Q1 2021 Ingersoll Rand Inc Earnings Call
Thank you for your patience, ladies and gentlemen of the Ingersoll Rand first quarter 2021 earnings conference call. It for you to begin shortly during the presentation you will have the opportunity. Each wassa question. My question's Dolphin is like one of your kind of thank you Pat.
[music].
Ladies and gentlemen, Hello, and welcome to the Ingersoll Rand first quarter 2021 earnings conference call. My name is Maxine and I'll be coordination of the crude today.
We'd like to ask the questions. During the presentation you may do save the refreshing stuff in it by one of your kind of think he Pat I will now hand, you of your highest Chris from Iran from Ingersoll Rand to the game Chris. Please go ahead when you're ready.
Thank you and welcome to the Ingersoll Rand 2021 first quarter earnings call.
I'm, Chris Martin Vice President of Investor Relations and joining me is the same day rate no President and Chief Executive Officer, and Vic Kenny Chief Financial Officer.
This is my first earnings call in the Investor Relations role and I look forward to working with you all.
We issued our earnings release and presentation yesterday that we will reference during the call.
Both are available on the Investor Relations section of our website Www Dot IR.
Dot com.
In addition, a replay of this conference call will be available later today.
Before we start I want to remind everyone that certain statements on this call are forward looking in nature and are subject to the risks and uncertainties discussed in our previous SEC filings, which you should read in conjunction with the information provided on this call.
Please review the forward looking statements on slide two for more details.
In addition in todays remarks, we will refer to certain non-GAAP financial measures.
You can find a reconciliation of these measures to the most comparable measure of calculated and presented in accordance with GAAP in our slide presentation and in our earnings release, both of which are available on the Investor Relations section of our website.
On today's call, we will provide the company strategy update review of our company and segment financial highlights and offer updated 2021 guidance for today's Q&A session. We ask each caller keep to one question and one follow up to allow time for other participants.
At this time I'll turn the call over to the center.
Thanks, Chris and good morning to everyone. Let me begin by welcoming increase to his role as vice President of Investor Relations cranes replaces bake in the role of who was appointed to CFO in June of last year.
I am delighted to be working alongside both of them Crazy perfectly lead corporate development for the company and played a critical role in accelerating our growth strategy most.
Most recently with the acquisitions of up to the Hill and Alvin pump as well as the completed divestitures of H B S and announced divestiture of blocker.
I would like to especially thank Craig for his military survey in the U S Army.
He's the military career he serve as infantry officer in Ranger.
Including the deployment in support of Operation Iraqi Freedom creates also a hell of a leadership role in the old guard at Arlington National The cemetery and serve as an aid to the president of the United States.
Following the military Kris held roles in finance and investment banking before joining us do the right strategy and corporate development efforts.
He is proud of veteran who continues to help fellow veterans transitioning from military the civilian life and he is integral to executing our strategic plan to de lever of value for our shareholders.
Crazy as one example, among our 16000 employees, who leave our company purpose inside and outside the company.
And as you see on slide three anchoring to our purpose is working we're realizing the achievement of our decided targets.
You'll hear three key themes today first we're accelerating our transformation, it's amazing to think a year ago, we closed the Ingersoll Rand industrial transaction and today, we're all looking approximately $2 billion of value with two of strategic divestitures.
And the great position to continue our portfolio of transformation.
Second you will hear about how we're over delivering the door expectations.
As you will recall during the down year of 2020, we control decremental margins and now in the upcycle, where delivering solid incremental margins.
We're delivering strong organic growth in orders and revenue and that illustrates our organic investments in demand generation and new product development are also working.
And third you'll hear how Ingersoll Rand execution excellent well, we call I got right.
It's becoming our economic engine do all know qunar potential.
The purposes are only as good as the team that executes them culture and human capital management are key differentiators of English for rent.
We have the highly engaged workforce, who act like owners because they are owners.
Every day, our employees make decisions that demonstrate thinking and acting like owners with the power of Iraq behind them.
Our employees all around the world. The serves sincere thanks for the adaptability and resiliency dedication and determination.
We will continue supporting our employees within the unwavering focus on health safety and mental well being.
And on that point, our thoughts are with everyone dealing with pandemic situations, particularly in India right now.
Moving to slide for you see the roadmap, we highlight of doing that during our Q3 2020 earnings call.
And since then we have achieved substantial traction.
Today, I will concentrate remarks around the last two strategies as we have had a lot of recent momentum across these areas.
Starting with all price sustainably and turning to slide five operating sustainably is one of our strategic pillars, because eat engages employees customers and communities, while delivering shareholder returns.
In February we committed to some aggressive targets around climate goals I.
I am proud of our teams continue to deliver and execute on these growth.
For example, last week with Earth day.
Our employees participate in implanting more than 3000 trees and collecting over 4000 pounds of waste well the.
The recycling almost 20% of that.
However, advancing our ESG journey goes beyond our environmental commitment. It is also about our social and governance actions.
Last week, you saw we announced our 2025 diversity equity and inclusion growth.
We set this goal is to accelerate and illustrate our commitment to the representation of talent and the career advancement and sense of belonging of all employees.
And actually one of the boldest and most of the lung and ask we have done in support our diversity equity and inclusion efforts inclination that some may not readily make was around $150 million of equity last September to all of our employees worldwide.
Broad based employee ownership has an equity component not often explorer.
Equity grants and broad based employee ownership such as what we did provide employees the tangible financial stake in the company performance and that benefits employees families communities and the economy at large.
Repeatedly studies show on the represent the population increase their earnings Oh, well.
If they are employed in organizations at all for equity grants.
That's a powerful aspect of our thinking and acting like an owner.
The ties into equity and how we directly impact global ESG efforts.
As I said last quarter, we see broad based employee ownership is a game changer or human capital management priorities are part of why we added operate sustainably as the strategic pillar of <unk>.
