Earnings Call Transcript
Ingersoll Rand Inc. (IR)
Earnings Call Transcript - IR Q3 2020
Operator, Operator
Thank you for joining us for Ingersoll Rand's Third Quarter 2020 Earnings Conference Call. All participants are currently in listen-only mode. After the presentations, we will have a question-and-answer session. Now, I would like to hand the conference over to our first speaker, Vikram Kini, Chief Financial Officer. Please proceed.
Vikram Kini, CFO
Thank you and welcome to the Ingersoll Rand 2020 third quarter earnings call. I'm Vik Kini, Ingersoll Rand's Chief Financial Officer and with me today is Vicente Reynal, 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 want to remind everyone that certain 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 information provided on this call. Please review the forward-looking statements on Slide 2 for more details. In addition, in today's remarks, we will refer to certain non-GAAP financial measures. You can find a reconciliation of these measures to 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 3, on today's call we will provide an update on the integration efforts of the company, as well as review our third quarter and total company and segment highlights. We will conclude today's call with the Q&A session. 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'll turn the call over to Vicente.
Vicente Reynal, CEO
Thanks, Vik and good morning to everyone. I want to start our call by thanking all our employees around the world for the hard work and commitment to the health and safety of our teams and their families. As we continue to navigate the COVID-19 pandemic, as well as their dedication to serving our customers at the highest level. Their focus and consistent contribution, coupled with the continued proliferation of IRX throughout our organization, delivered strong results we can all be proud of. Turning to Slide 4, I want to spend some time on our culture because it is a competitive advantage for us, particularly in the midst of a COVID-19 pandemic, our progress has been impressive. Let me point out a few examples of the inflight initiatives that are helping to foster our unique culture as we integrate both companies. We have now rolled out our purpose and values activation to nearly the entire company. These are highly engaging one-on-one sessions, where we work with our employees to discuss our purpose and values, and what it means to lead them every day. In addition, we have continued the owning our future forums, which are virtual micro town hall meetings to create open dialogue. Today, we have engaged and heard from over 7,000 employees. And their feedback is helping us simplify our internal processes. In the third quarter, we also conducted our first All Employee Engagement Survey, where we had a 95% participation rate across the entire company, which is nearly 15 percentage points higher than the manufacturing index we benchmark and puts us in the top quartile of participation. Our high engagement level is a positive reflection of employee satisfaction with working at Ingersoll Rand, and employee happiness is very important to us. A great example of our employees living our purpose and values and making a positive impact in our community is those champions within our Precision and Science Technologies segment. Those champions developed a method to deliver clean drinking water to an orphanage in a remote location in Madagascar, using our technology of electricity-free dosing pumps. Examples like these are happening around the company and are strong tools for the culture we build in Ingersoll Rand, which firmly supports our purpose of leaning on us to help you make life better. Moving to Slide 5, one of our key values is thinking and acting like an owner. In the third quarter, we took a major step forward in bringing that value to life by making all of our employees shareholders of the company. On September 21st, we were proud to virtually ring the opening bell at the New York Stock Exchange, and announced the issuance of $150 million in equity awards across our entire employee base. This is a meaningful distribution equal to 20% of an individual's base cash compensation. This is not simply a thank you note to the team. Instead, this is a catalyst to have all 16,000 owners all moving in the same direction to drive change and create value for all shareholders, including themselves. As we did with Gardner Denver, we reward based on a specific initiative of improving net working capital. We're training all employees on what it means to be an owner. When we launched this in 2017, we improved the working capital as a percentage of sales that Gardner Denver by about 500 basis points in less than three years. For us, we feel the future is extremely bright for Ingersoll Rand, and with 16,000 employee owners moving in a common direction, I am confident in our ability to create meaningful value. Turning to Slide 6, let me now provide an update on our integration efforts. We have built a strong foundation and are now pivoting to growth, with a specific focus on executing our talent priorities, continuing to capture supply chain synergies, and driving free cash flow, which is allowing us to accelerate investment in IoT, digital and e-Commerce initiatives. Finally, we are advancing our work on the ESG front as we look to be a recognized leader in corporate social responsibility. It is an exciting time at Ingersoll Rand as we continue to meld complementary cultures and leverage our deep portfolio to serve niche end markets and accelerate growth. Speaking about growth, let's turn to Slide 7 to showcase a few examples. The first example focuses on how we're leveraging differentiated compression technology to penetrate the Hydrogen Refueling and Dispensing niche market, which is a high growth and rapidly changing market. As part of the integration planning process, we did a lot of work to better understand these end markets and the potential it could bring to our combined company. Haskel, with over 70 years of industry experience, is one of the world leaders in offering the most reliable high-pressure equipment and technology today. We're very excited about Haskel's comprehensive portfolio of specialized compression solutions. We are well positioned to win share with turnkey refueling stations used for heavy-duty vehicles and buses, and light-duty passenger vehicles. We have now over 100 stations across the world and a technology leadership edge that we've created over the past 12 months. One example of our investments in innovation is the launch of a new small-scale, cost effective standalone hydrogen fueling station, which is designed for small, simple plug-and-play installations. But with a flexible configuration, it can be relocated from one location to another very easily for forklift applications. As we look ahead, the growth prospects in this space are extremely promising as we continue the penetration of hydrogen fueling into key markets, which is expected to create a $2.5 billion addressable market for us by 2027. Turning to Slide 8, the second example demonstrates how we can leverage the breadth of our technologies across multiple segments to win in targeted end markets like water and wastewater. For example, in a wastewater treatment plant shown on the picture, we have begun to leverage our technologies across the ICS and PST segments to drive further penetration in what is estimated to be nearly a $5 billion addressable market, with a 5-year CAGR of at least 2 times GDP. Utilizing IRX tools, we're focused on capturing quick wins within our combined broader portfolio. First, we're focused on increasing customer share of wallet by offering a broader set of product solutions. We have identified more than 50 new sales channels to penetrate. Second, we're coordinating internally our large project funnel to ensure all relevant businesses and brands are involved in bids, with the goal of maximizing the content of Ingersoll Rand products in any project. Thirdly, by combining demand generation database contacts across the two segments, we have now over 32,000 contacts with an expectation to increase by 40% in the US alone as part of our Impact Daily Management process. We're beginning to educate this entire universe of potential customers about our technologies and solutions through dedicated digital campaigns. While we're still in the early days, as we just launched this initiative, we've already seen an increase of over $30 million in our funnel. This commercial synergy is just the beginning of what we believe will be a future where we connect all the technologies to optimize the entire process. Given the work we are already doing on IoT, we feel that we're well positioned to capture this opportunity, given our deep know-how of the types of sensors and controllers required in our products to best optimize data acquisition and analytics. Let me now turn over the call to Vik for an overview on the financials. Vik?
