Ingersoll Rand Q4 2025 Earnings Call Transcript

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Provided by AlphaStreet
February 14, 2025
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Operator

Hello and welcome to the Ingersol Rand 2024 4th-Quarter Earnings 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. And if you would like to ask a question during this time, please press star one on your telephone keypad. I would now like to turn the conference over to Matthew Fort, Vice-President of Investor Relations. You may begin.

Matthew Fort
Vice President, Investor Relations and Global Financial Planning & Analysis. at Ingersoll Rand

Thank you, and welcome to the Ingersall Rand 2024 4th-Quarter Earnings Call. I'm Matthew Fort, Vice-President of Investor Relations. And joining me this morning are Vicente Ronal, Chairman and CEO; and Vick Kinney, Chief Financial Officer. We issued our earnings release and presentation yesterday afternoon, and we will reference these during the call. Both are available on the Investor Relations section of our website.

In addition, a replay of this conference call will be available later today. Before we start, I want to remind everyone that certain statements on this call are forward-looking in nature and are subject to the risks and uncertainties as discussed in our previous SEC filings, which you should read in conjunction with the information provided on this call. Please review the forward-looking statements on Slide 2 for more details.

In addition, in today's remarks, we will refer to certain non-GAAP financial measures. You can find a reconciliation of these measures to the most comparable measure calculated and presented in accordance with GAAP in our slide presentation and in our earnings release, both of which are available on the Investor Relations section of our website. On today's call, we will review our company and segment financial highlights and provide full-year 2025 guidance. For today's Q&A session, we ask that each caller keep to one question and one follow-up to allow time for other participants. At this time, I will turn the call over to Vicente.

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Thanks, Matthew, and good morning to all. Starting on Slide 3, the key to our financial durability is our economic growth engine, which helped us to deliver outperformance in 2024 with double-digit adjusted EPS growth and strong free-cash flow margin despite a very dynamic global market. Looking towards 2025, we see continued growth underpinned by organic investments and plenty of runway for our inorganic growth with over 200 active targets in the funnel. And we also expect strong operational execution through the use of our competitive differentiator IRX.

Most importantly, I want to thank all of our employees around the world for their contributions and always thinking and acting like owners of the company. On Slide 4, we're highlighting the differentiated company results delivered through our economic growth engine. With IRX underpinned by our innovative employee ownership model, we have created an increasingly durable financial profile with over 20,000 employees working towards our company's common goals.

As shown on the page, over the cycle, we have either delivered or outperformed our long-term Investor Day targets across all targets. On Slide 5, we continue to be a leader in sustainability, delivering financial performance while also doing good for the planet, our community and our employees. On the left-hand side of the page, for the third year in a row, we were named to the Dow Jones best-in-class Indices, ranking number-one in our industry and finishing in the top 1% of the corporate sustainability assessment.

Also for the second year in a row, was named to the A-list for our commitment to global environmental leadership by CDP. CDP's annual environmental disclosure and scoring process is globally recognized as the gold standard for corporate transparency. As you can see on the right-hand side of the page, with the ownership equity grants provided and through the performance of the company to date, we have created approximately $700 million of incremental wealth for our employees. We strongly believe that the combination of our ownership mindset and creating a great place to work is a true catalyst for long-term performance.

Moving to the next page, since the merger with in 2020, we have transformed the company into a premier growth compounder. We've reduced cyclicality through divesting our Cloud card and HPS businesses and we have reinvested approximately $5.4 billion into accretive acquisitions focused on high-growth sustainable end-markets. Through this transformation, in just three years, we have nearly doubled our total addressable market both through acquisitions and with continued organic investments in-product and service innovation. We believe that we're very uniquely positioned to grow our market-share within the $67 billion highly fragmented market through the combination of our innovative product portfolio, multichannel, multi-brand strategy and robust commercial and operational footprint, which is well-positioned for the current dynamic macro-environment.

On the right-hand side of the page, I want to highlight that our M&A strategy remains unchanged and that we will continue to be disciplined in our approach for M&A execution, creating shareholder value while further positioning ourselves in highly-attractive end-markets. Turning to Slide 7, we continue to diversify our products and portfolios into high-growth, high-growth sustainable end-markets and have expanded our total addressable market by approximately $12 billion in 2024. We acquired approximately $625 million in annualized revenue from 18 acquisitions at less than 14 times pre-synergy adjusted EBITDA multiple purchase.

And currently, we have seven additional transactions at the LOI stage as shown on the right-hand side of the page. Since our Q3 earnings call, we have closed on six companies, including channel acquisitions. We have added 40 companies to the LOI stage and abandoned one transaction. Our M&A funnel remains strong with over 200 companies currently funnel and we expect to acquire an additional 400 to 500 basis-points of annualized inorganic revenue in 2025, which will be incremental to our current guidance outlined later in this deck. On the next slide, having already closed on multiple transactions this year, we're off to a strong start to achieving our 2025 annualized inorganic revenue acquired target.

On this page, we're highlighting three acquisitions, which are highly aligned to our M&A strategy. Bolt-on in nature, these acquisitions expand our capabilities in core technologies focused in high-growth sustainable end-markets. And with an average of less than 10 times pre-synergy adjusted EBITDA purchase multiple, we continue to demonstrate our disciplined approach to M&A and expect to meet a mid-teens ROICE on average for these deals by the end-of-the third year of ownership. I will now turn the presentation over to Vic to provide an update on our Q4 and full-year 2024 financial performance.

