Hello, my name is Philip and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to the Fortive Corporation's second quarter 2018 earnings results conference call. 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 would like to ask a question during that time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the call over to Ms. Lisa Curran, Vice President of Investor Relations. Ms. Curran, you may begin your conference.
Thank you, Philip. Good afternoon, everyone, and thank you for joining us on the call. With me today are Jim Lico, our President and Chief Executive Officer, and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. We present certain non-GAAP financial measures on today's call. Information required by SEC Regulation G relating to these non-GAAP financial measures are available on the investor section of our website, www.fortive.com, under the heading Financial Information. A replay of the webcast will be archived on the investor section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call. A replay of the conference call will be available shortly after the conclusion of this call until Friday, August 10th, 2018. Instructions for accessing this replay are included in our second quarter 2018 earnings press release.
During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. All references to period-to-period increases or decreases in financial metrics are year-over-year. During the call, we will make forward-looking statements within the meaning of the federal securities law, 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. These forward-looking statements speak only as of the date they are made, and we do not assume any obligation to update any forward-looking statements.
With that, I'll turn it over to Jim.
Thanks, Lisa, good afternoon, everyone. Today, we reported another quarter of double-digit adjusted earnings and sales growth. This strong performance reflects the vitality of our portfolio and the momentum created from our acquisition flywheel. With our strong free cash flow generation and balance sheet, we are well positioned to continue deploying capital towards M&A. We are significantly advancing our portfolio enhancement work to accelerate growth and reduce cyclicality. Since last quarter, we announced two acquisitions, the Advanced Sterilization Products business from Johnson & Johnson for $2.7 billion and Gordian for $775 million. Both acquisitions provide a meaningful entry into quality markets. ASP is clearly aligned with Fortive's strategy to help customers drive better safety, compliance, and productivity. Gordian exemplifies our focus on investing in software-enabled workflows. We also issued 5% mandatory convertible preferred stock with net proceeds from the sale of the shares of $1.34 billion.
With substantial M&A capacity, our funnel remains strong with a range of targeted sizes to address strategic growth priorities. Before I provide quarterly results, I'd like to share that we published our first CSR or corporate social responsibility report in June. I'm excited about the path we've chosen and the progress we have made on the issues that matter most to our employees, customers, communities, and investors. While I'm proud of the direction we have established, I'm aware that our work is evolving, we welcome your feedback to inform our CSR-related strategies and goals in the coming years. With that, I'd like to turn to the details of the quarter. Adjusted net earnings of $321.7 million were up 28.7% over the prior year. Adjusted diluted net earnings per share were $0.91 based on an adjusted effective tax rate of 17.7% for the quarter.
Sales grew 13.9% to $1.9 billion, reflecting a core revenue increase of 5.3% as all of our six platforms posted core growth and four out of our six platforms grew mid-single digits or better. The continued success of acquisitions contributed 700 basis points of top-line growth. We're excited to review with you today several examples of how FBS growth tools and industry-leading innovation are continuing to drive top-line performance. Geographically, high-growth markets core revenue grew mid-single digits with continued strength in Asia and Latin America. Low double-digit growth in China was led by Gilbarco Veeder-Root, sensing technologies, and Automation & Specialty businesses. Developed markets core revenue grew mid-single digits, reflecting continued strength in North America. Core revenue growth in North America was mid-single digit and was driven by strong performances at Tektronix, Gilbarco Veeder-Root, Fluke, and Jacobs Vehicle Systems.
We delivered a third consecutive quarter of gross margins at or above 50%. In the second quarter, we posted a strong gross margin of 50.6%, reflecting 120 basis points of expansion over the prior year. Five of our six platforms delivered positive price for a net contribution of 50 basis points. Operating profit margin was 20.6%, with core operating margin expansion of 50 basis points, driven by Professional Instrumentation favorable incrementals. During the second quarter, we generated $315 million of free cash flow and a conversion ratio of 107%. For the full year, we are tracking well to deliver our expected free cash flow conversion ratio of approximately 110%. Turning to our segments. Professional Instrumentation posted sales growth of 17.1%, including core revenue growth of 3.4%. Acquisitions contributed 11.9% and favorable currency 1.8%.
Reported operating margin of 24.7% reflected core margin expansion of 180 basis points as FBS drove strong price, innovation, and supply chain benefits. Advanced instrumentation and solutions core revenue increased low single digits during the quarter, driven by market outperformance at Fluke. Field solutions core revenue grew mid-single digits in the quarter, reflecting mid-single digit growth in both developed and high-growth markets. Fluke delivered high single-digit core growth, led by double-digit growth at Fluke Digital Systems, Fluke Networks, and our thermal imaging business within Fluke Industrial. At eMaint, net new customer growth was 15% and recurring revenue grew greater than 25%. The combination of hardware and software, coupled with the safety and productivity value proposition offered by Fluke products, continues to resonate with customers and drive market share gains.
