Q3 2019 Earnings Call
Been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during that time simply press Star then the number one on your telephone keypad. If he would like to withdraw your question press the pound Keith I would now like turn the call over to Mr. Gryphon Whitney Vice.
Yes, It did have Investor relations Mr. Whitney you may begin your conference.
Thank you fill up good afternoon, everyone and thank you for joining us on the call.
With us today, our 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 FCC regulation G relating to these non-GAAP financial measures are available on the Investor section of our website Www Dot Fortive dot com under the heading financial information.
We completed the divestiture of the automation and specialty business on October Onest 2018, and accordingly have included the results of the N.S. business as discontinued operations for current and historical periods.
The results presented on this call are based on continuing operations.
In the presentation, we will describe certain of the more significant factors that impacted year over year performance all references to period to period increases or decreases and financial metrics our year over year on a continuing operations basis.
During the call we will make forward looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will for may occur in the future.
These forward looking statements are subject to a number of risks and uncertainties.
Actual results may 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 FCC filings, including our annual report on Form 10-K for the year ended December 31st 20 team.
These forward looking statements speak only as of the data. They are made and we do not assume any obligation to update any forward looking statements.
With that I'd like to turn the call over to Jim.
Thanks, Good reference and good afternoon, everyone.
Today, we reported adjusted diluted earnings per share of 87 cents for the third quarter of 2019, representing an increase of 18% year over year, Despite short cycle slowing that intensified over the course of the quarter.
While these challenges impacted growth in certain parts of our professional instrumentation segment, a double digit increase in earnings and strong.
Strong cash flow performance demonstrated both the contribution from our recent acquisitions and the strength of afforded business system to provide resilience to our portfolio.
As we navigate the slowing in the short term, we continue to invest in our businesses to drive organic innovation fuel further compounding and execute our capital allocation strategy to strengthen our long term competitive advantage across the portfolio.
We've completed a significant amount of deal activity over the past three years and the execution of our capital allocation strategy continues we have owned advanced sterilization products for a little more than two quarters. We're pleased with its performance, thus far and continue to make substantial progress with its integration in the coming weeks, we will close on China, representing a significant step forward.
We bring the remainder of ASP geography is under our direct control.
As we roll off the transition service agreements and install key elements of the forward of business system in the coming quarters, we will lay the groundwork for accelerated innovation and growth in the years ahead.
We also continue to make progress with respect to the intended separation of Newco, which we announced on September 4th.
Utilizing up yes, we have taken substantial steps forward with respect to our preparations and we remain on track toward completing the transaction and the second half of 2020.
We look forward to providing additional details on the transaction and updates on further milestones for newco in the coming weeks and months.
With that I'd like to turn to the details in the quarter.
Adjusted net earnings were $311 million up 13% over the prior year and adjusted diluted net earnings per share were 87 cents.
Sales grew 16.2% to $1.9 billion, reflecting a core revenue increase of 2.1% and the contribution from recent acquisitions core revenue growth was highlighted by strong performance and Gilbarco veeder root impacts Idmc, which was partially offset by declines in the short cycle businesses within professional instrument.
Asian, including Fluke Tektronix in some parts of sensing technologies.
Unfavorable foreign currency exchange rates reduced growth by 120 basis points.
Geographically developed markets core revenue grew low single digits, reflecting the slowing macro conditions across both north American Western Europe core revenue growth in North America was low low single digits led by GE, V.R.M.C. and industrial scientific while Western Europe grew slightly.
Hi grow bus markets core revenue decreased low single digits do the loss of why we related revenue it tektronix and weaker market conditions in the middle East China.
China posted slightly positive growth and strong performance its look and Qualitrol was largely offset by a decline it tektronix due to the walkaway impact and flat performance of GBR, India was flat as growth. It's looking qualitrol was offset by timing delays for certain large project Rollouts rollouts of GBR, which are now expected to start in the fourth quarter.
Adjusted adjusted operating profit margin was 21.3% representing a year over year decrease of 80 basis points, including 55 basis points of diluted up dilutive operating margin associated with acquisitions.
Core operating margins decreased 25 basis points as the continued slowing within professional instrumentation more than offset strength, the GBR and another solid quarter of operating margin expansion a mad cow.
During the third quarter, we generated $348 million a free cash flow for a sequential increase of $111 million from the second quarter. This free cash flow performance represented a conversion ratio of 168%.
Turning to our segments professional instrumentation posted sales growth of 24.8%. Despite a low single digit decrease in core revenue.
The significant contribution of recent acquisitions, most notably ASP continued to drive overall growth within professional instrumentation.
Unfavorable foreign currency exchange rates reduced growth by 110 basis points.
Segment level adjusted operating margin was 22.2% representing a year over year decrease of 300 basis points, including 120 basis points of dilutive operating margin associated with acquisitions.
Core operating margins decreased 180 basis points, reflecting a combination of slower revenue performance the impact of tariffs and unfavorable foreign currency exchange.
Advanced instrumentation and solutions core revenue decreased low single digits strong performance at AMC was more than offset by continued slowing across fluke and tektronix.
Field solutions core revenue decreased low single digits, including a low single digit decline in developed markets driven primarily by slowing it fluke in North America.
Hi growth markets increased low single digits, driven by growth that flu and strong performance when cultural in China.