Diversity equity and inclusion goals are the latest advancement.
And we will use the Iraq as a key enabler to the lever on the growth as we do every other critical initiative in our company.
Moving to slide six we have also use Iraq to deliver against our capital allocation strategy.
And as we see here the outcome has been extremely effective.
On the first of all of this month, we completed the majority of enter of interest sale of the high pressure solutions segment.
And the little more than a week later announced an agreement to sell club car.
Iraq enabled us to accelerate these transaction and make them happen.
We have solid processes executed by the engage teams to ensure we always maximize value creation in an expedited way.
That's our special and unique economic engine.
With the divestitures, we're proud of the buyers will continue the commitment to employee ownership.
Which may be a little unusual for this type of transaction, what if I said before it is important to us on many fronts.
And with these divestitures, we're unlocking approximately 2 billion of value.
And on slide seven we see of visual illustrating the volume and timing of transaction milestones in our evolution over the last for years.
Including the completed and announced divestitures this month.
Last quarter I mentioned capital allocation is a huge part of my personal focus.
<unk> been actively discussing this with our board.
Those discussions continue and as we have known all along with our capital allocation strategy. We will inform you when there is something significant for sure.
I would day is today I'll give you some additional color on how we having has our inorganic growth strategy.
So let's look at slide eight I have mentioned I Rx discipline a lot this morning.
It is an execution engine to drive change in every area of the business.
From our environmental goals and net working capital goes to our new product development growth goals on our diversity equity and inclusion of growth.
Iraq has been transformational in helping us with the integration of companies like till the hill and Alban.
As well as helping those with divestitures and accelerating our M&A funnel.
You can see our funnel has increased five X since Q2 of last year the.
Revenue of the company is in the funnel has increased by more than 50% and.
And we're moving potential acquisitions through the funnel much faster.
And we have not only been integrated and Ingersoll Rand and garden of member of the.
The past year, we have also completed a bolt on acquisition with total vacuum of blower systems being the most recent one.
And we have already seen solid progress with Dot hill such of growth outside the U S, where we highlighted that as a great opportunity.
All ready to receive the multimillion dollar order in Asia Pacific during the first quarter.
The simultaneous execution of small growth acquisitions, and divestitures highlights how <unk> enabled capabilities to drive significant inorganic growth.
I will now turn it over to Vic to provide an update on our financials Mike.
Thanks for the center.
Moving to slide nine we continue to be pleased with the performance of the company in Q1.
Q1 saw strong balance of commercial and operational execution fueled by the use of <unk> with continued signs of improvement across industrial end markets.
Total company orders and revenue increased year over year of 29% and 17%, respectively with strong double digit organic orders growth across each segment.
In fact, our organic growth on both orders and revenue in the quarter were records for the company and set us up well as we move into Q2.
In addition, the company continue to drive performance on productivity and synergy initiatives using <unk> as the catalyst and we remain on track to deliver on our $300 million cost synergy commitment.
The company delivered first quarter, adjusted EBITDA of $293 million of year over year improvement of $107 million and adjusted EBITDA margins of 21, 4% of 550 basis point improvement year over year.
Continuing performance from previous quarters, we also achieve incremental margins of 54% in Q1.
One item to note. These financial metrics do not include the high pressure solutions segment, which was classified as discontinued operations in Q1 with relevant restatements of prior periods.
Given the recently completed sale, we will not report on the segment moving forward.
Free cash flow for the quarter was $108 million up $78 million year over year, yielding total liquidity of $2 $6 billion at quarter end.
Turning to slide 10 for the total company orders increased 25% and revenue increased 13% both on an FX adjusted basis.
The <unk> precision and science technologies, and <unk> segments, all saw double digit organic orders growth in the quarter.
Starting first with IGN us.
The total segments of our 13% FX adjusted orders growth with strong momentum in core compressor technologies with the Americas, showing mid single digit orders improvement EMEA with low 20% growth in Asia Pacific with high double digit improvement.
Precision and science saw 14% FX adjusted orders growth in the quarter.
Continued double digit growth in product lines like medical and dose of Tron drove this performance given their niche end market exposure in areas like lab life Sciences water in animal health as well as strong performance from the <unk> brand, which primarily serves core industrial markets.
Specialty vehicles saw exceptionally strong orders performance up 89% excluding FX.
The team has shown positive orders growth for five straight quarters, and Q1 saw continued strong growth in consumer vehicles as well as golf offerings in aftermarket.
Overall, we posted a strong book to Bill of one two for for the quarter an improvement from the prior year level of 113.
We remain encouraged by the strength of our backlog moving into Q2.
The company delivered $293 million of adjusted EBITDA, an increase of 57% year over year.
The <unk> precision and science in SVT segments, all saw year over year improvements in adjusted EBITDA and strong triple digit margin expansion.
And finally corporate cost came in at $34 million for the quarter consistent with prior expectations.
Turning to slide 11 free cash flow for the quarter was $118 million on a continuing ops basis, driven by the strong operational performance across the business and ongoing prudent working capital management.
This compares to the free cash flow of $30 million in the first quarter of prior year on a continuing the ops basis in what is typically our seasonally weakest quarter from a free cash flow perspective.
The capex during the quarter totaled $15 million and free cash flow included $10 million of outflows related to the transaction.
From a leverage perspective, we finished at one nine times, which was an old <unk>, one turn improvement as compared to the prior quarter.
This included $184 million cash outflow to fund the Tuthill acquisition, which closed in February and did not include the cash received from the <unk> divestiture, which closed in April.
We have line of sight, the leverage coming down materially to below one times once the SPC sale is completed which as mentioned previously is expected in Q3 of this year.
On the right side of the page you can see the breakdown of total company liquidity, which now stands at $2 $6 billion based on approximately $1 $64 billion of cash on hand, and nearly $1 billion of availability on our revolving credit facility.
