Adient Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 13 speakers on the call.

Operator

Good morning. My name is Christa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Ingersoll Rand Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

And if you would like to withdraw your question, please press star 1. Thank you. I will now turn the conference over to Matthew Fort, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, and welcome to the Ingersoll Rand 2023 Third Quarter Earnings Call. I'm Matthew Forte, Vice President of Investor Relations. And joining me this morning are Vicente Reynal, Chairman and CEO and Vic Kinney, 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.

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, 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.

Speaker 1

On today's call, we will review company and segment financial highlights and provide an update to our 2023 guidance. For today's Q and 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.

Speaker 2

Thanks, Matthew, and good morning to all. I would like to start, as we always do, by thanking and acknowledging All of our employees for their hard work in helping us to deliver another record quarter in Q3. Despite the constantly changing macroeconomic environment, our employees continue to deliver on our commitments and consistently exemplify our purpose while thinking and acting like owners. I would also like to welcome our new employees from our recent acquisitions, OxyWise, FraserWoods, Roots and Kaylon. Beginning on Slide 3, Fueled by our competitive differentiator, IRX.

Speaker 2

In the Q3, we again delivered double digit growth in revenue, adjusted EBITDA, adjusted EPS and free cash flow. We remain nimble and focused on controlling what we can control And continue to direct our demand generation activities towards high growth sustainable end markets to accelerate market share gains. Finally, based on our continued robust performance year to date, we are once again raising our 2023 full year guidance. As we move to Slide 4, our economic growth engine is the key to delivering compounding annual results. During our last Investor Day in November 2021, we presented this model and highlighted our organic, inorganic and quality of earnings growth enablers.

Speaker 2

We remain committed to our strategy and our long term Investor Day targets as outlined on this page. In fact, We have so far exceeded our growth and margin commitments, including an organic orders and revenue CAGR of 12% and margin expansion of 170 basis points per year over the last 3 years. On the next slide, I will provide you with deeper insights into how we are accelerating organic growth in previously acquired businesses. So turning to the page to Slide 5, Here we have some examples of how we have driven outsized organic growth and margin expansion from recently acquired M and A. This is a testament to how we compound growth on recently acquired businesses and have examples from both our IPS and PST segments.

Speaker 2

On the left hand side of the page, we're highlighting our Leroy acquisition from June of 2017. We acquired this business for a purchase multiple of 11 times by pivoting our end market focus to high growth sustainable end markets, offering a complete ecosystem solution and leveraging our commercial footprint, we have achieved over 5 40% growth since the time of acquisition. In addition, our post tax ROIC is 155%, resulting in a 0.5 times post synergy adjusted EBITDA purchase multiple. Just an impressive result on how and what we can do with technologies once we incorporate them into our IRX process. On the right hand side of the page is our Air Dimension business, which was acquired in November of 2021, also at an 11 time purchase multiple.

Speaker 2

AirDimation serves high growth sustainable end markets like environmental services. And the team has delivered 27% revenue growth over the last 2 years by leveraging IRX, rapidly integrating our demand generation process and launching new innovative technologies. And given the outsized growth this business has delivered over the past 2 years, we're very well on track to exceed our 3 year post tax ROIC target demonstrated by already delivering a post synergy adjusted EBITDA purchase multiple of 8 times. Next on Slide 6. M and A continues to be at the forefront of our capital allocation strategy to compound value similar to the examples we displayed on the previous slide.

Speaker 2

We're pleased to highlight 2 recent closed transactions. With these two acquisitions, We have closed on approximately $190,000,000 of annualized inorganic revenue, which puts us very close to the bottom end of $200,000,000 to $300,000,000 of annualized inorganic revenue targets we set forth at the beginning of the year, And we have no doubt in our ability to deliver our target this year. Let me walk you through these two recent acquisitions. First, OxyWise, which is based in Slovakia. It's a leading provider of on-site oxygen and nitrogen generation systems.

Speaker 2

This acquisition Our technology ecosystem with a complementary product to the compressor and increases Ingersoll Rand's broader air treatment capabilities in point of use oxygen generation. Next is Fraser Woods, which is a leading provider of aftermarket services for blowers and pumps in the vacuum truck market. This acquisition expands Ingersoll Rand's technical expertise and service capabilities in Western Canada. Our M and A funnel remains very strong. And as of today, it continues to be over 5 times larger than it was at the time of the R and D.

Speaker 2

The characteristics of the targets in our funnel continue to be bolt on in nature with the exception of a couple that are approximately $1,000,000,000 purchase price. On Slide 7, as highlighted in the middle of the page, we continue to be recognized for our corporate responsibility, And we're proud that 3BL Media recently named us as one of the top 100 best corporate citizens in 2023. We're recently ranked on the top 3% among the Russell 1,000. Being a corporate citizen is part of our high performance employee ownership culture. Our company purpose of making life better is deeply ingrained into everything we do, including partnerships with community focused organizations such as the American Heart In addition to striving to be a responsible corporate citizen, We're thrilled to be named Best Companies to Work For in the Industrials and Business Service Sector, Receiving High Marks in Employee Sense of Belonging.

