Q2 2024 Ingersoll Rand Inc Earnings Call
Brianna: Good morning. My name is Brianna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ingersoll Rand second quarter 2024 earnings call.
Operator: I would like to welcome everyone to the Ingersoll-Rand second quarter 2024 earnings call. Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise.
Operator: Please note that this call is being recorded. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. To withdraw your question, press star 1 again.
Speaker Change: Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise.
Operator: After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, press star one again.
Speaker Change: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. To withdraw your question, press star 1 again.
Matthew Fort: I will now turn the call over to Matthew Fort, Vice President of Investor Relations. You may begin your conference. Thank you and welcome to the Ingersoll-Rand 2024 second quarter earnings call.
Matthew Fort: I will now turn the call over to Matthew Fort, Vice President of Investor Relations. You may begin your conference. Thank you. Thank you and welcome to the Ingersoll-Rand 2024 second quarter earnings call. I'm Matthew Fort, Vice President of Investor Relations. We issued our earnings release and presentation yesterday, and we will announce those during the call. Both are available on the investor relations section of our website.
Speaker Change: I will now turn the call over to Matthew Fort, Vice President of Investor Relations. You may begin your conference.
Matthew Fort: I'm Matthew Fort, Vice President of Investor Relations, and joining me this morning are Vicente Reynal, Chairman and CEO, and Vic Kini, Chief Financial Officer. We issued our earnings release in presentation yesterday, and we witnessed 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.
Matthew Fort: 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. Please review the forward-looking statements on slide two for more details.
Matthew Fort: 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 filing. Please review the forward-looking statements on Slide 2 for more details. In addition, in today's 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 on our slide presentation.
Matthew Fort: In addition, in today's 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 on our slide presentation and in our earnings release. Both of which are available on the Investor Relations section of our website.
Matthew Fort: On today's call, we will review our company and segment financial highlights and provide an update to our 2024 guidance.
Matthew Fort: On today's call, we will review our Company and Segment Financial Highlights. 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. Starting on slide three, despite the challenging macroeconomic environment, our team delivered another record quarterly result. Turning to slide four, our economic growth engine describes how we deliver durable compounding results. We're pleased to highlight three recently closed transactions. First Cap, which is a leading provider of compressed air and power generation services.
Matthew Fort: 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.
Vicente Reynal: At this time, I will turn the call over to Vicente. Thanks, Matthew, and good morning to all. I would like to begin by thanking and acknowledging our employees for their hard work, dedication, and continuing to think and act like corners, helping us deliver another record quarter in Q2. Starting on slide three, despite the challenging macroeconomic environment, our team deliver another record quarter results demonstrating the continuous strength of our execution engine IRX. We remain humble and are prepared to pivot as market conditions change.
Unknown Executive: This is a great example of strategic channel expansion, giving us access to a large installed base, strong end user relationships, and a robust technician network. At the bottom of the page, I'd like to highlight that with the closure of these transactions, In addition, the funnel continues to grow and stay very active. With exposure to high-growth therapies like GLP-1 and ADCs, this business is well-positioned to deliver double-digit growth in 2024 and beyond. Let's start with GLP-1, or glucagon-like peptide 1 therapy.
Vicente Reynal: And based on our solid performance, we are once again raising our 2024 full-year guidance. Turning to slide four, our economic growth engine describes how we deliver durable compounding results. We remain committed to our strategy and, over the cycle, delivering our long-term investor data targets as outlined on this page. IRX is our competitive differentiator, and combined with our unique ownership mindset, we expect to continue to deliver long-term value creation.
Matthew Fort: We remain committed to our strategy in order to cycle, delivering our long term investor day targets as outlined on this page.
Speaker Change: Our next is a competitive differentiator and combined with our unique ownership mindset, we expect to continue to deliver long term value creation.
Vicente Reynal: With that in mind, I would like to provide a brief update on our growth initiatives. On slide five, let me start with our inorganic growth initiatives. We'll place to highlight three recently closed transactions, which together are expected to achieve an average of mid-teens RYC by year three. Let me quickly walk you through this deal. First Caps, which is a leading provider of compressed air and power generation services. This is a great example of strategic channel expansion given those access to a large install base, strong, endless relationships, and robust ignition network. Next is Fruitland, which expands our technology with low flow applications.
Speaker Change: With that in mind I would like to provide a brief update on our growth initiatives.
Speaker Change: On slide five let me start with our organic growth initiatives.
Speaker Change: We're pleased to highlight three recently closed transactions.
Speaker Change: Together are expected to achieve an average of mid teens ROIC by year three.
Let me quickly walk you through the deals first caps.
Speaker Change: Which is a leading provider of compressed air and power generation services.
Speaker Change: This is a great example of strategic channel expansion, giving us access to a large installed base strong end user relationships and robust technician network.
Speaker Change: Next is from them, which expands our technology with low flow applications.
Vicente Reynal: And lastly, we have Dell pumps, emission-critical high-margin pumping solution across high growth of sustainable and markets in India. On the bottom of the page, I'd like to highlight that with the closure of these transactions, along with the closure of IELTS to the over within the quarter, we have already far exceeded our analyzed inorganic revenue target of 400 to 500 business points, sending us up well for a good start in 2025. In addition, the funnel continues to grow and stay very active with deals mostly both on the inside. On a prior earnings call, we mentioned that we had also a couple of $1 billion purchase price deals in the funnel.
And lastly, we have Dell bumps the mission critical high margin pumping solution across high growth sustainable end markets in India.
Speaker Change: On the bottom of the page I would like to highlight that with the closure of these transactions along with the closure of IOP Dover within the quarter.
Speaker Change: I've already far exceeded our annualized inorganic revenue target of 400 to 500 basis points.
Speaker Change: Setting us up well for a good start in 2025.
Speaker Change: In addition, the funnel continues to grow and stay very active with deals mostly bolt on in size.
Speaker Change: On our prior earnings call. We mentioned that we had also a couple of $1 billion purchase price deals in the funnel.
Vicente Reynal: During the second quarter, we decided to walk away from one of these larger transactions. And this is proved that we continue to remain very disciplined in our approach to M&A and committed to long term shareholder value creation through effective capital allocation.
Speaker Change: During the second quarter, we decided to walk away from one of these larger transactions.
Speaker Change: And this is proof that we continue to remain very disciplined in our approach to M&A and committed to long term shareholder value creation through effective capital allocation.
Vicente Reynal: We have to take more bottom deals to be announced later in the year, further exceeding our analyzed inorganic revenue targets.
Speaker Change: We expect more bolt on deals to be announced later in the year further exceeding our annualized inorganic revenue targets.
Vicente Reynal: Turning to slide six on this slide, I want to take a minute to walk you through why we're so excited about the IOC Dover acquisition. And deep dive into the bioforma business, which accounts for approximately half of the total business. With exposure to high growth therapies like GLP-1 and ADCs, this business is well positioned to deliver double digit growth in 2024 and beyond. The performance in bioforma is much better than the current market and speaks to the niche and the nature of the product solutions and offerings we have. Let's start with GLP-1 or look around like peptide one therapies, which are used in the treatment of five to diabetics and weight management.
Speaker Change: Turning to slide six on this slide I wanted to take a minute to walk you through why we're so excited about the ILC Dobra acquisition.
Speaker Change: And deep dive into the Biopharma business, which accounts for approximately half of the total business.
Unknown Executive: With a projected annual market growth rate of 20% to 30% over the next five years, GLP-1 manufacturers are rapidly expanding their capacity to meet both the current and growing market demand, where our proprietary single-use technology is already qualified into their production process, becoming an integral part of the validated bill of materials for GLP-1 production. As our customers expand capacity, either within their own facilities or as CMOs, our products are required inputs for these new production lines to minimize validation This market is expected to grow double digits annually over the next five years, driven by the efficacy of the technology. There have been several new ADCs approved in recent years with a robust drug development pipeline for this type of therapy.
Speaker Change: With exposure to high growth therapies like GOP one in Adcs.
<unk> is well positioned to deliver double digit growth in 2024 and beyond.
Speaker Change: The performance in Biopharma is much better than the current market and speaks to the niche and unique nature of the product solutions and offerings we have.
Speaker Change: Let's start with <unk>, one glucagon like peptide one therapies.
Speaker Change: Which are used in the treatment of type two diabetes and weight management.
Vicente Reynal: With a projected annual market growth rate of 20 to 30% over the next five years, GLP1 manufacturers are rapidly expanding their capacity to meet both the current and growing market demand. And we have deep and long-lasting relationships with our customers, where our proprietary single-use technology is already qualified into their production process, becoming an integral part of the validated bill of materials for GLP1 production. As our customers expand capacity, either within their own facilities or CMOs, our products are required inputs for these new production lines to minimize validation timelines, start-up cost risk. As illustrated on the right-hand side of the page, ILC Dover provides proprietary best-in-class technology in terms of single-use containment bags, liners, and other consumables that are used across a variety of steps in the GLP1 drug manufacturing process.
Speaker Change: With a projected annual market growth rate of 20% to 30% over the next five years <unk> manufacturers are rapidly expanding their capacity to meet both the current and growing market demand.
Speaker Change: We have deep and long lasting relationships with our customers, where our appropriate very single use technology is already qualified into their production process, becoming an integral part.
Speaker Change: The validated bill of materials for <unk> production.
Speaker Change: As our customers expand capacity either within their own facilities or a CMO.
Speaker Change: Our products are required inputs for these new production lines to minimize validation timelines startup cost and risk.
Speaker Change: As illustrated on the right hand side of the page Iot Dover provides appropriate there a best in class technology in terms of single use containment bags.
Speaker Change: <unk> and other consumables that are used across a variety of steps in the GOP one drug manufacturing process.
Vicente Reynal: Given our customers, the assurances they require to deliver compliant product to the market and reduce their cross-contamination risk. Moving on to ADC, or anti-body drug conjugates, which are used primarily in cancer treatment therapies, this market is expected to grow double digits annually over the next five years, driven by the efficacy of the technology. There have been several new ADCs approved in recent years with a robust drug development pipeline for this type of therapy. We believe our technology is 80 to 90% more cost effective than a clean-in-place technology. We continue to see customers convert their existing production lines and install new capacity, leveraging our single use containment technology.
Speaker Change: Given our customers the assurance that they required to deliver compliant product to the market and reduce their cross contamination risks.
Speaker Change: Moving onto ADC or anti body drug conjugates, which are used primarily in cancer treatment therapies.
Speaker Change: These market is expected to grow double digits annually over the next five years driven by the efficacy of the technology.
Speaker Change: There have been several new ADC is approved in recent years with a robust drug development pipeline for this type of therapy.
Speaker Change: Our patented containment technology is proven to perform better than both cleaning plays and single use alternatives.
Vicente Reynal: And we believe our technology is 80 to 90% more cost effective than a clean in place technology. We continue to see customers convert their existing production lines and install new capacity, leveraging our single-use containment technology. Thanks, Vicente. Starting on slide 7.
