Q4 2021 Ingersoll Rand Inc Earnings Call
We're now ranked in the top quartile of manufacturing organization.
That margin, we have improved the company's adjusted EBITDA margin 370 basis points in 2019.
Including the improvement of 160 basis points in 2021 alone.
We have realized $215 million in synergies or the $300 million commitment from the IR merger with an additional $50 million expected in 2022.
It operates effectively we continue to make progress and have received recognition from ESG rating agencies, including S&P global and MSCI.
Once again, demonstrating how we leverage the power of <unk> to drive performance across a multitude of initiatives.
And accelerate growth our unique growth enablers outlined during our 2021 Investor day strongly contributed to growth in the past year.
Our demand generation engine now generates three times more in marketing qualified leads compared to 2018.
Iot enabled assets were up 250% year over year, and new product innovation increased 95% in 2021.
And I don't care capital effectively we secured approximately $2 billion in gross proceeds from the divestitures of <unk> and high pressure solutions.
And we deployed over $1 billion to acquisitions in 2021.
Which represents over 6% of sales when annualized.
We also repurchased 731 million shares as part of the KKR. It's finally equity sale establish a new $750 million share repurchase program and initiated a quarterly dividend of <unk> <unk> per share during the fourth quarter.
We're incredibly proud of our 2021 accomplishment and could not have done it without the dedication of our team.
Turning to slide five we are committed to executing the strategy, we outlined at our 2021 Investor day and are confident it will produce the expected results.
This slide outlines how we are already delivering on that strategy and associated commitments. Our portfolio is now positioned to capitalize on global megatrends, such as Digitization sustainability and quality of life.
We expect to leverage our organic growth enablers to deliver mid single digit organic growth through 2025.
As you can see we outperform on this commitment in 2021, delivering 12% year over year organic growth.
When coupled with mid single digit annual growth from M&A and technology investments, we expect to deliver total growth of low double digits through 2025.
And in 2021, we delivered 4% each year growth from M&A and 6% annualized.
Our strong pricing aftermarket and ITV initiatives enabled us to generate operating leverage and incremental productivity.
With unexpected 100 basis points of margin improvement per year over the period.
And in 2020 , one we over deliver on this target capturing 160 basis points of margin expansion. Despite several challenges like supply chain constrained and inflationary pressures.
With Iraq, as a competitive differentiator and over 275 impact any management or IBM needs across our company each week, our high performance culture encourages strong execution.
These continue to support our goal of being a premier high quality company that consistently compounds earnings by double digits, each year, which with free cash flow margins in the high teens and.
And we feel that we're well on our way in 2021, we grew EPS by 63% and achieved adjusted free cash flow margin of 16%.
Turning to slide six we have achieved strong margin improvement across our portfolio to 22019.
Looking at the company margins improve 370 basis points from 2019, despite COVID-19 impact and persistent supply chain and inflationary pressures.
In the Ips segment, we improved an impressive 470 basis points since 2019 as.
As we continue to accelerate synergy capture and execute on value creation opportunities from the IR merger.
Incremental operating leverage and productivity should enable <unk> to achieve margins in the high <unk> over time.
In the P&C segment margins have expanded 170 basis points since 2019, and 290 basis points excluding M&A.
Continued strong flow through in the base PSD business, coupled with diligent synergy execution as we onboard acquisitions should yield adjusted EBITA margins in the mid <unk> over time.
It is important to note that as we highlight on the last bullet point due to the nature of our products, where mission critical with premium brands and high quality and reliability and we have the ability to remain price cost positive.
We have accomplished days in each quarter since the merger even during these inflationary times and expect to do the same in 2022.
Moving to slide seven we are thrilled to announce the recent validation of Ingersoll Rand's progress as an industry leader in ESG.
Based on demonstrated progress we received another upgrade from MSCI, which is our second upgrade in the past 18 months and now have an a rating.
And I am really excited to announce that S&P global and its annual sustainability assessment that was just released a few weeks ago scored ingersoll Rand in the top 15%.
And included in it.
It's sustainability yearbook for 2022.
In addition, S&P global recognized.
With the industry Motor Award, which.
Which is given to the most improved company in each sector of the year.
These recognitions exemplify our only wavering commitment to ESG.
In March of 2021, we committed to becoming a top quartile ESG industrial company in three years and.
And we believe we have achieved or are the cost of achieving that goal in one year and.
And S&P global I agree.
Elective towards sustainability yearbook, which recognizes the top 15% EOG performing companies in each industry sector.
Despite this progress we're just getting started on our journey.
And we're very focused on accelerating progress towards our <unk> growth.
I'm incredibly proud of our team for being recognized by the rating agencies already deep early in our journey.
I will now turn the presentation over to Vic to provide an update on our Q4 financial performance.
Thanks for Sanjay moving to slide eight we continue to be encouraged by the performance of the company in Q4, which saw strong balance of commercial and operational execution fueled by IRS to overcome persistent inflationary pressures and a challenging supply chain environment.
Through Q4, 2021, we have realized $215 million in cost synergies and are on track to deliver on our $300 million commitment.
Total company orders and revenue increased 24% and 16% year over year, respectively, driven by strong double digit organic orders growth across each segment. Despite comparisons to a strong Q4 2020.
Our orders and revenue in the quarter were records for the company eclipsing Q3, and setting us up well for 2022.
The company delivered fourth quarter, adjusted EBITDA of $342 million or 15% year over year improvement in adjusted EBITDA margins of 24, 1%, a 40 basis point sequential improvement.
Adjusted free cash flow for the quarter was $225 million after taking into account the unique items as pointed out on the slide.
