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

I think we're ready to go. All right. Our next fireside chat is Ingersoll Rand. We're really happy to have Vik Kini, Chief Financial Officer, here with us today. Vik, great to see you.

Yes. Thanks for having us.

So I don't know if you want to open up with any initial remarks, if you want to get right into Q&A however want to do this.

Listen, why don't we just jump right into it.

All right. Perfect. Why don't we start look, the evolution of Ingersoll has been incredible. The amount of M&A you guys have done over the last 4 to 5 years has also been incredible. It's been an important part of the value creation framework going forward. We're still trying to get to know a little bit about this ILC Dover acquisitions. Why don't we start there and tell us like what the strategy is behind that acquisition, ultimately, what that means for your broader medical portfolio as you continue to scale the business.

Yes, absolutely. So yes, so let me just start by saying, first and foremost, really excited by kind of the momentum we've seen. It's -- we're coming up on close to 5 years now since the merger to create Ingersoll Rand. And one of the biggest opportunities that we saw when we put the company together was a large, fragmented kind of end market based opportunity for acquisitions. And I think one of the big things, and we'll get to ILC Dover here was that there were a lot of bolt-on M&A opportunities. And so to set the stage, here we are in December 2024. I think over the last 4.5 plus years, we've done 55, 56 acquisitions, I would say, all largely bolt-on in nature, and maybe ILC Dover slightly larger than a bolt-on. I think in the context of ILC Dover, no surprise that life sciences has kind of been a focal point of the strategy. As you remember, post-merger, we wanted to specifically distance ourselves from, I'd say, what we call more cyclical assets. So we did take the opportunity essentially 1 year -- in the 1 year post the merger. We sold the legacy Gardner Denver Oil and Gas Pump business, the Club Car business, both great businesses, but just didn't fit the mission-critical flow creation, less cyclical asset portfolio that we were looking for. And now flash forward, Life Sciences already was our single largest end market total business. And we saw a big opportunity with ILC Dover to kind of, let's say, create a much more firmer beachhead, if you will, on the Life Sciences side. Both to establish Life Science even more prominently, but then also to create a platform for further M&A. I think in terms of ILC Dover, simply stated here, a great platform, really exposed a lot more on what we call the bioprocessing side. Particularly with the distinct focus in areas like consumables. So their hallmark products are things in like single-use powder containment, isolators, liquid handling type applications, consumables in the context of tubing which for us is exactly where you want to play in this space. And I think there also are some nice parallels and synergies with the existing portfolio. And so we can obviously talk a little bit more about ILC Dover. But one of the areas that's really exciting for us is, for example, in the IR medical business, which we've had, we had peristaltic pump technology. We never had the consumables like the tubing and whatnot. Well, ILC Dover, one of their core competencies is silicon and thermoplastic tubing and extrusion of that nature. So now we actually have the consumables to go with our peristaltic pump technology. Powder handling, a lot of the powder handling applications, you need to have air to convey the powder in the application set. And well, blowers and vacuums are piece and parcel to Ingersoll Rand. So I think we're seeing some nice synergies in terms of what we call commercial or cost synergies there. But I think ILC Dover when you think about the biopharma and the medical device business, which are essentially the 2 biggest pieces there in terms of true Life Sciences, really excited. They've had great growth trajectory, continue to perform well, and we're really excited about kind of the future opportunities there.

Awesome. Look, I remember years ago, it's probably -- I mean, probably when you guys were Gardner Denver, just talking about scaling this Medical business one day maybe be call it, a $2 billion-plus type revenue business. We're getting there. We're all -- we're getting there. You talked about those opportunities within ILC Dover necessarily be a beachhead, right? So where does this open up additional M&A bolt-on opportunities to get us to that -- potentially that $2 billion level.

