Fortive Corporation (FTV) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Barclays Hosted conference with Fortive. [Operator Instructions] As a reminder, this call is open only for Barclays Clients and Barclays employees, except employees in investment banking. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Julian Mitchell. Thank you. Please go ahead, sir.

Thank you very much, Catherine, and thanks, everyone, for joining this call. It's my pleasure to have on today's call, Jim Lico, President and CEO of Fortive Corporation; and of course, SVP and CFO, Chuck McLaughlin. It's been a busy time, as always, at Fortive, compounded by the macro backdrop of COVID-19. And so we thank Jim and Chuck for making this time available to us. For anyone listening into the webcast or call, please feel free to e-mail me questions anonymously to ask at any time to [email protected], or there's also the chance to ask some audio questions via operator at the end. Before we get started, just to highlight, there may be forward-looking statements and a discussion of non-GAAP financial measures on today's call. You can find further details on these important items on the Fortive website at www.fortive.com, under the Investors section.

And so with that behind us, maybe I'll start off by asking Jim and Chuck about current demand trends, what have you seen in terms of May orders relative to April? Any color you could start with on that, please.

Sure. Good morning, Julian, thanks for the opportunity, and good morning, everyone. Certainly, the morning here for us on the West Coast. Julian, I would say April was pretty much baked when we did the earnings call. So I don't know if there's a lot of color there. I would probably say that April and May look somewhat similar, maybe slightly better trends in May. So we feel consistency is definitely there. In June, probably still a lot to do in June. I think when you add all that together, we're probably looking at more -- as you know, we sort of said we would be more like down 20% to 25% in the quarter, the second quarter. We're probably looking more at high teens now. So probably a little bit better than what we had originally thought.

That's helpful, Jim. And maybe any color within that on different geographic regions. I remember on the earnings call, I think you'd said China, you thought would be similar in Q2 demand to Q1. Maybe how China has played out and then Europe and the U.S.

Yes. I would say probably on balance, obviously, under the backdrop of things being a little bit better than we thought. If you -- I would say, certainly, China is the place where we certainly see sequentially here being better in the second quarter. Several days or evenings, if you will, and getting an update on where we're at. And I would say on balance, we're starting to see some things free up a little bit. And so China -- and I think maybe more broadly, parts of Asia, maybe a little bit better. In the U.S., a little bit better on the backs of a couple of our businesses. Europe, probably in the same zone. I don't think we necessarily think Europe is -- we've seen much improvement there. If you recall, the groups that we outlined in the earnings call, those group 1, group 2, group 3. Within the -- I think those are mostly playing out the way we described. And maybe the one that is maybe a little bit better than we thought is on the Matco side, where we're seeing -- that was in our group 3. But we are seeing things free up here a little bit sooner than maybe what we had thought there.

And if you think about the 2 operating segments, Professional Instruments (sic) [Professional Instrumentation] on the one hand, Industrial Tech on the other, are you seeing much of a divergence between the 2 in terms of top line trends in recent months?

No. I would say, as we think about Professional Instrumentation, maybe slightly better there on the backs of some of the resilient parts of the business that we thought. The TI temperature part of Fluke, as an example, better Fluke Health, maybe as a couple of places are some of the software businesses, our intellect businesses, part of ISC in good shape. So those things may be a little bit better than we thought as part of PI. On the backs of IT, we certainly are starting to see, as we expected, Gilbarco is starting to come back as things would start -- equipment starts to get put in the ground. And as I mentioned before, Matco being better than we thought. And so I think when you add all that up, both segments a little bit better than we thought, consistent with the overall -- all of Fortive being a little bit better.

And then, when you're looking at the medium-term outlook at GVR within Industrial Tech, just wondered if there had been any changes on that medium-term outlook based on COVID-19 and what that has meant in terms of lockdowns this quarter? Any changes you've seen around the U.S. EMV market in that respect?

Yes. I think -- yes, for sure. We -- as you know, the deadline for EMV in North America has been pushed out to 2021. And so as we think about, maybe, call it, the next 12 months or 4 quarters, that's probably on balance a positive as it will extend sort of the volume, if you will, over time. And as I mentioned, we've seen -- we started to see things get in the ground. We've started to see the business ramp up a little bit more as in North America. So I think we feel good about what the trend -- we're starting to feel better about the trends. We always felt that the U.S. would have a good year. Obviously, it's very related to COVID because of the shutdowns. And as those shutdown orders get extended, contractors start to get on-site, we're seeing that business start to sequentially improve, for sure. And as I said, that will be -- that upgrade cycle will be extended a little bit longer into the 2021 deadline. And on balance, I think that's a positive for the business.

