Operator:

Good morning. My name is Briana, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ingersoll Rand Second Quarter 2024 Earnings Call. Please note that this call is being recorded. [Operator Instructions] I will now turn the call over to Matthew Fort, Vice President of Investor Relations. You may begin your conference.

Vicente Reynal :

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 corners 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. 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. 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 complete air and power generation services. This is a great example of strategic channel expansion, giving us access to a large install base, strong end-user relationships and robust technician network. Next is Fruitland, which expands our technology with low-flow applications. And lastly, we have Del 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 ILC Dover within the quarter, we have already far exceeded our annualized inorganic revenue target of 400 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 bolt-on in size. On our prior earnings call, we mentioned that we had also a couple of $1 billion purchase price deals in the funnel. During the second quarter, we decided to walk away from one of these larger transactions. And this is proved that we continue to remain very disciplined in our approach to M&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 want 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-1 and ADCs, this business is well positioned to deliver double-digit growth in 2024 and beyond. 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-1 or glucagon-like peptide-1 therapies, which are used in the treatment of type-2 diabetics and weight management. With the 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-1 production. As our customers expand capacity, either within their own facilities or CMOs, our products, all required inputs for these new production lines to minimize validation time lines, start-up cost and risk. As illustrated on the right-hand side of the page, ILC 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-1 drug manufacturing process, giving our customers the assurances they require to deliver compliant products 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 approvals in recent years with a robust drug development pipeline for this type of therapy. Our patented containment technology is proven to perform better than both clean-in-place and single-use alternatives. 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 Vik to provide an update on the Q2 financial performance.

Vicente Reynal :

Thanks, Vik. 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%, up 230 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. Important to note that we saw sequential order 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 note that we saw positive order growth across Americas, EMEIA 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. Industrial banking orders were up low single digits and revenue was up mid-teens. For innovation in action, we're highlighting Elmo Rietschle 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 deliver adjusted EBITDA of approximately $103 million with a margin of 30.3%. 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 micro-fluidics to create a customized liquid handling automated system for biotech R&D labs as well as the production of personalized therapeutics. 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 would like to spend a minute discussing the current market trends as we always get a lot of questions about our leading indicators. A key leading indicator of our short-to-medium cycle business is marketing qualified leads or MQLs. As illustrated on the top chart, our MQL continues to grow. In Q2, we saw organic MQLs up 13% year-over-year. 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 activities 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 another. 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. Switching back to 2024 expectations, from a regional perspective, Americas is on pace to deliver mid-single-digit organic revenue growth. EMEIA remains stable, and 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 million of incremental revenue from our recently acquired M&A. ILC Dover is the largest driver, contributing approximately $220 million of revenue in 2024. The biopharma business as highlighted earlier in the deck remain strong and on track to deliver double-digit growth. However, we do anticipate that the Aerospace & Defense revenue to be down approximately $30 million 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 xEVAS. As we move to Slide 14, given the solid performance in the first half, our recently acquired M&A and our expectation of continued operational execution fueled by IRX, we are once again raising our 2024 guidance. The company revenue is expected to grow overall between 6% to 8%, which is up 200 basis points versus our initial guidance. As discussed on the previous slide, we anticipate positive organic growth in 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 guidance. M&A is projected to contribute approximately $440 million, which reflects all completed and closed M&A transactions as of July 31, 2024. Corporate costs are planned at $170 million and will be incurred relatively evenly per quarter for the balance of the year. Total adjusted EBITDA for the company is expected to be in the range of $2.01 billion and $2.06 billion, which is up approximately 14% year-over-year at the midpoint. Adjusted EPS is projected to be within the range of $3.27 and $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. Gross interest expense is now expected to be approximately $250 million and net interest expense will be approximately $170 million 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% and 23%. No changes have been made to our guidance on CapEx spend as a percentage of revenue, free cash flow to adjusted net income curvation 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. 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 for 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. 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&A.

Mike Halloran :

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 pushouts of the orders as well as the China piece. So twofold question. One, was there something about July that you saw that maybe change that trajectory? And two, could you parse out some of the underlying things you're seeing from a demand environment excluding some of the project pushouts and if there's any changes elsewhere beyond just the China comments?

Mike Halloran:

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 pushouts shift some of that numbers?

Operator:

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

Vikram Kini :

Yes. Julian, this is Vik. 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. 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. 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 to note that the comps do get a little bit more easier, comparatively speaking, in the back half from a revenue perspective, specifically in China.

Julian Mitchell:

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 third versus fourth 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 $1.9 billion in Q3 and maybe just over $1.9 billion in Q4. Is that the way to think about it?

Operator:

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

Vicente Reynal :

Yes, absolutely. Jeff, so let me kind of break it into a couple of things. I mean, first of all, let's talk about the legacy Ingersoll Rand Life Science business and medical business as you saw, very, very good momentum in the quarter in Q2 with very nice growth at 8%. So that's actually very encouraging to see. 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 ILC Dover with biopharma. And I think the team continues to stay pretty encouraging on what they're seeing now there and as we go out and meet with the teams, we see some continued good momentum there. 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 seeing outside growth.

Vicente Reynal :

Yes. Great, Jeff. Thank you for asking the question. I think we continue to be very excited about all the actions that we're doing around the care packages and the service attachment. 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 of what we're seeing and whether it is with just 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 ready to give us more better channel, better access with a larger footprint on service. So service continues to be a very high priority for all of us as we move forward.

Rob Wertheimer :

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 higher gross 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.

Vikram Kini :

Yes. On the price cost side of the equation, so specifically in the quarter, price was, let's just say, approximately 2.5% across the entire enterprise, fairly comparable between the 2 segments. And then from an inflationary perspective, I'd say the commentary is 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. 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 to the bottom line and you see that reflected in the gross margin profile, along with some of the other initiatives that Vicente spoke to.

Vikram Kini :

Yes. Just to keep it relatively simple. I think we've said that pricing will kind of return to, I'd say, a little 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 should say. 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 2024 as well as expectation for '25 onwards.

Joe Ritchie :

Vicente, can we double-click on that commentary around the MQLs and the plays that you're seeing? I'm just curious, like, obviously, there's a lot of activity, particularly happening in the U.S. with mega project activity. And I'm just wondering if that's just a function of, look, 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 could give us around that would be helpful.

Joe Ritchie:

Got it. That's super helpful, Vicente. And then my other question, like, look, to take this a variety of different ways, but congrats on shoring up the balance sheet from a leverage standpoint and from a debt standpoint. I know how important M&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 the aerospace and defense number for the year by $30 million. I know that's a small number. And I think that, that's the part of the piece that came out of the ILC 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?

Operator:

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

Vikram Kini :

Yes. Andy, this is Vik. I think the way you've described it is correct. So just to calibrate 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. I think in terms of the components and the moving pieces, yes, 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. And I think the other factors you mentioned here are largely accurate. So I think we feel comfortable with the guidance as provided.

Vikram Kini :

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% EBITDA margins to about 30.3%. 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. 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 Q2 and into Q3 and then Q3 to 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.

Stephen Volkmann :

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?

Stephen Volkmann:

Okay. And then I'm curious about this CAPS 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?

Operator:

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

Vicente Reynal :

Yes. 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 [indiscernible] and 1 in this 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 is slightly different, but low single digits 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. 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 letter 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.

Vikram Kini :

Yes. Nigel, on the first part, we don't typically talk about kind of like end market, let's just call it, designations within our 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 level as what you've seen in prior year. And Vicente, I'll let you comment on the food and beverage.

Nigel Coe:

And just to clarify, Vicente, the low single digit, that's organic, not reported, right?

Operator:

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

Vicente Reynal :

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 someone said it as well. I mean, there's been a lot of megaprojects approval for 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 site 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 orders that they got to kind of push through the process. And what we're saying here is that it seems to bring to light, but potentially of having good 2025 as some of those projects get released and perhaps hear some as well here in the second half. Second question, Vik?

Joseph O'Dea:

Got it. Yes. No, makes sense, comments helpful. And then also just in terms of China, is it right that, 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. 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 at this point in time doesn't seem like it's going to play out that way?

Operator:

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

Vicente Reynal :

Nicole, I would 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 has been up from an orders perspective, kind of in the second quarter, 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.

Nicole DeBlase:

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

David Raso :

Two quick things. Maybe I missed it, I apologize, a lot of earnings this morning. But 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?

David Raso:

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, a $1.7 billion business. I think $700 million or so will now be a Life Science piece and then the other $1 billion 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?

Operator:

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

Operator:

This will conclude today's conference call. Thank you all for your participation. You may now disconnect.

Operator:

Thank you for standing by, and welcome to the Ingersoll Rand First Quarter 2024 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to your host, Matthew Fort, Vice President of Investor Relations. You may begin.

Vicente Reynal:

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 owners helping us to deliver another record quarter in Q1.

Vikram Kini:

Thanks, Vicente. On Slide 9, despite the ongoing macroeconomic uncertainty, we delivered solid results in Q1 through a balance of commercial and operational execution fueled by IRX. Total company organic orders and revenue declined 7% and 1% year-over-year, respectively. Both organic orders and revenue finished largely in line with expectations given the tough comps from the prior year. However, we did see approximately $15 million of revenue shift out of Q1 and into Q2 due primarily to customer site readiness. An additional headwind of approximately 1% due to FX as compared to our initial guidance.

Vicente Reynal:

Thanks, Vik. On Slide 12, our Industrial Technologies and Service segment delivered solid year-over-year revenue growth of 4% on top of outsized growth in Q1 of last year. Adjusted EBITDA margins were approximately 30%, up 370 basis points from the prior year. Book-to-bill was 1.02x with organic orders down approximately 7%.

Michael Halloran:

So simplistically, what's changed from a trend line perspective? If I listen to your comments, it feels like things really haven't changed that much organically from a trend perspective. So maybe talk about any areas where you're seeing maybe a little better trends or the worst trend, some sort of inflection? And also maybe talk to what you think the orders look like on a full year basis and how those might track through the year?

Vicente Reynal:

Yes. Sequential orders...

Vikram Kini:

Yes, sure. Let me maybe start with that latter point there. Let's start with the margins. So I think maybe in the context of the total company, I think the full year guide implies slightly more than 100 basis points of year-over-year margin expansion. And it's worth noting that's actually ahead of our Investor Day targets that we communicated late last year, which was about 75 basis points.

Julian Mitchell:

So maybe just without going down the rabbit hole of sort of monthly orders and so on, I guess maybe help us understand in the second quarter it sounds like orders are down again year-on-year firm-wide. Just wanted to make sure that's the case, and sort of when you see those returning to growth again on a firm-wide basis.

Vicente Reynal:

As a reminder, we don't really guide on orders, but just to provide a little bit of color here on Q2, I mean, April orders really finished relatively in line with the expectations. Generally, the same trend as what we saw in Q1, meaning China is the most noted headwind, again, based on that year-over-year comparison, due to the outgrowth that we saw Q1 and Q2 in China.

Operator:

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

Vicente Reynal:

Jeff, on the ITS, yes, I mean, we're very pleased with the performance. And you saw -- you heard the commentary that solid gross margin expansion, and that's basically kind of what we saw also on the ITS side, I mean, phenomenal gross margin expansion.

Jeffrey Sprague:

And then I think coming out of this quarter, right, those of us who haven't dialed in ILC yet will -- just any -- assuming kind of a mid, late quarter close, should we expect some EPS benefit in 2024? Or are there kind of integration and other costs that would kind of negate that?

Robert Wertheimer:

I guess I'd like to take it a little bit more towards the strategic end. And thinking about what ILC Dover opens up for you, which you kind of talked about in the prepared remarks on acquisition, on runway and on deals.

Joseph Ritchie:

Can we just start on the growth in the quarter? It was a touch lighter than we expected. Maybe this is just a follow on to like Mike's question from earlier. But was there anything in the quarter that either shifted out or just potentially surprised you, was a little bit softer than you expected, maybe which is all on PST? Just any comments around that would be helpful.

Joseph Ritchie:

Okay. All right. That's great to hear. And then I guess you've been talking about the life sciences business for a while now and the softness in that business. It was interesting to see that you've seen this sequential order improvement in 1Q. Are you starting to kind of see green shoots in that business? Should -- are you feeling better about the growth trajectory of that business throughout the rest of the year?

Operator:

Your next question comes from the line of Andy Kaplowitz from Citigroup.

Vicente Reynal:

No, I think we definitely categorize it more as really timing. And we do because as we mentioned on the prepared remarks, I mean, these renewable natural gas saw a lot of acceleration early in '23. And it has not stopped, but I mean it's basically a very, very fast start and then kind of tapering down. Still, we're seeing renewable natural gas growth or good orders. It's just that comparable to what we saw back in Q1, it was just difficult to overcome.

Vicente Reynal:

Yes. I think the team is still very energized and very encouraged about what they're seeing, clearly tough comps. But even in the tough comp environment, when you look at -- and we've done a lot of kind of work with the team to better understand the kind of core business.

Nigel Coe:

Just wanted to perhaps come on the back of Andy's question. I think you mentioned as well, Vicente, Europe where you're seeing sort of a pipeline of larger orders, kind of rather larger projects developing. And it sounds like it's more sort of reshoring into Europe. So I'd be curious if that's the case, whether you think this could be something we see happening pretty quickly? Or is this more sort of '25, '26? And any sort of color on some of the sectors where you see that activity.

Nigel Coe:

Okay. That's great. And then ILC Dover, the 25% that's space and defense, I think the question we were asking ourselves was how strategic is this business. And it sounds like it's very strategic. And it feels like you could actually -- it sounds like you want to be a space player, I mean, for want of a better word. So is that the case? Do you think that it's not just life sciences. yes, this is also an A&D play as well?

Joseph O'Dea:

Can you just expand on the MQL trends during the quarter, the degree to which that surprised you? Not sure if it was primarily China and Europe that drove that increase over the course of the quarter, if there was anything in North America, but just any additional color on what you attribute that to.

Vicente Reynal:

Yes. I mean April MQL activity was actually strong, 14% year-over-year growth on top of 5% growth in 2023. So again, it shows that the good solid momentum. I mean I think 14% is very good. And I would say also April, MQLs were also up 9% sequentially from March.

Vicente Reynal:

Yes, absolutely, Joe. So you're absolutely right. I mean, I think the legacy here comes in from the space. And you remember that we mentioned that Dover is the one that put the man on the moon basically with their spacesuit and leveraging a lot of that kind of layering technology to really expand into inflatable habitats and things like that.

Vicente Reynal:

For them, it was basically a good blend of both. I mean they have to acquire some companies, but then once they acquire, they continue that organic momentum.

Nathan Jones:

I'm going to pick up on ILC Dover as well. On the original acquisition call and again today, you guys have been highlighting revenue synergy opportunities with the current portfolio. Can you just talk a little bit more about that, are the products that you have today directly transferable, does there need to be some investment in development? And then just talk about what you think the market size for that potential revenue synergy is?

Nathan Jones:

Still figuring out the revenue synergies, I'm sure. Just one clarification or something I don't know on MQLs, which maybe I should know is what's the average duration for you guys for getting an MQL to an order? I'm just trying to figure out how far in advance is that a leading indicator of potential improvement in demand?

Operator:

That concludes our question-and-answer session. I will now turn the call back over to Vicente Reynal for some final closing remarks.

Operator:

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

Operator:

Good morning, and welcome to the Ingersoll Rand Q4 2023 Earnings Call. Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Matthew Fort, Vice President of Investor Relations. You may begin your conference.

