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

Ladies and gentlemen, thank you for standing by, and welcome to the Barclays hosted Ingersoll Rand call. [Operator Instructions] As a reminder, this call is open only for Barclays Clients and Barclays employees, except employees and investment banking. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Julian Mitchell of Barclays. Thank you. Please go ahead.

Thank you very much, Natalia. Hello, everyone, and thank you for joining. This is Julian Mitchell here of the Barclays multi-industry team. It's my pleasure to have on today's call, Vicente Reynal, CEO of Ingersoll Rand; and Vik Kini, who it was announced just last week, will be the new CFO. So warm congratulations to Vik. Also, we have on the new Investor Relations, Kristen Actis-Grande. So welcome to all 3. It's been a particularly busy time at Ingersoll Rand, given the recent RMT, now compounded by the macro backdrop of COVID. So we thank Vicente and Vik for making this time available to us. I'd like to remind you that our conversation today will contain forward-looking statements based on the company's current expectations. The company's expectations are subject to risks and uncertainties that could cause actual results to differ materially. Many of those risks are detailed in the company's reports filed with the SEC. In terms of the call format, we expect it to last up to around 45 or 50 minutes. I will start off with a handful of questions, but please, anyone listening, do feel free to e-mail me at any time to ask questions anonymously to [email protected], or else you can register and ask a question on audio in the latter stages of this call, time permitting. So with that behind us, maybe I will open it up now to Vicente by asking him to give any color, perhaps, on orders trends since that 20% decline in April. And any perspectives on how he sees demand playing out in different geographic regions?

Yes. Thank you, Julian, and good morning to everyone. First of all, thanks for invitation. Pleasure to be here, and glad to be participating here. Yes. So Julian, so maybe to the question that you talked about in terms of orders. As we mentioned during the earnings call, orders in April were down about 20%, but a book-to-bill above 1, which is good that we're building some backlog. May and June have trended fairly consistent with expectations. And I'll say, largely in line with what we have seen through April. Just like many of you, I mean, we continue to have limited visibility as we are planning for market conditions to be comparable to what we're seeing now here in the second half, it's kind of what I'm talking about. But we feel that IRX is the right tool, leading our teams to execute under all economic conditions. Currently, we have about 110 impact daily management rooms executed across the company every single week. And the focus here is day-to-day, week-to-week execution on what we can control. And as you saw, that's why we were able to do things like accelerate the synergies, executing like $90 million of structural cost takeout as well as adding more on the discretionary side. So let me pause there for a moment, Julian, or your second part of the question was around kind of what we're seeing here across each of the regions and segments, I assume, right?

Exactly.

Yes. Yes. So I think from a segment perspective, the industrial technology is largely in line with the total company average, which is down a bit over 20% of motors, suspected Americas and Europe, Middle East have been most prominently impacted here in the second quarter as the pandemic started to impact demand towards the end of Q2 and has been more pronounced here in the second quarter. China has seen recovery here in the second quarter, much like what we saw in April. However, other areas in Asia Pacific, most -- not only Southeast Asia, continue to be impacted, and they track in line with performance like we have seen in the U.S. and Europe. Precision and science continues to be the best-performing segment, largely on the momentum we saw in the medical orders. And as we saw in Q1, we took some pretty large frame orders in April for COVID-related products like medical pumps for ventilators, oxygen therapy and things like that. I just want to, kind of important to note that these outside orders are not typical, and we have seen orders get back to a more normal levels in May and June. And then on the other 2/3 of that segment, which is kind of PFS and ARO, they're kind of impacted due to demand environment, but not to the same degree as what we have seen in industrial technology. Specialty vehicles orders continue to perform in line with expectations in Q2 and slightly better than total company average. And finally, the high-pressure Solutions segment continues to perform fairly consistent to what we saw in April, where orders were down about 80%. And as we discussed before, frac fleets, we have seen them kind of bottom out in April. And while we have seen some sequential improvements into May and June on fleet count, it has not really created what we call a kind of meaningful change yet in order activity, given the continued overcapacity in the market and the customers kind of realizing what fleets are not in use.

That's helpful. And just on the last point, you mentioned excess capacity around the HPS segment, its end markets specifically. If you look across the whole of Ingersoll Rand today, how do you assess the inventory levels at your customers and maybe your channel partners, I suppose, maybe where they were -- where they are now versus a few months ago or versus normal seasonality for this time of year?

