Ingersoll Rand Inc. (IR) Q1 2022 Earnings Call Transcript

Ingersoll Rand Inc. (IR -0.70%)
Q1 2022 Earnings Call
May 05, 2022, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, everyone, and welcome to the Ingersoll Rand first quarter 2022 earnings call. My name is Victoria, and I'll be coordinating you call today. [Operator instructions] I'll now pass it over to your host, Chris Miorin, to begin. Please go ahead.

Chris Miorin -- Vice President, Investor Relations

Thank you, and welcome to Ingersoll Rand 2022 first quarter earnings call. I'm Chris Miorin, vice president of investor relations. And joining me this morning are Vicente Reynal, chairman and CEO; 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, www.irco.com. In addition, a replay of this conference call will be available later today. Before we start, I want to remind everyone that certain statements on this call are forward-looking in nature and are subject to the risks and uncertainties discussed in our previous SEC filings, which you should read in conjunction with the information provided on this call. Please review the forward-looking statements on Slide 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 strategy update, review our company and segment financial highlights, and provide an update to 2022 guidance.

For today's Q&A session, we ask that each caller keep to one question and one follow-up to allow time for other participants. At this time, I'll turn the call over to Vicente.

Vicente Reynal -- Chairman and Chief Executive Officer

Thanks, Chris, and good morning to everyone. Starting on Slide 3, Ingersoll Rand's unwavering commitment to our purpose of making life better is evident in the sustainability of our products, which help our customers reduce their energy consumption and water usage. We deliver another strong quarter in the first quarter with our teams leveraging the IRX process to outperform, even with ongoing challenges in supply chain, accelerating inflation, and geopolitical uncertainty. The performance in Q1 is attributed to our highly engaged employee base who think and act like owners.

Because they are. Our latest engagement scores highlight this dynamic, where we now rank in the upper part of the top quartile, scoring over 500 basis points above the manufacturing benchmark. But the most critical question of how happy are you working at Ingersoll Rand, we rank in the top 10% of all manufacturing organizations. Not only are we focused internally, but also on the needs of those outside our organization.

Last quarter, we made a $1 million commitment to support Ukrainians impacted by the war with humanitarian aid. Demand for our products and services remained strong, with our backlog at an all-time high and our leading indicators showing resiliency in our markets. We remain attuned to the dynamic environment around us and are hyper-focused on executing on what we can control. Moments Slide 4, we've spoken before about how operating sustainably is embedded in our company and is intentionally at the center of our core values as it underpins our very existence.

Ingersoll Rand makes life better for customers by making them more sustainable. We'd like to take time today to highlight that even in an uncertain environment, customers have significant opportunities to reduce their emissions and materially reduce their energy cost and water usage. And this is how we think about our sustainability strategy, growing sustainably by providing mission-critical solutions to customers that reduce energy and water usage and operating sustainably in the processes we employ to deliver those solutions. We spoke at our recent investor day in November about the sustainability megatrend.

And despite the uncertainty in today's market, we strongly believe that this trend will drive customer decision-making to invest on more efficient, low-creation devices, like air compressors, blowers, and pumps, which has been an underinvested area over the past decade or so. Turning to Slide 5, our customers are increasingly realizing that air compressors and air treatment optimization is an essential opportunity to reduce their Scope 1 and Scope 2 emissions. Air compressors consume up to 30% of a manufacturing site's electricity. And with the recent significant rise in energy costs, this will continue to increase.

Ingersoll Rand's products provide industry-leading efficiency that enables customers to reduce the energy cost from air compressors up to 50%, and air treatment solutions or dryers up to an incredible 90%. As we have forecasted out our potential impact of our Scope 3 emissions, we have established a goal of helping our customers achieve a combined 15% reduction in greenhouse gas emissions from the use of our products, which equates to more than 40 million megatons of CO2. Our customers are becoming more educated about the impact the compressor optimization can have on their emissions. We have shown two examples in this slide of global leaders in both the consumer electronics and paper industries who clearly identified compressor optimization as a top priority for greenhouse gas emission reduction in their latest sustainability reports.

In addition to energy usage, our customers are also faced with water shortage and a need to improve water management and quality. And you can see at the bottom of the page, where a global paper company and a world leader in consumer packaged goods have committed to reducing water usage by 25% and 20% per unit, respectively, a significant commitment and one we're very well-positioned to solve with our products. Approximately 30% of our total revenue base is generated from products focused on improving water management, purification, and reducing water consumption. And we're committed to helping customers save over 1 billion gallons of water annually through the use of our products.

Turning to Slide 6, not only are our largest customers making buying decisions based upon opportunities to improve energy efficiency, but we believe that almost all of our customers take energy efficiency into account. Additionally, governments are now regulating energy conservation standards for compressors, and we anticipate this trend will continue to accelerate. And we intend to remain at the forefront of these requirements. Last year, just in the U.S., we conducted over 4,000 customer compressor system audits, which is an increase of 60% from 2019.

After the audit, we made upgrade recommendations based upon evaluations of energy efficiency and several other factors. And these led to $100 million in sales directly attributable to these audits. And this is a great example of how we connect and educate our customer base on total cost of ownership and energy efficiency. We estimate that two-thirds of our current global info base could realize meaningful improvements in efficiency by upgrading their compressor system.

And with a midpoint of 15% energy efficiency uplift across that portion of the installed base, a customer with a typical compressor system will realize on average a payback of less than two years at current energy prices. So, you can see the savings here are real and meaningful, and we're highly engaged in educating our entire customer base about these opportunities. Moving to Slide 7, in addition to helping our customers progress on their sustainability journey, we're leveraging IRX to achieve our goal of being recognized as a top-quartile ESG company by operating sustainably. Those efforts have delivered a significant progress.

And within the past six months, we've been materially upgraded by all of our targeted ESG rating agencies, including MSCI, Sustainalytics, S&P Global, and CDP. And in fact, Sustainalytics and S&P Global now rank us in the top 15% of companies in our sector, exceeding our goal of becoming top quartile in half the time we had committed to it. But we're not finished with this journey. We're just getting started.

