Fortive Corporation

My name is Catherine, and I'll be your conference facilitator this afternoon. At this time, I'd like to welcome everyone to Fortiv Corporation's first quarter 2020 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star and then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the call over to Mr. Griffin Whitney, Vice President of Investor Relations. Mr. Whitney, you may begin your conference.

Thank you, Catherine. Good afternoon, everyone, and thank you for joining us on the call. With us today are Jim Leeko, 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.4div.com, under the heading Financial Information. We completed the divestiture of the Automation and Specialty business on October 1st, 2018, and accordingly have included the results of the ANS business as discontinued operations for historical periods. The results presented on this call are based on continuing operations. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. All references to period-to-period increases or decreases and financial metrics are year-over-year on a continuing operations basis. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward-looking statements that we make today. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31st, 2019, and subsequent quarterly reports on Form 10-Q. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements. With that, I'd like to turn the call over to Jim.

Thanks, Griffin, and good afternoon, everyone. Today we reported our financial results for the first quarter of 2020, reflecting solid performance in an operating environment that changed dramatically over the course of the quarter. Despite the unexpected headwinds that impacted our top-line performance, We delivered 150 basis points of core operating margin expansion, driving adjusted earnings per share to the high end of our guide, as well as strong free cash flow. Coming out of the first quarter, we're confident in the resilience of our portfolio, as well as our ability to execute the playbook required to sustain strong free cash flow, protect long-term competitive advantage, and overcome the macroeconomic challenges that lie ahead. When we provided our first quarter guidance back on February 6th, We built in expectations for the potential impact from COVID-19 disruption on our operations in China and some potential challenges throughout our supply chain. Since then, the scale and scope of the global public health crisis and the subsequent macroeconomic impact from efforts required to combat the spread of the virus have expanded significantly. Even as lockdown orders were put in place throughout Europe and much of the United States, we continue to operate our essential facilities, and fulfill commitments to our customers across a broad range of critical industries. Along the way, our emphasis is focused squarely on our highest priority, ensuring the health and safety of our teams around the globe as they continue to provide the essential technologies upon which our customers depend. I could not be more proud of how the Fortiv team has responded to the challenges we have faced over the past few months. In early March, we quickly shifted two-thirds of our total personnel to working from home. part of our broader effort to help ensure that our production facilities cooperate under enhanced safety guidelines. We also rolled out a range of new collaboration tools and technologies, most notably from the Florida Business System Office to sustain our commitment to continuous improvement. The nimble adoption of FBS to the challenges of work from home restrictions has enabled us to assure business continuity and transition key FBS processes such as problem solving, product development OBEA rooms, and visual daily management to virtual formats. Perhaps more importantly, leadership teams across our operating companies have continued to drive innovation to help support their customers and the communities in which they operate in the fight against the COVID-19 crisis. Advanced sterilization products recently received an emergency use authorization from the U.S. Food and Drug Administration for the use of its steroid systems to decontaminate compatible N95 respirators, which will help alleviate critical PPE shortages in the near term. Fluke has temporarily reconstituted a portion of its manufacturing capacity in Everett, Washington to produce productive face shields, which have been provided free of charge to healthcare workers on the front lines of the fight against COVID-19. Fluke Health Solutions and GEMS sensors are also actively working with ventilator equipment manufacturers to expedite additional ventilator supply to hospitals around the country. Turning to Vontir, given the lack of favorable conditions for an IPO due to the uncertain global economic and market conditions, we have decided to reevaluate the timing and structure of the separation. As a result, we submitted a request to the SEC to withdraw the Vontir registration statement. We strongly believe that separating Fordham and Vontir is the right strategic decision that will enable both companies to take full advantage of their respective growth opportunities and capital allocation priorities. Mark Morelli, Dave Nomura, and the rest of the volunteer team will continue to run the business within Fortiv, and we remain prepared to move forward with the separation when market conditions improve. With that, let's turn to the details of the quarter. Adjusted net earnings were $264.3 million, up 7.1% over the prior year, and adjusted diluted net earnings per share were 74 cents, meeting the high end of our guidance. Sales grew 7.6% to $1.7 billion, as growth from acquisitions more than offset a 3.8% decline in core revenue. Mid-single-digit core growth at GVR, low double-digit growth at Gordian were more than offset by declines across various other operating companies due to slowing related to COVID-19. Unfavorable foreign currency exchange rates also reduced growth by 160 basis points. Despite the top-line headwinds, core operating margin increased 150 basis points, resulting in adjusted operating margin of 20.4%. This performance reflected, in part, the structural cost actions we took in late 2019, which gave us a running start as we turned the corner into 2020. That leaner cost structure, along with the full flow-through of prior tariff mitigation efforts, continued strong pricing, disciplined cost, and supply chain management helped us weather the top-line deterioration across our portfolio due to COVID-19 headwinds throughout the back half of the quarter. During the first quarter, we generated $158 million of free cash flow, representing an increase of 15% year over year. The free cash flow performance in the first quarter, reflecting the underlying resilience of our free cash flow generation, as well as proactive shift by our operating companies to manage their cash expenditures and maximize free cash flow generation as the macroeconomic outlook deteriorated in the back half of the quarter. Turning to our segments, Professional instrumentation posted sales growth of 13%, quite a 7.2% core revenue decline. Acquisitions contributed 2,130 basis points, while unfavorable foreign exchange rates reduced growth by 110 basis points. Core operating margin increased 130 basis points, resulting in segment-level adjusted operating margin of 23.2%. Industrial technologies posted a sales decline of 1%, as core revenue growth of 1.6% was more than offset by an unfavorable foreign currency exchange rate of 230 basis points. Core operating margin increased 190 basis points, resulting in segment level adjusted operating margin of 19.3%. Switching to a view of our performance across the major geographies in Q1, which we've captured on slide 10 of the presentation, all regions were affected by the spread of COVID-19 pandemic to some extent during the quarter. Looking at Asia, core revenue declined over 20% in Q1. This was driven by declines across all major countries in the region. China was down more than 20% in the quarter. As expected, we lost a week due to the extended Lunar New Year holiday as mandated by the Chinese government at the beginning of February. Our plants began to reopen the following week and continue to wrap up capacity utilization steadily throughout the balance of the quarter, albeit more slowly than in prior years based on the extended holiday period and national virus containment measures. By the end of the quarter, each of our sites was operating at 80-plus percent of total capacity. Customers began to come back online in February and March, with order volumes picking up into the start of the second quarter. At the same time, we saw a significant negative impact from COVID-19 on demand across the rest of Asia as well, including Japan, as well as India, where customer investment slowed significantly later in the quarter as lack-bound measures went into effect. Western Europe core revenue declined high single digits in Q1. Western Europe was our most challenging geography coming into the year prior to any COVID-19 impact, but many of our operating companies also saw a significant impact on demand and customer activity in the wake of the pandemic as countries enforced broad economic lockdowns to slow the spread of the virus. ASP delivered mid single digit growth based in part on the decontamination of respirators across the Netherlands, Germany, and Belgium in March. At this point, we are starting to see early steps being taken to reopen certain economies, including countries such as Germany, which have fared better than some others. But it's too early to tell how