Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Ingersoll Rand first quarter 2020 earnings conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your child.
The phone we ask that you. Please limit yourself to one question and one follow up if you require any further assistance. Please press star Zero I would now like behind the conference over to your Speaker today Vic Kenny head of Investor Relations. Thank you. Please go ahead.
Thank you and welcome to the Ingersoll Rand 2021st quarter earnings call I'm, Vic any Ingersoll Rands Investor Relations leader and with me today, our percentage of rental Chief Executive Officer, and Emily Weaver, Chief Financial Officer.
Our earnings release, which was issued this morning, and a supplemental presentation, which will be reference during the call or both available on the Investor Relations section of our website Www Dot I RCR Dotcom. In addition, a replay of this morning to conference call will be available later today.
Before we get started I would like to remind everyone that certain statements on this call or forward looking in nature and are subject to the risks and uncertainties discussed in our previous FCC filings, which you should read in conjunction with the information provided on this call.
For more details on these risks please refer to our annual report on form 10-K filed with the Securities Exchange Commission and our current report on form 8-K filed with the Securities Exchange Commission on May Onest, 2020, which are available on our website at www Dot IR Seo dotcom.
Additional disclosure regarding forward looking statements is included on slide two of the presentation.
In addition in today's remarks, we'll refer to certain non-GAAP financial measures you can find a reconciliation of these measures to the most comparable measure calculated and presented in accordance with gap in our slide presentation and in our release, which are both available on the <unk> Investor Relations section of our website I.
I also remind everyone that in both our earnings release at today's presentation. We've included the as reported financials and supplemental financial information to assist with analysis and compare it is the as reported financials. Only include the Ingersoll Rand industrial segment results and the closing date of the transaction on February 20, I 2020, and the supplemental financial information provides results.
The transaction had occurred as of January 1st 2018 to write a full quarter of comparable results.
Turn to slide three on today's call will provide an update on the top priorities a company in the current operating environment as well as review our first quarter total company and segment highlights.
We will conclude today's call with acuity session. As a reminder, we would ask that each caller keep to one question and one follow up to allow for enough time for all the participants.
This time I will now turned over to the center and all Chief Executive Officer.
Thanks, Ken good morning to everyone older coal.
I would love to kick off on todays presentation by sending our thoughts to all who have been affected by called me 19.
And all the data could have helped her workers from responders and volunteers, who are on the front lines all over the world battling this component.
I would also like to take a moment to say sincere. Thank you too old old Ingersoll Rand employees around the world.
The pictures on slide four or just a few examples or dedicated global workforce, who have adapted to the realities of work environment to continue to serve our customers.
Every day I hear a new examples of our business is providing mission critical products to our customers.
I'm proud of what our company represents an hour employees have responded to these person to times.
Well there continues to be a lot of uncertainty about the future. One thing I'm sure about is the Ingersoll Rand will continue to keep the safety of our communities and serving our customers at the center of everything we do.
And I wouldn't be possible without the dedication and hard work all of our employees.
Well, we're just like five I would like to grow in every one of the critical priorities were following during these challenging times.
When we close the transaction a little over two months ago would go I've never anticipated within a matter of weeks, we will be dealing with a global pandemic colson disruptions to our customers supply chain and the day to day operations of the company.
Our response speaks to how the IRS took it has affected me helped US a plan accelerate and adapt our actions to act quickly and decisively around three core priorities.
First ensuring the safety of our employees customers under community second around keeping a strong focus on the integration and execution to ensure the financial stability of the company through these on certain done.
And finally, continuing to execute on the strategy of the company as we have multiple catalyst to drive ongoing body creation.
The strength of Ingersoll Rand team aligned around these three priorities will position the company to emerge from this crisis as a stronger and more unified company.
The next slide as a reminder, that our purpose on volumes as well as our execution engine and we called directs a really at the heart of how we operate as a company, especially in these unprecedent at times.
During the integration process, we spent a lot of time, hopefully, creating the company's purpose.
One study center around our stakeholders, we know that they can lean on those two.
To help make like better.
This purposes, when combined with a four key bodies, but our team we want to databases creates a framework of what we want to achieve as a company.
The basis of how we do it is the Ingersoll Rand execution excellence process.
The simplicity and effectiveness of this is allowing us to accelerate the creation of a single culture across Ingersoll Rand.
Turning to slide seven or will have to briefly update you on the company's response to the carbon 19 crisis. Since he has been swift and focus around two major components.
First as a health and safety and well being of our employees customers and communities.
And second business continuity, not only within operations, but across a larger supply chain.
Starting first with health and safety, we activated our Cobiz 19 task force in February.
I had a full coordinate a company approach in early March just weeks after the creation of then you company.
Our execution approach has served us very well as we're able to quickly implement enhanced site safety protocols and a mandatory work from home policy for those employees, who can work remotely.
And then as they are encouraging but our quick actions have been successful as we currently have had fewer done 30 confirmed cases of Colby 19, amongst our more than 17000 global employees.
What is more than just implementing sector protocols. It's also about supporting and engaging the employee base. As a result, we have implemented a number of measures, including global outreach program to solicit employee feedback.
Employees reacted quickly and with a true ownership mindset provided more than 200 suggestions when we asked for cost savings ideas.
Not only did our people into your to take individual Bakeoffs furloughs and forego vacation time busier they have thoughtful in depth suggestions menu, which we're actively implementing today.
From a business continued to perspective, starting first with our operations as we previously communicated we have seen plans large and in China, It's only in India impacted due to cover 19.
China was largely impacted in the month of January February and have seen steadily improved capacity I'm output through March and into April as things are now largely back to normal.
He told me in India, So about a two month like the China with operations being impacted in late March and into April.
In these times, our sites around the globe out or 98% operational with India still being the most impacted due to government old restrictions on returning to work.
The supply chain has seen a similar trends.
In fact in China is largely behind us and we currently have no meaningful delivery issues.
