Earnings Call: Q1 2021

Apr 29, 2021

Ladies and gentlemen, hello, and welcome to the Ingersoll Rand First Quarter 2021 Earnings Conference Call. My name is Maxine, and I'll be coordinating the call today. I will now hand you over to your host, Chris Myron from Ingersoll Rand to begin. Chris, please go ahead when you're ready. Thank you, and welcome to the Ingersoll Rand 20 21 First Quarter Earnings Call. I'm Chris Myron, Vice President of Investor Relations. And joining me is Vicente Reynal, President and Chief Executive Officer and Vik Kinney, 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. Irc0.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 2 for more details. In addition, in today's remarks, we will refer to certain non GAAP financial measures. You can find a reconciliation of these measures To the most comparable measure calculated and presented in accordance with 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 a company strategy update, Review our company and segment financial highlights and offer updated 2021 guidance. For today's Q and A session, we ask each caller At this time, I'll turn the call over to Vicente. Thanks, Chris, and good morning to everyone. Let me begin by welcoming Chris to his role. As Vice President of Investor Relations, Chris replaces Vic in the role who was appointed to CFO in June of last year. I'm delighted to be working alongside both of them. Chris previously led corporate development for the company and played a critical role in accelerating our growth strategy. Most recently, with the acquisitions of Tuthill and Albin Pump, As well as the completed divestitures of HPS and announced divestiture of Block Car. I would like to especially thank For his military service in the U. S. Army. During his military career, he served as infantry officer and Ranger, including A deployment in support of Operation Iraqi Freedom, Chris also held leadership roles in the Old Guard at Arlington National Cemetery And serve as an aid to the President of the United States. Following the military, Chris held roles in Finance and Investment Banking Before joining us to direct strategy and corporate development efforts, he is a proud veteran who continues to help fellow veterans Transitioning from military to civilian life, and he is integral to executing our strategic plan to deliver value for our shareholders. Chris is one example among our 16,000 employees who lead our company purpose inside and outside the company. And as you see on Slide 3, anchoring to our purpose is working. We're realizing the achievements of our desired target. You will hear 3 key things 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 unlocking approximately $2,000,000,000 of value with 2 strategic divestitures, putting us in a great position to continue our portfolio transformation. 2nd, you will hear about how we are over delivering to our expectations. As you will recall, during the down year of 2020, We control the incremental margins and now in the up cycle we're 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 Excellence, what we call IRX, is becoming our economic engine to unlocking our potential. Processes are only as good as the team that executes them. Culture and human capital management are key differentiators at Ingersoll Rand. We have a highly engaged workforce who acts like owners because they are owners. Every day, our employees make decisions that demonstrate thinking and acting like owners With the power of IRX behind them, our employees all around the world deserve sincere thanks For their adaptability, resiliency, dedication and determination, we will continue supporting our employees with an 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 4, you see the roadmap we highlighted 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 operate sustainably and turning to Slide 5, Operating sustainably is one of our strategic pillars because it engages employees, customers and communities while delivering shareholder returns. In February, we committed to some aggressive targets around climate goals. I am proud that our teams continue to deliver and execute on these goals. For example, last week was Earth Day, and our employees participated in planting more than 3,000 trees and collecting over £4,000 of waste While recycling almost 20% of that. However, advancing our ESG journey goes beyond our environmental commitments. It is also about our social and governance actions. Last week, you saw we announced our 2025 diversity, equity and inclusion goals. We set this goal 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 belonging acts we have done in support of our diversity, equity and inclusion efforts, A connection that some may not readily make was around $150,000,000 equity last September to all of our employees worldwide. Equity grants and broad based employee ownership such as what we did provide employees a tangible financial stake in company performance And that benefits employees, families, communities and the economy at large. Repeatedly, studies show underrepresented populations Increase their earnings and wealth if they are employed in organizations that offer equity grants. And that's a powerful aspect Of our thinking and acting like an owner that ties into equity and how we directly impact global ESG efforts. As I said last quarter, we see broad based employee ownership as a game changer. Our human capital management priorities are part of why we added operate sustainably as strategic pillar, our diversity, equity and inclusion goals are the latest advancement, and we will use IRX as our key enabler to the leader on these goals As we do every other critical initiative in our company. Moving to Slide 6, we have also used IRX to deliver against our capital allocation strategy. And as we see here, the outcome have been extremely effective. On the 1st of this month, we completed the majority interest sale of the high Pressure Solutions segment and a little more than a week later announced an agreement to sell ClubCar. IRX enabled us to accelerate these transactions And make them