these steps will affect demand dynamics, which we saw deteriorate over the course of March. North America core revenue grew by low single digits in Q1. In the United States, with the exception of a few businesses, including GVR, Gordian, and Qualtrol, we saw a significant negative impact on demand trends as well as our ability to access customers and customer sites across much of the portfolio. This was particularly the case late in the quarter and into the first half of April. With potential plans for reopening on a state-by-state or regional basis still very much in the early stages, it is difficult at this point to have a definitive view on how conditions will respond to any such reopening efforts during the second quarter. Finally, we saw a mid-teens decline in the Middle East and a high single digit increase in Latin America. Blowing in the Middle East was due to a combination of order delays and supply chain issues associated with COVID-19. We expect to see persistent headwinds as we look ahead. Strength in Latin America was driven by growth of more than 30% in Mexico. Latin America was later than other regions in terms of the emergence of COVID-19, and it is difficult at this point to gauge the full potential effect from the pandemic on the region as we look forward. Given the unprecedented public health crisis posed by the COVID-19 pandemic, as well as the broad economic restrictions imposed across the globe, forecasting the balance of the year has become more challenging. Under the circumstances we are withdrawing our previously issued full-year 2020 guidance and will not be providing guidance for the second quarter. In an effort to give you a sense for the next few quarters, we've analyzed our portfolio to better frame expectations for the relative impact of the COVID-19 pandemic across and within the various operating companies given the unprecedented global conditions we expect to face. If you turn to slide 11 in the earnings presentation, you will see that we have broken out operating companies as well as key portions of some operating companies into four groups based on what we would expect may be their relative sensitivity to COVID-19 related disruption and potential deterioration in end market demand. Group 1, which represents approximately 15% of total afforded revenue, includes those companies or key product lines that we expect may continue to grow throughout the coming quarters or we believe should show substantially resilient top-line performance through the balance of the year. Notably, this group includes a number of our recent acquisitions, including software-focused businesses such as Emate, Gordian, Intellex, Census, and the SAS portion of Accurrent. many of which we expect to benefit from a high share of recurring revenue and a focus on providing mission-critical workflow solutions to their customers. Group 2, which represents approximately 50% of total afforded revenue, includes a range of businesses where we expect to see a potentially significant top-line impact in the near term from lockdown measures and stay-at-home restrictions, from which we then believe should bounce back relatively soon after those lockdown measures are lifted. The biggest businesses in this group are GVR and ASP. In the case of GVR, EMV-related demand in North America in particular stayed strong through the end of the first quarter before moderating in April. While customer site access issues and other COVID-related disruptions will impact revenue in the near term, we expect GVR to perform better as economies around the globe begin to open back up. At ASP, we saw a significant drop in surgical procedure volume in China during Q1, upwards of 85% at the height of the COVID-19 response, but volume began to rebound by the end of March and continued into April. We expect the same pattern to play out in other geographies, and we've seen elective procedures get delayed, and we likewise expect volumes to begin to normalize as soon as hospitals get to the other side of COVID-19 peaks and can begin to address the pent-up demand for these procedures. Group 3 represents 10% to 15% of total afforded revenue includes businesses where we expect to see a potentially significant top-line impact from the lockdown measures and stay-at-home restrictions in the near term, and expect to see a more gradual improvement in performance after those lockdown measures are lifted. This group includes our sensing technologies portfolio, which has short-cycle sensitivity, and we will expect to see pressure across a number of its core industrial end markets as capital-related projects pause. There are, however, a number of potential offsets across healthcare, life science, and food and beverage applications, including CETRA's room pressure indicator product line, which monitors air quality in ICUs and other critical health care environments. Group 4, which represents 20% to 25% of total afforded revenue, includes the businesses where we expect the most significant revenue decline in the short term and the most sensitivity to both the depth and duration of the recession expected in the aftermath of the COVID-19 crisis. Notably, this includes portions of the fluke industrial business and the tech instruments business, where we've historically seen the most short-cycle sensitivity, including over the course of 2019. It also includes the instruments and rental businesses within ISC, which have significant exposure to the oil and gas end market and would expect to be impacted by persistent dislocations in oil and gas demand. While we are not in a position to forecast the rest of the year with sufficient level of visibility using this framework, we expect to see a significant revenue decline in the second quarter. To be more specific, We believe that our total revenue will decrease 20 to 25% on a year-over-year basis in the quarter. While the fall through on a decline of that magnitude can be challenging in the short term, we expect to manage the business to decrementals of approximately 35 to 40%. We will continue to benefit from the cost actions that were taken at the end of 2019, which significantly helped our margin realization in Q1, particularly within professional instrumentation. Over the course of the year, we expect to continue to manage decrementals to that 35% to 40% range as additional cost actions are executed across the portfolio. We also expect to deliver free cash flow conversion of greater than 100% of adjusted net income for the full year. As you would expect, we have taken immediate and decisive steps to reduce our cost base in response to the dramatic shift in macroeconomic outlook during the first quarter. These more recent cost reductions add to the significant cost actions that we took toward the end of 2019 in anticipation of continued short-cycle headwinds through the first half of this year. Across the portfolio, we have aggressively executed adjustments to direct labor expense, primarily through the use of furloughs, to match our expectations for the near-term demand deterioration. We have likewise instituted reductions in salary compensation costs and a wide range of discretionary spending items. At the same time, we've initiated aggressive cost reductions throughout our supply chain, including both direct and indirect spend, while also reducing our facilities expense through temporary closures. In total, we intend to deliver incremental savings for the balance of the year of at least $300 million across these various cost actions. We know that liquidity is critical during challenging macroeconomic conditions. We entered the first quarter with a cash balance of over a billion dollars, and we've continued to proactively manage our balance sheet and enhance our strong liquidity position. We recently extended the maturity of the $1 billion term loan due this August to May 2021, and in an abundance of caution, renegotiated our net leverage covenant to provide additional headroom through the first quarter of 2022. While we expect to use our free cash flow generation to continue to de-lever over the course of this year, these steps provide us with additional near-term flexibility. Over the past two months, we have also reduced our reliability on the commercial paper market, paying down our outstanding commercial paper exposure with a new term loan and repatriated cash. We expect to temporarily exit our commercial paper exposure entirely in the coming months, in turn giving us full access to our $2 billion revolving credit facility, which remains otherwise undrawn at present. Before I close, And as you turn to slide 14 on the deck, I want to underline for the Fordive team, as well as our investors, that as challenging as things appear now, this too shall pass. While we navigate the choppy waters that lie ahead of us in the short term, we will also move our businesses forward and position them for even stronger performance in the long term. That means continuing to invest in innovation, winning in the market through product and service differentiation, enhancing the level of talent throughout the company, and maintaining the disciplined market work that drives our M&A process. Over the past few months, I've been extremely proud by the agility and resilience I've seen throughout the organization as we adapted on the fly to the realities of the current global public health crisis. With the underlying strength of our portfolio, our culture, and the commitment to our shared purpose, we remain well positioned to realize the substantial long-term value creation opportunities ahead of us. With that, I'd like to turn it back over to Griffin.

