Earnings Call Transcript - IR Q2 2025

Operator, Operator

Hello, and welcome to the Ingersoll Rand Second Quarter 2025 Earnings Call. I would now like to turn the conference over to Matthew Fort, Vice President of Investor Relations. You may begin.

Matthew Fort, Vice President, Investor Relations

Thank you, and welcome to the Ingersoll Rand 2025 Second 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 afternoon, 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 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 review our company and segment financial highlights and provide an update to our full year 2025 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. Beginning on Slide 3, with our strong start in the first half of the year, we're raising our full year guidance on revenue, adjusted EBITDA, and adjusted EPS. With first half organic order growth in the low single digits, a book-to-bill of 1.06x and a total backlog increasing by 16% since the end of 2024, we remain confident in our full year outlook. We continue to focus on controlling what we can control, staying agile and leveraging IRX in what remains a very dynamic environment. On Slide 4, we continue to lead in sustainability and achieved strong financial performance while supporting the planet, our community, and employees. Our 2024 sustainability report outlines our commitment to innovation that benefits customers, improves efficiency, drives new opportunities and delivers consistent shareholder value. For the third consecutive year, we were ranked #1 in North America and globally in our industry on the Dow Jones Best-in-class Indices. And we placed in the top 1% of the Corporate Sustainability Assessment. Additionally, Ingersoll Rand earned a spot on CDP's A list for the second year in a row, recognizing our global environmental leadership and transparency. We strongly believe that a combination of our ownership mindset and creating a great place to work is a true catalyst for long-term performance. And that long-term performance-to-date has driven approximately $600 million of value creation for our team through our employee equity grants since the Gardner Denver IPO. Moving to the next page. Our value creation flywheel remains a central driver of our success, and our company's culture of an ownership mindset underpinned by IRX delivers long-term value creation and strong cash flow. We continue to leverage this cash flow through our capital allocation strategy, prioritizing M&A and focusing on high-return investments. Since our last earnings call, we have announced 2 additional transactions, adding approximately $90 million in annualized inorganic revenue. We have now closed on 11 transactions this year, totaling over $200 million in annualized revenue at a 9.5x pre-synergy EBITDA multiple. These results are a great start towards achieving our annual target of adding 400 to 500 basis points in inorganic revenue acquired. And on top of that, we have another 8 deals under current LOI. Over the past 5 years, we have completed 70 transactions with approximately 90% of those deals being sole sourced, largely coming from family-owned companies. Through each transaction, we continue to improve upon the process we have built for this incredible M&A flywheel, but we also stay humble and learn more with every transaction. I'd also like to point out that since the closing of ILC Dover just over a year ago, we have continued to compound value for our shareholders by deploying approximately $650 million to acquisitions. This capital was deployed across 20 acquisitions, adding over $300 million in annualized revenue at a 9.5x pre-synergy adjusted EBITDA purchase multiple. These acquisitions have been spread out across all of our growth platforms, adding attractive technologies in attractive end markets, continuing to turn our value creation flywheel, all while deleveraging our balance sheet by 0.3x, creating room for future M&A. Moving to our recent acquisitions, Lead Fluid is our first step towards building our new life science platform. We're excited about this acquisition as it brings 2 things: first, advanced peristaltic pump technology, which addresses a previous gap in our comprehensive pump portfolio; and second, it helps broaden our geographical reach as our life science platform is currently underpenetrated in Asia. It is important to note that we have another bolt-on deal under LOI, which will continue to broaden our life science platform, and we expect that transaction to close within the next few days. Another acquisition to highlight is Termomeccanica Industrial Compressors, which is a core bolt-on for our Compressor business. Both Lead Fluid and Termomeccanica were completed at a low double-digit pre-synergy adjusted EBITDA purchase multiple, and we expect these transactions to meet a mid-teens ROIC by the end of the third year. I will now turn the presentation over to Vik to provide an update on our Q2 financial performance.