happen. We have solid processes executed by engaged teams to ensure we always maximize value creation in an expedited way. And that's our special and unique economic engine. With these divestitures, we're proud the buyers will continue the commitment to employee ownership, which may be a little unusual for this type of transaction. But as I have said before, it is important to us on many fronts. And with these divestitures, we're unlocking approximately $2,000,000,000 in value. And on Slide 7, we see a visual Illustrating the volume and timing of transaction milestones in our evolution over the last 4 years, including the completed And announced divestitures this month. Last quarter, I mentioned capital allocation is a huge part of my personal focus, And I have been actively discussing this with our Board. Those discussions continue. And as we have done all along with our capital allocation strategy, We will inform you when there is something significant to share. Aligned with this today, I'll give you some additional color on how we have enhanced our inorganic growth strategy. So let's look at Slide 8. I have mentioned IRX Discipline a lot this morning. It is an execution engine to drive change in every area of the business, From our environmental goals and networking capital goals to our new product development goals and our diversity, equity and inclusion goals, IRX has been transformational in helping us with the integration of companies like Tothill and Albin, as well as helping us with divestitures and accelerating our M and A You can see our funnel has increased 5x since Q2 of last year. The average revenue of the companies in the funnel has increased by more than And we're moving potential acquisitions through the funnel much faster. And we have not only been integrating Ingersoll Rand and Gardiner member over the past year, but we have also completed 8 bolt on acquisition, With Foothill Vacuum and Blower Systems being the most recent one. And we have already seen solid progress with Foothill, Such as growth outside the U. S. Where we highlighted that as a great opportunity and already received a multimillion dollar order in Asia Pacific during the Q1. The simultaneous execution of funnel growth, acquisitions and divestitures highlights how IRX enables capabilities To drive significant inorganic growth. I will now turn it over to Vic to provide an update on our financials. Vic? Thanks, Vicente. Moving to Slide 9, we continue to be pleased with the performance of the company in Q1. Q1 saw a strong balance of commercial and operational execution fueled by the use of IRX with continued signs of improvement across industrial end markets. Total company orders and revenue increased year over year 29% 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 continued to drive performance on productivity and synergy initiatives using IREX as a catalyst and we remain on track to deliver on our $300,000,000 The company delivered 1st quarter adjusted EBITDA of $293,000,000 a year over year improvement of $107,000,000 And adjusted EBITDA margin of 21.4%, a 5 50 basis point improvement year over year. Continuing performance from previous quarters, we also achieved 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 to prior periods. Given the recently completed sale, we will not report on this segment moving forward. Free cash flow for the quarter was $108,000,000 Up $78,000,000 year over year, yielding total liquidity of $2,600,000,000 atquarterend. Turning to Slide 10. For the total company, orders increased 25% and revenue increased 13%, both on an FX adjusted basis. The IT and S, Precision and Science Technologies and SVT segments all saw double digit organic orders growth in the quarter. Starting first with IT and S. The total segment saw 13% FX adjusted orders growth with strong momentum in core compressor technologies With the Americas showing mid single digit orders improvement, EMEA with low 20s percent growth and 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 Dosatron Tron drove this performance. Given their niche end market exposure in areas like lab, life sciences, water and animal health, As well as strong performance from the ARO 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 5 straight quarters and Q1 saw continued Strong growth in consumer vehicles as well as golf offerings and aftermarket. Overall, we posted a strong book to bill Up 1.24 for the quarter, an improvement from the prior year level of 1.13. We remain encouraged by the strength of our backlog moving into Q2. The company delivered $293,000,000 of adjusted EBITDA, an increase of 57% year over year. The IT and S, Precision and Science and SVT segments all saw year over year improvements in adjusted EBITDA and strong triple digit margin expansion. And finally, corporate costs came in at $34,000,000 for the quarter consistent with prior expectations. Turning to Slide 11, Free cash flow for the quarter was $118,000,000 on a continuing ops basis, driven by the strong operational performance across the business and ongoing prudent working capital management. This compares to free cash flow of $30,000,000 in the Q1 of prior year on a continuing DOS basis in what is typically our seasonally weakest quarter from a free cash flow perspective. CapEx during the quarter totaled $15,000,000 and free cash flow included $10,000,000 of outflows related to the transaction. From a leverage perspective, we finished at 1.9x, which was an 0.1 turn improvement as compared to the prior quarter. This included $184,000,000 cash outflow to fund the Tuthill acquisition, which closed in February and did not include the cash from the HPS divestiture which closed in April. We have line of sight to leverage coming down materially to below one times once the SVC 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 $2,600,000,000 Based on approximately $1,640,000,000 of cash on hand and nearly $1,000,000,000 of availability on our revolving credit facility. With our current liquidity and the additional cash we expect to receive from the HPS and SVT divestitures, we will