Fortive Corp (FTV) 2018 Q2 法說會逐字稿

Hello. My name is Philip, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to the Fortive Corporation's Second 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, Philip. 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 and Presentations, and will remain archived until our next quarterly call.

A replay of the conference call will be available shortly after the conclusion of this call until Friday, August 10, 2018. Instructions for accessing this replay are included in our second 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 and financial metrics are year-over-year.

During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we 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 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, 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.

With that, I'll turn it over to Jim.

Thanks, Lisa, and good afternoon, everyone. Today, we reported another quarter of double-digit adjusted earnings and sales growth. This strong performance reflects the vitality of our portfolio and the momentum created from our acquisition flywheel, and with our strong free cash flow generation and balance sheet, we are well positioned to continue deploying capital towards M&A.

We are significantly advancing our portfolio enhancement work to accelerate growth and reduce cyclicality. Since last quarter, we announced 2 acquisitions, the Advanced Sterilization Products business from Johnson & Johnson for $2.7 billion, and Gordian, for $775 million. Both acquisitions provide a meaningful entry into quality markets.

ASP is clearly aligned with Fortive's strategy to help customers drive better safety, compliance and productivity, and Gordian exemplifies our focus on investing in software-enabled workflows. We also issued 5% mandatory convertible preferred stock with net proceeds from the sale of the shares of $1.34 billion. With substantial M&A capacity, our funnel remains strong with a range of targeted sizes to address strategic growth priorities.

Before I provide quarterly results, I'd like to share that we published our first CSR or corporate social responsibility report in June. I'm excited about the path we've chosen and the progress we have made on the issues that matter most to our employees, customers, communities and investors. While I'm proud of the direction we have established, I'm aware that our work is evolving, and so we welcome your feedback to inform our CSR-related strategies and goals in the coming years.

With that, I'd like to turn to the details of the quarter. Adjusted net earnings of $321.7 million were up 28.7% over the prior year. Adjusted diluted net earnings per share were $0.91 based on an adjusted effective tax rate of 17.7% for the quarter. Sales grew 13.9% to $1.9 billion, reflecting a core revenue increase of 5.3% as all of our 6 platforms posted core growth and 4 out of our 6 platforms grew mid-single digits or better. The continued success of acquisitions contributed 700 basis points of top line growth.

We're excited to review with you today several examples of how FBS growth tools and industry-leading innovation are continuing to drive top line performance.

Geographically, high-growth markets core revenue grew mid-single digits, with continued strength in Asia and Latin America. Low double-digit growth in China was led by Gilbarco Veeder-Root, Sensing Technologies and Automation & Specialty businesses. Developed markets core revenue grew mid-single-digits, reflecting continued strength in North America. Core revenue growth in North America was mid-single-digit and was driven by strong performances at Tektronix, Gilbarco Veeder-Root, Fluke and Jacobs Vehicle Systems.

We delivered a third consecutive quarter of gross margins at or above 50%. In the second quarter, we posted a strong gross margin of 50.6%, reflecting 120 basis points of expansion over the prior year. 5 of our 6 platforms delivered positive price for a net contribution of 50 basis points. Operating profit margin was 20.6% with core operating margin expansion of 50 basis points, driven by Professional Instrumentation favorable incrementals.

During the second quarter, we generated $315 million of free cash flow and a conversion ratio of 107%. For the full year, we are tracking well to deliver our expected free cash flow conversion ratio of approximately 110%.

Turning to our segments. Professional Instrumentation posted sales growth of 17.1%, including core revenue growth of 3.4%. Acquisitions contributed 11.9% and favorable currency, 1.8%. Reported operating margin of 24.7% reflected core margin expansion of 180 basis points as FBS drove strong price, innovation and supply chain benefits.

Advanced Instrumentation & Solutions core revenue increased low single digits during the quarter, driven by market outperformance at Fluke. Field Solutions core revenue grew mid-single-digits in the quarter, reflecting mid-single-digit growth in both developed and high-growth markets. Fluke delivered high single-digit core growth led by double-digit growth at Fluke Digital Systems, Fluke Networks and our thermal imaging business within Fluke Industrial. At eMaint, net new customer growth was 15% and recurring revenue grew greater than 25%. The combination of hardware and software, coupled with the safety and productivity value proposition offered by Fluke products, continues to resonate with customers and drive market share gains. Increased growth investments in sales and marketing are clearly paying off as Fluke further outperforms its markets, reflected by accelerated point-of-sale growth.

Industrial Scientific Corporation delivered mid-teens revenue growth, led by double-digit growth in the iNet and rental businesses. For those of you that attended our recent Investor Day last month at ISC, you were able to see firsthand the strength of the ISC team and their enthusiasm for adopting the Fortive Business System to drive revenue growth and margin expansion, while advancing ISC's digital strategy and continuous improvement culture.

Qualitrol core sales declined low double-digit as high single-digit growth in North America was more than offset by declines in China, Europe and the Middle East. The market softness is consistent with what we messaged last quarter, and we are actively working to improve what we expect to be declining sales for the remainder of the year.

