Ingersoll Rand Inc. (IR) Earnings Call Transcript & Summary

Hello, and welcome to the Ingersoll Rand Second Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the conference over to [ Max Borsheimer ], Director of Investor Relations. You may begin.

Thank you for joining Ingersoll Rand's Second Quarter 2026 Earnings Call. I'm [ Max Forsheimer ], Director of Investor Relations. And joining me this morning are Vicente Reynal, our Chairman and CEO; and Vik Kini, our Chief Financial Officer. Our earnings release and presentation were issued yesterday afternoon and are available on the Investor Relations section of our website, where a replay of this call will also be posted. Before we begin, please note that today's discussion will include forward-looking statements subject to the risks and uncertainties described in our SEC filings and on Slide 2 of this presentation, which you should read in conjunction with the information provided on this call. We will also reference certain non-GAAP financial measures. Reconciliations to the most comparable GAAP measures are included in our earnings release and this presentation both of which are available on the Investor Relations section of our website. Today, we will review our second quarter results, discuss segment performance and provide an update to our full year 2026 guidance. During Q&A, please limit yourself to 1 question and 1 follow-up to allow time for other participants. With that, I'll turn the call over to Vicente.

Good morning, everyone, and thank you for joining. Before we get started, I wanted to take the opportunity to formally introduce [ Max Worscheimer ], who has added Investor Relations responsibility to his current role on our M&A team. You will be seeing and hearing from him going forward, and I know he looks forward to engaging with many of you. Beginning on Slide 3, the second quarter and first half overall reflected continued strong execution and improved demand momentum in our business. In the second quarter, we saw organic order growth of 2%, organic revenue growth of 4% and adjusted EPS growth of 7%, demonstrating the strength and resiliency of our business. Our growth this quarter was broad-based across our diversified end market base. Every main region this quarter delivered positive organic revenue growth, and we continue to focus investments towards durable, structurally growing end markets. Importantly, our first half performance and the healthy demand trends we continue to see across much of the business reinforce our confidence in our outlook for the remainder of the year. As we will walk you through this morning, we are raising our full year revenue guidance and expect adjusted EPS to land towards the higher end of our previously communicated range. We also remain disciplined in our approach to capital allocation. Our acquisition pipeline continues to be robust, including 2 new announcements to date and remains focused on targeted bolt-on opportunities that strengthen our core technologies, expand our aftermarket presence and enhance our long-term growth profile. Our teams around the world remain focused on controlling what we can control through the use of IRX and our economic growth engine, we continue to drive operational execution, support our customers and outperform in the markets we serve. Turning to Slide 4. Before moving to our operational and financial results, I would like to briefly acknowledge the continued recognition we have received for our sustainability leadership and employee ownership culture. During the last year, we were recognized across multiple leading ESG, workplace and corporate salienship rankings, including joining the 2026 Fortune 500, a milestone that reflects the scale, discipline and momentum we have built as the Ingersoll we are today. These recognitions further outlined in our recently polished sustainability report reflect the strength of our ownership mindset culture and our commitment to making life better for our employees, our customers, our shareholders and our planet. Turning to Slide 5. I am excited today to announce the closing of one acquisition and signing of another. So this morning, we closed on the acquisition of Lone Star Blowers. The company referenced as a U.S.-based blower manufacturer in the presentation. Lone Star Blowers expands our expertise in key blower technologies and solutions and expands our aftermarket presence through an established service business and rental fleet. This acquisition will add approximately $50 million in annual revenue. We're also excited to announce the signing of the acquisition of Filtri, a manufacturer of industrial filters based in Italy. This acquisition will expand our filtration capabilities and also strengthen our aftermarket offerings. We expect this acquisition to close in Q4 and add approximately $30 million in annual revenue. Both of these transactions are highly consistent with our strategy of acquiring market-leading technologies that strengthen our core while maintaining disciplined valuation standards. Notably, both acquisitions strengthened our aftermarket capabilities, a key focus area as we continue to increase the resiliency and recurring revenue characteristics of our portfolio. We have 11 additional transactions under LOI and our funnel remains strong, focus on proprietary and internally sourced deals. Our disciplined M&A strategy remains a key differentiator and continues to be an important driver for long-term value creation. Now I'll hand it over to Vik, who will review our financial performance.

