Ingersoll Rand Inc. (NYSE:IR) Q2 2023 Earnings Call Transcript

Ingersoll Rand Inc. (NYSE:IR) Q2 2023 Earnings Call Transcript August 3, 2023 Operator: Thank you for standing by. My name is Kayla Baker, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ingersoll Rand Q2 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to, Vice President of Investor Relations, Matthew Fort. You may begin. Matthew Fort: Thank you, and welcome to the Ingersoll Rand 2023 second 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 yesterday 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 everyone 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, 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 an update to our 2023 guidance. For today's Q&A session, we ask that each caller keep to one question and one follow-up to allow time for other participants. At this time, I will turn the call over to Vicente. Vicente Reynal: Thanks, Matthew, and good morning to all. I would like to begin by thanking and acknowledging all of our employees for their hard work in helping us to deliver another record quarter in Q2. Our employees continue to deliver on our commitments, despite the constantly changing macroeconomic environment, and consistently exemplify our purpose while thinking and acting like owners. I would also like to welcome, our new employees from our recent acquisitions. Together, we have a great opportunity to build upon our strong complementary brands, products and capabilities, providing customers and the industry with a broader spectrum of solutions. Beginning on slide 3, fueled by our competitive differentiator, IRX in the second quarter, we delivered double-digit growth in revenue, adjusted EBITDA, adjusted EPS and free cash flow. We recently published our 2022 sustainability report, where we yet again delivered industry-leading results, while remaining on track to meet our 2030 sustainability goals. Finally, based on our continued robust performance in Q2, we're once again raising our 2023 full year guidance. As we move to slide 4, our economic growth engine is the key, to how we deliver compounding annual results. During our last Investor Day in Q4 of 2021, we presented this model and highlighted our organic, inorganic and quality of earning growth enablers. We remain committed to our strategy and our long-term Investor Day targets outlined in this page. On the next slides, I will provide you with deeper insights into our organic initiatives, which are centered, around product innovation and innovative value also known as i2V. In addition, we will provide an update on our progress towards our inorganic goals. Turning to slide 5, we start with our organic growth initiatives. Here, we have some examples of how in China, we have leveraged products localization as well as i2V to drive organic growth. On the left-hand side of the page, we show how localization has created new product offerings and enabled channel expansion all with a focus on high-growth sustainable end markets. Since the Gardner Denver and Ingersoll Rand merger, our blower and vacuum product lines have grown organically at a 17% CAGR. On the right-hand side of the page, we have an example of organic growth through the combination of recently acquired M&A and i2V. As you can see in the pictures at the bottom right-hand side of the page, the Asia Pacific team conducted a turndown event with legacy products, recently acquired M&A and competitive technologies. The outcome of that turndown event is the development of a new oil-free screw vacuum pump. This new product will expand our addressable market by over $350 million, and will go from development to launch in approximately six months. Next, on Slide 6, M&A continues to be at the forefront of our capital allocation strategy. We are thrilled to highlight our recently signed M&A deal Roots. This iconic Roots brand is a leading provider of low-pressure compression and vacuum technology. This brand is synonymous with blowers in the same way that clinics and Bandaid are recognized in consumer markets. We're very excited to acquire this iconic brand, which has been in business for almost 200 years. The acquisition also expands our capabilities in both low-pressure technology and centrifugal technology. And this technology is a critical component in the process of green steel manufacturing. Our M&A funnel remains strong. And as of today, it continues to be over five time larger than it was at the time of the R&D. We currently have seven transactions at the LOI stage. And more importantly, we have several other transactions in process, which are close to the LOI stage. Based on acquisitions to date, the seven transactions under LOI at our current M&A funnel, we are reaffirming our commitment to an additional $200 million to $300 million in annualized inorganic revenue to be acquired in 2023. On Slide 7, we recently released our 2022 sustainability report, showcasing the commitment and results of our strategic imperative leads sustainably. We have made significant progress in establishing ourselves as a top quartile ESG company by leveraging our competitive differentiator, IRX to deliver results in a very short period of time. In fact, we have received several industry-leading sustainability acknowledgments of our efforts, including being named to both the Dow Jones Sustainability World Index and the Dow Jones Sustainability North America Index. Ingersoll Rand was ranked as the number one performer in the IEQ machinery and electrical equipment industry in North America and number four globally in 2022. As a very close 2023, Ingersoll-Rand received an ESG risk rating of low at 12.8% from Morningstar Sustainalytics. We also received an ESG rating improvement to AA in 2023 from MSCI and ranked as a leader among 47 companies in the industrial machinery category. More important, we're also leading the way in the social aspect of ESG with our employee ownership model. We believe employee ownership creates economic