Fortive Corp (FTV) 2018 Q1 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 Fortive Corporation's First Quarter 2018 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 the conference call will be available shortly after the conclusion of this call until Friday, May 11. Instructions for accessing this replay are included in our first quarter 2018 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 expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from these 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, 2017. 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.

Before we move to Jim's prepared remarks, I'd like to take this opportunity to announce that Fortive will host its 2018 Investor Day on June 12, at Industrial Scientific in Pittsburgh. The day will focus on field solutions' operating companies and also provide you further insight into our newly acquired Landauer and ISC businesses. Additionally, we will make available field solutions' technology demonstrations and tours of ISC operations.

Further details on registration information can be found in our investor website under Events & Presentations. With that, I'd like to turn the call over to Jim.

Thanks, Lisa, and good afternoon, everyone. We are pleased by our strong start to 2018. The strength of our portfolio and focused execution by our teams using the Fortive Business System drove double-digit growth in both earnings and revenue as well as strong expansion in gross margins and core operating margin.

FBS continues to enhance our competitive position and drive growth, allowing us to make high-impact investments and product innovation in sales and marketing. As a result, 4 of our 6 strategic platforms, field solutions, product realization, sensing technologies, and automation and specialty, grew core revenue at mid-single-digit rate or better in the quarter.

We were also encouraged by the progress of our recent acquisitions, including eMaint, Orpak, Industrial Scientific, and Landauer. Collectively, these businesses are growing sales at a double-digit rate. FBS and our integration process have had a meaningful impact on our ability to instill our culture of continuous improvement and deliver on synergy commitments.

With that, I'd like to turn to the details of the quarter. Adjusted net earnings of $277.5 million were up 32.5% over the prior year. Adjusted diluted net earnings per share were $0.78, based on an adjusted effective tax rate of 17.9% for the quarter. Sales grew 13.4% to $1.7 billion, reflecting a core revenue increase of 2.6% as 5 of our 6 platforms posted core growth. The success of our recently acquired businesses boosted our performance and contributed 730 basis points to topline growth, demonstrating the strength of our capital allocation model.

Geographically, high-growth markets core revenue grew mid-single digits with continued strength in Asia and good growth in Latin America. High single-digit growth in China was led by Gilbarco Veeder-Root, Fluke, and sensing technologies. Developed markets core revenue grew low single digits, reflecting continued strength in Western Europe and North America. Core revenue growth in North America was mid-single digits, excluding Gilbarco Veeder-Root, and was driven by stronger performance of Fluke, Tektronix, Qualitrol, Jacobs Vehicle Systems and across the automation businesses.

We delivered strong gross margin of 50%, reflecting a 150 basis points of expansion over the prior year, with 5 out of our 6 platforms expanding gross margin. FBS continues to drive strong PPV and productivity. Through the vitality of our brands and product innovation, all 6 platforms delivered positive price for a net contribution of 70 basis points.

Operating profit margin was 19.4%, with core operating margin expansion of 100 basis points, driven by Professional Instrumentation volume and favorable fall through. We believe our strong margin expansion in this inflationary environment reflects the strength of our portfolio, leading technology, and the power of FBS.

During the first quarter, we generated $140 million of free cash flow, an increase of 15%, and delivered a conversion ratio of 54%. For the full year, we continue to expect that our free cash flow ratio will be approximately 110%.

Turning to our segments. Professional Instrumentation posted sales growth of 21.7%, including core revenue growth of 5.5%. Acquisitions contributed 12.2% and favorable currency of 4%. Reported operating margin of 23.7%, reflected core margin expansion of 310 basis points, partially offset by a 150 basis points of dilutive operating margin associated with acquisitions.

Advanced Instrumentation & Solutions core revenue increased mid-single digits during the quarter, with growth led by continued market share gains at Fluke and Tektronix. Field solutions core revenue grew high single-digits in the quarter reflecting strong growth across all regions, led by high single-digit growth in China and the United States. Fluke delivered high single-digit core growth and posted the seventh consecutive quarter of accelerating growth.

Growth was broad based around the world and across product lines, including high single-digit growth at Fluke Industrial as well as strong growth at Fluke Networks. I'm confident in our trajectory given leading indicators to sustained growth at fluke, including accelerating point-of-sale data and increasing demand for new products, such as the T6 family of electrical testers with FieldSense technology.

We are seeing continued strong double-digit core revenue growth from eMaint, and while early, we are pleased with Landauer's performance as well. It is a great addition to Fluke Health Solutions, where FBS is driving go-to-market synergies ahead of plan and strong operating margin expansion.

Industrial scientific delivered high single-digit revenue growth, driven by strong double-digit growth in the iNet business and high-growth markets. The Radius gas area monitor launch that I referenced last quarter is performing ahead of plan, and we received several key orders for iNet Now and safety net solutions. iNet Now live monitoring software provides real-time text and e-mail alerts for gas hazards, panic and man down situations, allowing customers to see and respond to incidents as they happen. I'm very pleased with ISCs performance and integration success to date, which includes the March announcement to expand ISCs rentals business to include a range of Fluke instruments available for weekly and monthly rentals.

