Hello, everyone, and welcome to Ingersoll Rand Q3 2022 Earnings Conference Call. My name is Emily, and I will be coordinating your call today. I will now turn the call over to our host, Matthew Fort with Ingersoll Rand. Please go ahead, Matthew.

Thank you, and welcome to the Ingersoll Rand 2022 Third Quarter Earnings Call. I'm Matthew Fort, Vice President of Investor Relations. And joining me this morning are Vicente Reynal, Chairman and CEO; and Vik Kini, Chief Financial Officer. We issued our earnings release and presentation yesterday, and we will be referencing these during the call. Both are available on the Investor Relations section of our website. In addition, a replay of this conference call will be available later today. Before I 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 strategy update, review our company and segment financial highlights and provide an update to 2022 guidance. At this time, I'll turn the call over to Vicente.

Thanks, Matthew, and good morning to all. I would like to begin with a big thank you to our employees worldwide for their hard work in helping us deliver another record quarter in Q3. You consistently exemplify our purpose and think and act like owners to deliver on our customer needs. Every day, I am impressed with how you're leveraging our IRX process to outperform in a continuously challenging environment. Our performance this quarter and year-to-date reinforces the impact we have as owners of Ingersoll Rand. And now let's review how we accomplished these results on Slide 3. Our achievement is reflected in the numbers and also in our commitment to Lead Sustainably. We continue to position Ingersoll Rand for long-term value creation through industry-leading innovation that offers intrinsically sustainable benefits to our customers. Through Q3, demand remained strong. And while macroeconomic, geopolitical and supply chain uncertainties continue to be a concern, we remain focused on what we can control while leveraging our strong balance sheet and operational mindset to execute on our commitments. Remaining agile in today's environment is critical, and you will see today how we continue to accelerate organic growth through demand generation and product execution. In addition, we remain committed to our capital allocation strategy, which is focused on inorganic growth through bolt-on acquisitions. Today, we're highlighting six new companies we have recently acquired or have under contract that will strengthen our position in core categories and broaden our exposure to high-growth, sustainable end markets. Moving to Slide 4, today, we will discuss four critical elements of our compounded model to demonstrate how we stay focused on controlling what we can control. Moving to Slide 5, we have some exciting news to share. We recently earned a score of 81 on the S&P Global Corporate Sustainability Assessment. As of October 21, this score puts us at number one in North America, number four in the world and in the 99th percentile within our industry, which is very impressive. And think about it, less than three years ago, we were not even showing on the list. And today, we are number one in our industry in North America. We continue to align our portfolio to sustainable, high-growth end markets supported by megatrends. In September, we hosted our second Annual Sustainability Call where we introduced our enhanced strategic imperative, Lead Sustainably, which is based on a simple two-pronged approach on grow sustainably and operate sustainably. On this slide, I'll spend a bit highlighting two examples from our broad product portfolio that help improve energy efficiency and reduce water consumption. We believe that within the U.S. alone, there are over $1.3 billion in cost savings opportunities for compressed air systems. And that number is likely five times greater globally. The energy recovery unit shown here is an innovative device that captures up to 94% of the heat generated during air compression and uses it to warm water that can be used in other processes or for space heating, with a payback period for our customers of less than one year on average. Our impact on water conservation occurs in multiple ways, but perhaps the most compelling is our products that eliminate the need for water usage in critical applications. The Runtech turbo blower technology is a perfect example. This blower technology is used by leading pulp and paper manufacturers, and it replaces an alternative technology that requires a fresh water supply. Our existing installed base around the world is currently saving 7.5 billion gallons of water a year. And we estimate that over 50 billion gallons of water per year could be saved with the full adoption of our Runtech technology globally. To put that into perspective, that's more than three times the amount of bottled water consumed in the United States annually. Within our own facilities, operate sustainably is an integral part of our