Speaker 2

We believe our employee ownership model drives increased employee engagement. And as a long term shareholder, it creates economic opportunity for our employees and their families. I will turn now the presentation over to Vic to provide an update on our Q3 financial performance.

Speaker 1

Thanks, Ascente. On Slide 8, Fueled by IRX, we again delivered record results in Q3 through a balance of commercial and operational execution. Total company organic revenue increased 6% year over year with incremental margins of 38%. Book to bill was 0.94x, which was in line with expectations. As a reminder, we typically see book to bill above 1 in the first half of the year due to the longer cycle large project orders received and a book to bill below 1 in the second half as those large longer cycle projects convert into revenue.

Speaker 1

We remain encouraged by the strength of our backlog, which is up approximately 6% year over year. The strength in our backlog provides good visibility and momentum as we move into the Q4 of 2023 and begin to look towards 2024. The company delivered 3rd quarter adjusted EBITDA $462,000,000 a 23% year over year improvement and adjusted EBITDA margins of 26.5%, 170 basis point year over year improvement. It is important to note that these results are closely approaching our long term targets set forth during our 2021 Investor For the quarter, adjusted diluted earnings per share was $0.77 up 24% versus the prior year. Free cash flow generation for the quarter was $369,000,000 up 46% versus the prior year.

Speaker 1

Free cash flow margins for the quarter finished at 21%. Total liquidity at quarter end was $3,200,000,000 which was flat compared to the prior quarter. And our net leverage continues to remain near all time lows. At 0.9 turns, we are 0.1 turns better than both the prior year and prior quarter. Turning to Slide 9.

Speaker 1

For the total company, Q3 orders declined 2% and revenue increased 13%, both on an FX adjusted basis. Total company adjusted EBITDA increased 23% from the prior year. The ITS segment margin increased 260 basis points, While the PST segment margin improved 120 basis points. Notably, both segments remain pricecostdollarandmarginpositive, which speaks to the nimble actions of our teams despite persistent inflationary headwinds. Corporate costs Came in at approximately $44,000,000 for the quarter, driven by continued investments to support growth in areas like demand generation and IoT as well as the impact of incentive compensation adjustments.

Speaker 1

Adjusted diluted earnings per share for the quarter was up 24% to $0.77 per share. This $0.15 year over year increase includes a $0.03 headwind from interest expense. And finally, the adjusted tax rate for the quarter was 22%. Moving on to the next slide. Free cash flow for the quarter was 360 $1,000,000 including CapEx, which totaled $29,000,000 Total company liquidity was $3,200,000,000 based $1,200,000,000 of cash and $2,000,000,000 of availability on our revolving credit facility.

Speaker 1

Cash outflows for the quarter included $308,000,000 deployed to M and A, largely driven by the acquisition of Roots. We returned $8,000,000 to shareholders in dividends And no share repurchases were made during the Q3, although we remain committed to our annual share repurchase plan of approximately $250,000,000 for the full year. M and A remains our top priority for capital allocation, and we continue to expect M and A to be our primary usage of cash for the foreseeable future. We continue to have an active and healthy funnel of inorganic growth opportunities. This funnel consists primarily of bolt on M and A relatively similar in size, scope and nature to the assets we've acquired over the past 2 to 3 years.

Speaker 1

Turning to Slide 11. As we have always planned, we continue to transform our debt portfolio. After being upgraded to investment grade credit rating across all three rating agencies, we refinanced $1,500,000,000 of secured term loans for the issuance of unsecured investment grade bonds in the quarter. Our capital structure continues to evolve and is designed to facilitate our capital allocation strategy. And we remain committed to having a fully unsecured investment grade capital structure in the near future.

Speaker 1

As a result of this debt portfolio transformation, We have improved our fixed to floating ratio to 74% fixed and 26% floating, and our weighted average maturity on debt has moved from 4 years to 6 years. Finally, on an annualized basis, our interest expense has been reduced by approximately $20,000,000 This should deliver an annualized improvement ultimately $0.04 of earnings per share, which will be realized across both 2023 2024. I will now turn the call back to Vicente to discuss our segment results.

Speaker 2

Thanks, Vic. On Slide 12, our Industrial Technologies and Service segment delivered strong year over year organic revenue growth of 9.5%. Adjusted EBITDA increased 31% year over year with adjusted EBITDA margin of 20 8.8%, up 2 60 basis points from the prior year with an incremental margin of 42%. I would like to take a minute to note that these high 20s adjusted EBITDA margin are in line with our 2025 long term targets set during our Investors Day in 2021. So we're almost 2 years ahead of schedule in terms of achieving these results.