opportunity for our employees and their families while driving increased employee engagement as our long-term shareholder. To that end, we have awarded approximately $275 million since 2017 in equity to our employees, employees that are not already on the management equity program. This has increased to over $660 million in value as of June 30, 2023. We will continue to offer our ownership works program that grant equity to all new employees after the 1-year anniversary. Our employees are a critical element of our business and making life better for them begins with opportunity. Through their engagement and commitment, we are on track to meet our 2030 sustainability objectives. With this, I'll turn now the presentation over to Vik to provide an update on our Q2 financial performance. Vik Kini: Thanks, Vicente. On slide 8, fueled by IRX, we again delivered solid results in Q2 through a balance of commercial and operational execution. Total company organic orders and revenue increased 5% and 12% year-over-year, respectively. Book-to-bill was 1.03, and we remain encouraged with the strength of our backlog, which is up approximately 12% year-over-year and up approximately 5% sequentially. The backlog is approximately 45% higher than it was at the end of 2021, which gives us good visibility and momentum as we move into the back half of 2023 and start to look into 2024. The company delivered second quarter adjusted EBITDA of $425 million, a 27% year-over-year improvement and adjusted EBITDA margins of 25.2%, a 190 basis point year-over-year improvement. For the quarter, adjusted diluted earnings per share was $0.68, up 25% versus the prior year. Free cash flow for the quarter was $204 million, despite ongoing headwinds from inventory due to the need to support backlog as well as continued global supply chain challenges. Even with these headwinds, free cash flow was up 24% versus prior year. Total liquidity of $3.2 billion at quarter end was up approximately $1 billion sequentially. This increase was driven in large part due to the recently amended, extended and upsized revolving facility, which took place in early Q2 of this year. Our net leverage continues to remain near all-time lows. At 1.0 turns, we are 0.1 turns better than both the prior year and prior quarter. Finally, I'd like to highlight an example of the power of our ownership mindset and the effectiveness of our competitive differentiator, IRX. Due to the team's resiliency in overcoming the cybersecurity incident, the Q2 revenue and adjusted EBITDA risk associated with the incident was mitigated within the quarter. This is no small task, and I would like to thank all of our employees that were involved in helping to overcome this impediment, enabling us to deliver tremendous results in Q2. Turning to slide 9. For the total company, Q2 orders grew 10% and revenue increased 18%, both on an FX-adjusted basis. Total company adjusted EBITDA increased 27% from the prior year. The ITS segment margin increased 200 basis points, while the PST segment margin improved 240 basis points. Notably, both segments remain price cost dollar and margin positive, which speaks to the nimble actions of our teams despite persistent inflationary headwinds. Corporate costs came in at approximately $43 million for the quarter, driven by continued investments to support growth in areas like demand generation and IIoT as well as the impact of incentive compensation adjustments. Adjusted diluted earnings per share for the quarter was up 25% to $0.68 per share. This $0.14 year-over-year increase includes a $0.04 headwind from interest expense. And finally, the adjusted tax rate for the quarter was 24%. Moving on to the next slide. I want to highlight that the company was assigned an investment-grade first-time issuer default rating from Fitch. We have now received investment-grade ratings from two of the three major rating agencies, and we remain committed to becoming an investment-grade rated across all of our rating agencies. Free cash flow for the quarter was $204 million, including CapEx, which totaled $25 million. Total company liquidity was $3.2 billion based on approximately $1.2 billion of cash and $2 billion of availability on our revolving credit facility. Cash outflows for the quarter included $49 million deployed to M&A and we returned $64 million to shareholders through $56 million in share repurchases and $8 million in dividends. M&A remains our top priority for our capital allocation, and we continue to expect M&A to be our primary usage of cash for the foreseeable future. We continue to have an active and healthy funnel of inorganic growth opportunities. This funnel consists primarily of bolt-on M&A relatively similar in size, scope and nature to the assets we have acquired over the past two to three years. I will now turn the call back to Vicente to discuss our segment results. Vicente Reynal: Thanks, Vik. On Slide 11, our Industrial Technologies and Service segment delivered strong year-over-year organic revenue growth of 14% with volume growth slightly outpacing pricing. Adjusted EBITDA increased 29% year-over-year with an adjusted EBITDA margin of 27.4%, up 200 basis points from the prior year with an incremental margin of 38%. We continue to see solid demand for our products with organic orders up 8% and a book-to-bill of 1.05. Note that on a two-year stack, ITS organic orders have grown 19%. Moving to the individual product categories. Each of the figures exclude the negative impact of FX, which year-over-year was approximately a 1.5 percentage point headwind across the total segment on both orders and revenues. Starting with compressors, we saw orders up in the low double digits. We continue to see oil free product orders outpace oil lubricated products. Orders were up low double digits in the Americas, with North America also up low double digits, demonstrating that we continue to see momentum from secular trends around ESG, on-shoring and near-shoring as well as continued