Fortive Corp (FTV) 2020 Q1 法說會逐字稿

My name is Katherine, and I'll be your conference facilitator this afternoon. At this time, I'd like to welcome everyone to Fortive Corporation's First Quarter 2020 Earnings Results Conference Call. (Operator Instructions)

I would now like to turn the call over to Mr. Griffin Whitney, Vice President of Investor Relations. Mr. Whitney, you may begin your conference.

Thank you, Katherine. 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 McLaughlin, our Senior Vice President and Chief Financial Officer.

We present certain non-GAAP financial measures on today's call. Information required by SEC Regulation G relating to these non-GAAP financial measures are available on the Investors section of our website, www.fortive.com, under the heading Financial Information.

We completed the divestiture of the automation and specialty business on October 1, 2018, and accordingly, have included the results of the A&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 for the year ended December 31, 2019, and subsequent quarterly reports on Form 10-Q. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements.

With that, I'd like to turn the call over to Jim.

Thanks, Griffin, and good afternoon, everyone.

Today, we reported our financial results for the first quarter of 2020, reflecting solid performance in an operating environment that changed dramatically over the course of the quarter. Despite the unexpected headwinds that impacted our top line performance, we delivered 150 basis points of core operating margin expansion, driving adjusted earnings per share to the high end of our guide as well as strong free cash flow. Coming out of the first quarter, we're confident in the resilience of our portfolio as well as our ability to execute the playbook required to sustain strong free cash flow, protect long-term competitive advantage and overcome the macroeconomic challenges that lie ahead.

When we provided our first quarter guidance back on February 6, we built in expectations for the potential impact from COVID-19 disruption on our operations in China and some potential challenges throughout our supply chain. Since then, the scale and scope of the global public health crisis and the subsequent macroeconomic impact from efforts required to combat the spread of the virus have expanded significantly. Even as lockdown orders were put in place throughout Europe and much of the United States, we continue to operate our essential facilities and fulfill commitments to our customers across a broad range of critical industries. Along the way, our emphasis is focused squarely on our highest priority, ensuring the health and safety of our teams around the globe as they continue to provide the essential technologies upon which our customers depend.

I could not be more proud of how the Fortive team has responded to the challenges we have faced over the past few months. In early March, we quickly shifted 2/3 of our total personnel to working from home, part of our broader effort to help ensure that our production facilities can operate under enhanced safety guidelines. We also rolled out a range of new collaboration tools and technologies, most notably from the Fortive Business System office to sustain our commitment to continuous improvement. The nimble adoption of FBS to the challenges of work-from-home restrictions has enabled us to ensure business continuity and transition key FBS processes such as problem solving, product development Obeya rooms and visual daily management to virtual formats. Perhaps more importantly, leadership teams across our operating companies have continued to drive innovation to help support their customers and the communities in which they operate in the fight against the COVID-19 crisis.

Advanced Sterilization Products recently received an Emergency Use Authorization from the U.S. Food and Drug Administration for the use of its STERRAD systems to decontaminate compatible N95 respirators, which will help alleviate critical PPE shortages in the near term. Fluke has temporarily reconstituted a portion of its manufacturing capacity in Everett, Washington to produce protective face shields, which have been provided free-of-charge to health care workers on the front lines of the fight against COVID-19. Fluke Health Solutions and Gems sensors are also actively working with ventilator equipment manufacturers to expedite additional ventilator supply to hospitals around the country.

Turning to Vontier. Given the lack of favorable conditions for an IPO due to the uncertain global economic and market conditions, we have decided to reevaluate the timing and structure of the separation. As a result, we submitted a request to the SEC to withdraw the Vontier registration statement. We strongly believe that separating Fortive and Vontier is the right strategic decision that will enable both companies to take full advantage of their respective growth opportunities and capital allocation priorities. Mark Morelli, Dave Naemura and the rest of the Vontier team will continue to run the business within Fortive, and we remain prepared to move forward with the separation when market conditions improve.

