480 infrared camera. The Ti480 introduces 640x480 resolution into a ruggedized pistol-grip form factor to maintenance professionals across a variety of vertical markets. We've seen incredible traction with this camera during its first six weeks of the market, and are excited about its growth prospects going forward.

Qualitrol's high single-digit growth marks its 11th consecutive quarter of positive core growth. Demand continues to be driven by utility customers in high-growth markets, particularly the Middle East and APAC regions, where we continue to gain share with OEMs. The Qualitrol team has made important progress executing their Condition Based Monitoring strategy and leveraging its broad offering to customers. Clearly FBS has played critical role in improving funnel visibility and market identification.

Moving to product realization, the platform core revenues were down low single-digits this quarter, reflecting project timing of PacSci EMC and Invetech. For the year, these two businesses grew at low single-digit rates. Given the nature of these project-based businesses, its not unexpected to see variation in growth quarter-to-quarter. We do have good line of sight into the backlog at PacSci EMC and Invetech, and we expect continued low single-digit growth trajectory forward.

Tektronix reported low single-digit core revenue growth during the quarter, reflecting continued outperformance in China of high double-digits in stabilization and developed markets. China growth remains to be driven by the semiconductor and communication segments, where we continue to gain market share with our industry-leading technology. In North America, we're seeing signs of stabilization, but no signs of recovery in the computer and semiconductor segments. The military, government, and educational sectors continue to perform well here, and we see tremendous traction with our 70 gigahertz Real-Time Oscilloscope, particularly within data centers.

Our Sensing Technologies platform posted high single-digit core growth in the quarter. The Controls end markets continue to be challenged, partially offsetting strong outperformance in our Sensor businesses, we saw new key account wins globally, and increased demand for our MRO products in North America.

Moving to our Industrial Technology segment, we realized core revenue growth of 5.6% in the quarter. Acquisitions contributed approximately 130 basis points of growth, relative to prior year, which was partially offset by 100 basis points of unfavorable currency translation. Reported operating profit margin increased to 20.7%, and core operating margin was up 80 basis points for the quarter, reflecting margin expansion across all platforms.

Our Transportation Technologies platform saw high single-digit growth in the quarter, with Gilbarco Veeder Root delivering high single-digit core revenue growth. During the fourth quarter, we experienced a headwind from EMV-related indoor point-of-sale solutions, that was more than offset by an increase in outdoor EMV-related demand from both dispensers and payment kits.

The November 2016 announcement regarding the outdoor liability shift in the US to 2020, did not have an impact on our fourth quarter results, as most customers have already ordered before year-end, consistent with their capital spend budgets.

Looking forward, we don't expect the delay to affect the total incremental outdoor EMV opportunity that we've previously outlined, and we continue to believe that this is a three to four year opportunity. Net-net, we view the 2020 timeline as a positive, as it reduces our customers' near-term liability, and also because we expect the incremental outdoor EMV impact will be more evenly distributed over the next several years.

Telematics realized core growth of low single-digits in the quarter, with most of the growth stemming from outside the US. Director, our new SaaS platform, continues to gain traction and we're encouraged by our record high install base in the United States. We are further encouraged by the recent ELD or electronic logging device decision that clears the way for ELD adoption by the transportation industry beginning in 2017.

Automation and Specialty Components posted mid-single-digit core revenue growth in the quarter. Automation growth was offset by core revenue decline at Jacobs Vehicle Systems, which was impacted by the challenged North American heavy truck market. Within Automation, Kollmorgen and Thomson both grew core revenues high single-digits.

Thomson's growth was driven by distribution, medical equipment, and off-highway vertical markets. This is Kollmorgen's third consecutive quarter of growth and was reflective outperformance in both developed and high-growth markets, driven primarily by targeted efforts in the medical, robotics, and metal forming verticals.

Kollmorgen's use of speed design review helped them execute their robotic strategy to address secular growth in collaborative robotics, and they grew revenue strong double-digits in China in 2016 as a result of their FBS commercial growth tools. These are just a couple of examples of how our businesses leverage FBS to drive growth and outperform their markets.

Moving to Franchise Distribution, which posted low single-digit growth for the quarter, I'm happy to share, that once again, Matco grew revenue at a high single-digit rate as we continue to gain share via both same-store sales and franchisee ads. Matco Expo, Matco's largest franchisee event of the year, is in the first quarter of 2017 and we are anticipating record attendance, of almost 10% over the prior year. Matco's mid-single-digit or better core revenue growth track record is now 26 out of the last 28 quarters.

