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

All right. Well, thank you, everybody. Very excited to have Ingersoll Rand up here. Vicente Reynal, Chairman and CEO; Vik Kini, CFO; and also Mike Weatherred, who we are super happy to have.

So maybe starting off high level, in my view, the best compounder in U.S. industrials, a lot of companies do M&A. I don't know if I cover any companies that grow margins through the M&A. That's what always stands out. So, what's the secret sauce?

Yes. No. Well, thank you for those kind words. The secret sauce is really the culture that we have created at Ingersoll Rand. So when you think about it as this ownership mindset where 20,000 plus employees across the company, they think and act like owners because they're owners. I mean we give them equity. So they have skin in the game, every year, we kind of walk them through our strategic year plan to all employees in the company. So they understand what it takes to drive long-term performance creation. And when you have these ownership mindset across employees globally, and then you give them the specific tools to execute really well, and the tool that we talk about here is IRX, and that combination is pretty powerful. And then when you give that ownership, the tools and the initiatives, initiatives around organic growth, around inorganic growth, we just created this flywheel that over the past few years, it's just been going on and now we just have a phenomenal platform across Ingersoll Rand with a fantastic culture that we just think -- that we truly believe is for here for many more years to continue on this journey of long-term value creation.

Yes. So it sounds like the foundation at the company helps do that. But is there also an element of when you're looking at what to acquire? Or are there certain things that you're saying, okay, hey, we know they're going to come in, integrate well. We can get margins up. What do you look for there?

Absolutely. So think about it for the past -- in the past 4.5 years, we have acquired 51 companies and it goes into the integration process pretty quickly with utilizing ITX. We look for companies that have good gross margin that we can expand. We look for companies that have a great aftermarket that we can actually improve. We look for companies that they're mostly bolt-on in nature. So out of the 51 companies that we have done, 50 of them, you could argue they're bolt-on in nature. We also said that every 3 to 5 years, we'll do a bit of an anchor acquisition, and that's what we just did here with ILC Dover to kind of penetrate even better into the life science end market. and now go back into the bolt-on acquisition. So there is a lot of good structure and thought around how we do that M&A and is an M&A as well that when you think about a 51 companies, 90% of them have been sole sourced. So we are cultivating hundreds of companies at any point in time. We put them through the funnel. We have a very rigorous process to look at velocity of the M&A going through our funnel and again, it's very process oriented, very process-oriented, staying close to the core, quick adjacent next to it, but we don't go for a new leg. We don't go to very far away kind of look into M&A that is kind of not aligned with everything that we do, and that has worked very well.

Yes. No, absolutely. While there's a lot to love about compounding, you drive growth without needing the cycle to get a perpetual driver of positive revisions on earnings. The concern that I have around compounding at times is when the companies have gotten so much bigger, I think you guys are probably 50% bigger than you were in 2019. So adding that mid-single digit, now you need 50% more, does that make it harder? Or is there a change in the way you have to do things?

Not necessarily, I would say, Chris. I mean I think what we have from a cultural perspective is definitely a culture that is scalable, because we've been able to scale it pretty quickly, very rapidly. We believe in 1 culture, the Ingersoll Rand culture that we have of ownership mindset and even after 51 acquisitions is really kind of core to all the acquisitions that we're integrating. And to your point, in terms of the growth, do we have perhaps maybe -- I mean do we have enough in the funnel to continue on the inorganic piece? And the answer to that is yes. I mean, we are roughly a $7 billion plus revenue, but we play in a $65 billion addressable market, where there's a lot of high level of fragmentation, in very kind of close to the core technologies. And we have a pretty robust -- on our earnings call, we said that even with ILC Dover and the other 3 bolt-ons, we still have 8 companies under LOI. And once we have a company under LOI, very likelihood it will close.

Yes. Absolutely. I guess maybe taking that kind of that total addressable market and bringing it to ILC Dover, was the TAM expansion there, a big part of that deal and the decision to push harder into life sciences?