have considerable balance sheet Flexibility to continue our portfolio transformation strategy with M and A coupled with targeted internal investments to drive sustainable organic growth. I will now turn it back to Vicente to discuss the segment performance. Thanks, Vic. Moving to Slide 12 and starting with Industrial Technology and Services. Overall, organic orders were up 11% and revenue up 9%, leading to a book to bill of 1.14. In addition to orders and revenue growth, the team delivered strong adjusted EBITDA, up 57% and adjusted EBITDA margins of 23.1%, Up 6 10 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%. A further breakdown into oil free and oil lubricated products shows that orders Both were up above 20%. From original split for orders and compressors, in the Americas, North America performed comparatively better at up mid single digits, while Latin America was up low single digits. Mainland Europe was up mid teens, while India, Middle East and Africa saw continued recovery and up high double digits. Asia Pacific continues to perform well with orders of high double digits, driven by high double digit growth in both China And across the rest of Asia Pacific. Moving to Vaccines 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 improved 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 Rontek in 2017. Rontek designs and manufactures 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 other regions. And this has led to a 65% increase in the installed base. This has helped achieve an average of 45% energy savings per installation and save several billions of gallons of water annually across the installed base. Moving to Slide 13 in the Precision and Science Technology segment. Overall, organic quarters were up 12%, driven by the medical and docetron businesses, Which serve lab, life sciences and water and animal health markets. These businesses were up double digits, And we also saw a strong performance in our more industrial end market oriented products like Milton Roy and ARO. The momentum on our hydrogen solution continues to build, and we saw some strong funnel activity. Revenue was up 7% organically, Producing a book to bill of 1.2. Additionally, the PSC team delivered strong adjusted EBITDA of $7,000,000 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 YZ brand 0 emission authorization and YZ Connect. Zio is an injection system that authorizes natural gas and hydrogen delivered to communities to help safeguard people. As customers replace legacy systems with our new Zio, this product is expected to dramatically eliminate emissions of methane. Our customers' Authorization programs are further enhanced by YZ Connect, which provides remote monitoring capability through its Internet of Things Cloud Platform, Which is another example on how our customers can lean on us to help make life better. Moving to Slide 14 on the Specialty Vehicle Technologies segment. Overall, Q1 was another very strong quarter for the SVT team. Orders and revenue were up organically 89% 29%, respectively, Driven by continued strength in consumer, growth and aftermarket product lines. Adjusted EBITDA of $48,000,000 increased 162% year over year, Leading to an adjusted EBITDA margin of 20.1%. This represents an outstanding ten 20 basis points improvement versus prior year, showcasing the power of IRX and the team's application to its tool to capture value and market share. And while this business continues to perform well, we made a strategic choice to divest the asset to continue aligning our portfolio to our mission critical flow creation technologies. As mentioned, we're very pleased with the strong economic outcome with the sale of Topgart to Platinum Equity. It was very important to us in this transaction and in our sale of HBS that we honor our commitment to employee ownership. As a result, employee recipients of our 2020 all employee equity grant will have 50% of the award best at closing 50% will be replaced by a new equity linked program implemented by Platinum. We're very pleased with this outcome for the Klotkar 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 on a reported basis, Comprised of mid single digit organic growth across each of the three segments. After removing SVT, 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 a low single digit tailwind for the business on a total year basis given of the U. S. Dollar against major foreign currencies like euro and British pound. So that is a slight headwind as compared to the initial guidance. From a pricing perspective, we anticipate the first half of the year to be up mid teens, while the FX tailwinds remained most evident during the first Half of twenty twenty one. Overall growth in the second half of the year is expected to normalize a bit comparatively, but still be up high single digits. We have received a lot of questions from investors and supply chain 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 IRX tools to help mitigate the impact, but our teams have executed very well, Including price execution and our continued I2B initiatives. We will see this environment continue in Q2 and likely after, We're confident that leveraging our IRX process and working with our suppliers will allow us to continue exceeding our customers' expectation. Based on these revenue assumptions, we're increasing 2021 adjusted EBITDA guidance to $1,120,000,000 to $1,150,000,000 Which represents approximately a $45,000,000 improvement from original 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 1.5% to 2% of revenue. And finally, we expect adjusted tax rate to be approximately 23%. Moving to Slide 16. As we wrap up today's call, Ingersoll Rand is in a great place. 