Thanks, Vicente. Starting on Slide 6. The second quarter represented another solid quarter of execution. Orders finished just over $2 billion, up 5% year-over-year, with organic orders up 2%. Book-to-bill finished at 1.0 turns slightly lower than we typically see in the second quarter, primarily reflecting the delayed timing of several large project orders. Important to note that we continue to see solid momentum in our short to medium cycle business, where orders were up mid-single digits. In addition, we expect these longer-cycle projects to recover in the back half of the year, and Vicente will provide some color on what we have seen thus far through July. Revenue grew 9% year-over-year to approximately $2 billion, with organic revenue growth of 4%. Aftermarket revenue represented 36% of total revenue during the quarter and continues to be an important contributor of the resiliency of our portfolio. Adjusted EBITDA was $520 million, an increase of 2% year-over-year with an adjusted EBITDA margin of 25.4%. Adjusted EBITDA margin was down 160 basis points year-over-year with the decline driven primarily by 3 factors: first, inflationary pressures, particularly in China, where it is more challenging to offset inflation with price; second, continued investment to support growth around new technology and commercial applications; and third, higher corporate costs. The higher corporate costs were largely driven by a year-to-date true-up of management incentive costs reflecting incentive compensation adjustments aligned with performance, which we do not expect to recur at this level in the back half of the year. Unallocated corporate costs were $49 million in the quarter versus $34.6 million PAUSE a year ago, driven largely by the incentive true-up, and we continue to expect approximately $170 million in corporate costs for the full year. Despite this quarter's year-over-year margin rate pressures, we remain confident in our ability to deliver within our previously communicated adjusted EBITDA range through continued operational execution and productivity actions. In terms of the sequential margin expansion we expect to see in the second half of the year, the margin ramp in the back half of the year is normal course for us as first half pricing actions and benefits from first half productivity projects are realized. We also had the incentive comp true-up here in second quarter that we do not expect to repeat to the same magnitude in the back half of the year. Adjusted EPS was $0.86 for the quarter, up 7% year-over-year. Turning to Slide 7. Free cash flow for the quarter was $269 million, up roughly 28% year-over-year. We ended the quarter with approximately $3.8 billion of total available liquidity, including approximately $1.2 billion of cash and $2.6 billion of available revolving credit facility capacity. Leverage remained at 1.7x, providing significant balance sheet flexibility. During the quarter, we deployed $110 million towards acquisitions and returned approximately $248 million to shareholders through share repurchases and dividends. We were also pleased to receive a one-notch upgrade from Moody's to Baa1 during the quarter, further reinforcing the strength of our balance sheet and capital allocation strategy. Overall, our balance sheet remains a strategic asset and positions us well to continue investing in attractive growth opportunities. One other update I wanted to provide here as you will see disclosed in our 10-Q for the second quarter, we reached an agreement on an initial $187.5 million recovery, which certain insurers on the RWI claim that we filed last year related to the ILC Dover transaction. We collected the first $25 million in the second quarter, and this is reflected in free cash flow for the quarter, with the remaining $162.5 million to be received during 2026. This is a significant and favorable initial recovery, and we continue to actively pursue additional meaningful recoveries related to the ILC Dover transaction beyond the $187.5 million. Consistent with our focus on earnings quality, these recoveries are excluded from adjusted earnings and the incremental cash that we expect to collect in the second half of 2026 is not reflected in our free cash flow guidance. We, therefore, view it as pure upside that directly strengthens our capital allocation firepower. I'll now turn the call back to Vicente to discuss our segment performance.

