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

Good morning, everyone, and welcome to our next fireside chat. We're really happy to have Ingersoll Rand with us today. We have Vicente Reynal, CEO; Vik Kini, CFO. We have a special guest. I did not know Mike Weatherred was going to be on, who is the Senior Vice President, in charge of IRX and Business Development. He's joining us as well. And we have Chris Miorin, who is Investor Relations. So guys, thanks for being on with me today.

Thank you. Thank you, Joe. Thanks for inviting us.

Yes. So maybe kicking it off, Mike, since you are part of the program today. I wanted to start off with just what you've accomplished over the last 2 years. I remember your presentation on -- it was GDX at the time, was part of Gardner Denver, and all of what you've accomplished with IRX in the last few years. I'm just curious, for the benefit of those that aren't listening, maybe if you could just spend a couple of minutes on how IRX works and why it's such a powerful long-term driver of value for the company?

Yes. Thank you, Joe. As I said that day, and I often say, everybody wants to talk about business operating systems. And then I wait for the chuckle, and there usually is a painful one.

A lot more for now.

Yes, yes. Yes, yes. The thing I would say, Joe, so maybe it will help if I draw the context between where we were then and where we are now. And when we saw you in New York and kind of publicly started talking about now IRX, Ingersoll Rand, execution excellence for the first time. We were about, let's call it, 15 months into launching the process and program into -- at Gardner Denver. And we were at the time and continue to be in a hyper learning mode, I think, of the power of what we can do with the process intensity. And for those of you that are hearing about it for the first time, Ingersoll Rand execution excellence is really -- it's our economic engine. And we use it in a variety of things from M&A, integration to DEI -- DE&I deployment, cash collections, and then, I would say, most rigorously in commercial execution every day. And Joe, you would have heard several stories from Vik and Vicente regarding the way we were able to integrate the 2 Ingersoll Rand and Gardner Denver into the new Ingersoll Rand and capture a lot of the synergies et cetera using IRX. So that kind of begs the question that you asked, what is IRX. And I would say, in its most simple definition, Ingersoll Rand execution is a daily management process of self-directed work teams set out to accomplish a bridge based goal. And when I say bridge-based, I'm really talking about an extra wide improvement. So it can be revenue, inventory, dates with project management, et cetera. There's always a clearly stated objectives. So the team -- so I think the power and what I'm learning about every minute of every day is the power is the initial phasing and development of assumed standard work and the goal and task to accomplish that. And then through these 100-day sprints, which Joe, you'll remember from New York, happened in 40-minute weekly sessions, the ability to course correct and countermeasure.

Mike, that's super helpful. And I do remember that from New York that the 40-minute weekly sprints really did stick with me. I guess, as you think about the pandemic specifically, how did that impact potentially accelerate, potentially impede your ability to continue to operate those weekly meetings as well as you had previously?

Yes. So the -- so at the -- in New York, we had about 60 of those sessions going weekly. By the time we got to the integration, let's say, we had something like 80. And we actually had our first IDM and you'll remember, Joe, we also talked about it's not a training, it's an install event, which at the end of about 3/4 of a day, you actually run the first session. And 100% of them done up to that point in person. And we had our first installation in the new Ingersoll Rand planned for -- I'm pulling the data out of the air, but something like March 18. On March 16, we went home not knowing we would not come back for now a little bit -- well over a year. Vicente asked me if I thought we could do the installations virtually, and I actually called him to tell him, no, but chickened out and went for with the virtual installation. And I'm telling you, Joe, the night before the first virtual installation, I could not sleep because I just could not -- I just kept thinking about how could you do something that's best done by flip charts and sticky notes? How could we do that virtually. And so we did it and it actually worked very well. And part of the reason why I think it works in the virtual environment well is the intensity of the attention. And so just like the Webex you're doing and with us present here on the screen, you would think, well, this would certainly be best done if we were all in person, but maybe the fact that we're all looking at a screen and highly engaged and not doing 3 or 4 other things makes the intensity of the outcome even better. So I think that we were actually very lucky to have the IDM tool because we went from 1 to another 130-plus installations in a real fast period of time. So we now have 225-ish Impact Daily Management weekly processes running every week, 7 days a week. I mean, we have some in the Middle East, obviously. But the great thing about it is, we now have many teams getting up -- the Gardner Denver teams now are into their, call it, eighth, ninth and tenth cycle of that 100-day sprint and we see incredible rigor. And then so those early days installed in the new Ingersoll Rand are now coming up on their fourth, fifth and sixth iteration of the 100-day sprint and equally impressive. And I'm almost embarrassed, but to say it, but it is kind of the way we run the company. I mean, next week -- week after next, Vik and Vicente and I and a few other are going to spend time with the teams, some in the field, some in the factories. And what we'll basically do is a week-long of IDM reviews. And they'll run the process. And the process has certainly tweaked, I would say, for better, Joe. But if you remember the one slide with the racetrack around and the 11 topics -- 12 topics, including the bridge, it's basically the same format and process formula.

