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

Hi, everyone. Welcome to the Ingersoll Rand presentation. My name is Mike Halloran, industrial analyst here with Baird. And we're pleased to once again welcome the team. Joining us today, Vicente Reynal, President and CEO; Vik Kini, CFO. Vicente is going to give some quick prepared remarks, and then we're going to dive into a Q&A session. If you have any questions, please reach out either through the portal. And all those questions will come directly to me. Or if you're more comfortable just e-mail me at [email protected]. We look forward to any of your questions. We'll make sure we weave them into our conversation. With that, Vicente, floor is yours. Thank you.

Thank you. Thank you, Mike, and thank you for -- it's great to be here. And hopefully, next year, we'll do a live move with the elevators from floor to floor as we typically do. So yes, let me start by saying a few things here, Mike. I mean we're very pleased with how we delivered in the third quarter, once again demonstrating that as a purpose-driven company, we remain grounded in what we do and how we do it. And we remain very focused on executing across our 5 strategic imperatives. And to just highlight a few points to that, let me just talk briefly about then, first of all, deploying talent. As you saw, we concluded our second employee engagement survey this year across 16,000 employees globally. Our participation rate was phenomenal at 91%, shows you the level of engagement that we're getting from our employees, several of our scores improved again, even including one that is very crucial that says how happy are you working at Ingersoll Rand, where now we were -- we rank on the top 10% of manufacturing organizations, and that leads to having the voluntary turnover that we have, which is less than 3%, which is phenomenal based on the current environment. Expanding margins is our next strategic imperative. You saw that we expanded margins again in the third quarter by over 100 basis points year-over-year. Operating sustainably, very core to everything that we do is also another strategic imperative, number three. And once again speaks to the speed at which we move and we were upgraded again by MSCI and now we sit on the top 1/3 of companies, and we expect we will continue to see improvement from here. Not only from this agency but from others. And then we spent a good amount of time on accelerating growth initiatives, whether -- what you're going to hear next week in our Investors Day around our organic enablers of demand generation, industrial IoT and new product innovation. But in addition to that, a lot of the compounding effects that we can create with our capital allocation, which is our last strategic imperatives. And with that, our third quarter was full of action around this topic. You have seen now how we have already deployed year-to-date over $1 billion in M&A. In the third quarter, we also executed on a $731 million share repurchase as part of a KKR sale. And on top of that, the Board authorized a multiyear $750 million share repurchase program. In the third quarter, we also completed close to $400 million of debt repayment, $396 million to be exact. And here in the fourth quarter, we're initiating our first quarterly dividend. So -- and even with all these actions, we still sit very strong at over $3 billion in liquidity. So Mike, as you can see, I'm very super excited about the progress, excited about what we have ahead. And if I leave you with some takeaways, the top 3 will be that we have many levers available to continue to drive our performance. And yes, we say that we have transformed the company where we're just getting started with our growth story. The second is our opportunity to deploy cash to accretive M&A is significant, and we have a great track record of delivering the synergies. And the third is sustainability. It's definitely embedded in our culture. We feel sustainability, we are enablers and beneficiaries of ESG initiatives and our businesses are focused on providing our customers with solutions that increase efficiency and reduce energy and water usage and waste production. So with that, that was just kind of a quick opening for you, Mike, and let's just go into Q&A.

Yes. Thanks, Vicente. And again, as a reminder, just reach out if you have any questions, happy to get through them. I think there's this occasional perception that you're towards the middle or the end of the journey sometimes because you do this massive transformative merger between Ingersoll Rand industrial assets and the Gardner Denver assets. You do some portfolio pruning as part of that process. And I think sometimes people think, what's next, right? But I think the reality, and I think the way you guys would describe it, it's almost like that was the end of the beginning phase while there's still a lot of life ahead of you. So maybe talk about where you think this portfolio goes over time? Because I know you're being very concentrated and targeted in how you're thinking about what assets you want to bring in. What does this portfolio look like 3-, 5-plus years from now? And how does it differ from what we saw 6 months ago, right after you got done with some of the bigger divestitures?

