Fortive Corporation

My name is Nicole, and I'll be your conference facilitator this afternoon. At this time, I would like to welcome everyone to the Fortis Corporation's second 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, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound keys. 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, Nicole. Good afternoon, everyone, and thank you for joining us on the call. With us today are Jim Liko, 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 1, 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 adjusted diluted net earnings per share of 68 cents for the second quarter of 2020 as we delivered better than forecasted revenue performance despite the difficult conditions created by the ongoing COVID-19 pandemic. It was a quarter that clearly reflected the power of the afforded business system as we executed our playbook on expense savings and working capital management enabling us to achieve decremental margins of 33 percent and generate very strong free cash flow. Throughout the quarter, we continue to operate all of our essential production facilities around the world and proactively manage our supply chains, while adopting comprehensive new protocols to protect the health and safety of our employees. With a focus on maintaining continuity, despite the shift to a virtual operating environment, the Florida team leveraged new virtual sales and marketing tools to continue to engage with customers. We also adjusted product development processes in order to continue to meet project timelines while continuing to invest across the portfolio to emerge from this period with an enhanced competitive position. When we looked ahead on our Q1 earnings call in April, we faced a highly uncertain operating environment due to the challenges posed by the COVID-19 pandemic. Our Q2 performance demonstrated the resilience we built into the portfolio over the past four years with an increased share of recurring revenue, from our expanding set of subscription-based software solutions, services, and consumables offerings. Recurring revenue accounted for more than 35% of total revenue in Q2, a new high for Fortiv. Importantly, this resilience came through despite the fact that a key source of our recurring revenue, advanced sterilizations products, experienced a decline in the elective surgical procedures as healthcare systems around the world weathered the early months of the pandemic. With respect to Vontir, we made additional progress in Q2 preparing for its separation from Fortiv as we can continue to evaluate our options for structuring the separation either via spin or split. The Fortiv and Vontir teams remain in a position to move forward and affect the separation as soon as market conditions permit. Mark Morelli and Dave Nomura continue to guide the Vontir businesses through the challenging macro conditions while also leading the build out of Vontir's organizational capacity as the team prepares for its future as an independent public company. We issued our most recent corporate social responsibility report at the end of Q2, highlighting the important progress we have made across our portfolio over the past year. Our CSR framework organizes our priorities into seven strategic pillars, which capture the full breadth of our initiatives around corporate social responsibility. Consistent with our belief in the strength that comes from building diverse teams, we have always aimed to cultivate an inclusive environment at Fordham, Over the past few months, we have acted on these values to help our teams advance an internal dialogue about addressing critical broader themes of social justice. As we look to continue living our values and fulfilling our commitment to our employees and our communities, the forwarding and volunteer teams will remain strongly committed to increase diversity, equality, and inclusion as a key tenant of our culture and our corporate social responsibility efforts. With that, let's turn to the details of the quarter. Adjusted net earnings were $241.9 million, down 25% from the prior year, and adjusted diluted net earnings per share were 68 cents. Total sales declined 15.7% to $1.6 billion, including a 16.8% core revenue decline, reflecting the significant negative impact of the COVID-19 pandemic. Acquisitions contributed 270 basis points of growth, while unfavorable foreign currency exchange rates reduced growth by 160 basis points. Gross margins held up well in Q2 at 52 percent supported by the growing contribution of our high margin software businesses. Gross margins also benefited from 70 basis points of price and disciplined supply chain execution. Given the top line challenges, core operating margin decreased 220 basis points resulting in an adjusted operating profit margin of 20.2 percent. This adjusted operating margin reflected total cost actions of greater than $100 million executed during the quarter in response to the widespread deterioration in macroeconomic conditions. During the second quarter, we generated $454 million of free cash flow, representing conversion of 188% of adjusted net earnings. This strong free cash flow performance reflected a proactive response taken by our operating companies using FBS to improve inventory turns and accounts receivable, driving $165 million tailwind from working capital in Q2. It also showed the increased resilience of free cash flow generation across the portfolio driven by specific portfolio transformation actions taken over the past few years. Turning to our segments, professional instrumentation posted a total sales decline of 11% including a 14.4% decline in core revenue. Acquisitions contributed 450 basis points while unfavorable foreign exchange rates reduced growth by 110 basis points. Core operating margin decreased 140 basis points, resulting in segment level adjusted operating margin of 23.1%. Industrial technologies posted a total sales decline of 23.7%, including a 20.8% decline in core revenue. Unfavorable foreign currency exchange rates reduced growth by 250 basis points. Core operating margin