Q2 2021 Ingersoll Rand Inc Earnings Call
Good day, and thank you for standing by welcome to the.
The Ingersoll Rand second quarter 2021 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone.
Be advised that today's conference is being recorded.
Recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Christopher Myron Vice President of Investor Relations. Please go ahead.
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Ladies and gentlemen, this is the operator please standby.
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This is the operator, please standby the conference will start momentarily. Thank you so much for your patience.
[music].
Good day, and thank you for standing by welcome to the Ingersoll Rand second quarter 2021earnings conference call. At this time, all participants are in a listen only mode. After the speaker's.
Gross presentation, there will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Christopher Mira <unk>, Vice President of Investor.
Please go ahead.
Good morning, everyone and thank you for the patients with the.
Technical difficulties this morning welcome.
Welcome to the Ingersoll Rand 21, 21 second quarter earnings call I'm, Chris Martin Vice President of Investor Relations.
And joining me is the same day right now president.
Investor Chief Executive Officer, and Vic Kenny Chief Financial Officer.
We issued our earnings release and presentation yesterday that we will reference during the call.
Both are available on the Investor Relations section of our website.
W. W. Dot I R C O dot com.
In addition.
<unk> and 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 2 for more details. In addition in todays 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.
On today's call, we will provide a company strategy update review, our company and segment financial highlights and offer updated 2021 guidance for.
For today's Q&A session, we ask each caller keep to 1 question and 1 follow up to.
Time for other participants at this time I'll turn the call over to <unk>.
Thank you Craig and good morning to everyone and as you can see on slide 3 anchor into a purpose. We're realizing the achievement of our desired targets.
You will hear 3 key themes today first we're effectively.
To allow for allocating capital to advance our portfolio transformation to generate significant value for our shareholders.
You'll hear about how we are outperforming and raising guidance, which illustrates our organic investments in new product development and demand generation our ultra working.
And third we will touch on our E M.
Is G journey.
I have never been more excited about the state I think is around the.
The combination of a highly engaged workforce, who think and act like owners and the use of I R. X is what makes us highly unique.
I want to thank our employees all around the world for their dedication and determination we.
<unk> our board our employees with an unwavering focus on health safety and mental well being.
Moving to slide for our 5 strategic imperatives are how we stay grounded on priorities and areas of focus.
Youll see on the right hand side during Q2, we have achieved substantial traction in all 5 imperatives.
Just within our operate sustainably in strategic imperative, we achieved another major milestone, but I'll touch on the next slide.
Moving to slide 5 a couple of weeks ago, We published our 2020 sustainability reported.
The reported reflects our 2020 is your data celebrates our progress and details are.
These goals with a high focus on measurable targets on accountability.
We will spend more time on this next Friday during our scheduled ESG and sustainability report investor update.
What I want to emphasize right now is the team's strong bias for action over the last year as you can see on this page.
We have focused and deliver on diverse.
Within our board and extend the leadership team, which is now 50% and 43% respectively.
We have launched aggressive 2030 in 2050 goals and improve our new product development process to address these growth.
We expanded our stock holders rights through corporate governance changes and 1.
Further things I am most proud of on behalf of our employees is granting a $150 million in equity to our employees.
Which we believe is the largest employee equity grant ever provided by an industrial company.
We see broad based employee ownership is a game changer.
No on the represented.
1 other patients increase their earnings on wealth, if their employer in organizations that offer equity grants.
And that's a powerful aspects of our thinking and acting like an owner.
That even ties into how directly impact global ESG efforts.
And I look forward to sharing more with you next week.
Moving to slide 6 the signing of definitive agreements to acquire <unk> and maximal solutions, both of which will become part of the precision and science technologies segment.
A representative of the key characteristics, we're targeting to drive our inorganic growth strategy.
<unk> is by our estimation.
The number 2 global progressive cavity pump manufacturer.
And it is a highly recognized brand as a premium player in the market that adds a new positive displacement pumps technologies to our portfolio.
Maximus solutions is a leader player in the Agri Tech software and controls market hosted.
Apology, we intend to pull through to other markets and leverage across the Ingersoll Rand portfolio.
Both of these companies have shown strong high single digit to double digit organic growth since our late 2017.
And our focus on sustainable end markets that tend to grow well above GDP rates.
In addition.
It looks like both have strong aftermarket profiles enhanced by digital revenue streams, including software as a service.
We anticipate both acquisitions to yield single digit post synergy adjusted EBITDA purchase multiple by year 3 of ownership.
With these 2 acquisitions were expecting to add approximately $3.8 billion to.
On the addressable market, which is an impressive 40% expansion.
The profiled on characteristics of these high quality high return on capital and highly strategic acquisitions are indicative of how we're structuring our M&A funnel.
Which leads us to slide 7.
We continue to execute.
Our M&A funnel using <unk> at its backbone.
Our funnel is comprised of 6 stages and is probability weighted according to likelihood of closing when we calculate our funnel sites.
For instance, <unk> has been in our funnel for some time.
And it was not until the owner became actively engage and we were in 90.
Huge creation that it was more from zero percent weighted revenue contribution to 50% and then 100% of signing and now it is out of our funnel calculation.
Last quarter, we discussed how our M&A funnel has grown materially since the Ingersoll Rand Gardner Denver transaction was completed.