The Americas and EMEA regions are stabilizing it seems like the suppliers in the U.S. on easily have started to come back online.
In about two weeks, we have seen the number of impact the supplies dropped by more than that which is a very good time and were supplement in supply from dual source is from other regions where possible.
Much like operations, India continues to be than most impacted aspect of the supply chain.
And we expect the situation to improve that later half of me when governmental restrictions big injuries.
We are addressing the current and bottom head on by actively managing those areas within our control. So let me tell you about what we're doing here.
Starting with slide eight through the use of minor eggs, we have been able to build the cost synergy funneled to over $350 million with increases across all major segun categories, and we continue to identify areas of incremental opportunity.
As a reminder, we expect to be able to realize the anticipated transaction cost synergies.
Fortunately $250 million by the end of year three after closing.
We expect to incur approximately $450 million of expense in connection with both achieving these cost synergies and the associated standup or the new company.
As we have stayed at multiple times over the past few quarters. The spacing of synergy delivery was always an area. We believe we could accelerate based on market conditions and that's exactly what we have done.
We have dramatically increase the pace, having already executed on $90 million, an annualized structural cost reductions with approximately $70 million savings expected to be that lever in twentytwenty.
The majority of these savings are coming from headcount actions already taken in the past two months, because we streamlined the company and reduce the years within the organization.
In addition, we have deployed the first wave a procurement initiative, we are excuse for nearly one third of our historical direct materials fan base already launched as well that some quick win initiatives being deployed.
In total were now expected to deliver approximately 35% of our overall synergies target in 2020.
Which is approximately three times higher than the original year want expectation of 10% to 15% reallocation.
We're keeping the overall cost synergy target at $250 million over three year timeframe at this time to remain prudent on volume dependent synergies like procurement and I to be given the current environment.
It is not only the structural cost that we have taken out but also how we're supplementing our synergy that LIBOR activities with thoughtful short term cost reductions to protect margins.
So let's move to slide nine to talk about that.
In Q1, despite the 15% wrote a decline that we so collectively across the business on a pro forma basis, we were able to limit adjusted EBITDA decrementals to less than 30%.
With the strongest performance coming from our two largest segments.
We expect that these additional actions would you $40 million to $50 million, an incremental cost savings and the piano. These here with the majority coming into second quarter and third quarter.
We will continue to reevaluate on a monthly basis any demand environment does not accelerate in the second half a year, we will potentially extend some of these actions and increase our taking and start to get accordingly.
Well, we're making some tough decisions to control cost one area that we're not calling back its strategic growth initiatives across the enterprise.
Much like we did back in 2015, a Gardner Denver, when we invested through the downturn to capitalize on market share gains and new broke opportunities. We're following the same playbook today.
Investments in R&D are being maintained at similar levels as prior years, and we continue to fall on target to commercial initiatives, such as demand generation and our I O p. platforms.
This is all part of the strategy to play often now, especially as we bring the two companies together through the integration.
Moving to slide 10, let me talk about liquidity.
The company continues to have a strong balance sheet with ample liquidity.
The time of the merger, we took the opportunity to reprise our legacy that we're placing the new $1.9 billion burned going to close the transaction.
All of our debt is a term loan b structure with very attractive pricing as the U.S. components are LIBOR, plus 175, and the your component is a Europe or plus 200.
The third loans have no financial covenants from his perspective, and there are no maturities until 2027.
Liquidity also remained strong at $1.6 billion as we finished the quarter with $556 million with cash on the balance sheet and over a billion dollars of capacity on our existing credit facilities.
As we look ahead, we continued to see several opportunities to on the cash as we remain very prudent on preserving liquidity.
Opportunities exist across working capital and cash taxes.
And we will continue to see Tailwinds from interest expense in the second half a year, that's all $825 million of legacy fixed interest rate swaps will expire by September up Twentytwenty.
Even though we feel our level of liquidity is proper, we're evaluating incremental debt or other liquidity vehicles, given the attractive rate and covenant environment.
Turning to slide 11, our commitment to our long term strategy remains on wavering.
You have heard me already referenced several elements of our strategy as were building the culture of Ingersoll Rand with our employees at the core.
We will continue to act quickly and prudently to protect margins and preserve liquidity.
And at the same time will position the company for future growth, both organically and through opportunistic targeted bolt on M&A.
Our business operates in a very fragmented markets and we see opportunities to add niche technologies to the portfolio.
And importantly, our newest strategic priority operating sustainably is taking shape as we launched several of our E G oriented initiatives already.
Overall, we have several value creation levers as we look ahead and we will continue to execute despite the uncertain macroeconomic landscape.
We'll now turn it over to Emily to walk you through the financials I mean.
Thanks for the same day.
On Slide 12, you will see the as reported financials for the company as a reminder, that reported financials include three months of legacy Gardner Denver, and one month of the legacy Ingersoll Rand industrial segment.
She went 2020 only the legacy Gardner Denver businesses in Q1 2019.
As a result, the comparisons are impacted materially by the transaction.
What's been a lot of time on this page as a result.
Other than to mention that the as reported net income in the corner include $197 million of amortization acquisition restructuring and other adjustments.
Which you can see listed in the reconciliation tables in the appendix at the presentation.
Turning to slide 13 to assist in clean comparative to the corner, we provided supplemental financial information, which treats the transaction as they could it happened as at January one 2018.
Total company perspective.
Our next adjusted revenue in orders declined, 14% and 7%, respectively and were impacted by Kobe 19.
Regionally, we saw notable declines in Asia Pacific as well as sharp declines in the U.S. and you're up towards the ended the quarter.
Most notably in the <unk> segment.
This led book to Bill could finish at 1.11 credit corridor.
The company delivered 208 million and adjusted EBIT that a decline of 24% driven mostly by the volume declines in IP Ns and the expected downturn in the H.P.S. segment.
Adjusted EBITDA margins were 16.4% down 200 basis points from last year.
However, our proactive cost controls within the business limited detrimental at 29%.
