My name is Ian, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to the Fortive Corporation's Fourth Quarter 2018 Earning Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, simply press the pound key. 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, Ian. Good afternoon, everyone, and thank you for joining us on the call. With us today are Jim Lico, our President and Chief Executive Officer, and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. We present certain non-GAAP financial measures on today's call. Information required by SEC Regulation G relating to these non-GAAP financial measures are available on the investors section of our website, www.fortive.com, under the heading Financial Information. A replay of the webcast will be archived on the investors section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call. A replay of the conference call will be available shortly after the conclusion of this call until Friday, February 22nd, 2019. Instructions for accessing this replay are included in our fourth quarter 2018 earnings press release.
We completed the divestiture of the Automation & Specialty business in the fourth quarter on October 1st, 2018, and accordingly, have included the results of the A&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-K for the year ended December 31st, 2017, and subsequent quarterly reports on Form 10-Q. 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. Our performance in the fourth quarter provided a strong finish to 2018, capping off another transformational year for Fortive. Looking at the full year, we generated adjusted earnings per share of $3.06 on a continuing operations basis, a 25% increase year-over-year, driven by 4.1% core revenue growth and 35 basis points of core operating margin expansion. The strong top-line performance of our core portfolio reflected solid execution against a range of ongoing growth initiatives as we drove product innovation and invested in our market-leading brands in order to continue to enhance our competitive advantage, take market share, and position Fortive for sustained outperformance over the long term. Over the course of 2018, our team significantly accelerated the portfolio transformation process that we have pursued since our spin.
During the year, we announced several strategically significant transactions, including the acquisitions of Gordian and Accruent, the divestiture of the A&S business to Altra, and the pending acquisition of Johnson & Johnson's Advanced Sterilization Products business. These transactions greatly advance our stated strategy to reposition the portfolio in higher growth, less cyclical markets. Taken together, the total acquisitions announced since the spin represent $1.7 billion in total revenue on an annualized basis, growing at a high single-digit rate. These acquisitions, which average 70% recurring revenue, greatly enhance the recurring revenue profile of the Fortive portfolio. The acquisitions of Gordian and Accruent advance the execution of Fortive's digital strategy, which is focused on addressing a range of critical software-enabled workflows for our customers. Both Gordian and Accruent are off to a good start, demonstrating strong growth momentum through the end of the year.
Turning to ASP, we made significant progress during the fourth quarter, employing the Fortive Business System to prepare for a successful transition of the business to the Fortive family. Consistent with what Johnson & Johnson recently announced, we now expect to close the transaction late in the first quarter or early in the second quarter of 2019. We're very excited about the contribution ASP will make once it's integrated into Fortive, and we look forward to discussing the company and the opportunities ahead when the transaction closes. With that, I'd like to turn to the details of the quarter. Adjusted net earnings were $325.1 million, up 30% over the prior year, and adjusted diluted net earnings per share were $0.91. Sales grew 11.4% to $1.8 billion, reflecting a core revenue increase of 7.4%.
All platforms posted core revenue growth, highlighted by Transportation Technologies, Product Realization, and Sensing Technologies, as well as very strong performance at Fluke and Industrial Scientific. Acquisitions, including Gordian and Accruent, contributed 580 basis points of top-line growth, while unfavorable foreign exchange rates reduced growth by 180 basis points. Geographically, high-growth markets core revenue grew high single digits with continued strength in Asia and Latin America. This growth was led by Gilbarco Veeder-Root, Tektronix, and Fluke. China, in particular, posted a strong quarter with low double-digit growth. While we remain cautious about certain parts of the China market, we are pleased with the continued outperformance in the fourth quarter and our strengthening competitive position. Developed markets core revenue grew high single digits, reflecting continued strength in North America. Core revenue growth in North America was high single digits, led by strong performances at GVR, Fluke, EMC, and Industrial Scientific.
Western Europe grew low single digits, led by high single-digit growth at GVR and Sensing Technologies, and mid-single-digit growth at Tektronix. In the fourth quarter, we posted a gross margin of 51.1%, our fifth consecutive quarter of gross margins at or above 50%. Pricing accelerated to 80 basis points with four platforms delivering positive price during the quarter. Operating profit margin was 16.8%, with core operating margins increasing 40 basis points as strong PPV and productivity were partially offset by the dilutive impact of tariffs and unfavorable mix during the quarter. During the fourth quarter, we generated $387 million of free cash flow, representing a seasonally strong conversion ratio of 166%. We generated free cash flow for the full year of $1.1 billion, an increase of $180 million or 20% on a year-on-year basis.
We were also pleased to see our annual free cash flow conversion increase to 120%, an 800 basis points increase from the prior year. Turning to our segments. Professional Instrumentation posted sales growth of 14%, including core revenue growth of 5.2%. Acquisitions contributed 1,020 basis points, while unfavorable foreign exchange rates reduced growth by 140 basis points. Reported operating margin of 16.1% reflected 545 basis points of dilutive operating margin associated with acquisitions and transaction expenses. Core margins were flat, reflecting the dilutive impact of tariffs at Fluke and Tektronix and some one-time warranty-related expenses in the quarter. Advanced Instrumentation and Solutions core revenue increased mid-single digits during the quarter, driven by continued outperformance at Fluke and ISC, and strong growth at Tektronix. Field Solutions core revenue grew low single digits, highlighted by mid-single-digit growth in developed markets, including strong performance for Fluke and ISC in North America.