Thanks, Vik. Turning to Slide 8. IT delivered another solid quarter. Revenue increased nearly 9% year-over-year, including organic revenue growth of 4%. Organic revenue growth was positive across all regions. Orders were approximately flat organically, resulting in a book-to-bill ratio of 1x. Within our compressor business, we continue to see healthy activity particularly in North America, where organic orders were up high single digits. Overall, compressor orders increased by low single digits globally. Organic order growth was impacted by the timing of several loan cycle blower and vacuum projects in Europe as well as the continued impact on the Middle East, where specific project activity remains delayed rather than canceled. IT generated adjusted EBITDA of $435 million, with margins of 26.8%. Margin performance was impacted primarily by challenges offsetting inflationary impacts with price primarily in China, and continued commercial investments to support future growth. For our innovation in action highlight, we're showcasing a plug-and-play on-site nitrogen generation solution that integrates multiple products from our portfolio into a single factory tested system. The solution enables faster deployment, simplify commissioning and full life cycle support, demonstrating our ability to leverage the breadth of our technology portfolio to solve critical customer needs. This solution also demonstrates the commercial synergies we continue to realize through M&A. The system combines technologies from our Oxy wise, Gardner Denver and York brands into a single integrated solution for customers. Turning to Slide 9. PST delivered an excellent quarter and continues to demonstrate the strength of the platform we have built. Orders increased 11% year-over-year, including 7% organic growth. Life Sciences delivered low double-digit organic order growth, while Precision Technologies grew mid-single digits organically. Revenue increased by 8% year-over-year, including 4% organic growth. Importantly, both Life Sciences and Precision Technologies delivered positive organic revenue growth in the quarter. Adjusted EBITDA increased 15% year-over-year to $135 million. Adjusted EBITDA margin expanded 200 basis points year-over-year to 31.5%, reflecting strong execution across the portfolio and the continued benefits of IRX. We're encouraged by the breadth of growth we're seeing across the segment and remain excited about the long-term opportunities within both Life Science and Precision Technologies. For our innovation in action, we're showcasing Dosatron's installation-ready dosing systems. This standardized solution simplify deployment, improve reliability and reduce installation complexity for customers while supporting strong commercial momentum across the business. I'm also proud to share that following the significant earthquake that recently struck the Philippines, Ingersoll Rand partnered with Planet Water Foundation to deploy safe drinking water stations across the hardest hit areas. Planet Water Foundation is not only a partner, but also valued Dosatron customers as our pumps are a key component of the Aqua block kiosks that deliver safe drinking water in these situations without the need for electricity. It serves a good reminder of the mission-critical nature of our portfolio and an example of our purpose of making life better in action. Turning to Slide 10. Given our momentum through the first half of the year, today, we are updating our full year guidance. Starting with revenue. We now expect revenue growth of 4.5% to 6.5%, 200 basis points higher at the midpoint, driven primarily by organic volume, reflecting a strong first half and healthy demand, particularly in the short to medium cycle side of the business. This outlook assumes approximately 1% to 3% organic growth, approximately 2.5% growth from M&A and approximately 1% growth from FX. We're maintaining our adjusted EBITDA guidance range of $2.13 billion to $2.19 billion. As Vik mentioned, the margin ramp we see in the second half is largely driven by first half pricing actions taking effect, the nonrecurrence of the incentive compensation true-up in Q2 and benefit from stronger productivity in the back half of the year from projects executed in the first half, all of which is normal course and consistent with prior years. Adjusted EPS remains projected at $3.45 to $3.55, and based on our current expectations, we expect results to finish near the high end of the range. Free cash flow conversion is currently expected to remain approximately 95%. The phasing of revenue, adjusted EBITDA and adjusted EPS remains consistent with prior years. One additional clarification on our guidance is that our adjusted EBITDA and adjusted EPS ranges exclude any benefit from [ AEPA ] refunds we expect in the second half of the year, which we will view as upside. We will update guidance once those amounts are materially received. And to give a bit of color on our start to Q3, while we don't guide on orders, I am happy to share that we have had a great start to July, where we have seen double-digit order growth through the first 4 weeks of the month. We have seen strong realization of several long cycle orders, which were delayed in the first half across all of our main regions, along with continuation of the short- to medium cycle strength that Vik mentioned earlier. We're encouraged in what we're seeing, and we're confident in achieving our updated guidance for the remainder of the year. Finally, on Slide 11. As we conclude this portion of the call, I am encouraged by the momentum we continue to see across the business. Demand remains healthy across the portfolio. Our teams continue to execute at a high level, and our M&A pipeline remains robust. We remain well positioned with a strong balance sheet, ample liquidity and significant flexibility to continue investing in growth. IRX remains the backbone of our organization and continues to enable execution and outperformance across the company. As we look ahead in the second half of the year, we believe we're well positioned to continue to deliver durable growth, strong cash flow generation and long-term value creation for our shareholders. Finally, I'm more important, I want to thank our employees around the world for their continued commitment, dedication and ownership mindset. Your efforts continue to drive our success and help us deliver strong results for all the stakeholders. With that, I'll turn the call back to the operator and open the line for questions.

[Operator Instructions] Your first question comes from Michael Halloran with Baird.

Welcome, Max. So can we talk a little bit about the momentum you're seeing on the short and medium side of things now. Maybe just drilling a little bit more on regional dynamics? And then any end markets in particular that you're seeing that momentum. And it seems like you're pretty comfortable that, that momentum can sustain as we're exiting the second quarter through July and onward. But any thoughts on how that momentum phases out?