That's really great to hear. I guess, maybe my last follow-up on this, Mike, I don't recall exactly like the portion of the organization that was utilizing this back in when you were part of Gardner Denver. But like how many executives, what percentage of the employee base is utilizing this today? And is it broad-based across the portfolio at this point?

Well, the answer -- the short answer is yes. It's broad-based. And when you saw it, Joe, I think we talked about that probably, let's say, 40 of the 65 or 70 at the time were commercial based. And what people in those commercial-based IDMs quickly discovered is that it could be used in other things like inventory reduction, like I2V, innovation and value attainment. We now run -- the other answer to the first part of your question is 100% of the executives are involved, including Vik and his counterpart in HR and Legal, et cetera, all run IDMs weekly to operate their departments and functions. And I think the thing that is most impressive to me, and it was -- again, been an extreme discovery process is that the power of establishing a 100-day objective and initiating your initial best guess of what standard work looks like allows you to problem solve and have a more likelihood of the outcome with each 100-day passing cycle. That said, it's a little bit like one of those weeds you get in your garden that you can't quite control because it kind of feeds on itself and has, in many ways, self-deployed.

Good analogy there.

Well, we have some weed in our Gartner a few years ago, and we still have. So I don't know -- I don't even know what it was, but we have to burn it then.

Well, Mike, I appreciate the guest appearance today. Thanks for walking myself through it again and the rest of the audience. I think it's super powerful. And maybe because we are kind of talking about at least one of the levers being margins. I think the next logical question, I think, for me, is really just going to talk through that wonderful funnel that we always talk about, the $350 million. I know that you guys have committed to $300 million in savings from the integration. And I also know a lot of the headcount actions are really kind of behind you. So whether this is Vicente or Vik, if you guys can maybe tackle what you see as kind of the next opportunities with the procurement side and the footprint side? And then also, like both come with complexity. So help me understand how you're managing through that complexity as well.

Yes. Sure. I'll start. And I feel like we should maybe let Mike just keep going. He's on a roll here, but I think it's a nice segue because I think to answer the last part of your question, how do you keep the momentum going? It's literally what you just heard. IRX is literally the toolkit that we use, these IDMs, every facet of the synergy equation, whether it was the headcount component that was really more 2020, as you mentioned, whether it's more the supply chain components, which is really the procurement savings as well as the I2V or the footprint piece, all of them have IDMs, as Mike spoke to, that we're literally going through on a weekly basis. So I think in terms of keeping the rigor, keeping the discipline, it's exactly what you just heard from Mike in terms of the same process. I think, Joe, to your point, you're absolutely right. We've stated pretty explicitly that we have a $350 million funnel, like we mentioned before, a funnel is just that -- it's a funnel, but it always gave us that confidence to be able to deliver the original target of $250 million, and obviously, you saw a great head start on that in 2020, and it gave us the confidence to increase that to $300 million. In the context of kind of where we are in that kind of cycle and how we should think about the delivery, I think it's pretty simple. When we think about the 3 components, the structural piece really is kind of behind us. That really was executed much more through 2020, really, frankly, right after kind of the merger and a lot of what Mike spoke to, the planning efforts we did, allowed us to execute on that literally 1, 2 weeks into the new company. As we sit here right now, I'd say the biggest component that we're working on right now is really the last 2 phases: supply chain and footprint. Supply chain really is the procurement piece, which we're well underway, and I2V as well. And I2V, innovate to value. I would tell you those 2 being kind of the biggest pieces of the direct material equation, which we really expect to deliver very tangible results really through this year into 2022. And the third piece of the equation, which I will say is always kind of purposely been the, I'd say, the piece that we expect to execute more towards the back end of that 3-year cycle is footprint. Obviously, some of that is just in the context of, in year 1, we wanted to really make sure we kind of have the foundation problem before we start thinking about footprint optimization in a much more meaningful manner. And clearly, with COVID, that probably limited our ability to go -- look at footprint rationalization in a more meaningful manner. Well, now that we're kind of seeing a little bit of a light at the end of the tunnel in that respect. Clearly, the teams have a lot of the funnel, a lot of the kind of blueprints for lack of better word say it. I would tell you, we've already been doing a lot of work in the realm of sales offices, headquarters, locations and things like that nature. And I think really more towards the back end of this year and into 2022, you'll see a little bit more of the, I'd say, the footprint and the ops kind of optimization. So well underway, I think we feel a lot of confidence in the $300 million target and sure, could there potentially be some opportunity above that, perhaps, but I think $300 million is a pretty prudent number for right now, and we'll revisit that as we move forward.