Total liquidity of $3 2 billion at quarter end was up approximately $400 million from prior year.
This takes our net leverage to one one times and <unk> nine time improvement from prior year.
<unk>.
Turning to slide nine for the total company Q4 orders grew 25% and revenue increased 18% both on an FX adjusted basis.
Overall, we posted a strong book to Bill of 1.06 for the quarter.
We remain we remain encouraged by the strength of our backlog, which is up over 7% from the end of Q3 and over 50% from the end of 2020.
Total company adjusted EBITDA increased 15% from the prior year.
Segment margin declined 40 basis points, while PST segment margin declined 400 basis points, driven largely by the impact of M&A.
When adjusted to exclude the impact of M&A completed in 2021, PST margin declined by 120 basis points.
Finally, corporate cost came in at $26 million for the quarter down year over year, primarily due to lower incentive compensation costs in general savings and prudency.
We expect corporate cost to normalize back to the low $30 million per quarter in 2022.
Adjusted EPS for the quarter was up 51% to <unk> 68 per share.
Off note the adjusted tax rate came in at 5% for the quarter and 12% for full year 2021.
Q4 benefited from our ongoing tax restructuring efforts, specifically, some nonrecurring impacts driven most notably by our efforts to manage and minimize the cash taxes associated with the divestitures of SVT and HTS completed earlier in the year.
As we look ahead to 2022, we expect the rate to be back in the low 20 is due to the non repeat of some of these discrete items.
Turning to slide 10 on a full year basis orders grew 28% and revenue increased 16% both on an FX adjusted basis. The full year book to Bill was 112.
And total company adjusted EBITDA was up 28% from 2020.
Margin expanded by 160 basis points with Icf's margin up by 220 basis points and PST declining 50 basis points.
When adjusted to exclude the impact of these acquisitions completed in 2021, PST margins increased by 70 basis points.
Ics posted incremental margins of 38% with PST at 27% or 36%, excluding the impact of M&A.
Moving on to the next slide.
Free cash flow for the quarter was $224 million on a continuing ops basis, driven by strong operational performance across the business, while continuing to invest organically.
Capex during the quarter totaled $23 million.
Our free cash flow included $4 billion of synergy in standup costs related to the IR merger.
In addition, free cash flow included a net inflow of $3 million in cash taxes related to the divestitures of the hps and <unk> segments.
Excluding these items adjusted free cash flow was $225 million in the quarter.
Leverage for the quarter was one one times, which was <unk> nine times improvement versus the prior year.
And total company and putting out stands at $3 $2 billion based on approximately $2 1 billion of cash and over $1 billion of availability on our revolving credit facility.
Liquidity increased by $100 million in the quarter, which included outflows of $165 million towards strategic M&A and $8 million to fund our first quarterly dividend.
Our M&A funnel remains robust and active up in excess of five times from the close of the IR merger and we are remaining disciplined in our approach.
Moving to slide 12, we would like to provide an update on synergy delivery and some detail on the impact of price versus cost.
On the left side of the page we are updating the cost to achieve the $300 million synergy commitment related to the IR merger as well as the associated to stand up the new company from a combined $450 million to now $280 million in aggregate reduction of roughly 40% or 100.
$70 million from our original estimates.
This speaks to how we are always heavily focused on high returns on our cash investments regardless of the situation.
I'm very proud of how our employee ownership culture continues to overdrive, our performance with everyone's thinking like an owner they think about how every dollar spent generates profit and improvement.
In addition to the $215 million in realized synergies to date, we expect an incremental $50 million in 2022 and $35 million in 2023.
The synergy funnel remains in excess of $450 million and while we don't expect our synergy commitment to materially change as we look ahead, we will provide periodic updates on status and execution, particularly as we approach the end of the IR merger related synergy delivery.
The right side of the slide highlights the ongoing price cost dynamic.
In 2021, we remain a price cost positive each quarter and we expect to deliver the same result in 2022.
Note that we are calculating cost, including direct material and logistics, but not direct labor or labor inflation as labor is mostly offset with internal productivity actions.
In Q4, we delivered an incremental margin of 23% for the total company, despite strong inflationary pressures and supply chain challenges.
What I'm most proud of is that even in this environment. Our team was able to achieve a sequential margin improvement of 40 basis points. This highlights the resilience of IRS in very difficult environments.
Looking forward to 2022, we expect to remain price cost positive each quarter as we continue to leverage <unk> to drive commercial execution and productivity initiatives.
Given continued inflationary pressures in a very tough comparison from Q1 of 2021, we expect Q1 to be the most challenged period on a year over year basis, but nonetheless expect incremental margins for the total year to be approximately 35% and the quarterly EBITDA profile to be well in line with prior year quarterly phasing.
We know this is not easy, but it just speaks to the commitment of our team to be differentiated and be in the top quartile performance.
I will now turn the call back to the center to discuss our segments.
Thank you Vic and turning to slide 13 in our industrial technologies and service segment organic revenue was up 11%.
The team delivered strong adjusted EBITDA, which rose 10% year over year and an adjusted EBITDA margin of 25, 7% up 20 basis points sequentially with an incremental margin of 23%.
As a reminder.
Other come in a very strong comp from Q4, 2020, or 400 basis point margin expansion. However.
However, important to highlight as well that on a two year clip. The team has delivered 360 basis point margin improvement.
Organic orders were up 19%.
Starting with compressors, we saw orders up in the low 20%.
And a further breakdown shows orders for oilfield products growing up over 15% and oil lubricated products growing at over 25%.