And then you referenced the group 1 to group 4 end market classification that you'd made alongside the Q1 earnings call. It sounded like most of that has sort of played out as you thought. I just wondered, perhaps with some of what you had put in group 4, some of those shorter cycle businesses that maybe a lot of investors would think might come back sooner, such as Fluke, CORE Industrial, Tektronix, Instrumentation. Those 2, in particular, you'd put in group 4. Just wondered any update on how you're seeing the trends there?

Yes. We've seen a little bit of group 4 improve for sure from what we talked about back in April. But I think what we'd say is, for now, that's probably more closer to consistent with a slight uptick. But again, I think in those businesses, given channels and things like that, we want to see things play out a little bit. June is an important month, as I mentioned. I think as we think about the groups, as I mentioned, group 1, holding in there. We feel good about the performance and the resiliency that we described. Group 2, we're starting to see move, as I mentioned with Gilbarco. We're starting to see things start to play out. The other big business in that group 2 is the -- is our ASP business. Hospitals are starting to move. I would say elective surgeries are starting, but they're not jumping back to normal right away, so that's going to be a progressive improvement. And then I think, as I mentioned, the group 3 area that really we've probably seen the biggest improvement is Matco. So -- and then at some regional parts of Tech and Fluke, for sure. And I think you add all that up and that's where we sort of see things right now. And I just come back to -- we're certainly better than we thought, and that feels good. But by the same token, June is a big month, and I really do -- is that sort of -- as we start to look at the second half, I think we want to see a little bit more data to be informed about how the rest of the year plays out.

And then you mentioned June and the second half. I don't know if there's anything you or Chuck would like to clarify around the seasonality of earnings or cash flow kind of as you're moving through this year?

Yes. Thanks, Julian. I'll take that one. Normally, we'd think about our earnings profile being 20%, 25%, 25%, 30% as you move through the year. Obviously, with the impact of COVID and seeing maybe our most challenging quarter on earnings, it's still going -- that we still expect that to be in Q2. So that profile is going to change as we go through the year. But from a cash flow standpoint, as a reminder, we had a good quarter. We got off to a good start in Q1. I expect that we're going to have a good -- we're going to show more resiliency in our cash flow this year than maybe our top line growth. But -- so while we think that we've improved our seasonality of the top line through all the acquisitions that we've done, I think as we looked at our free cash flow, you're going to see even more of an improvement. So less cyclical on there for a number of reasons how we manage our working capital, for instance, it's going to be a big part of that.

And you touched, Chuck, about some of the portfolio changes. Just wonder for you and for Jim. There's been a huge amount of portfolio turnover at Fortive since you spun out of Danaher just under 4 years ago. As you look at how this downturn has played out, maybe help us understand how satisfied you are with those efforts to render the portfolio less cyclical, more predictable, more recurring, albeit understanding that COVID-19 is perhaps not a normal downturn?

Yes, Julian, I think we can -- we certainly would always look at things and say, we would -- our starting point would always be how could we be better. So I think that's always our starting point. But I would say much of what we thought when we -- I think there's 2 pieces to that question. One is when we came out, we said that we had improved the cyclicality of the business from '08, '09 in the core parts of Fortive that existed in, say, 2016. And I think we're seeing that and adding services into Tektronix, adding some of the parts of Fluke Digital, those things that we've done several years ago, those are playing out. And the core parts of the portfolio are really playing out better than we would have thought, and very similarly the way we talked about the portfolio here since we really went public in 2016. And then as you said, the second part of that question is the things that we've added to the portfolio since then and how they provided the kind of resiliency that we would hope. And I certainly think that's true from an economic perspective. We're seeing a number of those businesses perform exceptionally well. Probably the part that we didn't kind of a black swan event is certainly ASP, where we didn't have a scenario where elective surgeries and hospitals would be so dramatically impacted by something like this. It's clearly not an economic situation, but certainly a part of the pandemic. So I would say when you look at the software parts of the portfolio, performing much more resilient like cash flow seems to be -- it's going to be in Chuck's words there, I think, are really consistent with that. Our businesses, like Intelex as an example, have a lot of help with COVID and really making health, safety and environmental a core part of conversation in every company around the world. And so we're seeing businesses like Intelex and Censis get good participation and the -- really, the trends, the secular drivers that really chose us to buy those businesses are there. And I think when you look at facilities management, as well at Accruent and Gordian, we're seeing those things. I would say the only exception that COVID impacts on software businesses, and we talked about this in the quarterly call, is this idea that getting on-site for service, getting on-site to turn customers on, getting to customers, even, is still -- will still mean that some of those parts of those businesses will come back not in a quarter or 2. But we're seeing very strong resilience from the portfolio. And I think just to the nature of your question, we feel good about how the compounding [Audio Gap] is a part of the portfolio, but -- as we think about those software businesses. But they're at their growth rates and they're compounding, they're going to increasingly become a greater part of the portfolio in the years to come.