Speaker Change: We believe our technology is 80% to 90% more cost effective than a clean in place technology.
Speaker Change: We continue to see customers convert their existing production lines and install new capacity leveraging our single use containment technology.
Vic Kini: I will now turn the presentation to Vic to provide an update on the Q2 financial performance. Thanks, Vicente. Starting on slide seven, despite the increasingly challenged macroeconomic environment, we delivered solid results in Q2 through a balance of commercial and operational execution fueled by IRX. Total company organic orders declined 1%, finishing largely in line with expectations. We saw strong sequential orders growth of 5% for the total company, with the books to bill of 1.0 times. Consistent with our guidance, book to bill finished above one in the first half at 1.01 times. This provides us with a healthy backlog to execute in the back half of the year and gives us conviction in delivering our full year 2024 revenue guidance.
Speaker Change: I will now turn the presentation to Vic to provide an update on our Q2 financial performance.
Vic: Thanks for the center.
Vic: Starting on slide seven despite the increasingly challenged macroeconomic environment, we delivered solid results in Q2 through a balance of commercial and operational execution fueled by IRS.
Vic: Total company organic orders declined 1%, finishing largely in line with expectations we.
Vic: We saw strong sequential orders growth of 5% for the total company with a book to Bill of 1.0 times.
Unknown Executive: Consistent with our guidance, book the bill finished above 1 in the first half at 1.01. This provides us with a healthy backlog to execute in the back half of the year and gives us conviction in delivering our full year 2024 revenue guide. Organic revenue was up 1% for the quarter and up 13% on a two-year stack. A 220-basis point year-over-year improvement, driven predominantly by gross margin. This marks six consecutive quarters of double-digit EPS growth and 12 out of the last 14 quarters of double-digit EPS growth beginning with Q1 of 2020. Free cash flow for the quarter was $283 million, and total liquidity was $3.7 billion, with $1.1 billion of cash on hand at quarter end.
Vic: Consistent with our guidance book to Bill finished above one in the first half at 1.01 times.
Vic: This provides us with a healthy backlog to execute in the back half of the year and gives us conviction in delivering our full year of 2020 for revenue guidance.
Vic Kini: Organic revenue was up 1% for the quarter and up 13% on a two-year stack. The company delivered second quarter adjusted EBITDA of $495 million at 16% year of year improvement and adjusted EBITDA margins of 27.4%. A 220 basis point year-over-year improvement year from predominantly through gross margin expansion, partially offset by investments for growth in SGNA. Adjusted earnings for share was 83 cents for the quarter, which is up 22% as compared to the prior year. This marked 6 consecutive quarters of double-digit EPS growth and 12 out of the last 14 quarters of double to DPS growth beginning with Q1 of 2021.
Vic: Organic revenue was up 1% for the quarter and up 13% on a two year stack.
Vic: The company delivered second quarter, adjusted EBITDA of $495 million or 16% year over year improvement in adjusted EBITDA margins of 27, 4%, a 220 basis point year over year improvement driven predominantly through gross margin expansion, partially offset by investments for growth in SG&A.
Vic: Adjusted earnings per share was <unk> 83 for the quarter, which is up 22% as compared to the prior year.
Vic: This marks six consecutive quarters of double digit EPS growth and 12 out of the last 14 quarters of double digit EPS growth beginning with Q1 of 2021.
Vic Kini: Free cash for the quarter was 283 million dollars, and total liquidity was 3.7 billion dollars with 1.1 billion dollars of cash on hand at quarter end. Our net leverage was 2.0 turns, which is up one turn versus the prior year. This increase is primarily driven by the 2.325 billion dollar acquisition of ILC Dover. For the full year, we do anticipate net leverage finishing at approximately 1.5 turns. Turning to slide 8, for the total company on an FX adjusted basis, Q2 orders were up 5% and revenue increased 8. Total company adjusted EBITDA increased 16% from the prior year.
Vic: Free cash flow for the quarter was $283 million and total liquidity was $3 7 billion with $1 1 billion of cash on hand at quarter end.
Unknown Executive: Our net leverage was 2.0 turns, which is up one turn versus the price. This increase is primarily driven by the $2.325 billion acquisition of ILC. Total company adjusted EBITDA increased 16% from the prior priority. On the next slide, free cash flow for the quarter was $283 million, including CapEx, which totaled $22 million.
Vic: Our net leverage was 2.0 turns which is up one turn versus the prior year.
Vic: This increase was primarily driven by the $2 $3 billion to $5 billion acquisition of IFC Dover.
Vic: For the full year, we do anticipate net leverage finishing at approximately one five turns.
Vic: Turning to slide eight for the total company on an FX adjusted basis, Q2 orders were up 5% and revenue increased 8%.
Vic: Total company adjusted EBITDA increased 16% from the prior year.
Vic Kini: The ITS segment margin increased 230 basis points, while the PST segment margin increased 110 basis points year over year. Overall, Ingressor ran expanded just EBITDA marches by 220 basis points. Corporate costs came in at $44 million for the quarter, largely in line with expectations. And finally, adjusted EPS for the quarter was up 22% year over year to 83 cents per share, including an adjusted tax rate for the quarter of 21.2.
Vic: The Ics segment margin increased 230 basis points, while the PST segment margin increased 110 basis points year over year.
Vic: Overall, Ingersoll Rand expanded adjusted EBITDA margins by 220 basis points.
Vic: Corporate costs came in at $44 million for the quarter largely in line with expectations.
Vic: Finally, adjusted EPS for the quarter was up 22% year over year to 83 per share, including an adjusted tax rate for the quarter of 21, 3%.
Vic Kini: 33%. On the next slide, free cash flow for the quarter was $283 million, including catbacks, which totaled $22 million. Total company liquidity now stands at $3.7 billion based on approximately $1.1 billion in cash and $2.6 billion of availability on our revolving credit facility. Leverage for the quarter was 2.0 turns, which was the one turn increase year over year. As noted earlier, this increase was driven primarily by the purchase of ILC Dover, which was funded through $2 billion in bonds and $325 million in cash. Specifically within the quarter, cash outflows included $2.6 billion overall deployed to M&A, as well as $71 million return to shareholders through $63 million in share purchases and $8 million for our dividend payment.
Vic: On the next slide free cash flow for the quarter was $283 million, including Capex, which totaled $22 million.
Unknown Executive: Total company liquidity now stands at 3.7 billion dollars based on approximately 1.1 billion dollars of cash and $2.6 billion of availability on our revolving credit. Our capital allocation strategy remains unchanged, with M&A being our top priority.
Vic: Total company liquidity now stands at $3 $7 billion based on approximately $1 $1 billion of cash and $2 $6 billion of availability on our revolving credit facility.
Vic: Leverage for the quarter was 2.0 turns which is a one turn increase year over year. As noted earlier. This increase was driven primarily by the purchase of ILC Dover.
Vic: Which was funded through $2 billion in bonds and $325 million in cash.
Vic: Specifically within the quarter cash outflows included $2 6 billion overall deployed to M&A as well as $71 million returned to shareholders through $63 million in share repurchases and $8 million for our dividend payment.
Vic Kini: Our capital allocation strategy remains unchanged, with M&A being our top priority, and we continue to expect M&A to be our primary use of cash as we look ahead.
Vic: Our capital allocation strategy remains unchanged with M&A being our top priority and we continue to expect M&A to be our primary use of cash as we look ahead.
Unknown Executive: And we continue to expect M&A to be our primary use of cash as we look. Transcribed by https://otter.ai; 16% floated. Our new capital structure is designed to facilitate our long-term capital allocation strategy, and we remain committed to maintaining our investment-grade status. Finally, book-to-bill was one time with organic orders down 2.6%, which was largely in line with expectations. Moving to the product line highlights, compressor orders were up low single digits while still registering a low double digit growth in Q2 of 2023.
Vic Kini: On slide 10, I'd like to take a minute to highlight the transformation of our debt portfolio. This transformation has been underway for several years, and I'm pleased to say that we now have a fully investment grade structure. Also important to note that within the quarter we received a one notch upgrade from each of the three rating agencies, which you can see highlighted on the right side of the page, further solidifying our investment grade status. In terms of the overall capital structure, in May, we issued $3.3 billion of unsecured investment-grade bonds. The proceeds of the bond issuance were used to repay $1.23 billion of our legacy secured term loans, and $2 billion was used to partially fund the acquisition of ILC Dover, with the remainder retained for general purposes.
Vic: On slide 10, I'd like to take a minute to highlight the transformation of our debt portfolio.
Vic: This transformation has been underway for several years and I am pleased to say that we now have a fully investment grade structure.
Vic: Also important to note that within the quarter, we received a one notch upgrade from each of the three rating agencies, which you can see highlighted on the right side of the page further solidifying our investment grade status.
Vic: In terms of the overall capital structure in May we issued $3 3 billion of unsecured investment grade bonds.
Vic: The proceeds of the bond issuance were used to repay 123 billion of our legacy secured term loans and $2 billion was used to partially fund the acquisition of ILC Dover with the remainder retained for general purposes.
Vic Kini: In addition, we took the opportunity to increase the size of our revolver from 2 billion to 2.6 billion, which further provides flexibility to execute on our strategic initiatives. As a result of this debt portfolio transformation, we now have a fixed-to-floating ratio of 84% fixed and 16% floating and extended our weighted average of maturity on our overall debt from six years to 10 years. Our new capital structure is designed to facilitate our long-term capital allocation strategy, and we are really committed to maintaining our investment grade status. Finally, our 2024 gross interest expense outlook is now approximately $215 million.
Vic: In addition, we took the opportunity to increase the size of our revolver from 2 billion to $2 6 billion, which further provides flexibility to execute on our strategic initiatives.
Vic: As a result of this debt portfolio transformation, we now have a fixed to floating ratio of 84% fixed and 16% floating and extended our weighted average maturity on our overall debt from six years to 10 years.
Vic: Our new capital structure is designed to facilitate our long term capital allocation strategy and we remain committed to maintain our investment grade status.
Vic: Finally, our.
Vic: Our 2024 gross interest expense outlook is now approximately $215 million.
Vic Kini: On an annualized basis, we expect gross interest to be approximately $260 million as we move into 2025.
Vic: On an annualized basis, we expect gross interest to be approximately $260 million as we move into 2025.
Vicente Reynal: I will now turn the call back to Vicente to discuss our segment results. Thanks, Vic. Moving to slide 11, our industrial technologies and service segment delivered solid year-over-year revenue growth of 6% on top of approximately 20% growth in Q2 of last year. Adjusted EBITDA margins were 29.7%, up 230 basis points from the prior year, which was driven primarily by gross margin expansion. Look to bill was one time with organic orders down 2.6%, which was largely in line with expectations. Important to note that we saw sequential orders growth of 5%, which were primarily driven by compression.
Speaker Change: I will now turn the call back to the center to discuss our segment results.
Nick: Thanks, Nick.
Speaker Change: Moving to slide 11, our industrial technologies and service segment delivered solid year over year revenue growth of 6% on top of approximately 20% growth in Q2 of last year.
