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

Great. Thanks, everyone, for being here. It's my pleasure to have up next Ingersoll Rand, Vicente Reynal, Chief Executive Officer and Chairman; Vik Kini, CFO; and Mike Weatherred, sort of IRX Guru. So thanks to the three of you for being here.

Maybe first off, Vicente, I think there's a lot of focus from investors since the Capital Markets Day on that recurring revenue aspect, a very large increase in the sales trend targeted there. So maybe help us understand kind of how much of that is about the care program, specifically? What are the elements of that recurring revenue, the drivers sort of stop in that, please?

Yes. So let me -- to permit up to start, at Investor Day in November, we said that today, we do about $200 million of really recurring revenue. And this is basically revenue that is signed on a contract that we get paid from the customer every month, regardless of utilization or not of the product. So it's really, really, really recurring. It's almost like software recurring revenue streams. And between now and 2027, we expect that to grow to about $1 billion. So we put a bold statement, bold, aggressive, but one that you can imagine that we have been testing for quite some time in order to come up with a target and with that approach. And let me also step back to as well and say that when you look at Ingersoll Rand, roughly 36% of our total revenue is actually aftermarket in nature, which some companies call that also recurring, but we like to call real recurring when you get every single month regardless of the usage. And when you think about going from $200 million to about $1 billion, couple of things to segment that and kind of unpack it. Today, the majority of that $200 million really happens mostly in North America. So when you think about expanding that through our global commercial footprint, that is definitely one avenue on how we're going to be able to achieve some of that growth. The second level of segmentation is in terms of a lot of the offerings that we're adding to this care program, care today offers 3 different solutions. In addition to that, last year, we made an acquisition with a company called Ecoplant that will give another offering of solutions really around energy savings and for customers to be able to have a dashboard that shows how much we're able to fine-tune that compressor and generate energy-savings consumption. And then there's another offering on top of that, that -- of a company that we also acquired, that basically makes air quality testing. So we clearly produce compressed air for very critical applications, in many cases, food, pharma, beverage, where you have to make sure that the air is silicon-free and highest purity of air that is going through some processes. And that will be also another added solution. So think about it that it's an expansion from a regional perspective, an expansion from new product innovation or new service solution innovation. And the third large bucket is basically -- taking that today is basically pretty much 100% compressor-based. And when you take that into a blower or some of the PST product solutions that we have, that will also add that incremental revenue. So we view it on the 3-dimensional approach.

Got it. And when you think about the sort of profitability of that business, is there kind of heavy reinvestment now and then later on, you get economies of scale? How should we think about the margin profile of that?

Yes. So today, I mean, that $200 million is roughly above 60% gross margin. And when you think about scaling that, it's really leveraging our service technician footprint that we have. And as we continue to connect a lot more machines, we increase efficiency. So it's not a linear correlation. I mean we will [ probably ] get plenty good economies of scale. So again, we like to say that it's, of course, like gross margins, but at the same time with a good EBITDA.

How important is that, if you talked to us about the linkage of this to the IIoT product push, and how many of your products out there in the field that are IIoT enabled, for example? And how have you seen the utilization of that capability change on the customer side? So I guess the more they use that ability, the easier it is for you to get your recurring revenue [ arc ]? How are you trying to push the customer to use that capability?

Yes. So right now, I can tell you that -- I mean, I'll say the majority of products that we're shipping today on the compressor devices are already digitally-enabled. So they come in already with the gateway through a GSM network, and we're able to see data and is then educating the customer on how we can help them operate that device better by being able to offer some of these solutions. So I think it's all about customer education and the more customers learn. And they learn a lot by the demand-generation activities that we do. We have digital marketing. We provide a lot of education to our customers. And I think that's the way that we continue to drive that acceleration of penetration.

Got it. And then when we look at the kind of near-term demand environment, is it surprising for many people that the compressors, vacuums, blowers, that piece seems to be sort of [ skirting ] or surviving the broader short-cycle downturn? I guess sort of any thoughts around why -- what are the main two or three things that are driving that?

