Q1 2020 Earnings Call

Excuse me, ladies and gentlemen, this is your conference operator their conference call is scheduled to begin momentarily.

Timeline for once again be placed enemies color. Thank you for your patience and please do not just kind of.

[music].

My name is Catherine you know the Air Conference facilitator. This afternoon at this time I'd like to welcome everyone to Fort if corporations first quarter 2020 earnings <unk> Conference call.

Lines have been placed on each prevent any background noise. After the speakers her mikes that will be a question and answer session. If you'd like to ask a question during that time simply press start and then the number one on your telephone keypad. If you would like to withdraw your question press the pound key I'm not like to turn the call ever to Mr. Griffin.

Eat ice president of Investor Relations Mr. Whitney you may be getting your conference.

Thank you Catherine.

Renewed every one and thank you for joining us on the call.

With us today, or Jim Lico, our President and Chief Executive Officer, and Chuck Waffling, or senior Vice President and Chief Financial Officer.

We present certain nongaap financial measures on today's call.

Information required by F.C.C. regulation G. relating to these non gaps natural measures are available on the investors section of our website W.W.W. dot <unk> dot 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.

The N.S. business as discontinued operations for historical periods.

Results presented on this call are based on continuing operations.

During the presentation. We will described certain of the more significant factors that impacted your every year performance all references to period, a period increases or decreases and financial metrics or your every 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 for 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 defer materially from these forward looking statements is available in R.S.U.C. filings, including our annual report on form 10, K. for the year end of December 31st 2019, and subsequent quarterly reports on form 10 Q.

These forward looking statements speak only.

As of the data, they're made and we do not assume any obligation to update any forward looking statements.

What's 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, Refracked, reflecting solid performance in an operating environment to change dramatically over the course of the quarter.

Despite the unexpected headwins 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.

Out of the first quarter competent and the resilience of our portfolio as well as our ability to execute the playbook required stained strong free cash flow protect long term competitive advantage and overcome the macro economic challenges that lie ahead.

When we provided our first quarter guidance back on February sick, we built in expectations for the potential impact from Cobin 19 disruption on our operations in China, and some potential challenges throughout her supply chain.

Since then the scale and scope of the global public health crisis, and the subsequent macro economic impact from efforts required to combat spread of the virus had expanded significantly even as locked down orders were put in place throughout Europe and much of the United States. We continue to operate are 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 essential technologies upon which our customers the pen.

I could not be more proud of how the Ford of 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 copper it under enhanced safety guidelines.

We also rolled out a range of new collaboration tools and technologies, most notably no most notably from the four to business system office to sustain or commitment to continuous improvement.

The nimble adoption that'd be asked to the challenges of work from home restrictions has enabled us to assure business continuity in transition key F.B.S. processes, such as problem solving product development obey rooms, and visual daily management to virtual format.

Perhaps more importantly leadership teams across our operating companies have continued to drive innovation to help support their customers and the community, which they operate in the fight against the carbon 19 crisis.

Advanced sterilization products recently received an emergency use authorization from the U.S. food and drug administration for the use of its stared systems. The decontaminate compatible and 95, respirators, which will help alleviate critical P.B. shortages in the near term.

Fluke is temporarily reconstituted a portion of its manufacturing capacity in Everett, Washington to produce productive face shields, which have been provided free of charge to health care workers on the front lines are the fight against Coven 19.

Fluke helped solutions and gems sensors are up also actively working with ventilator equipment manufacturers expedite additional ventilator supplied hospital around the country.

Turning to volunteer 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 in structure of the separation as a result, we submitted a request to the F.C.C. to withdraw the volunteer registration statement.

We strongly believe that the that separating fortive in volunteer is the right strategic decision that will enable both companies to take full advantage of their respective growth opportunities and capital allocation priorities.

Martorelli, Dave number and the rest of the volunteer team will continue to run the business with informative and we remain prepared to move forward with the separation when market conditions improved.

Without like let's turn to the details of the quarter.

Adjusted net earnings were $264.3 million of 7.1% over the prior year and adjusted diluted net earnings per share with 74 cents meeting the high end of our guidance.

Sales grew 7.6% to 1.7 billion as growth from acquisitions more than offset 3.8% declining core revenue.

Mid single digit core growth a GBR low doubled you to grow the gordian were more than offset by declines across various other operating companies do to slowing related covert 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%.

Performance reflected in part the structural cost actions, we took in late 2019, which gave us a running start as we turn the corner into 2020.

That leader cost structure, along with the full fall through flow through a prior Tara mitigation efforts continued strong pricing.

Upland cotton supply chain management helped us whether the top line deterioration.

Cross our portfolio due to covert 900 headwinds throughout the back half of the quarter.

During the first quarter, we generated $158 million, a free cash flow, representing an increase the 15% year over year, the free cash flow performance in the first quarter, reflecting the underlying resilience.

Of our free castle generation as well as practice shell fire operating companies to manage their cash expenditures and maximize free cash flow generation as the macro economic outlook deteriorated in the back half of the quarter.