Product Realization platform core revenues grew slightly for the quarter, led by low single-digit growth at Tektronix. Excluding the large 3D sensing win we highlighted in the second quarter 2017, Tektronix core revenue growth was high single digits. Results were driven by double-digit growth in developed markets and in industrial and automotive end markets, reflecting the success of multiple new product introductions and our target market strategy.

I'm excited to announce that Tek launched its 6 Series Mixed Signal Oscilloscope last week. Based on the same breakthrough platform as the popular 5 Series MSO, the 6 Series MSO is an industry-first for this class of oscilloscope, and provides higher performance up to 8 gigahertz to target the substantial growth in applications that handle a vast amount of data. It also measures devices at the lowest noise level of any product in the market, a critical feature for power devices, IoT and connected car applications, and leverages the ease-of-use and software of the 5 Series. With the 6 Series MSO, we're delivering a compelling combination of best-in-class performance and usability that will boost productivity and shorten time-to-market for our customers.

Our sensing technologies platform delivered mid-single-digit core revenue growth in the quarter, led by double-digit growth in China. New product introductions continued to deliver market share gains across the platform, and our digital strategy is fueling progress towards launching additional IoT offerings.

One of the most recent examples of this is [Acubin] Inventory Management. This technology enables customers to manage inventory remotely through a centralized and/or mobile user interface. By using a variety of sensing technologies, Acubin can continuously measure solid material and help customers manage inventory and rate of consumption trends in a number of applications.

Moving to our Industrial Technologies segment. Revenue grew 11.2% including core revenue growth of 6.9%. Acquisitions contributed 280 basis points of growth and currency 150 basis points. Reported operating margin of 20.8%, including core operating margin expansion of 30 basis points, offset by 40 basis points of diluted operating margin associated with acquisitions.

Our Transportation Technologies platform core revenue grew high single digits, led by strong double-digit growth in high-growth markets. Gilbarco Veeder-Root delivered high single-digit core revenue growth, reflecting a strong rebound in North America, driven by backlog reduction and increased demand for EMV solutions.

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. We are pleased with the success of our previously announced exclusive programs with Chevron, Texaco and Valero retailers to drive EMV compliance as sales across these programs are up double digits. Additionally, we are seeing a strong pick up in EMV sales with mid-tier accounts and single-site owners. These improved bookings, along with key business wins, continue to give us confidence in our expectation for GVR to grow core revenue mid-single-digits for the remainder of the year.

TeletracNavman delivered mid-single-digit core growth, led by double-digit sales growth in Asia Pacific and high single-digit SaaS sales growth. As we noted last quarter, the industry was challenged with integration and support issues associated with the electronic logging mandate -- device mandate. We now see these issues beginning to stabilize and expect moderated growth rates for the balance of the year in the U.S.

Automation and Specialty posted another quarter of low double-digit core revenue growth, led by high teens growth in Asia. JVS delivered mid-teens core revenue growth, driven by increased Class 8 truck production in the U.S. and market share gains in China.

Growth in our automation businesses was led by Kollmorgen, where low double-digit core revenue growth reflected continued robotic strength in Europe and China. The strong performance was also driven by Automation's focus on target verticals, including medical and food and beverage end markets as well as new product innovations.

Kollmorgen introduced barcode navigation technology for mobile robotics application in smart warehouses, and Portescap launched additions to the Ultra 22ECT Motor platform to provide higher torque capacity in the smallest footprint, allowing further miniaturization of customer applications, including industrial and surgical power tools.

The A&S business combination with Altra, as previously announced in March, is advancing nicely and we expect to close in the fourth quarter.

Moving to Franchise Distribution. The platform grew core revenue low single digits. Matco core revenue grew low single digits, reflecting double-digit growth in diagnostic software subscription sales and high single-digit growth in specialty tools, driven by new product launches and market share gains. We believe market fundamentals are healthy, given a variety of metrics, including positive sell-in to sellout ratio and a strong franchisee applicant funnel.

To wrap up, our team executed well during the second quarter, driving double-digit sales and adjusted earnings per share growth, 50 basis points of core operating margin expansion and strong free cash flow performance.

As we look to the second half of the year, we expect our core growth rate to accelerate versus the first half, driven by improving order trends and as the acquisitions of Orpak, ISC and Landauer become part of our core revenue. The power of the Fortive Business System, the vitality of our portfolio, and the momentum created from our acquisition flywheel position us well for the remainder of 2018 and beyond.

Turning to the guide. We are updating our full year 2018 adjusted diluted net EPS guidance to $3.42 to $3.50, which includes improved assumptions of 4% to 5% core revenue growth, core margin -- core operating margin expansion of approximately 75 basis points, an effective tax rate of 18% and free cash flow conversion of 110% for the year. The updated adjusted diluted net EPS guidance also reflects the dilutive impact from the mandatory convertible preferred stock offering, which we expect to offset with operational improvements.

