Q3 2022 Ingersoll Rand Inc Earnings Call
Hello, everyone and welcome to Ingersoll Rand Q3, 2022 earnings conference call. My name is Emily and I will be coordinating your code today at the end of the presentation. You will have the opportunity to ask a question for pressing star followed by the number one on your telephone keypad I'll now turn the call over to our highest Matthew foolish with Ingersoll Rand.
Please go ahead, Matthew Thank you and welcome to the Ingersoll Rand 2000, <unk> third quarter earnings call I'm, Matthew Port Vice President of Investor Relations and joining me this morning.
Chairman and CEO , indicating chief financial Officer.
We issued our earnings release and presentation yesterday, and we will be referencing these during the call. Both are available on the Investor Relations section of our website. In addition, a replay of this conference call will be available later today before I 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.
<unk> SEC filings, which you should read in conjunction with the information provided on this call. Please.
Please review the forward looking statements on slide two for more details in.
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 measures calculated and presented in accordance with GAAP in our slide presentation and in our earnings release, both of which are available on the Investor Relations section of our website on today's call. We will provide a strategy update review our COO.
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'll turn the call over to the center.
Thanks, Matthew and good morning to all and we'd like to begin with a big Thank you to our employees worldwide for their hard work in helping us deliver another record quarter in Q3.
Consistently exemplify our purpose and think Atlantic late corners to deliver on our customer needs.
Every day I'm impressed with how you're leveraging our IRS process to outperform in a continued challenging environment.
Our performance this quarter and year to date reinforces the impact we have as owners of Ingersoll Rand.
And knowledge of U haul we accomplished these results on slide three.
Our achievements is reflected in the numbers and also in our commitment to lead sustainably.
We continue to position <unk> for long term value creation through industry, leading innovation that offers intrinsically sustainable benefits to our customers.
Through Q3 demand remains strong and while macroeconomic geopolitical and supply chain uncertainties continue to be a concern we remain focused on what we can control, while leveraging our strong balance sheet and operational mindset to execute on our commitments.
Remaining agile in today's environment. It is critical and you will see today, we continue to accelerate organic growth through demand generation and product execution.
In addition, we remain committed to our capital allocation strategy, which is focused on inorganic growth through bolt on acquisitions today.
Today, we're highlighting six new companies, we have recently acquired or have under contract that will strengthen our position in core categories and Brooklyn, our exposure to high growth sustainable end markets.
Turning to slide four today, we will discuss four critical elements of our compound a model to demonstrate how we stay focused on controlling what we can control.
Moving to slide five we have some exciting news to share.
We recently earned a score of 81 on the S&P global corporate sustainability assessment.
As of October 20 <unk>.
<unk> puts us at number one in North America.
Number four in the world and in the 99 percentile within our industry, which is very impressive.
And think about it less than three years ago, we were not even showing on the list and today. We are number one in our industry in North America.
We continue to align our portfolio to sustainable high growth end markets supported by Mega trends in September we hosted our second annual sustainability call. When we introduced our enhanced strategic imperative.
It sustainably.
Which is based on a simple two pronged approach of growing sustainably and operate sustainably.
On this slide I'll spend a minute highlighting two examples from our broad product portfolio to help improve energy efficiency and reduce water consumption.
We believe that was in the U S alone there are over one $3 billion in cost savings opportunities for compressed air system.
And that number is likely five times greater globally.
The energy recovery units shown here is an innovative device that captures up to 94% of the heat generated during air compression and uses it to warm water that can be used in other processes or for space heating with a payback period or are customers of less than one year.
Yeah.
Our impact on water conservation occurs in multiple ways, but perhaps the most compelling as oppose that eliminate the need for water usage in critical applications.
It won't take Turbo blower technology is a perfect example.
Lora technology is used by leading pulp and paper manufacturers and it replaces an alternative technology that requires a fresh water supply.
Our existing installed base around the world is currently facing seven points by billions of gallons of water a year.
And we estimate that over 15 billion gallons of water per year could be potentially save with the full adoption of our <unk> technology globally.
To put that into perspective, that's more than three times the amount of bottled water consumed in the United States annually.
Within our own facilities operating sustainably is an integral part of our business, we will focus on reducing electricity and water consumption to drive gyro greenhouse gas emissions.
Payment to operating sustainably delivers value for our stakeholders and our planet creates a sense of purpose and inspiration for our employees and has a positive impact on the communities in which we operate.
This commitment also make Ingersoll Rand a supplier of choice for our customers.
Together, we're building a better future and planet by leading sustainable actions within our business with our suppliers and our communities.
Slide six demonstrates two simple examples on how we continue to control what we can control to deliver organic growth.
On the left we have an example of demand generation execution in Europe , which clearly has been a challenging market in.
