Ingersoll Rand Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2022

There are 10 speakers on the call.

Operator

Hello, everyone, and welcome to Ingersoll Rand Q3 2022 Earnings Conference Call. My name is Emily, and I'll be coordinating your call today. At the end of the presentation, you will have the opportunity to ask a question by pressing star followed by the number one on your telephone keypad. I will now turn the call over to our host, Matthew Forte with Ingersoll Rand. Please go ahead, Matthew.

Speaker 1

Thank you, and welcome to the Ingersoll Rand 20 22 Third Quarter Earnings Call. I'm Matthew Port, 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 be referencing 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 I start, I want to remind everyone that certain statements on this call are previous SEC filings, which you should read in conjunction with the information provided on this call. Please review the forward looking statements on Slide 2 for more details. In addition, in today's remarks, we will refer to certain non GAAP financial measures. You can find a reconciliation of these measures to the most comparable measure calculated and presented in accordance with GAAP in our slide presentation and in our earnings release, both of which are available on the Investor Relations section of our website.

Speaker 1

On today's call, we will provide a strategy update, review our company and segment financial highlights and provide an update to 2022 guidance. At this time, I'll turn the call over to Vincent.

Speaker 2

Thanks, Matthew, and good morning to all. I would like to begin with a big thank you to our employees worldwide For their hard work in helping us deliver another record quarter in Q3. You consistently exemplify our purpose and think and act like owners To deliver on our customer needs, every day, I am impressed with how you're leveraging our IRX process To outperform in a continuously challenging environment, how we accomplished these results on Slide 3. Our achievement is reflected in the numbers And also in our commitment to lead sustainably. We continue to position Ingersoll Rand for long term value creation through industry leading innovation That offers intrinsically sustainable benefits to our customers.

Speaker 2

Through Q3, demand remains strong. And while macroeconomic, geopolitical and supply chain uncertainties continue to be a concern, we remain focused on what we can control while leveraging our strong balance sheet and operational mindset to execute on our commitments. Remaining agile into this environment is critical, And you will see today how we continue to accelerate organic growth through demand generation and product execution. In addition, we remain committed to our Capital allocation strategy, which is focused on inorganic growth through bolt on acquisitions. Today, we're highlighting 6 new companies.

Speaker 2

We have recently acquired or have under contract that will strengthen our position in core categories and broaden our exposure to high growth sustainable end markets. Turning to Slide 4, today we will discuss 4 critical elements of our compounded model to demonstrate How we stay focused on controlling what we can control. Moving to Slide 5, we have some exciting news to share. We recently earned a score of 81 on the S and P Global Corporate Sustainability Assessment. As of October 21, This score puts us at number 1 in North America, number 4 in the world and in the 99th percentile within our industry, Which is very impressive.

Speaker 2

And think about it, less than 3 years ago, we were not even showing on the list. And today, we are number 1 in our industry in North America. We continue to align our portfolio to sustainable high growth end markets Supported by megatrends, in September, we hosted our 2nd annual sustainability call Eat Sustainably, which is based on a simple two pronged approach of grow sustainably and operate sustainably. On this slide, I'll spend a little bit highlighting 2 examples from our broad product portfolio that help improve energy efficiency and reduce water consumption. We believe that within the U.

Speaker 2

S. Alone, there are over $1,300,000,000 in cost savings opportunities For compressed air system and that number is likely 5 times greater globally. The energy recovery unit shown here It's an innovative device that captures up to 94% of the heat generated during air compression And uses it to warm water that can be used in other processes or for space heating with a payback period Our impact on water conservation occurs in multiple ways, Perhaps the most compelling is our products that eliminate the need for water usage in critical applications. The Runtech TURGO blower technology is a perfect example. This blower technology is used by leading pulp and paper manufacturers, and it replaces an alternative technology that requires a fresh water supply.

Speaker 2

Our existing installed base around the world is currently saving 7,500,000,000 gallons of water a year. And we estimate that over 50,000,000,000 gallons of water per year could be potentially saved with the full adoption of ArunTech technology globally. To put that into perspective, that's more than 3 times the amount of bottled water consumed in the United States annually. Within our own facilities, operating sustainably is an integral part of our business. We focus on reducing Our commitment to operating sustainably delivers value Our stakeholders and our planet creates a sense of purpose and inspiration for employees and has a positive impact on the communities in which we operate.

Speaker 2

This commitment also makes Ingersoll Rand a supplier of choice for our customers. Together, we're building a better future and planet by leading sustainable actions within our business, with our suppliers and in our communities. Turning to Slide 6, let us demonstrate 2 simple examples on how we continue to control what we can control to deliver organic growth. On the left, we have an example of demand generation execution in Europe, which clearly has been a challenging market. In Q1, at the start of the Russia Ukraine war, we saw The downward trend of marketing qualified leads or NQL.

