Hello. Welcome to the Rand Third Quarter 2021 Earnings Conference Call. My name is Harry and I'll be your operator today. [Operator Instructions]. I will now hand the call over to your host, Chris Miorin, 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 Miorin, Vice President of Investor Relations, and joining me are Vicente Reynal, President and Chief Executive Officer and Vik Kini, Chief Financial Officer. We issued our earnings release and presentation yesterday, and we will reference these during the call.

Both are available on the Investor Relations section of our website [Indiscernible] 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 2 for more details.

In addition, in today's remarks, we will refer to certain non-GAAP financial measures. You can find a reconciliation of these measures to the most comparable measure calculated and presented in accordance with GAAP in our slide presentation and in our earnings release, both of which are available on the Investor Relations section of our website.

On today's call, we will 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 1 question and 1 follow-up to allow time for other participants. At this time, I will turn the call over to Vicente..

Thanks, Chris. And good morning to everyone. Starting on Slide 3, coming out of the third quarter, Ingersoll Rand 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 micro-economic factors continue to be a challenge.

We're not immune to demand in 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 out-performance 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 4, we remain committed to our 5 strategic imperatives, and we'll focus our remarks today on our growth and capital allocation strategies. Before we move to those, I have 2 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 our performance 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 them, these results will 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 1/3 to now, being in the top 1/3 of the companies rated by MSCI.

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 Seepex and Maximus Solutions acquisitions and announced Air Dimension acquisition, last week. We also announced an agreement to acquire Tuthill 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 sale of their final equity stake in the Company, as well as the prepayment of the more expensive trench 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 mega trends.

We and our customers are seeking to address in how Ingersoll Rand products and services help make life better for all our stakeholders. Our strategy enables all to compound our contribution to address in 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 contents and allows us to generate over 200,000 marketing qualified leads per year. We also continued 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 6, 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 Rand, as well as our factory buyers and planners for their tireless efforts in creative thinking using data back 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. This has produced outstanding results. Moving to slide 7, we will now look more closely at our recent inorganic achievements. We signed definitive agreements to acquire Tuthill Pumps, which is expected to close in Q4.

And Air Dimensions, both of which will become part of the precision and science technology segment. We also closed acquisition of Lawrence Factor, which will become part of the Industrial Technology and Service segment. These 3 acquisitions are representative of the key characteristics we're targeting with our inorganic growth strategy.

Tuthill Pump, is the second asset we have purchased from Tuthill 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 Ingersoll Rand family.

This is another testament to how our unique approach to employee ownership allows us to be at the frontlines 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 bio-gas.

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 closed acquisition of Lawrence Factor, which will reside in the IPS segment.

Lawrence Factor, is a great example of an acquisition that is well aligned with our Company purpose of making lives better. As our 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 3 of these acquisitions were valued on attractive purchase multiple, and our synergy execution is expected to deliver mid-single-digit post-synergy realization by year 3, in line with our disciplined pre -deal screening process. I will now turn the presentation over to Vik to provide an update on our Q3 financial performance..

Thanks Vicente. Moving to slide 8, 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 synergy, 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 of $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 post 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 ITS and PST segments both saw year-over-year improvement in adjusted EBITDA. EBITDA margin on ITS improved a 150 basis points.

While the PST segment margin declined 100 basis points driven by the impact of the SEEPEX and Maximus Solutions acquisitions, both of which closed in Q3. When adjusted to exclude the impact of the SEEPEX in Maximus acquisitions, PST margins increased by 20 basis points. Finally, corporate cost 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 cost 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 nonrecurring 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 with $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 3 items, adjusted free cash flow was $307 million. Leverage for the quarter was 1.3 times, which was up 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 sale of the 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, Vik. Moving to Slide 11 in our Industrial Technology and Service segment, revenue was up 14%. The team delivered strong adjusted EBITDA up 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 were 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 of high 40s, while India and Middle East, so 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 banking [Indiscernible], always 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 improve 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 LeROI gas compressors are used to capture bio-gas immediate from landfills, dairy farms, and wastewater facilities.

As the gas is emitted, the system captures the gas, cleaning the methane from other gases such as, hydrogen sulfide and carbon dioxide. And our LeROI product compresses the methane for reinjection into pipelines or storage for power generation, both of which enabled the customer to capture additional economic value.

The compressor enables to capture up to 50% of the emitted bio-gas. Whereas without it, 100% of the gas will be released into the atmosphere. Our significant into base of 25,000 units will help capture 240 million cubic feet of bio-gas in the next 2 years.