We are also initiating our third quarter adjusted diluted net EPS guidance of $0.83 to $0.87, which includes assumptions of mid-single-digit core revenue growth, core margin -- core operating margin expansion of 30 to 50 basis points, and an effective tax rate of 18%.

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

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

(Operator Instructions) And your first question comes from Steve Winoker of UBS.

I wanted to just dive into some of the moving parts. First, Jim, on tariffs, the $0.06 headwind that you called out. Can you maybe give us a sense of what's baked into that? You said it's enacted. Is it the cost structure? Do you have any pricing? Also, that 50 basis points, is any of that pulling through there yet? Is there any demand impact on that -- in that?

First, I'll take the demand question. We don't think there's a demand impact on the tariff side. So that one's fairly, I think -- obviously, we raised the core growth for the second half so we feel good about the revenue profile. Relative to the cost infrastructure and some of the things that are going on, Steve, first and foremost, I think the 232 stuff that we have pretty good clarity of has been fully countermeasured. It's ratable across most of the businesses, and our teams have done a nice job at offsetting it. On the 301 things, where it's really been a mix of cost pricing first. So establishing more price in the businesses. Second, it's supply chain strategies. As you can imagine, a number of things we can do to offset that, and then some manufacturing changes in strategy. We have some situations where we can -- we have choices of where we produce product, and so we're making some of those decisions as well. So that's sort of the sum total of it. It probably -- it's really kind of a -- probably number one is on the price side.

Okay. All right. That's helpful. And then, the second thing is we're seeing all this prior M&A flywheel starting -- acquisitions now starting to move to core growth and core operating margin expansion. And you mentioned that it was going to help in terms of core growth acceleration. And on my simple math on the operating margin as I go out to Q4, given [30 to 50] in Q3 and [50] and [2] and [100] in Q1, I think it's around [110] or so or 100 , 110 in Q4. Can you maybe talk about some of those dynamics? Is most of this now starting to come from the new acquisitions as well? Or that are anniversary-ing?

Yes. It's still a smaller percent. Our guide is mostly, I would say, in terms of increasing the guide and the strength in the second half is still coming from the core business. Obviously, Orpak, Landauer and ISC all fall into different order there. And I didn't even do the order right. It's really Orpak, ISC Landauer, I think. So -- but we think about 20 basis points in the second half growth rate is probably with those deals. So they're growing well, and as we -- they're still a smaller part of the portfolio, but they're all doing exceptionally well, and we'll start to add to the core growth rate here as we go forward.

And the OMX contribution from those, is it similar also in the fourth quarter as part of that 100-plus?

Well, I think it's not different than what we had been assuming. And I think that it's -- yes, there's a little bit of tailwinds from the acquisitions. But as Jim said, they're not the biggest piece. And -- but us raising our guide is really about our business strengthening because the -- as well as these acquisitions are performing, they're really in line with what we've been seeing all year long.

Okay. And if I could just sneak one more in on Qualitrol, is that decline still all just end-market based on condition monitoring for the utility side? Or is there something else going on there?

We definitely think it's market. As I mentioned in the prepared remarks, the North American business is very good. Where it's really been -- it's mostly focused in China and in the Middle East. Now some of the Middle East business gets transacted through Europe so we call it out as Europe, Middle East and China, but it's really -- the European slowdown is really with OEMs who are servicing the Middle Eastern economy. So we definitely -- it's a longer cycle business, so the short cycle part of the business is doing okay. It's the project-based business that's longer cycle. And that's why we have, while we're doing a lot to change the direction of the business, the team's doing a good job to protect margins. But we think it's probably slow the rest of the year and slightly into the first quarter probably, until we start to see things pop up. The good thing is that Field Solutions is doing so well, as we mentioned. Fluke's doing very well, ISC is doing very well. So it's -- the platform itself is in a good place right now.

Your next question comes from Scott Davis of Melius Research.

I -- you announced a couple of interesting deals here. You did the J&J deal in June, and then Gordian in July, and financed with the convert. But is there a point where you have to slow down the M&A pace a little bit just more than anything else -- not because of financing limitations. That seems to be less of an issue now, but people issues. You don't have a huge corporate office. You have to integrate systems and all kinds of back-office stuff that I assume takes a fair amount of time. And then, I would imagine you plant a fair amount of your own people in those organizations at some juncture to help drive culture, too. So are there some challenges that just require you to slow down the pace of it in that regard?