business. We focus on reducing electricity and water consumption to drive zero greenhouse gas emissions. Our commitment to operating sustainably delivers value for our stakeholders and our planet, creates a sense of purpose and inspiration for employees and has a positive impact on the communities in which we operate. This commitment also makes Ingersoll Rand a supplier of choice for our customers. Together, we're building a better future and planet by leading sustainable actions within our business, with our suppliers and in our communities. Turning to Slide 6, let us demonstrate two simple examples on how we continue to control what we can control to deliver organic growth. On the left, we have an example of demand generation execution in Europe, which clearly has been a challenging market. In Q1, at the start of the Russia-Ukraine war, we saw a downward trend in marketing qualified leads or MQLs. The demand generation team immediately jumped into action, leveraging IRX to invert that trend through channel campaigns focused on high-growth, sustainable markets, vertical-specific and energy-efficient-related webinars and utilizing trend data to remain agile and revise all targeted campaigns. As a result of these actions, we saw a 60% increase in MQL, which is our primary leading indicator for orders. And as you can see from our results, orders in Mainland Europe continue to remain healthy and grew in the low single digits, excluding FX, for our compressor portfolio in ITS. On the right is an example of an outstanding product line execution in China. Prior to the merger, Gardner Denver had a solid compressor portfolio for the China market, but did not have the right sales structure or operational footprint. Post merger and leveraging IRX, the team refreshed the product line, integrating the best practices from both IR and GD. Through the new product development process, they improved efficiency by 5% to 10% and also improved the cost structure of the compressor portfolio through utilization of i2V. With those improvements in efficiency and cost structure, we focused on fast-growing small to medium-sized customers and expanded the Gardner Denver channel over 200%, separate from the legacy IR channel. The end result is triple-digit growth in revenue and unit volume in a highly competitive market. Turning to Slide 7, since our Q2 earnings call, we announced the signing of six bolt-on acquisitions that enable us to increase value across ecosystems by expanding our core mission-critical flow creation technologies while accelerating our addressable market with close adjacencies. So let me quickly walk you through these deals. First, Airmax, which is a leading full-service provider of air compressors and compressed air system services based in France. This is an example of strategic channel expansion for our ITS segment which will leverage Airmax's strong end-user relationship and technician network to convert competitive products and support aftermarket growth. Second is Pedro Gil, a leading Spanish manufacturer of blower and vacuum systems. This acquisition strengthens our position in core blower and vacuum categories in high-growth, sustainable markets, including water and wastewater. Next is Everest, which is a leading Indian manufacturer of blower and vacuum systems. Everest significantly broadens our presence in the key high-growth market of India. These three acquisitions are strongly aligned with our strategy and increase our product portfolio in core technologies or enabling expansion into close adjacencies. Continuing on Page 8, moving from left to right of the page, these are great examples of close adjacencies with immediate synergies. The SPX FLOW Air Treatment business is a leading manufacturer of desiccant and refrigerated dryers, filtration systems and purifiers for compressed air. These products are highly complementary to our portfolio since more than 75% of compressors need one of these air treatment solutions. In addition, they generate strong recurring aftermarket business. Next, Dosatron International, which is a U.S. leader in water-powered flow solutions and IIoT for hydroponics and agriculture markets, improves our capabilities in several high-growth, sustainable end markets through differentiated digital controls and IIoT solutions. Finally, Westwood Technical, a highly experienced control, instrumentation and IIoT specialist, with technology that is complementary to our YZ Systems product line. Westwood enhances our IIoT platform, including innovative, Low Power Wide Area Networking technology. We expect the team to integrate these acquisitions at the regional level by utilizing IRX and our proven model of integration excellence that you have seen in prior acquisitions. Our M&A funnel remains strong, and as of today, the funnel still remains over five times larger than it was in Q3 of 2020. I will now turn the presentation over to Vik to provide an update on our Q3 financial performance.

