Fortive Corporation
Q1 2017 Earnings Call Transcript

Published: 28 Jul 2017

[Operator:]

My name is Hope, and I will be your conference facilitator this afternoon. At this time I would like to welcome everyone to the Fortive Corporation Second Quarter 2017 Earnings Results Conference Call. [Operator Instructions] I would now like to turn the call over to Ms. Lisa Curran, Vice President of Investor Relations. Ms. Curran, you may begin your conference.

[Lisa Curran:]

Thank you, Hope. 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 Thursday, August 27, 2017. Instructions for accessing this replay are included in our second quarter 2017 earnings press release. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. All references to period-to-period increases or decreases in financial metrics are year-over-year. During the call, we will make forward-looking statements within the meaning of the Federal Securities Laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties and actual results might differ materially from any forward-looking statements that we make today. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2016. 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.

[Jim Lico:]

Thanks, Lisa, and good afternoon, everyone. We are pleased with our performance as we mark Fortive’s first anniversary. One year ago, we launched Fortive with a greater strategic focus. Key to that was accelerating growth investments to strengthen our market-leading positions and capital deployment for acquisitions. The Fortive business system was highlighted as the cornerstone of our competitive advantage. FBS is ourplaybook for accelerated innovation and superior customer satisfaction to drive improved core sales growth, operating margin expansion and strong free cash flow. We have consistently made meaningful progress towards all of our strategic and operational goals since the separation. I’m happy to announce that we have signed a definitive agreement to acquire Industrial Scientific Corporation, a leading provider of portable gas detection instrumentation and the safety-as-a-service pioneer, in an all-cash transaction for our purchase price of approximately $600 million. The addition of Industrial Scientific accelerates our digital strategy and creates a stronger platform for connected solutions for critical applications in maintenance and safety. The business is a natural extension of our current field solutions portfolio and have highly complementary customer base. Consistent with both Fluke and Qualitrol growth strategies, Industrial Scientific generates recurring revenue from a subscription-based model, which combines hardware, monitoring software and consumables into a safety-as-a-service offering. We are assuming a second half close without a meaningful for 2017 results, but we do anticipate 2018 earnings accretion. Now I’d like to turn to the details of the quarter. Our adjusted net earnings of $249.9 million were up 13% over the prior year. Adjusted diluted net earnings per share were $0.71 with an effective tax rate of 26.3% for the quarter. Sales grew 4.7% to $1.6 billion, a core revenue increase of 5.4%. Five out of six strategic platforms grew core sales mid-single digits or better, reflecting strong volume, market share gains and continued performance in high-growth markets. The favorable impact from acquisitions accelerated to 40 basis points of growth during the second quarter, partially offset by 110 basis points of unfavorable currency translation due to the strength in the US dollar. Geographically, high-growth markets core revenue grew double digits with continued strength across Asia. High-teens growth in China was driven by increased demand for Tektronix, Qualitrol, Thompson and Kollmorgen. Excluding China, high-growth markets’ core revenue grew low double digits. Developed markets’ core revenue grew low single digits, reflecting continued strength in Western Europe and incrementally better industrial markets in North America. North American growth of most single digits reflected strong performance at Gilbarco Veeder-Root, Fluke and Kollmorgen, which were somewhat offset by Jacobs Vehicle Systems. We continue to outperform in Western Europe posting high single digit as continued market share gains and peak project wins were realized in Gilbarco Veeder-Root, Qualitrol, and Morgan. Gross margin was 49.4%, as approximately 60 basis points of expansion in professional instrumentation was offset by nearly 45 basis points of contraction in industrial technologies. Notably, field solutions expanded gross margins 125 basis points in the quarter through the use of FBS lean tools driving supplying chain and manufacturing efficiencies. We are pleased that for the first half we delivered strong gross margin expansion of 70 basis points. Operating profit margin was 21.4% with core operating margin expansion of 90 basis point in the quarter and 125 basis points year-to-date. Both periods benefited 65 basis points from lower amortization. During the second quarter, we generated $217 million of free cash flow and delivered a conversion ratio of 90%, which keeps us on track for greater than 100% for the full year. Using FBS tools across our operating companies, we were able to improve working capital turns by half a turn, lead by strong improvements at Fluke, Tektronix and Gilbarco Veeder-Root. Turning to our segments. Professional Instrumentation posted sales growth of 4.8% with core revenue growth of 6.6% and operating margin of 24.4% with 240 basis points core expansion, which includes 140 basis points benefit from lower amortization. Advanced Instrumentation and Solutions core revenue increased high single digits during the quarter, driven by strong growth in Product Realization and Field Solutions. Field Solutions core revenue was up mid-single digits in the quarter with both Fluke and Qualitrol posting strong core revenue growth. Fluke’s mid-single-digit core growth results were led by Fluke Industrial and Fluke Networks, which delivered mid-single-digit and high single-digit growth, respectively. As we highlighted last quarter, Fluke Networks’ performance reflects the continued impact of the FBS growth room with sales conversation up 30% sequentially. Industrial growth was led in North America, where sales were up mid single digits with point-of-sales data trending better across all product categories. eMaint continues to grow sales double digits, leveraging the strength of Fluke’s large installed base. In May, we launched Fluke FLX, which is the platform brand for our digital and condition-based monitoring offerings. Additionally, in late June, we acquired SCHAD, a small technology company based in Germany. The SCHAD technology adds a suite of software products