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

All right. Good morning, everyone. We'll keep it rolling here on day 3. Thanks for joining us with the team from Ingersoll Rand. We have CEO, Vicente Reynal; CFO, Vik Kini; and then Mike Weatherred, who leads the IRX program. Looking forward to talking to everybody a lot of interesting dynamics going on in the company right now. But maybe just Vicente start us off with what you guys are seeing out there, what you're focused on and then we can take it from there?

Yes, sure. And clearly, when you say what are we seeing refers like China, Europe, in particular because I'm...

Yes. I mean the sort of deliberately open-ended yes, please.

So we, over the past 4 months, I have been to China now twice. And Europe as well and actually next week, head back to Europe as well because we like to see how things are in the ground, not just with the data. And I think what you can see is that clearly, there continues to be a lot of good pockets of growth. And that is what the team is doing. I mean, clearly, you can read the macro. But I think the winning recipe here is that how quickly can you reallocate that technology to the specific end markets. And I think that's what the teams are doing incredibly well. So if I were to think about it, I can categorize it up to three things that are working really well. One is that commercial excellence that we say, the demand generation that is creating a great ability to take technology that we had in one end market that maybe that end market is not seeing the growth and pivoting pretty quickly and applying that to that end market. And the demand generation executed through the IRX is particularly an excellent tool that is allowing us to see the 6,000 qualified leads per week where we think roughly 0.5% -- 50%of them are new accounts. So it kind of leads to the second point of taking share. So we believe that also clearly, our data shows and demonstrates that we're taking share in these locations. And when you think about our company that we're roughly this year will be $7 billion, but we play -- in revenue, but we play in a $60 billion market. There's clearly opportunities for us to continue aggressively take some market share and do it in a very profitable way as we're very focused on targeted on specific things. And that kind of comes to the third point where we saw it vividly in China and also in Europe with the teams that are taking all these acquisitions that we have done over the past 3 years, which is roughly 27 acquisitions, bolt-on acquisitions in 3 years. And many of these acquisitions have been very regionalized. So think about MD-Kinney a company that had 90% of the revenue was in the U.S. and the team in China, taking that technology, localizing that in China and then playing in China in markets that they were not playing before or taking even -- not even acquired companies, but taking the Gardner Denver compressor product that we had in China, clearly subscale-ed before the merge before the acquisition of Ingersoll Rand and now the team taking that and scaling that and Gardner Denver compressor now is roughly 5x what it was before the merge. So I think it's just the story of this self-help that we like and we see with the teams in the ground, driving it and grinding it every single day with a very robust process that Mike can talk about here clearly in terms of IRX.

Excellent. I do want to spend some time on IRX. And maybe sort of like a slight transition before we get to that point is, you guys have had a lot of self-help and kind of made your own luck in that regard. And it sounds like, okay, the ground game of Ingersoll Rand is going well. But I can't imagine your competitors are just sort of sitting around wondering why they're losing share. Is this a scale issue? Is it a kind of a corporate function issue? Obviously, it's a very long tail of small guys? Like, do you think they're taking share across the board? And is it that these folks don't have the tools or the awareness sort of try to put the other guys had on and why are they losing [indiscernible].

Great question, Josh. I would say -- think about it. I mean when we acquired a company, we acquired because of the brand and the equity that the brand has and the reputation and the history of that brand. And when you think about Gardner Denver, Ingersoll Rand even MD-Kinney I mean, these are 100-plus year old brands, highly, highly respected in the market, even most recently Roots. I mean, Roots, 1854 was founded, and so these companies are known. These brands are very well known globally. And but they have not been nurtured and they have not been enhanced with the processes that we have. And when you think about this commercial engine that we have demand generation that we have this rapid ability to, we like to describe it that we have a -- pointing the cannon to a specific end market and educating the customer of the technology that we have and very rapidly go into a transaction mode because we understand that buying cycle of that customer is pretty unique. So I think it's just, that's the uniqueness of that we have in terms of our economic growth engine. That every company that we acquire, we put them through that growth economic engine, and that gives us that ability to, yes, penetrate and understand that we have differentiated technology that offers a higher value to the customer because we save energy and we save water, and we can translate that into return on investment for the customer.

