Ingersoll Rand Inc. (NYSE:IR) Q1 2024 Earnings Call Transcript

Ingersoll Rand Inc. (NYSE:IR) Q1 2024 Earnings Call Transcript May 3, 2024

Ingersoll Rand Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. And welcome to the Ingersoll Rand First Quarter 2024 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]. Thank you. I’d now like to turn the call over to your host, Matthew Fort, Vice President of Investor Relations. You may begin.

Matthew Fort : Thank you. Welcome to the Ingersoll Rand 2024 first quarter earnings call. I’m 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 are subject to the risks and uncertainties discussed in our previous SEC filings, which you should read in conjunction with the information provided on this call.

Please review the forward-looking statements on slide two 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 measures 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 2024 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. 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. Starting on slide three, despite the constantly changing macroeconomic environment, our team delivered another solid start to the year, demonstrating the continuous strength of our execution engine, IRX. We remain nimble, and we’re prepared to pivot if market conditions were to change. Based on our solid Q1 performance, we are raising our 2024 full-year guidance. Turning to slide four, our economic growth engine continues to deliver compounding results. We remain committed to our strategy and our long-term Investor Day target outlined on this page.

IRX is our competitive differentiator, and combined with our unique ownership mindset, we expect to continue to deliver above-market growth in 2024. With that in mind, I would like to provide a brief update on our growth initiatives. On slide five, let me start with our inorganic growth initiatives. We’re pleased to highlight two recently closed transactions. Let me walk you through these two deals that are adjacent to our core. In other words, both companies’ products can be used by attaching them to our existing compressor or pump technologies. First, Ethafilter, which expands our technology by extending our reach into highly attractive end-markets with the additional of Sterile Filtration Technology. Next is Controlled Fluidics, which expands our technology with specialization in thermoplastics, high-performance plastic bonding, and custom plastic assembly products for life sciences, aerospace, and industrial applications.

And finally, on the right-hand side of the page, I would like to highlight that with the announced acquisition of ILC Dover, which is expected to close later this quarter, we have already exceeded our analyzed inorganic revenue target of 400 to 500 basis points. Having said that, we continue to execute our bolt-on M&A strategy and expect more deals to be announced later in the year, further exceeding our analyzed inorganic revenue target. Turning to slide six, I want to provide some additional information on the acquisition of ILC Dover with an overview of the portfolio. This slide details the breakdown of the business by end market, as well as the long-term CAGR for each portion of the business, core competencies, and future growth creation opportunities.

Approximately 75% of the total business falls into life sciences end market, which can be split roughly 60/40 between key markets of biopharma and Medical Components, CDMO. We expect this portion of the business to grow in the high single-digit plus range over the long-term. Let me dive a bit deeper, starting with biopharma, in which the core competencies are in powder and liquid handling, where we see future growth opportunities for pull-through on pumps and compressors, as well as the new customer and direct channel access to these customers. Some of the most exciting growth drivers in the biopharma market, where ILC Dover has great presence, is in supplying single-use and containment technologies in support of the manufacturing of fast-growing monoclonal antibodies and antibody derivatives in therapeutics to treat cancer and rare diseases.

ILC Dover also plays a crucial role in the growing markets for novel diabetes and obesity therapies. And the increasing demand for flexible, next-generation cell culture facilities to serve the cell and gene therapy market. The primary benefits for the single-use equipment produced by ILC Dover are a lower cross-contamination risk, reduced cleaning and sterilization efforts, a highly flexible manufacturing process, much shorter batch turnaround times, and reduced plant footprint and capital investment, respectively, all of which play an important role in the customer, ROI, which is core to how we at Ingersoll Rand support our customers with our current products and solutions. Moving on to the Medical Components, CDMO portion of the business, where the core competency is extrusion and molding of complex, custom silicone and thermoplastic components, as well as sub-assemblies.

This business gives us access to a wide range of new customers on the medical technology side, focusing high-growth segments like cardiovascular and neurology. In addition, we see a lot of future growth opportunities to leverage this niche technology for the creation of high-consumable items like tubing for the biopharma business, as well as pull-through on pumps and compression systems in the sub-assemblies they produce today. Moving on to the Aerospace & Defense end market, which accounts for approximately 25% of the total business, although small in nature, we’re very excited to have this business within our portfolio for multiple reasons. First, this is a very solid business in terms of growth and profitability. Second, it has given us a great point of entry into the global space market, which is estimated to be worth $1.8 trillion by 2035, nearly tripling from $630 billion in 2023.