Vikram Kini, CFO
Thanks, Vicente. Moving to Slide 9. Overall, we are extremely pleased with our performance in Q3 as industrial end markets saw gradual sequential momentum throughout the quarter. We saw similar trends across the majority of our businesses, as total company orders and revenue increased 13% and 6%, respectively, as compared to Q2 levels, with strong double-digit momentum in the Industrial Technology and Services, especially Vehicles and High Pressure Solutions segments. The Precision and Science segment saw slight sequential declines in orders, which was in line with expectations due to the significant COVID-related orders for medical pumps we saw in the first half of the year that we did not expect to repeat. As we continue to navigate these uncertain times, our goal is to continue to manage those areas that are controlled by utilizing IRX to maximize the value captured on productivity and synergy initiatives and maintain ample liquidity. The teams did exactly that as they delivered adjusted EBITDA of $284 million and adjusted EBITDA margin of 21.3%. This was a 220 basis points improvement in the second quarter. On a year-over-year basis, despite double-digit revenue funds, margins were up 150 basis points. When adjusted for the High Pressure Solutions segment, total company margins improved 240 basis points. The teams are continuing to execute extremely well on capturing cost synergies, and our annualized savings now stand at $150 million or 60% of our stated target of $250 million. Our strong commercial and operational execution led to company-wide decrementals of only 6%, which marks our lowest level seen thus far in 2020. From a cash flow and capital structure perspective, we saw similar strong performance as free cash flow grew to $179 million. Liquidity now stands at $2.3 billion. As a reminder, historical financials are provided in this deck on a supplemental basis, as if the transaction had happened on January 1st, 2018, to assist in clean comparatives for the quarter. Detailed assumptions and adjustments using this supplemental information can be found in the appendix of these slides and our earnings release. Turning to Slide 10, from a total company perspective, FX adjusted orders and revenue declined 8% and 11%, respectively, which is a meaningful improvement from the comparable 21% and 19% declines we saw in the second quarter. While COVID continues to create challenges, we saw continued stabilization in core markets in the Americas and EMEA, particularly in the IT&S segment. Both regions saw high single-digit order declines on a total quarter basis for core compressor, blower and vacuum equipment, with the strongest month of the period in September. Asia Pacific continued to show positive trends on both revenue and orders led by China. Specialty Vehicles saw strong order performance up 29% ex-FX as the momentum for Consumer Vehicles continues at record levels. Unexpectedly, the High Pressure Solutions segment saw order declines of slightly over 80% due to continued overcapacity in the market and depressed activity levels. Overall, we posted a strong book-to-bill of 1.02 for the quarter, which is slightly better than the levels in the prior year of 1.0. The company delivered $284 million of adjusted EBITDA, a decline of only 3% versus prior year even with the headwinds caused by the pandemic. The IT&S, Precision and Science, and Specialty Vehicles segments all saw a year-over-year improvement in adjusted EBITDA and strong triple-digit margin expansion. Offsets were seen in the High Pressure Solutions segment as well as higher corporate costs. We saw a large benefit in prior year costs due to reduced incentive compensation costs, as well as in-year investments primarily around infrastructure and growth initiatives to stand up the new company. Turning to Slide 11, free cash flow for the quarter was $179 million, driven by the strong operational performance across the business, working capital improvements and continued cost savings and CapEx prioritization initiatives in the current uncertain environment. CapEx during the quarter totaled $8 million. Free cash flow included $26 million of outflows related to the transaction, comprised of $13 million of synergy delivery spend and $12 million of company stand-up related expense. From a leverage perspective, we finished at 2.5 times, which was a 0.1 improvement as compared to the prior quarter, despite $10 million of lower LTM adjusted EBITDA. We would expect to continue to see leverage remain in the 2.5 times range or slightly better as we finish the year. We feel comfortable with our current leverage position and clear path to be at 3.0 times or better in the relatively near term. On the right side of the page, you can see the breakdown of total company liquidity, which now stands at $2.3 billion based on $1.3 billion of cash and nearly $1 billion availability on our revolving credit facility. During the quarter, we terminated our legacy Receivables Financing Agreement, which was due to expire at the end of the year. We were not intending to renew the RFA moving into 2021, due to our enhanced liquidity profile and the fact that the overall impact on liquidity from the RFA exit was less than 2%. As of September end, all the company's legacy fixed interest rates have now expired, which is expected to yield approximately $5 million cash interest benefit in Q4 compared to Q3 at current interest rate levels. The company's debt profile is now 100% floating; we'll be examining the appropriate fixed versus floating structure moving forward from a risk management perspective. In total, liquidity has now increased $730 million from the end of Q1, accompanied by ample dry powder to execute on our organic and inorganic growth strategies. Moving to Slide 12, we continue to see strong momentum on our cost synergy delivery efforts. Within the quarter, we accelerated the phasing of this initiative, and we have now already executed $150 million of annualized synergies. This includes $105 million of permanent structural cost reductions with approximately $80 million to $85 million of those savings expected to be realized in 2020. On procurement synergies, we've captured $40 million to $50 million with approximately $15 million to $20 million of the savings expected to be delivered in 2020. This represents an increase of $20 million of executed