Increased growth investments in sales and marketing are clearly paying off as Fluke further outperforms its markets, reflected by accelerated point-of-sale growth. Industrial Scientific Corporation delivered mid-teens revenue growth, led by double-digit growth in the iNet and rental businesses. For those of you that attended our recent investor day last month at ISC, you were able to see firsthand the strength of the ISC team and their enthusiasm for adopting the Fortive Business System to drive revenue growth and margin expansion, while advancing ISC's digital strategy and continuous improvement culture. Qualitrol core sales declined low double digits as high single-digit growth in North America was more than offset by declines in China, Europe, and the Middle East. The market softness is consistent with what we messaged last quarter. We are actively working to improve what we expect to be declining sales for the remainder of the year.
Product realization platform core revenues grew slightly for the quarter, led by low double-digit growth at Tektronix. Excluding the large 3D sensing win we highlighted in the second quarter of 2017, Tektronix core revenue growth was high single digits. Results were driven by double-digit growth in developed markets and in industrial and automotive end markets, reflecting the success of multiple new product introductions and our target market strategy. I'm excited to announce that Tek launched its 6 Series mixed-signal oscilloscope last week. Based on the same breakthrough platform as the popular 5 Series MSO, the 6 Series MSO is an industry first for this class of oscilloscope and provides higher performance up to 8 gigahertz to target the substantial growth in applications that handle a vast amount of data.
It also measures devices at the lowest noise level of any product in the market, a critical feature for power devices, IoT, and connected car applications. It leverages the ease of use and software of the 5 Series. With the 6 Series MSO, we're delivering a compelling combination of best-in-class performance and usability that will boost productivity and shorten time to market for our customers. Our sensing technologies platform delivered mid-single-digit core revenue growth in the quarter, led by double-digit growth in China. New product introductions continue to deliver market share gains across the platform. Our digital strategy is fueling progress towards launching additional IoT offerings. One of the most recent examples of this is Accubin inventory management. This technology enables customers to manage inventory remotely through a centralized and/or mobile user interface.
By using a variety of sensing technologies, AccuBin can continuously measure solid material and help customers manage inventory and rate of consumption trends in a number of applications. Moving to our Industrial Technology segment, revenue grew 11.2%, including core revenue growth of 6.9%. Acquisitions contributed 280 basis points of growth and currency 150 basis points. Reported operating margin of 20.8%, including core operating margin expansion of 30 basis points, offset by 40 basis points of diluted operating margin associated with acquisitions. Our Transportation Technologies platform core revenue grew high single digits, led by strong double-digit growth in high-growth markets. Gilbarco Veeder-Root delivered high single-digit core revenue growth, reflecting a strong rebound in North America, driven by backlog reduction and increased demand for EMV solutions. Strong double-digit core growth in China was led by continued demand at Veeder-Root for submersible pumps and automatic tank gauges related to double wall tank upgrades.
We are pleased with the success of our previously announced exclusive programs with Chevron, Texaco, and Valero retailers to drive EMV compliance as sales across these programs are up double digits. Additionally, we are seeing a strong pickup in EMV sales with mid-tier accounts and single-site owners. These improved bookings, along with key business wins, continue to give us confidence in our expectation for GVR to grow core revenue mid-single digits for the remainder of the year. Teletrac Navman delivered mid-single digit core growth, led by double-digit sales growth in Asia Pacific and high single-digit SaaS sales growth. As we noted last quarter, the industry was challenged with integration and support issues associated with the Electronic Logging Device mandate. We now see these issues beginning to stabilize and expect moderated growth rates for the balance of the year in the U.S.
Automation and Specialty posted another quarter of low double-digit core revenue growth, led by high teens growth in Asia. JVS delivered mid-teens core revenue growth driven by increased Class 8 truck production in the U.S. and market share gains in China. Growth in our automation businesses was led by Kollmorgen, where low double-digit core revenue growth reflected continued robotic strength in Europe and China. The strong performance was also driven by automation's focus on target verticals, including medical and food and beverage end markets, as well as new product innovations. Kollmorgen introduced barcode navigation technology for mobile robotics application in smart warehouses, and Portescap launched additions to the Ultra EC 22ECT motor platform to provide higher torque capacity in the smallest footprint, allowing further miniaturization of customer applications, including industrial and surgical power tools.
The A&S business combination with Altra, as previously announced in March, is advancing nicely, and we expect to close in the fourth quarter. Moving to Franchise Distribution, the platform grew core revenue low single digits. Matco core revenue grew low single digits, reflecting double-digit growth in diagnostic software subscription sales and high single-digit growth in specialty tools driven by new product launches and market share gains. We believe market fundamentals are healthy given a variety of metrics, including positive sell-in-to-sell-out ratio and a strong franchisee applicant funnel. To wrap up, our team executed well during the second quarter, driving double-digit sales and adjusted earnings per share growth, 50 basis points of core operating margin expansion, and strong free cash flow performance.
As we look to the second half of the year, we expect our core growth rate to accelerate versus the first half, driven by improving order trends and as the acquisitions of Orpak, ISC, and Landauer become part of our core revenue. The power of the Fortive Business System, the vitality of our portfolio, and the momentum created from our acquisition flywheel position us well for the remainder of 2018 and beyond. Turning to the guide. We are updating our full year 2018 adjusted diluted net EPS guidance to $3.42-$3.50, which includes improved assumptions of 4%-5% core revenue growth, core operating margin expansion of approximately 75 basis points, an effective tax rate of 18%, and free cash flow conversion of 110% for the year.