Vicente Reynal:

Thanks Matthew and good morning to all. I would like to begin by acknowledging and thanking our employees for their hard work in helping us deliver another record year in 2023. We finished the year on a high note with strong fourth quarter and full year results, despite the constantly changing macroeconomic environment. Our 2023 performance reinforces the impact our employee ownership mindset has for Ingersoll Rand. I would also like to welcome our new employees from our recent acquisition of Friulair, whom I had the chance to visit last week in Italy. I was very impressed by the entrepreneurial and technological spirit that has made this company grow at an impressive organic CAGR of 15% over the past three years. Starting on Slide 3, in 2023, we demonstrated again how we continue to outperform against our long-term Investor Day commitments with double-digits growth in revenue, adjusted EBITDA, adjusted EPS and free cash flow. As we move to 2024, demand remains solid. And while macroeconomic and geopolitical uncertainties continue to be at the top of everyone's mind. We remain agile and focus on what we can control. IRX is our competitive differentiator and combined with our ownership model, we remain confident in our ability to execute on our commitments. We recently held our Investor Day this past November, and I'd like to spend a few minutes providing a couple of important highlights that we presented. On Slide 4, we highlighted how we deliver compounding results through our economic growth engine. With the use of IRX, we have created an increasingly durable financial profile underpinned by our employee ownership model. Since 2016, we have transformed the company into a premier growth compounder. We have reduced the cyclicality through divesting our club car and HBS businesses and reinvested approximately $2.3 billion into accreative acquisitions focused on high growth sustainable end markets. Today, our balance sheet is stronger than ever and we enter 2024 well positioned to build upon our progress to date. Moving to the next page, we show how we are uniquely positioned to grow market share within the $55 billion of highly fragmented addressable markets we currently play. The combination of our product portfolio, multi-channel, multi-brand strategy, massive install base and unmatched commercial and operational footprint provides an exceptional foundation for continued market share growth, both organically and inorganically. On Slide 6, we demonstrate how we remain committed to delivering financial performance, while also doing good for the planet and our community. On the left hand side of the page, we have some very exciting news to share. S&P Global recently announced that Ingersoll Rand ranked first in the world within our industry, up for number two in the prior year. Also, Ingersoll Rand was named to the A list for its performance in tackling climate change and commitment to global environment leadership by CDP. CDP annuals environmental disclosure and scoring process is globally recognized as the gold standard for corporate transparency. Finally, as shown on the right hand side of the page, we continue to make progress towards our aggressive 2030 goals, and we're already well on our way to achieve them. On Slide 7, we show the catalyst for the progress, which is a highly engaged employee base combined with an ownership mindset. And as shown on the left hand side of the page, our employee satisfaction is over 600 basis points higher than the industry average. We believe our employee ownership model drives the increased employee engagement and as illustrated on the center of the page, we have created a massive economic opportunity for our employees and their families. That has been life changing for many, as expressed on the quotes from some of them. All of these leads us to the next slide, where you can see that the combination of all these factors, executed through our economic growth engine is evidence that our model provides durable long-term performance. Our portfolio is positioned to capitalize on global mega trends such as sustainability, digitalization and quality of life. We expect to leverage our organic growth enablers to deliver on average mid single-digit organic growth through 2027. And as you can see, we outperformed this commitment again in 2023, delivering 10% year-over-year organic revenue growth. In 2023, we also deliver 6% of in year growth from M&A. The combined organic and inorganic growth of 16% also surpassed our low double-digit growth commitment, and not only did we surpass our growth targets, but we also exceeded our margin expansion initiatives, generating 170 basis points of adjusted EBITDA margin expansion, and again, surpassing our long-term targets for this metric. With IRX, as our competitive differentiator and over 400 impact daily management sessions or IDMS across our company each week, our high performance culture encourages a strong focus on execution. In 2023, we deliver adjusted EPS growth of 25% and a free cash flow margin of 18%. These results prove that we are premier durable growth compounder. On Slide 9, to date, we're on track or ahead of schedule in delivering the 2025 targets set at our previous Investor Day. We have set new aggressive targets for 2027 long-term financial and our results give us confidence in delivering those targets that are on average over the cycle. Turning to Slide 10, M&A continues to be at the forefront of our capital allocation strategy. We invested over $450 million across 13 acquisitions in 2023. These acquisitions have been both market leading products and technologies, while accelerating our addressable market with close adjacencies. As of today, we currently have 10 transactions under LOI. Our M&A funnel remains strong and continues to be over 5x larger than it was at the time of the RMP. We expect an additional 400 to 500 basis points of annualized inorganic revenue to be acquired in 2024. The 10 transactions currently under LOI are similar in size and nature to the Bolton deals we have done over the past few years. However, outside of these 10 LOIs, we still have a couple of deals in the funnel where the purchase price exceeds $1 billion. I will now turn the presentation over to Vik to provide an update on our Q4 and full year 2023 financial performance.

Vicente Reynal:

Thanks, Vik. On Slide 15, our Industrial Technologies and Service segment delivered solid year-over-year organic revenue growth of 5%. Adjusted EBITDA increased 26% year-over-year with an adjusted EBITDA margin of 30%, up 260 basis points from prior year with an incremental margin of 48%. We also delivered sequential margin expansion of 120 basis points from Q3 to Q4. It is important to note that we have already achieved our 2025 high 20s adjusted EBITDA margin target for ITS, which is a full two years ahead of schedule. We continue to see solid demand for our products with organic orders also up 5%. Moving to the product line highlights. Compressors were up low double-digits in orders and up mid-single-digits in revenue. Industrial vacuum and blower were down low double-digits in orders, but up low double-digits in revenue. The order decline was mainly driven by prudently de-booking an order from an electric truck manufacturer in Europe that had some battery supply issues. However, the prospects are starting to look better for this manufacturer in 2024. Also, it is important to highlight that core product lines continue to show strong momentum on a two year stack, excluding FX and also excluding the recent acquisitions of SPX Air Treatment and Roots’ blower. On a two year stack, compressor orders were up mid-teens and revenue was up high 20s. Industrial vacuum and blower orders were up low double-digits and revenue was up mid-30s. As a reminder for additional detailed information on product lines and regional splits, we have moved the chart, which was previously included on this page to Slide 21 in the appendix. For our innovation in action section, we're highlighting a new compressor with advanced two stage technology. This product is a great example on how Ingersoll Rand is providing an innovative digitally-enabled sustainable solution with a 17% energy efficiency improvement versus the competition. Turning to Slide 16. Organic revenue in the Precision and Science Technology segment was approximately flat year-over-year. The PST team delivered adjusted EBITDA of $94 million, which was up approximately 2% year-over-year with a margin of 30.1%. Organic orders were down 1.6%, driven by the Life Science businesses. We see organic orders growth stabilizing and we remain positive about the underlying health of the PST business. In fact, PST excluding the life science businesses has seen positive organic orders and revenue growth in 11 out of the last 12 quarters. In addition, short cycle orders in the industrial businesses were up mid-single digits in Q4. Overall, the PST segment remains on track to meet our long-term Investor Day growth commitments. For our PST innovation in action, we're highlighting our ARO piston pump system. This is a perfect example of leveraging both i2V and demand generation to pivot an existing product line into a high growth sustainable end market. Over the past 12 months, we have already taken $7 million in orders with a leading OEM solar panel producer, which has the potential for $1 million in annualized after-market revenue. As we move to Page 17, we're introducing our 2024 guidance. Total company revenue is expected to grow between 5% to 7% with the first half growth of 4% to 6% and the second half growth of 6% to 8%. We anticipate organic growth of 2% to 4%, where price is approximately 2/3 and volume 1/3. FX is expected to contribute approximately 1% of a tailwind for the year, of which the impact will be realized relatively evenly throughout the year. M&A is projected as $160 million, which reflects all completed and closed M&A transactions in 2023, as well as the acquisition Friulair. Corporate costs are planned at $160 million and are expected to be incurred evenly per quarter throughout the year. Total adjusted EBITDA for the company is expected to be in the range of $1.915 billion and $1.975 billion. At the bottom of the table, adjusted EPS is projected to fall within the range of $3.14 and $3.24, which is approximately up 8% at the midpoint. We anticipate adjusted tax rate to be roughly 23%, gross interest expenses to be about $155 million and CapEx to be around 2% of revenue. On the right hand side of the page, we have included a 2024 full year guidance bridge showing the growth associated with both operational activity and the impact associated with corporate cost, interest income and expenses, FX, share count and changes in the adjusted tax rate, and based on the above guidance adjusted EPS growth is expected to be 6% to 9%. As we sit here in mid-February, we would like to provide some commentary on Q1. We expect our normal seasonality to return in 2024 from a revenue perspective, which means that Q1 will be the lowest revenue quarter of the year. In addition, as a reminder, Q1 has a very tough comp as we deliver 20% organic revenue growth in Q1 of 2023. As a result, we anticipate organic revenue growth to be flattish to slightly up for a quarter with continued year-over-year margin expansion. Turning to Slide 18, as we wrap up on today's call, I want to reiterate that Ingersoll Rand is in a solid position. We continue to deliver record results and both our long-term and '24 guidance is reflective of our performance to date and our increasingly durable financial profile. To employees, I want to thank you again for another excellent finish to the year. We deliver strong results by demonstrating our commitment to meeting our financial targets and executing our economic growth engine through the use of IRX. Thank you for your hard work, resiliency and focus actions. These results show the impact you each have as owners of the company. Our balance sheet is as strong as ever, and with our discipline 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, our performance. We remain nimble, continue to monitor the dynamic market conditions and we're prepared for the challenges that may come. And with that, I'll turn the call back to the operator and open it for Q&A.

Mike Halloran :

So let's start with where you ended there on the guidance piece. Certainly appreciate all the context and help and understand the relatively normal seasonality. But maybe you could just talk to what you're embedding from an underlying assumption perspective when it comes to the broader environment, broader end markets. Is this a year where you just see relatively sequential stability? Any specific pockets you're concerned about or where you see opportunities for acceleration? Less of an Ingersoll specific question meaning. I know you have a lot of drivers that you can use to goose growth relative to whatever the end markets are doing. More of just an end market specific in an environment question.

Mike Halloran :

And then a follow-up on the Life Science side. The one area of PST that like a lot of the folks are seeing some headwinds here. You listened what the bigger players in the industry are saying. There is more stability front half, improvement back half, I don't know, at least modest. Is that similar to what your expectations are from a recovery curve at this point?

Operator:

Your next question comes from Julian Mitchell with Barclays.

Vik Kini:

Yes. Julien, this is Vik. I'll take the first part of your question and I'll let Vicente probably talk on the margin front. I think the phasing -- generally I think you're in the right ballpark. Maybe other way to say it here is, if you look at the phasing in a manner that's consistent with, I'd say, revenue and earnings delivery as we saw in 2023, I think you'd be in the right ballpark in terms of our expectations here for 2024. And then in terms of the incremental margin piece, maybe I'll get started or --

Julian Mitchell:

And just as we're starting out the year, looking at orders naturally, the sort of volatile quarter to quarter, reflecting what you said on a sort of a tough Asia environment in the first half of the year and sort of very tough orders comps. Do we think about orders being down perhaps in the first quarter year-on-year and then you pick up after that, as the comps and perhaps Asia get better?

Operator:

Your next question comes from Jeff Sprague with Vertical Research.

Vicente Reynal :

The Life Science business is roughly 25% to 30% of the PST segment today. I think as we think about going into the second half is when we expect that to be getting back to normal growth.

Vik Kini :

Yes. Jeff, this is Vik. I'll take that one. I think simply stated here, I don't think you are going to see anything dramatically different than what you've seen historically. Meaning, we expect to generate approximately 2% price on a full year basis. We would expect to be both dollar and margin positive from a price cost perspective each quarter of 2024. So again, nothing different in terms of that equation as we move to the year. Obviously, ITS being the bigger segment clearly that comment pertains to ITS as well as PST as well.

Rob Wertheimer :

Actually, one more question on life science. I mean, we've seen you guys use demand generation and just IRX to outgrow tough markets in China, and maybe Europe last year. Has that been a factor in life science? Is there anything different in that market that constrains it? And then I wonder if you could just kind of compare market dynamics for you and life sciences to some of the other companies and industrials we've seen and the long drag. What does the recovery look like? Is there a bounce back? Has there been a decent. I mean, maybe just explain the sales dynamic there.

Rob Wertheimer :

It was a little bit of two. So it was like, does demand generation -- has demand generation or other tools allowed you to outgrow the decline in life sciences? And then maybe the same question as Jeff asked in a way, but does the other side of this look like a bounce back or does it just look like a return to normal growth? I don't know whether destock or whatever at your customers has led to below normal sales and you kind of pop back up in '25, or whether you just resume normal growth? I will stop there.

Operator:

Your next question comes from Andy Kaplowitz with Citigroup.

Vicente Reynal :

I would say, yes. I mean, the M&A, we feel that continues to open up, and again, I'll put it in perspective that these 10 transactions in the LOI are similar in size and nature to the bolt-on deals that we have done over the past few years. And these 10 LOIs are also sole source, meaning, we have been proactively talking to the family on and have built some incredible relationships. This is exactly what happened with the Friulair acquisition to us, well, which have been in contact with the founder named Luigi. But so again, outside of these LOIs, we still have a couple of those deals in the funnel where purchase price exceeds $1 billion. So yes, there's still --- I mean, timing of that obviously difficult. But we still have a couple of those in our funnel. I will also tell you that we actually -- also, we walked away from one of those billion dollar purchase price transactions, which again, speaks to the prudency and the discipline of our continued model that even after six to nine months of continued diligence, we decided that it was just not the best case for us to proceed. So, we remain highly disciplined in this environment and we see just a lot of good opportunities out there.

Vicente Reynal :

We think that maybe over the past couple years it was a lot more on the longer cycle. We see now, perhaps as you cannot continue to see PMI do better is that shorter to medium cycle will continue to see maybe a better momentum inflecting, we see some of that even already here. And you saw, we spoke about that particularly, let's say even PST on that we said, the industrial shorter cycle of mid-single digits year-over-year and then also sequentially. So, I will say that our teams continue to stay pretty agile in this -- in continuing to pursue energy efficiency in the compressors with our story around how we can save tremendous amount of energy, that is a very good thematic that continues to be out there. The thematic around reshoring is very strong. It continues to be the case in countries even like Mexico or even South America. I think the same thematic are still happening that we've been talking about for the past couple of years, Andy.

Nigel Coe:

All the big questions I think have been asked, but maybe just give us a bit of color on what you've seen in China looks like that was down in the quarter. Maybe just to quantify that and kind of like what's your sort of base case view on China? And then perhaps as part of that first half versus second half, it looks like core growth flat to 2% in the first half of the year and then we're going to lift the mid-single-digits in the back half of the year. Is that simply easier comps or are we seeing some acceleration, I don't know maybe in China or perhaps in life sciences? Any color there?

Vik Kini:

Yes Nigel on the second part of your question about the growth cadence first half versus second half. Yes probably a couple of factors I'd point to. One being, first and foremost, we do walk into the year with a still healthy backlog, including a good percentage of that that's longer cycle in nature. So that obviously gives us some good visibility into the back half of the year, when a lot of those projects tend to more naturally ship. And then yes, I do think there's a lot of truth in the statement you made about, clearly, comps gets a little bit more moderate in the back half of the year across the Board, but clearly whether it be China as well as the life sciences side of the equation on the PST business. So I think it's a couple of different factors. But again, like we said before, we think the phasing of delivery of revenue and earnings is actually very consistent in '24 versus what you've seen historically.

Vicente Reynal :

I would say, high energy prices and Scope 1, which are I mean kind of interrelated one with the other one. But yes, I'd say high energy prices, number one, Scope 1 in terms of targets that many of the companies have put out there and then the third will be around the CO2.

Joe Ritchie :

A nice sense of the year. Obviously, incremental margins were great. You hit your margin targets two years ahead of time. You think about this ITS business now, and I know that you have this incremental margin target for the year of 35 to 40. I guess just to -- I'm just curious, like how much of that do you -- would you say is volume dependent at this point? I know IRX is all about continuous improvement but just your ability to just deliver continued margin expansion if the volumes ultimately turn out to be weaker than expected.

Joe Ritchie :

Look, it sounds like you've been on the road slow trotting the last several weeks. I'm curious, just from a regulatory standpoint, are there any kind of changes in regulations that you guys are seeing across any particular region that might be impacting your business or could impact your business going forward in the next we'll call it next 12 to 24 months?

Operator:

Your next question comes from Steve Volkmann with Jefferies.

Vicente Reynal:

I'll categorize that. I mean, so good news is that clearly we're still a pretty high backlog, which is encouraging to see. I think over time perhaps yes, it will get normalized. But again, I think when we think about the business that if we continue to get this book to build of one of approximately one that we continue to expect to see here in 2024, I think backlogs seem to be continuing at a pretty higher level than what we have done historically.

Steve Volkmann :

And then switching gears a little bit, companies that are acquisitive and sort of have this flywheel that you guys have occasionally something comes over the transom that isn't quite what you thought it was going to be? And you may have a little disappointment in some piece of some business or something? So I'm just curious, any lessons learned, anything like that happening? And more importantly, should we expect some level of divestitures to be kind of part of this machine as we go forward?

Vicente Reynal:

Yes, I mean, the only thing that I'll add to that too as well is that, I think we said this before but my staff meeting, which happens typically on Fridays it's run as an IDM part of the IRX and one of the areas of focus is basically we have a dashboard of all the M&As as that are getting integrated, where we can clearly see if there's any issues or gaps. And that was an implementation that we did quite a few months ago, I would say 18 months ago as we saw maybe some businesses that were not properly integrated. So I think it's just part of that as Vik said, continuous improvement, good evolution and having the news travel fast, so that we can react and course correct if something is not going the right way.

Chris Snyder :

I wanted to also ask on the M&A engine and maybe a more high level one. So revenue in 2024 is going to be about 40% above 2021. Does that make it more difficult for the company to add this 400 to 500 basis points M&A contribution every year? And does it change anything around the process of doing so? Just as the numbers have, again, I guess gone 40% bigger versus three years ago to keep that same run rate.

Chris Snyder :

And then maybe just a follow-up on productivity and efficiency of the business. Obviously, margins have been really strong here the last three to four years. Do you feel like the efficiency of manufacturing has returned to pre-COVID levels? Obviously, there's a lot of disruption, coming out of the pandemic, which I'm sure was a headwind to margins in some capacity. Do you feel like that is fully back at this point?

Operator:

Your next question comes from Joe O'Dea with Wells Fargo.

Vik Kini:

I think we always view that there's upside on the demand gen side and frankly even on the volume side. Let me kind of unpack that a little bit. I think Vicente mentioned earlier, when you look at the regional trends here with primarily America is kind of at the top of the stack, EMEA relatively more stable and APAC which is largely China for us, probably facing the most headwinds at least as we enter the year. That's kind of the balanced equation that we looked at as we thought about the growth algorithm, as you said. Now that being said, we entered the year with healthy backlog, solid backlog. Demand generation without question is part of the equation here. And clearly, we would say not to dissimilar from frankly, even years past. If there's upside opportunity in the context of the guide or in the context of the year, it really probably more so becomes that organic volume piece, probably more so into the -- as the year progresses. Again, I don't think the equation for us is dramatically different than you've seen historically. But we are conscious and taking into consideration, some of the regional trends that we're seeing, particularly as we enter the year, and we're going to continue to monitor those and pulse those as we get through the quarter and into second quarter in the back half of the year.

