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

We're running a little bit late here, but good things are worth waiting for. So very pleased to wrap up the industrials track of the Wolfe conference here with Ingersoll Rand. [ Vikram is here ]. But certainly, very pleased to have you here Vicente Reynal, CEO; Vik Kini, CFO; and Mike Weatherred, SVP of IRX. So Vicente, maybe some opening remarks then we get to Q&A.

Yes. I'll -- well, first of all, Nigel, thank you for the invitation. I'm excited to be here, and I'll be kind of brief with my remarks just some timing. But again, I'll say we sit here pretty excited about our performance in the first quarter and the momentum that we continue to see across the company. And I think it's very exciting to see that it's just been 2 years since this kind of mega merger between Gardner Denver and Ingersoll Rand, and we have been successful at kind of navigating this environment over the past 2 years. First of all, 2 weeks after we kind of consolidated the 2 businesses, went into the middle of a pandemic and then supply chain logistics, inflation and still be able to deliver tremendous margin expansion over 400 basis points over the past 2 years and another 100-plus basis points in the first quarter and with some very strong orders and revenue in the double-digit organic. So very excited to see the momentum. And it's all thanks to the teams that we have.

Great. That's a great way to start. So I know that you face a lot of questions around China, supply chain, et cetera, and I'm sure we're going to touch on that as well. But I'm going to lead off the Q&A, but folks in the room, if you got any questions, please queue them up, and I'll give you a chance to ask questions in about 10 minutes or so. But I do want to just talk about the integration of the train industrial business 2 years ago. Maybe just talk about where we are in the integration process, what needs to still be done and really go from there.

Yes. So I'll say a few things and then maybe Mike can talk about the process because IRX was fundamental to the integration. I think I'll say that we're much well ahead than our expectations in terms of integration which is also the reason why last year, we increased our cost synergy target, and we continue to see continued room for more here in this year, another $50 million of cost synergy, $35 million more going into next year and still have plenty in the funnel that we can continue to execute through this integration. So I think it's been excited from that perspective. Even more exciting, in my view, because of the revenue synergies that we have seen, which obviously, you can see it on the numbers. Revenue synergies has been something that we never spoke about, but something that you can see on the outcome on the performance of the business. And the last thing I'll say is that I think difficult -- when you think about it, that in 2 years, we were able to integrate 2 companies in a very single unique culture set. So the new Ingersoll Rand will run now with this ownership mindset and our purpose of making life better for the employee, the customer, the community and the shareholders is really thriving across the world. And I'll say that, a lot of that, thanks to our IRX process execution. So Mike, I don't know if you want to make some commentary on IRX and how that led to a great outcome here.

Yes. I mean I don't know how much everybody knows about IRX, but IRX is -- just think about IRX as a 100-day spread that's executed -- we decided to use IRX or GDX, that same weekly 100-day spread mentality to integrate the companies. And I would say there were couple 3 big benefits. Number 1 is when we did the integration, we didn't -- nothing got delegated. So Vicente was the head of the steering committee and every functional leader played, regional, et cetera. And we had kind of a 2 person in a box mentality by function, 1 from Ingersoll Rand, 1 from Gardner Denver using IRX. And I think we started about months prior to close and then at about the 3 months prior to close, we got to bring some Ingersoll Rand people in. So when we hit day 1, we were moving on execution. So think about -- I think day 4, we took a significant headcount reduction. I think in the second or third week, we were getting cost reduction through suppliers, et cetera. But the big benefit of that was when we hit the pandemic 2 weeks later, we had kind of a methodology or an operating model that has really spread across the company. So now we have something like 300 of those weekly sprints running around the world by region, it's 100% across all the businesses.

I want to come back to revenue synergies because obviously, we're happy to focus on the cost side, but it seems that the revenue synergies are arguably as impactful, if not more so. But maybe, Mike, back to you. When you look at across the business portfolio, there's clearly -- the margins are excellent, but there's always a bell curve, right, within the portfolio. So where do you think IRX has been most impactful and the most mature? And where is at least mature and where is the work needs to be done?

