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

Great. Thanks, everyone, for being here. It's my pleasure to have up next Ingersoll Rand, Vik Kini, CFO. And thanks very much, Vik, for continuing to come to this conference.

Yes, of course.

Maybe first question, just how have you seen the demand environment in recent months? I think a lot of investors' attention is focused on kind of prospects for U.S. short-cycle industrial recovery. Are we seeing it yet? Or it's all as usual x months into the future?

Yes. So first of all, thank you again for having us. As far as the demand environment, let me start -- I'll start with the U.S. and then kind of make it a little bit broader. So I think in Q4, definitely encouraged, I think, by the momentum we saw, not just in the U.S., but kind of I would say, across both segments with positive organic growth from an orders perspective. On the U.S. side of the equation or North America, definitely seeing, I'd say, kind of the peak of uncertainty kind of being behind us. We're encouraged, I think, by some of the momentum we saw coming out of Q4. And I do think that's actually a comparable statement to what you've seen a little bit more globally, right. So even, for example, China, which for us is about 10% of our revenue, you've seen positive organic growth on the order side for the last roughly a couple -- 2 to 3 quarters, obviously, in a market that hasn't been seen that, broadly speaking. And so I do think it speaks to some of the self-help and things of that nature. Now Julian, as far as the go forward, I think we're encouraged by some of the momentum we're seeing. I think, obviously, with some of the leading indicators like PMI and whatnot starting to inflect a little bit more positively, I think we're encouraged. But I do think we still want to continue to be prudent in terms of expectations going forward. And I think you saw that in our guidance framework that we put forth on Friday in terms of, I'd say, prudency coming into 2026 just in terms of the organic growth equation and hopefully, an area that as we move through the year, hopefully an area for opportunity, particularly on the organic volume side as we move into the balance of 2026.

Perfect. And I think in recent years, there's been various kind of rolling headwinds. You have the sort of ITS hangovers from the China EV build-outs, the European bump post the Ukraine invasion, COVID hangover in PST, and then in the U.S., some of the sort of sustainability-type projects got put on ice 12, 15 months ago. So when you look at all those things today, is it fair to say they're kind of in the rearview mirror? Anything else that's bubbled up recently that could be a new kind of headwind or roll-off to think about?

Yes, you're absolutely right. I think the last few years, whether it was coming into '24 or '25, we had a market or a region that had some degree of a headwind. You mentioned a number of them. I think the simple answer here is moving into '26, no. We don't have something comparable to the U.S. RNG like you saw last year or the China EV solar that you saw a couple of years ago. So I think the comps in that respect are a little bit cleaner comparatively speaking, no meaningful headwind of that nature. Obviously, quarter-to-quarter, you're always going to have some of the project timing and whatnot, but that's pretty normal. So generally speaking, no, it's a little bit cleaner in that respect as we move into the 2026 framework.

And as you think about the broad sort of U.S. customer base, any difference in sort of behavior in terms of distribution versus OEMs or long-cycle projects versus kind of MRO activity?

Nothing dramatically different. Let me take those in pieces here. So on the distribution base, this is an area that we pay -- and we do -- we go multichannel. So we go to direct and distribution. On the distribution base, this is an area that, one, we watch very closely. It's not a channel that inherently builds a lot of inventory or things of that nature, just given inherently some of the customized nature of compression technology and things like that. So I'd say from that perspective, very comparable. And on the direct side, yes, nothing dramatically different, I would say, as we've kind of exited the back half of the year. Like I said before, I think the peak of uncertainty is probably a little bit behind us. But we do want to continue to see a little bit more of that momentum on a go-forward basis. I think one area that we've been very strongly pushing on, I'm sure we'll talk about it here even more is the recurring revenue side, where we continue to see, I'd say, a nice uptick, not just in North America, but also on a global basis. We mentioned during our earnings call in 2025, we eclipsed $450 million of recurring revenue on an Ingersoll-wide enterprise basis. Just to put that in perspective, back in 2023, that was circa $200 million and $100 million in years before that. So, to see that part of the business more than double, obviously, its very encouraging in the kind of, I'd say, ramp-up and the build-out of our recurring revenue initiative that we've talked about pretty explicitly over the last few years. I think the piece, though, for us that's even more encouraging is the fact that you're seeing it, I'd say, broadly based in terms of regions and product categories. Compressors in the U.S. are still, I'd say, the biggest piece of that equation, but you will see a very measurable baseline now across, I'd say, the other product technologies as well as the other regions. We have 9 P&Ls that kind of comprise Ingersoll Rand. And generally speaking, every one of them now has some form or fashion of recurring revenue that they're operating to, some obviously much bigger than others. But today, we're talking about recurring revenue in parts of blowers and pumps and things like that, which is frankly not something we talked about years ago. So encouraging, I'd say, to see the momentum that has kind of taken place over the last 2 years and frankly, expect that to continue to ramp as we move here into '26 and '27.