Vik Kini :

Yes, sure. Maybe I'll take those in pieces here. So, if my memory serves in correctly, it went from about 28.8% EBITDA margins to about 30%. So a little over a 100 basis points, sequential margin expansion from Q3 to Q4. I point to a couple things here. One, frankly as the revenue and volume levels tend to pace to the year, a lot of our productivity measures are tied to volume activity measures the i2V to follow, I'd say that's probably one of the single biggest drivers. I think price cost continue to remain quite positive and overall just strong solid execution as we exited the year. The other thing that I think we continue to see good what I'd say momentum on is the aftermarket side. That really sets up nicely even during the Investor Day. We indicated that aftermarket as well as the whole recurring revenue side of the equation is a big focal point for us and we would expect to continue to see that not only ramp as we think about the next few years, but also that being margin accretive in the overall equation. Again, I think that's probably the way that we think about the equation in terms of what kind of drove Q4 specifically. Now in terms of the whole incrementals and how we think about 2024 like we said, 35% to 40% is the kind of the overall average. The way I'd probably think about it here is, ITS is probably playing maybe towards the lower end of that probably in the 30s realm. PST obviously probably has a little bit more outsized opportunity. But I think that also goes with the fact that we said, that while we're pleased with PST delivering 30% EBITDA margins in the full year of 2023, we know that that business can get up into that mid 30s realm. And as such, there should be a little bit more of an outpaced opportunity. So there's a little bit of puts and takes there as well as Vicente mentioned earlier, a little bit of upside on the corporate cost as we think year-over-year. So hopefully that kind of gives you a little bit of a sense of how we're thinking about the airplane itself out.

Nathan Jones :

A couple fairly narrow questions. I know one of the strategic additions you've made in M&A has been to add drying to the portfolio. So I was just hoping to get an update on the benefits that you're seeing there, revenue synergies that you're generating there, whether or not you think that portfolio is built out or it's still an opportunity to add more of that capability?

Operator:

Your next question comes from David Raso with Evercore ISI.

Vik Kini:

So, I think, take them in pieces here. So you obviously have the carryover as well as the Friulair acquisition. So you see in our guidance be approximately $160 million of revenue contribution, that's the carryover and the completed to date, obviously would expect to book to close more acquisitions as the year goes by. But embedded in the guide is that 160. The comment about 400 to 500 would be the acquisitions that we expect to make in the year and the annualized revenue contribution. So for all the deals that we expect to make here, based on the funnel and all the comments that Vicente made, we would expect that to be 400 to 500 basis points on an annualized basis. So you should take those kind of two statements separate from each other. But again, I think, the short answer here is we expect to continue to operate well in line with our stated economic growth engine and how you've seen us operate in years past.

Vik Kini:

Let me take the first part of that and I’ll let Vicente to answer. The way I would describe it is, interestingly enough, we de booked it in Q4 of ‘23 and the original order happened to have come in Q4 of ‘22. So interestingly enough, it kind of it hit us both ends, both in the quarter as well as the comp. Vicente, I'll let you speak to the prospects going forward.

Operator:

Your last question comes from Nicole Deblase with Deutsche Bank.

Vik Kini:

Sure. I think in the call, I think broad structure, we still see an opportunity here. I think is the long and short of it. While we were pleased with our kind of exit momentum heading into '23, particularly on the inventory side, which was very much a source of cash in the quarter. We frankly still sit at elevated levels, comparatively speaking to, I'd say, the pre-supply chain dynamics and things of that nature. So I think that's definitely an opportunity as well as I'd say some of the just core -- I'll just call it blocking and tackling, whether that be just kind of the collections and things of that nature, fair to say that we still have a component of our portfolio whether it be part of the PST organization as well as a lot of some of the bolt-on M&A, that's not in the shared service environment, which obviously, for us, is a big catalog of working capital improvement. So you put that all together, I think that still lends itself as a good source of opportunity for '24 and beyond.

Vik Kini:

Yes, that's correct. We do not have any, I would say, incremental buybacks as part of the guidance. Now that being said, I think the way you should expect us to operate here in 2024 is similar to the prior years, meaning a requisite amount approximately. We've always said approximately $250 million is probably a good proxy and a placeholder in terms of expectations for the year. But you are correct that it's not formally in the guidance.

Vicente Reynal :

Thank you, Brian. And as we wrap up here, I just want to pass 1 more thank you to our employees who will continue to think and act like owners because they are owners of the company. And it's very exciting to see as I travel around the world, the high level of engagement and energy that we have across our organization. I think our economic growth engine is powered by that momentum on the ownership mindset and leveraging our IR. So again, very encouraged, very happy and to see the performance and look forward to another great year here in 2024. Thank you.

Operator:

Good morning. My name is Christa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Ingersoll Rand Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the conference over to Matthew Fort, Vice President of Investor Relations. Please go ahead.

Vicente Reynal:

Thanks Matthew and good morning to all. I would like to start, as we always do, by thanking and acknowledging all of our employees for their hard work in helping us to deliver another record quarter in Q3. Despite the constantly changing macroeconomic environment, our employees continue to deliver on our commitments and consistently exemplify our purpose while thinking and acting like owners. I would also like to welcome our new employees from our recent acquisitions, Oxywise, Fraserwoods, Roots and [indiscernible]. Beginning on Slide 3, fueled by our competitive differentiator, IRX, in the third quarter, we again delivered double-digit growth in revenue, adjusted EBITDA, adjusted EPS and free cash flow. We remain nimble and focused on controlling what we can control and continue to direct our demand generation activities towards high-growth sustainable end markets to accelerate market share gains. Finally, based on our continued robust performance year-to-date, we are once again raising our 2023 full year guidance. As we move to Slide 4, our economic growth engine is the key to delivering compounding annual results. During our last Investor Day in November 2021, we presented this model and highlighted our organic, inorganic and quality of earnings growth enablers. We remain committed to our strategy and our long-term Investor Day targets as outlined on this page. In fact, we have so far exceeded our growth and margin commitments, including an organic orders and revenue CAGR of 12% and margin expansion of 170 basis points per year over the last three years. On the next slide, I will provide you with deeper insights into how we are accelerating organic growth in previously acquired businesses. So turning to the page to Slide 5. Here, we have some examples of how we have driven outsized organic growth and margin expansion from recently acquired M&A. This is a testament to how we compound growth on recently acquired businesses and have examples from both our ITS and PST segments. On the left-hand side of the page, we're highlighting our LeROI acquisition from June of 2017. We acquired this business for a purchase multiple of 11 times by pivoting our end market focus to high-growth, sustainable end markets, offering a complete ecosystem solution and leveraging our commercial footprint we have achieved over 540% growth since the time of acquisition. In addition, our post-tax ROIC is 155% resulting in a 0.5 times post-synergy adjusted EBITDA purchase multiple. Just an impressive result on how and what we can do with technologies once we incorporate them into our IRX process. On the right-hand side of the page is our Air Dimension business, which was acquired in November of 2021, also at an 11 times purchase multiple. Air Dimension serves high-growth sustainable end markets like environmental services. And the team has delivered 27% revenue growth over the last two years by leveraging IRX, rapidly integrating our demand generation process and launching new innovative technologies. And given the outsized growth this business has delivered over the past two years, we're very well on track to exceed our three-year post-tax ROIC target demonstrated by already delivering a post-synergy adjusted EBITDA purchase multiple of 8x. Next, on Slide 6, M&A continues to be at the forefront of our capital allocation strategy to compound value similar to the examples we displayed on the previous slide. We're pleased to highlight two recent closed transactions. With these two acquisitions, we have closed on approximately $190 million of annualized inorganic revenue, which puts us very close to the bottom end of the $200 million to $300 million of annualized inorganic revenue targets we set forth at the beginning of the year, and we have no doubt in our ability to deliver our target this year. Let me walk you through these two recent acquisitions. First, Oxywise, which is based in Slovakia, is a leading provider of on-site oxygen and nitrogen generation systems. This acquisition expands our technology ecosystem with a complementary product to the compressor and increases Ingersoll Rand's broader air treatment capabilities in point-of-use oxygen generation. Next is Fraserwoods, which is a leading provider of aftermarket services for blowers and pumps in the vacuum truck market. This acquisition expands Ingersoll Rand's technical expertise and service capabilities in Western Canada. Our M&A funnel remains very strong. And as of today, it continues to be over five times larger than it was at the time of the RMT. The characteristics of the target in our funnel continue to be bolt-on in nature with the exception of a couple that are approximately $1 billion purchase price. On Slide 7, as highlighted in the middle of the page, we continue to be recognized for our corporate responsibility and we're proud that 3BL Media recently named us as one of the top 100 best corporate citizens in 2023. We're recently ranked on the Top 3% Among the Russell 1000. Being a corporate citizen is part of our high-performance employee ownership culture. Our company purpose of making life better is deeply ingrained into everything we do, including partnerships with community-focused organizations such as the American Heart Association, FeedNC, Drop In The Bucket, and La Escuelita Bilingual Preschool. In addition to striving to be a responsible corporate citizen, we're thrilled to be named Best Companies to Work for in industrials and business service sector, receiving high marks in employee sense of belonging. We believe our employee ownership model drives increased employee engagement. And as a long-term shareholder, it creates economic opportunity for our employees and their families. I will turn now the presentation over to Vik to provide an update on our Q3 financial performance.

Vicente Reynal:

Thanks Vik. On Slide 12, our Industrial Technologies and Services segment delivered strong year-over-year organic revenue growth of 9.5%. Adjusted EBITDA increased 31% year-over-year with adjusted EBITDA margin of 28.8%, up 260 basis points from the prior year, with an incremental margin of 42%. I would like to take a minute to note that these high 20s adjusted EBITDA margins are in line with our 2025 long-term targets set during our Investor Day in 2021. So we're almost two years ahead of schedule in terms of achieving these results. Book-to-bill remains on track and finished in line with expectations at 0.94 times. Consistent with previous guidance, we anticipate a book-to-bill of approximately one times for the year. As a reminder, we typically see a book-to-bill of above 1 in the first half as larger longer-cycle orders are placed and below 1 in the second half as those larger longer cycle orders are shipped. Organic orders came in line with our expectations, down 8.7% as we are comping high teens organic orders growth from Q3 last year. Therefore, it is good to highlight that on a two-year stack for the third quarter, ITS organic orders have grown 8%. Moving to the product line highlights. Product lines continued to show strong momentum on a two-year stack, excluding FX and also excluding the recent acquisitions of SPX Air Treatment and Roots' blowers. On a two-year stack, compressor orders were up low double digits and revenue was up mid-30s. Industrial Vacuum and Blower orders were up mid-teens and revenue was up low 30s. And the Power Tools and Lifting was up low double digits on both orders and revenue. For additional detail information on product lines and regional splits, we have moved the chart which was previously included on this page to Slide 17 in the appendix. Moving to the innovation in action portion of the slide, we're highlighting a new oil-free compressor, recently launched in North America. This product is a great example of Ingersoll Rand leveraging i2V to deliver new products with best-in-class efficiency. This IIoT ready compressor is 14% more efficient than the previous model, and it is 5% more efficient than the competition. Turning to Slide 13. Revenue in the Precision and Science Technology segment declined 5% mechanically. The decline in orders and revenue were primarily driven by the Life Science business, which continues to experience softness in the oxygen concentration and biopharma end markets. We remain positive about the underlying health of the PST business and short cycle orders in the industrial businesses were positive both sequentially and year-over-year. The increases in the short-cycle business were driven by demand generation activities and lead time reductions. Overall, the PST segment remains on track to meet our long-term Investor Day growth commitments as illustrated on the chart on the bottom left-hand side of the page. The three-year organic order and revenue CAGR of 5% and 7%, respectively, are in line with the long-term Investor Day targets of mid-single-digit plus growth. Additionally, the PST team delivered adjusted EBITDA of $94 million, which is up 2% year-over-year despite declines in revenue. Adjusted EBITDA margin was 30.3%, up 120 basis points year-over-year. The continued year-over-year improvement in our adjusted EBITDA margins is driven primarily by price cost improvements and synergy delivery on acquired businesses. For our PSP innovation in action, we're highlighting our YZ brand partnership with the largest natural gas transmitter in Europe, GRDF. During the second quarter of 2023, we executed a 10-year contract with GRDF to provide mission-critical odorization equipment for renewable natural gas or RNG. We're very excited about this partnership and believe that there are plenty of future growth opportunities as the European Union has committed to replacing 20% of lost Russian gas supply with RNG over the next six to seven years. Moving to Slide 14. Given the year-to-date solid performance and continued momentum from backlog, we're once again raising our 2023 guidance. For the full year, total company revenue is expected to grow between 14% and 16%, which is a 200 basis point improvement versus our previous guidance. We anticipate organic growth of 9% to 11%, where price and volume remains split approximately 60/40. FX is now expected to show a slight headwind of approximately 1% on a full year basis. Our revenue from M&A has increased by $60 million to approximately $360 million for the full year. This increase reflects the impact from all completed and closed M&A transactions as of November 1st, 2023. Corporate costs are planned at $170 million for the year. Total adjusted EBITDA for the company is expected to be in the range of $1.73 billion and $1.77 billion, which is up 2% versus prior guidance and up 9% versus our initial guidance at the midpoint. At the bottom of the table, adjusted EPS is projected to be within the range of $2.81 and $2.89, which is up 21% year-over-year at the midpoint. We're also reaffirming a book-to-bill of approximately one for the full year, which puts us in a solid position as we look to enter 2024. Based on our current full year outlook, backlog will finish at near record level highs, and we will end the year with approximately 40% higher backlog compared to the balance at the end of 2021. As Vik had mentioned earlier on the call, interest expense is now projected at $155 million, with a portion of the interest expense savings from the debt restructuring being realized in 2023. No changes have been made to our guidance on the adjusted tax rate or CapEx spend as a percentage of revenue. They remain in line with both initial and prior guidance. On the bottom right-hand side of the page, we included some additional commentary, specifically around Q4. We do expect organic orders to be positive both sequentially and year-over-year. In addition, we anticipate all organic revenue to be positive in both price and volume year-over-year. Incremental margins are expected to be approximately 35% for both Q4 and the full year. Turning to Slide 15. As we wrap up today's call, I want to reiterate that Ingersoll Rand remains in a strong position, and we're proving how resilient we are even in difficult macro environment. We continue to deliver record results and our updated guidance is reflective of our year-to-date performance and ongoing backlog momentum. To our employees, I want to thank you for another quarter of record results. These results show the impact each of you have as owners of Ingersoll Rand. We will remain focused on our commitment to meeting our financial targets and executing our economic growth engine using IRX. As we continue our track record of market outperformance, our balance sheet is as strong as ever. And with our disciplined and comprehensive capital allocation strategy, we remain resilient and have the capacity to deploy capital to investments with the highest return. We remain nimble and continue to monitor the dynamic market conditions and are prepared for the challenges that may come. With that, I will turn the call back to the operator to open the call up for Q&A.

Mike Halloran:

Hey good morning everyone.

Mike Halloran:

So, a couple of questions here. First, could you just put the order trajectory and trends in context for us? I certainly understand some of the life science stuff. But when you look at more of the industrial assets you have, why the confidence in the order recoveries as you look to the fourth quarter? Are you seeing any signs of software that points to the portfolio? And how do you think about the underlying momentum of the business as we look in 2024?

Mike Halloran:

Thanks for that. And then on the M&A side of things, I certainly appreciate all the color you gave on the slide on LOIs and funnel and everything like that. My question more is, have you seen any change in tone with the people you're interacting with from an interest rate perspective, lack of visibility on maybe where the demand picture is? Does that help to hurt the thought process and the conversations? And maybe just some thoughts on the sentiment around the people you're talking to and how you should think about close rates?

Mike Halloran:

Great. Really appreciate it. Thank you.

Operator:

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

Vik Kini:

Yes, Julian, this is Vik. I'll take that one. I think you're spot on both accords. In terms of the operating leverage, we've indicated whether it be Q4 or full year, and we've kind of been holding pretty steady to this, that mid-30s, call it, roughly 35% incrementals range is where we expect to operate in. And that's very consistent with I think where you've seen us historically, ITS maybe slightly on the higher side, but we think a mid-30s range is right kind of where we would expect to play, not just now, but on the go forward as well. And then in terms of the pricing side of the equation, yes, obviously, you've seen much more elevated price realization over the last few years. But quite frankly, you've seen a lot of that now starting to get comped and now you're falling into a much, I'd say, more normalized lower single-digit realm. And we would expect that kind of 1% to 2% net price to be a good proxy as we move into 2024. So yes, I think you're spot on, on both.

Vicente Reynal:

Sure Julian. So maybe a couple of things I'll say too as well. So when you think about the PST, think about it as -- even when you exclude the life science business, PST on 10 out of the 11 past quarters has been positive on organic orders and actually all organic revenue. So that tells you kind of the good strength of the rest of the PST segment. I mean clearly, the life science, which is roughly about a quarter of the PST has been on this kind of situation with biopharma, but also oxygen concentration. And the life science business has been pretty negative organic order growth momentum for probably the past six quarters. So it's been now a little while, while the non-life sciences has been positive. So, yes, I mean, we're experiencing these challenges that others have indicated on our life sciences. I mean, I think the way we think about it is that for us, biopharma, yes, we have some exposure. But it's not the biggest piece of our life science end market exposure within the PST. The biggest exposure for us is really oxygen concentration. And the oxygen concentration, when you think about it, really a great acceleration during the COVID days, and is the one that we saw building into negative, more pronounced earlier than even the biopharma. So it was almost like a leading indicator for us. So, as we kind of go here into the fourth quarter and maybe in the first half of next year, we see that more so next year maybe an uptick, not in a V-shape, but continue doing better from an oxygen concentration side of the business. So, we continue to think that PST, as even you saw on that segment slide, I mean, PST CAGR growth organically, revenue and orders momentum continues to be a segment that we'll see that mid-single-digit plus over the cycle and over time. I mean, it's with great characteristics on continuing to improve in that. So Again, I don't think it's going to be a V-shape, but even if it's a V-shape, it's not one that -- again, we don't have that big exposure into biopharma.

