Q3 2020 Fortive Corp Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patients.
[music].
[noise] My name is Erica and I will be your conference facilitator. This afternoon.
At this time I would like to welcome everyone to Fortive Corporation.
2020 earnings results conference call all lines have been placed on mute to prevent any background noise.
Speakers remarks, there will be a question and answer session.
Hi, My hit during that time simply press Star then the number one talked about how that might be.
If you would like to withdraw your question press.
I would now like to turn the call.
Wendy Vice President Investor Relations Mr. Whitney you May begin your conference.
[laughter]. Thank you Erica good afternoon, everyone and thank you for joining us on the call.
With us today are Jim Lico, our President and Chief Executive Officer, and Chuck Walk, one our senior Vice President and Chief Financial Officer.
We present certain non-GAAP financial measures on today's call information required by FCC regulation G relating to these non-GAAP financial measures are available on the investors section of our website www Dot fortive dotcom under the heading financial information.
We completed the divestiture of the automation and specialty business on October 1st 2018, and Accordingly have included the results of the N.S. business as discontinued operations for historical periods. The results presented on this call are based on continuing operations.
During the presentation, we will describe certain of the more significant factors that impacted year over year performance all references to period to period increases or decreases and financial metrics are year over year on a continuing operations basis.
During the call we will make forward looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will or may occur in the future.
These forward looking statements are subject to a number of risks and uncertainties and actual results might differ materially from any forward looking statements that we make today information regarding these factors that may cause actual results to differ materially from these forward looking statements is available in our SEC filings, including our annual report on form 10-K.
Okay 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. 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.
We are pleased with our third quarter results and strong execution across the portfolio delivered a topline performance there was significantly better than our initial guidance as well as a return to year over year growth in adjusted operating profit and adjusted earnings per share for the quarter. We reported adjusted diluted net earnings per share of 94.
Or cents, an 8% increase year over year.
While the operating environment remain challenging in Q3, we continued to successfully navigate the near term headwinds by leveraging the Fortive business system, we increased core operating margins by 160 basis points and generated another quarter of strong free cash flow, while prioritizing growth investments across our portfolio to drive continued share.
Our games.
On October nine we completed the successful spinoff of Volunteer Corporation, a global industrial technology company focused on mobility infrastructure.
I'm extremely proud of the effort and the focus shown by our team throughout the year, leading up to the separation and I'm very excited about the future opportunities that lie ahead for both companies the ability to maintain our readiness and execute this complex trend transaction. Despite the obvious challenges presented by the COVID-19 pandemic is a testament to the resilience and adaptability of our.
People and the power of MBS asset.
Separate companies Fortive invented are both well positioned to execute against their strategic priorities to generate increasing value for all our stakeholders.
With the spin off of on tier complete Fortive is well positioned as a provider of essential technologies for connected work flow solutions across a range of attractive end markets. We have strong established positions with leading brands the benefit from long term secular growth drivers and have opportunities to increase recurring revenue, we have a long track record of disk.
Upland at capital allocation significant balance sheet capacity and free cash flow and substantial opportunities for both organic investment and strategic M&A across the portfolio most.
Most importantly, we have the fortive business system, the cornerstone of our culture and an enduring source of competitive advantage that underpins our commitment to continuous improvement.
Since frontier was part afforded throughout the third quarter to the financial results that we will discuss today include the volunteer businesses. However, because by tier will be we'll be reporting their third quarter results on Thursday on today's call. We will focus our commentary on the businesses that remain with Fortive.
Also the guidance that we provide today will be for Ford is continuing operations only.
With that let's turn to the details of the quarter.
Adjusted net earnings were $338.5 million up 8.8% from the prior year and adjusted diluted net earnings per share were 94 cents total sales increased 2.3% to $1.9 billion with core revenue essentially flat, reflecting significant sequential improvement from the prior quarter acquisitions.
Contributed 220 basis points of growth and favorable foreign currency exchange rates increased growth by 20 basis points.
Adjusted gross margins were 51.8% in the third quarter, increasing 50 basis points year over year gross margins benefited from 50 basis points of price the growing contribution of our higher margin software businesses and disciplined supply chain execution.
We also generated a 160 basis points of core operating margin expansion, resulting in an adjusted operating profit margin of 22.7% for the quarter, our ability to drive strong core OMEX. Despite the significant ongoing challenges posed by the pandemic reflected the solid execution of our teams and the disciplined application of Fps.
We continue to effectively manage the business through this uncertain environment flexing cost actions as needed while also investing in our strategic product development and innovation priorities to position us well for the future.
During the third quarter, we generated $455 million of free cash flow representing conversion of 134% of adjusted net earnings and an increase of 31% year over year. This performance took our year to date free cash flow up to approximately $1.1 billion, representing a year over year increase of approximately.
48%, despite a challenging environment over the past few quarters, our operating companies continue use Fps to managed our working capital effectively in the short term increasing inventory turns and limiting the headwinds from the sequentially improving topline.
Turning to our segments professional instrumentation posted a total revenue increase a 0.9%. Despite a 3.5% decline in core revenue acquisitions contributed 370 basis points, while favorable foreign exchange rates increased growth by 70 basis points core operating margin increased 90 basis points, resulting in sales.
Segment level adjusted operating margin of 22.8%.
Industrial technologies performed well in Q3, driven in particular by the North American businesses are both Gilbarco veeder root and medco.
Total revenue increased 4.5%, including a 5.5% increase in core revenue core operating margin increased 290 basis points, resulting in segment level adjusted operating margin of 25.9%.
