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Fortive Corp
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My name is Catherine, and I will be your conference facilitator this afternoon. At this time, I would 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, Catherine. 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 headwind that impacted our topline performance, we delivered 150 basis points of core operating margin expansion, driving adjusted earnings per share to the height of our guide as well as strong free cash flow.
Coming on 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 in February 06, we built in expectations for the potential impact from COVID-19 disruption on our operations in China and some potential challenges through 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 had 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 cannot be more proud of how the Fortive team has responding to the challenges we've faced over the past few months In early March, we quickly shifted two birds of our total personnel to working from home. Part of our broader effort to help ensure that our production facilities comprehend under enhanced safety guidelines. We also rolled out a range of new collaboration tools and technologies most notably -- 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 assure business continuity and transition key FBS processes such as problem-solving, product development all bear 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 US Food and Drug Administration FDA for the use of its stereo system to decontaminate compatible N95 respirators, which will help alleviate critical PB shortages in the near-term. Fluke has temporarily reconstituted portion of its manufacturing capacity in Everett, Washington to produce productive facial which have been provided free of charge to healthcare workers on the front lines of the fight against COVID-19.
Fluke Health Solutions and Gem Sensors are also actively working with ventilator equipment manufacturers to expedite additional ventilators supply to hospital 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 the 3.8% decline in core revenue. Mid-single-digit core growth at GVR low double-digit growth in Gordian were more than offset by declines across various other operating companies due to slowing related to COVID-19. Unfavorable foreign currency exchange rate also reduced growth by 160 basis points.
Despite the topline headwinds, core operating margin increased 150 basis points, resulting in adjusted operating margin of 20.4%. This performance reflected in part the structural cost actually took in late 2019, which gave us a running start as we turn the corner into 2020. That leader cost structure along with a full flow through of prior tariff mitigation efforts, continued strong pricing discipline cost and supply chain management helped us weather the topline 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 resilient of our free cash flow generation as well as practice shift by our operating companies to manage the cash expenditures and maximize free cash flow generation as the macroeconomic outlook deteriorated in the back after the quarter.
Turning to our segments, Professional Instrumentation posted sales growth of 13% by the 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 continue to wrap 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 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 investment 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 with 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 lockdown 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're 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 site 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 our 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 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 upon the globe, forecasting the balance of the year has become more challenging. Part of the circumstances we are withdrawing our previously issued full year 2029 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've broken out operating companies as well as key portions of some operating companies into four groups based on what we would expect maybe their relative sensitivity to COVID-19 related to disruption and potential deterioration and end market demand. Group one, which represent 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 topline 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, Sensus, 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 two which represents approximately 50% of total Fortive revenue includes a range of businesses where we expect to see a potentially significant topline impact in the near-term from lockdown measures and stay-at-home restrictions from which we then believe should bounce back relatively soon after the lockdown measures are lifted. The biggest businesses in this group are GVR and ASP.
In the case at GVR, EMV related demand in North America in particular stayed strong through the end of the first quarter before moderating in April. Our customer site access issues and other COVID-related disruption 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 and we've 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 three represent 10% to 15% of total Fortive revenue includes businesses where we expect to see a potentially significant topline 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 would expect to see pressure across a number of its core industrial end markets as capital-related projects pause.
There are however a number of potential offsets across healthcare, life science and food and beverage applications including Setra's room pressure indicator product line, which monitors air quality in ICUs and other critical healthcare environments.
Group four, 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, Invetech 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 with 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're 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 to 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've aggressively executed adjustments to direct labor expense primarily through the use of furloughs to match our expectations for the near-term demand deterioration. We've likewise instituted reductions in salary compensation cost and a wide range of discretionary spending items. At the same time, we've initiated aggressive cost reductions through 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 entered 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 our 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 two months, we've also reduced our reliability on the commercial paper market paying down our outstanding commercial paper exposure with a new term loan and repatriating cash.
We expect to temporally exit our commercial paper exposure entirely in the coming months in turn giving us full access to our $2 million 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 position 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 discipline market work that drives our M&A process.
Over the past few months, I've been extremely proud by the agility and resilience I've seen throughout the organization as we adapted on-the-fly to the reality 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. Catherine, 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 guys. You talked about the 20% to 25% total sales sort of placeholder for the near term, maybe help us understand any nuance across the two divisions with that guide and any color you could give us how April trended for PI and IT in terms of orders or sales please.