At its current state.
Documents for funnel size remains approximately 5 times the size it was versus Q2 on 2020.
With average revenue larger and velocity accelerating meaningfully.
And to be clear. These described the funnel even after removing the 32 targets we passed on in the second quarter.
As well as.
Our signed deals on <unk> and Maximus and it also excludes SPX flow.
As you can see we have significant momentum in the funnel on our flywheel is in full motion.
Regarding SPX flow, we saw the day issue a press release, this Monday, stating that they will pursue strategic alternatives.
Our 80.
$5 per share offer was preemptive and fully accounted for SPX flow Investor Day plan, which is ahead of consensus estimates.
In terms of SPX flow a strategic alternative process.
We participate we intend to remain disciplined in our approach.
As we do with all of our M&A.
Yes.
And there can be no assurances that we will confirm our preemptive offer as part of any such process.
It is important it is very important also to note that 1 we received the second rejection from SPX flow more than a month ago, we pivoted.
So executing on other funnel opportunities.
We have always.
Demonstrated a very this is the sizes and highly disciplined approach with everything we do.
And we believe it is much more important now in this current environment.
Ill fated, even with SPX flow excluded our funnel remains as robust as it did last quarter, which exemplifies the.
The volume and quality of our future potential opportunities.
And we have sufficient cash on hand to execute on these opportunities with $4.7 billion new liquidity.
However, as noted we intend to remain very disciplined in this environment.
It is also important to note that we continue to review our capital allocation priorities with our board and plan.
And to communicate more formally on this topic later in the year.
I will now turn the call to <unk> to provide an update on our Q2 financial performance.
Thanks for center.
Moving to slide 8 we continue to be pleased with the performance of the company in Q2.
Q2 saw strong balance of commercial and operational.
And on execution fueled by the use of IRS with continued performance across industrial end markets.
Total company orders and revenue increased year over year, 48% on 25%, respectively with strong double digit organic orders growth across each segment.
Given the comparisons to 2020 are materially impacted by.
By the prior year impact of Covid, we think comparing this performance for 2019 is a better representation of how the business is improving and.
And we are very pleased with the momentum we are seeing as organic orders in Q2 were up 9% and 6% on a quarter to date and year to date basis, respectively as compared to 2019.
Our organic growth on.
Orders and revenue in the quarter were records for the company eclipsing Q1, and setting up setting us up well as we move into Q3.
Our commitment to delivering $300 million on cost synergies attributable to the Ingersoll Rand industrial segment acquisition remains intact.
As we continue to drive performance on productivity and synergies.
<unk> initiatives using <unk> of the catalyst.
The company delivered second quarter, adjusted EBITDA of $292 million, a year over year improvement of $75 million and adjusted EBITDA margins of 22, 8%, a 160 basis point improvement year over year.
1 item to note these financial metrics.
On both on include the high pressure solutions segment or the specialty vehicle technologies segment, both of which were classified as discontinued operations as of Q2 with relevant prior periods restated to conform to the current presentation.
We will not report on either segment moving forward.
Free cash flow for the quarter was 130.
Do not win.
Yielding total liquidity of $4.7 billion at quarter end up approximately $2 billion from Q1 as we received the gross proceeds from both divestitures in Q2.
This takes our net leverage to 0.2 times of 1.7 times improvement from Q1.
<unk> 6 <unk> turning to slide 9 for the total company orders increased 40% in revenue increased 19% both on an FX adjusted basis.
The Ics and PST segments, both saw strong double digit organic orders growth in the quarter.
Overall, we posted a strong book to Bill of 1.1 for for the quarter.
An improvement from the prior year level of zero point 96.
We remain encouraged by the strength of our backlog moving into Q3 and beyond.
The company delivered $292 million of adjusted EBITDA, which was an increase of 34% versus prior year.
And the ITN S&P NFC segments, both saw year over year improvements.
And adjusted EBITDA and strong margin expansion.
Finally, corporate cost came in at $38 million for the quarter up year over year, primarily due to higher incentive compensation costs as well as targeted commercial growth investments in areas like demand generation and other targeted strategic investments.
We expect corporate costs to remain.
Main elevated at comparable levels in both Q3 and Q4 due to the same drivers.
Turning to slide 10 free cash flow for the quarter was $136 million on a continuing ops basis, driven by the strong operational performance across the business and ongoing prudent working capital management.
Capex during the quarter totaled $12 million and free cash flow included $12 million of outflows related to the transaction.
In addition, free cash flow also included $36 million in cash tax payments related to the historical earnings profile of the hbf in SVT segments.
As is customary in these types.
So <unk> cash tax payments are included in cash flows from continuing operations due to the complexities involved in specific attribution with consolidated returns.
However, the $36 million represents our best quantification of the impact.
Given our reported financials, including revenue adjusted EBITDA adjusted net income and free cash flow are shown on.
Divesting non spaces, we're calling out to $36 million on cash tax outflows to provide a better representation of the under for underlying cash flow of the ongoing business.
From a leverage perspective, we finished the <unk> 2 times, which are the 1.7 times improvement as compared to prior quarter and this included the gross cash proceeds received.
See from both the Hps and SPT divestitures.
We expect to pay the cash taxes for both divestitures later in 2021, and if you were to pro forma Q2 leverage to account for these tax outflows leverage would have been closer to 0.6 times.
