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

Hello, and welcome to the Ingersoll Rand ESG and Sustainability Report Conference Call. My name is Harry, and I'll be coordinating the call today. I'll now hand over to your host Vikram Kini -- sorry, I will now hand over to your host, Chris Miorin. Chris, please go ahead now.

Thank you, and welcome to Ingersoll Rand's Sustainability and ESG update. I'm Chris Miorin, Vice President of Investor Relations. And joining me is Vicente Reynal, President and Chief Executive Officer; Mary Betsch, Vice President, Sustainability; Vik Kini, CFO; and Andy Schiesl, our General Counsel and CCO. Today's presentation is 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. At the end of our meeting, I will moderate today's Q&A session, asking a series of questions we received leading up to today's call. At this time, I'll turn the call over to Vicente.

Thank you, Chris, and good morning to everyone. Moving to Slide 3, is showing the 3 key themes for today. First, how operating sustainably is a strategic imperative to Ingersoll Rand; second, how we are effectively using IRX to operationalize sustainability and achieve our targets; and third, insight on those sustainability topics most material to the company and our stakeholders. Let's move to Slide 4 to discuss how sustainability fits into our strategic framework. Our 5 strategic imperatives are how we stay grounded on our priorities and areas of focus. Operate sustainably is at the core of our strategy and has become a driver motivation for our highly-engaged employees, purpose-driven and sustainably-minded employees with an ownership mindset are an unstoppable force. Our customer focus and sustainability commitment are solidifying our ability to deliver stakeholder benefits and ensuring the long-term health and security of our company. With the transparency of our data and the aggressiveness of our targets, I hope you recognize that what underpins our passion is the pursuit of our purpose, which is lean on us to help you make life better. Sustainability is strategic to us. We strive to protect and improve our environment. We strive to be active contributors in our communities. And in all we do, we strive to make life better for our employees, customers, shareholders and communities. Moving to Slide 5. Our Board is dedicated to our ESG journey. As a sign of this support and recognizing the importance of our operate sustainably strategic imperative, our Board recently formed a sustainability committee, and we're delighted to have Marc Jones serve as the Chair of the Committee with Kirk Arnold and Gary Forsee as members. It's also important to note that we have implemented meaningful governance changes that demonstrate our commitment to governance best practices. Over the past year, our Board of Directors and its nominating and Corporate Governance Committee undertook a very thorough evaluation of our corporate governance, taking into consideration the views held by the investment community as to best practices. And based on this review, our Board recommended a number of changes to our corporate charter and presented these changes to our stockholders for approval. At our most recent annual meeting, 99% of the vote cast by our stockholders were in favor of the recommended changes, including amendments to our certificate of incorporation that declassified our Board of Directors and provided for the annual election of all of our directors, eliminated the requirement for a supermajority vote of our stockholders to amend our certificate of incorporation and also eliminated the requirement for a supermajority vote of our stockholders to amend our bylaws. In addition, our Board made an amendment to our bylaws that changed the vote required to elect directors from a plurality of votes cast to a majority of votes cast. These changes demonstrate how we bring the same intentionality and supplements to our governance efforts as we bring to the environmental and social aspects of our ESG journey. The Board's dedication and commitment to our ESG journey has enabled the company to make swift progress and achievements in all areas of environmental, social and governance. Now moving to Slide 6. We will highlight some of those results. 3 weeks ago, we released our 2020 sustainability report, which is a very thorough transparent compilation of sustainability progress. Our aspirational goal is to be recognized as a top quartile industrial company in sustainability, and we're well on our way as we prioritize sustainability as the way we do business. I touched on many of these during our earnings call. And what's important to know here today is the volume and quality of achievement from the team over the last year has been outstanding. Even during the integration of our company in the middle of the pandemic, not only did we achieve great financial results, but we also built a strong foundation for long-term success with ESG at the center of how we operate. And the rigorous application of IRX is how we were able to do it all at once, which leads us to Slide 7. We continue to execute using IRX as our backbone whether for M&A or synergy delivery or sustainability efforts is proven to be effective. Slide 7 reminds us of the power of IRX to deliver strong momentum on our cost synergy delivery efforts. Due to the funnel we built in client IRX processes, we were able to accelerate our overall synergy delivery efforts and increase our cost savings target by 20% to $300 million. And as I said last week during our earnings call, to date, $250 million of annualized synergies have already been executed, which is slightly higher than 80% of the increased target. This progress shows what the team can accomplish through IRX, and I use this as one example of many to share how we're now applying this same discipline to our sustainability efforts. Moving to Slide 8, which shows how we're operationalizing sustainability with the help of IRX. We have a very systematic process to accelerate the cadence of execution. On the left, we have spoken to you about IRX, which starts from the outer ring with our values and then gets deployed via our strategic imperatives on the gray coloring and executed via 2 distinct tools that we call IMPACT Daily Management, or IDM; and Policy Deployment, or PD. This is a yearly ongoing cycle that has proven to drive successful acceleration performance. In this slide, I just want to highlight how we have leveraged IRX to drive environmental and social IDMs to accelerate our ESG journey. And turning to Slide 9. We put IRX to use to improve our public sustainability reporting and submissions to ESG rating agencies. Following IRX processes, we've built an improvement bridge across 13 key areas that ESG rating agencies review with a critical view toward the topics most material to our stakeholders and the company. And turning to Slide 10. Mary will touch on these material topics.