Turning to our segments professional instrumentation posted sales growth of 13%.

By the 7.2% or revenue decline.

Acquisitions contributed 2130 basis points.

Unfavorable foreign exchange rates reduce growth by 110 basis points.

Core operating margin increased 130 basis points riddled, 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 19.3%.

Switching to a view of our performance across the major geography is in Q1, which we've captured on slide 10 of the presentation. All regions were affected by the spread of covert 19 pandemic to some extent during the quarter.

Looking at Asia core revenue declined over 20 per cent and he won 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.

Or plants began to reopen the following week and continue to wrap up capacity utilization steadily throughout the balance of the quarter I'll be up 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 total capacity customers began to come back on line in February and March with order volumes picking up into the start of the second quarter.

At the same time, we saw significant negative impact from cobin 19 on demand across the rest of Asia, as well, including Japan, as well as India, where customer investments load significantly later in the quarter as lack down measures went into effect.

Western Europe or revenue declined high single digits and Q1, Western Europe was our most challenging geography coming into the air prior to any covert 19 impact, but many of our operating companies also saw a significant impact on demand customer activity in the wake of the pandemic as countries enforce broad economic lockdown to slow the spread of the virus.

F.P. delivered mid single digit growth based in part on the decontamination of respirators across the Netherlands, Germany in Belgium in March.

At this point, we're starting to see early steps being taken to reopen certain economies, including countries, such as Germany, which are fared better than some others, but it's too early to tell how these steps will affect demand that dynamics, which we saw deteriorate over the course of March.

North America core revenue grew by low single digits, Q1, and the United States with the exception of a few businesses, including GBR Gordy inequality role, we saw a cigarette significant negative impact on demand trend as well as our ability to access access customers in customer sites across much of the portfolio.

This is particularly the case late in the corridor in into the first half of April with potential plans for reopening on state by state or regional basis still very much in the early stages. It is difficult at this point to have a definitive view and how conditions for respond to any such reopening efforts during the second quarter.

Finally, we saw a mid teens decline in the middle East in high single digit increase in Latin America.

Long in the Middle East was due to a combination of order delays and supply chain issues associated with Coven 19, we expect to see persistent headwinds as we look ahead.

Strength in Latin America was driven by growth of more than 30% Mexico.

Latin America was later than other regions in terms of the emergence of covert 19 and it is difficult at this point to gaze the full potential effect from the pandemic on the region as we look forward.

Given the unprecedented public health crisis posed by the Cobin 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, where withdrawing or previously issued full year 2020 guidelines and will not be providing guidance for the second quarter.

In any effort in an effort to give you a sense for the next few quarters, we've analyze our portfolio to better frame expectations for the relative impact of the club in 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 maybe their relatives sensitivity to cobin 19 related to spread disruption and potential deterioration in the end market demand.

Group, one which represents approximately 15% of total Fortive 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 focus businesses, such as he make Gordian intellects census, and the fast portion of a current.

Many of which we expect to benefit from a high share of recurring revenue and a focused on providing mission critical workload solutions to their customers.

Group too, which represents approximately 50% of total quarter of revenue includes a range of businesses, where we expect to see a printed potentially significant top line impact in the near term from lockdown measures and stay at home restrictions.

From from which we then believe should bounced back relatively soon after those lockdown measures are lifted.

The biggest businesses in this group or GBR in A.S.P. and the case of G.R.E.M.V. related demand in North America. In particular stayed strong through the end of the first quarter before moderating in April.

Summer site access issues and other covert related disruptions will impact revenue in the near term, we expect GBR to perform better as economies around the globe begin to open backup.

At S.P., we saw significant drop in surgical procedure volume in China drink you one upwards of 85% at the height of the <unk> 19 response, but volume began to rebound by the end of March and continued into April we expect the same pattern to play out another geography have we seen elective procedures get delayed and we like <unk>.

Volumes to begin to normalize as soon as hospitals get to the other side of covert 19 peaks and and can begin to address the pent up demand for these procedures.

<unk> three represents tend to 15% of total afford of rap total 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 locked down measures are lifted his group includes our sensing technology support for.

You know, 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 amp applications, including ceteris room pressure indicator product line, which monitors.

Air quality, an ice use in other critical health care environments.

Group for which represents 20% to 25% of total Fortive revenue includes the businesses, where we expect the most significant revenue declined the short term and the most sensitivity to both adapt and duration of the recession expected in the aftermath of the Coven 19 crisis, notably this includes portions of the fluke industrial business and the tack in.

Drummonds business wherever you historically seen the most short cycles sensitivity, including over the course of 2019. It also includes the instruments and rental businesses within I.S.C., which have significant exposure to the oil and gas and 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 and on a decline of that man.

<unk> can be challenging in the short term, we expect to manage the business to Dacra mentals of approximately 35% to 40%. We will continue to benefit from the cost actions that were taken at the end of 2018, which significantly helped our margin realization a cue one particularly within professional instrumentation.

Over the course of the year, we expect to continue to manage decker mantles to that 35% to 40% range as additional cost actions are executed across the portfolio. We also expect to deliver free cash will conversion of greater than 100% of adjusted net income for the full year.