Thanks, Vicente. On Slide 9, we continue to be encouraged by the performance of the company in Q3, with a strong balance of commercial and operational execution fueled by IRX, despite ongoing macroeconomic uncertainty. We remain on track to deliver on our $300 million commitment in cost synergies from the merger. As we have indicated many times, we have a funnel that stands in excess of $350 million and we are ready to take incremental actions, if warranted by macroeconomic conditions and market activity. Total company orders and revenue increased 10% and 14% year-over-year, respectively. We saw strong double-digit organic revenue growth in both ITS and PST at 19% and 15%, respectively. Overall, we posted a strong book-to-bill of 1.09 turns for the quarter, and we remain encouraged by the strength of our backlog, which is up over 40% year-over-year. The company delivered third quarter adjusted EBITDA of $376 million, a 20% year-over-year improvement, and adjusted EBITDA margins of 24.8%, a 110 basis point year-over-year improvement and a 160 basis point improvement sequentially from Q2. Free cash flow for the quarter was $253 million, despite ongoing headwinds from inventory due to global supply chain challenges as well as the need to support backlog. Total liquidity of $2.6 billion at quarter end was up approximately $200 million sequentially. Our net leverage continues to improve and is at 1.0 turns, which is 0.1 turns better than the prior quarter. Turning to Slide 10, for the total company, Q3 orders grew 18% and revenue increased 22%, both on an FX-adjusted basis. Total company adjusted EBITDA increased 20% from the prior year. The ITS segment margin increased 70 basis points, while the PST segment margin declined 60 basis points, driven primarily by the impact of prior year acquisitions as well as the impact of prior year COVID-19-related demand. When adjusted to exclude the impact of M&A completed in 2021, PST adjusted EBITDA margin actually increased by 60 basis points. We did see a significant sequential increase in PST's adjusted EBITDA margins, which were up 230 basis points versus Q2. Now PST margins are generally back in line with where we have seen them historically at approximately 30%. It's important to note that both segments remain price cost positive in terms of dollars, which speaks to the nimble actions of our team despite ongoing inflationary headwinds. Finally, corporate costs came in at $30 million for the quarter. Adjusted EPS for the quarter was up 9% to $0.62 per share. The tax rate for the quarter was 21.7%, and we anticipate the full year being in the low 20s as well. Moving to the next slide. Free cash flow for the quarter was $253 million despite $69 million of inventory headwinds primarily to support backlog. CapEx during the quarter totaled $22 million. Leverage for the quarter was 1.0 turns, which was a 0.1 turn sequential improvement. Total liquidity now stands at $2.6 billion based on approximately $1.5 billion of cash and $1.1 billion of availability on our revolving credit facility. Cash outflows for the quarter included $4 million for share repurchases and $8 million to our dividend payment. M&A remains our top priority for capital allocation, and we continue to expect M&A to be our primary usage of cash as we look forward. I will now turn the call back to Vicente to discuss our segment performance.