With our current liquidity and the additional cash we expect to receive from the Aps in SVT divestitures will have considerable balance sheet flexibility to continue our portfolio transformation strategy with M&A, coupled with targeted internal investments to drive sustainable organic growth.
I will now turn it back to the center to discuss the segment performance.
Moving to slide 12, and starting with industrial technologies and services overall organic orders were up 11% and revenue up 9% leading to a book to bill of one one for.
In addition to orders and revenue growth the team delivered strong adjusted EBITDA of 57% and.
And adjusted EBITDA margins of 23, 1% up 610 basis points year over year.
With incremental margin of 65%.
Let me provide more detail on the orders performance starting with compressors, we saw orders up in the low 20%.
Further breakdown into oil free and oil lubricated products showed that orders for both were up above 20%.
From a regional please for orders on compressors in the Americas, North America performed comparatively better at up mid single digits, While Latin America was up low single digits.
Europe was up mid teen while India Middle East and Africa saw continued recovery at up high double digits.
Asia Pacific continued to perform well with orders up high double digits, driven by high double digit growth in both China and across the rest of Asia Pacific.
Moving to the vacuum and blowers orders were up low double digits on a global basis with double digit growth across each of our regions.
Moving next to the power tools and lifting the total business was up low double digits in orders and pivoted to positive growth driven mainly by our enhanced e-commerce capabilities and improve execution.
On the right side, we're highlighting the impact that our technologies are having on our customers' sustainability efforts.
As you May remember, we acquired <unk> in 2017.
Ron Thank the signs of manufacturers energy efficient solutions, primarily for use in pulp and paper mills.
Since the acquisition, we have done several new product launches as well as expanded commercially in all the regions and this has led to a 65% increase in the installed base.
This has helped achieve an average of 45% energy savings for installation.
And save several billions of gallons of water annually across the installed base.
Moving to slide 13, and the precision and science technologies segment overall organic orders were up 12% driven by the medical and dosage from businesses, which serve lab life Sciences, and water and animal health markets.
These businesses were up double digits and we also saw strong performance in our more industrial end market oriented products.
Like Milton Roy and Arrow.
The momentum on our hydrogen solutions continues to build and we saw some strong funnel of activity.
Revenue was up 7% organically producing the book to Bill of one two.
Additionally, the plc team delivered strong adjusted EBITDA of $67 million, which was up 26%.
Adjusted EBITDA margin was 31, 2% up 350 basis points year over year with incremental margins of 59%.
From a sustainability perspective, we're highlighting our Y Z brand zero emission authorization.
And why is the connect.
The always injection system that authorizes natural gas and hydrogen the liver to communities to help safeguard people of <unk>.
Customers replace legacy systems with our new CEO. This product is expected to dramatically eliminate emissions of methane.
Our customers are the efficient programs are further enhanced by Y Z connect.
Which provides remote monitoring capability through its internet of things cloud platform, which is another example on how our customers can lean enough to help make life better.
Moving to slide 14 in the specialty vehicle technologies segment. Overall Q1 was another very strong quarter for the <unk> team.
Orders and revenue were up organically, 89% and 29% respectively.
Driven by continued strength in consumer growth in aftermarket programs.
Adjusted EBITDA of $48 million increase of 162% year over year, leading to an adjusted EBITDA margin of 21%.
And these represent an outstanding 1020 basis points improvement versus prior year showcasing the power of out of our eggs and the team's application to install the captured value and market share.
And while these business continued to perform well.
We made a strategic choice to divest the asset the continue aligning our portfolio. So we're mission critical flow creation of technologies.
And as mentioned, we're very pleased with the strong economic outcome with the sale of Clubcard to platinum equity.
It was very important to us in this transaction and in our sale of H B.
And that we own or our commitment to employee ownership.
The result employee of recipients of our 2020, all employee equity Grant will have 50% of the award best of clothing, and 50% will be replaced by a new equity linked program implemented by platinum.
We're very pleased with this outcome for the club for team.
Moving to slide 15, given the company's performance in Q1 and continued strong outlook, we're increasing guidance for 2021.
Our initial revenue guidance was up high single digits to low double digits over the reported basis comprised.
Comprised of mid single digit organic growth across each of the three segments.
After removing SVP, we're now guiding up low double digits with high single digit organic growth across each of the segments.
FX is expected to continue to be of low single digit tailwind for the business on a total year basis, given the weakening of the U S dollar against major foreign currencies like Euro and British pound for that.
It is a slight headwind as compared to the initial guidance.
From a pacing perspective, we anticipate the first half of the year to be up mid teens.
While the FX tailwind remained most evident during the first half of 2021.
Overall growth in the second half of the year is expected to normalize the bid competitively, but still be up high single digits.
We have received a lot of questions from investors on supply chain, the inflationary pressures and the price cost dynamic.
When we issued our initial guidance, we took the anticipated inflationary headwinds into consideration.
And while we continue to see pressures around certain commodities and logistics, we have implemented our IRS tools to help mitigate the impact on our teams have executed very well, including price and execution and our continue I to the initiatives.
We do see this environment continued in Q2 and likely after but we're confident that leveraging our <unk> process and working with our suppliers will allows us to continue exceeding our customers expectation.
Based on these revenue assumptions, we are increasing 2021, adjusted EBITDA guidance to $1, one 2 billion to $1, one 5 billion.
Which represents approximately of $45 million improvement from the guidance at the midpoint of the range when excluding SVT.
In terms of cash generation, we expect free cash flow conversion to adjusted net income to remain greater or equal to 100%.
Capex is expected to remain one 5% to two percentage of revenue and finally, we expect adjusted tax rate to be approximately 23%.
Moving to slide 16, as we wrap of today's call ingots of run is in a great place.
2021 is poised to be of great year the.
The first quarter provided a solid springboard with momentum into Q2.
We take our role as the sustainably minded industry leaders very seriously.
One is focus on employee matters like broad based ownership.
