Good morning. My name is Kim, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ingersoll Rand Announces Plans to Acquire Precision Flow Systems Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. I would now like to turn the call over to Zach Nagel, Vice President of Investor Relations. Please go ahead, sir.
Good morning, and thank you for joining us on short notice to discuss the announcement we made this morning regarding our intent to acquire Precision Flow Systems. This call is being webcast at thegersollrand.com, where you'll find the accompanying presentation and press release. We are also recording and archiving this call on our website. Please go to Slide 2. Statements made in today's call that are not historical facts are considered forward looking statements and are made pursuant to the Safe Harbor provisions of federal securities law.
Please see our SEC filings for a description of some of the factors that may cause our actual results to differ materially from our anticipated results. This presentation also includes non GAAP measures, which are outlined in our news release this morning. Joining me on today's call are Mike Lamach, Chairman and CEO and Sue Carter, Senior Vice President and CFO. Also participating on today's call during the question and answer session are Dave O'Gnarri, who is the Executive Vice President of our Climate and Industrial segments and Paul Camuti, who is the Senior Vice President of Innovation and our Chief Technology Officer. With that, please go to Slide 3, and I'll turn the call over to Mike.
Mike?
Great. Thanks, Zach. Thanks to everyone for joining us on short notice for today's call. Please go to Slide 3. And while the focus on the call today is about the acquisition we're announcing, we've always good to give strategic context for how we think about creating value for our shareholders.
So this slide represents the consistent strategy that we've employed successfully for many years now. The announcement for pending acquisition of Precision Flow Systems aligns well with our dynamic capital allocation strategy, which is to deploy capital where it earns the best returns. For additional clarity on today's announcement, Sundyne and the administrative costs and personnel associated with Accudyne remained under private equity ownership. Turning to slide 4. Today's announcement marks a continuation of our portfolio strategy, which is focused on our Climate businesses, our Compressant Technologies business and our Fluid Management business, all of which share common technology and capabilities.
Precision Flow Systems or PFS is a global leader in providing mission critical solutions for water infrastructure, precision metering and chemical dosing for agriculture, industrial markets, pharmaceuticals, food and beverage and energy in addition to numerous others served end markets. They're known for their deep industry knowledge, their technically differentiated application specific solutions and their strong reputation for quality, reliability and efficiency, attributes which are shared by Ingersoll Rand's product offerings across both our segments and all of our business units. PFS enables us to accelerate our capabilities, enhance our product portfolio diversity and achieve scale in our fluid management business. Combined, we'll be well positioned as a leading provider for complex mission critical pump and flow control management technologies across highly diverse and attractive end markets and verticals. Defining characteristics of our combined business will be strong brand recognition, a deep patent portfolio, an entrenched customer base, proprietary aftermarket offerings and highly engineered tightly differentiated applications of solutions for customers.
PFS aligns well with our objective of driving a high mix of recurring revenue streams across our businesses with approximately 50% mix of aftermarket parts and replacement units and approximately 50% original equipment. The plan combination is expected to deliver consistent growth above GDP through the cycle with best in class EBITDA margins in the high 20% range, year 1 accretive EPS and strong free cash flow conversion. Importantly, the strength of our balance sheet enables us to acquire PFS while retaining significant capital deployment optionality. Please turn to slide 5, walk through a summary of the key items related to the planned transaction. We're excited to be purchasing a high quality asset with approximately $400,000,000 in revenues and high 20s EBITDA margins that we expect will deliver accretive EPS in the 1st full year.
With $1,450,000,000 purchase price, we're paying about 11 times EBITDA, net of expected synergies. PFS is a strategic asset that is consistently screened as one of our top ideas over many cycles in our portfolio reviews and is foundational for us to achieve scale in our Fluid Management business. With respect to financing, we expect to use a combination of cash and debt and post closing, we expect to remain in a very strong balance sheet position with continued good capital allocation optionality. From a timing perspective, we anticipate completing a transaction mid year subject to customary closing items including regulatory approvals. Please turn to slide 6.
Operating for over 75 years, PFS is a global leader in fluid management and flow control and well known for their deep industry knowledge, quality and reliability with a diverse set of end markets and a balanced global footprint. Today PFS has a global distribution reach supported by 7 manufacturing locations. Approximately 1,000 employees serve these diverse end markets with well known brands and applications. Slide 7 gives a good overview of PFS at a glance. And as you can see, PFS operates across extremely diverse and specialized segments.