Speaker 2

The demand generation team immediately jumped into action leveraging IRX to invert that trend Through trial campaigns, focusing on high growth sustainable markets, a vertical specific and energy efficient related webinars and utilizing Trend Data to remain agile and revise all targeted campaigns. As a result of these actions, we saw a 60% increase in NQL, which is our primary leading indicator for orders. And as you can see from our results, orders in Mainland Europe continue to remain healthy And grew in the low single digits excluding FX for our compressor portfolio in IPS. On the right is an example of an outstanding product line execution in China. Prior to the merger, Gardner Denver had a solid compressor portfolio for the China market, We did not have the right sales structure or operational footprint.

Speaker 2

Post merger and leveraging IRX, The team refreshed the program, integrating the best practices from both IR and GV. Through the new product development process, they efficiency by 5% to 10% and also improve the cost structure of the compressor portfolio through utilization of IQV. With those improvements in efficiency and cost structure, we focus on fast growing small to medium sized customers And expanded the Gardner Denver channel over 200% separate from the legacy IR channel. The end result is triple digit growth in revenue and unit volume in a highly competitive market. Turning to Slide 7, since our Q2 earnings call, we announced the signing of 6 bolt on acquisitions that enable us to increase value across Ecosystems by expanding our core mission critical flow creation technologies, while accelerating our addressable market with close adjacencies.

Speaker 2

So let me quickly walk you through these deals. First, Air Max, which is a leading full service provider of air compressors This is an example of a strategic channel expansion for our ITS segment, which will leverage Air Max's strong end user relationship and technician network to convert competitive products and support aftermarket growth. 2nd is Pedro Hill, a leading Spanish manufacturer of blower and vacuum systems. This acquisition strengthens our position in core blower and vacuum categories In high growth, sustainable markets, including water and wastewater. Next is Everest, which is a leading Indian manufacturer of blower and micron systems.

Speaker 2

Everest significantly broadens our presence in the key high growth market of India. These three acquisitions are strongly aligned with our strategy and increase our product portfolio in core technologies We're enabling expansion into closed adjacencies. Continuing on Page 8, moving from left to right of the page. These are great examples of close adjacencies with immediate synergies. The SPX FLOW air treatment business is a leading manufacturer of desiccants and refrigerated dryers, filtration systems and purifiers for compressed air.

Speaker 2

These products Are highly complementary to our portfolio since more than 75% of compressors need one of these air treatment solutions, And in addition, they generate strong recurring aftermarket business. Next, Dossetron International, which is a U. S. Leader in water power, Flow Solutions and IIoT for Hydrophonics and Agricultural Markets, which improves our capabilities in several high growth Sustainable end markets through differentiated digital controls and IIoT solutions. And finally, Westwood Technical, Which is a highly experienced control instrumentation and IoT specialist with technology that is complementary to our YZ system product line.

Speaker 2

Westwood enhances our IoT platform, including innovative low power wide area networking technology. We expect the team to integrate these acquisitions at the regional level by utilizing IRX and our proven model of integration excellence that you have Our M and A funnel remains strong. And as of today, the funnel still remains over 5 times larger than it was I will now turn the presentation over to Vic to provide update on our Q3 financial performance.

Speaker 1

Thanks, Vicente. On Slide 9, we continue to be encouraged by the performance of the company in Q3 with a strong balance of commercial and operational execution Fueled by IRX despite ongoing macroeconomic uncertainty.

Speaker 2

We

Speaker 1

remain on track to deliver on our $300,000,000 commitment in cost synergies from the merger. And as we have indicated many times, we have a funnel that stands in excess of $350,000,000 and we are ready to take incremental actions if warranted by macroeconomic conditions and market activity. Total company orders and revenue increased 10% 14% year over year respectively. We saw strong double digit organic revenue growth in both ITS and PST at 19% 15%, respectively. Overall, we posted a strong book to bill of 1.09 turns for the quarter And we remain encouraged by the strength of our backlog, which is up over 40% year over year.

Speaker 1

The company delivered 3rd quarter adjusted EBITDA of 3.70 $1,000,000 a 20% year over year improvement and adjusted EBITDA margins of 24.8%, 110 basis point Year over year improvement and 160 basis point improvement sequentially from Q2. Free cash flow for the quarter was $253,000,000 despite ongoing headwinds from inventory due to global supply chain challenges as well as the need to support backlog. And total liquidity of $2,600,000,000 at quarter end was up approximately $200,000,000 sequentially. Our net leverage continues to improve and is at 1.0 turns, Which is 0.1 turns better than the prior quarter. Turning to Slide 10.

Speaker 1

For the total company, Q3 orders grew 18% and revenue increased 22%, both on an FX adjusted basis. Total company adjusted EBITDA increased 20% from the prior year And the ITS segment margin increased 70 basis points, while the PST segment margin declined 60 basis points, driven primarily by the impact of prior year acquisitions as well as the impact of prior year COVID-nineteen related demand. When adjusted to exclude the impact of M and A completed in 2021, PST adjusted EBITDA margin actually increased by 60 basis points. And we did see a significant sequential increase in PST's adjusted EBITDA margin, which were up 2 30 basis points versus Q2. And now PST margins are generally back in line with where we have seen them historically at approximately 30%.

