Fortive Corp (FTV) 2017 Q4 法說會逐字稿

My name is Ian, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to the Fortive Corporation's Fourth Quarter 2017 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, Ian. Good afternoon, everyone, and thank you for joining us on the call. With me today are Jim Lico, our President and Chief Executive Officer; and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer.

We present certain non-GAAP financial measures on today's call. Information required by SEC Regulation G relating to these non-GAAP financial measures are available on the Investors section of our website, www.fortive.com, under the heading Financial Information. A replay of the webcast will be archived on the Investors section of our website later today under the heading Events & Presentations and will remain archived until our next quarterly call.

A replay of this conference call will be available shortly after the conclusion of this call until Friday, February 23, 2018. Instructions for accessing this replay are included in our fourth quarter 2017 earnings press release.

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 in 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 our annual report on Form 10-K for the year ended December 31, 2016. 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.

The Tax Cuts and Jobs Act was enacted on December 22, 2017. The tax reform, among other things, reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a onetime transaction tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign-sourced earnings. As of December 31, 2017, we have not completed the accounting for the tax effects of tax reform. However, pursuant to the guidance by the SEC, we have made a reasonable estimate of the effects of tax reform on our financial results for the period ended December 31, 2017. These estimated amounts are provisional and are subject to adjustment.

In addition, certain of our historical non-GAAP financial measures for 2017, including adjusted EPS and free cash flow conversion ratio, excludes the estimated provisional impact of the tax reform.

With that, I'd like to turn the call over to Jim.

Thanks, Lisa, and good afternoon, everyone. The fourth quarter closed out a defining year, with continued outperformance and strong execution by our team and positions us well for long-term success. The Fortive Business System continued to enhance our competitive advantage, driving market share gains, strong core margin expansion and robust free cash flow generation. 2017 adjusted earnings per share of $2.89 grew 15% driven by 4.5% core revenue growth and 110 basis points of core operating margin expansion or 55 points excluding the benefit from lower amortization.

As a reminder, in early 2017, we outlined our strategic priorities, and I'm pleased to report that we have met or exceeded all of them. In addition to delivering double-digit earnings growth, accelerated core growth, we delivered free cash flow conversion of 107% for the year. We launched game-changing technologies across the company, including the Tektronix 5 series, mixed signal oscilloscope and the Fluke T6 noncontact voltage electrical tester.

We made important strides advancing Fluke Accelix, Gilbarco Veeder-Root Insite360 and telematics digital strategies. We grew market share at many of our businesses, including Fluke, ISC, Tektronix, Qualitrol, Setra, Kollmorgen and Gilbarco Veeder-Root. We increased high-growth market sales as a percentage of total revenue by 150 basis points and delivered strong double-digit growth in the year.

Lastly, we deployed $1.6 billion towards strategic acquisitions, and we made successful strides towards enhancing our portfolio to having more recurring revenue, less cyclicality and higher exposure to quality end markets and secular growth drivers.

These important outcomes demonstrate that we are realizing our vision of Fortive as a diversified industrial growth company and that we remain focused on building a better, stronger Fortive aligned with our portfolio goals. The Fortive formula is clearly delivering differentiated performance, and we are well positioned to continue to post strong results in 2018 and beyond.

With that as a backdrop, let's turn to the details of the fourth quarter. Our adjusted net earnings of $288.6 million were up 21% over the prior year, representing the fourth consecutive quarter of double-digit earnings growth. Adjusted diluted net earnings per share were $0.82, which excludes among other items, a $70.3 million net after-tax gain, reflecting the effects of tax reform. Effective tax rate in the quarter was 21%.

Sales grew 11% to $1.8 billion, including a core revenue increase of 3%. The contribution from acquisitions substantially accelerated to 590 basis points of growth, reflecting the success of our capital deployment and positions us well for future organic growth. These strong results reflect the strength and diversity of our portfolio, industry-leading technology, continued performance in high-growth markets and further growth acceleration in industrial end markets in North America.

The breadth of growth across the portfolio is very strong, with 2/3 of our operating companies growing mid-single digits or better. Geographically, high-growth markets' core revenue grew mid-single digits with continued strength across Asia and growth in Latin America. Double-digit growth in China was led by business wins at Gilbarco Veeder-Root, Kollmorgen, Fluke and sensing technologies.

