Q2 2020 Fortive Corp Earnings Call
Ladies and gentleman today's conference is scheduled to begin momentarily until that time your life will again be placed on music old. Thank you.
[music].
[noise] My name is Nicole and I'll be your conference facilitator. This afternoon at this time I would like to welcome everyone to the border Corporation 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'd like to ask a question during that time simply press Star then the number one on your telephone keypad. If he would like to withdraw your question press the pound keys I would now like turn call over to Mr. Gryphon, 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, or Jim Lico, or President and Chief Executive Officer, and truck Mclaughlin, Our senior Vice President and Chief Financial Officer.
We present certain non-GAAP financial measures on todays call information required by FCC regulation G relating to these non-GAAP financial measures are available on the investors section of our website www dot fortive dot com under the heading financial information.
We completed the divestiture of the automation and specialty business on October Onest 20 team and accordingly have included the results of the N.S. business as discontinued operations first Oracle 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 our year over year on a continuing operations basis.
During the call we will make forward looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will for may occur in the future.
These forward looking statements are subject to a number of risks and uncertainties and actual results may differ materially from any forward looking statements that we make today.
Information regarding these factors that may cause actual results to differ materially from these forward looking statements is available in our 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 covered 19 pandemic. It was a quarter that clearly reflected the power the forward of business system as we executed our playbook on expense saves.
As a working capital management.
Leading us to achieve decremental margins of 33% 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 14 leverage 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 within any.
Hands competitive position.
When we looked ahead on our Q1 earnings call in April we face a highly uncertain operating environment due to the challenges posed by the cobot 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 base.
Offer solutions services and consumables offerings.
Recurring revenue accounted for more than 35% of total revenue in Q2, new high for Fortive.
Importantly, this resilience came through despite the fact that a key source of our recurring revenue advanced Sterilisations products experienced a decline in the elective surgical procedures as health care systems around the world whether the early months of the pandemic.
With respect to volunteer we made additional progress in Q2 preparing for it separation from four to as we can continue to evaluate our options for structuring the separation either via spin or split the fortive and volunteer teams remain in a position to move forward and effective separation as soon as market conditions permit.
Morality and Dave to merge continue to guide the onto your businesses through the challenging macro conditions, while also leading to build out of on tiers 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've 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 and inclusive environment at Florida over the past few months. We've acted on these values to help our teams advance and internal dialogue about addressing critical broader teams of social justice as we look to continue living our values and fulfilling our commitment to our employees in our communities the fortisandbox tier teams.
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 court.
Adjusted net earnings were $241.9 million down 25% from the prior year and adjusted net adjusted diluted net earnings per share was 68 cents total sales declined 15.7% to $1.6 billion, including a 16.8% core revenue decline, reflecting the signal.
Second negative impact of the cobot 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% 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 topline challenges core operating margin decreased 220 basis points, resulting in an adjusted operating profit margin of 20.2%. This adjusted operating margin reflected total cost actions of greater than $100 billion executed during the quarter in response to the widespread deterioration and macroeconomic conditions.
During the second quarter, we generated $454 million, a free cash flow rep, representing conversion of 188% of adjusted net earnings. This strong free cash flow performance reflected a proactive response taken by our operating companies using Fps to improve inventory turns and accounts receivable driving 106.
The $5 million of tailwind from working capital in Q2. It also showed the increase resilience our free cash flow generation across the portfolio driven by specific portfolio transformation and 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 of core revenue acquisition 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 to Q2 continued to be negatively impacted.
By covert 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 regions relative progress in terms of economic reopening as well as local public health dynamics as the quarter progressed and Asia core revenue declined low double digit.
It's 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 or core across our China businesses is they climb back from the low point experience 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, Japan, Likewise saw sequential improvement in Q2, well Indian southwest Southeast Asia remain more challenging India in particular saw severe economic locked on 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 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 topline 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 pay.
Endemic notably ASP posted low single digit growth and strong terminal sterilization capital sales and incremental consumable revenue from and 95 respirator reprocessing helped offset a significant significant decline and total surgical procedure volume.
Demand trends for fluke and tektronix, while still down significantly showed some improvement over the course the quarter.
North America core revenue also declined high teens in Q2, similar to Western Europe 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 a quarter was driven by the widespread lifting of lockdown measures, although customer access remains limited in certain mark.
Yes.
North America does benefit from the resilient performance of our software businesses, many of which drive the majority of the revenue in the region and provide important stability in Q2.
We believe improving trends for elective surgical procedure volumes continue to EMV related demand to GBR and early signs of Pos and permanent fluke create create the possibility for further sequential top line progress in the coming quarters that said, we continue to monitor the risks associated with rising cobot 19 infection rates and hot spots across the country.
And any re imposition of Lockdowns, which may be required.
Finally, we saw mid teens declined in the middle East and a greater than 20% decline in Latin America weakness in the middle East reflected the combined impact of cobot, 19, and budgetary pressures across the region tied to challenging conditions in the oil and gas market.
While Latin America experienced the spread of covert 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 the 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 sensitive sensitivity to pandemic disruption.
The resulting deterioration 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.
Intellects grew mid teens M- grew high single digits Guardian was up slightly in the SaaS and maintenance portion of a current was relatively flat.
Loop, one also benefited from very strong demand and flicks industrial imaging business, where customers spots to covert 19 drove very strong growth in the quarter. We're excited about the continued near term demand trends for these product lines of flu and the potential to accelerate a broader industrial imaging strategy.