Speaker 1

It's important to note that both segments remain price cost positive in terms of dollars, which speaks to the nimble actions of our teams despite ongoing inflationary headwinds. And finally, corporate costs came in at $30,000,000 for

Speaker 2

the quarter. Adjusted EPS for

Speaker 1

the quarter was up 9% to $0.62 per share. The tax rate for the quarter was 21.7 percent and we anticipate the full year being in the low 20s as well. Moving to the next slide. Free cash flow for the quarter was $253,000,000 despite $69,000,000 of inventory headwinds, primarily to support backlog. CapEx during the quarter totaled $22,000,000 and leverage for the quarter was 1.0 turns, which was an 0.1 turn sequential improvement.

Speaker 1

Total liquidity now stands at $2,600,000,000 based on approximately $1,500,000,000 of cash and 1,100,000,000 Availability on our revolving credit facility. Cash outflows for the quarter include $4,000,000 for share repurchases and $8,000,000 to our dividend payment. M and A remains our top priority for capital allocation and we continue to expect M and A to be our primary usage of cash as we look forward. I will now turn the call back to Vicente to discuss our segment performance.

Speaker 2

Thanks, Vic. On Slide 12, our Industrial Technologies and Services segment delivered strong year over year organic revenue growth of 19%, Split evenly between price and volume, adjusted EBITDA rose 15% year over year with an adjusted EBITDA margin of 26 0.2%, up 70 basis points from prior year with an incremental margin of 32%. We also delivered sequential margin expansion of 80 basis From Q2 to Q3. Organic orders were up 16% with a strong book to bill of 1.13 turns. And note that on a 2 year stack, the IT and S segment organic orders grew approximately 50%, which is in line with the Q2 2022 2 year stack, Meaning that thus far we continue to see strong demand for our products.

Speaker 2

Moving to the individual product categories, each of the figures The negative impact of FX, which was a 7% headwind across the total segment on both orders and revenue. Starting with compressors, we saw orders up in the high double digits and a further breakdown shows orders for oil free products grew 20% And oil lubricated products grew in the mid teens. The Americas team delivered solid performance With orders in North America up high 20s, while Latin America was up mid-30s. In Mainland Europe, orders remained strong with growth in the low single digits, while India and the Middle East were up high double digits. The Asia Pacific team delivered orders growth in the high single digits, driven by low single digit growth in China and low 30s percent growth across the rest of Asia Pacific.

Speaker 2

In vacuum and blower orders were up low 20s on a global basis. The Global Power Tools and Liquid team continues their strong performance with orders for the total business growing in the high double digits. Moving to the Sustainable Innovation in Action portion of the slide, we're highlighting the relaunch of our Buffalo, New York facility. The reopening of this site has not only localized manufacturing and reduced customer lead times, but it has also expanded our global capacity for air and gas centrifugal pellets in high growth sustainable end markets such as clean energy. During large part of restoring activities, orders are up over 500% in the Americas, with over $40,000,000 Since our May 2022 launch.

Speaker 2

And this is a real tangible and very inspirational example Turning to Slide 13, revenue in the Precision and Science Technology segment grew 15% organically evenly between price and volume. Additionally, the PST team delivered adjusted EBITDA of $92,000,000 which was up 22% year over year With incremental margins of 27%. Adjusted EBITDA margin was 29.1%, down 60 basis points year over year. As illustrated in the table on the bottom left side of the page, the decline year over year in adjusted EBITDA margin is driven by the impact of prior year acquisitions At 120 basis points and the impact of prior year COVID-nineteen related demand at 60 basis points. However, Sequential adjusted EBITDA margin significantly improved by 2.30 basis points due to operational execution and price cost performance.

Speaker 2

Organic orders were up 3% year over year as Q3 comps were impacted by headwinds from prior year comp related demand, primarily in the Thomas business. Adjusting for the COVID related orders, normalized organic orders were up approximately 8%. On a 2 year stack, organic orders are up 27%, which is higher than a 2 year stack from Q2. From our PST sustainable innovation in We're highlighting Air Dimensions. This recently acquired business is a market leader in diaphragm vacuum pumps serving mission critical environmental applications in sustainable end markets such as clean energy.

Speaker 2

Since the Q4 of 2021 acquisition, the team has Install and leverage IRX to accelerate investments in new product development and launch a higher pressure offering, securing orders from 4 major OEMs and system integrators. As a result, the business is seeing revenue growth of low double digits And has improved adjusted EBITDA margin from the mid-50s to low-60s in less than 3 quarters post acquisition. This is a great example of how we leverage our compounded model through the power of IRX to achieve double digit earnings growth. Moving to Slide 14, in terms of 2022 guidance, given the ongoing strength in commercial and operational performance, We are raising our organic revenue guidance from the total company to 12% to 14%, a 100 basis point increase from prior guidance Based on both our IPS and PSP segments, the organic growth increase is offset by the negative impact of FX, Which is expected to now contribute headwinds of approximately 6% compared to a headwind of 5% in the prior guidance. For the full year, we are reaffirming our 2022 revenue guidance at 11% to 13% total growth.

