Hey, welcome back, everyone for the ultimate session of the conference. My pleasure to have starting off Ingersoll Rand CEO Vicente Reynal, Vik Kini, CFO, and Mike Weatherred from the excellence and Business Excellence part of the company. We spent some time together last summer on the road. Welcome all three of you.
Thank you, Julian.
Maybe just, you know, sort of first off, you know, obviously had your results just a couple of days ago. You know, help us understand sort of how you're thinking about the volume growth outlook for the year. I think it's fairly prudent, cautious, conservative, whatever you'd like to describe it. I think there's a, there's a dichotomy of, you know, some companies saying, "We've got a good backlog, so we're gonna grow volume from that." Others may be a more cautious view like, "Yes, the backlog is good, but don't, you know, don't put too much store in that." You know, just help us understand what sort of assumptions, you know, top down-wise, are in your sort of volume guide.
Yeah, sure. Julian, so I'll start and Vic can add more here. First of all, very excited in terms of how the quarter and the year ended last year, the total year double-digit order kind of growth momentum.
Yeah.
And we continue to see that, you know, over the past seven quarters, double digit orders and revenue kind of outperforming here in terms of what we have seen. As we go into 2023, what we said is that, you know, organically 3%-5% kind of is what we're seeing. What we said too as well is that our backlog is pretty robust, over $2 billion, which is something that we never had before. What we said is that in our guidance, what we're assuming is that basically the backlog stays fairly constant, you know, point to point. We say that because of couple things that we continue to see.
One, we have said before that MQLs, the marketing qualified leads, it's a very good indicator that we tend to use internally to know how economically we are doing against the market. You know, we get over 5,000 leads every week, and that gives us a very good indication as to orders that we're gonna see here, you know, six to eight weeks down the road. That continues to be fairly stable if nothing kind of continue to move in the right direction. That's a bit of a self-help from us.
Yeah
... as we continue to take share in the market. The other indicator that I think we like that we think is a good tailwind, and we spoke a lot about that during the earnings call, is the long cycle CapEx. We're seeing CapEx getting released for these kind of mega projects, for projects that are related to sustainability, projects that are related to onshoring, and not only onshoring in the U.S., but things that are happening in India, China, and even in some countries in Europe. Net/net, what we said is that, okay, let's just view the total backlog kind of fairly stable or constant as we go point to point from now to the end of the year.
That assumes, you know, a prudent view of what will be in the second half of the year. Prudent because obviously, even though we have all these indicators, we still. There's just a lot of kind of noise, I would say, out in the market, and we just wanted to put more of a prudent view. We also said that if there's any upside, that clearly, you know, that organic volume should rise in the second half. At this point in time, just based on the visibility that we see, that we have, we wanted to have a more of a prudent view as we go into the, into the 2023.
You know, when you look at that backlog and the health of it, kind of how do you gauge, you know, the resiliency of it? You know, how valid a lot of it is in terms of pace that it can be pulled down into sales? I suppose you look at things like cancellation rates and-
Mm-hmm
... and that type of thing. You know, how would you describe sort of the health of that? You know, do you think that easing supply chains everywhere will put pressure on the backlog or not necessarily?
I'll say not necessarily. At least what we put in the in our guidance too as well, and we said this also, two days ago in the guidance, is that we see supply chain not... I mean, clearly year-over-year improving.
Yeah
... but we said not gonna dramatically improve. Driven by potentially the reopening of China.
Mm-hmm
... a lot of these kind of CapEx investments that we're seeing and acceleration of that CapEx cycle. We said, let's just have a prudent view that, you know, supply chain, although kind of better year-over-year, probably stays a bit constant, mainly driven by a lot of these other indicators that we're seeing out there in the market.
You know, when you look at, I guess, a couple of the shorter term questions that keep coming up for every company, and I think one is around, you know, inventory levels, OEM customers, distributors, that type of thing. You know, if every company is trying to bring down its own inventory, you know, aren't their customers doing the same to them?
Mm-hmm.
