Q1 2022 Ingersoll Rand Inc Earnings Call
Hello, everyone and welcome to the Ingersoll Rand first quarter 2022 earnings call. My name is Victoria and that'll be cool nature of cool today, if you'd like to ask a question. During the presentation you might G side by pressing star one on your telephone keypad. If you wish to deploy a question. Please press star two.
If you have joined US on nine please press the red flag icon when preparing to ask a question. Please ensure that your line is unmated likely I'll now pass over to highest Chris May run to begin. Please go ahead.
Thank you and welcome to the Ingersoll Rand 2022 first quarter earnings call.
I'm, Chris Martin Vice President of Investor Relations and joining me. This morning are descent, there right now chairman and CEO and VIX, Kenny Chief Financial Officer.
We issued our earnings release and presentation yesterday, and we will reference during the call.
Both are available on the Investor Relations section of our website Www Dot IR Seo Dot com.
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 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 today's call, we will provide a strategy update review our company and segment financial highlights and provide an update to 2022 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 the center.
Thanks, Kris and good morning to everyone.
Starting on slide three Ingersoll Rand unwavering commitment to our purpose of making lives better as evidenced in the sustainability of our products.
Which help our customers reduce their energy consumption and water usage.
We delivered another strong quarter in the first quarter with our team leveraging the Irish process to outperform even with ongoing challenges in supply chain accelerating inflation and geopolitical uncertainty.
The performance in Q1 is attributed to our highly engaged employee base, who think and act like owners because they are.
Our latest engagement scores I like this dynamic where we now rank in the upper part of the top quartile, scoring over 500 basis points above the amount of battery and benchmark.
And for the most critical question.
Happy are you working I think there's a red we rank in the top 10% of all manufacturing organizations.
Not only are we focused internally, but also on the needs of those outside our organization.
Last quarter, we made a $1 million commitment to support Ukrainian impacted by the war with humanitarian aid.
Demand for our products and services remained strong with our backlog at an all time high and our leading indicators showing resiliency in our markets.
We remain attuned to the dynamic environment around us and our hyper focus on executing on what we can control.
Moving to slide four we spoken before about how operating sustainably is embedded in our company and is intentionally at the center all of our core values as it underpins our very existence.
Ingersoll Rand makes life better for customers by making them more sustainable.
We'd like to take time today to highlight that even in an uncertain environment customers have significant opportunities to reduce their emissions and materially reduce their energy costs and water usage.
And this is how we think about our sustainability strategy.
Growing sustainably by providing mission critical solutions to customers that reduce energy and water usage.
On operating sustainably in the processes, we employ to deliver those solutions.
We spoke at our recent Investor day in November about the sustainability of Mega trend.
And despite the uncertainty in today's market. We strongly believe that this trend will drive customer decision, making to invest on more efficient low creation devices like air compressors, blowers, and pumps, which has been an underinvested area over the past decade or so.
Turning to slide five our customers are increasingly realizing that air compressors and air treatment optimization is an essential opportunity.
To reduce their scope, one and scope two emissions.
Air compressors consume up to 30%, although manufacturing sites electricity.
And with the recent significant rise in energy cost this will continue to increase.
I think it's a rise approach provides industry, leading efficiency that enables customers to reduce the energy cost from air compressors up to 50%.
And air treatment solutions, our dryers off to an incredible 90%.
As we have forecast it out or potential impact of our scope three emissions. We have established a goal of helping our customers achieve a combined 15% reduction in greenhouse gas emissions from the use of our products.
Which equates to more than 40 million tons of yogurt.
Our customers are becoming more educated about the impact the compressor optimization can have on their emissions.
We have shown two examples in this slide of global leaders in both the consumer electronics and paper industries, who clearly identified compressor optimization as a top priority for greenhouse gas emission reduction in their latest sustainability reports.
In addition to energy usage and our customers are also faced with water shortage and the need to improve water management and quality.
And you can see at the bottom of the page, where our global paper company and a world leader in consumer packaged goods have committed to reducing water usage by 25% and 20% per unit respectively.
A significant commitment and one we're very well positioned to sold with our products.
Approximately 30% of our total revenue base is generated from products focused on improving water management purification and reducing water consumption and we're committed to helping customers save over 1 billion gallons of water annually through the use of our products.
Turning to slide six not only are our largest customers, making buying decisions based upon opportunities to improve energy efficiency, but we believe that almost all of our customers take energy efficiency into account.
Additionally, governments are now regulating energy conservation standards for competitors and.
And we anticipate this trend will continue to accelerate and we intend to remain at the forefront of these requirements.
Last year, just in the U S. We conducted over 4000 customer compressor system audits, which is an increase of 60% from 2019.
After the audit we made upgrade recommendations based upon evaluations of energy efficiency and several other factors and these led to a $100 million in sales directly attributable to these audits.
This is a great example, on how we connect and educate our customer base on total cost of ownership and energy efficiency.
We estimate that two thirds of our current global installed base could realize meaningful improvements inefficiency by upgrading their compressor system.
The midpoint of 15% energy efficiency uplift across that portion of the install base customer with a typical compressor system will realize an average payback of less than two years.
Energy prices.
So you can see the savings here are real and meaningful and we're highly engaged in educating our entire customer base about this opportunity.