In Q1 at the start of the Russia, and Ukraine, where we saw a downward trend of marketing qualified leads or in the U S.
The demand generation team immediately jumped into action leveraging <unk> to enjoy that.
Through China campaigns focused on high growth sustainable markets.
Article specific and energy efficient related webinars and utilizing trained data to remain agile and revise all targeted campaigns.
The result of these actions we saw a 60% increase in NPL, which is our primary leading indicator for orders.
And as you can see from our results orders in mainland Europe continues to remain healthy and grew in the low single digits, excluding FX for our compressor portfolio in Ips.
On the right is an example of an outstanding product line execution in China.
Prior to the merger Gardner Denver had a solid compressor portfolio for the China market.
But did not have the right sales structure or operational footprint.
Post merger and leveraging the.
The team refreshed the product line integrating the best practices from both IR and Judy.
The new program, they improve efficiency by 5% to 10% and also improve the cost structure of the compressor portfolio, how do we get indication of activity.
With those improvements in efficiency and cost structure, we focus on fast growing small to medium sized customers and expanded the Gardner Denver channel over 200% separate from the legacy IR Chang.
The end result is triple digit growth in revenue and unit volume in a highly competitive market.
Turning to slide seven since our Q2 earnings call, we announced the signing of six bolt on acquisitions that enable us to increase value across ecosystems by expanding our core mission critical flow creation technology, while accelerating our addressable market with close adjacencies.
So let me quickly walk you through these deals first air Max which is a leading full service provider of air compressors and compressed air systems services based in France.
This is an example of a strategic channel expansion for our Ips segment, which will leverage air Max strong end user relationships and technician network to convert competitive products and support aftermarket growth.
Second it's Pedro here, leading Spanish manufacturer, a blower and vacuum systems.
This acquisition strengthens our position in core blower and vacuum category in high growth sustainable markets, including water and wastewater.
Next is Everest, which is a leading Indian manufacturer of lower consistence ever.
<unk> significantly broadens our presence in the key high growth market of India.
These three acquisitions are strongly aligned with our strategy and increase our product portfolio and core technologies or enabling expansion into close adjacencies.
Continuing on page eight moving from left to right of the page. These are great examples of close adjacencies with immediate synergies.
The SPX flow air treatment business is a leading manufacturer of desiccant and refrigerated drivers to nutrition systems, and purifiers will compress here.
These products are high.
Really complementary to our portfolio it seems more than 75% of compressors need one of these air treatment solutions and innovation they generate strong recurrent aftermarket business.
Next dose Detroit International, which is a U S leader in water power.
Flow solutions, and Iot hydroponics, and agricultural markets, which improves our capabilities in several high growth sustainable end markets through depreciated, the controls and Iot solutions.
And finally, Westwood technical which is a highly experienced control instrumentation and Iot specialist with technology that is complementary to our Y Z systems product line.
Westwood enhances our Iot platform, including a relative low power wide area networking technology.
We expect the team to integrate these acquisitions at the regional level by utilizing a rig and our proven model of integration excellent, but you have seen in prior acquisitions.
Our M&A funnel remains strong.
Today, the funnel still remains over five times larger than it was in Q3 of 2020.
I will now turn the presentation over to Vic to provide update on our Q3 financial performance.
Thanks for center.
On slide nine we continue to be encouraged by the performance of the company in Q3 with a strong balance of commercial and operational execution fueled by IRS, despite ongoing macroeconomic uncertainty.
We remain on track to deliver on our $300 million commitment in cost synergies from the merger.
And as we have indicated many times, we have a funnel that stands in excess of $350 million and we are ready to take incremental actions, if warranted by macroeconomic conditions and market activity.
Total company orders and revenue increased 10% and 14% year over year, respectively. We saw strong double digit organic revenue growth in both Ics N P. S T at 19% and 15% respectively.
Overall, we posted a strong book to Bill of 1.09 turns for the quarter.
We remain encouraged by the strength of our backlog, which is up over 40% year over year.
The company delivered third quarter, adjusted EBITDA of $376 million.
20% year over year improvement and adjusted EBITDA margin of 24, 8% 110 basis point.
Year over year improvement and a 160 basis point improvement sequentially from Q2.
Free cash flow for the quarter was $253 million, despite ongoing headwinds from inventory due to global supply chain challenges as well as the need to support backlog.
And total liquidity of $2 $6 billion at quarter end was up approximately $200 million sequentially.
Our net leverage continues to improve and is it 1.0 turns which is <unk>, one turn better than the prior quarter.
Turning to slide 10 for the total company Q3 orders grew 18% and revenue increased 22% both on an FX adjusted basis.
Total company adjusted EBITDA increased 20% from the prior year.
