Earnings Call: Q3 2019

Oct 29, 2019

Good morning, and welcome to the Gardner Denver Third Quarter Two 2019 Earnings Conference Call. After today's presentation, there will be an Please note today's event is being recorded. I would now like to turn the conference over to Vikram Kenny, General Gordon Denver's, our Investor Relations leader. Please go ahead, sir. Thank you, and welcome to the Gardner Denver 2019 Third Quarter Earnings Call. I'm the Kenny Gardner Denver's Investor Relations leader, and with me today are Sente Reynal, Chief Executive Officer and Neil Snyder, Chief Financial Officer. Our earnings release, which was issued yesterday, and a supplemental presentation we will be referenced during the call are both available on the Investor Relations section of our website gardnerdenver.com. In addition, a replay of this morning's call will be available later today. The replay number as well as access code can be found on Slide 2 of the presentation. Before we get started, I 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 on this call. For more details the Securities And Exchange Commission, which is available on our website at gardnerdenver.com. Additional disclosure regarding forward looking statements is included on Slide 3 of the presentation. In addition, in today's remarks, we will refer to certain non GAAP financial measures. You may find a reconciliation of these measures to the most comparable measure 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. Turning to Slide 4, on today's call, we will review our third quarter highlights and 2019 guidance as well as an update on the pending transaction with Ingersoll Rand. 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 Vic, and good morning to everyone. Turning to Slide 5, Let me start with a brief overview of the 3rd quarter. Overall, Q3 was a good example of the team's ability to utilize the principles of the Gardner Denver execution Excellence process or GDX in order to be nimble in the phase of a softening economic environment. Despite continuing headwinds in the upstream energy market and a slowdown in core industrial markets, particularly toward the end of Q3, we delivered solid results. In addition, the team pivoted to focusing on items within their control, resulting in solid working capital performance and free cash flow generation as well as the execution Let me provide a bit more color on the financial highlights in Q3. From a total company perspective, FX adjusted revenue and orders declines of 11% 8%, respectively, were heavily impacted by the known softness in the upstream energy business as well as strong prior year comps across the majority of our businesses. As you will remember, Q3 of last year was our strongest quarter in the option business with $186,000,000 of revenue, including our strongest quarter of original equipment pump shipments. As we have indicated, the expected demand environment in upstream to be sluggish in Q3, including minimal original equipment pump shipments, and that was largely what we saw. Encouragingly, the remainder of the business including industrials, Mid And Downstream Energy And Medical, so collectively FX adjusted revenue growth of 1% and orders growth of 3% despite the tough macro environment. The company delivered adjusted diluted earnings per share of $0.41, and adjusted EBITDA of $142,000,000 with an overall margin of 23.8%. Team continues to do a good job navigating a dynamically changing environment as shown by the 30 basis point improvement in margin versus the 2nd quarter, despite $32,000,000 less revenue. This improvement is due in part to continue execution on operational initiatives like innovative value and restructuring to offset market headwinds. I am particularly pleased with the rapid action of the teams have taken to identify an incremental restructuring opportunity across the total business to prudently control costs in light of market conditions. The action was executed in September and is expected to deliver $10,000,000 in annualized savings with $2,000,000 expected to be realized in 2019. From a balance sheet perspective, free cash flow in the quarter was $105,000,000. Free cash flow conversion to reported net income was 2 54%, as the team continues to make strong progress on working capital improvements including over $50,000,000 of cash generation within the quarter from AP, AR and inventory. The progress in inventory is particularly highlighted as we have historically noted this as an area for improvement. Inventory improved over $10,000,000 from prior year levels and approximately $40,000,000 when excluding the impact of upstream energy. By leveraging GDX to install inventory growth we believe there is considerable opportunity ahead of us. The strong cash performance led to net debt leverage of one 0.9 times. At quarter end, an improvement of 0.1 times as compared to Q2. Looking ahead, due to expectations sequential declines in upstream energy as well as the continued softening in the overall market, which we expect to have impact on both the base business as well as the timing of larger project shipments, we are updating full year guidance to a range of $550,000,000 to $570,000,000. Turning to Slide 6 before we get into the specific components of the revised guidance, I think it is important to ground everyone on the expected year over year performance of the company. At the midpoint of our revised 2019 guidance, we are expecting adjusted EBITDA to decline by $122,000,000 versus prior year. The performance in our industrials, Mid And downstream Energy And Medical Businesses is expected to be quite solid. Despite persistent market headwinds for much of the year, these businesses are expected to deliver FX adjusted year over year revenue growth of mid single digits and EBITDA improvement of nearly $30,000,000 upstream energy for nearly all of the expected year over year decline as market conditions, coupled with lower spending levels from customers particularly on larger CapEx items like original equipment pumps is writing approximately $110,000,000 of expected year over year declines. Important to highlight that nearly 85 percent of our 2019 revenues in the upstream business are expected come from