Great. Thanks everyone for being here. It's my pleasure to have up next Ingersoll Rand's Vicente Reynal, Chief Executive Officer and Chairman; Vik Kini, CFO; and Mike Weatherred, the sort of IRX guru. So thanks to the three of you for being here. Maybe first off, Vicente, you know, I think there's a lot of focus from investors since the capital markets stay on that recurring revenue, mm-hmm, aspect. You know, a very large increase in the sales trend targeted there. So maybe help us understand kind of how much of that is about the CARE program specifically, what other elements of that recurring revenue, the drivers. Start with that, please.
Sure. Yeah, so let me, to firm it up to start, Investor Day in November we said that today we do about $200 million of really recurrent revenue. And this is basically revenue that is signed on a contract that we get paid from the customer every month regardless of utilization or not of the product. So it's really, really, really recurring. It's almost like software recurrent revenue streams. And that, you know, between now and 2027 we expect that to grow to about $1 billion. So we put a bold statement, bold, aggressive, but one that you can imagine that we have been testing for quite some time in order to come up with that target and with that approach.
Let me also step back to as well and say that when you look at Ingersoll Rand, roughly, you know, 36% of our total revenue is actually aftermarket in nature, which some companies call that also recurring, but we like to call true recurring when you get every single month regardless of the usage. When you think about going from $200 million to about $1 billion, a couple things to segment that and kind of unpack it. Today the majority of that $200 million really happens mostly in North America. So when you think about expanding that through our global commercial footprint, that is definitely one avenue on how we're gonna be able to achieve some of that growth.
The second level of segmentation is in terms of a lot of the offerings that we're adding to this CARE program. CARE today offers three different solutions. In addition to that, last year we made an acquisition with a company called Ecoplant that will give another offering of solution really around energy savings and for customers to be able to have a dashboard that shows how much we're able to fine-tune that compressor and generate energy savings consumption. And then there's another offering on top of that that for a company that we also acquired, that basically makes air quality testing. So we clearly produce compressed air for very critical applications in many cases, food, pharma, beverage, where you have to make sure that the air is oil-free and highest purity of air that is going through some processes.
And that will be also another added solution. So think about it that it's an expansion from a regional perspective, an expansion from new product innovation or new service solution innovation. And the third large bucket is basically taking that today is basically pretty much 100% compressor-based.
Yeah.
When you take that into a blower or some of the PST product solutions that we have, that will also add that incremental revenue. We view it from that three-dimensional approach.
Got it. And when you think about the sort of profitability of that business, is there kind of heavy reinvestment now and, and then later on you get economies of scale? Like, how should we think about the margin profile of that?
Yeah, so today, I mean, that $200 million is roughly above 60% gross margin. And when you think about scaling that, it's really leveraging our service technician footprint that we have. And as we continue to connect a lot more machines, we increase efficiency. So it's not a, it's not a linear correlation. I mean, we definitely get plenty good economies of scale. So again, we like to say that it's software-like gross margins, but at the same time, you know, with a good EBITDA percentage margin.
And this, you know, how important is that? You know, you've talked to us about the linkage of this to the IIoT product push and how many of your products out there in the field are IIoT enabled, for example. You know, how have you seen the utilization of that capability change on the customer side? So I guess the more they use that ability, the easier it is for you to get your recurring revenue up. So how are you trying to push the customer to use that capability?
Mm-hmm. Yeah, so right now you could argue that, I mean, I'll say the majority of products that we're shipping today, on the compressor devices are already digitally enabled.
Yeah.
So they come in already with the gateways, through a GSM network, and we're able to see data. And it's then educating the customer on how we can help them operate that device better by being able to offer some of these solutions. So I think it's all about customer education. And the more customers learn, and they learn a lot by the demand generation activities that we do, via digital marketing. We provide a lot of education to our customers. And I think that's the way that, you know, we continue to drive that acceleration of penetration.
Got it. And then when we look at the kind of near-term demand environment, you know, I think it's been surprising to many people that the compressors, vacuums, blowers, you know, that piece seems to be sort of, you know, skirting or surviving the broader short-cycle downturn. I guess sort of any thoughts around, you know, why, you know, what are the main two or three things that are driving that?
Mm-hmm. I would say, you know, in the, I mean, a couple years ago we started talking a lot about the reshoring and near-shoring, if you remember. And we still see continuation of that. That hasn't really stopped at all. We see it whether it is expansion of chip producing facilities opening and or even, you know, we have one of our now vendors is basically moving their production from China to Mexico to even be closer. So we see a lot of continuation of reshoring that is happening. That's definitely number one. I think the second and big important factor is this energy efficiency.