On slide nine of today's presentation, we show the region by region break down for the third quarter note that the growth rates shown on slide reflect consolidated for the Q3 group Q3 growth, which includes the results of the volunteer businesses that said, we will focus our operating company color primarily on the businesses that remain with Fortive.
In Asia core revenue declined low single digits. Despite mid single digit growth in China strength in China was broad based highlighted by mid teens year over year growth at fluke double digit growth at advanced sterilization products and greater than 20% growth in sensing.
Western Europe core revenue decline to being mid single digits in Q3 highlighted by low double digit growth at ASP ASP as reported year over year growth in each quarter of 2020, thus far driven by solid sales execution accruing also delivered a strong quarter in western Europe led by Meridian, It's engineering information management solution, reflecting the momentum to come.
Money is built in the region, while point of sale remain negative for both fluke and tektronix the point of sales trend improved throughout the quarter and revenue at these businesses increased mid teens versus the prior quarter.
North America core revenue grew low single digits in Q3, showing broad based sequential improvement versus Q2 growth in North America was led by a strong quarter for the volunteer businesses at New Ford of a number of the software businesses continued to perform well with growth across intellects M- Incenses industrial scientific sign that.
Business and quality will also performed well as in Western Europe, Fluke and Tektronix sown saw improving point of sales trends, though still negative as we turn the corner into Q4.
In recent quarters, we have laid out a framework for analyzing our portfolio with businesses organized into groups based on the relative sensitivity to pandemic, driven disruption and resulting deterioration in end market demand on slide 10 of today's presentation. We show the portfolio groupings with an emphasis on the new for the portfolio as shown on slide 11, the relative.
Formats of these groups large and played out as expected in the quarter group, one which represented approximately 20% of new Fortive revenue in Q3 continued to show significant resilience posting low single digit growth. The group's performance again reflected a solid contribution from the software businesses highlighted by high single digit growth at intellects, which is seeing continue.
You'd robust growth in North America, and is benefiting from the successful execution of the company's expansion into Western Europe elsewhere senses posted low single digit growth underpinned by the momentum of the SaaS offerings accruing also benefited from the resilience of its SaaS business, which increased slightly in the quarter with continued growth in annual recurring revenue based on improving.
Churn and increased net retention fluke industrial imaging had another strong quarter, although its growth moderated at some of the initial cobot related demand began to level off gordian saw slowing in project work among state local governments and higher education customers, leading to a low single digit decline for the quarter. Meanwhile, Despite continued strong order flow.
M.C. registered a mid teens decline due to certain covered related supply chain issues and some customer delays.
Group to which represented approximately 32% of new forwarded revenue in Q3 recorded a low single digit decline is sees I net subscription business posted a high single digit growth, while fluke health solutions showed mid single digit growth driven by ventilator tester Tailwinds and support from land hours high recurring revenue business model.
ASP reported a mid single digit decline due to a mid single digit decline in North America and pressure in Japan, which saw a resurgence of coated cases and an associated reduction in elective procedures.
However, we are very pleased to see this partially offset by strong growth in both China and Western Europe in the quarter. We now estimate that elective procedures in the us are back to approximately 90% of pre coded levels and our back to approximately 95% in both China and Europe.
Group, three which represented approximately 12% of new Fortive in Q3 saw a high single digit decline in the quarter, while the sensing portfolio declined by mid single digits. This represented sequential improvement versus the second quarter semiconductors, and electronics continue to be a bright spot for sensing which also benefit.
Good from covered related Tailwinds in medical end markets.
Elsewhere in group three accruals professional services and licenses business lines saw an ongoing negative impact from continued delays in accessing customer sites.
Good for which represented approximately 36% of new Fortive Q3 revenue declined by high single digits in the quarter, but saw a meaningful sequential improvement and performed ahead of our forecast.
Both fluke industrial and the Tektronix instruments business saw broad based sequential improvement fluke industrial decrease by low single digits paced by flu calibration, which registered mid single digit growth. The performance of the tech instruments business was highlighted by Keathley, which recorded mid single digit year over year growth. The business also saw improved order activity.
As the quarter progressed, including initial orders for the new six and eight channel versions of the six series a sole scope. While we are encouraged by what we saw both fluke industrial and the tech Tronics instruments business in the third quarter, we remain watchful of key macro trends as we continue to work our way toward a return to year over year growth at both businesses.
Since the end of the second quarter, we have continued to reduce our net debt with our strong free cash flow and the proceeds received from the volunteer separation, including the recent proceeds from frontier. Our net debt is now approximately $2.8 billion down from over $5.1 billion at the end of 2019 as we look ahead, we expect to continue to generate.
Solid free cash flow, which will enable us to reduce our net debt. Further we also expect to monetize our remaining 19.9% stake in van tier in a tax efficient manner with timing subject to market conditions.
While Q3 saw a continuation of the better operating performance that started as the economic loss Lockdown lifted back in the spring we remain watchful of macro conditions in light of the continued fight against the Cove in 19 pandemic and Q4, we expect the total revenue will increase zero to 3% on a year over year basis, We also expect to deliver.
Our incremental margins of approximately 35% finally, we are planning to execute approximately $30 million of strategic productivity initiatives before the end of the year in line with our prior expectation that some of the temporary actions. We executed early in the year will be made permanent as we turn the corner into 2021.
Now that the volunteers spin off is complete on slide 12 of the presentation. You will see that we have organized the portfolio into three segments, which we will provide the basis for our financial reporting going forward. The re segmentation highlights the strong positions. We have assembled to provide essential technologies for connected work flow solutions across a range of attractive end mark.
What's this view also helps to frame, how we think about our portfolio from the perspective of both organic and inorganic opportunities.