that simplify data integration and mobile work management for our customers. We’ve also reached an important early-phase milestone for Fluke FLX by starting e-pilot with several large customers. Qualitrol delivered high single-digit growth lead by further penetration of condition-based monitoring solutions for European and Chinese OEM as well as utilities in the Middle East. Good growth in North American retro fits were driven by FBS as we focused on improving funnel visibility and identifying adjacent market opportunities. In China, we gained share with transformer OEMs via new product penetration and ultra-high voltage transmission. In June, the Qualitrol team closed the key order for comprehensive monitoring system for a Middle Eastern national electrical utility. We're pleased with our high-growth market expansion strategy as our go-to-market investments in targeted geographic continue to pay off. Moving to Product Realization. The platform core revenues were up low double digits for the quarter, lead by growth in Tektronix. Tektronix low double-digit core revenue growth continues to be driven by high-growth markets, where sales grew strong double digits this quarter. This performance reflected in part Keithley 3D sensing sales in Korea and China. China continued to deliver low double-digit growth, driven by increased demand for our leading technology targeting the optical and semiconductor end markets. We see encouraging signs entering the second half of this year as the China’s semiconductor market build-out is only in the middle of what we estimate to be a five-year opportunity. We launched the Tektronix 5 Series mixed-signal oscilloscope in June, which is the first in the series of hardware and software launches. We are pleased with the performance to-date and the strong positive reaction and technology reviews received from the market. This groundbreaking technology favorably positions us in our targeted automotive and power segments, which is consistent with the strategy we discussed at Investor Day. As we’ve previously noted, this new platform will have a more meaningful impact starting in 2018. Our Sensing Technologies platform delivered mid-single-digit core revenue growth in the quarter, lead by double-digit growth in high-growth markets and improved stabilization in the US. Growth was primarily driven by China and general industrial and market improvement in the US. Our sensing technology teams continue to see accelerating progress on our strategy of broadening our system development capability. As an example of this, we saw a greater than 30% sequential improvement in our target vertical funnel at GEMS. Moving to our Industrial Technologies segment. Revenue grew 4.7% with core revenue growth of 4.5% and delivered operating margin at 20.9%. The favorable impact to operating margins from increased demand for our product overall was offset by greater R&D investments and a decline in franchise distribution core revenue. Year-to-date, strong volume and improved productivity drove 90 basis points of core operating margin expansion. Our Transportation Technologies platform posted mid-single-digit core revenue growth in the quarter, led by mid-single-digit growth in Gilbarco Veeder-Root. The performance in Gilbarco Veeder-Root came in better than expected on share gains in Europe and Brazil and with several large North American retailers who continue to upgrade to EMV capable dispensers. Global dispenser sales were up high single digits reflecting the preference of our products around the world. We were excited to announce last month that Gilbarco Veeder-Root successfully processed the industry’s first US EMV chip transaction at a fuel retail site using our Passport point-of-sale solution and Encore fuel dispensers. We also launched LEGO, our new fuel point-of-sales system from Orpak, in high growth markets. This technology has a key building block to future Insite360 services and to advance through [Technical Difficulty] announced acquisition of Orpak in the third quarter of 2017. Telematics realized core revenue growth of low single digits in the quarter, led by strong, SaaS sales growth in Australia, New Zealand and increase installed base in Europe. These results were partially offset by the sales decline in North America, despite improvements across key metrics in the US. Given this positive trend, we expect to return to growth next quarter in the US with an acceleration to exit the years as mid- to high-single-digit growth at Telematics. Automation and Specialty grew core sales mid-single digits, driven by double-digit growth in high growth markets in robotics, both of which are aligned with our high-growth market and IoT growth initiatives. Growth was partially offset by flattish sales at Jacobs Vehicle Systems. Kollmorgen posted low double-digit core revenue growth, reflecting strong demand across our global Industrial Automation product line, which is driven by continued robotic strength in Europe, China and Japan. Comau, a leading European player in mobile robotics, recently launch its new mobile robotic solution, Agile1500, utilizing Kollmorgen’s guidance control system. Thompson delivered low single-digit core revenue growth, driven by double-digit growth in high growth markets, reflecting key project wins for factory automation applications in Asia. Jacobs Vehicle Systems is continuing to see strong sales in China and an improvement in North America, reflecting an increase in heavy-duty truck orders. Franchise distribution core sales declined low single digits, reflecting a low single-digit decline in core revenue and Matco. For the first half, hard line core revenue grew high single digits, and the Maximus family of diagnostic products grew core revenue double-digits. Despite the strength in these product lines, we’ve seen a pause in demand for tool storage. To wrap up, we took important steps towards accelerating growth of both organic and inorganic strategies. Progress towards our EMV, high growth market, digital and portfolio enhancement growth initiatives, including $1 billion of announced acquisition since the separation, positions us well going into the second half of 2017 and into 2018. We are raising our full year 2017, adjusted diluted net EPS guidance range to $2.72 to $2.80, which includes our updated core revenue growth expectation of mid-single digits and an effective tax rate of 26.5%. We continue to anticipate core margin expansion in excess -- in and around 50 to 70 basis points for the year. We are also initiating our third quarter adjusted diluted net EPS guidance of $0.59 to $0.73, which includes assumptions of mid-single-digit core revenue growth and an effective tax rate of 26.5%. And with that, I’d like to turn it over to Lisa.

