Ingersoll Rand Inc. (IR) Earnings Call Transcript & Summary

Good afternoon, everyone. Our next presentation is Ingersoll Rand. This is Joe Ritchie from the U.S. multis team. And today, we have Vicente Reynal, the Chief Executive Officer; Emily Weaver, the CFO; and Vik Kini from Investor Relations. Thank you all for participating in the conference and for being with us today.

Thank you, Joel, for the limitation. Thank you. Appreciate it.

Thank you.

Maybe before we get going here, just a quick reminder to those that are listening in on the line. If you guys want to send in some questions, you can do it via the web link. You can also send me an e-mail to [email protected]. And with that, Vicente, why don't we kind of kick it off.

So before we get into the details on the newco, just kind of thinking back to when you first started back at the old Gardner Denver in 2015. And I wanted to maybe see if you can give us like a comparison, compare and contrast, how you feel about the asset that just came into the fold the legacy Ingersoll Rand asset to how you were feeling about the organization and GDI back in 2015 when you had taken over. And I just recall there being a decent amount of working capital and margin opportunities. So I just would love to get your perspective on that.

Yes. Sure, Joe. Let me put in a few key bullet points on that perspective. I think we -- I definitely see a lot of similarities leading to the future long-term value creation, improvement opportunities that we were able to accomplish at Gardner Denver, and clearly now with the combined company. It's also kind of key reason and important to note that when I joined Gardner Denver in 2015, it was also at that inflection point where we saw a downturn in the not only upstream market, but also the industrial market. So hopefully, next time we make a big transaction acquisition or move, we don't see another downturn cycle. But I'll tell you that the improvements that I see is obviously -- or kind of similarities. I'll first will say that the employee base, in terms of the hearts and minds of employees that are in the company, when I got a chance to travel around in the month of March to the different Ingersoll Rand facilities and be able to spend time with the teams, it is incredible and amazing to see how employees are passionate about whether it is a compressor, the tool business, the Club Car business, so it's really encouraging to see that. Because I mean, clearly, you don't have that sense of hearts and minds of employees in the company. It is difficult to make improvements. And clearly, we're now changing that into this kind of ownership mindset. And I think it seems to be resonating quite well with our employee base. Another thing that I like about the combination of the 2 companies similarity in the sense of when I joined Gardner Denver is that really strong brands and leading market positions. I mean Ingersoll Rand has a multitude of brands, whether, obviously, as the Ingersoll Rand itself or Club Car or Milton Roy -- Haskel, I mean, there's a multitude of brands that are leading premier iconic brands in the markets they serve. And I think that's exciting because then that is actually -- the combination of those 2 are a great foundation to what we can create here long term. And when you think about from a financial perspective and the P&L, when I joined Gardner Denver in 2015 and compared to the financials of what we see with the legacy Ingersoll Rand, very similar. So same EBITDA margins as to what I found in Gardner Denver back in '15, and look what we were able to do a list in industrials to improve over 600 basis points on the Gardner Denver side industrials over the peer year between '15 and '19, with a good portion of that coming from gross margin expansion, and we see the same opportunity here too as well. From a commercial execution, our demand generation engine that we created is a great opportunity for the industrial space, one that we see now a lot of good opportunities as we leverage that engine into the industrial landscape with Ingersoll Rand. Also, as you mentioned, the refocus on the cash generation. I mean there are some businesses like the Specialty Vehicle that have great cash conversion cycle. But there's other similar improvement opportunities that we see in other areas of the business as what we saw back with Gardner Denver. And in terms of kind of your questions with the assets that came, I think this is something that I get super excited. I -- when I joined Gardner Denver, I was very excited about the multitude of technologies, compressors, blowers, vacuums, all around centered with this flow creation, and because it provides a great ability for us to create future applications, niche markets opportunities. And what we have been able to now get with Ingersoll Rand and obviously now really exploring more in depth, a lot of the technologies that are inside these kind of great basket of technologies, it's incredible. I mean, whether -- obviously, not only the new compressor technology, but the fluid management, the specialized pumps that are within the Precision and Science platform. So I think this is something that we get very excited about from a technology perspective and assets.