Yes. I think, in general, we feel relatively comfortable with inventory levels in the channel in our core businesses. Specifically in Industrial Technologies, the typical distributor is not stocking meaningful levels of inventory given their relative size. And these are not large distribution channels. And as an example, on the Gardner Denver side, typical distributor, they do less than $10 million of sales in a given year. And as such, they just don't have -- or they don't tend to stock meaningful levels of inventory at any time. And in addition to that, we're also able to track inventory levels at distributors to mitigate any risk of this happening as we don't like our distribution channel to do any other stocking. And from other businesses like power tools and specialty vehicles, we're also getting very good point-of-sale information, as well as inventory. And all it is fairly consistent with normal historical run rate that we have seen. And if anything, a bit too low at this point for those 2 businesses, particularly in specialty vehicles.

That's helpful. And then if we look within the IT&S segment, there's a lot of different businesses within that segment, if you like. You have the small compressors, the larger high horsepower ones, tools as well. Anything you'd call out around how those different pieces of IT&S are performing just because it is, by distance, the largest segment?

Yes. And I think if I were to relate here mostly to kind of what we mostly reported here in the first quarter. I mean I think when you think about China, and particularly, in this -- in the ITS segment, I mean, it is roughly 15% of the segment sales. And so -- and that has kind of definitely trended much better in the Q2 as compared to what we saw in Q1. This was definitely largely what we expected to see. But the one thing that we did want to get a better sense of was -- if this was just a more sustained recovery or pent-up demand from Q1. So far, what we have seen in the quarter is we believe it is a bit more sustained as order trends have held fairly well through May and in the early parts of June. And the other one that maybe to call out is that we also spoke about during the first quarter is the power tools, which power tools is also in this segment, and is roughly less than 10% of the segment, has continued to see a challenge in demand environment here in the second quarter. And we have taken that as an opportunity to take a critical look at the cost structure of the business and rightsize as needed to ensure stronger quality of earnings when the market kind of recovers.

I see. And looking beyond, perhaps, the very short-term when. You're looking out medium term, are there any businesses that you view as having major structural growth headwinds or tailwinds as a result of COVID? Or the impact should be fairly small across the company medium term?

Yes. I mean I -- we think about a bit over short term. Clearly, the medical business, which is part of the Precision and Science, has seen the biggest tailwind as a result of the current environment. I mean, obviously, as I just mentioned, I mean, the need for specific technologies in oxygen therapy, ventilators and other medical-oriented end markets drove some very outsized orders momentum in both March and April, that will help with backlog as we look into the second half of the year. And at this time, we just don't expect to see that type of outsized order momentum continue. And we have seen May and June turn to a more kind of normal environment. On the balance of the business, I mean, nothing that we will point to as a distinct headwind or tailwind as a result of COVID-19. Clearly, the shorter-cycle components of the business should see some ramp when the market conditions improve, both on original equipment and aftermarket as utilization rates continue to improve. And the longer-cycle project businesses is one that we continue to watch. I mean, clearly, Q1 was largely in line and behaved the way we expected, and we continue to see solid funnel projects with some getting closure, particularly in the more kind of niche end markets like wastewater treatment. The projects in the petrochemical area are the ones that are the most sluggish right now, a better way to describe it. But we do see, from an order perspective, some delays due to COVID, but at least, the discussion around the funnel picking up again as the teams are able to meet with the engineering firms and customers.

That's helpful. And maybe looking below the top line, in terms of Ingersoll Rand's own supply chain, how happy do you feel with the way that, that's come back since the depth of the COVID impact? I think you had, for example, some amber categories outside Asia-Pac back at the time of the Q1 call. So maybe just update us on those amber areas, in particular, if they're looking more green today?

Yes. Julian, I'd say they're looking definitely more green. And supply chain disruptions back in Q1, we said in China, then Europe and some in the U.S., but I'd say that all of that has mostly recovered now. And we're definitely monitoring Brazil, but that's not a major issue right now in the supply chain. And so we don't expect supply chain to cause material drag at this point in time.

Perfect. And if you look, maybe this is one more for Vik, perhaps, on the very short term. There's a lot of moving parts within the model at the moment around the RMT, the synergy timing short-cycle businesses fluctuating. Is there anything you'd like to call out as regards seasonality of earnings or cash flow within the year? Or it's just too difficult to tell because visibility is so low?