I think -- yes. So I think, number one, is the good thing about it is that we normally resource the integrations and the ability to sort of bring the acquisitions along with the platforms they're in. And so in the case of both of these, we've got separate platform leaders who are leading those integrations. So we feel good. We're always building capacity for deals from a talent perspective. So number one, first and foremost, when we talk about FBS, we always talk about growth, lean and leadership. And the leadership aspect of that is really about building the talent funnel to be able to take on these sorts of opportunities. So first and foremost, we've got the FBS capability. Barb and Kirsten and their teams are ready to go and assist those management teams. We're getting really good management teams in both the case of ASP and Gordian. So we think they're excited to be a part of Fortive. So I think we got a deserving organization that is doing a good job. They'll take FBS. They're platform leaders. We'll obviously have to fill some jobs there, for sure, more on the ASP side than on the Gordian side because Johnson -- will be, obviously, it's a carve out, and so that will require some more talent. But we feel very good about where we're at relative to that. And quite frankly, feel like we've got more capacity to do. We -- in fact, we'll review our leadership with our board here shortly, our leadership funnel. And our message to our board is going to be, we've got great capacity to continue to do things for the right kind of transactions that will continue to build the portfolio. So we're not just going to do deals to do deals, but to the extent that we can continue to build -- bring great businesses in, we've got the capacity to take it on.

And now that you just brought up Barb's job, which there's only one of her and there's lots of these companies you're buying. So how long does it take to teach someone FBS? I mean, how long do you -- how long does it take to get to some sort of level where you're acceptable that they're a fully functioning part of the Fortive culture as opposed to whatever culture they -- you were buying?

Yes. Well 22 years and I'm still learning. So I'm still trying to figure it out. But I think at the end of the day, it -- the point around -- it takes a couple of years for the business to sort of -- our sort of plan will be to sit down with the business leadership. We'll do our 100-day strategic plan. That will define kind of where the big opportunities are, where maybe the gaps are in performance that we want to improve. And then, from there, that sort of leads us to what are the FBS tools that you want to use. And we really use the successes of those tools to build the culture. And as the organization sees those wins, ultimately, the adoption rate becomes pretty fast. You saw that at ISC with our -- at Investor Day is we're 1 year in and the leadership team is really using the tools, understands the culture. And while they would admit I think that they've got a lot to learn, they're certainly very proficient. So in a year, they can make good progress. In a couple of years, they'll make substantive progress and obviously, we'll be with them for that whole journey.

Your next question comes from Steve Tusa of JPMorgan.

So on China, what's going on there? Maybe talk about what you're seeing and how this plays out in the second half. There's -- I know you guys have a bit of electronics exposure there, but it's different than perhaps some of the foreign players that sell into kind of directly into smartphones. Just curious as to what you guys are seeing in China, as a start.

Yes. So we -- at the beginning of the year, we said we thought China would slow to high single digit. We obviously just said that we'd be low double digits in the second quarter. So we're a little ahead of where we thought we would be. So that's good. I would say we're seeing, as we mentioned in the prepared remarks, we're not only seeing, obviously, the Gilbarco Veeder-Root business, but we're seeing, even in sell-through in a short cycle business like Fluke, we're seeing mid-single-digit sell out at our distributor level in the quarter. So we're still seeing pretty good growth. We feel good about China for the remainder of the year. We're obviously watching for things. We read the headlines and obviously trying to understand to the extent that there's things that might change that. But in real discussions with real customers, they continue to have demand. And in Tek's performance, if you take out the onetime 3D sensing situation there that we mentioned from a year ago, it actually had a pretty good quarter in China. So -- and relatively broad based. So I think we're still seeing good growth there. And as I said, we had always anticipated it would moderate a little bit from the really strong performance we've had the last 2 years and we've sort of been a little bit above that. So I feel pretty good about it, where we're at right now.

Where do you expect China to grow in the second half?

We'll be somewhere -- I think we'll be somewhere in the -- between low double-digit and high single probably is where we'll end up. Somewhere in that range. So not a lot of moderation.

Got it. Okay. And then, when you think about kind of all the moves that you guys have done, the preferred, ANS, ASP, Gordian, I don't know what other acronyms I'm missing here. But when we think of kind of all the things you've done over the last, call it, 4 to 5 months, if you will, what is all kind of -- what do you think is kind of all the net accretion for next year from all this stuff?

Steve, this is Chuck. So the way I think about that, before we put FBS to work and drive business, just the net of all these moving parts is slightly accretive into next year, maybe -- but less than $0.05. And then, on top of that, you're going to see us do our normal earnings growth type of running FBS, our volume and OMX growth on top of that. And then, whatever happens in the second half.

Your next question is from the line of Julian Mitchell of Barclays.

Maybe just a first question around the core margin expansion at Industrial Tech. There wasn't much in Q1 because of a tough comp on the margin. Q2, I guess, the core margin growth wasn't that substantial either. So just wondered if you could give a bit more color as to why that's the case and how you see that core OMX playing out in Industrial Tech in the second half.

Yes. Julian, it's Jim. We obviously had good growth in the quarter, and we had pretty good incrementals on that. We had a couple of situations, given the strength of the business we've had. We have a couple of onetime things at Gilbarco relative to a customer in India and some -- we mentioned some of the churn situations in telematic. So we had a couple of onetime things there that if we sort of looked through those, we see almost 100 basis points of margin expansion so -- in the segment. And we -- so we see -- we have good line of sight to -- in that 50 to 75 basis points kind of margin expansion. We have pretty good line of sight to the second half being in that zone.

