Fortive Corp (FTV) 2018 Q3 法說會逐字稿

My name is Brandon, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to the Fortive Corporation's Third 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, Brandon. 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, November 9, 2018. Instructions for accessing this replay are included in our third 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 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. Jim?

Thanks, Lisa, and good afternoon, everyone. Today, we reported strong high teens adjusted earnings growth for the third quarter, reflecting the underlying strength of our core portfolio, the power of the Fortive Business System and the increasing momentum of our M&A flywheel. Given our strong free cash flow generation and a healthy balance sheet, we are in an advantaged position to continue driving organic growth while pursuing acquisitions to accelerate achievement -- the achievement of our strategy.

During the third quarter, we closed the $775 million acquisition of Gordian and the $2 billion acquisition of Accruent. Through the application of FBS, we were also able to close the divestiture of the Automation & Specialty businesses to Altra well ahead of schedule on October 1.

In total, we have now announced $8.2 billion of transactions in 2018, $5.5 billion of which have already been closed. We have done so while maintaining our commitment to a strong balance sheet based on our consistent free cash flow performance as well as the successful execution of our mandatory convertible preferred stock offering in the second quarter.

Taken together, these transactions significantly advance our portfolio enhancement efforts aimed at increasing growth and reducing cyclicality across the portfolio. The Gordian and Accruent acquisitions provide entry into attractive markets characterized by strong long-term growth trends and limited cyclicality.

They also represent the continued execution of our digital strategy to address a range of critical software-enabled workflows for our customers through the acquisition of quality software assets with high margins and significant recurring revenue.

During the quarter, we also continued to make progress toward the closing of the previously announced acquisition of Advanced Sterilization Products. Based on close collaboration with our partners at Johnson & Johnson and our continued application of FBS, we successfully completed the requisite European Works Council consultations and cleared key regulatory hurdles, paving the way for the formal acceptance of our binding offer on September 20. We continue to expect to close the transaction in early 2019.

The third quarter represented the opportunity to demonstrate all that is special about the Fortive team as we responded to Hurricane Florence and other recent natural disasters around the world and showed our commitment to our local communities through our Annual Day of Caring.

Over the past 2 weeks, our employees participated in hundreds of events, including working with food banks, improving children's shelters and building houses for the low income and homeless. Coming together to support our communities has never been more important for the long-term success of our company and the communities in which we work.

With that, I'd like to turn to the details of the quarter. Adjusted net earnings of $321.1 million were up 18.2% over the prior year. Adjusted diluted net earnings per share were $0.86 based on an adjusted effective tax rate of 17.2% for the quarter. Sales grew 9.2% to $1.8 billion, reflecting a core revenue increase of 3.2%, driven by strong growth across Industrial Technologies as well as Fluke, Industrial Scientific and Gems. Acquisitions, including Gordian and Accruent, contributed 720 basis points to top line growth.

Geographically, high-growth markets core revenue grew mid-single digits with continued strength in Asia and Latin America. This growth was led by Gilbarco Veeder-Root, Sensing Technologies and Automation. Despite certain parts of the China market that are becoming more challenging, we performed well, generating high single-digit growth for the quarter.

Developed markets core revenue grew low single digits, reflecting continued strength in North America. Core revenue growth in North America was mid-single digits and was driven by strong performance at Fluke, Matco, Industrial Scientific and Jacobs Vehicle Systems. Western Europe declined low single digits as high single-digit growth at Tektronix was offset by continued weakness at Qualitrol and JVS.

In the third quarter, we posted a gross margin of 50.2%, reflecting 40 basis points of expansion over the prior year based on the strong contribution from our recent acquisition -- acquisitions, which was partially offset by anticipated impact of tariffs and inflationary pressures. The third quarter represented our fourth consecutive quarter of gross margins at or above 50%.

Pricing contributed 60 basis points, with 4 of our 6 platforms delivering positive price during the quarter. Operating profit margin was 17.5%, with core operating margin decreasing 25 basis points as strong PPV and productivity were more than offset by costs associated with lost production days at Gilbarco Veeder-Root due to Hurricane Florence as well as unfavorable mix dynamics within the portfolio.

During the third quarter, we generated $351.8 million of free cash flow, representing a 23% year-over-year increase and a free cash flow conversion ratio of 143%. For the full year, we are on track to deliver a free cash flow conversion ratio of greater than 110%.

Turning to our segments. Professional Instrumentation posted sales growth of 13.6%, including core revenue growth of 1.4%. Acquisitions contributed 1,320 basis points while unfavorable currency reduced growth by 100 basis points. Reported operating margin of 20.1% reflected 270 basis points of dilutive operating margin associated with acquisitions and transaction expenses.

Core margins were flat due to the impact of tariffs at Fluke and Tektronix, inflationary pressures and customer-related delays at EMC. Advanced Instrumentation & Solutions core revenue increased low single digits during the quarter, driven by continued outperformance at Fluke and Industrial Scientific.

Field solutions core revenue grew low single digits, reflecting mid-single-digit growth in developed markets, offset by some slowing in high-growth markets, which were slightly up in the quarter. Fluke delivered mid-single-digit core growth led by double-digit growth at Fluke Digital Systems and Fluke Health Solutions and high single-digit growth in the Fluke Industrial Group and Fluke Calibration. We are pleased with the progress we made in the quarter to counteract the impact of tariffs through FBS and supply chain strategies and expect to be fully counter-measured by the first quarter of 2019.

