Ingersoll Rand Inc.

Good morning, and welcome to the Ingersoll-Rand Q2 2020 earnings conference call. My name is Megan, and I will be your operator for the call. The call will begin in a few moments with a speaker remarks and then a Q&A session. All calls are on mute. To ask a question, please press star 1 on your telephone keypad. Please limit yourself to one question and one follow-up. I would like to introduce Vic Kenney. You may begin your conference.

Thank you, and welcome to the Ingersoll-Rand 2020 second quarter earnings call. I'm Vic Kinney, Ingersoll Rand's Chief Financial Officer, and with me today is Vicente Reynold, Chief Executive Officer. Our earnings release, which was issued yesterday, and a supplemental presentation, which will be referenced during the call, are both available on the Investor Relations section of our website, www.irco.com. In addition, a replay of this morning's conference call will be available later today. Before we get started, I would like to remind everyone that certain of the statements on this call are forward-looking in nature and are subject to the risks and uncertainties discussed in our previous SEC filings, which you should read in conjunction with the information provided on this call. For more details on these risks, please refer to our annual report on Form 10-K filed with the Securities and Exchange Commission and our current report on Form 8-K filed with the Securities and Exchange Commission on May 1st, 2020, which are available on our website. Additional disclosure regarding forward-looking statements is included on slide two of the presentation. In addition, in today's remarks we'll refer to certain non-GAAP financial measures. You can find a reconciliation of these measures in the most comparable measure calculated and presented in accordance with GAAP in our slide presentation and in our earnings release, which are both available on the investor relations section of our website. Turning to slide three, on today's call we'll provide an update on the integration efforts of the company in the current operating environment as well as review our second quarter total company and segment highlights. We will conclude today's call with a Q&A session. As a reminder, we ask that each caller keep to one question and one follow-up to allow for enough time for other participants. At this time, I will now turn it over to the Sente Reynal Chief Executive Officer.

Thanks, Vic, and good morning to everyone. I want to start today's call by thanking all of our employees around the world. The COVID-19 pandemic has presented unprecedented challenges to all of our communities around the world, and I am extremely proud of how our employees have stepped up to continue to serve our customers, keep our community safe, and execute on the strategy of the company. This speaks highly of the culture we're building here at Ingersoll REN, and I appreciate all the hard work and dedication that our teams continue to display. Turning to slide four, I want to share more about the culture and some of the initiatives we're taking. Our execution excellence permeates the whole company and guides how we connect our values, strategic imperatives, and execution tools. We do this to drive our company purpose, which is lean on us to help you make life better. With IRX, we're now doing over 150 weekly sessions, but we're able to mentor over 2,000 leaders globally every week on how to drive immediate execution. We know that to create a unique and single culture, constant and open communication is imperative. So, a few highlights to point out. First, during this no travel time, we wanted to create a more direct and open dialogue with our individual sightings. So, Owning Our Future forums were born from this idea. These are virtual one hour micro town halls with individual sites where 45 minutes are spent on Q&A specific to that location. These have been some of the most meaningful conversations I have had with employees over the last three months. In just the last 30 days, I have been able to interact directly and live with over 6,000 of our global employees. Second, the team designed a powerful, interactive, and fun purpose and values virtual curation session. Employees are having fun as they really get to know and decide how to apply our values every day in the roles. Third, we recognized the responsibility we had as a newly combined company to create a safe space for employees to have deep conversations on important topics. We recently hosted five sessions where black employees openly spoke about their racial experiences. And we had a lot of employees attending, listening, and reflecting. And it was an emotional and inspirational sessions. So, when you think about everything that has happened since the merger took place, including the pandemic and its impact on the work environment, as well as the structuring and streamlining of the organization, it's very highly of the foundation we're building at Invisalign as we're still able to maintain a strong sense of unity, culture, and ownership mindset. And this is what makes us highly differentiated. Moving to slide five, I want to take a moment to update everyone on the integration of the company. and how we're executing in a thoughtful, safe approach linked to our strategic imperatives. The first phase and one that we started even before the formal transaction closed at the end of February is building a strong foundation. As we have indicated a number of times over the past few quarters, our integration planning began in mid-2019, soon after we announced the transaction. Starting first with deploying talent, as I described on a previous slide, we're creating a unified culture across our entire workforce. that is central to who we are. And a major milestone will come later this summer when we plan to issue the All-Employee Equity Grant that we view as central to our strategy in terms of driving accelerated engagement, ownership mindset, and sustainable long-term shareholder value performance. This foundation can also be seen in the areas of expanding margins and allocating capital effectively. With the help of IRX tools, we have been able to accelerate our synergy delivery with a distinct focus on reducing structural cost. We have also built a strong balance sheet with ample liquidity. And finally, we're embarking on our newest strategy of operating sustainability. As you will see on the following slide, we're taking very proactive efforts to embed sustainability through an ESG mindset and develop a cadence of transparency and disclosure as we move forward. As we look ahead, having a strong foundation in place will allow us to transition to the next phase of our integration, which is pivoting for growth. Growth in the organization will take on many fronts, whether it be organic growth, where we have initiatives designed to drive further product and service penetration, or inorganic growth, as we have a large funnel of bolt-on M&A opportunities, giving our $40 billion plus addressable market. And as we continue to optimize the business, this will lead us to the third phase of our integration, which is portfolio optimization. While our focus right now is to continue to improve the underlying nature of our businesses, we will continue to thoughtfully evaluate the assets within the portfolio, as well as adjacent markets that allows us to grow the current $40 billion addressable market I just mentioned. I want to talk about progress we're making on our newest strategic imperative, which is operating sustainably. It starts with building a culture that embraces various points of views, backgrounds, and experiences. And I believe that it must start at the top of the house. Our board of directors is 50% diverse. We want to be surrounded by the best, and that means high levels of diversity in race, gender, thought processes, and perspectives. I have been laser focused on this in the last few years. And having such a strong experience board, in addition to being 50% race and gender diverse, it's a point of pride. Our culture is also behind the strength of our COVID-19 response and why customers, employers, and communities are leaning on us. Increased reporting on ESG measures is important. Recently, we completed a materiality assessment that determine our most impactful ESG topics. And details of this are in our first sustainability report published last week and can be found on the investor relations section of our website. More important are the actions we're already taking. One example here is on energy use, which in our facility in Wuzhen, China, has gone solar. This will reduce the Wuzhen plant CO2 emissions by approximately 3,800 tons every year. And that's equivalent to the electricity used by more than 550 homes. So, let's talk about putting operating sustainably along with our other four strategies into execution and move to page seven to talk about our Q2 financial highlights. Overall, the business performed very well given the expected revenue decline due to COVID-19 pandemic and the downturn in the high-pressure solution segment. As we indicated during our last earnings call, Our goal was to manage what's within our control, focusing on protecting the bottom line and ensuring ample liquidity. The teams did exactly that as they delivered adjusted EBITDA of $241 million and adjusted EBITDA margins of 19.1%. This was a 270 basis point improvement from the first quarter on relatively flat revenue. On a year-over-year basis, margins were down 50 basis points. but when adjusted for the high-pressure solution segment, total company margins improved 160 basis points. The teams executed very well as we continued to accelerate synergies, which now stand at $125 million on an annualized basis, or 50% of our stated target of $250 million. The teams also managed short-term costs extremely well, which ultimately led to a total company decremental margin of only 22%. From a cash flow and capital structure perspective, we saw similar strong performance in the quarter as free cash flow was 230 million and liquidity now stands at $2.2 billion. Leverage also stayed flat the prior quarter at 2.6 times. Overall, I am very pleased with the efforts of the team as they remain execution focused and delivered strong results despite a challenging microeconomic backdrop. I will now turn over the call to Vic to walk through the financials in more detail. Vic?