With that, let's turn to the details of the quarter. Adjusted net earnings were $264.3 million, up 7.1% over the prior year, and adjusted diluted net earnings per share were $0.74, meeting the high end of our guidance. Sales grew 7.6% to $1.7 billion as growth from acquisitions more than offset a 3.8% decline in core revenue. Mid-single-digit core growth at GVR, low double-digit growth at Gordian were more than offset by declines across various other operating companies due to slowing related to COVID-19. Unfavorable foreign currency exchange rates also reduced growth by 160 basis points.

Despite the top line headwinds, core operating margin increased 150 basis points, resulting in adjusted operating margin of 20.4%. This performance reflected, in part, the structural cost actions we took in late 2019, which gave us a running start as we turned the corner into 2020. That leaner cost structure, along with the full flow-through of prior tariff mitigation efforts, continued strong pricing, disciplined cost and supply chain management, helped us weather the top line deterioration across our portfolio due to COVID-19 headwinds throughout the back half of the quarter.

During the first quarter, we generated $158 million of free cash flow, representing an increase of 15% year-over-year, the free cash flow performance in the first quarter reflecting the underlying resilience of our free cash flow generation as well as proactive shift by our operating companies to manage their cash expenditures and maximize free cash flow generation as the macroeconomic outlook deteriorated in the back half of the quarter.

Turning to our segments. Professional Instrumentation posted sales growth of 13% despite a 7.2% core revenue decline. Acquisitions contributed 2,130 basis points, while unfavorable foreign exchange rates reduced growth by 110 basis points. Core operating margin increased 130 basis points, resulting in segment-level adjusted operating margin of 23.2%. Industrial Technologies posted a sales decline of 1% as core revenue growth of 1.6% was more than offset by an unfavorable foreign currency exchange rate of 230 basis points. Core operating margin increased 190 basis points, resulting in segment-level adjusted operating margin of 19.3%.

Switching to a view of our performance across the major geographies in Q1, which we've captured on Slide 10 of the presentation. All regions were affected by the spread of COVID-19 pandemic to some extent during the quarter. Looking at Asia, core revenue declined over 20% in Q1. This was driven by declines across all major countries in the region. China was down more than 20% in the quarter. As expected, we lost a week due to the extended Lunar New Year holiday as mandated by the Chinese government at the beginning of February. Our plants began to reopen the following week and continued to ramp up capacity utilization steadily throughout the balance of the quarter, albeit more slowly than in prior years based on the extended holiday period and national virus containment measures. By the end of the quarter, each of our sites was operating at 80-plus percent of total capacity. Customers began to come back online in February and March, with order volumes picking up into the start of the second quarter. At the same time, we saw a significant negative impact from COVID-19 on demand across the rest of Asia as well, including Japan as well as India, where customer investments slowed significantly later in the quarter as lockdown measures went into effect.

Western Europe core revenue declined high single digits in Q1. Western Europe was our most challenging geography coming into the year prior to any COVID-19 impact. But many of our operating companies also saw a significant impact on demand and customer activity in the wake of the pandemic as countries enforce broad economic lockdowns to slow the spread of the virus. ASP delivered mid-single-digit growth based in part on the decontamination of respirators across the Netherlands, Germany and Belgium in March. At this point, we are starting to see early steps being taken to reopen certain economies, including countries such as Germany, which have fared better than some others. But it's too early to tell how these steps will affect demand dynamics, which we saw deteriorate over the course of March.

North America core revenue grew by low single digits in Q1. In the United States, with the exception of a few businesses, including GVR, Gordian and Qualitrol, we saw a significant negative impact on demand trends as well as our ability to access customers and customer sites across much of the portfolio. This was particularly the case late in the quarter and into the first half of April. With potential plans for reopening on a state by state or regional basis still very much in the early stages, it is difficult at this point to have a definitive view on how conditions will respond to any such reopening efforts during the second quarter.

Finally, we saw a mid-teens decline in the Middle East and a high single-digit increase in Latin America. Slowing in the Middle East was due to a combination of order delays and supply chain issues associated with COVID-19. We expect to see persistent headwinds as we look ahead.

Strength in Latin America was driven by growth of more than 30% in Mexico. Latin America was later than other regions in terms of the emergence of COVID-19 and it is difficult at this point to gauge the full potential effect from the pandemic on the region as we look forward.