Speaker 2

Book to bill remains on track and finished in line with expectations at 0.94x. Consistent with previous guidance, We anticipate a book to bill of approximately one time for the year. As a reminder, we typically see a book to bill of above 1 in the first half As larger longer cycle orders are placed and below 1 in the second half as those larger longer cycle orders are shipped. Organic orders came in line with our expectations, down 8.7% as we are comping high teens organic orders growth from Q3 last year. Therefore, it is good to highlight that on a 2 year stack for the Q3, ITS organic quarters have grown 8%.

Speaker 2

Moving to the product line highlights. Core product lines continue to show strong momentum on a 2 year stack excluding FX and also Including the recent acquisitions of SPX Air Treatment and Roots Blowers. On a 2 year stack, compressor orders were up low double digits And revenue was up mid-30s. Industrial Banking and Blower orders were up mid teens and revenue was up low-30s. The Power Tools and Lifting was up low double digits on both orders and revenue.

Speaker 2

For additional detailed information on product lines and regional splits, We have moved the chart, which was previously included on this page to Slide 17 in the appendix. Moving to the innovation in action portion of the slide, we're highlighting a new oil free compressor recently launched in North America. This product is a great example of Ingersoll Rand leveraging I2V to deliver new products with best in class efficiency. This IIoT ready compressor is 14% more efficient than the previous model and it is 5% more efficient than the competition. Turning to Slide 13, revenue in the Precision and Science Technologies segment declined 5% organically.

Speaker 2

The decline in orders and revenue were primarily driven by the life science business, which continues to experience softness in the oxygen concentration and biopharma end markets. We remain positive about the underlying health of the PST business as short cycle orders in the industrial businesses were positive both sequentially and year over year. The increases in the shorter cycle business were driven by demand generation activities and lead time reductions. Overall, the PST segment remains on track to meet our long term Investor Day growth commitments, as illustrated on the chart on the bottom left hand side of the page. The 3 year organic order and revenue CAGR of 5% and 7%, respectively, are in line with the long term Investor Day targets of mid single digit plus growth.

Speaker 2

Additionally, The PST team delivered adjusted EBITDA of $94,000,000 which is up 2% year over year despite declines in revenue. Adjusted EBITDA margin was 30.3%, up 120 basis points year over year. The continued year over year improvement in our adjusted EBITDA margin is driven primarily by price cost improvements and synergy delivery on acquired businesses. For our PSP innovation in action, we're highlighting our YZ brand partnership with the largest natural gas transmitter in Europe, GRDF. During the Q2 of 2023, we executed a 10 year contract with GRDF to provide mission critical authorization equipment for Renewable Natural Gas or RNG.

Speaker 2

We're very excited about this partnership and believe that there are plenty of future growth opportunities as the European Union has committed to replacing 20% of lost Russian gas supply with RNG over the next 6 to 7 years. Moving to Slide 14. Given the year to date solid performance and continued momentum from backlog, where once again raising our 2023 guidance. For the full year, total company revenue is expected to grow between 14% and percent, which is a 200 basis point improvement versus our previous guidance. We anticipate organic growth of 9% to 11%, Where price and volume remains split approximately sixty-forty.

Speaker 2

FX is now expected to show a slight headwind of approximately 1% on a full year basis. Our revenue from M and A has increased by $60,000,000 to approximately $360,000,000 for the full year. This increase reflects the impact from all completed and closed M and A transactions as of November 1, 2023. Corporate costs are planned at $170,000,000 for the year. Total adjusted EBITDA for the company is expected to be in the range of 1 $730,000,000 $1,770,000,000 which is up 2% versus prior guidance and up 9% versus our initial guidance at the midpoint.

Speaker 2

At the bottom of the table, adjusted EPS is projected to be within the range of $2.81 $2.89 which is up 21% year over year at the midpoint. We're also reaffirming a book to bill of approximately 1 for the full year, which puts us in a solid position as we look to enter 2024. Based on our current full year outlook, backlog will finish at near record level highs, and we will end the year with approximately 40% higher backlog compared to the balance at the end of 2021. As Vik had mentioned earlier on the call, Interest expense is now projected at $155,000,000 with a portion of the interest expense savings from the debt restructuring being realized in 2023. No changes have been made to our guidance on the adjusted tax rate or CapEx spend as a percentage of revenue.

Speaker 2

They remain in line with both initial and prior guidance. On the bottom right hand side of the page, we included some additional commentary specifically around Q4. We do expect organic orders to be positive both sequentially and year over year. In addition, we anticipate organic revenue to be positive in both price and volume year over year. Incremental margins are expected to be approximately 35% for both Q4 and the full year.

