Ingersoll Rand Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 14 speakers on the call.

Operator

Good morning. My name is Brianna, and I will be your conference operator today. At this time, I would like to welcome everyone to Ingersoll Rand Second Quarter 2024 Earnings Call. Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. I will now turn the call over to Matthew Fort, Vice President of Investor Relations. You may begin your conference.

Speaker 1

Thank you, and welcome to the Ingersoll Rand 20 24 Second Quarter Earnings Call. I'm Matthew Fort, Vice President of Investor Relations. 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 discuss 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. Please review the forward looking statements on Slide 2 for more details. In addition, in today's remarks, we will refer to certain non GAAP financial measures. You can find a reconciliation of these measures to the most comparable measure calculated and presented in accordance with GAAP on 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 2024 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 our employees for their hard work, dedication and continuing to think and act like Conyers, helping us to deliver another record quarter in Q2. Starting on Slide 3, despite the challenging macroeconomic environment, our team delivered another record quarter results, demonstrating the continued strength of our execution engine, IRX. We remain nimble and are prepared to pivot as market conditions change. And based on our solid performance, we are once again raising our 2024 full year guidance.

Speaker 2

Turning to Slide 4, our economic growth engine describes how we deliver durable compounding results. We remain committed to our strategy and over the cycle delivering our long term Investor Day targets as outlined on this page. IRX is our competitive differentiator, and combined with our unique ownership mindset, we expect to continue to deliver long term value creation. With that in mind, I would like to provide a brief update on our growth initiatives. On Slide 5, let me start with our inorganic growth initiatives.

Speaker 2

We're pleased to highlight 3 recently closed transactions, which together are expected to achieve an average of mid teens ROIC by year 3. Let me quickly walk you through these deals. First, CAPS, which is a leading provider of compressed air and power generation services. This is a great example of strategic channel expansion, giving us access to a large inflow base, strong end user relationships and robust technician network. Next is Fruplan, which expands our technology with low flow applications.

Speaker 2

And lastly, we have Dell Pumps, a mission critical high margin pumping solution across high growth sustainable end markets in India. On the bottom of the page, I'd like to highlight that with the closure of these transactions, along with the closure of IOC Dover within the quarter, we have already far exceeded our annualized inorganic revenue target of 400 basis points to 500 basis points, setting us up well for a good start in 2025. In addition, the funnel continues to grow and stay very active, with deals mostly both on in size. On our prior earnings call, we mentioned that we had also a couple of $1,000,000,000 purchase price deals in the funnel. During the Q2, we decided to walk away from one of these larger transactions.

Speaker 2

And this is proof that we continue to remain very disciplined in our approach to M and A and committed to long term shareholder value creation through effective capital allocation. We expect more bolt on deals to be announced later in the year, further exceeding our annualized inorganic revenue targets. Turning to Slide 6. On this slide, I wanted to take a minute to walk you through why we're so excited about the ILC Dover acquisition and deep dive into the biopharma business, which accounts for approximately half of the total business. With exposure to high growth therapies like GLP-one and ADCs, this business is well positioned to deliver double digit growth in 2024 and beyond.

Speaker 2

The performance in biopharma is much better than the current market and speaks to the niche and unique nature of the product, solutions and offerings we have. Let's start with GLP-one or glucagon like peptide 1 therapies, which are used in the treatment of Type 2 diabetes and weight management. With a projected annual market growth rate of 20% to 30% over the next 5 years, GLP-1 manufacturers are rapidly expanding their capacity to meet both the current and growing market demand. We have deep and long lasting relationships with our customers, where our proprietary single use technology is already qualified into their production process, becoming an integral part of the validated bill of materials for GLP-one production. As our customers expand capacity, either within their own facilities or as CMOs, our products are required inputs for these new production lines to minimize validation timelines, startup costs and risk.

Speaker 2

As illustrated on the right hand side of the page, IOC Dover provides proprietary best in class technology in terms of single use containment bags, liners and other consumables that are used across a variety of steps in the GLP-one drug manufacturing process, giving our customers the assurances they require to deliver compliant product to the market and reducing their cross contamination risk. Moving on to ADC or antibody drug conjugates, which are used primarily in cancer treatment therapies. This market is expected to grow double digits annually over the next 5 years, driven by the efficacy of the technology. There have been several new ADCs approved in recent years with a robust drug development pipeline for this type of therapy. COPATRINET containment technology is proven to perform better than both clean in place and single use alternatives.

Speaker 2

And we believe our technology is 80% to 90% more cost effective than a clean in place technology. We continue to see customers convert their existing production lines and install new capacity, leveraging our single use containment technology. I will now turn the presentation to Vic to provide an update on the Q2 financial performance.

Speaker 1

Thanks, Ascente. Starting on slide 7, despite the increasingly challenged macroeconomic environment, we delivered solid results in Q2 through a balance of commercial and operational execution fueled by IRX. Total company organic orders declined 1%, finishing largely in line with expectations. We saw strong sequential orders growth of 5% for the total company with the book to bill of 1.0 times. Consistent with our guidance, book to bill finished above 1 in the first half at 1.01 times.

Speaker 1

This provides us with a healthy backlog to execute in the back half of the year and gives us conviction in delivering our full year 2024 revenue guidance. Organic revenue was up 1% for the quarter and up 13% on a 2 year stack. The company delivered 2nd quarter adjusted EBITDA of $495,000,000 a 16% year over year improvement and adjusted EBITDA margins of 27.4%, a 220 basis point year over year improvement driven predominantly through gross margin expansion partially offset by investments for growth in SG and A. Adjusted earnings per share was $0.83 for the quarter, which is up 22% as compared to the prior year. This marks 6 consecutive quarters of double digit EPS growth and twelve out of the last 14 quarters of double digit EPS growth beginning Q1 of 2021.