Qualitrol core sales declined low single digits as double-digit growth in North America was more than offset by declines in Europe and the Middle East. We expect the softness in the Middle East to continue through the year. Helping to offset Middle East market conditions are share gains in the Americas and Asia Pacific and new product launches. For example, the new transformer bushing monitoring system provides additional functionality to help electric utilities save millions by avoiding power transformer loss and unplanned outages.

As Lisa mentioned, we're excited to showcase our field solutions businesses and leaders at ISC this June. We look forward to seeing you in Pittsburgh.

Moving back to the quarter and product realization. The platform core revenues grew mid-single digits for the quarter led by mid-single digit growth at Tektronix. Growth in Tektronix was led by mid-single digit growth in developed markets and double-digit growth in oscilloscopes, driven by continued penetration of the Tektronix 5 series MSO and wideband solutions. As a reminder, we will lap the launch of the Tek 5 series next quarter in addition to the large 3D sensing win we highlighted in second quarter 2017.

While we expect core revenue growth will moderate in the second quarter, we believe this is more of a comparison issue as overall business conditions remained positive and several new product introductions, including our new Arbitrary Waveform Generator, AWG5200, continue to drive increased customer demand and market share gains.

Lastly, I'd like to take a moment to recognize the Tek team for achieving an important milestone as they sold their 1 millionth value oscilloscope, further demonstrating our enduring market leadership.

While PacSci EMC core growth was down low single digits for the quarter, historical high levels of backlog support our expectation of mid- to high-single digit growth for the year. We're excited about PacSci's MAPS, or Modular Architecture Propulsion System, which is resonating well with customers in new space applications.

Our sensing technologies platform delivered high single-digit core revenue growth in the quarter, led by strong double-digit growth in high-growth markets and at Setra as well as high single-digit growth at Gems Sensors. Developed markets grew low single-digits as strength in Europe was partially offset by headwinds from prior year large NAVSEA orders in North America.

We continue to realize market share gains in target verticals, including critical care environments and launched 2 new products focused on the nondairy food and beverage market.

Moving to our Industrial Technologies segment. Revenue grew 6.1%, with flat core revenue performance. Acquisitions contributed 300 basis points of growth, and currency, 310 basis points. Reported operating margin of 18.2%, including core operating margin expansion of 20 basis points. Our Transportation Technologies platform core revenue declined high single digits as double-digit growth at TeletracNavman, our telematics business, and GTT, was more than offset by low double-digit decline at Gilbarco Veeder-Root.

EMV continues to play out at Gilbarco Veeder-Root as we expected for the first half, while shipment timing for some large dispenser orders shifted out to the second quarter. Strong double-digit core growth in China was led by continued demand at Veeder-Root for submersible pumps and automatic tank gauges related to double-wall tank upgrades.

GVR channel synergies are driving substantial high-growth market performance at Orpak. And in addition to several automation tenders that Orpak won in India, GVR secured several large European multiyear orders and signed a master agreement with a major African retailer for payment systems.

I'm also pleased to announce today a competitive win with Chevron, where we are partnering to offer an exclusive program to Chevron and Texaco retailers to drive EMV compliance. These core business wins, improved bookings, and high-growth market automation success, give us confidence in our expectation for GVR to grow core revenue mid-single digits next quarter and for the remainder of the year.

TeletracNavman delivered a low double-digit core growth led by double-digit SaaS sales growth in Australia, New Zealand and Mexico, and continued installed base growth globally. Our director platform is the first and only product to achieve FedRAMP-ready status from the Federal Risk and Authorization Program. Despite this milestone, the industry continues to struggle with integration and support issues associated with the electronic logging devices mandate in The United States. We believe this could present [cost-ensured] headwinds into the next quarter or 2 as the mandate takes hold.

Automation and specialty posted low double-digit core revenue growth in the quarter, driven by strong automation growth in Europe and Jacobs Vehicle Systems growth in North America. JVS delivered mid-teens core revenue growth, driven by increased Class 8 truck production in the United States.

Kollmorgen posted double-digit core revenue growth, reflecting strong demand in its industrial automation product line, which was driven by continued robotic strength in Europe and China. Kollmorgen received its first order in China for our new platform, servo motor product, AKM2G, for use in a packaging and bottling application.

AKM2G allows customers to decrease the size, footprint and complexity of the machine, while still getting the power and performance they need in up to 20% less space. Thomson delivered moderated core revenue growth led by mid-single digit growth in North America, reflecting strong distribution in point-of-sale growth. The A&S platform business combination with Altra, as previously announced in March, is advancing according to plan, and we continue to expect closing by the end of the year.

Moving to franchise distribution, the platform grew core revenue slightly. Matco core sales were flattish as double-digit growth in hardline tools and market share gains were offset by continued softness in tool storage. Distributor sentiment coming out of our annual expo is positive. We recorded our second highest order results in expo history, and we continue -- and we expect to continue to outperform the market.