Speaker Change: EBITDA margins were 29, 7% up 230 basis points from the prior year, which was driven primarily by gross margin expansion.
Speaker Change: Book to Bill was one time.
Speaker Change: With organic orders down two 6%, which was largely in line with expectations.
Speaker Change: Important to note that we saw a sequential orders growth of 5%, which were primarily driven by compressors.
Vicente Reynal: Moving to the program highlights, compressor orders were up low single digits, while still comping a low double-digit growth in Q2 of 2023. It's good to know that we saw positive order growth across America, MEA, and Asia Pacific, excluding China. Compressor revenue was up mid single digits in the quarter, which we view still healthy after mid-teens growth in Q2 of 2023. Industrial vacuum and lower orders were up low single digits, and revenue was up mid-teens. For innovation in action, we're highlighting Elmo Richley, new high-speed blower technology, which was recently launched in Europe. Dispatented oil-free technology offers a 60% reduction in energy consumption compared to a traditional blower technology, enabling productivity for the customer and reducing total cost of ownership by up to 50%.
Speaker Change: Moving to the program highlights compressor orders were up low single digits, while still comping, a low double digit growth in Q2 of 2023.
Speaker Change: It's good to note that we saw positive order growth across America EMEA.
Speaker Change: EMEA and Asia Pacific Excluding China.
Unknown Executive: Compressor revenue was up mid-single digits in the quarter, which we view still as healthy after mid-teens growth in Q2 of 2023. Industrial vacuum upload orders were up low single digits, and revenue was up mid-teens, enabling productivity for the customer and reducing total cost of ownership by up to 50%.
Speaker Change: Compressco revenue was up mid single digits in the quarter, which we view still healthy after a mid teens growth in Q2 of 2023.
Speaker Change: Industrial vacuum up lower orders were up low single digits and revenue was up mid teens.
Speaker Change: For our innovation in action, we're highlighting Elmo recently, new high speed Blower technology, which was recently launched in Europe.
Speaker Change: This patented oilfield technology offers a 60% reduction in energy consumption compared to a traditional blower technology.
Speaker Change: Enabling productivity for the customer and reducing total cost of ownership by up to 50%.
Vicente Reynal: Turn to slide 12, the PSD segment achieved 6% organic order growth and deliver a geotardibita of approximately $103 million with a margin of 30.3%. It is encouraging to see that the legacy Ingersoll-Rand Lifescience business saw organic order growth of 8%. In addition, short cycle orders in the PSD segment remained positive, with book and ship orders of mid single digits year-to-year. We see organic order growth stabilizing, and we remain positive about the underlying health of the PSD business, and it remains on track to meet our long-term investor-day growth commitments. For our PSD innovation, in action, we're highlighting an extremely innovative technology within the legacy Ingersoll-Rand Lifescience business.
Unknown Executive: Turn to slide 12, the PST segment achieved 6% organic order growth and delivered adjusted EBITDA of approximately $103 million with a margin of 30.3%, and we remain positive about the underlying health of the PST business. Create a customized liquid handling automated system for biotech R&D labs, as well as the production of personalized therapy. On the next slide, I would like to spend a minute discussing current market trends, as we always get a lot of questions about our leading indicators.
Speaker Change: Turning to slide 12, the PST segment achieved 6% organic order growth and deliver adjusted EBITDA of approximately $103 million with a margin of 33%.
Speaker Change: It is encouraging to see that the legacy Ingersoll Rand life science business, so organic order growth of 8%.
Vicente Reynal: Combining multiple technologies across different brands, we have developed a product offering in micro-fluidics to create a customized liquid handling automated system for biotech R&D labs, as well as the production of personalized therapeutics. This innovative technology drives off to 50% productivity versus existing processes in a market that is expected to grow approximately 20% through 20% to 27%.
Vicente Reynal: On the next slide, I would like to spend a minute discussing the current market trends, as we always get a lot of questions about our leading indicators. A key leading indicator of our short-to-middle cycle business is marketing qualified leads or NQLs, as illustrated on the top chart. Our NQL continues to grow. In Q2, we saw organic NQLs up 13% year-over-year. As for the longer cycle component of our portfolio, one key indicator we look at is the funnel activity for engineered to order compressor systems. We remain encouraged as the funnel activities are 27% in the first half year-over-year.
Unknown Executive: The key leading indicator of our short to medium cycle business is Marketing Qualified Leads, or MQLs. And for the longer cycle component of our portfolio... One key indicator we look at is the funnel activity for engineers to order compressor systems. We remain encouraged by the final activities of 27% in the first half of the year. While the leading indicators have been encouraging, we have seen an elongation in the decision-making process. Having said this... Asia-Pacific, and specifically China, is a key driver of the reduction in our organic growth guidelines, and this is driven by lower than expected activity levels in our space business, predominantly related to the next generation spacesuit, which is often referred to as Ex-EVA.
Speaker Change: A key leading indicator of our short to medium cycle business is marketing qualified leads are in queue Els.
Speaker Change: As illustrated on the top chart, our <unk> continues to grow in.
Speaker Change: In Q2, we saw organic <unk> up 13% year over year.
Speaker Change: As for the longer cycle component of our portfolio.
Speaker Change: One key indicator, we look at is the funnel activity for engineered to order compressor systems.
Speaker Change: We remain encouraged as our funnel activities up 27% in the first half year on year.
Vicente Reynal: While the leading indicators have been encouraging, we have seen an elongation in the decision-making process with the prolonging of the time to convert an NQL to another. The feedback we hear contains multiple reasons, but some of the most often cited are customer-side readiness and too many projects happening at the same time, which is impacting EPC engineering capacity. Having said this, this situation is encouraging as we look to 2025. Switching back to 2024 expectations from a regional perspective, America is on pace to deliver mid-single-digit organic revenue growth. The NEA remains stable, and we see very good pockets of growth primarily in the emerging markets of India and the Middle East.
Speaker Change: While the leading indicators have been encouraging we have seen an elongation in the decision making process.
Speaker Change: With a prolonging of the time to convert an <unk> to an order.
Speaker Change: The feedback we hear contains multiple reasons.
Speaker Change: But some of the most often cited our customer site readiness and too many projects happening at the same time, which is impacting EPC engineering capacity.
Speaker Change: Having said this this.
Speaker Change: This situation is encouraging as we look to 2025.
Speaker Change: Switching back to 2024 expectations from a regional perspective Americas is on pace to deliver mid single digit organic revenue growth.
Vicente Reynal: Asia Pacific and specifically China is a key driver of the reduction in our organic growth guidance. Moving next to inorganic growth, we're anticipating approximately $270 million of incremental revenue from our recently acquired M&A. ILC Dover is the largest driver, contributing approximately $220 million of revenue in 2024. The biopharma business has highlighted earlier in the deck remains strong and on track to deliver double-digit growth. However, we do anticipate that the aerospace and defense revenue to be down approximately $30 million versus our initial expectations. And this is driven by lower than expected activity levels in our space business, predominantly related to the next generation space suit, which is often referred to as XE Bus.
Vicente Reynal: As we move to slide 14, given the solid performance in the first half, are recently acquired M&A, and our expectation of continuing operational execution fueled by IRAX, we are once again raising our 2024 guidance. The company revenue is expected to grow overall between 6 to 8%, which is up 200 basis points versus our initial guidance. As discussed in the previous slide, we anticipate positive organic growth in the range of 0 to 2%. The reduction in the range versus our prior guidance is largely attributable to lower organic growth expectations, specifically in China. FX is now expected to be a 1% headwind for the full year, which is now approximately 100 basis points as compared to our previous guys.
Unknown Executive: As discussed in the previous slide, we anticipate positive organic growth in the range of zero to two percent. FX is now expected to be a 1% headwind for the full year, which is down approximately 100 basis points as compared to our previous guidance. Corporate costs are planned at $170 million and will be incurred relatively evenly per quarter for the balance of the year. We're also seeing a two-cent improvement in our adjusted EPS as compared to our previous guidance due to an improvement in our four-year adjusted tax rate. The adjusted tax rate is expected to finish the year between 22% and 23%.
Vicente Reynal: M&A is projected to contribute approximately $440 million, which reflects all completed and closed M&A transactions as of July 31, 2024. Corporate costs are planned at $170 million and will be incurred relatively evenly per quarter for the balance of the year. Total adjusted EBITA for the company is expected to be in the range of $2.01 billion and $2.06 billion, which is up approximately 14% year-to-year at the midpoint. Adjusted EPS is projected to be within the range of $3.27 and $3.37, which is up 2% versus prior guidance and approximately 12% year-to-year at the midpoint. On the bottom right-hand side of the page, we have included a 2024 4-year guidance bridge showing the changes in our latest guidance as compared to our previous guidance provided in May.
Speaker Change: Which reflects all completed and closed M&A transactions as of July 31, 2024.
Speaker Change: Corporate costs are planned at $170 million and will be incurred relatively evenly per quarter for the balance of the year.
Speaker Change: Total adjusted EBITDA for the company is expected to be in the range of $2.01 billion.
Speaker Change: And $2.06 billion.
Speaker Change: Which is up approximately 14% year over year at the midpoint.
Speaker Change: Adjusted EPS is projected to be within the range of $3 27, and $3 37.
Speaker Change: Which is up 2% versus prior guidance and approximately 12% year on year at the midpoint.
Speaker Change: On the bottom right hand side of the page. We have included at 2020 for full year guidance bridge showing the changes in our latest guidance as compared to our previous guidance provided in may.
Vicente Reynal: As you can see, the primary driver of adjusted EPS growth is associated with operational execution, partially offset by increases in the net impact from interest and effects. We're also seeing a 2-cent improvement in our adjusted EPS as compared to our previous guidance from an improvement in our full year adjusted tax rates. State growth interest expense is now expected to be approximately $250 million, and net interest expense will be approximately $170 million, and will be incurred relatively evenly per quarter for the balance of the year. The adjusted tax rate is expected to finish in the year between 22% and 23%.
Speaker Change: As you can see the primary driver of adjusted EPS growth is associated with operational execution, partially offset by increases in the net impact from interest and FX.
Vicente Reynal: No changes have been made to our guidance on cap expense as a percentage of revenue, free cash flow to adjust the net income provision, or share count, or remaining in line with our previous guidance.
Vicente Reynal: Finally, as we turn to side 15, I am very pleased with how our teams continue to execute despite overall market conditions. We continue to deliver record results, and our updated guidance is reflective of our first half performance and ongoing momentum. With our most recent guidance, we continue to expect to deliver results above our long-term investor-day targets. Based on the midpoint of our 2024 full-year guidance, the four-year keger for organic revenue growth will be approximately 10%. We think this continues to show durable outperformance over the cycle. That, in combination with our inorganic growth, robust margin expansion, and execution of IRX, we expect to deliver a four-year keger in excess of 25% for adjusted EPS.