Vikram U. Kini, Chief Financial Officer

Thanks, Vicente. Starting on Slide 6. Orders continued their strong start, up 8% year-over-year with a book-to-bill of 1.03x. Sequentially, from Q1 to Q2, we saw 3% order growth as well as a mid-single-digit increase in backlog. As Vicente mentioned, compared to the end of 2024, our backlog is up mid-teens. We are pleased with the first half organic order performance, which is up low single digits. Aftermarket revenue finished at 37% of total revenue, which is up 100 basis points year-over-year. And the second quarter finished largely in line with expectations for revenue, adjusted EBITDA, and adjusted EPS despite the dynamic macro environment, which demonstrates our ability to continue to execute well. The company delivered second quarter adjusted EBITDA of $509 million with an adjusted EBITDA margin of 27%. The year-over-year decline in adjusted EBITDA margin was driven primarily by the flow-through on organic volume declines, as expected, the dilutive impact from recently acquired businesses, the dilutive impact of tariff pricing matching tariff costs one-for-one, and continued targeted investments to drive organic growth. Corporate costs came in at $35 million for the quarter. Our Q2 adjusted tax rate was 23.6%, and adjusted earnings per share was $0.80 for the quarter, which on a 2-year stack is up 18%. In the second quarter, we recorded both a noncash goodwill and asset impairment. These adjustments have no effect on our adjusted earnings or the underlying operational performance of the business. We provided detailed information in the 10-Q, which was filed yesterday, but I'll take a moment to provide some commentary. The impairments were driven by 2 major components: the High Pressure Solutions business and ILC Dover. Starting with the High Pressure Solutions business, we wrote down the minority stake we retained when we sold off the business. This write-down was due to changes in the revised long-term outlook driven by the upstream oil and gas market. And specific to ILC Dover, first, we had a change in the long-term outlook for our Aerospace and Defense business due to reduced expectations for business with a certain customer that resulted in an impairment. Second, while our long-term forecast for the Biopharma business remains robust, we did record an impairment. This impairment was driven primarily by market-based inputs such as an increase in the discount rate and contraction of peer market multiples. And finally, to a lesser extent, we recorded an impairment related to the ILC Dover trade name due largely to the above-stated factors. Given the ILC Dover impairments, I would like to comment on our disciplined approach to M&A. We have a holistic approach that includes comprehensive diligence appropriate for the transaction as well as negotiated representations and warranties. In the ILC Dover transaction, these reps and warranties were backed up by insurance, and we have filed a claim under that policy. I just want to reiterate our conviction in the long-term prospects of our Life Sciences business, which remains unchanged, and we believe that ILC Dover will play a key role in long-term value creation. Finally, we remain disciplined in our approach to M&A. And as a reminder, year-to-date, we have acquired 11 companies at a pre-synergy multiple of 9.5x. On the next slide, free cash flow for the second quarter was $210 million, which was down year-over-year due primarily to the timing of bond interest payments. Year-to-date, free cash flow remains robust, up 13% year-over-year. Total company liquidity is currently $3.9 billion, underscoring the strength of our balance sheet and providing continued flexibility to pursue value creation opportunities in what remains a dynamic market environment. Leverage for the quarter was 1.7 turns, which was a 0.3 turn improvement compared to the prior year. And specifically, within the quarter, cash outflows included $500 million deployed to share repurchases as well as $47 million to M&A and $8 million for our dividend payment. The $500 million in share repurchases made during the second quarter represented approximately 6.1 million shares at an average purchase price of $81.35. And as a reminder, we are still targeting up to an additional $250 million of share repurchases for the balance of the year. I will now turn the call back to Vicente to discuss our segment results.

Vicente Reynal, Chairman and CEO

Thanks, Vik. On Slide 8, second quarter orders for IT&S finished up 7% year-over-year and up 5% sequentially from Q1 to Q2. Book-to-bill was 1.05x. The segment delivered organic order growth in the low single digits, making the second consecutive quarter of positive organic order growth. Revenue finished up low single digits. Adjusted EBITDA margins declined year-over-year, driven by the flow-through on organic volume, the expected dilutive impact from recently acquired businesses, the dilutive impact of tariff pricing matching tariff clause one-for-one, and continued commercial investments for growth in the business. Moving to the product line highlights. Compressor orders were up low single digits. Industrial vacuum and blowers, orders were up high teens. And power tools and lifting orders saw a minimal decline of low single digits. On a regional view, we saw orders in the Americas up high teens, EMEA up high single digits, and Asia Pacific up low double digits. It is important to note that we saw organic order growth in China, which reflects the resilience of our team, the utilization of IRX, and the effectiveness of our demand generation initiatives. In our innovation in action, the new CompAir Ultima oil-free compressor product is truly a breakthrough offering, delivering a 14% improvement in energy efficiency. This new compressor has an optimized design with a fully integrated airend drive that eliminates the need for a gearbox, reducing friction and increasing reliability and serviceability. Launched initially under the CompAir brand, this product exemplifies Ingersoll Rand's multichannel, multi-brand strategy as this technology will be launched under other brands and across the globe.

Vikram U. Kini, Chief Financial Officer

Turning to Slide 9. Q2 orders in P&ST were up 13% year-over-year with a book-to-bill of 0.96x. Important to note that for the first half of the year, book-to-bill was above 1 at 1.02x. Organic orders were down 5%, but came in large with expectations. In the prior year, we saw some larger long-cycle orders, which were not expected to repeat in the current year. Excluding these large projects, organic orders were up low single digits. Revenue finished up 17% year-over-year, driven largely by M&A. P&ST delivered adjusted EBITDA of $117 million, which was up 14% year-over-year with a margin of 29.5%. Adjusted EBITDA margins finished in line with expectations, improving 40 basis points sequentially, and are up 190 basis points over the past 2 quarters. For our P&ST in action, we're highlighting the EVO Series electric diaphragm pump. This breakthrough technology sets a new benchmark, delivering a 15% improvement in energy efficiency over previous technologies. It is also designed with an ergonomic single-sided diaphragm for easier maintenance. In addition, this product provides us with a perfect platform to launch the ARO Protect, which is a care-type solution similar to our offering on compressors, designed to maximize customer uptime and minimize costs while increasing recurring revenues.

