Ingersoll Rand Inc.
Q2 2021 Earnings Call Transcript

Published: 29 Jul 2021

[Operator:]

Good day and thank you for standing by. Welcome to the Ingersoll Rand Second Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. I would now like to hand the conference over to your speaker today, Christopher Miorin, Vice President of Investor Relations. Please go ahead.

[Chris Miorin:]

Good morning, everyone and thank you for the patience with the technical difficulty this morning. Welcome to the Ingersoll Rand 2021 second quarter earnings call. 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.

[Vicente Reynal:]

Thanks, Chris. And good morning to everyone. And as you can see on Slide three 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 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. I want to thank our employees all around the world for their dedication and determination. We continue to support our employees with an unwavering focus on health, safety and mental well being. Moving to Slide four, 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. Operate sustainably in strategic imperative we achieved another major milestone that I'll touch on the next slide.

[Vik Kini:]

Thanks, Vincente. Moving to Slide eight, 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. Given the comparisons to 2020, are materially impacted by the prior year impact of COVID. We think comparing this performance to 2019 is a better representation of how the business is improving. And we are very pleased with the momentum we are seeing as organic orders in Q2 are 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 margins of 22.8%, 160 basis point improvement year-over-year. One item to note, these financial metrics do not include the high-pressure solution segment or the specialty vehicle technology segment, both of which were classified as discontinued operations as of Q2, with the relevant prior periods restated to conform to the current presentation. 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 0.2x a 1.7x improvement from Q1. Turning to Slide nine, 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 to 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.

[Vicente Reynal:]

Thank you, Vik. 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% 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 and 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. And power tools and lifting, the total business was up high 50% in orders and so continued positive growth driven mainly by our enhanced ecommerce capabilities and improved 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, we were in Q2 we completed the launch of our new line of refrigerated drive portfolio. There'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, thus 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 in the great adjacent technologies 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 know 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 Aztec, which was a company owned by legacy Ingersoll Rand. Since the merger of Gardner Denver and IR, not only we have accelerated our organic investments in new products for Aztec, but we're now leveraging that technology in order to serve Gardner Denver, Ingersoll Rand and in the future, even our champion compressor customers. The even more exciting bit here is that we're doing these while helping the environment. This new dryer portfolio is 20% more energy efficient and reduces greenhouse gas emissions by over 50%. Moving to Slide 13, in the precision and science technology segment, overall organic orders were up 20% driven by the Medical and Dosatron businesses, which serves lab life science, water and animal health markets. These businesses were up double digits and we also saw strong performance in our ARO and Mytholmroyd broad lines. The momentum in our Haskel hydrogen solution business continues to build and we saw some strong funnel activity. Revenue was up 12% organically which is encouraging, as we have some tough comps to cover the order 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 in this business. We have line of sight over $45 million in organic investments over the next five years to both build high 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 3x to over $250 million in potential projects. I also 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 the state-of-the-art hydrogen refueling stations to support the clock power and remote joint venture. Moving to Slide 14, given the company's performance in Q2 and continued strong outlook, we're increasing guidance for 2021. Our guidance excludes both the high pressure solutions and specialty the vehicle technology segment, as well as the pending acquisition of Seepex and Maximus. Our prior revenue guidance was up low double digits on a reported basis comprise of high single digit organic growth across both of our segments. And we're now up in guiding up to the 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, based on these revenue assumptions we are increasing 2021 adjusted EBITDA guidance to $1.1 5 billion to $1.18 billion, which represents approximately a $30 million improvement from prior guidance at the midpoint of the range. We also highlight that these also includes the increased copper 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 benefits. This is 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 is in an outstanding place. 2021 is poised to be a great year to our employees, I'd want to say thank you for how we come together every day to be there for our customers, solve problems, lean on each other and collaborate. We take a role as sustainably minded industry leaders seriously, and our employees eagerly embrace IRX to put us in that leadership position. I'm confident we will continue to transform Ingersoll Rand and deliver increased value to all of our shareholders. So with that, I'll turn the call back to the operator and open up for Q&A.

[Operator:]

Your first question comes from the line of Mike Halloran. Mr. Halloran, please provide your company name and proceed with your question.