Developed markets' core revenue grew low single digits driven by Western Europe and improved performance in North America, led by high single-digit growth at Tektronix and Fluke, reflecting new product innovations, strong commercial execution through the Fortive Business System and an improved industrial economy.

We posted a record gross margin of 50.4%, an increase of 140 basis points over last year as we applied FBS fundamentals, drove strong PPV and price performance. Five out of our 6 strategic platforms delivered positive pricing for a net contribution of 70 basis points. Operating profit margin was 19.7% in the quarter with core operating margin expansion of 50 basis points.

During the fourth quarter, we generated a record $450 million of free cash flow and delivered a seasonally strong conversion ratio of 156%.

Turning to our segments. Professional Instrumentation posted sales growth of 17.5% with core revenue growth of 5.6%. Acquisitions contributed 960 basis points; and favorable currency, 230 basis points. Core operating margin expanded 120 basis points with reported operating margin of 21.5%.

Advanced Instrumentation & Solutions core revenue increased mid-single digits during the quarter, led by market share gains at Fluke and Tektronix. Field solutions core revenue was up mid-single digits, with similar growth in both developed and high-growth markets and led by high single-digit growth at Fluke.

Fluke's high single-digit core growth reflected continued high-growth market performance and accelerated growth in developed markets. Core growth was broad based across businesses driven by market share gains and new technology penetration. Fluke's launch last quarter of the T6 family of electrical testers with FieldSense technology has substantially exceeded our expectations and continues to be recognized with several industry awards, including top honors at the International Air-Conditioning, Heating, Refrigerating Exposition 2018 innovation awards.

The T6 testers are the first tool to eliminate the need to make contact with electrical conductors, which reduces the potential for arc flash and significantly increases electrician safety.

Our growth investments and capital deployed into executing the field solutions strategy has accelerated our connected devices initiatives and technology leadership and enabled us to enter targeted adjacent markets like health care.

On that note, I'm very pleased with the early integration process with Landauer as we leverage their channel to market and expand our health solutions footprint. Going forward, we will refer to the combination of Fluke Biomedical and Landauer as Fluke Health Solutions.

ISC delivered double digit in their first full quarter within the field solutions portfolio. This performance was driven by strong iNet growth, channel expansion in high-growth markets and multiple new product introductions, including the Radius hazardous gas area monitor. Radius can detect up to 7 gases, has the largest display of any area monitor on the market and utilizes dual sense technology to increase worker safety by using 2 sensors to detect the same gas.

Qualitrol core growth declined low single digits as double-digit growth in North America was more than offset by declines in Europe and the Middle East and prior year project timing in China. As we shared with you last quarter, challenges in the Middle East continue to delay budget approvals, also impacting Europe OEMs. We expect the softness in the Middle East to continue into the first quarter of 2018, which should be more than offset by strong backlog.

Moving to product realization. Platform core revenues were up mid-single digits for the quarter, led by growth at Tektronix. Tektronix' high single-digit core revenue growth was led by double-digit growth in oscilloscopes, primarily driven by Tektronix 5-series MSO penetration and multiple business wins in target segments, including the data center [and] mil/gov.

Sales performance of the Tektronix 5 series mixed signal oscilloscope is continuing to exceed our expectations and win multiple industry awards, including Product of the Year by Electronic Products magazine. We also won several million-dollar video order -- a several million-dollar order with a live TV-streaming service provider to support expansion of OTT, or over-the-top television services, across North America. And as we announced today -- earlier today, we are excited for another consecutive Olympics, where we were selected by NBC Olympics to provide audio and video test and quality monitoring for the production of the Olympic Winter games.

Our sensing technologies platform delivered high single-digit core revenue growth in the quarter, led by share gains in targeted verticals and double-digit growth in high-growth markets. Setra continues to innovate and expand product offerings with particle counting and humidity. Bundling these new modalities with our flex and legacy pressure products positions us well in critical care environments. We are also pleased with Anderson-Negele's large project wins in pharma and pet foods as we target other growth verticals outside of their core dairy market.

Moving to our Industrial Technologies segment. Revenue grew 5.6% with core revenue growth of 0.9% and sales from acquisitions contributing 270 basis points. Reported operating margin of 20.3% includes core operating margin expansion of 10 basis points. Our Transportation Technologies platform core revenue declined low single digits in the quarter, reflecting mid-single-digit growth at telematics, offset by mid-single-digit decline in Gilbarco Veeder-Root.

