Earnings Call: Q4 2020

Feb 23, 2021

Ladies and gentlemen, thank you for standing by, and welcome to the Ingersoll Rand 4Q 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer I would now like to hand the conference over to your speaker today, Vik Kinney, Chief Financial Officer. Thank you. Please go ahead, sir. Thank you. Welcome to the Ingersoll Rand 20 24th Quarter and Total Year Earnings Call. I'm Vic Kinney, Chief Financial Officer and joining me is Vicente Reynal, Chief Executive Officer. 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.ir .com. In addition, a replay of this conference call will be available later today. Before we start, 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 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, which are both available on the Investor Relations section of our website. On today's call, we will provide a company strategy and integration update, review our company and segment financial highlights and offer 2021 guidance. At this time, I'll turn the call over to Vicente. Thanks, Nick, and good morning to everyone. Before we start, I want to take a moment to reflect. Think about it that 1 year ago today, We were 5 days away from day 1 as an integrated company of Garnet Vendor and the Ingersoll Rand Industrial segment. And what a year we selected to take on a transformational transaction. Our newly combined company committed to a purpose to lean enough To help you make life better and a set of values that include having the confidence to take on the most difficult problems With humility and integrity, and little did we know we will be tested so quickly. Looking back on 2020, the global pandemic was challenging for everyone. We will have to adapt and learn new skills to ensure our essential worker safety as they work to provide mission critical products and services To serve the frontline of the COVID-nineteen pandemic. And we turn to our innovation and creativity to discover new ways to connect with each other, With our customers and with our partners, I am proud of every one of our global employees for the resilience, dedication Our determination to think and act like colors and protect and nurture our 1 year old organization. Our employees are strong. We adapt quickly and move fast. It's part of our culture and that's not something you can replicate. It's a competitive advantage I will prove it worked for us this year. The backbone and economic engine is our Ingersoll Rand execution excellence, We return employees who trust and lead IRX every single day. And thanks to them, we deliver strong results and stand ready to grow in 2021 and beyond. Starting on Slide 3, today we're going to concentrate our remarks around 3 things. 1st, As we successfully pivoted to focus on growth and our portfolio utilization and third, how our focus on growth is supported Strong business segment performance during Q4 with momentum continuing in Q1. Moving to Slide 4, you have seen this before. It's a framework of building a strong foundation, building to growth and optimizing the portfolio, all guided by our 5 strategic imperatives down on the left hand side. It's a reminder to what we have been executing against to deliver on our commitment. Turning to Slide 5, that From completing the Ingersoll Rand industrial transaction and integrating complementary cultures to awarding 1 of the largest equity grants Ever given to employees in an industrial company and establishing diversity, equity and inclusion goals. Our 2020 accomplishments, especially in the area of human capital management are a differentiator. We see broad based employee ownership as a game changer. It takes performance to a new level. We're thinking a nice thing like another As one of our core values, it changes the mindset from this is the company I work for to this is my company. It's a master shift. Employees are highly engaged and active participants in our journey to create long term value. All of these human capital management priorities A part of why we added corporate sustainability as a strategic pillar and more on that in a minute. We enhanced our portfolio through bolt on acquisitions and also the sale of a majority interest in our high pressure solutions segment. Looking ahead to 2021 and beyond, we're focused on several areas. We're ahead of plan on our integration as we enter year 2. We are increasing our integration cost synergy target by $50,000,000 to $300,000,000 On growth, We're bringing together complementary products across businesses for strategic niche markets such as work. And we're on a strong balance sheet to support our inorganic growth strategy through accretive M and A transaction. Let's turn to Slide 6. As we successfully feel to growth and our portfolio limitation, we're unlocking our maximum potential as a company. Capital allocation is a huge part of my personal focus. And I'll come back to you with more thoughts on this already. So we're actively discussing this with the Board. To start, last week, we signed an agreement to sell a majority interest in our high pressure solution segment. At the time of close, we will receive approximately $300,000,000 While retaining a 45% common equity ownership in the business moving forward, we view the $300,000,000 alone as a good value as it is approximately 20 4 times 2020 adjusted EBITDA and also represents a solid multiple of 2021 expected adjusted EBITDA. The remaining terms of the deal are confidential, and we're not going to comment further, but we view our remaining equity as pure upside in the medium to long term. For Ingersoll Rand, the transaction is a meaningful step forward in our transformation. It materially reduces our And all of this was removing minimal current earnings from the company. On the M and A front, at the beginning of this month, we completed the purchase of 2 pill vacuum and blower systems. The transaction is highly complementary to our vacuum and blower technologies and will operate under the iconic and premium brands of NB, Pneumatic And Kimi back in pumps. As we pivoted to growth, we accelerate investments in IoT, e Commerce and Digitization. Last week, you may have seen our announcement with Google Cloud for its 5 year collaboration to advance connectivity across our portfolio. With real time data and machine learning, both smarter and more innovative products, we are strengthening our capabilities to help our customer be successful Along with recent new products and wins in strategic end markets we have recently shared with you, Like hydrogen, life sciences and oil free compressor products, our work with Google represents one way we are positioning ourselves for accelerated growth in 2021 and beyond. Unlocking our true potential means being focused on sustainable technologies in high growth end markets. And it also means being focused on our commitment to environmental, Social and governance principles as we see now on Slide 7. Yesterday, we joined the growing number The differentiator is that we are placing some ambitious milestones for our ESG efforts. We're committing to be net zero greenhouse Gas emission by 2,050, we're getting to 60% of this goal in less than 10 years by 2,030. In addition, we have also committed to targets for water and waste reduction. As our corporate space Lean on us to help you make life better. We want to be an active participant on this important cause for the long term sustainability of our planet. A key advantage for us is using IRX to deliver the performance needed to achieve our environmental goals. We will provide I will now turn it over to Phil to pick to provide an update on financials. Phil? Thanks, Vicente. Moving to Slide 8. Q4 saw a strong balance