I would say, in the -- I mean a couple of years ago, we started taking a lot about the reshoring and nearshoring, if you remember. And we still see a continuation of that. That hasn't really stopped at all. We see it whether it is an extension of whether the [ chips ] producing facilities opening and -- or even we have -- one of our now vendors is basically moving their product from China to Mexico to [ B&B ] closer. So we see a lot of continuation of reshoring that is happening. That's definitely number one. I think the second and big important factor is this energy efficiency. And we saw back when prices of gas were pretty high in Europe, and I think that level of education really start to bringing up awareness of what we have been saying. A lot that compressors consume roughly [ 30% ] of the energy, on average, of a typical manufacturing facility, and we can actually save 15%, 20% that creates great payback, which kind of brings to that third point, which is we sell -- our commercial team, they sell based on total cost of [ ownership ] with a good ROI. And we know that if we show customers that we are high on the list on the CapEx requirement because we can generate great ROI, that will be able to put [ us at priority ].

Got it. And then sort of within that context, I guess, you've got sort of 1%, 2% volume growth top line guide for this year. So why -- I guess sort of -- yes, in the context of those drivers, that number doesn't seem particularly aggressive. So I guess there's some offset from the non-compressor parts of the portfolio, clearly, maybe some conservatism on the [ compressor ] piece itself. I think you're starting the year tougher in Asia. Any kind of -- any other factors behind why that volume guide sits pretty low?

Yes. Sure, I'll take that one. So I think you hit upon a couple of points here. So you're absolutely right. As we enter the year, we do face some pretty strong comps from a prior-year perspective, where you were seeing double-digit growth in many areas of the portfolio. So obviously, that's kind of one factor. In terms of -- to build upon Vicente's point here, we do face some headwinds in certain areas as we enter the year. Probably the two most notable areas are China, specifically. The Asia Pacific region, about 19% of our overall revenue, of which the biggest concentration, 15%, is China. China obviously is a tough market right now. I think our perspective is we're not immune to that market and as such -- but we do expect to be able to outgrow the underlying pace of growth in China, but albeit, obviously, a much more a market that's placing more headwinds now than they have been, historically. And then similarly, on the PST side of the equation, similar statements on the life sciences side, 25% of our revenue base is on the life science side of the equation. It's been pretty well-known kind of what's going on in that space. And I think we will still continue to kind of digest some of those comps as we move to the first half of the year. So if you put that all together, to your point, 3% overall organic guide, 2% price, 1% volume, our expectation is that the growth equation gets nominally better, so the second half of the year versus the first half of the year. Interestingly enough, two factors. One, I'd say, the phasing from a year-over-year perspective in terms of revenue and earnings delivery first half or second half is remarkably similar to what you've seen in [ years ] past. And we would also say that we think the guide is prudent, and that also leaves hopefully some opportunity if there's some organic volume outperformance really more in the back half of the year. But again, we're going to continue to pulse the environment and see kind of how we exit the first half of the year.

And when you look at some of the more challenged market exposures, maybe within Industrial, whether Power Tools and [ winches ] and PST at life sciences, is the assumption that those are sort of down in the first half, up in the second half, it's sort of a gradual recovery? Is that the way to think about those pieces or...

Yes. The way I'd probably characterize it is it's -- our Q1 guide, for example, we said we expect to be flat. And the way I'd probably characterize that is often the Americas, relatively stable in Europe, most headwinds is based in China and life sciences, as you said. I think the Power Tool, interestingly enough, plays globally. And I would say, their regional trends are not too dissimilar, frankly, from what I just said. And then in the back half of the year, again, this is not an expectation that you get to the first half and all of a sudden, there's some big hockey stick up for either China or on the life sciences. We just think that, one, the comps get a little bit more reasonable in the back half, and we'd expect to see just some gradual nominal sequential improvement. But again, nothing that we would consider to be a meaningful uptick. Of course, if that happens, fantastic, we'll be ready to execute, but [indiscernible] embedded in the guidance.

And then within PST, it feels like you, [ Reynal ], always talks about the life sciences portion. There's the other 75% of that segment. How should -- what should you expect that for, kind of through cycle growth, some drivers around in energy? Which are the pieces of PST outside of life sciences are you most kind of excited about the growth rate?