Speaker 1

Free cash flow for the quarter was $283,000,000 and total liquidity was 3.7 $1,000,000,000 with $1,100,000,000 of cash on hand at quarterend. Our net leverage was 2.0 turns, which is up 1 turn versus the prior year. This increase is primarily driven by the $2,325,000,000 acquisition of ILC Dover. For the full year, we do anticipate net leverage finishing at approximately 1.5 turns. Turning to Slide 8.

Speaker 1

For the total company on an FX adjusted basis, Q2 orders were up 5% and revenue increased 8%. Total company adjusted EBITDA increased 16% from the prior year. The ITS segment margin increased 230 basis points, while the PST segment margin increased 110 basis points year over year. Overall, Ingersoll Rand expanded adjusted EBITDA margins by 220 basis points. Corporate costs came in at $44,000,000 for the quarter, largely in line with expectations.

Speaker 1

And finally, adjusted EPS for the quarter was up 22% year over year to $0.83 per share, including an adjusted tax rate for the quarter of 21.3%. On the next slide, free cash flow for the quarter was $283,000,000 including CapEx, which totaled $22,000,000 Total company liquidity now stands at $3,700,000,000 based on approximately $1,100,000,000 of cash and $2,600,000,000 of availability on our revolving credit facility. Leverage for the quarter was 2.0 turns, which is a one turn increase year over year. As noted earlier, this increase was driven primarily by the purchase of ILC Dover, which was funded through $2,000,000,000 in bonds and $325,000,000 in cash. Specifically within the quarter, cash outflows included $2,600,000,000 overall deployed to M and A as well as $71,000,000 returned to shareholders through $63,000,000 in share repurchases and $8,000,000 for our dividend payment.

Speaker 1

Our capital allocation strategy remains unchanged with M and A being our top priority and we continue to expect M and A to be our primary use of cash as we look ahead. On Slide 10, I'd like to take a minute to highlight the transformation of our debt portfolio. This transformation has been underway for several years and I'm pleased to say that we now have a fully investment grade structure. Also important to note that within the quarter, we received a 1 notch upgrade from each of the 3 rating agencies, which you can see highlighted on the right side of the page, further solidifying our investment grade status. In terms of the overall capital structure, in May, we issued $3,300,000,000 of unsecured investment grade bonds.

Speaker 1

The proceeds of the bond issuance were used to repay $1,230,000,000 of our legacy secured term loans

Speaker 3

and $2,000,000,000 was used to partially

Speaker 1

fund the acquisition of ILC Dover with the remainder retained for general purposes. In addition, we took the opportunity to increase the size of our revolver from $2,000,000,000 to $2,600,000,000 which further provides flexibility to execute on our strategic initiatives. As a result of this debt portfolio transformation, we now have a fixed to floating ratio of 84% fixed and 16% floating and extended our weighted average maturity on our overall debt from 6 years to 10 years. Our new capital structure is designed to facilitate our long term capital allocation strategy and we remain committed to maintaining our investment grade status. Finally, our 2024 gross interest expense outlook is now approximately $215,000,000 On an annualized basis, we expect gross interest to be approximately $260,000,000 as we move into 2025.

Speaker 1

I will now turn the call back to Vicente to discuss our segment results.

Speaker 2

Thanks, Vic. Moving to Slide 11. Our Industrial Technologies and Service segment delivered solid year over year revenue growth of 6% on top of approximately 20% growth in Q2 of last year. Adjusted EBITDA margins were 29.7 percent, up 2 30 basis points from the prior year, which was driven primarily by gross margin expansion. Book to bill was onetime, with organic orders down 2.6%, which was largely in line with expectations.

Speaker 2

Important to note that we saw sequential orders growth of 5%, which were primarily driven by compressors. Moving to the program highlights. Compressor orders were up low single digits while still comping a low double digit growth in Q2 of 2023. It's good to know that we saw positive order growth across Americas, EMEA and Asia Pacific, excluding China. Compressor revenue was up mid single digits in the quarter, which we view still healthy after mid teens growth in Q2 of 2023.

Speaker 2

Industrial vacuum and blower orders were up low single digits and revenue was up mid teens. For our innovation in action, we're highlighting Elmore Richele new high speed blower technology, which was recently launched in Europe. This patented oil free technology offers a 60% reduction in energy consumption compared to a traditional blower technology, enabling productivity for the customer and reducing total cost of ownership by up to 50%. Turning to Slide 12. The PST segment achieved 6% organic order growth and delivered adjusted EBITDA of approximately $103,000,000 with a margin of 30.3%.

Speaker 2

It is encouraging to see that the legacy Ingersoll Rand Life Science business saw organic order growth of 8%. In addition, short cycle orders in the PST segment remained positive with book and ship orders up mid single digits year over year. We see organic order growth stabilizing, and we remain positive about the underlying health of the PST business, and it remains on track to meet our long term Investor Day growth commitments. For our PST innovation in action, we're highlighting an extremely innovative technology within the legacy Ingersoll Rand Life Science Business. Combining multiple technologies across different brands, we have developed a product offering in microfluidics to create a customized liquid handling automated system for biotech R and D labs as well as the production of personalized therapeutics.