Vikram Kini
Senior Vice President, Chief Financial Officer at Ingersoll Rand

Thanks, Vicente. Starting on Slide nine, we delivered strong results through our competitive differentiator IRX despite a very dynamic global market. Total company orders and revenue improved sequentially, both of which finished largely in-line with expectations. In our underpenetrated markets, which include Latin-America, the Middle-East, India and APAC, excluding China, we saw robust growth in both orders and revenue. These results underscore the focused investments for growth we continue to make in these markets. The company delivered 3rd-quarter adjusted EBITDA of $532 million, a 6% year-over-year improvement and near-record adjusted EBITDA margin of 28%, a 50 basis-point Year-over-year improvement driven predominantly through gross margin expansion. Adjusted earnings per share was $0.84 for the quarter and $3.29 for the full-year. We continue to deliver on our long-term Investor Day targets of double-digit EPS growth, finishing up 11% for the full-year compared to 2023. Free-cash flow for the quarter was $491 million, delivering a robust 26% free-cash flow margin in the quarter. Total liquidity was $4.1 billion with $1.5 billion of cash-on-hand at quarter-end, demonstrating the tremendous strength of our balance sheet. Turning to Slide 10, for the total company, Q4 orders were up 8% and revenue increased by 4%. Book-to-bill for the quarter was 0.95, finishing in-line with our previous guidance of above one-time in the first-half and below onetime in the second-half. Total company adjusted EBITDA increased 6% from the prior year, expanding margin 50 basis-points year-over-year with corporate costs coming in at $32 million for the quarter, which is down $15 million year-over-year due in large part to management incentive costs. Finally, adjusted EPS for the quarter finished $0.84 per share, including a Q4 adjusted tax-rate of 23.4%. On Slide 11, for the full-year, total company orders were up 4% and revenue increased 5%. Book-to-bill finished the year at 0.98%, which finished largely in-line with expectations. Total company adjusted EBITDA increased 13% year-over-year with adjusted EBITDA margin finishing at record levels of 27.9%, up 190 basis-points from the prior year. Corporate costs finished the year at approximately $155 million, which is down $18 million year-over-year. The year-over-year declines once again are largely attributable to a reduction in management incentive costs as compared to the prior year. Finally, full-year adjusted EPS finished at $3.29 per share, up 11% year-over-year with a full-year adjusted tax-rate of 22.2%. On the next slide, free-cash flow for the quarter was $491 million, including capex, which totaled $35 million. Total company liquidity now stands at $4.1 billion based on approximately $1.5 billion of cash and $2.6 billion of availability on our revolving credit facility. As Vasante mentioned earlier, we are targeting 400 to 500 basis-points of annualized inorganic revenue acquired in 2025 and still have seven additional transactions currently under LOI. With over 200 companies currently in the funnel and our continued strength in free-cash flow generation, we are confident in our ability to deliver on this target. Leverage for the quarter was 1.6 turns, which was a one turn increase year-over-year and a 0.1 turn improvement sequentially versus Q3. As a reminder, the year-over-year increase in leverage was driven primarily due to the purchase of ILC Dover earlier in 2024. Specifically within the quarter, cash outflows included $200 million deployed to M&A as well as $71 million returned to shareholders through $63 million in share repurchases and $8 million for our dividend payment. I will now turn the call-back to Vicente to discuss our segment results.

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Thanks, Vig. On Slide 13, 4th-quarter orders for ITS finished up 3% year-over-year and were approximately flat organically. Excluding the impact of China and the power tools and lifting business, Q4 organic orders grew low-single digits. Revenue finished down low-single digits organically with the largest impact coming from our China business. Our ITS segment delivered solid year-over-year adjusted EBITDA margin expansion of 30 basis-points on-top of near-record level margin from the prior year.

For the full-year, adjusted EBITDA margin finished at a record level of 30.2%, already meeting our 2027 targets three years ahead of schedule. Moving to the product-line highlights, compressor orders were up low-single digits, industrial vacuum and blower orders were up mid-teens and power tools and lifting orders were down mid-single digits. Highlighted here on our innovation in action is our new pure air oil-free compressor.

This product is a great example of Ingersoll Rand's multichannel, multi-brand strategy, providing an innovative, digitally-enabled sustainable solution with a market-leading 14% energy efficiency improvement. With 100% oil less technology, this product is perfect for applications which require FDA approval. Turning to Slide 14, orders in PSC were up 29% and revenue finished 24% year-over-year, largely driven by M&A. 4th-quarter organic orders finished slightly down year-over-year.

However, it is important to note that we did see low-single digit organic order growth excluding the impact of China. PST delivered adjusted EBITDA of $107 million, which was up approximately 14% year-over-year with a margin of 27.6%. The year-over-year decline in Q4 adjusted EBITDA margin was largely due to the impact of lower volumes in the Aerospace and defense business within the ILC Dover business as well as the flow-through related to organic volume declines primarily attributed to China. Important to note that PSP finished the full-year at approximately 30% adjusted EBITDA margin despite the organic growth headwinds. I would also like to take a minute to review some key highlights within our ILC Dover business. In the 4th-quarter, ILC Dover Life Science business grew revenue double-digits, which demonstrated their continued ability to deliver above-market growth.

Also, I am pleased to announce that in December, we reached a $150 million-plus multi-year agreement for our legacy business. This long-term deal has been incorporated in our 2025 guidance and we remain optimistic about the opportunities for growth within the Aerospace and defense business. For our PST innovation in action, we're highlighting a new diaphragm metering pump, which offers increased energy efficiency and 20% reduction in total cost of ownership. This is a perfect example of innovation, generating over $50 million of additional market opportunities in key markets that include water and wastewater. Moving to Page 15, we're introducing our 2025 guidance.

Total company revenue is expected to grow between 3% and 5%. We anticipate organic growth of 1% to 3% or price and volume are split 75% and 25%. FX is expected to be approximately a 2% headwind for the year. M&A is projected at $300 million, which reflects all completed and closed M&A transactions in 2024 as well as the acquisitions of SSI Ariation and Excelsio Blower systems discussed earlier. Corporate costs are planned at $165 million and are expected to be incurred evenly per quarter throughout the year. Total adjusted EBITDA for the company is expected to be in the range of $2.13 billion and $2.19 billion.

