Earnings Call Transcript - IR Q1 2023

Operator, Operator

Good morning and a warm welcome to the Ingersoll Rand First Quarter 2023 Earnings Conference Call. My name is Candice and I'll be your coordinator for today's call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question-and-answer at the end. I would now like to hand the conference over to our host Matthew Fort, Vice President of Investor Relations. Please go ahead.

Matthew Fort, Vice President of Investor Relations

Thank you, and welcome to the Ingersoll Rand 2023 first quarter earnings call. I am 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 reference 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 we start, I want to remind everyone that certain statements on this call are forward-looking in nature and 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 review our company and segment financial highlights and provide an update to our 2023 guidance. For today's Q&A session, we ask that each caller keep to one question and one follow-up to allow time for other participants. At this time, I will turn the call over to Vicente.

Vicente Reynal, Chairman and CEO

Thanks, Matthew, and good morning to all. I would like to begin by thanking and acknowledging all of our employees for their hard work in helping us to deliver another record quarter in Q1. Our employees consistently exemplify our purpose while thinking and acting like owners to deliver on our commitments despite the constantly changing macroeconomic environment. Start on Slide 3, in Q1, we delivered double-digit adjusted EBITDA and adjusted EPS growth with strong free cash flow generation, which is up over 350% year-over-year. Fueling this performance is our competitive differentiator IRX. We continue to align to mega trends and high growth, sustainable end markets to deliver on our Investor Day commitments of achieving sustainable revenue growth. Based on the solid Q1 performance, we're raising our 2023 full-year guidance. Turning to Slide 4. Our economic growth engine continues to deliver compounding annual results. During our last Investor Day in Q4 2021, we presented this model and highlighted our organic, inorganic, and quality of earnings growth enablers. We remain committed to our strategy and our long-term Investor Day targets outlined on this page. On the next two slides, I will provide you with deeper insights into our organic and inorganic initiatives. On Slide 5, we start with our organic growth initiatives. So let's dive into how we approach the megatrends of sustainability, digitization, and quality of life. Demand Generation Excellence or DGX, which is a tool within IRX helps us to capture above market growth. Here we have six examples of initiatives that we launched during the first quarter of 2023. Important to note that these six are only a few examples out of hundreds of these initiatives we execute every quarter. I'll review a few of these examples shown on the page. Within the sustainability megatrend, we have a digital campaign example, which is focused on carbon capture system builders and integrators. This campaign generated a global supply agreement with a key carbon capture player and has also driven a $200 million increase funnel with no new product development required. For digitization, we have a great example on how we utilize IIoT to grow our aftermarket business; leveraging our IIoT connected equipment machine alerts are set up to trigger email notification to our customers and Ingersoll Rand service contracts when service is needed. The result of this initiative was increased orders on new contracts for preventive maintenance. This initiative is in its early stages and we plan to expand this approach to other key triggers in the future. Finally, at the bottom of the page, we have a great example within the quality of life megatrend. We launched a social media campaign tailored towards small farms and agriculture that increased our marketing qualified leads by 96% for Dosatron dosing pumps. These are merely a few examples of the tailwinds associated with megatrends and how we deploy our organic growth enablers to deliver compounding annual results...

Vik Kini, Chief Financial Officer

Thanks, Vicente. On Slide 10, despite the ongoing macroeconomic uncertainty, we delivered solid results in Q1 through a balance of commercial and operational execution fueled by IRX. Total company organic orders and revenue increased 8% and 20% year-over-year respectively. Book-to-bill was 1.09 and we remain encouraged by the strength of our backlog, which is up approximately 15% year-over-year and up approximately 10% sequentially. This provides a healthy backlog as we move into Q2 2023 and gives us conviction in delivering on our revised 2023 revenue guidance. The company delivered first quarter adjusted EBITDA of $400 million, a 32% year-over-year improvement and adjusted EBITDA margins of 24.6%, a 190 basis points year-over-year improvement. For the quarter adjusted diluted earnings per share was up 33% versus the prior year. This includes a $0.05 headwind from increased interest expense. Free cash flow for the quarter was $148 million despite ongoing headwinds from inventory due to the need to support backlog as well as continued global supply chain challenges. Even with these headwinds, free cash flow was up more than 350% versus the prior year. Total liquidity of $2.2 billion at quarter end was down approximately $500 million sequentially, and our net leverage continues to remain near all-time lows. At 1.1 turns, we are 0.1 turns better than the prior year and 0.3 turns above the prior quarter.

Vicente Reynal, Chairman and CEO

Moving to Slide 8. While our results have been strong and we continue to see orders and backlog growth, we do acknowledge that the market is in a state of constant change and we need to remain agile and nimble in order to respond. Over the past few years, we have transformed our portfolio to be more resilient than ever. We have a large, recurring, and highly profitable aftermarket business that accounts for approximately 35% of our total revenue, while growing at double-digits. In addition, we have divested almost $2 billion of highly cyclical assets in Club Car and high-pressure solutions, and in turn reinvested that into acquisitions that are better aligned in high growth sustainable end markets. We believe that this, along with a differentiated long cycle and better geographically balanced portfolio, will ensure a more durable, stable performance in the next slowdown. We also have a proven track record of performance. For example, in 2020, during the global pandemic, we were able to expand adjusted EBITDA margins by 190 basis points year-over-year. As you recall, during the pandemic, we immediately deployed merger-related synergies to ensure we were out in front and controlling cost pretty quickly. Also, in 2019, the legacy Gardner Denver Industrial Segment delivered 70 basis points of adjusted EBITDA margin expansion and grew adjusted EBITDA dollars 3% in spite of revenue declining 3% organically year-over-year. We're constantly monitoring for early indicators of an economic slowdown and we remain nimble and ready to act in the event that markets start to suffer. We have highlighted in past earnings calls how we are able to pivot our demand generation activities towards markets that are still growing. And with an addressable market of over $45 billion, we believe that there is still plenty of room to take market share.