The updated adjusted diluted net EPS guidance also reflects the dilutive impact from the mandatory convertible preferred stock offering, which we expect to offset with operational improvements. We are also initiating our third quarter adjusted diluted net EPS guidance of $0.83-$0.87, which includes assumptions of mid-single digit core revenue growth, core operating margin expansion of 30-50 basis points, and an effective tax rate of 18%. With that, I'd like to turn it over to Lisa.
Thanks, Jim. That concludes our formal comments. Philip, we are now ready for questions.
Yes, ma'am. As a reminder, if you would like to ask a question, that's star one on your telephone keypad. Again, that is star one. Please limit your questions to one question and one follow-up. Your first question comes from Steve Winoker of UBS.
Thanks, good afternoon, everybody.
Good evening, Steve.
For me. It's 10:00 over here. Anyway, I wanted to just dive into some of the moving parts. First, Jim, on tariffs, the $0.06 headwind that you called out. Can you maybe give us a sense of what's baked into that? You said it's enacted. Is it the cost structure? Do you have any pricing? Also, that 50 basis points, is any of that flowing through there yet? Is there any demand impact in that?
First, I'll take the demand question. We don't think there's a demand impact on the tariff side. That one's fairly. Obviously, we raised the core growth for the second half. We feel good about the revenue profile. Relative to the cost infrastructure and some of the things that are going on, Steve, first and foremost, I think the 232 stuff that we had pretty good clarity of has been fully countermeasured. It's ratable across most of the businesses, and our teams have done a nice job at offsetting it. On the 301 things, it's really been a mix of pricing first, so establishing more price in the businesses. Second is supply chain strategies. As you can imagine, a number of things we can do to offset that. Then some manufacturing changes in strategy.
We have some situations where we have choices of where we produce product. We're making some of those decisions as well. That's sort of the sum total. It's really kind of probably number one is on the price side.
Okay. All right. That's helpful. The second thing is we're seeing all this prior M&A flywheel starting acquisitions now starting to move to core growth and core operating margin expansion. You mentioned that it was going to help in terms of core growth acceleration. On my simple math on the operating margin, as I go out to Q4, given 30-50 in Q3 and 50 in two and 100 in Q1, I think it's around 110 or so, 100-110 in Q4. Can you maybe talk about some of those dynamics? Is most of this now starting to come from the new acquisitions as well, or that are anniversarying?
It's still a smaller percent. Our guide is mostly, I would say, in terms of increasing the guide and the strength in the second half, is still coming from the core business. Obviously, Orpak, Landauer, and ISC all fall into Different order there. I didn't even do the order right. It's really Orpak, ISC, Landauer, I think. We think about 20 basis points in the second half growth rate is probably with those deals. They're growing well, and they're still a smaller part of the portfolio, but they're all doing exceptionally well, and we'll start to add to the core growth rate here as we go forward.
The OMX contribution from those, is it similar also in the fourth quarter, as part of that 100-plus?
I think it's not different than what we had been assuming. I think that there's a little bit of tailwinds from the acquisitions. As Jim said, they're not the biggest piece. Us raising our guide is really about our business strengthening, because as well as these acquisitions are performing, they're really in line with what we've been seeing all year long.
Okay. If I could just sneak one more in on Qualitrol. Is that decline still all just end market based on condition monitoring for the utility side, or is there something else going on there?
We definitely think it's market. As I mentioned in the prepared remarks, the North American business is very good. Where it's really been, it's mostly focused in China and in the Middle East. Some of the Middle East business gets transacted through Europe, so we call it out as Europe, Middle East, and China. The European slowdown is really with OEMs who are servicing the Middle Eastern economy. It's a longer cycle business, so the short cycle part of the business is doing okay. It's the project-based business that's longer cycle, that's why while we're doing a lot to change the direction of the business, the team's doing a good job to protect margins. We think it's probably slow the rest of the year and slightly into the first quarter, probably, until we start to see things pop up.
The good thing is that Field Solutions is doing so well. As we mentioned, Fluke's doing very well, ISC is doing very well. The platform itself is in a good place right now.
Great. Thanks.
Thanks, Steve.
Your next question comes from Scott Davis of Melius Research.
Hi, good afternoon, Jim, Chuck, and Lisa.
Good evening.
Hey, Scott.
Thanks. You announced a couple interesting deals here. You did the J&J deal in June and then Gordian in July, and financed with the convert. Is there a point where you have to slow down the M&A pace a little bit, just more than anything else, not because of financing limitations, that seems to be less of an issue now, but people issues? You don't have a huge corporate office. You have to integrate systems and all kinds of back office stuff that I assume takes a fair amount of time. I would imagine you plant a fair amount of your own people in those organizations at some juncture to help drive culture, too. Are there some challenges that just require you to slow down the pace a bit in that regard?