This growth was partially offset by a slight decline in high-growth markets due to continued weakness at Qualitrol. China, however, posted a strong quarter with low double-digit core growth. Fluke delivered mid-single-digit core growth, led by mid-teens growth at Fluke Calibration and mid-single-digit growth at Fluke Industrial. Fluke had a strong finish to the year in China, highlighted by the increasing momentum behind Fluke's e-commerce efforts, which saw strong point-of-sale increases and continued share gains for its handheld products. Fluke Health Solutions saw a strong contribution from Landauer, which performed ahead of our expectations in its first full year within Fortive. The team leveraged FBS both commercially and in the factory, finishing with mid-single-digit growth and 270 basis points of gross margin expansion for the year and positioning the business to deliver strong returns in 2019 and beyond.
We're excited about the progress we continue to see at Fluke Digital Systems. The eMaint CMMS offering continues to deliver strong growth, up greater than 20% for the quarter and full year. Fluke's innovative sensor offerings are a key element of its digital strategy and continue to generate a strong positive response from customers, including the Fluke 3561 vibration sensor, which was recently named a 2018 Breakthrough Product by Processing Magazine. Industrial Scientific delivered low double-digit growth led by North America and Asia. iNet saw greater than 20% growth for the quarter, while rental revenue increased high single digits. During the quarter, ISC completed the transition of the iNet offering to a fully cloud-based solution, enabling the delivery of better speed and uptime to our customers.
ISC's commitment to FBS continues to yield strong operational improvements, including a significant decrease in working capital and a related increase in free cash flow over the course of the year. Qualitrol's core revenue declined high teens during the quarter, in line with our expectations, reflecting continued softness across its core geographic markets. We continue to expect the soft market conditions that challenged Qualitrol throughout the year to remain a headwind well into 2019. Product realization core revenue increased high single digits for the quarter, led by high single-digit growth at Tektronix and mid-teens growth at EMC. EMC posted a record quarter for revenue as it delivered against the backlog it carried into the quarter, including the volume that had been subject to customer-related delays as mentioned last quarter. Given strong order flow, EMC finished the year with record backlog, setting it up well for continued growth in 2019.
Growth at Tektronix was broad-based across both developed and high-growth markets. Developed markets saw mid-single-digit growth driven by Japan, North America, and Western Europe. We were pleased to see another quarter of double-digit growth for Tech in China, driven by strong performance at Keithley. Tech continues to benefit from momentum it has generated from its targeted higher-growth end markets. New product introductions remain a key driver of Tech's growth, reflecting the continued momentum behind the five and six series oscilloscopes, which saw key customer wins in both the automotive and power end markets during the quarter. Our Sensing Technologies platform increased high single digits in the quarter. All of the platform's major regions saw strong growth, including high single-digit growth in Western Europe and mid-single-digit growth in North America and China.
The strong performance in the quarter was driven by industrial and medical end markets, as well as revenue shifted from the previous quarter due to hurricane-related delays. We are excited about the number of new product initiatives across the sensing platform that launched in the fourth quarter, including the Setra next-generation industrial pressure transducer, the AXD, which is well positioned to gain market share based on superior range of features and functionality. Moving to our industrial technology segment, revenue grew 8.1%, including core revenue growth of 10.3%. Unfavorable foreign exchange rates reduced growth by 230 basis points. Reported operating margin of 20.5% reflected a core operating margin increase of 95 basis points, driven by the incrementals on the strong volume in the quarter. Our transportation technologies platform core revenue grew low double digits, led by greater than 20% growth in high-growth markets and low double-digit growth in developed markets.
Gilbarco Veeder-Root delivered mid-teens core revenue growth, driven by mid-teens increase in developed markets and a greater than 20% increase in high-growth markets. Developed markets were led by North America, reflecting strong EMV sales. As expected, Gilbarco continued to see an acceleration in EMV sales, including a major customer win at Murphy USA and the continued strength of our programs with Shell and Chevron. China saw mid-teens core growth driven by continued demand at Veeder-Root for submersible pumps and automatic tank gauges related to ongoing double wall tank upgrades. GVR's performance in high-growth markets also included significant growth in India as synergies from the combined Gilbarco and Orpak product offering continue to drive share gains to enhance GVR's strong position in that market. Orpak continues to perform well globally, exceeding expectations and generating greater than 50% of revenue from software to enhance GVR's recurring revenue profile.
Teletrac Navman declined low single digits as low double-digit core growth in Asia-Pacific was more than offset by high teens decline in North America. Teletrac Navman continues to perform well in Asia-Pacific, where the fourth quarter represented the 11th quarter out of 12 with double-digit core revenue growth. In North America, we have continued to experience a high level of customer churn, which remains a headwind for the business in 2019. Moving to franchise distribution. The platform grew core revenue low single digits. Matco delivered low single-digit growth reflecting strong performance from diagnostic and specialty tools. Tool storage grew low single digits during the fourth quarter, and we are pleased with how that category performed over the second half of 2018, particularly within our premium tool storage product line.
Matco's Maximus 3.0 diagnostic scan tool platform continues to perform well, driving improving growth in the diagnostics category and accelerating recurring revenue opportunities from the sale of MaximusFix, Matco's proprietary subscription-based automotive repair database. The Max 3 is expected to be a consistent growth driver in the coming quarters as Matco continues to roll out additional features and enhancements in the platform. To wrap up, we ended the year with a significantly enhanced portfolio with exposure to better end markets tied to attractive secular drivers, reduced cyclicality, a growing share of recurring revenue, and consistently robust free cash flow. This enhanced portfolio has us well positioned to continue to drive organic growth and innovation while also deploying our growing free cash flow into acquisitions that will accelerate our strategy and enhance our long-term competitive advantage.