As expected group to 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 experience to China in Q1, and subsequently bounce back faster than expected to drive higher consumables usage during the quarter.
At GPR, 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 to the recurring revenue business models of Icees, I net 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 covert 19.
Group, three which represented approximately 15% of total revenue in Q2 performed better than we had anticipated in the second quarter with mid teens decline. The group's performance was highlighted by Matco, 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.
Our across a number of its core industrial end markets. This was partially offset by growth in semiconductors, driven by demand for datacenter upgrades and infrastructure as well as covert related tailwinds and medical end markets, specifically Sutra and gems saw strong demand for critical environment products and ventilator components, respectively occurrence professional services.
His business faced significant headwinds in the quarter, but adjusted with new safety protocols and remote delivery capabilities to help address cobot 19 related restrictions and drive better performance later in the quarter.
Good for which represented approximately 23% of total Q2 revenue experienced the most topline pressure in the quarter as expected and posted an almost 30% decline that said businesses and group for showed earlier earlier signs of improvement that we had anticipated in April notably flutes core industrial business saw improvement and point of sale across.
Yes, its major reason regions with Asia, Pos positive in Q2, and Europe in 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 attack in the second half.
The combination of topline 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 continue to play off fence across our portfolio running our Fps 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 and our workflows solutions. While also expanding our use of the Gulf growth accelerator process to fund potential growth breakthrough opportunities.
In May we established a partnership with pioneer square Labs, Talcott help incubate industrial technology companies capable of bringing new products to market and an accelerated fashion. In addition to our internal development processes.
Stained 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 covert 19 sustained investment has also enabled the completion of longer term development of critical next generation products, such as tell track NAV man.
Newly introduced TN 360, telematics platform, which is expected to form a core part of its offering going forward.
Importantly, we're also investing to expand our commercial operations, particularly among our software businesses. We continue to expand intellects is European sales team to help capitalize on growth opportunities outside the U.S. and build the build the capability of census to address attractive opportunities emerging and 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 and 95 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 particularly in light of the persistent challenges associated with global efforts to keep cobot 19 infection rates under control consistent with Q2, we're not providing a guide, but we are providing additional color unexpected performance for the coming quarter. We expect a total revenue will improve sequentially in Q3, but decreased by 5% to 8% on a year on year basis.
Yes, we will continue to calibrate any remaining cost actions based on the topline 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 creek free cash flow and deliver a free cash flow 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 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 topline and sustained cash flow performance through the cycle.
More importantly, as we leverage the foundation of Fps 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 in downwardly faced 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.
Thanks, Jim that.
And we'll comments Nicole we're now ready for questions.
As a reminder, if you'd like to act in audio question you. They do so by pressing star and the number one on your telephone keypad again that is far one we do assets you limit your questions to one question and a follow up question.
One moment for the first question.
Our first question will come from the line as Nigel Coe with Wolfe Research.
Thanks, Jim Thanks, Chuck fence different.
And at opening.
Okay. The three Q.
Sales range of down pathways, as obviously quite a bit better than.
What you're pointing towards in April and so we realized in the quota. So I'm just curious how.
Yes, exactly well blow by blow here, but as we went through June July.
We see.
Not necessarily by business, but just generally what do you see in terms of organic sales progression.
As we went through the quarter in into July.
Thanks, Nigel yes.
A couple of things relative to the trends I think we certainly as we sort of said in the prepared remarks progressively things got better.
As we got through the quarter so.
I think every month got a little bit better certainly from a trend perspective.
July is just in and is probably good as well, but good in the sense of giving us confidence is to the guide. So I think the trends are certainly getting better I think it I think it's difficult to necessarily know how long will delve continue it hence the.
Through the through into the fourth quarter, but I think as we look at the near term trend they look pretty good and certainly as we said.
We have a good sense of what MPS will look like in the back half. That's a that's a driver obviously nacco getting better as another example, so that really covers industrial tech and on the professional instruments patient side elective surgeries still.
On the right trend the software businesses, staying resilient and certainly some of the Pos trends at fluke, starting to starting to starting to be a little bit better as well.
Sure.
And.
The decremental margins, obviously were very encouraging you seem to have a pretty good grip on on the cost management side of it.
35% decremental margin outlook FFO for Threeq, you I know you had compensate you could kind of main tayo kind of like bring back those gross margin decrementals into into that range you put out the so should we think about you know.
Three Q4, Q in that sort of 35% range.
Is the scope for it to be it a bit better in full Q. If we continue to see the improvement trends into into full queue. Thanks.
In our ability to Chuck.
I think what we're trying to say is that we will deliberately manage the business to 35% as we move forward. The top line is on in a better trajectory.
At least that it seems that at this point in time and Thats consistent with what we're guiding there. So we will strike that balance have managing our expenses.
In investing into the future that as we go forward. So 35 is is the right number.
Great thank very much.
Thanks, guys.
Our next question will come from the line as Scott Davis Melissa.
Oh, Yes research.
Hi, Good afternoon, guys on the book.
Good.
Hi, Congratulations on your book.
Yes, now thank you I am I hope that helps many people sleep.
[laughter] pages in or out like a light right.
But.
Thanks for that Chuck I am.
Everything looked pretty encouraging here overall on trying to.
I think it's probably a pit that there are six earnings call today, So look a little beaten up but.
Chuck you commented on I'm, sorry, Jim actually commented on the 70 basis points the price and.
Didn't get a sense.