Thanks, Vik. On Slide 12, our Industrial Technologies and Services segment delivered strong year-over-year organic revenue growth of 19%, split evenly between price and volume. Adjusted EBITDA rose 15% year-over-year, with an adjusted EBITDA margin of 26.2%, up 70 basis points from the prior year, with an incremental margin of 32%. We also delivered sequential margin expansion of 80 basis points from Q2 to Q3. Organic orders were up 16%, with a strong book-to-bill of 1.13 turns. Note that on a two-year stack, the ITS segment organic orders grew approximately 50%, which is in line with the Q2 2022 two-year stack, meaning that thus far, we continue to see strong demand for our products. Moving to the individual product categories, each of the figures excludes the negative impact of FX, which was a 7% headwind across the total segment on both orders and revenue. Starting with compressors, we saw orders up in the high double digits. A further breakdown shows orders for oil-free products grew 20% and oil-lubricated products grew in the mid-teens. The Americas team delivered solid performance with orders in North America up high 20s while Latin America was up mid-30s. In Mainland Europe, orders remained strong with growth in the low single digits, while India and the Middle East were up high double digits. The Asia Pacific team delivered orders growth in the high single digits driven by low single-digit growth in China and low 30s percent growth across the rest of Asia Pacific. In vacuum and blower, orders were up low 20s on a global basis. The global Power Tools and Lifting team continues their strong performance, with orders for the total business growing in the high double digits. Moving to the sustainable innovation and action portion of the slide, we're highlighting the relaunch of our Buffalo, New York facility. The reopening of this site has not only localized manufacturing and reduced customer lead times, but it has also expanded our global capacity for air and gas centrifugal products in high-growth, sustainable end markets such as clean energy. Due in large part to research and activities, orders are up over 500% in the Americas, with over $40 million booked since our May 2022 launch. This is a tangible and inspirational example of our employees thinking and acting like owners. Turning to Slide 13, revenue in the Precision and Science Technologies segment grew 15% organically, split evenly between price and volume. Additionally, the PST team delivered adjusted EBITDA of $92 million, which was up 22% year-over-year, with incremental margins of 27%. Adjusted EBITDA margin was 29.1%, down 60 basis points year-over-year. As illustrated in the table on the bottom left side of the page, the decline year-over-year in adjusted EBITDA margin is driven by the impact of prior year acquisitions at 120 basis points and the impact of prior year COVID-19-related demand at 60 basis points. However, sequential adjusted EBITDA margin significantly improved by 230 basis points due to operational execution and price/cost performance. Organic orders were up 3% year-over-year as Q3 comps were impacted by headwinds from prior year comp-related demand, primarily in the Thomas business. Adjusting for the COVID-related orders, normalized organic orders were up approximately 8%. On a two-year stack, organic orders are up 27%, which is higher than a two-year stack from Q2. From our PST sustainable innovation in action, we're highlighting Air Dimensions. This recently acquired business is a market leader in diaphragm vacuum pumps serving mission-critical environmental applications in sustainable end markets such as clean energy. Since the Q4 2021 acquisition, the team has installed and leveraged IRX to accelerate investments in new product development and launched a higher-pressure offering, securing orders from four major OEMs and system integrators. As a result, the business is seeing revenue growth of low double digits and has improved adjusted EBITDA margin from the mid-50s to low 60s in less than three quarters post acquisition. This is a great example of how we leverage our compounded model through the power of IRX to achieve double-digit earnings growth. Moving to Slide 14, in terms of 2022 guidance, given the ongoing strength in commercial and operational performance, we are raising our organic revenue guidance from the total company to 12% to 14%, a 100 basis point increase from prior guidance based on both our ITS and PST segments. The organic growth increase is offset by the negative impact of FX, which is expected to now contribute headwinds of approximately 6% compared to a headwind of 5% in the prior guidance. For the full year, we are reaffirming our 2022 revenue guidance at 11% to 13% total growth. We are also raising our adjusted EBITDA guidance at the midpoint by tightening the range to between $1.4 billion and $1.425 billion. It is important to note that this guidance includes nearly $20 million of adjusted EBITDA headwinds from FX when compared to our prior guidance. Due to investments in inventory to meet growing demand, we expect free cash flow conversion to adjusted net income to be approximately 90% for the year. Even with this change, free cash flow margins are expected to be in the mid-teens. We expect free cash flow conversion to return back to 100% as we think about 2023 and beyond. We anticipate our adjusted tax rate to be in the low 20s and CapEx to be approximately 2% of revenue. Interest expense is estimated to be approximately $35 million in the fourth quarter. Our M&A guidance does include the acquisitions of Hanye, Holtec, Hydro Prokav, Westwood Tech, Pedro Gil, Dosatron and Airmax. However, overall M&A revenue guidance for the year remains flat to prior guidance due to the impact of FX, specifically on previously acquired businesses, with Seepex and Maximus seeing the largest effect. Turning to Slide 15, as we wrap up today's call, I want to reiterate that Ingersoll Rand is in a strong position. We delivered strong results in the first three quarters of 2022, and our full year outlook remains optimistic. We're keeping a close eye on the dynamic market conditions while we remain agile and prepared for any challenges that may come. To ensure consistent delivery of our commitments, we will continue to leverage IRX across every facet of our business. To our employees, I want to again thank you for your ongoing engagement and for making thoughtful, action-oriented decisions like the owners you are. This continues to drive our ability to make life better for our customers, our planet and our stockholders. It is also exciting that our most recent survey on employee engagement continues to show improvement, which demonstrates the rapid changes we continue to drive are very welcomed by our employees. Our balance sheet is strong, and with our disciplined and comprehensive capital allocation strategy, we remain resilient and have the capacity to deploy capital to investments with the highest return as we continue our track record of market outperformance. With that, I will turn the call back to the operator and open for Q&A.