Absolutely. So when we acquired ILC Dover, it gave us a $10 billion addressable market increase. So we went from the $55 billion to $65 billion. And now we see very well similar to what we have done historically, which is very bolt-on in nature, acquisitions that we can actually continue to put in, in this level of fragmentation that we see in this specific area that we like to play in the life science end market. So yes, getting that great addressable market. And now we have a dedicated M&A leader for the life science segment. We already have a funnel that we review and the funnel is already very aligned with what we have done historically, which is kind of bolt-on in nature.

Yes. The deal, I think, more than doubled the Life Science business. So I guess 2 questions on that. How is it going? And then when we look at the M&A pipeline, is it fair to assume that there's more coming into life sciences as you continue to try to scale that?

Yes. So the integration is going fairly well. I mean, I would say that very common for us between -- at the moment we sign the transaction. Between sign and close, we do a lot of preparation for day 1. And then once we close, we're off to the races. So the teams are leveraging very well. IRX, they're very [indiscernible] and really leveraging a lot of the processes that we have. And are we going to put a 100% participation in life science? No. Do we have -- I think we have a very good blend funnel between ITS, PST and the life science as well, which is within the PST and we go for basically returns. Think about all these bolt-on acquisitions that we have done, mid-teens ROIC by year 3, it's a great financial performance, and that's exactly what we are very disciplined and sticking to the core of that.

Yes. The deal really stood out from a cross-selling opportunity. Maybe can you talk a little bit about that? And are you seeing that come through? Or does that maybe take a little bit longer?

Yes, still early in the process, but clearly, the revenue synergy was one of the most exciting pieces for us. Because now we're able to talk directly with the customer, whether biopharma, med device customers. And for them, it has been pretty high opening as to what we can do with the value proposition of the technologies that we have. Because when we go and talk to a customer, we just don't talk about that single technology. We talk about the subsystem that we can actually create and deliver to that customer and that provides incremental value add for that customer with a better return on investment on the technologies that they're using for us. So yes, early stages, but really exciting to see that where in the past, we have to -- in many cases, when we were talking to a customer, we have to like not quote that specific technology because we're going to have it now. We've been going back to those customers and saying, "Hey, with what we have now, and now we can provide that proposition to you."

Yes. And maybe last one on M&A. I think the deal was very positive from a total addressable market expansion, cross-selling opportunities. The concern that we heard from investors is that the history of industrial companies pushing into life science really hasn't been maybe always that successful. Maybe you don't have the same domain expertise, you have in industrial, generally subscale. I guess what gave you the confidence that this was the right move?

Yes, a couple of things. I mean one, I would argue that -- I mean, the team that we have in ILC Dover is fantastic and terrific. And one that -- many of the team members of the leadership team in there really came from industrial companies. And we've seen it many times too as well that actually very good life science companies have started the industrials as they moved there. In our case, we're saying we're not going to grow 100% life sciences. I mean life sciences for us is now high teens and do we -- from a total revenue perspective as an end market, do we see that maybe going to maybe 20s, but we get to 50 TBD, but very likely or very unlikely. But I think it's one that, yes, I mean, it's giving us exposure. A lot of the technologies that you see in life sciences, even simplistically, you think about peristaltic pumps and compression technology, they start in industrial, and then they get applied into life sciences. I think the benefit of this is that the rigor and the process orientation of execution and driving performance that you've seen many times in industrial and then applying that into a more scientific approach with a good structure, it drives better performance too as well. So there are a lot of good things that can happen as you kind of transcribe technologies from one space to the other.

Maybe before I turn to the market outlook, I just want to see if anyone in the audience had any questions they want to ask. All right. So to the market, when I look at the performance of the company with respect to the end markets, growth has bifurcated above those end markets, most specifically in Europe and China and in Asia, I guess where do you attribute that to? Is that just you guys are winning share? Is it that energy efficiency and the value add there is higher than it used to be. What's driving that market outgrowth?