Operator: With our most recent guidance, we continue to expect to deliver results above our long-term investor-day target. We think this continues to show durable outperformance over the cycle. That, in combination with our inorganic growth, robust margin expansion, and execution of IREG, we expect to deliver a four-year CAGR in excess of 25% for adjusted EPS. If you would like to withdraw your question, simply press star 1 again.
Vicente Reynal: To our employees, I want to thank you for the strong results thus far, showing the impact each of you have as owners of the company. Thank you for your resiliency, hard work, and focused attention. We believe the power of IRX combined with our ownership mindset and leading portfolios strengthens the durability of our company while delivering long-term value to shareholders.
Speaker Change: While delivering long term value to shareholders.
Operator: With that, I will turn the call back to the operator to open the call for Q&A. Thank you. We will now take your questions.
Speaker Change: With that I will turn the call back to the operator to open the call for Q&A.
Speaker Change: Thank you we will now take your questions.
Operator: If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again.
If you have dialed in and would like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue.
Speaker Change: If you would like to withdraw your question simply press Star one again.
Mike Hallorin: Our first question comes from the line of Mike Hallorin with Baird. Please go ahead. Good morning, everyone.
Michael Patrick Halloran: Our first question comes from the line of Mike Halloran with Baird, please go ahead. Hey, so let's start with the change in the second half organic assumptions. If I look at how the second quarter progressed, it feels generally consistent with what you were talking about on the top line, certainly understand the commentary about, and if there's any changes elsewhere. Yeah, no, thank you, Mike. I mean, I think you framed it up actually quite well.
Speaker Change: Our first question comes from the line of Mike Halloran with Baird. Please go ahead.
Mike Halloran: Hey, good morning, everyone.
Vicente Reynal: Good morning, Mike. Let's start with the change in the second half, organic assumptions. If I look at how the second quarter progressed, it feels generally consistent with what you were talking to on the top line coming into the quarter. You know, the book-to-bill orders down a little bit. Riding in levels came in at a reasonable level, all of a sequel. I certainly understand the commentary about, you know, a little longer to close and some of these transactions and push outs of the orders as well as the China piece.
Speaker Change: Good morning, Mike.
Speaker Change: So let's start with the change in the second half organic assumptions, if I if I look at how the second quarter progressed. It feels generally consistent with what you were talking to you on the top line.
Speaker Change: Coming into the quarter.
Speaker Change: Book to Bill orders down a little bit.
Speaker Change: Revenue levels came in at a reasonable level all else equal.
Speaker Change: I understand the commentary about.
Speaker Change: A little longer to close and some of these transactions some push outs of the orders as well as the China piece.
Vicente Reynal: So two full questions. One, is there something about July that you saw that maybe changed that trajectory and two? Could you parse out some of the underlying things you're seeing from a demand environment, excluding some of the project push-outs. And if there's any changes elsewhere, be out just to China comments.
Speaker Change: Twofold question one.
Unknown Executive: So the answer to your first question is definitely no. I mean, nothing that we saw in July gives us cause for concern and a change in kind of how we think about it. I think also, as you said, I think things kind of are operating in the first half exactly as we expected. You saw that even we saw some very good sequential improvement from Q1 to Q2 orders improving by 5% and actually improving on both segments, not only the ITS but also the TST.
Vicente Reynal: Yeah, no, thank you, Mike. I mean, I think you're from it up actually quite well.
Vicente Reynal: So the answer to your first question is definitely no. I mean, nothing that we saw in July that gives us the concern and the change in kind of how we think about it. I think also, as you said, I mean, I think things kind of are operating in the first half exactly as we expected. You saw that even we saw some very good sequential improvement Q1 to Q2. Orders improving the 5% and actually improving on both segments, not only the ideas, but also the TST. And what kind of one we think about the guidance and also, you know, you can see that in the second half, we do anticipate still organic revenue growth to be positive.
Unknown Executive: And but kind of when we think about the guidance, and also, you know, you can see that in the second half, we do anticipate organic revenue growth to be positive, with a very good relationship between revenue and EBITDA, similar to prior years, which obviously implies that we'll continue to see some kind of, you know, good, good improvement here sequentially. But in terms of the guidance, I think the reduction is really predominantly driven by China.
Vicente Reynal: With a very good facing between revenue and EBITDA similar to prior years, which always implies that we'll continue to see some kind of, you know, good, good improvement here sequentially.
Vicente Reynal: But in terms of the guidance, I think the reduction is really predominantly driven by China. Again, although we also were fairly encouraged with what we saw improvements Q1 to Q2 in China, which was positive. And we're also encouraged by kind of what we hear from our teens in terms of level of activity in the months of July, driven by these new programs in place of replacement equipment that the government is putting out together in the market. We feel that, you know, we're taking the approach to be prudent and not necessarily see that the market materially changes in the second half in China and kind of keep it more stable from here onwards.
Unknown Executive: Again, although we were fairly encouraged with what we saw in Q1 to Q2 in China, which was positive. And we're also encouraged by kind of what we hear from our teams in terms of the level of activity in the month of July, driven by these new programs in place of replacing equipment that the government is putting out in the market. We feel that, you know, we take the approach to be prudent and not necessarily see that the market materially changes in the second half in China and kind of keep it more, I will say, stable from here onwards.
Vicente Reynal: I will also say, kind of in terms of what I mean, any other changes in terms of market dynamics, I mean, not necessarily. We were very transparent here in terms of leading indicators that we always talk about, which is MQLs and final acceleration, just to show that, you know, market activity continues to be actually pretty good. I think is this elongation in what we call the velocity of converting some of those either phone or MQLs through the process. It seems to be kind of a little bit more elongated. Could that be driven by elections, or could that be driven by geopolitical, and obviously what we hear about.
Unknown Executive: I will also say kind of in terms of what, I mean, any other changes in terms of market dynamics, I mean, not necessarily, we were very transparent here in terms of the leading indicators that we always talk about, which are MQLs and funnel acceleration, just to show that, you know, market activity continues to be pretty good. I think it's this elongation in what we call the velocity of converting some of those funnel or MQLs through the process. It seems to be kind of a little bit more elongated.
Speaker Change: Some of those either formal or <unk> through the process. It seems to be kind of a little bit more elongated could.
Unknown Executive: Could that be driven by elections? Or could that be driven by geopolitics? And obviously, what we hear about EPC capacity constraints and site readiness, there's a little bit of a few different points. I think, in our view, what we wanted to do was just kind of be more prudent as we go into the second half. And, and again, based on the good visibility that we see on leading indicators, I feel good about how this could play out as we kind of head to 2025. Transcripts provided by Transcription Outsourcing, LLC.
Speaker Change: Could that be driven by elections or could that be driven by geopolitical and obviously, what we hear about EPC capacity constrains and site readiness and was it a little bit of everything.
Vicente Reynal: EPC capacity constraints and side readiness is a little bit of over a few different different points. I think in our view, what we wanted to do is just kind of be more prudent as we go here into the second half.
Speaker Change: A few from their points.
Speaker Change: I think in our view what we wanted to do is just kind of be more prudent as we go here into the second half.
Vicente Reynal: And again, based on these good disability that we see on leading indicators, feeling good about how this could play out as we kind of heading to 2025.
Speaker Change: And again based on these good visibility that we see on leading indicators feeling good about how this could play out.
Speaker Change: As we kind of heading into 2025.
Mike Hallorin: No, that makes sense.
Speaker Change: No that makes sense and does that change how you guys were articulating the book.
Mike Hallorin: And, you know, does that change how you guys were articulating the book-to-bill and order cadence from last quarter? If I remember correctly, it was orders slightly negative front half with positive back half and then the inverse on the book to bill. That's still the way to think about it, or do these push-out shifts some of that. No, that's exactly the way to think about it.
Julian C.H. Mitchell: I booked a bill and order cadence from last quarter, if I remember correctly, or slightly negative front half, but positive back half, and then the inverse on the book to bill. Is that still the way to think about it? Our next question comes from the line of Julian Mitchell with Darkplace. Please go ahead. Hi, good morning.
Speaker Change: Book to Bill in the order cadence from last quarter, if I remember correctly it was slightly.
Speaker Change: Slightly negative front half with positive back half and then the inverse on the book to Bill is that still the way to think about it or do these push outs shift some of that.
Speaker Change: No that's exactly the way to think about it like spot on right, yes, okay.
Mike Hallorin: Mike Spodong. Great. Yes. Thank you. Appreciate it.
Speaker Change: Appreciate it.
Operator: Thank you, Mike.
Mike Halloran: Thank you Mike.
Julian Mitchell: Our next question comes from the line of Julian Mitchell with Our Place. Please go ahead. Hi, good morning.
Speaker Change: Our next question comes from the line of Julian Mitchell with Barclays. Please go ahead.
Julian C.H. Mitchell: Maybe, good morning. Maybe Vicente, it seems like China was the sort of pivot point on the organic guide. So maybe a little bit more color there, you mentioned the teams on the ground sound more optimistic, but maybe just put some numbers around it, sort of remind us, I guess, you know, the total Chinese revenue exposure of Ingersoll-Rand. Yeah, Julian, this is Vik.
Vic Kini: Well, maybe, good morning. Maybe Vicente, it seems like China was the sort of the pivot point on the organic guide. Maybe a little bit more color. You mentioned the teams on the ground sound more optimistic, but maybe just put some numbers around it. Sort of remind us, I guess, you know, total China revenue exposure of Ingersoll-Rand and then, you know, what were organic sales in China down in the first half of the year? And what does the midpoint of the guide embed for second half revenue trends year on year in China, please?
Vic Kini: Yeah, Julie, this is fake.
Vikram U. Kini: Maybe I'll start. I'll let Vicente add some color as well. In terms of the first part of your question, I think it's fairly consistent with how we've described it historically, and it's important to note that this is a consistent statement across both segments, both ITS and PST. Total APAC is roughly about 20% of the revenue base, and China is the lion's share of that, probably somewhere in the high teens percent, so the preponderance of that revenue base in APAC is China.
Vic Kini: Maybe I'll start. I'll let all of a sudden, dad, some color as well. In terms of the first part of your question, I think fairly consistent with how we've described it historically, and it's an important note that this is a consistent statement about across both segments, both ITS and PST. Total APAC is, you know, roughly about, you know, 20% of the revenue based and China is the, you know, the lion's share of that probably somewhere in the, you know, high teens percent. So the preponderance of that revenue based in APAC is China. To kind of give rough numbers in terms of the growth expectations, and I'll focus my commentary on the revenue side.
Vikram U. Kini: To kind of give rough numbers in terms of growth expectations, and I'll focus my commentary on the revenue side, in the first half, total APAC, which of course, China is the biggest driver, is effectively down what's called low double digits on the revenue base. It's important to note, obviously, the comps are still pretty meaningful in the first half of the year, and as we move to the back half of the year, as Vicente just indicated, we do continue to see stability and some sequential, I'd say, progress from first half to second half, and then, year over year, we actually expect to be closer to flattish year over year, both that stability moving from first half to second half, but also important Specifically, in China.
