Q1 2020 Earnings Call
[music].
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 telephone 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 the hand the conference over to your speaker today Vic kidney head of Investor Relations. Thank you. Please go ahead.
Thank you and welcome to the Ingersoll Rand 2021st quarter earnings call I'm, Vic Kenny Ingersoll Rands Investor Relations leader and with me today are the center in all Chief Executive Officer, and Emily We were Chief Financial Officer.
Our earnings release, which was issued this morning, and a supplemental presentation, which we referenced during the call are both available on the Investor Relations section of our website Www Dot IR Seo Dotcom. In addition, a replay of this morning's conference call will be available later today.
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 the risks and uncertainties discussed in our previous SEC filings would you should read in conjunction with 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 will refer to certain non-GAAP financial measures you can find a reconciliation of these measures for 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 Investor Relations section of our website.
I also remind everyone that in both our earnings released on today's presentation. We've included both as reported financials and supplemental financial information to assist with analysis and Comparatives. The as reported financials. Only include the Ingersoll Rand Industrial segment results from the closing date of the transaction on February 29, 2020, and the supplemental financial information provides results.
The transaction had occurred as of January Onest 2018 to provide a full quarter of comparable results.
Turning to slide three on todays call, we will provide an update on the top priorities of the 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 the QNX session. 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 at this time I will now turn it over to the Centera NOL Chief Executive Officer.
Thanks, Ken good morning to everyone on the call.
I would like to kick off on today's presentation by sending our thoughts to all who have been affected by coping 19.
And all the dedicated healthcare workers furnace funders and volunteers, who are on the front line all over the world battling this from them.
I would also like to take a moment to say sincere. Thank you do all of the Ingersoll Rand employees around the world.
The pictures on slide four are just a few examples of our dedicated global workforce, who have adapted to the realities of the work environment to continue to serve our customers.
Every day I hear of new examples of our business is providing mission critical products to our customers.
I'm proud of what our company represents and power employees have responded to these on president at times.
Well there continues to be a lot of uncertainty about the future one thing I am sure about is the Ingersoll Rand will continue to keep the safety of our community and serving our customers at the center of everything we do.
And that wouldn't be possible without the dedication and hard work all of our employees.
Moving to slide five I would like to grant everyone on the critical priorities were following during these challenging times.
When we close the transaction and little over two months ago, we could have never anticipated that within a matter of weeks, we will be dealing with a global pandemic costing 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 effectively 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 and the community second our on keeping a strong focus on the integration and execution to ensure the financial stability of the company through these uncertain time.
And finally, continuing to execute on the strategy of the company as we have multiple catalyst to drive ongoing value 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 to our purpose and values as well as our execution engine that we call IR eggs I really at the heart of how we operate as a company, especially in these unprecedented times.
During the integration process, we spent a lot of time, hopefully, creating the company's purpose.
One that is centered around our stakeholders well, we know that they can lean on knows.
Who helped make life better.
This purposes, when combined with the four key values, but our team lead when a databases created a framework of what we want to achieve as a company.
And the basis of how we do it is the Ingersoll Rand execution excellence process.
The simplicity and effectiveness of bids is allowing us to accelerate the creation of a single culture across Ingersoll Rand.
Turning to slide seven I would like to briefly update you on the company's responds to the carbon 19 crisis since it 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 copied 19 tax poor's in February.
Had a full coordinate accompany approach in early March just weeks after the creation of any company.
Our execution approach has served us very well as we're able to quickly implement enhance site safety protocols and a mandatory work from home policy for those employees, who can work remotely.
And it is they are encouraging about our quick action have been successful as we currently have had fewer than 30 confirmed cases of Colby 19, amongst our more than 17000 global employee base.
What is more than just implanting safety protocols. It's also about supported and engaging the employee base. As a result, we have implemented a number of measures, including global outreach program to solicit employing feedback.
Our employees reacted quickly and waste a true ownership mindset provided more than 200 suggestions when we asked for cost savings ideas.