To wrap up, we had a strong start to the year with double-digit sales and adjusted earnings growth and outsized gross and operating margin expansion. The team's strong execution using the Fortive Business System continue to drive relative outperformance and enhance our competitive position. We're confident that our substantial M&A capacity, coupled with our focus on enhancing our portfolio and pursuing high-impact growth opportunities will help us continue to build a better, stronger Fortive in 2018 and the years to come.

At this point, I thought it would be helpful to provide you additional transparency surrounding the recently announced tariffs. With respect to Section 232, given the small amount we import, we expect the gross impact would be less than $1 million, and as reflected in our guide. We expect additional impact from the second and third tiers of our supply chain, and we are actively mitigating this risk.

Regarding Section 301, our focus has been to frame the exposure and stay close to suppliers and customers to understand the impact. We will continue to monitor this dynamic situation between the U.S. and China. As the situation plays out, the strength of our brand, combined with the Fortive Business System, gives us the tools to identify appropriate countermeasures.

Turning to the guide. We are raising our full year 2018 adjusted diluted net EPS guidance to $3.40 to $3.50, which includes our expectation of 3% to 4% core revenue growth or mid-single digit core growth for the rest of the year. We anticipate core margin expansion of 50 to 75 basis points and free cash flow conversion of 110%, and we are lowering our expected effective tax rate from 20%, to a rate of 19% for the year.

We are also initiating our second quarter adjusted diluted net EPS guidance of $0.86 to $0.90, which includes assumptions of mid-single-digit core revenue growth and an effective tax rate of 19%.

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

Thank you. Ian, you can open the line for questions.

(Operator Instructions) Our first question is from the line of Steven Winoker from UBS.

So listen, the first question on that GVR rollout shift to the second quarter, can you just give us a little more confidence that this isn't something that we're just going to keep seeing end of quarter shifts? What gives you high conviction that you're actually going to see this come through in the second quarter?

Yes. Thanks, Steve. I think, first and foremost, this is really kind of the first time we talked about a shift like this. I think as the quarter played out, what really happened was, we just saw the order rate move a little bit more to the back end. So our book-to-bill was actually over one in the quarter. So we really got the orders, it was just -- we really just didn't get them out, and we saw that backlog shifted to the second quarter. So we feel very confident about what's there. We also implemented an ERP system conversion at Gilbarco. We wanted to do that given we see the rest of the year so strong. So we did that in January as well. And then, we had a little -- a few last shipping days in January. And so the combination of those 2 things really pushed a few things into the second quarter. So as we said, we'll be mid-single digits in the second quarter, and we're confident about that. And as we get into the rest of the year, I think the combination of our customer conversations as well as some of the things we've actually seen, like as we mentioned in a number of the positive things we mentioned in the prepared remarks, give us strong confidence in Gilbarco for the rest of the year.

Okay. And then, the -- you talk about 50 to 70 basis points of core operating margin expansion for the year. You did 100 basis points in the quarter of core. So how should we think about sort of what's driving the pressures in the rest of the year?

Steve, this is Chuck. So the pressures in the rest of the year, normally, we are looking for 50 basis points in a normal quarter. So Q1 was strong, no doubt. We're really happy with that and a lot of broad-based delivery through with FDS in our pricing. I think we had 70 basis points there, we had good material cost savings. So -- and we also had favorable mix. We could see it come back a little bit as IT starts growing a little faster, but 70 -- anything over 50 is a really good number for us, and we're really happy with that.

And our next question is from the line of Steve Tusa from JPMorgan.

On Tektronix, what are you guys seeing out of kind of the technology channel there? I guess, both in Tektronix as well as on the robotic side for motion? There is -- obviously, that part of the world has been growing really fast. So just curious as to what your outlook is there for the next several quarters?

Yes. So relative to Tek, we're certainly seeing strong -- we saw a good quarter at Tek -- I think, we're mid-single digit in China, where we probably have a little bit more of electronics exposure. So off a very strong comp from a year ago. So we sort of feel like continued strength there will happen. We're also, obviously, building that business to be broader than beyond just semiconductor in China for Tek as well, Steve. North America was good for Tek. So I think on balance, we feel good about how Tek will play out in the year. A number of new product introductions that we discussed in the prepared remarks. Relative to Kollmorgen, really our main robotic exposure is really at Kollmorgen. And as we mentioned in the prepared remarks, we have really strong growth in the quarter, and we think we'll see continued strength there. The new product that I referenced in the prepared remarks is really a strong application for robotics, and we've got a number of pilots going out around the world with that technology. So we feel good about where it will be. We're probably moderate on the core a little bit in the second half at Kollmorgen, just because of the comps, but the business will still remain strong through the year.

So I mean, I'm sure -- well, at least my associates can do the math. I'm not a math guy, but I'm sure we can all do the math. But maybe just some sense as to what the mix is like? What acquisition do you have running at today? What growth they're running at? And then, obviously, you've got this kind of high-single-digit growth at automation, out of the automation business you're getting out of. If you kind of net those 2 out and assume the acquisitions go organic, and then, that automation business comes out, are they, essentially, like do they add up to kind of the same organic for this year? Does that question make any sense whatsoever, pro forma?

