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

Good afternoon, everyone. Welcome to e-Laguna this year. I'm your host for this discussion, Josh Pokrzywinski, I'm the firm's U.S. electrical equipment and multi-industry analyst. Joining me on the audio line this afternoon from Ingersoll Rand, we have President and CEO, Vicente Reynal; and also CFO, Vik Kini. Guys, welcome to the conference. Appreciate you taking the time. Before we get started here, I do need to read a quick disclaimer. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Guys, thanks for joining. Vicente, if you wouldn't mind, maybe just spend a couple of minutes here as we get started, given this to lay the land and anything you're seeing out there, any updates on how some of the integration is going, just kind of a broader level setting?

Yes, absolutely, Josh. Obviously, thanks for the invitation. It's exciting to to be here, although remotely, but we're kind of getting used to a lot of the remote and virtual meetings. So Josh, just to give you a quick overview. I mean, I think the integration continues to go really well. A couple of things I'll just kind of mention, we just completed our global employee engagement survey. We had over 95 participation rates. So when you think about 16,000 employees, 95% of them participating, it just tells you about the kind of the high level of engagement that we're creating across the organization. At the same time, later here in the month, as a matter of fact, on Monday of next week is when we're going to provide equity to all employees in the company and making employees owners of Ingersoll Rand. And so there's a lot of excitement and a lot of celebration that we're going to do around that. And I think that is just as a way to infuse the continuation of the momentum and the one culture that we want to create at Ingersoll Rand. And so I think I'll just say that, obviously, we never imagined back in March that we're going to be closing the acquisition and entering this kind of global epidemic. But I think the teams have done just an outstanding job controlling what they can control, creating a single culture, and we're really excited about what's the future here to us. So then maybe just with that, I'll just kind of pause it there and have you ask a bit of questions in terms of how the company is doing.

No, that's great. And I appreciate that intro. I guess, just to kind of start with the surprises we've all lived through since the March time frame, doubly so for you guys, given the strategic effort. I think on the fundamental side, we have seen some return to, I don't want to say normal, but some of these industrial niche markets that are more tied to OpEx and normal replacement start to moderate out. We've seen some folks kind of in your orbit, not necessarily direct competitors, but kind of elsewhere and similar fueling businesses started to see some improvement off the bottom. How would you characterize that across Ingersoll Rand? Obviously, you have some very short-cycle businesses and very long cycle, how would you characterize kind of business across the portfolio here as we move through 3Q?

Yes. I think overall, as we recall, in the second quarter earnings call, we spoke about kind of -- we gave a little glimpse in July and we said that July, total company orders were down 15% to 20%, some puts and takes, based on segments. And overall, I'd say we have seen a sequential improvement from that point forward. So we're very pleased with what we have seen. IT&S segment we -- the continue -- the recovery continues. I will highlight as well that it is being gradual in terms of what we have seen through August and obviously, not a sharp snapback or anything of that sort, but good moderate sequential improvement, which is great to see. From a regional perspective, U.S. and Europe, fairly comparable performance and consistent. In Asia, China continues to be positive. The rest of Asia Pacific is not the same strength as China due to some places like Singapore, Malaysia and Australia, just continue to be in strict control due to the second wave of COVID. And I remind you as well that within the IT&S segment, we have the power tool business, which we have seen sequentially better performance also in July and August as compared to the level that we saw in the second quarter. But obviously, from an overall perspective, the business order rates are still trending a bit more negatively as compared to the overall IT&S segment. Well, worth noting that the tools business within this business segment is performing much better than the material handling side of the business. And the precision and science technology, the other segment that is pretty exciting momentum. We indicated during the earnings call in July that orders were flat, but then we expected August and September orders to trend lower just due in part to the non-repeat of some of the larger COVID-related orders and design wins that we have seen in the month of July, particularly in the GDI, Gardner Denver Medical business. And this is exactly what we have seen kind of the business kind of normalizing a bit. And seeing the demand in line with industrials and other niche end markets that this business is exposed to. Specialty vehicles, orders in July were positive. And in general, we have continued to see positive trends in August. So again, largely attributable to the consumer business and the consumer business continues to be really healthy. Some due to market and some due to a lot of activities that we have been doing around demand generation and infusing this kind of direct-to-consumer approach. And finally, High Pressure Solutions business, July orders were down severely. And while activity in the space has gotten better, as we have moved through the third quarter with fleet count now in excess of 100 fleets, order rates haven't dramatically changed yet, given the continued overcapacity and cannibalization that we see in the market, but we're very encouraged by the level of activity and communication that we are having with customers and they seem to be getting ready to ramp here in the, hopefully, not-to-distant future. So I say overall, fairly well to the expectations that we had.

Got it. That's helpful. And I guess just thinking into the IT&S portfolio a little bit. Obviously, a lot of different slices of that business compared to kind of the old Gardner Denver Industrial segment in terms of different end markets, different niches. Anything that bears calling out in terms of that higher recurring revenue that I think the Ingersoll Rand side had compared to Gardner Denver. Has that proven to be kind of a source of relative strength? And then anything across maybe kind of the different size vectors of that compression portfolio that have been kind of better or worse. I guess, maybe saying it more broadly, are you seeing kind of a level of diversification, putting all these businesses together that wouldn't have been apparent otherwise?