At Fluke Digital Systems, we recently released the Fluke -- the new Fluke 3561 Vibration Sensor, which has generated a very positive response from the market based on the pace of orders thus far, driving continued customer expansion, including a large order from Martinrea. Annual recurring revenue from eMaint grew greater than 20% as growth investments in sales and marketing and the compelling value proposition of Fluke's combined hardware and software product offering continue to drive outperformance and market share gains.

Industrial Scientific delivered mid-teens revenue growth led by continued double-digit growth for iNet. The ISC team's ongoing implementation of the Fortive Business System has continued to highlight opportunities to drive significant revenue growth and margin expansion in the coming quarters.

ISC recently launched the RGX Gateway, a ruggedized gateway device that transmits worker location, gas reading and real-time alerts from connected devices to the iNet Now platform, simplifying the process of delivering live monitoring data to the cloud for a variety of critical industrial applications.

Qualitrol core sales declined high teens, reflecting lower sales in China, Europe and the Middle East. This represents a continuation of the market softness that we messaged in prior quarters and which we expect to remain a headwind into 2019.

Product Realization platform core revenues declined slightly for the quarter, led by a low single-digit decline at Tektronix. EMC registered mid-single-digit growth despite customer-related delays in North America, which we expect to reverse in the fourth quarter. The Product Realization platform registered a book-to-bill ratio greater than 1 for the quarter, reflecting solid order momentum heading into the fourth quarter.

Turning to Tektronix. Excluding the large 3D sensor order we highlighted previously, core revenue growth was low single digits. Results were driven by strong growth in Western Europe and China, offset by a decline in North America, primarily reflecting delays with U.S. defense contractors.

Tek's industrial and automotive end markets continue to deliver double-digit growth, reflecting the strong momentum created by the 5 Series and the recently introduced 6 Series mixed signal oscilloscopes. We were encouraged by positive order growth in the quarter, including a strong double-digit increase in orders for the 5 Series and key new customer wins for the 6 Series from Smith & Nephew and a Fortune 100 Internet technology company.

Our sensing technologies platform was up slightly in the quarter, led by high single-digit core revenue growth at Gems, which included a large order from a leading manufacturer of heavy-duty buses in the U.S. Core revenue declined low single digits in North America, reflecting headwinds due to Hurricane Florence and difficult comparables related to a large project for the Naval Sea Systems Command from the prior year. Double-digit core revenue growth in China more than offset the results in North America.

Moving to our Industrial Technologies segment. Revenue grew 5.3%, including core revenue growth of 4.8%. Acquisitions contributed 200 basis points of growth while unfavorable currency movements reduced growth by 150 basis points. Reported operating margin of 21.1%, reflecting a core operating margin decline of 40 basis points, driven by increased material costs due to inflationary pressure and tariffs as well as 40 basis points of dilutive operating margin associated with the Orpak acquisition.

Our Transportation Technologies platform core revenue grew mid-single-digits, led by strong double-digit growth in high-growth markets. Gilbarco Veeder-Root delivered low single-digit core revenue growth, driven by mid-teens increase in high-growth markets. GVR generated low single-digit growth in North America, reflecting the negative impact from Hurricane Florence. Continued strong double-digit core growth in China was led by demand at Veeder-Root for submersible pumps and automatic tank gauges related to double-wall tank upgrades.

As anticipated, we continue to see a pickup in EMV sales at Gilbarco, particularly with mid-tier accounts and single-site owners, and expect this trend to accelerate in the fourth quarter, reflecting a strong North American order book.

During the third quarter, GVR also made a minority investment in Tritium, a leading manufacturer of fast-charging solutions for electric vehicles, providing an early entry into the EV market. GVR had a very successful showing at the recent NACS Conference, highlighted by a positive reception to the Tritium announcement as well as a number of new product launches such as GVR's new Passport EDGE tablet-based point-of-sale solution.

Teletrac Navman grew mid-single digits, led by double-digit core growth in Asia Pacific and mid-single digits in Western Europe. In North America, we have continued to experience ELD implementation challenges causing accelerated customer churn. Due to the recurring revenue nature of the business, changes to the North American installed base will continue to have an unfavorable impact on Teletrac Navman's performance into 2019.

Automation and Specialty posted high single-digit core revenue growth for the quarter, led by high single-digit increases in both North America and Western Europe. JVS delivered mid-single-digit core revenue growth, driven by increased Class 8 truck production in the U.S.

Results in our Automation business were led by Kollmorgen, where high single-digit core revenue growth continued to be driven by strong double-digit growth in robotics. This strong performance was also driven by Automation's focus on high-growth markets led by double-digit growth in China. We wish our entire A&S team all the best as they join the Altra team in the fourth quarter.

Moving to franchise distribution, the platform grew core revenue mid-single digits. Matco returned to mid-single-digit growth, reflecting mid-teens growth at hardline and high single-digit growth in both tool storage and power tools, driven by new product launches and market share gain.

Matco recently launched Maximus 3.0, a unique full-featured diagnostic scan tool, which automatically links to vehicle make, model and year information and provides diagnostic reporting to a proprietary subscription-based automotive repair database called MaximusFix. Maximus 3.0 is expected to be a key growth driver in the coming quarters, while MaximusFix provides the diagnostic platform with a meaningful new recurring revenue opportunity.