Thanks, Vicente.

Turning to slide eight, you will see the QQ financials for the company. We provided the 2019 historicals on a supplemental basis as if the transaction had occurred on January 1st, 2018 to assist in clean comparatives for the quarter. From the total company perspective, FX adjusted orders and revenue declined 21% and 19% respectively. and continue to be impacted by COVID-19. This impact was seen within the ITNS segment where the Americas and EMEA region saw challenging conditions, particularly in April and May, partially offset by a return to positive revenue growth in China. Encouragingly, all regions saw improvement in order trends in June. The high-pressure solutions segment also saw the expected declines of over 80% in both revenue and orders due to continued overcapacity in the market and reduced activity levels. Overall, this led Book to Bill to finish at .96 for the quarter, which is generally in line with the levels seen in the prior year at .98. The company delivered $241 million of adjusted EBITDA, a decline of 23%. This was driven mostly by volume declines in the ITNS segment and high-pressure solution segment, as well as the impact of an increase in our accounts receivable reserve for the high-pressure solution segment due in large part to a single customer that declared bankruptcy. We will walk through this in more detail in the upcoming segment slides. Moving to slide nine, free capital for the quarter was $230 million, including $17 million of CapEx. The free capital was driven by the strong profitability performance of the business, combined with continued improvements in working capital management, particularly accounts receivable, as well as Q2 prudency measures, including reductions on non-critical CapEx. Free cash flow included $43 million of outflows related to the transaction, comprised of $28 million of synergy delivery spend and $15 million of stand-up related spend. From a leverage perspective, we finished at 2.6 times, which was flat the prior quarter despite $72 million of lower LTM adjusted EBITDA. While we do expect to see some short-term increase to leverage, we've shown the ability to deliver historically. On the right side of the page, you can see the breakdown of total company liquidity, which now stands at $2.2 billion. Within the quarter, we executed on an opportunistic term loan B debt placement of $400 million, which was completed at an attractive rate of LIBOR plus 275, OID of 98.5, and a 0% LIBOR score. The new term loan B has the same covenant line structure as the remainder of our debt and also matures in 2027. At the same time, we also increased our existing revolving credit facility by $100 million. Together with the cash generated in the quarter, total liquidity increased $650 million from the end of Q1, giving us ample dry powder to execute on our growth strategies as we look ahead, including continued discipline bulk on M&A. Moving to slide 10, our cost management efforts in the quarter were very strong. Starting first with an update on synergies, our funnel remains in excess of $350 million, and the teams continue to add incremental opportunities to the funnel, particularly as we build out more plans in areas like I2V and facilities. Vicente noted that our executed annualized synergies now stand at $125 million, which consists of structural and procurement synergies. Let me address each of these in turn. Within the quarter, we did accelerate the phasing of our synergy delivery, as we now have already executed on $100 million of annualized structural cost reductions with approximately $80 million of savings expected to deliver in 2020. These savings are coming from incremental headcount actions taken in the second quarter and reflect a $10 million increase to both the annualized figure and the 2020 in-year synergy delivery expectations as compared to Q1. Progress on procurement synergies continues to go well and remain in line with the figures communicating Q1 of approximately 20 to 30 million of executed actions, with approximately 15 million expected to deliver here in 2020. In total, we are now expecting to deliver approximately 35 to 40% of our overall synergy target in 2020, which is approximately $95 million a day. As we communicated previously, we are keeping the overall cost of the target at $250 million over a three-year timeframe, at this time, to remain prudent on volume-dependent synergies like Pyramid and I2V, given the current environment. We also continue to expect to incur approximately $450 million of expense in conjunction with both achieving these cost synergies and the associated stand-up with the new company. On the right side of the page, we continue to show solid progress on managing decrementals in the company. For the second consecutive quarter, we managed decrementals below 30% despite double-digit revenue decline with very strong performance in our IT&S, precision in science, and specialty vehicle segments. In addition to synergy delivery, a strong contributor was the additional short-term cost reductions we took given the market conditions, which yielded approximately $40 million of savings in Q2. All teams did a great job managing discretionary spend as well as right-sizing their cost structures given the operating environment within the corridor. So we do currently expect that approximately 30 to 35 million of these costs will return to the P&L in Q3. We're monitoring the environment closely, and we'll redeploy many of these measures if the market recovery is slower than expected. I will now turn it back to Vicente to discuss the technical.

