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

All right. Welcome, folks. I'm Steve Volkmann with Jefferies and very pleased to be hosting Ingersoll Rand for this fireside chat. Vik Kini, the CFO, has joined us. And we're going to run this as a fireside chat. So I'll probably lead off with a few questions, but would love to have your participation as well. If you're interested, we have a mic that will make a come up for air at some point and see if we have any questions from the field.

But Vik, I've been asking this question, you can answer as quickly or long as you would like. But since we are on a webcast, I figured I would just provide the opportunity if there's any updates or thoughts around how Q3 is progressing that you'd like to share, we'd love to hear them.

Yes, sure. So first of all, thanks for having us, and great to be here as always. I think simply stated here, obviously, nothing we're providing actually incremental around initially August or September or anything like that further than what we spoke about on our earnings call. But I'll reiterate some of the statements we made in Q2 at our earnings call because we did provide a little bit more color, particularly around July. I think the piece that we'd kind of lean on here is that in Q2, encouraged to see kind of some of that short medium cycle side of the business starting to kind of come back a little bit more. I think within ITS, you saw about mid-single-digit orders increase on the short to medium cycle side, which is kind of the call it a core bread and butter side of the equation with not surprising North America probably being the strongest contributor here on the orders front. In Q2, we did mention that some of the timing of some of the longer cycle was kind of a headwind that kind of sat on top of that, which is what brought ITS orders more flattish from an organic perspective. And we provided the color in our earnings call with the benefit of city towards the end of July, we had kind of 4 weeks of July behind us. And as you know, it's not our norm to initially give intraquarter orders, updates and things like that. But we thought it was important to provide a little bit of color that we had seen in the first number of weeks of July, low double digit to mid-teens orders improvement on the ITS front. And the best way I'd probably describe that here is comparable trajectory on the short to medium cycle that you saw in Q2. But the piece, obviously, that was encouraging on incremental to that was the long cycle piece. We've been talking for the better part of 18 to 24 months that long cycle, the funnel continues to remain active and relatively healthy, but you had seen kind of the elongation of decision-making from customers for a number of reasons. And as such, that had led to some, I'd say, lower, I'd say, orders front on the long cycle, they would have historically seen over that time frame. July, you did see a number of those projects finally come to fruition. So I think the good news here is, one, July is just 1 data point, but we're very encouraged to now start to see better momentum not just on the short to medium cycle side, but also on the long cycle side. Obviously, all of this lends itself to in the volume side of the equation, which is the piece that kind of the bigger headwinds on over the last 2 years. So again, encouraged by what we're seeing here. We'll continue to track and monitor this as we obviously and give you guys obviously appropriate color here as we get through earnings. But encouraged, I think, for the first time in a couple of years to really start seeing kind of both sides of the equation, starting to move in the positive direction, which is definitely encouraging from us -- from our front.

Great. So a couple of quick follow-ups just because everybody might not be deep in the weeds here. How do you think about the breakdown between your short cycle and long cycle?

For sure. Yes. So I'll talk to the lens of ITS, which is our largest segment, about 80% of the revenue of the company. So let me just start by saying business composition is -- I'll use rough numbers, 35% to 40% aftermarket. Aftermarket, obviously, is much more, I'd say, utilization base based on our equipment and things of that nature. When you park that, you have the other, let's call it, 60%, 65% that is original equipment. And that is broken down approximately 75% is kind of short to medium cycles. So I would call it core compressor blower, vacuum type technology, kind of the bread and butter, if you will, typically somewhere between 30-, 90-day type lead times, pretty tight book ship type business, but kind of the core. And then the balance, which would be the remaining 25% is longer cycle in nature. And the way to kind of think about longer cycle, you might hear us refer to it as ETO or systems or projects. They typically are larger scale projects in nature, predicated around the technology and then typically larger systems or skids or things like that built out customized for our respective customer base. And they're typically anywhere from 0.5 million, but typically 7-figure type price tags, 6 to 18 months in terms of duration, meaning from when the order is taken to final shipment. And obviously, the larger the sticker price typically the duration. So that's probably the best way to think about the composition, particularly with an ITS. Also worth noting that on the PST side, the Precision Technologies business, the core pumping business, which is about the larger piece of that equation, that also has a fairly similar exposure to our long-cycle projects as well in some of our pumping and dosing type technologies.

Okay. So short cycle, up mid-single digits, I think, in the 2Q. What really drove that after this kind of long wait?

