All right, we're gonna get started again. We are really excited to have Ingersoll Rand with us today. We've got basically the whole team. We've got Vicente Reynal, who is the Chairman and CEO, Vik Kini, who is the CFO, and Mike Weatherred, who is the SVP of IRX. Maybe I'm gonna start with you, Vicente. It's almost been... Well, I think it's exactly four years-
Mm
since the RMT. I think your vision was to create a premier industrial company focused on mission-critical flow creation, industrial technologies. It obviously seems like you've come a long way. But maybe talk about what's gone better than you expected. Has anything gone worse than you expected? And, you know, if we're sitting here four years from now, what do you think will be the biggest point of change in Ingersoll Rand four years from now versus today?
Yeah, I think, Andy, a great way to start the Q&A session. I, you know, for us, I would say for me, what has gone really well is the speed at which we have executed.
Mm-hmm.
In the sense that if you think about it, you know, in just almost four years, still one more week, and then we celebrate the four-year anniversary. But four years, and in the middle of four years, clearly the pandemic, supply chain, war, I mean, you name it, we had a lot of things and a lot of issues that were thrown at us to prevent from going to a smooth integration. But you can see that not only we integrated these two companies, Gardner Denver and Ingersoll Rand, we also divested our cyclical assets of Club Car and the high-pressure business, and then we reinvested back, and we acquired 42 companies-
Mm-hmm
in just about four years.
Mm-hmm.
And doing all of that while all the companies that we acquired really play in high growth, sustainable end markets.
Mm-hmm.
So I think we're very excited in terms of the speed at which we executed. We learned a lot on how we can leverage and utilize IRX to the fullest and to the best extent. I think we have now created a ... Talking about the next four years, what we are very excited about is that we created a very, what we call a durable financial profile.
Mm-hmm
of a company that we, as I said it on Investors' Day in November, that I—if I was very excited in 2016 when I took over as Gardner Denver and what I envisioned that we could do, I am, you know, more than elated and excited now that we have this great platform that creates, not only great top-line growth, good margin expansion, and a fantastic free cash flow generation that we can reinvest back. So as we continue to the next four years forward, it's all about continuing accelerating what we are doing today. And every day, we learn better. We know when we make mistakes, and then we fix them, and then we grow and do better, so.
Very helpful, Vicente. So you mentioned that this would be a relatively normal year for bookings, book-to-bill over one in the first half, you know, second half under one. But you also mentioned sequential improvement in Q1, and you seemed a little more positive on short-cycle markets, and specifically called out the Americas, including Mexico and South America. So maybe you could give us more color on where you, you're beginning to see short-cycle improvement. Could you expound on the Americas comment?
Yeah, a couple areas. So if you remember on the call, we talked about PST. The PST segment, start with that one, that we, where we said that the short-cycle business in the fourth quarter for PST, which we can clearly see very well, did well. I mean, mid-single-digit growth, on a year-over-year, and also some sequential improvement, too, as well. And then when we flipped the coin to also the ITS, the ITS, if you remember, Andy, back in the Gardner Denver days, we always said that the vacuum business, our industrial vacuum business in Europe, plays very well with OEMs.
Mm-hmm.
And that we have always seen a great correlation of how the business does against PMI and some of industrial production.
Mm.
We saw inflection points on that business, too, as well.
Mm-hmm.
So that gave us a bit more also good confidence. And then later, a month later, we see how also PMIs were actually sequentially start to improve.
Mm.
So, I think what we see is that then there's definitely clearly these PMIs that have been below 50 for a long time.
Mm.
Clearly, we for 18 months or so, we have outperformed that.
Mm.
It just shows you that we are going after end markets that are basically non-industrial in nature.
Mm-hmm.
I mean, high growth, sustainable end markets, and we're taking advantage of a lot of these micro growth secular trends that are happening, like m- reshoring-
Mm-hmm
anything around water conservation or energy conservation, too, as well.
Mm.
So, I think the good news here is that you can see that we can pivot very quickly from our technologies to end markets that are seeing the good pockets of growth, and while at the same time, did phenomenally well last year, at 10% organic growth-
Mm
and 6% inorganic. And as we start seeing the inflection of this kind of short cycle-
Mm
as per what we're seeing kind of early on in these PMIs, that will be even better.
Next time, I'm gonna come to you to start predicting PMIs, huh?
Yeah, yeah.
Is the industrial vacuum business continuing to inflect, would you say?
Yes.