The Americas team delivered strong performance with orders in North America up mid twenties, while Latin America was up high twenties.
In mainland Europe orders were up high teens, while India and the middle East were down low single digits.
Asia Pacific continued to perform very well with orders of approximately 20% driven by low 20% growth in China and high teens growth across the rest of Asia Pacific.
In the Bakken and blower product line orders were up approximately 20% on a global basis.
Moving next to the power tools and lifting orders for the total business were up approximately 20%.
And saw continued positive momentum driven mainly by our enhanced e-commerce capabilities and improved execution on new product launches.
On our sustainable innovation in action today, we wanted to highlight our recently acquired company.
<unk> is a manufacturer of condensate dreams oil and water separators and are saving products, which are part of the compressor ecosystem.
These products focused on improving overall system performance and creating energy efficiency through efficient use and recycling fluids on there.
Which helps our customers achieve their environmental goals were.
We're very excited about this complementary acquisition as.
As we continue to expand our offerings with a compressor ecosystem as well as the impact that Europe will have as we scale up and expand geographically.
Moving to slide 14 revenue in the precision and science technology segment grew 15% organically.
Which remains encouraging given the tough comp due to COVID-19 related orders and revenue in Q4 of 2020 for the medical business.
Additionally, the PSD delivered strong adjusted EBITDA of $78 million, which was up 22% year over year. Adjusted EBITDA margin was 26, 8% down 400 basis points year over year, primarily driven by the impact of M&A.
The segment was down 120 basis points, excluding the impact of acquisitions in Q4 of 2021 with an adjusted EBITDA margin of 29, 6% ex M&A.
Overall organic orders were up 14% driven by the medical and dosage from businesses, which were up strong double digits in the quarter and as they serve lab life Sciences water in animal health end markets.
Incremental margins were at 17% as reported and 21% when excluding the impact of M&A looking.
Looking at the sustainable innovation inaction portion of the slide we're highlighting our recent to the heat pump acquisition.
Pumps manufactured gear and be some bumps for sustainable end markets, such as medical and lab fluid and beverage water and wastewater.
So the Hilton. These theories magnetically couple pumps are used in lab applications, such as hematology and us.
As well as other chemistry analyzers the.
The business is complementary to our existing portfolio and we are well underway with integration of this business.
Moving to slide 15, we are pleased to introduce our 2022 guidance.
In aggregate, we expect total company revenue to be up 11% to 13%.
With the first half up 12% to 14% in the second half up 9% to 11%.
We expect organic revenue growth of 7% to 9% for the total company.
With 7% to 9% growth expected in <unk>, and 8% to 10% growth in PSC.
FX is expected to contribute a headwind of approximately 1% with.
With 1%, 2% coming in the first half of 2022 and.
Zero to 1% in the second half.
M&A announced and closed to date is expected to contribute an incremental $225 million of housing revenue.
Ill leave reflects normal seasonality in the business, which is typically lighter in Q1.
Similarly stronger in both Q2, and Q3 on an absolute basis and strongest in the fourth quarter.
We do not see quarterly phasing to be materially different from 2021, we expect total adjusted EBITDA for the company to be 1375 to 141 $5 billion, including corporate cost of approximately $135 million spread evenly over each quarter.
This yields an incremental margin of approximately 35% for the total company with positive margin expansion expected sequentially from Q1 through Q4 of 2022.
Free cash flow conversion to adjusted net income is expected to be greater than a 100%.
We anticipate our adjusted tax rate to normalize in the low twenties for the reasons Vic mentioned earlier with Capex, representing approximately 2% of revenue.
Looking at Q1, specifically, we expect double digit revenue growth year over year with Ips growing high single digits organically and PSP growing low double digits.
We also expect flat to slightly positive margin expansion due to the tough year over year comparison on ongoing supply chain constraints and inflationary pressures.
Turning to slide 16, as we wrap up today's call I want to reiterate that Ingersoll Rand is in an outstanding position.
2022 is poised to be a strong year, despite the challenging environment.
To our employees.
Want to again, thank you for your relentless efforts to execute and solve tough problems in 2021.
We accomplished an incredible amount together and we move into 2022 as an even stronger action oriented team.
We continue to invest for growth, both organically and inorganically with a focus on increasing the quality of our total portfolio.
Serving as an industry, leading sustainable company.
<unk> is truly on a backbone and drive every process in our company.
Enabling outperformance and ensuring our global team is speaking one language focus on capturing growth opportunities driving innovation and efficiencies and that can boldly to win in the marketplace.
Our balance sheet is very strong and with our disciplined and comprehensive capital allocation strategy, we have significant ability to redeploy capital to compound earnings and continue our track record of market outperformance.
With that I will turn the call back to the operator and open for Q&A.
Thank you.
I'd like to ask a question. Please press star followed by one on your telephone keypad now.
Your question its tough on my team.
Our first question today comes from Mike Halloran of Baird. Your line is open. Please go ahead.
Hey, good morning, everyone.
Hey, Mike Good morning Bert.
First on the.
Roughly 40% reduction in costs associated with the synergies maybe just what's behind that it's a pretty sizable reduction here and so just like the.
The moving pieces there.
Yes, I think Mike this kind of speaks to.
Our meticulous approach to always look at return on investment of the of the money that we used for every project.
And as we've mentioned on the remarks I mean, it also speaks to the power of these ownership mindset that we have that everyone really cares about how we spend the money. So we've been able to to be very efficient and very effective on the use of the cash of these kind of one time cash for for creating the synergies.
The backlog numbers are obviously really robust.
Maybe talk to a couple of things one how are you.
