Ingersoll Rand Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 11 speakers on the call.

Operator

You for standing by. My name is Kayla Baker, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ingersoll Rand Q2 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer I would now like to turn the call over to Vice President of Investor Relations, Matthew Fort.

Operator

You may begin.

Speaker 1

Thank you, and welcome to the Ingersoll Rand 2023 Second Quarter Earnings Call. I'm Matthew Fort, Vice President of Investor Relations. And joining me this morning are Vicente Reynal, Chairman and CEO and Vic Kinney, Chief Financial Officer. We issued our earnings release and presentation yesterday, and we will reference these during the call. Both are available on the Investor Relations section of our website.

Speaker 1

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

Speaker 1

On today's call, we will review our company and segment financial highlights and provide an update to our 2023 guidance. For today's Q and A session, we ask that each caller keep to one question and one follow-up to allow time for other participants. At this time, I will turn the call over to Vicente.

Speaker 2

Thanks, Matthew, and good morning to all. I would like to begin by thanking and acknowledging all of our employees for their hard work helping us to deliver another record quarter in Q2. Our employees continue to deliver on our commitments despite the constantly changing macroeconomic environment And consistently exemplify our purpose, while thinking and acting like owners. I would also like to welcome our new employees from our recent acquisitions. Together, we have a great opportunity to build upon our strong complementary brands, products and capabilities, Providing customers and the industry with a broader spectrum of solutions.

Speaker 2

Beginning on Slide 3, fueled by our competitive differentiator, IRX, In the Q2, we delivered double digit growth in revenue, adjusted EBITDA, adjusted EPS and free cash flow. We recently published our 2022 sustainability report where we yet again deliver industry leading results while remaining on track to meet our 2,030 sustainability goals. Finally, based on our continued robust performance in Q2, we're once again raising our 2023 full year guidance. As we move to Slide 4, our economic growth engine is the key to how we deliver compounding annual results. During our last Investor Day in Q4 of 2021, we presented this model and highlighted our organic, inorganic and quality of earning growth enablers.

Speaker 2

We remain committed to our strategy at our long term Investor Day targets outlined in this page. On the next slides, I will provide you with deeper into our organic initiatives, which are centered around product innovation and innovative value also known as I2V. In addition, we will provide an update on our progress towards our inorganic growth. Turning to Slide 5, we start with our organic growth initiatives. Here we have some examples of how in China we have leveraged products, localization as well as I2V to drive organic growth.

Speaker 2

On the left hand side of the page, we show how localization has created new product offerings and enabled channel expansion, All with a focus on high growth sustainable end market. Since the Garnet Denver and Ingersoll Rand merger, our blower and banking product lines have grown organically at a 17% CAGR. On the right hand side of the page, we have an example of organic growth through the combination of recently acquired M and A and I2V. As you can see on the pictures at the bottom right hand side of the page, the Asia Pacific team conducted a teardown event with legacy products, recently acquired M and A and competitive technologies. The outcome of that third on event is the development of a new oil free screw vacuum pump.

Speaker 2

This new product will expand our addressable market by over $350,000,000 and will go from development to launch in approximately 6 months. Next on Slide 6, M and A continues to be at the forefront of our capital allocation strategy. We are thrilled to highlight our recently signed M and A deal, Roots. This iconic Roots brand is a leading provider of low pressure, compression and vacuum technology. This brand is synonymous with blowers in the same way that clinics and Band Aids are recognized in consumer markets.

Speaker 2

We're very excited to acquire this iconic brand, which had been in business for almost 200 years. The The acquisition also expands our capabilities in both low pressure technology and centrifugal technology. And this technology is a critical component in the process of green steel manufacturing. Our M and A funnel remains strong. And as of today, it continues to be over 5 times larger than it was at the time of the R and D.

Speaker 2

We currently have 7 transactions at the LOI stage. And more importantly, we have several other transactions in process, which are close to the LOI stage. Based on acquisitions to date, the 7 transactions under LOI and our current M and A funnel, We are reaffirming our commitment to an additional $200,000,000 to $300,000,000 in annualized inorganic revenue to be acquired in 2023. On Slide 7, we recently released our 2022 sustainability report, showcasing the commitment and results of our strategic imperative, Lead Sustainably. We have made significant progress in establishing ourselves as a top quartile ESG company by leveraging our competitive differentiator, IRX, to deliver results in a very short period

Operator

of time.

Speaker 2

In fact, we have received several industry leading sustainability acknowledgments of our efforts, Including being named to both the Dow Jones Sustainability World Index and the Dow Jones Sustainability North America Index. Ingersoll Rand was ranked as the number one performer in the IEQ Machinery and Electrical Equipment Industry in North America A number 4 globally in 2022. As of April of 2023, Ingersoll Rand received an ESG risk rating of low at 12.8 from Morning Stand Sustainalytics. We also received an ENG rating improvement to AA in 2023 from MSCI And rank as a leader among 47 Companies in the Industrial Machinery category. More important, we're also Leading the Way in the Social aspect of ESG with our employee ownership model.