Yes. So I think with the ILC Dover acquisition, we've opened up probably an incremental TAM that's upwards of close to $10 billion comparatively speaking to where we historically played. So interestingly enough, I would tell you, I think the story there is actually not too dissimilar from what you've seen in the balance of the core business. When you think about how we have done M&A, it has been 90% sole-sourced including even, frankly, ILC Dover, largely bolt-on in nature. But I'd say, nice differentiated technology that we think that we can leverage and scale within Ingersoll Rand, obviously drive hopefully some good cost synergies and some controllable synergies in that respect. The reality is, we're seeing similar opportunities now with that kind of more established beachhead we had. We already had, I'd say, some opportunities. And I'd say some funnel for -- in the Life Science side. ILC Dover, quite frankly, came with its own ready-made funnel for lack a better way to say that. And so even in the -- when we did our earnings 6 weeks ago, we talked that we had done roughly 15, 16 bolt-ons year-to-date, and we announced that we also had 10 more deals under LOI, one of those actually is in the life sciences space. So I think, again, it will take some time to scale and ramp like anything else, but I think you're seeing good opportunity just like you've seen in the core business to kind of replicate that model, smaller bolt-ons, I'd say prudent multiples. We're not going to go over our skis in the context of kind of strain from the discipline you've seen us do from a purchase price perspective, but a very comparable model to what you've seen on the balance of ITS and PST.

Great. Look, we've talked a lot now about how this has created a ton of value for the company in the last few years, lots of singles and doubles if we're going to use maybe potentially the sports analogy. It was strange with this particular acquisition, the space piece of the business and then having a lower expectations fairly shortly after you completed the deal. Just maybe just talk about like that piece of it, like what part of the process didn't work in terms of trying to route that out ahead of time and what you learned from it?

Yes, of course. So I mean I think we'd always say we're always learning through the process, whether it be M&A or anywhere else. Like I said, and kind of as we started super excited about ILC Dover. I think the Life Sciences applications, the biopharma business, the medical device business continue to be really excited about and the synergies that come there. The space business, which obviously, for those of you who may not be familiar, the third business with ILC Dover has legacy played in the space kind of ecosystem, space suits and other applications for aerospace and defense. Good business, simply stated here, went through the diligence process. To be very honest with you, I don't think there's anything that would have could have been done differently, if I'm being very honest. We closed the deal in June and then late June, and that's just how timing works. We provide space suits to a third party who then provides to NASA and said third-party unexpectedly to anyone in this industry, including NASA decided to walk away. And so they descoped it. And as we're the supplier to them, that obviously trickled back to us from what was called the next-gen or [indiscernible] next-gen space suit. So that's just the reality of what happened. I don't think there's anything that could have been done differently or happen differently in terms of the diligence process or expectations. This is kind of was unforeseen and as unexpected as possible in the industry. And the way I'd say it here is, obviously, yes, a little bit of reset and expectation, specifically on the space revenue base. It obviously just come out of the equation, I'd say, partial year for this year because we only own the asset from June, but it is ongoing thereafter. So it's kind of reset expectations from a '25 onwards perspective. Space business, it's a good business. It's one that we've always viewed as kind of the optionality in terms of the acquisition, continuing to run it in the context of normal course, and we continue to kind of move forward from that perspective. So I think the simple answer here is -- anything we would have done dramatically different? No, I don't think so. Unfortunate, sure. We're continuing to move forward, though, in terms of the base business. And listen, if something of that nature or other space suit technology or something comes back to kind of replace some of that volume or what not, of course, we're well situated there, and we'll kind of see how that all plays itself out.

Makes some sense. And just to contextualize it, we're talking about like roughly $30 million revenue headwind into...

It's probably about $30 million this year, it's probably annualized closer to $50 million in terms of the go-forward, in terms of the full year.

Sure. Okay. Going into -- I think just closing the loop here on the M&A. So you mentioned 10 LOIs -- this year, you were kind of punching above the weight in terms of your long-term target from M&A. I think we're expecting somewhere between like 6 to 7 points of M&A. I think you've already got maybe 3 in the bag, heading into next year. Next year is shaping up to be another year where you maybe do more than the long-term target?