Speaker 2

Turning to Slide 15. As we wrap up today's call, I want to reiterate that Ingersoll Rand remains in a strong position, And we're proving how resilient we are even in difficult micro environments. We continue to deliver record results And our updated guidance is reflective of our year to date performance and ongoing backlog momentum. To our employees, I want to thank you for another quarter of record results. These results show the impact each of you have as owners of Ingersoll Rand.

Speaker 2

We will remain focused on our commitment to meeting our financial targets and executing our economic growth engine using IRX. As we continue our track record of market outperformance, our balance sheet is as strong as ever. And with our and comprehensive capital allocation strategy, we remain resilient and have the capacity to deploy capital to investments with the highest return. We remain nimble and continue to monitor the dynamic market conditions and are prepared for the challenges that may come. With that, I will turn the call back to the operator to open the call up for Q and A.

Operator

Question and answer session. Your first question comes from the line of Mike Halloran from Baird. Please go ahead.

Speaker 3

Hey, good morning, everyone.

Speaker 1

Good morning, Mike. Good morning, Mike.

Speaker 4

So a couple of questions here. First, could you just put the order trajectory and trends in context for us? Certainly understand some of the life science stuff, but when you look at more of the industrial assets you have, why the confidence in the order recoveries you look to the 4th quarter. Are you seeing any signs of softening at points to the portfolio? And how do you think about the underlying momentum of the business as we look into 2024?

Speaker 2

Yes, Mike. So maybe a couple of things here. First, as we mentioned earlier on the call, I mean, Q3 What we saw in Q3 is really on a year over year is really driven in large due to the tough comps from prior year, as you saw kind of Q2 Q3 of 2022, ITS was up 16% and PST up 3%. So I would say that Q3 orders finished in line with the expectations that we had. Even To your other question about what we were seeing underlying demand, we made a reference that even on the PST side, When you look at the short cycle business, which is really more driven by industrial side, I mean, we saw sequentially that business to be short cycle industrial being up Q2 to Q3 and also up year over year from an order perspective organically.

Speaker 2

I would also highlight that even our ITS segment. When you look at Mainline Europe, Q3 order momentum was actually higher than Q2. So So we still feel that the underlying businesses are performing to our expectations. We also, as you know, really look at this From an MQL perspective, the marketing qualified leads, we see stability, we see solid kind of continued momentum on that. And as we kind of head into the Q4, the level of confidence on what we said about orders sequentially being up and also on a year over year is driven by a lot of these kind of data points as well as long cycle visibility that we have coming into the Q4.

Speaker 4

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

Speaker 2

close rates. Yes, no, definitely, Mike. I will say that the sentiment has been on the positive side for us as buyers and acquirers. And as you well know, a lot of our M and A is sole source driven by A lot of the outreach that we do, to many cases, family owned companies. And I think the What you continue to see in the market for the macro environment, I think that is really enticing and encouraging others to really think about how to transition Those multi generation family companies to a great company like ours, where as you know, we do a lot of work around Ownership, employee engagement, and that's a big attracting factor for a lot of these companies to transition to us.

Speaker 2

So I think we're seeing continued very strong activity on the M and As.

Speaker 4

Great. Really appreciate it. Thank you.

Speaker 2

Thank you, Mike.

Operator

Your next question comes from the line of Julian Mitchell from Barclays. Please go ahead.

Speaker 5

Thanks. Good morning. Maybe, so looking at the Q4 guide, it looks like it's Sort of mid single digit organic sales growth and mid-30s incremental margin. I just wondered, as The Q4 probably represents a somewhat more normal price cost and somewhat more normal sort of demand environment in the last year or 2. So as we look ahead, should we assume that that sort of mid-30s operating leverage is a good placeholder for the period beyond Q4.

Speaker 5

And on the organic top line, maybe there's a little bit less price next year than in Q4, but that sort of low to mid single digit rate is a good starting point for sales growth.

Speaker 1

Yes. Julian, this is Vic. I'll take that one. I think you're spot on both accords. In terms of the operating leverage, We've indicated, whether it be Q4 or full year and we've kind of been holding pretty steady to this that mid-30s call it roughly 35% incrementals range is where we expect to operate in and that's very consistent with I think where you've seen us historically.

Speaker 1

ITS maybe slightly on the higher side, but We think a mid-30s range is right, kind of where we would expect to play not just now, but on the go forward as well. And then in terms of the pricing side of the equation, yes, obviously, you've seen Much more elevated price realization over the last few years. But quite frankly, you've seen a lot of that now starting to get comped And now you're falling into a much, I'd say, more normalized lower single digit realm, and we would expect that kind of 1% to 2% net price to be a good proxy as we move into 2024. So yes, I think you're spot on,

Speaker 2

on both.

