Earnings Call Transcript - IR Q3 2023

Operator, Operator

Good morning. My name is Christa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Ingersoll Rand Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I will now turn the conference over to 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 third quarter earnings call. I'm Matthew Fort, Vice President of Investor Relations. And joining me this morning are Vicente Reynal, Chairman and CEO; and Vik Kini, Chief Financial Officer. We issued our earnings release and presentation yesterday, and we will 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 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 start, as we always do, by thanking and acknowledging all of our employees for their hard work in helping us to deliver another record quarter in Q3. Despite the constantly changing macroeconomic environment, our employees continue to deliver on our commitments and consistently exemplify our purpose while thinking and acting like owners. I would also like to welcome our new employees from our recent acquisitions, Oxywise, Fraserwoods, Roots and others. Beginning on Slide 3, fueled by our competitive differentiator, IRX, in the third quarter, we again delivered double-digit growth in revenue, adjusted EBITDA, adjusted EPS and free cash flow. We remain nimble and focused on controlling what we can control and continue to direct our demand generation activities towards high-growth sustainable end markets to accelerate market share gains. Finally, based on our continued robust performance year-to-date, we are once again raising our 2023 full year guidance. As we move to Slide 4, our economic growth engine is the key to delivering compounding annual results. During our last Investor Day in November 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 as outlined on this page. In fact, we have so far exceeded our growth and margin commitments, including an organic orders and revenue CAGR of 12% and margin expansion of 170 basis points per year over the last three years. On the next slide, I will provide you with deeper insights into how we are accelerating organic growth in previously acquired businesses. Turning to Slide 5. Here, we have some examples of how we have driven outsized organic growth and margin expansion from recently acquired M&A. This is a testament to how we compound growth on recently acquired businesses and have examples from both our ITS and PST segments. On the left-hand side of the page, we're highlighting our LeROI acquisition from June of 2017. We acquired this business for a purchase multiple of 11 times by pivoting our end market focus to high-growth, sustainable end markets, offering a complete ecosystem solution and leveraging our commercial footprint we have achieved over 540% growth since the time of acquisition. In addition, our post-tax ROIC is 155% resulting in a 0.5 times post-synergy adjusted EBITDA purchase multiple. Just an impressive result on how and what we can do with technologies once we incorporate them into our IRX process. On the right-hand side of the page is our Air Dimension business, which was acquired in November of 2021, also at an 11 times purchase multiple. Air Dimension serves high-growth sustainable end markets like environmental services. And the team has delivered 27% revenue growth over the last two years by leveraging IRX, rapidly integrating our demand generation process and launching new innovative technologies. And given the outsized growth this business has delivered over the past two years, we're very well on track to exceed our three-year post-tax ROIC target demonstrated by already delivering a post-synergy adjusted EBITDA purchase multiple of 8x. Next, on Slide 6, M&A continues to be at the forefront of our capital allocation strategy to compound value similar to the examples we displayed on the previous slide. We're pleased to highlight two recent closed transactions. With these two acquisitions, we have closed on approximately $190 million of annualized inorganic revenue, which puts us very close to the bottom end of the $200 million to $300 million of annualized inorganic revenue targets we set forth at the beginning of the year, and we have no doubt in our ability to deliver our target this year. Let me walk you through these two recent acquisitions. First, Oxywise, which is based in Slovakia, is a leading provider of on-site oxygen and nitrogen generation systems. This acquisition expands our technology ecosystem with a complementary product to the compressor and increases Ingersoll Rand's broader air treatment capabilities in point-of-use oxygen generation. Next is Fraserwoods, which is a leading provider of aftermarket services for blowers and pumps in the vacuum truck market. This acquisition expands Ingersoll Rand's technical expertise and service capabilities in Western Canada. Our M&A funnel remains very strong. And as of today, it continues to be over five times larger than it was at the time of the RMT. The characteristics of the target in our funnel continue to be bolt-on in nature with the exception of a couple that are approximately $1 billion purchase price. On Slide 7, as highlighted in the middle of the page, we continue to be recognized for our corporate responsibility and we're proud that 3BL Media recently named us as one of the top 100 best corporate citizens in 2023. We're recently ranked in the Top 3% Among the Russell 1000. Being a corporate citizen is part of our high-performance employee ownership culture. Our company purpose of making life better is deeply ingrained into everything we do, including partnerships with community-focused organizations such as the American Heart Association, FeedNC, Drop In The Bucket, and La Escuelita Bilingual Preschool. In addition to striving to be a responsible corporate citizen, we're thrilled to be named Best Companies to Work for in industrials and business service sector, receiving high marks in employee sense of belonging. We believe our employee ownership model drives increased employee engagement. And as a long-term shareholder, it creates economic opportunity for our employees and their families. I will turn now the presentation over to Vik to provide an update on our Q3 financial performance.

