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

All right. We're going to get started again. We are really excited to having Ingersoll Rand with us today. We've got basically the whole team. We've got Vicente Reynal, who is the Chairman and CEO; Vik Kini, who is the CFO; and Mike Weatherred, who is the SVP of IRX.

Maybe I'm going to start with you, Vicente. It's almost been -- well, I think it's exactly 4 years since the RMT. I think your vision was to create a premier industrial company focused on mission-critical flow creation and industrial technologies. It obviously seems like you've come a long way. But maybe talk about what's gone better than you expected? Has anything got worse than you expected? And if we're sitting here 4 years from now, what do you think will be the biggest point of change in Ingersoll Rand 4 years from now versus today?

Yes. I think, Andy, a great way to start the Q&A session. For us, I will say, for me, what has gone really well is the speed at which we have executed. In the sense that if you think about it -- in just almost 4 years, still one more week and then we celebrate the 4-year anniversary, but 4 years, and in the middle of 4 years, clearly, the pandemic, supply chain, war, I mean, you name it, we had a lot of things and a lot of issues that were thrown at us to prevent from going to a smooth integration. But you can see that not only we integrated these 2 companies, Gardner Denver and Ingersoll Rand, we also divested our cyclical assets of Club Car and the High Pressure business. And then we reinvested back and we acquired 42 companies in just about 4 years. And doing all of that while all the companies that we acquired really play in high-growth sustainable end markets. So I think we're very excited in terms of the speed at which we executed. We learned a lot on how we can leverage and utilize IRX to the fullest and to the best extent. And I think we have now created -- talking about the next 4 years, what we are very excited about is that we created a very, what we call, a doable financial profile of a company that we -- as I said on the Investor's Day in November that if I was very excited in 2016 when I took over Gardner Denver and what I envisioned that we could do, I am more than elated and excited now that we have this great platform that creates not only great top line growth, good margin expansion, and a fantastic free cash flow generation that we can reinvest back. So as we continue to the next 4 years forward, it's all about continue accelerating what we are doing today. And every day, we learn better, we know where we made mistakes and then we fix them and then we grow and do better.

Very helpful, Vicente. So you mentioned that this would be a relatively normal year for bookings. Book-to-bill over 1 in the first half, second half under 1. You also mentioned sequential improvement in Q1, and you seemed a little more positive on short-cycle markets, and you specifically called out the Americas, including Mexico and South America. So maybe you could give us more color where do you are beginning to see short-cycle improvement? Could you expand on the America's comment?

Yes, couple areas. So if you remember on the call, we talked about PST, the PST segment. I'll start with that one, where we said that the short-cycle business in the fourth quarter for PST, which we can clearly see very well, did well. I mean, mid-single-digit growth on a year-over-year and also some sequential improvement too as well. And then when we flipped the coin to also the ITS, the ITS, if you remember, Andy, back in the Gardner Denver days, we always said that the banking business, our industrial banking business in Europe plays very well with OEMs, and that we have always seen a great correlation of how the business does against PMI and some industrial production. And we saw inflecting points on that business too as well. So that gave a bit more also good confidence. And then later here a month later, we see how also PMIs actually sequentially started to improve. So I think what we see is that there's definitely clearly these PMIs have been below 50 for a long time. Clearly, we -- for 18 months or so, we have outperformed that. It just shows you that we are going after end markets that are basically nonindustrial in nature. I mean, high-growth sustainable end markets. And we're taking advantage of a lot of these macro growth secular trends that are happening, like reshoring anything around water conservation or energy conservation too as well. So I think the good news here is that you can see that we can pivot very quickly from our technologies to end markets that are seeing the good pockets of growth. And while at the same time, did phenomenally well last year at 10% organic growth and 6% inorganic. And as we start seeing the inflection of this kind of short cycle as per what we're seeing kind of early on in these PMIs, that will be even better.

So next time I'm going to come to you and start predicting PMIs?

Yes.

Is the industrial vacuum business continuing to inflect, would you say?

Yes.

Okay. And then, since we are taking about regions, maybe talk about what you're doing in China to outpace the market. I know you said bookings were down mid-single digits in Q4, but you also said your China teams are more excited about '24 than '23. So do your teams think you could grow in China in '24? And what markets are they looking to most for growth?