As described on the slide, the majority of the volume is comprised of human mobility and habitation. Over the long term, in this end market, we anticipate a mid-single to high-single digit growth rate. With core competencies of space suits, inflatable habitats, lighter than air vehicles, and other inflatables, we believe that there is an opportunity for pull-through on our core technologies and a future growth opportunity. For example, oxygen generation is needed across all these products, and we’re currently a market leader in compression technology for portable oxygen concentrators. This is just one example to provide some additional perspective on how we see the pull-through of our technologies where today we’re not present. As we move to slide seven, let me spend some time talking about the alignment of ILC Dover against our stated strategic importance for M&A.

First, we start with an example of Adjacent Technology. Within the life science end market, we have always targeted the consumable portion of bioprocessing, which focuses on single-use technology, including powder containment, liquid management, tubing and components, isolator protectors, and many others. With ILC Dover, we get exactly that, a very clear adjacent market in which we can combine our pumps to those consumables and offer a more complete product portfolio to our customers. An example of this is combining our peristaltic pump technology with a newly launched ILC Dover tubing technology to deliver liquids to single-use devices, which are also made by ILC Dover. This is merely one example of how we can help support customers across multiple steps within their biopharma workflow.

Moving into the Aligned category, first, we’re getting mission-critical equipment like flexible isolators for biopharma manufacturing. Isolators made by ILC Dover are best in class, single-use, and an essential step in the manufacturing process of therapies requiring high-potency APIs, one of which is Antibody-Drug Conjugates, or ADCs, which is a fast-growing class of biopharmaceutical drugs designed to target and treat cancer. Second, the Medical Components, CDMO business enables us to enter a highly fragmented, high-growth segment of MedTech and biomanufacturing. As mentioned on the previous slide, we believe that there’s a significant opportunity for pull-through on our existing pumps and compression technology and also access to new customers and a direct channel of communication with them.

Finally, ILC Dover is giving us the optionality to access the fast-growing market of Aerospace & Defense. With ILC Dover’s deep relationship with NASA, Boeing, and ZeroSpace, to just name a few, we believe that we can leverage these relationships for pull-through opportunities on many of Ingersoll Rand existing flow creation technologies. The acquisition of ILC Dover now provides us a larger platform to continue to build our life sciences business through both an M&A and optionality with a fast-growing market of Aerospace & Defense. Moving to slide eight, let me touch base on our organic initiative. Total organic orders in the first quarter were down 7% due primarily to large project order timing. As we have discussed before, large, long-cycle projects usually driven by mega-project investment tend to be lumpy in nature, and this can create a dynamic of tough comparison in a single quarter.

We believe that we’re getting an outside share of these projects, and we continue to be focused on book-to-bill. In Q1, as expected, we saw book-to-bill greater than one, build in backlog which was up 2% year-over-year. Moving to the chart on the left side of the page, we’re encouraged by both the organic order acceleration through Q1 and the increased Marketing Qualified Lead’s or MQL activity in the second half of the quarter. On the left-hand side of the page, we illustrate the sequential order we saw throughout the quarter. February saw 5% sequential order growth as compared to January, and March, organic orders were up 18% sequentially versus February. Consistently with our initial guidance, book-to-bill was above 1x at 1.02x in the quarter, continued to build backlog in support of our organic growth targets.

As we had mentioned on our last earnings called Q1 2024, had some very tough comps due to large and long cycle project order timing. For a two-year stack, organic orders remain positive. Moving now to the right hand side of the page, we illustrate our MQL activity acceleration throughout the 1st quarter of this year. In Q1 2024, MQLs finished up 4% year-over-year, and this is on top of 9% growth in Q1 of the prior year. We remain encouraged by sequential momentum in MQLs throughout the quarter, where we saw an 11% increase in MQLs during the second half of the quarter as compared to the first half of the quarter. We do acknowledge that market conditions are constantly changing, and we remain nimble and prepared to pivot with those changing market conditions.

I will now turn the presentation over to Vik to provide an update on our Q1 financial performance.