Alongside this portfolio transformation, we continue to generate strong core operating results consistent with the Fortive formula, driving full-year adjusted earnings growth of 25% and increasing free cash flow conversion to 120%. This year once again demonstrated the power of the Fortive Business System, enabling our team to execute a series of complex capital allocation strategies to transform our portfolio while driving innovation to better meet our customer needs and delivering sustained top-quartile earnings growth for our shareholders. Turning to the guide. We are initiating our full year 2019 adjusted diluted net EPS guidance at $3.40- $3.50, representing year-over-year growth of 11% to 14% on a continuing operations basis. This does not include any contribution from the pending acquisition of ASP.
The guide also assumes 3%- 5% core revenue growth, core operating margin expansion of 50 basis points, an effective tax rate of 17%, and free cash flow conversion ratio of greater than 120% for the year. The adjusted diluted net EPS guidance also reflects the dilutive impact from the mandatory convertible preferred stock on an if converted basis. The fundamentals across our enhanced portfolio remain strong, and we once again expect to outperform and deliver sustained double-digit adjusted earnings growth in the year ahead. We are also initiating our first quarter adjusted diluted net EPS guidance of $0.64- $0.68, which includes an assumption of 3% to 4% core revenue growth, core operating margin expansion of 25 basis points to 50 basis points, and an effective tax rate of 17%.
In closing, I'd like to extend my personal thanks and appreciation to our Fortive teammates across the world for their continued dedication to our shared purpose of delivering essential technology for the people who accelerate progress. It is the commitment of our team which provides the foundation for our enduring culture of continuous improvement, and enables us to consistently deliver value for our customers and top quartile returns for our shareholders. With that, I'd like to turn it over to Griffin.
Thanks, Jim. Before we move into questions, I'd like to take this opportunity to announce that Fortive will host its Annual Investor and Analyst Day on May 16th, 2019 in New York City. Further details will be circulated soon. That concludes our formal comments. Ian, we're now ready for questions.
Ladies and gentlemen, if you'd like to ask a question, you may do so by pressing star and then the number one on your telephone keypad. Again, that is star one. If you would like to withdraw your question, press the pound key. In the interest of time, please limit yourself to asking one primary question and one follow-up question. Our first question is the line of Scott Davis from Melius Research.
Hi. Good afternoon, guys.
Hey, Scott. How are you?
I'm good. I wanted to reconcile a little bit, guys, and I know you don't have all the answers in the world, none of us do on China, but you said cautious on China, but all your numbers looked really pretty strong across the board. Is there anything in your forward order book or anything more tangible other than what we all read in the newspaper?
Well, I think there's a couple things, Scott. One, yeah, you're right. We had another very strong year of performance in China. We finished strong. I suspect some of that had to do with maybe a little bit of business that might've got pulled in as people were maybe avoiding price increases and stuff. On balance, a very strong fourth quarter for China as you identified. I think we are basing this on a couple things. One, we're going to sunset some slower, like the double wall tank upgrade at Gilbarco as an example. That's going to slow down a little bit in the back half of the year. That's one thing that we kind of know. We certainly think that we believe there'll be some slowing of some of the business at Tektronix, and we've seen that a little bit in the order book.
Still good growth, mid-single-digit growth, probably a little slowing off this double-digit that we've been in. Those are a couple of examples. We continue to believe we're outperforming, certainly it's early days. You've heard me say this a few times that January and February don't tell you a lot in China. You really have to get to March before you have a sense for that. I think as we turn the corner on the first quarter, we'll have a better sense if that number has some upside to it.
Okay, fair enough. Then, I'm normally not nitpicky like this, I'll say it anyway. Your 50 basis point margin guide. You lost about 50 basis points in the year to acquisitions, I think on the gross margin line at least. I would think getting those businesses kind of back to some sort of level of fully integrated and normal could be a nice tailwind. I guess what I'm asking is how much of that 50 basis points is fixing what you bought versus what you're going to get naturally out of your 4% core revenue growth midpoint number.
The 50 basis points for the year. We've always got things that happen during the year, in every year. That's got some pluses and minuses. Yeah, we'll fix some of those things at the end of the year, they won't repeat. There could be other things that come in. We might have upside to that number for the year, we are having to overcome the impacts of tariffs. While we've offset them at the EPS level, when you take price to offset the tariffs, that falls through at zero OMX, zero OP. It gives you a little bit of an optical headwind there.
Our next question is from the line of Julian Mitchell from Barclays.
Hi, good evening. Hey. Just the first question, maybe on the first quarter guidance. You have core growth guided pretty similar for Q1 as for the year. EPS, though, is starting out kind of flattish year-over-year with the total year up low double-digit. Maybe just help us understand the bridge there. Is it all about a lot of FX headwind in the quarter, and then the margins, it's the tariff issue and some cost inflation? Maybe just any color on that.
Yeah. Thanks, Julian. A couple of things. As you noted, there's FX. We've got $0.04 of FX headwind in the year. Half of that is sitting in Q1, so there's a couple pennies there. Our tax rate is up year-over-year. We had it 17%, still really good. Those are probably three big things we caught. While I think we're guiding nominally lower in Q1 at 3%-4%, rather than 3%-5% for the year, and that's reflecting maybe a little stronger finish in Q4. I think those are the main puts and takes there.
