The Ingersoll Rand Q4 2023 Earnings Call is being recorded and all lines have been muted. After remarks from the speakers, there will be a question-and-answer session. The Vice President of Investor Relations, Matthew Fort, introduces the CEO and CFO who will discuss the company's financial highlights and provide full year 2024 guidance. The call will also address forward-looking statements and non-GAAP financial measures. One question and one follow-up will be allowed during the Q&A session. The call is then turned over to the CEO, Vicente Reynal.

The speaker begins by thanking the employees for their hard work in achieving another record year in 2023. They also welcome new employees from a recent acquisition and highlight the company's outperformance against long-term commitments. The speaker then mentions the recent Investor Day and highlights the company's economic growth engine and financial profile. They also mention the company's transformation into a premier growth compounder through strategic divestments and acquisitions.

Ingersoll Rand's balance sheet is stronger than ever and they are well positioned to continue growing market share. They are committed to delivering financial performance while also making a positive impact on the planet and community. They have received recognition for their efforts, including being ranked first in the world in their industry and being named to the A list for their performance in tackling climate change. Their progress towards their 2030 goals is well on track. Their engaged employee base and ownership mindset have been catalysts for their success, leading to high employee satisfaction and creating a life-changing economic opportunity for their employees and their families.

The combination of various factors, executed through our economic growth engine, has resulted in durable long-term performance for our company. We are well-positioned to take advantage of global mega trends and have consistently outperformed our growth targets. Our high-performance culture and focus on execution have led to strong financial results, including 25% adjusted EPS growth and an 18% free cash flow margin in 2023. We are on track to meet or exceed our 2025 targets and have set new aggressive targets for 2027. M&A remains a key part of our strategy, with 13 acquisitions in 2023 and 10 currently under LOI.

In the fifth paragraph of the article, it is stated that the company's M&A funnel remains strong and is over 5x larger than it was at the time of the RMP. The company expects to acquire an additional 400 to 500 basis points of annualized inorganic revenue in 2024. There are currently 10 transactions under LOI, which are similar in size and nature to previous deals. The company also has a couple of deals in the funnel with a purchase price exceeding $1 billion. The presentation then shifts to an update on the company's Q4 and full year 2023 financial performance. They saw a 3% increase in organic orders and a 4% increase in revenue. The backlog is up over 8% year-over-year, providing a healthy backlog for 2024. Adjusted EBITDA improved by 19% year-over-year, with margins also improving. Free cash flow for the quarter was $552 million and for the year, it was nearly $1.3 billion. Total liquidity also increased by $400 million. Net leverage also improved year-over-year and sequentially. On an FX adjusted basis, Q4 orders and revenue both grew 11%, and adjusted EBITDA increased by 19% from the prior year.

The ITS segment margin increased and the PST segment margin remained flat, while corporate costs were at $47 million for the quarter. Adjusted EPS was up 19% to $0.86 per share. For the full year, orders grew 8%, revenue increased 17%, and adjusted EBITDA increased 25%. Free cash flow for the quarter was $552 million and total liquidity was $3.6 billion. Leverage improved by 0.2 turns and $295 million was returned to shareholders through share repurchases and dividends. M&A remains the top priority for capital allocation. The Industrial Technologies and Service segment saw 5% organic revenue growth.

In the fourth quarter, adjusted EBITDA increased 26% with a margin of 30%, exceeding the 2025 target for ITS. Overall demand for products remained strong with 5% organic order growth. Compressors saw double-digit order and revenue growth, while industrial vacuum and blower orders declined due to a de-booked order from a European electric truck manufacturer. However, core product lines showed strong momentum on a two-year stack. The Precision and Science Technology segment had flat organic revenue. An innovative new compressor with advanced technology was also highlighted.