Operator:

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

Vicente Reynal:

Morning.

Vicente Reynal:

Yes, I think Jeff, that's exactly what I was trying to refer to there is that we're seeing definitely before if you remember a few quarters or even last year, we spoke a lot about a lot of these kind of large projects that were being in conversations. And now we're seeing definitely the release of some of those funds. And so yes, so that's what's giving us a bit of a higher level of confidence in terms of how the long cycle funnel continues to build in a company that gives us a good level of visibility, I'll say, not only Q4 but also as we go into 2024.

Vicente Reynal:

Yes. So, that's right. I mean we said on the call that we -- and the funnel continues to be really strong and mostly bolt-on in nature, but there's a couple that are above $1 billion purchase price. And I'll say that those are very well in line with our M&A strategy. We should not think about it as being a third leg of the company. For competitive reasons, we don't want to kind of get into a lot of details, but we feel very comfortable with kind of even where we are from a balance sheet perspective and being less than one time on our net debt to adjusted EBITDA ratio. It actually puts us in a very strong position to move forward with this transaction. But yes, we're very excited with how the M&A funnel continues to build and what we see in terms of getting things executed here over the next couple of quarters.

Vicente Reynal:

Thank you.

Andy Kaplowitz:

Hey, good morning everyone.

Andy Kaplowitz:

Vicente, can you give us more color on what you're seeing by geography? I think you've been very active in really generating market share gains in your own demand in regions such as China and Europe. Are you confident for instance, that Chinese compressor growth will remain positive? And obviously, I think EMEIA compressor orders turned down, but I don't think you have big exposure to Germany, but how are you thinking about EMEIA as well?

Andy Kaplowitz:

And Vicente, maybe just following up on that. As the environment has been normalizing and interest rates are up here a little bit at least in the US, your focus on energy efficiency and sustainability through your products, how do customers -- when you have conversations with customers, how do they balance sort of maybe higher cost of financing versus your ability to provide them energy efficiency and sustainability, that's still trumping the higher cost?

Andy Kaplowitz:

Appreciate it.

Rob Wertheimer:

Thank you. Just to kind of follow up on a couple of those comments because I think what you've done in China has been impressive and maybe increasingly so. Is the market in China weakening? Do you have any sense of the outperformance gap that you've been able to deliver, as it's not widening the continued growth in the market that's kind of blown up a few results this quarter is great? And have you seen a competitive response? And if I may, Vicente, your comments on New York are relatively constructive. Are they meant to reflect IRX and how you're generating better orders in a softening market? Or are you really just not seen softening?

Rob Wertheimer:

Okay. Thank you.

Nigel Coe:

Thanks guys. Good morning. A couple as well. You covered a lot of ground. On PST, maybe could you just remind us after this, obviously, this correction where is biopharma as a proportion of that segment now? And then on the fourth quarter in PST, I think we're assuming a minus 5% to, I think, low to mid-single-digit growth there. I think the step up from Q3 to Q4 is a bit heavier than normal. So just wondering what you're seeing near term driving that improvement?

Vik Kini:

Yes. And I think your second part of your question was the sequential movement from Q3 to Q4?

Vik Kini:

Yes. Yes, I think we do expect to see, what I'll say, a slight nominal uptick from Q3 to Q4. I would remind you that this business doesn't, I would say, have a tremendous amount of seasonality comparatively speaking to other businesses. It's a relatively consistent quarter to quarter. But that being said, I'd say a combination of a couple of things. One, still continue to have a relatively healthy backlog, and that is reflected in terms of what we expect to ship in Q4 as well as Vicente indicated, relatively healthy and good, strong momentum on the, what I'll call, the industrial side of the business, where you continue to see good order intake in Q3, and we would expect to see that continue into Q4. So again, for those reasons, we would expect to see a slight nominal uptick from Q3 to Q4. I'd say relatively consistent to what you've seen historically.

Vicente Reynal:

No, they're property sourced. I mean they are ones that we have been cultivating for quite some time.

Vicente Reynal:

Yes, thank you.

Joe Ritchie:

Hey guys, good morning.

Joe Ritchie:

Hey. So just a lot of color today. Thank you. Just as you're kind of thinking through the book-to-bill and the order rates as you head into 2024, so is the expectation then that in the first half of 2024, we would expect a book-to-bill in IPS to be above one again, orders to continue to expand just based on what you're seeing today in your MQL?

Joe Ritchie:

Okay, great. And then maybe just a follow-up to that. Are you guys like hearing any concerns around projects pushing out a little bit to the right, just given what the rate environment looks like today and there's been a -- there's been, I think, a lot of concern in the market with certain end markets, at least like seeing projects push to the right, like the renewable sector. I'm just curious what you're seeing specifically in the conversations that you're having with your customers?

Joe Ritchie:

Okay, great. Thanks guys.

Operator:

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

Vicente Reynal:

Good morning.

Vicente Reynal:

Hey Joe, it's an interesting question. I -- again, and also maybe a few weeks ago, we were actually -- we were together with our team -- our demand generation team in Poland where we had a long week session, particularly thinking and looking at what are we seeing today and what do we expect to see in 2024? And how do we position the next level of demand generation activities to really position us in good strength as we go into 2024? So, all of that work is undergoing. I can tell you that -- the one level of detail, I'll tell you, as you kind of double click on that is that it varies region-by-region and even country -- in countries within the region. Like for example, in Mainland Europe, what we might be doing in France is very different from what we might be doing in the UK. And a lot of that is driven by what we're seeing at the micro level. So that's the level of detail that we undergo and we, as a team, kind of put together to really understand those best growth vectors that we're seeing at the micro level versus not keeping it at the macro, which if you do it at the macro is, you're going to get a few products wrong. So, that's the exciting piece. As a team, we kind of get together, and we feel that we're in pretty good momentum here to start 2024 in a good shape.

Vicente Reynal:

Yes. Joe, I would say that right now, ROIs -- and again, it could vary by region, but we're seeing ROIs between 12 to 15 months. So it's a really great payback, again, driven by a combination of energy efficiency, but also driven by higher energy costs. So, I think it's just one of those that we're driving really hard. And customers, when they see a payback of 12 to 15 months or call it, less than two years and combine that with the sustainability and what many of them had to do with Scope 1 and Scope 2 is the other kind of great factor that gives us a great tailwind.

Operator:

Your next question comes from the line of Chris Snyder from UBS. Please go ahead.

Vik Kini:

Yes. Sure, Chris. What I would probably tell you here is we kind of view it as probably, frankly, a bit of a tighter spread than that. But if I take it by the two components, and maybe I'll talk kind of year-over-year based on the guide here. Like we said, we do expect to see positive organic growth that includes across both segments, starting on the ITS side. If you're thinking, the guide would imply something in the range of roughly approximately 3% organic growth year-over-year. Again, given the pricing momentum we've seen as well as an expectation of organic volume growth, you can probably think of it as roughly speaking, two-thirds price, one-third volume. And I think I would fall back on kind of exactly what we said all year is that if there's kind of an upside opportunity in the context of the guide and as we think about Q4, it would really be that organic volume side of the equation, particularly on the -- I'm sorry, on the ITS side, where again, backlog continues to remain at effectively record levels. On the PST side, I'll go back to kind of some of the commentary we made earlier here. Again, continue to expect to see organic -- positive organic growth, probably a little bit more of a pricing tailwind comparatively speaking to what you've seen in ITS. And I would just really frankly attribute that more so to what we've said over the course of the last one to two years. ITS probably got out a little bit quicker than PST on the pricing front. And as such, now PST probably has a little bit of a longer-lasting tail on the pricing side of the equation. But again, those would be kind of the dynamics we would expect. But again, we would expect to see positive on both sides of the equation effectively falling at the midpoint of the guide as you saw us make in the prepared comments.

Vik Kini:

Yes, I would actually say it's probably a function of both. So for example, if you go back to last year, we acknowledged and you heard Vicente say in the prepared comments, Q3 was kind of a peak from an orders perspective in the context of some of these longer-cycle orders, some biogas orders, some things we saw last year that created that tough comp, right? And we did see -- we even indicated last year that think about it more on a second half basis, where you saw Q4 orders kind of normalize comparatively speaking to Q3. Now you're kind of facing the other side of that equation. So obviously, very tough comps in Q3, which we acknowledged. You saw that kind of play itself out. And now as you think Q3 to Q4, I think a combination of consistent, stable kind of MQLs, stable demand patterns, some of the longer cycle dynamics that Vicente spoke to. I think that sets up for what we're expecting to see in terms of the positive trajectory, both from Q3 to Q4 as well as on a year-over-year basis. Is there some degree of seasonality that is particularly a little bit more on the ITS side? Yes. I guess, obviously, with some of the other noise, you haven't necessarily seen that as prevalent, particularly in the last few years. But I wouldn't speak to any dramatic seasonality of no point itself out this year, whether it be ITS or PST.

Operator:

Your next question comes from the line of Nathan Jones from Stifel. Please go ahead.

Vicente Reynal:

Yes. Adam, I would say, again, given the highly customized nature of our products, there's really no material risk on the destocking that serves -- that kind of serves really well for the ITS segment. And for the PST segment on those businesses that kind of sell through distribution, we monitor really closely the sell-in and the sell-through or the sell-out activities to ensure that we prevent our customers from getting into an overstock situation. And we -- we have been doing this that way for probably -- I mean, we have data points over the past five years to really have a good view as to what's going on in the distribution channel.

Vicente Reynal:

Sure. So you're absolutely right that the PTL business has really done incredibly well. And to point out, when we acquired Ingersoll Rand, PTL came in with mid-teens EBITDA margin and now it's pretty close to that ITS kind of blended average kind of get getting to that point. So great improvement while still growing the business. The real nature of a lot of this performance has really been new product introduction. So, the team has done a really great job of reinvigorating new product. And I think the exciting piece here is that as we look into 2024, they're going to be launching a next-generation set of tools as well as lifting mechanisms that we think could continue to see some good performance.

Operator:

And we have no further questions in the queue at this time. I will turn the call back over to Vicente for closing remarks.

Operator:

This concludes today's conference call. Thank you for your participation and you may now disconnect.

Operator:

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

Vicente Reynal:

Thanks, Matthew, and good morning to all. I would like to begin by thanking and acknowledging all of our employees for their hard work in helping us to deliver another record quarter in Q2. Our employees continue to deliver on our commitments, despite the constantly changing macroeconomic environment, and consistently exemplify our purpose while thinking and acting like owners. I would also like to welcome, our new employees from our recent acquisitions. Together, we have a great opportunity to build upon our strong complementary brands, products and capabilities, providing customers and the industry with a broader spectrum of solutions. Beginning on slide 3, fueled by our competitive differentiator, IRX in the second quarter, we delivered double-digit growth in revenue, adjusted EBITDA, adjusted EPS and free cash flow. We recently published our 2022 sustainability report, where we yet again delivered industry-leading results, while remaining on track to meet our 2030 sustainability goals. Finally, based on our continued robust performance in Q2, we're once again raising our 2023 full year guidance. As we move to slide 4, our economic growth engine is the key, to how we deliver compounding annual results. During our last Investor Day in Q4 of 2021, we presented this model and highlighted our organic, inorganic and quality of earning growth enablers. We remain committed to our strategy and our long-term Investor Day targets outlined in this page. On the next slides, I will provide you with deeper insights into our organic initiatives, which are centered, around product innovation and innovative value also known as i2V. In addition, we will provide an update on our progress towards our inorganic goals. Turning to slide 5, we start with our organic growth initiatives. Here, we have some examples of how in China, we have leveraged products localization as well as i2V to drive organic growth. On the left-hand side of the page, we show how localization has created new product offerings and enabled channel expansion all with a focus on high-growth sustainable end markets. Since the Gardner Denver and Ingersoll Rand merger, our blower and vacuum product lines have grown organically at a 17% CAGR. On the right-hand side of the page, we have an example of organic growth through the combination of recently acquired M&A and i2V. As you can see in the pictures at the bottom right-hand side of the page, the Asia Pacific team conducted a turndown event with legacy products, recently acquired M&A and competitive technologies. The outcome of that turndown event is the development of a new oil-free screw vacuum pump. This new product will expand our addressable market by over $350 million, and will go from development to launch in approximately six months. Next, on Slide 6, M&A continues to be at the forefront of our capital allocation strategy. We are thrilled to highlight our recently signed M&A deal Roots. This iconic Roots brand is a leading provider of low-pressure compression and vacuum technology. This brand is synonymous with blowers in the same way that clinics and Bandaid are recognized in consumer markets. We're very excited to acquire this iconic brand, which has been in business for almost 200 years. The acquisition also expands our capabilities in both low-pressure technology and centrifugal technology. And this technology is a critical component in the process of green steel manufacturing. Our M&A funnel remains strong. And as of today, it continues to be over five time larger than it was at the time of the R&D. We currently have seven transactions at the LOI stage. And more importantly, we have several other transactions in process, which are close to the LOI stage. Based on acquisitions to date, the seven transactions under LOI at our current M&A funnel, we are reaffirming our commitment to an additional $200 million to $300 million in annualized inorganic revenue to be acquired in 2023. On Slide 7, we recently released our 2022 sustainability report, showcasing the commitment and results of our strategic imperative leads sustainably. We have made significant progress in establishing ourselves as a top quartile ESG company by leveraging our competitive differentiator, IRX to deliver results in a very short period of time. In fact, we have received several industry-leading sustainability acknowledgments of our efforts, including being named to both the Dow Jones Sustainability World Index and the Dow Jones Sustainability North America Index. Ingersoll Rand was ranked as the number one performer in the IEQ machinery and electrical equipment industry in North America and number four globally in 2022. As a very close 2023, Ingersoll-Rand received an ESG risk rating of low at 12.8% from Morningstar Sustainalytics. We also received an ESG rating improvement to AA in 2023 from MSCI and ranked as a leader among 47 companies in the industrial machinery category. More important, we're also leading the way in the social aspect of ESG with our employee ownership model. We believe employee ownership creates economic opportunity for our employees and their families while driving increased employee engagement as our long-term shareholder. To that end, we have awarded approximately $275 million since 2017 in equity to our employees, employees that are not already on the management equity program. This has increased to over $660 million in value as of June 30, 2023. We will continue to offer our ownership works program that grant equity to all new employees after the 1-year anniversary. Our employees are a critical element of our business and making life better for them begins with opportunity. Through their engagement and commitment, we are on track to meet our 2030 sustainability objectives. With this, I'll turn now the presentation over to Vik to provide an update on our Q2 financial performance.

Vicente Reynal:

Thanks, Vik. On Slide 11, our Industrial Technologies and Service segment delivered strong year-over-year organic revenue growth of 14% with volume growth slightly outpacing pricing. Adjusted EBITDA increased 29% year-over-year with an adjusted EBITDA margin of 27.4%, up 200 basis points from the prior year with an incremental margin of 38%. We continue to see solid demand for our products with organic orders up 8% and a book-to-bill of 1.05. Note that on a two-year stack, ITS organic orders have grown 19%. Moving to the individual product categories. Each of the figures exclude the negative impact of FX, which year-over-year was approximately a 1.5 percentage point headwind across the total segment on both orders and revenues. Starting with compressors, we saw orders up in the low double digits. We continue to see oil free product orders outpace oil lubricated products. Orders were up low double digits in the Americas, with North America also up low double digits, demonstrating that we continue to see momentum from secular trends around ESG, on-shoring and near-shoring as well as continued investments on energy savings. EMEIA demand continued to be above market with orders up high single digits. The Asia Pacific team continues to deliver a great performance with order growth in the mid-teens, driven by continued solid execution from our team in China where they saw orders up in the low 20s. Today, we showed on Slide 5, an example of how the team in China continues to outperform the market conditions with our own self-help initiatives. Vacuum and blower orders were up mid-teens and every region saw positive orders with good strength from Europe. Orders in the power tools and lifting business was up low single digits. Moving now to the innovation and action portion of the slide, we're illustrating an oil free hydrogen compressor recently launched in EMEIA. This product is a perfect example of how we continue to focus our portfolio on high-growth, sustainable end markets with region-for-region manufacturing. The EMEIA team collaborated with a clean energy tech startup in the Netherlands to develop and build a system for our innovative hydrogen process, and the first unit was shipped in July. Turn to Slide 12. Revenue in the Precision and Science Technology segment grew 5% organically. Additionally, the PST team delivered adjusted EBITDA of $90 million, which was up 16% year-over-year with incremental margins of 66%. Adjusted EBITDA margin was 29.2%, up 240 basis points year-over-year. The year-over-year improvement in adjusted EBITDA margin is driven primarily by price cost improvements, synergy delivery on acquired businesses like Seepex, and the impact of China lockdowns in the second quarter of 2022, which did not repeat. Organic orders were down 10% year-over-year with a book-to-bill of 0.95 times. It is important to note that the book-to-bill was one-time for the first half of the year. The primary driver of the organic order decline related to larger frame orders not repeating in the life science businesses, as well as the expected decline of longer cycle orders in the Agritech platform. Our book and ship business was solid, and we believe that the core business within PST remains very healthy. For PST innovation in action, we're highlighting our new peristaltic pump technology that is used for water treatment, industrial and life sciences market. This product innovative design provides a robust alternative for chemical dosing and transfer applications. The products are IoT-ready and complement our already strong portfolio of products for water treatment and chemical applications offering customers the opportunity to choose the best technology for each application. Leveraging this technology across both Albin Pump and LMI brands, we continue to execute our multi-brand, multi-channel strategy while expanding our addressable market by over $250 million. Moving to slide 13. Given the solid performance in the first half and continued momentum from backlog, we're again raising our 2023 guidance. As you may recall, during Q1 earnings, we guided an anticipated impact of approximately $20 million of adjusted EBITDA moving out of Q2 and into the back half of the year due to the cybersecurity incident that we experienced in late April. As Vik mentioned earlier, this risk was mitigated within the quarter and no significant revenue or adjusted EBITDA is now expected to have been pushed into the back half. We have included some additional commentary on the bottom right-hand side of the page, outlining the increase in full year guidance incorporating the impact from the Q2 outperformance and the improvement in organic growth expectations in the second half of the year. For the full year, total company revenue is expected to grow overall between 12% and 14%, which is a 200 basis point improvement versus our previous guidance. We anticipate organic growth of 8% to 10%, where price and volume is split approximately 60-40. FX is now expected to be a slight headwind, however, approximately flat on a full year basis. Our revenue from M&A has increased $30 million to approximately $300 million. This increase reflects the impact from all completed and closed M&A transactions as of August 1, 2023. Corporate costs are planned at $165 million and will be incurred relatively evenly per quarter throughout the year. Total adjusted EBITDA for the company is expected to be in the range of $1.69 billion and $1.74 billion, which is up 2% versus prior guidance and up 7% versus our initial guidance. At the bottom of the table, adjusted EPS is projected to be within the range of $2.70 and $2.80, which is up 17% year-over-year at the midpoint. No changes have been made to our guidance on the adjusted tax rate, total interest expense or CapEx spend as a percentage of revenue, all remain in line with both initial and prior guidance. Turning now to slide 14. As we wrap today's call, I want to reiterate that Ingersoll Rand remains in a strong position. We continue to deliver record results and our updated guidance is reflective of our Q2 performance and ongoing backlog momentum. We remain nimble. We continue to monitor the dynamic market conditions, and we're prepared for the challenges that may come. To our employees, I want to thank you for an excellent first half of the year. These results show the impact that each of you have as owners of the company. However, we're still a long way to go, and we need to remain focused on our commitment to meeting our financial targets and executing our economic growth engine through the use of IRX. Thank you for your continued hard work, resiliency and focus action. As we continue our track record of market outperformance, our balance sheet is as strong as ever. And with our disciplined and comprehensive capital allocation strategy, we remain resilient and have the capacity to deploy capital to invest with the highest return. With that, I'll turn the call back to the operator and open the call for Q&A.

Michael Halloran:

Hey, good morning, gentlemen. So can we just talk about how the underlying trends you saw through the quarter, maybe any sequential commentary and a focus on where you saw any changes positively or negatively, or is the demand environment essentially cadencing how you would have expected -- on an underlying level?

Michael Halloran:

And on the PST side, can you just put those orders in context a little bit. I certainly understand the Agritech side and some of the larger projects, orders not repeating. But it sounds like things are healthy when you exclude those 2 pieces. And maybe a little bit of help on how you expect the order trends to track from here and recovery curves in some of those markets?

Michael Halloran:

Thanks, Vicente.

Operator:

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

Vicente Reynal:

Yes. Julian, for total Ingersoll Rand on revenue and adjusted EBITDA margin Q3 looks a lot like Q2. And I'll say for Q3 on a year-over-year basis, remember that comps get increasingly more difficult. And as we think about the segments, ITS, for example, ITS is expected to grow revenue still at low double digit, including the impact of M&A, and as a reminder, I mean, think about that tough comp where Q3 of last year, we grew 19% organically. So that's kind of what we talk about those tough comps. But we still see a good line of sight to about 100 basis points of margin expansion in ITS. And PST is expected to grow mid-single digits. And as a reminder, that's on top of 20% growth in Q3 of 2022 and margins to be expected back again into that 30% level of EBITDA.

Vicente Reynal:

Yes. Julian, yes, I mean, clearly, we don't specifically guide on orders. But again, as a reminder, our Q3 prior year is probably 1 of the toughest comps for orders. As I recall, Q3 last year was roughly 14% organic order growth momentum, so very solid. In terms of the backlog, I'll say, we do anticipate backlog to drift down a little bit in the back half as we mentioned in the past, I mean, the normal cadence for orders is typically a book-to-bill greater than one in the first half due to larger longer projects and booking in the first half has been -- and booking in the second half being kind of less than one due to those larger orders kind of getting shipped most predominantly in the fourth quarter. Having said that, as a reminder, I think the past nine quarters out of 10 quarters, we had a book-to-bill of greater than one, so -- which obviously speaks again to the comps that we're seeing here.

Vicente Reynal:

Thank you.

Jeff Sprague:

Hi. Thanks. Good morning, everyone.

Jeff Sprague:

Hi, good morning. Vicente, can you elaborate a little bit more on your talking about demand in ITS and compressors in particular, you noted reshoring and ESG? I guess on the ESG side, you're pointing to kind of energy efficiency sort of investments and retrofit. But a, is that the case? And b, can you just elaborate a little bit on what you're seeing in those two buckets?

Jeff Sprague:

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

Jeff Sprague:

Great. Thank you.

Operator:

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

Vicente Reynal :

Good morning.

Vicente Reynal:

Yes, Rob, I think there's definitely some in markets that strategically we're going after more pronouncedly than others because we're seeing the growth in those you could think about electric vehicles, battery production, lithium, mining and things like that. But a lot of that, as you very well said too, as well, it kind of continues to change end markets. And I think the ability for us to pivot from 1 end market that has seen some growth to the other end market that are starting to see the spurt of growth, that is what I think is very core to what the team very nimbly is doing. In addition to that, I think what's exciting is the combination of the Gardner Denver and Ingersoll Rand company, where the team in China is leveraging a lot of the kind of, call it, legacy Gardner Denver products of blowers and the vacuums to really accelerate growth. And that's, as you saw on Slide 5, how we see this organic revenue CAGR of 17% on this kind of core product line and technology. So I'll say, yes, the team is firing on all cylinders this morning as I was driving, I was actually chatting with our leader in China. He's actually -- was actually our -- he was with the team at our innovation center in China and doing a review of their new product technologies and he was living super inspire and excited. So again, it's just a good team, solid performance and very happy with how the team continues to navigate this tough environment in China.

Vicente Reynal:

Thank you.

Andy Kaplowitz :

Good morning everyone.

Andy Kaplowitz:

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

Andy Kaplowitz:

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

Andy Kaplowitz:

Appreciate it guys.

Operator:

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

Vik Kini:

Good morning, Nigel.

Vik Kini:

Sure. Yeah. So Nigel, I think the way you've described Q3 is correct. If you think about ITS as Vicente earlier said, I think ITS will look fairly comparable to Q2. Now that being said, that still would embed nice margin expansion on a year-over-year basis. And we would expect on the PFT side for margins to get back to that 30% level, specifically in Q3. Now on the Q4 side of the equation, whether you're looking from a total company perspective or the individual components, I think it's actually going to be fairly comparable to what you've seen historically. Seasonally, it is the strongest quarter in the year. That's no different. So you will see a slight seasonal uptick from Q3 to Q4. But there is incremental margin expansion included in the Q4 guide, I would say it's not dramatically different than our prior guide in that respect. And the one thing to probably note here as we look and we got some of the questions about it earlier in terms of the cadence, kind of, like what we said before, we're still, I think, continue to remain prudent on the back half expectations, particularly Q4 on the volume side. And I think we would still acknowledge that's probably the single source of potential upside to the guide as we sit here, thinking specifically about organic volume in Q4.

Vicente Reynal:

Yes. Nigel, I would say that the industrial vacuum is kind of what we call rough vacuum when you look at the total market segmentation of that. And I will say that we have a more bigger spectrum of technologies, whether it's crew vacuum, rotary vein, liquid ring. So, we will say that we have not only great technologies, but also good brands. In terms of what we're seeing in the market, I'd say stability from what we're seeing. You could argue that sometimes the industrial vacuum plays slightly different where the industrial compressors will pay. So industrial vacuum many times will play in chemical processes or petrochem and things like that, things of that nature. But in our view, we're very happy and very pleased with what the team again continues to do from my self-help initiative here on driving new technologies. I mean we spoke about some of the technologies, again, not only on that slide five on what China team is doing. But now there's also new technologies that the team in Europe are launching to as well to start capturing even more share. So, I'll say that very, very pleased with the performance of the team is driving.

Operator:

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

Vicente Reynal:

Good morning Joe.

Joe Ritchie:

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

Joe Ritchie:

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

Joe Ritchie:

Awesome. Thanks, guys.

Operator:

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

Vicente Reynal:

I mean, I think, Chris, note that our MQLs are demonstrating or showing. We're -- even as we look here into the month of early days in July, I'll say that there continues to be that sustained momentum that we were seeing in the second quarter from an MQL perspective. So noting that we will highlight of specifically end market or maybe, as you said, regional view that has seen a dramatic decline. Again, I think, it's tough comps as we go into the third quarter. I think if I remember the ITS, America teams, I mean, had really hefty double-digit like close to 30% of growth in orders Q3 of last year. So I mean those are the difficult comps that we talk about. But -- having said that, I mean, I think when you think about it in perspective, we have been posting double-digit revenue organic growth for like 9 out of the 10 quarters. So that's kind of what we talk about tough comps. But again, the team continues to perform, execute and control what they can control.

Vicente Reynal:

Yeah.

Vik Kini:

Yeah. Chris, I think right now, our expectation is fairly consistent with what we've kind of messaged before. And you're absolutely right. When we came into the year, we did expect backlog to be largely flat as we look towards the end of the year. But we did explicitly say that, book-to-bill above one in the first half build backlog and then you'd see that kind of drift down, I think, as Vicente mentioned earlier in the second half of the year. And that's very consistent with, I'd say, our typical cadence, our typical seasonality, and based on what we're seeing now, given the level of backlog, but then also kind of the expectations for what we're seeing in the second half of the year. I don't think anything changed in that respect. To the point that was said before, I do think there continues to be an opportunity on the organic volume side, particularly probably more in the Q4 side of the equation, maybe as the upside to guide. But in terms of backlog being flat year in -- at the end of the year compared to where we started, I think that's still a fairly good expectation at this point in time.

Operator:

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

Vicente Reynal:

Good morning.

Joe O'Dea:

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

Joe O'Dea:

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

Joe O'Dea:

How far out it is?

Joe O'Dea:

Very helpful. Thank you.

Operator:

[Operator Instructions] Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Your line is open.

Vicente Reynal:

Good morning, Nicole.

Vicente Reynal:

Yeah, Nicole, I'd say continues to see good momentum. But again, I think I always like to put it in perspective in terms of the self-help that we're driving ourselves. It doesn't mean that the total market is actually seeing the same momentum as we're seeing. I mean we're definitely outgrowing the market by a lot of the focus that we're doing on these kind of vectors of growth that we're finding and whether it is in France, going after -- how can our technologies help with nuclear facilities and revamping that or in Germany. How -- whether LNG or the hydrogen push is actually helping us to refocus some of the technologies in that. So we get kind of variance on that kind of micro level for us to be able to decipher the best way for achieving that growth. So that's why we think that the view that we put out in this economic growth engine on how we kind of follow secular trends and leverage things like demand generation obviously, IoT, which we're very excited in terms of accelerating. We've been feeding a lot of new machines in the field and now how we're going to harvest all that packaged care and recurring service work that we can do because we're connecting machines. So there's multiple of places where we can find good growth that as you kind of add all these little buckets of growth kind of create a meaningful good growth momentum for us.

Vicente Reynal:

Yeah. Thank you, Nicole.

Vicente Reynal:

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

Operator:

Good morning and a warm welcome to the Ingersoll Rand First Quarter 2023 Earnings Conference Call. My name is Candice and I'll be your coordinator for today's call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question-and-answer at the end. [Operator Instructions]. I would now like to hand the conference over to our host Matthew Fort, Vice President of Investor Relations. Please go ahead.

Vicente Reynal:

Thanks, Matthew, and good morning to all. I would like to begin by thanking and acknowledging all of our employees for their hard work in helping us to deliver another record quarter in Q1. Our employees consistently exemplify our purpose while thinking and acting like owners to deliver on our commitments despite the constantly changing macroeconomic environment. Start on Slide 3, in Q1, we delivered double-digit adjusted EBITDA and adjusted EPS growth with strong free cash flow generation, which is up over 350% year-over-year. Fueling this performance is our competitive differentiator IRX. We continue to align to mega trends and high growth, sustainable end markets to deliver on our Investor Day commitments of achieving sustainable revenue growth. Based on the solid Q1 performance, we're raising our 2023 full-year guidance. Turning to Slide 4. Our economic growth engine continues to deliver compounding annual results. During our last Investor Day in Q4 2021, we presented this model and highlighted our organic, inorganic, and quality of earnings growth enablers. We remain committed to our strategy and our long-term Investor Day targets outlined on this page. On the next two slides, I will provide you with deeper insights into our organic and inorganic initiatives. On Slide 5, we start with our organic growth initiatives. So let's dive into how we approach the megatrends of sustainability, digitization, and quality of life. Demand Generation Excellence or DGX, which is a tool within IRX helps us to capture above market growth. Here we have six examples of initiatives that we launched during the first quarter of 2023. Important to note that these six are only a few examples out of hundreds of these initiatives we execute every quarter. I'll review a few of these examples shown on the page. Within the sustainability megatrend, we have a digital campaign example, which is focused on carbon capture system builders and integrators. This campaign generated a global supply agreement with a key carbon capture player and has also driven a $200 million increase funnel with no new product development required. For digitization, we have a great example on how we utilize IIoT to grow our aftermarket business; leveraging our IIoT connected equipment machine alerts are set up to trigger e-mail notification to our customers and Ingersoll Rand service contracts when service is needed. The result of this initiative was increased orders on new contracts for preventive maintenance. And this initiative is in its early stages and we plan to expand this approach to other key triggers in the future. Finally, at the bottom of the page, we have a great example within the quality of life megatrend. We launched a social media campaign tailored towards small farms and agriculture that increase our marketing qualified leads by 96% for Dosatron dosing pumps. These are merely a few examples of the tailwinds associated with megatrends and how we deploy our organic growth enablers to deliver compounding annual results. On the inorganic initiatives, we wanted to provide an integration update of one of our larger acquisitions since the merger to Seepex. In less than 15 months, the business has expanded adjusted EBITDA margins by over 1,000 basis points, and this margin expansion has come from a balanced approach of gross margin expansion and SG&A synergies. When we acquired this business adjusted EBITDA margins, we're in the mid-teens and we expect to deliver low-30s in 2023, while accelerating organic growth. And this speaks to the power of our M&A approach on finding phenomenal companies and then integrating them into our economic growth engine. With new acquisitions, we're not only focused on cost improvements, but also maintaining focus on growth. For Seepex, we accelerated organic growth across three levers. First, from the Seepex acquisition came a great IIoT technology, which we now have expanded and scaled across the entire PST segment. The second lever is combined Seepex technology with Ingersoll Rand existing channel knowledge to access lithium ion battery customers, and we were able to bring a mission critical product to market in less than nine months, while expanding our addressable market by over $250 million. Finally, we have also integrated Seepex pump and compressor technology to accelerate product differentiation within the marketplace by combining an air compressor with Seepex progressive cavity pump, this patented technology enables our customers to better transfer materials with controlled airflow and improved energy efficiency. As we move to Slide 7, M&A continues to be at the forefront of our capital allocation strategy. We're pleased to highlight one closed transaction and one signed M&A deal. These acquisitions add both market leading products and technologies, while accelerating our addressable market with closed adjacencies. Let me walk you through these two deals. First, Trace Analytics, which is a leading provider of lab-based testing and sampling for compressed air technologies. This acquisition has strong recurring revenue in air purity and quality across attractive markets such as life sciences, food and beverage, and pharmaceutical. Next is Gaopeng Vacuum, which is a well-established oil-free vacuum pump manufacturer that expands our product portfolio in a very attractive and growing sustainable end markets across Asia-Pacific. Our M&A funnel remains very strong, and as of today, it continues to be over 5x larger than it was at the time of the R&D. We currently have five transactions at the LOI stage, and more importantly, we have several other transactions in process which are close to the LOI stage. Based on acquisitions to-date, the five transactions are under LOI and our current M&A funnel; we are reaffirming our commitment to additional $200 million to $300 million in annualized inorganic revenue to be acquired in 2023. Moving to Slide 8. While our results have been strong and we continue to see orders and backlog growth, we do acknowledge that the market is in a state of constant change and we need to remain agile and nimble in order to respond. Over the past few years, we have transformed our portfolio to be more resilient than ever. We have a large, recurring, and highly profitable aftermarket business that accounts for approximately 35% of our total revenue, while growing at double-digits. In addition, we have divested almost $2 billion of highly cyclical assets in Club Car and high pressure solutions, and in turn reinvested that into acquisitions that are better aligned in high growth sustainable end markets. We believe that this, along with a differentiated long cycle and better geographically balanced portfolio, will ensure a more durable, stable performance in the next slowdown. We also have a proven track record of performance. For example, in 2020, during the global pandemic, we were able to expand adjusted EBITDA margins by 190 basis points year-over-year. As you recall, during the pandemic, we immediately deployed merger-related synergies to ensure we were out in front and controlling cost pretty quickly. Also, in 2019, the legacy Gardner Denver Industrial Segment delivered 70 basis points of adjusted EBITDA margin expansion and grew adjusted EBITDA dollars 3% in spite of revenue declining 3% organically year-over-year. We're constantly monitoring for early indicators of an economic slowdown and we remain nimble and ready to act in the event that markets start to suffer. We have highlighted in past earnings calls how we are able to pivot our demand generation activities towards market that are still growing. And with an addressable market of over $45 billion, we believe that there is still plenty of room to take market share. In addition, we have multiple levers to manage adjusted EPS as seen at the bottom right-hand side of the slide. On Slide 9, our commitment to become a market leader in ESG continues and we're very excited to continue receiving positive feedback from the rating agencies on our efforts. In April, Ingersoll Rand received an ESG risk rating of low with a score of 12.8 from Morningstar Sustainalytics. This rating ranks us second in the machinery industry group and places Ingersoll Rand in the first percentile in the machinery industry and six percentile of all rated companies. This is a perfect example of how we utilize IRX for agile execution across all aspects of our business. In this case, we use our own IRX execution process to grow from medium risk to low risk and are now in the top percentile in the industry and regionally. I will turn the presentation over to Vik to provide an update on our Q1 financial performance.