Yes, Mike, I think we're definitely looking at a portfolio where we're going to see sustainable organic growth that could be in the mid-single digits. And on top of that, that we can add some strategic M&A that could add another 400 to 500 basis points. So when you think about it, we're looking for a portfolio company that can actually deliver this total revenue growth of high-single digits to double digit. And it is a portfolio of businesses and technologies that are focused on mission-critical flow creation in very high growth end markets because that's where we're pivoting to. And it is a portfolio of technologies that provides great recurring revenue generation. Today, it's 40%, one that we continue to accelerate our growth and continue to expand our margins. I mean we still feel that there's plenty of room for us to continue to expand our margins on both segments that we have. And the last piece is that the portfolio that we have is asset light-based, generates great cash. You saw the cash that we generated in the third quarter. And that still has multiple levers for us to continue to improve. So I think we're very excited with what we have done. We're doing it quickly. But as you very well said, and as I said in the opening remarks, I mean, this is just the beginning of our journey that could be viewed as a very good, solid compounder of growth and earnings.

So what are some of those asset types or areas that you're looking to invest in inorganically? Obviously, PST seems to be a pretty heavy focal point, higher growth, a little more sustainability focus associated with it. I know you're willing to do the tuck-ins on the industrial side. But what do those types of acquisitions look like? What's the tie that binds them? And how are you thinking about it, more strategically, a little less financially?

Sure, sure. Yes, Mike, so we're looking always at -- we've been very thoughtful on looking at companies that can continue to help us elevate our portfolio from a growth perspective. And so these are assets and companies that bring new technology that we may not have or that is complementary to what we have and that companies that are playing in the same high-end markets, high-growth end markets that we want to play moving forward, that have, call it, minimal cyclicality that we can see continue. So that's whether internally, we tend to like to call it and group them and life-plus markets, but this is basically markets that are fluid, beverage, life and sciences, renewable energy. But markets that we can see that at least here in the near term, they're going to see some good growth momentum. And it's companies that have -- I know we said not talking about kind of margin profile, but companies that have already good gross margin, but one that we know we can improve and continue to expand from an EBITDA perspective. And companies that can bring technologies such as IoT, the industrial IoT. You saw with Maximus and Seepex. Both these companies, they brought to us some great technology but great technology that we were able to acquire at a very good multiple compared to what you might be seeing out there from a software perspective. So I think we're being very prudent, very disciplined, very strategic to these technologies that need to be complementary from a technology perspective that we see that we can put into our commercial footprint and accelerate the growth from here onwards.

You mentioned the digital part of it. I tend to simplistically think about it as just the software overlay that people start top down, and then there's the other half that maybe have the product focus and then use that as the base to leverage their way into more of the software applications. Certainly, it seems like you're the second. Can talk about it philosophically and how you can do that in a way that really makes sense from an entitlement perspective with what your core competencies already are.

That's exactly right, Mike. We want to make acquisitions that really are highly complementary to what we do today. And the same thing we're doing it on this kind of software and digital technologies that we're acquiring. And so if I give you the examples, when you think about a compressor, we develop our digital remote connectivity platform organically. When you look at on the PST segment, on the Precision and Science, we acquired the technology through -- via Seepex. I mean Seepex already has some digital IoT, but specifically, it is done for pumps that are more related to what the Precision and Science and Technology team is doing. So it's very much more core to that. And then Maximus, which then brings even another scale to our Dosatron pump technology on how to connect the Dosatron pump in the end markets where they play and start generating recurring revenue with the monitoring solutions that we can provide now. So yes, we're being -- at least at this point in time, we don't feel that we need to go and get this kind of overarching software solution. For us it's just more about if you look at the compressor and blower, how do we keep connecting that ecosystem that surrounds it so that we can make it better, make it smarter, and that is what our customers are asking us to do. It's just more focused on that versus these overarching solution that could get complex over time.

So Club Car and the upstream assets have been divested at this point. How do you feel about the rest of the portfolio here and what the opportunity set is for some further pruning?

Yes. So we think -- if you remember, when we did the RMT, we carved out 3 assets out of the RMT, so we can have a high level of flexibility. And 2 of those 3 assets we have already divested. So the one that the third asset or business that it was within this carve-out of technologies is the power tools and lifting business. And we have always said that was a business when we acquired Ingersoll Rand Industrial segment that it was kind of low to mid-teens. And it has dramatically -- we have dramatically improved the profitability of that business. And on top of that, with the new leadership team and the new initiatives, we are accelerating the growth and we're seeing some phenomenal growth. But when you think about the long-term view of this flow creation assets and portfolio that we have, that is kind of the more of the focus that we're going to provide. So yes, so I think we're continuing to evaluate the portfolio and the right timing as to maybe this potential asset divestiture.