high quality aftermarket parts and services, which carry a high margin profile and tend to be comparatively less lumpy than original equipment. Also, at current levels, upstream energy is expected to be less than 10% of the revenue of the combined Gardner Denver and Ingersoll Rand Industrial's business, which should mitigate this business's impact on profitability going forward. Finally, the balance of the year over year movement is driven by higher corporate costs due to the drivers we outlined at the beginning of the year and increased FX headwinds due to continued weakening of the euro and British pound. When I stepped back and I said the performance of the company, I am quite pleased with how our industrials made on downstream and medical businesses are performing. And despite the year over year EBITDA decline in upstream, the team continues to take proactive steps to right size the cost structure while at the same time, deliver further on innovation, particularly in areas like consumables to expand our growing base of aftermarket parts pricing total year guidance for adjusted from $610,000,000 to $630,000,000. The provision is largely attributable to 3 main areas. First is Ofgem Energy. Our Q3 performance was largely in line with expectations. Feedback from our customers lead us to believe that completions activity may be lower than in fourth quarter of last year, leading to a larger than usual sequential decline. In addition, our customers are lowering their capital investments, and we do expect an extended holiday season this year. In total, we're expecting an approximately 40% sequential decline from Q3 to 2nd is effects as we have seen continued currency headwinds, particularly from the euro and British pound. Since the prior guidance, FX is now contributing approximately 3,000,000 to 4,000,000 of anticipated incremental headwinds to adjusted EBITDA in the 4th quarter alone. 3rd is that we're not expecting the normal Q4 seasonal uplift that we typically see in industrials and downstream due to the continued softening of the market sequentially. In addition, we expect that several large projects will be deferred as we saw these already happening in September. Particularly in our runtech and downstream businesses. The positive news is that these projects are not being canceled. And they're just more doubt as customers continue to manage their timelines. In total, we're expecting Gardner Denver revenue growth, a excluding FX to be down mid single digits and down high single digits when including the impact of FX. Also, we're expecting year end net debt leverage to be approximately 2 times. And in addition, we expect a slight improvement in the tax rate to approximately 20% driven largely by geographic profit mix. From a cash flow perspective, we continue to target greater than 100 percent free cash flow to reported net income conversion. We are revising our CapEx expectations to the bottom end of our previous range, as we continue to be prudent due to market conditions as well as the Ingersoll Rand integration in order not to duplicate investments. However, we will continue to fund high return investments, particularly those focused on innovation and growth. And in total, we're expecting to deliver approximately $275,000,000 of free cash flow for the total year. Moving to Slide 8, I will provide more color on operating performance of our segments. I will start with Industrial segment. Where we saw positive FX adjusted orders and revenue performance, although below our original expectations. Industrial segment 3rd quarter order intake was $313,000,000, which was up 3% to prior year, excluding FX. Revenues in the quarter were $360,000,000, up 1% excluding FX. From a geographic perspective, the Americas saw positive FX adjusted orders and revenue growth. While Americas growth was below our expectations, It is worth noting that industry reports indicate that we have outperformed the market growth rates for several quarters. And were coming off some very large comps, including Q3 of prior year, where revenue growth was in excess of 10%. In addition, the same third party industry reports also show that in the oil lubricated rotary screw compressor line, which is a core product offering for the US market, our performance for both Q3 and total year is above the industry. In terms of both units and dollars. So we feel pretty good about where we stand from a competitive perspective on our relative performance. In Europe, despite the continued tough macro environment, both orders and revenue grew low single digits. Asia Pacific saw negative performance driven mainly by project delays in our runtech business. These projects are related to serve large turbo vacuum installations that are awaiting final commissioning at the customer site, and which we believe will defer into 2020. In terms of the product lines, we up low single digits on an FX adjusted basis. Backlog continued to see slight declines, driven particularly in Western European markets and China, where the business is more aligned with industrial process oriented OEMs. The market continues to soften across most major geographies, we are firm believers that continued product innovation will lead to a differentiated growth. We're very encouraged by the momentum we are seeing in our oil free product line. And recently installed compressor system at a food processing plant in the U. S, including our Altima oil free compressor equipped with the ICON IoT platform is delivering nearly 10% to 15% energy savings in both electricity and natural gas consumption. And these savings are in excess of $300,000 on an annual basis at the customer location. Moving to adjusted EBITDA. Industrial delivered $70,000,000 in the quarter. Is flat excluding FX. 3rd quarter adjusted EBITDA margin was 22.2%, down 30 basis points versus prior year. The year over year margin decline was largely attributable to the weakness in Asia Pacific as well as the large project deferrals and this was the reason for higher decremental margins unusual. Despite the overall segment margin decline, Americas and Europe combined margin expansion was positive benefiting from initiatives like pricing, aftermarket, and I2V to offset known