Q3 2019 Earnings Call
Good morning, and welcome to the guard the diverse third quarter 2019 earnings conference call.
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Oh, no teleconference, or whatever come Kenny General Garden divers <unk> Investor Relations layer. Please go ahead Sir.
Thank you and welcome to the Gardner Denver, 2019 third quarter earnings call.
Kenny Gardner Denver, the Investor Relations later and with me today, our besides here at all Chief Executive Officer, and Neil Snyder Chief Financial Officer.
Our earnings release, which was issued yesterday at a supplemental presentation, which will be reference during the call are both available on the Investor Relations section of our website Gardner Denver Dot com.
In addition, a replay of this morning's conference call will be available later today.
The replay number as well as access code can be found on slide two of the presentation.
Before we get started I would like to remind everyone that certain of the statements. On this call are forward looking in nature and are subject to risks and uncertainties discussing our previous <unk> previous as you see filing which you should read in conjunction with the information provided on this call.
For more details on these risks please refer to garnered over an annual report on Form 10-K filed with the Securities Exchange Commission, which is available on our website at Gardner Denver Dot com.
Additional disclosure regarding forward looking statements included on slide three of the presentation.
In addition in today's remarks, we will refer to certain non-GAAP financial measures you may find a reconciliation of these matters. The most comparable measure calculated and presented in accordance with gap in our slide presentation in our earnings release, which are both available on the Investor Relations section of our website.
Turning to slide four on today's call will review, our third quarter highlights and 2900 guidance as well as an update on the pending transaction with Ingersoll Rand.
We will conclude todays call with the Q and a recession as a reminder, we would ask that each caller keep to one question and one follow up to allow for enough time for other participants.
This time I will now turned over to the center and all Chief Executive Officer.
Thanks, Good morning to everyone turning to slide five let me start with a brief overview on the third quarter.
Overall Q3 was a good example, the team's ability to utilize the principles of the Gardner Denver execution excellence process or Gtx.
In order to be nimble in the phase of a softening economic environment.
By continuing headwinds in the upstream energy market and a slowdown in core industrial markets, particularly towards the end of Q3, we deliver solid results.
Lesion the team people tend to focusing on items within their control, resulting in solid working capital performance and free cash flow generation as well as the execution of an incremental restructuring action.
Let me provide a bit more color on the financial highlights in Q3.
From a total company perspective, FX adjusted revenue and orders declined 11% and 8% respectively were heavily impacted by the known softness in the upstream energy business as well as strong prior year comps across the majority of our businesses.
As you will remember Q3 last year was Austin was our strongest quarter in the upstream business with $196 million of revenue, including our strongest quarter of original equipment pump shipments.
As we have indicated the expected demand environment in upstream to beans, luggage in Q3, including minimal or you know equipment bump shipments and that was largely what we saw.
Encouragingly, the remainder of the business, including industrials mid and downstream energy and medical so collectively FX adjusted revenue growth of 1% and orders growth of 3% despite the tough macro environment.
The company that lever adjusted diluted earnings per share of 41 cents and adjusted EBITDA over $142 million.
Overall margin of 23.8%.
The team continues to do a good job navigating dynamically changing environment. That's shown by the 30 basis points can put many margin versus the second quarter, Despite 32 million less revenue.
This improvement is due in part to continue execution on operational initiatives like economic devalue and restructuring to offset market headwinds.
I'm, particularly pleased with the rapid actually the teams have taken to identify and incremental restructuring opportunity across the total business to prudently control cost in light up market conditions.
Actually it was executed in September I suspect it did any of EUR $10 million in annualized savings with 2 million expected to be realized in 2019.
From a balance sheet perspective free cash flow into quarter $105 million.
Free cash flow conversion to reported net income was 254%.
The team continues to make strong progress on working capital improvements.
Including over $50 million cast generation within the quarter from 80, Hey, AR and inventory.
The progress on the inventories, particularly highlight as we have historically noted there is an area for improvement.
In three improved over $10 million from prior year levels and approximately $40 million when excluding.
Seems like upstream energy.
By leveraging Gtx do installed inventory growth rooms, we believe there is considerable opportunity ahead of us.
Strong cash performance led to net debt leverage of 1.9 times at quarter end.
<unk> 0.1 times, that's compared to Q2.
Looking ahead due to expectations for continued sequential declines in upstream energy as well as it continues softening in the overall market.
Which we expect to have impacts on both the base business as well as the timing of larger project shipments.
We are updating for your guidance to a range of $550 million to $570 million.
Turning to slide six before we get into the specific components of the revised guidance I think it is important to ground everyone on the expected year over year performance of the company.
At the midpoint of our revised 2019 guidance, we're expecting adjusted EBITDA declined by $122 million versus prior year.
The performance in our industrials mid and downstream energy and medical business. It is expected to be quite solid.
Despite persistent market headwinds for much of the year. This businesses are expected to Delever FX adjusted year over year revenue growth of mid single digits, and EBITDA improvement of nearly $30 million.
Upstream energy accounts for nearly all of the expected year over year decline as market conditions, coupled with lower spending levels from customers, particularly on larger capex items like original equipment bombs is rising approximately $110 million of expected year over year declines.