Yes. And I think PST, you're absolutely right, Julian. I mean 75% of our business in PST, when you think about it, has been growing positively on orders and revenue in [ 11 ] out of the past 4 quarters. And when you think about PMIs being under 50 and still being able to deliver that, outpacing the growth, is actually true to the activities that we can do in terms of leveraging demand generation in some of our products and applying them into better end markets, a great [ couple ] there. On the earnings call, we spoke about the piston pumps from ARO, which is a pretty legacy business that we have taken and reapply that technology into double take sales for solar panels. And now, basically, we're kind of the core provider for some of these production facilities. So I think it speaks volumes to the ability to be able to take technologies that have been not leveraging these [ synergies ] or revenue growth environment and being able to utilize that. Hydrogen is definitely another possibility there. I mean, we have some [indiscernible] compression devices that are being talked -- there's a lot of talks about leveraging that or how do you compress some of the hydrogen into [indiscernible] gas to be able to create much better, cleaner power generation and so on. So there's just multiple of potential revenues here, where we can see ways of continuing to drive growth environment for the PST segment.

And food and beverage is another pretty big vertical [indiscernible] the company-wide. Demand, I guess, depending on who you talk [ it through, shows ] a mix recently in food and bev after a [indiscernible] uptick. Just your assessment and I realized it depends if you [ create a ] can shaping versus [indiscernible] piece.

Yes, that's right. I think it depends on -- I mean, for us, I can tell you that we're working with a very large glass company that makes [ basically ], bottles for the beverage industry. And they want to invest in their production because of energy efficiencies. If you think about food and beverage, they're high consumers of air. And we do -- can actually go in and really leverage the technologies that we have to save on that, it's impressive. A great example, in the U.K., a beverage company that we replaced, I think, about 11 old compressors with one new oil-free centrifugal compressor, and we were able to generate upwards of $1 million of [ revenue ].

And if you think about the sort of installed base, to your point, a lot of customers have a very old, inefficient installed base. Maybe help us understand kind of how do you go about driving on demand [ multi-sales ] installed base. There is some recurring element, which is a part from earlier, or a wholesale replacement? Maybe go into some of that demand generation point on the installed base?

Yes, yes. So I think that regardless of the [ current ] installed base, meaning, if it's a part of the market that's going well or if it's a part of the market that may be slowing or even a little bit of stale, then that's going to drive a lot of the [ message ]. So if the market -- so I think sometimes [indiscernible] in companies during sales cycle, [Technical Difficulty] if you can get to the top of the list from investment. So that's -- sort of like there's bottling, some of these pockets where it doesn't necessarily mean that part of the industry is ramping from an end use. But if we can get to the right person with the right message around an efficient use of capital even during a stop cycle, then we can awaken down to that. And we've got to the [Technical Difficulty], that's a little bit [indiscernible] more forward. But I think the goodness of the question [indiscernible] talent in demand generation is to make sure that we're talking to the right person at the right time during the customer journey, which is easy to talk about and really hard to do. And there's some of the goodness in the large scale. We have about 170 people that work on this 5 days a week every day, and the insight into that 5 million contract customer database, kind of slicing it, understanding where people are and giving them the right customers to get the right [ job ].

And in terms of, I guess, switching to maybe product types for a second, within PST, there's good breadth on the positive displacement technology. Kind of how much more [indiscernible] is there to go on then you have most of those [indiscernible] now?

So we still believe that we have more and more positive displacement technologies. But I also define it as -- if you remember in the Investor Day, when Liz was talking about the M&A, how we go from the core, which is basically the pumps, it could be blower, vaccum, positive displacement pumps, and we go into the adjacent -- in the adjacency. A great example of that I can give you, from a PST perspective, is those are [indiscernible] in, call it, in hydroponics and how we acquired core [indiscernible] electric. And then we acquired a control device that basically controls that ecosystem. So basically, then we move into controller and [Technical Difficulty] revenue. And in that case, actually, there's some SaaS revenue that we're actually generating, too, as well. And then we like to what we call [indiscernible], which is in, okay, now, not only [ we build ] the pump, we control the pump, but then what else could we do next to it? Call it, filtration, for example, other things that could be attached to that kind of ecosystem that is just not purely [ to pump ] but a total solution. So we view it from going deeper on to the technology, but also going into these adjacencies that are kind of pretty close to that [ pump system ].

If you think about, as you mentioned a couple of times, sort of recurring aspect as, [ currently ], there [ hasn't ] been a lot of M&A capital deployed by Ingersoll Rand in those areas. [indiscernible] organically, inorganically, it probably is as well. So just perspectives around that, and I don't think it's hard to exercise valuation discipline with SaaS.