[Mike Halloran:]

I'm with Baird. Thanks for taking the question. Focusing on the supply chains, inflation pressures, component shortages, things like that. Maybe some thoughts on how that's impacting results in the second quarter and how you see that playing out over the next couple quarters? When does normalization start materializing? And how are you thinking about that price cost equation internally?

[Vicente Reynal:]

Yes, Mike. Good morning. We definitely continue to see price cost equation to be positive. Even here in the second half. As you may recall, during the last earnings, we mentioned that we were seeing the inflation creeping up since Q4 of 2020. And we acted on that when building the budget for 2021. Since the end of Q1 of 2021 of this year, we have seen inflation and we've got inflation here, direct material and logistics continue to increase, which is the reason why we acted on additional pricing actions. I'll say those Brexit pricing actions are offsetting the incremental inflation that we're expecting to see in the second half. With that, we're also continuing to focus on mitigating these headwinds with a very heavy focus on I2V initiatives. So I think in terms of kind of moving forward, I will also categorize direct material inflation and continue to be a headwind but generally stabilizing while logistics side, we do expect to see continued pressure in the second half of the year compared to the first half. But this is kind of consistently with how we model our business and we are clearly working on a daily basis to ensure that our supply chain team is finding ways to mitigate the potential cost pressures. And then, there beyond as things materialize and we see good fruit of these continued price increases, obviously, we expect margin profile to continue to improve.

[Mike Halloran:]

Thanks for that. And then, the follow up is, obviously good momentum in the quarter underlying trends are healthy. What are the customers saying about sustainability at this point, large versus small sized projects maybe OE versus run rate? How are those tracking? And what is the visibility in the CapEx reinvigoration, as you're thinking forward? And again, what are customers saying about that topic?

[Vicente Reynal:]

Yes, Mike. I think if anything, what we saw is that, as we have some long cycle businesses, particularly kind of that Nash Garo and some of the large compressors. And we saw in the second quarter order momentum to continue to improve compared to the first half. We actually saw orders accelerating on these large projects. So maybe that's a good indicator in terms of the feedback that we're seeing from customers that they're kind of feeling more confident and comfortable about releasing CapEx for some of these large projects. And so, at least in our view, that's kind of good news. We also see, as I mentioned, good funnel momentum building on some of this kind of hydrogen refueling networks, which obviously that tends to create some good solid investments here that turn into revenue for our business.

[Operator:]

Your next question comes from the line of Julian Mitchell with Barclays.

[Julian Mitchell:]

Just wanted to start on acquisitions. And I think you've made it clear with flow that you weren't aggressively chase that maybe on the announced transactions, maybe help us understand, as you're thinking about sort of a full year EBITDA accretion, first 12 months or 2022 from Seepex and Maximus combined. What sort of number roughly should we be expecting there? And also Seepex margins, I think you're assuming that you can move those up quite substantially over several years. Maybe help lay out sort of some of the big moving parts within that.

[Vicente Reynal:]

Yes, Julian, thanks. We're really excited with these two pending acquisitions. And we actually see both companies as we kind of go ahead and look into next year to be continued to grow low double digit top-line. As we can have stated, Maximus is already at the precision and science technology margin profile. So and Seepex even though below we expect that Seepex, as we go into 2022 will be kind of a low 20 margin. And as you would expect, this is our initial view. And we have already launched an IBM part of the IRX with Seepex as part of our integration planning process, as we can move now into the next phase of closing the deal and move it into the integration. So far, what we see is that, we don't see any barrier to get Seepex margins through to the precision and science level, I think it's a business that it is solid with over 40% recurring after market, it has already launched a very meaningful or what we consider to be really strong digital platform where we've been able to kind of crack the code on creating edge devices for this type of pumps which tend to be highly cost effective. So we're excited with what we're seeing here with Seepex, I mean, as it brings to the table, not only a great new product portfolio with progressive cavity pumps, but also a great IoT technology. And clearly same thing with Maximus.

[Julian Mitchell:]

Thank you. And then, just my second question around sort of near-term margin dynamics in the base business. So I think looking at Slide 11, you've called out less of a margin increase in the second half year-on-year than the first half. So completely understand that, but the implied sort of incremental margins still look pretty high in the sort of mid 30s plus in the second half year-on-year. Just wanted to make sure that's roughly correct. And whether you think that's appropriately sort of conservative, given that backdrop of higher corporate costs, price cost pressures and so forth.