Yes. That makes a ton of sense, Vicente, and appreciate the comprehensive answer. I guess this is a good segue, right, to talk about the actions that you guys are taking. And clearly, I think the synergies are very top of mind for investors and for everyone that pays attention to the story. So you guys committed to $250 million in savings so far, but you did increase that funnel to $350 million just 2 days ago. So maybe just talk a little bit about like what enabled you to get a little bit more line of sight to that extra $100 million? And what that actually consists of?

Joe, we always said that internally, in our planning, we were working to a funnel much larger than the $250 million. Obviously, we had to kind of clearly wait until we own the asset to feel confident to talk about the increase of the funnel. Clearly, we need to execute the funnel. The $100 million incremental comes from a combination of structural savings as well as some quick footprint rationalizations. These are nonmanufacturing. These are kind of more, whether back office or sales office, opportunities as well as some I2V, some Innovate 2 Value product costs where we can see some kind of quick opportunities based on the work that we did during the integration planning that we were not counting for this to be possible. But I think the majority is definitely the structural, which when I say structural, is basically headcount. And this is a piece that you have seen us accelerate here.

Got it. That makes sense. And I guess just a clarification, right. You did increase the funnel, but you didn't really increase your commitment at this point. I guess -- I know that you are focused on getting more than the $250 million, but is there, in your view at this point, like much integration risk associated with that extra $100 million that you have identified?

No. I think the reason why we decided not to increase the synergy savings because when you think about the $250 million -- when we came out with $250 million, we were doing the $250 million based on 2019 volume. And when you look at the procurement savings, they're kind of volume-related. So naturally, we're in a market where we don't see the same level of volume at 2019. And so in order for us to feel comfortable and still hitting $250 million, we accelerated structural savings knowing that the volume will come later, and we'll see the savings on that volume. But I mean, at this point in time, we decided that it was more prudent to focus on still sticking to the $250 million. No matter what the volume happens, we will definitely go for the $250 million.

Got it. That's fair enough. And then the $80 million to $90 million that you guys talked about as well for 2020, I think that, that kind of breaks out $70 million or so that is, I think, more headcount-related based on the actions that you've already taken. And then $10 million to $20 million on the procurement side. I guess, as you think about the potential carryover benefit from both of those actions for 2021, how are you guys thinking about that the carryover benefit for next year?

Sure. So the $70 million, exactly, it was pretty much headcount. We see about $20 million carryover. So that kind of turns into $90 million in 2021. And then the $10 million to $20 million that also turns into $20 million to $40 million in 2021. But remember, not a straight-line as during the year, we see kind of volume and seasonality ramp through the end of the year.

Got it. And then you guys also kind of announced some temporary actions as well this quarter. How do we think about those temporary actions? Is there a portion of that, that reverses? I would imagine a lot of it reverses next year, but is there a portion that is kind of like volume dependent? How do we think about the $40 million to $50 million that you talked about as well?

I view it as more volume dependent really to -- mainly for the second quarter and third quarter. When we said $40 million to $50 million, we said the majority of that kind of hitting here in the second quarter. And if we see that the market conditions do not continue to improve, we'll find ways to extend and continue with that. But yes, I mean, the expectation is that this will come back.

Got it. And just from a -- just when you think about all of those buckets and you think about how that is going to kind of break into each of the segments, I would imagine a lot of it is in IT&S. But is there a kind of rule of thumb that how much of -- how much is kind of breaking into each of the segments and the actions you think you just described?

Yes. I -- It's definitely across business units, across all the segments, but the way you state it and frame it is correct in the sense that if you look at the absolute dollars, the majority of that is going to come from the IT&S segment. As you have seen, the Precision and Science as well as the Specialty Vehicle, we're taking some actions to cost prudency and rationalize, but we see less synergies there as we are more focused on the growth that we can achieve on those 2 segments. And the HPS segment, it's a smaller segment in nature. So you will not see a lot of dollars, but you will be seeing a lot of percentage of savings kind of coming from that business as a relation to the overall size of the business. And yes, in the -- and then there's also the piece in the corporate side too as well.