Yeah. I think number 1 is, the good thing about it is that we normally resource the integrations and the ability to sort of bring the acquisitions along with the platforms they're in. In the case of both of these, we've got separate platform leaders who are leading those integrations. We feel good. We're always building capacity for deals from a talent perspective. Number 1, first and foremost, when we talk about FBS, we always talk about growth, lean, and leadership. The leadership aspect of that is really about building the talent funnel to be able to take on these sorts of opportunities. First and foremost, we've got the FBS capability. Barb and Kirsten and their teams are ready to go and assist those management teams. We're getting really good management teams in both the case of ASP and Gordian.
We think they're excited to be a part of Fortive. I think we've got a deserving organization that are doing a good job. They'll take FBS, our platform leaders. We'll obviously have to fill some jobs there for sure, more on the ASP side than on the Gordian side, because Johnson will be, obviously it's a carve-out, and so that'll require some more talent. We feel very good about where we're at relative to that. Quite frankly, feel like we've got more capacity to do. In fact, we'll review our leadership with our board here shortly, our leadership funnel, and our message to our board's going to be, we've got great capacity to continue to do things for the right kinds of transactions that will continue to build the portfolio.
We're not just going to do deals to do deals, to the extent that we can continue to build, bring great businesses in, we've got the capacity to take it on.
Now that you've brought up Barb's job, which there's only one of her, there's lots of these companies you're buying. How long does it take to teach someone FBS? How long does it take to get to some sort of level where you're acceptable that they're a fully functioning part of the Fortive culture as opposed to whatever culture you were buying?
Well, 22 years and I'm still learning, I'm still trying to figure it out. I think at the end of the day, the point around, it takes a couple of years for the business. Our sort of plan will be to sit down with the business leadership. We'll do our 100-day strategic plan. That will define kind of where the big opportunities are, where maybe the gaps are in performance that we want to improve. From there, that sort of leads us to what are the FBS tools that you want to use? We really use the successes of those tools to build the culture. As the organization sees those wins, ultimately the adoption rate becomes pretty fast.
You saw that at ISC with our investor day is, we're one year in, and the leadership team is really using the tools, understands the culture, and while they would admit, I think, that they've got a lot to learn, they're certainly very proficient. In a year they can make good progress. In a couple of years, they'll make substantive progress. Obviously, we'll be with them for that whole journey.
Makes sense. Okay. Good luck. Thanks, guys.
Thanks, Scott.
Thanks, Scott.
Thanks, Scott.
Your next question comes from Steve Tusa of JPMorgan.
Hey, guys. How's it going?
How are you doing, Steve?
Good, Steve. How are you?
I'm doing all right. Getting through earnings season. On China, what's going on there? Maybe talk about what you're seeing and how this plays out in the second half. I know you guys have a bit of electronics exposure there, but it's different than perhaps some of the foreign players that sell into kind of directly into smartphones. Just curious as to what you guys are seeing in China as a start.
At the beginning of the year we said we thought China would slow to high single-digit. We obviously just said that we'd be low double-digit in the second quarter. We're a little ahead of where we thought we would be. That's good. I would say we're seeing, as we mentioned in the prepared remarks, we're not only seeing, obviously, the Gilbarco Veeder-Root business, but we're seeing even in sell-through, in a short cycle business like Fluke, we're seeing mid-single-digit sell-out at our distributor level in the quarter. We're still seeing pretty good growth. We feel good about China for the remainder of the year. We're obviously watching for things. We read the headlines and obviously trying to understand to the extent that there's things that might change that. In real discussions with real customers, they continue to have demand.
In Tek's performance, if you take out the one-time 3D sensing situation there that we mentioned from a year ago, it actually had a pretty good quarter in China. A relatively broad-based. I think we're still seeing good growth there, and, as I said, we had always anticipated it would moderate a little bit from the really strong performance we've had the last two years, and we've sort of been a little bit above that. I feel pretty good about it, where we're at right now.
Where do you expect China to grow in the second half?
I think we'll be somewhere between low double-digit and high single-digit probably is where we'll end up. Somewhere in that range.
Okay.
Yeah. Not a lot of moderation.
Got it. Okay. When you think about kind of all the moves that you guys have done, the Preferred, A&S, ASP, Gordian, I don't know what other acronyms I'm missing here, but when you think of kind of all the things you've done over the last, call it, 4 to 5 months, if you will, what do you think is kind of all the net accretion for next year from all this stuff?
Hi, Steve, this is Chuck. The way I think about that, before we put FBS to work and drive business, just the net of all these moving parts, is slightly accretive into next year, maybe less than $0.05. On top of that, you're going to see us do our normal earnings growth type of running FBS or volume and OMX growth on top of that. Whatever happens in the second half.
Okay, great. Thanks for the call. Appreciate it.
Thanks, Steve.
Your next question is from the line of Julian Mitchell of Barclays.
Hi. Good afternoon. My first question around the core margin expansion in Industrial Tech. There wasn't much in Q1 because of a tough comp on the margin. Q2, I guess the core margin growth wasn't that substantial either. Just wondered if you could give a bit more color as to why that's the case, and how you see that core OMX playing out in Industrial Tech in the second half.