Belonging and reducing our impact to the environment.
I am proud of all of our employees around the world.
Thank you for how you come together every day.
To be there for our customers solve problems and lean on each other and collaborate.
I am confident we will continue to transform Ingersoll Rand and deliver increased value to all of our shareholders.
And with that I'll turn the call back to the operator and open for Q&A.
Ladies and gentlemen, if you would like to ask the question. Please press star followed by one on the call. Thank you Pat now if you day times your mind. Please press star one.
Ross Your question. Please ensure your line is on the touch.
The first question comes from Julian Mitchell from Barclays. Your line is now.
M.
Just the question on the the raised guidance.
So I think it looks like you're embedding around the sort of mid forties.
Segment incremental margins for the year as a whole in that guidance.
Maybe just clarify if that's roughly correct and I suppose as you think about puts and takes from here after that mid fifties number in Q1.
Anything major to call out around say mix shifts.
The pricing it sounds like you're confident on price cost but.
But just wanted the extent to each of those pressures on the net basis will increase from here in the balance of the year.
Hi, Julian Yes, Youre correct.
On the first question the I kind of of that mid Forty's range.
And I know there are kind of the puts and takes let me just kind of give you a little bit of color here I mean Q1 as you pointed out I mean, very strong across the segments and regions and that is really encouraging.
A few things to highlight.
Q1, we're seeing the kind of an easier comp on a year over year basis due to the cost synergy savings as most of our savings really started to show in April of.
Last year and onwards.
We're also seeing the solid price realization based on the actions that we took in late 2020, and the continued execution of ITV and all the initiatives.
As we go into a into Q2 and the second half.
If I kind of break it down by segment.
The Ips overall, we're still expecting that kind of day to 35, incrementals, even with the headwinds.
Round not only the inflation, but also of the discretionary cost coming back.
Which again speaks to the ongoing synergy delivery efforts as well as our focus on kind of a quality of earnings.
On PST, yeah touching first on Q2.
<unk>, you know and as we highlighted in our you know the guidance Q2, incrementals will be lower than average.
To the fact that in 2020, we saw outsized demand for our medical compressors and pumps.
It used again to fight the COVID-19.
And the majority of these orders came in in Q1, and Q2 with shipments mostly in Q2 and Q3 and as a reminder, these shipments on the medical products came in at the premium margin.
In addition, PST is are you seeing some of the inflationary headwinds that most companies are seeing and while one of the back half of the year will be more normalize to about that kind of 35% and above.
So again, having said all days I mean as you know we're very we have a pretty strong processing in terms of price to be sourcing, but our teams are actively executing to offset any of these kind of headwind for many.
Thank you and then maybe switching to.
Capital deployment.
Given the proceeds from Hps and <unk> and the cash flow outlook.
It could be close to.
Zero net debt at the end of this year I think.
Also the it's a very.
The valuations are very high for M&A right now so maybe just help us understand sort of.
How optimistic you are on getting a meaningful degree of M&A.
This year.
Yeah, Julian we still remain very optimistic on the on the M&A I mean, the M&A M&A as we highlighted.
Pretty strong as you saw on the on the remarks from the slide that we put together so we've been thoughtfully.
If you kind of go back when we talked about our phases of creating the strong foundation and pivoting to growth and portfolio optimization, we've been very thoughtful on the timing of all of those and proactively working on the M&A funnel. So we're ready with the for.
Funnel again, we're not.
We're not going to go crazy on the market, we continue to stay very disciplined in this environment.
We buy companies that are of strategic fit.
As we have always highlighted the strategic fit.
Not only from a technology, but also commercial perspective.
We're never buy for kind of multiple arbitrage, we buy a company that can have that strategic fit and I think that's what's exciting.
Yes, you are right I mean, I think with these kind of unlocking $2 billion of value and with these two divestitures. We're we're ready for our for continued executing on M&A in a very disciplined way.
Great. Thank you.
Thank you Steven.
The next question comes from Mike Halloran from Baird. Your line is now open.
Hey, good morning, everyone.
Let's let's just follow up drilling on the last question, let's just follow up on that last question there a little bit then right. So.
Youre through the divestiture of <unk>, certainly put some of the chunk of your stuff, obviously, a little bit more to come potentially.
The good commentary on how you view the action ability there, but maybe just an update on how you're thinking about what this portfolio looks like three five years down the line.
We've had some indication of where the capital allocations are going to go but.
Maybe just a little bit of an update on directionally, how you're thinking about this portfolio composition over time, and where the chunk of your pieces of that capital allocation can do.
Sure, Mike I I of Juicy.
We kind of have these two segments and the one larger than the other we spoken a lot about.
Our strategic focus on building the funnel has been on the provision on science.
We see a lot of good things that we like on that on that segment and we've been very prudent in terms of saying, while we integrate the Gardner Denver and Ingersoll Rand.
Through the past 12 months.
Building the funnel on the provision of enzymes that did not have that many kind of distractions I'll say on the on the integration. So I think that continues to be to be the exciting piece in terms of kind of how we look at it we're still going to be these mission critical high aftermarket, we like the recurrent aftermarket side of the rotating components and <unk>.
License that we have.
And we like the space, where we play and we still have you know over $30 billion of addressable market, even when you exclude high pressure and the specialty vehicles. So all the things around the sustainable technology high growth end markets.
We've been very thoughtful in terms of focusing and doing a lot of fragmentation of market work around these kind of high end growth markets.
That where we can have the play in terms of flow creation in any of those adjacent adjacent markets that kind of complement our ecosystem of the product line.
And then and then a question on the guidance on the.
On the assumptions on the revenue side.
Just talk about how your revenue outlook compares to say normal seasonality or what kind of backdrop are you embedding as you work through the year pretty stable or is there an acceleration of assumed and then also maybe just touch on what youre seeing in the shorter cycle side of your businesses versus some of the longer cycle side of your businesses.