Thanks, Vic, and moving to slide 11, starting first with industrial technologies and services. The IPNS segment second quarter order intake was $788 million, down 23% versus prior year XFX. The order figures contained two large debookings amounting to $20 million of other projects that would be not shippable and decided to cancel. These were two isolated situations, and we do not expect any similar debukings or cancellations of this magnitude as we look ahead. Revenues in the quarter were $830 million, down 17% XFX, and leading to a book-to-bill ratio of 0.95, including the debukings. As I have said in the past, the immediate focus in IT&S was utilizing IRX to create the proper organizational structure and to execute synergies. This will allow us to demonstrate that our combined organization can focus on controlling quality of earnings and result in much better incremental margins once the market gets back to more normalized growth. With this in mind, we're very pleased with how the team performed despite the tough environment, as we were able to limit incremental margins to only 8%, leading to 280 basis points of margin expansion. and a record adjusted EBITDA margin of 22.2%. From a commercial perspective, we feel it is important to break the ITNS into its respective product lines, as it creates better comparison and understanding of the performance. So, let me first ground you on the composition of the segment. First is the compressor, which are 60% of the total segment, and comprise largely of oil-libricated and oil-free product categories. Orders for the compressor category were down low to mid-teens, with oil-free compressors flat and oil-libertated offerings down in the mid-teens. Second is industrial vacuum and blowers, which comprise 15% of the total segment. Orders were down in the high-teens. These businesses are largely based in Europe, where customer closures early in the quarter drove order decline in the 30-plus percent range, while the last month of the quarter came back relatively strong. We're not implying that the strength in June will sustain, but we're monitoring that closely. Next is the pressure and vacuum solutions, which is 15% of the total segment. As a longer cycle business containing NASH, Gero, and multi-stage gear centrifugal compressor offering. Orders were down in the low 20s, driven largely by a record quarter in Q2 of 2019 on the multi-stage centrifugal business, creating top year-over-year comps. We also see our funnel currently weighted towards more projects being booked in the second half of the year, which is not typical in this business, but we believe attributable to some of the deferred investment decisions from our customers due to the environment. And finally, power, tools, and listing, which is 10% of the segment. In PTL, orders were down nearly 40%. For the listing side of the business, orders were down more than 50%, while tools business was down in the high 30s. What we find encouraging is that the tool business saw much better performance in June as compared to April and May, not only in orders but also on point-of-sale performance from our customers. And from a regional perspective, the American's orders were down mid to high teens while Europe, Middle East, India, and Africa regions would hit the hardest with orders down low 30s due to complete government countrywide shutdowns in certain countries within the quarter due to the COVID-19. Asia Pacific performed comparatively better as orders were down a little more than 10% with China flat and the rest of Asia Pacific down in the low 30s. And from a facing perspective, we saw the month of June much better across all the regions as compared to earlier in the quarter, so a sequential improvement was encouraging to see as well. For our product highlight, this quarter we want to highlight the oil-free PA-NX5000. Customers have a strong need for oil-free compressed air offerings. that can deliver airflow in the range of 4,000 to 7,000 cubic feet per minute, while being both highly efficient and tailored economically to the specific site requirements. Current offerings at this type of range are either very large compressors that need to be highly modified, creating lower efficiencies, or small compressors that are common economically with all the added accessories that need to be placed. The TA-NX5000 plays very well in this mid-size market. offering a very modularized product that can meet customer needs while delivering best-in-class energy efficiency. Moving to slide 12, we'll review the precision and science technology segment. Overall, the segment had solid performance, as orders were $201 million down 6% XFX. Revenue was $196 million down 8% XFX for book-to-bill greater than one. As a reminder, precision and science technology segment is composed of mission-critical flow creation technologies that run across seven P&Ls and 14 different premium brands, many of which have leadership positions in very attractive niche markets. In Q2, we saw orders growth of 7% X effects in the medical business with continued demand for pumps that go into oxygen concentrators, ventilators, and other products focused on fighting COVID-19. as well as strong demand for products on our Dosatron business, offset by some of the other product lines like Milton-Roy, MP Pumps, and Overdopper that saw a decline more in line with other industrial end markets. As you can see on the right side of the page, Dosatron is a fluid-powered, non-electric chemical and dosing injector pump, making it the easiest and most reliable way to accurately inject chemicals into water lines. Dosatron injectors work using volumetric proportioning, ensuring that chemical mixtures remain the same regardless of variations in pressure and flow. And the technology is mostly used in niche end markets, like nutrient delivery systems, water treatment, food safety and sanitation, and animal health. This business continues to see strong growth in this environment, with order rates up in excess of 20%. Moving to adjusted EBITDA, precision and science segment delivered $59 million in the quarter. An adjusted EBITDA margin was resilient at 30.3%, up 90 basis points year-over-year, and up 260 basis points sequentially, driven by the use of IRX tools to drive productivity, leading to incremental margins of only 21%. Moving to slide 13 and the specialty vehicle technology segment. As we indicated in Q1, our main priority for this business is to continue to capture growth in the most profitable manner, utilizing IRX and commercial tools like demand generation and e-commerce. And with that in mind, the specialty vehicle segment deliver on both ends with strong commercial and margin performance. Orders were $208 million, up 5% XFX. And revenue was $218 million, down 7% XFX. As a reminder, we expected revenue to be down as the second quarter of last year saw increased shipments due to some supplier issues that shifted revenue from Q1 to Q2, as well as suspected declines in the commercial and utility product offerings. While those factors did play out, the business saw continuous strength from the consumer product offerings such as Onward, highlighted on the right side of the page. We continue to find success with our direct-to-consumer or BPC approach, to educate consumers while leveraging our broad channel to sell and service the vehicles. With this focus, the business saw a record in terms of consumer vehicle shipment in the quarter, with a nearly 50% increase in terms of units. Moving to adjusted EBITDA, specialty vehicles delivered $41 million, an adjusted EBITDA margin of 18.9%, which was up 270 basis points despite The revenue declined due to strong product mix as well as continued use of IRX tools to drive productivity improvements. Moving to slide 14 and the high-pressure solution segment, the business performed in line with expectations during what was considered one of the toughest quarter in the oil and gas industry. Orders were $13 million, down 87%, which includes 6 million of cancellations primarily from customers looking to reduce the spend. Revenue was $22 million, down 82%, and was generally in line with expectations, as practically counts grew up approximately 85% sequentially from Q1 to Q2, and our sequential revenue was down 78%. The majority of our revenue base continues to come from aftermarket parts and services, with consumables being the most resilient piece of the portfolio. Even in this environment, we continue to bring differentiated innovation, with our newest valve offering highlighted on the right side of the page. Products like the Redline V3 valve, which increases useful life by nearly 40%, will be differentiators as we look to continue to win shares despite the decline in the market. From an adjusted EBITDA perspective, we were on track to be nearly breakeven. However, we took $15 million in charges due to increases to our accounts receivable reserves, resulting in adjusted EBITDA for the quarter of down $15 million. The major driver was a specific provision for a customer that declared bankruptcy in mid-July, which required us to reserve $12 million based on our internal policy. Given the bankruptcy proceedings are still working their way through the court, it is uncertain how much will be deemed collectible, and we have always taken a very prudent approach and view to reserve our entire outstanding AR balance in these situations. In addition, due to the current environment, we took a more conservative approach on our accounts receivable reserve, taking an additional $2 million charge in the quarter. We are actively working with each of these customers and expect to collect our outstanding receivables here in the second half of the year. As we pivot to the back half of the year, we don't expect the market conditions to materially change. And while fleet count is expected to sequentially rise to about 80 fleets in the third quarter, The continued overcapacity of horsepower in the market and cannibalization of equipment will limit the growth. As a result, we will continue to be very prudent on cost and push for break-even profitability or better. Moving to slide 15, we wanted to provide a quick snapshot of how the business has performed thus far in the third quarter. Through July, the total companies now meet teams in orders with book to build greater than one. The industrial technology and service segment is largely trending in line with the total business as orders are down 15 to 20%. The precision and science technology segment is currently flat, although we do expect that rate to trend a bit more negatively as the quarter progresses. Specialty vehicles continue to see strong momentum as order rates are currently positive, largely driven by ongoing consumer vehicle demand. And not surprisingly, the high-pressure solution segment is down over 90%. as we continue to see limited activity in the market. We're not providing Q3 or total year guidance at this time, but from a high-level perspective framework, we expect a continuous low market recovery in Q3. In addition, we expect we will see normal seasonality like we have seen in prior years, including the impact from European holidays and the typical downturn in specialty vehicle in the growth cycle. From a margin perspective, we will continue to manage decrementals. but we do expect some headwinds versus the level seen in the second quarter, a steady to 35 million of short-term cost are expected to re-enter the P&L with a partial offset from the continued ramp of synergies. We will also plan to continue to invest for long-term growth as we want the business to be well-positioned when the overall market environment stabilizes. I will also add that we will continue to be very vigilant on our leading indicators, and we intend to act quickly. Moving to slide 16, as we wrap today, we just want to leave you with some takeaways. We're very excited, as we're still early in our transformation. Our employees have been able to drive tremendous performance, even in this difficult environment. And soon, we will make our employee owners of this amazing company. From Rachel in the compressor assembly line in Campbellsville, Kentucky facility, to Paolo, one of our machines in Brazil. And from Gong Lin, who works in an assembly cell in Wuhan, China. Muhammad, in our distribution center in Charlotte. And Max, who's an assembly line worker in Zimmer, Germany. Supalani, a shop maintenance team member in Chennai, India. These are among the more than 16,000 employees globally, who will soon not only be able to say they work for an amazing company, but that they own part of an amazing company. with skin in the game on our long-term transformation, one that we're mapping out as a multi-phase approach executed by utilizing our IRX tools and all centered on our values and our ultimate shared purpose for customers, employees, and communities. So with that, I'll turn the call back to the operator and open for Q&A.