Stay inability to underlying demand.
Second what with the guidance assumes as far as backlog phasing does that.
Backlog kind of normalize as you work through the year or do all the challenges plus the underlying demand kind of start extending when you get some backlog normalization.
Yes, Mike in terms of sustainability I would say that.
What we are seeing is that clearly the short cycle continues to be very broad based very strong.
And what we eventually we will see some tough comps and our ability what we have been able to show is our ability to actually pivot into the end markets that might be seeing some good growth and utilizing our products.
To capture any new trends that might be in the market.
We're very excited.
Excited I'm pleased with how we've been able to do that in the path and we expect to continue to do that I.
I will say in addition to what we're seeing that what we like in terms of recent trends is that we're starting to see a lot of the capex cycle.
Starting to get released.
And it's really for those projects that are really related to the mega trends.
We spoke about in the Investor day. So for example, we're seeing capacity expansions do too.
Re aligning supply chain, but also the quality of life around.
Farm out or new discovery drug discovery, we're seeing also capex projects related to sustainability, where new technology of compressors driving higher level of efficiency.
Kind of widely used by now a lot over the customers looking for reductions in scope, one and two and I'll tell you that we're also seeing a lot of customers asking about upgrading their technology to be able to make it more.
Iot capable products, so that they can actually increase and get the total cost of ownership benefits.
Great really appreciate the time.
Thanks, Mike.
Thank you. Our next question today comes from Josh <unk>.
<unk> of Morgan Stanley .
Josh Your line is open.
Hi, Good morning, guys Danny.
Yes, good morning.
No we don't hear users.
Hi, Josh Your line is open.
Hey, guys can you hear me.
We can hear you now yes.
Yes, sorry about that so maybe just to follow up on Mike's question on some of the backlog phasing maybe put it a different way from an orders perspective.
How should we think about book to Bill here.
I noticed in Ics, you kind of had a small sequential step down in orders, but memory serves some of those businesses that would be kind of a normal seasonally.
How do you think about kind of the sustainability of these like one five.
Cash type book to Bill numbers as we go through the year.
Yeah, Josh maybe I'll start and let the center add in as well I think in terms of the absolute order patterns.
We are pleased with the momentum we've continued to see if you think back and kind of think about typical seasonality that we typically see in the business. This is a business where book to Bill typically is above one in the first half of the year and then typically becomes a little bit at or below one towards the second half of the year largely attributable to kind of some of the sell through of some of the law.
<unk> project type businesses, typically which sell through a lot more into the back half of the year. So obviously been able to sustain above one book to bill in the fourth quarter. I was just speaks to clearly the underlying continued strength in the overall demand environment.
I think as we kind of turn the calendar here in 2022, I don't think we would expect to see the seasonality dramatically change obviously, we would expect to see book to Bill continues to be healthy.
And then above one.
Your expectation in the front half of the year, but then I think we would expect again as supply chains, presumably start to normalize, particularly as we think back to the to the latter half of the year, probably returned back to a typical more typical seasonality our book to bill being at or slightly below one in the back half of the year.
Got it that's helpful. And then how should we think about price and in the guide presumably healthy.
The pricing environment, and you guys are carrying probably a decent amount of that backlog into the year as well.
Yes, no thats right, Jonathan I mean, the way to think about pricing is that when you look at the kind of.
The organic growth think about it on average for the full year half of the organic growth coming from price.
And we think about the phasing maybe slightly lower than that happened in the first half of the year and continue to increase as we continue to take actions in the second half.
Great I appreciate the detail.
Thanks.
Our next question today comes from Jeff spot <unk>.
<unk> research partners.
Please go ahead, Jeff Your line is open.
Yeah.
Okay.
Thank you good morning, everyone.
And Jeff just.
Just.
Maybe coming back to price cost.
The incremental guide you're laying out here.
Quite impressive it actually would suggest you're nicely price cost positive in 2022.
Can you just true us up on that is that in fact, the case and maybe maybe give us some context on.
The impact of inflation algebra, so to speak on your margin rate.
Or speak to it in dollars and cents either way, but would just love to get kind of a.
Better understanding of what's embedded in the guide for 2022 on a price cost basis.
Yes, Jonathan maybe I'll start and again a lot of different AD. So yeah, just to reiterate what percent I said, obviously from our from a guide perspective, we do expect price to be approximately 50% of the organic growth for each segment. So that's kind of the way you should think about it and.
A little lower than that in Q1, and then obviously an improving as we move through the quarters just based on quite frankly, some of the the continued let's call. It pricing actions, we're taking as we speak just given the environment.
In terms of the actual price cost, yes, yes around on a dollar basis, just like we saw in 2021, we expect to be price cost positive from a dollar perspective, each each quarter of 2022, and then just as a reminder, in 2021 again, we were price positive price cost positive each quarter, obviously much more so in the first half of the year.
And then quite obviously, a much tighter spread in Q4 2021.
As we think about 2022, it's probably not too dissimilar in that sense that Q1 will probably be the tightest spread from a price cost perspective in terms of dollars and then obviously, we would expect that to get a little bit better as we move through the year again based on some of those pricing actions and then specifically with regards to the actual inflation kind of equation.
The way to think about inflation.
I think the easiest way to say it is that on supply chain and material inflation, we expect kind of a first half to be very consistent.
What we saw coming out of the back half of 2021, maybe some slight improvements in second half, but we're not really in forecasting any huge improvements in the situation in 2022.
Worth, noting we've started to see some some some slight tapering and some of the freight rates specifically on logistics.
