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

Hello, everybody. Welcome to the Jefferies Industrials Conference. I'm Steve Volkmann. I cover a number of industrials for Jefferies. One of them is Ingersoll Rand. And so we're very pleased to move on with Ingersoll Rand. We have 3 folks joining us from Ingersoll Rand. Vicente Reynal is the CEO, Vik Kini is the CFO. And at the back is Matt Fort, who looks after Investor Relations. So we're going to do this as just as a fireside chat, no prepared comments and would love to have participation in the room. In the meantime, I'll probably kick it off. But if anybody has a question, feel free to raise your hand we'll weave that in. So guys, welcome. Thank you so much for coming.

Thank you for the invitation.

And I guess I'll kick it off with probably the annoying question.

But obviously, a lot of our people in the market right now, people are nervous about what the ISM is telling us or not telling us. You guys have seen a little bit of slowing in your organic growth more than made up with inorganic. We'll get there as well. But if there's just any updates in terms of order activity or how you're seeing the current conditions, we'd love to hear that.

Steve, thank you. Great to be here with you, all of you here in the conference. And I'll say, Steve, I think everything continues to be pretty well normalized in terms of continuation to what we said on the earnings call. So we haven't seen anything of significant upside or downside. I mean I think everything continues to be stable. I think you alluded to the PMIs. As you know, we have been on a PMIs under 54 quite some time now. And we have spoken a lot about what we do at Ingersoll Rand, I'm sure we'll talk a little bit more about here later in terms of leveraging our Ingersoll Rand execution excellence process and particularly our demand generation to be able to control what we can control and be able to take market share with a lot of our technologies and really our commercial excellence that we like to call. So everything continues to be business-as-usual, and I think in line with expectations.

And can you just remind us how you're thinking about sort of order trends as we get through the second half?

Yes. Sure. So I'll take that one. So maybe just a little bit of a refresh. I think when we came in the year, we always said that our expectation for the year is, let's just say, a book-to-bill around 1 for the year. You can expect or book bill probably be a little bit above 1 in the first half, below 1 in the second half, it is the way we've framed the year. And I think, generally speaking, that's how things have played out to the first half. I don't think there's any -- to percentage point, given current order patterns, normal seasonality on the revenue side. I don't think there's any reason that we expect that to be anything different as far as specific quarterly orders or things like that. We don't guide on orders specifically. But I think what we have acknowledged is that first half of the year was probably our stiffest order comps on a year-over-year basis. 3Q was probably the more, I don't want to use word easiest, but maybe easiest is the right way to say it. The most achievable from a year-over-year less -- least headwinds. I don't think anything's changed in that respect. So I think, again, like Vicente said, the way we framed it up coming out of earnings is very consistent with, I think, how our expectations still playing themselves out, inclusive of that seasonality comment that typically ramps a little bit more into the back half of the year, particularly fourth quarter on shipments, particularly on the longer-cycle project side of the bus.

Super. Okay. So let's segue a little bit. In the second quarter call, you talked quite a bit about the MQL, the market qualified leads. And I believe you said they were up 13% in the quarter. So could you just level set us, what does this mean? What are you seeing? What are you measuring? And how do we think about those flowing through into orders and revenue?

Yes. Sure, Steve, let me step back to a little bit. Demand generation for us is our commercial execution engine. It's something that we have developed internally ourselves. Back in 2015, in December of 2015, we have demand generation leader, #1. Today, we have over 200 people dedicated to really instigate demand in the market via digital tools. So we basically can treat or B2B almost like a D2C, like a direct-to-consumer environment, where we are reaching out to end users and teaching them about our products, our technologies, how we can actually deliver a lot of the energy savings, create ROI with our products and so on. And one KPI, one critical performance indicator that we track is MQL or marketing qualified lead. And that's basically customers telling us, yes, I want to know more about this or I want to talk to one of your sales guys. So it's like a hot lead. And today, we generate roughly 6,000 of those per week. So you can think about that, this is a very great engine for us. where we think roughly about half of those marketing qualified leads come from new customer accounts. So we'll talk about the market share, how we continue to want to take some share gains. And so yes, I mean, 13%, it doesn't mean that the market conditions are obviously growing at that percentage. What it means that we're definitely instigating enough demand that we're able to capture a great share of a good customer base. So we feel very good about what we see as an early indicator, which is our marketing qualified leads as those turn eventually into sales. We never talk about the conversion rate but conversion rates even in this economic environment continue to be pretty stable. And so again, it's part of that controlling what we can control and how do we continue to take share.