of commercial and operational execution fueled by the use of IRX with ongoing signs of improvement across industrial end markets. We continue to be pleased with the performance of the company in Q4. Total company orders and revenue increased 12% and 13% The company continues to drive outperformance on productivity and synergy initiatives using IRX as the catalyst. The company delivered 4th quarter adjusted EBITDA $344,000,000 and adjusted EBITDA margin of 22.8%. This was 150 basis point improvement from Q3. And on a year over year basis, despite mid single digit revenue decline, margins increased 300 basis points. And when adjusted to exclude the High Pressure Solutions segment, Total company margins improved 3 50 basis points. Given the strong close in Q4, we had our best performance of the year in terms of managing decrementals With adjusted EBITDA increasing by $30,000,000 on a year over year basis despite the $78,000,000 decrease in revenue. As we have stated before, quality of earnings has been a key focus and you can see the continued momentum we had throughout 2020 on this metric. Cash flow on the balance sheet was another highlight for the quarter as free cash flow increased to $397,000,000 yielding total liquidity of $2,700,000,000 at year end. Moving to Slide 9, for the total company, orders increased 2% and revenue declined 7%, both on an FX This is a meaningful improvement from the comparable 8% 11% declines we saw in the Q3. IT and S, Precision and Science Technologies And Specialty Vehicle Technologies segment all saw positive organic orders growth in the quarter. Starting first with IC and S, The total segment saw 2% FX adjusted orders growth with both the Americas and EMEA regions showing mid single digit orders improvement for core Precision and Science saw 6% adjusted orders growth in the quarter, the highest level reached during the entire year. Continued strength in the product lines like medical and Dosatron, both of which saw double digit growth, were the major drivers given niche end market exposure in areas like lab, life sciences and Water. Specialty Vehicles saw continued strong orders performance, up 21% ex FX. Specialty vehicles showed positive orders growth each quarter in 2020 and Q4 saw a nice balance with continued strong momentum in consumer vehicles as well as double digit growth in golf as well as aftermarket. Overall, we posted a strong book to bill of 1.01 for the quarter. This was much better than the prior year level of 0.92. Given the typical seasonality we see in the 4th quarter With strong shipments and book to bill below 1, we are encouraged by the Q4 2020 book to bill being above 1 as it sets up a healthy backlog moving into 2021. The company delivered $344,000,000 of adjusted EBITDA, an increase of 10% versus prior year. The HVES segment continued to show profitability despite depressed revenue levels and performed largely in line with expectations. And finally, corporate costs came in at $32,000,000 for the quarter, consistent with prior expectations and relatively flat to prior year. Turning to Slide 10, quickly touching on the total year. FX adjusted orders and revenue were down 9% 13%, respectively, due primarily to the impact of COVID-nineteen in both the IC and S and Precision and Science segments, As well as the known downturn in the upstream energy markets, which impacted the HPS segment. Despite these headwinds, The business delivered adjusted EBITDA of $1,080,000,000 and adjusted EBITDA margin of 20%, which is up 60 basis versus the prior year or 180 basis points excluding HPS. This speaks to the team's ability to execute during differing business cycles As full year decrementals were limited to only 15% and the 3 core segments of IT and S, Precision and Science and Specialty Vehicles all delivered triple digit adjusted EBITDA margin This is only possible through the power of IRX as an execution engine to drive change in every area of the business. Turning to Slide 11, Free cash flow for the quarter was $397,000,000 driven by the strong operational performance across the business and ongoing working Inventory management was a particular highlight with a reduction of nearly $60,000,000 as we are starting to see benefits of many of the operational efficiency projects The team has been deploying as well as the benefit of the improving commercial environment. CapEx during the quarter totaled $15,000,000 Free cash flow included $17,000,000 of outflow related to the transaction. From a leverage perspective, we finished at 2 times, which was a 0.5 times improvement as compared to prior quarter due to both the strong generic cash generation in the quarter as well as the improvement in LTM EBITDA due to the strong Q4 finish. We have now reduced leverage to the same levels we had prior to the RMT and have line of sight to leverage coming down closer to 1.8x once the HPS sale concludes. On the right side of the page, You can see the breakdown of total company liquidity, which now stands at $2,700,000,000 based on approximately $1,800,000,000 of cash Nearly $1,000,000,000 of availability on our revolving credit facility. In total, liquidity has now increased nearly $1,200,000,000 from the end of Q1. This gives us considerable flexibility to continue our strategy of M and A coupled with targeted internal investments to drive sustainable organic growth. Moving to Slide 12. We continue to see strong momentum on our cost synergy delivery efforts. Due to the funnel we have built that stands in excess of $350,000,000 and strong execution, we are increasing our overall target by $50,000,000 to 300,000,000 To date, we have already executed approximately $175,000,000 of annualized synergies, which is approximately 60% of the overall target and a $25,000,000 increase from prior quarter. In total, we delivered approximately 40% of our new $300,000,000 accumulative 85% to 90% of the $300,000,000 in savings by the end of 2022 with the balance coming in 2023. The $50,000,000 increase in the target is largely driven from procurement and direct material oriented initiatives, as the team continues to make good strides both on leveraging the larger spend base of the company as well as executing on the i2b funnel. I2b is a particular success story. Over the past 6 months, we have conducted over 20 virtual events with our commercial, product management and manufacturing teams The business and Q4 was no different. I will now turn it back over to Vicente to discuss the segments. Thanks, Vic. Moving to Slide 13 and starting with Industrial Technologies and Services. Overall, organic orders are up 1% and revenue down 8% leading to a book to bill of 0.98 times. Despite the revenue decline, the team delivered strong adjusted EBITDA of 12% and adjusted EBITDA margin of 26.1 percent, up 400 basis points year over year. Margins were also up 2 10 basis points sequentially versus Q3. Can you provide more detail on order performance? Starting with compressors, we saw orders up mid single digits. A further breakdown into oil free and oil lubricated products shows that orders for both were up mid single digits. Oil free order rates slightly outperformed those of oil lubricated and speak to the efforts of leveraging the company's expanded oil free portfolio and taking advantage of new channels. Regarding the regional split for orders and compressors, In the Americas, North America performed comparatively better at up low single digits, while Latin America was down High single digits. Mainland Europe was up high single digits, while India, Middle East and Africa saw a nice inflection as of high teens as compared to being down double digits in the past two quarters. Asia Pacific continued