Yes, Andy, so we were in China the third week in January with the team because we wanted to be close to -- continue to understand what goes out there. And I can tell you before that, in October, I was there -- we were there as well. And even before that, we were one more time, too, as well in 2023. And I can describe a couple of things of what we saw in China this time. The first time that we went in 2023 and I gave this description to a lot of people, is that, we landed in Shanghai Airport and it was pretty empty, and this is early 2023. This time, in January, we landed in Shanghai and actually, you see good amount of people and, more important, a lot of foreigners, so Europeans, Americans. So it kind of tells you that there's definitely starting to get some movement, at least just by taking that as an anecdote and a data point. And then we went into our business reviews with our teams, and it was just incredibly phenomenal week because we spent a full day in our innovation center and it is amazing the level of innovation that, that team has done in just a year. So that's why we also continue to be excited about because we're controlling what we can control. That team is protecting the core of the business while continuing to invest and while continuing to now launch new innovations that we know is going to give us great access to new markets that we had no access. And so I think that's why we left super energized and very excited that -- yes, I mean, the market conditions in China as I said on the earnings call, is not -- is a market that is not booming, but it's a market that is definitely seeing some good areas of growth. And our team is doing all they can there to really outpace that market. And I'm confident that they will again this year.

Are there any particular markets that you're most confident in China could grow, just out of curiosity, like where are you seeing growth?

Yes. So we tend not to like to talk too much about them because we want to own them. But what the team does -- what we do with the team in China is that 3 times a year, we review end market and we review micro trends, so very early on. So we were very early on entrant into the electric vehicle production and into the battery production. And clearly, those markets really took off and we took advantage of that. As we saw that there was a lot of that going, I mean, we start getting nervous and then we start looking for other end markets. So there's definitely a handful of end markets that the team goes, leverages demand generation, creates the product innovation that is needed for those in markets and now we feel that we have not only the team, but the products, the end markets that have been selected, and I think that's how we will execute.

Very helpful. And then you mentioned, Vicente, you had a larger amount of longer cycle projects and backlog which I think is to prove another comment you made that you're still seeing mega trends, onshoring sustainability, bigger focus on energy efficiency. We are all trying to figure out where we are in the cycle of these mega trends and how sustainable they are? So from your perspective, the industrial cycle, do you think it's different this time? And if we're using the American baseball analogy, what inning are we in do you think in these mega trends?

Yes. I was told that there's no -- only 9 innings.

That's why I say, American baseball now, I got to be very clear, Vicente.

No. I will say that, yes, there's definitely a lot of good of these mega trends that are happening. I got the question yesterday about some of the CHIPS Act if we're seeing that. And that as an example of, is it the early innings or -- and I call it kind of more like early to mid, because I mean, there's actually new companies that still have new plans on how they're going to expand their production here in the U.S. And even if you take just that example about the -- not the CHIPS Act, but semiconductor or chips manufacturing companies, even companies that are today primarily in Taiwan and leaving Taiwan to kind of co-locate factories in other places. So clearly, we continue to see a lot of these mega trends of relocalizing the supply chain. That started a few years ago. And that, it takes time to get that going and get that chain. So we think that we still see good tailwinds of that, of those kind of mega trends that we talked about, whether the relocalization of supply chain, energy savings around Scope 1 and Scope 2, anything related to sustainability. And then, we'll talk maybe -- hear later about the digitalization and recurring revenues. So those mega trends, combined with maybe a bit of better improvement in short cycle, just demonstrated there's some tailwinds.

Yes, got it. And you guys obviously, a big part of your strategy is inorganic growth. And you sounded relatively bullish, I thought, in terms of answering my question on the call regarding M&A. You confirmed that you went from 4 LOIs in Q3 to 10 in Q4, and suggested your M&A market was opening up. Could you expand on what you're seeing? Is it really that lower or at least more stabilized rates are helping [indiscernible] confidence? Or are you just generating more opportunities? You mentioned a couple of larger deals, are there any white spaces nowadays in Ingersoll that you're really trying to hone your focus on?