That leads to a destock. Any perspectives on that? Also, you know, China, we touched on, just give us some insights as to sort of, you know, how you managed to get those results that you did last year and how this year is sort of in your plan for China.
Yeah. I think I would say that, when you think about inventory for us, maybe view it in two kind of buckets. One, when you look at the ITS segment-.
Mm-hmm
we have a multi-channel model where we go direct-
Yeah
... but we also go through distribution. In terms of distribution is really a lot of the small, I'll say, entrepreneurs, mom and pop, kind of regionally, locally, in cities. They're very loyal to the brand, in this case, Gardner Denver brand.
Yeah
... and some Ingersoll Rand too as well. They don't tend to load because they're just also cash constrained, right? I mean, meaning they're not gonna load up on inventory because it will be difficult for them to guess what type of.
Mm-hmm
... they're gonna be putting in an order. On the PST side, I'll say maybe roughly 20% of the business, 20%-30%, about a third of the business goes through more kind of national distribution. But for those, we actually have a pretty good process where we track sell in and sell out, so we can see the net of whether inventory is building or not. Our teams know very well that we don't want to build inventory in the channel, because typically when you build that inventory, you do it by providing discounts, and you know how disciplined we have been with the pricing, that we do. I think it's just one of those that at least in the...
at least right now at this point in time, we see a very good balance between the sell in and sell out, and not leading to any potential kind of de-stocking that maybe others could be seeing.
Mm-hmm.
In relation to the China question-
Yeah.
I mean, I think China, we said on the call, I mean, Q4, even during this COVID, you could see the numbers.
Yeah.
We spoke about China being up double-digit and seeing very good momentum. Even today now, when we spoke about the first five weeks of Q1 here into 2023, China continues to do fairly well. I think it's unique from the perspective of maybe two things that we can try to classify. One is a lot of these self-help commercial initiatives that we're driving. Again, we talked a lot about demand generation.
Mm-hmm.
Also in China specifically, if you remember historically, you know, we always said that Gardner Denver was under-penetrated, while Ingersoll Rand had a really great solid commercial footprint. What the team in China has done is they have taken the Gardner Denver brand and products and relaunched that into the market, leveraging the commercial footprint that they have in China. In addition, what they have done is they have taken like blowers and vacuums.
Mm-hmm.
From the Gardner Denver side too as well, and repositioning that through their commercial channel. We view it as, it's been basically a market share taking. It's not-
Yeah.
It's not that we're saying that the market is growing and stable, and it's just basically market share takes that we have been doing there. So again, these self-help initiatives. The other big bucket or area of outperformance is really, Julian, everything that we have been saying about this ownership mindset and how 16,000 employees across Ingersoll Rand are owners in the company. It is really unique situation here in China where, you know, the China team, for them, it's a very proud sense of ownership to be able to have a piece of ownership of a multinational company that trades in the US.
Right.
They put a big effort to ensure that, you know, that they work every day like an entrepreneur owning the company.
That's good color. You know, maybe a thematic point, you know, away from the cyclical stuff, the energy efficiency element in compressors, you know, it's a topic that gets a lot of airtime the last sort of 18 months or so. You know, help us understand sort of how much of a tailwind do you think that is? You know, someone might say, "Well, volumes are not growing much, so does that mean there's less of a tailwind?" Or, you know, how would you sort of explain it to someone, like the power of that as a driver for compressors?
I would say that, so think about if we, if we step back, compressors in particular, roughly, they consume 30%-40% of the energy, consumption at a average facility. That could vary, you know, could be up to maybe 60% if it's a brewery or a food or beverage facility.
Mm-hmm.
It could be less if it's a smaller location. It is known, and we have put a lot of data that on how, you know, there's just a lot of losses of energy because of leakage of air in many cases.
Yeah.
Misuse of the compressors. We have been doing a lot of things at around air audits, where we go to a facility, we do an air audit, and then we come up with a game plan on how we can reduce the energy. Are we seeing clearly in Europe, when the invasion in Ukraine happened and energy costs rise, a big ramp up in terms of conversations with customers around energy efficiency, and how paybacks back then became less than a year. Clearly very easy for-
Yeah.