[Lisa Curran:]

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

[Operator:]

[Operator Instructions] Your first question comes from the line of Steve Tusa with JPMorgan.

[Steve Tusa:]

So the deal, $600 million, I think. Can you just remind us, just breakdown, the billing you’ve spent? And then on this specific deal, a little more color on sales, margin to the extent you can give us?

[Jim Lico:]

Yes. So I’ll start with the second one, on the $600 million. We’re really excited about ISC. It’s a business that we’ve known for a long time. We’ve been friends with the [indiscernible] family for a long time. It’s been a long-term cultivation. They’ll do probably in the range of $170 million to $180 million of revenue this year. This will fit our return profile with 10% in three years on a right model. So we feel really good about the returns here and how we think the business will do is very consistent with our strategy that we talk about relative to digital initiatives. The fact that these are connected instrumentations, they’re deep into the customer workflow and in critical technology, which is essentially like our shared purpose essential technology. It’s a recurring revenue subscription-based model for a good portion of the revenue as well. So the financials and the strategic aspects of the business are really good. With this season around -- for 2018, around 10 to 12 times EBITDA, so I think a great opportunity for us to create value over the long time at a price that, quite frankly, we can get to a return profile in the timeframes that we’ve been disciplined about.

[Steve Tusa:]

So like $0.10 of accretion next year-ish?

[Chuck McLaughlin:]

Well, I think we’ll wait while we get the deal baked and closed and then wait for the guidance next year, but we expect to be accretive next year for sure.

[Steve Tusa:]

Okay, and then the other deals that remind us and what else makes up the billion dollars.

[Jim Lico:]

So the first couple of hundred million we acquired eMaint and GPP in Q4 last year, and then early this year there was Orpak for around a similar amount. And then we did a small technology deal called SCHAD. It’s a single-digit acquisition, but we got some technology that help us through that connected solutions.

[Steve Tusa:]

Okay. So then one last question on the second half, you're growing mid singles. Then we would like that much of a slowing relative to the first half. But again, these obviously kind of staring us in the face. So what's getting better in the second half to offset what is kind of an expected EMV slowdown to get to kind of back to the mid singles.

[Jim Lico:]

So first, I think, I would say that the third quarter for EMV looks pretty good, so we had a couple of orders that came in, that’ll us maybe a little bit better for the third. I would suggest that the other part is really the North American industrial market broadly sees. We've seen an up-tick through the quarters here in places like Fluke, as we mentioned on our prepared remarks, our Spencer businesses and automation, all saw improvements in North America. So it’s really a combination of a little bit better EMV than we originally thought and probably to some extent the North America industrial market sort of solidifying a little bit as well.

[Operator:]

Your next question comes from the line of Nigel Coe with Morgan Stanley.

[Nigel Coe:]

Just kind of – still there is a kind of effective product line of within the [indiscernible] or do you intend one as the standalone business? And what kind of proportion of revenues would you describe at SaaS?