Understood. Thanks. My second question. When we're thinking about professional instruments specifically, what kind of core incremental margins should we expect for 2019 in terms of expansion? Maybe how quickly do we see that? Do you anticipate Q1 you still have a bunch of these, maybe warranty issues, and inflation to get over? I guess I'm trying to ask how back-end loaded do you think the core margin expansion is at PI this year?
No. The warranty impact is a one-time that we booked in Q4, that's not going to be a drag going forward. Normally, I think we would expect probably 30%-40% in VCM's incrementals falling through in the quarter and the year. Just on the back end load, I think we're pretty level loaded after Q1.
Great. Thank you.
Thanks, Julian.
Our next question is from the line of Steve Tusa from J.P. Morgan.
Hi, good evening or afternoon wherever you are. You mentioned price offsetting tariffs. What is the level of price you have embedded in that 3%-5%?
Well, we did 80 basis points of price in Q4, and I expect it to trend up from there as it has been all year. It might probably get all the way to 100 basis points. That's 1%.
Okay. Then on GVR for the year, what are you assuming for growth in GVR? How much of that is a function of, I guess you mentioned there was the other regulation dropping off, obviously the EMV stuff is rolling in here, maybe just talk about how fast GVR can grow and then what you're expecting on kind of headwinds and tailwinds from these various regulatory drivers.
Yeah. Steve, it's Jim. I think we're sort of looking at mid-single digit at Gilbarco right now for the year. They finished stronger than we expected. Some of that overage in the fourth quarter was certainly Gilbarco with double-digit growth in the quarter. We think they're going to continue to be strong through the year. While the double wall had some impact on our overall China number, in the bigger business that we have at Gilbarco, it's not going to be a tremendous headwind. They've continued to do well in other high-growth markets like India. We think on balance, their high-growth business will be pretty good this year. Those markets are a little lumpy, so it could move around from quarter to quarter, we think the high-growth markets for Gilbarco will be good this year.
Then back to EMV, we saw good business, we saw strength, and customers clearly are starting to think about the trends going forward and some of the things that they need to do to be in compliance by the end of 2020. I think as we said in July, I think Gilbarco played out slightly stronger than we thought where we were when we were in July.
Why wouldn't Gilbarco be better than mid-singles then, if that's the case? I mean, don't you have really easy comps here in the first half of the year? I mean, are you just being conservative on this front?
I think like anything else, the year, there's certainly probably potential upside. I think at the end of the day, we did finish very strong, so the fourth quarter does impact the full-year number. We'll probably be a little bit better in the first half than that number. Obviously we're going to have a really tough comp off the double-digit number that they would just post in the fourth quarter. Yeah, you'll probably see some higher growth rates, probably as an example, in the first quarter. If you remember, we had some ERP issues last year in the first quarter, so we will see probably higher than that mid-single digit number in the first quarter for sure.
Okay, cool. Thanks a lot.
All right. Thanks, Steve.
Our next question is from the line of Andy Kaplowitz from Citi.
Hey, good afternoon, guys.
Hey, Andy, how are you?
Good, how are you? Jim, could you talk about Western Europe, actually? I mean, it was up low single digits, which was better than last quarter. I think you were down low single digits. As you know, there are concerns about growth over there. What actually improved in the quarter, and what's embedded in your growth forecast for 2019 in that region?
Andy, you're talking about Western Europe, right?
Yeah, correct.
Yeah. We were a little better. Still low single-digit in the quarter, in the fourth, Andy. That came in around where we thought it was going to come in. We'd been a little down, I think, in the third quarter. Even though the fourth quarter was a little better than the third, we still think Europe is probably low single-digit kind of environment. Maybe touches mid-single-digit, I think we still are conservative on the European forecast right now based on a lot of the things we all know about and just things we've seen as an example on a point of sale. One of the drivers in the quarter was Gilbarco. We had a pretty good mid-single-digit quarter in the fourth, and we don't expect necessarily that to continue through in Europe for the whole year of 2019.
I think a low single-digit kind of view of Western Europe is kind of where we're at right now.
Thanks for that, Jim. I was intrigued by your comments on China to the extent that you said that your competitive position continues to strengthen there. Maybe you could elaborate on that a bit. I think you mentioned e-commerce at Fluke. Obviously, you're doing well in GVR. Could you materially beat in terms of market share in 2019 as you go forward versus the market in China?
Yeah. I think the Fluke performance of the quarter was very good. Obviously, we've got a long history there of building products for that market, having both production and design capability over there to really build product, really be China for the China market. I think we just continue to build the business. Ironically, I think a great example of our benchmarking, a lot of the e-commerce efforts that we've put in over there really came from Tektronix, and they started that. I think it's a great example of learning from each other in those businesses. I think certainly we have pretty good sense that we're doing pretty well in the places you just mentioned. Our tech performance is good. It's always hard to gauge against others there from a share position.
Things kind of move around, but you know I think we'll now have had three years in a row of double-digit growth in China. Those numbers feel pretty good. Those are our three biggest businesses, and that's the basis for kind of our belief that we're outperforming, if you will. I think we can continue to outperform as well.
You're thinking mid-single digit growth for China in 2019, based on what you have under growth?
That's right. That's where we're at right now. I think, as I mentioned before, having been in China a lot over the course of 20 years, January and February, because of the Chinese New Year, don't give you a lot of color. You really got to get into March. Our best view right now with what we've seen from a point-of-sale perspective and what customers are telling us is mid-single digit.