Yes. No, Julian, it's a good question. I mean, obviously, visibility is quite low. I'll say that, generally speaking, and depending on how things continue to play themselves out for the balance of the year, the broad statement here is that it's kind of similar to how we've described the business before and that the business does tend to have some distinct seasonality. Typically, Q1 being the softest quarter of the year, ramps up Q2 and Q3 being fairly similar. And then Q4 typically finishing as the strongest quarter in the year. This does tend to follow the trend that Vicente spoke to that book-to-bill ratios tend to be a little bit greater than 1 in the first half of the year and below 1 in the second half. And remember, we do have the kind of longer cycle project nature of the business, which kind of fits that same realm. You take orders in the first half, ship them in the second half. I'd say that CapEx spend patterns definitely tend to be the driver of that seasonality. And yes, we do have some, I'd say, some businesses like high-pressure solutions that historically have caused some variation. But again, right now, clearly, that business is much smaller. It's in probably the area that's going to drive a lot of variability quarter-to-quarter. I think if you think about 2020, right now, I wouldn't say that we have reason to believe that it's going to be dramatically different from that perspective. Again, the COVID situation aside. But what we are, obviously, focused on from a Q2 onwards perspective is you will still see a lot more of the synergy delivery starting to hit the bottom line, a lot of which you frankly didn't see in Q1. So again, COVID will clearly cause a little bit of disruption from a quarter-to-quarter perspective. But if you peel that off, I think that's the way we think about seasonality, broad strokes.

And you mentioned synergies. I think on the last call, Vicente, you discussed the sort of net 30% or so decremental EBITDA ambition for the year. Maybe help us understand how comfortable you feel about that. Should we expect Q2 to come in somewhat wider given the top line pressure? And is there anything happening with mix this quarter or the balance of the year that you think will have an impact? Or it's just about volumes and then the cost saves?

Sure, Julian. This is Vik. I'll take that one. I think maintaining decremental is lower than 30%. It's clearly the target that we're driving the teams to. I think you saw that in Q1, and we were able to achieve those levels, finishing the quarter at roughly 29%. Clearly, Q2, to your point, we'll have -- we would probably hope to say the toughest revenue comps that we're going to face. But we have also executed not only on the synergies that you mentioned, but also on a lot of the shorter-term spend reductions around more discretionary areas. So as a result, we are still pushing for the targeted decrementals below 30% here in the short term. In terms of mix, there's always some degree of mix in the portfolio, but I think it will be more so in pockets across the businesses. So for example, some of the recent growth that we've seen in the medical business, with a business that historically sat right around 30% EBITDA, that should be maybe a bit of a tailwind in the Precision and Science Technology segment. But on the other side, you do have areas like high-pressure solutions, which probably will see its toughest quarter, and that will clearly have a mix impact on the total business given that 2Q of last year was still relatively strong. So again, pockets of mix, would we say that mix is going to be a major contributor as we think to the back half of the year, that's probably not how we would characterize it just yet.

And then one question I had from someone listening was around pricing. I assume that's a broad question, maybe HPS has some unique dynamics because of overcapacity. Maybe just help us understand if there's been any shift in pricing over the past 3 or 4 months?

I'd say we have -- as you saw, Julian, in the earnings call, we deliver price even in the first quarter. And we have always spoken about that, we believe in the quality of the earnings and that we have a very good rigorous process for pricing control. As you pointed out, I mean, HPA is definitely just a complete market, this location there. So there's definitely some more price pressure. Are we seeing things in the other segments? I mean there's always going to be some price pressure, especially from smaller competitors that have felt the downturn in a more, more prolific manner. But nothing that will push us to lower prices. And if anything else, we actually, in some of our businesses, announced some price increases here most recently. So again, we continue to be very, very prudent on that. Quality of earnings is critical, and we think that we have some product differentiation that allows us to come at a premium price in the market.

And Vik, you had mentioned the short-term measures. I think those were sized at $40 million or $50 million for the year. And then there's that kind of $80 million, $90 million or so of deal synergies for this year as well. Maybe just update us as to how those 2 buckets are playing out, how much should we expect in the first half relative to the second half, perhaps of those 2?