For the 20% to 25% at this point I think that it's best to just think of it is about the same across the two segments, but keep in mind there's a lot of moving pieces here and while we could end up with that same 20% to 25% in total, it could end up differently. But right now that we see it actually pretty much the same by the two segments for right now.
I would just to give you maybe a little bit of color around the businesses and what we try 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 for really toward 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'll be worse certainly in the second quarter and North America held up pretty decent on the back of strong Gilbarco. As I mentioned in the prepared remarks because of our inability to get equipment into the ground and 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 and fluke attack, we would expect deterioration through the second -- in the second quarter for sure from what was 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.
Now in April pretty much fell in line with that. So I would say one month is not a trend make but I think we certainly felt that it was appropriate. We some decisive actions in advance of what we thought would continue and I think April by and large is played out the way we thought it would relative to that down 20% to 25%.
Thanks. And then my second question just around the incremental margins and the cost savings to just to confirm that $300 million in cost savings is that included in that 35% to 40% incremental margin aspiration and I guess I'm a bit curious why the incremental margin wouldn’t get less severe later in the year at presumably as you get more savings booked and maybe the sales declines get a bit less intense?
Julian I think first of all you’ve got it understood correctly and the $300 million that we see coming out -- we see coming out pretty ratable at this point, we've made a lot of calls and taking the actions that we think will see them here in Q2 and that gets us that 30% 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 -- 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 as if we see a difference in the back half of the year maybe the decrementals move a little bit more but right now we're calling it at 35% to 40%.
Your next question comes from the line of Andrew Obin with BoA.
Just a question I apologize if I missed it just pricing in IT I think in the queue turned negative. Could you just give more color on that and I apologize if I missed it in the prepared remarks?
So prices, are you talking about for Q1?
Yes.
No it was I don’t think it was negative. We have it as positive, and it did normally positive.
Okay. Maybe I'll calculate and correct. I apologize. Just maybe you can just talk generally about sort of Fortive's pricing power in this environment?
I think I think we would continue to see -- our gross margins were up in the first quarter on a deteriorated volume, but we certainly saw I think we maintained price probably not getting as much price as we did a year ago because a lot of our tariff mitigations, the price was in the tariff mitigations Andrew, but in terms of seeing any price pressure at this point, we really haven't -- we really couldn’t call any places where we see any of that.
We probably are a little slightly reluctant to see anymore additional price in this environment just to 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 changes in the pricing environment here.
And just a longer term question, I think you talked about doing things differently using more Zoom, less travel sort of doing Kaizen's electronically what kind of -- have you guys 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?
Yeah so I think Andrew we were just talking before the call, Chuck and I are eight weeds working from home now and certainly have 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 the -- 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 will 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 cost, over time. I don't see it any other way.
But you know we're still again by evidence kind of company. We still aren’t -- we're looking forward to get back and visiting customers, we're looking forward to being closer together in Kaizen and things like that. So, no 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've taken a lot of notes and our FBS office has done a fabulous job of sort of clarifying 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.
When you say getting close Kaizen is not too close right.
No, that's right.
So look when you go back to '08, '09, Fluke and Tektronix were down mid 20s to drop then. So the fact that these cycle is not new news, but let me just characterize what you're seeing today versus back then and may be comparing a trust and would we expect the company profile to be similar back then?
Well I think there is a couple things. One and that's why we try to frame it in these groups because so I'll try to use that in the 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 probably find a Fluke maybe down in the 30 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 in the to call it out, when you look at Group four, which is what we would say maybe one of the business more in '08 and '09, we see the Fluke core kind of Fluke industrial business and you see the Tek instruments business, but once you go to the left and you see in Group one and two, as 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.
You may see the Tektronix Service Solution business there as well as you see the Fluke Health Solutions. So what you can see is that's where you broke the portfolio up because up in the context of Fluke you now see three 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 demonstrate to give some a visual picture of the kind of things we've done, which ultimately are a bit more resilient to the overall business.
Are we trying to say that with these beautiful businesses these are structuring and multiyear to the flat revenue businesses? These are fixed quarter decline maybe you expecting to be back to growth like prior cycles.