As a reminder, if you'd like to ask a question, please press star followed by the number one on your telephone keypad. We ask that you limit yourself to one question and one follow-up. Our first question is from Julian Mitchell with Barclays. Your line is open.

Hi, good morning. Maybe just a first question, Vicente, around that slide 15 on the right-hand side, the discussion around temporary costs. So, I think at the Q1 earnings, you talked about maybe a sort of 30%-ish detrimental margin for the balance of the year. You did come in better than that in Q2. But is that the rough sort of placeholder for the second half we should dial in as you sort of balance cost control with some reinvestment for the pending upturns?

Yeah, Nathan. I mean, I think the way we're thinking about it is, as you saw, you said, you know, Q1 and Q2, both decrementals were below 30%. What we're saying here is Q3 will see a little bit of more pressure, you know, due to some of these discretionary items coming back, offset by some of the synergy ramp. But that being said, we still expect decrementals to be in the low 30 range.

Okay, so low 30.

Low 30s for the second half. Yes. Okay, perfect. Thank you. That's clear. And then secondly, the free cash flow extremely strong in Q2. You know, receivables was about $100 million or so tailwind to that in the second quarter. Maybe just help us understand the puts and takes within that. how you see the second half free cash flow playing out, particularly around working capital performance, and also what level of cash charges should we expect for the year relating to synergy extraction and restructuring?

Yeah, Julian, this is Vic. I'll take that in two pieces here. So you're absolutely right. In the second quarter, really pleased with the free cash flow performance. Very good progress on the receivable side, generally across the portfolio. Clearly some more opportunity to go, but really pleased with the strong performance there in Q2. As we look ahead for free cash flow, kind of just in total, we do see opportunities continue on the working capital side. I'd say the biggest area continues to be on the inventory side of the equation. I'd say receivables and payables. You've seen good progress over the first half of the year. Continue to see some opportunities there. Inventory is clearly the piece that we're going to continue to look to right size, and we have a lot of, I'd say, opportunities and initiatives in place right now across the majority of the portfolio. In terms of the second part of your question, you know, we said at the end of the first quarter that we expect to see roughly about $100 million of cash spent for the balance of the year. around restructuring-related costs or synergy delivery costs in stand-up. We delivered right around $40 million of cash spend in 2Q and still largely on track. We would expect about $60 million in the back half of the year, which right now you can kind of equally split between the two quarters, and we'll see how the timing plays out, but that should be a good placeholder for right now.

Great. Thank you.