We take a role as sustainability leader very seriously, and we're committed to continuous improvements and progress toward achieving our other sustainability goals. I will now turn the call over to Vik to provide an update on our Q1 financial performance.

Vik Kini -- Chief Financial Officer

Thanks, Vicente. Moving to Slide 8, we continue to be encouraged by the performance of the company in Q1, which saw a strong balance of commercial and operational execution fueled by IRX to overcome persistent inflationary pressures, a challenging supply chain environment, increased geopolitical uncertainty, and lockdowns in Shanghai. Despite these challenges, we continue to remain on track to deliver on our $300 million synergy commitment, with $50 million expected to be realized in 2022. Total company orders and revenue increased 25% and 18% year over year, respectively, with strong double-digit orders growth in ITS and double-digit organic revenue growth across both segments.

Our orders in the quarter were a record for the company, and revenue was a first quarter record, setting us up for continued strength in 2022. The company delivered first quarter adjusted EBITDA of $304 million, a 24% year-over-year improvement, and adjusted EBITDA margins of 22.7%, a 110 basis-point improvement from prior year. Incremental margins for the company were 29% despite the aforementioned challenges. Free cash flow for the quarter was $32 million and remained positive despite working capital headwinds, most notably, an increase of approximately $100 million in inventory to support the growing backlog and elevated incentive compensation costs coming off the strong 2021 performance.

Total liquidity was $3.1 billion at quarter end, and cash was up approximately $400 million from prior year. This takes our net leverage to 1.2 times, an 0.7 times improvement from prior year, and a slight increase of 0.1 times from prior quarter. Turning to Slide 9, for the total company, Q1 orders grew 21% and revenue increased 14%, both on an organic basis. Overall, we posted a strong book-to-bill of 1.22 times for the quarter.

We remain encouraged by the strength of our backlog, which is up approximately 70% from Q1 of 2021. Total company adjusted EBITDA increased 24% from the prior year. ITS segment margin improved 70 basis points, while PST segment margin declined 260 basis points, with the largest driver of the decrease coming from M&A. When adjusted to exclude the impact of M&A completed in the 12 months ending March 31st, PST margin declined by 130 basis points, driven mainly by the impact of inflation, FX, and product mix.

It's important to note that both segments did remain price cost positive in terms of dollars in the first quarter, which speaks to the nimble actions of our team despite ongoing inflationary headwinds. Finally, corporate costs came in at $29 million for the quarter, down year over year, primarily due to lower incentive compensation costs and general cost savings, while continuing to invest in critical growth areas like demand generation and industrial Internet of Things. We expect corporate costs to normalize back to the low-30s in terms of millions of dollars per quarter for the remainder of the year. Adjusted EPS for the quarter was up 26% to $0.49 per share.

And the tax rate for the quarter was 23%. And we anticipate the full year being in the low-20s as well. Turning to Slide 10, free cash flow for the quarter was $32 million on a continuing ops basis, remaining positive despite the aforementioned increases in net working capital. Capex through the quarter totaled $18 million, which is an approximately 25% increase compared to last year, further demonstrating our continued investment in the business.

Free cash flow included $8 million of synergy and stand-up costs related to the IR merger. Leverage for the quarter was 1.2 times, which was an 0.7 times improvement versus the prior year. And total company liquidity now stands at $3.1 billion based on approximately $2 billion of cash and $1.1 billion of availability on a revolving credit facility. Liquidity decreased by approximately $100 million in the quarter, which included outflows of $30 million toward strategic M&A, $101 million in share repurchases, and $8 million for our dividend payments.

Our M&A funnel remains robust and active, with six bolt-on acquisitions currently under exclusive letters of intent. We remain prudent and disciplined to generate strong returns on transactions with highly strategic and synergistic characteristics. But clearly, we have significant firepower to deploy to M&A, which is a strong driver of our compounding growth model. I will now turn the call back to Vicente to discuss our segments.

Vicente Reynal -- Chairman and Chief Executive Officer

Thank you, Vik. And turning to Slide 11, our Industrial Technologies and Services segment delivered strong organic revenue growth of 14%, including approximately 6% in price and 8% volume growth, both of those year over year, while also demonstrating solid sequential acceleration on both price and volume. Adjusted EBITDA grew 17% year over year, with an adjusted EBITDA margin of 23.8%, up 70 basis points from prior year, with an incremental margin of 29%. Organic orders were up 25% with a strong book-to-bill of 1.24 times.

Starting now with compressors. We saw orders up approximately 30%. A further breakdown shows orders for oil-free products growing over 30%, and oil-lubricated products increased approximately 30%. The Americas team delivered strong performance, with orders in North America up approximately low-30%, while Latin America was up in the low-40s.

In mainland Europe, orders were up solidly in the 20s, with no material deceleration of note sequentially during the quarter. While India and Middle East were up in the mid-40s. Asia Pacific continues to perform well, with orders of mid-20s, driven by mid-20s growth in China and high-teens growth across the rest of Asia Pacific. In vacuum and blowers, orders were up low-20s on a global basis.

In the power tools and lifting business, orders for the total business were up high teens and saw continued positive momentum. As we discussed during the investor day, our demand generation capabilities provide us with the most forward-looking indicators of customer demand through the data-driven approach to developing marketing qualified leads or MQLs. And we gained an additional several months of insight by leveraging this data. And we're aware of the uncertainties related to the global economy.

But as we review MQLs across our business and across geographies each week, these indicators show double-digit growth year over year across all major geographies, including America, mainland Europe, the Middle East, India, and Asia Pacific. China has clearly been impacted due to the Shanghai lockdown. But even in the most recent weeks, MQLs are very near last year's level. As I mentioned earlier, we're very focused in our approach to delivering sustainable, innovative solutions.