Details on these segments are as follows the intelligent operating solutions segment includes fluke industrial scientific intellects, a current and Guardian and represents approximately 40% of new Fortive total revenue. This segment provides solutions to accelerate field and facility safety reliability and productivity as well as operating.
Intelligence to a range of end users and addresses a total available market of greater than $15 billion.
Precision technology segment includes Tektronix specific scientific AMC and the sensing businesses, which will now also include Qualitrol and represent approximately 35% of new Fortive total revenue. This segment provides mission critical technologies that enable our customers to accelerate the development of innovative products and solutions.
And addresses a total available market of greater than $10 billion.
The advanced healthcare solutions segment includes advanced sterilization products Fluke health solutions census, and Invotec and represents approximately 25% of new Fortive total revenue. This segment provides solutions that enhance patient safety prevent hospital infections deliver operating efficiencies and accelerate healthcare system in the innovation.
And and addresses a total available market of greater than $5 billion.
Importantly, we will report on this basis from the fourth quarter onward, and plan to issue supplemental financial information in the coming weeks that aligns with this re segmented view of the portfolio. So that you can rebase your models before.
Before we wrap up I want to quickly quickly express my appreciation to the Fortive advantage. Our teams for their continued effort and strong execution. In 2020. This has undoubtedly been an extremely difficult year, but our performance in the third quarter highlighted once again, our continued our team continues to rise and meet the challenge with a strong.
In support of SBS, we managed to complete our final preparations for the spinoff of volunteer while also navigating the challenging macro environment to deliver improved topline performance and another quarter quarter strong free cash flow.
While we face an uncertain environment in the near term. We continue we will continue to benefit from the increasingly resilient portfolio portfolio that we have established through our efforts to continue to transform the portfolio over the last four years with.
With our consistent free cash flow strong M&A pipeline and an expanding set organic innovation capabilities, we are well positioned to capitalize on the many opportunities ahead of us.
With that I'd like to turn it over to Griffin.
Thanks, Jim that concludes our formal comments Erika we are now ready for questions.
Ask the question.
Hi, Brad.
Star then the number one on your telephone.
If you would like to withdraw your question press the pound key we do ask that you limit yourself to one question.
Follow up question.
Well, we can now begin a roster.
Your first question is from Jeff Sprague with vertical research.
Thank you.
Good evening, Jeff.
Yes.
Okay.
Bob.
Yeah.
Hey, Jeff revenue level, we are having a tough time hearing you.
But any better.
Yes.
Sorry about that.
Can you help.
Triangulated on.
Full year free cash flow.
Ordered remainco.
Kind of what are starting base is and whether or not there's anything really.
Working capital or other items that would kinda hinder our ability to grow off that base.
Thanks, Jeff.
You probably noted it's another strong quarter in guiding Q3 for both companies.
I think in for boats of volunteer and Fortive simply answer is no I don't think there's anything that will hinder us going.
Going forward, it's been been pretty strong year to date, I think or the combined company's free cash flow I know they're up.
48%.
But I think the this split going forward, if you think of us as the trailing.
Year to date or trailing 12 is about a 60 40 split here.
I think that's probably a good proxy going forward.
So roughly 60% of what we saw year to date.
We can attribute.
For the Remainco.
Yes, I think there is some yes is the answer is I'm trying to say there is obviously.
There is some things that are improving throughout the year, but then there will be offsetting some of the deal cost in headwinds associated with it.
The separation.
So that's a pretty good number to use.
And then just on the productivity and restructuring actions are those actually.
Soldiers per se or is this just a.
Kind of more operational move against some costs that make permanent some of the actions you've taken earlier in the year.
These are.
At eight these will be called out as a separate restructuring in Q when we report Q4.
And Jeff I would I would think of those as really in two buckets, one would be the I think what we've done is we've done an incredible job this year on on and digital transformation, allowing us to do a number of things. So a part of that will be sort of leases in a reconfiguration of our our sort of.
Real estate footprint around the World and then the rest of it is sort of the what I would say our cost actions that we're taking around the portfolio, where where we think things may not necessarily come back faster or in places, where we want to make sure we're protecting investments.
For next year.
Great. Thanks, I'll pass it on.
Thanks, Jeff.
Our next question is from Josh talk with Morgan Stanley.
Hi, good evening guys.
Josh.
Just a couple of questions I guess first just on the pace the pace of near term activity.
Obviously buckets filling in for still under some pressure here, we've seen a lot of short cycle industrial.
Get start to improve a decent amount sequentially, obviously some of that here as well, but how important is just kind of flipping the calendar in terms of resetting budgets are thinking about inventory positions just trying to think about what these things kind of back on the map versus where where we are today.
Yes, well.
Well first of all I'll, maybe take one note that you made I think we feel from a from a standpoint of where we have channel inventory and Thats you probably in the three big places would be fluke tektronix into some extent ASP, we feel good about channel inventories and where those are at so we don't think we we necessarily we'll see any issues realm.
Relative to inventory.
Inventory in the channel that could be a hindrance to growing through the remainder of the main remaining part of the year and into next year. So thats, maybe a small part of it I think we're continuing to look at three things to really drive the business sequentially here through the year and certainly into next year, Josh really fall into this bucket certainly as you pointed out.
Short cycle southern permits and PMI some improvements in industrial production to see those continue and maybe to be a little bit more broad based globally. Secondly, elective procedures. We've seen some nice improvement from Q2 to Q3 went when do the when does that continue to improve I think right now we don't have a belief that the sara-lee that those now.