Perfect. And if you're looking about the demand environment, you said it's a little bit better signs on short cycle exiting last year. It doesn't seem to be dialed into the guide for '26 in the sense that you have kind of pretty similar organic growth every quarter or both halves dialed-in. Is there something to do with comps that explains that? Or it's just, as you said, a determined effort to have a prudent guide this year?

Yes. So let me start with -- I'll answer kind of both sides of that. I'll start with first. I think what you're seeing is prudency in the context of while we're encouraged to see some of the momentum in Q4 and some of the kind of leading indicators, we want to see a little bit more sustainment of that. So obviously, the guidance framework and the 1% organic growth at the midpoint, I think that just reflects the prudency as we come into the year. Now as far as seasonality, comps, things of that nature, I think it's important to note that the seasonality for 2026, we expect to play itself out almost exactly like you've seen in years past. right. So inherently, Q1 is a little bit of your lightest quarter, Q4 is typically your heaviest. But the first half, second half in terms of, let's call it -- phasing, whether it be on the revenue, earnings, EPS side, you're going to see it look exactly like it's seen in prior years. And that's also on the earnings growth. We have about 5% earnings at the midpoint on an EPS basis, and you're seeing a comparable level of earnings growth in both the first and second half at that kind of mid-single-digit realm. So I would say prudency in terms of the guidance framework, but continue to expect to see a comparable level of phasing from a growth and earnings perspective on the year.

Great. And you've touched on already recurring revenue and a broad push there. How much of that recurring revenue base is kind of the CARE effort that you talked about a lot at Investor Day 2 to 3 years ago? And how much is kind of broader tools that you use depending on the P&L?

Yes, for sure. So I think CARE and obviously, as a gold standard, you have PackageCARE, but you also have PlannedCARE, PartsCARE, you have different kind of tiers of the CARE model. Clearly, that's the biggest piece. Compressors is obviously our biggest piece of our total portfolio. So the CARE model that follows it clearly will be, I'd say, the biggest piece. But what you've seen to-date is kind of, I'd say, a couple of different kind of differing kind of pushes as well in addition to this CARE. One, you've seen a CARE-like model probably adapted. So it's actually called CARE, but it has a kind of -- it's a similar look and feel, but adapted for other parts of the portfolio. So whether it be our Blower portfolio or different Pump Technologies, they are adapting to what I would call differing recurring revenue type models that kind of mimic CARE in one way, shape or form. But you also have other aspects of the portfolio, whether it be some of the Air Quality, the Ecoplant, some of the other kind of, I'd say, offerings that are kind of now bundled into that kind of overall recurring revenue model that are now starting to get, I'd say, much better traction. So I think we're kind of looking at this from all sides. CARE obviously will be -- is and will continue to be the biggest piece of that equation. But unlike 2, 3 years ago, it's not the entirety of it. I think we're now starting to see good traction on other parts of the, I'd say, recurring revenue model. And clearly, those are areas we're going to expect to see accelerating at a comparable, if not faster growth trajectory as we move into the next few years as we kind of continue on that journey to $1 billion.

And when you think about the profitability profile of the recurring sales, kind of how should we think about that?