Sure. I think the way we think about it here is, let me put it this way, the funnel, whether you want to look at it as the funnel in totality, the deals under LOI as we sit here right now, I mean, we'd be necessarily not expecting that you're going to see an ILC Dover sized deal necessarily next year as we expect right now, and we'll always see that it should largely be bolt-on in nature. But in terms of deal flow, funnel, good equitable spread between ITS and PST as well as a good equitable spread, I'd say, geographically. There's no reason to expect anything different. So we're really excited about it. The way we probably would say it here right now is in the context even of 2024 to date, we kind of have 9 core P&Ls that kind of comprise total Ingersoll Rand, 9 that report to Vicente directly, if you will, 7 of the 9 have done M&A in 2024. And I would say if you were to give us another quarter or 2, you'd probably see 8 of those 9 having done M&A. And that spreads as far as from U.S. to China, Australia, Western Europe, India, Latin America. So it's as global as it can be, which I think speaks to the fact that this process is inherently in the business. We've got great M&A firepower engine sitting in the business, partnering with the business, and that's where the cultivation is happening. This is not happening in Davidson, North Carolina with 3 or 4 of us now. I mean we're helping to run the process. I'm far from it. Now we have an M&A leader. She's helping to kind of oversee the process and the funnel and cultivation and execution, but we have M&A leaders sitting in the business, partnering with the business leaders because they are the ones who are seeing it day to day and they now know what assets we should really be looking at.

Great. Can you give us an update on the Care initiative? This is for those not familiar with it. This is an initiative that you called out at your Investor Day in 2023 with basically trying to grow the enterprise recurring revenues of the business. At the time, it was like roughly a $200 million number ultimately trying to get to $1 billion. Just any update you can give us on that initiative?

Yes, absolutely. So it was actually, I think, maybe almost 1 year ago, exactly right down the street here, where we put forth what we'll call a bold target and kind of restate Joe, what you said $200 million is what we'll call true recurring revenue. I'll call it kind of that subset of aftermarket, that's true multiyear agreements that are essentially what I'll call almost an annuity flow stream of revenue, going from $200 million to $1 billion by 2027 is kind of that bold target. We're all set on where that $200 million is kind of in 2023, a lot of it -- the vast majority is coming from historically what we call care contracts, largely within the legacy Ingersoll Rand domestic U.S. Care contracts at their core, there's a multiple tiers of them, but think of it as kind of a risk transfer agreement where the customer is agreeing to enter into a multiyear agreement with Ingersoll Rand, they transferred the risk of operating their compressor to us. We are guaranteeing a certain amount of uptime and then we are essentially taking care of that asset for them, soup to nuts, including all maintenance and whatnot thereafter. In return, they are essentially cutting us a check every single month. And it's really a win-win for both sides. From a customer perspective, peace of mind. They don't have to employ in-house service techs or anything like that, which that demographic is kind of getting aged out and hard to kind of come by. It's very forecastable for them. They don't have to deal with break fix. And essentially, it's kind of a piece of mind factor for the customer. In return, Ingersoll Rand, we have a global service tech network, so it's not like anyone can do this. We have the know-how. We have the ability with our enterprise to be able to service it compressors. And frankly, we know who to sell it to, when to sell it, how to sell it. Done properly, this is margin accretive to the enterprise. We have, like you said, about $200 million base done properly in place 60% plus gross margins. So really, for us, what we have spent the last year doing and full disclosure a year ago, we put out a bold target. And I wouldn't tell you at that point in time, we had it all really mapped out. Flash forward a year, we have it mapped out essentially across the entire enterprise. Remember, this was historically a domestic U.S. kind of Ingersoll Rand. So Europe, Asia, the Gardner Denver portfolio. And then there also are targeted, not everywhere, but targeted opportunities in PST, where care-like model can kind of be adapted. So we really have it now mapped out by business, by product line, I would tell you down as low as level to the kind of the salesperson level. Every Friday, Vicente staff call. We know we are managing -- we have multiple KPIs, 2 to 3, specifically on recurring revenue, where we're actually seeing what the leading indicators are to get us to that next kind of milestone. And then the other piece that's really exciting here is in addition to care, we also have kind of the air quality and the Ecoplant platforms that are kind of the 2 other legs of this tool. And so as we flash forward now to -- 1 year later, I think the momentum is really exciting. We're not getting out and giving quarterly updates on where we're at. I will say this, when you take $200 million in '23 and $1 billion by '27, you can do the math, where it says, $200 million, $400 million, $600 million. No, there is a little bit of a ramp because there is this adoption on the global side of it. But I think as we sit here right now and getting closer to the end of 2024, I'd say we feel pretty good about the momentum, and we very much still feel like we're on track to that $1 billion target.

