Ingersoll Rand Inc.

My name is Harry and I'll be your operator today. If you'd like to ask a question during the Q&A session, you may do so by pressing start followed by one on your telephone keypad. And I'll now hand the call over to your host, Chris Boylan, Vice President of Investor Relations. Chris, please go ahead now.

Thank you and welcome to the Ingersoll Rand 2021 Third Quarter Earnings Call. I'm Chris Myron, Vice President of Investor Relations, and joining me are Vicente Reynal, President and Chief Executive Officer, and Vic Kinney, 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, www.irco.com. 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 are 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 two 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 provide a company strategy update, review our company and segment financial highlights, and offer updated 2021 guidance. For today's Q&A session, we ask that each caller keep to one question and one follow-up to allow time for other participants. At this time, I'll turn the call over to Vicente.

Thanks, Chris, and good morning to everyone. Starting on slide three, coming out of the third quarter, Ingus O'Brien remains in a position of strength, demonstrating again that as a purpose-driven company, we remain grounded in what we do and how we do it. In the environment we find ourselves in right now, our agility, our nimbleness, and using IRX for speed to execution has proven to be our competitive advantage. Of course, global microeconomic factors continue to be a challenge. We're not immune to demanding supply chain inflation and labor market conditions, but we continue to outperform on our commercial and operational commitments. And we are again raising our guidance. This outperformance is propelled by continued organic and inorganic investments into the organization, and our comprehensive M&A-focused capital allocation strategy is fueled by our drive to create long-term value and compound stockholder returns. Moving to slide four, we remain committed to our five strategic imperatives, and we'll focus our remarks today on our growth and capital allocation strategies. Before we move to those, I have two important call-outs. Our strategy to deploy talent across our organization is paying off. We just concluded our second employee engagement survey this year across all 16,000 employees globally. And I am extremely proud to share we had outstanding participation at 91%. And several of our scores improved again, placing us well above the relevant manufacturing benchmarks. in results and participation. In fact, on responses to how happy are you working at Ingersoll Rand, we now rank in the top 10% of manufacturing organizations. When we talk about outperforming because of our agility, nimbleness, and IRX, it's because of our people. This is our culture. We always say and continue to believe that the combination of a highly engaged workforce coupled with an ownership mindset is a catalyst for long-term performance. The fact that our voluntary turnover is less than 3%, even in this challenging environment, also speaks highly of the culture we're nurturing and how we inspire our employees. I want to take a moment to acknowledge and thank the tremendous contributions of each and every one of our 16,000 employees without whom these results would not be possible. Our Operate Sustainably strategic imperative also highlights the speed at which our company moves. In less than 18 months, we have been upgraded twice by MSCI, and we sit now at a rating of A. This is an improvement from approximately the bottom one-third to now being in the top one-third of the companies rated by MSCI. And we believe, based on our work, we will continue to see our ratings improve with the various ESG rating providers. Great strides have been made this year to accelerate growth and allocate capital effectively, as we have announced or deployed approximately $1 billion towards M&A. In Q3, we completed both the CPEX and Maximum Solutions acquisitions and announced Air Dimensions acquisition last week. We also announced an agreement to acquire 2 fuel pumps earlier this week. We shared our comprehensive capital allocation strategy with you earlier in September. Along with our focus on M&A, we completed a large share repurchase as part of KKR's sale of their final equity stake in the company, as well as the prepayment of the more expensive tranche of debt taken out last year during the onset of COVID. And in addition, we initiated a quarterly dividend that began in Q4 and a new board-authorized $750 million share repurchase program. On the next slide, it's a partial preview of what's to come at our November 18th Virtual Investor Day, where we look forward to talking in more detail about the megatrends we and our customers are seeking to address and how Ingersoll Brand products and services help make life better for all our stakeholders. The strategy enables us to compound our contribution to addressing megatrends such as digitization, sustainability, and quality of life through organic growth enablers where we have specific advantages. For example, we continue to leverage our own unique and proprietary demand generation engine to drive a holistic approach to customer buying patterns, one that has already captured over 3 million end user contacts. and allows us to generate over 200,000 marketing qualified leads per year. We also continue to invest in our industrial IoT platform as we aim to connect or digitally enable a meaningful portion of the 5 million assets that we have identified in the field. Moving to slide six, we're not unique in needing to effectively manage the challenges of the current supply chain environment. However, our key differentiator is our ability to respond. with agility and discipline through the use of IRX to quickly and effectively minimize negative impacts from challenging supply chain conditions. I would like to especially thank our global sourcing and logistics team at Ingersoll Run, as well as our factory buyers and planners for their tireless efforts and creative thinking using data-backed analytics to overcome delivery gaps. We saw very early on that supply chain and logistics challenges were going to be an important issue. So we invested in this area to guarantee that we have rigorous processes and capabilities in place to succeed. And this has produced outstanding results. Moving to slide seven, we will now look more closely at our recent inorganic achievements. We signed a definitive agreement to acquire Tuthill pumps, which is expected to close in Q4. and their dimensions, both of which will become part of the precision and science technology segment. We also close the acquisition of Lawrence Factor, which will become part of the industrial technology and service segment. These three acquisitions are representative of the key characteristics we're targeting with our inorganic growth strategy. Toothill Pumps is the second asset we have purchased from Toothill Corporation. It is a leader in the gear and piston pumping market. which supports the expansion of our positive displacement pump portfolio. This is another example of a multi-generation family-owned company with premium assets that approached us on an exclusive basis because of the relationship that we have built and the opportunities they saw for their company and employees as part of the Ingus O'Brien family. This is another testament to how our unique approach to employee ownership allows us to be at the front lines in M&A. Air Dimension is a market leader in gas diaphragm pumps, which is complementary to our existing lab and life science businesses and is specialized for environmental applications like emission monitoring and biogas. It has an impressive pre-synergy EBITDA margins of over 50%. And more than 70% of its revenue comes from like-to-like replacement of original equipment and aftermarket parts. We also close the acquisition of Lawrence Factor, which will reside in the ICS segment. Lawrence Factor is a great example of an acquisition that is well aligned with our company purpose of making life better, as the technology ensures safe work and play activities for people who depend on compressed air and gas through their proprietary air sampling and aftermarket offerings. All three of these acquisitions were valued in an attractive purchase multiple, and our synergy execution is expected to deliver mid-single-digit post-synergy realization by year three, in line with our discipline pre-deal screening process. I will now turn the presentation over to Vic to provide an update on our Q3 financial performance.