And the Ips segment margin increased 70 basis points, while the PST segment margin declined 60 basis points, driven primarily by the impact of prior year acquisitions as well as the impact of prior year COVID-19 related demand.
When adjusted to exclude the impact of M&A completed in 2021, PST adjust EBITDA margin actually increased by 60 basis points.
And we did see a significant sequential increase in PST has adjusted EBITDA margins, which were up 230 basis points versus Q2, and now PST margins are generally back in line with where we've seen them historically at approximately 30%.
It is important to note that both segments remained price cost positive in terms of dollars, which speaks to the nimble actions of our team despite ongoing inflationary headwinds.
And finally corporate cost came in at $30 million for the quarter.
Adjusted EPS for the quarter was up 9% to 62 per share.
The tax rate for the quarter was 21, 7% and we anticipate the full year being in the low twenties as well.
Moving to the next slide free cash flow for the quarter was $253 million, despite $69 million of inventory headwind primarily to support backlog.
Capex during the quarter totaled $22 million.
Leverage for the quarter was 1.0 turns which was an old one turn sequential improvement.
Total liquidity now stands at $2 6 billion based on approximately $1 5 billion of cash and $1 1 billion of availability on our revolving credit facility.
Cash outflows for the quarter include $4 million for share repurchases and $8 million to our dividend payment.
M&A remains our top priority for capital allocation and we continue to expect M&A to be our primary usage of cash as we look forward.
I will now turn the call back to the center to discuss our segment performance.
Thanks, Vic on Slide 12, our industrial technologies and services segment delivered strong year over year organic revenue growth of 19% split evenly between price and volume.
Adjusted EBITDA rose, 15% year over year with an adjusted EBITDA margin of 26, 2% up 70 basis points.
Our year with an incremental margin of 32%.
We also delivered sequential margin expansion of 80 basis points from Q2 to Q3.
Organic orders were up 16% with a strong book to Bill of 113 turns.
Note that on a two year stack. The Ats segment organic orders grew approximately 50%, which is in line with our Q2 2022 year stack, meaning that those far we continue to see strong demand for our products.
Moving to the individual categories each of the figures exclude the negative impact of FX, which was a 7% headwind across the total segment on both orders and revenue.
Starting with compressors, we saw orders up in the high double digits.
And a further breakdown shows orders for all three products grew 20%.
And oil lubricator products grew in the mid teens.
The Americas team delivered solid performance with orders in North America up high twenties, while Latin America was up mid Thirty's.
In mainland Europe orders remained strong with growth in the low single digits, while India and the middle East were up high double digits.
In the Asia Pacific team delivered orders growth in the high single digits, driven by low single digit growth in China, and low 30% growth across the rest of Asia Pacific.
In vacuum and blowers orders were up low twenties on a global basis.
The global power tools and liquid team continues their strong performance with orders for the total business growing in the high double digits.
Moving to the sustainable innovation international portion of the slide we're highlighting the relaunch of our Buffalo New York facility.
The reopening of the site has not only localized manufacturing and reduced customer lead times. What he has also expanded our global capacity for air and gas and typically tell us in high growth sustainable in market such as clean energy.
Due in large part of reassuring activities orders are up over 500% in the Americas with over $40 million since our May 2020 do lunch.
And this is a real tangible and very inspirational example, all of our employees thinking and acting like owners.
Turning to slide 13 revenue in the precision and science technology segment grew 15% organically split evenly between price and volume.
Recently, the PST team deliver adjusted EBITDA of $92 million, which was up 22% year over year with incremental margins of 27%.
Adjusted EBITDA margin was 29, 1% down 60 basis points year over year.
As illustrated in the table on the bottom left side of the page the decline year over year in adjusted EBITDA margin is driven by the impact of prior year acquisitions at 120 basis points and the impact of prior year COVID-19 related demand at 60 basis points.
However, sequential adjusted EBITDA margins significantly improved by 230 basis points due to operational execution and price cost performance.
Organic orders were up 3% year over year as Q3 comes were impacted by headwinds from prior year corporate related demand primarily in the terminals business.
Adjusting for the Covid related orders normalized organic orders were up approximately 8%.
On a two year stack organic orders are up 27%, which is higher than a two year stack from Q2.
From our PST sustainable innovation in action, we're highlighting <unk> mentioned.
These recently acquired business is a market leader in diaphragm vacuum pumps, serving mission critical environmental applications in sustainable end markets such as clean energy.
It seems like Q4 of 2021 acquisition the team has installed and leverage <unk> to accelerate investments in new product development and launch a higher pressure offering securing orders from four major Oems and system integrators.
As a result, the business has seen revenue growth of low double digits and has improved adjusted EBITDA margin in the mid fifties to low sixties in less than three quarters post acquisition.
