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

Maybe I'll start, and Steve you're talking simply about the 2 deals we've announced recently, Seepex and Maximus. I think our -- yes. So I think -- yes, I mean, very pleased. I think, frankly, these are, I think, kind of the assets you've seen us talk about the size of the funnel, the kind of profile of companies we're looking for in terms of higher growth, sustainable end-market focus, good aftermarket, digital revenue streams, even Software-as-a-Service type in the context of these assets. That's exactly kind of where Seepex and Maximus both fall. So both our Q3 -- that we expect to close in Q3. In fact, Maximus actually closed last Friday. So interesting enough, we're one day into kind of now ownership or 2 days into ownership of Maximus. And I think in terms of the integration, what's really interesting here and I think we spoke about this a little bit during our earnings call, is that we don't wait for day 1 of closing for these deals to start getting integrated. We've talked about, very explicitly, IRX and kind of this IDM process. And really for acquisitions, what this looks like is we're starting something like 60 to 90 days in advance, where we're really putting together the full integration kind of playbook, running it through an IDM process, and it's focused on exactly the areas you would expect, demand generation, cost synergies, the integration lanes, systems, people, so forth and so on. And generally speaking, for the first 30 days, we get it set up, we're running internally, probably about 30 days prior to the close. We actually bring on the target, and they're actually doing it hand-in-hand with us. Such that day 1, we can turn the reins over and they're running the playbook and running integration from day 1. So the great news here is this is how we kind of get a head start, frankly, on all integration processes. If we go back, this is exactly how we did the Gardner Denver Ingersoll Rand merger. It's also how we did the Tuthill acquisition and the merger -- the Tuthill acquisition earlier this year. And I can say we acquired them on February, here we are in August, and they're already seamlessly integrated, frankly, into ERP systems. It's been about a smoother if transition, as you can expect. So again, running that same playbook for both Seepex and Maximus, and I would tell you we see great traction here, as we look to integrate those 2 assets, and we're really excited about adding them to portfolio.

Okay. Great. And how would you characterize the funnel? I mean, obviously, there was one very large one that seemed to be working its way through in some way, shape or form that I don't know if that still is or not. But what does the rest of the funnel look like to you?

Yes. Steve, as we -- it's looking pretty strong. As we said on the call earlier, on the earnings call, it is 5x what it used to be basically a year ago from -- in terms of size. And that actually is excluding the 32 deals that we passed in the second quarter, and we're going to talk more about why we passed on those. It also excludes Seepex and Maximus because obviously, they're now into the signed transaction, and it also excludes SPX Flow. So I think we have a pretty sizable, meaningful funnel. Now we kind of characterize as high-quality assets, very similar to, I would say, the Seepex and Maximus in terms of being able to deliver organic growth, great gross margin, portfolio of technologies that are complementary to what we have. And they're kind of more bolt-on to medium size in nature and nothing that we consider at this point in time transformative.

Okay. And since you mentioned it for the ones that you do pass on, are there any common kind of lessons from that?

I'll say maybe a couple of things. One of them definitely valuations. I mean we've been very disciplined, and we're decisive and disciplined in this market. And as we evaluate and we feel that valuation is just too high for us to even think about it than we just passed. And so that speaks to the very good diligence and kind of due diligence process that we go through to ensure that the financials are not only kind of what happened in the past, but also what we see moving forward. And if we don't see that ability to get to our financial thresholds, which is basically mid-teens ROIC by year 3 or post-synergy multiple of kind of high single digits by year 3 or 4, then we just kind of don't consider those companies to be in our funnel.

Okay. All right. Good. So maybe we'll back up a little bit. I mean you guys have been through a lot of change over the last couple of years from the RMT and selling off some assets, et cetera. So maybe a couple of things with that. I mean, I guess you were targeting about $250 million of cost synergies following the RMT and you talked about upsizing that a little bit. And then I think you've also mentioned that there could be sort of further upside depending on volume. And I guess volume is in your favor now. So just kind of your thinking around that?

Sure. Yes. Maybe -- yes, I think you summarized it well, Steve. We had an original cost synergy target of $250 million as part of the merger. I think probably fair to say and I described kind of how we did a lot of the integration work. Clearly, we got out of the gates really quickly. And I think we were able to really outpace, quite frankly, our original expectations. But really strong execution across the board. And we mentioned that we have a funnel that's kind of in excess of $350 million. And at the beginning of this year, we mentioned that we're raising the target to $300 million. So now we're kind of executing towards a $300 million target. You are right. I think that the area that probably has the biggest opportunity, it's always kind of been the biggest opportunity in the funnel is in the realm of direct material, whether it be procurement savings from kind of a classical procurement blocking and tackling perspective or the I2V side in the context of redesigning products, taking costs out, things of that nature. Yes. I think we've said that as volumes start to get back to 2019 levels, that would probably be the single biggest potential tailwind in the context of potentially thinking about doing something higher than $300 million. I think right now, frankly, just given what -- and I'll say the same teams who are executing across a lot of those procurement supply chain measures are frankly the same teams who we are talking to about mitigating inflationary headwinds and logistics challenges and things of that nature. So I think we're very encouraged by seeing where the volumes are trending. I would say, yes, that does potentially lend itself to some potential tailwind in the context of potentially over-delivering. I think right now, we still feel that $300 million is quite prudent. We want to see kind of how the balance of this year continues to play itself out, and we'll revisit this as we get towards the end of the year. Could there potentially be some upside opportunity of that $300 million? Sure. And I think that you've seen, we're not standing still, we're going to execute against it. I think the direct material and really the footprint side of the equation are kind of the 2 last legs in the context of that funnel that are allowed to be executed. We have a strong pathway to $300 million. And if there's opportunity to upsize, absolutely, we'll do that. I think right now, just given the kind of totality of what the teams are working through, particularly on the procurement and supply chain side, we're staying prudent with the $300 million, and we'll revisit as we get closer to the end of the year.