Yes, great question. I think the biggest benefit of IRX has been on the commercial side and it's back to your point around revenue synergies. So if you take a 100-day target of X to Y improvement in a geography and you apply the IRX model, and you've got sales, marketing, aftermarket, operation and finance, say, involved, you get this collaborative process that allows you to move really, really quickly. So for example, we knew China was a gold mine for us because Gardner Denver relatively small, China, relatively big. Those teams came together like overnight. And so -- and almost within weeks, you couldn't even tell which team anybody came from. So commercial benefited greatly. I think the second biggest benefit has been I2V and cost product material synergy, and I think that was somewhat COVID-driven, right? So they had a lot of momentum. We were talking to 4 or 5 suppliers in every single category. And then overnight, the world changed. But we had engagement with our suppliers because we've been talking to them for 9 months leading up to that. So that would be the second biggest beneficiary. I think the places -- and -- but in saying all that, I would say it's really early innings around the long-term benefit of IRX. And the reason for that is that there's about 6,000 people a week who participate in these 300 sessions around the world. And what we're basically teaching them is set a target that you're looking at 100 days. What are the 3 or 4 things you can measure that will predictively let you know whether on a weekly basis, you're likely to achieve that goal or not. And they're never perfect. And so there's this target setting, react, countermeasure, problem-solving mentality that's happening. And I think the benefit, Nigel, to directly answer your question, will come in some of the functional areas, like, for example, we're using IRX on our DE&I initiative. And I think Vicente has regular chats with a lot of CEOs, ESG as well. And they all -- everybody -- nobody is short of a plan or a want to around what are you going to do in DE&I or ESG. But then a lot of them struggle with so what do we do now? How do we execute? I mean it's simple to the point of being blatantly offensive, but we know what to do. We're going to take an IDM and we're going to get the stakeholders and we're just going to -- so I think the functional areas and maybe some things that you wouldn't normally think about will be the biggest beneficiaries as this mentality spreads.

And then obviously, bringing together the GDI and IR industrial portfolios like hand in glove really, talk about the revenue synergies. I'm not sure you've ever quantified what those have been so far, but maybe just -- are you now in a position where you can actually quantify, we expect the run rate revenue synergies to be from that integration?

So Nigel, we decided never to quantify that externally and not to kind of comment externally because I mean we think that, as you said, I mean this came in, in a perfect like a glove, and it was so strategic in nature that we viewed it as just a great opportunity for us to really accelerate our market share when the combined company. So I think he has been very exciting to see the outcome and the gains as we look at it, has been on both brands, Gardner Denver and Ingersoll Rand. So I think it's been just a lot of good, solid momentum on both. And we're very excited. I mean, we have tremendous portfolio now in the compressor business, on the blower business. There were some technologies that Ingersoll Rand had that we knew they had, but we didn't know how good they were. So for example, filtration systems or even a blower system that with the Hibon brand that now is highly complementary to a lot of the blower technology that we have on the Gardner Denver portfolio. So there were so many good things that we are excited and still many more to come.

So Mike, you commented that China gold mine. I know it's different context, but we're not hearing gold mine in China too often in this conference right now. So I'm just wondering can you give us a pulse check in terms of what you're seeing right now in real time in China, obviously, the lockdowns, how that's progressing? And then how do you see the recovery part in the second half of the year?

So I mean, China, clearly, as we were going into the earnings call, there was a beginning or kind of in the middle of the lockdowns. We get at that time, approval for our facilities to start opening up and slowly trickling the employee base back into the locations. Clearly, we're leveraging IRX on some of the IDM on the KPIs on a daily basis to track how we're ramping the production of the facilities and how we're ramping the entire supply chain. And we get a daily report and daily conversation with the teams on how that is going. I think it's going better than what we expected, to be honest. And it's, I would say, thanks to the team, how they're handling the situation and how they're rapidly moving. In terms of order momentum and kind of what we talk about these marketing qualified leads, we still see fairly good stability. And the good news is that a lot of our team members in China are talking about how there's a lot of conversation of investments that are about to happen here in the second half from the government on certain unique end markets and industries and how we're positioning ourselves to really capture that. So I think it's going well. I mean, obviously, it's also thanks to our teams and this ownership mindset that we have in our company that employees are raising their hands and wanting to go voluntarily to stay inside the facility for days or weeks, all by following the proper protocol that is required by the government in China that we're clearly doing that. But I think it's going fairly well.

And that's the -- so the Ingersoll Rand specific recovery path in terms of the production facilities, supply chain. What about the customers though? Are the customers pretty active right now in terms of their recovery path?

I'd say, I mean the best indicator is what Vicente said. So whether you want to look at it from an orders perspective or like MQLs market qualified leads, which just to put in perspective, that's a qualified lead that probably is a precursor to orders by around 8 weeks. And we've seen relative stability. Yes, obviously, when the first lockdown does have maybe a little bit of a blip, but that was just that just a blip, and I think it's been back to a stable state. So nothing that's been really discernible there. And as Vicente said now, as our facilities continue to ramp back up here. And just to put it in perspective, in our ITS business, one major facility, but out on the outskirts of Shanghai so still operational, but you're only as operational as your supply chain can allow you to be operational, that's been ramping. And then 3 plus weeks ago, right around the time of our earnings call our aftermarket distribution center that is within Shanghai got the green light to open back up, and now that's been ramping on a weekly basis. So we actually track it actually on a daily basis. We actually we wake up every day to a daily e-mail. That actually tracks I'd say, 2 big leading indicators fulfillment, which is really the health of our operations and what they're doing and then the supply chain or the suppliers as well. So we're tracking both of them on a daily KPI and weekly. And I'd say, over the last, let's say, 2 weeks, they've actually been able to be at or above the internally set targets thus far. So again, it continues to ramp as well as could be expected.