Important to highlight the nearly 85% of our 2019 revenues in the upstream business are expected to come from high quality aftermarket parts and services.
Which carry a high margin profile and tend to be comparatively less lumpy, then or you know equipment.
Also at current levels upstream energy is expected to be less than 10% of the revenue on the combined Gardner Denver, and Ingersoll Rand industrials business.
Which should mitigate this business its impact on profit to be looking looking forward.
Finally, the balance of the year over year movement, Israel in by higher corporate cost due to the drivers we outlined at the beginning of a year and increased FX headwinds due to continued weakening of the euro and British pound.
When I stepped back and I said the performance of the company I'm quite pleased with how our industrial made on downstream and medical businesses are performing.
And despite the year over year EBITDA decline in upstream.
Team continues to take proactive steps to rightsize the cost structure, while at the same time the LIBOR further on innovation.
I think learning areas like consumables to expand our growing base of aftermarket parts and services.
Turning to slide seven on guidance for 2019, we are revising total your guidance for adjusted EBITDA to a range of 550 million to $570 million from 610 million to $630 million.
A recent is largely attributable to three main areas.
First is upstream energy what kids. They performance was largely inline with expectations feedback from our customers lead us to believe that completions activity, maybe lower than in the fourth quarter last year, leading to a larger than usual sequential decline.
You know they show our customers are lowering their capital investments and we do us, but expect an extended hold me they see somebody's year.
In total were expecting an approximately 40% sequential decline from Q3 two Q4.
Second these effects as we have seen continued currency headwinds, particularly from the euro and British pound <unk>.
The prior guidance FX is now contributing approximately three to 4 million of anticipated incremental headwinds to adjusted EBITDA in the fourth quarter alone.
Sure. He said, we're not expecting to normal Q4 seasonal uplift that we typically see in industrials and downstream.
Through the continued softening of the market sequentially.
In addition, we expect that several large projects will be deferred.
We saw these already happening in September .
Particularly you know wrong tech and downstream businesses.
The positive news is that these projects are not being canceled and they're just moved out as customers continue to manage their timelines.
In total were expecting garner Denver revenue growth, excluding FX to be down mid single digits.
Down high single digits, when including the impact of FX.
Also worth spending your and net debt leverage to be approximately two times I.
I mean any shall we expect a slight improvement in the tax rate to approximately 20% driven largely by geographic profit Mitch.
From a cash flow perspective, we continue to target greater than the 100% free cash flow to reported net income conversion.
We are revising our capex expectations do the bought a man of our previous range as we continue to be prudent due to market conditions as well as the Ingersoll Rand integration in order not to duplicate investments.
However, we will continue to fall on high return investments, particularly those focus on innovation and growth.
And in total were expecting to deliver approximately 270 $75 million a free cash flow for total year.
Moving to slide eight I will provide more color on operating performance of our segments.
I will start with industrial segment, where we saw positive FX adjusted orders and revenue performance, although below our or you know expectations.
Industrial segment third quarter order intake was $330 million, which was up 3% to prior year excluding FX.
Revenues in the quarter worth $360 million up 1% excluding FX.
From a geographic perspective, the Americas, so positive FX adjusted orders and revenue growth.
Well the Americas growth was below our expectations. It is worth noting that industry reports indicate that we have outperformed the market growth rates for several quarters.
And we're coming off some very large comps, including Q3, all prior year, where revenue growth was in excess of 10%.
In addition, the same third party industry reports also show letting the oil lubricated Rotary school compressor line, which is a core product offering for the U.S. market. Our performance for both Q3 and total year is above the industry in terms of both units and dollars, but we feel pretty good about.
Where we stand from a competitive perspective on a relative performance.
In Europe . Despite the continued tall microenvironment, both orders and revenue grew low single digits.
Asia Pacific So when they get the performance driven mainly by project delays you know run think business.
This project related to several large durable vacuum installations that are awaiting final commissioning of the customer site.
And which we believe we'll defer into 2020 .
In terms of the product lines, we continued to see solid performance in core compressors as well as blowers, which were up low single digit on an FX adjusted basis.
I can continue to see slight decline driven particularly in western European markets and China. When the business is more aligned with industrial process oriented Oems.
That's a market continues to soften that crawls molds merger major geography is we are affirming lever that continue probably innovation will lead to a differentiated growth.
We're very encouraged by the momentum we are seen in our oil free product line.
And it recently installed compressor assist them out of food processing plant in the U.S. include in our ultimate oil frequent prints are equipped with the icon I don't see platform is the liberal nearly 10% to 15% energy savings in both electricity and natural gas consumption.
And these savings are in excess of $300000, when I know bases or the customer location.
Moving to adjusted EBITDA industrial de lever $70 million in the quarter, which is flat excluding FX.
Third quarter, adjusted EBITDA margin was 22.2% down 30 basis points versus prior year.
The year over year margin decline was largely attributable to the weakness in Asia Pacific.
As well as a large part project deferrals and this was the reason for higher decremental margins unusual.
Despite the overall segment margin decline Americas, and Europe combine margin expansion was positive.