This does 70 basis point generally come in that bucket of 35% recurring revenue where.
You are able to get a little bit more pricing power or is there some.
Other base level price increase that you have across the board.
Yes, we're really encouraged we've had good price and quite frankly as you know the comps on price have been pretty pretty pretty good too. So you know to get that it was mostly in professional instrumentation in the quarter. Scott. So you know I would say and certainly the software businesses were part of that better, but we had good mark we had good pricing.
In some of our key hardware business businesses as well its leukotac. So I think across the board is we think about our playbook certainly on the expense side, we talked about 100 million a cost reductions in the quarter, but also part of that playbook is trying to find opportunity for price and I think the teams did an exceptional effort.
In the quarter try where those opportunities exist. They took advantage of them and while you know I think in and we will continue to do that through the rest of the year.
Okay, encouraging and then.
[music].
The bonds here profit profile look like the topline growth profile, you gave a thing as far as the Decrementals and overall profit cash and such as that fairly consistent with the rest of Florida or is there some differences there.
No I think that the there's a little bit a difference in terms. When you look at actual operating profit margin by a couple hundred basis points between the two segments, but when you get to the Decrementals.
They don't behave all that different between the two.
Okay Super helpful. Thanks, guys. Good luck.
Thanks Scott.
Our next question will come from the line of Julian Mitchell with Barclays.
Hi, good afternoon.
Maybe.
Just circling back to the the revenue outlook, so yes dialing in around about a 10 point.
Less bad year on year drilling Baden third quarter than what you saw in the second quarter.
Is there any more detailed you could provide.
Around that narrowing either on a segment basis appeal I versus IP.
And all in that group once a four.
Basis, just to help us sort of understand.
What's driving that improvement.
Hey, Joe and I didn't think it this way.
As we look at the quarter, we just had and whats improving I T is going to improve a little bit more than PPI, both are going to improve sequentially. We've got.
Think about the IP the volunteer group you have got Matco really.
Is continuing to show some strength there and then we've got that MB secular trend that is going to be helping achieve VR. Those are were impacted in Q2 by the walk town and you know is is that gets released that's really good move that to more of a low single digit.
Dechra down low single digit for volunteer and when you look at the official instrumentation I think that sequentially going to improve that's where you're seeing.
These some of his acquisitions doing really well and then again getting a little bit of a lift from the lockdown coming off side I'd see that improving to down high single digit in Q3.
Thank you Chuck and then maybe a second question around that the free cash flow.
There's a big working cap tailwind in Q2.
Generally in the first half receivables.
Taking a freed up.
200 million plus the cash I think.
So maybe help us understand what's happening with working capital.
In the second half as you're seeing this revenue outlook improve.
On the extent to which you are seeing an improvement in the SP business around that free cash flow profile.
Yes, let me take a shot at then Jim will.
Probably add a few comments I think we think the tailwind from working capital from Q1 to Q2 is about 165 million and because when you take a look at everything in there.
And I think that that was just a lot of great work by our teams getting on things early managing inventory levels appropriately.
Example, managing which can manage and that gave us.
A good push and as you saw.
Cash flow overall was was very strong it.
Hundred 50 million I think that what I would expect going forward it really depends on.
How steep the sequential improvement.
Continues to be going into the second half, but I'd expect a little bit of a tailwind, but not not at the same level, it's probably.
Maybe I have to a third of that coming back as a tailwind again, it really just depends on how steep.
Good.
Increase.
Quarter over quarter is Julian I would just I would just add a couple of things number one is what we're really happy with what we saw relative to free cash flow.
Lot of times, we'll talk about those working capital Tailwinds in a way that suggests that it doesn't actively have to be managed the last time I checked customers weren't in a hurry to pass last quarter. So so the out the work that we did I think we using Fps was really profound it's also a.
Using it to capture and keep those out those advantages once we get into.
Little bit of growth mode or less decker less.
Left down if you will I would say the second thing I'd add is when we look at the historically, we said we would preserve some.
So more in the 80 to 80 Percentish range of free cash flow when we're in a down cycle and we've been talking about that for four years and I think what you saw in the quarter and what you're going to see in the year is better than that obviously, we were much better than that in the second quarter. We think we can we'll do better into the ninetys.
For the full year, so I think what you're seeing is the strength of the portfolio the highest higher gross margins and pie, particularly around software I think our gross margins and pie for the quarter around 56%. So the the ability to derive more free cash out of the portfolio given the changes I think also gives us some confidence that free cash and the remaining part of the year will be good as well.
Great. Thank you.
Thanks Julien.
Our next question will come from the line into strong supported.
Thanks, Good morning, everyone.
Good afternoon I guess.
Good evening.
Two from me if I could just on the on bonds here on the timing.
Yeah. This market, obviously has been extraordinarily resilience.
What is it that you're looking for waiting for.
To make your decision on timing here.
Well I think there a couple of Theres a couple of things were looking for when we thought it was important obviously too.
Get out here with our Q2 results.
And then we're just looking for.
Continued stabilization wood in the market and less volatility and while we think that the trends or go definitely going the right direction.
We probably need to see a little bit more time here going forward to ensure that we're not looking for a week to get out we're looking for a little bit longer time period, but but we're encouraged by the direction of the markets are going right now.
And also we are prepared to go.
We are ready and that volunteers ready to separate work and we're still convinced that the strategies correct, we're too and we're committed to the execution. So we're just waiting for a little bit more time and stability.
And just thinking about investment Jim so.