Speaker 2

We're also raising our adjusted EBITDA guidance at the midpoint by tightening the range to between $1,400,000,000 And $1,425,000,000 Important to note that this guidance includes nearly $20,000,000 of adjusted EBITDA headwinds from FX when compared to our prior guidance. Due to investments in inventory to meet growing demand, we expect free cash flow conversion to adjusted net income to be approximately 90% for the year. Even with this change, free cash flow margins are expected to be in the mid teens, And we expect free cash flow conversion to return back to 100% as we think about 2023 and beyond. We anticipate our adjusted tax rate to be in the low 20s and CapEx to be approximately 2% of revenue. Interest expense is estimated to be approximately $35,000,000 in the 4th quarter.

Speaker 2

Our M and A guidance does include the acquisitions of Hanier, Haltech, Hydro ProCast, Westwood Tech, Pedro Hill, Dosatron and Air Max. However, overall M and A revenue guidance for the year remains flat to Prior guidance due to the impact of FX, specifically on previously acquired businesses with CEPEX and MAXIMUS seeing the largest effect. Turning to Slide 15. As we wrap up today's call, I want to reiterate that Ingersoll Rand is in a strong position. We delivered strong results in the 1st 3 quarters of 2022, and our full year outlook remains optimistic.

Speaker 2

We're keeping a close eye on the dynamic market conditions, while we remain agile and prepared for any challenges that may come. To ensure consistent delivery of our commitments, we will continue to leverage IRX across every facet of our business. To our employees, I want to again thank you for your ongoing engagement and for making thoughtful, action oriented decisions like the owners you are. This continues to draw our ability to make life better for our customers, our planet and our stockholders. It is also exciting that our most recent survey on employee engagement continues to show improvement, which demonstrates the rapid changes we continue to drive Are very welcome by our employees.

Speaker 2

Our balance sheet is strong, and with our disciplined and comprehensive capital allocation strategy, We remain resilient and have the capacity to deploy capital to investments with the highest return as we continue our track record of market outperformance. With that, I will turn the call back to the operator and open for Q and A.

Operator

Thank We'll just take a brief pause and allow the queue to fill. Our first question today comes from Mike Halloran with Baird. Please go ahead, Mike. Your line is open.

Speaker 3

Hey, good morning, everyone.

Speaker 2

Good morning, Mike. Good morning.

Speaker 4

So, 2 questions here. First question, Obviously, the orders trends are really healthy and pretty impressive considering the backdrop here. Maybe just talk a little bit about the volume trends saw through

Speaker 5

the quarter anything notable in

Speaker 4

the areas of weakness. And when you look at those leading indicators that you talked to, Any signs of concern in there? Do you think there's just a lot going on that is unique to Ingersoll Rand that allows you To be able to continue a pretty healthy clip going forward on the order side.

Speaker 2

Yes, Mike. I'll say nothing that I will Classified as major significance, up or down, I mean, very good, stable, robust Across the portfolio, the regions, the segments. Clearly, as we kind of highlighted here on the earnings call, it's a lot All that has to do with controlling what we can control and clearly our demand generation fits in great example here that we're Showing some proof points in terms of how that is helping us overcome any market dynamics that we see out there. Clearly, aftermarket continues and services continue to be a very important piece of our equation. And then so I think it's just continual the teams driving the initiatives that we have in place.

Speaker 4

And I heard Vic's comments about if things Change, you have the ability to leverage into some of those synergies to drive some upside to the range. And I know Vicente, you've got a History of being able to act quickly if the environment changes. And so I guess what I'm just wondering is what kinds of things you guys looking for To be able to pull that trigger in a more real time basis?

Speaker 2

Yes, Mike, as you could expect, we're quick and Pretty agile and nimble and taking action, and a lot of that has to do with the proper planning that we have in place. So we already have several downplay Scenario playbooks that we have with the teams that as we cannot look at the demand and we see that order patterns, if those materialize In terms of reduction or decrease, we will definitely take immediate action. So I think it's just one of those that we continue to look at the leading indicators, the NQL, the order rates, And we're ready to pull the trigger. I mean, if you can think about it, one example of this is that over the past couple of years as we integrated the 2 large During the period of in the middle of pandemic, we didn't do much on footprint and footprint could be another Area of continued expansion expanding our synergy creation here from the merger of the 2 companies. Appreciate that.

Speaker 2

Thanks. Thank you.

Operator

Our next question comes from Julian Mitchell with Barclays. Please go ahead, Julian.

Speaker 6

Hi, good morning. Maybe just a first question on the very short term. I know you get asked this Hundreds of times in the last few months, but help us understand that 4th quarter EBITDA ramp Yes. One more time. I think it implies sequentially sales are down slightly and then EBITDA is up about $20,000,000 sequentially, even with a wider sort of corporate costs.