Vik Kini, Chief Financial Officer

Thanks Vicente. On Slide 8, fueled by IRX, we again delivered record results in Q3 through a balance of commercial and operational execution. Total company organic revenue increased 6% year-over-year with incremental margins of 38%. Book-to-bill was 0.94x, which was in line with expectations. As a reminder, we typically see book-to-bill above 1 in the first half of the year due to the longer cycle, large project orders received and a book-to-bill below 1 in the second half as those large longer-cycle projects convert into revenue. We remain encouraged by the strength of our backlog, which is up approximately 6% year-over-year. The strength in our backlog provides good visibility and momentum as we move into the fourth quarter of 2023 and begin to look towards 2024. The company delivered third quarter adjusted EBITDA of $462 million, a 23% year-over-year improvement and adjusted EBITDA margins of 26.5%, a 170 basis point year-over-year improvement. It is important to note that these results are closely approaching our long-term targets set forth during our 2021 Investor Day. For the quarter, adjusted diluted earnings per share was $0.77, up 24% versus the prior year. Free cash flow generation for the quarter was $369 million, up 46% versus the prior year. Free cash flow margins for the quarter finished at 21%. Total liquidity at quarter end was $3.2 billion, which was flat compared to the prior quarter. And our net leverage continues to remain near all-time lows. At 0.9 turns, we are 0.1 turns better than both the prior year and prior quarter. Turning to Slide 9. For the total company, Q3 orders declined 2% and revenue increased 13%, both on an FX adjusted basis. Total company adjusted EBITDA increased 23% from the prior year. The ITS segment margin increased 260 basis points, while the PST segment margin improved 120 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 $44 million for the quarter, driven by continued investments to support growth in areas like demand generation and IoT as well as the impact of incentive compensation adjustments. Adjusted diluted earnings per share for the quarter was up 24% to $0.77 per share. This $0.15 year-over-year increase includes a $0.03 headwind from interest expense. And finally, the adjusted tax rate for the quarter was 22%. Moving on to the next slide. Free cash flow for the quarter was $369 million, including CapEx, which totaled $29 million. Total company liquidity was $3.2 billion based on approximately $1.2 billion of cash and $2 billion of availability on our revolving credit facility. Cash outflows for the quarter included $308 million deployed to M&A, largely driven by the acquisition of Roots. We returned $8 million to shareholders in dividends and no share repurchases were made during the third quarter, although we remain committed to our annual share repurchase plan of approximately $250 million for the full year. M&A remains our top priority for capital allocation, and we continue to expect M&A to be our primary usage of cash for the foreseeable future. We continue to have an active and healthy funnel of inorganic growth opportunities. This funnel consists primarily of bolt-on M&A, relatively similar in size, scope and nature to the assets we've acquired over the past two to three years. Turning to Slide 11. As we have always planned, we continue to transform our debt portfolio. After being upgraded to an investment-grade credit rating across all three rating agencies, we refinanced $1.5 billion of secured term loans through the issuance of unsecured investment-grade bonds in the quarter. Our capital structure continues to evolve and is designed to facilitate our capital allocation strategy, and we remain committed to having a fully unsecured investment-grade capital structure in the near future. As a result of this debt portfolio transformation, we have improved our fixed-to-floating ratio to 74% fixed and 26% floating, and our weighted average maturity on debt has moved from four years to six years. Finally, on an annualized basis, our interest expense has been reduced by approximately $20 million. This should deliver an annualized improvement of approximately $0.04 of earnings per share, which will be realized across both 2023 and 2024.