But again there is a material piece is clearly the biggest piece of the equation and then just to address it even though it is not necessarily in that price cost equation, because we manage the teams to offset labor inflation through productivity.
Labor, we would tell you right now we expect to be largely in line with the levels of inflation or merit that we saw in 2021.
Great Thanks for that color.
The same thing maybe maybe on the M&A comments here again today about the size of the funnel and the like obviously theres been a big.
Big dislocation in the market year to date and including obviously this whole Russia situation today.
Any change in the nature of the dialogue any impact on <unk>.
Multiples that.
Sellers are expecting in this environment or is it.
Really too early to see that.
But just wondering on the kind of action ability of the pipeline.
And the valuation outlook at this point.
Yes, no, Jeff I will say that.
Perhaps maybe a little bit too early to tell although on a case.
Roughly.
But on a case by case basis basis, we definitely see in some instances that multiples are starting to kind of maybe slightly come down or expectations.
<unk>.
Some of the kind of company that we're counting on the kind of one time call that revenue to continue to happen is not materializing that been aggressively out there. We're expecting so we continue to be highly disciplined.
And I think thats the good news in terms of our funnel is very large.
We're very active.
We're getting a lot of doors getting open based on a lot of the word but we have done it.
Around employee engagement and the ownership mindset I can tell you that has been very very unique.
<unk> for us in the sense of family owned companies opening the door and having that conversation because they know that we're different and unique and so the conversations are very active to your point I mean, I think when the market is in a situation like this that there is maybe some volatility maybe that that enticing more faster process too.
Get some M&A executed.
As you know.
Owners want to have a better visibility or kind of get things locked in and so we're very active on that Jeff and I think that's the exciting piece and as you saw to your point the funnel is very strong.
Great. Thank you.
Our next question comes from Nicole the place of Deutsche Bank. Please go ahead.
Yes, thanks, good morning, guys.
Good morning.
Morning can we just good morning can we just talk a little bit about the progression of EBITDA margins throughout the year like if we're starting the year flattish.
The key drivers to getting to that full year, EBITDA margin target, which Jim.
Progressive year on year improvement in margins.
And then installation going away price costs can we just kind of walk through the puts and takes that drive the conviction around that.
Absolutely Nicole let me let me take.
With that I'll say <unk>.
First off first off in terms of seasonality, we expect both revenue and adjusted EBITDA for the total company facing to look very comparable to what we saw in 2021 otherwise.
Although I said, we're not expecting some big hockey stick effect in 2022 from a phasing perspective compared to historical performance or anything of that nature based on our current backlog and actions on forecast for the year and to give you a bit more color in terms of kind of first half to second half adjusted EBITDA split maybe easier too.
Your point kind of give you that on a year over year basis, and I'll say that first as you may recall comps are extremely challenging I would say in the first half of 2021, where Ics margin expansion in Q1 of 'twenty. One was more than 600 basis points and then I know there are 250 basis points in Q2 of 2000.
So a lot of it is back then had to do with the proactive pricing measures that we took towards the end of 2020, particularly in the legacy IR compressor products and these result.
This resulted in very strong carryover pricing into the first half of 2021 before any of the inflationary pressures, we're really evident and very favorable price cost spread.
As 2021 progress and and kind of what they mentioned too as well, we continue to maintain being price cost positive, but the spread clearly tightened in the back half of the year due to the inflationary pressures are accelerating and these now leads to a tougher comp in the first half and more reasonable comps in the second half of 2022.
And then in addition, some of the things we mentioned about the M&A. When you think about the impact of M&A. The majority of our 2021 actions were completed in PSP in the second half of 2021.
And as we now start to execute on our synergy plans associated with those deals and particularly the Olympics.
Company.
We would expect that the savings start to materializing more so in the back half of the year and for those reasons, we expect margins to sequentially improve each quarter of 2022.
But being more favorable.
<unk> cost spread normal seasonality and synergies from recent M&A should lend themselves to more of our year over year margin expansion being in the back half of 'twenty to 'twenty two.
Okay got it. Thanks, that's really helpful. And then I guess, how did you put your plan together thinking about what's going on from a supply chain perspective.
Is the expectation baked into the plan that we see no improvement in supply chain or have you guys kind of feathered in.
Easing of that constraint as we progressed through the year.
Yes, great question.
It is very very slight improvements I mean, we're telling our teams plan for the worse.
Take action based on what we have visibility of it now and don't plan for it to come back very positively and strong in the second half. So our teams are executing plans that being a very kind of a stable environment at these kind of levels and and if we see a benefit that inflationary markets abate through the rapidly than that.
An improvement in our total good margin expansion.
Thank you I'll pass it on.
Thank you.
The next question and the key comes from Rob Wertheimer of Melius research.
Your line is open.
Thank you good morning, Thanks for the comments on price costs. One other one just I don't know how much kind of volatility you're seeing underneath the cost side of price cost and supply chain et cetera, I'm sure everybody is working incredibly hard on it how far out can you sort of see stability, whether it's <unk> and then just maybe you could refresh us on how much pricing in your house.
Quick pricing flexibility can come if costs do pop ups the upside how do you manage that.
Central volatility thanks.
Yes sure.
There is definitely volatility and to your point I mean.
It's kind of what I'd say, it's definitely a lot of hard work by the teams are doing to really control what we can control and so that is a focus of our of our kind of culture is that but high level of emphasis on controlling what we can control and control your destiny and that basically means supply chain in terms of the cost yes.
A bit of a kind of walking them on what we can assume that sometimes you see supply and logistics then you see steel steel now coming that's coming down as you see ferrous materials going up do you see nonferrous material going down. So we got a team that is basically looking at it in all of the indicators and then taking actions as proactively as possible with our supply base very very quickly and very early.