And then one question I just had incoming, as you mentioned some of these recent transactions, ASP, Gordian and Accruent, Censis. Maybe just help us understand, any of them running sort of behind your expectations, leaving beside COVID-specific impacts? And maybe just to frame up, what types of financial returns by year 3, 4, 5, do you think investors should expect from those sort of half a dozen more meaningful acquisitions you've made in the past 18 months?

Yes. Julian, it's Chuck. Consistent with what we've said in the past, and we'll continue to look at is, for the bigger acquisitions, we're wanting to get to a 10% ROIC within 5 years. And for smaller deals, bolt-ons, within 3 years. And I don't think that anything has changed about that. We -- obviously, COVID in this moment in time is going to take many -- a dip in returns for this year. But when we look at -- as I'm sure you have is, when you look at other years, that bounces back. And so if you take ASP, for example, we're not even to the 2-year mark with ASP and we're feeling very confident -- remain confident as we were 6 months ago that we'd get to 10%, say in, by year 4. And I don't think anything has changed in our point of view on that. So we feel confident that we got there. Some of the others, we'd said, take 5 or a little bit more with maybe Accruent. But then there's others like Gordian, continue to run strong too, maybe even a little bit ahead. So I think the -- as you said, setting aside the COVID impact here, which will have a down in a recovery in that period, nothing's changed in our point of view there.

Thanks, Chuck. And I think ASP, perhaps the largest single transaction for you. Any comments on that one specifically around things like the progress on transition service agreements and so forth?

Yes. I'll start with -- on transition services agreement. We'd hope to get our IT systems up by the end of Q2, before we knew about COVID. And then, obviously, COVID hit. But what's been very pleasing is the teams have been very resilient in finding different ways, and we've turned both of those IT systems on at this point. And so we feel like we're largely on track to exactly where we thought we would be. I think we will exit the TSAs. Maybe there's a few weeks delay at some point as we do the impacts. But not -- remember, the IT systems are the biggest piece of the spend. And so getting those things off. But we're -- I think we're remarkably close to staying on track with what we said we would do. So very pleased with that.

Julian, I'd just add maybe a little bit on the -- just from what we're seeing in the business side. As Chuck mentioned, I think the resiliency of the team, the ability, I think, just the power of the Fortive business system to sort of be able to continue to do that integration during what was amounts to be about 3 or 4 months of unplanned time where the teams could barely be together. I think it's just a testament to the integration process that we took over from our Danaher days and have applied to all of our businesses. And you just see it play out in spades here. Commercially, I think we're continuing to see the importance of sterilization. So I think the secular drivers of infection prevention and the issues that hospitals have around hospital-induced infection is only greater today based on COVID. So the trends in the secular drivers are only stronger today than they were in our original hypothesis. It's just going to take a little while for hospitals and the financial situation and the work that they've done here to be up and running. And that's very much around-the-world situation. But we're starting to see things [ drop out ] in China. We get very good data in the United States, in particular, around elective surgeries on a weekly basis through our sensor -- our Censis software. So we're seeing those things happen better, and we're confident that, that will continue. As we talked to a number of our hospital customers over the last several weeks, and they're very committed to really ramping up elective surgeries. A lot has been talked about the need for hospitals to get back on track with a lot of that preventive care and the kinds of things that they do on a daily basis. And so we're confident those things -- hard to predict exactly when that will happen, but confident that it will happen.

Perfect. And you mentioned there perhaps some secular tailwind behind aspects like sterilization post-COVID. When you look across the Fortive portfolio, are there any other businesses that stand out as maybe having, because of COVID, some different nuance, some structural growth headwinds or tailwinds?