Not only did our team volunteered to take individual pay costs furloughs and forego vacation time busier they have thoughtful in depth suggestions many of which we're actively implementing to date.
From a business continued to prospective starting first with our operations as we previously communicated we have seen plans largely in China easily in India impacted due to cover 19.
China was largely impacted in the month of January February and have seen steadily improved capacity on outboard through March and into April as things are now largely back to normal.
He's done in India, So about a two month lag from China with operations being impacted in late March and into April.
And in these times our sites around the globe added 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 trend as they impact in China is largely behind us and we currently have no meaningful delivery issues.
The Americas and EMEA regions are stabilizing that's impacted suppliers in the U.S. and easily have started to come back online.
In Apache weeks, we have seen the number of impact us glares dropped by more than half, which is a very good time and were supplement in supply from dual sources 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 in the later half of Maine, when governmental restrictions begin to east.
We are addressing the current environment 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 my rigs, we have been able to build the cost synergy funneled to over $350 million with increases across all major saving 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 of approximately $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 of in your company.
As we have stayed at multiple times over the past few quarters. The phasing of synergy delivery was always in the area. We believe we could accelerate based on market conditions and that is exactly what we have done well.
We have dramatically increase the pace, having already executed on $90 million, an annualized structural cost reductions with approximately 70 million dollar savings expected to be delivered in twentytwenty.
The majority of these savings are coming from headcount actions already taken in the past two months as we streamlined the company and reduce the years within the organization.
In addition, we have deployed the first wave of procurement initiative with RF cues for nearly one third of our historical direct materials fan base already launched as well that some quick win initiatives being deployed.
In total we're now expecting to deliver approximately 35% of our overall synergy target in 2020.
Which is approximately three times higher than be reading, a year, one 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 have to be given the current environment.
It is not only the structural cost that we have taken out but also how we are supplementing our synergy to lever 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% revenue decline that we sell 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 yield $40 million to $50 million of incremental cost savings and the pinedale Didier with the majority coming into second quarter and third quarter.
We will continue to a reevaluate on a monthly basis and in the nine environment does not accelerate in the second half a year, we will potentially extend some of these actions and increase our segments target 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 at Gardner Denver, when we invested through the downturn to capitalize on market share gains and new product opportunities. We're following the same playbook today.
Investment in R&D are being maintained at similar levels as prior years, and we continue to fund target the commercial initiatives, such as demand generation and our I O p. platforms.
This is all part of a 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 how to 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 dollar term loan 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 the euro bore plus 200.
The third zones have no financial covenants from his perspective, and there are no maturities until 2027.
Liquidity also remains 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 due 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 as all $825 million of legacy fixed interest rate swaps will expire by September aplenty 20.
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 unwavering.
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 of 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 Emily.
Thanks, if any day.
On Slide 12, you will see the as reported financials for the company as a reminder, that reported financial being paid treatments that legacy Gardner Denver, and one mine and the legacy Ingersoll Rand Industrial segment in Q1, 2020, and only the legacy Gardner Denver businesses in Q1.
2019.
As a result, the comparisons are impacted materially by any transaction.
And we'll spend a lot of came on this page as a result.
Other than he mentioned that the as reported net income in the corner included $197 million of amortization acquisition restructuring and other Catherine.
When you can see lifted in a reconciliation tables in the appendix at the presentation.
Turning to slide 13 to assist in clean compared it to the corner, we provided supplemental financial information, which treats the transaction as they did it happened as at January one in 2018.
Total company perspective.
Thanks, adjusted revenue in orders declined, 14% and 70%, respectively and were impacted by Kobe 19.
Regionally, we saw notable declines in Asia Pacific as well as sharp declines in the U.S. in Europe towards the end of the coronary most notably in the I TNS, saying that.
It's like book to Bill could finish at 1.11 for the quarter.
It can be need delivered to entering an 8 million and adjusted EBIT that and decline of 24% driven mostly by the volume declines in CNS 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 EBITDA 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 at 51 million of adjusted EBITDA in March as opposed to a combined 16 million for January and February.
