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

Let me just introduce myself first as we're on the webcast, is Nicole DeBlase. I am Deutsche Bank's multi-industry and electrical equipment analyst. And I'm very pleased to introduce Vik Kini, CFO of Ingersoll Rand, and we also have Max who is now running IR bringing this all. So Vik, I'm going to start at a pretty high level and then drill down to the segment. Just for the people in the room. If you have any questions, I'll stop every so often to again, please feel free to jump in. So the second quarter earnings call, I think Vicente noted that July organic orders were up low double digits to mid-teens, which nice acceleration from 2% in 2Q. Can you just recap the drivers of this longer cycle projects versus short-cycle ITS versus PST, et cetera the brands?

For sure. So book of all, thanks for having us. Max is not mic-ed up to say thank you on both behalf here. As far as the orders profile, let me maybe start with Q2 and then we can kind of move into the July number just to kind of ground ourselves. So in terms of Q2, 2%, if I go to my side, I'll really start with ITS. ITS, you saw more flattish organic orders I think if you kind of peel the onion back a layer though, what you saw was on the short to medium cycle side, you saw comparably better momentum. You saw some approaching more mid-single-digit kind of order trajectory. And yes, obviously, the piece that created a little bit more of the, I'd say, more timing on the headwind was on the long cycle side. And specifically, in Q2, it was a little bit more European-centric and some of our blower and vacuum kind of longer cycle systems. It should be noted that we have long cycle exposure across kind of compressor blower vacuum, even our precision technologies pump business. So there is about 20% to 25% of our original equipment is a longer cycle in nature. So one thing you say here, and I think you've heard us for a couple of quarters, is that in terms of the long-cycle funnel continues to remain healthy. But there had been that kind of elongation for lack of a better way to say it, in terms of the decision-making and ultimately getting to the finish line with POs and the orders. So now flash forward into July. To your point, a low double-digit, mid-teens kind of organic up through at the time we did earnings to the first 4 weeks of July. I think you know it's not our norm to necessarily be talking about intra-quarter orders or anything of that nature. But I think the reason we wanted to provide that color was twofold. One, we kind of peel that onion back a layer the medium -- short to medium cycle continuing to show, I'd say comparable momentum to what you saw in Q2. So I think that has continued, as you expect. And then obviously, the piece that kind of really drove that outsized July performance was the longer cycle side of the equation and particularly through the ITS lens. And the way I'd probably characterize it here is, as we've said, the funnel has remained healthy. It just was kind of getting to that final getting POs in place and things of that nature. And so in July, you saw it was actually a number of kind of longer-cycle projects, pretty good cross-section across regions and end markets. I wouldn't point to 1 region or 1 application or end market in particular. To your point, obviously, encouraged by what we've seen in July. We're not now trying to sort represent that, that's the norm porting of that nature. But I think it does speak to the fact now that I think you're starting to see better momentum on the long cycle, converting now into POs, combined with that short to medium cycle momentum we've now been talking about for a couple of quarters, Q2 now in the July time frame. And I think we're really encouraged now by seeing that organic volume piece of the equation is starting to take a little bit of better foothold. In Q2, on the revenue front, on ITS, you saw 4% organic revenue growth. Good contribution for gross price and volume and now also into the kind of in the back half, you're starting to see the volume trend starting to improve, which definitely is the first time we're seeing volume being a little bit more explicit in the course of the last 18-plus months which we're really encouraged by.

Okay. Okay. That was really comprehensive. Maybe a couple of follow-ups. It felt pretty strongly, and it was kind of echoed in your comments right there that you guys don't want us to extrapolate about low double digits to mid-teens to rest of the quarter yet. I guess a couple of questions on that. Any thoughts on the I'll try -- and then in that one cycle strength like if you look at what's in the funnel, I get that there was a boost from long-cycle activity in July. Is it likely that, that continues? Are you saying all the funnels may be not showing as attractive as a setup for August and beyond.

No, no, I wouldn't read. So necessarily try to comment any further on through the guide. I appreciate the effort. No, I think we're encouraged by what we're seeing. Like we said, July it was the first 4 weeks you saw good momentum on the long cycle, but the funnels themselves continue to remain healthy. I think we've been talking about that elongation for a while and delays, but not cancellations. I think July was definitely a proof point of that, but I think the funnels themselves continue to remain encouraging. And as such, I think we would continue to expect to see long-cycle project momentum and things of that nature on a go-forward basis. So I think to your point here, I think we're very encouraged by now starting to see, I'd say, [ elecquisite ] contributions from both the short to medium and now the longer cycle piece as well.