Understood.
Thanks, Andy.
Our next question is line of Jeffrey Sprague from Vertical Research.
Thank you. Good afternoon, everyone.
Hey, Jeff.
Jeff. How's it going?
Hey, just two things from me. Just first on J&J. Closed maybe a little later than you hoped, but, relative to your expectations, should we still be thinking about kind of roughly $0.30 on an annualized full-year run rate basis for the first full year of ownership?
Yeah, I think nothing's changed from the first four quarters moving forward. I think we said $0.30-$0.35 last quarter, and nothing's changed from that.
Okay, great. Just back to the EMV question, maybe a little bit to Steve's point. I just thought 2019 would be a little bit stronger too, to avoid maybe kind of a big fire drill in 2020 on the compliance deadline. Do you see a situation lining up where 2020 is kind of a big scramble? Do you expect kind of a smooth acceleration into that compliance deadline?
I think what we've seen, first of all, we had a stronger finish in 2018, as I mentioned before, but we still think 2019, with the numbers we're seeing, these are going to be very good numbers. Jeff, I think at this point, we're starting to think more the other way, is that things are going to move and stretch into 2021 a little bit more. No one's got a perfect crystal ball here right now, but as we talk to folks, we think people are going to make decisions based on their liability. Some of the larger customers are looking at where they've had liability thus far and will make some intelligent decisions about their upgrades based on that. Our crystal ball right now probably says things are continuing to be good, but they probably push into 2021 right now.
Great. Thank you.
Thank you.
Thanks, Jeff.
Our next question is from the line of John Inch from Gordon Haskett.
Hi, everybody.
Hi, John.
Hey, guys. I think, Jim, you said Tech in China is going to go from double-digit to mid-single in 2019. Based on the guide, what actually happens to Fluke and Tech based on your guide in 2019, and what do they do in 2018? If you could just remind us. Core growth.
You mean for China? Are you talking about for China?
No, I was giving you the China data point. I didn't hear if you had said anything about Tech overall. What's the Fluke and Tech on 2018 versus 2019 core growth, roughly, based on your assumptions?
I think Fluke's mid-single 2018, mid-single 2019. Tech is mid-single. I think they had a stronger finish in 2018, so I think that got them to mid-single, and they're probably closer to low single, low to mid in 2019. Hopefully that's helpful.
Yeah, no, that's right. That makes sense. The 3%-5% guide, what about the deals that we've done? Like how much of the recently acquired acquisitions, how much do they contribute in a collective to the 3%- 5%? Chuck, you said pricing's 1%. What about the other businesses that we've done recently?
The only thing, that 3%- 5% is a core growth. That only includes Landauer and ISC and Orpak. I think I calculated it. That was like 30 basis points. The more recent ones, they won't turn core until the fourth quarter of next year.
Okay, still pretty small. All right.
Yeah.
Jim, if you were to not read the newspapers, but simply just think about your businesses, what are you most concerned about in 2019? Again, not macro stuff because we're all sort of concerned about that, but just if you think about the businesses, how they lined up, where do you want to apply the most pressure as CEO on an operations basis? Where do you feel like you've got to kind of focus the most attention, if there's an issue at all in 2019?
Yeah, it's a great question. Probably I could go for a half hour on it. I would say as we think about, maybe start with how we think about risk. Certainly, I think, it's impossible not only reading the paper, but also seeing in our own business. I mentioned this before, Western Europe continues to be a watchful eye. It's not our biggest geography, but certainly some of the things we've seen out of Germany, as an example, would have us watching out to make sure that we're prudent in what we're doing over there. China could go up or down. It's probably a risk and an opportunity regionally. I think operationally, as we think about it from a business perspective, we certainly want to make sure we take advantage of the opportunities that are in front of us relative to GVR and the EMV opportunity.
We mentioned in the prepared remarks, as an example, the Murphy U.S.A. order that we got, that was a big win for us. We want to continue to have those big wins and to continue to convert those into revenue opportunities and increase our installed base over time. I would say GVR, and then more broadly, John, we're always working to accelerate innovation. We've put a big effort into digital analytics and IoT in a number of our businesses. You've heard us talk about some of those successes, like Fluke Digital. Certainly Gordian and Accruent, we're learning a lot from them as well, how to accelerate some things.
We're going to have a leadership conference here in a few weeks. Those will be a number of the things we're going to be talking about and focused on as we talk to our top leaders in the business.
Our next question is the line of Richard Eastman from Baird.
Hi, Jim. Good afternoon, and Chuck.
Hey, Rick.
Could you just give us kind of a quick update on Gordian and Accruent? Just trying to get kind of year-over-year growth rates there. Even though they're not core, I'm just curious, are they pacing out at the growth rate that you expected, and just kind of what the demand and order rate look like?
Yeah, I think we had a high single-digit growth rate in for Accruent last year, and we delivered ahead of where we thought we'd be, although, as we said, only a few months of our own ownership. We won't take any credit there. Gordian, probably a little bit better from a growth rate, more closer to double digits. Again, they did a nice job as well. Far they've gotten out of the gate well. We were with the Accruent team a few weeks ago for their 100-day strategic plan, and the energy and enthusiasm about what they can do and what we can do together I think really makes for, I think both are going to be great businesses for us going forward. I think you'll start to see those growth rates I just mentioned are probably the growth rates for 2019 as we look at things.