Speaker 2

This innovative technology drives up to 50% productivity versus existing processes in a market that is expected to grow approximately 20% through 2027. On the next slide, I'd like to spend a minute discussing the current market trends as we always get a lot of questions about our leading indicators. The key leading indicator of our short to medium cycle business is marketing qualified leads or MQLs. As illustrated on our top chart, our MQL continues to grow. In Q2, we saw organic MQLs up 13% year over year.

Speaker 2

As for the longer cycle component of our portfolio, one key indicator we look at is the funnel activity for engineered to order compressor systems. We remain encouraged as the funnel activity is up 27% in the first half year over year. While the leading indicators have been encouraging, we have seen an elongation in the decision making process with the prolonging of the time to convert an MQL to an order. The feedback we hear contains multiple reasons, but some of the most often cited are customer site readiness and too many projects happening at the same time, which is impacting EPC engineering capacity. Having said this, this situation is encouraging as we look to 2025.

Speaker 2

Switching back to 2024 expectations, from a regional perspective, Americas is on pace to deliver mid single digit organic revenue growth. EMEA remains stable. We see very good pockets of growth, primarily in the emerging markets of India and the Middle East. Asia Pacific and specifically China is a key driver of the reduction in our organic growth guidance. Moving next to inorganic growth, we're anticipating approximately $270,000,000 of incremental revenue from our recently acquired M and A.

Speaker 2

IOC Dover is the largest driver, contributing approximately $220,000,000 of revenue in 2024. The biopharma business, as highlighted earlier in the deck, remains strong and on track to deliver double digit growth. However, we do anticipate that the aerospace and defense revenue to be down approximately $30,000,000 versus our initial expectations. And this is driven by lower than expected activity levels in our space business, predominantly related to the next generation spacesuit, which is often referred to as ex EVAS. As we move to Slide 14, given the solid performance in the first half, our recently acquired M and A and our expectation of continued operational execution fueled by IRX, we are once again raising our 2024 guidance.

Speaker 2

The company revenue is expected to grow overall between 6% to 8%, which is up 200 basis points versus our initial guidance. As discussed

Speaker 4

in the previous slide, we anticipate positive organic growth in

Speaker 2

the range of 0% to 2%. The reduction in the range versus our prior guidance is largely attributable to lower organic growth expectations, specifically in China. FX is now expected to be a 1% headwind for the full year, which is down approximately 100 basis points as compared to our previous guide. M and A is projected to contribute approximately $440,000,000 which reflects all completed and closed M and A transactions as of July 31, 2024. Corporate costs are planned at $170,000,000 and will be incurred relatively evenly per quarter for the balance of the year.

Speaker 2

Total adjusted EBITDA for the company is expected to be in the range of $2,010,000,000 $2,060,000,000 which is up approximately 14% year over year at the midpoint. Adjusted EPS is projected to be within the range of $3.27 $3.37 which is up 2% versus prior guidance and approximately 12% year over year at the midpoint. On the bottom right hand side of the page, we have included a 2024 full year guidance bridge, showing the changes in our latest guidance as compared to our previous guidance provided in May. As you can see, the primary driver of adjusted EPS growth is associated with operational execution, partially offset by increases in the net impact from interest and FX. We're also seeing a $0.02 improvement in our adjusted EPS as compared to our previous guidance from an improvement in our full year adjusted tax rate.

Speaker 2

Gross interest expense is now expected to be approximately $250,000,000 and net interest expense will be approximately $170,000,000 and will be incurred relatively evenly per quarter for the balance of the year. The adjusted tax rate is expected to finish in the year between 22% 23%. No changes have been made to our guidance on CapEx spend as a percentage of revenue, free cash flow to adjusted net income provision or share count, all remain in line with our previous guidance. Finally, as we turn to Slide 15, I'm very pleased with how our teams continue to execute despite overall market conditions. We continue to deliver record results and our updated guidance is reflective of our first half performance and ongoing momentum.

Speaker 2

With our most recent guidance, we continue to expect to deliver results above of our long term Investor Day targets. Based on the midpoint of our 2024 full year guidance, the 4 year CAGR or organic revenue growth will be approximately 10%. We think this continues to show durable outperformance over the cycle. That in combination with our inorganic growth, robust margin expansion and execution of IRX, we expect to deliver a 4 year CAGR in excess of 25% for adjusted EPS. To our employees, I want to thank you for the strong results thus far showing the impact each of you have as owners of the company.

Speaker 2

Thank you for your resiliency, hard work and focused attention. We believe the power of IRX combined with our ownership mindset and leading portfolios strengthens the durability of our company while delivering long term value to shareholders. With that, I will turn the call back to the operator to open the call for Q and A.

Operator

Thank you. We will now take your questions. Our first question comes from the line of Mike Halloran with Baird. Please go ahead.

Speaker 5

Hey, good morning, everyone.

Speaker 1

Good morning. Hey, Mike.

Speaker 5

Hey, so let's start with the change in the second half organic assumptions. If I look at how the second quarter progressed, it feels generally consistent with what you were talking to on the top line coming into the quarter. The book to bill, orders down a little bit, revenue levels came in at a reasonable level, all else equal. I certainly understand the commentary about a little longer to close on some of these transactions and push outs of the orders as well as the China piece. So twofold question.

Speaker 5

One, was there something about July that you saw that maybe changed that trajectory? And 2, could you parse out some of the underlying things you're seeing from a demand environment, excluding some of the project push outs? And if there's any changes elsewhere beyond just the China comments?

Speaker 4

Yes. No, thank you, Mike. I mean, I think you've framed it up actually quite well. So the answer to your first question is definitely no. I mean, nothing that we saw in July that gives us the concern and the change in kind of how we think about it.

