Q2 2020 Ingersoll Rand Inc Earnings Call
I would like to introduce that Kenny you may begin your conference.
Thank you and welcome to the Ingersoll Rand 2022nd quarter earnings call.
They can eat Ingersoll Rand's Chief Financial Officer, and with me today is the same favorite <unk> Chief Executive Officer.
Our earnings release, which was issued yesterday and a supplemental presentation, which will be reference during the call or both available on the Investor Relations section about website www dot I ever Sito Dotcom. In addition, a replay of this morning's conference call will be available later today.
Well, we get started I would like to remind everyone that certain statements on this call are forward looking in nature and are subject to risks uncertainties discussing our previous SEC 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 made for 2020, which are available on our website.
Additional disclosure regarding forward looking statements included on slide two of the presentation.
In addition in today's remarks, we refer to certain non-GAAP financial measures you can find a reconciliation of these measures are most comparable measure calculated and presented in accordance with gap in our slide presentation and earnings release, which are both available on the Investor Relations section of our website.
Turning to slide three on today's call will provide an update on the integration efforts of the company in the current operating environment as well as review our second quarter total company and segment highlights.
We'll conclude todays call with accumulate session. As a reminder, we 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 said there were no chief Executive Officer.
Thanks, Nick and good morning to everyone.
I want to start Tobago coal by thanking all of our employees around the world.
19 pandemic has person took on president the challenges to overcome entities are one of the world.
Hi, I'm extremely proud of how our employees have stepped up to continue to serve our customers.
People coming into safe and execute on just try to hear the company.
This big highly all the culture, we're building here at Ingersoll Rand.
And I appreciate all the hard work dedication to our teams continue to explain.
This was like four I want to share more about the culture and somewhat initiatives were tick.
Our Ingersoll Rand execution excellence permeate the whole company and guide how we can make their bodies strategic imperatives and execution tools.
We do they used to drive our company purpose, which is ninos to help you make life better.
Well I rigs, we're now doing over 150, we concessions.
Well, we're able to mentor over 2000 leaders globally every week on how to drive immediate execution.
We know that to create a unique and single cultural constant an open communication is imperative.
So a few highlights to point out first during these no trouble time, we wanted to create a more direct and open dialogue with our individual psyches, so owning or future forms were born from these idea.
These are virtual one hour Michael Dahl with individual sites were 45 minutes are spent on key what is specific to that location.
These are being somewhat the most meaningful conversations I've had with employees over the last three months.
And just the last 30 days have been able to endorse directly alive with over 6000 of our global employees.
Second the team to sign a powerful interactive and small proposed I'm values virtual incubation sessions.
Employees or how does one of they really get to know and decide how to apply ore bodies everyday in the roles.
Third we recognize the responsibility we had a newly combined company to create a say space for employees to how deep conversations on important topics.
We recently hosted by sessions were Black employees open spoke about the original experiences.
And we had a lot of employees attending leasing and reflecting.
And it was an emotional and inspirational sessions.
So when you think about everything that has happened since the merger to plays including the pandemic and its impact on the work environment as well as restructuring and streamlining of the organization.
Very highly Oh the foundation, we're building a ingersoll Rand, that's we're still able to maintain strong sense of unity culture and ownership mindset.
And this is what makes a highly differentiated.
Moving to slide five I want to take a moment to update everyone on the integration of the company. That's how we're executing in a thoughtful based approach linked to our strategic purpose.
The first phase I Wonder we started even before a formal transaction close at the end of February is building a strong foundation.
We have indicated a number of times over the past few quarters. Our integration planning began in mid 2019 soon after we announced transaction.
Starting first with the point down as I described with a pretty wide will create a unified culture across our entire workforce, but is central to who we are.
And it May your milestone will come later this summer when we pumped we should be all employee equity grant we view as central to a strategy in terms of driving accelerated engagement ownership mindset and sustainable long term shareholder value performance.
This foundation can also be seen in the irrs of expanding margins and allocating capital effect.
With the help of IRS tools, we have been able to accelerate our soon as you'd really agree with a distinct focus on reducing structural costs.
We also built a strong balance sheet with ample liquidity a.
Finally, we're embarking or a new strategy operating system.
As you will see on the phone was like we're taking very proactive efforts to embed sustainability somewhat UGI mindset and develop a cadence of transparency and disclosure as we move forward.
As we look ahead, how did the from from becoming plays will allows us to transition to the next phase over integration just be looking for girls.
Growth in the organization will take on many fronts.
Whether it be organic growth well, we have initiatives designed to drive further product and service penetration or inorganic growth as we have a large born on bolt on M&A opportunities given our 40 billion dollar plus addressable market.
As we continue to optimize the business this will lead us to the surface over integration, which is portfolio optimization.
Our focus right now is to continue to improve the underlying nature of our businesses.
We will continue to thoughtfully evaluate.
Yes, it's within the before.
As well as adjacent markets that allows us to grow the current 40 billion addressable market I just mentioned.
Turning to slide six I want to talk about cordless, we're making or New York strategic imperative, which is operating system.
It starts with building the culture that embraces various points abuse bike launch expenses.
And I believe I mean, most start at the top of the house.
Moreover, actors, it's 50% diapers.
We want to be surrounded by the best and that means high levels of diversity in raise gender thought processes on perspectives.
I have been laser focus on these in the last few years.
Having such a strong that's doing board in addition to between 50% rate engendered diapers, it's a point applied.
A culture, it's also behind the strength of our Kabi 19 respond and why customers employees and community or linear channels.
The increase reporting on your gene measures is important.
Recently, we completed a materially assessment that determine our most impactful yes he topics.
And details of this Oh, you know affairs sustainability report published last week and can be found on the Investor Relations section of our website.
More importantly, darby actions already taken.
One example of your views on energy use.
Which is always pursue appealing we on China has gone solid these what to do the what's your plan feel to emission by approximately 3800 times every year.
And that's equivalent to be electricity use by more than 550 homes.
