Earnings Call: Q1 2020

May 12, 2020

Ladies and gentlemen, thank you for standing by and welcome to the Ingersoll Rand First Quarter 2020 Earnings Conference Call. At this I would now like to hand the conference over to your speaker today, Vic Kenny, Head of Investor Relations. Thank you. Please go ahead. Thank you, and welcome to the Ingersoll Rand 2020 First Quarter Earnings Call. I'm Vic Kinney, Ingersoll Rand, Investor Relations Leader. And with me today are Vicente Reynal, Chief Executive Officer and Emily Weaver, Chief Financial Officer. Our earnings release, which was issued this morning, and a supplemental presentation, which will be referenced during the call, are both available on the Investor Relations section of our website www.irco.com. In addition, a replay of this morning's conference call will be available later today. Before we get started, would like to remind everyone that certain of the statements on this call are forward looking in nature and are subject to the risks and uncertainties discussed in our previous SEC filings which you should read in conjunction with the information provided Securities And Exchange Commission and our current report on Form Eight K filed with the Securities And Exchange Commission on May 1, 2020, which are available on our website at www.irc0.com. Additional disclosure regarding forward looking statements is included on Slide 2 of the presentation. In addition, in today's remarks, we will refer to certain non GAAP financial measures, You can find a reconciliation of these measures to the most comparable measure calculated and presented in accordance with GAAP in our slide presentation and in our release. Which are both available on the Investor Relations section of our website. I will also remind everyone that in both our earnings release and today's presentation, we have included both as reported financials and supplemental financial information to assist with analysis and comparatives. To as financials only include the Ingersoll Rand Industrial segment results from the closing date of the transaction on February 29, 2020, the supplemental financial information provides results as if the transaction had occurred as of January 1, 2018 to provide a full quarter of comparable results. Turning to slide 3, on today's call, we will provide an update on the top priorities of the company in the current operating environment, as well as review our first quarter total company and segment highlights. We will conclude today's call with a Q and A session. At this time, I will now turn over to Vicente Reynal, Chief Executive Officer. Thanks, Ike and good morning to everyone on the call. I would like to kick off today's presentation by sending our thoughts to all who have been affected by COVID-nineteen and all the dedicated healthcare workers further responders and volunteers who are on the front lines all over the world battling this pandemic. I would also like to take a moment to say since here, thank you to all the Ingersoll Rand employees around the world. The pictures on Slide 4 are just a few examples of our dedicated global workforce. Who have adapted to the realities of the work environment to continue to serve our customers. Every day, I hear a new examples of our business providing mission critical products to our customers. And I am proud of what our company represents and how employees have responded to these unprecedented times. While there continues to be a lot of uncertainty about the future, one thing I am sure about is that Ingersoll Rand will continue to keep the safety of our communities and serving our customers at the center of everything we do. And that wouldn't be possible without the dedication and hard work of all of our employees. Moving to Slide 5, I would like to grant everyone on the critical priorities we're following during these challenging times. When we closed the transaction a little over 2 months ago, could have never anticipated that within a matter of weeks, we will be dealing with a global pandemic, causing disruptions to our customers, supply chain and the day to day operations of the company. Response speaks to how the IRX toolkit has effectively helped us a plan, accelerate and adapt our actions to act quickly and decisively around 3 core priorities: 1st, ensuring the safety of our employees, customers and the community. 2nd, around keeping a strong focus on the integration and execution to ensure the financial stability of the company through these uncertain times. And finally continuing to execute on the strategy of the company as we have multiple catalysts to drive ongoing value creation. The strength of English O'Brien team aligned around these 3 priorities will position the company to emerge from this crisis as a stronger and more unified company. The next slide is a reminder that our purpose and values, as well as our execution engine that we call are really at the heart of how we operate as a company, especially in these unprecedented times. During the integration process, we spent a lot of time thoughtfully creating the company purpose, one that is centered around our stakeholders where we know that they can lean on us to help make life better. This purpose, when combined with the 4 key values that our teams live on a daily basis, creates a framework of what we want to achieve as a company. And the basis of how we do it is the Ingersoll Rand execution excellence process. The simplicity and effectiveness of this is allowing us to accelerate the creation of a single culture across Ingersoll Rand. Turning to Slide 7, I would like to briefly update you on the company's response to the COVID-nineteen crisis since it has been swift and focused around 2 major components. First is the health and safety and well-being of our employees, customers and communities. And second, business continuity, not only within operations, but across the larger supply chain. Turning first with health and safety, we activated our COVID-nineteen tax pours in February and had a full coordinated company approach in early March just weeks after the creation of the new company. Our execution approach has served us very well as we're able to quickly implement enhanced site safety protocols and a mandatory work from home policy for those employees who can work remotely. And it is very encouraging that our quick actions have been successful. As we currently have had fewer than 30 confirmed cases of COVID-nineteen amongst our more than 17 1000 global employee base. But it's more than just implementing safety protocols. It's also about supporting and engaging the employee base. As a result, we have implemented a number of measures including a global outreach program to solicit employee feedback. Our employees reacted quickly and with a true ownership mindset provided more than 200 suggestions when we asked for cost savings ideas. Not only did our team volunteer to take individual pay cuts, furloughs and for go vacation time this year, They have thoughtful in-depth suggestions, many of which were actively implementing today. From a business continuity perspective, starting first with our operations, as we previously communicated, we have seen plans largely in China, Italy and India impacted due to COVID-nineteen. China was largely impacted in the month of January February and has seen steadily improved capacity and output through March and into April as things are now largely back to normal. Italy and India saw about a 2 month line to China, with