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spk07: like to ask a question, please press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, please press star one. Thank you. I will now turn the conference over to Matthew Fort, Vice President of Investor Relations. Please go ahead.
spk03: Thank you and welcome to the Ingersoll Rand 2023 third quarter earnings call. I'm Matthew Fort, Vice President of Investor Relations. And joining me this morning are Vicente Rinal, Chairman and CEO, 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. 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 review 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.
spk12: Thanks, Matthew, and good morning to all. I would like to start, as we always do, by thanking and acknowledging all of our employees for their hard work in helping us to deliver another record quarter in Q3. Despite the constantly changing macroeconomic environment, our employees continue to deliver on our commitments and consistently exemplify our purpose while thinking and acting like owners. I would also like to welcome our new employees from our recent acquisitions, OxyWise, Fraser Woods, Roots, and K-Lon. Beginning on slide three, fueled by our competitive differentiator, IRX, in the third quarter, we again delivered double-digit growth in revenue, adjusted EBITDA, adjusted EPS, and free cash flow. We remain nimble and focus on controlling what we can control and continue to direct our demand generation activities towards high growth, sustainable end markets to accelerate market share gains. Finally, based on our continued robust performance year to date, we are once again raising our 2023 full year guidance. As we move to slide four, our economic growth engine is the key to delivering compounding annual results. During our last Investor Day in November 2021, we presented this model and highlighted our organic, inorganic, and quality of earnings growth enablers. We remain committed to our strategy and our long-term Investor Day targets as outlined on this page. In fact, we have so far exceeded our growth and margin commitments, including an organic orders and revenue CAGR of 12%, and margin expansion of 170 basis points per year over the last three years. On the next slide, I will provide you with deeper insights into how we are accelerating organic growth in previously acquired businesses. So turning to the page, to slide five, here we have some examples of how we have driven outside organic growth and margin expansion from recently acquired M&A. This is a testament to how we compound growth on recently acquired businesses and have examples from both our IPS and PST segments. On the left-hand side of the page, we're highlighting our Leroy acquisition from June of 2017. We acquired this business for a purchase multiple of 11 times. By pivoting our end market focus to high-growth, sustainable end markets, offering a complete ecosystem solution, and leveraging our commercial footprint, we have achieved over 540% growth since the time of acquisition. In addition, our post-tax ROIC is 155% resulting in a 0.5 times post-synergy adjusted EBITDA purchase multiple. Just an impressive result on how and what we can do with technologies once we incorporate them into our IRX process. On the right-hand side of the page is our Air Dimension business, which was acquired in November of 2021, also at an 11-time purchase multiple. Air Dimensions serves high growth sustainable end markets like environmental services. And the team has delivered 27% revenue growth over the last two years by leveraging IRX, rapidly integrating our demand generation process, and launching new innovative technologies. And given the outside growth this business has delivered over the past two years, we're very well on track to exceed our three-year post-tax ROIC target demonstrated by already delivering a post synergy adjusted EBITDA purchase multiple of eight times. Next, on slide six, M&A continues to be at the forefront of our capital allocation strategy to compound value, similar to the examples we displayed on the previous slide. We're pleased to highlight two recent closed transactions. With these two acquisitions, we have closed on approximately $190 million of annualized inorganic revenue, which puts us very close to the bottom end of the 200 million to 300 million of annualized inorganic revenue targets we set forth at the beginning of the year. And we have no doubt in our ability to deliver our target this year. Let me walk you through these two recent acquisitions. First, OxyWise, which is based in Slovakia, is a leading provider of on-site oxygen and nitrogen generation systems. This acquisition expands our technology ecosystem with a complementary product to the compressor and increases Ingersoll Rand's broader air treatment capabilities in point-of-use oxygen generation. Next is Fraser Woods, which is a leading provider of aftermarket services for blowers and pumps in the vacuum truck market. This acquisition expands Ingersoll Rand's technical expertise and service capabilities in Western Canada. Our M&A funnel remains very strong, and as of today, it continues to be over five times larger than it was at the time of the R&T. The characteristics of the target in our funnel continue to be Bolton in nature, with the exception of a couple that are approximately a billion-dollar purchase price. On slide seven, as highlighted in the middle of the page, we continue to be recognized for our corporate responsibility, and we're proud that 3BL Media recently named us as one of the top 100 best corporate citizens in 2023. We're recently ranked on the top 3% among the Russell 1000. Being a corporate citizen is part of our high-performance employee ownership culture. Our company purpose of making life better is deeply ingrained into everything we do, including partnerships with community-focused organizations such as the American Heart Association, Feed NC, Drop in the Bucket, and La Escuelita Bilingual Preschool. In addition to striving to be a responsible corporate citizen, we're thrilled to be named best companies to work for in the industrial and business service sector, receiving high marks in employee sense of belonging. We believe our employee ownership model drives increased employee engagement, and as long-term shareholders, it creates economic opportunity for our employees and their families. I will turn now the presentation over to Vic to provide an update on our Q3 financial performance.