In addition to their broad product portfolio, which includes precision dosing, mixing and specialty pumps, their selling process is also highly technical and consultative in nature. This has created a loyal long term customer base, which drives a higher mix of recurring revenue. All the markets are expected to have solid growth profiles in the mid single digit range with the exception of a smaller part of upstream processes, which have more modest growth assumptions expected and built into our valuation model. However, it's important to note that they have 0 exposure to upstream exploration. Turning to slide 8.
Our Fluid Management business also serves mission critical, technically differentiated, highly engineered and product specific applications in attractive diverse end markets. By adding PFS to our portfolio, we build a stronger, highly profitable, globally competitive business with scale, adding greater end market and product portfolio diversity. This will enable us access to multiple new avenues for growth in revenue and profitability, including growing our addressable market, vertical integration of products, broader use of specialized applications and leverage from the integration of our business operating system. Please go to slide 9. This slide presents a different view of many of the key integration benefits I discussed on slide 8.
Through the portfolio addition, we benefit from adding significant product and end market diversity in the combined portfolio. We also see benefits from expanded channel access and ability to leverage a broad suite of relevant ancillary products in unserved or underserved areas. The integration will also benefit from the advanced digital capabilities of both of our businesses where we see enhanced broad based application opportunities. Let's go to slide 10. So in summary, the PFS acquisition aligns extremely well with our strategy to create value for shareholders.
Our strategy is tied to attractive end markets for healthy and growing profitably. Our business operating system and our culture are differentiated and sustainable competitive advantage. And lastly, our business model generates powerful cash flow that combined with a disciplined and thoughtful capital allocation strategy delivers strong shareholder returns. Our acquisition of PFS checks the boxes across each of these core elements of our strategy, making it a clear priority for capital deployment. Once the transaction closes, we look forward to welcoming the Precision Flow Systems team to the Ingersoll Rand family.
And with that, Sue, Dave, Paul and I will be happy to take your questions.
Your first question comes from Steve Tusa from JPMorgan. Your line is open.
Hey guys, good morning.
Good morning, Steve.
Good morning. Just on the kind of financial impact here in the near term, I assume that there will be a few one timers that will be kind of adjusted out. But is there any dilution to 2019 that we should be aware of in our numbers? Like will you on an operating basis be changing your guidance at all acknowledging there's no change in the ops part of that, but because of this deal in the 1st 6 months whether there's a step up related accounting or anything like that?
Yes. Steve, I think the first part just around the capital allocation strategy and what we outlined for guidance for 2019 including modeling of the $500,000,000 in buyback, there'd be no change to that portion of our model. As it relates to the exact timing of the close and the accounting on the transaction, we're going to update that when it closes. But there shouldn't be anything extraordinary in this that I can think of at this point. Sue?
No. Steve, so as you think about this transaction and what we'll do as we get closer to the transaction closing is, first of all, from their side, the announcement has adjusted EBITDA and that's because as we took and looked at the model for 2018 actuals, we took out a little bit of restructuring and we took out a little bit of one time costs. We are not expecting to have anything in the 2019 numbers other than the actual deal costs that will be a part of the transaction. And then looking at what we have going forward. So after we close, what we'll do is we'll give you an update of what this means to our overall guidance and updated earnings per share, how we finance the transaction, cash flow and all of the components that go along with that.
But like I say, we'll get through purchase accounting and the actual close of the transaction and then we'll do that. But the most important point is the one that Mike made, which is we're not changing our capital allocation strategy for Ingersoll Rand on the basis of what we're doing, with this transaction.
So you're still doing the $500,000,000 in buyback this year?
Well, we asked you to model that in, Steve. So that's our and we wouldn't give you any advice to change what we've given you guidance to model in at this point.
Okay. And then one last one. This is it's a decent sized deal. You how do you avoid the same kind of cycle mistake as you know and then again acknowledging that Cameron was a very good strategic transaction, but obviously the cycle kind of took you guys a bit by surprise. I mean, how do you kind of avoid that?
How are you so sure that you're kind of avoiding that this time around? Because obviously, that's not anything you can really control, but it's something you can obviously avoid. How should we think about how this business performs maybe in a downturn and how we shouldn't really be worried about that, I guess, is kind of the context?
Yes. I can tell you since 2010, 4 full blown portfolio reviews that we've done has had this in the top right box of what we're looking at, really the whole category of precision flow, this being really the only asset of any scale because this is obviously a product portfolio that you'll find a lot of diversification across end market segments. And some of the smaller acquisitions we're looking at will make more sense as it relates to kind of rolling into PFS in the long run. So for us, it was looking at the fact that this was a process that was competitive. We may not be timing the cycle exactly right, but in the long run, we believe it's the right asset for Ingersoll Rand.