Vicente Garcia- Thanks, Vicente. Moving to slide eight, we continue to be pleased with the performance of the company in Q3. which saw a strong balance of commercial and operational execution fueled by the use of IRX to overcome a challenging inflationary and supply chain constrained environment. Our commitment to deliver $300 million in cost synergies attributable to the Ingersoll Rand industrial segment acquisition remains intact as we continue to drive performance on productivity and synergy initiatives using IRX as the catalyst. Total company orders and revenue increased 37% and 19% year over year, respectively, driven by strong double-digit organic orders growth across each segment. Compared to 2019, as-reported orders in Q3 were up 27% and 16% on a quarter-to-date and year-to-date basis, respectively, highlighting the strong performance of our business irrespective of the COVID-impacted 2020. Our orders and revenue in the quarter were records for the company, eclipsing Q2 and setting us up well as we move into Q4. The company delivered third quarter adjusted EBITDA $314 million, a year-over-year improvement of $62 million, and adjusted EBITDA margins of 23.7%, a 110 basis point improvement year-over-year. Adjusted free cash flow for the quarter was $307 million after taking into account the unique items as pointed out on the slide. Total liquidity at $3.1 billion at quarter end was up approximately $0.7 billion from prior year. This now takes our net leverage to 1.3 times, a 1.2 times improvement from prior year. Turning to slide nine, for the total company, orders increased 33% and revenue increased 17%, both on an FX-adjusted basis. Overall, we posted a strong book-to-bill of 1.13x for the quarter, We remain encouraged by the strength of our backlog moving into Q4, which is up approximately 40% from the end of 2020. The ITNS and PNST segments both saw year-over-year improvements in adjusted EBITDA. EBITDA margin in ITS improved 150 basis points, while the PST segment margin declined 100 basis points driven by the impact of the CPEX and Maximus Solutions acquisitions, both of which closed in Q3. When adjusted to exclude the impacts of the CPEX and Maximus acquisitions, PST margins increased by 20 basis points. Finally, corporate costs came in at $35 million for the quarter, up year-over-year primarily due to higher incentive compensation costs as well as targeted commercial growth investments in areas like demand generation. We expect corporate costs to remain elevated at comparable levels in Q4 due to the same drivers. One other item of note is the adjusted tax rate, which came in at 10% for the quarter and stands at 15% on a year-to-date basis. The adjusted rate is benefiting from our tax restructuring efforts that we've outlined before, and specifically a few non-recurring impacts driven by our movement of IP and implementation of a royalty structure, as well as the utilization of carry-forward foreign tax credits. As a result, we do expect the adjusted rate for the year to be in the mid-teens, But as we look ahead to 2022, we would expect the rate to be back in the low 20s due to the non-repeat of some of these items. Turning to slide 10, free cash flow for the quarter was $131 million on a continuing ops basis driven by strong operational performance across the business and prudent working capital management. CapEx during the quarter totaled $15 million, and free cash flow included $6 million of synergy and stand-up outflows related to the IR merger. In addition, Free cash flow also included $220 million in cash tax payments related to the capital gains realized due to the divestitures of the HPS and SVT segments. Finally, free cash flow also included a $49 million payment from Trane Technologies for post-closing adjustments related to the IR merger. Excluding these three items, adjusted free cash flow was $307 million. Leverage for the quarter was 1.3 times, which was 1.2 times improvement as compared to prior year. Total company liquidity now stands at $3.1 billion based on approximately $2 billion of cash and over $1 billion of availability on our revolving credit facility. Liquidity decreased by $1.6 billion in the quarter as we executed our capital allocation strategy. by buying back $731 million in shares as part of KKR's sale of their remaining equity stake, strategically deployed nearly $600 million to M&A, and prepaid approximately $400 million in debt to remove the tranche of debt taken out during the onset of COVID-19, which carried a higher interest rate. We maintain considerable balance sheet flexibility to continue our portfolio transformation strategy through M&A coupled with targeted internal investment to drive sustainable organic growth. I will now turn it back to Vicente to discuss the segments.