Yes, for sure is we have aligned very well with some very good secular growth trends. And that is, number one, around sustainability. And sustainability, energy efficiency. Energy efficiency, water conservation. And that has really aligned all of our technologies at Ingersoll Rand to provide a benefit to the customer that when you think about compression technology that consumes 30% to 40% of the energy at a typical manufacturing facility. And we can come in with new technology and provide 15%, 20% energy savings and on top of that, we can give them a technology that we call Eco plant that can dynamically fine-tune that compression technology even remotely and providing incremental benefit of energy efficiencies, the return on investment is fantastic for customers. So that has been definitely a very big push for us. The second push is around digitalization. Once you connect these machines, there's so much data that you can get and then what we're doing with that data is providing incremental services and solutions to our customer. And you saw in our Investor Day how we said that today as a total company, 40% of our revenue comes in from consumables. But we want to create even more stickiness to the consumable and we're going to call that recurring revenue. And at Investor Day, we said, "Hey, today we had a base of $200 million of recurring revenue, and we want to increase that to about $1 billion over the next few years by 2027." And that incremental really comes in from that stickiness of having that data and providing a solution that is really conducive to providing good ROI to that customer based on an unmet need that they have today, which it could be energy efficiency, it could be air quality or it could be just simply saying, "I don't want to deal with that compressor room. you, Ingersoll Rand, take care of it. So I think those are kind of somewhat key core revenues that are providing that incremental revenue growth that we think is taking share. And then the last piece is our demand generation engine that Mike is leading, and this is a phenomenal engine for generating marketing qualified leads, instigating demand and being out there with a customer in a very simplistic way digitally.

Yes. Do you think -- is the bigger difference from the customer standpoint that just, hey, the ROI or the paybacks are better than they were 5 years ago, whether that's just because electricity prices are higher. Maybe the digitization has helped with that? Or do you think it's more that customers are maybe more focused on building resilience that was obviously a big theme in Europe, given some of the energy stocks over the last couple of years?

Yes, great question. It's probably both. It's the resiliency it's the energy and the third piece is really sustainability. I mean many companies have put out their 2030, 2050 targets and when you read their sustainability reports from these kind of large companies, they are actually even writing how -- on their reports, how compressed air and air treatment systems is the next phase for them to get to that Scope 1 and Scope 2. What I can tell you as well is that I know that ESG is a conversational topic that some people now are kind of not believing but customers that are doing it, they're doing it because it is a great return on investment for them because they see that really getting that energy savings is going down to the bottom line.

And is that return better than it was 5 years ago that you provide to the customer? Is there any numbers or anything you could talk about on that?

It is. I think maybe if you think about maybe pre-COVID, on average, you could see returns of maybe 2 years close payback. Today, on average, 15-month payback. And we think that with technologies as we continue to develop technologies and continue to connect -- remotely connect, this payback will go even lower.

So I mean 15-month payback is a phenomenal investment for anybody. I guess what's the pushback for people maybe not upgrading their systems?

It's just mainly education, mainly education. That's why we think the demand generation engine that we have is fantastic. I mean just to give you a quick glimpse, I mean, we have 5 million end users in our database. So for an industrial company to have that many end users in a database that we can actually leverage as a way to communicate with them and obviously companies that we acquire, we put them in this data lake system that we have that we can extract more data and then communicate more with them, we're communicating with thousands of customers daily. And that is giving us roughly 6,000 qualified leads per week. So it's a lot of touch points that we can generate. You can only do that if you have a highly automated engine, and that's basically what we have created.

Yes. Maybe over to those MQLs, Mike's doing a great job, I think, up 13% in Q2, it really stood out to us. When do you think those MQLs could start driving a more material impact on organic growth for the company?