This is a great example of how we leverage our compounded model through the power of Iraq to achieve double digit earnings growth.
Moving to slide 14 in terms of 2022 guidance given the ongoing strength in commercial and personal performance. We are raising our organic revenue guidance for the total company to 12% to 14%.
100 basis point increase from prior guidance based on both our Ics and DSD segments.
Youre going to growth increase is offset by the negative impact of FX, which is suspected to now contribute headwinds of approximately 6% compared to a headwind of 5% in the prior guidance.
For the full year, we are reaffirming our 2022 revenue guidance at 11% to 13% total growth.
We're also raising our adjusted EBITDA guidance at the midpoint by tightening the range to between $1 4 billion and $1 $4 billion to $5 billion.
Important to note that this guidance includes nearly $20 million of adjusted EBITDA headwind from FX when compared to our prior guidance.
Due to investments in inventory to meet growing demand, we expect free cash flow conversion to adjusted net income to be approximately 90% for the year.
Even with these change free cash flow margins are expected to be in the mid teens.
And we expect free cash flow conversion to return back to a 100% as we think about 2023 and beyond.
We anticipate our adjusted tax rate to be in the low twenty's and capex to be approximately 2% of revenue.
Interest expense is estimated to be approximately $35 million in the fourth quarter.
Our M&A guidance.
Those include the acquisitions of Honey and Paul.
<unk> How'd, you broke up Westwood Tech Pedo Hill dosage run and air Max.
However, overall M&A revenue guidance for the year remains flat to prior guidance due to the impact of FX, specifically on previously acquired businesses with setbacks and Maximus seem the largest effect.
Turning to slide 15, as we wrap up today's call I want to reiterate that Ingersoll Rand is in a strong position. We delivered strong results in the first three quarters of 2022 on our full year outlook remains optimistic.
We're keeping a close eye on the dynamic market conditions, while we remain agile and prepare for any challenges that may come to.
To ensure consistent delivery of our commitments, we will continue to leverage <unk> across every facet of our business.
So our employees I want to again, thank you for your ongoing engagement.
And for making thoughtful action oriented decisions like the owners you are.
This continues to draw our ability to make life better for our customers our planet and our stockholders.
It is also exciting but our most recent survey unemployed engagement continues to show improvement, which demonstrates the rapid changes we continue to drive our very welcomed by our employees.
Our balance sheet is strong and with our disciplined and comprehensive capital allocation strategy, we remain resilient and have the capacity to deploy capital to investments with the highest return as we continue our track record of market outperformance.
With that I will turn the call back to the operator and open for Q&A.
Thank you.
Like to ask a question you may do so now by pressing star followed by the number one on you kind of think he patch I'm preparing to ask your question. Please ensure that your device I'm, Joe microphone unleash it likely if you change your mind I would like to be withdrawn from the key. Please press stop for by T. We were just take a brief pause and allow the key to film.
Yeah.
Our first question today comes from Mike Halloran with Baird. Please go ahead, Mike Your line is open.
Hey, good morning, everyone.
So where am I going to question two.
Two questions for your first question.
Obviously, the orders trends are really healthy and pretty impressive considering the backdrop here, maybe just talk with them about the volume trends you saw through the quarter anything notable in the areas of weakness.
When you look at those leading indicators that you talk to.
And any signs of concern in there or do you think there's just a lot going on that is unique to Ingersoll Rand and that allows you to be able to continue with a pretty healthy clip going forward on the order side.
Yeah, Mike I would say nothing.
But I would classify as major significance op are down I mean very good.
Stable robust across the portfolio of the regions.
The segments you know clear.
Clearly as we kind of highlighted year on the earnings call. It's a lot of that has to do with controlling what we can control and clearly our demand generation at some degree.
Good example, here that that we're showing some proof points in terms of how that is helping us.
Overcome any any market dynamic that we see out there clearly aftermarket continues and services continued to be a very important piece of our or of our equation.
And then so on.
So I think its just continue.
Teams driving the initiative.
We have in place.
And then.
I heard Vic's comments about you know if things change you have the ability to leverage into some of those synergies to drive some upside to the range.
And I know that <unk> got a history of being able to act quickly if the environment changes and so I guess, what I'm. Just wondering is what kinds of things you guys are looking for to be able to pull that trigger and in a more real time basis.
Yes, Mike as you could expect.
We're quaking pretty agile and nimble and taking action and a lot of that has to do with the proper planning that we have in place. So we already have.
Several downplayed scenario playbooks that we have with the team that as we cannot look at the demand and we see that order patterns. If those materialize in terms of reduction will decrease we will definitely take immediate action. So so I think it's just one of those that we continue to look at the leading indicators the MQM the order rates and we're ready to pull the trigger and many of you.
