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

All right. Thank you, everybody. Welcome back from lunch. Really excited to have Ingersoll Rand with us as the next presenters. We're lucky to have the CEO, Vicente Reynal; the CFO, Vik Kini; and Chris Miorin, Investor Relations. Vik was trying to do double duty for a while. I know he was the happiest man on earth when Chris accepted the job. So you’re making Vik's life a little easier, Chris. So thank you for that. But with that, I will turn it over to Vicente. If you want to give folks a little lay of the land of Ingersoll, some of the key strategic initiatives, and then I'll start to provide some questions to you.

Yes. Thank you, David, and thank you for the invitation. Excited to be here with you on this great conference. So yes, thanks for joining today. I'm sure you saw our earnings last week. I'm very proud of the continued progress we make as a combined company. Today actually marks the 2-year anniversary of the new company. And the transformation we have done is one that we're truly proud of, led by our employees who, as all of you know, have this ownership mindset because they're owners of the company when we gave equity to all employees in September of 2020. And we continue to leverage IRX, the Ingersoll Rand execution excellence as the engine to drive our progress. And I think the past 2 years have been just a testament to how our unique culture can embrace this ever-constant volatile and changing environment. And whether you look at the data that we provided during the earnings call that over the past 2 years, in the middle of a pandemic, in the middle of integration of these 2 companies, we were able to expand margins by more than 400 basis points. And we did it every year over the past 2 years. It was just not a onetime jump, but it was a continued improvement and one that we think we still have plenty of room to improve. And I'm sure we can talk about a lot of those initiatives, David, through the next 30 minutes or so. But I think the other excitement is that not only the margin improvement and the growth, but also the investments. We were able to divest 2 businesses, Club Car and the High Pressure, generated over $2 billion in cash from that, and reinvested that back into the business organically and inorganically, making over a dozen acquisitions that are very great strategic fit to us and provide a better view of a more sustainable end market growth activity. So I know there's a lot of volatility and a lot of geopolitical situation happening in the world. But again, I think we have a proven testament of our playbook that in these very difficult and unchartered territories, we have the agility and the tenacity and 16,000 owners in the company that do what it takes to make sure that the company continues to move ahead and improve and puts us in a better position for when growth continues to happen.

All right. Well, thank you for those opening remarks to set the stage. So bringing home though to today, obviously, a big issue out there right now with Russia, Ukraine, the unfortunate situation there. Can you level set for everybody what your direct exposure is to Russia and Ukraine? How you're handling your operations there or selling to Russia at the moment? And then, of course, any indirect, be it a supply chain risk, be it an opportunity on higher commodity prices impacting some investment in a positive way in certain verticals, whatever it may be. Just curious how you'd frame the situation there impacting Ingersoll Rand?

Yes. David, I'll tell you that our direct exposure to Russia in terms of revenue is very immaterial, very minimal, very small. I echo what you said, very unfortunate situation, dark days in -- for the people in Ukraine. We don't have any employees in the Ukraine, but we do have citizens of Ukraine. And we're doing everything we can to support them. I mean we have a very large demand generation center in Poland, and we're doing everything that we can to support our employees, our citizens and actually their families, whether providing shelter, food or access to other countries that they can go into. So again, we're doing everything that we can to support our people. But yes, to your question, not exposure to -- in terms of revenue, very minimal, I will say, from a customer base and also from a supplier base. In terms of kind of your question about the situation from an opportunity perspective, when we created the budgets for our teams, we told our teams to plan for the worst in terms of inflation and supply chain, and particularly inflation. So you saw that as we kind of gave guidance for the year that -- and we spoke during the earnings call that a lot of our inflation is kind of fairly -- we view it as fairly stable and not a massive decline in the second half, and that our teams needed to price and properly reflect in the P&L how we were going to continue to be price/cost positive through every single quarter of the year. So our teams are ready and executing to that level. We're already on Friday during our staff call that -- we actually run our staff call as -- with an IRX IDM tool, where we kind of look at a lot of the KPIs. Our team was already talking about doing another proactive, above and beyond pricing execution based on the potential. So our teams are getting ready, kind of locked and loaded to be able to execute if we see that commodities tend to start rising again. You have seen that we have been very proactive in the market with our pricing actions. And I think based on our products that are mission-critical technologies, very low cost relative to the overall system, very small share of wallet when you think about the total process that they participate, but very critical because if they fail, the process in our customer fails. So our customers are looking and the market looks for a highly reliable product in this type of process and application. So again, we see the ability to continue to pass on price. And so far, we have not seen any pushback whatsoever. I will also make reference, David, to one of the questions that you asked on the call about what does it mean for utility and energy costs increasing? And this is really honed in and centered to our commitment to ESG, one that we have already been recognized in the top 15% with S&P sustainability most recently, or a few weeks ago. Today, we received notification of our sustainability also ranking going higher. So I think it's exciting that we continue to be seen as a company that is in the top quartile of ESG rating companies. And what that means is that we provide products that help our customers as well reduce their Scope 1 and Scope 2. So when you think about a compressor in a typical factory that consumes about 30% of the total energy in that factory, having compressors that are launching new products that we launch with new technologies that reduce that energy efficiency, that is what our customers want to be able to purchase and acquire. Very often, more and more, we're seeing very large corporations talking about air compressors and air treatment systems in the sustainability reports as a way for them to achieve Scope 1 and Scope 2. So again, we see that as energy prices continue to increase, it's a very good opportunity for us to continue to sell our products and help our customers achieve better efficiency and better energy reductions.