Okay. And then, you know, since we're talking about regions, maybe talk about what you're doing in China to outpace the market. I know you said bookings were down mid-single digits in Q4, but you also said your China teams are more excited about 2024 than 2023. So do your teams think you could grow in China in 2024, and what markets are they looking to most for growth?
Yeah, Andy, so we were in China. I was in China the third week in January with the team, 'cause we wanna be close to continue to understand what goes on there. And I can tell you before that, in October, I was there as we were there as well, and even before that, we were one more time, too, as well, in 2023. And I can describe a couple things of what we saw in China this time. The first time that we went in 2023, and I gave this description to a lot of people, is that we landed in Shanghai Airport, and it was pretty empty. This is early 2023.
Mm-hmm.
This time in January, we land in Shanghai, and actually, you see a good amount of people, and more important, a lot of foreigners. So Europeans, Americans. So it kind of tells you that there's definitely starting to get some movement, at least just by taking that as an anecdote and a data point. And then we went into our business reviews with our teams, and it was just an incredibly phenomenal week, because we spent a full day in our innovation center, and it is amazing the level of innovation that that team has done in just a year. So that's what we also continue to be excited about, because we're controlling what we can control.
That team is protecting the core of the business while continuing to invest, and while continuing to now launch new innovations that we know are gonna give us great access to new markets that we had no access. So I think that's why we left super energized and very excited that... Yeah, I mean, the market conditions in China, as I said on the earnings call, is a market that is not booming, but it's a market that is definitely seeing some good areas of growth. And our team is doing all they can there to really outpace that market. And I'm confident that they will again this year.
Are there any particular markets that you're most confident in China could grow, just out of curiosity? Like, where are you seeing growth?
Yeah, so, you know, we tend not to like to talk too much about them.
Mm
'cause we wanna own them.
Uh-huh.
But what the team does, what we do with that with the team in China, is that, three times a year, we review end market,
Mm
we review, you know, microtrends, so very early on. So we were very early, we're very early on entrant into the electric vehicle production-
Okay
and into the battery production. And clearly those markets really took off, and we took advantage of that. As we saw that, you know, there was a lot of that going, I mean, we start getting nervous, and then we start looking for other end markets. So there's, there's definitely a handful of end markets that the team goes, leverages demand generation, creates a product innovation-
Yeah
that is needed for those end markets. And now we feel that we have, you know, not only the team, but the products and the end markets that have been selected, and I think, that's how we will execute.
Very helpful. And then you mentioned, Vicente, you had a larger amount of longer cycle projects in backlog, which I think is a part of another comment you made, that you're still seeing megatrends, you know, onshoring, sustainability, bigger focus on energy efficiency. We're all trying to figure out where we are in the cycle of these megatrends and how sustainable they are. So from your perspective, is the industrial cycle, do you think it's different this time? And, you know, if we're using the American baseball analogy, what inning are we in, do you think with these megatrends?
Yeah. Yeah, I was told that there's no, no, no, only nine innings in-
That's why I say American baseball now. I gotta be very clear, Vicente.
No, I will say that yes, there's definitely a lot of good of these megatrends that are happening. I got the question yesterday about some of the CHIPS Act, if we're seeing that.
Yeah.
And that as an example of, is it the early innings or... I call it kind of more like early to mid, because, I mean, there's actually new companies that are still have new plans on how they're going to expand their production here in the U.S.
Mm.
Even if you take just that example about the not the CHIPS Act, but, you know, semiconductor or chips manufacturing companies, even companies that are, you know, today primarily in Taiwan and leaving Taiwan to kind of collocate factories in other places. So clearly we're, we continue to see a lot of these megatrends of relocalizing the supply chain.
Mm.
That started a few years ago, and that, it takes time to get that going-
Yeah
A nd to get that change. So, so we think that, we still see good tailwinds of that, of those kind of megatrends that we talked about, whether the relocalization of supply chain, energy savings around Scope 1, Scope 2-
Mm
Y ou know, just anything related to sustainability. And then we'll talk maybe here later about digitalization-
Yeah
A nd recurring revenues.
Sure.
So those megatrends combined with maybe a bit of better improvement in short cycle, it's just demonstrated that there's some good tailwinds.
Yeah. Got it. And you guys, obviously, you know, a big part of your strategy is inorganic growth. And you sounded relatively bullish, I thought, in terms of answering my question on the call regarding M&A. You know, you confirmed that you went from 4 LOIs in Q3 to 10 in Q4, and, you know, suggested the M&A market was opening up. But could you expand on what you're seeing? Is it really that lower, at least more stabilized rates are helping market confidence, or, you know, are you just generating more opportunities? You mentioned a couple larger deals. Are there any white spaces nowadays in Ingersoll that you're really trying to hone your focus on?