Vicente Reynal:

Thanks, Vik. On Slide 13, our Industrial Technologies and Service segment delivered strong year-over-year organic revenue growth of 24% with volume growth outpacing pricing. Adjusted EBITDA increased 40% year-over-year with an adjusted EBITDA margin of 26.2% up 240 basis points from prior year with an incremental margin of 35%. We continue to see solid demand for our products with organic orders up 10% and a book-to-bill of 1.1. And note that on a two-year stack, the ITS segment organic orders grew more than 35%. Moving to the individual product categories, each of the figures exclude the negative impact of FX, which year-over-year was a 4 percentage point headwind across the total segment on both orders and revenue. Starting with compressors. We saw orders up in the low 20% and we continue to see oil-free products outpace oil-lubricated products. Orders were up high-20s in the Americas, driven by both strong book-and-turn business and large long cycle projects in high growth, sustainable end markets. EMEA demand continues to be above market with orders up mid-teens and the Asia-Pacific team once again delivered a great performance with order growth in the low-double-digits. Vacuum and blower orders were down low-single-digits. As many of you know in this category, we have large engineer to order products like our Nash and Garo product lines. In this case, the timing of a large order in Q1 2022 not repeating was the large contributor of the decline. Our funnel remains very strong and we're not concerned about the Q1 decline at this point. The power tools and lifting business saw its best booking quarter since Q4 of 2014 with global orders up high-single-digits. Moving to the innovation in action portion of the slide, we're highlighting a differentiated carbon capture solution that incorporates three different products within the Ingersoll Rand portfolio of brands. Here, utilizing patented technology, we have partnered with a clean tech innovator to deploy a new system for industrial point-source CO2 capture. The first units are being commissioned and monitored in the U.S. and will include four Ingersoll Rand products in each model. Turning to Slide 14. Revenue in the Precision and Science Technologies segment grew 6% organically. Additionally, the PST deliver adjusted EBITDA of $95 million, which was up 11% year-over-year with incremental margins of 64%. Adjusted EBITDA margin was 30.3%, up 170 basis points year-over-year, and margins were up sequentially from Q4 of 2022. The year-over-year and sequential improvement of, in our adjusted EBITDA margins is driven primarily by price/cost improvements, and synergy delivery on acquired businesses like Seepex. Organic orders were down 2% year-over-year with a book-to-bill of 1.05. Across the PST segment, we did see strong organic order growth from all businesses, with the exception of the oxygen concentration business, which declined approximately $25 million, primarily due to long cycle frame orders received in Q1 2022 that did not repeat in Q1 2023. Excluding the non-repeating oxygen concentration business orders, the PST segment grew mid-single-digits organically. For our PST innovation in action, we're highlighting our new Seepex battery fluid pump. Here is a perfect example of how we leverage our recent acquisitions and existing portfolio to drive product differentiation and organic growth in sustainable end markets. As I mentioned earlier, we combine Seepex technology with Ingersoll Rand existing channel knowledge to access this high growth lithium ion battery customers. The unique progressive cavity design ensures zero contamination, which is mission critical to the production of precise high purity coatings and leveraging IRX, we brought this new product to market in less than nine months and expanded our addressable market by over $250 million. As we move to Slide 15, given the solid performance in Q1, and momentum from backlog, we're raising our 2023 guidance. Total company revenue is expected to grow overall between 10% and 12%, which is a 300 basis point improvement versus our initial guidance. We anticipate organic growth of 6% to 8% where price and volume remain split at approximately 70%:30%. FX is now expected to be relatively flat for the full-year. M&A remains projected at approximately $270 million, which reflects all completed and closed M&A transactions as of May 1, 2023. Corporate costs are planned at $160 million and will be incurred evenly per quarter throughout the year. The increase versus initial guidance is driven by investments for growth as well as the impact of incentive compensation adjustments. Total adjusted EBITDA for the company is expected to be in the range of $1.66 billion and $1.71 billion, which is up 5% versus our initial guidance. At the bottom of the table, adjusted EPS is projected to be within the range of $2.64 and $2.74, which is up 6% versus prior guidance and 14% year-over-year at the mid-point. No changes have been made to our guidance on the adjusted tax rate, total interest expense or CapEx spend as a percentage of revenue. All remain in line with initial guidance. However, I do want to provide an update on a recent development that affects the phasing of the guidance. Late in the evening on Thursday, April 27, we detected and took actions to contain a cybersecurity incident that resulted in a disruption of several of our IT systems. We immediately partnered with external experts to assess, mitigate, and restore these systems. In parallel, we proactively took immediate actions to maintain business continuity and minimize disruption by isolating certain systems and implementing workarounds. We expect to begin restoring the impacted systems to normal operations next week. We do not expect this incident to impact the full-year guidance we just provided on this slide, although it could result in some revenue shifting from our second quarter to the second half of 2023. In fact, as a matter of potency, we have kept the phasing of adjusted EBITDA delivery between the first half of the year and the second half of the year, consistent with our original expectations. This will imply delivering approximately 45% of our adjusted EBITDA in the first half of the year, and 55% in the second half, which generally means that the balance of our adjusted EBITDA guidance raised in addition to the Q1 outperformance will fall into the second half of the year. It is important to note also that the underlying demand environment remains healthy and in line with our expectations. And while our investigation is ongoing, at this time, we're not aware that any confidential customer information was exfiltrated. If we become aware that any such information was ill-exfiltrated, we will make appropriate notification. We remain fully committed to our customers as we diligently work to resolve the issue and restore normal operations in a safe and secure manner. I'm sharing these with you today as part of our commitment to transparency, and because this incident is still under investigation, I cannot provide further details at this time. Turning to Slide 16. As we wrap up today's call, I want to reiterate that Ingersoll Rand remains in a strong position. We continue to deliver record results and our updated guidance is reflective of our Q1 performance and ongoing backlog momentum. We are monitoring the dynamic market conditions and remain very nimble, and we're prepared for the challenges that may come. To our employees, I want to thank you again for an excellent start to the year. These results show the impact each of you have as owners. However, we're still in the early stages and need to remain focused on our commitments to meeting our financial targets and executing our economic growth engine through the use of IRX. Thank you for your hard work, resiliency, and focus actions. As we continue our track record of market outperformance, our balance sheet is stronger now more than ever, and with our discipline and comprehensive capital allocation strategy, we remain resilient and have the capacity to deploy capital to investments with the highest return. With that, I'll turn the call back to the operator and open up for Q&A.

Mike Halloran:

Hey, good morning, everyone. Hopeful all is well.

Mike Halloran:

So can you just help provide some more context on -- on Vicente's comments about the cadence and changing. So I guess twofold, right? I certainly understand the 45%, 55% splits, 1H versus 2H. Any help on the segment details? And then when you think about what the underlying demand would look like, is there any front half back half underlying demand cadence and not necessarily when it shows up in the revenue, but are you assuming anything or basically how are you assuming the underlying demand cadences as you work through the back half of the year?

Vik Kini:

Yes. And Mike, to your first question in terms of phasing and the segment implications as Vicente indicated, we're expecting that whether you look from a total company perspective at adjusted EBITDA or adjusted earnings per share using about a 45%, 55% first half or second half split is generally in line. And I would say the segments should follow a fairly close split to that. The same should be said for corporate, which the corporate spend obviously is pretty ratable over the year in line with our revised guidance. So I wouldn't say that there's dramatic changes in the context of the segments versus the total company. And then as we've indicated before, and I think is still the case, we're continuing to remain prudent in terms of the back half of the year, particularly on the organic volume side of the equation. Just given that, you still don't necessarily have full visibility into the back half of the year.

Vicente Reynal:

Yes. Sure, Mike. I think the good news is that here in the first quarter, we actually saw good resiliency on both kind of the short cycle and the long cycle, which was very good news to us to see that continue momentum on both, which is also the reason why on that shorter cycle why we were able to even out deliver some of the price, right? So in terms of long cycle, we think that the tailwinds of sustainability on ensuring all of that continues to be really front and center. And at least our expectation is that even things like IRA, the Inflation Reduction Act, all that funding still has to come through. We're seeing some early indications funnels look very strong. You saw also a lot of communication activity around carbon capture. So at least on the long cycle side, we think that there should be more to come from that perspective while the short cycle seems to be at least in our case and in our business fairly healthy.

Julian Mitchell:

Yes. Hi, good morning. Maybe a first question, if you could just size the backlog in dollar terms at the end of March. I saw you gave the percentage deltas, but maybe just give us a sense of the dollar scale of the backlog. And then, as we're thinking about the cadence through the year, are we assuming revenues are sort of flat to up slightly sequentially each quarter, and then EBITDA margins are up slightly sequentially each quarter? Is that kind of the main framework for the guidance?

Vik Kini:

Yes. Julian, on the cadence generally speaking, I would say we expect again, I'll refer back to the 45%, 55% split, as Vicente indicated, we do see potential of some revenues shifting from Q2 into the back half of the year as Vicente earlier indicated. But generally speaking here, the way we would think about it is, with the guidance array of the strong Q1 performance and still seeing 35% to 40% incrementals, we do still expect to see margin expansion on a year-over-year basis in each quarter and obviously the second half of the year will as it typically is continue to be the strongest performance both on the revenue side as well as the margin profile.

Brandon McCann:

Hi, good morning guys. This is Brandon on for Josh.

Vik Kini:

Hi, Brandon.

Vicente Reynal:

Yes. Maybe Brandon on the orders, as we said, I mean, I think good momentum, good strength on both kind of the short cycle and the long cycle. If I get your question correctly, I think you were asking about maybe how much was price versus volume.

Vicente Reynal:

Yes. So I think in the first quarter, price and volume is roughly 50:50. As we go into the second -- into the rest of the year, we think it's going to be more like 70:30. And so that kind of give you an indication of kind of how we're thinking about price volume here. In terms of your second question about LNG, hydrogen, are we seeing -- I mean we're seeing definitely some clearly the -- on the long cycle, I'll say maybe more continuation what we see the most is on air separation systems and large call it carbon capture activity. So I think a lot of good momentum on these kind of good sustainability tailwinds that we have been speaking about for now the past few quarters. And so again funnel continues to be pretty strong and -- but like I said on the prior answer, I don't think that we have seen the full scope of a lot of these IRA or other green deal funds come through fruition yet. So that hopefully will give us a good indicator of that more -- a little bit more tailwind here to come.

Rob Wertheimer:

Thank you. I wanted to ask I mean obviously ITS compressor orders are very strong, and you've touched on a couple aspects, but would you qualitatively talk about what is driving that order of strength? I know you have your oil-free, I know you've done a lot on demand generation, but is this mega projects coming through? Is it energy efficiency; is it just general CapEx renewal? Because there's a certainty in the economy and you're seeing really strong orders, so I just wonder if you can give any color around that.

Rob Wertheimer:

Okay. Thank you. And if I may do another one that's a little bit less directly quarterly related, but the battery fluid pump you have on Slide 14, it's Seepex nine months from start to finish on i2V innovative value. I mean, that's fast even knowing how fast you guys move. I wonder if you could give us a quick sketch of just how that looks start to finish and how you -- how that process runs and how it goes so fast. Thank you. I'll stop it.

Operator:

Thank you. Our next question comes from Andy Kaplowitz of Citi. Your line is now open. Please go ahead.

Vicente Reynal:

Yes. Andy, I think definitely price/cost is definitely helping. And as you also alluded the continue acceleration of the M&A bolt-on acquisitions that we have done, that's helping too as well. Seepex being one but even I point out to someone like ADI air dimensions, which again we acquired that at 50% EBITDA margins, and today it's above kind of call it 60%. So again, it's a combination of a lot of the things that we have put in action. So, yes, good price/cost, good synergy execution and the teams as we have said before, we're a little bit delayed on getting things like i2V in place at PST, but that is now ramping up and that's what we get the excitement that there should be more to come here.

Vicente Reynal:

Sure, yes. I think you said it very well. Yes, I mean, I -- so five LOIs now which is obviously less than what we said on the park order, but that's because I mean, we closed some and we departed from some but I think the good news is that we still have a good handful of those at the stage that is right before signing the LOI. So that's why it continues to give us that confidence that we will be able to reach the target that we set and nothing that we're worried about that. In terms of the activity, we continue to see strong momentum activity out in the market. Again, it has to do because of a lot of the sales searching that we do in terms of finding good transactions that could be part of our company. So I think momentum continues to be pretty good on that M&A bolt-on strategy that we have.

Joe Ritchie:

Thank you. Good morning, everyone. Nice to hear and sorry to hear about the cyber issues. The maybe -- can we just try to square some of the commentary on the cybersecurity stuff? So appreciate the color that you gave earlier. I was just trying to size like the -- like sales and EBITDA impact and who knows whether my numbers are right. But my ballpark numbers were call it like roughly a $30 million to $50 million EBITDA impact. So I don't know, maybe a $100 million to $150 million revenue like am I ballpark correct in how much is shifting away from 2Q?

Joe Ritchie:

Okay. All right. That's helpful. Thanks for clarifying. And then -- and then I guess maybe Vicente just is there any concern that that that some of the sales you were expected to ship in 2Q to push out, is there any concern that that that those sales go away? Or do you have high degree of confidence that you'll be able to ship in the second half?

Joe Ritchie:

All right. Great. That's great to hear. And look, you gave a lot of really positive order data across your different businesses. I guess I'll be the one that asks about power tools. It's really nice to see that that pick up a little surprising honestly. So maybe just kind of provide a little bit more color on what you're seeing in that business.

Operator:

Thank you. Our next question comes from the line of Joe O'Dea of Wells Fargo. Your line is now open. Please go ahead.

Vik Kini:

Yes, Joe, I'll start with that. I think obviously when you look at the revised guidance now at the mid-point the 7% organic guide versus our previous guides, which is about 4% at the mid-point, 300 basis points of improvement. And I think the way you could think about it in just broad strokes is about two-thirds of that is driven by the Q1 beat with the other third really coming in the back half of the year. So the answer is yes. We are actually seeing slightly better second half growth than our original guidance would've implied. And as Vicente indicated in his opening comments, we're still seeing a split of approximately 70%, 30% price versus volume. And I think we would also say that at this point in time, we're still continuing to take a prudent view on volume in the back half of the year. Still continues to probably be the biggest source of potential upside. Backlogs are still strong, but like I said before still don't necessarily have full visibility after the back half of the year. So we're going to continue to execute. And if that continues to be a source of upside that's something that we'll execute to.

Vicente Reynal:

Yes. Thanks, Joe for the question. Again on the cost opportunity, absolutely, we see a lot of cost opportunity and as you can imagine, we're leveraging some of our IRX tools to drive a weekly cadence on how we go after we call it price clawback, which is kind of looking at 2019 prices from some of our suppliers and how do we want to get as much as possible as we see some deflationary marketing happen in some areas. Now, I will say too as well, that there's some areas that we see some continued price inflation and reason why we continue to do some pricing activity out in the market. So it's not a -- but net-net we see stability and maybe going down and to your point, absolutely you can expect, I mean, we started this process. I would say maybe a couple quarters ago, going back to suppliers and start doing a lot of what we call reverse auctions through our process. In terms of our customers, I'll say it's a slightly different there, because as you know, our customers, they don't buy our product basically every week or every month. Or I mean, if they buy a compressor today, they're not going to buy a compressor until a few years later down the road. And in many cases, it's configured to the specific order. So it is difficult, I say to compare price to price, so difficult to argue for a price reduction when there's different features and different options that are being selected. So no, I will say as long as we continue to add incremental value to the product with the innovation that we're launching, we should be able to still continue to generate price.

Nicole DeBlase:

Maybe just starting with price/costs. So I know it was positive on a dollar and margin basis for the quarter. What is the expectation like of how the cadence of price/cost benefit trends through the year? Are you kind of at your maximum price/cost benefit at this point, or is it spread kind of evenly throughout 2023?

Nicole DeBlase:

Got it. Thanks, Vik. And then just with respect to the order trends through the quarter, did you guys see like acceleration into March? How did things go from month-to-month? And if you're willing to comment on April, that would be awesome too. Thank you.

Operator:

Thank you. Our next question comes from the line of Nigel Coe of Wolfe Research. Your line is now open. Please go ahead.

Vicente Reynal:

Hi, Nigel.