As you would expect we have taken immediate indecisive steps to reduce our cost base in response to the dramatic shift macro economic 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 headwins through the first half of this.

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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've likewise instituted reduction salary compensation costs and arrive 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 well also reducing our facilities expense through temporary closures and 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 macro economic conditions, we entered the first quarter with a cash balance of over a billion dollars and we've continued to practically manage our balance sheet and enhance our strong liquidity position.

We recently extended the maturity of our one of the 1 billion dollar term loan do this August to May 2021, and then in abundance of caution renegotiated our <unk>, 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 D. 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 reliability on the commercial paper market paying down or up scanning commercial paper exposure with a new term loan and <unk>.

Cash.

We expect to temporarily x. at our commercial paper exposure entirely in the coming months and turn given us full access to our 2 billion dollar revolving credit facility, which remains otherwise undrawn at present.

Before I close.

As you <unk> and as you turned slide 14, ADAC I want to underline for the Fortive team as well as our investors that is challenging a 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 positioning them for even stronger performance in the long term that means contain.

And to invest in innovation, winning in the market your product and service differentiation and hand, [noise] enhancing the level of talent throughout the company and maintaining the discipline market work that drives our emanate 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, the current global public health crisis.

With the underlying strength of our portfolio 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.

<unk> like to turn it back over to Griffin.

Thanks, Jim that concludes our formal comments Catherine we're not ready for questions.

Hey, These engines men just as a reminder, if you'd like ask that question. Please press start and then the number one on your telephone keypad.

Again that a star in the number one and we ask that she limit. Your question. She just one question I follow up question.

[noise] Yeah first question comes from a line of Gillian Mitchell, let's Barclays.

Hi, good afternoon.

Maybe hey, maybe just the first question around the the sales guide. So you talked about a 20% to 25% total sales sort of place hold for me it's.

Maybe help us understand you know any new ones across the two divisions were back guide and then the color you could give on how April.

<unk> for P.I.N.I.T. in terms of gold is sales please.

<unk> Chuck.

You don't for that 20% to 25%.

This point I think that it's best to just think of it is.

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 it could end up differently, but right now that we see it actually pretty much the same by the two segments for right now.

Hey, <unk> Giants, Jim I I would just to give you a maybe a little bit of color around the businesses and and when we tried to do on flight 11, as give you a little bit a sense of some of that as well I think is we saw we saw trying to come back at the end of March, but we didn't see China come back towards really towards three tobin kinds of numbers and we don't really expect.

That do occur that much in the in the second quarter. So just I'll give you a regional view first Europe was down you know high single digits, we think it'll be worse.

Certainly in the in the in the second quarter in North America held up pretty decent in.

On the back with strong Gilbarco as I mentioned, the prepared remarks, because of our inability to get.

Equipment into the ground, particularly in North America, and certainly with elective surgeries being almost you know almost nonexistent here at E.S.P.

Those are a couple of big examples in North America, and certainly point of sale and fluke attack, we would expect deterioration.

Through the second you know in the second quarter for sure from what we saw in the first quarter really that whole sort of last few weeks tomorrow really playing out throughout the quarter with no expectation of improvement through.

Through the quarter now.

In April pretty much fell into line with that so I would say.

One month is not to try and make but I think we we certainly felt that it was appropriate we took some decisive action in advance of what we thought would continue and I think April by and large is played out the way we thought it would relative to that sort of down 20 to 25.

Thanks, and then my second question just around the the decremental margins and the cost savings. So just to confirmed that 300 million in cost savings.

Is that included in that 35% to 40% see <unk> aspiration.

I guess I'm a bit curious why the D. comments were margie and wouldn't get less of the later in the yet presumably as you get more savings books, and maybe the sales declines scared a bit less intense.

Yeah.

First of all you you you've got it understood correctly.

In the 300 million.

That we see coming out and we see coming out pretty pretty ratable at this point, we've made a lot of a calls and and taken the actions. We think we'll we'll see him hearing Q2 in that gets this that 30 35 40 as we go through the year, we're going to learn more and there's some choices that we can make in the back and half the year, but for right now.

Now we think that.

For which is also given the uncertainty in the back half you know that 35 to 40, you still have the right place to be for right now, but you can be rate as if we see a difference in the back half the year you know made a detrimentals.

Move move a little bit lower but right now we're calling it at 35 to 40.

Great. Thank you.

Thanks Julian.

Yeah next question comes from the line of Andrew with the L.A.

I guess can you hear me.

Good afternoon, I guess I checked the question I apologize if I missed that just pricing and I cheat.

<unk> turn negative could you just get more color on that I apologize I Miss out 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 says positive here.

Oh, maybe just did nominally positive.

Okay.

Maybe to calculate in cracks I apologize just maybe you can just talk generally about to sort of what part of pricing power in this environment.

Yeah, I think I think we've.

We would continue to see.

Our gross margins robbing the first quarter on a deteriorated volume so we certainly saw.