Given the unprecedented public health crisis posed by the COVID-19 pandemic as well as the broad economic restrictions imposed across the globe, forecasting the balance of the year has become more challenging. Under the circumstances, we are withdrawing our previously issued full year 2020 guidance and will not be providing guidance for the second quarter. In an effort to give you a sense for the next few quarters, we've analyzed our portfolio to better frame expectations for the relative impact of the COVID-19 pandemic across and within the various operating companies given the unprecedented global conditions we expect to face.

If you turn to Slide 11 in the earnings presentation, you will see that we have broken out operating companies as well as key portions of some operating companies into 4 groups based on what we would expect may be their relative sensitivity to COVID-19-related disruption and potential deterioration in end market demand.

Group I, which represents approximately 15% of total Fortive revenue, includes those companies or key product lines that we expect may continue to grow throughout the coming quarters or we believe should show substantially resilient top line performance through the balance of the year. Notably, this group includes a number of our recent acquisitions, including software-focused businesses such as eMaint, Gordian, Intelex, Censis, and the SaaS portion of Accruent, many of which we expect to benefit from a high share of recurring revenue and a focus on providing mission-critical workflow solutions to their customers.

Group II, which represents approximately 50% of total Fortive revenue, includes a range of businesses where we expect to see potentially significant top line impact in the near term from lockdown measures and stay-at-home restrictions, from which we then believe should bounce back relatively soon after those lockdown measures are lifted. The biggest businesses in this group are GVR and ASP. In the case of GVR, EMV-related demand in North America, in particular, stayed strong through the end of the first quarter before moderating in April. While customer site access issues and other COVID-related disruptions will impact revenue in the near term, we expect GVR to perform better as economies around the globe begin to open back up. At ASP, we saw significant drop in surgical procedure volume in China during Q1, upwards of 85% at the height of the COVID-19 response, but volume began to rebound by the end of March and continued into April. We expect the same pattern to play out in other geographies having seen elective procedures get delayed, and we likewise expect volumes to begin to normalize as soon as hospitals get to the other side of COVID-19 peaks and can begin to address the pent-up demand for these procedures.

Group III represents 10% to 15% of total Fortive revenue, includes businesses where we expect to see a potentially significant top line impact from the lockdown measures and stay-at-home restrictions in the near term and expect to see a more gradual improvement in performance after those lockdown measures are lifted. This group includes our Sensing Technologies portfolio, which has short-cycle sensitivity, and we will expect to see pressure across a number of its core industrial end markets as capital-related projects pause. There are, however, a number of potential offsets across health care, life science and food and beverage applications, including Setra's room pressure indicator product line, which monitors air quality in ICUs and other critical health care environments.

Group IV, which represents 20% to 25% of total Fortive revenue, includes the businesses where we expect the most significant revenue decline in the short term and the most sensitivity to both the depth and duration of the recession expected in the aftermath of the COVID-19 crisis. Notably, this includes portions of the Fluke industrial business and in the Tek instruments business where we've historically seen the most short-cycle sensitivity, including over the course of 2019. It also includes the instruments and rental businesses within ISC, which have significant exposure to the oil and gas end market and would expect to be impacted by persistent dislocations in oil and gas demand.

While we are not in a position to forecast the rest of the year with sufficient level of visibility, using this framework, we expect to see a significant revenue decline in the second quarter. To be more specific, we believe that our total revenue will decrease 20% to 25% on a year-over-year basis in the quarter. While the fall-through on a decline of that magnitude can be challenging in the short term, we expect to manage the business to decrementals of approximately 35% to 40%. We will continue to benefit from the cost actions that were taken at the end of 2019, which significantly helped our margin realization in Q1, particularly within Professional Instrumentation. Over the course of the year, we expect to continue to manage decrementals to that 35% to 40% range as additional cost actions are executed across the portfolio. We also expect to deliver free cash flow conversion of greater than 100% of adjusted net income for the full year.