Sure. I think at its, I'll call it, gold standard, the risk transfer kind of PackageCARE, you can see gross margin profiles playing in that 60%, 70% -- you can -- they're very, very profitable. First and foremost, aftermarket in total for Ingersoll Rand is quite profitable. This just probably happens to play at that kind of upper end. Clearly, though, there also are areas that we want to continue to invest in, right? This model is, I'd say, based in large part based on service techs, density of your service kind of network across the globe. Clearly, there are areas we're going to continue to invest in. So I think you're seeing us take that opportunity. Even areas like the Ecoplant platform, that's a business that's more software-oriented and as such, requires kind of more investment today, comparatively speaking, to its earnings profile. So I think you're seeing that all happen today. So I think on a gross margin profile, quite healthy. I think we're taking the opportunity to reinvest for growth, both on recurring revenue and other areas. And that's, I think, what you're seeing kind of now in the kind of margin profile, which even for ITS, which is where the preponderance of recurring revenue sits, we finish still operating at 29% EBITDA margin. So I think you're seeing a nice balance of continuing to see the growth in recurring revenue, but also continue to invest for future growth.

And then within the Compressor side of ITS, I think tariffs had a big impact last year on the cost base and still do Section 232 and the pre-existing sort of country-based tariffs. How have you seen the industry respond to those, say, in the U.S. compressor market? How is pricing and kind of market share played out? And I realize it feels a long time, but it's fairly recent in a way to the Section 232.

Yes, for sure. So I think the way you characterized it is quite appropriate. Obviously, ourselves as well as peers and have seen our requisite share of, I'd say, tariff exposure and also, quite frankly, even the ebbs and flows as this has kind of, I'd say, migrated over the course of the last number -- like the last year, even as of late, India now going from 50% back down to, I think, roughly 18%. So you continue to see ebbs and flows in terms of the tariff equation. I think as far as how has the market responded to pricing whatnot, I think it's been quite rational. Obviously, our exposure tends to come much more from just our global supply chain. Otherwise said, it doesn't really come from what I would call intercompany dynamics or things like that. We tend to be much more in-region for-region, which has always been the strategy of the company. And I think even in this environment and the situation, I think, tends to be a nice -- hopefully, competitive differentiator in that respect as well. But we clearly have a global supply chain. And as such, we've seen our fair share of tariff exposure. I think much like others, we've taken, I'd say, the requisite pricing actions to offset. For us, we've been very clear from day one that, that pricing is meant to offset tariffs one-for-one. We're not necessarily looking to make margin on tariffs. And that's generally what you're still seeing to this date. Yes, we do have, I'd say, a carryover impact into this year. Clearly, with tariffs really starting in the April-May time frame last year and then ramping from there, you kind of have, I'd say, more of a first half of this year kind of carryover on the tariff side. But pricing is matching that fairly well. What I would call it is price/cost dollar-neutral. Obviously, that's margin dilutive. And as such, that -- so it kind of plays a little bit more of a headwind on the ITS margin profile in the first half of the year, and we do expect that to kind of normalize and get back to margin expansion in the back half of 2026. So I think as far as share and things of that nature, I think we're maintaining very nicely. We're encouraged, I think, by how the teams have operated even in Q4, where we did mention, I think, in our last earnings cycle, there was maybe a little bit of timing on [ tariff ], that's a little bit quicker than price. I think the teams executed very well. You saw us kind of delivering towards the high end on both revenue and earnings profile, which I think was the team is executing very well as we move through Q4. And I think as we move here into 2026, no expectation that should be dramatically different.

And when you look at what competitors have done, I think a lot of in compressors, they may have a more global sourced approach than you. They're less in-region for-region. So in the U.S., did you see them respond yet with big price increases? Or they're more kind of trying to balance out?

Yes. I mean we've seen -- I think we've seen a varying degree of responses for a better way to say it. I think what we're very focused on here is, one, making sure that we -- from a quality of earnings perspective, are kind of protecting the bottom line, which I think we've done a nice job of. We obviously have, I'd say, certain degrees of tariff mitigation that have been in place, and I think is in motion as we speak in terms of whether it be shifting sources of supply in very isolated instances, shifting some of our internal supply dynamics. Like I said, we're very much in-region for-region. So that part is a little bit more limited for us. Clearly, the pricing side of the equation, taking requisite price. But I'd say this is a very rational market, and I think continues to behave fairly rationally in that respect.