At the bottom of the table, adjusted EPS is projected to fall within the range of $3.38 and $3.50, which is approximately up 5% at the midpoint. We anticipate our adjusted tax-rate to be roughly 23%, net interest expense to be about $220 million and capex to be around 2% of revenue revenues. On the right-hand side of the page, we have included a 2025 full-year guidance bridge showing the growth associated with the operational activity and the impacts associated with FX, interest income and expense, tax-rate, corporate cost and share count.

On the next slide, we have provided some additional commentary regarding the phasing of our 2025 full-year guidance. So let me touch on a few key highlights. We expect total revenue growth to be consistent across both the first and the second-half of the year at approximately 3% to 5%. Consistent with what we have seen over the past few years, we expect sequential improvement throughout the year with Q1 being the lowest quarter in terms of revenue. To put a finer point on-Q1, we expect to see a very similar percentage decline in terms of revenue from Q4 '24 to-Q1 '25 to what we saw in the prior year. What that should equal to is low-single digit total revenue growth in the first-quarter. The 2025 phasing of both our revenue and adjusted EBITDA remains consistent with prior years. And this is illustrated on the right-hand side of the page showing both our historical revenue and adjusted EBITDA phasing since 2021 and our assumptions for 2025.

Finally, we expect adjusted EPS to follow the adjusted EBITDA phasing with a 46% to 54% split between the first and second-half of the year. Turning to Slide 17, is well-positioned for strong operational performance in 2025. We remain nimble and we're prepared to pivot in what continues to be a very dynamic global market environment. We continue to differentiate as an investment delivering double-digit revenue and adjusted EBITDA growth on average since 2020. To our employees, I want to thank you again for your part in delivering another record year. We delivered strong results by demonstrating our commitment to meeting our financial targets and executing our economic growth engine through the use of IRX. Today, our balance sheet remains stronger than ever, and we enter 2025 well-positioned to build upon our success to date. With that, I'll turn the call-back to the operator and open it for Q&A.

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Operator

Thank you. If you would like to ask a question, please press star one on your telephone keypad. Please ensure you are not on speaker phone and that your phone is not on-mute when called upon. Thank you. Your first question comes from Mike Halloran with Baird. Your line is open.

Michael Halloran
Analyst at Robert W. Baird

Hey, good morning, everyone. Can we just talk a little about some assumptions embedded in the guidance from a demand perspective? Essentially, how are you thinking about what the underlying demand cadence looks like through the year more qualitatively?

Are you expecting any improvement in end-markets more stability, thoughts on how you think the orders play-out this year and what kind of growth assumptions we're assuming as we move forward?

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Yeah, Mike. So kind of let me frame it this way. As we discussed in terms of total revenue phasing, we're expecting to look very quite similar to what we have seen historically. So if you think about that total revenue and EBITDA, it is consistent with prior years. From -- and then from an overall organic growth perspective, just as a reminder, price is approximately 70% of the total and we can clearly control that as you know.

And the other 25% is coming in from positive volume. And for that, we continue to be highly encouraged by the many growth initiatives that we're driving, such as the unpenetrated region acceleration that we talked about, very specific targeted new product development and obviously, our continued progress on recurring revenue. When you think about these organic growth is expected approximately flat in the first-half of the year with approximately 4% growth expected in the back-half of the year. And again, of that 4% back-half organic growth, approximately half of that will be realized through pricing.

So we're just talking about a 2% organic volume in that second-half. And as I said, a lot of good organic investments that we're driving. And yes, comps also moderate in the back-half of the year, which also helps. In terms of the regional perspective, when you think about from a -- from a high-level growth assumptions at the regional level, America is planned to be in the upper-end of the low-single digits. Mainland Europe planned towards the lower-end of the low-single digits, China, assuming completely flattish? And then Middle-East, India and the rest of Asia is assuming the mid-single-digit range?

Michael Halloran
Analyst at Robert W. Baird

Okay. And just a finer point there. Is there an assumption for end-market improvement embedded in the guidance or is it relative stability from where we sit here today?

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Relative stability from where we sit here today? Yeah.

Michael Halloran
Analyst at Robert W. Baird

Okay. Thanks for that. And then on the PST side, can you maybe just talk a little bit about the margins in the quarter and a little worse than we were expecting and how to think about that ramp as we work-through this next year?

Vikram Kini
Senior Vice President, Chief Financial Officer at Ingersoll Rand

Yeah. Sure, Mike. This is Vic. I'll take that one. So in terms of within the quarter specifically, two major drivers that we point out. I think we called out kind of during the prepared comments. First is specifically lower volumes as we kind of talked about within the ILC Dover Aerospace and Defense business. So you had the deleveraging you saw there with the with the lack of volume, largely coming from the lack of the large space contract and things of that nature that we've talked about historically.

The other piece is the impact from the organic volume declines, which is, I'd say the largest driver of that is coming from China. Now as we think about going-forward, I think we remain quite optimistic about the long-term margin profile and the ability to get to our kind of Investor Day targets of those mid-30s over-time. When you think about the drivers, first and foremost, as you've seen historically, one, we expect to continue to remain price-cost positive throughout every single quarter like you've seen historically. Two, we do have a pretty robust productivity funnel.

I'd say there has been some targeted restructuring that has been done. And then the other piece of the equation here is, as you would expect, now that we've kind of owned ILC Dover for a little over six months, you typically see a lot of that margin expansion as we start a lot of the integration activities, synergy activity, things like that really ramp into the, let's say, first year into the second year. And that's exactly what we're expecting to see as we move through '25. So we would expect to see returning back to that 30% EBITDA margin profile as we progress through 2025 and we feel pretty comfortable about the ability to control the margin profile going-forward.

Michael Halloran
Analyst at Robert W. Baird

Thanks. Appreciate it guys.

Vikram Kini
Senior Vice President, Chief Financial Officer at Ingersoll Rand

Thanks. Thank you.