Understood. I guess if I were just kind of zoom out for historical context, I think there are some folks in the room who probably view it the same way for yourselves and maybe the market at large that this business is sort of a call on capacity utilization, right? You kind of bump up against the wall, you need to add more roof line, more capacity, bigger compressors. Something has clearly changed. Obviously, there's tightness out there in the market, but I think at other points in time, CapEx would have had a lot more sensitivity to some of the macro jitters that we've gone through. Obviously, you guys are taking share, but it's not like the market has been completely unforgiving at that time frame. What do you think has changed? Is it all the megatrend stuff like de-carb or the payback on energy efficiency that you guys are mentioned is a little bit of everything? Like maybe a few things that you would just call out to help us level set like just how much different this market has become?

Absolutely, Josh. I would say when you go back to November 2021 and we did the Investor Day and we were kind of unveiling. Obviously, we were doing it already. How we are aligning our technology towards these megatrends of -- particular trends of sustainability, digitization, and quality of life, and if I spend on the first two sustainability and the utilization, are dramatically accelerating Sustainability, clearly, we know energy and anything that can really conserve energy efficiency or water conservation and has a great payback to the customer. Customers are more pronounced to be able to do that. And so I think that is driving not only from the customer perspective, but then even on top of that, the tailwinds of what governments are doing, whether it could be IRA that is really heavily focused on RNG, renewable natural gas, again, better biomethane sustainability, hydrogen networks and things of that nature or the Green Deal in Europe as well with the hydrogen infrastructure. So, so it's kind of like a double tailwind where companies, private companies are definitely seeing that there's a benefit of going in terms of sustainability. Well, also government is really aligning that investment too as well so that it can accelerate. So that's a great tailwind. And in terms of the sustainability,- sorry, in the digitization, more and more customers want to know about their products and clearly connecting them and creating new revenue streams, it's a great opportunity for us. We're at super early stages on that, but one that we think has a long tailwind for us here to come.

Understood. And then maybe just coming back to some of the regional commentary, you mentioned that you spent a decent amount of time in China. Are there regions globally that have been a little bit more stubborn or disappointing? I think there are some other folks on stage this week, have certainly had the China [indiscernible]. I think you're well documented. A few gripes about Europe here and there. But anything from your perspective? That would stick out. I guess maybe just kind of the subpart to that we've heard a little bit more about that as supply chain is healed, we're kind of back to normal summer shutdowns in Europe, anything there that we should be cognizant of? And just in terms of the seasonality getting more normal?

Yes. I mean I think, clearly, at the micro level, economically, we see all these countries that they're slow down, whether it could be Germany or China, but it goes back to then how do we continue to outperform and it gets back to the self-help. So are there regions that are stubbornly or end markets? I mean, absolutely. I mean, you go to China and the water and wastewater for us, infrastructure. I mean, that market, we don't see that growing here for quite some time until the government infuses more funds into it. But again, electric vehicle, battery production, that is growing very well. For us, offsetting the decline in some of these other end markets. So are there sub regions and end markets that particularly showed some, so we -- absolutely. But the key for us is like how do you overcome that with be able to find these other great vectors of growth that we've been able to find.

Understood. And is there anything on the summer shutdown stuff that you guys have noticed or you'd want to call out?

I'd say we have a big business in Europe rightfully, but nothing of significance that we will say dramatically different. And, but no.

Got it. I want to pivot over to IRX obviously, central tenet of -- it gets a lot of credit for the success you've had. I think a lot of folks have kind of their operating system that they're very proud of and have leaned into. You guys have definitely had kind of more objective success with yours and maybe come out of a little bit of left field for folks -- didn't really expect that as the merger came together, and just how successful that would be? Can you explain sort of the central principles and really what you think makes it special?