In terms of adjusted EBIT task composition for the company the legacy Gardner Denver business delivered 97 million as compared to our original guidance expectation of approximately 100 million.
Which we view as relatively strong performance given the environment.
The legacy IR businesses delivered 51 million of adjusted EBITDA in March as opposed to a combined 60 million for January and February.
Moving to slide 14 free cash flow for the quarter with $60 million on an as reported basis, including $8 million of Capex.
The Q1 free cash flow includes $63 million of outflows related to the transaction comprised of 38 million of synergy delivery and standup related costs and another 25 million of transaction fees.
We also paid $38 million of debt issuance costs in the quarter, which you can see in a financing section of the cash flow statement, bringing our total transaction related outflows in the quarter to $100 million.
From a leverage perspective, we finished at 2.6 times and while we do expect to see some short term increase to leverage we have shown the ability to de lever historically.
As you can see on the right side of the page will remain extremely disciplined on cash and we expect our capital allocation priorities to be very aligned with what you have seen historically.
Specifically.
Internal reinvestments for growth prudent debt pay down and opportunistic bolt on M&A.
We have no plans for any share repurchases or a dividend at this time.
I'll now turn it back to the same day to walk through the segment centric.
Thanks, Emily starting first with industrial technologies and services like 15.
The IDN and segment first quarter adjusted order intake was $889 million down 9% versus prior year, excluding the effects.
Adjusted revenues in the quarter were $796 million down 17% excluding FX.
And leading to a book to Bill ratio of 1.12 times.
From a regional perspective Asia Pacific revenues were down in the mid Thirtys.
With Europe down, 50% and Americans down 7% all excluding the effects.
We use these trending as an indication of how Q2 could potentially play out meaning that the apex declined in Q1 is what we expect to see in Americas EMEA in the near term.
This is a big on we're using to plan the cost controls for our business, but we're staying highly active with demand generation activities embracing controls well, we continued to demonstrate disciplining price generating over 1% in the quarter.
Well these markets are more opaque done historically, we're using our unique data acquisition strategy to mop order trends and remain agile in serving our customers into current environment.
We break these out into two areas aftermarket and original equipment.
For aftermarket leading indicator we have is actual compressors utilization data.
We can see the I want to usage of thousands of compressors worldwide, but our connected to what remote monitoring system.
In America Europe, we saw sharp decline in compressors really fishing in the last few weeks or March of nearly 30% with some recovery in the past few weeks of April.
We're not using these other way to know where our service teams need to focus while at the same time using that as a leading indicator for aftermarket activity, which is approximately 50% of a compressor business today.
For original equipment, we're using demand generation leads we said in the past I'd imagine was a leading indicator of orders that will be getting into next six to eight weeks.
With more down a thousand leads per week, we have a lot of commercial insight in our system.
What we saw into litter weeks of March was a drop of 30% versus what we saw earlier in the quarter.
What similar trends in America and Europe.
We have seen also early signs of improvement over the past few weeks of April, but still approximately 20% to 25% off from the high in the early part of a year.
Let me give you know some color from abroad. In my perspective, we have seen very similar trends across compressors blowers, and vacuums, where we saw orders down in the mid to high single digits.
I have spoken about a third party industry reports in the past.
And the Q1 data speaks well for the outcome of the combining the two companies.
According to a leading third party report the market in the U.S. was down mid single digits in dollars into first quarter.
Garnered number branded products were flat and Ingersoll Rand branded product was down high single digits.
But when you look into the details you see the power of the two companies has garnered number so a good share gains on low to medium horsepower machines well it was around two chair on high horsepower compressors.
This was exactly or hypothesis coming into the deal and we see these as a way to leverage the technology portfolio as well as a direct and indirect channels both companies have.
Our tools and lift which is part of the segment had a very tough quarter with orders and revenue down both over 20%.
The business was highly impacted by large inventory purchases that online retailers typically make into first quarter to support first half of your revenue.
However, this quarter in addition to the slowdown of the market many online retailers switched their focus to household essentials.
Moving to non-GAAP, adjusted EBITDA, IDN as a lever $135 million in the quarter, which was down 25%.
Non-GAAP adjusted EBITDA margin was 17%, which was down 150 basis points when the power. Your other cost mitigation efforts helped limit decrementals to 25%.
Segment that typically has bays decrementals, 35% to 40% before cost actions.
Moving to slide 16 to the precision and science technology segment.
Overall the segment have solid performance in these economic environment as adjusted orders were 290 million up 2% ex FX I.
Just a revenue was 192 million down 9% ex effects on strong prior year comps up 12% X effects growth and shipping delays due to call the 19.
This platform is a collection of technologies and premium brands that have leadership positions in very attractive niche markets.
The first quarter, we saw orders growth high single digits in the legacy medical pump business.
As we are leading keep layer in several applications like oxygen concentrators respirators and liquid handling.
You can see many of the applications that are medical palms go into at the bottom of the page.
Our teams have been working 24, seven providing modified solutions that can be used for new applications to fight probably 19 now and into future.
The remainder of the portfolio salt slightly negative orders performance down 2% X effect with the majority due to call. It looked downs in January and February China and towards the end of the quarter in India.
It is encouraging is that we continued to see good portal and orders agreed with the across many of the product lines and regions due to the niche applications in water and chemicals, which will help balance some of the expected witnesses in a more industrial end markets.
Moving to non-GAAP adjusted EBITDA being 50, the LIBOR $53 million in the quarter, which is down 6%.
Non-GAAP adjusted EBITDA margin was 27.7% up 120 basis points, driven by strong cost controls and productivity leading to decremental margins only 15%.
Moving to slide 17, and the specialty vehicle technology segment, our priorities for the segment are to continue to capture growth in it profitable manner.
We see that these segment can expand margins with the use of the same IRS tools, we have use across all the segments and expect to see improvements of this business moving forward.
Having said that this business performed very well the first quarter.
Just at orders were $230 million.