Levers that I quoted in the prepared remarks necessarily changed too much in the short run, but we're certainly watching that particularly around the world to see how those go and then I would say the third thing is the.
How much have returned to work what shut downs occur those kinds of things that that has some impact on really on on how we get on to customer sites to do things whether it be on some of our software businesses, where we're doing we're doing service businesses on site. Some of that has been slowed some of the customer decision, making has been slowed so.
So I think we're looking to some of those things to see if those start to improve so I think those are the three big things, we're probably continuing to keep an eye on we think the business will continue to sequentially improve but but I think the inflection point the big inflection point really happened from Q2 to Q3.
Got it Thats helpful. And then just shifting more strategically now that.
Non tier separations behind you can start thinking about future M&A with reloaded balance sheet I guess, just with the new segmentation. The the segments that sticks out on a pro forma basis looks like precision technologies I mean, I think in the other two the this whole workflow solutions.
Portfolio thesis seems that come through in the various piece parts, maybe not as much in that piece.
How should we think about that in terms of M&A priorities would it be kind of shore up some more.
Some more of that end to end solution in that piece of the business or to continue building on the other two were you already EPS and good momentum going well I think we are.
Obviously, we like the momentum we have created in the too. So every intention of maintaining that momentum as you as you highlighted I think as we think about precision technologies.
We really certainly see the tektronix and what they do in a work flow around product development and innovation and we see a number of factors and opportunities I think the team did a wonderful job. This year in their strategic plan really highlighting some of those opportunities. So we're certainly looking in that way and then we think about sensing and we really have a broad view of.
So really maybe not necessarily a huge worked well, but we can play differently in the workflow whether it be with Iot enabled sensors, whether it be maybe a little bit bigger part of the solution like in Anderson negative where we now have a digital recorder that can that can really do more of the verification work. So we're certainly seeing a slightly bigger salute.
And that we can plan in sensing tack and I think thats, where the opportunities will be and then obviously I think tech does play into in a work flow. That's that's pretty well defined so I think we really believe that when we look out and you obviously heard the numbers in terms of total available market space, We really think theres a number of opportunities for us to continue to work on the.
Quite frankly, the places where we're at today and just expand upon that both or Inorganically, but also organically.
Perfect. Thanks for the color Thanks, Josh.
Your next question is from Scott Davis with Amelia Research.
Good evening guys.
Scott.
Im going to snap back pretty quickly it's nice to see.
Good good work there but.
Yes, I don't know if you want to take a stab at this and but do you think fluke industrial has a chance of actually crossing into positive territory in Fourq you.
Well, there is a little bit of ways to get there, but certainly we like the trends.
We announced a few product launches that that are going to be part of part of Q4.
We now have a thermometer that said that has a clinical nature to it which we've got FDA approved E. Anyway, you on so I think that we've got a new imager out. So I think when we look at fluke industrial we had a great quarter in China as an example, where I would say the market is pretty good and we've we've just done it.
Better job of taking advantage of that market I'd like to see the markets continue to improve in places like the you asked I think fluke industrial has a good shot in the US Europe, maybe a little bit more mixed and high growth markets, maybe a little bit more mix. So I think overall fluke industrial.
It's going to continue to improve but I think the U.S. will look good Scott I think maybe some of the other markets around the world non China.
I think there's still some questions about what the what the macro is going to look like and some of those parts of the world between now and the end of the year.
<unk> expenses now, though on the topic of China.
Do you have a sense and whether that the recovery there is still accelerating or did we snap back and now are at kind of a plateau and.
Yes for the rest of the World really has two to contribute for us to take take another step up yes, we had a good really for it at Newport have had a very good quarter.
As we said double digit growth in and the ASP and sensing was 20, almost 20% I think look obviously double digit so that's pretty broad based from health care to industrial to Oems Isis.
I suspect Scott did a little bit of that with the snap back.
From maybe what happened in the first part of the year, but we still see growth there and I think I think the world whether the next level of growth comes there obviously stimulating that economy I think I think what we're continuing to watch is.
Obviously, if other parts of the world to stimulate because their economies that maybe provide some impetus to catch up but I think China, probably still leads the pack here through the remaining part of the year.
Okay really helpful. Thanks, Good luck guys, yes, thanks Scott.
Your next question is from Julian Mitchell with Barclays.
Hi, good evening.
Julie.
Maybe a first question on the margin outlook.
So you guide on slide.
14 for that 35% incremental.
Just wondered if that's a good place holder looking out beyond the fourth quarter.
You are doing some cost out measures in Q4.
Wonder if you could frame how large the opportunity is.
Full cost reduction with a sort of simpler portfolio without Valencia.
Today, and any major puts and takes on temporary cost reversals, so big fixed cost out next year.
So Julien I think we've done we think of it this way first of all we're a long way from guiding the topline which is the biggest number here in in Q2, we were trying to signal is that 35% incremental margins is how we're going to run the business.
Of course that moving into if we if we are assuming we move into positive territory.
Next year.
They'll come back it better.
Better than 35% margins, but we've got some headwinds of the temporary costs that we'll have to that will snap back in as well and these productivity initiatives that we.
Put in place, we think gives us the latitude under a number of scenarios to manage to that 35% increase.
Incremental margins the last piece of the equation will be depending on what the top line does we'll we'll also we'll be pacing our reinvestment back into the business, but we like the 35% because of that you know this is what were roughly what we're trying to manage the business too.
Thanks, and then maybe a follow up just on the.
M&A appetite today.
Cold out that 2.8 billion thats sort of real time.
Leverage.
And maybe help us understand how quickly you want to get to work on acquisitions I.
Just to clarify the extent to which that is contingent on monetizing that 20% vantiv stake.