Then if it team from initiatives like pricing aftermarket and I do the to offset known headwinds such as terrorists.
Looking ahead to Q4, we expect decremental margins to be better than what we saw in the third quarter.
In large part to the cost actions we have taken.
Moving next to the energy segment on slide nine.
The energy segment third quarter order intake was doing them $5 million down 20%, excluding the effects.
Even largely by the expected downturn in upstream energy.
Partially offset by a low double digit increase in meat on downstream.
Revenues in the quarter were $209 million down 29% excluding FX.
With upstream revenue was down 46% and mid and downstream revenues collectively down 1% excluding the effects.
Addressing the components of energy, let me first start with upstream.
Orders were down 37% and revenue was down 46% both excluding effect.
I'm very much in line with the expectations at approximately $100 million each.
Well my oldest perspective with so many more orders for or you know equipment, Frank bumps, which was not surprising given market capacity utilization levels and customers stacking fleet.
We were pleased that aftermarket increased 10% sequentially as we continue to see good momentum on many of our parts and services what price on levels remain relatively flat.
In terms of revenue it was a very similar story as over 90% of our revenue composition came from aftermarket parts and services.
These high concentration of revenue on healthy margin aftermarket components as well as prudent cost control allowed our upstream business to deliver adjusted EBITDA margins in excess of the total energy segment average.
Further demonstrating the financial resiliency of the business.
In addition, decremental margins in the quarter were below 45%.
Which was improved versus the level seen through the first half of the year, a much lower than the 50% plus incremental seen in many quarters one of the business was ramping up.
As we look ahead to the fourth quarter, we expect to see continual improvement on the decremental margins for the upstream business due to continued productivity initiatives.
One of the many areas we have focused on in terms of ongoing productivity in the business Youve continued improvement in our manufacturing processes.
On the bottom of the slide you'll see that we've recently hit a landmark in our consumables manufacturing plant as we crossed over 1 million parts produce for buyouts and seats in the last 12 months.
This has been largely attributable to investments instead of the our machine to an automation combined with lean manufacturing principles, which allows for improved performance.
From a market outlook perspective, we continue to see a challenging environment heading into the fourth quarter.
We expect that lower completions activity and customer capital spending reductions will drive negative sequential growth in the fourth quarter.
That's a result, we will continue to look at prudent cost measures to optimize our cost position.
On demand downstream side orders were collectively up 10% and revenue was down 1% both excluding FX.
We're encouraged by the year over year growth in orders, which is largely helping to build the porno for 2020 .
And the overall project funnel remains very active.
However, much like what we saw into second quarter, we have seen the project quote do order cycle extended.
From a revenue perspective, we did have a few large projects in Asia Pacific could differ from Q3, partially into Q4 and the balance into the 2020 .
We're expecting similar dynamic that happened in the fourth quarter.
The positive news again here is on these projects are not being canceled and are just moved out.
The energy segment, the lever adjusted EBITDA of 55 million in the third quarter, which was down 41% to prior year excluding FX.
That's a percentage of revenue third quarter adjusted EBITDA was 26.6%.
Around 520 basis points from prior year due to the decline in upstream energy well made on downstream collectively margin performance was relatively stable.
Moving next to medical segment on Slide 10.
Order intake was 66 million down 8%, excluding the effect.
The oldest performance came on top of very strong prior year comps in excess of 20% growth.
In addition to decline was due almost entirely to the timing of a large prior year frame order, which the customer is now placing in small quarterly installments.
Backlog remains healthy and in line with levels, we have seen through much of 2018 and early parts of 2019.
Revenues in the quarter were $72 million up 5% excluding effects.
Despite the strong prior year comps up 19% growth excluding affects.
The business continues to execute well on innovation and design wins.
One such example is highlighted on the bottom of the flight.
Our team recently won and deliver an order for an automated liquid handling solution for a chemical laboratory in Western Europe .
The system is comprised of multiple technologies from our medical segment.
Including robotic liquid handling solutions as well that's the range bumps to the LIBOR and more efficient and reliable solution for the customer.
This example highlights an area that I am very excited about as we're now able to bundle multiple technologies for the portfolio to meet customer needs.
The ability to bundle technologies and provide innovative solutions for our customer has been an explicit component of our M&A strategy as we have diversified into liquid bombs and liquid handling solutions.
I'm very encouraged by the growth opportunities that lie ahead of us.
Medical adjusted EBITDA performance for the quarter was 22 million up 12% excluding the effect.
Margins were 31%.
190 basis points versus prior year.
Marked the fifth consecutive quarter of triple digit margin expansion.
Due largely to strong flow through from volume increases and continued operational efficiency driven by execution through the use of GDX.
Turning to slide 11, let me spend a few minutes looking ahead to our exciting future.
Our simple four points strategy provides a powerful foundation underpinned by GDX, which allows for nimble execution eventing changing economic conditions.
As I have mentioned previously talent eased at the center of everything we do I'm, having the best team is core to the strategy.
I have gotten the tries to spend time with the Ingersoll Rand industrials team over the past few months and I see a lot of similarities into cultures between the two companies, which gives me confidence in our integration efforts.