Yes. Let's start -- on the tailwind side, I think, for sure, when you look at some of the key theses that we've had over the last few years. We had a thesis around condition monitoring and the fact that asset utilization would be really important to manufacturing industrial customers. And you certainly see that continue to play out in a manufacturing environment, the productivity and quality that they get from those solutions continues to be strong. So condition monitoring as a infection prevention, only going to be more important in a COVID world. We think about what we've done with ISC and Intelex and this idea of worker safety and risk management and tracking around health and safety, is really going to continue to be a strong secular driver for those efforts. And then finally, as we think about working from home or really, I think the more appropriate statement today is work from anywhere and how our end markets are going to think about our end users, if you will, are going to think about their facilities management and how they manage real estate, how they manage leases, how they manage their space, all of those things are going to continue to be changes and new views of the world, and that certainly benefits Accruent and Gordian. So I think when you think about those secular drivers, certainly there. And then I think on the -- not to have Vontier miss out, certainly, on the mobility side, we're certainly going to see, I think, a lot of changes to mobility here and acceleration on the mobility front that is going to allow Vontier to take advantage of a lot of new trends. So those are probably the plus side. Certainly, the near-term is certainly part of what I would call COVID and certainly economic consequences globally around how countries come back. Municipalities might be a little slower. So there'll be sectors of our businesses that may be in the -- state and local governments might slow a little bit. So those are probably some maybe near-term headwinds that we're certainly keeping track of. But I think when you wrap up those secular drivers, certainly a lot more pluses than minuses that we're -- and we're certainly excited about that.

That's good to hear. And one other question around the sort of shorter-term top line I just received was around how would you characterize inventory levels in the channel? How is your own inventory within Fortive itself? And maybe any thoughts looking ahead post-COVID, changes to how Fortive will run its own supply chains and global manufacturing operations?

Yes, a lot there to unpack, for sure. I think, first, relative to channel inventories. And obviously, I'll segment that into sort of health care customers and industrial customers. I think on balance, we've been, particularly in the U.S. and Europe where we get better data, we've been very -- we've watched that very carefully to make sure that we don't get overextended and we stay close to that. And I think inventories, I would not characterize them as super low nor super high. I would characterize them probably as, in the U.S. and Europe, is about where they should be. I think in the health care, given just some of the dramatic changes that happen in the hospitals, we might -- we're maybe a little bit high, but not anything that is overly concerning. But June -- in both those cases, June will be a big month to continue to watch point-of-sale to understand that as we exit the quarter. So that's kind of where we stand. We are certainly always driving inventory reduction in the business. That's the power of FBS. Our own supply chain, I would characterize as in better shape. Certainly, we had some challenges in the early -- maybe the late part of the first quarter and early parts of the second quarter that we've, I think, managed very, very well. I would characterize that as mostly second and third tier supply chain issues as opposed to issues with our first tier. So we've been more involved, more actively involved in helping our tier 1 suppliers manage their second and third tier situations. And you have situations where countries, as an example, shut down -- what comes to mind is some suppliers in Malaysia as an example that were shut down for an extended period of time that we had to -- we just had to work around. I think we're in much better position. We've done that through, I would say, more rigorous and disciplined but necessarily inventory positions. And then lastly, maybe the more broader question about the transformation of our supply chain and manufacturing footprint. We did a fair amount of work relative to tariffs when that started almost 2 years ago. And when we started to see the tariff situation, we realigned our supply chain more in line with making things for the regions of where we sell. And we'll continue to evolve that over time. I don't necessarily see any major dramatic shifts in that regard. But certainly, in some places, we want to be in a better position to be able to produce locally where that -- and given our ability to sort of implement FBS, we can do that with, quite frankly, minimal capital and capital outlays. We really find our way to do that with not a lot of big -- really, with no cost increase whatsoever.

And then maybe pivoting away from the top line towards profitability. Maybe help us understand how the slight improvement in the top line outlook, how has that affected your margin perspective? How comfortable do you feel today with that 35%, 40% decremental margin guide you'd laid out for Q2 and the full year?

Yes. Thanks, Julian. So I think the -- from the decremental point of view, you're right, we laid out 35% to 40%. We were very confident in the actions that we took coming into the quarter to be able to deliver that. And obviously, what you highlighted our high incremental gross margins of around 65%, that will push us closer to 35% in Q2 than to 40% would be my expectation. And especially in the short run where we really haven't changed our cost actions in Q2. So I would -- I feel very comfortable being in the range and coming -- and being not at the high end of the range.

And then, Chuck, on that point, you talked about at least $300 million in savings this year on the last earnings call. Maybe help us understand how much of that sort of is in place? And maybe any thoughts on more structural cost out versus the temporary-type measures?

