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

So Vik, Vik Kini, CFO of Ingersoll Rand. Thanks for being here.

Yes, thank you.

I don't think you want to make opening remarks, so let's kick into it.

Maybe just tell us what do you see now there? What's sort of the environment for Ingersoll Rand right now?

Yes. So first of all, Nigel, thanks for having us here. It's always good to see everybody, and hopefully, everyone can attend that cocktail reception later today. So I think in terms of just kind of the state of the union on what we're seeing, I don't think dramatically different from kind of how we talked about things on our earnings call a few weeks ago. So as we entered the year, I'd say demand trends stay relatively stable. Obviously, as we move into the year, I'd say there was -- from a regional perspective, we had a little bit of a mixed expectation in the context of just some of the end market dynamics. And the way I would probably characterize it is Americas used to be probably the leader of the pack in the context of expectations and kind of the growth. EMEA, relatively stable. Kind of more so that statement on the core, I'd say core European side, Western Europe. Definitely still some nice pockets of growth in areas like the Middle East and India. And then in Asia Pacific, which is largely China for us, we knew that the environment there was going to be a little bit -- it's going to have a little bit more headwinds comparatively speaking to the kind of the levels we had seen in prior years. And then you couple that with the expectation that the level of some of the large projects, just interesting enough, I'd say they're still relatively stable, just not necessarily at the same level that we saw, particularly in the first half of last year, specifically in China with things like EV batteries, where the team did a phenomenal job in first quarter into second quarter; as well as areas like RNG, or renewable natural gas, in the Americas. So in the context of Q1, I thought that dynamic is exactly how it played itself out. As we move into Q2, I think what we said on our earnings call was a couple of things. We track things like marketing-qualified leads, MQLs, which is really that precursor to orders. And those continue to trend nicely. I think that's indicative of what's going on in the base business. April continued to show what I would say sequential growth over March and mid-teens growth year-over-year, which I think continues to give us conviction in the stability of what I'll call more of the base business. So as we sit here right now, I wouldn't point to anything playing itself out anything differently than kind of how we characterized it on the earnings call a few weeks ago. But encouraged by the momentum particularly that we're seeing on the MQL side.

Okay. And obviously, you disclosed the kind of sequential build in orders during 1Q. And you also disclosed the weekly MQLs as well. How does that shape continue? Have you seen -- continue to have momentum?

Yes. So I think we wanted to give that visibility and that color, whether it was the kind of sequential orders or kind of the first half of the quarter versus the second half of the quarter, really just to speak to what I'd say is the stability and some of the momentum that we were expecting to see and we did see. As we moved into April, like I said, it was about a 9% sequential growth on MQLs from April versus March and 14% from April versus prior year. So again, continues to show what I would say, stable demand trends. Gives us conviction in the context of the pace of orders that we think are required to deliver our guidance from a top line perspective. I think one thing to say from a Q2 perspective is that Q1 and Q2 probably would be, I'd just say, the toughest comps from a year-over-year basis, particularly in Q1, you saw that. I think Q2, while we don't guide on orders, probably fair to say that Q2, our expectation is sequentially, orders will be better than Q1. And I'd say the performance on a year-over-year basis would be better than the levels you saw in Q1. And then quite frankly, as we move to the second half of the year, particularly in Q3, the comps get considerably more reasonable, for lack of a better way to say it. So I'd say that's kind of how things are playing themselves right now. As we talk about May, I'd say nothing dramatically different than how our expectations were coming into the quarter.

I think the sort of the math that we work with is, I don't know, 1.05 book-to-bill in the first half of the year, 0.95 or something in the second half of the year. It feels like this year is going to be a bit more level on the book-to-bill. Is that fair?

Yes, we are still expecting that first half will be above 1, second half will be below 1. Maybe not 1.05 and 0.95, but maybe a little bit tighter tolerances there. But again, I think in terms of -- and you've seen this in years past, we do typically are -- we do typically see better than 1 book-to-bill in the first half, particularly as we book some of these longer-cycle projects. I think the good news here is funnel continues to remain quite healthy. We think we're winning our fair share of those projects on a global basis. And then they tend to ship more so in the back half of the year, which just leads to that what I would consider to be very normal seasonality pattern. And this year should be really no different from that perspective.

Okay. Then obviously, Vik, you mentioned the strength in the project, especially 1Q of '23. I mean, the large orders, we heard yesterday from Carrier, and they were talking about data centers can be 10x the number of chillers in these projects. And I think the same thing, maybe not to the same degree, but a similar dynamic with you as well with air compressors in some of these large projects. So are we seeing a bigger mix of larger orders in the backlog at this point?

