I think we're good to go here? Yes, this sounds like it's working. All right. Hello, everybody. Welcome to the Jefferies Industrials Conference. I'm Steve Volkmann. I cover a number of industrials for Jefferies. One of them is Ingersoll Rand, and so we're very pleased to move on with Ingersoll Rand. We have three folks joining us from Ingersoll Rand. Vicente Reynal is the CEO, Vik Kini is the CFO, and at the back is Matt Fort, who looks after investor relations. So, we're gonna do this as just a fireside chat, no prepared comments, and would love to have participation in the room. In the meantime, I'll probably kinda kick it off, but if anybody has a question, feel free to raise your hand and we'll weave that in. So, guys, welcome.
Thank you so much for coming.
Thank you for the invitation.
I guess I'll kick it off with probably the annoying question, but obviously a lot of upheaval in the market right now, people nervous about what the ISM is telling us or not telling us. You guys have seen a little bit of slowing in your organic growth, more than made up with inorganic. We'll get there as well, but if there's just kinda any updates in terms of kinda order activity or how you're seeing the current conditions, we'd love to hear that.
Yeah, no. Good morning, Steve, and thank you. Great to be here with you, all of you here in the conference. And no, I'll say, Steve, I think everything continues to be pretty well normalized in terms of continuation to what we said on the earnings call. So we haven't seen anything of significant upside or downside. I mean, I think everything continues to be stable. You know, I think you alluded to the PMIs. You know, as you know, we have been on PMIs under 50 for quite some time now.
And we have spoken a lot about what we do at Ingersoll Rand, that I'm sure we'll talk a little bit more about here later, in terms of leveraging our Ingersoll Rand Execution Excellence process, and particularly our demand generation, to be able to control what we can control and be able to take market share with a lot of our technologies and really our commercial excellence, that we like to call. So everything continues to be, you know, business as usual, and I think in line with expectations.
Can you just remind us how you're thinking about sort of order trends as we get through the second half?
Yeah.
Yeah, sure. So I'll take that one. So maybe just a little bit of a refresh. I think when we came in the year, we kind of always said that, you know, our expectation for the year is, let's just say, a book-to-bill around one for the year. You can expect or, you know, book-to-bill to probably be a little bit above one in the first half, below one in the second half, kind of is the way we've kind of framed the year. And I think generally speaking, that's kinda how things have played out through the first half. I don't think there's any, to Vicente's point, given current order patterns, normal seasonality on the revenue side, I don't think there's any reason that we expect that to be, you know, anything different.
You know, as far as, you know, specific quarterly orders or things like that, we don't guide on orders, you know, specifically. But I think what we have acknowledged is that, first half of the year was probably our stiffest order comps on a year-over-year basis. 3Q was probably the more, you know, the - I don't wanna use the word easiest, but maybe easiest is the right way to say it, you know, the most achievable kinda from a, you know, year-over-year, you know, less - least headwinds. I don't think anything's changed in that respect.
So, I think, you know, again, like Vicente said, the kinda way we framed it up coming out of earnings is very consistent with, I think, how our expectations are still playing themselves out, inclusive of that kinda seasonality comment that typically ramps a little bit more into the back half of the year, and particularly fourth quarter on shipments, particularly on the longer cycle project side of the business.
Super. Okay, so let's segue a little bit. In the second quarter call, you talked quite a bit about the MQL, the Marketing Qualified Leads.
Mm-hmm.
I believe you said they were up 13% in the second quarter. So can you just kind of level set us? What does this mean? What are you seeing? What are you measuring, and how do we think about those flowing through into orders and revenue?
Yeah, sure, Steve. Let me kind of step back to a little bit. You know, demand generation for us is our commercial execution engine. It's something that we have developed internally ourselves. Back in 2015, in December of 2015, we have demand generation leader number one. Today, we have over 200 people dedicated to really instigate demand in the market via digital tools. So we basically kind of treat our B2B almost like a D2C, like a direct-to-consumer environment, where we are reaching out to end users and teaching them about our products, our technologies, how we can actually deliver a lot of the energy savings, great ROI with our products and so on. One KPI, one critical performance indicator that we track is MQL, or marketing qualified lead.