Yes. And first of all, I would say it's not really special. I mean it's simple to the point of being offensive. And the way that we think about it is we want to, two things is, we want to be able to accomplish what we say we're going to do. So when Vicente says, control what you can control, we want to arm teams with a simple process in which they can go after that 5 or 6 days a week with some rigor. So that's really kind of what it is. The second thing is that we want to focus them on 100-day improvement targets. So to Vicente's point, if I'm in a part of China, and I'm a regional sales leader. And I can see that part of my economy is not as strong as I would like to be. I want to take that into consideration in a plan called headwind, but then I've got other things like maybe electric vehicles where I need to get specifically focused on that. So we're going to, we've allowed those teams to take this weekly process, line up a series of leading KPIs or key performance indicators in which how are we going to move away from the part of the market that's soft and move over to the part of the market that's not as soft or maybe there's some opportunity. So there's really that simplicity. And then the thing I think we are proud of as our employees think and act like owners, there's 440 something of those sessions that go on, on a weekly basis. So the simplicity gets made more powerful when the simplicity happens 24 hours a day, 7 days a week with the people on the street that, or the people closest to the factories or the people in finance, et cetera, it's run in all functions in all parts of the organization. So I would say, and I know this room, this group, what you guys do for a living, you see more junk and more fake operating systems in this space.

I myself [indiscernible] simple to the point of being offensive.

Which makes you an easy target for a movie set if we're not careful, right? So that's not what we're about. And we don't we really talk about, we talk about IRX is the how, not the what, the what is the people and the what is arming them with the self-help commercial economic growth engine.

And I think the employee ownership is something that does stand out as being different. Certainly something you guys referenced a lot. And I think the results probably say that this whole thinking and acting like an owner because you are one makes a lot of sense. I guess any sort of comparison or before and after? Obviously, you guys have had lives outside of Ingersoll Rand as well that didn't have that same mindset necessarily. What sort of differences does that unlock? I mean you could see the engagement, but are there sort of practical examples that people can get their arms around?

Yes. I mean, so I've been with the company for 13 years and the employee ownership model really started at the IPO of Gardner Denver, so 2017. So I was with the company well before that. I think the count -- the examples are countless, First and foremost, we've issued close to well over $250 million of equity to all of our employees through a series of all employee grants. We have an ongoing program. We're all new employees to the company, whether they're direct hired or via an acquisition, become owners in the company as well. And that $275-ish million that we've granted is close to probably well north of $550 million to $600 million in value today. So clearly, it's meaningful. And in terms of the improvements we've driven, I mean, you could point to so many things. If you go back to the Gardner Denver days when we IPO-ed, we've done a lot of great things, but we told you working capital probably an area for opportunity. We were above 30% working capital. Today, we stand below 20% working capital as an entire enterprise, even in the mid-stuff a merger and 37 bolt-on acquisitions. Everybody wakes up every single day, thinking about how they can drive improvement. And we're very transparent. One of the biggest things that comes with it is being transparent and the communication with the employee base. So quite frankly, every single quarter, we'll do earnings. We'll talk to you guys. Probably 48 to 72 hours later, will have a global town hall and we'll literally walk them through the exact same pages that we show you. And that's because, frankly, they're owners, just like you guys are, and they have invested skin in the game, but they also want to understand how can I drive improvement in organic growth, in margin expansion, in free cash flow, in pick whatever metric makes sense, but it's the same metrics that you ask us about, they're asking us about as well. So for us, we've seen tangible improvement across the board, and we think this has really been a game changer for us and one we're excited to continue.

Got it. Now some of the things are easier to measure than others, of course. And I think maybe the demand piece is the one that's a little harder. Obviously, a very dynamic environment. You can't just say like how much you outgrow in GDP but -- but how do you measure growth? And where do you see yourself having kind of the most success on those sorts of things?

Yes. So we look at all the statistics. I mean, clearly, the GDP and GDP particularly manufacturing only, they survey site too as well, PMI, IP. ISM I mean we looked at all of them. Now what we say is that those are a little bit of lagging indicators, right? I mean, because obviously, it's telling you the history of really what happened in the past. We do have a lot of good leading indicators. Leading indicators for us will be marketing qualified leads as an example, we generate that. So we're -- we always want to say that we want to see that stability of the demand generation leads continue to grow year-over-year, much higher than what we're seeing the markets are growing. We also have really great data points such as capacity utilization of our connected compressors -- bless you -- so we see manufacturing activity as well. And that gives us a very -- by end market, and that gives us the ability to then go into better end markets that we're seeing -- are seeing the better growth momentum. So when we think about outgrowing the market, we always like to say that we want to grow 100 to 200 or 300 basis points higher than those statistics that we're reviewing. And we like to say that the way we achieve that is simple formulaic in the sense that we should generate 1 to 2 points of price every year. Even in down cycles, we've proven to do that back in the GD days, we were doing it. We should be able to, with the self-help of the demand generation, get another 1 or 2 points of price. And then with all this kind of localization and product rationalization, innovation, that gives us another kind of a couple of points of growth. So yes, you can start adding up and then there's some of the offsets, which could be market declines or market corrections. But I think we always say that we have that ability, and we tell the teams, control what you can control because those three things that I just talked about, we can control it. And we can control how we take market share. We can control how we go to market and we can control how we grow so yes.