Got it. No, that's helpful. And Emily, maybe kind of turning to you and just discussing free cash flow and the cost to achieve. I know you guys have kind of -- you kind of talked about this roughly $350 million or so to achieve these synergies and $100 million to stand up the organization. You guys layered in how much that cost in 1Q, I think, was about $63 million. How do you think about the impact on just the cost to achieve throughout the remainder of the year? And then beyond that, how are you thinking about free cash flow ex those items for the second quarter and then for also 2020?

Sure. Thanks, Joe. I'll take those in order. So with the actions on the synergy side that we announced, the phasing of the $250 million, first off, you can kind of think about that now as 35% in year one. And again, that's 3x higher than we were talking about just a few months ago. And then in year 2, 50% to [ 60% ]. As far as the cost to achieve go, we have $350 million of cost to achieve. And you can think about that as phasing in ahead of the synergy delivery, maybe by a quarter or so. In addition to that, we have $100 million of what we're calling standup costs, things like IT applications and things of that nature that just are required as you're bringing the 2 companies together to rightsize. That $100 million, we expect to hit the P&L over about the next 18 months. Obviously, we're being extraordinarily prudent on all of these dollars that we save while making sure that we still hit the synergy targets. And Vicente and I are reviewing, for example, every cost over $1,000 on the corporate side and our business leaders are doing the same within their businesses. Moving to free cash flow. Yes, the business came in at $60 million of free cash flow in Q1. And that included, like you said, Joe, $63 million transaction-related but in that $63 million, there was $25 million of success fees on the transaction. So that left $38 million that was related to synergy cost to achieve and stand up costs. So that's the detailed breakdown there. So we feel pretty good when you back that out, it would lead to $123 million of cash ex transaction-related things. We feel good about that. Definitely noise in the P&L with all the purchase accounting, that's going on in the amortization drag on net income. So the conversion is not clean right now with the purchase accounting that we're working through. But long term, we certainly want to -- we will be at 100% conversion or greater. And we're looking at every cost around the business and all the opportunities to preserve cash, and as well as getting after working capital, there's obviously a good opportunity in a down year to unlock some of that as well as getting after our tax cash rate, and we've got some interest tailwinds as we repriced the legacy Gardner Denver debt at the beginning of the year. So that will help. And also tamping down our CapEx, these businesses usually run at 1.5%, maybe 2%, and we'll get down to 1.5% this year.

No, that's -- that was great. That was what we were looking for. And I think maybe just talking a little bit more about the working capital component. And then Vicente, you can talk a little bit about your experience at kind of legacy GDI. And Emily, I'd love to hear about your experience at Fortive or otherwise on your ability to kind of drive working capital improvements over time?

Yes, Joe. This is an area that, as you remember back in the Gardner Denver, when we did the IPO, we said ownership mindset, it's all about cash. And we did that very heavy focus on net working capital as a percentage of sales, and we were able to improve that kind of tremendously. As we already communicated, a lot of the same concepts to the new global organization, so we're going to do it again. We're still expecting to award equity to all employees of the new company, sometime here late in the summer. And we're going to launch a very similar approach around how do we unlock cash, and we expect to see some very good momentum here in cash. We definitely see a lot of good opportunities across the 3 levers of, obviously, not only working capital in terms of AP/AR and inventory, but also around interest expenses and tax. So I think it's definitely multiple layers that we see of unlocking cash here moving forward.

Got it. And Emily, maybe if you could add to your experience as well?

Yes, I'm just really excited about what we're doing at Ingersoll Rand using the IRX, Ingersoll Rand Execution Excellence, to get after AR, AP and inventory improvements. The businesses use our impact daily management, and we see real improvements driving there on the receivables and payables side. And we announced last year that were using the same techniques to get after inventory improvements, and we're doing that now with the combine companies. So I'm really excited about how that's going to play out through the balance of the year here.