Thanks, Vic. Moving to slide 11, in our industrial technologies and service segment, revenue was up 14%. The team delivered strong adjusted EBITDA of 26% year over year and an adjusted EBITDA margin of 25.5%, up 150 basis points year over year with an incremental margin of 33%. Organic orders were up 31%. Starting with compressors, we saw orders up in the high 30%. A further breakdown into oil-free and oil-lubricated products shows orders for oil-free up over 50% and oil-lubricated up over 30%. In the Americas, orders in North America were up mid-20s, while Latin America was up high 40s. Mainline Europe delivered strong performance, up high 40s, while India and Middle East saw continued strong recovery, with order rates up in excess of 70%. Asia Pacific continues to perform well, with orders up high 30s, driven by strong mid-50% growth in China and mid-single-digit decline across the rest of Asia Pacific. In vacuum and blowers, orders were up low 30s, on a global basis with strong double-digit growth across each of our regions. Moving next to power tools and lifting, orders for the total business were up mid-20s and so continued positive growth driven mainly by our enhanced e-commerce capabilities and improved execution on new product launches. We will also like to highlight one of the many ways that we enable our customers to become more sustainable. Our Leroy gas compressors are used to capture biogas emitted from landfills, dairy farms, and wastewater facilities. As the gas is emitted, the system captures the gas, cleans the methane from other gases such as hydrogen sulfide and carbon dioxide, and our Leroy product compresses the methane for reinjection into pipelines or storage for power generation, both of which enable the customer to capture additional economic value. The compressor enables to capture up to 50% of the emitted biogas, whereas without it, 100% of the gas will be released into the atmosphere. Our significant insta-base of 25,000 units will help capture 240 million cubic feet of biogas in the next two years. Technologies such as these across our portfolio enable us to advance our ESG impact not only with the steps we're taking internally to reduce our carbon footprint, water, and energy usage, but also create significant value for our customers from both sustainability and economic perspectives. Moving to slide 12 and the precision and science technology segment, revenue was up 10% organically, which remains encouraging given the tough comps due to COVID-related orders and revenue in Q3 of 2020, for the medical business. Additionally, the PST team delivered strong adjusted EBITDA of $76 million, which was up 17%. Adjusted EBITDA margin was 29.7%, down 100 basis points year over year, driven by the impact of CPEX and Maximo solutions. And again, the segment was up 20 basis points, excluding the impact of those acquisitions. Overall, organic orders were up 25%. driven by the ARO and Milton Roy product lines, and the medical and dosatron businesses, which serve lab, life sciences, water, and animal health and markets. All of these businesses were up double digits in the quarter. Incremental margins were up 25% as reported, and 33% when excluding CPECs and maximums. In this segment, we would like to highlight the momentum our Haskell Hygiene Solutions business continues to build to making life better through a more sustainable world. We have announced a long-term agreement with Hiringa Refueling to supply high capacity hydrogen refueling stations for a nationwide green hydrogen network across New Zealand. Hiringa has placed the first order of four stations with a total commitment of 24 stations to be provided through 2026. The totality of this frame agreement alone will double our Haskell hydrogen refueling business on a revenue basis. We're incredibly excited about this partnership. And as we spoke about last quarter, the investments we're making to expand our technologies and manufacturing capabilities in these high growth markets are producing meaningful growth. Moving to slide 13, given the company's performance in Q3 and continued strong outlook, we're increasing guidance for 2021. Our guidance excludes both the divested high-pressure solutions and specialty vehicle technology segments, as well as the pending acquisition of foothill pumps. However, CPEX, maximum solutions, air dimensions, and Lawrence factor are included in our guidance. Our prior revenue guidance was up mid-teens on a reported basis, comprised of low double-digit organic growth across both of our segments. We're now guiding up high teens in total. with low double-digit growth, organic growth across both segments. This reflects an approximately 100 basis points increase in organic growth for the total company as compared to prior guidance. FX is expected to continue to be low single-digit tailwind. M&A was previously expected to contribute approximately $60 million in revenue, but given the close acquisitions of Maximus, CPEX, Air Dimensions, and Lawrence Factor, we're increasing that expected contribution to $135 million. Based on these revenue assumptions, we're increasing 2021 adjusted EBITDA guidance to $1.175 billion to $1.195 billion, which represents a $20 million improvement from prior guidance at the midpoint of the range. In terms of cash generation, we expect adjusted free cash flow to adjusted net income conversion to remain greater than or equal to 100%. CAPES is expected to be approximately 1.5% of revenues. And finally, we expect our adjusted tax rate for the year to be in the mid-teens for the reasons Vic provided earlier. Turning to slide 14, we're very excited about our upcoming Virtual Investor Day. which is fast approaching and will be held on November, in alignment with megatrends and compounded by our unique organic growth in markets and technologies.

And further, we will discuss how our strong talent, operational execution, demand generation, and M&A capabilities, coupled with a sustainable growth mindset, creates incredible targets.

Register for the event using the link on slide 14. And I look forward to seeing many of you on the webcast.

Moving to slide 15. 2021 is poised to be a great year despite the challenging environment.

To our employees, I want to again say thank you for your relentless efforts to execute and solve tough problems throughout the quarter. They are absolutely appreciated, and it is apparent in our company's performance.

We are actively investing to deliver outpaced growth, both organically and through M&A, to continue increasing the quality of our portfolio.

We continue to take our role as a sustainability-minded industry leader very seriously, and our employees eagerly embrace IRX to put us in that leadership position. We're proud of the transformation we have achieved at Ingersoll REN and are excited about the future opportunity to compound growth and deliver increased value to all of our shareholders. With that, I'll turn the call back to the operator and open for Q&A.