Technology 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 delivers 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 SEEPEX and Maximus 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 SEEPEX and Maximus.

In this segment we would like to highlight the momentum our Haskell hydrogen solution 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 played the first order of 4 stations, with a total commitment of 24 stations to be provided through 2026. The totality of these frame agreement alone, will double our Haskel 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 market s 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 Tuthill Pumps. However, Sypex, Maximus 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 point 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 closed acquisition of Maximus, Seepex, Air Dimensions, and Lawrence Factor, we're increasing that expected contribution to a $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 a 100%.

CapEx is expected to be approximately 1.5% of revenues. And finally, we expect our adjusted tax rate for the year to be in the [Indiscernible] for the reasons Vik 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 18.

We look forward to outlining our long-term growth strategy fueled by alignment with Megatrends and compounded by our unique organic growth enablers.

We will provide detail on our markets and technologies, and further discuss how our strong talent, operational execution, demand generation, and M&A capabilities, coupled with a sustainable growth mindset creates incredible competitive advantages for our Company. We will also outline future financial targets.

You can 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, as we wrap up today's call, I want to reiterate that Ingersoll Rand is in an outstanding position. 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. It is apparent in our Company's performance.

We are actively investing to deliver outpaced growth, both organically and through M&A, to continue increase in the quality of our portfolio. We continue to take our role as a sustainability minded industry leader very serious. And our employees eagerly embraced IRX that puts us in that leadership position.

We're proud of the transformation we have achieved at Ingersoll Rand 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..

Thanks very much. [Operator Instructions]. Our first question is from Mike Halloran from Baird. Mike, your line is open if you'd like to proceed with your question..

Great. Thank you. Good morning, everyone..

Good morning, Mike..

Hi, Mike..

So let's start on the guide, and how you guys are thinking about the fourth quarter coming up year sales. Obviously, if you feel good about what the demand conditions look like, you're layering on some acquisitions here.

3Q was 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..

Mike, as of -- our guidance, as you heard, is taking the midpoint of our prior guidance of by $20 million. You can think about it being 2/3 M&A and 1/3 is organic. In this current environment, we continue to be prudent, based on the overall supply chain environment noise of situation that you hear out there.

In addition, just to point out, ITS margins in Q4, 2020 were up for 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 continued 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 decretive but gross margin accretive. And some of the accelerated Hydrogen investment that we're doing based on that frame order that we just received.

The EBITDA margin profile still is in the 30's kind of range, which we view as quite healthy given the top comps on medical shipments in 2020, as well as the inflation and discretionary investment that we have done here in 2021 and still do -- 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..

Since -- 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..

Yes, Mike, I wouldn't -- No, I think what [Indiscernible] saying is exactly in line with 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 in line with offsetting those headwinds, much like you saw in Q3.

So I think in that respect we see Q4 fairly comparable to Q3 in terms of price mitigating the inflationary risks..

Got you. And then on the order side, obviously really strong orders, good to see. Maybe some thoughts on what types of orders, those are -- those more short cycle in nature or 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..

Yes, I think, Mike, we're seeing kind of both. We see sustainable momentum on the short-cycle. And actually what we see is, long-cycle accelerating that some projects are getting released. The hydrogen being one, but others like, the bio-gas, is a very substantial project too as well. We're pretty pleased with what we're seeing.

At the same time I can tell you that we're -- with the level of technologies that we have across our portfolio, you're going to hear a lot more about this during Investor Day is how we're able to pretty quickly, reallocate technologies to some of those end markets that are seeing some meaningful growth.

And 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, gentlemen. 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..

Morning, Joe..

Maybe to staying with orders, obviously, clearly incredibly strongest quarter.

I'm just curious, are you starting to hear this more CapEx decisions being made, Vicente, where your customers are looking to deploy a little bit more CapEx in this environment that's given, given the supply chain, is been fairly unprecedented in what we're experiencing today, or is this -- is it 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 it's exciting to see that a lot of the older technologies, the majority of our technologies are 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 whether compressors, blowers and back-ends, 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 by achieving by 2020, 2030 and 2050. So I think a lot of this is really seem some -- it's going to see, it can still continue momentum in my view..

Got it. That's helpful. And I guess just maybe if you could just parse out that 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 pretty decent price cost benefit coming through your numbers?.

Yes. Sure, Joe, I'll take that one. So in the context of Q3, price realization was a little bit in excess of 3% across the entire enterprise, which obviously speaks to the healthy performance and frankly the proactive measures that frankly, all of our business is taking.