A customer to see how can they actually save energy with a very quick payback. We saw good momentum on that. I think what we're seeing very different right now is that whereas before a lot of the conversations were happening at the plant manager level, at the customer level.
Mm-hmm.
Conversations are now happening more at the C-suite with large customers. For example, you know, last week, I was in conversations with a global operations leader for a very large, you know, food company, and what they're looking for is basically someone like us that they can partner with that could go across all their facilities and understand how can they obtain these energy efficiencies. And I think it's more and more of those examples that we're seeing in better conversations that we think it's a good tailwind.
Mm-hmm.
Specifically how much of that tailwind is gonna create, I mean, difficult to pinpoint exactly.
Sure.
At least we're seeing that there's just a lot more conversations at a higher level to be able to deploy it more effectively across.
You know, another point I think where there's been a lot of discussion broadly is around sort of reshoring, if you like. You know, Ingersoll has a very global footprint. Just wondered, you know, you'll benefit from that with, you know, in industrial in particular and to a degree PST, but, you know, do you see a real change in that reshoring appetite among customers? Are you doing anything yourself? You know.
Mm.
Three years now since COVID, or you think it's sort of things are settling down to business as usual as it was four years ago?
I think the best example here is that, what we're doing even ourselves internally.
Mm-hmm.
Last year, we spoke about the reopening of our Buffalo facility, and we did that as, you know, to be able to produce our multi-stage centrifugal oil-free compressor, to be able to make compressors in the U.S. for the U.S. market.
Yeah.
Immediately, as soon as we did that, capacity count got sold in less than nine months, and now we're continuing to expand capacity. In addition, you saw how, you know, last on the earnings call, we announced.
Mm-hmm.
how we're doubling our footprint in India.
Yeah.
This is on top of the four facilities that we have in India. We're expanding our footprint, again, because of the demand that we're seeing in India for made-in-India products. Also later this year, we'll be opening our new rooftop in Brazil. Again, same thing about there's a lot of, you know, in Brazil or in Brazil for Latin America kind of action. When you put that into perspective, that's exactly what we see from our customers. Our customers are looking at production expansions as well as relocalizing themselves to be more in local and in region for the region.
Got it. You know, I suppose product-wise, I think people found it interesting to look at that IIoT-enabled product sharing. It's up to almost 20% now. I guess two questions on that. One is, you know, the fact that it's IIoT capable, I guess how much is actually being used of that capability by the customer? How are you driving that usage? How does Ingersoll itself benefit from them using that IIoT capability?
Julian, maybe couple things. It's, we're still at the very early stages-
Yeah.
of being able to generate the revenue that we can generate from these remotely connected machines. Even though during the Investors Day, we spoke about already having roughly about $100 million revenue stream.
Mm-hmm.
That is getting generated from these kind of service agreements and packages that we create as we connect more machines. That continues to accelerate. We decided that to talk about this leading indicator that for us is a percentage of revenue of equipment that we're shipping already IIoT enabled. Because we think that that's a leading indicator of what we're putting in the market that later-
Yeah.
obviously through demand generation and through our sales guys, we're able to then connect the machine and offer services. Here, you know, we're offering services, multi-year service agreements where we can guarantee uptime, where we can guarantee or kind of work with energy savings and kind of remotely fine-tune a lot of the compressors or devices that we have to be able to provide that. I'll say early stages, but we're seeing some very good momentum on accelerating that, which is part of our long-term strategy on increasing our aftermarket and recurring revenue, 'cause this becomes a real kind of recurring revenue on these multi-year agreements that we get paid on a monthly basis.
On, you know, ITS has got a very well-developed sort of aftermarket model now, particularly in the compressor piece. PST, you know, aftermarket's a long way behind as a share of revenue. You know, how quickly are you driving that up? I guess why is that starting point kind of so low there?
Happy to take that one, Julian. In the context of classical aftermarket, you're right in the way we measure it and define it. ITS, closer to 40%.
Mm-hmm.