But the business did perform very well, and we were impressed by that in the 2014, 2015 timeframe. And the aftermarket piece of this thing was pretty compelling. So we're fifty-fifty of the revenue would be original equipment versus replacement and like for like, 65% some of the margins are on that side of the business. So it's fairly resilient and we were favorably impressed by that.
Okay. One quick one. What's the gross margin for this business?
It's very high. It looks just like our Aero business, so you can think about it as north of 40.
Great. Okay. Thanks a lot.
Thank you.
Your next question comes from Julian Mitchells from Barclays. Your line is open.
Hi, good morning and congratulations. Thanks, Julien. Maybe just the first question around the EBITDA margins are very high, high 20s. Maybe just explain if you see any scope for productivity push to lead them higher or any cost synergies with your base business, which I guess has about €150,000,000 of sales? And how concerned are you that this asset might need some reinvestment, either R and D or plant modernization, given it's been under private ownership for a while and also maybe was a non core piece of a conglomerate previous to that?
Yes, Julien. First, if I look at our own aero portfolio, the EBITDA margins there are really equal to the PFS portfolio. So and if you look at some of the pure play flow companies, you'll see that these margins are pretty much what this industry earns. So we feel very good about that. We're impressed with the amount of investment that's gone into the business over the last 5 years.
Paul, maybe you want to comment a little bit on some of the aspects here.
Sure. Thanks for the question, Julien. I think related to the R and D investment, they've actually done a nice job, good strong pipeline of innovation coming out. Some of that has already hit the market and there's a pretty robust pipeline going forward. The processes align pretty closely with our business operating system.
And so the way that they manage the projects and really the relevance that they bring to the end markets is good. And lastly, I would say there's probably is an opportunity because our global engineering footprint is a little bit stronger than theirs. So I would expect that there's probably a small engineering opportunity with the company.
On the synergy front, Julien, we model in $20,000,000 It's about evenly split between say tenant cost and tenant of revenue upside. The tenant cost, a piece of what Paul has talked about is the engineering, but we've got that pretty well detailed out. The $10,000,000 on the growth side, there's a few things here. One is, aero has been a pneumatic diaphragm, air powered diaphragm pump company that all of our customers talk about the desire to see that electrified. I think that bringing in PFS really very quickly accelerates electrification of the aero portfolio.
Secondly, the IoT investments by both companies fairly strong and we've got a good capability inside the company and I think we can accelerate that growth. And third, PFS is in a very early innings pricing capability build. And as you know, we've been at this a long time with systems and tools and processes and metrics that we do a good job with that. We think you can really accelerate that whole pricing equation there. So I think the $20,000,000 split 10 and 10 is a pretty reasonable conclusion.
This is Dave, Jillian. I agree with Mike. I also think that leveraging other aspects of our BOS are also going to enhance the synergies that we see.
Thanks. And then my follow-up question, maybe a slightly more strategic one, Mike, but obviously this is a piece of former UTX assets, particularly Milton Roy. Solaire Compressors was another piece that came out of UTX and then went to Hitachi a couple of years ago. Arguably, both Solaire and PFS, very good fits with Ingersoll Industrial. You passed on Solaire.
You went for this one. Maybe just help us understand the rationale that's behind the two decisions?
Yes. I think if I recall right, Julien, when it came out of UTC like in the 2013 timeframe, it was Sundyne, Solair and PFS. We had looked at the Solair portfolio, but frankly, there's just way too much road compressor working there and we had divested that with our road infrastructure business years earlier. Just didn't like the cyclicality around that and some of the margins there. We didn't see that Solaire portfolio would be added.
At the same time, we had an idea that Cameron might be coming out, and Cameron was an asset we looked at for a long time and knew that the engineered air component of that would be very additive to the portfolio. We didn't have an interest in So as it came out, it really wasn't actionable to just pick up the PFS portion in 2013. Cameron played well versus Solaire and then as this work that's way through private equity ownership last 5 years, it really comes out as a nice strong asset, which if you recall, it was under invested in probably in the 2013 timeframe. That was our concern. We did a lot of due diligence around that.
It's really the reason Paul is on the call here today as well and we were very impressed with what's happened, not just in the product portfolio, but in the way they're going to market in these very application specific ways. Some say niche applications, but really it's engineered into a core part of a larger process. Often that process is something that is either regulated or heavily specified, and it tends to be a very long term relationship, and they've done a very nice job of really carving out those application specific segments.