In the fourth quarter, the PST team delivered adjusted EBITDA of $94 million, up 2% year-over-year with a margin of 30.1%. Organic orders were down 1.6%, but excluding the life science businesses, PST has seen positive organic growth in 11 out of the last 12 quarters. The segment remains on track to meet long-term growth commitments. The company is introducing 2024 guidance, with expected revenue growth of 5-7%, organic growth of 2-4%, and adjusted EBITDA of $1.915 billion to $1.975 billion. Adjusted EPS is projected to increase by 8% at the midpoint. The company's ARO piston pump system, which leverages i2V and demand generation, has already received $7 million in orders and has potential for $1 million in annualized after-market revenue.

In this paragraph, the speaker discusses their expectations for the company's adjusted tax rate, gross interest expenses, and CapEx for the year 2024. They also mention a 2024 full year guidance bridge that shows the expected growth in adjusted EPS. They provide some commentary on Q1, stating that they expect normal seasonality to return and a tough comp to impact organic revenue growth. The speaker reiterates that the company is in a solid position and thanks employees for their hard work and commitment. They also mention the company's strong balance sheet and comprehensive capital allocation strategy.

The company remains flexible and is constantly monitoring market conditions. The call is now open for questions. The first question is about the company's guidance and what underlying assumptions are being used for the broader environment and end markets. The CEO answers by discussing regional performance, with America and Europe being stable and showing good momentum, while Asia Pacific faces some challenges.

The company saw strong growth in the first half of 2023 in Asia Pacific, driven by China. They expect to outperform the market in China and have proven their ability to do so in the past. There are no specific markets that stand out as highly differentiated, but the company continues to pivot towards high-growth and sustainable markets. They have successfully relaunched a legacy product line using demand generation and IRX. On the Life Science side, there are some headwinds but the company expects to see sequential improvement in the second half of the year. This is in line with the expectations of other players in the industry.

Julian Mitchell asks about the cadence and incremental margins for the year. Vik Kini responds that the first quarter will likely make up about 21% of earnings and the high 30s figure for incremental margins will be steady across both segments. Vicente Reynal adds that the 35% to 40% incremental margin will come from initiatives, prior M&A improvement activities, proactive restructuring, and corporate cost reduction.

During a conference call, Julian Mitchell asks Vicente Reynal about the company's orders and whether they will be down in the first quarter due to a tough environment in Asia. Vicente Reynal responds that they typically do not give specific guidance on orders, but they do expect them to be up in the first quarter compared to the previous quarter. He also mentions that the Life Science business is roughly 25-30% of the PST segment and they expect it to return to normal growth in the second half of the year. Vik Kini adds that they expect to generate approximately 2% price on a full year basis, similar to previous years.

The speaker discusses the expected financial performance of the company in 2024, stating that they anticipate being both dollar and margin positive. They also mention that this applies to both the ITS and PST segments. The speaker is then asked about the impact of demand generation and IRX on the life science market, and they explain that the market has seen similar declines to other biopharma related markets, but they are excited about the prospects of their SPX business in China. They also mention their ability to adapt and pivot to different end markets without major changes to their products.

In this paragraph, Rob Wertheimer and Vicente Reynal discuss the impact of demand generation on the decline in life sciences and the potential for a bounce back in growth. Reynal emphasizes the importance of demand generation in reaching a fragmented customer base and providing solutions. He also mentions an increase in LOIs and a more open M&A market, with 10 transactions in the works similar to previous bolt-on deals.

The company has 10 LOIs that are sole source and they have built strong relationships with the families involved. They walked away from one billion dollar transaction due to prudency and discipline. The company remains highly disciplined and sees a lot of good opportunities. The growth in Americas and EMEA is supported by both longer and shorter cycle markets, with shorter to medium cycle showing better momentum. The company expects to see continued growth in the industrial shorter cycle, particularly in PST.

The company remains agile in pursuing energy efficiency and reshoring. China was down in the quarter, but the company is staying close to the market and controlling what they can. Orders in China were down mid-single-digits, but this is on top of strong growth in the previous year. The CEO has visited China multiple times to stay updated on the situation.

