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Text: I'm Chris Miorin, Vice President of Investor Relations, and joining me is Vicente Reynal, President and Chief Executive Officer; and Vik Kini, Chief Financial Officer.
Both are available on the Investor Relations section of our website, www.
In addition, a replay of this conference call will be available later today.
In addition, in today's remarks, we will refer to certain non-GAAP financial measures.
For today's Q&A session, we ask each caller keep to one question and one follow-up to allow time for other participants.
And as you can see on Slide 3, anchoring to our purpose, we're realizing the achievement of our desired targets.
You will hear three key themes today: First, we're effectively allocating capital to advance our portfolio transformation to generate significant value for our shareholders; second, you will hear about how we are outperforming and raising guidance, which illustrates our organic investments in new product development and demand generation are also working; and third, we will touch on our ESG journey.
I have never been more excited about the state of Ingersoll Rand.
The combination of a highly engaged workforce who think and act like owners, and the use of IRX is what makes us highly unique.
We continue to support our employees with an unwavering focus on health, safety and mental well-being.
Moving to Slide 4.
Our five strategic imperatives are how we stay grounded on priorities and areas of focus.
You will see on the right-hand side, during Q2, we have achieved substantial traction in all five imperatives.
Within our operate sustainably strategic imperative, we achieved another major milestone that I'll touch on the next slide.
Moving to Slide 5.
A couple of weeks ago, we published our 2020 sustainability report.
The report reflects our 2020 ESG data, celebrates our progress and details our further goals with a high focus on measurable targets and accountability.
We'll spend more time on this next Friday, during our scheduled ESG and sustainability report investor update.
What I want to emphasize right now is the team's strong bias for action over the last year, as you can see on this page.
We have focus and deliver on diversity within our Board and extended leadership team, which is now 50% and 43%, respectively.
We have launched aggressive 2030 and 2050 goals and improve our new product development process to address these goals.
We expanded a stockholder rights through corporate governance changes.
And one of the things I am most proud of on behalf of our employees is granting $150 million in equity to our employees, which we believe is the largest employee equity grant ever provided by an industrial company.
We see broad-based employee ownership as a game changer.
We know underrepresented populations increase our earnings on wealth if they're employed in organizations that offer equity grants.
And that's a powerful aspect of our thinking and acting like an owner that even ties into how directly impact global ESG efforts.
And I look forward to sharing more with you next week.
Moving to Slide 6.
The signing of definitive agreements to acquire Seepex and Maximus Solutions, both of which will become part of the Precision and Science Technologies segment, a representative of the key characteristics we're targeting to drive our inorganic growth strategy.
Seepex is, by our estimation, the #2 global progressive cavity pump manufacturer, and it is a highly recognized brand as a premium player in the market that adds a new positive displacement pump technology to our portfolio.
Maximus Solutions is a leader, player in the agritech software and controls market.
With technology, we intend to pull through to other markets and leverage across the Ingersoll Rand portfolio.
Both of these companies have shown strong high single-digit to double-digit organic growth since at least lease 2017, and our focus on sustainable end markets that tend to grow well above GDP rates.
In addition, both have strong aftermarket profiles enhanced by digital revenue streams, including software as a service.
We anticipate both acquisitions to yield single-digit post-synergy adjusted EBITDA purchase multiples by year three of ownership.
With these two acquisitions, we're expecting to add approximately $3.8 billion to PST addressable market, which is an impressive 40% expansion.
The profiles and characteristics of this high-quality, high return on capital and highly strategic acquisitions are indicative of how we're structuring our M&A funnel, which leads us to Slide 7.
We continue to execute our M&A funnel using IRX at its backbone.
Our funnel is comprised of six stages and its probability-weighted according to likelihood of closing when we calculate our funnel size.
For instance, Seepex has been in our funnel for some time.
And it was not until the owner became actively engaged, and we were in active negotiation that it was moved from 0% weighted revenue contribution to 50% and then 100% assigning.
And now it is out of our funnel calculation.
Last quarter, we described how our M&A funnel has grown materially since the Ingersoll Rand Gardner Denver transaction was completed.