And that's basically customers telling us, "Yes, I wanna know more about this," or, "I want to talk to one of your sales guys." So it's kind of like a hot lead. And today we generate roughly 6,000 of those per week. So you can think about that. This is a very great engine for us, where we think roughly about half of those marketing qualified leads come from new customer accounts. So we'll talk about the market share, how we continue to want to take some share, share gains. And so yes, I mean, 13%, it doesn't mean that the market conditions are obviously growing at that percentage, but it means that we're definitely instigating enough demand that we're able to capture a great share of a good customer base.
We feel very good about what we see as an early indicator, which is our marketing qualified leads, as those turn eventually into sales. We never talk about the conversion rate, but conversion rates, even in this economic environment, continue to be pretty stable.
Okay.
Again, it's part of a controlling what we can control and how do we continue to take share.
Where are you in the game in terms of sort of growing MQL? Are you in the second inning or the seventh, or is it a game that never ends?
Yeah, I would say a game that never ends, because every year we kind of increase the level of sophistication on how we do that. Even yesterday, you know, I had a kind of session with some of a kind of core subgroup of team on how we're gonna leverage more of, you know, these artificial intelligence tools that exist today to even accelerate our demand generation efforts even further. So I think we're always looking at how do we continue to evolve what we're doing from an MQL perspective.
Can the rate of closures also continue to increase?
Yeah, I mean, I think absolutely. I, I would say that's part of our continuous improvement. I mean, clearly, if we're at X% today, you bet that we're measuring how do we get that to a better improvement? So we track a lot of statistics, including Net Promoter Score, in terms of how do we answer those qualified leads? How quickly do we answer them? Just to give you a perspective, two years ago, we were answering these qualified leads with a measurement of within 48 hours, then we moved to 24 hours, and now we measure it based on minutes. So it just speaks to the level of sophistication in terms of how we continue to improve this commercial execution engine.
Okay, interesting. And then maybe final one on this topic:
Mm-hmm.
Are there certain end markets or products where this is particularly effective, or is this sort of broad and deep?
It's pretty broad and deep. I think the beauty here is that you can customize it to the specific situation that might be happening in a specific country. What we see on a global perspective is that a lot of the growth patterns are very distinct country by country and even sub-region by sub-region. So even here in the U.S., in one region of the U.S., we might be attacking more qualified leads around renewable natural gas, versus in another area, we might be attacking it more or approaching it more from a food and beverage perspective. So I'll say that the beauty of this is that we can customize it to a specific end markets and specific trends that we're seeing in the markets.
Okay, great. Let's sort of segue then to inorganic growth, and, you recently added three new businesses.
Mm-hmm.
Maybe you can just kind of level set us on what you're doing and why.
Yeah. So, three, we announced the three bolt-on acquisitions. One of them, CAPS. CAPS is based in Australia. CAPS basically expands our distribution network in Australia by being able to now have the opportunity to get closer to the end user. This adds on to already our footprint that we already had in Australia. And again, what that creates is that ability to, from a compressor perspective, to go to those end users and talk to them about our recurring revenue streams, whether it is Care Packages that we've spoken about, EcoPlant, and Trace Analytics. So many of the solutions that we can offer to the customer on an ongoing basis. The second acquisition we announced, Friulair. Friulair, it gives us a great technology around vacuum pumps.
A company that is based in Canada, which brings a new technology to us. And the third, Del Pumps. Del Pumps is based in India, and Del Pumps gives us, you know, one of the leading small pumps around screw technology and gear technology in India for India market.
Okay, great. And then maybe touch on Dover and kind of how that's going.
Yeah, and then ILC Dover, which we also announced, the closure of ILC Dover. ILC Dover continues to progress. It's been now roughly three months. Just to put in perspective, to everyone in the audience, I mean, typically, between the time we sign a transaction and the time we close, we do a lot of work to ensure that on day one, we're good to go into the integration. And that's what we had also the chance to do with ILC Dover. So we did a lot of work on the integration planning, and on day one and forward over the past three months, that's exactly what we've been doing, integrating it, bringing in the IRX tools. The demand generation is still even early on ILC Dover.
That, that comes out next, 'cause typically, we have a pretty good cadence on how we incorporate some of these tools in the companies that we acquire. But the IDMs, which is part of the Ingersoll Rand Execution Excellence, is going well.