Yes. I think the -- so 1 of the things -- and Vicente talked about in the past that we usually think about 6 to 8 weeks kind of lag time. And 1 of the things -- and I think it's the thing that's important, there's 1 point just before I go to the sales funnel, but this is 160 people, and it's not a corporate function, but it's centralized. So we have 160 people that work in a unified fashion and get up every day thinking about creating demand and versus other large industrial companies I've worked for in the past, you may have an equal number, but they may be fragmented. And then to the point Vicente made, not only is that database centralized but the way we go to market through the web and the way we use marketing automation and the way we use the CRM and so on and so forth, it all looks the same. It looks the same in Singapore as it does in Mexico as it does in Canada, et cetera. So when a marketing qualified lead comes in, and to Vicente's point, there's roughly 6,000 of them a week, a good metric to look at is converting 30% of those to SQL. And SQL is a sales-qualified lead, which means now it's in the hands of the sales force, and they're going to run it through a sales funnel. And we think about a 30% conversion rate is being good and we've been able to stay roughly at that level. And then we track those through the 5-stage funnel. And the third stage is where we're making a quote, And we plan to win 50% of the things that we quote on. So we see this year, that 6- to 8-week lag time is definitely taking longer, but that Stage 3 and the funnel is getting bigger and bigger. And things -- if 1 of the questions we got asked several times yesterday is, are things in that funnel not active anymore. And there aren't any things in the funnel that are not active because once they become inactive, we're going to take them out, right, because it's just clutter and junk. So the enthusiasm at which Matthew and Vik and Vicente talked about the Q2 results is not only are the MQLs up, but the funnel is bigger and especially the large project funnel is I think you guys said 20% bigger year-over-year. And that's -- again, when you're looking at that globally in a unified similar metric format, that gives us a lot of self-comfort.

Yes. I mean, I guess maybe on that short-cycle side, what is driving -- I mean I know short cycle actually stayed pretty solid for you guys, but are you seeing positive rate of change? And what's driving that? Do you think the end markets are getting better? Is that okay, maybe there was some channel inventory digestion that needed to be worked through?

Yes. I'll take that one. I think obviously, we think about Americas, Europe, Asia, different dynamics region to region, of course. I think what we kind of see right now is, obviously, in general, we'll call stability, right? Our kind of view here is things are kind of moving sideways. It's probably worth noting that up to 3 regions, Americas has probably been the best performing. Europe has been, call it, in the middle, not all parts of Europe made equal. Obviously, certain parts much better than others and others that clearly, there's more room for opportunity as we think forward. And Asia, I think, is quite well understood in terms of the headwinds that, that market has seen. And quite frankly, we were pretty explicit even coming into the year that we had a large project kind of dynamic that was just going to be, quite frankly, with the run-up you've seen in Asia, in particular in China, in EV battery and solar over the course of the last, let's call it, 18-plus months coming into 2024. That was just a phenomenon that wasn't going to repeat itself. As we move in the back half of the year, I think it's probably fair to say that things continue to operate generally in line with what we saw coming out of Q2, I mean really not a dramatic amount of difference. As you can probably imagine, there's still uncertainty clearly in the market, whether you want to attribute it to elections or pick your favorite driver. So for us, I think the MQL phenomenon is kind of this whole kind of self-help kind of dynamic. MQL, in my opinion, are really a reflection of our team's ability, and as Mike said, almost 200 people every single day, how do you instigate demand for our products. Our products are fairly ubiquitous in the context that they serve a lot of different end markets, and there always are going to be pockets of growth, even though China, obviously, you read the headline news, but there are some pockets of growth. There are products like blower and vacuum and 50-plus acquisitions we've made that are getting translated into Asia. And by definition, those should lend themselves to some nice opportunity that demand gen helps kind of amplify. So for us, it's just going to continue to be how do you instigate demand even in what might be a sluggish growth environment.

Yes. On maybe the longer cycle funnel, first half, I think up in the 20s year-on-year. But I think we're saying that, that conversion is slower. It sounds like there's a lot of reasons for that. We can maybe pick our favorite. But I guess, what do you think are the biggest? And why do you think that is converting slower than you would expect?