Speaker 4

I think also as you said, I mean, I think things kind of are operating in the first half exactly as we expected. You saw that even we saw some very good sequential improvement Q1 to Q2 orders improving 5% and actually improving on both segments, not only the IPS, but also the PST. And what kind of when we think about the guidance and also you can see that in the second half, we do anticipate still organic revenue growth to be positive with a very good phasing between revenue and EBITDA similar to prior years, which obviously implies that we'll continue to see some kind of good improvement here sequentially. But in terms of the guidance, I think the reduction is really predominantly driven by China. Again, although we also were fairly encouraged with what we saw improvements Q1 to Q2 in China, which was positive.

Speaker 4

And we're also encouraged by kind of what we hear from our teams in terms of level of activity in the month of July, driven by these new programs in place of replacing equipment that the government is putting out together in the market. We feel that we're taking the approach to be prudent and don't necessarily see that the market materially changes in the second half in China and kind of keep it more, I

Speaker 2

will say, stable from here onwards.

Speaker 4

I will also say kind of in terms of what I mean, any other changes in terms of market dynamics, I mean, not necessarily, we were very transparent here in terms of leading indicators that we always talk about, which is MQLs and funnel acceleration. Just to show that market activity continues to be actually pretty good. I think it's this elongation in what we call the velocity of converting some of those either formal or MQLs through the process, it seems to be kind of a little bit more elongated. Could that be driven by elections or could that be driven by geopolitical? And obviously, what we hear about EPC capacity constraints and site readiness, there's a little bit of a few different data points.

Speaker 4

I think in our view, what we wanted to do is just kind of be more prudent as we go here into the second half. And again, based on these good visibility that we see on lead indicators, feeling good about how this could play out as we kind of head into 2025.

Speaker 5

No, that makes sense. And does that change how you guys were articulating the book to bill and order cadence from last quarter? If I remember correctly, it was orders slightly negative front half, but positive back half and then the inverse on the book to bill. Is that still the way to think about it? Or do these push ups shift some of that

Speaker 2

numbers?

Speaker 4

No. That's exactly the way to think about it, Mike. Spot on. Great. Yes.

Speaker 2

Great. Thank you. Appreciate

Speaker 6

it. Thank you, Mike.

Operator

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

Speaker 1

Hi, good morning.

Speaker 3

Maybe Vicente, it seems like China was the sort of the pivot point on the organic guide. So maybe a little bit more color there. You mentioned the teams on the ground sound more optimistic, but maybe just put some numbers around it, sort of remind us, I guess, total China revenue exposure of Ingersoll Rand? And then what were organic sales in China down in the first half of the year? And what does the midpoint of the guide embed for second half revenue trends year on year in China, please?

Speaker 1

Yes. Julien, this is Vic. Maybe I'll start and I'll let Vicente add some color as well. In terms of the first part of your question, I think fairly consistent with how we've described it historically. And it's important to note that this is a consistent statement about across both segments, both ITS and PST.

Speaker 1

Total APAC is roughly about 20% of the revenue base and China is the lion's share of that, probably somewhere in the high teens percent. So the preponderance of that revenue base in APAC is China. To kind of give rough numbers in terms of the growth expectations and I'll focus my commentary on the revenue side. In the first half, total APAC, which of course China is the biggest driver, is effectively down, let's call it low double digits on the revenue base. It's important to note obviously the comps still pretty meaningful in the first half of the year.

Speaker 1

And as we move to the back half of the year, as Vicente just indicated, we do continue to see stability and some sequential, I'd say, progress from first half to second half. And then year over year, we actually expect probably to be closer to flattish year over year, both that stability moving from first half to second half, but also important note that the comps do get a little bit more easier comparatively speaking in the back half from a revenue perspective, specifically in China.

Speaker 4

Yes. And the other things to add there Nigel, in terms of kind of some of the color that we see is that, if you were to even exclude some of these kind of large project, long cycle projects, China orders kind of that core business, which excludes these long cycle, especially fairly good momentum there, Julien. So I'll say that even though in this challenging environment, they're still performing actually quite well.

Speaker 3

Thanks very much. And then just my quick follow-up, just within the sort of second half guidance as we think about kind of seasonality, I realize there's some distortions sequentially into Q3 because of the acquisitions that closed in early June. But when we think about sort of 3rd versus 4th quarter in your guide, are we thinking kind of Q3 is, I don't know, 25%, 26% of the year's EPS? And then revenue wise, you kind of have just under €1,900,000,000 in Q3 and maybe just over €1,900,000,000 in Q4. Is that the way to think about it?

Speaker 1

Yes. Stuart, I think you're close enough around it. I think that's probably the right way to think about it. So interesting enough, I'd say the seasonal phasing, whether it be on the revenue side or on the earnings side, not dramatically different than what you've seen in prior years, slightly more weighted towards the back half than the front half. That is correct.

Speaker 3

Great. Thank you.

Speaker 4

You bet.

Operator

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

Speaker 1

Hey, thank you. Good morning, everyone.

Speaker 2

Hey, Vicente, can you drill in

Speaker 1

a little bit more on kind of PST in general, but kind of biopharma markets in particular? It does sound like you're seeing and feeling kind of the turn in those markets, but just kind of speak to what's going on in the channel or the channels cleared, what the outlook for maybe the remainder of the year is there?

