Earnings Call Transcript
Ingersoll Rand Inc. (IR)
Earnings Call Transcript - IR Q2 2023
Operator, Operator
Thank you for being here. I'm Kayla Baker, your conference operator for today. I want to welcome everyone to the Ingersoll Rand Q2 2023 Earnings Conference Call. All lines are muted to avoid background noise. Following the speaker's remarks, we will have a question-and-answer session. Now, I will hand the call over to Matthew Fort, Vice President of Investor Relations. You may begin.
Matthew Fort, Vice President of Investor Relations
Thank you, and welcome to the Ingersoll Rand 2023 second 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 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, during 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 Q2. Our employees continue to deliver on our commitments, despite the constantly changing macroeconomic environment, and consistently exemplify our purpose while thinking and acting like owners. I would also like to welcome our new employees from our recent acquisitions. Together, we have a great opportunity to build upon our strong complementary brands, products and capabilities, providing customers and the industry with a broader spectrum of solutions. Starting on slide 3, fueled by our competitive differentiator, IRX in the second quarter, we delivered double-digit growth in revenue, adjusted EBITDA, adjusted EPS, and free cash flow. We recently published our 2022 sustainability report, where we yet again delivered industry-leading results while remaining on track to meet our 2030 sustainability goals. Finally, based on our continued robust performance in Q2, we're once again raising our 2023 full year guidance. As we move to slide 4, our economic growth engine is key to how we deliver compounding annual results. During our last Investor Day in Q4 of 2021, we presented this model and highlighted our organic, inorganic and quality of earning growth enablers. We remain committed to our strategy and our long-term Investor Day targets outlined on this page. On the next slides, I will provide you with deeper insights into our organic initiatives, which are centered around product innovation and innovative value also known as i2V. In addition, we will provide an update on our progress towards our inorganic goals. Turning to slide 5, we start with our organic growth initiatives. Here, we have some examples of how in China, we have leveraged product localization as well as i2V to drive organic growth. Since the Gardner Denver and Ingersoll Rand merger, our blower and vacuum product lines have grown organically at a 17% CAGR. On the right-hand side of the page, we have an example of organic growth through the combination of recently acquired M&A and i2V. The outcome of that event is the development of a new oil-free screw vacuum pump. This new product will expand our addressable market by over $350 million and will go from development to launch in approximately six months. M&A continues to be at the forefront of our capital allocation strategy. We are thrilled to highlight our recently signed M&A deal with Roots. This iconic brand is a leading provider of low-pressure compression and vacuum technology. The acquisition also expands our capabilities in both low-pressure technology and centrifugal technology, which is a critical component in the process of green steel manufacturing. Our M&A funnel remains strong. And as of today, it continues to be over five times larger than it was at the time of the R&D. We currently have seven transactions at the LOI stage and several other transactions in process, which are close to the LOI stage. Based on acquisitions to date, the seven transactions under LOI, we are reaffirming our commitment to an additional $200 million to $300 million in annualized inorganic revenue to be acquired in 2023. On Slide 7, we recently released our 2022 sustainability report, showcasing the commitment and results of our strategic imperative leads sustainably. We have made significant progress in establishing ourselves as a top quartile ESG company by leveraging our competitive differentiator, IRX to deliver results in a very short period of time. Ingersoll Rand received several industry-leading sustainability acknowledgments of our efforts, including being named to the Dow Jones Sustainability World Index and the Dow Jones Sustainability North America Index. We have also awarded approximately $275 million since 2017 in equity to our employees, which has increased to over $660 million in value as of June 30, 2023. We will continue to offer our ownership works program that grant equity to all new employees after their 1-year anniversary. Through their engagement and commitment, we are on track to meet our 2030 sustainability objectives. With this, I'll turn now the presentation over to Vik to provide an update on our Q2 financial performance.