I wouldn't say a dramatically bigger shift. And the way we've characterized it is that, of our total revenue base, if you think about kind of the construct of Ingersoll Rand let's just say for round numbers, approximately 40% of the revenue base is aftermarket, which tends to have a much more book-and-ship nature. And then if you think about the original equipment, I'd say about 20%, 25% behaves more longer cycle we'll call them the larger projects. With the balance being kind of the core compressor, blower, vacuum pump type business, typically behaves a little bit more short- to medium-cycle in nature. That component that's larger cycle, I'd say, is a representative amount of our backlog at any given point in time. And they do typically sit in backlog from anywhere from about 6 to 18 months. Would I characterize the size of those orders as dramatically different from what you've seen historically? No. Meaning, I don't think that there are, to use those numbers, $10 million, $15 million, $20 million type projects is the majority, no. I would say the vast majority of those larger projects are typically low 7-figure, low $1 million-plus type orders. And that's typical of what we see. I'd say that's representative of what you're seeing in the backlog right now for those longer-cycle projects.

Does that change, though? If we do get this $1 trillion megaproject pipeline come through and comes through into orders, I mean, do we start to see a bit more lumpiness?

It could. There definitely are talks of these larger projects. I think the way that we would characterize it is, obviously, we are poised to be able to compete and hopefully win our fair share of those. Is our guidance or our expectations predicated on those being a material driver of the top line? No. I would say, to the degree of something of that magnitude were to book, first and foremost, I would consider that to be a bit of the upside scenario. And realistically, the lead times on those would be probably 12-plus months, which means it would probably be revenue in 2025, not in this year.

Okay. Okay. And I think one of the big features over the last couple of years has been the emphasis on sort of making your own luck through MQLs and really going to customers, doing [ energy ] orders and things like that. I think you've disclosed that the conversion ratio from MQL to a sales qualified lead is about 30%. And then from there on to -- into an order conversion. I mean, has that changed at all? And what kind of resources you put into kind of accelerating that MQL?

Yes, it's a great question. So I think that, that conversion ratio that you've referenced there, it's still pretty tried and true. We've been at the whole demand generation, really creating this engine for the better part of a decade now. And so I'd say we have a considerable amount of history. Every part of the business is kind of part of that demand generation engine. And frankly, on a daily, weekly basis, we can look at MQL trends, pretty much slice and dice however you would expect, business regions and then country and split it however you would expect. So the concept of an MQL translating to a sales-qualified lead, translating to an order, that digestion period being 6 to 8 weeks. Some shorter, some longer, but that's a pretty good indicative ratio. And then in terms of the investment and how we are actually continuing to run the business. I would tell you the demand generation side of the equation, not just for the base business, but then also for acquired assets as we think about the bolt-on M&A engine without question is probably one of the single biggest pieces of organic reinvestment we continue to make. So absolutely, this will be -- it's kind of piece and parcel to the strategy and absolutely is how I believe that we are, I'd say, outperforming the underlying rate of growth in whatever markets we play in. Demand gen will continue to be a part of that, and absolutely, we're continuing to reinvest there.

Great. I want to switch look to M&A. I wouldn't know me focus on M&A as early in the session as this, but it is sort of half your [ bank ] growth over the medium term. ILC Dover, maybe just brings up the speed on where we are in getting the approvals and closing that deal.

Yes. So nothing's changed. ILC Dover, we've stated that we expect to close here in the second quarter of 2024. Nothing has changed on that end. We still to close here within the quarter. So hopefully, that means pretty imminently. And we're incredibly excited, as you've mentioned, Nigel here. This is -- this will be the largest transaction we've done since the merger. Approximately $2.4 billion in purchase price. Acquired at what we believe to be a really prudent pre-synergy adjusted EBITDA purchase multiple of approximately 17x. But really brings a fantastic asset predicated in the life sciences space that now really gives us a much more established, what I'll call, beachhead in life sciences and PST with a fantastic management team who's coming over, that we continue to see now great opportunities both from an organic growth perspective and inorganic. So I'm sure we'll talk about that more. But everything remains on track at this point in time.

I mean, it looks like a great asset. But it is a big number, $2.4 million, 17x EBITDA, which is a little bit higher than what you normally spent. But what is it? Maybe just talk about the -- what you're seeing in ILC Dover's potential, the ability for you guys to run this business better, that convinced you that this was a great deal?