Yes, Julian I'd say, it's Jim I think really we think weve always weve tried to not really ever slow down our effort.
I think we've tried to remain disciplined we said at the beginning of the year that we would probably be mostly a bolt on kind of this pre coded be a bolt on kind of the year we.
We obviously haven't we haven't announced anything.
But I think we've been we've been we've been busy through the year. We've looked at a number of things I think weve. It remain disciplined in that regard I think we will I think our appetite to continue to accelerate the businesses through M&A is always something we're trying to do.
Well I think we're very comfortable with the funnels that we've created I think the new segment structure will give really get will help helps us understand and articulate really have a vision for each one of those segments.
That that I think is exciting for for companies that are interested in maybe selling themselves. So I think we're in a very good place relative to where we're at strategically in it from an M&A execution standpoint in terms of readiness and obviously the balance sheet is in much better shape in order to give us these opportunities and will be and continued good shape given.
Given where we're at with as we mentioned in the prepared remarks, not only with the continued free cash flow, but obviously with the opportunity to to with the volunteers stake as well. So I think we've got we're in a very good position right now for M&A as we as we look into the fourth quarter and into 2021.
Great. Thank you.
Yeah.
Your next question is from Steven.
Morgan.
Hey, Steve.
Got it.
Just that your software businesses.
Do you have a kind of a look into a kind of how big.
Just a standalone software businesses are now and Matt can you give us an idea of what bookings as well as.
Retention rate is and how those are kind of trending.
Thanks.
So.
Software revenue now is about mid is low teens, so think of it that way in a number.
In the.
It's going to vary a little bit quarter to quarter, but low teens is probably the right number.
The I don't have the bookings number in front of me, Steve, but you know if we think about SaaS bookings they were pretty good in the quarter.
I would say probably in the in the range of mid single digits, probably and net retention was over 100%. We had our best net retention number of the year and so.
Through the quarters. So we feel good about net retention, we're seeing you know it's a little harder today to if you think about the components of net retention things like Upselling and cross selling take a little longer in this environment and a covert environment. So as renewals take a little bit longer. So we're seeing we're seeing some of these things move out in the funnel. So some.
Some bookings will move around a little bit more at the funnels, taking longer to close but I think thats why we keep such a good eye on that net retention number because it's so important to us so having having a number that's the best of the year and better from a year ago, and certainly better than certainly better than a year ago is just I think a testament to.
How we've used the fortive business system around the various components of of software business to continue to make sure that we're driving the business even in a really obviously in a challenging environment and then what was total revenue growth for that bucket of revenue.
I think we were roughly for all the software businesses all up we were roughly flattish and the SaaS businesses were mid single digit.
Okay that part so what happened the sales.
Yes, because the SaaS parts or mid single digit what's what's the more challenging part of the onset onsite services professional services. That's the part of the business right now that's lagging and that's just a situation of.
It's just harder to get on site to do some of this we've done a great were significantly better than we were in Q2 because of a number of the remote site work that we've developed in order to be able to do a remote turn on but we need to continue to do that and then just some cost it just taking longer with some customers.
What's the split of that revenue between like you know what you would consider to be kind of recurring and the more transactional.
Hi, This is Steve I think its two thirds, one third roughly two thirds of that right.
Right. So I think so the two thirds up kind of low.
Low to mid singles and then the and then.
The stuff that's not recurring.
No doubt.
Given the environment, Yes, I mean, some in some of the businesses. Obviously, we vary for business to business as we called out in the prepared remarks, we've got some businesses.
That are that are able to kind of push through that because their their amount of onsite support is less that we turn on faster that kind of accruing as a business, where we have a little bit more service then.
Then maybe professional services and managed services than we do and maybe some of the other software businesses as an example.
Got it and one last one on on those kind of more transactional stuff. What is the impact on margin is the is the recurring stuff higher margin or is the episodic staff higher margin.
Try and most importantly through some of the software reports, yes, almost without exception the SaaS businesses are higher margin.
Okay, great. Thank you. Thank you.
Your next question is from Andrew Obin with Bank of America.
Hi, good afternoon.
Naming Andrew.
Good question.
If the Combet question and just thinking about a your commentary about elective surgery, and also sort of getting site access and software.
How are you seeing sort of.
These businesses developing given that we're sort of have more news flow about rising cobot cases.
For the fourth quarter, what kind of visibility to do you have and maybe you can give us.
Some color on the trends in October for both thank you, yes, so on elective surgeries.
The numbers, we we highlighted in the prepared remarks are about what we saw in October. So I don't think much difference and quite frankly, we're not planning for those numbers to improve it improved so we don't need a necessarily an improvement in and and things and I think as we look I do think relative to hospitals as weve talked to large major.
<unk> hospital chains for drilling you asked customers I think they're much better prepared now for Covance in order to maintain procedures, whereas at the beginning of all this they were they obviously weren't his prepared so I think the hospital network today is much more prepared to continue to do elective procedures with the increase in KOVA cases.
They were in the second quarter. So so we feel we feel pretty good about the the number we have obviously, it's impossible to predict the pandemic and that kind of thing, we're not going to get into that position, but I think we feel we feel like we understand that and and we certainly certainly have other scenarios, but I think our scenario that we have going forward is for that not to necessarily improve.
The remaining part of the year, rather than getting the site relative to getting on site for customers I think we're in a mode of not expecting any more onsite really what we're trying to deal with is really we've assumed for pretty much since the middle of the summer that our customer set was just going to continue to be take longer.
