Q4 2022 Ingersoll Rand Inc Earnings Call
Speaker 2: Thank you all for standing by. I would like to welcome you all to the Ingersoll Rand Q4 2022 Earnings Conference call. All lines have been placed on mute to prevent any background noise.
Speaker 2: And after the speakers remarks we will conduct a question and answer session.
Speaker 2: To ask a question at this time please press star followed by 1 on your telephone keypad.
Speaker 2: If you do change your mind at any time, please press star then 2 to remove your question.
Speaker 2: And for operator assistance at any time, please press the star 0 key. Thank you. I would now like to turn the conference call over to our host Matthew Fort to begin. So Matthew, please go ahead.
Speaker 3: Thank you and welcome to the Ingersoll Rand 2022 fourth quarter earnings call. I am Matthew Ford, Vice President of Investor Relations. And joining me this morning are Centa Rinalg, Chairman and CEO of <expletive> Kinney Chief Financial Officer.
Speaker 3: We issued our earnings release and presentation this morning, and we will reference these during the call. Both are available on the investor relations section of our website. In addition, a replay of this conference call will be available later today. Before we start, I want to remind everybody that certain statements on this call are forward-looking in nature.
Speaker 3: and subject to the risks and uncertainties discussed in our previous SEC filings, which you should read in conjunction with the information provided on this call. Please review the forward-looking statements on slide 2 for more details. In addition, in today's remarks, we will refer to certain non-GAAP financial measures. You can find a reconciliation of these measures.
Speaker 3: the most comparable measure calculated and presented in accordance with GAAP in our slide presentation and in our earnings release.
Speaker 3: both of which are available on the investor relations section of our website. On today's call, we will review our company and segment financial highlights and provide 2023 guidance. For today's Q&A session, we ask that each caller keep to one question and one follow-up to allow for time for other participants.
Speaker 3: At this time, I'll turn the call over to the side deck.
Speaker 4: Thanks Matthew and good morning to all. I would like to start by acknowledging and thanking our employees for their hard work in helping those that live a record year in 2022.
Speaker 4: We finish the year on a high note, with strong fourth quarter and full year results despite ongoing inflation, rising interest rates, supply chain constraints, and geopolitical uncertainty.
Speaker 4: Our employees consistently exemplify our purpose while thinking and acting like owners to deliver on our commitment.
Speaker 4: At our performance is here clearly reinforces the impact we have at Sotin's helping us to run.
Speaker 4: Starting with slide three, in 2022, we demonstrated again how we continue to overdeliver on our investment and commitment.
Speaker 4: We also made tremendous progress against our sustainability goals, but I am very proud that English O'Brien was named to the 2022 Dow Jones Sustainability Index.
Speaker 4: As we look to 2023, the demand remains solid and while microeconomic, geopolitical, and global supply chain uncertainties continue to be at the top of everyone's mind, we will remain agile and focus on what we can control.
Speaker 4: IRX is our differentiator to fuel our performance and continue to execute on our commitments.
Speaker 4: Turning to slide four, during our last investor day, we highlighted how we believe that compounding results through our economic growth engine.
Speaker 4: We remain committed to our strategy and its success, if evident, given the results outlined at the bottom of this page.
Speaker 4: A portfolio is positioned to capitalize on global megatrends such as digitization, sustainability, and quality of life.
Speaker 4: We expect to leverage our organic growth enablers to deliver mid-single-digit organic growth through 2025.
Speaker 4: As you can see, we outperformed this commitment again in 2022, delivering 16% year-over-year organic revenue growth.
Speaker 4: In 2022, we deliver 4% of in-year growth from M&A, or 5% on an annual basis.
Speaker 4: The combined organic growth and inorganic growth of 20% are so past our low double-digit level of commitment.
Speaker 4: As we look to 2023 and beyond, we reaffirm our commitment to deliver total average growth of low double digits to 2025.
Speaker 4: Our strong organic growth levels of aftermarket demand generation as well as our I2D initiatives will enable us to generate operating leverage and incremental productivity with an expected 100 basis points of adjusted EBITDA margin improvement per year on average.
Speaker 4: With IRS as our competitive differentiator and over 300 impact daily management or IVMs across our company each week, our high performing culture encourages a strong focus on execution.
Speaker 4: This continues to support our goal of being a premier company that consistently compounds earnings on average by double digits each year.
Speaker 4: In 2022, we continue to achieve that goal with adjusted EPS growth of 13%.
Speaker 4: Moving to slide five.
Speaker 4: In 2022, we saw strong organic order and revenue growth of 11% and 16% respectively.
Speaker 4: Aftermarket continues to be a strategic focus and we deliver growth of 17% excluding effects.
Speaker 4: Our 120 basis points of adjusted EVP margin expansion was driven in part by improvement in our gross margin due to pricing, aftermarket revenue growth, and IED actions.
Speaker 4: As we continue to align our business to the mega growth trends, we formalize our IR Digital Team to accelerate how we create new revenue streams.
Speaker 4: It's important to note that this is an incremental investment we made in addition to the teams that reside at the prison hall.
Speaker 4: With 90% of our total revenue coming from IIOG ready products, we have already exceeded our 2023 investor day target.