Yes. Andy, I'll take that one. So I think one thing and that will -- you're absolutely right. We kind of give a snapshot every 90 days at our earnings call kind of how the M&A funnel and LOIs, and this is kind of the high watermark of any quarter we reported with 10 LOIs. First and foremost, those 10 LOIs, I'd characterize them as very similar in terms of look, feel, size as to what you've seen us do. As Vicente said, we're coming up on our 4-year anniversary of the merger here next week, and we've done 42 bolt-on acquisitions in 4 years. And I would tell you, the 10 under LOI look very similar to the ones you've seen us do historically. But it's worth mentioning here that while I think we do see the overall market continuing to improve, our model hasn't changed. And that -- what I mean by that is we're not sitting, waiting necessarily for deals to find us, we continue to cultivate. So 90% of all deals we've done, and I'd say that the LOIs are no different, are sole-sourced. So that is our team. Obviously, we have a team at corporate. It's really one person, but we have teams within the business. And so that's where a lot of this, I'd say, cultivation really happens, kind of on the floor, if you will, because these are the companies that we're operating against out in the field. And so that's how you've seen those 42 bolt-ons come to bear, and how we've continued to expand our addressable market. The thing that we like to remind people of is when we did the merger, we were, let's call it, something around a $25 billion addressable market. Well, today, we play in something closer to $55 billion, and we see runway to that being $70 billion plus in the near future. And that continues to open the aperture in the context of where we can continue to find bolt-on acquisitions. We also mentioned on the call that we do have a couple of -- sorry, the larger deals in the funnel. So think of deals that are maybe in the $1 billion to $2 billion-ish type purchase price. Probably worth noting here that we see opportunities on both sides. So you mentioned white space. I think we are very, I'd say, excited about the prospects on both sides of the equation, but PST, obviously is a continuing area that we continue to see the ability to grow from a scale perspective. It's still only about 20% of the revenue base. We think through organic and inorganic means. That's one that we want to continue to see get to, let's call it, ITS size over the horizon. So again, we continue to be, I'd say, very disciplined, very prudent in how we approach the M&A side. Vicente mentioned on the conference call or earnings call last week that we actually walked away from $1 billion-plus purchase price deal in, let's call it, late fourth quarter, early first quarter. And that was a deal that we have been working on for quite a while. But at the end of the day, it just didn't make sense and we walked away from it. And the [reality] here is we've continued to move forward with the balance of the funnel. And we're very pleased with kind of how this year is shaping up already. And we already closed one deal we mentioned at February 1, Friulair, which is squarely in our Air Treatment portfolio and couldn't be more excited to integrate it and include it in the portfolio.

Every time I hear 42 deals in 4 years, I get both excited and a little scared. And you guys have done a really good job executing this thing. Maybe it's -- if we take a slight segue and talk about that, like have you been able to sort of not avoid the lemon, if you may, in what you're doing?

Well, I think it starts with what we buy. So I think there's a lot of work done on making sure we're buying the right stuff. But to your point, Andy, I think the key is that the catchers of those integrations are the business units themselves. And the work that they do in integrating those businesses using IRX and the same sort of simplicity and standard work approach is not unlike the other work that they're doing day to day. And I think the goodness is now, after 42 of these acquisitions, we have hundreds of people that have had tons of reps of doing this. So most people in my career prior to Gardner Denver was all once every 5 or 6 years, something big would fall in your lap, and it would be a unique year and a unique stretch of work. I don't think we have that. I think we can look across all the geographies, including China, which we saw a wonderfully integrated asset when we were there in January. They did a fantastic job. And again, it's just that block and tackling on kind of weekly planning and 100-day sprints, bringing in the acquired, say, finance partner, HR partner, so on and so forth, and just repetitive, good, simple work, standard work.

Yes. Very good. Vicente, you mentioned recurring revenue. So let's talk about that a little bit. So it's been a big initiative for you guys since you combine GDI and Ingersoll. And so maybe update us on where you are. I think you talked at the Investor Day about a $1 billion goal you've set for IR by '27. I think you can expand and integrate your equipment in system services, much more in PST. So can you give us an update on how that's going, initial rollout, where you are?