Yeah.
We saw it back when prices of gas were pretty high in Europe. I think that level of education really start to bringing up awareness of what we have been saying a lot that, you know, compressors consume roughly 30% of the energy on average of a typical manufacturing facility, and we can actually save, you know, 15%-20%, and that creates great payback, which kind of brings to that third point, and which is we sell our commercial team, they sell based on total cost of ownership with a good ROI. We know that if we show customers that we are high on the list under CapEx requirements because we can generate great ROI, they will be able to put us as a key priority.
Got it. And then sort of within, you know, that context, I guess you've got that sort of 1-2% volume growth top-line guide for this year. So, you know, why I guess sort of, yeah, in the context of those drivers, that number doesn't seem particularly aggressive. So I guess there's some offset from the, the non-compressor parts of the portfolio, clearly maybe some conservatism on the compressor piece itself. You know, I think you're starting the year tougher in Asia. Any kind of other factors behind why that volume guide seems pretty low?
Yeah. Jon, I'll take that one. So, I think you hit upon a couple of the points here. So you're absolutely right, you know, as we enter the year, we do face some pretty, you know, strong comps from a prior year perspective where we were seeing double-digit growth in many areas of the portfolio. So obviously that's kind of one factor. You know, in terms of, you know, to build upon Vicente's point here, you know, we do face some headwinds in certain areas as we enter the year. You know, probably the two most notable areas are, you know, China specifically. You know, the Asia-Pacific region, about 19% of our overall revenue, of which the biggest concentration, 15%, is China. China obviously is a tough market right now.
You know, I think our perspective is, you know, we're not immune to that market, and as such, but we do expect to be able to outgrow the underlying pace of growth in China. But are we at obviously a, a much more, you know, a, a market that's facing more headwinds now than they have been historically? And then similarly on the PST side of the equation, similar statement on the life sciences side. You know, 25% of our revenue base is on the life sciences side of the equation. It's been pretty well-known kind of what's going on in that space. And I think we will still continue to kind of digest some of those comps as we move to the first half of the year.
So if you put that all together, you know, to your point, 3% overall organic guide, 2% price, 1% volume, you know, our expectation is that the growth equation gets a nominally better, slightly better, second half of the year versus the first half of the year. But interestingly enough, you know, two factors. One, you know, I'd say the phasing from a year-over-year perspective in terms of revenue and earnings delivery first half or second half is remarkably similar to what you've seen in years past. And we would also say that, you know, we think the guide is prudent and that also leaves hopefully some opportunity for some organic volume outperformance really more in the back half of the year. But again, we're gonna continue to pulse the environment and see kind of how we exit the first half of the year.
When you look at, I guess, some of the more challenged, you know, market exposures, you know, maybe within industrial, you've got the power tools and, and winches, and PST at life sciences, is the assumption that those are sort of down in the first half, up in the second half? It's sort of a gradual recovery. Is that the way to think about those pieces, or?
Yeah, the way I'd probably characterize it is it's, you know, our Q1 guide, for example, we said we expect to be flatter, you know. And the way I'd probably characterize that is, you know, up in the Americas, relatively stable in Europe. Most headwinds is faced in China and life sciences, as you said. I think the power tools, interestingly enough, plays globally. And I would say their regional trends are not too dissimilar, frankly, from what I just said. And then in the back half of the year, again, this is not an expectation that you get to the first half and all of a sudden there's some big hockey stick upward either China or the life sciences.
We just think that, one, the comps get a little bit more reasonable in the back half, and we'd expect to see just some gradual, nominal, sequential improvement. But again, nothing that we would consider to be some meaningful uptick. Of course, if that happens, fantastic. We'll be ready to execute, but nothing better than the guide.
Then within PST, you know, it feels like everyone always talks about the life sciences portion. There's the other 75% of that segment. How should what should people expect there for kind of through-cycle growth, you know, some drivers around clean energy? You know, which are the, the pieces of PST outside of life sciences are you most kind of excited about the growth rate?
Yeah, and I think I think PST, you're absolutely right there, Julian. I mean, 75% of business in PST, when you think about it, has been growing positively on orders and revenue 11 out of the past four quarters. And when you think about PMIs being under 50 and still being able to deliver that outpacing of the growth, it's actually proof to the activities that we can do in terms of leveraging demand generation and some of our products and applying them into better end markets. So a great example there, on the earnings call, we spoke about the, the piston pumps from Aero, which is pretty legacy business that we have taken and reapplied that technology into photovoltaic sales for the, for, for solar panels. And, and now, you know, basically we're kind of the core provider for some of these production facilities.
