Ingersoll Rand Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2021

Key Takeaways

  • Ingersoll Rand raised its full-year 2021 guidance, now targeting mid-teens total revenue growth with low-double-digit organic gains and boosting adjusted EBITDA to $1.15B–$1.18B, while maintaining free cash flow conversion at ≥100%.
  • Q2 results were strong: total company orders jumped 48% and revenue rose 25% year-over-year, with record organic orders compared to 2019, adjusted EBITDA of $292M at a 22.8% margin, and net leverage down to 0.2×.
  • Signed definitive agreements to acquire Cipex and Maximo Solutions, expanding the Precision & Science Technologies addressable market by ~40% and aiming for single-digit post-synergy EBITDA purchase multiples by year three.
  • The hydrogen refueling business funnel tripled to over $250M, prompting a $10M investment over the next 12 months and planned expansions of two European plants to meet growing demand.
  • IRX-driven integration has delivered ~$250M of the $300M synergy target to date, with 85%–90% of total cost savings expected by the end of 2022.
AI Generated. May Contain Errors.
Earnings Conference Call
Ingersoll Rand Q2 2021
00:00 / 00:00

There are 12 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Ingersoll Rand Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Christopher Myron, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning, everyone, and thank you for the patience with the technical difficulties this morning. Welcome to the Ingersoll Rand 20 21 Second Quarter Earnings Call. I'm Chris Myron, Vice President of Investor Relations. And joining me is Vicente Reynal, President and Chief Executive Officer and Vic Kinney, Chief Financial Officer. We issued our earnings release and presentation yesterday that we will reference during the call.

Speaker 1

Both are available on the Investor Relations section of our website, www.irco.com. 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.

Speaker 1

You can find a reconciliation of these measures to the most comparable measure calculated and presented in accordance with GAAP in our slide presentation and in our earnings release, both of which are available on the Investor Relations section of our website. On today's call, we will provide a company strategy update, review our company and segment financial highlights and offer updated 2021 guidance. For today's Q and A session, we ask each caller keep to one question and one follow-up to allow time for other participants. At this time, I'll turn the call over to

Speaker 2

Vicente. Thank you, Chris, and good morning to everyone. And as you can see on Slide 3, anchoring to our purpose, We're realizing the achievement of our desired targets. You will hear 3 key things today. First, we're effectively allocating capital To advance our portfolio transformation to generate significant value for our shareholders.

Speaker 2

2nd, you will hear about how we are outperforming and raising guidance, which illustrates our organic investments in new product development and demand generation are also working. And third, we will touch on our ESG journey. I have never been more excited about the state of Ingersoll Rand. The combination of a highly engaged workforce, Hosink and Magdalik owners, and the use of IRX is what makes us highly unique. I want to thank our employees all around the world for their dedication and determination.

Speaker 2

We continue to support our employees with an unwavering focus on health, Safety and mental well-being. Moving to Slide 4, our 5 strategic imperatives are how we stay grounded You will see on the right hand side during Q2, we have achieved substantial traction in all five imperatives. Within our operate sustainably strategic imperative, we achieved another major milestone that I'll touch on the next slide. Moving to Slide 5, a couple of weeks ago, we published our 2020 Sustainability Report. The report reflects our 2020 ESG data, Celebrates our progress and details our further goals with a high focus on measurable targets and accountability.

Speaker 2

We'll spend more time on this next Friday during our scheduled ESG and Sustainability Report Investor Update. What I want to emphasize right now is the team's Our bias for action over the last year as you can see on this page. We have focused and delivered on diversity within our board and extended leadership team, which is now 50% And 43%, respectively. We have launched aggressive 2,030 and 2,050 goals and improved our new product development process to address these goals. We expanded stockholder rights through corporate governance changes.

Speaker 2

And one of the things I am most proud of on behalf of our employees Is granting $150,000,000 in equity to employees, which we believe is the largest employee equity grant ever provided by an industrial company. We see broad based employee ownership as a game changer. We know underrepresented populations increase their earnings and wealth If they're in organizations that offer equity grants. And that's a powerful aspect of our thinking and acting like an owner that even ties into how directly impact global ESG efforts. And I look forward to sharing more with you next week.

Speaker 2

Moving to Slide 6, the signing of the Fintiv agreements to acquire Cepix and Maximo Solutions, both of which will become part of the Precision and Science Technology segment, A representative of the key characteristics we're targeting to drive our inorganic growth strategy. CEPEX is by our estimation the number 2 global progressive cavity pump manufacturer, And it is a highly recognized brand as a premium player in the market that adds a new positive displacement pump technology to our portfolio. Maximo Solutions is a leader player in the agri tech software and controls market, With technology, we intend to pull through to other markets and leverage across the Ingersoll Rand portfolio. Both of these companies have Showing strong high single digit to double digit organic growth since at least 2017 and our focus on sustainable end markets They tend to grow well above GDP rates. In addition, both have strong asset market profiles enhanced by digital revenue streams, including software as a service.

Speaker 2

We anticipate both acquisitions to yield single digit post synergy adjusted EBITDA purchase multiples by year 3 of ownership. With these two acquisitions, we're expecting to add approximately $3,800,000,000 to PST addressable market, which is an impressive 40% expansion. The profiles and characteristics of these high quality, high return on capital and highly strategic acquisitions are indicative of how we're structuring our M and A funnel, which leads us to Slide 7. We continue to execute Our M and A funnel using IRX as its backbone. Our funnel is comprised of 6 stages and its probability weighted according to likelihood of closing when When we calculate our funnel size.