to perform well with orders up mid single digits driven by mid single digit growth in China and relatively flattish growth across the rest of Asia Pacific. In terms of Vikings and Blowers, orders were up mid teens with strong double digit growth in the industrial banking and blower portfolio as well as mid single digit Moving next to power tools and lifting. The total business Was down low T and D orders. The tools part of the business was down high single digit in orders compared to down high teens in Q3. We expect to pivot back to positive orders growth in the first half of the year, driven mainly by our enhanced e commerce capabilities. On the right side, you'll see 3 market drivers common to our go forward segment, which is sustainability, digitization and shifting demographics. For each segment, I will comment on how they're stepping forward to address these drivers. For IPS, The Google Cloud enhancement I referenced earlier is a prime example of how the business is expanding comprehensive data digitization that will help increase the Let me move now to Slide 14 And the Precision and Science Technologies segment, overall, organic orders were up 5%, driven by the medical and docetron businesses, which were both up double digits as well as healthy growth in the water and general industrial markets for growth like Milton Road. The momentum on our Hygiene and Solutions continues to build and we saw some good orders and funnel activity in this rapidly changing end market. Revenue was down 8% organically with a major driver being 2 large projects for a large aerospace and defense company that shipped in Q4 of 19 within the legacy PFS business. Despite the revenue decline, the PFS team delivered strong adjusted EBITDA up 7%. Adjusted EBITDA margin was 30.8%, up 290 basis points year over year. As a reminder, this segment was already generating a very respectable 27.7 percent adjusted EBITDA margin back in Q1 of 2020. We're very pleased with how the team continues to transform this business. As now in Q4, we compare with revenue As what we did in Q1, this segment is generating 3 10 basis points more margin. Looking at the market drivers, The Precision and Science team is meeting the demand for more sustainable energy sources and launching into markets like hydrogen. From a digital perspective, many of our new pump technology can be remotely controlled litering and dosing to ensure And the segment's medical business is answering the demand for Moving to Slide 15 on the Specialty Vehicle Technology segment. Overall, Q4 was another strong quarter for the Specialty Vehicle team. Orders were up 21% organically We continue to get stronger throughout the quarter as the consumer offering continued to gain momentum and market share. We also saw an inflection on growth that continued into Q1. We believe our lithium Ion battery launch is clearly a market leader and we're taking share in the market. Organic revenue was up 8% Adjusted EBITDA of $46,000,000 increased 40% year over year, leading to an adjusted EBITDA margin of 18.7 percent. And this represents a 4 20 basis point improvement versus prior year. Again, proving that IRX can be applicable to any business For example, in Q4, we saw more than 80% unit growth for lithium cars versus the prior year. Digitization is critical also as owners expect connected cars to provide real time data on their vehicles. They can range from maintenance information, location based data or infotainment services. And from a demographic perspective, we're seeing a higher demand for family Moving to Slide 16 and the High Pressure Solutions segment. The pesos performed largely in line with expectations in the midst of continued low demand in the oil and gas market. Orders and revenue were down 51% 42%, respectively, which was an improvement over the decline seen both in Q2 and Q3. Nearly 90% of the revenue base continues to come from aftermarket parts and services, and the business delivered Positive adjusted EBITDA of $2,500,000 and decrementals of 40% despite the meaningful revenue declines. Beginning with the Q1 of 2021 and due to the recently announced sale, the HPS business will be classified as discontinued operations below future periods and we will retroactively adjust the comparable prior periods. Within the income statement, The historical HPS business results will be presented on a single financial statement line below operating income. And upon deal closure, we will account for our 45% interest under the equity method This means we will record our proportionate share of the HPS business income or loss for the period Moving to Slide 17, we will review guidance for 2021. Given the pending sale, the HPS segment will not be included in our revenue or adjusted EBITDA guidance for the year. Starting with revenue growth, we expect total Indusil Rand revenue to be up high single digits to low double digits on an actual quarter basis. This is comprised of mid single digit organic growth across each of the 3 segments. FX is expected to be a low single digit tailwind for the business On a total year basis, given the weakening of the U. S. Dollar against major foreign currency like euro and British pound, our FX assumptions are based on December 2020 exit rates. And finally, we expect the M and A impact to $60,000,000 driven primarily by the Cugnio acquisition in the IPS segment. From a pricing perspective, we anticipate the First half of the year to be up low double digits driven by the prior year impact of COVID-nineteen, particularly in China in Q1 2020 And the rest of the world starting in Q2 of 2020. In addition, the FX tailwinds will be most evident during the first half of twenty twenty one. Overall growth in the second half of the year is expected to mobilize a bit comparatively, but still be up As is typical, we expect Q1 to be comparatively lighter than the remaining 2021 quarters. Based on these revenue assumptions, we're introducing 2021 adjusted EBITDA guidance of $1,230,000,000 to 1,260,000,000 The range includes an expectation for approximately $100,000,000 of incremental transaction related cost synergies with slight offsets due to 2 factors. First, approximately $35,000,000 to $40,000,000 of temporary cost taken In 2020, we're turning to the P and L and second, some expected materials and logistics inflation given current dynamics across the global supply chain. We continue to monitor overall inflation and will take appropriate incremental pricing actions if and when warranted. In terms of cash generation, we expect free cash flow conversion to adjusted net income to be greater or equal to 100%. CapEx is expected to be approximately 1.5% to 2% of revenues. And finally, we expect the adjusted Moving to Slide 18. As we wrap today's call, I reflect in 2020 as a year that changed our call. We took every measure to prioritize our employee safety while enabling our essential workers to maintain their livelihood and that is because Our employees, Mina Noss, we concentrated on delivering our mission critical products and services to the And we even proactively reached So we take our role as a sustainably minded employee owned industry leader, As can be seen by our clear commitment to reducing our impact on the environment, I am proud of every fellow team member in our company So how we came together and delivered to protect the interest of all of our stakeholders this year. What a difference this year makes. On the traceable of our 1 year anniversary, it's been a momentous ride, creating a differentiated culture and improving the performance of our company. 