Just a revenue was $185 million up 8% answer and percent respectively.
With a book to Bill of 1.15.
Growth was driven by the strength in gold conductivity and consumer problems.
The business saw strong double digit order momentum in early January February.
But as a pandemic either you as we saw sharp decline in the second half of March.
Well, there's a lot to be excited about we're expecting to do it to be down compared to last year for couple of reasons.
First last year was a tough comp as the business had some supplier issues in the first quarter.
Where are some problem was shifted to the second quarter of 2019.
And to the business is not immune to these current environment.
While April orders were down year over year, we're starting to see some sequential improvement in orders.
We feel this is driven by couple of factors first in the consumer product line, then people to quickly to leverage in demand generation techniques widely used in the legacy industrial businesses and we have seen better momentum recently into run rate.
And second with the word we have known a proactive Colby prevention across all of our locations, where we're able to remain open what some of our competitors workloads.
Moving to non-GAAP, adjusted EBITDA specialty vehicles that lever $18 million in the quarter down 1%.
Non-GAAP adjusted EBITDA was 9.9%, which was down 80 basis points due to strategic growth investments and product mix.
Moving to slide 18 of the high pressure solution segment, the business perform a ball ours petitions unit tall operating environment.
Justin orders $84 million, and adjusted revenues of $96 million down, 26% and 29% respectively.
I suspect that the revenue base and the business was nearly 90% aftermarket and the team executed very well commercially with sequential adjusted orders up 6% and sequential adjusted revenues up 26% versus the fourth quarter of two dozen lending.
We continue to see share gain upper twentys an aftermarket.
And specifically consumables, where we saw orders and revenue up double digit sequentially.
This allowed us to deliver non-GAAP adjusted EBITDA of $24 million on margins of 24.6%.
It was down from last year level of 30.8% well sequentially better by over 400 basis points.
As we'd be able to the second quarter in Brazil, the year key leading indicator for this business has always been activity and intensity.
We can make sure that in multiple ways, what the simplest form is a number of fleets operationally in the market.
As a reminder, each frac fleet has about 60 to 80 trucks with each truck carrying one pump each bomb has a fluent and everett fluid and utilizes consumables.
What do you want to 2020 on average we sold through on an 18 active fleets the exit rate in March was 240.
We expect to see a substantial dropping to second quarter, where we believe the multiple April ended up roughly 50 active fleet due to the recent blame on dynamics in the market with the oversupply and lower pricing for oil.
And this will have a meaningful impact on revenues within the segment.
Because of that we're taking very proactive stance to drive corporate cost takeout to still show reasonable profitability in the quarters to come.
Moving to slide 19, we wanted to provide a quick snapshot of how the business has performed thus far in April.
Overall, the total company is down approximately 20% in orders that's a month began various low, particularly in U.S. and European markets.
Well, we're encouraged by the order momentum throughout April we expect total revenue to be lower down orders in the second quarter.
In terms of orders bold industrial technology and services and specialty vehicle segments were right in line with a total company average.
What precision on science technology is performing considerably better with positive year over year orders performance. Thus far as a result of continued strength in medical bumps.
And not surprisingly high pressure solution segment is down approximately 80% in orders as a market resets for will likely be a prolonged downturn that we expect will last for a number of quarters.
As we look forward due to the uncertain environment that we find ourselves in we will not be providing Q2 or total year guidance at this time.
However, the best manage our business and ensure we're taking the right that's too much during the downturn.
We're running multiple scenarios to stress test the balance sheet and the associated impact on cash flows.
Our current model shows up the business will need to be down 40% on an island basis to be cash flow breakeven using fairly conservative assumptions around working capital and capex, coupled with a cost actions we have taken thus far.
We feel that these puts us in a very solid position moving forward when compared to current order trends and coupled with our current liquidity position.
Turning to slide 20 for some concluding remarks.
When I say that what we manage through what we will no doubt be tough second quarter.
Uncertain recovery thereafter, we feel that the fundamental investment pieces and the company has not changed.
And this will run as a premier industrial company and we are in the early stages over transformation.
We have multiple levers for accelerating value creation, well being very focused on the current priorities.
We feel good about our liquidity.
With opportunities to increase these by all looking cash as well as taking advantage of the current rate environment.
We will continue to drive a culture of execution and we continue to pay attention to the opportunities in our large addressable market, particularly under current conditions to be strategic bolt on acquisitions.
With this we will turn the call back to the operator and open the call for killing it.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad. If you would like to remove yourself from the Q you May press the pound key and we ask that you limit yourself to one question and one follow up. Thank you. Your first question.
Comes from Andy Kaplowitz from Citigroup. Your line is open.
Good morning, guys how are you.
One and it gives you.
The since they can you give us more color into the April order declines you're seeing in your largest segment and I TNS first of all how long do you think that changing customer behavior from that power tools business that you talked about can lessen obviously you now have.
Smaller upstream, but especially downstream midstream related exposure nineteena. So are there discernible differences in the run rate of these businesses.
Given its they're more project versus the industrial compressor business.
Yeah, Let me just give you a little bit of call. It I mean as you saw we said roughly April total orders down 20% book to Bill grid of them Wong.
From a book to Bill perspective, you know the industrial technology, and the precision signs where were grid or.
But one of them, obviously, leading the way Oh, sorry, you know in terms a in terms of ideas. In particular, you know I will categorize it as you know the the short cycle was mostly most impacted in the quarter and continue to see.
So given the weakness here I'm looking for work I mean is mostly cost related to a again, maybe the PMI you know from a from the down into mainstream which is what we can see that to be more on the long cycle.
Also you know compared to lead a bit more stable in the first quarter and a and we kind of continued to see maybe some of that in the month of April a again typically we tend to get the orders for that long cycle now into first half of the year in order to get shipments a into second half and and from a BPL <unk>.