We'll continue to look. We're certainly looking as we finish their 100-day strategic plans, Rick, as you know, because you know us well. We'll look for opportunities to invest into more growth opportunities to accelerate some of those growth rates. Those things, because of the software nature of the business, some of those probably won't start to really take an impact until the latter half of 2019 and into 2020.
Do you spend any time at all trying to look and correlate the ABI with Gordian's demand?
Say a little bit more on that. Correlate their demand with?
With the ABI index, construction index.
Oh, the ABI index. Yeah.
There's a lot of concern around that, but
Right. No, sorry, I didn't hear the A part of that.
Yep. Mm-hmm.
No, we haven't found a lot of correlation there yet, I think because, in their case, it's such an under-penetrated market that what's actually happening from projects versus just the ability to grow the business just by increasing the penetration of their offering is such an opportunity that it doesn't necessarily correlate as well as one might think.
Yeah, fair enough. Just the last question. Around the PI sensing businesses. It's kind of maybe your fourth largest, maybe set of businesses. One would think there's some cyclical sensitivity to those businesses around automation, perhaps around China. They finished the year strong. Is there anything in the order rate that might give you pause in those kind of sets of businesses? Gems.
They're likely to de-sell a little bit in 2019. As a platform, they were a stronger mid-single digit grower. In 2019, they might slow a little bit to low to mid-single. I think it's still early to tell, but there'll be a little bit of slowing that's possible. I think we still see a lot of opportunities. You mentioned in the prepared remarks that Setra had some nice introductions in technology. We've also seen we've taken the businesses into what I would call maybe a little bit less cyclical markets, like food and beverage and some critical environment applications. I think the teams have done a really nice job of trying to reposition the businesses into verticals that maybe are into less cyclical markets, like some of them that you just mentioned.
Okay. Very good. Thank you.
Thank you, Rick.
Thanks, Rick.
Our next question is the line of Deane Dray from RBC Capital Markets.
Hey, thanks. Good afternoon, everyone.
Hey, Deane.
Hi, Deane.
I'd like to stick with Accruent and Gordian, if we could. Could you remind us of their deferred revenue profiles and what the cash flow contribution, the free cash flow contribution were this quarter?
Deane, I think if you're comparing to maybe some other companies about a big prepayment and getting a deferred revenue, that's really not how they're set up. I don't think that there's much there, and especially moving the needle on free cash flow.
Just if you gave us a profile of what you expect, even if it's not 100%, but what would the free cash flow profile or free cash flow yield for the businesses be?
I think it'll be similar to what the rest of Fortive would be. I think that it's going to have great margins. As that free cash flow percentage of earnings, I think you look at it around the 120% that the rest of the company is. I think that would be great. When you get that deferred revenue, you can sometimes see it jump up beyond there.
Good. Then just still on these two, when you acquired them, you referenced some significant adjacencies for more M&A in this space, and how you feeling about that? Does it make sense to have them in the field solutions piece? Might you be breaking these out at some point?
I wouldn't necessarily speculate on breaking it out at any point in time. I certainly think they fit the mandate of what Wes is trying to do within the platform at this point in time. Relative to M&A, yeah, we have a solid funnel there. As you can imagine, both of them being private equity backed, they had a funnel already working. Accruent had closed some deals right around the time we closed the deal, so they had already brought in a couple of businesses that they were working on. Yeah, we like the funnel at both businesses, and we're continuing to look for both small and maybe larger opportunities where available to bring into the business. Both management teams have good experience in integrating acquisitions. Not only obviously, we have the capital to do this, but we've got the management capacity in both of those businesses to accelerate growth.
Thank you.
Thanks, Deane. Have a great day.
Our next question is the line of Scott Graham from BMO Capital Markets.
Hey, good evening.
Hi, Scott.
I want to kind of ask the same question as Deane, but maybe in a little bit of a different way. The portfolios, the segments are a little bit lopsided right now. Could we be one year from today looking at a three-segment portfolio? Does that seem to make more sense?
Well, I think that lopsided in terms of what we have on board, I'm not sure I agree with that, but I suspect you're meaning when we get to the other side with ASP. I think once we get that on board, we'll take a look and see what makes the most sense. Right now, I think we're thinking about ASP coming on, and it'll become its own platform. We'll wait till we get probably to the end of the year before we take up segments.
Okay. Fair enough. Thank you. The follow-up is simply, again, not to beat the horse dead here, but 3%-5% organic. As I look at what's coming into the organic in 2019, the 17 acquisitions, and then we have some also faster growth acquisitions coming in late this year into the core. It seems like 3% organic would be something that you can do in your sleep. I'm just wondering, what gets you down to a 3% at the low end? What are the things that you're concerned about that you would put a plus three out there? Particularly if you remember also, we talked about this at the Investor Day where GDP+, I think that there was some thinking about possibly going to numbers and something a little bit higher than GDP. Can you just weigh in on the 3% in particular?
Scott, we agree with you. We're really excited about the businesses that we brought on. The main thing is the Gordian and Accruent and ASP. Gordian and Accruent will turn into that core number only in the fourth quarter, really. ASP won't be in it at all. I think when you get to 2020, I think fair comment, but that's the main point.
If you could just maybe finish that, Chuck, if you don't mind, the three. What are the things out there that get you to the three? What would have to happen there?