At its current state, the funnel size remains approximately 5 times the size it was versus Q2 of 2020, with average revenue larger and velocity accelerating minutely.
And to be clear, this describes the funnel even after removing the 32 targets we passed on in the second quarter as well as our signed deals of Seepex and Maximus, and it also excludes SPX Flow.
As you can see, we have significant momentum in the funnel but our flywheel is in full motion.
Our $85 per share offer was pre-emptive, and fully accounted for SPX Flow's Investor Day plan, which is ahead of consensus estimates.
In terms of SPX Flow's strategic alternative presence, if we participate, we intend to remain disciplined in our approach as we do with all of our M&A transactions, and there can be no assurances that we will confirm our pre-emptive offer as part of any such process.
It is important -- it is very important also to note that when we received the second rejection from SPX Flow more than a month ago, we pivoted to executing on other funnel opportunities.
We have always demonstrated a very decisive and highly disciplined approach with everything we do.
And we believe it is much more important now in this current environment.
As stated, even with SPX Flow excluded, our funnel remains as robust as it did last quarter, which exemplifies the volume and quality of our future potential opportunities.
And we have sufficient cash on hand to execute on these opportunities with $4.7 billion in liquidity.
However, as noted, we intend to remain very disciplined in this environment.
It is also important to know that we continue to review our capital allocation priorities with our Board and plan to communicate more formally on this topic later in the year.
Moving to Slide 8.
We continue to be pleased with the performance of the company in Q2.
Q2 saw a strong balance of commercial and operational execution fueled by the use of IRX with continued performance across industrial end markets.
Total company orders and revenue increased year-over-year 48% and 25%, respectively, with strong double-digit organic orders growth across each segment.
And we are very pleased with the momentum we are seeing as organic orders in Q2 were up 9% and 6% on a quarter-to-date and year-to-date basis, respectively, as compared to 2019.
Our organic growth on both orders and revenue in the quarter were records for the company, eclipsing Q1 and setting us up well as we move into Q3.
Our commitment to delivering $300 million in cost synergies attributable to the Ingersoll Rand Industrial segment acquisition remains intact as we continue to drive performance on productivity and synergy initiatives using IRX as the catalyst.
The company delivered second quarter adjusted EBITDA of $292 million, a year-over-year improvement of $75 million and adjusted EBITDA margin of 22.8%, a 160 basis point improvement year-over-year.
We will not report on either segment moving forward.
Free cash flow for the quarter was $136 million, yielding total liquidity of $4.7 billion at quarter end, up approximately $2 billion from Q1 as we received the gross proceeds from both divestitures in Q2.
This takes our net leverage to 0.2 times, a 1.7 times improvement from Q1.
Turning to Slide 9.
For the total company, orders increased 40% and revenue increased 19%, both on an FX-adjusted basis.
The IT&S and P&ST segments both saw strong double-digit organic orders growth in the quarter.
Overall, we posted a strong book-to-bill of 1.14 for the quarter, an improvement from the prior year level of 0.96.
We remain encouraged by the strength of our backlog moving into Q3 and beyond.
The company delivered $292 million of adjusted EBITDA, which was an increase of 34% versus prior year.
And the IT&S and P&ST segments both saw year-over-year improvements in adjusted EBITDA and strong margin expansion.
Finally, corporate costs came in at $38 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 and other targeted strategic investments.
We expect corporate costs to remain elevated at comparable levels in both Q3 and Q4 due to the same drivers.
Turning to Slide 10.
Free cash flow for the quarter was $136 million on a continuing ops basis, driven by the strong operational performance across the business and ongoing prudent working capital management.
capex during the quarter totaled $12 million and free cash flow included $12 million of outflows related to the transaction.
In addition, free cash flow also included $36 million in cash tax payments related to the historical earnings profile of the HPS and SVT segments.
As is customary in these types of divestitures, cash tax payments are included in flows from continuing operations due to the complexities involved in specific attribution with consolidated returns.
However, the $36 million represents our best quantification of the impact.