Great. Thank you.
Your next question comes from John Walsh from Credit Suisse. Please go ahead.
Hi, good morning.
Good morning, John.
Hi, congrats on the announcement. I guess, maybe my first question here, I think you guys have obviously been talking about it when you think about the compression markets, more of this vertical go to market strategy. I saw you put that right there on the slides. Maybe can you kind of elaborate how this deal helps accelerate that as you think about approaching your markets more on a vertical basis?
Yes. I mean, well, you can first of all, when you look across the Climate businesses and our Compression Technology business, you can immediately first see the synergy between the compressor, motor drives, controls, the services business and how we go to market around that. It's a very similar analogy between the compression technology business and the precision flow business as it really creates as it really leverages this whole flow generation set of applications and processes. So that's how the synergy kind of works across this. Clearly, we've got a huge combined footprint.
When you think about our Compression Technology business and then think about the PFS business, heck of an opportunity to cross sell within specific verticals as well. And then even from a vertical product portfolio perspective, again, coming back to taking the air operated pumps that we have today and electrifying them very quickly on a really strong brand is a big growth idea within the aero brand itself.
Yes. I mean, I think I could add just a little bit of color maybe with an example. If you think about, as we described, the water business, right, it really is a specific part of water in terms of making the water quality better through dosing applications into water. And so it's not just municipal water, right? Municipal water would be part of it.
Industrial applications, food and beverage pharmaceutical type applications that use a lot of water and also in commercial buildings where with our chiller portfolio, you're moving a lot of water and the water quality is important. And so I think the vertical go to market enhancement is really a deep understanding of what's required in these different applications even underwater and providing application specific expertise and a little bit more sticky expert relationship with a customer and that obviously helps us to capture value in those relationships.
Got you. And then maybe just a follow-up, thinking about the EBITDA margins again. And I think in an earlier comment, you said it was about in line with your own fluid handling business. But I wonder, if we kind of broaden that question, I look at your total industrial segment more in the mid teens type EBITDA margin range. Maybe just help us understand, is there mix differences between these businesses, the amount of investment they require, CapEx, kind of just reconciling a little bit really where can the EBITDA margin should we think about everything kind of lifting higher or are there structural reasons why this business has those nice high 20 EBITDA margins and really the broader industrial business has kind of been around mid teens?
Yes. A couple of ways to look at this. 1, structurally, these well run businesses have EBITDA margins at the high 20s. And so I don't know there's a cap on that, but everyone seems to be in the high 20s around that. To me, it's not trying to squeeze more orange out of the Ryan here.
It's about planting more orange trees like this. So you think about growing EBITDA margins across the industrial segment for us. I mean, this is clearly taking that uptown for us. And the compressor business operates in the high teens as well and is getting better as you well know. I think we've probably added about 500 basis points of margin here over the last few years.
So we're watching that whole industrial portfolio, increase EBITDA margins nicely and this will continue to pull that up.
All right. Thank you.
Thank you.
Your next question comes from Gautam Khanna from Cowen and Company. Your line is open.
Yes. Thank you. Good morning. Good morning. Two questions.
I guess, first, I was wondering if you could help us actually frame the EPS accretion you anticipate. You gave us EBITDA, maybe if you could give us GA intangibles or at least frame it relative to the opportunity cost of doing a buyback, which would have been about 5% or 6% accretive? Anyway you want to answer that?
Yes. First of all, it's pretty early for us to early for us to do that. We want to get that accounting right really at close. So we're not going to really take that to a GAAP level right now, but I think that clearly it's pretty calculable. I think you guys are all in the right ballpark from the notes I saw this morning around the cash accretion, cash EPS per share, and the cash flow I always see here is extremely high.
I think when you look about sort of the light asset base here, I know that we checked our math about 10 times because the cash flow ROIC is about twice the portfolio. So it's a great business. Sue?
Yes. And what I would also say is as you think about this business, so Mike's right, we really need to do all of the purchase accounting and really get everything nailed down. But the way that I would think about this is, we talked about the gross margin structure, we talked about the amount of the business that is pointed towards the aftermarket or like for like $4,000,000 $5,000,000 $6,000,000 $6,000,000 per year. So that $4,000,000 $5,000,000 $6,000,000 per year. So that's the asset light portion of this.