[Jim Lico:]

Well, first, we would like -- really see this as a third leg of the Field Solutions platform. So they’re certainly considered to be with Fluke and the core customers with Fluke. We see some real opportunities with if you think about in a verity of industrial environments, where our maintenance worker is also using safety technologies, we’ve seen a real opportunity to link what we're doing with connected solution both with Fluke and with IFC. But IFC will be at a, we think, a standalone business that has a great growth profile in and of itself. I think the recurring revenues in the business today are around right around 40% or something like that, but it’s a high growth part of the business. So if you sort of compound that over time, it becomes very good recurring business over a longer period of time.

[Nigel Coe:]

Okay, that’s great. And then just turning to industrial. You called out R&D as a headwind to margins this quarter. Obviously margins were pretty flat year-over-year. Anything else in that? Is there any mix impacts price rose to think about as well? And then he called out franchise as a tools and storage solutions. I think we still see some weakness from Stanly and also Snap-on too. So I'm just wondering any perspective we have on what’s causing this pause.

[Chuck McLaughlin:]

On the margin compression and looking at Industrial Technologies, we have to do with Matco that’s growing. It’s one of our highest-margin businesses. That just gives us a little bit of a mix. But we think that even with that flowing that we're seeing there, as we -- when we look year-to-date, we’re seeing good margin expansion we think by the end of the -- as we move forward into the second half, we’re going to continue to see that. But at this point in time versus a tough compare that's the main reason.

[Jim Lico:]

On the franchise distribution, we noted in the prepared remarks, we see some product lines that are pretty good. We had a 10% increase in our expo participation from a year ago, so that method was pretty good. A lot of the forward-looking metrics around help are good. And number of the product lines was pretty good, as was mentioned, in diagnostics and some of our hard line tools. And really, as long as really is in tool storage, as you mentioned, I think a number of the other folks in the market have also denoted the same thing. We get a lot of good data off truck in terms of what we see from a sales-out perspective, and we do see some slowing. So I don’t necessarily think we had four or five years of really strong mid-to high-single digit growth here, so I think this is more a pause than anything. But certainly when we go back to other times when we saw a long-term slowing, we didn’t -- we saw changes in some of those health metrics that we typically see. So, we’ll probably see a little bit maybe another quarter or so as we work our way through some of this, but I think on balance we feel the business is still good and we think we can do some things that might make a little bit of our own locked here as we get later into the year.

[Nigel Coe:]

Okay, that's great. By the way, thirds quarter is just going to see good sort of quarter unlike some other companies will today.

[Operator:]

Your next question comes from the line of Julian Mitchell with Credit Suisse.

[Julian Mitchell:]

Just focusing again on the industrial tech segment, is there any impact you are seeing right now from input costs there? And I guess as the assumption was that the gross margin decline was a blip simply from mix, how should we see, for example, better pricing in the second half in IT that will help that gross margin rebound?

[Jim Lico:]

Yes, we feel that in terms of the margin profile, as you mentioned, Chuck mentioned a minute ago, we had a couple of things on the mix away from Matco and into any other business within the segment is obviously a mix challenge. But we had a few onetime things that occurred. But as we look year-to-date, both gross margins and operating margins are good for the segment. So I would really see this as a more of the onetime things. As we go into the second half, we’re highly confident we can continue to get good margin improvements in Industrial Technologies. Relative to input cost, we really don’t see -- this really is not driven by input cost. Our PPV numbers are purchasing cut price reductions that we got it very good. It's something that Chuck and I look at every month. We look at our input costs pretty detailed as well. And we are in pretty good shape in that regard. Price has been good across the portfolio. I think five of our six platforms got at least 20 basis points of price or more, so in many in the 30 to 50 range. So we still think we can be in the 30 to 50 points range and price for the year. So I think really some of the gross margin things that occurred we really think are more of a onetime nature and we feel very good about what we’re going to have going into the second half.

[Nigel Coe:]

Thanks. And then my second question was just still be within industrial tech but on the sort of turnaround effort within Telematicsm. Just gave us an update with that reorganization on the way how you are thinking about the progress there. And also I guess it sounds if you are going to see an improvement in sales trends, how much is that sort of end-market driven versus your own reorganization?

[Jim Lico:]

Yes, I think end markets are pretty good and I don’t think the end market is necessarily picking up. There is a little bit of help with ELD, but that’s not a huge percentage of a market. So we really think that the improvement is what we’ve been doing. We’re obviously very focused as we talk on many calls around the fact that we wanted to improve the business there. We started with the integrated platform. We changed our go-to-market in some respect and changed some of our go-to-market investments to take advantage of that. We have the highest number of growth adds in North America than we’ve ever had I think in a quarter, in the past quarter. So our churn numbers are looking good. Our growth add numbers are looking good. Our -- what we look at in terms of how we look at average prices is improving. So all of the long-term go-forward metrics that we look at are all very good for the quarter. But obviously in a SaaS business, it takes a little while for all that to sort of churn through into a revenue projection. So we think by, as we said in the prepared remarks, we think mid- to high single digit exiting the year, and there is no reason why we can’t see that kind of growth into 2018. So we think would be at least market at that point, but still working really hard to do better with the market as we push into the following years from there.