Vikram Kini: Thanks, Vicente. On slide nine, 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 revenues 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. The year-over-year decline in organic orders was primarily driven by the timing of large long-cycle orders. It’s important to note that on a two year stack, total company organic orders and revenue grew 1% and 20% year-over-year respectively.

We remain encouraged by the strength of our backlog, which was up approximately 2% year-over-year as well as our book-to-bill for the quarter, which was 1.02x. This provides us with a healthy backlog to execute on for the balance of the year and gives us conviction and delivering our full year 2024 revenue guidance. The company delivered first quarter adjusted EBITDA of $459 million, a 15% year-over-year improvement, and adjusted EBITDA margins of 27.5%, a 290 basis point year-over-year improvement. Adjusted earnings per share was $0.78 for the quarter, which is up 20% as compared to the prior year. Free cash flow for the quarter was $99 million and total liquidity was $3.5 billion with $1.5 billion of cash on hand at quarter end. Our net leverage was 0.7 turns, which is 0.4 turns better than the prior year.

Turning to slide 10, for the total company on an FX adjusted basis, Q1 orders declined 4% and revenue declined 3%. Total company adjusted EBITDA increased 15% from the prior year. The ITS segment margin increased 370 basis points, while the PST segment margin increased 50 basis points year-over-year. Overall, Ingersoll Rand expanded adjusted EBITDA margins by 290 basis points. The improvement in adjusted EBITDA was driven by 390 basis points of gross margin expansion, largely driven by our continued execution of i2V initiatives and pricing. Partially offsetting this gross margin expansion were investments in SG&A centered around commercial footprint and R&D initiatives. Corporate costs came in at $44 million for the quarter, and finally, adjusted EPS for the quarter was up 20% year-over-year to $0.78 per share, and the adjusted tax rate for the quarter was 21.3%.

On the next slide, I’d like to take a minute to highlight the $1 billion increase to our share repurchase program. This repurchase authorization is incremental to the remaining amount on the existing $750 million authorization and is currently expected to start being executed against in the first quarter of 2025. Much like the prior authorization, we would expect to utilize the new $1 billion share repurchase authorization over a three year time period. Our capital allocation strategy remains unchanged and share repurchases are an important part of that strategy. M&A remains our top priority for our capital allocation and we continue to expect M&A to be our primary use of cash as we look ahead. Free cash flow for the quarter was $99 million, including CapEx, which totaled $62 million.

The year-over-year decline in free cash flow of $49 million was driven primarily by two factors. First approximately $40 million of CapEx timing. As outlined in our guidance, our expected CapEx spend remains unchanged at approximately 2% of revenue for the full year. And second, approximately $20 million of interest payment timing. Due to the bond issuance completed in August of 2023, interest payments on those bonds are now made twice per year as compared to our prior structure, which was generally paid evenly over the course of the year. This will normalize as we move throughout the year. Total company liquidity now stands at $3.5 billion based on approximately $1.5 billion of cash and $2 billion availability on our revolving credit facility.

Leverage for the quarter was 0.7 turns, which was a 0.4 turn improvement year-over-year. Specifically within the quarter, cash outflows included $143 million deployed to M&A, as well as $81 million returned to shareholders, of which $73 million of the share repurchases and $8 million for our dividend payment. I will now turn the call back to Vicente to discuss our segments.

Vicente Reynal: Thanks, Vik. On slide 12, our Industrial Technologies and Service segments deliver 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%. Moving to the product highlight, compressors were down high single digits, primarily driven by large, long-cycle project order timing, primarily in the renewable natural gas in the U.S., and EV battery and solar projects in China. Excluding these items, organic orders in compressors were approximately flat year-over-year. Important to note that on a two-year stag, compressor orders are up low double digits and revenue is up mid-30s.

Industrial vacuum and blower orders were up high single digits and revenue was up mid-teens. On a two-year stag, vacuum and blower orders were up mid-single digits and revenue is up low 40s. For innovation in action, we’re highlighting Elmo Rietschle new vacuum pump technology, which was recently launched in EMEA. This patented oil-free technology ensures no air contamination or waste, which is ideal for high-growth, sustainable end markets like food and beverage, pharma, and medical. This product also offers an almost 50% reduction in energy consumption compared to equivalent liquid green technology, enabling productivity for customer and also reducing total cost of ownership. Turning to slide 13, the PST team delivered adjusted EBITDA of $91 million with a margin of 30.8%.