You're happy, having owned it three months now, that no surprises relative to sort of trends in pharmaceutical or healthcare?
Yeah, we spoke. Very happy. I mean, we spoke a lot about that during the earnings call, how the biopharma, which is kind of the largest piece of ILC Dover, is doing very well, and we expect that it's gonna finish the year at double-digit organic growth. So yes, I mean, I think, you know, that was one of the core thesis that we had around the biopharma piece, and that is trending well.
I guess the other side is the space piece.
Mm-hmm.
... maybe didn't work out, or at least near term, as well as you had hoped. Any lessons learned there, or maybe, just an update?
Yeah, yeah. So part of ILC Dover. So think about ILC Dover, 75% of the business is life sciences, and 25% is on the aerospace and defense. In the aerospace and defense, a contract that they had is around the next generation of spacesuits. And I think it was at the end of June or early July, you know, there was actually a cancellation, or, you know, not a cancellation, but a deleveraging the specs, and that kind of change, and basically drove roughly a $30 million top line that we spoke about during the earnings call gap into this year, which obviously we expect maybe that to be $50 million run rate into next year.
But hey, nothing that we worry about from the perspective in terms of how we continue to drive and controlling what we can control. That team is working on the current spacesuit already, and you know, to be determined how much more we go there. But I mean, I think it's given us a great opportunity to speak to great customers in the aerospace industry about some of our products, and that has been very exciting.
Okay, interesting. And if I'm not mistaken, I think those two astronauts that are stranded up there, it's a spacesuit issue, isn't it? That- there's some sort of-
No
... interoperability.
No, but-
I thought maybe you could be the solution.
Yeah, yeah, yeah. That's right. Well, we can give them spacesuits. I can-
... Anyway, enough on that. Let's move to margins, and then we'll see if there's any questions here. But can you just kinda level set us with sort of where you think the two segment margins ultimately kind of deserve to go?
Yeah, I'll take that one. So first and foremost, you know, I'll start on the ITS side, where, you know, I think since, frankly, the merger, you, you've seen a tremendous progression on the margin front. You know, effectively, at this point in time, we're approaching 30% EBITDA margins in ITS. And, I think the simple answer here is we don't necessarily see a cap, you know, per se, on the margin profile. I think with the funnel that we still have ahead of us with regards to, you know, again, being quality of earnings focused, we, you know, we continue to see, you know, runway on price.
Maybe not at the same levels you've seen over the last few years, but clearly price opportunity, productivity, direct materials, even things in, you know, the context of, you know, as we've talked about here, bolt-on M&A, that we continue to see good margin accretion on. You know, we continue to see margin runway. Is it gonna be at the same level that we've seen, you know, over the last few years of well over 100 basis points? No, I don't think that's necessarily the expectation, but you've actually already seen good, you know, you've seen probably better than expected even over the first half of this year. So, you know, I think the 30% threshold is well within, you know, reach.
And, you know, the reality here is we're gonna continue to push and prudently, I'd say, reinvest in the business to drive ongoing organic growth. Obviously, that's part of the thesis and will continue to be. On the PST side, PST already at 30%. It's a business that we've indicated that we think can get to mid-30s%. So I think comparatively speaking from this point forward, you know, once again, continued margin expansion on the PST side, but I think that's where a little bit more of the outsized opportunity sits as we sit here forward. You know, we've been pretty explicit that there are still components of the PST organization. There are some that play, you know, well above 40% EBITDA. There's plenty that play kind of in the segment margin, you know, segment profile.
And then there, frankly, are still some that are playing below segment average, and those are largely assets that probably are, you know, just not fully, you know, at commercial run rate and things like that. So they probably have a little bit more outsized cost base compared to their top line. But the good news is, that's room to run thereafter. So, you know, I think we feel really comfortable with where we're at, continue to see good margin expansion opportunities across both segments. PST will probably be a little bit more of the outsized one, and then I think the M&A bolt-on and continued kind of, you know, continued progression on all the bolt-on M&A across both segments will continue to play itself out, including ILC Dover.
On the flip side, are there some divestitures, targeted divestitures that you need to do to get you there, or?