[Chuck McLaughlin:]

Nigel, if you remember what we’re talking about North America challenged, outside the US, we continued to do well.

[Operator:]

Your next question comes from the line of Jeffrey Sprague with Vertical Research.

[Jeffrey Sprague:]

Just on the point-of-sale color, Jim. I know you pointed to industrial kind of being better in the back half, offsetting maybe ENV. Could you just elaborate a little bit more on the point of sale strength that you’re seeing, how broad it is? It sounds like its mostly centered in Fluke, but perhaps it’s broader than that?

[Jim Lico:]

Yes, we’ve talked in the last few quarters that the US was stable. We certainly would suggest now that it’s starting to get a little bit better. As you know, as long as anybody, we did pretty good visibility at Fluke in terms of point of sale, and we really see all of that in the point of sale data. So the mid-single-digit kind of grow that we’ve seen in North America at Fluke as an example is really consistent with what we’re seeing in point of sale. So we’re not seeing any inventory build or anything like that. We also get pretty good point of sale information at places like Kollmorgen as well, so we’re seeing consumer trends there in constant. So we feel pretty good that the trend is -- right now is occurring.

[Jeffrey Sprague:]

I was also just wondering on the deal pipeline, the notion that this is someone you’ve known for a long time and cultivated. But maybe it’s part of Danaher. Maybe that got push from the back burner and wasn’t even a live prospect if they were even prepared to sell. Just kind of comment on that? I mean is there stuff that where the trail maybe got cold where you’re kind of warming it back up and is that in any way influence your pipeline here as look into ‘18?

[Jim Lico:]

I think it has influenced the pipeline. I’ve talked a little bit about this over the last 12 months. A little bit what has influenced the pipeline more broadly is the fact this is a more focused industrial company with the strategy similar to like IFC around connected devices, taking advantage of digitization in that and kind of the mobile workforce. You start to see more of that kinds of strategies that we’re thinking about and certainly in IFC’s case very consistent with how they were thinking about of where the world is going. So there are those situations for sure in the funnel, where we could definitely point to businesses that have been more interested in talking with that. I think, in this case, maybe a little bit less true that also to do with the families timing and how they to wanted to think about things. So I would necessarily jump to the conclusion if this wouldn't have happened in the prior life, but we're really excited to have them as part of the team. We see the world very similarly and I would also say that really when you think about field solutions and what rest in the team, have really got an IFC done, as we’ve articulated the consistency with the strategy. The small deal that we did with SCHAD, which give us some great technology around and it would really integrate to facilitate industrial sites with data facilitation amongst multiple kinds of applications. Just large and small, I really think that articulates the breadth of the funnel. We’ve been talking for a while that the breadth of the funnel is pretty good, and I think this quarter is a great example, accelerating strategy to fill solutions with the both the large deal and a very tiny technology deal that accelerates strategy as well as finalizing Orpak. So I think this is a -- I think why were excited about this quarter in many respect is that all of these things that we've been talking about as we celebrate our one year anniversary come together in a very similar way.

[Operator:]

Your next question comes from the line of John Inch with Deutsche Bank.

[John Inch:]

Jim, just to put a fire point around your commentary on Industrial Technologies’ profitability, I mean do you expect as part of your third quarter guide, year-over-year op margins to be up? Or do you – I’m just trying to understand are you expecting kind of the trajectory of margins to get back to up by the year end? Or what would you say about it.

[Jim Lico:]

We would expect that both segments will have good operating margin expansion in the second and the third quarter and the fourth quarter.

[John Inch:]

All right. So that clears that up. Talking about IFC for a sec, so what kind of growth do you expect out of this business as you apply your tools to it? What sort of a growth rate on the top line would you expect? And I don’t know if you said there were revenue synergies, but if there are, could you maybe talk a little bit to what those might be and how significant that could be?