On the rights on the page you can see the breakdown of total company liquidity.
<unk>, which now stands at $4.71 billion based on approximately $3.7 billion of cash and nearly $1 billion of availability on our revolving credit facility.
We have considerable balance sheet flexibility to continue our portfolio transformation strategy with M&A, coupled with targeted invest internal investments to drive sustainable organic.
Growth.
Moving to slide 11, we continue to see strong momentum on our cost synergy delivery efforts.
Due to the funnel, we have built that stands in excess of $350 million and strong execution. We are reaffirming our stated $300 million cost savings target.
To date, approximately 250 million.
With annualized synergies have already been executed or are in motion, which is slightly higher than 80% of the overall target.
As a reminder, and consistent with previous guidance, we delivered approximately 40% of our $300 million target in 2020, which equaled approximately $115 million.
For a savings.
In addition, we expect to deliver an incremental $100 million of savings in 2021, which would bring the cumulative total to approximately 70% at the end of this year.
We expect accumulative, 85% to 90% of the $300 million in savings by the end of 2022 with the balance coming in 2023.
The bottom of the page shows the progress we've made across the different areas of synergy delivery with the most notable progress coming from direct material initiatives and procurement as well as <unk>.
In addition, we are starting to see some of the initial wave of savings from our footprint actions and we expect these savings to ramp into 2022.
On the.
Page, we did want to highlight that despite the headwinds we've seen on the cost side, largely coming from direct material and logistics as well as well as some of the expected return of onetime and discretionary costs and strategic growth investments. We do continue to expect to be positive from a price versus cost perspective on a total year basis.
This is <unk>.
<unk> due to the team's use of IRS to proactively implement and deploy targeted pricing actions in the first half of the year.
In addition, we continue to evaluate the overall landscape, particularly with regards to inflation and are evaluating potential incremental pricing actions for the second half of the year.
Overall, we expect to achieve further.
<unk> EBITDA margin expansion for the total company in the second half of the year, although not at the same levels, we delivered in the first half.
I will now turn it back over to <unk> to discuss the segments.
Thank you Vic and moving to slide 12, starting with industrial technologies and services overall organic orders were up 41%.
And revenue up 17.
17%, leading to a book to Bill of 115.
In addition, the team delivered strong adjusted EBITDA of 41% on an adjusted EBITDA margin of 24, 7% up 250 basis points year over year with incremental margin of 34%.
Let me provide more detail on the orders performance starting.
Adjust pressures, we saw orders up in the mid 40%.
Further breakdown into oil free and oil lubricated products shows that orders for both were up above 40%.
From a regional split for orders on compressors.
In the Americas, North America performed strong at all low 40%.
While Latin America was up in the mid 70%.
Mainland Europe was up low, 50%, while India Middle East. So continues for a recovery with order rates up in excess of 100%.
Asia Pacific continues to perform well with orders for low 30% driven by low 30% growth in.
Both China and high 20% across the rest of Asia Pacific.
From a vacuum on blower perspective orders were up in mid forties.
On a global basis with strong double digit growth across each of our regions.
And power tools and lifting the total business was up high 50% in orders and so continue.
With the growth driven mainly by our enhanced e-commerce capabilities and improve execution on new product launches.
On the right hand side, we're highlighting 1 of our new exciting products.
Which is a result of our continued commitment to organic investments in our portfolio.
In this case during Q2.
Partly to the launch of our new line of.
Frigerator dry portfolio.
It's a bit on my background, the basic function of the air dryer.
To remove moisture from the air by calling it with a refrigerant doesn't water vapor is condense and the air can be easily comprise.
The result is dry compressed air which can be used in compressed air equipment without causing any damage.
A dry technology is sold as an accessory to all rotary oil lubricated in oil free air compression technology.
So it is a great adjacent technologies that increases the total quantity of are provided.
For the customer.
This is a very important requirement.
<unk> oils for compression where customers demand high air quality in terms of <unk> in particular.
It is also good to note that it is a great aftermarket generator as it filters or disciplined needs to be change often.
In.
As we leverage the technology develop Asics, which was a company owned by legacy Ingersoll Rand.
Since the merger of Gardner Denver on IR, not only we have accelerated our organic investments in new products for <unk>.
But we're now leveraging the technology in order to serve Gardner Denver Ingersoll.
This gain and in the future even our champion compressor customers.
They even more exciting piece here is that we're doing these while helping the environment.
These new dryer portfolio is 20% more energy efficient and reduces greenhouse gas emissions by over 50%.
Moving to slide 13.
Around precision and science technologies segment overall organic orders were up 20%.
Driven by the medical and dosage from businesses, which serve lap life science water and animal health markets.
These businesses were up double digits.
And we also saw strong performance in our Aero and Milton Roy.
Product lines.
The momentum in our Haskell hydrogen solution business continues to build and we saw some strong funnel activity.
<unk> was up 12% organically, which is encouraging as we have some tough comps due to COVID-19 related orders and revenue in Q2.2020 for the medical business.
Additionally, the PSD.
<unk> delivered strong adjusted EBITDA of $71 million, which was up 20%.
Adjusted EBITDA margin was 37% up 40 basis points year over year with incremental margins of 33%.
Today, we want to highlight our hydrogen refueling business to give you an update on where we are and.