Great. And ITS margins, they've got to a very high level in the last few years. You have been comparable with your main global peer on margins for a couple of years now. What's the sort of next leg to getting margins up if there is one? Is it around the recurring side or adjacent products to get bigger and away from Compressors? How to think about where margins could go in ITS?

Yes. So we've hit 30% EBITDA margins in ITS. We're planning around 29-ish percent now with some of the tariff headwinds. I think if you take a look at the last few years with some of the headwinds we've seen, particularly whether it be on the tariff side and things like that, first and foremost, given some of those headwinds and frankly, an environment that you haven't seen a lot of organic volume growth, actually quite encouraged by how the team has been able to maintain margins at that upper 20s to 30% level, which speaks to pricing discipline, productivity, we've been very explicit. We've taken some restructuring actions and things of that nature, including some of the second half of 2025. As we move forward, we've said very explicitly, we don't necessarily see a cap per se on margins, right? Obviously, playing against that 29%, 30% it's hard to see the level of margin expansion you saw back in the 2021, '22, '23 days. But I think as far as going forward, I'd say the concept of being able to deliver 1% to 2% price, continuing to see the productivity equation, any requisite volume growth obviously comes with pretty healthy flow-through. I think can be the catalyst inclusive of recurring revenue for continued margin expansion. But also, we're going to be very conscious of continuing to reinvest for growth, right? We've talked about it very explicitly, whether it be growth from an innovation perspective, recurring revenue or quite frankly, just the feet on the street, the R&D, things of that nature, not just in the areas we talk about quite a bit often U.S. and Western Europe, but also those under-penetrated markets, right? And those under-penetrated markets being Latin America, India, Middle East and I'd say, Southeast Asia, kind of the balance of Asia, that's not China. And just to give that a little color, in Q4, you saw actually 20% plus orders growth in that non-China part of Asia, which I think speaks to some of that focus and some good project wins and things of that nature. Brazil has continued to show very nice growth. India tends to be kind of probably our best growth region if you look across a number of years. So I think we're going to continue to be balanced in terms of continuing to drive that reinvestment for growth. But absolutely, I think the concept of requisite pricing with organic volume and the productivity, there still is opportunities for margin expansion.

And then PST struggled for 3, 4 years to get margins towards that mid-30s range. It's been much better performance in the last kind of 5 quarters or so. Help us understand like what's driven that improvement? And kind of what should we expect for margins? I think this year is just over 1 point of margin. Is that a good -- I don't know, placeholder until we get to the mid-30s and then you kind of get fresh...

Yes. I mean just to give it a little bit of color, historically, to your point, this was a business that moved from approximately 30% EBITDA margins in the 2021 timeframe to about 30% EBITDA margins in 2024, 2025. And it's worth noting that there were a lot of ebbs and flows in between, whether it be the legacy Ingersoll Rand Medical business, which was kind of probably the biggest beneficiary of COVID and then obviously saw the biggest headwinds thereafter, a business that plays above segment average margin profile. You had some acquisitions like Seepex that were intentionally acquired at certain levels, but you've seen that get to fleet average. So as much as we move, let's call it, 30% to 30%, I would say a lot of good efforts from the team to be able to offset some known headwinds that were kind of occurring under the covers. Now that being said, going forward, to your point, seen a lot better momentum here over the last couple of quarters. And I think that's attributable to two big factors. One, continued integration of some of the recent acquisitions, particularly on the Life Sciences side, where you're seeing good growth. And now as those acquisitions are getting much more firmly embedded and integrated as well as aspects of IRX and productivity starting to play themselves out, you've seen better margin performance. And then two, we always mentioned that particularly on the kind of, I'll call it, more legacy part of PST, so the Precision Technology, the kind of legacy Pump business, it's probably that historically speaking, back post-merger, it probably didn't have as much of the focus in terms of the integration. And that's really just because a lot more of the effort was spent around ITS. Now that being said, the concept of IRX taking hold, I2V, productivity, even some targeted cost actions, you're seeing that taking place now on the balance of that PST portfolio, which I think is helping to drive some of that margin expansion. And listen, similar story at ITS, with some of that kind of organic volume growth, you're seeing some of that leverage come through. So yes, 2026, the kind of guidance framework embeds a little over 1 point of expected margin expansion. Is there any reason that we shouldn't be able to expect similar levels as we move into '27? No. And I think that speaks very well to the expectation of continuing to drive this business to that mid-30s EBITDA margin profile, which has always been the target.