Yeah, Andy, I'll take that one. So, you know, I think one thing that we'll reflect on, so you're, you're absolutely right. We, we kind of give a snapshot every 90 days at our, our earnings call, kind of how the, the M&A funnel and LOIs, and this is kind of the high-water mark of any quarter we reported with 10 LOIs.
Mm.
First and foremost, those 10 LOIs, I'd characterize them as very similar in terms of look, feel, size as to what you've seen us do. You know, as Vicente said, we're coming up on our four-year anniversary of the merger here next week, and we've done 42 bolt-on acquisitions in four years.
Mm.
And I would tell you, those 10 under LOI look very similar to the ones you've seen us do historically. But it's worth mentioning here that, while I think we do see the overall market continuing to improve, our model hasn't changed. And that, what I mean by that, is we're not sitting, waiting necessarily for deals to find us. We continue to cultivate. So 90% of all deals we've done, and I'd say that the LOIs are no different, are sole sourced. So that is our team. You know, obviously, we have a, we have a team at corporate, it's, you know, really one person.
Mm-hmm.
But we have teams within the business, and so that's where a lot of this, I'd say, cultivation really happens, kind of on the, on the floor, if you will. Because these are the companies that we're operating against out in the field. And so that's how you've seen those 42 bolt-ons come to bear, and how we've continued to expand our addressable market. You know, the, the thing that we, we like to remind people of, is when we did the merger, you know, we were, let's call it something around a $25 billion addressable market. Well, today we play in something closer to $55 billion-
Mm
A nd we see runway to that being $70 billion+ in the near future. And that continues to open the aperture in the context of where we can continue to find bolt-on acquisitions. You know, we also mentioned on the call that, you know, we do have, you know, a couple of slightly larger deals in the funnel, so think of, you know, deals that are maybe in the $1 billion-$2 billion-ish type purchase price. Probably worth noting here that, you know, we see opportunities on both sides. So you mentioned white space. I think we are very, I'd say, excited by the prospects on both sides of the equation. But, you know, PST obviously is a continued area that we continue to see the ability to grow from a scale perspective.
It's still only about 20% of the revenue base. We think through organic and inorganic means, that's ones that we wanna continue to see get to, you know, let's call it ITS size over the horizon. So again, we continue to be, you know, I'd say, very disciplined, very prudent in how we approach the M&A side. Vicente mentioned on the conference call, our earnings call last week, that we actually walked away from one billion-dollar-plus type purchase price deal in let's call it late fourth quarter, early first quarter. You know, that was a deal that we had been working on for quite a while, but at the end of the day, it just didn't make sense, and we walked away from it.
The reality here is we've continued to move forward with the balance of the funnel, and we're very pleased with kinda how this year is shaping up already. We already closed, you know, one deal we mentioned at the February 1st, Friulair, which is squarely in our air treatment portfolio, and couldn't be more excited to integrate it and include it in the portfolio.
You know, every time I hear 42 deals in four years, I get both excited and a little scared, you know?
Mm-hmm.
You guys have done a really good job executing these things. So maybe it's... We take a slight segue and talk about that.
Mm-hmm.
Like, how have you been able to sort of not, you know, avoid the lemon, you know, if you may, in what you're doing?
Well, I think it starts with the what we buy. So I think there's a lot of work done on making sure we're buying the right stuff. But to your point, Andy, I think the, the key is that the catchers of those integrations are the business units themselves.
Mm-hmm.
The work that they do in integrating those businesses using IRX and the same sort of, you know, simplicity and standard work approach, is not unlike the other work that they're doing day to day. And I think the goodness is now, after 42 of these acquisitions, we have hundreds of people that have had tons of reps of doing this. So, you know, and most people, my career prior to Gardner Denver, was all, you know, once every five or six years, something would, big would fall in your lap, and it would be a, you know, it would be a unique year and a unique stretch of work. I don't think we have that. I think we can look across all the geographies, including China, which we saw a wonderfully integrated asset when we were there in January.
They did a fantastic job. And again, it's just that block and tackling on kinda weekly planning and 100-day sprints, bringing in the acquired, say, finance partner, HR partner, so on and so forth, and just, you know, repetitive, good, simple work, standard work.
Yeah, very good. Vicente, you mentioned recurring revenue, so let's talk about that a little bit.
Yes.
So it's been a big initiative for you guys, you know, since you combined GDI and Ingersoll, and so maybe update us on where you are. I think you talked at the Investor Day about a $1 billion goal you've set for IR by 2027. I think you're gonna expand and integrate your equipment and system services much more in PST. So can you give us an update on how that's going, initial rollout-
Sure
Where you are?