Vicente Reynal, Chairman and CEO

As we move to Slide 10, we are raising our guidance on total revenue, adjusted EBITDA, and adjusted EPS. As highlighted on the right-hand side of the page, we're increasing total revenue driven by M&A and FX, which is partially offset by a reduction in tariff-related pricing. It is important to note that the change in organic revenue is solely based on a reduced tariff pricing assumption, which has no impact on adjusted EBITDA or adjusted EPS. Given that the tariff landscape will remain fluid due to the introduction of new trade agreements, we have included an appendix slide detailing our underlying assumptions incorporated into our latest guidance. We have raised our adjusted EBITDA midpoint to $2.13 billion, matching the top end of our previous guidance. We have also increased our adjusted EPS to $3.40 at the midpoint, which is up $0.06 or 2% from the midpoint of our previous guidance. For the rest of the components of our full year guidance, we anticipate our adjusted tax rate to be roughly 23%, net interest expense to be about $220 million, and CapEx to be around 2% of revenue. We have updated our share count assumption of approximately 403 million shares, which reflects the impact of the $500 million in share repurchases made during the second quarter. Our guidance excludes the effect of any additional share repurchases or M&A, which may happen later in the year. At the bottom of the slide, we have added commentary regarding our own internal indicators we track, which continue to show positive signs. MQLs remained up double digits in the second quarter with continued momentum in July. Large long-cycle funnel activity remains robust with approved projects continuing to progress through the decision-making process. While the macro environment remains dynamic, business conditions remain stable, and we're encouraged by the organic order growth and robust book-to-bill we saw in the first half of the year. We continue to focus on controlling what we can control, and our teams remain resilient and are executing very, very well. We remain committed to leveraging our robust balance sheet to strategically deploy capital and drive value for our shareholders. Finally, on Slide 11, as we wrap up this portion of the call, I would like to highlight that we remain nimble and are prepared to pivot in what continues to be a dynamic global market environment. We will continue to utilize our strong balance sheet to strategically allocate capital, ensuring sustained durable value creation for our shareholders. Our capital allocation strategy remains unchanged, and we will continue to be disciplined in our approach to M&A. To our employees, I want to thank you again for your part in delivering another strong quarter, remain focused on controlling what you can control and stay agile through the use of IRX. With that, I will turn the call back to the operator and open it for Q&A.

Operator, Operator

Your first question comes from Mike Halloran with Baird.

Michael Patrick Halloran, Analyst

So maybe we could just talk a little bit about how you see the demand cadence, order cadence playing out in the back half of the year. I know you saw sequential improvement from Q1 to Q2. How did that track through the quarter and into the start of the third quarter? And what are you assuming in guidance from a seasonality or improvement perspective as we work through the back half of the year?

Vicente Reynal, Chairman and CEO

Yes, Mike. As you are aware, we typically do not provide external guidance on orders. However, historically, this business tends to maintain a book-to-bill ratio of around 1 over a full year. We started the first half of the year strong with a book-to-bill ratio of 1.06, which positions us well for the second half considering the backlog we have. In the second quarter, we observed stable momentum throughout the quarter, with no significant declines, remaining consistent with what we typically see. This trend continued into July, which is encouraging. Additionally, we noticed ongoing strength in large long-cycle orders, primarily driving organic order growth, especially in the IT&S sector. We anticipate these orders will positively impact our revenue heading into 2026, further building our backlog. Lastly, regarding underlying demand, IT&S has seen two consecutive quarters of positive order growth, which is a good sign. For P&ST, without the impact of last year’s long-cycle hydrogen-related orders, we would also be experiencing positive growth in the quarter.

Michael Patrick Halloran, Analyst

And then maybe a somewhat similar question on the margins. If I look at what's implied in the margins back half of the year, a little bit of a step-up. Maybe just walk through the puts and takes, why the step-up in the back half of the year? Is it seasonal? Are there other factors associated with it?

Vikram U. Kini, Chief Financial Officer

Yes, Mike, this is Vik. I'll take that one. So I think it would be fairly consistent with kind of how you've seen prior years. So just a couple of things to point out. One, definitely seasonality. I think the cadence of revenue and earnings is very consistent in terms of our guide for 2025 is what you've seen historically. And so with the increased revenue profile in the back half of the year, you typically see some of the flow-through come from that, not just on the organic volume and the pricing side, but then some of the productivity initiatives like I2V and things like that, that follow volume. The other thing I would say is the continued integration on the M&A side, whether it be the bolt-ons as well as kind of as we've talked about for multiple quarters now, the ongoing progress on the ILC Dover side. And it is worth noting that particularly in Q4 on a year-over-year basis, our P&ST business probably has their easiest comp comparatively speaking, which obviously kind of helps factor into that. So again, I would point to the normal kind of drivers and factors you would typically see that go along with seasonality.

Operator, Operator

The next question comes from Julian Mitchell with Barclays.

Julian C.H. Mitchell, Analyst

Maybe just wanted to start with the sort of phasing within the second half of the sales and EBITDA step-up that Vik just highlighted. I think historically, maybe just to start with your EBITDA is about 26% of the year in Q3. So based on your full year guide, it's a sort of $550-ish million number for Q3. Is that roughly the right way to think about it in terms of that Q3 phasing?

Vikram U. Kini, Chief Financial Officer

Yes, Julian, let me start with that. So obviously, we don't provide quarterly guidance, but what I'll say is this. First and foremost, I think the phasing of revenue and EBITDA is largely consistent with both our prior guidance and prior years. So we'll start there. And then as you think about the back half of the year and kind of maybe to put a little bit of a finer point on the second half, particularly as far as the moving parts. First and foremost, we do expect, obviously, the second half to be better than the first half. But again, that's very consistent with what we put out in our prior guidance. And I think the organic orders growth and book-to-bill that Vicente kind of referenced earlier through the first half of the year supports that view. As far as kind of the large moving parts, let me kind of break it down for you a little bit. In the second half of the year, we do expect organic volume growth to be down in the low single-digit range, which compares to being down in the kind of mid-single-digit range in the first half of the year. And on pricing, we expect pricing to be in the, let's call it, 3.5% to 4% total range with a relatively even split between base pricing and tariff-related pricing. And it's worth noting that, that base price of about 2% is very much in line with what we've always indicated as a normal level of pricing that we should be able to generate in the business. And then on the margins, I think it's exactly what you would expect. We do expect to see sequential margin improvement with Q4 kind of being the high watermark for the year.