Let's talk about putting operating sustainably along with our oldest for strategies into execution and move to page seven to talk about our Q2 financial highlights.
Overall, the business performed very well given the expected revenue declines due to covert 19 pandemic and the downturn in the high pressure solutions like.
As we indicated during our last earnings call. Our goal was to manage watch within our control.
Focusing on protecting the bottom line and ensuring ample liquidity.
The teams did exactly that as they deliver adjusted EBITDA of $241 million and adjusted EBITDA margins of 19.1%.
This was a 270 basis point improvement from the first quarter on relatively flat revenue.
On a year with your bases margins were down 50 basis points, but when adjusted for the high pressure solution segment total company margins improved 160 basis points.
The teams executed very well as we continued to accelerate synergies, which now stands at $125 million, what a nice basis or 50% or stated target of 250 million.
The teams also manage short term cost extremely well, which ultimately led to a total company decremental margin of only 22%.
From a cash flow and capital structure perspective, we saw similar strong performance in the quarter. That's free cash flow was 230 million and liquidity now stands at $2.2 billion.
Leverage also stay flat to prior quarter, a 2.6 times.
Although I'm very pleased with the efforts of the team as they remain execution focus and delivered strong results. Despite a challenging macroeconomic backdrop.
I will now turn over to cultivate to walk through the financials in more detail.
Thanks.
Turning to slide eight you'll see the Q2 financials for the company.
We provided the 2019 historicals on a supplemental basis as if the transaction had occurred on January 1st 2018 to assisting clean comparatives for the quarter.
Total company perspective, FX adjusted orders and revenue declined 21% at 90%, respectively. I continue to be impacted by covered 19.
Impact was seen within the segment, where the Americas EMEA region saw challenging conditions, particularly in April and May partially offset by returned to positive revenue growth in China.
Encouragingly all regions saw improvement in order trends again.
The high pressure solution segment also saw the expected declines of over 80% in both revenue and orders due to continued overcapacity in the market and reduced activity levels.
Overall this one book to Bill to finish 1.96 for the quarter, which is generally in line with the level seen in the prior year at night.
The company delivered $241 million of adjusted EBITDA decline of 23%.
This was driven mostly by volume declines in the IP in a segment and high precision solution segment as well as the impact of an increase in our accounts receivable reserve for the high pressure solutions segment due in large part to a single customer a declared bankruptcy.
We will walk through this in more detail in the upcoming segment.
Moving to slide nine free cash flow for the quarter was $230 million included $17 million a capex.
Three castle was driven by the strong profitability performance of the business.
Combined with continued improvements in working capital management, particularly accounts receivable as well as Q2 prudency measures, including reductions on Noncritical Capex.
Free cash flow included $43 million outflows related to the transaction comprised of $28 million, a synergy delivery spend and $15 million a stand definitely.
Well Levered perspective, we finished the 2.6 times, which was flat to prior quarter, just like $72 million lower LTM adjusted EBITDA.
Well, we do expect to see some short term increase to leverage we've shown the ability to de lever historically.
On the rights on the page you can see the breakdown of total company liquidity, which now stands at $2.2 billion within the quarter, we executed on an opportunistic term loan b debt, placing the $400 million, which was completed at attractive rates of LIBOR plus 275.
Oh idea of 98 half and a zero percent LIBOR floor.
The new term loan B has the same covenant light structure as the remainder of our debt and also matures in 2027.
The same time, we also increased our existing revolving credit facility by $100 million.
Together with the cash generated in the quarter total liquidity increased $650 million from the end of Q1, giving us ample dry powder to execute on our growth strategies. As we look ahead, including continued disciplined bolt on M&A.
Moving to slide 10.
Our cost management effort in the quarter were very strong.
Starting first with an update on synergies our funnel remains in excess of $350 million and the teams continue to add incremental opportunity funnel, particularly as we build out more plans in areas like I do the in facilities.
Yes, I noted that are executed annualized synergies now stand at $125 million, which consist of structural and procurement synergies.
Let me address each of these in turn.
Within the quarter, we did accelerate the phasing of our synergy delivery and we now have already executed on $100 million of annualized structural cost reductions with approximately $80 million a savings expected to deliver in 2020.
These savings are coming from incremental headcount actions taken in the second quarter and reflect the $10 million increased about the annualized bigger and for 2020 in your synergy delivery expectations as compared to Q1.
Progress on procurements interviews continues to go well and remained in line with the figures communicating Q1, approximately 20 to 30 million.
Dollars executed action with approximately 15 million expected to deliver here in 2020.
In total we're now expecting to deliver approximately 35% to 40% of our overall synergy target in 2020 with approximately $95 million savings.
As we communicated previously we're keeping the overall cost synergy target $250 million over a three year timeframe at this time terming prudent on volume dependent synergies like chairman and I can be given the current environment.
We also continue to expect to incur approximately $450 million of expense in conjunction with both achieving cost synergies and the associated stand up with your company.
On the why side of the page we continue to show solid progress on managing detrimental to the company for the second consecutive quarter managed decremental below 30%. Despite double digit revenue decline with very strong performance in or I CNS precision in science and specialty vehicle segments.
In addition to synergy delivery a strong contributor was the additional short term cost reduction we thought given the market conditions, which yielded approximately $40 million a savings in Q2.
All teams did a great job managing discretionary spend as well as rightsizing their cost structure, given the operating environment within the quarter.
But we do the currently expected approximately 30 to 35 million. These core turned to the piano in Q3, we're monitoring the environment closely and we'll redeploy many of these measures in the market recovery at slower than expected.
I'll now turn it back to the sent to discuss the segments.
Thanks, Eric and moving to slide 11, starting first with industrial technologies and services. The idea that segment second quarter ordering take what $788 million.
Down 23% versus prior year ex effects.
Well the figures contained two large de bookings amounting to $20 million older projects that we'd be mill shippable and decided to cancel.
These were to isolate a situations and wouldn't do not expect any similar de bookings or cancellations of this magnitude as we look ahead.