Yeah, Julian, it's Jim. We obviously had good growth in the quarter, and we had pretty good incrementals on that. We had a couple of situations given the strength of the business we've had. We had a couple of one-time things at Gilbarco relative to a customer in India, and we mentioned some of the churn situations in Telematics. We had a couple of one-time things there that if we sort of look through those, we see almost 100 basis points of margin expansion in the segment. We have good line of sight to, in that 50-75 basis points kind of margin expansion. We have pretty good line of sight to the second half being in that zone.
Got it. Thanks. My second question, just around the product realization sales softness. What do you see as the growth rate, the core growth rate for that business in the second half? Any big sort of moving parts in terms of regional mix, if you're focused specifically on consumer electronics, and also the energetic materials business that you called out?
Julian, this is Chuck. As Jim mentioned, we had the 3D sensing order last year, but if we take that out, what that would indicate for the second half is mid-single digit growth for them, and that's what we expect. That's, I think, where they're going to end up at the end of the year.
Great. Thank you.
Your next question comes from Deane Dray of RBC Capital Markets.
Thank you. Good afternoon, everyone.
Good evening.
Hey. Maybe start with Chuck. Just on the convert, we don't see a lot of this structure, at least in our sector. What's unique about Fortive's capital structure and financing needs in this situation that a convert made sense?
Well, great question. I think that given our appetite for M&A and our desire to keep a strong balance sheet, and the attractive rates, we looked around and looked at all the things that were available to us. We really felt like this was a great time to go with a convert. Also, as we've talked about, we've got this Altra deal where we're going to end up retiring shares. To actually get the value out of the separation, we needed to replace those shares, and this gets pretty close to doing that.
Got it. Optically, there are times where the buyers of these converts will short the common just as a way of hedging, and I haven't seen the latest update in short interest. Are you expecting to see this, and people just have to understand it's related to hedging, not a bet against the stock?
I think we don't expect that to be a big number. It's not that big relative to our market cap that I expect that's going to be a big thing, there'll be a little bit of that, for sure.
Got it. What's the shares assumption in the dilution?
Well, I think the dilution is about $0.04 a quarter, and the shares is somewhere around 14 million-18 million, depending on what the stock price does. As stock price goes up, the dilution comes down.
Just as a follow-up, Jim, in the prepared remarks, five out of six businesses got price. Just the ranking of the pricing power on the portfolio today and, if push comes to shove and there's got to be more price increases, what room do you have?
Well, I think as you know, we have good pricing power in most of the portfolio. Where we historically have seen good price has probably been more in professional instrumentation. We tend to sell, and the go-to-market there is not as much OEM, so it's a little easier to get price. The Section 301 stuff hits professional instrumentation a little bit more than it does industrial tech. The idea of tariffs and some of those kinds of things line up well with where we typically get price. We feel good about the countermeasures we've got in place, Deane. There's a little bit of effect where we'll get all of it in the fourth quarter. We don't have complete coverage in the third as some of the pricing actions take place.
We feel really good about our ability to countermeasure what we have, what we've seen thus far, and if other things were to come out there, we feel good about our ability to countermeasure.
Got it. Thank you.
Thanks, Deane.
Your next question comes from Nigel Coe of Wolfe Research.
Thanks. Good afternoon, guys.
Hey, Nigel.
Yeah. Just to pick up on the tariffs here. I've done some basic arithmetic around this, and I hope I'm right here, but it looks like about $500 million of purchases subject to tariffs would be an annualized number. Is that about right, Chuck? Is my math correct there?
Did you say $500 million?
Yeah.
For the tariffs? Is that your-
No, no. The gross purchases subject to tariffs, just $50 million of tariffs, tax rate divided by share counts is about $0.12. That's how I did the math. Would that be right?
No, I think that's overweight quite a bit. We can get you-
Okay
the exact. For us, we're seeing about $0.03 a quarter of a gross headwind, and that's for our business.
Okay. Maybe just a little bit more color in terms. Jim, you alluded to the fact that some of the businesses impacted by the tariffs are where you think you've got better pricing power, so there's almost like a hedge there. Maybe just talk about which businesses are most impacted. Any color in terms of what you're sourcing and producing in China that you bring into the U.S. would be helpful. Then just in terms of the 3Q guidance , it looks like you're assuming sort of $0.03 impact offset in full Q. Is that sort of the right layup?
Well, we can tag team this a little bit. When we think about the two sets of tariffs, the 232 stuff is sort of ratable across, as I mentioned. Everybody buys a little bit of steel, a little bit more like in a toolbox, obviously, versus something. By and large, that number's a little smaller and more ratable. It's a smaller number. 301 is much more focused on electronics. You can imagine where we have electronics content and where we tend to be more global. Places like Fluke and Tek, for examples of that, are going to be where we might see more of the tariffs. The good news there is we have global supply chains, we have global manufacturing capability.
Our ability to countermeasure with some of those kinds of activities is actually greater as well, and those are the actions we're taking.