The R and D component, we've circled around this a couple of times as a percentage of revenue is between 2% 3%. And as you think about cash flow and free cash flow as a percentage of net income, the business is also roughly about 100% of net income. So when you think about all of those metrics and you think about the similarities to an Ingersoll ran into our overall strategy, all of those things are very good fact patterns. So as Mike said, you guys are in the right zip code in terms of the analysis that you've been doing, but we'll come out with more specifics after we actually close the transaction. But I want to give you color on a couple of other data points that will actually show you how attractive this business is, not just EBITDA margins, but the other components.
I appreciate that. That's very helpful. And just my quick follow-up would be, does this I mean, Mike, you obviously have bought a platform kind of size acquisition here. You do have some other industrial businesses that are where ARO used to be in size or even in that ballpark. Should we expect any kind of harder looks at the portfolio in the coming year, either things that maybe don't get to scale and get jettisoned or I'm just wondering what this informs about the broader look at that segment and portfolio reshuffle?
Yes. I'd really go back, I'd say, 18 months ago, and this would be no news to anybody on this call or any investors that we've met with or at conferences. We talk about the pipeline of M and A really being in Climate, Compression Technologies and Fluid Management. It doesn't mean for a minute that we're not investing to win organically across all of the businesses we own, whether they're mentioned there specifically or not. That's important to us.
We've been very successful around the tools business, Material Handling and ClubCar in that organic investment. In essence, when we think about that, we think about who is the best owner for the business. And for our shareholders, the best owner for this business would have more synergy opportunity than we do, and therefore, there'd be an applied value to those businesses. It's certainly, calculable in our estimation. So we're operating today under that best owner mentality.
And if that changes, that might change over time. But today, we're investing to win organically in those businesses.
Your next question comes from Andrew Kaplowitz from Citi. Your line is open.
Hey, good morning, guys.
Hi, Andy.
Mike, I wanted to follow-up on your comments on pricing. One of the good things about the current HVAC environment in general and certainly for Ingersoll has been that you've seen that pretty good pricing power as an industry and as a company. How would you characterize the competitive landscape facing PFS including current market share and specifically the pricing power the company has? And could you elaborate on how you can improve their pricing capability, which you did mention?
Yes. The easiest thing probably is exactly that, Andy, which is we just look at what we've done within our Aero portfolio and compare it to the PFS portfolio. And if we can just bring it up to the same standard, I think it would be successful. Now I'll tell you, PFS has exactly the same mentality around that, and they've engaged a lot of external help to be able to do that. They're in the early innings.
But again, this is something that for better part of 10 years, we've been working on this and always getting better at it, but we've, I think, differentiated ourselves, frankly, with their competitors and our ability to get that and capture that in excess material cost. So my sense is we'll be able to accelerate that path working with PFS and we just have to look at our aero business, which is in that same business, as a proof source.
And would you say that the car and aero business has a similar has a similar pricing capability as your HVAC business? I mean, how do we compare the 2?
Andy, I missed your first word. Which business were you asking?
Your current business to get a view on the PFS business.
Yes. We've had good success with Arrow. So we can specifically look at the pricing in 2018 and our plans for 2019, look at how we're thinking about new product development, new offerings in the market, any noise associated with material and tariffs and have a clear path to the typical 20, 30 basis point expectation we have across the portfolio, that's what we would be looking to do would be to continue to expand that. And again, this is no fault of the PFS team, multi brand strategy and the notion of having a centralized pricing capability or centralized tools to be able to do this wasn't something they had in house. They went outside to go get that.
They've done a lot of the right analysis around that and they're in the very early innings of being able to execute on that and we think we can accelerate that with them.
Pricing structure and how they're going about it. So, pricing structure and how they're going about it. So, Mike said early innings, but I know we can accelerate that based on what we have in our operating system. So we're eager to get this transaction closed and start that work.
And Mike, just a similar follow-up in terms of you view the Greater Ingersoll Business in terms of sustainability, regulatory concerns, energy efficiency, it's in the sort of sweet spot of those areas. How would we look at PFS in comparing it versus your core business now and its ability to sort of get that secular growth from the drivers that I just mentioned?
Yes, Andy, great question. So 2 thirds of the business really fits squarely within that whole same sustainability tailwind that we've been talking about, water infrastructure, conservation, precision dosing or precision irrigation for that matter, all fits squarely in that. The 1 third that is more a process and energy related, to me it's interesting because I believe that as the world transitions to cleaner sources of energy, whether it be coal to gas or ultimately to sustainable sources, there is a big opportunity in that transition, which is going to take a fair amount of time. So, as an example, you think about the regulatory aspect of natural gas, I think everyone knows natural gas has no odor, and it's PFS that puts the odor in natural gas. And so it's very much a safety factor here that we're all acutely aware of.