Yes. You've seen that there's been -- on a global basis, not only in the U.S., a lot of these large mega projects announced. And once it gets announced, it takes a little bit of time to get through the engineering procurement contract in the company, EPCs and basically, we have several EPCs who we do a lot of work with. But they're saying that just basically at capacity. I mean they don't have enough engineers to actually process a lot of these large engineering projects and then kind of release those projects into when you may want to call construction. So I'd say that's definitely 1 that we have seen. I mean when you look at the backlog of some of the EPCs, I mean, they're 2- to 3-year backlog that they have. That is in regards kind of has been 1 of the largest things that we have seen as to why the elongation in the funnel. And the second one that we hear often is the site of the customer is not ready. And in many cases, it could be because not enough labor to finish the construction or it could be governmental paperwork that needs to get done, but the site is not ready to them accept. And therefore, it kind of delays the decision a little bit more. I think what all these -- the good news, as Mike said, is that we're not seeing the cancellation. We don't see. And so what this does is it kind of bodes well for us to see that there's actually discontinued good visibility as we go into later in the year or even more particularly into 2025.

Yes. I mean some pretty positive. Projects are not moving slow because maybe there's not demand for what that factor would ultimately produce. They're trying to move fast, but they're just hangups in the process.

That's right. That's right. And we do -- I do personally a lot of trouble globally, and you see the movement. I mean, you go to Mexico, you see that definitely the nearshoring, reshoring, it is real. You go to Brazil, you see it there too as well. You go to Southeast Asia, it is very, very active. So there's just a lot of good areas of growth that we're seeing that we're putting some good focus into it.

Yes. On those mega projects, the U.S. gets a lot of focus, obviously, it's something we focus on a lot. But you mentioned mega projects elsewhere. Can you kind of talk about more globally what you're seeing there? Because I feel like that often is really not as focused on, at least from us in the U.S.

Yes. I mean I feel that kind of come to mind. I mean, Middle East, Middle East is -- from a project perspective, Middle East is growing incredibly fast whether you think about expansion into how do you extract gas to then liquefy that gas or if you go to India, whether it is around infrastructure, I mean the fact that in India, still only 30% of the water gets treated. So from a water treatment perspective is also very important and railway systems that's going to drive better infrastructure. You start going now into Asia, shipyard build-outs in order to be able to support the growth of not only the LNG ship vessels but also support the conversion of the vessels into more of a clean technology. And when you think about all those that I mentioned there, replay, compression technology is needed. Compression technology is needed for boil of gas. When you're inside the LNG ship vessel, compression technology is needed. If you want to start up that engine with compression technology is needed. If you want to extract the gas, compression technology is needed. If you're supporting the localization of life sciences, supply chain in India, for example. So I think that's a bit. I think it's for us is we're really attuned to what we call micro growth trends. So even though holistically, we look at all the macro secular trends, I personally and we have 2 people in our team in Davidson that all they do all day long is basically look at about 100 micro trends that happen and not just globally both by country and by specific vision. And that then gives you the ability to point our canon, which we call demand generation to then instigate demand and then kind of talk to those customers pretty quickly. And all of that done in a very cost-effective way.

Yes. Yes, absolutely. Maybe to Vik on margins. It's been a great story for the company on expanding margins. Right now, not much volume growth out there. But in a slower environment, the business does mix more to aftermarket, which is margin accretive. What should investors expect for margins going forward?