Pricing did slightly outweigh inflation in Q3, so we were price-cost positive in the context of Q3, we would expect to be at fairly comparable of that equation in Q4. Now it is worth noting obviously that not unexpectedly inflation, obviously, headwind have risen in the second half of the year compared to the first half.

We always expected that, and that's why we got ahead a lot of the pricing actions. Again, we're quite pleased with the performance and the momentum that we're seeing. As we think about 2022, frankly, a little bit too early to start guiding on numbers just yet, but obviously, 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, our 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 we're -- we'll reserve commentary just yet on the price cost equation into 2022.

But I think we're quite encouraged by the actions the team has taken to still say, price cost positive in the context of the second half of this year..

Sounds good. Nice job guys..

Thanks, Joe..

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

Thanks. Good morning, guys. Just wanted to attack on the back of that question, inflation. Just how do you define inflation? Do you just look at the direct input costs, the materials, is that labor and a board, definition increasing freight? That'll be interesting to hear. But just curious on obviously the orders very strong.

Can you maybe talk about where we are on the revenue synergy capture from the merger? Obviously, you put together a much more balanced portfolio showing some clear synergies across the product.

So, just wondering if some of this order strength is seeing some of the synergies come through?.

Nigel, I'll take the first one and I'll let Vicente speak to the second one on the revenue synergies. On the price cost, specifically on the cost comments that I made. The inflationary numbers that I was speaking to really are, what we'll call direct material and logistics or freight.

Obviously, we all, of course, measure and look at, what I'll call, labor inflation. The reality is, labor inflation has been frankly largely in line with our expectations the majority of this year. So again, while we do look at it, 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, that Vicente mentioned it here is quite frankly, yes, while labor is, we're in the same labor environment than 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 put forth..

Yeah, I'll draw on the second question around the orders in terms of revenue synergies coming from the transaction, yes, we're definitely seeing some of that. You're going to hear more on some of the case stories that we will show you during the Investor Day.

But clearly we're very pleased with how our oil-free compressor product line is moving, how air treatment -- a lot of good momentum that with a little product that we have launched and through the multichannel, multi-brand strategy that we have on a global basis is really giving us some good tailwinds on that..

And secondly, on the Investor Day, you said longer-term target, just wondering, are we looking here at sort of three-year targets, but not 2022?.

That's correct. We'll be talking about 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..

And your next question is from Jeff Sprague from Vertical Research. Jeff, your line is open now..

Thank you. Good morning, everyone. Maybe just coming back one more on cost also I would've guessed, actually you might need more than 3% price to offset inflation. So I'm just wondering if in that direct materials, I would assume you are including, you're kind of sourcing and merger-related benefits.

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 battle the inflation here..

Just to be clear and put a finer point on it. The pricing number you're going to see in the cue when it's issued tomorrow, right around 3.4%- 3.5% kind of net across the entire enterprise. Fairly comparable numbers between ITS and PST.

And in the context of what I was speaking to in terms of that covering inflationary headwinds, we're not incorporating, let's call it any of the merger related synergies, or anything of that, into that equation.

You're right, it does become a bit of a score keeping exercise, but we've been pretty disciplined and prudent to 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 separate, and I will say, as we said at the beginning of the call, we're still on track to deliver the kind of the year 2 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 total additional revenue contribution.

But would you mind just checking through those 3, what the annualized revenue of each one of those are?.

Sure. I can absolutely do that. So in terms of the 3 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 million to $12 million in annualized revenue. The Tuthill Pumps is in the mid-20s in terms of 25 which is probably a good number to use.

And Lawrence Factor is relatively small. It's a $6 million purchase price, which is actually very comparable to the revenue base and 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 IPS portfolio..

Great, appreciate it. Thanks for the color..

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 -- Good morning. Maybe just circling back on aggregate 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 look at next year, how quickly, I guess, do we see that operating leverage move back into the 30s.

Do you think something that can happen 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?.

Yes. I think that the latter part of your statement's probably true. I think obviously we're working through our views on 2022 and the annual budgeting process as you would expect right now. I think it's a little too early to call. 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 continued inflation into 2022, and then frankly, the synergy expectations for the base business, because we shouldn't forget that we still have the third year of the merger-related synergies as well as the integration nationally acquired assets.

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 more client closer to web. Let's call it that 30 – ish percent type number that we've been seeing across the segments, if not a little bit healthier.

But I'd say right now, the specific timing of exact cadence is something we're working through. And I think we'll give a bit more color as we do 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 at sort of across those acquisitions or you can call out one or two specific ones or more interested in maybe the total deployment, what do you think the 3 or 5 year return, sort of metric should be on those billion dollars or so that you have deployed? And if there's maybe 1 or 2 acquisitions in particular where you think the margin expansion should be above average.