Great. Look, it was never expected to be linear, right? It sounds like now that the plans are in place, 2025 could potentially be an inflection year? Or is that the expectation?

Yes. I mean I think ['25 into '20] -- I think without question, we expect to see acceleration. Let me be clear here. I mean we've seen nice growth here in '24 as well. It's just -- it's 200 becoming 400 no, it's not exactly later, as you said. But I think we're excited by the momentum we're seeing. I think the global adoption has been great. Ecoplant is now effectively now being bundled into care. So it's kind of almost becoming another offering set the care model. The air quality piece is taken off as well. And so I think we're quite excited, quite frankly, even now the mindset change within a lot of the other businesses who historically just hadn't thought about selling this way and now seeing the model adapting kind of best practice or from the U.S. which I think for us is great because you're kind of kick starting this process. To get to where we were at 2023, that $200 million, it was a decade plus of learning and to their credit, historically speaking, how to get there. I think we're accelerating that learning curve exponentially as we now take that best practice and some kind of move it to the enterprise.

Yes, great to hear. So on your latest earnings call, you guys talked about projects taking a little bit longer. Some of that was attributed to election uncertainty, the election is now behind us. Just curious like whether there's been any update, any uplift that you've seen at all at this point since the election? I know it's only a month away.

Exactly. So I mean I think the simple answer here is it's good that whatever uncertainty or "distraction" that it created is kind of behind us. Would I tell you anything has dramatically changed, at least in terms of like on the ground type activity, not dramatically. I think we always said it'll be good for this to kind of be behind us. And then we expect a gradual improvement is probably the way to think about it. And so I think that's probably exactly the way things are continuing to play themselves out. So nothing dramatic of sorts here, no light switch type effect or things of that nature. But we continue to remain encouraged by, I'd say, some of that positive sentiment and whatnot, that will continue to move into 2025.

It is so a lot of discussion at this conference and then heading into the conference around short-cycle trends. And so as we head into 2025, any comments you want to make on how you guys are thinking about the shorter-cycle pieces of your business? And then ultimately, as you think about an initial framework for 2025, any color that you'd like to add as well?