That was -- that makes sense. Vik, I appreciate the comprehensive answer. I guess one follow-up to that would be just on the direct material savings, right? You have this -- yes, you've always said it's partly related to volumes, right? And volumes seemingly are coming back. So that's a very good thing. But you're also experiencing inflationary pressures. Does that curb some of the opportunity at all or maybe even augment the opportunity? I'm just trying to understand how that impacts your ability to get after those direct material savings?

Sure. No, it's a great question. I don't think for us, it changes when you think about it over a multiyear time frame, does it necessarily change the way we're thinking about it? No, not necessarily. Obviously, you are correct, much like every other company, I'm sure you're speaking to today. Clearly, inflation in the pipeline and dealing with things from a direct material as well as logistics perspective, we're no different than others in that respect. But I think when you think about the power of $2 billion of direct material spend coming together, even in the context of last year, you talked about volume. Volume was obviously at much more depressed levels comparatively in 2020 versus the baseline that we used from 2019. But I think the team has done a great job in terms of probably getting slightly better price percentage realization from a direct material perspective than we probably originally anticipated. So I think we have a lot of levers to play with. You're absolutely right. Probably the one that look forward to look to going forward is more on the volume side of the equation. But I think the good news here is we continue to recalibrate the funnel, I think, with regards to the momentum we've seen and the 3-year trajectory of where we think the kind of procurement savings as part of direct material can come from, we still feel confident. And then the other kind of lever that we're looking at here is, sure, inflation is in the equation, but that's also why we look at I2V. I2V is the other component of the direct material equation of kind of how can we redesign products, either de-content from taking cost out or adding more content to be able to kind of increase the value from a commercial selling perspective. And I think we're very encouraged by the funnel and the momentum we've seen, including what Mike spoke to. In the context of last year, we did multiple product summits virtually. And as part of the product summits, not only was it focused on innovation and NPDs, things like that, but also how can I2V be a part of that equation. So I don't think we missed a beat on the I2V side despite this kind of remote work environment we find ourselves in for last year.

That's awesome here. Vicente, I want to switch gears to you and really kind of focus on some of the longer term growth drivers for the company. I mean, you guys have mentioned the hydrogen opportunity water, oil free, and you put some pretty sizable addressable markets out there for each of those opportunities. Still relatively small pieces of your business. And so I'd love for you to maybe just kind of step through -- maybe start with hydrogen. Where do you see Ingersoll Rand play in hydrogen, and we'll go from there?

Yes. So on the hydrogen side, what we showed a couple of earnings calls ago is that how we can leverage our compression technology into dispensing units. And when you look at just the opportunity in the dispensing units over the period of time in terms of the expected growth, it could be -- it's going to be roughly -- it was set to be a $2.5 billion addressable market. And that is just purely on dispensing units, assuming that, obviously, the growth and the installed base kind of works the way a lot of the reports and kind of countries are saying that they're going to do. Now beyond that, we're now also working on other technologies in terms of how can we continue to leverage our high compression devices to really be more effective in the entire value chain. And so publicly, we haven't gone out and say, how much that $2.5 billion addressable market can expand. But for sure, we're working on how do we take that $2.5 billion and make it a $5 billion addressable market and continue to leverage our technologies on that scope. We're definitely working with some pretty large kind of customers to prove out our technology. And I think at the right time, we'll be able to talk more about that. But I think it's exciting that what we're very focused is on the specific areas where we believe there's going to be some real growth momentum. Definitely, dispensing is going to be one of those. And then the other one is around decarbonization, and how when you go to a steel mill, you can use a lot of the high-pressure compressor devices to really push the hydrogen fuel into the production or the steel mills. So I think there's a lot of good prospects on the hydrogen side. And hopefully, here, over the next few weeks, we'll continue to talk about more of that publicly. Beyond that, I...

