Ladies and gentlemen, hello. And welcome to the Ingersoll Rand First Quarter 2021 Earnings Conference Call. My name is Maxine and I'll be coordinating the call today. [Operator Instructions] I would now hand over to your host, Chris Miorin, from Ingersoll Rand to begin. Chris, please go ahead when you are ready.

Thank you, and welcome to the Ingersoll Rand 2021 first quarter earnings call. I'm Chris Miorin, Vice President of Investor Relations. And joining me is Vicente Reynal, President and Chief Executive Officer and Vik Kini, Chief Financial Officer. This is my first earnings call in the Investor Relations role, and I look forward to working with you all. We issued our earnings release and presentation yesterday that we will reference during the call. Both are available on the Investor Relations section of our website, www.irco.com. In addition, a replay of this conference call will be available later today. Before we start, 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 the 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, both of which are available on the Investor Relations section of our website. On today's call, we will provide a Company strategy update, review our Company and segment financial highlights and offer updated 2021 guidance. For today's Q&A session, we ask each caller keep to one question and one follow-up to allow for time for other participants. At this time, I'll turn the call over to Vicente.

Thanks, Chris. And good morning to everyone. Let me begin by welcoming Chris to his role, as Vice President of Investor Relations, Chris replaces Vik in the role who was appointed to CFO in June of last year. I am delighted to be working alongside both of them. Chris previously led corporate development for the company and played a critical role in accelerating our growth strategy. Most recently with the acquisitions of Tuthill and Albin Pump, as well as the completed divestitures of HPS and announced divestiture of Club Car. I would like to especially thank Chris for his military service in the US Army. During his military career he served as infantry officer and ranger, including a deployment in support of Operation Iraqi Freedom. Chris also held leadership roles in the Old Guard at Arlington National Cemetery, and served as an aide to the President of the United States. Following the military, Chris held roles in finance and investment banking, before joining us to direct strategy, and corporate development efforts. He is proud veteran who continues to help fellow veterans transitioning from military to civilian life. And he is integral to executing our strategic plan to deliver value for our shareholders. Chris is one example among our 16,000 employees who live our company purpose inside and outside the company. As you see on slide three, anchoring to our purpose is working. We're realizing the achievement of our desired targets. You'll hear three key themes today. First, we're accelerating our transformation. It's amazing to think a year ago we closed the Ingersoll Rand industrial transaction. And today, we're unlocking approximately $2 billion of value with two strategic divestitures, putting us in a great position to continue our portfolio transformation. Second, you will hear about how we are over-delivering to our…

Thanks, Vicente. Moving to slide nine, we continue to be pleased with the performance of the company in Q1. Q1 saw strong balance of commercial and operational execution fueled by the use of IRX with continued signs of improvement across industrial end markets. Total company orders and revenue increased year-over-year 29% and 17% respectively, with strong double-digit organic orders growth across each segment. In fact, our organic growth on both orders and revenue in the quarter were records for the company and set us up well as we move into Q2. In addition, the company continued to drive performance on productivity and synergy initiatives using IRX as a catalyst, and we remain on track to deliver on our $300 million cost synergy commitment. The company delivered first quarter adjusted EBITDA of $293 million, a year-over-year improvement of $107 million and adjusted EBITDA margins of 21.4%, up 550 basis point improvement year-over-year. Continuing performance from previous quarters, we also achieve incremental margins of 54% in Q1. What item to note, these financial metrics do not include the High Pressure Solution segment, which was classified as discontinued operations in Q1 with relevant restatements to prior periods. Given the recently completed sale, we will not report on the segment moving forward. Free cash flow for the quarter was $108 million, up $78 million year-over-year, yielding total liquidity of $2.6 billion at quarter end. Turning to slide 10, for the total company orders increased 25% and revenue increased 13%, both on an FX adjusted basis. The IT&S, Precision & Science Technologies and SVT segments all saw double-digit organic orders growth in the quarter. Starting first with IT&S. The total segment saw 13% FX-adjusted orders growth with strong momentum in core compressor technologies, with the Americas showing mid single digit orders improvement, EMEA with low…