decreased 250 basis points, resulting in segment level adjusted operating margin of 19.6%. Looking across the major geographies, our performance in Q2 continued to be negatively impacted by COVID-19 headwinds, but was broadly better than expected. The region by region breakdown, as shown on slide nine of the earnings presentation, ultimately reflected each region's relative progress in terms of economic reopening, as well as local public health dynamics as the quarter progressed. In Asia, Core revenue declined low double digits in Q2, representing a significant improvement from the prior quarter, driven primarily by China. China was down mid-single digits in the quarter. We continue to see steady signs of progress across our China businesses as they climb back from the low point experienced back in February. All of our major businesses in China experienced significant sequential improvement in Q2, with a number of operating companies, including Fluke and ASP, returning to year-over-year growth. We were encouraged by the positive signs coming out of Q2, including improving point of sale trends at Fluke and Tektronix and elective surgery volumes for ASP back to approximately 90% of the levels that prevailed prior to the onset of the pandemic. Looking across the rest of Asia, PAN likewise saw sequential improvement in Q2, while India and Southeast Asia remain more challenging. India in particular saw severe economic lockdown measures put into place for much of Q2. This significantly limited access to customers for sales and marketing activities as well as services implementation. Western Europe core revenue declined high teens in Q2. The quarter played out largely as expected with significant challenges through April and then sequential improvement in May and June as economies began to reopen. The resulting top line for Western Europe was a bit better than expected in Q2, particularly in light of relatively weaker trends in the region prior to the onset of the pandemic. Notably, ASP posted low single-digit growth as strong terminal sterilization capital sales and incremental consumable revenue from N95 respirator reprocessing helped offset a significant decline in total surgical procedure volume. Demand trends for flu contactronics, while still down significantly, showed some improvement over the course of the quarter. North America core revenue also declined high teens in Q2. Similar to Western Europe, the U.S. bottomed in April and then saw sequential improvement across May and June, resulting in a better than expected high teens decline in total revenue. Improvement over the back half of the quarter was driven by the widespread lifting of lockdown measures, although customer access remains limited in certain markets. North America does benefit from the resilient performance of our software businesses, many of which derive the majority of their revenue in the region and provide important stability in Q2. We believe improving trends for elective surgical procedure volumes, continued EMV-related demand at GVR, and early signs of POS improvement at fluke create the possibility for further sequential top-line progress in the coming quarters. That said, we continue to monitor the risks associated with rising COVID-19 infection rates in hotspots across the country and any re-imposition of lockdowns which may be required. Finally, we saw a mid-teens decline in the Middle East and a greater than 20% decline in Latin America. Weakness in the Middle East reflected the combined impact of COVID-19 and budgetary pressures across the region tied to challenging conditions in the oil and gas market. While Latin America experienced the spread of COVID-19 a bit later than other regions, the impact became significant in Q2 with particular headwinds for our businesses in Mexico and Brazil. We anticipate that conditions will likely remain challenging throughout both these regions as we look through the end of the year. Last quarter, we laid out a framework for analyzing our portfolio, found on slide 10 of today's presentation, with businesses organized into groups based on relative sensitivity to pandemic disruption and resulting deterioration in end market demand. As shown on slide 11, the performance in Q2 across the four indicated groups played out very much in line with our expectations for the quarter. Group one, which represented approximately 14% of total revenue in Q2, showed significant resilience and posted mid-single-digit growth for the quarter, despite the challenging economic conditions. The group's performance reflected a strong contribution from a number of our software businesses. IntellX grew mid-teens, eMake grew high single digits, Gordium was up slightly, and the SaaS and maintenance portion of Accruant was relatively flat. Group 1 also benefited from very strong demand at Fluke's industrial imaging business, where customer response to COVID-19 drove very strong growth in the quarter. We're excited about the continued near-term demand trends for these product lines of fluke and the potential to accelerate a broader industrial imaging strategy. As expected, Group 2, which represents approximately 48% of total revenue in Q2, was significantly impacted early in the quarter by lockdowns. Overall, the group's improvement over the back half of the quarter resulted in mid-teens revenue decline, roughly 10 points better than expected. For ASP, surgical procedure volumes in both the U.S. and Western Europe troughed at levels higher than those experienced in China in Q1 and subsequently bounced back faster than expected to drive higher consumables usage during the quarter. At GVR, where bookings increased mid-single digits in the first half of the year, the pandemic impacted our ability to convert orders to deliveries in Q2. Despite the push out of the liability decline, we continue to see strong demand for EMV upgrades in North America. Elsewhere in Group 2, the recurring revenue business models of ISC's INET and Fluke Health Solutions' Landauer Dosimetry business provided added resilience in the second quarter. Fluke Health Solutions, which