operations being impacted in late March into April. And in this time, our sites around the globe are 98% operational, with India still being the most impacted due to governmental restrictions on returning to work. The supply chain has seen a similar trend as the impact in China is largely behind us and we currently have no meaningful delivery issues. The Americas and EMEA regions are stabilizing as impacted suppliers in the U. S. And Italy have started to come back online. In the past few weeks, we have seen the number of impacted suppliers drop by more than half, which is a very good sign and we're supplementing supply from dual sources from other regions where possible. Much like operations, India continues to be the most impacted as of the supply chain. And we expect the situation to improve in the later half of May when governmental restrictions begin to ease. We are addressing the current environment head on by actively managing those areas within our control. Let me tell you about what we're doing here. Turning with Slide 8, through the use of IRX, we have been able to build the cost synergy funnel to over $350,000,000, with increases across all major saving categories, and we continue to identify areas of incremental opportunity. As a reminder, we expect to be able to realize the anticipated transaction cost synergies of approximately $250,000,000 We expect to incur approximately $450,000,000 of expense As we have stated multiple times over the past few quarters, the phasing of synergy delivery was always an area we believe we could accelerate. Based on market conditions, and that is exactly what we have done. We have dramatically increased the pace having already executed on $90,000,000 of annualized structural cost reductions with approximately $70,000,000 savings expected to be deliver in 2020. The majority of these savings are coming from headcount actions already taken in the past 2 months as we streamline the company and reduce layers within the organization. In addition, we have deployed the first wave of procurement initiative with RFQs for nearly 1 third of our historical direct materials pan base already launched as well as some quick win initiatives being deployed. In total, we're now expecting to deliver approximately 35% of our overall synergy target in 2020, which is approximately three times higher than the original year one expectation of 10% to 15% realization. We're keeping the overall cost synergy target at $250,000,000, over 3 year timeframe at this time to remain prudent on volume dependent synergies like procurement and I2B given the current environment. It is not only the structural cost that we have taken out, but also how we are supplementing our synergy delivery activities with thoughtful short term cost reductions to protect margins. So let's move to slide 9 to talk about that. In Q1, despite the 15% revenue decline that we saw collectively across the business on a pro form a basis, we were able to limit adjusted EBITDA decrementals to less than 30% with the strongest performance coming from our 2 largest segments. We expect that these additional actions will yield $40,000,000 to $50,000,000 of incremental cost savings in the P and L this year, with the majority coming in the second quarter 3rd quarter. We will continue to reevaluate on a monthly basis and if demand environment does not accelerate in the second half of the year, we will potentially extend some of these actions and increase our savings target accordingly. While we're making some tough decisions to control costs, one area that we're not calling back is strategic growth initiatives across the enterprise. Much like we did back in 2015 at Gardner Denver, when we invested through the downturn to capitalize on market share gains and new product opportunities, we're following the same playbook today. Investments in R&D are being maintained at similar levels as prior years. And we continue to fund targeted commercial initiatives such as demand generation and our IoT platforms. This is all part of the strategy to play offense now especially as we bring the 2 companies together through the integration. Moving to Slide 10, let me talk about liquidity. The company continues to have a strong balance sheet with ample liquidity. At the time of the merger, took the opportunity to reprice our legacy debt by placing the new $1,900,000,000 term loan to close this transaction. All of our debt is a term loan based structure, with very attractive pricing as the U. S. Components are LIBOR plus 175 and the Euro component is a Eurobore plus 200. The term loans have no financial covenants from a maintenance perspective and there are no maturities until 2027. Liquidity also remains strong at $1,600,000,000 as we finished the quarter with $556,000,000 of cash on the balance sheet and over $1,000,000,000 of capacity on our existing credit facilities. As we look ahead, we continue to see several opportunities to unlock cash as we remain very prudent on preserving liquidity. Opportunities exist across working capital and cash taxes. And we will continue to see tailwinds from interest expense in the second half of the year as all $825,000,000 of negative fixed interest rate swaps will expire by September of 2020. Even though we feel our level of liquidity is proper, we're evaluating incremental debt or other liquidity vehicles given the attractive rate and covenant environment. Turning to Slide 11, our commitment to our long term strategy remains unwavering. You have heard me already referenced several elements of our strategy as we're building the culture of Ingersoll Rand with our employees at the core. We will continue to act quickly and prudently to protect margins and preserve liquidity. And at the same time, we will position the company for future growth both organically and through opportunistic targeted bolt on M And A. Our business operates in a very fragmented market and we see opportunities to add niche technologies to the portfolio. Importantly, our NEOS strategic priority of operating sustainably is taking shape as we launch several of our ESG oriented initiatives already. Overall, we had several value creation levers as we look ahead and we will continue to execute despite the uncertain macroeconomic landscape. I will now turn it over to Emily to walk you through the financials. Emily? Thanks, Vicente. On Slide 12, you will see the as reported financials for the company. As a reminder, the reported financials include 3 months of Legacy Gardner Denver and 1 month of the Legacy Ingersoll Rand Industrial segment in Q1, twenty twenty and only the legacy Gardner Denver Businesses in Q1 of 2019. As a result, the comparisons are impacted materially by the transaction. And won't spend a lot of time on this page as a result, other than to mention that the as reported net income in the quarter includes $197,000,000 of amortization, acquisition, restructuring, and other adjustments. Which you can see listed in the reconciliation tables in the appendix of the presentation. Turning to Slide 13, To assist in clean comparatives for the quarter, we provided supplemental financial information, which treats the transaction as if it had happened as of January 1, 2018. From a total company perspective, FX adjusted revenue and orders declined 14% and 7% respectively, and were impacted by COVID-nineteen. Regionally, we saw notable declines in Asia Pacific as well as sharp declines in the US and Europe towards the end of the