Sure, yeah. And, maybe to frame it up, I mean, let's start by saying that, you know, we're roughly call it $7 billion in revenue, and, you know, high 30% of our revenue is aftermarket already. So... And I know some companies, they call that already as recurring. What we like to call recurring is that, is that basically, you have a signed agreement with the customer that every month you're gonna get paid a certain amount of money, regardless of the utilization of that, of that device. And that's basically what this $200 million that we are generating today. It's part of that aftermarket umbrella, but it's really recurring in nature.
It's basically almost like software, like, revenue that, you know, we also have margins very similar to software, like, I mean, above 60%, as we said on the earnings call, Investor Day. And then, well, we set a big ambition. We said that we can get to about $1 billion by 2027, and we have a glide path on how we're gonna get that. And if you think about it, I'm gonna bucketize it by in three main areas. Number one is really today, the $200 million that we spoke about on the Investor Day, is really mainly in the U.S.
Mm.
We have used the U.S. as almost like a laboratory to really hone in and precisely have the right product in place.
Mm.
While at the same time, we have been shipping all of our compressors with already digitally enabled technologies, meaning that we can connect them very quickly and then add the services. So as we go from the U.S. into Europe and into Asia, that gives us a great expansion in terms of how we're gonna take the same model and apply that to customers that in many cases are globally, that are asking us to take that same service or revenue into other countries. The second big bucket is around increasing the solutions that we serve. So for example, you know, today we have what we call CARE package. CARE package is actually three different solutions that we offer. On top of that, last year, we acquired a company called EcoPlant that offers an add-on service around energy efficiency.
Not only we can CARE, we can talk to the customer about maintaining that product, operating at the highest level of efficiency, but we can save energy, and we can show you, Mr. Customer, how we can-
Mm
A ctually generate energy savings. And the third big bucket is, all of that is compressors only.
Mm.
But we have blowers, vacuums, and in the PST segment, several technologies that can... The same recipe can be very applicable. So we already are expanding into the blowers.
Yeah.
So, for example, blower technology that is used in the pulp and paper facilities, we are, you know, launching. It's called RunCare.
Mm-hmm, mm-hmm.
But it's a very similar solution that allows the customer to get not only the uptime very high, but then now energy savings and water conservation and so on. And then PST will be the same. We see it as a very good glide path on how we can get from $200 million to $1 billion.
Very helpful. I'm gonna open up to the audience in a second, but let me ask you, Vicente, and it's probably actually for Vic. You mentioned corporate costs will be down in 2024, and you're taking proactive restructuring at the end of 2023. Obviously, for a long time, we're asking about your RMT cost synergies, you know? I don't think you got any questions on that on the call. They're helping you with incremental margins, but how should we think about the sort of buckets going forward of cost-out? You know, whether it's lower corporate costs, M&A improvement activities, targeted restructuring, higher mix of aftermarket we just talked about. You know, what are the biggest contributors to that self-help?
Yeah, sure. So, you are right. We kind of have, I'd like to say, put a bow on the whole merger-related synergies, and I, I think we, quite frankly, executed well in line with our, our expectations, outpaced our original expectations.
What was the final number, Vik?
Yeah, well, we reported $300 million, and we'll say that.
That's fine
You know, we delivered well in line with that. But to your point, there was always kind of a larger funnel, if you will.
Yeah.
We talked about $350 million + of a funnel. And so if I take them in, I'd say in terms of the opportunities we look forward, you know, first and foremost, you know, we continue to be a very quality-of-earnings-centric company. You've seen that in the margin profile across the board. Price will always be part of the equation, so there, you know, we always expect to be price cost-positive. That's no different in 2024, you know, and will be no different going forward. Two, as Vicente said, this whole recurring revenue kind of, you know, this ambition to go from $200 million to $1 billion. You know, again, ambitious goal, one that we definitely have plans built out to line of sight to.
But, you know, Vicente mentioned that that portfolio plays at 60%+ type gross margins. And we know that because, quite frankly, that's where the $200 million we have today plays at.
Mm-hmm.
So, there's no reason that if we scale, it shouldn't continue to operate those levels, and that'll be very nicely accretive to the overall margin portfolio across the enterprise. I think in terms of the productivity side of the equation, you know, whether it be I2V, the reality is we're still coming off of, you know, 2023, where direct material pricing has still kind of been at highs. You know, we do expect that there's gonna be price clawback-type opportunities as we look forward. The team is very much pushing for that.