Yes. So I mean, maybe one, we'll obviously give proper '25 guidance on kind of our next earnings cycle. So I'll kind of step back to that for a second. What I will say here is, when you think about kind of the portfolio construct for Ingersoll Rand, roughly speaking, we'll use rough numbers, 20%, 25% of the revenue base is longer cycle in nature, which we just spoke about. The balance would be what I call short cycle and kind of the more aftermarket side of the equation. If you look at like the last couple of quarters and whether it's ITS or PST, obviously, it can be a little bit challenging to see because you got a peel back a layer so. But interesting enough, I'd say the short cycle side of the equation has actually been relatively stable. You've actually even seen good book-to-bill trends in areas like PST and some of the more industrial side of the business, which are much more book and ship and shorter cycle. So I think we continue to remain encouraged there. Now I think as we move into '25, I would say the same comment as we said before here, I think it's going to continue to be gradual. It's probably the best way to say it. We don't expect some major inflection or things of that nature necessarily happen overnight. We think that gradual recovery will probably be the answer in terms of improvement and things of that nature. When you think about our business and kind of give a little bit more regional color, we're pretty global in nature, as you know, roughly speaking, about 50% of our revenue base in the Americas, U.S. being the biggest piece of that. But the Americas has been the best performer year-to-date. I'd say, actually, Latin America has been even better, but it's relatively small comparatively speaking. Europe or EMEA, as we'll call it, Western Europe has kind of just been, frankly, a bit of a tale of which country you want to talk about. Areas like Germany have obviously seen some pretty steep headwinds. Some areas -- other areas in Western Europe have been a little bit better comparatively speaking. I wouldn't tell you anything has dramatically changed on that front. Our best performers, and frankly, you heard us talk about it quite a bit is have been Middle East and India, where I think the growth prospects continue to remain quite healthy on the go forward. And then in Asia, roughly 15%, 18% of revenue, China is obviously the biggest piece of that equation. China without question has obviously been the biggest headwind we faced. What I would tell you here as we continue to move kind of through the balance of the year is, has anything changed there? No. I think at the Q3 earnings call, we said things haven't really changed now. If there's a positive that we had, they haven't necessarily gotten worse, but they haven't gotten better either. And I think that's the reality of what we're going to be facing moving into the first -- that's the reality as we move into 2025. Obviously, our team is pretty large contingent in China. Obviously, with the election, the clearly uncertainty as to what that's going to be as we move into 2025 I think we're encouraged by at least some of the anecdotal. Some of the governmental stimulus thing they talk about, upgrade assets from an energy efficiency perspective and things like that. I think we're well situated when that starts to come to bear. But I don't think we expect things to dramatically change on the ground in China for at least the relatively short term. So what does that mean for '25, I think it shapes itself up for continuation into the first half of the year kind of comparable, what you're seeing gradual recovery and hopefully, a little bit of a better exit in the second half of 2025 is probably the way things shape up. But as far as kind of the growth algorithm and things like that, again, we'll give a little bit more color when we do earnings, the ability to deliver price, 1% to 2%, the ability to drive, I'd say, a little bit above market with demand generation, some of the self-instigation demand with MQLs and then the balance will be kind of the innovation, targeted market share opportunities and just kind of the puts and takes between growth and some of the known headwinds, I think that's probably the area. If there's one good to be said about China, we're not going to be walking into next year with the $100 million plus of large projects that we have to comp. So I'll take that as a positive, but things on the ground in China are still kind of comparable to what you've been hearing before.

Makes a lot of sense. I'm going to open it up to the audience, see if there's any questions or else I'm happy to keep going. Any questions from the audience? All right. Let's keep going, Vik. So super helpful color on 2025. One of the things that you guys also talked about this past quarter was just this delay in site readiness and potential political instability also affecting some projects being pushed out and specifically around your MQLs, your MQLs were up 12%, but the conversion of those MQLs are taking a little bit longer. Just talk to us about that dynamic? And how do you see that kind of hopefully working itself out in the near term?