2021 is poised to be a great year. The Q1 provided a solid springboard with momentum into Q2. We take our role as a sustainably minded industry leaders very seriously, One who is focused 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 and A. Our first question comes from Julian Mitchell from Barclays. Your line is now open. Just a question on the raised guidance. So I think it like you're embedding around the sort of mid-40s segment incremental margin 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-50s number in Q1, Anything major to call out around, say, mix shifts, pricing? It sounds like you're confident on price cost, I just wondered the extent to which those pressures on a net basis will increase from here in the balance of the year. Hi, Julian. Yes, you're correct on the first question. Yes, kind of that mid-40s range. And in order kind of a 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 segments and regions and that is really encouraging. A few things to highlight. In Q1, we're seeing 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 We took in late 2020 and the continued execution of I2V and other initiatives. As we go into Q2 and the second half, if I kind of break it down by segment, IPS overall, we're still expecting that Kind of steady to 35 incrementals even with the headwinds around not only the inflation, but also the discretionary cost coming back, Which again speaks to the ongoing synergy delivery efforts as well as our focus on kind of quality of earnings. On PST, touching first on Q2, as a reminder and as we highlighted in our original guidance, Q2 incrementals will be lower than To the fact that in 2020, we saw outsized demand for our medical compressors and pumps, used again to fight COVID. And the majority of these orders came in Q1 and Q2 with shipments mostly in Q2 and Q3. And as a reminder, these shipments on the medical products It's came in at a premium margin. In addition, PST is seeing some of the inflationary headwinds that most companies are seeing. And while the back half of the year will be more normalized to about that kind of 35% and above. And so again, having said all this, I mean, as you know, we're very we had a pretty strong processing in terms of price, I2B sourcing, But our teams are actively executing to offset any of these kind of headwinds I mean. Thank you. And then maybe switching to capital deployment. Given the Proceeds from HPS and SVT and the cash flow outlook, you could be close to 0 net Debt at the end of this year, I think. Also though it's a very valuations are very high for M and A right now. So maybe just help us understand sort of how optimistic you are on getting a meaningful degree of M and A done this Yes, Julien. We still remain very optimistic on the M and A. I mean, the M and A, as we highlighted, Pretty strong as you saw on the remarks on the slide that we put together. So we've been thoughtfully if you can go back when we talked About our phases of creating a strong foundation, pivoting to growth and portfolio optimization, we've been very thoughtful on the timing of all those And proactively working on the M and A funnel. So we're ready with the funnel. Again, we're not going to go crazy on the market. We continue to stay very disciplined in this environment. We buy companies that are strategic fit. And as we have always highlighted, Strategic fit, not only from a technology, but also commercial perspective. We never buy for kind of multiple arbitrage. We buy companies that Can't have that strategic fit, and I think that's what's exciting. And yes, you're right. I mean, I think with these kind of unlocking $2,000,000,000 of value in with these 2 divestitures, We're ready for continued executing our M and A in a very disciplined way. Great. Thank you. Thank you, Jamie. Our next question comes from Mike Halloran from Baird. Your line is now open. Hey, good morning, everyone. Good morning, Maxine. Let's just follow-up on that last question there a little bit then, right. So You're through the divestiture piece, certainly some of the chunkier stuff, obviously a little bit more to come potentially. Good commentary on how you view the Maybe just an update on how you're thinking about what this portfolio looks like 3, 5 years down the line. We've had some indication 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 chunkier pieces of that capital allocation can go? Sure, Mike. As you see, we kind of have these 2 segments and one larger than the other. We've spoken a lot about How our strategic focus on building the funnel has been on the precision and science. We see a lot of good things that we like On that segment. And we've been very prudent in terms of saying, while we integrate Gardner Denver and Ingersoll Rand Through the past 12 months, building the funnel on the Precision and Science, I did not have that many Distractions, I would say, on the integration. So I think that continues to be the exciting piece. In terms of How we look at, we're still going to be this mission critical high aftermarket. We like the recurrent aftermarket side of these rotating components and devices that we have. And we like the space where we play and we still have over $30,000,000,000 of addressable market Even when you exclude high pressure and specialty vehicles, so things around sustainable technology, high growth end markets, We've been very thoughtful in terms of focusing and doing a lot of segmentation and market work around these kind of high end growth markets That where we can have the play in terms of flow creation and any of those adjacent markets That kind of complement our ecosystem of the product lines. And then a question on the guidance On the assumptions on the revenue side, maybe just talk about how your revenue outlook compares to Say normal seasonality or what kind of backdrop are you embedding as you work for the year pretty stable or is there an acceleration assumed? And then Also maybe just touch on what you're seeing on the shorter cycle side of your businesses versus some of the longer cycle side of your businesses? Yes. Mike, let me touch base first on the short cycle and the long cycle, and then I kind of let Dick comment on the other Sure. Cycle, we see very good strength, pretty broad based, particularly kind of this medical market, animal health, We're kind of what we call also AgTech and Aquatec kind of end markets that we're putting a lot of effort To really continue to penetrate pharma, food and beverage and water