And where are you in the game in terms of sort of growing MQL. Are you in the second inning or the seventh or is it a game that never ends?

Yes. I would say again that never ends because every year, we increase the level of sophistication on how we do that. Even yesterday, I had a session with some of core subgroup of team on how we're going to leverage more of these artificial intelligence tools that exist today to even accelerate our demand generation efforts even further. So I think we're always looking at how do we continue to evolve what we're doing from an MQL perspective.

And can the rate of closures also continue to increase?

Yes. I mean, I think absolutely. I would say that's part of our continuous improvement. I mean clearly, we are at x percentage today. You bet that we're measuring how do we get that to a better improvement. So we track a lot of statistics, including Net Promoter Score in terms of how do we answer those qualified leads, how quickly do we answer them. Just to give you a perspective, 2 years ago, we were answering these qualified leads with a measurement of within 48 hours, then we move to 24 hours, and now we measure it based on minutes. So it just speaks to the level of sophistication in terms of how we continue to improve this commercial execution engine.

Okay. Interesting. And then maybe final 1 on this topic. Are there certain end markets or products where this is particularly effective or is this broad and deep?

It's pretty broad and deep. I think the beauty here is that you can customize it to the specific situation that might be happening in a specific country. What we see on a global perspective is that a lot of the growth patterns are very distinct country by country and even subregion by subregion. So even here in the U.S., in one region of the U.S., we might be attacking more qualified leads around renewable natural gas versus in another area, we might be attacking it more or approaching them more from a food and beverage perspective. So I'll say that the beauty of this is that we can customize it to a specific end markets and specific trends that we're seeing in the markets.

Okay. Great. Let's sort of segue then to inorganic growth. And you recently added 3 new businesses. Maybe you can just level set us on what you're doing and why?

Yes. So 3 -- we announced the 3 bolt-on acquisitions. One of them, CAPS. CAPS is based in Australia. CAPS basically expands our distribution network in Australia by being able to now have the opportunity to get closer to the end user. This adds on to already our footprint that we already had in Australia. And again, what that creates is that ability to, from a compressor perspective, to go to those end users, and talk to them about our recurring revenue streams, whether it is care packages that we've spoken about, Ecoplant and trades analytics. So many of the solutions that we can offer to the customer on an ongoing basis. The second acquisition we announced Friulair. Friulair, it gives us a great technology around vacuum pumps, a company that is based in Canada, which brings a new technology to us. And the third, Del Pumps. Del Pumps is based in India, and Del Pumps gives us 1 of the leading small pumps around screw technology and gear technology in India for India market.

Okay. Great. And then maybe touch on Dover and how that's going?

Yes. And then ILC Dover, which we also announced the closure of ILC Dover. ILC Dover continues to progress. It's been now roughly 3 months. just to put in perspective to everyone in the audience, I mean, typically between the time we sign transaction at the time we closed, we do a lot of work to ensure that on day 1, we're good to go into the integration. And that's what we had also the chance to do with ILC Dover. So we did a lot of work on the integration planning. And on day 1 and forward over the next -- over the past 3 months, that's exactly what we've been doing, integrating it, bringing in the IRX tools, the demand generation still even early on, on ILC Dover that comes out next because typically, we have a pretty good cadence on how we incorporate some of these tools in the companies that we acquire. But the IDMs, which is part of the Ingersoll Rand execution excellence is going well.