Think about it. One example of this is that over over the past couple of years as we integrated two large companies Gardner Denver I think as a run during the period of in the middle of the pandemic.
We didn't do much on footprint and footprint could be another area of continued expansion expanding our synergy creation here from the merger of the two companies.
I appreciate that thanks.
Thank you.
Our next question comes from Julian Mitchell with Barclays. Please go ahead Julien.
Hi, good morning.
Maybe just a first question on the very short term I know you get asked this hundreds of times in the last few months, but help us understand that fourth quarter EBITA ramp one more time I think it implies sequentially sales.
Slightly and then EBIT dollar is up about $20 million sequentially, even with a wide sort of corporate cost. So it may be just help us understand between the two segments. How those earnings are moving up sequentially.
Yes, Judy I think the way to think about it sequentially.
Think about revenue to be kind of fairly.
On an absolute dollar basis, consistent maybe slightly up.
Q4, compared to Q3 and.
This implies kind of on a year over year.
Organic growth is going to be in the top end of the organic growth guidance kind of mid teens growth.
What you saw here in the in the third quarter fairly similar slightly above.
But.
<unk> continued to be a headwind of an additional 100 to 150 basis points and an M&A roughly 200 basis points lower than Q3 at some of the M&A falls off.
We moved through <unk> through the fourth quarter. So when you put all these together kind of comparing to the total company from an EBITDA perspective, and this is fairly similar I would say.
In this in the segment level is that would you continue to see improved price realization Q3 to Q4, given the actions that we have already taken an inflation staying flat.
Flat to Q2 exit levels. So again, we expect to see a moderate improvement as we go quarter to quarter.
M&A synergy realization for the deals we close in the second half of 'twenty to 'twenty. One particular PFT, we'll continue to see some acceleration of that as we kind of move ahead and and also then don't forget that we still have.
Roughly in the year, we had about roughly $50 million of merger related synergies that I think the corralling to volume. So again, we'll see some of that here in the fourth quarter. So those are the kind of the three core variable that allows us to to your point.
With a prudent revenue being roughly consistent Q3 to Q4, we still see improvement in the EBITDA, even though we're getting a big headwind on the FX. So again it just speaks.
Now lead to what the teams continue to execute really well.
Like a lot of the headwinds that we continue to see.
That's very helpful. Thank you and then maybe just my quick follow up yeah. There's a massive of good color on N S orders and sales by region, maybe tend to focus on P. S T.
How are you thinking about the sort of organic orders trajectory there.
Kind of low single digit for a couple of quarters in a row understood. The COVID-19 headwind. So maybe how do we think about all this next few quarters in N P. S T play out.
Sure.
You said it well in terms of kind of restricting here into Q3 and Q2 ex scrub it.
Impact that we saw from these kind of large orders in the 'twenty to 'twenty one not happening now when you exclude that PSC was in the Q3 was up 8%.
We view as relatively healthy and in line with our stated Investor day targets of growing PSP in the mid single digit plus range.
As we continue to move forward over the.
The next few quarters, we expect that the teams will continue to deliver that.
That kind of in that kind of range as we move forward.
Got it and the Covid headwind kind of drops out as we enter 2003.
Yes, that's right.
Great. Thank you.
Yeah. It was very it was mostly noted Q2 and Q3.
A little bit here in the fourth quarter, but more I mean, less significant and obviously as you go into 'twenty 'twenty three there's definitely nothing.
Perfect. Thank you.
Thank you.
Our next question comes from Joe Ritchie with Goldman Sachs. Please go ahead Jay.
Thanks, Good morning, guys.
Good morning, Joe Good morning, Joe.
So I'm just starting off I guess you have the same pace.
Thinking about it the order strength has been has been notable you know throughout the year.
Yes, it might be too early to think about 2023 framework.
I'm curious if you have any preliminary thoughts on growth, particularly in it yet and then also you know pricing has been very strong maybe some comments around the carry forward in pricing.
About that for 'twenty three.
Yeah, Joe So as we think about 2023 and clearly we're not going to provide kind of a little guidance here on this call on 'twenty 'twenty three but a couple of items to consider is that from a revenue perspective I.
I mean, we had a very strong book to book to Bill in Q3.
Over one and particularly you know much even stronger in the Ics and so again, we continue to build more backlog, we built more backlog in Q3 as compared to the second quarter, even though obviously, we had increased revenue output. So heading into 2023, we're very pleased that we're going to have much more backlog.
And we have ever historically had and and I think a lot of that has to do with how we have continued to align to the mega trends that we spoke about around sustainability digitization that those are kind of gathering very good momentum and it is then what will allow us as we continue to continue to move up.
A word.