Moving to slide seven in addition to helping our customers progress on their sustainability journey, we're leveraging the Irish eggs to achieve our goal of being recognized as a top quartile ESG company by operating sustainably.
Those efforts have delivered significant progress.
In the past six months, we've been materially upgrade by all of our targeted EOG rating agencies, including MSCI, just analytics S&P global and C D.
And in fact.
Olympics, and S&P global now rank in the top 15% of companies in our sector exceeding our goal of becoming a top quartile in half the time, we had committed to it.
But we're not finished with the journey, we're just getting started.
We take our role a sustainability leader very seriously.
And we're committed to continuous improvement and progress towards achieving our other sustainability goals.
Now I'll turn the call over to Blake to provide an update on our Q1 financial performance.
Thanks, a J.
Moving to slide eight we continue to be encouraged by the performance of the company in Q1, which saw a strong balance of commercial and operational execution fueled by IRS to overcome persistent inflationary pressures are challenging supply chain environment increased geopolitical uncertainty and lockdowns in Shanghai.
Despite these challenges we continue to remain on track to deliver on our $300 million synergy commitment with $50 million expected to be realized in 2022.
Total company orders and revenue increased 25% and 18% year over year, respectively with strong double digit orders growth in Ics and double digit organic revenue growth across both segments.
Our orders in the quarter were a record for the company and revenue was a first quarter record setting.
Setting us up for continued strength in 2022.
The company delivered first quarter, adjusted EBITDA of $304 million or 24% year over year improvement in adjusted EBITDA margins of 22, 7%, a 110 basis point improvement from prior year.
Incremental margins for the company were 29% despite the aforementioned challenges.
Free cash flow for the quarter was $32 million and remained positive despite working capital headwinds, most notably an increase of approximately $100 million in inventory to support the growing backlog and elevated incentive compensation costs coming off a strong 2021 performance.
Total liquidity was $3 1 billion at quarter end and cash was up approximately $400 million from prior year.
This takes our net leverage to one two times and one seven times improvement from prior year and a slight increase of one one times from prior quarter.
Turning to slide nine for the total company Q1 orders grew 21% and revenue increased 14% both on an organic basis.
Overall, we posted a strong book to Bill of one to two times for the quarter will.
We remain encouraged by the strength of our backlog, which is up approximately 70% from Q1 of 2021.
Total company adjusted EBITDA increased 24% from the prior year.
<unk> segment margin improved 70 basis points, while PST segment margin declined 260 basis points with the largest driver of the decrease coming from M&A.
When adjusted to exclude the impact of M&A completed in the 12 months ending March 31.
PST margin declined by 130 basis points, driven mainly by the impact of inflation FX and product mix.
It's important to note that both segments did remain price cost positive in terms of dollars in the first quarter, which speaks of the nimble actions of our team despite ongoing inflationary headwinds.
Finally, corporate cost came in at $29 million for the quarter down year over year, primarily due to lower incentive compensation costs and general cost savings, while continuing to invest in critical growth areas like demand generation and industrial internet of things.
We expect corporate cost to normalize back to the low 30 percents in terms of millions of dollars per quarter for the remainder of the year.
Adjusted EPS for the quarter was up 26% to <unk> 49 per share.
And the tax rate for the quarter was 23% and we anticipate the full year being in the low twenties as well.
Turning to slide 10 free cash flow for the quarter was $32 million on a continuing ops basis remaining positive despite the aforementioned increases in networking capital.
Capex during the quarter totaled $18 million, which is at approximately 25% increase compared to last year further demonstrating our continued investment in the business.
Free cash flow includes $8 million of synergy in standup costs related to the IR merger.
Leverage for the quarter was one two times, which was an old 0.7 times improvement versus the prior year.
And total company liquidity now stands at $3 $1 billion based on approximately $2 billion of cash and $1 $1 billion of availability on our revolving credit facility.
Liquidity decreased by approximately $100 million in the quarter, which included outflows of $30 million towards strategic M&A $101 million in share repurchases and $8 million for our dividend payment.
On the M&A funnel remains robust and active with six bolt on acquisitions currently under exclusive letters of intent.
We remain prudent and discipline to generate strong returns on transactions with highly strategic and synergistic characteristics, but clearly we have significant firepower to deploy to M&A, which is a strong driver of our compounding growth model.
I will now turn the call back to the center to discuss our segments.
Thank you Vic and turning to slide 11, our industrial technologies and service segment delivered strong organic revenue growth of 14% included approximately 6% comprise an 8% volume growth both of those year over year, while also demonstrating solid sequential acceleration on both price and volume.
Adjusted EBITDA rose, 17% year over year with an adjusted EBITDA margin of 23, 8% up 70 basis points from prior year with an incremental margin of 29%.
Orders were up 25% with a strong book to Bill of 124 times.
Starting now with compressors, we saw orders up approximately 30%.
Further breakdown shows orders for oilfield products growing over 30% and oil lubricated products increased approximately 30%.
The Americas team delivered strong performance with orders in North America up approximately low 30%, while Latin America was up in the low forties.
In mainland Europe orders were up solidly in the Twenty's with no material deceleration of note sequentially during the quarter.