spk04: Thanks, Vicente. On slide 8, fueled by IRX, we again delivered record results in Q3 through a balance of commercial and operational execution. Total company organic revenue increased 6% year-over-year with incremental margins of 38%. Book-to-bill was 0.94 times, which was in line with expectations. As a reminder, we typically see book to bill above one in the first half of the year due to the longer cycle large project orders received and a book to bill below one in the second half as those large longer cycle projects convert into revenue. We remain encouraged by the strength of our backlog, which is up approximately 6% year over year. The strength in our backlog provides good visibility and momentum as we move into the fourth quarter of 2023 and begin to look towards 2024. The company delivered third quarter adjusted EBITDA of $462 million, a 23% year-over-year improvement, and adjusted EBITDA margins of 26.5%, a 170 basis point year-over-year improvement. It is important to note that these results are closely approaching our long-term targets set forth during our 2021 investor day. For the quarter, adjusted diluted earnings per share was 77 cents, up 24% versus the prior year. Free cash flow generation for the quarter was $369 million, up 46% versus the prior year. Free cash flow margins for the quarter finished at 21%. Total liquidity at quarter end was $3.2 billion, which was flat compared to the prior quarter. And our net leverage continues to remain near all-time lows. At 0.9 turns, we are 0.1 turns better than both the prior year and prior quarter. Turning to slide 9, for the total company, Q3 orders declined 2% and revenue increased 13%, both on an FX-adjusted basis. Total company adjusted EBITDA increased 23% from the prior year. The ITS segment margin increased 260 basis points, while the PST segment margin improved 120 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 $44 million for the quarter, driven by continued investments to support growth in areas like demand generation and IoT, as well as the impact of incentive compensation adjustments. Adjusted diluted earnings per share for the quarter was up 24% to 77 cents per share. This $0.15 year-over-year increase includes a $0.03 headwind from interest expense. And finally, the adjusted tax rate for the quarter was 22%. Moving on to the next slide, free cash flow for the quarter was $369 million, including capbacks, which totaled $29 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 $308 million deployed to M&A, largely driven by the acquisition of Roots. We returned $8 million to shareholders in dividends, and no share repurchases were made during the third quarter, although we remain committed to our annual share repurchase plan of approximately $250 million for the full year. M&A remains our top priority for 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've acquired over the past two to three years. Turning to slide 11, as we have always planned, we continue to transform our debt portfolio. After being upgraded to an investment-grade credit rating across all three rating agencies, we refinanced $1.5 billion of secured term loans through the issuance of unsecured investment-grade bonds in the quarter. Our capital structure continues to evolve and is designed to facilitate our capital allocation strategy, and we remain committed to having a fully unsecured investment-grade capital structure in the near future. As a result of this debt portfolio transformation, we have improved our fixed to floating ratio note to 74% fixed and 26% floating, and our weighted average maturity on debt has moved from four years to six years. Finally, on an annualized basis, our interest expense has been reduced by approximately $20 million. This should deliver an annualized improvement of approximately $0.04 of earnings per share, which will be realized across both 2023 and 2024. I will now turn the call back to Vicente to discuss our segment results.