And then, you know, as far as that kind of, let's call it synergy funnel, if you will, from the merger-related opportunities, probably the biggest piece of that, that we never, I'd say, fully executed on, and for a lot of reasons, you know, hopefully, that are somewhat obvious, but, was the footprint. And, you know, that's not to say that sales offices and things like that, we didn't optimize. We did, but things in terms of, you know, manufacturing footprint, there was never an expectation to move things, you know, from one region to another or anything like that, but maybe some more in-region optimization. And that's quite frankly, because of, you know, the four years since the merger has been-
Pandemic
COVID, supply chain, and a bunch of reasons why, quite frankly, footprint optimization probably wasn't the most prudent thing to do.
Yeah.
But that continues to remain some opportunity going forward. And then the last piece of the equation, you are right, year-over-year, corporate costs have been a bit of a tailwind. I'd say there's some moving factors there in terms of incentive compensation costs, as well as, frankly, some offsets with some reinvestments in areas like, demand generation and IoT, and things of that nature. We'll continue to reinvest in the company prudently from an organic growth perspective, so I don't think you're gonna continue to see that be any different. But to your point, is there gonna continue to be a little bit of a tailwind, both segments, as well as corporate, in the context of when you do 42 bolt-on M&A opportunities, there's always gonna be some bolt-on M&A synergies-
Mm-hmm
A nd there's always room for optimization. I'll use my own world, you know, finance-
Mm-hmm
Pushing shared services, things like that, you know, with still a huge opportunity for the enterprise. So the reality here is, I think there's plenty of opportunity across the board, across many different aspects, but recurring revenue is probably one of the areas that I think is the most exciting for us, just given the runway.
Got it. Any questions from the audience? Anybody wanna ask a question? I can't see through the light, but I don't think there's questions there. Okay, so let's focus a little bit more on the segments. So you've got a new leader in PST, Santiago Duval. And you mentioned on the last earnings call that he was in the process of better implementing I2V now, and, you know, that's as part of your 35%-40% incremental margin guide. You know, PST could be a bit higher than ITS. So, you know, you also mentioned PST could be mid-30% operating margin over time. So maybe give more color on what Santiago is doing and how he sort of really, you know, accelerates improvement in PST.
Yeah, sure. So I would say, it's all about the people and the processes that we implement. And, so Santiago coming in, we actually also upgraded or enhanced some of the general managers in some of the P&L businesses that we have within PST. So we think we have a really strong team now that can take PST to the levels that we want to. And then it goes back to utilizing the playbook that we know works very well, which is a lot of the IRX. And when you look at our growth, economic growth engine, whether demand generation, I2V, aftermarket, those are initiatives that the teams, they know how to execute, but sometimes you have to refresh.
Mm-hmm.
So what we ended up doing is also... I mean, this year, we already—I mean, we, in the month of January, we had a week-long event for I2V across all businesses for PST, where global teams came to a location with competitive product. They disassembled the product, they had voice of customer, they had voice of dealer, voice of service technician, and that led to reconfiguring the products and making a lot of changes that, you know, gave us a pretty substantial funnel of potential savings. And we call it the I2V, Innovate to Value, because we look at not only how can we lower the cost, the bill of material cost, 'cause keep in mind, you know, 70% of our cost of goods sold is direct material, so we're always looking at direct material cost.
But then, how do we innovate in price? Because the more features that you know how to put in, that the customer is willing to pay for, those are the ones that we wanna put in and be able to tweak the price, and be able to get that price. So that's why we call it Innovate to Value, 'cause you get margin expansion both ways. So I'd say the team generated, you know, pretty substantial, you know, kind of call it mid-single million-dollar funnel on how now they need to start executing on that. I'll say in addition to that, I think, you know, a week after that, you know, Mike led a week-long event where we are looking at how do we create standard work for commercial execution-
Mm-hmm.
With the utilization of the demand generation . And now there's a very strong playbook. So I think that all the pieces are in place there to now continue to that execution, and we're seeing it with the teams. Because we participate on the, you know, I personally participate on the IDMs, the Impact Daily Management with the teams, to continue to see that momentum. And we're seeing it. So we're proud with what the team, how the team has grabbed this kind of dramatic change and shift in the gears, and-
Yeah, yeah.
So yeah.
I mean, it's great to hear, 'cause I mean, you and I talked about this. It seems, you know, I'll use your word, dramatically different than last year in terms of, you know, positive momentum in that segment.
Yes.
Is that true?