Organic orders in the PST segment were down approximately 5% year-over-year. The decline in orders was driven primarily by softness in life sciences and expected declines in China wastewater end markets. It is important to note and encouraging that life science business saw more than 15% increase sequentially in order momentum in Q1 2024 as compared to Q4 of 2023. In addition, short-cycle orders in the PST segment remain strong with book-and-ship orders up high single digits sequentially. We see organic order growth stabilizing, and we remain positive about the underlying health of the PST business. Overall, the PST segment remains on track to meet our long-term investor-day growth commitments. For PST Innovation in Action, we’re highlighting a great recurring revenue opportunity with ELCOM.

ELCOM is a range of comprehensive end-to-end IIoT solutions that seamlessly integrate into existing infrastructure that enable monitoring, controlling, and optimization of operations. In this slide, we show one application of ELCOM system to monitor and control gas pressure on the distribution grid that can help utility companies reduce emissions by up to 10%. We see these as a great opportunity for recurring revenue through subscription-based software and services. As we move to slide 14, given the solid performance in Q1, we’re raising our 2024 guidance. Total company revenue is expected to grow overall between 4% to 6%, which is down 100 basis points versus prior initial guidance, driven entirely by FX. We anticipate positive organic growth of 2% to 4%, consistent with prior guidance, where price and volume remains split at approximately 70/30.

FX is now expected to be relatively flat for the full year, which is 100 basis points headwind as compared to our initial guide. M&A is projected at approximately $170 million, which reflects all completed and closed M&A transactions as of May 1st of 2024. ILC Dover is not included in these figures and is expected to close later in the quarter. Corporate costs are planned at $170 million and will be incurred relatively evenly per quarter for the balance of the year. The increase versus initial guidance is driven by investments for growth in demand generation activities, as well as investments in IR digital and other IT-related investments. Total adjusted EBITDA for the company is expected to be in the range of $1.94 billion and $2 billion, which is up approximately 11% year-over-year at the midpoint.

At the bottom of the table, adjusted EPS is projected to be within the range of $3.20 and $3.30, which is up 2% versus prior guidance, and approximately 10% 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 initial guidance provided in February. As you can see, the primary driver of EPS growth is associated with operational activity related to improve incremental and operational performance. As I mentioned earlier, FX is the largest headwind driving approximately 100 basis points of total revenue declines and a $0.04 of EPS headwinds. Total interest expense is now expected to be approximately $130 million and will be incurred relatively evenly per quarter for the balance of the year.

No changes have been made to our guidance on the full-year adjusted tax rate, CapEx spend as a percentage of revenue, free cash flow to adjusted net income conversion or share count, all remain in line with initial guidance. Turning to slide 15, as we wrap up today’s call, I want to reiterate that Ingersoll Rand remains in a very strong position. We continue to deliver record results, and our updated guidance is reflective of our Q1 performance and ongoing momentum. Our M&A funnel remains strong, and with acquisitions announced and close today, we’re poised for a record year of annualized inorganic growth. We remain nimble, and we’re prepared to pivot with the constantly changing market conditions. To our employees, I want to thank you one more time for an excellent start to the year.

These results show the impact each of you have as owners of the company. Thank you for your hard work, resiliency, and focused actions. We believe the power of IRX combined with our ownership mindset and leading portfolio 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.

See also 25 Richest Billionaires in Media and Entertainment and The World’s 30 Least Powerful Passports in 2024.

Q&A Session

Operator: Thank you. [Operator Instructions]. Your first question today comes from the line of Mike Halloran from Baird. Your line is open.

Mike Halloran : Good morning, everyone.

Vicente Reynal: Morning, Mike.

Vikram Kini: Good morning, Mike.

Mike Halloran : So, simplistically, what’s changed from a trend line perspective? 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, a little worse trends, some sort of inflection. 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: Yeah, Mike, I’ll say that the only real change has been the increased funnel activity since we last reported or spoke publicly. Despite the headwinds we saw in Q1 from large projects on a year-to-year basis, the very encouraging sign is that the funnel activity for large projects on a global perspective, as we look forward, is still quite healthy. What we saw, it was definitely a very increased activity and improvement in China in particular, as well as other places across EMEA that are related to kind of large mega-project investments that are mostly in region for the region. So, we view, again, the messaging very consistent versus what we said in February, and that is kind of quite encouraging.