spk12: Thanks, Vic. On slide 12, our industrial technologies and service segment delivers strong year-over-year organic revenue growth of 9.5%. Adjusted EBITDA increased 31% year-over-year with adjusted EBITDA margin of 28.8%, up 260 basis points from the prior year with an incremental margin of 42%. I would like to take a minute to note that these high 20s adjusted EBITDA margin are in line with our 2025 long-term targets set during our Investors Day in 2021. So we're almost two years ahead of schedule in terms of achieving these results. Book-to-bill remains on track and finished in line with expectations at 0.94 times. Consistent with previous guidance, we anticipate a book-to-bill of approximately one time for the year. As a reminder, we typically see a build-to-build of above one in the first half as larger, longer cycle orders are placed, and below one in the second half as those larger, longer cycle orders are shipped. Organic orders came in line with our expectations, down 8.7%, as we are counting high teens organic orders growth from Q3 last year. Therefore, it is good to highlight that on a two-year stack for the third quarter, ITS organic orders have grown 8%. Moving to the product line highlights, core product lines continue to show strong momentum on a two-year stack, excluding FX and also excluding the recent acquisitions of SPX air treatment and roots blowers. On a two-year stack, compressor orders were up low double digits and revenue was up mid-30s. Industrial vacuum and blower orders were up mid-teens and revenue was up low 30s. And the power tools and lifting was up low double digits on both orders and revenue. For additional detailed information on product lines and regional splits, we have moved the chart, which was previously included on this page, to slide 17 in the appendix. Moving to the innovation in action portion of this slide, we're highlighting a new oil-free compressor recently launched in North America. This product is a great example of Incuso brand leveraging I2V to deliver new products with best-in-class efficiency. This IIoT ready compressor is 14% more efficient than the previous model, and it is 5% more efficient than the competition. Turning to slide 13, revenue in the precision and science technology segment declined 5% organically. The decline in orders and revenue were primarily driven by the life science business, which continues to experience softness in the oxygen concentration and biopharma end markets. We remain positive about the underlying health of the PST business as short cycle orders in the industrial businesses were positive both sequentially and year over year. The increases in the short cycle business were driven by demand generation activities and lead time reductions. Overall, the PST segment remains on track to meet our long-term investor day growth commitments as illustrated on the chart on the bottom left-hand side of the page. The three-year organic order and revenue caregiver of 5% and 7%, respectively, are in line with the long-term investor day targets of mid-single-digit plus growth. Additionally, the PST team delivered adjusted EBITDA of $94 million, which is up 2% year-over-year despite declines in revenue. Adjusted EBITDA margin was 30.3%, up 120 basis points year-over-year. The continued year-over-year improvement in our adjusted EBITDA margins is driven primarily by price-cost improvements and synergy delivery on acquired businesses. For our PST innovation in action, we're highlighting our YZ brand partnership with the largest natural gas transmitter in Europe, GRDF. During the second quarter of 2023, we executed a 10-year contract with GRDF to provide mission-critical authorization equipment for renewable natural gas, or RNG. We're very excited about this partnership and believe that there are plenty of future growth opportunities as the European Union has committed to replacing 20% of lost Russian gas supply with RNG over the next six to seven years. Moving to slide 14, given the year to date solid performance and continued momentum from backlog, we're once again raising our 2023 guidance. For the full year, total company revenue is expected to grow between 14% and 16%, which is a 200 basis point improvement versus our previous guidance. We anticipate organic growth of 9% to 11%, where price and volume remain split approximately 60-40%. FX is now expected to show a slight headwind of approximately 1% on a full year basis. Our revenue from M&A has increased by $60 million to approximately $360 million for the full year. This increase reflects the impact from all completed and closed M&A transactions as of November 1st, 2023. Corporate cost or plan at $170 million for the year. Total adjusted EBITDA for the company is expected to be in the range of $1.73 billion and $1.77 billion, which is up 2% versus prior guidance, and up 9% versus our initial guidance at the midpoint. At the bottom of the table, adjusted EPS is projected to be within the range of $2.81 and $2.89, which is up 21% year-over-year at the midpoint. We're also reaffirming a booked bill of approximately one for the full year, which puts us in a solid position as we look to enter 2024. Based on our current full-year outlook, backlog will finish at near record-level highs, and we will end the year with approximately 40% higher backlog compared to the balance at the end of 2021. As Vic had mentioned earlier on the call, interest expense is now projected at $155 million, with a portion of the interest expense savings from the debt restructuring being realized in 2023. No changes have been made to our guidance on the adjusted tax rate or cap expense as percentage of revenue. They remain in line with both initial and prior guidance. On the bottom right-hand side of the page, we included some additional commentary specifically around Q4. We do expect organic orders to be positive both sequentially and year-over-year. In addition, we anticipate organic revenue to be positive in both price and volume year-over-year. Incremental margins are expected to be approximately 35% for both Q4 and the full year. Turning to slide 15, as we wrap up today's call, I want to reiterate that Ingersoll Rand remains in a strong position, and we're proving how resilient we are even in difficult microenvironments. We continue to deliver record results, and our updated guidance is reflective of our year-to-date performance and ongoing backlog momentum. To our employees, I want to thank you for another quarter of record results. These results show the impact each of you have as owners of Ingersoll Brand. We will remain focused on our commitment to meeting our financial targets and executing our economic growth engine using IRX. 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 investments with the highest return. We remain nimble and continue to monitor the dynamic market conditions that are prepared for the challenges that may come. With that, I will turn the call back to the operator to open the call up for Q&A.
spk07: As a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. And please limit yourself to one question and one follow-up. Your first question comes from the line of Mike Halloran from Baird. Please go ahead.
spk03: Hey, good morning, everyone. Morning, Mike.
spk04: Morning, Mike.
spk05: So a couple questions here. First, could you just put the order trajectory and trends in context for us? I certainly understand some of the life science stuff, but when you look at more of the industrial assets you have, You know, why the confidence in the order recovery as you look to the fourth quarter? Are you seeing any signs of softening points in the portfolio? And how do you think about the underlying momentum of the business as we look into 2024?