Vik Kini, Chief Financial Officer
Thanks, Vicente. On slide 8, fueled by IRX, we again delivered solid results in Q2 through a balance of commercial and operational execution. Total company organic orders and revenue increased 5% and 12% year-over-year, respectively. Book-to-bill was 1.03, and we remain encouraged with the strength of our backlog, which is up approximately 12% year-over-year. The company delivered second quarter adjusted EBITDA of $425 million, a 27% year-over-year improvement, and adjusted EBITDA margins of 25.2%, a 190 basis point year-over-year improvement. For the quarter, adjusted diluted earnings per share was $0.68, up 25% versus the prior year. Free cash flow for the quarter was $204 million despite ongoing headwinds from inventory due to the need to support backlog as well as continued global supply chain challenges. Total liquidity of $3.2 billion at quarter end was up approximately $1 billion sequentially, driven in large part due to the recently amended, extended, and upsized revolving facility. Our net leverage remains near all-time lows. At 1.0 turns, we are 0.1 turns better than both the prior year and prior quarter. Finally, I'd like to highlight an example of the power of our ownership mindset and the effectiveness of our competitive differentiator, IRX. Due to the team's resiliency in overcoming the cybersecurity incident, the Q2 revenue and adjusted EBITDA risk associated with the incident was mitigated within the quarter. This is no small task, and I would like to thank all of our employees that were involved in helping to overcome this impediment, enabling us to deliver tremendous results in Q2. Turning to slide 9, for the total company, Q2 orders grew 10% and revenue increased 18%, both on an FX-adjusted basis. Total company adjusted EBITDA increased 27% from the prior year. The ITS segment margin increased 200 basis points, while the PST segment margin improved 240 basis points. Notably, both segments remain price cost dollar and margin positive, which speaks to the nimble actions of our teams despite persistent inflationary headwinds. Corporate costs came in at approximately $43 million for the quarter, driven by continued investments to support growth in areas like demand generation and IIoT as well as the impact of incentive compensation adjustments. Adjusted diluted earnings per share for the quarter was up 25% to $0.68 per share. Cash outflows for the quarter included $49 million deployed to M&A and we returned $64 million to shareholders through $56 million in share repurchases and $8 million in dividends. M&A remains our top priority for our capital allocation, and we continue to expect M&A to be our primary usage of cash for the foreseeable future. I will now turn the call back to Vicente to discuss our segment results.
Vicente Reynal, Chairman and CEO
Thanks, Vik. On Slide 11, our Industrial Technologies and Service segment delivered strong year-over-year organic revenue growth of 14% with volume growth slightly outpacing pricing. Adjusted EBITDA increased 29% year-over-year with an adjusted EBITDA margin of 27.4%, up 200 basis points from the prior year with an incremental margin of 38%. We continue to see solid demand for our products with organic orders up 8% and a book-to-bill of 1.05. Note that on a two-year stack, ITS organic orders have grown 19%. Starting with compressors, we saw orders up in the low double digits. EMEIA demand continued to be above market with orders up high single digits. The Asia Pacific team continues to deliver a great performance with order growth in the mid-teens, driven by continued solid execution from our team in China where they saw orders up in the low 20s. Today, we showed on Slide 5, an example of how the team in China continues to outperform the market conditions with our own self-help initiatives. Moving now to the innovation aspect of the slide, we're illustrating an oil-free hydrogen compressor recently launched in EMEIA. This product is a perfect example of how we continue to focus our portfolio on high-growth, sustainable end markets with region-for-region manufacturing. The EMEIA team collaborated with a clean energy tech startup in the Netherlands to develop and build a system for our innovative hydrogen process, and the first unit was shipped in July. Turning to Slide 12, revenue in the Precision and Science Technology segment grew 5% organically. Additionally, the PST team delivered adjusted EBITDA of $90 million, which was up 16% year-over-year with incremental margins of 66%. Organic orders were down 10% year-over-year with a book-to-bill of 0.95 times. It is important to note that the organic order decline related to larger frame orders not repeating in the life science businesses, as well as the expected decline of longer cycle orders in the Agritech platform. Our book and ship business was solid, and we believe that the core business within PST remains very healthy. Leveraging this technology across both Albin Pump and LMI brands, we continue to execute our multi-brand, multi-channel strategy while expanding our addressable market by over $250 million. Given the solid performance in the first half and continued momentum from backlog, we're again raising our 2023 guidance. For the full year, total company revenue is expected to grow overall between 12% and 14%, which is a 200 basis point improvement versus our previous guidance. We anticipate organic growth of 8% to 10%, where price and volume is split approximately 60-40. FX is now expected to be a slight headwind, however, flat on a full year basis. Total adjusted EBITDA for the company is expected to be in the range of $1.69 billion and $1.74 billion, which is up 2% versus prior guidance and up 7% versus our initial guidance. At the bottom of the table, adjusted EPS is projected to be within the range of $2.70 and $2.80, which is up 17% year-over-year at the midpoint. As we wrap today's call, I want to reiterate that Ingersoll Rand remains in a strong position. We continue to deliver record results, and our updated guidance is reflective of our Q2 performance and ongoing backlog momentum. Thank you for your continued hard work, resiliency, and focus action. As we continue our track record of market outperformance, our balance sheet is as strong as ever. And with our disciplined and comprehensive capital allocation strategy, we remain resilient and have the capacity to deploy capital to invest with the highest return. With that, I'll turn the call back to the operator and open the call for Q&A.