Flukes core revenue declined mid single digits due to a high single digit decrease its look industrial flow digital systems grew greater than 20% led by strong growth at M-, which generated 10% increase in net new customers and a greater than 20% increase in annual recurring revenue.
From a geographic perspective, the slowing that emerge at the ended the second quarter became more pronounced in the third quarter, particularly in North America, which saw high single digit decrease in revenue was slowing point of sale trends.
Luke generated mid single digit growth in China, driven by strong performance across look industrial process instruments and fluke networks.
Look health one a multimillion dollar order for Radwatch a product developed in collaboration with the U.S. Army to modern mot monitor and measure radiation dosage.
The acquisition for Technic closed at the beginning of the quarter and has gotten off to a solid start.
We're excited about the integration of protect Nick.
How the integration of for technic enhances looks offerings and capabilities with respect to asset reliability and condition monitoring.
I see delivered low single digit core growth as decreases in Western Europe , and China, partially offset stronger performance in North America.
I see is lower core growth in the quarter Rep reflected a decline instrument sales, which tend to be more sense is sensitive to broader macro macro slowing.
I have seen I note offering had another strong quarter generating mid teens growth is IC continues to increase its share of subscription based recurring revenue.
I asked the also recently launched the Wi Fi enabled Ventas pro five multi gas monitor I ask these first direct to cloud product and a key step forward for IC is emerging connected worker safety initiative. The integrations are both intellects and safer systems are progressing well positioning IC to significantly advance its safety as a service stress.
Gee aimed at providing real time solutions for its customers environmental health and safety related workflows.
Quality deals core revenue declined low single digits as the continued challenges in North America Western Europe in the Middle East were partially offset by greater than 20% growth in China and greater than 30% growth in Latin America.
Qualitrol saw mid teens growth and their basic sensors product line driven by share gains and it started to see early signs of more positive bookings momentum heading into the fourth quarter.
Our facilities in asset management businesses, Gordon and occurring both rolled core during the third quarter, but had a relatively small effect on the core performance of professional instrumentation given the partial period.
These businesses continued to perform well generating high single digit core growth Guardians procurement platform. In particular continues to drive strong growth pace by increased construction volume with large enterprise customers, including the New York City Department of Education. Gordian also recently closed its largest facility planning deal today with comments.
We are at health systems to complete a facility condition assessment across its entire network.
Accrued saw slower go through the quarter due to softer licensing revenue as it transitions customers away from certain legacy products toward its higher growth SAS offerings. The company continues to generate strong SaaS bookings with its sales team increasingly driving enterprise customers towards longer term subscription based contracts with higher total contract value occur.
Current added more than 70 customers in the third quarter to quarter, while significantly expanding its existing contract with cushman Wakefield to cover a broader range of offerings across the current software platform.
Product realization core revenue decreased slightly as strong growth in both MCN AMETEK was offset by continued weakness it tektronix.
MC generated another quarter of broad based double digit sales growth across both its core defense product lines and its commercial satellite offering MC continues to maintain a very strong backlog with large recent customer wins and increasing momentum among commercial satellite operators, providing the company with the excellent revenue visibility into next year.
Tectonic tektronix registered high single digit decrease in core revenue.
Tektronix continued to be negatively impacted by slowing at keathley broad based weakness in western Europe and the loss of its why we business due to U.S. government imposed trade restrictions earlier this year.
While tektronix registered strong growth from its high performance the full scopes driven by the Fiveg Buildout in China. It also saw further slowing in North America, including a low double digit decline for its core midrange scopes.
Negative point of sale trends present, an ongoing challenge heading into the fourth quarter. Despite the macro challenges, which we expect to persist into next year Tektronix continues to focus on business execution driving gains in its strategic growth segments, including key datacenter and automotive wins during the quarter.
Core revenue for sensing technologies decreased low single digits as growth in North America, China was more than offset by weakness in Western Europe Anderson NAGL I had a strong quarter using Fps commercial tools to drive continued share gains in adjacent segments of the food and beverage end market.
Building on the momentum in its environmental monitoring offering Cetra recently launched its central light product line, providing a simple cost effective and highly visible solution to address pressure monitoring requirements and hospital rooms, which has been very well received by the market.
Turning to advance sterilization products. The company grew low single digits inline with our expectations as we continue to work our way through the completion of the transition service agreements.
Piece growth was led by strong performance in China, Japan, We saw continued momentum and terminal sterilization as well as strong growth in high level disinfection tied to the recent launch of its new automatic endoscope Reprocessor product line for the Japanese market.
ASP also landed some key wins in North America, expanding its footprint and overall portfolio and strategic integrated delivery networks about Texas in Illinois.
The aspartame is DSP team has begun to apply the border business system to streamline its innovation efforts and accelerate the introduction of a series of new products targeted for launch in 2020.
Consistent with our strategy to build strong positions and connected workflows. We recently signed an agreement to acquire census, a leading provider of instrument tracking software as a key addition to our sterilization offering.
Census, provide central sterilization departments with frontline air prevention tools, and analytics, which help improve efficiency and productivity and sterilization workflows optimize compliance reporting and reduce the risk of hospital acquired infections. We expect the acquisition to close before the end of the year.
Moving to industrial technologies revenue grew 5.2%, including core revenue growth of 6.5%.