As such, I want to spend time highlighting our LeROI gas compression business, which we acquired in mid-2017. Since then, we have been very focused on repositioning the portfolio of LeROI to further penetrate biogas market, which has seen strong growth as customers are able to capture gas emitted from sources such as landfills and cattle farms and monetize it as an energy source. And as you can see on the page, the growth we have realized from these efforts has been phenomenal and continues to rapidly accelerate. Orders were over $100 million in the past 12 months.

And revenue is expected to be more than double in 2022, bringing a total organic growth of over five years to over 440% and creating a post-synergy multiple of the acquisition to around 1 time. We greatly exceeded our mid-teens return on capital target and expect to achieve approximately 70% ROIC by this year. LeROI is just a fantastic example of a highly strategic and synergistic company, whose value has been unleashed in the transition from a family owned business to ownership under Ingersoll Rand. A few weeks ago, I got a chance to visit the LeROI team in Sidney, Ohio.

And the transformation the team is making is very impressive. You can feel the energy, passion, and engagement of the employees as you enter the manufacturing floor. We heard a lot of feedback around how the ownership mentality we had and the equity we granted has positively impacted not only the performance we show here, but, more important, the lives of many of our employees in a very positive way. Moving to Slide 12, revenue in the Precision and Science Technology segment grew 12% organic, with approximately 5% price and 10% volume growth.

Additionally, the PST team delivered strong adjusted EBITDA of $85 million, which was up 27% year over year with incremental margins of 22%. Adjusted EBITDA margin was 28.6%, down 260 basis points year over year, primarily driven by the impact of M&A. And again, this segment was down 130 basis points, excluding the impact of acquisitions, with an adjusted EBITDA margin of 29.9% ex-M&A. Overall organic orders were up 6%, which is on top of 13% year-over-year organic growth in Q1 of 2021.

In addition, we continue to be excited about our funnel for the hydrogen fueling business, which now stands in excess of $100 million. The integration of Seepex, which we acquired in September of 2021, continues to progress very well, with strong growth in new geographies and an acceleration of margin expansion into the low-20 from the mid-teens level inherited at the transaction closed just a couple of quarters ago. I also got a chance to visit the Seepex team in the U.S. And once again, our unique approach to ownership grants is playing a very crucial role in accelerating engagement and performance.

I left very excited about the future potential of Seepex as part of Ingersoll Rand. A further example of our focus on sustainable, innovative solutions is the Thomas Pumps brand, a compression technology primarily serving the life science market with a $2.5 billion addressable market. Thomas pumps, they serve the patient care end market, both in facility through applications like ventilators and also at-home through oxygen concentrators. Adjacent to these is the in-vitro diagnostic end market.

And we have leveraged our highly translatable technology to grow 40% within this market, with a very strong focus on OEM and with significant runway ahead. We have recently secured several sizable orders from large pharma customers in the in-vitro space, who designed our Thomas Pump into their new products, which will generate strong recurring revenue over the customer's product life cycle. Moving to Slide 13, after a strong start to the year, we're raising 2022 guidance. We're raising organic revenue growth 100 basis points from 8% to 10%, driven by a 100 basis-point increase in organic growth expectations from both the ITS and PST segments as compared to the original guidance.

FX is expected to now contribute a headwind of approximately 2% versus 1% on the prior guidance. And these leads to a total company revenue, up 11% to 13%. We're also increasing the adjusted EBITDA range to $1.35 billion to $1.425 billion. We continue to expect free cash flow conversion to adjusted net income to be greater than or equal to 100%.

We anticipate our adjusted tax rate to be in the low-20s and capex to be approximately 2% of revenue. Lastly, we want to provide some color on mainland Europe and lockdowns in Shanghai. During the quarter and into April, we have not seen any material slowdown in orders. In fact, we monitor our marketing qualified leads or MQLs, as we said, fairly close as they are really a leading indicator for order activity.

And MQLs in Europe have been quite stable throughout 2022. As per the lockdowns in Shanghai, we're starting to see the ease of the lockdowns trending positively. We remain encouraged. But as you know, this is a fluid situation that we continue to monitor closely.

And although we don't provide quarterly guidance, the best way to think about it is we are not making significant changes to the first half and second half pacing as compared to our original guidance, as we're taking a prudent view in the second quarter due to the lockdowns in Shanghai. Having said this, we still see continued Q1 to Q2 sequential growth in revenue and adjusted EBITDA but expected to be modest. Turning to Slide 14, as we wrap up today's call, I want to reiterate that Ingersoll Rand is in a very strong position. We delivered record performance in the first quarter, and our backlog provides momentum into the second quarter.

2022 is poised to be a strong year despite known challenges and dynamic market conditions. We will continue to remain agile and leverage IRX across every facet of our business to deliver on our commitments. To our employees, I want to say thank you for your continued engagement and making thoughtful, action-oriented decisions like the owners that you are. This engagement continues to drive the accomplishment of our mission to make life better for our customers, the environment, and the shareholders.

Our balance sheet is very strong. And with our disciplined and comprehensive capital allocation strategy, we remain resilient and have the ability to deploy capital to investments with the highest return on capital as we continue our track record of market outperformance. So with that, I'll turn the call back to the operator and open for Q&A.

Questions & Answers:

Operator

[Operator instructions] And our first question comes from Michael Halloran from Baird. Please go ahead. Your line is open.

Mike Halloran -- Robert W. Baird and Company -- Analyst

Hey, good morning, everyone.

Vicente Reynal -- Chairman and Chief Executive Officer

Good morning, Mike.

Vik Kini -- Chief Financial Officer

Good morning.

Mike Halloran -- Robert W. Baird and Company -- Analyst

Just some thoughts on backlog and what kind of visibility that gives you. So, obviously, order is really strong, particularly in ITS. How is that expected to cadence out? What's going on with the backlog levels? And what kind of visibility does that give you on a forward basis as we sit here?

Vicente Reynal -- Chairman and Chief Executive Officer

Hey, Mike. So, clearly, it gives us, I mean, obviously, much greater visibility than what we have seen in prior years. ITS, as you know, has a portion of being long cycle. And the way we may want to think about it is that kind of 20 to, you know, maybe a 20% to 25% of that backlog being kind of more on the longer-cycle perspective, which kind of gives us a good view into potentially 2023.