As you would expect, we have taken immediate and decisive steps to reduce our cost base in response to the dramatic shift in macroeconomic outlook during the first quarter. These more recent cost reductions add to the significant cost actions that we took toward the end of 2019 in anticipation of continued short-cycle headwinds through the first half of this year. Across the portfolio, we have aggressively executed adjustments to direct labor expense, primarily through the use of furloughs, to match our expectations for the near-term demand deterioration. We have likewise instituted reductions in salaried compensation costs and a wide range of discretionary spending items. At the same time, we have initiated aggressive cost reductions throughout our supply chain, including both direct and indirect spend, while also reducing our facilities expense through temporary closures. In total, we intend to deliver incremental savings for the balance of the year of at least $300 million across these various cost actions.

We know that liquidity is critical during challenging macroeconomic conditions. We ended the first quarter with a cash balance of over $1 billion, and we've continued to proactively manage our balance sheet and enhance our strong liquidity position. We recently extended the maturity of the $1 billion term loan due this August to May 2021 and, in an abundance of caution, renegotiated our net leverage covenant to provide additional headroom through the first quarter of 2022. While we expect to use our free cash flow generation to continue to delever over the course of this year, these steps provide us with additional near-term flexibility. Over the past 2 months, we have also reduced our reliability on the commercial paper market, paying down our outstanding commercial paper exposure with a new term loan and repatriated cash. We expect to temporarily exit our commercial paper exposure entirely in the coming months, in turn, giving us full access to our $2 billion revolving credit facility, which remains otherwise undrawn at present.

Before I close, and as you turn to Slide 14 in the deck, I want to underline for the Fortive team as well as our investors that as challenging as things appear now, this, too, shall pass. While we navigate the choppy waters that lie ahead of us in the short term, we will also move our businesses forward and positioning them for even stronger performance in the long term. That means continuing to invest in innovation, winning in the market through product and service differentiation, enhancing the level of talent throughout the company and maintaining the disciplined market work that drives our M&A process.

Over the past few months, I've been extremely proud by the agility and resilience I have seen throughout the organization as we adapted on the fly to the realities of the current global public health crisis. With the underlying strength of our portfolio, our culture and the commitment to our shared purpose, we remain well positioned to realize the substantial long-term value creation opportunities ahead of us.

With that, I'd like to turn it back over to Griffin.

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

(Operator Instructions) And your first question comes from the line of Julian Mitchell with Barclays.

Maybe just the first question around the sales guide. So you talked about a 20% to 25% total sales sort of placeholder for the near term. Maybe help us understand any nuance across the 2 divisions with that guide and any color you could give on how April trended for PI and IT in terms of orders or sales, please.

Julian, this is Chuck. For the 20% to 25%, at this point, I think that it's best to just think of it as about the same across the 2 segments. But keep in mind, there's a lot of moving pieces here. And while we could end up at that same 20% to 25% in total, it could end up differently. But right now, we see it actually pretty much the same by the 2 segments for right now.

Julian, it's Jim. Just to give you maybe a little bit of color around the businesses. And what we tried to do on Slide 11 is give you a little bit of sense of some of that as well. I think as we saw -- we saw China come back at the end of March, but we didn't see China come back really towards pre-COVID kinds of numbers. And we don't really expect that to occur that much in the second quarter. So just I'll give you a regional view first. Europe was down high single digits. We think it will be worse certainly in the second quarter. And North America held up pretty decent on the back of a strong Gilbarco. As I mentioned in the prepared remarks, because of our inability to get equipment into the ground, particularly in North America, and certainly with elective surgeries being almost nonexistent here at ASP, those are a couple of big examples in North America. And certainly, point-of-sale at Fluke and Tek, we would expect deterioration in the second quarter, for sure, from what we saw in the first quarter.

Really, that whole sort of last few weeks of March really playing out throughout the quarter with no expectation of improvement through the quarter. And April pretty much fell in line with that. So I would say, 1 month does not a trend make, but I think we certainly felt that it was appropriate. We took some decisive actions in advance of what we thought would continue. And I think April, by and large, has played out the way we thought it would relative to that sort of down 20% to 25%.

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

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

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

Yes, can you hear me?