Our first question today comes from Mike Halloran with Baird.

Two questions here. First question, obviously, the orders trends are really healthy and pretty impressive considering the backdrop here. Maybe just talk a little bit about the volume trends you saw through the quarter. Anything notable? Any areas of weakness? And when you look at those leading indicators that you talk to, any signs of concern in there? Or do you think there's just a lot going on that is unique to Ingersoll Rand that allows you to be able to continue a pretty healthy clip going forward on the order side?

Yes. Mike, I'll say nothing that I will classify as major significance up or down. I mean very good, stable, robust across the portfolio or the regions and segments. Clearly, as we kind of highlighted here on the earnings call, a lot of that has to do with controlling what we can control. And clearly, our demand generation, it's a great example here that we're showing some proof points in terms of how that is helping us overcome any market dynamics that we see out there. Clearly, aftermarket continues and services continue to be a very important piece of our equation. So I think it's just continuing the teams driving the initiatives that we have in place.

And I heard Vik's comments about if things change, you have the ability to leverage into some of those synergies to drive some upside to the range. And I know, Vicente, you've got a history of being able to act quickly if the environment changes. And so I guess what I'm just wondering is, what kind of things are you guys looking for to be able to pull that trigger in a more real-time basis?

Yes. Mike, as you could expect, we're quick and pretty agile and nimble in taking action. A lot of that has to do with the proper planning that we have in place. We already have several downplay scenario playbooks that we have with the team that, as we cannot look at the demand and we see that order patterns change, if those materialize in terms of reduction or decrease, we will definitely take immediate action. So I think it's just one of those that we continue to look at, the leading indicators, the MQLs, the order rates, and we're ready to pull the trigger. If you can think about it, one example of this is that over the past couple of years, as we integrated the two large companies, Gardner Denver and Ingersoll Rand during a period in the middle of the pandemic, we didn't do much on footprint. Footprint could be another area of continued expanding our synergy creation here from the merger of the two companies.

Our next question comes from Julian Mitchell with Barclays.

Maybe just a first question on the very short term. I know you get asked this hundreds of times in the last few months, but help us understand that fourth quarter EBITDA ramp one more time. I think it implies sequentially, sales are down slightly and then EBITDA is up about $20 million sequentially even with a wider sort of corporate cost. So maybe just help us understand between the two segments how those earnings are moving up sequentially.

Yes. Julian, I think the way to think about it sequentially is to consider revenue to be fairly consistent on an absolute dollar basis, maybe slightly up Q4 compared to Q3. This implies kind of on a year-over-year basis that the organic growth is going to be at the top end of the organic growth guidance, kind of mid-teens growth versus what you saw here in the third quarter. It will be fairly similar, slightly above. But FX continues to be a headwind of an additional 100 to 150 basis points. M&A is roughly 200 basis points lower than Q3 as some of the M&A falls off and we move through the fourth quarter. So when you put all this together, kind of comparing to the total company from an EBITDA perspective, and this is fairly similar, I would say, in the segment level, is that you would continue to see improved price realization Q3 to Q4, given the actions that we have already taken and inflation staying relatively flat in comparison to the Q2 exit level. Again, we expect to see a moderate improvement as we go quarter-to-quarter. M&A synergy realization for the deals we closed in the second half of 2021, particularly PST, will continue to gain acceleration moving forward. Also, don't forget that we still have roughly about $50 million of the merger-related synergies that tend to correlate to volume. So again, we'll see some of that here in the fourth quarter. So those are kind of the three core variables that allows us to, to your point, with prudent revenue being roughly consistent from Q3 to Q4, we still see improvement in the EBITDA even though we're getting a big headwind on the FX. So again, it just speaks loudly to what the teams continue to execute really well despite a lot of headwinds that we continue to see.

That's very helpful. And then maybe just my quick follow-up. There's a massive good color on IT&S orders and sales by region. Maybe then to focus on PST, how you're thinking about the sort of organic orders trajectory there. They were up kind of low single digit for a couple of quarters in a row. Understood the COVID headwind. So maybe how do we think about orders next few quarters in PST play out?