Okay.
I think just to follow on, is we expect to be able to countermeasure the impact of the tariffs in the year. There might be a slight impact in Q3 for us. We'll get it all out through the year.
Okay. That's helpful. Just a follow-on question. Obviously, lots of moving parts on the utilization this quarter. You said mid-single-digit growth in the second half of the year. Some of the forecasts for next year calling for semiconductor CapEx to be down next year in 2019. Do you think you can still grow in that kind of mid-single-digit zone if semiconductor CapEx is down next year?
Yeah. I think one, that mid-single-digit number is against really strong comps in the second half last year. That's very good performance. We continue to see opportunities. It's probably still a little too early to tell how much the CapEx overall number will necessarily impact our overall business. As you know, Nigel, Tek is mostly almost exclusively in the R&D side of things and not around manufacturing CapEx. As the manufacturing CapEx is really the big swing in that number. Somebody puts in a line or not, has nothing to do with whether or not Tek sells another oscilloscope in many cases. We continue to have conversations with customers. The 6 Series oscilloscope that we just announced is in a number of applications that we think will have tremendous opportunity next year.
Automotive, which is principally autonomous vehicles, data centers, low signal, low power applications in IoT. I don't think those applications are necessarily going to be things that are less next year. We've repivoted the business towards a number of those kinds of applications. It's a little early to predict what 2019 will look like, but we still think there's plenty of opportunity in 2019.
Okay, great. Thanks, Chuck.
Thanks.
Your next question comes from Sawyer Rice of Morgan Stanley.
Hi, good afternoon, guys.
Afternoon, Sawyer.
Maybe just a two-parter here on GVR. Any sense of what the mix between dispensers and kits was in the quarter and maybe the impact there on margins as a result? Then just kind of looking forward, are you guys expecting this business to start to ramp into the back half and into next year as we start to approach the EMV deadline here in the U.S.?
I think minimal margin impact on the kits versus dispensers. We'll follow up with you what the exact number is. I think it was sort of the way we came in. When you look at the mix of business, it was a good mix of business. As we said, the exclusive partnerships that we've got with people like Valero was up double digits, as we said in the prepared remarks. I think what we really liked was the single retailer, what we call the single network owner, that business coming back. That tends to be a pretty good margin business as well. I think all the trends we saw in the quarter would suggest that the second half is pretty good. Is that helpful?
Thanks. I'll leave it there. Yep, I'll leave it there. Thanks.
Sure.
Our next question comes from the line of Andrew Kaplowitz of Citi.
Hey, good afternoon, guys.
Hey, Andy.
Can you give us a little more color on Gordian? You do call it cyclically resistant, but obviously the underlying end market is building construction. We know it's high in recurring revenue and software. It seems like the underlying end markets would be cyclical, though. Can you talk about its historical performance, especially during slowdowns, and is there anything else that gives you confidence that the business is really cyclically resilient?
Yeah. The core customer here is the public sector asset owner. Think of the VP of facilities at a public university and some contractors and architects as well. That's first and foremost kind of who they sell into. State and local governments, healthcare, universities are the principal customers. These are not for big CapEx projects. They're mostly used, whether it's job order contracting or RSMeans or even Sightlines. They're mostly used for things like small projects that tend to not still be done in times of slowdowns and things like that. I think that's first and foremost. I think the business performed pretty well 2008, 2009, we think it'll be fine. The sort of end market capital project, it's really not tied to commercial real estate in the sense of new.
Much of commercial real estate tends to be in things that are big building related. This is much more tied to the maintenance of buildings, which tends to be pretty stable.
Got it. That's helpful. Then can you give us a little more color on Franchise Distribution and Matco in particular? You mentioned a little better growth here in Q2 and high single-digit growth in your tools business. Have you turned the corner here and now you do have better visibility toward growth moving forward?
Yeah. I think versus the market, they outperformed when we look at the growth rate. As we said in the prepared remarks, I think on a small base that the subscription revenue was up, which was good to see, building more of a recurring revenue set. The health metrics were good, and that's probably the thing we felt good about, maybe a little bit more optimism here, is that the health metrics we're seeing more the franchisee applicant funnel, which is a good predictor of business down the road, is becoming more full. Those are good signs. We have still not seen the toolbox business come back. I would call Matco right now stable, and I wouldn't necessarily suggest we've seen an inflection point yet, but I think we're in growth mode and we're in a stable growth mode.
We'll continue to watch the metrics to see when that sort of moves the growth rate up. I think right now I would say stability is really the right word to describe it, the business.
Chuck, just a quick one for you. Tax rate keeps drifting down, which you have to commend your team on, I would guess at some point there's a low point to where it could go. 18% seems pretty low already. Do you have more room there or is that what we should expect going forward?
Well, I take the second question. I think 18%'s a good number at this point in time, and I'd probably use that into next year as well. How low can it go? It really just depends on how the world keeps changing. There's tax reform that happens outside the U.S., then as we come to learn the correct interpretations of the U.S. tax reform, it creates opportunities. When you put all that together with our M&A, I don't know how much lower it goes. It depends on what the law does. Right now, 18%'s a good number.