Yes, we can, Andrew.

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

So pricing, are you talking about for Q1?

Yes.

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

Okay. Maybe I calculated incorrectly, I apologize. Just maybe you can just talk generally about sort of Fortive's pricing power in this environment.

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

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

Yes. So I think, Andrew, we were just talking before the call. I think Chuck and I are 8 weeks working from home now. And certainly I've been -- as I said in the prepared remarks, I've been amazed at the quality and the level of work that our team has done to do that so quickly. And from a just productivity perspective, really not see really any impact in productivity. I think it's too early to sort of call long term what this means. But I think for many things, you could certainly see, it would not be hard to suggest that with the way we've been working, certainly, we'll open ourselves to more employee flexibility, which I think gives us an opportunity for talent. And I think the second thing would be that certainly it's going to foresee us to be able to reduce travel costs over time. I don't see it any other way.

But we're still a gemba evidence kind of company. We're looking forward to getting back and visiting customers. We're looking forward to being closer together in kaizens and things like that. So none of that will be completely eliminated, but I certainly think that the opportunity for us to think about how we can do things -- we're seeing a lot. We're taking a lot of notes. And our FBS office has done a fabulous job of sort of codifying a lot of these new processes so that we can replicate them into the future in all of our operating companies.

Your next question comes from the line of Nigel Coe with Wolfe Research.

Jim, when you say getting close on kaizen, it's not too close, right?

Yes, no, that's right, exactly right.

Okay. Great. So look, when you go back to '08, '09, Fluke and Tektronix were down mid-20s peak to trough then. So the fact that this cycle is not new news, but maybe just characterize what you're seeing today versus back then and maybe comparing the trough. And would -- do we expect the recovery profile to be similar to back then?

Well, I think there's a couple of things. And that's why we tried to frame it in these groups, so I'll try to use that as a context. One is, I think if you go back to some quarters, you can find a quarter maybe where Tek was probably down 40% in '09 and you can probably find Fluke maybe down in the 30-ish range. So a little bit more dramatic than your reference point, but I don't know if it's -- that's just for context. I think when you look at what we've done here, and I think it's just so evident to call it out, when you look at Group IV, which is what we would say maybe was the business more in '08 or in '09, you see the Fluke -- core kind of Fluke industrial business and you see the Tek instruments business. But once you go to the lab and you see in Group I and II, and you start to see Fluke Digital, you see Fluke Imaging. And so you see those additions that we've made to the Fluke business that are far more resilient as part of the revenue base. You see the Tektronix Service Solutions business there as well as you see the Fluke Health solutions.

So what you can see is -- that's why we broke the portfolio up because in the context of Fluke, you now see 3 substantial additions to the portfolio that are a lot more resilient to that business. And you see in the Tek business, the service business, which is more resilient. So we're not calling out that parts of Fluke and parts of Tek aren't cyclical to the macro. But I think what this kind of demonstrates, it gives you a visual picture of the kinds of things that we've done, which ultimately will put more resilience in the overall business.

But what you're trying to say with these Group IV businesses, these aren't structurally multiyear sort of flat revenue businesses. These are just a 6-quarter decline. So maybe you expect them to be back to growth like in prior cycles.

You're talking about in group -- businesses in Group I or II?

Group IV.

Oh, Group IV. Well, I think depending on the -- this is where I think it's tough to call, particularly in light of some of the things we saw in '19. Tough to call how long Fluke and Tek, those parts in Group IV would come back, but you'd typically think that would roughly track with sort of improvement in industrial production, global PMI. So those businesses maybe track a little bit closer to those metrics. Whereas in Groups I and II, you start to find secular drivers and much more resilient business models like SaaS and service models.

Okay. Great. Then my follow-on is sort of like, a nice segue there to the SaaS side. As we know, there has been some chatter about in this environment, maybe SaaS contracts get repriced or there's a pickup in churn. Have you seen any of that? And maybe just give us a flavor in terms of what you're seeing at Gordian and Accruent through April?