Acquisitions contributed 10 basis points of growth, while unfavorable foreign exchange rates reduced growth by 140 basis points segment level adjusted operating margin was 23%, including a core operating margin increase of 190 basis points driven by the continued strong volume of GDR and solid performance in Mexico.
Our transportation technologies platform core revenue grew high single digits led by mid teens growth in North America.
TBR delivered low double digit core revenue growth highlighted by a mid teens increase in developed markets.
GB ours performance in North America is paced by sustained momentum from M.B. related sales while growth in Western Europe reflected a combination of continued share gains and significant service rollouts with casco during the quarter.
GTR posted flat growth across high growth markets as strong performance in Latin America was offset by continued delays from automation project Rollouts in India as well as a large dispenser tender, which expected delivery has been shifted into the fourth quarter.
Despite the short term dynamics GBR continues to build on a strong position within high growth markets in India in particular as strong order momentum at a healthy backlog provide good visibility into the region sustained growth in the coming quarters.
TV, our recently launched passport Express lane, adding a self checkout system optimized for convenience stores to its passport suite of solutions.
GB are also launched a new family of products for insight 360, called Halo, which provide a significant upgrade to the systems fueled logistics functionality.
During the third quarter, we made a follow on investment and tritium as we continue to support the company's rapid growth.
JV are also recently announced the integration of a credit card reader and it's pretty is high speed TV charging stations enhancing payment functionality to include credit card debit card in contact with payment methods.
Tell track now man performed in line with expectations generating low teens core revenue decrease in the third quarter as continued strong growth across Asia Pacific was more than offset by the company's performance across North America in Western Europe . The key priority for the tell attract navigate team remains the stabilization of its business in North America as it addresses the high level of customer.
Turn over the past 12 month and returns the company to sustainable growth trajectory, we continue to see improvements and our customer related metrics, including the level of customer churn.
Moving to franchise distribution platforms core revenue grew low single digits during the third quarter as low single digit growth at MCE was partially offset by a low single digit decline to Tennessee.
America was led by another strong growth quarter of growth and hardline tools offset by some slowing and tool storage.
Nacco continues to see good traction with new product introductions highlighted by the recent launch of a new half inch air impact ranch with a market, leading combination of power and control and a lightweight design that makes it significantly easier for the technician to handle.
Before turning to the guide as we look ahead to 2020, we're mindful of the challenging macro economic environment and are therefore planning to increase our spending on a range of strategic productivity initiatives by approximately $45 million in the fourth quarter. These initiatives will better position better position us to deliver sustained earnings growth.
Maintaining investments to drive future growth and innovation.
We are updating our full year 2019, adjusted diluted net EPS guidance to $3.42 to $3.47, representing a year over year growth of 12% to 13% on a continuing operations basis.
The revised annual guide reflects the headwinds faced by our professional instrumentation segment due to the short cycle slowing dynamics that became more pronounced in the third quarter, and which we expect to persist through the end of the year.
The revised guidance assumes 1% to 2% core revenue growth in an effective tax rate of approximately 15%.
We're also initiating our fourth quarter adjusted diluted net EPS guidance of 96 cents to a dollar in one cent representing year over year growth of 5% to 11%. This includes assumptions of flat core revenue growth flat core on Max in an effective tax rate of approximately 15%.
To wrap up during the third quarter, we delivered high teens earnings growth with strong free cash flow, even as the macroeconomic backdrop became more challenging the quarter demonstrated the powerful earnings contribution from the acquisitions. We have out added over the past few years, which are also increasing the resilience of our portfolio as they become as a compound and become.
A larger share of our total revenue despite short cycle slowing in the headwinds we expect to persist into next year, we continue to execute our capital allocation strategy to drive further portfolio transformation build a better stronger fortive and create greater long term value for employees customers and shareholders.
With that I'd like it turn I'd like to turn it over to Greg. Thanks, Jim that concludes our formal comments Philip we're now ready for questions.
At this time, if you'd like to ask a question. Please press Star then the number one on your telephone keypad.
Please limit your questions to one question and one follow up if you would like to withdraw your question, Chris the pound key.
Your first question is from a line of Steve Tusa with JP Morgan.
Hey, guys.
Good afternoon.
Steve area.
I'm doing right.
So can you just help us a little bit with parsing out the acquisitions, how much of an impact on margin and then maybe easier just like what was a negative earnings impact from.
Stuff that ran through funded deals that you closed in the third quarter. If there was any.
In the third quarter the deal expenses we.
And our adjusted earnings said, there's nothing in there that ran through there and there really wasn't any.
Headwinds related to the acquisitions on that and the headwinds we face for largely about slowing of the topline as we progress for the quarter.
Okay, and then and then when it comes at the deals that year, who were planning to contribute this year like Gordy in accruing, adding ASP is kind of a bit of a standout that seems to be on track.
Just remind us what you said they were going to contribute at the beginning of the year and is that still the case here that they're going to contribute the same amount or is the accruing comment that you made I think there's a currently there to comment around is that slowing having an impact on what what those are ultimately going to contribute.
So I think that the.
His key is it continues to be right on track on the 20 cents in I think the what we said in the beginning theirs.
But to go back and looked at 24 to 28 cents.
For the year and I think when we get there they're largely intact keep in mind that.
Probably a third of the Opie from those who those things are in the fourth quarter. So I think that were required we continue to be in that range.
Your next question is from the line of Deane Dray with RBC capital markets.