On your price/cost staying positive, the impact, though, actually on the margins, when you look out as the year progressed, can you give us a sense of when do you think you'll be price/cost margin neutral, if not even positive? And has the calculus changed at all with the events of the last week where maybe some costs you thought would be coming down, you have to maybe back that up? But at least sounds like your team is saying, all right, we're ready if you need to back that cost back up, we can launch price?

Yes, David, I'll take that one. So the way you described it is spot on. So if you think about the 4 quarters of 2021 as well as what we're expecting for 2022, we are very much expecting to be price/cost positive. We obviously were in 2021. We're expecting to be price/cost positive each quarter of 2022. Now that's from a dollars perspective. I would say that in the fourth quarter of 2021 as well as the first quarter of 2022, while we are price/cost positive from a dollar perspective, obviously, the spread is the tightest. You can kind of envision that 1Q '22 doesn't look dramatically different than 4Q '21. So dollar positive, but not margin positive. We would expect that we're actually getting closer to, what I would say, more margin neutral by second quarter and then margin positive into the back half of the year. And a lot of it goes back to what Vicente was saying. Clearly, given the environment we're in right now, we are looking at, what I would call, some strategic pricing actions as we sit here right now. Given quite frankly, the backlog that we currently have coming into 2022 as well as some of the actions that we're actually taking as we speak, we wouldn't expect to see those pricing actions start to ramp into the run rate until Q2, and then obviously, into the back half of the year where we would expect to be, I would say, more price/cost positive even on a, let's call it, more sideways inflationary curve perspective than where we are in 1Q.

Okay. But you don't seem rattled by the recent actions in Ukraine to have to change the calculus margin?

I mean not yet. Obviously, it's still quite early in that context. Best we can tell right now, nothing is -- obviously, it's only been a handful of days, so it's tough to read. But to Vicente's point here, you've seen us be quite proactive on the pricing front here. We haven't necessarily waited for others or peers or anything like that. We've been very proactive. Most of our businesses have not all took approximately 2 to 3 pricing actions in the context of 2021. In the context of taking strategic pricing actions, if we were to see inflationary pressures get maybe a bit higher than we are expecting right now, I don't think that gives us a huge cause for concern as we sit here right now.

And bigger picture, Vicente, I think maybe it was at the analyst meeting in November. You gave fairly long-term targets mid-decade. You were comfortable putting out mid-single organic, low double, including M&A. When I think about the portfolio from here, I mean, there's a tools business that might be a divestiture. But is it fair to say outside of that, there's really nothing you're thinking of any size really, that would be a divestiture? And if that's the case when it comes to M&A, can you give us a flavor for the type of things you're looking for where I remember there was a slide that showed all the different end markets exposures. Pretty broad. What are the couple of end markets that you'd say, if I had to give you a projection of that 5 years out, this is where I think we'll see the biggest percent of revenue change?