Vicente -- sorry, just on the hydrogen side for a second before we move on to the other ones. So just to clarify, right, you guys have talked about, I think, roughly a funnel of like $90 million or at least that's what the funnel was in 2020 or greater than that number. Is that just on the dispensing units today that's not on like this steel mill opportunity that you're talking about that you just mentioned?

That's correct, Joe. Yes, that's purely dispensing. We show -- yes, the numbers that we show was purely on dispensing, yes.

Okay. Got it. And when you think about the application on the dispensing side, do you think that this application is more better suited for trucks and autos? Like how are you thinking about that within that addressable market opportunity?

Yes. Good question, Joe. It is really addressable to whether small like material-handling vehicles, which could be, obviously, forklifts. All the way to heavy duty vehicles, so Class A trucks and that nature. And we already are doing some on the consumer side, kind of more auto models. So in a country like Czech Republic and Poland, we already have dispensing units that are 4 refueling stations for some hydrogen vehicle that are kind of mostly used on fleets. So nobody is really applicable. We -- I think the beauty of what the team was able to do here, Joe, is that we were able to design something modularized, so that we could actually go into the small of highway vehicles, we call it, which is obviously kind of forklifts and things like that, all the way to scale that up to even all the way to trucks.

Okay. No, that's interesting. And I don't know whether you wanted to go down the oil-free side next or with the water side, but apologies for cutting you off earlier.

No, no, no, no worries. I was going to go into the oil-free. I mean oil-free continues to be pretty exciting. We always said that oil-free, it was roughly $3 billion to $4 billion market, growing at a much faster rate than what you typically see the other type of compression technologies. And if you remember back in the old Gardner Denver days, as we were launching some of the products, we said that we could only be participant of about 1/3 or 20% to 30% of that oil-free market. Fast forward that now into the combined company, we can touch the entire addressable market. So now the question is that how do we continue to evolve our commercial go-to-market to accelerate our penetration in the way we like to do it, which is kind of this dual-brand, dual-channel strategy of being able to leverage Gardner Denver and Ingersoll Rand brands into their respective markets and be able to capture as much share as possible. So I think we still see some very good growth momentum on that. You saw in the first quarter, we spoke about our total compressor, growing at 20% -- more than 20%. And the breakdown between oil-free and oil-lubricated, oil-free slightly higher than oil-lubricated, but fairly similar. And so it speaks that to volumes that not only we're looking for these kind of good growth vectors based on great kind of macro trends, but we're never forgetting the core. And we need to continue to support the core of our business. And I think the first quarter was just a very good example on how we protect the core, grow the core, while expand into these other addressable -- new addressable markets that we believe there's some good growth momentum there.

Got it. And how big is oil-free for you today?

We don't typically have said -- have communicated that externally, Joe, just mainly on strategic complications there, but yes.

Okay. Fair enough. And then just really quickly on water and wastewater. Maybe talk a little bit about some of the synergies between ITS and PST there that haven't been tapped yet. No pun intended.