While India and Middle East were up in the mid Forty's.
Asia Pacific continues to perform well with orders up mid 'twenty, driven by mid <unk> growth in China and high teens growth across the rest of Asia Pacific.
In vacuum and blowers orders were up low twenties on a global basis.
In the power tools and lifting business orders for the total business were up high teens and saw continued positive momentum.
As we discussed during the Investor day, our demand generation capabilities provide us with the most forward looking indicators of customer demand through the data driven approach to developing marketing qualified leads or <unk>.
We gain an additional several months of insight by leveraging these data.
We're aware of the uncertainty related to the global economy, but as we review <unk> across our business and across geographies each week they.
Indicators show double digit growth year over year across all major geographies, including America mainland Europe , the Middle East, India and Asia Pacific.
<unk> has clearly been impacted due to the Shanghai lockdowns, but even in the most recent weeks and Kols are very near last years level.
As I mentioned earlier, we're very focused in our approach to delivering sustainable innovative solutions.
I want to spend time, I mean, it highlighting our leroy gas compression business, which we acquired in mid 2017.
Since then we have been very focused on repositioning the portfolio.
Leroy to further penetrate biogas market, which has seen strong growth as customers are able to capture gas emitted from sources, such as landfills in California and monetize it.
Energy source.
And as you can see on the page the growth we have realized from these efforts has been phenomenal and continues to rapidly accelerate.
Orders were over $100 million in the past 12 months and revenue is expected to be more than double in 2022, bringing total organic growth of over five years to over 440%.
And creating a post synergy multiple of the acquisition to around one one times.
We greatly exceeded our mid teens return on capital target and expect to achieve approximately 70% ROIC by this year.
Leroy is just a fantastic example of a highly strategic and synergistic company, whose value has been on niche in the transition from a family owned business to ownership under Ingersoll Rand.
A few weeks ago I got a chance to visit the neuro team and see me on how you and.
And the transformation that team is making is very impressive.
You can feel the energy passion and engagement.
Employees as you entered the manufacturing floor.
We heard a lot of feedback.
Around how the ownership mentality, we have and the equity we granted has positively impacted not only the performance we show here, but more important the lives of many of our employees in a very positive way.
Moving to slide 12 revenue in the precision and science technology segment grew 12% organic with approximately 5% price and 7% volume growth.
Additionally, the PSC a team delivered strong adjusted EBITDA of $85 million, which was up 27% year over year with incremental margins of 22%.
Adjusted EBITDA margin was 28, 6% down 260 basis points year over year, primarily driven by the impact of M&A.
And again the segment was down 130 basis points, excluding the impact of acquisitions with an adjusted EBITDA margin of 29, 9% ex M&A.
Overall organic orders were up 6%, which is on top of 13% year over year organic growth in Q1 of 2021.
In addition, we continue to be excited about our funnel for the hydrogen fueling business, which now stands in excess of $100 million.
The integration of <unk>, which we acquired in September of 'twenty to 'twenty, one continues to progress very well with.
With strong growth in new geographies, and an acceleration of margin expansion into the low twenty's from the mid teens level inherited at the transaction closed just a couple of quarters ago.
I also had a chance to visit the <unk> theme in the U S.
And once again, our unique approach to ownership grant is playing a very crucial role in accelerating engagement and performance I left very excited about the future potential of slippage as part of Ingersoll Rand.
For another example of our focus on sustainable innovative solutions is a Thomas pump Brian .
Our compression technology, primarily serving the life science market with a $2 5 billion dollar addressable market.
Thomas pumps, they serve the patient care end market both in facility through applications like ventilators and also at home through oxygen Concentrators.
I think today is the in vitro diagnostic end market and we have leveraged our highly translatable technology to grow 40% within these market with a very strong focus on the OEM and with significant runway ahead.
We have recently secured several sizable orders from large pharma customers in the in vitro space, who designed our Thomas pump into their new products, which will generate strong recurring revenue over the customer's product lifecycle.
Moving to slide 13, after a strong start to the year, we're raising 2022 items where.
We're raising organic revenue growth of 100 basis points from 8% to 10% driven by a 100 basis point increase in organic growth expectations from both the Acs and PMT segment as compared to the original guidance.
FX is expected to now contribute a headwind of approximately 2% versus 1% on the prior guidance and these leads to a total company revenue up 11% to 13%.
We're also increasing the adjusted EBITDA range to $1 $385 billion to $1 $4 billion to $5 billion.
We continue to expect free cash flow conversion to adjusted net income to be greater than or equal to 100%. We anticipate our adjusted tax rate to be in the low twenties and capex to be approximately 2% of revenue.
Lastly, we want to provide some color on mainland Europe and Lockdowns in Shanghai.
During the quarter and into April we have not seen any material slowdown in orders in fact, we monitor our marketing qualified leads or <unk> as we said fairly close and as they are really a leading indicator of where order activity and <unk> in Europe have been quite stable throughout 2022.
That's probably love downtown Shanghai, we're starting to see the ease of the Lockdowns trending positively.
Remain encourage whereas you know this is a fluid situation that we continue to monitor closely.
And although we don't provide quarterly guidance the best way to think about it is we are not making significant changes to the first half and second half facing as compared to a two hour guidance as we're taking a prudent view in the second quarter due to the Lockdowns in Shanghai.