Sure. Yes. And maybe to frame it up. I mean, let's start by saying that we're roughly, call it, $7 billion in revenue and high 30% of our revenue is after market already. So -- and I know in some companies they call that already as recurring. What we like to call recurring is that basically you had a signed agreement with a customer that every month you're going to get paid a certain amount of money regardless of the utilization of that device. And that's basically what this $200 million that we are generating today. It's part of that aftermarket umbrella, but it's really recurring in nature. It's basically almost like software, like revenue that -- we also have margins very similar to software like, I mean, above 60% as we said on the earnings call -- Investor's Day. And then, we set a big ambition. We said that we can get to about $1 billion by 2027. And we have a glide path on how we're going to get that. And if you think about it, I'm going to bucket-size it in 3 main areas. Number one is really, today, the $200 million that we spoke about on the earnings day is really mainly in the U.S. And we have used the U.S. as almost like a laboratory to really hone in and precisely have the right product in place. While at the same time, we have been shipping all of our compressors with already digitally enabled technologies, meaning that we can connect them very quickly and then add these services. So as we go from the U.S. into Europe and into Asia, that gives us a great expansion in terms of how we're going to take the same model and apply that to customers that, in many cases are globally that are asking us to take that same service of revenue into other countries. The second big bucket is around increasing the solutions that we serve. So for example, today, we have, what we call, care package. Care package is actually 3 different solutions that we offer. On top of that, last year, we acquired a company called Ecoplant that offers an add-on service around energy efficiency. So not only we can talk to the customer about maintaining that product operating at a higher level of efficiency, but we can save energy and we can show you, Mr. Customer, how we can actually generate energy savings. And the third big bucket is all of that is compressors only. We have blowers, vacuums, and in the PST segment, several technologies that can -- the same recipe can be very applicable. So we already are expanding into the blowers. So for example, blower technology that is used in the pulp and paper facilities, we are launching, it's called RunCare, but it's a very similar solution that allows the customer to get not only the uptime very high, but they now [indiscernible] and water conservation and so on, and then PST will be the same. So we see as a very good glide path on how we can get from the $200 million to $1 billion.

Very helpful. I'm going to open up to the audience in a second, but let me ask you, Vicente, it's probably actually for Vik. You mentioned corporate cost will be down in '24 and you're taking proactive restructuring again in '23. Obviously, for a long time, we're asking about your RMT cost synergies. I don't think you've got any questions on that on the call. They're helping you with incremental margin. But how should we about the sort of buckets going forward of cost out, whether it's lower corporate costs, M&A improvement activities, targeted restructuring, higher mix of aftermarket we just talked about, what are the biggest contributors to that self-help?

Yes, sure. So you are right, we kind of have, like say, put a bow on the whole merger related synergies. And I think we, quite frankly, executed well in line with our expectations, outpaced our original expectations.

What's the final number, Vik?