actions as compared to the prior quarter. As a reminder, our funnel for direct material-led synergies is based on 2019 direct materials spend. In total, we now expect to deliver approximately 40% of our overall synergy target in 2020, which is approximately $100 million of savings. Additionally, we now expect to deliver approximately 70% of our cumulative synergy savings by the end of 2021, and approximately 85% by the end of 2022, with the balance coming in 2023. We previously communicated that we are keeping the overall cost synergy target at $250 million over a three-year timeframe to remain prudent on volume-dependent synergies like procurement and I2V, given the current environment. We'll provide an overall update when we give 2021 guidance during our February 2021 earnings call. We also continue to make strong progress on lowering decremental margins. Total company decrementals were only 6%, with IT&S, Precision and Science, and Specialty Vehicles all seeing strong flow-through and High Pressure Solutions managing decrementals below 40% for the first time this year. We mentioned last quarter that we expected to see approximately $30 million to $35 million of the short-term cost actions taken in Q2 come back to the P&L. The teams managed those costs well, and we only saw approximately $10 million returned to the P&L. Given the gradual recovery of the overall market, alongside the very recent COVID-related lockdowns in several countries, we now expect the full return of that $30 million to $35 million cost base to extend into 2021.
Vicente Reynal, CEO
Thanks, Vik. Moving to Slide 13, starting with the Industrial Technologies and Services. Overall, this segment performed better than expected with organic orders and revenue down 8% and 9%, respectively, resulting in a book-to-bill ratio of 1. Despite the revenue decline, the team delivered strong adjusted EBITDA that was up 9% and an adjusted EBITDA margin of 24%, up 370 basis points year-over-year. Moving to commercial performance, while we know that many like to compare the entire ITS segment against some of our peers, that comparison can be a bit challenging given that we have several different businesses in this segment. Last quarter, we broke down the segment based on our internal business structure. In the spirit of transparency and desire to help you understand the business, we are now showing a product line breakdown. Starting with compressors, which represent about 65% of the segment, orders were down mid single-digit and revenue down low single-digit. A further breakdown into oil-free and oil-lubricated products will show that oil-free was up low double-digit in revenue, which we believe demonstrates the success of our strategic focus in this category, as well as market resiliency for oil-free products. From an oil-lubricated perspective, orders and revenue were down mid-to-high single-digits, mainly driven by small rotary compressors while large compressors continued to outperform. Regarding the regional split for revenue on compressors in the Americas, the North American team performed competitively better, down low single-digits, while Latin America was down in the mid single-digits. Mainland Europe was down low single-digits, while India, Middle East and Africa continued to see a decline in the mid-teens, which is a great improvement from Q2 levels of down nearly 40%. Asia-Pacific continues to be the best performer with revenue up mid single-digits driven by positive growth in China, while Southeast Asia is still seeing declines due to COVID shutdowns in some countries. Moving to vacuum and blowers, which represent approximately 20% of the segment. Orders were down low single-digit driven by mid-single declines in the blower business, partially offset by positive order momentum in our longer cycle Nash and Garo vacuum businesses. We were encouraged also to see that the industrial vacuum business in Europe was relatively flat, compared to down double-digits in the second quarter, which is a sign that our OEM customers are seeing some underlying improvement in their markets. Moving next to the power tools and lifting, which comprise 10% of the segment; the total business was down high-teens in orders and mid-20s in revenue. An encouraging sign here is the rapid improvement from last quarter, where we were down low-40s in orders. The tool business has materially improved from the second quarter, while the lifting and material handling business remained depressed. As we have said in the past, our focus has been to materially improve the profitability of this business. We are very happy with how the team has executed, delivering 270 basis points of sequential adjusted EBITDA margin expansion. In this quarter, we want to highlight one of our growth synergies, which is the expansion of our oil-free compressor launch in Europe. You may recall, we launched a radical new technology in the oil-free space within Gardner Denver just a few years ago. This patented technology delivers completely oil-less air with a value proposition unmatched in the market. At that time, the Gardner Denver channel was not properly set up and experienced enough to sell such a unique product focused on total cost of ownership in the oil-free space. However, the Ingersoll Rand team has a lot of experience in selling oil-free products. In a matter of months, we have re-launched the product under the Ingersoll Rand brand and leveraged the Ingersoll Rand channel. We have also trained over 400 channel partners, and our funnel has increased to $15 million in a matter of months. It is good to note that more than 20% of that funnel increase was generated purely through demand generation efforts. Moving to Slide 14, we'll review the Precision and Science Technology segment. Although organic orders were down 9%, as expected, total order levels were down 3% sequentially. However, normalizing for the COVID-related orders we saw in the medical side of the business in the second quarter, the sequential improvement was actually positive. Revenue performance was quite strong at down only 1% organically, driving the strong performance within the business were the Dosatron and Medical businesses, which delivered double-digit revenue growth. The Precision and Science Technology team also delivered strong adjusted EBITDA that was up 14% on relatively flat revenue. This led to a very resilient