To wrap up, we have a strong finish in the fourth quarter contributing to a solid start for Fortive. As I've alluded to before, the reinvigoration of our culture was evident as the Fortive Business System drove both core topline and earnings outperformance, while allowing for investment in the future. Our excellent cash flow performance, combined with our strong balance sheet, leaves us well-positioned for disciplined acquisitions and growth investments to strengthen our businesses and market-leading positions in 2017.

We are initiating our full-year 2017 adjusted diluted net EPS guidance of $2.60 to $2.70, which includes assumptions for low single-digit core revenue growth amid stable end markets. Combined with the benefits of our additional restructuring and growth investments this past quarter, as well as decreased amortization, we anticipate core margin expansion in excess of 50 basis points, with an effective tax rate of 28% for the year. In 2017, we expect currency to be approximate headwind of 100 basis points to 200 basis points to the topline and $0.05 to EPS.

As you can see from the waterfall on the slides, we expect productivity and restructuring benefits to provide a $0.04 to $0.05 tailwind and low single-digit core revenue growth, at a 30% to 35% fall-through, to contribute $0.04 to $0.13. Our resulting 2017 adjusted earnings-per-share guidance of $2.60 to $2.70 implies growth of 7% at the high-end of the guide. We are also initiating our first-quarter adjusted diluted net EPS guidance of $0.54 to $0.58, which also includes an assumption of low single-digit core revenue growth.

In closing, I want to say how proud I am of our 24,000 employees for all that we've accomplished in this milestone year. I'm looking forward to Fortive's first full-year as a standalone company. Fortive's culture of FBS and accountability will serve our customers, and you, our shareholders well, as we live our values and work every day to deliver essential technology for the people who accelerate progress. We are committed to making 2017 another great year.

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

Thanks, Jim. Before we move into questions, I'd like to take this opportunity to announce that Fortive will host its first Investor & Analyst day on May 18, 2017 in New York City. Further details will be circulated soon. That concludes our formal comments. David, we are now ready for questions.

( Operator Instructions )

Steven Winoker, Bernstein.

Thanks. Good afternoon, everybody. I'd love to, Jim, get your thoughts on the M&A pipeline. Actually, stepping back for a minute here, it's obviously an important part to the overall business model, and in terms of how that's tracking in the capability building up, what you see and what you would like investors to have, from and expectations perspective, in terms of both direction and how you see that playing out over the next year.

Thanks, Steve. I think, first of all, M&A continues to be our main priority, so no change in that. We think today, we have about $3 billion worth of capacity over the next couple of years and so we've got plenty of opportunity.

As we mentioned on prior calls, really a number of things have been happening, in relative to building our own capacity. A couple deals that we got on in the third quarter, as we mentioned on the prior call. Nothing this quarter, but certainly we're very busy and I think we are very fortunate to be in a position we're at right now, from a balance sheet perspective. I'm highly confident we'll get some things done in 2017, with a breadth of deals, both from a size perspective and across the platforms.

And are bid ask spreads in places which you think are favorable enough to getting deals done?

Yes, I wouldn't say pricing has been an issue at all. I think at the end of the day, we've been active and I think we haven't seen much change in pricing over the last 12 months.

Okay, great. And maybe just a little color. I you had already guided to that $0.04 of additional investment last quarter and I'm looking also at the core margin contraction and professional instrumentation. I think that $0.04 would probably translate to something like 120 basis headwind overall for the whole Company, but maybe just talk about where it was spent. Did you spend more than that, is there additional restructuring, what was the makeup of that 30 basis point contraction, that kind of thing?

Hi Steve, this is Chuck.

Hi, Chuck.

The restructuring that we spent -- we spent additional $0.02 and it was fairly evenly split between the two platforms, may be a little more in terms of PI, but pretty evenly split there. And then I think -- the other $0.02 we did an other additional on growth-spend.

The other $0.02 on growth was mostly in PI, I think, Steve, as it translated. We were able to accelerate a number of things around Condition Monitoring, some things we wanted to do on the new platform attack, as well as couple of incremental investments in other parts of the portfolio. So, that just gives you a sense about the restructuring and the growth.

Okay, great. And, Jim, while I've got you, just one last thing, which is, what are you really sensing underlying drivers of sentiment and growth across your customer discussions, particularly in light of all of the political and other changes since November? What you hearing out there, and Chuck probably should maybe comment on the tax position for the Company as well.

Okay. We'll take that in short answer. But certainly as we've talked to a number of customers we been out, I think there is not a real change at this point with anyone's outlook at this point. A lot moving around and most customers are really sort of waiting to really understand if there's differences, from a policy perspective, that are actually going to be enacted.

So I would say it's still very early days. We noted the stabilization in the North American market from really the third to the fourth being pretty consistent. So no real uptick, nor is there one planned in our guide.