Things like service, parts, labor, you know, consumables. The PST side, you know, just given some of the nature of the products, for example, you know, a little bit more of, you know, OEM installed parts and things of that nature, they tend to have a little bit less of those classical, you know, consumable parts and whatnot. In the context of recurring revenue, meaning, for example, you have a pump that reaches end of life and it's replaced like for like-
Mm-hmm.
there's actually a much stronger correlation to the percentages that look more like ITS. Classical aftermarket, as we define ITS, you know, screens a little bit lower, but like for like replacement, and as such, that stickiness component that resembles the aftermarket you have in ITS, PST actually looks fairly comparable in that respect. That being said, I do think that there is a big push to continue, particularly in, you know, businesses like ARO and Tuthill pumps and.
Mm-hmm.
-assets that have those consumables pumps that are very similar in nature to ITS. You are continuing to see a lot of the same momentum initiatives, IIoT aftermarket being deployed there as well.
You know, within PST, I suppose there's a very, you know, there's a fragmented market there, a lot of different niches. You've gone after some of those niches with, you know, organic growth, inorganic. You know, how satisfied are you with your range across different pump technologies now?
Mm-hmm.
You know, what are some of the technologies that you're looking at getting into? Is there any sort of or much of a synergy across the different pump niches?
Yeah, Julian. We said that there's definitely positive displacement pump technologies, and we have, you know, roughly 3/4 or 2/3 of all technologies that are available in the market. There's still a possibility to keep expanding on technologies that we don't have.
Mm-hmm.
How satisfied are we? I mean, we're very proactive with our M&A, and you can see that not only looking at new of these kind of pump technologies, but also kind of incremental add-ons to the technologies that we have. What you have seen that we have done here over the past year is really acquiring technologies that are gonna be complementary to the ecosystem. By that, I mean is that technologies that can actually make that pump smarter. Then we can actually generate more recurring revenue.
Mm-hmm.
Give you an example. We have a business called YZ, and YZ is the market leader in odorizing natural gas, which is, you know, when you think about it, natural gas doesn't have any smell.
Mm-hmm.
You have to odorize that. We're the market leader for odorizing natural gas.
Important to know that, you know, as we go into hydrogen, you're gonna have to atomize hydrogen. We believe that this technology can actually be very well applicable to that. It's a very mission-critical technology. You don't want, you want to provide the proper amount of, of chemical to be available to atomize. Otherwise it becomes very expensive or if you provide too much, it becomes dangerous to the population. Very critical. We acquired a company called Westwood. Westwood offers low radio frequency Wi-Fi systems that now we're gonna be able to go into a network of utility companies and provide connected multiple locations at the same time via Wi-Fi systems that can go and expand up to 10 miles.
Now that's a technology that not only is going to be beneficial for YZ Systems, but we're going to take that and utilize that into our compressor system. Again, this is just one example that value additive solutions on controlling that ecosystem that is going to give us more better penetration into our customer. Same thing we did with Maximus. Maximus was a way to control the ecosystem for our Dosatron pumps in vertical farming solutions or cannabis solutions and things like that, of that nature. We've been putting a lot of attention on that ecosystem controllers so that we're able to have better recurring aftermarket services solutions.
On sort of PST, you know, end market wise, it's got higher growth this year than the Industrial division. You know, maybe sort of clarify what's driving that. I think investors seem to have a good grasp of Industrial, but PST, there's always a sort of a hazier impression for people.
Yeah. PST has a really nice, I'd say, end market diversification in the context of, yes, you do have some local core industrial, but then you supplemented that with, let's say, lab life science, water, some, you know, clean, renewable energy type applications, agritech, as Vicente just mentioned.
Mm-hmm.
Which on the whole, we do believe has a, you know, obviously a slightly higher growth rate than ITS, which also has good end market diversification, but tends to be classified a little bit more as classical industrial.
Yep.