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. Great. Thank you. Please standby while we compile the Q and A roster. And your first question Here comes from the line of Nicole DeBlase from Deutsche Bank. Please go ahead. Your line is now open. Yes. Thanks, guys. Good morning. Good morning, Nicole. Maybe we could start by just talking about if you guys are seeing any impact to production or your supply chain Relative to COVID and how confident you feel about the ability to ramp up as we move into 2Q when presumably growth should be pretty significant? Yes, Nicole. I'll say that, I mean, we're clearly not immune to what is happening out there in the supply chain, whether Delivering or kind of the logistics side. I think the good news here is I'd say 2 things. 1, We have always said that we're in the region for the region. So we're really co located our factories to really support our customers in the regions. And for the most part, a lot of our supply chain is really co And I think the second point that it has been good for us is that with the combination of the companies, we have a larger supply chain. And as we have gone through the procurement and the rationalization of suppliers, we're selecting some pretty strong partners that are here to support us from a global perspective. And that is kind of leading to having that disruption that perhaps others are seeing. So in terms of ramping the capacity, We just don't foresee that to be an issue. I mean, for the most part, most of our factories, they operate on the 1 shift Operations, I mean, we have to expand that should be just a matter of expanding capacity from incremental shifts. Got it. That's helpful. Thanks Vicente. And then when you think about the proceeds from HPS once the divestiture closes or the partial divestiture, Sure. Is the idea that that's going to be used completely to pay down debt? I know you mentioned bringing down leverage on a pro form a basis. And is that indicative of maybe the M and A pipeline is definitely one of my top priorities and we're having a constant conversation with the Board. We'll provide an update here in due course. But yes, I mean, we're very excited where we are. You have seen that we still play in a pretty large addressable market, highly fragmented. Our M and A funnel is really robust, very strong. And it's just a matter of making sure that we're disciplined with current valuations, but It's something that we're going to remain really active. Okay, thanks. I'll pass it on. Thank you, Nicole. Your next question comes from the line of Mike Halloran from Baird. Please go ahead. Your line is now open. Hey, good morning everyone. Good morning. So let's start on the cost outside. So Uptick the target from $250,000,000 to $300,000,000 funnel still $350,000,000 but obviously you're talking about some upside to that. So two things. 1, Can you talk to the components of what you've seen that gave you confidence to raise it from $250,000,000 to $300,000,000 And then also maybe talk about what some of the things that are That would raise the synergy target funnel above that $350,000,000 level? Yes, sure, Mike. This is Vic. I'll take that I think like we've said, we had a larger funnel in the current in the course of $350,000,000 And I think the teams have been executing really well. I think a large part of the, what I'll call, structural actions are really behind us. Really most of those taken much more closer to the merger. And really what you've seen the momentum building on here is really execution across really the more direct material focused components of that funnel. So really, Well, I'll call it procurement as well as now really getting deep into the I2B side of the equation. So I think a lot of what you're seeing is just good execution. Like we always said, we had a larger funnel. I'd say that not every idea in the funnel is going to necessarily translate straight to the bottom line, but the teams have executed really well. We saw a really good momentum, including in 4th quarter. Our annualized synergy number actually increased in 4th quarter compared to where we were in Q3. And so it gave us the confidence to be able to increase the synergy target up to $300,000,000 I think in terms of the second part of your What would give us kind of increased confidence to increase it further from there? I think it's really continued execution. What's really ahead of us It's items like procurement, I2B and footprint. And we've always been very disciplined in saying that the footprint piece of the equation was always going to come More so towards the back end of the kind of 3 year plan. Nothing has changed in that perspective. But I think now as we're moving into kind of our 2nd year as a combined company, Now the teams are really starting to kind of build out that footprint funnel and start to see kind of some of that momentum. So I think that's really will tell in terms of being able to kind of increase the number from there, but we're optimistic about where we've gone thus far. Thanks for that, Vic. And then the second one here, When you think about assumptions embedded in the revenue guidance for the year, maybe just talk a little bit about what the cadence looks like. Obviously, First half, second half dynamics you laid out in prepared remarks as well as in the slide deck. But are you assuming normal sequentials? Are you Assuming a pretty conservative ramp through the year, maybe just give some context on what type of environment is embedded in the assumptions as you look at the 3 units? Yes. Mike, I think in general, I think what you can expect is that quarterly phasing in terms of revenue should be quite comparable to what we've seen in 2020 in terms Sales per quarter. And what you typically see there is Q1 is typically the lightest quarter, as customers kind of reload budgets and things of that As well as the Chinese New Year holidays in the Q1. 2nd and third quarter in between in Q4 typically becomes the heaviest quarter. Again, for the same dynamics that we've seen historically as well as some of our, I'd say, larger project businesses tend to ship more so in the Q4 or in the second half of the year. So again, I don't think anything is largely different in that respect, when you think about the kind of overall equation and 2020 is probably a pretty good proxy to use in terms of The quarterly phasing and applying that to 2021. So if I hear you right then, you're basically assuming normal sequentials from the current run rate And no real acceleration in the environment from an underlying perspective from here. Yes. I think that's fair way to describe it. Like we mentioned in the prepared remarks, I think we continue to see the overall kind of industrial demand environment improving sequentially kind of as you saw through Q4. I think as you look at it in the context of 2021, we see a fairly similar cadence to what we saw in prior year. Thanks, Dave. Thanks, Sandra. Thank you, Mike. Your next question comes from the line of Julian Mitchell from Barclays. Please go ahead. Your line is now open. Hi, good morning. Maybe just starting off with that adjusted EBITDA guide for the year, Just wanted to confirm that, that implies around 30% incremental margin or so. And then I understand there's $100,000,000 of extra cost synergies as a tailwind for the EBITDA. Maybe give any color around The headwinds embedded in that guide from, say, the scale of temporary costs coming back, any kind of input cost headwind, that sort of thing? Yes, sure, Jillian. I'll take that one. So I think in terms of the incrementals that we're expecting on a total year basis, On an all in basis, I'd say growth as well as the some of the synergies as well as some of The other cost headwinds, it's probably closer to about a 35% incremental or