Speaker 2

For instance, CPEX has been in our funnel for some time. And it was not until the owner became actively engaged And we were in nice negotiation that it was moved from 0% weighted revenue contribution to 50% and then 100% assigning. And now it is out of our funnel calculation. Last quarter, we described how our M and A funnel has grown materially since the Ingersoll Rand Garnet damage transaction was completed. At its current state, the funnel size remains approximately 5 times the size it was versus Q2 of 2020.

Speaker 2

With average revenue larger and velocity accelerating meaningfully. And to be clear, this describes the funnel even after Removing the 32 targets we passed on in the 2nd quarter as well as our signed deals of CIPEX and Maxima and it also excludes SPX FLOW. As you can see, we have significant momentum in the funnel, and our flywheel is in full motion. Regarding SPX FLOW, we saw that they issued a press release this Monday stating that they will pursue strategic alternatives. Our $85 per share offer was preemptive and fully accounted for SPX FLOW's Investor Day plan, which is ahead of consensus estimates.

Speaker 2

In terms of SPX Flow's strategic alternative process, if we participate, we intend to remain disciplined in our approach as we do with all of our M and A transactions. And there can be no assurances that we will confirm our preemptive offer as part of any such process. It It is very important also to know that once we received the second rejection from SPX FLOW more than a month ago, We pivoted to executing on other funnel opportunities. We have always demonstrated a very decisive And highly disciplined approach with everything we do. And we believe it is much more important now in this current environment.

Speaker 2

As stated, even with SPX FLOW excluded, our funnel remains as robust as it did last quarter, which exemplifies the volume and And we have sufficient cash in hand to execute on these opportunities with $4,700,000,000 in liquidity. However, as noted, we intend to remain very disciplined in this environment. It is also important to note that we continue to review our capital allocation priorities with our Board and plan to communicate more formally on this topic later in the year. I'll now turn the call to Vic to provide an update on our Q2 financial performance. Thanks Vicente.

Speaker 1

Moving to Slide 8, we continue to be pleased with the performance of the company in Q2. Q2 saw a strong balance of commercial and operational execution fueled by the use of IRX with continued performance across industrial end markets. Total company orders and revenue increased year over year 48% 25% respectively with strong double digit organic orders growth across each segment. Given the comparisons to 2020 are materially impacted by the prior year impact of COVID, we think comparing this Performance of 2019 is a better representation of how the business is improving. And we are very pleased with the momentum we are seeing As organic orders in Q2 were up 9% 6% on a quarter to date and year to date basis respectively as compared to 2019.

Speaker 1

Our organic growth on both orders and revenue in the quarter were records for the company, eclipsing Q1 and setting us up well as we move into Q3. Our commitment to delivering $300,000,000 in cost synergies attributable to the Ingersoll Rand Industrial segment acquisition remains intact. As we continue to drive performance on productivity and synergy initiatives using IRX as

Speaker 3

the catalyst.

Speaker 1

The company delivered 2nd quarter Adjusted EBITDA of $292,000,000 a year over year improvement of $75,000,000 and adjusted EBITDA margins of 22.8%, 160 basis point improvement year over year. One item to note, these financial metrics do not include the High Pressure Solutions segment or the Specialty Vehicle Technologies segment, both of which were classified as discontinued operations as of Q2 with relevant prior periods restated to conform to the current presentation. We will not report on either segment moving forward. Free cash flow for the quarter was $136,000,000 yielding total liquidity of $4,700,000,000 atquarterend, Up approximately $2,000,000,000 from Q1 as we received the gross proceeds from both divestitures in Q2. This takes our net leverage to 0.2 times, a 1.7 times improvement from Q1.

Speaker 1

Turning to Slide 9, for the total company, orders increased 40% and revenue increased 19%, both on an FX adjusted basis. The IT and S and P and ST segments both saw strong double digit organic orders growth in the quarter. Overall, we posted a strong book to bill of 1.14 for the quarter, an improvement from the prior year level of 0.96. We remain encouraged by the strength of our backlog moving into Q3 and beyond. The company delivered $292,000,000 of adjusted EBITDA, which was an increase of 34% versus prior year.

Speaker 1

And the IT and S and PNST segments both saw year over year improvements in adjusted EBITDA and strong margin Finally, corporate costs came in at $38,000,000 for the quarter, up year over year primarily due to higher incentive compensation costs as well as targeted commercial growth investments in areas like demand generation and other targeted strategic investments. We expect corporate costs to remain elevated at comparable levels in both Q3 and Q4 due to the same drivers. Turning to Slide 10, free cash flow for the quarter was $136,000,000 on a continuing ops basis, driven by the strong operational performance across the business and ongoing prudent working capital management. CapEx during the quarter totaled $12,000,000 and free cash flow included $12,000,000 of outflows related to the transaction. In addition, free cash flow also included $36,000,000 in cash tax payments related to the historical earnings profile of the HPS and SVT segments.