Yes. Well, a good example would be Fluke Digital. In the quarter, Fluke grew double digit, and the eMaint business grew, I think, 20%. So just to give you an example of resiliency and probably one of our more resilient businesses relative to SaaS. The Gordian business grew double digits in the quarter or -- I'm working through all the number. Intelex grew in the quarter. The SaaS part of Censis grew in the quarter. So all those businesses actually grew pretty much on track for the quarter. What we do see is in parts of those businesses where they have service, professional services or some installation services and things like that where we couldn't get on-site, we see some revenue degradation there. Most of that comes back in the full year, we think. So you see a little bit of headwind from the on-site stuff.

Bookings maybe -- the long-term bookings maybe changed a little bit because customers aren't necessarily signing all the contracts. You'll see a little bit over time, depending on the depth of the economic impact, where we'll see maybe a little bit of sea change, but pricing has held up well. And quite frankly, when you start to think about some of the solutions, whether they be in things that save money like Accruent and Gordian where you're really saving money in activities, or things like Intelex where you're really in the HS, the health and safety aspects of the business where there's no greater time when Fortune 1000 companies are focused on that, I think the secular drivers here are going to hold up pretty well in those businesses.

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

I think you were on TV recently, Jim, weren't you?

I think you were, too.

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

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

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

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

Steve, I was just going to add that we've built a number of scenarios around what we think the second half could look like. This is not one of those things where we're going into it wondering what's going to happen. We obviously -- Chuck and I have been through a few of these. The vast amount of gray hair between the 2 of us probably suggests that this isn't even our second time. So I think we've built scenarios. We've identified the cost reductions that we think are available to the multiple of those scenarios, and we're confident in those decrementals relative to both the actions and several of the scenarios. And if things get worse, as we said certainly in the presentation as well, we've got some additional levers we could pull, if needed, if we saw things come down. But it's still such early days, too early to call on anything like that just yet.

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

Well, I can't speak for others. I think that the severity of restrictions, if you look at our big businesses, I would think about it this way. Gilbarco, one of our largest businesses, can't put stuff in the ground. So while they had a very strong first quarter in North America, inevitably until these restrictions get lifted, they're not putting sites in the ground. So we still think the resilience is there because ultimately 1 quarter does not a year make, and we think that will come back in the year. Certainly, with EMV, we're confident that, that demand is there. You take another business like Matco. Where people are sheltering in place, they're not putting as many miles. Repair shops are closed. In many states, they maybe were considered nonessential. And so that needs to come up.

And then ASP, obviously, with elective surgeries just so dramatically -- those really aren't economic impact. Those are really very much shelter-in-place impact. So I think we probably would never plan for a shelter-in-place economic scenario when we build the portfolio given we haven't seen a pandemic in a little while. So those are very unique, and that's why we sort of put them in the Category 2 because once these restrictive things come into play, the business will come back much faster than, say, if it was an economic consequence, if you will.

Okay. One last quick one. How are orders at GVR? Have those held up? Or are those kind of trending down?

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

Your next question comes from the line of Deane Dray with RBC Capital Markets.

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

Well, thanks, Deane. I think there's probably 3 things to keep in mind. One is the, well, the strategy around the separation hasn't changed at all. We said that we would be ready to go at the end of Q1, which we were, with the management team to move forward. And we just evaluate whether the market was ready to go. Obviously, we don't think that the market is receptive for this type of separation transaction in the next few months. And so what we're really looking for is for the market to become stable and for us to be able to move forward and look at that. And then like we've always said is like, look, we'll look at what that looks like. We can't really tell right now. But when we get there, both split or spin options will be open to us, and we'll figure out which one works best for all of our stakeholders.

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

So probably the easiest way on the true CapEx, we're very CapEx-light. But we'll probably, I'd expect our CapEx year-over-year to be down 25%, probably more when you think about what we were actually guiding for the year 3 months ago. But that's the simple answer on CapEx. When it comes to working capital, we have got a very strong procurement team and the operating companies really focus on working capital turns. It's one of our core value drivers, as you know, and we've worked hard on. And so what we'll do is as the revenue comes down, we're going to make sure our supplies, that we don't bring on more inventory than we need. So try to do the best job that we can in terms of maintaining the inventory turns. That will naturally free up some cash coming out. As the Q2 slows down, that will be a source of cash rather than a use of cash in the near term.

