My name is Nicole, and I’ll be your conference facilitator this afternoon. At this time, I would like to welcome everyone to the Fortive Corporation Second Quarter 2020 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [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, Nicole. 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 1st, 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 31st, 2019 and subsequent Quarterly Reports on Form 10-Q. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements. With that, I’d like to turn the call over to Jim.

Thanks, Griffin and good afternoon, everyone. Today we reported adjusted diluted net earnings per share of $0.68 for the second quarter of 2020. As we delivered better than forecasted revenue performance despite the difficult conditions created by the ongoing COVID-19 pandemic. It was a quarter that clearly reflected the power of the Fortive business system as we executed our playbook on expense, savings and working capital management, enabling us to achieve decremental margins of 33% and generate very strong free cash flow. Throughout the quarter, we continued to operate all of our essential production facilities around the world and proactively manage our supply chains, while adopting comprehensive new protocols to protect the health and safety of our employees. With a focus on maintaining continuity, despite the shift to a virtual operating environment, the Fortive team leveraged new virtual sales and marketing tools to continue to engage with customers. We also adjusted product development processes in order to continue to meet project timelines, while continuing to invest across the portfolio to emerge from this period with an enhanced competitive position. When we looked ahead on our Q1 earnings call in April, we faced a highly uncertain operating environment due to the challenges posed by the COVID-19 pandemic. Our Q2 performance demonstrated the resilience we built into the portfolio over the past four years, with an increased share of recurring revenue from our expanding set of subscription-based software solutions, services and consumables offerings. Recurring revenue accounted for more than 35% of total revenue in Q2, a new high for Fortive. Importantly, this resilience came through despite the fact that a key source of recurring revenue Advanced Sterilization Products experienced a decline in the elective surgical procedures as healthcare systems around the world weathered the early months of the pandemic. With respect on…

Thanks, Jim. That concludes our formal comments. Nicole, we’re now ready for questions.

[Operator Instructions] Our first question will come from the line of Nigel Coe with Wolfe Research.

Thanks, Jim. Thanks, Chuck. Thanks, Griffin. Good evening, good afternoon. Obviously the 3Q, you know, sales range of down pathways is obviously quite a bit better than you know what you’re pointing towards In April and then what you realized in the quarter. So I’m just curious, you know, how and I, you know, don’t exactly want to blah, blah, blah here. But you know, as we went through June-July, what are you seeing, you know, not necessarily by business, but just generally, what do you see in terms of organic sales progression as we went through the quarter and into July?

But, thanks, Nigel. Yeah I think a couple of things relative to the trends, I think we certainly as we sort of said in the prepared remarks, progressively things got better as we got through the quarter. So, you know, I think every month got a little bit better certainly from a trend perspective. July is just in and is probably good as well, but good in the sense of giving us confidence as to the guide. So, I think the trends are certainly getting better. I think it’s difficult to necessarily know how long they’ll continue and hence the, you know, like through the end of the fourth quarter, but I think as we look at the near-term trend, they look pretty good. And certainly as we said, you know, we have a good sense of what EMV is going to look like in the back half. That’s a driver, obviously, macro getting better is another example. So that really covers industrial tech and on the Professional Instrumentation side, elective surgery still, you know, on the right trend, the software business is staying resilient and certainly some of the POS transit Fluke starting to be a little bit better as well.

Thanks, Jim. And you know, the decremental margins obviously were very encouraging, you seem to have a really good firm grip on the cost management side of it, you know, 35% decremental margin outlook for 3Q. I know you had confidence that you could, you know, kind of maintain or kind of like bring back those gross margin decrementals into that range you put out there. So should we think about, you know, your 3Q, 4Q in that sort of 35% range, you know or is there a scope for it to be to look better in 4Q if we continue to see the improvement trends into 4Q? Thanks.

Hey, Nigel, this is Chuck. I think what we’re trying to say is that we will deliberately manage the business to 35% as we move forward. The top line is on a better trajectory. At least, that it seems at this point in time, and that’s consistent with what we’re guiding there. So, we’ll strike that balance of managing our expenses and investing into the future that as we go forward. So 35% is the right number.

Very clear, thank you very much.

Thanks, Nigel.

Our next question will come from the line of Scott Davis with – Melius Research.

Hey, good afternoon guys.

Hey, Scott congratulations on the book.

Thanks.

Scott, congratulations on your book.

Yeah, now thank you. I hope that helps many people sleep. A couple of pages in, you’re out like a light, right. But now, thanks for that, Chuck. I – everything look pretty encouraging here overall and I’m just trying to think it’s probably fifth or sixth earnings call today so a little beating up. But Chuck, you commented on – I’m sorry, Jim actually commented on the 70 basis points of price and I didn’t get a sense is that 70 basis point generally come in that bucket of 35% recurring revenue where, you know, you’re able to get a little bit more pricing power or is there some other base level price increase that, you know, you have across the board?