And investments we're making.
As we have discussed before during our Q4 earnings call. We made investments in developing a hydrogen dispensing unit leveraging our high school high pressure technology and were now ready to capture the growth in this business.
We have line of sight to about $45 million.
Organic investments over.
Over the next 5 years to both build out capacity and fund ongoing product development in the hydrogen refueling space.
With approximately $10 million of these investment expected in the next 12 months.
Since our last call, we have seen our funnel growth 3 X to over $250 million.
In potential projects and we still feel confident that this is a business, where we will see meaningful growth for years to come and.
Driving our decision to expand 2 of our factories in Europe to support anticipated growth.
In addition, we want to highlight that Ingersoll Rand is designing and developing a state of the art Hydra.
<unk> refueling stations to support the plug power and remote joint venture.
Moving to slide 14, given the company's performance in Q2.
And continued strong outlook, we're increasing guidance for 2021.
Our guidance excludes both the high pressure solutions and specialty vehicle technologies segment.
As well as the pending acquisition of <unk> and <unk>.
Our prior revenue guidance was up low double digits on a reported basis comprised of high single digit organic growth across both of our segments and.
And we're now up in guiding up to be mid teens in total with low double digit org.
Again growth across both segments.
These are for the future.
Afflicts, approximately 250 to 300 basis point growth inorganic growth for the total company as compared to prior guidance.
FX is expected to continue to be a low single digit tailwind in.
And based on these revenue assumptions, we are increasing 2021 adjusted EBITDA.
To 1.15 billion to $1.8 billion.
Which represents approximately a $30 million improvement from prior guidance at the midpoint of the range.
We also highlight that these also includes the increased corporate cost of approximately $6 million per quarter for both Q3 on Q4 as compared to prior.
Doug items as mentioned on the right hand side on the slide.
In terms of cash generation, we expect free cash flow to adjusted net income conversion to remain greater than or equal to 100%.
Capex is expected to be approximately 1.5% of revenue.
And finally, we expect our adjusted tax rate for the year to.
To be approximately 20%.
And this does include a 35 million benefit due to a tax restructuring plan that was recently completed that is reflected approximately 40% in acute day rate with the balance in the second half of the year.
Moving now to slide 15, as we wrap today's call Ingersoll Rand.
Got it in on outstanding place.
2021 is poised to be a great year to our employees I'd want to say thank you for how we come together every day to be there for our customers solve problems lean on each other and collaborate.
We take our role as a sustainably minded industry leader seriously.
But our employees eagerly embraced IRS.
To put us in that leadership position.
I am confident we will continue to transform Ingersoll Rand on deliver increased value to all of our shareholders.
So with that I'll turn the call back to the operator and open for Q&A.
As a reminder to ask a question you will need to prestige.
<unk> is on on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Your first question comes from the line of Mike Halloran, Mr. Helen Please provide your company name and proceed with your question.
Hey, good morning, everyone on with Baird.
Thanks for taking the question.
Just focusing on.
With supply chains inflation pressures components shortages things like that maybe some thoughts on how that is impacting results in the second quarter and how you see that playing out over the next couple of quarters when does normalization start.
Start materializing and how are you thinking about the price cost equation internally.
Yes, Mike.
We definitely continue to see price cost for questions will be positive.
Even here in the second half.
As you may recall during the last earnings we mentioned that.
We were seeing the inflation creeping.
Obviously in Q4 of 2020.
And we acted on that 1 building the budget for 2021.
Since the end of Q1 of 2021 of this year, we have seen inflation and we call inflation here, the red materials and logistics.
Continue to increase which is the reason why we acted on additional pricing actions.
I'd say those price.
Pricing actions are offsetting the incremental freight inflation that we're expecting to see in the second half.
With that we're also continuing to focus on mitigating these headwinds with a very heavy focus on <unk> initiatives. So I think in terms of.
Kind of moving forward I will also cut they were is the regulatory on inflation has continued.
<unk> had.
Headwind, but generally stabilizing.
While logistics side.
We do expect to see continued pressure in the second half.
Of the year compared to the first half.
But this is kind of consistently with how we model our business and we are clearly working on a daily basis to ensure that our supply chain team is finding ways to mitigate.
The potential cost pressures.
And then there are beyond as things materialize and we see good fruit of these continued price increases obviously, we expect the margin profile for continuing to improve.
Thanks for that and then follow up is.
Obviously, good momentum in the quarter underlying trends are healthy.
What.
What are the customers, saying about sustainability at this point.
Large versus small sized projects or.
You know maybe OE versus run rate how are those tracking in what is the visibility and the capex reinvigoration as you're thinking forward and again, what are customers, saying about that topic.
Yeah, Mike I think if anything what we saw is that as you know we have a we have some long cycle businesses, particularly Canada Nash Garo on some other large compressors.
And we'll we saw in the second quarter order momentum to continue to improve compared to the first half.
We actually saw orders accelerating on these on on these large.
So maybe that's a good indicator in terms of the feedback that we're seeing from from customers on their kind of feeling more confident and comfortable about re leasing capex for some of these large projects.
And so so at least in our view that's kind of good news, we also see as I mentioned.
Good funnel momentum building on on some of these.
Project Julien refueling.
<unk> networks, which obviously.
That tends to create some good solid investments.
