Ingersoll Rand Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2021

There are 13 speakers on the call.

Operator

Hello, and welcome to the Rand Third Quarter 2021 Earnings Conference Call. My name is Harry, and I'll be your operator today. And I will now hand the call over to your host, Chris Boyeran, Vice President of Investor Relations. Chris, please go ahead now.

Speaker 1

Thank you, and welcome to the Ingersoll Rand 20 21 Third Quarter Earnings Call. I'm Chris Myron, Vice President of Investor Relations. And joining me are Vicente Reynal, President and Chief Executive Officer and Vic Kenny, 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, www.irco.com.

Speaker 1

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, 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 provide a company strategy update, review our company and segment financial highlights and offer updated 2021 guidance. At this time, I'll turn the call over to Vicente.

Speaker 2

Thanks, Chris, and good morning to everyone. Starting on Slide 3, Coming out of the Q3, Ingersoll Rand remains in a position of strength, demonstrating again that as a purpose driven company, We remain grounded in what we do and how we do it. In the environment we find ourselves in right now, Our agility, our nimbleness and using IRX for speed to execution has proven to be our competitive advantage. Of course, global macroeconomic factors continue to be a challenge. We're not immune to demand in supply chain, inflation and labor market conditions.

Speaker 2

But we continue to outperform on our commercial and operational commitments, and we are again raising our guidance. This outperformance is propelled by continued organic and inorganic investments into the organization. And our comprehensive M and A focused capital allocation strategy is fueled by our drive to create long term value and compound stockholder returns. Moving to Slide 4. We remain committed to our 5 strategic imperatives and we'll focus our remarks today on our growth and capital allocation strategies.

Speaker 2

Before we move to those, I have 2 important call outs. Our strategy to deploy talent Across our organization is paying off. We just concluded our 2nd employee engagement survey this year across all 16,000 employees globally. And And I am extremely proud to share we had outstanding participation at 91%, and several of our scores improved again, Placing us well above the relevant manufacturing benchmarks in results and participation. In fact, On responses to how happy are you working at Ingersoll Rand, we now rank in the top 10% of manufacturing organizations.

Speaker 2

When we talk about outperforming because of our agility, nimbleness and IRX, it's because of our people. This is our culture. We always say and continue to believe that the combination of a highly engaged workforce, coupled with an ownership mindset is a catalyst For long term performance. The fact that our voluntary turnover is less than 3%, even in this challenging environment Also speaks highly of the culture we're nurturing and how we inspire our employees. I want to take a moment to acknowledge and thank the tremendous contributions of each and every one of our 16,000 employees without whom these results would not be possible.

Speaker 2

Our operate sustainably strategic imperative also highlights the speed at which our company moves. In less than 18 months, We have been upgraded twice by MSCI, and we sit now at a rating of A. This is an improvement From approximately the bottom onethree to now being in the top onethree of the companies rated by MSCI. And we believe based on our work, we will continue to see our ratings improve with the various ESG rating providers. Great strides have been made this year to accelerate growth and allocate capital effectively, as we have announced or deployed approximately $1,000,000,000 towards M and A.

Speaker 2

In Q3, we completed both the Cipex and Maximus Solutions acquisitions and announced AirDimension's acquisition last week. We also announced an agreement to acquire Tufill Pumps earlier this week. We shared our comprehensive capital allocation strategy with you Earlier in September, along with our focus on M and A, we completed a large share repurchase as part of KKR sale of their final equity stake in the company as well as the prepayment of the more expensive tranche of debt taken out last year during the onset of COVID. And in addition, we initiated a quarterly dividend that began in Q4 and a new board authorized 715,000,000 share repurchase program. On the next slide, it's a partial preview What's to come at our November 18 Virtual Investor Day, where we look forward to talking in more detail About the megatrends, we and our customers are seeking to address and how Ibisor brand products and services Help make life better for all our stakeholders.

Speaker 2

Our strategy enables us to compound our contribution to addressing megatrends Such as digitization, sustainability and quality of life through organic growth enablers where we have specific advantages. For example, We continue to leverage our own unique and proprietary demand generation engine to drive a holistic approach to customer buying patterns, One that has already captured over 3,000,000 end user contacts and allows us to generate over 200,000 marketing qualified leads per year. We also continue to invest in our industrial IoT platform as we aim to connect or digitally enable a meaningful portion of the 5,000,000 assets that we have identified in the field. Moving to Slide 6, we're not unique in needing to effectively manage the challenges of the current supply chain environment. However, our key differentiator is our ability to respond With agility and discipline through the use of IRX to quickly and effectively minimize negative impact from challenging supply chain conditions.

Speaker 2

I would like to especially thank our global sourcing and logistics team at Ingersoll Rand as well as our factory buyers and planners for their tireless efforts And creative thinking using data backed analytics to overcome delivery gaps. We saw very early on that supply chain and logistics challenges We're going to be an important issue. So we invested in this area to guarantee that we have rigorous processes and capabilities in place to succeed. And this has produced outstanding results. Moving to Slide 7, we will now look more closely at our recent inorganic achievements.