slightly higher depending on some of the quarters, but it's a little bit closer 35% is kind of the implied incremental on all in basis, which we actually see as pretty healthy given kind of the puts and takes. And it does, of course, include Reinvestment back in the business as we're kind of focused on sustainable organic growth as we move forward. I think in terms of the some of the moving pieces, I think you hit it on the head here. In addition to just kind of the organic growth in the M and A and some of the FX tailwinds that we called out in guidance, a couple of pieces I'd probably include $1,000,000 to $100,000,000 that you spoke to in terms of the incremental synergy savings. That's the year 2 of our transaction related integration savings. The second item then on the headwinds would really be the $35,000,000 to roughly $40,000,000 of temp costs really coming back into the equation, Really ramping as we move through the back half of the year. And then we have baked in, I'd say, a nominal amount of inflation. We're not necessarily quantifying the exact dollar amount, but As you would expect and as Vicente mentioned, we're seeing some of the kind of normal, I'd say, supply chain and logistics oriented inflation that you would expect. So those are probably the major pieces. In terms of the I'd say the components that we're seeing, and I think that hopefully kind of characterizes the components. Thanks, Luke. And then maybe my second question just around the free cash flow was very, very strong in 2020. Just wanted to confirm sort of what's left in terms of cash costs to achieve synergies And maybe what the phasing of that is embedded in your free cash flow in sort of 2021 2020 Sue? Yes. Sure, Joe. I think we can keep it relatively high level. I mean, we still we do definitely have, I'd say, a fair amount of what I'll call continued Integration of the company as well as synergy delivery, particularly on the footprint side. So again, I think we've been saying, roughly speaking, On average, about $20,000,000 to $30,000,000 per quarter is typically kind of been what you've seen in terms of cash costs going out the door for execution. I don't think that's A bad placeholder use for 2021 as you look forward. So again, I think the equation still largely holds in terms of the expectation in terms of savings And the ultimate amount of cash cost going out the door, the only difference is we've really taken up the synergy number. We don't really feel like we need to Increase the amount of cash out the door that we're expecting to spend to be able to deliver. So again, I think we're pretty encouraged by how we've been managed to Execute to a higher number in terms of synergies, but continue to keep the kind of cash outflows pretty disciplined. But remember, we do have the footprint piece of this equation ahead of us, Which again does tend to be a little bit more on the cost side. Great. Thank you. Your next question comes from the line of Jeff Sprague from Vertical Research. Please go ahead. Your line is now open. Thank you. Good morning, everyone. Hey, I just wonder if we could come back to the kind of the margin discussion a little bit and if you could elaborate a little bit on what you're expecting for price realization over the course of 2021. And just to be clear on your comments about cost, were those kind of inflationary pressures net of Pricing actions, perhaps you could just provide a little more color on that. Jeff, let me give kind of give you a little bit of color on the price. I mean price, We definitely we generated price in the 4th quarter. I mean, we have said it very well that our products are such a mission critical In the entire process that we have been highly strategic on the price equation that we will continue to do so as we go into 2021. And, Nick, do you want to comment about the headwinds here? Yes. So, Jeff, I think the way I think about the headwinds are, we view those headwinds as kind of separate from the pricing equation that Jose just mentioned. Net net, we do expect to be price cost positive. That's not the trend you've seen historically through the business. And I think the other thing I mentioned here is To the degree, inflationary pressure potentially become higher if that's really happening. We've not actually seen that just yet, but We want to continue to look at price and delever to be able to pass that through. So I think right now we see everything as kind of a price cost on digitization And can you also give us some thoughts on what you actually expect HPS could do in 2021. Vicente, I think you kind of mentioned a multiple on 'twenty one. I didn't catch it When you said it, so that implied an earnings number. Just thinking about what kind of placeholder should be coming through on equity income? Yes, Jeff, we're not providing the guidance on HPS in the 2021 or anything further in terms of kind of the details Of the transaction, what I said on the remarks is that when you look at the $300,000,000 of cash Equals to roughly 24 times EBITDA of 2020. And also it implies a pretty good multiple on based on expected 2021, But we're not guiding to any specific number for 2021. I'm sorry, can I just ask one more Backlogs were characterized as healthy, but can you just give some context? Are they Where they stand, maybe backlogs as a percent of kind of forward projected sales. Are they When you look at the 3 segments, you could characterize, I'll start with maybe the The vehicles you've seen the Bluetooth momentum. I mean, definitely they're coming in really strong into 2021 with very, very robust kind of backlog. ITS saw some very good large loan cycle orders as well in the Q4. So That really and also with some of the orders that we received in the Q3 that kind of gets shippable into 2021. So the backlog in IPS is coming in also better than what we have seen historically. And the Precision and Science is really more kind of more in the short cycle. They don't have that long cycle with the exception of the hydrogen Orders and those we saw a few of them that we called out on some press releases in the 3rd quarter, And we continue to see the fundamental momentum of that continue to grow. So all in all, we feel pretty good position in terms of where we're we have the backlog coming into 2021. Thank you. Thank you, John. Your next question comes from the line of Josh Pokrzywinski from Morgan Stanley. So I guess we've come a long way from talking about fluid and pricing. So just really congrats on the overall portfolio transition the last few years. Thank you, Jeff. Appreciate it. So in kind of the compressor vacuum blower more traditional side of IC and S, Maybe a bit stronger on orders than you would normally see at this stage of recovery. I mean, comps aren't really even truly easy yet. I know you're not big in semiconductor, maybe relative to your other big competitor out there. But can you maybe contextualize what's going on in the market and why orders are bouncing back so hard? It Doesn't seem like it would be capacity for your customers, but some sort of debottlenecking or near shoring or like any way you would characterize Yes. What is it seems to be kind of earlier strength? Yes. Just know we're obviously excited with what the team has been able to accomplish there. As we have kind of articulated in the past, that vacuum and blower, as you very well said, is mostly We don't really play in the semiconductor market. And it's really due to the nature of the kind of the niche business that we have in terms of applications. And the team on the vacuum side, they continue to win new OEM accounts. And these OEM accounts are basically new pretty unique applications. And the