Speaker 6

So maybe just help us understand between the two segments, So how those earnings are moving up sequentially?

Speaker 2

Yes, Julien. I think the way to think about it sequentially, Think about revenue to be kind of fairly on an absolute dollar basis consistent to maybe slightly up Q4 compared to Q3. And this implies kind of on a year over year, The organic growth is going to be in the top end of the organic growth guidance, kind of mid teens growth versus what you saw here in the Q3, Fairly similar, slightly above. But FX continue to be a headwind of an additional 100 basis points to 150 basis points And M and A roughly 200 basis points lower than Q3 as some of the M and A falls off and we move through the Q4. So when you put all this together, kind of comparing to the total company from an EBITDA perspective, and this is fairly similar, I will say, in the segment level is that We would you continue to see improved price realization Q3 to Q4 given the actions that we have already taken and inflation staying flat, I mean relatively flat to Q2 exit level.

Speaker 2

So again, we expect to see a moderate improvement as we go quarter to quarter. M and A synergy realization for the deals we closed in the second half of twenty twenty one, particularly PST, we'll continue to see some acceleration on that as we kind of Move ahead. And also don't forget that we still have roughly in the year, we had about roughly $50,000,000 Of the merger related synergies that tend to correlate to volumes. So again, we'll see some of that here in the Q4. So those are kind of the 3 core variables that Allows us to your point, with a prudent revenue being roughly consistent Q3 to Q4, We still see improvement in the EBITDA even though we're getting a big headwind on the FX.

Speaker 2

So again, it just speaks Loudly to what the teams continue to execute really well despite a lot of headwinds that we continue to see.

Speaker 6

That's very helpful. Thank you. And then maybe just my quick follow-up. Yes, there's a massive good color on IT and S Orders and sales by region. Maybe then to focus on PST, how you're thinking about the sort of organic orders Trajectory there, they were up kind of low single digit for a couple of quarters in a row.

Speaker 6

I understood the COVID headwind. So maybe how do we think about orders next few quarters in PST play out?

Speaker 2

Sure, Julien. You said it well in terms of kind of reflecting here in the Q3 and Q2 ex COVID Impacts that we saw from this kind of large orders in the 2021 not happening now, when you exclude that, PST was In the Q3, it was up 8%, which we view as relatively healthy and in line with our stated Today targets of growing PSD in the mid single digit plus range. As we continue to move forward over the Next few quarters, we expect that the teams will continue to deliver that in that kind of range as we move forward.

Speaker 6

Got it. And the COVID headwind kind of drops out as we enter 2023?

Speaker 2

Yes, that's right.

Speaker 6

Great. Thank you.

Speaker 2

I mean, there's a yes, it was mostly noted Q2 and Q3. A little bit here in the Q4, but more I mean less significant. And obviously as you're going to 2023, there's definitely nothing.

Speaker 6

Perfect. Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from Joe Ritchie with Goldman Sachs. Please go ahead, Joe.

Speaker 7

Thanks. Good morning, guys.

Speaker 2

Good morning, Joe. Good morning, Joe.

Speaker 7

So just starting off, I guess, Vicente, thinking about ITS, Yes, the order strength has been notable throughout the year. I guess it might be too early to think about the 2023 framework, But I'm curious as do you have any preliminary thoughts on growth, particularly in IPS? And then also, pricing has been very strong. Maybe some comments around the carry forward in pricing and how to think about that for 2023?

Speaker 2

Yes, Joe. So as we think about 2023 and clearly, we're not going to provide Kind of detailed guidance here on this call on 2023, but couple of items to consider is that from a revenue perspective, I mean, we had a very strong book to bill in Q3 over 1 and particularly much even stronger in the ITS. And so again, we continue to build more backlog. We built more backlog in Q3 as compared to the Q2, even though obviously we had Increased revenue output. So heading into 2023, we're very pleased that we're going to have much more backlog than we have ever historically had.

Speaker 2

And I think a lot of that has to do with how we have continued to align to the megatrends That we spoke about around sustainability, digitization, that those are kind of gathering very good momentum. And it is Then what will allow us as we continue to move forward, perhaps continue to deliver or out deliver The commitment that we said that the ITS segment can continue to grow at this kind of organically mid single digit over the horizon and the period that we committed to. I mean in terms of price, we said that even in any market we can generate at least 1% to 2% of price Regardless of the market conditions, again, that's just because of the nature of our product being so mission critical. So as we kind of go into 2023, you expect that we'll definitely continue to generate some of that new price As well as carryover, there will definitely be plenty of carryover that will be much higher than the 1% to 2% of price. But I think the good thing that is that as we think about 2023 is that inflation seems to be Currently stable or stabilizing, which when that starts turning more favorable or kind of inflation decreasing, we're holding the price, so expect That continued to drive continued margin expansion and that we recognize But as we move forward, we'll continue to see also very good momentum on the integration of the M and A that we're doing here.