Speaker 2

We believe employee ownership creates economic opportunity for our employees And their families, while driving increased employee engagement as our long term shareholder. To that end, we have awarded approximately $275,000,000 since 2017 in equity to our employees, employees that are not already on the management equity program. This has increased to over $160,000,000 in value as of June 30, 2023. We will continue to offer our OwnershipWorks program that grants equity to all new employees after their 1 year anniversary. Our employees are a critical element of our business And making life better for them begins with opportunity.

Speaker 2

Through their engagement and commitment, we are on track to meet our 2,030 sustainability objectives. With this, I'll turn now the presentation over to Vic to provide an update on our Q2 financial performance.

Speaker 1

Thanks, Asante. On slide 8, fueled by IRX, we again delivered solid results in Q2 through a balance of commercial and operational execution. Total company organic orders and revenue increased 5% 12% year over year respectively. Book to bill was 1.03 And we remain encouraged by the strength of our backlog, which is up approximately 12% year over year and up approximately 5% sequentially. The backlog is approximately 45% higher than it was at the end of 2021, which gives us good visibility and momentum as we move into the back half of twenty twenty three start to look into 2024.

Speaker 1

The company delivered 2nd quarter adjusted EBITDA of $425,000,000 a 27% year over year improvement and adjusted EBITDA margins of 25.2%, a 190 basis point year over year improvement. For the quarter, adjusted diluted earnings per share was $0.68 up 25% versus the prior year. Free cash flow for the quarter was $204,000,000 despite ongoing headwinds from inventory due to the need to support backlog as well as continued global supply chain challenges. Even with these headwinds, free cash flow was up 24% versus prior year. Total liquidity of $3,200,000,000 at quarter end was up approximately $1,000,000,000 sequentially.

Speaker 1

This increase was driven in large part due to the recently amended, extended and upsized revolving facility, which took place in early Q2 of this year. Our net leverage continues to remain near all time lows. At 1.0 turns, we are 0.1 turns better than both the prior year and prior quarter. Finally, I'd like to highlight an example of the power of our ownership mindset and the effectiveness of our competitive differentiator, IRX. Due to the team's resiliency in overcoming the cybersecurity incident, the Q2 revenue and adjusted EBITDA risk associated with the incident was mitigated within the quarter.

Speaker 1

This is no small task and I would like to thank all of our employees that were involved in helping to overcome this impediment, enabling us to deliver tremendous results in Q2. Turning to slide 9. For the total company, Q2 orders grew 10% and revenue increased 18%, both on an FX adjusted basis. Total company adjusted EBITDA increased 27% from the prior year. The ITS segment margin increased 200 basis points, while the PST segment margin improved 2 40 basis points.

Speaker 1

Notably, both segments remain pricecost dollar and margin positive, which speaks to the nimble actions of our teams Despite persistent inflationary headwinds. Corporate costs came in at approximately $43,000,000 for the quarter, driven by Investments to support growth in areas like demand generation and IIoT as well as the impact of incentive compensation adjustments. Adjusted diluted earnings per share for the quarter was up 25% to $0.68 per share. This $0.14 year over year increase includes a $0.04 headwind from interest expense. And finally, the adjusted tax rate for the quarter was 24%.

Speaker 1

Moving on to the next slide, I want to highlight that the company was assigned an investment grade first time issuer default rating from Fitch. We have now received investment grade ratings from 2 of the 3 major rating agencies and we remain committed to becoming investment grade rated across all of our rating agencies. Free cash flow for the quarter was $204,000,000 including CapEx, which totaled $25,000,000 Total company liquidity was $3,200,000,000 based on approximately $1,200,000,000 of cash $2,000,000,000 of availability on our revolving credit facility. Cash outflows for the quarter included $49,000,000 deployed to M and A and we returned $64,000,000 to shareholders through $56,000,000 in share repurchases and $8,000,000 in dividends. M and A remains our top priority for our capital allocation and we continue to expect M and A to be our primary usage of cash for the foreseeable We continue to have an active and healthy funnel of inorganic growth opportunities.

Speaker 1

This funnel consists primarily of bolt on M and A relatively similar in size, scope and nature for the assets we have acquired over the past 2 to 3 years. I will now turn the call back to Vicente to discuss our segment results.

Speaker 2

Thanks, Vic. On Slide 11, our Industrial Technologies and Service segment Delivered strong year over year organic revenue growth of 14%, with volume growth slightly outpacing pricing. Adjusted EBITDA increased 29% year over year with an adjusted EBITDA margin of 27.4%, up 200 basis points from the prior year with an incremental margin of 38%. We continue to see solid demand for our products with organic orders up 8% and a book to bill of 1.05. Note that on a 2 year stack, IPS organic orders have grown 19%.

Speaker 2

Moving to the individual product categories, each of the figures exclude the negative impact of FX, which year over year was approximately a 1.5 percentage point headwind across the total segment on both orders and revenues. Starting with compressors, we saw orders up in the low double digits. We continue to see oil free products orders outpace oil lubricated products. Orders were up low double digits in Americas With North America also up low double digits, demonstrating that we continue to see momentum from secular trends around ESG, Onshoring and nearshoring as well as continued investments on energy savings. EMEA demand continues to be above market with orders up high single digits.