headwinds such as tariffs. Looking ahead to Q4, we have decremental margins to be better than what we saw in the third quarter, due in large part to the cost actions we have taken. Moving next to the Energy segment on Slide 9, the Energy segment's 3rd quarter order intake was $205,000,000, down 20%, excluding FX, driven largely by the expected downturn in upstream energy. Partially offset by a low $9,000,000, down 29%, excluding FX, with upstream revenues down 46% and mid and downstream revenues collectively down 1%, excluding FX. Addressing the components of energy, let me first start with upstream. Orders were down 37% and revenue was down 46%, both excluding FX. And very much in line with the expectations at approximately $100,000,000 each. From an orders perspective, we saw minimal orders for original equipment Frank pumps, which was no surprising given market capacity utilization levels and customers stacking fleets. We were pleased that aftermarket increased 10% sequentially as we continue to see good momentum on many of our parts and services while pricing levels remain relatively flat. In terms of revenue, it was a very similar story as over 90% of our revenue composition came from aftermarket parts and services. This high concentration of revenue on healthy margin aftermarket component as well as prudent cost control allowed our upstream business to deliver adjusted EBITDA margins in excess of the total energy segment average, further demonstrating the financial resiliency of the business. In addition, the incremental margins in the quarter were below 45%, which was improved versus the level seen through the first half of the year, a much lower than the 50% plus incremental fee in many quarters when the business was ramping up. As we look ahead to the fourth quarter, we expect to see continual improvement on the decremental margins for the upstream business due to continued productivity initiatives. One of the many areas we have focused on in terms of ongoing productivity in the business is continued improvement in our manufacturing processes. On the bottom of the slide, you will see that we recently hit a landmark in our consumables manufacturing plant as we crossed over 1,000,000 parts produced for valves and seats in the last 12 months. This has been largely attributable to investments instead of the R machine tools and automation combined with lean manufacturing principles, which allows for improved performance. From a market outlook perspective, we continue to see a challenging environment heading into the fourth quarter. We expect that lower completions activity and customer capital spending reductions will drive negative sequential growth in the 4th quarter. On the mid and downstream side, orders were collectively up 10% and revenue was down 1% both excluding FX. We're encouraged by the year over year growth in orders, which is largely helping to fill the funnel for 2020 and the overall project funnel remains very active. However, much like what we saw in the 2nd quarter, we have seen the project quote to order cycle extending. From a revenue perspective, we did have a few large projects in Asia Pacific defer from Q3 partially into Q4 and the balance into the 2020. We're expecting a similar dynamic to happen in the fourth quarter. The positive news again here is that these projects are now being canceled and are just moved out. The Energy segment delivered adjusted EBITDA of $55,000,000 in the 3rd quarter, which was down 41% to prior year, excluding FX. As a percentage of revenue, 3rd quarter adjusted EBITDA was 26.6%, down 5.20 basis points from prior year due to the decline in upstream energy, while mid and downstream collectively margin performance was relatively stable. Moving next to Medical segment on Slide 10, order intake was $66,000,000, down 8% excluding FX. The orders performance came on top of very strong prior year comps in excess of 20% growth. In addition, the decline was due almost entirely to the timing of a Backlog remains healthy and in line with levels we have seen through much of 2018 early parts of 2019. Revenues in the quarter were $72,000,000, up 5% excluding FX, despite strong prior year comps of 19% growth, excluding FX, The business continues to execute well on innovation and design wins. One such example is highlighted on the bottom of the slide. Our team recently won and delivered an order for an automated liquid handling solution for a chemical laboratory in Western Europe. The system is comprised of multiple technologies from our Medical segment, including robotic liquid handling solutions, as well as syringe pumps to deliver a more efficient reliable solution for the customer. This example highlights an area that I am very excited about as we are now able to bundle multiple technologies from the portfolio to meet customer needs. The ability to bundle technologies and provide innovative solutions for our customer has been an explicit component of our M and A strategy as we have diversified into liquid pumps and liquid handling solutions. And I am very encouraged by the growth opportunities that lie ahead of us. Medical adjusted EBITDA performance for the quarter was $22,000,000, up 12% excluding FX. Margins were 31 percent, up 190 basis points versus prior year and marked the 5th consecutive quarter of triple digit margin expansion due largely to strong flow through from volume increases and continued operational efficiencies driven by execution through the use of GDX. Turning to Slide 11, let me spend a few minutes looking ahead to our exciting future. Our simple 4 point strategy provides a powerful foundation underpinned by GDX, which allows for nimble execution, even in changing economic conditions. As I have mentioned previously, talent is at the center of everything we do and having the best team is core to the strategy. I have gotten the chance to spend time with the Ingersoll Rand Industrial team over the past few months, and I see a lot of similarities in the cultures between the two companies. Which gives me confidence in our integration efforts. In addition, we're making great steps on completing the leadership team for the combined company. Comprised of members from both organizations. As you