Speaker 5

Thanks very much. And then just my quick follow-up. PST, specifically, it can be Tricky from the outside to understand the moving parts on the revenue there. And you called out Vicente that the short cycle industrial bit is pretty good. The biopharma bit is still Bad, which everyone else has iterated as well.

Speaker 5

What's your sort of best view of that biopharma piece from here and kind of how large is that medical piece now of PST as we exit this year. I think when we look at next year, some people have talked about a V shape in biopharma. It's not obvious to me why that would happen at all, I just wanted your perspectives.

Speaker 2

Sure, Julien. So maybe a couple of things I'll say to you as well. So when you think about the PST, PST think about it that even when you Exclude the Life Science business, PST on 10 out of the 11 past quarter has been positive on organic orders and actually all organic revenue. So that tells you kind of the good strength of the rest of the PST segment. I mean, clearly, the life science, which is roughly about a quarter of the PST, has been on this kind of situation with biopharma, but also oxygen concentration.

Speaker 2

And the Life Science business has been probably negative organic order growth momentum for probably the past 6 quarters. So it's been now a little while, while the non life sciences has been positive. So yes, I mean, we're experiencing these challenges that others have indicated on our life sciences. I mean, I think The way we think about it is that for us biopharma, yes, we have some exposure, but it's not the biggest piece of our life science end market exposure within the PST. The biggest exposure for us is really oxygen concentration.

Speaker 2

And the oxygen concentration, when you think about it, really a great acceleration during the COVID days and is the one that we saw peotene into negative, more pronounced earlier and even the biopharma. So it was almost like a leading indicator for us. So as we kind of go here into the Q4 and maybe in the first half of next year, We see that more so next year, maybe an uptick, not in a V shape, but a continual doing better from an oxygen concentration side of the business. So we continue to think that PST as even you saw on that segment slide. I mean PST CAGR growth, organically revenue and orders momentum continues to be a segment that will see that mid single digit plus over the cycle and over time.

Speaker 2

I mean, it's with great characteristics on continuing to improve in that. So Again, I don't think it's going to be a V shape, but even if it's a V shape, it's not one that, again, we don't have that exposure in the biopharma.

Speaker 5

That's great. Thank you.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Jeff Sprague from Vertical Research Partners. Please go ahead.

Speaker 6

Hey, thank you. Good morning, everyone. Good morning, Good morning. Vicente, maybe elaborate a little bit on kind of this visibility on long cycle orders that you mentioned

Speaker 2

in Q4. And kind of

Speaker 6

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

Speaker 2

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

Speaker 6

And then I think it was Vic, maybe it was you when talking about deals saying there's a couple of $1,000,000,000 things in the pipeline. It sounds like you expect bolt ons Most likely, which would be, I guess, natural, but maybe kind of a little bit of color on What's going on in the bigger deals and the likelihood of getting something done in that size range?

Speaker 2

Yes. So that's right. I mean, we said on the call that we in the funnel continues to be very, really strong and mostly bolt on in nature, but there's a couple that are above $1,000,000,000 purchase price. And I'll say that those are very well in line with our M and A strategy. We should not think about it as being a 3rd leg of the company.

Speaker 2

For competitive reasons, we don't want to kind of get into a lot of details, but we feel very comfortable with kind of even where we are from a balance sheet perspective and being less than one time on our net debt to adjusted EBITDA ratio, it's actually puts us in a very Strong position to move forward with this transaction. But yes, we're very excited with how the M and A funnel continues to build and What we see in terms of getting things executed here over the next couple of quarters. Great. Thanks for the color. Thank you.

Operator

Your next question comes from the line of Andy Kaplowitz from Citigroup. Please go ahead.

Speaker 7

Hey, good morning, everyone.

Speaker 2

Good morning.

Speaker 7

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

Speaker 2

Sure, Andy. So, first of all, on the Chinese compressor, I mean, Clearly, not surprisingly, the overall China market has continued to be, I'll say, choppy and soft. However, you saw how we deliver. The team in Asia Pacific and particularly in China, again demonstrated one more time another quarter of kind of growth organically in the compressor side from an orders and revenue perspective, which speaks to the continued self help that the team is driving And leading relative to the overall performance of the market and we'll clearly share more examples of that as we head into the Investors Day. I'll say in Europe, no significant changes in demand.

Speaker 2

I mean MQL activities remain solid. We continue to focus our on demand generation for high growth sustainable end markets. Our economic engine is working. As I made on the remarks, I mean, we saw Even orders sequentially in Mainland Europe come from for the compressor side actually grew sequentially Q2 to Q3. So that gives us continued encouragement that again these self help initiatives are working And this kind of year over year tough comps is one that we're just not worried about as we see the underlying demand continue based on the self help.