spk12: Yeah, Mike, so maybe a couple things here first. As we mentioned earlier on the call, I mean, Q3, what we saw in Q3 is really on a year-over-year is really driven in large numbers. due to the tough comps from prior year. As you saw kind of Q3 of 2022, ITS was up 16% and PST up 3%. So I would say the Q3 orders finish in line with the expectations that we had. Even to your other question about what we were seeing underlying demand, You know, we made a reference that even on the PST side, when you look at the short cycle business, which is really more driven by industrial side, I mean, we saw sequentially that business to be short cycle industrial being up Q2 to Q3 and also up year to year from an order perspective organically. I will also highlight that, you know, even our ITS segment, when you look at mainline Europe, Q3 order momentum was actually higher than Q2. So we still feel that the underlying businesses are performing to our expectations. We also, as you know, really look at this from a MQL perspective, the marketing qualified leads. We see stability. We see solid kind of continued momentum on that. And as we kind of head into the fourth quarter, you know, the level of confidence on what we said about orders sequentially being up and also on a year-to-year is driven by a lot of these kind of data points as well as, you know, long cycle visibility that we have coming into the fourth quarter.
spk05: Thanks for that. And then on the M&A side of things, you know, certainly appreciate all the color you give on the slide on LOIs and funnel and everything like that. My question more is have you seen any change in tone with the people you're interacting with from an interest rate perspective, lack of visibility on maybe where the demand picture is. Does that help or hurt the thought process in the conversations? And maybe just some thoughts on the sentiment around the people you're talking to and how you should think about close rates.
spk12: Yeah, no, definitely, Mike. I will say that the sentiment has been on the positive side for us as buyers and acquirers. And as you well know a lot of our M&A is sole source, uh, driven by a lot of the outreach that we do, uh, to many cases, you know, family owned companies. And, and I think the, the, what, what you continue to see in the, in the market for the micro environment, I think that is really enticing and encouraging others, uh, to really think about how to transition, uh, those multi-generation family companies, uh, to a great, uh, company like ours, where, as you know, we do a lot of work around employee ownership, employee engagement, and that's a big attracting factor for a lot of these companies to transition to us. So I think we're seeing continue very strong activity on the M&As.
spk05: Great. Really appreciate it. Thank you.
spk07: Thank you, Mike. Your next question comes from the line of Julian Mitchell from Barclays. Please go ahead.
spk08: Thanks. Good morning. Maybe looking at the fourth quarter guide, it looks like it's sort of mid-single digit organic sales growth and mid-30s incremental margin. I just wondered, you know, as the Q4 probably represents a somewhat more normal price cost and somewhat more normal sort of demand environment in the last year or two, So as we look ahead, should we assume that that sort of mid-30s operating leverage is a good placeholder for the period beyond Q4? And on the organic top line, maybe there's a little bit less price next year than in Q4, but that sort of low to mid-single digit rate is a good starting point for sales growth.
spk04: Yeah, Julian, this is Vic. I'll take that one. I think you're spot on on both accords. In terms of the operating leverage, we've indicated, whether it be Q4 or full year, and we've kind of been holding pretty steady to this, that mid-30s, call it roughly 35% incrementals range, is where we expect to operate in, and that's very consistent with, I think, where you've seen us historically. ITS may be slightly on the higher side, but we think a mid-30s range is right, kind of where we would expect to play, not just now, but on the go forward as well. And then in terms of the pricing side of the equation, yes, obviously you've seen much more elevated price realization over the last few years. But quite frankly, you've seen a lot of that now starting to get comped, and now you're falling into a much, I'd say, more normalized, lower single-digit realm. And we would expect that kind of 1% to 2% net price to be a good proxy as we move into 2024. So, yes, I think you're spot on on both.
spk08: Thanks very much. And then just my quick follow-up. PST specifically, you know, it can be tricky from the outside to understand the moving parts on the revenue there. And you called out Vicente, the short cycle industrial bit's pretty good. The biopharma bit is still bad, which everyone else has iterated as well. You know, what's your sort of best view of that biopharma piece from here and kind of how large is that medical piece now of PST as we exit this year? I think when we look at next year, some people have talked about a V-shape in biopharma. It's not obvious to me why that would happen at all, but just wondered your perspectives.