No. I think simply stated here, no. You know, I think we have historically stated that, you know, if you flash back to now, it's almost four and a half years ago, at the time of the merger, there were three assets that we indicated that, you know, probably just didn't fit the mold altogether. You know, one being the legacy Gardner Denver oil and gas business, the second being the legacy Club Car business. Both were sold within a year after the merger. The third was the power tools business. I think we took the stance here, if it's a good business, we saw a lot of opportunity to fix the business, both top and bottom line. Flash forward now to today, it's part of our ITS segment. It will continue to be part of our ITS segment.
You know, we don't see any need to really do anything different. The business has grown, I'd say, at a comparable rate to ITS, and let's just put it this way, four years ago, the business was probably playing in the mid-teens EBITDA margin %. Today, it's playing, I'd say, in the ballpark of segment average profile.
Okay.
It's come up, you know, a thousand basis points plus. It's a great business. Nothing that we see we need to imminently do anything with. Nothing we, you know, at this point in time, will tell you is an imminent divestiture or frankly, anything we need to do to get to the stated margin profile.
Great. Since you mentioned price, let's go there a little bit.
Sure.
That's been a theme early in this conference, but it's been a theme so far.
Mm-hmm.
And I think a lot of people are worried because across industrials, all these companies have taken pretty amazing amounts of price over the last few years. And the concern, obviously, is that we end up having to give that back at some point. So can you answer both parts of that? How much price, sort of, cumulatively, have you taken in the past few years, and what's the risk that that has to go back down?
Yeah, maybe I'll start and Olivier can chime in. So I don't have the exact number off the top of my head in terms of the cumulative price, but, you know, I think you can say over the context of 2021 into 2023. And it should be noted for us that, you know, I think a lot of it was, you know. There was a big chunk of it that obviously was driven by the market and direct material pricing, and we obviously more than passed that through. Also fair to say that, you know, I think some of it was just, frankly, execution on the company side.
You know, we were pretty explicit that when we brought the two portfolios together, there was an opportunity between the legacy Gardner Denver and legacy Ingersoll Rand, particularly on the air compression technology spectrum, just to be able to do some prudent pricing to kind of bring them to the levels of parity between the two portfolios and in line with market. So you saw kind of two things for us, frankly, maybe a little bit different than others. And the reality is that, that latter part, in terms of the, some of the internal price averages part of the merger, those are things that we always expected to operate and execute on, and we got started on that much sooner. That's how we, frankly, got ahead of a lot of the direct material inflation.
So to answer your question, did we probably see cumulatively across the board, you know, mid- to high-single-digit kind of pricing levels in, you know, most of our regions for parts of those couple years? Yes, I think is the simple answer. I think as we sit here right now, simply stated here, you know, you can just use this year as an example, and I think we can kind of even say, well, we've even put better than guidance. We are continuing to be positive on the price side. We had a, you know, between, I'd say, normal course pricing actions, which we've always said is about 1%-2%, plus a little bit of the carryover. That was a little, you know, kind of carrying into the beginning half of this year.
You were a little bit above those levels in the first half of the year and will kind of settle into that 1%-2% range in the back half of the year, and we have no reason to expect there won't be any, you know, that'll be a different level into next year. So pricing remains relatively consistent, and there hasn't been and will not be any view of taking price down or giving price back.
Mm-hmm.
That we haven't seen a need to do that, and we won't.
Okay.
The other thing to add to there, Steve, is that, I mean, typically we do price because we're able to deliver that cost of ownership reduction to our customers, whether it is energy savings or water conservation. So that is how our teams sell commercially. It's based on that ROI, and as long as we can get that return on investment to the customer, and we can generate a price, clearly by driving further innovation, we'll continue to do so.
Great. Okay, let's take a quick pause here. Anybody from the audience who would like to ask a question? We have a mic, so... I told you this would happen.
Mm-hmm.
I can keep going, but happy to have help. All right, I will keep going. Let's talk a little bit about some of your longer term goals relative to service and attachment rates-
Mm-hmm.
... and so forth. Can you just kind of let us sort of level set us with where we are and where we think we're going?
Sure. So to frame it up, I mean, roughly call it $7 billion plus in revenue and, you know, approximately 36% or high 30s is aftermarket in nature, or you can think about it kind of consumable. Within the ITS is more like 40%. And again, that's part of the compression business that we have. You know, we have aspirations of that number to become more than 50, clearly, and the way we think about it is that we're launching new service innovation technologies such as, you know, Care Packages or things that we can add more service to our customers. So for example, when we sell a compressor, the compressor will last 8 to 10 years.