To wrap up, during the third quarter, we delivered double-digit adjusted earnings per share growth and strong free cash flow despite some headwinds associated with Hurricane Florence and tariffs. We also made significant progress in our long-term portfolio transformation efforts, positioning Fortive in markets with faster top line growth, reduced cyclicality and enhanced opportunities to grow recurring revenue.

Throughout the year, we have continued to generate strong core operating results, consistent with the Fortive formula, driving year-to-date adjusted earnings growth of 23% and a 29% increase in free cash flow while also implementing a number of complex capital allocation strategies. With the power of the Fortive Business System and the demonstrated momentum of our acquisition flywheel, we will continue to enhance all aspects of our portfolio in our drive to deliver sustained top quality earnings growth.

Turning to the guide. We are updating our full year 2018 adjusted diluted net EPS guidance to $2.98 to $3.02 on a continuing operations basis, which excludes the 2018 results of the divested A&S business. The guide assumes approximately 4% core revenue growth, core operating margin expansion of approximately 50 basis points, an effective tax rate of 17.2% and a free cash flow conversion ratio of greater than 110% for the year, excluding the impact of the gain from the divestiture of the A&S business.

The updated adjusted diluted net EPS guidance also reflects the dilutive impact from the preferred stock offering on an if-converted basis. We are also initiating our fourth quarter adjusted diluted net EPS guidance of $0.83 to $0.87, which includes assumptions of 5% to 6% core revenue growth, core operating margin expansion of 75 to 100 basis points and an effective tax rate of 17.5%.

Before moving to questions, we wanted to provide an early view on 2019, given the extensive portfolio transformation and complex capital transactions which we successfully executed in 2018. We expect closed acquisitions to collectively contribute $0.20 to $0.25 of earnings per share, reflecting the addition of high-margin, high-growth software assets. Our enhanced portfolio profile of greater than 30% recurring revenue should generate strong annuity free cash flows with gross margins exceeding 50%.

The fundamentals of our core portfolio remain strong, particularly in North America with EMV continuing to ramp while we monitor conditions in China and pockets of Europe and the Middle East. Through solid execution and the application of the Fortive Business System, we expect to fully offset the unfavorable impact from announced tariffs.

Assuming a stable macroenvironment, our preliminary -- our remaining preliminary modeling assumptions include approximately 50 basis points of core operating margin expansion, free cash flow conversion ratio greater than 115% and an effective tax rate in the high teens. We anticipate deleveraging quickly after the closing of ASP, enabling us to maintain our investment grade rating. And lastly, we plan to offset A&S stranded cost of $0.01 to $0.02 of earnings per share with the savings generated by our 2018 restructuring efforts.

In summary, it is our expectation to deliver another year of double-digit adjusted earnings growth in 2019. And with that, I'd like to turn it over to Lisa.

Thank you, Jim. That concludes our formal comments. Brandon, we are now ready for questions.

(Operator Instructions) And your first question comes from the line of Julian Mitchell from Barclays.

Maybe if you could just start by helping us understand why the core sales growth accelerate so quickly in Q4. I think you said 5% to 6% after just doing around 3%. So what are the biggest 2 or 3 moving pieces that get you there?

We -- as you know, from a few months ago, we said we thought that we'd be in the sort of 4% range for the second half, mid-single-digit range in the second half. And really this is just playing out with a slightly different cadence. Some of the backlog that we talked about with the hurricane pushed into the fourth quarter. So we built backlog at Fluke, not only at Gilbarco, we also built backlog at Tek and Fluke.

So we're walking into a good backlog situation. We talked about some of the orders at EMC as well that moved into the fourth. So we've got a movement, but it's really no change really to how we sort of see the macro or see the revenue, it's just a slightly different cadence between the third quarter and the fourth quarter.

Understood. And then my second question would just be around the earnings sort of base and coupling that $3 base you gave for 2018 with the initial comments on 2019. So just to be clear, is the right way to think about it, you have the $3 base high single-digit core EBIT growth from that $0.20, $0.25 from closed deals, $0.30 for ASP? And so if we round all of that together, we get up to sort of $3.80-ish or something for next year. Is that a good sort of template?

Julian, this is Chuck. Yes, that's directionally correct. The one thing that obviously isn't closed is ASP but I think that's consistent with what we've said before. So it depends a little bit on the timing of that. But everything else, I agree with.

And your next question comes from Andrew Obin from Bank of America.

So just a little bit more color on what happened in Tektronix. I know you highlighted Keithley. But maybe give a sense of what's happening by geography outside of Keithley. We've been getting a lot of questions on Chinese semis. That seems to be okay, but whatever color you can give within Tektronix would be greatly appreciated.

Yes, sure. So as we said, we sort of sunsetted this 3D sensing discussion with the end of the third quarter, but that had a little bit of obvious impact in it. Really, as we said in the prepared remarks, Western Europe was pretty good for Tek, in particular, one of the highlights of Europe for all of Fortive. And China remained good in the mid-single-digit range. So we really -- and really, the semiconductor side of that was pretty good. So we felt pretty good about the quarter in that realm.

Really, the -- if you will, the decline -- a little bit of decline in the quarter was really due to North America. That was some -- a little bit of slowness, combined with some orders that moved into the fourth. So we think we'll improve that. We know we'll improve that number in the fourth quarter.