Yes. No, I think I know what you're trying to get at. Let me take a shot. Chuck can clean it up because he'll have the numbers right off the top of his head. But I think what we're seeing -- well, first of all, we had a very good quarter for organic growth in the acquisitions. Obviously, they're not in the organic number, but as we look at them organically, and as we mentioned, really good performance that it really, those acquisitions that we named. Things like eMaint are core, so they're in the Fluke core number now. But as we think about the 2 -- principally, the 3 big ones we did last year, Orpak, Landauer, ISC, they'll go core through the second half, mostly in the fourth quarter, really, and they'll be helpful to core right now, certainly, in the -- but they're still small. When you look at that relative to -- and then sort of separate question around, what does automation do? If we look through the year, the in or out of automation in our core is about the same. So it really -- it's within -- really, within a rounding error of being almost the exact same number.

Yes. I would think that's exactly right. And I think if you look over multiple years, the only thing I'd add is the recent acquisitions are probably -- or more single-digit or the long-term gap, probably is going to be not high most years, probably beat that where we're giving up there.

And our next question is the line of Julian Mitchell from Barclays.

Just a question -- you spoke about the margin sort of mix impact for maybe Industrial Tech rebounding. But I guess, just within Professional Instrumentation an extremely strong core margin performance in the first quarter, was there anything within that that's sort of onetime or may fade quickly as we go through the balance of the year?

Julian, this is Chuck. No, nothing unique in Professional Instrumentation. It's got some really high gross margins in that, and when we pop a strong growth like we did, you can sometimes see that. Now we'll be evaluating is how much we maybe invest later in the year, but there is nothing anomalous about what's in the PI -- gross margin or operating margin expansion.

Understood. And then, I guess, within franchise distribution, you talked a little bit about Matco and what's going on there. There's been a lot of other industrial companies talking about pretty muted trends around automotive and so forth. Just wondered if you could give an update on your outlook for Matco? And how you think overall franchise distribution trends the balance of the year?

Yes. It's -- I think, we're really -- we saw a good performance from Matco in the quarter. I think, as we look relative to peer companies, they clearly outperformed the industry. On the backs of really strong -- a good expo and things like our tools and diagnostics category. I think of those categories, Julian, as tools that our customers need right away to do the work they're doing. So I think that speaks to that tool storage, which has been slower. It's typically something that a customer could put off for a quarter or 2, if they wanted to. So I think that's what you're seeing. Quite frankly, new car sales slowing is actually, in the short run, tends to be a little bit better because cars being older tend to need more repair. And at most -- 3 quarters of our sales are into car repair shops as opposed to dealers. So most of our sales are not related to the dealer network, they're mostly related to repair shops around the country. So we think -- I think, we've said this a few times, that as the mechanic hours and dollars start to accumulate with the '08, '09 downturn, we think we'll start to see some improved economics with mechanics in the second half. And we think that tends to correlate pretty well with tool storage. So we think storage will start to improve in the second half, and hence, Matco will start to improve. But we're very focused on -- we're really not tied to new car sales in the short run. Now as we've mentioned, 10 years from now, if new car sales go down, then it might put a little bit of a dent in the market then, but I think right now for how we see the year, we think Matco continues to strengthen through the year.

And our next question is the line of Deane Dray from RBC Capital Markets.

A couple of questions on Fluke. The first is, could you take us through the economics you said that you can, offering Fluke on a rental basis. And what kind of fleet utilization, if you can use that analogy, do you need versus the question, does it cannibalize any sales?

Yes. First -- yes, Deane, did you have a second part there?

I do. And then, the second part of the question is just you touched on accelerating point of sale, I'm always interested in the sell-in versus sell-through at Fluke from the channel.

Yes. Got it. So the economics are pretty good. What we found when we bought ISC was this rental market, which quite frankly, was pretty unknown to us at Fluke, tends to be around facility upgrades, where they're taking down a site for the part of 2 or 3 months. And we saw this rental program as an opportunity to really accelerate the use of tools. And what we found is, is that it really is a new market that very often people are not -- they are utilizing the one tool they have as opposed to maybe needing 2 or 3 tools. And so we think -- for maybe 2 or 3 months. So we think the use of the rental program is going to be -- is really upside for us. We did a lot of work on cannibalization analysis to understand that. And the payback is really within a year. We can basically rent it a little bit less than twice, and it's a pretty good payback. So we feel pretty good about what the economics will look like. Relative to point-of-sale, we saw accelerated POS here over the last several months. If does move around a little bit month-to-month, but we feel good about point-of-sale of Fluke in North America. We also saw improved point-of-sale at Thomson, as we mentioned in the prepared remarks as well as Kollmorgen in North America. So those are sort of our 3 bellwethers where we get pretty good point-of-sale data, and we look at those 3 things to see if the trajectory is pretty good. And I think right now that would suggest that things are going to continue to be pretty good.