Thanks, Vik. Moving to slide 12 and starting with Industrial Technology and Services. Overall organic quarters were up 11% and revenue up 9%, leading to a book-to-bill of 1.14. In addition to orders and revenue growth, the team delivered strong adjusted EBITDA up 57% and adjusted EBITDA margins of 23.1% up 610 basis points year-over-year, with incremental margin up 65%. Let me provide more detail on the order performance. Starting with compressors, we saw orders up in the low 20%, a further breakdown into oil free and oil lubricated products show that orders for both were up above 20%. From a regional split for orders on compressors, in the Americas, North America performed comparatively better at up mid-single digits, while Latin America was up low single digits. Mainland, Europe was up mid-teens, while India, Middle East and Africa saw continued recovery at up high double digits. Asia Pacific continues to perform well, with orders up high double digits, driven by high double-digit growth in both China and across the rest of Asia Pacific. Moving to Vacuum and Blowers, orders were up low double digits on a global basis, with double digit growth across each of our regions. Moving next to the power tools and lifting. The total business was up low double digits in orders and pivoted to positive growth, driven mainly by our enhanced e-commerce capabilities and improve execution. On the right side, we're highlighting the impact that our technologies are having on our customers sustainability efforts. As you may remember, we acquired Runtech in 2017. Runtech designs and manufacturers energy-efficient solutions primarily for use in pulp and paper mills. Since the acquisition, we have done several new product launches, as well as expanded commercially in other regions, and this has led to a 65% increase in the installed…

[Operator Instructions] Our first question comes from Julian Mitchell from Barclays. Your line is now open.

Just a question on the raised guidance. So I think it looks like you're embedding around the sort of mid-40s segment incremental margin for the year as a whole. I mean, that guidance, maybe just clarify if that's roughly correct. And I suppose as you think about puts and takes from here after that mid-50s number in Q1, anything major to call out around, say mix shifts, pricing, it sounds like you're confident on price cost. But just wondered the extent to which those pressures on a net basis will increase from here in the balance of the year?

Hi, Julian. Yes, you're correct. On the first question, yeah, kind of that mid-40s range. And in order, kind of puts and takes, let me just kind of give you a little bit of color here. I mean, Q1, as you pointed out, I mean, very strong across segments and regions. And that is really encouraging. If you think to highlight, you know, in Q1, we're seeing kind of an easier comp on a year-over-year basis due to the cost energy savings, as most of our savings really started to show in April of last year and onwards. We're also seeing the solid price realization based on the actions that we took in late 2020. And the continued execution of I2V and other initiatives. As we go into Q2 and the second half, if I kind of break it down by segment, you know, IPS [ph] overall, we're still expecting that kind of 30 to 35 incrementals, even with the headwinds, around not only the inflation, but also the discretionary costs coming back, which again, speaks to the ongoing synergy delivery efforts, as well as our focus on kind of quality of earnings. On PST, you know, touching first on Q2, it's a reminder, and as we highlighted in our original guidance, Q2 incrementals will be lower than average, to the fact that in 2020 we saw outsized demand for our medical compressors and pumps, used again to fight COVID. And the majority of these orders came in Q1 and Q2 with shipments mostly in Q2 and Q3. And as I reminder, these shipments on the medical products came in at a premium margin. In addition, PST is seeing some of the inflationary headwinds that most companies are seeing. And while the back half of the year will be more normalized to about that kind of 35% and above. So again, you know, having said all days, I mean, as you know, we're very - we had a pretty strong processing in terms of price, I2V sourcing, that our teams are actively executing to offset any of these kind of headwind coming in.

Thank you. And then maybe switching to capital deployment, you know, given the proceeds from HPS and SVT and the cash flow outlook, you could be close to zero net debt at the end of this year, I think. Also, though, it's a very - it's, you know, valuations are very high for M&A right now. So maybe just help us understand sort of how optimistic you are on getting a meaningful degree of M&A done this year?

Yeah, Julian. We still remain very optimistic on the M&A. I mean, the M&A as we highlighted, pretty strong, as you saw on the remarks on the slide that we put together. So we've been thoughtfully - if you can go back when we talked about our phases of creating a strong foundation, people think [ph] to growth and portfolio utilization, we've been very thoughtful on the timing of all those and proactively working on the M&A funnel. So we're ready with the funnel. Again, we're not going to go crazy on the market, we're continue to stay very disciplined in these environments. We buy companies that are strategic fit. And as we have always highlighted, the strategic fit, you know, not only from a technology, but also commercial perspective. We'll never buy for a kind of multiple arbitrages. We buy company that can have that strategic fit. And I think that's what's exciting. And yes, you're right. I mean, I think with these kind of unlocking $2 billion of value in - with these two divestitures, we're ready for continue executing M&A in a very disciplined way.