Yes, sure. So I think, by and large, we continue to be very pleased with the progress that we're making on both fronts. And just to put this in perspective. Remember, we really started executing on all these initiatives, particularly on the synergies just weeks into the acquisition. And dealing with a pandemic, we were still able to accelerate and execute on both the synergies as well as really task teams to develop the pipeline for the shorter-term cost actions. So I think that really speaks to IRX and how we've been managing the integration, be able to kind of do that with that type of speed. In terms of the synergies, the $80 million to $90 million of deal-related synergies, they are comprised of approximately $70 million in-year structural savings, largely around headcount, the majority of which, in fact, almost all of which have been taken at this point in time. And then approximately another $10 million to $20 million of procurement-related savings. The structural savings should largely be spread fairly evenly across 2Q through 4Q. As I mentioned, we took the majority of those actions in the first few weeks after the close of the transaction. So by and large, largely behind us. And the procurement savings are expected to materialize a little bit more in the back half of the year, given we recently launched a lot of those RFQs. And then on the other bucket, Julian, in terms of the $40 million to $50 million of the shorter-term actions, those are expected to deliver largely in 2Q and 3Q. As you can imagine, we continue to be as prudent as possible with discretionary spend in this environment. And we continue to find pockets of opportunities around discretionary spend reduction to protect margins. But it is worth noting here that these are probably areas that we're revisiting on a month-to-month basis, given demand and order trends. And as we mentioned, they are short term. So they are areas that will come back into the cost structure, either late half -- later part of this year or into 2021, depending on how the demand environment plays itself out.

I see. And it sounds as if, yes, the year 1 synergies, you're on track despite COVID. It doesn't seem like COVID has caused much of an issue for that. Maybe just clarify that. And then when we look out for the medium term, you've got that $250 million deal synergies goal. How much of that do you think investors can expect to see realized in the bottom line as opposed to being reinvested in salespeople or R&D? How much of that $250 million is a real net number that will show up in the earnings?

Julian, let me take the first part, and then we'll have -- I'll let Vik go on the second part. I mean on the first part, yes, I mean, definitely no delays on COVID-19. As Vik mentioned, I mean, it's obviously unprecedented to think, closing on this major transaction and then get hit with the pandemic. But we're pleased with where we are, and think it speaks really highly about the power of IRX, our culture, the processes that we have implemented, the talent of the people that we have. And I think a lot of it goes back to how we prepare and approach the deal from the mid-2019, where we started cross-functional integration across both organizations utilizing IRX, and this really allowed us a very good headstart on the integration process execution. So I think from my perspective, COVID has been an accelerator in the same that they have gotten us even more focused on what we need to bring -- to do to bring these 2 companies together as one, from an integration perspective. And we've spoken about processes like product summits, structural cost reductions, procurement, innovative value planning, all of those, we have kind of picked up virtually. And just to give you an example, I mean, over the past 30 days, we have done kind of what I call live engagements, touching over 5 -- 1,500 employees across the world. And an example of that is just last week, we did 13 virtual town halls with different locations. And this week, we'll do more and next week and other, where we call these Own Our Future forums, where we're very focused on specific kind of microtunnel meetings at the lower level of the site and the location, and it's creating a lot of engagement to really have a good open discussion not only about integration, but about what's going on across the world and how our culture is really well assimilated to taking action and engagement on those situations. So to your second question on the $250 million, Vik?

Yes. So Julian, on the second part about how much of the $250 million should hit the bottom line. I think very simply, we would expect the $250 million synergy target to hit the bottom line over that 3-plus-year time frame that we've laid out for the delivery of synergies. It is important to note that there is a meaningful piece of the synergy target that is volume dependent. And as you can imagine, when we were going through a lot of the integration planning, that was largely based on 2019 volumes. So again, clearly, we need to see the market normalize a little bit, and that's why we've kept the $250 million target despite the fact that the funnel is larger. But in terms of the other component of your question about reinvesting. Absolutely, we will continue to reinvest in the front of the business for growth initiatives. We would expect to be able to continue to fund those investments while still delivering our stated synergy delivery target. And as we mentioned, given that we have a higher funnel that we are executing to as well as the expectation that the business will return to a kind of more normalized growth cadence as we look to the future, this should provide sufficient capacity to meet both our stated synergy targets but also reinvest in growth. And Julian, maybe one thing for everyone's sake, that I'd kind of maybe ground everyone on is this framework is actually very similar to what you saw us do at the Gardner Denver business back in the 2015-2016 time frame, where we were able to deliver on some meaningful margin expansion, but also continue to invest in the front end of the business. That was a very balanced approach. And during that time frame, you saw us obviously improve the margin profile across all 3 of the legacy Gardner Denver segments. But also stand up front end facing resources like a demand generation organization, R&D investments, IoT, pricing processes, presenting the I2V. So again, we're following a fairly similar approach. But again, $250 million is clearly the commitment of the business that we expect to deliver over the stated time frame.