Operator

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

Julian Mitchell
Analyst at Barclays

Hi, good morning

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Good morning.

Julian Mitchell
Analyst at Barclays

Maybe -- Good morning. Maybe just wanted to start with the orders. It seemed that maybe they fell a touch light in Q4 versus what you had thought, was that all related to China or anything else happening there? And when we're thinking about the first-quarter, I think organic sales year-on-year are down low-single digits or so. Assuming a book-to-bill slightly above one for normal seasonality, are we thinking sort of flattish orders just mechanically for Ingersol year-on-year in Q1?

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Yeah, Julien. So to answer the first question, yes, I mean, it was basically primarily driven by China. China was a bit softer than anticipated, driven largely by kind of timing on a couple of large orders that kind of making the overall company organic order growth essentially flat. I think it's important to note that also in Q4, I mean, China book-to-bill was actually approximately one, which is encouraging. And also when you compare the first-half of 2024 to the second-half of 2024 for China. In terms of orders, China was basically essentially moving sideways, which speaks to some stability.

Also, you know, as you heard, excluding China, we will have finished up low-single digits in terms of organic orders in both segments, which speaks to the continued resiliency across the other regions despite this ever-changing dynamic environment. And I think looking-forward in respect to the timing of those large orders, I mean they're not gone. They just kind of move sideways. We continue to see very good funnel momentum on these longer-cycle projects, which is they just haven't converted yet. But as we kind of enter 2025, that kind of bodes well. And the good news is the dialog remains very, very active.

Vikram Kini
Senior Vice President, Chief Financial Officer at Ingersoll Rand

Yeah, Julian, on your second part of your question with regards to-Q1, I think your read on the kind of organic revenue growth of down low-single digits is in-line with -- that's with in-line with expectations. On the orders front, I'll say we don't guide on orders externally. But as we've historically said, this is a business that tends to be around one on a full-year basis. And sitting here today, I don't think we see anything materially different than what we've seen historically on the seasonality front?

Julian Mitchell
Analyst at Barclays

That's helpful. Thank you. And then my second question, I just wanted to circle back on PST and how you're sort of thinking about the EBITDA margin cadence through 2025 and sort of general satisfaction with the ILC Dover performance?

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Yeah, Julian, maybe I'll start with the ILC and then let talk about the margin cadence. I mean, I don't see it over -- continues to -- continues to improve and do pretty well. I would say very, very happy with the life science businesses. I'll see it over that we continue to see double-digit revenue growth, which is in-line with expectations, but way above the market. We're also having a lot of very good cross-selling and revenue synergy opportunity. And I think the conversations go really well with some pretty large medical device customers that they're pulling us into conversations, not just as an ILC Dover, but holistically as a total Ran and that that's a recent event that just happened here over the past couple of weeks and that's continued exciting to see.

We've done a lot of work at ILC Dover, including restructuring, as Vig mentioned, but now we're organized into three distinct P&Ls and that including also some new leadership in the P&L side. And this is driving greater visibility and focus all-around. The -- everything around the IRX implementation is going really well. Here at the end-of-the quarter, we're going to have another session around what we call commercial excellence execution, which is another tool that we have in our -- in our toolbox of IRX. So I'll say, continue to pursue the good momentum and very happy to see the continued performance on the business.

Vikram Kini
Senior Vice President, Chief Financial Officer at Ingersoll Rand

Yeah. And then Julien, on the margin front, let me just take a step-back and kind of calibrate. When we did our Investor Day, we kind of said that PST, we would expect approximately 100 basis-points of margin expansion on an annual basis. And I think the reality and kind of what's baked-in the guide here is actually slightly better than that. If you look at the full-year for PST, we finished at 29.6% EBITDA margin, obviously, slightly lower number than that here in Q4. But as we now kind of transition into 2025 with a lot of the Factors that Vicente said, the integration on the ILC overside, we would expect to see, I'd say, back kind of more in-line with where you've seen historically playing closer to that 30% range and sequentially improving, obviously, the easiest comp being in Q4 of next year.

Julian Mitchell
Analyst at Barclays

Thanks very much.

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Good. Thank you.

Operator

The next question comes from Jeff Sprog of Vertical Research. Your line is open.

Jeff Sprague
Analyst at Vertical Research Partners

Hey, thank you. Good morning, everyone. I wanted to touch base on the Aerospace and defense business. I think obviously, you bought IOC Dover for the Life Science business and that makes sense, right? And spacesuits kind of came along for the ride. But -- but at the time, you did indicate you like the business and may build and grow there.

It seems like it's become more of a distraction than anything. So really my question is, would you actually commit additional capital to these aero and defense-related businesses? Is there stuff in your pipeline, your funnel that plays into this space?

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Yeah, Jeff. So as you recall, we always said that the aerospace and defense was kind of optionality, an optionality both ways, one clearly to learn more about the space economy and the relationship that the strong relationship that ILC on that aerospace side has with many customers in that industry. And it has led to some kind of cross revenue synergies with some of our other compressor businesses like selling helium blanketing for some of the rocket shipment or rocket ships. Now, as we said, the kind of optionality to your question in terms of the M&A, do we have anything in the funnel for the specific things? The answer to that is no.

Jeff Sprague
Analyst at Vertical Research Partners

Okay. Great. And then just on the on the 400 to 500 bps of M&A impact. Just wanted to be kind of clear on that. So that's sort of excluding any wrap-around effect from what you did in 2024 and would just be the annualized impact of what might get accomplished in 2025.

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

That is correct. Yes. So we're saying that 400 to 500 basis-points is incremental to what we have in the guidance.

Jeff Sprague
Analyst at Vertical Research Partners

Got it. Thank you.

Operator

The next question comes from Rod Wertheimer with Melius Research. Your line is open. Rob, perhaps your line is on-mute not on-mute.

Rob Wertheimer
Analyst at Melius Research

Can you hear me now?

