Earnings Call Transcript - IR Q1 2025

Operator, Operator

Hello, and welcome to the Ingersoll Rand Q1 2025 Earnings Call. All lines have been muted to avoid any background noise. Following the speakers' comments, we will have a question-and-answer session. I would now like to turn the conference 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 2025 first quarter earnings call. I'm Matthew Fort, Vice President of Investor Relations. 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 risks and uncertainties as 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. Starting on Slide 3, we're off to a strong start in Q1, as we delivered 10% total order growth with a book-to-bill of 1.1 times. Additionally, organic orders increased by 3.3% and we delivered a record Q1 free cash flow of $223 million. We remain encouraged as April orders continue to show stability finishing in line with expectations. We continue to focus on controlling what we can control, staying agile and leveraging IRX to offset all known tariff impacts. On Slide 4, I want to spend a minute highlighting why in this current environment, our in-region-for-region footprint provides us with a competitive advantage. We have built a footprint that allows us to serve our customers with a wide range of technologies via an in-region-for-region model. This, in combination with our proprietary demand generation tool, has positioned us very well to take market share in this environment by serving our customers locally with technologies and solutions that offer the highest ROI. Turning to Slide 5. Our durable financial profile combined with our strong cash flow generation provides us with multiple levers to drive value creation. Our capital allocation strategy remains unchanged with M&A continuing to be our top priority. As a reminder, our M&A strategy is centered around making smaller bolt-on acquisitions that complement existing technologies. With a highly fragmented addressable market of approximately $57 billion, we believe there are still plenty of opportunities for bolt-on acquisitions across all of our businesses. Our nine deals currently under LOI and more than 200 companies currently in the acquisition funnel are largely centered around these smaller bolt-on acquisitions, which are mainly in-region-for-region and are also primarily internally sourced. As part of our balanced capital allocation strategy, our Board has authorized an additional $1 billion of share repurchases, bringing our total value authorization to $2 billion. This provides us with optionality for opportunistic share repurchases over the short and medium term. We remain confident in our long-term value creation and we'll leverage our strong cash flow generation to continue our focus on bolt-on acquisitions as well as share buybacks. At this point in time, we're expecting to execute up to $750 million of share repurchases by the end of 2025. Even with this accelerated share repurchase activity, we continue to be committed to our expected 400 to 500 basis points of annualized inorganic revenue to be acquired in 2025. Moving to the next page. We're highlighting two additional transactions that were closed during the month of April. Bolt-on in nature, these acquisitions expand our capabilities in core technologies, focusing on high-growth, sustainable end markets. With both acquisitions at nine times or less pre-synergy adjusted EBITDA purchase multiple, we continue to demonstrate our disciplined approach to M&A and expect to meet a mid-teens ROIC for both deals by the end of the third year of ownership. We're off to a strong start towards achieving our 2025 annualized inorganic revenue target with six transactions already closed this year at a weighted average purchase multiple of approximately nine times. I will now turn the presentation over to Vik to provide an update on our Q1 financial performance.

Vik Kini, Chief Financial Officer

Thanks, Vicente. Starting on slide 7. Organic orders got off to a strong start, up 3.3% year-over-year with a book-to-bill of 1.10. We were pleased with the organic order performance across both segments, specifically within ITS, which saw organic order growth within all three regions. Aftermarket revenue finished at 38% of total revenue, which was up 110 basis points year-over-year. The 6% growth in aftermarket revenue underscores the focused efforts and progress we continue to make on aftermarket and recurring revenue. The first quarter finished largely in line with expectations for revenue, adjusted EBITDA, and adjusted EPS. It's important to note that approximately $15 million in revenue initially anticipated to be recognized within the first quarter has been deferred to the second quarter due in large part to customer requests. Additionally, we continue to make requisite investments for growth in the business, which did impact our year-over-year margin profile. The company delivered first-quarter adjusted EBITDA of $460 million, with an adjusted EBITDA margin of 26.8%. Adjusted earnings per share was $0.72 for the quarter and free cash flow for the quarter was a Q1 record of $223 million. Total liquidity was $4.2 billion with a net leverage of 1.6 times, demonstrating the tremendous strength of our balance sheet, which we believe enables value creation optionality in volatile environments like the one we are currently facing. Turning to slide 8. For the company, total Q1 orders were up 10% and revenue increased by 3%. Book-to-bill for the quarter was a robust 1.10 times, showing great momentum. And total company adjusted EBITDA was flat compared to the prior year. Corporate costs came in at $36 million for the quarter. And finally, adjusted EPS for the quarter finished at $0.72 per share, including a Q1 adjusted tax rate of 22.6%. On the next slide, free cash flow for the quarter was $223 million, including CapEx, which totaled $34 million. Total liquidity now stands at $4.2 billion based on approximately $1.6 billion of cash and $2.6 billion of availability on our revolving credit facility. As Vicente mentioned earlier, we are off to a strong start towards realizing our 2025 commitment of 400 to 500 basis points of annualized inorganic revenue acquired in 2025. Leverage for the quarter was 1.6 turns, which was a 0.9 turn increase year-over-year and flat sequentially versus Q4 2024. As a reminder, the year-over-year increase in leverage was driven primarily due to the purchase of ILC Dover in June of the prior year. Specifically, within the quarter, cash outflows included $163 million deployed to M&A, as well as $18 million returned to shareholders through $10 million in share repurchases and $8 million for our dividend payment. I'll now turn the call back to Vicente to discuss our segment results.