Having said this we still see continued Q1 to Q2 sequential growth in revenue and adjusted EBITDA, but expect it to be modest.
Turning to slide 14, as we wrap up today's call I want to reiterate that Ingersoll Rand is in a very strong position with.
We delivered record performance in the first quarter and our backlog provides momentum into the second quarter.
2022 is poised to be a strong year, despite known challenges and dynamic market conditions.
We will continue to remain agile and leverage either X across every facet of our business to deliver on our commitments.
To our employees I want to say thank you for your continued engagement and making thoughtful action oriented decisions like the owners that you are using.
These engagement continues to drive the accomplishment of our mission to make life better for our customers the environment and the shareholders.
Our balance sheet is very strong and with our disciplined and comprehensive capital allocation strategy. We remained resilient and have the ability to deploy capital to investments with the highest return on capital as we continue our track record of market outperformance.
So with that I'll turn the call back to the operator and open for Q&A.
Okay.
Thank you we will now start our Q&A session. If you would.
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And now our first question comes from Michael Halloran from Baird. Please go ahead. Your line is open.
Hey, good morning, everyone.
Good morning.
Just just some thoughts on backlog and what kind of visibility that gives you. So obviously orders really strong.
Particularly in a T S.
How does how is that expected the cadence out what's going on with the backlog levels and what kind of visibility does that give you on a on a forward basis as we sit here.
Hey, Mike So clearly it gives us.
Obviously, much greater visibility than what we have been in prior years Ah Ips as you know has a.
Portion of being long cycle.
And the way we may want to think about it is that that kind of 'twenty two.
A third 20% to 25% of that backlog being kind of more than longer cycle.
Perspective, which kind of gives us a good view into potentially 2023. So I think it's a it's we're having great great visibility here, obviously for the next couple of quarters and an even greater visibility than we have seen in the past as we go into 2023.
So it was part of the conservatism than less about what you're actually seeing from a demand perspective, because you have that visibility in the backlog and it was just more on.
Uncertainty about when that backlog actually converts at this point in time or is there something else to the conservatism that you laid out in the guidance.
That said Mike it's.
It's a prudency clearly as we kind of navigate the ramp after the load balancing China and and any continue geopolitical environment that might be happening out there that maybe clouds a bit of a.
Short term shorter term visiting with you, but I mean, I think it's do you see any new orders in the in the remarks. We made momentum continues our marketing qualified leads continue to be pretty strong and resilient and I don't think at this point in time, it's just more prudency based on what we're seeing.
I appreciate it thank you.
Thank you Mike.
Okay.
Perfect. Thank you Mike for your question.
Our next question comes from Julian Mitchell from Barclays. Please go ahead. Your line is open.
Uh huh.
Hi, good morning.
Maybe I'm just.
Just wanted to start with a question on the margin outlook. So you had 29% Incrementals in Q1, and then you're saying sort of mid thirties for the year.
When we're thinking about the second quarter should we assume that the incremental margin is year on year was maybe a little bit lower than Q1 that seems to be what you're saying, but just wanted to confirm that.
And then maybe in that light sort of talk about price cost margin impacts what it was in the first quarter and what you expect for the year.
Yes, Julian I think the way Youre thinking about it is is quite is quite accurate. So maybe I'll start with the price cost.
Price cost from a dollar perspective was positive in the first quarter.
I'd say on a margin perspective, not necessarily margin accretive, but we did cover inflation from price perspective, we would expect the dynamic in Q2 to frankly be fairly comparable obviously.
Given a lot of the the the geopolitical situation as well as some of the the <unk>.
It comes off of the Russia, Ukraine situation clearly that's driving some of the inflationary pressures, we're seeing incrementally into Q2 worth noting here, though that obviously, we've continued to recalibrate from a pricing perspective, and we would expect price cost to be more favorable and more positive and margin accretive more into the back half of the year.
So that's kind of the way to think about it but when you're in your thought in terms of the incrementals being a little bit more subdued in Q2 due to that nature as well as the Shanghai Lockdowns, that's correct as well in Q2 that will drive a slightly more subdued incrementals in Q2, specifically.
Thanks, very much and then just my quick follow up would be around the Oh does expectations. So you had better orders than I expected in the first quarter given your comp.
It sounds like orders are staying good into Q2, just wanted to make sure. That's correct and then within P. S T. Specifically.
The orders are up I think mid single digit in the first quarter. How are you thinking about those looking out the next few months.
Yeah, Nigel so so yeah, I mean, I think our orders continued to be actually fairly a fairly a fairly good clearly as we go more into Q2 Q3 tougher comps are obviously.
You remember last year, we were seeing about 30% and 40% orders momentum.
But we still see very good very good momentum as we are moving here into the month of April .
And from a PSD perspective, I think the way the way I think about it is again you know day, there, they're comping against a double digit orders from Q1 of 2021 what if I look at it from a sequential perspective actually on an absolute dollar.
Sequentially Q4 to Q1, we saw about a 10% increase in order momentum on the PSD, Phil again speaks pretty well as to no concerns on what the team has seen in that ramp continues in terms of the order momentum, which always will lead to a better output.
Thanks very much.