probably saw a few weeks ago, we announced the transition of the CFO role. Emily Weber will be joining Gardner Denver in December and comes to us from Fortif Corporation, where she only serve as the Chief Accounting Officer. Emily has an extremely strong background in Finance And Accounting, and her performance driven mindset and operational focus will make her a perfect fit for Gardner Denver and the future combined company with the Ingersoll Run Industrial segments. Emily has been involved in several large transformational transactions during her time with both Fortive and Danaher and will make her an ideal candidate to lead both the finance and IT functions of the combined organization. I look forward to having Emily as my partner as we move ahead. I will also like to personally thank Neil for his leadership and partnership over the last several years. Neil has been a key driver in building a deployment of strategy and making Gardner Denver the performance driven company that it is today. And I wish him the best in his future endeavors. Turning to Slide 12, another core component of the strategy is ongoing margin expansion. We have stated that we expect to deliver $250,000,000 in cost synergies by the end of year 3 after the close of the deal and our confidence in achieving that target remains unchanged. On our last earnings call, we provided a framework on how with work streams, building charters, blueprints and work plans to define the future state organization and how we will deliver synergies across the enterprise starting on day 1. The key takeaway here is that we are not waiting until the deal closure. To start building out As we have previously mentioned, the largest area of saving expectation from the combined company is in operations and supply chain, with procurement savings comprising a large piece of that equation. Soon after the deal signing back in April, both Gardner Denver and Ingersoll Rand industrials, provider provided their full repository of both direct and indirect spend to a 3rd party advisory group that we referred to as Clinting. This clean team is able to analyze the data on behalf of both companies and create what we refer to as a local room for RSUs that are ready to go starting on day 1. Each one of these lockers contains an specific commodity RFQ that is tied to a quantified savings opportunity along with the timeline for execution. At this time, the Clean team has analyzed approximately 90% of the $2,000,000,000 plus of combined direct material spend and 60% of the indirect spend. Overall, the funnel is progressing very, very well. Similarly, the remainder of their work streams are utilized in the principles of GDX and the toolkit of growth rooms to manage the integration line of the transaction. As a reminder, since the deal announcement back in April, we have already completed the U. S antitrust process and the initial submissions for all international regulatory filings. As we look ahead, we expect all of the required SEC filings to occur in the 4th and 1st quarters with a shareholder vote and other final steps are occurring in Q1 of 2020. This should continue to push us right on track the anticipated early 2020 deal closure timeline. In conclusion, while we continue to navigate a challenging market environment, I am very pleased with the proactive steps the teams are taking to manage those areas within their control. GDS remains at the center of how we operate as a company, and we're using the toolkit to drive targeted growth initiatives, while at the same time, prudently managing costs and cash. Looking ahead to 2020, while we will not be providing explicit guidance at this time, we do expect a slow growth environment and we'll continue to manage the business accordingly. In addition, I continue to be encouraged by the progress the teams are making on the closure of the pending Ingersoll Brand transaction. As the long term prospects for the combined company, and the value creation opportunity both remain very positive and more exciting than ever. With that, I will turn the call over to the operator and open it for Q And A. Yes, thank you. And the first question comes from Andrew Kaplowitz with Citi. Vicente, how would you compare the current upstream downturn to the downturn in 2015 2016? You obviously have a much more robust business given your consumables exposure, you know, serviceability, improve relationships with large customers, but it seems you've still been a bit surprised about a decline even within in your aftermarket business. So how do you get confidence that the upstream business is nearing a bottom at this point? And could you give us any thoughts and how to think about the business in 2020. Can you sustain the order rates that you have spoken about in the past of $30,000,000 or so a month in aftermarket related orders? Yes. No, Adi, thanks. We, the big difference is exactly, as you said, in a sense that today, when you look at the business, it is most of it aftermarket and consumables. As we said, revenue is roughly 90% of it are aftermarket. And that is kind of comprised of the line of consumables that we did not had that type of consumable line back at the last down cycle. So I think that is definitely providing us a much better margin profile as well as a much better revenue profile as we have seen in this down cycle. When you look at a year over year comparison of the upstream business, the biggest change here has been the original equipment pumps. That, you could argue is roughly anywhere between $100,000,000 to $150,000,000 less revenue on a year over year basis. So, and we said that that was definitely not going to occur, into 2019. It is proven to be, exactly correct. In terms of your question, what we have seen and many of you have read to us well is that the past weeks, there have been plenty of announcements, from pressure pumpers, and many of them announcing that they're cutting up and pairing all capacity. Our estimates of public and private companies is that approximately 2,000,000 of horsepower is being impaired and are retired. And I think that's good news for the industry as this helps bring supply and demand back into the balance. In addition, you have several other customers