Julian C.H. Mitchell, Analyst

That's very helpful. And when we're thinking about the organic sales sort of year-on-year, total company, let's say, I think the first half was down about 3.5% year-on-year. The full year guide is sort of minus 1%. So you're up maybe low single digit in the second half year-on-year on your guide midpoint. Does all that growth come in the fourth quarter? Or do we see sort of flattish organic sales in Q3? And is that the same for both segments?

Vikram U. Kini, Chief Financial Officer

Yes. Let me start there. I do think Q4 will be a little bit of a healthier growth than Q3. So Q3, slightly positive. Q4, a little bit better than that is kind of the way the ramp will work between Q3 and Q4. The way that you outlined, obviously, the first half and the second half expectations is largely correct and consistent with kind of what I said before. And then your second part of your question in terms of the 2 segments, what I would say is not dramatically different between the 2 segments. I think you've seen fairly consistent performance in terms of the volume side of the equation in the first half for IT&S and P&ST. I don't think you're going to see dramatically diverging performance between the 2 segments in the back half of the year.

Operator, Operator

The next question comes from Jeff Sprague with Vertical Research.

Jeffrey Todd Sprague, Analyst

I appreciate you mentioning the ILC at the beginning. However, when it comes to managing mergers and acquisitions over time, these smaller deals appear to be straightforward and desirable in large numbers. They generally make sense, and as the company expands and targets grow, there will always be opportunities that might not fully align with our goals. For instance, some deals might contribute 20%, 25%, or 30% of sales that we didn't actually pursue but ended up acquiring nonetheless, similar to what occurred with the ILC. Could you provide more details on the steps you took to safeguard against such situations? You referenced some indemnities; how do you approach the management of potentially larger and more intricate mergers and acquisitions in the future?

Vicente Reynal, Chairman and CEO

Yes, Jeff, that's a great question. There are a couple of points to consider. Even in light of everything you've heard, we remain very optimistic about the Life Science segment of our business, which accounts for 75% of our operations. Overall, for ILC Dover, we anticipate achieving a mid-single-digit return on invested capital by year three, which we believe is reasonable for such a significant transaction. As you mentioned, for our smaller acquisitions, we expect to reach mid-teens return on invested capital by year three. We have always anticipated that larger deals would yield lower returns. This acquisition is establishing a foundation for the life sciences sector that we have discussed previously. As we proceed with our strategy, we will create a substantial platform and continue to add smaller acquisitions at historical rates and multiples, similar to what we have seen with the Lead Fluid acquisition we just announced. We also have another transaction in the letter of intent stage that we expect to close soon, which should align well with our historical performance, aiming for mid-teens returns on smaller acquisitions. Regarding our approach to larger transactions, consider our experience with the merger of Gardner Denver and Ingersoll Rand, where we extensively utilized integration resources. Now, five years later and after completing over 70 transactions, we've learned a lot and have made continuous improvements and refinements to our methodology. We have a solid playbook in place, which includes thorough due diligence and carefully negotiated representations and warranties. For the ILC Dover transactions, these warranties were supported by insurance, and we have filed a claim under that policy. As you can imagine, these situations are complex. We completed an extensive internal review, and we felt prepared to proceed with our claim. I want to stress that this issue has not diverted our management team's attention from running the business. Meanwhile, we have continued to invest specifically in ILC, adding new team members, creating profit and loss statements, and implementing our post-integration strategy.

Jeffrey Todd Sprague, Analyst

Great. And then just on the MQL specifically, anything in just the nature of these longer-cycle projects that stand out regionally, vertical market, different flavors? Or is there kind of a consistent theme in what you're seeing on the longer cycle side?

Vicente Reynal, Chairman and CEO

Yes. Jeff, let me provide some insights on the MQLs and the long cycle. As we've noted, demand generation, which we consider our marketing engine, is aimed at achieving growth above the market average. This demand generation is a key factor driving many of our MQLs. We are observing positive organic growth in areas like our compressor performance and China, despite the overall market not expanding. This growth is a result of our efforts to stimulate demand and identify growth opportunities through MQLs and demand generation activities. In recent quarters, we have encountered some uncertainty, with large projects being delayed and other macroeconomic factors affecting the conversion of MQLs into orders, which influences our overall organic growth. Nevertheless, we remain optimistic about the momentum in MQLs, recognizing that there is genuine demand in the market that we expect will translate into orders over time. We are committed to keeping these customers engaged and are ready to finalize orders as they arise. Regarding the long cycle, we experienced solid momentum in the second quarter, particularly in wastewater facilities and water and wastewater infrastructure, which contributed to the growth of our Vacuum and Blower business. We also see strong performance related to reshoring efforts, especially from countries like India that are enhancing their localization strategies for supply chains.