adjusted EBITDA margin of 30.7%, up 350 basis points year-over-year and 40 basis points sequentially. Again, driven by solid execution and the use of IRX tools to drive productivity enhancements. We're excited to introduce Albin Pump to the Ingersoll Rand family. Albin is a leader in the manufacturing of electric peristaltic pumps, which is one of their highest growth positive displacement technologies. We see strong commercial synergies as we leverage Albin alongside our ARO and Milton-Roy brands and plan to use the Precision and Science global network and channel to accelerate growth as Albin. This is a great example of the type of bolt-on acquisitions we're very excited about for the company. Moving to Slide 15, under Specialty Vehicle Technologies segment, although Q3 was another strong performance for the Specialty Vehicle Technology team, with organic orders and revenue up 29% and 1%, respectively. Adjusted EBITDA of $38 million increased 36% year-over-year, leading to an adjusted EBITDA margin of 19.7%, which represents a 510 basis points improvement versus last year. Proliferation of the IRX toolkit is allowing the Specialty Vehicles team to capture strong end market demand in the Consumer Vehicle segments and grow our share. The strength is based on continued digital demand generation activities, compelling new product launches, including lithium batteries, and a 6-passenger offering alongside extremely consistent production and channel performance. We're also pleased with the traction on the launch of the second-generation lithium battery for the golf car market, where we're seeing an improvement in cost, reliability and range, which we believe is now leading in the industry. The aftermarket also continues to be a strong focus, including our Club Car Connect platform, which is showcased on the right side of the slide. With over 100,000 connected vehicles, Club Car Connect is a GPS-enabled technology platform that provides fleet managers with car control features such as geo-fencing and location-based speed control, as well as asset management tools such as the ability to monitor the location of the golf cars and report vehicle diagnostics. Moving to Slide 16, under the High Pressure Solutions segment. The business performed largely in line with expectations, reflecting continued low demand in the oil and gas industry. Orders and revenue were down 81% and down 68%, respectively. Nearly 90% of the revenue base continues to come from aftermarket parts and services, with consumables being the most stable component of the revenue base. I'm extremely proud of the team for their proactive efforts and productivity improvements around cost management controls, which allows us to deliver positive adjusted EBITDA of $1 million and decrementals below 40%, despite the significant revenue declines. Looking ahead to the fourth quarter, as we face some of the worst seasons of market recovery, we deal with the unknown of extended holidays later in the quarter, as well as continued pandemic headwinds. Looking forward to 2021, we remain encouraged by how the business is positioned from a product offering and cost structure perspective. We feel there is some pent-up demand in the market, which will return at some point beginning with the service and repair work. We're well positioned to capture these opportunities with the premier service centers, like our Permian facility that is highlighted on the right side of the slide. Moving to Slide 17, we want to provide a quick snapshot of how the business has performed thus far in the fourth quarter. Through the first three weeks of October, the total company is now mid single-digits in orders, with a book-to-bill ratio greater than 1. Within the Industrial Technologies and Services segment, the regions are largely trending in line with the year-over-year order trends that we saw in the third quarter, and the Power Tool business continues to see sequential improvements. The Precision and Science Technologies segment is currently positive year-over-year, and the Specialty Vehicles segment is continuing to see healthy momentum on the consumer side coupled with growth seasonality. The High Pressure Solutions segment is down 30% to 35%, which is encouraging; however, we see limited expectations for activity in December. We're not providing formal Q4 or total year guidance at this time. However, from a high-level perspective, we expect the gradual market recovery to continue in the fourth quarter with revenue trending positively on a sequential basis. The Industrial Technology and Specialty Vehicles segments should support most of that strength given normal seasonality in their shorter cycle components of Industrial Technology, as well as larger projects that will ship later in the quarter. For the Precision and Science Technology and High Pressure Solutions segments, we expect comparable revenue performance relative to the third quarter. From a marketing perspective, we will continue to actively manage decrementals and expect to be below 30%. We're anticipating some headwinds in the fourth quarter compared to what we saw in the third quarter, mainly unfavorable product mix in Precision and Science due to a low contribution from Medical as the COVID-related backlog has largely shipped. Specialty Vehicles has mix shifts more towards growth, which carries a lower margin than the consumer, which has been very strong. We also expect the cost base to increase slightly as we continue to invest in organic initiatives to fuel long-term growth. It's also worth noting that this assumes no additional material headwinds from the pandemic. We haven't seen any notable impact on order rates just yet, but we're monitoring closely, and we will be ready to execute our playbook as we have successfully done this year to react quickly to any business interruptions. Moving to Slide 18, as we wrap up today's call, I want to reiterate that we're excited about our products. While we're still in the early stages of our transformation, we have taken meaningful steps forward in creating a differentiated culture and improving the performance of the company. Now with 16,000 employees, who are owners of the company, I am confident that we can continue to transform Ingersoll Rand and deliver increased value to all of our shareholders. With that, I'll turn the call back to the operator and open for Q&A.