Thank you very much. If you would like to ask a question, you may do so by pressing star or number one on your telephone keypad. Our first question is from Mike Haran from Baird. Mike, your line is open now if you'd like to proceed with your question.

Great. Thank you. Good morning, everyone. Good morning, Mike. So let's start on the guide and how you guys are thinking about the fourth quarter coming up here. Sales, obviously, you feel good about what the demand conditions look like. You're layering on some acquisitions here. 3Q is a good quarter in terms of performance. Feels like maybe the margins on an organic basis are a little lower than what the sequential trend would imply. So maybe some commentary on how you're thinking about that as you move into the fourth quarter, and certainly correct me if I have the wrong assumption there.

Yeah, Mike, you know, our guidance, as you heard, you know, it's taking the midpoint of our part of guidance up by 20 million. You can think about it being two-thirds M&A and one-third is organic. You know, in this current environment, we continue to be prudent based on all the overall supply chain environment kind of noise of situation that you hear out there. In addition, just to point out, you know, ITS margins in Q4 2020 were up 400 basis points, reaching 26% margins. What our guidance here implies is that even with all the inflation, discretionary spend, increases, and investments, we're going to be kind of flattish in margin expansion year over year, which speaks to all the great actions that the teams continue to execute and puts that segment to a very solid margin performance in this environment, we believe. And PST margins for the core business, which is kind of excluding the M&A that we said is EBITDA-decrative, but gross margin accretive, and some of the accelerated hydrogen investments that we're doing based on that frame order that we just received, the EBITDA margin profile is still in the 30s kind of range, which we view as quite healthy given the tough comps of medical shipments in 2021. as well as the inflation and discretionary investments that we have done here in 2021 and still plan to do in the fourth quarter. So we feel good about that, and at the same time prudent in terms of how we see supply chain out there.

So if I'm hearing you right, you're not implying that the market headwinds accelerate for you on the margin line 3Q to 4Q in terms of supply chain, logistics, labor, transportation expenses, things like that?

Yeah, Mike, I wouldn't – no, I think what Vicente is saying is exactly in line with kind of how you're interpreting it. Clearly, obviously, a lot of those same headwinds persist into Q4. But like we've been doing, we think we've kind of taken prudent pricing actions to kind of remain, you know, in line with offsetting those headwinds, much like you saw in Q3. So I think, you know, in that respect, we see Q4 fairly comparable to Q3 in terms of price, you know, mitigating the inflationary risk.

Gotcha. And then on the order side, obviously really strong orders. Good to see. Maybe some thoughts on what types of orders those are. Are those more short cycle in nature? Is this just a kind of MRO, short cycle type move? Or are you starting to see some more project or CapEx type orders coming through the funnel as well? Obviously, you highlighted the hydrogen, but I'm thinking a little bit more broadly.

Yeah, I think, Mike, we're seeing kind of both. We see sustained momentum in the short cycle, and actually what we see is long cycle kind of accelerating as some projects are getting released, you know, the hydrogen being one, but others, like the biogas, is a very substantial project, too, as well. So I think we're pretty pleased with what we're seeing. At the same time, I can tell you that with the level of technology that we have across our portfolio, and you're going to hear a lot more about this during Investors Day, is how we're able to pretty quickly reallocate technologies to some of those end markets that are seeing some meaningful growth. And I think with the level of agility that we have in our business, it's positioned really well to capture the tailwind from any of those markets and continue to see that, continue to sustain momentum in the order rates.

Great. Appreciate it, Jonathan.

Thank you.

Thank you, Mike.

Our next question is from Joe Ritchie from Goldman Sachs. Joe, your line will be open now if you'd like to proceed.

Great. Thank you. Good morning, everyone. Hey, Joe. Good morning, Joe.

Hey, so maybe just staying with orders, obviously, you know, clearly incredibly strong this quarter. I'm just curious, are you starting to hear just more, you know, CapEx decisions being made, Vicente, where your customers are looking to deploy a little bit more CapEx in this environment, just given the supply chain has been fairly unprecedented in what we're experiencing today? Or is this predominantly still a lot of OpEx that's coming through here?

Joe, we're definitely hearing a lot more on the CAPEX, too, as well. And when we hear about CAPEX, it really has to do with ESG and sustainability. And I think it's exciting to see that, you know, all the technologies, I mean, the majority of our technologies are kind of enablers and beneficiary for ESG. And I think the exciting thing here is that compressors can reduce energy consumption, and you can see how energy has really radically increased across mainland Europe and even also China. So with the compressors, blowers, and vacuums, we have always spoken a lot about our energy efficiency. And so I think customers are starting to make the move based on the targets that they set up themselves to be achieving by 2030 and 2050. So I think a lot of this is really going to see some continuing momentum, in my view.

Got it. That's helpful. And I guess maybe if you could just kind of parse out the pricing commentary a little bit more. I'd be curious to hear how positive the price-cost equation was this quarter, what the expectation is through the end of the year, and then As we head into 2022, should we continue to see, like, pretty decent price-cost benefit coming through your numbers?