Revenues in the quarter worth $830 million down 17% X effects.
And leading to a book to bill ratio of <unk> 0.95, including the de bookings.
As I have said in the past the immediate focus in DNA is whats utilizing I Rx to create the proper organizational structure.
And to execute synergies.
They will allows us to demonstrate that our combined organization can focus on controlling quality of earnings and result in much better incremental margins once the market gets back to more normalized gross.
With this in mine, we're very pleased with how the team performed despite the tough environment.
As we were able to limit decremental margins due only 8%.
Leading to 280 basis points of margin expansion and the record adjusted EBITDA margin of 22.2%.
From a commercial perspective, we feel is important to break the IDN as into with respect to Portland.
As it creates better compares on an honest and they know the performance.
So let me first run you on the composition of the second.
First is a compressor, which are 60% of the total segment I comprised largely of oil lubricating oil Freeport categories.
What is for the compressor category were down low to mid teens with oil for compressors flat and oil lubricated offerings bound in the mid teens.
Second is industrial back human blowers, which comprise 15% of the total segment.
Orders were down into high teens.
These businesses are largely based in Europe, where customer closures early in the quarter drove order declines in the 30 plus percent range.
Well the last month of the quarter came back relatively strong.
We're not implying that the strength in June will sustain but we're monitoring that closely.
Next to the pressure in Baton solutions, which is 15% or the total segment.
The longer cycle business containing Nash, Garo and multistage gears centrifugal compressor offering.
Orders were down in the low twentys driven largely by a record quarter in Q2 of 2019, when the multistage centrifugal business.
Creating talking year over year comps.
We also see our phone currently weighted towards more projects being booked in the second half of the year, which is not typical in this business, but we believe attributable to somewhat the despair investment decisions from our customers due to the environment.
And finally power tools, and lifting which is 10% of the segment.
BTL orders were down nearly 40%.
Well the list inside of the business orders were down more than 50%.
While tools business was down in the high Thirtys.
Well, we find encouraging is that the dual business. So much better performance in June as compared to April and May not only in orders, but also on point of sale performance from our customers.
And from a regional perspective, the Americas orders were down mid to high teens, while Europe Middle East, India Africa reasons was hit the hardest with orders down low thirtys due to complete government country wide shutdowns in certain countries within the quarter due to the carbon 19.
Asia Pacific performed compared to only better as orders were down a little more than 10% with China flat and the rest of Asia Pacific down even low thirtys.
No problem facing perspective, we sold the month of June much better across all divisions as compared to earlier in the quarter. So sequential improvement was encouraging to see as well.
Propose highlights this quarter, we want to highlight the oil free P. Eight an X 5000.
Customers have a strong need for oil free compressed air offering that can deliver airflow in the range of four to 7000 cubic feet per minute.
Well being both highly efficient and Taylor economically to the specific site requirements.
Current offerings at these type of range are either very large compressor is the need to be slightly modify creating more efficiencies or small compressors that the common economically.
With all the added auxiliaries that need to be place.
The T.A. Nx bipartisan plays very well in this mid size market.
Well for in a very modularized product that can meet customer needs, while delivering best in class energy efficiency.
Moving to slide 12 will review, the precision and science technology segment.
Although the segment had solid performance as always were $201 million down 6% takes effect.
Revenue was $196 million down, 8% X effects for book to Bill greater than one.
As a reminder, precision on science technology segment is composed of mission critical low creation technologies, the run across seven PNM and 14 different premium brands.
Many of which have leadership positions in very attractive niche markets.
In Q2, we saw orders growth of 7% X effects in the medical business. We continue the man for pumps that go into oxygen Concentrators ventilators and other products focused on fighting Colby 19.
As well as strong demand for products on our dosage from business offset by snowmobile appalled lines like Milton ROI, MP pumps and over and over the saw a decline more in line with other industrial end markets.
As you can see of the Reits out of the page those itron is a fluid power, none electric chemical and dosing injector pump.
Making it the easiest and most reliable way to accurately inject chemicals into water lines.
Those are trying injectors work using volumetric proportion ensuring that chemical mixtures remain the same regardless of variations in pressure on field.
On the technology is mostly use image in markets like.
Like nutrient delivery systems water treatment would save consolidation and animal health.
This business continued to see strong growth in this environment with order rates up in excess of 20%.
Moving to adjusted EBITDA precision and sign segment delivered $59 million in the quarter and adjusted EBITDA margin was resilient at 30.3% <unk>.
<unk> 90 basis points year over year, and up 260 basis points sequentially driven by the use of Iris tools to drive productivity, leading to decremental margins of only 21%.
Moving to slide 13, and the specialty vehicle technology segment.
As we indicated in Q1, our main priority for these businesses to continue to capture growth in a more profitable manner.
Utilizing IRS, some commercial tools like demand generation and ecommerce and we've had in mind the specialty vehicle segment deliver on both ends with strong commercial and margin performance orders were $208 million up 5% ex FX.
And revenue was $218 million down 7% X effects.
As a reminder, we expected ready to be down as the second quarter of last year. So increased shipments due to some supplier issue the shift of revenue from Q1, two Q2 as well I suspect the declines in the commercial and utility both offerings.
Well those factors they play out the business will continue streams from the consumer product offerings, which was onward highlighted on the right side of the page.
We continue to find success with our direct to consumer or did you see approach to educate consumers, while leveraging our broad channel to sell and serve as a vehicles.
With this book as a business saw a record in terms of consumer vehicle shipments in the quarter.
With the nearly 50% increase in terms of units.
Moving to adjusted EBITDA specialty vehicles, the LIBOR $41 million.
Adjusted EBITDA margin of 18.9%, which was up 270 basis points. Despite the revenue declined due to strong product mix as well as continued use of irex tools to drive productivity improvements.
Moving to slide 14, and the high pressure solutions like.
The business performed in line with expectations during the what it was currency there one of the toughest quarter in the oil and gas industry.