Yeah, you know, we were really encouraged you know, we’ve had good price and quite frankly, as you know, the comps on price have been pretty good too. So, you know, to get that it was mostly in Professional Instrumentation in the quarter, Scott. So, you know, I would say and certainly the software businesses were part of that. But we had good mark. You know, we had good price in some of our key hardware businesses as well like Fluke and Tek. So I think across the board as we think about our playbook, you know, certainly on the expense side, we talked about $100 million of cost reductions in the quarter, but also part of that playbook is trying to find opportunity for price. And I think the teams did an exceptional effort, you know, in the quarter to try where those opportunities exist, they took advantage of them and while you know, I think and we will continue to do that through the rest of the year.

Okay, encouraging. And then the Vontier profit profile look like the top line growth profile you gave the, as far as the decrementals and overall profit and cash and such, was that fairly consistent with the rest of Fortive or was there some differences there?

No, I think that the – there’s a little bit of difference in terms when you look at actual operating profit margin by a couple hundred basis points between the two segments. But when you get to the decrementals, I don’t – they don’t behave all that different between the two.

Okay, super helpful. Thanks, guys. Good luck.

Thanks, Scott.

Our next question will come from the line of Julian Mitchell with Barclays.

Hi, good afternoon. Maybe just circling back to the revenue outlook, so you’re dialing in around about a 10 point less bad year-on-year drop in the third quarter than what you saw in the second quarter. Is there any more detail you could provide around that narrowing, you know, either on a segment basis for PI versus IT, and/or on that Group I to IV basis, just to help us sort of understand what’s driving that improvement?

Hey, Julian, think of it this way, as we look at the quarter that we just had and what’s improving, IT is going to improve a little bit more than PI, both are going to improve sequentially. We’ve got you know, if you think about the IT, the Vontier Group, We’ve got Matco really, you know, is continuing to show some strength there. And then we’ve got that EMV secular trend that’s going to be helping GVR, those are – were impacted in Q2 by the lockdown. And you know, as that gets released that’s really could move out to more of a low single-digit – or down low single-digit for Vontier. And when you look at Professional Instrumentation, I think that’s sequentially going to improve. That’s where you’re seeing, you know, to these – some of these acquisitions doing really well and then again, getting a little bit of a lift from the lockdown coming off. So I’d see that improving to down high single-digit in Q3.

Thank you, Chuck. And then maybe a second question around the free cash flow. There was a big working cap tailwind in Q2, generally in the first half receivables, in particular, freed up $200 million plus of cash, I think. So maybe help us understand what’s happening with working capital in the second half as you’re seeing this revenue outlook improve on the extent to which you’re seeing an improvement in the ASP business around that free cash flow profile.

Yeah, let me take a shot at them and Jim will probably add a few comments. I think – we think the tailwind from working capital from Q1 to Q2 is about $165 million and because you know, when you take a look at everything in there, and I think that that was just a lot of great work by our teams getting on things early, managing inventory level appropriately, you know, it’s an example of managing which can manage and that gave us a, you know, a good push. And as you saw cash flow overall was very strong at $450 million. I think that what I would expect going forward, it really depends on how steep the sequential improvement continues to be going into the second half. But I’d expect a little bit of a tailwind but not at the same level. It’s probably, you know, maybe a half to a third of that coming back as a tailwind. Again, it really just depends on how steep the increase quarter-over-quarter is.

Julian, I would just add a couple of things. You know, number one is, we’re really happy with what we saw relative to free cash flow. You know, a lot of times we’ll talk about those working capital tailwinds in a way that suggests that it doesn’t actively have to be managed. The last time I checked customers weren’t in a hurry to pay us last quarter. So the work that we did, I think we’re using FBS was really profound. It’s also using it to capture and keep those up those advantages once we get into, you know, a little bit of growth mode or less – you know, less, you know, less down, if you will. I would say the second thing I’d add is, you know, when we look at the, you know, historically, we said we would preserve, you know, somewhere in the 80 to – 80 percentage range of free cash flow, when we were in a down cycle. And we’ve been talking about that for four years. And I think what you saw in the quarter, and what you’re going to see in the year is better than that. Obviously, we’re much better than that, in the second quarter, we think, you know, we can – we’ll do better into the 90s for the full year. So I think what you’re seeing is the strength of the portfolio, the higher gross margins in PI particularly around software, I think our gross margins in PII for the quarter were around 36%. So the ability to drive more free cash out of the portfolio, given the changes I think also gives us some confidence that free cash in the remaining part of the year will be good as well.

Great, thank you.

Thanks, Julian.

Our next question will come from the line of Jeff Sprague with Vertical.

Hey, Jeff –

Thank you. Good morning, everyone or good afternoon, I guess.

Good evening.

Just two for me, if I could. Just on Vontier on the timing. You know, this market obviously has been extraordinarily resilient. What is it that you’re looking for or waiting for you know, to make your decision on timing here?