On.
So to your questions, Yes, I think I'll still see a lot of volatility on a kind of comp.
Commodity to commodity that kind of lends to a total average to be still that flattish stable as to what we saw in the second half of the year.
And then Rob on your the second part of your question around pricing and kind of the flexibility, yes, I mean, I think the team has done a fantastic job on that and I mean, we've talked about it a number of times in the context of a lot of the process improvements the distinct pricing tier.
Team that we have in place to really be agile utilizing a lot of the IRS tool kits to be able to.
One connect with our supply chain operations team to understand the impact of inflation as I said as I said almost weekly monthly basis as necessary and then recalibrate pricing obviously in the context of 2021, we indicated that we took multiple pricing actions across pretty much every part of our business and so the ability to be able to react in a pretty quick timeframe. We've shown it in obviously.
We're able to react in a comparable manner here in 2022.
Thank you.
Okay.
The next question today comes from Nigel Coe of Wolfe Research. Please go ahead. Your line is open.
Thanks, Good morning, Thanks for the question.
Alright.
Hi, guys just wanted to back to <unk>.
To kind of the margin cadence.
Points so like.
<unk> charges excluded from adjusted EBITDA. So I think that means the inflation kind of bucket steps up from full Q2 two <unk>.
Implies the price also steps up materially from 40 to one can you just maybe just confirm that you do have a bit more price coming in.
In Q1 versus Q4.
And then the comments around <unk> margins flat for the corporation. It looks like PST is going to be down again materially on the M&A dilution so implies that.
It is going to be up I guess is going to be up year over year, just maybe just confirm that.
How would you think about it.
Sure. So yes, so Nigel I'll take those in pieces here I think with regards to the the price cost.
Kind of.
Dynamic and the pricing I think you can probably expect that pricing is at least comparable to what you saw in Q4 and as we indicated here clearly we are still looking at and Recalibrating and taking pricing actions frankly.
Frankly as appropriate just given the let's call it the kind of ever evolving environment.
I spoke to.
In terms of.
The segment margin spread.
You are correct, obviously Q1 for for PST will still show will show margin decline year over year, largely attributable to the M&A dynamic on the.
The Ics side, we would expect to be.
I would say Ics is probably more so in line.
With.
The total the total overall environment flattish to slightly up and then obviously you can also kind of look at some of the some of the corporate as being kind of the rest of that noise to kind of get to that flattish to slightly up.
You know kind of expectation that we indicated for Q1 of 2022.
Okay, great. Thanks, and my follow up is can you just go into the compressor order trends North American standouts. Once again is pretty strong and it sounds like we might be seeing some elements of some supply chain benefits.
Environmental upgrades and you mentioned the IOC. So I'm just wondering if you can maybe flesh out some of our end markets.
Commentary.
Perhaps.
On the Iot is that a retrofit to existing equipments or does that require a bit more of a meaningful replacement cycle.
Okay.
Yes, Nigel in terms of Americas, Yes, I mean, we were very pleased to see how the team performed.
Not only in the U S. But also even Latin America, as well too as well really good performance there.
From an end market perspective, I will say that.
Finally, it fairly broad based general industrial being strong.
Also.
That has to do with oil free products, such as food pharma.
Semiconductor industry. So a lot of good momentum on our oil free product line here in the in the U S and.
And in terms of the Iot Youre, absolutely right, we can retrofit.
The compressors.
Products that we have in the field that.
That is definitely something that we're doing in order to kind of generate more of that recurring revenue stream that we spoke about during the investor day.
But also in many instances the customers when they look at the Iot.
We have our teams very well trained to talk about that if theyre going to retrofit they might as well should look into the total new compressor. For example, so that they can actually maximize the energy savings that they can achieve and not just retrofit and all in all technology. So I think it's an opening the door conversation topic that led into a higher ASP selling point.
Great. Thank you very much.
Thank you.
Yeah.
The next question comes from David Raso of Evercore. Please go ahead.
Hi, Thank you for the time.
Just curious it sounds like can you give us from your years of experience thoughts around what we're seeing with Russia, Ukraine and select Nat gas prices, obviously very strong.
Oil prices strong just trying to balance.
Obviously some of these could be even positive demand drivers when it comes to where commodities are Budd.
Are there maybe European factories, feeling the squeeze of high gas prices that may be cool their thoughts on capex. So I know, it's early but just given the dynamics of the day here I'm just curious how do you think about the impact of a situation like this especially the last one.
Sure sure.
Very good.
Very good very interesting question I mean, I would tell you that.
I'll say first of all.
Our thoughts and prayers go to the people of Ukraine and based on Europe , I mean, obviously, the dark days. Indeed, I can tell you that from our side.
Our revenue in the Ukraine, and Russia, I will say, it's fairly immaterial and nominal.
In terms in terms of kind of the overall impact yes, I mean, I expect that gas prices will continue to rise based on what we're seeing in Europe .
Already very high I will say that what we have seen in ourselves in our internal factories and potentially these kind of correlates to two others as well and we're seeing it.
Is that in many cases, our teams are accelerating projects to reduce the cost of energy.
So cost energy efficiency and when you think about compressors at a roughly 30% of the energy consuming a factory. It is a very high speaking point to them as people think that these high energy prices are going to be here for the long it really accelerated that conversation of that new compressor to reduce the energy and.
In our factories, we're doing it we're upgrading our compressors.
We're putting we're putting solar energy into into our factories as well and that is increasing the level of conversations to our customer base. So I think that mega trend at around sustainability and how our products can really.