and wastewater. In terms of kind of long cycle end markets, Most of our long cycle business, as all of you know, is in kind of what we call the NASH GRA business as well as the very large Which is kind of the centrifugal compressor that the multistage centrifugal compressors. I'll categorize the large multistage centrifugal compressors 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 companies as well as markets like renewable energy, general and general industrial. The NASH Aero in the Q1 was kind of down, primarily due to the timing we say. You think about the Nanciero is one business that changes quarter to quarter. So we kind of think to look at a bit more from a first half compared year on year and the funnel still continues to be highly active. And just as a reminder, that business in the 4th quarter, so Very positive orders in kind of the mid to high single digit order cycle. Yes. And Mike, I think on your first part of your question with regards to 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 Q1. I think we're very encouraged by the orders profile where in IT and S and Precision and Science, you had book to bills of, I think, 1.14 and 1.20, respectively. So we've obviously built some solid backlog now moving into the Q2. And as Vicente said, typically speaking, you tend to see, particularly for the longer cycle businesses, order 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 the weakest, Q4 seasonally strongest And Q2, Q3 in between. I don't think you're going to see anything dramatically different in the context of the phasing or how we think about seasonality here in the context of 2021. Thanks for the answers as always. Appreciate it. Thank you, Mike. 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. Vicente, you indicated you felt you had Price cost pretty well dialed even to start the year, but maybe give us a little color on what's going on with price. Have you gone out multiple times? And maybe as part of that question too, are there any particular supply disruptions that you're dealing with in the business? Sure, Jeff. That you're dealing with in the business? Sure, Jeff. On the price cost, the good thing is that we actually We planned for the inflation during the budget time last year with the teams. I mean we were seeing early indications of inflation and we you told the team 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 we definitely increased prices by then. And I think the inflation is really coming in fairly in line with what we plan. And then I would say in addition From a margin perspective, we continue to run the I2B procurement work that we're doing with that we did with the synergy integration between Ingersoll Rand and Gardner Denver, and that's kind of working really well. As we move forward, I mean, clearly, we continue to watch carefully this inflation. And the teams, They're kind of lock and loaded to plan for incremental price increases based on what we're seeing, primarily typically like the logistics side of things. But yes, we're looking at Doing a proactively positioning of our products here in this inflationary market. And in terms of supply chain, I mean, we're definitely not immune to what you're seeing and hearing a lot 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 a great strategy For us, not only in these difficult times, but also as companies looking to rejoin, it has been very helpful for us. I'll say second, we're working with a much larger Purchasing power than in the past. So many of these are kind of new partnerships that we're creating. And this really has helped in the supply chain As they want to deliver and have very good terms with us. So I'd say that supply chain, not immune, I think the team really working very well to get it in control. And second, unrelated, just what's going on with service? Do 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 there. How does the year play out on the service? Yes, Jeff, in the Q1 we saw outsized Order momentum on the original equipment. And certainly as the market recovers, we definitely want to see this. And we're very glad because again, As you're kind of alluding there, we're kind of feeding the market and putting our products so that then we can connect them with our IoT platform and then continue to generate these accelerated aftermarket. So that's good news. I would say that still with that, the service and the aftermarket sequentially, We saw improvement in most of the regions. So again, good things that some of the strategies are definitely seeing good momentum here. Great. Thank you. Our next question comes from Nigel Coe from Wolfe Research. Your line is now Thanks. Good morning, everyone. Thanks for the question. I want to go back to capital allocation and M and A and I'm curious if the proposed tax changes, Capital gains tax changes in particular, whether that's whether you've seen more activity on the private seller sites and so any comments there would And then just given that we've seen an acceleration in disposals, obviously a lot of kind of available cash now. Is this driven by just like timing and just this one of those things Do you have increased confidence and line of sight on deployment from here and that's kind of driven you to kind of accelerate the sale of Topgolf? Thanks. Sure, Nigel. I think on the cat gain taxes, I think maybe still slightly too early to tell. And obviously, that's mostly particularly here in the U. S. I think Europe continues to be at least no major changes. But too early to tell. I think it could free up Better momentum in some cases, but nothing that I will classify as saying it is creating an imminent change yet. Maybe some of the family owners are thinking about it, and we'll see. I mean, we'll stay pretty close and create good cultivation. So we'll see on that. I think on the timing, as Ken alluded, I think we've been very thoughtful on the timing. We said that We want to create stability, but at the same time we want to improve some of these companies so we can maximize the value that we could generate. And at the same time, we did