Steve, from the tax standpoint, as I'm sure you're aware, there's a breadth of opportunities out there and changes going. It's really hard for us to put a fine point on that. But we would note that corporate tax rates coming down is going to be favorable for us, like it is all industrials.

We're a little more overweight in the US and we know to be a net-exporter. So all the scenarios I've seen so far, are going to be favorable to us. But we haven't baked any of that in and we're going to wait until something gets a little closer to print before we start quantifying that.

Sounds great. Thank you.

Thank you, Steve.

Scott Davis, Barclays.

Hi, good afternoon, guys.

Hi, Scott.

Trying to get a sense -- I mean a couple things, one just nit-picky, but is 6.1% kind of the level of R&D that you expect to stay at longer term? And same kind of my question, SG&A, maybe you addressed why that went up year-over-year, but is that a function of some of the new acquisitions that came in or that kind of a new level, now that you've had a chance to hire people that you needed to hire and build out the corporate structure that you've needed?

Yes, so for the R&D, the 6.1%, we've been right around there, up or down 10 basis points, and I expect us to be there. When you click down by OpCo, there's going to be some changes as projects ebb and flow. But, no real changes to R&D from a -- we want to change investment levels? It's just the normal plays. The big thing that's going on SG&A is the growth investments we've put in in the second half of the year.

As we saw the topline strengthening, we kicked off a little bit more investment. And we really called out some of that the third quarter when we overachieved in that third quarter, said we're going to even put in a little bit more to try and accelerate and help us out next year.

Fair enough. And then just a follow-up, I'm guessing you guys would be pretty disappointed if you just did 3% to 7% EPS growth your first full year out of the gate. Would you characterize this as a fairly conservative forecast, that you would certainly hope to be able to beat? Don't want to put words in your mouth but, if you can address that a bit, how you think about it.

Scott, we think of it a couple of ways. First, the guide doesn't assume any M&A and so if -- getting into high single-digits, without the benefit of deploying using our balance sheet, is what we've been really consistently saying and we feel pretty good about that. Having said that, as Jim said, we expect to deploy some M&A, and that's the thing, though, I think is going to take --that I expect to take our earnings growth up over the next year or two.

Okay. Best of luck, guys. Thank you.

Thanks, Scott. Have a good day.

Nigel Coe, Morgan Stanley.

Thanks, good evening guys. Just want to -- can you hear me?

Yes we can, hello, Nigel.

Hi, Jim. Can you just maybe talk about the low single-digits growth the next year, and how you're seeing that shaking out by segment, and maybe by SBU? And maybe just as a follow on to that, if you just look at some of your [clearing] and Kollmorgen businesses, such as automation, up high single-digits. It feels like there's a bit more of a powerful recovery, maybe forming here. You're obviously not ready to make that call, but maybe just address that point as well?

So Nigel, the thing on the core growth at low single-digit -- we posted a couple of low single-digits in the second half of 2016. Our markets remain stable. We're not seeing a big change in them going forward. And that's really about what we're seeing in the -- what the guide is going forward. Certainly there's some things that are going up and down by regions and by product lines, but net-net-net we haven't seen any big recovery.

Nigel, maybe just a little bit of color. I think as we said in the prepared remarks, regionally, we expect the US and the developed markets to be, what I would say, relatively stable in the low single-digit range. We'll probably get a little bit uptick in the high-growth markets above that, maybe mid-single-digits in the high-growth markets for the year. So that's kind of our thought here.

We don't anticipate any big shift in any of the markets, relative to operating companies. Certainly we're seeing a little bit better growth in places like Fluke, that we expect. And Automation Kollmorgen's, three quarters in a row track record is obviously very good, we're very pleased with that. And then some of the perennial folks, like Matco and Gilbarco will continue to do well. But, I think it's very balanced approach to growth, I think as we think about it. Both regionally as well as within -- as Chuck mentioned in the segments, and certainly as you drill down into the operating company, it's pretty balanced as well.

Still a little noisy at Tektronix, particularly in the developed markets. They're doing an outstanding job in their high-growth markets, particularly in China, as we noted on the prepared remarks. We still think Tek is going to be a little noisy in the first half.

Okay. That's great color. Just a quick follow-on, the bridge looks very reasonable in totality. We've had a little bit -- a couple questions on the margins for next year, 30%, 35%. I think a lot of folks see you at 35% or maybe better flow through. Anything -- obviously you want to be conservative, anything in terms of growth investments or restructuring that you're baking into next year?

Well, Nigel, two things. One is if you're looking on the bridge there, we do call it 30% to 35%, but we also call out a couple bars back, where there's productivity, that probably take that number to be a little bit higher, and I think that's what you've been seeing this year, a little bit better on that flow-through. Getting to the OMX of around 50 basis points.

Okay, fair enough. Thank you very much.