Vicente Reynal, Chairman and CEO

Thanks, Vik. On Slide 10, first quarter orders for ITS finished up 6% year-over-year, with a book-to-bill of 1.1 times. Organic orders grew 3.5%. It's important to note that we saw organic order growth across all regions, including Asia Pacific, and we remain encouraged by the market activity we're seeing in China. Revenue finished down 2%. We continue to be encouraged by the growth in recurring revenue, which was up double digits year-over-year. Adjusted EBITDA margin declined year-over-year, driven by the flow-through of organic volume, the expected dilutive impact from recently acquired companies and continued commercial investments for growth in the business. Moving to the product line highlights. Compressor organic orders were up mid-single digits. Industrial vacuum and blower organic orders were up low single digits. And power tools and lifting organic orders were up low single digits. Highlighted here in our innovation to action section is an example of our Innovate 2 Value process or I2V. The North American compressor team harmonized core components across multiple offerings of our oil-lubricated products, driving a 23% reduction in total cost. This is one example of how we continue to see gross margin improvement opportunities even with technologies that have been in our portfolio for a while. Turning to Slide 11. Q1 orders in PST were up 28% year-over-year and up mid-single digits sequentially from Q4 '24 to Q1 '25. Organic orders finished up 3%, and it is important to note that we saw organic orders growth in both the Precision Technologies and Life Science businesses. Revenue finished up 23% year-over-year driven by M&A and finished down 3% organically. PST delivered adjusted EBITDA of $106 million, which was up approximately 16% year-over-year with a margin of 29.1%. Adjusted EBITDA margins improved 150 basis points sequentially and finished in line with expectations. For PST innovation in action, we're highlighting a great I2V solution for progressive cavity pumps. This new solution optimizes the maintenance process for the replacement of key consumable components, reducing critical downtime for our customers and improving margins by 10%. As a reminder, Seepex was a company we acquired with mid-teens EBITDA margin, and in less than 3 years, we improved that to the PST fleet average. As you can see from this example, we continue to find ways to increase value both for the customer and for the financial profile of the business. As we move to Slide 12, I wanted to provide an update to the potential tariff impact on our business and how we're mitigating it. Starting on the left side of the slide, based on announced tariff rates, our in-year exposure for tariffs is approximately $150 million. You can see the tariff rates outlined on the slide. And it is worth noting that the approximate $150 million estimate also includes the secondary impact of tariffs, which refers to price increases we're anticipating largely from our domestic US suppliers, who are procuring components from outside the US. On the right-hand side of the page, we're showing the mitigation actions that we have currently deployed and which are well underway. First, with pricing actions, we have taken a multistep approach with list price actions across our impacted businesses put in place as of April 1st, followed by targeted surcharges effective the week of May 1st. Based on these pricing actions, we expect to offset the impact of tariffs one-for-one. In addition to pricing actions, we have launched a tariff war room to operationalize our tiered supply chain mitigation plan. These include operational and/or routing changes at Ingersoll Rand manufacturing locations, supply chain relocation of existing supplier production to alternative manufacturing locations, and leveraging the global supply base to source from new suppliers. It is worth noting that many of these actions will take some time to fully implement. So, we're not expecting a material impact from these actions in the year, but we'll continue to utilize IRX to drive these actions to completion in an accelerated manner. On Slide 13, regarding our current guidance, we decided to take a prudent view by maintaining total revenue consistent with prior guidance despite the tailwinds we're seeing from a strong start in organic orders through April, incremental pricing actions to mitigate the impact of tariffs, foreign exchange tailwinds, and incremental revenue from recently completed acquisitions. To maintain total revenue, we're including a contingency in organic volume as outlined on the table. We're taking that contingency in volume at normal flow-through, which creates a change in adjusted EBITDA and adjusted EPS also shown in the table. 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. Finally, our guidance does not include the impact of any anticipated share repurchases we spoke about or incremental M&A, which we expect to complete over the balance of the year. At the bottom of the slide, we have also added commentary regarding the current market indicators we track, which continue to show good signs. MQLs were up double digits in Q1 2025 and remained strong in April. Large loan cycle funnel activity continues to be robust, with projects continuing to progress through the decision-making process, and April orders have continued to show stability in line with expectations. While we are operating in a dynamic environment, business conditions remain solid, and we're encouraged by the organic order growth we saw in Q1 and the continued momentum we have seen in April. We're focused on controlling what we can control and our teams continue to execute very well. We remain committed to leveraging our robust balance sheet to strategically deploy capital and drive value for our shareholders. Finally, on Slide 14, as we wrap up this portion of the call, I would like to highlight that we remain nimble but are prepared to pivot in what continues to be a dynamic global market environment. We will continue to leverage our robust global in-region-for-region manufacturing capabilities and pivot towards opportunistic end markets, remaining aggressive and focused on taking share regardless of the macro conditions. We have multiple levers to deliver shareholder value, which differentiates Ingersoll Rand as an investment. To our employees, I want to thank again for your part in delivering another strong quarter. Stay focused on controlling what we 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

Thank you. Your first question comes from Mike Halloran with Baird. Your line is open.