At Gilbarco Veeder-Root, EMV continues to play out as we expected as dispenser revenue declined, reflecting a pause in EMV upgrades due to the delay in the liability shift to 2020. It's worth noting that the fourth quarter last year was the highest quarter for dispenser growth in company history. High-growth markets core revenue grew low single digits, led by double-digit growth in China, reflecting continued demand at Veeder-Root for submersible pumps and automatic tank gauges related to double wall tank upgrades, partially offset by tender timing in India.

During the quarter, we won a 400 site point-of-sale bid with Matco, one of the largest independent chains in North America. And overall point-of-sale core revenue growth improved sequentially, reflecting share gains. We are also encouraged by expectations of customer CapEx investment solidifying in the second half of 2018.

Telematics posted core revenue growth of mid-single digits, led by strong SaaS sales growth, continued increased installed base and improved performance in North America. The results are driven by the continued success of our new director platform. Utilizing FBS growth tools and digital marketing, we improved our mobile lead generation conversion rate by greater than 80% and reduced our ELD campaign cost per click by greater than 30%. Sales growth also benefited from the strong adoption of electronic logging devices coinciding with the Federal Motor Carrier Safety Administration mandate that went into effect December 18. While enforcement of the mandate doesn't go into full effect until April 1 and compliance requirements are still evolving, we continue to expect to see ELD as an opportunity to gain share and enter 2018 at a high single-digit growth rate.

Automation and specialty grew core sales high single digits driven by continued double-digit growth in high-growth markets and robotics. Jacobs Vehicle Systems delivered mid-teens core revenue growth driven by increased Class 8 truck production in the U.S.

Kollmorgen posted high single-digit core growth, reflecting strong demand in its industrial automation product line, which was driven by continued robotic strength in Europe and China. I'm excited to report that the recent launch of Kollmorgen's latest mobile robotics system software, [NCA 3.0], is driving strong double-digit sales. This technology lowers labor costs and increase productivity through vehicle automation used primarily in warehousing. Thomson delivered mid-single-digit core revenue growth, led by double-digit growth in China and Western Europe and industrial linear actuator sales.

Franchise distribution core revenue grew low single digits. Matco core sales were flat as double-digit growth in diagnostics was offset by continued softness in tool storage and a challenging hardline tool sales comparison. We see encouraging signs with improving distributor inventory levels and headcount.

Before turning to guidance, let me extend my personal thanks and gratitude to our Fortive colleagues around the world for their commitment to continuous improvement and living our shared purpose of delivering essential technologies for the people who accelerate progress. It is our people who make Fortive and create our enduring culture that will continue to be the foundation of our success. It's our extraordinary team that gives us the confidence in our ability to build a great industrial growth company.

We are pleased with the meaningful progress we've made in the last year advancing a number of our strategies around building a growth company from an organic and inorganic perspective. The M&A flywheel that you've heard me talk about many times is beginning to show itself with strong revenue growth and increased earnings.

We remain focused on building a better, stronger Fortive by utilizing our strong balance sheet to continue to execute our portfolio enhancement strategy. With that said, we are raising our capital deployment today by announcing $5 billion of available acquisition capacity. As always, it's hard to predict the exact timing of deployment and resulting portfolio changes, but I have more confidence today than ever that we're on the path for substantial smart capital allocation.

We are initiating our full year 2018 adjusted diluted net EPS guidance range of $3.35 to $3.45, which includes our core revenue growth expectation of 3% to 4% and an estimated effective tax rate of approximately 20%. We anticipate core margin expansion of 50 basis points for the year and cash flow conversion of approximately 110%. We are also initiating our first quarter adjusted diluted net EPS guidance of $0.72 to $0.76, which includes assumptions of low single-digit core revenue growth and an estimated effective tax rate of 20%.

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

Ian, we're ready now for questions.

(Operator Instructions) Our first question is from the line of Steve Tusa from JPMorgan.

So just on kind of the way that first half should trend in Transportation Tech, could you just give us a little bit of an update on how you expect that to come through?

Yes. This is Jim. I think the -- we -- as we said in the prepared remarks, the fourth came in around how we've been predicting it. We see the fourth -- we see the first quarter of '18 similar to the fourth quarter, so we think that will play out. And then as we progressively get through the year, we'll continue to improve. We would expect growth in the second half. So as I mentioned in the prepared remarks, we think CapEx will start to solidify at that point. I think we feel good about that right now, and we'll see where things go as -- obviously, as the year plays out.