investments on energy savings. EMEIA demand continued to be above market with orders up high single digits. The Asia Pacific team continues to deliver a great performance with order growth in the mid-teens, driven by continued solid execution from our team in China where they saw orders up in the low 20s. Today, we showed on Slide 5, an example of how the team in China continues to outperform the market conditions with our own self-help initiatives. Vacuum and blower orders were up mid-teens and every region saw positive orders with good strength from Europe. Orders in the power tools and lifting business was up low single digits. Moving now to the innovation and action portion of the slide, we're illustrating an oil free hydrogen compressor recently launched in EMEIA. This product is a perfect example of how we continue to focus our portfolio on high-growth, sustainable end markets with region-for-region manufacturing. The EMEIA team collaborated with a clean energy tech startup in the Netherlands to develop and build a system for our innovative hydrogen process, and the first unit was shipped in July. Turn to Slide 12. Revenue in the Precision and Science Technology segment grew 5% organically. Additionally, the PST team delivered adjusted EBITDA of $90 million, which was up 16% year-over-year with incremental margins of 66%. Adjusted EBITDA margin was 29.2%, up 240 basis points year-over-year. The year-over-year improvement in adjusted EBITDA margin is driven primarily by price cost improvements, synergy delivery on acquired businesses like Seepex, and the impact of China lockdowns in the second quarter of 2022, which did not repeat. Organic orders were down 10% year-over-year with a book-to-bill of 0.95 times. It is important to note that the book-to-bill was one-time for the first half of the year. The primary driver of the organic order decline related to larger frame orders not repeating in the life science businesses, as well as the expected decline of longer cycle orders in the Agritech platform. Our book and ship business was solid, and we believe that the core business within PST remains very healthy. For PST innovation in action, we're highlighting our new peristaltic pump technology that is used for water treatment, industrial and life sciences market. This product innovative design provides a robust alternative for chemical dosing and transfer applications. The products are IoT-ready and complement our already strong portfolio of products for water treatment and chemical applications offering customers the opportunity to choose the best technology for each application. Leveraging this technology across both Albin Pump and LMI brands, we continue to execute our multi-brand, multi-channel strategy while expanding our addressable market by over $250 million. Moving to slide 13. Given the solid performance in the first half and continued momentum from backlog, we're again raising our 2023 guidance. As you may recall, during Q1 earnings, we guided an anticipated impact of approximately $20 million of adjusted EBITDA moving out of Q2 and into the back half of the year due to the cybersecurity incident that we experienced in late April. As Vik mentioned earlier, this risk was mitigated within the quarter and no significant revenue or adjusted EBITDA is now expected to have been pushed into the back half. We have included some additional commentary on the bottom right-hand side of the page, outlining the increase in full year guidance incorporating the impact from the Q2 outperformance and the improvement in organic growth expectations in the second half of the year. For the full year, total company revenue is expected to grow overall between 12% and 14%, which is a 200 basis point improvement versus our previous guidance. We anticipate organic growth of 8% to 10%, where price and volume is split approximately 60-40. FX is now expected to be a slight headwind, however, approximately flat on a full year basis. Our revenue from M&A has increased $30 million to approximately $300 million. This increase reflects the impact from all completed and closed M&A transactions as of August 1, 2023. Corporate costs are planned at $165 million and will be incurred relatively evenly per quarter throughout the year. Total adjusted EBITDA for the company is expected to be in the range of $1.69 billion and $1.74 billion, which is up 2% versus prior guidance and up 7% versus our initial guidance. At the bottom of the table, adjusted EPS is projected to be within the range of $2.70 and $2.80, which is up 17% year-over-year at the midpoint. No changes have been made to our guidance on the adjusted tax rate, total interest expense or CapEx spend as a percentage of revenue, all remain in line with both initial and prior guidance. Turning now to slide 14. As we wrap today's call, I want to reiterate that Ingersoll Rand remains in a strong position. We continue to deliver record results and our updated guidance is reflective of our Q2 performance and ongoing backlog momentum. We remain nimble. We continue to monitor the dynamic market conditions, and we're prepared for the challenges that may come. To our employees, I want to thank you for an excellent first half of the year. These results show the impact that each of you have as owners of the company. However, we're still a long way to go, and we need to remain focused on our commitment to meeting our financial targets and executing our economic growth engine through the use of IRX. Thank you for your continued hard work, resiliency and focus action. As we continue our track record of market outperformance, our balance sheet is as strong as ever. And with our disciplined and comprehensive capital allocation strategy, we remain resilient and have the capacity to deploy capital to invest with the highest return. With that, I'll turn the call back to the operator and open the call for Q&A. See also 20 Highest Rated Pilsner Beers in 2023 and 15 Worst Performing NASDAQ Stocks In 2023.