Mike Halloran, Analyst

Hey, good morning, everyone.

Vicente Reynal, Chairman and CEO

Good morning, Mike.

Vik Kini, Chief Financial Officer

Good morning, Mike.

Mike Halloran, Analyst

So the last comments on the guide. I just want to make sure we're all on the same page here. Essentially, could you bridge previous guide to current guide? It seems like you are taking the organic volume assumptions down, but it's more precautionary as opposed to anything you're seeing today from an order trend backlog, et cetera. And so maybe you could just break that out on how you're thinking about the volume, price, confirm the precautionary FX and just kind of walk through those moving pieces?

Vicente Reynal, Chairman and CEO

You're right, Mike. We consider it a precautionary measure. We decided to keep the total revenue guidance consistent with the previous forecast. Although we could have increased it due to a 2% rise in tariff pricing and other factors like foreign exchange and mergers and acquisitions, we thought it was more prudent not to raise the revenue guidance given the current environment. Consequently, we adjusted our organic volume estimate down by 4%, which we believe reflects a careful approach and helps mitigate risks while maintaining the total revenue guideline.

Mike Halloran, Analyst

Helpful. And then a twofold question. Can you just talk to any nuance you're seeing on the short-cycle businesses versus the long-cycle businesses, more on the ITS side there? And then on the PST side, you've had positive orders for, what, four quarters or so now. At what point does that turn to positive organic growth on the revenue-wise?

Vicente Reynal, Chairman and CEO

In terms of the short-term cycle, we observed a positive balance in both areas. We've mentioned that MQLs have been up significantly for a few quarters, but decision-making has been taking longer. In the previous quarter, we indicated that we weren't seeing any canceled orders or potential leads in the funnel; it's just taking a bit longer. We're still seeing good momentum in processing those orders. Both MQLs and long-cycle projects are showing positive trends. In the first quarter and through April, MQLs have continued to perform well, and the long-cycle is also strong, not only in total size but in the number of projects we are adding.

Vik Kini, Chief Financial Officer

Yeah. Hey, Mike, this is Vik. So yeah, I think first of all, to your point, I think similarly, we're encouraged by the momentum we've been seeing on the PST side. A couple of comments I think we made in the upfront comments here that we did see organic growth on both components of PST, so both the Precision Technology side as well as the Life Sciences. So that Life Sciences is really referring to the piece of that, that's organic, is the legacy, what we call the medical business. So obviously, that has had probably the most challenging comps for a period of time. I don't think we'd say we've seen necessarily an inflection point fully yet, but we are encouraged that we're seeing a little bit of a return to organic growth. So I think we're encouraged here about what we're seeing going forward. And that will lead to better growth momentum as we move particularly into the back half of the year, which should also help the margin profile as well.

Mike Halloran, Analyst

Really appreciate it, guys. Thanks for all the help.

Vik Kini, Chief Financial Officer

Thank you.

Operator, Operator

The next question comes from Julian Mitchell with Barclays. Your line is open.

Julian Mitchell, Analyst

Yes. Good morning. Just wanted to start with the organic growth outlook. So as you said, it seems like trends year-to-date in orders have been as you thought. There's some sales sort of moving around as normal. But when we're looking at the sort of seasonality of revenue this year, maybe help us understand how the quarterly organic sales are expected to progress. Anything abnormal seasonality-wise, and what sort of exit rate for the year does your guidance embed on organic sales?

Vik Kini, Chief Financial Officer

Yeah, Julian, let me maybe kind of take that in two pieces, including also just talking about maybe half one, half two, probably is the right way to frame that up. So first and foremost, I do think that from a seasonality perspective, when you think about either a percentage of revenue or a percentage of earnings first half or second half, very comparable to what you've seen historically, not being really out of sorts from that perspective. I think when you think about the moving components, and I'll probably answer your question here in terms of the organic. First and foremost, we do expect, obviously, organic growth trends to improve moving into the back half of the year compared to the first half of the year. So I would think about the first half of the year as from an organic perspective in total being down approximately 3% to 4%, with price contributing approximately 2% of growth, including, I would say, the beginning of some of the tariff-related pricing actions here in the April and May timeframe. As you move to the second half of the year, we're expecting to be up approximately 3% to 4% total organic, with organic volume expected to be down low single digits and the balance coming from full run rate of pricing, including the tariff-related pricing actions. So that can kind of help frame it up, including the pricing and volume components. It is worth noting here that the comps in the back half of the year do moderate a bit, which does help with that comparison point.

Julian Mitchell, Analyst

That's helpful. Thank you, Vik. And then just my follow-up would be looking at the EBITDA margins, those were down slightly year-on-year in the first quarter. I think the guide for the year, they're sort of flattish overall. So maybe help us understand kind of any effects on the margin rate from tariffs as we go through the balance of the year? And should we expect sort of margins to just be up a bit in each of the remaining three quarters year-on-year?