And I do believe that we'll see over the next, say, decade, decade plus, against this transition, certainly away from a dirtier source of energy to natural gas. And ultimately, that will transition as well to more renewables.
Thanks, Mike. Yes.
I mean, I think just to add a little bit there, I think that the sustainability focus of the company is really strengthened with the assets of PFS. In all cases, if you think about the main thing of dosing and mixing, it helps all the applications, even the industrial applications to be more efficient in their use of the resources that they're touching. So, I think it fits pretty squarely in. And we've had it's interesting, there's a couple of points of intersection with the company where we're already using some of their products in our internal operations to execute on our internal sustainability goals. So we use a Haskell high pressure pump in leak testing of some of our HVAC components and it really reduces the amount of gases that we would vent to the atmosphere as an example.
So I think that the applications that they deal with are really additive to our sustainability story.
Yes. The only ones
I would add is, if you think about their Dosatron business, 2 things that are really in the early stages of there. 1 is vertical farming, and there's big opportunity there. The other is water purification through a dosing technology using water as the source of power in remote areas. So think of areas maybe in Africa or some of these other areas that are less developed. So beginning stages, but it's exciting and there's certainly an opportunity there.
The only other one I would highlight is Haskell, again, beginning stages, but really hydrogen refueling stations. Again, these are very precise pumps. They go from 5,000 PSI up to 100,000 PSI. So they're highly engineered, but a lot of applications there that could really lead to next generation fuel sources.
Appreciate it, guys.
Thanks, Andy.
Your next question comes from Rich Kwas from Wells Fargo. Your line is open.
Hi, good morning everyone. Good morning. Mike, on the in terms of the market share position, it looks like a couple of years ago, you had a 1,500,000,000 dollars addressable market. So does this put you seems like 35%, 40% market share? Is that the right way to think about it?
No. I think you got to look at sort of the addressable market here as being 10 times that through this acquisition. So this has generally been a very fragmented market where a company will pinpoint a specific process or industry or application and then working with sort of that process owner, a highly engineered application suited for that. And so you tend to find somebody's got a very high concentration in a very, very narrow application, but many, many applications to go after with the same technology. So I'd say that David, I'm talking about $10,000,000,000 Yes.
PFS would say their market is around a $10,000,000,000 market. I think that's a good way to look at it.
And air operated diaphragm pumps, we would have thought to have been somewhere $1,500,000,000 or South.
Okay. Got you. And then on Asia, it looks like about a quarter of their sales is Asia overall. How is the China mix? And then when you think about deploying some of the strategies with regards to HVAC on the service aftermarket side, are there some synergies there over the longer term you'd look to apply or strategies?
The China piece is about half of the 25. So it's about a little bit north of 14 actually on the split. And as far as the aftermarket question?
Really on HVAC, I think the question was pretty early innings there, but to Paul's point, I think there is something around potentially water in buildings. I've talked about it before as an adjacency. And so I think that as this evolves, we'll figure out again how to take some of that product portfolio and apply it very specifically toward water, HVAC and buildings, and that would be on the radar screen for development, but not something that's modeled in the synergy today as we stand here.
Yes. And the details of the product portfolio and where they play varies geographically. And so there is an opportunity to level up the geographic penetration of certain parts of the portfolio.
Okay. And then just lastly, real quick, does this limit you in any way in terms of pursuit of other assets that may be of interest?
No, it does not. No, to the earlier point, this is why we can be relatively certain that we haven't changed the guidance we gave you 13 to 12 days ago regarding modeling $500,000,000 of buybacks. So lots of balance sheet flexibility. I mean this acquisition and the synergy associated happens pretty quickly. And so the amount of cash, sort of we're adding back to the portfolio in and of itself would delever very quickly.
Great. Thank you.
Thank you.
Your next question comes from Jeffrey Sprague from Vertical Research. Your line is open.
Good morning, everyone.
Hey, Jeff. Just a couple
of cleanups from me, actually. Just back to growth. Could you be a little bit more specific maybe the last 5 years or so? Did the business actually decline during that
industrial recessionary period? And then how
has it fared in the last area period? And then how has it fared here the last 2, 2.5 years as we've gotten into this industrial recovery?
Yes, it did take a dip, Jeff, but I would tell you that it's not back to peak levels and you'd really have to go in and look specifically by the product. And I would tell you that there's still upside from where they would go to get back to what we would call peak. So, for example, if you look at pick one of their brands, let's say, the water business, it still has a lot of room there for growth to get back to peak levels. The other thing in water is you think about water purification, you think about the prior question was specific to China, we see a lot of growth opportunities in that space. And especially as urbanization starts to take place, we think there's going to be a lot of growth potential within China, specifically in water.