Thanks, guys.
Thanks, Andy.
Your next question comes from Jeff Sprague of Vertical Research.
Thank you. Good day, everyone.
Hey, Jeff.
Wondering if we could just circle back to the guidance one more time. I guess slide eight would seem to suggest you're bluffing the top end of the range. I don't know if that's correct or not, but I guess whether that is correct or not, what needs to happen to get you to the upper end? I kind of ask that in the spirit, I think, of maybe one of the first questions, that the implicit operating margins in the fourth quarter do need to step up very nicely. Is there something in cost drop-through or mix or something that you have visibility on that makes that fourth quarter come together?
I think that there's a little bit of some investments that we made in the fourth quarter of last year that makes probably the margin expansion a little better. There's not a step function in terms of the VCMs that we would expect to see from Q3 to Q4 to make that, getting to the high end. I would emphasize that we do have a range, and even though in a rising market, we're to the high end. The way we gave that reconciliation out there at the high end was meant just so you could see the moving pieces really clearly.
Just a quick modeling question. Corporate was a little bit higher than I was expecting. Some business development going on in there or what, and what should we expect for the year?
I think that this is where we're seeing some of these deal-related expenses show up for the Altra deal and the ASP deal, and there's also some external spend around the tax deal. That's what's mostly driving the step-up in corporate.
Is that a run rate now off this Q2 number, or that's elevated?
I think it's going to be elevated from here in Q3 and in Q4, coming into next year, it'll drop back down into the low 20s.
Great. Thanks for the color.
Thanks, Jeff.
Your next question comes from the line of Richard Eastman of Baird.
Well, that'd be me. Thanks, Jim, and Chuck and Lisa for the questions. Jim, just a question around bracketing out a little bit Fluke Health Solutions, with Landauer now coming into core later this year. You got Fluke Biomedical, J&J, the ASP deal gets done. I think we can calculate this out at over a billion in revenue on the health solutions side. What's the strategy for those three businesses? Do they ultimately get? Is that the makings of kind of a new platform here? How will you integrate those and manage them, or will they kind of stay separate businesses?
I think what we will do here, not to push the question off a little bit, what we will do with Altra going out or our automation business going into Altra and with our work with ASP, we'll ultimately come back to everybody with how this is all going to look from a platform perspective. It suffice it to say that there are opportunities for synergies with some of the businesses. You're right in your numbers. We will have over $1 billion worth of healthcare between the businesses, Fluke Biomedical, Landauer, and with ASP. That's obviously a meaningful amount of revenue with good growth and great margin expansion opportunities. We're thinking through a variety of things that'll make sense and a couple of different angles.
More to come on that, I think the idea that we're building this capability around safety, productivity, and quality assurance in medical applications has been the reigning strategy for all of those additions to the portfolio. What we do is really, I think, exciting to be able to offer these sorts of solutions to customers. There are synergies between the two. We don't always have to structure things differently in order to get after those synergies. That's always been a culture of us. We are in the process of determining the appropriate organizational structure and more to come once we're landed on all of the puts and takes going on in the portfolio.
It would seem that greater than $1 billion, maybe it's $1.2 billion or something like that, would have probably some of your best FBS opportunity.
Definitely for sure.
ASP and Landauer?
Most of that revenue is 12 months old, right? Landauer, we just bought a year ago. ASP will come into the fold. Without a doubt, just by nature of them just joining us, joining the team, they will have more opportunity to be able to take advantage of productivity, safety, quality. Growth. I think as we said when we announced the ASP deal, we thought the innovation and growth tools would be a big help to the ASP business as well.
Okay. Then just a quick one for Chuck. What's the FDS for a number that you're using for third quarter guide?
I'm sorry, I didn't get that.
Fully diluted share count that you're calculating using third quarter guide.
Hang on, I got it right here.
Because that will capture the convert, correct?
Yeah. Say, 373.
Okay. Great. Thank you.
Thanks, Rick. Have a good night.
Your next question comes from Scott Graham of BMO Capital Markets.
Hey, good evening.
Hey, Scott.
I have two questions, one on pricing, one on GVR. I was actually a little surprised that the pricing was only up 50 basis points. Will we see that higher in the second half of the year? Is there anything you netted against that to We're seeing little higher elsewhere.
Most of it is because when you think about some of the things related to tariffs and inflation, it really hasn't impacted us until mid-July. The 232 stuff that a lot of other companies saw early was a reason to go in and go into the marketplace with price. We had so little impact from 232, it's a little difficult to do from a marketplace. When you look at the 50 basis points that we had in the second quarter, that's kind of our typical pure strength of portfolio, strength of market position kind of price. The second half, we'll see that accelerate as a number of our countermeasures start to play out.
Right. Fair enough. Along those same lines, when we talk about the inflation, the cost 232 less so, 301 more so, when you say that you're throwing a lot of things under tariffs, obviously there was inflation before the tariffs. My sense here is that with the minimal impact on 232, you're essentially saying, I don't want to put words in your mouth, but you're essentially saying that you weren't seeing a lot of inflation in front of the tariffs. That was just pure commodities inflation that we saw second half of last year, for example.