Speaker 2

We signed definitive agreement to acquire Tufill Pumps, which is expected to close in Q4 and Air Dimension, both of which will become part of the Precision and Science Technology segment. We also closed the acquisition of Lawrence Factor, which will become part of the Industrial Technology and Service segment. These three acquisitions are representative of the key characteristics we're targeting with our inorganic growth strategy. Tuthill Pumps is the 2nd asset we have purchased from Tuthill Corporation. It is a leader in the gear and piston pumping market, which supports the expansion of our positive displacement pump portfolio.

Speaker 2

This is another example of a multi generation family owned company With premium assets that approached us on an exclusive basis because of the relationship that we have built and the opportunities they saw for their company and employees as part of the Ingersoll Rand family. This is another testament To how our unique approach to employee ownership allows us to be at the front lines in M and A. Erde mentioned He's a market leader in gas diaphragm pumps, which is complementary to our existing lab and life science businesses and is specialized for environmental applications like emission monitoring and biogas. It has an impressive pre synergy EBITDA margins of over 50%, And more than 70% of its revenue comes from like to like replacement of original equipment and aftermarket parts. We also closed acquisition of Lawrence Factor, which will reside in the ICI segment.

Speaker 2

Lawrence Factor is a great example of an that is well aligned with our company purpose of making life better. As the technology ensures safe work and play activities for people who depend on compressed air and gas Through the proprietary air sampling and aftermarket offerings. All three of these acquisitions were valued and attractive I will now turn the presentation over to Vic to provide an update on our Q3 financial performance.

Speaker 3

Thanks Vicente. Moving to Slide 8, we continue to be pleased with the performance of the company in Q3, which saw a strong balance of commercial and operational execution fueled by the use of IRX to overcome a challenging inflationary and supply chain constrained environment. Our commitment to deliver $300,000,000 in cost synergies attributable to the Ingersoll Rand Industrial segment acquisition remains intact As we continue to drive performance on productivity and synergy initiatives using IRX as the catalyst. Total company orders and revenue Increased 37% and 19% year over year respectively, driven by strong double digit organic orders growth across each segment. Compared to 2019, as reported orders in Q3 were up 27% 16% on a quarter to date and year to date basis, highlighting the strong performance of our business irrespective of the COVID impacted 2020.

Speaker 3

Our orders and revenue in the quarter were records for the company, It eclipsing Q2 and setting us up well as we move into Q4. The company delivered 3rd quarter adjusted EBITDA of $314,000,000 A year over year improvement of $62,000,000 and adjusted EBITDA margins of 23.7%, a 110 basis point improvement year over year. Adjusted free cash flow for the quarter was $307,000,000 after taking into account the unique items as pointed out on the slide. Total liquidity of $3,100,000,000 at quarter end was up approximately $700,000,000 from prior year. This now takes our net leverage to 1.3 times, a 1.2 times improvement from prior year.

Speaker 3

Turning to Slide 9, for the total company, Orders increased 33% and revenue increased 17%, both on an FX adjusted basis. Overall, we posted a Strong book to bill of 1.13x for the quarter. We remain encouraged by the strength of our backlog moving into Q4, While the PST segment margin declined 100 basis points driven by the impact of the CPEX and MAXIMUS solutions acquisitions, both of which closed in Q3. When adjusted to exclude the impact of the CPEX and MAXIMUS acquisitions, PST margins increased by 20 basis points. Finally, corporate costs came in at $35,000,000 elevated at comparable levels in Q4 due to the same drivers.

Speaker 3

One other item of note is the adjusted tax The adjusted rate is benefiting from our tax restructuring efforts that we've outlined before and specifically a few non recurring impacts driven by our movement of IP and implementation of a royalty structure as well as the utilization of carry in the low 20s due to the non repeat of some of these items. Turning to Slide 10. Free cash flow for the quarter was $131,000,000 on a continuing ops basis, driven by strong operational performance across the business and prudent working capital management. CapEx during the quarter totaled $15,000,000 Free cash flow also included Finally, free cash flow also included a $49,000,000 payment from Trane Technologies for post closing adjustments related to the IR merger. Excluding these three items, adjusted free cash flow was $307,000,000 Leverage for the quarter was 1.3 times, which was a 1.2 times improvement as compared to prior year.

Speaker 3

Total company liquidity now stands at $3,100,000,000 based on approximately $2,000,000,000 of cash and over $1,000,000,000 of availability on our revolving credit facility. Liquidity decreased By $1,600,000,000 in the quarter as we executed our capital allocation strategy by buying back $731,000,000 in shares as part of AKR sale of the remaining equity stake strategically deployed nearly $600,000,000 to M and A and prepaid approximately 400,000,000 To continue our portfolio transformation strategy through M and A coupled with targeted internal investment to drive sustainable

Speaker 2

Thanks, Vic. Moving to Slide 11. In our Industrial Technologies and Service segment. Revenue was up 14%. The team delivered strong adjusted EBITDA of 20 basis points year over year with an incremental margin of 33%.