So am I hearing that sort of supply chain conditions have to normalize a little bit before they can kind of get back at it? Or is that not?

I mean, I think that's a piece of it. I mean rest assured here, I think the teams are executing, as you would expect. I do think we want to see how things normalize, how things stabilize in the context of the overall supply chain equation before we kind of take that next step on wherever the synergies may head to. But I think the good news here is, yes, the funnel still sits in that $350 million-plus range. As I've said before, not every opportunity in the funnel is going to translate to the bottom line. But I think we have a lot of good opportunities that the team continues to build upon, particularly in areas like I2V that we have a high degree of confidence in. But I think at the same time, we're going to remain prudent for the time being until we get a little closer to the end of the year, and we'll think about kind of where that kind of that opportunity resizes to.

Okay. And then I guess just on portfolio mix, maybe there's sort of 1 or 2 businesses that don't obviously fit quite as well. But I'm sort of curious within the 2 segments, the IT&S and PST, are there sort of onesie, twosies in there that might need to be divested or less focused going forward? Or are you pretty happy with the portfolio?

No, I think we're pretty happy. I mean I think we were very open into saying that when we did the R&D, we carved out some businesses that within maybe long term, not kind of align with where we want to be, and that was basically high-pressure HPS, which has been divested since then or transacted Specialty, the Club Car business transacted. And then the third business, it was the Power Tool business. And we have been very vocal that last year, we were very focused on fixing the profitability and it's just been a phenomenal margin improvement story. And this year, very focused on growth. And again, very good story so far. So I think we have positioned that business for some very good kind of performance and now we'll evaluate the next steps in terms of what we do with that business.

So just from a management perspective, Vicente, are you the type of person who would say, I love this business because it's just a cash cow and I can use it to fund other things, even though it's not really core? Or would you rather kind of get everybody focused on things that are core?

I tend to like to get everyone focused on what's the core and how do we really create value from the assets as holistic view that -- and we see just a lot of meaningful potential here that with IT&S and PST, 2 different segments, but still there's a lot of things that we could do by being able to leverage the technology portfolio. So yes, so I'm more of a big believer of just focus on the core and improve your core businesses to be able to be those cash flow generation companies that they can enhance the entire portfolio.

Okay. Great. And we just have, I think, about 4 -- 3, 4 minutes left, but I want to just bring up ESG. It feels like you guys sort of focus on that more than average. And I know you just put out a pretty detailed sustainability report. Just what are sort of the highlights from your perspective?

Yes, Steve, I think we're excited that we're going to have also an Investor Call on Friday this week to just go and deep dive or kind of give investors a deeper look into how we're executing to our ambitious goals and targets and what we have done so far. So yes, I think I would classify it as, we're a company that, based on our technology, we're very focused on the environmental side. You'll see that on Friday that we have a really high percentage of our total portfolio that touches water, and we'll be able to talk about that. And -- but also, it's not only about what we do with the products and some of the greenhouse gas emission targets that we're going to be -- that we're putting in that are ambitious, but we have a good game plan on how to get them. But also what we do on the S and the G, I mean, the social and governance side when you see what we have done with diversity, equity and inclusion that at the Board level, 50% diversion whether gender or ethnicity are into Hispanics and African-American to females and all by bringing in great domain expertise, right? I mean, I think our Board are classified as it has been very thoughtful position just to bring very domain expertise that is aligned with our strategic imperatives. And same thing now with our executive management team, 43% diverse, similar, ethnicity or gender. And in addition to that, what we do to our employee base with the equity and how much we believe that this is almost like an inverted pyramid from thinking that the underrepresented population that typically happens to be in the workforce, we want to give them the equity. So they can have that skin in the game and the ability to be able to build some wealth for themselves, the family and the communities, which I think is holistically helping the sustainability of the entire company.

Good. All right. Well, that basically takes us to our 25 minutes. It always flies right by, but thanks for the preview of the Friday meeting. We'll certainly look forward to that. But thank you so much for doing this. And we will see you on Friday.

Thank you. Thanks, Steve.

Cheers. Bye-bye.

Bye-bye.