Thank you, Vicente. In early 2020, Ingersoll Rand executed a formal materiality assessment process that included numerous stakeholders. The assessment process followed the global reporting initiatives or GRI standards framework with the goal of pinpointing topics most impactful to Ingersoll Rand and that create value for our stakeholders, which include employees, the families, our customers, suppliers, shareholders and our communities. The materiality assessment process identified the 3 topics most material based on their relative importance to stakeholders and to the Ingersoll Rand business. First, labor and employee matters; second, product stewardship, new product development and innovation; and third, energy use. Through continuous focus on our material topics, we ensure our strategy aligns with stakeholder expectations and the needs of our communities while positively impacting the world. Ingersoll Rand is tracking aggressive key performance indicators, or KPIs, for each topic. Let's take a closer look at each. Vicente will share more information about our first 2 material topics.

Thanks, Mary. And so with that, let's move to Slide 11. Our employees are the bedrock of Ingersoll Rand. Their safety and engagement are paramount to our success. We commit to core values that foster a culture that celebrates diversity, equity and inclusion and promotes an ownership mindset. Our passion to foster inspire teams [indiscernible] to provide all employees with equity grants totaling $250 million since 2017. An employee who was granted equity in 2017 has realized a nearly 150% increase in value. Making this real, let me share a story about one of our ITS European employees, Rizwan Rabbani, who is based in Germany and goes by Rizzy. Rizzy grew up in an SOS Children's Village Home in Pakistan, separated from his mother who was working hard as a house cleaner in a privileged area of Islamabad to support her 5 children. Years later, found Rizzy in Germany, struggling with the challenges including language barriers, cultural shock, financial instability and most importantly, difficulties in landing a permanent job. Disheartened, he was ready to give up when he got a job with us in 2014 at Gardner Denver. Rizzy had one big dream, which was uniting his family together into a home. In 2017, Rizzy was part of the first employee equity grant during the Gardner Denver IPO. And he also received equity again in 2020 when we combined Gardner Denver and the industrial segment of Ingersoll Rand. For Rizzy, the financial security these grants provided and are providing are life-changing for him and his family. Rizzy made his dream come true by purchasing his mother her own home with the initial equity he obtained during the Gardner Denver IPO. Rizzy's mother is very happy in her new house and is very grateful for his journey with Ingersoll Rand. And so we are very grateful for Rizzy. This is just one example of how Ingersoll Rand has invested in employee equity, morale, motivation, engagement and our community at large. When our employees think and act like owners, they know they're welcome, safe and [indiscernible]. They perform better, work more efficiently and are loyal to Ingersoll Rand. And our employees also know that they have skin in the game in our long-term journey. And this translates to increased company innovation and growth, which makes others, people and businesses take notice, allowing Ingersoll Rand to recruit top-tier employees while also gaining social credibility. Moving to Slide 12. We're passionately committed to diversity, equity and inclusion. On this page, you see our long-term goals and critical initiatives. Our vision is to be a DE&I leader within our industry. We leverage diversity, equity and inclusion to exceed our business goals, attract and retain the best talent and address today's global challenges. We hold ourselves accountable to building an inclusive workplace that cultivates a sense of belonging, empowerment and respect for all of our employees across the globe. As participant in the CEO Action for Diversity and Inclusion Pledge since 2019, we are proud that Ingersoll Rand Board of Director members are 50% diverse in gender or ethnicity. And also that our full extended leadership team is nearly 30% female and is 43% diverse in gender or ethnicity. In 2020, we introduced a powerful initiative called Lean into Change where employees from across the company participated in culturally sensitive conversations and with trust and transparency. Profiles in the diversity journal recognized this Ingersoll Rand initiative with a Top 10 Innovations in Diversity Award. The company also launched 3 employee-led