Speaker 4

Yes, absolutely. Jeff, so let me kind of break it into a couple things. I mean, first of all, let's talk about the legacy Ingersor Rand Life Science Business, Medical Business. As you saw, very good momentum in the quarter in Q2 with very nice growth at 8%. So that's actually very encouraging to see.

Speaker 4

And some, I'd say, good wins as we continue to you saw the product in action, the innovation in action that we put there. And so I'm getting that team is getting some very good exposure to personalized medicine, particularly around cancer treatment, which is very encouraging to see that. And I think on top of that, I mean, I think we're now 2 months into the ownership of IOC Dover with the biopharma. And I think the team continues to stay pretty encouraged on what they're seeing out there. And as we go out and meet with the teams, we see some continued good momentum there.

Speaker 4

And you saw in the prepared remarks that we still expect that business to be able to generate that kind of double digit growth for this year. So again, speaks to the good kind of product innovation and nicheness of our technology and how we're particularly trying to be very focused on specific end markets that are seen outside growth.

Speaker 1

And then maybe just shifting, maybe this is total IR, maybe bias is a little bit more towards industrial tech. But what's going on with kind of service, service attachment? Is it growing here? How does it look into the back half?

Speaker 4

Yes, great, Jeff. Thank you for asking the question. I think we As a matter of fact, I As a matter of fact, I mean, even this week right now here, we have a team kind of getting together to talk about the continuation of taking service activities to the next level. So we continue to be very encouraged on what we're seeing and whether it is, which is regular kind of service attachment, but also EcoPlant, as EcoPlant continues to see some progression. And you saw that even also we acquired a company called CAPS in Australia, and that's really to give us more better channel, better access with a larger footprint on service.

Speaker 4

So service continues to be a very high priority for us as we move forward.

Speaker 7

Great. Thanks.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Rob Wertheimer with Melius Research. Please go ahead. Rob Wertheimer, your line is now live.

Speaker 8

Hi, I'm so sorry. Good morning.

Speaker 4

Hey, good morning, Rob.

Speaker 8

So my question is on gross margin. It was great in the quarter. I wonder if you could touch on price cost a little bit, price and competitive dynamic and how you're kind of winning or not share in the market. And then just out of curiosity, when you have that high risk margin, you can lean a bit more into spend. Curious how you manage that and what that kind of increased it wasn't, but increased spending might be?

Speaker 8

Thanks.

Speaker 4

Yes, Rob, great question. The gross margin expansion, very pleased to see a lot of that. And driven through the execution of initiatives like Fries, yes, as you mentioned, but I2V as well as the higher recurring revenue streams that we were just even talking about on the last question. So all of that is really inflicting some very good expansion into our gross margin that helped us deliver that expansion into our EBITDA margin. And absolutely, we're definitely investing.

Speaker 4

I mean, we continue to invest in areas like demand generation, R and D and many other areas as needed, whether sales force, activity and service technician to continue to grow their recurring revenue. From price cost, Vic, do you want to comment on that?

Speaker 1

Yes. On the price cost side of the equation, so specifically in the quarter, price was just approximately 2.5% across the entire enterprise, fairly comparable between the two segments. And then from an inflationary perspective, I'd say the commentary very similar to what we saw in Q1. I'd say the direct material side, it kind of continues to move sideways. So not a lot of what I would say headwinds on a year over year basis, but kind of sideways.

Speaker 1

And then I'd say on the labor side, relatively normal course. So again, continue to see good pricing momentum from the organization, good translation of the bottom line and you see that reflected in the gross margin profile along with some of the other initiatives that Vicente spoke to.

Speaker 8

Got it. Thank you. And then just a minor follow-up, just pricing looking forward roughly the same. And what does the new normal and price feel like now? Is it good going forward as far as

Speaker 9

you can see or 2

Speaker 8

or 3 or any comment there and I'll stop? Thanks.

Speaker 1

Yes. Just to keep it relatively simple, I think we've said that pricing

Speaker 4

will kind of return to, I'd say, a little

Speaker 1

bit more of the norm that you've seen historically, which is probably around that 1% to 2% gross pricing levels or net pricing level, I

Speaker 4

should say.

Speaker 1

And if you think about where we're headed in the back half, I think that's kind of where we should be. We were still benefiting from a little bit of some of the carryover pricing actions from last year here to the first half, but we would expect between 1% to 2% is probably a good indicative range for the back half of twenty twenty four as well as expectation for 2025 onwards.

Operator

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

Speaker 1

Thanks. Good morning, guys.

Speaker 2

Good morning. Hi,

Speaker 10

Joe. Hey, Vicente. Can we double click on that commentary around the MQLs and the delays that you're seeing? I'm just curious, like obviously, there's a lot of activity particularly happening in the U. S.

Speaker 10

With mega project activity. And I'm just wondering if that's just a function of what these projects have started, but you guys aren't really seeing the orders as quickly at this point, but they're on the come because projects have broken ground. Just any other color you can give us around that be helpful.

Speaker 4

Yes, Joe, I think, great question. And I would say, on that slide, we tried to separate 2 things, the kind of short to medium cycle and then the long cycle. And I would say that the mega projects perhaps view more on that kind of more on the loan cycle where we continue to see funnel increases, but there is that continued elongation driven by in some cases, we have seen some of our EPCs having 2 to 3 years of backlog and kind of creating a delay in how they continue to release those basically large projects into orders. So I think it's just a that's why when we made the commentary, that there is this perhaps glut of projects that as they get released, we will see some better momentum on that. So and from an MQL perspective, which is kind of that short to medium cycle, I think we made some commentary around PST.