[Jim Lico:]

So when we think about the value creation, clearly we’re buying a great business with a great team. And as standalone business, this business will do well. It’s been a mid-single digit growth through the cycle for a number of years. And iNet platform, which is really that Safety-as-a-Service platform, has been growing even better than that. So that becomes more of the part of the business. The grow trajectory is the business should improve to high single digit in a not too distant future. So that kind of gives you the growth profile of the business. We see from the synergy prospective one obviously we can help them with global reach. Fluke in our Field Solutions platform is our most global platform with both Fluke and Qualitrol have tremendous growth in and around the world will certainly help them invest in more technology. They will help us with some things. We can help them. Certainly M&A is going to be an aspect of this. We will be able to bring capital for them with many of the ideas they have. So that’s really -- those three things are really focused on growing the IFC business and accelerating with team as there. I think certainly FBS is wonderful opportunity as we meet with. Justin McElhattan, who is CEO of the business and will stay with us, Justin was most excited. They make some good progress on FBS on a lean side and are really excited about some of the growth and leadership tools that come -- that we compare to the business. Well, those are all good synergies. Specially though around where there is an opportunity, we’ve coined this terms safetynance, which is the combination of safety and maintenance, and what that really is, is when maintenance professionals go into environment where many of them regulated where they need gas protection equipment, that they are using Fluke tools. And so this combination of being able to work within the maintenance workflow like we do with eMaint be able to apply Fluke connected tools along with their tools and bring out about as also a growth opportunity. So it's not the biggest driver of the model, but we certainly think that's a good growth opportunity for the platform over time.

[John Inch:]

Safetynance, I like that.

[Jim Lico:]

I haven’t trademarked it, so hopefully to seeing that.

[John Inch:]

In that safetynance, I think you’re – the conference call operator was hope, now you got hope, so hope we’re on track here. Maybe one more from me. You raised prices by -- it was appearing to be a pretty significant amount in the PI business, is that -- what was that? Was the Tektronix new products? Or how did you accomplish that? And will it be sustained?

[Jim Lico:]

Well, I think -- yes, I think it can be sustained. I think we had good price over -- we are working off it is in good price comps, quite frankly. I think if I recall last year, the second quarter was a really good price comp for us last year, tough comp if you will. So I think we can maintain it. It speak to the -- we talk a lot about the strength of our market positions and part of that is the differentiated technology that we have and part of that is the brand and the strength of the market -- the relationship we have with customers would ultimately gives us some pricing power. We certainly don’t use that to an advantage, but we certainly like see creating more value allowed for us to take more price. On the new product, we won't see price because that's -- we take that out of our price calculation. So on a new product, you might see better gross margin, but we don’t create that in our price calculations.

[John Inch:]

Yes, I think I've said it was like up 0.3 for the first half but up 0.6 for the second quarter, which, no, that’s a pretty big difference. What are you suggesting -- I'm assuming that that was no compare. There were other things going on or…

[Jim Lico:]

No, that's right. Yes, we did improve a little bit. I think at Fluke we had a much better second quarter. I think we had moved from price increases -- around the world I think we’ve moved them from the first quarter to the second quarter. So I think we started good attraction on that in the second quarter.

[John Inch:]

Got it. All right. Thank you very much. Appreciated.

[Operator:]

Your next question comes from the line of Andy Kaplowitz with Citigroup.

[Andrew Kaplowitz:]

Jim, you just mentioned price in the PI. When I look at incremental margins in that business, I mean they are very strong in the quarter. Can you give us your initial FY ’17 block at the beginning of the year? You highlighted that you expected $0.04 to $0.05 in productivity and restructuring benefits in '17 versus '16. But I think a lot of that in PI. So are you getting more EPS than you expected so far from these benefits? And what would that updated number being versus that $0.04 to $0.05 that you talked about in the beginning of the year?

[Chuck McLaughlin:]

Andy, this is Chuck. So no, I don’t think we're getting more than what we expected out of that restructuring. We’re getting exactly what we thought we would. I think what you are seeing especially in PI is the core growth has been trending up since maybe Jim talked about those comments and at the VCMs that we as incremental margins we generate added that business, that's really what's commenced to lift.

[Andrew Kaplowitz:]

Okay, that's fine. And then you guys are continuing to sort of outperform expectations in Western Europe, high single digits again, which I think is above most of the peers that have improved this quarter. I know you've been doing well and you share growth, but how sustainable do you think this kind of growth is moving forward? And where would you say it's mostly coming from?

[Jim Lico:]

No, I think I've been proving wrong a couple of different times. I keep calling our Europe team as they keep making a liar out of me with the work they’re doing. But I think the reality is is that we probably see that moderating a little bit. We have some key projects wins that were driving accelerated performance here over the last quarter. So we mentioned in prepared remarks, specifically in Kollmorgen and Gilbarco. So we have seen that. But I think this moderates probably in the second half to mid single digit. Some of that is just not maybe a little bit tougher comp, because we’re comping now off of high single digit growth in the second half of last year. So there is a little bit of comp in there. And then I think just a little bit of what I would say is the slight slowdown in a couple of places just in the core business, just a base business if you want.