Scott, it's Jim. I think it would really be two things. One, probably a little bit slower Western Europe, and maybe China not coming back in that, we called it mid-single digit, and there's a range of numbers within mid-single digit, and it'd probably be on the lower end of that mid-single is probably the two things that. I think North America is solid. In February, I'm never going to call a year. I've found that that's not necessarily a great thing to do with not having an economics degree. I think the brutal reality is what we should be doing, what we're doing, what we need to be doing for a market environment that looks like low to mid-single digit growth, depending on the business. I think if North America is good, Western Europe holds in there, China continues to be pretty good.
The rest of the markets are relatively small. You start to see the high end of that, and if any of those, I think North America is probably the most likely to stay pretty good, and the other two weighing would be where you start to get into the lower end of that guide.
Appreciate that. Thank you.
All right. Thanks, Scott.
Our next question is from the line of Josh Pokrzywinski from Morgan Stanley.
Hi, good evening, guys.
Hey, Josh.
Hey, Josh.
Yeah, just to keep on with 1Q, I know, to go back to where we are, probably beating the horse pretty dead at this point. Just pulling out the price comment from earlier about the point of price in the first quarter, the comp gets easier. You mentioned GVR feels a little bit better. I guess, Jim, you made a comment about some pull forward maybe in China. Is there anything else that got pulled forward elsewhere as best you can tell? Anything kind of wonky in the backlog? Otherwise, you would think that having January behind you at this point, that it would be easier to bridge that out.
Yeah. I think one is, there is probably about 70 basis points-100 basis points of growth in the fourth quarter that probably is equated to probably was first quarter business. If you look at our guide, part of that is probably 70 basis points-100 basis points that happened. Part of our overage in Q4, and it really comes down to a few things. One, certainly there was some business at Gilbarco where people looked at year-end money and decided to spend it and wanted to take those orders in revenue in the quarter. That is one place. EMC had customers that wanted to get content and business, and that went out as well. As we mentioned in the prepared remarks, they had their biggest quarter in the history of the company.
Some pull forward of some of the pricing actions that we've got around tariffs that happened at Fluke and Tek. Those things combined equal to about 70 basis points-100 basis points. We go in with, I think some optimism around North America and in China based on how we finished, but we also know that some of what we saw was probably business that would have transacted in the first quarter.
Got it. Just to stick with that same line of thought, is there anything on the margin side that we should think about in a 4Q to 1Q bridge? I know there's a lot of moving pieces with the deals and obviously with ASP, if it closes in the quarter, that'll move it around further still. Anything sequentially that adds on, drops off, kind of beyond a volume input?
No, I think that's the main difference there from Q4 to Q1, especially when you look at what normally happens between these quarters. It's a significant step down, but nothing that comes to mind that's abnormal.
Got it. Thanks. I'll leave it there.
Thank you.
Our next question is the line of John Walsh from Credit Suisse.
Hi, good afternoon.
Hey, John.
A lot of ground covered, but wondered just to get a little more specific. Can you actually give us the ballpark of where EMV revenue ended for 2018 so we just know the jumping off base for that piece of the business?
Are you talking about the We're about 40% through the cycle, a little over 40% through the cycle, as we sunset 2018. That's about where we thought we'd be, maybe a little bit ahead. We also see, as I mentioned before, that we think it extends out farther. The remaining, call it 60%, will never go to 100%. The remaining percentage will probably be, we've been saying, as you know John, 85% roughly by the end of 2020, and we think that number is actually pushing out. I don't want to get too specific because it's a little bit of false precision at this point, but we do think that more than four or five points probably is at least pushing into 2021 at this point.
Okay, thank you. Maybe just to get after the core growth question a little differently. As we think about Q1 in the full year, and I look at your kind of large buckets, whether it's field solutions, product realization, Sensing, Transportation. You've already kind of talked about some ranges on where you think the core growth is, but are any of those main platforms negative or down in either Q1 or in the full year construct, or is there growth across all those major platforms in both Q1 and for the full year?
All the platforms have growth, John. As we mentioned in the prepared remarks, the two places where individual businesses might be negative for a few quarters, one, telematics and the other Qualitrol. Those individual businesses, Qualitrol sits in field solutions, telematics and Transportation Tech, they're obviously not even close to the biggest businesses in those platforms. The platforms will continue to grow, those individual businesses are probably the businesses we're working the hardest to make sure we can turn them around, if you will.
Great. Thank you.
Thank you.
Our next question is the line of Andrew Obin from Bank of America.
Yes. Can you guys hear me?
We can, Andrew.
Yeah, thanks for fitting me in. Just on professional instrumentation. As I think about Pacific Scientific, Tektronix. A, how did the federal-related revenues do in the quarter, and any impact from shutdown on the ability to collect or book business in the first quarter? Thank you.
Yeah. Interestingly enough, very little. We had the business booked. We were a little worried about EMC because they do have some resources that come in to approve the products before they ship. The team did a great job in getting ahead of that. We had a little bit of impact at Gordian, on balance, probably within the weeds of a company of our size and scale. Thus far, no direct impact. You might say maybe, and I think it's too early to tell if there was any second or third derivative impact.
Terrific. Thanks a lot.
Thanks, Andrew.
Our next question is the line of Nigel Coe from Wolfe Research.
Thanks. Good evening, guys.
Hey, Nigel.
Look, I hate to really beat this horse to death two or three times here, but Chuck, I'm really struggling with the 1Q math, and I know a lot of folks out there are as well. Maybe if you just explore that again. It seems to me that your organic and FX is basically a wash, so we have flattish top line in 1Q. If we set up about $0.05 Or $0.06 of M&A roll forward from Accruent and Gordian coming through in 1Q year-over-year, and my math has your tax rate down in the first quarter. I'm really struggling to understand why your midpoint guidance is only $0.01 above the prior year. Maybe some help there would be good.