Chuck's point, you're actually managing to a detrimental right. So sales are going to come in better thats going to free up spending.
You provided a couple of examples here on on what you're working on.
Should we should we expect most of that delta is going into growth for.
I would assume there some restoration of just trying to you know temporary things that you had a kind of choke down here in the second quarter.
Yeah, I mean, Jeff and we think playbook really is first and foremost as we see some of those revenue.
Going down if you will we first and foremost think about the factory and supply chain alignment with capacity and we're focused on managing gross margins you saw good really good work on that on the part of the teams to do that in the quarter Theres. The temporary cost actions theres. The permanent set of cost actions and then there's this fourth part about dynamic resource allocation, which is.
Moving money around to the highest opportunities, which is I think where you're going out. So we're managing the decrementals relative to those things, we're making decisions about temporary and permanent cost reductions as we really understand the outlook.
More or less into 2021 and those decisions are probably more in the in the coming months, but I think the most important thing where you're going as we're really making sure. We're funding the growth opportunities that are inevitably going to create competitive advantage over time.
A good example is the for where we bring data analytics projects for the businesses. Our projects are up three X from where they were a year ago. So we're doing three times the number of data analytics projects that we're doing a year ago I think thats, a big focus you're hearing a lot about digital transformation around companies and I think thats really what we do at the four.
Work is leading that for both our operating companies and some internal projects that were doing for Florida. So I think Thats. That's one example, maybe one other example is.
We're continuing to accelerate.
All of our investments in the software businesses were number of our software businesses are really able to take advantage of a lot of the going back to work challenges that occur the changes in facilities. The the new safety health and safety protocols that exist in facilities and buildings and so a number of our we're we're really pivoting our.
Our our solutions and our feature sets at both the current and Gordian as well as it intellects to really take advantage of those opportunities. So a number of our increases investment are going towards some of those things, where we have I think real good secular drivers overtime.
Just one quick quick clarification, if I could.
Yes revenue color I think you gave to Juliens question was that reported revenues or was that organic revenue.
Commentary you were giving.
It's organic although we're lapping most of the most of our acquisitions here I think dip or maybe census, but organic was my comment.
All right great. Thanks.
Thanks, Jeff.
Our next question will come from the line and Andrew Obin with Bank of America.
Yes, good afternoon.
Hi under.
Just a question on fluke as we think about.
The business today.
How much of any sort of X help how much would as core industrial at this point and at that point industrial business what was the performance in the quarter.
Yeah, I think when you look at the the core industrial piece. That's in that's in that group for which would be our sort of our core industrial instrumentation, probably about 60 60 ish percent I think maybe two thirds probably in that range.
Or center.
Gotcha, Okay now okay, okay that makes sense.
And then just a question on software just to clarify Gordon Akron performance. So am I correct. The Gordon has a marketplace revenue model. So it's just.
Volume going through the platform is down so that's what's impacting it Akron and.
Anything else going on besides sort of license. This has transitioned to depress the revenue.
Yes, so I think you're exactly right and gordian, so get that one first they.
And really you know that's interesting Andrew there their revenue model also very often requires some some some work on site with the customer to get started and obviously with the stay at home orders.
We were prevented from working with customers in some cases so.
So there's some delays, but theres no we often get the question about new construction, it's really it's really not new construction. It's really changes that are going on the facility. So we think with everything going on with Covidien facility changes required around protocols that ultimately that business will come back in as you said the purchasing construction dollars will start to flow back through.
Audience and ultimately the revenue will get we'll we'll we'll be back in growth, while David as you know doubled strong double digit grower for quite some time now we still think we've got great opportunity there across a little bit more complex in that regard. We saw some again, we're seeing a lot of good growth in the businesses that are really tied to pursue.
Ladies and facilities management.
And really returning to work assessment work, our Chi Chi cloud.
Opportunities are SMS business are connected health care businesses and in Lucerne Index, which is which is our lease management business continues to be good. So those businesses are mostly the SaaS parts of the portfolio and again, they're doing they're much more resilient, where we saw the challenges that accrual is really one on the license revenue side and again on the managed service side got a little bit.
Better as we said in the prepared more prepared remarks light. The some of the managed services got better at the end of the quarter as we were able to get more on site and be able to do some of our work remotely, but I think that will continue to be we continue to think the SAP part of accrual will be durable and.
We're we're still getting back to getting getting working with customers on a regular basis and that's still still work to be done through through the third quarter I'm sure.
Thank you.
Thank you.
Our next question will come from the line in Glasscock Wolfcamp with Morgan Stanley.
Hi, good even get.
Hey, Josh.
Okay everyone's well just.
A couple of questions here for mine I guess purse on.
Businesses that go through distribution, I guess fluke and tech kind of come to mind first.
How do you characterize kind of selling versus sell out I think tweaks and supply chain delays and distributor destocking, we've seen a bit of backlog carry then for some other short cycle guys in the second half how do you guys think you score against that.
Yes.
I think we saw a little bit better point of sale trending at flu than we did it tackle recall I would I would call tech more stable, whereas got it improved but flute, maybe a little bit more more of an improvement, but still still negative our inventory positions that remain pretty much.
I'd say flat to down so no real inventory built so I think as we get into the second half we don't anticipate any big.
Big issues relative to inventory.
On the other hand, we don't expect really distributors to necessarily take on inventory. So so everything embedded in what we talked about for the guide for the third sort of assumes that sort of business as usual trends continue around point of sale, which means that get a little bit better, but but at the end of the day no big dramatic.