Well I think there are a couple of or there’s a couple of things we’re looking for. One, we thought it was important obviously to you know, get out here with our Q2 results, and then we’re just looking for continued stabilization with – in the market, nice volatility. And while we think that trends are definitely going in the right direction. We probably need to see a little bit more time here, going forward to ensure that, you know, we’re not looking for a week to get out where we’re looking for a little bit longer time period. But we’re encouraged by the direction of the markets are going right now. And also, you know, we’re prepared to go, we’re ready and you know, that Vontier’s ready to separate. And we’re still convinced that the strategy is correct. And we’re committed to the execution. So we’re just waiting for a little bit more time and stability.

And just thinking about investment, Jim, so, you know, to Chuck’s point, you’re actually managing to a decremental, right. So sales are going to come in better, that’s going to free up spending. You know, you provided a couple examples here on what you’re working on. Should we expect most of that delta is going into growth or I would assume there’s some restoration of just kind of, you know, temporary things that you had to kind of, you know, choke down here in the second quarter?

Yeah, I mean, you know, Jeff, and you know, we think of playbook really is, first and foremost, as we see some of those revenue going down, if you will, we, first and foremost, think about the factory and supply chain alignment with capacity. And we’re focused on managing gross margins, you saw good, really good work on the part of the teams to do that in the quarter. There’s the temporary cost actions, there’s the permanent set of cost actions. And then there’s this fourth part about dynamic resource allocation, which is moving money around to the highest opportunities, which is, I think, where you’re going at. So we’re managing the decrementals relative to those things. We’re making decisions about temporary and permanent cost reductions as we really understand the outlook more or less into 2021. And those decisions are probably more in the coming months. But I think the most important thing, where you’re going is, we’re really making sure we’re funding the growth opportunities that are inevitably going to create competitive advantage over time. A good example is the FORT, where we bring data analytics projects for the businesses, our projects are up 3x from where they were a year ago. So we’re doing 3 times the number of data analytics projects that we were doing a year ago. I think that’s a big focus. You’re hearing a lot about digital transformation around companies. And I think that’s really what we do at the FORT is leading that for both our operating companies and some internal projects that we’re doing for Fortive. So I think that’s one example. Maybe one other example is, you know, we’re continuing to accelerate all of our investments in the software businesses where, you know, a number of our software businesses are really able to take advantage of a lot of the going back to work, challenges that occur, the changes in facilities, the new safety – health and safety protocols that exist in facilities and buildings. And so a number of our – we’re really pivoting our solutions and our feature sets at both the current Gordian as well as an Intelex to really take advantage of those opportunities. So a number of our you know, increases in investment are going towards some of those things where we have, I think real good secular drivers over time.

And just one quick clarification, if I could. Chuck, that revenue color I think you gave to Julian’s question. Was that reported revenues or was that organic revenue? A commentary you were given?

It’s organic, although we’re wrapping most of our acquisitions here, I think that for maybe Censis, but organic was my comment.

All right, great. Thanks.

Thanks, Jeff.

Our next question will come from the line of Andrew Obin with Bank of America.

Yes, good afternoon.

Hi, Andrew.

Just a question on Fluke, as we think about, you know, the business today, how much of it is sort of ex-health you know, how much of it is Core Industrial at this point, and at the Core Industrial business what was the performance in the quarter?

Yeah, I think when you look at the Core Industrial piece that’s in that Group IV, which would be our sort of our Core Industrial Instrumentation, probably about 60 – 60%-ish, I think maybe two-thirds probably in that range –

And –

And maybe a little bit up.

Got you, okay, now, okay. Okay, that makes sense. And then just a question on software just to clarify Gordian and Accruent performance. So am I correct that Gordian as a marketplace revenue model, so it’s just, you know, volume gone through the platform is down. So that’s what’s impacting it. And Accruent, you know, anything else going on besides sort of license to SaaS transition to depress the revenue?

Yeah, so I think yeah you’re exactly right on Gordian so you get that one first. They – and really you know that’s interesting, Andrew their revenue model also is very often requires some work on-site with the customer to get started. And obviously with the stay-at-home orders, you know, we were prevented from working with customers in some cases. So, you know, there’s some delays, but there’s no – we often get the question about new construction, it’s really not new construction, it’s really changes that are going on in the facility. So we think, you know, with everything going on with COVID and facility changes required around protocols that ultimately that business will come back. And as you said, the purchasing construction dollar will start to flow back through Gordian and ultimately, the revenue will get – will be, you know, back in growth mode. They’ve been, as you know, a double – a strong double-digit grower for quite some time now, we still think we’ve got great opportunity there. Accruent a little bit more complex in that regard. You know, we saw some, again, we’re seeing a lot of good growth in the businesses that are really tied to facilities and facilities management and really returning to work, assessment work, our high cloud opportunities are EMS business, our Connected Healthcare businesses. And in Lucernex, which is our lease management business continues to be good. So those businesses are mostly the SaaS parts of the portfolio. And again, they’re doing – they’re much more resilient. Where we saw the challenges that Accruent is really one on the license revenue side. And again, on the Managed Service side, got a little bit better as we said in the prepared remarks like the – some of the Managed Services got better at the end of the quarter as we were able to get more on-site and be able to do some of our work remotely. But I think that’ll continue to be, you know, we continue to think the SaaS part of Accruent will be durable. And, you know, we’re still getting back to getting working with customers on a regular basis. And there still work to be done through the third quarter, I’m sure.