Orders were $13 million down, 87%, which includes 6 million of cancellations, primarily from customers looking to reduce the spend.
Revenue was $22 million down, 82% and was generally in line with expectations as Frac fleet Count grew up approximately 85% sequentially from Q1 could you do on a sequential revenue was down 78%.
The majority of our revenue base continues to come from aftermarket parts and services with consumables being the most recently in piece of the portfolio.
Even in this environment, we continue to bring differentiated innovation with our newest bow offering highlighted on the rights on the page.
Well it looks like the Red line beat the rebound, which increases useful life by nearly 40% will be differentiators as we look to continue to win share. Despite the decline in the market.
From an adjusted EBITDA perspective, we were on track to be nearly breakeven. However, we took $50 million in charges due to increases to our accounts receivable reserves.
Resulting in adjusted EBITDA for the quarter of down $50 million.
The major driver was a specific provision for a customer to declare bankruptcy mid July which requires to reserve $12 million based on our internal policy.
Given the bankruptcy proceedings are still working their way through the court. It is uncertain how much will be beam collectible and we have always taking a very prudent approach and view the reserve our entire outstanding air balance in these situations.
In addition, this is the current environment, we took a more conservative approach on our accounts receivable reserve taken an additional $2 million charge in the quarter.
We are actively working with each of these customers and a spectacle that our outstanding receivables here in the second half of the year.
As we people to the back half of a year, we don't expect the market conditions to materially change and while fleet count is expected to sequentially lies to about 80 fleets in the third quarter the.
The continued overcapacity of horsepower in the market and cannibalization of equipment will limit the growth.
That's a result, we will continue to be very prudent cost and push for breakeven profitability or better.
Moving to slide 15, we went to provide a quick snapshot of how the business has performed thus far in the third quarter.
So July the total companies down mid teens in orders would book to Bill greater than one.
The industrial technology and service segment is largely trending in line with a total business as orders are down 15% to 20%.
The precision and science Technology segment is currently flat, although we do expect that rate trend a bit more negatively as the quarter progresses.
Specialty vehicles continue to see strong momentum as order rates are currently positive.
Actually driven by ongoing consumer vehicle demand.
Not surprisingly the high person shows in segment is down over 90% as we continue to see limited activity in the market.
We're not providing Q3 or totaled your guidance at this time, but from a high level perspective framework. We expect it continues low market recovery in Q3.
You should we expect we will see normal seasonality, we have seen in prior years, including the impact from European holidays, and the typical downturn in specialty vehicle in the Gulf cycle.
From a margin perspective, we will continue to minus decrementals, but we do expect some headwind versus the level seen in the second quarter, a steady to 35 million of short term costs are expected to reenter the PNM with the partial offset for the continued ramp of synergies.
We will also plan to continue to invest for long term growth as we won the business to be well position when the overall market environment stabilizes.
I will also add that we will continue to be very vigilant on our leading indicators and we intend to I quickly.
Moving to slide 16, as we wrap today, we just want to media with some thinking ways.
Very excited as we're still early in our transformation.
Our employees have been able to drive tremendous performance even in these difficult environment.
And soon we will make our employee owners of these amazing company.
Come Rachel and the compressor Assembly line in Campbell's Blue, Kentucky facility to Pollo, one of machines in Brazil.
From gone clean rewards in assembly sale in Wuhan, China Mohammed.
Distribution center in Charlotte.
A Max putting assembly line worker in simmer, Germany to planning a.
As shop means team member in Chennai, India.
These are among the more than 16000 employees globally, who will soon not only be able to say they worked for an amazing company, whether they own part of an amazing company with scheme in the game on our long term transformation.
One that we're mapping out as a multi phased approach executed by utilizing our eirik stools and old center on our values and our ultimate share purpose for customers employees and communities.
So with that I'll turn the call back to the operator and open procuring.
As a reminder, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad.
The limit yourself to one question and one follow up.
Our first question is from Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
Maybe just the first question for sensei around that slide 15 on the right hand side the discussion around temporary costs. So.
I think it the Q1 earnings you talked about maybe a sort of 30% ish.
Rental margin for the balance of the year you did come in better than that in Q2, but is that the rough sort of place holder for the second half we should dial in as you sort of balance cost control with some reinvestment so depending up to.
Yes, I mean, I think I think the way we're thinking about it as you saw you said Q wanting to do both decrementals were below 30%.
Well, we're saying here is Q3 will see a little bit of more pressure due to some of these discretionary items coming back offset by some of the synergy ramp but that that being said, we still expect decrementals to being the low to any range.
Okay. So low low so to use for the second house.
Yes.
Okay perfect. Thank you that's clear and then secondly, the free cash flow extremely strong in Q2.
Receivables, but it's about a 100 million dollar or so tailwind to that in the second quarter, maybe just help us understand the puts and takes within that how you see the second half free cash flow playing out because the around working capital.
Form and.
And also what level of.
Cash charges should we expect for the year relating to synergy extraction and restructuring.
Yeah. Julien. This is this is Nick I'll take that into pieces here. So you actually right in second quarter really pleased with the free cash flow performance.
Very good progress on the receivable side.
Generally across the portfolio clearly some more opportunity to go but really pleased with the strong performance during Q2.
As we look ahead for free cash flow kind of just in total we do see opportunities continued on the working capital side I'd say the biggest area continues to beat on the inventory side of equation.
I'd say receivables and payables you've seen good progress over the first half of the year contingencies and opportunity that inventory critical piece that we're going to continue to look to right size and we have a lot of I'd say opportunities and initiatives in place right now across the majority of the portfolio.
In terms of the second part of your question.
We said at the at the end us.
First quarter that we expect to see roughly about $100 million of cash spend for the balance of the year around.
Restructuring related costs were synergy delivery costs and stand up we delivered right around $40 million cash spend into Q and still largely on track, we would expect about $60 million in the back half of the year, which right now you can kind of equally split between the two quarters and multi on the timing plays out but that should be good good place holder right now.
Great. Thank you.