Speaker 4

I mean PST on that short cycle business continues to be actually quite good at mid single digit growth even in the Q2. We just wanted to show that MQL, it is double digit kind of growth in a year over year. Clearly, all of that doesn't translate into the orders as we're not seeing that double digit orders, But it's a great indicator as to the market activity on how we're instigating demand and how we're getting really penetrated into new accounts and new customer base. And I think that's just for us good leading indicator on an ongoing performance for us.

Speaker 10

Got it. That's super helpful, Vicente. And then my other question is like, look, I could take this a variety of different ways, but congrats on shorting up the balance sheet from a leverage standpoint and from a debt standpoint. I know how important M and A is for you guys going forward and how it has been a great value creator for you. It is interesting to see you take down though the aerospace and defense number for the year by $30,000,000 I know that's a small number.

Speaker 10

And I think that that's the part of the piece that came out of the IOC Dover acquisition that you just completed. So I guess the question is, as you're kind of thinking through these acquisitions and there might be pieces of these acquired companies that you buy that you'll have inherent volatility. How are you thinking about like managing that going forward as you look through your evaluation process?

Speaker 4

Yes. Great question, Joe. I think particularly if you think about IOC Dover, we're very excited about the business. And if you remember, when we talk about the company, very excited about that exposure into the life sciences, which is basically 75% of approximately 75% of the total business for IL Sudover is Life Sciences with a good blend between biopharma and medical device component.

Speaker 2

And we always spoke about in

Speaker 4

this case aerospace being a bit of an optionality, good exposure, good things to learn, but also good to better understand. So as we continue to go forward and learn more about the business, what we can do with it, you know that historically we have always been pleased with doing whether it is carve outs and then selecting basins that we like or emphasizing more one versus another. But I think it's the purpose and the strategic view that we had with El Segover is that higher penetration onto the Life Science side of the business.

Speaker 10

That makes sense. Thank you, guys.

Speaker 6

Thank you.

Operator

Our next question comes from the line of Andy Kaplowitz with Citi. Please go ahead.

Speaker 11

Good morning, everyone.

Speaker 4

Good morning, Andy.

Speaker 11

Andy. Vicente or Vic, you started out essentially flat in terms of organic revenue growth for the first half of twenty twenty four. So I think in order to hit the midpoint of your guide now, you need to grow at the high end of that 0% to 2% for the second half. So we know you have easier comps, but do you need to see any incremental acceleration in your short cycle businesses to achieve that midpoint? Or are you basically just assuming more status quo in terms of short cycle markets now, remaining somewhat constrained in long cycle markets contributing more growth?

Speaker 1

Yes. Andy, this is Vic. I think the way you've described it is correct. So just to calibrate on the numbers, I think you're right. 1% to 2% organic growth in the back half of the year is probably the right way to think about it system wide.

Speaker 1

I think in terms of the components and the moving pieces, yeah, I think what we would say here is relative stability, no dramatic, let's just call it hockey stick improvement or anything of that nature in the back half implied. Obviously, we've taken down the China expectations, which is effectively the preponderance of what changed the organic growth guide. So, I think now it's execution of the backlog. You know that we typically do have a little bit of seasonality in the business where second half is stronger than first half. That's no different this year.

Speaker 1

And I think the other factors you mentioned here are largely accurate. So, I think we feel comfortable with the guidance, as provided.

Speaker 11

That's helpful. And then maybe,

Speaker 10

can you talk about what

Speaker 11

happened to PST adjusted EBITDA margin in Q2? I mean, it was down sequentially despite significantly higher revenue. I think we recognize there's a fair amount of acquisition related revenue in there. But I thought that ILC Dover was coming in an accretive margin to the segment. Did any other acquisition to the margins or something else happened in the quarter?

Speaker 1

Yes, Andy. So just to address the second part of your question first, we did have 1 month of ILC Dover results in Q2. And I'd say largely in line with expectations, both from a top line and bottom line and profitability perspective. I think generally speaking here, about 30.8 percent EBITDA margins to about 30.3 percent. I wouldn't attribute that to anything more than just some of the normal course revenue mix and things of that nature from the balance of the business.

Speaker 1

Nothing that I think you should read into any further than that as we think frankly going forward here into the back half of the year, those numbers closer trending sequentially better from Q3 Q2 into Q3 and then Q3 into Q4, absolutely. So I don't think anything has changed in our context as far as that getting to a mid-30s EBITDA margin profile over the next few years in line with our Investor Day targets for PST. So, nothing has really changed in that respect.

Speaker 2

Appreciate the color, Vic. Yes.

Operator

Our next question comes from the line of Steve Volkmann with Jefferies. Please go ahead.

Speaker 12

Hi, good morning guys. Most of my questions are answered, but I'm curious to go back to your kind of indicators, the MQL and the funnel activity. You must track kind of win rates or conversion or something over time as well. Any changes to note there? Yes.

Speaker 4

Yes, we do. And no changes on that. I think the change has been basically more because we also track the velocity of those kind of projects or orders through the funnel. And that is basically what I will say has maybe changed, and then the reason why we call it that elongation. But in terms of win rates and

Speaker 2

all that, no change in that.

Speaker 12

Okay. Thanks. And then I'm curious about this Katz acquisition. I'm not sure if I'm reading this right, but this sounds like you're actually providing power and air to customers, which is kind of a different kind of service, I think, than most of the rest of what you do. Does this open up sort of a new area where you can be more of a power by the hour type supplier across a bigger addressable market?