And when you look to the recovery, and now that you've had several months to experience the new business that was brought in, what type of operating leverage or incremental margin should we expect on the way up? Is it sort of similar to that 30-ish or slightly lower decremental on the way down?

Yes, Julian, I mean, it's a good question. And I think, yes, we should expect to see incrementals probably be a bit tapered once growth comes to back. If for no other reason, obviously, the short-term cost actions that we have announced would come back into the cost structure. So yes, incrementals that are probably in the low 30s should be expected if you want to take kind of a broad spectrum approach across the entire portfolio. And like we said, we're going to continue to keep finding ways to invest in the business but still hit that synergy delivery commitment. So again, like we said, we're going to evaluate this on a month-to-month basis, really dependent on kind of order trends in the demand environment, and that will really dictate that kind of pace of the shorter-term cost actions when we -- either we continue to kind of push them into the second half of the year or start killing them off one by one, given that there is a multitude of different actions that make up that $40 million to $50 million bucket.

And maybe turning to free cash flow. How should we think about that this year, whether it's on a conversion basis or margin? Maybe help us understand how working capital is trending and what the cash costs of these synergy actions might be this year?

Yes, sure. I'll take that kind of altogether there, Julian. Obviously, there is a lot of noise here in the financials here in 2020, just given the structure -- the deal and a lot of the financial implications that are rolling through the P&L. And the easiest way we would probably say it here is we are targeting free cash flow to reported net income. Adjusted for some of those noncash items like purchase price amortization and things of that nature, the PPA adjustments and things of that nature to be 100% or better. Clearly, we're going to have some noise quarter-to-quarter on cash flow, just given the timing on synergy delivery and standup costs. But again, we do continue to see -- expect to see healthy cash flow, particularly as we focus on continued efficiencies from working capital, as you mentioned, prudent CapEx spend and then over the more medium to longer term, things like continued improvement for cash taxes. You did mention working capital. Working capital, in particular, has meaningful opportunity ahead. I think if you think probably a little bit more shorter term here, standardizing kind of some of the more AP and AR practices across the 2 legacy companies is clearly a focal point. Very similar actually to what you saw Gardner Denver do over the last few years to really get a lot of the working capital levels down into that mid- to lower 20s realm. And we definitely see opportunities to spread some of those practices and kind of standardize across the board. And then inventory reduction, we would say, is an opportunity across the board. We've said this historically, at Gardner Denver, we have done a lot around that ownership mentality and empowering employees to drive inventory. It just takes a little bit longer time. So I think there's a lot of good wheels in motion here, and we see a lot of good practices from the, let's call it, legacy Ingersoll Rand side that we are, I'd say, putting together right now. But it's just going to take a little bit longer time. And interesting enough, the environment we're in right now is probably an environment that you can look to take advantage of some of those opportunities. One example here, Julian, is the high-pressure solutions business, which we've been very explicit that in -- this is a cyclical business, but one that does tend to consume a little bit more working capital during more upturn. So again, an area that we probably expect to be able to unlock some working capital here as the business is obviously troughing and cycling down. And then the latter part of your question in terms of the amount of cost to achieve and for things like cost out and synergy actions. Roughly speaking, about $100 million to be spent between cost to deliver -- cost deliver synergies and standup costs for the balance of this year. So again, we're being very prudent there, scrutinizing all the projects, particularly on the standup side, but $100 million between Q2 to Q4 is probably a pretty good place over to use for right now.

That's helpful, Vik. And longer term or medium term, do we think about that conversion ratio on cash over 100% as the benchmark or closer to 100% just because of working capital?

Yes. I mean I think the 100% threshold is clearly how we would think medium term, with probably a little bit of room to exceed as we start to free up some of those medium to longer-term opportunities, particularly around inventory as well as the cash tax side of the equation. But again, fairly similar thinking as we've put the business together and how we're thinking it's more medium to longer term.