Yes, Michael Let me, let me touch base first on the short cycle one of the long cycle and then.
Kind of Olympic comment on the other one.
Sure cycle, we see very good strength.
The broad base.
Particularly kind of the medical market the animal health.
What kind of what we call also act egg M. <unk> kind of end markets that were put in a lot of effort to.
To really continue to penetrate.
Pharma food and beverage and in water and wastewater.
In terms of kind of long cycle the markets most of our long cycle business as all of you know is in kind of what we call. The the Nash Garo business as well as the very large compressors, which is kind of the centrifugal compressors at the.
Of the Multistate centrifugal compressors.
Good day, where is the the large multistate centrifugal compressors or the orders were very strong and positive. This is an area, where we are seeing very good start with.
When you think about kind of some of the end markets. We're seeing good momentum on kind of re shoring on some on some companies as well as the markets like renewable energy General and general industrial the.
And as Carol in the in the first quarter was kind of.
Down primarily due to the timing we say.
If you think about the Nash Airways won business that changes quarter over quarter to quarter. So we kind of thing to look at a bit more from a first half.
Compare year on year and in the funnel still continues to be highly active and just as a reminder of that business in the fourth quarter. So very positive orders and kind of the mid to high single digit order cycle.
Yes, Michael on your first part of your question with regards to kind of seasonality and kind of how we're thinking about the backdrop I don't think we're thinking about it much differently than you've seen from a historical perspective, obviously strong first quarter I think we're very encouraged by the orders profile, where in Etfs and precision and science you had book to bills of $1 one for 120, respectively.
So we've obviously built some solid backlog now moving to the second quarter and as the center of said typically speaking you tend to see.
Particularly for the of some of the longer cycle businesses. The order of stronger in the first half and shipment stronger in the second half. So typically speaking you tend to see Q1 seasonally a little bit of of the weakest Q4 seasonally the strongest in Q2 Q3 and between I don't think youre going to see anything dramatically different in the context of the the phasing or how we think about seasonality here in the context of 2021.
Thanks for the answers as always I appreciate it.
Where do you like.
Our next question comes from Jeff Sprague from vertical Research partners. Your line is now open.
Thank you good morning.
I Wonder if we could just talk actually a little bit about price specifically the center. You indicated you felt you had price cost pretty pretty well dialed even to start the year, but.
Maybe you could give us a little color on what's going on with price have you gone out multiple times and.
And maybe as part of that question two are there any particular supply disruptions that youre dealing with in the business.
Sure, Jeff you know on the <unk>.
On the price cost.
The good thing is that we actually plan for the inflation during the budget time last year with the teams I mean, we were seeing early indications of inflation and we basically told the teams to plan for the inflation and with that to plan for the price and then we executed on the price.
And I think it was part of.
Kind of our original guidance as well.
And reason why is that.
The increase prices back then.
And I think the inflation is really coming in fairly in line with what with what we planned.
And then I would say in addition from a from a margin perspective, we continue to run the <unk> procurement.
Work that we're doing with the we did with the synergy integration between Ingersoll Rand and Gardner, Denver, and Thats kind of working where it really well.
We move forward I mean, clearly we continue to watch carefully this inflation and in the teens theyre kind of looking loaded to plan for incremental price increases based on what we're seeing primarily typically like for like the logistics side of things.
But but yeah, we're looking at.
Doing the proactively.
<unk> of <unk> of our of our products here in this inflationary market.
And in terms of supply chain.
I mean, we are definitely not immune to what youre seeing on gearing of loan about logistics.
But I think a couple of things to highlight here first we're mostly in the region for the region and this has proven to be of great strategy for us not only in these difficult times, but also as companies looking to re shoring and has been very helpful for us.
I will say second we're working with a much larger purchasing power than in the past.
Many of these are kind of new partnerships that we're creating and these really has helped in the supply chain as they want to deliver and have a very good terms with us. So so I'll say that the supply chain.
Not immune but I think the team really working very well to get it in control.
Yeah.
And second unrelated.
What's going on with service.
You see a clear pickup in activity, there and commensurate with some of the kind of equipment order dynamics that are starting to tick up or would you expect some lagging impact their audits of the year play out on the service.
Yes, Jeff in the first quarter, we saw outsize order momentum on the origin of equipment.
And certainly as the market recovers, we definitely want to see that.
And we're very glad because again as youre kind of alluding there, we're kind of seeding the market and putting our products through the day, we can connect them with our Iot platform and then continued to generate these accelerated aftermarket so for.
That's good news.
I would say that.
Still with that you know the service on the after market sequentially.
We saw improvement in most of the region. So again, good things of that some.
Some of the strategies are definitely seen good momentum here.
Great. Thank you.
Yes.
On the next question comes from Nigel Coe from Wolfe Research. Your line is now open.
Thanks, Good morning, everyone. Thanks for the question.
I will go back to capital allocation on the M&A and I'm curious if the.
Post tax changes.
Cap cap GAAP cash.
A couple of gains the FX changes the particular well.
What are you seeing more activity on the private seller sites and so any comments there would be would be goods and then you'll just given that we've seen an acceleration in the disposals are obviously a lot of the kind of available cash now.
Is this driven by just like the.
Timing of this.
One of those things.
Or do you have increased confidence and line of sight on deployment from here and Thats kind of driven you to the kind.
The sale of the cocoa costs. Thanks.
Sure Nigel I think of the cap gains taxes, I think maybe fill a slightly too early to tell.
And obviously, that's mosley, particularly here in the U S. I think Europe continues to be at least the no no no major changes, but too early to tell I think it could free up a better momentum in some cases, but nothing that I will classify as the same it has created an imminent change yet.
Maybe some of the family owning the owners are thinking about it and we will see I mean, we stay pretty close and create good cultivation. So we'll see on that.
From the timing.
It's kind of alluded I think we've been very thoughtful.