Got it. And my second question, just around the Product Realization sales softness. What do you see as the growth rate, the core growth rate for that business in the second half? And any big sort of moving parts in terms of regional mix, if you focus specifically on consumer electronics, and also the energetic materials business that you called out?

So Julian, this is Chuck. As Jim mentioned, we had the 3D sensing order last year. But if we take that out, what that would indicate for the second half is mid-single-digit growth for them, and that's what we expect. That's I think where they're going to end up at the end of the year.

Your next question comes from Deane Dray of RBC Capital Markets.

Maybe start with Chuck. Just on the convert, what -- we don't see a lot of this structure, at least in our sector. But what's unique about Fortive's capital structure and financing needs in this situation that a convert made sense?

Well, a great question. I think that given our appetite for M&A and our desire to keep a strong balance sheet and the attractive rates, when we looked around and looked at all the things that were available to us, we really felt like this was a great time to go with a convert. And also as we've talked about, we've got this Altra deal where we're going to end up retiring shares. And to actually get the value out of the separation we needed to replace those shares. And while -- and this gets pretty close to doing that.

Got it. And then, optically, there are times where the buyers of these converts will short the common just as a way of hedging, and I haven't seen the latest update in short interest. But are you expecting to see this and people just have to understand it's related to hedging, not a bet against the stock?

I think -- we don't expect that to be a big number. I mean, we didn't -- it's not that big of a -- relative to our market cap that I expect that's going to be a big thing. But there'll be a little bit of that for sure.

Got it. What's the share's assumption and the dilution?

Well, I think the dilution is about $0.04 a quarter. And the shares it's somewhere around 14 million to 18 million, depending on what the stock price does. If stock price goes up, the dilution comes down.

Understood. And then, just as a follow-up. Jim, in the prepared remarks, 5 out of 6 businesses got price. Just the ranking of the pricing power on the portfolio today. And if push comes to shove and there's got to be more pricing -- price increases, what room do you have?

Well, I think we've had -- as you know, we have good pricing power in most of the portfolio. Where we saw -- where we historically have seen good price has probably been in, more in Professional Instrumentation. We tend to sell in -- the go-to-market there is not as much OEM, so it's a little easier to get price. The 301 stuff hits Professional Instrumentation a little bit more than it does Industrial Tech. So the idea of tariffs and some of those kinds of things line up well with where we typically get price. So we feel good about the countermeasures we got in place, Deane. There's a little bit of effect where we'll get all of it in the fourth quarter. We get a little bit of -- some of the -- we don't have complete coverage in the third if some of the pricing actions take place. But we feel really good about our ability to countermeasure what we have, what we've seen thus far, and if other things were to come out there, we feel good about our ability to countermeasure.

Your next question comes from Nigel Coe of Wolfe Research.

So just on the -- just taking a look on the tariffs here. So I mean, I've done some basic arithmetic around this and it looks like about $500 million of purchases are subject to tariffs would be like an analyzed number. Is that about right, Chuck? I mean, is my math correct there?

Did you say $500 million?

Yes.

For the tariffs? Is that...

No. No. No. The gross purchases subject to tariffs. I mean, just $50 million with tariff, tax rates, divided by share count is about $0.12. That's how I did the math. I mean, would that be right?

I think that's -- no, I think that's overweight quite a bit. We can get you the [figures]. I think it's -- for us, we're seeing about $0.03 a quarter of a gross headwind. And that's for our business.

Okay. Maybe just a little bit more color in terms -- I mean, Jim, you alluded to the fact that some of the businesses impacted by the tariffs are where you think got better pricing power so there's almost like a hedge there. So maybe just talk about which businesses are most impacted. And any color in terms of what you're sourcing and producing in China that you bring into the U.S. would -- will be helpful. And then, just in terms of the 3Q guidance, it looks like you're assuming a $0.03 impact offset in 4Q. Is that sort of the right layup?

Well, we can [tie up this] a little bit. So we think about the 2 sets of tariffs, the 232 stuff is sort of ratable across as I mentioned. Everybody buys a little bit of steel. A little bit more like in toolbox, obviously, versus something. But by and large, that number is a little smaller and more ratable across. But it's a smaller number. 301 is much more focused on electronics. So you can imagine where we have electronics content and where we tend to be more global, so places like Fluke and Tek are examples of that, are going to be where we might see more of the tariffs. The good news there is we have global supply chains. We have global manufacturing capability. So our ability to countermeasure with some of those kinds of activities is actually greater as well and those are the actions we're taking.

And I think just to follow on is we expect to be able to countermeasure the impact of the tariffs in the year. There might be a slight impact in Q3 for us just -- but we'll get it all out through the year.

Okay. That's helpful. And then, just a follow-on question. Obviously, lots of moving parts on [programization] this quarter. You said mid-single-digit growth in second half of the year. Some of the forecasts for next year calling for semi-cap -- semiconductor CapEx to be down next year in 2019. Do you think you can still grow in that kind of mid-single-digit zone if semiconductor CapEx is down next year?

