My name is Erica, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortis Corporate First Quarter 2019 Earnings Results Conference Call. I would now like to turn the call over to Mr. Griffin Whitney, Vice President of Investor Relations. Mr.
Whitney, you may begin your conference.
Thank you, Erica. Good afternoon, everyone, and thank you for joining us on the call. With us today are Jim Leko, 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, May 10, 2019. Instructions for accessing this replay are included in our Q1 2019 earnings press release. We completed the divestiture of the Automation and Specialty business on October 1, 2018, and accordingly have included the results of the A and S business as discontinued operations for current and historical periods. The results presented on this call are based on continuing operations.
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 on a continuing operations basis. 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 ks for the year ended December 31, 2018.
These forward looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward looking statements. With that,
I'd like to turn the call over to Jim. Thanks, Griffin, and good afternoon, everyone. Today, we reported 1st quarter results that reflected a solid start to 2019, setting us up to deliver another year of strong double digit earnings growth. Our first quarter adjusted earnings per share was in line with our expectations as the performance of Industrial Technologies led by strong growth from Varco Vida Root was partially offset by near term headwinds within professional instrumentation. We also generated strong free cash flow growth of greater than 30% in the quarter, reflecting the vitality of our businesses as we continue to invest in organic innovation and pursue acquisitions that will accelerate our strategy.
On April 1, we closed the acquisition of the Advanced Sterilization Products business from Johnson and Johnson, welcoming the business and its employees to the Fortive family. We are very pleased that we closed this complex carve out on schedule in just under 10 months. The $2,700,000,000 transaction represents our largest acquisition to date and provides Fortive with a strong position in the attractive $4,000,000,000 mid single digit growth medical sterilization and disinfection market. With a strong global installed base and leading brands, ASP brings growth, high recurring revenue and significant earnings potential to the Fortive portfolio. While ASP is our most recent acquisition, we're excited about the progress being made by the other acquisitions closed over the past couple of years.
Gordian and Acruent have continued their early momentum, generating strong growth through the Q1 of 2019. Likewise, ISC, Landauer and Orpak are performing well as they embrace the Fortive business system in order to deliver enhanced go to market execution, innovation and improvements in free cash flow. Growth of these businesses continues to drive the evolution of the Fortive portfolio toward a higher growth, less cyclical profile. We look forward to sharing more detail about our progress when we are together at our Investor Conference in May. With that, I'd like to turn to the details of the quarter.
Adjusted net earnings were $245,600,000 up 6.7% over the prior year and adjusted diluted net earnings per share were $0.69 Sales grew 6.7 percent to $1,600,000,000 reflecting a core revenue increase of 3.7%. Core revenue growth was highlighted by the strong performance of GVR as well as Industrial Scientific and EMC. Acquisitions, including Gordian and Accruent, contributed 580 basis points of top line growth, while unfavorable foreign exchange rates reduced growth by 2 80 basis points. Geographically, high growth markets core revenue grew mid single digits led by Asia and the Middle East. China posted another strong quarter with high single digit growth led by GVR, Fluke and Tektronix.
Developed markets core revenue grew low single digits, reflecting continued strength in North America and strong performance in Japan. Core revenue growth in North America was mid single digits, led by GVR, Tektronix, EMC and Industrial Scientific. Western Europe was relatively flat as strong growth at GVR and Qualitrol was offset by slower growth at Fluke and weakness at Tektronix. In the Q1, we posted a gross margin of 51%, including 160 basis points of pricing. Reported operating margin profit margin was 13.6%, reflecting 2.40 basis points of dilution from acquisitions and 190 basis points of dilution from deal related costs.
Core operating margins were down 70 basis points as stronger volume at GVR was offset by lower than expected growth at Tektronix and Fluke and unfavorable foreign exchange rates across the company. During the Q1, we generated $137,000,000 of free cash flow and a seasonally strong conversion ratio of 84%. Free cash flow generated in the quarter represented a 31% increase year over year.
For the
full year, we continue to expect free cash flow conversion of greater than 120%. Turning to our segment. Professional Instrumentation posted sales growth of 8.7%, including core revenue growth of 1.8 percent. Acquisitions contributed 9.50 basis points, while unfavorable foreign exchange rates reduced growth by 2 60 basis points. Reported operating margin of 14.4 percent reflected 7.40 basis points of dilutive operating margin associated with acquisitions and deal related costs.
Core operating margins decreased 190 basis points, reflecting the weaker than expected revenue growth at Tektronix and Sensing, the impact of tariffs and unfavorable foreign exchange. Advanced Instrumentation and Solutions core revenue increased low single digits as strong performance in Industrial Scientific and EMC was offset by lower growth for Fluke and Tektronix during the quarter. Field Solutions core revenue grew low single digits with low single digit growth in developed markets, paced by the continued strong performance of ISC. High growth markets grew slightly as solid growth from Fluke and ISC was largely offset by continued weakness at Qualitrol. China posted another strong quarter with mid single digit core growth.
Fluke generated low single digit core growth led by double digit growth at Fluke Calibration. Fluke's industrial growth in the Q1 was impacted by slower point of sale trends in Western Europe and the United States and the stronger finish in 2018. We did however see improvement in point of sale growth in North America over the back half of the quarter. Fluke Digital Systems grew greater than 30% led by Emate, which added more than 50 new customers and generated a greater than 20% increase in annual recurring revenue. Fluke continued its strong broad based growth in China with point of sale increases reflecting the enhanced strength of Fluke's competitive position and healthy momentum as it ended the quarter.