Sure, Julian. I think you said it well in terms of reflecting here in Q3 and Q2 excluding COVID impact that we saw from these large orders into 2021 not happening now. When you exclude that, PST was in Q3 up 8%, which we view as relatively healthy and in line with our stated Investor Day targets of growing PST in the mid-single-digit plus range. As we continue to move forward over the next few quarters, we expect that the teams will continue to operate in that range as we move forward.

Got it. And the COVID headwind kind of drops out as we enter '23.

Yes, that's correct. It was primarily noted in the second and third quarters, with a slight presence in the fourth quarter, but it was less significant. As we approach 2023, there is clearly nothing to be concerned about.

Our next question comes from Joe Ritchie with Goldman Sachs.

So just starting off, I guess, Vicente, thinking about ITS, the order strength has been notable throughout the year. I guess it might be too early to think about the 2023 framework, but I'm curious, do you have any preliminary thoughts on growth, particularly in ITS? And then also, pricing has been very strong. Maybe some comments around the carryforward in pricing and how to think about that for '23.

Yes, Joe. So as we think about 2023, and clearly we're not going to provide kind of a detailed guidance here on this call on 2023. But a couple of items to consider is that from a revenue perspective, we had a very strong book-to-bill in Q3 over one, and particularly much even stronger in the ITS. Again, we continue to build more backlog. We built more backlog in Q3 as compared to the second quarter, even though obviously we had increased revenue output. Heading into 2023, we're very pleased that we're going to have much more backlog than we have ever historically had. I think a lot of that has to do with how we have continued to align to the megatrends that we spoke about, around sustainability, digitization, that those are kind of gathering very good momentum. As we continue to move forward, perhaps the ITS segment can continue to grow organically in the mid-single digit range over the horizon and the period to which we committed. In terms of price, we noted that even in any market we can generate at least 1% to 2% of price regardless of the market conditions. Again, that's just because of the nature of our product being so mission-critical. As we kind of go into 2023, you expect that we'll definitely continue to generate some of that new price as well as carryover, that will definitely be much higher than the 1% to 2% of price. The good thing is that, as we think about 2023, inflation seems to be relatively stable or stabilizing, which when that starts turning more favorable or when inflation decreases, we're holding the price. I expect that to drive continued margin expansion. We also recognize that as we move forward, we'll continue to see very good momentum on the integration of the M&As that we're doing here.

Got it. That's very helpful. I have a question for Vik. This quarter, you had a $33 million LIFO adjustment, while last year it occurred in the fourth quarter. Can you provide some context around the timing of these adjustments and what we can expect going forward? Are there likely to be any surprises in this area?

Yes, sure, Joe. I'll take that one real quick. The LIFO adjustment is obviously a non-cash adjustment. It's done, frankly, more so for book or really tax purposes. We do state our books each quarter on a FIFO basis, which we believe is a more accurate assessment of our true operating performance. As such, we do adjust out the LIFO reserve adjustment from our non-GAAP results. It's also worth noting, as you indicated, this is 100% consistent with our historic practice. You saw in Q4 2021, we did exactly the same thing. Interestingly enough, the dollar impact was almost exactly the same amount. With regards to the timing, I'd say it's really much more in line with accounting requirements. We do monitor materiality on a quarterly basis to determine when the adjustment should be made. It was deemed that given the inflationary dynamics we've seen, it was appropriate to make that adjustment here in Q3 of 2022. I would say not inconsistent with what you've seen historically. It's just the facts and circumstances that have dictated that we take the adjustment this quarter. Our guidance regarding non-GAAP financial metrics, whether it be adjusted EPS or adjusted EBITDA, is 100% consistent. Whether it's the adjusted EBITDA number you saw or the $0.62 of adjusted EPS, that excludes that impact, but that's 100% consistent with how we guided and how we historically reported.

Our next question comes from Bastian Sosa Marin with Wolfe Research.