Okay. Cool. Maybe stepping into the segments a little bit, and just starting with the industrial tech segment. The decrementals you guys put out this quarter was really great. I mean 25% decrementals on negative 17% organic. I know that -- I know you got some pricing this quarter in that business. Vicente, like what's your sense on your ability to potentially hold price in this type of environment? Do you think that that's something that's going to be sustainable?

I mean we believe so, Joe. I mean I think we always spoke about quality of earnings is a focus and that's important. And when you think about process improvement, price was definitely a big process improvement back at the legacy Gardner Denver. As a matter of fact, I mean, we're now executing this month the same tool across the entire new company and processes that we used in the legacy Gardner Denver. So I think it's exciting to not only be able to control the leakage of the price with the tools that we're using, but also for us to be able to know that as a team, we kind of get together and really look at the product portfolio, still start thinking and seeing how we can accelerate price moving forward. I mean Q2 will no doubt being the toughest quarters in terms of commercial execution and profitability and all that. But I'm really looking forward to the actions that the team is taking and how, in these product portfolio meetings that we had, how we're positioning our product to be able to maximize the quality of earnings that we can get via price and many other vehicles.

Got it. That makes sense, Vicente. And just going back to something you guys said at the quarter, you made that reference to the 30% drop in utilization in North America and Europe in the last 3 weeks of March. I'm just curious like when we hear that number, I immediately think that, that's going to affect our aftermarket business as well. How do you think about the Parts piece of your business on the compressor side versus the original equipment side and the ability for the Parts business to remain resilient in that kind of utilization drop?

Yes, Joe. I mean we usually see aftermarket that kind of drops half of the drop of the original equipment. We have seen this consistently here across all the regions. And I think the opportunity here is that we still have some more room to improve in terms of aftermarket as a percentage of total revenue. This is something that we were pretty excited about the combination with Ingersoll Rand because they have done a good job. And I think we're doing a lot of good lessons learned from what they have done, applying that actually to the Gardner Denver side. So I think it's a really great blend of here the 2 companies in terms of the aftermarket. But yes, I mean, aftermarket, it's proven to be more resilient in a downturn.

Got it. And you made the call out as well on the -- how the legacy GDI products performed versus like the legacy IR products? And I know there are some differences in horsepower. Maybe just talk a little bit about whether that alone was really kind of like the reason for the difference in demand or whether it was specific end markets that the types of compressors are being sold into? Like what was the big difference between the disparity between the demand in both of the legacy GDI, legacy IR compressors?

Yes, Joe, I think there's kind of 2 -- I mean, 2 big pieces. One is what you highlighted in terms of the size of the horsepower, which tends to be more prone to a higher level of price. But the other big piece here is -- and the biggest piece is the China, where clearly, the legacy IR has a much higher percentage of revenue here than the legacy GDI. And as you saw, the IPS in the first quarter, down 36% -- 35%, but China was actually lower than that. So -- and the big majority of that is because of China.

Got it. Well, that's interesting, right? So is it fair to say that kind of like first in, first out that you would expect to see kind of like the legacy Ingersoll Rand compressors and also rebound faster because of that EM exposure?

It could. Yes, that's right. That's right. I mean that's what we talked about IPS, APAC being positive in kind of April in terms of orders. And just to clarify that, Joe as well. I mean I said -- when I said that China had been lower, I mean lower than 35%. So basically, China was actually down in the 40s, mid-40s versus the total APAC down in the mid-30s.

Sure. No, that makes sense. And look, the other call out, I know the other piece that was weak this quarter was really the Power Tools and Lifts business. You guys haven't been the only ones that have been kind of calling out your online retailers, like basically switching focus more household essentials, right? We heard that yesterday out of Emerson, and I believe also out of Allegion. Does that mean that there's potentially going to be some pent-up demand for these products when stocking does start to occur?