In addition, we're making great steps on completing the leadership team for the combined company comprised of members from both organizations.
As you probably saw a few weeks ago, we announced the transition or the CFO role.
I mean, the waiver will be joining Gardner Denver in December and comes to all from Fortive Corporation, where she most recently served as the Chief Accounting Officer.
There really has an extremely strong background in finance and accounting I her performance read them mindset and operational focus will make her a perfect fit for Gardner Denver and the future combined company with the Ingersoll Rand industrial segments.
It really has been involved in several large transformational transactions during her time with both supportive and diner.
And we'll make her and ideal candidate to lead both the finest and IP functions of the combined organization.
I look forward to have an Emily as my partner as we move ahead.
I will also like to personally thank Neal for his leadership and partnership over the last several years.
Neil has been a key driver in building on the plane or strategy I'm, making Gardner Denver the performance driven company that it is today and I wish him the best use future endeavors.
Turning to slide 12, I know their core component of this strategy is ongoing margin expansion.
We have stated that we expected the LIBOR $250 million in cost synergies by the end of year three after the close of the deal and our confidence in achieving that target remains unchanged.
On our last earnings call, we provided a framework on the holiday integration planning is happening with Workstreams building charters blueprints on worked lens to define the future state organization and how we will delever synergies across the enterprise starting on day one.
The key takeaway here is that we are not waiting until the deal closure to start building out the seanergy funnel.
Well just like you will see an example of how we are approaching the procurement work stream.
As we have previously mentioned the largest aereo saving expectation from the combined company isn't operations on supply chain.
With procurement savings comprising a large piece of that equation.
We went after the deal signing back in April both Gardner, Denver, and Ingersoll Rand industrials.
Provider provided their full repository of both direct and indirect spend to a third party advisory group, we referred to as Clinton.
It's clean team is able to analyze the data on behalf of both companies and created what we referred to as a local room for our skews that are ready to go starting on day one.
It's one of these lockers contains a specific commodity argue that is tied to wait quantified savings opportunity along with a timeline for execution.
At this time the clean team has analyze approximately 90% of the 2 billion plus of combined direct materials band and 60% of the indirect spend.
Overall, the funnel is progressing very very well.
Similarly, the remainder of their work streams are utilizing the principles of gtx and the tool kit or growth rooms to manage it integration planning process and build out the funnel for synergies.
Turning to slide 13, we continue to progress well in terms of the timeline of the transaction.
A reminder, since the deal announcement back in April we have already completed the U.S. anti trust process and the initial submissions were all international regulatory filings.
As we look ahead, we expect all of that require FCC filings, New York to occur in the fourth and first quarters, where the shareholder border boat and all their final steps or current in Q1 up 2020 .
It should continue to push was right on track for the anticipated early 2020 deal closure timeline.
In conclusion, while we continue to navigate it challenging market environment I'm very pleased with a proactive steps. The teams are taken to manage those areas within their control.
Do they actually remains at the center of how we operate as a company.
And we're using the tool kit to drive targeted growth initiatives, while at the same time prudently managing cost and cash.
Looking ahead to 2020, well, we will not be providing explicit guidance at this time, we do expect to slow growth environment, and we'll continue to manage the business accordingly.
In addition, I continued to be encouraged by the progress the teams are making on the closure of the pending Ingersoll Rand transaction.
As a long term prospects for the combined company and the value creation opportunity, both remain very positive and more exciting than ever.
That I will turn to call over to the operator I hope it at procuring.
Yes. Thank you well now begin the question answer session.
Yes. Good question do me a press Star then one under Touchtone phone.
If you are using speakerphone, please pick up your hands up before pressing the keys to try to question. Please press Star then too it's time, we'll pause momentarily to assemble the roster.
And the first question comes from Andrew Kaplowitz with Citi.
Hey, good morning, that's.
Right now they [noise].
So Dave how would you compare their carbon upstream down turn to the downturn 15, and 16, you obviously have a much more robust there's no [laughter] now given your consumables exposure, you know serviceability and group relationships with large customers, but it seems you still got that surprised by the decline even would be in your aftermarket business, how do you get comp.
And then step yes, you can control is nearing a bottom at this point could you give us any thoughts on how to think about because incident 2020 can you sustain the order rates that you've spoken about in the past the 30 million or sell a month in aftermarket related orders.
Yeah, I know the thanks.
We are the big difference is exactly as you said you know sends a two day when you look at the business as it is most of it aftermarket and consumable as we said revenues roughly 90% of it our aftermarket.
And that is kinda comprised of the lineup consumables that we did not had a that type of consumable line back at the last died down cycle.
So I think that is definitely providing us a much better margin profile as well as a much better revenue profile as we have seen in these down cycle.
When you look at a year over year compared to one of the upstream business as the biggest change here has been the or you know equipment pumps.
That you could argue is roughly anywhere between 100 $250 million less revenue on a year over year basis.
So and we said that that was definitely not going to going to occur.
Into a into 2019 and it is proving to be a exactly correct.
In terms of your question you know what we have seen and many of you have read too as well is that the past weeks a there have been plenty of announcements from pressure pumpers and many of them announcing that they're calling up and parion all capacity.