quarter, most notably in the IT and S segment. This led book to bill to finish at 1.11 for the quarter. The company delivered $208,000,000 of adjusted EBITDA, a decline of 24%, driven mostly by the volume declines in ITNS and the expected downturn in down two hundred basis points from last year. However, our proactive cost controls within the business limited decremental to 29%. In terms of adjusted EBITDA, composition for the company, the legacy Gardner Denver business delivered 97,000,000 as compared to our original guidance expectation of approximately $100,000,000, which we view as relatively strong performance given the environment. The legacy IR businesses delivered $51,000,000 of adjusted EBITDA in March as opposed to a combined $60,000,000 for January February. Moving to Slide 14. Free cash flow for the quarter was $60,000,000 on an as reported basis, including $8,000,000 of CapEx The Q1 free cash flow includes $63,000,000 of outflows related to the transaction, comprised of $38,000,000 of synergy delivery and stand up related costs and another $25,000,000 of transaction fees. We also paid $38,000,000 of debt issuance costs in the quarter which you can see in the financing section of the cash flow statement bringing our total transaction related outflows at two point six times. And while we do expect to see some short term increase to leverage, we have shown the ability to de lever historically. As you can see on the right side of the page, we'll remain extremely disciplined on cash, and we expect our capital allocation priorities to be very aligned with prudent debt pay down, and opportunistic bolt on M And A. We have no plans for any share repurchases or a dividend at this time. I'll now turn it starting first with Industrial Technologies And Services on Slide 15. The IT and N segment 1st quarter adjusted order intake was $889,000,000, down 9% versus prior year, excluding FX. Adjusted revenue in the quarter was $796,000,000, down 17% excluding FX. And leading to a book to bill ratio of 1.12 times. From a regional perspective, Asia Pacific revenues were down in the mid-30s. With Europe down 15% and Americas down 7% all excluding effects. We use this trend in an indication of how Q2 could potentially play out, meaning that the APAC decline in Q1 is what we expect to see in Americas and EMEA in the near term. This is the baseline we're using to plan the cost controls for our business, but we're staying highly active with demand generation activities and pricing controls we continue to demonstrate discipline in price, generating over 1% in the quarter. While these markets are more opaque than historically we're using our unique data acquisition strategy to map order trends and remain agile in serving our customers in the current environment. We break this out into 2 areas, aftermarket and original equipment. For aftermarket, a leading indicator we have is actual compressor utilization data as we can see the hourly usage of thousands of compressors worldwide that are connected to our remote monitoring systems. In Americas and Europe, we saw a sharp line and compressor utilization in the last few weeks of March of nearly 30% with some recovery in the past few weeks of April. We're now using this as a way to know where our service teams need to focus, while at the same time using it as a leading indicator for aftermarket activity. Which is approximately 50% of the compressor business today. For original equipment, we're using demand generation leads. We said in the past that demand gen was a leading indicator of orders that we will be getting in the next 6 to 8 weeks. With more than 1000 leads per week, we have a lot of commercial insight in our system. What we saw in the later weeks of March was a drop of 30% versus what we saw earlier in the quarter. With similar trends in America and Europe. We have seen also early signs of improvement over the past few weeks of April, but still approximately 20% to 25% off from the highs in the early part of the year. Let me give you now some color from a product line perspective. We have seen very similar trends across compressors, blowers and vacuums where we saw orders down in the mid to high single digits. We have spoken about 3rd party industry reports in the past, and the Q1 data speaks well for the outcome of the combining of the two companies. According to a leading third party report, the market in the U. S. Was down mid single digits in dollars in the first quarter. Carner Denver branded products were flat and Ingersoll Rand branded product was down high single digits. But when you look into the details, you see the power of the 2 companies. As Gardner Denver saw good share gains on low to medium horsepower machines, while Ingers Run took share on high horsepower compressors. This was exactly our hypothesis coming into the deal, and we see this as a way to leverage the technology portfolio as well as the direct and indirect channels that both companies have. Our tools and lift, which is part of the segment had a very tough quarter with orders and revenue down both over 20%. The business was highly impacted by large inventory purchases that online retailers typically make in the first quarter to support first half of the year revenue. However, this quarter, in addition to the slowdown of the market, many online retailers switched their focus to household essentials. Moving to non GAAP adjusted EBITDA, IT and S delivered $135,000,000 in the quarter, which was down 25%. Non GAAP adjusted EBITDA margin was 17%, which was down 150 basis points from the prior year as our cost mitigation efforts help limit decremental to 25% in a segment that typically has base decremental of 35% to 40% before cost actions. Moving to Slide 16 to the Precision And Science Technology segment. Overall, the segment had solid performance in this economic environment, as adjusted orders were $218,000,000, up 2% ex FX. Adjusted revenue was $192,000,000, down 9% ex FX, on strong prior year comps of 12% ex FX growth and shipment delays due to COVID 19. This platform is a collection of technologies and premium brands that have leadership positions in very attractive niche markets. In the first quarter, we saw orders growth high single digits in the legacy medical pump business as we are leading key player in several applications like oxygen concentrators respirators, and liquid handling. You can see many of the applications that our medical pumps go into at the bottom of the page. Our team have been working 20 fourseven providing modified solutions that can be used for new applications to fight COVID-nineteen now and in the future. The remainder of the portfolio saw slightly negative orders performance, down 2% ex FX, with the majority due to COVID lockdowns in January February in China, and towards the end of the quarter in India. What is encouraging is that we continue to see good funnel and orders activity across many of the product lines and regions due to the niche applications in water and chemicals, which will help balance some of the expected weaknesses in a more industrial end markets. Moving to non GAAP adjusted EBITDA, P and ST delivered $53,000,000 in the quarter, which is down 6%. Non GAAP adjusted EBITDA margin was 27.7 percent, up 120 basis points, driven by strong cost controls, and productivity leading to the incremental margins of only 15%. Moving to Slide 17 and the Specialty Vehicle Technology segment, Our priorities for this segment are to continue to capture