On the new product front, Fluke Networks launched 2 new fiber testing and inspection products during the quarter, which have gotten off to a strong start. ISC delivered high teens core growth led by North America. INET saw another quarter of greater than 20% growth, while rental had a opportunity for bundled solutions that combine Inet with the company's rental offering in the coming quarters. ISC delivered over 100 basis points of operating margin expansion in the Q1 as the application of FBS continues to drive consistent operational improvements. Qualtrul's core revenue declined low double digits during the quarter, in line with our expectations.
While the company has started to see some early signs of more stable conditions in certain markets, we continue to expect the headwinds from soft market conditions to remain a challenge throughout 2019. Product realization core revenue increased low single digits as high teens growth in the EMC was moderated by a flat quarter from Tektronix. EMC saw strong base business growth along with the continued progress of its product offering for commercial satellites with the first launches of satellites employing its fully networked pyrotechnic release solution during the quarter. Flat growth at Tektronix was a result of contrasting performance across developed and high growth markets during the quarter. Developed markets grew low single digits led by strong growth in North America and Japan, which was partially offset by a decrease in Western Europe.
High growth markets were down mid single digits as a strong quarter in China was more than offset by declines in South Korea and the rest of Asia. Tektronix oscilloscope offering continues to drive growth, benefiting from the momentum behind the 6 Series MSO, which was introduced in the Q3 of 2018. As part of the ongoing effort to reshape and focus the Tektronix portfolio, the company also recently signed an agreement to contribute its video test and monitoring business to a new entity formed with Telestream and Genstar Capital, Telestream's private equity owner. We expect the transaction to close at the beginning of Q3. Core revenue for the Sensing Technologies platform decreased low single digits in the quarter.
Sensing had a slow start to the year, experiencing headwinds across certain parts of its core industrial end markets, including slower demand trends from electronics and semiconductor OEM customers. Growth remained solid across the platform's medical and defense end markets, while recent new product launches continue to drive strong growth in critical environment applications. The platform performed well in China registering high single digit growth was offset by low single digit declines in North America and Western Europe. Moving to our Industrial Technologies segment, revenue grew 4%, including core revenue growth of 6.4%. Acquisitions contributed 80 basis points, while unfavorable foreign exchange rates reduced growth by 3 20 basis points.
Reporting operating margin of 16.3 percent reflected 20 basis points of dilutive operating margin associated with acquisitions. Core operating margin increased 130 basis points, driven by the strong volume at GVR in the quarter. Our Transportation Technologies platform core revenue grew low double digits led by greater than 20% in high growth markets and high single digit growth in developed markets. GVR delivered mid teens core revenue growth highlighted by a low double digit increase in developed markets and a greater than 20% increase in high growth markets. Developed markets were led by North America reflecting a combination of accelerating EMV sales and the lapping of ERP implementation issues that affected performance in the Q1 of 2018.
Gilbarco continued to generate strong growth from EMV sales, driven by programs with major oil company partners. Phillips 66 recently announced the release of outdoor EMV capability for its sites running the Gilbarco Passport point of sale system. Gilbarco also reached an agreement with Shell to offer its EMV ready Passport Edge point of sale solution to Shell's dealer network on a monthly subscription basis. China saw greater than 30% growth driven by the continued regulatory tailwind at Veeder Root from ongoing double wall tank upgrades. GVR's strong results in high growth markets included significant growth in India as GVR's comprehensive product and service capability, including recent innovation within Orpak automation offering, led to a number of large tender wins during the quarter.
As expected, Teletrac Navman declined high single digits in the Q1 as strong growth across Asia Pacific was more than offset by a decline in North America. The TeletracNavman team remains focused on stabilizing the North American business, where the high level of customer churn that emerged in 2018 remains a headwind despite some improvement during the quarter. TeletracNavman was recently awarded a FedRAMP provisional authority to operate, making its director product eligible for procurement by all federal agencies based on its security and reliability as a third party cloud solution. Moving to franchise distribution. The platform declined low single digits during the Q1.
Hennessy's performance was impacted by significant customer inventory reductions, while Matco was up slightly. At the company's annual tool expo, Matco launched exclusive mobile AC recycler line optimized for uptime and service reliability that has been well received by the market and drove shop equipment growth during the quarter. Turning to the guide. We are updating our full year 2019 adjusted diluted net EPS guidance to $3.55 to $3.65 representing year over year growth of 16% to 19% on a continuing operations basis. The revised annual guide includes $0.20 for the addition of ASP and a reduction of $0.05 due to the Tektronix video transaction.
The guide also assumes 3% to 5% core revenue growth, 25 to 50 basis points of core OMX, an effective tax rate of 17% and free cash flow conversion of greater than 120% for the year. We're also initiating our 2nd quarter adjusted diluted net EPS guidance of $0.86 to $0.90 representing year over year growth of 18% at the high end. This includes assumptions of 3% to 4% core revenue growth and an effective tax rate of 17%. To wrap up, our first quarter results came in as we expected despite some near term challenges that impacted our shorter cycle businesses as well as headwinds from tariffs and foreign exchange. For the quarter, we delivered high single digit total revenue growth, mid single digit core revenue growth and greater than 30% growth in free cash flow.
With the closing of ASP at the beginning of the second quarter, we also took another significant step forward in the ongoing transformation of the Fortive portfolio, greatly increasing our exposure to an attractive healthcare tied to long term secular growth drivers and adding another source of high recurring revenue and consistently robust free cash flow. Looking ahead with the combination of a resilient core portfolio, the foundation of the Porta Business System, the growing contribution of Gordian and Accruent and the addition of ASP, we remain well positioned to deliver another year of top quartile earnings growth. We look forward to seeing many of you at our upcoming Investor Day in New York on May 16,
where we
will give you deeper insights into the digital strategy at Fortive as well as an update on our portfolio transformation efforts. With that, I'll turn it back to Griffin.