Thanks, Jim. That concludes our formal comments. Catherine, we're now ready for questions.

Ladies and gentlemen, just as a reminder, if you'd like to ask a question, please press star and then the number one on your telephone keypad. Once again, it is star and the number one, and we ask that you limit your question to just one question and a follow-up question. And your first question comes from the line of Julian Mitchell with Barclays.

Hi, good afternoon. Hi, Julian. Maybe just the first question around the sales guide. So you talked about a 20% to 25% total sales sort of placeholder for the near term. Maybe help us understand any nuance. across the two divisions with that guide, and any color you could give on how April trended for PI and IT in terms of orders or sales, please.

Hey, Julian. This is Chuck. You know, for the 20 to 25 percent, at this point, I think that it's best to just think of it as about the same across the two segments. But keep in mind, there's a lot of moving pieces here, and while we could end up at that same 20 to 25% in total, it could end up differently. But right now, we see it actually pretty much the same by the two segments for right now.

Hey, Julian, it's Jim. Just to give you maybe a little bit of color around the businesses, and what we tried to do on slide 11 is give you a little bit of sense of some of that as well. I think as we saw China come back at the end of March, but we didn't see China come back really towards pre-COVID kinds of numbers. And we don't really expect that to occur that much in the second quarter. So I'll give you a regional view first. Europe was down high single digits. We think it'll be worse, certainly in the second quarter. And North America held up pretty decent on the backs of strong Gilbarco. As I mentioned in the prepared remarks, because of our inability to get equipment into the ground, particularly in North America, and certainly with elective surgeries being almost non-existent here at ASP. Those are a couple of big examples in North America, and certainly point of sale at Fluke and TAC. We would expect deterioration in the second quarter for sure from what we saw in the first quarter. really that whole sort of last few weeks of March really playing out throughout the quarter with no expectation of improvement through the quarter. Now, in April, pretty much fell into line with that. So I would say, you know, one month is not a trend make, but I think we certainly felt that it was appropriate. We took some decisive actions in advance of what we thought would continue. And I think April, by and large, has played out the way we thought it would relative to that, you know, sort of down 20 to 25.

Thanks. And then my second question just around the decremental margins and the cost savings. So just to confirm that that $300 million in cost savings, is that included in that 35% to 40% decremental margin aspiration? And I guess I'm a bit curious why the decremental margin wouldn't get less severe in later in the year, presumably as you get more savings booked and maybe the sales declines get a bit less intense?

Yeah, Julian, I think, first of all, you've got it understood correctly. And the $300 million that we see coming out, we see it coming out pretty ratable at this point. We've made a lot of our calls and taken the actions that we think we'll see them here in Q2, and that gets us to that 35 to 40. As we go through the year, we're going to learn more, and there are some choices that we can make in the back half of the year. But for right now, we think that, which is also, given the uncertainty in the back half, that 35 to 40 is still the right place to be for right now. But you could be right if we see a difference in the back half of the year. you know, maybe the decrementals, you know, move a little bit lower. But right now, we're calling it at 35 to 40.