Vicente Reynal:

No, Nigel, I mean I'll say that the only thing I will say is that, only certain item IT systems were disrupted that and that that did not impact the majority of the company. And as I mentioned, where things were impacted were proactively took immediate actions to maintain business continuity and minimize disruptions. And we expect to begin restoring the impacted systems to normal operation here coming next week. So I think it's -- it speaks volumes and I think you can read that as well in terms of what we're saying that we don't expect this incident to impact the full-year guidance, and we felt it was prudent just to kind of give you even more color as to what we see here in the second quarter. But yes, that's we're not probably going to get into any more specifics on that.

Vik Kini:

Yes, Nigel, I'll answer that. In the context of your second part of your question, were there any pull-ins into 1Q or any of that nature? The answer is no. I think the way you described it is very accurate. We mentioned that we're being prudent in terms of the phasing as a result of the cyber incident. And then as such, I think the way you're thinking about it and even how you've kind of thought about the EBITDA levels is fairly appropriate. So I wouldn't read into it any more than that.

Vicente Reynal:

Yes, Nigel, I -- yes. The one thing is that it's difficult to quantify specifically only because I mean when we take the order it could be reassuring or it could be something else. I mean clearly we know what goes into the Chips Act as an example and what goes into other things like that. But what we can tell you is what we said about the Buffalo facility, right? That we reopen Buffalo facility and that that business sold over $40 million in orders last year pretty quickly. And the momentum continues on that -- on that facility too as well. And a lot of that is really driven by the reassuring.

Chris Snyder:

Thank you. Volume growth for the company really stands out versus broader industrial. Seems like it was up low-double-digits range or so for Q1. And when we kind of look at the rest of the year, it seems to imply not much of any volume growth over the next three quarters. Does that more so reflect the macro uncertainty or potential supply chain uncertainty? What's that reflecting because it does feel like a pretty sharp fall off?

Chris Snyder:

I appreciate that. And the company really good track record on price and holding that price. When we see some of the year-to-date reflation in metals, does that change the way you think about incremental price throughout the rest of the year because potentially some of these commodity inputs are going higher into next year. Thank you.

Operator:

Our final question comes from the line of Nathan Jones of Stifel. Your line is now open. Please go ahead.

Vicente Reynal:

Yes. Nathan, as we say -- as we -- so I mean, first of all, I'll tell you we're super excited with that business only roughly about a quarter into it. And anything that we see is really exciting. I mean, five incredible brands within that portfolio that we're leveraging and doing a lot of work, as you can imagine, on demand generation, i2V, and the team is super, super engaged on really accelerating that. I think in terms of growth, yes, I mean, we see no reason why this set of businesses should accelerate the growth based on all the initiatives that we're doing much faster than what they were growing before. And in terms of margin expansion, yes. Same thing that we said when we acquired the business that we see that this business could get to roughly in the 30% EBITDA margins.

Nathan Jones:

Where is it today?

Nathan Jones:

And then just on the power tools business, I think at the merger, the strategic plan was to divest that business. Has that changed or is that still the plan here at some point in the future?

Operator:

Thank you. As there are no additional questions at this time, I'll hand the conference back over to Vicente Reynal for closing remarks.

Operator:

Ladies and gentlemen, this concludes today's Ingersoll Rand first quarter 2023 earnings conference call. Have a great day ahead. You may now disconnect your lines.

Operator:

Thank you all for standing by. I would like to welcome you all to the Ingersoll Rand Q4 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, we will conduct a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference call over to our host Matthew Fort of Ingersoll. Matthew, please go ahead.

Vicente Reynal:

Thanks, Matthew, and good morning to all. I would like to start by acknowledging and thanking our employees for their hard work in helping us deliver a record year in 2022. We finished the year on a high note, with strong fourth quarter and full year results despite ongoing inflation, rising interest rates, supply chain constraints and geopolitical uncertainty. Our employees consistently exemplify our purpose, while thinking and acting like owners to deliver on our commitment. And our performance this year clearly reinforces the impact we have as owners of Ingersoll Rand. Starting with Slide 3, in 2022, we demonstrated again how we continue to over deliver on our Investor Day commitments. We also made tremendous progress against our sustainability goals, but I'm very proud that Ingersoll Rand was named to the 2022 Dow Jones Sustainability Index. As we look to 2023, demand remains solid. And while macroeconomic, geopolitical and global supply chain uncertainties continue to be at the top of everyone's mind, we will remain agile and focused on what we can control. IRX is our differentiator to fuel our performance and continue to execute on our commitments. Turning to Slide 4. During our last Investor Day, we highlighted how we delivered compounding results through our economic growth engine. We remain committed to our strategy and its success is evident, given the results outlined at the bottom of this page. Our portfolio is positioned to capitalize on global megatrends, [digitization] (ph), sustainability and quality of life. We expect to leverage our organic growth enablers to deliver mid-single digit organic growth through 2025. And as you can see, we outperformed this commitment again in 2022, delivering 16% year-over-year organic revenue growth. In 2022, we delivered 4% of in-year growth from M&A or 5% on an annual basis. The combined organic growth and inorganic growth of 22% [also surpassed] (ph) a low-double digit growth commitment. As we look to 2023 and beyond, we reaffirm our commitment to deliver total average growth of low-double digits through 2025. Our strong organic growth levers, aftermarket demand generation, as well as our i2V initiatives will enable us to generate operating leverage and incremental productivity with an expected 100 basis points of adjusted EBITDA margin improvement per year on average. With IRX as our competitive differentiator and over 300 IMPACT Daily Management, or IDMs, across our company each week, our high-performance culture encourages a strong focus on execution. This continues to support our goal of being a premier company that consistently compounds earnings on average by double digit each year. In 2022, we continued to achieve that goal with adjusted EPS growth of 13%. Moving to Slide 5. In 2022, we saw strong organic order and revenue growth of 11% and 16%, respectively. Aftermarket continues to be a strategic focus and we delivered growth of 17% excluding FX. Our 120 basis points of adjusted EBITDA margin expansion was driven in part by improvement in our gross margin due to pricing, aftermarket revenue growth and i2V actions. As we continue to align our business to the mega growth trends, we formalized our IR-Digital team to accelerate how we create new revenue streams. It's important to note that this is an incremental investment we made in addition to the teams that reside at the business level. With 19% of our total revenues coming from IIoT-ready products, we have already exceeded our 2023 Investor Day targets. On the right side of the page is a great example of our ability to deliver organic growth by focusing on the sustainability and efficiency megatrend. We were selected to be a critical technology provider for what will be the largest carbon capture and storage project in the world when it comes online in 2024. With a capacity to permanently capture and store 12 million tons of carbon dioxide gas every year. This one project will deliver more than $14 million of value for Ingersoll Rand between 2023 and 2024. On Slide 6, M&A continues to be at the forefront of our capital allocation trends. We invested over $800 million in 12 acquisitions in 2022, including the SPX Flow transaction with the annualized revenue from these acquisitions being approximately $300 million. These acquisitions have added both market-leading products and technologies, while accelerating our addressable market with close adjacencies. Our M&A funnel remains strong. And as of today, it continues to be over five times larger than it was at the time of the R&D. And more importantly, we currently have 11 transactions under LOI. We expect an additional $200 million to $300 million in annualized inorganic revenue to be acquired in 2023. Finally, we started the year well with regards to executing on our inorganic strategy with the recently completed acquisition of Paragon Tank Truck, a leading provider of solutions used for loading and unloading dry bulk and liquid tanks in demanding industrial environments as well as food and beverage. Moving to Slide 7, we have some exciting news to share. We achieved placement on the DJSI World and DJSI North America Indices. Our score of 81 on the S&P Global Corporate Sustainability Assessment puts us at the Number One in North America and Number Four in the world within our industry, which means that we are in the top decile of global companies. This is a perfect example of how we leverage IRX for agile execution across all aspects of our business. In this case, we use our own IRX execution process to go from being unranked to now in the top 10% of all companies [revealed] (ph) by S&P Global. I will now turn the presentation over to Vik to provide an update on our Q4 and full year 2022 financial performance.

Vicente Reynal:

Thanks, Vik. On Slide 12, our Industrial Technologies and Services segment delivered strong year-over-year organic revenue growth of 22%, with volume growth outpacing growth from pricing. Adjusted EBITDA increased 24% year-over-year with an adjusted EBITDA margin of 27.4%, up 170 basis points from prior year with an incremental margin of 38%. We also delivered sequential margin expansion of 120 basis points from Q3 to Q4. We continue to see solid demand for our products with organic orders up 4%. Note that on a two-year stack the ITS segment organic orders grew more than 20%. Moving to the individual product categories. Each of the figures exclude the negative impact of OpEx, which year-over-year was [67] (ph) percentage point headwind across the total segment on both orders and revenue. Starting with compressors, we saw orders up in the low-single digits and we continue to see oil free products orders outpacing oil lubricated products. Orders were down mid-single digits in the Americas, driven by a large order push from Q4 to the first quarter of 2023. EMEIA demand continues to be above market, with orders up mid-single digits. The Asia-Pacific team continues to deliver great performance with orders growth in the mid-teens, which is impressive when you think about that our team in China delivered double digit growth even throughout the COVID-related closures and disruptions. In vacuum and blowers, orders were up low-20%s level. And the power tool and lifting global orders grew mid-single digits. Moving to the innovation in action portion of the slide, we're highlighting our footprint expansion in India, which is another organic investment initiatives we're drive. We have seen significant growth in India and we continue to drive opportunities for in region for region manufacturing, which is driving the need for increase in our footprint. Turning to Slide 13. Revenue in the Precision and Science Technologies segment grew 9% organically. Additionally, the PST team delivered adjusted EBITDA of $93 million, which was up 20% year-over-year, with incremental margins of over 80%. Adjusted EBITDA margin was 30.1%, up 330 basis points year-over-year. We continue to see sequential improvement in our adjusted EBITDA margins driven by price/cost improvement and synergy delivery on our recently completed M&A, such as Seepex. Organic orders were down 2% year-over-year as Q4 comps were challenged due to headwinds from a single large hydrogen order intake in Q4 of 2021, which will deliver a network of refueling stations in New Zealand. Adjusting for these hydrogen order, normalized organic orders were up slightly. And on a two-year stack, organic orders are up double digits. For our PST innovation in action, we're highlighting our EVO Electric Diaphragm Pump. This recently launched product is the only-electric triple-chamber diaphragm pump in the market. The EVO Series pump is utilizing high-growth end markets, such as electric vehicle batteries, specialty chemical manufacturing and food and beverage applications. This product offers significant energy savings, leading to faster payback times for our customers. And this is yet another perfect example of sustainability as a growth driver and our focus on high-growth sustainable end markets, enabling us to deliver double-digit earnings growth. As we move to Slide 14, we're introducing our 2023 guidance. Total company revenue is expected to grow between 7% to 9%, with the first half growth of 9% to 11% and the second half growth of 4% to 6%. We anticipate organic orders growth of 3% to 5%, where price is approximately 70% and volume 30%. FX is expected to contribute approximately 1% of a headwind for the year, of which the impact will primarily be realized in the first half of the year. M&A is projected at $270 million, which reflects all completed and closed M&A transactions in 2022 as well as the acquisition of SPX Flow Air Treatment and Paragon Tank Truck. Corporate costs are planned at $140 million and will be incurred evenly per quarter throughout the year. The year-over-year increase is largely driven by investment in IIoT and demand generation. Total adjusted EBITDA for the company is expected to be in the range of $1.57 billion and $1.63 billion. At the bottom of the table, we're introducing adjusted EPS guidance. While we have not historically guided EPS, we will now include [these key] (ph) metrics moving forward. Adjusted EPS is projected to fall within the range of $2.48 and $2.58. We anticipate our adjusted tax rate to be in the low-20%s, interest expense to be approximately $165 million and CapEx to be around 2% of revenue. The right hand side of the page includes a 2023 full year guidance bridge showing the growth associated with operational activity and the headwinds associated with interest expenses, FX and changes in the adjusted tax rate. Based on the above guidance, adjusted EPS growth attributed to operational performance, is approximately 13% to 17%, offset by approximately 8% in headwinds from interest expense, FX and the adjusted tax rate. As we sit here in mid-February and to provide some Q1 commentary, it is worth noting that we have seen organic orders continue to be positive on a quarter-to-date basis through the first week of February, which is consistent with our expectations. Turning to Slide 15. As we wrap up today's call, I want to reiterate that Ingersoll Rand is in a solid position. We finished 2022 with strong Q4 results. We continue to monitor the dynamic market conditions, while remaining agile and prepared for any challenges that may come. To our employees, I want to thank you again for an excellent finish to the year. We delivered strong results by demonstrating our commitment to meet our financial targets and executing our economic growth engine through the strong use of IRX. Thank you for your hard work, resiliency and focus actions. These results show the impact you have as owners of the company. Our balance sheet is strong. And with our disciplined and comprehensive capital allocation policy and 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&A.

Mike Halloran:

Hey, good morning, everyone.

Vik Kini:

Good morning.

Vicente Reynal:

Yes. Hey, Mike. I'll say that facing comparable to what we have seen historically. Clearly, the item to watch is that, as expected, comps become more meaningful as we go into the back half of the year. And we don't have anything to assume in our guidance or the phasing related to supply chain returning to normalization and/or significant commodity deflation either. And so, in terms of the organic, I mean, second half, based on that and the tough comps, we say kind of roughly flattish. And as we said on the remarks, good continued momentum that we see on price. And what we expect is that we expect as we go through the year to see continued strength on kind of what we call the long cycle orders, which are driven by a lot of these megatrends that we've spoken about before in the past around sustainability, onshoring and things like that. So, net-net, that leads us to believe that we just don't see significant changes in our backlog as we go through 2023.

Vicente Reynal:

That's correct. Yes, that's correct. And basically, as you can see, a bit of a prudency here in the second half.

Vicente Reynal:

Yes, Mike, I will say that the simple answer is, yes, in the sense that -- keep in mind, yes, we're seeing much stronger momentum as we talk to a lot of the sellers out there. And -- but it has to do primarily because keep in mind that 90%-plus of our deals and transactions are sole sourced. So, we have really long-standing cultivating relationships with the company that we're looking for to be attracted to Ingersoll Rand. And the relationship goes along the lines of understanding that, hey, you know, there continues to be all these changes that happen every year, and [how many] (ph) ownership is realizing that we are a great place for them to continue to kind of keep the legacy and treat employees in a very unique way the way we do. And that is driving the continued momentum of being able to open the door and have a much better conversation with a lot of these companies that we want to bring to Ingersoll Rand. So, again, I think that's what gives us the confidence that our M&A funnel continues to be very strong. And the fact that you see that we still have 11 transactions under LOI and the momentum continues to get accelerated. So, yes, we're very pleased with what we're seeing here.

Vicente Reynal:

Thanks, Mike.

Julian Mitchell:

Hi, good morning. Maybe just...

Julian Mitchell:

...the first question I wanted to start with -- good morning, just to start with the top-line outlook. And just to understand it, so it sounds like you think that, that backlog stays at about $2 billion through the year, a book to bill around 1 for the year as a whole. And then, within the second half, organic sales guide, you're assuming sort of volumes are down slightly, but that's solely a function of comps, it's not related to destocking or any particular region softening or anything like that?

Julian Mitchell:

That's helpful. And then, just on the thinking about the sort of the earnings seasonality, because I know in 2022, we spent the whole year, people fretting about the sort of Q3, Q4 ramp in EBITDA margins and the implied incrementals in the back half and all the rest of it. So, just to understand, for 2023, are you assuming kind of first half, second half EPS split? Is the consensus split roughly okay at sort of 45/55 and then anything you're kind of calling out year-on-year moving around much in the back half?

Julian Mitchell:

That's great. Thank you.

Jeff Sprague:

Thank you. Good morning. Hey, just on the price/cost...

Jeff Sprague:

Hey, good morning. Thanks for the question. Just want to be clear, I think you said 70% of the organic growth guide was price, just confirming that. But the question is would that just be carryover price or are there other actions in flight for 2023? And maybe you could also just give us some perspective on just the total price/cost equation for 2023 embedded in the guide?

Jeff Sprague:

And then, just maybe totally shifting gears, just thinking about some of the initiatives in the -- in particular the IIoT enabled initiative. To what extent are customers paying additional for that capacity? And to what extent, given the product actually has that capability, is it driving higher or kind of more profitable service or other revenue streams?

Jeff Sprague:

Great. Thank you.

Rob Wertheimer:

Thank you. Good morning, everybody.

Rob Wertheimer:

So, I just wanted to go back to revenue outlook for -- yes, hey, the revenue outlook for a minute, where you have backlog up, I think, 30%, and organic growth [7%] (ph), covered by price up 3% to 5%. And so, I think you mentioned earlier, Vicente, that you're not assuming a whole lot of supply chain improvement in cost. Is the revenue still constrained by supply chain? If that loosens up, is there upside there? How do we sort of foot the backlog in the orders and the revenue outlook?

Rob Wertheimer:

Okay, perfect. And then, I apologize if I missed in the prepared remarks, but ITS North America orders were kind of the only weak spot. Any additional color there? I don't know if you're seeing broad-based strength in small projects and large, or order [picking up] (ph) or if things are fading away? Thank you.

Rob Wertheimer:

Great. Thank you.

Nigel Coe:

Thanks. Good morning, everyone.

Nigel Coe:

So, it seems like -- yes, good morning. You're talking about this hydrogen order in the prior year and order in North America slipping into 2023. So, it seems like we've got larger lumpier orders coming through, which given these mega project decarb-reassuring type projects, we should expect, I mean, do you agree with that -- particularly with that, that we will have lumpier orders sequentially from here? And my real question is, as we get larger orders, do we have comparable margins to -- on these larger orders versus sort of run rate?