I think -- well, yes, and I think, one, we're going to have -- that mid-single-digit number is against really, really strong comps in the second half last year. So that's very good performance. We continue to see opportunities. It's probably still a little too early to tell how much the CapEx overall number will necessarily impact as -- our overall business. As you know, Nigel, Tek is mostly in the -- almost exclusively in the R&D side of things and not around manufacturing CapEx. And as the manufacturing CapEx is really the big swing in that number. So somebody puts in a line or not has nothing to do with whether or not Tek sells another oscilloscope to most -- in many cases. So we continue to have conversations with customers. The 6 Series oscilloscope that we just announced is in a number of applications that we think will have tremendous opportunity next year. Automotive, which is principally autonomous vehicles, data centers, low -- low signal, low power in applications and IoT. So I don't think those applications are necessarily going to be things that are less next year. So we've repivoted the business towards a number of those kinds of applications. And so it's a little early to predict what '19 will look like, but we still think there's plenty of opportunity in '19.

And our next question comes from Sawyer Rice of Morgan Stanley.

Maybe just a 2-parter here on GVR. Any sense of what the mix between just the dispensers and kits was in the quarter? And maybe the impact there on margins as a result? And then, just kind of looking forward, are you guys expecting this business to start to ramp into the back half and into next year as we start to approach the EMV deadline here in the U.S.?

Well, I think minimal margin impact on the kits versus dispensers. We'll follow up with you what the exact number is. But I think it was sort of the way we came in. When you look at the mix of business, it was a good mix of business as we said. The exclusive partnerships that we've got with people like Valero was up double digits, as we said in the prepared remarks. I think what we really like was the single retailer, what we call the single network owner, that business coming back. That tends to be a pretty good margin business as well. So I think all of the trends for the second half -- all the trends we saw in the quarter would suggest that the second half is pretty good. Is that helpful?

Yes. I'll leave it there.

Our next question comes from the line of Andrew Kaplowitz of Citi.

Can you give us a little more color on Gordian? Because you did call it cyclically resistant, but obviously, the underlying end market is building construction. We know it's high in recurring revenue in sophomore -- software. It seems like the underlying end markets would be cyclical though. So can you talk about its historical performance, especially during slowdown? And is there anything else that gives you confidence that the business is really cyclically resilient?

Yes. So the business primarily -- the core customer here is the public sector asset owner. So think of the VP of facilities at a public university and some contractors and architects as well. So that's, first and foremost, kind of who they sell into. State and local governments, healthcare, universities are the principal customers. These are not for big CapEx projects. They're mostly used, whether it's job order contracting or RS means or even sightlines, they're mostly used -- they're mostly used for things like small projects that tend to not have -- not -- still be done in times of slowdowns and things like that. So I think that's first and foremost. I think we -- the business performed pretty well '08, '09, so we think it'll be fine. In the sort of end market capital project, it's really not tied to commercial real estate in the sense of new -- so much in commercial real estate tends to be in things that are big building-related. This is much more tied to the maintenance of buildings, which tends to be pretty stable.

Got it, that's helpful. And then, can you give us a little more color on franchise distribution in Matco in particular? You mentioned a little better growth here in Q2 and high single-digit growth in your tools business. So have you turned the corner here and now do you have better visibility toward growth moving forward?

Yes. So we were -- I think, versus the market, they outperformed when we look at the growth rate. As we said in the prepared remarks, I think on a small base, but the subscription revenue was up, which was good to see, building more of a recurring revenue set. And the health metrics were good. And that's probably the thing we felt good about, maybe a little bit more optimism here is that the health metrics, we're seeing more -- the franchisee applicant funnel, which is a good predictor of business down the road is getting -- is becoming more full. So those are good signs. We have still not seen the toolbox business come back. So I think we have -- I would say, I would call Matco right now stable. And I wouldn't necessarily suggest we've seen an inflection point yet. But I think we're in growth mode and we're in a stable growth mode. And so we'll continue to watch the metrics to see when that sort of moves the growth rate up, but I think, right now, I would say stability is really the right word to describe it, the business.

Chuck, just a quick one for you. Our tax rate keeps drifting down, which you have to commend your team on. But I would guess at some point, there's a low point to where it could go. 18% seems pretty low already. So do you have more room there? Or is that kind of what we should expect going forward?

Well, I think -- take the second question. I think 18% is a good number for -- at this point in time, and I'd probably use that into next year as well. How low can it go? It really just depends on how the world keeps changing. There's tax reform that happens outside the U.S. And then, as we come to learn the correct interpretations of the U.S. tax reform, it creates opportunities. And when you put all that together with our M&A, I don't know how much lower it goes. It depends on what the law does, but I think right now, 18% is a good number.

Your next question comes from Jeff Sprague of Vertical Research.