Your next question is from by Colleran with Baird. Your line is open.
Hey, good morning, everyone.
Right.
Hey, so just want to parse out the on slide 15 began to switch you mean by the sequential commentary slow recovery. Obviously, there was some shutdowns that impacted the revenue trends in the quarter.
When you looked for that sequential Twoq to Threeq you are you, saying that sequentially, we should see normal sequential patterns I mean, excluding kind of high pressure business, but no pretty normal sequential pattern should the other three pieces or is this just keep or is this more of it just keep in mind that there are some sequential softer that you have to worry about within a few of the <unk>.
He says but.
All else equal you still do have a better shriek you on a revenue lines in twoq.
Yes, only like let me, let me just probably take that into into some other pieces, but.
By segment, so IDN as we do see typically seasonality in that in the Q3 due to the holidays, particularly in Europe.
However that is likely going to get offset by improving conditions through other quarter and so assuming that we do not see any second wave of coverage of course and as you saw IDN as orders were down 620% in July which is comparable performance through what we saw in June and better than what we saw in in April.
But again, we're watching these cautiously given the uncertainty that still exist.
And you know partition on science similar conditions apply that that I, just made reference to the DNS.
Orders orders have started the quarter as well.
You have seen you know very.
Flat performance continue improvement from from amongst of June and specialty vehicle is the business that does tend to see much more seasonality in Q3 versus Q2, particularly driven by the goal cycle.
And you can see from historical periods that Q3 revenue loss tend to be down about 15% to 20% sequentially. Currently consumer demand is helping to offset there's a little bit.
But we will continue to watch these.
Kind of consumer orders as we go through the quarter and finally high pressure, which have don't expect any material shift in demand patterns as we look really during the second part of the year.
Thanks for that as the industrial Tech side.
We appreciate the granularity of the moving pieces there.
Do you guys think about what's share it looks like and how that tracked.
Maybe there was a little selling against she was the original combination. The two companies was materializing, but we look at the trends you're seeing within the compressor blower vacuum side of the pieces, how do you think you're performing versus market.
Any regional commentary would be appreciated.
Yeah, sure, Mike I mean I.
You know last quarter, we did a lot of commentary on the compressor side.
Particularly based on the association reports that but I can over the most known and we'd have access to.
And we said that we felt in the first quarter compressor side, we took some share on the small to medium and some share on the large compressors into your whereas what we saw in the second quarter, it's kind of holding holding share. So no no taken or no loosing share on the compressor side and what we see on the on the Viking them lower which is kinda.
Primarily mostly in Europe through through Oems or you know.
End markets like wastewater treatment for sort of lower side again fairly fairly consistent in terms of holding share. So again, we saw we saw a second quarter, where obviously to off across the world, but one that that we're not concerned on the on licensure idle.
Appreciate it thanks for the time.
Thank you.
Your next question is from Jeff Sprague with vertical research your line is open.
Thank you good day, everyone I'm, just first if I could just a follow up on cash flow.
Look I think you said.
Average is going to go up a bit and the back half and just looking at.
Out of the likely LTM EBITDA right. It doesn't change a lot I don't think and the the cash restructuring didn't sound, particularly onerous say described to Julian there is there some other cash item.
In the third quarter in the back half that takes the leverage up.
Yes, I think what we're referring to here is that it on the on the LTM adjusted EBITDA, there will be a little bit of noise. There as we kind of continually due to lap some of the previous quarters of 2019.
In terms of the back half the year nothing major with the call out obviously, we do have some of the normal cash taxes in some of that that will play itself out generally inline with what we've said for the total year, but again, when we say there might be a little bit of pressure to leverage at the levels right now we're not expecting meaningful uptick you know still in that 2.6 to high.
You are to round, but not much higher than that at all and again could you give you a good passive de levering like you've seen us do historically at the on the legacy Gardner Denver, So again, not not meaningful uptick, but even around levels, where youre right now and maybe slightly higher.
Great. Thanks, and then the stuff that you mentioned the very active a bolt on M&A.
Pipeline.
As the organization ready to take that on are you just cultivating a pipeline and we should expect.
Things kind of further out into the future what's your general view on that.
Jeff I I definitely feel the organization is ready for it.
You know and we said in the past, particularly around the precision in science technology. It's just on auto focus on we're putting on by one and as we sit in the past ones well I mean, there's not a lot of kind of cost.
Heavy integration structurally on that on that segment, so and so the team is definitely ready to take a more and on the industrial taken services as well I mean, we were cultivating a very good pipeline, primarily you know kind of channel and some key technologies.
What is one that that the piano so feel good about about thinking.
Thank you.
Sure. Thank you.
Your next question is from any Catholics with Citi. Your line is open.
Hey, good morning, guys.
Got it.
Since they look some of your our businesses and I T Nasa's, especially power tools their businesses that seem to have been a little weaker so far during the pandemic you didnt mention the stronger June in these businesses, but is there more you can do to bounce out the performance of these segments for instance, sub segments are you increasing new product intros in this business and then could you.
Talk also about.
Legacy IR compressor business the larger business.
Is that business at all having new lagging in terms of orders given its focus on large projects.
Yes, the on the first on the first converse on the first question around you know apart tools. I mean, yes result, you saw the softness we alluded to some of the softness early on the even on the last earnings call to the fact of kind of a shift of some of our customers on what they were.
Putting more attention to from an online perspective.
We saw actually in the month of Jones from pretty good pickup in in orders, but also point of sales.
On the two side.
While we continue to see something as he's on the lifting side kind of the material handling lifting and that's out of the business. The end markets that that performs is just not.
Note improving at this point time, I mean, it's got something about somebody has some oil and gas exposure to it.
But you know to your question in terms of what we're going to accelerate growth I mean, coincidentally you know last week, we had a four day session of our long term planning.
New strategic land positions, where we look at.
21, 22, and 23 and there's some very good activity that we're putting forward here on a tool side, but the team is putting forward that we think.