Yes. Maybe I'll talk about it in kind of holistic terms, and I'll kind of take it in 2 pieces. Because you hit the aftermarket, which I'll park on the side here for a moment. But if we think about kind of just the growth algorithm and how we think about whether it be the growth or the margin side of the equation, first and foremost, we effectively now have 2 segments that play effectively close to 30% EBITDA margins, which is a testament to the team's execution and what the team has done over the last 4.5 years, whether it be executing on the merger-related synergies, pricing opportunities, things of that nature. In terms of going forward, I think the algorithm continues to lend itself nicely to margin expansion. So as Vicente, I think, started the conversation on your first question, when customers are highly focused on innovation, returns, energy efficiency, total cost of ownership, if you can deliver on that, the context of being able to, in a normalized environment, deliver 1% to 2% price is pretty consistent. And that we've shown to be able to do that and then frankly, in certain years, even more than that. Second, I mean the productivity equation. Simply stated, we are a $7 billion-plus revenue enterprise, 20,000-plus employees, 75-plus manufacturing sites globally. And we subscribe to an in-region for the region model, which we recognize probably lends itself to a larger footprint. But by definition, that also should lend itself to productivity opportunities. Direct material cost, still we're obviously at relatively high levels. So we think there's continued to be some price clawback opportunities, we think 2025 onwards. And then in addition to the productivity and the pricing equation, we've done 50-plus bolt-on acquisitions. And generally speaking, those acquisitions probably come in slightly below fleet average margins, but within a 2- to 3-year time frame by showing by how we underwrite deals, controllable synergies, getting that mid-teens ROIC, we see no reason they can't get to kind of fleet averages, if not better. So I think there's that kind of perpetual behind the scenes kind of a little tailwind on the bolt-on M&A, continuing to see that expansion. So one, the concept of continuing to see margin expansion, absolutely. We don't see any cap necessarily, for example, on ITS margins. Probably fair to say that where you're seeing strong triple-digit plus margin expansion for ITS over the last 3 to 4 years, maybe that reverts more to like a 50 basis points going forward. We're already at 30% and maybe PST has a little bit more of the outsized opportunity. Now I'll come back to the area you said, obviously, there is this recurring revenue opportunity. And simply stated $200 million of revenue up to a possibly $1 billion, it's not only the highest probably growth piece of the equation from an organic growth perspective going forward, done properly and done well and that $200 million shows it. This has like 60-ish percent type gross margins. And so without question, that's kind of in our opinion, I'd say the cherry on top for lack of a better way to say it, that's the incremental hopefully upside. By no means where our Investor Day targets predicated on just delivering that piece of the equation. It's really delivering that controllable piece of margin expansion and growth and the recurring revenue, we're going to be kind of the upside opportunity. But frankly, we're seeing some of that mix up on aftermarket as we speak. I'd say that's been part of the first half results as we continue to ramp and globally expand the care model and the recurring revenue model. And for us, that's a huge piece of excitement as we go forward.

Yes, you mentioned the company gets very consistent 1% to 2% price, pretty much every year. Obviously, with inflation, it was higher. But when I hear that customer paybacks or ROI is materially better, does that change the way you think about pricing and maybe not sharing those economics a little bit?

Yes. No. I -- even there's also new business revenue models that we're exploring. So I mean there's definitely all kinds -- and I think the advancement of technology and how we're incorporating technology to continue to get that payback lower is just opening a new door of opportunities on how we can actually create more sticky revenue. I mean recurring revenue is definitely 1 avenue, but there's many other things that we can do to really provide a customer at a much higher margin for us, but it provides an even better solution for the customer that the customer is willing to pay for.

Yes, yes. Maybe, Vik, you gave some regional commentary earlier. Maybe finishing up on China. There hasn't been much out there to be optimistic about. You guys, in Q2, talked about, I believe, orders and revenue up sequentially versus Q1, a little bit of backlog build. Do you feel like things are getting better there? Or maybe there's too much to extrapolate out on there I don't know there's seasonality in that.

Yes, I think the simplest way to say here is kind of probably just moving sideways at this point in time. To your point, encouraged by the Q1 to Q2 sequential improvement. We did build backlog there. Obviously, we all know what the market is doing. We're not immune to that. But we do feel like the team on the ground there is executing well in spite of a tough landscape, and that fundamentally, yes, while maybe growth rate expectations in China in total have maybe reset the opportunity for our team to probably still outpace that by virtue of localization of products, demand generation, some of that self-help, if you will, that's the piece that we're encouraged by. So to your point, still uncertainty out there. We'll continue to see how the team executes and kind of how the landscape unfolds through the back half of the year. But I think we're at least encouraged by the fact that the team has seen general stability in what is a pretty tough landscape and hopefully sets itself up for a better growth algorithm into 2025.

Well, I appreciate that. We're up on the 30 minutes, but love the conversation. Thank you guys for being here.

Thank you. Appreciate it.

Thank you. Great. Thanks.