I think it speaks volume to the ability to be able to take technologies that have been, you know, not leveraged in these clean energy or rapid growth environments and being able to utilize that. Hydrogen is definitely another possibility there. I mean, we have some gas high-compression devices that are being talked about. There's a lot of talks about leveraging that for how do you compress, you know, some of the hydrogen into natural gas to be able to create more, better, cleaner, you know, in power generation and so on. So there's just multiple potential avenues here where we can see ways of continuing to drive growth environment for the PST segment.
And I think, you know, Food & Beverage is another pretty big vertical company-wide demand, I guess, depending on who you talk to, it feels like it's more mixed recently in Food & Beverage after a sort of small uptick. You know, just your assessment there, and I realize it depends if people are in, you know, can shaping versus some other piece.
Yeah, that's right. I think, you know, it depends on, I mean, for us, I can tell you that, we're working with a very large drinks company that makes, essentially bottles for the beverage industry. And they want to invest in their production because of energy efficiencies. I mean, if you think about Food & Beverage, they are high consumers of air.
Mm-hmm.
Where you can actually go in and really leverage the technologies that we have to save on that, it's impressive. You know, a great, a great example in the U.K., a beverage company that, that we replaced, I think it was about 11, 11 old compressors with 1 new oil-free centrifugal compressor, and we were able to generate upwards of $1 million of savings in the year in energy consumption.
If we think about the, the sort of installed base, to your point, a lot of customers have a very old, inefficient installed base. You know, maybe help us understand kind of how do you go about, you know, driving demand on the installed base, whether it's some recurring element, which you talked about earlier, or a wholesale replacement of 11 units with one. Maybe go into some of that demand generation point on the installed base.
Yeah, yeah. So I think that, you know, regardless of the current state of the installed base, meaning if it's a part of the market that's going well or if it's a part of the market that may be slowing or even a little bit stale, then that's gonna drive a lot of the messaging. So if the market, you know, so I think sometimes, you know, really well-run companies during the downcycle, that's what we talk about in business, if you can get to the top of the list from a recent investment. So that's, you know, so like these bottling, some of these pockets where it doesn't necessarily mean that part of the industry is ramping from an end use.
But if we can get to the right person with the right message around an efficient use of capital, even during a soft cycle, then we can awaken them to that. And they've got a situation where they're expecting, you know, that's a little bit easier and more straightforward. But I think, I think the goodness of the question is that our challenge in demand generation is to make sure that we're talking to the right person at the right time during their customer journey, which is, you know, it's easy to talk about and really hard to do. And that's some of the goodness in the, you know, large scale. We have about 170 people that work on this, you know, five days a week, every day, and the insight into that 5 million contract customer database.
It's kind of slicing it, understanding where people are, giving them the right message at the right time.
In terms of, I guess switching to maybe, you know, product types for a second, within PST, you know, there's good breadth on the positive displacement technology. Kind of how much more width is there to go after there when you think you have most of those technologies for now?
No, we still believe that we can have more of those positive displacement technologies. But I also define it as, if you remember in the Investors' Day, when Liz was talking about the M&A, how we go from the core, which is basically the pumps.
Yeah.
It could be blower, vacuum, positive displacement pumps. And then we go into the adjacent into the adjacencies. And a great example of that I can, I can give you from a PST perspective is, you know, Dosatron pumps that are used in we call it, in hydroponics. And how we acquired, that particular core. It's basically a non-electric pump. And then we acquire, a control device that basically controls that ecosystem. So basically then we move into controller and then we move on to revenue. And in that case, actually, there's some SaaS revenue that, that we're actually generating to as well. And then we go into what we call the align, which is then, okay, now not only do we take the pump, we control the pump, but then we what else can we do next to it?
We could call it filtration, for example, or other things that could be attached to that kind of ecosystem, that is just not purely just the pump, but a total solution. So we view it from going deeper onto the technology, but also going into these adjacencies that are kind of pretty close to, to that pump technology.
And if we think about, you know, yeah, there's been, you've mentioned a couple of times the sort of recurring aspect. Historically, hasn't been a lot of M&A capital deployed by Ingersoll Rand in those areas, I think. You know, it is such a big focus for the company sort of organically, inorganically, it probably is as well. So just perspectives around that and kind of, it's hard to exercise valuation discipline with SaaS.
That's right. Yeah. We don't believe in, at least not at this point in time, that it's not that we need to acquire software to be able to generate this recurring revenue at all. We, I think the beauty of the model that we're creating here is that we believe and we have it, this $200 million right now, is that we can really generate recurring revenue, but with hardcore solutions that do not require for us to continue to acquire any type of software.