Thank you Julian.
Thank you so much for your question. Our next question comes from about 11 landmark from Melius Research. Please go ahead.
Thanks, and good morning, everybody.
Hey, good morning.
My question, you made pretty clear comments on Europe , and I just wanted to circle back there because it still seems like there is I.
I don't know a closing potentialities, where you can have a recession in the demand drop and at the same time Europe desperately needs energy efficiency energy savings and solutions to the growing energy crisis, and so more qualitatively on your <unk> can you just talk about timeline is the issue of the energy Spike you know.
<unk> already started to impact plans for upgrades or people coming to you for that reason can you see it in your pipeline.
I think robot what.
Our teams will tell you that they're seeing an increase in requests from our customers as it relates to what.
What else can they do from an energy efficiency perspective.
I think a data point to think about it we talked about the about the audits that we do in factories.
How when you think about it in the U S. It's up 60% the number of orders that were doing energy efficiency audits as compared to pre pandemic levels back in 2019, we didn't comment on Europe , but in Europe . We also do a lot of audits and the audits are kind of a similar in nature in there.
<unk> seen good momentum in terms of growth so.
So customers are definitely more attuned to it.
We leverage our demand generation engine to continue to educate the customers on what they can achieve and so we're taking that advantage and continue to create a bit of a tailwind here for us.
Perfect and then can you give any comments on maybe it varies a lot, but on the general timeline and whats your factory upgrade might be.
Estimated decided upon and delivered.
I'll stop there thanks.
Yeah on the customer audits you were trying to I from the time that the customer request and we go and show up to the facility to the time that we provide a report it could be a couple of months, we definitely want to gather a lot of good data points and and by the time that we kind of do their reports and provide days and communicate I think the cycle it could be roughly.
Two months in order for us to get to do.
So that face to face meeting with the customer and agreeing what they may be making a purchase.
Perfect and then if they do do the purchase of the upgrade is that another few months or how long is the lead time. Thank you Danny.
And then it goes into the lead time of minerals and clearly you know we got to extend the backlog now so depending on the pro it could be yes. It will go into the backlog of the regular lead time on the product. So it could be another couple of months out or longer.
Thank you.
Thank you.
Thank you. Our next question comes from Joe Spak from that's Cool Research. Please go ahead. Your line is open.
Thank you good morning, everyone. Good.
Just one I was wondering if you could give us a little more color on the on the deal pipeline and specifically the.
The six bolt ons that you've mentioned here, maybe collectively the size and.
Maybe what's the historical hit rate for you once you get into the kind of exclusive LOI.
Yeah, Hey, Jeff Hi.
Once we're in exclusive Eli if we don't find anything I mean, I sort of hit rate is pretty high I'm going to say, maybe 90% plus.
So we're confident that we're going exclusive with them and and we have done enough diligence, but it's just a matter of kind of some other final negotiating points in <unk>.
So deal size think about these six bolt ons similar in nature to Canada, Leroy what the time that we made that acquisition.
So you can see that a they're small in size, but not that every deal will be like Leroy we wanted to be all we'd always like that but we're clearly it shows that these bolt ons can become a significant good acquisitions for us over over a period of time.
Right understood and then just.
A follow up on the whole the QL.
You know kind of information insight that it provides I wonder also if there's a.
Any update on kind of your hit rate there.
You know as you've tried to look further out and develop leads further in advance.
Just kind of what's going on you know kind of conversion so lead to weaker.
Anything to certain older sure.
Yeah, you know just to give you that.
To frame it up I mean, when we have a marketing qualified lead it is what we consider to be medium to hardly so he had been already kind of pre qualify through a lot of the algorithm that we do internally and kind of with our demand generation.
We like to call. It artificial intelligence engine that we have so it is it is higher than the typical close rate. So if you think you know we don't we don't explicitly talk about our close ratio.
We think that that's kind of a strategic to us but it is much higher than the typical sales goal that we can make so that's why we're very encouraged with just keep pushing <unk> and at the rate of <unk>.
Thousands of marketing qualified leads per week.
Quite encouraging.
Great. Thanks, a lot.
Thank you.
Perfect. Thank you. Our next question comes from Joe Ritchie from Goldman Sachs. Please go ahead.
Thank you and good morning, everyone.
Hey, Joe.
So maybe.
Maybe just starting off going back to the discussion around audits.
A really interesting discussion so I know, it's not an apples to apples comparison, because you know 4000 audit your installed base I think across your portfolio of products with something like $5 million I'm just trying to think through this this opportunity you know on a longer term basis, because I see 100 million dollar conversion and.
That's pretty meaningful it's like two points to your tier <unk> growth and so I'm. Just wondering is this something or.
It is like a growth multiplier over the coming years. This is something you guys are hoping to kind of bank on a going forward and any thoughts around that would be helpful. Yeah. Joe. So I can tell that the 4000 that we.
<unk> referenced is only in the U S. A so so yeah, I mean, but definitely many more as we think about it globally from a global perspective.
And Oh, Yeah, I mean, I think we're this is something that we're leveraging as another kind of a what we call. It self help growth initiative.
We think it is.
Meaningful for the customers to learn more about what they can do.