Understood. And when you talk to customers about like what's giving them that comfort and finally making the CapEx decision, what's changed?

Yes. I mean, listen, I wouldn't say that there's been some dramatic like catalysts that all of a sudden things change. I think some of this is just timing, to be very honest with you, a little bit more certainty in kind of where the markets are and things of that nature. Maybe some degree of any of the bottlenecks that may have existed historically are kind of getting loosened up and things of that nature. So I think the piece like I said, that's encouraging for us is it really wasn't just like one region or a couple of larger projects. No, it was a little bit broader based on that. And as such, I think we're -- we continue to be encouraged by the fact that, to your point, like there's definitely still plenty of healthy long-cycle funnel out there that this continues to hopefully be something that we see continue to click through here as we move through the balance of the year. And remember, this long cycle, long cycle project on average, are 6 to 18 months, roughly speaking, in terms of duration from PO to shipments. And as such, a lot of what you're seeing now is starting to build the backlog out for that long cycle component into 2027.

Makes sense. Okay. Understood. And then you guys raised your total company full year organic growth guidance to 1% to 3% with earnings -- but I think 2Q organic was 4%. So you're kind of embedding a little bit of a decel in the back half. Why is that?

Sure. Yes. So yes, just to take a step back here, we did raise kind of the organic growth target by 1% at the midpoint on the full year. Obviously, the way to think about that is it's effectively all volume, and it's largely ITS driven, okay? On the backs of, I would say, that good momentum you're seeing on the short to medium cycle side, to a degree, some of the longer cycle. Some of that long cycle does have like POC, so you get a little bit of some of the revenue recognition kind of along the way, but the majority of that revenue profile is into '27. The way I think about it here is 4% revenue growth organically in Q2. The implied guide for the back half is in that 3% to 4% realm. So it's comparable, I think, to what you're seeing in Q2, and I think a requisite kind of mix of price and volume. Obviously, we're slightly negative in Q1. So I think we're encouraged by, I think, the sequential trends we're seeing here. And I should say that's obviously through the lens of ITS. PST comparatively has been a little bit more stable from that perspective or healthier. And again, we continue to expect to see organic growth into the back half of the year as well on the PST side.

Okay. Understood. We'll dig into the segments for sure. Maybe just a few more high-level questions first. I think pricing, you guys said is going to contribute about 2% to revenue in 2026. How sustainable is that level of pricing power as tariff surcharges potentially roll off or become less impactful? And any thoughts on just price cost into the second half?

Yes, sure. So I think we've always said that the company, and I've been with the company for 15-plus years, 1% to 2% price is normal in any degree of a normal environment. And I think we can also agree you probably haven't seen a normal environment for a little while. And you've obviously seen maybe outsized pricing as a result of supply chain or tariffs or things of that nature. That all being said, I think the 1% to 2% realm and towards the upper end of that range as we sit here right now is, without question, I think, a normalized expectation. To your point, yes, we're kind of in the midst now of rolling through a lot of those tariff-related -- not tariff-related pricing actions. And so what you're seeing is in this year, we're taking, I'd say, the more normal price, if you will. It's not a vanilla spread peanut butter approach. Effectively, it's product by product, region by region. Every part of the business takes pricing actions at the part point in time of the year that makes sense for their cadence. And as such, you've even seen, I'd say, more normal course pricing actions in the first half of the year as well that will take root in the back half and things of that nature. So I think the simple answer here is that 1% to 2% pricing level, very normal, very consistent with what you've seen historically. And I don't think there's any expectation that should be anything different into 2027 or any thereafter.

Okay. Okay. Makes sense. I also wanted to ask about recurring revenue. I think the last data point we got was that it exceeded $450 million in 2025 and is still growing in '26 Any thoughts on like how recurring revenue as a percent of total sales might develop?