grew low single digits in Q2, also saw strong demand for ventilator calibrators related to the fight against COVID-19. Group 3, which represented approximately 15% of total revenue in Q2, performed better than we had anticipated in the second quarter with mid-teens declined. The group's performance was highlighted by MAGCO, which saw significant pressure early in the quarter, but then a strong recovery in orders as lockdowns began to lift. Elsewhere, the sensing portfolio saw pressure across a number of its core industrial end markets. This was partially offset by growth in semiconductors, driven by demand for data center upgrades and infrastructure, as well as COVID-related tailwinds in medical end markets. Specifically, Cetra and GEMS saw strong demand for critical environment products and ventilator components, respectively. Accruance professional services business faced significant headwinds in the quarter, but adjusted with new safety protocols and remote delivery capabilities to help address COVID-19 related restrictions and drive better performance later in the quarter. Group 4, which represented approximately 23% of total Q2 revenue, experienced the most top line pressure in the quarter, as expected, and posted an almost 30% decline. That said, businesses in Group 4 showed earlier signs of improvement than we had anticipated in April. Notably, Fluke's core industrial business saw improvement in point of sale across its major regions, with Asia POS positive in Q2 and Europe and the U.S. improving off their early Q2 lows. The Tektronix Instruments business performed largely as expected in the second quarter, with sequential improvement in China. Conditions remain challenged, but we anticipate some sequential improvement at Tekt in the second half. The combination of top-line resilience, strong margin execution, and substantial cash flow generation enabled us to continue to enhance our liquidity position and pay down debt as expected during the second quarter. We ended the quarter with over $1 billion of cash on our balance sheet in addition to our undrawn $2 billion revolving credit facility. While there were plenty of immediate challenges to address in Q2, we continued to play offense across our portfolio, running our FBS playbook by using dynamic resource allocation to invest in key growth initiatives to enhance our long-term competitive position. We remain focused on driving innovation across the portfolio using the Fort, our centralized artificial intelligence and data analytics hub, to bring more advanced analytics and machine learning capabilities to bear in our workflow solutions, while also expanding our use of the growth accelerator process to fund potential growth breakthrough opportunities. In May, we established a partnership with Pioneer Square Labs to help incubate industrial, technology companies capable of bringing new products to market in an accelerated fashion, in addition to our internal development processes. Sustained investment has enabled our operating companies to quickly address emerging opportunities, including the growing demand for critical environmental solutions, et cetera, and industrial imaging products at Fluke, driven by the response to COVID-19. Sustained investment has also enabled the completion of longer-term development of critical next-generation products, such as Teletrak Navmans, newly introduced TN360 telematics platform, which is expected to form a core part of its offering going forward. Importantly, we are also investing to expand our commercial operations, particularly among our software businesses. We continue to expand IntellX's European sales team to help capitalize on growth opportunities outside the U.S. and build the capability of Census to address attractive opportunities emerging in the ambulatory surgery center market. At ASP, despite challenges reaching customers in the quarter, our continued investment in sales and service enabled the team to quickly address the near-term N95 respirator reprocessing opportunities. Despite the better trends we saw coming out of Q2, macro conditions remain challenging with the potential for future volatility. This is particular in light of the persistent challenges associated with global efforts to keep COVID-19 infection rates under control. Consistent with Q2, we are not providing a guide, but we are providing additional color on expected performance for the coming quarter. We expect that total revenue will improve sequentially in Q3, but decrease by 5% to 8% on a year-on-year basis. We will continue to calibrate any remaining cost actions based on the top-line progression from here as we manage to decremental margins of approximately 35% in Q3. As we look ahead, we also expect to continue to generate strong free cash flow and deliver a free cash flow conversion ratio of greater than 110% of adjusted net earnings for the full year. The second quarter of 2020 was truly an unprecedented period as we had to quickly adjust to an unfolding global public health crisis and a resulting deterioration of the global macroeconomic environment. We weathered the storm delivering financial performance that significantly exceeded our expectations three months ago. As such, our Q2 performance demonstrated the progress we have made with our portfolio transformation over the past four years, establishing a more resilient top line and sustained cash flow performance through the cycle. More importantly, as we leverage the foundation of FBS to sustain our performance and develop new virtual collaboration tools, we continue looking forward by making the investments in innovation and team development that will lay the groundwork for the continuation of our portfolio transformation. Finally, I am extremely proud of our team's efforts over the past three months. And while we undoubtedly face additional challenges in the coming quarters, I'm confident in our ability to navigate through them as we continue to generate substantial value for our employees, customers, shareholders, and our communities. With that, I'd like to turn it over to Griffin.