Here that turn into revenue for our business.
Okay. Thanks for Centex appreciate it.
Thank you Mike.
Your next question comes from the line of Julian Mitchell with Barclays.
Hi, good morning.
I just wanted to start on acquisitions, but I think you've made it clear with flow that you on aggressively chase that maybe on the announced transactions maybe.
Maybe help us understand.
As youre thinking about sort of full year EBIT dollar accretion for 12 months of 2022 from CPAP for Maximus combined.
What sort of number roughly should we be expecting there and also <unk> margins. I think you were assuming that you can move those up quite substantially over several years.
Maybe help lay out sort of some other big moving parts within that.
Yeah Julien thanks.
We're really excited with these 2 with these 2 pending acquisitions and we actually see both companies as we kind of go ahead and look into next year.
To be continued to grow low double digit topline.
As we kind of hesitated Maximus is already at the provision on science technology margin profile.
So and ZIP X, even though below we expect that setbacks as we go into 2022 will be kind of a low 20 margin and as you would expect.
This is our initial view and we have already.
And IBM part of the IRS.
With <unk> as part of our integration planning process as we kind of move now into the next phase of closing the deal and moving into the integration. So so far what we see that we don't see any any barrier to get <unk> margins through the.
For the precision on signs level I think is a business that it is solid with over 40% recurrent aftermarket.
It has already launched a very meaningful or what we consider to be really.
Strong digital platform, where they've been able to kind of crack the code.
Laundering edge devices for this type of pumps, which tend to be.
Really cost effective so we're excited with what we're seeing here with <unk> as he brings to the table not only a great new product portfolio with progressive cavity pumps, but also a great Iot technology and clearly same thing with microphones.
On credit. Thank you and then just my second question around sort of near term margin dynamics in the base business. So I think looking at slide 11, you had called out.
On.
Less of a margin increase in the second half year on year on the first half so completely understand that but the implied sort of incremental margin.
Margins still look pretty high in the sort of mid <unk> plus in the second half year on year.
Just wanted to make sure that's roughly correct.
And whether you think that's appropriately conservative given that backdrop of higher corporate costs.
Price.
Cost pressures and so forth.
Yeah, Hey, Julien this is Vic I'll take that 1 so yeah, I mean, I think first and foremost in terms of the second half of the year as we as we mentioned and I think actually even the left side of that page kind of highlights.
Despite some of the inflationary pressures.
<unk> and headwinds that we've been seen you've seen a couple of distinct actions taken by the team first is the proactive kind of pricing measures that we that we spoke to.
I would say you know we've talked about this historically from a legacy Gardner Denver perspective, having a.
A distinct pricing team, that's able to be pretty nimble and take actions pretty quickly.
Particularly in an environment like this and obviously the first half for the year was no different so I think between some of the proactive pricing measures you saw us taking towards the back half of last year as well as some of the actions we've taken on the first half of this year I think that's obviously continued to allow us to keep the price cost equation on the positive side and on the other pieces, obviously, we 100% still.
<unk> committed to the $100 million of incremental synergies that we're expecting to be delivered this year and interesting enough. Some of those distinct actions are really coming from the direct material side, particularly now starting to see a good influx on the on the <unk> side. So you are correct that yes, we are seeing some of those inflationary headwinds in the back half of the year I think some of the pricing.
As well as the productivity actions are definitely helping to offset as well as some of those those corporate cost headwinds. We do believe that we can we will continue to see EBITDA margin expansion in the back half of the year, albeit to your point not necessarily at the levels that we saw on first half obviously, given some of the some of the some of the headwinds we're talking about.
Great. Thank you.
Your next question comes from the line of Jeff Sprague with vertical research.
Thank you.
Morning, everyone.
Good morning.
Can you just talk a little bit more color on.
The funnel that you really built here on the on the M&A.
Measure.
Firstly I would imagine the vast majority of its on PST.
Non of confirm or elaborate on that and also just.
Interested if theres any common theme on what you are actually passing on but it just primarily be valuation I would imagine they were in the funnel because they've got some interesting.
Attribute slightly they wouldn't have been there that begin with so it was just.
Just kind of a valuation dynamic or as you've dug deeper into these are just like some of the synergy opportunities on what you would've hoped.
Yes sure Jeff.
So I'd say on the funnel.
To answer your question, it's kind of almost like a 60.40, so 60%.
So <unk> 40 per cent on still on idea. So we still see some good.
Kind of momentum here on the IPR side I will say that you know the characteristics are right now on our formula Theyre largely bolt on in nature with some medium to large size targets as well.
And you know, but nothing that I would describe as kind of transfer.
Information on the nature I'll also describe them as great companies and by that I mean highly recognized brands market leader good gross margin, but we can see a path to improve.
And we continue to be prudent and seeing that ROIC can be achieving the mid teens by year 3.
So with that in mind, yes.
You're absolutely right in terms of the 1 other come on teams of passing is valuation.
But what I will say that it kind of areas and valuation is an important threshold.
And in how we screen.
Deals against our financial metrics, but we're also very focused on future growth profiles of these businesses and in some.
We have seen.
Patients of inflated future growth due to expectations on the ongoing COVID-19 related demand, which we tend to be very disciplined by discounting. It. So I think it just speaks a lot about the solid process that we have in terms of our diligence.