So congratulations on the quarter. I was just curious and I wanted to ask a follow-up question on the LIFO reserve. Maybe you could shed a little bit more color on why it was so large. And are you seeing any add-backs in Q4? And if you can, something about the future of inflation.

Yes. I'll keep it pretty short here. The LIFO reserve adjustment is obviously correlated to the inflationary levels that we have been seeing in the market. Given where inflation has continued to trend, whether it be last year or this year, you're obviously seeing the impact there. I would tell you, it's reflective of the current operating environment that we're in. It's not being, quite frankly, more than that. That's quite frankly the easy direct answer there. I would also reiterate what I've said before; our practice regarding stating our non-GAAP metrics is 100% consistent. As such, that's what you've seen us report, whether it's our guidance, our actuals or our comparatives on a year-over-year basis.

Great. That's helpful. And my follow-up question would be about orders in compressors. So you had a low 30% order book in the Americas, while Europe and China were more in the middle single digits and high single digits. Could you maybe shed a little bit of light on your marketing qualified lead and how they stack up against softer orders in Europe? And maybe if you could shed a little bit of light on what's the pipeline of MQL conversion order looks like?

Yes. In terms of the MQL, I mean you saw on one of the slides, we provided a little color in terms of that increase in MQLs that we saw particularly in Europe, again, driven by the activities that the team have been doing. As you saw, I mean over 60% increase in MQLs. It does take time to convert those leads. Typically, we say it's anywhere between 6 to 8 weeks to go from the marketing qualified lead to the sales qualified lead that generates the order. To your point, there's a percentage of conversion rate. We don't really talk about that externally because, obviously, we think that this whole system that we have is really strategic and proprietary to us, which is very exciting what we have been able to build here together internally. But again, the exciting piece is that whether you look at it by region or by product line, MQLs continue to be stable, if not continuing to show a bit of upward momentum as we move into here in the fourth quarter.

Our next question comes from Andy Kaplowitz with Citigroup.

Vicente, it seems like a relatively difficult time to get M&A done given the volatility of the markets, but you've obviously been able to maintain or even step up your M&A activity. I know you mentioned your funnel is still five times larger. Could you talk about the sustainability of your recent made momentum? Obviously, you announced some larger deals pretty recently. So just talk about what you're seeing out there.

Sure, Andy. I would say that we continue to see pretty good momentum and activity on the M&A side. A lot of our M&A, call it 90% of that, is sole sourced, meaning that we are proactively going to the owners and cultivating that relationship in order to execute the M&A at the right moment in time. A lot of these deals are exactly that. I mean think about even Everest, that vacuum and blower Indian manufacturer, that's been a relationship cultivation over two years. Clearly, now is the right time to transition from the ownership of the family to us. We continue to leverage a lot of our processes. As you can imagine, we're utilizing IRX processes as a way to drive M&A through the funnel and increase the velocity. I would say that we still see continued demand. We still see a lot of companies that we're also walking away from. In the same amount that you see deals that we're transacting, we walked away from a very, very large number of deals and transactions. Over 80 companies, we've said no to over the past couple of quarters. That tells you a lot about the kind of velocity and movement we see in the M&A funnel. But again, we’re excited that, as you said, over five times the funnel size and already eight LOIs currently under negotiation in addition to the transactions that we have announced.

Got it. And Vicente, maybe give us a little more color regarding what you're seeing in China. Order growth looks like it maybe decelerated a bit in China in Q3 versus Q2. I think it was up low double digits pre last quarter and up low single digits this quarter. What's your visibility like there? I know you've done a lot of work there. The RMT has helped you. So what's your visibility there going into Q4 and into 2023?

Yes. I would say, Andy, that we still see fairly stable demand even as we kind of go into October. October on a year-over-year basis, actually, from a percentage perspective ex FX, accelerated from the numbers we posted here in Q3. We continue to see good, stable demand. Important to note that Q3 of 2021 was the time when we were seeing a 50% type of growth number. It’s a bit of a tough comp. However, the team was able to deliver a two-year stack that is really impressive to see that continued momentum as we go into the fourth quarter. As you pointed out, a lot of that is self-help. We show the example of compressors. But you can imagine that vacuums and blowers is a very similar story that the team is driving by localizing products, making it more tailored to the market and leveraging the commercial footprint to execute with the help of IRX.