And ITS, I suppose, not a firm -- the target you hit the target and then we're sort of waiting, I suppose, for a new one at some point?

Yes. I think that's probably the best way to say it. I'll say, one, is there still opportunity for margin expansion we talked about? Yes. Do we expect to be seeing the triple-digit margin expansion that you saw back in the 3, 4 to 5 years post the merger? No, not to those levels, just given where the margin profile is, some of the opportunities that were evident back then in terms of the merger and things like that. Now that being said, I still think the margin expansion is still an opportunity there. We'll obviously recalibrate that as we move forward in terms of more forward-looking expectations at our Investor Day and things of that nature. But clearly, we've been at 30% plus EBITDA margins before. I don't think we see any reason why that can't exist again in the future. And we haven't -- we've said it before, we don't necessarily see a cap on margins, but I think we also want to be prudent in terms of the expectation there. It's not the same level of opportunity as what you saw back in a few years post the merger.

And then you mentioned the Life Sciences acquisitions in PST. How is ILC Dover performing now? Its more than 18 months, I think, just since the close, organic growth, sort of progress on margins?

Yes. I think we're really encouraged by what we're seeing. To your point, it's, I guess, coming up on 2 years here in the not-too-distant future in terms of the acquisition of ILC Dover. I think the Life Sciences side continues to execute and operate quite well. We talked about it in Q4, you saw double-digit orders growth in that Life Sciences part of the business. I think whether it be the biopharma side, which still has as many of the same kind of opportunities with GLP-1s and things of that nature going forward as well as kind of the more kind of Med Device business, which I think the -- way I think about that is continuing to see that multiyear trajectory as we kind of ramp up on platforms that you're kind of getting spec-ed into. So that business, yes, does have a book and ship dynamic and kind of a shorter nature to it. But I look at it kind of more from a medium-term perspective in terms of those multiyear platforms you're getting spec-ed into that you live that kind of duration of that life cycle with your end customer. And I think we're encouraged by what we're seeing on both ends. I think the other piece here that, that team has done a really great job on is we talked about it before, really adapting, I think, a lot to -- a lot of the IRX processes. So whether it be IRX demand generation, the productivity equation, rightsizing the cost structure, the first, call it, 6 to 12 months, there was a lot of change in that business, new GMs, new structure, changing from a more matrix and P&L environment to a more straight line, today. I'd say that's kind of really all cleaned up here. And so I think we're really encouraged by the momentum we're seeing going forward. And you're also now starting to see that bolt-on M&A approach, right? We've done multiple acquisitions, 4 or 5 acquisitions now that have been put into Life Sciences, including the one we just closed here in January of Scinomix. And I think we're really encouraged by now having that, we'll call beachhead in Life Sciences that you can now see the kind of Ingersoll Rand bolt-on M&A kind of playbook starting to replicate itself. And that's -- it's no different. We're doing low double-digit pre-synergy adjusted EBITDA purchase multiple acquisitions there, driving a similar return profile and synergy de-leveraging like you see in ITS and in the legacy Pump business and no reason why that can't continue on a go forward. So I think we're actually really encouraged by the momentum we're seeing there as well as now that platform for future growth, both organically and inorganically.

And on the non-medical side of PST, any particular focus areas for share gain, whether on the type of pump or end market? It can be hard from the outside to sort of understand what's happening in that non-medical part.

Yes. I'd say the best way to probably describe it is it kind of behaves in a comparable manner to what you're seeing in IT. So it's obviously got a number of different end market exposures, whether it be wastewater, agri-tech, [ aquatic ], core industrial, more process-oriented, but it's actually very global in nature. In fact, the revenue profile of the legacy, we call it Precision Technologies, but the legacy pump portfolio looks very similar to what you're seeing in ITS. So generally speaking, and also has a long cycle component to it as well in some pieces. So similar, very similar, I'd say, to what you're seeing on the ITS side. And actually, the growth trajectory there, inclusive in Q4, you saw a very comparable orders trajectory as what you saw in ITS. So I would correlate it fairly well to what you're seeing in ITS, which obviously, we're encouraged by some of the momentum, but we want to stay prudent in terms of that expectation going forward.