Yes. I mean I think it's -- I mean, for sure, the percentage of recurring revenue is something really exciting in our business. And the legacy Ingersoll Rand, the compression business had a much higher percentage of the current business at nearly 50%. As to compare the legacy Gardner Denver Industrial business, that it was about 35%, and we categorize that through most kind of normal cycles, we tend to see that aftermarket is roughly 1.5x more resilient than the original equipment. I think what is exciting for us is that as we look ahead, we definitely see a lot of meaningful opportunity. And as you said, to continue to diversify into these highly reoccurring aftermarket profile in the IT&S segment. I mean, currently, we stand at 60-40, so 40% in terms of aftermarket, which is good. But our goal without question is to continue to improve that aftermarket mix. And just to put in perspective, as you recall, we were able to improve 3 to 100 basis points on the legacy Gardner Denver Industrial segment from 2015 to 2019 period, and we don't see any reasons for not being able to do that same thing here. So a lot of our strategic areas around harmonization of the IoT platforms and as well as leveraging and utilizing the direct sales force that Ingersoll Rand had already established. Those are really great opportunities for us to continue to see this really good diversification and get that 40% of recurring aftermarket revenue to continue to improve from here. So I think from our side, we just see great opportunities for good commercial and growth upside.

So there's no technology barrier per se on the Gardner Denver side that would prevent it from getting somewhere closer to Ingersoll Rand's level?

No whatsoever. I mean -- and again, I think it's just mainly the channel dynamics, one through a dealer, the other one direct. Clearly, now the harmonization of that and how we're going to leverage that. So now from a technology perspective, there is really no barrier from a technological perspective. And if anything, we see technology as a future enabler for us to continue to grow this with technologies like the IoT platform connectivity.

And then I guess just zooming out a little bit and thinking about this, a little higher level or more top down. 2 things that come to mind on IT&S side. I guess first is, I've always thought of this as more of kind of a capacity utilization-type business than maybe just tied to industrial production. So in theory, IP can improve a lot next year, maybe capacity utilization still has some slack in it. How do you think about this business being kind of a coincident recovery with broader industrial activity versus needing new capacity to be required by the market? I guess one comes faster than the other.

Yes. I think, Josh, I think the -- what is really, I would say, highly encouraging is that, I mean, obviously, as you very well said, capacity utilization is at low -- still low point, but and both capacity utilization and IP are trending the right way with good sequential improvement, and that should bode well for us moving forward. Short, medium and long term [indiscernible]. I think in terms of correlation, we believe that we're also in a very unique environment where due to some of the reshoring and reconfiguration of the supply chain some of the previous correlations could prove to be slightly different. And by that, I mean that more CapEx investments as companies looking to investing more regionally could drive new equipment, while the existing locations will require more aftermarket end upgrades. I think we feel that we're pretty well positioned in the sense that we have always said that our strategy is to be in the region for the region, and we foresee that to continue to be a benefit on us if that trend continues to happen, meaning the reshoring, the reconfiguration of supply chains and everything to be more kind of local-for-local. And so I think ultimately, we continue to be positive in terms of, I guess, we're encouraged about this trend. I think, Josh, the other thing is that not only we look at these external factor trends, but I mentioned that for us, something that we pay a lot of attention to is our own internal leading indicators, such as demand generation and the leads, and we have now created a pretty good way of tools and statistics to be able to predict what could come here in about 6 to 8 weeks. So we have seen that leads that we generate now are a good predictor of what we may see a 6-week indicator of an order. And what we continue to see is that kind of gradual continued improvement, which really correlates very well to some of the improvement that we have seen whether PMI, IP or some of the continued sequential movement on some of these other kind of external trends. So again, I'll just say that maybe what is good to say here is the fact that it's encouraging that whether capacity utilization, IP and everything else seems to be trending the right way from a good sequential improvement month-over-month.

And I guess that anticipated one of the other questions I had related to that on this whole near-shoring topic. I'd like to think we've done a decent amount of work on this, but ultimately, it's still pretty early. I think we're just now starting to enter what you would consider to be the capital planning cycle for 2021. Are you getting, I guess, tangible feedback inquiries, something of the like from customers that would suggest that we could start to get some momentum on this into next year? Or is it still kind of in the ether and waiting to help further down the road?

I will still call it a little bit early. I mean, definitely, we're hearing more about it. And as you very well pointed out as we get closer to the end of the year, and the companies are continuing to do their budgetary under planning for 2021, I am sure that we're going to see more of it. At least based on the initial conversations, maybe still too early. But there's definitely some talks in some of the end markets that we have been more pronounced kind of proactively working through. So so conversations, nothing that I could count on yet, but at least good positive conversations.

And then I guess on the end market side, related to that, I mean, I guess I've always thought of compression as being kind of the fourth utility in a manufacturing environment. So not necessarily betting on one market specifically as it would pertain to your business. But any markets or applications that if they were to come back to the U.S. or North America would be particularly fruitful for Gardner Denver -- I'm sorry, for Ingersoll Rand relative to the broader kind of general industrial set?

I mean I think one of the really good indicators there could, obviously, the pharma industry and particularly as we see -- we've spoken a lot about our focus on oil-free compression. And so the fact that we feel we have a good program, I think a lot of this kind of maybe new investment could prove to be pretty good greenfield ground for us to be able to enter that, penetrate that segment further. Also, I think you said it very well. I mean, the air is the fourth utility and not only manufacturing, but also in places like wastewater treatment facilities. And so our blower technology plays really well on that. So if there is some infrastructure investments that need to happen, and we see a lot of good concentration on mostly around energy efficiency and how the technology that we have now really helps on the energy efficiency. So I think, yes, I mean, I think to your question, definitely, pharma being one, but then also not to forget some of the other kind of larger perhaps infrastructure areas, such as wastewater for municipalities, but also wastewater for private companies or manufacturing companies where they're looking for clearly not only staying within the environmental considerations, but more around sustainability and being able to reduce the energy consumption. And when you think about blowers consuming 60% of the wastewater treatment facility energy. So it is a good way to invest in energy consumption and sustainability performance. So yes. I mean, I think there's quite a few kind of global macro trends that we feel could prove to be good growth vectors for the company.