blower, some good momentum on water and wastewater treatment facilities as well as some other kind of niche And markets that we have been very actively engaged in opening. And when you combine some of that with The activity that we're driving with demand generation in this kind of highly fragmented end market, it's really what's causing that kind of good solid momentum to Perhaps show the ability to take some market share. Got it. That's helpful. And then I guess just speaking to that fragmented end market, you guys are kind of a rarity in U. S. Industrials that you've been able Pretty consistently defined properties over the last several years at pretty steep discounts on valuation to yourselves. The properties in general tend to be on the smaller side, but are there a lot of Tuthill's Albin's run techs Out there to be found, like is this a flywheel you guys can keep going? Because obviously the balance sheet and cash flow are in good shape. It's More of a question of do you have a place to consistently put it? I will say yes, Josh. It is. It is something that we spend a lot of time even in 2020 improving our process, how focused are with process and our M and A process from stage 0 in terms of ideas and cultivation has dramatically improved. Also the level of investments that we have done with the team across the different segments to really support more penetration of M and A And the leverage of even IRX as a way through every week, we kind of review some key critical performance indicators on Things that we're adding to the funnel and how the funnel velocity is working, particularly in M and A, I think that's working really well. And so to answer your Yes, I mean, I think we see some continued pretty good momentum on the funnel activity and what could translate into acquisitions for us. And yes, we're very also very prudent on the price. We continue to be highly disciplined on that. Perfect. Thanks for the color. Thank you. Your next question comes from the line of Rob Wertheimer from Melius Research. Please go ahead. Your line is now open. My question is a little bit just on the Google Cloud announcement I'm curious if that brings you new revenue models in the next 5 years. I'm a little bit curious if it's If it puts you ahead of competition, how you thought about the decision strategically and how it relates to how you interact with customers? Thanks. Sure. Yes, Rob. To your question, absolutely. I mean, this should help us become more creative On new revenue streams over the next 5 years, and when you think about it, the potential of what we have In North America alone, when you look at all of our assets, when you look at particularly the segments of Industrial Technologies and Precision and Science, We have over 1,000,000 assets in the field in North America alone. So as we continue to find ways on how we connect them And how we harvest the data and how we leverage now the supercomputing power from Google Cloud to be able to create better predictive analytics and better Data rating streams, I think that's the powerful of what we see here over the next few years. And we're very excited that It's a pretty rigorous process. We were able to select Google Cloud as one of those partners That can help us really harvest a lot of these data and analytics over the next few years to come. Do you have any comment on how connected that asset base is today? What you were doing internally and what you gain with Google? Is Some of the groundwork has been done on the compressors. I think the excitement here too as well is now as, let's say, that you go to specific end market and we alluded to some of this on our last Earnings call on how when you look at the water wastewater, we have multiple of assets that could be connected to really optimize the entire process. This is where we see The powerful of realizing with the Google Analytics, but we're at the early stages in that one. Thank you. Thank you. Your next question comes from the line of Joe Vitchie from Goldman Sachs. Please go ahead. Your line is now open. Thanks. Good morning, everybody. So obviously, great job navigating Yes, really, really tough environment this year. I guess as I'm thinking about the medium term for you guys from a margin Perspective, you exited the year really strong in both IPS and PSP. I'm just wondering, like how do we think about The medium term targets for both of those segments, just given the upside synergies, like can ITS be like sustainably in the high I'm just trying to think about this like really kind of beyond 2021 into 2022, 2023. Yes, Joe. I to answer that question specifically, yes. I mean, we haven't come out with a specific guidance in terms of over the medium term of where we see this margin profile to come. But I mean, look, ITS, I mean, finishing the 4th quarter of 26% margin. And if you remember back in the Gardner Denver days, we said that industrial segment, we wanted to be in the 20s. So, but we also said that mid-20s is not the cap and that's just kind of a milestone and we see more room for improvement From there on, when you kind of open the door inside IT and A, I mean, we have as you know, We're running P and Ls and we have definitely P and Ls that are way above that kind of mid-20s. So we know that we have a model On how to get to that kind of high 20s. In the Precision of Science, You saw I made some commentary, very proud with the team. When we started with that business in Q1 of this year, the business was doing respectable high 20s And we finished at above 30 on an exit rate. So do we see a potential of that continuing? I'll make the same analogy. Back The medical business, when we had that with Gardner Denver, we were in maybe the mid-20s and we ended up in the 30s. And again, we see we also said that, that was just kind of a milestone, but more room for us to improve on that. So we'll Come here maybe sometime soon in terms of kind of how we think about the medium guidance for some of those segments, But we definitely see continued room for improvement from here in the young. Got it. No, that's helpful and great to hear Vicente. I guess my one follow-up question and I have to ask you about the portfolio, just given the announcement and HBS. So I guess maybe 2 questions. 1, just On HBS and keeping the 45% ownership here, like I guess what's the kind of thought Process, is it to play in some of the upside and potentially then monetize it in the future? And then how are you thinking about the rest of the Because there are other pieces, but this maybe don't necessarily fit longer term, but I'd be curious to hear any thoughts around that as well. Yes, Joel, I think we're very excited with the HPS for multiple reasons. I mean, one, this kind of we found a great partner with AIP and we're also very excited with the team on them becoming that pure play in the upstream oil and gas with a very premium product A very premium business. I think we view it very really good because we were able to lock in some cash, but at the same time, as you said, participate in any of the potential upside that could come. I mean, this as you know, there's multiple cycles that can happen here. And as As we continue to see, we got that 45% participation in terms of what could come next. And in terms of your other questions, I Clearly, as we said in the past, I mean, we look at all possible scenarios and to the degree that we can create shareholder value by doing something creative With some of the businesses that might not be that properly aligned, we won't hesitate to explore those options. And I think we just want to be thoughtful And strategic and discipline on how we do that. Makes sense. Thank you, guys. Thank