On the timing, we said that we went to great creates the ability but at the same time, we wanted to improve some of these companies. So we can maximize.
The value that we could generate and and at the.
The same time, we did it in a way that we wanted to have some sort of visibility to the funnel. So in parallel we've been working on all of these aspects not only the divestitures, but also accelerating the funnel and you can see how are some of the statistics on the funnel.
And we're excited that it's one of those five X what we had even last year.
The average revenue of the sites for companies more than 50%, then and the velocity, which is really important has been cut by half.
So I think it's been.
It's been done everything strategically well foot out from them in parallel.
Nigel.
Thanks.
And then on.
You called out of PST is of an area, where you are seeing good opportunities in the pipeline.
Is there an appetite.
Even visibility to expand the medical.
<unk> of PST.
Absolutely, yes, definitely definitely not true.
I mean it has been.
If you remember yeah absolutely.
Great. Thanks.
Thank you.
On the next question comes from Josh question Winski from Morgan Stanley. Your line is now a penny.
Hey, good morning, guys.
Good morning, Joseph and Josh Chris.
That's something in the role of your your background makes me feel like maybe I haven't done enough since one of the.
All of the seventh grade spelling Bee.
Thanks, Josh I appreciate it.
Yes.
You said that your 22% margins in some of it still feels like an early point in the cycle.
I think the VIX pointing out of seasonal high point.
I get that maybe margins will move around with M&A here, but can you get to mid <unk> in the next couple of years on a core basis.
I know that's sort of been thrown out there as a.
The noble goal for a while but it seems like maybe it's accelerating as an.
Opportunity.
Yes, Josh is the Vic I'll start there.
I think the answer is absolutely. Yes, you know we've been we've been very I think transparent in the context that quality of earnings and continued to execute on many of our strategic levers, notably areas like the synergy funnel of procurement <unk> as well as price realization are are clearly.
Clearly focus areas and footprint for example, as that will still kind of more so yet to come frankly from a synergy delivery perspective. So I think the answer is a.
The mid 20% EBITDA margin kind of on the <unk>. The Ics segment is without question I think where we are we are targeting this business to be from a more medium term perspective, and I think one thing to add would be you know, we're really encouraged by the momentum we're seeing and frankly across all of the parts of that business, it's really not coming from one distinct area I would tell you all of the regions as well as.
The power tools business inclusive of continuing to show good momentum and I think some of the commercial initiatives that we also have percentage of spoke to continuing to see good aftermarket traction, we're seeing a little bit outsized OE right now, which we think is a good thing as we kind of start to show up more of that shift into aftermarket and build from that 40% kind of base.
Line, we have right now of the aftermarket from a sales that'll obviously help as well so all good signs and things that we would say, yes should point to 25% margins definitely being the target here as we think of it.
Got it that's helpful. And then I guess, we've talked a lot about the the M&A side of the equation.
So maybe just kind of focusing on the core business.
You guys mentioned, maybe some signs of near shoring, taking place just wondering if theres anything else that sort of looks.
Yes the.
As you will or stands out at this point in the recovery, whether it's an end market that's.
You're kind of leading or lagging and of surprising way or a mix of business, where folks are doing more capex earlier in the cycle just any observation on.
Kind of the complexion of spending underneath some of the some of the consolidated numbers.
Yeah, sure Julien I mean, maybe something to highlight.
We spoke about this industrial vacuum of blower business to be kind of low double digits and when you cannot decompose that that has the industrial side.
Kind of of brands like M will owe more recently in Rimouski and things like that but included in there is also the vacuum business like Nash, which is kind of more of the longer cycle and as I. Just mentioned I mean Nash was down in the first quarter, which obviously implies that the industrial vacuum business was really high and.
And that was basically up in the in the kind of twenties range for the industrial vacuum or industrial vacuum is really co located within the kind of large Oems and Oems, we always said that.
The industrial vacuum was always a leading of good leading indicator for industrial recovery and it is very exciting to continue to see that momentum happening on that industrial vacuum side of the business. So I think that's very good news for what the industrial recovery.
<unk> seen.
In terms of some of the other things is actually also good momentum based on the lot of the self help initiatives on the commercial side I think Josh it's exciting to see that we're seeing really good traction on some of the commercial kind of of products. Some activities that we talked about prior quarters in terms of.
The combination of Gardner, Denver, and Ingersoll Rand examples like.
Oil free product like the <unk>, which was the Gardner Denver technology launched <expletive> Ingersoll running Europe, that's a really really good momentum in Europe and that is getting launched now here in the U S. So I expect to see that accelerated momentum too as well. So the combination of those kind of multiple things is not only the market, but also a lot of the.
Good execution from the team based on these initiatives that we're doing.
And just to be clear when you say vacuum that for you guys does not include semiconductor exposure right.
Correct, Yeah, we don't play in the semiconductor market that's right, yes. It is all industrial.
Gotcha perfect yes.
Got it thank you Joseph.
Our next question comes from Andy Kaplowitz Citigroup. Your line is now open.
Hey, good morning, guys.
One of them.
And then maybe can you give us a little more color to what you're seeing by region. You you, obviously talked about APAC sales and orders up high double digits, but is that just easy comparisons given the pandemic hit that region first or have you been able to harness some of the opportunities you've cited for China and Southeast Asia and then the Americas.
We just kind of talked about it obviously easier comparisons coming up but just the cadence of orders and revenue continue to improve as we go through April here.
Yes, I think the initial Pacific I'll say it is.
The combination of both I mean definitely some easy comps in China for sure.
But if you recall the southeast Asia was definitely not an easy comp yet in the first quarter, because I mean, the southeast Asia really start to getting the kind of look down in the second quarter. So I'll say a good combination of maybe easy comps, but at the same time, some really good momentum in China and Asia Pacific I think this is we always high.
When we created the the.
The integration of Ingersoll Rand and garner the remember that we said Asia Pacific is definitely in the area of growth and opportunity and we're doing some very good organic investments.