Perhaps continue to deliver or all deliver the commitment that we said that the Ics segment can continue to grow at these kind of organically mid single digit over the horizon in the period that we that we committed to.
I mean in terms of price, we said that even.
So in any market, we can generate at least 1% to 2% of price regardless of the market conditions again.
Because just because of the nature of our product being sold mission critical so.
As we kind of go into a into 'twenty 'twenty. Three you know you expect that we will definitely continue to generate some of that new price as well as a carryover that will definitely be plenty carryover.
That will be much higher than that but then the 1% to 2% of price.
But you know I think the good thing that is that as we think about 'twenty 'twenty three is that inflation seems to be fairly stable stabilizing.
You know when that starts spending turning more favorable.
Or kind of inflation decreasing we're holding the price or expect that continuing to drive continued margin expansion and a and then we you know we we recognize that.
But as we move forward, we will continue to see also very good momentum on the integration of the M&A that we're doing here.
Got it that's Super helpful. And then maybe one question for Vic.
This quarter you guys had the $33 million LIFO adjustment I think last year. It happened in the fourth quarter can you just maybe just provide some context around the timing of the adjustment like what what to kind of expect that yes.
I guess, maybe maybe that there aren't any surprises, it's kind of like going forward.
In that regard.
Yes sure John .
I'll take that one real quick so just kind of just high level first and foremost won the LIFO adjustment. It's a noncash adjustment it's done frankly more so for book are really tax purposes.
Do stay on our books each quarter on a FIFO basis, which we believe is a more accurate assessment of our true operating performance.
As such while we do adjust out the LIFO reserve adjustment from our non-GAAP results. It's also worth noting as you indicated this is 100% consistent with our historic practice you saw in Q4 2021.
We did exactly the same thing and in fact, the dollar impact was.
Almost exactly the same amount now with regards to the timing and I'd say really much more in line with.
Research. Please go ahead bastian.
Hi, everyone.
The quarter Uhm I was curious in a way to ask a follow up question on the library here Uhm.
Get you a little bit more color on why it was so large and are you see any add backs on the queue for and if you have something about the future of inflation. Thank you.
Yeah, I'll I'll I'll I'll keep it pretty short here I mean, the LIFO reserve adjustment is obviously correlated to be inflationary levels that we had been seen in the market and as you would expect given where inflation has continued to trend whether it be last year or this year, obviously seen the impact commensurate there. So again I would tell you it's reflective.
About the current operating environment that we're in.
It's not being quite frankly more than that but I think that's that's quite frankly be the easy direct answer there and then.
Reiterated kind of what I've said before our practice with regards to stating are non-GAAP metrics is 100 per cent consistent and as such that's what you've seen US report, whether it be whether it's our guidance or actual or our comparative on a year over year basis.
Great that's helpful.
Follow up question would be about orders and compressor. It. So you had a low of 30 per cent order, but I think Americans, while Europe , and China were more legal.
Single digits in high single digits.
Could you may be show the light on your marketing qualified lead and how do they stack up against up their orders alright in Europe , and maybe if you could try to live a light on what's the pipeline of M. Q all conversion to order it looks like.
Yeah.
Yeah in terms of in terms of the <unk> I mean, you saw on the on one of those legs, we provided a little bit of color in terms of that increase the named <unk>.
Particularly in Europe , again, too driven to the activities of the team had been doing and.
And as you saw him you know over 60 per cent increase in <unk>. It does take time to convert those leads what where you typically say is that it's anywhere between six to eight weeks to go from the marketing qualify lead to the sales qualify lead that kind of generates the order and to your point I mean, there's a percentage of conversion rate, we don't really actually.
Above that externally cause obviously, we think that this whole system that we have is really strategic appropriate there two r's, which is very exciting when we have been able to build here together internally, but but again I I I think the the exciting piece is that whether you look at it by region or by product line <unk> <unk>.
Be stabled, if not continue to look a bit awkward momentum.
As we as we can all go into into here in the fourth quarter. So.
Thank you that's helpful.
Mmm.
Our next question comes from Andy capture like specific eight please go ahead and.
Hey, good morning, everyone [laughter].
Good morning, and it.
Sunday It seems like it reality relatively difficult times again, M&A done given the volatility in the markets, but you've obviously been able to maintain or even step up your M&A activity. I know you mentioned your final still five times larger could you talk about the sustainability of your recent named momentum, obviously and announce to someone.
Larger deal pretty recently, so just talk about sort of what you're seeing out there.
Sure. They all say that we continue to see pretty good momentum and activity on on the M&A.
And again I think we have said it before which is that a lot of our M&A call at 90% of that it is sole-source millions of we are proactively going to the owners and cultivate a relationship in order to execute the Yemeni at the right moment in time and.
