Ingersoll Rand Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Thank you for standing by, and welcome to the Ingersoll Rand First Quarter 2024 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to your host, Matthew Fort, Vice President of Investor Relations. You may begin.
Thank you, and welcome to the Ingersoll Rand 2024 First Quarter Earnings Call. I'm Matthew Fort, Vice President of Investor Relations. And joining me this morning are Vicente Reynal, Chairman and CEO; and Vik Kini, Chief Financial Officer.
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 owners helping us to deliver another record quarter in Q1.
Thanks, Vicente. On Slide 9, despite the ongoing macroeconomic uncertainty, we delivered solid results in Q1 through a balance of commercial and operational execution fueled by IRX. Total company organic orders and revenue declined 7% and 1% year-over-year, respectively. Both organic orders and revenue finished largely in line with expectations given the tough comps from the prior year. However, we did see approximately $15 million of revenue shift out of Q1 and into Q2 due primarily to customer site readiness. An additional headwind of approximately 1% due to FX as compared to our initial guidance.
Thanks, Vik. On Slide 12, our Industrial Technologies and Service segment delivered solid year-over-year revenue growth of 4% on top of outsized growth in Q1 of last year. Adjusted EBITDA margins were approximately 30%, up 370 basis points from the prior year. Book-to-bill was 1.02x with organic orders down approximately 7%.
We will now begin the question-and-answer session. [Operator Instructions] Your first question today comes from the line of Mike Halloran from Baird.
So simplistically, what's changed from a trend line perspective? If I listen to your comments, it feels like things really haven't changed that much organically from a trend perspective. So maybe talk about any areas where you're seeing maybe a little better trends or the worst trend, some sort of inflection? And also maybe talk to what you think the orders look like on a full year basis and how those might track through the year?
Yes, Mike, I'll say that the only real change has been the increased funnel activity since we last reported or spoke publicly. Despite the headwinds we saw in Q1 from large projects on a year-over-year basis, the very encouraging sign is that the funnel activity for large projects on a global perspective, as we look forward, is still quite healthy.
And then the order expectations as you think about the year?
Yes. Sequential orders...
Yes, maybe I'll jump in there, Mike. I think -- in terms of the order activity here, first and foremost, we did see book-to-bill above 1 for the first quarter, about 1.02x, which is very much in line, I think, with how we intended for the year to start. And as a reminder, we typically are above 1 for the first half of the year and below 1 in the second half, largely due to normal seasonality as well as the shipment of -- for long-cycle projects.
And then maybe talk to the sequential trends you're expecting for the year from an earnings perspective and a cadencing. Anything different from normal seasonality as well as the 1Q margins in the compressor segment, ITS, is that the right run rate? I mean, it's a pretty healthy first quarter margin. So I just want to make sure that's the right base to build off?
Yes, sure. Let me maybe start with that latter point there. Let's start with the margins. So I think maybe in the context of the total company, I think the full year guide implies slightly more than 100 basis points of year-over-year margin expansion. And it's worth noting that's actually ahead of our Investor Day targets that we communicated late last year, which was about 75 basis points.
Your next question comes from the line of Julian Mitchell from Barclays.
So maybe just without going down the rabbit hole of sort of monthly orders and so on, I guess maybe help us understand in the second quarter it sounds like orders are down again year-on-year firm-wide. Just wanted to make sure that's the case, and sort of when you see those returning to growth again on a firm-wide basis.
As a reminder, we don't really guide on orders, but just to provide a little bit of color here on Q2, I mean, April orders really finished relatively in line with the expectations. Generally, the same trend as what we saw in Q1, meaning China is the most noted headwind, again, based on that year-over-year comparison, due to the outgrowth that we saw Q1 and Q2 in China.
Yes. And then, I mean, I'll take the revenue side of that question, Julian. So I think to answer your first part, yes, we do expect to see Q2 revenue performance sequentially trend upwards from Q1. So I think that's a completely fair statement.
That's helpful. And then just my quick follow-up on the second quarter. So if the revenue is sort of up sequentially, the margins may be down sequentially. Is that the point? I mean, often, you have revenue up sequentially second quarter and then sequential operating leverage with it and EPS up sequentially.
Yes. And Julian, maybe I'll keep it at relatively high level. But I think the way we would think about it here is, obviously, Q1, really strong performance, particularly on the margin side of the equation, over 27% EBITDA margin profile.