So, I think it's -- we're having great visibility here obviously for the next couple of quarters and an even greater visibility than what we have seen in the past as we go into 2023.

Mike Halloran -- Robert W. Baird and Company -- Analyst

So, it's part of the conservatism and less about what you're actually seeing from a demand perspective because you have that visibility in the backlog, and there's just more uncertainty about when that backlog actually converts at this point in time? Or is there something else to the conservatism that you laid out in the guidance?

Vicente Reynal -- Chairman and Chief Executive Officer

That's it, Mike. It's prudency. Clearly, as we kind of navigate the ramp after the lockdowns in China and any continued geopolitical environment that might be happening out there that maybe clouds a bit of a shorter-term visibility. But I mean, I think, it's -- you see it in the orders and the remarks that we made.

Momentum continues. Our marketing qualified leads continue to be pretty strong and resilient. And I think at this point in time, it's just more prudency based on what we're seeing.

Mike Halloran -- Robert W. Baird and Company -- Analyst

Appreciate it. Thank you.

Vicente Reynal -- Chairman and Chief Executive Officer

Yup. Thank you, Mike.

Operator

Perfect. Thank you, Mike, for your question. Our next question comes from Julian Mitchell from Barclays. Please go ahead.

Your line is open.

Julian Mitchell -- Barclays -- Analyst

Hi. Good morning. Maybe I just wanted to start with a question on the the margin outlook. So, you had 29% incrementals in Q1, and you're saying sort of mid-30s for the year.

When we're thinking about the second quarter, should we assume that that incremental margin year on year is maybe a little bit lower than Q1. That seems to be what you're saying but just wanted to confirm that. And then maybe in that light, sort of talk about price cost margin impacts, what it was in the first quarter, and what you expect for the year.

Vik Kini -- Chief Financial Officer

Yeah. And, Julian, I think the way you're thinking about it is quite accurate. So, maybe I'll start with the price cost. You know, so price cost from a dollar perspective was positive in the first quarter.

You know, I'd say on a margin perspective, not necessarily margin accretive, but we did cover inflation from price perspective. We would expect the dynamic in Q2 to frankly be fairly comparable. Obviously, given a lot of the geopolitical situation, as well as some of the the outcomes of the Russia-Ukraine situation, clearly that's driving some of the inflationary pressures we're seeing incrementally to Q2. Worth noting here, though, that, obviously, we've continued to recalibrate from a pricing perspective.

And we would expect price cost to be more favorable and more positive and margin accretive more into the back half of the year. So, that's kind of the way to think about it. But -- and your thought in terms of the incrementals being a little bit more subdued in Q2, due to that nature, as well as the Shanghai lockdowns, that's correct as well in Q2. That will drive a slightly more subdued incrementals in Q2 specifically.

Julian Mitchell -- Barclays -- Analyst

Thanks very much. And then just my quick follow-up would be around the orders expectations. So, you had better orders than I expected in the first quarter, given your comp. It sounds like orders are staying good into Q2.

Just wanted to make sure that's correct. And then within PST specifically, you know, the orders were up, I think, mid-single digit in the first quarter. How are you thinking about those looking out the next few months?

Vicente Reynal -- Chairman and Chief Executive Officer

So, yeah. I mean, I think order continues to be actually fairly good. Clearly, as we go more into Q2, Q3, tougher comps, obviously. As you remember, last year, we were seeing about 30% and 40% orders momentum, but we still see very good momentum as we are moving here into the month of April.

And from a PST perspective, I think the way I, you know, think about it is, again, you know, they're comping against double-digit orders from Q1 of 2021. But if I look at it from a sequential perspective, actually, on an absolute dollar, sequentially Q4 to Q1, we saw about a 10% increase in order momentum on the PST. So, again, it speaks pretty well as to no concerns on what the team is seeing and the ramp continues in terms of the order momentum, which always will lead to a better output here.

Julian Mitchell -- Barclays -- Analyst

Thanks very much.

Vicente Reynal -- Chairman and Chief Executive Officer

Thank you, Julian.

Operator

Thank you so much for your question. Our next question comes from Rob Wertheimer from Melius Research. Please go ahead.

Rob Wertheimer -- Melius Research -- Analyst

Thanks. And good morning, everybody.

Vicente Reynal -- Chairman and Chief Executive Officer

Good morning.

Vik Kini -- Chief Financial Officer

Hey, Rob.

Rob Wertheimer -- Melius Research -- Analyst

My question -- you made pretty clear comments on Europe. And I just wanted to circle back there because it still seems like there's, I don't know, opposing potentialities where you can have a recession and a demand drop. And at the same time, Europe desperately needs, you know, energy efficiency, energy savings and solutions to the growing energy crisis. And so, more qualitatively, on your MQLs, can you just talk about timeline? Has the issue, the energy spike, you know, already started to impact plans for upgrades or people coming to you for that reason? Can you see it in your pipeline?

Vicente Reynal -- Chairman and Chief Executive Officer

I think, Rob, what -- I think our teams will tell you that they're seeing an increase in requests from customers as it relates to what else can they do from an energy efficiency perspective. I think a data point to think about it, we talked about the audits that we do in factories and how, when you think about it in the U.S., it's up 60%, the number of audits that we're doing, energy efficiency audits as compared to pre-pandemic levels back in 2019. We didn't come in in Europe. But in Europe, we also do a lot of audits.

And the audits are kind of similar in nature in terms of seeing good momentum in terms of growth. So, customers are definitely more attuned to it. We leverage our demand generation engine to continue to educate the customers on what they can achieve. And so, we're taking that advantage and continue to create a bit of a tailwind here for us.

Rob Wertheimer -- Melius Research -- Analyst

Perfect. And then can you give any comment on -- I mean it varies a lot, but on the general timeline, which battery upgrade might be, you know, investigated, decided upon, and, you know, delivered? I'll stop there. Thanks.