Operator, Operator
Thank you. Our first question comes from Julian Mitchell from Barclays. Please go ahead. Your line is open.
Julian Mitchell, Analyst
Hi, good morning.
Vikram Kini, CFO
Good morning.
Julian Mitchell, Analyst
Maybe just the first question around the operating leverage as we look ahead to a more normalized recovery stage, you had 60% sequential incremental margins in Q3, so extremely high level, and understand those incrementals will moderate as the recovery matures. But maybe any kind of placeholder as you're thinking about the net off of temporary costs coming back, the ongoing synergy extraction and the extent to which you'll manage those incrementals via ongoing reinvestments as well?
Vikram Kini, CFO
Yeah, and hey, Julian, this is Vik, I'll start with that and let Vicente weigh in as well. You're absolutely right. I think Q3 was an extremely strong quarter for all the reasons you mentioned. I think as we think forward, as we look into Q4, we mention that we don't expect the sequential incrementals to look quite as strong. As we look ahead, frankly even into 2021, we believe that normalized incrementals across the portfolio should play in that 30% to 35% range without using some upside opportunity for synergy extraction. Remember, there are some cost normalizations and things of that nature that will continue to unfold as we move into 2021. I think 30% to 35% is probably a good base level to use with some upside opportunity as synergies start to materialize into 2021 and thereafter.
Julian Mitchell, Analyst
That's very helpful, thank you. And then my second question really around the free cash flow, you know, very strong in the nine-month, you know, what, $470 million or 125% conversion to adjusted net. I realized that was the first sort of year of the combined entity. And maybe there are some one-time pieces moving around the working capital move perhaps a bit abnormal this year. So just wondered, you know, what you could indicate in terms of free cash conversion expectations as you look out, and also within this year's number, what's the total synergy in stand-up cash outflow for the year, please?
Vicente Reynal, CEO
Yeah, Julian. I think we would expect to be greater than or equal to 100% of adjusted net income on a free cash flow perspective. I think what we're excited about is that you have seen some very good momentum on free cash generation. The most important piece here is that we still feel we have plenty of levers for us to improve. Clearly, one that we just discussed is how we're rallying all 16,000 employee owners in the company on their working capital, as a percentage of sales, and how we believe we can unlock a good amount of cash by getting everyone focused on that perspective as we did with Gardner Denver in the past. Then there are all the levers such as tax or tax rates that we spoke a lot about, that also offer good meaningful opportunities. I think regarding this year, Julian, we still have more improvement opportunities.
Vikram Kini, CFO
Yeah, and Julian on the second piece in terms of some of the moving components and what we've spent thus far from a free cash flow perspective, specifically on the synergy and stand-up costs. In the first half of the year, we had about $80 million between the first and second quarter of cash outflows. Then, you could see in Q3, we had about $26 million. So you've had a little over $100 million of cash outflows thus far specifically for synergy and stand-up related spend through the first three quarters. We expect right now that Q4 should look comparable to what you saw in Q3 as we've guided before. So I can give you an idea of the one-time synergy and stand-up related spend that has flowed through free cash flow.
Julian Mitchell, Analyst
Fantastic, thank you.
Vicente Reynal, CEO
Thank you.
Operator, Operator
Your next question comes from Michael Halloran from Baird. Please go ahead. Your line is open.
Michael Halloran, Analyst
Hey. Good morning, gentlemen.
Vicente Reynal, CEO
Good morning, Mike.
Vikram Kini, CFO
Good morning, Mike.
Michael Halloran, Analyst
So why don't we start with some thoughts as you're thinking about next year, just a lot of uncertainty out there. Qualitatively, how are you guys positioning things internally in your core businesses as we sit here? Just to hear your thought process of how you guys are going about the iterations for next year? Any kind of high-level thoughts on that side?
Vicente Reynal, CEO
Yeah, Mike. Clearly, we're now in the midst of that cycle of getting with the teams to run through our budget cycle for 2021. This is part of our process, and as we completed our strategic plans a couple of months ago, while we don't have full visibility, I mean, we like what we see from the macro indicators. BMI, Exane — across the world, showing continued gradual improvement. We're encouraged about this, but we know there's some uncertainties with COVID in many other global markets and lockdowns. I think the most important thing for me to highlight here is that we believe that we have demonstrated how we're able to adjust and adapt to whatever environment looks like. You can see that from the downturn and how we have controlled our decrementals very well while investing. The way that we're working with the teams is with a perspective of good gradual continuous sequential growth. More importantly, we're making sure that we're making the right investments while controlling costs and continuing improvements in our company. I'd say to you as well, Mike, that we feel good about the backlog in terms of our long cycle businesses like our large Compressors or some of our larger Vacuum businesses; they also have a very solid backlog heading into 2021. At this point in time, we're going to be working with the teams under budgets and building for 2021 with a high level of flexibility.