Your next question is from Mike Halloran with Baird. Your line is open.

Hey, morning, everyone. Morning, Mike. Hey, so just want to parse out on slide 15 again just what you mean by the sequential commentary, slow recovery. Obviously, there were some shutdowns that impacted the revenue trends in the quarter. When you looked for that sequential 2Q to 3Q, are you saying that sequentially we should see normal sequential patterns? I mean, excluding kind of the high-pressure business, but you know, pretty normal sequential patterns for the other three pieces, or is this just key, or is this more of a just keep in mind that there are some sequential softening that you have to worry about within a few of the pieces, but all else equal, you still do have a better 3Q on a revenue line than 2Q?

Yeah, so let me just take that into some of the pieces, but, you know, by segment. We do see typically seasonality in the Q3 due to the holidays, particularly in Europe. However, that is likely going to get offset by improving conditions throughout the quarter. And so, assuming that, you know, we do not see any second wave of COVID, of course. And as you saw, you know, IT&S orders were down 15, 20% in July, which is comparable performance to what we saw in June and better than what we saw in April and May. You know, we're watching this cautiously, given the uncertainty that's still expressed. And, you know, precision and science, similar conditions apply that I just made reference to the IPNS. Orders have started the quarter as well, as you have seen, you know, very flat performance, continued improvement from the months of June. And specialty vehicle is the business that does tend to see much more seasonality in Q3 versus Q2, particularly driven by the growth cycle. And you can see from historical periods that Q3 revenue loss tend to be down about 15 to 20% sequentially. Currently, consumer demand is helping to offset this a little bit, but we will continue to watch these kind of consumer orders as we go through the quarter. And finally, you know, high pressure, we just don't expect any material shift in demand patterns as we look really to the second half of the year.

Thanks for that. On the industrial tech side, really appreciate the granularity of the moving pieces there. How do you guys think about what share looks like and how that tracked? Maybe there was a little selling against you as the original combination of the two companies was materializing. But when you look at the trends you're seeing within the compressor, blower, vacuum side of the pieces, how do you think you're performing versus market? And any regional commentary would be appreciated.

Yeah, sure, Mike. I mean, I, you know, last quarter, we did a lot of commentary on the compressor side, particularly based on the association reports that are kind of the most known and we have access to. And we said that, you know, we felt in the first quarter, you know, on the compressor side, we took some share on the small to medium and some share on the large compressors in the U.S. What we saw in the second quarter is kind of holding share. So no taking or no losing share. on the compressor side. And what we see on the vacuum and blower, which is kind of primarily mostly in Europe through OEMs or, you know, end markets like wastewater treatment for the blower side, again, fairly consistent in terms of holding shares. So, again, we saw a second quarter where obviously tough across the world, but one that we're not concerned on losing share at all.

Appreciate it. Thanks for the time.

Yeah, thank you.

Your next question is from Jeff Sprague with Vertical Research. Your line is open.

Thank you. Good day, everyone. Hey, just first, if I could, just to follow up on cash flow, Vic, I think you said leverage is going to go up a bit in the back half. And just looking at kind of the likely, you know, LTM, EBITDA, right, it doesn't change a lot, I don't think. And the, you know, the cash restructuring didn't sound particularly onerous that you described to Julian there. Is there some other cash item in the third quarter in the back half that takes the leverage up?

Yeah, Jeff, I think what we're referring to here is on the LTM adjusted EBITDA, there will be a little bit of noise there as we kind of continue to lapse some of the previous quarters of 2019. In terms of the back half of the year, nothing major we would call out. Obviously, we do have some of the normal cash taxes and some of that that will play itself out generally in line with what we've said for the total year. But again, when we say there might be a little bit of pressure to leverage at the levels we're at now, we're not expecting meaningful uptick, you know, still in that 2.6 to higher two realm, but not much higher than that at all. And again, continue to see a good path to delivering like you've seen us do historically at the Legacy Gardener Denver. So again, not meaningful uptick, but even around the levels where you are right now and maybe slightly higher. Great, thanks.

And then Vicente, you mentioned a very active bolt-on M&A pipeline. Is the organization ready to take that on? Are you just cultivating a pipeline and we should expect you know, things kind of further out into the future? What's your general view on that?

Okay, Jeff, I definitely feel the organization is ready for it. You know, and we said in the past, you know, particularly around the precision and science technology, it's just a lot of focus that we're putting on that one. And as we have said in the past, too, as well, I mean, there's not a lot of kind of cost heavy integration structurally on that segment. So, the team is definitely ready to take on more And on industrial tech and services as well. I mean, we're cultivating a very good pipeline, primarily, you know, kind of channel and some key technologies, but it's one that the team also feels good about taking on.

Thank you.

Sure. Thank you.

Your next question is from Andy Kavlitz with Citi. Your line is open.

Hey, good morning, guys. Morning, Andy. Good morning. If you look at some of your smaller businesses in ITNAS, especially power tools, there are businesses that seem to have been a little weaker so far during the pandemic. You did mention the stronger June in these businesses, but is there more you can do to balance out the performance of these segments? For instance, subsegments, are you increasing new product intros in this business? And then could you talk also about the legacy IR compressor business, the larger business? Is that business at all having a lagging in terms of orders given its focus on large projects?

Yeah, on the first conversation, on the first question around, you know, the power tools, I mean, yes, you saw the softness. We alluded to some of the softness early on the, even on the last earnings call to the fact of kind of the shift of some of our customers on what they were, you know, putting more attention to from an online perspective. We saw actually in the month of June some pretty good pickup in orders but also point of sales on the tool side. What we continue to see is softness is on the lifting side, kind of the material handling and lifting, and that side of the business, the end market that that performs is just not improving at this point in time. I mean, it has some oil and gas exposure to it. But, you know, to your question in terms of what we're doing to accelerate growth, I mean, coincidentally, you know, last week, We had a four-day session of our long-term planning review, strategic plan sessions, where we look at, you know, 21, 22, and 23. And there's some very good activity that we're putting forward here on the tool side that the team is putting forward that we think, you know, kind of selling more of what we have through more unique channels. So I think we expect to see a better momentum, but it'll just take time to, to really kind of readjust that business. We have been very focused on really the cost adjustment, and now we're pivoting more towards the growth. On the legacy IR, the larger compressor side, I think you're referring to the multi-stage centrifugal, this business is one that saw really strong demand in Q2 of last year. So I wouldn't say that it's getting really soft, but I mean, last year, there was actually a lot of good momentum on refining and LNG markets. And just, you know, as an example, Q2 of 2019, there was just a single project that it was worth upwards of $40 million in Vietnam. So just seeing kind of some tough comps based on some of the larger projects that kind of really happened in the second quarter of last year versus this year, we're not seeing the momentum on those large projects happening here now. However, you know, the team is fairly encouraged because they see, really strong funnel and potential income here on the second half of things that are coming back to normality in some of the countries.