On the qualified leads, Clearly, this is something you guys have had a lot of success with. At some point, this becomes sort of a base effect where, yes, you we're out there getting them, but getting that incremental on becomes more difficult. Market is huge. So I'm not saying that it's necessarily mature yet. But how far along are we in that journey? Is there sort of a point down the road where it's hard to get that incremental? Just because you've already touched a lot of the market.

I mean I would say, I might -- we're still, we consider that we're still at the early innings. I mean, we -- I mean, this is so sophisticated process that we have. We presented to our Board constantly and we present it with our maturity metrics. But the maturity metrics that you look at it now, if we're, call it, at the -- halfway point that, maturity metric look very different. We were at the top, maybe a year from now. So it's a way to continue to evolve that for us. So we always like to say that we're going to be here that if the maturity metric that we have is 5 stages, right now, the team is thinking as to what are the next 5 and the incremental 5 stages. So it's part of that evolution that we continue to see greater and greater acceleration. Really more tools come in. I mean, people talk a lot about artificial intelligence. I mean, when you -- we don't mention that buzz word, but we like to say that internally, we've been doing that for quite some time. Because you get thousands of connecting points every single day with customers. And we're able to easily track Net Promoter Scores with the customers across buying points. We're able to track the digital footprint of customers going to our web pages, all the web pages that we have, their search engine optimized as well. So I think it's just that really maturity that we think yes, we have done a lot of great work, but plenty of more room for us to improve.

I think one area where that's been particularly obvious and maybe an uphill battle is in oil-free, Obviously, you have a pretty large incumbent competitor there that also does some good work. How do you think about what is the, is that plan of attack look different than maybe in some of the more fragmented markets? And what do you see as sort of the entitlement in share there over time? As you get further into that.

Yes. So I think oil-free is definitely, oil-free compressor is clearly a market that we always like. And one of the investment pieces for the acquisition of Ingersoll Rand was basically the acceleration of the product development that we could have in terms of the portfolio of technologies that could be easily compete against the #1 in the market. And so you have seen every quarter, we report oil-free growth. And oil-free continues to outpace the growth of the total compressors, which obviously shows that we continue to really do pretty well. I would say that oil-free is, it's a market that it grows higher than the oil lubricated, clearly, because it offers the benefit of not only sustainability, not oil. But many other benefits and technology now is at a point that you can have a higher energy efficiency in many cases as to compare to the oil lubricated. So customers are definitely asking for it. It's very difficult to enter the oil-free market for those competitors. For multiple reasons. One, the technology inside oil-free is not easy. It requires highly, highly precisioned manufacturing and engineering to be done. And the second is service networks. I mean service networks are really essential for oil-free. It's a higher level technology. Customers don't have the skill, customers want OEMs like us to be able to service those levels of technology. So I think it's just a one that we're very excited about. We continue to accelerate innovation and, but penetration for us continues to be a great winning avenue because we see, one, we can continue to take some share and also the total market continues to grow better than the oil lubricated.

And you touched on kind of my next point here on the service side. Not something that we talk about a ton, but certainly a decent part of the business and a very profitable part of the business. How should we think about things like attachment rate or sort of outgrowth opportunities there? I think there's probably in your industry, a little bit more fungibility around service, maybe not for oil-free, but for other areas, a little bit more cross-pollination. Clearly, you guys want to get more of that. How do you guys approach the market? How do you think about attachment rates there?