[Andrew Kaplowitz:]

Jim, just following up on that Kollmorgen, I think you said it was up below teen this quarter and I think it was only mid-single digits the last quarter. So is that business actually accelerating based on the robotics offering that you have? Or how is that is doing?

[Jim Lico:]

Yes, we’re really -- the Kollmorgen team’s done a great job. It’s really been -- we’ve been working. As you know, we have to get the project win from a few years, that happened maybe a year or two again and start to get some traction. We’re seeing that. It’s also a little bit of better North America and is a base core industrial market. I think one of the places I mentioned a few minutes ago is when we start to see a little bit, we’re seeing a little bit of tailwind now in North America in the industrial business than we’re probably seeing that more in at Kollmorgen and Fluke maybe than in other places. So we think that sustainable from what we see in point of sale at this point. But we do -- so some of it, to bring it back to the specific question at Kollmorgen, it’s really a combination of both share gain but also a little bit of lift in North America.

[Operator:]

Your next question comes from the line of Dean Dray with RBC Capital Market.

[Dean Dray:]

I’d like to go back to the IFC deal. It was a question of why gas detection. This is a fairly crowded space. Honeywell has got a big presence there with [indiscernible] and First Technology and then that it’s not, I guess it’s not a coincidence. But Danaher tried to buy First Technology in gas detection and get into bidding world with Honeywell like 10 years ago. So has this been on your wish list all this time? And so what is it about gas detection that makes sense now?

[Jim Lico:]

Well, I would say, first, if we go back 10 years, I prefer to not do that although I was probably one involved. It really has to do with the fact that we see the convergence of technology, there is clearly large-scale safety player, as you mentioned, Honeywell, obviously people like MSA and three other in those markets as well. So what we really see at this core advantage is around the Safety-as-a-Service pioneer that they really putt in. We really think it’s a business model. The core relationship that they have with the workflow and what we can do with the combination of our auto field solutions businesses gives us the unique and differentiated position. And in many cases they’ll probably have multiple players in one facility, but we think we have a very sustainable position based on the strength of the business that they really don’t as well as the huge strength that we have with Fluke.

[Dean Dray:]

So just on that point, Jim, on the idea you’re going to run this business as a third leg, but might you consider migrating some of the subscription -based model into your other instrument businesses?

[Jim Lico:]

Yes. I think there is certainly an opportunity. The team there at ISC is really thoughtful and they’ve done a lot of great things, really as I mentioned, the pioneer in thinking through this kind of business model. We obviously have some skill sets from our SaaS-based businesses that at Telematics and Insite360. But we really bring in a core industrial recurring revenue expertise at ISC that quite frankly is applicable across all of our industrial businesses. So yes, the quick answer to that question is we think it’s an opportunity to leverage, and also they’re presence in Pittsburgh, they have a great relationship with Carnegie Mellon. And obviously, Carnegie Mellon is really graded artificial intelligence, robotic and just broadly in software. So they bring a whole bunch of expertise relationships, quite frankly, that we haven’t had as well. So we’re static about the opportunity to have them join the team and we think this is great for us for a long period of time.

[Operator:]

Your next question comes from the line of Patrick Newton with Stifel.

[Patrick Newton:]

I guess, I will lay off the ISC questions. I think we had mostly the key points there. I wanted to pivot to GVR. You talked about some strength in the quarter and that 3Q orders for EMV are better than expected. I'm just wondering if you could comment on whether the recent announcement from Exxon that it’s incentivizing upgrades across its branded stations, contributed to the EMV order flow, and then maybe how these incentives could impact trends through the duration of 2017.

[Jim Lico:]

So obviously we announced our position with Exxon. We have great relationship with them. We didn’t see much impact to that in the second quarter, and we don’t think there is a tremendous impact in the thirds. It solidifies things a little bit, but still to be determined. We just think more broadly with – we really saw a little bit of strength specifically with two large retailers that we have a great relationship with. They’ve bought a little earlier than we thought and a little bit more than we thought, which solidifies the third quarter, and that’s why we think the first -- the second half is going to better than we originally thought. But we still think there’s probably -- there is still the potential of an air pocket out there in the fourth or in the first quarter. So I still think at some point how people take a little bit of pause, but we just had a couple of. The strength of Gilbarco in general in the quarter has much to do with outside of the US as it did anything. But we did get a little bit more business in North America than we originally planned.