Well, let me -- a couple of comments on when we look at the whole year and, really, the last 3 quarters. You just heard my comments on the decrementals in Q2. Depending on what the top line does, as it improves, if it sequentially improves, we will, again, be closer or maybe even a little better than in any one quarter, the 35% decrementals that we talked about because of our -- the gross margins. But we want to manage the business here. And some of those costs, that $300 million, are incentive-based and variable. And so as the top line comes back, some of them will come back and maybe we'll actually realize a little less than $300 million, but still being in that 35% in the second half or so, maybe a little better on the decrementals, given that. But it's not -- that $300 million is not a static number. As you mentioned, we've got a lot of temporary actions, and some of those will -- not all of them will naturally unwind. With regards to the permanent actions, some of those things were permanent savings. The volunteer separation, there are some deal costs that have come down because now we can do it ourself, and that will be helpful. There's also a number of permanent -- not permanent, temporary headcount that we took out. So there's some costs that come out, maybe 30 -- maybe as much as 1/3 that are -- will come out and stay out throughout the year. And so -- but the other part, as the top line recovers, we would expect that to come back, some of it to come back. With regards to your -- what we look to more permanent actions. One of the things, as we move into the second half and get stability in terms of not only what the second half is, but what next year is going to look like and the levels that -- whatever 2021 is like, that's really going to be the guide to whether we have to take further actions to have a more permanent nature. And so we'll continue to evaluate that and try and understand it. I'll pause there and see if that -- if you had any follow-up questions.

Yes. I think you mentioned, Chuck, that 1/3 ratio on the cost out. So did you mean that whatever the total bucket of cost savings ends up being this year, $300 million or a bit less, 1/3 of that total number is structural? Or was that something else?

Well, I'd say there's costs, for example, around -- on travel. And we're all seeing -- those costs aren't going to come -- all come back in the near term. There's also cost around -- as we saw slowing in Q1, we had temporary workforce that we flexed down. And that will -- until we start getting to a higher level of the top line, those types of things will stay out a little more longer term than maybe things that are sales commissions, for example, or something like that.

And Julian, I think the -- maybe just to maybe put up. I think very much the way we've tried to manage the business here is to understand the uncertainty that's ahead of us, make sure that we were tight everywhere possible, which we've always been able to do. We know today that, of that number, roughly 1/3 is structural costs, productivity initiatives, the kinds of things we would do. Again, we took a number of actions last year, if you recall, at the end of the year as well. And hence, we had such good margin expansion in Q1. It was on the backs of the strong structural cost reductions we took out in late '19. So I think you've got that. You've got the structural actions we've already taken. And then the decisions we've got to make around going forward. Once we have a better sense of how this is going to play out, the trade-offs that you always make during these times around temporary versus structural cost. And we've had a long history of knowing where that's at and the kinds of opportunities that are in front of us. We're certainly evaluating a number of those things. But we also want to be sensitive to the fact that we have a number of parts of the portfolio, as I mentioned, that have secular headwinds or tailwinds, and we want to make sure we also have some opportunities to invest in those. And that's -- those are the balance of decisions that we're looking at right now and we'll play out in the next, sort of, several months.

Thanks, Jim. And when we look ahead to the eventual recovery, what type of incremental margins -- with the Fortive portfolio as it sits now and today, what type of incrementals do you think we should expect on the way up?

The simple answer is it's going to be close to what we saw on the way down. If we -- if you think about if we were down 38%, that's probably a pretty good number. If we overachieve that and come down at 34%, then you'd probably see us come back close to that. But I'm sure you can appreciate that's not an exact science, and it's -- we're not going to get overly prescriptive on 100 or 200 basis points. But we would expect it to come back at the same rate and measure that it went down at.

And then maybe turning to the balance sheet and cash flow. Maybe update us on the thoughts around the deleverage path from this point? I think you were around 3x net leverage at the end of last year. How quickly do we see that move down? And anything you can say around the Vontier IPO, sort of latest thoughts?

Yes. So a couple of things there. First, on the delevering, we came into this year expecting to do bolt-on type transactions and delever through the year, and that's still our base case. So not that much is really changing from what we expected to do. I'll let Jim talk about maybe the M&A environment that we're looking at. So we'd expect the debt to come down from the end of the year, and that certainly happened in Q1 and in Q2. We've also took steps during this quarter to improve our liquidity with some of the moves around covenants, and note that's been very successful. And we're also repatriating some cash to pay down. So we're accelerating that paydown. We're very pleased with where we're going to be in the first half. And in the second half, I think you'll see more of the same where we will -- we'll continue that delevering. And I think that, that will keep us in that under 3 range on most scenarios, maybe a little faster. It really depends on the other part of the equation about how the business performs, which is slightly improving. So we feel good about that. When we move to the separation with Vontier, we've always said that a tax-free separation is our goal here. And I think that there's -- we still believe that, that's likely in a reasonable timeframe, and we would expect there to be further deleveraging. And really, the economics that we've been talking about there haven't changed. We think that we're going to see Vontier's got some secular tailwinds and that when we separate, we'll delever. And that without our base case coming into next year will probably be in the 2x net leverage would be the path, I think we're on.

I see. And Chuck, that's under 2x, assuming the Vontier does IPO?

Yes. And if we -- until that happens, that we make that separation, it's really the separation because that goes with Vontier. Maybe it's -- we'll be in that 2 to 2.5x when you get into next year.