Thank you.

Thank you.

Our next question will come from the line of Josh Pokrzywinski with Morgan Stanley.

Hi, good evening guys.

Hey, Josh.

Hope everyone’s well. Just a couple of questions here for mine, I guess, you know, first on businesses that go through distribution, I guess, you know, Fluke and Tek kind of come to mind first. How do you characterize kind of sell-in versus sell-out? I think when supply chain delays and distributor restocking, we’ve seen you know a bit of backlog carried in for some other short cycle guys into the second half. How do you guys think you score against that?

Yeah, you know, I think we saw a little bit better point-of-sale trending at Fluke than we did at Tek, I would call Tek more stable, whereas, you know, got it improved, but Fluke maybe a little bit more of an improvement, but still negative. Our inventory positions have remained pretty much, I would say, flat to down, so no real inventory built. So I think as we get into the second half, we don’t anticipate any big issues relative to inventory. On the other hand, we don’t expect really distributors to necessarily take on inventory. So everything embedded in what we talked about for the guy to the third sort of assumes that sort of business as usual, trends continue around point-of-sale, which means, they get a little bit better. But at the end of the day, no big dramatic increases or decreases in inventory, nor any big swings on point-of-sale.

Got it, that’s helpful. And then I guess, you know, Jeff took my question on Vontier timing. So ask a different one. On the four buckets that you’re kind of breaking down the business and is obviously, those are shifting around a little bit as the businesses are separated, but does this current environment give you any kind of thought into how to manage M&A amongst those buckets? I mean, do we just kind of – can we expect mostly, you know, buckets I and II or are there room for you know, maybe some more cyclical or, you know, choppy assets that would have been later in this current environment that they’d be still attracted to Fortive?

Yeah, I think it’s a great question. I think, you know, obviously, if using the groupings as we have them. We clearly have, I think demonstrated a propensity over the last several years to grow, you know, the lion’s share of our M&A deployed into mostly Group I and Group II. So I think that would – that you know, I would say the trend is going to – that trend will continue. That said, you know, there are certain situations, I would say PRUFTECHNIK is a deal we did last year for Fluke, which had both the service and an instrument aspect to it, that was really important to our overall Fluke digital offering. So in that case and we got it at a very, very high ROIC. So, I think here what you’ll find is, if we do make some of those decisions that are in Group III or group IV, they’re going to tend to be ones in which we’d see the return is very high. But I would say if you said, let’s talk about the lion’s share of our capital allocation over the next several years, it’s really going to be in building in those groups that are articulated I and II. And they’re focused on things like condition monitoring, facilities management, healthcare enablement and health, safety and environmental, the places where we deploy the lion’s share of our capital over the last four years.

Got it, appreciate the color. Good luck, guys.

Thanks, Josh.

Thanks, Josh.

Our next question will come from the line of Richard Eastman with Baird.

Yes, good morning, afternoon, evening.

Hey, Rick.

Hey, just a couple of questions. First, just around the recurring, Jim, I think you mentioned you know, recurring revenue and I think you were including software and consumables and services were 35% of Fortive’s revs in the quarter kind of a new high. But how did that bucket as you defined it, they’re at 35% of revenue, how did that do year-over-year in the second quarter?

Well, I have to disaggregate it into the – you know, into the groups. But I would say, if you thought about the sort of PI related software businesses, they were up about mid single-digit. And then obviously, Telematics, the big software business that we would have on the Vontier side, you know, is down in the quarter. But, you know, as I mentioned, I think the new platform that we’re launching, we’re excited about the opportunity for Telematics here going forward. So that kind of gives you the software view of what the quarter look like. Services, which are mostly in Group II buckets, probably, you know, sort of down to down. You know, I think our dosimetry business at Landauer was up in the quarter, but I think Tek services as an example was down low single-digits, something like that. So I probably would say the service parts of the business, you know, at Landauer which called as Fluke Health and the Tek probably down a little bit. But still, obviously much more resilient than the other parts of the portfolio.

I got you, okay. And then just a question as we managed to this 35% decremental here for, you know, for the balance of the year a question just is around, you know, as we manage into next year around what’s discretionary on the cost side, what our investments are on the cost side? How do you start to think about incrementals? You know, for PI and Vontier, what do we manage to there? I mean we have more software content, we have more recurring revenues, what would be the appropriate view on an incremental margin for PI and IT or Vontier?

Yeah, Rick this is Chuck, I would think that a good starting place is that we’d come back up the same amount that we went down, because we want to reset back to starting to growing on our 2019. So recovering that revenue if it went down at 35% and I think of it coming back at 35%. Beyond that, it really depends on where we’re growing as you mentioned, some of our – some of the software business obviously have higher decrementals, you know, as you move forward in time. So kind of depends after that, but first thing is to get back.