Moving to slide 14 free cash flow for the corner like $60 million on an as reported basis.
Leading $8 million of Capex.
Q1 free cash flow included $63 million of outflows related to the transaction comprised of 38 million of synergy delivery and standup related cost and another 25 million a transaction fees.
We also paid $38 million of debt issuance cost in the corner, which you can see it in a financing section of the cash flow statement.
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 it can 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 here 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 10 day to walk through the segment.
Okay.
Thanks, Emily starting first with industrial technologies and services on slide 15.
Yeah, I CNN segment first quarter, adjusted order intake was $889 million down 9% versus prior year, excluding the effect.
I just have revenues in the quarter were $796 million down 17%, excluding the effects.
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, 15% 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 decline in Q1 is what we expect to see in Americas EMEA in the near term.
This is a based on where using to plan to cost controls for our business, but we're staying highly active with imagination activities embracing controls well, we continued to demonstrate disciplining price generating over 1% in the quarter.
Well these markets are more opaque than 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.
Our aftermarket and leading indicator we have is actual compressor utilization data.
We can see the I wonder usage of thousands of compressors worldwide. There are connected to our remote monitoring systems.
In America Europe, we saw a sharp decline in compressor decision in the last few weeks on 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 dean need to focus while at the same time using it as a leading indicator for aftermarket activity, which is approximately 50% of the compressor business today.
Well original equipment, where are you seeing demand generation leads within in the past the man Jan was a leading indicator of orders that we'll we'll be getting into next six to eight weeks.
With more down at thousand leads per week, we have a lot of commercial insight in our system.
Well, we signed a letter weeks of March was a drop of 30% versus what we saw earlier in the quarter.
With 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 a pro line perspective.
We have seen very similar trends across compressors, blowers, and vacuums, where we saw orders down in the mid to high single digits.
We have spoken about 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 in the first quarter.
Garner Denver branded products were flat and Ingersoll Rand run to pull it was down high single digits.
But when you look into the details you see the power of the two companies has gone to Denver. So a good share gains on low to medium horsepower machines, well increase a run to care on high horsepower compressors.
This was exactly our hypothesis coming into the deal and we see these as a ways to leverage the technology portfolio as well as a direct and indirect channel the both companies have.
All the tools at least 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 two support first half of the 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, what 17%, which was down 150 basis points when the prior year. Other caused me to gauge and efforts help limit decrementals to 25% in a segment that typically has bays decrementals or 35% to 40% before cost actions.
Moving to slide 16 to the precision and science technology segment.
Overall, the segment had a solid performance in these economic environment, that's adjusted orders worth 290 million up 2% ex FX I.
Just a revenue was 192 million down 9% ex FX on strong prior year comps up 12% X effects growth and shipment delays due to call the 19.
This platform is a collection of technologies and premium brands the 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 their applications on our medical problems go into other bottom of the page.
Our teams have been working 24, seven providing modified solutions that can be used for new applications defied koby 19, now and in the future.
The remainder of the portfolio, so slightly negative orders performance down 2% ex effects. We the majority due to called it look downs in January and February in China and towards the end of the quarter in India.
What is encouraging is that we continued to see good funnel 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 weaknesses in a more industrial end markets.
Moving to non-GAAP, adjusted EBITDA being a fee 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.
Good productivity, leading to decremental margins of 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 would the use of the same IRS tools, we have used across all the segments and expect to see improvements of this business moving forward.
Having said that this business performed very well in the first quarter.
Just that order is worth $230 million, you know and adjusted revenue was $185 million up 8% and 7% respectively.
With a book to Bill of 1.15.
Growth was driven by the strength in gold connectivity and consumer Posluns.
The business saw strong double digit order momentum in early January February.
It does it 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 Q2, it to be down compared to last year for couple of reasons.
First last year was a tough comp as a business have some supplier issues in the first quarter.
Where 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, but then people to quickly to leveraging demand generation techniques widely used in the legacy industrial businesses and we have seen better momentum recently in the run rate.