Operator: [Operator Instructions] Our first question comes from the line of Michael Halloran with Baird. Your line is open. Michael Halloran: Hey, good morning, gentlemen. So can we just talk about how the underlying trends you saw through the quarter, maybe any sequential commentary and a focus on where you saw any changes positively or negatively, or is the demand environment essentially cadencing how you would have expected -- on an underlying level? Vicente Reynal: Yeah, I'll say, Mike, we saw the sequential cadence in the quarter, very comparable to what we always see, which is typically lower on month one and kind of starts ramping up through the quarter, and we saw that happening pretty well. So nothing that, we will call anything different out of color. So -- which obviously continues to show that there is good cadence and momentum and that more important for us to as well is the leading indicators. And particularly as we always talk about the MQLs, those marketing qualified leads that we generate with our demand generation engine. And that continues to see good sustainable pace momentum across the product lines, which is encouraging to see. Michael Halloran: And on the PST side, can you just put those orders in context a little bit. I certainly understand the Agritech side and some of the larger projects, orders not repeating. But it sounds like things are healthy when you exclude those 2 pieces. And maybe a little bit of help on how you expect the order trends to track from here and recovery curves in some of those markets? Vicente Reynal: Yeah. Sure, Mike. I mean I think you said it very well. I mean, I think what we continue to see that we get excited is that the book and turn business remains pretty strong in the business, which you could call it the short cycle side of the business. And then what we saw here in the quarter, it was just that lumpiness with Agritech with some of our businesses that last year, we're doing on some large projects and also some of the oxygen concentration business that kind of similar to what we spoke in the first quarter of kind of large frame orders that happened last year, not this year. So I guess -- so with that, I think we continue to stay very encouraged. We see that the trend in the PST segment continues to be to deliver that mid-single-digit plus. I mean, there's definitely no over the cycle and over time. So there's no change in that long-term perspective of what we can achieve here in the PST team with the PST segment, and we anticipate continued momentum here. So, yes. Michael Halloran: Thanks, Vicente. Vicente Reynal: Yeah. Thank you, Mike. Operator: Your next question comes from the line of Julian Mitchell with Barclays Capital. Your line is open. Julian Mitchell: Thanks very much. Good morning. Maybe first question just around that split of sort of how you see the second half playing out between Q3 and 4. I think the guide embeds are sort of low 70s EPS figure each quarter, but just wondered about how much of that ends up being weighted into Q4 and if there's any big difference between the two segments from that standpoint? Vicente Reynal: Yes. Julian, for total Ingersoll Rand on revenue and adjusted EBITDA margin Q3 looks a lot like Q2. And I'll say for Q3 on a year-over-year basis, remember that comps get increasingly more difficult. And as we think about the segments, ITS, for example, ITS is expected to grow revenue still at low double digit, including the impact of M&A, and as a reminder, I mean, think about that tough comp where Q3 of last year, we grew 19% organically. So that's kind of what we talk about those tough comps. But we still see a good line of sight to about 100 basis points of margin expansion in ITS. And PST is expected to grow mid-single digits. And as a reminder, that's on top of 20% growth in Q3 of 2022 and margins to be expected back again into that 30% level of EBITDA. Julian Mitchell: That's very helpful. Thank you. And then just secondly, when you're thinking about the sort of firm-wide orders and backlog trajectory from here across both businesses. Are we thinking sort of orders flattish organically year-on-year in the back half and then the sort of backlog maybe starts to drift down a bit sequentially, just as those lead times shorten. And so sort of customers can adjust their orders a little bit? Vicente Reynal: Yes. Julian, yes, I mean, clearly, we don't specifically guide on orders. But again, as a reminder, our Q3 prior year is probably 1 of the toughest comps for orders. As I recall, Q3 last year was roughly 14% organic order growth momentum, so very solid. In terms of the backlog, I'll say, we do anticipate backlog to drift down a little bit in the back half as we mentioned in the past, I mean, the normal cadence for orders is typically a book-to-bill greater than one in the first half due to larger longer projects and booking in the first half has been -- and booking in the second half being kind of less than one due to those larger orders kind of getting shipped most predominantly in the fourth quarter. Having said that, as a reminder, I think the past nine quarters out of 10 quarters, we had a book-to-bill of greater than one, so -- which obviously speaks again to the comps that we're seeing here.