Thanks, Jim. That concludes our formal Erica, we're now ready for questions.
And your first question comes from Steve Tusa.
Hey, good afternoon, I think, for you guys, right? Sorry. How are you doing?
Good evening,
Thanks. On the revenue contribution from acquisitions for Gordian and Accruent, I think when I add them up, I guess, to something like on a pro rated basis, like $100,000,000 a quarter, if the acquisition contribution contribution in that segment was like $80,000,000 I think or something like that. I mean is there seasonality to that business or am I doing the math wrong?
Yes. No, you're not doing the math wrong. There is a seasonality to Gordian and Accruent. It's a little bit different than what our traditional or core business is. And we're we think maybe we get 20% 45% in the first two quarters of the year.
And I think that it's going to have like maybe a 46% be waiting first half to second half.
Okay. And any on accordion, is there any market dynamics there that are moving around relative to expectations?
No, no. In fact, we had a good quarter of both, Steve. It's Jim. We saw good strength in the construction spend through the platform. That's the job order contracting part of the business or what we call procurement solutions.
That business was up double digits. So and that's roughly 60% of the business. So now at Gordian, we saw good performance and we saw good performance at Accruent as well. So we're as we said in the prepared remarks, we're off to a very good start. And I think one of the things we like the best about the business in addition to its great secular drivers is we really are getting an outstanding team in both businesses.
Okay. And then one last one for you. Just from a macro perspective, and now that you've kind of had an opportunity to absorb the Q1 here, looking back, was there any sort of pull in or pre buy in the Q4 in any of your products? And maybe just touch high level on what you're seeing in the macro out there. It seems like there are a lot of different businesses moving around on you, some negative, some positive, relatively consistent performance, I'd say.
Is there anything going on the macro that kind of worries you for the second half?
Yes. So maybe put a little bit of the geographies in context, Steve. I think what we saw in our overall North American growth was pretty good, but obviously Gilbarco drives a lot of that because of the quarter they had. I think the good news in the quarter at Gilbarco was really the high growth markets. Now those are specific to Gilbarco, so I don't know if you get a macro read there as much.
A good high growth market performance pretty much in every part of the world. A lot of that we said in the prepared remarks. What we did see relative to your polling question or what we saw is we definitely I think we highlighted this in February that we thought there was somewhere around 70 to 100 basis points of revenue in the Q4 that was probably came out of the first. We now think that number is closer to $125,000,000 and that's a chunk of tariff avoidance. And then I think the other thing is we definitely saw North America in a number of places sort of start out slow and then get better through the quarter.
Point of sale at Fluke as an example clearly got better through the quarter. Matco got better in March. So we did see some trends that were improving through the quarter. And I would say just in our distribution businesses, mostly weaker in professional instrumentation. Clearly, Europe was a weak point for our distribution in Europe.
Got it. Okay. Thanks a lot. Yes.
Thank you, Steve.
And your next question comes from Scott Davis.
Hi, guys.
Hey, Scott.
Hi. Just I don't think I've ever asked a question on sensing technologies business at all, but what does that business turn around 2019 or we now kind of hoping for 2020?
No. Well, it's probably going to be a little we always thought it was a low single digit in the year and that changed that point of view doesn't really change. A little bit different number, but probably the lower part of low single digit. They were negative in the quarter, but will continue to get a little bit better as and their comps get a little easier in the second half as well. One of the good things about the business is they've done they're obviously a very profitable part of the business and they did a good job in protecting free cash flow in the quarter.
So they'll move to growth here through the rest of the year and they'll continue to contribute better from an earnings perspective as they go through the year.
Okay. And if I just look at Slide 4 and you just take a look at the R and D numbers as a percent of revenues, you've bought a lot of businesses spend a lot of money on R and D. And Jim, what's your early take on if you're getting your bang for your buck on that spend? Is there any way to get any efficiency on it or productivity? And I know it's tough to scale it because they're very different companies that you own, but just a little comment maybe on R and D.
Yes. I think a couple of things. 1, clearly, the software businesses like Gordian and Accruent are going to require a little bit more R and D. And quite frankly, they were pretty tight on R and D being owned both being owned by private equity. We will probably add to their R and D spend as we look forward to opportunities to accelerate growth and to build out their platform and solutions.
As you know, the great addition of these businesses, the continued additive features to current customers, which really delivers strong earnings potential over time. So we'll do that. But in many standpoint, the overall Fortive number may not move all that much because as we'll look for productivity as we're always looking for productivity in other places. We're through some of the big spend at Tektronix on their new platform as an example. There's clearly what we often call dynamic resource allocation where we're really moving money into places where we have the highest growth opportunities.
Okay. That's helpful. Thank you, guys. Good luck. I'm going to put our cocktail now.
It's been a long day.
Yes, it has been a long day.
And your next question comes from Julian Mitchell.
Hi, good afternoon. Just looking at Slides 89, if we just look at the core revenue growth contribution to EPS, you did about $0.05 or you're expecting to do about $0.05 in the first half. The year is guided at about $0.25 so a big sort of step up in that contribution from first half to second half. Maybe just walk through some of the biggest moving parts in terms of that slip up, please?
Well, I think the bigger thing is just as we move through the quarter, our volume steps up sequentially. We normally, if you think from Q1 to Q2, our revenue is going to go up by 20%. Obviously, our expenses don't the fixed expenses don't see that. So that creates a normal step up through the year. We generally think of our earnings growth EPS being contributed $20,000,000 in the Q1, dollars 25,000,000 in the second, third and $30,000,000 in the Q4.