You know, in the context of Q3, the price realization was, you know, which obviously speaks to the healthy performance and, frankly, the proactive measures that, frankly, all of our businesses have taken. Pricing did slightly outweigh inflation in Q3, so we were price-cost positive in the context of Q3. We would expect to be fairly comparable to that equation in Q4. Now, it is worth noting, obviously, that not unexpectedly, inflation obviously headwinds have risen in the second half of the year compared to the first half. We always expected that, and that's why we kind of got ahead a lot of the pricing actions. So, again, I think we're quite pleased with the performance and the momentum that we're seeing. You know, as we think about 2022, I think, frankly, a little bit, you know, too early to, you know, start. We would expect to see healthy carryover on the pricing actions. I'd say the majority of the pricing actions that we have taken are list price oriented. So, obviously, it should be inherently a little bit stickier. But obviously, we do obviously have some carryover inflation that we will be dealing with into 2022 as well. So, you know, we'll reserve commentary just yet on the price-cost equation into 2022, but I think we're quite encouraged by the actions the teams have taken to still say price-cost positive in the context of the second half of this year.

All right. Sounds good. Nice job, guys. Great to go.

Our next question is from Nigel Coe from Wolfberry Shirts. Nigel, your line is open now if you'd like to proceed.

Thanks. Good morning, guys. I just want to tack on the back of that question. Inflation, just how do you define inflation? Do you just look at the direct input costs, you know, the materials, or is that, you know, labor and a broad definition, including freight? So that would be interesting to hear, but... Just curious on, you know, obviously the order is very strong. Can you maybe talk about, you know, where we are on the, you know, revenue synergy capture from the merger? Obviously you put together a much more balanced portfolio, some clear, you know, synergies across the product. So just wondering if some of this order strength is seeing some of those synergies come through.

Yeah, Nigel, I'll take the first one, and I'll let Vicente speak to the second one on the revenue synergies. on the uh the price cost and specifically on the cost comments that i made um you know the inflationary numbers that i was speaking to really are what we'll call direct material and uh and logistics or freight um obviously we all of course measure and look at uh what i'll call labor inflation um the reality is labor inflation has been frankly largely in line with our expectations the majority of this year um so again while we do look at it uh the commentary that i made was specifically around price versus what we'll call direct material and logistics And I think one thing that we're quite pleased with, and Vicente mentioned it here, is quite frankly, yes, while labor is – we're in the same labor environment that everyone else is, we've been really pleased with our retention rates and our very low voluntary turnover, which I think Vicente spoke to in the prepared comments, speaks very highly of the culture and a lot of the employee engagement and ownership initiatives that we've put forth.

Yeah, and Joe, on the second question around the orders, in terms of revenue synergies coming from the transaction, Yeah, we're definitely seeing some of that. You're going to hear more on some of the case studies that we will show you during Investors Day. But clearly, we're very pleased with how our oil free compressor product line is moving, how air treatment, so a lot of good momentum that with a lot of the products that we have launched and through the multi-channel, multi-brand strategy that we have on a global basis is really giving us some good tailwind on that

And secondly, on the investor day, you said longer-term targets. Just wondering, are we looking here at three-year targets but not 2022?

That's correct. We'll be talking about what we'll call 2025 targets in the framework to think about, and then we will formally guide 2022 when we do our next earnings call.

Great. Thank you, guys.

Thank you. Jeff Sprague from Percival Research. Jeff, your line is open now.

Thank you. Good morning, everyone. Maybe just coming back one more on cost also.

I would have guessed actually you might need more than 3% price to offset inflation. So I'm just wondering if, you know, in that direct materials, I would assume you are including, you know, your kind of sourcing and merger related benefits. I'm sure it gets harder and harder to kind of separate those with the passage of time, but maybe just update us where you're at on that and what role that's playing in helping you kind of battle the inflation here.

Yeah, Jeff, just to be clear and put a finer point on it, the pricing – The pricing number you're going to see in the queue when it's issued tomorrow, you know, right around 3.4%, 3.5% kind of net across the entire enterprise, fairly comparable numbers between ITS and PST. And, you know, in the context of what we write, it does become a bit of a scorekeeping exercise, but we've been pretty disciplined and prudent to, you know, keep those buckets separate in terms of how we actually manage and run the organization.

So things like some of the direct material productivity or some of the innovative value, those are kind of separated.

And I will say, as we kind of said at the beginning of the call, you know, we're still on track to deliver the kind of the year two synergies as part of the merger, which was the $100 million number that we committed to.

That's great to hear.

Thanks. And then just on the new M&A, you gave us the kind of total additional revenue contribution, but would you mind just ticking through those three, what the kind of annualized revenue of each one of those are?

Sure. I can absolutely do that. So in terms of the three acquisitions that we've kind of spoken to here, which are air dimensions, Tuthill pumps, and Lawrence factor. Air dimensions is a low double-digit, right around $10 to $12 million in annualized revenue. The Tuthill pumps is in the mid-20s in terms of 25-ish is probably a good number to use. And Lawrence Factor is relatively small. It's about a $6 million purchase price, which is actually very comparable to the revenue base, I think, mid-single digits, about $5 million. But very exciting technology on air sampling and aftermarket offerings that we think we can leverage very highly within our ITS portfolio.

Great. Appreciate it. Thanks for the call.

Our next question is from Julian Mitchell from Barclays. Julian, your line will be open now if you would like to proceed with your question.