Today, that aftermarket is roughly one time of that initial price, and we're developing solutions that will ensure that we can, how do we get that initial one sale to become four or five times that initial sale via solutions? One solution of that is, it's an acquisition we made called EcoPlant. So EcoPlant basically can fine-tune that compressor or device remotely to be able to maximize for energy efficiency. And this is now very well used by a lot of Fortune 500 companies out there. We have another solution that is around the air quality of that air that we produce, and that could generate another one time of the revenue. And in regulated environments like food and pharma, it is definitely needed.
So again, it's all about how do we have more sticky, recurring revenue streams that customers are signing up for over a period of, call it three to five years, that every month we're gonna continue to get that, recurring revenue. And in many cases, it's basically just increasing that share of wallet on what we can offer to the customer, because in many cases, the customer, they don't have the skilled labor to be able to do it anymore. And that's where we come in. We can provide the skilled labor, but we can combine the labor with the technology in order to drive high-level optimization. And so when we think about these incremental recurring revenue streams that we said on the Investors Day, we wanna get to about $1 billion by 2027.
That comes in at almost software-like margins, so where gross margins are, you know, above 65%, and so that's part of also the equation on how we're gonna continue to improve our EBITDA margins on that segment as an example.
Is that billion gonna be a little overweight PST relative to ITS, or?
It's gonna be more overweight ITS.
More overweight ITS.
Yes.
Okay, interesting. And, you know, when I hear you talk about that, my question in my mind is, why wouldn't everybody do this? Like, if they're not signing up with you, what are they doing?
It's not that easy, because you need to do... Obviously, if you sign the wrong contract by not having the right data and the right information and the right historicals, you could actually create, you know, that gross margin to evaporate pretty quickly, right? I think it goes along the lines of saying that there's just a lot of historical data tracking that we have done in order to create this. When I say a lot, it's talking about 10-15 years of data points. A lot of these really started with the legacy Ingersoll Rand compression business, as they were learning from the HVAC commercial business on how these type of solutions could be applicable.
I think it takes some time, and doing it right is the key.
Okay. All right. So you mentioned, compressors last eight to ten years, I think you said, correct me if I got that wrong.
Yes.
But just, can you update us on where you think kind of the installed base is?
Mm-hmm.
Is it, you know, super old? Is it okay? You know, what are the kind of longer term drivers there?
Yeah. So on the Investors Day, we talked about having five billion assets out in the field, not just compressors, but also some pumps. That those five million assets are the ones that we can see correlation on how we can connect them, to be able to get data and to be able to gain then these kind of type of agreements or solutions that we can provide. In terms of the age, I mean, it's a wide spectrum of this age. So there's always gonna continue to be, you know, potential things for us to replace, whether it is with the whole goods, obviously selling the new compressor, selling the new pump.
But also, we're very excited about just trying to sell more services and solutions to that current install base that is out there, and in many cases, we could even expand the life further, even more.
Okay. All right. Any questions? Mike? We have-
You'll probably do it without the microphone.
Mike, you need the mic.
Ah, okay. Thanks, thanks for the time and taking the question. I just wanted to go back to, kind of where we started the conversation with Steve. You were kind of talking about book-to-bill and kind of the markets. I just wondered if you could give us a bit of a view into the different end markets or the different types of customers and what you're seeing in the different kind of segments that you operate.
Yeah, maybe I'll, maybe I'll start, and I'll let Vicente weigh in. We obviously play across a wide spectrum of end spectrum. Maybe I'll do it more like maybe regionally and maybe some we can talk about PST, take the two pieces. I think on the ITS side.
... I think we've been pretty consistent in this kind of verbiage over the course of the year. And frankly, while we're not gonna initially talk specifics about, you know, Q3 interquarter order trends or anything like that, I think it's probably fair to say nothing's dramatically changed on this front. And that being, I think the most stable, you know, best growth region, comparatively speaking, is probably the Americas, particularly, you know, North America. And I'll come back to some of the pockets here in a moment. Europe has kind of been in the middle, you know, relatively stable comparatively, but, you know, good pockets of growth, not everything behaving the same, certain end markets, certain countries a little bit better than others.