Perfect. And the cash taxes, you just mentioned once or twice. One question I just had was around -- I'm not sure how much you've been able to look at this so far, given the CFO news is very recent. But you're bringing in a business that was part of an Irish domiciled company, merged into a U.S. domiciled one now. So any thoughts on the tax rate, I suppose, this year and maybe looking further out, how much scope there might be to bring it down medium term.

So Julian, I think this is 1 specifically, I'll make a few comments and let Vik add more, but that we said is a great opportunity for us. I mean, as you saw, we told we will think about kind of mid-20s in the first quarter, and we said that that's probably prudent to keep that for the rest of the year. If you look at the Gardner Denver, when I joined in 2015, we were kind of in the mid- to high 20s. And we finished in 2019, call it, in the [ 19, 20 ]. So it is definitely an area of opportunity for us and one that, that I know there's some kind of road mapping already being done and one that we foresee that will help us create better leverage here moving forward.

Perfect. And on the balance sheet, you're just over 2.5x net levered at the end of March. How are we thinking about the path to delevering? And maybe just any update on the liquidity position. I think there was that term loan news earlier this week, for example.

Yes. Sure, Julian. I'll take the first about leverage, and I'll let Vicente kind of play on the second half. I think in terms of the balance sheet and leverage and the pass delevering and how we feel comfortable, I think the easy answer here is we want to get back to that kind of 2x level. Obviously, we get to a little bit lower than that, that's clearly a comfortable range for us. The 2x leverage, interestingly enough, that's exactly where we had gotten kind of Gardner Denver to at the end of 2019. And to put it in perspective, as you remember, at the time of the IPO, which was just 2 years earlier, about 2.5 years earlier, we were at 4.2x. So again, we've shown a good ability to be able to delever, given the cash flow nature of the business. And at this point in time, we are relatively comfortable with the leverage levels where we currently stand. And we know that there's going to be some short-term pressure on leverage, just given the macro environment and where EBITDA trend on an LTM basis over the next few quarters. But again, we see no reason why that shouldn't come back into more normalized levels once the environment kind of stabilizes or normalizes, and then given the free cash flow nature continue to trend down to that lower 2s.

Yes. Yes. And on the liquidity question, Julian. So I mean, I'll say first, we continue to remain comfortable around the liquidity position. As you saw, finish -- we finished in Q1 with about $1.6 billion of liquidity between cash on hand and the availability of our credit facilities. However, there remains some uncertainty in the market as we look ahead in the second half of the year. And as a result, we did launch a very opportunistic incremental $400 million term loan B offering yesterday. We view this as -- kind of this is really just for incremental liquidity and we'll be leverage neutral. In addition, it gives us some increased liquidity to potentially play off offense in the coming quarters for attractive bolt-ons, although most of the bolt-ons that we're seeing now, we expect to pay with cash on hand. And also worth noting that the incremental annual interest expected from this debt is more than offset by the annualized interest expense savings we expect to see when our current fixed interest rate swaps fall off in the coming months. So again, the current offering is -- it's a deal with a lot of momentum. I mean we are already oversubscribed within hours after the launch. And we're also targeting the increase in our revolver, which speaks about the strong relationship we have with our banking partners. And as we said, this is going to be opportunistic, and I think this extension proves that to be the case.

That's very prudent. And maybe on the portfolio, you cited the potential for some bolt-on acquisitions. Maybe thinking about the portfolio as it is today, a very large transaction only closed about 3 months ago, so it seems premature to talk about additional changes to that. I mean I suppose we should assume that any divestments or asset exits are probably some way off sometime next year. Is that a fair view? And maybe help us understand what are the main criteria that you're using or will use to decide which assets stay in this portfolio longer term?