You know, I think when we look at the multitude of different end markets there, we do see, you know, good growth opportunities on the whole. It's also worth noting that with a lot of the acquisitions that we've done as of late, whether that be, you know, Maximus, whether that be, SEEPEX, whether that be Air Dimensions, Tuthill pumps, a lot of these are now being much further integrated into, I'd say, our core processes. You know, Mike can speak a lot to the demand gen side that we think is gonna help grow and drive a little bit of disproportionate growth for some of these newer assets in the portfolio.
Yeah. Thanks, Vic. Mike, on that point, you know, maybe help us get a clearer picture of sort of SEEPEX, you know, that ramp inside the organization of margins, lead generation.
Yeah. Yeah.
You know, it wasn't a bad business when you bought it.
No, no. Really a great business, great technology. Yeah, great markets. SEEPEX is a little bit unusual because I think with SEEPEX, the path to profitability was a little more straightforward, kind of block and tackling. What I mean by that is SEEPEX had, you know, tremendous gross margin, barely, you know, mid-teens % type EBITDA, but we could see, you know, a cost structure and a price play and probably an I2V, you know, some Innovate to Value to get the value out pretty quickly. I think in Q4 it was roughly 25%-
Yeah.
% EBITDA. You know, 1,000 basis point improvement there, which again, pretty straightforward. I think there's another, I don't know, Vic, 500 basis points plus to go.
Mm-hmm.
That's where I think some of the expertise of things like demand generation will come into play. We've talked to you about this, Julian, but I think, you know, we're unique in that in an industrial space, we have about 150 people that work full-time on customer insight and customer, providing customers with information at the right time in a period where they're trying to make a decision that will ultimately lead to a purchase of a product that we have available. Easy to talk about, really hard to do. The other benefit and uniqueness I think we have as an industrial company is this 150-person team has spent their whole careers, which in some cases are 10 years-ish.
Mm-hmm.
They've spent it all in digital marketing. They're not going up a learning curve of, "I used to do marketing in a classical way, knocking on doors and making phone calls. I just this is the only way I know." With that, we get about 5,000 MQLs a week, and then within, in some cases, five minutes, in worst case, 48 hours, we convert those into sales qualified leads or reject them. SPX or SEEPEX
Mm-hmm.
most recently SPX, but those companies, they get the immediate benefit of that as soon as they come in the tent. We would fully expect in certainly 2023, SEEPEX to be a major beneficiary of that. Again, you know, we're not gonna be creating demand and marketing on things that aren't of the highest margin. There's also a good mix play there.
That makes sense. On, you know, M&A and Mike, you just mentioned the Flow deal that closed a month ago. You know, how would you characterize the environment today? Last year was obviously tough for global M&A activity. You managed to get, you know, a good amount done despite that. Do you think this year will be any easier for M&A? Then I guess on size of deal, you know, I think you know, investors seem to like bolt-ons the last 18 months.
Yeah.
A lot of industrial companies have announced larger transactions and, you know, received a fairly clear negative reaction from investors pretty quickly. How are you thinking about like?
Yes. I think, Julian, to the point of, are we seeing acceleration in terms of the companies, you could say yes. You could argue to say yes, and the proof point to that, in the prior Q3 earnings call, we talked about having eight companies in LOI.
Yeah.
We closed two of them, so call it down to six, and now we announced that we have 11 on their LOI. That just shows the sequential acceleration that we saw in terms of companies moving to an LOI.
Yeah.
An LOI for us is pretty close to high probability that we will close them.
Mm-hmm.
Again, 90% of these transactions have been sole sourced by us. We're talking to the family, to the ownership family. We know that unless something that we see that we don't like, we're likely close the transaction. These 11 LOIs, very similar bolt-on in nature, similar to maybe what you saw us announce with Paragon Tank Trucks.
Yep.
Very niche, specialized technologies that complement very well to the portfolio of technologies that we have. Paragon Tank Truck gives us an entry into the liquid, tank, aspect of with the blower technology that we don't have in our portfolio. Believe it or not, they're one of the top leaders on that kind of niche application, which when you think about food, beverage.
Yeah
Pharma, you need to load and unload liquids from tanks. Again, you know, at this point in time, our funnel very sizable. We said continues to be 5x.