Operator, Operator

The next question comes from Rob Wertheimer with Melius Research.

Robert Cameron Wertheimer, Analyst

I'm curious about the MQL arena, where you've experienced some delays in decision-making that are affecting projects moving through the funnel. Has the reason for these delays changed over time? In the past, it was often due to political issues. Is the resolution of tariffs playing a role here, or are customers expressing more concerns about interest rates? Do you have any insights on what might help ease this situation? Additionally, regarding larger projects you've mentioned, when you notice hesitancy, does that also impact smaller projects, or is there a steady flow in those areas while only the larger ones are affected?

Vicente Reynal, Chairman and CEO

Yes, Rob, I would describe this as more about resolving tariff issues. There is ongoing fluctuation in the tariff percentages that we are observing, which is leading to immediate reactions regarding project flows and the resulting unpredictability and uncertainty. Additionally, the Big Beautiful Bill Act has also caused delays for some renewable energy projects. To address your second question, we continue to see movement in this lengthy process, although it's significantly slower than we have experienced historically. The situation varies; there may be factors like site readiness, adjustments in technical work, or modifications in specifications, which all lead to the EPC needing to redesign and collaborate with us. The positive aspect is that we are still witnessing engagement and not cancellations, but the progression of these projects is considerably slower due to changes in specifications, overcapacity, or limited engineering resources from the EPC to finalize projects and place purchase orders.

Operator, Operator

The next question comes from Andy Kaplowitz with Citigroup.

Andrew Alec Kaplowitz, Analyst

Vicente, just on P&ST, can you give more color into your legacy Gardner Denver Medical business? Are you seeing any green shoots there into the business turning? And then stepping back on P&ST, as you know, you haven't seen sort of that mid-single-digit plus growth algorithm in a while here. I do think it's easier comps in the second half as you talked about, but can you talk about your confidence in acceleration of overall P&ST moving forward?

Vicente Reynal, Chairman and CEO

Yes. Regarding the legacy Gardner Denver Medical business, I see good momentum in the fluid handling segment. This part of the business works well with personalized cancer research and treatments, where we are experiencing continued positive momentum. Notably, this marks the second consecutive quarter of organic revenue growth in the life sciences sector. This organic growth highlights the performance of the legacy Gardner Denver business, indicating solid growth and an improving situation. As for the mid-single-digit growth in the P&ST, we noted good order growth in the first quarter and this quarter, which would have shown better results if not for some large projects that we decided to exit, specifically in hydrogen refueling stations. Removing those from the equation would result in positive organic order growth. Additionally, when we analyze what we call the legacy P&ST, or Precision Technology, some of the pump businesses have also shown mid-single-digit growth in orders. Hence, we remain optimistic about this turning point and expect continuous improvement moving forward.

Andrew Alec Kaplowitz, Analyst

Vicente, that's helpful. And then maybe this one is for Vik. Maybe just a little more color into that IT&S margin in Q2 because I think you expect the margin to sequentially increase and it did decrease a bit. I know you called out all the factors that impacted margin, but were there any in particular that were slightly worse than you're expecting? And can you talk about your confidence level? I know you've got improving margin dialed in for the second half.

Vikram U. Kini, Chief Financial Officer

Yes. So Andy, I think just to kind of restate, we mentioned the factors with regards to the volume, some of the M&A and then kind of the dilutive impact on the tariff pricing offsetting costs one-for-one. Was there anything that I would say was tremendously out of sort of expectation? No, I wouldn't point to anything of a dramatic nature. Again, this is a business that's still playing that 29%, roughly speaking, EBITDA margin profile. So extremely healthy and one that we quite frankly, kept up in that 29% level despite some of the volume headwinds that we've called out. So I do think that we expect to see sequential margin expansion, as we stated in the kind of the earlier question, kind of in line with kind of normal, what I would call seasonality. But again, nothing I would say out of sorts or anything that we think caused any concern or anything of that nature that we saw in Q2.

Operator, Operator

The next question comes from Nigel Coe with Wolfe Research.

Nigel Edward Coe, Analyst

I just want to confirm the numbers. Vik, you mentioned a price increase of 3.5% to 4% in the second half of the year. Is that increase evenly distributed across the portfolio? We've heard more about IT&S. Are we seeing similar increases in services and equipment? Is this trend observed globally, or is it mostly focused on U.S. equipment? Specifically, are U.S. compressors expected to rise by nearly 10%? Any clarification on this would be appreciated.

Vikram U. Kini, Chief Financial Officer

Yes. So let me maybe start at the top of the house, and I'll maybe work my way down, Nigel. One, I think that, that expectation of 3.5%, 4%, I think, is actually fairly comparable between the 2 segments. And like we said, a relatively equitable split between or even split between what I'll call base pricing, which, as you would expect, has the typical flow-through you would expect and then the tariff-related pricing, which is essentially offsetting tariffs one-for-one. Now as far as the second part of your question, as far as the regional splits, I would say that when you think about IT&S, I would say it is pretty well equitably spread and split with maybe the exception of China, which is obviously a bit of a tighter pricing environment comparatively speaking, which is probably as expected. But I think when you think about Europe, North America, Latin America, even the Power Tools business, I think we're generating the equitable price you would expect. And yes, it is, I'd say, comparable between the components, i.e., the compressors and/or the aftermarket of the service. We don't take what I would call a peanut butter approach to pricing. It's very targeted. I would say that's even been the case where we've had to take certain tariff-related actions. So again, it's very consistent, I think, with the pricing kind of strategy you've seen us do historically. Maybe the only nuance here is that tariff-related pricing, which is, I'd say, just offsetting costs one-for-one.