Hi, good morning. Maybe just circling back on sort of aggregate, you know, incremental margin or operating leverage. So it's running in the sort of mid-20s, firm-wide, I think the back half of this year. Understand the cost constraints and new acquisitions coming in affecting that. But as you sort of look at Next year, you know, how quickly, I guess, do we see that operating leverage sort of move back into the 30s, do you think? Do you think that's something that can happen sort of fairly quickly or it's just too early to tell given these acquisitions that just come in and given the cost environment is moving around quite quickly?

Yeah, I mean, I think that the latter part of your statement is probably true. I think, obviously, we're working through our views on 2022 and the kind of annual budgeting process, as you would expect right now. So I think it's a little too early to call. You know, I think the view right now is the first half of 2022. Obviously, we're still going to be facing some of the same dynamics we're facing now with regards to some of the inflationary headwinds. And obviously, we have the pricing momentum to continue to offset some of that, if not all of that. And then, frankly, yes, we will be continuing to integrate a lot of those acquisitions. So, I think given the carryover price, as well as the kind of integration from the acquired assets, You know, we would expect to continue to see that trend improve as we move through 2022 based on kind of what we can see now and get kind of more closer to a, you know, let's call it that 30-ish percent type number that we've been seeing across the segment, if not a little bit healthier. But I'd say right now, specific timing, that cadence is something we're working through, and I think we'll give a bit more color as we do, you know, our next earnings call and formal guidance for 2022.

Thank you. And then just on the capital deployment, so, yes, about a billion dollars of deployed sort of M&A funds this year. Maybe when you look sort of across those acquisitions, you know, you can call out one or two specific ones. I'm more interested in maybe the total deployment. What do you think the three- or five-year return sort of metric should be on that billion dollars or so that you have deployed? And if there's maybe one or two acquisitions in particular where you think the margin expansion should be above average now that they're – or once they're integrated into Ingersoll?

Yeah, I think, Julian, we should definitely expect to see that kind of low double-digit to meet the ROIC return on these transactions. We always say that that is a financial criteria that we have in our deals. We're still finding great technology, commercial acumen and all. to provide a good financial outcome based on a lot of the post-synergy activities that we can do.

And then any sort of color transactions that you think offer above-average sort of margin expansion scope?

Well, I mean, one that I'll say comes to mind, right, Now, for sure, CPEX, right? I mean, CPEX, when we acquired CPEX, we said that that was in kind of the mid-teens EBITDA, but that we see that business to be way like a segment level to PST. So, I mean, that is a tremendous margin expansion. Also, on the ITS, the recently signed transaction on Toothill Pumps, when you think about the prior Toothill, I mean, it was a phenomenal margin expansion. So, we still expect that to to see some good momentum on expanding that. So, you know, I think, you know, really across the board in a lot of these transactions, we expect to see some good meaningful expansion. I mean, clearly, when you look at Maximus that is already acquired at, you know, PST segment level, more difficult than that. And also Air Dimensions that is in the 50s, more difficult to continue expanding than that. And those tend to then focus more on the organic growth opportunities that we see as we look into our commercial global footprint to expand the growth there.

Great. Thank you.

Thank you. And our next question is from Andy Kablowitz from Citigroup. Andy, your line is now open if you'd like to proceed.

Hey, good morning, guys. Morning, Andy. Andy. Cindy, you've really been pushing hard into some of these newer markets over the last couple years, you know, lab life sciences, water, animal health. It's obviously leading to that 35% order growth and 20% revenue growth in PSKT that you saw. If we look back at Gardner Denver's old medical business, it averaged, I think, something like mid-single-digit growth. But given the sort of niche focus of PST and what seems like higher-growth markets here, Is it fair to say that PST could average higher than mid-single digits as you go into 22 and beyond?

Yes, absolutely. I think we feel really compelled on that. I mean, I think, as you said, all the investments that we're doing are paying off in terms of redirecting into these kind of very niche markets and commanding some good, strong leadership positions, launching a lot of new products.

You're going to hear a lot more about that also on the Investors Day on how the cadence of new product has just been accelerated dramatically.

Even during the COVID days, you know, the team accelerated the new cadence of product development, and we're seeing that come through fruition here now and into next year.

Great. And then maybe a little bit more color into what's going on regionally for you guys, particularly in China. It looks like you had really strong compressor growth in China, and I know it's one of your key initiatives for the combined company, but the rest of APEC orders were down a little bit in compressors. So maybe just talk about regionally what's going on, particularly in Asia.

Yeah, I think we're incredibly pleased with how the team continues to execute in Asia Pacific and particularly in China. And, you know, what we saw quarter of a quarter, Q2 to Q3, we saw actually the momentum of orders really accelerate in China, which is kind of contradictory to some of the things that you hear out there in other companies. So, It speaks to a lot of the self-help initiatives that the team is doing. We spoke about relaunching the Garnet Denver compressors, which obviously has proven to be a tremendous success. And that was something that we always said we were super excited about, the combination of Ingersoll Brand and Garnet Denver, because we could have a multi-brand, multi-channel strategy, particularly in China. And the team has just done a phenomenal job leveraging the I2V initiative and actions to then relaunch an entire product portfolio with Garner Denver. And the second piece is blowers and vacuums. You know, blowers and vacuums was a fairly small piece in China. And again, I think the team is putting a lot of good dedication and localizing and really penetrating some of the end markets that we have seen are good in terms of applications in other regions. The rest of Asia Pacific, I cannot maybe split it between, you know, emerging and the developed, developing like Australia, for example. And that still continues to perform fairly well. Where we saw maybe a little bit of softness was on the emerging, as, you know, maybe countries like Vietnam or Philippines was creating a lot of shutdowns due to COVID. But again, that's a fairly small portion of our business. Therefore, you know, China overcoming COVID. some of that decline still drive meaningful growth in the quarter for Asia Pacific.