inclusion groups: The Black Employee Network, the Women's Inclusion Group and the Veteran's Inclusion Group as strategic resources for talent management, community influence and leadership development and mentoring. Connecting to our value of fostering inspired teams, we cultivate diversity, we promote equity and pursue a more inclusive culture that strengthens the sense of belonging for all. We expect individuals to uphold these aspirations with humility, integrity and respect. Our 2025 DE&I goals illustrate this commitment. We're passionate about solidifying and advancing the development of our company culture by increasing diversity of talent, supporting navigation of career paths and ensuring equal opportunities while fostering a sense of belonging. Moving to Slide 13. We see how the team is deploying IRX to achieve our DE&I goals in the areas of representation, career development and employee engagement. We're focused on leading indicators of performance to ensure we exceed our goals. Moving to Slide 14. Ingersoll Rand global employees care deeply about our neighbors and shared planet. Before we move on to our next material topic, I want to mention, we strongly believe that we have the power and responsibility to build a better world, and we wake up every day with the desire to help make life better. Our company-wide citizenship strategy guides -- topic priorities and activities, which are aligned to the UN sustainable development goals and to our company's business drivers. Managing our citizenship strategy in this way provides clear direction and enable us to use our product expertise and strength of our employee volunteers to have maximum, measurable [indiscernible] impact on communities and the world. Moving to Slide 15. After employee matters, our second material topic is product stewardship, new product development and innovation. Ingersoll Rand grows our business by providing customers with the sustainable products they need and desire. Our company excels through the creation of innovative customer solutions, new products and services and associated technologies. Ingersoll Rand has long been respected for the reliability of our products. We're focused on energy efficiency and invest in technology that allows us to develop products that are long-lasting, reliable, sustainable and relevant. This not only meets the need of our customers and the environment, but it lowers the operating cost and negative impacts on the environment for both Ingersoll Rand and its customers. We estimate that approximately 30% of our revenues or $1.5 billion are generated from products that are related to water processes, and our teams continue to find ways to improve the efficiency of water and energy use. For instance, the Dosatron business, which serves food safety, water and animal health markets, among others, is a technology that allows them to move fluid without the use of electricity. This core proprietary IP we developed is part of this product. Our Runtech, which has the ability to dramatically reduce water consumption in end markets like pulp and paper. In the pulp and paper market, we're not only able to save on average 45% energy consumption, we also can save up to 90% of water consumption. And with our current installed base, we estimate that, that results in more than 7 billion of gallons of water saved per year. Looking at Slide 16. It's also important to note that our M&A funnel is driven by our strategic imperatives, including operate sustainably. The signing of a definitive agreement to acquire Seepex and the closing of Maximus Solutions, both of which will become part of the Precision and Science Technology segment, are very representative of incorporating sustainability into key characteristics we're targeting to drive our inorganic growth strategy. As a reminder, Seepex is, by estimations, the #2 global progressive cavity pump manufacturer. And it is a highly recognized brand as a premium player in the market that adds a new positive displacement pump technology to our portfolio. Maximus Solutions is a leading player in the agritech software and controls market, whose technology we intend to pull-through to other markets and leverage across the Ingersoll Rand portfolio. We're very excited to have just recently closed on this transaction, and welcome the Maximus employees to our Ingersoll Rand family. Both of these companies are focused on sustainable end markets that tend to grow well above GDP rates and have delivered strong high single-digit to double-digit organic growth since at least 2017. Moving to Slide 17. I will now turn it back to Mary to talk about our third materiality focus, which is energy use.