So you highlighted the aspirations for this to be a stronger growth profile on an organic basis. Let's pick out a couple of those pieces. First, obviously, we know you're putting capital dollars towards some of these higher growth initiatives. Maybe talk philosophically about how you prioritize those investment dollars internally towards those growth avenues and what the internal processes look like around that?

Yes. So you -- so Mike, I think what we like to do is that we call it our growth enablers for organic growth. And there are -- kind of 3 of them pretty distinct. And you're going to hear more about them on the Investors Day. But one is the demand generation. Demand generation is our comprehensive, we call it engine for growth that has dramatically evolved over the past years and continues to evolve. So early on, it was just purely about marketing qualified leads. I mean today is about a comprehensive solution on how we harvest the customer base that we have now, one that we have already over 3 million contacts on our database of end users that we're leveraging that to -- in order to make sure that we're better aligned with the buying cycle steps of our customer. Our customer journey is long. We buy the whole goods, and then the aftermarket and the service and they're recurring. So now we're getting really smart about how do we communicate and continuously work with our customer on that while at the same time maximizing our price. So price is a team that is part of the demand generation. Also, our commercial excellence team is part of our demand generation. And then the last piece that we just added now is our data analytics team. So now we're going to be able to do a lot of these phenomenal predictive and artificial intelligence data with the thousands of data points that we get every day to be able to make better decisions in terms of how we support and continue to grow our top line revenue. So it's -- it's a very exciting time from that demand generation. And that is -- all of that is just demand generation. Then we have our IoT, industrial IoT, and this is how we leverage our 5 million assets that we have identified in the field that we want to go out and connect to get data points remotely and be able to provide better revenue stream. So you're going to see some of that also next week. And the last piece, we have this passion for new product innovation. As you see every quarter on our earnings calls, we always talk about new product innovation and the pace at which the team has been able to accelerate new product is just phenomenal. Even in a year where we were all remotely working from home still being able to generate a cadence of innovation that is almost 100% higher than what it has been historically. So I think those 3 enablers are really great enablers for our organic growth momentum.

But why don't you touch a little bit more on the R&D side because if I think back to what it looked like before you came to Gardner Denver, and I think about what maybe the IR industrial piece from an R&D perspective, looked like before you merged with -- IR and GDI merged together. I think there was a lot of change that had to happen for it to be as targeted and as commercially successful as it's been. So maybe talk a little bit about that evolution.

Yes, Mike, and that's exactly right. I mean we believe in the quality of the R&D projects and not the kind of quantity of the R&D projects. And so we quickly prioritized a lot of the -- a lot of it. We have been able to prioritize tremendously the amount of R&D projects so that we can then have better focused cadence of execution. And in addition to that, we have in the P&L, 2 areas where we do what we call this development of new technologies. There's clearly the normal R&D, which you could argue is 2% to 3% -- or 2% of the revenue. But the way to think about it is that we have in the gross margin equation, what we call the engineers that are doing Innovate 2 Value or I2V that we're utilizing I2V as a way to launch new products and new solutions also in the market. So when you combine those 2, I mean, we're spending 300 to 400 basis points or 3% to 4% as a percentage of sales on what you could call new product innovations and solutions. And in addition to that, the partnerships that we're creating, whether the partnerships with Google for Google Cloud or the many other ones that we have in our pipeline to really accelerate how we create innovation and connectivity. So I think, Mike, so I think right now, we leverage IRX in our global teams. We have a center of excellences in India as well, where that has allowed us to accelerate some of the innovation cadence and be able to be acquisitive on talent that has a unique perspective on how to do more of the remote connectivity platforms. So it's an exciting time, and I tell you that the teams are -- we're putting a lot of attention to innovation, not only in the product but also in service solutions.

So let's shift gears to the operational side of things. Obviously, a tremendous amount of synergy drive that's materializing organizationally. And that's happening at the same time, there's a tremendous amount of volatility in the environment. So let's take those in 2 separate buckets, although, obviously, if they need to be kind of combined, certainly feel free. But where do you think you stand right now on the synergy journey. This last quarter, you reiterated the target? I know the funnel in turn is higher, but it's probably a little bit harder to execute on some of that funnel in the midst of all this volatility. So I'd love an update on that side.