You know I think we've maintained price probably not getting as much prices, we did a year ago, because a lot of our tariff mitigation.

The price was in the <unk> mitigations enter but in in terms of seeing any any price pressure at this point, we really haven't we really couldn't call any places where we'd we'd see any of that we are we probably will look slightly reluctant to see any more you know additional price in this environment just want to make sure that we're not we're careful by volumes but.

But but in terms of just how we see things relative the albeit direct business or even with channel partners. We don't we don't really see any changes in the in the pricing environment here and adjust the longer count question. You know sort of I think you talked about doing things differently using <unk> less crowd Oh sort of doing is.

Electronically.

What kind of have you guys and get out to give us an answer but have you guys considered what kind of long term impact you can make to afford if cost structure given the last ones operating a lot sounds that you've learned.

And crisis and what are the main buckets of savings.

Yeah, So I think Andrew.

Sign before the call.

Checking are eight weeks working from home now and and certainly I've been they send the prepared remarks I've been amazed at the quality and the level of work and our team is done to do that so quickly and from just productivity perspective really nasty.

Any impact and productivity I think it's too early to sort of call longterm, what this mean, but I think for the for for many things you could certainly see it would not be hard to suggest that with the way. We've been working certainly will open ourselves to more employee flexibility, which I think gives us an an opportunity for tag.

And I think the second thing would be that it certainly is going to.

<unk> to be able to reduce travel costs over time, I don't see it any other way.

But you know we're still again by evidence kind of company. We still are we're looking for to get back and visiting customers. We're looking forward to you know being closer together and <unk> and things like that so none of that will be.

Completely eliminated, but I, certainly think that the opportunity for us to think about how we can do things. We're we're seeing a lot were taken a lot of notes and R.F.B.S. office has done a fabulous job of sort of codifying a lot of these new processor. So that we can.

We can replicate them into the future in all of our operating companies. Thank you.

Thank you.

Yeah next question comes from the line of Nigel Coped with well face search.

Thanks, guys good afternoon.

Hmm Nigel.

Such as when you say getting close.

It's not too close right.

Yeah, No that's right.

Okay.

So look when you go back to <unk> <unk>.

<unk> would down you know mid twenties.

To trough then so the fact that the cycle is not you know new news, but maybe just characterizing and what you're seeing today. This is you know back then and maybe comparing a charleston, but we expect of it can be profile to be similar.

You to to back then.

Well I think there's a couple things one and that's why we tried to to frame frame. It for in these groups because and so I'll try to use that as a contact one is I think I think if you go back in some quarters you can find a quarter, maybe where tack was probably down 40, and you know nine you'd probably find out a fluke baby down in the Thirtyish range. So.

So a little bit more dramatic them, then you reference point, but but I don't know if it that's just for context I think when you look at what we've done here and I think it's it's just so evident in the.

Call. It out when you look at her before which is you know what we would say maybe was the business more and <unk> you see the flute core kind of fluke industrial business and you see the tech instruments business, but once you go to the left and you see a group one in too is you start to see flow digital you see fluke imaging you see and so you see those additions that we've made to the flute.

That are far more resilient as part of the revenue base and see the Tektronix service solutions business, there as well you see the flu Cal solution. So what'd you can see is you know that's why we broke the portfolio up because in the context of flu now see three substantial edition the portfolio that are a lot more resilient to that business and you see.

In the Tech business service business, which is more resilient. So we're not calling out that parts of fluke in parts attack, our second call for the macro but I think what this kind of demonstrates it gives you some a visual picture of the kinds of things that we've done, which ultimately I'll put more resilient and the overall business.

[noise], but we try to say the with these couple for businesses. You know these on structurally multi year sort of flat bread new businesses. He's a fifth of the next quarter decline that'd be expecting to be back to growth.

No like probably cycles.

You you taught them in a group, but this is one or two a group full.

I think it you know depending on the this is where I think it's tough to call, particularly in light of some of the things we saw in 19.

How long fluke in tech those parts saver forward come back, but you typically think if if if you know is that would roughly track was sort of improvement industrial production global P.M.I.. So both businesses, maybe track a little bit closer to those metrics, whereas in groups wanted to you started to find secular drivers and much more resilient business models.

And service models.

Okay great.

<unk>.

And I think with it to the fast because we know that has been some chatter about.

And it's environment, maybe south contract scary price still says to pick up and showing you know have you seen any of that maybe just give it a slave in terms of what you've seen.

According to the crew in through April. Thanks, Yeah, well you know good example would be fluke digital and a quarter live grew double digit and the he may business grew I think 20%. So just give you. An example of resiliency, you've probably one of our more resilient businesses.

<unk>.

The the Guardian visit screwed double digits in the quarter are that I'm working working through all the number intellect screw in the quarter to staff part of census were in the corner all those businesses that 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 but but so you see a little bit ahead when from from the on site stuff.

Bookings, maybe you know the the long term bookings maybe change a little bit because customers are aren't necessarily sign in all the contract 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 sea change, but pricing is held up well and quite frankly, you know when you start to think about some of the solutions, whether they be and things that caught you'll save money like a current and Gordian, where you really saving money in a in activities or things like intellects, where you really in the each health and safety aspects.