Vicente Reynal, Chairman and CEO

Thanks Vik. On Slide 12, our Industrial Technologies and Services segment delivered strong year-over-year organic revenue growth of 9.5%. Adjusted EBITDA increased 31% year-over-year with adjusted EBITDA margin of 28.8%, up 260 basis points from the prior year, with an incremental margin of 42%. I would like to take a minute to note that these high 20s adjusted EBITDA margins are in line with our 2025 long-term targets set during our Investor Day in 2021. So we're almost two years ahead of schedule in terms of achieving these results. Book-to-bill remains on track and finished in line with expectations at 0.94 times. Consistent with previous guidance, we anticipate a book-to-bill of approximately one times for the year. As a reminder, we typically see a book-to-bill of above 1 in the first half as larger longer-cycle orders are placed and below 1 in the second half as those larger long-cycle orders are shipped. Moving to the product line highlights. Product lines continued to show strong momentum on a two-year stack, excluding FX and also excluding the recent acquisitions of SPX Air Treatment and Roots' blowers. On a two-year stack, compressor orders were up low double digits and revenue was up mid-30s. Industrial Vacuum and Blower orders were up mid-teens and revenue was up low 30s. And the Power Tools and Lifting was up low double digits on both orders and revenue. For additional detail information on product lines and regional splits, we have moved the chart which was previously included on this page to Slide 17 in the appendix. Moving to the innovation in action portion of the slide, we're highlighting a new oil-free compressor, recently launched in North America. This product is a great example of Ingersoll Rand leveraging i2V to deliver new products with best-in-class efficiency. This IIoT ready compressor is 14% more efficient than the previous model, and it is 5% more efficient than the competition. Turning to Slide 13. Revenue in the Precision and Science Technology segment declined 5% mechanically. The decline in orders and revenue were primarily driven by the Life Science business, which continues to experience softness in the oxygen concentration and biopharma end markets. We remain positive about the underlying health of the PST business and short cycle orders in the industrial businesses were positive both sequentially and year-over-year. The increases in the short-cycle business were driven by demand generation activities and lead time reductions. Overall, the PST segment remains on track to meet our long-term Investor Day growth commitments as illustrated on the chart on the bottom left-hand side of the page. The three-year organic order and revenue CAGR of 5% and 7%, respectively, are in line with the long-term Investor Day targets of mid-single-digit plus growth. Additionally, the PST team delivered adjusted EBITDA of $94 million, which is up 2% year-over-year despite declines in revenue. Adjusted EBITDA margin was 30.3%, up 120 basis points year-over-year. The continued year-over-year improvement in our adjusted EBITDA margins is driven primarily by price cost improvements and synergy delivery on acquired businesses. For our PSP innovation in action, we're highlighting our YZ brand partnership with the largest natural gas transmitter in Europe, GRDF. During the second quarter of 2023, we executed a 10-year contract with GRDF to provide mission-critical odorization equipment for renewable natural gas or RNG. We're very excited about this partnership and believe that there are plenty of future growth opportunities as the European Union has committed to replacing 20% of lost Russian gas supply with RNG over the next six to seven years. Moving to Slide 14. Given the year-to-date solid performance and continued momentum from backlog, we're once again raising our 2023 guidance. For the full year, total company revenue is expected to grow between 14% and 16%, which is a 200 basis point improvement versus our previous guidance. We anticipate organic growth of 9% to 11%, where price and volume remains split approximately 60/40. FX is now expected to show a slight headwind of approximately 1% on a full year basis. Our revenue from M&A has increased by $60 million to approximately $360 million for the full year. This increase reflects the impact from all completed and closed M&A transactions as of November 1st, 2023. Corporate costs are planned at $170 million for the year. Total adjusted EBITDA for the company is expected to be in the range of $1.73 billion and $1.77 billion, which is up 2% versus prior guidance and up 9% versus our initial guidance at the midpoint. At the bottom of the table, adjusted EPS is projected to be within the range of $2.81 and $2.89, which is up 21% year-over-year at the midpoint. We're also reaffirming a book-to-bill of approximately one for the full year, which puts us in a solid position as we look to enter 2024. Based on our current full year outlook, backlog will finish at near record level highs, and we will end the year with approximately 40% higher backlog compared to the balance at the end of 2021. As Vik had mentioned earlier on the call, interest expense is now projected at $155 million, with a portion of the interest expense savings from the debt restructuring being realized in 2023. No changes have been made to our guidance on the adjusted tax rate or CapEx spend as a percentage of revenue. They remain in line with both initial and prior guidance. On the bottom right-hand side of the page, we included some additional commentary, specifically around Q4. We do expect organic orders to be positive both sequentially and year-over-year. In addition, we anticipate all organic revenue to be positive in both price and volume year-over-year. Incremental margins are expected to be approximately 35% for both Q4 and the full year. Turning to Slide 15. As we wrap up today's call, I want to reiterate that Ingersoll Rand remains in a strong position, and we're proving how resilient we are even in difficult macro environment. We continue to deliver record results and our updated guidance is reflective of our year-to-date performance and ongoing backlog momentum. To our employees, I want to thank you for another quarter of record results. These results show the impact each of you have as owners of Ingersoll Rand. We will remain focused on our commitment to meeting our financial targets and executing our economic growth engine using IRX. 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 investments with the highest return. We remain nimble and continue to monitor the dynamic market conditions and are prepared for the challenges that may come. With that, I will turn the call back to the operator to open the call up for Q&A.