And second with the word we have known a proactive qualys prevention across all of our locations, where we're able to remain open well some of our competitors workloads.
Moving to non-GAAP adjusted EBITDA specialty vehicles, the LIBOR $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 in the high pressure solution segment in the business performed above our expectations units tough operating environment.
With Justin orders or $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 of 26% versus the fourth quarter of two dozen lending.
We continue to see share gain upper twentys an aftermarket.
Specifically consumables, where we saw orders and revenue up double digits sequentially.
These allowed us to de lever 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 people to the second quarter I must have a year that key leading indicator for this business has always been active at the end intensity.
We can make sure that in multiple ways, what the simplest form is the 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 problem has a flu in antivirus fluid and utilizes consumables.
What do you want to 2020 on average we saw a 318 active fleet the exit rate in March was 240.
We expect to see a substantial dropping to second quarter, where we believe the month of April ended up roughly 50 active fleet due to the recent demand 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 the proper cost take out 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, both industrial technology and services and specialty vehicle segments were right in line with a total company average.
Well 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 what 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 on 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 that the business will need to be down 40% on an annual 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 compare to current order trends and coupled with our current liquidity position.
Turning to slide 20 for some concluding remarks.
When I say that well, we manage through what we will no doubt be tough second quarter and an uncertain recovery thereafter, we feel that the fundamental investment these isn't the company hasn't change.
Ingersoll Rand is a premier industrial company and we are in the early stages of our 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 on bolt on acquisitions.
Well, there's we'll we'll 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 made press the pound key and we ask that you limit yourself to one question and one follow up. Thank you you know first question.
Comes from Andy Kaplowitz from Citigroup. Your line is open.
Good morning, guys how are you.
Well now that get you [laughter]. They can you give us more color into the April order declines you're seeing <unk> 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 you know smaller upstream, but especially downstream midstream related exposure.
Hi, Tina so are there discernible differences in the run rate of these businesses.
Given its they're more project versus the industrial compressor business.
Yeah, David Let me just give you a little bit a cold I mean as you saw we said roughly you know April total orders down 20% book to Bill greater than one.
From a book to Bill perspective, you know the a industrial technology and the precision on signs where were grid or.
That one of them, obviously, leading the way.
I will say you know in terms a in terms of ideas in particular, you know I will cut their where I sit as you know the a the short cycle was mostly most impacted in the quarter and continue to see a you know some growth given the weakness here I'm looking for work I mean is mostly quarter related to a I guess, maybe the PMI you know from a from the.
Down on the midstream, which is what we consider to be more on the loan cycle.
I'll take you know compared to like a bit more stable a into first quarter and a and we kind of continued to see maybe some of adding the month of April a again typically we tend to get the orders for that long cycle now into first half of the year, you noted to get shipments a into second half and and from a BPL <unk>.
<unk> 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. There, we're seeing some fairly good growth momentum from a their expansion into online retailers and a and you saw that a into first quarter of many of these on your debt 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 powerful business.
[laughter]. So that's helpful to send Dan I'm sure you you expect just asking about detrimental margin in some ways. So let me just asking like there's some obviously you know good results in Q1 them close to 30 now how do I think about Detrimentals with high pressure solutions, you know the orders down 80% can you hold decker.
Rentals there in the mid Fortys at what point you know this 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.
Yeah, so, especially on the I mean, that's that's kind of what we're targeting four and I mean, a as we have seen you know we have performed well in the down cycles in the past a I think we had a good solid playbook that we that we executed in the into 15 16 that included both not only the in industrial downturn, but also a an upstream downturn.
Based decrementals they tend to be around 40% across the business with a slightly higher in a in businesses like Ah Ah the high pressure as we mentioned as well as the precision and science because of a nice high gross margins are both businesses have and you know lower on the specialty vehicles and the industrial technology they tend to.
Playing that kind of 40, plus 40% range are you seeing that we have taken very decisive actions between synergies and the short term actions to protect the margin.
We saw as you 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 manage the decrementals with a target being closer and closer to about 30%.