Your next question comes from the line of Jeff Sprague from Vertical Research Partners.
Maybe could we just unpack actually the Q1 margins in ITS a little bit more, the stuff that you mentioned, I2V, and price cost and everything. But Obviously, a very impressive performance in the quarter. So I'd like to get a little more color there on what happened. And just on the change in incrementals, Vik, I assume the FX change helps that number a little bit, maybe speak to is there any change in kind of the underlying expectation for incrementals for the year?
Jeff, on the ITS, yes, I mean, we're very pleased with the performance. And you saw -- you heard the commentary that solid gross margin expansion, and that's basically kind of what we saw also on the ITS side, I mean, phenomenal gross margin expansion.
Yes. And then Jeff, to the second part of your question on the incrementals. The way I would probably think about it is just, frankly, a continuation of what Vicente spoke to.
And then I think coming out of this quarter, right, those of us who haven't dialed in ILC yet will -- just any -- assuming kind of a mid, late quarter close, should we expect some EPS benefit in 2024? Or are there kind of integration and other costs that would kind of negate that?
Yes, Jeff, let me take that one. So yes, to your point, just to be very clear, obviously, our guidance does not include ILC Dover as the deal has not closed. To Vicente's kind of earlier comments, we do expect to close later in the quarter. So again, we would expect nominal if any impact in Q2. As far as the balance of the year, which I'm really now focusing on the second half, we would expect to see some nominal EPS impact.
Your next question comes from the line of Rob Wertheimer from Melius Research.
I guess I'd like to take it a little bit more towards the strategic end. And thinking about what ILC Dover opens up for you, which you kind of talked about in the prepared remarks on acquisition, on runway and on deals.
Yes, Rob, we feel definitely that the acquisition of ILC Dover, we have now a very strong life science platform to build around. It's not only on the biopharma, but also on this kind of CDMO medical component technology that you even saw that we actually closed already on another acquisition, Controlled Fluidics, even in the quarter, and that's going to get added to that team.
Your next question comes from the line of Joe Ritchie from Goldman Sachs.
Can we just start on the growth in the quarter? It was a touch lighter than we expected. Maybe this is just a follow on to like Mike's question from earlier. But was there anything in the quarter that either shifted out or just potentially surprised you, was a little bit softer than you expected, maybe which is all on PST? Just any comments around that would be helpful.
Joe, if you remember in the Q4 earnings call, we talked about being flattish organic revenue, and we feel that the results came in kind of roughly in line with that. And when you think about the difference between the Q1 results and the implied Q1 organic guidance, essentially, the change was basically largely attributed to the couple of revenue orders that Vik mentioned on the call that got pushed out into Q2, roughly $15 million of orders are basically attributable mostly to customers, and it was just basically site readiness, nothing to be worried about.
Okay. All right. That's great to hear. And then I guess you've been talking about the life sciences business for a while now and the softness in that business. It was interesting to see that you've seen this sequential order improvement in 1Q. Are you starting to kind of see green shoots in that business? Should -- are you feeling better about the growth trajectory of that business throughout the rest of the year?
We are, Joe, and particularly not only all the sequential improvement, but also the conversations that we're having with customers and even also including some of the biotech funding that we're starting to see here kind of coming through as well. So yes, I mean, I think it's one that we're encouraged to see not only from the numbers that we just posted, but also from the conversations that we're having with customers about new applications and new technologies. So yes, very encouraging.
Your next question comes from the line of Andy Kaplowitz from Citigroup.
You mentioned large project order timing was a big reason why organic orders were down in Q1. But how would you characterize the large project order environment in '24? Do you have visibility that you'll see another large project bookings quarter like you had in that Q1 '23 at some point soon. So is it truly a timing issue? Or is it more difficult market for large projects to get over the finish line?
No, I think we definitely categorize it more as really timing. And we do because as we mentioned on the prepared remarks, I mean, these renewable natural gas saw a lot of acceleration early in '23. And it has not stopped, but I mean it's basically a very, very fast start and then kind of tapering down. Still, we're seeing renewable natural gas growth or good orders. It's just that comparable to what we saw back in Q1, it was just difficult to overcome.
That does sound encouraging. So Vicente, just following up on your geography comments specifically on China. I think last quarter, you suggested the China team was pretty energized. It looks like APAC orders still had enough tough year-over-year comp. But does China turn here as you go over into the second half in terms of orders? Like any sort of more characterization would be helpful.