Great. Thank you. Thanks, Julian.

Your next question comes from the line of Andrew Obin with BOA.

Yes. Can you hear me?

Yeah, we can, Andrew. Good afternoon.

Yes. Just a question. I apologize if I missed it. Just pricing in IT... I think in the queue it says it turned negative. Could you just give more color on that? And I apologize if I missed it on the prepared remarks.

So pricing, are you talking about for Q1?

Yes.

Yeah, I think it, no, it was, I don't think it was negative. We have it as positive here. Maybe just nominally positive.

Okay. Maybe I calculated incorrectly. I apologize. Maybe you can just talk generally about sort of affordability pricing power in this environment.

Yeah, I think we would continue to see, you know, our gross margins were up in the first quarter on a deteriorated volume. So we certainly saw, you know, I think we've maintained price, probably not getting as much price as we did a year ago because a lot of our tariff mitigations You know, the price was in the tariff mitigations, Andrew. But in terms of seeing any price pressure at this point, we really couldn't call any places where we'd see any of that. We're probably slightly reluctant to see any more, you know, additional price in this environment. Just want to make sure that we're careful about volumes. But in terms of just how we see things relative to albeit direct business or even with channel partners, we don't really see any changes in the pricing environment here.

And just a longer-term question, you know, sort of I think you talked about doing things differently, using more Zoom, less travel, sort of doing Kaizens electronically. What kind of, have you guys, and you don't have to give us an answer, but have you guys considered what kind of long-term impact you can make to afforded cost structure given the lessons, operating lessons that you've learned?

uh in this uh crisis and what are the main buckets of savings yeah so i think um andrew you know we were just talking before the call i think we're chuck and i are eight weeks working from home now um and uh and certainly i've been as i said the prepared remarks i've been amazed at the quality and the level of work that our team has done to do that so quickly and and from a just productivity perspective really not see uh really any impact in productivity I think it's too early to sort of call long-term what this means, but I think for many things you could certainly see, it would not be hard to suggest that with the way we've been working, certainly we'll open ourselves to more employee flexibility, which I think gives us an opportunity for talent. And I think the second thing would be that it certainly is going to foresee us to be able to reduce travel costs over time. I don't see it any other way. But, you know, we're still a Gemba Evidence kind of company. We still are, you know, we're looking forward to getting back and visiting customers. We're looking forward to, you know, being closer together in Kaizans and things like that. So none of that will be, you know, completely eliminated. But I certainly think that the opportunity for us to think about how we can do things, we're seeing a lot, we're taking a lot of notes. And our FBS office has done a fabulous job of sort of codifying a lot of these new processes so that we can replicate them into the future in all of our operating companies. Thank you. Thank you.

Our next question comes from the line of Nigel Coe with Wolf Research.

Thanks, guys. Good afternoon. Good afternoon, Nigel. So, Jim, when you say getting close on Kaizen, it's not too close, right?

Yeah, no, that's right.

Okay, great. So, look, when you go back to 08, 09, you know, fluke and tectronics were down, you know, mid-20s to trough then. So the fact that these cycle is not, you know, new news, but maybe just characterize, you know, what you're seeing today versus, you know, back then and maybe compare and contrast. And would you expect the recovery profile to be similar, you know, to back then?

Well, I think there's a couple things. One, and that's why we tried to frame it in these groups. So I'll try to use that as a context. One is I think if you go back to some quarters, you could find a quarter maybe where tech was probably down 40 in 2009, and you'd probably find a fluke maybe down in the 30-ish range. So a little bit more dramatic than your reference point. But I don't know if it's – that's just for context. I think when you look at what we've done here, and I think it's just so evident to call it out, when you look at Group 4, which is what we would say maybe was the business more in 08 or 09, you see the Fluke core, kind of Fluke industrial business, and you see the tech instruments business. But what you go to the left and you see in Group 1 and 2 is you start to see Fluke digital, you see Fluke imaging, and so you see those additions that we've made to the Fluke business that are far more resilient as part of the revenue base. You see the Tektronix Service Solutions business there as well as you see the Fluke Health Solutions. So what you can see is, you know, that's why we broke the portfolio up because in the context of Fluke, you now see three substantial additions to the portfolio that are a lot more resilient to that business And you see in the tech business, the service business, which is more resilient. So we're not calling out that parts of Fluke and parts of tech aren't cyclical to the macro, but I think what this kind of demonstrates and gives you a visual picture of the kinds of things that we've done, which ultimately will put more resilience in the overall business.

But what you're trying to say with these groups of businesses, these aren't structurally multi-year sort of flat revenue businesses. These are fifth or sixth quarter declines that you expect to be back to growth in No, because I'd like prior cycles.

You're talking about businesses in group one or two?

Group four.

Oh, group four. Well, you know, I think, you know, depending on their – this is where I think it's tough to call, particularly in light of some of the things we saw in 19. Tough to call how long Fluke and Tech, those parts in group four, would come back. But you typically think if, you know, if that would roughly track with sort of improvement in industrial production, global PMI. So those businesses maybe track a little bit closer to those metrics, whereas in groups one and two, you start to find secular drivers and much more resilient business models like SaaS and service models.

Okay, great. And my follow-on is a nice segue there to the SaaS side, because there has been some chatter about in this environment, maybe SaaS contracts get repriced or there's a pick-up in churn. Have you seen any of that? And maybe just give us a flavor in terms of what you've seen. at Gordian and Accruance through April. Thanks.