Yes. Absolutely, Joe. I think this is the other kind of exciting piece that we see here at Ingersoll Rand is that, obviously, the teams continue to be dedicated in kind of running their P&Ls and seeing good growth through their P&Ls. But now leveraging the tool, and in this case, IRX is helping, leveraging the tool like the Impact Daily Management to be able to go into a specific end market. And now we have an IDM for we call that, the Ingersoll Rand Water IBM, with one in North America, and we do one in Europe. And this is basically multi businesses in the case of ITS and PST and multiple business run within, actually running an IDM as if they were a very unique entity in company. So again, it just picks to the flexibility that this is allowing us to become really agile and nimble in saying, this is an end market that we see, we can capture some good growth. Let's just find a way on how we can create a cross-functional team with multiple technologies, and then be able to drive some good growth momentum. And so the opportunity here is that when you go to a wastewater treatment facility, in the past, we were clearly selling just the blowers for the aeration. Or we were selling the mixers for mixing kind of the tanks or the dosing pumps to put the right chemicals in place to kind of manipulate or kind of clean the water or sanitize the water. And today, we're saying we will continue to do that. But on top of that, how do we leverage the multiple channels that we have to ensure that we're kind of maximizing the coverage in an end market like this. And I think what we wanted to do with that, Joe, is just provide an example on how water and wastewater is one example, but there's many other kind of niche end markets, whether in aquaculture could be another one and hydroponics, but I mean, there's a multiple of other kind of more niche end markets that we're following the same approach, which is we have multiple technologies, we don't want to disrupt the way we run our company, which is decentralized P&Ls and businesses, but then putting something on top that we can actually create the connecting points to do that. And in addition to that, I think the other exciting piece here, Joe, is that then leveraging demand generation, which is obviously an overarching digital marketing initiative that we have to really penetrate how we gather leads as a total holistic company in some of these end markets.

Yes. That's super helpful. I guess that, Vicente, the next logical question there really is just around whether you do this organically or inorganically, right? And congratulations, like the portfolio has totally changed not just in the past year, but really in like the past 2 months, down to 2 different segments, 2 more -- 2 segments. So as you think about the portfolio today, I think that the -- as we've discussed before, the kind of priority has been to really scale up PST. So I'm just -- you guys have been talking about this pipeline being a lot greater today than it was a year ago. Like help us understand kind of like a little bit of a flavor for what's in that M&A pipeline, how you're thinking about scaling up that business? Any color there would be helpful.

Yes, sure. Maybe if I can kind of give you a quick example on that is that if you think about the 2 segments, ITS and PST, it's almost like 70%, 30%, right? So ITS is much larger than PST. If you look at our M&A funnel that we talked a lot about growing it by 5x over the past kind of 12 months, right now, the funnel is more like -- almost like 50-50, if not maybe slightly larger on PST. So that just tells you the level of acceleration that we have done in terms of really understanding how do we grow the addressable market for PST, continue to stay very focused on the technologies that we like, which is obviously a lot of these kind of flow creation technologies and then basically accelerated the pipeline of technologies. So the opportunity is there to -- for us to be able to kind of, as you said, and we said, double in size the PST segment. Obviously, we have to do that through M&A. I will describe that -- maybe in the past, we were doing a lot of small tuck-ins. We have also graduated our funnel to be more kind of the -- maybe the medium-sized companies with a few of kind of maybe more larger, I don't want to call it transformational, but for sure, larger in revenue than we see. So as one question that came before, I thought -- I think it was during the call that do we see a way of deploying $1 billion or several billions over the next 12 to 18 months? And our answer to that is yes, absolutely, at least everything that we see in the funnel that we have been very selective at putting and what we have in the funnel is actionable. I mean, we just don't put the pipe dreams because, I mean, those get a very weighted funnel of a weighted average number of maybe more like 0%. So we don't count that. So yes, I think it's really exciting what we have. And you can imagine, Joe, I mean, we have -- our growth IDM that particularly talks about the M&A funnel every single week, every Friday at 8:00 am, we get together and we kind of drill down through the M&A funnel and the specificity of some of the KPIs and seeing -- we're seeing the velocity move and improve.

So Vicente, not to put you on the spot here, but would you be a little bit bumped out if you didn't put at least $1 billion to work over the next 12 months?

Yes.

I would understand.

I think you will be very disappointing, yes.

Should I have said $3 billion to work? I mean I should have given a bigger number?

Yes. And the beauty of that to as well, Joe, is pretty disciplined. I mean we continue to be very disciplined. We continue to look at ROIC by year 3 to make sure that we hit the thresholds that we always wanted to do. And great example, Tuthill. I mean, Tuthill is going to be a very -- I mean, big home run for us, already seeing some great momentum, and that was also larger -- kind of medium sized, $200 million acquisition there. And already seeing some good momentum, yes.

Okay. All right. Just maybe switching gears quickly into the segments. ITS, incremental margins this quarter were superb, north of 60%. It seems like you're managing price costs in the supply chain pretty well. I guess just in 2Q, why wouldn't incrementals be kind of 50% plus, just given the growth that we're seeing in the business?