Thanks, Vicente. We announced ambitious environmental goals in March. Let me take a minute to remind everyone, in the area of waste, our goal is to have 50% of our sites achieve zero waste to landfill by the year 2030. We already have 31 sites that have certified to zero waste to landfill. This means that 98% of nonhazardous waste is first eliminated, reused or recycled with the remainder sent up site to incineration for energy. For water, by 2030, our goal is to review 17% of all water used globally in our operations. If all our site test bands are not already in a closed loop system, this is certainly an opportunity we are evaluating. We simply cannot waste this natural resource. Rather, reuse it again and again. And regarding energy, our goal is to reduce 60% of our greenhouse gas emissions by 2030. This includes electricity, natural gas, fuels, including gasoline and diesel as well as propane, VOCs and refrigerants. Energy use is a direct contributor to climate change. Reduction of operational energy and shifting remaining energy to renewables further reduces our impact. We have one other goal, which is to achieve net zero greenhouse gas emissions by 2050. Already, we have 4 plants powered by solar: 2 in India and 2 in China and 3 sites currently under construction in Italy. Additionally, 14 locations have agreements with their utilities to purchase green energy. And we're just getting started. There's a lot more to come on this front. Moving to Slide 18. We can't just talk about these ambitious goals. We need to act upon them. We need to move from commitment to impact, from words to actionable results. And we're beginning that journey using the IRX process for our operations and our products. We're developing a road map on how we're going to reach our 2030 and 2050 goal. First, let's talk about operationalizing sustainability in our own operations. We launched an Impact Daily Management, or IDM, on July 22 with 30 employees across all our business units and functions around the world. The goal is to embed sustainability into our businesses and operationalize at scale, looking upstream into our processes to find reduction in recycling solutions, methods for reusing materials, improving the efficiency of water and energy, and developing take-back solutions with our suppliers. Some of these examples include: turning off all the production lights during lunch in [indiscernible] China; in Redditch, England, reducing the test time from 8 hours to 4 hours; increasing summer set points 5 degrees in Mocksville, North Carolina; implementing returnable packaging in Naroda, India; and closed-loop recycling in Tampere, Finland. Sustainability is all about thinking and acting like owners. Our employees are constantly identifying ways where we can recycle and reuse waste and how we can conserve water and energy. Recently, I was in Mocksville, North Carolina and an employee had a brilliant idea to reuse the coolant that coats the chips in the machining centers when they're dumped into large hoppers. The coolant drains to the bottom of the hoppers and instead of going to the wastewater treatment plant and then eventual disposal to the city, the coolant is now collected, pumped back into [indiscernible] and taken right back out onto the production line for reuse and a savings of $600 a day. Genius. That employee found an estimated $150,000 annual savings for Mocksville. Just think if 1% of our employees can find a simple solution like that within their own area of influence, then we're looking at annual savings of more than $22 million of environmentally-friendly actions. I mentioned our renewable energy goal. One of the focus areas in this IDM is to develop our long-term renewable energy strategy. Well, that's a bit about how we intend to operationalize sustainability within our operations. Our businesses are right now developing their business unit roadmaps. We have a swimlane dedicated to providing all the tools, calculators, resources and idea generators to the business units and a swimlane focused on communications and telling our story, both internally and externally. Now how do we intend to accomplish our product-related goals? Again, we're using the IRX process to accomplish this work. In August, we're doing an IDM install event with nearly 40 employees to understand the water and energy impacts of our products. Energy-efficient products have a lower use impact. Our customers save on costs by lowering energy use in their operations and add to revenue by attracting customers seeking sustainable solutions that decrease our environmental impact. Reducing the energy use of our products positively affects our environment and increases our value proposition to our customers in search of similar solutions. We have 2 goals surrounding our products: greenhouse gas and water. We will develop an approved and verified methodology to measure the baseline and then, over time, demonstrate the reduction of water and energy in our product portfolio, enabling our customers to reduce their environmental footprint. That helps give a little more color on how we will achieve our goals, and we'll have more to share with you as we progress on our journey. And now I'll turn it back to you, Vicente to close this out.

Thank you, Mary. And turning to Slide 19. As we wrap up today's call, Ingersoll Rand is taking a leadership role in sustainability for our own operations and with our products. We have made significant progress and we're guided by our purpose and value and will ensure execution through our use of IRX. We're making positive impacts across environmental, social and governance areas that are most material to Ingersoll Rand and our stakeholders. We take our role as sustainability-minded industry leader very seriously, and our employees eagerly embrace IRX to strengthen our leadership position. And finally, sustainability is also part of our M&A and capital allocation work. I believe our future looks very bright. And I look forward to seeing what our global employees will accomplish. With that, I'll turn the call back to Chris to moderate us through Q&A.

Thanks, Vicente. First, I'd like to say thank you to our research analysts who provided questions ahead of today's call.

We'll start with a question for Vicente. How is Ingersoll Rand's portfolio exposure to ESG-centric products going to change by 2030, especially as we expand within hydrogen, oil-free water and wastewater? How are the long-term growth drivers including hydrogen, oil-free water and wastewater contributing to meeting the 2030 ESG targets for Ingersoll Rand?