Yeah, and also to think about it, too, as well, that, you know, I know, when you look at the headlines of a PST segment, but if you kind of open the hood, and if you think the segment, 25% of the segment is life sciences.
Yeah.
We know, you know, the market, how life sciences has happened there. The other 75%, still, I mean, 11 out of the last 12 quarters has been positive organic orders and positive organic revenue.
Mm.
So again, in a market where PMIs have been below 50-
Yeah, yeah
which is supposed to be construction. So again, it speaks to the volume that the team even still continues to execute. We just have such high expectations that-
Yeah
'cause we know that we can do better.
Yeah.
That's basically the difference is that... I mean, yeah, when you compare the performance against the market-
Yeah
... 75% is outperforming the market, but-
Yeah
... we want more.
Yeah, and that was gonna be my next question, Vicente. Like, so let's say life sciences, I mean, your, your guidance is that it would improve in the second half of the year and get more normal in the second half of the year. But let's say it doesn't, for whatever reason, this other, the 75%, can it carry you to the 2%-4% growth to some extent that you have, Vik?
Yeah, maybe I'll, maybe I'll take that one. So kind of building off what Vicente said here, the 25%, that's life sciences, let me start there. We still have some headwinds we've got to digest as we move through the beginning part of the year here, really first quarter into a bit of the second quarter. So again, the good news here, as we enter the second half, those comps alleviate considerably. Now, just to be very clear, our guidance doesn't imply some, you know, big acceleration or hockey stick or anything of that nature. It just frankly implies some just sequential, maybe nominal improvement, but nothing, you know, I'd say needle moving, for lack of a better way to say it. The balance of the portfolio, I'd say, you know, as Vicente said, has been relatively stable, well-performing.
That is, to be very honest with you, where the, I'd say, the majority of the growth is coming from. You know, I think in the context of the guide, it's actually both segments, but, you know, PST, it's a 3% organic, 2% price, 1% volume.
Mm-hmm.
We've gotten this question a lot. I think, it pertains to both segments. Right now we're taking kind of a prudent view to the year, just given that you don't have a tremendous amount of visibility into the back half of the year. If it's there, absolutely, we'd, we'd like to say some organic volume hopefully maybe becomes the upside opportunity in the back half of the year. But again, let's execute the first half and kind of see how that plays itself out.
But to be clear, you don't see anything really... Life sciences is kind of, like, stable.
Mm-hmm.
Is that kind of how you'd put it right now?
Yeah.
Yeah, okay. And then stepping back, Vicente, it's an election year in the U.S., other, other parts of the world, right? So, you know, you're at the forefront of markets. I notice you haven't gotten some hydrogen questions in the last, you know, quarter or two. So, do you worry at all about election uncertainty could creep into, you know, PST or ITS customers? And could you update us on what's going on, you know, in some of your newer markets, like hydrogen, for example?
Yeah, I'll answer that, Andy, by saying that, you know, the thematic for us over the past few years, since we actually combined the two companies, has been control what we can control.
Mm-hmm.
When you look at every single year since we got together, first the pandemic, then, you know, Russia invading Ukraine, then-
Mm
Y ou know, so here in the Middle East, logistics, freight, supply chain, now, you know, Red Sea, it seems like every, almost every quarter something is happening. And we just view the elections as maybe it's just another event.
It's another thing.
I think what we are continuing to remain very committed to is be agile and nimble.
Mm.
We know that regardless of who wins the election, there's gonna be some wins for some markets.
Mm
End markets, and that's basically where we're gonna pivot ourselves and then go after them.
Mm.
So whether it could be hydrogen or it could be other investments or other things, we'll definitely continue to learn and continue to pivot pretty quickly to be able to recuperate that.
I always like talking to you a little bit about these newer markets. Are you continue to see positive momentum in them? You know, not just hydrogen, but there are a lot of other things you do, you know, that are more-
Yeah
different-
No, that's right.
first start.
There is. You know, even just this past week, I think there was a new IRS regulation around renewable natural gas.
Mm.
And so that's actually gonna continue. I mean, we spoke about renewable natural gas in the U.S. has been a good investment, and good growth for us. But it's being kind of conflicted by certain level of size of farms or methane-producing locations. This new tax regulation, I think, it just expands and creates an even bigger market. You know, last time we were in India, we actually met with a minister of hydrogen, 'cause India has some pretty aggressive targets-
Mm
O n how they want to get there, India. We're hearing now, clearly, you know, whether China or other countries also rethinking hydrogen or LNG. But yeah, so I think there's just a lot of goodness that is happening in, in, in multiple areas. And the way we, the way we take it is that we don't take anything like a peanut butter across initiative. It has to be customized and localized for the region. We're taking our technologies and be innovative on how we make that approach.