Vik Kini, Chief Financial Officer

Yes, Julian, I think it's fair to say that you're correct. The overall projection for the year suggests it will be relatively stable. You'll likely see that reflected in ITS, with a slightly better performance from PST. The main factor at play is the tariff pricing, where we're implementing price adjustments that match the tariff costs dollar for dollar, which is roughly estimated at $150 million for both pricing and costs. This approach results in no net impact on cash flow or margins, which could be seen as dilutive to our overall results. That's the primary element influencing us. When we consider other factors, such as productivity and standard pricing strategies, we are feeling quite confident, consistent with our historical performance. Regarding the quarterly outlook, while there are some variables, we anticipate it will generally align with our flat expectations from Q2 to Q4.

Julian Mitchell, Analyst

Great. Thank you.

Operator, Operator

Your next question comes from Jeff Sprague with Vertical Research Partners. Your line is open.

Jeff Sprague, Analyst

Thank you, good morning everyone. I'm a bit late. Regarding tariffs, Vicente, when you were explaining the hedges in the guide, you mentioned that the tariff impact is about 2% of sales. It seems you are not planning to pass the entire amount onto prices. Could you provide more details on how much of that will be absorbed through pricing versus cost adjustments or other sourcing measures to mitigate this gross figure?

Vicente Reynal, Chairman and CEO

Yes, Jeff, I think we have a solid strategy in place regarding pricing and surcharges. Everything we implemented on April 1 was entirely focused on price. The changes we made on May 1 struck a balance between price adjustments and surcharges. This approach gives us the flexibility we need as we enter the second half of the year and gain better insight into the surcharges and which elements will remain in effect. Additionally, I want to highlight that typically, when we raise prices, those increases tend to stay in place. We have been very disciplined about not discounting after a price increase. It's also worth noting that many tariffs currently do not account for significant cost-saving measures we are exploring. We are actively working on various strategies for cost mitigation, including supply chain optimization, relocalization, and transferring products between factories. Our extensive global footprint allows us to move products between facilities as needed. While these efforts are not reflected in our guidance, we are consistently focused on finding ways to reduce costs.

Jeff Sprague, Analyst

Yes, great. No, that's what I was sort of getting at. So yes, the plan is all priced, but you're obviously doing a lot of other stuff. Could you also just speak to the China business, specifically, China for China, kind of the tone of demand that you're seeing there and sort of any evidence of backlash against US companies or anything of that nature?

Vicente Reynal, Chairman and CEO

Jeff, actually I'll say I was with the China team a couple of times already this year. The team continues to be fairly optimistic about what could happen this year based on some of the push that the government seems to be doing now for China, and how everything that we do in China really stays in China. We’re kind of being viewed as a very local company in China for China. So things seem to be very stable. Clearly, throughout the quarter, we saw better improvements. Still for the year, we're predicting that China is going to be materially down, it's kind of what we imply in our guide. But we're encouraged by what we're seeing and how our teams continue to really accelerate the process of localization and also gain market share with new technologies and products such as blowers and vacuums. Also highlight, as well, Jeff, you heard us talk a lot about how outside of China, we have put a lot of attention on how to accelerate our share or market share, which is underpenetrated. Pleased to say that, obviously, overall, within the ITS, we saw Asia Pacific up organically in orders. That speaks to the fact that we continue to see good momentum outside of China with the organic investment initiatives that we have done outside of China. That remains a good encouragement to offset any potential softness that China may continue to see throughout the rest of the year. But again, in China, I would say we're encouraged and see no negative retaliatory gestures from customers against us.

Jeff Sprague, Analyst

Thank you for that. I'll leave it there.

Vicente Reynal, Chairman and CEO

Yes.

Operator, Operator

The next question comes from Rob Wertheimer with Melius Research. Your line is open.

Rob Wertheimer, Analyst

Thank you. I'm curious how you think about acquisitions, your desire to close, how conversations changed just given obviously, there's more uncertainty that you reflected in your own guidance? Do you assume a safety factor and are willing to go forward? Or what is the outlook for kind of closing deals in the year? Thanks.

Vicente Reynal, Chairman and CEO

Yes, Rob, I'll say it continues to be a very strong formal that we have on the M&A, and you have seen that we have closed quite a few transactions here in the year already. So we're off to a very good start. As you have seen us do, we're very focused on bolt-on acquisitions. We're very disciplined with price. You can see that the last two that we mentioned here, roughly nine times pre-synergy multiple, with the expectation that on a post-synergy, we can lower that to another three turns. So very good return on those investments that we're making there. I'd also highlight that our funnel is consistent with what we have always done before, which is sole source. We go to family-owned companies. Moments like this, in this macro environment provides a lot of uncertainty to those multi-generation families and also provides a good opportunity for us to continue to emphasize how we're a good home for those acquisitions. Clearly, in the financial diligence, we do a lot of work to understand if the macro is making changes or not, and we're being prudent on how we kind of that right in the model to create that ROIC. The last two points I'll say are, a lot of these acquisitions are very in-region for-region, which obviously proves again a very good concept in this environment. The last point I'll say, Rob, is that a lot of these multi-generation companies, they are encouraged to come to us because of our ownership model. Regardless of the macro environment, they view us as a great home for transitioning their legacy, especially the way we treat employees and how the long-term ownership of having those employees be part owners of the company.

Rob Wertheimer, Analyst

Thank you.

Vicente Reynal, Chairman and CEO

Thank you, Rob.