Speaker 1

As is customary in these types of divestitures, cash tax payments are included in cash flows from continuing operations due to the complexities involved in specific attribution with consolidated returns. However, the $36,000,000 represents our best quantification of the impact. Given our reported financials including revenue, adjusted EBITDA, adjusted net income and free cash flow are shown on a continuing ops basis, We are calling out the $36,000,000 in cash tax outflows to provide a better representation of the underlying cash flow of the ongoing business. From a leverage perspective, we finished at 0.2 times, which is a 1.7 times improvement as compared to prior quarter. And this included The gross cash proceeds received from both the HPS and SVT divestitures.

Speaker 1

We expect to pay the cash taxes for both divestitures later in 2021 And if you were to pro form a the Q2 leverage to account for these tax outflows, leverage would have been closer to 0.6 times. On the right side of the page, you can see the breakdown of total company liquidity, which now stands at $4,700,000,000 based on approximately $3,700,000,000 Cash and nearly $1,000,000,000 of availability on our revolving credit facility. We have considerable balance sheet flexibility to continue our portfolio transformation strategy with M and A coupled with targeted internal investments to drive sustainable organic growth. Moving to Slide 11, we continue to see strong momentum on our cost synergy delivery efforts. Due to the funnel we have Bill that stands in excess of $350,000,000 and strong execution, we are reaffirming our stated $300,000,000 cost savings To date, approximately $250,000,000 of annualized synergies have already been executed or are in motion, which is slightly higher than 80% of the overall target.

Speaker 1

As a reminder and consistent with previous guidance, We delivered approximately 40% of our $300,000,000 target in 2020, which equaled approximately $115,000,000 of savings. In addition, we expect to deliver an incremental $100,000,000 of savings in 2021, which would bring the cumulative total to approximately 70% at the end of this year. We expect a cumulative 85% to 90% up to $300,000,000 in savings by the end of 2022 with the balance coming in 2023. The bottom of the page shows the progress we have made across the different areas of synergy delivery, with the most notable progress coming from direct material initiatives In procurement as well as IQV. In addition, we're starting to see some of the initial wave of savings from our footprint actions and we expect these savings to ramp

Speaker 2

On the right side of

Speaker 1

the page, we did want to highlight that despite the headwinds we have seen on the cost side, largely coming from direct material and logistics, as well as some of the expected return of one time and discretionary costs and strategic growth investments, We do continue to expect to be positive from a price versus cost perspective on a total year basis. This is entirely due to the team's use to proactively implement and deploy targeted pricing actions in the first half of the year. In addition, we continue to evaluate the overall landscape, Particularly with regards to inflation and are evaluating potential incremental pricing actions for the second half of the year. Overall, we expect to achieve further adjusted EBITDA margin expansion for the total company in the second half of the year, although not at the same levels we delivered in the first I will now turn it back over to Vicente to discuss the segments.

Speaker 2

Thank you, Vic. And moving to Slide 12, starting with Industrial Technologies and Services. Overall, organic orders were up 41% and revenue up 17% leading to a book to bill of 1.15. In addition, the team delivered strong adjusted EBITDA of 41% and adjusted EBITDA margin of 24.7%, Up 2 50 basis points year over year with incremental margin of 34%. Let me provide more detail on the order performance.

Speaker 2

Starting with compressors, we saw orders up in the mid-forty percent. Further breakdown into oil free and oil lubricated products shows that orders For both, we're up above 40%. From original split for orders on compressors, In the Americas, North America performed strong at up low 40%, while Latin America was up in the mid-seventy percent. Mainland Europe was up low 50%, while India and Middle East saw continued strong recovery with order rates up in excess of 100%. Asia Pacific continues to perform well with orders up low 30%, driven by low 30% growth in both China and high 20% across the rest From a vacuum and blower perspective, orders were up in mid-40s on a global basis with strong double digit growth Across each of our regions.

Speaker 2

In Power Tools and Lifting, the total business was up high 50% in orders and saw continued positive growth, driven mainly by our enhanced e commerce capabilities and improved execution on new product launches. On the right hand side, we're highlighting one of our new exciting products, which is a result of our continued commitment to organic investments in our portfolio. In this case, during Q2, we completed the launch of our new line of refrigerated dry portfolio. As a bit of a background, the basic function of the air dryer is to remove moisture from the air by cooling it with a refrigerant. Thus the water vapor is condensed and the air can be easily compressed.

Speaker 2

The result is dry compressed air, which can be used in compressed air equipment without causing any damage. A dryer technology is sold As an accessory to all rotary oil lubricated and oil free air compression technology. So it is a great adjacent technology that increases the total quality of air This is a very important requirement, especially in oil free compression where customers demand high Air quality in terms of dryness and particulate. It is also good to know that it is a great aftermarket generator as the filters Our desiccant need to be changed often. In this case, we leverage a technology developed at ZEC, which was a company owned by legacy Ingersoll Rand.

Speaker 2

Since the merger of Garnet Denver and IR, not only we have accelerated our organic investments in new products for SEX, We're now leveraging the technology in order to serve Gardner Denver, Ingersoll Rand and in the future even our champion compressor customers. The even more exciting piece here is that we're doing this while helping the environment. This new dryer portfolio is 20% more energy efficient And reduces greenhouse gas emission by over 50%. Moving to Slide 13, in the Precision and Science Technologies segment, Overall, organic orders were up 20%, driven by the medical and docetron businesses, which serve lab, Life Science, Water and Animal Health Markets. These businesses were up double digits, And we also saw a strong performance in our aero and Milton ROI product lines.