Very helpful, Vicente. Thank you. Yeah, thank you.

Our next question is from Rob Worthmeyer from Melius Research. Rob, your line is now open if you'd like to proceed. Thank you.

Hi, thank you. Vicente, I'd love to hear if you have any more color on how IRX was applied to supply chain issues that maybe rose in prominence through the quarter. I don't know if you switched the quarterly cadence up or added to the process in any way. And then maybe just the outflow of that, we had a few unexpected cost surprises across industrials this quarter. You guys avoided that entirely. I'm curious if you think that the risk of unexpected surprises is kind of nil because you've got a handle on it or whether it lasts another few months, whether you see, you know, more and more issues pop up that you have to deal with or whether it's stable, just, you know, general outlook on supply chain over the next couple of quarters, if you would. Thank you.

Yeah, absolutely. Great question there. I mean, so I can tell you that definitely things will continue to pop up. And even though clearly based on the results, you can see how we have overcome, it really speaks to a lot of great work that everyone is doing. And I would say, great work supported by IRX as the process and the tool that we use. So we have definitely leveraged the IRX tool. As you know, it's a very high cadence, high touch mechanism that we use to just accelerate how we execute and reprioritize the teams to the critical items. And that has allowed us to create this massive agility and nimbleness, even though obviously we're a fairly large global company. and allows us to really redirect the teams to the proper priorities that are happening out there. So, for example, we leveraged IRX when logistics was a major issue. And, you know, you could go, say, for example, into a factory and you can see how IRX tool we were leveraging to track the backlog of containers that we needed to fulfill and acquire. as an example, I mean, as simple as that could be. And now we're leveraging the IRX to prioritize the suppliers and the commodities that we need to go after. And, again, that daily, weekly cadence of ensuring that the teams continue to see a good momentum and good perspective is really what's giving us the outcome that you see here. So I think as we continue, I mean, we think we live in a very dynamic world that we'll continue to see some maybe challenges. But that's why we have always said that agility and nimbleness is going to be a core competitive advantage. Follow through the use of IRX as a tool to really execute. It's just giving us that great sense of comfort zone that the teams will be able to continue to perform well.

Thank you. Our next question is from Josh from Morgan Stanley. Josh, your line is now open if you'd like to proceed.

Just a question on compressor orders. I understand there's some virtuous cyclicality going on there, but

You know, any idea of where those stand on, you know, kind of the historical basis? Like, are we at all-time highs on compressor orders today? Obviously, there's a lot of new pieces of the portfolio and the combination. And what do you think the market has done sort of relative to you guys? Because, you know, apparently, you know, there is a recovery going on, but I would imagine that, you know, with some of the IRX tools, you're gaining a lot of shares as well.

Yeah, Josh, I think in terms of compressor orders, we're definitely way above 2019 levels. And, you know, one could think that it could be at a record level. We haven't gone and gone backwards with the combined companies to really reassess is it record levels or not. We haven't done that. I mean, we're just focused on continuing to execute and take solid market share. So I think in terms of, again, what we see in the market, I think we continue to position ourselves as a premium provider of compressor products. You see that we're focused not only on the growth, but also on the profitability. So we believe in profitable growth is one of our key drivers and enablers for us. And with the unique differentiation that we're launching in terms of technologies that reduce total cost of ownership and great energy reductions, I think that is what has positioned us really well to continue to take some share and continue to launch products that help with that. I mean, one example, the team in Europe, the Compare team, just launched a new compressor very large, very sizable compressor that some radical new technology, and it is one of the most efficient compressors of that size and power in the market today. So a lot of continued innovation is really what is driving the momentum, in my view, and because we're able to deliver some differentiated value to the customers, then we're able to continue to command that price positioning that we have in the market.

Got it. That's helpful. And I guess maybe just following up on that last comment on kind of the pricing power and pricing to value, it seems like steel could start to be coming down here. Can't help but notice the average Ingersoll Rand product, particularly in the ITS portfolio, has an awful lot of Ferris content in it. If steel prices, say, got cut in half, what sort of kind of cost tailwind would that be to you guys? Because I would imagine that pricing stays fairly sticky in that environment.

Yeah, great point there, Josh. Definitely pricing very sticky. And so as we look forward and commodities continue to get stabilized, yes, we should see that margin progression to even accelerate. I mean, not only from the commodity, but also as we continue to execute a lot of the ITV initiatives that we have in our funnel. So I think, you know, we're overcoming the current market situation fairly well, in my opinion. Again, thanks to the team and leveraging the tools that we have like IRX. But as this current inflationary market subsides at some point in time in 2022, we should see earnings power to accelerate. Great. Thanks, guys. Best of luck. Thank you.

Our next question is from Nicole DuPlace from Deutsche Bank. Nicole, your line is now open.

Yeah, thanks. Good morning, guys. Hi, Nicole.

Hi, Nicole.

So we've been through a lot here, but I guess I just have a few pretty brief ones. First, just a clarification. I think you talked about, Vic, like 30% PST margins in the fourth quarter, but that was organic. Is the drag from M&A expected to be pretty similar to 3Q? I know you have some more deals folding in in the fourth quarter.