From a power to perspective, yeah, I mean rough rough quarter in a in the end up in Q1, Oh, it's as I alluded I mean last year than we're seeing some fairly good growth momentum from their expansion into online retailers and a and you saw that a into first quarter. Many of these only to retailers they moved or to have another kind.
No more household goods or critical needs to fight called it a couple of 19 and clearly you know these business. So some of them, but I'll say april's dailies a relatively slow so we haven't seen the the a the p. whatever the momentum of a of the portal business.
[laughter]. So that's helpful to send Dan I'm sure you you expect just ask about detrimental margin in some way. So let me just asking like there's some obviously you know good results in Q1 of close to 30, no I don't think about Decrementals with high pressure solutions, you know the orders down 80% can you hold decker.
Mentally there in the mid Fortys at what point the fixed cost become a problem I know you talked about accelerated cost out do you think about the rest of the business can the rest of the business hold 30% Decrementals with a 20% decline that you're seeing overall and the rest of the business.
Yes, so I'll say on the I mean, that's that's kind of what we're targeting four and I mean, a as we have seen we have performed well in the down cycles in the past a I think we had a good solid playbook that we though we executed in the into 15 16 that included both not only the in industrial downturn, but also a an upstream downturn.
Base Decrementals, they tend to be around 40% across the business with a slightly higher in a in businesses like the high pressure as we mentioned as well as the precision and signs because of a nice high gross margins are those businesses hub and you know lower on the specialty vehicles and the industrial technology. They think.
To play in that kind of 40% 40% range.
You know you've seen that we have taken very decisive actions between synergies and the short term actions to protect the margin.
We saw as we've mentioned you know some very good first quarter results for the total business under 30% and Q2 will clearly see a bit more pressure from a Dublin perspective, but we will continue to monitor decrementals with a target being closer and closer to about 30%.
All of a of Oh.
Baby, though and when you think about the actions word we're clearly taken much more aggressive actions on that high pressure.
Around cost actions based on what we see here with a lot of our data points and ER and the long duration of the downturn, we has picked up business.
Very helpful to send to stay well.
You do on it.
Your next question comes from Julian Mitchell from Barclays. Your line is open.
Hi, good morning.
Good morning Julien.
Only maybe just the first question on that point on decremental margins. So if you could help us understand perhaps the phasing of the cost synergies through the year and also looks that.
40 to 50 million of other cost out actions.
And should those mean that decremental margins narrow in the second half or not necessarily depending on mix and some other things.
Yeah, So maybe maybe break it down into the two buckets or usage if any of that 40 to 50 that we spoke about that I've kind of more related to discretionary or kind of volume related those are largely second quarter in a third quarter or with a good majority I'll say more and more so on the on the second quarter.
From a from the cost synergy perspective.
The the $70 million.
It will be $80 million to $90 million, an 18 year.
Roughly 70 million about his head count and I'll say that is kind of consistent through the second quarter third quarter in fourth quarter, while the other roughly $10 million to $20 million that comes from procurement. It is really more weighted towards that kind of Q3 in Q4.
That's very helpful. Thank you and then maybe just my second question for you Ofer Emilie around the free cash flow said, a good performance in Q1.
Just one did you had the slide on the very broad brush sort of assumptions around breakeven free cash, but assuming that down 40 doesn't play out.
You know what kind of sales are down call. It 20, 25% for the year well, it's like the free cash flow conversion should we expect how do you see working capital moving and maybe just remind US you had I think in the free cash that $63 million.
Transaction and separation cash cost in Q1, what's the rough.
Assumptions for the year.
Yeah. There will so you know where we're very pleased with the Q1 cash performance as easy as you saw their julianne and we've been managing cash.
You know from the day after the transaction very carefully and continuing to put in good process. He has been strong controls around it had given the current prices.
We.
Okay.
We we expect task to still be it could still be good as we move forward, but certainly a longer cash cycle as we move through and what's going to happen here. When it comes at 19, and we're really managing.
Payments as in in response to the collections were receiving to maintain our strong cash flow and liquidity positions.
And you know what the future holds and a lot of that's going to depend on things that we can't predict at this time and for sure, but we know we've got the right processes in place to maintain our cash position and our liquidity.
And how about the transaction and separation cost any very rough guide post for the year in light of that 63 million in Q1.
Yeah, and there there will be it and some incremental cash outflows in Q2 and I don't have they don't have that figure at my fingertips at the moment, Chilean but I can get back Tim it.
Okay. Thank you.
Your next question comes from Michael Holleran from Baird. Your line is open.
Good morning, everyone everyone's doing well.
So so could we just talked about the synergy funnel you referenced what are some incremental sources and relative to.
You originally identified 250 million synergies and maybe talk about the difference you're seeing more and the cost side versus no longer term some of the revenue synergy opportunities you're seeing.
Yeah, Mike.
As you recall, we always said that that we were going for a formal hired on the 250.
As we were 60 days into a into into into the transaction. We have obviously, a more to more kind of line and clear visibility as to what that's one that could could potentially be roughly the $100 million comes from a combination of structural savings as well as some quick quick footprint rationalization is kind of non manufacturing.
You know alluded to on the investments goal that we had back in April but we have no. It pretty good database of all the the locations across the world and that is giving us a very good way for us to really understand and rationalize or not so much of the manufacturing yet because we still see manufacturing kind of coming year to year, three but more.
More the the older kind of quick kids that are that we can think from a footprint perspective.
So so second part of the question liquidity isn't as strong position.
Once you get through.
Some of the one off things associated depending restructuring and separation in some of the extra can generally just referenced.
What would it takes you guys to be a little bit more aggressive with the cash outflow and then secondarily are related to that.
Do you think the fact that we're going into some sort of recession here, who knows how long does it go. These low did you think the opportunity is going with solid feed deploy capital more towards Nissan things over the next couple of years in a position for that today and any kind of thoughts and how you're thinking cumulative out that the capital side over the next year.
Plus month.
Yeah, No absolutely Mike I mean, I think you know clearly over the next a couple of years.
We see M&A continued to be really part of our strategy.
