The Ingersoll Rand Q2 2023 Earnings Conference Call has begun with Kayla Baker, the conference operator, welcoming everyone. Matthew Fort, the Vice President of Investor Relations, then took over and reminded everyone of the forward-looking statements and non-GAAP financial measures. He then invited Vicente Reynal, the Chairman and CEO, and Vik Kini, the Chief Financial Officer, to review the company and segment financial highlights and provide an update to the 2023 guidance. Finally, he asked that each caller keep to one question and one follow-up to allow time for other participants.

Vicente Reynal thanked the employees for their hard work and welcomed new employees from recent acquisitions. He mentioned that the company had delivered double-digit growth in revenue, adjusted EBITDA, adjusted EPS and free cash flow and published a sustainability report. He then discussed the company's economic growth engine and organic initiatives, which are centered around product innovation and i2V. He also mentioned their progress towards their inorganic goals, and gave an example of how they have leveraged products localization and i2V to drive organic growth in China.

The Gardner Denver and Ingersoll Rand merger has led to a 17% CAGR in blower and vacuum product lines. Through a turndown event, a new oil-free screw vacuum pump was developed, which expanded the addressable market by $350 million. M&A has been a focus of capital allocation, and the recently acquired Roots brand expands capabilities in low-pressure and centrifugal technology, which is important for green steel manufacturing. The M&A funnel is over five times larger than before and seven transactions are at the LOI stage.

Ingersoll Rand is committed to increasing its inorganic revenue by $200-300 million in 2023, and has made significant progress in establishing itself as a top-quartile ESG company. It has been named to the Dow Jones Sustainability World and North America Indices, and has received an ESG risk rating of low from Morningstar Sustainalytics. To further promote employee engagement, it has awarded over $660 million in equity to its employees since 2017 and offers an ownership works program that grants equity to new employees after one year.

The company had a successful Q2, with total company organic orders and revenue increasing 5% and 12% year-over-year respectively. Adjusted EBITDA was up 27% year-over-year and adjusted diluted earnings per share was up 25%. Free cash flow was up 24% versus the prior year and total liquidity increased by $1 billion. The company's competitive differentiator, IRX, is an example of their ownership mindset in action.

The Q2 revenue and adjusted EBITDA risk associated with the cybersecurity incident was mitigated during the quarter, and the company saw 10% order growth and 18% revenue growth on an FX-adjusted basis. Adjusted EBITDA increased 27%, and both segments remain price cost dollar and margin positive. Adjusted diluted earnings per share was up 25%, and the adjusted tax rate was 24%. The company also received an investment-grade first-time issuer default rating from Fitch, and free cash flow for the quarter was $204 million with $25 million in CapEx and total liquidity of $3.2 billion.

This paragraph discusses the company's cash outflows and investments into M&A, as well as their Industrial Technologies and Service segment's strong year-over-year organic revenue growth and adjusted EBITDA. The segment saw double digit growth in orders and pricing, while the Americas and EMEIA saw low and high single digit growth respectively. Oil free product orders also outpaced oil lubricated products, indicating momentum from trends such as ESG, on-shoring and near-shoring, as well as energy savings investments.

The Asia Pacific team has seen order growth in the mid-teens, driven by strong performance from China. The EMEIA team collaborated with a clean energy tech startup to develop and build an oil free hydrogen compressor, and the first unit was shipped in July. Revenue in the Precision and Science Technology segment grew 5% organically, and adjusted EBITDA was up 16% year-over-year. Organic orders were down 10% year-over-year due to larger frame orders not repeating in the life science businesses and the decline of longer cycle orders in the Agritech platform.

PST is introducing a new peristaltic pump technology for water treatment, industrial, and life sciences applications. Leveraging this technology across both Albin Pump and LMI brands, they are expanding their addressable market by over $250 million. PST is raising their 2023 guidance due to their solid performance in the first half and continued momentum from backlog, with total company revenue now expected to grow between 12-14%, organic growth of 8-10%, and FX being approximately flat on a full year basis.

Ingersoll Rand has seen an increase in M&A revenue, bringing it to approximately $300 million. Corporate costs are planned at $165 million and total adjusted EBITDA is expected to be in the range of $1.69 and $1.74 billion. 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. Ingersoll Rand remains in a strong position and is prepared for any challenges that may come. The company is focused on meeting financial targets, executing their economic growth engine, and deploying capital with the highest return.

Vicente Reynal and Michael Halloran discussed the underlying trends seen in the quarter, with Vicente noting that the cadence was in line with what is usually seen, and that the marketing qualified leads continued to see good momentum. Regarding the PST side, Vicente noted that the book and turn business remains strong, indicating a healthy demand environment.