It is just more about doing more of what we are doing today, which is keep connecting a lot of these machines and keep really utilization of these, you know, many people call it today artificial intelligence, but I mean, it's really machine learning and the ability to be able to understand what the machine is telling you, how do you optimize that process. And that is kind of core to a lot of the things that we have really in our powerhouse. I mean, we have kind of an amazing team of data analysts and even also software engineers that are basically that's what they do every day. Every couple of days, they just look into those machines that are connected and more and more creating the programming code that is necessary to continue to optimize the systems.
I think on that M&A point, you know, you mentioned on the last call perhaps the appetite to do maybe larger acquisitions. You know, what should investors expect in terms of, I guess, one, does larger acquisitions equal higher valuation that you have to pay? And then two, you know, particularly given where the valuation of Ingersoll Rand itself now, this sort of using equity starts to look more appetizing with your valuation and where interest rates are.
Yeah. I would say, Julian, that so, on the earnings call, we said that, you know, clearly we have our current M&A funnel that is pretty active. 10 LOIs, 10 acquisitions on their LOI. All those 10, they look like bolt-ons, but that 10 is actually the highest number of LOIs that we ever have, since we have been talking about LOI. So it just tells you about the level of activity that we have and that engine that is committed to work. We said also on the sidelines to that funnel, there's a couple of billion-dollar purchase price companies, acquisitions that we have been looking at.
I also mentioned, and I think it was to you in your question, that how we actually walked away from one of those billion-dollar purchase prices, which obviously speaks to the discipline that we continue to have. And the way we view it is that we were very disciplined. We need to continue to be disciplined. And we think that in this case, it was, you know, painful because it was an acquisition that we have been cultivating for five years. And it came to a valuation point that, you know, it's what we felt we had to and then we had to walk away. Having said that, we still have a couple of those kind of billion-dollar purchase price companies. We think we will continue to be, you know, disciplined in what we have done.
You see in that we have paid kind of that mid-single, sorry, mid-teens to even in some cases, some high-teens multiple with a good way on how we take that down further pretty quickly. And so we think that that model can continue to happen even on those large sizes.
Got it. And the sort of appetite around, I mean, if it was $1 billion, you wouldn't need equity issue.
Really?
I mean, it you know, in the event of something larger, what's the appetite to use equity? Or that's very unlikely.
Yeah. I think, first of all, I guess to the Santiago speaking to not being that in our mind would.
Yes.
Enter that realm. But that being said, you know, we, we will look at, you know, we last year officially became investment grade. We're well on our path there. We still have a little bit of the debt portfolio to kind of fully, you know, transfer it to an investment grade structure. And as such, we will be very cognizant of, you know, leverage levels and that investment grade profile on a go-forward basis. And as such, if something is larger in nature, you know, obviously, we'll look at the returns. We'll look at the math. But we're also very conscious of where leverage is at and things of that nature. So again, it's, it's part of the equation, but I, I guess the easy answer right now is for the acquisitions and the size that we're looking at, we feel quite comfortable with that going in that direction.
Got it. And then in terms of kind of healthcare as an area, not so much by M&A, but more broadly, just running it within the company. You know, there's been some people who are sort of skeptical as to how good industrial companies are managing healthcare businesses. There's been a lot of them that have been sort of jettisoned in the last few years. So maybe kind of talk about why you think, you know, for Ingersoll, healthcare makes sense as a vertical in terms of reinvestment. I don't know if there's anything IRX-related that's different to healthcare versus other verticals.
Yeah. No. Yeah. Great. I will go into further technology and maybe IRX. But I mean, you know, when you think about the technologies that we have across our portfolio of Ingersoll Rand, they can easily go from one end market to the other. If you think about peristaltic pump technology, I mean, that was born in basically kind of core industrial markets. It is basically what is heavily used in bioprocessing, pharma, end markets. So that's just one example of how technology can actually cross-pollinate from the industrial market into the healthcare.
And then what I mean, and you can think about it, all types of technologies, compressors, vacuums, blowers, all of those can be applicable from one place to the other, even including a lot of the air treatment technology that we have today, where you can actually now create oxygen, oxygen at point of use, for, for many of these industries. So I think it's just a matter of continuing for us is how do we continue to create a company that has a lot of focus on these high-growth, sustainable end markets, so our ability to be less cyclical. And you saw that we divested Club Car. We divested our high-pressure business to remove the cyclicality. And I think last 2023 was a great year where we were able to demonstrate that even in PMIs, we're in contraction.