Julian Mitchell: That makes sense. Thanks very much. Vicente Reynal: Thank you. Operator: And your next question comes from the line of Jeff Sprague with Vertical Research. Your line is open. Jeff Sprague: Hi. Thanks. Good morning, everyone. Vicente Reynal: Good morning, Jeff. Jeff Sprague: Hi, good morning. Vicente, can you elaborate a little bit more on your talking about demand in ITS and compressors in particular, you noted reshoring and ESG? I guess on the ESG side, you're pointing to kind of energy efficiency sort of investments and retrofit. But a, is that the case? And b, can you just elaborate a little bit on what you're seeing in those two buckets? Vicente Reynal: Yes, Jeff. So absolutely. I mean, again, we're very pleased with the momentum that we saw on the compressor product line, and particularly, you saw that oil-free compressor outpacing the growth and that was kind of high 20s momentum that we saw on the oil-free. So very, very exciting to see that one of the core strategies that we launched continues to actually see some fruit and growth. In terms of ESG, I mean we continue to see that the energy savings, again, based on the return on the investment that we have conversations with customers still is resonating quite well and -- so that momentum continues. Our few earnings ago, we spoke about the air audits that we're doing. We continue to do that at a faster clip than ever before, and that's really driving a lot of good leading data points for us as we see kind of moving forward. And from a reshoring, yes, it's kind of whether you think about reinsuring companies expanding capacity or reallocating their supply chains more locally. I talked about also near-shoring because clearly, in Mexico, we're seeing a lot of expansion too as well. And we have a very strong team as well in Mexico there that is really capturing some good momentum to as well. But this reshoring is happening here in the U.S. We see it, that's why we reopened Buffalo at that time, but we also see it in India, and we see it in China as well. So we see good momentum of companies really investing in the core technologies and in particularly here, the compressor systems. Jeff Sprague: And maybe you could give us a little color on service too, Vicente. I would imagine if customers are going through the air audit process that creates quite an opportunity for service and stickier service attachment on the back end. Where are you at now on service as a percent of revenues? And how is that growing? Vicente Reynal : Yes, absolutely. Jeff, particularly the statistic that we said before is that roughly these are audience, we see kind of a 70-30, 70% leading to new equipment, but 30% leading to actually incremental service revenue. And we've seen good momentum in terms of -- we spoke a lot about Care and the Packaged Care solutions, the team in North America continues to really accelerate that. And we're seeing now better momentum as well in our team in Europe and also in team in Asia. So yes, this continues to be very front and center in our strategy and particularly as we continue to connect more compressors with our remote monitoring devices and be able to capture more recurring revenue here. So yes, we continue to be actually a one that we see good momentum to come. Jeff Sprague: Great. Thank you. Vicente Reynal : Thank you. Operator: And the next question comes from the line of Rob Wertheimer with Melius Research. Your line is open. Rob Wertheimer : Hey, good morning. Vicente Reynal : Good morning. Rob Wertheimer : Vicente, I think you touched on China, APAC orders and compressors up mid-teens. I think that's comping mid-teens. And so -- I know you called out kind of the good job the team has done there. Is there any particular end market strength in China that's adding to that? I think we've seen China be a drag elsewhere in industrials. And then just in general, I don't know if you can expand on your market position there and the broader efforts you're doing? Thank you. Vicente Reynal: Yes, Rob, I think there's definitely some in markets that strategically we're going after more pronouncedly than others because we're seeing the growth in those you could think about electric vehicles, battery production, lithium, mining and things like that. But a lot of that, as you very well said too, as well, it kind of continues to change end markets. And I think the ability for us to pivot from 1 end market that has seen some growth to the other end market that are starting to see the spurt of growth, that is what I think is very core to what the team very nimbly is doing. In addition to that, I think what's exciting is the combination of the Gardner Denver and Ingersoll Rand company, where the team in China is leveraging a lot of the kind of, call it, legacy Gardner Denver products of blowers and the vacuums to really accelerate growth.

And that's, as you saw on Slide 5, how we see this organic revenue CAGR of 17% on this kind of core product line and technology. So I'll say, yes, the team is firing on all cylinders this morning as I was driving, I was actually chatting with our leader in China. He's actually -- was actually our -- he was with the team at our innovation center in China and doing a review of their new product technologies and he was living super inspire and excited. So again, it's just a good team, solid performance and very happy with how the team continues to navigate this tough environment in China. Rob Wertheimer : Excellent. Thank you. Vicente Reynal: Thank you. Operator: And the next question comes from the line of Andy Kaplowitz with Citigroup. Your line is open. Andy Kaplowitz : Good morning everyone. Vicente Reynal: Hi, Andy. Andy Kaplowitz: Vicente, could you give us a little more color into the dynamics of your compressor order strength in the sense that, I think, historically, you've had 20% cycle versus 80% short cycle. The long cycle business is currently much stronger than short cycle in one end markets. If you could give us some detail or driving the most order growth right now? Vicente Reynal: Yeah. I would say Andy, maybe not a dramatic change. I mean, maybe instead of being 80-20, could it be 70-30, potentially? Yes. But not in such a dramatic way. So we see good momentum on the long and the short, I think what we're very happy with is the performance of the oil-free. Oil-free, which tends to be higher level of technology, more difficult for others to penetrate. So we still see this as a main market and a product line that we see continued momentum for growth as we continue to take more share in a good way. Andy Kaplowitz: That's helpful. And then Vik, it looks like it's just a tweak, but I think you actually lowered your incremental margin forecast for the year to 35% versus 35% to 40% previously despite you beating margin in Q2, and I would imagine price versus cost of anything is getting better in the second half versus the first half. So could you give us more color into what you're seeing there? Vik Kini: Sure. Yeah, Andy. I think in terms of the last part of your question on the price cost, like we said before, we were very early in our pricing actions. I think right now, the expectation is the back half looks fairly comparable to how we were guiding before. I wouldn't call that a meaningful change. In terms of the margin tweak as you put it, it's just that, just a minor tweak. A couple of things to note, we did call out that there's some slight increase on corporate cost. We did have -- you saw some of the capital that was deployed to M&A. So we did actually have a technology acquisition that we completed in Q2 that right now, I'd say minimal revenue base to the cost base but one that we're very excited about for the future. So again, when you put those two in perspective, that's probably the meaningful portion there. And as we've always said, we're going to continue to invest in the business. I mean, as Vicente said, whether it be in Asia or anywhere else around the world. We're going to continue to invest in growth resources to drive out-performance from an organic growth perspective as we look forward. So I think that's the way we look at it in totality. But again, nothing in terms of a meaningful change in our opinion, from where we've been operating or prior guidance. Andy Kaplowitz: Appreciate it guys. Vik Kini: Thank you. Operator: And your next question comes from the line of Nigel Coe with Wolfe Research. Your line is open. Nigel Coe: Good morning. Vik Kini: Good morning, Nigel.