And I think what you what you saw here and there are a lot of these deals is exactly that I mean think about even the Everest that.
Vacuum on Bloor.
Indian manufacturer that has been in relationships conservation of over two years and and clearly now is the right time to move on on transition mutually on the ownership of the family to do even also off so so I think we continued to leverage a lot of our processes. As you can imagine we're utilizing irag processes as a way to.
Drive M&A through the funnel and increase the velocity. So I will say that we are still circle continued demand we still see that there's there's a lot of companies that were also walking away from Ah. So are in the same amount they usually deals that were transacting.
Looking at what walking away from a very very large number of deals and transactions. All over 80 80 companies that we have said no to over the past a couple of quarters. So you can that tells you a lot of the kind of.
But lots of <unk> and movement that we see in the M&A Colonel but again, yes, we're excited.
As you said five times the the final size and still already eight LOI on current currently negotiation. In addition to obviously of the transactions that we have an ounce.
[laughter] Guy named Vincent and maybe give us a little more color regarding what you're seeing in China girls looks like it may be decelerated a bit in China in Q3 versus Q2, I think it was upload double digits pretty last quarter and upload single digits. This quarter, what's your visibility like there I I know you've done a lot of work there.
RMT has helped to you so what's your visibility they're going into a queue foreign into 2023.
Yeah, I would say in that.
That was still seem fairly stable demand, even as we kind of grow hearing too into the month of October .
A year over year basis actually from a percentage fresh perspective, XFX, even accelerated from from the numbers that we posted a year in Q3, so again as we continue to see.
Good stable demand and and I think important to note that.
Q3 of 2021 I mean this is the time when the when China, we were seeing really like 50% type of growth numbers. So again, it's a bit of a top comp, but still even the theme where is able to deliver.
Two year stack that is really impressive and see that continue momentum as we go here into the fourth quarter and as you pointed out a lot of that very important self-help. We show. The example of compressors, where you can imagine that vacuums and blowers is very similar story.
Is driving an enduring localizing products, making it more for in the market for the market and then leveraging the commercial footprint to execute with the help of my R X.
Appreciate the color.
Thank you I mean.
Our next question comes from front went mine with Malleus Research. Please go ahead drop.
Okay.
Thanks, and good morning, everybody.
Morning.
So my question is really on Europe .
You, obviously used all your ex to offset some some choppiness and European markets and it's really just the fundamental question again about the rising need for energy efficiency in Europe is energy prices have gone way up versus the obvious potential hesitancy on spending capex. So aside from what you've done there do you see.
The customers coming to you with a need for energy efficiency did you see them being husband, how would you characterize the market.
Oh, absolutely that's definitely one of the core fundamental things that are definitely happening in Europe is at.
Clearly natural gas prices and you know you've seen a little bit of a drop here or dramatic drop natural gas prices, but it takes time to digest that also went through the system, but yeah. No longterm, yeah, I mean, we see that continue.
Rising energy in Europe , but also in other places of the world as a way for us to drive that.
Return on that investment capital to be very very palatable. When you think about generating lives in one year payback when you buy a compressor and not only you know a quick payback, but also youre doing something good for the planet, because you're saving the energy and helping these customers achieve their sustainability targets.
And so do you think that Europe is getting worse or better on on the underlying to them, but the man demand dynamics sure the quarter and into <unk> and I'll stop there.
Yes, and in terms of in terms of what we saw in the in the third quarter again fairly fairly stable, but the stability comes in really driven by I would say a good you know.
<unk> non cyclic capex kind of getting released and that is in the same sort of again related to sustainability relating to energy transition activities and one of the things that we've been spoken about talking about in terms of getting ourselves aligned to these mega trends.
I was just going to be with the uneven digitization I mean, the team you can choose to do a very good job on driving that service.
Service and aftermarket capability in Europe , and as we kind of look into the into hearing to October again, we used Dorothy ethics adjusted positive growth in the month of October from the orders perspective.
In Europe are particular to your.
Question, Yes, Sir.
Sure.
Our next question comes from Josh pace, Kravinsky with milk and finally, he's kind of head Josh.
Hey, Good morning, this is Brandon on for Josh.
To follow ups on some of the questions that have already been asked.
First on the <unk> when you turn to this <unk> process in places like Europe .
Where demand may be slowing does that come with some sort of margin impact burst the more typical order process.
Hey brothers.
The the cost up customer acquisition for I mean, QL is really low.
So so I would say think about it as even perhaps it might be a margin accretion margin improvement because we're not sending the sales guy to knock on doors and we're doing all these kind of digitally and so we're really increasing in enhancing the efficiency. So if anything I'd say that we because we're.
More prone to specifically put products with a higher margin through the MQM process is actually good news that you see a total average margin improvement.