Phil.
We see it's a very unique environment right now.
We still see at this point time, some very good going on bolt on we feel very good funnel around you know the precision and signs as well as some of the industrial technologies, but there really more related towards bottoms.
Thank you.
Thanks, Mike.
Your next question comes from Nigel Coe from Wolfe Research Your line is open.
Good morning, how are you guys.
Good day.
Yeah. Good. Thanks, I wanted to just go back to the industrial Tech woman, so a little bit surprised to see you know the down 15% pro forma form and send the seems like most of that came from the legacy I all businesses piece, maybe just kind of spell out in a bit more detail how much of that can be explained by the geographic.
And end market mixes.
The industrial of the IR industrial business and and also what have you can say this during the quarter.
I wanted ask question, Nigel but to what yeah, what what happy to sit within within it stems encompassed in how we said this.
Yeah, so to the FERC to the first question, Yes, I mean, I think a coming China was definitely impacted largely in January and February.
The legacy IR business, they have a pretty sizeable China a exposure.
And we saw we still on impact to that.
You know terms so in terms of the service you know we saw serve is better than original equipment. I mean, it's typically would typically we sold roughly about two times from a percentage perspective better performance than that than the original equipment and just to kinda give me a maybe a little bit more color here, particularly as you know there's so much.
You know external ways of comparing some of the.
Some of the industrial technology, you know just what technology is composed of multiple technologies compressors backing the blowers and our compressor business is clearly within the industrial technologies, when we specifically compared to some of the competitors couple of data points that we look at is what I referenced in terms of the third party report a.
At the same time, you know just to give you a further perspective, the legacy Gardner Denver business in Q1 orders were down in the low single digit we just got comparable to what we saw in the market and a you know since since we since we didn't owned and legacy IR for the full quarter.
We just didn't do not comment on what we saw specifically you know January February that they so from an order perspective, but that gives you a good perspective as to how we where we were able to perform even on the legacy Judy.
Great. Thanks, [laughter] today, and then switching to the high pressure business. This is different so small notes so Mr. Bowman, but if it if it is down the sense in the quarter that implies.
Revenues of 25, 30, I mean is it possible to to breakeven as those kinds of levels and given your current expecting this business to to be kind of like we could no longer or what do you expect revenues to kinda I'd like to spend some of the trough here. So next several quarters I mean, any any color there would be helpful.
Yeah. So for sure you know that's what we're targeting to be breakeven, even even positive or I mean, we're taking some pretty pretty aggressive actions at the same time I mean does business is now 100% aftermarket in consumables, so that kind of carries a much better.
Margin profile through as well and you know those factories that are kind of not not not needed based on volume I mean, we're basically keeping them a close or or in very very low a exposure. So yeah. I mean, I think you know the team has a pretty good playbook on how to navigate this it is something that we have dawn extensive work.
And I think we see that we can definitely overcome these kind of long term and our plan is that it's going to be down for a while and into the second question. You know I mean, clearly is a market, but as you saw we just invested in a new fluid and technology. So so that when the market comes back up again, we can be ready for capturing so.
So accelerate more culture.
Great. Thanks very much.
Yes.
Your next question comes from Jeff Sprague from vertical Research partners. Your line is open.
Thank you good morning, everyone.
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One of we've just come back to service for a moment the something interesting comment about the utilization down.
30%, but how do we actually interpret and apply that to a forward look right. So that doesn't necessarily mean your sales are going to be down 30% into service I don't believe well if you have enough data historically, the kinda piece that together, but what does that down 30% tell you.
Yeah, Jeff a great question.
So in terms of historical data, we don't have a lot of historical because as you know as you can imagine a lot of these remote monitoring systems and connectivity with it I would be platforms that we both companies have now is fairly new but we have enough data to do them break it down by the specific.
So I'll end markets and that I mean, they indication here is that a filling those where our ddos market that we should continue to play or doubled down from a service perspective. So it is helping us to redirect the teams or it is also helping us to really better serve our customers and making sure that we're still more resilient from that perspective.
You know in terms of in terms of being down 3%.
I mean, I think we just see that as a bit of indication as to what can happen here, but as you just just very well pointed out it doesn't give us a great correlation as we don't have a lot of historical data to really extrapolate here. So what we're doing and just thinking that they don't want to really reassess our commercial teams and refocusing damang those area.
As regions in markets that we're still seeing some very good utilization of the compressors.
And the answer to your prior question, where do you know you noted I T. S. Obviously includes more than compressors vacuums blowers et cetera.
Are you, suggesting that those other products are areas outside of back use and blowers were substantially worse than the compressor business in the core.
Yes, so for sure yes, I mean for sure the a the power tool and lifting business was one that it was worse than that.
I mean, the power tools and Scott So they have a two main product lines I means that tool business, but also they have a lifting business, but it's kind of more related to two factory consumption or factory rationalization. So I think you know that that was impacted more so.
Then China is a region was definitely a.
Heavily impacted and you know from a from the other product lines in terms of the longer cycle.
Which these are kind of brands like Nash Carol Oden equilibrium palms and be Korean vacuums, those are more longer cycle and those were I'll say more stable than resilient.
Great. Thank you.
Sure.
Your next question comes from David Raso from Evercore ISI. Your line is open.
Good morning, my questions about in the I.T.S. business when I think about the inventory in the channel and you think about some of the recent improvement you've seen can you give us some sense on.
Any sequential improvement sort of a lead lag and obviously inventories part of it and also the mix. So your businesses being short cycle versus long cycle can you just give us some sense of the inventory.
In those channels in some way we can read the lag you would need to see or that you would experience if say the PMI has got better for example.
Oh, Yeah. They want me I think when when we look at the inventory in those channels I mean, theres just not a lot of inventory I mean, I'm going to describe needs from a from a compressor perspective, which is obviously the one that has the biggest sites on the distribution network and it is also a more particularly towards the Gardner Denver branded products.