Well, we reported $300 million, and we'll say that -- we delivered well in line with that. But to your point, there was always kind of a larger funnel, if you will. We talked about $350 million plus of the funnel. And so if I take them in -- I'd say in terms of the opportunities we look forward, first and foremost, we are -- we continue to be a very quality of earnings-centric company. You've seen that in the margin profile across the board. Price would be part of the equation. So we always expect to be price/cost positive, that's no different in '24 and will be no different going forward. Two, as Vicente said, this whole recurring revenue, kind of this ambition to go from $200 million to $1 billion, again, ambitious goal, one that we definitely have plans built out to -- line of sight to. But Vicente mentioned that, that portfolio plays at 60% plus gross margins. And we know that because, quite frankly, that's where the $200 million we have today plays out. So there's no reason that [indiscernible] or shouldn't continue to operate those levels, and that will be very nicely accretive to the overall margin portfolio across the enterprise. I think in terms of the productivity side of the equation, whether it be I2V, the reality is we're still coming off of 2023 where direct material pricing has still kind of been at highs. We do expect that there's going to be price clawback type opportunities as we look forward. The team is very much pushing for that. And then as far as that kind of, let's call it, synergy funnel, if you will, from the merger-related opportunities, probably the biggest piece of that, that we never, I'd say, fully executed on and for a lot of reasons, we can -- hopefully, that are somewhat obvious, but was the footprint. And it's not to say that sales offices and things like that, we didn't optimize. We did. But things in terms of manufacturing footprint, there was never an expectation to move things from one region to another or things like that, but maybe some more in-region optimization. And that's, quite frankly, because of -- the 4 years since the merger has been COVID, supply chain and a bunch of reasons why, quite frankly, footprint optimization probably wasn't the most prudent thing to do. But that continues to [remain] some opportunity going forward. And then the last piece of the equation, you are right, year-over-year corporate costs have been a bit of a tailwind. I'd say, there's some moving factors there in terms of incentive compensation costs as well as, frankly, some offsets with some reinvestments in areas like demand generation and IoT and things of that nature. We'll continue to reinvest in the company prudently from an organic growth perspective. So I don't think you're going to continue to see that be any different. But to your point, is there going to continue to be a little bit of a tailwind in both segments as well as corporate in the context of when you do 42 bolt-on M&A opportunities, there's always going to be some bolt-on M&A synergies and there's always room for optimization. I'll use my own world, finance, pushing shared services, things like that, still a huge opportunity for the enterprise. So the reality is, I think, there's plenty of opportunity across the board, across many different aspects, but recurring revenue is probably one of the areas that I think is the most exciting for us just given the runway.

Got it. Any questions from the audience? Anybody want to ask a question? Can't see through the light, but I don't think there's questions there. Okay. So let's focus a little bit more on the segment. So you've got a new leader in PST, Vicente, Santiago Duval. And you mentioned on the last earnings call that he was in the process of better implementing I2V now. And that's -- as part of your 35% to 40% incremental margin guide, PST could be a bit higher than ITS. So you also mentioned PST could be mid-30% operating margin over time. So maybe give more color on what Santiago is doing and how he sort of really accelerates improvement in PST?

Yes, sure. So I would say, it's all about the people and the processes that we implement. And so Santiago coming in, we actually also upgraded or enhanced some of the general managers and some of the P&L businesses that we have within PST. So we think we have a really strong team now that can take PST to the levels that we want to. And then it goes back to utilizing the playbook that we know works very well, which is a lot of the IRX. And when you look at our growth, economic growth engine, demand generation, I2V, aftermarket, those are initiatives that the teams, they know how to execute, that sometimes you have to refresh. So what we ended up doing is also -- I mean, this year, we already -- I mean, in the month of January, we had a week-long event for I2V across all businesses for PST where global teams came to a location with competitive product. They disassembled the product, they had voice of customer, they had voice of dealer, voice of service technician, and that led to reconfiguring the products and making a lot of changes that gave us a pretty substantial funnel of potential savings. And we call it I2V, Innovate to Value, because we look at not only how can we lower the cost, the bill of material cost, because keep in mind, 70% of our cost of goods sold is direct material. So we're always looking at direct material cost. But then, how do we innovate in price? Because the more features that you know how to put in that the customer is willing to pay for, those are the ones that we want to put in and be able to tweak the price and be able to get that price. So that's why we call it Innovate to Value because we get margin expansion in both ways. And so I'd say the team generated pretty substantial kind of, call it, mid-single million dollar funnel on how now they need to start executing on that. I'll say, in addition to that, I think a week after that, Mike led a week-long event where we are looking at how do we create standard work for commercial execution with the utilization of the [margin] and now there's a very strong playbook. So I think that all the pieces are in place there to now continue that execution, and we're seeing it with the teams because we participate on the -- I personally participate on the IDMs, the impact daily management with the teams to continue to see that momentum. And we're seeing it. So we're proud what the team -- how the team has grabbed this kind of dramatic change and shift in the gears. And, so yes.

I mean, it's great to hear because, I mean, you and I [talk of this], it seems -- I will use your word, dramatically different than last year in terms of positive momentum in that segment, is that true?