spk12: Sure, Julian. So maybe a couple of things I'll say too as well. So when you think about the PST, PST think about it that even when you exclude the life science business from PST on 10 out of the 11 past quarter has been positive on organic orders and actually organic revenue. That tells you the good strength of the rest of the PST segment. Clearly, the life science, which is roughly about a quarter of the PST, has been on this kind of situation with biopharma, but also oxygen concentration. The life science business has been probably negative organic order growth momentum for probably the past six quarters. It's been now a little while while the non-life sciences has been positive. We're experiencing these challenges that others have indicated on life sciences. The way we think about it is that for us, biopharma, yes, we have some exposure, but it's not the biggest piece of our life science. And market exposure within the PST, the biggest exposure for us is really oxygen concentration. And the oxygen concentration, when you think about it, really a great acceleration during the COVID days and is the one that we saw pivoting into negative more pronounced earlier than even the biopharma. So it was almost like a leading indicator for us. As we kind of go here into the fourth quarter and maybe in the first half of next year, we see that more so next year maybe an uptick, not in a V-shape, but a continual doing better from an oxygen concentration side of the business. So we continue to think that PST, as even you saw on that segment slide, I mean PST CAGR growth, Organically, revenue and orders momentum continues to be a segment that will see that mid-single-digit plus over the cycle and over time. I mean, it's with great characteristics and continue to improve in that. So, again, I don't think it's going to be a V-shape, but even if it's a V-shape, it's not one that, again, we don't have that big exposure in the biopharma.
spk08: That's great. Thank you.
spk12: Thank you.
spk07: Your next question comes from the line of Jeff Sprague from Vertical Research Partners. Please go ahead.
spk02: Hey, thank you. Good morning, everyone. Morning. Morning. Hey, Vicente, maybe elaborate a little bit on kind of this visibility on long cycle orders that you mentioned in Q4. And kind of the spirit of my question is, you know, we've heard from a few companies this earnings season, electrical companies, HVAC companies, that know kind of the mega project pipeline is building and becoming more visible but there haven't been a lot of orders booked yet and they're just starting to kind of come into kind of the booking cycle uh are you seeing any of that uh sort of dynamic or maybe uh if not maybe share a little bit more color on kind of the nature of the long cycle orders you are starting to see come into view
spk12: Yeah, I think, Jeff, that's exactly what I was trying to refer to there is that we're seeing definitely, you know, before, if you remember a few quarters or even last year, we spoke a lot about a lot of these kind of large projects that were being in conversations. And now we're seeing definitely the release of some of those funds. And so, yeah, that's what's giving us a bit of a higher level of confidence. in terms of how the long cycle funnel continues to build in our company that gives us a good level of visibility, I'll say, not only Q4, but also as we go into 2024.
spk02: And then I think it was Vic, maybe it was you talking about deals, saying there's a couple billion dollar things in the pipeline. Sounds like you expect bolt-ons most likely, which would be, I guess, natural. But maybe kind of a little bit of color on, you know, what's going on in the bigger deals and the likelihood of getting something done in that size range.
spk12: Yeah, so that's right. I mean, we said on the call that we, in the funnel, continues to be really strong and, you know, mostly bolt-on in nature, but there's a couple that are, you know, above a billion-dollar purchase price, and I'll say that those are very well in line with our M&A strategy. We should not think about it as being a third leg of the company. You know, for competitive reasons, we don't want to kind of get into a lot of details, but we feel very comfortable with kind of even where we are from a balance sheet perspective and being less than one time on our net debt to adjusted EBITDA ratio, it actually puts us in a very strong position to move forward with this transaction. But, yeah, we're very excited with how the M&A funnel continues to build and what we see in terms of getting things executed here over the next couple quarters.
spk02: Great. Thanks for the call.
spk12: Thank you.
spk07: Your next question comes from the line of Andy Kaplowitz from Citigroup. Please go ahead. Good morning, everyone.
spk06: Morning. Vicente, can you give us more color on what you're seeing by geography? I think you've been very active in really generating market share gains in your own demand in regions such as China and Europe. Are you confident, for instance, that Chinese compressor growth will remain positive? Obviously, I think EMEA compressor orders turned down a bit. I don't think you have big exposure to Germany, but how are you thinking about EMEA as well?
spk12: Sure, Andy. So, you know, first of all, on the Chinese compressor, I mean, clearly, not surprisingly, the overall China market has continued to be, I'll say, choppy and soft. However, you saw how we deliver. You know, the team in Asia Pacific and particularly in China, again, demonstrated one more time another quarter of kind of growth organically in the compressor side from an orders and revenue perspective, which speaks to the continual self-help that the team is driving and leading relative to the overall performance in the market. And we'll clearly share more examples of that as we head into the investors' day. I'll say in Europe, no significant changes in demand. I mean, MQL activities remain solid. We continue to focus on our own demand generation for high growth sustainable in markets. Our economic engine is working. And as I made on the remarks, I mean, we saw even orders sequentially in mainland Europe come from, for the compressor side, actually grew sequentially Q2 to Q3. So that gives us continued encouragement that, again, these self-help initiatives are working and these kind of year-over-year tough comps. is one that we're just not worried about as we see the underlying demand continue based on the self-help.