This is where there's no greater time, when when fortunate 1000 companies or focus on that I think we the secular drivers here are going to hold up pretty well in those businesses.

Okay. Good luck.

Thanks, Thanks, Thanks title.

Yeah next question comes from the line that Steve case out with J.P. Morgan.

Hey, Hey, guys has gone.

Okay.

I think you're on a T.V. recently.

<unk> I think I think you were to mmm.

[laughter].

The the detrimental I'm, just kind of turning back to that if I. If I just assume a you know kind of 10% type of decline yep just picking around number.

It <unk> you know x. that 300 million in savings it looks like you'd be kind of decker men thing like get 100 per cent.

On the deck them at the margin that's a simple math of taking that you know 35 per cent and then yeah subtracting the 300 I've savings yeah, there's some mix impact they or something like that I'm I'm just.

No I know you you sound like you're being Conservative I guess I I, just it's a little bit you know tough to kind of make those numbers Ah reconciled.

Well I.

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 we used it is 10 per cent down on the year and if we're 20 per cent down here you are going to do some funny things there that makes that math, but we were trying to say is by corridor 35 to 40 is about what you should expect.

Under Decrementals given that we've we've front end loaded you know some more.

It's higher down in Q. too as we call that 2025.

Our methods that booing follow up in the follow up call about how that that comes down.

So you're you're so <unk>, so you're so you're basically saying did like at a certain level of your your kind of assuming a a certain level of revenue decline. So if you know for example, the revenue came in you know less than 20 per cent <unk>. So I guess implicit in that in the annual guide is you know like a 20 per cent type of.

Type revenue decline is is that kind of what you're saying.

No I think.

To think about it is easy.

The types of false who's that we will manage soon <unk> by pulling or guide, we're saying we don't know what the second half is.

There, maybe maybe maybe we do more actions as we go through the year maybe.

In moderates, a little bit but we.

You know, we're we're trying to have we have more obviously more clarity around the second quarter.

And the second half, we we specifically don't know that yet.

I was going to add that.

We built a number of scenarios around what we think the 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 suggest that this is that even our second time. So I think we we've built scenarios. We've identified at the cost reduction that we think are available to a multiple of those scenarios and we're confident in those detrimental relative to both the actions and you know several scenarios and if if things get worse, we as we sat in.

Certainly in the presentation as well we've got some additional levers we could pull if needed and we saw things come down, but it's still it's early days too early to call on anything like that just yet.

And then just to follow up on the on along the lines of the revenue declined that I know that you know there's not a lot of disability here, but like most companies are kind of talking about.

You know summer, saying April's down mid teens, you know they have kind of a worst case of down 20. This quarter and then you know things bounce back and start to the shape or whatever you know you're you're 20 to 25 in the second quarter for those that have given it is relatively steep especially in the context.

You know all those groups of revenues you have you know the did that should be holding up do you what <unk>, how do you kind of.

Reconcile that I mean, I I thought that you guys. It kind of pivoted the portfolio to be you know 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 in the lower to the range around versus kind of what others were saying you know are they do you think they're just kind of under punching out.

Kind of bad it is out there.

Well I can't speak for others, I think that the severity of restrictions or you know if you look at our big businesses.

I would think about it this way you know.

Gilbarco one of our largest businesses can't put stuff in the ground. So while they had a very strong.

Corridor in North America inevitably until these restrictions got lifted they're not putting sites in the ground. So we still think the resilience is there because ultimately one quarter does not have your make and we think that will come back and you know in the year certainly with the M.B.. We're we're confident that that demanded there you take another business like Matco, where where people.

Sheltering in place to not putting as many mouse repair shops are closed in many states they've they maybe we'll considered.

You know non essential in so that needs to come up and so and then a F.P. obviously with with elective surgeries. Just so dramatically that's really aren't economic impact those are really very much shelter and place impact. So I think we would we probably would never planned for shelter and place economic scenario when we build the portfolio given.

Given we haven't seen a pandemic and a little while so those are very unique and that's why we sort of put them in the category too because once these restriction. These restrictive things come and play the business will come back much faster than than say if it was an economic.

Once if you will.

I mean, one last quick one hour orders at G.B.R. <unk> that is held up or what are those kind of trendy down.

No they've they've held up.

North America, you know some issues with <unk> around the world where.

We have a national company you know in oil prices are down they may delay is tender or something like that but I think we mentioned it into prepared remarks around India. As an example, we see a little bit of that China as well, but I think if you. If you just take North America, whereas the orders are holding up well, we'll we'll see we're we're pretty confident that that will come back once we can start put stuff in the gray.

Around.

And then we'll have a good of bill when construction starts around the United States, you'll start to see that business come back pretty quickly.

Thanks to other color appreciate it thanks. Thank you.

Yeah next question comes from the line.

With I.B.C. capital market.

Thank you that each and every one.

Hey.

Hey.