Nigel Edward Coe, Analyst

Okay. That's great color. And then maybe just following up on Rob's question around what sort of unlocks this next investment cycle? Because I think the way you sort of framed the second half volumes down low single digits was conservatism back in April. Now we've sort of hardwired that. It feels like we've got better visibility with tariffs, et cetera. So just wondering, are we seeing like a sort of a step down here and another step down in the market? Are we seeing a pushout in decisions? So I guess the question is, what's changed versus April in terms of that sort of conservatism view? And what do you think Vicente kind of unlocks this demand cycle?

Vicente Reynal, Chairman and CEO

Yes, that's a great question. In our guidance, we've chosen to remain cautious regarding volume projections. Currently, there are impending deadlines for many tariffs, which are influencing the situation. We believe that once we gain more clarity, it will significantly enhance the discussions we're having with various customers who have been waiting. They are asking for a better understanding of the overall picture before proceeding. Many conversations we're having revolve around factors such as tax incentives and depreciation in the U.S., as well as uncertainties in Asia-Pacific and other countries outside of China. Customers in regions like South Korea and Japan are also awaiting clarity on tariffs. This understanding is crucial for driving decisions and unlocking potential in our sales pipeline. At this moment, we are still taking a cautious approach.

Operator, Operator

The next question comes from Joe Ritchie with Goldman Sachs.

Joseph Alfred Ritchie, Analyst

Thanks for the initial comments on ILC Dover. I just want to be clear, I guess, maybe around one specific item. So the customer that you referred to, I know you don't want to call it out by name, but is it consistent with the reduction in guidance, the revenue guide that you saw a year ago when the transaction had just closed? Or is this a new customer that we're talking about within the aerospace and defense sector?

Vicente Reynal, Chairman and CEO

Yes, Joe, this is a new customer, a customer and a project that is really tied to the next-generation International Space Station and which has been delayed. I mean the funding for this seems to be kind of having approved already in the Big Beautiful Bill, but it's kind of just getting delayed. So that's basically the decline.

Vikram U. Kini, Chief Financial Officer

Joe, the only thing I'd add to that, though, is, as you saw in our guidance, there's really no change to the organic equation other than tariff pricing. So I think the team has done a nice job to kind of supplement and offset that volume. So that's again why you're not seeing any short-term change to the current guide.

Joseph Alfred Ritchie, Analyst

Okay. Got it. No, I appreciate the clarification there. And then I know we've had some discussions around the marketing qualified leads and then ultimately, that turning into better organic growth. I guess when I take a look at maybe just the Compressor business or IT&S just the last couple of years, the order growth has been fairly muted, and so I know we're getting is we're starting to get some questions from investors like whether structurally, there's any concerns around maybe the longer-term growth algorithm for compressors going forward. So Vicente, maybe you can kind of tackle that question head-on and how you feel about the long-term kind of growth opportunity within compressors and why maybe we've seen a little bit more muted growth over the last 2 years.

Vicente Reynal, Chairman and CEO

Yes, Joe, the long term absolutely does not change. And if anything else, we continue to get more excited because, obviously, as we go and attach a lot of these solutions for recurring revenue, that provides, in our view, even better upside than what we even consider originally when we were looking at a lot of these back in the Gardner Denver days. I think what you have seen here over the past couple of years is that there's definitely been a lot of kind of fluctuation of large projects or large kind of one-time investments, whether renewable natural gas in the U.S., that turned to be almost $100 million of revenue that then next year turns to basically, call it, down to $10 million to $20 million. So I think when you peel the onion and take a lot of those projects and look at fundamentally the base of what we're seeing in the compressor market, we continue to see pretty, I mean, I'd say, positive, stable growth comparable to what we call historically as that GDP plus. And then on top of that, we try to overcome that. So I think it feels like over the past couple of years, we have seen obviously a more normalization of these large compressors. And now we're seeing like China as an example, again, 1 month is not a trend, but China is an example, where now after all that kind of large investments in projects such as electric vehicles, battery production and things of that nature, now we're getting into much of that normalcy. And in China, the market is not growing, but our team in China saw positive order organic growth here in the second quarter. And we're not predicting that China is going to continue to be accelerating. But again, we continue to expect that we take some share. So no fundamental change in the growth algorithm. And I think as we kind of see more normalization here ex-large projects, things will be more stable.

Operator, Operator

The next question comes from Chris Snyder with Morgan Stanley.

Christopher M. Snyder, Analyst

I understand that the decrease in organic guidance is mainly due to reduced tariff-related pricing. However, in the previous quarter, it appears that part of the volume reduction was linked to these higher prices, which raises concerns about elasticity. Now that prices are somewhat lower but we haven't seen a positive volume response, do you think this indicates a challenge as we've progressed through the year?