Operator, Operator

The next question comes from Andrew Kaplowitz with Citigroup. Your line is open.

Andrew Kaplowitz, Analyst

Hey, good morning, everyone.

Vicente Reynal, Chairman and CEO

Good morning, Andy.

Andrew Kaplowitz, Analyst

Vicente or Vik, book-to-bill over one-time as you said, which was strong and still strong in April. And I know you said your MQLs remain strong. So maybe you could talk about your order expectations for the year. This year end up actually being normal for you where book-to-bill stays over one-time in Q2 and you end up booking book-to-bill at/or above one for 2025?

Vik Kini, Chief Financial Officer

Yeah, Andy, this is Vik. Maybe I'll take that one. Obviously, we're not going to necessarily try to guide on orders. I think what we'll say is this. One, encouraged by the momentum we saw in Q1. Worth noting that a good balance between both what we'll call short- to medium-cycle products, as well as longer cycle activity. I think it speaks to a lot of what we've been talking about even in prior quarters that MQL activity has remained healthy. We've been seeing that, I'd say, funnel activity and were just waiting for some of those longer cycle projects to get to the finish line, if you will, in terms of the PO. So we're encouraged that we saw a nice balance of that. Right now, listen, our expectation is that we're not expecting to see dramatic changes from what we've seen historically in terms of book-to-bills from a seasonal perspective and things of that nature. That's the best view we have at this point in time just given the macro environment.

Andrew Kaplowitz, Analyst

That's helpful, Vik. And then Vicente or Vik, can you talk about the Q1 margin performance in the segments? I know you got hit with operating deleverage in ITS, given the $15 million moving to the right, as you said. But if I look over the last couple of quarters, margins at least versus high expectations have been a bit choppier. And we know your acquisition activities continue to be robust. So is there anything to read into here that acquisition noise and margins are a little higher these days? Is there anything you could do to mitigate that noise?

Vicente Reynal, Chairman and CEO

Yeah, Andy. Let me start on kind of maybe the ITS and just remind everyone that Q1 2024, the ITS EBITDA margins were really strong. I mean there were 29.9% in the first quarter of last year, which was up 370 basis points. So still, when you look at a two-year stack, like Q1 2024 and Q1 2025, we're still up 260 basis points, which we're very pleased with what the teams continue to do, including obviously, bringing new M&As in also, as you said, some of the deleveraging because of the organic decline. So we continue to be very pleased with how the teams continue to execute within the ITS. And to your point, I mean, there's still plenty of runway for us to improve. You saw the great example that we gave in the slide of the ITS, how even on very kind of core technologies that have been with us for quite some time, we're still finding ways with the use of innovative value to really consolidate those product lines and still save. I think it was like a 23% improvement in the bill of material cost of that specific product line. We're encouraged; we continue to see tremendous runway. We spoke a lot about how recurring revenue and things like that will also improve the margin profile of the ITS. On the PST segment, you saw sequentially great improvement, 150 basis points from Q4 to Q1. We continue to be very pleased with what we see on what it was kind of that legacy PST, now called Precision Technologies, they continue to see some very good improvements, and also the operational improvements that we saw on the ILC Dover business on a sequential basis from Q4 to Q1. Everything seems to be moving along with expectations. Clearly, there is still plenty of runway for us to see improvement on both segments.

Andrew Kaplowitz, Analyst

Appreciate the color, Vicente.

Vicente Reynal, Chairman and CEO

Thank you.

Operator, Operator

The next question comes from Nigel Coe with Wolfe Research. Your line is open.

Nigel Coe, Analyst

Thanks. Good morning, guys. Just wanted to maybe sharpen update the 2Q kind of thinking here. You said previously, I think, 46%, 54% on EBITDA, but obviously, a lot of change since February. So, are we still on that sort of 46% phasing for the first half, Vik?

Vik Kini, Chief Financial Officer

Yes, I think you're still very much right in line with that expectation.

Nigel Coe, Analyst

So, about $505 million of EBITDA, $0.80 of EPS, in that kind of zone?

Vik Kini, Chief Financial Officer

You're in the right ballpark, Nigel.

Nigel Coe, Analyst

Okay. Fair enough, fair enough. That's helpful. And then a big picture question, I think, maybe for you, Vicente. I mean the services growth, the aftermarket growth of 6% is really encouraging and shows resilience of that franchise. But that sort of backs into equipment down close to 10%, 9% to 10%, I think, is the number. That feels recessionary. So, I understand there was some push from Q1 to Q2, but any sort of perspective you have on the cycle would be pretty helpful?

Vicente Reynal, Chairman and CEO

I'd say, Nigel, keep in mind that we're putting a big effort on the recurring revenue that we said that recurring revenue is kind of up double-digit. I think we still feel fairly good on the overall compressor product portfolio. As you saw where the compressors, blowers, and vacuum technologies, and even included in the power tools, we continue to see positive good order organic momentum. We do analyze a lot of the data that we get from associations, particularly here in the U.S., which continues to show that we're holding to taking share. We remain encouraged. We have an amazing installed base of core equipment. It's very important for us to start connecting a lot of that, which we are very focused on. In addition to that, we continue to see more equipment across the world. So, nothing that it is concerning here to us.

Nigel Coe, Analyst

Okay. Thanks a lot.