Wondering if we could just circle back to the guidance one more time. I guess Slide 8 would seem to suggest you're bluffing the top end of the range. I don't know if that's correct or not. But I guess, whether that is correct or not, what needs to happen to get you to the upper end, that kind of (inaudible) setting spirit, I think, that's maybe one of the first questions that the implicit operating margins in the fourth quarter do need to step up very nicely. So is there something in the cost [structure] or mix or something that you have visibility on that makes that fourth quarter come together?

No, I think that there's a little bit of some investments that we made in the fourth quarter of last year that makes probably the margin expansion a little better. But there's not a step function in terms of the VCMs that we would expect to see from Q3 to Q4 to make that -- getting to the high end. Although I would emphasize that we do have a range, and even though in a rising market where, to the high end, it's not -- we just wanted to give that the way we give that reconciliation out there at the high end was meant just so you could see the moving pieces really clearly.

And then, just a quick modeling question. Corporate was a little bit higher than I was expecting. Some business development going on there or what, and what should we expect in the year?

I think that this is where we're seeing some of these deal-related expenses show up for the Altra deal and the ASP deal are some -- and there's also some external spend around the tax deal. So that's what's mostly driving the step-up in corporate.

Is that a run rate now? This Q2 number? Or is that elevated?

I think it's going to be elevated from here in Q3 and in Q4. But then, coming into next year, it'll drop back down into the low 20s.

Your next question comes from the line of Robert (sic) [Richard] Eastman of Baird.

Well, that would be me. Jim, just a question around -- bracketing out a little bit, Fluke Health Solutions with Landauer now coming into core later this year. You got Fluke Biomedical, J&J, the ASP deal gets done. I mean, I think we can calculate this out at over $1 billion in revenue on the health solutions side. What's the strategy for those 3 businesses? Do they ultimately get -- is that the makings of kind of a new platform here? How will you kind of integrate those and manage them? Or will they kind of stay separate businesses?

Yes, I think what we will do here, not to push the question off a little bit. But what we're trying to -- what we will do with Altra and with Altra going out -- or our automation business going into Altra and with our work in -- with ASP, will ultimately come back to everybody with how this is all going to look from a platform perspective. It is -- suffice it to say that there are opportunities for synergies with some of the businesses. You're right in your numbers. We will have over $1 billion worth of healthcare between the businesses, Fluke Biomedical, Landauer and with ASP. So that's obviously a meaningful amount of revenue with good growth and great margin expansion opportunities. We're thinking through a variety of things that will make sense on a couple of different angles. So more to come on that, but I think the idea that we're building this capability around safety, productivity and quality assurance in medical applications has been the reigning strategy for all of those additions to the portfolio. So it -- what we do is really, I think, exciting to be able to offer these sorts of solutions to customers. So there are synergies between the 2. We don't always have to structure things differently in order to get after those synergies. That's always been the culture of us. So we'll determine what the appropriate -- we are in the process of determining the appropriate organizational structure and more to come once we -- once we're landed on all of the puts and takes going on in the portfolio.

So it would seem that greater than $1 billion, maybe it's $1.2 billion or something like that would have, probably, some of your best FBS opportunity? I would think with...

Well, it definitely with, for sure...

ASP and Landauer?

For sure most of that revenue is 12 months old, right? Landauer, we just bought a year ago. ASP will come into the fold. So without a doubt, just by nature of them just joining us -- joining the team, they will have more opportunity to be able to take advantage of productivity, safety, quality, all of the things that -- and growth. I think as we said when we announced the ASP deal, we thought the innovation and growth tools will be a big help to the ASP business as well.

Okay. Okay. And then, just a quick one for Chuck. What's the FDS for -- number that you're using for third quarter guide?

The F -- I'm sorry, are you...

The fully diluted share count that you're calculating using third quarter guide.

Hang on, I got it right here.

Because that will capture the convert, correct?

Yes. Say [3 73].

Your next question comes from Scott Graham of BMO Capital Markets.

I have 2 questions, one on pricing, one on GVR. I was actually a little surprised that the pricing was only up 50 basis points. Will we see that higher in the second half of the year? Are there anything -- is there anything you netted against that to -- because we're seeing a little higher elsewhere.

Well, most of it is because when you think about some of the things related to tariffs and inflation, it really hasn't impacted us until mid-July. So it's -- the 232 stuff that a lot of other companies saw early was a reason to go in and go into the marketplace with price. Because we had so little impact from 232, it's a little difficult to do from a marketplace. So when you look at the 50 bps that we had in the second quarter, that's kind of our typical pure strength of portfolio, strength of market position kind of price. And then, the second half, you'll see that accelerate as a number of our countermeasures start to play out.

All right. Fair enough. And then, along those same lines, when we talk about inflation that -- the cost 232 less so, 301 more so, when you say that you're throwing a lot of things under tariffs, but obviously, there was inflation before the tariffs. And my sense here is that with the minimal impact on 232, you're essentially saying -- I don't want to put words in your mouth, but you're essentially saying that you weren't seeing a lot of inflation in front of the tariffs. That was just pure commodities inflation that we saw second half of last year, for example.