[Vik Kini:]

Yes, Julian, and this is Vik. I'll take that one. So, yes, I mean, I think first and foremost, in terms of the second half of the year as we mentioned, and I think actually, even the left side of that page kind of highlights despite some of the inflationary pressures and headwinds that we've been seeing, you've seen as a couple of distinct actions really taken by the team. First, is the proactive kind of pricing measures that we spoke to I'd say, we've talked about this historically, from a legacy Gardner Denver perspective, having a distinct pricing team that's able to be pretty nimble and take actions pretty quickly, particularly in an environment like this. And obviously, the first half of the year was no different. So I think between some of the proactive pricing measures you saw us taking, towards the back half of last year, as well as some of the actions we've taken in the first half of this year. I think that's obviously continued to allow us to keep the price cost equation on the positive side. And then, the other piece is, obviously, we are 100% still committed to the $100 million of incremental synergies that we're expecting to be delivered this year. And interesting enough, some of those distinct actions are really coming from the direct material side, particularly now starting to see a good influx on the I2V side. So you are correct that, yes, we are seeing some of those inflationary headwinds in the back half the year. I think some of the pricing measures as well as the productivity actions are definitely helping to offset as well as some of those corporate cost headwinds. We do believe that we continue to see EBITDA margin expansion in the back half of the year, albeit to your point, not necessarily at the levels that we saw in first half, obviously, given some of the headwinds we're talking about.

[Operator:]

Your next question comes from the line of Jeff Sprague with Vertical Research.

[Jeff Sprague:]

Hey, Vincente, can you give a little bit more color on the funnel that you really built here on the on the M&A side? First, I would imagine the vast majority of its in PST, kind of confirm or elaborate on that. And also just, interested if there's any common theme on what you're actually passing on, would it just primarily be valuation? I would imagine that we're in the fall because they've got some interesting attributes. And they wouldn't have been there to begin with. So it was just -- this kind of evaluation dynamic or as you dug deeper into this, you just found some of the synergy opportunities that were you would have hoped.

[Vincente Reynal:]

Yes. Sure, Jeff. So I say in the funnel 20% is kind of almost like 60

[Jeff Sprague:]

And then separate unrelated question just on kind of, the energy efficiency push going on across, the product offering, just wondering, to what extent do you actually see this as a retrofit driver, where companies looking to kind of prove their ESC, profile or actually willing to kind of rip and replace functional equipment in the name of efficiency? Or should we really just think about the energy efficiency of new products is really just the basis of competition on new business or kind of regular replacement business.

[Vicente Reynal:]

Yes, Jeff, it is a great interesting question. I will say that -- we see a lot of retrofitting driver, because in many instances and we have said, some of these before, when you look at a blower that goes into a wastewater treatment facility, the energy consumed by a blower is close to like, 60% of the energy consumed at that total facility. So, these are devices that are highly mission critical, low cost to the overall process, when you put in perspective when it purchased -- when you buy the product, but they can be high energy users. Same thing with compressors and a lot of our new compressor technology it’s just massively much better from an efficiency perspective than the old compression technology. So in many cases, we have, train our sales team, our commercial teams, to really sell on that value proposition. And this is what we see as one of the main drivers, when customers want to replace product, they say, might as well help the environment in terms of having a much more energy efficient and with energy continue to increase in countries like or areas like Europe and even Asia, there's a larger propensity for customers to go after products that can reduce that energy consumption.

[Operator:]

Your next question comes from the line of Nigel Coe with Wolfe Research.

[Nigel Coe:]

Yes. So I just want to dig into your China, you reported 15 plus all the growth for compressors that on top of, I think the growth quarter into 2Q '20, as well. So it wasn't an easy comp. So curious, number one, what you've seen in China, there's some concerns, a hardest landing. And then maybe how your share is trending in China, obviously, you're up against a very strong competitor in that market.