Jeff, the other point I'd say is the EBITDA margins in 'fourteen, 'fifteen, we were really impressed with their ability to manage on the deleverage side of that. To my recollection, there was very little or very little, if any, sort of decremental EBITDA margin there. So it was well done.
And that's really and that's in the industry because we saw the same trend within our aero business. We didn't see big dips in our EBITDA margins at all.
I guess one thing maybe just a little confused on now, maybe you don't have the granularity on it, but if it was a shallow decline and then we've now had 2 or 3 years of growth, why aren't we back to where we were?
David, just picking out segments in different areas, again, it's pretty fragmented. So he was telling you a little bit about water, some of the water infrastructure, I think a second ago. Other parts are going to be higher, you can imagine.
Yes, you think about their process, that took a bigger dip, Jeff, especially in the oil and gas side of that. But it's not it's certainly something that it's not at the low, but it's certainly not where the peak was.
Pharma and food and bev would be toward a high, but it's like an ever increasing high. It's not as if that's got the same cycle as you would with the process industries.
And I think the way to think about this, Jeff, just from my perspective overall is, I think you look at the business over time with revenue growth across this business in the low single digits to mid single digits depending upon the different areas and the EBITDA margins staying in that high 20s arena during that time. So you could pick out a lot of different things in a lot of different segments, but again, low single digits to mid single digits over the period and high 20s EBITDA margin across the period. So they're pretty consistent and we see all of that continuing in the future. So we didn't see any weak spots in that.
And then just a follow-up also on revenues. Is the $10,000,000 revenue synergy the profit associated with revenue synergies or is that a revenue number that $10,000,000
No, it's the OI. So $20,000,000 in operating income, dollars 20,000,000 EBITDA I should say and $10,000,000 is roughly between the two. I think that we'll phase in within 24 months, and I think you could use a typical half and half, half the first year, half the second The gross synergies might take just a little bit longer.
Maybe just one other one, if I could. In many respects, right, you're bolting arrow onto PFS. And so just from a management standpoint, are there key leadership folks coming over with the acquisition or do you plan on kind of propagating your own people across kind of this new organization? Maybe a little color there.
Yes. I think the answer is both. Obviously, during the due diligence process, we were very impressed with the PFS management team. It's still obviously we have to wait to the close, but we anticipate that they'll be joining our company. We also have some great talent in our aero business that we'll be augmenting that with.
We're going to be creating a separate strategic business unit within Ingersoll Rand. So this will be a separate SBU and it will be reporting to me, Jeff.
Yes, Jeff, I would tell you, this is not a reduction in the combined headcount of people that know fluid management, right? This is plant more orange trees, not squeezing oranges here with the management team. That we were very impressed and the intent would be to have that management team join and integrate together with our existing management team and create the business unit that Dave just talked about.
Makes sense. I like the orange tree analogy. Thanks a lot. That's all for me.
Thanks.
Your next question comes from Josh Pokrzywinski. Your line is open.
Hi, good morning guys.
Hey, Josh.
Just a question on where we are in kind of the margin cycle or product mix for PFS. And I guess where I'm coming from in that, if you have such high recurring revenue, I would imagine that there could be at least a decent split in profitability between the two businesses. And if we're not really that far off of trough, what happens to the mix as the OE side grows? Or is there not as much of a split between those two to really think about it in terms of a mix dynamic on operating leverage?
Well, I mean half and half, half is going to be replacement either like for like or aftermarket parts and half it's going to be original equipment. But remember, almost 2 thirds of the margin is on the aftermarket side. So again, trying to make sure that that aftermarket continues to grow there. These pumps and components are wearable. They're specked into the process.
And so there is a healthy replacement business that comes off the installed base. But there's not margins margins are north of 40 either way. So whether it's the product or it's the aftermarket, the margins are great. Both sets of margins are accretive to Ingersoll Randi and the Industrial segment.
Got it. So there's not going to be a case where the business ramps up, but we don't see any operating leverage at all. It all kind of goes hand in hand on that.
Yes, correct. And it would be the same as our aero business, and we've had a close eye on that for a long time now.
Got it. And then just a follow-up kind of on the future strategy, and I apologize if someone already asked this, I jumped on a little late, but just thinking about M and A dollars from here, you've really flushed out the compressor side of the business, fluid management, I think like Jeff said, is more of a reverse bolt on there. Should we expect more dollars to come in some of the industrial niches? I think there's less of an opportunity to do anything in climate. Is that where the M and A gets focused, is kind of around the core within industrial versus the portfolio at large?