Yes. Sure, Mike. I'll take that one. I mean I think the story is exactly like you heard. I mean we reiterated the $300 million commitment, which shouldn't be lost obviously that, that is a number that was raised from the original kind of RMT target. When we did the RMT, we committed to $250 million of synergies over a multiyear time frame. And as you saw last year, obviously, a lot of acceleration in the environment where we were in last year. It was kind of the prudent course. And quite frankly, we were -- we frankly accelerated and outpaced even what, frankly, our initial expectations were so much so that about 7, 8 months after the closure of the RMT, we actually raised the target up to $300 million or $250 million up to $300 million. I think in terms of the execution, it's continuing to follow generally kind of, I'd say, the pace that we would have expected. Upfront was kind of more structural headcount-driven actions. We're kind of really in the midst of, I'd say, the more direct material-oriented components. You are right that supply chain is obviously a consideration. We'll park that for a moment. But things around like the classical procurement as well as the Innovative 2 Value. And kind of the third kind of leg of the stool, which is kind of yet to come really more into next year and thereafter is the footprint side, footprint optimization. As we sit here right now, Mike, I would say nothing's really changed. You are right. We obviously have a higher funnel, as you would expect, $350 million. Like I've always said, not every opportunity in the funnel is going to materialize to the bottom line. But I think your point here of transitioning to now supply chain and how that's impacting things. As you can expect, the same team that is delivering on procurement or I2V or footprint-oriented synergies is the same team that's obviously executing on managing through the global supply chain challenges that everyone is obviously seeing, ourselves included. And so making sure that material is in the plant at the right point in time so we can serve customer demand is clearly, I would say, the biggest focal point of the team. So I think as we sit here right now, yes, bigger funnel, yes, volumes have kind of returned to 2019 levels. But we still view the $300 million number as the prudent synergy target. Like we've always said, we'll reevaluate and if there's opportunity to be able to execute, without question, you'll see us do that. But I think $300 million remains the prudent number. And we're pretty pleased with, frankly, how the team is still managing to hit on the commitment and deliver those synergies despite clearly, the supply chain constraints and challenges that everyone is working through right now.

So let's just touch on those then as long as it's a natural segue. I mean how do you -- how internally are you managing through the process? It seems like on a comparative basis, you're doing quite well. But would love to hear how the supply chain is specifically impacting your business, which you're doing to remediate and how you think this plays out over the next, I'd love to say a couple of quarters, but I suspect it's going to stretch much longer than that.

Yes, sure. We'll maybe start to kind of taking into components, you can talk supply chain [ as well as ] the kind of inflationary components. Obviously, they're quite co-mingled. But I think in terms of the supply chain piece, let me just start by saying that obviously, we're operating in the exact same environment as everyone else. It's not an easy environment to operate in, and we're pretty pleased with the performance of the teams for the first 3 quarters. We gave some color in the Q3 earnings call last week about kind of the structure in the organization and how we're utilizing IRX to kind of manage through it. But it's like I'll say hand-to-hand comment almost on a day-to-day basis. That's how the teams are operating. It's very structured in terms of making sure we have the right materials and the right plans at the right point in time. And we do believe that our in-region for the region kind of manufacturing footprint and structure helps. Obviously, you've got to get the inbound raw materials into the right plants, but we don't really run into the, I'd say, constraint that we make in one plant in one geography and have to supply the world. We generally have manufacturing co-located within their respective regions to supply local demand, which we do believe is helping us in this environment. In terms of just kind of how things are playing themselves out, Mike, I think you're completely right. We look at kind of how this year has played out. And we've seen continued strong order input and order inflow. We've seen book-to-bill be above 1 and really at levels like 1.15 now for 3 consecutive quarters. And you know our kind of business and the seasonality typically speaking, you see book-to-bill above 1 in the first half of the year, particularly as you try to book some of those longer-cycle projects, and you tend to see book-to-bill below 1 in the second half of the year as you tend to shift some of those through. So seeing book-to-bill above 1 and at 1.15 now for the third consecutive quarter, speaks quite frankly, to the continued strong healthy order intake, but it also speaks to the fact that you're absolutely right, the supply chain isn't necessarily able to keep up frankly, with the level of the order input. And as such backlog continue to remain very healthy. We've kind of said now, 2 consecutive quarters of backlogs are at record levels. I'm sure we'll be saying something comparable with that at the end of this year, and it will take some time into 2022 for that to alleviate and that's just how we're going to continue to operate and execute through this. I'll quickly touch upon the inflationary side because it fits the kind of the...