Speaker 2

The Asia Pacific team continues to deliver a great performance with order growth in the mid teens Driven by continued solid execution from our team in China, where they saw orders up in the low 20s. Today, We showed on Slide 5 an example of how the team in China continues to outperform the market conditions with our own self help initiatives. Vacuum of Lower orders were up mid teens and every region saw positive orders with good strength from Europe. Orders in the power tool and lifting business was up low single digits. Moving now to the Innovation in Action portion of the slide, we're illustrating an oil free hydrogen compressor recently launched in EMEA.

Speaker 2

This product is a perfect example of how we continue to focus our portfolio on high growth sustainable end markets with Region for Region Manufacturing. The EMEA team collaborated with a clean energy tech startup in the Netherlands to develop and build a system for our innovative hydrogen process. And the first unit was shipped in July. Turn to Slide 12. Revenue in the Precision and Science Technology segment grew 5% organically.

Speaker 2

Additionally, The PST team delivered adjusted EBITDA of $90,000,000 which was up 16% year over year with incremental margins of 66%. Adjusted EBITDA margin was 29.2%, up 2 40 basis points year over year. The year over year improvement in adjusted EBITDA margin driven primarily by price cost improvements, synergy delivery on acquired businesses like CPEX and the impact of China lockdowns in the Q2 of 2022, which did not repeat. Organic orders were down 10% year over year with a book to bill of 0.95 times. It is important to know that the book to bill was one time for the first half of the year.

Speaker 2

The primary driver of the organic order decline related to larger Frame orders not repeating in the Life Science businesses as well as the expected decline of longer cycle orders in the AgriTek platform. Our bookingship business was solid, and we believe that the core business within PST remains very healthy. For our PST innovation in action, we're highlighting our new pre esthetic pump technology that is used for water treatment, industrial and life sciences market. This product's innovative design provides a robust alternative for chemical dosing and transfer applications. The products are IoT ready and complement our already strong portfolio of products for water treatment and chemical applications, Offering customers the opportunity to choose the best technology for each application.

Speaker 2

Leveraging this technology across both Albin Pump and LMI brands, We continue to execute our multi brand, multi channel strategy, while expanding our addressable market by over $250,000,000 Moving to Slide 13. Given the solid performance in the first half and continued momentum from backlog, we're again raising our 2023 guidance. As you may recall, during Q1 earnings, we guided an anticipated impact of approximately $20,000,000 of adjusted EBITDA moving out of Q2 and into the back half of the year due to the cybersecurity incident that we experienced in late April. As Vic mentioned earlier, this risk was mitigated within the quarter and no significant revenue or adjusted EBITDA is now expected to have been pushed into the back half. We have included some additional commentary on the bottom right hand side of the page, outlining the increase in full year guidance, incorporating the impact from the Q2 outperformance and the improvement in organic growth expectations in the second half of the year.

Speaker 2

For the full year, total company revenue is expected to grow overall between 12% 14%, which is a 200 basis point improvement versus our previous guidance. We anticipate organic growth of 8% to 10%, where price and volume is split approximately sixty-forty. FX is now expected to be a slight headwind, however, approximately flat on a full year basis. Revenue from M and A has increased $30,000,000 to approximately $300,000,000 This increase reflects the impact from all completed and closed M and A transactions as of August 1, 2023. Corporate costs are planned at $165,000,000 and will be incurred relatively evenly Q3 throughout the year.

Speaker 2

Total adjusted EBITDA for the company is expected to be in the range of $1,690,000,000 $1,740,000,000 which is up 2% versus prior guidance and up 7% versus our initial guidance. At the bottom of the table, adjusted EPS is projected to be No changes have been made to our guidance on the adjusted tax rate, total interest expense or CapEx spend as a percentage of revenue. All remain in line with both initial and prior guidance. Turning now to Slide 14. As we wrap today's call, I want to reiterate Ingersoll Rand remains in a strong position.

Speaker 2

We continue to deliver record results and our updated guidance is reflective of our Q2 performance and ongoing backlog momentum. We remain nimble. We continue to monitor the dynamic market conditions, and we're prepared for the challenges that may come. To our employees, I want to thank you for an excellent first half of the year. These results show the impact that each of you have as owners of the company.

Speaker 2

However, we're still a long way to go, and we need to remain focused on our commitment to meeting our financial targets and executing our economic growth engine through the use of IRX. Thank you for your continued hard work, resiliency and focused actions. As we continue our track record of market outperformance, Our balance sheet is as strong as ever. And with our disciplined and comprehensive capital allocation strategy, we remain resilient and have the capacity to deploy capital to invest with the highest return. With that, I'll turn the call back to the operator and open the call for Q and A.

Operator

Our first question comes from the line of Michael Halloran with Baird. Your line is open.