Our estimates of public and private companies is that approximately 2 million of horsepower. It's been in pair and I retired and I think that's good news for the industry as these helps bring supply and demand back into the balance.
In addition, you know you have several other customers that are stacking up fleets and kind of a life and equipment and what we don't expect these trend to change in the fourth quarter. I mean, we know this is on sustainable over the short to medium term as equipment does does need to get maintain and eventually replace so weve continued to keep an eye closing today.
As we think it would definitely provide some perhaps a pent up demand.
And as we are not providing 2020 guidance at least.
It is worth noting that a couple other major <unk> pressure pumping companies are aspect in.
You want 2020 activity to pick up from Q4, 19 levels and others are saying a rebound may happen at some point time next year, but again, it's too early to tell.
So we will see as we exit 2019, and and we have more conversations with our customers on their 2020 span and capex expectations.
But needless to say I mean, I think a as we said on the gardening.
The remarks, we continued to be excited in the saying that this business in the third quarter to lever up all EBITDA margin profile than the energy and even with these lower revenue was still in that fourth quarter, we expect expected to be above 20% EBITDA margin business.
Sounds good thanks for that and then can you talk about the cadence in the corner for the rest of your differences you mentioned your expected quarter and ramp up in industrial than mid and downstream, especially you asked didn't happen under conditions actually soften peanuts equivalent on but some of your industrial peers have seen did include men toward the under a quarter in Europe .
Sample or here in October . So if you continue to see deferrals orders or has there been any stabilization in reaching one market.
Yeah, well well we have seen here in the month of a cover its oh say stable.
Compared to the exit rate that we saw in the a into third quarter.
And I think you know October is largely inline with expectations.
You know so and as we kind of think about it too as well and the in the third quarter.
As you know, we expect that industrials to be mid single digit a we did low single digit ex FX and the drivers in decades, where Americas and as you would you pointed out and we said on the remarks due to the lack of the ramp.
But also keep in mind that we also mentioned that some of the change that we're doing in the guidance on what we saw in the third quarter. He had to do with some project push outs.
And these are kind of meaningful large projects that got pushed out to Q4 and 2020 .
Thanks, Andy.
Sure. Thank you.
Thank you and then especially comes from Mike Halloran with Baird.
Hi, Good morning, everyone Horny, Mike do so just kind of continuing on the train of thought just didn't they are the end markets, you're serving right now growing on organic basis and.
It's the sequential trend continues I'm from what you saw in the third quarter into October here does that imply the end markets themselves can grown 2020, probably some greater challenges in the front half in 2020, there's just a back half, but just trying to understand the cadence in the underlying end markets. As you did you get this year and then into next year.
Yeah. So it's a couple of things there Ah Ah Mike you know first of all.
To answer your question, yes, that's that's kinda our expectation any of you you know what we said also is that still core oil number kick in person kind of the core business is still seeing growth Oh, a low single digit growth.
And that is across most of the kind of core markets. So we have a including the U.S., where we continue to see even in the third quarter. Some pretty good growth on on core or new and this is on top of so I'm pretty tough comps from 2018. So I think when you look at our data points I think it's better to think about.
Got it more from I kind of a two year period in the same that we're still growing but we're growing on top of some very calm.
And to re read kind of Reground, everyone is that we're still going to see a year over year rose and a in industrial market. So so yes, I mean, that's the way you frame that up it's a it's correct.
And then when you're thinking about the restructuring side of things, obviously, it's an incremental restructuring announced this quarter you've had other actions going places here.
Could you just help provide a a cumulative sense for where what kind of actions you've taken this year on a whole what that means in terms of savings implied for 2019, and then what the run rate of savings on top of kind of called the incremental run rate for savings going into next year would be from all the actions you've done.
Sure. So so far a into the year, we spent approximately $60 million in restructuring actions.
You know early in 2019, the actions that we too we're largely in the upstream business.
And that's why you're seeing that the decremental margins have improved sequentially, even though the revenue sequentially has a decline kind of accelerate it Ah. So again it proves that the actions we need in the upstream inside our are really impacting the business positively.
And the team continues to work on a few more fuel more actions you're in the fourth quarter, particularly particularly on productivity improvements.
And the action that we just recently took off a roughly $10 million annualized savings. We expect that 2 million of that we'll be in 2019, a benefit of that into piano and roughly a million dollars will carry over into 2020 .
Appreciate it. Thank you thank you Mike.
Thank you and the next question comes from Nathan Jones with Stifel.
Good morning, everyone one of the Nathan.
HM Centseight, you talked about industrial market ex FX, our industrial business being up.
Low single digits, I think it's probably down maybe two or 3% on an organic basis.
Which is down from the mid single digits. During the first half maybe could you talk a little bit more about the sub markets in their way you've you've seen those weakening I think he said you know the core oil compressor markets still up low single digits, where other parts of the market that you're seeing the softness.
Sure Nathan and let me just kind of run a.
Referring you the organic growth has been kind of less than a negative 1% so down about 1% organic and yes. The markets have slowed down a you know what in the third quarter. We so low single digit growth in compressors on blowers X effects.