Speaker 7

Vincente, maybe just following up on that. As the environment has been normalizing and interest rates are up here a little bit at least in the Your focus on energy efficiency and sustainability through your products, how do customers when you have conversations with customers, how do they balance sort of and maybe higher cost of financing versus your ability to provide them energy efficiency and sustainability. Is that still trumping the higher cost?

Speaker 2

Yes. Al Thierry, it's all about that ROI and the payback. And as customers prioritize CapEx as they go into 2024 and beyond, it's all going to be all about ROI, no different to how we do it ourselves internally. And these energy savings, energy efficiency is definitely driving the conversation at the top even at the C suite level now where customers are looking for what could do what can they do to drive this great payback. So again, This is how our sales guys sell.

Speaker 2

They sell based on total total ownership and ROI.

Speaker 7

Appreciate it.

Operator

Your next question comes from the line of Rob Wertheimer from Melius Research. Please go ahead.

Speaker 8

Thank you. Just to kind of follow-up on a couple of those comments, because I think what you've done in China has been impressive and maybe increasingly so. Is the market in China weakening? Do you have any sense of the outperformance gap that you've been able to deliver? Is it not widening because the continued growth in a market that's Kind of blown up a few results this quarter is great.

Speaker 8

And have you seen a competitive response? And if I may, Vicente, your comments on New York are relatively Are they meant to show or to reflect IRX and how you're generating better orders In a softening market or you're really just not seeing softening?

Speaker 2

Yes, great. I think the 2 there are pretty well I think IRX is definitely what is helping us drive this outperformance that we're seeing against the backdrop in the market. And even when you think about it that ISM and PMIs have been below 50 and we still have been able to deliver over the past few quarters really great strength in orders and revenue momentum. I think that is what gives us that uniqueness in terms of leveraging IRX as a differentiator. And clearly, we're not immune to the market, but it's all about controlling what we can control.

Speaker 2

And this is what our teams have done exceptionally well, guided and driven by how we leverage IRX as the execution engine to overdrive. And to the China slowdown question there, Rob, I'll say that China continues to be very soft and choppy. I was in China. I've been in China now twice over the past 5 months and just to see myself firsthand. And I think what the teams continue to do there is just incredible.

Speaker 2

But as we always said, we're in China for China And that is really also helping from a strategy perspective, because we're being view in the China market as a local almost like a local player, obviously, with Great reputation of a multinational and the great quality and innovation that we're launching. But again, it's a lot of self help that We're getting executed through the use of IRX. Okay. Thank you.

Speaker 7

Thank you.

Operator

Your next question comes from the line of Nigel Coe from Wolfe Research. Please go ahead.

Speaker 9

Thanks guys. Good morning. Hope you're all as well. A couple of ground. On PST, maybe could you just remind us after this, obviously, this correction, where is BioPharma as a proportion of that segment now?

Speaker 9

And then on the Q4 in PST, I think we're assuming a minus 5 To, I think, low to mid single digit growth there. I think the step up Q3 to Q4 It's a bit heavier than normal. So just wondering what you see in near term driving that improvement?

Speaker 2

Yes. Nigel, first on the PST, Overall, Life Science is about a quarter of the PST segment. And biopharma, it is I'll say maybe, I don't know, maybe a third of that quarter. And the big life science here for us, more so, is on the oxygen concentration side of the equation. I think it's important to note that when you look at PST segment ex Life Science, We have been able to kind of put organic orders and revenue positive momentum on 10 out of the last 11 quarters.

Speaker 2

So That kind of shows the good strength on and diversity of that segment that gives us confidence on that overall over the long cycle or cycle The mid single digit plus.

Speaker 1

Yes. And I think your second part of your question was the sequential movement from PST Q3 to Q4?

Speaker 2

That's right. Yes.

Speaker 1

Yes. I think we do expect to see what I'll say a slight nominal uptick from Q3 to Q4. I would remind you that this business doesn't I would say have a tremendous amount of seasonality comparatively speaking to other businesses. It's a relatively consistent quarter to quarter. But that being said, I'd say a combination of a couple of things.

Speaker 1

1, still continue to have relatively healthy backlog And that is reflected in terms of what we expect to ship in Q4 as well as, as Sante indicated, relatively healthy and good strong momentum on the what I'll call the industrial side of the business where you continue to see good order intake in Q3 and we would expect That continue into Q4. So again, for those reasons, we would expect to see a slight nominal uptick from Q3 to Q4, I'd say relatively consistent to what you've seen historically.

Speaker 9

Okay. That's great. Thanks, Beck. And then on the I mean, Jeff asked the question as well, but I just want to follow-up on the couple of the $1,000,000,000 type transactions. Are these typical property sourced negotiated deals?

Speaker 9

Or are these more sort of investment banking driven auction type processes?

Speaker 2

No, they're probably sourced. I mean, they're ones that we have been cultivating for quite some time.