You're talking group businesses in group one or two?
Group four.
Group four, what you know I think depending on the, this is where I think to call particularly in light of some of the things we saw in '19, tough to call how long Fluke and Tek both parts in Group four would come back but you typically think if it never roughly track with sort of improvement in industrial production, global PMI.
So both businesses maybe track a little bit closer to these metrics where I think Groups one and two you start to find secular drivers and much more resilient business model like SaaS and service models.
Okay. Great and my follow-on is like nice segue there to the SaaS side because we know there have been some chatter about in this environment maybe SaaS contract getting price tool has pick up in churn. Have you seen any of that and maybe just us a flavor some of what you're seeing at Gordian accruing through April thanks.
Yeah. Well good example would be Fluke Digital. In the quarter Fluke grew double-digit and the e-may 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 working through all the numbers. Intellect grew in the quarter and the SaaS part of Sensing [ph] grew in the quarter. So all those businesses actually grew pretty much on track for the quarter.
What we do see is in part 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 onsite staff. Bookings maybe the long-term booking maybe change a little bit because customers aren’t necessarily signing all the contracts.
You'll see a little bit overtime to paying 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 thing that save money like the Gordian [ph] where you're really saving money in activities or things like Intellect where you really are in the HS, health and safety aspects of the business where there is 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 this kind of turning back to that if I just assume a kind of 10% type of decline just picking a round number extra $300 million in savings it looks like it would be kind of decrementing like 100% on the decrement; margin that's just simple math of taking the 35% and then subtracting the $300 million of savings. Is there some mix impact there or something like that. I'm just -- I know you sound like being conservative I guess. It's a little bit tough to kind of make those numbers reconcile.
I think it is better if you break it by quarter to do that. I think it will help make the map because I think what you just did is 10% down on the year and if we were 20% down here you're going to do some funny things there that makes that math but we're trying to say is by quarter 35% to 40% is about what you should expect on the decrementals given that we've frontend loaded some more is higher down in Q2 as we called out 20% to 25%. So our math will going forth in the follow-up call about how comes down.
So you're seriously 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 your guidance and we don't know what the second half is. There 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. In the second half, we specifically don't know that yet/
I was just going to add that when we built a number of scenarios around what we think the second half would look like, this is not one of the things where we're going to wondering what's going to happen. We obviously Chuck and I've been through a few of these the vast amount of greater between the two would probably suggest that isn’t even our second time.
So I think we built scenarios, we've identified the cost reductions that we think are available to the multiple bulk scenarios and we're confident in those decrementals relative to both the actions and several scenarios and if things get worse as we said certainly in the presentation as well, we've got some additional levers we can pull up 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 on along the line to the revenue declines and I know that there's a not a lot of visibility here but like most companies are kind of talking about some are saying April was down mid teens, they have kind of a worse case of down 20 this quarter and then things bounces back and start to reshape of whatever. You're 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 thought that you guys have 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 in the range around versus kind of what others are saying. Are they giving just kind of under punching how 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 got lifted they're not putting sites in the ground. So we still think the resilience is there because ultimately one quarter does not 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 and not putting as many mouths, repair shops are closed. In many states maybe were considered nonessential and so that needs to come up and then AFP obviously with elective surgery just so dramatically. Those are really very much shelter and place impact. So I think we would -- we probably would never plan for 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 put them in the category two because once these restrictive things come in play the business will come back much faster than say if it was in economic consequence if you will.
Okay. one last quick one. How are orders at GVR? Are those held up or are those kind of trending down?
No they’ve held up decently particularly in North America. Some issues with around the world as an example we 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 Chin 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 put stuff in the ground, then we'll have a good when construction starts around the United States, you'll starts 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 would be interested you also said you're delaying the timing and structure. So how might the structure change of the spend based upon what we were looking at before?
I think there is probably three things to keep in mind. One is 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 we're looking 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 out before and then Chuck while I have you for free cash flow, guidance saying you'd be better than 100%. What that means for CapEx I don’t know if I might've 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?
Probably the easiest way on the true CapEx were very CapEx light, but we'll probably I'd expect our CapEx year-over-year to be down 25% probably a bit more than what we -- more when you think about what we were actually guiding for the year three months ago, but that's the simple answer on CapEx.