Off a of Oh baby, though and you know and when you think about the actions word we're clearly taken much more aggressive actions them at 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 that we has picked up business.
[laughter] very helpful send to stay well.
Thank you you're doing it.
Your next question comes from Julian Mitchell from Barclays. Your line is open.
Hi, good morning.
Good morning, Julie.
Only maybe just a 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 a 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 would you suggest to me on the 40 to 50 that we spoke about ER 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 would say more more so on the a on the second quarter.
From a from the cost synergy perspective.
The the $70 million or out of the $80 million to $90 million go in year.
You know roughly 70 million about his head count and I would 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 emulate around that free cash flow.
Had a good performance in Q1.
Just one did you know yet you had the slide on the very broad brush sort of assumptions around a breakeven free cash, but assuming that down 40 doesn't play out.
You know what kind of you know if sales are down call. It 20, 25% for the year what type of free cash flow conversion should we expect you know how do you see working capital moving and maybe just remind US you how to think in the free cash that $63 million a transaction them separately.
Jason 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 he has he saw their julianne and we've been managing cash and you know from the day after the transaction very carefully and continuing to put in good pro.
Let's see isn't as strong controls around it and given that crane crisis.
We [noise].
[noise] me, we expect has to still be it could still be go ahead as we move forward, but certainly a longer cash cycle as we move through and what's going to happen here wed come at 19, and we're really managing you know payments as in any.
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 you know I'm 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 the transaction and separation costs any very rough guidepost for the year in light of about 63 million in Q1.
Yeah, and there there will be it then an incremental cash outflows in Q2.
I don't have then I don't have that figure at my fingertips at the moment Trillium, 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 who's doing well.
Hi, My.
So so could you just talked about the synergy finally reference what are some incremental sources in the relative to.
You originally identified 250 million synergies and maybe talk about different you see more on the cost side versus no longer term somebody revenue synergy opportunities you're seeing.
Yeah, Mike I as you recall you know, we always said that a than we were going for a funnel hired on the 250.
It was we were 60 days into a into he into into the transaction. We have obviously a much more kind of line there and clear visibility as to what that funnel group could could potentially be roughly $200 million comes from a combination of structural savings as well as some quick quick footprint rationalization kind of nonmanufacturing.
You know a alluded to on the investors goal that we had back in April but Oh, we have now pretty good database of all the then locations across the world and bad is giving up 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.
Or more the a the older kind of quick kids that are that we can take from a footprint perspective.
[laughter] too so second part of the question.
Ladies and strong position you know once you get too.
Some of the one offerings associate the 10 construction 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 shop, So and then secondarily over there to do that.
Do you think the fact that we're going to some sort of recession here, who knows how long does it go these low but do you think the opportunity it's been what salary to deploy capital more towards the M&A fan things over the next couple of years in a position for that today and any kind of thoughts on how you're thinking cumulative out that the capital side over the next six months.
Plus months.
Yeah, No absolutely Mike I mean, I think a you know clearly over the next a couple of years.
We see M&A continued to be a really part two of our strategy.
You know, it's still a you know we see it's a very unique environment right now.
We still see a these playing time some very good bono on bolt on we feel very good funnel around you know the precision I'm signs as well as some of industrial technologies, but there really more related towards bolt ons.
Thank you.
Thanks Ryan.
Your next question comes from Nigel Coe from Wolfe Research Your line is open.
Good morning, how are you guys [laughter].
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 17% Puma.
Woman and it seems like most of that came from the legacy I all businesses piece, maybe just kind of spell out a bit more detail how much of that can be explained by the geographic and end market mixes Oh, the industrial of the I, our industrial business and I'm also happy to say the steering the quota.
What was the last question Nigel bothered to what yeah. What have you just said within within its done simply put them how what's the this yeah.
Yeah, so to the first to the first question Yeah, 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 some.
You know external ways of comparing some of the.
Somebody industrial technology, you know that's what technology is composed of multiple technologies compressors backing them 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.
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 just kinda comparable to what we saw in the market and a you know seen since we since we've been an owned a legacy IR for the full quarter. A we just didn't do not comment on what we saw specifically you know generally in February.