Yes. Maybe I'll take a step back here. I think we've said that exiting next year, we want to be on that $1 billion kind of trajectory, if you will. I think as we moved into -- you got it right, $450 million we eclipsed, it's worth noting that it wasn't about a few years ago 2023 at our Investor Day, where we were just scratching the surface of $200 million. So clearly, the recurring revenue piece of the portfolio not only has been probably the single biggest -- one of the biggest, I'd say, organic growth initiatives. It's also been 1 of the higher growth piece of the equation. And I don't think anything is expected to change in any way, shape or form in that context. I would say from where we were in 2023, where just to kind of take a step backwards here, I think as most people remember and know this model really kind of grew up on the compressor side of the business in North America and kind of the legacy Ingersoll Rand side of the business. And really now, I'd say, proliferating this across the portfolio, Europe, Asia, India, Latin America, the Gardner Denver portfolio of products and even into parts of the portfolio, lower vacuum precision pumps on the PFT side. That to be honest with you, years ago, they didn't really think about recurring revenue. But if there's any degree of service and recurring aftermarket needs, there's probably a care or a recurring revenue-type model that can be applied and exist? So a couple of things to think about here. What you think about it is exactly right. We would expect that the recurring revenue piece of the equation definitely be kind of the highest torque or the highest growth piece of the equation. It obviously comes through a healthy margin profile. So again, over time, this is a piece that, one, yes, will become a healthier mix of aftermarket. As you said today, if -- just use rough numbers here, aftermarket approaches 40% of the portfolio, that's approximately $3 billion and at $450 million, and you can do the math, obviously, the percentage there. That's a number that we would expect to grow as a percentage of the total pie or aftermarket over time and one that actually we would expect to see good requisite contributions on both P&Ls. Obviously, IPS will have the most outsized the compressor P&L will obviously be the piece that is still the biggest piece of that equation. But I think now we finally have what I would call very measurable baselines and lower vacuum pumps that we expect to continue to grow. So all things that I think should continue to grow. And yes, that should be margin accretive over time.

Okay. Okay. Great. I'm going to move on to specific questions related to ITS now unless anyone has anything they want to ask on high-level stuff. Okay. So could we just double-click a bit more on the short and medium cycle activity that you're seeing? Like do we think that this acceleration that you guys have talked about in 2Q is finally the impact of PMI inflection that we have been waiting for.

Yes. Yes. I mean I think -- we've always said there's maybe a bit of a lapping between some of those leading indicators and what you see in the portfolio, the concept of being at that kind of, let's call it, mid-single-digit-ish type realm of short to medium cycle orders momentum, continuing to see. Well, you yes, we would point to that, I think, as I think signs of that. Now obviously, as you know, we're very global in nature. About half of our revenue base in North America, 1/3 EMEA and about 15% is APAC with a meaningful piece of that being in China. So we obviously have some of those geographic and regional kind of dynamics at play. But I think broad strokes here, yes, we would point to, I'd say, some of that improvement from a macro perspective, starting to see that kind of now starting to translate more. And like I said before here, off of obviously what '24 and '25 were comparatively tougher sledding for a better way to say that, I think you're seeing comparative now improvement across effectively most of the major end markets.

Okay. Got it. And understood that is broad-based across those end markets. What about regionally? Like is the U.S. kind of leading the charge? Are you seeing improvement in Europe and Asia as well?

Yes. So if we kind of take Q2, I think North America was definitely kind of the best from an organic orders perspective, where I think you were approaching it like high single-digit type organic orders across the North America profile of, obviously, compressors is the biggest piece, but a compressor blower vacuum kind of be in that short to medium cycle side of the equation. So North America, definitely, obviously, clearly, North America is probably the most impacted last year in Q2 just because of the tariff dynamics, but that clearly, I think, improving trends is definitely a piece of that equation. Europe, obviously, has been probably the most stable region over the last couple of years. I'd say that's -- nothing has dramatically changed there. Now not all Europe is necessarily made equal. I would tell you the U.K., the Nordics, the France Italy, Spain of the world are probably the comparative better performers, not surprisingly, Central Europe, particularly Germany, less or so. Now I would say our revenue profile in Germany is probably not as outsized as it may be in other parts of Europe. So that is there. And then clearly, Germany has clearly not been the star performer for a number of years for about say Middle East, we've talked about pretty explicitly. Obviously, we have about a low single-digit kind of revenue exposure there, call it, maybe 3%, 4%. That's obviously getting a bit more normalized here as kind of hopefully things continue to settle down, hopefully, in the Middle East. India has been probably the best performer of the portfolio, double-digit growth for several years on end at this point in time. And then Asia, what I'd point to in Asia is, I'd say, the non-China markets Australia, Korea, Southeast Asia for us have been relatively stable, good performance. China, obviously, China has kind of reset over the last few years. That was roughly closer to 15% of the revenue of the portfolio maybe 3 years ago, now it's closer to 10%, 11%. And I think the good news here is that you're starting to see, I'd say, better trends from like a volume perspective, just obviously off of a slightly lower baseline. So I think we're encouraged but we're seeing particularly on the volume side of that equation. But I think in Q2, definitely, from an order perspective, North America was probably the leader in the back.

