Ingersoll Rand Inc. (NYSE:IR) Q4 2022 Earnings Call Transcript

Ingersoll Rand Inc. (NYSE:IR) Q4 2022 Earnings Call Transcript February 21, 2023

Operator: Thank you all for standing by. I would like to welcome you all to the Ingersoll Rand Q4 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers’ remarks, we will conduct a question-and-answer session. Thank you. I would now like to turn the conference call over to our host Matthew Fort of Ingersoll. Matthew, please go ahead.

Matthew Fort: Thank you, and welcome to the Ingersoll Rand 2022 fourth quarter earnings call. I am Matthew Fort, Vice President of Investor Relations. And joining me this morning are Vicente Reynal, Chairman and CEO; and Vik Kini, Chief Financial Officer. We issued our earnings release and presentation this morning and we will reference these during the call. Both are available on the Investor Relations section of our website. In addition, a replay of this conference call will be available later today. Before we start, I want to remind everybody that certain statements on this call are forward looking in nature and subject to the risks and uncertainties discussed in our previous SEC filings, which you should read in conjunction with the information provided on this call.

Please review the forward-looking statements on Slide 2 for more details. In addition, in 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 in our slide presentation and in our earnings release, both of which are available on the Investor Relations section of our website. On today’s call, we will review our company and segment financial highlights and provide 2023 guidance. For today’s Q&A session, we ask that each caller keep to one question and one follow-up to allow for time for other participants. At this time, I will turn the call over to Vicente.

Vicente Reynal: Thanks, Matthew, and good morning to all. I would like to start by acknowledging and thanking our employees for their hard work in helping us deliver a record year in 2022. We finished the year on a high note, with strong fourth quarter and full year results despite ongoing inflation, rising interest rates, supply chain constraints and geopolitical uncertainty. Our employees consistently exemplify our purpose, while thinking and acting like owners to deliver on our commitment. And our performance this year clearly reinforces the impact we have as owners of Ingersoll Rand. Starting with Slide 3, in 2022, we demonstrated again how we continue to over deliver on our Investor Day commitments. We also made tremendous progress against our sustainability goals, but I’m very proud that Ingersoll Rand was named to the 2022 Dow Jones Sustainability Index.

As we look to 2023, demand remains solid. And while macroeconomic, geopolitical and global supply chain uncertainties continue to be at the top of everyone’s mind, we will remain agile and focused on what we can control. IRX is our differentiator to fuel our performance and continue to execute on our commitments. Turning to Slide 4. During our last Investor Day, we highlighted how we delivered compounding results through our economic growth engine. We remain committed to our strategy and its success is evident, given the results outlined at the bottom of this page. Our portfolio is positioned to capitalize on global megatrends, (ph), sustainability and quality of life. We expect to leverage our organic growth enablers to deliver mid-single digit organic growth through 2025.

And as you can see, we outperformed this commitment again in 2022, delivering 16% year-over-year organic revenue growth. In 2022, we delivered 4% of in-year growth from M&A or 5% on an annual basis. The combined organic growth and inorganic growth of 22% (ph) a low-double digit growth commitment. As we look to 2023 and beyond, we reaffirm our commitment to deliver total average growth of low-double digits through 2025. Our strong organic growth levers, aftermarket demand generation, as well as our i2V initiatives will enable us to generate operating leverage and incremental productivity with an expected 100 basis points of adjusted EBITDA margin improvement per year on average. With IRX as our competitive differentiator and over 300 IMPACT Daily Management, or IDMs, across our company each week, our high-performance culture encourages a strong focus on execution.

This continues to support our goal of being a premier company that consistently compounds earnings on average by double digit each year. In 2022, we continued to achieve that goal with adjusted EPS growth of 13%. Moving to Slide 5. In 2022, we saw strong organic order and revenue growth of 11% and 16%, respectively. Aftermarket continues to be a strategic focus and we delivered growth of 17% excluding FX. Our 120 basis points of adjusted EBITDA margin expansion was driven in part by improvement in our gross margin due to pricing, aftermarket revenue growth and i2V actions. As we continue to align our business to the mega growth trends, we formalized our IR-Digital team to accelerate how we create new revenue streams. It’s important to note that this is an incremental investment we made in addition to the teams that reside at the business level.