Ingersoll Rand's Q3 is expected to have similar revenue and adjusted EBITDA margins to Q2, while the Industrial Technologies Solutions (ITS) segment is expected to grow revenue at a low double digit rate with 100 basis points of margin expansion. The Power Solutions Technologies (PST) segment is expected to grow mid-single digits.

Vicente Reynal discussed the demand for ITS and compressors, noting the influence of reshoring and ESG. He mentioned that Q3 of the prior year had a tough comp for orders and that 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 second half being less than one due to those larger orders getting shipped in the fourth quarter.

Vicente Reynal discusses the success of the compressor product line, particularly the oil-free compressor, and how the energy savings from the investment is resonating well with customers. He also talks about air audits being done at a faster clip and reshoring, which is happening both in the US and other countries such as India and China. Finally, he mentions that customers going through the air audit process creates an opportunity for service and stickier service attachment.

Vicente Reynal discussed the statistic that 70% of revenue is from new equipment and 30% from service revenue. He also mentioned that there is good momentum in Care and Packaged Care solutions in North America, Europe, and Asia. Additionally, there is strength in certain end markets such as electric vehicles, battery production, lithium, and mining in China.

Vicente Reynal explains that the team is performing well despite a tough environment in China, and that the order strength in their compressor business is not a dramatic change, but rather an even mix of long and short cycle orders. He also notes that the oil-free performance has been particularly strong.

Vik Kini explains that the slight decrease in their incremental margin forecast for the year is due to an increase in corporate costs and the technology acquisition they completed in Q2. Despite this, they are still investing in the business and expect their pricing and cost to remain comparable to their prior guidance.

Vik Kini and Nigel Coe discuss the expected margins for the third and fourth quarters, with Kini noting that the third quarter will show year-over-year margin expansion and the fourth quarter will remain comparable to historical levels. He also notes that there is incremental margin expansion included in the fourth quarter guidance, but they remain prudent on the volume expectations for the fourth quarter as the potential source of upside to the guide.

Vicente Reynal explains that industrial vacuum trends remain stable, and the company has a wide range of technologies and brands. He also notes that industrial vacuum plays differently than industrial compressors. He is pleased with the team's performance and their ability to capture more market share with new technologies.

Vicente Reynal explains that the majority of the product in the ITS is customized to specific applications, so there is no risk of destocking. In the PST, they track monthly sell-in and sell-out to get visibility on the level of inventory available and whether it is being destocked or overstocked. They have been proactive in preventing overstocking and have not seen any major destocking.

Vicente Reynal speaks about the exciting opportunity of an oil-free hydrogen compressor that their engineering center in India is now capable of testing. They are one of the only companies in India with this capability and have spoken about the expansion they are making on prior earnings calls. Market sizing is still in early stages and they will provide more color on it at the Investor Day. The team in India developed the technology in collaboration with a company in Europe and they were the only ones able to meet the performance requirements. This speaks to the investments they have made in R&D and technology.

Chris Snyder asked Vicente Reynal if there is any region or market where demand is softening, to which Reynal replied that there has been sustained momentum in terms of MQLs in the month of July. He also mentioned that there are tough comps to consider in the third quarter, but the team has been posting double-digit revenue growth for nine out of the last ten quarters. Snyder then followed up by asking about the prior quarters' prediction of a flat backlog, to which Reynal replied that this trajectory is still generally the same.

Vik Kini and Vicente Reynal discuss the expected backlog for the year and the dynamics of pricing and volume growth for the second half of the year. They expect the backlog to remain flat at the end of the year and that the organic volume growth in the fourth quarter may be slightly higher than expected. They also note that pricing may remain similar between the third and fourth quarters.

Vicente Reynal and Joe O'Dea discuss Q3 and Q4 revenue and bottom-line growth. Vicente explains that Q3 organic growth is expected to be healthier than Q4, and that pricing is expected to normalize in the back half of the year. He also mentions that volume expectations have increased, and that the backlog could provide an opportunity to outperform in Q4. Joe then inquires about how the company is anticipating growth and positioning itself in advance. Vicente responds that they are trying to identify and anticipate growth far in advance.

The team is analyzing over 100 micro trends in order to identify potential growth vectors. As an example, they are looking at lithium battery recycling technologies. In addition, the team is reassessing which markets will see higher growth and pivoting resources and technologies to attack those early indications.

Vicente Reynal is pleased with the company's momentum and success, attributing it to their focus on growth vectors such as nuclear facilities and LNG or hydrogen in France and Germany. He is excited about the potential of their IoT technology, as well as the demand generation, packaged care, and recurring service work that can be achieved with it. He expresses his gratitude to the company's employees for their hard work in delivering a record quarter.

The company is counting on its team to continue to execute and take advantage of its unique ownership model, IRX, which is seen as a differentiator. The conference call has concluded.

This summary was generated with AI and may contain some inaccuracies.