that are stacking up fleets and cannibalizing equipment. And what we don't expect this trend to change in the fourth quarter I mean, we know this is unsustainable over the short to medium term as equipment does need to get maintained and eventually replaced. So we continue to keep an eye close to this. We think it would definitely provide some, perhaps pent up demand. And as we are not providing 2020 guidance at this time, it is worth noting that, a couple of the major pressure pumping companies are expecting Q1 twenty twenty activity to tick up from Q4 twenty nineteen levels and others are saying the rebound may happen at some point in time next year. But again, it's too early to tell. So we will see as we exit 2019, and we have more conversations with our customers on their 2020 spend and CapEx expectations. Needless to say, I mean, I think, as we said in the earning, on the remarks, we continue to be excited in the sense that this business in the third quarter, deliver above EBITDA margin profile than the energy. And even with these lower, revenue still in the 4th quarter, we expect it to be above 20% EBITDA margin business. Vicente, thanks for that. And then can you talk about the cadence in the quarter for the rest of your businesses? You mentioned you're expected quarter end ramp up in industrial and mid end downstream, especially in the U. S. Didn't happen and the conditions actually softened for you as the quarter went on. But some of your industrial peers have seen a bit of improvement toward the end of the quarter in Europe, for example, or here in October. So if you continue to see deferrals of orders or has there been any stabilization in regional end markets? Yes. What we have seen here in the month of October is, I would say stable compared to the exit rate that we saw in the third quarter. And I think October is largely in line with expectations. So, and as we kind of think about it too as well, Andy, in the third quarter, as we expected to be mid single digit, within low single digit ex FX. And the drivers in that case where Americas as you, as you pointed out, and we said on the remarks, due to the lack of the ramp. But also keep in mind that we also mentioned that, some of the change that we're doing in the guidance and what we saw in the third quarter, it had to do with some project push outs. And these are kind of meaningful large projects that got pushed out to Q4 and 2020. Thanks, Sandy. Thank you. And the next question comes from Mike Halloran with Baird. Hey, morning, everyone. Good morning, Mike. So just kind of continuing on the train of thought Vicente, are the end markets you're serving right now, growing on an organic basis. And if the sequential trend continues, from what you saw in the third quarter through October here, does that imply the end markets themselves can grow in 2020. Probably some greater challenges in the front half of twenty twenty versus the back half, but just trying to understand the cadence in the underlying end markets as you look this year and then into next year a little bit. Yes. So, it's a couple of things there. Mike, you know, 1st of all, to answer your question, yes, that's kind of our expectation. And if you, what we said also is that still core oil lubricated compression kind of the core business is still seeing growth, low single digit growth. And that is across most of the kind of core markets that we have, including the U. S. Where we continue to see even in the third quarter, some pretty good growth on core Oulu. And this is on top of some pretty tough comps from 2018. I think when you look at our data points, I think it's better to think about it more from a kind of a 2 year period in the sense that we're still growing, but we're growing on top of some very comps and to re re kind of regrown everyone is that, we're still going to see a year over year growth in industrial market. So yes, I mean, that's the way you frame that up, it's correct. And then when you're thinking about the restructuring side of things, obviously, it's an incremental restructuring announced this quarter. You've had other actions going in place this year. Could you just help provide a cumulative sense for what kind of actions you've taken this year on a whole what that means in terms of savings implied for 2019? And then what the run rate of savings on top of kind of call it the incremental run rate for savings going into next year would be from all the actions you've done? Sure. So so far, into the year, we spent approximately, I think, $60,000,000 in restructuring actions. Early in 2019, the that we took were largely in the upstream business. And that's why you're seeing that the decremental margins have improved sequentially, even though the revenue sequentially has, declined kind of accelerated. So again, it proves that the actions we did in the upstream side are really impacting the business and the team continues to work on a few more few more actions here in the fourth quarter, particularly on productivity improvements. And the action that, that we just recently took of roughly $10,000,000 annualized savings, we expect that $2,000,000 of that will be in 2019. Benefit of that in the P and L and roughly $8,000,000 of carryover into 2020. Appreciate it. Thank you. Thank you, Mike. Thank you. And the next question comes from Nathan Jones with Stifel. Good morning, everyone. Good morning, Nathan. Vicente, you talked about the industrial market ex FX or industrial business being up. Are low single digits. I think it's probably down maybe 2% or 3% on an organic basis, which is down from the mid single digit in the first half. Maybe could you talk a little bit more about the submarkets in there where you've seen those weakening? I think you said the core oil compressor market's still up low single digits, where are the parts of the market that you're seeing the softness? Sure, Nathan. And let me just kind of, reframe you, the organic growth has been kind of less than negative 1%. So down about 1% organic And yes, the markets have slowed down. What, in the third quarter, we saw low single digit growth in compressors and blowers, XFX, which we're very quite pleased with this performance. And this is actually