[Vicente Reynal:]

Hi, Nigel. We're very pleased with what the team in China continues to do. I can say that even about a year ago, when COVID hit really hard in China, the team immediately start to pivot into end market, where they could see meaningful growth as the recovery from the China economy will come. And we're seeing a lot of that now. That pivoting into better end markets that are in markets where government has put in some good investments. I'll say that also the team has done some really great product launches. The team overall they have now relaunched the Gardner Denver brand line of compressors, it is getting really well positioned in the China market. I will also say that before, our blower and vacuum business was actually very small in a big market. Now that we have a larger scale team with a Ingersoll Rand acquisition, we're leveraging the channel and the knowledge of that team into the market to really accelerate the growth on the vacuum and blower business. And, one example that I show, even here today with the air treatment revenue right now in China is very low. So it is a really meaningful opportunity for the team in China as we can’t take these new product line of dryer solutions and launch that and kind of launch that in China. So really good combination of -- the team is executing really well, commercially, selling what we have in different end markets, while at the same time launching new products that are really getting good traction in the market.

[Nigel Coe:]

Thanks, that's great. And then on the $100 million of synergies from the IR Co integration. Obviously, supply chain and procurement are a big bucket in that. And some of your kind of peer industrial companies are pushing out some of the kind of supply chain cost savings that they're targeting, because of the pressures that we're seeing right now. Have you seen some of that as well as or some of these projects moving to the right? And then within that as well, the inflation that you're seeing in the supply chain? Is that $100 million bucket? I know, it's not supply chain, but is that net inflation? Or the inflation outside of that bucket?

[Vik Kini:]

Probably backwards, frankly. So to start with your second question, they're kind of distinct. So yes, we are seeing inflation, but we're still very much committed to the 100 billion dollars of total synergies of which obviously, the agenda procurement direct material component comprises a big, big component. So it's no different than how we've messaged it before, even coming into the year, we were seeing, I would say $100 million expectation of synergies, and frankly, a smaller degree of inflation, clearly, inflationary pressures have probably grown a bit. But, those two numbers are somewhat distinct. And that's the way we're kind of managing it. Clearly our teams have done a really great job, when you think about the procurement and supply chain organizations, they've now really, I'd say, you know, been able to, I would say, use IRX and use a lot of our internal processes to be able to balance, as their attention between both synergy delivery, as well as managing a lot of the supply chain and logistics constraints that, frankly, the general markets have seen. So I think right now, we're extremely pleased, are we seeing any dramatic push out of savings, or anything of that nature compared to our original expectations? No, not in any material manner? I think for us, what we've been seeing here has probably given us a bit of a acceleration in the context of looking at more I2V initiatives as a means to mitigate. So, like we said, we're not immune to what's going on. But I think that right now, we're kind of keeping that synergy equation quite balanced to what we originally thought. And also opening, I'd say, the team up to, frankly, looking at more I2V initiatives and things like that as cost mitigants.

[Operator:]

Your next question comes from the line of Rob Wertheimer with Melius Research.

[Rob Wertheimer:]

I had a couple questions, it’s on the acquisition funnel, engine one is just on Maximus. So I'm curious, if the IoT aspect and growth are a little bit different than asset and whether, connectivity IoT, or find a way in the backlog or in the acquisition funnel in a more meaningful way. And how you think about transforming that opportunity, the acquisition versus what you're, also doing through your installed base. And the second one is, I may just do both at once. And just obviously, if you do a large deal, you replace some of the revenue, disappearance from special vehicle more quickly. I just wanted to ask you about your comfort with doing smaller deals and how long it takes and whether you think about that way. Thank you.

[Vicente Reynal:]