Great, thank you.

Thank you, Julian

Our next question comes from Mike Halloran from Baird. Your line is now open.

Hey. Good morning, everyone. Let's just follow up on that last question.

Good morning.

Let's just follow up on that last question there a little bit then, right. So you're through the divestiture piece, some of the chunkier stuff, obviously a little bit more to come potentially, you know, good commentary on how you view the actionability there. But maybe just an update on how you're thinking about what this portfolio looks like, three, five years down the line. We've had some indication where the capital allocations are going to go, but maybe just a little bit of an update on directionally how you're thinking about this portfolio, composition over time, and where the chunkier pieces that capital allocation can go?

Sure, Mike. I - as you see, we kind of have these two segments and one larger than the other. We've spoken a lot about how our strategic focus on building the funnel has been on the Precision and Science. We see a lot of good things that we like on that segment. And we've been very prudent in terms of saying, you know, while we integrate Gardner Denver and the Ingersoll Rand through the past 12 months, building the funnel on the Precision and Science, I did not have that many kind of distractions, I will say, on the integration. So I think that continues to be the exciting piece. In terms of kind of how we look at, we're still going to be this mission-critical, high aftermarket. We like the recurring aftermarket side of these rotating components and devices that we have. And we like the space where we play. And we still have, you know, over $30 billion of addressable market, even when you exclude high pressure and specialty vehicles. So things around sustainable technology, high growth, end markets, we've been very thoughtful in terms of focusing and doing a lot of segmentation and market work around these kind of high end growth markets that where we can have the play in terms of flow creation, and any of those adjacent markets that kind of complement our ecosystem of the product line.

And then a question on the guidance, on the assumptions on the revenue side, maybe just talk about how your revenue outlook compares to say normal seasonality, or what kind of backdrop are you embedding as you work through here, pretty stable or is there an acceleration assumed? And then also maybe just touch on what you're seeing on the shorter cycle side of your businesses versus some of the longer cycle side of your businesses?

Yeah. Let me let me touch base first on the short cycle and then long cycle, and then I kind of let Vik comment on the other one. Short cycle, you know, we see very good strength, pretty broad base, particularly kind of this medical market, animal health, what kind of, what we call also agtech and aquatech [ph] kind of end markets that were putting a lot of effort to really continue to penetrate, pharma, food and beverage and water and wastewater. In terms of kind of long cycle end markets, most of our long cycle business, as all of you know, is in kind of what we call the Nash, Garo business, as well as the very large compressors, which is kind of the centrifugal compressors that the multistage centrifugal compressors, I will categorize the large multistage centrifugal compressors orders were very strong and positive. This is an area where we are seeing very good start with - when you think about kind of some of end markets we're seeing good momentum and kind of reshoring on some companies, as well as markets like renewable energy and generally industrial. The Nash, Garo in the first quarter was kind of down, primarily due to the timing we say. You know, if think about the Nash, Garo is one business that changes quarter, quarter-to-quarter, so we kind of think to look at it a bit more from a first half compare year-on-year. And the funnel still continues to be highly active. And just as a reminder, you know that business in the fourth quarter saw very positive orders in kind of the mid to high single digit order cycle.

Yeah. And Mike, I think your first part of your question with regards to kind of seasonality and kind of how we're thinking about the backdrop, I don't think we're thinking about it much differently than you've seen from a historical perspective. Obviously, strong first quarter, I think we're very encouraged by the orders profile where in IT&S and Precision & Science, you had book-to-bills of, I think 1.14 and 1.20 respectively. So we've obviously built some solid backlog now moving in the second quarter. And as Vicente said, typically speaking, you tend to see, particularly for the longer cycle businesses order stronger in the first half and shipment stronger in the second half. So typically speaking, you know, you tend to see Q1 seasonally a little bit of the weakest, Q4, seasonally, strongest and Q2, Q3 in between, I don't think you're going to see anything dramatically different in the context of the phasing, or how we think about seasonality here in the context to 2021.

Thanks for the answers. As always, appreciate it.