Operator, Operator

Your first question comes from the line of Mike Halloran from Baird. Please go ahead.

Mike Halloran, Analyst

Hey good morning everyone.

Vicente Reynal, Chairman and CEO

Good morning Mike.

Mike Halloran, Analyst

So, a couple of questions here. First, could you just put the order trajectory and trends in context for us? I certainly understand some of the life science stuff. But when you look at more of the industrial assets you have, why the confidence in the order recoveries as you look to the fourth quarter? Are you seeing any signs of software that points to the portfolio? And how do you think about the underlying momentum of the business as we look in 2024?

Vicente Reynal, Chairman and CEO

Yes, Mike, let me address a few points. As we discussed earlier, the performance in Q3 compared to the previous year was significantly affected by challenging comparisons from last year, as you noted with ITS growing by 16% and PST by 3% in Q2 and Q3 of 2022. Q3 orders met our expectations, and regarding underlying demand, we mentioned that the short cycle business, particularly in the industrial sector, showed sequential growth from Q2 to Q3 and also increased year-over-year in terms of orders. Additionally, in our ITS segment, order momentum in Mainland Europe during Q3 was stronger than in Q2. Overall, we believe the underlying businesses are performing as expected. We also monitor our marketing qualified leads, which show stability and ongoing momentum. Looking ahead to the fourth quarter, our confidence in seeing an increase in orders both sequentially and year-over-year is supported by various data points and the long cycle visibility we have.

Mike Halloran, Analyst

Thanks for that. And then on the M&A side of things, I certainly appreciate all the color you gave on the slide on LOIs and funnel and everything like that. My question more is, have you seen any change in tone with the people you're interacting with from an interest rate perspective, lack of visibility on maybe where the demand picture is? Does that help to hurt the thought process and the conversations? And maybe just some thoughts on the sentiment around the people you're talking to and how you should think about close rates?

Vicente Reynal, Chairman and CEO

Yes, there hasn't been much change, Mike. I can say that the sentiment has been generally positive for us as buyers and acquirers. A significant portion of our mergers and acquisitions is driven by our outreach to many family-owned businesses. The current macro environment seems to be encouraging more owners to contemplate transitioning their multi-generational family companies to a well-established firm like ours. We place a strong emphasis on employee ownership and engagement, which are significant attractions for many of these companies when considering a transition to us. Therefore, we are observing continued strong activity in M&A.