Okay, very good. Thank you.

Thanks, Rick.

Thanks.

Our next question will come from the line of Joe Giordano with Cowen.

Hey, guys.

Hey, Joe.

Hey, can you kind of go through the cost outs, you mentioned $100 million in this quarter. As you look to like you know for the quarter and for like the balance of the year, how would you break that out between kind of temporary things that actions that you took that come back to the business when things are more normal versus more permanent savings?

Are you talking about for the quarter or what you think we’ve done for the year?

I guess, kind of like what did you do in the quarter, how would you break out that $100 million you mentioned in the prepared remarks and how you’re thinking about the split and magnitude of temporary versus permanent for the rest of the year?

I think the – so in the quarter, I think that let me back up. It’s a little easier to talk about for the year. I think that the permanent that we paid – we’re likely to take, we have taken action on, will be $50 million permanent through the year, obviously not all that in Q1 or in Q2, that $100 million is, you know, a little less than that. But as you go through the year and think of it being $50 million in permanent action, that’s on top of the actions we took in Q4 of last year where we did – [technical difficulty] [60 million] [ph] [technical difficulty]. And then as – it really depends on you know, let’s see how the rest of the year plays out, particularly in Q4, but I would expect the next quarter, we’ll know, obviously, we’ll know how the third quarter played out and have a strong view into next year and see if we need to do anything of a more permanent nature or whether we think the top line is going to recover.

Joe, also part of that is obviously we’re getting a substantial reduction in travel. And, you know, you know, part that we’re very much working through now, a number of our virtual and digital, you know, work that we’re doing with customers to understand how much of our real travel expenses, quite frankly, can become permanent cost reduction, because we just don’t need necessarily make the trips that we’ve historically made. So I think as we think about, you know, as once we have a better sense of what we think the revenue outlook will look like in 2021, then we can certainly, as Chuck said, make that decision, but not – those decisions aren’t just the typical incentives and things like that, but it’s also very much things like travel and costs that are – that would historically be considered temporary, but quite frankly, I think a significant amount of them are going to be permanent as we move into next year.

That’s fair, though, my follow-up just wanted to talk on the elective procedure volumes you guys mentioned that was interesting. You said in North America, you’re seeing 80% to 90% - 85%, 90% of pre-COVID. Some of the checks we’ve did it sounds like that rate is reflective of some of the kind of specialty hospitals, but like the big hospitals were more like in the 75% range. And I’m just curious how you kind of view? Is that – just is that geared toward more a specific type of facility? And how is that looking now with what’s going on in Florida and some of the places that are having flare-ups again?

Yeah, so our prepared remarks may not have been as clear. So we see – we see the China hospitals up at around 90%. And in the US hospitals, we’re getting back I think our numbers would quite frankly agree with yours at the end of the quarter in the sort of 70%, 80% range. We got pretty good data from our Censis software business [technical difficulty] sterilizations. We not only have the understanding of what the procedures are. But we have an understanding with sterilization we think that continues to get back as we get through the quarter, but we don’t see it a 100% even through the end of the third quarter, I don’t think, still a long way to go between now and then. But we definitely think it continue to see we really get the data by day and we are seeing continued improvement through July as well. So we think things will continue [technical difficulty]. But as you said, it is a little bit of a type of facility dependent.

Thanks.

Thank you.

Our next question will come from the line of Andy Kaplowitz with Citigroup.

Good afternoon, guys.

Hey, Andy.

Jim, maybe can you give us a little more color into your regional sales breakdown. You mentioned your, generally sales were down to the mid single-digits into Q2. Does that turn positive in Q3 and as you think about the revenue outlook improvement in Q3 versus Q2, are all regions generally improving at the same rate or do you see for instance, LatAm or even the US lagging the other regions?

Yeah, I think, you know, as you said, China was measurably better in Q2 than Q1. I wouldn’t – you know, and, you know, that was on the backs of ASP and Fluke. I think, you know, China’s going to get better through the second half, but I don’t necessarily think that China gets to any dramatic growth rate in the second half. I think it gets better. But I don’t think we’ve seen enough to think that things are going to, you know, get significantly better. So I think our China theory here at this point is probably better. The rest of Asia, I think is a little mixed. As we mentioned, India continues to have a lot of lockdowns. And but we think by the end of the year, our India business and money – in many respects is driven by the GVR business. And we think that there’s a number of things that – but the order pattern there’s been very good. So we think India might get better by the end of the year. I think as we think about the Middle East, we think about Latin America, we don’t anticipate anything getting better there. So that kind of gives you the high growth market view. The US will definitely get better through the remaining part of the year. I think the – and I would anticipate, whereas I don’t necessarily see Western Europe getting that much better with the rest of the year. And the difference there is, we have the EMV tailwind in the US, we have Matco getting better in the US, we have ASP getting better, which is a bigger US business than it does at European business. And Fluke’s point of sale is getting better. So I would say North America tends to get better through the remaining part of the year. And as I mentioned in the prepared remarks, Western Europe, in particular, wasn’t ripened to begin with when we sort of started with COVID. And I anticipate that to be a little bit more long – longer drawn out recovery. Hope to be proven wrong there, but that would sort of be our sort of thought process as we get into the second half year.