you, Josh. Your next question comes from the line of Steven Volkmann from Jefferies. Please go ahead. Your line is now open. Hi, good morning guys. Maybe just back to Joe's margin question quickly. Any difference amongst The segments and how we should think about incrementals for 2021? Yes. I'll take that one. I think the way to think about it is, I think ITS will probably be, at least from a year over year perspective, probably the healthiest Overall, just because frankly a lot of the cost synergies as we mentioned before are much more isolated or centralized I should say in the IT and S segment. In terms of the Precision and Science and Specialty Vehicles businesses, the incrementals there will be a little bit more muted just frankly on a year over year basis. Frankly, a little bit of balancing in terms of the mix, in terms of the top line. If you remember on the precision and science, we did see a pretty strong, in swell of COVID related demand In 2020, on the medical side, it actually came at a pretty good margin premium. That is obviously not expected to recur in 2021, replaceable a little bit more, but I'll call it more general industrial. And then obviously some of the investments back in. And then the SVT business kind of comparable as the commercial and golf businesses tend to kind of normalize. You're not going to necessarily see that mix be quite as what it was in 2020. And we obviously continue to invest for new products and growth. So Again, I think ITA and S is where you'll see it a little bit more pronounced. Okay, great. That's helpful. And then if I could just ask about kind of recurring revenue and services and Maybe both near and longer term, I mean, are your guys able to get out and do the servicing? Do we have some pent up demand there? And then longer term, are we getting those types of contracts? I know that's been a target for you guys, maybe an update there. Yes, Steve, I think we're definitely are able to go get out there and do a lot of these service work and we have Fantastic team that being created, not only by doing that physically, but in some cases even remotely as we kind of connect more and more machines. And as we continue to go forward, absolutely, I mean, we see a lot of good potential here based on our installed base and the technologies that we're launching With IoT and then now here further expanding into with the connectivity with Google Cloud, being able to be more pronounced on how we can create some unique Your next question comes from the line of Nigel Coe from Wolfe Research. Please go ahead. Your line is now open. Thanks. Good morning. Hope all is well. Not a whole lot to read, run through here, but I just want to go back from Synges. And obviously procurement has been a big source of cost savings. With the sort of Supply chain issues you've seen out there, is that limiting in any way your ability to get procurement savings in near term? Does it feel like it is, but And then the second part is G and A is a relatively small part of the synergy mix. I'm just wondering now you've had IRN for a year now whether you see a bit more potential for G and A? Yes, sure, Nigel. I'll take both of those. I think on the procurement front, like we said, there is some inflation in the system, but does that prohibiting us from being able to deliver on the procurement savings? I'll even I'll just make that even broader, the direct material equation, whether it be classical procurement from leveraging a larger spend base as well as now the I2B I just want to I think the answer is no. You've seen the continued momentum. Obviously, the conviction in raising the synergy target of $300,000,000 So I think that We have a pretty good line of sight and pretty good conviction being able to deliver those procurement and direct material oriented numbers. And then on the G and A side, again, I'd say There's always room for opportunity, but I think like we said, the majority of the more structural related savings and cost takeout, You really saw that much more executed in 2020. So again, I would say that part is kind of largely behind us, but we'll always look for rents for optimization. Okay, great. And then just going back to Joe's question on the portfolio. Just curious, just given the performance of FPT much better than we would expect it, How's your view on SVT evolved over the past 12 months? And how confident are you So this kind of performance can be sustained beyond reopening? Yes. I mean, I think I'll put I'll put it a couple of ways there, Nigel. I mean, I think what you see on the LCT is clearly great performance based on product launches that the team has done On the consumer side, when you look at also commentary that we made, even the Q4, also very good momentum in gold, Again, based on new product launches that they have done, particularly with lithium battery cars that they have done. So We feel that the team has taken some good market share and they're not done yet. I mean, was COVID maybe an accelerator or accentuate The decision making for some consumers to really buy now versus maybe buy later, yes, it could be. But I think what's exciting is that the momentum has continued. What is also exciting is that the team is getting ready to make some pretty good product launches in 2021, not only the consumer, but also the utility market That could play very well, not only in the U. S, but also in Europe. So I think the team is really hitting in all cylinders. We're supporting with great investments And more to come. Great. I'll leave it there. Thanks, guys. Thank you. Your next question comes from the line of Nathan Jones from Stifel. Please go ahead. Your line is now open. Good morning, everyone. Good morning, Gabriel. Good morning. A couple of questions on investments in growth here. Can you talk about Kind of what kind of level of reinvestment you're making in growth at the moment and what the kind of potential to take that 2 years? And then the 1.5% to 2% CapEx seems a little low to me. Can you talk about opportunities to invest more here in order to drive better growth? Yes, I think in terms of investment on growth, multiple ways. 1, on the corporate side, I mean, we're continuing to make some Good investments on some of our kind of demand generation activities as well as what you have seen here with the Google Cloud. And then within the businesses, absolutely, we're making some very solid investments, Maybe something I can highlight on the Precision and Science. The team is making their investments in the hydrogen and really seeing some acceleration in terms of the product launches That they expect to get as well as commercialization by investing on feet on the street throughout the world. And on industrial technology, heavy investment on product launches. Now that we have the combined Two companies, particularly on the compressor side, there's going to be a very good cadence of the execution of what we were planning and delivering And working through 2020, that is getting executed and launched now here through the year. And in terms of CapEx, Sure. I mean, absolutely. We think 1.5% to 2%. I mean, we're typically very light CapEx base. So But if the team comes in with a great proposal that provides some very good return on invested capital, we look at ROIC even on a CapEx basis, then we'll do it. Okay. And then I wanted to ask one about revenue synergies. I know when we put these businesses together, revenue synergies is What opportunities you've seen, what successes you've seen and what's expected in the future? Sure, Nathan. I'll touch it kind of high level. Obviously, we haven't necessarily quantified growth synergies externally, but clearly, it's Strategic