Speaker 2

Organic orders were up 31%. Starting with compressors, we saw orders up in the high 30s percent. A further breakdown into oil free and oil lubricated products shows orders for oil free up over 50% and oil lubricated up over 30%. In the Americas, orders in North America were up mid-20s, while Latin America was up high 40s. Mainline Europe delivered strong performance, up high 40s, While India and Middle East saw continued strong recovery with order rates up in excess of 70%.

Speaker 2

Asia Pacific continues to perform well In Banking and Blowers, orders were up low 30s on a global basis with strong double digit growth across each of our regions. Moving next to power tools and lifting, orders for the total business were up mid-20s and saw continued positive growth driven mainly by our enhanced e commerce. We will also like to highlight one of the many ways that we enable our customers to become more sustainable. Our Leroy gas compressors are used to capture biogas emitted from landfills, As the gas is admitted, the system captures the gas, Clean the methane from other gases such as hydrogen sulfide and carbon dioxide And our Leroy product compresses the methane for reinjection into pipelines or storage for power generation, Both of which enable the customer to capture additional economic value. Without it, 100% of the gas will be released into the atmosphere.

Speaker 2

Technologies such as to advance our ESG impact Not only with the steps we're taking internally to reduce our carbon footprint, water and energy usage, but also create significant value both sustainability and economic perspectives. Moving to Slide 12, segment. Revenue was up 10% to 20%. This is encouraging given the tough comps due to COVID related orders and revenue in Q3 of 2020 for the medical business. Additionally, the PST team delivered strong adjusted EBITDA of $76,000,000 which was up 17%.

Speaker 2

Adjusted EBITDA margin was 29.7%, down 100 basis points year over year, Driven by the impact of CPEX and Maximal Solutions, And again, the segment was up 20 basis points, excluding the impact of those acquisitions. Overall, organic quarters were up 25%, driven by the ARO and Milton Roy product lines and the medical and docetron businesses, which serve lab, life sciences, water and animal health end markets. All of these businesses were up double digits in the quarter. Incremental margins were up 25% as reported and 33% when excluding. In this segment, we would like to highlight the momentum our Hasco Hydrogen Solution business To supply high capacity hydrogen refueling stations for a nationwide green hydrogen network across New Zealand.

Speaker 2

First order of 4 stations with a total commitment of 24 stations to be provided through 2026. The totality of this frame agreement alone will double our Hasco Hydrogen Refueling Business And as we spoke about last quarter, the high growth markets are producing meaningful growth. Given the company's performance in Q3, we have an increase in guidance for 2021. Our guidance excludes both the divested high pressure solutions segment as well as the pending Revenue guidance was up mid teens on a reported basis, comprised of low double digit organic growth across Both guiding of high teens in total, with low double digit growth, organic growth across both segments. This reflects an approximately 100 basis points increase in organic growth.

Speaker 2

FX is expected to continue to be low single digit tailwind. M and A was previously expected to contribute Approximately $60,000,000 in revenue, but given the close acquisitions of Maximus, CPEX, Air Dimensions and Lorenz Factor, We're increasing that expected contribution to $135,000,000 Based on these revenue assumptions, we're increasing 2021 adjusted EBITDA guidance to 1,175,000,000

Speaker 4

to $1,195,000,000

Speaker 2

which represents a $20,000,000 improvement from prior guidance at the midpoint of the range. In terms of cash generation, we expect adjusted free cash flow to adjusted net income conversion to remain greater than or equal to 100%. CapEx is expected to be approximately 1.5% of revenues. And finally, we expect our adjusted tax rate for the year to be in the mid teens for the reasons Vic provided earlier. Turning to Slide 14, we're very excited about our upcoming virtual Investor Day, which is fast approaching and will be held on November 18.

Speaker 2

We look forward to outlining our long term growth strategy fueled by alignment with megatrends and compounded by our unique organic growth enablers. We will provide detail on our markets and technologies and further discuss Our strong talent, operational execution, demand generation and M and A capabilities, coupled With a sustainable growth mindset creates incredible competitive advantages for our company. We will also outline future financial targets. You can register for the event using the link on Slide 14. And I look forward to seeing many of you on the webcast.

Speaker 2

Moving to Slide 15. As we wrap up today's call, I want to reiterate that Ingersoll Rand is in an outstanding position. 2021 is poised to be a great year despite the challenging environment. To our employees, I want to again say thank you For your relentless efforts to execute and solve tough problems throughout the quarter. They are absolutely Appreciate it.