Our customer is a very high point of conversation.
Yeah.
Alright, thank you for that and quickly when I think about the 'twenty two guide and.
And the margins between the segments. If you had to think of an area where.
Let's say earlier in the year, hopefully, maybe leaving a little in your back pocket for where maybe margins could.
Surprised to the upside or simply cushion if price cost goes the wrong direction, but at least thinking on a glass half full view, if you had to say, where there's more margin potential to surprise to the upside would it be more on Ics, just given strong volumes and particularly nice margin.
<unk>, that's priced well or is it more maybe PFC.
Hopefully some of the acquisitions you've made that have been diluting. The margin you can you can drive those margins now that they're under your under your control.
I'll say, David that it will be it will definitely be on the <unk> I mean.
And you even saw it when you think about it Q3 to Q4, our sequential margin actually improve even in an inflationary market that continues to rise.
So I would say that if anything will be continue to see very strong momentum.
Good idea.
Okay. Thank you very much appreciate it.
Thank you.
Our next question comes from Joe Ritchie of Goldman Sachs. Your line is open.
Thanks, Good morning, everybody.
Alright, Joe Hey, Joe.
Hey, So I guess, maybe my first question.
As the quarter progressed I'm, just curious like they did things get worse at all from Mike like Absenteeism labor supply chain perspective, and maybe even in the early part of 2022 and I'm also curious obviously the backlog very good.
I'm curious were there any revenue deferrals into 2022.
Yes, I think there is a progression that Joe Q4 in terms of absenteeism.
Not so much.
But we can call out that really spiked I mean, clearly absinthism spiked in in the early part of 2022 kind of January but.
But we are back to normal levels now.
I'd say from a quarterly progression in the fourth quarter, absolutely resume normal.
In terms of inflationary fairly normal normal to kind of continuing to rise. That's why we continue to put our emphasis on more incremental price increases that we have continued to do and.
But as we look here in the first quarter.
We'll see better stability here now.
Now that we have passed that spike of the omnicom.
Yes.
And then the second part of your question in terms of any revenue deferrals or anything of that nature.
I'd point to anything in terms of like true deferrals or things of that nature from a customer base perspective, asking for things, but nothing of any consequence, there obviously, probably fair to say that you know just given some of the supply chain constraints and we would fully acknowledge obviously backlog being at levels. They are and even some past due backlog that obviously, our intent is to get out the door here in Q1 clearly.
There were.
A low single digit.
Points from an organic growth perspective, but you could argue could have been a little bit better, but again, given the supply chain environment and the constraints.
Quite frankly fully expected and I think the teams did a fantastic job all in quite frankly still hitting what we'd say our commitments in the context of a topline from a Q4 perspective.
Great that's.
That's great to hear and then I guess my follow on question is going back to the margin, particularly.
Particularly in PST and I wanted to just focus on 100 on feedback for a second so I think we have those margins coming in like the low Twenty's I'm just curious like as you kind of see the progression and the synergies in that business.
Maybe just kind of talk us through the cadence there.
What gets that business back to more kind of like PSP level type margins over the next.
12 to 18 months.
Yes, absolutely.
I think the way Youre thinking about it is spot on you know, let me just to calibrate everyone. The <unk> business.
$200 million revenue base business that we indicated that in when we purchased it which was in the latter half of Q3 of 2021 more in the mid teens EBITDA margin realm, but gross margin profile is extremely strong and it plays in if not better than the than the overall PST margin or segment profile margin from a gross margin perspective.
You are absolutely right. Obviously, there is synergy plans in place I will tell you a lot of those actions are actually kind of going into motion as we speak and so I think the way that you have thought about it in the context of where we expect the margin profile to be here from a 2022 perspective eclipsing that 20% margin EBITDA margin Mark is completely fair I think obviously.
Then as we continue to integrate we've always said within a three year timeframe, we expect that to kind of be closer to the PST segment margin profile.
We're not even one year in at this point in time. So obviously, we still have a little bit of a road ahead of us, but quite frankly getting from mid teens to over 20% here.
Within the first year is obviously quite encouraging and then the other piece here is now as we start to also integrate from a commercial perspective. The technology is very complementary to the broader PST segment. So again, we expect to see some good revenue growth and synergy profile coming from that so again everything continues to be well on pace. You are correct, obviously our expectation is.
At the margin progression there does get better at 2022 progresses, just quite frankly, given that we're taking some of those synergy actions as we speak right now.
Great to hear thanks, guys.
Thanks, Joe.
Sure.
Our next question comes from Nathan Jones of Stifel. Please go ahead.
Good morning, everyone.
Good morning, I wanted to start off with that.
Good morning.
You talked about la.
Project capital projects, starting to come back into the market, which I think is encouraging as we start to see some mid to later cycle tap.
Capital come back into the market can you give us a little more color on where youre seeing those projects what kind of end markets, what kind of geographies youre starting to see those projects.
The outlook for growth in.
The next two or three years.
Yes in terms of all in terms of where we're.
We're seeing we're seeing good momentum in what we call in Asia Pacific and the Middle East.
And.
From an end market perspective.
We're seeing water and wastewater as being one that is highly active.
Whether project in India or projects in in China, or even in southeast Asia, We're seeing a lot of good momentum on a water and wastewater and.
And I think that.
The good news here.
Some meetings with some large actually EPC company.
And C suite C suite conversation I mean, there is definitely a lot of very strong momentum.
And what we what we what I liked what I heard is that.
All of these kind of hydrogen conversion is here pretty soon to come maybe.