Vic Kini: In the first half, you know, total APAC, which of course China is the biggest driver, you know, is effectively down what's called low double digits on the revenue base. It's important to note, obviously, the comp's still pretty meaningful in the first half of the year. And as we move to the back half of the year, as Vicente just indicated, we do continue to see stability and, you know, some sequential, you know, progress from first half to second half. And then, you know, year of year, we actually expect, you know, probably to be closer to the flatish year of year, both that stability moving for first half, second half, but also important note that the comp's do get a little bit more, you know, easier comparatively speaking in the back half from a revenue perspective, specifically China.
Vicente Reynal: Yeah. And the other thing to add their natural intents of kind of some of the color that we see is that if you were to even exclude some of these kind of large project, long cycle projects, China, China order is kind of that core business, which excludes these long cycle, especially fairly, fairly good momentum there, Julian. So I'll say that even though in this challenging environment, they're still performing actually quite well.
Vikram U. Kini: And the other thing to add there, Nigel, in terms of kind of some of the color that we see, is that if you were to even exclude some of these kind of large projects, long-cycle projects, China Order is kind of that core business which excludes these long cycles. It's actually fairly good momentum there, Julian. So I'll say that even though in this challenging environment, they're still performing quite well. Think about kind of seasonality. I realize there's some distortions sequentially into Q3 because of the acquisitions that closed in early June. Yeah, Julian, I think you're, you know, close enough around it.
Julian Mitchell: Thanks very much.
Julian Mitchell: And then just my quick follow-up, just within the sort of second half guidance as we think about kind of seasonality. I realize there's some distortions sequentially into Q3 because of the acquisitions that closed in early June. June, but when we're thinking about sort of third versus fourth quarter in your guide, are we thinking kind of Q3 is, I don't know, you know, 25, 26% of the year's EPS, and then revenue-wise, you kind of have just under 1.9 billion in Q3 and maybe just over 1.9 billion in Q4. Is that the way to think about it?
Julian Mitchell: Yes, and then revenue wise you kind of have just under $1 9 billion in Q3, and maybe just over $1 9 billion in Q4 is that the way to think about it.
Julian C.H. Mitchell: I think that's probably the right way to think about it. So interestingly enough, I'd say the seasonal phasing, whether it be on the revenue side or on the earnings side, not dramatically different than what you've seen in prior years, slightly more weighted towards the back half than the front half. That is correct. You bet. Thank you, Julian.
Speaker Change: Yes, I think you're close.
Speaker Change: Close enough around it and I think that's probably the right way to think about it so interesting off I'd say the seasonal phasing whether it be on the revenue side on the earnings side not dramatically different than what <unk> seen in prior years slightly more weighted towards the back half than the front half that is correct.
Vic Kini: Yeah, I think that's probably the right way to think about it.
Vic Kini: So, interestingly enough, I'd say the seasonal phasing, whether it be on the revenue side, on the earning side, not dramatically different than what you've seen in prior years, slightly more weighted towards the back half and the front half. That is correct. Great.
Speaker Change: Great. Thank you.
Julian Mitchell: Thank you.
Operator: Thank you, Julie.
Speaker Change: You bet. Thank you Julien.
Jeff Sprague: Our next question comes from the line of Jeff Sprague with Vertical Research Partners. Please go ahead. Hey, thank you.
Speaker Change: Our next question comes from the line of Jeff Sprague with vertical Research partners. Please go ahead.
Vicente Reynal: Good morning, everyone. Hey, Vicente, can you drill in a little bit more on, you know, kind of PST in general, but kind of by a farm of markets in particular. You know, it does sound like you're seeing and feeling kind of the turn in those markets, but it's going to speak to what's going on in the channel or the channels cleared. What the outlook for maybe the remainder of the year is there. Yeah, absolutely. Jeff, so let me kind of break it into a couple of things. I mean, first of all, let's talk about the legacy in just a random life science business, that medical business that, as you saw, very, very good momentum in the quarter.
Jeff Sprague: Hey, Thank you good morning, everyone.
Jeffrey Todd Sprague: Hey, Vicente, can you drill in a little bit more on, you know, kind of PST in general, but kind of biopharma markets, in particular, you know, it does sound like you're seeing and feeling kind of the turn in those markets, but just kind of speak to what's going on in the channel or the channels cleared, and what the outlook for maybe the remainder of the year is. Yeah, absolutely. Jeff, so I'll kind of break it down into a couple things.
Cynthia: Hey, the Cynthia can you drill in a little bit more on.
Cynthia: Kind of PST in general, but kind of Biopharma markets in particular.
Speaker Change: It does sound like Youre, seeing and feeling kind of the turn in those markets, but just kind of speak to whats going on in the channel or the channels cleared.
Speaker Change: The outlook for maybe the remainder of the year is there.
Vicente Reynal: I mean, first of all, let's talk about the legacy Ingersoll-Rand life science business, that medical business that, as you saw, had very, very good momentum in the quarter in Q2, with very nice growth at 8%. So that's actually very encouraging to see. And, you know, some, let's say, good wins as we continue to, you saw the product in action, the innovation in action that we put there, and some getting, you know, that team is getting some very good exposure to personalized medicine, particularly around cancer treatment, which is very, very encouraging to see that.
Speaker Change: Yes, absolutely.
Speaker Change: So let me, let me kind of break it into.
Vicente Reynal: In Q2 with very nice growth at 8%. So, that's actually very encouraging to see. And you know, some say good wins as we continue to; you saw the product in action, the innovation in action that we put there. And some getting, you know, that team is getting some very good exposure to personalized medicine, particularly around cancer treatment, which is very, very encouraging to see that. And I think on top of that, I mean, I think we were now two months into the ownership of IOC over with the biofarma. And I think the team continues to say pretty encouraged on what they're seeing out there.
Vicente Reynal: And on top of that, I think we are now two months into the ownership of ILC Dover by the biopharma, and I think the team continues to be pretty encouraged by what they're seeing out there.
Vicente Reynal: And as we go out and meet with the teams, we see some continued good momentum there. And you saw the prepared remarks that we still expect that business to be able to generate that kind of double-digit growth this year. So, again, this speaks to the good kind of product innovation and nichiness of our technology and how we're particularly trying to be very focused on specific end markets that are seeing outside growth.
Vicente Reynal: And as we go out and meet with the teams, we see some continued good momentum there. And you saw the prepared mindset. We still expect that business to be able to generate that kind of double-digit growth for this year. So, again, speaks to the good kind of product innovation and nichiness of our technology and how we're particularly trying to be very focused on specific and market that are seen outside growth.
Vicente Reynal: And then maybe just shifting. Maybe this is total IR, maybe biases a little bit more towards industrial tech. But what's going on with kind of service service attachment. You know, is it growing here? How does it look into the back half? Yeah, great. Great. Thank you for asking the question. And I think we continue to be very excited about all the actions that we're doing around the care packages and the service attachment.
Vicente Reynal: And then maybe just shifting, maybe this is total IR, maybe biases a little bit more towards industrial tech, but what's going on with kind of service, service attachment, you know? Is it growing here? How does it look into the back half?
Vicente Reynal: Yeah, great. Great, Jeff. Thank you for asking the question. I think we continue to be very excited about all the actions that we're doing around the care packages and the service attachment. As a matter of fact, even this week, right now here, we have a team kind of getting together to talk about the continuation of taking service activities to the next level. So we continue to be very encouraged by what we're seeing and whether it is with just regular kind of service attachment, but also Ecoplant as Ecoplant continues to see some progression. And you saw that we even acquired a company called CAPS in Australia.
Vicente Reynal: As a matter of fact, I mean, even these weeks right now here, we have a team kind of getting together to talk about the continuation of taking service activities to the next level. So, so we continue to be very encouraged of what we're seeing. And whether whether it is which is the regular kind of service attachment, but also eco plant as eco plant continues to see some progression. And you saw that even also we acquired a company called Caps in Australia and that's really to give us more better channel better access with a larger footprint on service.
Robert Cameron Wertheimer: And that's really to give us more better channels, better access with a larger footprint on service. So service continues to be a very high priority for us as we move forward. Great. Thanks. Thank you. Rob Wertheimer, your line is now live.
Vicente Reynal: So service continues to be a very high priority for all as we move forward. Great.
Operator: Thanks. Thank you.
Rob Wertheimer: Our next question comes from the line of Rob Wertheimer with Malia's Research. Please go ahead.
Vic Kini: Rob Wertheimer, your line is now live. I am so sorry. Good morning. So my question's on gross margin. It was great in the quarter. I wonder if you could touch on price cost a little bit. Price and competitive dynamic and higher, you know, kind of winning or not share in the market.
Vicente Reynal: So my question is on gross margin. It was great and the, I wonder if you could touch on price cost a little bit, price and competitive dynamics, and how you're, you know, kind of winning or losing share in the market. And then, just out of curiosity, when you have that high risk margin, you can lean a bit more into spend. Curious how you manage that and what that kind of increased. It wasn't.
Vic Kini: And then just out of curiosity, when you have that high gross margin, you can lean a bit more into spend. Curious how you manage that and what that kind of increased. It wasn't that, you know, but increased spending might be.
Vic Kini: Yeah, Rob, great question. The gross margin expansion, very, very pleased to see a lot of that. And driven through the execution of initiatives like that price, yes, as you mentioned, but I to be as well as the higher recurrent revenue streams that that we were just even talking about on the on the last last question. So all of that is really inflicting some very good expansion into our gross margin that helps us deliver that expansion into our EBITDA margin. And, and absolutely, we're definitely investing. I mean, we're we can do the investing areas like the man generation, R&D and many other areas as needed, whether Salesforce activity and service technician to continue to grow the recurrent revenue from price growth.
Vicente Reynal: Yeah, Rob, great question. The gross margin expansion, very, very, very pleased to see a lot of that being driven through the execution of initiatives like Fry's, yes, as you mentioned, but I2V, as well as the higher recurrent revenue streams that we were just even talking about in the last question. So all of that is really inflicting some very good expansion into our gross margin that helps us deliver that expansion into our EBITDA margin.
Vicente Reynal: And absolutely, we're definitely investing. I mean, we continue to invest in areas like demand generation, R&D, and many other areas as needed, whether Salesforce activity and service technician to continue to grow recurrent revenue. And from a price cost, Vik, do you want to comment on that?
Vic Kini: Big, you want to comment on that? Yeah, on the price cost side of the equation, so specifically in the quarter, price was just approximately 2.5% across the entire enterprise, fairly comparable between the two segments. And then, from an inflationary perspective, I'd say the commentary is very similar to what we saw on Q1. I'd say the direct material side. It kind of continues to move sideways. So not a lot of what I would say headwinds on the year of your basis, but kind of sideways. And then I tell the labor side relatively normal course. So again, continue to see, you know, good, good pricing momentum from the organization, good translation of the bottom line, and then you see that, you know, reflected in the gross margin profile, along with some of the other initiatives that Vicente spoke to.