When it comes to working capital we've got a very strong procurement team and the operating companies really focus on working capital terms as one of our core value drivers as you know and we've worked hard on that so what we'll do is as the revenue comes down we're going to make sure supplies that we don't bring on more inventory then we need. So trying to the best job that we can in terms of maintaining the inventory turns that will naturally free up some cash coming up as the Q2 slows down that'll be a source of cash rather than 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. But that's not that different than what they have to deal with every quarter. So I think we're well-suited with 40 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 the people that are OpCo's 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 they recover a bit and you mentioned you would play offend with your balance sheet over the next year. So could you comment on your acquisition pipeline, your appetite to do a larger deal obviously not in the short-term but as the pandemic eases?
Yeah I think just as we always remind ourselves that we spent $4 billion last year, brought a number of good companies in this portfolio and we had always thought that 2020 might be a year more built on and maybe some strategic investments as well in technology, things that tend to be a little smaller. I think that's probably still remains our view and if we saw -- what we've always said is that Vontier will be part of Fortive until and it's spun and so if there were something that we would see that was attractive, we wouldn't necessarily preclude ourselves from doing that.
I think as you point out and as we've continued to work -- during this time we focus more -- generally focus more on cultivation and more on market work in part Andy because generally during this time, seller's price expectations and buyer's 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 up.
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 opportunity but if I were to bet I would say if we were to do anything we would most likely be the bold on this year and in the next few quarters.
That's helpful and then Jim just kind of to ask Steve's question maybe a different way some of your 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 really see more of you in China. So maybe give us a little more color on that and could you comment on your electronic focused businesses?
Yeah sure. So I'd say I think we got always letters for recovery. I think at the end of the day, this is not a snapback recovery in China. If we look at our four largest businesses there, Tektronix is got electronic focus, that's 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 is still remains slow. So I haven’t seen much recovery there. I think with Gilbarco, we've been mostly waiting to put stuff in the ground given there are still a lot of restrictions there. I mentioned that in North America but we're seeing that other places around the world.
So that's probably been more slow than the other two 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 what does that mean when we add it all up, I think of the end of the day China does 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.
Good evening everyone. Hope everybody is well. I just want to come around to the cost savings the $300 million to make sure fully understand the moving pieces there. So the $300 million is a annualized run rate or is it $100 million a quarter and then we had to cut it off there. Just little bit of color on really what it is, what's temporary, what's structural and how it rolls out would be helpful?
I think it's meant to be more about over the last three quarters. So think of it as $100 million a quarter maybe will give little bit more in Q2 with some of those. I think there's where 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 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 is 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 and there is 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 and to make sure that and we've got actions identifies but those are some of the bigger ones.
Jeff, I'd just say may be to add on obviously we've historically as part of continue improvement historically kept a decent amount of temporary labor in factory. So from a productivity perspective, we're going to accelerate productivity in a down cycle 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'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 in the demand play out.
So that brings me back around to what Steve Tusa was asking if we model sales down low 20s and kind of the mid-30s decrementals and then back out $100 million to $150 million of cost savings, it implies your underlying decremental like 60% to 70%. I guess that maybe isn't crazy relative to your gross margin with five 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.
Yeah I think keep in mind there's moving pieces that we look at but yeah and being 65% plus decrementals from the top line with our gross margins into 50s depending on where it comes in as the other places that will fall through higher than that for sure. So that's not a crazy -- that is actually right where we are at 65% to 70% where it 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 we 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 were released, a fairly substantial charge around the Telematics business and I'm just curious if there's any change of strategy there. I would've thought perhaps that business might've been one of your more resilient businesses just because it is 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?
That is purely an accounting non-cash charge. We do an annual impairment value analysis of all of our business. That one was close to it, through the impacts of COVID that takes our forecast down a little bit as it just creeps it over the line and that's what drove that charge.
I would say, relative to change in strategy, no change in strategy in fact I think we've had a new leadership team in there for a little bit, Mark [ph] who we hired obviously to bring on through those Vontier role has been very involved and I think the team is actually pretty excited about some of the work they’ve got going here is going to play out in the back half of the year.