Yes, Chris, I mean, we're extremely focused on realigning and investing in our portfolio to be oriented towards ESG-centric technologies. When we completed the Ingersoll Rand Industrials and Gardner Denver merger, we knew there were some key actions that needed to happen. First was aggressively pursuing organic growth opportunities in sustainable end markets such as water, wastewater, medical, lab, agritech, hydrogen and many others. We have formed IDNs, as you have seen, very focused specifically on these end markets, with the teams highly focused on further penetration of these end markets and new product development oriented towards addressing the applications of our technologies in these markets. As we highlighted in our Q2 earnings call, we are planning to invest approximately $45 million into expanding our hydrogen solutions and manufacturing capacity in anticipation of the growth demand. Second, a critical piece was to materially remove our exposure to the upstream oil and gas industry, which we accomplished earlier this year through the sale of our high-pressure solutions business. And third, as we look forward towards growth through inorganically or M&A, one of our key analytical criteria is end-market screening with sustainability being a very high level of focus. And not only are these markets advancing our ESG strategy, they also tend to be higher growth and higher margin, which naturally leads to them right into the top of our funnel priorities and as we remain highly disciplined and returns very -- returns-focused in our approach to M&A. So as you can see, we're making and we're taking swift action and really living this strategic imperative as we think daily about our future portfolio of technologies for our company.

Thanks, Vicente. So given that, Vik, how do we balance ESG improvement with our mid-teens return on capital hurdle by year 3 for acquisitions? The market has seen ESG-related assets price increase materially over the past year.

Yes. Thanks, Chris. I think a lot of it goes back to what Vicente just mentioned. I think from an M&A perspective, our funnel really is largely comprised of targets that are levered much more to sustainable end markets, largely because those end markets tend to grow faster than GDP. But a critical factor of a target moving through our funnel is the ability to deliver on our return thresholds, which really ensures that we don't overpay for the targets that we pursue. And you're right. While we have seen multiples, in some instances increase recently, we continue to remain very disciplined on purchase price. We don't feel like we need to chase targets, and we take a highly strategic approach to each target. Key to us is the ability to drive those mid-teens ROIC by year 3 of ownership and also the ability to buy down the purchase multiple over time through the realization of synergies. I would say, and very consistent with what we talked about in our earnings call last week, our funnel is currently comprised largely of targets that fit both the sustainability focus and return thresholds that we target, and we're moving very swiftly back to them.

Great. Thanks, Vik. Next question is for Mary. Regarding the goal of 17% water reduction by 2030, can you talk about some of the progress we've made to date? And what are the steps we're planning to take in the future to achieve that goal?

Sure, Chris. Happy to address that. Let me give you some examples from around the world. In Shandong, China, we are using the condensate generated from the steam system instead of using potable water on site. In Wujiang, China, we're reusing treated sanitary water in the equipment production process. We're harvesting rainwater in Sahibabad, India for reuse in our operations. And in Naroda, India, we've installed a reverse osmosis system for sanitary and industrial water, where the water is reused for outdoor vegetation and recycled for use in our factory paint operations. We've also installed closed-loop test stands in Tampere, Finland to reduce water consumption. And then finally, in Mocksville, North Carolina, we're recycling wastewater used in plant operations. As you can see, all over the world, our teams are thinking creatively to materially reduce water consumption, and it's going to take a global team effort to achieve our goal. We're excited to come together as an Ingersoll Rand family to get there.

That's great, Mary. So in our sustainability report and on the call today, we provided a lot of statistics around water conservation, waste reduction and energy efficiency. So what does that look like in practice?

Currently, our manufacturing sites are evaluating their energy footprint, using an energy calculator tool, which provides understanding of their total facility energy footprint, and it also prompts solutions for their consideration. The sites enter their ideas into an environmental tracker, which is used by the business units to develop their own energy road maps towards their 2030 goals. Additionally, the IBM team is working on developing standard work to include other evaluations, such as water and waste analysis, green teams and identifying other helpful resources as we progress in our sustainable journey. There are 83 energy projects, 27 waste projects and 11 water projects in our environmental tracker today. The excitement is really building among the employees.

Thanks so much, Mary. So then can you talk about our 2030 emission targets in terms of greenhouse gas Scope 1 and 2 and how that compares to best-in-class industrial peers? We're typically appropriately conservative when we provide targets. And so should we assume a similar level of conservatism in these targets?

When we set our goals, we reviewed best-in-class ESG companies across multiple industries to refine our focus and benchmarking. We view our targets as appropriately aggressive but achievable and consistent with best-in-class industrial peers, aligning with our value as being bold in our aspirations while moving forward with humility and integrity.