Sure. So our offerings had to be more digital oriented we had to we had to move our services organization to try to do more remote onsite support and we continue to do that we have no expectation necessarily of meeting people to get back to work anytime soon in order to sort of fulfill.
Where we think things right and Thats, maybe the uncertainty that continues to remain but we'd love to see people getting back into some things that are normal, but we don't suspect that is between now and the end of the year. It's.
Good well, it's good to hear and it's not good to hear but it's good to hear in regards to your guidance.
And just a follow up question on Tektronix could you give some color by vertical into products.
Federal.
That is what are you guys seeing there. Thank you.
In the quarter in the quarter, we had good auto we had good we had good semi we had good mil Gov I think milk ups continued to be pretty good.
And we saw what we would call consumer electronics was pretty good as well. So those those sectors were pretty good I would say sort of general industrial.
It was probably the place where where we saw maybe things not as good but but certainly really semiconductor was really driven occasionally the keep the comment we made in the prepared remarks was really driven by semi so so I would say auto semiconductor and Mil Gov, where the three segments that we saw positive positive growth in the quarter.
Thanks, Mike Thanks.
Your next question is from capital with Citigroup.
Hey, good afternoon guys.
Andy Andy Tim.
Tim how much of the slowdown that you saw Gordian do you think is as temporary access issues that you talked about versus the pressure that you say it and I'm from state and local governments and would you expect to see group one that you talked about stay around that low single digit growth moving forward at least for the next few quarters.
Yes, Theres Theres a couple of drivers that would have helped group one one is as we noted.
Our AMC business, which has has just a tremendous backlog and has done a great job of securing new business has has really had some supply chain challenges driven by coven and some customer acceptance issues. They have in terms of having customers come on site to approve things has been a challenge so I think if.
They had had even normal quarter, if you will.
I would have boosted that group a couple of percentage points, probably couple of basis points relative to gordian.
I think we continue to think that it's been that's probably a two thirds one third issue relative to two thirds onsite challenged one third state local government education.
Budget kind of situation I think we obviously those budgets are challenged but.
In many cases as you know Andy we don't play in the new construction aspects are than the new building kind of part of this this is really the renovation and operations part of facilities management. So we feel that thats going to continue as.
As we start to get some facility still need to get some of these things done. So so there'll be some pressure in that for sure. So we're not suggesting that thats perfect, but it is Bennett, we really do start our job order contracting business.
But generally with an on site assessment so I.
I think thats a couple of quarters probably of of challenges, we continue to see where the pandemic goes.
We were really pleased with our Rs means online business, which was up I think high single digits in the quarter. So so part of the business continues to do well from a customer engagement perspective, but the job order contracting businesses. The biggest piece. We think it's got some pressure for our outlook for at least a quarter or two here.
That's helpful. Jim and then you mentioned the Josh about sort of sensing tech opportunities that one of the big topics that I always get asked about sort of digital transformation and what it can mean for companies are you seeing evidence because of covet itself for the need for more sort of automation software in general in more conversations around some of the.
Products that could drive growth as you go into 21 and beyond yes.
Yes, I think.
A lot of what we've done in sensing tack around digital transformation has actually been in the on the innovation side they've been one of the great.
Users, if you will or market participants and a number of our growth accelerator innovation projects I.
I mentioned Anderson NAGL has a digital process for quarter that is all about workflow validation and then playing a bigger role in the digital world for their customers.
And so Thats a good example, cetra.
How to play with Covance of their airborne.
In negative pressure situations. They have they have an infection monitor if you will or air monitor that they've been able to put into workflow all around cove. It but its also digitally helps these isolation rooms understand where they're at so I think our sensor businesses through the efforts they've had over a couple of years of a broadening broadening the work they want to do.
Not just be a sensor, but a little bit more of a solution. That's been work weve done for a couple of years and I would say that thats starting to accelerate still small numbers, though I think if we were to look at what those numbers look like I think it's probably we would start to see the benefit of that with some scale, probably not until 2022, but but but we like the trajectory that those teams there.
Only been in the traction those teams have really been getting in the last 12 months.
Appreciate it Jim.
Thanks Danny.
Your next question is from Richard Eastman with Baird.
Yes. Good afternoon. Thanks, Thanks for the question.
Jim could you just speak to SP for a minute and when you look at that business and outperformed in the quarter down mid single digits. How does what was the composition of that was we're placements machine newer equipment placements down big and consumable starting to ramp back up then one.
When do when this is.
Patient procedure number start to.
The factor into their business can the habit can they havent up fourth quarter.
That is true.
Yes, so if theres definitely a story around the world I think when we look at the end.
They said no none of the major regions, China, Western Europe, or the us had elective procedures back to 100% and yet we had strong growth in China and Western Europe Western Europe had a good cat has had a good capital opportunity. So so they've sort of all they've seen more capital placements during a time when maybe.
Consumables were actually not growing as much but capital is made up for China, a little bit of the same story, we haven't seen as much of that in the us and so we see naturally that to us is a little bit of.
Maybe farther behind in that regard, but I think we feel good we had a good full year, our biological indicator business was was very good around the world.
That's a that's a part of the business is fairly sizable obviously terminal sterilization is the biggest piece and it's really at this point I think it'd be more north American return. We think we can continue that we've we've seen some nice placements here recently and but they have a bigger part of their business is services and and and consumables. So I think we we still need to see.
That sort of come back now I'm not necessarily predicting that this year, but I think in 2021, we'll start to see some of that improvements in some of the some of the impact of some of those things the placements that we've seen here recently, so so we feel good about the business. We've we've done a number of things to get the business on track as you well know and I think it's it's.
On a good trajectory at this point.