It's not only looking at our businesses, but we do a lot on market work, including.
Casey of customer and interviews.
To ensure that we understand market trends and commercial possibilities.
And then separate unrelated question just on kind of.
The energy efficiency push going on across the product offering just wondering to what extent do you actually see this is.
On the in vitro driver.
Where companies looking to kind of prove their ESG.
Profile are actually willing to kind of rip and replace functional equipment and the name of efficiency or should we really just think about the energy efficiency of new products is really just.
The base.
As a real competition on new business or kind of regular replacement business.
Yes, Jeff.
Interesting question I will say that I, we see a lot of retrofitting.
On driver.
Because in many instances and we have said some of these before you know when you look at our blower.
That goes into a wastewater treatment facility the energy consumed by a blower is close to like 60% of the energy consumed that total facility. So these are these are devices that are highly mission critical.
Low cost to the overall process when you put in perspective when it purchase.
When.
So for the product.
But they can be high energy users same thing with compressors and a lot of our compressor new compressor technology is.
<unk> much better from an efficiency perspective than the old compression technology. So in many cases.
Have a.
Train our.
Our sales teams on our <unk> commercial teams.
To really sell on that value proposition and this is what we see as 1 of the main drivers when customers want to replace probably say might as well healthy environment in terms of having a much more energy efficient and with energy.
<unk> continued to increase in countries like or areas like Europe.
You bought on even in Asia.
Larger propensity for customers to go after products that can reduce that energy consumption.
Great. Thanks, I'll leave it there.
Your next question comes from the line of Nigel Coe with Wolfe Research.
Thanks, Good morning, everyone. Thanks, Paul mentioned.
Yeah.
Yeah, So just wanted to dig into.
China, you reported 30% plus order growth for <unk>.
Compresses.
On top of.
I think a growth quarter in <unk> 'twenty as well so it wasn't an easy comp so.
Curious number 1 what you've seen in China, there's some concerns of our hottest landing.
<unk> and <unk>.
Maybe how your share is trending in China, obviously, you're up against a very strong competitor in that market.
Yes.
We're very pleased with what the team in China continues to do I can say that even about a year ago.
When COVID-19 hit.
Really hard in China.
The team immediately start to pivot into.
Into end markets, where they could see meaningful growth as the recovery from the China economy will come and we're seeing a lot of that now that.
Pivoting into better end markets that are in markets, where government is putting some good investments.
Say that also.
So the team has done some really great product launches.
The team overall did have now relaunched the Gardner Denver brand lineup compressors. It is getting really well position in the China market I will also say that before our blower and vacuum business was actually fairly small.
And a big market.
Now that we have.
Larger scale team with the Ingersoll Rand acquisition, we're leveraging the channel and the knowledge of that team into the market to really accelerate the growth on the vacuum on blower business.
And 1 example.
But surely even here today with.
These are treatment air treatment revenue right now in China is very low so it isn't a really meaningful opportunity for the team in China as we kind of take these new product line of drier solutions and launched on kind of launch that in China. So really good combination of the team is executing really well.
Commercially selling.
What we have in different end markets, while at the same time launching new programs new.
Launching new products that are really getting good traction in the market.
Thanks, that's great and then on $100 million of.
Of synergies from the <unk> integration.
<unk> supply chain.
And then became a big bucket and that and some of your peer industrial companies are pushing out some of the kind of supply chain.
Cost savings at <unk> because of the pressures that we're seeing right. Now are you seeing some of that as well on some of these projects moving to the to the right and then within that as well the inflation that.
You're seeing in the supply chain is that 100 million $100 million of buckets I know its the whole supply chain is that net of inflation with the inflation outside of that bucket.
Yeah, I'll answer on Arlington I'm, probably.
Backwards frankly on it so to start with your second question.
They're kind of distinct so yes, we are seeing inflation, but.
We're still very much committed to the $100 million.
Of total synergies of which obviously the I'd say the procurement direct material component comprises of a big a big component on it. So it's no different than how we message it before even coming into the year. We were seeing I would say $100 million expectation on synergies and frankly on a smaller degree of inflation clearly inflationary pressures are probably grown a bit but.
Those 2 numbers are somewhat distinct and that's the way we're kind of managing it.
Clearly our teams have done a really great job you know when you think about the procurement and supply chain organizations. They have now really I would say <unk> been able to I would say use <unk> and use a lot of our internal processes to be able to balance you know I'd say their attention between both synergy delivery.
Well as you.
Managing a lot of the supply chain and logistics constraints that frankly, the general market has seen so I think right. Now we're extremely pleased are we seeing any dramatic push out of a savings or anything of that nature compared to our original expectations no not in any material manner.
Think for us.
As you know what we've been seeing here has probably given us.
A bit of a acceleration in the context of looking at more <unk> initiatives as a means to mitigate so.
Like we said, we're not immune to what's going on but I think that right now we're kind of keeping that that synergy equation quite balance to what we originally thought and also opening I'd.
Up to frankly, looking at more <unk> initiatives and things like that as cost mitigates.
Okay I'll leave it there thanks very much.
Your next.
<unk> comes from the line of Rob Wertheimer with Melius research.
Hello, and thank you.
I had a couple of questions just on the on the acquisition funnel.
I'd say the tenants just on Maximus I'm curious.