And our -- right now, from what we're seeing, the headline -- look away from the headlines but what we're actually seeing in China from an orders perspective is the continuation of the business in China with growth at Tektronix. And we're certainly watching all the things that you all watch to see if the headlines become reality. But at this point right now, the order book looks pretty good for the fourth quarter for China for Tektronix.

And just a follow-up. You sort of highlighted Fluke Digital doing well. Seems to have accelerated recently. You did bring out some new products. But in a big picture, what has changed to accelerate growth in that business?

Well, I think it's -- yes, it's a great question. First, I think we're starting to see some of the hardware sales that took a little bit longer. We talked about that. The vibe sensor that we launched this quarter, really a great product. It's a 3-year life, real ease-of-use, really gets to a real core modality of challenge for condition monitoring.

So the hard -- really, the killer hardware solution comes out. As we said, eMaint's been a good double-digit grower for, really, since we bought the business. So we're getting scale in that regard as well. So it's not -- I think we added 131 customers in the quarter as well. So the addition of new customers plus upselling to current customers and with the hardware coming along, it's starting to create just some really nice tailwinds for the business.

And your next question comes from Steven Winoker from UBS.

Jim, just I know you've hit it a couple of times, but just in good kind of FBS fashion, could you maybe give us a better sense on the why behind that simple comment you had around backlog getting pushed sequentially to Q4?

When you dig into all the little pieces of what is driving this, I know you're saying it's not macro-related, but what are kind of the whys behind some of that, to give us confidence like we would worry with some other companies that they may not actually see that push or it gets another quarter after that?

Yes, thanks for the opportunity. Clearly, one of the things we saw with the cadence at GVR was that it was a slightly back-end loaded quarter. And then the hurricane kind of came at a time when a lot of our employees had to deal with the issues at home and things like that.

And so we lost a number of production days, which not only pushed revenue into the fourth quarter but also cost us on the cost side that as well. So it was a headwind from a cost side as we put in premium freight and some of those things in order to protect the customers we could.

But it really -- it was really maybe a less linear quarter than we thought. A lot of our small net -- the nice thing about the small network owners was a number of them showed up in the quarter. Maybe the downside to that is they showed up later in the quarter. So that really pushes the big chunk of the backlog into the -- that we saw into the fourth quarter.

The other places where we built backlog really were just large orders. Some of them were customer situations. Everyone has its story, but I think as we -- as Chuck and I went through all the forecasts, we felt pretty good about -- a lot of it wasn't necessarily past due backlog but rather, backlog that was just going to be due. So combination of some orders getting delayed, some customers pushing things out was really the answer.

Now we're almost done with the month right now for us, and most of those orders have already revenued. So we feel good about the fact that those are now some of the improvements that we've had. And as we mentioned in the prepared remarks, some of these government orders were -- really just took longer than we thought. And like I said, some of them have already been revenued.

Okay, that's great color. And then I'd like to just shift gears to Tritium. That investment that you announced at the October 8 and mentioned just earlier in this call, that seems to me like it could be a rather significant move for Gilbarco Veeder-Root over time. Could you maybe just expand a little bit on that in terms of how that sort of -- that affects your thinking about the footprint and utilizing the footprint over the long term?

Yes, Steve, we're really excited about it. It's a prudent way to make an investment here that allows for us to sort of have the technology we need. We've got a great footprint, as you know, around the world with gas station owners. And we'll really -- as we're starting to talk to large-scale network owners, they're wanting to -- they're starting to think about an EV solution. That needs to be fast-charging obviously because in a gas station, it's not going to be something slow.

So this fast-charging technology that we've got that's IP-protected is really a great advantage for us, and we can globalize that business with a partner like Tritium. So in the U.S., that's going to be mostly large network owners. In Europe, it's going to be a little bit different. It will be some of the oil and gas folks, it will be some utility and so we'll have some slightly different partners as well to expand the business.

So -- and we do -- so I think we're really excited about what we can do to help them globalize the business with that technology. We do have a right to purchase the company as well. So if things play out the way, hopefully, we all think and depending on timing, I think that's what I mean by prudent. We don't know necessarily the timing of electric vehicles and how long it will take for there to be meaningful investment with some of our customers. But we're getting to work.

As I mentioned at the National Association of Convenience Stores trade show we had a few weeks ago, we launched -- this is where we made the announcement, and we had a lot of large scale customers who were pretty excited about the offering.

And your next question comes from Scott Davis from Melius Research.

I'm trying to get my arms around a couple of things. These quarters when you have these big spinoffs are always a little hard. When I look at kind of the color of the call, just trying to get some granularity on, if your price was up 60 basis points, are you now caught up to price/cost or are you still a little behind?

Scott, this is Chuck. So I think that we're ahead of price/cost because of the great work that our procurement team does and the pricing. But I think inherent in your question here is what we see is that we should accelerate from here.

Okay. So you should -- meaning accelerate -- be at least neutral to the rising prices that are coming -- or costs that are coming?

I think rather than 60 basis points, what I'm saying is I'd expect it to be greater than that going forward. As tariffs happen to us, not all, some of our countermeasures are supply chain in nature but some of them are price. But they don't -- haven't even hit yet really, so -- that's going to be a tailwind. And we think we're in an inflation -- we know we're in an inflationary environment, and we think that we will -- we expect to get more price than normal -- than historic.