That's what I was going to go next. So perfect.

Yes. Hand-in-hand here, they kind of -- 2 kind of correlate. What I would say is, obviously, yes, absolutely. We've seen the inflationary pressures in the context of 2021. I'd say that the direct material side was probably the piece that I'm not going to say it was initially expected, but it was probably a little bit more transparent and visible as we were trying to -- starting to enter 2021. Clearly, the logistics and freight piece is the piece that I'd say that was probably a little bit more elevated than anyone could have expected. Now I think from an internal perspective, the way that we've really managed here, and you've heard us be very explicit is that we haven't waited for the market or other competitors or anyone else to kind of be a leader here. We've been pretty kind of on the forefront on pricing. We have taken the requisite actions that we think are appropriate to be able to manage through this environment. And as such, you've seen us stay price cost positive for the duration of the year. Now of course, it was -- the spread was much higher in terms of price versus cost favorability in the first half of the year compared to what we expect to see here through the second half of the year, but we continue to remain on that price cost positive spectrum, which is extremely, I'd say, positive in this environment and the fact that we were able to get out of it pretty early. And I would say that, by and large, we've been taking the majority of our pricing actions, more or less price-oriented as opposed to other mechanisms just as a manner to continue that momentum as we move through 2022. So again, I think we're pretty pleased with the performance of the team and how the team has really not waited for leading indicators or anyone else to really take the actions we've been pretty on the forefront there. And I think it's led to, frankly, the margin performance you've seen all year, including through Q3.

How much concern is there internally that the supply chain challenges, inflation pressures backlog keeps getting pushed. Did you get some demand destruction ultimately. I know there's not really double ordering in the backlog as you sit here today. But do you think there's some sort of self-fulfilling or circular thing that can materialize here as things keep getting pushed, which then just kind of constrains people's willingness to put capital dollars forward or more than just your typical OpEx?

Mike, I don't think that I would say, a heavy concern at this point in time, I think what we see is many of our customers, they're making also -- or having more conversations about making the necessary investments that they need to make in order to even achieve their 2030 and 2050 environmental targets that they have put out to be. So I don't -- I think that between capacities expansions that we're seeing, a lot of around sustainability, how we're moving to these other higher growth end markets that are seeing some very good trends. I think there's enough variables here in the piece that hopefully, we're building some cushion in case that there are some of those concerns that you mentioned could materialize. But nothing that, at this point in time, we see in the near term.

Any differences that you're noticing on the short cycle side versus the long cycle or the more CapEx-oriented side? I'm sure there are differences, I guess a better question might be, are you seeing above normal deceleration or acceleration on the short cycle side? And how much willingness or conversations you're having around a better CapEx outlook at this point?

Yes. So we -- I would say that the short cycle is kind of fairly stable. I mean we remain really stable, and we made commentary that even in some regions such as even including Europe and China, between Q2 and Q3, we saw acceleration in orders, which I know many others are talking about slowdown in China and that our teams, at least we don't have that yet. But watching that carefully. So I'll say short cycle, fairly stable, robust, while more and more conversations on the CapEx that is needed, whether for localization of some companies, that getting kind of released faster. And the exciting piece is projects related to environmental targets. I mean I just -- on the earnings call, we spoke about 2 meaningful ones. One is this hydrogen dispensing network across the country of New Zealand. And the other one was around utilizing our compressor solution from the company that we own, a company called LeROI, for biogas sequestration. So I think we're definitely seeing more of those fairly large capital projects that are related to sustainability getting executed.

Well, it makes sense because you've obviously set pretty aggressive internal targets yourself, as you said. Unfortunately, we are out of time. But Vicente, Vik, really appreciate the time today. Coming up next, session 1, Brady Corp; session 2, Watts; Session 3, [ Leonis Holding ]; Eagle Materials, session 4; Session 5, Brunswick; Clean Harbors is Session 6; and Session 7 is Embark Trucks. Gentlemen, really appreciate the time today. That was great, very informative. And if anybody has questions, reach out to the IR team and reach out to our team. Happy to help as we can. Thanks, guys.

Perfect. Thank you.

Thanks, Mike.

Thank you.