Okay. Let me ask my follow-up on GVR. Specifically, you mentioned India, it does tend to be lumpy for you guys and you know you tend to see delays sometimes in orders and obviously we know what’s going on there in terms of new infections, so maybe confidence level in the international GVR business doing better in the second half of the year. And then you talked about mid single-digit order growth in North America. Does that just convert in the second half of the year as stay-at-home orders have, you know, basically, I mean they haven’t gone away, that they’re a little better in the second half of the year, does that just convert into revenue growth in North America?

Yeah, I think North America orders was continued to be good in the second half. It’s a little mixed around the world. As you know in the rest of the world, a number of our customers are integrated oil companies and so oil and gas prices has a little bit more impact in some parts of the world than it does in the US, where that’s a disaggregated market. So I do think the second half still follows some of those patterns that I was describing relative to the economy. But I think I think India in particular will continue. I think our position in India is very good. We, you know, we’ve done a number of acquisitions there, Orpak acquisition or Matco acquisition, we have a very good position, we have great relationships with customers. So I’m confident, as you said, it can be lumpy quarter-to-quarter, but if we look year-on-year-on-year, we built a really good business there and I’m confident that the team will continue to execute there. So I think, you know, some of the other markets might be a – we did a Middle East review with the team the other day for all Fortive. And I think they’re executing well there and some markets are going to continue to be okay. So I think GVR, in general, will, you know, it’ll depend on the market and country. But I think, you know, we’ll see a little bit better order pattern likely in the second half and on the backs of a continued strong EMV market in North America.

Thanks, Jim.

Thank you.

The next question will come from the line of the Deane Dray with RBC Capital Markets.

Thank you. Good afternoon, everyone.

Hi, Deane.

Hey, I’m interested in hearing a bit more about this joint venture with Pioneer Square Labs. It sounds like you’ve got your first company getting launched. Could you remind us what kind of investments that you’re making in this? What kind of returns you’re expecting? And this really does sound something more than just a proxy for R&D?

Yeah, it’s – we’re really excited about it. We’ve built a very good relationship with them in the team. You know, what it really is, as we agree on an idea generation process, we devote, we have a number of Fortive people that work at the lab alongside the PSL team, we generate ideas, we find an idea that we want to invest in, we invest in it, we have a couple of different milestones where we can decide if we want to bring that in or continue to invest in it. And at a certain point in time, we draw conclusion as to whether or not we want to own it or necessarily do something that you know obviously do something and take it out. And I think, you know, I think the economics are good for both parties and we feel very good about the relationship. So still very early days. They bring a lot of great entrepreneurship, fast cycle product development, lots of software experience. I think we’ve been – I think they’ve been very enthusiastic in the level and quality of talent that we brought to the table. But still very early days, as we said, we’ve launched one team and hopefully we’ll, you know, we’ll continue to have, you know, a number of wins and you know, that we can put on – put up over the next few years.

Well these businesses be spun out, sold with other synergies within core Fortive. Just maybe kind of explain how the company benefits from this overall?

Yeah, I think it could be all the above, it could be a great idea that really benefits Fortive and we see a way to spin that in and we’ve got economics associated with that, so that, you know, we can spin it in and bring it and make it part of Fortive. But we also have the economics if it’s a great idea, but that isn’t necessarily that would be something consistent with what Fortive wants to become. And ultimately, we would, you know, we would decide to do something to spin that out as well. So, there are a number of options, we – I think we’ve got good flexibility as to the kinds of ideas and what is sort of in our strike zone. But also obviously, if there’s ideas that have maybe utilize Fortive technology, but don’t necessarily mix with what we want to do and become, then ultimately we’ll try to find other ways to create value and spinning it out and building something, you know, in a different in a different structure.

Got it? And just as a second question, I want to go back to this structure of these four groups that you’ve set up. And just, Jim a few minutes ago, you said that you’re really not looking to commit capital necessarily into groups III and IV, except on those situations where you’re getting higher returns. But once you start saying you’re not investing further in M&A for those businesses, it kind of opens up the question that there might be some non-core businesses opportunities to exit. I know you’ve got some Vontier businesses there already. And those decisions have been announced. But are there businesses in Group III and IV that might be considered non-core?