it in a way that we want to have some sort of visibility to the funnel. So in parallel, we've been working on all these aspects, not only the divestitures, but also accelerating the funnel. And you can see how some of the statistics on the funnel. And we're excited that the funnel is 5x What we had even last year, the average revenue size per company is more than 50% and the velocity, which is really important, has been cut by half. So I think it's been done everything strategically well thought out from in parallel, I will say, Nigel. Thanks. Thanks, Sydney. And then on you called out PST as an area where you're seeing good opportunities in that pipeline. Is there an appetite Or even visibility to expand the medical components of PST? Absolutely. Yes, definitely. Definitely, Maxine. Yes. I mean, it has been Great, thanks. If you remember, yes, absolutely. Great, thanks. Thank you. Our next question comes from Josh Chris Winski from Morgan Stanley. Your line is now open. Hey, good morning, guys. Good morning, Josh. Good morning, Josh. Chris, congrats on your role. Your background makes me feel like maybe I haven't done enough since winning that Southern Freight spelling bee. Hardly. Thanks, Charlie. Appreciate it. Listen, Lee. Thanks, Josh. Appreciate it. Lucinda, your 23% margins in IT and S, so it still feels like an early point in the cycle and I think to Vic's point, not a seasonal high point. I get that maybe margins will move around with M and A here, but can you get to mid-20s in the next Couple of years on a core basis. I know that's sort of been thrown out there as a noble goal for a while, but it seems like maybe it's Accelerating is an opportunity. Yes, Josh, this is Vic. I'll start there. I think the answer is absolutely yes. We've been very, I think, transparent in the context that quality of earnings and continue to execute on many of our strategic levers, Notably areas like the synergy funnel procurement, I2B as well as pricing realization are Clearly, our clearly focus areas and footprint, for example, as that will still kind of more so get to come frankly from a synergy delivery perspective. So I think The answer is a mid-20s percent EBITDA margin kind of on the ITS 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, we're really encouraged by the momentum we're seeing, frankly, across all 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, continuing to show good momentum. And I think some of the commercial initiatives that we also have, Vicente just spoke to, continuing to 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 more of that shift Into aftermarket and build from that 40% kind of baseline we have right now of aftermarket sales, that will obviously help as well. So all good signs and things that we would say yes should point to 25% margin is definitely being the target here as we think ahead. Got it. That's helpful. And then I guess we've talked a lot about The M and A side of the equation. So maybe just kind of focusing on the core business. You guys mentioned maybe some signs of near shoring Just wondering if there's anything else that sort of looks unusual or stands out at this point in the recovery, whether it's an end market that's kind of leading or lagging in a 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 those consolidated numbers? Yes. Sure, George. I mean, maybe something Highlight, I mean, we spoke about this industrial vacuum and blower business to be kind of up low double digits. And when you kind of decompose that, That has the industrial side, kind of brands like Elmore Richley and Robuski and things like that. But included in there is also The vacuum business like NASH, which is kind of more the longer cycle. And as I just mentioned, I mean, NASH was down in the Q1, which obviously implies that industrial vacuum business And that was basically up in the kind of 20s range, the industrial vacuum. Our industrial vacuum is really Within kind of large OEMs and OEMs, we always said that industrial vacuum was always a leading a 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 Mark, it is Ian. In terms of some of the other things, it's actually also good momentum based on a lot of the 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 like product summit 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 Ultima, which was a Gardner Denver technology launched as Ingersoll Rand in Europe, that's a really, really good momentum in Europe, And that is getting launched now here in the U. S, so expect to see that accelerate the momentum too as well. So a combination of those kind of multiple things It's 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. Yes, we don't play in the semiconductor market. That's right. Yes. It is all industrial. Got it. Yes. Both industrial products wrapped package. Thank you, Jack. Our next question comes from Andy Kaplowitz from Citigroup. Your line is now open. Hey, good morning, guys. Good morning, Andy. Good morning, Andy. Vicente, maybe can you give us a little more color to what you're seeing by region? 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 Americas, we just kind of talked about it. Obviously, easier comparisons coming up, but is the cadence of orders and revenue continue to improve as we go through April here? Yes. I think in Asia Pacific, I'll say it is definitely a combination of both. I mean, definitely some easy comps in China for sure. But if you recall, Southeast Asia was definitely not an easy comp yet in the Q1 because I mean the Southeast Asia really So I'll say 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 highlighted when we created the integration of Ingersollana and Gardner Denver that we Asia Pacific is definitely an area of growth and opportunity, and we're doing some very good organic investments. I mean, We spend a lot of new capital equipment to be able to have in region for region in areas like that and I think it's really, really exciting. And We put a renewed focus also on emerging markets in Southeast Asia, something that before with the scale that we had, it was very difficult to