As you saw on our Investor Day, we spoke with spoke a lot about excitement on kind of how our products can play in that in that in that room. So that's that's the one piece that we haven't seen anything come yet from a kind of a large capex, except obviously in our fuel dispensing business that we continue to see good momentum, but from a compressor perspective as it is aligned to.
Hydrogen in the energy conversion, that's that's yet to come.
And I wanted to follow up.
On your response to Dave's question on the energy efficiency of compresses I think an important point that pumps and compressors and some of the manufacturing facility.
The power usage electricity baseband contributes pretty significantly to the operating costs of those facilities can you talk about what kind of the payback period is.
On a compressive debt reduces energy usage by 30% and any metrics you have around what that contributes what kind of.
The energy consumption contributes to the operating costs of 108.
Facility.
Just to give people an idea of what the potential savings for customers.
Yes, absolutely Nathan.
Based on the energy cost.
It is now some payback projects are even not even a year or less in some cases so.
I think it depends on the country were for.
For example, Germany, where energy costs are very high or even China too as well the payback is actually fairly quickly or fairly quick.
And to your point when you look at our compressor.
Dresser consumes approximately on average 30% of that energy.
Got it gets consumed and the total factory.
And again it depends on the on the type of factory, but clearly.
One of those where we are.
We're very.
Very excited about that opportunity, but it's not only the compressors and there's also the blowers I mean, when you look at the blowers.
In the wastewater facility at lower consumes 60% of the energy.
And so we're talking to upwards of 50% reduction.
That 60% or that or that 30% and to your point in terms of absolute dollar savings.
The range is based on the size of the company, but we can tell you that we have we receive a phone call from a.
A very large.
Beverage.
Company.
That installed some of our compressors and basically they called us.
They receive a call from the utility company.
There were energy have been reduced by more than 50%. So so again that we're surprised that thinking that the energy utility companies surprised that potentially they were shutting down the factory and indeed, what it what's happening is that the new compressors, we're consuming 50% of those energy therefore savings couple of hundred thousand dollars of energy cost.
Per year.
Great color, thanks for taking my questions.
Thank you Nathan.
The next question comes from Stephen Volkmann of Jefferies. Your line is open.
Alright, guys. Most of it's been answered, but just I'm curious the playbook that you have for kind of this global dislocations like what we're seeing in Russia. Now obviously your stock has been caught in the downdraft here and given your balance sheet do you focus more on sort of opportunistic.
Susan this type of environment or do you kind of circle, the wagons, a little bit and protect the balance sheet.
I would say.
Jeff Good question.
We don't want to kind of dramatically change our strategy and to be honest in these kind of dislocation of the market. This is a good opportunity to also be more aggressive on M&A. Some.
Some of the price points kind of get to the levels that are actually more even more appealing to the way it was before so.
So we see that in this type of dislocation, yes, I mean as a good opportunity to be aggressive on the on the on the M&A, which continues to be our number one.
Number one capital allocation priority, but obviously very prudently.
But as you saw we're definitely have very good use of cash.
You saw that we approve that $750 million share repurchase from the board.
And we definitely plan to utilize that.
Great. Thank you.
Yeah.
Okay.
And our final question today comes from John <unk> of <unk>.
Wells Fargo. Please go ahead.
Hi, good morning.
I wanted to jump on the Digitization.
Hi.
When you think about kind of 2022 and Digitization targets can you give us any insight in terms of kind of what youre looking at in terms of kind of what would be successful for you in the progress towards the five year framework, you gave and whether thats in our penetration of fielded units or whether that's kind of the percentage of Iot ready products, but what youre thinking about in terms of 2010.
Two targets.
No that's good.
In our goals and objectives that we deploy to our team there is actually a very specific go through digitization and any related in this case through the revenue that we can generate so.
With the digital assets that were connected and in our case. It is very specifically tied to service and how that recurring service.
Revenue in this case, particularly the compressors should accelerate as we continue to digitize and connect our compressors.
At a lower level, we also have.
Clearly that leading leading indicators of metrics such as the revenue that we're shipping with digitally enabled products across the entire company and we think that that is a great indicator for us to say how much of our assets are be shipped that already enable that then later we move in.
To our future revenue revenue streams.
One thing that could build too as well Joe.
The excitement of some of these M&A that we're doing is that as we kind of.
Go deeper into companies like <unk> <unk> is doing a phenomenal job on Iot.
<unk> and one that even in comparable to some other kind of Iot Standalone company. So again, we're very excited that that was an acquisition that we've got a great technology, but we also got a great team that is highly comparable to these kind of Iot standalone software companies.
And then here is the great benefit that we were able to find an old look not only a great progressive progressive cavity pump, but also a team that that we're going to leverage to the better benefit of the entire company not just the <unk> business. So a lot of good momentum good excitement around this topic.
Great. Thank you.
We have no further questions in the queue. So I'll hand back to the management team for closing remarks.
Thank you as we close we clearly are in some pretty tough times someone said on the on that.
In Q&A, but as you can see from our performance, we and actually particularly on slide six even in these very difficult environments, we're able to perform and outperform to our needs. Because we have a team that has this ownership mindset the like to control their destiny and really execute do what we can control and also make life better for our employees customers the planet.
And also importantly, the shareholder which in this case our employees our shareholders of the company.
So with that I, just want to say again, a big thank you to our employees. Thank you as well as support that all of you are giving US 2021 was a great year and we are here ready to take on any challenges that are coming into 2022. So thank you again.
This concludes today's call. Thank you for joining you can now disconnect your lines.
Yeah.
Yes.