Nigel Coe:

Okay. Yes, nothing wrong with lumpy as long as they can [contribute] (ph) to revenue. And then, I want to go on the service revenue growth. I think, you said 17% ex FX. Just so that implies, I don't know, mid-teens -- low mid-teens organic service growth, which is pretty good. So just wondering -- to come back to Jeff's question to what extent is the service growth being driven by, I don't know, some kind of deferred catch-up? Or are we seeing this IIoT enabled devices starting to contribute meaningfully to revenue growth? And any thoughts there would be helpful.

Nigel Coe:

Great. I'll leave it there. Thanks for the questions.

Operator:

Your next question comes from David Raso of Evercore ISI.

Vicente Reynal:

Well, David, again, we're saying that the order momentum is actually positive across the two segments. So, yes, I mean, if you think about it from a percentage perspective, that is correct.

Vik Kini:

Yes, David, I would say to Vicente's remarks that orders in first quarter, quarter-to-date across both segments are trending positive on an organic basis. And within that, I would say the pricing dynamic, given the carryover pricing dynamic that Vicente mentioned, which, as you would expect, is more obviously evident in the first half of the year, comparatively speaking, I'd say it's comparable to what you have seen exiting 2022. So, nothing has dramatically changed in that respect. And I think to the question that was asked before, the margin profile is healthy on those projects, and the pricing levels on those projects are commensurate or comparable to what you see in some of the more standard book/ship type business. So, we've been seeing comparable margin performance and comparable pricing across both the shorter cycle and longer cycle components of our business.

Operator:

Thank you. We now have Steve Volkmann of Jefferies. Please go ahead when you are ready.

Vicente Reynal:

Yes. I mean, so it is definitely improving as compared to last year. What we're saying is that -- but there's still some bottlenecks and issues that pop up here and there. So, it's not -- again, what we're saying is that it is not perfect. It is not back to normal conditions. And that what we foresee here as we go into 2023, whether it is with the reopening of China or a lot of the CapEx cycle releases that we're seeing in terms of long cycle, we think there's going to be continued constraints in the supply chain. So, these were just being more proactive in terms of kind of realizing that there's a lot of work that our teams need to continue to do and realizing that, hey, things are not going to be back to normal from a supply chain perspective as we go into the second half, based on a lot of these other kind of trends or indicators that we're seeing that are happening in there.

Vik Kini:

Yes. It's a good question. So, yes, approximately 100 basis points enterprise-wide. You're going to see both segments trend right around there. I do think the PST probably is a little bit more outsized than ITS, probably not overly surprising, because you had a little bit of an inverse happening in 2022. So, I think a lot of this is now, quite frankly, as we've now got Seepex, which was probably the largest headwind on EBITDA margins through the better part of 2022, now that's coming closer to fleet average with, frankly, still room to run, I think you're going to see a little bit more outpace on the PST side comparatively speaking, but total business should be trending closer to 100 basis points.

Operator:

Thank you. We now have Josh Pokrzywinski from Morgan Stanley. Your line is now open, Josh.

Vicente Reynal:

Good morning, Josh.

Josh Pokrzywinski:

Just wanted to dig into -- hey, good morning. Just wanted to dig into the complexion of what you're seeing on the compressor side or even maybe more broadly across [IT&S] (ph). You talked about some of the big drivers, Vincente, around things like nearshoring, kind of a broader CapEx cycle. I mean, we just haven't seen one of those in so long. I'm just wondering like are you seeing larger pieces of equipment, a lot more of what looks like capacity versus replacement. I know some of that detail, it can go missing in the numbers. But as you talk to customers, like are they adding roofline? Are they adding capacity? Or is this sort of an extended replacement cycle that has kind of been caused by all this post-COVID interruption?

Josh Pokrzywinski:

Got it. That's helpful. And then, just a follow-up on hydrogen, specifically. And I think there's a lot of stuff out there that's in discussion, maybe projects that are not quite ready to go FID, because there's [a norm] (ph) making clarity in the IRA that hasn't been established yet. But just wondering how you guys are thinking about the timing of when you could see another order wave there? And anything you're watching specifically that could help us track alongside that?

Josh Pokrzywinski:

Great. Thanks for the color. I'll leave it there.

Joe O'Dea:

Hi. Thanks for taking my questions. I wanted to start on the backlog, and I think you said a little over $2 billion of backlog. But it sounds like the view would be that, that's more a normalized level, would be trending, I guess, a little bit over 30% of 2023 revenue. I'm guessing, historically, backlog hasn't been quite as strong relative to revenue. So, could you just talk about sort of what you're seeing sort of structurally within that, the confidence that we should be thinking about that as more of a normalized backlog level?

Joe O'Dea:

Okay. And then, just a clarification on the $200 million to $300 million of annualized inorganic revenue to be acquired. Of that, how much is included in the 2023 M&A revenue contribution? And does that amount include sort of all 11 of the LOIs that you currently have?

Joe O'Dea:

Okay. And then -- but are those 11 included in the $200 million to $300 million that you're talking about acquiring over the course of 2023?

Joe O'Dea:

Got it. That's helpful. Thanks a lot.

Adam Farley:

Good morning. This is Adam Farley on for Nathan.

Adam Farley:

So, you performed very well in China in 2022, despite COVID headwinds. Could you provide some color on how you outperformed? And maybe what you expect in 2023 in China, specifically with reopening?

Adam Farley:

Okay. And then, on the recent close of the SPX Flow Air Treatment business, could you provide any color on revenue or cost synergy opportunity, given that it's still early days of integration work?

Adam Farley:

Okay. Thank you for taking my questions.

Operator:

Thank you. We now have Chris Snyder of UBS. Please go ahead when you are ready, Chris.

Vik Kini:

Yes. Sure, Chris. So, I guess, I'll start by saying, I think the way you described it is relatively accurate. Yes, we did see a little over 0.9 in Q4. Worth noting here, it's quite normal in the business to see book to bill less than 1 in the second half of the year, and particularly in Q4. And that's largely attributable to shipping the longer -- the larger, longer cycle orders during the second half. And you see that primarily in the ITS business. And that's exactly what we saw on Q4 as well as obviously the strong revenue performance. So that did drive the book to bill to be less than 1. But to Vicente's point and some of the commentary, we are seeing the order momentum continuing here in the first quarter, quarter-to-date through the first week in February. Orders -- organic orders performance is up. And it's worth noting, that's driven despite the headwind of the Chinese New Year timing, which is in January this year versus February in last year. So, again, continued to be encouraged by the trending. As Vicente said, backlog continues to remain healthy with a good contribution from the longer cycle projects, which will continue to extend over a 12- to 18-month timeframe. So again, yes, book to bill less than 1, but quite normal in Q4 and continue to be encouraged about what we see here moving into 2023.

Vik Kini:

Sure. I'll take that one, Chris. So, yes, 80 basis points to 90 basis points, slightly right below 100 basis points, that's probably right in line. I think it's a few things to note. When we gave our Investor Day targets, we said to expect about 100 basis points on average over a multiyear timeframe. Obviously, worth noting that we have outpaced that in the prior two years. So, we're still very much tracking in line with that. And I think in terms of the guidance, your point is spot on. We do expect to continue to be price/cost positive. We are still driving productivity as well as the synergies, the last phase of the merger to merger-led synergies to offset any degree of merit and/or labor inflation, which obviously we are seeing and speaks to Vicente's point earlier. But I think the other thing here is that we are continuing to reinvest for growth and to drive ongoing organic growth, which is very much part of our Investor Day target. So, you are seeing requisite investments in -- to the appropriate commercial resources and growth resources in the business as well as some of the investments we called out specifically even at the corporate level around demand generation and IIoT. So, again, we'll continue to be very prudent. We continue to expect margin expansion year-over-year as we go through the year. And sequentially, the margins could continue to sequentially increase quarter-to-quarter as we move from Q1 to Q4, much like you saw in 2022.

Vik Kini:

You bet.

Vicente Reynal:

Thank you so much. As I kind of wrap up the call today, I just want to say that our teams have done an outstanding job executing our plan throughout 2022, despite the ongoing macro challenges, and that's because they think and act like owners, because they are owners to the company at Ingersoll Rand. And we have clearly demonstrated that there's a lot of resiliency here in our business as we continue to invest organically and inorganically and continue to focus ourselves in sustainability, innovative product and solutions. And that, we believe, is truly positioning Ingersoll Rand as a global leader. So, thank you for the time and attention today. Thank you.

Operator:

Hello, everyone, and welcome to Ingersoll Rand Q3 2022 Earnings Conference Call. My name is Emily, and I will be coordinating your call today. [Operator Instructions] I will now turn the call over to our host, Matthew Fort with Ingersoll Rand. Please go ahead, Matthew.

Vicente Reynal:

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. Our performance this quarter and year-to-date reinforces the impact we have as owners of Ingersoll Rand. And now let's review 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. Through Q3, demand remained 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 in today's 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 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&P Global Corporate Sustainability Assessment. As of October 21, this score puts us at #1 in North America, #4 in the world and in the 99th percentile within our industry, which is very impressive. And think about it, less than 3 years ago, we were not even showing on the list. And today, we are #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 second Annual Sustainability Call where we introduced our enhanced strategic imperative, Lead Sustainably, which is based on a simple two-pronged approach on grow sustainably and operate sustainably. On this slide, I'll spend a bit highlighting 2 examples from our broad product portfolio that help improve energy efficiency and reduce water consumption. We believe that within the U.S. alone, there are over $1.3 billion in cost savings opportunities for compressed air system. And that number is likely 5x greater globally. The energy recovery unit shown here is 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 for our customers of less than 1 year on average. Our impact on water conservation occurs in multiple ways, but perhaps the most compelling is our products that eliminate the need for water usage in critical applications. The Runtech turbo 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. Our existing installed base around the world is currently saving 7.5 billion gallons of water a year. And we estimate that over 50 billion gallons of water per year could be potentially saved with the full adoption of our Runtech technology globally. To put that into perspective, that's more than 3x the amount of bottled water consumed in the United States annually. Within our own facilities, operate sustainably is an integral part of our business. We focus on reducing electricity and water consumption to drive zero greenhouse gas emissions. Our commitment to operating sustainably delivers value for 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. 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 a downward trend of marketing qualified leads or MQLs. The demand generation team immediately jumped into action, leveraging IRX to invert that trend through channel campaigns focused on high-growth, sustainable markets, 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 MQL, 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 ITS. 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, but did not have the right sales structure or operational footprint. Post merger and leveraging IRX, the team refreshed the product line, integrating the best practices from both IR and GD. Through the new product development process, they improved efficiency by 5% to 10% and also improved the cost structure of the compressor portfolio through utilization of i2V. With those improvements in efficiency and cost structure, we focused 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. So let me quickly walk you through these deals. First, Airmax, which is a leading full-service provider of air compressors and compressed air system services based in France. This is an example of a strategic channel expansion for our ITS segment which will leverage Airmax' strong end-user relationship and technician network to convert competitive products and support aftermarket growth. Second is Pedro Gil, 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 vacuum systems. Everest significantly broadens our presence in the key high-growth market of India. These 3 acquisitions are strongly aligned with our strategy and increase our product portfolio in core technologies or enabling expansion into close 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 desiccant and refrigerated dryers, filtration systems and purifiers for compressed air. 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, Dosatron International, which is a U.S. leader in water-powered flow solutions and IIoT for hydroponics and agriculture 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 IIoT specialist, with technology that is complementary to our YZ Systems product line. Westwood enhances our IIoT 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 seen in prior acquisitions. Our M&A funnel remains strong. And as of today, the funnel still remains over 5x larger than it was in Q3 of 2020. I will now turn the presentation over to Vik to provide update on our Q3 financial performance.

Vicente Reynal:

Thanks, Vik. 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 26.2%, up 70 basis points from prior year, with an incremental margin of 32%. We also delivered sequential margin expansion of 80 basis points 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 ITS 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. Moving to the individual product categories. Each of the figures exclude 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. In vacuum and blower, orders were up low 20s on a global basis. The global Power Tools and Lifting team continues their strong performance, with orders for the total business growing in the high double digits. Moving to the sustainable innovation and 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 products in high-growth, sustainable end markets such as clean energy. Doing large part of research and activities, orders are up over 500% in the Americas, with over $40 million booked since our May 2022 launch. This is a real tangible and very inspirational example of our employees thinking and acting like owners. Turning to Slide 13. Revenue in the Precision and Science Technologies segment grew 15% organically, split evenly between price and volume. Additionally, the PST team delivered adjusted EBITDA of $92 million, 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-19-related demand at 60 basis points. However, sequential adjusted EBITDA margin significantly improved by 230 basis points due to operational execution and price/cost performance. 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 action, 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. Since the Q4 of 2021 acquisition, the team has installed and leveraged IRX to accelerate investments in new product development and launched 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%, 100 basis point increase from prior guidance based on both our ITS and PST 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. We are also raising our adjusted EBITDA guidance at the midpoint by tightening the range to between $1.4 billion and $1.425 billion. Important to note that this guidance includes nearly $20 million 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 million in the fourth quarter. Our M&A guidance does include the acquisitions of Hanye, Holtec, Hydro Prokav, Westwood Tech, Pedro Gil, Dosatron and Airmax. However, overall M&A revenue guidance for the year remains flat to prior guidance due to the impact of FX, specifically on previously acquired businesses, with Seepex 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 first 3 quarters of 2022, and our full year outlook remains optimistic. 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 drive 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 welcomed by our employees. 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&A.

Mike Halloran:

Two 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 you saw through the quarter. Anything notable? Any areas of weakness? And when you look at those leading indicators that you talk to, any signs of concern in there? Or 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?

Mike Halloran:

And I heard Vik'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 kind of things are you guys looking for to be able to pull that trigger in a more real-time basis?

Operator:

Our next question comes from Julian Mitchell with Barclays.

Vicente Reynal:

Yes. Julian, I think the way to think about it sequentially, think about revenue to be kind of fairly, on an absolute dollar basis, consistent, 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 third quarter. Fairly similar, slightly above. But FX continue to be a headwind of an additional 100 to 150 basis points. And M&A roughly 200 basis points lower than Q3 as some of the M&A falls off and we move through the fourth quarter. So when you put all this together, kind of comparing to the total company from an EBITDA perspective, and this is fairly similar, I would say, in the segment level, is that you would 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. So again, we expect to see a moderate improvement as we go quarter-to-quarter. M&A synergy realization for the deals we closed in the second half of 2021, 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 million of the merger-related synergies that tend to correlate to volume. So again, we'll see some of that here in the fourth quarter. So those are kind of the 3 core variables that allows us to, 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. So again, it just speaks loudly to what the teams continue to execute really well despite a lot of headwind that we continue to see.

Vicente Reynal:

Sure, Julian. I think you said it well in terms of kind of reflecting here in the Q3 and Q2 ex COVID impact that we saw from these kind of large orders into 2021 not happening now. When you exclude that, PST was -- in the Q3 was up 8%, which we view as relatively healthy and in line with our stated Investor Day targets of growing PST 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 kind -- in that kind of range as we move forward.

Vicente Reynal:

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

Joe Ritchie:

So just starting off, I guess, Vicente, thinking about ITS, 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, do you have any preliminary thoughts on growth, particularly in ITS? And then also, pricing has been very strong. Maybe some comments around the carryforward in pricing and how to think about that for '23.

Joe Ritchie:

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

Operator:

Our next question comes from [Bastian Sosa Marin] with Wolfe Research.

Vik Kini:

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, you'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 not being, 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've said before, 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.

Vicente Reynal:

Yes. In terms of the MQL, I mean you saw on one of the slides, we provided a little bit of color in terms of that increase in MQLs that we saw particularly in Europe, again, driven to the activities that the team have been doing. And as you saw, I mean over 60% increase in MQLs. 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. 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 is 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 fourth quarter. So...

Andy Kaplowitz:

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

Andy Kaplowitz:

Got it. And Vicente, 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 pre last quarter and up low single digits this quarter. What's your visibility like there? 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?

Operator:

Our next question comes from Rob Wertheimer with Melius Research.

Vicente Reynal:

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 growth of natural gas prices, but it takes time to digest that also through the system. But 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 a quick payback, but also you're doing something good for the planet because you're saving the energy and helping these customers achieve their sustainability targets.

Vicente Reynal:

Yes. Rob, in terms of what we saw in the third quarter, again, fairly stable. But the stability comes in really driven by, I would say, a good loan 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 the things that we've been talking about in terms of getting ourselves aligned to these megatrends of sustainability and even digitization. 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 the -- into here into October, again, we still see FX-adjusted positive growth in the month of October from an orders perspective in Europe particularly, to your question. Yes, sure.

Brandon McCann:

This is Brandon on for Josh. Just two follow-ups on some of the questions that have already been asked. But 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?

Brandon McCann:

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

Operator:

Our next question comes from the line of Nathan Jones with Stifel.

Vicente Reynal:

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

Vicente Reynal:

Yes. So Nathan, in simple terms, the more you can actually optimize the total system versus optimizing or suboptimizing 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 to 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 that 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 treatments whether you design it or whether you're really utilizing the air treatment as a way to generate nitrogen or oxygen at point of use, 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.

Vicente Reynal:

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 a customer buy a compressor and then buying something else from someone else and the 2 of them have just not been optimized together. So the better optimization which then drives better -- yes.

Vicente Reynal:

Yes. Thank you. Concluding, 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 it's driven by a load of activity that we do internally in the company as well as this ownership mindset and thinking and acting like owners 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. Thanks.