Thank you, Mike.

Our next question comes from Jeff Sprague from Vertical Research Partners. Your line is now open.

Thank you. Good morning. I wondered if we could just talk actually a little bit about price specifically, you know, Vicente, you indicated you felt you had price costs pretty well dialed even to start the year. But maybe give us a little color on what's going on with price? Have you gone out multiple times and maybe as part of that question, too, are there any particular supply disruptions that you're dealing with in the business?

Sure, Jeff. You know, on the price cost, the good thing is that, we actually planned for the inflation during the budget time last year with the team. I mean, we were seeing early indications of inflation. And we basically told the teams to plan for the inflation. And with that to plan for the price, and then we executed on the price. And I think, it was part of kind of our original guidance as well. And reason why we - it definitely increased prices back then. And I think the inflation is really coming in fairly in line with what we planned. And then, you know, I will say, in addition from a margin perspective, we continue to run the I2V procurement work that we're doing with the - that we did with a synergy integration between Ingersoll Rand and Gardner Denver. And that's kind of working really well. As we move forward, I mean, clearly, we continue to watch carefully this inflation and the teams, they're kind of lock and loaded to plan for incremental price increases based on what we're seeing, primarily typically like the logistic side of things. But, but yeah, we're looking at doing that proactively positioning of our products here in this inflationary market. And in terms of supply chain, I mean, we're definitely not immune to what you're seeing, I'm hearing a lot about logistics. But I think a couple things to highlight here. First, we're mostly in the region for the region. And this has proven to be a great strategy for us, not only in these difficult times, but also, as companies looking to reshoring, it has been very helpful for us. I'll say, second, you know, we're working with a much larger purchasing power than in the past, many of these are kind of new partnerships that we're creating. And these really has helped in the supply chain, as they want to deliver and have very good terms with us. So I'd say that supply chain, you know, non-immune, but I think the team really working very well to get it in control.

And second, unrelated, just what's going on with service, you see a clear pickup in activity there and commensurate with some of the kind of equipment order dynamics that are starting to tick up, or would you expect some lagging impact there? How does the year play out on the service?

Yeah, Jeff, you know, in the first quarter, we saw outsize order momentum on the original equipment. And certainly, as the market recovers, we definitely want to see this. And we're very glad because again, as you're kind of alluding there, we're kind of seeding the market and putting our products, so then we can connect them with our IoT platform and then continue to generate these accelerated aftermarket. So that that's good news. I will say that, still with that, the service on the aftermarket sequentially we saw improvement in most of the regions. So again, good things that some of the strategies are definitely seen good momentum here.

Right, thank you.

And the next question comes from Nigel Coe from Wolfe Research. Your line is now open.

Thanks. Good morning, everyone. Thanks for the question. I want to go back to cap allocation and M&A. And I'm curious if you know the proposed tax changes, cap - capital gains tax changes in particular, whether that's - where you've seen more activity on the private seller sides. And so any comments there would be good. And then just given that we've seen acceleration in disposals, obviously, a lot of kind of available cash now. Is this driven by just like your timing, you know, this is one of those things or do you have increased confidence and line of sight on deployment from here, and that's kind of driven you to kind of accelerate the sale of Club Car? Thanks.

Sure, Nigel. I think on the cap gain taxes, I think maybe still slightly too early to tell. And obviously, that's mostly particularly here in the US. I think Europe continues to be, at least, no major changes, but too early to tell. I think it could free up better momentum in some cases, but nothing that I will classify as saying it is creating an imminent change, yet. Maybe some of the family owning owners are thinking about it, and we'll see, I mean, we'll stay pretty close and create good cultivation. So we'll see on that. I think the timing, as kind of alluded, I think we've been very thoughtful. On the timing, we said that we went to create stability, but at the same time, we want to improve some of these companies so we can maximize the value that we could generate. And at the same time, we did it in a way that we went to have some sort of visibility to the funnel. So in parallel, we've been working on all these aspects, not only the divestitures, but also accelerating the funnel. And you can see how some of the statistics on the funnel. And we're excited that, you know, the funnel is 5x what we had even last year, the average revenue size per company is more than 50%. And the velocity, which is really important, has been cut by half. So I think it's been - it's been done everything strategically well thought out from - in parallel, I would say, Nigel.