Yeah, well, you know, a good example would be Fluke Digital in the quarter grew double-digit, and the E-Mate business grew, I think, 20%. So just to give you an example of resiliency, probably one of our more resilient businesses relative to SaaS. The Gordian business grew double-digits in the quarter, or I'm working through all the numbers. Infilex grew in the quarter. The SAS part of Census grew in the quarter. So all those businesses actually grew pretty much on track for the quarter. What we do see is in parts of those businesses where they have service, professional services or some installation services and things like that where we couldn't get on site, we see some revenue degradation there. Most of that comes back in the full year, we think. So you see a little bit of headwind from the on-site stuff. Bookings maybe, you know, the long-term bookings maybe change a little bit because customers aren't necessarily signing all their contracts. You'll see a little bit over time, depending on the depth of the economic impact, where we'll see maybe a little bit of seat change. But pricing has held up well. And quite frankly, you know, when you start to think about some of the solutions, whether they be in things that save money, like Accruant and Gordian, where you're really saving money, in activities or things like intellects where you're really in the health and safety aspects of the business where there's no greater time when Fortune 1000 companies are focused on that. I think the secular drivers here are going to hold up pretty well in those businesses.

Okay. Thanks, Jim. Good luck.

Yeah. Thanks, Nigel.

Your next question comes from the line of Steve Tusa with JP Morgan.

Hey, guys. How's it going? Good. I think you were on TV recently. Jim, weren't you?

I think you were too.

Anyway, the decremental, just kind of turning back to that, if I just assume a kind of a 10% type of decline, just picking a round number, X the $300 million in savings, it looks like you'd be kind of decrementing like at 100%. on the decremental margin. That's just simple math of taking the, you know, 35-ish percent and then, you know, subtracting the 300 of savings. Is there some mixed impact there or something like that? I'm just, you know, I know you sound like you're being conservative, I guess. I just, it's a little bit, you know, tough to kind of make those numbers reconcile.

Well, you know, I think it's better if you break it by quarter to do that. I think it'll help make the math because I think what you just did is 10% down on the year. And if we're 20% down here, you're going to do some funny things there that makes that math. But what we're trying to say is by quarter, 35 to 40 is about what you should expect on the decrementals, given that we've front-end loaded some more. It's higher down in Q2, as we've called that, 20 to 25. So our math holds up, but we can follow up in the follow-up call about how that comes down.

So you're basically saying that you're kind of assuming a certain level of revenue decline. So if, for example, the revenue came in less than 20%, so I guess implicit in that in the annual guide is like a 20% type of revenue decline. Is that kind of what you're saying?

No, I think a better way to think about it is these are the types of fall-throughs that we will manage through. By pulling our guide, we're saying we don't know what the second half is. Maybe we do more actions as we go through the year. Maybe it moderates a little bit. But we're trying to have obviously more clarity around the second quarter, and the second half we specifically don't know that yet.

I was just going to add that, you know, we've built a number of scenarios around what we think the second half could look like. This is not one of those things where we're going into it wondering what's going to happen. We obviously, you know, Chuck and I have been through a few of these. The vast amount of gray hair between the two of us probably suggests that this isn't even our second time. So I think we've built scenarios, we've identified the cost reductions that we think are available to multiple of those scenarios, and we're confident in those decrementals. relative to both the actions and, you know, several of the scenarios. And if things get worse, as we said, and certainly in the presentation as well, we've got some additional levers we could pull if needed if we saw things come down. But it's still such early days, too early to call on anything like that just yet.

And then just to follow up along the lines of the revenue declines, and I know that, you know, there's not a lot of visibility here, but like most companies are kind of talking about, Some are saying April's down mid-teens. They have kind of a worst case of down 20 this quarter, and then things bounce back and start to V-shape or whatever. Your 20 to 25 in the second quarter, for those that have given it, is relatively steep, especially in the context of all those groups of revenues you have that should be holding up. How do you kind of reconcile that? I mean, I thought that you guys had kind of pivoted the portfolio to be more defensive. And the 20 to 25, while it's not out of the question, certainly given the macro, it just seems like it's kind of on the lower end of the range around versus kind of what others are saying. Do you think they're just kind of underpunching how kind of bad it is out there?

Well, I can't speak for others. I think that the severity of restrictions, if you look at our big businesses, I would think about it this way. Gilbarco, one of our largest businesses, can't put stuff in the ground. So while they had a very strong first quarter in North America, inevitably until these restrictions get lifted, they're not putting sites in the ground. So we still think the resilience is there because ultimately one quarter does not a year make, and we think that'll come back in the know in the year certainly with emv we're we're confident that that demand is there you take another business like matco where where people are sheltering in place they're not putting as many mouths repair shops are closed in many states they've uh they maybe were considered um you know non-essential and so that needs to come up and so and then asp obviously with uh with elective surgeries just so dramatically those really aren't economic impacts Those are really very much shelter-in-place impact. So I think we probably would never plan for a shelter-in-place economic scenario when we build the portfolio, given we haven't seen a pandemic in a little while. So those are very unique, and that's why we sort of put them in the category, too, because once these restrictive things come in place, the business will come back much faster than, say, if it was an economic consequence, if you will.

Okay, one last quick one. How are orders at GBR? Are those held up, or are those kind of trending down?

No, they've held up decent. They've held up, particularly in North America. You know, some issues with around the world, you know, as an example, where you have a national oil company, you know, and oil prices are down, they may delay a tender or something like that. But I think, you know, we mentioned it in the prepared remarks around India as an example. We've seen a little bit of that in China as well. But I think if you just take North America – The orders are holding up. We're pretty confident that that will come back. Once we can start putting stuff in the ground, then we'll have a good ability. When construction starts around the United States, you'll start to see that business come back pretty quickly.

Great. Thanks for the call. I appreciate it. Thanks.

Thank you.

Your next question comes from the line of Dean Dre with RBC Capital Markets.

Thank you. Good afternoon, everyone. Hey. Hey. Good afternoon. Thanks. No surprise that you are delaying the timing here on Vontir. But I'd be interested, you also said you're delaying the timing and structure. So how might the structure change of the spin based upon what we were looking at before?