Well, the business units that I've mentioned, which is really the 2 climate businesses, Compression Technologies and Fluid Management, again, 99% of anything we're looking at from an M and A standpoint is associated with those 4 business units. So, that's the emphasis for us there. That's where we think there's opportunities. We've done 22 acquisitions over the last, say, 5 years. Most of them have been relatively small technology channel, etcetera.
So we tend to find very accretive, very simple tuck ins within those businesses. But what I would say though is that we've adopted more of how I think private equity would look at where to invest capital and that's toward the best returns. And so it's a competitive process inside the company as to how we think about where the best returns are and which deals are. Hypothetically, if 2 weekly sized deals were actionable and affordable, we would look to see which ones got higher ROIC and less risk and probably opt for that. We always are looking at share buyback as well, and we've clearly made a commitment toward buying shares back.
What I like about these really high cash flow ROIC ideas like PFS is it's compounding, right? And so the notion of compounding cash is appealing to us in this regard.
Got it. Appreciate the color. Congrats on the deal.
Thank you.
Your next question comes from Steve Wolfman from Jefferies. Your line is open.
Hi, good morning guys. Most of my questions have been answered, but maybe one just sort of longer term strategic question. I think, Mike, if I heard you right, you said you had a number of other opportunities also potentially queued up in this area. And I'm just curious, as we think forward, I don't know, maybe 5 years or something, but the Fluid Management business tends to be a little bit higher multiple type business. Would you expect it to be a meaningfully larger piece of the overall IR pie going forward?
Once you get past this one, everything else is very, very small in terms of what you're acquiring and building in, at least that we think to be actionable at this point in time. And so this creates a lot more synergy now relative to those potential ideas. And so if you thought about taking something that would have done a tenth of the size of our aero business, it's very difficult to get synergies on a business that's small. But if you now begin to think about the $550,000,000 combined footprint globally of the business, there are a lot more synergies associated with the smaller opportunities. So, yes, I don't think there are any other large scaled opportunities like this one out there.
And again, this is why this was a top priority for us. It's really the only scalable opportunity out there.
Understood. I appreciate it.
Thank you.
Your next question comes from Deane Dray from RBC Capital Markets. Your line is
open. Thank you. Good morning, everyone.
Hi, Deane.
Hey, just had a couple of cleanup questions here. Just can you talk a bit about the sales process, the visibility, how much of the business goes through distribution versus direct?
Sure. Yes, I mean, I'll start with our business and we sell through distributions. What that means is the distribution will be the fulfillment agent, but we'll actually be with end customers and designing specifications with the end customers will be fulfilled through the distribution side. If you think about PFS, it's kind of a mix, okay, but it's similar in the nature. These are highly layouts, so they're helping with the design layouts.
And then we'll fulfill that through the distribution side of
the business. Dean, just so you think about it, it's the model our Thermo King business uses, right? We're always with end customers. We're always developing product solutions for the customers and then the fulfillment is through this very decentralized, dense distribution organization around the globe.
I think it's a big point that the voice of the end customer and the markets on the application are one of the things that the businesses has changed in order to be able to drive this application specific view. So it's part of what we really like about their go to market setup.
Just one of the other go to market focuses for flow companies is knowing their installed base, because that's the key to the aftermarket. Is there a sense of precision around knowing where the installed base is and any analytics around that?
Yes. Actually, that's one of the
things we also like when
we did the diligence was they know exactly where I'm not saying it's 100%, but it's a high percentage of their products are located. And I think you could see that when you see that 50% of the business is replacement and aftermarket. So they're on top of that. And I think that's only going to get better as they start with really their connected Internet of Things connected technologies.
Got it. And just a one off question, Mike, you had mentioned tariffs and your answers on pricing power. Is there anything unique on the tariff side and any kind of input cost pressures that have been unique to the business?
Really no worries here at all.
We actually looked at that, Dean, when we did all of the modeling and it was a relatively small and insignificant number. And so it didn't have a material impact on anything that we were looking at or doing in terms of modeling and the risk to the organization. It was really
small. Got it. Thank you.
Thank you.
I now turn the call back over to Zach.
Hi. I want to thank everyone for joining today, especially on such short notice. We'll be around to answer questions over the next several days. And we look forward to speaking with you soon and seeing you some of you on the road in upcoming days at the Barclays and the Citigroup conferences. Thanks.
This concludes today's conference call. You may now disconnect.