Thank you good afternoon, everyone.
Okay.
Maybe we could start with the the market conditions and I know you pick your words carefully and the prepared remarks, but you said the short cycle slowing intensified and then if I heard you correctly did you say that you expect some of the slowness to persist into next year, So take us.
The cadence for the quarter and then what this means in terms of outlook for 2020, I know, you're giving specific guidance, but just in terms of how long. This persists, yes sure. Thanks, Deane. So I would say, it's Jim by the way I would say that a couple of things one.
Take us back to where we're at in July what we saw in July was mostly in what we thought to be inventory correction and our point of sale in places like flu can tack, where we have the best visibility point of sale was still holding in there pretty well in June but our sales into those channel partners was generally slower. So we we saw it is destocking mode.
Lastly, as we progressed as a core increasingly saw the degradation and point of sale and I think thats with let us to what we believed to be true now is this will continue to persist and so our guide for the year really reflects what we've seen in terms of degradation on the point of sale side. I'd also say that we started to see it in our direct business as well in some places so.
So it's not just a channel situation and typically and I think this is probably more flu comment dean because of knowing the history. There is that the the smaller channel partners tend to be down more than than the bigger ones too. So so that's a dynamic that we typically see maybe a more protracted slowdown in just a quarter two.
Yeah.
It to your question about how does how whats our view of of the of next year I think you step back and you look at we really took.
A significant look at where we're at and the and the productivity initiatives that we announced the 45 million I think really have a construct in which we think a number of these things continue into next year. So I don't have a crystal ball for the full year right now nor would I want to try to provide that I think it's fair to say that when we snap the line on the calendar things aren't probably likely to choose.
Change all that much and that it's at least likely the first quarter and probably into the second quarter a number as these things continue and that's that's sort of our thought process at this point.
Great appreciate that color in terms of the expectations and could you flush out a bit on this restructuring initiative. This is right out of the Dan our playbook year ran restructuring set yourself up for a stronger leaner coming year. The 20 540.
5 million what in terms of cash might that be how much is head count is there.
Rooftops and just some color there would be helpful. Thanks.
Hey, Dan This is Chuck I think the returns we would expect on that would be under a year on that 45 million I think that its a.
There's a number of different places as we saw slowing in the quarter.
Initiatives across the businesses.
Primarily where we're seeing slowing so more and more focused in the.
Beyond that given that we're just get rolling those things out at the operating companies I think will believe the details for another day.
Your next question is from the line of Julian Mitchell with Barclays.
Hi, good afternoon.
Maybe just a hey, just a question around the sort of the Q3 performance in the Q4 guidance.
So in the third quarter, you had I think 2% coal growth on a slight decline in coal margins.
Q4 will get guiding full.
Flat core sales in a flat core margin so.
Just one that would that slowdown in the topline that you've you've talked about.
Why don't we see that core margin pressure increase in Q4, it has something to do in mix within the two segments or something around the terrorists timing impact a year ago, maybe just help us understand that margin dynamic.
And maybe to put a points on it.
Adjusted margin in Q3 was 21.3% just to clarify if you can what's the number for Q4.
Sure.
First I'll take the adjusted margin percentage in Q4 raises to 22.1.
For the for the full company I think the main thing.
Mix plays certainly part of it and can give you some variations and on the flat on Max but I think when you look back to last year. In Q4, we had some onetime things that aren't repeating and so that that gets us to a little bit better than what we saw inc. Q3, but if you look back over Q2 to Q3 it's.
Been flat generally I think it also reflects which saw in the third quarter was this sort of slow down through the quarter. We're much more prepared from a fourth quarter standpoint for that slowdown and so what you also see as us taking action and the impact of those actions actually really having more impact in the quarter. So it's a it's what it's certainly the we've got.
It looks slightly easier comps on the tariffs to as you accurately pointed out but it's also this ability for us it get after.
The free cash flow in the third quarter was was so strong we were certainly prepared on the working capital side and I think were better prepared on the PML side.
In the fourth and then say we were in the third.
Understood and then maybe just my follow up around capital deployment.
You have announced the display which will happen nine to 12 months from now you've also got some restructuring underway today because of the slowing top line.
Given those two aspects.
Do you think its plausible that you would have much M&A activity in the coming two or three courses. So the view as you have a lot on your plate and so maybe M&A takes a back seat for awhile.
Well I would say.
First we certainly would agree with the point that we we have a focus on a number of things that are really important we mentioned in the prepared remarks, both both the ASP integration and the separation into new co are going well and and that's certainly takes time and resources and energy. So we would certainly vehemently agree that as a prioritization those things are top of mind.
And things that Chuck and I and the rest of the management team are certainly focused on and on a really on a daily basis.
We announced we've done three really if you think about from the second quarter. We in the second quarter. We closed ASP. We've done safer we've done intellects, we've done for to protect Nick and of course is today, we announced the census deal. So for deals in the better part a 90 day. So we've been pretty active and we're certainly very focused on the integration of those things. So I think census.
As a good example, we as I mentioned that we had a couple of the conferences recently, we'd be more likely to be focused on anything if we did something to be bolt on ish and or maybe adjacent adjacent that's within the real strategic side and I think census represents that in many respects if it's it's adjacent to exactly.