With 19% of our total revenues coming from IIoT-ready products, we have already exceeded our 2023 Investor Day targets. On the right side of the page is a great example of our ability to deliver organic growth by focusing on the sustainability and efficiency megatrend. We were selected to be a critical technology provider for what will be the largest carbon capture and storage project in the world when it comes online in 2024. With a capacity to permanently capture and store 12 million tons of carbon dioxide gas every year. This one project will deliver more than $14 million of value for Ingersoll Rand between 2023 and 2024. On Slide 6, M&A continues to be at the forefront of our capital allocation trends. We invested over $800 million in 12 acquisitions in 2022, including the SPX Flow transaction with the annualized revenue from these acquisitions being approximately $300 million.

These acquisitions have added both market-leading products and technologies, while accelerating our addressable market with close adjacencies. Our M&A funnel remains strong. And as of today, it continues to be over five times larger than it was at the time of the R&D. And more importantly, we currently have 11 transactions under LOI. We expect an additional $200 million to $300 million in annualized inorganic revenue to be acquired in 2023. Finally, we started the year well with regards to executing on our inorganic strategy with the recently completed acquisition of Paragon Tank Truck, a leading provider of solutions used for loading and unloading dry bulk and liquid tanks in demanding industrial environments as well as food and beverage. Moving to Slide 7, we have some exciting news to share.

We achieved placement on the DJSI World and DJSI North America Indices. Our score of 81 on the S&P Global Corporate Sustainability Assessment puts us at the Number One in North America and Number Four in the world within our industry, which means that we are in the top decile of global companies. This is a perfect example of how we leverage IRX for agile execution across all aspects of our business. In this case, we use our own IRX execution process to go from being unranked to now in the top 10% of all companies (ph) by S&P Global. I will now turn the presentation over to Vik to provide an update on our Q4 and full year 2022 financial performance.

Vik Kini: Thanks, Vicente. On Slide 8, we finished the year with strong performance in Q4 through a strong balance of commercial and operational execution, fueled by IRX despite the ongoing macroeconomic uncertainty. Total company organic orders and revenue increased 2% and 19% year-over-year, respectively. We remain encouraged by the strength of our backlog, which is up 30% year-over-year, equate over $2 billion of backlog. This provides a healthy backlog to execute on as we enter 2023 and gives us conviction in delivering our 2023 revenue guidance. The company delivered fourth quarter adjusted EBITDA $420 million, a 23% year-over-year improvement, and adjusted EBITDA margins of 25.9%, a 180 basis point year-over-year improvement and a 110 basis point improvement sequentially from Q3.

For the quarter, adjusted EPS was up 6% versus prior year. This is despite some meaningful headwinds that I will explain shortly. Free cash flow for the quarter was $321 million, despite ongoing headwinds from inventory due to global supply chain challenges as well as the need to support backlog. Total liquidity of $2.7 billion at quarter-end was up approximately $100 million sequentially. Our net leverage continues to improve year-over-year and sequentially. At 0.8 turns, we’re 0.3 turns better than the prior year and 0.2 turns better than prior quarter. Turning to Slide 9. For the total company, Q4 orders grew 5% and revenue increased 21%, both on an FX-adjusted basis. Total company adjusted EBITDA increased 23% from the prior year, with the ITS segment margin increasing 170 basis points, while the PST segment margin improving 330 basis points.

It’s important to note that both segments are price/cost, dollar and margin positive, which speaks to the nimble actions of our team despite ongoing inflationary headwinds. Corporate costs came in at $33 million for the quarter. And finally, adjusted EPS for the quarter was up 6% to $0.72 per share. This 6% growth includes significant headwinds associated with FX as well as favorability in the prior year tax rate due to one-time benefits that were not expected to recur and an ongoing headwind associated with interest expense. The adjusted tax rate for the quarter was 19.7%, with the full year adjusted rate finishing slightly below 22%. On Slide 10, total company full year orders grew 16% and revenue increased 21%, both on an FX-adjusted basis.