And I guess, you guys said $5 billion in acquisition capacity. Can you -- is that something you can like do immediately? Or is that just a commentary around what you feel like you have over the next 3 years?

Steve, that's probably our max capacity if we wanted to do everything this year. Obviously, several assumptions built into that, and that's still with the assumption that we will -- we have a strong commitment to keep investment grade. So we just wanted to frame where we're at and what we felt we could do.

Okay. And then just lastly, an update on the -- and again, I'm sorry, I didn't hear this in the prepared remarks, an update on kind of the outlook for your business that's related to semi CapEx. Any signs of weakness there?

Yes. Well, I think probably the most exposure there would be Tek and particularly strong -- a strong year that really affects their Chinese -- China business the most. And we'll probably see a little bit of slowdown after 3 years of double-digit growth. We'd probably see a high single-digit-like growth in China for them next year. But we still think 2018 will be a good year for Tek relative to the exposure they have in semi, which again is mostly in China.

And our next question is from the line of Scott Davis from Melius Research.

I just want to clarify a couple of things. When you said price was up 70 bps, is that net of cost or just that's price of 70 and then your costs were up something comparable? Or how do you reconcile that?

So 70 -- I would say, we had very minimal inflation. So we look at our price cost pretty closely in every business, and we really are not seeing much inflation here. We've been able to mitigate almost all of it. So it might be a couple of points off that, Scott. I'm not exactly sure what the number would be. But it's minimal compared to the 70 that we got.

Okay, that's helpful. And how do you guys think about this -- the EMV getting pushed out to 2020. I mean, but we also have full 100% depreciation if you guys spend the money now. I mean, is there any chance that this stuff ends up getting pulled forward just because you guys can spend the money now and are cash rich, et cetera? Or does it not matter as much in that market?

The tax rate does help a lot in that industry. So I suspect that as individual businesses start to think about what their tax rate will be and the opportunities available to them, I think that will -- we really haven't heard that yet in customer conversations. But I suspect that's still a conversation to be had. I don't think that there'll be a massive pull forward, but I suspect what it does do and why we said it is that it will solidify the second half of '18.

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

Just a question, it goes to $5 billion in capacity, how do you guys think about your cost of capital in this environment where there are concerns about inflation? How do you think about what is your cost of capital in this environment? And how will you adjust it over the year if we get inflation or rates going up?

Well, Andrew, the way we look at it is we think about returns first. And we like to -- we've always talked about getting, for bolt-ons, 10% return on capital and -- or return on invested capital and maybe taking 5 years for maybe a little bigger deployment. As far as the cost of capital, the cost of debt is going up. It doesn't really change -- we're still in that 8 range of cost of capital. We didn't change our hurdle rates as interest rates went down, and we're not really going to look at them any differently as they go up.

Cool. And just a follow-up on China. You touched on semiconductor equipment. Can you also talk about the truck market in China, particularly as it relates to Jacobs? Because I think that's a key growth component there as well.

Yes. I think it will be a little bit slower -- it will certainly be slower in '18 than it was in '17. We had a just a bang-up year in '17 for JVS. So it will slow a little bit. For the business itself, it will be -- it will start to get made up by the U.S. So net-net, it will still continue to be a good year for Jacobs. But yes, China will slow a little bit for them. They'll still grow in China in 2018, but they won't have the really high double-digit growth that they've had. It will mute a little bit.

And your next question comes from the line of Deane Dray from RBC Capital Markets.

Maybe to start with Chuck. Were there any surprises in the tax reform application? Lisa made that emphasis that this was provisional. Was there anything unique to Fortive that you would highlight?

No. We have an option. The SEC gave us unprecedented option to be able to make it a provisional. And with the sheer complexity and volume of this, it's just good sense to put up a provisional estimate. Having said that, we've done extensive work and to -- we think we've got a very good number here. But by putting up a provisional, it keeps -- it means that we could make minor adjustments.

Got it. And then just on tax reform as the potential second derivative changes, do you have any sense that companies will be willing to divest noncore businesses now that tax leakage is less, and so for potential acquisitions for Fortive but also within your own portfolio?