Well, thanks, Dean. I think there's probably three things to keep in mind. One is the strategy around the separation hasn't changed at all. We said that we would be ready to go at the end of Q1, which we were, with the management team to move forward. And we just evaluate whether the market was ready to go. Obviously, we don't think that the market is receptive for this type of separation transaction in the next few months. And so what we're really looking for is for the market to become stable and for us to be able to move forward and look at that. And then, like we've always said, it's like, look, we'll look at what that looks like. We can't really tell right now, but when we get there, both split or spin options will be open to us, and we'll figure out which one works best for all of our stakeholders.

Okay, good. That sounds familiar with what we were looking at before. And then, Chuck, while I have you, for free cash flow – guidance saying you'd be better than 100%. What's that mean for CapEx? I don't know if I might have missed that. And then assumptions on working capital. Will you be liquidating the portfolio? Some inventory becomes a source. And what are you thinking about receivables and credit quality and so forth?

Well, probably the easiest way on the true CapEx, you know, we're very CapEx light, but we'll probably... I'd expect our CapEx year-over-year to be down 25%, probably more when you think about what we were actually guiding for the year three months ago. But that's the simple answer on CapEx. When it comes to working capital, we've got a very strong procurement team, and the operating companies really focus on working capital. terms. It's one of our core value drivers, as you know, and we've worked hard on that. So what we'll do is as the revenue comes down, we're going to make sure our supplies, that we don't bring on more inventory than we need. So try to do the best job that we can in terms of maintaining the inventory terms. That will naturally free up some cash coming out, you know, as As the Q2 slows down, that will be a source of cash rather than a use of cash in the near term. But our teams are going to strike a balance. Every one of these operating companies will be in a little bit different situation. We don't want to end up with too much inventory, but we don't want to end up with too little when things start to recover. But that's not that different than what they have to deal with every quarter. So I think we're well-suited with the 40 business system to help us do that. On receivables, we're off to a good start in cash flow collections. Again, it's an opco by opco story. We have a lot of daily management around this, and we feel confident in how this is going to perform as we go through the year, as Jim said. It's not just Jim and I. A number of people at our opcos were with us in 2009 as well. So we feel confident about where we're at.

Great. Thank you, and best of luck to everyone. Thanks, Dean.

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

Good afternoon, guys. Hi, Andy. Jim, does the M&A focus for Fortiv and Vontir change at all moving forward, even if you stay together for a while, given the increased focus from basically setting up Vontir to be on its own? Do we see more acquisition capital drift that way over the next few quarters once the world recovers a bit? And you mentioned you would play offense with your balance sheet over the next year. So could you comment on your acquisition pipeline, your appetite to do a larger deal, obviously not in the short term, but as the pandemic eases further?

Yeah, I think, you know, just as we always remind ourselves that we spent $4 billion last year, brought a number of good companies into the portfolio. And we had always thought that 2020 might be a year more of bolt-ons and maybe some strategic investments as well in technology, things that tend to be a little smaller. I think that probably still remains our view. And if we saw, and what we've always said is that Vontia would be part of Ford until it spun. And so if there was something that we would see that was attractive, we wouldn't necessarily preclude ourselves from doing that. I think, as you point out, and as, you know, we've continued to work, and during this time, we generally focus more on cultivation and more on market work, in part, Andy, because generally during this time, Sellers' price expectations and buyers' price expectations aren't aligned usually right at the front end of this stuff. It takes a few quarters for those things to start to equal out. So, you know, we'll wait. We'll certainly patient there. We'll focus on the things that we can control. And we certainly continue to look for, you know, any opportunities. But if I were to bet, I would say if we were to do anything, it would most likely be bolt-on-ish here in the next few quarters.

That's helpful. And then, Jim, I'm just trying to ask these questions maybe a different way. Some of your multi-industry peers have talked about a V-shaped recovery in China specifically, and some strength, or at least not weakness, in semiconductor and some types of electronics. It seems like you're really seeing more of a U in China, so maybe give us a little more color on that, and could you comment on your electronics-focused businesses?

Yeah, sure. So, you know, I would say I think it's You know, we've got all these letters for recoveries. I think at the end of the day, this is not a snapback recovery in China. You know, if we look at our three, you know, our four largest businesses there, you know, Tektronix has got electronics focused. That's been pretty slow. We had a little bit of Huawei impact in the first quarter, but that's been relatively slow still and haven't seen that come back much. Fluke has seen nice demand. in things like imaging, so they've seen some strong demand there, but the remaining part of it still remains slow. So I haven't seen much recovery there. I think with Gilbarco, we've been mostly waiting to put stuff in the ground, given there's still a lot of restrictions there. I mentioned that in North America, but we're seeing that in other places around the world. So that's probably been more slow than the other two. And of course, ASP, I mentioned elective surgeries. At their peak, we're down 85% in China. So they've come back considerably but not come back to normal yet. We would anticipate that to happen over the next 60 days. So that could come back a little bit faster, just to give you a little bit of color. So overall, I think, what does that mean when we add it all up? I think at the end of the day, you know, China does – I don't think China looks all that different in the second quarter than it does in the first quarter.

Appreciate it, Jim. Thanks.

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

Hi, Jeff. Hey, good evening, everyone. Hope everybody's well. Hey, I just wanted to come around to the cost savings, the $300 million, and make sure I fully understand the moving pieces there. So the $300 million is an annualized run rate, or is it $100 million a quarter? And then we kind of cut it off there. Just a little bit of color on that. really what it is, what's temporary, what's structural, and how it rolls out would be helpful.