That's right. Yes. We don't believe in -- at least not at this point in time that it's not that we need to acquire software to be able to generate this recurring revenue at all. We -- I think the beauty of the model that we're creating here is that we have this $200 million right now, is that we can really generate recurring revenue, work with our core solutions that does not require or [ wanting ] to acquire any type of software. It's more about doing more of what we are doing today, which is keep connecting a lot of these [indiscernible], really utilization of these, call it today, artificial intelligence, but I mean it's really machine learning and the ability to be able to understand what the machine is telling you on how do you optimize that process. And that is kind of core to a lot of the things that we have really in our powerhouse. I mean, we have an amazing team, updated analysts and even software engineers, basically, that's what they do every day. They look into those machines that are connected, more and more creating the programming code that is necessary to continue to optimize the systems.

I think on the M&A point, you mentioned on the last call, perhaps the appetite to do maybe larger acquisitions, what should investors expect in terms of, I guess, one, does larger acquisitions equal higher valuation that you have to pay? And then two, particularly given where the valuation of Ingersoll Rand itself is now, just using equity start to look for advertising evaluation of where interest rates are?

Yes. I was saying, Julian, so on the earnings call, we said that clearly, we have our current M&A portal that is pretty active in acquisitions on their LOI. All those [ 10 ], they look like bolt-on, but that [ 10 ] is actually higher the number of LOIs that we have, since we have been thinking about LOI. So it just tells you about the level of activity that we have and that engine that is [ in support ]. We said also on the sidelines to that portal, there's a couple of billion dollar purchase price companies that we have been looking at. We also -- I also mentioned -- I think it was to you in your question that how do we actually got away from one of those billion purchase price, it obviously speaks to the discipline that we continue to have. And the way we view it is that we were very disciplined with [Technical Difficulty]. And we think that in this case, it's painful because it was a position that we have been [ competing ] for 5 years. [Technical Difficulty] point that it's what we felt we had to [ end ], and then we had to walk away. Obviously, with [Technical Difficulty] $1 billion purchase right company, we think we will continue to be disciplined in what we have done. You've seen that we have kind of that mid-single -- sorry, in some high-teens multiple with a good way on how we take that down further pretty quickly. And -- so we think that, that [ one ] will continue to happen even on those [indiscernible].

Got it. Sort of around [indiscernible] you need equity issue. I mean [indiscernible] larger, what's the appetite to use? Equity or that's very unlikely?

Yes. I think I guess that speaking to [indiscernible] that in our mind would [Technical Difficulty ]. But that being said, we will look at -- we, last year, officially became investment grade, well on our path there. We still have a little bit of the debt portfolio to kind of fully transfer to investment-grade structure. And as such, we will be very confident on leverage levels [Technical Difficulty] investment-grade profile on a go-forward basis. It has something larger in nature. Obviously, we'll look at the returns, we'll look at the math, but we're also very confident we're leveraged in that nature. So again, it's part of the equation, but I guess the answer right now is for the acquisitions and the size that we've been quite comfortable without [Technical Difficulty] in that direction.

Got it. And in terms of kind of health care as an area. [indiscernible] it more broadly [indiscernible] running it company. I think there's been some people who were sort of skeptical as to how [indiscernible] industrial companies are managing health care businesses. There's been -- a lot of them have been sort of jettisoned in the last few years. So maybe kind of talk about why you think for Ingersoll, health care makes sense as a vertical in terms of reinvestment. I don't know if there's anything IRX-related that's different to health care versus other vertical?

Yes, yes, great. I will go into further technology and maybe IRX, but I mean, when you think about the technologies that we have across our portfolio of Ingersoll Rand, they can easily go from one end market to the other. If you think about peristaltic pump technology, I mean, that was born in basically kind of core, core industrial market. It is basically what is heavily used in bioprocessing, pharma end market. So that's just one example of how technology can actually cross-pollinate from the industrial market into the health care. And then what -- I mean, and you kind of think about [Technical Difficulty] something compressors, vacuums, blowers, all of those can be applicable from one place to the other, even including a lot of the air treatment technology that we have today, where you can actually now create oxygen at point of use for many of these industries. So I think it's just a matter of continuing. For us, it is how do we continue to create a company that has a lot of focus on these high-growth sustainable end markets, so our ability to be less cyclical. And you saw we divested [ Club Car ], we divested our High Pressure business to remove the cyclicality. And I think last 2023 was a great year, where we were able to demonstrate that even in PMIs where we were in [ contraction ], we were able to outpace and grow and achieve an organic growth of 10%. And on top of that, it's expected [ 6% ] from an inorganic perspective, 16% in the market that you could argue it was a stressed out from an industrial perspective. We also think that the discipline and the approach of exactly IRX is we can make great industrial companies to play a very good in marketplace of health care.