Okay. Okay. Perfect. Understood. And then can we actually spend some time on the China pricing challenges that you guys talked about on the second quarter earnings call. Maybe some background on like when it started and if you've at least seen some stabilization at a minimum?

Yes. So I think a couple of statements here. So I think China has always been comparatively speaking to North America, Europe has probably been a little bit more of the more competitive pricing environment comparatively speaking, that's not a new statement. That's always been the case.

Sure.

Yes. I think what you saw in Q2, I think we said it pretty explicitly, you saw probably like negative low single-digit pricing headwinds in China specifically? I'd say it was probably a little bit more pronounced in Q2, but you've been seeing comparable numbers here. It just didn't start in the first half of the year, like a better way say -- as far as kind of that dynamic, yes, listen, I think obviously a kind of a reset baseline in China in terms of the market, a little bit of a deflationary environment there comparatively speaking, and maybe just the overall not necessarily compressed but the overall kind of industry, a bit of oversupply and kind of things of that nature. I think that's probably kind of the contributors to what you're seeing here. And I think we said it on the call here. We don't view that as something that is there long term. We view that hopefully a little bit more transient over the medium term, right? So don't think of that as something that gets back to flat necessarily or what not, maybe in the back half of the year, we would think that that's something that over the medium term as some of those macro dynamics settle a little bit, we'll get back to more normalized levels. Now to take a step back, what normalized probably means is we've talked about pretty explicitly 1% to 2% for the overall enterprise. But that's probably with, I think, China and more normalized [indiscernible] closer to flattish than where it is now. I don't think China being at North America or Europe level is honestly, that's not something we've seen historically nor would be the expectation going forward.

Okay. Okay. Understood. And I guess like -- so if we're moving from pricing being a low single-digit headwind to flat in China, how does that get resolved? Like is there just excess inventory that we need to burn through?

Yes. I think it's just a little bit of timing and frankly, just a little bit more of normalization in the market and things of that nature. And that's why we were private to kind of [indiscernible] term dynamic something in 2027 onwards. Not something that we necessarily say is going to necessarily be playing itself out like overnight or here into Q3. So I think right now, things are fairly comparable. But again, taking a step back from a broader enterprise perspective. Remember, we did take certain pricing actions here through the first half of the year across the globe. And as such, I think you would expect to see from a sequential perspective, Q2 and the back half of the year, slightly better pricing performance in the back half of the year compared to what you saw in Q2.

Okay. Okay. Understood. And I guess, just in general, are the competitive dynamics a lot different? Like is there a local Asia competition that you're up against in China that you don't necessarily see elsewhere?

There is local competition. And I would say there's China competition and whatnot you see in other parts of the other geographies as well. Now I would also say that in a lot of cases, we're not necessarily competing exactly in the same technology realms and things of that nature. And I do think that when it comes to the efficiency of machines and the ability to service it on a global basis, I think our global service tech network and multiple thousands of service techs who can do things like the recurring revenue and care model that I think hopefully is what sets us apart. But yes, I mean, you see Chinese competition -- you do see it albeit maybe at the lower end of the market.

Okay. Okay. Got it. And maybe we can talk about some of the competitive dynamics within compressors more globally. When you compare yourselves to your biggest competitor, Atlas, what would you say is like your special sauce that makes Ingersoll stand out? I mean, it seems to me like the product that you -- you're both really good companies, the product is kind of similar, but that's an outsider's perspective, what's your review?