Yeah.
what it was back in 2020, and one that it is very bolt-on in nature, where we're continuing to be very disciplined with the multiples on average, you know, low teens, or low 10. Between, you know, 11 to 12 times with post synergy that goes into the high single digits and generates a ROIC of mid-teens by year 3.
On that ROIC, you know, we should expect that at SEEPEX and the Flow Air deal.
Yes.
all of those fit that. Is, you know, sometimes people ask, you know, the types of acquisitions, you know, they're hardware centric, good cost synergy.
Mm-hmm.
Maybe the question might be around sort of long-term organic growth profile. You know, should you be trying to, I don't know, future-proof the company with more of a software or digitized-?
Mm-hmm.
M&A strategy? What would be your sort of response?
Yeah, I think if you look at some of these acquisitions that we've done, they're all not, I mean, they're not software, pure software, but, you know, Aircom.
Yeah.
A great way to transmit the data, and obviously do a lot at the gateway point of transmitting the data. There's a lot of software involved in that. Maximus is the controlling of the systems that be able to sell, you know, SaaS revenue. They do have some software as a service revenue already and one that we think we can continue to expand. Even someone like SEEPEX.
Mm-hmm.
SEEPEX, great acquisition. It really came with a very strong IoT platform that we're leveraging and utilizing across the entire PST segment and now even moving to the ITS segment. I think when we make an acquisition, are we buying a pure play software company? No, we have not done that historically.
Yeah.
You know, one of those just primarily just based on, you know, valuation points and being disciplined on how we do things. But at this point in time, we feel that by trying to manage that ecosystem, then we can actually apply better service revenue models that have that recurring revenue with a gross margin that is very similar to software in the, you know, high seventies or low eighties kind of gross margin revenue. That's basically what we're being able to accomplish with these kind of recurring service revenue models.
That's helpful. Maybe last question very quickly before we get to the audience, response surveys around, you know, you talked about going back to the sort of the cycle element, a sort of single-digit orders growth assumption for the year. Best case, do we assume that's fairly sort of linear as we go through the year?
Yeah. I would say we feel it to be relatively consistent. You know, the one thing to keep in mind, given that the ITS business is still, you know, roughly speaking, 80% of the revenue profile...
Yeah.
There does tend to be a little bit of seasonality associated with the ITS business. You know, as a reminder, it's one that typically has book-to-bill above one in the first half.
Yes.
Slightly below one in the second half. That's largely driven by the longer cycle project.
Yeah.
nature of the business, which still is around 20-ish% or 20%-25% of the revenue base. Q4 was a great example. We tend to have propensity to booking in the first half, and the shipments happen second half, tend to be really more so Q4 weighted. That's exactly what you saw in Q4 of 2022, where ITS book-to-bill was closer to, you know, a little bit above 0.9, but that was very consistent with typical seasonality that we see.
Fantastic. Thank you, Vik, for that. If we could quickly pivot to the audience response. The first question around sort of current ownership.
Gonna vote there. Yeah.
Yeah, normally it's about 70% no. Second question is around sort of general sentiment or your own sentiment. Generally quite positive. Third on this is just thrills or U.S. multi-industry. That's the reference point. Clearly above the average. Next question is around capital deployment. Obviously people are very comfortable with bolt-ons.
Mm-hmm.
Next is around valuation. What kind of through cycle, if you like, P/E ratio to put on it? Okay, 20 times, pretty much, or 19-20 times. The next question is sort of why is it that high teens or 20 times, you know, why not higher than that? What's the sort of single biggest concern?
Finance. CFO.
Core growth, that maybe goes back to some of that acquisition type of asset point. Lastly, a new question this year, I'm sure the responses will evolve over time, but just sort of ESG and the significance of that as an investment decision factor. Pretty typical. Mostly it's about 25% for answer one.
Mm-hmm.
Then 75 for 3.
Mm.
With that, thank you so much for participating.
Thank you, Julian. Thank you so much.
Thank you.
Appreciate you. Thank you.
Pleasure.