growth in a profitable manner. We see that this segment can stand margins with the use of the same IRX tools we have used across other segments and expect to see improvements of this business moving forward. Having said that, this business performed very well in the first quarter. Adjusted orders were $230,000,000 and adjusted revenue was $185,000,000. Up 8% 7%, respectively, with a book to bill of 1.15. Growth was driven by the strength in gold connectivity and consumer product lines. The business saw strong double digit order momentum in early January February, as the pandemic hit the U. S. We saw sharp decline in the second half of March. There is a lot to be excited about. We're expecting Q2 to be down compared to last year for a couple of reasons. First, last year was a tough comp as the business had some supplier issues in the first quarter, where some product was shifted to the second quarter of 2019. And 2, the business is not immune to this current environment. While April orders were down year over year, we're starting to see some sequential improvement in orders. We feel this is driven by a couple of factors. 1st, in the consumer product line, the team pivoted quickly to leveraging demand generation techniques widely used in the legacy industrial businesses. And we have seen better momentum recently in the run rate. And second, with the work we have done on proactive COVID prevention across all of our locations, we were able to remain open while some of our competitors were closed. Moving to non GAAP adjusted EBITDA, Specialty Vehicles delivered $18,000,000 in the quarter, down 1%. Non GAAP adjusted EBITDA was 9.9%, which was down 80 basis points due to strategic growth investments and product mix. Moving to Slide 18 and the High Precious Solutions segment, and the business performed above our expectations in a tough operating environment. With adjusted orders of $84,000,000 and adjusted revenues of $96,000,000, down 26% and 29% respectively. As expected, the revenue base in the business was nearly 90% aftermarket and the team executed very well commercially with sequential adjusted orders of 6% sequential adjusted revenues of 26 percent versus the fourth quarter of 2019. We continue to see share gain opportunities in aftermarket. And specifically consumables where we saw orders and revenue up double digit sequentially. This allowed us to deliver non GAAP adjusted EBITDA of $24,000,000 on margin of 24.6%, which was down from last year level of 30.8%, but sequentially better by over 400 basis points. As we pivot to the second quarter and rest of the year, a key leading indicator for this business has always been activity and intensity. We can measure that in multiple ways, but the simplest form is the number of fleets operational in the market. As a reminder, each frac fleet has about 16 to 18 trucks. With each truck carrying 1 pump. Each pump has a fluid end and every fluid end utilizes consumables. While Q1 of 2020, on average, we saw a 318 active fleets, the exit rate in March was 240. We expect to see a substantial drop in the 2nd quarter where we believe the month of April ended at roughly 50 active fleets due to the recent dynamics in the market with the oversupply and lower pricing for oil. And this will have a meaningful impact on revenues within this segment. And because of that, we're taking very proactive stance to drive the proper cost takeout to still show reasonable profitability in the quarters to come. Moving to Slide 19, we wanted to provide a quick snapshot of how the business has performed thus far in April. Overall, the total company is down approximately 20% in orders. The month began very slow, particularly in U. S. And European markets. What we're encouraged by the order momentum throughout April we expect total revenue to be lower than orders in the second quarter. In terms of orders, both industrial technology and services specialty vehicle segments were right in line with the total company average. While Precision And Science Technology is performing considerably better with positive year over year orders performance thus far as a result of continuous strength in medical pumps. And not surprisingly, the high pressure solutions segment is down approximately 80% in orders, as the market resets for what will likely be a prolonged downturn that we expect will last for a number of quarters. As we look forward, due to the uncertain environment that we find ourselves in, we will not be providing Q2 or total year guidance at this time. However, to best manage our business and ensure we're taking the right steps to manage during the downturn, we're running multiple scenarios to stress test the balance sheet and the associated impact on cash flows. Our current model shows that the business will need to be down 40%. On an annual basis to be cash flow breakeven using fairly conservative assumptions around working capital and CapEx, coupled with the cost actions we have taken thus far. We feel that these puts us in a very solid position moving forward when compared to current order trends and coupled with our current liquidity position. Turning to Slide 20 for some concluding remarks. Want to say that when we manage through what we will no doubt be a tough second quarter and an uncertain recovery thereafter. We feel that the fundamental investment thesis in the company have not changed. Ingersollbrand is a premier industrial company, and we are in the early stages of our transformation. We have multiple levers for accelerating value creation, but being very focused on the current priorities. We feel good about our liquidity. With opportunities to increase these by unlocking cash as well as taking advantage of the current rate environment. We will continue to drive a culture of execution, and we continue to pay attention to the opportunities in our large addressable market, particularly on the current conditions to be strategic on bolt on acquisitions. With this, we will turn the call back to the operator and open the call for Q and Thank you. Your first question comes from Andy Kaplowitz from Citigroup. Your line is open. You give us more color into the April order declines you're seeing in your largest segment in IT and S? First of all, how long do you think the change in customer behavior from that power tools business that you talked about can lessen. And obviously, you now have smaller upstream, but especially downstream and midstream related disclosure in IT now. So are there discernible differences in the run rate of these businesses given they're more project versus the industrial compressor business? Yes, Andy, let me just give you a little bit of color. I mean, as you saw, we said roughly April total orders down 20% book to bill greater than 1. From a book to bill perspective, the industrial technology and the precision and science were greater than one and obviously leading the way. I'll say in terms of ITS, in particular, I will categorize it as the, the short cycle was mostly most impacted in the quarter and continue to see, some relatively weakness here, moving forward. I mean, it's mostly correlated to I guess, maybe the PMI, from, from the down and the midstream, which is what we consider to be more on the loan cycle, I'll say comparatively a bit more stable, in the first quarter and, and we kind of continue to see maybe some of that in the month of April. Again, typically, we tend to get the orders for that loan cycle now in the first half of the year in