Operator, Operator
Our first question comes from Michael Halloran with Baird. Your line is open.
Michael Halloran, Analyst
Good morning, everyone. Can we discuss the underlying trends you observed throughout the quarter, including any sequential insights and where you noticed positive or negative changes? Is the demand environment aligning with your expectations on a fundamental level?
Vicente Reynal, Chairman and CEO
Yeah, I'll say, Mike, we saw the sequential cadence in the quarter, very comparable to what we always see, which is typically lower in month one and starts ramping up through the quarter. We saw that happening pretty well. Nothing to call out different or any color that deviates from that trend, which obviously continues to show that there is good cadence and momentum. More importantly for us, the leading indicators, particularly the MQLs, those marketing qualified leads that we generate with our demand generation engine continue to see good sustainable pace and momentum across the product lines, which is encouraging to see.
Michael Halloran, Analyst
And on the PST side, can you just put those orders in context a little bit? I certainly understand the Agritech side and some of the larger projects, orders not repeating. But it sounds like things are healthy when you exclude those 2 pieces. And maybe a little bit of help on how you expect the order trends to track from here and recovery curves in some of those markets?
Vicente Reynal, Chairman and CEO
Yeah. Sure, Mike. I think you said it very well. I mean, we continue to see that the book and turn business remains pretty strong in the business, which you could call the short cycle side of the business. What we just saw in the quarter was a bit of lumpiness with Agritech, where last year we were doing some large projects and also some of the oxygen concentration business that did not repeat this year. However, we see that the trend in the PST segment continues to deliver mid-single-digit-plus growth. There's no change in that long-term perspective of what we can achieve here in the PST team, and we anticipate continued momentum here.
Michael Halloran, Analyst
Thanks, Vicente.
Operator, Operator
Your next question comes from the line of Julian Mitchell with Barclays Capital. Your line is open.
Julian Mitchell, Analyst
Thanks very much. Good morning. Maybe first question just around that split of sort of how you see the second half playing out between Q3 and Q4. I think the guide embeds are sort of low 70s EPS figure each quarter, but just wondered about how much of that ends up being weighted into Q4 and if there's any big difference between the two segments from that standpoint?
Vicente Reynal, Chairman and CEO
Yes. Julian, for total Ingersoll Rand on revenue and adjusted EBITDA margin, Q3 looks a lot like Q2. For Q3 on a year-over-year basis, remember that comps get increasingly more difficult. For the ITS segment, we're expecting to grow revenue still at low double digits considering we grew 19% organically in Q3 of last year. But we still see good line of sight to about 100 basis points of margin expansion in ITS. The PST segment is expected to grow mid-single digits, which is again on top of 20% growth in Q3 of 2022, and margins are expected to get back into that 30% level of EBITDA.
Julian Mitchell, Analyst
That's very helpful. Thank you. And then just secondly, when you're thinking about the firm-wide orders and backlog trajectory from here across both businesses. Are we thinking sort of orders flattish organically year-on-year in the back half and then the backlog maybe starts to drift down a bit sequentially, just as those lead times shorten, and customers can adjust their orders a little bit?
Vicente Reynal, Chairman and CEO
Yes, Julian. We don't specifically guide on orders. But as a reminder, our Q3 prior year is probably one of the toughest comps for orders. Q3 last year was roughly 14% organic order growth momentum. In terms of backlog, we do anticipate it to drift down a little in the back half, as we mentioned in the past. The normal cadence for orders is typically a book-to-bill greater than one in the first half due to larger projects that are booked in the first half, with bookings in the second half being less than one. We’ve seen a book-to-bill of greater than one in the past nine out of ten quarters, so that speaks again to the coms that we're seeing.
Julian Mitchell, Analyst
That makes sense. Thanks very much.
Operator, Operator
And your next question comes from the line of Jeff Sprague with Vertical Research. Your line is open.
Jeff Sprague, Analyst
Hi. Thanks. Good morning, everyone.
Vicente Reynal, Chairman and CEO
Good morning, Jeff.
Jeff Sprague, Analyst
Vicente, can you elaborate a little bit more on your talking about demand in ITS and compressors in particular, you noted reshoring and ESG? I guess on the ESG side, you're pointing to kind of energy efficiency sort of investments and retrofit. But a, is that the case? And b, can you just elaborate a little bit on what you're seeing in those two buckets?