Speaker 2

And it is apparent in our company's performance. We are actively investing to deliver outpaced growth, both organically and through M and A to continue increasing the quality of our portfolio. We continue to take our role as a sustainability minded Industry leader very serious, and our employees eagerly embrace IRX to put us in that leadership position.

Speaker 4

We're proud

Speaker 2

of the transformation we have achieved at Ingersoll Rand and are excited about the future opportunity to compound growth and deliver increased value

Operator

Our first question is from Mike Halloran from Baird.

Speaker 5

So let's start on the guide and how you guys are thinking about the Q4 coming up here. Sales, obviously, you feel good about what the demand conditions look like. You're layering on some acquisitions here. 3Q was a good quarter in terms of performance. It feels like maybe the margins on an Organic basis, a little lower than what the sequential trend would imply.

Speaker 5

So maybe some commentary on how you're thinking about that as As you move into the Q4 and certainly correct me if I have the wrong assumption there.

Speaker 2

Yes, Mike. Our guidance, as you heard, taking the midpoint of our prior guidance up by $20,000,000 You can think about it being 2 thirds M and A and 1 third is organic. In this current environment, we continue to be prudent based on all the overall supply chain environment Kind of noise of situation that you hear out there. In addition, just to point out, ITS margins in Q4 2020 were up 400 basis points reaching 26% margins. What our guidance here implies is that even with all the inflation, discretionary spend, Increases and investments, we're going to be kind of flattish in margin expansion year over year, which speaks to all the great actions that the teams continue to execute And puts that segment to a very solid margin performance in this environment, we believe.

Speaker 2

And PST margins for the core business, which is kind of excluding the M and A that we said is EBITDA accretive, but Gross margin accretive and some of the accelerated hydrogen investments that we're doing based on that frame order that we just received, The EBITDA margin profile is still in the 30s kind of range, which we view as quite healthy given the tough comps on medical shipments in 2020 As well as the inflation and discretionary investments that we have done here in 2021 and still do plan to do in the Q4. So We feel good about that and at the same time, prudent in terms of how we see supply chain out there.

Speaker 5

So if I'm hearing you right, you're not implying that the market headwinds accelerate for you on the margin line 3Q to 4Q in terms of Supply chain, logistics, labor, transportation expenses, things like that.

Speaker 3

Yes, Mike, I wouldn't

Speaker 6

no, I think what Vicente

Speaker 3

is saying Exactly in line with kind of how you're interpreting it. Clearly, obviously, a lot of those same headwinds persist into Q4. But like we've been doing, we think we've kind of taken pricing actions to kind of remain in line with offsetting those headwinds, much like you saw in Q3. So I think in that respect, we see Q4 fairly comparable to Q3 in terms of price mitigating the inflationary risk.

Speaker 5

Got you. And then on the order side, obviously, really strong orders, good to see. Maybe some thoughts on what types of orders those are? Are those more short cycle in nature? Is this just a kind of MRO short cycle type move or are you starting to see some more project or CapEx Type orders coming through the funnel as well.

Speaker 5

Obviously, you highlighted the hydrogen, but I'm thinking a little bit more broadly.

Speaker 2

Yes. I think, Mike, we're seeing kind of both. We see sustained momentum on the share cycle. And actually, what we see is long cycle kind of accelerating as some Projects are getting released, the hydrogen being won, but others like the biogas is a very substantial project too as well. So I think we're pretty pleased with what we're seeing.

Speaker 2

At the same time, I can tell you that we're with the level of technologies that we have Our portfolio, you're going to hear a lot more about this during the Investor Day is how we're able to pretty quickly reallocate technologies to some of those end markets that are Seeing some meaningful growth. And I think with the level of agility that we have in our business, it's positioned us really well to capture the tailwind from any of those markets and continue We see that continue to sustain momentum in the order rates.

Speaker 5

Great. Appreciate it, gentlemen. Thank you.

Speaker 2

Thank you, Mike.

Operator

Our next question is from Gerry Ritchie from Goldman Sachs. Gerry, your line will be open now if you'd like to proceed.

Speaker 7

Great. Thank you. Good morning, everyone.

Speaker 2

Hey, Joe. Good morning, Joe.

Speaker 7

Hey, So maybe just staying with orders, obviously, clearly incredibly strong this quarter. I'm just curious, are you starting to hear just more CapEx decisions being made, Vicente, where your customers are looking to deploy a little bit more CapEx in this environment, just Given the supply chain, is it been fairly unprecedented in what we're experiencing today? Or is this predominantly still a lot of OpEx That's coming through there.

Speaker 2

Joe, we're definitely hearing a lot more on the CapEx too as well. And when we hear about CapEx, it really has to do with ESG and sustainability. And I think it's exciting to see that a lot of all the technologies, I mean, the majority of our technologies are Kind of enablers and beneficiary for ESG. And I think the exciting thing here is that compressors can reduce energy consumption, and you can see how energy Has really radically increased across Mainland Europe and even also China. So with the compressors, blowers and backings, we have always spoken a lot about our energy efficiency.