Operator, Operator

The next question is from Joe Ritchie of Goldman Sachs. Your line is open.

Joe Ritchie, Analyst

Hey guys. Good morning.

Vicente Reynal, Chairman and CEO

Morning Joe.

Joe Ritchie, Analyst

Hey, just tackling this new guidance from a little bit of a different angle. So, if I take a look at the kind of midpoint of your EBITDA for the year, it's like $2.1 billion. It feels like we can get there just from your completed M&A. So, I want to make sure that I've got that straight. And then like all else being equal, it really isn't much baked in for the rest of the business?

Vik Kini, Chief Financial Officer

Yes, Joe, let me take that one. Obviously, with regards to the M&A that we have completed, we sized that in the earnings at approximately $330 million, which I think is a relatively normal flow-through as you would expect for things that are completed kind of year one. As far as the other moving parts, remember, with the organic volume adjustments we talked about and pricing, a meaningful component, which comes through at 0 margin, it's a little bit atypical compared to prior years, but we think, as we said, kind of prudent given what we're seeing. Again, are you far off the mark in the kind of the moving parts? No, I don't think so in that respect. But I would say that the composition of the growth elements, particularly the zero flow-through on tariff pricing is probably the unique aspect of this year compared to years past.

Joe Ritchie, Analyst

Okay. Okay, great, Vik. And then just Vicente, maybe a bigger picture question and touch on hypotheticals here, just given the environment that we're in. But if the tariffs were to kind of resolve themselves, let's call it sometime in the next couple of months, given just the demand picture that you're seeing in your business today and that contingency that you have built in, would your expectation then be that like, okay, you're going to get a little bit better growth than as the year progresses, and we can get back to potentially what the original guidance was for the year?

Vicente Reynal, Chairman and CEO

Yes, potentially, Joe. I mean, I think there are a lot of things that can happen. So yes, I mean, absolutely. Again, I think we're incredibly encouraged that even though in this environment, we're seeing what we're seeing in terms of the organic order growth momentum year-to-date. As we said, we just decided to take a prudent view because if you start stacking up all the positives, it kind of became more of a situation that we said, hey, we want to be more prudent. If tariffs come off, could there be accelerated growth? Yes. But TBD when that moment happens, and at that time, we will definitely evaluate what the situation is.

Joe Ritchie, Analyst

Makes a lot of sense. Thanks guys. Appreciate it.

Operator, Operator

The next question comes from Stephen Volkmann with Jefferies. Your line is open.

Stephen Volkmann, Analyst

Great. Good morning, guys. Just a couple of quick follow-ups here. I think you talked, Vik, about like $150 million or something of pricing. Is that pretty much even in the two segments?

Vik Kini, Chief Financial Officer

Well, yes, obviously, it's I'd say, proportional between the two given the size. What I would say is the level of tariffs and/or the level of pricing actions have been very commensurate across the two. It's probably the best way to think about it.

Stephen Volkmann, Analyst

Okay. And then I'm just trying to get my head around. You're obviously doing some other things on the cost side, sourcing, et cetera. It would seem to me like those would take a little while to sort of filter in, but it also doesn't seem like you're really saying the second quarter will be weaker and we'll sort of grow into it. So I just thought that was interesting. Any way to square that circle?

Vik Kini, Chief Financial Officer

Yes, I'll address that. There are a few ways to look at it. Regarding the cost actions mentioned earlier, we are taking a careful approach. We have initiated tariff war rooms and similar collaborative efforts across the company. We expect this process to take some time to complete, and we’re being cautious about the impacts this year. We're effectively balancing the tariffs by implementing corresponding pricing actions. The reason you see a stable dollar impact from quarter to quarter is that we implemented these actions in two phases. We took immediate steps at the beginning of April, which helped manage some of the challenges we faced in Q2, followed by another round of actions on May 1. This two-tiered pricing strategy relative to the tariffs has helped us maintain stability.

Stephen Volkmann, Analyst

Got it. Okay. Thank you, guys.

Operator, Operator

The next question comes from Joe O'Dea with Wells Fargo. Your line is open.

Joe O'Dea, Analyst

Hi, good morning. Can you unpack the 4% volume impact, I guess, embedded as contingency? And it would seem that that's an annualized number, so it's an even bigger hit that you're taking primarily to the back half of the year. But where do you think about that vulnerability really sitting between segments and then within segments by end markets or product groups? Just to understand what you're watching most closely for the volume vulnerability.

Vik Kini, Chief Financial Officer

Yes, Joe, this is Vik. I'll take that one. A couple of things here. One, we've taken what we think to be a prudent view for the balance of the year. Obviously, with only three quarters in the year, yes, there is an impact in the second half. As far as how to think about it between the two segments, we view it actually very comparable, right? Vicente has mentioned here, we look at this in kind of two fronts. One, I'd say, prudently de-risking the guide, but then also keeping total revenue intact. You'd see that we actually kept that across; it's commensurate across both segments. As far as product lines or anything of that nature, no, I don't think we view it necessarily any different. We're taking a prudent view on the volume expectations to keep the revenue guide kind of intact from a total perspective. Yes, obviously, the second half impact, as I kind of outlined before, we are expecting organic volumes to be down low single digits in the back of the year.