Vicente Reynal, Chairman and CEO
Yes, Jeff. We're very pleased with the momentum that we saw on the compressor product line, particularly the oil-free compressors outpacing the growth, which was high 20s momentum. We continue to see energy savings as a clear driver based on the return on the investment that we have conversations with customers. Our air audits are being conducted at a faster pace than ever before, driving strong data points for us moving forward. In terms of reshoring, we see that not only in the U.S. with the reopening of facilities but also in India and China as companies are reallocating their supply chains more locally.
Jeff Sprague, Analyst
And maybe you could give us a little color on service too, Vicente. I would imagine if customers are going through the air audit process that creates quite an opportunity for service and stickier service attachment on the back end. Where are you at now on service as a percent of revenues? And how is that growing?
Vicente Reynal, Chairman and CEO
Yes, absolutely. We see about 70% leading to new equipment, but 30% leading to incremental service revenue. Our North America team is accelerating our Packaged Care solutions, and we're seeing improved momentum in Europe and Asia as well. Connecting more compressors with remote monitoring devices will capture more recurring revenue, and this service opportunity remains a high focus for us.
Jeff Sprague, Analyst
Great. Thank you.
Vicente Reynal, Chairman and CEO
Thank you.
Operator, Operator
And the next question comes from the line of Rob Wertheimer with Melius Research. Your line is open.
Rob Wertheimer, Analyst
Hey, good morning.
Vicente Reynal, Chairman and CEO
Good morning.
Rob Wertheimer, Analyst
Vicente, I think you touched on China, APAC orders and compressors up mid-teens. Is there any particular end market strength in China that's adding to that? I think we've seen China be a drag elsewhere in industrials. And then just in general, I don't know if you can expand on your market position there and the broader efforts you're doing?
Vicente Reynal, Chairman and CEO
Yes, Rob. There are specific end markets strategically that we're pursuing, such as electric vehicles and lithium mining. We're able to pivot based on growth conditions, leveraging the combination of Gardner Denver and Ingersoll Rand products to boost growth in China. The team is performing well and is encouraged by the performance, which is further enabled by our product offerings.
Rob Wertheimer, Analyst
Excellent. Thank you.
Vicente Reynal, Chairman and CEO
Thank you.
Operator, Operator
And the next question comes from the line of Andy Kaplowitz with Citigroup. Your line is open.
Andy Kaplowitz, Analyst
Good morning, everyone.
Vicente Reynal, Chairman and CEO
Hi, Andy.
Andy Kaplowitz, Analyst
Vicente, could you give us a little more color into the dynamics of your compressor order strength in the sense that, I think, historically, you've had 20% cycle versus 80% short cycle. The long cycle business is currently much stronger than short cycle in one end markets. If you could give us some detail or driving the most order growth right now?
Vicente Reynal, Chairman and CEO
Yeah. Andy, I don't see a dramatic change in that split. We still see good momentum across long and short cycle orders. The oil-free product line continues to show growth, which is a main area for us.
Andy Kaplowitz, Analyst
That's helpful. And then Vik, it looks like it's just a tweak, but I think you actually lowered your incremental margin forecast for the year to 35%, despite beating margin in Q2. Could you give us more color into what you're seeing there?
Vik Kini, Chief Financial Officer
Sure. In terms of the last part of your question on the price cost, the back half looks comparable to prior guidance. The margin tweak is a minor adjustment due to increased corporate costs and technology acquisition in Q2 with minimal revenue impact anticipated at this time.
Andy Kaplowitz, Analyst
Appreciate it guys.
Vik Kini, Chief Financial Officer
Thank you.
Operator, Operator
And your next question comes from the line of Nigel Coe with Wolfe Research. Your line is open.
Nigel Coe, Analyst
Good morning.
Vik Kini, Chief Financial Officer
Good morning, Nigel.
Nigel Coe, Analyst
Thanks. Just wanted to maybe just take a different crack at the second half margin question. This feels like the guide doesn't embed much of a kick-up in Q4, and normally 4Q margins are substantially higher on volumes. So just wondering what you’re expecting for Q4?
Vik Kini, Chief Financial Officer
Yeah. Nigel, Q3 is expected to be comparable to Q2, with good year-over-year expansion. For Q4, it's historically the strongest quarter of the year, and we will see a slight seasonal uptick from Q3 to Q4. There is incremental margin expansion included in the Q4 guidance, not dramatically different from previous guidance. Organic volume in Q4 remains the single source of potential upside.
Nigel Coe, Analyst
Okay, that’s reasonable. Regarding vacuum trends, they remain very strong overall. However, I think there was some mention of a slight weakness in industrial vacuum. Are you noticing any signs of weakness in your markets?
Vicente Reynal, Chairman and CEO
Nigel, we have not seen major weaknesses. Our industrial vacuum is performing well. We've been expanding our product offerings, and we're capturing growth through our various technologies, which is important to us as we expand this line.