Thanks, No surprise that you are delaying the the timing I hear on volunteer but it'd be interesting. You also said you delaying the timing and structure. So how might the structure change of the span based upon what we were looking out before.

Well, Thanks, Dean I think there's probably three things to keep in mind went one is the well.

The strategy around the separation hasn't changed at all.

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 this type of separation transaction and the next few months and so what we're really looking for is for the market to be come stable.

Whereas to be able to move forward and look at that and then make we've always said is like look where 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 we'll figure out which one works best for all of her stakeholders.

Okay. Good that sounds familiar with what we were looking out 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 cap backs I don't know if I if I might have missed that and then assumption time working capital will you be Ah liquidating the portfolio. Some inventory becomes a source and what are you thinking about receivables in credit quality and so forth.

Well, but.

The probably the easiest way on the true cap X. you know, we're very cap X. light, but we'll probably I'd expect or cap next year over year to be down 25% probably more than what we.

More when you think about what we were actually guiding for the year.

Three months ago.

But that's the simpler answer.

<unk> when it comes to working capital you know we have got a very strong procurement team and they are <unk>.

Operating companies really focus on working capital terms is one of our core value drivers as you know and.

And we've worked hard on then so what we're what we'll do as as the revenue comes down we're going to make sure supplies.

We don't bring on more inventory than than we need so try to do the best job debt.

Can in terms of maintaining the inventory turns that will naturally free up some cash.

Coming out.

As as the Q2 slows down that will be a source of cash rather than use of cash in in the near term but.

Teams are going to strike a balance every one of these operating companies a little bit different situation. We don't went to end up with too much inventory, but we don't want to end up with two widow when things start to recover so.

But that's not bad different than what they have to deal with every quarter. So I think we're well suited with.

40 business system help us do that on receivables, we we're off to good start in cash flow collections again, it's an optical by Opcos story.

I have a lot of daily management around this and we we feel confident.

In in how this is going to perform.

As we go through the year as Jim said.

Gemini number of people that are up codes were worth with us in 2009 as well so I, we feel confident about where we're at.

Great. Thank you and best luck to everyone.

Thanks, Dave.

Yeah next question comes from online and he kept last last T.K.

Good afternoon guys.

Annie.

The <unk>, how many focus for Fortive and volunteered change it all moving forward, even if you stay together for a while giving the increase focus from basically setting up on T.V. it'd be on its own do we see more acquisition capital drift that way over the next two quarters once the world recovers a dead you mentioned you would play often with your balance sheet of next year. So could you comment on your.

Position pipeline your appetite do electric deal obviously not in the short term, but as the pandemic eases.

Yeah I think.

Just as we always.

Remind ourselves that we spent $4 billion last year abroad number of good companies in his portfolio and we had always thought that 2020 might be a year more bolton.

Maybe some strategic investments as well in technology.

Things that tend to be a little smaller I think that's probably still remains our view.

We we saw what we've always said is that <unk> be part of Florida until it's fun and so if there was something that we would see that was attractive we wouldn't we wouldn't necessarily.

Include ourself from doing that I think is used as you point out and as you know we've continued to work in during this time, we focused more generally focus more on cultivation and more on market work in party, Andy because generally during this time sellers price sours price expectation and buyers price expectation.

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 will certainly patients there will will focus on the things that we can control and we certainly continue to look for you know any opportunities, but if I were if I were to bad I would say if we're to do anything it would most likely be bullpen vanish here in the next few quarters.

That's helpful and then Jim I'm just kinda. These question, maybe a different way some of your multi English appears have talked about a v. shaped recovery in China's specifically.

And some strength you know at least not weakness in semiconductor and some types of like Tronics seems like you really see more of a you in China. Some maybe give us one more call there on that and could you comment on your electronics focus businesses.

Yeah sure. So you know I would say I think it.

You know we've got all these letters for recovery I think at the end of the day. This is not a a snap back recovery in in China.

You know if we look at our three or four largest businesses there.

You know tektronix this got electronics focus, that's but pretty slow we had a little bit while away impact in the first quarter, but that that's been relatively slow still and haven't seen that comeback much.

Fluke is seen nice demand and things like imaging, so they've seen some strong demand there, but the the remaining part of it is still remain 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 North America, but we're saying that in other places around the world.

So that that's probably been more slow than the other two and of course ask P. I mentioned elective surgeries at their peak, we're down 85%, 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 channel looks all that different in the second quarter than it does the first or.

Appreciation.

Yeah next question comes from online Chats Spock particle research.

Hi, Jeff.

Good evening every one hope everybody as well, Hey, I just want to come around to the the cost savings and so the 300 million and make sure fully understand the moving pieces. There. So the 300 million is is a annualized run right or is it 100 million a quarter.

<unk>.

Then we you know we've had a cut it off they're just little bit of color on.

Really what it is what's temporary what structural and how it rolls that would be helpful.

Yeah, I think it.

It's meant to be more about over the last three quarters. So think of it 100 million a quarter, maybe we'll get a little bit more in q. too.

Some of those.

There's you know where we don't have an announced.