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Yes. We can hear you.

Rob Wertheimer
Analyst at Melius Research

I wasn't -- anyway. So sorry about that. So I think your comments on China were clarifying in that it doesn't seem like you experienced kind of a macro slowdown in the quarter, but rather order -- order comps. But could you talk about China in a more general sense? It's been tough to call for a while now.

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Yeah, Rob, I think you kind of fitted away there for so I think your question really is just talk about China and kind of what we see there. You know, I think we see -- we see stability. I mean, when you look at the order rates, first-half to the second-half, kind of fairly stable in the business. Also, when you kind of unpack China, there are some very good pockets of growth. I mean, we have some businesses like the blower and vacuum business that is actually growing organically at high-single-digits.

So we're seeing -- we're seeing that the investments we're making in-kind of localizing some technology and some very targeted focus in some specific end-markets, it seems that the payback of those investments into positive organic growth in China. So that's -- that's kind of the good news. I think in China in 2024, clearly, we were coming into a year that we had some very tough comps from 2023. I mean, 2023, the China team were growing at a pretty accelerated pace driven by electric vehicle investment, battery, solar production, which obviously that did not reoccur in 2024.

And so you know, I would say that the three times that I spent in China last year, I could see progress in movement in terms of the stability. So I mean the only thing I'll add to that here, Rob, is that as we said, we have been trying to also kind of pivot and reinvest a lot of our energy and organic investments outside of China. And that's exactly what you're seeing with the commentary that we just made. I was just in Vietnam, I was in Australia as well a few weeks ago and the momentum that we see in those countries based on the investments that we're making, it is very, very encouraging and very exciting to see the teams push through the initiatives as we see some of the growth move away from China and into some of those regions.

Operator

The next question comes from Andy Kaplowitz of Citigroup. Your line is open.

Andrew Kaplowitz
Analyst at Smith Barney Citigroup

Good morning, everyone.

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Good morning, Andy.

Andrew Kaplowitz
Analyst at Smith Barney Citigroup

It's interesting that you didn't speak about MQL this quarter. Maybe you want to get away from that, but can you give us an update on how your MQLs are looking? Last quarter, you mentioned they were still up 12% year-over-year, 7% sequentially, but that lead times at MQLs were getting extended. Have they extended further, MQL still up or maybe stepping back, how do you feel about your short-cycle businesses outside of China?

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Yeah. No, a good question there, Andy. And the MQL activity remain -- remains strong and finished the year up low-double-digit both in the 4th-quarter and for the full-year of 2024. So we continue to be encouraged by what we see on the MQL. And I would say that as we kind of move here, now I would say also too that our long-cycle pipeline as we talked about in historically, but we did not mention that here. I mean, the pipeline for that long-cycle, it's also up low double-digit for the full-year 2024, which is also very encouraging. So we're encouraged by the strong growth we saw in those MQLs and long-cycle.

Now clearly, we spoke before about the elongation of decision-making and things are happening as fast as historically has been. That continues to be the case. I would also say that you know on a better news, the customer conversation activity has increased and we see better momentum of conversations happening and potentially turning into some decision-making here as we move into 2025. So I would say that we continue to be encouraged, Andy, and the other thing I would highlight is that I was also in Poland with our team in the demand-generation center a few weeks ago and we have just an incredible talented team there that is taking this demand-generation of creating the, they're taking it to the next level.

Andrew Kaplowitz
Analyst at Smith Barney Citigroup

So very helpful. And then just back to the PST margins for one second. I think we understand that margin improvement can be slowed by weaker organic. But a lot of times when a company does a lot of M&A, it's hard to integrate the acquisitions, margin improvement slows. You're already at 30%, which is high. So I think, Vik, you mentioned some targeted restructuring, but maybe any lessons learned in terms of the greater acquisition strategy as this was a larger deal for you? Do you approach acquisitions differently at all, maybe you integrate differently because you're usually very good at integrating as you know?

Vikram Kini
Senior Vice President, Chief Financial Officer at Ingersoll Rand

Yeah, Andy, I think the simple answer is nothing of any that I would speak to specifically. We've had experience integrating larger assets. As for example, in the in the PST business, you had a few years ago, and we were pretty explicit that that's a fantastic differentiated technology, healthy gross margins, but the EBITDA margin profile was kind of in that, let's Call-IT, mid-teens area and we had the kind of guide path to get to kind of fleet average for PST and that's essentially where it's playing right now. As far as ILC Dover, I think, obviously, yes, you've had some of the volume deleverage and things of that nature on the aerospace and defense side.

But I think in terms of the core integration, the ability to kind of as Vicente mentioned, kind of restructure the business, three distinct P&Ls, some new leadership there and getting a little bit more streamlined, absolutely. I would tell you from an integration and kind of the pure blocking and tackling perspective, the ILC Dover has really progressed on that end in terms of our kind of core processes, utilizing IRX and then quite frankly, a lot of the core, I'd say, day-to-day processes that you've seen in Ingersol ran. So nothing I would point to that is really dramatically different from the ILC Dover perspective. And it's also worth noting the same can be said for, I'd say, the balance of the smaller bolt-ons that you saw in 2024 as well.

Andrew Kaplowitz
Analyst at Smith Barney Citigroup

I appreciate the color. Yeah.

Operator

Thank you. The next question comes from Stephen Volkmann of Jefferies. Your line is open.

Stephen Volkmann
Analyst at Jefferies Financial Group

Great. Good morning, everybody. Thanks for taking the question. Sorry if I missed this. I know you talked about incrementals, 45% 50%. Should we think about those pretty similarly, Vic in both of the segments?

Vikram Kini
Senior Vice President, Chief Financial Officer at Ingersoll Rand

Yeah. Thanks, Steve. So I think the answer there is, generally speaking, yes, I think there's maybe a little bit more opportunity on the PST side, particularly as you get to the back-half of 2025, just given kind of some of the margin comps you have. But generally speaking, I think they're in that comparable ballpark. That's correct.