do. But now we have the scale, And these organic investments are definitely showing some good momentum. I think in the Americas, Yes. As we said, particularly in the U. S, Andy, we will see better, easier comps here in the U. S. In the second half, Same in Europe. What I'd say as well, you saw that in Europe, at least on the compressor side, Orders, we were kind of in the mid teens up, while 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 Europeans, as I just mentioned before, they kind of went in faster in terms of doing some of these integration of the product lines that we've spoken about, and now we're seeing that Getting implemented in the Americas. Again, Americas or the U. S, it's a more complex environment where you have A combination of direct versus distribution, so we just wanted to be careful. But I think everything is going really well now in the U. S. As well, and we'll see some inflection here As we move forward. Helpful, Vicente. 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 is faring well, but you actually harvest more procurement related synergies as part of your $300,000,000 program given expected higher sales and I'm cognizant of you just raised your Good. So just thinking sort of medium to longer term here. Yes. No, Andy, I think you hit the nail on that. Obviously, when we so the answer to your question is, you're completely right. Obviously, the direct material components of our synergy equation, most notably, The procurement side and I2B are frankly 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. We've seen, for example, procurement, I'd say probably better than expected percent realization on savings. So that had kind of been a nice kind of, I'd say, mitigant to lower volumes. Clearly, a higher volume equation clearly can materialize into higher savings. But as you said, Some of that was definitely dialed in to the raise when we moved the number from $250,000,000 to $300,000,000 We clearly indicated that the majority, if not all of that, really 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 momentum we're seeing, frankly, even still today On the procurement and the I2B side, it's very encouraging in the context of the price realization and the percent realization that the teams are actually recognizing. So Quite encouraged, but I'd say a lot of that was factored into the raise from 250 to 300. Appreciate it, guys. Thanks, Andy. Our next question comes from Joe Ritchie from Goldman Sachs. Your line is now open. Thanks. Good morning, guys. Good morning, Joe. Good morning, Joe. So maybe just starting out, Yes, Sensei, you've highlighted in the past this longer term opportunity on the oil free side, water, I guess, some Positive comments on hydrogen and the funnel activity. How do you think about these initiatives as providing some type of like GDP multiplier Fire effect for the company over the course of the next 2 to 3 years? Yes, Joe. Definitely, we believe that this is These initiatives are the ones that will give us that kind of plus plus that we always like to talk about in terms of how we execute that in the sense that we play in this kind of GDP environment End markets, but with the initiatives that we're putting, we're kind of moving more towards those end markets that can give us that plus plus And out execution, we always said, call it anywhere between 100 to 3 up to 300 basis points About the GDP depending on kind of the region and the market. So these initiatives continue to be really, really exciting for us. We launched with the help of Several of the impact daily management programs from a global perspective, and I'm very excited with kind of what we are seeing And definitely much more to come. Yes. No, that's helpful, Vicente, I guess maybe just with like oil free and water, those are end markets that you guys have had traction. I think I heard you say on Justin. The things were picking up. Like is there anything that's happening kind of like at the margin that has changed just in the near term on any of those opportunities? You mean the margin in terms of profitability? No, I just said margin meaning like anything incremental, yes. Yes. Well, I mean, I think on the all three, 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, as you can imagine, I mean, we and we talked a lot about that last That year, all the product summits and the Q2 that we were doing to combine this kind of create a highly complementary, I think a lot of the results should be and could be seen now. And I think same thing for the water and wastewater. I mean, I think it takes a little bit of time to see the results. 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 that we have selected. Got it. No, that makes sense. If I could ask one more just on free cash flow longer term. You guys have made a ton of progress on the Free cash flow margins, even when it was impacting the DDI days on working capital, how do you think about driving to Potentially a 20% type free cash flow number or free cash flow margin by like in the next few years. And is that possible? And how do you think about the working capital opportunities in the company? Yes, Joe, I mean, I think with that question, we continue to see I mean, we're pretty pleased with, I think, the momentum we've already seen, but we've been very adamant that there's still a number of, I'd say, levers that we have to pull. 1st and foremost, I'll start with the tax rate. We mentioned that when we started as kind of 1 year ago, putting 2 companies together, we really didn't have what I would consider to be an optimized tax rate. We've done a lot of work. The tax organization, frankly, our whole organization is a lot of We've 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% and 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 lower 20s over 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 talk about procurement, and we focus a lot on the savings side, But there's also the making sure that you're negotiating terms properly and that you're actually making sure that you're pulling inventory only when you need it. And then also