I think the -- certainly, that would be speculation because it's pretty early obviously as people start to think through these things, Deane. I would say that on balance, generally, divestitures, whether it's us or someone else, tend to always be related to more strategic decisions. Certainly, with the tax rate being lower, it does make the financials look a little bit better. So I suspect on balance, as we go through the year, we'll see others do that. And that will probably provide some additional opportunities. I think for us, though, we really -- it's really about strategy. It's about our ability to grow the business long term and what we can do with it. And those are really the real reasons for doing things. It's not because we could get a little bit more money on a sale. It's really about what's the long-term potential for success in the business over time.

Our next question is from the line of Steve Winoker from UBS.

Can you maybe break out that 3% to 4% core growth a bit across the businesses in terms of not just cadence, you talked to that a little bit, but between PI and IT a little more detail?

Yes. I think you'll see PI in the mid-single-digit range. You'll probably see IT in the low single-digit range. As far as the quarters, that will probably even out more as we get longer through the year, as Gilbarco turns to growth in the back half of the year. But I suspect we'll see a little bit better growth out of PI. As we said in the prepared remarks in the quarter, Fluke and -- Fluke did very well and, maybe more broadly, the industrial macro economy in North America has improved. We've seen better point-of-sale in a number of our businesses that are more industrial related like Fluke and our sensors businesses and some of our automation businesses. So I suspect we'll see that certainly in the first part of the year, which we have a little bit of visibility to. So that gives you some sense. And as far as geographically, we think North America will be pretty good. If we take ex Gilbarco and -- all the businesses in North America will be pretty good. And as I mentioned, we still think China is going to be good. It may not necessarily tip to double-digit range every quarter this year, but we think China will continue to be good. We think India will be good for the year. Latin America has done a nice improvement here over the last couple of quarters. And while it's a really small base, we think that might be. So I'd give you a geography view, too, but a little maybe too much information. But hopefully, it gives you some perspective on how the year -- we think the year will play out at least kind of early days.

Jim, never too much information for us. That's great. And by the way, on that seasonality, Q4 to Q1, if I take out -- if I back out kind of the tax impact from Q4 and Q1, it does seem like a little bit less of a drop than we've see in some prior years. Is that how you guys are thinking about it, too, or looking for about the same?

You're talking about the VCM?

Yes.

Yes, a little bit. I think we're looking for it to be -- it'll be a little bit stronger versus Q4 and Q1. That's how we have it modeled it as well.

Okay. And then just lastly, Jim, as I'm staring at this $5 billion available M&A capacity and I'm also thinking about the EMV air pocket that you're talking about and then your kind of longer-term retail fueling opportunity and challenges, is this your -- is your thoughts that, that M&A flywheel might mean like that $6.5 billion company today that you -- that retail fueling, if you kind of fast-forward through that, become -- moves from less than a quarter that revenue base to something significantly lower?

Well, I don't know significantly lower. I think we've seen good -- really good positions in the high-growth markets. And so while there's a lot of talk about EVs, we're seeing some of the largest tenders in the history as a company in places like India and other parts of Southeast Asia. So we're still seeing a lot of high-growth market tender activity despite the conversations around electric vehicles. So I think high-growth markets will be a bigger part of Gilbarco Veeder-Root over time. I think that Transportation Technologies will continue to look for and take advantage of opportunities that exist in the secular growth drivers that are beyond just retail fueling like telematics, like smart cities and smart transportation. A lot of money going into logistics and supply chain and warehousing. We're certainly taking advantage of some of those kind of trends at telematics. So I think as a business and as a platform, there'll be changes going on. But we -- and I suspect we'll continue to look at opportunities to take advantage of some of those longer-term drivers as well. And so I feel really good about the platform in general. North America might be a little bit less in a pure dispenser perspective, but payment challenges will still be out there. I'm sure we're not going to get rid of credit card fraud any time soon. Point-of-sale opportunities, those are still going to exist. So when you look around the portfolio, I think the revenue will probably change by product line and geography. But ultimately, we still think there's opportunities there. And more broadly, as we look at EV and AV for the company, we think there's as many opportunities for the company as anything. So with the changes that are required for the grid, for all the challenges of putting some of the -- that sort of high power into opportunities for fast charging, those are going to provide opportunities for Fluke and Qualitrol and a number of our other businesses as well. So on balance, we see more opportunities than threats, both with the combination of EV and AV and EMV trends that are going on in the market.