Vicente Reynal -- Chairman and Chief Executive Officer

Sure. Yeah. On the customer audit side, you're referring to, right? From the time that the customer request and we go and show up to the facility, to the time that we provide a report, it could be a couple of months. We definitely want to gather a lot of good data points.

But the time that we kind of do the reports and provide data and communicate, I think the cycle could be roughly two months in order for us to get to that face-to-face meeting with the customer and agreeing what they may be making a purchase there.

Rob Wertheimer -- Melius Research -- Analyst

Perfect. And then if they do the purchase, the upgrade, is that another few months? Or how long is the lead time? Thank you.

Vicente Reynal -- Chairman and Chief Executive Officer

Yeah. Then it goes into the lead time. I mean, clearly, you know, we got extended backlog now. So, depending on the product, it could be -- yes, it will go into the backlog of the regular lead time of the product.

So, it could be another couple of months, yeah, or longer.

Rob Wertheimer -- Melius Research -- Analyst

Thank you.

Vicente Reynal -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Jeff Sprague from Vertical Research. Please go ahead. Your line is open.

Jeff Sprague -- Vertical Research Partners -- Analyst

Thank you. Good morning, everyone.

Vik Kini -- Chief Financial Officer

Morning.

Vicente Reynal -- Chairman and Chief Executive Officer

Morning.

Jeff Sprague -- Vertical Research Partners -- Analyst

Just wondering if you could give us a little more color on the deal pipeline and specifically, you know, the six bolt-ons that you mentioned here, maybe collectively the size and, you know, maybe what's the historical hit rate for you once you get into that kind of exclusive LOI?

Vicente Reynal -- Chairman and Chief Executive Officer

Yeah. Hey, Jeff. You know, once we're in an exclusive LOI, if we don't find anything -- I mean, I see our hit rate is pretty high. I'm going to say maybe 90% plus.

So, we're confident that, you know, we're going exclusive with them. And we have done enough diligence that it's just a matter of kind of some of the final negotiating points. In terms of deal size, think about these six bolt-ons, similar in nature to, you know, the LeROI, the time that we made that acquisition. So, you can see that they're small in size, but not that every deal will be like LeROI.

We want it to be always like that. But clearly, it shows that these bolt-ons can become significant good acquisitions for us over the period of time.

Jeff Sprague -- Vertical Research Partners -- Analyst

Right. No, understood. And then just a follow-up on the whole MQL, you know, kind of information, insight that it provides, I wonder also if there's, you know, any update on kind of your hit rate there, you know, as you've tried to look further out and develop leads further in advance, just kind of what's going on, you know, kind of conversion lead to order, anything to serve there --

Vicente Reynal -- Chairman and Chief Executive Officer

Yeah. You know, just to give you kind of to frame it up, I mean, when we have a marketing qualified lead, it is what we consider to be a medium to hot lead. So, it has been already kind of pre-qualified through a lot of the algorithm that we do internally and kind of with our demand generation, you know, we like to call it artificial intelligence engine that we have. So, it is higher than the typical close rate.

So, if you think -- you know, we don't explicitly talk about our close ratio as we think that's kind of strategic to us. But it is much higher than than the typical sales goal that we can make. So, that's why we're very encouraged with just keep pushing MQLs. And at the rate of several thousands of marketing qualified leads per week, it's quite encouraging.

Jeff Sprague -- Vertical Research Partners -- Analyst

Great. Thanks a lot.

Vicente Reynal -- Chairman and Chief Executive Officer

Thank you.

Operator

Perfect. Thank you. Our next question comes from Joe Ritchie from Goldman Sachs. Please go ahead.

Joe Ritchie -- Goldman Sachs -- Analyst

Thank you. Good morning, everyone.

Vicente Reynal -- Chairman and Chief Executive Officer

Good morning, Joe.

Vik Kini -- Chief Financial Officer

Hey, Joe.

Joe Ritchie -- Goldman Sachs -- Analyst

Hey, so, maybe just starting off, going back to the discussion around audit. I thought that was a really interesting discussion. So, I know it's not an apples-to-apples comparison because, you know, 4,000 audits, your installed base, I think, across your portfolio products is something like 5 million. I'm just trying to think through this opportunity, you know, on a longer-term basis because I see a $100 million conversion.

And that's pretty meaningful. It's like two points to your ITS growth, you know. And so, I'm just wondering, is this something where, you know, it's like a growth multiplier over the coming years? Is this something you guys are hoping to kind of bank on going forward? Any thoughts around that would be helpful?

Vicente Reynal -- Chairman and Chief Executive Officer

Yeah, Joe. So, I can tell you that the 4,000 that we made reference is only in the U.S. So, yeah, I mean, but definitely many more as we think about it globally -- from a global perspective. And yeah, I mean, I think we're -- this is something that we're leveraging as another kind of what we call a self-help growth initiative.

We think it is meaningful for the customers to learn more about what they can do. It is something that we've been doing for a little bit of time. But we're getting really good at doing this not only for compressors but also for like blowers. So, when you look at a company like Runtech in the pulp and paper industry, they're now doing a lot of these audits as well to think about energy, as well as water conservation in the pulp and paper industry.

So, I think it's something that is very strategic to us. We're kind of unique in how we do it. We think some of the acquisitions that we're making, like Lawrence Factor a couple quarters ago, it's another enhancer on how are we going to be able to do not only our audits, but maintain the level of purity of air and efficiency and so on with remote connectivity testing. So, I think it's -- yeah, it can be a good growth driver for us.

It has been for us so far. And as we said on the remarks, 60% improvement from the number of audits that we did in 2019 pre-pandemic. So, it's definitely an area of continued investment for us.

Joe Ritchie -- Goldman Sachs -- Analyst

Yeah. No, that's great to hear, Vicente. I guess maybe my follow-on question, just on China. I'm just curious, like, can you maybe just provide some on-the-ground color, you know, size of business for you guys.

What are you seeing in the region right now? What's been the impact and how are you thinking about it, you know, quantitatively for the guide?