Well, you know, no, I think when – what I meant with that answer is, you know, one of the things that we love about that grouping is, I think it gave everybody a good perspective of how, you know, it was meant – really meant to show the sequencing of how our parts of our businesses would perform and mirror, sort of the resiliency and dynamics of COVID and the economic consequences of COVID. So it’s really a framework for that, as you know, a number of our businesses are really built with portions of group I, II, III, and IV all together. So, you know, just take an example, like Fluke, as we said before, you know, a good chunk of Fluke is in Group I and II is in I and II. So and increasingly becoming a growing part of that. So I don’t think it necessarily says that our individual businesses are necessarily going to be, you know, not invested in, but what we’re going to find in a number of our businesses, within our businesses or within our operating companies, probably the best words is we’re finding those opportunities to build more resilient, more durable, more higher growth aspects of the business and that’s where, you know, we’ll probably end up having more of our investments. So as Fluke is a good example. You know, we bought eMaint, we bought PRUFTECHNIK, but we also bought Landauer. So we, you know, a good chunk of that capital that we deployed into Fluke in the last few years has been to add those Is and IIs to the core Fluke business. I think we have those same opportunities for some of the parts of group III and IV, that we can also do, you know, even within Sensing Tech, some of the things we talked about that are driving the growth there and Environmental Monitoring as another example, those are places where we’re investing in those businesses, because those parts of the businesses really have Group II and Group I aspects to them.

That was helpful. Thank you.

Thanks, Deane.

Our next question will come from the line of John Walsh with Credit Suisse.

Hi, good evening.

Hey, John.

Hey. So a lot of ground covered. I guess, just thinking about the SaaS businesses. Was there any discernible change positive or negative across them as it relates to customer retention rates? I think that might be the best way to ask the question versus kind of thinking about net adds? But however you kind of want to answer it’s helpful.

Yeah, we really – the key metric we look at John is net retention and that combined sort of not churning customers, keeping current customers and that metric is really in all of our SaaS businesses improved in that metric in the quarter. So it’s a key metric we keep an eye on, we actually review those metrics with the board. And every board meeting, they’re so important. So I think we feel very good about the work the team is doing on all those metrics. And there’s still lots of them, you know, certainly improvement to get in some of our businesses are kind of at benchmark, some of them still have some ways to go. So we where it’s a continued focus for a lot of our FBS tools as well within those businesses.

Great, thank you. And then just maybe a point of clarification around Telematics and the new platform, has that actually launched or is that something you expect to launch here in the back half?

I think it’ll launch now and now we’re starting to get some traction. So call it, you know, in the early stages of launch.

Great, thank you. I’ll pass it along. Appreciate the color.

All right, thanks, John.

Our next question will come from the line of Andrew Buscaglia with Berenberg.

Hey, guys you know everything kind of picked over, but I have one last one that I wanted to squeeze in is, you know on your comment that you saw some strong demand for Industrial Imaging Products within the Fluke business. You know, some of your competitors kind of in that niche vertical, are seeing, you know, really strong demand and exponential growth as it relates to skin temperature cameras. Is this a – is that what you guys were referencing and, you know, can you just comment more on that, that’s you know, an area that could see our outsized growth within PI?

Yeah, Andrew you know, our principal business there is Thermal Imaging and Temperature Measurements so it ranges from all the imaging line as - Thermal Imagers as well as literally IR guns and thermometers. So yeah that business is doing well. And it also has a number of new entrepreneurial opportunities that we’re working on that do sort of fold into some of the challenges that happen in facilities relative to COVID-19. So we think this, we mentioned a little bit in the prepared remarks that we’re excited about a broader strategy here, we’ve got some people counting business that is a part of an acquisition we had a few years ago, that we’re building a solution out that we’ve launched. So a number of things that we’ve got going and we’ll see how it goes and whether it’s sort of a, you know, whether that you know, we really think the resiliency and durability that we might be able to build here is beyond just COVID-19 and we’re excited to try to build on that here in the coming quarters.

Okay, got it. Thanks, guys.

Thanks, Andrew.

The next question will come from the line of John Inch with Gordon.

Hey, John.

John, your line is open – it must be muted –

Hello, can you hear me?

Can now.

Oh, you can hear me now. Okay, great. Sorry about that, technology, right? Hey, I was wondering, given Chuck, you inferred you’ve kind of your comments about North America is getting better and so forth. Is the implication that just is the impact from COVID flaring up and surging in the southern states in California or that you are seeing, you know, impact but that other aspects of the business are superseding that, like how to think about this, because, you know, what you’re describing isn’t that dissimilar from other industrial companies. So I’m just curious kind of what you’re seeing on ground, kind of regionally and how that plays out?

I would say the biggest place, the two biggest places, John, where we see COVID impact relative to call it, daily stuff or maybe the three places is really in the hospitals and sterilization procedures that we described a little while ago, it’s getting Matco equipment in the ground, or sorry, getting GVR equipment in the ground and really the Matco ability to call on customers every day. So I think as we look through, and those are big US businesses as well. So, you know, those are kind of COVID related. The point-of-sale, stuff at Fluke is really economic related. You want to see you know better PMI, better IP numbers so and that’s probably a global point for Fluke, but so what we’re really watching for is, you know, the surgery numbers, the ability to not go back into lockdown. As we mentioned a little bit in the prepared remarks, the lockdown really impacted Matco. April was, you know, was a really tough month. But as soon as things started to open up, it accelerated back to what we would normally call a pretty resilient business, quite frankly, historically relative to economic cycles. And I think I saw today that car – average car ownership years is that of the highest point it’s ever been which is a good thing for Matco. So I think that’s what we’re watching for. We don’t want to see hospitals close back down. We don’t want to say – see cities get back into lockdown mode where they won’t be – where auto repair shops aren’t open or that, you know, construction can’t occur and sites can’t be upgraded at Gilbarco – for Gilbarco.