The speaker discusses the positive order momentum in China and the team's ability to navigate the difficult market by being agile and leveraging technology. The CFO also mentions the healthy backlog and longer cycle projects, giving visibility into the back half of the year. The strength in European compressor orders is noted, and the speaker is asked to rank the importance of Scope 1 emission targets, CO2 pricing, and high energy prices.

Vicente Reynal, CEO of IR, discusses the top three challenges facing the company: high energy prices, Scope 1 targets, and CO2 emissions. He also mentions the company's strong performance in terms of incremental margins and achieving margin targets ahead of schedule. He explains that the ITS business is driving this success through initiatives such as i2V, pricing strategies, and after-market sales. Reynal also mentions recent restructuring measures as a means of protecting the company's profits.

The speaker discusses controlling what can be controlled and taking actions to improve margins. They also mention not seeing any significant changes in regulations that could impact the business in the next 12-24 months. In terms of backlog, it is currently high and may eventually normalize, but with a consistent book to build ratio, it will remain at a higher level than in the past.

Vik Kini discusses how the company has seen a change in the composition of their backlog, with more longer cycle projects, compared to previous years. He also addresses any potential disappointments with acquisitions and mentions the importance of integrating businesses from day one for success. The company has a playbook for integration that they will continue to use for future acquisitions.

Vicente Reynal and his team have implemented a dashboard to monitor the integration of M&As and react quickly to any issues or gaps. The company's revenue in 2024 is expected to be 40% higher than in 2021, making it more difficult to maintain the same M&A contribution every year. However, with the company's addressable market increasing from $25 billion to $55 billion, there is a larger pool of potential acquisitions to choose from.

The speaker discusses the M&A engine and its growth potential, mentioning that they track transactions and make constant improvements to the process. They also mention that while margins have been strong in recent years, there are still some supply chain disruptions affecting efficiency in manufacturing. The company remains focused on improving operations.

The speaker discusses the company's growth algorithm and how it is driven by both demand generation and organic volume. They mention that there is potential for upside on both sides, but the regional trends and backlog indicate that APAC may face more challenges. However, the company is optimistic about their growth potential and believes that the equation for success remains consistent with previous years.

The company is aware of regional trends and will continue to monitor them throughout the year. The ITS segment saw a sequential improvement in margins from 28.8% to 30% in the fourth quarter, driven by productivity measures, positive price-cost dynamics, and strong execution. The aftermarket and recurring revenue are also a focus and are expected to contribute to margin growth in the future.

The company has made strategic acquisitions to add drying capabilities to its portfolio, which has resulted in revenue synergies. They have acquired several companies in this sector and plan to continue expanding in this area due to the high attachment rate to compressors.

The speaker discusses the positive impact of air treatment on the growth of the compressor market, stating that it drives momentum and generates solid aftermarket revenue. They also mention the optimization of energy efficiencies when the two are connected and remotely controlled. In response to a question about M&A, the speaker clarifies that the 400 to 500 basis points mentioned refers to future acquisitions, while the $160 million revenue contribution in the guidance includes current and completed acquisitions.

The company expects to continue operating in line with their stated economic growth engine. There is potential for a large order from an EV truck manufacturer in Europe to come back on the books. The company is in talks with them and the prospects for 2024 look good. In terms of free cash, the company plans to convert 100% of their CapEx and sees an opportunity for improvement in working capital.

The company is pleased with its exit momentum and inventory levels, but still has room for improvement in areas such as collections and shared services. There are no planned buybacks in the guidance for 2024, but the company typically allocates approximately $250 million for buybacks. The CEO thanks employees for their ownership mindset.

The speaker expresses excitement about the level of engagement and energy within their organization as they travel around the world. They believe this momentum and focus on ownership and leveraging their IR is powering their economic growth. The speaker is encouraged and happy with their performance and looks forward to another successful year in 2024. The conference call is now concluded.

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