Yes. So we talked quite a bit about our demand generation engine. And one of the -- obviously, the -- I'll call it a leading indicator, but one of the key outputs there is MQLs or marketing qualified leads. And so for us, we've been continue to be encouraged by the fact that, obviously, we've seen low double-digit MQL growth. Obviously, MQLs shouldn't necessarily take them as a direct translation to orders, obviously. There's a digestion period historically. You could say that a conversion rate from an MQL to an order was in that 6- to 8-week span. And yes, it has elongated in that respect. I think from our perspective though, the reason that we're still encouraged by what we're seeing in the MQLs a couple of things. One, MQLs is really, in our opinion, a reflection of health instigation of demand. right? So demand that we are instigating with our customer base. And roughly speaking, 50% of our MQLs are coming from new customers, 50% from existing customers. So I think without this kind of demand generation engine, without these efforts, I think there'd be a lot of opportunity left on the table that we would otherwise not be benefiting from. So I think one, the MQL momentum is -- continues to be encouraging; yes, of course, elongation based on what's happening out there. But at least it speaks to the fact that there still is that kind of underlying demand and interest in the market. And then to your point, hopefully, as things alleviate a little bit here, as sentiment gets better, that stuff that will translate a little bit more to tangible orders that you'll see in the backlog. So continue to be encouraged here. I would tell you the momentum on demand generation, the investment in demand generation, it's probably -- and you guys have met Mike before, he kind of runs the DGX or demand generation team. It's probably the one, I would say, business-centric function. We actually run holistically. So it actually kind of sits all together running under Mike. And that's just because we see scale from it running as one enterprise as opposed to breaking it into 9 or 10 different pieces. So continue to be encouraged on that front. The other piece of it is the funnel -- or sorry, the funnel for the longer cycle, which I think we kind of gave you both of those views. The funnel in the longer cycle, same thing. Continues to be growing quite nicely. One thing that, like I said, 20%, 25% of our revenue base is longer cycle in nature and it actually sits on both sides of the business. So we talk about it a lot more on the ITS side with large compressors and large blowers. But quite frankly, with like Milton Roy, dosing pumps and things like that, there are some long-cycle type projects that sit there as well. And what I would tell you there is, whether it be some of the skittishness around some of the election. A lot of it, quite frankly, though, was just the glut of projects that EPCs have had. We see it quite frankly, both in the elongation of funnel getting to order as well as, in fact, some of the orders we already have that are being executed. And that final site readiness, factory acceptance testing, kind of that last milestone or 2, getting that over the finish line. Has anything changed dramatically today? The answer is no. I don't think any change as we sit here, to your point, 3, 4 weeks post-election. But I think here, hopefully, with time, that will continue to alleviate similar to kind of what we talked about here as we move into 2025. And I think hopefully, both the momentum we're seeing, both on the orders front as well as then digestion through to the larger ecosystem will continue to get better.

Yes. And yes, I know Mike, well, I love Mike. I think I referred his presentation to more investors on your business model than any other...

I will be sure to let him know.

I'm sure he's listening. On the compressor side, the long cycle piece of the business, you said MQLs were up 22%. And what types of projects -- I know you said it's across, but you talk about ITS a lot more than you do in the SC segment, like what types of projects are you seeing that increase.

You're seeing it across the board. So interesting enough, in our ITS business, you'll have the long cycle, the large compressors. So we cap out at kind of like centrifugal compressors. We don't play larger than that. We don't play in like the turbine -- large, like almost like engine like or like they look like big, what do you call it, the larger side than [indiscernible] that other competitors play in turbine -- sorry, turbine type almost looking compressors. We also play in what we'll call large blower, so multistage blowers. And so we're playing across quite a bit of a spectrum there. In terms of applications, you can see them in all sorts of applications, large air separation, we actually play very nicely. We have our LeROI business. We bought right around the Gardner Denver IPO, which is playing in things like large-scale renewable natural gas, which has been a great tailwind for a couple of years now. So it's pretty -- I'd say pretty universal in terms of the large-scale applications. It's also quite global in nature. You actually see a lot of these EPCs, a handful EPCs, but these projects are being taken pretty global. So we see them across everywhere from Europe, Middle East, Asia, even parts of the U.S. as well. So again, I think you've seen a good spectrum of those types of projects in multi-application.

So we talked on China, I think very clear comments on China. So we'll see how the first half of the year turns out, and hopefully, things kind of pick up as the year progresses. Can you maybe just talk about Europe? What parts of your business are actually over-indexed to Europe? And then we've talked now for a few years about the upgrade opportunity, replacement opportunity, and fairly short payback associated with your more energy-efficient compressors. Just help us kind of understand what's happening in Europe for you guys and that replacement opportunity?