Scott, maybe just one thought. We'll see it accelerate in the fourth quarter as Chuck said. So a lot of our countermeasures early in the third quarter were an attempt to -- kind of, what I'll call, short term in nature. And as Chuck mentioned, the supply chain and pricing things are really going to carry the water in the fourth quarter and into 2019.

And we've been pretty deep into this, trying to make sure that we're appropriately covered and we feel pretty good about that. The fact that we expanded gross margins in part because of the business model change in the quarter, I think, also reflects that we started to get some traction in some of those efforts relative to how we go into the fourth quarter.

Okay, that's fair enough. And then just to back up a little bit, in Gordian and Accruent, how long do you think it takes to get their -- get the margin structure of businesses like that up to your segment average?

Well, Gordian's pretty close already. So we -- I think it -- I think by -- probably, relatively quickly in both businesses really, I think we're probably in the range of that by 2019 and into 2020. So maybe the second half of 2019 and into 2020, we'll be in the zone.

And they're great businesses. We -- one of the caveats to that though is as we get into it and we do the 100-day strategic plan, I think the question we're going to ask ourselves is, can we accelerate the growth rate? So some of that might require additional investment.

And we've seen that benefit at eMaint to take it back to the question we had before. We're starting to see some of that accelerated growth at eMaint because we didn't necessarily put all the money to the bottom line early at eMaint. We decided to invest in sales and marketing.

So we haven't necessarily done that yet. We'll wait to sort of go through the 100-day strategic plan, but we certainly are going to look for opportunities to accelerate the growth rate. With the kind of gross margins that are in those businesses and the recurring revenue, we think that would be a prudent thing to do.

Okay. And just real quick. I never ask 3 questions, and I'm going to this time because I'm just trying to figure out when you have a hurricane impact like you had and say, it knocks you a point off the top line or something on Industrial Technologies, can you measure with any precision what kind of a margin impact that has?

Yes, I think the margin impact on volume, we calculate to fall through at greater than 50%. So yes, we've got a pretty good idea. But the margin in terms of -- operating margin that we're talking about in PI is also the fact that with the increasing volume at Gilbarco, we're also ramping up. And we're less efficient than we would normally be if -- due to really just the increasing volume we're seeing. But we expect IT to deliver 50 basis points of OMX in the whole business in -- for the whole year so we're going to be okay.

And your next question comes from Stephen Tusa from JPMorgan.

Can you just talk about -- you said you're watching China. What exactly, specifically, are you watching in China for 2019? What kind of makes you most cautious, I guess? Not that you're cautious, but what worries you the most out of China specifically for your business?

Yes, I mean, what we saw -- we said in the prepared remarks that there were some challenging parts, and what we meant by that is really the utilities. We saw -- where we have utilities sales principally at Qualitrol and a small part of Fluke, we clearly saw some investment going down in those parts of the business. Now they don't have the -- we still grew high single digits so it didn't have a huge impact.

But we're watching for the particular verticals to see if there's trends. We look at our point-of-sale at Fluke, which remains strong but we want to continue to watch that. That's sort of a good view of just the day-to-day economy. And of course, we're going to continue to watch semiconductor and electronics markets in China because of the impact that that has on Tektronix.

So those are probably some places that sort of move the needle, if you will, relative to our business. And obviously, the gas station business, the GVR, Veeder-Root business has been secularly growing because of the investment in double-wall tanks. And that's a trend right now that's going very well for us. And so there's certain secular trends within the GVR business that we'll watch as well.

Great. And just on the tariff stuff. Can you give us some color as to how you went about coming to that number? Almost all of our companies are kind of coming up with some reasonably sizable numbers and just a simple way to look at it, which is amount sourced from China and then applying like anywhere from 10% to 25% on that.

Maybe you could give us some color on how you came to the math that you're getting to, where you think you can offset it entirely with price on the tariff side. And what are you including in that? Which tariffs are you including?

So Steve, a couple of things. First of all, price is one lever we're using but it's not the entire lever. We're also using -- going after a supply chain where we're sourcing and in some cases, moving where we're going to be producing our products. But all those things come together to offset the tariffs that we see from all the 232 and the 301s, was 1, 2, 3, all 3 of those lists.

We actually have our -- we've got our teams work on it and the duty team sizes that very specifically, and there's -- and it's really pretty prescriptive, and we feel like we have a rather exact amount. I mean, we ship more and there'll be more duties, but we have a good handle on exactly what it is, and therefore, we've matched up to countermeasures.

There's generally a lag. We've seen a lag of when a new tariff -- not saying there will be more new tariffs, but a new tariff goes in where it takes us probably a better part of the quarter, at least a couple months, to get them in, it takes a quarter to fully offset that in a run rate. And so since we last talked, there's been new lists put out. And so that's why it's giving us a little bit -- a little more hit in the back end. But as I said, we feel we've got it handled and offset in 2019.

So what's the total number, year-over-year cost that you have to overcome?

The dollar number?

Yes, per share, $70 million?

Yes, we have it in the range of $50 million to $70 million.

And your next question is from Deane Dray from RBC Capital Markets.

I wanted to go back to the price question again. And if I heard it correctly, you said you had 4 out of 6 businesses had positive price. So who didn't get price? And any kind of calibration in terms of the ranges of price you are getting, any pushback from customers and what more you can do there?

Yes, I think part of -- first and foremost, I think as we look at the price metric, as we said, 60 bps. In every quarter, we'll have a few businesses that maybe don't hit that number. I think product realization, we didn't hit it in part because we've got some contracts in the third quarter with some U.S. military folks that carry price reductions as an example.