Joe O'Dea, Analyst

Got it. I guess, just related to that, are you seeing different demand trends? You've got products that price at a pretty wide range of points. Are you seeing anything in different demand trends between those, whether something that would be more at the reciprocating scroll compressor price points or up to centrifugal, like any hesitation out there on higher price points?

Vicente Reynal, Chairman and CEO

I'd say, I mean, Joe, nothing of significance that we can think about. I mean as you kind of well point out, when you think about centrifugal, and some of the kind of medium to large, those tend to be more CapEx oriented versus maybe the smaller compressors will be more related kind of, I'd say OpEx. We play more on the kind of medium-ish to large compressor side; we clearly are not in the game of do-it-yourself sort of compressor style based on compressors, which I assume that's maybe more related to consumer spend or your sales, which we don't play in that market. Our products are more in the highly engineered, and they do provide that return on investment. As long as we have proven that as long as we show the customer that the payback is 15 months or less, they will put that project up on the list because, obviously, it's a great payback. The technologies that we're launching and how we save energy, how we conserve water, and everything else creates a great way for customers to view that sort of cost of ownership that offers a payback.

Joe O'Dea, Analyst

And then just on tariffs, $150 million, can you size how much of that is China? And within that, how much is import? How much is export? Really so that we have a sense of moving forward, and if we see headlines on changes to these, we have a sense of how much of that applies to the $150 million?

Vik Kini, Chief Financial Officer

Sure, Joe. I’ll take that one. I would say that most of the costs are related to China, particularly concerning imports from there. It’s primarily costs associated with third-party spending. As we mentioned, we’re mostly sourcing locally for our regional needs. While there is a minor impact from that, it’s not the primary factor. It’s also important to note that our estimate includes what I refer to as the Tier 2 impact, which means we expect increases in costs from domestic suppliers in the U.S. because they are obtaining components from international sources. We factored that into our $150 million estimate, attributing most of it to those China-related components. So, that’s the main reason behind the $150 million.

Joe O'Dea, Analyst

Thanks a lot.

Operator, Operator

The next question comes from Chris Snyder with Morgan Stanley. Your line is open.

Chris Snyder, Analyst

Thank you. I wanted to ask about the contrast between the Q1 1.10 book-to-bill, which I know shows positive seasonality and appears to be the best since 2022, and the four-point decrease in volume guidance. Is there a possibility that these orders included some advance ordering due to the tariffs? Are your discussions with customers in Q2 leading to more caution regarding the second half? Additionally, can you provide any specifics about the situation in China, where it seems that the demand for manufactured products has shifted significantly compared to Q1? Thank you.

Vicente Reynal, Chairman and CEO

Thank you, Chris. Regarding the pull forward, we haven't observed anything notable. Most of our products require selecting options and are somewhat customized, so our customers can't build significant inventories of specific compressors and similar items. We monitor sales data from our distributors, especially in precision technology, and keep track of inventory levels to ensure they don't hold too much stock. Based on our observations, we don't see any signs of pull forward. As for China, we're optimistic about the trends we've seen throughout the quarter and moving into April. The team is encouraged by the activities we’re witnessing, but we don't anticipate a quick recovery in China. We're also focusing on growth outside of China, particularly in Asia Pacific, where we see strong momentum.

Chris Snyder, Analyst

Thank you. I appreciate that. And then I'm just following up, have tariffs changed the competitive positioning for you in the U.S. market, whether it's some of your bigger competitors? Or to the extent, do you guys compete at all against maybe lower-cost foreign imports, whether it's China or elsewhere that could be impacted by the tariffs? Thank you.

Vicente Reynal, Chairman and CEO

Yes, Chris, we have a competitive advantage due to our in-region for-region model. When you examine our competitors, most of them source products from outside the region. This gives us a clear competitive edge, and we are applying this strategy not only in the U.S. but globally. Many of our customers are requesting local products, and we are able to meet that demand effectively.

Chris Snyder, Analyst

Thank you.

Operator, Operator

Sorry. The next question comes from Nicole DeBlase with Deutsche Bank. Your line is open.

Nicole DeBlase, Analyst

Yes. Thanks. Good morning, guys.

Vicente Reynal, Chairman and CEO

Good morning, Nicole.

Vik Kini, Chief Financial Officer

Good morning, Nicole.

Nicole DeBlase, Analyst

Just one quick follow-up on the Q1 margins. Were margins impacted at all by price cost headwinds just because the inflation kind of came in really quickly? And I think you guys started to attack this with pricing in April rather than during 1Q?

Vik Kini, Chief Financial Officer

Yes, Nicole, I think the simple answer is not dramatically. I would say that the tariff impact has become more of a Q2 dynamic forward. We did have some of the carryover pricing that comes normally from prior year end to this year. I wouldn't say there was anything of a dramatic nature there.

Nicole DeBlase, Analyst

Okay. Thanks. And then we've gotten through a lot of my questions here. But I guess one thing we didn't talk about is what you're seeing in Europe. I suspect that it's probably stability, not really much change relative to what we've seen in the past few quarters. But could you talk a little bit about order activity in that region?

Vicente Reynal, Chairman and CEO

Yes, Nicole, that's a great question. Thank you for asking. We are very pleased with what we observed in Europe. We experienced mid-single-digit organic growth in the ITS segment in that region, which is encouraging.