And you referred status for you when you spoke to the channel around Fluke and Tektronix is the channel and any inventory that might be in the channel is that around consumable sales that around the equipment is around consumables and it's not that it's not a big number like fluke attack if that flu can tack as we know.
Is it 40 50, 60% of revenue is in distribution, it's not that number but there is some some aspect of channel inventory Thats why I referenced it.
And just maybe a bigger picture as well when you think about the equipment and instrument placements versus.
Maybe the 30% of.
Of Newco, Fortive thats recurring or services.
How did how did the overall instrument placement or equipment placements look in the third quarter relative to that to the consumer.
Consumable number or recurring number.
Yes, so although one one is I think new new 400 is going to be approaching almost 40% total total recurring revenue. So just that just so you have that number it's ed side, just shy of 40% at this point so I.
I think we're we've you know every quarter moves a little bit.
Don't have the numbers handy, but I would say in general we tend to think of the the recurring revenue part of that business is about 80.
80% of total relet versus capital and within that 80 is consumables.
Probably two thirds of the 80 and services is maybe a third.
Okay, Okay, and I know that number doesn't change radically quarter to quarter its.
So I think if it does it's a it really is sort of one particular customer and I think it's always better to sort of think about that on a year to date basis anyway, Okay, and just if I could sneak one more in you just are you going to lay the you know the SVP structure on top of the new segmentation.
Is that is that the plan and then what does yes. So we haven't we haven't we're going to give it. We're obviously going to continue to roll out some color around the organization, but you could think of that as an organizational view as well. So so as you think about that structure you can think about it as an organizational view as well okay very good. Thank you. Thanks again, thanks Rick.
Your next question is from John Lewis with Credit Suisse.
Hi, John.
Good afternoon.
I wanted to revisit incrementals.
In the fourth quarter and just come at the question a little bit differently. I think you guys have out correct. What you were guiding this year there.
In terms of Incrementals, but is there anything from a mix perspective or a.
Need to reinvest in any of the product lines.
Because 35 would be a step down from where you've been in the last two quarters, just trying to understand if there's a specific item or we're just a little bit conservative on top line trajectory.
I think the.
We added uncertainty I'd say coming into the third quarter, where the top line would end up and it did come in better than what we built their cost structure around and that's what you're seeing about why did they.
The incrementals are a little bit better I.
I think that.
We're tying will have relatively smaller dollars compared to Q2 of course and serves the magnitude and the but in Q4 there'll be some some of those.
Expenses will come back.
Into into our expense base speak as the top line recovers, but we're we're also trying to balance what were seeing to deliver that 35% margin, but also in continuing to invest as much as possible to spur growth and and and future success for our customers and our.
Yeah.
In our businesses.
Got you know that makes sense.
And then I guess, just a mechanical question here around the remaining monetization of on tier.
You know were there as you monetize that will will there be any kind of announcement triggered as as you monetize that position and then maybe how do we think about kind of the tax implications as you do that I'm not sure kind of.
If you have a dollar cost basis in the stock at when it split off or if theres anything we need to think about as you monetize the remaining 20%.
Well with the remaining 20% as it sets up right now assuming.
Assuming we do it in the next 12 months in a base case or sooner. We don't really have any tax implications there become it's set up as a tax tax free spin.
Ben I think the.
ER is tax free transaction I think that the timing is what we need to do is we need to spend the company we need to have these earning calls file. These cues we want to get to the other side of the election, and then we're going to let market dynamics dictate what the right timing is and will will be upfront about that were not.
But but we need to probably good.
At another month, probably get well past the election, I would guess at least in but I'd like to get it hope to get it done the first half next year or sooner.
Okay. Thank you take care.
Thanks, John.
Your next question is from the Gray with RBC capital markets.
Thank you good evening, everyone David.
Leaving Dean I was hoping you could clarify where you stand on addressing stranded costs at Remainco I might have missed this but it did sound like some of that $30 million repositioning had some footprint.
Reductions, which sound like.
Taking out stranded costs, but if you could just start with that please yeah Deane I wouldn't say that they are really addressing stranded cost.
Per se I think it's more deep Jim talked about the digital transformation and the opportunities we seeing.
For stream.
Streamlining some some of our operations and also setting us up for next year.
We do have a smaller revenue at this point in time, but not it's not.
It's not related to empty buildings doing to do.
Due to the split it's more on there are some leases and buildings that were exiting there for sure but it has more to do with how we see a different way to run these businesses given what we're calling the digital transformation.
Got it and are there any shared services with volunteer that will be in existence and if so for how long.
So there will be there's very few most of them completed and that before the end of this year Theres a few.
And so when we separated from Danaher, most notably around a tax agreements, where we have to file taxes from you just can't get away from that until for a long period of time, but I'd.
I'd say minimal.
Beyond the next two months good I think David Mark has done a tremendous job building their organization.
Excellent just a last one when you are rattling off.
Some of that quarter dynamics that I hear it packs I am see there were some supplier issues for that.
Company specific or is there any systemic issue a product shortage or anything like that.
Yes, no I think we've dealt with we had some supply chain issues I think that a lot of people talked about in Q2, Deane, we've mitigated and really did a great job that supply chain teams really proud of the work they did in the quarter, particularly as you know we continued to guide revenue up through the quarter. So we continue to see revenue coming in in short.
Higher as we move through the quarter and yet we are on time delivery metrics were good our our past due backlog. So it's really an issue is very specific to really a couple of suppliers, who had challenges in their own factories with covance and with as I said the customer onsite work, which is just tougher to Kim tougher to communicate.
And sort of coordinate if you will with a bunch of customers that ended in a business, where you need on site approval before you shipped to a customer.