Mike Halloran : Then the order expectations, as you think about the year?

Vicente Reynal: Yeah, sequential orders.

Vikram Kini: Yeah, maybe I’ll jump in there, Mike. I think in terms of the order activity here, first and foremost, we did see book-to-bill above 1x for the first quarter at about 1.02x, which is very much in line, I think, with how we intended for the year to start. As a reminder, we typically are above 1x for the first half of the year and below 1x in the second half largely due to normal seasonality as well as the shipment of the long-cycle projects. I think if we move into Q2, I think that the Q2 comps particularly on a year-over-year basis are still, I’d say a touch challenging and I think they normalize a bit more as we move into the back half of the year. So again very consistent, I think with how we saw things coming into the year and I think by and large Q1 played itself out largely as we expected.

Mike Halloran : Thanks for that. and then maybe talk to the sequential trends your expecting for the year from a earnings perspective and a cadence thing, meaning difference from normal seasonality, as well as the 1Q margins in the compressor segment, ITS. Is that the right run rate? I mean, it was a pretty healthy first quarter margin. So just want to make sure that’s the right base to build off of.

Vikram Kini: Yeah, sure. Let me maybe start with that latter point there, 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 a 100 basis points of year-over-year margin expansion. 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. So, we’re actually quite pleased with the continued momentum we’re seeing. Yes, as you indicated here, clearly ITS probably is the leader of the pack in that respect, but what I would say here is Q1, our expectation certainly will be our highest margin expansion on a quarterly basis for the year, and we expect the levels of margin expansion to kind of moderate as we move into the latter half of the year.

Now that being said, Mike, I think we would say you, we continue to be really operationally focused, QFE [ph] focused, and we’ll continue to try to drive outperformance where possible. The first part of your question in terms of, I’d say the phasing and the seasonality, nothing I’d point to that’s dramatically different than what you’ve seen in prior years, whether you want to look at it from an earnings perspective, first half or second half, as well as what I spoke to earlier on the book to bill cadence. So again, I’d say relatively consistent with what you’ve seen, but we’re very encouraged with the strong start of the year we saw on Q1.

Mike Halloran : Appreciate it guys, thank you.

Vicente Reynal: Thanks Mike.

Operator: Your next question comes from the line of Julian Mitchell from Barclays. Your line is open.

Julian Mitchell : Hi, good morning everyone.

Vicente Reynal: Morning Julian.

Julian Mitchell : Good morning. So maybe just, I don’t know, 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. Then on the revenue line, is the point that revenues are up sequentially, sort of low mid-single digits in Q2, like normal. You have the tailwind of the 50 million push out that maybe the top line environment is also soggier now than it was a few months ago.

Vicente Reynal: Yeah, Julian, 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-to-year comparison due to the outgrowth that we saw Q1 and Q2 in China. EMEA and America is performing, comparatively much better, clearly. Q2 comps are still a bit of a challenge from a year-to-year perspective, but that being said, we do believe that Q2 organic order growth will definitely perform better than Q1. We do expect Q2 organic orders to be up sequentially as compared to Q1. So our confidence level here is based on the fact that we continue to see momentum on MQL activity.

As we explained also that kind of intra-quarter sequential momentum that we saw in the first quarter, which is relatively much higher than what we have seen historically, that kind of continues to build a confidence that, things are kind of losing up and freeing up as we continue to see better visibility from a customer perspective.

Vikram Kini: Yeah, and then, I’ll take the revenue side of that question, Julian. So, I think to answer your first part, yes, we do expect to see, Q2 revenue performance sequentially trend upwards from Q1. So I think that’s a completely fair statement. I think specifically with regards to Q2, and maybe I’ll focus my commentary a little bit more year-over-year here, we do expect to see Q2 up, well I’ll say low single digit on an organic revenue growth perspective with continued year-over-year EBITDA margin expansion. Then I think as far as kind of the other kind of moving components, not dramatically different than frankly what you saw in Q1, meaning M&A contribution comparable to what you saw in Q1. FX, I mean a slight headwind on a year of year basis.