I thought you were looking at Vik. I was waiting for Vik's answer. No. So I think, yes, a big opportunity and clear area of focus. So Vicente and I, Monday morning were with the guy who runs the North American business and a person who's specifically focused on aftermarket. And they have said now and you'll remember from the Investor Day 2 years ago, we talked about care, and we talked about the likelihood of doubling care over a relatively short period of time. I would say their enthusiasm is probably higher than it was 2 years ago, and part of that's been because they've gotten the traction that you're talking about. So like demand generation, like some of this formulaic commercial execution, there's a maturity path to it. And I think Ingersoll Rand was clearly ahead of Gardner Denver in the aftermarket. They were about -- they had about 50% mix of their products was aftermarket, although their EBITDA was quite low. We had a lot of curiosity about that. So we've actually learned a lot from Ingersoll Rand in the last 2 years. I think we'll update the figures that you saw 2 years ago at the end of November at our next Investor Day. I think our enthusiasm for North America, which is the most mature of the market is really high. And then as other markets, that Vicente mentioned, we were in China, we were in South Korea, a separate trip a couple of 3 weeks ago. They're all coming up that maturation curve of how do we sell care? When do we sell care? What does it look like as an offering to the customers? The other thing that I would say that's happened in our industry through COVID. It was, had some momentum going into COVID. COVID definitely accelerated it, is finding people to work on these machines is not as easy as it once was. The compressor room is usually off the beaten path and there's a guy close to my age, who's been in there his whole career...

30?

48, 35. Turning wrenches. Those guys are aging out. It's a hard job, and they're not, it's not as easy to hire for, we can also go in with these care contracts and show them where maybe they don't need to hire someone. We can take that service off their hands. So this whole, as we talk about IRX, commercial formulaic execution, demand generation, they all kind of point at the aftermarket, and there's a lot of enthusiasm.

And clearly, I think the other added benefit here is that we talk a lot about this care and aftermarket and services on the compressor side. But now we're obviously launching that into blowers, vacuums, and even on the PST, where we have some ability to be able to increase the aftermarket via these service agreements that we're putting in place now.

Got it. And I think all that kind of rounds up to margin opportunity. You guys have had a lot of success there. what's the functional ceiling? I mean pricing power seems to be pretty solid. You guys have a lot of obviously productivity to keep that cost growing relative to the pricing power. You continuing the mix up. I mean, I don't know that we have a lot of kind of real-life examples of where margins go, but it doesn't seem like we've heated out yet. Where do you see us as kind of your medium target?

Yes. So I mean, 2 years ago, at the Investor Day for ITS in our -- we said we want to be in the higher 20s on the EBITDA margin percentage. And well, here we find ourselves we're effectively there. I think the simple answer to your question is we don't necessarily view there's an inherent cap on margins. That's not the way we drive the organization or the teams. If you think about the opportunity set, we've mentioned a few of them. Quality [ variance ] is a huge focus, we've shown the ability to deliver 1% to 2% net realized price year in, year out. Obviously, the last few years much higher than that. Aftermarket, we just talked about these care contracts that Mike was explaining, these are 60-ish-percent type gross margin type contracts, right? They're quite lucrative and they're a win-win for the customer as well as ours. And then you look at just a number of other factors, whether it be just the ongoing productivity-type initiatives, IQV, things for a company of our size. We are now reaching kind of the tail end of the merger-related synergies. If you remember, $300 million of merger-related synergies, when we came out of the merger, it was $250 million, we immediately raised that pretty much within a few months to $300 million. But we've always said that there's a funnel, $350 million-plus. And admittedly, there was just, there's opportunity set in there, whether it be supply chain oriented with the direct material base, whether it be some targeted footprint opportunities that admitted we just -- we necessarily had to go execute upon, but also probably wasn't the right thing to be executing on in the last few years just given the supply chain environment. So you put that all together and our view here is there's still plenty of run. We also have now done 35 -- 37 bolt-on acquisitions, and those all come with our synergy-related profiles that we should be executing on, two of the largest ones happened in here in the last year with the SPX FLOW Dryer business and the Roots transaction, which coming in below segment margin profile, but no reason those can't be a 30% EBITDA margin, and they're integrating quite well. And the other piece that's quite exciting for us is we've done this all in the last 2 years in the face of some pretty considerable inflationary headwinds, right? So as we think forward, clearly, we are, our supply chain teams, our procurement teams are pushing as hard as you can imagine, on price clawbacks and things of that nature. And our view is what that would be the upside? As we think about 2024 onwards. So we think there's a lot of levers still to be pulled and those really exist across both segments.