We're very quite pleased with this performance and this is actually good performance as Ns Third party reports in the U.S. support we're outperforming the market in the third quarter and a and year to date for onto forget a compressors.
Now the vacuum a industrial vacuum <unk>, we have seen that is kind of more correlated with a with Oems.
That has continued to be softer a done deal are there to kind of core product lines.
Okay. That's helpful. I think it's pretty clear that you are outperforming that the sub markets interesting.
A discussion there about the pre acquisition work you're doing an IR I think typically you would see some of these cost synergies b.
More year to waited all year three weighted does does the work you're doing here, maybe accelerate the expectation is some of that $250 million if of cost savings and is there any directional kind of guidance you could give us on how you think it does it will be realized.
Yeah, They said potentially.
I mean, we're still doing obviously the integration planning on as we get to close we will have a very visibility on how much weaker or we could potentially accelerate based on macro.
Economic environment, but the phasing that we're thinking right now as you know, 10% to 15% or realize done visible in the BNL in year, one a with a ramp up from there with a the actions taken by end of year three through to see the savings in the piano.
Okay. That's helpful. Thanks, very much thank you Nathan.
Thank you and your next question comes from Julian Mitchell with Barclays.
Hi, good morning.
Good morning is doing really good morning, and thanks, Neil tool to help and wish you all the best in future.
Maybe just the first question around the mid and downstream energy piece.
It looks as if that's implied in Q4 to be down double digits I'm, just given you're saying the urease sort of flattish and you had a very very strong Q1.
I just wanted to check if that's right and if so.
You know, what's really driving that big down sending the market is there any particular, a geographic presence there what type of customer, which is driving that I'm sure fool and whether you think that that downturn in the mid and downstream markets in particular.
Good loss through sometimes do next year as well.
Sure sure Nathan and so we're seeing we're seeing made on downstream actually closer to flattish or in the into fourth quarter, that's going to be up sequentially from our Q3 and any of you remember we talked a lot about some pretty large projects that are schedule in the fourth quarter now in our new God.
Yes, we're assuming some of them still kind of facing to 2020 as we saw some push outs from Q3, two Q4, we assume a and as we went through the team with the teams through project by project, we assign the probability based on what current market conditions are saying on some projects that will then get pool.
Do 2020 , but we expect me to down to be flat ish in the fourth quarter.
You know the <expletive> the good thing I guess on the on the meat on down as you. So with the low Oh, we did double digit order growth in the third quarter were continues to build the funnel for Four Q2 020 and in terms of the original a aspect similar to what we saw in Industrials Asia Pacific tends to.
Be the region, where we're seeing most of the push outs or here in a in the fourth quarter into 2020 and this is a you know that positive news here is that a these projects are just getting this fair doesn't know getting canceled in many of these projects or the customer prepays already Sir.
And the amount of cash and and I think you know when they get commission and installed that's when they need to do that last payment and in some cases, we think that some customers are just managing their cash.
Thank you very much my second question.
Just looking at the the balance sheet leverage. So you know initially I think you'd said that at the time as the I'll deal close you'd be about 2.3 times net debt EBITDA ex synergies that was when you were thinking yearend. This year would be about 1.6 times at Gd I you know GDR itself is.
Now up to two times Levered at yearend. So just wondered what you will view, how you'll view has changed if the pro forma leverage.
As of the deal close date early next year.
Yeah, I think this as we as we kind of close get closer will or will be able to see what are what we will see I mean, I think you know me mid twos, and it's still probably within the range and but you know we're still waiting to get a lot of the carve out financials and everything else to kind of having better pursue.
Acted on a better view on a on what that might be.
Great. Thank you.
Thank you Jim.
Thank you and the next question comes from the current Blaze with Deutsche Bank.
Yeah. Thanks, Good morning, guys good morning nickel.
So first question just around the cost actions that you're taking you talked about how a lot of this is obviously happening within upstream energy, but I think you also mentioned that you expect decremental margins within industrials to improve in the fourth quarter. So just curious if theres a sense of you know how much restructuring payback goes into industrial is relative to upstream energy and what gives you.
Confidence around not improvement in decremental margins within industrials.
Sure Nicole so so the comment I made about the restructuring of the upstream that was really more related towards the beginning of the year. The the 10 million dollar of annualized savings that we just execute a here in the third quarter. You can you can actually spread of roughly same as kind of a percentage of revenue. So you can think about that roughly 50% of that.
That will be in industrials and even when you think about the $2 million I will be generated in 2019 of savings from that restructuring that we did in the third quarter about 50% of that kind of coming into the industrials.
So so I think that that in combination with a with with the impact of price I to be and some of the cost actions that continue to accelerate through the year that is what will give us the confidence of having a better decremental as we're going to the fourth quarter for industrial.
Okay got it makes is intact and then just maybe a little bit more on the drivers of the midstream and downstream or shrink that you called out and I think that general perception is not you know midstream capex is going to be pretty weak into 2020. So you know just curious where where that strength is actually coming from.
Yeah, I think what we have seen the strength is really coming from a when we're able to combine multiple technologies to offer.
Kind of unique solutions.