Speaker 9

Okay, great. Well, good luck with that. Thanks.

Speaker 2

Yes, thank you.

Operator

Your next question comes from the line of Joe Ritchie from Goldman Sachs. Please go ahead.

Speaker 2

Hey, guys. Good morning. Good morning. Hey, Joe.

Speaker 10

Hey. So just a lot of color today. Thank you. Just as you're kind of thinking through the book to bill and the order rates As you head into 2024, so the expectation then that in the first half of twenty twenty four, we would expect a book to bill In ICS to be above 1 again, orders to continue to expand just based on what you're seeing today in your MQLs.

Speaker 1

Joe, yes, I think, obviously, we're not going to get into guidance for 2024 yet, but I think the construct remains consistent with what you indicated. I think in Generally any degree of a typical year book to bill above 1 through the first half of the year, particularly as that longer cycle Kind of orders funnel continues to progress through and then book to bill below 1, when I'd say a combination of normal seasonality combined with The longer cycle larger project shipping through the back half that will typically lead to that normal dynamic of book to bill above 1 in the first half and below 1 in the second half. Right now, No reason to think something anything differently for

Speaker 10

2024. Okay, great. And then maybe just, just a follow-up to that. Are you guys like hearing any concerns around projects pushing out a little bit to the right, just given what The rate environment looks like today and there's been a there's been, I think, a lot of concern in the market with certain end markets, at least, like Seeing projects pushed to the right like the renewable sector. I'm just curious what you're seeing specifically and the conversations that

Speaker 2

you're having with your customers. Well, Joe, I'd say nothing of significant or material change. And if anything, when we if we see projects pushed to the right, It is really mainly due to sites not been ready, which has been more driven by finding the labor to just get the sites on track and be done. Having heard much about the context of interest rates being the driver for getting these projects pushed to the right. Okay, great.

Speaker 2

Thanks guys. Thank you. Thank you.

Operator

Your next question comes from the line of Joe O'Dea from Wells Fargo. Please go

Speaker 11

ahead. Hi, good morning. Thanks for taking my questions.

Speaker 2

Good morning.

Speaker 11

I wanted to start on Resource Allocation Planning for 2024 and I think you've got a model that allows you to be pretty nimble as you sort of exploit growth where growth is. And so what are you doing now? What's kind of underway in terms of how you want to position those resources? I'm thinking from a geographic perspective, from an end market perspective, Where you see growth is most attractive and how you're positioning for that?

Speaker 2

It's an interesting question. Again, and also maybe a few weeks ago, We were actually we were together in with our team, our demand generation team in Poland, where we had a long week session, particularly thinking and looking at what are we seeing today and what do we expect to see in 2024 And how do we position the next level of demand generation activities to really position us in good strength as we go into 2024. So All of that work is undergoing. I can tell you that the one level of detail I'll tell you as you kind of double click on that is that It varies region by region and even country in countries within the region. Like for example, in Mainland Europe, What we might be doing in France is very different from what we might be doing in the UK.

Speaker 2

And a lot of that is driven by what we're seeing at the micro level. So that's the level of detail that we undergo and we as a team kind of put together To really understand those best growth vectors that we're seeing at the micro level versus not keeping it at the macro, Which if you do it at the micro, you're going to get a few product wrong. So that's the exciting piece is that as a team, we cannot get together and we feel that we're in pretty good momentum here to start 2024 in a good shape.

Speaker 11

Appreciate it. And then I wanted to ask on the ROI side and the example you gave on the oil free compressor and fourteen more efficient than the previous model and just any more perspective on when that previous model would have been launched to get a sense of would customers be at sort of a natural kind of replacement stage or what about that ROI Is compelling such that the payback would encourage them to replace ahead of the natural aging of the prior model system.

Speaker 2

Yes. Joel, I will say that right now, ROI is and again, it could vary by region, But we're seeing ROIs between 12 to 15 months. So it's a really great payback, again driven by a combination of energy efficiency, But also driven by higher energy cost. So I think it's just one of those that we're driving really hard. And customers, when they see a payback of 12 to 15 months, or call it less than 2 years and combine that with the sustainability and what many of them Have to do with Scope 1 and Scope 2 is the other kind of great factor that gives us great tailwind.

Speaker 11

Got it. Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Chris Snyder from UBS. Please go ahead.

Speaker 3

Thank you. I wanted to ask on the Q4, The guide a pretty wide range of outcomes in the organic growth guide, anywhere from down 1 to up 6 by my math. Can you just maybe talk about some of the puts and takes or the variables that would drive the range of outcomes from the high end to the low end? Thank you.

Speaker 1

Yes, sure Chris. I what I would probably tell you here is, we kind of view it as probably frankly a bit of a tighter spread than that. But if I take it by the 2 component. So maybe I'll talk kind of year over year based on the guide here. Like we said, we do expect to see positive organic growth that Across both segments starting on the ITS side.