Stephen Volkmann
Analyst at Jefferies Financial Group

Okay. All right. Thanks. And then Andy, I think almost touched on the question that I was going to ask, but it feels to me like you have sort of two competing targets here relative to margins, especially On PST, but also continuing to drive that 400 to 500 basis-points of M&A. As you know well, these M&A margins often come in a little bit lower at acquisition. And so it just feels like those two goals are kind of at odds with each other. And I'm curious, Vicente, how you sort of balance that as you think about hitting those PST margin targets in the mid-30s?

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Yeah. No, great question, Steve. A couple of things I'll say. Not all acquisitions are margins accretive. I want to highlight maybe one in the PST segment called ADI, which was a high-pressure pump that we acquired a couple of years ago. And if you remember, we acquired a business that had like 50% EBITDA margins today is at like 60% EBITDA margin. So I think it speaks to the power of what we can continue to do with good I mean, great business as a good solid margin that we can make them even better.

So I would say that we balance our M&A approach is based on the on the quality of the business that we see from an end-market perspective exposure that we can see high-growth sustainable end-markets with a margin profile that if it is not at that fleet average, we can continue to improve. So I would say that good blend even in our funnel today, we have a have you know an M&A portfolio of companies that could go into PST that could look that are basically at a higher-margin than the fleet average PST. So again, it's -- and I would say we look at that consistently and the fact is that is that not every business is going to be margin-accretive.

Stephen Volkmann
Analyst at Jefferies Financial Group

Got it. Okay. So the seven LOIs, I should just assume are 50% EBITDA margin.

Vikram Kini
Senior Vice President, Chief Financial Officer at Ingersoll Rand

Thank very good. Thanks.

Operator

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

Chris Snyder
Analyst at Morgan Stanley

Thank you. You mentioned a couple of bigger projects in China pushing to the right in Q4. Do you think that this was related to the US election outcome and just the expectation that incremental tariffs are coming? I mean, just in that same vein, has customer conversations in China changed following the election.

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Yeah. No, great question, Chris. Specifically this project, no, they were not related to the election. This is -- I mean, when you go to China, I mean, China is becoming a pretty large from an EPC perspective, engineering project and contracting companies and it had to do with End-User technical specifications and kind of more conversations as to these projects that require some of our critical technology. So in those cases, it was not related to the election.

In terms of overall, have we seen anything further from China as related to the elections? I would say not dramatic. Keeping in mind that January for China is kind of typically slow because of the Chinese New Year and things of that nature. But conversations with our team in China continue to be very positive as kind of they think about what could be -- could happen here in 2025, but nothing that we have seen election-wise related positive or negative.

Chris Snyder
Analyst at Morgan Stanley

Thank you. Appreciate that. And then maybe following-up with one for Vic. You know, it sounds like this year we're going to get that typical revenue step-down into Q1. Usually that is accompanied by a sequential step-down in margins on the lower volumes. Last year we didn't get that. So it feels like this Q1 margin comp is maybe particularly difficult. But should we expect margins to be down year-on-year in Q1? Any color on that would be appreciated. Thank you.

Vikram Kini
Senior Vice President, Chief Financial Officer at Ingersoll Rand

Yeah, Chris, let me start with your first comment in terms of -- and I think Vicente mentioned in our prepared remarks, the kind of normal sequential step-down you see from Q4 to-Q1, I think you're going to see a very similar level that you saw kind of prior year. So I think that's completely fair. I think in the context of the margin profile, you're right, we kind of came into the year in 2024 a '24 relatively quite healthy margins, I think that will be our stiffest comp in the context of year-over-year. So should you expect to see meaningful margin expansion in Q1? No, I wouldn't say that.

I would taper those expectations in that respect. I do think though as you progress through the year and particularly as you get to the back-half of the year and as I said earlier, clearly Q4, I think that's where you'll continue to see the step-up in margin. And I think the good news here is, I think a lot of the same levers that have historically existed, I mentioned before, pricing, productivity, some of those targeted restructuring actions, which have already kind of occurred, which means you kind of see them go into the into the run-rate as well as some of the M&A synergies are all going to kind of bear.

And then maybe the other piece to mention here that we actually haven't mentioned yet is the progress on recurring revenue. We continue to be really pleased with the with the kind of the trends that we're seeing kind of across-the-board. We did see a nice pickup on recurring revenue kind of in-line with expectations. And as expected, that comes with a bit of a margin premium. So you are seeing that largely on the ITS side and that is definitely helping, I'd say, on the mix side as well as the margin profile.

Chris Snyder
Analyst at Morgan Stanley

Thank you. I appreciate that.

Operator

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

Nicole DeBlase
Analyst at Deutsche Bank Aktiengesellschaft

Yeah, thanks. Good morning, guys. Good morning,. Maybe just continuing the tariff and election question more from a cost perspective. I guess, can you guys talk a little bit about the exposure that you have, whatever you're willing to provide as a percent of COGS with respect to Mexico, Canada, things that haven't been an issue before? And then any plans to offset what we've already seen with respect to tariff actions?

Vikram Kini
Senior Vice President, Chief Financial Officer at Ingersoll Rand

Yeah. Nicole, great question here. So let me just kind of start high-level. First and foremost, let me just start by saying there is actually nothing in our guidance today explicitly with regards to what I'll call incremental tariffs or any of the mitigation actions. As you know, the tariff situation remains pretty dynamic, but we believe we're really well-positioned, I think, to mitigate any of those impacts. So first and foremost, from an overall perspective, we're largely in-region for the region from a manufacturing standpoint, which does insulate us a bit and limits the kind of the overall impact of tariffs compared to others.