Thanks, Nigel.

Julian Mitchell, Credit Suisse.

Hello, good afternoon.

Good afternoon, hi Julian.

Hi, my first question would really-- just be on the industrial tech piece, and GVR specifically. You'd mentioned some headwind around the indoor rollout in Q4, so I just wondered how you see that playing out over the next 12 months, in terms of the US indoor versus outdoor growth rates?

So we would expect the indoor to be a headwind now for the next four quarters, or so, Julian. It's really -- we're at about, what we would say is kind of a typical run rate, almost a replacement rate at this point. So, it will be a headwind the rest of the year.

We noted that for Fortive, the [E] of the outdoor be around 100 basis points of help. We probably now think that's going to be a little bit under, given the announcement to 2020. We still have a firm belief in the strength of the opportunity over the next three or four years, through 2020, but maybe an air pocket or two this year as some of our customers maybe delay things a quarter or two.

I think, very consistently with what we talked about, since we've been talking about [ENV], over 12 months, having been in the industry for a long time, we really don't think it will be the summertime before we'll really have a good sense of how this is going to roll out over the next couple of years.

Understood. Thanks. And then my follow-up would just be around the sensing business. That had had a very tough couple of years, I think, maybe some shared loss in there, seemed to come back in the fourth quarter. Maybe give a little bit of detail on what drove the sensing recovery and what sort of growth rates you should expect that piece to have over the next 12 months.

Well, I think first, we were pleased in the fourth quarter with the performance. We think about the sensing platform as two pieces: the controls aspect, which is things like temperature controllers, and then pure sensing, particularly our sensing businesses Gems and Anderson-Negele. The sensor businesses are going to certainly grow in the mid-single-digit range. They had a little bit easier comp in the fourth quarter, but they'll sunset some of those comps through the year, and I think have good growth this year. That's on the backs of some new OEM wins, as well as just broader MRO performance.

So, I think we're probably in that low to mid-single-digit growth for them, for the platform for the rest of the year, a little bit dependant on how the control side does. But we're very bullish on the sensor side of that and we think they'll have a good year in 2017.

Great. Thank you.

Thank you.

Jeffrey Sprague, Vertical Research Partners.

Good day, everyone.

Hi, Jeff.

Jim, could you touch a little bit more on tech and how you see it playing for the year? I think through the back half of 2016 you're kind of gearing up for some new product launches and there's kind of a refresh going on. Is there any particular timeline to think about, in terms of meaningful things hitting the market or do they expect some kind of more gradual progression there?

Yes, so the fourth quarter performance was really more of a story of just them blocking and tackling well. China, their high-growth market is doing very well, China, India, a number of those markets doing well. So, there really was not as much an innovation story, that's really to come.

I think we highlighted, they have a new platform coming out in the second half of the year, which we're really excited about. We think it will deliver some increased revenue for sure. And, we just passed a major milestone on that platform here couple weeks ago. So it gives us even more confidence that launch is going to be on time in the second half. And that will start a series of new products over the next several years. So, it's not just sort of one big launch in the second half, but really a start off this platform that will keep a level of innovation in the marketplace that we're excited about.

The tech team is doing -- I think we'll see a little bit choppy first half. I think they'll probably be okay in the first quarter because of the little bit easier comp in the first quarter, as well. But I think as we get to the second half, we will see improved performance.

And then, in a similar vein, in terms of growth initiatives, maybe update us a little bit on Fluke Connect, you mentioned it in your opening script, but how that is progressing, maybe the size of the business at this point if you'd like to share it or any other color around that?

Yes, we launched the condition mon-- we've have the Fluke connected tools out for a few years, as we mentioned, on the new infrared camera that's just a launch of another connected tool, which is great. So that level of innovation we've continued into the marketplace. The condition monitoring solution, that we'll certainly highlight at the investor conference as well, will give you a sense of that. But that really got launched in the fourth quarter.

Early days, as I mentioned, that, combined with the eMaint suite software suite that will be an integrated solution here shortly, and we're seeing a lot of dual selling that's able to happen with the team, relative to getting sales leads and building funnel. But it's still fairly early days, not a lot of revenue yet.

I were to say one thing, the sales cycle is little bit longer. This is a SaaS-based solution. So it takes a little bit longer to get the customer to think through that. So, I think we're probably not going to see meaningful revenue til the second half as we work through the lead gen -- work through the funnel. And then, obviously, you need to build momentum with SaaS-based business before it starts to ring the cash register.

So it's really, probably a second-half, even into 2018 kind of story. It's still early days, as I said on the prepared remarks, but I think we're in a very good place, relative to the solution, and the way customers are really understanding it and getting to understand the solution.

Great. Thanks.