Total company adjusted EBITDA increased 20% from the prior year. The ITS segment margin increased 100 basis points, while the PST segment margin declined 70 basis points. When adjusted to exclude the impact of M&A completed largely in 2021, PST adjusted EBITDA margin increased by 60 basis points. As you recall, most of the decline in adjusted EBITDA margins throughout the year was due to the Seepex acquisition. I am pleased to report that Seepex is another amazing story where we acquired a business at mid-teens EBITDA margin and the exit rate in Q4, just five quarters after the acquisition, is in the mid-20%s. We are well underway to getting Seepex to our PST fleet average EBITDA margin. We continue to see sequential increases in PST’s adjusted EBITDA margins and now PST margins are generally back in line with where we have seen them historically, at approximately 30%.

Both segments, finished the year price/cost, dollar and margin positive, which was a major driver of the company’s overall triple-digit adjusted EBITDA margin expansion. Corporate costs finished the year at $127 million, down $6 million from prior year, largely due to adjustments in management incentive costs. And lastly, adjusted EPS for the year was up 13% to $2.36 per share. It is important to note that the adjusted EPS growth includes significant one-time headwinds associated with FX, prior year tax rate and interest expense. If you exclude the impact of these headwinds, our adjusted EPS growth would have been over 20%. Moving to the next slide, in 2022, we returned $294 million to shareholders through share repurchases and dividends. Free cash flow for the quarter was $321 million, including CapEx, which totaled $34 million.

And total company liquidity now stands at $2.7 billion, based on approximately $1.6 billion of cash and $1.1 billion of availability on our revolving credit facility. It’s important to note that these figures include approximately $525 million of cash, which has subsequently been deployed for the SPX Flow’s Air Treatment business acquisition on January 3, 2023. Leverage for the quarter was 0.8 turns, which was 0.3 turn improvement year-over-year. And cash flow outflows for the quarter included a $184 million deployed to M&A, $8 million to our dividend payment and $3 million for share repurchases. M&A remains our top priority for capital allocation and we continue to expect M&A to be our primary usage of cash. I will now turn the call back to Vicente to discuss our segments.

Vicente Reynal: Thanks, Vik. On Slide 12, our Industrial Technologies and Services segment delivered strong year-over-year organic revenue growth of 22%, with volume growth outpacing growth from pricing. Adjusted EBITDA increased 24% year-over-year with an adjusted EBITDA margin of 27.4%, up 170 basis points from prior year with an incremental margin of 38%. We also delivered sequential margin expansion of 120 basis points from Q3 to Q4. We continue to see solid demand for our products with organic orders up 4%. Note that on a two-year stack the ITS segment organic orders grew more than 20%. Moving to the individual product categories. Each of the figures exclude the negative impact of OpEx, which year-over-year was (ph) percentage point headwind across the total segment on both orders and revenue.

Starting with compressors, we saw orders up in the low-single digits and we continue to see oil free products orders outpacing oil lubricated products. Orders were down mid-single digits in the Americas, driven by a large order push from Q4 to the first quarter of 2023. EMEIA demand continues to be above market, with orders up mid-single digits. The Asia-Pacific team continues to deliver great performance with orders growth in the mid-teens, which is impressive when you think about that our team in China delivered double digit growth even throughout the COVID-related closures and disruptions. In vacuum and blowers, orders were up low-20%s level. And the power tool and lifting global orders grew mid-single digits. Moving to the innovation in action portion of the slide, we’re highlighting our footprint expansion in India, which is another organic investment initiatives we’re drive.

We have seen significant growth in India and we continue to drive opportunities for in region for region manufacturing, which is driving the need for increase in our footprint. Turning to Slide 13. Revenue in the Precision and Science Technologies segment grew 9% organically. Additionally, the PST team delivered adjusted EBITDA of $93 million, which was up 20% year-over-year, with incremental margins of over 80%. Adjusted EBITDA margin was 30.1%, up 330 basis points year-over-year. We continue to see sequential improvement in our adjusted EBITDA margins driven by price/cost improvement and synergy delivery on our recently completed M&A, such as Seepex. Organic orders were down 2% year-over-year as Q4 comps were challenged due to headwinds from a single large hydrogen order intake in Q4 of 2021, which will deliver a network of refueling stations in New Zealand.