Mike Halloran, Analyst

Great. Really appreciate it. Thank you.

Julian Mitchell, Analyst

Thanks. Good morning. Looking at the fourth quarter guidance, it seems we are expecting mid-single-digit organic sales growth and mid-30s incremental margin. I was wondering, since Q4 likely reflects a more typical pricing and demand environment compared to the last couple of years, should we consider that mid-30s operating leverage as a reliable benchmark for the period after Q4? Additionally, while there may be slightly less pricing next year compared to Q4, is the low to mid-single-digit growth rate a reasonable starting point for sales growth?

Vik Kini, Chief Financial Officer

Yes, Julian, this is Vik. I'll take that one. I think you're spot on both accords. In terms of the operating leverage, we've indicated whether it be Q4 or full year, and we've kind of been holding pretty steady to this, that mid-30s, call it, roughly 35% incrementals range is where we expect to operate in. And that's very consistent with I think where you've seen us historically, ITS maybe slightly on the higher side, but we think a mid-30s range is right kind of where we would expect to play, not just now, but on the go forward as well. And then in terms of the pricing side of the equation, yes, obviously, you've seen much more elevated price realization over the last few years. But quite frankly, you've seen a lot of that now starting to get comped and now you're falling into a much, I'd say, more normalized lower single-digit realm. And we would expect that kind of 1% to 2% net price to be a good proxy as we move into 2024. So yes, I think you're spot on, on both.

Julian Mitchell, Analyst

Thanks very much. And then just my quick follow-up. PST specifically, it can be tricky from the outside to understand the moving parts on the revenue there, and you called out Vicente that the short-cycle industrial bid is pretty good. The biopharma bid is still bad, which everyone else has iterated as well. What's your sort of best view of that biopharma piece from here? And kind of how large is that medical piece now of PST as we exit this year? I think when we look at next year, some people have talked about a V-shape in biopharma. It's not obvious to me why that would happen at all, but just wanted your perspectives.

Vicente Reynal, Chairman and CEO

Certainly, Julian. I want to share a few points as we look at the PST. Excluding the life sciences segment, PST has shown positive organic orders and revenue in 10 out of the last 11 quarters, indicating strong performance in the rest of the PST segment. The life sciences, which comprises about a quarter of PST, has faced challenges, particularly with biopharma and oxygen concentration. Over the past six quarters, the life sciences business has struggled with negative organic order growth, while the non-life sciences segment has performed positively. We acknowledge the difficulties in the life sciences area, but our exposure to biopharma is not substantial compared to our exposure to oxygen concentration. We experienced significant growth in oxygen concentration during the COVID period, but it's since decreased, acting almost as a leading indicator for us. As we approach the fourth quarter and into the first half of next year, we expect to see some improvement, though not in a V-shaped recovery. Nevertheless, we remain positive about the PST's long-term growth, aiming for mid-single-digit increases in organic revenue and order momentum over time. While a V-shaped recovery isn't likely, our limited exposure to biopharma helps mitigate the impact on our overall performance.

Julian Mitchell, Analyst

That’s great. Thank you.

Jeff Sprague, Analyst

Thank you. Good morning everyone.

Vicente Reynal, Chairman and CEO

Morning.

Jeff Sprague, Analyst

Hey Vicente, maybe elaborate a little bit on kind of this visibility on long-cycle orders that you mentioned in Q4. And kind of the spirit of my question is, we've heard from a few companies this earnings season, electrical companies, HVAC companies that kind of the mega project pipeline is building and becoming more visible. But there haven't been a lot of orders booked yet, and they're just starting to kind of come into kind of the booking cycle. Are you seeing any of that sort of dynamic? Or maybe, if not, maybe share a little bit more color on kind of the nature of the long-cycle orders you are starting to see come into view?

Vicente Reynal, Chairman and CEO

Yes, I think Jeff, that's exactly what I was trying to refer to there is that we're seeing definitely before if you remember a few quarters or even last year, we spoke a lot about a lot of these kind of large projects that were being in conversations. And now we're seeing definitely the release of some of those funds. And so yes, so that's what's giving us a bit of a higher level of confidence in terms of how the long cycle funnel continues to build in a company that gives us a good level of visibility, I'll say, not only Q4 but also as we go into 2024.