It could potentially, yes. I mean, we would like to say that -- we would love to see that to be the case. And I think in the portion that is measured or that kind of solved through there, yes. I mean, in the meantime, we're being very prudent with cost actions and kind of not counting that, that will come and just basically reassessing the business size and level of cost to the level of what we see now.

Got it. And Vicente, maybe switching to the next segment, PST, like your Medical Pumps business in legacy GDI had been a great growth story, right? And I think it's roughly about 1/3 of the segment. So talk to me about how you expect that business to kind of perform in this backdrop?

Yes. So you're correct, Joe. I mean that medical business is about 1/3 of the segment. I mean we have seen some very good momentum in the business, primarily because of all the technologies that we have that are really serving the market that is in need right now, whether it is oxygen concentrators, respirators, ventilators, dialysis machines. I mean we have seen a big, good momentum on those technologies, and we'll see what the second half comes about. I mean I think right now, what we're seeing is that some very large good order momentum because these are kind of large frame orders that we'd like to say. And then they get typically shipped out through the rest of -- kind of more evenly through the rest of the year and the quarters. We're expecting that this type of order momentum will continue and it's been sustainable. No. I mean we don't think that this is that sustainable because, obviously, we're now seeing the big influx of orders being to kind of the COVID-19 side, and we'll see what comes out later. I mean I think the exciting here is that in the second half, the team is already working on some kind of new technologies. And what I like is that the team is getting invited to a lot of these kind of new technologies that could be coming out into the market. And that, to me, is also the exciting piece that now, we're seeing the influence in orders based on the momentum of the technologies that we have now. While for the future, we're getting invited with different OEMs to be able to drive new technology momentum.

Got it. That makes sense. That's helpful. I guess as I think about the margins of this business, Vicente, the decrementals this quarter were great, right?

Yes.

Yes, 15% decrements, high single-digit declines in the business. I guess, like you made a comment on the call around like the decrementals being higher, like 40%-ish for this business, just given the good gross margins. I guess, is that a function of Precision's flow and the legacy Ingersoll assets now being a part of this? I'm just -- I'm trying to understand like why this business doesn't hold up maybe slightly better in this backdrop.

Yes. I think one of the things that you see there is the Medical business, which, as we said, has been 1/3 of the business. And that business, if you remember, they finished up 31% EBITDA margins in 2019. And they were seeing some very good momentum. I mean they were seeing upwards of 200 basis points improvement year-over-year based on not only the growth, but also the cost actions. And we still had some of that momentum kind of coming in here in the first quarter. So I'll say that, that is definitely one of the pieces. The other piece is price. This is a segment that we also generated some price momentum. I think combination of that is really leading us to have this kind of very low decremental.

Got it. The next segment, Club Car, the Specialty Vehicle segment, it's interesting, and I know that you've only owned it for a short period of time. But you just referred to it as being like a really good free cash flow type business. I guess, as you kind of think about the long-term trajectory of the business, I guess 2 questions. One, what do you think the profitability of this business could be longer term? And then secondly, what do you think about this business strategically? I mean it doesn't fit perfectly within any other pieces of your business. Just how are you thinking about the longer term for this business?

Yes. I'd say that -- I mean, the team in this business has done a really great job around finding some good growth vectors and really executing there fairly well. I think normalized range for margins is in the 13%, 14%, as you kind of saw also from the supplementals we provided. I mean do we think that there's improvement opportunities from here? Yes. And the team is actively working on how do we now expand margins and utilizing the same tools that we have used in the past to expand margins, which is around gross margin, and some of the more effective ways of utilizing SG&A funds. And in terms of long term, I mean, again, we like what we see here. Let us continue to help the team outperform the market, which we believe the team is outperforming here. And let's see where we end up here in the future. But at this point in time, our focus is on just staying, continuing doing the integration, helping apply a lot of these kind of toolkits that we have in our Ingersoll Rand Execution Excellence tools, to be able to find ways to continue to improve the business. And then from there, we'll take it on there.