Adjusting for these hydrogen order, normalized organic orders were up slightly. And on a two-year stack, organic orders are up double digits. For our PST innovation in action, we’re highlighting our EVO Electric Diaphragm Pump. This recently launched product is the only-electric triple-chamber diaphragm pump in the market. The EVO Series pump is utilizing high-growth end markets, such as electric vehicle batteries, specialty chemical manufacturing and food and beverage applications. This product offers significant energy savings, leading to faster payback times for our customers. And this is yet another perfect example of sustainability as a growth driver and our focus on high-growth sustainable end markets, enabling us to deliver double-digit earnings growth.

As we move to Slide 14, we’re introducing our 2023 guidance. Total company revenue is expected to grow between 7% to 9%, with the first half growth of 9% to 11% and the second half growth of 4% to 6%. We anticipate organic orders growth of 3% to 5%, where price is approximately 70% and volume 30%. FX is expected to contribute approximately 1% of a headwind for the year, of which the impact will primarily be realized in the first half of the year. M&A is projected at $270 million, which reflects all completed and closed M&A transactions in 2022 as well as the acquisition of SPX Flow Air Treatment and Paragon Tank Truck. Corporate costs are planned at $140 million and will be incurred evenly per quarter throughout the year. The year-over-year increase is largely driven by investment in IIoT and demand generation.

Total adjusted EBITDA for the company is expected to be in the range of $1.57 billion and $1.63 billion. At the bottom of the table, we’re introducing adjusted EPS guidance. While we have not historically guided EPS, we will now include (ph) metrics moving forward. Adjusted EPS is projected to fall within the range of $2.48 and $2.58. We anticipate our adjusted tax rate to be in the low-20%s, interest expense to be approximately $165 million and CapEx to be around 2% of revenue. The right hand side of the page includes a 2023 full year guidance bridge showing the growth associated with operational activity and the headwinds associated with interest expenses, FX and changes in the adjusted tax rate. Based on the above guidance, adjusted EPS growth attributed to operational performance, is approximately 13% to 17%, offset by approximately 8% in headwinds from interest expense, FX and the adjusted tax rate.

As we sit here in mid-February and to provide some Q1 commentary, it is worth noting that we have seen organic orders continue to be positive on a quarter-to-date basis through the first week of February, which is consistent with our expectations. Turning to Slide 15. As we wrap up today’s call, I want to reiterate that Ingersoll Rand is in a solid position. We finished 2022 with strong Q4 results. We continue to monitor the dynamic market conditions, while remaining agile and prepared for any challenges that may come. To our employees, I want to thank you again for an excellent finish to the year. We delivered strong results by demonstrating our commitment to meet our financial targets and executing our economic growth engine through the strong use of IRX.

Thank you for your hard work, resiliency and focus actions. These results show the impact you have as owners of the company. Our balance sheet is strong. And with our disciplined and comprehensive capital allocation policy and strategy, we remain resilient and have the capacity to deploy capital to investments with the highest return as we continue our track record of market outperformance. With that, I will turn the call back to the operator and open for Q&A.

See also George Soros’ Top 15 Holdings and 12 Most Profitable Utility Stocks.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. We have our first question from the line of Mike Halloran of Baird. Your line is now open.

Mike Halloran: Hey, good morning, everyone.

Vicente Reynal: Good morning, Mike.

Vik Kini: Good morning.

Mike Halloran: Can we go through the first half-second half cadencing you’re talking about? Obviously, FX gets a little more favorable in the back half of the year, but the growth rate is slowing. How much of that’s organic versus just phasing of acquisitions? And then, is it just price? Is it an assumption on the macro environment being a little bit worse? Just kind of any puts and takes on how you think about the seasonal factors 1H versus 2H?

Vicente Reynal: Yes. Hey, Mike. I’ll say that facing comparable to what we have seen historically. Clearly, the item to watch is that, as expected, comps become more meaningful as we go into the back half of the year. And we don’t have anything to assume in our guidance or the phasing related to supply chain returning to normalization and/or significant commodity deflation either. And so, in terms of the organic, I mean, second half, based on that and the tough comps, we say kind of roughly flattish. And as we said on the remarks, good continued momentum that we see on price. And what we expect is that we expect as we go through the year to see continued strength on kind of what we call the long cycle orders, which are driven by a lot of these megatrends that we’ve spoken about before in the past around sustainability, onshoring and things like that. So, net-net, that leads us to believe that we just don’t see significant changes in our backlog as we go through 2023.