Yes, I think it's -- like you've seen kind of in the broader -- obviously, with PMI is continuing to improve I think you're seeing now our portfolio, which core industrial, compression, blower technology, vacuum technology, pump technology, it's kind of mission-critical from a process perspective. And so you're seeing it kind of broad based. I wouldn't point to one specific end market. I think what you've seen over the last few years is, I talk by region, you've obviously seen a couple of years of headwinds from a North America perspective, particularly from areas like some of the tariff-related impact you saw last year and then some of the items that from administration changes provided to that, things like neural natural gas that kind of had a peak back in the '24 time frame. And obviously, you kind of came back down, back in '25. China similar. China used to be about 15% of the revenue base of the company. Today, it's close to 10%. And Europe has actually been kind of the most stable business kind of in between over the last few years. So I think some of the just kind of inherent macro recovery you're seeing, you're seeing, obviously, not surprisingly, North America and Asia, particularly China, starting to see better traction. And that's exactly like we said, we saw in Q2 with the short to medium cycle being up mid-single digits, with -- but North America being the leader of the pack there at up high single digit on the order's front. So again, encouraged to see kind of that, I'd say, regular kind of I'd say industrial activity starting to come back. You're seeing it obviously in the short to medium cycle side. And then we've obviously talked about the long cycle side, starting to finally see some better traction on the orders front.

So I was going to go to long cycle next. So we've had some delays on some big projects. Those seem to be starting to loosen up -- is this more sort of a timing issue? Or do you think there's a broadening of demand there as well.

Yes, the way we'd probably describe it here is kind of go back to how we characterize it. The long-cycle funnel had been relatively active and healthy. Yes, you've definitely seen an elongation in terms of just customers decision-making patterns to actually kind of ink the final PO, but one of the big things and frankly, some of the reasons that we wanted to provide a little bit of that July commentary is inherently, the question becomes if you see delays that ultimately led to cancellations of these projects. And that's not the case. . If you actually look at our product portfolio, you actually have long-cycle exposure across all of our core technologies, compressor, blower, vacuum and pump. And it's actually a fairly widespread from a geographic -- so it's not hypercenterc, or region. It's actually pretty widespread. And even in July, again, it wasn't just like 1 or 2 big projects. It was actually a number of the kind of more call it, single-digit millions of dollar type projects coming to fruition actually well spread from a geographic and end market perspective. So I think what we'd say here is I can't point to necessarily one single bullet. Silver bullet is like here is the reason. I think we would attribute it a little bit more to timing and just some of the customer decision making, but it also does speak to those projects valid, we're always going to get -- continue to move forward and now finally starting to see a little bit of unlock. But I think the other piece that's encouraging is the long-cycle funnel in general continues to be active. It's not like you're seeing a big flush and there isn't, I'd say activity backfilling and we're actually seeing good quoting activity continuing within the funnel, which is encouraging.

Great. Okay. The other thing that's been topical this last couple of days here is a lot of kind of cost volatility, whether it's metals or energy or transportation and just sort of bring us up to speed on kind of how you're seeing that play out?

Yes. So I mean I think like anyone, we're seeing requisite pockets here and there. Now let's characterize who we are and who we not. We're not like heavy manufacturing. We are essentially assembly. So we're not buying raw commodities or anything like that. We're buying much more semi-finished goods and things of that nature. So obviously, I think we're managing that piece as you would expect. I think at this point in time, pricing, I think, from our end, has kind of come back into that typical norm of 1% to 2% that you typically see, I'd say, in a given year. Now obviously, the last number of years, you've seen elevated pricing levels due to tariffs and some of the supply chain disruption. So I think we're continuing to manage that at this point in time. We'll continue to evaluate as we go forward here. I think the teams are doing a good job managing that within expectations, but nothing I would call out as dramatically out of source at this point in time.

Okay. And so for the second half, we're assuming price/cost neutrality.

Neutrality to slightly better. Yes, I think we expect it to be improving from the first half into the second half. We have taken some pricing actions on half that would expect to kind of materialize in the back half. To your point, we'll continue to monitor what's going on in a pretty fluid environment. But yes, I think -- the last few years, you obviously have seen, particularly with the tariff side, you've seen price/cost be neutral, but obviously margin dilutive. I think we're slowly surely growing out of that. And I think as we move into next year and the year after, we would expect pending what may or may not happen there. We expect that to return back to a slightly better margin equation compared to what you've seen in the last few years.

Okay. All right. Maybe let's open up the aperture a little bit. Investors keep asking about AI exposure. It depends on what day they ask whether that's a good thing or a bad thing. But talk about how compressors, vacuum blowers, pumps fit into data center and power gen and sort of that theme.

Yes, for sure. So I think to date, our direct AI exposure -- data center exposure has been relatively minimal as you've seen. It's probably fair to say maybe second derivative impacts of some of the providers. We obviously are providing our air compression technology in process-driven equipment for their manufacturing needs and things of that nature. Now that being said, probably over the last year or so, we have spent, I'd say, more time internally really from an organic perspective, thinking about how we can maybe play a little bit more in the data center realm to keep it simple here. When you think about air compression technology pumps, things that move air gas and liquid for cooling purposes or other purposes, we do feel like there is applicability there. I would say, also bundled with one of our core competencies is our engineering capabilities and ETO capabilities. So ETO or long cycle. Like we said, 25% of our original equipment is long cycle or ETO in nature. And we do believe that with some of the trends that we're seeing there with some of these larger hyperscalers or data center manufacturers, that is a capability they want to see. So I think simplest way to say it right now, Steve, is right now, is it very material in the Ingersoll Rand revenue perspective, not today. Do we feel like on the go forward, there are opportunities for us to play a little bit more tangibly in the space and that we're actively working with some of these customers to actually be able to show off showcase not just some of our technology, but then also our ETO capabilities, yes. So I think there are some opportunities and pockets that we're looking to target across our core technology on a go-forward basis.