It reminded me to ask you, 'cause you just mentioned it, like, a couple companies have talked about India as, like, kind of the new China, in quotes... What do you think there? Like,
Yeah, if you remember, Andy, I think it was maybe more than two years ago that we said that we were gonna double down.
Mm.
On an earnings call, we said we were doubling down in India, and even in Investors Day in 2021, we spoke about India. We have seen good growth out of India, yes. We have even done M&A in India.
Mm.
We have acquired, now, one company, and we actually have in the process of a couple more. So, it continues to be a great place for us to-
Right now, percent of the business, one, two?
Yeah, it's less than, yeah, 2%-3%.
Okay.
But it's, it's been one that I'd say, growth-wise, has been quite frankly at the top of the top of the stack in terms of growth. And to Vicente's point, we've actually also put incremental capacity, you know, you know, building facility, particularly on the ITS side, 'cause we quite frankly are... We were at capacity. So we've, you know, the doubling down has not only been in the inorganic side from M&A, it's been on the organic side in terms of capacity and footprint as well.
So Vik, just, I want to ask you on ITS, like, you achieved high 20% EBITDA margin in ITS two years early of schedule. This might be for you, too, Vicente, but, you know, can you give us a little more color into why you were able to reach the target early, you know? And then, you know, given what you recorded in the second half of 2023, it doesn't seem like that 30% 2027 goal is, you know, that much of a stretch. So why can't you achieve more than that margin over the next few years?
Yeah, I think, you know, to the first part of the question, first and foremost, the team has executed unbelievably well. You know, obviously, this is the part of the business where I think the vast majority of the merger really was focused on from a, you know, the compressor, blower, vacuum platforms. And I think everything we've mentioned here, whether it be, you know, positive execution, the price cost, the organic growth, the synergies, the productivity, the I2V, you'll really pick one of those, any of those areas, I think the team has done an unbelievable job on execution. And, as such, you know, the in-region, for-region kind of model, we really think has been a huge tailwind, and will continue to be one.
So, for all those reasons, I think, you've continued to see the team, you know, embrace IRX, really act nimbly, really quickly, even in the forefront of some of the supply chain challenges. That, that team got well ahead of some of the inflationary, pressures, and you've seen them be price cost positive and margin accretive effectively for almost every quarter since that kind of started. So, you know, a ton of credit to them in that respect. To your point, we have reached our kind of stated margin targets a couple of years early. Now, that being said, you know, in terms of the go forward here, we do still very much see margin expansion. You know, is it, you know, the 2024 guide, is it the same triple-digit margin expansion that you've seen in the last four years? No.
Mm-hmm.
It is still positive? Absolutely. I think some of the same tailwinds that you've talked, we've talked about are gonna be the drivers there. But rest assured, we're also reinvesting for organic growth, so there are meaningful reinvestments back into the business to drive sustainable, ongoing organic growth. And to your, the second part of your question, do we inherently see a cap on margins at 30%? No. I don't think that's at all how we think about it.
Mm.
I think we are gonna continue to balance prudent margin expansion with reinvestment to kind of drive ongoing growth, both on top and bottom line, but we don't inherently see that there's some, you know, upward bound that we can't cross.
Got it. So I want to focus on digital demand generation for a second. Like, you know, maybe peer under the hood a little bit as to how it works in the sense that, you know, who do you, who do you think you're taking share from? What particular markets does digital demand generation work best, if you may?
Yeah, I think it works. I think it works best in three places. It works. And first of all, for those of you that aren't aware, it's one of the few central corporate functions that we have. So we have 160 people that get up every day, and their first thought, you know, once they're thinking about work, is: How can I create demand and awareness, and solve customer challenges, provide customers the right information, depending on where they are in their buying cycle? And I would say that the big advantage we have, Andy, in digital overall, and then I'll get to the question, is that there's scale. So I use, like, search engine advertising or search engine optimization.
In every industrial company, and for, you know, and probably thousands of consultants around the world, you'll find somebody providing that service in pockets of two or three people, and those two or three people are doing it, let's say, 40% of their time.
Mm-hmm.
We have, you know, somewhere close to 40 people around the world, that's all they do is search engine optimization and the precision on advertising. And I can tell you, for an industrial company, that scale is a big advantage, and we could—I could go across the way that we do all elements of digital, including e-commerce and outbound campaigns, et cetera, et cetera. I think the three places it works really well is superior technology, so like for oil-free or for EcoPlant.