Yes. I'll say, David, you're absolutely right. So we gave those targets, mid-single organic, and on top of that, another call it mid-single from M&A. So we kind of committed to this 400 to 500 basis points of top line growth from an M&A perspective to give us to that kind of low double digit. And you're absolutely right as well. Besides that one business that we carved out, I mean when we did the RMT, we think it's a run, we carved out 3 businesses that could potentially be divested, that was Club Car, High Pressure and Power Tools, and the first 2 have been divested. And so yes, I mean, I think our -- we have been very purposeful driving our portfolio to be more focused towards sustainable, high-end markets. And that means that less cyclical markets, better growth momentum and ones that are aligned to the 3 megatrends that we spoke about during the Investor Day, which is digitization, sustainability and quality of life. And the quality of life has to do with life and lab, medical businesses, sustainability with anything around clearly, whether hydrogen, energy transition, anything that has to do with improving the environment. And obviously, the digitization, anything that is related to IIoT, industrial Internet of Things, and data transition that could really provide better service and solutions. So if you think about the end market, to your question, I think you're going to see that anything that surrounds those end markets, and that will be life and lab, anything that is related to the medical side. We have -- even back in the Gardner Denver Day, we were doing a lot of work to really emphasize that side of our business, and we have continued to do so. Water. Anything that touches water today, 30% of our revenue touches or has the ability to improve water conservation, improve water efficiency. So we continue to see that water, doesn't have to be only wastewater. Anything around water solutions is going to be an area of focus for us. And so I think those are 2 that I will call out as ones that you're definitely going to see much bigger change as we continue to move forward.

The total addressable market, I'm going from memory here, but I remember it increased over 50% from last year's thought of what our TAM was to where it will be just in 4 years.

Yes.

And I appreciate the big secular trends, digitization, electrification. But when I think of a 50% jump, how much do you need M&A to give you bigger platforms to really be in those TAMs? Or would you say, no, we're already there. We're just going to go attack them with M&A? You're already in that bigger -- I mean you're only a $5 billion company. So a $70 billion TAM gives you the headroom of just getting the -- 15% market share would be huge growth, right? So I'm just trying to understand how much you're already positioned, or no, we need a couple of acquisitions that we think broaden that TAM out?

Yes. No, correct. Let me give you kind of a bit of a history. So back in 2019, during the Gardner Denver Investor Day, we were only doing a $25 billion addressable market. When we did the merge, IR and GD, it jumped to $40 billion. And here, in 2021, during the Investor Day, we announced that we were at $44 billion. And that was even after taking out the divestitures, Club Car and High Pressure, and then bolting on a lot of the other companies that we've been able to do. So currently, we're at $44 billion, $45 billion. And yes, to your point, we're saying that by 2025, we expect that we can be at that $70 billion addressable market. Some of that is driven by the growth on these kind of markets that we're exposed to. But a little bit of that too as well has to come with -- from an M&A perspective. We're not going to quantify exactly how much is it from M&A, but there's definitely some adjacent markets that we're looking at that we have very prone approach to be able to enter in those end markets. But the big majority of that is definitely going to come from the organic levers that we've spoken about, which is demand generation, the IIoT as it relates to aftermarket and services, and the product and service innovation related to these end markets that we've been talking about. And then yes, some of the M&A will include the expansion of that addressable market.

Can we bring it a little closer to home on the near term? When I think of your supply chain, and it's fair to say your backlog is very large, how far does that backlog extend out? Like the business, I think, is a little less long cycle than I would have thought when I go through the exercise. And I'm not sure why. I mean you have some consumables in there. I would have figured it would be a little longer cycle. So I'm kind of curious, how far does it extend? And just trying to think through the risk around the supply chain, up or down? Just what are you seeing on a day-to-day basis?