Obviously, the biggest headwinds for us have been on the APAC side, where we have approximately, you know, I'm gonna round it up, 20% of our revenue in APAC, with the majority of that being China, and I don't think I need to probably, you know, tell you guys kinda the China story here. I think the good news is our team continues to operate and execute well. It's just operating in an environment that's just, you know, has more headwinds that it's facing compared to pre years past. You flash back, and I'll kind of now, you know, reference some of the things Vicente said, whether it be MQLs and things of that nature. So again, you know, you look at the MQL, and it obviously, I think we're encouraged by the level of activity the team is still being able to drive.
Obviously, we're not immune to the end markets we play in, so that's kind of factoring in, but I think the piece that gives us a lot of encouragement is when you kind of deep dive into each of those regions, there's still incredible amounts of opportunity. You know, whether it be Latin America, Middle East, India, Southeast Asia. I think between the two of us, we've probably been to every one of those regions somehow in the last, like, four months, and I think the reality here is we continue to see a lot of outsized, you know, growth opportunity for Ingersoll Rand, specifically in those.
Obviously, we talk a lot about the core. We talk a lot about the more developed markets, but those four areas, which frankly are not small, continue to be areas where I think we continue to say we have room to run in terms of share in the context of the next, you know, number of years. So quite encouraged, and interestingly enough, I think the PST story, not dramatically different. Interestingly enough, our revenue percentage, you know, distribution is fairly comparable in PST as it is to ITS, including in the Asia Pac realm, so we've seen fairly similar trends. I think the good news is, if you take some of the specific PST items, one, you saw positive order growth in Q2, right? Which is super encouraging to see.
Second, I think we've talked for quarters now about some of the headwinds we faced in our medical business, specifically in PST, and the good news is, I think we've largely digested those. We aren't saying there's some, you know, big recovery necessarily in the back half, but I think the stiff order comps and some of those negative trends you've seen, at least for the last number of quarters, are somewhat behind us. So I think we're encouraged. You know, again, like I said, we gave the guidance, and I think that there's, you know, that's still our best view of the world. But, you know, I think we're encouraged by some of the pockets of opportunity we continue to see.
Great. I think we have time for maybe one more. No, anyone? So let's, none of these discussions would be complete if we didn't touch on M&A and the funnel.
Mm-hmm.
Obviously, you guys, it feels like the M&A portion of the story has actually accelerated a little bit recently.
Mm-hmm.
I don't know if that's just random timing, or do you view that as, as kind of how we should think about it going forward?
Yeah, we continue to be pretty enthusiastic about the M&A side. You saw on the earnings call, we said also that we have eight additional bolt-ons into our funnel already while the funnel continues to rapidly accelerate. If you think about the past four and a half years, roughly fifty-one acquisitions that we have done, and about 95% of them sole source. So we have an M&A engine that we are very proud of from the perspective that we do a lot of market segmentation. I mean, we understand the technologies that we wanna acquire, and then we go after in many cases, family-owned companies and tell them the story of who we are and what we can do to transition that legacy.
And many of you know a little bit about our story, if not, you know, just to kind of highlight that piece is the story of the ownership mindset and how 20,000 of our employees at Ingersoll Rand are owners of Ingersoll Rand shares. So we believe in the ownership mindset that is a very big differentiator and accelerant to our performance, that combined with our Ingersoll Rand Execution Excellence process, it's a pretty unique culture that can drive long-term performance. And so when owners of companies, family-owned companies, they see that we can continue with the legacy because we believe in multi-brand, multi-channel strategy.
So we keep the brand because there's a lot of equity in the brands, and we can add that legacy of providing the long-term equity and ownership to those employees that they have been grooming for so many years. It's a very compelling story on why they would like to transact with us. So I think it's our M&A engine. It's pretty unique from just the cultural aspect, the integration outside, but also how do we scout and search these technologies globally and then pursue the acquisition.
You're not seeing any kind of a change in target companies' willingness to sign LOIs or talk about?
No, I think in our case, the part of the story, too, as well, is the compelling story to tell them, "Hey, over the past four and a half years, look at the world." Macroeconomic, pandemic, world - I mean, wars and so on. So it is even more compelling for these owners, these own family-