Recent inventory, nor any big swings on point of sale.
Got it that's helpful. And then I guess just a quick question on on onto your timing so ask at different one.
On the four buckets that you kind of breaking down the business and these days obviously those are shipped around a little bit as the businesses are separated but.
This current environment.
Have you any kind of thought into how demanded M&A amongst those buckets I mean do we just kind of how should we expect mostly buckets one in two or are there.
For maybe some more.
Nicole or choppy assets that that would have been later in this current environment, but maybe still attractive quarters.
Yes, I think it's a great question I think obviously, if using the groupings is as as we have them.
We clearly have.
I think demonstrated a propensity over the last several years to be growth.
The the Lions share of our M&A deployed into mostly group, one and group too so I think that.
I would say the trend is going to that will trend will continue that said you know there are certain situations I would I would say prove technic as a deal we did last year for flu, which had both a service and that an instrument aspect to it there was really important to our overall flu digital offerings. So in that case and we got it.
Very very high ROI C.. So I think you what you'll find as if we do make some of those decisions that are in group three or four they're going to tend to be ones, when which we see the returns very high but but I would say if you said, let's talk about the lions share of our capital allocation over the next several years, it's really going to be in building in those.
Those groups that are that are articulated one and two in they're focused on things like condition monitoring facilities management healthcare enablement and health safety and environmental the places where we deployed the lions share of our capital over the last four years.
Got it appreciate the color guys.
Thanks, Josh Thanks.
Our next question comes from the lineup Richard Eastman with Baird.
Yes, good morning afternoon.
Hey, just just a couple of questions first just to run the recurring.
Jim I think you mentioned recurring revenue and I think you're including software and consumables and services were 35% afford us reps in the quarter kind of new high but how did how did that bucket as you defined it there are 35% of revenue how did that do year over year.
In the in the second quarter.
Okay.
Well I have to disaggregated into the into the end of the groups, but I would say if you thought about the sort of pie related software businesses. They were up about mid single digit.
And then and then obviously telematics the big software business that we would have on the volunteers side.
It was down in the quarter, but you know as I mentioned I think the new platform that we're launching we're excited about the opportunity for telematics here going forward. So that kind of gives you. The software view of what the quarter look like services, which are mostly in group two buckets probably.
Sort of down to down.
I think our dosimetry business at Landauer was up in the quarter, but I think Tech services example was down low single digits something like that so so I, probably would say the service parts of the business.
You know at at Landauer would call that fluke health and attacked probably down a little bit, but still obviously much more resilient than they were the other parts of the portfolio.
Got you, Okay, and then just a question as we as we managed to this.
35% decremental here.
For the balance of the year.
A question just is around you know as we manage into next year around whats discretionary on the cost side would or investments are on the cost side. How do you start to think about incrementals for P. API and volunteer.
What do we managed to there I mean, we have more software content, we more more recurring revenues what would be the appropriate view on an incremental margin for Pete.
Two.
Frontier.
Yes, a rigorous check.
I would think that a good starting places that we'd come back up the same amount that we went down because.
We want to reset back to starting to growing on or 2019, so recovering that revenue. If it went down at 35. It I think of it coming back at 35 beyond that it really depends on where where we're growing issue as you mentioned some of our.
Some of the software business, obviously have higher higher decrementals.
As you move forward in time, so kind of depends after that but.
First thing is to get back.
Okay.
Good thank you.
Thanks, Rick Thanks.
Our next question will come from the line of Joe Giordano with counting.
Hey, guys.
Hey, Joe.
Can you kind of go through the cost down you mentioned 100 million in this quarter.
I'd like to look for the quarter for like the balance of the year, how would you breakdown between and the temporary things then actually that you took the come back to the business when things are more normal versus more permanent savings.
Are you talking about for the quarter or would you think we've done for the year I guess kind of like what are the when you do in the core how would you break out that 100 million you mentioned in his prepared remarks, and how you're thinking about this split in magnitude of.
Hey versus permanent for the rest of the year.
I think the so in the in the quarter I think that.
Let me back there is little easier to talk about for the year I think to the permanent that we were likely to take we have taken action on.
We'll be 50 million permanent.
Okay.
In Q1 or in Q2 that hundred million is.
Little less than that but as you go through year think of it being 50 million.
And permitted action that's on top of the actions we took in Q4 of last year, where we did.
60.
Okay.
Thanks.
Then as we it really depends on let's see how the rest of the year plays out, particularly in Q4, but I would expect the next quarter. We'll we'll know obviously, we'll know how the third quarter played out and have a strong view into next year and see if we need to do anything of a more permanent nature or whether we think the top lines.
To recover Joe also part of that is obviously, we're getting a substantial reduction in travel and you know.
Pardon.
We're very much working through now a number of our virtual and digital work that we're doing with customers to understand how much of our real travel expenses quite frankly, it can become permanent cost reduction because we just.
Make the trips that we've historically made so I think as we think about once we have a better sense of what we think the revenue outlook for look will look like in 2021, and we can certainly as Chuck said make that decision, but those decisions are just the typical incentives and things like that but it's also very much things like travel and and costs that are that would.
Historically be considered temporary but quite frankly, I think a significant amount of them are going to be permanent as we as we move into next year.
That's fair I know my fellow slight talk on the elective procedure volume as you guys mentioned.