Understood. Vicente, I'm trying to figure out how Ingersoll Rand maybe fits into the broader CapEx ecosystem. A lot of discussion around big mega projects across a whole variety of areas, but clearly some secular demand drivers out there. From the time that we're pouring the concrete or putting a shovel in the ground, which may be in some of these cases we're close to doing when do you guys start to see the uptick? I got to imagine you maybe more like mid- to late in that process. But, is there sort of a rule of thumb that we could use if these things really start to kick off early next year?

I'd say it's mid to late, but it's really more like, I mean, our -- we have basically like a 12- to 18-month lead time sort of window. For a lot of these large projects because they require large compressors, large blowers, devices that -- they don't require reengineering, but they require that we add on maybe some subsystems type of work. So, so we get visibility based on construction data clearly. I mean our team used that as a kind of leading indicator because I mean we have a lot of databases that show a lot of these kind of construction projects. And then -- but then, yes, I mean, the order will come in more like mid- to late stage.

Understood. Then I want to spend our remaining time here on M&A. You guys have obviously had a lot of success in a lot of transactions. I get that there's market fragmentation and sort of what that opportunity presents itself in some of those core kind of rotating part type markets that you participate in? But how have you had I guess what do you use to identify what quality looks like? Even though the market is fragmented, you said there's some long-term brands out there. Clearly, someone out there is not as good, and I was wondering how with these companies that are all sort of small to medium size, how you go in and evaluate here's a gem where maybe profitability is lacking that we can bring it up versus it's just lower quality?

Yes. I'll say it first starts with, I mean, we do a lot of market segmentation and a lot of market maps to better understand what are those white spaces that we're not playing that we want to play. That's how we got Seepex and many other ones. And then we go on deep dive into technologies. Once we look at a set of technologies, then we find what is the best brand that is recognized out in the market. And those are typically the technologies that we want to have. So we look for great brand, great equity, but they might be kind of niche, maybe a number on the top quartile of kind of being able to provide that technology to many companies, even though in many cases, they're small. But then once we start looking at the financials, yes. I mean we see, the way we run every single model in terms of acquisition is that we want to be able to achieve mid-teens ROIC by year 3 and that we're going to do it with what we can control. And that basically means can we leverage price in many cases, again , great brand, great reputation, family owned. They have not done a lot of that sophistication in price. Can we improve gross margin? Clearly, we're very good with IQV, with our supply chain. So we can definitely take us out. And then also, we look at the SG&A. I mean, we know, as we always said, we have these very great vast commercial footprint, so we can take these technologies and put them through our commercial footprint network without having to really increase the cost, and in many cases, reduce the cost for these companies that we acquire. So again, those are the three variables that we look in terms of when we acquire a company and controlling what we can control to be able to be accretive to the total equation.

As you look at across the landscape, I would imagine you're executing on the stuff that's some combination of easier to execute on a willing seller, but also where some of those, that market analysis says you're the ones we want to buy first. Having had a decent amount of success in that, does that funnel of opportunity get smaller at some point? It sounds like it's not, but do you anticipate a time in the next few years where that gets more difficult just because of the base effect?

We don't think so. Again, I go back to that $7 billion revenue today, playing a $60 billion highly fragmented. A lot of the companies we have been cultivating for years, companies that, I mean, Roots, we knew about Roots back in 2016 when the transitioned from GE to Colfax. So I mean, a lot of these companies today -- we cultivated with a family for close to 5 years. So, so I think we have a really robust process of cultivation of bridging out that we know enough what we have in this pipeline that is yet not in the funnel because cultivation doesn't mean that it's going to go into the funnel. Cultivation means that we're cultivating like target 0 like we have no value to that acquisition yet. So, and we still see a lot of companies on that [ restoration ] stage.

Excellent. Well, I see we are over time. Guys, really enjoy the [indiscernible] conversation.

Thank you. Appreciate it.

Thank you for joining us.

Yes. Thank you.