with the footprint side of the equation, footprint is One of the biggest areas of the synergy equation, you really haven't started to see delivering on 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 all together, and clearly there are other areas in terms of the payables and receivables Clearly, I think working capital is a major opportunity ahead that can help drive us to the levels that you're speaking to here over time. So I think we're encouraged. It's definitely, I'd say, a big focal point of the ops and finance and business teams. And we're going to continue to make momentum here as we move through this year and frankly into next. Our next question comes from Rob Wertheimer from Melius Research. Your line is now open. Thank you and good morning. My question is on maybe more of the structural or strategic side Pricing as opposed to the responsive or tactical things that you kind of discussed already. I know you guys have done a lot of work on looking at Tracking, discounting better and looking at various initiatives to sort of improve the way pricing flows to the organization. And I wonder, could you talk a little bit about the outcomes? As you look at your products, have you 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 into years out, is that a material difference from the past? Thank you. Yes, Rob, I would say that great question on the pricing side and definitely something that Strategic pricing, that is basically what we like to do. We typically never do peanut butter across price increases. It's just based on the specific product lines. And I will say that, as you know, our mission critical products We're 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 mission criticalness 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 pricing elasticity in many of our end markets and many of our products. We have a really great, I'll say, internal process for scoping that out and making sure that we continue to Push the boundaries and the envelopes on that as we see that we can. And obviously we can only do it only as long as we have differentiated products, Which is the other big play in terms of how our I2D has been really strong process for being able to continue to create differentiated Whether it might be tweaks of innovation that is not only so it's a process that is not only for driving direct It's not your close down, but it's also driving some increase in profit price and profitability. Okay. That's a great answer. Thank you. And then just to understand it, I mean, when you think about all the testing, the measuring, the elasticity you've done, the profit of new product improvement, you starting to see a lot of benefit from that or is that a year out or 2 years out when it sort of kicks in and I'll stop? Thank you. Yes. No, we're seeing some of that. I mean, when you look at the margin expansion that we saw here in the Q1, a good chunk of that also came from gross margin. So we're seeing gross margins Continue to improve on it year over year and even historically when you go back even we'll go back to 2015, I mean definitely some very, very Solid gross 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. Nathan James, your line is now open. Sorry, he's on mute. Good morning. This is Matt on For Nathan Jones this morning. Yeah. Hi, Mike. You mentioned targeting sustainable investments. I was wondering if can you Talked about what kind of level of investments you're making growth at the moment and what kind of potential that is to take it to? And can you talk about the opportunities to invest more here in order to continue to drive growth in 2020 beyond For 2021, John. 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 questions we've had with regards to whether it be oil free, whether it be investments in hydrogen, whether it The products that we actually highlighted in the release in the slides, the RunTec acquisition that we made back in 2017 or Yes, the ZEO application from the Precision Science Technologies business. Generally speaking, all of our NPDs 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 by and large when we're looking Innovation, and it's also a huge criteria that we're looking at when we're actually looking at the M and A pipeline. So I'd say it's front and center. Trying to quantify exact dollars is probably a little bit tricky, I would tell you 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 Vicente, you can we've obviously spoken to quite a bit. So again, I think it's kind of permeating the culture, and now we're actually putting distinct targets and goals that are associated 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 or your supply chain relative to COVID cases spiking, particularly in Europe India. And then how confident do you feel about the ability to continue ramp as we move into 2Q and the rest of the year? Yes, Matt. I mean, I think in terms of production, I mean, our plants are up and running. I mean, clearly, the area that we're monitoring really close is India. We're deemed as a critical manufacturer and all of our manufacturing facilities are at the moment they're open. Some of the close downs that is happening in India, at least in the cities Where we are operating hasn't happened to us. But we're watching that carefully. We're proactively supporting vaccination efforts for employees based there. Again, this is because we're deemed as a critical manufacturer and you've seen that lack of oxygen in many hospitals, our products Are actually helping to enhance that. And so we're working really closely with the government to really accelerate that. But 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, so I'll hand it back. Well, thank you everyone for your interest and joining on the call today. We're very excited. We're very thankful for Our employees for all the work and dedication that they're doing and thinking and acting like owners. So we're excited With the momentum that we're having and look forward to talking to many of you here pretty soon or in the future. Thanks again. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.