We spend a lot of new capital equipment to be able to have in region for region.
And in areas like that and I think is really really exciting and we put a renewed focus also on emerging markets in south East Asia something of that before with the scale that we had it was very difficult to do but now we have the scale and and these organic investments are definitely showing some of some good momentum I think in in India Americas.
Yes, as you said.
Beginning of the U S.
And we will see better easier comps here in the U S. In the second half.
I mean, assuming Europe.
But I think as well you know you saw that in Europe at least on the compressor side.
You know.
Orders, we were kind of in the in the mid teens up while the Americas or the U S. Mid single digit up and maybe some of that is a little bit of timing in the sense that the.
Of the Europeans as I, just mentioned before the kind of went in the faster in terms of doing some of these inter.
Integration of the product lines that we that we've spoken about and now we're seeing that getting implemented in the Americas.
Again, the Americas or the U S of more complex environment, where you have the combination of direct versus distribution. So we just wanted to be careful but I think everything is growing really well now in the U S as well and we will see some inflection here as we move forward.
Helpful for Sunday, and then one of the issues that you've mentioned in the past with your synergy progress was that procurement synergies would be partly a function of your sales volume.
So you mentioned already that your supply chain as well, but could you actually harvest more procurement related synergies as part of your $200 million program given the expected higher sales and you know I'm cognizant of you just raised your target so just thinking sort of medium to longer term here.
Yeah.
The I think I think you hit the nail on that obviously when we so the answer to your question is you are completely right obviously the.
Of the direct material components of our synergy equation most notably.
The procurement side of <unk> are frankly of a function of volume and we did note that even in 2020, obviously volumes were not at kind of that kind of baseline 2019 levels. What we had seen for example of procurement I'd say, probably better than expected percent realization on savings. So that the kind of been of nice kind of I'd say mitigate lower volumes clearly a higher volume equation.
Clearly can materialize into into higher savings, but as you said some of that was definitely dialed in to the the raise when we when we move the number from $250 million to $300 million, we'd clearly indicated that the majority if not all of that really was coming from the direct material equation could there be some potential in the medium term.
Over and above perhaps but I think we want to continue to see how things play themselves out, but we're very encouraged and I think the the momentum we're seeing frankly, even still today on the procurement and the ITV sided is very encouraging in the context of the price realization and the percent realization of the teams are actually are recognizing so quite encouraged but I would say a lot of that was factored in.
The the range from 250 to 300.
I appreciate it guys.
But for me.
The next question comes from Joe Ritchie from Goldman Sachs. Your line is now open.
Hi, Thanks, Good morning, guys.
Good morning, Joe Joseph.
So maybe just starting out with the day you've highlighted in the past this longer term opportunity.
On the oil price side water and get some positive comments on hydrogen in the funnel of activity.
Do you think about these these initiatives is providing some type of like GDP multiplier effect for the company over the course of the next two to three years.
Yeah, Joe of definitely definitely we believe that this is these initiatives are the ones that will give us that kind of a plus clause that we always like to talk about in terms of of how we execute that in the sense that we play in these kind of GDP environment.
End markets, but with the initiatives that we're putting in we're kind of moving more towards those end markets that can give all of that plus plus.
And our execution.
<unk> always said you know call it anywhere between.
103 of the 300 basis points above above.
But the GDP, depending on kind of the region on the market.
These initiatives continue to be really really exciting for us.
Launched.
With the help of our AG several of the impact Daily management.
<unk> from a global perspective, and I'm very excited with the kind of what we are seeing.
And definitely much more to come.
Yes.
For the center I guess, maybe just.
With like oil free and water of those if those of end markets that you guys have had traction I think I heard you say on hydrogen and the things. We're picking up is there anything that's happening in kind of like at the margin.
That has changed just in the near term on any of those opportunities.
The you mean the margin in terms of of profitability.
Oh, no I just meant on the.
The median like anything incremental yeah.
Yeah, well I mean, I think I think on the on the all the three is.
It's more about.
I think this year and moving forward is when we start seeing the execution of this product line combination between the two companies and as you can imagine I mean, we and we talked a lot of about that last year all of the products from its end of Q2 that we were going to combine the.
Just kind of create a highly complementary I think of lot of the results should be and could be seen now and I think you know.
Same thing for the water.
And wastewater I mean, I think it takes a little bit of time to see the results, but I think we're very excited and very encouraging to kind of what the momentum we're seeing across the company on these strategic end markets and we have selected.
Got it no that makes sense, if I could ask one more just on free cash flow of longer term.
It hasn't made a ton of progress on the free cash flow margin.
Even when the wave of patent the DDI days of working capital.
Do you think about driving potentially of 20% type of free cash flow number.
Our free cash flow margin by late in the next few years and is that possible and how do you think about the working capital opportunity from the company.
Yeah, John I mean, I think without question, we continue to see opportunities I mean, we're pretty pleased with I think the momentum we've already seen but we've been very adamant that they are still a number of I'd say levers that we have the poll.
The first and foremost.
I'll start with the tax rate you know we mentioned that.
When we started as kind of one year ago, putting two companies together, we really didn't have what I would consider to be an optimize tax rate. We've done a lot of work out of their tax organization, Frank our organization a lot of work.
<unk> started to implement a lot of those I'd say practices here and you're already starting to see some good momentum on the tax rate.
We've said that we're guiding to approximately 23% in last year, you were 24% plus you're already starting to see some good momentum there and we have line of sight to getting that into the lower twenties overtime.
In terms of the working capital side absolutely.
I think the biggest area that is still ahead of US here is on the inventory side. We've mentioned I think a few times that inventory is really almost connected in some respects to a lot of our synergy delivery initiatives, we talked about procurement and we focus a lot on the savings side, but theres also the making sure that you're negotiating terms properly and that you are actually making sure that you are you pulling inventory.