Yes. So Joe, I think, obviously, to your point, we did a -- I think we did -- the teams, I should say, really did a great job managing decrementals in last year's environment. And obviously, now that we've kind of returned to growth, you obviously see some healthy incrementals. I think we continue to expect to see good incrementals. But clearly, in the context of 1Q, at 65% plus type of incrementals. Remember, first quarter, well, definitely saw some benefits in the context of, for example, 1Q year-over-year, last year first quarter, we really didn't have any synergies, right? So 1Q was probably a bit of the -- maybe the easier comp, comparatively speaking. 2Q onwards, we obviously now kind of have a full year kind of year-over-year from a synergy perspective. So while we still expect to see good incrementals on a year-over-year basis, I don't think we quite expect to see the level that you saw in 1Q. I still think 30%, 35% type numbers, we're still managing price cost in a very disciplined manner. As we've talked about, we've taken quality of earnings as a huge focus for us in the second half of last year, particularly in '19 as we did take some targeted price increases. You can be rest assured here, given the commodity environment we find ourselves in. We're, obviously, looking at kind of, I'd say, some targeted kind of out of cycle price increases, for lack of better way to say that, to continue to manage that equation. But I think we still expect to see good margin expansion opportunities on a year-over-year basis, maybe not the same type of incremental we saw in 1Q, but still pretty healthy on a go-forward from an ITS perspective.

That makes sense. And I guess maybe just sticking one other question on ITS. One kind of theme that's emerging across the market is this whole, early cycle, mid cycle, late cycle and how each of the companies are positioned? I guess, as you think of your own ITS portfolio, how do you think about that business being broken up across like early versus kind of like mid, late cycle?

Sure. Yes. Maybe I'll start and let the guys wane as well. Maybe I'll answer kind of backwards here. The kind of more, what I'll call, medium later cycle, we tend to correlate a little bit more with the kind of larger project-based businesses that we see in our business. So you can think of the Nash/Garo business, vacuum liquid ring pump to compressors. You can also think more about this in tropical compressor business from the legacy IR side. I would say, roughly speaking, 15%, 20%, roughly speaking, up the 15% of the ITS portfolio would probably fall into that category. With the balance kind of falling more into what I'll call the core compressor, blower, vacuum, and then obviously, power tools as well-being for that segment. So that's probably the right way to think about it in terms of that mix, if you will.

Got it. No, that's helpful. And then also in that context, you've also got an aftermarket business that should be fairly resilient throughout, right? That's...

Absolutely.

Call it, about 40% of your business, if I -- yes. Yes. Okay. Cool. Switching gears to PST. 2020 probably got some benefit from like COVID-related growth. I guess like how should we be thinking about the headwind in 2Q and then for the remainder of 2021 from the growth that you benefited from last year?

Sure. I think in terms of -- to Joe, to your point, absolutely, we did see, I'd say, some very outsized growth in 2020, specifically from the medical side of the PST segment. Obviously, we're selling miniaturized compression technology that goes into breathing technology, lab, life sciences, diagnostics type equipment. We didn't necessarily disclose the exact amount, but I can tell you is well north of $10 million, well north of that number in the context stuff, the amount of what we'll say COVID-related demand that we saw in 2020. Largely, I'd say, increased orders probably in 1Q, 2Q and increased shipments in the 2Q, 3Q time frame. So your point is very valid that we will see a bit of a headwind here in the middle part of 2021. And I think the beauty of the portfolio, though, is when you think about, one, first and foremost, the medical end markets themselves, quite healthy. So while we are facing maybe this one discrete kind of headwind, I'd say the overall medical end markets continue to remain very healthy. It speaks to, I think a lot of the momentum we've been talking about for the last few years where not just having gas pumps, but having liquid pumps and liquid handling technology, a lot of the design wins that we've been speaking about for a number of years. You're starting to see a lot of that really click into the funnel. So I think that's helping to compensate. But the other piece is the other kind of 2/3 of the segment, which is the legacy PFS ARO businesses that came from legacy IR side of the equation. I'd say a combination of good industrial kind of end market exposure as well as a lot of what Vicente has been speaking to earlier with regards to animal health, hydrogen, water, a lot of these niche end markets. And so Joe, I think despite the fact that we do see the headwind for medical, it's really being compensated by good growth from, I'd say, the other core medical markets but also PFS ARO. And as our guidance said, we still expect to see high single-digit organic growth for this segment from a total year perspective despite that headwind we mentioned. So I think we're really encouraged by the momentum we're seeing here. And now the kind of diversity of end markets we have across precision and science, which is really one of the attractive features we feel about this segment.