Yes, Julian, on the portfolio optionality. Yes, I mean, we're very focused on the integration and leveraging the synergies as kind of Vik well articulated that. And even in this time, I mean, we're definitely utilizing the IRX tools to optimize and improve those businesses. A great example is utilizing the IRX tools to help specialty vehicles, continue to accelerate their growth momentum they're seeing in some of the parts of the businesses. And so with that, in terms of the bolt-on, I mean, the main criteria in terms of looking for these kind of bolt-on companies, I kind of look at it from kind of a couple of dimensions from a technology perspective. I say, we like mission-critical flow creation with high recurring aftermarket that we can improve over time. And these mission-critical flow creation technologies, we like that they're low-cost relative to the system, but then high cost of failure. And when we look at that from the other lens of the market perspective is that we like business and technologies that play in large addressable markets with high degree of fragmentation because, obviously, we can be acquisitive, but at the same time, we can leverage a lot of the tools that we have like demand generation to be really effective and very efficient commercially but a very highly fragmented market. And we also like markets that have exposure to good secular trends and load cyclicality. And we feel that the wide variety of technology that we have in our portfolio and the one that we're looking for will allow us to be more selective on niche end markets that we can participate. And that's -- we've spoken a lot about that in the past, how we have been very selective in a lot of the niche markets that we'll be adding into our portfolio. So that's kind of the way I like to -- we like to think about it.

Perfect. And how about -- Vicente, on the sort of appetite or scope for divestment. I mean I'm assuming that the acquisition criteria apply as well to the existing business. Maybe just clarify that? And is the assumption that just because of all the integration needs and the COVID disruptions have broader M&A activity, divestments are really at least sort of 12 months-plus away from now?

Yes. Potentially, yes. Yes, Julian. I mean, again, we -- as I mentioned here before, we continue to be very focused on integration and enhancing the value of all the businesses. And so that's where we're very focused. And I think as we've said before, when we created the R&D, we carved out some businesses to help with the increased flexibility if the time comes to evaluating this portfolio. And as we made reference, these businesses are kind of the specialty vehicles, power tools and high-pressure solutions. For here in the short to medium term, we're very focused on integrating and adding value to these businesses.

And one question I just had was around the industrial compressor market specifically. There has been some consolidation in recent years, not just your recently concluded RMT, but some other businesses, for example, from the former UTX being merged into Hitachi and so forth. Atlas Copco in the background sort of continuously doing bolt-ons as well. So just wondered kind of what your thoughts were on this market. Do you think you're at some kind of tipping point perhaps on pricing power, whether in OE or aftermarket because of some of that consolidation that's happened? Do you expect to see better competitive dynamics because of all this? Or you think that already, this was a very disciplined market and perhaps not much changes on that front?

Well, Julian, I think we've spoken a lot when we -- at the Gardner Denver side on legacy Gardner in Denver, Ohio, were very prudent with price, and we did a lot of work to really bring a lot of discipline on price. So we will continue with that. I think there will be some of that discipline in the market. We expect that this technology is being sold such a mission-critical technology, it kind of brings that discipline inside. And at least, as we've said here earlier in the call, we generated price in the first quarter. We continue to be very prudent on quality of earnings and the fact that we believe that if you have product differentiation, you can come on price. So yes, I mean, we will continue to see that prudency, at least from our side. And so we expect the market to behave similarly.

Great. And then on capital deployment, I fully understand that debt reduction, the main priority, possibly some acquisitions on the smaller scale over the next 12 months. If people are sort of asking about share buybacks or dividends, what are the updated thoughts on those 2 avenues?

Yes. I mean I'd say, long-term buybacks and dividends are avenues of capital deployment that we will consider. And there are areas that we will continue to revisit with the Board on a periodic basis. But important to note that those are not part of the current capital allocation policy. So in the current environment, we view capital allocation the same way we were doing here with GD not long ago, which is bolt-on M&A, internal investments, particularly around growth and the prudency with the debt pay down at appropriate time to manage leverage.

I see. And this is maybe more of a delicate question, perhaps, that we've had from some investors in the past 6 days. Just around the CFO position has changed a couple of times in recent years. That can strike investors as a bit curious, perhaps. So I don't know if there's any color at all that you could provide on that topic. I understood, if not, but I just thought I would ask.

No, Julian, yes. I mean I think when you look at the path, each of the CFO departures was unique in its circumstances and had nothing to do with any disputes with the company or any financial matter. And you look at all my other direct reports, I mean, turnover is very, very low. And you'll remember that we spoke a lot about our #1 strategic priority is talent, and we continue to acquire talent and even so continue to do so here now after we actually closed the merge. But we're excited, looking ahead, to have Vik step into the role. I have worked with Vik since the time I started at Garner Denver back in 2015. Vik was my VP Finance for the Industrial segment when I was running Industrials. And I want to remind everyone that we have also 2 really strong ex-CFOs on our Board. Bill Donnelly, ex-CFO from Mettler-Toledo and John Humphrey, ex-CFO of Roper Technologies. Both of them created an amazing total shareholder value creation at their respective companies. And both have always been part of the process, and here, clearly mentoring Vik as Vik has been on the succession planning here for quite some time over the years. And Vik most recently demonstrated great leadership on the finance and IT integration planning and execution as he was kind of the lead in these work streams since April of 2019. So I definitely look forward to here working with Vik as he is both strategically and operationally driven, and really well aligned with our culture and values.