So I think -- I don't think you ever really defined the impact of China, but it seems like maybe a 4-point impact to 2Q on revenues. Is that about it?

So I'll maybe answer it the other way around here. Probably the best way to describe it here is that in Q1 by, let's just say, most maybe -- maybe your measure, we probably exceeded Q1 by around $20-ish million in the bottom line. And what we've said here is we're keeping the first half largely intact with our original guidance. So you can kind of think that Q1 about a $20 million beat. Q2, we prudently kind of said, hey, we're going to obviously probably see an equal and offsetting impact around $20 million. That's how we kept Q1 -- or sorry, first half intact, but then we did raise guidance by $10 million in totality, which is coming from the second half of the year. So that's probably the best way to think about it is China, the only thing in there? No, we have some Russia-Ukraine type dynamics, but China was probably the biggest factor there. So that's probably the other way around to think about it.

That's actually a much better way think about it. I'll take one more question, and then I'll throw it up to the room. Sticking with China, it seems that China was one of the markets where you maybe had a lot of market share opportunities. And certainly feels like you're outperforming your big competitor in China. And I'm just -- I just saw some headlines from them today that they're a bit more cautious on China in the second half of the year. So it feels like you continue to perform them. Is that fair? And what do you see as the share opportunity in China?

Yes. I mean we're very excited with what the teams are executing in China. And I will say that think about that as not only a purely compressor business, but also a blower business and a vacuum business. And we had, as Mike said, with Gardner Denver, a great product portfolio, but a channel that -- and a go-to-market that it was not, I'd say, fully mature and now add in a great brand with a great leader and a great team that came from the legacy Ingersoll Rand team and leveraging that commercial footprint and the scale that they had and now being able to relaunch the Gardner Denver portfolio and relaunch the Gardner Denver blowers and the vacuums. It is really seeing some very good momentum. And clearly, the compressor side, I think the team in China from an oil-free perspective is doing just a phenomenal job and one that we think that they have become now the market leader, as they say. So I think it's just it's a very good kind of self-help initiative from the team to be able to just completely leverage all the technologies that we have to the best outcome.

So becoming a market leader in all 3 in China, has that elicited a response from your good friends in Sweden?

Well, we go based on what we see in the market.

Okay. Any questions? There should be a microphone to come around. So please put your hand in the air. No help for me here. That's good. Switching to Europe. There's a big debate right now in Europe, the war in Ukraine and this inflationary shock waves that's coming through, which actually might have some benefits for you as well down the road, we'll touch on that in a second. But any change in posture in -- from the European customer base?

I think what we see is, again, it speaks to a lot of these kind of self-help commercial initiatives that we have, demand generation being one of them. And how we have leveraged the fact that energy prices are so high, that lead to a much quicker payback on investments in things like compressors. I mean compressors, if you remember, is roughly 30% of the energy consumption at a typical manufacturing facility. So again, it's high consumption of energy. And new technologies can reduce that by anywhere between 15% to 20%. So we're leveraging this digital marketing engine that we have where we're generating thousands of marketing qualified leads to be able to educate customers on how we can help them with the energy efficiency that lead to Scope 1 and Scope 2 improvements. And a great example of that, Nigel, is that last week, we were talking to a very key critical customer in England, in the U.K. And they had 15, 16 compressors in 1 facility, so a very high usage of air compressing system. And we came in with a recommendation of changing that with a new technology called centrifugal technology, and the payback was less than 1 year. And not only a payback of less than 1 year, but with the energy and electricity reduction, we were able to articulate a 1 million tons of CO2 reduction for the customer. So again, we're simulating that to the customer how they think, which is they want payback and they want to be able to materialize that as to how can it help impact the environment. So again, we're helping them become an enabler of their Scope 1 and Scope 2 targets that they have to as well.

Of course, in Europe, there's carbon trading, right? So CO2 emissions are very -- an important part of the payback math, in the U.S., it is a bit more bit more conceptual. That's great. And just run us through the NG audit process. So you go to the customer, you make a proposal, they'll come back to yes or no, you'll go in. I mean, I'm not [ going to think it was an ] easy math, but maybe just take us through that.