What we do and sterilization, it's sort of like how intellects is akin to I see it's very much akin to what we do it ASP. So I think we'll be focused on those kinds of transactions if the right down the middle of the fairway, we would that we would be acting on but but we do have we do have a focus on a number of these things and.
Well I wouldn't say, we're not focused on M&A I think it's safe to say that the M&A. We've done is pretty considerable here recently.
Your next question is Milan.
I'm sorry, the lot from a lot of Andrew opened with Bank of America.
Yes, good evening Hi, how are you guys can you hear me.
Yep Yep Exxon. So you did highlight north American flow down anti.
And I wish I was wondering what specific end markets or would you attribute.
The flow downtown.
Yes, I would say well first in terms of location, we said it was.
No I would say, we certainly saw where we were.
If I think about flu fluke was fluke industrial in particular, our fluke networks business as well. The those are two places in North America. So that was relatively broad base, but you could certainly see where.
Industrial customers were slower.
Don't have a lot of automotive exposure, but we have manufacturing.
Certainly in those numbers and you'd see you'd see some of those places or just some examples of where you might see a little bit more end market slowing certainly electronics would be the other place where we out where we sought so whether that's.
Anyone assembling are designing electronics, we saw a little bit slower markets and that's a channel dynamic as much as anything. So those are some end markets I think where we stand where we stood up.
Where we had innovation, we we continue to do pretty well from a product perspective.
The the I 900, the Sonic imagery, we announced last quarter at fluke did exceptionally well in the quarter, our thermal imaging product line did pretty well in the quarter, So where we have some innovation we still saw some opportunities. So I think the key for US is to continue to find those places, where theres opportunity and and really utilized prioritization and what we call dynamic resource Alex.
Patient to put our resources some of those end markets I would say that when we look at places like where we have software conversions of staff things are really well. So he makes a great example, as while the end market might be similar to some of the places that are slowing from an instrument standpoint, we're still seeing a lot of cat SaaS conversion in those end markets with maintenance software.
You mentioned you make grew over 20% for another quarter in a row and their performance was outstanding So where we have those SaaS conversion to Andrew I would say the end market almost doesn't matter, we're still doing pretty well.
And just a follow up question on products, there's been some headlines that we're seeing stabilization.
Sort of semiconductor market specifically.
Is that a.
Has your view changed on that until fourth quarter next year are you seeing any signs of stabilization does it matter for tektronix, where we all right now I.
I think it's still early for us to call stabilization I.
I would say on the capital front.
The ones the choosy stuff might might be something that continues but some of the bigger projects like our keathley businesses as as a decent bellwether there we still haven't seen a big upturn or maybe even a flattening out so I think we still.
At least a quarter.
I've heard some of the same things, but I think we're we're definitely not planning for any of that in the in the rest of the year.
Your next question is from the line of anti capital wins with Citi.
Okay, and good evening, Hey, good morning, guys.
Kingbird, Chuck you said you had a 150 basis points from prior quarter early seems like a good deal price. The could you talk about the trade off between price versus cost across the company I know you lap cash in Q3, but did you have positive price first across and food can tektronix in particular, and if you didn't how quickly could pricing.
Chuck caught from those segments and what's sort of look like for the company moving forward.
Yeah, I think both it at fluke and attack in the quarter, we beat the corporate average from price standpoint.
I think we're still we're still a little a little behind on the price cost dynamic at both those places.
We've got some cost reductions that have offset some of those but from just a pure price Terra Andy we're still we're still lagging a little bit relative to that and I think as we go into the into the year that obviously tapers a little bit because we sort of start to sunset. Some of the tariffs in the fourth quarter, because even though the terrorists or announced last year and a three.
Are you really hit in the fourth and in the first so so we'll start to see a little bit of that that could be a better but unfortunately, the volume reductions sort of wipe out a lot of that as well. So so on the one hand, we've got the the right price cost, but that's sort of us.
Sort of a static metric it doesn't really have a volume dynamic to it. If you were kind of look at on a volume basis, we probably lost a little bit more on the on the on the gross margin front from just the volume reduction.
That's helpful and then sorry go ahead.
Let's say and so if volume comes back that we'd start to see things, maybe ramp a little bit better, but right now we're not anticipating any big volume come back here in at least the rest of the year.
That's helpful and then Western Europe , I think you could be slightly which is based on last quarter's low single digit decline you're watching western you're pretty carefully so telling your peers have mentioned, maybe even some stabilization in Europe is a clear it went on.
TV are doing well in Europe for you guys and we should still Gonna watch PPI differences there in the short cycle business. There did you see any stabilization.
Yes, Andy.
I think we did see some stabilization across the businesses. It's beyond just just TVR, but I think that we remain watchful of everything is going on in Europe and.
This was a slightly better quarter than.
Maybe we cant coming in but.
We're still watching a pretty carefully.
Your next question is from Milan, Josh Pokrzywinski with Morgan Stanley .
Hi, good evening.
Having Josh.
Could you just remind us Jim on court in an accrual and just because these are kind of going organic more recently.
I guess specifically for for Gordon on some of these larger projects is that revenue cycle tied more toward when these projects kick off for when they ramp up but I guess, where the question is going is if some of that underlying activity slows a little bit more is there still kind of an extensive backlog where projects wrap up and then.
Still get paid.