Yes, Mike, let me first give you by region. So Americas is roughly 50% of our revenue, and it's been the strongest region so far. ITS orders up high single digits, healthy compressor activity. And we're seeing the short-cycle indicators that are the best in the portfolio. EMEA is about 1/3 of the revenue. Orders were down low double digits organically. And I want to be precise about why it is 2 things, both timing rather than demand is the phasing of some long cycle project orders in our blower and vacuum side of the business in Europe. And it's also the Middle East. Underneath that core compressor orders in the region were up low single digits organically, which is better read on the underlying market. And then Asia Pacific, which is about 15% with China around 10% of total. China organic revenue was up low double digits in the quarter. The volume story there is very good. But as we indicated in the prepared remarks, this continues to be the most challenged market from a pricing perspective, but we're encouraged by how our original equipment is getting into the market, again, in China, for China in some very kind of unique applications that we expect will generate some very good aftermarket in future years. From an end market perspective, PST, we mentioned life sciences, obviously, up mid-teens, driven mainly, in this case, here, biopharma. Biopharma we continue to see that low double-digit growth there. I'm very encouraged about the timing of bringing the full Ingersoll's portfolio into Biopharma. So not just what we got in PST, but now the team is driving pull-through of other technology into biopharma. And then in the ITS, it's broad-based. I mean, Americas, we saw momentum in power gen, electricity infrastructure, some air separation for semiconductor, Europe is resiliency, continues in general, industrial, food, beverage, kind of kind of the more normal industrial side. We still expect maybe defense picking up here soon, hopefully. And Asia Pacific is growing in kind of electronic shipbuilding among others. So you can see kind of multiple fairly broad base in many cases.

No, that makes sense. And then maybe just on the larger projects. I know you referenced some of the longer-cycle projects. Are you at the point where project pushouts are starting to roll through and people are willing to move forward with projects? Are we still seeing delays on a global basis? And how do you think that long-cycle activity plays out as we look forward?

Yes. I think, Mike, that's where we are getting more and more encouraged. For a while, we were talking about elongation and kind of what we're seeing now is basically customers getting more enthusiastic and project getting kind of moved in a better direction. So we're seeing better momentum on the long cycle projects, yes.

Your next question comes from Jeff Sprague with Vertical Research.

Just a quick follow-up on the long cycle. First, is there any sort of common thread in what is now being released and previously held up and released, perhaps more energy or some other vertical market? Maybe any comments you'd point to there?

Yes, Jeff, good point. I mean this is actually one of the more encouraging conversations we're having in terms of that energy efficiency. I mean, as we -- you know the compressed air is typically 30% of the industrial electricity consumption in a manufacturing facility, and it could be higher based on applications. So we're seeing more as power prices have moved up the payback on replacing an older, less efficient machine is getting shorter. So definitely, that is definitely one of the key indicators here that we're seeing that is driving some better momentum among other things. I think historically, past few earnings calls, we were talking about kind of delays in project just due to engineering capacity or it could be EPC and a lot of that is also kind of freeing up to as well.

Great. And maybe then just a quick one for Vik. So just on the organic revenue guide, just primarily a reflection of going after additional price? Or is there actually some improved volume sort of underpinning that bump? And what volume improvement be if there is some?

Yes. So Jeff, I think it's more of the latter. So it's the volumes, the organic volumes. So I think as we indicated in the prepared comments here, encouraged by what we saw in Q2, where you saw 4% overall organic growth. I think volume was obviously relatively healthy there, particularly on the short and medium cycle side of the business. So I think that's where you're really seeing the uptick. So the incremental 1% organic for the full year is really volume driven. I think as Vicente said here, encouraged by what we're seeing both in the Americas front. China continues to show good momentum there. And so that's really where we're seeing in price. We have taken certain pricing actions in the first half of the year, which was consistent with our expectations, and those are starting to kind of more materialize into the back half of the year. But I would say that's fairly consistent with what we had expected in previous guidance.

Your next question comes from Nigel Coe with Wolfe Research.

And Max, I look forward to meeting you in due course. But just on the orders in July, obviously, really encouraging to see that the longer cycle orders starting to kick in. Can I just clarify, when you say double digits if we strip out acquisitions, et cetera, we're still seeing double-digit organic orders. Just want to clarify that one first of all. And then are we seeing the backlog building for '27 given that these are longer cycle projects? Or could these hit in the back half of the year? It doesn't feel like you're baking these orders into the back half of the year?

Yes. Nigel, let me take the first one and I'll let Vik comment about the second one. Yes. I mean organic is low double digit to mid-teens, basically is what we're seeing here in the month of July.