Yeah, now that makes sense. And then just maybe as a follow-up, Jim, how are you thinking about kind of strategically further M&A? And I ask it in the context of, is this going to be somewhat contingent on the volunteer separation and getting that dividend from volunteer to do the reload and lower the debt to cap or debt to EBITDA thresholds back again or are the two somewhat disassociated in terms of the tracks? I.e., one does not necessarily contingent on the other?

Well, I think first and foremost, you know, we always said this year would be a bolt-on – more likely a bolt-on year because of digesting a number of things that we did last year as well. And I think that’s been our thesis, although you never can be – we’ve looked at some fairly sizable things. So, you know, I think at the end of the day we’ve continued to be busy. I think there continues to be a couple of things that are impacting the M&A market. I know some of our peers have talked about this. One is the bid-ask spreads are still not in alignment necessarily. It’s hard to distinguish the COVID impact from things and that takes sometimes an additional quarter two that results to work through with a seller. The second piece of it, it’s just harder to do due diligence, right. We can’t get on site in many cases, we can’t meet people. And so I think things are slower by nature of those two aspects. And then – but I think we’ve been busy, we continue to think that there’s opportunity, I wouldn’t necessarily say that it’s tied to the Vontier separation. But you know, because of the fact that really, we never were really tying those things together to begin with. But certainly Vontier certainly when we complete the Vontier transaction, it certainly gives us, you know, more firepower and more opportunity.

By the way, just when you say bigger, do you mean bigger bolt-on or you mean bigger than something –

Yeah, no, it means – it means some things that were bigger. I mean, we haven’t necessarily said we’re not going to do anything, because, you know, there are certain things that we’ve been cultivating for several years. And we, you know, we can’t say, hey, do you mind, you know, selling at a different time. So, you know, things are going to sell when they’re going to sell and we have to be responsive to that. But, you know, we’re obviously taking into account the economic conditions and all the things that might impact returns. So it’s a complicated answer, hence, maybe too many words here. But I think at the end of the day, we’re focused on making sure we can create value in a focused, prioritized way that probably ends up being more bolt-ons than not, but we are – we do have our ear to the railroad if there’s other opportunities.

Appreciate it, it’s complicated time. So thanks very much.

Yeah. Thanks, John.

Our final question will come from the line of Scott Graham with Rosenblatt Securities.

Hey, good evening. Thanks for taking my question on the overtime here. I just wanted to ask two questions. You told us that price was up 70 basis points was – were materially lower than that. Were you positive on the price cost side?

Hey, Scott. Yes is this the short answer and there’s a good – we have our teams procurement professionals and they do a heck of job every year and this is no different.

Got you. And then the second one is the group III and group IV. So the sales on those businesses you know, a little bit heavier. And the second quarter was kind of all about lockdowns and people were doing break and fix, you know, as needed, which tends to be higher margin type of sale. So I’m just wondering, was that the case for you guys in the quarter – in the second quarter sort of the as needed stuff, which maybe help enrich the mix, particularly in PI? Or was that not the case, because I’m just wondering if that’s maybe a headwind two quarters from now?

No, not at all. You know, I think when we look at what, you know, really, we have a very tight margin spread in our product lines. This is the power of FBS, quite frankly. So we don’t necessarily distinguish that the price, the price metric is really has to do with the fact that, you know, as we said, from time, time to time that, you know, our high valued brands are critical at these times, you know, for everyone. And so I don’t think I’m looking across the groups right now and trying to think of where I could point to, where I could think of a margin, you know, situation that might be different from what I just commented and I can’t find one. So I think you know, well, you know, more consumables is obviously higher margin, more, you know, more Matco is higher margin. So, you know, number, obviously, the software businesses are high margin, but there’s some of our newer businesses, so they don’t necessarily represent the highest operating profit margin. So I think, as our core businesses come back that, in some respects you might suggest is certainly a help as we look at margin expansion in the – you know, over the next year or so.

Understood. Nice quarter. Thank you.

Thank you, Scott.

Thank you.

Well, I think that concludes it, everybody thanks so much for going over time with us. We appreciate it. I know it’s a challenging time for everyone. I hope that your families are safe and your – and work is going well for all of you as we all try to manage the challenges of working virtually. We certainly are incredibly proud of the work we’ve done. I couldn’t say enough about our 25,000 employees around the world who’ve just done an incredible job that making Fortive just have a very strong quarter, but more importantly, building the business for what we envision in the years to come. So thanks for taking the time with us and we look forward to the calls. Obviously everybody’s available for calls afterwards. Thanks, have a great evening.

This concludes today’s conference call. We thank you for your participation and ask that you please disconnect your lines.