Michael Halloran, Analyst
That makes sense. And then maybe help with some puts and takes on the capital optionality side. One, how you're thinking about the current portfolio as it sits today? Any changes there? Secondarily, you're in a good balance sheet position; Vik mentioned earlier towards 2x in the near future. How are you thinking about M&A? What's the funnel look like? And then secondarily, are buybacks something you guys are considering in the near term?
Vicente Reynal, CEO
Yeah, Mike, I think this is as you saw, we have our three phases. We spoke openly about our phase three or portfolio optionality that gives us plenty of opportunities to evaluate. That's equal on both sides, as you said, optionality on potential debt securities, but at the same time on the M&A side, as I tell you, the formula is very, very active. We're very excited with Albin, that acquisition we just made. A lot of these acquisitions have also shown that we continue to source them ourselves. We find that being proactive and working with a lot of these companies within our relationships is really unlocking the opportunity for us to be more prudent and disciplined in terms of multiples that we pay. The M&A funnel is very, very active, and we're excited about what we have ahead of us in that case.
Michael Halloran, Analyst
And the buyback side, any help there?
Vicente Reynal, CEO
Not at this point, I would say, Mike, because we see very good opportunities for us in the M&A side. You have seen from pre and post multiple reviews that pulls multiple synergies dramatically. We see just greater payback right now on the M&A.
Michael Halloran, Analyst
That makes a lot of sense. Thanks, Vicente. Appreciate it.
Vicente Reynal, CEO
Thank you, Mike.
Operator, Operator
Your next question comes from Jeff Sprague from Vertical Research. Please go ahead. Your line is open.
Jeff Sprague, Analyst
Thank you. Good morning, everyone.
Vicente Reynal, CEO
Good morning.
Jeff Sprague, Analyst
Hey, just coming back to kind of the synergy question. As you think about the funnel, I just wonder if the complexion of the funnel is changing at all. Some of your concerns just about the ability to travel and all these sorts of things seem to suggest that the $250 million target doesn’t seem to be borne out. It seems like you're getting at it, maybe a little bit quicker than you thought. Really kind of two questions: the speed at which you can continue to knock out the $250 million, and whether there's anything really moving around on the $350 million, and when that might move from kind of funnel to actual firm target?
Vikram Kini, CFO
Sure, Jeff, this is Vik. I’ll take that one. You're absolutely right; we've been pleased with how we've been able to execute on the synergy funnel at this point. I don’t think that, frankly, the COVID environment has really prevented us from executing on the funnel. We started with a lot of activities particularly on the structural side and I'd say the beginning phases of procurement, frankly, before the merger was even really completed. We've been able to see those activities accelerate. We’ve seen a sequential increase every quarter, and we’re now saying around 40% of the savings to be delivered here in 2020, 70% by next year, and then 85% by the year thereafter. This is considerably steadier compared to our original expectations. So at this point, I don’t think COVID has dramatically put a stop to things. We have found ways to proceed, including holding virtual workshops and i2V operations. In terms of the larger funnel, you know, in excess of $350 million, I'd say the complexion really hasn’t changed. What lies ahead of us here is much more direct material-oriented savings as well as footprint. As we mentioned, the direct material side has a big component tied to volume equations, which should become clearer as we get better visibility to 2021 and thereafter. The footprint fees largely have not changed, but executing on that may be more difficult in this environment. The good news is that the funnel is continuing to progress nicely. We always planned to execute on that footprint funnel in 2021 and 2022, and nothing has really changed in that manner. We're pleased with how things are progressing, and we’ve largely accelerated what's within our control.
Jeff Sprague, Analyst
Great, thanks for that. Just back to IT&S on some of the heavier CapEx oriented parts of the business. You gave us the order color and appreciate that. I was wondering if you could give us more color just on, you know, what your customers are saying. How does the CapEx outlook in some of these vertical markets that are more industrial sensitive, you know, look as we look into at least the first part of 2021?
Vikram Kini, CFO
Jeff, I think the good — I mean we’re encouraged in terms of how we’re hearing conversations with the customers. Obviously, we spoke earlier in the year on how things were slow. We're seeing pretty good momentum among these non-cycle businesses that require significant capital investments, so we’re encouraged with the conversations our teams are having. We saw also some of that here in the second quarter. We always said that the fourth quarter is a quarter where we expect a lot of these orders to be closed and built into the orders. So at least we’re encouraged by that. I think that’s what we meant by the backlog in terms of our long cycle businesses with large compressors or larger vacuum businesses also having a solid backlog heading into 2021.
Jeff Sprague, Analyst
Great, thank you.
Vikram Kini, CFO
Thank you, Jeff.
Operator, Operator
Your next question comes from Nigel Coe with Wolfe Research. Please go ahead. Your line is open.