Jeff Sprague, Analyst

And then I think it was Vik, maybe it was you talking about deals saying there's a couple of billion dollar things in the pipeline. It sounds like you expect bolt-ons most likely, which would be, I guess, natural. But maybe kind of a little bit of color on what's going on in the bigger deals and the likelihood of getting something done in that size range?

Vicente Reynal, Chairman and CEO

Yes, that's correct. We mentioned during the call that our deal pipeline remains strong, primarily consisting of bolt-on acquisitions, though there are a few with a purchase price exceeding $1 billion. These align well with our M&A strategy. It's important not to consider this as a separate aspect of the company. Due to competitive factors, we won’t delve into too many specifics, but we feel confident about our position, particularly from a balance sheet perspective, with a net debt to adjusted EBITDA ratio of less than one times. This gives us a solid foundation to proceed with this transaction. We're very enthusiastic about the ongoing development of our M&A pipeline and our ability to execute over the next couple of quarters.

Jeff Sprague, Analyst

Great. Thanks for the color.

Andy Kaplowitz, Analyst

Hey, good morning everyone.

Vicente Reynal, Chairman and CEO

Morning.

Andy Kaplowitz, Analyst

Vicente, can you give us more color on what you're seeing by geography? I think you've been very active in really generating market share gains in your own demand in regions such as China and Europe. Are you confident for instance, that Chinese compressor growth will remain positive? And obviously, I think EMEIA compressor orders turned down, but I don't think you have big exposure to Germany, but how are you thinking about EMEIA as well?

Vicente Reynal, Chairman and CEO

Sure, Andy. So first of all, on the Chinese compressor, I mean, clearly, not surprisingly, the overall China market has continued to be, I'll say, choppy and soft; however, you saw how we deliver. The team in Asia-Pacific, and particularly in China, again, demonstrated one more time, another quarter of kind of growth organically in the compressor side from an orders and revenue perspective, which speaks to the continued self-help that the team is driving and leading relative to the overall performance in the market, and we'll clearly share more examples of that as we head into the Investor Day. I'll say in Europe, no significant changes in demand. I mean MQL activities remain solid. We continue to focus on our own demand generation for high-growth sustainable end markets, our economic engine is working. And as I made in the remarks, I mean, we saw even orders sequentially in Mainland Europe come for the compressor side actually grew sequentially Q2 to Q3. So that gives us continued encouragement that, again, these self-help initiatives are working. And this kind of year-over-year tough comps is one that we're just not worried about, as we see the underlying demand continue based on the self-help.

Andy Kaplowitz, Analyst

Vicente, to follow up on that, as the environment normalizes and interest rates in the US have increased, how do customers weigh the higher cost of financing against your ability to offer energy efficiency and sustainability? Is that still more important to them than the increased costs?

Vicente Reynal, Chairman and CEO

It's all about the return on investment and payback. As customers prioritize capital expenditures going into 2024 and beyond, ROI becomes crucial. Internally, we follow the same approach. Energy savings and efficiency are key topics, even at the executive level, as customers seek ways to achieve significant payback. Our sales team emphasizes total cost of ownership and ROI in their discussions.

Andy Kaplowitz, Analyst

Appreciate it.

Chris Snyder, Analyst

Thank you. I wanted to ask about the fourth quarter. The guidance indicates a wide range of potential outcomes in organic growth, anywhere from a decrease of 1% to an increase of 6% by my calculations. Could you discuss some of the factors that would influence the range of outcomes from the high end to the low end? Thank you.