Yes. I think it's a story that's continued to play itself out probably for the last few years. So in terms of -- I'll call it Europe, we'll focus on Western Europe. We are pretty well established across the entire spectrum, whether it be the CompAir brand, legacy Ingersoll Rand, even parts of Gardner Denver. So we have a pretty well-established presence there. We've also done quite a bit of M&A in that area. What I think you'll hear and see here is that obviously, it's very country specific. Areas like Germany, for example, have had, quite frankly, a lot more headwinds. It's an area that's kind of hypercompetitive in terms of a lot of the competitive suite play in there. Area, we've probably been, I'd say, comparatively speaking, lower share in other areas of Europe, but it's probably a little bit more consciously so, but an area that's faced more headwinds. We've seen, I'd say, probably better comparative activity in areas like Italy and France and Spain of the world. So again, I think in terms of where we're indexed, I think we're actually quite well exposed across the board. But I think we have presence in most major areas. And I would tell you now if we kind of expand the base of touch, continuing to grow our presence in the Middle East and India, we kind of put that together with our European -- an area that I think, historically, we've probably been underpenetrated, which is why I think you hear us talk about the excitement about India, for example, as a growth vector going forward. In fact, we were just there and we're opening our second compressor plant as we speak, that will be up and running in 2025. In terms of the other part of your question about kind of what we're expecting going forward and kind of how we're thinking about Europe and other aspects there, I think we're continuing to run it very much like you see how we're doing it in the balance of the business. The reality here is when you think about MQLs, self-instigation demand and then also the opportunity to drive the acquired M&A in region, I think that's an area for us that is quite exciting. The biggest thing here is when you've done 55, 56 bolt-ons, and the way I tell the team is, guys, it's inorganic for 12 months. It's our job and your job thereafter to try to drive the organic side of it thereafter. And generally speaking, we have any number of examples where great technology, it's been hyper centric in 1 area, 1 geography, but that technology is translatable. And so a year ago, if you remember our Investor Day, our Asia Pac business leader, Arnold Li, he gave like 4 different case studies. Every single one of them was a revenue synergy that somehow translated to taking an acquired technology, things of that nature from an acquisition and taking it into China. And that's why even in China, I know your question was on Europe, but in China, in what has been a pretty tough year, if you peel the onion back here and you actually look at things like blower, vacuum, they've actually been growing in areas like that. It obviously kind of gets lost in the large project comps and compressor. And part of that -- and the biggest part is that's taking either legacy Gardner Denver technology or acquire technology from a MD-Kinney or one of these businesses we've acquired in the U.S. and taken into China where there's applications, they just historically had no reach into those areas. So that's what I think you're going to continue to see us do, focus on those controllable areas. We're independent of what the market may or may not be doing, how do we drive those singles and doubles, you say, whether it be through demand generation or translation of 50-plus bolt-on acquisitions that now are very translatable globally.

Super helpful. I want to go back to your comments earlier on Life Sciences, being your largest end market. One area within Life Sciences that we're seeing across some of the companies that I cover, that is like been super exciting is like theranostics or radio pharma. I'm curious, like do you guys have much of a play there today? And is there maybe an opportunity to expand into that market?

What was the first end market?

Similar like either -- like nuclear medicine, radiopharmaceuticals.

Yes. Nothing, I would say that's like big exposure today is the simple answer. So I think we're playing a lot more in the bioprocessing side of the equation, I think the consumable single use technology in powder management, liquid handling as well as we do have some legacy exposure in, I'd say, some more of the kind of core like oxygen concentration, stuff like that, which is probably the piece that faced the toughest headwinds coming out of COVID from the IR Medical. Anything of the nature you're saying not necessarily a huge exposure to that.

Understood. Look, helpful to see the biopharma markets stabilize for you guys as well. That's a nice opportunity. Let's talk about margins for a second. So the adjusted EBITDA margin high 20s, potentially low 30s. You're already at the low end of that target, that 2027 target this year. How are you guys thinking about incremental margins going forward? And I don't want to ask you for a new target at this point, but you're already at the low end. So just how you're thinking about margins.