You know, we don't tend to have a lot of inventory because these these are particularly smaller distributors more sabrina lines.
More localized they don't tend to put a little cash upfront to have compressors on the shelf so to speak I mean, maybe on the smaller compressors they may.
But not on the medium to high level compressors, and the inventory will come in more on consumables aftermarket parts.
But those tend to really move fairly a fairly well I mean, they turned pretty quickly.
And the recent improvement you've seen just some clear is that a stabilization on a low level. After the initial shock not T.S. or have you seen some little improvement in order to sequentially.
Curious is that more short cycle or long cycle.
Yeah, I know you're a great question, yeah. It is oh categorize it as the step stabilization.
And initially and then obviously when you look at it within the month I mean, the month of April you know there are some slight improvement on the second half of April compared to the first time.
But again was that more short cycle improvement short cycle yet.
Yes sure cycle alright. Thank you. Thank you very much appreciate it.
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Your next question comes from Josh Pokrzywinski from Morgan Stanley. Your line is open.
Hi, good morning.
Morning.
So the Sunday I guess, everyone here on the call kind of seamless questions that were going through for most companies. We've covered a lot of ground already.
Thanks.
Just with some of the commentary around utilization and what the comments you made around supply chain interruption, how much of the decline.
You are seeing and yeah. I guess this comment is mostly in rtms comment is related to customer shutdowns or supply chain interruption and in some form like you know satellites come back on in a certain amount of demand comes back as I think some of these points on.
Service or utilization that maybe that's not the the steady state state of the world there.
Yeah, just I'll say more so most will definitely in Q1 or in China. A if you want to think about it kind of that drive disruption or completely also into into first quarter, maybe some disruption from the perspective of ER in Europe, particularly in Italy.
I mean, we do have some very good manufacturing base in Italy.
And we although we stayed operationally I mean, most of our suppliers have to shut down.
I would say that now or just kind of the comment that I made before we see kind of these lower demand level kind of getting more stabilized.
But but you know it's still not.
Not seen that that kind of recovery and you were just kind of waiting to see how the recovery will will play out.
Okay, and then switching over to Steve to the synergy funnel and sounds like the year three.
High point of activity has to stay there as you have to act on other things first since more manufacturing centric.
Fair to say that the incremental step up in synergies that into your two is it's smaller I guess is you know is this more of a pull forward from year to or.
Are you kind of implicitly, saying, Hey, we think there's more than 250 here we're just.
We're working on this as fast as we can we'll update you as we know.
Yeah, I mean, I think it doesn't starting in the case, where I mean.
At this point time I mean, we think we think we want to keep it up to 50, just because we think is prudent and we think is bring because we're I mean clearly focused on a lot of the internal funnel and execution you see how we accelerated and we executed I mean this is not just talking about that create and savings to the savings that we just already executed but there is a component around procurement then.
And and I to be savings a innovate to value that is Bonnie independent and when we did a 250 million dollar costs into your funnel. It was on based on 2019 kind of a run rate levels, so to speak of spend levels.
So we're just wanted to be prudent from a from kind of going out there in saying that that to 50 will increase Ah you know ones were ready, we'll definitely and when we see it kind of more stability or no Mart normalization in the markets, maybe we come back with that but at this point I'm. We're we're accelerating what we can control and we know that we can control that structural head count out and that's exactly.
But we know we can control a lot of the quick kings and procurement 'cause commodities are lower and we are executing that and we know we can control a lot of discretionary spend and that's exactly what we also executed. So we're very focused on kind of going through the list of things that we can really execute.
Great appreciate the color Colombia.
Yes.
Your next question comes from Nathan Jones from Stifel. Your line is open.
Good morning, everyone.
One thing.
I think I'll start on pad say.
Revenue down 8.6 to ex FX margins up 120 basis points. They clearly some.
Very good control left can you maybe give us a little more color on what drove the very good decrementals, there or how you say the decrementals going forward and maybe any color you can give you. Some what you think the long term margin opportunities in that business.
Yes. This is.
I'll say some very good cost control, but also some very good momentum that we had also from the medical business. If you remember last year, when we talked about the medical business. We were seeing upwards of 200 basis points margin improvement and the medical business, finishing bad year at roughly 30, 31% or EBITDA margin. So again very good momentum from that business and.
And clearly as we saw some something into the market that seem continued to execute those targets that they didn't have that needed to meet needed to get done you know I think it went went when when when you look at this business that I mean has some very nice gross margins and Ah you know the decremental that bays Decrementals are typically you know 45, or so I mean really good job.
But the team data here in order to get the decrementals onto the 15%.
And I say from a long term perspective, we'll definitely come from back a with a given some kind of medium to long term perspective.
Do I quit comparison, when you can see that medical we were able to.
You know mode, but only just a few years ago that medical business wasn't that 25, 26% EBITDA margin and we finish last year and a 31% EBITDA margin and there's just a lot of good commonalities between the medical and the legacy a PFS Aero business that are within the segment.
Okay, maybe just one on receivables.
When you look through that do you see any customer credit risk any collection rates there I guess, it's particularly in upstream comment.
Given the way it given the way that market's going but anywhere else you see a.
Actually shoes in receivables, how you're going about managing customer credit those kinds of things.
Let me also not necessarily Nathan I mean, I think Israel is one that we live by day by day, I mean, clearly the err on the a under Hyperscale solution, which is as you'd mentioned that most exposed I mean customers are still being but take longer to pay but they'll be a you know they they they also realize that Ah you know from an upstream person.
Active that our business is critical and essential for one to market comes back up again, so we.
We have been pretty strict and a in many cases that are that we need to see the payments or we will stop shipment and then we seized to two to provide any type of about any type of up output of product either now or later in the into future. So I think where it. We're we're really executing a good label gear on collections wouldn't teams.
Excellent. Thank you.
Yes.
Your next question comes from Nicole Deblase from Deutsche Bank. Your line is open.
Thanks, Good morning, guys.