Nigel Coe, Analyst
Thanks, good morning. I wanted to switch to your upstream on gas, the High Pressure, HPS. Obviously encouraging trends; it seems like we’ve found a flow, so we're starting to improve sequentially. A couple of questions. Would you say a disproportionate amount of the temporary cost measures have gone into that business to preserve the margins? Should we expect some modest sequential improvement in that business similar to what we've seen in prior recoveries?
Vikram Kini, CFO
You know, Nigel, there’s definitely a good amount of temporary costs, but I mean I would say similar in nature to what we’ve done. If we remember, the HPS is a business that even back in the second half of last year was undergoing restructuring, and the business was really different from a footprint perspective and also from the capital investment that we made. So I think we're encouraged with what the team has done to rapidly adjust. I think that is encouraging as we see a similar kind of comeback in the market.
Nigel Coe, Analyst
And then for sequential growth from here, do you think that's reasonable based on your customer conversations and what do you see in the market?
Vicente Reynal, CEO
We think so. We think, Nigel, that we're being thoughtful and prudent. You never know what's going to happen on some of the holidays here after Thanksgiving and into Christmas. But based on fleet count, it's sequentially increasing. Our order rates continue to increase. So now, year-over-year, as we pointed out in the first week of October, we’re down only 30% to 35%. Those are encouraging. But we feel that there’s some pent-up demand that has not come through, so I think that's highly encouraging.
Nigel Coe, Analyst
Okay, great. And then my follow-up question on ITS. First of all, thanks for all the detail. I think you preempted about 10 questions with a detail. But how did services track within that mix? I know that was hit pretty hard by the shutdowns. I'm just wondering if we've seen some pent-up demand coming through there and whether we're back to growth in services?
Vicente Reynal, CEO
Yeah, no, good, good question, Nigel. I would say that the big service business that we have is really mainly, I would say, mostly in the US and Europe, where we mostly in many cases will go direct. We saw good sequential improvement through the quarter. Our aftermarket and services all done holistically is roughly 2 times better than the whole goods so very consistent. I wouldn't call it a massive pent-up demand, just good gradual improvement as people are opening up their locations and it allows us to go in and serve them better.
Nigel Coe, Analyst
Great, thank you.
Vicente Reynal, CEO
Thank you.
Operator, Operator
Your next question comes from Rob Wertheimer from Melius Research. Please go ahead. Your line is open.
Rob Wertheimer, Analyst
Hey, good morning, everyone.
Vicente Reynal, CEO
Good morning, Rob.
Vikram Kini, CFO
Good morning, Rob.
Rob Wertheimer, Analyst
So Vicente, I think you've talked a couple of times on long cycle versus short cycle dynamics. I wonder if you could just tell us underlying demand trends? Is there a very wide gap between the two? How wide is it? Are we already seeing longer cycle stuff coming up, not just relying on the short cycles?
Vicente Reynal, CEO
It feels that way, Rob. We can see that on the long cycle business it was actually positive from our perspective in the third quarter. That can sometimes be spotted based on the size of the project that you see. But we're seeing some momentum in CO2 capture, good momentum in air separation and industrial gases. Some projects are more related to onshoring release, allowing us to implement our technology in those areas. We’re seeing good, I'd say, sequential improvement on that. For me, the more encouraging thing is the conversations our teams are having with customers seem to be much more active than in the past. But is there a big separation between the two? Not dramatically, but there are encouraging signs on both.
Rob Wertheimer, Analyst
Okay, that's very helpful. Thank you. If I can ask just one other on pivot to growth on phase two, I wonder if you can characterize where you think you have the organization focused? Has the intense focus been on synergies the past few months, and you've preemptively pivoted to growth initiatives?
Vicente Reynal, CEO
Sure, Rob. That's a great question. We’re able to drive a lot of agility and nimbleness through the use of IRX. We have nearly 200 activities weekly with an Impact Daily Management process. I can tell you in our conversations, we’re discussing growth synergies more now as we see good momentum on cost synergies. We still keep KPIs on cost synergies but now we’ve added the KPIs on growth synergy. So the conversation is now heading towards that direction. It takes time to see that solid momentum in the business. We were able to pivot and have been writing this through the third quarter. We feel encouraging as we head into 2021; we anticipate seeing the benefits of those actions.
Rob Wertheimer, Analyst
Thanks so much.
Vicente Reynal, CEO
Thank you.
Operator, Operator
Your next question comes from Stephen Volkmann from Jefferies. Please go ahead. Your line is open.
Stephen Volkmann, Analyst
Hi. Good morning, guys. If I could just go back to some of your comments about margin incrementals. I think we had originally thought about 30%-ish this quarter, and obviously you blew that away and talked about some of the temporary costs not coming back as you expected. I'm just trying to understand how does that work? It sounds like you don't actually drive that from a top-down perspective; maybe it's more driven by the businesses. I'm trying to think about how that plays out in the fourth quarter?
Vicente Reynal, CEO
Our categories are always driven by the teams. As we are preparing our budgets for 2021, our teams really pay close attention to what incrementals and decrementals can be viewed as best-in-class. When we provided that conversation, there was a lot of discretionary costs that were not accounted for in Q3. Our teams closely monitor many leading indicators, and I think in our commentary, we’ll be attuned to what we expect to see, but with room for our teams to drive further improvements.