Speaker 7

Got it. That's super helpful. And then if I maybe one question for Vik. You saw that this quarter you guys had the $33,000,000 LIFO adjustment, I think last year it happened in the Q4. Can you just maybe just provide some context around The timing of the adjustments, like what to kind of expect to that yes, I guess maybe that there aren't any surprises kind of like going forward in that regard?

Speaker 1

Yes, sure, Joe. Yes, I'll take that one real quick. So just kind of just high level 1st and foremost, One, the LIFO adjustment, it's non cash adjustment. It's done frankly more so for book or really tax purposes. We do state our books each quarter on a FIFO basis, which we believe is a more accurate assessment of our true operating performance.

Speaker 1

And as such, we do adjust out the LIFO reserve adjustment from our non GAAP results. It's also worth noting as you indicated, this is 100% consistent With our historic practice, you saw in Q4 2021, we did exactly the same thing. And in fact, the dollar impact was Interesting, almost exactly the same amount. Now with regards to the timing, and I'd say really much more in line with accounting Requirements, we do monitor materiality on a quarterly basis to determine when the adjustment should be made. And obviously, it was deemed that just given The inflationary dynamics that we've seen that it was appropriate to make that adjustment here in Q3 of 2022.

Speaker 1

So Again, I would say nothing inconsistent with what you've seen historic. It's just the facts and circumstances here That have dictated that we take the adjustment here in Q3. And it's also worth noting obviously that Our guidance, the way we report all of our non GAAP financial metrics, whether it be adjusted EPS or adjusted EBITDA, 100% consistent. So, Whether it's the adjusted EBITDA number you saw or the $0.62 of adjusted EPS, that excludes that impact, but that's 100% consistent with how we've guided and how we've historically reported.

Speaker 7

Great. Thanks guys. Thanks, Joe.

Operator

Our next question comes from Bastien Sasson Moren with Wolfe Research. Please go ahead, Bastien.

Speaker 5

Hi, everyone. So congratulations on the quarter. I was Curious and I wanted to ask a follow-up question on the LIFO reserve. Maybe you could shed a little bit more color on why it was so large And are you seeing any add backs on Q4? And if you tell us something about the future of inflation?

Speaker 5

Thank you.

Speaker 1

Yes, I'll keep it pretty short here. I mean the LIFO reserve adjustment is obviously correlated to The inflationary levels that we have been seeing in the market and as you would expect given where inflation has continued to trend whether it be last year or this year, we're obviously seeing the impact Commensurate there. So again, I would tell you it's reflective of the current operating environment that we're in. It's nothing quite frankly more than that, but I think That's quite frankly the easy direct answer there. And then I'll reiterate kind of what I said before.

Speaker 1

Our practice with regards to Stating our non GAAP metrics is 100% consistent and as such that's what you've seen us report, whether it be whether it's our guidance Or our actuals or our comparatives on a year over year basis.

Speaker 5

Great. That's helpful. And then my follow-up question would be about orders in So you had a low 30% order growth in Americas, while Europe and China were more middle single digits and high single digits. Could you maybe shed a little bit of light on your marketing qualified lead and how do they stack up against softer orders And maybe if you could shed a little bit of light on what's the pipeline of MQR conversion order looks like?

Speaker 2

Thank you. Yes. In terms of the MQL, I mean, you saw on one of the slides, we provided a little bit Color in terms of that increase in NQL that we saw particularly in Europe, again driven to the activities that the team have been doing. And as you saw over 60% increase in NQLs, it does take time to convert those leads. What we typically say is that It's anywhere between 6 to 8 weeks to go from the marketing qualified lead to the sales qualified lead that kind of generates the order.

Speaker 2

And to your point, I mean, there's a percentage of conversion rate. We don't really actually talk about that externally because obviously we think that this whole system that we have It's really strategic and proprietary to us, which is very exciting what we have been able to build here together Internally, but again, I think the exciting piece is that whether you look at it by region or by product line, MQLs continue to be Stable, if not, continue to look a bit upward momentum as we kind of go into here in the 4th quarter.

Speaker 5

Thank you. That's helpful.

Operator

Our next question comes from Andy Kaplowitz with Citigroup. Please go ahead, Andy.

Speaker 8

Hey, good morning, everyone.

Speaker 2

Good morning, Andy. Andy.

Speaker 8

Vicente, it seems like a relatively difficult time to get M and A done given the volatility of the markets, but you've obviously been able to maintain or even step up your M and A activity. I know you mentioned your funnel is still 5 times larger. Could you talk about the sustainability of your recent M and A momentum? Obviously, you announced And some larger deal pretty recently. So just talk about sort of what you're seeing out there?

Speaker 2

Sure, Andy. I'll say that we continue to see Pretty good momentum and activity on the M and A. And again, I think we have said it before, Which is that a lot of our M and A, call it 90% of that, it is sole source, meaning that we are proactively going to the Owners and cultivate that relationship in order to execute the M and A at the right moment in time. And I think What you saw here in a lot of these deals is exactly that. I mean, think about even Everest, that vacuum and blower Indian manufacturers, I mean that has been a relationship cultivation of over 2 years.