Speaker 2

And so I think customers are starting to make the move based on the targets that they set up themselves to be by achieving by 2020, 2030 and 2,050. So I think a lot of this is really seeing some is going to see some continued momentum in my view.

Speaker 7

Got it. That's That's helpful. And I guess just maybe if you could just kind of parse out the pricing commentary a little bit more. I'd be curious to hear like How positive the price cost equation was this quarter? What the expectation is through the end of the year?

Speaker 7

And then as we head into 2022, should we continue to Like pretty decent price cost benefit coming through your numbers?

Speaker 3

Yes, sure, Joe. I'll take that one. So in the context of price realization was a little bit in excess of 3% across the entire enterprise, Which obviously speaks to the healthy performance and frankly the proactive measures that frankly all of our businesses taken. Pricing did slightly outweigh inflation in Q3. So we were price cost positive in the context of Q3.

Speaker 3

We would expect to be fairly comparable to that equation in Q4. Now it is worth noting obviously that not unexpectedly inflation obviously headwinds have risen in the second half of the year compared to the first half. We always expected that and that's why we kind of got ahead a lot of the pricing actions. So again, I think we're quite pleased with the performance and the momentum that we're seeing. As we think about 2022, I think, frankly, a little bit Too early to start guiding on numbers just yet, but obviously, we would expect to see healthy carryover on the pricing actions.

Speaker 3

I'd say the majority of The pricing actions that we have taken are list price oriented. So obviously, it should be inherently a little bit stickier. But obviously, we do obviously Some carryover inflation that we will begin with into 2022 as well. So, we'll reserve commentary just yet on the price Cost equation into 2022, but I think we're quite encouraged by the actions the teams have taken to still say price cost positive in the context of the second half of this year.

Operator

Our next question is from Nigel Coe from Wolfe Research. Nigel, your line is open now if you'd like to proceed.

Speaker 8

Thanks. Good morning, Just want to tack on the back of that question, inflation, just how do you define inflation? Do you just look at the direct Input costs, the materials or is that labor and a board definition including freight. So that'd be interesting to hear, but Just curious on obviously the order is very strong. Can you maybe talk about where we are on the revenue synergy capture from the merger?

Speaker 8

Obviously, you put together a much more balanced portfolio, some clear synergies across the product. So just wondering if Some of this order strength has seen some of those synergies come through.

Speaker 3

Nigel, I'll take the first one and I'll let Vicente speak to the second one on the revenue synergies. On the price cost and specifically on the cost comments that I made, the inflationary numbers that I was speaking to really are what we'll call direct material and logistics The majority of this year. So again, while we do look at it, the commentary that I made was specifically around price versus What we'll call direct material and logistics. And I think one thing that we're quite pleased with and Vicente mentioned it here is quite very low voluntary turnover, which

Speaker 6

I think Vicente spoke to in

Speaker 3

the prepared comments speaks very highly of the culture and a lot of the employee engagement and ownership initiatives that we've put forth.

Speaker 2

Yes. And Joe, on the second question, yes, we're definitely seeing some of that. You're going to hear more on some The case studies that we will show you during the Investor Day, but clear pressure product line is moving, So a lot of the products that we have launched and through the multichannel, multibrand strategy that we have given us some

Speaker 8

And secondly, on the Investor Day, You said longer term targets. Just wondering, are we looking here at 3 year targets, but not 2022?

Speaker 3

So yes, that's correct. We'll be talking about, we'll call,

Operator

Our next question is from Jeff Sprague from

Speaker 1

Maybe just coming back one more on cost also. I would have guessed actually you might need more than 3% price to offset inflation. So I'm just wondering if in that direct materials, I would assume you are kind of sourcing and merger related benefits. Sure, it gets harder and harder to kind of separate those with

Speaker 3

the passage of time, but maybe just update us where you're at in the queue when it's issued tomorrow, right around 3.4%, 3.5% comparable numbers between ITS and PST.

Speaker 7

Now in the context of what I was speaking to

Speaker 3

in terms of that covering inflationary headwinds, We're not incorporating, let's call it, any of the merger related synergies or anything of that into that equation. You're right, it does become a bit of a scorekeeping exercise, but we've been pretty disciplined and prudent to keep those buckets separate in terms of how we prudent to keep those buckets separate in terms of how we actually manage and run the organization. So things like some of the direct material productivity or some of the innovative value, Those are kind of separated. And I will say, as we kind of said at the beginning of the call, we're still on track to deliver the That's great to hear. Thanks.