That being said, we're not immune to tariffs. Maybe to kind of size and I'll say, first of all, kind of the, I'd say domestic US kind of purchases from China specifically, it's a single-digit percentage of cost-of-goods-sold, right? So relatively muted, but there is a little bit of impact there. As you would expect, we have kind of what I'll call tiered mitigation plans ready to be executed and they vary based on the severity of the tariffs. That does include, I'd say, leveraging our global supply-chain to shift certain third-party procured materials to alternate sources based on the level of tariffs.

And then as you would expect, the balance of tariff impact will be mitigated through pricing actions. And I'll just kind of a little bit of a reminder, we faced a very similar situation back-in the kind of 2021 timeframe soon after the merger. And you saw us, we were able to navigate those waters pretty well. We stayed both dollar and margin-accretive and positive kind of throughout the duration. And so overall, we feel pretty good about our ability to manage through the tariff impact. And as you'd expect, we're continuing to monitor it pretty closely. So I feel pretty good kind of where we sit right now, but relatively limited and then specific to your question on Canada and Mexico, again, similar, fairly, fairly small impacts, but again, same kind of routine we're going through from a China perspective moving where needed and mitigating the balance through price.

Nicole DeBlase
Analyst at Deutsche Bank Aktiengesellschaft

Got it. That was super helpful. Thank you, Vic. And then on PST, can we just talk about what you guys are seeing with respect to? You talked a lot about like the ILC Dover life sciences business. What about the legacy Ingersol RAND business? Are you seeing that continued recovery play-out on the biopharma and life sciences side. Thank you.

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Yeah, Nicole, I'd say on the legacy medical business, fairly stable. I don't say that, that there has been or that we saw an acceleration here in the 4th-quarter and so I'll say, I'll Call-IT out being stable and you can actually see it even also fairly stable as you kind of move sequentially kind of Q3 to Q4.

So we'll see that as we kind of move into 2025, that's kind of a bit of a good news as we kind of overcome a lot of those kind of tough comps. And clearly, we see and meet with a lot of our customers in that in that life science tools segment where the IR medical business kind of participates and I expect to -- nothing -- as we look into 2025, we don't have an expected V-shape recovery in our guidance at all for that business. We actually decided to keep it in the same vein as fairly stable and kind of muted recovery?

Nicole DeBlase
Analyst at Deutsche Bank Aktiengesellschaft

Thanks, Vicente. I'll pass it on. Yeah.

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Thank you.

Operator

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

Nigel Coe
Analyst at Wolfe Research

Good morning and thanks for the question. We've been dancing around the margin questions around PST, but I wonder that can you maybe be a bit more specific in terms of that path for PST margins back above 30%. And I'm just Just -- I'm wondering, based on your 1Q comments about that Q-o-Q, do we sort of start the year at a similar level in that 27% 28% range and then ramp from there? Any kind of first-half, second-half comments would be helpful.

Vikram Kini
Senior Vice President, Chief Financial Officer at Ingersoll Rand

Yeah, Nigel, I'll take that one. So I think the expectation here is in whether it be first-half or 1Q, I think it's a little bit better than the exit-rate you saw in Q4. It's probably healthier than that, probably closer to that upper 20s realm is kind of where you should expect PST in total to play. And then you'll see some kind of slight sequential ramp from there.

So again, do we expect to see, like I kind of mentioned before, our Investor Day targets on a full-year basis were approximately 100 basis-points. We actually expect to do better than that on a full-year basis. And I'll say it will start a little bit more kind of muted as we kind of begin the year, but should as frankly, as the comp on ILC Dover kind of happens midyear in June, you should see that kind of then be a bit of more of an inflection point back into the second-half of the year.

Nigel Coe
Analyst at Wolfe Research

Okay. And then just maybe expanding on Nicole's question about the kind of what are you seeing under the hood at ILC Dover, I think you called out double-digit growth, 10% growth or some of that. And in the life sciences portion. What are you seeing in 2025? Maybe just dissect between A&D and Life Sciences '25?

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Yeah, for the Life Science, we continue to see continued momentum as we -- as we expect here in terms of our kind of long-term expectations of that low double-digit to-high single-digit flows and that remains largely on-track as we kind of sit here today. And that has to do due to the end-market exposure that the ILC Dover life science side of the business is exposed to, which is kind of more the biopharma as it relates to-high potency APIs, which are then related to GLP-1 as one example or also the gene therapy treatment, the personalized immuno treatments that are happening that we see also acceleration of that. So I think the ILC that's kind of what we like is that they're kind of exposed to some pretty good markets and a very good position on that side.

Nigel Coe
Analyst at Wolfe Research

Great. Thank you.

Operator

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

Nathan Jones
Analyst at Stifel Nicolaus

Good morning, everyone.

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Good morning,.

Nathan Jones
Analyst at Stifel Nicolaus

Maybe we could start with an update on some of the things you talked about last quarter. I think on some of these projects you were talking about tight capacity on engineering, site preparations, those kinds of things holding back on some of those projects moving forward. Maybe just start with an update on that.

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Yeah, Nathan, I would categorize it as a -- I mean, not a dramatic change from freeing up capacity. Now, but I think the key thing that I do think it changed is I met with one of the customers, I think it was the last week of December, it's actually the week of December 20th and basically that customer spoke about that in the End-User to these customer was basically releasing a lot of the procurement, which then translates into eventually getting some of these orders.

But when I was in Australia, kind of similar thing, I spent time with one of the customers that had one of those large projects and again, same thing is just not getting canceled, but conversations are definitely happening more-and-more often. So I would say that that's kind of a dramatic or not a dramatic change, but the improvement is the conversations that are really happening, but is it now rapidly accelerating and everything kind of freeing up and going ganbusters? No, I mean that's not the case. But again, positive with the conversations and the fact that none of the projects have been canceled. As a matter of fact, some of them are kind of moving in the right direction.