But on balance, we're really looking at the full year. And as we look in the -- I suspect we'll be in a good position as we get to the sort of second half price. We'll find that most of the platforms will have gotten price at that point. So that's really how we think about it.

And as Chuck mentioned on the previous question, we're going to see an acceleration of price. Most of the price increases are in, so the gross price is in. So from that perspective, I think we're going to be in good shape to continue to offset. And any price inflation -- any cost inflation that we have, whether it be tariffs or anything else, plus gain some of that price as a margin expansion opportunity as well in '19.

Got it. And then just separate topic. With the welcoming of Gordian and Accruent, it just becomes increasingly obvious that your current segmentation doesn't quite fit the new look for Fortive. So what kind of thought have you given to re-segmenting and what might that look like?

Well, I think that we've noticed similar things as we're really excited with Gordian and Accruent and all our acquisitions to come on board. But our current thinking is that we'll wait until we get to the other side of the ASP business. And then that sets the timing that'll make sense. Probably look at it at a platform level first, that's going to make the most sense, and it will be after that. That's what I would expect.

And your next question comes from [Michael Cole] from Wolfe.

Yes, this is Nigel Coe for [Michael Cole] here. Definitely Nigel. So yes, you're making us work pretty hard late at night here. So maybe a little bit of help on the 5% to 6% for 4Q. I guess, would you expect both segments to be in that range? Or are we seeing IT above that range with the GVR ramp-up and maybe PI is still seeing some of these headwinds? Any color there, in particular on some of the 3 or 4 major businesses, will be helpful.

I think we'll -- we should see pretty evenly distributed so I suspect around those numbers. So probably in the range -- they'll be in the range of each other probably. I don't think we'll see an enormous delta between the 2, to be honest with you, Nigel.

And I think you'll see the continuation of businesses like Fluke, you'll see the continuations -- you'll see some acceleration at Gilbarco, you'll see some good acceleration at Tektronix, as examples. It's kind of hard for us to not move the needle up in the whole business without the big businesses going up.

So I think you'll start to see that. Some of that will be backlog-related and some of that will be just demand that we see. So that's sort of our assumptions.

Regionally, we sort of think the U.S. will continue to be pretty good. As we mentioned, Western Europe; Europe, broadly defined, when we think of EMEA, maybe a little weakening. So parts of Western Europe but also Russia and the Middle East. Russia and the Middle East have been weaker and we would see that continuing. And continuing to see China and Asia be pretty good.

So I think that's kind of how we think about it regionally. And maybe give you -- but we think the big businesses, for the most part, Fluke hanging in there, Matco hanging in there, Gilbarco and Tek probably being a little bit better.

Great, that's helpful. And then looking at the IT segment ex automation. I think the numbers we're working with is about [10%] margin for the new segments. You mentioned stranded costs. Now are all the stranded costs from the automation divestments in that segment? And how does that look then as you start to weigh those stranded costs? Any quantification on the cost would be helpful.

Yes. They're not really that big a cost but you're right, they're in the IT segment and we'll get after them in the fourth quarter sum. We've got some opportunity here with some acquisitions to redeploy these people, so it's not necessarily needing that much restructuring dollars to get them out, though there could be some. But we'll get after that and it is in the IT section.

And then just quickly on ASP and I understand that China sign off not required for that deal. Is that because it doesn't meet the threshold for China sales?

Yes. Essentially, yes, that's the easiest way to think about it. I mean, I think as we think about all the regulatory hurdles, we mentioned in the prepared remarks that we got through the European Works Council consultations, which was a good step, and we don't really see any issues with China principally because it's not -- there's really no antitrust work at all.

So it's really focused on setting up subsidiaries and things like that, which are much simpler parts of the -- much -- hard to do but much simpler than things like waiting for antitrust approval.

And your next question comes from John Inch from Gordon Haskett.

So the core margin decline in the quarter of 25 basis points, Jim, you had thought -- you and Chuck had thought the margins will be up 30 to 50. Is the delta the lost production days, the lower volume? Is there some way to just sort of parse that out in terms of what accounted for that difference?

Yes, John, there's 2 things. One is evenly split between the lost production and the volume, we would have gotten volume through it greater than 50% margin. And the other, as we mentioned, we are accelerating into our Gilbarco business. And we saw some maybe growing pains and an increase in the volume there. And spent -- we will -- we expect to do better coming into Q4. But those are the 2 things that really dragged us down from where we thought we would be on our core OMX in Q3.

Did that stuff kind of play out, Jim, toward the end of the quarter in terms of, say, September, the weaker volumes and stuff? Or was this kind of a trend that you noticed that was relatively consistent?

Well, I think there were 2 things. There's the EMV wave that came in that was maybe towards the end. But there's other things that happened during the quarter that got pushed out that really are unrelated to that and some that -- onetime customer pushouts that just moved things into October.

That's fine. Field solutions, I think it was up low single versus mid-single last quarter and the compares looked about the same. You guys sounded pretty upbeat on Fluke based on the commentary. Was it all Qualitrol that drove that lower realized growth rate or was Fluke also a little bit softer?

I think Fluke was a little softer, maybe 100 bps or something like that but the big delta there is Qualitrol. We really saw a -- we have been working with the business, tried to work in a tough market and they just had a tougher quarter than -- really around the world as we mentioned in the prepared remarks.