Great. And how about the mechanism of the demerger? When you get questions around the spin-off or split off, maybe just help us understand if you're thinking around the mechanism for the IPO has changed or evolved at all?

Well, first of all, we were -- are ready to go, having set up 2 -- a separate company with Vontier with the leadership team. And we're very pleased to have them on board and helping [ us ] through this time. I think that's going very well. And really, we're just waiting for the right time in the market, and we'll be ready to go either split or spin. Both of those will be tax efficient, which is the original goal of how we wanted to do the separation. Right now, from the market -- we don't think the market is ready, even though it's recovered. Maybe the volatility is still not where we would want it to be to try and do a separation at this point in time. But we noticed that it's getting better as we move through time, and we'll continue to look for finding the right time that the market will make a fair -- be able to judge and make a fair separation going forward. But I think we're closer to that than we were 3 months ago.

Thanks, Chuck. And maybe this is one for Jim as well, a fairly direct question from an investor. If someone's thinking of buying your stock today, how do you give them comfort given all the uncertainty around the different paths for Vontier in terms of spin or split, the timing back and forth of that? How do you sort of help them get over the hump when they're seeing this spin or split looming?

Well, I think number one is, when you look at a number of things that we've seen over the last few months, we've been reducing variation with every month, right? We've -- as Chuck mentioned, we're in a very good place relative to the ASP work we're doing where we're seeing the benefits of the resiliency of the portfolio, particularly in the free cash flow. You're seeing the operating margins even in very tough times in a number of places. You're starting to see the gross margin benefit of what the company is going to look like post-Vontier, which the financial structure and as we get through a number of these trying times is going to be good. And we're moving forward towards that pace in a very good time. So I think that's sort of the Fortive story. And then I think we're very committed and have a track record of these sorts of structures that really benefit shareholders. And I think we're -- we remain very -- the Board is very committed to that as well. So I think from a standpoint of we've reduced risk relative to the transaction, it's taken -- now that we're going forward in a few more months, we're doing a lot -- the business will be much more self-sufficient than it would have been and be incredibly self-sufficient, I guess, is the better word. Mark and Dave are up and running and ready to go. So I think we've reduced risk from where we were a few months ago in everything just because of the execution success that we've had across a number of items. So -- and we're committed to a final structure that's inevitably going to help both the Vontier shareholders but also certainly the Fortive shareholders. And I think we wouldn't do something that destroys value. And as we look ahead, we see a number of structures out there. As Chuck mentioned, we're flexible in that regard that can create value for Fortive.

That's very clear. And I guess one topic that sometimes arises with Fortive relates to -- there's quite a lot of complexity, I think, looking from the outside, partly because of the change in the portfolio. So I just wondered, any thoughts around when segmental disclosure might change? I assume that would follow whatever happens with Vontier. But any thoughts around the sort of external reporting structure?

Yes. Julian, I think that you're right. We will -- when we separate, one, that should help with the -- some of the complexity when Vontier goes out. But you're likely -- that's a likely good trigger and timing for us also to talk about how we would -- what are the likely platform/segments going forward would be. And I think that's a reasonable expectation for us.

Understood. And on the capital deployment, maybe, Jim, if you're thinking about the balance of -- there's a lot going on macro-wise, integrating several of those acquisitions we talked about earlier. How keenly are you exploring new acquisitions? Or should we assume that all of those would come, or any of those would come sometime after a Vontier split?

Well, Julian, we had always said, and I think Chuck mentioned this a little while ago, we had always said that we would probably be more a year of bolt-on just given the number of things that we've done in '18 and '19. And so -- and I think that's continuing to play out from a point of view. We've seen -- we've been active in the work we're doing in our M&A team, both continuing to do the kinds of things that we do in market work. Obviously, there's less transactions. That's been, I think, pretty well known. But we've certainly been busy in doing the kinds of preparation work that we would typically do maybe when things are slower to be ready. So first and foremost, I think our hypothesis of this likely being a bolt-on year still plays out. We see a number of places where those opportunities exist, and we're hopeful to do some things this year. I think the other part of it is, it always takes a little while, a few quarters, for things to sort of sort themselves out during these times. So I would expect that something bigger and more transformative likely is more -- likely towards the tail end of the year. Not because of any decisions we make but just how sellers and we'll be thinking about how things play out. And we'll -- certainly, would timing -- would be good with how we think about our -- all the work we're doing right now and how we enter 2021. We certainly will do that within the context of the macro backdrop, having been through this a few times. We know -- we understand bid-asks and how those things change. We want to understand that. And hence, it's why we stay active during these times is to make sure that we stand ready for opportunities. But how those play out necessarily, probably a little bit more unpredictable during these kinds of times than, say, things a little bit more straightforward like in '17 and '18. So I think we -- I'm confident we'll do some things. But again, I think at the end of the day, the hypothesis of what we originally thought for '20 probably still -- that's probably the more likely scenario as we go forward here in the back half of the year.

