Ingersoll Rand Inc. (NYSE:IR) Q1 2023 Earnings Call Transcript May 4, 2023

Ingersoll Rand Inc. beats earnings expectations. Reported EPS is $0.65, expectations were $0.52.

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.

Matthew Fort: Thank you, and welcome to the Ingersoll Rand 2023 first quarter earnings call. I am Matthew Fort, Vice President of Investor Relations. And joining me this morning are Vicente Reynal, Chairman and CEO; and Vik Kini, Chief Financial Officer. We issued our earnings release and presentation yesterday and we will reference these during the call. Both are available on the Investor Relations section of our website. In addition, a replay of this conference call will be available later today. Before we start, I want to remind everyone that certain statements on this call are forward-looking in nature and subject to the risks and uncertainties discussed in our previous SEC filings, which you should read in conjunction with the information provided on this call.

Please review the forward-looking statements on Slide 2 for more details. In addition, in today’s remarks, we will refer to certain non-GAAP financial measures. You can find a reconciliation of these measures to the most comparable measure calculated and presented in accordance with GAAP in our slide presentation and in our earnings release, both of which are available on the Investor Relations section of our website. On today’s call, we will review our company and segment financial highlights and provide an update to our 2023 guidance. For today’s Q&A session, we ask that each caller keep to one question and one follow-up to allow time for other participants. At this time, I will turn the call over to Vicente.

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.

Vik Kini: Thanks, Vicente. On Slide 10, 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 increased 8% and 20% year-over-year respectively. Book-to-bill was 1.09 and we remain encouraged by the strength of our backlog, which is up approximately 15% year-over-year and up approximately 10% sequentially. This provides a healthy backlog as we move into Q2 2023 and gives us conviction delivering on our revised 2023 revenue guidance. The company delivered first quarter adjusted EBITDA of $400 million, a 32% year-over-year improvement and adjusted EBITDA margins of 24.6%, 190 basis points year-over-year improvement.

For the quarter adjusted diluted earnings per share was up 33% versus the prior year. This includes a $0.05 headwind from increased interest expense. Free cash flow for the quarter was $148 million despite ongoing headwinds from inventory due to the need to support backlog as well as continued global supply chain challenges. Even with these headwinds, free cash flow was up more than 350% versus prior year. Total liquidity of $2.2 billion at quarter end was down approximately $500 million sequentially, and our net leverage continues to remain near all-time lows. At 1.1 turns, we are 0.1 turns better than the prior year and 0.3 turns above prior quarter. The sequential decline in total liquidity and increase in net leverage are largely driven by the timing of the SPX Flow Air Treatment acquisition, which closed in early January.

Turning to Slide 11. For the total company Q1 orders grew 13% and revenue increased 26%, both on an FX adjusted basis. Total company adjusted EBITDA increased 32% from the prior year. The ITS segment margin increased 240 basis points while the PST segment margin improved 170 basis points. Notably, both segments remained price/cost, dollar, and margin positive, which speaks to the nimble actions of our teams despite persistent inflationary headwinds. Corporate costs came in at $40 million for the quarter driven by continued investments as well as the impact of incentive compensation adjustments. Finally, adjusted diluted earnings per share for the quarter was up 33% to $0.65 per share, and the adjusted tax rate for the quarter was 22.1%. Moving on to the next slide.

I want to highlight that our credit rating was recently upgraded to an investment grade rating by S&P. This is a major milestone for the company and we remain focused on becoming investment grade across all of our rating agencies. Free cash flow for the quarter was $148 million, including CapEx, which totaled $22 million. And as of March 31, 2023, total company liquidity was $2.2 billion based on approximately $1.1 billion of cash and $1.1 billion of availability on our revolving credit facility. It is important to note that in April, we amended and extended our existing revolving credit facility, including upsizing the overall borrowing capacity of the facility from $1.1 billion to $2 billion. This amended credit facility not only strengthens our balance sheet, but also supports the company’s growth strategy by adding additional flexibility for M&A.

The increase also speaks to the credibility we have in the financial markets as this was purely an increase in borrowing capacity with all the same favorable covenants and structure from the original $1.1 billion facility. Leverage for the quarter was 1.1 turns, which was an 0.1 turn improvement year-over-year, and cash outflows for the quarter included $566 million deployed to M&A, and we returned $85 million to shareholders through $77 million in share repurchases and $8 million in dividends. As mentioned earlier, approximately $520 million of the M&A-related cash outflows were attributed to the SPX Flow Air Treatment business, which closed in early January. M&A remains our top priority for our capital allocation and we continue to expect M&A to be our primary usage of cash looking forward.

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

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.

Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question comes from the line of Mike Halloran of Baird. Your line is now open. Please go ahead.

Operator: Thank you. Our next question comes on the line of Julian Mitchell of Barclays. Your line is now open. Please go ahead.

Operator: Our next question comes from the line of Josh Pokrzywinski of Morgan Stanley. Your line is now open. Please go ahead.

Operator: Thank you. Our next question comes from the line of Rob Wertheimer of Melius Research. Your line is now open. Please go ahead.

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

Operator: Thank you. Our next question comes from the line of Joe Ritchie of Goldman Sachs. Your line is now open. Please go ahead.

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.

Operator: Thank you. Our next question comes from the line of Nicole DeBlase of Deutsche Bank. Your line is now open. Please go ahead.

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

Operator: Thank you. Our next question comes from the line of Chris Snyder of UBS. Your line is now open. Please go ahead.

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

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.

Vicente Reynal: Yes. Thank you, Candice. Once again, I mean, the Ingersoll Rand team has demonstrated their own match ability to execute despite these ongoing microeconomic volatility. We’re very appreciative of our teams and the outperformance. This quarter truly demonstrates the power of IRX and the ownership mindset from our employees. And with that, just want to say thank you all of you for joining the call today and your interest in Ingersoll Rand. Have a great day,

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.