spk06: Vicente, maybe just following up on that, as the environment has been normalizing and interest rates are up here a little bit, at least in the U.S., your focus on energy efficiency and sustainability through your products, how do customers, when you have conversations with customers, how do they balance maybe higher costs of financing versus... you know, your ability to provide them energy efficiency and sustainability, is that still trumping, you know, the higher cost?
spk12: Yeah, I'll say, Eddie, it's all about that ROI and the payback. And as customers prioritize CapEx as they go into 2024 and beyond, it's all going to be all about ROI. No different to how we do it ourselves internally. And these energy savings, energy efficiency is definitely driving the conversation at the top, even at the C-suite level now where customers are looking for what could they do to drive this great payback. So, again, this is how our sales guys sell. They sell based on total cost of ownership and ROI.
spk07: Appreciate it. Your next question comes from the line of Rob Wertheimer from Malleus Research. Please go ahead.
spk01: Thank you. Just to kind of follow up on a couple of those comments, because I think what you've done in China has been impressive, and maybe increasingly so. Is the market in China weakening? Do you have any sense of the outperformance gap that you've been able to deliver? Is it widening because of continued growth in a market that's kind of blown up a few Results this quarter is great. And have you seen a competitive response? And if I may, Vicente, your comments on Europe are relatively constructive. Are they meant to show or to reflect IRX and how you're generating, you know, better orders in a softening market? Or have you really just not seen softening?
spk12: Vicente Bonilla- Yeah, great. I think the two there are pretty well tied. I mean, I think IRX is definitely what is helping us drive this outperformance that we're seeing. against the backdrop in the market. And even when you think about it, that ISM and PMIs have been below 50 and we still have been able to deliver over the past few quarters really great strength in orders and revenue momentum. I think that is what gives us that uniqueness in terms of leveraging IRX as a differentiator. And clearly we're not immune to the market, but it's all about controlling what we can control. And this is what our teams have done exceptionally well, guided and driven by how we leverage IRX as the execution engine to overdrive. And to the China's low-down question there, Rob, I'll say that China continues to be very soft and choppy. You know, I was in China. I've been in China now twice over the past five months. And just to see it myself firsthand. And I think, you know, what the teams continue to do there is just incredible. Yeah. But as we always said, we're in China for China, and that is really also helping from a strategy perspective because we're being viewed in the China market as almost like a local player, obviously with a great reputation of a multinational and the great quality and innovation that we're launching. But, again, it's a lot of self-help that we're getting executed through the use of IRX.
spk01: Great. Thank you.
spk07: Your next question comes from the line of Nigel Coe from Wolf Research. Please go ahead.
spk09: Thanks, guys. Good morning. Hope all goes well. Covered a lot of ground. On PST, maybe could you just remind us, after this, obviously, this correction, where is biopharma as a proportion of that segment now? And then on the fourth quarter in PST, I think we're assuming, you know, a minus five to, I think, low to mid single digit growth there. I think the step up Q3 to Q4 is a bit heavier than normal. So just wondering, you know, what you're seeing near term driving that improvement.
spk12: Yeah, first on the PST, overall life science is about a quarter of the PST segment and And biopharma, it is maybe, I'll say maybe, I don't know, maybe a third of that quarter. And the big life science here for us more so is on the oxygen concentration side of the equation. I think it's important to note that when you look at PST segment X life science, we have been able to kind of put organic orders and revenue positive momentum on 10 out of the last 11 quarters. So that kind of shows the good strength and diversity of that segment that gives us confidence on that overall over the long cycle or cycle, the mid-single-digit plus.
spk04: Okay, that's great. I think your second part of your question was the sequential movement from PST Q3 to Q4.
spk09: That's right, yeah, yeah.
spk04: Yes, I think we do expect to see, what I'll say, a slight nominal uptick from Q3 to Q4. I would remind you that this business doesn't, I would say, have a tremendous amount of seasonality, comparatively speaking, to other businesses. It's a relatively consistent quarter-to-quarter, but that being said, I'd say a combination of a couple things. still continue to have a relatively healthy backlog, and that is reflected in terms of what we expect to ship in Q4, as well as Vicente indicated, relatively healthy and good, strong momentum on what I'll call the industrial side of the business, where you continue to see good order intake in Q3, and we would expect to see that continue into Q4. So again, for those reasons, we would expect to see a slight nominal uptick from Q3 to Q4. I'd say relatively consistent to what you've seen historically.
spk09: Okay, that's great. Thanks, Beck. And then on the, I mean, Jeff asked the question as well, but I just want to follow up on a couple of the billion dollar type transactions. You know, are these typical privately sourced negotiated deals or are these more sort of investment banking driven auction type processes?
spk12: No, they're privately sourced. I mean, they're ones that we have been cultivating for quite some time.