Maybe just a final note on that, we've got about -- the target market on that is about 600,000 in manufacturing sites around the world, where they really don't have a solution today and can really easily install the solution with a very low entry cost and ability to upsell them with new features, over time. So, it takes a little while to get out to those places and get the lead generation engine going, but we've started and I'm very -- I've got great optimism here.

Great. Thank you.

Thank you.

Richard Eastman, Robert W Baird.

Yes. Good afternoon.

Hi, Rick.

Jim, Chuck, maybe one of you could just address pricing and how much price we're able to capture in 2016, and maybe what the outlook is for 2017, and just kind of flow that into the gross margin discussion. I'm curious, with gross margin up 90 basis points year-over-year, what's the realistic pacing of improvement in gross margin, year-over-year, that we should look for to kind of help you pay for the other investments?

So Rick, this is Chuck, a couple of things. For the year, I think we were up 40 basis points in pricing and our gross margins, the easy ones going forward, 50 basis points is a good thing to plug in, looking forward. Deploying FBS, from all the levers that we have, it's sometimes going to be a little higher, sometimes going to be a little lower. I think that's -- those are the quick answers.

One thing, I feel like I probably get your next question, is Q4 was actually down in pricing and we were down 20 basis points, largely due to some big deals around the ENV. If we pulled that out, we would have been up 10 to 20 points in Professional Instrumentation and Industrial Technologies. But because of that ENV, some of the big deals, some of our big guys, that did pull us negative in Q4, but still 40 basis points for the year.

The final plan, even though we did have a little bit more price at Gilbarco in the quarter, we had excellent gross margin in performance in the quarter. So one of the things we look is the combination of price and gross margins, probably part of your question, Rick, is to make sure that even we're giving up a little price, sometimes we're giving price on maybe higher software or something that inevitably brings higher gross margins into the portfolio anyway. And in this case, even with that price, we were able to, as you pointed out, to deliver excellent gross margins.

Yes, is a noticeable, the mix of business shifting, again toward subscription, towards SaaS, is that noticeable or is this really about price and about FBS, at this point?

I think at this point, it's still price and FBS. We really do, as you know, we drive the businesses really hard on a regular basis around continuous improvement on gross margins. Price is an FBS tool and we utilize it in every business every year. So, those are just kind of standard work in our businesses.

Our SaaS and software today is 4%. Those businesses were up about double-digit, I think, if we looked at all those collective offerings in the quarter. But it's still a small part of the business. It's really going to take a little while for that to really be a meaningful impact. And that's part of our confidence, whenever we get the question about our ability to drive gross margins over time. It's not only power of FBS, but its also the business mix that we can see over the next four, five years coming at us.

Yes, and then, just a last question, on the telematics business, this shift that's been going on, I'm going to say industrywide, but certainly at Fortive -- towards more of a SaaS-based model for subscription within the telematics business, is that going to continue and will it keep the growth rate within the telematics business, kind of in this low single-digits range here for another 12 months or could that accelerate?

Yes, it should accelerate. I think the market is growing. I think as we pointed out the last couple of quarters, is that our non-US business has been exceptionally good. We added, in the fourth quarter, double-digit units into the portfolio, but because of a variety of different things that we needed to do, relative to some customers, it doesn't necessarily transition in the quarter, right, because SaaS, it takes a number of quarters to play out. So we think that this certainly can be -- the market is growing in the US, mid- to high single-digits -- and in some segments even higher than that.

So, we really believe we've launch this new Director platform, as we mentioned in the prepared remarks, and we're excited about it. We need to get it more pervasively throughout our install base. And we think once that's in with more customers, our opportunity to change the trajectory of the growth rate is pretty good as we move throughout 2017.

Understood. Okay, thank you.

Thanks, have a great night.

Shannon O'Callaghan, UBS.

Good evening, everyone.

Hi, Shannon.

Hi, Jim, maybe just follow-up on the ENV, the idea of maybe people pushing things out a little bit post the deadline, I mean have you heard that so far? And also, what's your view on how the mix of kits versus dispensers might shift versus -- you know, now that there's a longer time frame, do you think people might get the kit and wait for a full dispenser upgrade. Maybe just some thoughts on how the push out might affect some of the dynamics, even if the overall opportunity is the same.

I think our instincts, as we said, we really wouldn't know what the rollout would be. I think our instincts would tell us, right now, I know it's not as much customer conversations as it is instincts, having been in the industry for 20 years. Our instincts tell us it'll be a little bit of a pause here for customers as they think about the rollout strategy. That will be months and quarters, not years. That's why we think we come off a little bit of that 100 basis points, maybe a little bit less than 100 basis points. But the upside to that is probably a better curve, in terms of rollout, and as you mentioned, we think probably less kits and more dispensers.