Vik Kini, Chief Financial Officer

Certainly, Chris. What I can say is that we see it as a tighter spread than that. If I break it down by the two components and consider the year-over-year guidance, we do anticipate positive organic growth in both segments, starting with the ITS side. The guidance suggests around 3% organic growth year-over-year. Taking into account the pricing momentum and the expectation of organic volume growth, you can think of it as approximately two-thirds from price and one-third from volume. I would reiterate what we've mentioned throughout the year: if there's an opportunity for upside in the current guidance and as we approach Q4, it would primarily be on the organic volume side, particularly for ITS, where the backlog remains at record levels. Regarding the PST side, we continue to expect positive organic growth, likely benefiting from a more significant pricing advantage compared to ITS. This shift can be attributed to our observations over the last couple of years, as ITS experienced pricing increases earlier than PST, which now appears to have a more sustained pricing tailwind. Overall, we anticipate positive growth on both sides, aligning with the midpoint of our guidance as mentioned in our prepared remarks.

Chris Snyder, Analyst

Thank you for that. Really, really helpful. Maybe for my follow-up, just on prior commentary around the expecting sequential order improvement into Q4, it doesn't really seem like that's seasonal. It seems like typically, Q4s are similar to Q3, if not lower. So, should we take that? Is that just around timing of some of these bigger projects coming through? Or is that a signal of demand is at least stabilizing, if not improving? Thank you.

Vik Kini, Chief Financial Officer

Yes, I would say it's likely a combination of both factors. Looking back to last year, we noted that Q3 represented a peak in orders, particularly for some of the longer-cycle and biogas projects, which created a challenging comparison. As we pointed out last year, we anticipated a more normalized order pattern in Q4 compared to Q3. Now, we're seeing the opposite scenario. Q3 posed difficult comparisons that we acknowledged and observed. As we approach Q3 to Q4, we expect a mix of consistent and stable marketing qualified leads, stable demand patterns, and the longer-cycle dynamics that Vicente mentioned. This positions us for the positive trajectory we expect between Q3 and Q4, as well as on a year-over-year basis. Some seasonality may be more pronounced on the ITS side, but recent years haven't shown such clear seasonality. Overall, I wouldn't highlight any dramatic seasonal effects this year, whether in ITS or PST.

Nathan Jones, Analyst

Thank you. This is Adam Farley on for Nathan. My first question is on channel inventory. What, if any, impact of channel inventory correction having on your business?

Vicente Reynal, Chairman and CEO

Yes, Adam, I would say that due to the highly customized nature of our products, there is really no significant risk regarding the destocking that benefits the ITS segment. For the PST segment, particularly in businesses that sell through distribution, we closely monitor the sell-in and sell-through activities to prevent our customers from becoming overstocked. We have been managing this for quite some time and have gathered data over the past five years to maintain a clear understanding of the distribution channel dynamics.

Adam Farley, Analyst

Okay, that makes sense. And then on my follow-up, the Power Tools and Lifting business continues to show really solid growth. That business has really improved under your ownership. So, what's driving the strength there? And I believe that business has been considered noncore in the past. So, maybe could you provide an update on, are you thinking about the portfolio and the potential for portfolio rationalization?

Vicente Reynal, Chairman and CEO

Sure. So you're absolutely right that the PTL business has really done incredibly well. And to point out, when we acquired Ingersoll Rand, PTL came in with mid-teens EBITDA margin and now it's pretty close to that ITS kind of blended average kind of getting to that point. So great improvement while still growing the business. The real nature of a lot of this performance has really been new product introduction. So, the team has done a really great job of reinvigorating new product. And I think the exciting piece here is that as we look into 2024, they're going to be launching a next-generation set of tools as well as lifting mechanisms that we think could continue to see some good performance.

Adam Farley, Analyst

Thank you for taking my questions.

Operator, Operator

And we have no further questions in the queue at this time. I will turn the call back over to Vicente for closing remarks.

Vicente Reynal, Chairman and CEO

Great. Thanks, everyone, for your level of interest. And as we said on the call, I want to thank, again, all of our 20,000 employees across Ingersoll Rand who are owners of Ingersoll Rand, and have a great performance here as we kind of close the year and as we go into 2024. So, thanks again for the interest and look forward to catching up with many of you. Thank you, thank you, everybody.

Operator, Operator

This concludes today's conference call. Thank you for your participation and you may now disconnect.