Speaker 2

The momentum in our Haskol Hydrogen Solution business continues to build and we saw some strong Revenue was up 12% organically, which is encouraging as we had some tough comps due to COVID related orders and revenue in Q2 2020 for the medical business. Additionally, the PSC team delivered strong adjusted EBITDA of $71,000,000 which was up 20%. Adjusted EBITDA margin was 30.7%, up 40 basis points year over year with incremental margins of 33%. Today, we want to highlight our hydrogen refueling business to give you an update on where we are and investments we're making. As we have discussed before during our Q4 earnings call, we made investments in developing a hydrogen dispensing unit leveraging our HASCO High Pressure Technology and we're now ready to capitalize on this business.

Speaker 2

We have line of sight to about $45,000,000 development in the hydrogen refueling space, with approximately $10,000,000 of this investment expected in the next 12 months. Since our last call, we have seen our funnel grow 3x to over $250,000,000 in potential projects, And we're still so confident that this is a business where we will see meaningful growth for years to come, driving our decision to expand 2 of our factories in Europe to support anticipated growth. In addition, we want to highlight that Ingersoll Rand is designing and developing The state of the art hydrogen refueling stations to support the Plug Power and Remote joint venture. Moving to Slide 14. Given the company's performance in Q2 and continued strong outlook, we're increasing guidance for 2021.

Speaker 2

Our guidance excludes both the High Pressure Solutions and the Specialty Vehicle Technologies segment, as well as the pending acquisition of CEPEX and MAXIMUS. Our prior revenue guidance was up low double digits on a reported basis comprised of high single digit organic growth across both of our segments. And we're now open guiding up to the mid teens in total with low double digit organic growth across both segments. This reflects approximately 250 to 300 basis points growth in organic growth for the total company as compared to prior guidance. FX is expected to continue to be a low single digit tailwind.

Speaker 2

And based on these revenue assumptions, we're increasing 2021 adjusted EBITDA guidance to 1,150,000,000 to $1,180,000,000 which represents approximately a $30,000,000 improvement from prior guidance at the midpoint of the range. We also highlight that these also include the increased corporate cost of approximately $6,000,000 per quarter for both Q3 and Q4 as compared to prior guidance as mentioned on the right hand side of the slide. In terms of cash generation, we Free cash flow to adjusted net income conversion to remain greater than or equal to 100%. CapEx is expected to be approximately 1.5 percent of revenue. And finally, we expect our adjusted tax rate for the year to be approximately 20%.

Speaker 2

And this does include a $35,000,000 benefit due to a tax restructuring plan that was recently completed that is reflected approximately 40% In the Q2 rate with the balance in the second half of the year. Moving now to Slide 15. As we wrap today's call, Ingersoll Rand is in an outstanding place. 2021 is poised to be a great year. To our employees, I want to say thank you For how we come together every day to be there for our customers, solve problems, lean on each other and collaborate.

Speaker 2

We take our role as sustainably minded industry leaders seriously, and our employees eagerly embrace IRX to put us in that leadership position. I am confident we will continue to transform Ingersoll Rand and deliver increased value to all of our shareholders. So with that, I'll turn the call back to the operator and open for Q and A.

Operator

Your first question comes from the line of Mike Howland. Mr. Howland, please provide your company name and proceed with your question.

Speaker 1

Good morning, everyone. I'm with Baird. Thanks for taking the question. Just focusing on the supply chains, inflation pressures, Component shortages, things like that. Maybe some thoughts on how that's impacting results in the Q2 and how you see that playing out over the next Couple of quarters, when does normalization start materializing?

Speaker 1

And how are you thinking about that price cost equation internally?

Speaker 2

Yes, Mike, good morning. We definitely continue to see price cost sequentially positive even here in the second half. As you might recall, during the last earnings, we mentioned that we were seeing the inflation creeping up since Q4 of 2020, and we acted On that, when building the budget for 2021, since the end of Q1 of 2021 of this year, we have seen inflation And we call inflation here direct material and logistics continue to increase, which is the reason why we acted on additional pricing actions. I'll say those pricing actions are offsetting the incremental inflation that we're expecting to see in the second half. With that, we're also continuing to focus on mitigating these headwinds with a very heavy focus on ITV initiatives.

Speaker 2

So I think in terms of Kind of moving forward, I will also categorize direct material inflation as continuing to be a headwind, but generally stabilizing. While logistics side, we do expect to see continued pressure in the second half of the year compared to the first half. But this is kind of consistently with how we model our business, and we are clearly working on a daily basis to ensure that our supply chain team is finding ways to mitigate the potential And then there beyond as things materialize and we see good fruit of these continued price increases, obviously, We expect margin profile to continue to improve.

Speaker 1

Thanks for that. And then the follow-up is, obviously, good momentum in the quarter, Underlying trends are healthy. What are the customers saying about sustainability at this point? Large versus small sized projects or Maybe OE versus run rate, how are those tracking? And what is the visibility into CapEx reinvigoration as you're thinking Forward and again, what are customers saying about that topic?

Speaker 2

Yes, Mike. I think if anything, what we saw is that, As you know, we have some long cycle businesses, particularly kind of that managed care and some of the large compressors. And we saw in the 2nd quarter order momentum to continue to improve compared to the first half. We actually saw Orders accelerating on these large projects. So maybe that's a good indicator in terms of the feedback that we're seeing from customers that they're kind of Feeling more confident and comfortable about releasing CapEx for some of these large projects.