Speaker 2

Hey, good morning, gentlemen. Good morning, Michael. Good morning. So can we just

Speaker 3

talk about how the underlying trends you saw through the quarter, maybe any sequential commentary And a focus on where you saw any changes positively or negatively or is the demand environment essentially cadencing how you would have expected earnings On an underlying level.

Speaker 2

Yes. I would say, Mike, we saw the sequential cadence in the quarter Very comparable to what we always see, which is typically lower on month 1 and kind of starts ramping up through the quarter. And we saw that happening pretty well. So nothing that we will call anything different out of color, which obviously Continue to show that there is good cadence and momentum. And that, more important for us too as well is the leading indicators.

Speaker 2

And particularly as we Always talk about the MQLs, those marketing qualified leads that we generate with our demand generation engine. And that continues to see good sustainable pace momentum across the product lines, which is encouraging to see.

Speaker 3

And on the PST side, could you just Those are orders in context a little bit. I certainly understand the Agritech side and some of the larger projects orders not repeating. But it sounds like things are healthy when you exclude those two pieces and maybe a little bit of help on how you expect the order trends To track from here and recovery curves in some of those markets.

Speaker 2

Yes, sure Mike. I think you said it very well. I mean, I think what we continue to see that we get accretive is that the book and term business remains pretty strong in the business, which You could call it the short cycle side of the business. And then what we saw here in the quarter, it was just that lumpiness with our agri tech with some of our businesses that last year we're doing on some large projects and also some of the oxygen concentration business that Kind of similar to what we spoke in the Q1 of kind of large frame orders that happened last year, not this year. So I guess, so with that, I think we continue to stay very encouraged.

Speaker 2

We see That the trend in the PST segment continues to be to deliver that mid single digit plus. I mean, there's definitely no over the cycle and over time. So there's no change in that long term perspective of what we can achieve here in the PST team with the PST segment, and we anticipate continued momentum here. So, yes. Thanks, Vincent.

Speaker 2

Yes. Thank you, Mike.

Operator

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

Speaker 4

Thanks very much. Good morning. Maybe first question just around that Split of sort of how you see the second half playing out between Q3 and Q4. I think the guide embeds are sort of low 70s EPS figure each quarter, but just wondered about how much of that ends up being weighted Into Q4, and if there's any big difference between the two segments from that standpoint.

Speaker 2

Yes. Julian, I said, for total Ingersoll Rand on revenue and adjusted EBITDA margin, Q3 looks a lot like Q2. And I'll say for Q3, on a year over year basis, remember that comps get increasingly more difficult. And as we think about the segments, ITS, for example, ITS is expected to grow, revenue still at low double digit, including the impact of M and A. And as a reminder, I mean, think about that tough comp, where Q3 of last year, we grew 19% organically.

Speaker 2

So that's kind of where we talk about those tough comps. But we still see good line of sight to about 100 basis points of margin expansion in ITS. And PST, expected to grow mid single digits. And as a reminder, that's on top of 20% growth in Q3 of 2022 and margins to be expected back again into that 30% level of EBITDA.

Speaker 4

That's very helpful. Thank you. And then, just secondly, when you're thinking about the sort of Firm wide orders and backlog trajectory from here across both businesses. Are we thinking sort of orders Flattish organically year on year in the back half and then the sort of backlog maybe starts to drift down a bit Sequentially, just as those lead times shorten and so sort of customers can adjust their orders a little bit.

Speaker 2

Yes. I'll tell you, Julien, yes, clearly, we don't specifically guide on orders. But again, as a reminder, our Q3 prior year is probably one of the toughest comps for orders. As I recall, Q3 last year was roughly 14% organic order growth momentum, so very solid. In terms of the backlog, I'll say, we do anticipate backlog drift down a little bit in the back half, as we mentioned in the past, I mean, the normal cadence for orders is typically a book to bill greater than 1 in the first half Due to larger longer projects and booking in the first half has been and booking in the second half being kind of less than one Due to those larger orders kind of getting shipped most predominantly in the Q4.

Speaker 2

Having said that, as a reminder, I think the past 9 quarters out of 10 quarters, we had a book to bill of greater than 1, so which obviously Speaks again to the comps that we're seeing here, but.

Speaker 4

That makes sense. Thanks very much.

Speaker 2

Thank you.

Operator

And your next question comes from the line of Jeff Sprague with Vertical Research. Your line is open.

Speaker 1

Hey, thanks. Good morning, everyone. Hey, good morning. Hey Vicente, can you elaborate a little bit more when you're talking about demand in ITS and In particular, you noted reshoring in ESG. I guess on the ESG side, you're pointing to kind of energy efficiency sort of investments and retrofit.

Speaker 1

But A, is that the case? And B, can you just elaborate a little bit on what you're seeing in those two buckets?

Speaker 2

Yes, Jeff. So absolutely. I mean, again, we're very pleased with the momentum that we saw on the compressor product lines. And particularly, you saw that oil free compressor outpacing the growth and that was kind of high 20s, momentum that we saw on the oil free. So Very, very excited to see that one of the core strategies that we launched continues to actually see some fruit and growth.