and you've seen a lot of the momentum that we're actually driving, whether it be in the organic growth numbers that we've actually guided to, things around The water end market, some of the leveraging of the oil free compressor technologies and the kind of expanded channel of the market that the combined company has brought. I think that probably each of the segments, particularly in IT and S and Precision Science, have a good funnel of what All growth synergies that they've been executing to that you're really going to kind of see embedded, what I would tell you, within kind of the organic growth numbers. And I think we're really encouraged. You've seen some of The healthy order numbers, we talked about kind of the healthy backlog that we have exiting the year. I think you're starting to see some of those revenue synergies start So again, we're not going to necessarily guide him explicitly, but I think you've seen a lot of momentum and what we're going to continue to do is give you those examples and kind of give you that color Your next question comes from the line of John Walsh from Credit Suisse. Please go ahead. Your line is now open. Hi, good morning, everyone. Good morning, John. Hi. Just one here From me, going back to the free cash flow guidance for this year, the greater than or equal to the 100%. Is there another way you guys could kind of articulate what you're expecting in terms of free cash flow, either through a free cash flow margin Or maybe free cash flow as a percent of EBITDA and then how you kind of think about that going forward as well. Yes. John, I mean, I think we're going to obviously, the guidance we gave Was greater than or equal to 100 percent of adjusted net income, which we think is probably the right way to look at it, clearly taking a lot of the purchase accounting implications and things of that out of the equation. Think if you look, for example, at 2020, how we're able to deliver, we were quite pleased. Obviously, we saw some pretty good headwinds I'm sorry, some tailwinds in the context of Probably a little bit lower than normal CapEx and some pretty good working capital management. But the good news here is we look into 2021, we see some Strong equal opportunities, whether it be cash interest, which is coming down with all of our fixed interest rate swaps having rolled off in the second half of the year, the tax rate expected to be lower And also some good networking capital opportunity. So again, I think the guidance itself, I think is pretty prudent. We would expect to see Strong cash flow over the course of the entire year, much like you saw in 2020. Obviously, some of the opportunities now, though, are really starting to click in and some of the things we've mentioned before in terms of really the Your next question comes from the line of Markus Mittermeier from UBS. Please go ahead. Your line is now open. Yes. Hi, good morning, everyone. Just a quick one. Hi, good morning. On procurement execution, Obviously, good to see the incremental €60,000,000 here. Could you remind us what's the total spend base here for direct and indirect? And how far Through the spend base, are you now roughly in sort of consolidating spend, picking in new suppliers? Just want to get a sense of visibility here for how far that increment is $50,000,000 goes in that total spend base? Yes. Sure, good question. I mean, so we do roughly a little bit above $2,000,000,000 It's kind of the mark That we said that we were going to do in terms of RFQs and negotiation and stuff like that. And we're maybe 3 quarters of the way So we still have another portion that we still need to go through the process. As you can imagine, it's just a lot of detail that the team is going through. We still have some way to go to cover all that $2,000,000,000 plus. Great. That's very helpful. And then second one, if I may. Just on Compressors and a follow-up to the earlier discussion on Order intake, I mean what sticks out to me is particularly that high single digit Europe order intake. Is that positive mix for you guys in Europe or is there some share gain Obviously, a strong European peers, how should we think about that in the quarter? Yes, I think the team is really executing pretty well in Europe in the combination of the power 2 of the multiple brands. I mean, as you know, in Europe, we had Compare as one of the leading brands in Europe And now Ingersoll Rand and also Champion. So we have a multi brand approach and we're just leveraging the channel across all the regions. And We feel that, yes, the team is really executing well and potentially taking some share based on the numbers. Great. Thanks so much. Good luck. Thank you. Your next question comes from the line of Andy Kaplowitz from Citi. Please go ahead. Your line is now open. Hey, good morning, guys. Hey, Andy. Hi, Andy. Sethi, could Some more color into how you're thinking about growth in the APAC region in 2021 as we know it's a strategic area of growth for you. China looks solid, but maybe the rest of the APAC remains a bit weak. And since you have a bigger presence there with the merger, could you update us on your progress in the region? Yes. I mean, so obviously, 2 sub segments there. I mean, China, the team is really I mean, we have great leadership. We just went through a lot of the accelerated commercialization based on the combination of the two brands on the technologies just year before the Chinese New Year and it's exciting to see what the momentum there continue to build. And we always said Southeast Asia is definitely an area of opportunity for us. It was an it is it was an area of opportunity for not only For not only Gardner Denver, but also Ingersoll Rand. And now with the combination of the 2, we can actually really go after a better channel and better end market channel. So we're being very selective. The team is really appropriately investing in that region. So It's just a lot of good potential opportunities that we see in the Southeast Asia. Got it. And then guidance for mid single digit revenue growth for the segments makes sense 21, but just looking at Specialty Vehicle, you mentioned orders strengthened through the quarter, up over 20%. Are you expecting some sort of slowdown there? I know the comparisons are more difficult versus the other segments, but seems like Very good momentum versus that guidance for 'twenty one in that segment? Yes, it's definitely very good momentum. I think we're being a bit More prudent in terms of maybe some normalization coming here in the second half. And as we continue to see momentum from product launches and kind of market We will update, but I think the team is very focused on delivering to the commitment that they have now. And I will just be kind of more prudent based on the normalization that could be seen here in the second half. And normalization, I mean, just the tough comps. I mean, probably Some pretty hefty comps that they need to overcome based on what they were able to execute in 2020. But we see room for improvement. Thanks, Vicente. Thank you, Andy. And there are no further questions. I will turn the call back over to Vicente for any closing comments. I just want to say thank you to everyone for the interest. I know that in these calls, many of our Our employees around the across the world joined to listen to the excitement of what they have been able to accomplish. And to all of them, I just want to pass another big thank you. 2020 was a phenomenal year. We're about to celebrate our 1 year anniversary altogether here And what a phenomenal journey has been. And this is just the beginning. We're getting started. And there's just definitely much more to come. So thank you.