Speaker 2

And so at least in our view, that's kind of good news. We also see, As I mentioned, good funnel momentum building on some of these kind of hydrogen refueling networks, Which obviously that tends to create some good solid investments here that turn into revenue for our business.

Operator

Your next question comes from the line of Julian Mitchell with Barclays.

Speaker 4

Hi, good morning. Just wanted to start on acquisitions. I mean, I think you've made Clear with flow that you won't aggressively chase that. Maybe on the announced transactions, maybe help us understand As you're thinking about sort of full year EBITDA accretion, 1st 12 months or 2022 from CPEX and MAXIMUS combined, What sort of number roughly should we be expecting there? And also, CPEX margins, I think you're assuming that you can move those up quite substantially over several years, maybe help lay out sort of some of the big moving parts within that?

Speaker 2

Yes, Julien, thanks. We're really excited with these 2 pending acquisitions. And we actually see both companies as we kind of Go ahead and look into next year to be continue to grow low double digit top line. As we kind of have stated, MAXIMUS is already At the Precision and Science Technology margin profile, so and Seapex, even though below, we expect that As we go into 2022, we'll be kind of the low 20 margin. And as you would expect, this is our initial view and we have already launched And IBM, part of the IRX with CFX as part of our integration planning process as we kind of move now into the next phase of closing the deal And moving into the integration.

Speaker 2

So, so far, what we see is that we don't see any barrier to get CIPEX margins To the precision and science level, I think it's a business that it is solid with over 40% recurring aftermarket. It has already launched a very meaningful or what we consider to be really strong digital platform We're being able to kind of crack the code on creating edge devices for these type of pumps, which tend to be highly cost effective. So we're excited with what we're seeing here with CIPIX. I mean, as it brings to the table not only a great new product portfolio with progressive cavity pumps, but also a great IoT technology And clearly, same thing with Maximo.

Speaker 3

Thank you. And then just my second question around

Speaker 4

sort of near term margin dynamics in

Speaker 5

the base business. So I

Speaker 4

think looking at So I think looking at Slide 11, you called out less of a margin increase in the 2nd half year on year than the first half. So completely understand that. But the implied sort of incremental margins still look Pretty high in the sort of mid-30s plus in the second half year on year. Just wanted to make sure that's roughly correct And whether you think that's appropriately sort of conservative given that backdrop of higher corporate costs, price cost

Speaker 1

1st and foremost, in terms of the second half of the year, as we mentioned, and I think actually in the left side of that page Kind of highlights, despite some of the inflationary pressures and headwinds that we've been seeing, you've seen A couple of distinct actions really taken by the team. 1st is the proactive kind of pricing measures that we spoke to. I'd say, we've talked About this historically from a legacy Gardner number perspective, having a distinct pricing team that's able to be pretty nimble and take actions pretty Particularly in an environment like this and obviously the first half of the year was no different. So I think between some of the proactive pricing measures you saw us taking Towards the back half of last year as well as some of the actions we've taken in the first half of this year, I think that's obviously continued to allow us to keep the price cost equation On the positive side. And then the other piece is obviously we 100% still committed to the $100,000,000 of incremental synergies that we're expecting to be delivered this year.

Speaker 1

And interestingly enough, some of those, the think actions are really coming from the direct material side, particularly now starting to see a good influx On the I2V side. So you are correct that, yes, we are seeing some of those inflationary headwinds in the back half of the year. I think some of the pricing measures as well as the productivity actions are We're helping to offset as well as some of those corporate cost headwinds. We do believe that we can we'll continue to see EBITDA margin expansion in the back Half of the year, albeit to your point, not necessarily at the levels that we saw in first half, obviously, given some of the headwinds we're talking about.

Speaker 3

Great. Thank you.

Operator

Your next question comes from the line of Jeff Sprague with Vertical Research.

Speaker 1

Hey, thank you. Good morning, everyone. Hey, Jeff.

Speaker 6

Good morning. Hey, Jessica, can you give a little bit more color

Speaker 1

The funnel that you really built here on the M and A side, first, I would imagine the vast majority of it's in PST. Could you Kind of confirm or elaborate on that. And also just interested if there's any common theme on what you're Actually passing on, would it just primarily be valuation?

Speaker 2

I would imagine they were in

Speaker 1

the funnel because they've got some interesting attributes, right, or they wouldn't have been there to So, is it just kind of a valuation dynamic or as you've dug deeper into these, you've just found like some of the synergy opportunities are, as you would have hoped?

Speaker 2

Yes, sure, Jeff. So I'd say on the funnel, to answer your question, it's kind of almost like sixty-forty. So 60% more on the PST, 40% on still on ITS. So we still see some good kind of momentum here on the ITS side. I would say that The characteristics right now on our funnel, they're largely bolt on in nature with some medium to large size targets as well.

Speaker 2

And but nothing that I will describe as kind of transformational in nature. I will also describe them as great companies. And by that, I mean, Highly recognized brands, market leader, good gross margin, but that we can see a path to improve. And we continue to be prudent and seeing that ROIC I see it can be achieved in the mid teens by year 3. So with that in mind, yes, I mean, you're absolutely right in terms of The one of the common themes of passing is valuation.