Restructuring or anything beyond what we did and the last fourth quarter. So you know by their nature. These things are are somewhat temporary you know we're trying to maintain the team that we had coming into it coming out the other side at least.

As as we put these actions, but in them or things like travel obviously way down.

There's going to be some misleads spend.

It will slow down on the margins around maybe some marketing and really sales programs as well throughout our backs.

Going to be.

You know some spending around.

You know the pay furloughs that'll come out those those are some of the main ones, but we're we'll look at every bucket.

And to 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 data you know obviously, we we've historically as part of continuous improvement historically kept a decent amount of temporary leyburn factory. So.

Perform a productivity perspective, we can accelerate productivity.

In in a downcycled little bit that's part of the cost reductions as well and and quite frankly, probably a little bit more temporary isn't that 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 is walls additional buckets as we see the demand play out.

So that that brings me back around I think to what Steve too So was asking right I mean.

You know, we model sales download twenties and kind of a mid thirties detrimental.

Back out you know 100 150 million a cost savings.

Pleasure underlying detrimental, it's like 60% to 70%.

I guess that maybe isn't crazy relative the your gross margin with five handle but as the year progressive than sales.

Theoretically the declines begin to moderate you know if we're if we're still holding it that 35 40 observe detrimental and yet they implied under underlying number just doesn't really seem to make a lot of sense.

Yeah, I think I think there's keep in mind, there's moving pieces.

Here that we look at but yes being.

65, plus decrementals.

From a top line with you know our our gross margins in the fifties, depending on where it comes in other places that will fall through it higher than that for for sure. So that's not a crazy.

This is actually right, where we have at 65 70 will fall through as we get into the second half you know, we'll continue to evaluate that and it depends.

What follows through in which you can get after.

Is the little different if you down 20 that if you're down 15 so.

Were to come on now.

Alright, Christian colored thanks, guys plus a lot.

You are next question comes from the line of Richard Eastman What's bad.

Oh, yes. Good afternoon. Thank you thank the questions.

Jim I noticed and.

In the documents here the release.

Truly substantial charge you roam the telematics business and I'm just curious if there's any changes strategy there.

I would've thought perhaps that business might have been one of your more resilient businesses.

Just because it is a kind of as fast business.

Is that just an accounting to up to the price paid burst the imply value today or any changes strategy there.

Yeah right. Because this is checked that that is purely and accounting knowing cash charge.

We do and annual impairment and value.

Most of our business that one was close to it.

Due to the impacts of coded that.

Forecasts down a little bit it it's just trips over the line and that's.

You know.

What drove that charge.

<unk> relative the changes strategy wreck no changes strange in fact I think.

You know we've had a new leadership team in there for a little bit Mark rally.

Hired obviously to bring on for the the volunteer role is it's been very involved in I think the team is is actually pretty excited about some of the work they've got going here, that's going to play out in the back half the year.

You know it'll it'll it.

And as you said is there's a little bit of degradation, they've got a little bit a small business impact you got some fleet folks who've seen some reduction than frightened so they've lowered the number of trucks.

So there's a little there's some degradation is Chuck mentioned, but but it's it's not changing singular sport.

Outlook kind of thing than anything else. So I think I think you know by the end of the year. It doesn't we can't move the needle quickly enough business because it is fast, but I think as we start to see the back half of the year I know he said that that'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 I will see where plays out.

Okay, and then just to just as a follow up around the healthcare businesses E.S.P. land hour, even fluke medical consensus.

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 know you lose some of these movement control orders.

Is there were 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 there there's pretty I mean, there's pretty good leverage.

You know the time picking the timing, obviously little challenging but as you say this in this case is this pen true pent up demand I was talking with.

See you have one of the biggest hospital networks in the country. This this.

This afternoon Who's talking about you know literally all kinds of different patient groups that have just they've just not seen.

Including elective procedures and I think that the the the what's gonna happen here is both clinical in the financial needs are going to happen right. There's a whole bunch of pent up demand for for these types of procedures, that's the clinical need and obviously hot.

Procedures elective surgeries in particular are very profitable for the hospital, so she'll be a real need for off from a financial perspective to accelerate the so we would expect to see that acceleration difficult to predict when given given the number of states and present in the U.S. and the number of countries in Europe and need to sort of turn this back on and how quickly things.

Turned down, but but we do think there'll be laboratory those business landauer ruin the first quarter as an example, so so we even in some cases, we saw some some good performance even despite some of those challenges as fast as consensus continue to continue to grow as well.

Got it very good thank you.

Thanks. Thanks.

Next question comes from the line of Scott gave us with Malice research.

Pick it up here.

<unk>.

I.

Most of my questions unanswered, but one of the things I was curious about is just that there was an awful lot up.

Big liquidity moves that you made yeah, yeah right totally so but is is there a meaningful costs increase no interest expense or otherwise it goes along with making those moves.

Certainly some you know anytime you you change those may I think that total cost of fees were in that.

Less than.

West and Penny a year, probably more like painting and a half.

<unk>.

And then there's some there's some changing in terms of the floors around.