Well, I mean, I think it's two-pronged. So the first is that we have this digital marketing machine that's generating the interest. So think about a call to action. We could help you. We know you're overwhelmed. We know you have problems to solve, let us come provide a service. That would be one prong. The second prong would be existing customers, which have the same problems that we're talking about. So think about a small team or an individual that is really an expert on efficiency around the way a factory works, a compressor room, the air, so on and so forth. Going in there could be a day, it could be a week depending on the scale. And these are, I would say, more scientists than they are sales people. So they're really -- they're walking in with a problem statement, and they're figuring out the best solution to try and provide that, give that feedback. And again, to your point, it's either -- and it's not really a yes or no. It's either okay or not now, but we'll let you know because there's such benefit on a machine, let's say, 3, 5, 6, 7 years old to the new technology from us or from anybody. So consultive service to start the significant lead generation and commercial opportunity, which, in my experience, that consultative way -- the consulted foot in is the best foot in, which then leads to a lot of momentum and a lot of goodness.

You said 3 to 7 years. I think an air compressor has been maybe 15 to 20 years of use of life. So are we talking about replacing, upgrading compressors that are...

It could be a variety of solutions. I mean it's not a one-size-fits-all. About that 3-year to 5-year mark, you're getting in the range where you need to do some significant -- depending on your preventative maintenance to that state. But at the 5-year mark, you're usually in the overhaul or it needs a significant attention. But again, like the watch you have on versus the watch of 3 years ago, right? I mean it's just -- the technology is getting better every day. So if a machine is, I would say, 5 years or greater, the opportunity for value add is significant. But it doesn't always mean a significant 16 compressor swap out. It could be a lot of variety in the solutions, which if we can get in there and we can get in there with a care agreement, which is kind of a pay for preventative maintenance as you go, we win. We win because we're going to keep that machine up. We're almost guaranteed to get the replacement when it comes. And the customers under care agreements are, by far and away, the most satisfied customers we have.

That's great. Just touching on the U.S. quickly, and I do want to touch on margins as well. We get a lot of questions on the second half margin ramp. So I'm sure you're prepared for that. But U.S. manufacturing, reshoring, whatever you want to call it, are we seeing a pipeline of opportunities on capacity expansions in the U.S. from your approach?

We are. Yes. We're -- I think we open -- I mean, I think it's clearly knowledge in the market about the semiconductor kind of reshoring that is happening, call it reshoring or capacity expansion, but that is real. And our large air compressor, air separation devices, products and technology is basically what is kind of highly used in that. So we are a participant on that. And we definitely get a lot of feedback from our channel as well as direct sales guys. Basically, we're seeing a lot of customers that they are expanding their capacity locally because they want to reshore their supply chain. So whether it is die casting facilities in the U.S. or anything that they want to really accelerate. They need compressed air in order to be operative. And the only way they can actually expand is by investing in that -- those compressors. So yes, we're definitely seeing a lot of that happening.

This is very real for me.

It is real. I mean it's also in our case to as well, right? I mean we're we'll be talking about relocalizing our supply chain to be more co-centric with our factories, which as you know we have the strategy of being in the region for the region.

That's right. Moving on to margins, I think when it comes to the framework, I think we understand the bridge for the PST margins with the dynamic on the M&A dilution. The question we get a lot are in the second half, the ITS sequential margin expansion. So just maybe just one for the benefit of the room, just run through the kind of the moving pieces for that first half and the second half.