Hi nickel.
So a lot of this has been answered we caught a lot of ground. So fire, but I just wanted to ask one into next year as we think about approaching or recovery. There's clearly a lot of moving pieces here, we've got more structural cost savings coming through presumably you have temporary cost probably coming back to the best.
And then just kind of Dovetailing all of that with typical incremental margins I'm not sure how best we can get us the funding, but it would be really helpful to kind of characterize the way you see incrementals coming out you know on the other side of this downturn.
Yeah, I don't recall, yes, that's right I mean, I think I think you know, we typically see how the base or what are called the base level of incremental to be for a total business between 35% to 40%.
Again, you know when you look at a precision on science, maybe hired on that specialty vehicles.
Lower than that would maybe industrial technologies above that level definitely we'll we'll we'll see a little bit of a headwind as we see a lot of these structural activities that we're going to come to fruition.
We also see a lot of Ah Tailwinds, Oh, I'm, sorry, we see dealt with a lot of these kind of structural costs to come out we see some on some of the headwinds, but you know as we kind of get closer to.
Coming out here to our budgets on how we kind of will work with the teams will definitely find ways on how we can continue to get that incremental margin obviously.
To be at a minimum of that base or more.
Your next question comes from John Walsh from Credit Suisse. Your line is open.
So are your next question is from Marcus Niton Meyer from you be yes. Your line is open.
Hi, good morning, everybody.
Just putting one more on the on the Hi, Hi, good morning on on synergies I do appreciate that obviously procurement is volume dependent but you fly kit pinned to 20 million savings realized in 2020, and what you can only a few months sort of food run rate savings hopes that wave one off the spin, which you think.
It's a third of fuel gross spend and how should we think about more medium truck. So the other two thirds. If you assume that at some point in a normalized good facts about 319 Devin.
Two.
Yeah, I think if you think about a 10 to 20 coming in a in indeed year as you go into Twentytwenty, while I'm, assuming maybe kind of current volume levels. It will be 20 to 40 million.
So that maybe at least a that what do you can see here coming from we've won or not when an annualized level that current volumes.
And that will easy, it's only covering portion of the total span.
Weights to one wait three coming up out here in the second half a year.
Right and if that sort of estimate you can give us what that would've been up 19 volume level, that's sort of not 20 to 40.
I mean, it will definitely be a much and there will be higher than that I mean, I I wonder.
You know I think I think in its onetime or you could say you know 40 to 50 could be a upwards of 60.
Okay, and then and then second question on capital allocation you flagging. This lightsmyth look interesting bolt ons in peace tea. Its obviously pretty fragmented market you probably have a share of call it 15% in that space.
How do you how do you think about this how does that segment looks like in a few years I mean, it's you know from an aftermarket perspective, I know to design win and replacement business will be off the market dollars presales share, it's relatively small uncompetitive company average, but but how do you think about this sort of.
It's just struck me as I do but it was nice specifically in the slides.
Yeah, I mean, I think I think this is a segment, we like a lot by the but the way that but this businesses are kind of so kind of niche and very very solid.
Market positions and any has just a lodo, great descriptors, which as you know kind of high gross margins and and very specialized bombs that.
But I kind of really sold in the mission critical a into into in the process is where they were they apply.
We continue to see that there's a lot of potential not only inorganic but also organically.
And we're doing a little work on bad weather, you take technologies like the arrow and combine that with the with like either Haskell branded product or a Milton ROI product and then you can actually create some uniqueness in terms of applications and then enter some new markets and that's what wasn't a lot of the team are doing is how do we.
We.
Our being thoughtful and mindful on some of those vertical markets and kind of new niche adjacent areas that we went to playing and not only do that organically, but then see what all that technologies from a bulk of perspective, we can we can acquire so so little a lot a really great work strategically going on in this segment.
Really a picture deism, how do we kind of Goldman.
Thanks look good luck.
<unk>.
Your next question comes from John Walsh from Credit Suisse. Your line is open.
Hi, good morning, sorry about that had some technical difficulties earlier.
I'm glad to hear everyone's doing well you were maybe just one question here you alluded on the call to share gains on kind of both the legacy Tdm, Ian and I are businesses I'm wondering though if you could put a little more color around what's driving those is there.
Something on the product sunlight is that you know some of the end market strategies you were doing previously around you know more news markets like paper and pulp.
Maybe some competitive pressures from smaller guys just any kind of color you could provide there would be helpful.
Sure John Yeah, So and I could talk where I see I mean, what I, what I said on the call is that it is on specific horsepowers.
And what we saw that we like is that this is in the U.S. based on the third party Ah report.
And and we like because he was very very complimentary. So if you look at the legacy Gardner Denver, we saw some share takes in the low to medium horsepower or what we saw and Ingersoll Rand some share take on the higher kind of larger horsepower compressors I look at the guys that as you know Ingersoll Rand has done a pretty good job on launching some new technology on the on the larger.
Yes power well as you know you know from a Gardner Denver perspective, we have been more focus on the medium to small compressor and and I think you know this is a what I mentioned on the call that this is a great hypotheses that we had on these great merge.
And combining the two companies because now we have great new complimentary products and spectrum of technologies that are that you know a lot of these but I mentioned is on the oil lubricated.
Which is very good solid kind of core product line, but as we spoke about during the April call. Now also the oil free product line spectrum. So so again, it's it's new technology, new products and be able to a two to show that uniqueness of differentiation on that broke out the teams are luncheon.
Great appreciate taking the question.
Thank you Jim.
There are no further questions at this time I turn the call back over to the company.
Thank you I just want to close out by saying thanks to everyone for for your interest in a Ingersoll Rand I want to do another showed out and thank you to our employees that are always they're doing a lot of work here.
To stay health Ah stay felt safety.
And on a same time, you know provide to our customers. The mission critical programs that are needed a in these kind of current market conditions. So hopefully it won't stay safe and healthy and we'll look forward to out talking to you a over the next few weeks. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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