Speaker 2

In terms of ESG, I mean, we continue to see that these energy savings, again, based on the return on the investment that we have conversations with customers, It still is resonating quite well. And so that momentum continues. Our few earnings ago, we spoke about The

Speaker 1

air audits that we're doing, we

Speaker 2

continue to do that at a faster clip than ever before, and that's really driving a lot of good leading data points for us as we see kind of moving forward. And from a reassuring, yes, it's kind of whether you think about reassuring company's expanding capacity or reallocating their supply chains more locally. I talked about also near shoring because clearly Mexico we're seeing a lot of expansion too as well. And we have a very strong team as well in Mexico there that is really capturing some good momentum too as well. Well, this re churn is happening here in the U.

Speaker 2

S. We see it. That's why we opened reopened Buffalo at that time, but we also see it in India and We see it in China as well. So we see good momentum of companies really investing in the core technologies and in particularly here the compressor systems.

Speaker 1

And maybe you could give us a little color on service too Vicente. I would imagine if customers are going through the AIR audit process that creates quite an opportunity for service and stickier service attachment on the back end. Where are you at now on service as a

Speaker 2

Yes, absolutely, Jeff. Particularly, The statistics that we said before is that roughly, these air audits, we see kind of a seventythirty, 70% leading to New equipment, but 30% leading to actually incremental service revenue. And we've seen good momentum in terms of we spoke a lot about care and the package Care Solutions. The team in North America continues to really accelerate that, and we're seeing now better momentum as well in our team in Europe and also in team in Asia. So yes, this continues to be very front and center in our strategy, And particularly as we continue to connect more compressors with our remote monitoring devices and be able to capture more Recurring revenue here.

Speaker 2

So yes, continues to be actually one that we see good momentum to come. Great. Thank you. Thank you.

Operator

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

Speaker 3

Hey, good morning. Good morning. Vicente, I think you touched on China. APAC orders from compressor is up mid teens. I think that's comping mid teens.

Speaker 3

And so I know you called out kind of a good job the team has done there. Is there any particular end market strength in China that's adding to that? I think we've seen China be a drag Elsewhere in Industrials. And then just in general, I don't know if you can expand on your market position there and the broader efforts you're doing. Thank you.

Speaker 2

Yes, Rob. I think There's definitely some in markets that strategically we're going after more pronouncedly than others because we're seeing the growth in those. You could think about electric vehicles, battery production, lithium mining and things like that. But a lot of that, as you very well said, too, as well, It kind of continues to change end markets. And I think the ability for us to pivot from one end market that has seen some growth to the other end market that is starting to see 1st of growth.

Speaker 2

That is what I think is very core to what the team very nimbly is doing. In addition to that, I think what's exciting is the combination of the Gardner Denver and Ingersoll Rand Company, where the team in China is leveraging a lot of the, I call it legacy Gardner Denver products, the blowers and the vacuums to really accelerate growth. And that's, as you saw on Slide 5, how we see this organic revenue CAGR of 17% on this kind of core product line and technology. So I'll say, yes, the team is firing on all cylinders. This morning, as I was driving, I was actually chatting with Our leader in China, he's actually was actually at our he was with the team at our innovation center in China and Doing a review of their new product technologies and he was leaving super inspired and excited.

Speaker 2

So again, it's just a good team, solid performance and very happy with how the team continues to navigate this tough environment in China.

Speaker 3

Excellent. Thank you.

Speaker 2

Thank you.

Operator

And the next question comes from the line of Andy Kaplowitz with Citigroup. Your line is open.

Speaker 5

Good morning, everyone.

Speaker 2

Good morning, Andy.

Speaker 5

Vicente, could you give us a little more color into the dynamics of your compressor Order strength in the sense that I think historically you've had 20% long cycle versus 80% short cycle. The long cycle business currently much stronger than short cycle 1 end markets, if you could give us some detail or driving the most order growth right now.

Speaker 2

Yes. I'd say, Andy, would say maybe not a dramatic change. I mean, maybe instead of being eightytwenty, could it be seventythirty potentially? Yes, But not in such a dramatic kind of way. So we see good momentum on the long and the short.

Speaker 2

I think what we're very happy with is the performance of the oil free. Oil free, Which tends to be a higher level of technology, more difficult for others to kind of penetrate. So We still see this as an end market and a product line that we see continued momentum for growth as we continue to take more share In a good way.

Speaker 5

That's helpful. And then Vic, it looks like it's just a tweak, but I think you actually lowered your incremental margin forecast The year to 35% versus 35% to 40% previously, despite you beating margin in Q2. And I would imagine price versus cost, if anything, It's getting better in the second half versus the first half. So could you give us more color into what you're seeing there?

Speaker 2

Sure.

Speaker 1

Yes, Andy. I think in terms of the last part of your question on the price cost, Like we said before, we were very early in our pricing actions. I think right now the expectation is the back half looks fairly comparable to how we were guiding before. I wouldn't call that In terms of the margin tweak kind of as you put it, it's just that, just a minor tweak. A couple of things to note.