Nathan Jones
Analyst at Stifel Nicolaus

I guess a follow-up question on that as it relates to US policy. There's obviously been a lot of noise around tariffs and what's happening and what's not happening. And uncertainty does tend to keep people's hands in their pockets when it comes to making capital investments. I think probably more outside of the US where that impact is unknown today, is that kind of uncertainty around what US policy impacts might be in places like Europe, China, Canada, Mexico, moving some of those projects a bit further to the right with that uncertainty, people sitting around kind of waiting to see what happens with the US policy.

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Yeah I would say that not much has changed in terms of -- in terms of in terms of that, to be honest, and one of the data points that we track is clearly this MQL activity, which is a -- like is almost like a dynamic way to understand how customers are behaving in terms of their -- their desire to purchase patterns and that has not changed. So -- and we watch that daily and weekly and the continued momentum that we see on customers about trying to understand so they can make decisions. That continues to be fairly robust as we even continue here. So no, no at least nothing of significance that we have seen that the US policy is creating a movement one-way or the other.

Nathan Jones
Analyst at Stifel Nicolaus

What do you need to say as a catalyst to get these decisions made and get these projects moving forward at a better rate? And thanks for taking my questions.

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Yeah. I think it kind of varies project-by-project to be honest. So I think it's difficult to kind of pinpoint to a specific -- a specific point. I mean the customer that I made a reference here at the end of December, it got -- things got released in that case because of some of the energy policies in the US and the customer -- the end-customer feeling more comfortable with the stance of the new administration. If I can talk about another EPC customer in Europe, a very large one that the sole reason has been this capacity constraint of engineering and we continue to work with them. As a matter of fact, we actually are putting some of our engineers to help that customer to kind of get things moving. But I will say it kind of varies project-to-project or customer-to-customer.

Nathan Jones
Analyst at Stifel Nicolaus

Thanks for taking my questions.

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Thank you, Nathan.

Operator

The next question comes from David with Evercore ISI. Your line is open.

David Raso
Analyst at Evercore ISI

Hi, thank you very much. On the organic sales guide, you said 75% is going to be price, right? So 1.5%. But then you alluded to the pricing in the second-half of the year is going to be 2%. So I'm just curious the acceleration that you're expecting in pricing, where are you seeing that? And is that a midyear price increase or something about the backlog and you're layering on maybe prices to start this year. Just trying to get a sense of why we see pricing accelerating as the year goes on.

Vikram Kini
Senior Vice President, Chief Financial Officer at Ingersoll Rand

David, you hit it right on the head. You can attribute it to some of the midyear kind of pricing actions that typically happen now. We don't -- we don't have one uniform date for every business in terms of when they take pricing actions. And in fact, in given the environment, there have been many instances where you take multiple pricing actions through the course of the year. But what I would attribute to is some of the planned in-year pricing actions across the business and the expectation of that kind of coming into -- into the P&L. It's also worth noting that, that phasing and kind of that expectation of a little bit healthier price in the back-half is actually a fairly consistent comment between both segments.

David Raso
Analyst at Evercore ISI

Okay, that's interesting. Thank you so much. I appreciate it.

Operator

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

Andrew Buscaglia
Analyst at BNP Parabis

Hey, good morning, guys. Good morning. I just wanted to focus on M&A for a minute. You got this pipeline and kind of along the lines of the questions Nathan was asking, just do you see a year setting up where some uncertainty might influence the types of deals that move forward. As in, do you see more kind of singles, doubles, small deals rather than any sort of ILC dover type acquisition moving across?

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Yeah. No, I'll say absolutely. I mean, I'll categorize basically our pipeline to be more along the lines of the bolt-on side in nature. And clearly, we're leveraging the current geopolitical dynamic environment across the world as a way to continuously push these family-owned companies to move into a transaction, like why keep worrying and be in a situation where there's a lot of uncertainty and that continues to move pretty well. So yeah, think about those companies in the funnel similar to the ones that we announced today on the prepared remarks, SSI and Excelsior, Blower and, same kind of bolt-on size in nature, great technologies that continue to be purchased at a great multiple and provide incremental addressable market for us?

Andrew Buscaglia
Analyst at BNP Parabis

Yeah. And as it pertains to Dover, sticking with M&A, I know it's kind of like a new platform you intend to probably add-on to. Are there other deals in that kind of life sciences arena you see in that pipeline? And then do you plan To get into kind of adjacencies with medical consumable -- consumable selling to med-tech and maybe less so for life sciences application, but for other medical applications.

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Yeah., as a matter of fact, I mean some of the some of the companies that we have in the LI, two of them are in the life science side of the business and again, bolt-only nature and the very good additions as if they go through to the team. So that shows you how quickly we were able to gravitate and find some good transactions. In terms of adjacencies, I mean, we have a medical device kind of side of the business also on that ILC business, which we sell to medtech -- to medical device companies and it's all-around componentry, a highly-specialized component.

I think we talked about the silicon injection molding or silicon extrusion of componentry that is kind of highly-specialized that can then get attached to a lot of our pump and then sell as a package. So I think more-and-more, yes, we have a funnel of companies that kind of look in that nature. Nothing in the LOI phase, but something -- some technologies that we're looking at.

Andrew Buscaglia
Analyst at BNP Parabis

Okay, got it. Thank you.

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Thank you.

Operator

This concludes the question-and-answer session. I'll turn the call to CEO, Vincente Renau for closing remarks.

Vicente Reynal
Chairman, President and Chief Executive Officer at Ingersoll Rand

Thank you, Sarah. I just want to say thank you all for your interest in and a very special thanks to all of our employees who I know many of them are listening to the call and continue to think and act like owners that you are to continue to drive another strong performance in 2025. So with that, conclude the call and have a great day.

Operator

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

Corporate Executives
  • Matthew Fort
    Vice President, Investor Relations and Global Financial Planning & Analysis.
  • Vicente Reynal
    Chairman, President and Chief Executive Officer
  • Vikram Kini
    Senior Vice President, Chief Financial Officer
Analysts

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