Probably, as we get to mid-year, we'll have a better sense of that. We remodel it every month, but I think our model will be more accurate. And at that point, we'll have a better sense for the market opportunity. But I think we always knew that there was probably going to be some level of push out. And this really is mostly good news for us, relative to how the next several years will look.

Okay. Thanks. And then, as you think about the payoffs from some of these growth investments, you look a business like Qualitrol, you said its grown for 11 straight quarters, it seems like every once in a while you guys have a business like that, that goes on one of these runs. Was that the result of some growth investment in the prior-year where you saw a particular market opportunity and is the current spending -- do you see that kind of opportunity in other business and the thing you're spending money and now?

Yes, a couple things. One is some expansion in resources around sales force around the world, the business just is doing great, globally. That's number one, and then a couple of acquisitions that we did several years ago, that gave us some of the products, from a condition monitoring perspective, that are driving the growth as well.

So the team has excellent -- and that's the growth flywheel that we talk about metaphorically -- so often about how acquisitions, even small ones can accelerate growth in midsize businesses and we think that opportunity exists in a number of places in the portfolio.

Great. Thanks.

Thank you.

Steve Tusa, JPMorgan.

Hi, guys. Good evening.

Hi, Steve.

Can you just touch on organic growth for how the year is going to start here for the fourth quarter, just generally? And anything, seasonally, to think about on the EPS split as we work through the year, from a quarterly perspective?

I think the core growth, we're talking about, is low single-digit, but we do have an easier compare in Q1, so it's probably going to be higher into that range, in Q1. And then I think that the EPS split as it goes through the year, we're still learning as we go here, but it's going to be something like 22, 26 -- 26, 28, if I got the numbers -- that probably didn't quite right, but it's in those ranges, plus or minus there.

Okay, perfect and I know Snap-on has talked some weakness in their business. Maybe just from a Matco perspective, anything to talk about their growth rate wise? It's been pretty strong the last couple of years. Just curious if there's anything that changes here and intermediate term?

Yes, they had a strong quarter again, the team is really executing well. They're continuing to expand franchisees, which really drives growth. We really kind of make sure that same-store sales are good. I suspect there was a little bit of noise, if we went month-to-month, but as we really roll up the quarter, it was a very good. So I think at this point, with what we're seeing right now, with the combination of just a wonderful attendance rate our Expo here in a couple of weeks, as well as, a good start, I think we're still going to be in that mid- to high single-digit range for a while now.

They're doing a great job. You know, as we said, and I know you know this, is FBS is really just one of our -- from a growth perspective, is one of our best businesses for deploying FBS, from a growth perspective. So they'll continue to do, and I think we'll continue to perform well.

And then one last one, you may have discussed this and I may have missed it, sorry if that happened. But, on the acquisition front, any commentary on whether it's kind of tougher to get things to the finish line with all the uncertainty out there out of Washington? An any color around the pace of discussions between the buyers and sellers, or even just being able to seal the deal, given uncertainty around tax rate et cetera?

Nothing yet. I think we've been -- a number things that we're doing actively have been going on for a little while. I don't necessarily get a sense that anyone is holding off or doing anything because of waiting for Washington to do anything. And obviously, our discussions are global as well, so between the various things that go on, both from a macro economic perspective and a geopolitical situation, you've got a number of elections in Europe as well, which provides some uncertainty, and usually uncertainty is a good thing for M&A.

So, I think all those things roll up to a pretty good environment right now. As I mentioned before, the bid asks, they haven't changed radically, so that's what gives me confidence to say I know we'll do the deals here in 2017.

Okay. Great thanks a lot guys.

Thanks, have a great evening.

Andrew Obin, Bank of America.

Hi, yes, good evening.

Hi, Andrew.

Just the question on China, can you just talk about Chinese trend, and we've been hearing that there are some messages in China about delays in capital spending in the first quarter, yet the numbers that have been reported by corporate so far are very good and everybody believes that things continue to accelerate, can you just give it more detailed read as to what you're seeing in China?

Yes, sure. One, we don't have a lot of CapEx businesses in China, so we're really fortunate to have things that are more related to operating expense kinds of things. We're certainly getting the benefit of the secular trend at Tektronix, where they've really positioned themselves over the years to take advantage of a lot of the semiconductor and communication expansion that's going there and they're doing exceptionally well. So that's certainly in our number and really have to do with -- really isn't a macro point.

I think if we go around the rest of the portfolio, though, we're continuing to see strength with a number of our OEMs that are Automation team has partnerships with, and our Qualitrol business has, and our Fluke business has done pretty well as well. We had an exceptional fourth-quarter. I don't necessarily think that the strength that we've seen is necessarily what will happen all of 2017. But we still feel very bullish on what China will look like next year. And think it will outpace our overall growth rate next year.