Yes. And also to think about it, too, as well that I know when you look at the headlines of the PST segment, but if you kind of open the hood, and you think this segment, 25% of the segment is life sciences. And we know -- the market, how life sciences happened there. The other 75% still, I mean, 11 out of the last 12 quarters has been positive organic orders and positive organic revenue. So again, in a market where PMIs have been below 50, which is supposed to be contraction. So again, it speaks to the volume that the team even still continues to execute. We just have such a high expectations that -- because we know that we can do better. And we -- that's basically the difference is that -- I mean, yes, when you compare the performance against the market, 75% is outperforming the market. But we want more.

Yes. And that was going to be my next question, Vicente, like so let's say life sciences, I mean, your guidance is that it would improve in the second half of the year and get more normal in the second half of the year. But let's say it doesn't, for whatever reason, this other -- the 75%, can it carry you to the 2% to 4% growth to some extent that you have?

Yes. Maybe I'll take that one. So kind of building off of what Vicente said here, the 25%, that's life science, let me start there. We still have some headwinds we got to digest as we move through the beginning part of the year here, early first quarter into a bit of the second quarter. So again, the good news here as we enter the second half, those comps alleviate considerably. Now just to be very clear, our guidance doesn't imply some big acceleration or hockey stick or anything of that nature. It just frankly implies some just sequential, maybe nominal improvement, but nothing, I'd say, needle-moving for like a better way to say it. The balance of the portfolio, I'd say, as Vicente said, has been relatively stable, well performing. That is, to be very honest with you, where I'd say, the majority of the growth is coming from. I think in the context of the guide, it's actually both segments. But PST, it's 3% organic, 2% price, 1% volume. And we've gotten this question a lot, I think it pertains to both segments. Right now, we're taking kind of a prudent view to the year just given that you don't have a tremendous amount of visibility into the back half of the year. And if it's there, absolutely, we'd like to say some organic volume, hopefully, maybe becomes the upside opportunity in the back half of the year. But again, let's execute the first half and kind of see how that plays itself out.

But to be clear, you don't see anything really -- life sciences is kind of like stable, is that kind of how you put it right now?

Yes.

Yes, okay. And then stepping back, Vicente, it's an election year in the U.S. and other parts of the world, right? So you're at the forefront of markets. I know you haven't gotten some hydrogen questions in the last quarter or 2. So do you worry at all that election uncertainty could creep into PST or ITS customers? And could you update us on what's going on in some of your newer markets, like hydrogen, for example?

It's -- yes, I'll answer that, Andy, by saying that the thematic for us over the past few years, since we actually combined the companies has been control what we can control. And when you look at every single year since we got together, first the pandemic, then Russia invading Ukraine, then also here in the Middle East, logistics, freight, supply chain, now Red Sea, it seems like every -- almost every quarter, something is happening. And we just view the elections as maybe it's just another event. And I think what we are continuing to remain very committed to is be agile and nimble. And we know that regardless of who wins the election, there's going to be some wins for some markets, end markets, and that's basically where we're going to pivot ourselves and then go after them. So whether it could be hydrogen or it could be other investments or other things, we'll definitely continue to learn and continue to pivot pretty quickly to be able to recuperate that.

I always like talking to you a little bit about these newer markets. You continue to see positive momentum in them, not just hydrogen, but there are a lot of other things you do that are more...

No, that's right. There is. Even just this past week, I think there was a new IRS regulation around renewable natural gas. And so that's actually going to continue. I mean, we spoke about renewable natural gas in the U.S. has been a good investment and good growth for us. And -- but it's being kind of conflicted by certain level of size of farms or methane-producing locations. This new tax regulation, I think, it just expands and creates an even bigger market. We were -- the last time we were in India, we actually met with the Minister of Hydrogen, because India has some pretty aggressive targets on how they want to get there, India. We're hearing now, clearly, whether China or other countries also rethinking hydrogen or LNG. But yes, so I think there's just a lot of goodness that is happening in multiple areas. And the way we take it is that we don't take anything like a peanut butter [across] initiative. It has to be customized and localized for the region we're taking that technologies and be innovative on how we make that approach.

It reminded me to ask you because you just mentioned it like couple of companies have talked about India as like kind of the "new China." What do you think there?