Vikram U. Kini: Yeah, on the price cost side of the equation, specifically in the quarter, price was, let's just say approximately 2.5% across the entire enterprise, fairly comparable between the two segments. And then from an inflationary perspective, I'd say the commentary is very similar to what we saw in Q1. I'd say on the direct material side, it kind of continues to move sideways.
Vikram U. Kini: So not a lot of what I would say headwinds on a year-over-year basis, but kind of sideways. And then on the labor side, a relatively normal course. So again, we continue to see good pricing momentum from the organization, and good translation of the bottom line. And you see that reflected in the gross margin profile, along with some of the other initiatives that Vicente spoke about. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please go ahead. Good morning.
Vic Kini: Got it.
Vic Kini: Thank you. And then it just a minor follow up just pricing, looking forward roughly the same.
Speaker Change: And then just a minor follow up just the pricing looking forward roughly the same and what does the new normal and price feel like now is it is it going forward as far as you can see are two or three years or or any comment there and I'll stop.
Vic Kini: And what, what does the new normal and price feel like now? Is it? Is it going forward as far as you can see, or two or three years, or any comment there, and I'll stop. Thanks.
Vic Kini: Yeah, just to keep it relatively simple, I think we've said that pricing will kind of return to, I'd say, a little bit more of the norm that you've seen historically, which is probably around that one to 2%. You know, gross pricing levels or net pricing level, I should say. And if you think about where we're heading, the back half, I think that's kind of where we should be. We were still benefiting from a little bit of some of the carry over pricing actions from last year here to the first half, but we would expect, you know, between 1% to 2% is probably a good indicative range for the back half of 2024, as well as, you know, expectation for 25 onwards.
Speaker Change: Yes, just to keep it relatively simple I think we've said that pricing will kind of returned to I'd say, a little bit more of the norm that you've seen historically, which is probably around that 1% to 2%.
Speaker Change: Gross pricing levels, our net pricing level I should say.
Speaker Change: And if you think about where we're headed in the back half I think that's kind of where we should be we were still benefiting from a little bit of some of the carryover pricing actions from last year here into the first half, but we would expect.
Speaker Change: Between 1% to 2% is probably a good indicative range for the back half of 2024 as well as expectations for 'twenty five onwards.
Speaker Change: Thanks.
Speaker Change: Thank you.
Joe Richie: Our next question comes from the line of Joe Richie with Goldman Sachs. Please go ahead. Thanks. Good morning, guys.
Speaker Change: Our next question comes from your line of Joe Ritchie with Goldman Sachs. Please go ahead.
Joe Ritchie: Thanks, Good morning, guys.
Vicente Reynal: Good morning.
Joe Ritchie: Morning, Joe.
Vicente Reynal: Hey, Vicente, can we double-click on that comment area around the NQLs and the blaze that you're seeing? I'm just curious, like obviously there's a lot of activity, particularly happening in the US with mega-project activity. And I'm just wondering if that's just a function of, look, these projects have started, but you guys aren't really seeing the orders as quickly at this point. But they're on the come because projects are broken ground. Does any other color you can give us around that would be helpful?
Joseph Alfred Ritchie: Hey, Vicente, can we double-click on that commentary around the MQLs and DeBlase that you're seeing? I'm just curious, like, obviously, there's a lot of activity, particularly happening in the U.S. with megaproject activity. And I'm just wondering if that's just a function of, look, these projects have started, but you guys aren't really seeing the orders as quickly at this point, but they're coming because projects have broken ground. Any other color you can give us around that would be helpful.
Joe Ritchie: <unk> can we.
Vicente Reynal: Yeah, Joe, I think a great question. And I will say, you know, on that slide, we tried to separate two things: you know, they're kind of short to medium cycle and then the long cycle. And I will say that, you know, that the mega projects perhaps viewed more on that kind of more on the long cycle where we continue to see formal increases, but there is that continuous elongation driven by, you know, in some cases, we have seen some of EPCs having, you know, two to three years of backlog and kind of creating a delay in how they continue to release those, those basically large projects into order.
Vicente Reynal: Yeah, Joe, I think that's a great question. And I will say, you know, on that slide, we tried to separate two things, you know, the kind of short to medium cycle and then the long cycle. And I will say that, you know, the megaprojects perhaps view more on that kind of the long cycle, where we continue to see funnel increases. But there's that continual elongation driven by, you know, in some cases, we have seen some EPCs having, you know, two to three years of backlog and kind of creating a delay in how they continue to release those, those basically large projects into order.
Joseph Alfred Ritchie: So I think it's just a consistent, you know, that's why, when we made the commentary, we say, hey, I think it's good news, as we think about ahead, and particularly maybe, as we think even around 2025, that there's this, perhaps a lot of, of projects that as they get released, we will see some, some better momentum on that. So, and, and from an MQL perspective, which is kind of a short to medium cycle, I think we made some commentary around PST, I mean, PST on that short cycle business continues to be actually quite good at mid single digit growth, even in the second quarter, we just wanted to show that, you know, MQL, it is double digit kind of growth on a year to year, clearly, all of that doesn't translate into the orders, as we're not seeing that double digit orders, but it's a great indicator as to the market activity on how we're instigating demand, and how we're getting really penetrated into new accounts and new customer base. And, and I think that's just for us good leading indicator on on an ongoing performance for us. Got it. That's super helpful, Vicente.
Vicente Reynal: So I think it's just a consequence is, you know, that's why when we made a commentary, we say, hey, I think it's good news as we think about ahead and particularly maybe as we think even around 2025 that there's this perhaps do up of projects that as they get released, we will see some better momentum on that. So, and from an MQL perspective, which is kind of that short to medium cycle, I think we made some commentary around PST. I mean, PST on that short cycle business continues to be actually quite good at mid single digit growth, even in the second quarter.
Vicente Reynal: We just wanted to show that, you know, MQL, it is double digit kind of growth in a year or year. Clearly, all of that doesn't translate into the orders, as we're not seeing that double digit orders, but it's a great indicator as to the market activity on how we're instigating the man and how we're getting really penetrated into new accounts and new customer base. And I think that's just for us, a good leading indicator on an ongoing performance for us. Got it.
Joseph Alfred Ritchie: And then my other question is, like, look, I could take this in a variety of different ways, but congrats on shoring up the balance sheet from a leverage standpoint and from a debt standpoint. I know how important M&A is for you guys going forward and how it has been a great value creator for you. It is interesting to see you take down, though, the aerospace and defense number for the year by $30 million. I know that's a small number.
Vicente Reynal: That's the super helpful to send day, and then my other questions, like look, I could take this a variety of different ways, but congrats on shorting up the balance sheet from a leverage standpoint and from the debt standpoint. I know how important M&A is for you guys going forward and how it has been a great value creator for you. It is interesting to see you take down though the aerospace and defense number for the year by 30 million dollars. I know that small number. And I think that that's part of the piece that came out of the, you know, I also go over acquisition that you just completed.
Vicente Reynal: And I think that that's part of the piece that came out of the ILC Dover acquisition that you just completed. So I guess the question is, as you're kind of thinking through these acquisitions, and there might be pieces of acquired companies that you buy that have inherent volatility, how are you thinking about managing that going forward as you look through your evaluation? Great question, Joe. You know, I think, particularly if you think about ILC Dover, we're very excited about the business.
Vicente Reynal: So I guess the question is, as you're kind of thinking through, you know, these acquisitions that there might be pieces of these acquired companies that you buy, that you have inherent volatility. How are you thinking about, like, managing that going forward as you look through your evaluation process?
Vicente Reynal: And if you remember, when we talk about the company, we're very excited about that exposure to life sciences, which is basically approximately 75% of the total business for ILC Dover is life sciences, with a good blend between biopharma and medical device components.
Vicente Reynal: Yeah, great question, Joe. You know, I think a particularly if you think about ILC over, we're very excited about the business. And if you remember when we talk about the company, very excited about that exposure into the light sciences, which is basically 75% of approximately 75% of the total business for ILC over his life sciences with a good blend between bio farms and medical device component and we always spoke about in this case aerospace being a bit of an optionality. Good exposure, good things to learn, but also good to better understand. So, as we continue to go forward and learn more about the business, what we can do with it.
Vicente Reynal: And we always spoke about, in this case, aerospace being a bit of an optionality, good exposure, good things to learn, but also good to better understand. So as we continue to go forward and learn more about the business, what we can do with it, you know that historically, we have always been pleased with doing, whether it is carve outs and then, you know, selecting businesses that we like or emphasizing more one versus another. But I think the purpose and the strategic view that we had with ILC Dover was a higher penetration into the life science side of the business.
Vicente Reynal: You know that historically we have always been pleased with doing whether it is carve outs and then you know selecting bases that we like or emphasizing more one versus another. But, but I think it's it's it's the purpose and the strategic view that we had with ILC over is a higher penetration onto the lifeline.
Vicente Reynal: I'm sorry to be.
Vicente Reynal: That makes sense.
Vicente Reynal: Thank you, guys. Thank you.
Andy Kaplowicz: Our next question comes from the line of Andy Kaplowicz with City. Please go ahead. Good morning, everyone.
Unknown Executive: That makes sense. Thank you, guys. Thank you. Good morning, everyone. Good morning, Andy. Good morning, Andy.
Vic Kini: Morning, Andy. The center of it, you started out essentially flat in terms of organic revenue growth of the first half of 24. So I think in order to hit the midpoint of your guide, now you need to grow, you know, the high end of that zero to two for the second half.
Unknown Executive: Vincent, you start out essentially flat in terms of organic revenue growth for the first half of 2024. So I think in order to hit the midpoint of your guide, to grow at the high end of that 0 to 2 for the second half. So we know you have easier costs, but do you need to see any incremental acceleration in your short cycle? And then maybe, can you talk about what happened to PSG, PST adjusted even that margin in Q2 is down sequentially, despite significantly higher revenue. I think we recognize there's a fair amount of acquisition-related revenue in there. But I thought ILC Dover was coming in and the creative margin was the same. Any other acquisitions or margins or something else happened in the quarter? Hi, good morning, guys.
Vic Kini: So we know you have easier costs, but do you need to see any incremental acceleration in your short cycle businesses to achieve that midpoint? Basically, just assuming more status quo in terms of short cycle markets now, remaining somewhat constrained in long cycle markets, contributing you more growth. Yeah, and this is the, I think the way you've described it is correct. So just to calibrate on the numbers, I think you're right. You know, one to two percent organic growth in the back half of the year is probably the right way to think about it system-wide. I think in terms of the components in the moving pieces, yeah, I think what we would say here is, you know, relative stability, no dramatic, let's just call it hockey stick improvement or anything of that nature in the back half implied.
Vic Kini: Obviously, you know, we've taken down the China, you know, expectations, which is effectively the preponderance of what changed the organic growth guide. So, you know, I think now it's execution of the backlog. You know that we typically do have a little bit of seasonality in the business. We're second half is stronger than first half. That's no different this year. And I think the other factors you mentioned here are largely accurate. So, you know, I think we feel comfortable with the guidance as provided.