Yes. I think there are a couple of components of it and probably 3 or 4 major areas. The first one, which obviously everyone probably is familiar with is the price cost equation. When we -- just to kind of backtrack here a little bit, when we exited 2021 fourth quarter, we probably had the tightest price cost spread. So we were still price cost, dollar positive, but not necessarily on the margin side. So it's still margin decretive but price cost positive. And what we said is, as we came into the year, we expected Q1 to look fairly comparable and then the spread to kind of get better as we move forward. And then obviously, through Q1, again, price cost positive dollars, but everyone said with the Russia, Ukraine, continued supply chain disruptions, it's probably fair to say some of that moved a little bit forward into Q2. I think Q2 will look frankly much like Q1 in that respect. In terms of still price cost positive on the dollar side, but not necessarily on the margin side of the equation. But what we've said here as we move into the back half of the year, a couple of things. One, as you would expect, with increased inflationary pressures that we've seen through the first half of the year, we've taken the requisite pricing actions that we feel are appropriate across the entire portfolio, inclusive of ITS, I think through Q1 into the beginning parts of Q2. But given the size of the backlog we have, you're not going to feel that pricing impact until the second half of the year. And then in terms of the guidance, we are not banking on or counting on any sort of deflation going into the back half of the year. Our expectation was that inflation would kind of move sideways into the back half of the year. And as we move now through the first, let's almost call it, 2 months of second quarter, I think that's largely what we're seeing. Yes, do we see the periodic this one isolated supplier? Sure. But I think by and large, we've seen relative stability at least on the inflationary side of the equation, whether that be direct material or the logistics side. I'd say on the labor side, that's it's been there, but it's not any different than, frankly, what our expectations were coming into the year. So I think price cost, the spread, we inherently expect to get better as we move into the back half of the year. And the beauty on that one is we see it, frankly, in our backlog. We measure price on bookings on a weekly basis across every facet of the business. So we kind of know what's coming in and what's going into the backlog. So we see it. It's just a matter of executing on that backlog. I think the second piece of the equation, Nigel, is the synergies. We've talked about we're in the kind of the third year now of the merger-related synergies, $300 million in total, $50 million this year. And that $50 million is largely predicated on what I'll call supply chain-oriented actions, largely the I2V, the innovative value, which is really going to come through when you actually ship the products. So it's actually kind of tied to the volume side. And so as that volume shifts through, which tends to be inherently a little bit more second half weighted, you actually see more of those synergies come through. And as you would expect, more of those synergies are ITS weighted because that's where the biggest piece of the overlap between the 2 legacy companies comes from. The third piece I would point to here is inherently some of the normal seasonality that happens within the business. We talk about we have about 20% of our revenue base that is the, what I'll call, longer cycle projects. And they typically have a cadence of bookings in the first half, shipments in the second half. It's always the cadence, whether that be the typical business or the Nash/Garo or Emco/Wheaton businesses from legacy Gardner Denver. This year will be no different. We probably talk about this every year and we debate is 3Q going to be the stronger quarter than 4Q. And for whatever reason, it typically always is 4Q. This is no different. And a lot of those projects come through at a margin premium, and you see that shift through in the fourth quarter. So I think you put all of those factors together, you are going to see a lot more of that step up. And then the one other thing I'd probably just point to is a little bit of a backdrop, the comparisons on a year-over-year basis. And if you remember, in the first half of 2021, some of the revenue synergies we talked about second half of 2020, we did take some, I'll call out-of-cycle pricing actions on the legacy IR compressor portfolio. And that lent itself to some strong pricing tailwinds we carried into 2021 first half when there was really no dialogue about inflation. So if you remember, in the first quarter for ITS of 2021, 600 basis points of margin expansion, then another 250 basis points in Q2, and then things tightened up as the inflationary kind of pressures came a little bit more into focus. So now, obviously, as you comp on that, you have a little bit of a different dynamic first half for second half. So I'd probably put that all together, and that's probably kind of lends itself to why we do see the second half incremental as being much stronger.

Very fair answer. I'm sure you've had that question once or twice.

Maybe once or twice.

Very well prepared. We're running very, very short on time here. In fact, we're blowing the budget. But I do want to touch on M&A. You talked about the 6 LOIs at the time of the 1Q earnings. Where are we now? How does the pipeline look here? Is there any sort of large opportunities in the pipeline? And if you can just maybe touch on, I know in the 10 seconds we have left, can you just maybe touch on like is the pendulum swinging towards buybacks here to some degree?

Yes. So first of all, on the M&A, we're super excited -- we're very pleased and excited with the funnel. And like you said, and we said 6 LOIs -- exclusive LOIs and speaks to the process that we follow, which is one that if you think about over the past 2 years, 20 small bolt-on acquisitions, 90% of them sole sourced. So we went in after doing a market segmentation and really assessing the companies, which ones were the ones that we wanted to go out and acquire. The funnel continues to be the same way. A lot of bolt-on in nature. At this point in time, no multibillion-dollar larger deals. We see the market as continuing to do a lot of these kind of bolt-on great technologies, great acquisitions that drive overgrowth and over good momentum in our portfolio and elevate the bar of the total quality of our portfolio of Ingersoll Rand. And in terms of buybacks, no, I mean, it's not that we were swinging the peddle. I mean it's one that we have a $750 million authorization. We said that we were going to do that $250 million per year. But clearly, as we saw some of these locations, we accelerated some of the buybacks now. So in the first quarter, you saw that we did $100 million and some of that kind of continue to happen here in the second quarter.

Right. Okay. Well, thank you very much, Vicente. That's fantastic. Nick and Mike, thank you very much.

Thank you, Nigel.

Thank you.

Thank you.