Kind of filling more of what we have two more unique channel. So I think I think we'll expect to see a better momentum, but ill just take time to two really kind of readjust. The business. We were but we have been very focused on really the cost adjustments and now where people doing more doors stores or growth.
On the on the legacy our IR to larger compressor side, I think you're referring to the multi state centrifugal.
This business is one that we saw a really strong demand in Q2 of last year. So I wouldn't say that that is getting really soft, but I mean last year. There was actually a lot of good.
Momentum on refining and LNG markets and and just.
Total Q2 off 2019 that were just a single project, but it was worth upwards of $40 million in Vietnam. So just being kind of some tough comps based on some of the larger projects that kind of really happening in second quarter last year versus this year, we're not seeing the momentum on those large projects happening here. Now. However, you know the team is fairly incurred.
Because they see really strong funnel and potentially that went from here on the six habit things are complaining back to normality in some of the some of the countries.
Thanks for that the said they have then just thinking about your overall synergy target understanding that it's early and you haven't changed the yet the youre creeping up in your synergy forecast in terms of now expecting 35% to 40% of the savings in 2020, I think you said, 35% last quarter.
Does that give you more confidence in that 250 million cars get even with the procurement being volume dependent.
Yes. Indeed this is Eric I'll take that one I think the answer is absolutely yes in terms of the confidence.
Hurt us kind of reiterate the confidence on the last few quarters.
Obviously, we have a higher bundle, but given that.
Meaningful piece that bundle is procurement and I to be in supply chain, which is all kind of volume dependent and we're not at 2019 volume levels, which is when a lot of that base lining work was done. That's why you just haven't seen as kind of take the target up higher but again still feel competence and obviously have a healthy funnel that we're executing Jim.
Thanks, guys.
Okay.
Next question is from Nicole Deblase with Deutsche Bank. Your line is open.
Getting good morning, guys.
We are integral part I guess, maybe going back to the temporary cost actions coming back and third quarter, what's what's the nature of that and I guess the reason I ask is it feels like the environment isn't getting I mean, clearly got a little bit better in July, but not accelerating significantly and so I'm just curious what would be your appetite keep temporary actions in place.
In Threeq you, if we kind of remain in the current level of revenue decline.
Yes sure Nicole. This is this is the ill take that so clearly we did mentioned last quarter that we were going to take roughly $40 million to $50 million in discretionary spend controls over Q2 in Q3.
We really kind of outpaced that we delivered approximately 40 million in Q2 alone and did you you're kind of your first part of question. There are still component of that equation that are staying in terms of cost saving things around reduced compensation for executive management, and senior leaders naira deferrals and on certain discretionary spend reductions, but as we can look forward to Q.
Three here and we start to see a slow recovering market. We're currently not expecting the same level of actions things like Furloughs. For example is kind of a bigger piece of the equation and we would expect to see some of the discretionary spends darken return.
To your to your second point of your question absolutely. If the markets are slow to recover than expected. We will implement many of the same cost saving measures that you saw in Q2.
And you saw our ability to ramp up those cost savings in Q2 and exceeded our prior expectations and we'll be prepared to do the same thing if market conditions warrant that and the other thing I'd probably mentioned here is we have kind of continued to make some prudent I'd say growth investments in the context of Q to you and me to do so going forward, which you'll kind of see just in the run rate of the numbers things around demand.
Generation thing that we're kind of setting ourselves up for future growth that we expect to have really strong beta.
Okay got it. Thanks, that's helpful and maybe just a follow on around the cost synergies projected for 2020 of 95 million now I guess can you just give some color on what had been achieved and so far predominantly into two and then how that ramp in Threeq and Fourq you.
Yes, sure so I think.
At a high level very simply stated $95 million, it's about $80 million up in year structural savings, which is really coming from head count oriented actions.
You've seen us take the majority those actions here over the first 120 days I wouldn't say that weren't necessarily 100% done, but you see that kind of coming to conclusion here pretty quickly just given the actions. We've taken and then right now about $15 million in year procurement savings again very consistent what we said first in the first quarter.
German piece is really meant to start ramping up in 2021 onwards, so in terms of.
Overall synergy number $95 million are you expecting between 35, 40% year. That's in good year from a total year of a total of 250 million dollar synergy target and as we look ahead to 2021.
We'll start to ramp obviously, you're not going to see the same magnitude of head count related synergies a big that nature ramp at the same pace. So we are expecting probably about 50% to 60%, 55% roughly of the synergies in in 2021, and then 75% delivered in year three and then you obviously get the full run rate into your four thereafter, so very consistent on the back end of this as.
You've seen us historically reported.
Thanks, Nick I'll pass it on.
Our next question is from Josh Pokrzywinski with Morgan Stanley. Your line is open.
So Vic just just following up on that last question.
Wasn't able to run the math and real time, there how should we think about the.
Temporary savings rolling off into next year versus the the incremental.
Pick up that you have on the synergy funnel, just given that you've pulled more forward into into 2020.
Sure, Yes, let me kind of taken in pieces here, Josh I think in terms of the the short term actions on by and large you should see those largely back in the run rate as we exit the year as we mentioned we did about $40 million a saving during Q2, we would expect the majority of those trickle back into the panned out here in Q3 in Q4, and then some of the smaller items.
Around merit deferrals and things like that we expect obviously come back in the cost structure next year, but again, you should largely be those re entering the the cost equation here as we exit 2020, and then in terms of fee.
The synergy ramp and I think to Nicole's question before.
He said, we've done about $80 million up in your headcount actions, that's the major pieces the equation.
Probably expected around 20 $25 million that in Twoq, you and then rampion kind of Ratably between Q. During Q4 as of Q3, Q4, being a little bit higher probably closer to about $30 million per quarter, and then the procurement piece a $15 million of in year. That's largely all second half weighted you really haven't seen any material amount of alcohol integration related or transaction.
Related synergies when it comes to procurement just yet we've launched a lot of the RF views have lot of good momentum on some of the initial waves, but you should expect to see that really more in the back half of the here Your Q3 Q4.