Sure, David. Maybe I'll take that one here. And I think the way you're describing it, obviously, we have kind of a gamut of products, whether you want to consider things maybe a little shorter cycle. We have some project nature side of the business behaves a little bit longer cycle, and arguably some shades of gray in between. I think the way we would think about it here is on the totality of the profile and kind of the portfolio, typically, you don't walk -- you walk into -- in a typical environment, you typically walk into any kind of quarter with maybe up to maybe 60 days' worth of visibility kind of across the portfolio. Typically, not much more than that. It varies a little bit region to region, but that's probably a fairly good proxy. Clearly, right now, our visibility is a bit longer than that. You could argue that any -- you can argue 4 to 8 weeks longer roughly speaking. You argue, yes, walking with a little bit more of a -- with the lead times being a little bit more elongated, and quite frankly, the backlog obviously being higher than it's been, whether you look about year-over-year, we even grew backlog sequentially from Q3 to Q4. So clearly, you do walk into the year with more visibility comparatively speaking to what you've seen in years past. The other piece to probably mention here is that -- maybe speaking a little bit more to the longer cycle kind of components of the portfolio, we do have -- and this is probably a little bit more within the ITS business, approximately 20%, roughly speaking, of the revenue base that's a little longer cycle in nature. It's more project in nature. So whether it be kind of the vacuum liquid ring pump portfolio of the Nash & Garo business, or the centrifugal compressor business, tend to be more project in nature. You could argue, 6-, 12-, 18-month type lead times. And as such, those are the parts of the business that you probably do have more visibility to, probably extending more so into the back half of this year. But even on the -- what I would call the more kind of book, ship, core compressor, blower, vacuum side of the business, you're not right now sitting with visibility into the second half of the year. Maybe you could argue a little bit deeper into Q2 than you would typically be sitting here at the end of February, but that's a function of what you said, the supply chain, things of that nature, which -- and again, just to speak to it, we -- obviously, we mentioned this on our earnings call last week. So clearly, nothing has materially changed in the last few days. Supply chain, I would tell you is not dramatically different here in Q1 2022 than what you saw in Q4 '21. Meaning still a constrained supply chain. Vicente uses the term, it's kind of like whack-a-mole. You solve 1 issue today, you got another issue tomorrow or next week. That's just the reality of the environment we're in. And right now, it's tough to say, you'll probably continue to see that playing itself out into Q2 at this point in time.

Retention of employees right now, and I’ve got to give you credit, the ownership culture has got to be a great retention tool relative to just a gun for hire. Right now, what is the wage inflation like this year? I don't know how you weave in the equity portion of it, but just kind of traditional wage inflation that you're seeing?

I would say nothing dramatic, to be honest, David. I mean, to your point, let me first emphasize, yes, I mean, turnover -- voluntary turnover in the quarter -- in the fourth quarter was less than 3% for hourly and salary. salary almost kind of down to 2%. So yes, it's definitely that ownership mindset that really drives that passion. But I would say a lot of the work that we have done around creating a great place to work, and we see that on the employee engagement survey that continues to -- we see improvements. We're now ranked on the top 10% of manufacturing companies. And to put it in perspective, David, back when we did the first survey, we were in the 19th percentile. So we were really low. And over the past 5 years, dramatically improved the engagement with our employee base. So I think, from that perspective, that is the reason why we're able to retain a lot of our employees. From a merit, we're definitely very competitive and do what it takes. I would say nothing that I will call out or stand out that we have had to do broad-based specific pockets here and there. But I will say that what the teams have been able to do is really drive any of that inflationary that we may see in the labor with productivity. So the way we always say is that any labor inflation gets offset with productivity, while the direct material and logistics gets offset with the price. So we say price/cost is price over that inflation that we see in material and logistics. And the last point I'll make is that labor is small percentage as of the total gross margin or gross profit within our P&L.

Any labor contracts coming up, just given the pendulum power of [ similar goods ]? After 30 years of NAFTA, it feels like it's sort of small in the other way here a little bit.

So we have over 65 manufacturing locations. And in the U.S., there's only 3 that are union-based. So we're a fairly nonunionized company. Obviously, when you go outside the U.S., you have the workers' council and things like that, where merit gets dictated by the government in many cases, but we're fairly nonunionized labor.

A lot of the initiatives you speak of are less cyclical, generally, fairly high-margin businesses. I think your margin targets, I mean you're already had 23-or-so percent margin, but you're targeting 28%, 29%, right, opportunity?

That's right.

But the traditional compressor business that is just classic factory CapEx, how much are you -- I mean my company is already -- you're seeing the CapEx up in '22 versus '21? But that just -- it could just be just, hey, we're tight on supply and -- but more of a structural -- and this is something would come up in a conversation with your folks. The days of just leaning out, just I don't want any redundancies in sister factories around the world, I trust my supply lines from Asia, you name it, philosophical views of how those countries are being run. How palpable is the industrial CapEx coming home to Europe and North America to those, call it, Western developed world? How palpable is it? And is it an extra 100 bps of revenue growth from it? Or does it feel that alone could be a pretty powerful driver, and then everything about the longer-term sustainability remodel with water, we have a discussion for hydrogen build-out and so forth? I'm just curious about legacy classic [ Factor 4 ] CapEx story.