Got it and then just on M&A with all the deals recently, how are you guys thinking about synergies for 2023.
What's been announced.
Yeah, I'll take that one.
Hey, I would think about it here is again the framework with which we have done all these deals and again I will talk about it Donovan totality.
Kind of seen very much in line with historic practice, you know the the pre cinergy adjusted EBITDA purchase multiple across effectively the sweet have you seen us do I've kind of been that low double digit type range. We typically are able to drive anywhere from some roughly two to four turns of EBITDA multiple.
Purchase reduction as we as we think about a three year out view and so whether you want to look at it from a purchase multiple perspective, and the ability to reduce that through synergies or alternately the wrong kind of calculus, where everything we're doing is very much in line with kind of our stated return criteria mid teens roissy within our cost of capital.
Again double digit type returns that's the way I would probably describe all of these in the centre I mentioned during the prepared comments. These are all core technologies are close adjacencies. They are technologies businesses companies, we know very well they are split nicely between the two segments and interests may not actually across the different geographies.
Which is great because the integration happens in the business and.
I would tell you right now we don't see any reason why these won't be in line with the types of deals and the types of returns and the types of cinergy profile as you've seen from our historic bolt on acquisitions.
Our next question comes from the line of making change 64 police Captain Nathan.
Good morning, everyone.
Morning isn't isn't.
I'm Gonna ask a couple of questions a max that the aim at hate recovery device that you highlighted.
You talked about that being one.
$1.3 billion of potential cost savings for customers in the U S spot towns that globally at less than one year payback, which kind of implies that is more than $5 billion revenue opportunity for Ingersoll Rand.
It typically looking for two years or less payback on those kinds of investments.
What's the limiting factor to getting those out a day like how do you think how do you view the rollout at something like that and the customer adoption for something like that what do you have to do for education marketing those kinds of things to get that product out into the market.
Yeah, I think I think I will say that that is basically the.
Probably the limiting factor or not but this is why we think.
And why we believe that the men generation in terms of digitally educating customers in a better way more efficiently and more proactive is the way to go even an industrial market space than we are today. So I think it's just a matter of continued to educate customers customers see that.
Technology is like this what can drive for them.
Clearly you hear a lot about whether heat pumps and other things in Europe . We think this is also another avenue of technology that can really help a lot of companies save.
Save energy not only in these caves or how we do it on.
When the heat recovery unit, but many other applications. So again, it's just one of those that it's just all about educating customers and customers seeing that.
They can grab that.
Activity and implemented in their businesses, so, but yeah, you you'd imagine that we're leveraging as you can imagine we're leveraging the demand generation team and a lot of our digital transformation activities doors educating customers on their unique innovations like this.
And then my follow up.
Around the drawing side of the business I think it's pretty obvious you guys.
At decided that having the drawing capability to go with compression strategic advantage, bringing default ran with some of the acquisitions you've been making can you talk about why you think being able to supply, but both the drawing and the compression is a strategic advantage and and how you can leverage that in the marketplace.
Yeah, I'll say Nathan in simple terms the more you can actually optimize the total system versus optimize in or Suboptimized multiple systems separately.
Better off many and if you have a compressor that is attached to a driver and you can actually work in a way to really optimize it too at the same time in an ongoing operating operating basis that that I think is a very winning proposition for us to drive that to the customer and then potentially create new revenue streams that that could be very good for us. So again, it's just one of the.
Oh is that we believe that air treatments, where there you know.
Whether your design, it or whether you're really utilizing the air treatment as a way to generate nitrogen or oxygen at point of use it as a good thing for the customer is a good thing for the planet and it goes really well aligned with are just total holistic company strategy.
The customers say the value in in you having that the Jew capabilities.
Oh, Yes, yes, yes. Because then then again you know you can when you said that you were talking to the customer above the best optimal solution between the two versus having the customer by a compressor and then buying something else from someone else and the two of them have just not been optimize together.
So the better better optimization, which then drives better.
Yep.
Those are the questions we have for today, so I'm not going back to the same type of concluding remarks.
Yeah. Thank you I I you know concluding by all just wanted to say that you have seen in our culture continues to be a very unique differentiation.
The appreciation based on the performance that were driving and this is driven by our employees, which we pass on with a big. Thank you I mean, our players come to your employees continue to be highly engage in is driven by a lot of activity that we do internally in the company as well as these ownership mindset and I'm thinking of 19 my corners, because all the important ploys our owners in the company.
And we're very excited about what's ahead of us and continue to drive performance and be very transparent with all the investor community. So with that thanks, so much in before to see many of you as we go into the road. Thanks.
Thank you for joining US today. This concludes our conference call and you may now disconnect your lines.
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