Yes. If you remember, Andy, I think it was maybe more than 2 years ago that we said that we were going to double down. On an earnings call, we said we were doubling down in India, and even on Investor's Day in 2021, we spoke about India. And we have seen good growth out of India, yes. We have even done M&A in India. We have acquired now one company, and we actually have in the process of -- a couple of more. So it continues to be a great place for us to...

Right now, percent of the business, 1%, 2%?

Yes, it's plus 2%, 3%. It's been one that I'd say, growth-wise has been, quite frankly, at the top of the stack in terms of growth. And to percentage point, we've actually also put incremental capacity-building facility, particularly on the ITS side, because we quite frankly, we were at capacity. So we've -- the doubling down has not only been in the inorganic side from M&A, it's been in the organic side in terms of capacity and footprint as well.

So Vik, just I don't want to ask you on ITS, like you achieved high 20% EBITDA margin in ITS 2 years early of schedule. This might be for you, too, Vicente. But can you give us a little more color into why we're able to reach the target early. And then given what you recorded in the second half of '23, it doesn't seem like that 30% '27 goal is that much of a stretch. So why can't you achieve more than that margin over the next few years?

Yes, I think to the first part of the question, first and foremost, the team has executed unbelievably well. Obviously, this is part of the business where I think the vast majority of the merger really was focused on from the compressor blower vacuum platforms. And I think everything we've mentioned here, whether it be positive execution, the price cost, the organic growth, the synergies, the productivity, the I2V, you really pick one of those, any of those areas, I think the team has done an unbelievable job on execution. And as such the in-region/for-region kind of model, we really think has been a huge tailwind and will continue to be one. So for all those reasons, I think you've continued to see the team embrace IRX really act nimbly really quickly. Even in the forefront of some of the supply chain challenges, that team got well ahead of some of the inflationary pressures and you've seen them be price/cost positive and margin accretive effectively for almost every quarter since that kind of started. So a ton of credit to them in that respect. To your point, we have reached our kind of stated margin targets a couple of years early. Now that being said, in terms of the go-forward here, we do still very much see margin expansion. Is it -- the '24 guide, is it the same triple-digit margin expansion that you've seen in the last 4 years? No. Is it still positive? Absolutely. I think some of the same tailwinds that you've talked -- we've talked about are going to be the drivers there. But rest assured, we're also reinvesting for organic growth. So there are meaningful reinvestments back into the business to drive sustainable ongoing organic growth. And to the second part of your question, do we inherently see a cap on margins at 30%? No. I don't think that's at all how we think about it. I think we are going to continue to balance prudent margin expansion with reinvestment to kind of drive ongoing growth both on top and bottom line, but we don't inherently see that there's some upward bound that we can't cross.

Got it. So I want to focus on digital demand generation for a second, like maybe [peer] under the hood a little bit as to how it works, in the sense that, who do you think you're taking share from, what particular markets does digital demand generation work best, if you may?

Yes. I think it works best in places. It works -- and first of all, for those of you that aren't aware, it's one of the few central corporate functions that we have. So we have 160 people that get up every day and their first thought, once they're thinking about work, is how can I create demand and awareness and solve customer challenges, provide customers the right information depending on where we are and their buying cycle. And I would say that the big advantage we have, Andy, in digital overall, and then I'll get to the question is that there's scale. So I use like search engine advertising or search engine optimization. In every industrial company and for -- and probably thousands of consultants around the world, you'll find somebody providing that service in pockets of 2 or 3 people. And those 2 or 3 people are doing it, let's say, 40% of their time. We have somewhere close to 40 people around the world, that's all they do is search engine optimization and the precision on advertising. And I can tell you for an industrial company, that scale is a big advantage, and I could go across the way that we do all elements of digital, including e-commerce and outbound campaigns, et cetera, et cetera. I think the 3 places that works really well is superior technology. So like 4 oil-free or 4 Ecoplant in different ends of the spectrum and different levels of awareness and understanding from the consumer, but it's a way to go in and educate with precision to the person who we think is dramatically overworked. So the people who buy our products, they have -- statistics will say, 3x to 4x the responsibility they had just 5 years ago. They got a big pile of paper, the people that can provide the information at the right time, can get to the highest priority list. Vicente always talks about this, we talk about return on investment, we're going to go in with a return on investment on a high-priority project and that's going to move that along. The second place that works really well is for newly acquired assets. So take, for example, Seepex or anybody that -- any of these 42 companies, and we were at Friulair 2 weeks ago, the Italian-based company that we just purchased, they don't have demand generation. They have people who think about the web. They have people who think about trade shows. And again, those people are kind of 20% of the equation. So they're going to get -- in this next 100 days, we'll get them digitally savvy and will start to create demand and awareness and add them goodness in the form of leads. And then the third place that works is to pivot to these new markets. So again, we've got 170 people that they know the digital equation, but in the businesses in the region, that's where the expertise on these markets are. And we're looking at them 6, 12, 18 months ahead on something like electric battery, electric vehicle production or now recycling, and so the combination of those 2, the scale at the corporate level and the local end market specific use case expertise just gives us instant leverage.