Our next question is from the line of John Inch from Deutsche Bank.

Were there any gains in this quarter? I'm trying to bridge the $0.82 versus the way we had modeled it and not quite getting there. I'm just curious, were there any kind of gains in the quarter to any degree?

None in the adjusted earnings. Are you talking about onetime gains?

Yes. I didn't know if there was -- if you had a business sale or anything like that, that might be probably why there's a difference.

Well, in the GAAP numbers, yes, we've had -- on the interest and other line, there's an $8 million gain on the sale of building related to the [comps] unit that was part of the NetScout sale if you go back to Danaher time. So that's in there, but not in the adjusted numbers.

Okay. That's not in the adjusted. Okay. We'll pick it up offline. The PI core margins looked pretty good, right, the 120. But 10 basis point on the Industrial Technologies is perhaps a little light, even though you did a percent of core growth. Was there anything else going on in that segment with respect to perhaps mix or something else? And where do you sort of see those VCMs trending, I guess, in IT over the course of '18?

So in Q4, IT was lighter than normal, mostly because of the top line. And there's a little bit of timing. You can look back to last year where they had a tough compare. But to your fundamental question about what should we expect for the VCM going forward, 30 to 35 is a good number. If you just back up and look at their whole year, that's right where they're trending and that's what we'd expect going forward.

For both segments, Chuck?

Yes.

Okay. Can I ask, was there an FX impact on margins that you would call out that's noteworthy, specific to, say, the fourth quarter that maybe run rate's in a different cadence over the course of 2018?

I think no, not really. And there was a slight favorable, it wasn't -- but it wasn't material. I think you'll see in our bridge in the first half of '18 that we'll see a couple of cents a quarter in Q1 and Q2 and then it tapers off.

Okay. Just lastly, your Software-as-a-Service, where did we end the year in your -- with respect to it as part of the revenue mix? And where do you see it in '18? Where would you like to end it based on your targets you had presented before?

We said we'd be in the 20 to 25 range, which I think is where we were through the year. I think we ended closer to 25 at the end of the year. I would expect that probably ticks up 200 to 300 basis points as we go through the year.

Organically, it ticks up like that?

Yes. Well, just because you get the full year effect of all the businesses we bought plus the growth in things like Insite360 and some of those businesses.

And our next question is from the line of Andrew Kaplowitz from Citigroup.

Jim, so high-growth markets have been growing double digit for you over the last several quarters. But I think you mentioned that they slowed to mid-single digits. Some of the issue is, I'm sure, more difficult comparisons. It was bound to happen. It's good to see China still growing double digits. But what is just the Middle East that slowed down significantly in Q4? And do you think the high-growth markets grow mid-single digits or higher in '18?

So in the fourth quarter, you're exactly right, the Middle East was probably the big one. India, too, in the fourth was a little slower, too, because just some timing -- tender timing that happens all the time. And so that -- we'll look past that. We'll have a good year in India in 2018. That will -- it moves around a little bit by quarter there. But overall, we know -- we're confident in a good year in '18. So I think that's where it stands. I think the year will look -- as I said, will slow a little bit in China probably to high single digits. But by and large, I think we'll continue to see good China, good India. Latin America will be good off a small base. So those are probably -- and I think Middle East, as we noted in the prepared remarks a little bit, that Qualitrol will move through some of their challenges with some backlog. But we'll be still slow in the Middle East, I think, in the first half.

You did mention strong backlog there in Qualitrol. Does that help flip that business back to growth in the Middle East as you go in 2018?

I think it's -- they'll have -- yes, I think by the end of the year, it does. I'm just thinking right now. As they get through the year with some -- obviously, they're working off projected business that they have line of sight to. And right now, that looks like they would be able to do that and be back to growth by the end of the year.

Got it. And then last year, you guys had -- I think it was $0.04 to $0.05 in productivity gains in your forecast for '17. And obviously, you don't have that in '18. You have the 30% to 35% incrementals. Is that because you just haven't done discrete restructuring here in '17? Or could productivity gains actually be upside to your forecast, all else equal?

So no, we definitely continue to expect productivity gains. We just didn't call it out onto the bridge and we kind of lumped it into the other with interest and share price. There's actually a productivity gain if you -- you just got -- thought I was getting too many bars on that graph, but...

And our next question is from the line of Jeff Sprague from Vertical Research Group.