Okay. So from an order perspective, but that hopefully 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.
Thanks to the high pressure business [laughter], so small notes its almost irrelevant, but if if if it is down 8% in the quarter. It implies you know down it implies revenue is a pretty 30, I mean is it possible to breakeven as those kinds of levels and given your cleated expecting this business to to be kind of like.
We get the longer.
Yeah, what do you expect revenues to kinda like just found something the trough here. So the next several quarters I mean, any any color that was helpful.
Yeah I know you also so for sure you know that's what we're targeting to be you know the breakeven I, even even positive.
I mean, we're taking some pretty pretty aggressive action at the same time I mean do business is now, 100% aftermarket and consumables or that kind of carries a much better a margin profile do as well and you know those factories that are kind of not not not a native based on volume I mean, we're basically keeping them, a close or or very very low.
So 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 done extensive work and a you know I think we see that we can definitely over time. These kind of long term and our plan is that it's going to be down for awhile.
And to the second question you know I mean, clearly the market, but that's due so we just invested in a new fluid and technology. So so that when the market comes back up again, you know we can be ready for capturing some ah so I'm accelerate market share.
Great. Thanks very much.
Your next question comes from Jeff Sprague from vertical Research partners. Your line is something.
Thank you good morning, everyone I'm wondering.
What we've just come back to service for a moment. This let's say a 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.
Kinda pieced 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 chronic DVD without the 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 are and that I mean, the indication here is that a filling those where are those market that we should continue to play or double 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 as a bit of indication as to what could 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 through really extrapolate here.
So what we're doing it just thinking that data point to really reacts as our commercial teams and refocusing them on those areas regions in markets that are that we're still seeing some very good utilization of their compressors.
And the answer to your prior question, where do you know you noted I P. S. Obviously includes more than compressors backings lowers et cetera are you, suggesting that there was other products are areas outside of vacuums and blowers were substantially worse than the compressor business in the core.
Yeah. So for sure yes, I mean for sure the a the power tool and the listing business. A was one that it was worse than bad or I mean, the power tools as cats or they have a two main product lines that means that tool business, but also they have.
And 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 a and then China has a region was definitely a.
Heavily impacted ER and you know from a from the other product lines in terms of the longer cycle.
Which these are kind of brands like Nash Garo leak, reviewing palms and be Korean backing those are more longer cycle and those were I'll say more stable than resilient.
Right. 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 or your businesses being short cycle versus long cycle. She just give us some sense of the inventory.
In those channels in some way we can read the lag you would need to see how did that you would experience if say the PMI has got better for example.
Oh, Yeah, there I mean, I think you know with when we look when we look at the inventory in those channels. I mean, there's 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 side some of the distribution network and I need is also a more particularly towards the Gardner Denver branded products.
You know, we don't seem to have a lot of inventory because these these are particularly smaller distributors more Sabrina line.
More localized they don't tend to do put a little cash upfront to have compressors on the shelf so to speak I mean, maybe on the smaller compressors. They they may but not on the medium to high level compressors and the inventory will come in more on consumables aftermarket imparts, but those tend to really move fairly a fairly well.
Let me they turn fairly quickly.
And the recent improvement you've seen just some clear is that a stabilization on a low level. After the initial shock and I T S or have you seen some little improvement in order sequentially and I'd be curious is that more short cycle or long cycle.
Yeah, I know you're a great question, yeah. It is out Oh categorize it as the step stabilization.
And ER initially and then obviously when you look at it we think the month I mean, the month of April you know there some slight improvement on the second half of April compared to the first half.
But again was that more short cycle improvements to our cycle yet.
Sure cycle all right. Thank you. Thank you very much appreciate it.
Your next question comes from Josh.
Kalinsky from Morgan Stanley Your line is open.
Hi, good morning.
One of <unk>.
Sunday I guess, everyone here on the call kind of seamless to questions that were going to refer for most companies. We've covered a lot of ground already.
I guess.