Yes. And then just to follow up on that. As far as the long-cycle projects, definitely building the backlog out for 2027, as you would expect, most of these are long-cycle projects are the typical 6- to 18-month type duration in terms of projects difficult to what you've seen. So they're largely building out the backlog for 2027. That's not to say that some won't have some revenue recognition here in the back half of the year. But yes, solid backlog build more as we move into 2027 with regards to some of those longer cycle projects.

Okay. That's great. And then just maybe just a bit more details on the ITS margin momentum through the back half of the year. And can you just maybe just clarify was the sort of the margin weakness in the quarter? Was that confined to China and the price pressure in China? Or was it a bit more than that?

No. No, it's really confined to China, basically. And in addition to some of the investments that we're making. I mean you saw we made an announcement about earlier in the quarter about a partnership that we made for some new technology to as well. So it continues to be some good investments that we're doing, I mean, despite what kind of market conditions might be. And on top of that, has been the pricing on challenge in China.

Your next question comes from Rob Wertheimer with Melius Research.

I wanted to check in on trends in Life Sciences and PST. It seems like you had pretty good orders, comp was a little bit easy. And there were some kind of cross currents around the industry that don't seem to have affected you in the quarter. So I wonder if you could just sort of characterize the market? Is it steadily rolling? Is it accelerating? How do you see it right now?

Yes, Rob, we see good momentum on the Life Science business as we kind of alluded here. We see that it's largely driven by the biopharma. In our case, the exposure that we continue to have to GLP-1 is very strong so that as that market continues to grow and seeing some investments, we're pleased to see that. In addition, we're -- we have made some investments to play in the larger biopharma side and are working on what you also kind of hear in the news on the biopharma expansion. Now a lot of that hasn't come to fruition yet, but we're excited about what the potential of that could be as we move into the second half or even 2027 based on the new facilities that are kind of getting invested now. So again, we see continued stability in that market and good growth based on, I guess, the investments that we're making and the focus that we're putting in to really accelerate our penetration in the biopharma side.

Your next question comes from Nathan Jones with Stifel.

I guess I asked the same question I asked on most of these calls, just said there about quote to order times. Obviously, you had a few of these longer-cycle projects get delayed in the quarter. But if you kind of exclude those, are you seeing any changes in that quote to order time, maybe in the U.S., you are maybe in Europe or not. But any details you can give us on, I guess, the customers' willingness to accelerate these orders?

I would say this, nothing dramatically significant. I mean, obviously, you're seeing the short cycle business, and Vik mentioned that, I mean, mid-single-digit organic quarter growth on [indiscernible] cycle business. So we continue to see momentum. And when you -- when we about sequentially continue to improve and obviously now here in July as well. But in terms of that quote to order, I don't think anything that customers are trying -- at least not on our products, or the end markets where we play that we have seen that customer quote-to-order cycle get shortened dramatically.

Okay. Fair enough. Maybe just a question on China and the pricing power over there. Ingersoll Rand has always tended to try and play in areas and products where it has significant differentiation in a command price. Are there opportunities for you to consider what you want to sell in China, how you want to sell it and look at the portfolio overall through that kind of lens, where maybe some of these products you're selling in China don't have pricing power and you don't need to be in that business or anything from that perspective?

Sure, Nathan. I would say, I mean, we're always going to play a mission-critical products where total cost is low based on the total process in the equation. So, I mean, right now, what you see in China is just basically a timing issue in our view. More broadly, we're spending quite a bit of time localizing newly acquired technologies into China, and typically under an existing brand that we have in China. So I want to say that we're cutting back on our product portfolio, but rather investing in new technologies in the market where we have seen success from acquired businesses elsewhere and kind of have unique technology that we can have. The second big piece is that a lot of the growth that we see in China is related to original equipment hold goods, which come in -- comes at a lower margin typically than the aftermarket. And in some cases, what we have done here in China as there have been some very unique applications with specific customers that we never had before, but that we see that can have a great potential in the future for us. We're making some commercial investments to really penetrate those new applications. And again, in China for China. So I'd say we feel good about the product portfolio we have in China, and we continue to invest in China for China.

Okay. So the pricing is a bit more transient and an issue?

It is definitely more transient, yes.

Your next question comes from Andy Kaplowitz with Citigroup.

Vicente, it looks like you've continued to have nice acceleration in your Precision Technologies business. Could you talk about the durability of that growth? Like what are the biggest drivers? And I think precision is mostly comprised of shorter cycle markets. So is it fair to expect continued acceleration from that mid-single-digit growth from here?