Nigel Coe: Thanks. Thanks for the question. Just wanted to maybe just take a different crack at the second half margin question, I think you talked about 3Q looking like 2Q, which makes sense. This feels like the guide doesn't embed much of a kick-up in 4Q and normally 4Q margins are substantially higher on volumes. So just wondering what are you expecting for 4Q. Maybe my math is wrong, that's -- please correct me. But it does feel like we don't have much of a seasonal uplift in 4Q? Vik Kini: Sure. Yeah. So Nigel, I think the way you've described Q3 is correct. If you think about ITS as Vicente earlier said, I think ITS will look fairly comparable to Q2. Now that being said, that still would embed nice margin expansion on a year-over-year basis. And we would expect on the PFT side for margins to get back to that 30% level, specifically in Q3. Now on the Q4 side of the equation, whether you're looking from a total company perspective or the individual components, I think it's actually going to be fairly comparable to what you've seen historically. Seasonally, it is the strongest quarter in the year. That's no different. So you will see a slight seasonal uptick from Q3 to Q4. But there is incremental margin expansion included in the Q4 guide, I would say it's not dramatically different than our prior guide in that respect. And the one thing to probably note here as we look and we got some of the questions about it earlier in terms of the cadence, kind of, like what we said before, we're still, I think, continue to remain prudent on the back half expectations, particularly Q4 on the volume side. And I think we would still acknowledge that's probably the single source of potential upside to the guide as we sit here, thinking specifically about organic volume in Q4. Nigel Coe: Okay, okay. That's fair. And then vacuum -- taking into wiz here, but the vacuum trends remain really strong, compressor. But I think Copco called out a bit of weakness in industrial vacuum, not just semi, but also a little bit of weakness in industrial. And you're obviously not seeing that. So are you seeing any signs of weakness developing in any of your end markets? And is there a reason why vacuum and compressor would be couple? Just curious there. Vicente Reynal: Yes. Nigel, I would say that the industrial vacuum is kind of what we call rough vacuum when you look at the total market segmentation of that. And I will say that we have a more bigger spectrum of technologies, whether it's crew vacuum, rotary vein, liquid ring. So, we will say that we have not only great technologies, but also good brands. In terms of what we're seeing in the market, I'd say stability from what we're seeing. You could argue that sometimes the industrial vacuum plays slightly different where the industrial compressors will pay. So industrial vacuum many times will play in chemical processes or petrochem and things like that, things of that nature. But in our view, we're very happy and very pleased with what the team again continues to do from my self-help initiative here on driving new technologies. I mean we spoke about some of the technologies, again, not only on that slide five on what China team is doing. But now there's also new technologies that the team in Europe are launching to as well to start capturing even more share. So, I'll say that very, very pleased with the performance of the team is driving. Nigel Coe: That’s great color. Thanks a lot. Operator: And the next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is open. Joe Ritchie: Hey, good morning guys. Vicente Reynal: Good morning Joe. Vik Kini: Hi Joe. Joe Ritchie: Maybe just following along Nigel's questions around just potential weakness. I know that you're seeing really good order trends across your businesses, but there's a real focus right now on companies that are seeing destocking across their channels. And so maybe just on your shorter cycle businesses, just maybe talk to us about whether you see any kind of risk to any piece of your business today on -- from a channel perspective? Vicente Reynal: Yes, Joe, I'll say maybe -- I'll start with the two big buckets, obviously, the ITS and PST. On the ITS side, a lot of the product -- I say the majority of the product that we have in the ITS is really customized to specific applications. So, it's very difficult to kind of at least on our technology to really have stock of those compressors in the shelves. It's basically high working capital for the distribution channel network that we have. So, we don't see much of that. At the same time, we have a very loyal channel and we have access and visibility to what levels of inventory they have. On the PST side, PST will be the 1 that maybe plays a little bit more on what we call the national distribution, national industrial distribution, at least particularly in the US here.