The Iot aspect on the growth.
Or a little bit different non asset and weather.
On connectivity Iot are finding their way into the backlog and the acquisition funnel and a more meaningful way and how do you think about transforming that opportunity via acquisition versus.
And what Youre also doing for your installed base and the second 1 if I may just doing both at once is just on.
Obviously, if you do a large deal you replace some of the revenue.
Disappearance from specialty vehicle more quickly.
I just wanted to ask you about your comfort with.
Doing smaller deals.
As it takes and whether you think about it that way.
Yeah. Thanks, Rob.
I'm actually more of the Iot growth.
It is.
Phenomenal find in terms of an acquisition on that came from looking at the market from a different kind of sort of angle on perspective in the sense that we had a good pump business.
<unk> called this is Ron.
That plays really well in the animal health and agricultural market. It is the market leading.
Non electrical pumps, so it basically creates dosing and movement of water.
Just by pure.
The flow itself.
So it's kind of really unique technologies and.
Hello, and most of these kind of highly specialized applications and you can think about those applications like hydroponics.
No.
Manav to rein the acreage.
He is available in the world to.
Continued to grow vegetables, and feed animals is kind of shrinking really fast.
So more and more you are moving to indoor farming and.
<unk>, which is obviously the.
The way of growing vegetables, with the use of water and here, we have a really great leadership position. So when you go to 1 of these in their farms. This is maximus is a leader in these aggregate growth.
<unk> controlling aspect of being able to control the entire ecosystem of that.
And where we.
100, <unk> a lot of very good plays of not only our pumps for other devices that are inside that we can now actually bundled on kind of complete together an entire package.
And when you think about that type of process could we take it on replicate that into a wastewater treatment facility or into any of these other end markets that is what our thesis is also.
Goes into is that how do you take that Maximus software Iot comprehensive solution and then utilize that on leverage it for other end markets and that's where we just get Super Super excited.
In terms of doing a large deal I mean, obviously you could argue that that day.
Smaller deals take as much time as largely.
So that's what got many say I will say that with the use of <unk> right now we'll building some incredible processes on muscle.
As.
In integrating.
Small or bolt on deal.
Is.
It goes actually quite.
Largely it well I mean to the hill or M. <unk> is a great example.
We're the team in the Americas was able to integrate that.
Pretty much by themselves and in a very rapid way, including the integration of the entire ERP system.
And they're very highly cost effective way.
So do we think that larger deals can give us.
Quite bigger faster scale, yes, but we also know that.
Deals coming with what I call it a bit of hurry and this means that not all larger deals are 100% perfect and sometimes you need to divest in kind of the couple of businesses that you may not like from those systems from those businesses. So.
<unk>.
We continue.
Be excited about our bolt on a medium size business acquisitions that we have in our funnel and we think that the processes that we have will continue to accelerate how we do deals.
Thank you Vince I think because I think thank.
Thank you Robert.
Your next question comes from the line of Joe Ritchie with Goldman Sachs.
Thanks, Good morning, everybody.
Continued to put in Georgia.
<unk> I know, we've talked a lot about the M&A funnel, but just quick question as you kind of thinking through the types of opportunities are you looking more for kind of a fixer uppers, where you can utilize the IRS system to really drive better margin expansion or is there like a good balance.
Maybe margin accretive type acquisitions that youre looking at as well.
No I think I think Joel.
We're looking for businesses that can continue to raise the bar of Ingersoll Rand in the sales, we're making Ingersoll Rand continued to be a great.
If they go from here.
Good company for a great company.
Even greater company and by that it has to be strategic deals that make a lot of sense to our product portfolio.
That makes a lot of sense to how we look at margin expansion and top line growth for.
The future value of the company.
<unk>.
But also maximize arent too I'll say gray businesses for example are growing double digit growth great technologies.
Maximus is already at the margin profile of proficient on science setbacks has room to improve but it is a technology that we like so I think it's just 1 of those at in some cases, we look at both but more.
Important is not the size is kind of adjusted margin expansion that we can generate on make the total company and better. So we can continue to see multiple accretion in on overall business.
Got it that's helpful context, and then I guess, maybe just my follow on question you referenced the book to Bill earlier I. Thank.
You guys are at like 1.1 for for total company.
If I take a look at your order trends for the first half of the year versus revenue I think you're up about $350 million box.
Is the way to think about this going forward.
For booking.
Even more kind of like mid cycle type work at this point.
And Thats why Youre youre going to have to play catch up on the revenue side with with your order rates or how should we be kind of thinking about how revenue and orders kind of converge over the next call. It 12 to 24 months.
Yes, Joe This is Ed I'll take that 1 so I think first of almost yes, I mean, we've.
Really pleased with the orders performance I think the good thing here that we've talked about in the percentage you mentioned and then the second quarter, we actually saw a good mix of what we'll call kind of core compressor blower vacuum type orders, which typically ship out within kind of the next quarter thereafter, youre not typically booking those for 5.
6 months out in most regions.
Obviously been but we've also seen a nice tailwind in some of the kind of the larger project side, whether that'd be the centrifugal compressor side, whether it'd be the Nash Garo business.
So I'd say those are those other types of orders that tend to have a 6 to 12 and certain kids even longer than that kind of order.
Order to sale kind.