Got it much appreciate it. Thank you thanks and have a great night.
Your next question is from John Gordon.
Pardon.
Yes, thanks, Thanks, very much hi, everyone.
So.
Quick question on tax Hi, guys.
One of the lowest tax rates in multi amongst multi companies and I believe when you bought ASP, you did and tax structure reorganization favourably to shareholder benefit.
If you guys have any preliminary thoughts on the proposed Democrat tax plan I think they obviously clearly want to raise corporate taxes for everybody, but I think they've talked about going after guilty taxes and other aspects of this as well I'm just I'm just curious if there are other leavers prospectively that you could pull to kind of keep things.
As favorable as they had been in the past.
Thanks, Thanks, John well I think we're watching a number of things and there are different scenarios and things that we can do that.
Our potential countermeasures, but before we get start thinking about will they be able to offset any any taxes that may or may not happen and we need to see exactly what they're going to change and what the timing is and then then remember overlaid with what's happening in the rest of the world and we've got.
Not quite half of our income and revenue outside their and their change their taxes too. So we have to sell that plays it will be well into next year before it will really be able to have an opinion there about what it will actually do.
Okay. No. That's fair. Thanks, Chuck and then just just as a quick follow up if I think actually interesting if not even ironic that healthcare now has become a reporting segment or platform, which clearly wasn't the plan envisioned when industrial forward was on out of.
Health care Danaher right and so my question is do you see healthcare opportunities Jim in todays market with valuations pretty high.
We see these opportunities being able to sort of expand this platform to become even something that.
It was much bigger than perhaps we even envision today.
And I guess also part of your question is boy you got to ASP quite the value. So.
I think it's I think at the end of the day. We've now built a billion dollar platform in healthcare and as you said Weve I think we have a very good position. Our position is really in the work flow were really talking about is really in many respects hospital enablement, it's about helping hospitals be more innovative help them drive a fish.
One sees deal with patient safety and I think there is a number of opportunities we've got a wonderful.
Amount of work that we've done around that workflow. We think the current businesses. We have today have opportunities and we do think we have a number of opportunities I think we bought census last year. So our most recent acquisition, which.
Which has been a great very good deal for us and again I think we've continued to see at a good value. So I think we've been able to find opportunities and it's really about what we can do with them now and I think now with a scalable billion dollar platform the opera.
Two years ago, three years ago, four years ago, we didnt have necessarily that platform in which to build on which you can generally get faster returns in some cases, because you are buying your bolt you now have bolt on opportunities right and so the mix of capital allocation can be a mix of maybe longer term that longer term returns in some value creation.
Opportunities and I think now more than ever we have that opportunity John So I'm I'm real I think we're really excited about the work that we've done there and we're excited that we were pushing through and and got ASP in into the family in in the timeframe. We said it would be a lot of work to get there, but I think now we haven't launched.
Pat on which to build off of.
Yes, and to your point, Jim hospitals, clearly need to help right. So thanks again, Russia, yes, it's not that challenge isn't going away.
Your next question is from Joe Giordano with Cowen.
Hi, guys. Thanks for squeezing me in.
Thanks, Joe sure Joe.
Just on that on the healthcare side again.
Jim.
I appreciate the comments earlier that hospitals are better prepared now to deal with rising cases on last time like how far are we in terms of.
Jason load now versus where we were when things started to shut down and how far above that level. Do you think we can get before that becomes an issue and how are you guys thinking about European business now with France talking about 30 day, Lockdowns and things like that.
Yes, so I think.
You know I think first of all I'll take that I'm not sure we would necessarily we got into it in North America I think in Q2, we were in the 75 percentish load at its low point.
That's probably a good number to sort of work from and I think where we're at today you never you never know so there's certainly ambiguity in every every one of these comments, but but I think I think we believe that just because of our own onsite work recently in the last few months that the hospitals are much better prepared.
For what what could potentially happen with caseload is going up and obviously the financial situation in which elective procedures are a tremendous funding mechanism for hospitals, there is that theres a financial ramification to.
Getting rid of elective procedures. So I think we feel that the numbers. We quoted a few times on the call today that 90 sort of 92% range in the us.
I think.
I think thats, where we think the the rest of the remaining part of the year will be and then let's see what the trend line looks like for for 2021, I Wouldnt begin to start to predict what those numbers would look like for next year Western Europe, let's see one country is not going to make a big a huge difference we would need to see that pretty broad base lets see where that goes.
And again I think Sterilisations continue the good thing about this is that Sterling. There are lot of elective procedures, there's still a lot of procedures that go on that or not elective as part of the business. So.
Surgeries still happen a lot of procedures have to happen because they are emergency related. So so as I said I think let's see where that goes.
For sure we are prepared for a variety of scenarios.
Thanks, guys.
And that.
I think we're going to have to call. It their power guys for if we didn't get it certainly Griffin and Ross are available for for follow up conversations if we didn't get to your IP or for anything that is that is needed. We obviously want to thank everyone I want to thank everyone for right. It's hard to believe the 2020 is.
His eyes three cores are really 10 months now fit.
Finished it's been a tough year for everyone I know on including everyone. On this call. We appreciate all the support we're incredibly excited about where we're at we're excited for for everything that we have going the new segmentation hopefully you see the excitement that we have in our voices as we start as we move forward with new Fortive and we know about tier teams going to do an outstanding job there'll be.
They will be on the phone on Thursday, and I know, they're going to do a great job best of luck to them as well to our to our friends over there Mark and Dave were going to be great. Thanks, everybody have a great evening, we'll talk to you soon.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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