And then I suppose once it happens, the remaining of those leverages, sub-2x, sometime early mid next year, that's the point at which, potentially, assuming a normal macro, larger acquisitions, again, would become something to discuss, I suppose?

Yes.

Well, you can never predict -- go ahead, Chuck.

It'd be easier to demonstrate that we'd have the capacity. But it's not an exact point in time. The way that our capacity is really is about our debt leverage and then what our cash flow is going forward and stuff. So I don't know that there's a month that you're going to point to that says now we can do that. We're always looking, I think, and as Jim said, we're very active about adding M&A. And so I think we're evaluating what our opportunities are. And when the right thing that's value-creating comes forward, we'll consider it.

Perfect. And then this is maybe a bigger picture question from an investor, for Jim, around how has FBS evolved, I mean, during the pandemic? I mean, it's only been 3 or 4 months, I suppose. It feels a lot longer, I'm sure, to most people on this call. But anything you could point to the evolution of FBS itself or maybe some of the results that FBS has produced? Or how you've seen it be very well battle-tested, clearly in this time?

Yes. It's a great question, and thanks for that, Julian, because I think it's one of the things that we've been just so proud of is the pivot that we've made to doing things virtually around the company. All of our facilities remain essential and were deemed essential. So we really moved everybody out of the offices and out of facilities that we could in order to make sure that we could keep our people safe in the facility. We've done an incredible job of doing that. And I think our folks who have been working from home over the last several months have pivoted with new FBS tools. We have FBS office hours every day. We've done the number of virtual kaizens I couldn't even keep up with because those numbers are so high. We're helping our sales and commercial teams really understand how to get into customers we've got -- with folks to be able to support organization. We've seen some benefit of technical components to it. We've actually seen extending our ability to take application engineering. And instead of visit 1 or 2 customers a day, we're now accelerating and doing 5, 6, 7 customers a day. And so we're seeing some of those benefits. We're doing virtual trade shows and webinars at a pace that -- I was around with one of our businesses this morning. They're doing -- they've done, I think the number was 10x, the number of webinars and digital work that they've done from a year ago. All of that is the backdrop of FBS as a supportive mechanism. I think the digital transformation of our business has been accelerated incredibly, not just with video and some of the things we talk about, but also just the opportunity for organizations around the world to work together on problem solving. So I think -- we reviewed the other day a number of us in the leadership team, a number of changes that we've been making to FBS that we'll codify in the training here in the next few months. So a number of things that we've added. And certainly, I would say our digital capability is probably the thing that I would point to the most. We've pivoted a number of things. The digital relationship, there's a number of digital tools within FBS, digital marketing tools. And I would say the pivoting of that and moving that has really been effective, and we've really moved up in a number of places, really showing digital strength and getting the sort of lead mechanisms that ultimately will be a huge benefit. So I think that's one example. Certainly, I would say the last thing is on the innovation side. The tools that we've really learned over the last few years, we've really deployed more aggressively to do -- develop product development within the context of virtual collaboration, which is not an easy thing to do. And I've been really proud of the work our -- last week, we had 500 people for a machine learning AI session. We had the same number of digital marketers together virtually. Best -- sharing best practices and have the ability to sort of apply those in the second half. So I think in a number of areas, we've seen the power of FBS even create more momentum than even what we've seen in a half.

Very good. And then maybe, I guess, the last incoming one I've received, circling back on the cash flow. I think a question around how are you balancing some of the short-term measures to shore up cash flow versus sort of playing on the offense as you move past this. And maybe, Chuck, just to clarify the extent to which the better free cash flow now is relating to maybe some catch-up on ASP or sort of short-term working capital tailwinds that might reverse? Maybe just any extra detail on that cash flow point.

Yes. I think the ASP tailwind is, for sure, I think when we reported Q2 last year, we talked about the need to reload that ASP as part of the split out. So that's obviously a tailwind for us that we expected and -- but it's still coming to play. I think on the working capital, if left to its own devices, working capital doesn't come down. And this is where with -- Jim and I go spend a lot of time working with the teams and trying to share best practices, to get that working capital coming down and we're seeing that. We're also paying very close attention to rolling significantly, it becomes a slight use of cash flow or where working capital can be of slight use. And -- but I think that getting the working capital to release in the quarter is really a big thing to have happen, and we're seeing that. And we'll deal with coming back and I don't think it's going to be a big thing. But even without those 2 adjustments, we're very pleased with how our working capital is going. It's a number of things coming together as well as our margins -- our gross margins going up. So I think that, yes, ASP tailwind is there, but we realize that. And then we'll have a little bit of a headwind as you come into it sequentially, but I still think that, that's not the main part of it. It's just we've -- we're managing our decrementals well and we're doing a great job on collections.