order to get shipments, in the second half. And, and from a PTL, from a power tool perspective, yes, I mean, rough quarter in the, in the, in Q1, as I alluded, I mean, last year, they were seeing some fairly good growth momentum from their expansion into online retailers. And, and you saw that, in the first quarter, many of these online retailers, they've moved, to have another kind of more household goods or critical need to fight COVID, COVID-nineteen and clearly, you know, this business saw some of the impact. I'd say April still is relatively slow. We haven't seen the pivot over the momentum of the PowerSchool business. So that's helpful Vicente. And I'm sure you you expect us to ask about decremental margin in some way. So let me just ask it like this. I'm obviously good result in Q1 of close to 30. How do I think about decrementals with high pressure solutions, the orders down 80%. Can you hold incrementals there in the mid-40s at what point does fixed cost become a problem? I know you talked about accelerated cost out. If you think about the rest of the business, can the rest of the business hold 30 percent decrementals with the 20% decline that you're seeing overall in the rest of the business? Yes. So I'll say, Andy, I mean, that's kind of what we're targeting for. And, I mean, as you have seen, we have performed well in the down cycles in the past. I think we have a good solid playbook that we executed in the 2015, 2016 that in industrial downturn, but also an upstream downturn. Based incrementals, they tend to be around 40% across the business with slightly higher in businesses like the high pressure, as you mentioned, as well as the precision and science. Because of a nice, high gross margins that those businesses have. And lower on the specialty vehicles. And, the industrial technology, they tend play in that kind of 40% range. You've seen that we have taken very decisive actions between synergies and the short term actions to protect the margin. We saw, as you mentioned, some very good first quarter results for the total business under 30% And Q2, we'll clearly see a bit more pressure from a top line perspective, but we will continue to manage the incrementals with the target being closer to that 30% of, of, of the EBITDA. And when you think about the actions, we're clearly taking much more aggressive actions under high pressure around cost actions based on what we see here with a lot of our data points and the long duration of the downturn that we expect that business to have. Very helpful, Vicente. Stay well. Thank you. You too, Andy. Your next question comes from Julian Mitchell from Barclays. Your line a first question on that point on decremental margins. So if you could help us understand perhaps the phasing of the cost synergies through the year and also of that, $40,000,000 to $50,000,000 of other cost out actions, And should those mean that decremental margins narrow in the second half or not necessarily depending on mix and some other things? Yes. So maybe break it down into the two buckets, Jason, just let me on the 40 to 50 that we spoke about, that are kind of more related to, discretionary or kind of volume related. Those are largely 2nd quarter and the 3rd quarter. With a good majority, I would say, more so on the, on the second quarter, from a cost synergy perspective, the $70,000,000, I mean, out of the $80,000,000 to $90,000,000 of in year, roughly $70,000,000 of that is headcount. And I'll say that is kind of consistent through the 2nd quarter, 3rd quarter and 4th quarter. While the other roughly $10,000,000 to $20,000,000 that comes from procurement, it is really more weighted towards that kind of Q3 and Q4. That's very helpful. Thank you. And then maybe just my second question for you or for Emily around the free cash flow. You had a good performance in Q1. Just wondered, you had the slide on the very broad brush sort of assumptions around breakeven free cash, but assuming that down $40,000,000 doesn't play out, what kind of sales are down call it 20%, 25% for the year? What type of free cash flow conversion, should we expect, how do you see working capital moving? And maybe just remind us, you had, I think, in the free cash, that 63 $1,000,000 of transaction and separation cash cost in Q1. What's the rough assumption for the year? Yes, there will so we're very pleased with the Q1 cash performance. As you saw there, Julian. And we've been managing cash, from the day after the transaction very carefully and continuing to put in good processes and strong controls around it, given the current crisis. We expect cash to still be to still be good as we move forward, but certainly a longer cash cycle as we move through what's going to happen here with COVID-nineteen. And we're really managing payments as in in response to the collections we're receiving to maintain our strong cash flow and liquidity positions. You know, what the future holds, a lot of that's, you know, gonna depend on things that we can't predict at this time. For sure, but we know we've got the right processes in place to maintain our cash position and our liquidity. And how about the transaction and separation costs? Any very rough guidepost for the year in light of that $63,000,000 in Q1? Yes. There will be some some incremental cash outflows in Q2. I don't have the I don't have the figure at my fingertips at the moment, Julian, but I can I can get back to you on that? Okay. Thank you. Your next question comes from Michael Halloran from Baird. Your line is open. Good morning, everyone. Hope everyone's doing well. So, could we just talk about the synergy funnel you what are some of the incremental sources in that relative to the originally identified $250,000,000 in synergies and maybe talk about difference you're seeing more on the cost side versus longer term some of the revenue synergy opportunities you're seeing? Yes, Mike, I, as you recall, we always said that, that we were going for a funnel higher than the 250 You know, as we were 60 days into, into the transaction, we have obviously a much more kind of line and clear visibility what that funnel could potentially be. Roughly the $100,000,000 comes from a combination of structural savings, as well as some could quick footprint rationalizations, kind of non manufacturing, you know, alluded to, on the investor's call that we had back in April that, you know, we have now pretty good database of all the, the locations across the world and that is giving us a very good way for us to really understand and rationalize not so much the manufacturing yet, because we still see manufacturing kind of coming year to year 3, but more, more the other kind of quick hits that we can take from a print perspective. So, second part of the question, liquidity is in a strong position. Once you get through some of the one off things associated with the timing of restructuring, the separation and some of the extra things Emily just referenced. What would it take for you guys to be a little bit more aggressive with the cash outflow? And then Secondarily related to that, do you think the fact that we're going into some sort of recession here, who knows how long visibility is low But do you think the opportunity has been like solid for you to deploy capital more towards the M and A side of things over the next couple of years? And are you positioned for that today? And any kind of thoughts on how you're thinking cumulatively about that capital side over the next 6, 9 plus