Thanks, Vicente. And then on - you called out PST is an area where you're seeing good opportunities in that pipeline. Is there an appetite or even visibility to expand the medical components of PST?

Absolutely. Yes, definitely, Nigel, yeah. I mean, it has been, if you remember, yeah, absolutely.

Great. Thanks.

Thank you. Operator Our next question comes from Josh Pokrzywinski from Morgan Stanley. Your line is now open.

Hey. Good morning, guys.

Morning, Josh.

Morning, Josh.

Chris, congrats on the new role [ph] Your background makes me feel like maybe I haven't done that since winning that seventh-grade spelling bee.

Thanks, Josh. Appreciate it.

Vicente, your 23% margins in IT&S, which still feels like an early point in the cycle. And I think to Vik's point, not a seasonal high point. I get that maybe margins will move around with M&A here, but can you get to mid-20s in the next couple of years on a core basis? I know that's sort of been thrown out there as a noble goal for a while, but it seems like maybe it's accelerating is an opportunity?

Yeah, Josh. This is Vik. I'll start there. I think the answer is absolutely yes. You know, we've been very, I think transparent in the context that quality of earnings and continue to execute on many of our strategic levers, notably areas like the synergy funnel, procurement, I2V, as well as you know, pricing realization are clearly focus areas and footprint, for example, you know, as that'll still kind of more so yet to come, frankly, from a synergy delivery perspective. So I think the answer is, you know, a mid-20s percent EBITDA margin kind of on the IT&S segment is without question, I think where we are targeting this business to be from a more medium-term perspective. And I think one thing to add would be, you know, we're really encouraged by the momentum we're seeing, frankly, across all the parts of that business. It's really not coming from one distinct area, I would tell you, all the regions, as well as, you know, the power tools business, inclusive, continuing to show good momentum. And I think some of the commercial initiatives that we also have, you know, Vicente just spoke to continuing to see good aftermarket traction. We're seeing a little bit outsized OE right now, which we think is a good thing. As we kind of start to show more of that shift into aftermarket and build from that 40% kind of baseline we have right now with aftermarket sales that obviously help us well. So all good signs and things that we would yet say, yes, should point to 25% margins definitely being the target here as we think ahead.

Got it. That's helpful. And then I guess, we've talked a lot about the M&A side of the equation, so maybe just kind of focusing on the core business. You guys mentioned, maybe some signs of nearshoring taking place, just wondering if there's anything else that sort of looks unusual or stands out at this point in the recovery, whether it's end market that you're kind of leading or lagging in a surprising way, or a mix of business where folks are doing more CapEx earlier in the cycle. Just any observation on kind of the complexion of spending underneath, you know, some of those consolidated numbers.

Yeah, sure. Josh, maybe something to highlight. I mean, we spoke about these industrial vacuum and blower business to be kind of up low double digit. And when you cannot decompose that, that has the industrial side, kind of brands like [indiscernible] and Robuskey [ph] and things like that. But included in there is also the vacuum business like Nash, which is kind of more the longer cycle. And as I just mentioned, I mean, Nash, you know, was down in the first quarter, which obviously implies that the industrial vacuum business was really high. And that was basically up in the - in the kind of 20s range, the industrial vacuum. Our industrial vacuum is really collocated within kind of large OEMs and OEMs. We always said that, industrial vacuum was always a leading - a good leading indicator for industrial recovery. And it is very exciting to continue to see that momentum happening on that industrial vacuum side of the business. So, I think that's very good news for what the industrial recovery market is seeing. In terms of some of the other things is, it's actually also good momentum based on the - a lot of the self-help initiatives on the commercial side. I think, Josh, it's exciting to see that we're seeing really good traction on some of the commercial kind of that product summit activities that we talked about prior quarters, in terms of, you know, the combination of Gardner Denver, and Ingersoll Rand, examples like, oil-free product like the Ultima, which was a Garnet Denver technology launched as Ingersoll Rand in Europe, that saw a really, really good momentum in Europe. And that is getting launched now here in the US. So expect to see that accelerated momentum too, as well. So a combination of those kind of multiple things, is not only the market, but also a lot of good execution from the team based on these initiatives that we're doing.

And just to be clear, when you say vacuum that for you guys does not include semiconductor exposure, right?