Just one question on business-related items and then just a couple of financial things. Just Jim, your optimism or signs of optimism that you're seeing in Matco and the tools business, can you elaborate a little bit on precisely what you're talking about? Is there something in particular going on or some new products or something?

Well, I think we saw some things in the fourth quarter that led us to believe that things might be starting to get better. I wouldn't try to highlight that things are going to turn over right in the first quarter or anything like that. We start Expo here in a couple of days, which is our large franchisee event every year. We've got good attendance this year, which is good to see. But we still think some of those things -- some of the data points that we typically look at around predicting the business will start -- are starting to get a little bit better and will get better into the summer. What we did see in the fourth was we saw some order growth, which was good. We saw some things strengthening with -- in terms of our franchisee headcount. So a lot of those forward-looking things are starting to get better. I wouldn't call them really good yet, but we have a little bit more optimism. Obviously, the team is doing a great job executing, as I mentioned in the prepared remarks, around -- in diagnostics and in places where they have opportunity. They've done a very good job. And we think that a lot of that effort plus a little bit better market will start to happen as we progress through the year. I don't -- I think they'll be in the growth mode probably this quarter, but I think that number will get better through the year.

And I just wanted to clarify on the acquisition-related costs that you disclosed in your bridge, I think they were $11 million in the quarter. Those are running through your segment operating profit numbers as they're reported, right, more than adjusting them out at the bottom of the bridge? Is that correct?

Yes, that's correct.

Yes. And then finally on tax, Chuck, I think 20% might be the lowest number I've seen except for the Irish-domiciled firms that I cover. Are you confident that's a long-term number? Is there something shorter term that you burn off, say, in a year or 2 and you drift higher? Or can we think about that as a pretty solid long-term rate?

No, we've spent a lot of time. It's likely -- maybe we'll learn more as there's more pronouncements coming out. But we feel very good about the 20%. We don't think that's going to drift higher unless there's some change in the code going forward. And we're very pleased with the work our tax team's done, and there's been some incremental spend to get there. But we're pretty happy with all the work, and I think you can use that going forward.

And our hardest working tax -- team in Florida in the last 30 days has probably been our tax team, so they did a great job.

And our next question is from the line of Scott Graham from BMO Capital Markets.

I, too, have a question similar to Jeff, but maybe we'll take it offline if you want on the PI margin and how the transaction costs are being taken out. I'll just say it in brief and maybe you can help me out. And if not, after we can talk offline. The transaction costs have been taken out of the adjusted EPS, yet here they are in this margin. Can you kind of walk through -- I mean, shouldn't then essentially the adjusted margin be shown here as 120 basis points higher? Or am I misunderstanding?

No, I think if we adjusted the margins for transaction costs out, that's correct. But we just adjusted out one place on the EPS, but you're not wrong about that.

Okay, I see what you're saying. Okay, I think I see what you're saying. Okay. The other question is the dilution from the acquisitions looks like a ton of that was due to the hiccup in amortization. Where do we go from here on those acquisitions in terms of taking out cost to eliminate that margin dilution? And on a go-forward basis, should we see this type of amortization hiccup on future acquisitions?

Well, I think what we try to focus on is that core segment margins, which I'd point you to for just that kind of reason until we get to a year. But this is a -- that's a multilayered question that I'd rather -- why don't we take it offline and we'll walk you through each one of those things. But that's the reason we try to focus on the core and give you that on the presentation.

Right. But this is something that did run through the margin on an adjusted basis this quarter? And I guess, what I'm saying is on a go-forward basis, is this something that you're comfortable with? This type of hit to margin?

We think that it helps grow earnings per share. And so yes, we are.

And our next question is from the line of Joe Ritchie from Goldman Sachs.

So maybe just touching on Tek for a second. The growth rates all year were really impressive. Clearly, the product introductions are working. I guess, maybe talk a little bit about the go forward around what you're doing from a product perspective and then how you guys are thinking about this business from a longer-term growth rate perspective?