months? Yes, no, absolutely, Mike. I mean, I think, you know, clearly over the next couple of years, we see M and A continue to be a really part of our strategy, still, we see it's a very unique environment right now. We still see point in time, some very good funnel on Bolton. We see also very good funnel around, you know, the precision and science as well as some of the industrial technologies. But they're really more related towards bolt ons. Thank you. Thanks Mike. Your next question comes from Nigel Coe from Wolfe Research. Your line is open. Good morning. How are you guys? Hi, Michael. Good, Neil. Yeah, good. Thanks. So I wanted to just go back to the Industrial Tech Performance. A little bit surprised to see the down 17% pro form a performance and it seems like most of that came from the legacy IR businesses. Can you maybe just kind of spell out in a bit more detail? How much of that can be explained by the geographic and end market mixes? Of the industrial of the IR industrial business? And also what happened to service during the quarter? What was the last question Nigel? I'm happy to Yes, what happened to service within us down 70%? How would service? Yes. So to the first question, yes, I mean, I think, China was definitely impacted largely in, in January February. The legacy IR business, they have, a pretty sizable China exposure, and we saw an impact to that. In terms of the service, you know, we, we saw service better than original equipment. I mean, typically, typically, we saw roughly about two times from a percentage perspective. Better performance than the original equipment. And just to kind of give you maybe a little bit more color here, particularly as you know, there's some, external ways of comparing some of the, some of the industrial technology, the industrial technology is composed of multiple technologies, compressors, backings and blowers. And, our compressor business is clearly within the, industrial technologies. When we specifically compare to some of the couple of data points that we look at is what I referenced in terms of the 3rd party report. At the same time, just to give you further perspective, the legacy Gardner Denver business in Q1, orders were down in the low single digit, which is kind of comparable to what we saw in the market. And since we didn't own the legacy IR for the full quarter, we just tend to not comment on what we saw specifically January February that they saw from an order but that hopefully gives you a good perspective as to how we were able to perform even on the legacy GD. Great. Thanks. Thanks. And then switching to the high pressure business, this doesn't become so small now. It's almost irrelevant, but if it is down 8% in the quarter, implies that implies revenues of 25 to 30. I mean, is it possible to break even at those kinds of levels? And given you're clearly expecting this business to be kind of like weaker for longer, would you expect revenues to kind of like just bounce on the trough year for the next several quarters? I mean, any color there would be helpful. Yes. So for sure, that's what we're targeting to be the breakeven, even and, I mean, we're taking some pretty, pretty aggressive actions. At the same time, I mean, this business is now 100% aftermarket and consumables. So that kind of carries a much better margin profile too as well. And those factories that are kind of not, needed based on volume, I mean, we're basically keeping them, close or very, very low, exposure. So, yeah, I mean, I think, you know, the team has a pretty good playbook on how to navigate this. It is something that we have done extensive work. And, you know, I think we see that we can definitely overcome these kind of long term. And our plan is that is going to be down for a while. And to the second question, I mean, clearly, it's a market that As you saw, we just invested in new fluid and technology. So that when the market comes back up again, we can be ready for capturing some accelerated market share. Great. Thanks very much. Your next question comes from Jeff Sprague from Vertical Research Partners. Your line is open. Thank you. Good morning, everyone. Good morning, Jeff. Wondering if we just come back to service for a moment, interesting comment about utilization down 30%. But how do we actually interpret apply that to a forward look, right? That doesn't necessarily mean your sales are going to be down 30% into service. I don't believe. I don't know if you have enough data historically kind of piece that together, but what does that down 30% tell you? Yes, Jeff, great question. I mean, so terms of the historical data, we don't have a lot of historical because as you know, as you can imagine, a lot of these remote monitoring systems and connectivity with the IoT platforms that we both companies have now, is fairly new. But we have enough data to then break it down by the specific sub end markets, and that, I mean, the indication here is that it's telling us where are those market that we should continue to play or double down from a service perspective. So it's helping us to redirect the teams. It is also helping us to really better serve our customers and making sure that we're still more resilient from that perspective. In terms of being down 30%, mean, I think we just see that as a bit of indication as to what could happen here, but as you just very well pointed out, it doesn't give us a great correlation as we don't have a lot of historical data to really extrapolate here. So what we're doing is just taking that data point to really reassess our commercial teams and refocus in them on those areas, regions and markets that we're still seeing some very good utilization of the compressors. And the answer to your prior question where you noted IPS obviously includes more than compressors, vacuums, blowers, etcetera. Are you suggesting that those other products areas outside of vacuums and blowers were substantially worse than the compressor business in the quarter? Yes. So for sure, yes, I mean, for sure, the power tool and the listing business was one that it was worse than that. I mean, the power tools is kept, they have 2 main product lines. I mean, it's that tool business, but also they have a lifting business, that is kind of more related to factory consumption or factory rationalization. So I think that, that was impacted more so. And then China as a region was definitely heavily impacted. And, you know, from a, from the other product lines in terms of the longer cycle, which these are kind of brands like, NASH, Hero and liquidgreen ponds and liquidgreen vacuums. Those are more longer cycle and those were, I'll say, more stable and resilient. Great. Thank you. Your next question comes from David Raso from Evercore ISI. Your line is open. Good morning. My question is about in the ITS business. When I think about the inventory in the channel, and you think about some of the recent improvement you've seen, can you give us some sense on any sequential improvement, sort of a lead lag and obviously inventory is part of it and also the mix of your business is being short cycle versus long cycle. Can you just give us some sense of the inventory in those channels and some way we can read the lag you would need to see or that you would experience if, say, the PMIs got better, for example? Yes, Dave. I mean, I think when we look at the inventory in those channels, I mean, there's just not a lot of inventory, I mean, and I'm going to describe these