Nigel Coe, Analyst
That’s great color. Thanks a lot.
Operator, Operator
And the next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is open.
Joe Ritchie, Analyst
Hey, good morning guys.
Vicente Reynal, Chairman and CEO
Good morning, Joe.
Joe Ritchie, Analyst
Vicente, could you give us a little more detail on the order trends and the potential impact of destocking across your channels?
Vicente Reynal, Chairman and CEO
Yes, Joe. Our ITS products are highly customized, making it hard to stock. Our distribution channels don't typically hold much inventory. We track monthly sell-in and sell-out to avoid overstocking, and there hasn't been any material destocking detected.
Joe Ritchie, Analyst
No, that's great. I figured as much, but I had to ask. So that's helpful color, Vicente. And, I guess, the follow-on question really kind of want to maybe dig into this oil-free hydrogen compressor opportunity.
Vicente Reynal, Chairman and CEO
Yes, Joe, this is a very exciting opportunity, and we're now considered a leading company in India for hydrogen compression systems. The market is still early stage, but we're optimistic about our product positioning and the technology we’re developing to serve this market.
Joe Ritchie, Analyst
Awesome. Thanks, guys.
Vicente Reynal, Chairman and CEO
Thanks, Joe.
Operator, Operator
And your next question comes from the line of Chris Snyder with UBS. Your line is open.
Chris Snyder, Analyst
Thank you. So Q2 really showed strength across all three geographies. And I understand that comps are getting a good deal tougher into the back half of the year. But when you look at these three geographies, is there any one or any place where you see demand softening?
Vicente Reynal, Chairman and CEO
I think MQLs are demonstrating continued momentum from Q2. We don't see any significant regions or end markets showing dramatic declines at this stage, though we acknowledge tough comparisons this year.
Chris Snyder, Analyst
I appreciate that. Obviously, with the tough comps, you're trying to sometimes separate like demand from growth.
Vicente Reynal, Chairman and CEO
Correct.
Chris Snyder, Analyst
I appreciate the insights shared. Following up on that, in previous quarters, you mentioned that the backlog would be essentially flat year-on-year by the end of the year. I understand that's still the overall direction, but do you still anticipate not adding any backlog throughout the year?
Vik Kini, Chief Financial Officer
Yeah. Chris, when we came into the year, we did expect backlog to be largely flat as we exit. The book-to-bill being above one in the first half builds backlog, but typically in the second half we see a natural drift down. Our expectations remain largely unchanged at this point.
Chris Snyder, Analyst
Thank you. Appreciate that.
Operator, Operator
And your next question comes from the line of Joe O'Dea with Wells Fargo. Your line is open.
Joe O'Dea, Analyst
Hi. Good morning. Thanks for taking my questions.
Vicente Reynal, Chairman and CEO
Good morning.
Joe O'Dea, Analyst
First, just another one on back half, but the price and volume dynamic within organic. It seems like the way the back half is set up between the quarters, we're looking at pretty similar organic growth, 3Q and 4Q. Just curious, in terms of pricing comps and if we're looking at primarily volume growth in the back half?
Vik Kini, Chief Financial Officer
Yeah, Joe. Q3 will look fairly similar to Q2, but we expect organic growth to be a bit healthier in Q3 than Q4 due to tough comparisons from last year. Pricing is expected to normalize as we lap previous price increases, and we have also slightly increased our volume expectations for the back half.
Joe O'Dea, Analyst
Got it. And then, Vicente, I think your response to Rob's question was interesting on how you identify growth internally and position yourself in advance. So it's not chasing the puck, but just being well-positioned for anticipating that. Can you elaborate on that?
Vicente Reynal, Chairman and CEO
Absolutely. We analyze over 100 micro trends to identify potential growth avenues early. This involves close assessments and engagement with our demand generation team to ensure we’re aligned with emerging market demands. For example, we're focused on lithium battery recycling and other technologies that will create future opportunities for us.
Joe O'Dea, Analyst
Very helpful. Thank you.
Vicente Reynal, Chairman and CEO
You're welcome.
Operator, Operator
And there are no further questions at this time. Mr. Reynal, I'll turn the call back over to you.
Vicente Reynal, Chairman and CEO
Thank you. I just would like to end by thanking and acknowledging again all of our employees for their hard work, helping us to deliver another record quarter in Q2. We're counting on our team to continue to execute our strategies effectively to achieve our financial targets and market performance. These results show the impact that each of you has as owners of the company. Thank you for listening to our call, and we appreciate your continued support.
Operator, Operator
And this concludes today's conference call. You may now disconnect.