[Patrick Newton:]

Okay. And then I guess shifting gears to Keithley, where you again mentioned 3D sensing. I think Pat Byrne at your Analysts Day highlighted 3D something being a more than $20 million opportunity. We’ve seen several suppliers in this market provide pretty non-aggressive guidance for the September quarter. So could you comment on how that business is fair and beyond your prepared remarks? And then pretending to the $20 million market opportunity comment from your Analysts Day, can you help us understand that time frame to recognize that opportunity?

[Jim Lico:]

I think our opportunity, as you noted, there is a lot of folks talking about 3D sensing certainly on the sensor side and a number of places where there’s a huge opportunity for them. I think for us, we're still trying to gauge the overall broad opportunity for us. We’ve challenged Pat and the team to really help us think through that and this year’s strategic plan. What we really thought Keithley first was very good performance even outside of 3D sensing. If you take 3D sensing out, they still have mid-single-digit growth in the quarter. So the Keithley team continued to execute it very well. I think what we really saw, we saw most of that $20 million in the second quarter, probably saw all of it in the first half, and that was really a specific couple of customers in Korea and China that bought. So at this point, that opportunity likely as broader but we haven’t seen that yet. So we executed against that opportunities that were available to us and we’ll evaluate how big a opportunity that is for that us over the longer period of time.

[Operator:]

Your next question comes from the line of Charley Brady with SunTrust Robinson Humphrey.

[Unidentified Analyst:]

Hi, guys. This is actually Patrick [indiscernible] in for Charley. Thanks for taking my questions. Just one, just on the very last question that you guys had for 3D sensing. Obviously the $20 million opportunity, can you -- that market is in terms of what the addressable market possibly could be out there?

[Jim Lico:]

It would be tough for us to do at this point. I think that’s probably something we’ll gauge share by the end of the year. As I mentioned, we -- Chuck and I'll start here shortly after this call, in fact next week, going through strategic plans with some of the businesses that will carry throughout the third quarter in August and September. So we will get a sense of when the tech team walks us through that what that looks like, but at this point, we don’t really have a gauge. So we have specific market opportunity with some customers and some design wins that we got that are very centered on the key Keithley technology that's really flexible for manufacturing lines. So they really took advantage of the flexibility of that technology. But I think, more broadly, how our whole offering really pertains to 3D sensing is still work to be done for.

[Unidentified Analyst:]

Okay. And as we look at the robustness of your M&A pipeline, I mean, what is the management team thinking about in some of a focus maybe even region? Can you help us sort of -- can you give us a little more color on your thoughts on what you guys are looking at next, both regionally as well as the product category?

[Jim Lico:]

I think, yes, maybe looking back 12 months helps us look forward into the future, and I think what you've seen from us over the last 12 months, as Chuck articulated, is roughly a $1 billion of spend, a number of those deals are really focused on accelerating our digital strategies, taking advantage of software, buying business that are deeply embedded in the workflow where we can extent solution over time, leveraging our current business structure in most cases. We've focused mostly on field solutions and transportation technologies, the two platform that are our largest two platforms and probably have the most served market opportunity. So certainly I think we’ll continue to do that and build on the strength of presence and strength of market positions we have in the business, and those businesses are almost two-thirds of the company. So that is certainly something we will continue to do. We will continue to look globally. We think that there are opportunities outside of the US. Obviously, the Orpak acquisition is headquartered in Israel. It's a great example of how we’re trying to globalize the business, build on technology capability in other parts of the world. You will see us continue to do that. And then I suspect, as we noted in our Investor Day that we’ll continue to look for new platforms where there’s opportunity, and we highlighted a few places and secular trends that we like to think about going forward to do that, and we will continue to think about those. I think are now gaining more expertise than how to buy and integrate these software businesses, and quite frankly, I think that’ll be part of it. And I think this quarter is example we’re being able to do that and create a lot of value and hit our return hurdles has been demonstrated.

[Unidentified Analyst:]

Great. Thanks, guys.

[Operator:]

There are no further questions at this time. I would now like to turn the floor back over to management for any further or closing remarks.

[Jim Lico:]

Well, thanks everybody for taking the call. And it s a rainy day here in Seattle, unusual in the summer time. We are exceptionally excited to start our second year here at Fortive. We feel really good about our start a lot of the strategic opportunities and the operational targets that we set for ourselves. We feel really good about the progress we made. And Chuck and I and the rest of the leadership team really look forward to seeing even more opportunity as we turn the clock on 12 months and start our second year here. We’ll look forward to seeing you all soon. And if we don’t have a chance to talk to you before the end of the summer, have a great summer, and with certainly Lisa is available and team to answer any questions, if you have one. Thanks, everybody.

[Operator:]

This concludes today's Fortive Corporation Second Quarter 2017 Earnings Call. You may now disconnect.