And you're happy having owned it 3 months now that no surprises relative to trends in pharmaceutical or health care.

Yes, we spoke -- very happy. I mean we spoke a lot about that during the earnings call, how the biopharma, which is the largest piece of ILC Dover is doing very well, and we expect that it's going to finish the year at double-digit organic growth. So yes, I mean, I think that was one of the core pieces that we had around the biopharma piece, and that is trending well.

And I guess the other side is the space piece maybe didn't work out or at least near term as well as you had hoped, any lessons learned there or maybe just an update?

Yes, yes. So part of ILC Dover, so think about ILC Dover 75% of the business is life sciences and 25% is on the aerospace and defense. In the aerospace and defense contract that they had is around the next generation of spacesuits. And I think it was at the end of June, early July, there was actually a cancellation or -- not a cancellation but deleveraging the specs and that change. And basically, it drove roughly a $30 million top line that we spoke about during the earnings call. gap into this year, which obviously we expect maybe that to be $50 million run rate into next year. But hey, nothing that we worry about from the perspective in terms of how we continue to drive and controlling what we can control. That team is working on the current spacesuit already. And to be determine how much more we go there. But I mean, I think it's given us a great opportunity to speak to great customers in the aerospace industry about some of our products, and that has been very exciting.

Okay. Interesting. And if I'm not mistaken, I think those 2 astronauts that are stranded up there, it's a spacesuit issue, isn't it? There's some sort of interoperability.

No.

I thought maybe you could be the solution.

Yes, yes. That's right. Well, we can't give them spacesuits.

Anyway. Enough on that. Let's move to margins and then we'll see if there's any questions here. But can you just level set us with sort of where you think the 2 segment margins ultimately deserve to go.

Yes, I'll take that one. So first and foremost, I'll start on the ITS side, where I think since, frankly, the merger, you've seen a tremendous progression on the margin front, effectively, at this point in time, we're approaching 30% EBITDA margins in ITS. And I think the simple answer here is we don't necessarily see a cap per se on the margin profile. I think with the funnel that we still have ahead of us with regards to, again, being quality of earnings focused, we continue to see runway on price, maybe not at the same levels you've seen over the last few years, but clearly, price opportunity, productivity, direct materials things in the context stuff, as we've talked about here. Bolt-on M&A that we continue to see good margin accretion on. We continue to see margin runway. Is it going to be at the same level that we've seen over the last few years of well over 100 basis points? No, I don't think that's necessarily the expectation that you've actually already seen good -- I mean you've seen probably better than expected even over the first half of this year. So I think the 30% threshold is well within reach. And the reality here is we're going to continue to push and prudently, I'd say, reinvest in the business to drive ongoing organic growth. Obviously, that's part of the thesis and will continue to be. On the PST side, PST already at 30%. It's a business that we've indicated that we think can get to mid-30s. So I think comparatively speaking from this point forward, once again, continued margin expansion on the PST side, I think that's where a little bit more of the odd-sized opportunity sits as we sit here forward. We've been pretty explicit that there are still components of the PST organization. There are some that play well above 40% EBITDA. There's plenty that play in the segment margin segment profile. And then there, frankly, are still some that are playing below segment average. And those are largely assets that probably are just not fully at commercial run rate and things like that. So they probably have a little bit more outsized cost base compared to their top line. But the good news is that's room to run thereafter. So I think we feel really comfortable with where we're at, continue to see good margin expansion opportunities across both segments. PST will probably be a little bit more of the outsized one. And then I think the M&A bolt-on and continued progression on all the bolt-on M&A across both segments will continue to play itself out, including ILC Dover.

And on the flip side, are there some divestitures -- targeted divestitures that you need to do to get you there?