Yes. We have -- we get a lot of what we -- purchase price variance, PPD. We have a really high-quality supply chain organization that really does a fantastic job. So we've been pretty good at mitigating some of the kinds of things that have occurred over -- that we've already seen. We've seen some stuff on fuel surcharges and stuff like that as oil prices went up. But by and large, those have been things that we just mitigate as a normal course of action. So -- and we've been very good at that, and that's why we've been able to -- when you look at the gross margin expansion, as an example that we've seen over the last several quarters, it's been really strong despite, you might say, a little bit more of an inflationary environment than the quarters before that.

Got you. My GVR question is you've given us some information here for, I think, the first time that this mid-tier strength double-digit. And you called those sort of, I think, smaller, I don't know how many stations per owner type thing. How much of the market for EMV is that? Let's say, a potential $500 million -- yes?

The single site owners is probably 70-plus percent of the stations. But it's the 80-20, right? So it's 70% of the stations but only maybe 30% of the -- it's pretty close to 80-20. So it's -- they don't spend as much money as the big retailers. So -- but they do convert. And so we've seen a lot of visibility from the larger retailers over time as they get ahead of this. As I think we've said pretty consistently, is that one of the reasons why the single site owners -- or single network owners, a lot of them know their customers. Maybe they're in a smaller town or something like that. So they are the majority of the stations but not necessarily a majority of the dollars. But seeing them come on board. Now the multisite owners

[Audio Gap]

tier of the market, and that's kind of a bit of a sweet spot in the market. And it's -- I don't have the exact numbers of percentages, but it's 30% probably of the market in some way, shape or form and probably for dollars. So it's a good chunk of the market. To start to see them doing their capital planning and starting to implement is a good sign for EMV.

Your next question comes from Joe Giordano of Cowen.

I'm curious on Tek. How much -- given the margin profile there, like how sensitive would that whole -- would that segment be to movements there? Is that -- would that be one of the more, like, principal drivers on a given percentage move of margins in that business? Does that make sense?

You mean across the whole company, right?

Well like -- or in just PI. Like does that have the biggest move on like a given percentage change of revenue -- change in PI?

No, I think Fluke is the biggest piece of that on the PI side. But Tek's got great margins, and so when it goes up, it does lift. And it's got great fall through, well over 50%. So yes, it's impactful, but it just really depends on the size of the impact.

And I'd maybe just -- an add, which was really good to see in the quarter, Joe, was even though Tek didn't have the growth rate that they had a year ago because of the comp this year, they did an exceptional job on the gross margin side. And it really is on the backs of their innovation. We talked about the 5 Series being a very strong margin product. They've done an exceptional job of really bringing out these new products with more software and a better value proposition, which is obviously even in a lower growth environment, is allowing for them to really deliver better gross margins.

Okay. And then, on the tariff side, I know you guys are pretty niche-y in your businesses, so maybe this isn't really that applicable. But are you seeing any, like, competitors, non-U. S. competitors being like opportunistically competitive? Is that having any impact in those specific businesses that you operate?

Not yet. Every business is different because kind of depends on where the competitors are. We're certainly looking to watch some of that. And quite frankly, we're looking to do some of that as well. So we'll see where those -- if those opportunities are available to us, but they'll be on a case-by-case basis. I think the biggest thing is it's really early right now. When you really think about most of these things really went live for sure just in the last few weeks. It's pretty early to really tell if anything is -- if there's a trend on anything yet.

Your next question comes from Nigel Coe of Wolfe Research.

Well, I missed a couple of quarters. So I'm catching up here. So just a quick clarification actually, Chuck. You mentioned $0.05 net impact from M&A/Altra. I think that's the number you gave in your response to Steve's question. Would that include the dilution from converts? Or was that separate?

Yes. Actually, what I was trying to say is all the things that we've done this year with Altra, ASP, the mandatory convert, and you net all that stuff out, what -- where will it land? They -- with -- after share retirement and ASP closing. So I think it's $0.05 accretive next year. And then, on top of that, will be our normal earnings growth that we get from the businesses. And then, whatever we do in the second half of the year.

And we have no further questions in queue at this time.

Well, Philip, thank you, and thanks, everybody, for taking the time this evening. We couldn't be more excited about the performance in the second quarter. We're really -- as we turn -- as we close out the first half of the year and started in July, we celebrated our second anniversary of being out. And we've gotten a lot done. We're really proud of the work we've done, the capital we've deployed, the ability to bring in great businesses to take the opportunity to do the portfolio transformation. 2 years has gone exceptionally fast, and those of you who know us, you know that we're never satisfied and the highest expectations that we have are those of ourselves.

So we're really excited. We appreciate the time and energy you put into learning more about us. Thanks for a great start last 2 years. We look forward to telling you more about what's going on. Lisa and team are available for follow-ups.

So we'll look forward to talking to you all soon, and have a great evening. Thank you.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect. Thank you for your participation.