Yes. So as you said, they had a very strong year. Really, a number of things that they've done exceptionally well from an execution standpoint. I think we highlighted last year, we had a large order from a large mobile phone manufacturer in the first part of the year. That helped. In the second half of the year, we really did a really strong, really great job with the new product introduction, the 5 Series that we talked about in the prepared remarks. That 5 Series is the first generation of a new platform of products that will continue to come out in a series of things over the next several years. So not only will the product itself have some runway in the next year, but the platform itself will also deliver some runway. We've always said that Tek is somewhere in the low single-digit grower over a long period of time. And during -- when things are a little bit better, they'll top up above that. That's around -- a little bit better than market growth. They tend to perform better than market growth, so that's how we think about it. And what we've been trying to do with the business is continue to build less cyclicality out of it with extending our service business, which is a pretty substantive part of Tektronix now. So those are the things we're doing long term to not only solidify the growth rate, but also make it less cyclical. And a number of our actions have been working. And you saw that play out in '17, and you'll see that play out in '18.

No, that's helpful, Jim. And maybe my follow-on here, just touching base, you had some pretty positive comments on ISC. I think I heard it growing double digits. Can you give us a little bit more of an update on Landauer? I think you said integration was going well, but just curious to see how that business is growing.

Yes. So we had -- just maybe a little bit, we were with the ISC team last week. We're really impressed with the work that they've done to take the Fortive Business System and really do a lot with it. They already had a pretty strong continuous improvement culture and have really done a great job with it. Landauer, a little bit later into the process because, obviously, we closed on them after the ISC deal. We'll see them in about a month and have an opportunity to see their progress. We did a short review with the team here last week, and really, really happy with the progress they've made on a number of actions that they need to get after. I mentioned in the prepared remarks about we're using their channel now. We've rebranded the entirety of the portfolio, Fluke Health Solutions. And we've been seeing some real good synergy on the revenue side. So we feel good. Early days. It's still very early days. But it's good to be in a good place in the early days than an alternative to that. So...

And our next question is from the line of Brian Drab from William Blair.

So I was just -- as I'm listening here and thinking about the comment that you made on the $5 billion, are you -- I was looking back at the notes that I have, the most recent comments that you made were $5 billion to $7 billion through 2021, I think. And I'm just wondering if you're warming us up to the idea of larger acquisitions coming sooner versus more of a bolt-ons, with a potential for a large one. And there's obviously a lot of M&A activity expected post clarity on the tax policy. And so that's just what I'm thinking. Are you warming us up to the idea of maybe a larger acquisition here in the near term?

Well, Brian, I think we've always tried to be clear about 2 things. One is that we would look for strategic opportunities to accelerate our businesses. And two, we try to give you a sense of what our spending capacity could be at a point in time. Sometimes, we give you a longer cycle to that. I think what we've tried to do this time is to be really transparent about the opportunities we have in front of us. I'm not trying to telegraph anything. The funnel we have today is very good. The breadth of the funnel and the strength -- the strength of the funnel, meaning good businesses; the breadth of the funnel, meaning across platforms and geographies. So we feel good that there's opportunity to deploy that. You never know how to predict those things, but we feel good about it. We didn't want to -- we're really not trying to warm anybody up but rather just be very transparent and give you a real sense of what kinds of opportunities we could take advantage of should they avail themselves to us.

Okay. And I just have one follow-up. And by one, I don't mean 4. But is there anything in the pipeline that is larger than, say, $2 billion, $3 billion?

Well, I think it's hard to call anything -- there are lots of things in the pipeline from a variety of sizes, even some things we probably couldn't do today but would love to do down the road. So I think that's the way we think about it. There's -- and that's why the breadth of things are things we could do today and things we can do tomorrow. I think our success has always been about making sure that we don't just have an eye on the thing -- on the next bankbook that drops but rather have a real strategic vision of what we can do and cultivate the funnel that way. And so there's a great breadth of opportunity for us. And hopefully, with the work we do, we'll make some of those a reality over time.

And at this time, I'm showing that we have no further questions. Presenters, I turn it back to you.

Well, thanks, everybody. As I said in the prepared remarks, we're really proud of the year we had. We really wanted to thank our employees around the world, but we also want to thank all of you who spent the time with us, who've really allowed us to give you a sense of our vision for the company and for the strength of the feedback you've given us. We're incredibly proud of 2017 but even more excited about 2018. So we'll look forward to seeing you all soon in a number of conferences and things like that. Lisa and the team are around for questions and follow-up, and we'll see you all real soon. Have a great night. Thank you.

Ladies and gentlemen, we thank you greatly for joining us for that Fortive Corporation Fourth Quarter 2017 Earnings Call. You may now disconnect.