Speaker 2

But I'll say that it kind of varies. Valuation is an important threshold in how we Green deals against our financial metrics, but we're also very focused on future growth profiles of these businesses. And in some cases, we have seen expectations of inflated future growth due to expectations of ongoing COVID related demand, which We tend to be very disciplined by discounting it. So I think it just speaks a lot about the solid process that we have in terms of our diligence that It's not only looking at businesses, but we do a lot of market work, including voice of customer and interviews to ensure that we understand market trends and commercial possibilities.

Speaker 1

And then separate unrelated question, just on kind of the energy efficiency push going on across The product offering, just wondering to what extent do you actually see this as a retrofit driver Where companies looking to kind of prove their ESG profile are actually willing to kind of rip and replace Functional equipment in the name of efficiency or should we really just think about the energy efficiency new products is really just The basis of competition on new business or kind of regular replacement business.

Speaker 2

Yes, Jeff, it's a really interesting question. I will say that we see a lot of retrofitting driver, Because in many instances, and we have said some of these before, when you look at a blower that goes into a wastewater treatment facility, The energy consumed by Avalor is close to like 60% of the energy consumed at that total facility. So these are devices that Our highly mission critical, low cost to the overall process when you put in perspective, when a purchase When you buy the product, but they can be high energy users. Same thing with compressors. And a lot of our compressor new compressor technology It's just massively much better from an efficiency perspective than the old compression technology.

Speaker 2

So in many cases, we have Train our sales team, our commercial teams to really sell on that value proposition. And this It's what we see as one of the main drivers when customers want to replace products, they say might as well help the environment in terms of having a much more energy efficient.

Operator

Your next question comes from the line of Nigel Cuddle with Wolfe Research.

Speaker 2

Thanks. Good morning, everyone. Thanks for the question. Yes, so just want to

Speaker 7

dig into China. You reported 5% plus oil growth for compressors. That's on top of, I think, the growth quarter in 2Q 2020 as well. So it wasn't an easy comp. So Curious, number 1, what you've seen in China?

Speaker 7

There's some concerns there of a hardest landing. And then maybe how your share is trending In China, obviously, you're up against a very strong competitor in that market.

Speaker 2

Yes, hi, Joe. We're very Pleased with what the team in China continues to do. I can say that even about a year ago, when COVID hit really hard in China, The team immediately starts to pivot into end markets where they could see meaningful growth as the recovery And the China economy will come, and we're seeing a lot of that now, that pivoting into better end markets that are end markets where government is putting some good investment. I'll say that also the team has done some really great product launches. The team overall, they have now relaunched The Gardner Denver brand line of compressors, it is getting really well positioned in the China market.

Speaker 2

I will also Say that before our blower and banking business was actually fairly small in a big market. Now that we have a larger scale team with the Ingersoll Rand acquisition, we're leveraging the channel And the knowledge of that team into the market to really accelerate the growth on the vacuum and blower business. And one example that I can So even here today with these air treatment, air treatment revenue right now in China is very low. So this is a really meaningful opportunity for the team in China as we This new product line of dryer solutions and launch that and kind of launch that in China. So really good combination of the teams executing really well, Commercially selling what we have in different end markets, while at the same time launching new products that are really Getting good traction in the market.

Speaker 7

Thanks. That's great. And then on the $100,000,000 Of synergies from the IR Coac integration. Obviously, supply chain and procurement are a big bucket in that. And some of your Kind of peer industrial companies are pushing out some of the kind of supply chain cost savings that they're targeting because of The pressures that we're seeing right now, are you seeing some of that as well?

Speaker 7

Are some of these projects moving to the right? And then within that as well, the inflation that you're seeing in the supply Is that $100,000,000 bucket, I know it's not all supply chain, but is that net inflation or is the inflation outside of that bucket?

Speaker 1

Yes, I'll answer them probably backwards, frankly. So to start with your second question, they're kind of distinct. So, yes, we are seeing inflation, but we're still very much committed to the $100,000,000 of total synergies, of which obviously the I'd say The procurement direct material component comprises a big component up. So it's no different than how we've messaged it before. Even coming into the year, we were seeing, I would say, dollars 100,000,000 And frankly, a smaller degree of inflation.

Speaker 1

Clearly, inflationary pressures have probably grown a bit. But those two numbers are somewhat distinct and that's the way we're kind of managing it. Clearly, our teams have done a really great job. When you think about the procurement and supply chain organizations, they've now really, I'd say, I've been able to, I would say, use IRX and use a lot of our internal processes to be able to balance, I'd say, there are tension between both synergy delivery as well as Managing a lot of the supply chain and logistics constraints that frankly the general markets have seen. So I think right now we're extremely pleased.

Speaker 1

Are we seeing any dramatic push out of savings or anything of that nature compared to our original No, not in any material manner. I think for us, what we've been seeing here has probably given us a bit of Acceleration in the context of looking at more I2V initiatives as a means to mitigate. So, like we said, We're not immune to what's going on, but I think that right now we're kind of keeping that synergy equation quite balanced to what we originally thought and So opening, I'd say the team up to frankly looking at more I2B initiatives and things like that as cost mitigants.

Speaker 5

Okay.

Speaker 2

I'll leave it there.

Speaker 7

Thank you very much.

Operator

Your next question comes from the line of Rob Wertheimer with Melius Research.