From a leverage perspective, we finished at 0.2 times, which is a 1.7 times improvement as compared to prior quarter, and this included the gross cash proceeds received from both the HPS and SVT divestitures.
We expect to pay the cash taxes for both divestitures later in 2021, and if you were to pro forma the Q2 leverage to account for these tax outflows, leverage would have been closer to 0.6 times.
On the right side of the page, you can see the breakdown of total company liquidity, which now stands at $4.7 billion based on approximately $3.7 billion of cash and nearly $1 billion of availability on our revolving credit facility.
We have considerable balance sheet flexibility to continue our portfolio transformation strategy with M&A coupled with targeted internal investments to drive sustainable organic growth.
Moving to Slide 11.
We continue to see strong momentum on our cost synergy delivery efforts.
Due to the funnel we have built that stands in excess of $350 million and strong execution, we are reaffirming our stated $300 million cost savings target.
To date, approximately $250 million of annualized synergies have already been executed or are in motion, which is slightly higher than 80% of the overall target.
As a reminder and consistent with previous guidance, we delivered approximately 40% of our $300 million target in 2020, which equaled approximately $115 million of savings.
In addition, we expect to deliver an incremental $100 million of savings in 2021, which would bring the cumulative total to approximately 70% at the end of this year.
We expect a cumulative 85% to 90% up to $300 million in savings by the end of 2022 with the balance coming in 2023.
The bottom of the page shows the progress we've made across the different areas of synergy delivery, with the most notable progress coming from direct material initiatives in procurement as well as I2V.
In addition, we're starting to see some of the initial wave of savings from our footprint actions, and we expect these savings to ramp into 2022.
On the right side of the page, we did want to highlight that despite the headwinds we have seen on the cost side, largely coming from direct material and logistics as well as some of the expected return of onetime and discretionary costs and strategic growth investments, we do continue to expect to be positive from a price versus cost perspective on a total year basis.
This is entirely due to the team's use of IRX to proactively implement and deploy targeted pricing actions in the first half of the year.
In addition, we continue to evaluate the overall landscape, particularly with regards to inflation, and are evaluating potential incremental pricing actions for the second half of the year.
Overall, we expect to achieve further adjusted EBITDA margin expansion for the total company in the second half of the year, although not at the same levels we delivered in the first half.
And moving to Slide 12.
Starting with Industrial Technologies and Services.
Overall, organic orders were up 41% and revenue up 17%, leading to a book-to-bill of 1.15.
In addition, the team delivered strong adjusted EBITDA of 41% and adjusted EBITDA margin of 24.7%, up 250 basis points year-over-year, with incremental margin of 34%.
Let me provide more detail on the order performance.
Starting with compressors, we saw orders up in the mid-40%.
A further breakdown into oil-free and oil-lubricated products shows that orders for both were up above 40%.
From a regional split for orders on compressors, in the Americas, North America performed strong at up low 40%, while Latin America was up in the mid-70%.
Mainland Europe was up low 50%, while India, Middle East, saw continued strong recovery with order rates up in excess of 100%.
Asia Pacific continues to perform well with orders up low 30% driven by low 30% growth in both China and high 20% across the rest of Asia Pacific.
From a vacuum and blower perspective, orders were up in mid-40s, on a global basis with strong double-digit growth across each of our regions.
In power tools and lifting, the total business was up high 50% in orders and so continued positive growth driven mainly by our enhanced e-commerce capabilities and improve execution on new product launches.
On the right-hand side, we're highlighting one of our new exciting products, which is a result of our continued commitment to organic investments in our portfolio.
In this case, during Q2, we completed the launch of our new line of refrigerated drive portfolio.
That's a bit of a background.
The basic function of the air dryer is to remove moisture from the air by cooling it with a refrigerant.
Does the water vapor is condensed and the air can be easily compressed.
The result is dry compressed air, which can be used in compressed air equipment without causing any damage.
Air dryer technology is sold as an accessory to all rotary oil-lubricated and oil-free air compression technology.
So it is a great adjacent technology that increases the total quality of air provided to the customer.
This is a very important requirement, especially in oil-free compression where customers demand high air quality in terms of dryness and particulate.