It is it is something that that we've been doing for a little bit of time, but we're getting really good at doing this not only for compressors, but also for like blowers. So when you look at a company like <unk> in the pulp and paper industry. They're now doing a lot of these audits as well to think about energy as well as water conservation in the pulp and paper Indo.
So so yeah I think it's a it's something that that that is very strategic to us where we're kind of unique in how we do it.
We think some of the acquisitions that we're making like Lawrence factor a couple of quarters ago. It's another enhancer on how are we going to be able to do not only the our audits but maintain.
The the level of purity of air and efficiency and so on with remote connectivity testing. So I think it's a yeah. It can be a good growth driver for us it has been for us so far and as we said on the remarks.
3% improvement from the number of audits that we did in 2019 pre pandemic. So it's a it's definitely an area of continued investment for us.
Yeah, No that's great to hear the same day I guess, maybe my my my follow on question just on China I am just curious like.
Can you maybe just provide some on the ground color.
Size of the business for you guys. What do you what are you seeing in the region right now what's been the impact and how you're thinking about it quantitatively for the guide.
Yes, also China, China for US is roughly 15% of sales one five.
And I think we said it before that were really in the country for the country. So.
You could argue that roughly 90% of the product that gets sold in China is produced in China.
And so therefore that supply chain is kind of close by we.
We don't have a we don't have a factory in Shanghai our.
Factories are outside in Suzhou, and Wuxi, and and Bush and so these are kind of different cities that have not been fully impacted by the lockdowns.
As our operators can still go to the factory in Shanghai. We have is we have a distribution center. So it kind of has impacted maybe some of the distribution center that we do for them, which is mainly aftermarket.
But but most recently here the government is allowing for some companies to actually go back and we have been one of those companies that we have been allowed to go back. So the situation here now is where we need now to supply chain to start ramping up so it's not so much about odds, but making sure that those suppliers that we have within the Shanghai region. There has been.
Look down, but they are able to ramp up kind of as fast as what we have been able to do so I think it's just one of those that we're taking a prudent view as we go here in the second quarter and as we're able to work with our suppliers and be able to ramp that up even faster and better.
It's it's you know it will be.
Hopefully some upside opportunity from the perspective of being able to support our customers in a better way.
Okay, great. Thank you.
Perfect. Thank you. Our next question comes from Nigel Coe from Wolfe Research. Please go ahead.
Nigel Your line is open.
Maybe Victoria will move to the next and then come back Nigel Yes.
They Brooklyn, our next question comes from Josh Bushard V ski at Morgan Stanley .
Hi, good morning, guys.
Hey, Josh.
Just to keep on the energy audit kind of discussion for a second.
I'm sort of wondering if what the historical context is here the center, we've seen sort of energy price spikes before I think you know kind of going back at points in time.
Theres been a compelling payback analysis, but like you haven't seen customers move as much yeah, I guess, the current environment feels maybe more different and more structural with what's going on in Ukraine, but like her.
Has this happened before and you know what sort of order of magnitude difference.
I think Josh maybe they want different variable debt is maybe very new here is ESG and the 2030 in 2015 targets that companies are.
Our our green too.
And you saw on one of our slides how we actually included.
Quote Strom sustainability reports from pretty large companies that are basically talk about the compressor and the air treatment systems is there way for getting to their scope, one and scope two activity. So I think it's a combination of the multiple there is variables that yes energy.
Energy has peaked in the past and that kind of maybe creates a little bit of acceleration, but I think now they're really fundamental change in the market is is that is the fact of these kind of ESG targets companies are putting out and realizing that these underinvested area of compressors blowers and pumps that consumes energy there.
It's now time to really upgrade that and the second variable could be around Iot and how the industrial internet of things on the road remote connectivity is really accelerating that connectivity of the product to really enhance energy consumption water usage, even even stronger.
So those are the two variables that are very different now that really we think are going to create a better sustainable ongoing momentum.
Got it that's helpful and maybe that's part of the answer to my next question as you know this business and other points in time felt a bit more cyclical with this sort of macro backdrop, whether it's PMI or.
Specific disruptions in regions.
What do you think is sort of the.
Big difference now I mean part of it is probably some of the sustainability stuff, maybe nearshoring, maybe your own lead generation, but like if you had to focus on kind of one or two things either macro or micro <unk>.
You think are sort of driving better order performance today.
And kind of past volatile periods like what would you sort of break that down.
Yeah, I'll say, Josh do you know if I say in terms of things that we can control that we have been working on for the past several years.
Is how we have moved to better end markets kind of what we call sustainable high growth end markets, whether it is food beverage life and sciences, we call that we'll call that out in the in the Investor's day as the quality of life and how we continue to see that as we move more of our product by our own choosing.
To be able to play in those end markets that provides a better sustainability. The second one is again in terms of what we can control it will be demand generation. We think that this is a really compelling.
<unk> differentiator that is allowing us to reach these highly fragmented customer base and a much more highly cost effective way and there is very very efficient, allowing us to create these acceleration of the market to qualify leads turning into sales qualified leads and the way we like to say, sometimes internally that we're gonna get we get and our sales guys more at bats.
And basically he didn't more horn runs than in the past and the therapies internally in terms of what we can control is I'll say innovation I mean, usually you know how new product development for us is essential.