Sure. So you said in North America, you're seeing 80 to 90, 590% of pre co bid on some of that you actually did it sounds like that rate is reflective of some of the right kind of specialty hospitals that like the big Big hospitals were more like in the 75% range and I'm. Just curious how you kind of you it does not geared toward more specific.
Facility and How's that looking now with what's going on in Florida in some of the places that are having flare ups again.
Yes, so our prepared remarks may not have been is clear. So we see that we see that we see the China hospitals up at around 90% and the U.S. hospitals were getting back I think our numbers would quite frankly agree with yours at the end of the quarter in that sort of 70, 80% range, we had pretty good data from our sense is software business.
Yes.
They should.
We have the understanding what the procedures are but we havent.
Thanks.
That continues to get back in as we get through the quarter, but we don't see it to 100% even through the end of the third quarter I don't think stole a long way to go between now and then but we definitely think it continued to see we really get the data by day and and we are seeing we're seeing continued improvement through through July as well. So we think things will continue.
But as you said it is a little bit of type of facility dependent.
Thanks.
Thank you.
Our next question will come from the line of Andy Kaplowitz with Citigroup.
Good afternoon guys.
Andy.
Maybe you could give us a little more color into your regional sales breakdown you mentioned your churn related sales were down still down mid single digits in Q2, because that's really positive in Q3 and as you think about the revenue outlook improvement in Q3 versus Q2 are all regions generally improving in the same rate or do you see for instance, latam or even the U.S. lag.
The other regions.
Yeah, I think as you said, China was measurably better in Q twos in Q1 I wouldn't it.
That was on the backs of ASP and fluke.
I think China is going to get better through the second half, but I don't necessarily think the China gets to any dramatic growth rate in the second half I think it gets better but I don't think we've seen enough to think that things are going to.
Get significantly better so I think our China theory here at this point is probably better it the rest of Asia I think is a little mixed as we mentioned India continues to have a lot of locked down and but we think by the end of the year, our India business and money in many respects is driven by the JV, our business and we think that Theres a number of things.
That bid the order pattern there has been very good. So we think we think India might get better by the by the end of the year I think as we think about the middle East We think about Latin America, we don't anticipate anything get better there. So that kind of gives you the high growth market view, the U.S. will definitely get better through the rent remaining part of the year I think the.
I would anticipate whereas I don't necessarily see western Europe getting that much better the rest of the year and the difference there as we have the tailwind in in in the U.S., we have Mac of getting better in the U.S., we have ASP getting better which is a bigger U.S. business than it does a European business and flukes point of sale is getting better so.
I would say North America tends to get better through the remaining part of the year and as I mentioned in the prepared remarks Western Europe in particular wasn't wasn't rip and to begin with when we sort of started with covance and I anticipate that to be a little bit more long longer drawn out recovery hope to be proven wrong, there, but that would sort of be are sort of thought process as we get into the second half.
Sure.
Ken Let me ask my follow up on JV, I, specifically mentioned, India. It does tend to be lumpy for you guys and you tend to see delays sometimes in orders and obviously, we know what's going on there in terms in the infections. So maybe confidence level in the international JV, our business doing better in the second half of the and then you talked about mid single digit.
Our growth in North America does that just convert in the second half of the year as stay at home orders have.
Basically I mean, they haven't gone away, they're a little better in the second as the or does that just convert into revenue growth in North America.
Yes, I think I think North America orders will continue to be good in the second half, it's a little mixed around the world as you know as you know in the rest of the world a number of our customers are integrated oil companies and so oil and gas prices has a little bit more impact in some parts of the world than it does in the U.
I guess, where that's a disaggregated market market. So so I do think the second half will so follow some of those patterns that I was describing relative the economy.
But I think I think India in particular will continue I think our position in India is very good. We've we've done a number of acquisitions, there or pack acquisition or mid co acquisition. We've a very good position, we would be great relationships with customers. So I'm confident as you said it can be lumpy quarter to quarter, but if we look year on year on year, we've built a really good business there and I'm.
Confident that that the team will continue to to execute.
There so I think some of the other markets might be a we did a middle East review with the team. The other day for all Fortive and and I think they're executing well there in some markets are going to continue to be okay. So so I think JV are in general will depend on the market and country, but I think I think I think we'll see a little bit better order path.
And likely in the second half and on the back of US a continued strong.
SMB market North America.
Thanks, Jim.
Thank you.
The next question will come from the line at the end jives with RBC capital market.
Thank you good afternoon, everyone.
I'd hate.
Interested in hearing a bit more about this joint venture with pioneer square labs. It sounds like you've got your first company getting launched could you remind us what kind of investments that you're making in this what kind of returns you're expecting and this really does sound something more than just a proxy for R&D.
Yes works, we're really excited about it we built a very good relationship with them.
And the team there.
What what it really is is we agree.
Generation process, we devote we have a number of four to people that work at the lab alongside the sell team we generate ideas and we find an idea that we want to invest in we invest in it. We have we have a couple of different milestones, where we can decide if we want to bring that in.
Or continue to invest in it and at a certain point in time, we draw conclusion as to whether or not we want to own it or necessarily do something that.
Obviously do something in the in and take it take it out and I think I think the economics are good for both parties and we feel very good about the relationship so still very early days.
They bring a lot of great entrepreneurship fast cycle product development lots of software experience I think we've been I think they've been very enthusiastic and the level and quality talent that we Bronx brought to the table, but still very early days as we said we've launched one team.
Number wins and.
We can put on put put up over the next few years.
Well these businesses be spun out sold.