Mike Halloran: So, you’re essentially assuming a pretty normal sequential cadencing and not much change in the macro backdrop, if I interpret that correctly, Vicente?

Vicente Reynal: That’s correct. Yes, that’s correct. And basically, as you can see, a bit of a prudency here in the second half.

Mike Halloran: Yes. No, that helps. And then, on the M&A side, obviously, the backdrop has changed a little bit, not for you all. You guys seem to still see very high levels of success here. Maybe you could just talk about what the buyer’s mentality is? Obviously, you’ve got a lot of deals you’re working on, the LOIs are high. Have you seen a greater willingness by buyers to move forward and consummate some of these transactions? Has there been any change in that landscape at all?

Vicente Reynal: Yes, Mike, I will say that the simple answer is, yes, in the sense that — keep in mind, yes, we’re seeing much stronger momentum as we talk to a lot of the sellers out there. And — but it has to do primarily because keep in mind that 90%-plus of our deals and transactions are sole sourced. So, we have really long-standing cultivating relationships with the company that we’re looking for to be attracted to Ingersoll Rand. And the relationship goes along the lines of understanding that, hey, you know, there continues to be all these changes that happen every year, and (ph) ownership is realizing that we are a great place for them to continue to kind of keep the legacy and treat employees in a very unique way the way we do.

And that is driving the continued momentum of being able to open the door and have a much better conversation with a lot of these companies that we want to bring to Ingersoll Rand. So, again, I think that’s what gives us the confidence that our M&A funnel continues to be very strong. And the fact that you see that we still have 11 transactions under LOI and the momentum continues to get accelerated. So, yes, we’re very pleased with what we’re seeing here.

Mike Halloran: Thanks, Vicente. Appreciate it.

Vicente Reynal: Thanks, Mike.

Operator: Thank you. We now have Julian Mitchell from Barclays. Your line is open.

Julian Mitchell: Hi, good morning. Maybe just…

Vicente Reynal: Good morning.

Julian Mitchell: …the first question I wanted to start with — good morning, just to start with the top-line outlook. And just to understand it, so it sounds like you think that, that backlog stays at about $2 billion through the year, a book to bill around 1 for the year as a whole. And then, within the second half, organic sales guide, you’re assuming sort of volumes are down slightly, but that’s solely a function of comps, it’s not related to destocking or any particular region softening or anything like that?

Vicente Reynal: Yes, that is absolutely correct, Julian. Yes, that’s accurate. And again, we’re saying that we’re viewing these as — perfect. No, I was going to add to that, Julian, as I said on the answer before too as well, we view these as a prudency right now at this stage, and, as you know, we’ll continue to update as the year goes, kind of not to the similar to what we did here in 2022.

Julian Mitchell: That’s helpful. And then, just on the thinking about the sort of the earnings seasonality, because I know in 2022, we spent the whole year, people fretting about the sort of Q3, Q4 ramp in EBITDA margins and the implied incrementals in the back half and all the rest of it. So, just to understand, for 2023, are you assuming kind of first half, second half EPS split? Is the consensus split roughly okay at sort of 45/55 and then anything you’re kind of calling out year-on-year moving around much in the back half?

Vik Kini: Yes. Julian, this is Vik. I’ll take that. I think the answer is that, that’s correct. I think the phasing of whether you want to talk about top-line or on the earnings side of the equation is very consistent with what you’ve seen historically. I think the margin implication on from an adjusted EBITDA perspective is, roughly speaking, close to 100 basis points on a total year basis for total company, which remains relatively consistent and right in line with what we messaged at our last Investor Day. So, again, nothing dramatically different there, but yes, the phasing is very much consistent with what you’ve seen in years past.

Julian Mitchell: That’s great. Thank you.

Operator: Thank you. We now have Jeff Sprague of Vertical Research Partners. Please go ahead when you are ready.

Jeff Sprague: Thank you. Good morning. Hey, just on the price/cost…

Vicente Reynal: Good morning.