And so when you do that, it gives you this profile. And so I think that that's most of it. The other thing last thing I'd point out is there's FX in the first half, particularly I think there's $0.03 in Q2 or Q1 and then $0.01 or $0.02 in Q2. And then it really flattens out in the back half. So those are some of the dynamics that's giving a little bit of a back end of a ramp through the year.
But it's mostly the revenue ramp.
Understood. And then my second question may be around Professional Instruments specifically. You talked about the sensing assumptions there. Any color maybe on what you're seeing on the order intake in Fluke and Tektronix? How quickly you think those accelerate maybe in the rest of the year?
And whether you thought you suffered from much destocking in the distribution facing businesses in PI in Q1?
Yes. I'll take the last part first, Julien. We definitely think we saw destocking in some places at Fluke and Tek. I would say definitely in Europe for both businesses and probably and certainly some in the U. S.
Tech had an interesting dynamic where their direct business was up significantly more. They had like mid single growth in their direct business, but their distribution business was down in the Q1. So that really kind of we attribute a chunk of that to destocking and a little bit of what we said before, which was kind of tariff avoidance, pricing avoidance that occurred in the Q4, as I mentioned in an answer a few minutes ago. So I think that provides a dynamic where we'll see that play out and improve the Q2 and through the rest of the year. I would also point out that Tek had a book to bill over 1 in the Q1.
I think Fluke did as well. But so we certainly feel like we're seeing some solid performance. And I think in both cases, we're starting to see the point of sale numbers start to improve as we move through the quarter. So I think we started off a little slower than we thought. Obviously, the Professional Instrumentation at just under 2% core growth certainly reflects that.
Tech being flat certainly reflects that. But we think it we're not really expecting a big macro improvement here to deliver what we need to deliver. It's really more just kind of working through that inventory destocking and really just kind of seeing the current rate sort of play out. Great. Thank you.
Thanks, Julien.
And your next question comes from Deane Dray.
Thank you. Good afternoon, everyone.
Good afternoon, Deane. Could you
take us through the Tektronix video transaction? What's the what are the economics? What's the opportunity here?
Yes. The strategically and Dean you know as well. So we've always been looking from a portfolio perspective to always put our businesses in the best position for success. We also asked our operating companies to do that as well. And I think the Tektronix team really came back with this understanding that, hey, by combining with the Tele those businesses businesses was looking better and better.
So we'll combine the businesses. We'll have a minority interest in the combined entity and we'll really benefit from the success of the synergies in the business and what over time are going to be good because
we think the synergies are strong.
Got it. And then on the 160 basis points of price, how does that spread across the businesses? Where did you get the most price?
And was there any give up?
Hey, Deane, this is Chuck. So for the most part, we got price across all of our company operating companies. A little bit more we're a little more successful instrumentation side at 80 basis points. So but we I think we were successful across most places. We struggled for 1 couple of places where we struggled on price for some very specific reasons.
At Tech, they were down 50 basis points, which is not what we were expecting, and we're going to work to regain that, but that was a little bit different. And also at EMC, but unrelated to they have some contractual things that was mostly known about coming in. But everywhere else, we're really happy with 160 basis points in total, where we normally would get 40 or 50.
That's great. And just on tech, on the pricing, was that give up on the direct side or through just distribution?
Probably more on the direct side as those are more as you can imagine, those are more case by case decisions on the business. And so I would say it leaned more to the direct side. A little bit in distribution, but some of it was price not realized on the distribution side because of to think about it this way, we expected more price with the January 1 price increases, but because we had more pull into the quarter from distribution, we sort of avoided the price metric, if you will, in the Q1, if that makes sense, Dean. It does. Thank you.
Thank you. Thanks.
And your next question comes from Andrew Obin.
Hey, guys. Good afternoon. Hey, Andrew.
Just a question on Professional Instrumentation margins. They've sort of been negative
for a
couple of quarters now. What would it take
operationally for the margins to inflect back up?
It's a great question. There's a couple of things. One is they've been struggling for a couple of quarters. Remember, tariffs are really a big impact at both Fluke and Tek. And so for professional instrumentation, that's really it's hammered there pretty well.
So we'll lap those tariffs or the majority of them in Q3. So we'll start to deal with there. Also, Professional Instrumentation has high fall through on their on shipments. And so we need to that pull in or that avoidance that maybe some of the distributors went for, we just need to get more volume out the door and get back to growth. So that hurt us in Q1.
So that will start to moderate. And one other factor is FX has really hurt us a little bit more than we expected, the fall through on those things. And again, we're going to start when we get into the second half, we should lap those as well. So if FX just stays here, there's some there's less impact in Q2 than Q1, but when we get to Q3, most of those should go away. So I would expect that we'll see we'll be back to normal margin expansion in the second half of this year.
Andrew, the other thing that it's just maybe important to keep an eye on is we had our best quarter in the history of the PI. We had 300 basis points of margin expansion in the Q1 last year or so. So when we look on a 2 year stack there, we still feel pretty good about the margin expansion in the core business. Obviously, the tariffs, as Chuck mentioned, have some impact there. But I think when we look at sort of the core work that we typically do, we feel pretty good about that and that will get better as we work through the year.
And just a follow-up question on growth. So Q1 core growth was 3.7. I think in the second quarter, we're
guiding 3 to 4.
For the year, the range is still 3 to in
the
core growth for the year with acceleration in the second half, particularly as
the comps get tougher in the second half? Thanks.