Are there are synergies would then core forward of.
Just maybe kind of explain how how the company benefits from the silver, yes, I think it could be all the above it could be a great idea that really benefits fortive and we see a way to spin that in and we've got economics associated with that so that we can spin it in and bring it make it part of Fortive, but we also.
The economics, if it's a great idea, but not isn't necessarily that would be something consistent with what fortive wants to become and ultimately we would we would decide to to do something to spin that out as well. So there are number of options I think we've got good flexibility as to the kinds of ideas and and what what is.
In our in our in our strike zone, but also obviously if theres ideas that have maybe utilized supportive technology, but don't necessarily mix with what we want to do and become then ultimately we'll try to find other ways to create value and spinning it out and building something in a different in a different structure.
Got it and just as a second question I want to go back to this.
Structure. These four groups that you've set up and just Jim a few minutes ago, you said that you're really not looking to commit capital necessarily into groups three and four except on those such situations, where you're getting high returns, but once you start saying you're not investing further.
And M&A for those businesses it kind of opens up the question that there might be some non core businesses opportunities to exit I know you've got some volunteer businesses there already.
Decisions have been announced but are there businesses in groups three and four that might be considered non core.
Well.
No I think I think when what I meant with that answer is one of the things that we love about that grouping is I think it gave everybody a good perspective of how it was meant really meant to show the sequencing of how our parts of our businesses would perform in mirror sort of the resiliency and dynamics of Cove. It in the economic consequences.
Because of it so it's really a framework for that as you know a number of our businesses are really built with portions of group 123, and four altogether. So you know just taken example, like fluke as we as we said before you know a good chunk of Fluke is in group one and two is in one and two so and increasingly becoming a growing.
Part of that so I don't think it necessarily says that our individual businesses are necessarily going to be not invested in but what we're going to what we're going to find in a number of our businesses within our businesses are within our operating companies probably is the best words as we're finding those opportunities to build more resilient more durable or higher growth asps.
Next to the of the business and that's where we'll probably end up having more of our investment. So as fluke is a good example, we bought M-, we bought prove technic, but we also bought landauer. So.
Good chunk of the capital that we deployed into fluke in the last few years is bend to add those ones and twos to the core fluke business I think we have the same opportunities for some of the parts of group three and four that we can also do.
Even within sensing tax some of the things we talked about that are driving the growth there and environmental monitoring.
As another example, those are places where we're investing in those businesses because those parts of the businesses really have group to and group one aspects to them.
That was helpful. Thank you.
Thanks Deane.
Our next question will come from the Lion John loss with credit Suisse.
Hi, good evening.
Hey, John.
Hey, so a lot of crown covered.
I guess, just thinking about the SaaS businesses.
Was there any discernible change positive or negative across them as it relates to customer retention rates.
I think that might be the best way to asked the question versus kind of thinking about net adds but however, you kind of want to answer it's helpful.
Yes, we really the key metric we look at John is net retention and that combined sort of not churning customers keeping current customers.
And that metric is really in all of our SaaS businesses improved in that metric in the quarter. So it's a it's a key metric we keep an eye on we actually we actually review those metrics with the board and every board meeting there is so important so I think we feel very good about the work the team's doing on all those metrics and there's still lots of them certainly improvement.
To get in some of our businesses are kind of at benchmark some of them still have some ways to go. So we were it's a continued focus for a lot of our Fps tools as well within those businesses.
Great. Thank you and then just maybe a point of clarification around telematics and the new platform has that actually launched or is that something you expect to launch here in the back half.
I think I think it launched now and now is starting to get some traction so call. It in the early stages of launch.
Great.
Thank you I'll pass it along appreciate the color alright, thanks John.
Our next question will come from the line and Andrew both can create within bag.
Hi, guys.
Everything kind of picked over but I have one last one day.
Squeeze that is.
On your you comment that's due south and strong demand for industrial imaging products within the food business.
Yes.
Hi, there is kind of in that in each vertical are seeing really strong demand exponential growth as it relates to skin temperature cameras.
Is this a is that what you guys are referencing and and maybe just comment more on that.
Area that could see out outsized growth within.
Yes, Andrew.
Principal business, there is thermal imaging and temperature measurements so it ranges from.
All the imaging line as thermal imagers as well as literally IR guns, and and thermometer. So.
Yeah that business is doing well.
And it also has a number of new entrepreneurial opportunities that we're working on the do sort of fold into some of the challenges that happen at facilities relative to covert 19. So we think as we mentioned little bit in the prepared remarks that we're excited about a broader strategy here.
We've got some people counting business that is part of an acquisition. We had a few years ago that we're building a solution out that we've launched so number of things that we've got going and we'll see how it goes in and whether it's sort of.
Whether that we really think the resiliency and durability that we might be able to build here is beyond just covert 19, and we're excited to try to build on that here in the coming quarters.
Okay got it thanks guys.
Thanks.
The next question will come from the line of John inch for total.
Hey, John.
John Your line open you already muted.
And now.
But you can hear me now okay, great sorry about that technology right.
Hey, I was wondering.
Given Chuck to infer kind of your comments about North America, getting better and so forth is implication that.
Or just any impact from co bid flaring up and surging in the southern States in California or that you are seeing.
Impact, but other aspects of the business, our superseding that like how to how to think about that's because what you're describing isn't that the similar from other industrial companies. So I'm, just curious kind of what you're seeing on ground kind of regionally and how that plays out.