Well, that's a great question, David. And I will say that I'm not going to -- we're -- related to specific kind of basis points of growth, but the excitement that we have is that when you compound the relocalization of the supply chain, kind of bring it back more -- I mean, for lack of a better way of saying it, more nationalistic to be able to support and kind of control your destiny from a customer perspective. And customers have to do that investment. The way they're thinking about it is that on top of that or compounding that is the ESG and the applicability that by 2030 and 2050, there's some pretty meaningful targets that need to be achieved. So I think it's a compounding of those 2 that I think gets us really excited on what that CapEx cycle could come out and really be pretty powerful. Specifically, I mean, how much do we expect on that? We don't have a specific number, but that's what kind of also gives us the confidence of this kind of mid-single-digit organic growth momentum. And the other thing that is really exciting in terms of a kind of macro trend that -- or kind of a big trend is that obviously, with the lack of ability of finding skilled labor in many places, one example of that is service technicians in factories. So this is why we believe that the remote connectivity, the IIoT and what we're doing to support our customers with kind of percentage of uptime of the compressors, as long as we get paid some sort of recurring revenue, it's a very exciting revenue stream for us that kind of gets measured even up to the kind of similar to like software margin kind of revenue. So it's a combination of that CapEx and also the ability of what we're doing here from a recurring revenue perspective that, to be honest, gives us the confidence and the excitement here moving forward on how we're aligning our teams to be able to deliver technology that is really focused on that.

And we're running out of time in a couple of minutes. But my last question, you might be a little too diplomatic to really answer this, but give us something to chew on here a little bit. I know coming together, Ingersoll Rand did a lot for the service effort and so forth and recurring revenues. But in the context of CapEx coming home, let's say, to the Western world. And you think of an Atlas Copco, and correct me if I'm wrong, but I always got the impression Atlas maybe had a little leg up in China versus definitely Gardner and even Ingersoll, to be fair. But obviously, their home turn on EU, they're pretty very tough to beat, I mean even today, the dollar is stronger, can't be helpful. But when you think of the competitive landscape, and you already have Ingersoll, I'm not saying since pre-Ingersoll, how do you look at the competitive landscape today? And where do you think you can really win on that onshoring? And how much is it, I’m making too much of the competitive dynamic, there should be plenty of food to feed everybody in the jungle on this trend. And maybe there's some players I'm not cognizant of that maybe are rising up and they're more competitive than I appreciate, even maybe coming out of Asia for...

Yes. Yes.

Potential...

Yes. No, absolutely. I like that question. I tell you that we're highly competitive. So I'll tell you that our teams will say that there's plenty for us to chew on in every region. And we want to be the #1 in every region. Right now, we're best positioned as -- and you said it very well, I mean we're very, very well positioned here in the U.S. We have 2 really core manufacturing centers for compressors in the U.S., very sizable, very large, and a lot of R&D that goes here into the U.S. We're also very strong in China, and where 90% of the revenue that we're generating is kind of in the country for the country, and that continues to grow. We continue to invest from the perspective of the Gardner Denver product is now manufactured in a very high-tech factory that it was a legacy Ingersoll Rand that we have continued to invest on that. And that is giving us access to a new tier level of compressor and customer base that we never had access before. Also during the Ingersoll Rand days, I mean, they made almost a $70 million investment in that factory to really accelerate the very large centrifugal oil-free compressor. And we're enjoying the fruits of that -- of some of that now. And in Europe, yes, I mean, you're right, our #1 competitor has a very strong presence. But it's kind of -- it's pockets in the sense that we feel we had a really strong presence in the U.K., good presence in Germany. So I think in the most kind of larger countries with good economical conditions, we have some pretty good presence that -- and -- but yes, I mean, we're smaller and have better opportunity for us to grow and expand. The good news there is that our product line and our brand was compared -- comparing Gardner Denver are 2 very well-respected compressors in Europe. And now taking the Ingersoll Rand brand as another brand and another channel, we're able to even capture more access and better -- so I think I'd say there are very good pockets of opportunity for us to continue to take share. But in terms of the reshoring, very -- we feel we're very well structured to be in the U.S. and what we see in Asia.

Well, we've run out of time. I wanted to ask what the take rate is on the IoT connectivity, which are the -- what's the rate you're seeing of new devices being sold, getting turned on for subscription? But I assume we're still pretty early in that. So I assume it's a very low single digit at this stage. But I know you have big aspirations for that.

That's right. That's right.

To be continued. Really appreciate the time. Thank you so much. Have a great rest of the day with your meetings. And again, I really appreciate you taking the time.

Thank you, and thanks, everyone.

Bye.