Great. And then capital deployment, obviously there was a large transaction announced about 2 years ago now, just under -- what's the -- I think you had mentioned on the earnings call, a couple of billion dollar-plus deals in the pipeline. So what's the likelihood that we see an ILC Dover-sized acquisition this year?

Yes. So I think maybe just to take a broader kind of view on capital allocation. I think in 2025, you saw, I'd say we did roughly a little over $500 million of M&A from a capital deployment perspective, 16 bolt-on acquisitions, right at kind of the lower end of that 400 to 500 basis points of annualized inorganic growth. We did do a bit more outsized on the share repurchases, close to $1 billion. And obviously, the dividend, the same dividend profile we've seen before. As we move into 2026, what I would tell you is the expectation for continuing to see M&A being kind of the catalyst to capital allocation, absolutely. Typically speaking, historically, we've always targeted something around 80%, 85% of free cash flow typically goes towards M&A. I don't see any reason that should be dramatically different. Share repurchase at this point, probably targeted at that $300 million to $350 million range on a full year basis and really no expectation to change anything on the dividend side at this point in time. To your question on the M&A front, yes, I think as Vicente mentioned on our earnings call, a couple of slightly larger bolt-on acquisitions. I'll still call them bolt-on at $1 billion, roughly speaking. So I think there's maybe opportunity for something a little bit more sized in that respect, still bolt-on in nature. Much larger than that. Right now, I wouldn't say that there is necessarily an expectation of actually the ILC Dover size per se, but still $1 billion plus complemented by, I'd still say, the concept of doing the smaller bolt-ons, just like you saw in 2025, no reason to expect anything different. In fact, we've already done one in January, actually in our Life Sciences business, 9 more under LOI as we sit here today. So I think the funnel remains as healthy as it's been historically. No reason to expect that the equation to be dramatically different than what you saw in 2025.

And in terms of the type of asset that you'd look for, you mentioned Ecoplant as a sort of software business and the software sector has taken a bath recently because of AI concerns. Does that derating make it more appealing potentially for Ingersoll to do software M&A? Or it's just not on the radar?

Yes. I wouldn't go that far. I mean I think for us, where we've done software like an Ecoplant, it's because it made sense for the ecosystem where we play, right? Connectivity of compressor assets or driving efficiency from a compressor perspective. So valuations and things like that aside, yes, I would say if there's something from a software perspective that makes sense from the ecosystem we play in or connectivity, perhaps. But I would expect that you're going to see M&A look very much like what you've seen in years past. Meaning what I would call core compressor, blower, vacuum pump assets, something that's really close to core, targeted channel where it makes sense and a good distribution between both segments. So we are allocating capital to both segments in A, I'd say, equitable prudent manner. So you're not seeing M&A capital just going to Life Sciences or vice versa. So it's going to be a good spread just like you saw in 2025.

Fantastic. Well, with that, I think we'll pivot to audience response survey questions, please. So the first one is current ownership of Ingersoll Rand? So 70%, no, which is fairly typical of these answers. Second question is around sort of current bias to the stock today? So fairly evenly spread. Third question is around EPS growth profile kind of versus the multi-industry average? Sort of in line-ish to above. Next question is around cash usage. Where should -- we just talked about M&A, but what's the best use of cash? Almost all bolt-on M&A and very little appetite for larger deals. And I suppose the point on the buyback was the $1 billion, it was really because average purchase price, I think, was just under $80 a share. So quite a bit higher than that for the buyback to be at a similar level, you'd need some kind of similar share price action?

Correct. And as such, M&A is clearly the focal point as we move into 2026.

Great. And next question is on sort of valuation. What's the right PE multiple for Ingersoll this year? So I don't know, 20x, I guess. And then last question. What's the main reason why the multiple shouldn't be higher? So organic growth, yes, it's been tough for a couple of years. So with that, thanks, everyone, and thank you very much Vik for being here.

Thank you.