Vic Kini: Tell for a minute, maybe can you talk about what happened to PST, PST, adjustity of a done margin in Q2? I mean, it's down sequentially despite significantly higher revenue. I think we recognize there's a fair amount of acquisition-related revenue in there, but I thought I else see Dover was coming in and the creative margin to the segment. And any other acquisition to the margins is something else happened in the quarter.
Vic Kini: Yeah, Andy. So, just to address the second part of your question, first, you know, we did have one month of ILC Dover results in Q2. And I'd say largely in line with expectations, both from a top line and bottom line, and profitability perspective. I think, you know, generally speaking here, you know, about 30.8 percent EBITDA margins to about 30.3. I wouldn't attribute that to anything more than just some of the normal course revenue mix and things of that nature from the balance of the business. Nothing that I think you should read into any further than that, as we think, frankly, going forward here into the back half of the year.
Vic Kini: You know, those numbers closer, you know, trending, you know, sequentially better from Q2 into Q3. And then Q3 to Q4, absolutely. So, you know, I don't think anything has changed in our context as far as that getting to, you know, mid-30s EBITDA margin profile over the next few years in line with our investor day targets for PSD. So, not these really change in that respect.
Speaker Change: Is that getting to a mid <unk> EBITDA margin profile over the next few years in line with our Investor day targets for PST, So nothing's really changed in that respect.
Vic Kini: Appreciate the color, Vic.
Speaker Change: I appreciate the color Jay.
Operator: Yep.
Joe Ritchie: Yes.
Steve Volkman: Our next question comes from the line of Steve Volkman with Jefferies. Please go ahead.
Speaker Change: Our next question comes from the line of Steve Volkmann with Jefferies. Please go ahead.
Vicente Reynal: Hi.
Unknown Executive: Most of my questions are answered, but I'm curious to go back to your kind of indicators, the MQL and the funnel activity. You must track some kind of win rates or conversion or something over time as well. Any changes to note there? Yeah, yes, we do. And no changes on that. I think the changes are basically more because we also track the velocity of those kinds of projects or orders through the funnel. And that is basically what I would say has maybe changed. And then the reason why we call it that elongation, but in terms of wind rates and all that, there is no change in that.
Steve Volkmann: Hi, Good morning, guys. Most of my questions are answered, but I am curious to go back to your kind of indicators the <unk> and the funnel activity you must track kind of win rates or conversion or something over time as well any changes to note there.
Vicente Reynal: Good morning, guys. Most of my questions are answered. But I'm curious to go back to your kind of indicators, the MQL and the funnel activity. You must track kind of wind rates or conversion or something over time as well. Any changes to note there? Yeah, yes we do, and no changes on that.
Speaker Change: Yeah, Yes, we do and no changes on that.
Vicente Reynal: I think the change is being basically more because we also track the velocity of those kind of projects or orders through the funnel, and that is basically what I would say has maybe change. And then the reason why we call it that elongation, but in terms of wind rates and all that, no change in that.
Vicente Reynal: Okay, thanks. And then I'm curious about this cap to acquisition. I'm not sure if I'm reading this right, but this sounds like you're actually providing. Power and air to customers, which is kind of a different kind of service, I think, than most of the rest of what you do. Does this open up sort of a new area where you can be more of a power-by-the-hour type supplier across a bigger addressable market. Yeah, I'll say that I mean they're mainly a primarily a compressor distributor. They do have some powers out of the business that in small in nature, but interestingly enough, I mean they actually have provided power for some, even including data centers among so things.
Unknown Executive: Okay, thanks. And then I'm curious about this CAPS acquisition. I'm not sure if I'm reading this right, but this sounds like you're actually providing power and air to customers, which is kind of a different kind of service, I think, than most of the rest of what you do.
Vicente Reynal: So I think it's just an interesting area that we're learning, and you know, we have some chiller technology with free or that we're seeing how can we interact. So, I mean, we're definitely learning a lot on that side.
Vicente Reynal: In terms of air, you know, air by the hour or things like that, we do have some of those programs already in place in Australia, even with our legacy in the runs out of the business, and we call it air over their fence in many cases. But, you know, I think we're very excited about caps. I mean, it gives us a tremendous amount of footprint in Australia and great connectivity to a very good level of customer base in addition to the great strong base of revenue that we already have with English. Great. Thank you.
Nigel Edward Coe: Does this open up sort of a new area where you can be more of a, you know, power by the hour type supplier across a bigger addressable market? Great, thank you. Our next question comes from the line of Nigel Coe with Wolf Research. Please go ahead. In response to Mike's question, I think you talked about the inverse of the first half. So are we talking about sort of like a high 0.9, maybe close to 1x book to bill in the back half of ITS?
Nigel Coe: Our next question comes from the line of Nigel Co with Wolf Research. Please go ahead. Thanks. Good morning, everyone. Hopefully as well.
Vicente Reynal: Yeah, we've got a lot of ground already. So thanks for the details.
Vicente Reynal: I just want to make sure that we've got the second half booked to build sort of mind up here. I think, in response to my question, I think you talked about the inverse of the first half. So are we talking about sort of like a high point nine, maybe like close to one X booked to build in the back half for ITS and obviously that would suggest orders up mid to high single digits. So I just want to make sure that's the message, and what do we see getting better here? Do we see China improving?
Nigel Edward Coe: And obviously, that would suggest orders up mid to high single digits. So I just want to make sure that's the message. And what do we see getting better here? Do we see China improving?
Nigel Edward Coe: Are we expecting some of these larger projects to start breaking free? Because it sounds like the EPC project panel is not really breaking free until 2025. So just what? Try and dial into that comment.
Vicente Reynal: Are we expecting some of these larger projects to start breaking free? Because it sounds like the EPC project funnel is not really breaking free until 20 or 25. So just just want to just try and you know, dial into that comment.
Vicente Reynal: Thanks. Yeah, sure, sure. I so booked the bill. Yes, definitely less than one in the second half, which is kind of back to our normal way of we always said, you know, I wonder if one is the first half and then it's basically less than one in the second half. And that will imply, you know, kind of since I would say maybe to the numbers. I mean, think about it, Q3 and Q4 slightly different, but low single digit a year a year in Q3 and Q4, that's kind of what we imply there. Although keep in mind that we don't tend to guide on orders, but you can do the back-of-the-envelope calculation there.
Nigel Edward Coe: Thanks. Yeah, sure, sure. Sure, Nigel.
Vicente Reynal: Yeah, so book the bill, yes, definitely less than one in the second half, which is kind of back to our normal way of... We always said, you know, add one greater than one in the first half, and then it's basically less than one in the second half. And that will imply, you know, kind of, I would say maybe two numbers. I mean, think about it, Q3 and Q4 are slightly different. But low single-digit year-over-year growth in Q3 and Q4, that's kind of what we imply there.
Vicente Reynal: However, keep in mind that we don't tend to guide on orders, but you can do the back of the envelope calculation there. And on the second question, I mean, the EPC and the large project continue to still be at play here in the second half. I think what we're saying is that, you know, this elongation of decision-making is taking much longer. And, you know, for a better or worse way of saying it, we're discounting that even further, but these are projects that are active.
Vicente Reynal: And on the second question, I mean, the EPC and the large project continues to still be at play here in the second half. I think what we're saying is that, you know, these elongation of decision making is taking much longer. And, you know, for better weather, way of saying it, we're discounting that even further, but these are projects that are active and whether they might happen in the second half or they may happen as we go into 2025. We view that as great disability as to what's out there in the market that will be eventually coming back to us.
Vicente Reynal: And whether they might happen in the second half, or they may happen as we go into 2025, we view that as great visibility as to what's out there in the market that will be eventually coming back to us. Okay, so low simulated growth in the second half of the year. Okay, that's helpful. And, you know, obviously, China is the issue here. I had battery needy as maybe 15% or so of the China business, want to make sure that's still the sort of the right zone there. And just think about your verticals across the globe.
Vicente Reynal: Okay, so low zoom in to growth in the second half of the year, okay, that's helpful. And, you know, obviously, China is the issue here. I had battery needy; it's maybe 15% or so of the China business. I want to make sure that's still the right zone there. And just think about your verticals across the globe. I mean, we are seeing some noisy trends in food and beverage. I'm just curious if you're seeing stable trends in food and beverage, or whether there's some noise there as well. Yeah, Nigel, on the first part, we don't typically talk about kind of like end market, let's just call it designations with our bits to the regions, but I think it's fair to say that EV battery solar, we're two meaningful, you know, end markets in terms of the order and revenue contribution in 2023.
Nigel Edward Coe: I mean, we are seeing some noisy trends in food and beverage. So I'm just curious if you think that's right. That's exactly right.
Vicente Reynal: I just don't say they are; they are active markets, but just frankly, obviously not at the same levels as what you've seen in prior year. And so that lets you comment on the food and beverage. I mean, nothing, nothing of note to be able to say about that. I think it's fair to say that EV battery solar, we're two meaningful, you know, end markets in terms of the order and revenue contribution in 2023. I just don't say they are active markets, but just frankly, obviously not at the same levels as what you've seen in prior year.
Vicente Reynal: And so that lets you comment on the food and beverage. Yeah, what a beverage. I mean, nothing, nothing of note to be honest there, Nigel. I mean, I think food and beverage will continue to sell based on just as we always do in terms of sustainability, whether it is, you know, return on investment based on energy savings, the ability to be able to provide, you know, service agreements, so many of the combination of all. And, and it's about prioritizing, you know, the spending those facilities, and as long as we show great return investment, which we are with our technologies and our solutions.
Speaker Change: And it's about prioritizing the spanning those facilities and as long as we show a great return on investment, which we are with our technologies and our solutions are we can get that into us.
Vicente Reynal: We can get that into us.
Vicente Reynal: I'm just to clarify something that the low single digits, if that's organic, not report right. That's right. That's exactly right. Yes. Yeah. Right.
Brian: And just to clarify that the low single digits, if that organic number of quarter Brian.
Brian: Right, that's exactly right, yes, yes, okay alright. Thank you. Thank you.
Operator: Thank you.
Speaker Change: Thank you.
Joe O'Day: Our next question comes from the line of Joe O'Day with Wells Fargo.
Speaker Change: Yeah.
Speaker Change: Our next question comes from the line of Joe O'dea with Wells Fargo. Please go ahead.
Vicente Reynal: Please go ahead. Hi, good morning. So I was on mute.
Unknown Executive: Yes. Yeah. Great. Thank you. Thank, Thank you. Hi, good morning. Sorry I was on mute.
Joe O'dea: Hi, Good morning, Sir I was on mute.
Speaker Change: Good.
Vicente Reynal: So I also wanted to ask on some of the slight readiness and EPC dynamics you're talking about and just, you know, your evaluation on why that's emerging now. It doesn't seem like the demand environment has changed all that much. Not sure if this is more a reflection of kind of mega project funnel, but just what you've seen over the course of the past, you know, two or three quarters such that this would be emerging as a challenge now.
Speaker Change: So.