Speaker 4

Yes. Yes, Steve, I would say that, I mean, they're mainly primarily a compressor distributor. They do have some power side of the business that small in nature, but interestingly enough, I mean, they actually have provided power for some even including data centers, I mean, amongst all things. So I think it's just an interesting area that we're learning and we have some chiller technology with Fruillator that seeing how can we interact. So I mean, I mean, we're definitely learning a lot on that side.

Speaker 4

In terms of air by the hour or things like that, we do have some of those programs already in place in Australia, even with our legacy Ingersoll Rand side of the business And we call it air over the fence in many cases. But I think we're very excited about cats. I mean, it gives us a tremendous amount of footprint in Australia and great connectivity to a very good level of customer base in addition to the great strong base of revenue that we already have with Ingersoram. Great.

Speaker 6

Thank you.

Speaker 11

Thank you.

Operator

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

Speaker 6

Thanks. Good morning, everyone. Hope all is well. Yes, we've got a lot of ground already. So thanks for the details.

Speaker 6

I just want to make sure that we've got second half book to bill sort of lined up here. I think in response to Mike's question, I think you talked about the inverse of the first half. So are we talking about sort of like a high 0.9 maybe like close to 1x book to bill in the back half for ITS and obviously, that would suggest orders up mid to high single digits. So I just want to make sure that's the message. And what do we see getting better here?

Speaker 6

Do we see China improving? Are we expecting some of these larger projects to start breaking free? Because it sounds like the EPC project funnel is not really breaking free until 2025. So just wanted to just try and dial into that comment. Thanks.

Speaker 4

Yes, sure, sure. Sure, Nigel. So book to bill, yes, definitely less than 1 in the second half, which is kind of back to our normal way of we always said, add 1 greater than 1 is the first half and then it's basically less than 1 in the second half. And that would imply kind of since I would say maybe to the numbers, I mean think about it Q3 and Q4 slightly different, But low single digit year over year in Q3 and Q4, that's kind of what we imply there. Although keep in mind that we don't tend to guide on orders, but you can do the back of the envelope calculation there.

Speaker 4

And on the second question, I mean, the EPC and the large project continues to still be at play here in the second half. I think what we're saying is that this elongation of decision making is taking much longer. And for better or better way of saying it, we're discounting that even further. But these are projects that are active and whether they might happen in the second half or they may happen as we go into 2025, We view that as great visibility as to what's out there in the market that will be eventually coming back to us.

Speaker 6

Okay. So low single digit growth in second half of the year. Okay. That's helpful. And obviously, China is the issue here.

Speaker 6

I had battery and EV as maybe 15% or so of the China business. I want to make sure that's still the sort of the right zone there. And just thinking about your verticals across the globe, I mean, we are seeing some noisy trends in food and beverage. So I'm just curious if you're seeing stable trends in food and beverage or whether there's some noise there as well?

Speaker 1

Yes Nigel, on the first part, we don't typically talk about kind of like end market, let's just call it designations in our business specific regions. But I think it's fair to say that, EV battery solar were too meaningful end markets in terms of the order and revenue contribution in 2023. I'd still say they are active markets, but just frankly, obviously not at the same levels as what you've seen in prior year. And Sande, I'll let you comment on the food and beverage.

Speaker 4

Yes, food and beverage, I mean, nothing of note, to be honest there, Nigel. I mean, I think food and beverage, we continue to sell based on just as we always do in terms of sustainability, whether it is return on investment based on energy savings, the ability to be able to provide service agreements. So I mean, it's a good combination of all, and it's about prioritizing the spend in those facilities. And as long as we show a great return on investment, which we are with our technologies and our solutions, we can get that into us.

Speaker 6

And just to clarify that, I'll send to you, that the low single digit, that's organic, not reported, right?

Speaker 4

That's right. That's exactly right, yes.

Speaker 6

Yes. Great. Thank you. Yes. Thank you.

Operator

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

Speaker 7

Hi, good morning. Service on mute. So, also wanted to ask on some of the site readiness and EPC dynamics you're talking about and just your evaluation on why that's emerging now. It doesn't seem like the demand environment has changed all that much. I'm not sure if this is more of a reflection of kind of mega project funnel, but just what you've seen over the course of the past 2 or 3 quarters such that this would be emerging as a challenge now?

Speaker 7

And then as it relates to the guide and expectations in the back half of the year, does that embed kind of any expectation that some of these sort of projects move forward or that the EPC capacity eases? Or if any of that happens, should we think about that as more kind of upside?

Speaker 4

Yes, I'll take the first one and let Vik kind of talk about the second one. As you know and I think you said it and that someone said it as well, I mean there's been a lot of mega projects approved over the past few years, but not all those orders and revenue have been seen from those projects. And so there's definitely bottlenecks throughout the process. And what we hear is basically that customer side readiness due to labor, but also that EPC capacity. I made an example about an EPC in Europe that currently has something like 2.5 years of backlog in order that they get to kind of push through the process.

Speaker 4

And all we're saying here is that it seems to bring to light the potentially of having a good 2025 as some of those projects get released and perhaps hear some as well here in the second half. But maybe second question, Vik?

Speaker 1

Yes. I think, Joe, in terms of the second half, is there anything directly embedded? No, I think this is simple answer. Obviously, our second half includes execution on existing backlog. Obviously, there's a component of longer cycle projects like you've seen in prior years.

Speaker 1

To the degree, as Vasily said, some of this loosens up or things like that, great. I would view that as potential, maybe some orders. But remember, most of these are 6 to 18 month type lead time type projects. So reality is those will not convert to revenue until 2025 or later.