No. I think simply stated here, no. I think we have historically stated that if you flash back to 4.5 years ago, at the time of the merger, there were 3 assets that we indicated that probably just didn't fit the mold altogether. One being the legacy Gardner Denver, oil and gas business; the second being the legacy Club Car business, both were sold within a year after the merger. The third was the power tools business. And I think we took the stance here, it's a good business. We saw a lot of opportunity to fix the business, both top and bottom line. Flash forward now to today, it's part of our ITS segment and will continue to be part of our ITS segment. We don't see any need to really do anything different. The business has grown, I'd say, at a comparable rate to ITS. And let's just put it this way, 4 years ago, the business was probably playing the mid-teens EBITDA margin percent. Today, it's playing, I'd say, in the ballpark of segment average profile. So it's come up 1,000 basis points plus. So it's a great business. nothing that we see, we need to imminently do anything with. So nothing we, at this point in time, will tell you as an imminent divestiture or, frankly, a thing we need to do to get to the stated margin profile.

Great. Since you mentioned price, let's go there a little bit. That's been a theme early in this conference, but it's been a theme so far. And I think a lot of people are worried because across industrials, all these companies have taken pretty amazing amounts of price over the last few years. And the concern, obviously, is that we end up having to give that back at some point. So can you answer both parts of that, how much price cumulatively have you taken in the past few years? And what's the risk that, that has to go back down?

Yes, maybe I'll start and let Vicente add. So I don't have the exact number off the top of my head in terms of the cumulative price. But I think you can say over the context of '21 into '23. And it should be noted for us that I think a lot of it was -- there's a big chunk of it that obviously was driven by the market and direct material pricing and we obviously more than pass that through. Also fair to say that I think some of it was just, frankly, execution on the company side. We were pretty explicit then when we brought the 2 portfolios together, there was an opportunity between the legacy Gardner Denver and legacy Ingersoll Rand, particularly on the air compression technology spectrum. Just to be able to do some prudent pricing to try to bring them to the levels of parity between the 2 portfolios and in line with market. So you saw 2 things for us frankly, maybe a little bit different than others. And the reality is that, that latter part in terms of the some of the internal price averages part of the merger, those are things that we always expected to operate and execute on, and we got started on that much sooner. That's how we frankly got ahead of a lot of the direct material inflation. So to answer your question, did we probably see cumulatively across the board mid- to high single-digit pricing levels in most of our regions for parts of those couple of years? Yes, I think is the simple answer. I think as we sit here right now, simply stated here, you can just use this year as an example. And I think we can kind of even say, well, we've been better in guidance. We are continuing to be positive on the price side. We had between, I'd say, normal course pricing actions, which we've always said is about 1% to 2% plus a little bit of the carryover that was a little kind of carrying into the beginning of this year. You were a little bit above those levels in the first half of the year, and we settle into that 1% to 2% range in the back half of the year, and we have no reason to expect there won't be any -- will be a different level into next year. So pricing remains relatively consistent, and there hasn't been and will not be any view of taking price down or giving price back. We haven't seen a need to do that, and we won't.

And the other thing to add to there, Steve, is that, I mean, typically, we do price because we're able to deliver that cost of ownership reduction to our customers, whether it is energy savings or water conservation so that is how our teams sell commercially is based on that ROI. And as long as we can get that return on investment to the customer, and we can generate a price clearly by driving further innovation, we'll continue to do so.

Great. Okay. Let's take a quick pause here. Anybody from the audience would like to ask a question. We have a mic. All right, I will keep going. Let's talk a little bit about some of your longer-term goals relative to service and attachment rates and so forth. Can you just level set us with where we are and where we think we're going?