So ISC did great. Fluke did great. So it's really -- and we think that will continue. And we're continuing to work on countermeasures at Qualitrol. But as I mentioned in the prepared remarks, we think that's going to -- luckily, that's one of our smaller businesses, but it is going to probably continue into 2019 near as we can tell at this point.

I mean, Jim, how confident are you in -- I mean, the big businesses like Fluke, Tektronix, given what's going on in the global economy, you've outperformed in China, but -- and Europe, it looks like a little bit but not every company is. I'm just -- you've lived through these sort of periods before. I mean, how do you respond? Like, are you guys doubling down various efforts? Are you thinking about other kind of measures for possible global softening? I mean, what's sort of the playbook?

Yes. Well, unfortunately, I have been through this kind of thing too many times. But I think at the end of the day, what Chuck and I have really done is we'll go through the budget cycle with the businesses here in the coming weeks here. And we'll really sit down on an individual-by-individual basis to understand where they think their revenue is going to be. And it is really going to be -- certain businesses are going to probably have opportunities.

I think right now, it's still a little early. We're trying to manage, trying to understand the headlines versus the reality. As I mentioned, in China, I think there's -- we have seen, as I mentioned, some places where demand has moved but in other places, we haven't really seen any change. And so we're going to maintain a realistic view while we continue to see how things go.

And I think this idea that globally -- I mean, I think we're already -- having listened to a lot of peers talk about this already and certainly others having talked with several CEOs as well, I think we definitely know that this globally tuned growth is probably not happening now, and so it's going to be more important to make our bets correctly, and we know how to do that.

And while at the same, making sure we take advantage of opportunities like we mentioned, North America, EMV, we think is going to be a tailwind for us next year, and so we want to make sure we take advantage of those opportunities.

And your next question comes from Andrew Kaplowitz from Citi.

Jim or Chuck, a recurring theme this quarter, I think has been a fair amount of [mobile] industry companies have talked about transactional cost headwind. How should we think about currency going forward for you guys? Was it just in a few emerging markets that you saw where currency really moved? And was the impact really contained in Q3? Could you see any more in Q4 and beyond?

This is Chuck. We saw little FX movements and it cost us about probably $0.01 in the quarter. But we don't -- if you're asking about hedging, we don't hedge for that. We just think that currencies move and we need to deal with those things. And in general, if they move enough, then we have to adjust our cost structure. But we're not seeing huge dollars for us in our businesses in the third quarter at all.

Andy, we do spend a lot of time with our teams on street price within each country, so where we've seen currency movement, we want to make sure that where street prices are impacted, we're taking prices up or dealing with that. So that's a pretty common piece of work that our operating company leaders do on a regular basis.

And Jim, you mentioned the strong order book, given EMV in North America and obviously, there was a hurricane impact in the quarter, I think you said GVR grew low single-digits in North America. What would it have grown at? And then as you look into next year, have you gotten now good visibility toward that acceleration that you've been talking about?

Yes, a few months ago, we said we thought that GVR would probably be mid-single digit in the second half, and we still view that. It's just going to be probably slightly higher mid-single digits in the fourth quarter and obviously, low single-digits in the third.

So the cadence of it changes a little bit because of the movement of shipments, but I think our view of the world and the business is pretty close to the same. We would like to see the -- I think we'll start to see some of the larger customers come into the order book here in the fourth quarter. And we're obviously looking for that. But we feel good about what they've got for a forecast at this point, given the order book.

And your next question is from Richard Eastman from Baird.

Just Jim, just -- I want to just return to EMEA for a minute. Again, kind of a slow single-digit growth rate. We talked a little bit about Qualitrol. I think you said JVS was weak. But the -- is the trend at all kind of disturbing here as we kind of head into -- again, head into '19?

Do you see some of these businesses -- and maybe you could give a little bit more color on Western Europe versus Middle East in that low single-digit growth rate. But just kind of talk about maybe an inflection point here in that region.

Yes, I think -- well, I think for sure that -- we don't have a huge business in Russia, so it doesn't necessarily move the needle for us. But a lot of folks talk about EMEA and they're talking about this kind of the way they run the business, right, which is a leader usually runs all those places. And really, we think about Western Europe. Fluke point-of-sale as an example in Western Europe was actually pretty good.

So that gives us some sense of optimism that some things are there, but then we've got a pretty decent sized business in Italy as an example GVR, that was obviously -- that was hindered. We mentioned the Qualitrol situation as well. I think, at this point, it's hard -- it's too early to tell what Europe might look like for '19.

But I think as we think about Western Europe, we've had really -- 3 really strong years in Western Europe. And I think that the mid-single-digit growth that we saw in the last several years is definitely moving to low single-digit. We certainly heard the decline in this quarter. So I'm not sure I would call it a decline next year but we're certainly seeing a slowing, broadly defined.

Okay. And then just a very quick question on -- you just mentioned Fluke Health Solutions in -- kind of in passing. So this is -- basically, you said it was plus double digits. That is still primarily Fluke Biomedical. How did Landauer perform in the quarter and what are the prospects there?

Yes, they were in mid-single-digit in the quarter. Fluke Health had a very good quarter. In fact, we were with the team yesterday for their strategic plan. Really excited about how they're bringing the integration together, how they're really thinking more broadly about a broader set of solutions now that they've got all these different customer sets.