Speaker 7

Got it. Yes. No, at least 10 comments helpful. And then also just in terms of China, is it right that China kind of played out as expected more or less in the first half of the year? And so the guidance adjustment would be more reflective of the second half of the year, a little softer than anticipated?

Speaker 7

And if so, it seems like it's more kind of stable in China first half to second half. And so what did you think might get a little bit better that at this point in time doesn't seem like it's going

Speaker 2

to play out that way?

Speaker 4

So I'll say that China definitely played out very well in terms of what we kind of saw in the first half. I will say that even in some regards slightly better because we saw that Q1 to Q2 sequential improvement in orders in China, which we were so surprised to see and the team building some backlog. We just decided that based on everything that we cannot see coming out of China and whether geopolitical elections and all of that kind of put together, we decided to be more prudent and kind of put China more as being stable here in the second half versus seeing any material improvement from here onwards.

Speaker 7

Got it. Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Please go

Speaker 13

ahead. Yes, thanks. Good morning, guys.

Speaker 2

Hi. Good morning, Nicole.

Speaker 10

We've had

Speaker 13

a lot of discussion around the large project activity in ITS. I guess, can you talk a little bit about what you guys saw on the short cycle part of the business from an order perspective throughout the quarter?

Speaker 4

Yes, Nicole, I will say that one data point that we talked a lot about is that kind of short cycle on the PST side, mid single digit kind of growth in Q2, which is actually very good to see. And when you think about all the other in the ITS side, I mean, all the regions, including except obviously China, they saw actually some very good momentum too as well. As indicated, as you can see in terms of some of the product line aspect that we talked about compressors and compressor is being up from an orders perspective, kind of in the Q2, which obviously a lot of the compressor that's driving to as well. The majority for us is on that kind of short cycle side short to medium cycle.

Speaker 13

Got it. Thanks, Vicente. And then on the ITS margins, is the expectation that margins kind of remain in this slightly below 30% zone in the second half?

Speaker 1

Yes. Nicole, that's a fair conclusion. Yes, around 30% is a pretty good number.

Speaker 13

Thanks, Vic. I'll pass it on.

Speaker 4

Thank you.

Operator

Our final question comes from David Raso with Evercore ISI. Please go ahead.

Speaker 9

Hi, thank you. Two quick things. Maybe I missed it, I apologize, a lot of earnings this morning. So you made a comment about deciding to walk away from one of the larger transactions. Can you provide a little color, was that strictly a price related decision to walk away or something about the markets or anything you could enlighten us on why you'd walk away to maybe to learn more how you think about other larger deals that could be coming?

Speaker 4

Yes. Great question there, David. I think the reason for that is that, first of all, I'd say this is a transaction that we cultivated for past kind of 3 years. So we've been kind of watching them on the sidelines and learning a lot about them. And this transaction, I would say, fell really more into the adjacent category as compared to our core offering of compressor blower and vacuum.

Speaker 4

But yes, I mean, I think ultimately, it was all about valuation. I mean, we continue to be highly disciplined. And we, as you very well know, we tend to do a lot of our ROI analysis along the lines of things that we can control and how do we view that business on areas that we can control versus extrapolating on revenue activity that we tend to discount heavily. So I will say that ultimately that led to a performance that we decided that it was just not right timing for us.

Speaker 9

And one follow-up, maybe I should know this, but I don't. The new with ILC, right, PST is going to be, call it a run rate $1,700,000,000 business. I think $700,000,000 or so will now be a life science piece. And then the other $1,000,000,000 is the precision tech. Within the total segment margin of call it 31% this year, something like that, what's the difference between the margins of Precision Tech and Life Sciences?

Speaker 1

Yes, David, interesting enough. Yes, quite comparable to each other. I wouldn't tell you there is a meaningful mix differential between the 2. Both are playing in and around that, I'd say, segment average profile. So actually quite comparable.

Speaker 9

Helpful. Okay. Thank you.

Speaker 4

Thank you.

Operator

This will conclude our question and answer session. I will now turn the call back over to Vicente for closing remarks.

Speaker 4

Thank you, Brianna. I'll just say thank you for your level of interest, and I appreciate all the questions and all the participants that I know many of our employees are actually listening to the call. And after those that are listening to the call, I just say thank you again for another great quarter performance and let's get out of here now to execute again here in the second half of the year. With that, thank you very much and have a good day.

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Key Takeaways

  • Ingersoll Rand delivered a record Q2 with organic revenue up 1%, adjusted EBITDA of $495 million (+16% YoY), 27.4% margins, adjusted EPS of $0.83 (+22%), $283 million free cash flow, and raised its full-year guidance.
  • The company exceeded its 2024 inorganic revenue target by closing three bolt-on acquisitions and ILC Dover, targeting mid-teens ROIC by year 3, while maintaining M&A discipline.
  • ILC Dover’s biopharma business, focused on GLP-1 and ADC therapies, is positioned for double-digit growth through proprietary single-use containment technology and deep customer relationships.
  • Leading indicators showed MQLs up 13% and engineered-systems funnel up 27%, with Q2 organic orders down 1% but sequentially up 5% (book-to-bill of 1.0), while longer decision cycles and China softness moderate H2 organic growth.
  • For 2024, revenue is now guided to grow 6%–8% (0%–2% organic, –1% FX, +$440 million M&A), with adjusted EBITDA of $2.01–2.06 billion, adjusted EPS of $3.27–3.37, and year-end net leverage around 1.5 turns on an investment-grade debt profile.
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Earnings Conference Call
Ingersoll Rand Q2 2024
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