Speaker 1

We did call out that there's some slight increase on corporate costs. We did have you saw some of the capital that was deployed To M and A. So we did actually have a technology acquisition that we completed in Q2 that right now I'd say minimal revenue base, but a cost base, But one that we're very excited about for the future. So again, when you put those 2 in perspective, that's probably the meaningful portion there. And as we've always said, we're going to going to continue to invest in the business.

Speaker 1

I mean as Vicente said, whether it be in Asia or anywhere else around the world, we're going to continue to invest in growth resources to drive Outperformance from an organic growth perspective as we look forward. So I think that's the way we kind of look at it in totality. But again, nothing in terms of a meaningful change in our opinion from Where we've been operating or prior guide.

Speaker 5

Appreciate it, guys.

Speaker 2

Thank you.

Operator

And your next question comes from the line of Nigel Coe with Wolfe search. Your line is open.

Speaker 6

Good morning.

Speaker 2

Good morning, Nigel.

Speaker 6

Thanks for the question. Just Wanted to maybe just take a different crack at the second half margin question. I think you talked about 3Q looking like 2Q, which makes sense. This feels like the guide doesn't embed much of a kick up in 4Q and normally 4Q margins are substantially higher On volumes. So just wondering what you're expecting for 4Q.

Speaker 6

Maybe my math is wrong, please correct me. But it does feel like we don't have much of a seasonal in 4Q.

Speaker 1

Sure. Yes. So Nigel, I think the way you've described Q3 is correct. If you think about ITS, As Asante earlier said, I think ITS will look fairly comparable to Q2. Now that being said, that still would embed nice margin expansion on a year over year basis.

Speaker 1

And we would expect on the PST side for margins to kind of get back to that 30% level specifically in Q3. Now on the Q4 side of the equation, whether you're looking from a total company perspective or the individual components,

Speaker 7

I think it's actually going to be

Speaker 1

fairly comparable Historically, seasonally, it is the strongest quarter in the year. That's no different. So you will see a slight seasonal uptick from Q3 to Q4. But there is incremental margin expansion included in the Q4 guide. I would say it's not dramatically different than our prior guide in that respect.

Speaker 1

And the one thing to probably note here as we look and we got some of the questions about it earlier in terms of the cadence. Kind of like what we said before, we're still I think continuing to remain prudent on the back half expectations, particularly Q4

Speaker 7

on the volume side. And I think

Speaker 1

we would still acknowledge that's probably the single source Potential upside to the guide as we sit here thinking specifically about organic volume in Q4.

Speaker 6

Okay, okay. That's fair. And then, vacuum digging in the weeds a bit here, but the vacuum trends remain pretty strong, Ditto compressor, but I think, COPCO called out a bit of weakness in industrial vacuum, not just semi, but also a little bit of weakness in industrial. And you're obviously not seeing that. So are you seeing any signs of weakness developing in any of your end markets?

Speaker 6

And Is there a reason why vacuum and compressor would decouple? Just curious there.

Speaker 2

Yes, Nigel, I'll say that the industrial vacuum is kind of what we call Vacuum, when you look at the total market segmentation of that. And I will say that we have a more bigger spectrum of technologies, Whether it's crew vacuum, rotary vein, liquid ring, so we will say that we have Not only great technologies, but also good brands. In terms of what we're seeing in the market, I'd say stability from what we're seeing. You could argue that sometimes industrial vacuum plays slightly different, where the industrial compressors will play. So industrial vacuum many times, we'll play in chemical processes or petrochem and things like that, things of that nature.

Speaker 2

But in our view, we're very happy and very pleased with what the team again continues to do from a self help initiative here on driving new technologies. I mean, we spoke about Some of the technologies, again, not only on that Slide 5 on what China team is doing, but now there's also new technologies that the team in Europe are launching to as well To start capturing even more share. So I'll say that very, very pleased with the performance that the team is driving.

Speaker 6

That's great color. Thanks a lot.

Operator

And the next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is open.

Speaker 8

Hey, good morning guys.

Speaker 2

Good morning, Joe.

Speaker 8

Hey, just maybe just following along Nigel's questions around just potential weakness. I know that you're seeing really good order trends across your businesses, but there's a real focus right now On companies that are seeing destocking across our channels. And so maybe just on your shorter cycle businesses, just can you talk to us about Whether you see any kind of risk to any PCV business today on from a channel perspective.

Speaker 2

Yes, Joe, I'll say maybe I'll start with the 2 big buckets, obviously, ITS and PST. On the ITS side, A lot of the product, I'll say the majority of the product that we have in the IPAs is really customized to specific applications. So it's very difficult to kind of at least on our technology to really have stock of those compressors in the shelves. It's basically high working capital for The distribution channel network that we have. So we don't see much of that.

Speaker 2

At the same time, we have a Very loyal channel, and we have access and visibility to what levels of inventory they have. On the PST side, PST will be the one that maybe plays a little bit more on We call the national distribution, national industrial distribution, at least particularly in the U. S. Here. And on those, we track Very I mean, on a monthly cadence, sell in and sell out.