Or is that more of kind of the leading edge of the project cycle, Yes, I mean, there's certainly a component to it have you side. The way you got to get the you got to get the cost structure going through the job order contracting mechanism. So so you're right. There is a point where at the start it's not as great as it is maybe through.
The first third probably isn't as great as the there was a ramp to that is more cost come through and you're probably get more at the end than you do at the beginning.
The one thing about it though is and what are the interesting dynamics about the businesses is that because we don't really play in the the massive construction cycle, it's really more about the rebuilds in the reducing the maintenance stuff. It doesn't really have a big component to it of large scale construction and in fact, when things slow a little bit people tend to fix stuff.
More and they actually as a pretty good dynamic for the business. So the combination of that and it being underpenetrated means that I think we still have a lot more opportunity in the business going forward. Despite what what the economic cycle might look like.
Understood and then I guess, just a second question on GBR.
Obviously heading into a tougher comp here into the fourth quarter M.B., though is just kind of reaching its time to shine in that whole adoption cycle can you help us kind of calibrate what the push and pull those two dynamics are the tough comp versus closer to two the transition period.
Well, we had we had a really good third quarter. There as we said I think in North America.
I would I because of you slightly tougher we certainly have a tougher comp in the fourth quarter. So it's probably closer to high single digit.
For the we'd probably see India, we mentioned in the prepared remarks that India would we had a number of projects push into.
Into into the fourth quarter, so I suspect our high growth market numbers will be better in the fourth quarter, there and our north American number will be a little bit different just because in part because of the tougher comp, but not because of the overall demand, which we see continued to be good.
Your next question is from the line of John Walsh with Credit Suisse.
Hi, good afternoon.
Hi, John .
Maybe just following up on that last question.
You know could you actually help us with the organics your.
Expecting in Q4, obviously, you gave us the total company, but there is that comp in the India dynamic I mean, maybe asked differently I mean can I T actually grow in Q4 19.
Yes.
It will will grow and.
Probably in the mid single digit range ish, if we were to sort of think about that and I think what we'll see and pie is probably still down still down a little bit so.
Pretty close maybe maybe because of the tougher comp a little bit a little bit lower than what we've seen in the.
In the third quarter.
Great. Thank you and then.
Going back to the repaired remarks, you I think for Crewing. You made this comment that you had signed up 70 new customers.
In the quarter I was I was wondering if you could help provide some context around that number and how to think about it and maybe building off of Josh is question.
When things slow.
I think theres a penetration rate story here, particularly for both the accruing and Gordian I mean, maybe how does where do you see the penetration rates.
Of those solutions in the market and then how to think about.
Signing up 70 customers I'm, just not sure how to actually think about the out of termed out of business.
That makes sense.
John I would say couple of things one maybe maybe talk about the Gordian thing first is to tie that off I think we're very that the market is very underpenetrated again, thats not a SaaS business, it's really more do business model in terms of job order contracting so theres a lot theres a lot of growth we have to invest in that growth.
Adding salespeople in building capability and we put some additional investments in the business. This year in order to do that we're seeing we're seeing the business grow im getting good returns off those off those envisage investments across it today is has a larger installed base and is also more of a has a more of a license revenues.
Models that they're converting to fast so while SaaS is.
Still alert a large proportion of the sales today, they still have a conversion going on so so part of part of a little bit of the noise in the quarter with a current that we don't have in some of our other software businesses. This transit transition to SaaS and so the 70, new customers is a good number because it demonstrates that we're adding customers and that's a good thing, but I think the.
Other thing in the prepared remarks was the average contract value going up and that average contract value going up or what we would call HCV is really a demonstration that we're converting people to SaaS and they're doing that over a longer term contract and so that's those are both positive signs for the long term growth of the business of course, when you make that conversion of SaaS in a pretty.
Similar quarter or with a few months left in the year is not going to be as is beneficial is getting a big subscription or excuse me getting a big license contract, but but but over time, it's it's remarkably better and certainly from a margin perspective. So so that's really the dynamics going on in the business and overall, we're we're seeing good progress and I think the said.
70 number I think if there are over 50, new customers a quarter, we're feeling pretty good about that number now of course is the customer base gets bigger we'll have to raise expectations on that but I I suspect the team there will be raising it before we are.
Your next question is from the line of Richard Eastman with Baird.
Good afternoon, Jim sorry.
He just a question the reference.
Has been made frequently to the pie businesses, the short cycle short turns businesses.
If I try to hang a number on those I mean.
How much revenue was there I mean I'd size is close to 2 billion between tuck in.
You know fluke industrial can use different definitions are but I'm just curious.
What that looks like and the the point that you make about.
The Pos kind of slowing here.
Through the quarter.
Do you have a good read on the channel there.
In those in those two business, yes. So I think two questions. There you know you if you took fluke.
And fluke, all off which locale.
<unk> networks that remains there fluke industrial all of the Pete flu calibration all those you're in the you know and combine that with tektronix, you're roughly a little over $2 billion in revenue. So that's a that's a decent number.
Two to one I think probably is a good number there.
Relative to I think we have the best visibility, we get point of sale data in the U.S. Europe and China for.
For both businesses I think we have better granularity in North America and increasingly as you get farther from the you asked the numbers become less of the total sales and they become maybe a little bit more or less perfect.
But north America is pretty good fluke, we get better we probably get the best data because we get multiple we get a multiple industry look it's often been called Canary in the coal mine and so I think I think we get decent visibility and that's why we said in June the point of sale date actually look decent it was really the third quarter, where we progressively saw.