Nicole DeBlase, Analyst

Thank you. I’ll pass it on.

Operator, Operator

The next question comes from Nathan Jones of Stifel. Your line is open.

Nathan Jones, Analyst

Good morning, everyone. I wanted to ask a question thinking about these price increases from your customers' perspective. I mean, we're talking about a 2% price for Ingersoll Rand. But if we start thinking about that being across three quarters and 40% to 45% of revenues in the U.S., so if you just spread that across kind of the U.S. portfolio, you're talking more about a 6% price increase on that kind of stuff. And then probably some of the services don't need to see that price. So maybe you're pushing into the high single digits on products. Everybody else is raising price the same amount. Do these things start to impact customers' go, no-go decisions on projects because the return metrics for their investments have changed because of these price increases as they go into effect?

Vicente Reynal, Chairman and CEO

That's a great question. I want to highlight a couple of points. First, our products are essential, making them necessary for specific projects and applications. It's not just about price increases; we monitor the competitive landscape and see similar trends across the board. Customers will analyze the return on investment to determine if it makes sense for them, as I mentioned earlier. We provide presentations to our customers demonstrating how we can deliver payback on their investments. While there could be a chance that market changes might lead some customers to hesitate, we haven't noticed this happening yet. This is why we are being careful with our guidance. So far this year, particularly in Q1 and through April, we haven't seen any changes in orders. Lastly, we emphasize our in-region for-region strategy since we observe many customers preferring locally made products. We have a distinct advantage, not only with compressors but also with blowers, vacuums, and other technologies that are widely used in the markets.

Nathan Jones, Analyst

Thanks for that. I guess the second question for me is a bit of a longer-term one. We've seen things like fiscal stimulus announcements in Europe and Germany specifically; you've probably seen more of that. We started to see stories about South America looking to invest in capacity to decouple from the US. A lot of those things are talked about and probably don't impact you this year, but maybe start impacting you next year. Maybe just talk about the opportunities that that could provide for the business.

Vicente Reynal, Chairman and CEO

Yes, Nathan, that's a great question. This year, I have visited all regions including Latin America, Europe, Asia, the Middle East, and throughout the U.S. I have spent considerable time speaking with many of our customers, and a clear message has emerged: they want localized products. We are uniquely positioned to offer this to them. We are seeing good investments in this area, particularly in places like India and Brazil, where we recently inaugurated our new facility. Customers are looking for local content in their products, which positions us well in that market.

Nathan Jones, Analyst

Thanks very much for taking my questions.

Vicente Reynal, Chairman and CEO

Thank you.

Operator, Operator

The next question comes from Andrew Buscaglia with BNP Paribas. Your line is open.

Andrew Buscaglia, Analyst

Hey. Good morning, everyone.

Vicente Reynal, Chairman and CEO

Good morning, Andrew.

Andrew Buscaglia, Analyst

Maybe just one for me. Everyone kind of took my last few questions I had. So I wanted to get an update on ILC Dover, and how that is tracking during the tariffs. It's not a market I'm too familiar with, but I'm wondering what the exposures are there, and if you're seeing any change in demand trends in that specific area? Thanks.

Vicente Reynal, Chairman and CEO

Yes, Andrew. We continue to remain really encouraged by the momentum we're seeing in the Life Science front. Just to highlight, the Life Science component of ILC Dover, which is everything except the Aerospace business, had a book-to-bill of 1.11, and core single-use powder handling portfolio bookings are up low double digits year-over-year in Q1, and operationally very encouraged by what we saw from Q4 moving into Q1, as I mentioned on the call. We continue to make a lot of investments in the ILC. Over the long term, we continue to see that clear path for that long-term margin targets that we outlined when we announced the deal and the transaction. Particularly to your question on tariffs, I'd say fairly minimal in nature. Where we have seen them, we can actually work with our customers to pass that, whether it is price or surcharges.

Andrew Buscaglia, Analyst

Okay. Got it. That’s it for me. Thank you.

Vicente Reynal, Chairman and CEO

Thank you.

Operator, Operator

This concludes the question-and-answer session. I'll turn the call to Vicente Reynal for closing remarks.

Vicente Reynal, Chairman and CEO

Yes. Thank you, Sarah. I just want to highlight that last month we crossed our five-year anniversary of combining Gardner Denver and Ingersoll Rand. As you have seen over the past five years, we have been through a lot: COVID, supply chain challenges, freight issues, a couple of wars, and things of that nature. We like to say that we're now much stronger than ever. We completed divestitures, and acquired 65 companies. We have a pretty unique portfolio. Needless to say, we know how to navigate this market. We have a management team that has done it before. We have done it over the past five years. Regardless of what comes out, we're pretty agile and nimble in this environment. We know that we'll definitely come out even stronger out of this situation than we have historically in the past. We remain very excited and encouraged about what's ahead of us at Ingersoll Rand. Lastly, I want to thank all 21,000 employees, who are owners of the company. That is one of the reasons why we continue to remain very agile and nimble despite any of the market situations; all of them are pushing toward the same goals and characteristics that we want to do, and we know that we will be successful. With that, I will call it for today, and thank you, everyone.

Operator, Operator

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