Speaker 1

And then just On the new M and A, you gave us the kind of total additional revenue contribution. But would you mind just ticking through those

Speaker 3

Sure. I can absolutely do that. So in terms of the 3 acquisitions that we The Tuthill pumps is in the mid-20s in terms of 25 ish is probably a good So, it's about a $6,000,000 purchase price, which is actually very comparable to the revenue base, mid single digits, about 5 Great. Appreciate it. Thanks for the color.

Operator

Our next question is from

Speaker 9

Maybe just, incremental margin or operating leverage understand the cost constraints and new acquisitions coming in affecting that. But as you sort of look at Next year,

Speaker 3

how quickly, I guess, do we see sort

Speaker 9

of fairly quickly or it's just Too early to tell, given these acquisitions have just come in and given the cost environment is moving around quite

Speaker 3

Yes. I mean, I think that the latter part of your statement is probably true. I think, obviously, we're working through our views on 2022 and the kind of annual budgeting as you would expect right now. So I think it's a little too early to call. I think the view right now is the first half of None of the same dynamics we're facing now with regards to some of the inflationary headwinds.

Speaker 3

And obviously, we have the pricing momentum to continue to That's some of that, if not all of that. And then frankly, yes, we will be continuing to integrate a lot of those acquisitions. So I think given the carryover price as well as the continued inflation into 2022 and then frankly the synergy expectations for the base business because we shouldn't forget that we still have the kind of the 3rd year of the merger related synergies and as well as the kind of integration on the acquired assets. We would expect to continue to see that trend in closer to a, Let's call it that 30 ish percent type number that we've been seeing across the segments. It's not like cadence is something we're working through and I think We'll give a bit more color as we do our next earnings call and formal guidance for 2022.

Speaker 9

Thank you. And then just on The capital deployment, so deployed sort of M and A funds this year. Maybe when you look at sort of across those acquisitions, 1 or 2 specific ones, I'm more interested in maybe What do you think the 3 or 5 year return sort of metric should be on that Our margin expansion should be above average now that they're all once they're integrated into Ingersoll.

Speaker 2

We should definitely expect to see that kind of low double digit to mid teen ROIC return. We always say that, that is a financial criteria that we have in our deals. We're still finding great transactions that are highly complementary from technology, commercial acumen and all that and still be able to provide a good financial outcome based on a lot of the post synergy activities that we can do.

Speaker 9

And then any sort of color, Vicente, on specific transactions that you think offer above average sort of margin expansion

Speaker 2

Well, I mean, one that I'll say comes to mind right now, for sure, CPEX, Right. I mean, CPEX when we acquired CPEX, we said that, that was in kind of the mid teens EBITDA, but we see that business to be way like a segment level to PST. So I mean that is a tremendous margin expansion. Also on the ITS, the recently acquired the recently signed transaction on Flut Hill Pumps, When you think about the prior Tothill, I mean, it was a phenomenal margin expansion. So we still expect that To see some good momentum on expanding that.

Speaker 2

So I think really across the board In a lot of the transactions, we expect to see some good meaningful expansion. I mean, clearly, when you look at Maximus that is already Also, Air Dimension that is in the 50s, more difficult to continue spending on that. And those tend to be then focus more on the organic growth opportunities that we see As we look into our commercial global footprint to expand the growth there.

Speaker 9

Great. Thank you.

Operator

And our next question is from Andy Kaplowitz from Citigroup. Andy, your line is now open if you'd like to proceed.

Speaker 10

Vicente, you've really been pushing hard into some of these newer markets over the last Couple of years, lab, life sciences, water, animal health, it's obviously leading to that 35% order growth and 20% revenue growth in PSK that you saw. If we look back And Gardner Demmer's old medical business had averaged, I think, something like mid single digit growth. But given the sort of niche focus of PST T and what seems like higher growth markets. Is it fair to say that PST could average Higher than mid single digits as you go into 2022 and beyond?

Speaker 2

Yes, absolutely. I mean, I think We feel that all the investments that we're doing are paying off in terms of redirecting into this kind of very niche markets and commanding some good strong leadership positions, launching a lot new products, you're going to hear a lot more about that also on the Investors Day on how The cadence of new product has just been accelerated dramatically. Even during the COVID days, the team accelerated The new Canada product development and we're seeing that come through fruition here now and into next year.

Speaker 10

China, it looks like you had Really strong compressor growth in China. And I know it's one of your key initiatives for the combined company, but the rest of APAC orders Down a little bit in Compressor. So maybe just tell us particularly in Asia.

Speaker 2

Yes. I'm incredibly pleased with how the team continues to In Asia Pacific and particularly in China. And what we saw quarter over quarter, Q2 to Q3, we saw actually The momentum of orders really accelerate in China, Which is kind of contradictory to some of the things that you hear out there in other companies. So it speaks to a lot of the self help initiatives that the team is doing. We spoke about relaunching the Garnet Denver compressors, which obviously has proven to be a tremendous success into And that was something that we always said we were super excited about the combination of Ingersoll Rand and Gardner Denver because we could have a multi brand, multi channel strategy, Particularly in China, and the team has just done a phenomenal job leveraging the I2V initiative And action to then relaunch an entire product portfolio with Gardner Denver.