Yes. I mean, listen, Atlas is great competitor, obviously, very global in nature, very competitive technology set. Maybe to take a step backwards here by combining, I think, the Gardner Denver and Husain portfolios. I think you really now created a much more global kind of top to bottom offering set with regards to oil-free and oil lubricated. Historically speaking, where 1 part of Gartner number IR was stronger on small to medium, the other was better and medium to large 1 had lower vacuum, 1 less or so. And now obviously, by virtue of putting the 2 companies together and now what you've seen post merger, particularly through organic means, but also that kind of torque that you've seen from the inorganic piece, where we've done 80 plus bolt-on acquisitions and seeing us effectively go from something that I wouldn't say. Not being but minimal, for example, like air treatment and dryers and all the kind of periphery that is in the ecosystem of air compression technology, now we have, I think, one of the leading portfolios in areas like air treatment. So I think one good line up there. Now to your point here, the portfolios aren't exactly the same. Our ITS business is compressor, blower, vacuum and power tools all under one portfolio under none roof. They're obviously very similar across all them, but didn't organize differently. I think even in the compressor and vacuum space, our technology suites are a little bit different. Cap out at like [ centrifical ] compressors. We don't play in those large, I think, LNG-related kind of like turbomachinery turbine type compression technology. We also don't play on the semiconductor side of vacuum, right? So I think in terms of where the portfolios match up and where kind of I'd say there's comparability, I'd say, very comparable performance. And I'd say you say special sauce and things of that nature. I think for us, it's fairly simple here. It's leading technology, leading efficiency, being able to kind of prove out both efficiencies and total cost of ownership over the life of your technology and then be able to serve it through the aftermarket. And as such, the fact that we have multiple thousands of service techs around the globe who can do things like the care model and that recurring revenue initiative we've talked about and then being able to attach more offerings to our compressor to be able to serve the customer better. Once upon a time, it was a compressor in your basic aftermarket. Today, you've gone all the way to compressor aftermarket recurring revenue, air treatment and all the periphery in between. So I think -- and then things like eco plants and some of the connectivity features and things like that. So I think that's something that you're not going to see change. It also is why, for example, right now, even despite some of the headwinds, for example, in China that we've talked about. The reality is China in Q2 was up low double digits from a revenue perspective organically, inclusive of the negative low single-digit pricing. So that kind of implies scratching the surface of mid-teens volume growth in Q2 in China, and that should be a means to an end in the context of continuing to push the installed base that you can then service through the aftermarket, albeit more medium term. So I think good global competitor. We've always said that. And I think we're encouraged by the improving volume trends that we're seeing. Be able to kind of service it through aftermarket, which is obviously a big piece of our equation.

Okay. Okay. Understood. So a few follow-ups then. Maybe first, how would you kind of stack up market share versus Atlas over the past few years? I mean I don't really notice a trend, it seems to bounce around between the 2 of you were just judging based on organic growth, but just curious if you have any?

Yes. I mean we view it as very stable I'm sure there's pockets where maybe we're doing better. I'm sure others would say their pockets. You hear that kind of across the board. But we would view it in the core markets where we operate as relatively stable. Now I would also tell you that we've been pretty explicit that there are certain markets we've kind of historically represented them or talk about them as underrepresented or underpenetrated markets. So in no particular order of Latin America, Middle East, India and Southeast Asia. And all markets we have a presence in, but all markets where whether it's through official third parties or just operating in these environments for long enough, we have a general sense of where we think our share position is. And I think it's probably fair to say the 4 areas I mentioned here, we know that our share is probably lower comparatively speaking to where we are in the U.S., Western Europe and China. Fundamentally, we don't view that there's any reason that, that should be the case. It's probably been historically either a lack of focus or lack of investment, whatever the case may be. And as such, over the course of the last few years, you've heard us talk about these regions pretty explicitly. You've taught her talk about we opened a new compressor manufacturing plant in Brazil. First time we actually have in-region compressor manufacturing. We opened a new plant in India late last year, our second compressor manufacturing plant because we run out of capacity. And then Middle East and Southeast Asia, not necessarily requiring distinct footprint or manufacturing footprint but a lot of more commercial reinvestment and things of that nature. And so we would fully acknowledge that I think there are areas that we feel like we probably have over a medium-term maybe a little bit more of a disproportionate opportunity to grow maybe just as a result of kind of our historical presence in ZED markets. But the manner to get there, whether it be commercial investment, manufacturing footprint or some combination of both. It's a little bit different market by market, but that's also why you've seen us not hesitant to continue to reinvest in the business even over the course of the last few years. And yes, that's been a little bit of some of the ITS margin profile. But for us, that's an investment that's again for the benefit of longer-term volumes, that should be the catalyst for growth going forward.

Okay. Okay. Understood. And then one more follow-up from what you said earlier is mid-teens volume growth in China in 2Q, you come back into because we know what the price situation was drove that. I'm surprised to hear mid-teens grow from anything in China.