But our teams are going to strike a balance. Every one of these operating companies will be a little bit different situation. We don't want to end up with too much inventory. But we don't want to end up with too little when things start to recover so. But that's not that different than what they have to deal with every quarter. So I think we're well suited with the Fortive Business System to help us do that. On receivables, we're off to a good start in cash flow collections. Again, it's an OpCo-by-OpCo story. We have a lot of daily management around this. And we feel confident in how this is going to perform as we go through the year. As Jim said, it's not just Jim and I, a number of people at our OpCos were with us in 2009 as well. So we feel confident about where we're at.

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

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

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

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

Yes. Sure. So I would say, I think it's -- we've got all these letters for recovery. I think at the end of the day, this is not a snapback recovery in China. If we look at our 4 largest businesses there, Tektronix has got electronics focus. That's been pretty slow. We have a little bit of Huawei impact in the first quarter, but that's been relatively slow still and haven't seen that come back much. Fluke has seen nice demand in things like imaging. So they've seen some strong demand there, but the remaining part of it still remains slow. I haven't seen much recovery there. I think with Gilbarco, we've been mostly waiting to put stuff in the ground given there's still a lot of restrictions there. I mentioned that in North America, but we're seeing that in other places around the world. So that's probably been more slow than the other 2.

And of course, ASP, I mentioned elective surgeries at their peak were down 85% in China. So they've come back considerably, but not come back to normal yet. We would anticipate that to happen over the next 60 days. So that could come back a little bit faster just to give you a little bit of color. So overall, I think, what does that mean when we add it all up? I think at the end of the day, I don't think China looks all that different in the second quarter than it does in the first quarter.

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

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

Yes. I think it's meant to be more about over the last 3 quarters. So think of it as $100 million a quarter. Maybe we'll get a little bit more in Q2 with some of those. We don't have an announced restructuring or anything beyond what we did in the last fourth quarter. So by their nature, these things are somewhat temporary. We're trying to maintain the team that we had coming into it, coming out the other side, at least as we put these actions. But in them are things like travel, obviously, way down. There's going to be some miscellaneous spend that will slow down on the margins around maybe some marketing and really sales programs as well throughout OpEx. There's going to be some spending around the pay furloughs that will come out. Those are some of the main ones. But we'll look at every bucket to make sure that we -- and we've got actions identified, but those are some of the bigger ones.

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

So that brings me back around, I think, to what Steve Tusa was asking, right? I mean, if we model sales down low 20s and kind of a mid-30s decremental and then back out $100 million, $150 million of cost savings, it implies your underlying decremental is like 60% to 70%. I guess that maybe isn't crazy relative to your gross margin with a 5 handle. But as the year progresses and sales, theoretically, the declines begin to moderate, if we're still holding at that 35% to 40% observed decremental, the implied underlying number just doesn't really seem to make a lot of sense.

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

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

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

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

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

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

No. There's pretty, I mean, there's pretty good leverage. Picking the timing of that is obviously a little challenging. But as you say, in this case, this is true pent-up demand. I was talking with a CEO of one of the biggest hospital networks in the country this afternoon who was talking about literally all kinds of different patient groups that they've just not seen, including elective procedures. And I think that what's going to happen here is both the clinical and the financial needs are going to happen, right? There's a whole bunch of pent-up demand for these types of procedures. That's the clinical need. And obviously, the elective procedures, elective surgeries, in particular, are very profitable for the hospital. So there's going to be a real need from a financial perspective to accelerate this. So we would expect to see that acceleration. Difficult to predict when given the number of states, particularly in the U.S., and the number of countries in Europe that need to sort of turn this back on and how quickly things get turned on. But we do think there'll be leverage in those business. Landauer grew in the first quarter, as an example. So even in some cases, we saw some good performance even despite some of those challenges. The SaaS business at Censis continue to grow as well.

Your next question comes from the line of Scott Davis with Melius Research.