That's helpful background. One question I've just had was around the, I suppose this is maybe more focused on industrial compressor, but maybe more generally applicable as well. But your main global peer in the compressor side, at least, extremely successful at kind of mining their installed base for aftermarket in terms of the steadiness of that revenue, but also the high margins and returns they can derive from that. So I wondered, now that you're putting together these 2 large installed bases across the whole range of small, medium and high horsepower compression, anything you might do differently to get the most out of that installed base for the new Ingersoll Rand's aftermarket revenues. There's certainly the perception that your main gear is sort of ahead of the pack in how they do aftermarket. And I'm not sure if that's genuinely something different they do or perhaps it's just a function of their larger market share on the installed base. Any thoughts on that topic?

Sure, Julian. Yes. I mean it's definitely an important topic for us. And if you think about Industrials segment, Garner Denver aftermarket for us was roughly 35% of sales. If you were to look at the CTS, which is the compressor business for Ingersoll Rand, their aftermarket at 50%. So there's definitely a lot of great lessons learned from what Ingersoll Rand has done that are now applicable to Gardner Denver to be able to get that percentage of sales much higher. Now some of the differences have been around the direct service and direct -- be able to service your compressors direct. So a lot of work that is going behind that. And in addition to that, I'll say that from a technology perspective, the iConn platform and our IoT technology platform and Ingersoll Rand also has one, and we're now consolidating the 2 into 1, is going to be very helpful for us going forward as a unified company to be able to drive a better aftermarket progression here in the compressor market.

Perfect. I think that's most of my e-mail incoming questions. I don't know, operator, if you have any audio ones in the queue.

[Operator Instructions] There are no...

And if there's no questions on the audio, one more recently I've just had around. I think one of your previous companies, Danaher, has always been very successful at balancing cost control and margin performance in downturns, but also managing to find ways to reinvest at those periods and so come out of that much more quickly perhaps than their competitors who are still in massive cost-cutting mode, even as the recovery has got underway. Maybe help us or give us some insights into how you think about balancing those 2 aspects. You have the synergies, you then got this cost-cutting on top, you're trying to fight volume deleveraging, while at the same time, perhaps reinvest in the parts of the medical business, oil-free compressors, some other areas?

Yes, Julian. Well, so that's -- I mean, you actually highlighted a few there that are top of mind. But yes, I mean, I even go back to even the last down cycle, '15 and '16. Obviously, when I was running Garner Denver as well. And we -- in those times is when we created and invested heavily on demand generation and a lot of the commercial activities that we have today that we're still utilizing in the new Ingersoll Rand. And now what we're doing is exactly along the lines of what you mentioned. We're reinvesting in product -- product development and technologies by reprioritizing a lot of the products across both companies. And we're finding, definitely, some very good niche markets that we're taking what we would like to say, kind of double down in terms of the resources. So sometimes, it's not that you have to do a lot of incremental spend, but it is that you have to reprioritize and pick the different areas where you want to say, yes, and the ones that you want to say no, to really accelerate the momentum when the market gets back up again. So we're definitely doing a lot of reinvestment. We're doing also what we call a lot of the research reallocation to be able to reallocate, whether it is engineers or funds from a marketing and sales perspective to those end markets that we see will be the most prone to be successful markets when the market gets back up again. So to answer your question, I mean, absolutely. I mean we view this from the lens of, yes, protecting the margin, protecting the decremental and protecting the company from business continuity. But at the same time, yes, absolutely, it's the power of the and in between that it is taking the cost but also and doing the investments in the company for long-term success.

Perfect. Well, I think on that note, we're out of time, unfortunately. So thanks very much to Vicente, Vik and Kristen for having this interesting discussion with us. Thank you, everyone, for dialing in as well.

Thank you, Julian. Thanks, everyone.

Thank you.

Thank you.

Thanks. Bye-bye.

This concludes today's conference call. Thank you for your participation. You may now disconnect.