Speaker 2

And the second piece is blowers and vacuums. Blowers and vacuums was Fairly small piece in China. And again, I think the team is putting a lot of good dedication and localizing. And Asia Pacific, I can now maybe split it between Developing like Australia, for example, and that still continues to perform fairly well. Where we saw maybe a little bit of softness was on the emerging.

Speaker 2

Maybe countries like Vietnam or Philippines was creating a lot of shutdowns due to COVID. But Therefore, the China overcoming some of that decline still drive meaningful growth in the quarter for Asia Pacific.

Speaker 10

Very helpful,

Operator

And our next question is from Rob Wertheimer from Melius Research. Rob, your line is now open. If you'd like to proceed. Hi, thank you.

Speaker 2

Vicente, I'd love to hear if

Speaker 5

you have any more color on how IRX Was applied to supply chain issues that maybe rose and promised through the quarter. I don't know if you've switched the quarterly cadence Expected cost surprises across industrials this quarter, you guys avoided that entirely. I'm curious if you think that the risk of unexpected General outlook on supply chain over the next couple of quarters if you would. Thank you.

Speaker 2

Yes, absolutely. Great question there. I mean So I can tell you that everyone is doing, and I will say great work supported by IRX. So we have definitely leveraged the IRX So as you know, it's a very high cadence, high touch mechanism that we use to just accelerate how we execute And we prioritize the teams to the critical items. And that has allowed us to create this massive agility and nimbleness, Even though obviously we're fairly large global company, we're going to direct the teams to the proper priorities that are happening out there.

Speaker 2

So for example, We leveraged IRX when logistics was a major issue. And you could go How IRX tool we were leveraging to track the backlog of containers that we needed to fulfill and acquire As an example, I mean, as simple as that could be. And now we're leveraging the IRX to prioritize the suppliers and the commodities that we need to go after. And again, of ensuring that the teams continue to see a good momentum and good perspective is really what's giving us the outcome that you see here. So I think as we continue, I mean, we think we live in a very dynamic world that is And but that's why we have always said that competitive advantage follows the use of IRX as a tool to really execute is just giving us that great sense of comfort zone that the teams will

Operator

Our next question is from Josh Pokrzywinski from Morgan Stanley. Josh, your line is now open if you'd like to proceed.

Speaker 5

Just a question on

Speaker 11

I guess, Question on compressor orders. I understand there's some virtuous cyclicality going on there. But Any idea of where those stand on kind of the historical basis? Like are we at all time highs on Compressed orders today, obviously, there's a lot of new pieces of the portfolio and the combination. And what do you think the market has done Sort of relative to you guys because apparently there is a recovery going on, but I would imagine that with some of the IRX tools you're gaining

Speaker 3

a lot of share as well.

Speaker 2

Yes, Josh. I think in terms of compressive orders, We're definitely way above 2019 levels. And one could think that it could be at a record level. We And going backwards to with the combined companies to really reassess this is record levels or not, that we haven't done that. I mean, we're just focused on continuing to execute and take solid market share.

Speaker 2

So I think in terms of against what we see in the market, I think we continue to position ourselves as a premium provider of compressor products. You see that we're focused not only on the growth, But also on the profitability. So we believe in profitable growth is one of our key drivers. And with the unique differentiation that we're launching in terms of technologies that reduce total cost of ownership and great Energy reductions, I think that is what has positioned us really well To continue to take some share and continue to launch products that are in the new compressor, very large, It's a fairly flexible compressor that some radical new technology and it is one of the most efficient compressors of that size and power In the market today. So a lot of continued innovation is really what is

Speaker 11

Got it. That's helpful. I guess, maybe just following up on that last comment on kind of the pricing power and pricing to value. But notice the average Ingersoll Rand product, particularly in the IT and S portfolio has an awful lot of Various content in it. If steel prices, say, got cut in half, what Sort of kind of cost tailwind would that be to you guys sticking in that environment?

Speaker 2

Yes, great point there, Josh. Definitely pricing very sticky. And so as we look forward and commodities continue to get stabilized, yes, we should see That margin progression to even accelerate, I mean, not only from the commodity, but also as we continue to execute a lot of the I2V initiatives that we have in our funnel. So I think We're overcoming the current market situation fairly well in my opinion. Again, thanks to the team and leveraging the tools that we have like IRX.

Speaker 2

But as this current inflationary market continues subsides at some point in time in 2022, we should Thank you.

Operator

Our next question is from Nicole DeBlase from Deutsche Bank. Nicole, your line is now open.

Speaker 12

So we've been through a lot here, but I guess I just have a few pretty brief ones. First, just a clarification, I think you About VIC lately similar to 3Q, I know you have some more deals folding in, in the 4th quarter.