Thanks for that Vicente. And then just thinking about your overall synergy target, understanding that it's early and you haven't changed it yet, but you are creeping up in your synergy forecast in terms of now expecting 35 to 40% of the savings in 2020. I think you said 35% last quarter. So does that give you more confidence in the $250 million target, even with the procurement being volume dependent?

Yeah, Andy, this is Vic. I'll take that one. I think the answer is absolutely yes in terms of the confidence. You know, you've heard us kind of reiterate the confidence the last few quarters. Obviously, we have a higher funnel, but, you know, given that, you know, a meaningful piece of that funnel is procurement and I2B and supply chain, which is all kind of volume dependent, and we're not at 2019 volume levels, which is when a lot of that baselining work was done. That's why you just haven't seen us kind of take the target up higher. But, again, still feel confident and obviously have a, you know, a healthy funnel that we're executing to. Thanks, guys. Okay.

Your next question is from Nicole DeBlaze with Doja Bank. Your line is open.

Yeah, thanks. Good morning, guys.

Morning, Nicole.

I guess maybe going back to the temporary cost actions coming back in the third quarter, what's the nature of those? And I guess the reason I ask is it feels like the environment isn't getting – I mean, clearly got a little bit better in July, but not accelerating significantly. And so I'm just curious, what would be your appetite to keep temporary actions in place in 3Q if we kind of remain in the current level of revenue decline?

Yeah, sure, Nicole. This is Vic. I'll take that. So, you know, clearly we did mention last quarter that we were going to take roughly $40 to $50 million in discretionary spend controls over Q2 and Q3. We really kind of outpaced that. We delivered approximately $40 million in Q2 alone. And to answer kind of your first part of the question, there are still components of that equation that are staying, you know, in terms of cost savings, things around reduced compensation for executive management and senior leaders, merit deferrals. and, you know, certain discretionary spend reductions. But, you know, as we kind of look forward to Q3 here and then we start to see a slow recovery in the market, we're currently not expecting the same level of action, things like furloughs, for example, is kind of a bigger piece of the equation. And we would expect to see some of the discretionary spend start to return. To your second point of your question, absolutely. If the markets are slower to recover than expected, we will implement many of the same cost-saving measures that you saw in Q2. And, you know, you saw our ability to ramp up those cost savings in Q2 and exceed our prior expectations, and we would be prepared to do the same thing if market conditions warranted. And the other thing I'd probably mention here is, you know, we have kind of continued to make some prudent, I'd say, growth investments in the context of Q2, and we expect to do so going forward, which you'll kind of see just in the run rate of the numbers, things around demand generation, things that we're kind of setting ourselves up for future growth that we expect to have really strong payback.

Okay, got it. Thanks, Vic. That's helpful. And maybe just a follow-on around the cost synergies projected for 2020, the $95 million now. I guess, can you just give some color on what has been achieved so far, predominantly in 2Q, and then how that ramps in 3Q and 4Q?

Yeah, sure. So, I think at a high level, very simply stated, $95 million, it's about $80 million of in-year structural savings, which is really coming from headcount-oriented actions. You've seen us take The majority of those actions here over the first 120 days, I wouldn't say that we're necessarily 100% done, but you see that kind of coming to conclusion here pretty quickly just given the actions we've taken. And then right now about $15 million of in-year procurement savings. Again, very consistent with what we said first in the first quarter. The procurement piece is really meant to start ranking up in 2021 onwards, so in terms of You know, the overall synergy number, $95 million, you know, expecting between 35 and 40% here. That's in year from a total year of a total of $250 million synergy target. And as we look ahead to 2021, you know, that will start to ramp. Obviously, you're not going to see the same magnitude of, you know, headcount-related synergies and things of that nature ramp at the same pace. So we are expecting, you know, probably about 50 to 60%, 55% roughly of the synergies. in 2021, and then 75% delivered in year three, and then you obviously get the full run right into year four thereafter. So very consistent on the back end of this, as you've seen us historically report. Thanks, Vic. I'll pass it on.

Our next question is from Josh with Morgan Stanley. It's open.

So, Vic, just following up on that last question, I wasn't able to run the math in real time there. how should we think about the temporary savings rolling off in the next year versus the incremental pickup that you have on the synergy funnel, just given that you've pulled more forward into 2020? Sure.

Yeah, so let me kind of take them in pieces here, Josh. I think in terms of the short-term actions, by and large, you should see those largely back in the run rate as we exit the year. As we mentioned, we took about $40 million of savings here in Q2. We would expect the majority of those to trickle back into the P&L here in Q3 and Q4. And then some of the smaller items around, you know, merit deferrals and things like that, we expect to obviously come back in the cost structure next year. But again, you should largely see those reentering the cost equation here as we exit 2020. And then in terms of the synergy ramp, and I think to Nicole's question before, You know, like we said, we've done about $80 million of in-year headcount actions. That's the major piece of the equation. You know, you could probably expect at around $20 to $25 million of that in 2Q and then ramping kind of roundably between Q3 and Q4. So Q3, Q4 being a little bit higher, probably closer to about $30 million per quarter. And then the procurement piece of $15 million a year, that's largely all second-half weighted. You really haven't seen any material amount of what I'll call integration-related or transaction-related synergies when it comes to procurement just yet. We've lost a lot of the RFQs, have a lot of good momentum on some of the initial waves, but you should expect to see that really more in the back half of the year, year two, three, and two, four.