Yeah. We get a lot of purchase price variance, PPV. We have a really high-quality supply chain organization that really does a fantastic job. We've been pretty good at mitigating some of the kinds of things that have occurred over, that we've already seen. We've seen some stuff on fuel surcharges and stuff like that as oil prices went up. By and large, those have been things that we just mitigate as a normal course of action. We've been very good at that, and that's why we've been able to. When you look at the gross margin expansion as an example that we've seen over the last several quarters, it's been really strong, despite, you might say, a little bit more of an inflationary environment than the quarters before that.
Got you. Thank you. My GVR question is, you've given us some information here for, I think, the first time that this mid-tier strength, double digit, and you called us sort of, I think smaller, I don't know how many stations per owner type thing. How much of the market for EMV is that? Let's say a potential $500 million. Yeah.
The single site owners is probably 70-plus% of the stations, but it's the 80/20, right? It's 70% of the stations. It's pretty close to 80/20. They don't spend as much money as the big retailers. They do convert, and we've seen a lot of visibility from the larger retailers over time as they get ahead of this. I think we've said pretty consistently is that one of the reasons why the single site owners or single network owners, a lot of them know their customers. Maybe they're in a smaller town or something like that. They are the majority of the stations, but not necessarily the majority of the dollars, but seeing them come on board.
The multi-site owners, the other part of that is the mid-tier of the market, and that's a bit of a sweet spot of the market. I don't have the exact numbers of percentages, it's 30% probably of the market in some way, shape, or form, probably for dollars. It's a good chunk of the market. To start to see them doing their capital planning and starting to implement is a good sign for EMV.
Got it. Hey, thanks for your time.
Thanks, Scott.
Your next question comes from Joseph Giordano of Cowen.
Thanks for taking my questions here.
Hey, Joe.
Hey, Joe.
I'm curious on Tek. Given the margin profile there, how sensitive would that segment be to movements there? Would that be one of the more principal drivers on a given % move of margins in that business? Does that make sense?
You mean across the whole company, right?
In just PI, does that have the biggest move on a given % change of revenue change in the PI?
No, I think Fluke is the biggest piece of that on the PI side. Tech's got great margins, when it goes up, it does lift, and it's got great fall through, well over 50%. Yeah, it's impactful, but it just really depends on the size of the impact.
Maybe just an add, which was really good to see in the quarter, Joe, was even though tech didn't have the growth rate that they had a year ago because of the comp this year, they did an exceptional job on the gross margin side. It really is on the backs of their innovation. We talk about the Five series being a very strong margin product. They've done an exceptional job of really bringing out these new products with more software and a better value proposition, which is obviously, even in a lower growth environment, is allowing for them to really deliver better gross margins.
Okay, then on the tariff side, I know you guys are pretty niche-y in your businesses, so maybe this isn't really that applicable, but are you seeing any competitors that were non-U.S. competitors being opportunistically competitive? Is that having any impact in those specific businesses that you operate?
Not yet. Every business is different because it kind of depends where the competitors are. We're certainly looking to watch some of that. Quite frankly, we're looking to do some of that as well. We'll see if those opportunities are available to us, but they'll be on a case-by-case basis. I think the biggest thing is it's really early right now. When you really think about it, most of these things really went live for sure, just in the last few weeks. It's pretty early to really tell if there's a trend on anything right yet.
Okay, great. Thanks, guys.
Thanks, Joe.
Your next question comes from Nigel Coe of Wolfe Research.
Thanks. Thanks. I missed a couple of quarters, so I'm catching up here. Just a quick clarification, actually, Chuck. You mentioned $0.05 net impact from M&A stroke Altra. I think that's the number you gave in your response to Steve's question. Would that include the dilution from convert or was that separate?
Actually, what I was trying to say is all the things that we've done this year with Altra, ASP, the mandatory convert, and you net all that stuff out, where will it land after share retirement and ASP closing.
It is included.
I think it's $0.05 accretive next year, and then on top of that will be our normal earnings growth that we get from the businesses, and then whatever we do in the second half of the year.
Right. That's all I had. Thanks, guys.
All right. Thanks, Nigel.
We have no further questions in queue at this time.
Well, Philip, thank you, and thanks everybody for taking the time this evening. We couldn't be more excited about the performance in the second quarter. As we close out the first half of the year and started in July, we celebrated our second anniversary of being out, and we've gotten a lot done. We're really proud of the work we've done, the capital we've deployed, the ability to bring in great businesses, to take the opportunities to do the portfolio transformation. Two years has gone exceptionally fast, and as those of you who know us, you know that we're never satisfied, and the highest expectations that we have are those of ourselves. We're really excited. We appreciate the time and energy you put into learning more about us. Thanks for a great start the last two years. We'll look forward to telling you more about what's going on.
Lisa and team are available for follow-up. We'll look forward to talking to you all soon, and have a great evening. Thank you.
Ladies and gentlemen, this does conclude today's conference call. You may now disconnect. Thank you for your participation.