good performance as third party reports in the U. S. Support were outperforming the market in the third quarter and year to date, for oil lubricated compressor. Now the vacuum, industrial vacuum, we have seen that is kind of more correlated with OEMs. That has continued to be softer than the other 2 kind of core product lines. Okay, that's helpful. And I think it's pretty clear that you are outperforming the submarkets. Interesting, a discussion there about the the pre acquisition work you're doing on IR, I think typically you would see some of these cost synergies be more year 2 weighted or year 3 weighted. Does the work you're doing here maybe accelerate the expectation of some of that $50,000,000 of cost savings. And is there any directional kind of guidance you could give us on how you think those will be realized? Yes, Nathan, potentially, as, I mean, we're still doing obviously the integration planning. And as we get to close, we will have a very ability on how much we could, we could potentially accelerate based on macroeconomic environment But the phasing that we're thinking right now is 10% to 15% realized and visible in the P and L in year 1, with a ramp up from there with the actions taken by end of year 3 to see the savings in the P and L. Thank you Nathan. Thank you. And the next question comes from Julian Mitchell with Barclays. Morning. Good morning. And thanks, Neil, for all the help and wish you all the best in future. Maybe just the first question around the mid and downstream energy piece. I think it looks as if that's implied in Q4 be down double digits, just given you're saying the year is sort of flattish and you had a very, very strong Q1. Just wanted to check if that's right. And if so, what's really driving that big downturn in the market? Is there any particular geographic big presence there or type of customer, which is driving that shortfall. And whether you think that that downturn in the mid and downstream markets in particular could last through some time through next year as well? Sure, Nathan. And, so we're seeing Midland Downstream actually closer to flattish, in the fourth quarter. It's going to be up sequentially from our Q3. And if you remember, we talked a lot about some pretty large projects that are scheduled in the fourth quarter. Now in our new guidance, we're assuming some of them still, kind of facing to 2020, as we saw some push outs from Q3 to Q4. We assume, and as we went through the team with the teams through project by project, we assigned a probability based on what current market conditions are saying on some projects that will then get pushed to 2020. But, we expect Mida Down to be flat ish in the fourth quarter. You know, the good thing, I guess, on the, on the medium down, as you saw, We did low, we did double digit order growth in the third quarter. We continue to build the funnel for 2020. And in terms of the regional, aspect, similar to what we saw in industrials, Asia Pacific tends to be the region where we're seeing most of the push outs here in the fourth quarter into 2020 And this is, the positive news here is that these projects are just getting deferred. They're not getting canceled. In many of these projects, the customer, prepays already a certain amount of cash. And, and I think when they get commission and install, that's when they need to do the last payment. And in some cases, we think that some customers are just managing their cash. Thank you very much. My second question, just looking at the balance sheet leverage So initially, I think you'd said that at the time of the IR deal close, you'd be about 2.3x net debt EBITDA ex synergies. That was when you were thinking year end this year would be about one 0.6 times at GDI. GDI itself is now up to 2 levered at year end. So just wondered what your view or how your view has changed of the pro form a leverage as of the deal close date early next year? Yes, I think, Nathan, as we kind of close, get closer, will, we'll be able to see what, what we will see. I mean, I think, mid-2s is still probably within the range. And, but we're still waiting to get a lot of the carve out financials and everything else to kind of have a better perspective and a better view on, on what that might be. Yes, thanks. Good morning, guys. Good morning, Nicole. So first question just around the cost actions that you're taking. You talked about how a lot of this is obviously happening within upstream energy. But I think you also mentioned that you expect decremental margins within industrials to improve in the fourth quarter. So just curious if there's a sense of how much restructuring payback goes into industrials relative to upstream energy and what gives you confidence around improvement in decremental margins within industrials? Sure, Nicole. So the comment I made about the restructuring of the upstream, that was really more related towards the beginning of the year, the $10,000,000 of annualized savings that we just executed here in the third quarter, you can actually spread it roughly same as kind of a percentage of revenue. So you can think about that roughly 50% of that will be in industrials. Even when you think about the $2,000,000 that will be generated in 2019 of savings from that restructuring that we did in the third quarter, about 50% of that kind of coming into the industrials. So I think that, that in combination with the impact of price, I2B and some of the cost actions, that continue to accelerate through the year, that is what will give us the confidence of having a better decremental as we go into the fourth quarter for industrials. Okay. Got it. And then just maybe a little bit more on, the drivers of the midstream and downstream order strength that you called out. I think the general perception is that midstream CapEx is going to be pretty weak into 2020. So just curious where that strength is actually coming from. I think, what we have seen, the strength, is really coming from, when we're able to combine multiple technologies to offer kind of unique solutions. And in some cases, we're uniquely positioned in the sense that we have leaker green compressor with our gyro business, with liquid rain, vacuums with the NASH business. And