Our next question comes from Rob Wertheimer with Melius Research.

So my question is really on Europe. You obviously used IRX to offset some choppiness in the European markets. It’s really just the fundamental question again about the rising need for energy efficiency in Europe as energy prices have gone way up versus the obvious potential hesitancy on spending CapEx. So aside from what you've done there, do you see customers coming to you with a need for energy efficiency? Do you see them being hesitant? How would you characterize the market?

Absolutely, Rob. That's definitely one of the core fundamental things that is happening in Europe is that, clearly, natural gas prices have risen considerably, which takes time to digest through the system. Long term, we see that continuing rise in energy in Europe and also in other places in the world as a way for us to generate returns on invested capital that are very palatable when you think about generating less than one-year payback when buying a compressor. Not only a quick payback but also you're doing something good for the planet because you're saving energy and helping these customers achieve their sustainability targets.

And so do you think that Europe is getting worse or better on the underlying demand dynamics through the quarter and into Q4? And I'll stop there.

Yes. Rob, in terms of what we saw in the third quarter, again, fairly stable. But the stability comes really driven by, I would say, a good loan cycle CapEx getting released. This relates to sustainability and energy transition activities. A lot of the things that we've talked about in terms of getting ourselves aligned to these megatrends of sustainability and digitization. The team continues to do a very good job on driving that service and aftermarket capability in Europe. As we look into October, again, we still see FX-adjusted positive growth in the month of October from an orders perspective in Europe particularly.

Our next question comes from Josh Pokrzywinski with Morgan Stanley.

This is Brandon on for Josh. Just two follow-ups on some of the questions that have already been asked. But first on the MQLs. When you turn to this MQL process in places like Europe where demand may be slowing, does that come with some sort of margin impact versus the more typical order process?

Brandon, the cost of customer acquisition for MQL is really low. So I would say, think about it as even perhaps it might be a margin accreditation or improvement because we're not sending the sales team to knock on doors, and we're doing this digitally. We really increase and enhance the efficiency. If anything else, I would say that we're more inclined to specifically put products with a higher margin through the MQL process, which is actually good news that you see a total average margin improvement.

Got it. And then just on M&A. With all the deals recently, how are you thinking about synergies for 2023 in what's been announced?

Yes. Brandon, I'll take that one. The way I would think about it here is to consider the framework with which we have done all these deals. You've seen this very much in line with historic practice. The pre-synergy adjusted EBITDA purchase multiple across effectively the suite that you've seen us do has been in that low double-digit type range. We typically are able to drive anywhere from roughly two to four turns of EBITDA multiple purchase reduction as we consider a three-year outlook. Whether you want to look at it from a purchase multiple perspective and the ability to reduce that through synergies or alternatively the ROIC calculus where everything we're doing is very much in line with our stated return criteria, with mid-teens ROIC greater than our cost of capital, double-digit type returns, that's the way I would probably describe all of these. As Vicente mentioned during the prepared comments, these are all core technologies or close adjacencies. They are technologies, businesses, companies we know very well. They're split nicely between the two segments and, interestingly enough, across the different geographies, which is great because the integration happens in the business. I would tell you, right now, we don't see any reason why these won't be in line with the types of deals and the types of returns and the types of synergy profiles you've seen from our historic bolt-on acquisitions.

Those are all the questions we have for today. So I'll now hand back to Vicente for concluding remarks.

Yes. Thank you. Concluding, I just want to say that you have seen our culture continues to be a very unique differentiation based on the performance we're driving, which is driven by our employees, which we pass on with a big thank you. Our employees continue to be highly engaged, driven by a lot of activity that we do internally in the company as well as this ownership mindset and thinking and acting like owners because all employees are owners in the company. We're very excited about what's ahead of us and continue to drive performance while being very transparent with the investor community. So with that, thanks so much, and I look forward to seeing many of you as we go into the road. Thanks.

Thank you for joining us today. This concludes our conference call, and you may now disconnect your lines.