Vicente Reynal -- Chairman and Chief Executive Officer

Yes. So, China for us is roughly 15% of sales, 15. And I think, you know, we said it before that we're really in the country for the country. So, you know, you could argue that roughly 90% of the product that get sold in China is produced in China.

And so, therefore, the supply chain is kind of close by. We don't have a factory in Shanghai. Our factories are outside in Suzhou and Wuxi and Baoshan. So, these are kind of different cities that have not been fully impacted by the lockdowns as our operators can still go to the factory.

In Shanghai, what we have is we have a distribution center. So, it kind of has impacted maybe some of the distribution center that we do from, which is mainly aftermarket. But most recently here, the government is allowing for some companies to actually go back, and we have been one of those companies that we have been allowed to go back. So, the situation here now is where we need now the supply chain to start ramping up.

So, it's not so much about us, but making sure that those suppliers that we have within the Shanghai region that has been locked down, that they're able to ramp kind of as fast as what we have been able to. So, I think it's just one of those that we're taking a prudent view as we go here in the second quarter. And as we're able to work with our suppliers and be able to ramp that even faster and better, it will be, you know, hopefully some upside opportunity from the perspective of being able to support our customers in a better way.

Joe Ritchie -- Goldman Sachs -- Analyst

OK. Great. Thank you.

Operator

Perfect. Thank you. Our next question comes from Nigel Coe from Wolfe Research. Please go ahead.

Nigel, your line is open. Unfortunately --

Vicente Reynal -- Chairman and Chief Executive Officer

Maybe, Victoria, we'll move to the next and then go back to Nigel.

Operator

Yes, no problem. Our next question comes from Josh Pokrzywinski at Morgan Stanley.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Hi. Good morning, guys.

Vicente Reynal -- Chairman and Chief Executive Officer

Morning, Josh.

Vik Kini -- Chief Financial Officer

Hi, Josh.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Just to keep on the energy audit discussion for a second, I'm sort of wondering what the historical context is here, the sense that we've seen sort of energy price spikes before. I think, you know, kind of going back at points in time, there's been a compelling payback analysis, but we haven't seen customers move as much. You know, I guess the current environment feels maybe more different and more structural with what's going on in Ukraine. But, like, has this happened before and, you know, what's sort of the order of magnitude difference?

Vicente Reynal -- Chairman and Chief Executive Officer

I think, Josh, maybe the one different variable that is maybe very new here is ESG and the 2030 and 2050 targets that companies are agreeing to. And you saw on one of our slides how we actually included quotes from sustainability reports from pretty large companies that basically talk about the compressor and the air treatment systems as their way for getting to their Scope 1 and Scope 2 activities. So, I think it's a combination of the multiple various variables that, yes, energy has spiked in the past and that kind of maybe creates a little bit of acceleration. But I think now, the really fundamental change in the market is that, is the fact that these kind of ESG targets that companies are putting out and realizing that these underinvested area of compressors, blowers, and pumps that consumes energy, there's now time to really upgrade that.

And the second variable could be around IOT and how the industrial Internet of Things and the world remote connectivity is really accelerating that connectivity of the product to really enhance energy consumption and water usage even stronger. So, those are two variables that are very different now that really, we think, are going to create a better, sustainable, ongoing momentum.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Got it. That's helpful. Maybe that's part of the answer to my next question is, you know, this business and other points in time felt a bit more cyclical with this sort of macro backdrop, whether it's PMIs or, you know, specific disruptions in regions. What do you think is sort of the the big difference now? I mean, part of it is probably some of the sustainability stuff, maybe near shoring, maybe your own lead generation.

But like, if you had to focus on kind of one or two things, either macro or micro that you think are sort of driving the better order performance today than kind of past volatile periods, like, what would you sort of break that down to?

Vicente Reynal -- Chairman and Chief Executive Officer

Yeah. I'd say, Josh, you know, if I say in terms of things that we can control that we have been working on for the past several years is how we have moved to better end markets, kind of what we call sustainable high growth end markets, whether it is food, beverage, life and sciences, we call that out in the in the investor day as the quality of life and how we continue to see that as we move more of our product by our own choosing to be able to play in those end markets that provides a better sustainability. The second one is, again, in terms of what we can control, it will be demand generation. We think that this is a really compelling, competitive differentiator that is allowing us to reach this highly fragmented customer base in a much more highly cost effective way and very, very, very efficient, allowing us to create these acceleration in marketing qualified leads that turn into sales qualified leads.

And the way we like to say sometimes internally is that we're going to get -- we're getting our sales guys more at bats and basically hitting more home runs than in the past. And the third piece, internally, in terms of what we can control is, I'll say, innovation. I mean, you're seeing, you know, how new product development for us is essential. And every quarter, we speak about how we've been able to create new technologies, new product, I mean.

The Thomas Pumps in the technology and moving it into in-vitro diagnostics or even the LeROI compressor, which it was a very gas compressor-oriented, and we move that to a much more sustainable end market. So, I think those are three areas that we have in our control that are allowing us to have a much more sustainable ongoing growth.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Perfect. Thanks for the color.

Vicente Reynal -- Chairman and Chief Executive Officer

Yup.

Operator

Perfect. Thank you so much. Our next question comes from Andrew Kaplowitz from Citi. Please go ahead.

Andy Kaplowitz -- Citi -- Analyst

Good morning, everyone.

Vicente Reynal -- Chairman and Chief Executive Officer

Good morning, Andy.

Andy Kaplowitz -- Citi -- Analyst

Vicente, I just want to follow up on something you just said. If you talk about the resiliency of IR's portfolio now versus a few years ago, I think one of the big initiatives you've had at the company post the RMT was to improve the aftermarket capability of the company. So, how has you proceeded with that initiative? And, you know, how has the improvement gone over the last few years?

Vik Kini -- Chief Financial Officer

Yeah. Andy, this is Vik. Maybe I'll start, and I can let Vicente on as well. You're absolutely right.