Stephen Volkmann, Analyst
Okay, so just to clarify, then. Vik mentioned about 35%-ish incrementals; is that right?
Vikram Kini, CFO
No, Steve. The comment was regarding a longer-term view into 2021. Specifically, for the fourth quarter, we expect decrementals to remain below 30%. We also expect to control it in line with the levels seen in Q2 or slightly better. But we do not anticipate replicating the performance seen in Q3, which had the benefit of favorable margin mix items.
Stephen Volkmann, Analyst
Great, thank you. That's exactly what I was looking for. I should have said decrementals, sorry. That's all I got. Thank you.
Vicente Reynal, CEO
Okay, thank you.
Operator, Operator
Your next question comes from Andrew Kaplowitz from Citigroup. Please go ahead. Your line is open.
Andrew Kaplowitz, Analyst
Hey. Good morning, guys.
Vicente Reynal, CEO
Good morning, Andy.
Andrew Kaplowitz, Analyst
Vicente, can you give us a little more color on what you're seeing in terms of the growth within Precision and Science? You mentioned the expected decline in the forum; PFS business was down 6% in Q3, GDI Medical, I think, was up 10%. You mentioned the overall segment is positive through the first weeks of Q4. So is PFS continuing to turn more positive? Or has that really strengthened that GDI Medical business? Could you give us some more color on what's driving the improvement in PFS?
Vicente Reynal, CEO
Yeah, Andy, I’d say that most of the businesses are continuing to strengthen within Precision and Science. It’s clear you’ve seen that throughout the quarter in Q3, and we saw continued improvement through the month of Q3.
Andrew Kaplowitz, Analyst
And then, Vicente, obviously, you spent some time talking about hydrogen. Obviously, ESG becomes more important every day. You just mentioned onshoring and the initiatives there. So if you look at all these newer trends together, is it having an impact on your business overall right now? And as you think about '21, how well positioned are you to grow above market because of all these new trends that you guys are exposed to?
Vicente Reynal, CEO
You know, that is the thing that excites me, Andy. A lot of these trends continue to unfold in our favor from that perspective, and not just by pure luck, but mainly because of the self-help innovation that the team is driving. We are identifying some of these growth secular trends and evaluating how our technology can be applicable. We go deep and create unique differentiated innovations. That’s what makes our position exciting. In 2021, you will see the efficiency for hydrogen is going to be massive in terms of growth. We want to be players with our new unique technology. But that’s going to be a medium to long-term play.
Andrew Kaplowitz, Analyst
Thanks, Vicente.
Vicente Reynal, CEO
Thank you.
Operator, Operator
Your next question comes from David Raso with Evercore ISI. Please go ahead. Your line is open.
David Raso, Analyst
Hi. Thank you for the time. A question about what's in the backlog for each business? The color you provided on ITS appears to be a positive mix when I hear that the bigger compressors are strong. And then within Precision, just thinking about Medical, maybe that driving the growth diminishes a little bit. So we think about that as potentially a little less positive mix moving forward. So I'm just trying to get a sense of what's in the backlog? What we have seen so far in October to better understand the mixed developments for the revenue within those two segments?
Vikram Kini, CFO
Sure, David. I'll start with the Precision and Science perspective. We did have a somewhat elevated medical backlog that we were leveraging in the second quarter and third quarter. Rectifying that, it's become more pronounced as we head into the fourth quarter, while the medical piece has a little bit of margin upside comparatively to PFS, the other Precision and Science. The segment itself has strong margins, but they do not reach medical COVID-related orders. That should normalize at the end of Q4 and into 2021. On the IT&S side, it’s not dramatically different. Each project is unique, but I would say that the margin profile here is pretty comparable. The typical shorter-cycle compressors or blower and vacuum equipment, so the Q4 margin profile should be comfortable.
David Raso, Analyst
That's helpful. And lastly, on the COVID impact, especially some of the lockdowns we began to see in Europe. And hopefully we don't see any here. But when you think about the potential impact, are you trying to get ahead of that a bit, maybe securing some kind of buffer component inventory? Or are you just sort of playing it straight and letting it unfold as it unfolds? I'm just curious how you're reacting to potential impacts.
Vicente Reynal, CEO
So, David, I wouldn't call it that we're accelerating inventory at this stage. What our teams have done is that they’ve learned a lot from the past and are clearly working with the suppliers to ensure they can hold more buffer inventory versus having all the inventory held by us. We believe we’re prepared and working with our supply chains to service us proactively.
David Raso, Analyst
And so far, no implications on any facilities from some of the French or UK or that lockdowns we've seen in Germany, no?
Vicente Reynal, CEO
No implications, no.
David Raso, Analyst
Terrific, thank you. Appreciate it.
Vicente Reynal, CEO
Thank you.
Operator, Operator
We have no further questions. I would like to turn the call over to Vicente Reynal for closing remarks.
Vicente Reynal, CEO
Thank you, and thank you, everyone for the interest in Ingersoll Rand. I'm very appreciative of the tremendous amount of work that our employees are doing here, even in these difficult environments, and they are delivering tremendous results. Thank you, and have a good day.
Operator, Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.