Okay. What about semiconductor is another focus. And I know your big competitor has more exposure there. But is that a target for you as well?

So we do have on the compressor side, I'd say, selling larger health compression technology for air separation, things like that, which plays into the semiconductor kind of value chain. From a direct, what I'll call the vacuum perspective, I think was your question here. No, we don't play on the -- what I'll call the high vacuum side of vacuum. We play much more on what we call the rough industrial process vacuum. So it's much more of the industrial or kind of non-semiconductor type applications. That's where we've historically played. So and I don't think you're going to see that really change going forward. So the direct semis exposure on vacuum that you're referencing no, that's not part of our vacuum portfolio. .

Okay. Maybe we'll do a little geographic discussion. You mentioned China has gone from 15% to 10% of revenue. Describe what happened there for those that might not be as close to it. And then, of course, outlook what's the outlook?

For sure. Yes. So if you flash back a couple of years, let's go find really back to the 2020 post merger, kind of until '23-'24 time frame. Obviously, China was closer to 15% of our total company revenue. I think you saw 1 just based on the markets there, but then also you saw areas like EV battery and photovoltaic and solar type application. You saw a big run-up in that market. If you've been to China, I mean, you can see it there, with your own eyes. And a lot of our core compression technology plays well in that space. So what you saw kind of post that time frame, whether '24 to '25 is not surprisingly, you saw obviously with the EV batteries and some of that kind of coming back down. You saw -- I'll use rough numbers, roughly about $100 million headwind as that kind of reset back to normalized levels, then combined with obviously some of the challenges seen in the general China kind of market. And so you kind of flash forward now to kind of where we are today, China is closer to approximately 10% of revenue from a total company perspective. As we sit here right now, though, I think we're encouraged by -- after about 2 years of the China business kind of leveling out, for lack of a better way, say it, we have seen, I'd say, kind of I'd say, healthier volume here as we've sat here into the first half. In second quarter, just an example, we saw low double-digit revenue growth in China, and that's really all volume driven. So I think we're encouraged to finally start to see some return to kind of, I'd say, hopefully, some normalization on the growth front in China. I think if you think about where our business plays in China, Ingersoll Rand's presence in China historically has been very compressor centric. That's really where it space was. Obviously, that team has done an incredible job bringing in, and I'd say, leveraging technology is that they historically didn't have as much access to. And what I mean by that is what came as part of the merger that the legacy IR China franchise didn't have. That would be product technologies like blower and vacuum which came from Gardner Denver, air treatment technology that came via acquisition post-merger. And then if you remember, we've done now 80-plus bolt-on transactions since the merger. Now not every one of them is necessarily applicable to this lens, but there have been a number that have, whether they be U.S., Western Europe, even India-based acquisitions that have differentiated technology that, that China team is probably -- they're probably the poster child internally in terms of being able to localize and localize with speed. And so they've done a really good job. And so even if you look, despite even some of the headwinds we've seen over the last few years, if you were to kind of go under the covers and look you'll actually see some nice growth in some of those differentiated technologies, albeit off a much lower baseline. And so I think we're encouraged by where that portfolio is at least positioned to continue to leverage some of those strengths in terms of differentiating technology. We'll still be in, I think, what we consider to be an industry leader on the compression side that we'll continue to see hopefully growth off of , albeit a reset baseline that we talked about for the last 2 years.

Okay. And I think pricing has been a bit of a challenge. You mentioned low double-digit volume in terms of recent growth. Is that stabilizing?

Yes, I think the way we'd say it here and just maybe to give a little bit of color, I think we talked about this period in our second quarter earnings call. We always talked about this year after, I'd say, the pricing dynamics in the last few years with supply chain and tariffs that obviously drove an outsized pricing impact. We would expect the pricing to kind of refer back to that 1% to 2% level, which is pretty normal in this industry. And this is exactly where we are. Now it should be mentioned here that, that includes a negative low single-digit headwind from China specifically. Now I would say China, even historically has probably been a much more competitive pricing environment. I wouldn't say that even historically speaking, China was at the levels of North America or Western Europe or areas like that. But to your point, yes, I think just given some of the resets you've seen in the market, some of the capacity that's been in the market and things like that in a broader sense, not just naturally our technology, but broader sense, you have seen some more pricing headwinds we would view that as something that, over the medium term should moderate. Again, as things continue to normalize, as volumes continue to get healthier out there, we would expect that to get back to historic levels, but that's not going to be something that happens at overnight quarter. That's more of a 2027 onwards dynamic. So definitely something we're seeing right now but an area that we would expect to moderate and improve as we move over the course of the next number of quarters.