That's real helpful. And then, a follow-up question, when you're hitting the 50 basis on gross margin, that was a big threshold for Danaher, and they worked towards it and they got there, and it was a focus for them to be for M&A that they wanted to be above that. How sustainable is this for Fortive? Is it drive much of your M&A focus in terms of the economics of potential targets?

Well, it certainly an important -- let me answer the second part first. We always look at gross margin trends and businesses when we acquire them. That's an important dynamic in terms of ability to assess market position, pricing power, level of -- quality of innovation. So it's always an important metric. Relative to how we think about things, as we think about the kinds of businesses we're looking at that have more recurring revenue, tend to have more of a software aspect to them, those tend to be higher gross margin. So the financial intention is somewhat, but the more important aspect of it is the strategic intent of trying to accelerate some of these kinds of business models into our portfolio. So that by nature will improve gross margins. I'd speak to the first question saying 50% gross margins in a quarter that's usually one of our lower gross margin quarters. The Professional Instrumentation gross margins were really good and we felt good about Industrial Technologies being able to grow their gross margins despite flattish sales. So I think when you look throughout the portfolio, we're incredibly proud of the work of our teams did in the quarter around FBS to drive gross margin. That's not only business model innovation, it's also the work we do. I think it speaks to our confidence in the year.

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

I just want to follow-up on Fluke for a second. You mentioned sales have been strong. I would argue you're bucking the trend of some of your peers who've had some shorter cycle weakness crop up. I think you mentioned Fluke was up high single digits, including Fluke's industrial business was also up high single digits. So are you just taking share in your markets there? Would you say that there is any difference between, maybe your energy-focused businesses within Fluke versus your industrial businesses?

Well, I think, when we look at our channels, we would probably tend to think that it's hard for us to differentiate pure industrial from, maybe, what is getting some benefit from oil and gas. So I would just maybe speak to that caveat first of all. But our -- if I take Fluke, we're -- our core point-of-sale has outgrown -- our sellout is faster than our sell-in. So that's good. I think probably some of it is market share. We're doing a really good job on innovation. So that's certainly part of it, but so I would feel good about that. But we have strong partnerships with a lot of our industrial distributors and I think that also has a -- we're able to make -- some of this is making our market because Fluke has pretty high market share. So some of the things they have to do is, really, to make their market.

Okay. That's helpful. And then, maybe somewhat of a related question, but several of your peers have displayed some weakness in Western Europe this quarter. I'm not sure if it's Easter or maybe slightly weaker macro. But doesn't seem like you guys saw that weakness. Maybe you can elaborate on that region? And then, whether you will see any improvement in the Middle East, as oil prices have begun to respond here?

Yes. I think, maybe I wanted to just -- I forgot one part of the POS answer too. We will -- while we're seeing really strong POS right now, we'll start to get to some tougher comps in the second half. So we'll see history strong POS. We expect strong POS in the second half, Andy, but probably the numbers might be a little less just because we'll be working off good comps in the second half. Relative to Western Europe, we had a good quarter. We've got a couple of secular things like Qualitrol, where they transact some of their business with the Middle East through European OEMs. So that's slowed us a little bit. But in places like Fluke and Kollmorgen, a number of our bigger businesses, we saw good business in Europe. We continue to say, and I think I joked about this on the call for the end of the year call in January, that we continue to think Europe will slow, and then, it ends up being pretty good. And it has to do with, I think, the execution that we've got in -- across a number of our businesses to really do a good job in our innovation and some of the trends, like robotics and things like that are driving the business as well.

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

We hit most of the business questions, I think. Maybe just unrelated, on tax. Obviously, you guys have -- extending a lot of resources there. What do you view as your entitlement on tax rate? Is there some more opportunity there?

Jeff, I do think our tax team would think that's part of business too, and we're really happy and proud about their results. But I think that we've lowered the tax rate to 19% for the year. Part of it was Q1 coming in lower as really just option exercises were higher than we had modeled. And then, looking forward, it's coming down the rest of the year, a little bit as we've got a better idea about the mix of our earnings likely to be this year outside of the U.S. and that planning. Entitlement, no, there's a lot of -- I wouldn't say, we have an entitlement, but I would say that our tax team -- change is an opportunity for them, and certainly, there has been a lot of change in -- with the tax reform. And also, then, when you put acquisitions on top of that, you can see a lot of options for things to do. I wouldn't say that we would -- we're entitled to anything, but we're always looking to see what else we can do here.

Jeff, I would just add. I think, Chuck wouldn't say this, but I think at the end of the day, it's pretty easy to -- for people to look at the tax rate improvements we've had in less than 2 years and say it's kind of the Trump Administration, but the reality is, our tax team has done an outstanding job at really looking for opportunities. They applied continuous improvement in the same way that we do everywhere else in the company.

Should we expect cash taxes to be nearing this GAAP tax rate we see? Or plus or minus relative to that?

We actually have now got our cash tax rate under our effective tax rate. So it will, for the foreseeable future, it's going to be less than the 19% we've got modeled now.

And our next question is from the line of Richard Eastman from Baird.