It is also good to note that it is a great aftermarket generator as the filters or desiccant need to be changed often.
In this case, we leverage a technology developed at [Indecipherable], which was accompanied owned by legacy Ingersoll Rand.
Since the merger of Gardner Denver and IR, not only we have accelerated our organic investments in new products [Indecipherable], but we're now leveraging the technology in order to serve Gardner Denver, Ingersoll Rand and in the future, even our champion compressor customers.
The even more exciting piece here is that we're doing this while helping the environment.
This new driver portfolio is 20% more energy-efficient and reduces greenhouse gas emissions by over 50%.
Moving to Slide 13 and the Precision and Science Technology segment, overall, organic orders were up 20% driven by, i.e., the Medical and Dosatron businesses, which serve lab, life science, water and animal health markets.
These businesses were up double digits.
And we also saw strong performance in our ARO and Milton Roy product lines.
The momentum in our Haskel Hydrogen Solution business continues to build, and we saw some strong funnel activity.
Revenue was up 12% (sic) [13%] organically, which is encouraging, as we have some tough comps due to COVID-related orders and revenue in Q2 2020 for the Medical business.
Additionally, the PST team delivered strong adjusted EBITDA of $71 million, which was up 20%.
Adjusted EBITDA margin was 30.7%, up 40 basis points year-over-year, with incremental margins of 33%.
Today, we want to highlight our hydrogen refueling business to give you an update on where we are and investments we're making.
As we have discussed before during our Q4 earnings call, we made investments in developing a hydrogen dispensing unit leveraging our Haskel high-pressure technology, and we're now ready to capture the growth in this business.
We have line of sight to about $45 million in organic investments over the next five years to both build out our capacity and fund ongoing product development in the hydrogen refueling space, with approximately $10 million of this investment expected in the next 12 months.
Since our last call, we have seen our funnel grow 3 times to over $250 million in potential projects.
And we still feel confident that this is a business where we will see meaningful growth for years to come, driving our decision to expand two of our factories in Europe to support anticipated growth.
In addition, we want to highlight that Ingersoll Rand is designing and developing a state-of-the-art hydrogen refueling stations to support the power and remote joint venture.
Moving to Slide 14.
Given the comp performance in Q2 and continued strong outlook, we're increasing guidance for 2021.
Our guidance excludes both the High Pressure Solutions and the Specialty Vehicle Technology segments as well as the pending acquisition of Seepex and Maximus.
Our prior revenue guidance was up low double digits on a reported basis, comprised of high single-digit organic growth across both of our segments.
And we're now open guiding up to be mid-teens in total with low double-digit organic growth across both segments.
This reflects approximately 250 to 300 basis point growth in organic growth for the total company as compared to prior guidance.
FX is expected to continue to be a low single-digit tailwind, and based on these revenue assumptions, we're increasing 2021 adjusted EBITDA guidance to $1.15 billion to $1.18 billion, which represents approximately a $30 million improvement from power guidance at the midpoint of the range.
We also highlight that these also includes the increased corporate cost of approximately $6 million per quarter for both Q3 and Q4 as compared to prior guidance, as mentioned on the right-hand side of the slide.
In terms of cash generation, we expect free cash flow to adjusted net income conversion to remain greater than or equal to 100%.
capex is expected to be approximately 1.5% of revenue.
And finally, we expect our adjusted tax rate for the year to be approximately 20%, and this does include a $35 million benefit due to a tax restructuring plan that was recently completed, that is reflected approximately 40% in the Q2 rate with the balance in the second half of the year.
Moving now to Slide 15.
As we wrap today's call, Ingersoll Rand brand is in an outstanding place.
2021 is poised to be a great year.
We take our role as sustainably minded industry leader seriously, and our employees eagerly embrace IRX to put us in that leadership position.
I am confident we will continue to transform Ingersoll Rand and deliver increased value to all of our shareholders.

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raising fy 2021 adjusted ebitda guidance to $1.15 billion to $1.18 billion.
sees full-year 2021 revenue growth expectation to mid teens.

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