And in some case as you know we're uniquely position into sands that we have lingering compressor with our Dara business with Lincoln rain vacuums within that business and when you combine those two is really offers some pretty unique solutions to customers to ensure that they see productivity gains in the a in there.
Factories and processes. So that is really what we're seeing most of US most of the good momentum coming through is really for from a from highly engineered solutions that combine multiple technologies.
Got it thanks I'll pass it on.
Thank you Nicole.
Thank you and the next question comes from Joe Ritchie with Goldman Sachs.
Hi, Thanks, Good morning, guys good morning, Joan.
And so the Sunday, maybe just touching on upstream for a second if I heard you correctly. The Fourq you run rate's going to be roughly $60 million I know, we've been kind of holding this <unk> hundred million dollar line I'm on a quarterly basis throughout the year I guess I guess, how do you how do you think about 60 a improving.
As we as we head into 2020 are we gonna be at this kind of $60 million run rate for a few quarters.
Yeah, Joe a I, we don't believe that a this isn't your run rate.
Keep in mind that Q4 is being negatively impacted by customers, taking fleets cannibalization on lower activity level and what we expect to be an elongated and holiday season and this is why we're expecting roughly to 60 million dollar revenue in the fourth quarter with almost all of it being aftermarket and.
Well, there is always difficult to call a trough or bottom in the oil and gas market. We do believe that the levels you will see in the fourth quarter levels that we will consider considered to be pretty close to the trough and up and you know and and so at least that's kind of the way, we we're thinking about it.
Okay, and then maybe if I, if I kind of thinking about a longer term question I. The sent a and you think about the upstream business.
And in some of the dynamics that are occurring in the space today, where you have you know M p's being a lot more discipline from a capital perspective, you have reserve lending you know drying up I'm just trying to understand like how do you guys think about this business then what's the new normal for this business can we ever get back to you know prior peaks in this business or <unk> or should we be.
Thinking about this business from a normalize perspective is being some are lower than where you gossipy before.
Well I think you know a so so I mean I you know, we still see continued opportunity for multiple levels of Ah multiple levers of growth.
You know think about it that these year, we have seen on the Frac side, basically almost no or original equipment bombs.
And the pumps are still working out pretty harsh in the a in the field so that cycle. They still is yet to come.
You know as we were finishing up 2018, many people thought that we were going to see an OE replacement cycle that obviously has not come through in 2019 that still needs to happen and as customers are stacking up lead cannibalizing fleets and in many cases also impairing or pairing all capacity or please.
It is suspected that that or you know equipment replacement work on the second lever for growth is that this year, we're seeing basically zero a drill a business right now from the drill bombs or consumables from drill bumps. So so that is again another one that could expect it to be coming up back in the future.
Sure and the third lever.
You know our team does not stop innovation aren't even in these year. So we're pretty excited with the fuel.
New innovations that we're working with the with basically taking our pumps and really utilizing that for all their non oil and gas applications and I think you know is going to be pretty exciting that a you know what the team is doing a little strategic work here, how do diversified and take the same technology of the high pressure reciprocating pump and applied.
That do all other processes that are that we feel could create a great benefit by having these type of technology.
Okay. Thanks, guys.
Thank you.
Thank you and the next question comes from Josh Wenski without Morgan Stanley .
Hi, Good morning, guys, Hey, Josh.
Just a question on the industrial business I know, we've covered a lot of ground kind of on on upstream like just projects in general, but you're thinking about the combined compressor offering with whats yourselves and Ingersoll Rand I think you know organically orders in that business were down a little bit too.
Do you think about those combined businesses is being on any kind of offsetting cycle. Obviously, they're both weak right now were weaker but are they on the same cyclicality, where we should expect more the same when they get combined or are there other niche markets in there where you know maybe one plus one.
You know kind of flattens out a little bit in terms of kind of that cyclical amplitude.
Great Great Great question, Josh It you know when you think about it and obviously you know as we sit here will will will will listen to the Ingersoll Rand or earnings into for more detail well you could actually look it in there from a Atlas Copco earnings report, where they talked a lot about good book.
Good momentum on the large compressors dot dot is at technology that garnered Denver, we don't have that isn't technology that a that is complimentary to what we have that that that that we know in the combined company. We can really leverage all the technology. So.
If we think that that these kind of large gas process compressors combined with the commentary that we still made about oil lubricated core compression technology is still doing well for AWS, we're where we get excited.
That the combination continues to be within what we call out that thesis to be which is complimentary technology that gives us better lever better leverage for long term value creation. There's also you know kind of also some niche products around vacuums and specialty pumps or.
Obviously, you know a if you go beyond the palm their compressors, you know what what a Ingersoll Rand has dawn with PFS acquisition. It really creates a very highly complimentary technology for some of our other spaces like like the medical segment. So it's always yeah, I mean, I think there could be a placebo combination here where.
The combination of technologies provides a better or kind of call it less cyclicality as as we go forward.
Great. That's that's helpful. And then just following up on the earlier question about you Kinda day, one leverage you know maybe being a little bit higher on an EBITDA basis, just as a function of kind of the recent stepped down on the core business does that make you rethink at all you know kind of some of the portfolio Optionality.