I noticed in the -- again, the guide kind of picks up the core growth by a point or so for the full year now. I mean, we're talking mid-single digits versus 3 to 4. Is that -- where is the extra point of core growth coming from? Where is your confidence? Is that Gilbarco and Matco? Or...

Well -- so a number of things. First of all, the guide for the year was always 3 to 4, and we always saw the first quarter being low single and the rest of the year being mid-single. So we really don't see that much has changed here. There's a little bit of timing as we talked about at Gilbarco in -- going from Q1 to Q2, but really, we don't see that as the change. We do see, as we've been talking about and Jim mentioned earlier, that Gilbarco will start to -- will turn to growth now with -- in Q2. But in the second half, we've always thought that as we get closer to that EMV deadline.

Okay. And then, again the adjusted guide for the full year went up by $0.05 at the midpoint. And we're about $0.04 above the midpoint in Q1, I think if the tax rate comes down 19%, that's another $0.05, perhaps, just a little bit curious here. I mean, do we still have a little cushion in there? Or is there some slippage on mix or anything like that?

First of all, we took the guide at the low and the high-end up a $0.05, and that's $0.04 on the tax rate coming down and another $0.01 there for FX. We really like the fundamentals of the company going forward, mid-single digit growth for the rest of the year is really good, and we think that's going to drive (inaudible) above our normal 50 basis points of OMX, and that's not different. We are aware though that we're sitting in Q1, and there is a lot of the year left to play. So we went with a read-through in Q1, and then taking up tax and the FX.

Rick, I'd just add that, we're really focused on outperformance here. And I think what we demonstrated in Q1 is when you look around the portfolio, professional instrumentation is a great example. A great very strong performance. We took market share and so if the market is better, I think, we will outperform. Still early days, as Chuck mentioned, but we are focused on outperformance, and certainly, it's early. But if the markets continue strong, then we'll probably have a little bit of upside in some areas, but we're very much focused right now on what we can see. As Chuck mentioned, there's also some risky things there that we want to make sure we can take care of. And the last thing is we want to make sure we continue to invest in the business. It's one thing for us to have a number of good quarters, but as you know, having followed us for a long time, you know we're very focused on '19, and '20, and '21, and so we're going to always going to work making sure that we're investing in the future as well.

And our next question is from the line of Sawyer Rice from Morgan Stanley.

Just maybe a question here, again, most of the question on the quarter have been answered here. But maybe stepping out a bit, looking at the M&A channel and pipeline here, you'll obviously have some expanded capacity post-Altra. Any sense of the multiples you guys are seeing? And maybe, size of assets in the pipeline, and then, maybe I'll just tuck my follow-up in here, but any urgency to bring on maybe another platform-sized acquisition post-Altra?

Yes. thank you. And I think, first, as we've talked for each quarter, M&A is episodic. I think, a year ago, we were talking about that, and then, within a quarter or so, we had a number of transactions completed. So we do -- we're working hard. We're very busy. There is a number of things that we're obviously very involved in and feel confident in saying that we will get M&A done here in the future. Relative to the -- I think, there is a little bit of a difference in bid-ask spreads right now. So probably seen a little bit of seller [short of] maybe this week, expectations on sellers are being a little high. I think that's one of the reasons why you haven't seen a lot of M&As done in the last 6 months amongst a lot of our peer group as well, particularly the big stuff. So I think there is certainly opportunity, but I think expectations may be a little higher. So that's one thing. I think relative to how we think about new platform, 2 years ago, when we went out, I said, "Hey, probably within 5 years, we would probably add a new platform." And now we're 2 years into it, with 3 years left. So I guess the probability of doing a new platform is more likely. But we really like the $30 billion of served market than we have within the current portfolio today. You're going to hear it at our Investor Conference, how Wes Pringle thinks about that, with our field solutions platform and the opportunity there as well. I think, that's a perfect example of how our platform leaders think about growing their platforms, and we've obviously done that. You see that results in the first quarter where I think field solutions is up over 20% in total -- or excuse me, Professional Instrumentation is up over 20% in revenue between core and non-core because of the way we've built out those platforms. So you're seeing that kind of success and you'll hear about that. So we don't necessarily feel obligated to create a new platform, but there's certainly opportunities to improve the portfolio. We talked a lot about that and the kinds of things we're looking for to add to the portfolio. And if there's an opportunity to do that, we certainly would -- we'd love to do it.

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

Just a couple of questions. First in field solutions. The conversion to Accelix, and I think, I last spoke with Wes, there were sort of 60 tools, I guess that was sort of mid last summer, which represented sort of about 5% sort of connectivity tools of the portfolio of the conventionals. Where are you on that number of tools curve and percentage of conversion at this point?