So you're not seeing a slowdown in China so far?

Not really. It's still early, right, you know you can never call China until about March, because of the New Year, and particularly the way the New Year was positioned this year. So having run China for a long time, I generally try not to make any predictions until well into March.

Thanks, and then, just one question, you sort of highlighted off-highway Thomson being very strong, can you just comment what region or end market that refers to?

That is mostly in North America and a little bit of China comment. Their positions are pretty nitchey, so it really is market share gains for them. And a business of that size, a few big market share wins really makes the difference.

Terrific, thank you.

Thanks Andrew.

Andrew Kaplowitz, Citi.

Good afternoon, guys.

Hi, Andrew, how' re you doing?

Good, how are you? So, Western Europe grew high single-digits in the quarter and last quarter, I think you said, it was going to moderate, it doesn't seem like it did so, so maybe you could talk about that. And then, how concerned are you that geopolitical risk over there could moderate the grill as you going to 2017, because it does look like it's performing pretty well for you right now?

You're exactly right, thanks for calling out my inability to forecast the geography, but clearly I think what we saw was some really good performance with some work that we've been doing, like at Kollmorgen on collaborative robots, where we have a number strong customers in Europe, and a number of businesses, as well, that are really more secular driven than any macro. And that continued in the quarter. But we don't think that will continue.

You mentioned some of the geopolitical risk. Chuck and I would say that that does exist. We're monitoring it to understand it, and we do think that Western Europe will moderate through 2017. We still think it will grow. We still think it's probably, at least, a low single-digit grower right now. In might be a little more noisy, month-to-month, and maybe even quarter-to-quarter because of what we just described on the election cycle. But, I still think, given our positions and we've been doing from execution perspective, we feel good that we can get growth and of Europe this year.

Okay. That's helpful, and then Chuck, maybe you could talk about free cash flow conversion -- you mentioned at end the year, about 115%. We know you guys are greater than 100% for the year, but can you talk about if there's any reason why free cash flow conversion would materially change in 2017? If the business does ramp up a bit more, do you need more working capital to fund the business? Any sort of puts and takes that we should think about as we going to 2017 here?

I think you got it pretty well nailed at 115% for the year. I think that's a strong number for us. There's a couple of things that give us a little downward pressure. We have a little bit of amortization rolling off in the year, into 2017. We also finished really strong in our collections and that has a little bit of artifact to the days and how they fell out and probably it wouldn't be wise for us to count on that. So, we think definitely over 100%, and we think that's a good number for us.

Okay, and just real quick follow-up, the weakness they said at JBS, we started to see orders pickup in the US heavy truck market, have you seen any impact on the business yet or is it still too early for that?

It's certainly still early. Their story for performance has been --they've done a great job of mitigating much of the North American challenge with a great business in China, but it's still a little early -- in the early days on North America and if that's going to tick up or not.

Thanks, guys.

Thank you.

Patrick Newton, Stifel.

Yes, good afternoon Jim and Chuck. I guess my first question is on EMV. I think in the past, one of the key competitive advantages that was highlighted was a first market with qualified products, I'm just curious if the delayed enforcement opens the window for increased competition or was that more of an indoor phenomena?

Well, the certifications and those kinds of things are certainly something that was from an early perspective, is really one of the reasons why we've had such great growth in the last couple of years in North America. At the end of the day its mostly a two-horse race here, and we have a good competitor there in Wayne, so I think at the end, how that will play out next several years is how we predicted. So we were never counting on that certification as being our competitive advantage.

Our real competitive advantage is being number one in dispensers, being number one in payment, and having the largest retail POS systems for retail petroleum in the industry. Combine that with our leak detection capability at Veeder-Root. That ultimately is our competitive weapon. It's the technology we have at the site that we think is how we compete. And it's a logical competition amongst smart-minded players, if you will. So that's one of the reasons why we like the market so much.

Great. Thank you for the detailed answer. And I guess just shifting to M&A, focusing on a transaction that occurred in the test measurement industry, a rather large take-out. To whatever extent you can comment, did you look at the asset, and if so, if any discussion you can provide there and if not, why not? Then, just given that we're seeing the test measurement industry, kind of heat up, given multiple companies are looking to roll up the industry, can you help us compare how this fits into your ranks as an M&A opportunity, relative to your other platforms?

Well, as we think about M&A, relative to both field solutions at product realization are where Fluke and Tek are -- we certainly feel very strongly that additions to the set of solutions that we want to add at Fluke in manufacturing, in facilities, where we take advantage of our huge install base with Fluke -- like eMaint, like we did last quarter, are going to be the transactions. Or something bigger that would give us the ability to leverage our position around the world.