And on those, we track very on a monthly cadence, sell in and sell out. So, we have a visibility on how much we're selling to the channel and how much of that channel is selling out. So at least we get visibility with the level of inventory that is somewhat available in the shelves and whether it is getting destocking or overstocking, we're always proactively trying to prevent the overstocking. It's a situation that we just don't like to be entangled with. So I think -- I'd say we've been fairly proactive from that perspective to making sure that we're watching those trends carefully, nothing of material of note that we're seeing in terms of major destocking. But again, it has to do because there was not a lot of overstocking as well. So -- I don't know that helps, but that's maybe a little bit of color there. Joe Ritchie: No, that's great. I figured as much, but I had to ask the question. So that's helpful color, Vicente. And, I guess, the follow-on question really kind of want to maybe dig into this opportunity, this oil-free hydrogen compressor opportunity. Maybe talk a little bit more about what the opportunity is there and then specifically what the applications are today? Vicente Reynal: Yes, Joe, I mean, I'll say this is a very, very exciting opportunity and one that this, we have now an engineering center inside in our facility in India. We're now considered to be one of the only India companies in India that has the capability of actually testing hydrogen compression systems. Hydrogen is going to be, we think, a good growth vector in the market in India. So we're happy to be the first, and we're happy to be the ones with the largest lab and technology center in India at this point in time, which is the reason why on the prior earnings call, we spoke about the expansion that we're doing. In terms of market sizing, I mean, I think I'd say it's still early stages from the perspective. We don't want to put numbers at -- I mean, obviously, if you kind of trust what market dynamics are saying, these are kind of huge markets, but we're not going to size it here on this call. I think on the Investor Day, we'll definitely give you a little bit more color on this one. But again, this is one super exciting opportunity that technology that the team in India was able to develop and actually work pretty closely with a company in Europe to develop something really unique. And in this case, we were kind of the only company that could achieve the performance requirement that it was required by this technology company. So again, it speaks volumes to the investments that we continue to make in R&D and continued investments that we make in technologies that we think will play well for us in the future. Joe Ritchie: Awesome. Thanks, guys. Vicente Reynal: Yes. Thanks, Joe. Operator: And your next question comes from the line of Chris Snyder with UBS. Your line is open. Chris Snyder: Thank you. So Q2 really showed strength across all three geographies. And I understand that comps are obviously getting a good deal tougher into the back half of the year and price contribution is easing. But when you look at these three geographies, is there any one or any place where you see demand softening on the leading edge? Vicente Reynal: I mean, I think, Chris, note that our MQLs are demonstrating or showing. We're -- even as we look here into the month of early days in July, I'll say that there continues to be that sustained momentum that we were seeing in the second quarter from an MQL perspective. So noting that we will highlight of specifically end market or maybe, as you said, regional view that has seen a dramatic decline. Again, I think, it's tough comps as we go into the third quarter. I think if I remember the ITS, America teams, I mean, had really hefty double-digit like close to 30% of growth in orders Q3 of last year. So I mean those are the difficult comps that we talk about. But -- having said that, I mean, I think when you think about it in perspective, we have been posting double-digit revenue organic growth for like 9 out of the 10 quarters. So that's kind of what we talk about tough comps. But again, the team continues to perform, execute and control what they can control. Chris Snyder: Yeah. No, I appreciate that. Obviously, with the tough comps, you're trying to sometimes separate like demand from …. Vicente Reynal: Yeah. Chris Snyder: …growth. So I appreciate all that color. And then, I guess kind of following up on that. In prior quarters, you guys talked about basically flat backlog year-on-year to exit the year, building the first half burn in the back half. I know that's still generally the trajectory. But is -- do you still expect not to add any backlog throughout the year, even if we burn a little off in the back half, just does feel like demand may be running a little bit better than expected six months ago? Thank you. Vik Kini: Yeah. Chris, I think right now, our expectation is fairly consistent with what we've kind of messaged before. And you're absolutely right. When we came into the year, we did expect backlog to be largely flat as we look towards the end of the year. But we did explicitly say that, book-to-bill above one in the first half build backlog and then you'd see that kind of drift down, I think, as Vicente mentioned earlier in the second half of the year. And that's very consistent with, I'd say, our typical cadence, our typical seasonality, and based on what we're seeing now, given the level of backlog, but then also kind of the expectations for what we're seeing in the second half of the year. I don't think anything changed in that respect.