We were able to outpace and grow and achieve an organic growth of 10%. And on top of that, it's in excess of 6% from an inorganic perspective. So 16% in a market that, you could argue, it was stressed out from an industrial perspective. We also think that the discipline and the approach of exactly IR's is what can make great industrial companies to play in very good end markets like healthcare.
Yeah. I think and I know we're almost out of time. But I think that's the key, though, is that I think we can take the boilerplate of an ownership culture, you know, true owners, all 16,000 employees are owners. We can use IRX, and it's, you know, offensive simplicity. But I think we have to have you know, I think where some industrial companies may mess up is just thinking you just move over into that next vertical without that customer insight. So I think for us to be successful and sustainably successful, I think we just have to be, you know, losing a lot of sleep about learning more about that customer. And that could mean attracting talent or getting that through an acquisition.
But we have to know that customer and what's different about them, say, versus a bottling factory, because it's not the same. But I think the foundational goodness of good boilerplate standard work is transportable.
Maybe, you know, away from end markets with M&A, but more the sort of profile of potential targets. You know, your own margins, particularly in ITS, have gone up very sharply in the last five years. That may kind of a high bar when you're screening for targets that you're sort of wary of buying something now that's very dilutive to margin, whereas five years ago, it wouldn't have been that dilutive because your own margins were much lower.
Yeah. I would say, with that, we always want to see transactions that we can see to get to that above 30% EBITDA margin. It could be the chance that maybe they're not there yet. I mean, that's what happened with a company called Seepex. When we acquired at the end of 2021, early 2022, where it was basically mid-teens EBITDA margin. And here, last year, they finished in pretty much close to the PST average, pretty high 20s EBITDA margin. So as you can see that by year three, we'll definitely get that to 30% or above, yeah, EBITDA margins. Now, do we like companies as well when they come in at 30% up? So, and do we have a few of those that, yes, definitely.
I think it's just a matter of understanding, you know, the core technology that we want to acquire or end market where we want to get in and penetrate. That, sometimes, will drive, you know, the percentage of EBITDA that we can get to. Not afraid of acquiring companies that are below our floor average because as long as we can see that value proposition, then we can get them. The only big piece I would say too as well is that when we look at M&A, we look for premium brands, premium brands that are well known in the market, that we know that they're well recognized because that can generate great profit.
Perfect. I think we're almost out of time. If there's any audience questions?
It's like the 42 acquisition?
Yes.
So how fast is the algorithm? They're in the lead, and they know actually how to grow faster than the core business, right?
Yeah. I'll take that one. So if you didn't hear the question, the question was we've done 42 bolt-on acquisitions since the merger. What is the pace of growth that we're seeing there? I think it's a great question because I think it actually goes back to maybe the first question, Julian, that you asked about some of the growth drivers. And the fact is, you see us report those acquisitions as inorganic for the first 12 months. And then in month 13, they kind of become part of the report and become part of organic. But when you've done 42 of them, and now those are kind of tucked into the kind of core portfolio, that's actually a nice little, I'd say, kind of tailwind that's kind of under the surface of driving kind of outpace growth in totality.
You know, in isolation, each of these are, you know, quite small. When you add them together here, they can be a nice little, you know, tailwind on the growth side. So to answer your question, obviously, there's a variety in terms of all the different assets. I would say they in by and large are growing in line, if not in certain cases slightly better than the overall portfolio, which has been doing quite nicely. And a lot of what we're seeing there are opportunities where the vast majority of the deals we've done have been first of all, 90% of them have been sole sourced. The characteristic is great technology, private, family-owned.
Then we're able to take that technology, plug it into the overall enterprise, drive outsized growth, but then also take that technology and probably move it through our commercial chain internationally, so where they hadn't had a presence historically. That's been a fantastic opportunity. In fact, in our Investor Day, we highlighted a number of those examples that have driven, I'd say, some outsized and outpace growth over the last few years.
Great. I was going to think we have to go now to the audience response survey. So the first question is your sort of current ownership of Ingersoll. Totally overweight or not at all. And number two is around sort of current bias to the company at the moment. So generally very positive. Number three, just tied to sort of through-cycle earnings growth against a kind of multi-industry average. Generally above the range. Number four, what to do with excess cash. More straightforward here than other companies, I think. So yeah. Well, bolt-on M&A. Number five, what PE multiple should Ingersoll trade at on year one? So generally in the 20s. And then the last question is around what's the fundamental reason sort of preventing someone owning more of the stock today? So organic. Fantastic. Thanks very much, everyone. Thanks for attending.