Speaker 2

So we have a visibility on how much we're selling to this channel and how much that channel is selling out. So at least we get visibility with the level of inventory that is somewhat available in the shelves And whether it is getting destocking or overstocking, we're always proactively trying to prevent the overstocking. It's a situation that we just don't like to be entangled with. So I think we say I'd say we've been Fairly proactive from that perspective to making sure that we're watching those trends carefully. Nothing of material of note that we're seeing in terms of major destocking, Again, I have to do because there was not a lot of overstocking as well.

Speaker 2

So not only that helps, but that's maybe a little bit of color there.

Speaker 8

No, that's great. I figured as much, but had to ask the question. So that's helpful color, Vicente. And I guess the follow on question, really kind of want to maybe dig into this opportunity, this oil free hydrogen compressor opportunity. Yes, maybe talk a little bit more about what the opportunity is there and then specifically what the applications are today.

Speaker 2

Yes, Joao, I mean, I'd say this is a very, very exciting opportunity and one that these we have now an engineering center Insight in our facility in India. We're now considered to be one of the only India companies in India that has the capability of actually testing Hydrogen Compression Systems. And Hydrogen is going to be, we think, a good growth vector in the market in India. So we're happy to be the first and we're happy to be the ones with the largest lab and technology center in India at this point in time, which is the reason why on the prior earnings call we spoke about the That we're doing. In terms of market sizing, I mean, I think I would say it's still early stages from the perspective we don't want to Put numbers at, I mean, obviously, if you kind of trust what market dynamics are saying, these are kind of huge markets.

Speaker 2

But we're not going to size it here on this call. I think on the Investor Day, we'll definitely give you a little bit more color on this one. But again, this is one super exciting Opportunity that technology that the team in India was able to develop and actually work pretty closely with a company in Europe to develop something really unique. And in this case, we were kind of the only company that could achieve The performance requirement that it was required by this technology company. So again, it speaks volumes to the investments that we continue to make in R and D And continue investments that we make in technologies that we think will play well for us in the future.

Speaker 8

Awesome. Thanks guys.

Speaker 2

Yes. Thank you,

Operator

Joe. And your next question comes from the line of Chris Snyder with UBS. Your line is open.

Speaker 7

Thank you. So Q2 really showed strength across all three geographies. And I understand that comps are obviously getting a good deal tougher into the back half of the year and price contribution is easing. But When you look at these three geographies, is there anyone or any place where you see demand softening on the leading edge?

Speaker 2

I mean, I think, Chris, note that our NQLs are demonstrating or showing. We're even as we look here into the month of early days in July, I'd say that there continues to be that sustained momentum That we were seeing in the Q2 from an MQL perspective. So nothing that we will highlight of Specifically end market or maybe as you said regional view that is seeing a dramatic decline. Again, I think it's tough comps as we go into the Q3. I think if I remember the ITS, America teams, I mean, had really hefty double digit Like close to 30% of growth in orders Q3 of last year.

Speaker 2

So I mean those are the difficult comps that we talk about. But Having said that, I mean, I think when you think about in perspective, we have been posting double digit revenue organic growth for like 9 out of the 10 quarters. So that's kind of when we talk about tough comps, but again the team continues to perform and execute and control what they can control.

Speaker 7

Yes. No, appreciate that. Obviously, with the comps, you're trying to sometimes separate like demand from growth. So appreciate all that color. And then I guess kind of following up on that.

Speaker 7

In prior quarters, you guys talked about basically flat backlog year on year to exit the year, Build in the first half, burn in the back half. I know that's still generally the trajectory,

Speaker 2

but is

Speaker 7

Do you still expect not to add any backlog throughout the year even if we burn a little off in the back half? Just as you like demand Maybe running a little bit better than expected 3, 6 months ago. Thank you.

Speaker 1

Yes. Chris, I think right now our expectation is fairly consistent with what we've kind of messaged before. And you're absolutely right. We did expect backlog to be largely flat as we look toward the end of the year, but we did explicitly say that Book to bill above 1 in the first half build backlog and then you'd see that kind of drift down, I think as Ascente mentioned earlier in the second half of the year. And that's very consistent with, I'd say, our typical cadence, our typical seasonality.

Speaker 1

And based on what we're seeing now, given the level of backlog, but then also kind of The expectations for what we're seeing in the second half of the year. I don't think anything has changed in that respect. To the point that was said before, I do think there continues to be an on the organic volume side, particularly probably more on the Q4 side of the equation, maybe as the upside to guide. But in terms of backlog being flat year At the end of the year compared to where we started, I think that's still a fairly good expectation at this point in time.

Speaker 2

Thank you. Appreciate that.

Operator

And your next question comes from the line of Joe O'Dea with Wells Fargo. Your line is open.

Speaker 9

Hi, good morning. Thanks for taking my questions.

Speaker 5

Hi, Joe.

Speaker 9

Hi. So first, just another one On back half, but the price and volume dynamic within organic, it seems like the way the back half is set up Between the quarters, we're looking at a pretty similar organic growth 3Q and 4Q. Just curious in terms of kind of pricing comps And if what we're thinking about at this point is that it's really volume growth in the back half.