Yeah, I think it's meant to be more about over the last three quarters, so think of it as $100 million a quarter. Maybe we'll get a little bit more in Q2 with some of those. I think there's, you know, we haven't announced, you know, restructuring or anything beyond what we did in the last fourth quarter, so By their nature, these things are somewhat temporary. We're trying to maintain the team that we had coming into it, coming out the other side, at least as we put these actions. But in them are things like travel, obviously way down. There's going to be some miscellaneous spend that will slow down on the margins around maybe some marketing and really sales programs as well throughout OPEX. There's going to be, you know, some spending around, you know, the pay furloughs that will come out. Those are some of the main ones. But we'll look at every bucket to make sure that we – and we've got actions identified, but those are some of the bigger ones.

Jeff, I would just say, maybe to add on it, you know, obviously we've historically, as part of continuous improvement, have historically kept a – decent amount of temporary labor in factories so you know from a productivity perspective we can accelerate productivity in a down cycle a little bit that's part of the cost reductions as well and quite frankly probably a little bit more temporary than typically because because of the nature of this recovery and how it might happen I think we want to maintain as many degrees of freedom as we can for as long as we can but certainly we we understand you know, exit rates into 2021 and what that's going to need to look like. And we're going to continue to evaluate that bucket as well as additional buckets as we see the demand play out.

So that brings me back around, I think, to what Steve Tusa was asking, right? I mean, you know, if we model sales down low 20s and kind of a mid 30s decremental and then back out, you know, 100, 150 million of cost savings, it implies your underlying decremental is like 60 to 70%. I guess that maybe isn't crazy relative to your gross margin with a five handle, but as the year progresses and sales, you know, theoretically the declines begin to moderate, you know, if we're still holding at that 35 to 40 observed decremental, the implied underlying number just doesn't really seem to make a lot of sense.

Yeah, I think there's – keep in mind there's moving pieces, you know, here that we look at. But, yeah, being 65-plus decrementals from a top line with, you know, our gross margins in the 50s, depending on where it comes in, there are other places that will fall through higher than that for sure. So that's not a crazy – that is actually right where we have it, 65 to 70, what will fall through. As we get into the second half, you know, we'll continue to evaluate that. And it depends, you know, what falls through and what you can get after is a little different if you're down 20 than if you're down 15. So more to come on that.

All right. Appreciate the call. Thanks, guys. Best of luck. Thanks, Jeff.

Your next question comes from the line of Richard Eastman with Baird.

Yes, good afternoon. Thank you for the questions. Jim, I noticed in the documents here that are released a fairly substantial charge around the telematics business, and I'm just curious if there's any change of strategy there. I would have thought perhaps that business might have been one of your more resilient businesses just because it is kind of a SaaS business. Is that just an accounting true-up to the price paid versus the implied value today or any change of strategy there?

Yeah, Rick, this is Chuck. That is purely an accounting non-cash charge. We do an annual impairment in value analysis of all our business. That one was close to it. Due to the impacts of COVID, that takes our forecast down a little bit. It just trips it over the line, and that's what drove that charge.

Yeah, I would say, relative to the change in strategy, no change in strategy. In fact, I think, you know, we've had a new leadership team in there for a little bit. Mark Morelli, who we hired, obviously, to bring on for the volunteer role, has been very involved. And I think the team is actually pretty excited about some of the work they've got going here that's going to play out in the back half of the year. You know, it'll... As you said, there's a little bit of degradation. They've got a little bit of small business impact. You've got some fleet folks who've seen some reductions in freight, so they've lowered the number of trucks. So there's some degradation, as Chuck mentioned, but it's not changing. It's more kind of an outlook kind of thing than anything else. So I think by the end of the year, we can't move the needle quickly in that business. because it is fast, but I think as we start to see the back half of the year, I know we said that it's been a self-help project for several quarters now. I think the team is more inclined to be positive on it than ever before, so we'll see where it plays out.

Okay. And then just as a follow-up, around the healthcare businesses, you know, ASP, Landauer, even Fluke Medical and Census, you know, the businesses really are correlated to, you know, patient visits or, like you said, elective procedures. But as those businesses start to ramp back up and basically you lose some of these movement control orders, is there a leverage in those businesses? I mean, they come back at a very nice gross margin, but is there leverage from a sales perspective or do they ramp back up from a sales perspective?

No, there's pretty good leverage. Picking the timing on that is obviously a little challenging. But as you say, in this case, this is true pent-up demand. I was talking with a CEO of one of the biggest hospital networks in the country this afternoon who was talking about literally all kinds of different patient groups that they've just not seen, including elective procedures. And I think the... What's going to happen here is both the clinical and the financial needs are going to happen, right? There's a whole bunch of pent-up demand for these types of procedures. That's the clinical need. And obviously, the elective procedures, elective surgeries in particular, are very profitable for the hospital, so there's going to be a real need FROM A FINANCIAL PERSPECTIVE TO ACCELERATE THIS. SO WE WOULD EXPECT TO SEE THAT ACCELERATION. DIFFICULT TO PREDICT WHEN, GIVEN THE NUMBER OF STATES IN THE U.S. AND THE NUMBER OF COUNTRIES IN EUROPE THAT NEED TO SORT OF TURN THIS BACK ON AND HOW QUICKLY THINGS GET TURNED ON. BUT WE DO THINK THEY'LL BE LEVERAGING THOSE BUSINESSES. LANDAUER GREW IN THE FIRST QUARTER AS AN EXAMPLE. SO EVEN IN SOME CASES WE SAW SOME GOOD PERFORMANCE, EVEN DESPITE SOME OF THOSE CHALLENGES THE SAS BUSINESS AT CENSUS CONTINUED TO to grow as well.

Got it. Very good. Thank you.

Thanks, Rick.

Thanks. Our next question comes from the line of Scott Davis with Nellis Research.

Hey, good afternoon, guys. Hi, Scott. I think most of my questions have been answered, but one of the things I was curious about is just that there was an awful lot of pretty big liquidity moves that you made, rightfully so, but Is there a meaningful cost increase, you know, interest expense or otherwise that goes along with making those moves?