Correct. Yeah, we don't play in the semiconductor market. That's right. Yes. It is all industrial. All industrial product…

Got it. Thank you.

Our next question comes from Andy Kaplowitz from Citigroup. Your line is now open.

Hey. Good morning, guys.

Morning, Andy.

Morning, Andy.

Vicente, maybe can give us a little more color to what you're seeing by region, you obviously talked about APAC sales and orders up high double digits. But is that just easy comparisons given the pandemic hit that region first? Or have you been able to harness some of the opportunities you've cited for China and Southeast Asia? And then, you know, America's, we just kind of talked about it, obviously, easier comparisons coming up, but is the cadence of orders and revenue continue to improve as we go through April here?

Yeah. Andy, I think Asia Pacific, I'll say it is definitely combination of both. I mean, definitely some easy comps in China, for sure. But if you recall, Southeast Asia was definitely not an easy comp, yet, in the first quarter, because I mean, the Southeast Asia really start to getting kind of lock down in the second quarter. So I'll say, you know, a good combination of maybe easy comps, but at the same time, some really good momentum in China and Asia Pacific. I think this is - we always highlighted when we created the integration of Ingersoll Rand and Gardner Denver that we said, Asia Pacific is definitely an area of growth and opportunity. And we're doing some very good organic investments. I mean, we spend a lot on new capital equipment to be able to have in region for region in areas like that I think is really, really exciting. And, you know, we put a renew focus also on emerging markets in Southeast Asia, something that before with the scale that we had, it was very difficult to do, but now we have the scale. And these organic investments are definitely showing some good momentum. I think in the Americas, yes, as you said, particular in the US, Andy, we will see better, easier comps here in the US in the second half, same in Europe. But I'd say as well, you know, you saw that in Europe, at least on the compressor side, orders we were kind of in the mid-teens up, while America or the US mid single digit up. And maybe some of that is a little bit of timing in the sense that the Europeans, as I just mentioned before, they kind of went in faster in terms of doing some of these integration of the product lines that we spoke about. And now we're seeing that getting implemented in the Americas. Again, the Americas, or the US is a more complex environment where you have a combination of direct versus distribution. So we just wanted to be careful. But I think everything is going really well, now in the US as well, and we'll see some inflection here as we move forward.

Helpful, Vicente. And then one of the issues that you've mentioned in the past with your synergy progress was that procurement synergies would be partly a function of your sales volume. And so you mentioned already that your supply chain is faring well, but could you actually harvest more procurement related synergies as part of your $200 million [ph] program, given, you know, expected higher sales? And you know, I'm cognizant of you just raised your target? So just thinking sort of medium to longer term here?

Yeah. Andy, I think you hit the nail on the head. Obviously, when we - so the answer to your question is, you're completely right. Obviously, the direct material components of our synergy equation, most notably, the procurement side and I2V are, frankly a functional volume. And we did note that even in 2020, obviously, volumes were not at kind of that - kind of baseline 2019 levels. But we had seen, for example, a procurement, I'd say probably better than expected, percent realization on saving, so that it kind of been a nice - kind of I'd say, mitigant to lower volumes. Clearly, a higher volume equation clearly can materialize into higher savings. But as you said, some of that was definitely dialed in to the race, when we moved the number from $250 million to $300 million, we'd clearly indicated that the majority, if not all of that really was coming from the direct material equation. Could there be some potential in the medium term, over and above? Perhaps, but I think we want to continue to see how things play themselves out. But we're very encouraged. And I think the momentum we're seeing, frankly, even still today on the procurement and the I2V side is very encouraging in the context of the price realization, and the percent realization that the teams are actually recognizing. So quite encouraged, but I'd say a lot of that was factored into the, you know, the raise from $250 million to $300 million.

Appreciate it, guys.

Thanks, Andy.

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

Thanks. Good morning, guys.

Morning, Joe.

Morning, Joe.

So maybe just starting out, Vicente, you've highlighted in the past this longer-term opportunity on the oil free side, water, I guess some positive comments on hydrogen and the funnel activity. How do you think about these initiatives is providing some type of like, you know, GDP multiplier effect for the company over the course of the next two to three years?