when you combine those 2, it really offers some pretty unique solutions to customers to ensure that they see productivity gains in the, in their factories and processes. So that, that is really what we're seen most of, most of the good momentum coming through is really for from highly engineered solutions that combine multiple technologies. Got it. Thanks. I'll pass it on. Thank you, Nicole. Thank you. And the next question comes from Joe Ritchie with Goldman Sachs. Thanks. Good morning, guys. Good morning, gentlemen. And so Vicente, maybe just touching on upstream for a second, if I heard you correctly, the 4 run rate is going to be roughly $60,000,000. I know we've been kind of holding this $100,000,000 line on a quarterly basis. Throughout the year. I guess, how do you think about 60 improving as we into 2020, or are we going to be at this kind of $60,000,000 run rate for a few quarters? Yes, Joe, we don't believe that, that this is a new run rate Keep in mind that Q4 is being negatively impacted by customers taking fleets, cannibalization, lower activity level, and what we expect to be an elongated holiday season. And this is why we're expecting roughly the $60,000,000 revenue in the fourth quarter with almost all of it being aftermarket. And, while it's always difficult to call a trough or bottom in the oil and gas market, we do believe that the levels you will see in the fourth quarter are levels that we will consider to be pretty close to the trough. And, and, you know, and so at least that's kind of the way we're thinking about it. Okay. And then maybe if I kind of think about a longer term question, Vicente, and you think about the upstream business, And some of the dynamics that are occurring in the space today, where you have E and Ps being a lot more disciplined from a capital perspective, you have reserve lending drying up I'm just trying to understand like how do you guys think about this business then? What's the new normal for this business? Can we ever get back to prior peaks in this business or should we be thinking about this business from a normalized perspective as being somewhere lower than where you guys have peaked before? No, I think, you know, so I mean, I, you know, we still see continued opportunity for multiple of multiple levers of growth. Side, basically almost no, original equipment pumps. I mean, the pumps are still working out pretty hard in the, in the field. So that cycle is still is yet to come. As we were finishing up 2018, many people thought that we were gonna see an OE replacement cycle that obviously has not come through in 2019. That still needs to happen. And as customers are stacking of fleets, cannibalizing fleets, and in many cases, also impairing or pairing all capacity of fleets, it is expected that that original equipment replacement will come. The second lever for growth is that this year, we're seeing basically a 0 drill business right now from the drill pumps or consumables from drill pumps. So that is again another one that could expect it to be, coming up back in the future. And the 3rd lever is, our team does not stop innovation even in this year. So we're pretty excited with a few, new innovations that we're working with the, with basically taking our pump and really utilizing that for other non oil and gas applications. And I think it's going to be pretty exciting that, what the team is doing a lot of strategic work here on how to diversify it and take the same technology of high pressure reciprocating pump and apply that to other processes that, that we feel could create a great benefit by having this type of technology. Okay. Thanks guys. Thank you, Joe. Thank you. And the next question comes from Josh Pokrzywinski with Morgan Stanley. Hi, good morning guys. Hey, Josh. Just a question on the industrial business. I know we've covered a lot of ground kind of on upstream and I guess projects in general. But thinking about the combined compressor offering with yourselves and Ingersoll Rand, I think organically orders in that business were down a little bit too. Do you think about those combined businesses as being on any kind of offsetting cycle. Obviously, they're both weak right now or weaker, but are they on the same cyclicality where we should expect more of the same when they get combined? Or are there other niche markets in there where maybe 1+1 kind of flattens out a little bit in terms of kind of that cyclical amplitude? No, great, great question, Josh. When you think about it, and obviously, as we sit here, we'll we'll, we'll, we'll listen to the, Ingersoll Rand, earnings in 2 for more detail. Well, you could actually look it in there from, where they talked a lot about good booking momentum on the large compressors. That, that is a technology that at Gardner Denver, we don't That is a technology that, that is complimentary to what we have, that, that we know in the combined company, we can really leverage all the technology. So if we think that, that these kind of large, gas compressors combined with the commentary that we still made about oil lubricated core compression technology still doing well for us. We get excited, that the combination continues to be within what we call out the thesis to be which is complementary technology that gives us better lever and better leverage for long term value creation. There's also kind of also some niche products around vacuums and specialty ponds. I mean, obviously, you know, if you go beyond the pump, the compressors, you know, what, what Ingersoll Rand has done with PFS acquisition, it really creates a very highly complementary technology for some of our other spaces, like, like the medical segment. So, yeah, I mean, I think there could be a possible combination here where the combination of technologies provides, better or kind of call it less cyclicality as we go forward. Great. That's helpful. And then just following up on the earlier question about kind of day one leverage, maybe being a little bit higher on an EBITDA basis, just as a function of kind of the recent step down on business. Does that make you rethink at all, kind of some of the portfolio optionality on the combined organization, maybe some non core businesses that could