Vikram U. Kini, Chief Financial Officer

Yes, Chris, this is Vik. I'll take that. So I think like we said when we gave the guidance framework a quarter ago, we said we're taking a precautionary view of the year given the uncertainty. And I think the simple way to think about that is we just haven't changed that view as we kind of think about the equation. And that's what you see in the framework from a guidance perspective. To Vicente's point that was kind of just made, as we hopefully get a little bit more certainty on where tariffs land and things like that with some of the things from the bill and things of that nature, those should hopefully be tailwinds in the grand scheme of the equation. And listen, to the degree that the volume equation is a little bit healthier than what our guidance implies, we'll consider that maybe the upside to the framework we put forth. But I think we just saw it prudent to keep the precautionary kind of outlook that we had before. And that's kind of, I think, what you should see from the guidance framework, nothing more than that.

Christopher M. Snyder, Analyst

Very much appreciate that. I guess, has there been any change in sentiment from international customers following the tariffs? And I guess if we look at the overall company orders flattish, is there anything you could provide on the regional split there?

Vicente Reynal, Chairman and CEO

Yes, Chris. From a regional perspective, we noticed positive organic orders in EMEA, covering Europe, the Middle East, and India. Overall, in Asia Pacific, particularly China, we saw positive organic growth. Other countries in the region seem to be in a wait-and-see mode as customers seek clearer information regarding tariff agreements. EMEA appears to be quite resilient, while Latin America remains robust, and we're pleased with the results from our ongoing investments. North America is experiencing sluggishness in the second quarter due to the uncertainty surrounding tariffs. However, we maintain a cautiously optimistic outlook for the medium term in North America. We see strong momentum in longer cycles, which is contributing to our backlog for 2026.

Operator, Operator

The next question comes from Joe O'Dea with Wells Fargo.

Joseph John O'Dea, Analyst

I wanted to start just on the back half bridge and when we think about some of the key drivers. And so the volume assumption moving to down low single from first half of the year, down mid-single, that seems like it's really comps. And so there's no kind of underlying assumption in volume sequentially being much better. And then on the EBITDA side, price cost seems like it would be the most important driver. Is that pricing in place such that there is a notable step-up from Q2 to Q3? Or is there still pricing that you plan to implement in the back half of the year?

Vikram U. Kini, Chief Financial Officer

Yes, Joe, this is Vik. Let me address that. The way you framed the volume assessment is quite accurate. It’s important to highlight that the positive organic orders in IT&S during the first half and the book-to-bill ratio enhance our confidence in a slight improvement in organic volume from the first half to the second half. Regarding your price and cost equation, I can confirm that the necessary pricing actions are already implemented, and we are actively monitoring this. We have good visibility on these measures being in place. In summary, I believe you captured the situation well, and this aspect is one of the factors contributing to margin expansion in the latter part of the year. However, it’s not the only factor; we also have seasonality, volume, productivity improvements, and ongoing integration from recent acquisitions to consider. Your assessment was well done.

Joseph John O'Dea, Analyst

And then on the clean energy vertical in IT&S, can you unpack that a little bit? Just talk about what you're seeing in terms of demand trends, some of the end markets, kind of regional activity, just overall kind of what you're watching there for the opportunity set?

Vicente Reynal, Chairman and CEO

Yes, Joe. If I break it down by region, in the U.S., we're experiencing stagnation in renewable natural gas. A couple of years ago, we saw significant growth and acceleration due to the IRA implementation, but now we're seeing a slowdown. This trend continues. In Europe, biogas and RNG production remain strong, showing good investment potential and momentum. In the Asia Pacific region, particularly China, there is notable growth in applications related to fuel gas boosters for power generation and pumped storage for hydropower. Overall, we observe a mix of different end markets based on the regions where we operate. Lastly, in Latin America, we're seeing promising investments in clean energy.

Operator, Operator

The next question comes from Nathan Jones of Stifel.

Nathan Hardie Jones, Analyst

I wanted to just ask a follow-up on the building of the platform for life sciences here. Lead Fluid is obviously pretty small, and it will take some time to build out a life sciences platform at that pace. Any kind of color you can give us on if there are larger bolt-ons out there that you could use to build that more rapidly? Do you think you need to deploy more capital into that to build scale? Just any color you can give us around the strategic pathway to building that business out?

Vicente Reynal, Chairman and CEO

Sure, at this moment, I would say no. We prefer to focus on more niche applications and specific steps within the process. For instance, ILC Dover is a strong player in the GLP-1 sector and powder containment along with ADC and high potency APIs that will likely connect to future immunotherapies. Similarly, Lead Fluid has excellent technology in peristaltic pump systems that we aim to utilize not just in Asia, but on a global scale. The letter of intent we have will soon close; it's a small acquisition, but it adds a very niche application that complements our operations in ILC and how we serve our customers. Our strategy will continue to focus on these niche applications, where we can secure a significant market share leading to favorable pricing, high margins, and enhanced proximity to our customers.

Nathan Hardie Jones, Analyst

I guess one on the accelerated depreciation that's in the BBB. It's probably unfair to ask if you think that will be a catalyst for 4Q spending, but we have had periods historically where we've had accelerated depreciation. Maybe you could just comment on what historically you've seen that in terms of it being a catalyst for maybe late-year spending to take advantage of those kinds of things?

Vikram U. Kini, Chief Financial Officer

Yes, Nathan, I'll take that one. I'll keep it pretty simple. You're right, kind of hard to prognosticate what that may or may not mean. I think we view it as definitely a bit of a tailwind, a good positive factor. Obviously, we hope to see it kind of drive some degree of acceleration in second half orders. But I don't think that our guide or the framework we put forth contemplates that, right? So historically, maybe some movement there, but nothing that I would consider to be an extreme needle mover comparatively speaking.