You know, I think if you followed the journey here for a few years, we made some very concerted efforts, I'd say, to eliminate a lot of the, what I'll call, cyclicality that was inherent in the portfolio previously. So, you've obviously seen that with the divestitures, particularly with upstream oil and gas, obviously, being divested away from the business. And then I'd say a couple of other areas now as we think about today and moving forward. One is the aftermarket piece, which you're absolutely right.

You know, we see a path to be above 40% from a total enterprise perspective, which is a more stable and recurring base of revenue, obviously, you know, more profitable as well. And I think the other one that Vicente just mentioned, and he gave a number of examples, whether it be the LeROI or the Thomas Pumps, is, what I'll call, higher growth, more sustainable end markets. So you've seen a lot of push for areas, whether it be on the water side, whether it be on the lab life science, whether it be hydrogen, a lot of the applications that our oil-free compression technology goes into. So, I would tell you, yes, that's absolutely been a huge push and a very concerted effort.

And I think if you look at the portfolio today, even versus what the composition was from an end market perspective at the time of the RMT, meaningfully different by virtue of both of those areas that we focused on.

Andy Kaplowitz -- Citi -- Analyst

And then, Vik, if I could follow up with you on cash flow, obviously, started out seasonally slow in Q1. You mentioned $100 million investment in inventory. How are you thinking about working capital improvement as you go through the year to reach that 100% goal? And should we expect sort of normal cadence from here?

Vik Kini -- Chief Financial Officer

Yes. That's thought on, Andy. Obviously, you know, clearly, given the backlog and the global supply chain environment, you have seen a build of inventory here in Q1. I would say, obviously, right now, clearly, with the Shanghai situation and still kind of some of that supply chain unrest that's there, we would expect to continue to see working capital at probably a slightly elevated levels here, particularly through the first half of the year.

So, Q2 probably not being much different. And then the second half being I'd say about more of the normalization. So, I think by the second half, again, assuming everything continues to return to some semblance of normal, you would expect to see that seasonality probably come back in. And it's worth noting here that, you know, our cash flow is typically seasonal Q1 is typically the lightest and it does ramp toward the end of the year.

We would expect no different this year. Just a little bit more exacerbated in the first half due to the inventory situation.

Andy Kaplowitz -- Citi -- Analyst

Appreciate it.

Vik Kini -- Chief Financial Officer

No problem.

Vicente Reynal -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Nathan Jones at Stifel. Please go ahead.

Nathan Jones -- Stifel Financial Corp. -- Analyst

Good morning, everyone.

Vik Kini -- Chief Financial Officer

Good morning, Nathan.

Vicente Reynal -- Chairman and Chief Executive Officer

Hey, Nathan.

Nathan Jones -- Stifel Financial Corp. -- Analyst

I wanted to start off with some questions around the backlog and lead times. I mean, you've obviously had very strong book-to-bill ratios, very strong orders. But I'm sure you have more backlog than you would like at this point. Are you in lead times getting shorter, getting longer? Any color you can give us around how that's impacting the business and how that's impacting past due backlogs, etc.

Vicente Reynal -- Chairman and Chief Executive Officer

Yeah, Nathan, I would say -- it actually varies by business and also the product lines within the businesses. So for example, we've now been able to have like the small compressors to reduce the lead time dramatically versus what it was in the past. And so I think in the aggregate, you can think about lead time maybe about the same to slightly better, with some kind of mix within those product lines that we have. So, you know, is our team working aggressively to try to reduce and use it as a competitive advantage? You bet, they are.

Yeah.

Nathan Jones -- Stifel Financial Corp. -- Analyst

Do you think that your lead times are better or significantly better than the competitions and that that is leading to market share gains?

Vicente Reynal -- Chairman and Chief Executive Officer

I think it will vary country by country, Nathan. I mean, as you know, we're still in region for region or in country for country. It could vary country to country. And in some cases, like I said, you know, I think if we have that opportunity to utilize our lead time as a way to have a competitive differentiator, we will.

Nathan Jones -- Stifel Financial Corp. -- Analyst

And just one quick one on the energy audits. Do you actually charge for those energy audits? Or do you view that as kind of a selling expense?

Vicente Reynal -- Chairman and Chief Executive Officer

Yeah. No, we actually do it as -- well, I won't say that it varies again, Nathan. In some industries, we're actually charging for some of that, minimal amount. What we do is only mainly because we just want to see the commitment from the customer in doing these audits.

I mean sometimes, if you do it for free, they just don't pay the attention to it. So, in some cases, we're actually charging. I mean -- but you know, not to generate a profit on these audits. It's just more to create that conversation on what we can do to the customer.

Nathan Jones -- Stifel Financial Corp. -- Analyst

Makes sense. Thanks very much for taking my questions.

Vicente Reynal -- Chairman and Chief Executive Officer

Yeah. Thank you, Nathan.

Operator

Thank you. Our next question comes from Stephen Volkmann at Jefferies. Please go ahead.

Steve Volkmann -- Jefferies -- Analyst

Hey, good morning, guys. Vik, I just wanted to go back to the incremental margin question, if I could, because I guess the second half is going to have to be pretty heady relative to incremental margins to kind of get to the 35% for the year. And I guess probably most of that's price cost. But I just want to make sure you have a conviction and visibility into that, accelerating in the second half.

And I assume the fourth quarter would be kind of the highest of the year. But just any comfort around that would be great.

Vik Kini -- Chief Financial Officer

Yes, Steve, that's completely correct. Yes. I'd say the incremental margins are expected to be, you know, obviously much better in the second half of the year than the first half. The major drivers clearly price cost.

It's probably the single biggest driver. As we said, we would expect that price cost is going to be dollar positive in all quarters, but not actually margin positive, particularly in the first half. In the second half, much more so. I'd say the other areas to note would be, one, we do have the $50 million of synergies that we are still expecting to see.

Remember, those tend to be a bit more seasonal because the synergies we're seeing now are much more, I would call, I2V-oriented maybe to a degree, footprint in certain areas. But they are very volume -- they show up on the volume shifts there. So obviously, they have the seasonality associated with them that, once again, would follow them more so in the second half of the year. It's seasonally stronger.