That's correct, yeah. Just to be clear, that's 30% on the base business. Obviously, the overall, because you're going to have a full quarter now of the acquisitions, primarily CPEX, which you only had one month of in the Q3. So the overall margin profile for PST, it will be dilutive, obviously, up front here. You're thinking kind of more in the upper 20s range, you know, think uh you know that's probably a probably decent proxy so it'll be a little bit more dilutive than the impact you saw discreetly in q3 just because of the the full quarter impact of cpex but to defense's point here you know the great views on cpex is that's a gross margin accretive business so obviously there's meaningful synergy opportunity that you know admittedly you're going to see us start to execute on very shortly here in the 2022 onwards

Got it. Thanks, Vic. And then secondly, on the synergy profile, so I know no change to the $300 million, you know, full run rate synergies, but are you guys still expecting to do about 50 million incremental in 2022? I'm just thinking about, you know, all the big puts and takes in the walk into next year.

Yeah, definitely a lot of puts and takes. But, Nicole, at this point, that's correct. You know, just to kind of recalibrate, you know, $115 million was delivered in 2020. We expect $100 million this year, $50 million next year, and then the tail, which would be $35 million in 2023. At this point in time, nothing's really changed in terms of that phasing. And clearly, as we move into 2022 and onwards, I'd say I2V and the footprint components of that equation are probably the more prominent drivers of the Synergy profile moving forward.

Got it. Thanks, Vic. I'll pass it on.

Thanks, Nicole.

Our next question is from Marcus from UBS. Marcus, your line is now open.

Yes. Hi. Good morning, everyone. I wanted to follow up. Hey, hi, good morning. Follow up on Josh's question, if I may, on compressor orders. And if I look at that, particularly compared to the large European peer, they're quite impressive. And this has been going on for a few quarters now. So I wonder if this product, if this channel, if this, you know, you guys may be managing availability better. I think if you could elaborate on that, that would be great. And then connected to that, how much visibility do you have into the backlog? Obviously, these massive order intake numbers, there could be some concern that some customers just call the build slots. I just wonder the risk of double ordering. How do you judge that?

Yeah, Marcus, so in terms of the first question about the compressor's orders, I'll tell you that it's a little bit of everything. I mean, it's definitely the product because, again, you know, how we are leveraging the entire product portfolio across multiple brands. It is also the channel. And I think this is a great lead question, Marcus, as we kind of go into the investor's day because we have case stories actually that we will show you on how we have expanded our channel to really accelerate the growth and also reposition the product to really accelerate the growth. So I think it has to do with a lot of the work that we have done since the product summit. If you remember back in the, I don't know, about a year ago, we spoke a lot about product summits and how the team, so it's just been very thoughtful way and then executed with the use of IRX to really reposition a lot of the products on the channel without creating any conflict. And I think that has proven to be a pretty successful recipe. I mean, availability, you know, in some products has been actually quite good. I mean, I saw the team is marketing, for example, on blowers that we have one of the best lead times and how that is accelerating now even the momentum as they see here in the fourth quarter. To your question in terms of the visibility of backlog, you know, customers for compressors, because you have to customize many times the options to the specific application, there's not a lot of preorder that can be done on compressors just because of the optionality. And the visibility that we have in the backlog in the compressors is really in the more larger compressors, the multistage centrifugal compressors that are kind of we position that as more long cycle business. And those, when we're doing a contract with a customer, we have caveats that we could actually pass or surcharge any specific cost increases that we're seeing through the supply chain in this environment. So I think we feel that we're doing everything that we can to protect ourselves in case that, obviously, inflation continues to stay at this level and commodities do not go down. But I think, you know, we – we feel good in terms of kind of how we're protecting ourselves from the cost position.

That's very helpful. Thank you. And just a very brief follow-up to that last comment. So that 40% increased backlog, which is probably related to those longer cycle orders, you could, if you have to, reprice that. Do I understand that right? Yes.

Mark, let me clarify here. So the 40% increase in backlog is overall, it's total. So is some of the longer cycle project a part of that? Sure. But also some of it, and a good portion of it is obviously just the normal course orders that we've taken for things that are typically what are called shorter to medium cycle type compressors, not the larger compressors. In terms of the comment on whether you can reprice backlogs, as I said, there's components, like the longer cycle, that you do have some of those optionality. By and large, though, no. I mean, most of the rest of the backlog is, you know, typically a couple months in duration, and you wouldn't expect to reprice that. You know, clearly it's inclusive of the pricing actions we've already taken, but not typical to reprice, you know, those types of backlog items.

Yeah. As a team, I'll say one more point there. I mean, we track pricing on bookings, so we know – we have a really great leading indicator on how that backlog is doing against the price increases that we have done.

Super. Thank you.

Thank you.

And we have no further questions registered, so I'll hand the call back to Vicente for closing remarks. Vicente, over to you.

Great. I just want to say thank you for the interest in Ingersoll Rand. I know that many of our employees are participating in the call. I also see that many of our employees from the new acquisitions are on the call. So I just want to say one more time, welcome to those of you that are new. Excited to have everyone on board. Exciting that how we're very thankful for everything that all of you are doing every day to make life better for our customers, our employees, our communities, and obviously our shareholders. So With that, we'll leave it here for now and talk to you soon. Thank you.

Thank you to everyone who has joined us today. This concludes the call and you may now disconnect your lines.