Just with some of the commentary around utilization and with the comments you made around supply chain interruption, how much of the decline.
You are seeing and yeah. I guess this comment is mostly a night CNS comment is our weighted to customer shutdowns or supply chain interruption and in some form like you know the lights come back on in a certain amount of demand comes back as I think if somebody's points on you know service or utilization that.
Well that's not the the study state you know state of the World there.
Yeah, just I'll say more so most of definitely in Q1 or in China. A if you want to think about it kind of after a disruption or completely also into into first quarter, maybe some disruption from the perspective of Ah 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 that have to shut down Oh I would say that are now or I'm, just kind of the comment that I made before we see kind of these lower demand level kind of getting more stabilized, but ah, but you know it's still.
I'm not seeing that Ah that kind of recovery and you would just kind of waiting to see how good recovery will will play out.
Okay, and then switching over to Steve or to the synergy funnel I mean, it sounds like the year three pipeline them activity has to stay there as you have to act on other things first since one manufacturing centric.
[noise] fair to say that the incremental step up in synergies then 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 you know we're working on this as fast as we can walk the U.S. we know.
Yeah, I mean, I think it doesn't collecting the cash [laughter] or I mean, I just went down I mean, we think we think we want to keep it up to 50, just because we think it's prudent and we think is bring because we're I mean clearly focused on a lot of the a 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 don't.
Already executed well, there's a component around procurement, then ER and a and I do be savings a innovate to value that is being independent and when we need to 250 million dollar comes into your funnel. It was done based on 2019 kind of a run rate levels. So to speak well spend levels. So we're just want to be prudent from a from kind of going out there and saying.
That that to 50 will increase.
The ones were ready, we'll definitely and when we see it kind of more stability or no more 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 what we executed we know we can control a lot of the quick in some procurement is commodities are lower and we are executing that.
And we know we can control a lot of discretionary span 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 pay I say.
Revenue down 8.6 to ex FX margins up 120 basis points. They clearly some.
Very good control there can you maybe give us a little more color on what drugs are 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.
Yeah. This is.
You know I will say some very good cost controls, but also some very good momentum that we had also from the medical business. If you remember last year, when we talked about a 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.
Thanks, and clearly as we saw logs on something like that that market that seem continued to execute those targets that they didn't have the meaning they needed to get done you know I think it when when when when you look at this business that I mean has some very nice gross margins and you know the decremental that bays Decrementals are typically you know 45, or so I mean created.
Good job that the team data here in order to get the decremental down to the 50% or and I say you know from a long term perspective, well, we'll definitely come from back a with the given some kind of medium to long term perspective, I just do a quick comparison when you can see that medical we were able to you know not only do you know just a few years ago that medical business wasn't the 25.
Right and 6% EBITDA margin and we finish you know last year in that 31% EBITDA margin and there's a just a lot of good commonalities between the medical and the legacy up you know PFS Aero businesses that are within the segment.
Okay, maybe just a one on receivables no. 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 say you know any potential issues in receivables, how you're going about managing customer credit those kinds of things.
I mean, I'll say not necessarily they've done 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 that you had mentioned that most exposed I mean customers are still paying a but take longer to pay but they still pay a you know they they they also realize that Ah you know from Oh.
Dave that our business is critical and essential for when the market comes back up again, so we.
We have been pretty strict in a in many cases that are.
We need to see the payments or we will stop shipment and then we seized to a two to provide any type of about any type of up output of product either now or later in the in the future. So I think where it. We're we're we're really executing a good playbook year on collections wouldn't teams.
Excellent. Thank you.
Thank you.
Your next question comes from Nicole Deblase from Deutsche Bank. Your line is open.
Thanks, Good morning, guys.
Turning to go.
And so a lot of this is Ben answer I would kind of a lot of ground. So fire, but I just wanted to ask one into next year as we think about you know approaching or recovery. There's clearly a lot of moving pieces here. We've got you know more structural cost savings coming through presumably you have temporary cost probably coming back to the best [laughter] and then just.