Yes. I think the team is still very energized and very encouraged about what they're seeing, clearly tough comps. But even in the tough comp environment, when you look at -- and we've done a lot of kind of work with the team to better understand the kind of core business.
Your next question comes from the line of Nigel Coe from Wolfe Research.
Just wanted to perhaps come on the back of Andy's question. I think you mentioned as well, Vicente, Europe where you're seeing sort of a pipeline of larger orders, kind of rather larger projects developing. And it sounds like it's more sort of reshoring into Europe. So I'd be curious if that's the case, whether you think this could be something we see happening pretty quickly? Or is this more sort of '25, '26? And any sort of color on some of the sectors where you see that activity.
It's definitely a little bit of reshoring. And even I was actually talking to a very large chip manufacturing company earlier this week. And it is also about the "Chips Act" put in Europe. I mean so there's also some investments of that happening, whether you think about it in the U.K. So there's some of that.
Okay. That's great. And then ILC Dover, the 25% that's space and defense, I think the question we were asking ourselves was how strategic is this business. And it sounds like it's very strategic. And it feels like you could actually -- it sounds like you want to be a space player, I mean, for want of a better word. So is that the case? Do you think that it's not just life sciences. yes, this is also an A&D play as well?
Yes, I mean, I think that's what we call a very highly opportunistic in the sense that -- I mean, we're learning a lot. But even before owning this space business, we were looking at already some compression technology and pump technology that is actually used in space. And even our sales internally within PST, we have a company called Haskel, and Haskel is already a big player providing compression technology for SpaceX as an example.
Your next question comes from the line of Joe O'Dea from Wells Fargo.
Can you just expand on the MQL trends during the quarter, the degree to which that surprised you? Not sure if it was primarily China and Europe that drove that increase over the course of the quarter, if there was anything in North America, but just any additional color on what you attribute that to.
Yes, Joe, I would say that the reason why we wanted to kind of share the data points with everyone is because of not only on the MQL but also the intra-quarter momentum that we saw that we also put on that page, it was just much more accelerated than what we had historically have seen in the first quarter.
And that continues in April?
Yes. I mean April MQL activity was actually strong, 14% year-over-year growth on top of 5% growth in 2023. So again, it shows that the good solid momentum. I mean I think 14% is very good. And I would say also April, MQLs were also up 9% sequentially from March.
Okay. Very helpful. And then another one on ILC Dover. And I think the legacy of that business is aerospace and defense and that the life sciences is a relatively newer kind of addition to it. But could you just expand on what they did to build that out and now a $300 million business? And so what happened over the last several years to sort of put that together?
Yes, absolutely, Joe. So you're absolutely right. I mean, I think the legacy here comes in from the space. And you remember that we mentioned that Dover is the one that put the man on the moon basically with their spacesuit and leveraging a lot of that kind of layering technology to really expand into inflatable habitats and things like that.
So is that more an organic than inorganic, building of that $300 million?
For them, it was basically a good blend of both. I mean they have to acquire some companies, but then once they acquire, they continue that organic momentum.
[Operator Instructions] Your next question comes from the line of Nathan Jones from Stifel.
I'm going to pick up on ILC Dover as well. On the original acquisition call and again today, you guys have been highlighting revenue synergy opportunities with the current portfolio. Can you just talk a little bit more about that, are the products that you have today directly transferable, does there need to be some investment in development? And then just talk about what you think the market size for that potential revenue synergy is?
The products are definitely transferable. This is basically taking pump technology that today we have in the industrial space like peristaltic technology and taking that and then penetrating that into the biopharma market.
Still figuring out the revenue synergies, I'm sure. Just one clarification or something I don't know on MQLs, which maybe I should know is what's the average duration for you guys for getting an MQL to an order? I'm just trying to figure out how far in advance is that a leading indicator of potential improvement in demand?
For us is anywhere -- it's averaging between 6 to 8 weeks.
That concludes our question-and-answer session. I will now turn the call back over to Vicente Reynal for some final closing remarks.
Thank you. I just want to say thank you for the interest in Ingersoll Rand, and most important, thank you again to the entire team of Ingersoll Rand for another solid quarter performance and note that everyone is focused here on continuing to make life better for the employees, the customers, the planet and the shareholders.
This concludes today's conference call. Thank you for your participation. You may now disconnect.