Perfect. Chuck, I think that's everything I had on e-mail. I don't know, switching to the operator if there's anyone who's been patiently waiting on the audio line.

[Operator Instructions] And we do have a question over the phone. And Habib Subjally, may you please state your question. Habib, please state your question. Is your line muted?

Sorry, I was on mute. This is Habib Subjally from RBC Global Asset Management. My question was about how you balance cost cutting, cash flow, kind of hitting short-term numbers, managing the debt levels and leverage? And on the other hand, going on the offense. This is when customers really need you, they need more hand holding, they need more support. How do you balance that short-term cost versus long-term benefit versus I need to keep investors in the market happy and manage short-term margins?

Yes, that's a wonderful question. And I think it gets to the crux of a couple of things that we talked about here today and certainly on our investor call that Chuck and I spent a great deal of time on. And I would call out 2 things. Obviously, our -- the idea that we would have incrementals or decrementals assume some -- the flexibility that we want to maintain to play offense. Obviously, our gross margin numbers are higher than that. But we want to make sure that in a number of places, we have the degrees of freedom to continue to play offense. We have managed a number of these businesses during downturns, and we know that some of the decisions we make relative to technology and innovation and the investments and go to market. Inevitably, when we can make those investments now, they will pay off significantly in the years to come. So I certainly think that idea of how we think about incremental margins is in the context of that balance very much of understanding that while both balancing the short term and the long term of earnings and free cash flow. And I think our Board is very active in that conversation. We have a thing we call dynamic resource allocation that goes back to our days of Danaher. It is really looking at the businesses and understanding how are we taking resources and making sure we fund the most important things no matter what the condition of the business and the outlook would be in the business in the short run. So I think we've been very active in that, and that's an active part of the time that Chuck and I spend during our days. The other one would be the $300 million in cost reduction. We've talked about some of that being structural, some of that being temporary. And the reason why we've outlined it like that right now is not knowing exactly what the outlook is necessarily going to be for the next 6 to 12 to 18 months. We want to make sure that we maintain structural opportunities within the context of cost reductions. It makes no sense for us to go and take structural cost out of the business to go add it back in 6 months. That is just not a -- that is not good for shareholders, but -- it doesn't make any sense for our customers or for how we want to build businesses long term. So the balance of those things are parts of our decision. We know that where we'll have to take some things because we might have some longer-term issues. But what we want to make sure is that within the construct all the things we communicate to investors that we're fundamentally balancing the long term and the short term. And a great example of that, maybe a final thought is, a number of our businesses, we have not taken cost out at this point. We see the opportunities. We -- even in maybe the short-term COVID situations, we want to make sure that we continue to serve customers and take care of them. Because the relationships you build with customers right now, the times when you can take care of them, they live in perpetuity. And we understand that across our business lines, and that's conversations we have with all of our operating company presidents.

Okay. So I just want to -- yes, since you have to kind of maintain that balance. You are not -- a number of other business leaders have said that this is an opportunity to move on the offense and forget about your margins and [ how to optimize ] that. But we're going to play the long game here. You're much more measured than that.

I would say we have -- almost in every business, we have examples where we're playing offense for sure, even in this quarter, which is probably our toughest quarter. We have across business lines understand where we're doing that. And maybe some short -- some suggestions. We just made an investment with Pioneer Square Labs, an incubator in the Seattle area. We've got a number of start-ups that we're investing in as an example that we think are going to build on investments. We look through our growth breakthrough investments that we do to accelerate innovation in the businesses. We have not cut in any way, shape or form. We've continued to accelerate investments. Chuck and I will be looking at a few more of those that we'll be looking at in the second half. So a number of those innovation things that are going to play out in the years to come. We have made absolute -- just as a specific example, we've made no reductions in those investments whatsoever.

Good. Well, yes, I think we're out of time now. So thank you so much, Jim and Chuck and also Griffin and Ross in the Investor Relations team for taking all the time today. I think it's been a very, very informative discussion, and we look forward to catching up with you again over your Q2 earnings.

Great. Thanks.

Julian, thanks for the time today. We appreciate it. We're -- and obviously, we're always open to discussions as needed, but we appreciate -- we very much appreciate the conversation today.

Thank you. Bye-bye.

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