Operator, Operator

The next question is from Nicole DeBlase with Deutsche Bank.

Nicole Sheree DeBlase, Analyst

Maybe just starting with the Power Tools and Lifting business. I think the orders here got a bit worse, turned negative again. Can you give a little bit more color on what you're seeing there? And that's been a business that's been kind of tough from an order perspective for a while now. Do you think that we're getting close to a bottom there?

Vicente Reynal, Chairman and CEO

Yes, Nicole, I believe orders were actually positive in Q1. There isn't anything significant that I would consider negative. We have different segments within the business, particularly in material handling, which is performing fairly well. We are optimistic about the Power Tool segment as we are rolling out new products. Overall, there is nothing major to report. We continue to invest in this business, and margins are close to the fleet average, generating good cash flow.

Nicole Sheree DeBlase, Analyst

Okay. Got it, Vicente. And then just as a follow-up, I know you guys said that you wouldn't give guidance on second half orders, totally understand that. But if you kind of do the math on normal seasonality, which is what you have said, you do kind of get to like an organic order decline in the third quarter, I believe, unless my math is wrong. Would you guys push back to that? Just curious on your perspective.

Vikram U. Kini, Chief Financial Officer

Yes, Nicole, we won't provide guidance on orders or similar metrics. The best way to address this is to refer to how Vicente framed it. In July, the momentum for MQL has maintained a similar pace to what we experienced in Q2. You observed the order performance during that time, and we discussed the factors influencing both segments. Overall, we're not seeing any dramatic changes in trends. Additionally, we are still navigating the uncertainty surrounding tariffs. As the situation regarding tariffs stabilizes, we hope it will lead to more clarity and potential acceleration. However, I would emphasize that currently, we aren't witnessing any significant changes compared to what we observed at the end of Q2.

Operator, Operator

The next question comes from Andrew Buscaglia with BNP Paribas.

Andrew Edouard Buscaglia, Analyst

Just wanted to check on capital allocation. Just it sounds like you have some M&A still in the pipeline, per usual, but what's your preference maybe for share repurchase over the near term? How are you thinking about that?

Vikram U. Kini, Chief Financial Officer

Yes, Andrew, I'll keep it pretty simple here. I don't think anything has changed from our kind of capital allocation strategy. Yes, you did see some accelerated share repurchase activity in Q2 of the $500 million. We have said that we'll do up to about $250 million more for the balance of the year. But without question, the focal point of the capital allocation strategy sitting here today as well as even moving into future years will continue to be the M&A led by the bolt-on strategy, as Vicente mentioned. So again, nothing has really changed, and we'll continue to execute on share repurchase very much in line with what you've kind of seen in prior years.

Andrew Edouard Buscaglia, Analyst

Yes. Okay. And then maybe just to check, your aftermarket expansion has been solid. How do you foresee the year and the next couple of years playing out, especially with any decisions regarding capital equipment? What are the dynamics like for you regarding that mix?

Vicente Reynal, Chairman and CEO

Yes. Andrew, I think we have always said that we want to continue to accelerate the growth on the aftermarket and particularly, that's why the recurring revenue is a very, very important step and initiative on that. We want that percentage to continue to grow even if the whole goods or new equipment gets unlocked and released and grow, we want to continue to outgrow that so that, that percentage continues to be a bigger piece of the total equation.

Operator, Operator

The next question comes from Amit Mehrotra with UBS.

Amit Singh Mehrotra, Analyst

I'll keep it quick here. We've obviously observed pharma companies kind of announce pretty meaningful U.S. production capacity increases. I think we're tracking something like $300 billion over the next 4 or 5 years. None of those have been constructed yet. So maybe it's too early. But can you just talk about the opportunity that offers you given obviously the exposure to that vertical?

Vicente Reynal, Chairman and CEO

Yes, that's a great question. This is why we remain optimistic about what we refer to as this long cycle. Typically, based on the scale of some of these projects, they will fit into this, not only on the compressor side but also from an ILC perspective. Some of that expansion is occurring with our current customers. Obviously, that will provide additional support. So yes, we are closely monitoring the situation with the EPCs and construction firms, as well as maintaining a strong connection with our customers.

Amit Singh Mehrotra, Analyst

When I examine the first half book-to-bill ratio, it typically falls below 1, while the second half tends to exceed 1. However, you've exceeded expectations in the first half. Is this reflected in the book-to-bill ratio? Do you still anticipate the usual trend of the book-to-bill ratio being above 1 in the second half?

Vicente Reynal, Chairman and CEO

Yes, it's too early to see significant changes. As you can imagine, projects are announced but take time to get started. Currently, we're projecting a book-to-bill ratio of about 1 for the entire year, which might go above 1 as things progress, but it also indicates that it could be below 1 later on. This reflects what we expect in terms of seasonality, and our view remains cautious given the current environment.

Operator, Operator

That is all the time we have for questions. I'll turn the call to Vicente for closing remarks.

Vicente Reynal, Chairman and CEO

Thank you, Sarah. I appreciate the level of interest in Ingersoll Rand. Thank you for all the great questions, and thank you to employees that are listening to the call. And let's just keep staying focused on controlling what you can control. Thank you, everyone.

Operator, Operator

This concludes today's conference call. Thank you for joining. You may now disconnect.