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

There's certainly some anytime you change those. But I think the total cost of fees were in that less than $0.01 a year, probably more like $0.015. And then there's some changing in terms of the floors around off of LIBOR. But frankly, it's below -- the floor that is negotiated in there is lower than where we're at right now. So not a huge cost for that.

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

Yes. All of our facilities are up and running and have been. We had a couple of situations where we might have been in the U.S. and Europe where -- we had 1 facility or 2 facilities in the U.S. where we were down a day or so, where we were working through the local situations. But all of our facilities now have been pretty much through the downturn up and running. We have furloughed a few facilities in the second quarter, as we said, with some demand, but we're able to run all of our facilities now around the world.

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

Can you just remind us of the mix in ASP of consumables versus equipment? And just sort of what sort of levels are these consumables running down today, sort of dovetailing back to the point about elective procedures and so forth just to kind of put this into a context.

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

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

No. It's really a temporary measure. At the end of the day, the hospitals are probably going to want to utilize single-use masks for the most part. This really gives them at a time when PPE has been a challenge. They can turn on the STERRAD. They're essentially not at capacity right now in their hospitals to create more opportunities. But the decontamination was really an effort for us to help out. It's really more of an effort to help out our customers, not a really big financial opportunity. Probably in the neighborhood of $10-plus million in the quarter but hard to tell how many hospitals will necessarily need to use that more longer term.

No. But it's good press nonetheless. I want to ask you, Jim, you guys have sizable, long-term operations in China, depending on how sort of the politics of the pandemic all play out when this subsides, some people are sort of talking about the risks of the U.S. and China going into a cold war. We've had the economic issues, but maybe this becomes something much more extreme. How are you, as CEO, thinking about this in your assets there and possibly kind of future growth trajectory, M&A? Like it's kind of a holistic question to what could be a turn for the worst in terms of our relations between the 2 countries.

Yes. I've been pretty close to China for a long time, having run it back in the Danaher days for a long time. And we're pretty close to those questions. I think one, John, is we derisked our supply chain considerably once the tariffs started. So we've really derisked our supply chain considerably since from where we were at, say, even a year ago. We're going to continue to assess those things. And we will continue to probably -- we mostly make for China in China. So as we look at bigger moves, we'll continue to evaluate. We don't have many big moves left. To be honest with you, I'm not sure we have any. But we certainly are continuing to think about this continued move in places to build locally for many of our businesses.

Our health care businesses almost exclusively build in the U.S. and in Europe. So I know there's a lot more energy on the health care side to wonder about origin. And certainly, we're fine in that situation. So in case that was also -- I'm inferring that in your question as well. So anyway, I think we're in a good place. And we're well positioned from -- I think what we've demonstrated in the tariff situation is that we can move pretty quickly if we need to do other things. We certainly are able to do that. We're monitoring all the things that you've obviously described.

All right. I think that we appreciate the energy. I'm not sure we got through everything today. Obviously, a lot there for everyone to want to know about, and we appreciate the time and energy that everybody has put into this. I know we're available for follow-up and certainly want to make sure we make ourselves available to anyone who needs time. Griffin and team are available. Chuck certainly and I are also available.

I just want to thank everyone. At a time when it's just been -- the word unprecedented is used so often these days. It's probably the most overused term. And the focus on health and safety of our teams has never been more important to us than every day we wake up. But we also want to make sure that we've given you an understanding that while there is uncertainty in the near term, we're in a very strong position to be able to manage the business around multiple scenarios. And the moves that we've made over the last 3 years strategically continue to be very good moves for us from a resiliency perspective, and I'm confident we'll see that play out in the weeks and months and quarters to come.

So we look forward to a continued dialogue to give you better color. Hopefully, we did more with this presentation to give you that color. And we're certainly available to continue to give you a sense of what we're seeing and available to help in any way, shape or form.

I hope everybody on the call is safe. I hope your family and friends are safe as well. I hope you've been able to be productive in all this work-from-home stuff and in just such a challenging time. We look forward to the time when we can all see you at a conference or something. We look forward to those days, and hopefully, they're not in the not-too-distant future. Thanks, everybody. Have a great evening. We'll talk to you soon.

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