Got it. And then I guess next year, the temporary bleed-off versus the incremental synergy funnel is – It won't quite be a push, but there'll be kind of a small number that necks out of that.

That's right.

That's a fair way to think about it. Got it. Okay. That's helpful. And then, you know, just on the oil-free side of the house, since they made some, you know, opening comment remarks about some new products there, you know, I think over time, you know, oil-free comes up pretty regularly as, hey, we've got a new product, new commercial initiative, something on that front. Obviously, you have a big competitor who's pretty dominant there. Anything that you can share with us on growth rates in the product line, anything that you think you're doing on market share gains? Because it seems like it's still kind of a small piece of the portfolio and maybe not a big driver of overall performance, but is this something that we should expect to be a larger piece over time, just given that it's probably one of the more attractive areas of the market?

Yeah, I know, George. So, I mean, I'll say that for sure it is an area that we're putting a lot of focus into as well here. And, you know, oil-free outperform oil-lubricated. Oil-free is, you know, it's kind of basically slattish revenue performance. So, it's actually good in terms of speaking about the resiliency and the strength of the end markets that it serves and why we continue to be excited about, you know, what our future holds in this product line. So, yeah, I mean, I definitely, without going into a lot of details of our strategies and what we want to accomplish here, it is definitely an area that we are putting some focused attention and that we definitely want to continue to outgrow.

Great. Thanks for the call. Be well, guys.

Yep. Thanks, Josh.

Our next question is from Joe Ritchie with Goldman Sachs. Your line is open.

Thanks. Good morning, everyone. And, Vic, congratulations on the promotion to CFO. Thank you. Maybe just kind of starting off, I know, Vicente, you mentioned that cancellations you don't expect to repeat going forward, but maybe just provide a little bit more color on what end markets they were related to and what your conversations with your customers are like today on what's already been booked into backlog.

Yeah, and so your question, Joel, just to be more specific, is really along the kind of the loan cycle, right, the kind of the larger loan cycle products?

Yeah, yeah, that's right.

Yeah, yeah. So I think, you know, the most of our long cycle businesses is kind of within the industrial technology in the business unit that we call PVS or pressure and vacuum solution. And as a reminder, it's just like 15% of the total segment. You know, you can even split that business into two main areas. One is kind of the legacy garden of Denver, kind of what we call the Nash Gero, which used to be in the downstream side of the business. That business actually performed fairly well. I mean, they saw order rates being positive in the second quarter and actually, you know, on a year-to-date basis, positive high single digits, so book-to-bill of like 1.3. So that's good and encouraging because that's exactly what we want. We always said that, you know, bookings of that longer cycle business, we want it to be strong in the first half of the year so that we can start making the shipments in the second half of the year. And the commentary in terms of the multi-stage of kind of the larger compressors, those are the ones that saw really meaningful tough comes. I mean, second quarter of 2019, it was a record quarter for that business. And it was really more on end markets such as, you know, LNG and gasification and processed gas. So a lot of kind of maybe momentum that was getting into those end markets earlier into 2019. And what we're seeing now is basically a little bit of a shift. We're putting a big shift in terms of new end markets. So we are putting focus on utilizing these large compressors for food and beverage. And so we expect that as we kind of rebalance the end market, that we should see probably a better stability moving forward. But in terms of the backlog, I think we're fairly well positioned for here for the second half. So, you know, these are kind of more orders that... that, you know, we still expect to hopefully get here in the second half based on the funnel from the team. So it's not order cancellations. It's just, in some cases, order push-outs and just the more smaller orders as to compare to the large big orders that were coming through in the early part of 2019.

Okay, gotcha. That's helpful, Carlos Vicente. And maybe just my follow-on question, you know, just taking a look at the specialty vehicle segment and the performance this quarter, it was really nice to see the margin improvement there. I guess just thinking about this, I know this question comes up a lot around kind of like portfolio optionality and deleveraging. But again, just how are you kind of just thinking about the different pieces today, you know, and your ability to potentially monetize, you know, parts of the portfolio to help maybe accelerate the deleveraging plans across the organization?

Yeah, Joe, I think no change in strategy on that one. I mean, I think we still see, that our current, you know, number one priority is to create integration, stabilize the businesses, drive some performance, and that's exactly what you see that we're doing. And not only, in this case, an efficiency vehicle from an order perspective and revenue, but also from a margin side. And I think when the time is right and the moment comes in that we can look into all the potential alternatives, we'll definitely be ready. As we said on the opening remarks, I mean, we have, kind of this is a multi-phase transformation, and we have a phase three that we're doing a lot of work in terms of strategically understanding each of the businesses and the path forward, while at the same time we put a good foundation to invest and really drive some good improvement performance. So, yeah, I mean, I think this is what's really exciting in our story, that, you know, we got some optionality here for later down the road while we continue to really fix the businesses.

Okay, great. Thank you.

Your next question is from Nigel Coe with Wolf Research. The line is open.

Thanks. Good morning. Can you hear me okay?

Yes, perfect, Nigel.

Yeah, hi, Nigel. Yeah, great. Thanks. Hey, I just want to address aftermarket. You know, mainly within, you know, industrial tech, a big portion of that business is aftermarket, and obviously that business was impacted by the shutdown, so I was curious how that tracked during the quarter and what your outlook is in the back half of the year for services.

Yeah. So, you know, after market for the recurrent revenue, roughly 40% of the total segment, so pretty large, sustainable, you know, large and one that we definitely want to continue to invest. You know, sequentially, Q1 to Q2, we saw original equipment growing faster than the aftermarket, which is a good sign. of capital investment, but at the same time, good sign of future aftermarket growth as we are creating more machines in the field. And also, it was in line with expectations from events of demand in China and other markets. I mean, clearly, in the second quarter, surveys on the aftermarket side was a bit more impacted due to COVID and the associated customer closures and the inability to be on the site. I mean, however, we see these as a really great opportunity moving forward as we would expect this to be a tailwind in future quarters, assuming that market conditions, you know, and these machines will need to be serviced. We're also encouraged by our IoT platform and the remote monitoring capabilities, which allows for remote diagnostics of the machine and, you know, in some cases, the ability to service the machine via associated technology, and we did some of that work actually here in the second quarter as well. Yeah, I think a lot of good signs for long-term continuation of improvement of that side of the business.