And the third area to note here is, remember, we do have the, I'd say, the synergies on the bolt-on acquisitions that we completed last year. And so, you know, we're taking a lot of that is in the Seepex business specifically. We're taking a lot of the actions now, and we'd expect to see a lot more of those in the -- actually in the margin profile more toward the back half of the year. So -- and again, it's -- you know, obviously, it's probably worth noting that right now, particularly for those PST acquisitions, you didn't have them in the prior year for the first half.

So, there is a bit of a nuance between first half, second half. Once you start comping fully on the acquisitions, it starts to normalize a bit more. But those would probably be the three biggest drivers, price cost obviously being the biggest of the three of them.

Steve Volkmann -- Jefferies -- Analyst

Understood. That's helpful. I appreciate it. And it actually sort of leads to my follow-on because I was curious about the six bolt-ons that you have in the pipeline.

Are those likely to be margin dilutive? I know you can sometimes find some pretty good margin acquisition targets. But just curious if you actually get those over the goal line, how we should think about that mix.

Vik Kini -- Chief Financial Officer

Yeah. Steve, I wouldn't -- so they're bolt-on in nature here. They vary in margin profile. And they also, I'd say, vary from a segment perspective as well.

So, we have a pretty good, I would say, you know, mix across the portfolio. Not meaningfully, I mean, majority of things we're purchasing are in that 20%, 25% plus realm, typically speaking. But we typically have a very good path to how they will get to segment margin profile, if not better, within a three-year time frame, if not better. And I would tell you the margin profile -- I'm sorry, the return profile from an ROIC perspective on all six of these deals is completely in line with the targets that we've laid out previously.

So, even if there is some slight dilution upfront, we would tell you that's something we feel like we can rightsize pretty quickly.

Steve Volkmann -- Jefferies -- Analyst

Super. Thank you, guys.

Vicente Reynal -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you, Stephen, for your question. Our final question comes from Nigel Coe from Wolfe Research. Please go ahead.

Nigel Coe -- Wolfe Research -- Analyst

Thanks. Good morning. This time, I'm here. Sorry, managing coupled of calls here.

So, I apologize for that, embarrassing. I want to go back to the energy audits. I know you've touched on it a number of times here. But you said a two-year payback, Vicente.

I'm wondering how that looks specifically in Europe, just given, you know, how high energy prices are there. You know, two-year payback is definitely in the realms of a good capex ROI, but just wondering how that looks in Europe.

Vicente Reynal -- Chairman and Chief Executive Officer

Yeah. Great, Nigel. Yeah, I mean Europe, clearly, with the energy cost being much higher, will be better than that two-year payback. We don't want to specifically quantify region by region.

But as energy costs will continue to rise, that is definitely kind of core to the mathematical formulation of getting that payback in there.

Nigel Coe -- Wolfe Research -- Analyst

OK. And then just I'm curious, are there any -- I'm not aware of any specific credits or incentives at the manufacturing level. But are there any incentives that you're aware of that could encourage, maybe, you know, get some customers over the line on replacements?

Vicente Reynal -- Chairman and Chief Executive Officer

Nothing that I would say meaningful, Nigel, to be honest. No, nothing meaningful, you know.

Nigel Coe -- Wolfe Research -- Analyst

OK. And then just finally on compressors, the legacy Ingersoll Rand, i.e., train -- you know what I mean.

Vicente Reynal -- Chairman and Chief Executive Officer

Yeah.

Nigel Coe -- Wolfe Research -- Analyst

The old compressor portfolio was definitely a bit more oily than the Gardner Denver portfolio, larger, you know, higher prices.

Vicente Reynal -- Chairman and Chief Executive Officer

[Inaudible]

Nigel Coe -- Wolfe Research -- Analyst

Yup. Just wondering, what is the mix right now of energy-centric, you know, end markets there?

Vicente Reynal -- Chairman and Chief Executive Officer

Yup.

Nigel Coe -- Wolfe Research -- Analyst

And so what trends you're seeing in those verticals?

Vicente Reynal -- Chairman and Chief Executive Officer

Yeah, no. Great. You know, so, this is actually one that very well fits in line to what we said before about moving to the sustainable high-growth end markets. So, we're taking that technology of that large centrifugal compressors into air separation, like for hydrogen or for LNG.

So, these are kind of the more, what we call, more into the sustainable end markets that we're seeing. Also, food and beverage and also a lot of the new semiconductor expansions that you're seeing and the localization of the supply chain. And the last one is electric vehicle production and lithium battery ion production. I mean, those are kind of the end markets that we have pivoted away from oil and gas and into these better sustainable growth end markets.

So, this is a great example on taking what we can control, which is taking the products and position them very well into end markets that are seeing better growth momentum.

Operator

This concludes our Q&A session. And now, I'll pass it back over to Vicente Reynal for any final remarks.

Vicente Reynal -- Chairman and Chief Executive Officer

Thank you, Victoria. I just want to say thanks to everyone for your interest on Ingersoll Rand. And to all the employees that are listening to here on the call who are shareholders. And also to all of our shareholders, we want to say thanks again for the support.

As you can see, we're a company very well-positioned to continue to execute even in difficult environments. And we're always guided by our purpose of making life better not only for the planet, our customers, but also our employees and shareholders. So, with that, I want to conclude here and say thank you again. And talk to some of you soon.

Thank you.

Operator

[Operator signoff]

Duration: 59 minutes

Call participants:

Chris Miorin -- Vice President, Investor Relations

Vicente Reynal -- Chairman and Chief Executive Officer

Vik Kini -- Chief Financial Officer

Mike Halloran -- Robert W. Baird and Company -- Analyst

Julian Mitchell -- Barclays -- Analyst

Rob Wertheimer -- Melius Research -- Analyst

Jeff Sprague -- Vertical Research Partners -- Analyst

Joe Ritchie -- Goldman Sachs -- Analyst

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Andy Kaplowitz -- Citi -- Analyst

Nathan Jones -- Stifel Financial Corp. -- Analyst

Steve Volkmann -- Jefferies -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

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