from from a compressor perspective, which is obviously the one that has the biggest size of the distribution network. And it is also more particularly towards the Gardner Denver branded products. We don't tend to have a lot of inventory because these, these are particularly smaller distributors, more sub regional lines, more localized. They don't tend to put a lot of cash up front to have compressors on the shelf, so to speak. I mean, maybe on the smaller compressors, they may. But not on the medium to high level compressors. And the inventory will come in more on consumables aftermarket and parts. But those tend to really move fairly well. I mean, they turn fairly quickly. And the recent improvement you've seen, just so I'm clear, is it a stabilization at a low level after the initial shock in ITS? Or have you seen some little improvement in orders sequentially I'd be curious, is that more short cycle or long cycle? Yes, no, yes, great question. Yeah, it is all categorized, it has the stabilization and, initially. And then, obviously, when you look at it within the month, I mean, at the month of April, you know, there's some slight improvement on the second half of April compared to the first But again, was that more short cycle improvement? Short cycle. Yes. Short cycle. All right. Thank you. Thank you very much. Appreciate it. Sure. Your next question comes from Josh Pokrzywinski from Morgan Stanley. Hi, good morning all. Good morning, Josh. So Vicente, I guess everyone here on the call kind of same list of questions that we're going through for most companies. So we covered a lot of ground already. But I guess just with some of the commentary around utilization, and with the comments you made around supply chain interruption, how much of the decline that you're seeing? And I guess this comment is mostly in IT and S comment is related to customer shutdowns or supply chain interruption in some form like the lights come back on and a certain amount of demand comes back? Because I think to some of these points on service or utilization that maybe that's not the steady state state of the world there? Yes, Josh, I'll say more so definitely in Q1, in in China. If you want to think about it kind of that disruption, completely, also in the, in the first quarter, maybe some disruption from the perspective of, in Europe, particularly in Italy. I mean, we do have some very good manufacturing base in Italy. And we, although we stayed operationally, I mean, most of our suppliers had to shut down. I would say that now as kind of the comment that I made before, we see kind of days lower demand level kind of getting more stabilized. But, but still not seeing that, that kind of recovery. And we're just kind of waiting to see how the recovery will play out. Okay. And then switching over to the synergy funnel. I mean, it sounds like the year 3, pipeline of activity kind of has to stay there as you have to act on other things first since more manufacturing centric. Fair to say that the incremental step up in synergies then in the year 2? Is it smaller? I guess is this more of a pull forward from year 2 or are you kind of implicitly saying, Hey, we think there's more than 250 here. We're just we're working on this as fast as we can. We'll update you as we know more. Yes, I mean, I think that's exactly the case. Well, I mean, at this point in time, I mean, we think, we think, we want to keep it at 2 50 just because we think it's prudent, And we think it's prudent because we're, we're, I mean, clearly focused on a lot of the internal funnel and execution. You see how we accelerate it and we execute it. Mean, this is not just talking about creating savings. It's a savings that we just already executed. But there's a component around procurement and I2B, savings, innovate to value that is bond independent. And when we did a $250,000,000 cost synergy funnel, it was done based on 2019 kind of run rate level, so to speak, on spend levels. So we just want to be prudent from, from kind of going out there and saying that the $2.50 will increase Once we're ready, we'll definitely, and when we see kind of more stability or normalization in the markets, maybe we come back with that, But at this point in time, we're accelerating what we can control. And we know that we can control that structural headcount out, and that's exactly what we executed. Know we can control a lot of the quick things in procurement because commodities are lower and we are executing that. And we know we can control a lot of discretionary spend and that's exactly what we also So we're very focused on kind of going through the list of things that we can really execute. Your next question comes from Nathan Jones from Stifel. I think I'll start on PST. Revenue down 8.6 ex FX margins up 120 basis point. So clearly some very good control there. Can you maybe give us a little more color on what drove the very good decrementals there, how you see the decrementals going forward? And maybe any color you can give us on what you think the long term margin opportunity is in that business? Hey, Nathan, this is, I'll say some very good cost controls, but also some very good momentum that we had also from the medical business. If you remember last year, when we talked about the medical business, we were seeing upwards of 200 basis points margin improvement, the medical business finishing last year at roughly 30%, 31% EBITDA margin. So again, very good momentum from that business and clearly, as we saw some softness in the market, the team continued to execute those targets that they needed to get done I think when you look at this business that, I mean, has some very nice gross margins and, the decremental, the base decrementals are typically 45 or so. I mean, pretty good job that the team did here in order to get the decrementals down to the 15%. And I'll say, from a long term perspective, we'll definitely come back with giving some kind of medium to long term perspective. I'll just do a quick comparison and you can see that medical, we were able to, not only just a few years ago, that medical business wasn't at 25%, 26% EBITDA margin. We finished last year in the 31 percent EBITDA margin. And there's just a lot of good commonality between the medical and the legacy PFS and ARO business that are within this segment. Okay. Maybe just one on receivables. When you look through that, do you see any customer credit risk, any collection risk there? I guess it's particularly an upstream comment given the way given the way that market's going, but anywhere else you see, any potential issues in receivables, how you're going about managing customer credit, those kinds of things? I mean, I'll say not necessarily, Nathan. I mean, I think it's one that we live by day by day. I mean, clearly, the, on the high pressure solution, which is, as you've mentioned, they're most exposed. I mean, customers are still paying. They take longer to pay, but they still pay. You know, they also realize that, from an upstream perspective that our business is critical and essential for when the market comes back up again. So, we have been pretty strict in, in many cases that, that we need to see the payments or we will stop shipments and then we cease to, to provide any type of, output of products either now or later in the future. So I think we're really executing a good playbook here on collections with the teams. Excellent. Thank you. Your next question comes from Nicole DeBlase from Deutsche