Yeah. Joe, definitely we believe that this is - these initiatives are the ones that will give us that kind of plus, plus, that we always like to talk about in terms of how we execute that, in the sense that, you know, we play in these kind of GDP environment, end markets, but with the initiatives that we're putting, we're kind of moving more towards those end markets that can give us that plus, plus an out execution. We always said, you know, call it anywhere between 100 to three - up to 300 basis points above the GDP, depending on kind of the region and the market. So these initiatives continue to be really exciting for us. We launched with the help of IRX several of the impact daily management programs from a global perspective, and I'm very excited with kind of what we are seeing and definitely much more to come.

Yeah. No, that's helpful, Vicente. I guess, maybe just, you know, with like oil-free and water, those are end markets that, you know, you guys have had traction. I think I heard you say on hydrogen that things were picking up, like is there anything that's happening kind of like at the margin, that has changed just in the near term on any of those opportunities?

You mean, the margin in terms of profitability?

Oh, no, I just meant on the margin, meaning like anything incremental, yeah.

Yeah, well, I mean, I think on the oil-free it's more about you know, I think this year and moving forward is when we start seeing the execution of this product line combination between the two companies. As you can imagine, I mean, we talked a lot about that last year with all the product summit and the acuity [ph] that we were doing to combine this kind of creative, highly complementary, I think a lot of the results should be and could be seen now. And I think, you know, same thing for the water, water and wastewater. I mean, I think it takes a little bit of time to see the results. But I think we're very excited and very encouraging to kind of what the momentum we're seeing across the company on these strategic end markets that we have selected.

Got it. No, that makes sense. If I could ask one more just on free cash flow longer term, you guys have made a ton of progress on the free cash flow margin, you know, even when it was passing [ph] the GDI days of working capital. How do you think about driving to potentially, you know, a 20% type free cash flow number or free cash flow margin by like, in next few years? And is that possible? And how do you think about the working capital opportunities in the company?

Yeah, Joe, I mean, I think without question, we continue to see opportunities. I mean, we're pretty pleased with I think the momentum we've already seen. But we've been very adamant that there - there are still a number of, I'd say levers that we have to pull. First and foremost, I'll start with the tax rate. You know, we mentioned that when we started as kind of one year ago, putting two companies together, we really didn't have what I would consider to be an optimized tax rate. We've done a lot of work, their tax organization, frankly, whole organization and a lot of work. We've started to implement a lot of those, I'd say, practices here, and you're already starting to see some good momentum on the tax rate. We've said that we're getting to, you know, approximately 23%. And, you know, last year, you were 24% plus. So you're already starting to see some good momentum there. And we have line of sight to getting that into the lower 20s over time. In terms of the working capital side, absolutely. I think the biggest area that is still ahead of us here is on the inventory side. We've mentioned, I think a few times that inventory is really almost connected in some respects to a lot of our synergy delivery initiatives. We talk about procurement, and we focus a lot on the saving side. But there's also the - you know, making sure that you're negotiating terms properly, and that you're actually making sure that you're pulling inventory only when you need it. And then also, with the footprint side of the equation, you know, footprint is probably one of the biggest areas of the synergy equation, you really haven't started to see deliver in a material manner just yet. But you can be rest assured here, when we start to actually optimize our footprint on the manufacturing side, there will be working capital opportunities there. So you put that all together, and clearly there are other areas in terms of the payables and receivables equation that we're working. Clearly, I think working capital is a major opportunity ahead that, you know, can help drive us to those, you know, the levels that you're speaking to here over time. So I think we're encouraged. It's definitely, I'd say, a big focal point of the ops and finance and business teams. And we're going to continue to make momentum here as we move through this year, and frankly, into next.

Great to hear. Thanks, guys.

Thanks, Joe.

Our next question comes from Rob Wertheimer from Melius Research. Your line is now open.

Thank you, and good morning. My question is on maybe more of the structural or strategic side of pricing, as opposed to the responsive or tactical things that you kind of discussed already. I know you guys have a lot of work on, you know, looking at, you know, tracking discounting better and looking at various initiatives to sort of improve the way pricing flows to the organization. And I wonder, could you talk a little bit about the outcomes, as you look at your products, have you found that they have the pricing power you want or, you know, is there structural options there, and as you look forward into the backlog and into years out, is that a material difference from the past? Thank you.