One thing, I think our tax rate is up in Q1, not down.
Okay.
You said our Q1 tax rate is down.
Q1 Okay.
Our tax rate is going to be 17% in Q1, and I think it was around 15.3% and thereabouts in the prior year.
Okay. Nothing else, nothing to pull out. Okay, we'll take it offline and I can go through this line.
I talked about the. I'm reiterating, as long as we're beating dead horses, FX $0.02 in the quarter. There's also headwinds, as I mentioned, from tax. We've got more shares this year. It's also given us a little bit of a headwind.
Okay. We'll go through it more offline. Thanks.
Yeah, sure. No problem.
On the PI module, again, we've touched on this as well. I think, Jim, you talked about some negative mix, I think, in PI. I think you're referring to PI. I'm not sure I understand that, because Fluke and Tektronix were very strong in the quarter. Was that negative mix in PI, is that a factor why margins are flattish? Then, Chuck, if you could just maybe quantify this warranty cost. I'm not sure I picked that up on the prepared remarks.
I don't think there was a mixed impact in PI. I think there's two things going on in PI. There's a tariff is primarily hits, not entirely, but the biggest places it hits is in Fluke and Tek, and that probably gives us 60 basis points of headwind on our OMX. The warranty is about $6 million, and that's another 40 basis points. That's for the company, for a little bit, probably 60 basis points, another 60 basis points on the warranty. When you look at those two, those are the two headwinds why we're flat on our OMX. Otherwise, we'd be at triple digits.
Nigel, I think it might have been in the prepared remarks, we talked a little bit about mix, but that was overall. That was just a little bit more IT than PI. That's what we were talking about there. Just a little bit of mix there. That's overall at Fortive. As Chuck mentioned, he obviously answered all the questions within Professional Instrumentation. We actually feel pretty good about the margins in PI in the fourth quarter. Obviously, we don't love a one-time charge for a warranty issue. At the end of the day, if you sort of push through that, and combined with the work that the teams did to negate some pretty considerable tariffs, we're really pleased with where that ended up. I think it's going to put us in a good shape as we get through the year in 2018.
That's pretty helpful, Jim. Just to underline the point, Q1 PI, you think core margins up in Q1?
Yes.
Yeah.
Great. Thanks, guys.
Thank you.
Our next question is from the line of Joe Giordano from Cowen.
Hey, guys. Thanks for squeezing me in here.
Hey, Joe.
Hey, Joe.
Just the M&A impact from acquisitions on PI really stepped up quite a bit from third quarter. I know you have more time of Gordian Accruent in there, but it was a little bit larger than we were thinking. I'm just curious to see how you think about that bleeding off into 2019, like on a cadence basis.
Are you talking about the step-up around amortization or the step-up on the deal cost?
Not the transaction cost, the - 375 basis points for acquisitions, yeah.
Okay.
On the revenue side. I think, well, clearly we got full credit for both deals in the fourth quarter. I think that number's probably Obviously, it's going to end, it'll go core in the fourth quarter of next year. We should see. The fourth quarter is always seasonally big for those businesses. I wouldn't necessarily multiply that number by four, but.
No, sorry. I meant on the margin side. Like on the PI, on the operating margin, you had acquisitions - 375 basis points.
Oh, yeah.
Just curious how that kind of plays out.
Yeah. They'll absolutely get better through the year. We had very little impact on the margins in the quarter, given where we closed, for sure, they'll continue to improve through the year.
Okay. Question on ASP. Obviously, sterilization a big thing now with hospitals. I was curious how the trend towards single use, does that have any impact on ASP? How does the pull on that two kind of opposite trends?
It doesn't because of the products that are used. They're typically products that are not necessarily going to fall into the single-use category. We've been tracking some technologies where those might be opportunities. I think when we look at the exposure that our technologies and our products and the products we sterilize to single use, there's very little impact and still a lot of under-penetration around the world. The U.S. and Europe, obviously, standards and regulations are fairly developed. When you look around the world, we were in China about a month and a half ago, visiting our ASP team, and clearly a lot of opportunity for unpenetrated market there in all forms of hospitals there. I think on balance, yeah, very little exposure to single use, and certainly when you look at the under-penetrated side of the market, lots of growth opportunities.
Interestingly enough, I was with a number of the sales leaders. They're here this week, and we were with them as we roll out some of the Fortive Business System tools with them and stuff, and they're incredibly excited about the opportunity that's available to us. I think across all fronts, as we get more and more into the business, Joe, we see a growth opportunity.
At this time, I'm showing that we have no further questions. I'd like to turn the call back to Jim Lico for closing remarks.
Thanks, Ian, and thanks everybody for taking the time this evening. It's cold and snowy in Seattle. That's a pretty rare thing for us. I think despite the weather, we are incredibly excited about what's ahead of us in 2019. We obviously had a very strong finish to the quarter with over 7% core growth, our best core growth quarter in the history of the company, 30% earnings growth. We think that's great, on the other end, we know our best days are still yet to come given the great portfolio transformation work that we did in the year. Thanks for your support, and obviously, Griffin and team are available for questions and clarification tonight and tomorrow. Thanks, everybody. Have a great night.
Ladies and gentlemen, this does conclude the conference call. We thank you for your participation. You may now disconnect.