You know, there's certainly some, you know, anytime you change those. But I think the total cost of fees were in that, you know, less than a penny a year, probably more like a penny and a half. And then there's some changing in terms of the floors around off of LIBOR, but frankly, the floor that it's negotiated in there is lower than where we're at right now. So not a huge cost for that.

Okay, fair enough. And then just a quick follow-up. I mean, the percent of facilities that you guys have up and running right now, I know you gave a number from one of the businesses, but I don't recall seeing a The aggregated number, is there something that you have?

Yeah, all of our facilities are up and running and have been. We had a couple situations where we might have been in the U.S. and Europe where we had one facility or two facilities in the U.S. where we were down a day or so where we were working through the local situations. But all of our facilities now have been pretty much through the downturn up and running. We have furloughed a few facilities in the second quarter, as we said, with some demand. But we're able to run all of our facilities now around the world.

Okay. That's great. Good luck, guys. Thank you.

Thanks, Scott.

Your next question comes from the line of John Inch with Gordon Haskett.

Thanks. Good afternoon, everybody. Hi, guys. Hey, can you just remind us of the mix in ASP of consumables versus equipment and just sort of What sort of levels are these consumables running down today, sort of dovetailing back to the points about elective procedures and so forth, just to kind of put this into a context?

Yeah, it's about 75-25 or, you know, if you thought of service and consumables together, it's probably 75-25. It moves around a little bit by quarter depending on, you know, larger deals in some parts of the world, but that's probably a decent number to go with. And then You know, we get pretty good data in North America because of census. The census track software at census really tracks the daily amount of sterilizations that go on in the U.S. And as an example, we see those down as much as 60% in the United States. So that's probably a number. We don't get as good a data in Europe. And as I mentioned, we get decent data in China. And we saw at the peak, as I mentioned, the prepared remarks. down about 85%. So we've seen significant reductions in those consumables, John. We are decontaminating N95 respirators in the U.S. and in some countries in Europe. That brings back that volume a little bit probably, but by and large, we really want to see those electric procedures come back in order to really drive the revenue.

Yeah, I was going to ask you about that decontamination opportunity. Is that big enough once it gets to full rollout to move the needle, call it in the next two quarters or whatever, or is it still a relatively minor business?

No, it's really a temporary measure. At the end of the day, the hospitals are probably going to want to utilize single-use masks for the most part. This really gives them, at a time when PPE has been a challenge, they can turn on the stare ads that are essentially not at capacity right now. in their hospitals to create more opportunity so but the decontamination is really was really an effort for us to help out it's really more of an effort to help out our customers not a really big financial opportunity probably in the neighborhood of 10 plus million dollars in the quarter but uh you know hard hard to tell how many hospitals will necessarily need to use that more longer term no but it's uh it's good price nonetheless um

I want to ask you, Jim, you know, you guys have sizable long term operations in China, depending on how sort of the politics of the pandemic all play out when this subsides. Some people are sort of talking about the risks of the US and China going into a Cold War. You know, we've had the economic issues, but maybe this becomes something much more extreme. How are you as CEO thinking about this in your assets there and possibly you know, kind of future growth trajectory M&A? Like it's a kind of a holistic question to what could be, you know, a turn for the worse in terms of our relations between the two countries.

Yeah, and you know, I've been pretty close to China for a long time, having run it back in the Danner days for a long time. And we're pretty close to those questions. I think one, John, is we de-risked our supply chain considerably once the tariffs started. So we've really de-risked our supply chain considerably since from where we were at, say, even a year ago. We're going to continue to assess those things, and we will continue to probably – we mostly make for China in China, so as we look at bigger moves, we'll continue to evaluate. We don't have many big moves left, to be honest with you. I'm not sure we have any. But we certainly are continuing to think about this continued move in places to build locally for many of our businesses. Our healthcare businesses almost exclusively build in the US and in Europe, so I know there's a lot more energy on the healthcare side to wonder about origin, and certainly we're fine in that situation. in case that was also, you know, I'm inferring that in your question as well. So anyway, I think we're in a good place, and we're well positioned from, I think what we've demonstrated in the tariff situation is that we can move pretty quickly if we need to do other things. We certainly are able to do that. We're monitoring all the things that you've obviously described.

Yeah. Okay. Appreciate it. Thanks. Good luck, and stay safe.

Thanks.

You too, John.

Thank you.

All right, I think that we appreciate the energy. I'm not sure we got through everything today. Obviously, a lot there for everyone to want to know about, and we appreciate the time and energy that everybody has put into this. I know we're available for follow-up and certainly want to make sure we make ourselves available to anyone who needs time. Griffin and team are available. Chuck certainly and I are also available. I just want to thank everyone at a time when it's just been, you know, the word unprecedented is used so often these days. It's probably the most overused term. And the focus on health and safety of our teams has never been more important to us than every day we wake up. But we also want to make sure that we've given you an understanding that while there is uncertainty in the near term, we're in a very strong position to be able to manage the business around multiple scenarios. And the moves that we've made over the last three years strategically continue to be very good moves for us from a resiliency perspective. And I'm confident we'll see that play out in the weeks and months and quarters to come. So we look forward to continued dialogue to give you a better color. Hopefully we did more with this presentation to give you that color. We're certainly available to continue to give you a sense of what we're seeing and available to help in any way, shape, or form. I want to wish everybody, I hope everybody on the call is safe. I hope your family and friends are safe as well. I hope you've been able to be productive in all this work from home stuff and in just such a challenging time. We look forward to the time when we can all see you at a conference or something. We look forward to those days, and hopefully they're in the not-too-distant future. Thanks, everybody. Have a great evening. We'll talk to you soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.