Well, I think, probably what Wes was alluding to is that about 5% of the market is -- probably has those tools. We probably have a bigger percentage of our portfolio than 5%. So it's probably a higher range of that. I'm not sure exactly what it is. But if we look at some of the key categories, we've got a number of tools now that are out there. I think, the best thing I could say about the quarter is the acceleration of core growth at Fluke is getting a number of those connected tools out. I'm not sure what the exact penetration is or -- we can certainly get back to you on that, but we're certainly continuing to accelerate that. We talked in the prepared remarks that our FieldSense technology and our T6 family of testers, those are some places where we'll have connection as well. So we certainly think that we're continuing to accelerate that. I think that -- and as we think about more broadly around Accelix, we felt really good about the quarter. We mentioned eMaint doing a great job. That's really a core part of our software portfolio. The connected tools and as well as just our overall tool sales have been good to be able to put tools in the hands that they can utilize what they want to do. Our SCHAD business is doing well. The one place where we maybe been a little bit slower is on the condition monitoring aspect of this, and while we think we feel very good about the solution, it's just is taking longer for customers to convert pilots. So we said that for a couple of quarters here and it remains true I suspect, that the selling cycle, we're learning, is just a little bit longer. But we feel good about where that's at. And we'll certainly detail that in a great level -- but we'll give a great level of detail to that at our Investor Conference, when we focus on field solutions.

Do the rentals help the conversion speed? Or hinder it?

I don't think, they hinder it, but I don't -- I'm not sure they really help it. I think the rental program will typically be for more of a part-time thing. It won't be a high-volume thing. It's really more a niche of when customers, at the end of the day, need more tools and have reluctantly bought more than likely they've just tried to get more out of the tool that they have. And I think, it's just an opportunity for us to be more pervasive. It's still early days. I think it will take us a little while to know if it really helps our forward strategy or not.

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

Just a couple of questions left here. The Landauer business that caught my eye as I was looking at Lisa's email, up mid-single digits, excluding the large orders. Can you talk a little bit about how regularly you see large orders in that business? And is the Landauer acquisition, in general, going as expected? And any thoughts on accretion in that business?

Yes. I think, typically, what we see, Brian, is that, that business doesn't have a lot of large orders. It's typically government-related. I think, one occasionally, and we see that in our current, the Fluke Biomedical businesses, which really makes up the other part of Fluke Health Solutions. Throughout that business, the only time we really see large orders is when a government agency will buy at one period of time. And that happens maybe once every other year or something like that. So that's the frequency of that. We feel really good about the progress we made on the margin side. Chuck and I were with the team earlier in the year for their 100-day strategic plan, and I was just struck by how broadly the organization was telling us, how the Fortive Business System tools are really applying to them as they try to fix a lot of the things that they wanted to fix for a long period of time. So right now, the businesses is a little bit better from a core perspective than we anticipated. That's good to see. We're seeing pretty good fall through there on the margin side. But it's still early. So I think we'll certainly believe strongly that we'll continue to do -- make the business better, but we're -- but I think it's still early days and it's going to be a good deal for us, and we're confident in the long-term returns here -- both the short-term and the long-term returns are coming in as planned.

Okay. Great. And then, just one more quick one. On the organic revenue growth, mid-single digits for the balance of the year. The easiest comp looks like it's coming in the fourth quarter. Can you give us any additional granularity in terms of, which quarters would have a slightly better or worse organic revenue growth?

Well, it's still -- it's pretty -- fourth quarter -- well it's funny, because the fourth quarter seems like a long way away, but it'll probably be here tomorrow. But the reality is, probably, the fourth will probably end up being one of the better quarters. But we're going to see relative consistency for the next couple of quarters. And obviously, we'll see how things play out, but we feel right now that all the quarters will be pretty close. And so I think that's the way I'd think about it.

And our next question is from the line of Joe Giordano from Cowen.

Got 2 for you. One, as you kind of progress with this portfolio transformation strategy that has very clear characteristics of the companies you're looking for, in terms of cyclicality and things, how does that translate into like maybe morale at some of the companies in your current portfolio who may not have those characteristics? No one wants to be someone else's cost synergies. So what are you doing to maybe get ahead of some of that?

Yes, I don't think -- I think more people -- I would say, that the excitement coming out of this separation continues, our employee engagement has never been higher. So we feel good about all of our businesses and how people feel about the portfolio. I think all of our businesses that will be remaining in Fortive have a play in some of the business model transformation that we've been talking about. Maybe a slightly different aspect to that. Whether it's maybe more services in one business, some other businesses might have a little bit more software. But the ability to improve recurring revenue, the ability to reduce cyclicality, is something that all of the businesses have been working on, even the businesses that are going to Altra have done a great job in that regard. So I think it's really 0 issue with moral, and I think we have really high expectations about what our businesses can do. And I think our businesses are living up to that, and so that's what we talk about. And our conversations are always about making businesses better, and that's a consistent theme through our history. So I don't think this is really different than what we've had, and I'm pretty close to the organization, so I feel pretty confident that our ability to sort of drive continuous improvement in the portfolio, make our businesses better is a recurring theme that everybody understands and believes in.

Okay. And then, Chuck, if you could just strip out, what was core growth this quarter if you just take out the A&S segment? And if you -- or at least the businesses that are effectively sold? And how is that like in your internal model for the mid-single digit for the rest of the year, how much do you have in your model of that -- those businesses contributing to that?