Those are great deals and I think we've said over time that our funnel for field solutions has been good for a while. Relative to Tek and product realization, there was certainly a large transaction. We know the company well. We used to be in that industry but we got out of it, so we really weren't interested in it. We felt strongly that exposure to telecommunications players, and things like that, over time was probably less our -- less where we were going.

I think from that perspective it's probably safe to say that, while we were in that business a number of years ago, and so we know a number of the players in the industry, where were going with Tektronix, is really around service and adding capability there to reduce volatility, to improve the margin structure, build on that great brand that we have Tek. Those are going to be the kinds of deals that we would typically play, that would be in our sweet spot. But nothing in industries where we'd likely see more volatility and where we see consolidation amongst customers.

Great. Thank you for taking my questions. Good luck.

All right. Thanks, Patrick. Have a great night.

(Operator Instructions)

Joe Ritchie, Goldman Sachs.

Thanks. Good evening guys.

Good evening.

Following up on the price cost question from earlier, I guess what's your expectation then for 2017, are you baking in much material or labor inflation and your ability to use price to offset any of that?

Joe, what we've got baked in, is what we normally have baked in. Looking forward, we think we have opportunities for a 30 to 50 basis points of price. I think your question on the cost side, about what we expect from commodities and inflation -- we're not really seeing a lot of inflation at this point, so when we see it will react to it.

And we also -- one of the great things about our portfolio is we're not exposed to a lot of commodities, that doesn't mean we're at zero, but fairly little, so we haven't seen much of that upward pressure, but even when there is, we don't think it's going to be a big driver that we won't be able to offset.

Got you. That's helpful. I guess, maybe sticking on the margin point for a second, I saw that it's in your 2017 earnings bridge, you did call out about $0.04 to $0.05 of productivity and restructuring benefits, how much flexibility do you guys have to potentially flex this number higher and is this net of the growth investments that you're making in 2017 as well?

What we have in here on that line is the investments that we made in prior years, in 2016, how much we think that's going to improved earnings, because we invested in the business in the year before. So, that's with that is. The whole guide does include -- we expect to be doing restructuring in these businesses at all times, so at any point in time, with the number businesses we have and the things going on, there's always some level of this restructuring.

Okay, got it.

That includes growth too, so when we think about it, what Chuck and I do on a quarterly basis is meet with -- every month we meet with our operating leaders to go through the financials. And if we think we opportunity, both either on the cost side or on the growth side, we will typically make decisions for incremental investments, as we see the quarters play out.

Got it. That makes sense. Thanks, guys.

Thanks Joe.

Brian Drab, William Blair.

Hi, thanks for taking my questions. I just have two quick follow-ups to earlier questions. On the free cash flow for the year, do we need to see a pickup in M&A activity for you to get to that 100% and above -- to get to that threshold, given without that you won't have some of the low hanging fruit, in terms of working capital generation?

Good question, but no, our guide of being 100%, 105% of free cash flow to net income does not assume any significant change in that. Going forward, over time, I could see that percentage working up -- as we do more M&A and get that benefit amortization, you'll see it come off of 100%, 105%, to something higher. But, that's not in there now.

Okay. Thanks. Then, I may have missed this, but when you're talking about the impact of price, I heard you talk about 2016 and the fourth quarter, but what is baked into the 2017 forecast, in terms of price?

We have baked into next year 50 basis points of operating margin and gross margin expansion. Price is a piece of that and we would expect, through the cycles to get to 30 to 50 basis points there -- not every quarter, but when you take a look at three or four quarters that's what we typically average.

Okay. Thanks very much.

Thanks, Brian.

Charley Brady, SunTrust Robinson Humphrey.

Hi, thanks guys, just a couple of quick ones here. Can you give us a little granularity on -- a lot of talk around border tariffs and a sense of any meaningful amount of COGS the you're getting from outside that goes into the US manufacturing operations? If there were something meaningful that would hit that line in your cost of goods sold line? And then, on the other side of that, kind of, what you're manufacturing, maybe outside the US, you're bringing back in and gets sold in here, that could be affected by an any kind of border tax?

Well, there's a lot of scenarios out there and we're watching them all, but net-net from the best way -- the way we're looking at it is that we are a net exporter here, and so every scenario that I have seen, this is going to be favorable to us. We do have things that we import externally, but we export more. So far, every scenario, I think we're going to turn out to have a lower tax rate, if and when they pass a law and enact it.

Okay. Thanks, that's all I had.

All right. Thanks, Charley.

All right, well, thanks for joining us today. Remember, we announced our Investor Day will be May 18, and Josh and I are around yet this evening if you have any follow up questions, tomorrow as well. Thank you.

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