So I think first of all, we probably want to see Western Europe get better. China to continue, we were high single digit in the month during the quarter. We've said for a while now that China was likely to be more mid single digit for the year. So if China held in there, maybe got a little better and Western Europe got better, I think we'd more be at the high end of the range. And also we also have some easier comps in some places, like at Sensing and at Fluke.
So if we get to the higher end of their businesses as well, there's some opportunity. So we'll build the business model around that range. And what we feel really good about is we're going to deliver double digit earnings growth in the first half of the year on that 3% growth. And we're going to deliver double high teens earnings growth through the year. So even in that range of growth rates, I think the earnings growth is going to be despite the fact that we missed the PI revenue number by a little bit.
The free cash flow up 31%, I think was a good testament of our operational ability to continue to deliver. And cash
flow certainly stood out. Thanks a lot.
Thanks. And your next question is from Richard Eastman.
Good afternoon.
Jim or Chuck, could you just speak to the video business that you're contributing, tech's video business you're contributing to this venture. What kind of revenue does it have? What kind of profits? And just when do you expect that to be complete?
So I'll take the second part first. We expect it to be completed early in the 3rd quarter is what we're looking at. And the business in terms of size is $55,000,000 or $60,000,000 in revenue with for us, it was probably around a I think it's a 20% operating profit.
Okay. So pretty decent. And then I just have a question on the EPS guide for the 2nd quarter. I'm a little bit curious, I would have thought so $0.86 to $0.90 and I'm kind of referencing your 25%. So I guess Chuck, your 25%.
So I guess $0.90 kind of fits. But I would think with the ASP acquisition, I mean, shouldn't that add approximately a 0.0 to the quarter? It sounds like the studio business doesn't come out till Q3. So what's the drag there on the EPS for the Q2?
Actually, I think the there's only 2 things that you might be missing. I agree with the nickel on ASP. If you look at our core business without the benefit of Gordian and Accruent ASP and FX, you get a number that's around for the quarter at 25% is $0.80 You build it up with $0.05 of ASP, as you noted. And there's I think we've got $0.06 in for Gordian and Accruent. And so that's probably the one thing is there's still $0.01 to $0.02 of tailwind on FX.
Okay. Okay. Very good. Thank you.
I'm just want to make sure I call Headwind.
The headwind. Yes, yes. I understood.
All coming up 18% earnings per share growth.
Okay. All right, fair enough. Thank you.
Thanks, Rick.
And your next question is from Andy Kompoulis.
Hey, good afternoon, guys.
Hi, good afternoon, Andy.
I'm getting a push up, SG and A was up 4 50 basis points, over 30 percent of sales. It's not really surprising, it's a lighter quarter in sales and given the acquisition related activity you've had. But is it up simply because of that? Would you expect it to come down now versus a relatively a seasonally high Q1?
So if you're just talking about the total SG and A, actually, it's up quite a bit because of the amortization and also the purchase accounting related to the deals and the deal costs. That's actually the main step up there.
Nothing unusual in there other than just the increased M and A activity, correct?
It's just there's a little bit with Gordian and Accruent where they've got really high gross margins and so they're above the fleet average. But the first two things I talked about is 90% of it.
Got it. And then Jim, just focusing on China for a second. You mentioned last quarter that you're seeing some slowing in the tech order book in China, but it doesn't look like you saw any real slowdown in that business. So when you focus on China, I mean, you mentioned maybe you can be resilient here. Has a lot of that resilience been GVR?
Did tech actually outperform in China? And then what's going on in the rest of Asia? Because you mentioned places like South Korea being a little weak.
Yes. So on Tek specifically, we saw as you said, we saw a little bit better China than we thought. I think some of that I'm still we still expected that to moderate a little bit. As I said, it's high single digits in the quarter, but probably mid single in the full year. So I think that's still going to be a good year after I think 4 years in a row of either double digit or high single digit growth for tech in China.
And it's been relatively resilient as you said. I think we saw most customers in most segments of the market pretty good. And the other thing I would call on just relative to China macro is that Fluke's point of sale in its shops, which is a pretty good bellwether for the market was good and Fluke's growth was pretty broad based in China as well. So I think China is holding in there. I wouldn't I'm not going to be a pundit that says that everything's great and it's going to turn wonderful.
But I think it was certainly solid in our it was a little better than we thought it would be overall. And as you mentioned GVR's continued regulatory performance, but that will wane a little bit in the second half. Relative to tech in the rest of Asia, very a lot of our business South Korea is 3 d sensing related and it's Keith Lee related. We probably have more semiconductor process, if you will, or manufacturing exposure in Korea. And so while that's not a big issue for Fortive, it does impact the Asia business as we cite it.
And so we saw that in Korea and in other parts of Asia. So that was probably the one of the headwinds that we saw at Tektronix in the quarter for sure. That moderates a little bit through the year just because we have some easier comps.
Thanks, Jim.
Thank you, Andy.
And your next question comes from Jeffrey Sprague.
Thank you. Good day, everyone. Hey, how are you doing? Good. Hey, maybe just for me on ASP.
Just curious how the business performed during this carve out period. I think the 2017 revenues were $775,000,000 or so. What's the revenue base here as it enters the Court of Empire?
Probably about $8.25 $8.20 somewhere around there.
And are you so that sounds like it's off top of my head 5% growth or so, maybe a little bit more than that. Is that
They're mid single digit in 2018, so yes.
They did. Okay. And is that basically what's implicit in the guidance for the year here for it's not going to be organic obviously for you this year, but you see that type of growth continuing over the balance of 2018?