So they certainly outperformed in the quarter for sure. But we're ahead of where we wanted to be with Landauer at this point. And now the team is really working on some strategies to stay ahead. And I think we're very excited about what that team is doing.

And your next question comes from Jeffrey Sprague from Vertical Research.

Two things from me. First, just on EMV. Can you give us a sense of now what you're actually expecting in 2019 as a growth rate off this modestly rebased 2018?

Yes, I think we think right now, it's probably looking -- I mean, it's -- crystal ball would say probably mid-single digits for next year.

And then secondarily, just trying to sort through actually the margins and kind of the deal accounting noise. Just a little confused on the transaction cost, kind of the 90 bps or so that's in PI. That's only roughly $8 million. So Chuck, is rest of that $56 million that we see in the bridge, is that just in Other?

Yes, that's in Other because you've got -- you don't really have ASP in one of the segments appropriately and A&S is not going to be there going forward.

I see. And then Other looks like it's been kind of inherently low if we pull that out. Is there something else going on there, too?

No, I don't think so. I didn't think you'd think that was low. We've got a normal corporate cost in that as well.

Okay. All right. Just $58 million, if I take out close to $50 million, it seems like a low number. But I'll follow up...

Yes, we can follow that up, but I think of the total amount, there's -- some of it's in -- into the businesses, Gordian and Accruent did get in there so you're missing about $18 million, I think, relative to the deal cost associated with Gordian and Accruent, but we can follow up on that.

And your next question comes from Scott Graham from BMO Capital.

Just, I'm looking at the -- Slide 9, the bridge, the initial thinking on 2019. And the closed acquisitions, when we throw ASP in there, we consider A&S. It looks kind of like largely a push, correct me if I'm wrong. And I'm sure when you transact in the amount that you have and still will with ASP that, I guess, that's kind of not what you're thinking that you would want sort of net accretion there.

So how does the pipeline look right now? And could you give us an idea of what your capacity is at this moment. And do the acquisitions that have closed and with ASP coming, is that going to slow you down a bit?

So we'll tag team this one. I think the funnel looks good right now. I think we -- as we've talked -- since we've -- over the last couple of years, we continue to see opportunities available to us. The Gordian and Accruent deals bring new parts to the funnel, that's the nice thing about those acquisitions. They come with new market opportunities, new served market opportunities in which we could look at.

Because they were PE-owned, they were pretty active on the M&A front, and so they come really with funnels already in hand, and so we've got some opportunities there. ASP does as well but obviously, we'll wait to close that deal.

So I think first and foremost, we like the funnel, we like the situation we're in. We've been pretty busy over the last 90 days, that's for sure. But we don't necessarily slow the market work down or the cultivation work down. And so the opportunities are still there. So the current market situation that's going on over the last couple of weeks, obviously, the consternation and that kind of thing probably shakes the trees on some other things, but we haven't seen those yet.

And then Scott, to your other questions, I'd just simply say we have $2 billion, $2.5 billion of room that maintains investment grade in 2019. And then with our strong cash flow that, as we said, we keep to delever -- we have to delever going forward.

In terms of Slide 9, I think if you're saying a push, if you mean a push from this year, I think you need to add in what's not in there is you're either -- and we can work with you off-line on this, is the organic margin expansion or the ASP, you might -- you're probably missing that.

Actually, what I meant was the on the acquisitions. It looks like the closed acquisition plus ASP minus A&S is roughly a push. Is that a fair estimate?

No. Because there's some -- it's complicated and it's easier to come off-line but you're missing the retired shares that comes with the Altra deal, which is understandable and how the mandatory convert plays into that. So let's walk you through that, but I think that there, it's not an exact push.

Great, that would be helpful. The other question is, I'm on the same pages. I didn't hear you talk about organic at all. And I know that at the investor meeting, I think you were kind of being pushed to move up your long-term target of GDP, GDP plus, but with things a little bit weaker in Europe and some concerns in China. But then you add in a little faster growth acquisitions, can we still stay at that GDP/GDP plus level for organic for next year?

I think we tried to give you early color even before our budget, so I think I'd stay away from any specific numbers at this point until we see how the quarter plays out. See how we end, that has some influence in it as well. But we certainly think that that's in the range of options for sure.

So I think we'll certainly, as we get closer to it, provide some deeper level of insight as that goes. What we try to do with the 2019 early view is really just to try to give you a little sense of how we're thinking about this, given all the puts and takes that have occurred, as you and Chuck were just talking about. We want to make sure you at least had some view of how we're thinking about it. And as we get more details, we'll obviously share them with you.

And your next question comes from Joe Giordano from Cowen.

This is Tristan in for Joe. Just a quick one here. What's the share count that you're using for your 4Q guide?

I think it's 356 million.

And there are no more questions in queue.

Okay. Well, thanks, everybody, for the time this evening on the East Coast. We really appreciate all the time and energy you put in to really help and really listening to our discussion. We're exceptionally excited. I think the third quarter, to use the word transformational would be an understatement with everything we were able to accomplish in the quarter.

We're incredibly pleased at where we're -- where we sit today and we're even more excited about what we can do with these businesses here in the coming months and years. So thanks for your time. We'll look forward to seeing many of you in various places here throughout the fall. But thanks for your time and certainly, Lisa and the IR team are available for questions and follow-up. Thanks, everybody. Have a great night.

And this does conclude today's conference call. You may now disconnect.