As we said, there is a little bit of degradation, they’ve got a little bit of small business impact, you got some fleet folks who've seen some reduction in freight and so they lowered the number of trucks. So there is a little -- there is some degradation as Chuck mentioned but it's not changing there is more of an outlook kind of thing than anything else. So I think by the end of the year, it doesn't -- we can't move the needle quickly in that because it is fast, but I think as we start to see the back half of the year, I know we said that there has been a self-help project for several quarters now. I think the team is more inclined to be positive out than ever before. So we'll see where it plays out.
Okay, and then just as a follow-up when did the healthcare businesses ASP, Land Hour, even Fluke Medical and Sensus, the businesses really are correlated to patient visits like you said like the procedures but as those businesses start to ramp back up and basically you lose some of this movement control orders is it leverage in those businesses, 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 is pretty good leverage. Picking a timing on 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 is 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 in both the clinical and financial needs are going to happen right. There is a whole bunch of pent-up demand for these type of procedures. That's the clinical need and obviously the elective procedures, elective surgeries in particular are very profitable for the hospital. So there is 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 US and the number countries in Europe the need to turn this back on how quickly things get turned on but we do think there will be leverage in those business. Land Hour grew in the first quarter as an example. So we even in some cases we saw some good performance even despite some of those challenges. The SaaS business at Sensus continue to continue to grow as well.
Your next question comes from the line of Scott Davis with Melius Research.
Most of my questions have been answered but one of the things I was curious about is just there was an awful lot of pretty big liquidity moves that you made likely so but is there a meaningful cost increase, interest expense or otherwise it goes along with making the moves?
There's certainly some anytime you change those, but I think the total cost of fees were in that less than a penny a year probably more like penny and a half. And then there's some changing in terms of the floors around off of LIBOR but frankly it's below -- the floor that it's negotiating in there is lower than where we're at right now. So not a huge cost for them.
And then just a quick follow-up the percent of facilities that you guys have up and running right now, is there a -- I know you’ve a given a number for one of the businesses, but I recall seeing an aggregated number. Is there something that you have?
Yeah all of our facilities are up and running and have been. We had a couple situations where we might've been in the US and Europe where we had one facility or two facilities in the US where we were down day or so where we were working through the local situation but all of our facilities now or 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 have -- we were able to run all of facilities now around the world.
Your next question comes from the line of John inch with 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 of elective some procedures and so forth, just to trying to put this into a context?
Yeah it's about 75%, 25% or if you thought of servicing 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 Sensus. The Sensus Trax software it senses really check tracks the daily amount of sterilization that go on in the US and is an example we see those down as much 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 US 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.
Yeah I was going to ask you about the decontamination opportunity, is that big enough once it gets to full grow-out to rollout to move the needle let's call it in the next few quarters or whatever or is that still 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 opportunity. So when 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.
It's been pressing 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 one thing we're sort of talking about the risk of the US and China going into a cold war, we have 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 future growth trajectory M&A like it's kind of a holistic question to what could be turn for the worse in terms of our relations between the two countries?
Yeah and you know I've been pretty close to China for a long time having run it back in the Danner days for a long time and we're pretty close to those questions. I think one Jon as we deriks our supply chain considerably, once the tariff started, so we've really derisked our supply chain considerably since from where we were at even a year ago. We're going to continue to assess those things and we will continue to probably -- we mostly make or China in China.
So as we look at bigger moves, we'll continue to evaluate, we don’t have any big moves left. To be honest we've mentioned 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 healthcare business almost exclusively built in the US and in Europe, so I know there's a lot more energy on the healthcare side to wonder about origin and certainly we're fine in that situation. So in case that was also I am referring that in your questions as well.
So anyway I think we're in good place and we're well-positioned from I think what we've demonstrated in a 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 obviously described
I think that we appreciate the energy and I am 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. We're available for follow-up and certainly want to make sure we make ourselves available if anyone needs time, Griffin and team are available. Chuck and 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 is probably the most overused term in the focus on health and safety of our teams has never been more important to us than every day we wake up. But we would also want to make sure that we've give 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 three years strategically continue to be very good moves from a resiliency perspective and I am confident we'll see that play out in the weeks and months and quarters to come.
So we look forward to continue dialogue to give you a better color. Hopefully we did more of 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 want to wish everybody -- 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 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.