And every quarter, we speak about how we've been able to create new technologies, new product I mean, the Thomas pump in the taking technology and moving it into in vitro diagnostics or even the then they're already compressor, which it was a very gas compressor oriented and we moved that to a much more sustainable end markets. So I think those are three areas that we have in our <unk>.
Joel.
That are allowing us to have a much more sustainable.
Ongoing growth.
Perfect. Thanks for the color.
Yep.
Perfect. Thank you so much.
Our next question comes from Andrew Kaplowitz from Citi. Please go ahead.
Good morning, everyone.
Really.
You said that I just wanted to follow up on something you. Just said if you could talk about the resiliency of Irish portfolio now versus a few years ago I think one of the big initiatives that you've had the company post the RMT was to improve the aftermarket capability of the company. So.
As you proceeded with that initiative.
How have the how has it been prudent and gone over the last few years.
Yeah. Andy This is Vic maybe I'll start and I can I can let them spend to add on as well.
You're absolutely right I think if you followed the journey here for a few years, we've made some very concerted efforts.
I'd say two to eliminate a lot of the what I'll call a cyclicality that was inherent in our portfolio of previously so you've obviously seen that with the divestitures, particularly.
Upstream oil and gas obviously been divested away from the from the business and then I'd say a couple of other areas now as we think about today and moving forward. One is the aftermarket piece, which you're absolutely right. We see a path to be above 40% from a total enterprise perspective, which is a more stable and recurring base of revenue, obviously more profitable as well.
And I think the other one that the center I just mentioned and he gave you gave a number of examples whether it be leroy or the Thomas pumps is what I'll call higher growth more sustainable end market. So you've seen a lot of push for areas whether it be on the water side, whether it would be on the lab life science, whether it be hydrogen on a lot of the applications that are oil free.
Technology goes into so I would tell you, yes, that's absolutely been a huge push in a in a very concerted effort I think if you look at the portfolio today, even versus what the composition was from an end market perspective at the time of the of the RMT meaningfully different but by virtue of both of those areas that we focused on.
And then they could I just follow up with you on cash flow, obviously started out seasonally slow in Q1, you mentioned $100 million investment in inventory. How are you thinking about working capital improvement as you go through the year to reach that 100 per cent go when should we expect sort of normal cadence from here.
Yes.
Thats thought on Andy obviously.
Clearly given the backlog and in the global supply chain environment, you have seen a build of inventory here in Q1, I would say, obviously right now clearly with the the Shanghai situation.
And still kind of some of that supply chain unrest out there. We would expect to continue to see working capital are probably slightly elevated levels here, particularly through the first half of the year, So Q2, probably not being much different and in the second half being I'd say about more of a normalization. So I think by the second half again, assuming everything continues to return to some semblance of normal you would expect to see that seasonality.
<unk>, probably come back in and it's worth noting here that you know that.
Our cash flow is typically seasonal Q1 is typically the lightest and it does ramp towards the end of the year. We would expect no different this year, just a little bit more exacerbated in the first half due to the inventory situation.
I appreciate it.
No problem. Thank you.
Thank you.
Our next question comes from Nathan Jones at Stifel. Please go ahead.
Good morning, everyone.
Hi, Nathan.
Wanted to I wanted to start off with some questions around the backlog and lead times I mean, you've obviously had very strong book to Bill ratio is very strong orders.
But until you have more backlog than you would like at this point.
Lead times getting short of getting longer.
Any color you can give us around how that how that's impacting the business and how that's impacting posture backlogs etcetera.
The only thing I would say.
And it actually varies by varies by business and also the product lines within the businesses. So for example, we now being able to have a small compressors to reduce lead time dramatically versus what it was in the past.
And so I think in the aggregate you can think about lead time, maybe about the same to slightly better with some kind of mix within those product lines that we have so.
So as our team working aggressively to try to reduce and use it as a competitive advantage you bet. They are yes.
Okay.
Do you think that your lead times are better or significantly better than the competitions and that that is leading to market share gains.
I think it will vary country by country Nathan I mean, as you know we're so in region for region, we're in country for country. It could it could vary from country to country.
And in some cases like I said, you know I think if we have that opportunity to utilize our lead time is a way to have a competitive differentiator we will.
And just one quick one on the energy audits do you actually charge for those energy audits or do you view that as kind of a selling expense.
Yeah, no, we actually do it as well.
Well.
I wouldn't say that it varies again.
In some industries, we're actually charging for some of that minimal amount what we do it only mainly because we just want to see the commitment.
From the customer in doing these audits I mean, sometimes it isn't.
You do it for free they just don't pay attention to it. So so in some cases, we're actually charging I mean, but.
No no not to generate a profit on these audits, it's just more to create that conversation and on what we can do to the customer.
Makes sense. Thank you very much for taking my questions.
Thank you Adam.
Thank you.
Our next question comes from Stephen Volkmann of Jefferies. Please go ahead.
Great Good morning, guys.
I just wanted to go back to the incremental margin question, if I could because I guess the second half is going to have to be pretty heady relative to incremental margins to kind of get to the 35% for the year.
And I guess, probably most of that price cost, but I just wanted to make sure you have sort of conviction and visibility into that accelerating in the second half and I assume the fourth quarter would be kind of the highest of the year, but just any comfort around that would be great.