I would see the biggest play the two biggest places John where we see cove it impact relative to call. It daily stop or maybe the three places is really in the hospitals and sterilization procedures that we described a little while ago right, it's getting medco equipment in the ground.
Oh, sorry, getting DVR equipment in the ground and really the matco ability to call on customers every day. So I think as we look through and those are big U.S. businesses as well. So those are kind of covert related the point of sale stuff at fluke is really economic related you want to see if better about the am I better IP number so.
And Thats, Frank Global point for flu, but so what we're really watching for is the surgery numbers the ability to not go back into locked down.
As we as we mentioned a little bit in the prepared remarks, the lockdown really impacted Matco April was was really tough month, but it soon as things started open up accelerated.
Back to what we would normally call a pretty resilient business quite frankly, historically relative to economic cycles, and I think I thought a David that car average car ownership years is at the highest point, it's ever been which which is a good thing from ACA. So I think thats what were that's what we're watching for we don't want to see hospitals close back down we don't.
Want to say see cities get back into Lockdown mode, where they won't be you were auto repair shops aren't opened or or or that construction cans occur and sites can't be upgraded it go bark for gilbarco.
Yes, no that makes sense and then just maybe as a follow up given how are you thinking about kind of strategically further M&A and I ask it in the context of is this going to be somewhat contingent on the volunteers separation and getting that dividend from volunteered to do the reload and lowered the debt to cap.
EBIT da thresholds back again or.
Are the two somewhat disassociated in terms of the tracks one does not necessarily contingent on the other.
Well I think first and foremost we always said this year would be a bolt out more likely a bolt on year because of digesting a number of things that we did last year as well and and I think that that's been our thesis. Although you never can be we've we've looked at some fairly sizable thing so.
I think at the end of the day, we've continued to be busy I think there continues to be a couple things that are impacting the M&A market I know some of our peers have talked about this one is the bid ask spreads are still still not in alignment necessarily.
It's hard to distinguish the cobot impact from things and that takes sometimes an additional quarter two of results to work through with a seller. The second piece of it. It's just harder to do to do due diligence right. We can't get on site. Many cases, yes, we can't meet people and so I think things are slower by nature of those two aspect and then but.
But I think we've been busy we continue to think that theres opportunity I wouldn't necessarily say that it's tied to the volunteer separation.
But because because of the fact that really we never really tying those things together to begin with.
But certainly volunteers certainly when we complete the volunteer transaction. It certainly gives us more firepower more opportunity.
By the way just when you say bigger do you mean bigger bolt on or you mean bigger than something.
Leads that are things that were bigger I mean, we havent necessarily said, we're not going to do anything we'd because there are certain change things that we've been cultivating for several years and we we can't say Hey, do you mind.
Selling at a different time so.
Things are going to sell when they're going to sell them, we have to be responsive to that.
But we're obviously taken into account the the economic conditions and all the things that might impact return. So it's a it's a complicated answer hence maybe too many words here, but I think at the end of the day, where we're focused on making sure we create value.
In a focus prioritize way.
That probably ends up being more bolt ons than not but we are we do have our year to the railroad if there's other opportunities.
Appreciate it's complicated times. So thanks very much yeah. Thanks John.
Our final question will come from the line as Scott Graham right with Rosenblatt Securities.
Hey, good evening, Thanks for taking my question on the over time here.
Just wanted to ask two questions.
You told us the price was up 70 basis points was.
Turning to lower than that we positive on the price cost.
Oh.
Hey, Scott.
Yes is the short answer is a good.
If our teams procurement professionals and they do actually job every year and this is no different.
Gotcha and then the second one is.
Q3 and grew four so the sales on those businesses, you know a little bit heavier.
And the second quarter was kind of all about Lockdowns and people were doing break and fix.
As needed which tends to be higher margin.
Hi sale. So im just wondering was that the case for you guys in the quarter in the second quarter shortly as needed stuff, which maybe help enrich the mix, particularly in P.I. or was that not the case because I'm just wondering if that's maybe a headwind two quarters from now.
No not at all I think when we when we look at what really we have a.
We have a very tight margins spread in our product lines. This the power of Fps quite frankly, so we don't necessary distinguish that the price. The price metric is really has to do with the fact that you know as we said from time time to time that are high valued brands are critical at these times.
For everyone and so I don't think I'm looking across the groups right now and trying to think of where I could point to where I could think of a margin just.
Situation that might be different from what I, just comment and I can't find one so I think you know well more consumables is obviously higher margin more more more matco is higher margin. So number obviously the software businesses are our high margin high margins, but there's some of our newer businesses. So they don't necessarily represent the.
Highest operating profit margin. So I think as our core business has come back that in some respect you might suggest is is certainly a help as we look at margin expansion in the.
Over the next year so.
Understood.
Nice quarter. Thank you.
Thank you Scott.
Well I think that concludes that everybody. Thanks, so much for going over time with US. We appreciate it I know, it's a it's a challenging time for everyone. I Hope I hope that your families are safe and your and work is going well for all of you as we all try to manage the challenges of of working virtually we certainly.
The proud of the work we've done I couldn't say enough about our 25000 employees around the world, who just on an incredible job that making fortive.
Just have a very strong quarter, but more importantly building the business for what we envision in the years to come. So thanks for thanks for taking the time with us and we look forward to the calls obviously everybody is available for calls afterwards, thanks have a great evening.
This does conclude today's conference call. We thank you for your pit station and assets you. Please disconnect your line.
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