On the combined organization you know maybe some noncore businesses that can be more closely examined <unk> I guess, the you know the point would be to accelerate that journey into you know kind of compression M&A in to the extent to de levering you know slows that down Im looking at the portfolio may.
Maybe an accelerant there.
Sure, Josh I I will say.
It doesn't change our thinking dramatically or you know, we still like the portfolio well, let me, having said that we love the portfolio Optionality that we have.
You know, we're still going to be very prudent ER and a and I think this is the exciting. Unfortunately is that you know we're combining two great companies that were going to be very focused on the seanergy creation on the $250 million and and you know from there we have just a incremental optionality to do different things.
Okay. Thanks for the time.
Thank you just [noise].
Thank you and the next question comes on John Walsh with Credit Suisse.
Hi, good morning.
Good morning to merge them.
Just wanted to kind of put a couple answers together here. Obviously you know you don't want to talk about a 2020 guidance, yet, but I want to make sure sounds like in the NAND and in a response to an earlier question energy absolute dollars is you know closer to trough than not you have.
During savings that'll carry over into next year. I think you said you expect your end markets you know at least to grow or at least that's the best expectation today I mean should we assume that EBITDA growth happens next year.
Yeah, John I think I think it's a you know we're definitely expecting that is gonna be a slow growth environment.
Into 2020 .
We're create clearly really focuses on on a on our prudency around cost and restructuring.
We're gonna see the first half of the year have some tough comps I mean as you as you have seen here in the first half of the year, where we're doing a really well long basically all the soon there's upstream midstream medical and industrial so there will be some tough comps in the first half of the year Oh on in terms of a of the growth of David.
I mean, we that's that's what we always want to be able to achieve a and that's what we're driving our teams were basically saying that they slow growth is here, but we need to continue to do margin expansion.
And we'll ask it will continue to execute our proven playbook on margin expansion with I to be sourcing restructuring and a emprise and keep the keep very focus is on the items that are within our control.
Okay. Thank you for that and then you know I guess, you talked a little earlier about price cost, but kind of what are your expectations. There on kind of a go forward or we you know how green, our we and how do you expect that to kind of trend as input costs arguably can come down.
Sure if I, if I take maybe the last quarter here in terms of Ah the proof point a in industrial price cost a it still is positive I mean, we so about 2% price improvement year over year.
Which are offset the impact of tariffs and other cost.
And also offset you know what we saw in the third quarter. The offset here was really due to a dramatic on some can kind of these large project deferrals. So so we expect that pricing industrials continues to be in that kind of range, 1% to 2%.
We have always said that a we like to have better the quality of earnings are obviously more important for us. We compete we don't compete on price we compete on technology and innovation and that will lead us to keep in mind that better pricing points.
Alright, thank you.
Thank you Jim.
Thank you and that's when it comes from anywhere Levine with P.T.J.
Hey, guys.
No money.
On the U.S. Frac market, how long can the industrial potentially go on cannibalizing fleets before they run out have you have you done that kind of analysis or spoken with customers on that topic.
No no not not necessarily I mean, but.
You can imagine that that we do the same thing that than many other people do I mean, we actually many of our sales guys when they when they drive to cost of more location. They see the fleet, but our part in the graveyards oriented yard and they they do see I mean, they they do kind of inventory around a the number of fluid.
Ends are not on the bombs or to bomb or the trucks that don't have any pumps. So so we do that on a on a kind of weekly basis with our sales teams going to customers.
I prefer not to quantify it I mean, we quantified ourselves internally about dawn don't express those numbers, but it is it is happening a and it is real and that is similar to what Oh I don't think as to the point to the last downturn, but it is it's kind of getting there.
Great and then given the the weakness we're seeing an upstream energy could this open now operate.
Opportunity for consolidation I mean, I know, you're you're looking to reduce upstream exposure not the other way around but I wonder if there's some opportunities that could be you know too good to pass out.
Yeah. He isn't there were no I mean, I potentially I mean, I know, we do here that they could be a lot of consolidation from our customer base.
You know, we actually like that because they do you think about it or you know when when when when we look at our platinum accounts are key relationship customers. Those are you know tier one and to your do reni pressure pumper customers that they know and really understand total cost of ownership and a and were very unique.
Good position to be able to provide that where as other independent sellers for let's say single fluid and or single parts. They just cannot provide a totally question that we can provide so it's all consolidation happening or on the err on the customer base, we hear about its we have seen some of it right with a keen on C.J.
And hopefully there's there's more to come on that.
Great. Thank you I'll turn it back.
Thank you.
Q.
So I would like to return the photo management for any closing comments.
Thank you. Thank you everyone for your interest in Gardner Denver wholesale so quite important I just want to thank you. Thank all of our employees that Garner then before to continue execution, even in these tough macroeconomic environments.
And we're very pleased with how our teams continue to progress through the integration planning and we're very excited to continue to work with the Ingersoll Rand Industrial segment team and we look forward to get into a close and continue to execute here through the end of a year, but at the same down in parallel content to work on the integration planning so.
With that thanks, everyone and look forward to see and many of you over the next a few weeks or months.
Thank you you conference has now concluded thank you much today today's presentation.
Disconnect your lines.