Now that they are all once, they're integrated into Ingersoll..

I think, Julian, we should definitely expect to see that, kind of low double-digit to mid-teen ROIC return on these transactions. We always said that that is a financial criteria that we have in our deals. We're still finding great transactions that, are highly complementary from technology, from commercial acumen, and all of that.

And still be able to provide a good financial outcome based on a lot of post-synergy activities that we can do..

And then any sort of color Vicente on specific transactions that, you think offer above-average sort of margin expansion scope..

Well, one that I'll say comes to mind right now, for sure, SEEPEX, right? When we acquired SEEPEX, we said that was a mid-teens EBITDA. But we see that business to be way like a segment level to PST. So that is a tremendous margin expansion. Also, on the ITS, the recently acquired -- the recently signed transaction on Tuthill Pumps.

When you think about the prior Tuthill, I mean, it was a phenomenal margin expansion, so we still expect that to see some good momentum on expanding that. So, I think really across the Board, the Board, in a lot of the transactions we expect to see some good meaningful expansion.

Clearly, when you look at Maximus that is already acquired at PST difficult than that. And also, Air Dimensions, that is in the 50s, more difficult to continue spanning on that. And those tend to be, 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 Kaplowitz from Citigroup. Andy, your line is now open if you'd like to proceed..

Good morning, guys..

Morning [Indiscernible]..

You said that you've really been pushing hard into some of these newer markets over the last couple of years, lab life sciences, water, animal health, which obviously is leading to that 35% order growth in 20% revenue, growth in PST that you saw.

If we look back Gardner Denver is all medical business at average, I think something like mid-single-digit growth, but given the sort of niche focus of PST and what seems like higher-growth markets.

Is it fair to say the 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, old investments that we're doing are paying off in terms of, redirecting into these very niche markets and commanding some good, strong leadership positions, launching a lot of new product.

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, the team accelerated the new? [Indiscernible]product development and we're seeing that come through for? [Indiscernible] 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 a really strong compressor growth in China, and I know it's one of your key initiatives for the combined Company, but the rest of APAC orders were down a little bit in compressors.

So maybe just talk about regionally, what's going on, particularly in Asia..

Andy, I think we're incredibly pleased with how the team continues to execute in Asia-Pacific and particularly in China. And what we saw quarter-over-quarter, Q2 to Q3, we saw actually the momentum of orders really accelerate in China, which is kind of contradictory through some of the things that you hear out there in other companies.

So, it speak to a lot of the self-help initiatives that the team is doing.

We spoke about relaunching the Gardner Denver compressors, which obviously has proven to be a tremendous success into -- and that was something that we always said we were super excited about, the combination of Ingersoll Rand and Gardner Denver because we could have a multi-brand, multi-channel strategy, particularly in China.

The team has just done a phenomenal job, leveraging the [Indiscernible] initiative and an action to then relaunch an entire product portfolio with Gardner Denver. The second piece is Blowers and Vacuums. Blowers and vacuums was 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 can maybe split it between emerging and developing, like Australia, for example.

And that's still continued to perform fairly well, where we saw a little bit of softness was on the emerging as countries like Vietnam or Philippines was created on a lot of shutdowns due to COVID. But again, that's a fairly small portion of our business.

Therefore, China overcoming 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 Wertheimer from Melius Research. Rob, your line is now open, if you'd like to proceed..

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 and [Indiscernible] through the quarter, and switched the quarterly cadence upper or are added to the process of anyway, and then maybe just the outflow of that.

We had a few unexpected cost surprises across industrial first quarter, you guys avoided that entirely.

I'm curious if you think that the risk of unexpected surprises is nil because you've got a handle on it or whether it lasts another few months, whether you see more and more issues pop up that you have to deal with, or whether it's stable, just general outlook on supply chain over the next couple of quarters if you would. Thank you..

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 will say, great work supported by IRX and 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 used 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, do the proper priorities that are happening out there. So for example, we leveraged IRX when logistics was a major issue.

And you could go say, for example, into a factor you can see how IRX to 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. But 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 team has continued to see a good momentum and good perspective. It's 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, is just giving us that great sense of comforts zone that the teams will be able to continue to perform well..

Right. Thank you..

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

Good morning, guys..

Morning Josh..

Just a question on -- I guess a question on compressor orders. I understand there's some virtuous [Indiscernible] going on there, but any idea of where those stand on, 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 apparently there is a recovery going on, but I would imagine that with some of the IRX tools you're gaining a lot of shares well..