To the point that was said before, I do think there continues to be an opportunity on the organic volume side, particularly probably more in the Q4 side of the equation, maybe as the upside to guide. But in terms of backlog being flat year in -- at the end of the year compared to where we started, I think that's still a fairly good expectation at this point in time. Chris Snyder: Thank you. Appreciate that. Operator: And your next question comes from the line of Joe O'Dea with Wells Fargo. Your line is open. Joe O'Dea: Hi. Good morning. Thanks for taking my questions. Vicente Reynal: Good morning. Vik Kini: Hi Joe. Joe O'Dea: Hi. So first, just another one on back half, but the price and volume dynamic within organic, it seems like the way the back half is set up between the quarters, we're looking at pretty similar organic growth, 3Q and 4Q. Just curious, in terms of kind of pricing comps and if what we're thinking about at this point is that it's really volume growth in the back half? Vik Kini: Yeah. Joe, the way I would probably think about it in terms of the back half. I do think if you look on a -- like we said, Q3 will look fairly similar to Q2, particularly on the ITS side, if you're thinking about revenue and bottom-line. I think the way to think about it if you want to kind of think about the two quarters individual. I think the organic growth side will probably be a little bit healthier in Q3 than Q4. Remember, Q4 of last year, we had an exceedingly strong end of the year, particularly in ITS. I think ITS Q4 organic sales growth was in excess of 20%. So again, aside from the kind of timing between the quarters, to your point, we do expect to see pricing continue to, I'd say, normalized in the back half. A lot of that is just, frankly, due to the timing of when we took price increases in the prior year. So we are now lapping that. And we would expect to see price continue to kind of ramp down on a sequential basis, but very consistent with what we said in terms of our original guide. I don't think anything has really changed on that end. And then again, on the volume side, again, volume, we continue to slightly up-tick our volume expectations for the back half, each of our successive guides. This guidance note is no different. And with the backlog, hopefully there's some opportunity to outperform there, as we think about Q4. Joe O'Dea: Got it. And then, Vicente, I think your response to kind of Rob's question was interesting on the ability to pivot to growth. And I'm curious, just in terms of the internal approaches to identifying that growth and how you try to sort of position in advance of it. So it's not so much of chasing the puck, but just being well-positioned for anticipating that. And kind of how far out that goes? I mean, what we can think about what you're doing today in terms of what you anticipate for growth? Vicente Reynal: Yeah. Joe you are right. Joe O'Dea: How far out it is? Vicente Reynal: Yeah. No, I love that question. Because we have a team -- I mean, a team for us, the team is like a team of one. But we have two people actually here sitting in our corporate offices that we're currently analyzing like 100-plus micro trends. And these are kind of trends that we're seeing early indicators of potentially becoming good vectors of growth. So that's one avenue how so early. We're looking at these new potential trends. I mean, give you one example could be lithium battery recycling. Clearly, with a lot of the production on electric vehicle and lithium battery production, there's going to come a time that batteries will need to recycle. So we're already looking at the technologies that we can incorporate in those and finding the early-stage development processes where we can actually incorporate a lot of our technologies and products. So -- and to think about it, I mean, we have about 100 of those kind of micro trends that at any point in time, we're analyzing and then we're leveraging our demand generation team to get close and closer to those customers to better understand how can we help and participate on those early trends. That's just one example of kind of how early we can do it. And then obviously, as you go to a country like China, I mean, the team, every year, we reassess the end markets that we expect to see a higher growth and then with pivot resources and technologies. And again, demand generation to be able to start attacking those early indications that we're seeing. Joe O'Dea: Very helpful. Thank you. Vicente Reynal: Yeah. Operator: [Operator Instructions] Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Your line is open. Nicole DeBlase: Yeah. Thanks. Good morning, guys. Vicente Reynal: Good morning, Nicole. Nicole DeBlase: Most of mine have been answered today, but I guess one thing that I want to dig into is just I think there's concern among investors about potential slowing in Europe. So I mean it sounds like everything from your commentary is going pretty well there, but if we could just dig into that a little bit on what you're seeing? Thanks. Vicente Reynal: Yeah, Nicole, I'd say continues to see good momentum. But again, I think I always like to put it in perspective in terms of the self-help that we're driving ourselves. It doesn't mean that the total market is actually seeing the same momentum as we're seeing. I mean we're definitely outgrowing the market by a lot of the focus that we're doing on these kind of vectors of growth that we're finding and whether it is in France, going after -- how can our technologies help with nuclear facilities and revamping that or in Germany. How -- whether LNG or the hydrogen push is actually helping us to refocus some of the technologies in that. So we get kind of variance on that kind of micro level for us to be able to decipher the best way for achieving that growth.

So that's why we think that the view that we put out in this economic growth engine on how we kind of follow secular trends and leverage things like demand generation obviously, IoT, which we're very excited in terms of accelerating. We've been feeding a lot of new machines in the field and now how we're going to harvest all that packaged care and recurring service work that we can do because we're connecting machines. So there's multiple of places where we can find good growth that as you kind of add all these little buckets of growth kind of create a meaningful good growth momentum for us. Nicole DeBlase: Understood. Thanks Vicente. Vicente Reynal: Yeah. Thank you, Nicole. Operator: And there are no further questions at this time. Mr. Reynal, I'll turn the call back over to you. Vicente Reynal: Yes. Thank you. I just would like to end by thanking and acknowledging again all of our employees for their hard work, being helping us to deliver another record quarter in Q2. We're counting on our team to continue to execute, we're counting that we know that IRX continues to be our differentiator. And IRX, as we said, is rooted in our unique ownership model. So again, thanks for listening to our call and appreciate it. Thank you. Operator: And this concludes today's conference call. You may now disconnect.

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