Speaker 2

And clearly now is the Right time to move on and transition mutually from the ownership of the family to even also us. So I think we continue to leverage A lot of our processes, I mean, as you can imagine, we're utilizing IRX processes as a way to drive M and A through the funnel And increase the velocity. So I will say that we still see continued demand. We still see that there's a lot of companies that we're also walking away from. So in the same amount that you see deals that we're transacting, I mean, we're working away from a very, very large number of deals and transactions.

Speaker 2

So Over 80 companies that we have said no to over the past kind of couple of quarters. So you can that tells you a lot of the Kind of velocity and movement that we see in the M and A funnel. But again, yes, we're excited that, As you said, over 5 times the funnel size and still already 8 LOIs on current currently on negotiation, addition to all the other transactions that we have announced.

Speaker 8

Got it. And then Vincente, maybe give us a little more color regarding what you're seeing in China. Order growth looks like it Maybe decelerated a bit in China in Q3 versus Q2. I think it was up low double digits for you last quarter and up low single digits this quarter. What's your visibility like there?

Speaker 8

I know you've done a lot of work there. The RMT has helped you. So what's your visibility there going into Q4 and into 2023?

Speaker 2

Yes. I will say, Andy, that we still see fairly stable demand. I mean, even as we kind of go here Into the month of October on a year over year basis, actually from a percentage perspective ex FX Even accelerated from the numbers that we posted in here in Q3. So again, as we continue to Seeing good stable demand. And I think important to note that Q3 of 2021, I mean, this is the time when China, we were seeing really Like 50% type of growth number.

Speaker 2

So again, it's a bit of a tough comp, but still even the team was able to deliver a 2 year stack That is really impressive and see that continued momentum as we go here into the Q4. And as you pointed out, a lot of that Very important self help. We show the example of compressors, but you can imagine that vacuums and blowers is very similar story But the team is driving and doing localizing products, making it more for in the market for the market and then leveraging the commercial footprint to execute With the help of IRX.

Speaker 8

Appreciate the color.

Speaker 2

Thank you, Emily.

Operator

Our next question comes from Rod Wertmeier with Melius Research. Please go ahead, Rob.

Speaker 3

Thanks and good morning, everybody.

Speaker 2

Good morning, Rob.

Speaker 3

So my question is really on Europe. You obviously used Set some choppiness in the European markets. And it's really just the fundamental question again about the rising need for Energy efficiency in Europe as energy prices have gone way up versus the obvious potential hesitancy on spending CapEx. So Aside from what you've done there, do you see customers coming to you with a need for energy efficiency? Do you see them being hesitant?

Speaker 3

How would you characterize the market?

Speaker 2

Absolutely, Rob. That's definitely one of the core fundamental things that is definitely happening in Europe is that Clearly, natural gas prices and you've seen a little bit of a drop here or dramatic drop in natural gas prices, but it takes time to digest that also through the system. Yes, long term, yes, I mean, we see that continue rising energy in Europe, but also in other places of the world As a way for us to drive that return on that invested capital to be very, very palatable When you think about generating less than 1 year payback when you buy a compressor and not only quick payback, but also you're doing something good for Because you're saving the energy and helping these customers achieve their sustainability targets.

Speaker 3

And do you think that Europe is getting worse or better on the underlying Demand dynamics through the quarter and into 4Q, and I'll stop there. Thanks.

Speaker 2

Yes, Robbie. In terms of what we saw in the Q3, again, Fairly stable, but the stability comes in really driven by, I would say, a good long cycle CapEx Kind of getting released and that is in the sense of again related to sustainability, relating to energy transition activities. A lot of things that we've been talking about is talking about in terms of getting ourselves aligned to these megatrends of sustainability and even I mean the team continues to do a very good job on driving that service and aftermarket capability in Europe. And as we kind of look into here into October, again, We still see FX adjusted positive growth in the month of October from an orders perspective.

Operator

Our next question comes from Josh Pokrzywinski with Morgan Stanley. Please go ahead, Josh.

Speaker 9

Hey, good morning. This is Brandon on for Josh. Just two follow ups on some of the questions that have already been asked. First on the MQLs, when you turn to this MQL process in places like Europe, where demand may be slowing, Does that come with some sort of margin impact versus the more typical order process?

Speaker 2

Hey, Brandon. The cost of customer acquisition for MNQL is really low. So I would say think about it as even Perhaps it might be a margin accretion or margin improvement because we're not sending the sales guy to knock on doors and we're doing all this kind of digitally. And so we're really increasing and enhancing the efficiency. So if anything else, I'll say that we because we're more prone to specifically put Products with a higher margin through the MQL process is actually good news that you see a total average margin improvement.

Speaker 9

Got it. And then just on M and A with all the deals recently, how are you guys thinking about synergies For 2023, and what's been announced?