Yes, I don't think you're going to hear new necessarily target from me here today, but I think, yes, we're incredibly excited by the momentum the team continues to drive. To kind of put it in perspective, obviously, you've seen some pretty outsized incrementals this year. I think it would be attributable to all the areas you would expect, and I'll kind of touch upon them here briefly. I think on a go-forward basis, though, would we tell you that like 30% to 40% incremental is probably where the comfort zone is, sure. I think in terms of some of the drivers here in terms of that continuation from this point forward, price cost. We've said very explicitly that our enterprise we should be playing in that 1% to 2% price realm year in, year out. Obviously, you've seen some outsized opportunity compared to that in years past. But I've been with the company 14 years at this point in time. There's not one year I can remember where we haven't delivered that or more. Cost out of the equation continues to move kind of sideways at this point in time. Obviously, we will see kind of what happens as we move into next year from a tariff perspective. I think the good news on that front is a couple of things. One, we are in region for the region. So you do not really see a lot of, what I would call, for example, China production coming back to the U.S. or things like that. It's immaterial at best.

Yes, all pretty minimal last time around.

Yes. Exactly. And yes, we do obviously have we're not immune to tariffs. We do have some of our supply chain from a China perspective. But I would tell you, it's a relatively small, team has done a nice job over, quite frankly, the last number of years, continuing to diversify the supply chain base. We have minimal exposure to Mexico. So again, I would tell you, we'll continue to mitigate just through, I'd say, if tariffs were to come to bear in a material manner, pricing opportunity as well as just, I'd say, some resourcing opportunities. The other pieces I would tell you, productivity when you have an in-region for the region model, we do recognize that you do tend to have a little bit of heavier footprint. With that comes, we're -- 80, 90 plants roughly globally. There's always a -- whether it be on the labor productivity, I2V, productivity angle, and the other 2 angles I would tell you here that we've talked about, one, bolt-on M&A. Typically speaking, we're buying M&A that probably comes in, in the low 20s EBITDA margin at the time of purchase. We're driving for a mid-teens ROIC by year 3 through controllable actions, which is largely cost synergies and maybe controllable areas like price. And so you'll continue to see some step change on that bolt-on in nature between both segments. And the last piece is the recurring revenue. So I think you have a lot of good levers to continue to pull. Obviously, we're going to continue to reinvest from an organic growth perspective because for us, continuing to drive that organic growth momentum is really going to be the differentiator as we think 5 years out, 10 years out. So that's feet on the street, innovation, NPD, or things like demand generation, you're going to continue to see us, and we're doing that as we speak. So put that together, we continue to be really optimistic. We don't necessarily see a cap on margins. We recognize that we're probably at some of our stated margin targets, particularly on the ITS side. What I think that means going forward here is we still see opportunity in the ITS side, quite frankly, the recurring revenue momentum itself is probably the biggest kicker from that perspective. But I think the piece we're really excited about though is PST, which obviously has been the one that comparatively speaking, has probably had less of to run compared to ITS. The reality is some of these -- initiatives, I2V,some of the stuff probably got just a little longer to kind of get implemented in PST. But the concept of that business, which is playing that 30% EBITDA margin profile today as we continue to integrate ILC Dover, as we continue to drive productivity, pricing opportunities, even some targeted recurring revenue, the constantly getting that to that mid-30s target we've talked about. I think that's the area you're going to see a little bit more overdrive as we think in the next few years, but I think margins are going to continue to be an area for optimism for us.

Great. Last but not least, real quick. Free cash flow margins, 20-plus percent inventory still the good lever? Or how are you thinking about [indiscernible] there?

I think team has done a great job. But without question, I think there continues to be an inventory opportunity, continued levers in that respect, inventory probably be the biggest one. So we're encouraged by what we've seen on the free cash flow side, but there's -- without question, there's still work to be done.

Awesome. Vik. So great to see you.

Yes. Pleasure. Thank you.