Got it. Okay. That's helpful. So last segment, and I can't believe that we're talking about it last, the High Pressure Solutions segment. You used to dominate every conversation.

Yes, exactly.

So, all right. So getting into it, you guys gave a ton of color on the call, and that was super helpful, especially -- I especially appreciated the color around like the active frac fleets and how far they had come down. And you referenced $50 million by the end of April versus an average of, call it, [ 318 ] by Q1. So the $50 million number, is $50 million, in your mind, the bottom? How long do we stay at $50 million? Like any thoughts around like where we go from here?

Yes, Joe, I think everything that we have done in terms of a lot of the good market data, talking to our customers out in the field, and a lot of -- I mean, we feel that a lot of our triangulation says that $50 million is the trough. And we definitely -- that we all plan for that number to be the trough, but for that trough to stay here a little bit long. And that's what the team is doing. And I can tell you, I'm so proud of the team and our leader in that business, Edward, for all the phenomenal job that he's done with his team to really act incredibly fast and quickly. And this is where I think it's really inspirational that ownership mindset. I mean that team is in very tough environment. But they're taking some pretty rough actions and difficult decisions, but they're doing it all in minds of how do we protect our customers in the long term, while at the same time, we'll maintain a high level or some level of profitability in the business to protect the company. And I think balancing those 2 is difficult, but they are doing a fantastic job.

That's great to hear. And Vicente, I guess, as you kind of think about this business and the commentary around working towards like breakeven profitability in 2Q, maybe even slightly positive. In light of kind of like an 80-plus percent decline in the business, like how are you getting there? How are we getting to breakeven? Is it -- I know you guys have outlined some cost actions. Is it just fair to assume that those cost actions are going to get -- help you get there? I'm just -- what's the framework?

Yes, exactly. I mean I think it's all about those cost actions. I mean, if you remember, we start doing also some restructuring in the later part of the fourth quarter, kind of December -- November, December last year, that continued into the first quarter. And we were doing that in anticipation of a long downturn. I mean we were not expecting this bigger -- big rapid downturn, but team really reacted quickly and found a new approach on how to accelerate some of the plans that we had. And yes, it's really a lot of structural cost, rethinking strategically. When the market gets back up, what is the best way to position the business, to outgrow the market the same way that we did a bank in 2017 when the market came back really strong, and we were capturing a lot of good profitable share. And I think the same thing is what the team is doing now: Protecting the business in the downturn, protecting the customers. And then it's a little hard work. It is very hard work, but the team is doing a pretty good job on this perspective.

Got it. Maybe one last question for you guys, and appreciate the time today as always. As you kind of -- so first off, congratulations on getting the transaction executed.

Thank you.

And -- but as you think of like that first full year of running this much larger organization, Vicente, what do you hope to accomplish next year when we're talking, what do you hope to be able to say you accomplished over the next -- over the last 12 months when we're speaking a year from now?

Yes. I always tell my team that -- jokingly that we don't get paid on hope, right? So we get paid on the execution. I think for my perspective, I'll say that a year from now, I would like to say that we have been able to execute pretty flawlessly our game plan, which is be able to create this very unique culture across a larger enterprise, and be able to really have a really great pace on this integration so that we can move forward and kind of start becoming more on the offense. And we always say that we play in this pretty large, highly fragmented market, where we see a lot of small bolt-on potential opportunities. I think it's just having that unique culture of execution with an ownership mindset and the team that has great aspirations to continue to pursue our long-term purpose in terms of value creation. So I think just a lot of exciting things that we see ahead of us. And I look forward to next year, when we connect again, that the market will be in a different position, and then we will be able to talk about a lot of the great things that we have accomplished.

That's great. Vicente, Emily, Vik. Again, thanks so much for being with us today. I hope you guys have a great rest of your week, and we will talk soon.

All right. Thank you, Joe. Appreciate it. Thanks everyone.

Take Care.