Speaker 1

Yes, Brandon, I'll take that one. The way I would think about it here is, Again, the framework with which we have done all these deals and again, I'll talk about it kind of in totality. You've kind of seen very much in line with historic practice, The pre synergy, adjusted EBITDA, purchase multiple across effectively the suite of everything you've seen us do has kind of been in that low double digit Tight range, we typically are able to drive anywhere from some roughly 2 to 4 turns of EBITDA multiple purchase reduction As we think about a 3 year out view. And so whether you want to look at it from a purchase multiple perspective and the ability to reduce that through synergies Or alternately the ROIC kind of calculus where everything we're doing is very much in line with kind of our stated return criteria, mid teens ROIC Within our cost of capital, so again, double digit type returns, that's the way I would probably describe all of these. And as Vicente mentioned during the prepared comments, These are all core technologies or close adjacencies.

Speaker 1

They are technologies, businesses, companies we know very well. They are split nicely between the two segments and interestingly enough actually across the different geographies, which is great because the integration happens in the business. And I would tell you right now we don't see any reason why these won't be in line with the types of deals and the types of returns And the types of synergy profiles you've seen from our historic bolt on acquisitions.

Operator

Our next question comes from the line of Nathan Jones with Stifel. Please go ahead, Nathan.

Speaker 9

Good morning, everyone.

Speaker 2

Good morning, Nathan. I'm going to ask a couple

Speaker 9

of questions. The EMAC heat recovery device that you highlighted, You talked about that being your $1,300,000,000 of potential cost savings for customers in the U. S, 5 times that globally at less than a 1 year payback, Which kind of implies that's more than a $5,000,000,000 revenue opportunity for Ingersoll Rand. Customers are typically looking for 2 years or less payback on those What's the limiting factor to getting those out there? Like how do you think how do you view the rollout Something like that and the customer adoption for something like that, what do you have to do for education, marketing, those kinds of things to get that product out into the market?

Speaker 2

Yes. And I think I'll say that, that is basically the, I call it, limiting factor or not. But this is why we think And while we believe that demand generation in terms of digitally educating customers in a better way, more efficiently and more proactive It's the way to go even in the industrial market space than we are today. So I think it's just a matter of continuing to educate customers. Customers see The technologies like this, what can drive for them, clearly, you hear a lot about weather heat pumps and other things in Europe.

Speaker 2

We think this is also another avenue of technology that can really help a lot of companies save energy, not only in this case for how we do it On the heat recovery unit, but in many other applications. So again, it's just one of those that it's just all about educating customers and customers seeing that They can grab that activity and implement it in their businesses. So but yes, you can imagine that We're leveraging as you can imagine, we're leveraging the demand generation team and a lot of our digital transformation activities towards educating customers on very unique Innovations like

Speaker 9

this. Then my follow-up is around the drying side of the business. I think it's pretty obvious you guys I've decided that having the drying capability to go with compression is the strategic advantage for Ingersoll Rand with some of the acquisitions you've been making. Can you talk about why you think being able to supply both the drying and the compression is a strategic advantage and how you can leverage that in the marketplace?

Speaker 2

Yes. So, Nathanael, in simple terms, the more you can actually optimize the total system versus Optimizing or sub optimizing multiple systems separately, then you're better off. Meaning, if you have a compressor that is attached to a dryer and you can actually work in a way We really optimize the 2 at the same time in an ongoing operating basis that I think is a very winning proposition for us to drive to the customer and then potentially create new revenue streams that could be very good for us. So again, it's just one of those that we believe that air Whether you're drying it or whether you're really utilizing the air treatment as a way to generate nitrogen or oxygen, that point of view It's a good thing for the customer. It's a good thing for the planet, and it goes really well aligned with our just total holistic company strategy.

Speaker 9

Do customers see the value in you having that the dual capabilities?

Speaker 2

Oh, yes, yes, yes. Because then again, you can when you sell it, you're talking to the customer About the best optimal solution between the 2 versus having the customer buy a compressor and then buying something else from someone else And the 2 of them have just not been optimized together. So it's a better optimization, which then drives better

Operator

Those are all the questions we have for today. So I'll now hand back to Vicente for concluding remarks.

Speaker 2

Yes, thank you. Concluding my role, I just want to say that you have seen our culture continues to be a very unique differentiation And differentiation based on the performance that we're driving and this is driven by our employees, which we pass on with a big thank you. I mean, our Employees continue to be highly engaged and is driven by a lot of activity that we do internally in the company as well as these ownership mindset And I'm thinking that I think my call is because all the employees are owners in the company. And we're very excited about what's ahead of us And continue to drive performance and be very transparent with all the investor community. So with that, thanks so much and look forward to seeing many of you as we go into the road.

Speaker 2

Thanks.

Operator

Thank you for joining us today. This concludes our conference call, and you may now disconnect your lines.

Powered by Quartr
Earnings Conference Call
Ingersoll Rand Q3 2022
00:00 / 00:00