Speaker 1

If you're thinking the guide would imply something in the range of roughly approximately 3 percent organic growth year over year. Again, given the pricing momentum we've seen as well as an expectation for organic volume growth, You can probably think of it as roughly speaking 2 thirds price, 1 third volume. And I think I would fall back on kind of exactly what we said all year is that if there's kind of an upside opportunity in the context of the guide. And as we think about Q4, it would really be that organic volume side of the equation, particularly on the I'm sorry, on the ITS side, where again backlog continues to remain at effectively record levels. On the PST side, I'll go back to kind of some of the commentary we made earlier here.

Speaker 1

Again, again, continue to expect to see organic positive organic growth. Probably a little bit more of a pricing tailwind comparatively speaking to what you've seen in ITS. And I would just really frankly attribute that more so to what we've said over the course of the last 1 to 2 years. ITS probably got out a little bit quicker than PSD on the pricing front. And as such now PSD probably has a little bit of a longer detail on the pricing side of the equation.

Speaker 1

But again, those would be kind of the dynamics we would expect. But again, we would expect positive on both sides of the equation, effectively falling at the midpoint of the guide as you saw us make, in the prepared comments.

Speaker 2

Thank you for that.

Speaker 3

Really, really, really helpful. Maybe for my follow-up, just on prior commentary around this expecting sequential order improvement into Q4. It doesn't really seem like that's seasonal. It seems like Typically Q4 orders are similar to Q3, if not lower. So should we take that is that just around timing of some of these bigger projects coming through.

Speaker 3

Or is that a signal of demand is at least stabilizing, if not improving? Thank you.

Speaker 1

Yes. I would actually say it's probably a function of growth. So for example, if you go back to last year, we acknowledge and you heard Vicente say in the prepared comments, Q3 was kind of a peak from an orders perspective in the context of some of these longer cycle orders, Some biogas orders, some things we saw last year that created that tough comp, right? And we did see we even indicated last year that think about it more on a second basis where you saw Q4 orders kind of normalize comparatively speaking to Q3. Now you're kind of facing the other side of that equation.

Speaker 1

So obviously very tough comps in Q3, which we acknowledged, you saw that kind of play itself out. And now as you think Q3 to Q4, I think a combination of consistent stable kind of MQLs, stable demand patterns, some of the longer cycle dynamics that Vicente spoke to. I think that sets up for what we're expecting to see in terms of the positive trajectory both from Q3 to Q4 as well as on a year over year basis. Is there some degree of seasonality that is particularly a little bit more on the ITS side? Yes.

Speaker 1

I guess, obviously, with some of the other noise, you haven't necessarily seen that as prevalent, particularly in the last few years. But I wouldn't speak to any dramatic seasonality of No Plan itself out this year, whether it be ITS or PST.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Nathan Jones from Stifel. Please go ahead.

Speaker 12

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

Speaker 2

Yes, Adam, I will say, again, given the highly nature of our products. There's really no material risk on the destocking. And that serves That comment serves really well for the ITS segment. And for the PST segment on those businesses that kind of sell through distribution, We monitor really closely the sell in and the sell through or the sell out activities to ensure that we prevent our customers from getting into an overstock situation. And we have been doing this that way for probably I mean, we have data points over the past 5 years To really have a good view as to what's going on in the distribution channel.

Speaker 12

Okay. That makes sense. And then my on my follow-up, The Power Tools and Lifting business continues to show really solid growth. That business has really improved under your ownership. What's driving the strength there?

Speaker 12

And I believe that business has been considered non core in the past. So maybe could you provide an update on How you're thinking about the portfolio and the potential for portfolio rationalization? Thanks.

Speaker 2

Sure. So you're absolutely right that the PTL business has really done incredibly well. And to point that when we acquired Ingersoll Rand, PTL came in with mid teens EBITDA margin and now it's pretty close to that ITS kind of blended average kind of getting to that point. So great improvement while still growing the business. The real nature of a lot of this has really been new product introduction.

Speaker 2

So the team has done a really great job of reinvigorating new product. And I think the exciting piece here is that as we look into 2024, they're going to be launching a next generation set of tools as well as lifting mechanisms that we think could continue to see some good performance.

Speaker 12

Thank you for taking my questions.

Operator

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

Speaker 2

Great. Thanks everyone for your level of interest. And as we sit on the call, I want to thank again all of our 20,000 employees across Ingersoll We're owners of Ingersoll Rand and have a great performance here as we kind of close the year and as we go into 2020 So thanks again for the interest and look forward to catching up with many of you. Thank you. Thank you.

Speaker 2

Bye bye.

Operator

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

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Earnings Conference Call
Adient Q3 2023
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