Yeah, Steve that's completely correct, yes, I'd say that the incremental margins are expected to be obviously much better in the second half of the year than the first half of.
The major drivers clearly price cost.
It's probably the single biggest driver as we said we would expect that price.
Price cost is going to be dollar positive in all quarters, but honestly margin positive, particularly in the first half and second half much more so I'd say the other areas to note would be one we do have the $50 million of synergies that that we are still expecting to see remember those tend to be a bit more seasonal because the sinter.
We're seeing now are much more of a I would call ITV oriented maybe to a degree footprint in certain areas, but they are very volume.
They show up when the volume should service, obviously to have a seasonality associated with them that once again would follow a more so in the second half of the year and seasonally stronger and then a third area to note here is remember we do have the.
The synergies on the the bolt on acquisitions that we completed last year and so we're taking a lot of that is in the <unk> business. Specifically, we're taking a lot of those actions now and we'd expect to see a lot more of those in the act.
In the margin profile more towards the back half of the year.
So and again, it's obviously, it's probably worth noting that right now, particularly for those PSD acquisitions.
You didn't have them in the prior year for the first half. So there is a bit of a nuance between first half second half once you start comping fully on the acquisitions. It starts to normalize a bit more but those are probably the three biggest drivers price cost obviously would be the biggest up those three though.
Understood. That's helpful. I appreciate it and actually sort of leads to my follow on because I was curious about the six bolt ons that you have in the pipeline.
Are those likely to be margin dilutive I know you can sometimes find some pretty good margin acquisition targets, but just curious if you actually get those over the goal line, how we should think about that mix.
Yeah, Steve I wouldn't I wouldn't say there are bolt on in nature here they.
They vary in margin profile and they also I'd say very from a segment perspective as well so we have a pretty good.
I would say.
You know it's mixed across the portfolio.
Not meaningfully I mean.
The majority of things we are purchasing are in that 20% to 25% plus realm typically speaking, but we typically have a very good path to how they will get to segment margin profile, if not better within a three year timeframe, if not better and I would tell you the margin profile.
I'm sorry for the return profile from an ROIC perspective on all six of these deals is a is completely in line with the targets that we've laid out previously so even if there is some slight dilution upfront. We would tell you that's something we feel like we can right size pretty quickly.
Super Thank you guys.
Thank you.
<unk>.
Thank you Stephen for your question.
Our final question comes from Nigel Coe from Wolfe Research. Please go ahead.
Thanks, Good morning at this time I'm here sorry, managing.
So I apologize for that.
Embarrassing.
I want to go back to the to the energy orders I know you've touched on it a number of times here, but.
You said, a two year payback with sensei I'm wondering how that looks specifically in Europe , just given how high energy prices all the.
You know to your payback is definitely the problems are a good capex ROI, but just wondering how that looks in in in Europe .
Yeah.
Great Nigel Yeah, I mean in Europe , clearly with the energy cost being much higher will be will be better than that two year payback.
We don't.
We don't want to specifically quantify it region by region, but as energy costs will continue to rise that is definitely kind of core to the mathematical formulation of getting that that payback in there.
Okay and then just curious are there any I'm not aware of any specific credits or incentives at the manufacturing level, but are there any incentives that you're aware of that could encourage maybe you know get get some customers over the line on replacements.
Nothing that I would say meaningful nigel to be honest no nothing meaningful.
Okay, and then just finally on compresses.
The the legacy Ingersoll Rand's E train.
Uh huh.
Compressor portfolio was definitely a bit more oily than than than the Gardner Denver portfolio.
You know larger play large preference I was just wondering you know what.
Yeah, what a minus what is the mix right now of Angie centric you know end market spend and so what trends you're seeing there.
And in those vehicles.
Yeah I know.
Great I you know so this is actually one that very well.
Fits in line to what we said before about moving into these sustainable high growth end markets. So we're taking that technology of that large centrifugal compressors into air separation like up or hydrogen or for LNG.
So these are kind of more.
Kind of more what we call it more into the sustainable end markets that are that we're seeing and also food and beverage and also a lot of the the new semiconductor expansion that you're seeing and the the localization of the supply chain and the last one is electric vehicle production and lithium battery production I mean, those are kind of the end markets that we.
Have pivoted away from oil and gas and into these better sustainable growth in markets, where there is a great example on picking what we can control, which is taking the products in position then.
Very well into end markets that are seeing better growth momentum.
Okay, great. Thanks for that I appreciate it.
Thank you.
Perfect. Thank you Andre for your question.
This concludes our Q&A session and I will pass back over to the sense right now for any final remarks.
Thank you Victoria.
And I say, thanks to everyone for your for your interest when Ingersoll Rand and to all the employees that are listening to here on the call who are shareholders and also to all of our shareholders are going to say thanks again for the support as you can see where our company very well positioned to continue executing and even in difficult environments and we're always guided by our purpose of making life better.
<unk> not only for the planet our customers, but also our employees and shareholders. So with that when I conclude here at say, Thank you again and talk to some of you soon thank you.
Thank you everybody for joining today's call you may now disconnect your lines.
Uh huh.
Yeah.
Yeah.