Mm-hmm.
So in different, you know, different ends of the spectrum and different levels of awareness and understanding from the consumer, but it's a way to go in and educate with precision to the person who we think is dramatically overworked. So the people who buy our products, they have, you know, statistics will say, three-four times the responsibility they had just five years ago.
Mm-hmm.
They got a big pile of paper. The people that can provide the information at the right time can get to the highest priority list. You know, Vicente always talks about this. We talk about return on investment. We're gonna go in with a return on investment on a high-priority project, and that's gonna move that along. The second place it works really well is for newly acquired assets. So we'll take, for example, SEEPEX or you know, anybody that, any of these 42 companies, and we were at Friulair two weeks ago, the Italian-based company that we just purchased. They don't have demand generation. They have people who think about the web, they have people who think about trade shows, and again, those people are kinda 20% of the equation. So they're gonna get...
In this next 100 days, we'll get them digitally savvy, and we'll start to create demand and awareness and add them goodness in the form of leads. And then the third place it works is to pivot to these new markets.
Mm-hmm.
So again, we've got 170 people that they know the digital equation, but in the businesses, in the region, that's where the expertise on these markets are. And we're looking at them, you know, six, 12, 18 months ahead on something like electric battery, electric vehicle production, or now recycling. And so the combination of those two, the scale at the corporate level and the local, in-market-specific use case expertise, is just gives us instant leverage.
Very helpful, Mike. And then I wanna ask you guys about cash flow. I, Vik, I think you mentioned inventory at Ingersoll is not back to pre-pandemic levels, and that you saw more opportunity there.
Mm-hmm.
Maybe talk about that, and then, you know, it's a good place to step back, and you can remind us, you know, you've got this Ownership Works program, right? It seems like a good, catalyzing specific goals, like improving cash performance, would be a good place to use that program, so maybe talk about that.
Yeah, absolutely. So maybe I'll start with the latter piece of that, the Ownership Works, and kind of the ownership mentality. You know, it's, we've talked about it quite a bit, Andy, about the ownership philosophy within the company, that all of the employees, now 18,000+ strong, are employees of the company. And we have an ongoing program called Ownership Works, where anyone new to the company, whether it be direct hire or through acquisition, one year after their start date, they get equity in the company as well. So we keep the momentum of this program going, and it's, we think it's an absolute differentiator. I'll let Vicente come back to that here. In the context of cash, absolutely. Very pleased with the cash flow performance in 2023. Close to $1.3 billion of free cash flow.
You know, 18% free cash flow margin. But an area that we know we continue to have some opportunity. To your point, inventory, I think the teams did a nice job exiting the year. Are we back to pre-pandemic or anywhere close to those types of levels? Not quite yet. Are there still opportunities in areas like collections and things like that? Absolutely. We have 42 acquired assets, many of which are not in shared services or, you know, probably at the levels on, you know, any of the metrics you would think on DSOs, DPOs, turns, things like that, that you would hope for them to be at. So I, I think there's plenty of opportunity as we think about the equation, across the board on how we can continue to drive free cash flow and free cash flow generation.
And you are absolutely right. As owners of the company, this becomes probably one of the easiest areas for, you know, frankly, any employee in the company to tangibly feel how they can influence that equation. 'Cause fundamentally, any employee in the company, whether you're in one of my teams in the shared services, you know, dealing with vendors on payables or collections, or you're on the shop floor with inventory, you're touching cash in some way, shape, or form. And now, as an owner, you can really show them, and we do. We show every single quarter, we show performance. We show the metrics. We help them understand how they're influencing that outcome, and how that can drive value creation, from whether a share price perspective or otherwise. So it's pretty powerful. But, you know, Vicente, I'll let you add on.
Yeah, no, I think, I think, this is one of the most exciting pieces of the story.
Mm-hmm
A nd the one that we feel really very proud of doing what we have done. And we put a page of that on the last earnings just to show the amount of wealth that has just created to the employees on this, and how it has been life-changing for many of them. And you can read the quotes of some of them. But every time I go to a location anywhere in the world, it is just really, really energizing. When we do a town hall meeting, and you get, town hall meetings will typically last about an hour, and it's just me, five-minute opening remarks, and it's 50+ minutes of Q&A.
Mm.
Just highly engaging questions.
Yeah.
Engaging questions asking about dividends, and you name it. But I think that is, it's just a catalyst for long-term performance.
Got it. So we're basically out of time, but I gotta ask you this last question, and it'll be quick, just 'cause I'd ask all companies the question: What are the top two or three innovations-