Yeah, Rob, I will say that - great question on the pricing side, and definitely something that you know, strategic pricing, that is basically what we like to do. We typically never do peanut butter across price increases, it's just based on the specific product lines. And I will say that, you know, as you know, our mission-critical products were very low cost relative to the overall system. And that is very good for us and works really well for us in situations of continuing to be able to increase price because the mission criticalness and the low cost relative to the overall system that our products have. In terms of the stickiness and the elasticity, I mean, we have done a lot of work on testing pricing elasticity in many of our end markets and many of our products. We have a really great, I'll say internal process for scoping that out and making sure that we continue to you know, push the boundaries on the envelopes on that, as we see that we can. And obviously we can only do it only as long as we have differentiated products, which is the other big play in terms of how our I2V has been really strong process for being able to continue to create differentiated products, whether it might be tweaks of innovation that is not only - so it's a process that is not only for driving direct material costs down, but it's also driving some increase in profit - price and profitability.

Okay. That's a great answer. Thank you. And then just to understand it, I mean, when you think about, you know, all the testing, the measuring, the elasticity you've done and the profit - the product improvement, have you started to see a lot of benefit from that? Or is that, you know, a year out or two years out when it sort of kicks in? And I'll stop, thank you.

Yeah. No, we're seeing some of that. I mean, when you look at the margin expansion that we saw here in the first quarter, a good chunk of that also came from gross margin. So we're seeing gross margins continue to improve on a year-over-year, and even historically, when you go back, even go back to 2015, I mean, definitely some very, very solid gross margin expansion. So we're definitely seeing it in the real core of the business.

Great, thank you.

Our next question comes from Nathan Jones from Stifel. Your line is now open. Nathan Jones, your line is now open.

Sorry, it's on mute. Good morning. This is Matt on for Nathan Jones this morning.

Hi, Matt.

You mentioned targeting sustainable investments. I was wondering if can you talk about what kind of level of investments you're making growth at the moment? And what kind of potential that is to take it to? And can you talk about the opportunities to invest more here in order to continue drive growth in 2020 and beyond? Or 2021 and beyond?

Sure, Matt. Yeah, I mean, I think generally speaking, a lot of the initiatives we talked about, I think you've been speaking to, you know, a lot of the - a lot of the questions we've had with regards to whether it be oil-free, whether it be investments in the you know, hydrogen, whether it be the products that we actually highlighted in the release, in the slides, the Runtech acquisition that we made back in 2017, or the, you know, the ZEO application from the Precision, Science technologies business. Generally speaking, all of our NPDs that we're really looking at have some facet of sustainability, energy savings and efficiency really baked in. So I would say it's probably the single biggest criteria by and large, when we're looking at innovation. And it's also a huge criteria that we're looking at when we're actually looking at the M&A pipeline. So I'd say its front and center, trying to quantify exact dollars is probably a little bit tricky. But I would tell you it's probably the single biggest factor. And I would also point to, you know, we really made a commitment to it in the context of our ESG goals, which Vicente you can - you know, we've obviously spoken to quite a bit. So again, I think it's kind of permeating the culture, and now we're actually putting distinct targets and goals that are associated with it as well.

Great, thank you. And then I wanted to follow up in regards to the supply chain conversation. Are you guys seeing any impact to production? Or your supply chain relative to COVID cases spiking, particularly in Europe, and India? And then how confident do you feel about the ability to continue ramp as we move into 2Q and the rest of the year?

Yeah. Matt, I mean, I think in terms of production, I mean, our plants are up and running. I mean, clearly, the area that we're monitoring really close is India. We're deemed as a critical manufacturer, and all of our manufacturing facilities are - at the moment, they're open. A lot of - some of the closedowns that have - that is happening in India, at least in the cities where we are operating hasn't happened to us. But we're watching that carefully. We're proactively supporting vaccination efforts for employees based there. Again, this is because we're deemed as a critical manufacturer, and you've seen that lack of oxygen in many hospitals. Our products are actually helping to enhance that. And so we're working really closely with the government to really accelerate that. But so far, you know, no major impact, I will say, something that we're watching carefully.

Okay, great. Thank you.

Thank you.

We have no further questions, so I'll hand it back.

Well, thank you, everyone, for your interest and joining on the call today. We're very excited. We're very thankful for our employees for all the work and dedication that they're doing, and thinking and acting like owner. So we're excited with the momentum that we're having and look forward to talking to many of you here present in the future. Thanks, again.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.