Just to clarify, so aftermarket within ITNS underperformed the benchmark or the segment average during 2Q?

Both were about the same.

About the same, okay. And then just my follow-on question is really, You know, within, you know, high-pressure solutions, I think you mentioned the ambition to get back to break-even or better performance in the second half of the year. I'm just curious, you know, how you're, you know, balancing the opportunities in the market with, you know, some credit risks that you obviously saw in 2Q. You know, what is the potential for further credit problems in the first half of the year?

Yeah, Daniel, I mean, you know, we believe that, you know, that this segment will continue to return to the breakeven in the third quarter. I mean, obviously, in the second quarter, it was going to be the case for this kind of one situation. You know, in the second quarter, we were on pace, as I said, to be breakeven. We would not expect that to be a repeat moving forward, and also worth noting that we continue to take costs out of the business, including continuing restructuring efforts through the first half of the year. that are not 100% seen in the financials just yet. So while we don't expect market conditions to improve meaningfully in the second half of the year, we're focused on those items within our control, which is prudent cost control, and being very proactive with our customers to ensure proper collection of any of the outstanding ARs.

That's great. Thank you.

Your next question is from Rob with Milius Research. Your hand is open.

Thank you. Good morning, everybody. My question is just on pricing in general, and then some of your initiatives in specific, you know, how did it hold in? And then I know it's early days on the IR assets, but, you know, some of the tracking and, you know, monitoring and, you know, price discipline maybe is the right word, but just management, you know, is it too soon to see effect on that, on either, you know, margin or, you know, how it might shape your product portfolio evolution? Thanks.

Yeah, well, so I'll say, you know, second quarter, we saw price up. I mean, we actually saw, you know, if you look at the different segments, industrial tech and precision and science, price up between, you know, 1.5% to 2%. But you still haven't seen the uplift or the changes that we're making based on the composition of the company in the P&L yet. So, and to your question, yes, absolutely. There's definitely opportunities that we see here to be more prudent and more precise on price. I mean, as we have said in the past, You know, we believe in quality of earnings, and that's one of our key areas of focus.

Perfect. And then your oil free comments were pretty helpful in contextualizing your results, but you don't seem to think you lost any head-to-head share, I suppose, in the quarter in any meaningful way. Is that right?

No. I mean, that's correct. I mean, based on all the indicators that we see, that's correct. I mean, you know, one of the indicators obviously here that I just spoke a lot about is the orders on order patterns. and as well as some of the third party reports that we see and, you know, know that we can think of. Okay. Thanks, Vicente. Thank you.

Our next question is from David Rosso with Evercore ISI. Your line is open.

Hi. Thank you. Can you help us with price versus cost during 2Q and how you see that progressing the next couple quarters just on sort of what you're seeing in your backlog and what the market trends are like? And sort of separate from your longer-term cost actions where you're taking structural cost out, more of a kind of on an operating basis, what are you seeing?

Yeah, David.

Particularly on ITX, but the whole company would be great, too.

Yeah, I think the easy answer, kind of following up all of the things I said, is that the price-cost equation, particularly looking at, you know, price versus really the procurement equation, continues to remain positive. You know, we have seen good momentum on procurement initiatives. I'd say kind of more the normal course procurement initiative that had kind of been in place as the two companies were coming together, showing a little bit of a tailwind there. And as Vicente mentioned, price was up in both the IT&S and precision and science segments, which are the kind of two largest, between 1.5% and 2%. So continue to see a pretty good cost equation there, price-cost equation there, which obviously was seen in the margin profile. So again, continue to see good momentum there, and especially with regards to price, wouldn't expect to see dramatically different results as we look to the second half of the year. So, again, continue to be very quality. I think we'll show it.

So, that's my question. So, the price-cost, you don't feel the price erosion will, you know, the increase of diminishing will be greater than the procurement cost savings? I'm just trying to make sure that price-cost spread you see continuing, or do you think it even could widen?

Yeah, we see continued, actually, improvement on the price in the sense that, you know, we executed here in the second quarter a lot of our pricing actions that are not seen yet in the P&L.

Okay, so with the procurement savings, then you're expecting the price cost to actually be better in the second half than the second quarter.

That's exactly right. It will trend positively. That's correct, David.

Terrific. Okay. Thank you very much.

Thank you.

Our final question is from John Walsh with Credit Suisse. Your line is open.

Hi. Good morning, and thanks for fitting me in here. Absolutely, John. Maybe just a clarification question first. And I don't know if it has to do with maybe the timing of the transaction closing or – if any of the deal assumptions have changed, but just wanted to ask about kind of the amortization expense stepping up, you know, as I look across the different schedules, Q1 to Q2. It's a little bit greater than we thought. Yeah, John, keep it pretty simple here.

It really just has to do with some of the purchase price changes adjustments that we're still working through. As we work through Q2, obviously saw us true those up, and I'd say, you know, given that we were only 30 days, frankly, into the transaction through Q1, you saw kind of a normalization of that in Q2. So, again, the levels that you're seeing in Q2 should be largely indicative of what you'd expect going forward, but, again, is really nothing more than just the timing of the deal, and Q2 is a pretty good run rate to use going forward.

Okay. Excellent. That's very helpful. And then I guess maybe just a follow-up question. I don't think I heard any mention of supply chain in the prepared remarks. You know, is there anything to call out there, or does everything seem to be up and running now on a normal perspective?

No, Jeremy, everything is up and running in a normal perspective. I mean, nothing that I will call out that is creating issues at this point in time.

Great. Thank you for taking the questions.

Thanks, Jim.

We have no further questions at this time. I turn the call back to Vasanti Reynolds for closing remarks.

Thank you. I just want to thank everyone for their interest in Ingersoll Rand and participating on the call today. I also want to thank again our employees who, many of them, are actually on the call listening to their performance. So thank you for the great performance in the second quarter. We believe we're on a very exciting path, and we look forward to speaking with many of you over the next few days and weeks. So thank you. Have a great day.

This concludes today's conference call. You may now disconnect.