Yes. We've got a we'll probably be in the low to mid range right now. I think we're still getting a sense of what the business can be like. We had a couple of one time things that were last year that I would say maybe their But we think the we know the market is growing mid single digit, in that range, kind of 3 to 4. But we think the we know the market is growing mid single digits.
So I think as we said a year ago when we announced the signing of the deal that we felt good about over a time period we could turn the business into a mid single digit grower. But I think implicit in the guide with about 12 months of TSAs, Jeff, and working through Johnson and Johnson on some of the revenue profile for a time period, it's probably going to be a more like low single digit until we've got every aspect of the business under our ownership.
And I think also there was obviously you had to do a lot of prep work to kind of accept the carve out into your enterprise. But I think after ownership, you were looking at some pretty heavy work on their matrix management structure and the like. Is that still in front of you? Is that embedded in the guide? Or is that something that, I don't know, maybe gets capitalized in acquisition accounting or something?
No, I think if
you're talking about the standing up the team that's going to run this, I think that we've done quite a bit of that. I think the thing that's in front of us really is basically outside of the U. S, we've got these TSAs that we're going to have to bring them under into our IT platform. And that's going to go on for probably 4 quarters. And as we is that the cost structure that led to the returns for the business is every bit in place.
So we feel very good about that. We think we still believe in the opportunity to improve the gross margins as well. And then finally, when you look at the so we know a lot of the tenants of the core tenants of the value creation are there. And we did this at a much lower interest rate cost and at a much different tax rate. And so the return profile has improved pretty a great deal since we announced the deal 12 months ago 10 months ago.
Great.
Thank you for that.
Thanks, Jeff. Thanks, Jeff. And
your next question is from John Inch.
Hi, everybody.
Chuck, the convertible senior notes you just issued seem to have been done at very favorable terms. I'm not sure if that's incrementally additive even by a penny or 2 to sort of the thought process here. And I was wondering about just the balance sheet in general, given if you can do that with that tranche, are there other things you could perhaps be doing or a thought process around the balance sheet or is it pretty well locked in?
Well, I think in terms of the guide first, thank you. We like the deal with the convertible notes. But we as we came out this year, while we didn't know the exact terms that we would get, we had most of that factored in when we set the original guide. It's not accretive to the guide, but we do we like the deal that we did. Are there other things around the balance sheet?
It doesn't just because on this one as a convertible note, I mean, it's treated as debt, not equity. So I don't think it gives us any more debt financing for M and A around that. But are there other things around the balance sheet? We're there's we're continuing to look and see what our optionality is. And as we've said for a while, we'll consider what the best fit at the time is for financing and raising capital.
But it sounds like it's
going to be tied to probably future M and A. It sort of brings up the question, Jim, how are you thinking at this stage in late April about additional portfolio moves in 2019? I mean, you guys have done a ton for the last couple of years, probably a lot of digestion work, I'm assuming, but you obviously want to be opportunistic. Is there an early read in terms of kind of how you thinking about these opportunities today or are you intent to sort of sit back and wait?
Yes. I'm I would rarely be described as someone who sits back and waits on anything. But I feel obligated to answer that as we're certainly leaning into opportunities. I think John, we've been pretty busy. I think we've been as busy as we've been over time period.
So we'll continue to look for opportunities. As you said, we just closed 24 days ago, the largest acquisition in the history of the company. And so we certainly are digesting that and spending a considerable amount of time to make sure we do that right. And that's important. So I don't want to in any way shape or form suggest that that's not a first priority because it is.
But we also want to make sure we just between Gordian and Accruent and also with ASP, we've now bought, call it, almost $10,000,000,000 of served market opportunity with it. And with that comes more opportunity. So we feel good about the opportunities in front of us. But again, I think we have we now have the we certainly have the ability to be disciplined like we always have been, and we're return focused as well. So almost sunsetting our 3 year anniversary here pretty soon.
As you know well, the deals ebbed and flowed, and I suspect that will continue to be true. Got it.
Thanks much guys. Thank you. Thanks, John.
And your next question is from Josh Pokrzywinski.
Hi, Josh.
Hi, good afternoon, guys.
We're doing great.
Excellent. So just want
to follow-up on Gordian and Accruent. You had them under your belt for a while now. And I think obviously some differentiated assets in the software space. But it seems like every company out there is coming out with kind of a software add on for everything they're doing and obviously the big software guys are still everywhere. When you think about your total software exposure, including those 2 and Inet, eMaint, you're kind of putting all in one big basket, How would you characterize the competitive landscape?
Are you seeing more folks show up? Do you feel like the niches are well protected? And how does that make you feel about kind of more activity in those spaces?
Well, I would say that the environment hasn't changed a lot in the last several months. Certainly for the last few years, it's been competitive in the sense of we've just the 2 major deals that we've done were in private equity hands. And private equity is showing up increasingly in a lot of these transactions. So I would say I wouldn't necessarily say we want to play where we're advantaged, where we have a proprietary view of the business, where and certainly now with some of the additions where we have synergy. And so I think those we're going to play in places where I think we are more likely to win.
But I think the most important part is first having a strategic view of how to build a workflow and to really understand what you can do with the business, not only with the business you have, but also with additional things in building more scale. And as you point out now, with Gordian and Accruent, EMADE alone and sort of that facilities maintenance, facilities management software space, we're almost at $500,000,000 That gives us a tremendous amount of scale in which to do things. And then in some of our other businesses where we have strategic positions, we're adding on to things to make the workflow more competitive. And that builds on the strength of the brands, whether it be Gilbarco or Tektronix or whatever. So we're continuing to do those things as well.