I think I know we're almost out of time, but I think that's the key, though. I think we can take the boiler plate of an ownership culture, a true owners, all 16,000 employees are owners. We can use IRX and its [ offensive ] simplicity. But I think we have to have -- I think where some industrial companies may mess up, it is just thinking you just move over into that next vertical without that customer [ insight ]. So I think for us to be successful and sustain the market, I think we just have to be losing a lot of sleep about learning more about that customer, and that could mean attracting talent or getting that, do an acquisition. But we have to know that customer and what's different about them, saying, versus a bottling factory because it's not the same. But I think the foundational goodness of good boilers like standard work is transportable.

Maybe away from end markets with M&A, but more the sort of profile of potential targets, your own margins, particularly in ITS, have gone up very sharply in the last 5 years. [ That ] make kind of a high bar when you're creating the targets that you're sort of wary of buying something now that is very dilutive to margin. Whereas 5 years ago, it wouldn't have been that dilutive as your own margins were much lower.

Yes. I would say, with that, we always want to see [ transactions ] that we can see to get to that above 30% EBITDA margin. It could be the chance that maybe they're not there yet. I mean that is what happened with the company called [indiscernible], when we acquire at the end of 2021, early 2022, where it was basically mid-teens EBITDA margin. And here -- last year, definition pretty much goes through the PST average, pretty high 20s EBITDA margin. So as you can see that by year 3, you definitely get that through [Technical Difficulty] EBITDA margin. Now do we like companies as well when they come in at 30% up and do we have a [Technical Difficulty]? Yes, definitely. So I think it's just a matter of understanding the core technology that we want to acquire or [Technical Difficulty] we are getting and penetrate. That, sometimes, will drive the percentage of EBITDA that you can get. We are not afraid of acquiring a company that are below our [ fleet ] average because as long as we can see that value proposition, then we can get them. The only big piece I would say to us well is that when we look at M&A, we look for premium brand, premium brand that are well known in the market, that we know that they're well recognized because that can generate great [ value ].

Perfect. I think we're almost out of time. [ Any ] audience questions?

[indiscernible].

Yes, I'll take that one. If you didn't hear the question, the question was we've done 42 bolt-on acquisitions since the merger. What is the pace of growth that we're seeing there? I think it's a great question because I think it actually goes back to maybe the first question, Julian, that you asked about some of the growth drivers. And the facts is you see us report acquisitions that [ are ] organic for the first [ 12 ] months and then 1/3 kind of [Technical Difficulty]. But when you own 42 of them, and now those are kind of tucked into the kind of core portfolio, that's actually a nice fuel, I'd say, kind of tailwind that's kind of under the surface of driving kind of outpaced growth in totality. In isolation, each of these are quite small. When you add them together here, there could be a nice little tailwind on the growth side. So to answer your question, obviously, there's a variety in terms of all different assets. I would say, they, by and large, are growing in line, in certain cases, slightly better than the overall portfolio, which has been doing quite nicely. And a lot of what we're seeing there are opportunities where the vast majority of the deals we've done have been, first of all, the [ 90% ] of them in [ sole forced ]. But characteristic is great technology, private-, family-owned. And then we're able to take that technology, plug it into the overall enterprise, drive outsized growth, but then also take that technology and probably move it through our commercial chain internationally, so where they hadn't had a presence historically. And that's been a fantastic opportunity. In fact, in our Investor Day, we highlighted a number of those examples that have driven at least some outsized and outpaced growth over the last few years.

Great. I think we have to go now to the audience response survey. So the first question is your sort of current ownership of Ingersoll. [Audio Gap] or not at all. Number 2 is around sort of current bias for the company at the moment? [Audio Gap] Very positive. Number three, just tied to sort of through-cycle earnings growth against the kind of multi-industry average. Mainly above the range. Number four, what to do with excess cash? More straightforward here than other companies, I think. On to M&A. Number five, what PE multiple should Ingersoll trade at on year 1? Generally, in the 20s. And then the last question is around what's the fundamental reason, sort of preventing someone owning more of the stock today? So, organic. Fantastic. Thanks very much, everyone.

Thank you.

Thank you.