Only when you need it and then also what the footprint side of the equation footprint is probably the one of the biggest areas of the synergy equation, you really haven't starting to see delivery in a material manner, just yet, but you can be rest assured here when we start to actually optimize our footprint on the manufacturing side, there will be working capital opportunities. There. So you put that altogether on and clearly there are other areas in terms of the the payer.
All of the receivables of equation that we're working clearly I think working capital is a major opportunity ahead that can help drive us to the the level that youre speaking to here over time. So I think we're encouraged it's.
It's definitely I would say a big focal point of the the ops and finance and business teams and we're going to get you to make momentum here as we move through this year and frankly into next.
Yeah.
Great to hear thanks, guys.
Thank you.
The next question comes from the World what time of from many of US Research. Your line is now open.
Thank you and good morning.
My question is on maybe more of the structural or strategic side of pricing as opposed to the response of our tactical things that you kind of discussed already I know you guys have spent a lot of work on on looking at tracks from discounting better I'm looking at.
The various initiatives of sort of improve the way pricing closer to the organization and I Wonder could you talk a little bit about the outcomes. As you look at your new products would be found that they have the pricing power you want or.
Is there a structural upshift, there and as you look forward into the backlog and in two years out of that a material difference from the past. Thank you.
Yeah, Rob I would say that.
Great question on the on the pricing side of him.
And definitely something that the.
The strategic pricing that is basically what we'd like to do we typically never do.
The peanut butter across price increases of just based on the specific product lines.
And I will say that.
As you know.
Our mission critical.
Products were very low cost relative to the overall system and that is very good for us and works really well for us in situations of continuing to be able to increase price because of the because of the mission critical mass and the low cost relative to the overall system that our products have in terms of.
The stickiness and the elasticity I mean, we have done a lot of work on testing price elasticity in many of our end markets and many of our products, we haven't really great.
I'll say internal process for scoping that out and making sure that we continue to push the boundaries on the envelope from that as we see that we can and all of these we can only do it only as long as we have differentiated products, which of which is the other big play in terms of of how our eye to the has been.
Really strong process for be able to continue to create differentiated products.
It might be tweaks of innovation that is not only so is the process that is not only for for driving direct material costs down, but it's also driving from.
Some increase in profit price and profitability.
Okay. That's of Great answer. Thank you and then just so I understand it I mean, when do you think about all of the.
Testing the measuring the elasticity you've done in the profit of the product improvement of you're starting to see a lot of benefit from that or is that you know a year out of two years out one of the sort of kicks in and then I'll stop thank you.
Yeah.
We're seeing some of that I mean, when you look at the the <unk>.
Margin expansion that we saw here in the first quarter of good chunk of of that also came from gross margin. So we're seeing gross margins continuing to improve one of the year over year and even historically when you go back.
Even going back to 2015, I mean definitely some very very solid growth margin expansion. So we're definitely seeing it in the real core of the business.
Great. Thank you.
Our next question comes from Nathan Jones from Stifel. Your line is now open.
Okay.
Yes.
Nathan James Your line is now open.
Sorry.
Good morning. This is Matt on for Nathan Jones of this morning.
Okay.
You mentioned targeting sustainable investments I was wondering if can you talked about what kind of a level of investments youre, making growth of at the moment and what kind of potential that has to take it to and can you talk about the opportunities to invest more here in order to continue drive growth in 2020 and beyond.
Our 2021 John sure.
Sure Matt.
Yes, I mean, I think generally speaking a lot of the initiatives, we talked about I think you've been speaking to a lot of the a lot of the questions. We've had with regards to whether it be oil free whether it'd be investments in the hydrogen whether it would be the.
The the.
The the products that we actually highlighted India in the release and the slides of the <unk> acquisition that we made back in 2017 or the the.
The CEO of application from the precision science technologies business generally speaking in all of our NPD is that we're really looking at have some facet of sustainability energy savings and efficiency really baked in so I would say, it's probably the single biggest criteria of by and large when we're looking at.
Innovation and it's also a huge criteria that we're looking at when we're actually looking at the M&A pipeline. So I would say, it's front and center trying to quantify the exact dollars is probably a little bit tricky, but I would tell you. It's it's probably the single biggest factor and I would also point to we really made a commitment to it in the context of our ESG goals, which are just one day you can we've obviously spoken to quite of.
So again I think it's kind of permeating the culture and now we're actually putting distinct targets and goals that are associated with it as well.
Great. Thank you and then I wanted to follow up in regards to the supply chain conversation are you guys seeing any impact to production orders.
Supply chain relative to COVID-19 cases, spiking in particular in Europe.
India and then how confident do you feel about the.
The ability to continue ramp as the move into <unk>.
First of the year.
Yeah, Matt I mean, I think in terms of of production I mean, our plants are up and running.
Clearly the area that we're monitoring really closely of India.
We're deem is of critical manufacturer in all of our manufacturing facilities are at the moment they are open.
A lot of of some of the close downs.
That is happening in India.
At least in the cities, where we are operating it hasnt happened to us.
But we're watching that carefully we're proactively supporting the vaccination efforts of our employees base. There again. This is because we're deem is of critical manufacturer and you're seeing that lack of growth.
Lack of oxygen in many hospitals.
Our products.
Are actually helping.
You know to enhance that.
And so we're working really closely with the government of really excellent rate of that but so so far no major impact I will say something that we're watching carefully.
Okay, great. Thank you.
Thank you.
We have no further questions I'll hand, it back.
Well. Thank you everyone for your interest in joining on the call. Today. We are very excited we're very thankful for our employees for all of the work and dedication that theyre doing and thinking of 19 like orders. So we're excited with the.
For the momentum that we're having and look forward to talking to many of you here Bruce of Orange the future. Thanks again.
Ladies and gentlemen, this concludes today's call. Thank you for joining.
You may now disconnect your line.
Okay.
Yeah.