Got it and then I guess next year, the temporary bleed off versus the incremental synergy funnel is quite be a push federal they'll be kind of a small number that mapped out of that.
That's fair way to think about it.
Got it okay. That's that's helpful and then.
Just on the oil free side of the house something you made some you know opening comment remarks about new products there.
Yeah, I think over time oil free comes up pretty regularly is hey, we've got new product new commercial initiatives something on that front.
Obviously, you have a big competitor who's who is pretty dominant there anything that you can share with us on.
Growth rates in the product line.
Anything that you think you're doing on on market share gains.
It seems like still kind of a small piece of the portfolio and and maybe not big driver of overall performance, but is this something that we should expect to be a larger piece overtime, just given that it's probably one of the more attractive areas of the market.
Yeah, I know John So I mean, I'll say that for sure. It is an area that were put in a little focusing through into it through as well here and.
Oil free outperform all appreciate it.
Oil free as.
It was kind of basically flattish.
Revenue performance all is actually good in terms of speaking about the resiliency and the strength of the end markets that he serves and why we continued to be excited about.
You know what our future holds in this product line.
So yeah, I mean, I definitely without going into a little details of our strategies and and when we went to accomplish here. It is definitely an area that we are putting some focus attention and we definitely want to continue to outgrow.
Great. Thanks for the color for you all guys.
Thanks.
Our next question is from Joe Ritchie with Goldman Sachs. Your line is open.
Thanks, Good morning, everyone and Vic congratulations on the on the promotion to CFO.
Thank you.
But maybe maybe just kind of starting off I know.
You mentioned.
That.
Cancellations, you don't expect to repeat I'm going forward, but maybe just provide a little bit more color on line what end markets. They were related to you and what your what your conversations with your customers are like today on what's already been booked into backlog.
Yeah. So your question Joel just to be more Pacific is really a along the that's kind of let alone cycle right now kind of a larger long cycle products.
Yeah, Yeah, that's right.
Yes, So I think you know the most.
Most of our long cycle businesses, it's kind of within these.
The industrial technology in the business, you know that we call PBS much.
Pressure and backing solution and as a reminder, I'd just like 50% of a total total segment.
You know when when you can even split that business into two main areas. One is kind of the legacy Garner denbury kind of what we call. The Nash Garo what used to be in the downstream side of the business.
That business actually perform a fairly well I mean, this order rates are being positive.
In the second quarter and actually.
Year to date base is positive high single digits or book to Bill of like 1.3. So so that's good encouraging because that's exactly what we want we always said that bookings of that longer cycle business. We wanted to be strong into indifference happened a year. So that we can start making the shipments in the second probably easier.
Currently in terms of of the of the multistage or kind of the larger compressors. Those are the ones. That's all really meaningful tough comps I mean second quarter of 2019. It was a record quarter for that business and it was really more on on on end markets, such as you know LNG and classification on them.
Processed gas.
So a lot of that kind of maybe momentum that was getting into those end markets earlier into 2019.
And what we're seeing now is basically a little bit of a shift when a big shift in terms of new end markets. So we're putting focuses on utilizing these large compressors for food and beverage and so we expect that as we kind of rebalance the end market that we should see probably a better stability moving.
Forward, but in terms of the backlog I think we're very fairly well position.
For here for the second half so.
These are kind of more orders that.
That we still expect to hopefully get here into second half based on the funnel from the team. So he's not order cancellations is this in some cases order push outs and just a more smaller orders as two compared to the large big orders that were coming through in in the early part of banking.
Okay got you that's a that's helpful color defense and maybe just my follow on question you know just taking a look at the especially specialty vehicle segment and the performance. This quarter was really nice to see the margin improvement there I guess just thinking about this I noticed question comes at a lot around kind of like portfolio Optionality and de leveraging but.
Again. This how are you kind of just thinking about the different pieces today, you know and your ability to potentially monetize.
Parts of the portfolio to help maybe accelerate the de leveraging plans across the organization.
Hi, Joe I think don't know changing strategy on going I mean, I think we still see that our current number one priority is to create integration stimulates the businesses drive some performance and that's exactly what you see that we're doing.
And that not only in this case and official to be going from an order perspective and revenue, but also from a margin side.
I think when the time is right in a moment comes in that that we can look into all the potential alternatives will definitely be ready as we said on the on the opening remarks I mean, we have.
This is a multi phase transformation and we haven't phase three that.
We're doing a lot of work in terms of strategically understanding each of the businesses and the path forward. While at the same time, we put a good foundation to invest and really drive some good improvement performance. So yeah. I mean I think this is what really exciting in our story, we got some optionality year for later down the road, while we continue to do really.
Fixed the businesses.
Okay, great. Thank you.
Yes.
Your next question is from Nigel Coe with Wolfe Research Your line is open.
Thanks, Good morning can you give me okay.
Yes, perfect Nigel Yeah, I know you had great. Thanks, Hey, I'm.
Just want to address the office markets.
Mainly but then you know industrial tech.
Portion of that business is off the market and obviously that that business with a was impacted by the shutdown. So just curious how that track during the quarter on what Youre sort of look isn't about health for the full services.
Yes, Michael So no aftermarket for the business or recurring revenue roughly 40% of the total segment. So a pretty large sustainable since you know large and one that we definitely want to continue to invest.
Sequentially Q1 to Q2, we saw original equipment growing faster than the aftermarket which is a good sign.
Of capital investment and what did the same time good sign of future aftermarket growth as we are creating more machines in the field.
And also it was inline with expectations from a pent up demand in China and other markets I mean, clearly in the second quarter service on the aftermarket side was a bit more impacted the two covet and the associated customer closures and the inability to be on the site I'd be however, we see these as it really grid opportunity moving forward as we would expect.
Just to be a tailwind in future quarters, assuming that market conditions.
And these machines will need to be service.
We're also encouraged by our identity platform and the remote monitoring capabilities, which allows for remote diagnostics of the machine and in some cases the ability to serve as a machine via associated technology, and we did some of that work actually here in the second quarter as well. So yes, I think a lot of good good signs for long term content.