More but frankly, it's below the floor that you know that it's negotiating there is lower than where we're at right now so not not a huge huge in costs for that.

Okay, and then just just that.

Follow up I mean that the percentage facilities that you guys have up and running right. Now is there a given number for one of the businesses, but I don't recall seeing the aggregated numbers or something <unk>.

Yeah, all of our facilities are up and running and have then we had a couple of situations, where we might have been.

In the U.S. in Europe, where we we had one facility or two facilities in the <unk>, where we were down a day or so where were we were working through the local situations, but all of our facilities now or have been pretty much through the through the downturn up and running we have for a load a few facilities in the second quarter as we said with some demand but.

We have we're we're able to run all of our facilities now around the world.

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

<unk>.

You know next question comes from line of John enjoyed court in half Cat.

Oh, Thanks, good afternoon everybody.

Guys.

Hey can you just remind us of the Knicks in A.S.P. of consumable versus equipment, and just sort of what what sort of levels are these consumables running down today sort of dubbed telling back to the points about electrics procedures and so forth just kind of put this into a context.

That's about as about 70 525 or.

Or you know with Sir if if you saw.

Servicing consumables together together, it's price 25 moves around a little bit by quarter, depending on you know larger deals in some parts of the world. That's that's a probably a decent number to go with.

And then and then you know we get pretty good data in North America, because a census, the census tracts software. It. It says this really check tracks the daily amount of Sterilisations that go on in the U.S. and as an example.

See we see those down as much as 60% and the United States. So that's that's probably a number and we don't get as good of data in Europe, and as I mentioned, we get decent data in China. We saw at at the peak as I mentioned, the prepared remarks doubt about 85%. So so we've seen significant reductions in those can syllables John.

The we met you know we are we are Decontaminating and 95 respirators in in the U.S. and in some countries in Europe that brings back that volume a little bit probably but but by and large we really want to see those elective procedures comeback 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 too full roll out to move the needle call. It in the next three quarters or whatever or is it still relatively minor business no. It's it's.

It's really a temporary measure at the end of the day. The hospitals are probably going to want to utilize you know single use masks for the most part this really gives them at a time when people he's been a challenge. They can turn on the stair ads that are essentially not at capacity right now in their hospitals to create more opportunity so but the decontamination.

Really really an effort for us to help out it's really more of a how 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.

Hard hard to tell how many hospitals will necessarily need to use that more longerterm.

No, but it's it's it's good press Nonetheless, I want to ask huge 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 rest of the U.S. in China going into a cold War you know we've had the economic issues, but maybe this become something much more extreme how're you a C.E.O. thinking about this in your assets, there and possibly you know kind of future growth trajectory lemonade like it's a kind of a holistic question to what could.

The you know it turned for the worse in terms of our relations between the two countries.

You know I've been I've been pretty close to China for a long time haven't haven't run it back into the dinner dates for a long time and and we're pretty close to those questions. I think one John is we d. risk our supply chain considerably wants to tear started so we've really d. list our supply chain considerably sense from where we were at say even a year ago.

Yeah.

We're going to continue to assess those things.

And we will continue to have probably we we mostly make for China in China. So so as as we look at you know bigger moves.

Will continue to evaluate we don't we don't have many big moves left to be honest, but I'm not sure. We have any but we certainly are continuing to think about you know the discontinued move in places to build locally.

For many of our business as our health care businesses more almost exclusively built in the U.S. and in Europe. So so I know, there's a lot more energy on health care side to wonder about.

Origin, and certainly were fine in that situation. So 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 we're well position from I think what we've demonstrated a terrorist 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 thing.

<unk>.

<unk> you obviously described.

Yeah. Okay. Appreciate it thanks, good luck and stay safe.

Thank you. Thank you.

<unk> Alright, I think I think we appreciate the energy and I'm not sure we got through everything today, obviously, a lot a lot there for everyone to want it want to know about and we appreciate the time and energy that everybody has put into this I know, we're we're available for follow up and and certainly want to make sure we make herself available at any.

Anyone any time Griffin in team are available Chuck was certainly and I are also available I just want to thank everyone at a time when it suspend you know the word on precedented is used so often these days, it's probably the most over use term.

In the focus on health and safety of our team has never been more important to us than every day, we wake up but we also want to make sure that we've given an understanding that while while the there is uncertainty in the near term. We're we're in a very strong position to be able to manage the business around multiple scenarios and the movies that we made over the last three or strategically.

We 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 in quarters to count. So we look forward to continue dialog to give you a better color hopefully we did more with his presentation to give you that color or certainly available to continue to give you a sense of what we're seeing and available to help in any way shape.

Perform I want to wish everybody I hope everybody on the call safe I Hope your family and friends are safe as well I hope you've.

You've you've been able to be productive in all this work from home stuff and and just such challenging time, we will afford to the time, we can all see you at a conference or something we've we look forward in those days and hopefully they're not in the not too distant future. Thanks, everybody have a great evening, we'll talk too soon.

Ladies and have them in this concludes today's conference call. Thank you for your participation you may now disconnect.

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Yeah.

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