Sure. So to frame it up, I mean, roughly, call it, $7 billion plus in revenue and approximately 36% or high 30s is aftermarket in nature or you could think about it consumable within the ITS it's more like 40%. And again, that's part of the compression business that we have. We have aspirations of that number to become more than 50% clearly. And the way we think about it is that we're launching new service innovation technologies such as care packages or things that we can add more service to our customers. So for example, when we sell a compressor, the compressor will last 8 to 10 years, Today, that aftermarket is roughly 1x of that initial price and we're developing solutions that will ensure that we can -- how do we get that initial 1 sale to become 4 or 5x that initial sale via solutions. One solution of that is it's an acquisition we may call Ecoplant. So Ecoplant basically can fine-tune the compressor or device remotely to be able to maximize for energy efficiency. And this is now very used by a lot of Fortune 500 companies out there. We have another solution that is around the air quality of that air that we produce, and that could generate another 1x of the revenue. And in regulated environments like food and pharma, it is definitely needed. So again, it's all about how do we have more sticky recurring revenue streams that customers are signing up for over a period of, call it, 3 to 5 years, that every month, we're going to continue to get that recurring revenue. And in many cases, it's basically just increasing the share of wallet on what we can offer to the customer because in many cases, the customer don't have the skilled labor to be able to do it anymore. And that's where we come in. We can provide the skill labor but we can combine the labor with the technology in order to drive high level optimization. And so when we think about these incremental recurring revenue streams that we said on the Investors Day, we want to get to about $1 billion by 2027 that comes in at almost software-like margins, so where gross margins are above 65%. And so that's part of also the question on how we're going to continue to improve our EBITDA margins on that segment as an example.

Is that billing going to be a little overweight PST relative to IST?

It's going to be more overweight ITS.

More overweight ITS. Okay. Interesting. And when I hear you talk about that, question in my mind is why wouldn't everybody do this? Like if they're not signing up with you, what are they doing?

Well, so it's not that easy because you need to do -- obviously, if you sign the wrong contract, by not having the right data and the right information and the right historicals, you could actually create that gross margin to evaporate pretty quickly, right? So I think it goes along the lines of saying that there's just a lot of historical data tracking that we have done in order to create this. And when I say a lot, is talking about 10 to 15 years of data points. So a lot of these really started with the legacy Ingersoll Rand compression business as they were learning from the HVAC commercial business on how these type of solutions could be applicable. So yes, I think it takes some time and doing it right is the key.

Okay. All right. So you mentioned the compressors last 8 to 10 years, I think you said, correct me if I get that wrong, but just -- can you update us on where you think the installed base is? Is it super old? Is it okay? What are those longer-term drivers.

Yes. So on the Investors Day, we talked about having 5 million assets out in the field, not just compressors, but also some pumps that those 5 million assets are the ones that we can see correlation on how we can connect them to be able to get data and to be able to gain these type of agreements or solutions that we can provide. In terms of the age, I mean, there's a wide spectrum of this age. So there's always going to continue to be potential things for us to replace whether it is with the whole goods, obviously selling the new compressors, selling a new pump. But also we're very excited about just trying to sell more services and solutions to that current installed base that is out there. And in many cases, we could even expand the life further even more.

Okay. All right. Any questions, Mike?

I just wanted to go back to where we started the conversation. Steve, you were talking about book-to-bill and the markets. I just wondered if you could give us a bit of a view into the different end markets or the different types of customers and what you're seeing in the different segments that you operate?