Speaker Change: Also wanted to ask on the site readiness and EPC dynamics, you're talking about and just your evaluation on why that's emerging now it doesn't seem like the demand environment.
Unknown Executive: Your evaluation of why that's emerging now doesn't seem like the demand environment. Transcripts provided by Transcription Outsourcing, LLC, or if any of that happens, should we think about that as more kind of... Yeah, I'll take the first one. Let Vic kind of talk about the second one. I, you know, as you know, and I think you said it and that someone said it as well, there's been a lot of megaprojects approved over the past few years, but not all those orders and revenues have been seen from those projects.
Vicente Reynal: And then, as it relates to the guide and expectations in the back half of the year, you know, does that embed kind of any expectation that some of these, you know, sort of projects move forward or that the, you know, the EPC capacity eases? Or if any of that happens, should we think about that as more kind of upside? Yeah, I'll take the first one.
Vicente Reynal: Let me kind of talk about the second one. I, you know, as you know, and you think you said it, and that someone said it as well. I mean, there's been a lot of mega projects approved over the past few years, but not all, not all those orders and revenue have been seen from those projects. And so there's definitely bottlenecks throughout the process. And what we hear is basically that customer cyber readiness due to labor, but also that EPC capacity. I made an example about an EPC in Europe that currently has something like two and a half years of backlog in order that they get a kind of push through the process.
Unknown Executive: And so there's definitely bottlenecks throughout the process. And what we hear is basically customer side readiness due to labor, but also EPC capacity. I gave an example of an EPC in Europe that currently has something like two and a half years of backlog in order that they get to kind of push through the process.
Vicente Reynal: And all we're saying here is that it seems to bring to light the potentially of having good 2025, but some of those projects give release.
Vicente Reynal: And all we're saying here is that it seems to bring to light the potential of having a good 2025 as some of those projects get released. And, you know, perhaps there are some as well here in the second half. Second question, Vic?
Vic Kini: And you know, perhaps here some as well here in the second half, but any second question? Yeah, I think Joe, in terms of the second half, is there anything directly embedded? No, I think this is a simple answer. Obviously, our second half includes execution existing backlog. Obviously, there's a component of longer cycle projects like you've seen in prior years. Do the degree, as I said, some of this loosens up or things like that. Great. I would view that as potential, you know, maybe some orders. But remember, most of these are 6, 18, 6, 18 month type lead time type projects.
Vikram U. Kini: Yeah, I think, Joe, in terms of the second half, is there anything directly embedded? No, I think this is a simple answer. Obviously, our second half includes execution on existing backlog. And obviously, there's a component of longer cycle projects like you've seen in prior years.
Speaker Change: Obviously, there's a component of longer cycle projects like you've seen in prior years to the degree as I said he said some of this loosens up and things like that great I would view that as potential maybe some orders, but remember most of these are six to 18 six to 18 months type of lead time type projects. So reality is those will not convert the revenue until 2025 or less.
Vikram U. Kini: To the degree, as I said, some of this loosens up or things like that. Great. I would view that as potential, you know, maybe some orders. But remember, most of these are six, 18, six to 18 month-type lead time type projects.
Vikram U. Kini: So the reality is that those will not convert to revenue until 2025 or later. Got it. Thank you. Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Please go ahead. Got it. Thanks, Vicente. And then on the ITS margins, is the expectation that margins kind of remain in this slightly below-30 zone in the second half?
Vic Kini: So reality is those will not convert the revenue until 2025 or later.
Speaker Change: Sure.
Speaker Change: Got it yet.
Speaker Change: <unk> comments helpful. And then also just in terms of China.
Vicente Reynal: And then also just in terms of China, is it right that China kind of played out as expected more or less in the first half of the year? And so the guidance adjustment would be more reflective of the second half of the year, a little softer than anticipated. And if so, it seems like it's more kind of stable in China, first half of the second half. And so what did you think might get a little bit better? That's, at this point in time, doesn't seem like it's going to play out that way. So I'll say that China definitely played out very well in terms of what we kind of saw in the first half.
Speaker Change: Is it right that the China kind of played out as expected more or less in the first half of the year and so the guidance adjustment would be more reflective of the second half of the year, a little softer than anticipated and if so it seems like it's more kind of stable in China first half to second half and so what what what did you think might get a little.
Speaker Change: Bit better than that at this point in time doesn't seem like it's going to play out that way.
Vicente Reynal: I will say that even in some regards slightly better because we saw that Q1 to Q2 sequentially improving orders in China, which we were surprised to see, and the team building some backlog. We just decided that, you know, based on everything that we cannot see coming out of China and whether geopolitical elections and all of that kind of put together, we decided to be more prudent and kind of put China more as being stable here in the second half. There's a scene any material improvement from here onwards. Got it.
Nicole DeBlase: Thank you. Our next question comes from the line of Nicole DeBlaze with Deutsche Bank. Please go ahead.
Vicente Reynal: Yeah, thanks.
Vicente Reynal: Good morning, guys. Hi.
Vicente Reynal: Morning, Nicole. We had a lot of discussion around the large project activity in ITS. I guess can you talk a little bit about what you guys saw on the short cycle part of the business from an order perspective throughout the quarter? Yeah, Nicole, I will say that, you know, one data point that we talked a lot about is that kind of short cycle on the PST side, mid single digit kind of grows in the in Q2, which is actually very good to see. And when you think about all the other in the ITS side, I mean, all the regions, including except WZ China, they saw actually some very good momentum through as well.
Vicente Reynal: As indicated, as you can see in terms of some of the product line aspect that we talked about, compressors and compressor is being, you know, up from an orders perspective, you know, kind of in the second quarter, which always be a lot of the compressor that's driving to as well. The majority for us is on that kind of short cycle site short to medium cycle. Got it.
Vic Kini: Thanks to Sentay and then on the ITS margins, is the expectation that margins kind of remain in this slightly below 30 zone in the second half. Yeah, Nicole, that's a that's a fair conclusion. Yes, around 30% is a pretty, pretty good, pretty good number.
Speaker Change: Okay, and then on the I T. S margins is the expectation that margins kind of remain in this slightly below 30 zone in the second half.
Speaker Change: Yeah that's.
Speaker Change: That's a that's a certain collusion, yes around 30% is a pretty pretty good pretty good number.
Vic Kini: Thanks, Vic. I'll pass it on.
Speaker Change: Thanks, I'll pass it on thank you.
Operator: Thank you.
Speaker Change: Yeah.
David Russell: Our final question comes from David Russell with Evercore ISI. Please go ahead.
Unknown Executive: Thanks, Vic. I'll pass it on. Thank you. Our final question comes from David Raso with Evercore ISI. Please go ahead.
Speaker Change: Our final question comes from David Raso with Evercore ISI. Please go ahead.
Vicente Reynal: Hi, thank you. Two quick things. Maybe I missed it.
David Raso: Hi, Thank you two quick things, maybe I missed it I apologize letter earnings. This morning, but you made a comment about deciding to walk away from one of the larger transactions can you provide a little color was that strictly a price related decision to walk away or something about the markets or anything you could enlighten us on why you'd walkway to maybe.
David Michael Raso: Maybe I missed it, I apologize. Comment about deciding to walk away from one of the larger transactions or how you think about the others. Yeah, no, great, great, great, great question there, David.
Vicente Reynal: I apologize a lot of earnings this morning, but you made a comment about deciding to walk away from one of the larger transactions. Can you provide a little color? Is that strictly a price-related decision to walk away, or something about the markets, or anything you could enlighten us on why you'd walk away to maybe, you know, to learn more how you think about other larger deals that could be coming.
Speaker Change: To learn more how you think about other larger deals that could be coming.
Vicente Reynal: Yeah, no. Great, great, great good question there, David. You know, you know, I think that the reason for that is that it, first of all, say, this is a transaction that we could give it for, you know, past kind of for a year. So we've been kind of watching them on the sidelines and learning a lot about them. And, and this this transaction, I would say, fell really more into the adjacent category as compared to our core offering of compressor, blower, and vacuum. But yeah, I mean, I think ultimately it was all about valuation. I mean, we continue to be highly disciplined.
Vicente Reynal: You know, you know, I think that the reason for that is that, first of all, say, this is a transaction that we have cultivated for, you know, the past kind of three years. So we've been kind of watching them on the sidelines and learning a lot about them. And this transaction, I will say, fell really more into the adjacent category as compared to our core offering of compressors, blowers, and vacuums. But yeah, I mean, I think, ultimately, it was all about valuation.
Vicente Reynal: I mean, we continue to be highly disciplined. And we, as you very well know, tend to do a lot of our ROI analysis along the lines of things that we can control. And how do we view that business in areas that we can control versus extrapolating on revenue activity that we tend to discount heavily?
Vicente Reynal: And and and we we, as you very well know, we tend to do a lot of our ROI analysis around the lines of things that we can control. And how do we view that business on areas that we can control versus extrapolating on revenue activity that we tend to discount heavily. So I will say that ultimately that led to performance that we decided that it was just not right timing for us.
Vicente Reynal: So I will say that, ultimately, that led to a performance where we decided that it was just not the right time for us. And one follow-up, and maybe I should know this, that the new with ILC right PS, Call it a run. 1.0. 1.0. 1.0. 700 or so will now be life science.
Vic Kini: And one follow-up, maybe I should know this, but I don't. The new, with ILC, right? PST is going to be, call it a run rate, a billion, seven business. I think 700 or so will now be a life science piece. And then the other billion is the precision tech. Within the total segment margin of, call it 31% this year, something like that.
Vic Kini: What's the difference between the margins of precision tech and life sciences? Yeah, David, interesting enough. Yeah, quite comparable to each other. I wouldn't tell you there's a meaningful mix differential between the two. Both are playing in and around that segment average profile. So actually quite, quite comparable helpful.
Unknown Executive: In the margins of Thank you, Brianna. I'll just say thank you for your level of interest, and I appreciate all the questions and all the participants. I know many of our employees are actually listening to the call, and to those that are listening to the call, I just say thank you again for another great quarter performance, and let's get out of here now to execute again in the second half of the year. With that, thank you very much, and have a good day. This will conclude today's conference call. Thank you all for your participation. You may now disconnect.
Vic Kini: Okay, thank you. Thank you.
Vicente Reynal: This will conclude our question and answer session. I will now turn the call back over to Vicente for closing remarks. Thank you, Brianna. I'll just say thank you for your level of interest. And I appreciate all the questions and all the participants. That I know many of our employees are actually listening to the call, and to those that are listening to the call. I just say thank you again for another great quarter performance. And let's get at it here now to execute again here in the second half of the year with that. Thank you very much.
Speaker Change: But I know many of our employees are actually listening to the call. After this but I was listening on the call I'll just say thank you again for another great quarter performance and let's get out of here now to execute again here in the second half of the year with that thank you very much and have a good day.
Operator: I have a good day.
Operator: This will conclude today's conference call. Thank you all for your participation. You may now disconnect. Thank you.
Speaker Change: This will conclude today's conference call. Thank you all for your participation you may now disconnect.
Speaker Change: [music].