Speaker 8

Hello and thank you. I had a couple of questions just on the acquisition funnel. And one is just on MAXIMUS. I'm curious if the IIoT aspect and the growth Are a little bit different in that asset, whether connectivity, IoT or finding a way in the backlog or in the acquisition funnel in a more meaningful way. How you think about transforming that opportunity via acquisition versus what you're also doing through your installed base?

Speaker 8

And the second one, if I may, just doing both at once is just, obviously, if you do a large deal, you replace some of the revenue, disappearance from specialty vehicle More quickly, I just wanted to ask you about your comfort with doing Smaller deals and how long it takes and whether you think about it that way. Thank you.

Speaker 2

Yes. Thanks, Rob. The Maximos IoT growth, that is It's a normal find in terms of an acquisition, and that came from looking at the market from a different Kind of sort of angle and perspective in the sense that we have a good phone business called Vosotron that plays really well in the animal health And agricultural market, it is the market leading non electrical pump. So it basically creates dosing and movement of water Just by pure by the flow itself. So it's kind of really unique technology.

Speaker 2

And in most of these Kind of highly specialized applications, and you can think about those applications like hydrophonics. I mean, we know the amount of terrain, the acreage That is available in the world to continue to grow vegetables and feed animals is kind of shrinking really fast. So more and more you're moving to indoor farming and hydroponics, which is obviously the way of growing vegetables with the use of water. And here we have a really great leadership position. So when you go to one of these indoor farms, this is Maximus is the leader in this agri tech Controlling aspects of being able to control the entire ecosystem of that and where we see a lot of very good plays of not only our pumps, but other devices That are inside that we can now actually bundle and kind of complete together the entire package.

Speaker 2

And when you think about that type of process, Could we take it and replicate that into a wastewater treatment facility or into any of these other end markets? That is what Our thesis also goes into is that how do you take that Maximus software IoT comprehensive solution and then utilize it and leverage it for other end markets. And that's where we just get super excited. I mean, in terms of doing a large deal, I mean, obviously, you could argue The small deals take as much time as large deals, that's what many say. I would say that With the use of IRX right now, we're building some incredible processes and muscle, Whereas integrating a small or bolt on deal is it goes actually Quite well.

Speaker 2

I mean, Toothill or and Zucchini is a great example, where the team in the Americas was able to integrate that Pretty much by themselves and in a very rapid way, including the integration of the entire ERP system, and in a very highly cost effective way. So, do we think that larger deals can give us a bigger, faster scale? Yes, but we also know that larger deals Coming with what I call a bit of hair in the sense that not all larger deals are 100% perfect. And sometimes you need to divest and kind of Decouple of businesses that you may not like from those systems from those businesses. So, we continue to be excited about our bolt on and medium sized Business acquisitions that we have in our funnel, and we think that the processes that we have will continue to accelerate how we do deals.

Speaker 2

Okay. Thank you, Vincente. Thank you,

Operator

Rob. Your next question comes from the line of Joe Ritchie with Goldman Sachs.

Speaker 3

Thanks. Good morning, everybody.

Speaker 2

Good morning, Joe. Good morning, Joe.

Speaker 3

Hey, Vicente. I know we've talked a lot about the M and A funnel, but just quick question. As you're kind of thinking through the types of Are you looking more for kind of fixer uppers where you can utilize the IRX system to really drive better margin Expansion or is there like a good balance of maybe margin accretive type acquisitions that you're looking at as well?

Speaker 2

No, I think Joe, we're looking for businesses that can continue to raise the bar Ingersoll Rand in the sense of making Ingersoll Rand continue to be a great, I think, from being a good company to a great company, but also even make it a greater company. And by that, it has to be strategic deals that make a lot of sense to our product portfolio, that makes a lot of sense to how we look at Margin expansion and top line growth for the future value of the company. Cipex And Maximo's are kind of 2, I would say, great businesses. For example, our growing double digit growth, great technologies, Maximo is already at the margin profile of Precision and Science. Citex has room to improve, but it's a technology that we like.

Speaker 2

So I think it's just one of those that in some cases we look at both, but more important is not the size, it's kind of just the margin expansion that we can generate and make The total company and better, so we can continue to see multiple accretion in an overall business.

Speaker 3

Got it. That's helpful context. And then I guess maybe just my follow on question. You referenced the book to bill earlier. I think you guys were at like 1.14 for total company.

Speaker 3

If I take a look at your order trends for the first half of the year versus revenue, I think you're up About $350,000,000 Is the way to think about this going forward that you're booking more kind of like mid cycle type At this point and that's why you're going to have to play catch up on the revenue side with your order rates Or how should we be kind of thinking about how revenue and orders kind of converge over the next call it 12 to 24 months?

Speaker 1

Yes, Joe. This is Vic. I'll take that one. So I think first of all, yes, I mean, we've obviously been really pleased with the orders performance. I think the good thing here that we've talked about and Vicente mentioned is in the second quarter, we actually saw a good mix of what we'll call kind of core compressor blower vacuum Five quarters, which, yes, typically ship out within kind of the next quarter thereafter.

Speaker 1

You're not typically booking those for 5, 6 months out in most regions. We've also seen a nice tailwind

Speaker 7

in some of the kind of

Speaker 1

the larger project side, whether that be the centrifugal compressor side, whether that be the NASH Darrow business. So I'd say those are the types of orders that tend to have a 6 to 12 and in certain cases even longer than that kind of Order to sale kind of lead time. So the good news here is we've seen a bit of a balance. So I think in the context of orders to revenue, yes, Obviously, we have a stronger backlog. I think we have more backlog visibility today than we've had in probably any quarter coming in.