Yes. Thanks, Rob. The Maximus IoT growth that is, a phenomenal find, in terms of an acquisition. And that came from looking at the market from a different kind of sort of angle and perspective in the sense that we had a good pump business called Dosatron. That plays really well in the animal health and agricultural market, that is the market leading non-electrical pumps, so basically creates dosing and movement of water, just by the flow itself. So it's kind of really unique technology. And in most of this kind of highly specialized applications and you can think about those applications, like hydroponics. I mean, we know the amount of the rain, the acreage that is available in the world to continue to grow vegetables and feed animals is kind of shrinking really fast. So more and more you're moving to indoor farming and hydroponics which is obviously the way of growing vegetables with the use of water. And here we have a really great leadership position. So when you go to one of these indoor farms, this is Maximus is a leader in these agritech controlling aspects of or being able to control the entire ecosystem of that. And where we see a lot of very good plays of not only our pumps, but all the devices that are inside that we can now actually bundle and kind of complete together the entire package. And when you think about that type of process, could we take it and replicate that into a wastewater treatment facility or into any of these other end markets? That is what our thesis also goes into? Is that how do you take that Maximus software IoT comprehensive solution, and then utilize it and leverage it for other end markets? And that's where we just get super excited. I mean, in terms of doing a large deal, I mean, obviously, you could argue that the smaller deals take as much time as large deals, that's what many say. I will say that with the use of IRX right now, we're building some incredible processes and muscle, whereas integrating is small or bolt-on deal is -- it goes actually quite well. I mean, Tuthill or Kinney is a great example. Where the theme in the Americas was able to integrate that pretty much by themselves and in a very rapid way, including the integration of the entire ERP system and in a very highly cost- effective way. So we think that larger deals can give us a bigger, faster scale. Yes, but we also know that, larger deals come in with what I call a bit of air in the sense that not all larger deals are 100% perfect. And sometimes you need to divest and kind of decouple businesses that you may not like from those systems from those businesses. So we continue to be excited about our bolt-on a medium size, business acquisitions that we have in our funnel. And we think that the processes that we have will continue to accelerate how we do deals.

[Operator:]

Your next question comes from the line of Joe Ritchie with Goldman Sachs.

[Joe Ritchie:]

Hey, Vincente, I know we've talked a lot about the M&A funnel. But just a quick question, as you're kind of thinking through the types of opportunities, are you looking more for kind of fixer uppers where you can utilize, the IRX system to really drive better margin expansion? Or is there like a good balance of maybe, margin accretive type acquisitions that you're looking at as well?

[Vicente Reynal:]

No, I think Joe, we're looking for businesses that can continue to raise the bar of Ingersoll Rand in the sense of making Ingersoll Rand continue to be a great, I think what -- from being a good company to a great company, but also even bigger than greater company. And by that, it has to be strategic deals that make a lot of sense to our product portfolio. That makes a lot of sense to how we look at margin expansion and top-line growth for the future value of the company. Seepex and Maximus are kind of two, I would say great businesses that, for example, are drawing double-digit growth, great technologies. Maximus already at the margin profile of precision and science. Seepex has room to improve, but it's a technology that we like. So I think it's just one of those that in some cases, we look at both, but more important, is not the size, it's kind of just the margin expansion that we can generate and make the total company better. So we can continue to see multiple accretion in an overall business.

[Joe Ritchie:]

Got it. That's helpful context. And I guess maybe just my follow on question, you referenced the book-to-bill earlier, I think you guys were at, like 1.14 for total company. If I take a look at your order trends to the first half of the year versus revenue, I think you're up about 350 million bucks, is the way to think about this going forward, that you're booking even more kind of like mid cycle type work at this point. And that's why you don’t have to play catch up on the revenue side with your order rates, or actually be kind of thinking about, how revenue and orders kind of converge over the next, call it 12 to 24 months?

[Vik Kini:]

Yes, Joe. This is Vik. I'll take that one. So, I think first of all is yes, I mean, we've always been really pleased with the orders performance. I think the good thing here that we've talked about and Vincente mentioned, in the second quarter, we actually saw a good mix of what we'll call kind of core compressor blower vacuum type orders, which, yes, typically ship out within kind of the next quarter thereafter, you're not typically booking those for five, six months out in most regions. But we've also seen a nice tailwind in some of the -- kind of the larger project size, whether that'd be the centrifugal compressor side, whether that be Nash Garo business. So I'd say, those are the types of orders that tend to have six to 12, in certain cases even longer than that kind of order to sale kind of lead time. So the good news here is, we've seen a bit of a balance. I think in the context of orders to revenue. Yes, obviously, we have a stronger backlog and we have more backlog visibility today than we've had in probably any quarter coming in, backlogs are up, strong double digits and frankly, even better in certain parts of the business. And yes, we have strong visibility into Q3 at this point in time, pretty much across most of the portfolio. But the good news here is, we've also taken some really nice, longer recycle orders, as we would call them, that kind of now even extended to 2022. So giving us even a little bit more visibility into 2022 than we had, frankly, over the course of last few months. So I think we're seeing a good balance of both is the answer Joe.

[Operator:]

Your next question comes from the line of Markus Mittermaier with UBS.