Yes, George, I think in terms of compressor orders, we're definitely way above 2019 levels. And one could think that, it could be at a record level. We haven't done and going backwards to -- with the combined companies to really reassess if these record levels or not, but we haven't done that.

We're just focused on, continue to execute and take solid market share. So in terms of against 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 on not only in 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 a unique differentiation that we're launching, in terms of technologies that reduced 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.

One example, the team in Europe, the CompAir teams has launched a new compressor. Very large, fairly sizable compressor that has 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 -- the price positioning that we have in the market..

That's helpful. 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 becoming down here. Can't help but notice the average Ingersoll Rand product, particularly in the ITS portfolio, has an awful lot of ferrous content in it.

If steel prices say got cut in half, what sort of cost tailwind would that be to you guys? Because I would imagine that pricing stays fairly sticky in that environment..

Great point there, Josh. Definite pricing are very sticky, and as we look forward, and commodities continue to get stabilized, yes, we should see that margin progression to even accelerate. Not only from the commodity, but also as we continue to execute a lot of the I2B initiatives that we have in our funnel.

So we're overcoming the current market situation fairly well. In my opinion, I guess, again, thanks to the team in leveraging the tools that we have like a IRX, but as this current inflationary market continue -- 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 DeBlase from Deutsche Bank. Nicole, your line is now open..

Yes, thanks. Good morning, guys..

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, Vik 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 great, just to be clear, that's 30% online unlock all the base business. Obviously the overall -- because you have a full quarter now off the acquisitions, primarily SEEPEX, which you only had 1 month of in the Q3. So the overall margin profile for PST, it will be dilutive, obviously, upfront here.

You're thinking kind of more on in the upper 20s range. That's probably a probably decent proxy or maybe a little bit more dilutive than the impact you saw discretely in Q3 just because of the full-quarter impact at SEEPEX. But to the [Indiscernible] point here, the [Indiscernible] views on the SEEPEX is as gross margin accretive business.

So obviously there's meaningful synergy opportunity that admittedly, you're going to see us start to execute on very shortly here into 2022 onward..

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

Definitely a lot of puts and takes. But, Nicole, at this point, that's correct. Just to re-calibrate, $115 million was delivered in 2020, we expect a $100 million this year, $50 million next year, and then the tail which will be $35 million into 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. I'll pass it on..

Thanks, Nicole..

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

Yes. Hi, good morning, everyone. I wanted to --.

Hi, Mark.

Hey, hi, good morning. Follow-up on George 's question, if I may, on compressor orders in -- if I look at that particularly compared to your large European peers, they're quite impressive. And this has been going on for few quarters now. I wonder if it's product, is this channel, is this -- 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, at these massive order intake numbers, there could be some concerns that some customers, just for the build slots, I just wonder the risk of [Indiscernible] how do you adjust that?.

Markus, in terms of the first question about the compressors orders, I'll tell you that it's a little bit of everything. It's definitely the product, because again, 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 Markus, as we go into to the Investors Day, because we have case studies actually that we will show you on how we have expanded our channel to really accelerated growth, and also reposition the product to really accelerated growth.

So I think it has to do with a lot of the work that we have done since the product summits.

If you remember, back in the -- I don't know, about a year ago we spoke a lot about product summit and how the team, so it's just being very thoughtful way and then executed with the use of IRX to really reposition a lot of the products on the channel with out creating any conflict. I think that has proven to be a pretty successful recipe.

Availability in some products has been actually quite good. I saw that team is marketing for [Indiscernible] and 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 visibility of backlog, customers for compressors, because you have to customize many times the options to the specific application. There's not a lot of pre -order 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 on the more larger compressor, the multistage centrifugal compressor that are -- we positioned that as more long-cycle business.

And those -- when we're doing a contract with a customer, we have caveats where 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 we feel good in terms of how we're protecting ourselves from a cost position..

That's very helpful, thanks. And just a very brief follow-u to that last comments, so that's 40% increased backlog, which is probably related to those longer cycle orders. You could, if you have to re-price that, understand that write-off..

Let me let me clarify here. So the 40% increase in backlog is overall, it's total. So some of the longer cycle projects are 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 I'll call shorter to medium cycle type compressor, not the larger compressors. In terms of the comment on whether you can re-price backlog.

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 typically a couple of months in duration, and you wouldn't expect to re-price that.

Clearly, it's inclusive of the pricing actions we've already taken, but not typical to re-price those types of backlog items..

Kind of the [Indiscernible] I'll say it one more point there, Markus. 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 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.

Exciting to have everyone on board, exciting that how 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..