On a lead time so the good news here is we've seen a bit of a balance I think in the context of orders to revenue. Yes, obviously, we have a stronger backlog I think we have more backlog visibility today than we've had in probably any quarter coming in a bag.
Backlogs are up strong double digits, and frankly, even better in certain parts of the business.
And yes, we.
<unk> from visibility into Q3 at this point in time pretty much across most of the portfolio, but the good news here is we've also taken some really nice longer cycle orders as we would call on that kind of now even extend into 2022, so giving us even a little bit more visibility into 2022, then we had frankly over the course of the last few months. So I think we're seeing a good balance of both is the.
Yes.
Got it that's great. Thanks, guys.
Thank you.
Your next question comes from the line of Mark Smith with UBS.
Yes, hi, good morning, everyone. Good.
Maybe I just.
Hi, Good morning, maybe I'll just follow up on on that Christian So snow.
Answered.
The last Capex spending cycle for 16, 17, 18, and I look at for the former in the current run industrial Gardner Denver.
And the growth there was interesting to see that both companies are actually at the top of the 6 are pretty much among the top in terms of that growth inflection is.
That's something in the context of what.
What you just mentioned around sort of short cycle long cycle nitpick, what that we should use as a framework maybe for the next 2.3 years.
Assume that a similar point in the Capex cycle to find good things for the long cycle business the size and how much of the short cycle business in short cycle in nature.
True.
For the light topic.
Yeah.
Yes, because I think I think that's probably a good analogy you have to see to see to think that at least what we see here is kind of a broad based optimism in the market in that <unk>.
Capex are kind of getting more and more getting starting to get released and so yeah. You could argue that thats kind of the same.
But momentum that we expect to see.
Yes.
Great and then maybe just a quick follow up on hydrogen.
You've mentioned.
Sort of a 250 million funnel, how should we think about the timing.
Timing on on the conversion of that funnel.
Type of Neil.
Hope fragmented market, if you look at that 2 and a half feeling opportunity because for me Tony.
Kevin.
Do you think that market looks like 3 for 5 years down the road.
Yeah in terms of the fragmentation is.
They are actually not that many players.
In the dispensing market.
Yeah.
You could argue that there's kind of like top III.
Players with us being 1 of them.
So at this point in time it is such a highly specialized way of dispensing. This type of guidance that you have to do it.
With specialized equipment and in this case high school is.
There's 1 other leading providers for for doing that on high school has a lot of history on dispensing hydrogen because they used to do a lot of these for a ruckus ships.
I mean decades ago.
And in terms of the 250 minute maid on phone on I mean, we see this over the next horizon of years I mean it varies on.
To project.
But I think the good thing is to be continuing to see that funnel momentum increase and get specced on many of these projects that are seeing expansion on networks.
And it marks I would I would add to that that frankly, given that funnel and given where our technologies headed thats driving obviously the investment that we announced.
The $10 million and we expect to spend over the next 12 or so months, that's really meant to build out capacity in a large part here with the expectation to be able to execute on a meaningful part of that funnel. So I think we're kind of seeing the funnel and we're reacting and we said.
Quite explicitly we're going to continue to invest in those higher growth organic growth.
On projects as being a big 1 and we're quite excited about a couple of other plant expansions that are going to be coming up here in Europe and in the next 12 months.
Yeah.
Great. Thank you.
Very good.
Your final question comes from the line of John Walsh with Credit Suisse.
Mr.
Growth areas.
Yes, sorry, hi, there thanks for squeezing me in here.
Just 1 question from me good morning.
Could you talk a little bit about how you're thinking about free cash flow build in the second half for the year.
I don't know if theres some type of bridge.
You want to talk a little bit about or maybe help us dial in on what greater than a 100 means because obviously very very strong conversion and you usually back half weighted thank you.
Yeah, John you're exactly right I think the free cash flow side of the equation typically tends to be a bit more second half seasonally weighted.
<unk> comes from probably a couple of different factors 1 is.
1 the revenue and earnings profile of the business.
Does tend to.
Be a little bit more backend weighted in the context of just kind of our earnings profile you've seen that in most years I would also say the working capital side of equation tends to follow a pretty seasonal path. This.
This year will probably be no exception here where.
As you can see in the numbers, we have seen some inventory build prudently frankly in the back and the front half of the year a lot of that is positioned quite frankly for the second half execution second half orders and so we do expect to see a nice tailwind on working capital on the back half of the year that tends to be I would say the kind.
On the biggest contributors I would also tell you that we've been working really hard steadily on the on the tax rate. We continue to see good momentum there on the on the tax position on the cash tax rate for the overall company and 1 that we would expect to continuously moving into 2022 as well. So I think there is multiple different levers that we're looking at and we're pulling I think we're being very prudent continued in.
In this environment in terms of deploying cash, but again, we'd expect to see a second strong second half of the year not too dissimilar to what you saw last year.
Great I'll leave it there thank you.
Thank you Jim.
This concludes the question and answer session I will now turn the call over to present day.
<unk> for closing remarks.
Thank you so much I just want to say it 1 more time, thanks again to all of the employees that are listening on the call I. Appreciate all your hard work and therefore identification.
I also thank all of the investors and potential investors to.
Participating on the interest that you have in our company and look forward to speaking to many of you.
Over the next days and weeks. Thank you.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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