be more closely examined. I guess the point would be to accelerate that journey into kind of compression M and A and to the extent the delevering slows that down. Looking at the portfolio may be an accelerant there? Sure, Josh. I would say, it doesn't change our thinking dramatically. We still like the portfolio. I mean, having said that, we love the portfolio of finality that we have. We're still going to be very prudent. And, and I think this is the exciting portion is that we're combining 2 great companies. We're going to be very focused on the synergy creation on the $250,000,000. And from there, we have just incremental optionality to do different things. Our next question comes from John Walsh with Credit Suisse. Just wanted to kind of put a couple of answers together here. Obviously, no, you don't want to talk about 2020 guidance yet, but I want to make sure it sounds like in a response to an earlier question, energy absolute dollars is closer to trough than not. You have restructuring savings that'll carry over into next year. I think you said you expect your end markets at least to grow or at least that's the best expectation today. I mean, should we assume that EBITDA growth happens next year? Yes, John, I think it's, we're definitely expecting that it's going to be a slow growth environment. Into 2020. We're clearly really focused on our prudency around cost restructuring. We're going to see the first half of the year have some tough comps. I mean, as you have seen here in the first half of the year, We were doing really well on basically all the cylinders, upstream, midstream, medical and industrial. So there will be some tough in the first half of the year. You know, and in terms of, of the growth of the EBITDA, I mean, we that, that's that's what we always want to be able to achieve. And that's what we're driving our teams. We're, we're basically saying that a slow growth is here, but we need to continue to do margin expansion. And we'll, it will continue to execute our proven playbook on margin expansion with I2B sourcing, restructuring and, and price and keep the, keep very focused on the items that are within our control. Okay. Thank you for that. And then, I guess, you talked a little earlier about price cost, but kind of what are your expectations there on kind of a go forward? Are we, how green are we and how do you expect that to kind of trend as input costs arguably can come down? Sure. If I take maybe the last quarter here in terms of, the proof point, in industrial, price cost, is still is positive. I mean, we saw about 2% price improvement year over year, which, offset the impact of tariffs and other costs. And also offset, what we saw in the third quarter, the offset here was really due to, to runtech, on some kind of these large project deferrals. So we expect that, pricing industrials continues to be in that kind of range 1% to 2% we have always said that, we, we like to have better, the quality of earnings are obviously more important for us. We compete don't compete on price. We compete on technology and innovation, and that will lead us to command better pricing points. All right. Thank you. Thank you, John. Thank you. And the next question comes from Igor Levy of BTIG. Hey guys. Hey, good morning. On the U. S. Frac market, how long can the industry potentially go on cannibalizing fleets before they run out. Have you done that kind of analysis or spoken with customers on that topic? No, not necessarily mean, but, you can imagine that we do the same thing that, that many other people do. I mean, we actually, many of our sales guys, when they when they drive to customer location, they see the fleets that are parked in the great yards or in the yards. And they do see, I mean, they do kind of inventory around, the number of fluid ends that are not on the pumps or the pump or the trucks that don't have any pumps. So we do that on a kind of weekly basis with our sales teams going to customers. I prefer not to quantify it. I mean, we quantified our sales internally, but don't express those numbers, but it is happening, and it is real. And it is similar to what, I don't think it's to the point the last downturn, but it is it's kind of getting there. Great. And then given the the weakness we're seeing in upstream energy, could this open up opportunity for consolidation? I mean, I know you're looking to reduce upstream exposure, not the other way around, but I wonder if there's some opportunities that could be too good to pass up. You just never know. I mean, I, potentially, I mean, I, you know, we do hear that that there could be a lot of consolidation from our customer base. We actually like that, because if you think about it, when we look at our platinum accounts, our key relationship customers. Those are Tier 1 and Tier 2 really pressure pumper customers that, that they know and really on the and total cost of ownership. And, and we're very uniquely positioned to be able to provide that, whereas other independent sellers for, let's say, single fluid end or single parts, they just cannot provide a totally question that we can side. So consolidation happening, on the customer base, we hear about it. We have seen some of it, right? With Keith and CJ. And hopefully there's more to come on that. Thank you. Thank you. And at this time, I would like to return the floor to management for any closing comments. You. Thank you, everyone, for your interest in Gardner Denver. I will say also quite important. I just want to thank you, thank all of our employees at Gardner Denver for the continue execution, even in these tough macroeconomic environments. And, we're very pleased with how our teams continue to progress through the integration planning. And we're very excited to continue to work with the Ingersoll Rand Industrial segment team. And we look forward to, get into a close and continue to execute here through the end of the year, but at the same time, in parallel, continue to work on the integration planning. So with that, Thanks everyone and look forward to seeing many of you over the next few weeks or months. Thank you. The conference has now concluded. You for attending today's presentation. You may now disconnect your lines.