We saw more of a de stocking activity going on in June what we saw in the third quarter was we still saw some destocking, but we also saw really actual demand going down.
Okay and then just so just one follow up question is around DSP you did reference some of the investments there.
And some of that going into new products and product launch.
For 2020, but given the timing there I don't know if you need five 10-K for any of that probably not but just my question is do you have a pipeline of new products and given the timing.
That can can move the needle on growth in ASP as soon as 2020.
Well first of all whenever we would talk about a new product launch with with with.
With ASP, we would we would be including the FDA approval that would be required. So so when we talk about 20 to 20, we're talking about the actual launch a products. So whether it's the FDA or the you know there there are the organization the appropriate organization elsewhere in the world, We would always be talking about launching a product with those approvals. So we won't talk.
I think about a launch before we would assume that when we give you a date that we've got those kinds of approvals already in hand. So so that's first and foremost and we have been able to accelerate some things.
We started doing some work even before.
You know not not necessarily helping them with product launches, but educating them around some of our tools of new product development, but they've also had their own innovation funnel the doing their own things too. So so we think we're accelerating some of those things and the it will start to see those in a in the file next year.
Your next question is from Milan, Nigel Coe Wood with Wolfe research.
Hi, Thanks, Thanks to question.
Hey, I like to be like to better understand the pathway to pie margin.
Stability I guess.
Chuck I think you called out.
FX and test says two headwinds and of course, we got some pre.
Big Decremental margins.
Tektronix and sick.
The tax you mentioned that the kind of lapping a pool Q. So these largely list to tariffs the streets that's important.
Seems like FX is starting to stabilize right. So so pepsis im good news that I'm just curious how do we so Ben the the kipp on margins at pie and the absence of any good news on volumes and maybe kind of like what kind of get ICW is most their destruction you're doing centered around pie.
Yes, I think Theres a couple of quick thinks areas keep in mind the tariffs they ramped through ask yet years.
As they were implemented so when even though we're lapping the started tariffs I think the lapping starts around the first of the year. When it's so like for like amount. So that'll that'll give us some stabilization I agree that.
Theres still a little bit of FX headwind.
In.
In the year, but thats, starting hopefully they'll remain remained stable, but I do think that.
Some some of the restructuring that are the.
That we're doing that we just announced is primarily focused in pie.
And not all because we have slowing and a number of places, but I think thats going to be helpful. There.
And don't forget that SP is sitting in.
Professional instrumentation, as well and that should that should give us some.
Lift there as well.
Okay that makes me not sound say next question, which is the tier say about off that ASP.
Can you maybe quantify kind of to what extent.
That's a problem right now what impact is that some margin I've got a number of the 15 $20 million per quarter in my head is that a good number going forward.
I think that we win when we get down the road and we're all got entirely off the T. assays, yeah, I think that that will be a quarter a number I don't I wouldn't actually call. It a problem in that it's it's playing out as we expected.
It's an opportunity that we expect to move forward with and so I feel pretty good about.
Your next question is from the line of John inch with Gordon Haskett.
Thanks, very much afternoon, everyone.
John I think you both said Tektronix and fluke industrial were down high single digit and obviously the shift has been much more to point of sale I'm not sure if you.
No, we're kind of granularly or more granularly comment on the degree of destock like as Destocked getting better and you guys think that tech and fluke or pit sort of low water mark in terms of their core growth degradation or based on sort of.
The cadence then markets seems like this is just kind of beginning to hit in North America things potentially going to get worse here in the short run.
Well I think I think we said North America Fluke industrial was was high single digits in the quarter. So.
That's a that's a pretty.
Got it to you can come up with a lot of different scenarios around what the economic situation looks like but I think given what we saw progressed through the quarter that that that idea that it will progress there will continue for a period of time you know is.
It's really the basis by which we took the productivity initiatives. So I think we don't we don't expect anything to come back and return.
In the sales in a sort of equating to the sales out now so.
You know at some point in time, we'll see some inventory left but we're not planning any inventory left and I would expect that well into next year. So so I think were prudent we're out right now John certainly we could come up with a scenario where.
Where maybe it gets worse, but I think right now from everything we're seeing having this idea that it progresses or continues and certainly into next year is I think is the most accurate thing and it seems as we've learnt listened other peers. It seems similar from an end market perspective, we're seeing some similar things so.
I will try that we try to triangulate off of that as well.
No that makes sense and then we also just could you guys. Maybe I don't if there's any sort of an update you could give us with respect to the timeline of events for separation. So I'm.
Thinking you were going to talk about maybe at some point he expected capital.
Structure, both of the company's at some point, we're going to get that management for Newco et cetera, then there's a road show what are there any milestones that we should be looking for coming up next few months.
Well I think yeah, I mean, it's very early days I.
But I like as we met said the prepared remarks, I think we've made some real really good progress I would say, we've we filed registration statements. We've gotten commentary from the FCC. We've responded to that feedback. So we're not having done a few of these are my life now.
What I call the real the real work the groundwork you've got to do from a filing perspective from a subsidiary standpoint from a pre tax work. We've made we've made a lot of progress in the last several months, obviously, we just announced a five or six weeks ago, but I think those comments would suggest we've been hard at work for much longer than that and we're certainly building the management team.