Speaker 3

That's correct. Yes, just to be clear, that's 30% on all the base business overall, because You have a full quarter now of the acquisitions, primarily CPEX, which you only had 1 month off In the Q3. So the overall margin profile for PST, it will be dilutive, obviously, upfront here. You're thinking kind of more in the upper 20s range. I think that's probably a decent margin accretive business.

Speaker 3

So obviously, there is meaningful synergy opportunity that admittedly you're going to see us

Speaker 12

Profile, so I know no change to the $300,000,000 full run rate synergies. But are you guys still expecting to do about $50,000,000 incremental in 2022. I'm just thinking about all the big puts and takes in the walk into next

Speaker 6

Definitely a lot of puts

Speaker 3

and takes. But Nicole, at this point, that's correct. Just to kind of recalibrate, dollars 115,000,000 was delivered in 20.20 And then the tail, which will be $35,000,000 into 2023. At this point in time, nothing has really changed in terms of that phase

Operator

Our next question is from Markus Mitternecht. Your line is open.

Speaker 4

Yes. Hi, good morning, everyone. I wanted to Hey, hi, good morning. Follow-up on first question, if I may, on compressor orders. And if I look at that particularly compared to your large Peter,

Speaker 7

they're quite impressive.

Speaker 4

And this has been going on for a few quarters now. So I wonder if this product, if this channel, if this You guys made it better. I think if you could elaborate on that, that would be great. And then connected to that, how much visibility do you think There could be some concern that some customers just hold a bit slot. I just wonder the risk

Speaker 2

Yes, Markus. So in terms of the first question about the compressor's orders, I'll tell you that is a little bit of everything. I mean, it's definitely the product because again, how we are leveraging the entire product portfolio. It is also the channel. And I think this is a great lead question, Marcos.

Speaker 2

We have case studies actually that we will show you on how we have expanded our channel To really accelerate the growth or and also really accelerate the growth. So I think we have done since back in the I don't know, but a year ago, we spoke a lot about product summits and how the team so it's just been very thoughtful with the use of IRX to really reposition a lot of the products on the channel without creating any conflict. And I think that has proven to be a pretty successful recipe. I mean, availability, in some good, I mean, I saw the team is marketing, for example, on blowers That we have one of the best lead times and how that is accelerating now even the momentum as they see here in the Q4. To your question in terms of the visibility of backlog, customers for compressors because you have to customize Many times the options to the specific application, there's not a lot of preorder that can be done on compressors Just because of the optionality.

Speaker 2

And the visibility that we have in the backlog in the compressor is really in the more larger compressor, the multistage Centrifugal compressor that are kind of we position that as more long cycle business. And those when we're doing Contract with the customer, we have caveats that we could actually pass or surcharge any specific cost increases that we're seeing Through the supply chain in this environment. So I think we feel that we're doing everything that we can to protect ourselves in case that obviously Inflation continues to stay at this level and commodities do not go down. But I think We feel good in terms of kind of how we're protecting ourselves in the cost position.

Speaker 4

That's very helpful. And just a very brief follow-up to that last comment. So So that 40% increased backlog, which is probably related to those longer cycle orders, you could, if you have to, We price that, do I understand that right or?

Speaker 3

Margins, let me clarify here. So the 40% Increase in backlog is overall. It's total. So is some of the longer cycle projects a part of that? Sure.

Speaker 3

But also some of it and a good portion of it is obviously just the normal Orders that we've taken for things that are typically what are called shorter to medium cycle type compressors, not the larger compressors. In terms of the comment on whether you can reprice backlog, as I said, there's components like the longer cycle that you do have some of those optionality. By and large, though, no. I mean, most of the rest of the backlog is typically a couple of months in duration, and you wouldn't expect to reprice that. Clearly, it's inclusive of the pricing actions we've already taken, but not typical to reprice those types of backlog items.

Speaker 2

And it's a team. I'll say one more point there to that market. I mean, we track pricing on bookings. So we know we have a really great leading indicator on how that backlog is doing Again, the price increases that we have done.

Speaker 4

Super. Thank you.

Speaker 2

Thank you.

Operator

And we have no further questions registered. So I'll hand the call back to Vicente for closing remarks. Vicente, over to you.

Speaker 2

Great. I just want to say thank you for the interest in Ingersoll Rand. I know that many of our employees are participating in the call. I also see that many of our employees from the new acquisitions are on the call. So I just want to say one more time, welcome to those of you that are new.

Speaker 2

Excited to have everyone on board, exciting that how Very thankful for everything that all of you are doing every day to make life better for our customers, our employees, our communities and obviously our So with that, we'll leave it here for now and talk to you soon. Thank you.

Operator

Thank you to everyone who has joined us today. This concludes the call and you may now disconnect your lines.

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Earnings Conference Call
Ingersoll Rand Q3 2021
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