Vik Kini, Chief Financial Officer

Our credit rating was recently upgraded to an investment-grade rating by S&P. This is a major milestone for the company and we remain focused on becoming investment grade across all of our rating agencies. Free cash flow for the quarter was $148 million, including CapEx, which totaled $22 million. And as of March 31, 2023, total company liquidity was $2.2 billion based on approximately $1.1 billion of cash and $1.1 billion of availability on our revolving credit facility. It is important to note that in April, we amended and extended our existing revolving credit facility, including upsizing the overall borrowing capacity of the facility from $1.1 billion to $2 billion. This amended credit facility not only strengthens our balance sheet but also supports the company's growth strategy by adding additional flexibility for M&A. The increase also speaks to the credibility we have in the financial markets as this was purely an increase in borrowing capacity with all the same favorable covenants and structure from the original $1.1 billion facility. Leverage for the quarter was 1.1 turns, which was a 0.1 turn improvement year-over-year, and cash outflows for the quarter included $566 million deployed to M&A, and we returned $85 million to shareholders through $77 million in share repurchases and $8 million in dividends.

Vicente Reynal, Chairman and CEO

Thanks, Vik. On Slide 13, our Industrial Technologies and Service segment delivered strong year-over-year organic revenue growth of 24% with volume growth outpacing pricing. Adjusted EBITDA increased 40% year-over-year with an adjusted EBITDA margin of 26.2%, up 240 basis points from the prior year with an incremental margin of 35%. We continue to see solid demand for our products with organic orders up 10% and a book-to-bill of 1.1. And note that on a two-year stack, the ITS segment organic orders grew more than 35%. Moving to the individual product categories, each of the figures exclude the negative impact of FX, which year-over-year was a 4 percentage point headwind across the total segment on both orders and revenue. Starting with compressors. We saw orders up in the low 20% and we continue to see oil-free products outpace oil-lubricated products. Orders were up high-20s in the Americas, driven by both strong book-and-turn business and large long cycle projects in high growth, sustainable end markets.

Andy Kaplowitz, Analyst

The last couple of quarters of the Precision and Science Technologies segment you've averaged I think something like 70% incrementals. You obviously gave us an update on the Seepex improvement, which I would imagine is a decent tailwind. Is there anything else going on within PST in particular that you're doing to really ratchet up performance? I would assume price/cost is helping, and I remember some acute supply chain issues earlier last year, but maybe you could elaborate on what you're doing there.

Vicente Reynal, Chairman and CEO

Yes, Andy, I think definitely price/cost is definitely helping. And as you also alluded the continued acceleration of the M&A bolt-on acquisitions that we have done, that's helping too as well. Seepex being one but even I point out to someone like ADI air dimensions, which again we acquired that at 50% EBITDA margins, and today it's above kind of call it 60%. So again, it's a combination of a lot of the things that we have put in action. So, yes, good price/cost, good synergy execution and the teams as we have said before, we're a little bit delayed on getting things like i2V in place at PST, but that is now ramping up and that's what we get the excitement that there should be more to come here.

Joe Ritchie, Analyst

Thank you. Good morning, everyone. Nice to hear and sorry to hear about the cyber issues. Can we just try to square some of the commentary on the cybersecurity stuff? I was just trying to size like the sales and EBITDA impact and who knows whether my numbers are right. But my ballpark numbers were call it roughly a $30 million to $50 million EBITDA impact. Can you clarify that?

Vicente Reynal, Chairman and CEO

I think Joe, you're definitely on the high side on that perspective. I think if you do the math in terms of that 45%, 55%, you come with a much lower number, I mean, roughly half of what you just said.

Chris Snyder, Analyst

Volume growth for the company really stands out versus broader industrial. Seems like it was up low-double-digits range or so for Q1. And when we kind of look at the rest of the year, it seems to imply not much of any volume growth over the next three quarters. Does that more so reflect the macro uncertainty or potential supply chain uncertainty? What's that reflecting?

Vik Kini, Chief Financial Officer

Yes, the idea is quite straightforward. First, I believe your interpretation of Q1 is pretty correct. I would mention a couple of points. One, keep in mind that as we progress through the year, the comparisons will become more challenging due to last year's performance. That's simply the reality of the situation and the mathematics involved. Additionally, I want to reiterate what we mentioned previously; particularly in the second half of the year, we have increased our organic guidance. So, we are indeed experiencing somewhat better organic growth in the latter half of the year than our original forecast suggested.

Vicente Reynal, Chairman and CEO

I want to thank you again for an excellent start to the year. These results show the impact each of you have as owners. However, we're still in the early stages and need to remain focused on our commitments to meeting our financial targets and executing our economic growth engine through the use of IRX. Thank you for your hard work, resiliency, and focused actions. As we continue our track record of market outperformance, our balance sheet is stronger now more than ever, and with our discipline and comprehensive capital allocation strategy, we remain resilient and have the capacity to deploy capital to investments with the highest return.

Operator, Operator

Ladies and gentlemen, this concludes today's Ingersoll Rand first quarter 2023 earnings conference call. Have a great day ahead. You may now disconnect your lines.