Kind of Dovetailing all of that with typical incremental margins I'm not sure you know how fast you can get us if anything they would be really you know how what the kind of characterize the way you see incrementals coming out you know on the other side of this downtime.
Yeah, I don't recall, yeah. That's those are great. 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 are lower than that would maybe industrial technologies above that level or see a little bit of a headwind as we see a lot of these are structural activities that we're going to come to fruition.
We also see a lot of Ah you know Tailwinds, Oh, I'm, sorry, we see tailwinds that 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 can all worked with the teams will definitely find ways on how we can continue to get that.
Incremental margin, obviously, a to be at a minimum of my bad days 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 wondering one more on the on the Hi, Hi, good morning on on synergies I do appreciate that obviously procurement is volume dependent.
You fly kids into 20 million savings realized in 2020, what do you currently a few months sort of food run rate savings I'll start with one off the spin, which you think it's a third off your overall spend and how should we think about more medium truck. So the other two thirds.
If you assume that have come on in a normalized would get back to about 29 team members.
Two.
Yeah, I think if you think about a 10 to 20, you know coming in a in indeed year as you go into Twentytwenty, while I'm, assuming maybe kind of current volume levels or it would be 20 to 40 million.
So that's maybe at least a that what do you can see a key are coming from wave one on a on an annualized level that current volumes.
And that will these be it's only covering you know what portion of the total spend with a ways to wait three coming up out here in the second half a year.
Right and if there's sort of the estimated you can give us what that would've been up 19 volume level, but for the not 20 to 40.
I mean, it will definitely be a much and let it be higher than that I mean.
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. Okay, and then and then second question on capital allocation you snacking, the slides will be interesting sort of bolt ons in peace tea. Its obviously pretty fragmented market you probably have a share of cone that 16% 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 in replacement business. So they'd be off the market dollars per se or share, it's relatively small compared to a company average, but but how do you think about this sort of just struck me as I do most because like specifically in the Tonight.
Yeah, I mean, I think I think this is a segment, we like a lot by the but the way that a these businesses are kinda, so kind of niche and very very solid.
Market position than any have just a lodo great the script or such as you know kind of high gross margins and and very specialized bombs that a better kind of really sold in the mission critical a into in the in the process is where they were they apply.
You know 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 a 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 if you know how do we.
We.
Our being thoughtful and mindful on some of those vertical markets and kind of new niche adjacent areas that we want to playing and not only do that organically, but then see what older technologies from or both and perspective weekend. We can acquire so lot of loader really gray work strategically going on at least segment or to really.
Picture de them, how do we kind of relevant.
Thanks, Good luck.
Thank you.
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.
Maybe just one question here are you lose on the call to to share gains on kind of both the legacy Tdm, Ryan 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 the product sunlight is that you know some of the end market strategies you were doing previously around you know more niche markets like paper and pole.
Maybe some competitive pressures from smaller guys just any kind of color you could provide there would be helpful.
Sure John Yeah, So I I could to gradually I mean, what I, what I said on the call is that it is on specific horsepowers.
And what we saw that we liked is a this is in the U.S. based on the third party Ah report.
And and and we like because he was very very complimentary. So you look at the legacy Gardner Denver, we saw some share takes into low to medium horsepower a while we saw on day Ingersoll Rand some share take on the high you kind of larger horsepower compressors I look at the Guy that as you know Ingersoll Rand has done a pretty good job on lunch in some new technology on the on the larger.
Its power as well as you know you know from a garnet number 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 one of these great merge and combining the two companies because now we have great new complimentary products and spectrum.
Technologies that are that you know what are these but I mentioned is on the oil lubricated, a which is very good solid or kind of core product line what else. We spoke about during the April call. Now also the oil free product line spectrum. So so I get it. It's it's it's new technology, new products and be able to.
To to show that uniqueness of differentiation on that program. 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 that thanks to everyone for for your interest in a Ingersoll Rand I want to do another short out there I'm thinking through our employees that are always they do a lot of work here.
To stay health Ah stay fails to safety.
And are the 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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