Bank. Your line is open. Yeah, thanks. Good morning guys. Good morning Nicole. So a lot of this has been answered. We've covered a lot of ground so far, but I just wanted to ask one, into next year as we think about approaching a recovery, there's clearly a lot of moving pieces here. We've got more structural cost savings coming through, presumably. You have temporary costs probably coming back to the business. And then just kind of dovetailing all of that with typical incremental margins. I'm not sure, you know, how best you can do this this Sunday, but it would be really, you know, helpful to kind of characterize the way you see incrementals coming out, you know, on the other side of this downturn? Yeah. No, Nicole, yeah, that's great. I mean, I think, I think, you know, we typically see kind of the base, what I call the base level of incremental to be, you know, for the total business, between 35% to 40% Again, when you look at, Precision And Science, maybe higher than that, specialty vehicles, lower than that, with maybe industrial technologies about that level. Definitely, we'll see a little bit of a headwind as we see a lot of these structural activities that we're doing to come to fruition. We also see a lot of, tailwinds I'm sorry, with the tailwinds, a lot of these kind of structural costs come out, we see some of the headwinds, but as we kind of get closer to coming out here to our budgets and how we kind of work with the teams, we'll definitely find ways on how we can continue to get that incremental margin, obviously, to be at a minimum of that base or more. Your next question comes from John Walsh from Credit Suisse. Your line is open. Sorry, your next question is from Marcus Nit Meyer from UBS. Your line is open. Yes. Hi. Good morning, everybody. I just want to add one more on the Hi, hi, good morning. On synergies, I do appreciate that obviously procurement is a volume dependent, but you flagged your $10,000,000 to $20,000,000 savings realized in 2020. What do you currently assume as sort of full run rate savings out of that wave 1 of the spend, which I think is a 3rd of your overall spend? And how should we think about more medium term? So the other 2 thirds, if you assume that a compound in a normalized word get back to that 2019 level of mid start here? Yes, I think if you think about it, 10 to 20 coming in, in, in this year, as you go into 2021, assuming maybe kind of current volume levels, it will be $20,000,000 to $40,000,000 So that's maybe at least that what you can see here coming from wave 1 on an annualized level at current volumes. And that obviously, it's only covering a portion of the total spend with WAV 2 and WAV 3 coming up here in the second half of the year. Right. And is there sort of an estimate you can give us what that would have been at 2019 volume levels that's sort of 20 to 40? I mean, it will definitely be much a little bit higher than that. I mean, think at this point in time, you could say 40 to 50 could be upwards of 16. Okay, okay. And then second question on capital allocation, you flagged in the slides with what's interesting sort of bolt ons in PST. It's obviously pretty fragmented market. You probably have a share of, call it, 15% in that space. How do you think about this? How does that segment look like in a few years? I mean, it's from an aftermarket perspective, I know it's a design win and replacement business, so the aftermarket dollar per share is relatively small compared to your company average. But how do you think about this sort of it just struck me that it was flagged specifically in this life? Yes, I mean, I think this is a segment we like a lot by the way that, that these businesses are kind of so kind of niche and very, very solid market positions, and it has just a load of great the scripters such as kind of high gross margins and very specialized pumps that are kind of really solidly mission critical, in the processes where they, where they apply. We continue to see that there's a lot of potential, not only in organic, but also organically. And we're doing a lot of work on that, whether you take technologies like, the ARO and combine that with the, with the, like a, either a Haskell branded product or a Miltonroy product and then you can actually create some uniqueness, in terms of applications and then enter some new markets. And that's what a lot of the team are doing is, you know, how do we are being thoughtful and mindful on some of those vertical markets and kind of new niche adjacent areas that we want to play in and not only do that organically, but then see what other technologies from a bolt on perspective we can acquire. So, so a lot of really great work strategically going on segment to really picture these on how do we kind of double it. Thanks a lot. Good luck. Your next question comes from John Walsh from Credit Suisse. Your line is open. Hi. Good morning. Sorry about that. Had some technical difficulties earlier. I'm glad to hear everyone's doing well. Maybe just one question here. You alluded on the call to share gains on kind of both the legacy GDI and IR businesses. Wondering if you could put a little more color around what's driving those. Is it something on the product side? Is it some of the end market strategies you were doing previously around more niche markets like paper and pulp? Maybe some competitive pressures from smaller guys. Just any kind of color you could provide there would be helpful. Sure, Jonya. So, and, and, I categorize it, I mean, what I, what I said on the call is that it is on specific horsepowers. And what we saw that we liked is that this is in the U. S. Based on the 3rd party, report. And, and, and we liked because it was very, very complimentary. So if you look at the legacy Gardner Denver, we saw some share takes in the low to medium horsepower, while we saw on the Ingersoll brand, some share take on the high kind of larger horsepower compressors, will categorize that as, you know, Ingersollring has done a pretty good job on launching some new technology on the larger horsepower. Well, as you know, from a Gardner Denver we have been more focused on the medium to small compressor. And and I think, you know, this is, what I mentioned on the call that this is a great hypothesis that we had on these great merge, and combining the 2 companies because now we have great new complementary products and spectrum of technologies that, that, you know, a lot of these that I mentioned is on the oil lubricated, which is very good solid, kind of core product line. But as we spoke about during the April call, now also the oil free product line spectrum. So again, it's new technology new products and be able to, to show that uniqueness of differentiation on the products that the teams are launching. Great. I appreciate taking the question. Thank you, John. There are no further questions at time, I turn the call back over to the company. Thank you. I just want to close out by saying, thanks to everyone for your interest in Ingersoll Rand. I want to do another shout out and thank you to our employees that are, obviously doing a lot of work here, to stay health, stay safe to safety. And, at the same time, you know, provide to our customers a mission critical product that, that, that are needed, in this kind of current market condition. So Hopefully, everyone stay safe and healthy. And we'll look forward to talking to you over the next few weeks. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.