Very helpful, Mike. And then I want to ask you guys about cash flow. Vik, I think you mentioned inventory at Ingersoll was not back to pre-pandemic levels and that you saw more opportunity there. Can we talk about that? And then it's a good place to step back and you can remind us, you've got this Ownership Works Program, right? It seems like a good -- catalyzing specific goals, like improving cash performance would be a good place to use that program. So maybe talk about that.

Yes, absolutely. So maybe I'll start with the latter piece of that, the Ownership Works and kind of the ownership mentality. We've talked about it quite a bit, Andy, about the ownership philosophy within the company that all of the employees, now 18,000 plus strong, are employees of the company. And we have an ongoing program called Ownership Works for anyone new to the company, whether it be direct hire or through acquisition, one year after their start date, they get equity in the company as well. So we keep the momentum of this program going. And it's -- we think it's an absolute differentiator. I'll let Vicente come back to that here. In the context of cash, absolutely. Very pleased with the cash flow performance in 2023, close to $1.3 billion of free cash flow, 18% free cash flow margin. But an area that we know we continue to have some opportunity, to your point, inventory. I think the teams did a nice job exiting the year. Are we back to pre-pandemic or anywhere close to those types of levels? Not quite yet. Are there still opportunities in areas like collections and things like that? Absolutely. We have 42 acquired assets, many of which are not in shared services or probably at the levels on any of the metrics you would think on DSOs, DPOs, churns, things like that, that you would hope for them to be at. So I think there's plenty of opportunity as we think about the equation across the board on how we can continue to drive free cash flow and free cash flow generation. And you're absolutely right. As owners of the company, this becomes probably one of the easiest areas for, frankly, any employee in the company to tangibly feel how they can influence that equation. Because fundamentally, any employee in the company, whether you're in one of my teams in the shared services, dealing with vendors on payables or collections or you're on the shop floor with inventory, you're touching cash in some way, shape or form. And now as an owner, you can really show them. And we do. We show -- every single quarter, we show performance. We show the metrics. We help them understand how they're influencing that outcome and how that can drive value creation from whether a share price perspective or otherwise. So it's pretty powerful, but Vicente, I'll let you add on.

Yes. No, I think this is one of the most exciting pieces of the story, Andy, and the one that we feel really very proud of doing what we have done. And we put a page of that on the last earnings just to show the amount of wealth that has -- just created to the employees on this and how it has been life-changing for many of them. And you can read the quotes of some of them. But every time I go to a location anywhere in the world, it is just really, really energizing. When we do a town hall meeting and you get -- town hall meetings will typically last about an hour. And it's just me 5-minute opening remarks and it's 50-plus minutes of Q&A, and just highly engaging questions. Engaging questions asking about dividends, you know what I mean. But I think that is just a catalyst for long-term performance.

Got it. So we're basically out of time, but I've got to ask you this last question and I'm going to be quick, just because I ask all [indiscernible] of question, what are the top 2 or 3 innovations and structural changes affecting the company over the next 5 years?

We think digitalization and the way we're doing this recurring revenue is something that structurally will change how we financially perform, too, as well.

That's a great place to end on. Vicente, Vik, Mike, thank you very much.

Thank you.