[Markus Mittermaier:]

Maybe I just follow up on that question. So now, if I look at the last CapEx spending cycle from 16, 17, 18, and then look at sort of pro forma in the industrial Gardner Denver, in the growth there, but interesting to see that both companies are actually at the top of the sector, pretty much among the top in terms of that growth inflection? Is that something in the context of what you just mentioned around sort of short cycle, long cycle, et cetera, that they should use as a framework, maybe for the next two, three years, if we assume that we are at a similar point in the CapEx cycle, just trying to get a sense for these long cycle businesses size and how much of the short cycle business is short cycle in nature that industry is driven by CapEx.

[Vicente Reynal:]

Hey, Marcus. I think that's probably a good analogy, just to see -- to think that, at least, what we see here is this kind of broad base optimism in the market, and that our CapEx are kind of getting more and more, getting started to get released. And so yes, you could argue that's kind of the same type of momentum that we expect to see.

[Markus Mittermaier:]

Great. And then, maybe just a quick follow up on hydrogen. You've mentioned, sort of a 250 million funnel, how should we think about that timing on the conversion of that funnel? And ultimately, how fragmented is that market? If you look at that 2.5 billion opportunity for 2027? What do you think that market looks like, three, four or five years down the road?

[Vicente Reynal:]

Yes. In terms of the fragmentation is, there actually not that many players in the dispensing market. You could argue that they're kind of like top three main players with us being one of them. So at this point in time, it is such a highly specialized way of dispensing these types of gas, and that you have to do it with specialized type of equipment. And in this case, Haskel is one of the leading providers for doing that. And Haskel has a lot of history on dispensing hydrogen, because they used to do a lot of these for rocket ships, many, I mean decades ago. And in terms of the 250 million funnel, I mean, we see these over the next horizon of years. I mean, it varies from project-to-project. But I think the good thing is to be continued to see that funnel momentum increase and get back on many of these projects that are seeing expansion of networks.

[Vik Kini:]

And Markus, I would add to that, frankly, given that funnel and given where our technology is headed, that's driving, obviously, the investment that we announced, the $10 million that we expect to spend over the next 12 or so months, that's really meant to build out capacity in a large part here, with the expectation to be able to execute on a meaningful part of that funnel. So I think we're kind of seeing the funnel and we're reacting. And we always said, quite explicitly, we're going to continue to invest in those higher growth -- organic growth areas, this being a big one. And we're quite excited about a couple of the plant expansions that are going to be coming up here in Europe in the next 12 months.

[Operator:]

Your final question comes from a line of John Walsh with Credit Suisse.

[John Walsh:]

It was just one question from me. Good morning. Could you talk a little bit about how you're thinking about free cash flow build in the second half of the year? I don't know if there's some type of bridge you could talk a little bit about or maybe help us dial in on what greater than 100 means because obviously, very strong conversion and you're usually back half weighted. Thank you.

[Vik Kini:]

Yes, John, you're exactly right. I think the free cash flow side of the equation typically tends to be a bit more second half seasonally weighted, that comes from probably a couple of different factors. One is -- one, the revenue and earnings profile of the business does tend to be a little bit more back end weighted in the context of just kind of our earnings profile, you've seen that in most years, I would also say the working capital side of equation tends to follow a pretty seasonal path. This year will probably be no exception here where, as you can see the numbers, we have seen some inventory build prudently, frankly, in the back -- in the front half of the year, a lot of that is positioned, quite frankly for the second half execution second half orders. And so, we do expect to see a nice tailwind on working capital in the back half of the year that tends to be, I would say, the kind of the two of the biggest contributors. I would also tell you that, we're working really hard steadily on the tax rate, we continue to see good momentum there on the tax position and the cash tax rate for the overall company and one that we would expect to continuously moving into 2022 as well. So I think there's multiple different levers that we're looking at and we're pulling. I think we're being very prudent continued in this environment in terms of deploying cash. But, again, we'd expect to see a strong second half of the year, not too dissimilar to what you saw last year.

[Operator:]

This continues the question-and-answer session. I'll now turn the call over to Vicente Reynal for closing remarks.

[Vicente Reynal:]

Thank you so much. I just want to say one more time, thanks again to all of the employees that are listening to the call. I appreciate all your hard work . And I also thank all of the investors and potential investors to participate and the interest that you have in our company and look forward to speaking to many of you here over the next days and weeks. Thank you.

[Operator:]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.