And I would say the other thing I would say is that while maybe the follow-up question might be pricing, I don't think we're necessary for great assets, I don't think we're really seeing differences in pricing over the last year or 2. I think the crummy assets maybe have prices have increased. And so everything in the bottom end has moved up. But I think when you look at what great growth, great margin profiles with good high recurring revenue, those really strong assets with differentiated market positions, fundamentally that pricing really hasn't changed in the last year or 2.
Got it. That's helpful, Jim. And then just one shifting gears a little bit. Thinking about the second half or even maybe beyond the second half, at some point too long, you're going to run into some pretty tough comps on GVR. And I think orchestrating that handoff between that business and some of the PI stuff where it's kind of the higher quality businesses over time are the ones that are getting more of the focus.
Do you anticipate that being a smooth handoff, I. E, some of the headwinds today or end market shuffling today times itself to where it goes away by the time GVR has tougher comps?
Yes. So I think Chuck and I can tag team this a little bit. I think strategically we're certainly looking within Gilbarco, within Transportation Tech and within Fortive to countermeasure these things. So within Gilbarco, we're building out our high growth market positions. We've done 2 really almost 3 acquisitions over the last several years in India as an example to build our positions in high growth markets.
We just launched a new dispenser for high growth markets that is I think a really great product. So build out our positions in markets where we're that are non EMV, that's number 1. I think number 2 is to continue to take advantage of opportunities like in electric vehicles where our Tritium investment is doing some things and we'll certainly continue to do that. So that's what we're doing within Gilbarco. And then certainly in the platform, we're looking for new opportunities.
And certainly, as you mentioned, the do these things are going to be all opportunities for us to do these things are going to be all opportunities for us to countermeasure, if you will, the EMV shortfall, which inevitably will happen. I think we've been consistent well over for at least a couple of years to say that inevitably there will be a step down at some point in time. That's, I would say, somewhat predictable, probably not within a specific quarter, but certainly within a couple of quarters, we have a pretty good sense for that. Yes. Josh, if I could add on it, if you want to size that when you start looking at in 'twenty beyond 2021, 20222023, it's probably $100,000,000 to $200,000,000 step down over an 8 quarter period, which is probably about $0.10 to $0.20 And if you think about $0.10 a year, I think we can handle that in terms of an earnings power.
Also worth noting, dollars 1,700,000,000 of acquired assets growing at high single digits is also part of and Jim mentioned some of those in the GVR platform.
Awesome. Thanks guys. Thanks guys.
And your next question is from Scott Graham.
Hey guys. Good afternoon. I was hoping you could give us a little bit more color on what the PI impact from acquisitions looks like on a full year basis? It was minus 4.10 this quarter. What does that look like on a full year basis?
Are you talking about on the SG and A there or on the
I'm talking about on your exhibit on Page 6, the operating margin on bundle. I
see. I have to think about that. And I prefer not to just spitball it here because we've got the ASP coming in here with that its amortization. But it's likely to be in the same size as what we just saw with Gordian and Accruent for the full year because they're rough. If you think about $2,800,000,000 spent on Gordian and Accruent, dollars 2,700,000,000 on ASP.
You just kind of look about this similar impact on our total operating margins. But I think that anyway, so I think that's what I would expect to see.
That's fair. And so when
you were talking earlier about
the upward inflection in the PI margin, you were
just talking about the core?
Yes. That's right. Okay.
For sure. I also noticed that when you talked about OMX, not only did that number come down from plus 50 to plus 25 to 50 on a full year basis, but you talked a lot about mix. I was hoping you could tell
us a little bit more, maybe size
that for us. Is that 30, 40, is that that 25 basis points of takedown? What happened with OMX both the guidance and what's going on with mix within that?
Well, most of what happened with the guide for the year is the Q1. And so our Q1 coming in at negative 70% didn't make the second half go up anymore. And it's really not much more complicated than that. I do think that we will see sequential improvement from Q1 to probably flat to a little positive to back to normal because the big headwinds of that we called out in order of mix and tariffs and FX are really a first half problem and then they normalize when we get to the second half. And we're Scott, we're very focused on continuing to countermeasure all those things.
So I think the idea that I think Chuck and I have spent a considerable amount of time making sure that we've got the actions and the businesses to go after this. And that's why I think even though you see a little bit of a lower OMX, you see the continued strength in EPS and you see the continued strength in free flow. So the metric itself, it's a little bit influenced by the way you measure tariffs and things like that. But at the end of the day, what we don't change is you see the incredibly strong high teens EPS growth and a continued focus on 120% free cash flow conversion. Good to hear.
Okay. Thank you. Thank you, Scott.
And your next question comes from Nigel Coe.
Thanks guys. Good afternoon. Hi, Nigel. Hey. Just got a lot of ground, but I do want to go back to Gordian and Accruent.
They've been rolling into core, come September and into 4Q. So maybe just speak to how those performed in 1Q core on a like for like basis? How did they hold up in this slower environment? And the second part on that is just stripping out to do the math on EBITDA margins. By the way, the initial exposure is great.
It looks like the margins came in at 23%, 24% for Gordian Accruent. Is that math correct? Because we're working with low 30s for those 2 companies.
Yes. You're talking about the EBITDA for Gordian and Credit? Would you say
Yes, that's right.
That's I think for this year, yes, it starts probably a little under that, but not much and ramps through the year. So yes, that's correct.
Okay. And then the like for that growth
Nigel, your first question was a little bit of I think around durability of Gordian and Accruent. Is that No, no, it's really more about
how they performed during the quarter, Jim. Okay, got it, got it, got it.