Yes. So a couple of things here. I think we've made no secret of our, what I would say, desire to continue to grow from an inorganic perspective, particularly in what we'll call higher-growth sustainable end markets. End markets that, over the long haul, we think we're going to have a better, higher growth profile. ILC Dover, obviously, is exactly that, with 75% of their revenue base being in the core life sciences with a good split between what we'll call biopharma and then medical devices. And then quite frankly a very strong leading presence in the smaller piece of the business, but the space side of the equation. So to your point, yes, we did pay a slightly higher multiple than you have seen historically, comparatively speaking. But I think the concept of being able to pay 17x for a high-quality, double-digit, mid-teens CAGR growth business over the last 3 years, 30%-plus EBITDA margins, and we can talk more about the profile of the business. That's -- and one that still fits the mold of how we've thought about our financial framework while still building an ROIC by year 3 that exceeds our cost of capital. We're very excited, quite frankly, by what ILC brings to bear here. And then in the context of how we think about it and how we're going to run it. This is an exciting asset for us in the context of the end market exposure, the aftermarket consumable profile of the business. And quite frankly, the hand-in-glove fit that we really see with the business and Ingersoll Rand in the context of an asset that has been largely predicated on the production side of biopharma. We have an established life sciences business within Ingersoll Rand that's been a little bit more on the research and development side. But now the opportunity to kind of bundle an Ingersoll Rand peristaltic pump, for example, with the consumables and tubing and whatnot that is made by ILC Dover and really start to penetrate even further within this life sciences space. And now you put it together, we've got a $700 million established platform. Corey Walker, who is the CEO of ILC Dover, will be running that combined platform within PST. And as you mentioned here, I think a incredible opportunity to now leverage that asset, grow it organically. But rest assured there is a healthy pipeline of bolt-on opportunities on the M&A front that we see that can add to ILC.

Well, so life sciences, I think, is now your largest single vertical. I think 15% of sales, which makes it the largest. Feels like you might be leading a new segment here or maybe a new focus. Maybe life sciences grows disproportionately. Is that fair?

Yes. I wouldn't say it's a dramatic departure, frankly, from where we have been positioning. So you're absolutely right. If you think back at kind of when the merger happened 4-plus years ago and even years thereafter, we've always had a presence in life sciences. But to your point, we've been explicitly, both organic and inorganically, looking to continue to increase that exposure. And you're right, that mid-teens now percentage across the total business is kind of where we sit now. As far as a separate segment or anything of that nature, I'm not sure we're at that point or thinking about anything in that respect. The way we have now positioned it is, within our PST segment, we are now, let's just say, having two, what I'll call platforms, the life sciences one, which is now the combination of ILC Dover with Ingersoll Rand's legacy medical business, that will be a healthy $700 million platform. And the balance of PST will be our precision technologies business, which is the balance will be about $1 billion. So they both have good scale. I think the concept of that $700 million growing hopefully at a healthier clip over time, without question, is how we're thinking about things. But I think the key here is this is not, in our opinion, a new platform, a new third leg or anything like that. These assets on ILC are very much positioned very closely to how we have structured the business where we have historically played. We think it's a natural extension and one that we will continue to grow here over time. But don't think of now a third leg or anything of that nature. I think it's very much key to how PST has been operating.

Very clear. And then the space business, again, I don't want to make too much of this. But should we view that, this is a great niche business that probably has some great growth vectors, but not necessarily a nucleus for further expansion?

Yes, I think that's probably a fair characterization. I think it gives us great optionality, to be very honest here. It gives us a good entry point more classically into that kind of aerospace defense side of the equation. Just to kind of put a pin on it here, ILC Dover, their presence is as well established in the space side of the equation as you can think. They are the frankly only manufacturer of space suits from a historical perspective. Very established presence there with the customer base, you would think the NASAs, the Boeings, the players in that space. And the reality here is we haven't historically have seen potential opportunities to continue to push for, for example, our core compression technology, into end markets like this. I think this gives us an even stronger kind of hook into in that space. So we'll continue to look. I mean, to be very honest with you, are there potential bolt-on opportunities there? Sure. Is that maybe the primary focus of where our efforts are? I'm not sure I would go that far. But it does give us a great business, good optionality, a business that has grown at a comparable level to the classical biopharma life sciences side. So again, we're pretty pleased to have it as part of the portfolio and excited to kind of see where things go. But yes, we do -- space suits in a space business is an exciting space to be in.