Speaker 1

Yes. Joe, the way I would probably think about it in terms of the back half, I do think If you look on a like we said, Q3 will look fairly similar to Q2, particularly on the ITS side, if you're thinking about revenue and bottom line. I think the way to think about it, if you want to kind of think about the 2 quarters individual, I think the organic growth side will probably be a little bit healthier in Q3 than Q4. Remember, Q4 of last year, We had an exceedingly strong end of the year, particularly in ITS. I think ITS Q4 organic sales growth was in excess of 20%.

Speaker 1

So again, aside from the kind of timing between the quarters, to your point, we do expect to see pricing continue to, I'd say, Normalizing the back half. A lot of that is just frankly due to the timing of when we took price increases in the prior year. So we are now lapping that. And we would expect to see price continue to kind of ramp down on a sequential basis, but very consistent with what we In terms of our original guide, I don't think anything has really changed on that end. And then again, on the volume side, Again, volume, we continue to slightly uptick our volume expectations for the back half, each of our successive guides.

Speaker 1

This guidance is no different. And with the backlog, hopefully there's some opportunity to outperform there as we think about Q4.

Speaker 9

Got it. And then Vicente, I think your response to kind of Rob's question was interesting on the ability to pivot to growth. And curious just in terms of the internal approaches to identifying that growth and how you try to sort of position in advance of it, so it's not so much a chasing the puck, but Being well positioned for anticipating that and kind of how far out that goes, I mean, what we can think about what you're doing today in terms of what you anticipate for growth?

Speaker 2

Yes, Joe, I love how

Speaker 1

far out it is.

Speaker 2

Yes, no, I love that question. Because we have a team, I mean, The team is like a team of 1, but we have 2 people actually here sitting in our corporate offices that we're currently analyzing like 100 plus micro trends. And these are kind of trends that we're seeing early indicators of potentially becoming good vectors of growth. So that's one avenue how so early We're looking at these new potential trends. I mean, give you one example could be lithium battery recycling.

Speaker 2

Clearly, with a lot of the production on electric vehicle And lithium battery production. There's going to come a time that batteries will need to recycle. So we're already looking at the technologies that we can incorporate in those And finding the early stage development processes where we can actually incorporate a lot of our technologies and products. So And to think about it, I mean, we have about 100 of those kind of micro trends that at any point in time we're analyzing and then we're leveraging our demand generation team To get close and closer to those customers to better understand, how can we help and participate on those early trends. That's just one example of kind of how early we can do it.

Speaker 2

And then obviously, as you go to a country like China, I mean, the team, every year, We reassess the end markets that we expect to see a higher growth and then we pivot resources and technologies and again demand generation To be able to start attacking those early indications that we're seeing.

Speaker 9

Very helpful. Thank you.

Operator

Our next Question comes from the line of Nicole DeBlase with Deutsche Bank. Your line is open.

Speaker 10

Yes, thanks. Good morning, guys.

Speaker 2

Good morning, Nicole.

Speaker 10

Most of mine have been answered today, but I guess one thing that I want to dig into is just I think there's concern among investors about potential slowing in Europe. So I mean it sounds like everything from your commentary is going pretty well there, but if we could just dig into that a little bit and what you're seeing. Thanks.

Speaker 2

Yes, Nicole. I'll say continues to see good momentum. Again, I think I always like to put it in perspective in terms of the self help that we're driving ourselves. It doesn't mean that the total market is actually Seeing the same momentum as we're seeing. I mean, we're definitely outgrowing the market by a lot of the focus that we're doing on these kind of vectors of growth that we're finding.

Speaker 2

And whether it is in France going after how can our technologies help with nuclear facilities and revamping that or In Germany, how whether LNG or the hydrogen push is actually helping us to refocus some of the technologies in that. So So it kind of varies at that kind of micro level for us to be able to decipher the best ways for achieving that growth. So that's why we think that The view that we put out on this economic growth engine on how we kind of follow secular trends and leverage things like demand generation, Obviously IoT, which we're very excited in terms of accelerating. We've been feeding a lot of new machines in the field And now how are we going to harvest all that package care and recurring service work that we can do because we're connecting machines. So there's multiple of places where we can find good growth that as you kind of add all these little buckets of growth kind of creates a meaningful good growth momentum for us.

Speaker 10

Understood. Thanks Vicente.

Speaker 2

Yes. Thank you, Nicole.

Operator

And there are no further questions at this time. Mr. Reynal, I'll turn the call back over to you.

Speaker 2

Yes. Thank you. I just would like to end by thanking and All of our employees for their hard work in helping us to deliver another record quarter in Q2. We're counting on our team to continue to execute. We're counting that we know that IRX continues to be our differentiator and IRX, as we said, is rooted in our unique ownership model.

Speaker 2

So again, thanks For listening to our call and appreciate it. Thank you.

Operator

And this concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Ingersoll Rand Q2 2023
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