New ways of improving about side of the business.
Just to clarify so often market within within I'd seen us.
On the benchmark will be second average during twoq.
It was up both were about the same.
But let's say, Okay and then just my follow on question is really.
Hi, Crush solutions I think you mentioned.
Let's get back to to breakeven or better performance in the second half of the year I'm just curious how you're you're balancing the opportunities the market with some credit risk that you. Obviously, so in two to live workers from central prefer their credit problems.
So basically it back over to you.
Yes that you I mean, we believe that.
That this segment will continue to return to the breakeven in the third quarter. Two I mean are we seeing second quarter and we're going to be the case. It feels it would these kind of one once you duration.
The second quarter, we weren't pays as I said into breakeven, we wouldn't expect that to be to be a repeat moving forward.
And also worth noting that we can do to take cost out of the business, including continued restructuring efforts through through the first half a year that are not 100% senior financial engines, yet so while we don't expect market conditions to improve meaningfully in the second half of the year. We're focused on those items within our control, which is prudent cost control and being there.
With our customers to ensure population of any of the outstanding they ours.
That's great. Thank you.
Your next question is from Rob whether Amir with millions research your line is open.
Thank you good morning, everybody.
When running around.
My question is just on pricing in general and then some of your initiatives in specific how to hold in and then I know it's early days on the IR assets, but.
Some of the tracking and monitoring and price disciplined maybe is right word, but just management.
Is it too soon to see effect on that on either margin or you know how much if you're a product portfolio evolution. Thanks.
Yeah, Rob So I'll say you know second quarter, we saw price I mean, we actually saw it you know if you look at a different segments.
Industrial tech and precision and signs price all between when I have to 2%.
But you still having seen the uplift on the changes that we're making based on the composition of the company in the in the PML yet so after your to your questions. You has absolutely. There's there's definitely opportunities that we see here to to be more more prudent to more precise on price I mean, as we have said in the past.
We believe and quality of earnings and that's one of our key areas of focus.
Perfect and then your oil free comments were pretty helpful and contextualize in your results, but you don't seem to think you lost any Ed Ed share I suppose in the quarter in any meaningful way.
Right.
I mean, thats, where I mean based on all the indicators that we see that's correct I mean.
You know one of the Encanas, obviously here that I, just spoke and what about is the orders on order patterns.
And as well that someone a third party.
Reports that we see and know that we can think of.
Okay. Thanks Pacific.
Thank you.
Our next question is from David Raso with Evercore ISI. Your line is open.
Hi, Thank you can you help us with price versus cost during two Q and how you see that progressing the next couple of quarters, just on sort of what you're seeing in your backlog in the market trends are like and sort of separate from your your longer term cost actions, we're taking structural cost out more of a kind of on an operating basis, what are you, saying.
Yes, David I, certainly think LTSS, but.
It would be great too.
Yes, I think the the easy answer kind of following up all of US not decided that the price cost equation, particularly looking at.
A price versus really the procurement equation continued to remain positive we have seen good momentum on procurement initiatives I'd say kind of more than normal course procurement initiatives that it kind of been in place as the two companies were coming together showing a little bit of the tailwind there and as Bill said they mentioned price was up in both the IP NSN precision in Science Center.
Thats what are the kind of two largest between one and a half a 2%. So continue to see a pretty good cost equation there at a price cost questionnaire, which obviously was.
Seen in the margin profile. So again continue to see good momentum, there and especially with regards to price.
I wouldn't expect to see dramatically different result, as we look to the second half of the year. So again continue to be very quality.
I will show it.
So that's my question. So the price costs, you don't feel the price erosion will you know that the increase is diminishing will be greater than the procurement cost savings I'm, just trying to make sure that price cost. So as you see continuing or do you think it even could widen.
Yes.
Maybe we see can you are where we think that can have.
Yeah, we see continue actually improvement on on the prize in the sand that.
You know we executed here in the second quarter load of our pricing actions that are not seen getting at PNM.
Okay, so with the procurement savings and you're expecting the price cost there should be better in the second half in the second quarter.
That's exactly right.
It will trend positively that's correct David.
Yes terrific. Okay. Thank you very much.
Thank you.
Your final question is from John Walsh with Credit Suisse. Your line is open.
Hi, good morning, and thanks for fitting me in here.
Absolutely.
Maybe just a clarification.
Question first.
And I don't know if it has to do with maybe the timing of the transaction closing or if any of the deal assumptions have changed but just wanted to ask about kind of the amortization expense stepping up.
You know as I look across the different schedules Q1 to Q2, so little bit greater than we saw.
Yes, John keep it pretty simple here. It written it really just has to do with some of the the purchase price.
Adjustments that were still working through as work there could you obviously saw true those up and I'd say that we were only 30 days frankly into their transaction through Q1, you saw kind of a normalization of that in Q2, so again to the level that you're seeing huge you should be largely indicative of what you'd expect going forward, but again, it's really nothing more than just the timing of the deal. Thank you too.
Pretty good run rate to use going forward.
Okay excellent that's very helpful.
And then I guess, maybe just a follow up questions I don't think I heard any mention of supply chain.
In the prepared remarks.
It was there anything to call out there or does everything seemed to be up and running now on a normal perspective.
Roger I mean, I think everything is up and running and remember compressed perspective, I mean, nothing nothing too, but I will call out.
It is creating a issues at this point thing.
Great.
Thank you for the taking the questions.
Mhm.
We have no further questions at this time I turn the call back to the Sunday rental for closing remarks.
Thank you I just want to thank everyone for their interest in Ingersoll Rand in participating on the call. Today I also want to thank again, our employees, who many of them aren't showing a call listening to the their performance. So thank you for the great performance in the second quarter.
We believe we're in a very exciting path and we look forward to speaking with many of you over next few days and weeks. So thank you I mean are they.
This concludes today's conference call you may now disconnect.
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