That's helpful. A couple of other quick ones for me just to kind of end to round things off. I guess the first one, just going back to M&A for 1 minute. Vicente, as I think about the types of acquisitions that you're looking for, especially with PST, that seems to be like probably margin accretive to the entire portfolio. But I'm just curious, like, are you looking for margin accretive type acquisitions? Are you looking for acquisitions where you could actually deploy IIRX and really improve the value of those businesses? Like what's kind of like the sweet spot for you?

Yes. No, I'll say that the sweet spot is one that we find a company that has, it doesn't have to be margin accretive. And we say that -- I say that because we can quickly change that we get the tools in the playbook to be able to improve that. So we're looking for good businesses. We're looking for businesses that are good that play in very good markets. We're looking for really good premium brands that have a really solid channel to the market. But one that we can grow based on our commercial footprint. So if you think about it, businesses that could be even gross margins in the 30s, that we can even improve to the 40s. The PST is -- I mean, medical is just one example. I mean, medical back in the Gardner Denver day is good business. Margins were in the -- gross margins were in the 30s, and it's now way above 40s. So we have the playbook on how we can improve these good businesses and make them great businesses. So yes, it doesn't have to be margin accretive from day 1.

Got it. No, that's helpful. And then just maybe to close out. You guys are creating this picture, right, where the portfolio is just heading towards high 20s type EBITDA margins over the next few years, right? And it seems very achievable. Under that scenario, free cash flow margins seem like they could get into the 20s. And I'm just curious like how you're thinking about that longer term and that opportunity on the free cash flow side?

Yes. I mean, Joe, I think this is the exciting piece I will say here for us is that, yes, I mean, you see a PST that is already kind of in the low 30s and ITS that kind of easily get into the path of the mid- 20s, and we see no reason why it could get above that. So yes, pretty quickly, you see 2 segments that are best-in-class kind of margin profile, mid- to kind of high 20s, generating great cash. We're low asset kind of businesses that we have, low capital intensity, businesses that we have. We've actually more room to improve our cash generation efforts. So I think for us, yes, it's one that we can definitely see that we can continue to do a lot of this kind of compounding effect of a buying a company that it is a strategic fit for us. I think that's one very important topic there, Joe, is that all the companies that we have purchased have a strategic fit with our technology and commercial footprint. We don't buy companies just to do it kind of EBITDA accretion multiple and things like that. We buy because we know the businesses we can actually include them in our technology portfolio and then can expand and that's why our post multiple synergy of what we buy, I mean, we cut it almost by half. But yes, on top of that, I mean, this kind of free cash flow accretion, Vik?

Yes. No, I think everything Vicente said is 100%. When you think about the levers we still have, Joe, we've talked about a lot. Vicente mentioned net working capital. It shouldn't be lost that we made all of our employee shareholders. We've tied an initiative to then be parallel with us net working capital optimization because, frankly, we feel that every employee in the company, in some manner, can touch one of the components of working capital, if not multiple. You also have areas like Vicente said, CapEx-light business. We have tax opportunities we've spoken to. There's just a lot of levers that we continue to see that we're able to pull. And quite frankly, even in the context of the way we started the conversation with IRX and synergies. When you think about synergies, the first place everyone goes in the cost savings. Well, when you think about, for example, the procurement initiatives, we're also looking at ways that we can renegotiate terms to do that in a better manner. When we talk about footprint optimization, not just the footprint savings, but then you take side A and side B and put them together, you should be able to get some inventory and working capital benefit from that as well. So that working capital kind of dynamic and how we can continue to do cash flow, I'd say, is really kind of that other piece that's the layer for pretty much every initiative that we're looking at, and we've really -- we've hopefully motivated and made every employee in the company kind of a stakeholder in that as well.

I'm sure. Vicente, Vik, Mike, Chris, always a pleasure. Thank you for spending the time with us today, and hope you have a great rest of your week.

Thank you.

Thank you, Joe.

You, too.

Thank you. Bye-bye.