spk09: Okay, great. Well, good luck with that. Thanks.
spk12: Yeah, thank you.
spk07: Your next question comes from the line of Joe Ritchie from Goldman Sachs. Please go ahead.
spk13: Hey, guys. Good morning. Morning. Hey, Joe. Hey, so just a lot of color today. Thank you. Just as you're kind of thinking through the book-to-bill and the order rates as you head into 2024, so is the expectation then – that in the first half of 2024, we would expect to book the bill in ICS to be above one again, orders to continue to expand just based on what you're seeing today in your MQLs?
spk04: Joe, yeah, I think obviously we're not going to get into guidance for 2024 yet, but I think the construct remains consistent with what you indicated. I think in generally any degree of a typical year, book the bill above one through the first half of the year, particularly as that longer cycle kind of orders funnel continues to progress through, and then book-to-bill below one, what I'd say a combination of normal seasonality combined with the longer cycle, larger project shipping through the back half, that will typically lend to that normal dynamic of book-to-bill above one in the first half and below one in the second half. Right now, no reason to think anything differently for 2024.
spk13: Okay, great. And then maybe just the follow-up to that. Are you guys hearing any concerns around projects pushing out a little bit to the right, just given what the rate environment looks like today? There's been, I think, a lot of concern in the market with certain end markets, at least seeing projects push to the right, like the renewable sector. I'm just curious what you're seeing specifically and the conversations that you're having with your customers.
spk12: I'd say nothing of significant or material change. And if anything, if we see projects pushed to the right, it is really mainly due to sites not being ready, which has been more driven by finding the labor to just get the sites on track and be done. Having heard much about the context of interest rates being the driver for getting these projects pushed to the right.
spk13: Okay, great. Thanks, guys.
spk12: Thank you. Thank you.
spk07: Your next question comes from the line of Joe Odia from Wells Fargo. Please go ahead.
spk10: Hi. Good morning. Thanks for taking my questions.
spk07: Good morning.
spk10: I wanted to start on resource allocation planning for 24. And I think you've got a model that allows you to be pretty nimble as you sort of exploit growth where growth is. And so what are you doing now? What's kind of underway? in terms of how you want to position those resources and thinking from a geographic perspective, from an end market perspective, where you see growth as most attractive and how you're positioning for that.
spk12: It's an interesting question. Again, and also maybe a few weeks ago, we were actually together with our team, our demand generation team in Poland, where we had a long week session, particularly thinking and looking at what are we seeing today and what do we expect to see in 2024, and how do we position the next level of demand generation activities to really position us in good strength as we go into 2024. So all of that work is undergoing. I can tell you that, you know, the one level of detail I'll tell you as you kind of double click on that is that it varies region by region and even in countries within the region. Like, for example, in mainland Europe, what we might be doing in France is very different from what we might be doing in the UK. And a lot of that is driven by what we're seeing at the micro level. So that's the level of detail that we undergo and we as a team kind of put together to really understand those best growth vectors that we're seeing at the micro level versus not keeping it at the macro, which if you do it at the macro, you're going to get a few product wrong. So that's the exciting piece is that as a team, we kind of got together and we feel that we're in pretty good momentum here to start 24 in a good shape.
spk10: Appreciate it. And then I wanted to ask on the ROI side and the example you gave on the oil-free compressor and 14% more efficient than the previous model and just any more perspective on when that previous model would have been launched and to get a sense of would customers be at sort of a natural kind of replacement stage or what about that ROI is compelling such that the payback would encourage them to replace ahead of the natural aging of the prior model system?
spk12: Yeah, Joel, I would say that right now ROI is, and again, it could vary by region, but we're seeing ROIs between 12 to 15 months. So it's a really great payback. again, driven by a combination of energy efficiency, but also driven by higher energy costs. So I think it's just one of those that we're driving really hard. And customers, when they see a payback of 12 to 15 months, or call it less than two years, and combine that with the sustainability and what many of them have to do with scope one and scope two is the other kind of great factor that gives us great tailwind.
spk10: Got it. Thank you.
spk12: Thank you.
spk07: Our next question comes from the line of Chris Snyder from UBS. Please go ahead.
spk14: Thank you. I wanted to ask on the fourth quarter, you know, the pretty wide range of outcomes in the organic growth cried, anywhere from down one to up six by my math. Can you just maybe talk about some of the puts and takes or the variables that would drive the range of outcomes from that high end to that low end? Thank you.