Yes. Maybe I'll start, and I'll let Vicente weigh in. We obviously play across a wide spectrum [indiscernible] I'll do it more like maybe regionally and maybe some -- we can talk about PST, we take in 2 pieces. I think on the ITS side, I think we've been pretty consistent in this verbiage over the course of the year. And frankly, while we're not going to initially talk specifics about Q3 in our quarter, order trends or anything like that. And I think it's probably fair to say nothing has dramatically changed in this front. And that being, I think probably the most stable best growth region comparatively speaking, is probably the Americas, particularly North America. And I'll come back to some of the pockets here in a moment. Europe has kind of been in the middle, relatively stable comparatively, but good pockets of growth, not everything behaving the same certain countries a little bit better than others. Obviously, the biggest headwinds for us have been on the APAC side, where we have approximately -- I'm going to round it up 20% of our revenue in APAC with the majority of that being China. And I don't think I need to probably tell you guys the China story here. I think the good news is our team continues to operate and execute well. It's just a marketing environment that's just -- has more headwinds than it's pacing compared to years past. You flash back, and I'll now reference some of the things Vicente said, whether it be MQLs and things of that nature. So again, you look at the MQL and obviously, I think we're encouraged by the level of activity the team is still being able to drive. Obviously, we're not immune to the end markets we play in, so that's kind of factoring in. But I think the piece that gives us a lot of encouragement is when you deep dive into each of those regions, there's still incredible amounts of opportunity, whether it be Latin America, Middle East, India, Southeast Asia. I think between the 2 of us, we've probably been to every one of those regions somehow in the last like 4 months. And I think the reality here is we continue to see a lot of outsized growth opportunity for Ingersoll Rand, specifically in those. Obviously, we talk a lot about the core. We talk a lot about the more developed markets. But those 4 areas, which frankly are not small, they continue to be areas where I think we continue to say we have room to run in terms of share in the context of the next number of years. So quite encouraged. And interesting enough, I think the PST story, not dramatically different. Interestingly enough, our revenue percentage distribution is fairly comparable in PST as it is to ITS, including in the Asia Pac realm. So we've seen fairly similar trends. I think the good news is if you take some of the specific PST items, one, you saw positive order growth right, which is super encouraging to see. Second, I think we've talked for quarters now about some of the headwinds we faced in our medical business, specifically in PST. And the good news is, I think, we've largely digested those. We aren't saying there's big recovery necessarily in the back half. But I think the stiff order comps and some of those negative trends you've seen at least for the last number of quarters are somewhat behind us. So I think we're encouraged. Again, like I said, we gave the guidance, and I think that there's -- that's still our best view of the world but I think we're encouraged by some of the pockets opportunity we continue to see.

Great. I think we have time for maybe 1 more. None of these discussions will be complete if we didn't touch on M&A and the funnel. Obviously, you guys -- it feels like the M&A portion of the story has actually accelerated a little bit recently. I don't know if that's just random timing? Or do you view that as how we should think about it going forward?

Yes, we continue to be pretty enthusiastic about the M&A side. You saw on the call, we said also that we have 8 additional bolt-ons into our funnel already on their LOI, sorry. Well, the funnel continues to rapidly accelerate. If you think about the past 4.5 years, roughly 51 acquisitions that we have done. And about 95% of them sole source. So we have an M&A engine that we are very proud of from the perspective that, we do a lot of market segmentation. I mean we understand the technology that we want to acquire. And then we go after, in many cases, family-owned companies and tell them the story of who we are and what we can do to transition that legacy. And many of you know a little bit about our story, if not, just to highlight the piece, is the history of the ownership mindset and how 20,000 of our employees at Ingersoll Rand, they're owners of Ingersoll Rand shares. So we believe in the ownership mindset that is a very big differentiator and accelerant to our performance and combined with our Ingersoll Rand Execution Excellence process, it's a pretty unique culture that can drive long-term performance. And so when owners of companies, family-owned companies, they see that we can continue with the legacy because we believe in multi-brand, multichannel strategy. So we keep the brand because there's a lot of equity in the brands. And we can add that legacy of providing the long-term equity and an ownership to those employees that they have been grooming for so many years. It's a very compelling story and why they will like to transact with us. So I think it's -- our M&A engine, it's pretty unique from just a cultural aspect, the integration side, but also how do we scout and search these technologies globally and then pursue the acquisition.

And you're not seeing any change in target companies' willingness to sign LOIs or talk about?

No. I think in our case, the part of the story to as well is the compelling story to tell them, hey, over the past 4.5 years, look at the world, macroeconomic, pandemic, wars and so on and so on. So it is even more compelling for these owners, own family and companies to say this might be the right time.

All right. Perfect. That's our time. We really appreciate your insights. Thank you.

Thank you.

Thank you.