I'll take the second question first. We have the A&S business is built into our model for the rest of the year. So -- and that's not going to change until we have -- until the deal gets closed, which we have said will be at the end of the year. I think the important thing is, if we take the A&S businesses out of it, and really we look at the business without GVR in there, it's the same 5.5 mid-single-digit growth, but without the A&S businesses, it's low single-digit, just like it is for the total.

And our next question is a follow-up from the line of Steve Tusa from JPMorgan.

Just expanding a bit on the acquisition questions. How will you kind of handle this thing is going to close at year-end, you obviously don't want to press on deals just to kind of bridge the gap from EBIT loss from these divestitures. So -- or will you kind of -- or do you have that aim to get something that you can get done and closed by the time kind of next year comes around? Or how will you kind of handle that guidance for next year when that time comes -- that comes to kind of bridge the gap?

Steve, I'll go first, and then, Jim, can chime in. But we're just looking at it. Those are 2 things that we're working on very hard. We're very pleased with the progress we're making towards -- with the Altra deal, and we're on track with that, and we'll get it done at the end of the year. And then, separately, we're working very hard to do M&A as we have always been. But as you know, the timing of that is -- you really can't control that. So I understand what you're saying, but realize we're working very hard to do both of those things, and the M&A will fall when it falls. But we're optimistic about what we're seeing out there.

I couldn't answer any better. So I'm just going to say hi.

And our next question is a follow-up from the line of Scott Graham from BMO Capital Markets.

I want to ask a question on EMV. Does the lower tax rate structure we're facing here increase the $500 million-plus market opportunity?

No, I don't think so. I think the number -- we've wondered if it would accelerate some things. We don't see that thus far. I suspect because the mix of kinds of customers we have from large-scale retailers to small mom-and-pop shops, probably their tech strategies differ wildly. But what we -- so we don't think it really changes the market. It's a compliance-driven situation. So the idea that people would do less is probably not going to happen. They're obviously going to want to be compliant. So the regulatory environment is really the driver here, and we suspect that that's the real driver. As I mentioned, we thought maybe the tax might accelerate some things. Haven't seen that yet. But we do, as we mentioned in a couple of different situations, we now think the business is going to be in growth mode for the remainder of the year. And we said that a year ago, is that we thought we'd have an air pocket in Q4 and Q1, and then we would move to growth in Q2, and quite frankly, that's what's playing out.

Yes. You did say that. My second one is an easy one. Chuck, was mix positive in both segments?

Was mix positive in both segments? No, I think -- well, so the mix I talked about was between the segments. So that with PI growing faster than IT, that drove a little bit more VCM fall-through. When you look in within the segments, I think, that I could say yes because I think they're both showing margin expansion on both of those segments. So I guess, the answer would be yes.

And we have a question from the line of Charley Brady from SunTrust Robinson Humphrey.

Just a bigger picture kind of longer-term question for GVR. When we get through the deadline here, we've effectively replaced a good chunk of the installed base in the U.S. I'm sure you've thought about it. But what happens? How do you maintain at least some growth? Or you mitigate the down tick that's going to come at GVR. Is it a function of just trying to get more recurring revenue on that product stream? Or what's the thoughts around that kind of a longer-term broad basis?

Yes. We'll have -- we'll certainly have, probably, a year, where we're coming back from that, depending on how the revenue plays out. I think what we said was the move from 2020 from 2017 to 2020 helps that and sort of mitigates the drop, if you will. And what we're really focused on, Charley, has been about the recurring revenue model, growing the business organically in high-growth markets, building a larger base, a lot of the Orpak acquisition that we did last year was really focused on that. And as we mentioned in the prepared remarks, we're off to a very, very strong start there, building a great business in places like India, which are making massive investments in their network. So those are going to be kinds of things that we can do. And of course, we'll -- obviously, working to mitigate the earnings at a Fortive level as well. So yes, we're probably have some time where Gilbarco will go negative for a little bit. But between building a recurring revenue model and some of the things we're doing from acquisitions, where we feel good about the size and scale of that network and what we can do because the technology upgrades that will come through EMV will allow for us to do a number of things with data analytics and supply chain logistics with customers that are -- that will build into our recurring revenue model, which we call Insite360, by the way. So I needed to get that in there.

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

Well, thanks, Ian, and thanks, everyone for taking the time for -- to spend with us today. I know you're all busy. This a busy week for all of you and a busy couple of weeks for you.

We feel very good about the quarter. We couldn't be more pleased with what we saw from a Fortive Business System perspective and the quality of work that our teams did throughout the quarter to make the quarter possible. And quite frankly, we're really excited about how the year will play out at this point forward.

We're really excited to see you in June, in Pittsburgh. We hope all of you can make it. I think you'll see the quality of how we build a platform. And more importantly, you'll see the quality of the team that we have, the players that we put on the field every day, to make the business so successful.

So we'll look forward to seeing you soon. And I know Lisa, and Chuck, and team are available for calls. We look forward to talking to you soon. Thank you.

Ladies and gentlemen, we thank you for joining us for the Fortive Corporation's First Quarter 2018 Earnings Call. You may now disconnect.