spk04: Yeah, sure, Chris. I, you know, what I would probably tell you here is, you know, we kind of view it as probably, frankly, a bit of a tighter spread than that. But, you know, if I take it by the two components, so maybe I'll talk kind of year over year based on the guide here. Like we said, we do expect to see positive organic growth. That includes across both segments, starting on the ITS side. If you're thinking the guide would imply something in the range of roughly approximately 3% organic growth year-over-year, again, given the pricing momentum we've seen as well as an expectation for organic volume growth, you can probably think of it as, roughly speaking, two-thirds price, one-third volume. And I think I would fall back on kind of exactly what we've said all year, is that if there's kind of an upside opportunity in the context of the guide, and as we think about Q4, it would really be that organic volume side of the equation, particularly on the ITS side, where, again, backlog continues to remain at effectively record levels. On the PFT side, I'll go back to some of the commentary we made earlier here. Again, continue to expect to see positive organic growth. Probably a little bit more of a pricing tailwind, comparatively speaking, to what you've seen in ITS. And I would just really frankly attribute that more so to what we've said over the course of the last one to two years. ITS probably got out a little bit quicker than PST on the pricing front. And as such now, PST probably has a little bit of a longer lasting tail on the pricing side of the equation. But again, those would be kind of the dynamics we would expect. But again, we would expect to see positive on both sides of the equation, effectively falling at the midpoint of the guides as you saw us make in the prepared comments.
spk14: Thank you for that. Really, really, really helpful. Maybe for my follow-up, just on prior commentary around this expecting sequential order improvement into Q4, it doesn't really seem like that's seasonal. It seems like typically Q4 orders are similar to Q3, if not lower. So should we take that? Is that just around timing of some of these bigger projects coming through? Or is that a signal of demand is at least stabilizing, if not improving? Thank you.
spk04: Yeah, I would actually say it's probably a function of both. So, for example, if you go back to last year, you know, we acknowledge and you heard Vicente say in the prepared comments, Q3 was kind of a peak from an orders perspective in the context of some of these, you know, longer cycle orders, some biogas orders, some things we saw last year that created that tough comp, right? And we did see, you know, we even indicated last year that think about it more on a second half basis. where you saw Q4 orders kind of normalized, comparatively speaking, to Q3. Now you're kind of facing the other side of that equation. So obviously very tough comps in Q3, which we acknowledged. You saw that kind of play itself out. And now as you think Q3 to Q4, I think a combination of consistent, stable kind of MQLs, stable demand patterns, some of the longer cycle dynamics that Vicente spoke to. I think that sets up for what we're expecting to see in terms of the positive trajectory, both from Q3 to Q4, as well as on a year-over-year basis. Is there some degree of seasonality that is particularly a little bit more on the ITS side? Yes, I guess obviously with some of the other noise, you haven't necessarily seen that as prevalent, particularly in the last few years. But, you know, I wouldn't speak to any dramatic seasonality of no playing itself out this year, whether it be ITS or PST.
spk14: Thank you.
spk07: Your next question comes from the line of Nathan Jones from Stiefel. Please go ahead.
spk11: Thank you. This is Adam Farley on for Nathan. My first question is on channel inventory. What, if any, impacts is channel inventory correction having on your business?
spk12: Yeah, Adam, I will say, again, given the highly customized nature of our products, there's really no material risk on this stocking. That common serves really well for the ITS segment. And for the PST segment on those businesses that kind of sell through distribution, we monitor really closely the sell-in and the sell-through or the sell-out activities to ensure that we prevent our customers from getting into an overstock situation. And we have been doing this that way for probably, I mean, we have data points over the past five years to really have a good view as to what's going on in the distribution channel.
spk11: Okay, that makes sense. And then on my follow-up, the power tools and lifting business continues to show really solid growth. That business has really improved under your ownership. What's driving the strength there? And I believe that business has been considered non-core in the past. So maybe could you provide an update on anything about the portfolio and the potential for portfolio rationalization? Thanks.
spk12: Sure, Adam. So you're absolutely right that the PTL business has really done incredibly well. And to point out, when we acquired Ingersoll Rand, PTL came in with mid-teens EBITDA margin, and now it's pretty close to that ITS kind of blended average, kind of getting to that point. So great improvement while still growing the business. The real nature of a lot of this performance has really been new product introduction. So the team has done a really great job of reinvigorating new product. And I think the exciting piece here is that as we look into 2024, they're going to be launching a next generation set of tools as well as lifting mechanisms that we think could continue to see some good performance.
spk11: Thank you for taking my questions.
spk07: And we have no further questions in the queue at this time. I will turn the call back over to Vicente for closing remarks.
spk12: Great. Thanks, everyone, for your level of interest. And as we said on the call, I want to thank, again, all of our 20,000 employees across Ingersoll Run who are owners of Ingersoll Run and have a great performance here as we kind of close the year and as we go into 2024. So thanks again for the interest and look forward to catching up with many of you. Thank you. Thank you. Bye-bye.
spk07: This concludes today's conference call. Thank you for your participation, and you may now disconnect.
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