Speaker 1

Backlog is up strong double digits And frankly, even better in certain parts of the business. And yes, we have strong visibility into Q3 at this point in time, pretty much But the good news here is we've also taken some really nice longer cycle orders as we would call them that kind of now even extended to 2022. So giving us Even a little bit more visibility into 2022 than we had frankly over the course of last few months. So I think we're seeing a good balance of both is the answer, Jeff.

Speaker 3

Got it. That's great. Thanks guys.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Markus Mittermeier with UBS.

Speaker 6

Yes. Hi, good morning, everyone.

Speaker 2

Good morning, Markus.

Speaker 1

Good morning. Maybe I just hi, good morning.

Speaker 6

Maybe I just follow-up on that question just now. If I look at the last CapEx spending cycle from 2016, 2017, 2018 and I look at sort of the former Intercontinental Industrialist, Gardner Denver And the growth there, it was interesting to see that both companies are actually at the top of the sector pretty much among the In terms of that growth in collection, is that something in the context of what you just mentioned around sort of short cycle, long cycle, etcetera, That we should use as a framework maybe for the next 2, 3 years if we assume that we are at a similar point in the CapEx cycle. Just trying to get a sense of this long cycle business, the size and how much of the short cycle business is short cycle in nature that ultimately driven by CapEx?

Speaker 2

Yes, I think that's probably a good analogy, yes, to see to think that at least what we see here This kind of broad based optimism in the market and that CapEx are kind of getting more and more getting started to get released. And so yes, you could argue that that's kind of the same type of momentum that we expect to see.

Speaker 6

Great. And then maybe just a quick follow-up on hydrogen. You've mentioned sort of a 250,000,000 tonne. How should we think about The timing on the conversion of that funnel and ultimately, how fragmented is that market? If you look at that 2.5 billion opportunity by 2027.

Speaker 6

What do you think that market looks like 3, 4, 5 years down the road?

Speaker 2

Yes. In terms of the presentation is, there are actually not that many players in the dispensing market. You could argue that they're kind of like top 3 main players with us being one of them. So at this point in time, it is such a highly specialized way of dispensing this type of gas and that you have to do it with specialized type of equipment. And in this case, HASCO is one of the leading providers for doing that.

Speaker 2

And HASCO has a lot of history On dispensing hydrogen because they used to do a lot of these for rocket ships many, I mean, decades ago. And in terms of the $250,000,000 phone, I mean, we see this over the next horizon of years. I mean, it varies on project to project. But I think the good thing is to be continue to see that funnel momentum increase and get spec on many of these projects that are seeing expansion of networks.

Speaker 1

And then, Marcus, I would add to that that, frankly, given that funnel and given where our technology is headed, that's driving The investment that we announced, the $10,000,000 that we expect to spend over the next 12 or so months, that's really meant to build out capacity in a large part here with the expectation to be able to execute on a meaningful part of that funnel. So I think we're kind of seeing the funnel and we're reacting and we Quite explicitly, we're going to continue to invest in those higher growth organic growth areas, this being a big one. And we're quite excited about a couple of the plant expansions that are going

Operator

Your final question comes from the line of John Walsh with Credit Suisse. Mr. Walsh?

Speaker 9

Hi, there. Thanks.

Speaker 10

Yes, sorry. Hi there. Thanks for squeezing me in here. Just one question from me. Good morning.

Speaker 10

Could you talk a little bit about how you're thinking about the free cash flow build in the second half of the year? I don't know if there's some type of bridge you could talk a little bit about or maybe help us dial in on what greater than 100 means because Very strong conversion and you're usually back half weighted. Thank you.

Speaker 1

Yes, John, you're exactly right. I think the free cash flow side of the equation Typically tends to be a bit more second half seasonally weighted. That comes from probably a couple of different factors. One is, one, the revenue and earnings profile of the business Does tend to be a little bit more back end weighted in the context of just kind of our earnings You've seen that in most years. I would also say that working capital type equation tends to follow a pretty seasonal path.

Speaker 1

This year will probably be no exception here where, as you

Speaker 5

can see the numbers,

Speaker 11

we have seen some inventory build prudently, frankly, in the back

Speaker 1

and the front half of the We have seen some inventory build prudently, frankly, in the back and the front half of the year. A lot of that is positioned, quite frankly, for the second half execution, And so we do expect to see a nice tailwind on working capital in the back half of the year. That tends to be, I would say, the kind of the 2 of the bigger I would also tell you that we're working really hard steadily on the tax rate. We continue to see good momentum there on the Exposition in the cash tax rate for the overall company and one that we would expect to continue to see moving into 2022 as well. So I think there is multiple different levers that we're looking at And we're pulling, I think we're being very prudent continued in this environment in terms of deploying cash.

Speaker 1

But again, we'd See a second strong second half of the year, not too dissimilar to what you saw last year.

Speaker 10

Great. I'll leave it there. Thank you.

Speaker 2

Thank you, John.

Operator

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

Speaker 2

Thank you so much. I just want to say one more time, thanks again to all of the employees that are listening to the call. I appreciate all your hard work and effort and dedication. And I also thank all of the investors and potential investors to participate in the interest that you have in our company and look forward to

Operator

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

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