And I would also say just to that point is and maybe just it's a small but important caveat is that we spent a bunch of time with the businesses and we may choose to invest in the business through the year. In fact, for sure, we've already approved some additional investments to accelerate the growth in the business too, which may not necessarily pay out in half percentage by a few time we'll make those decisions and that could impact that percentage by a few 100 basis points depending on when and how we do it.
Okay. And the growth, Chuck, what was the growth of quoting accruance?
High single digit in Q1 and that's what we expected, that's what we're seeing and we expect that as that comes into Q4 this year, that's probably a 30 point lift to our core growth.
Okay, great. And then just quickly on the ASP accretion. The phasing of accretion, it looks like a nickel in 2Q. Obviously, it looks like a $0.07 to $0.09 3Q, 4Q. Is that the TSA roll off you alluded to?
Is that considered to the better accretion in the back half of the year? And are we still looking at $0.35 for the
12 months?
So $0.30 $0.35 for the 1st 12 is that's still the range. And yes, for the most part, on why it's stepping up as it goes through time. There's also a little bit of seasonality. It's like many businesses, the businesses, the Q4 is going to be stronger than the first and whatnot. But yes, those are the major levers.
Okay. Thanks guys. Thanks, Nigel.
And your next question comes from John Walsh.
Hi, good afternoon and good evening. A lot of ground covered. So just a quick one here. Just looking at the language in your press release around the headwinds on professional instrumentation. Just wanted to make sure I understood clearly.
I mean, that's really a way to call out what you were talking about with the distribution channel or is there anything else that, that language alludes to, I guess?
No, it's really kind of in our short cycle businesses primarily at Fluke and Tek. The probably greater Q4 than we originally expected, which led to some and we'll call most of that probably tariff avoidance. So it's that. There is a little bit of point of sale starting slower too in the 1st part of the quarter as well, John. So I wouldn't I think it's those two things.
The destocking, some of it is because of the point of scale. It's also some of it because of the increase in inventory that they had at the end of the year.
Okay,
great. And then I guess looking at the Q, you guys call out Germany as a country. Obviously, there has been a lot of concerns around Germany given what we've seen from some of the macro data there. Your sales were actually down very modestly. Maybe just help us understand really what drives your business there and maybe even broaden it out to Europe because actually thought the European performance was a little bit better given some of the macro scares?
Yes. I think as we said, I would I'm still I still think Europe is a challenge for us. So in the quarter, Qualitrol and GVR, which Qualitrol was a project, GVR was more secular typically and not a good read on the macro. That's a broader Europe comment, John. When you look at tech was down in Europe and a chunk of that was in Germany.
Fluke had a weaker but they weren't down in Europe. They were weaker than normal. So I think those are maybe a little bit more of a tell tale sign of the macro. And so we don't have a big, big belief that that's going to significantly improve for the rest of the year. We'll sunset some easier comps.
But I think we're watching we're reading a lot of the same macro stuff everyone's reading. We're certainly looking through a lot of the other peer company filings to get a read on that. And I think it seems like it kind of depends. So the good news is like some of our software businesses have been pretty resilient. I think Accruent was up high single digits in Europe as an example.
So the places where we have good resiliency within the business model are still doing pretty well. Great. Thank you.
Thank you.
And your last question comes from Joe Giordano.
Hey guys, good afternoon. Hey Joe. Hey Joe. Hey.
So Chuck, did you give the specific number for Fluke? I think you said Fluke Digital, what the growth was in the quarter. And did you give like the legacy Fluke growth in the quarter? I don't believe I did. Total Fluke was low single digit though basically, yes.
Low single digit? Okay. And was there a management changes going on there this quarter? Yes. So I think we're finishing, but we did we announced a couple of changes.
We put in many of our senior leaders have been sort of owner operators and and businesses since our inception. We've hired somebody from the outside that was in Immersion for a while and put him, Mark Tremblay into the Fluke job and we promoted Tammy Newcomb into the Tektronix job. So those two organizational announcements have been out there and are we're really excited about having 2 really strong leaders into new positions. Also freeze Pat and Wes up. Wes obviously has picked up a lot with all the new acquisitions.
Pat certainly has been the lead role on ASP. So gives us the opportunity for the 2 of them to spend more time on building out the platforms and that kind of thing.
And then what did the I just want to
make sure on the build up here for Gordian and Accruent, I'm getting the math right. So I think it's $0.06 in 2Q is the expectation. Was it something like $0.04 in the Q1 here? I think we're saying $0.05
Okay. And then and
we're having that into core in 4Q, right? So the incremental on top of that in your full year, that's just in from the Q3, right? Yes. It turns core in the Q4.
Okay. Just wanted to confirm that
the bridge we're looking at apples to apples. Okay. Thanks guys.
Thank you. Thanks, Joe.
I think that's it. Thanks everybody for a great interaction and the time today. Obviously, a busy day for everyone, and so we appreciate the time you've taken to be with us. We're really proud of the work we did in the quarter, certainly some things to fix. As I think we mentioned, we're very focused on that, but at the same time, the ability to sort of do what we believe is going to be a strong year.
We're off to a good start. We look forward to seeing all of you in New York in May, and we'll give you more detail on ASP, onboarding and Accruent. We'll certainly outline our digital strategy and certainly give you a better perspective on a number of the strategies that we're utilizing to drive growth this year, but more importantly, to build a better fortive over time. Thanks and Griffin and team and Chuck are around for questions tonight, tomorrow and next week. Take care everybody.
Have a great week.
Thank you. This does conclude today's conference call. You may now disconnect.
Thanks.