And we've we're building a board were doing a number of those things.
And they really all need to come at a at one time. If you will so I don't want to put up predictive time on that but certainly you know I wouldn't think I would think we'll certainly be talking about that by the end of the or early part of next year.
I think with pretty good specificity, we've announced the location, we're going to put the headquarters in a in Charlotte North Carolina.
A Raleigh Durham, North Carolina, sorry about that.
So the so we've got to location and more and that's that's something we're doing so we've made a number of we've made progress on a number of fronts and we feel good about where and you know as we bring everything else along we'll have an opportunity to continue to share things as they come out, but I think thats really probably the early part of next year, where out where we come up with.
Some of the where we can come out with maybe that's the next major milestone and maybe that's tied to earnings announcement or somewhere in around there too.
Your next question is on the line of Andrew Buscaglia with Berenberg.
Yes, thanks for taking my question.
Andrew Hey, can you talk little bit more about ASP. So no it's Ben.
In your numbers for a couple of quarters now can you.
Can you talk about where you are with regards to.
FBS initiatives first off kind of what inning you are there.
And with regard to the margin contribution can you talk to you know can you can you try to quantify that in the within the quarter and then potentially.
How that progresses through next year.
Sure So Andrew Chuck and I can tag team that I think we're we're very pleased with with the work that's been done on the Ford business system with the team there we've made good progress we've done.
A number of things I mentioned in the prepared remarks, some of the innovation efforts. We've had we've also had a number of value selling.
And funnel management workshops with them. We've we've taught them daily management, we've done some Kaiser hands in the factory as well. So we made we made some nice progress with adoption of Fps. It while it's and it's it's really early days I was a couple of weeks ago I was with that teams in China, and Japan and and those teams are really.
You know integrating while we mentioned China is going to come onto our direct control here in a few weeks. So we're making good we're making good progress of the teams are very thirsty for adopting after yes.
The work that's been done I think suggested having their hands on a continuous improvement system and a set of tools has been something that they've been looking forward to and so far adoption is or is very early days as we know this is a multi multi year journey, but haven't done. This a number of times I think we're off to a pretty good start.
And.
Andrew This is Chuck is with the regards to margins adjusted operating margins I think at this point, our nominally accretive but as we were off in the TS Asia, you'll see a significant lift and benefit from us over the next year.
From a ASP or for the total 40.
Right, Okay and.
Is there any incentive to.
Can move them as FBS step forward.
Pre spin.
I think what are you are you are you talking about there.
SP or just yeah, it's ASP, specifically I guess.
I think I think you know the roadmaps for what we need to do at both businesses, both the separation and the ASP integration. They really have independent paths and we're we're working to super hard.
Super well to rush to get those done as quickly as possible, but the reality is there bolt on separate path and they'll find there. The fact that we talk about one at the end of some at the end of the first half and the other one in the second half. That's just sort of just happens to be that weighed we're very much running pretty hard I don't anticipate opportunities to do much.
Sooner on either either one of those because of the work that we have ahead of US. The good news is we're making good progress along this path now.
Your next question is from the line of Joe Giordano with Cowen.
Hi, Joe.
Hey, guys. Thanks for taking my question here.
Do you have any color on core own that core on next growth by segment, where.
Well I think.
In general is going to look at off the last like what we saw.
This quarter.
Both.
For core on X. I think that when you look at are adjusting operating margins I think both.
And it will be around 23% with overall company in 2022.
Okay and then.
On the SaaS transition for accurate.
I wanted to something like that generally take I know, it's a good development long term, but sometimes it can be a tough transition as it as it happens so how long does that business take the transition over.
Yes.
Well continue to do I think what we what we really built out our return model was that it would occur over a couple two to three years not not every customer were not forcing a transition by any stretch and imagination.
There are certain value, that's created particularly as as people.
As people move to the cloud and have different thoughts around how they want to handle handled there it transitions and some of these markets. So it's certainly a continued two to three year transition.
And I don't think there's anything that will precipitate a massive change to that net it's certainly well it might move around the core growth rate might move around a little bit quarter to quarter here, but we we still sit in that.
The mid to high single digit growth rates that we'll see in those.
The combined business here certainly through.
You know certainly over the next few years with having those transitions.
And there are no further questions at this time.
Well, thanks, everybody and Phil. Thank you. Thanks, everybody for taking the time I know, it's an incredibly busy day.
I understand there were some challenges with Edgar even today so on some on getting some documents. So our information is on the web on our website. If you weren't able to do that I'm sure I girl figure out what they have going but thanks. So much for the time, we obviously feel.
I feel that we've taken a number of steps I know this is a volatile environment with a lot of change going on relative to the end markets, but we feel very good about what we've done from a free cash flow perspective and earnings perspective in the quarter.
Really are working hard to make sure that we can implement some of the things to not only protect our earnings for next year, but also to make sure that we do what we called dynamic resource allocation, which is to make sure. We can continue to prioritize the investments they're going to have the most dramatic impact on our core growth and our margin expansion in the years to come So we'll look forward to.
We continue to talk to all of you there.
Obviously, Griffin and Chuck and Ross are available for questions will will be available when when when needed to answer any follow ups. Thanks for the time and good luck in the remaining days and weeks of earnings. Thanks, everybody have a great night.
That does conclude todays conference. Thank you for participating you may now disconnect.