Speaker 4: On the right side of the page is a great example of our ability to deliver oriented growth by focusing on the sustainability and efficiency megatrends.
Speaker 4: We were selected to be a critical technology provider for what will be the largest carbon capture and storage project in the world when it comes online in 2024, with the capacity to permanently capture and store 12 million tons of carbon dioxide gas every year.
Speaker 4: This one project will deliver more than $14 million of revenue for English for a brand between 2023 and 2024.
Speaker 4: On Xisig, M&A continues to be at the forefront of our capital allocation trend.
Speaker 4: We invested over $800 million in 12 acquisitions in 2022.
Speaker 4: including the SBA explosion section, with the analyzed revenue from these acquisitions being approximately $300 million.
Speaker 4: These acquisitions have added both market leading products and technologies while accelerating our addressable market with close adjacency.
Speaker 4: Our M&A funnel remains strong and as of today it continues to be over five times larger than it was at the time of the R&D.
Speaker 4: And more importantly, we currently have 11 transactions under LOI.
Speaker 4: We expect an additional $200 to $300 million in annualized inorganic revenue to be acquired in 2023.
Speaker 4: Finally, we started the year well with regards to executing on our inorganic strategy with the recently completed acquisition of Pyramid and Tantra.
Speaker 4: A leading provider of solutions used for loading and unloading bright work and liquid tanks in demanding industrial environments as well as wood and beverage.
Speaker 4: Moving to slide 7, we have some exciting news to share. We achieve placement on the VGSI World and VGSI North America indices.
Speaker 4: Our score of 81 on the S&P Global Corporate Sustainability Assessment puts us at the number one in North America and number four in the world within our industry, which means that we are in the top decile of global companies.
Speaker 4: This is a perfect example of how we leverage IRX for agile execution across all aspects of our business.
Speaker 4: In this case, we used our own IRX execution process to go from being on-ramp to now in the top 10% of all companies reviewed by S&P Global.
Speaker 4: I will now turn the presentation over to Vic to provide an update on our Q4 and full year 2020 financial performance.
Speaker 5: Thanks, Mr. Centered.
Speaker 3: On slide 8, we finished the year with strong performance in Q4 through a strong balance of commercial and operational execution fueled by IRX despite the ongoing macroeconomic contract search
Speaker 3: Total company organic orders and revenue increased 2% and 19% year-over-year respectively.
Speaker 3: We remain encouraged by the strength of our backlog, which is up 30% year over year, equating over $2 billion of backlog.
Speaker 3: This provides a healthy backlog to execute on as we enter 2020-23 and gives us conviction in delivering our 2023 revenue guidance.
Speaker 3: The company delivered fourth quarter adjusted EBITDA of $429 million, a 23% year-over-year improvement.
Speaker 3: and adjusted EBITDA margins of 25.9%.
Speaker 3: 180 basis point year-over-year improvement, and 110 basis point improvement sequentially from Q3.
Speaker 3: For the quarter, adjust the APS with up 6% versus prior year. This is despite some meaningful headwinds that I'll explain shortly.
Speaker 3: Three cash flow for the quarter was $321 million, despite long wind headwinds from inventory due to global supply change challenges, as well as the need to support backflow.
Speaker 3: Total liquidity of $2.7 billion at quarter end was up approximately $100 million sequentially.
Speaker 3: Our net leverage continues to improve year-over-year and sequential.
Speaker 3: At 0.8 turns, we're 0.3 turns better than the prior year and 0.2 turns better than prior quarter.
Speaker 3: 30th slide 9 for the total company Q4 order is group 5% and revenue increased 21%, both on an affect-adjusted basis.
Speaker 3: Total company adjusted EBITDA increased 23% from the prior year.
Speaker 3: with the ITS segment margin increasing 170 basis points.
Speaker 3: while the TST segment margin is improving 330 minutes.
Speaker 3: It's important to note that both segments are price, cost, dollar, and margin positive, which speaks to the nimble actions of our teams despite ongoing inflationary heads.
Speaker 3: Corporate costs came in at $33 million for the quarter.
Speaker 3: And finally, adjust the EPS for the quarter with up 6% to 72 cents per share.
Speaker 3: This 6% growth includes significant headwinds associated with FX, as well as favorability in the prior year tax rate due to one-time benefits that were not expected to recur, and an ongoing headwind associated with interest expense.
Speaker 3: The adjusted tax rate for the quarter was 19.7%.
Speaker 3: with the full year adjusted rate finishing slightly below 22%.
Speaker 3: On slide 10, total company of full year orders grew 16% and revenue increased 21%, both on an FX-adjusted basis.
Speaker 3: Total company adjusted EVA to increase 20% from the prior year.
Speaker 3: The ITS segment margin increased 100 base points, while the PST segment margin declined 70 base points.
Speaker 3: When adjusted to exclude the impact of M&A completed largely in 2021, PST and just EBITDA are largely increased by 60 basis points.
Speaker 3: As you recall, most of the decline in Justin Bieber's margins throughout the year was due to the CPAC acquisition.
Speaker 3: I am pleased to report that CPEX is another amazing story, where we acquired a business at mid-key DBA-DUM margins and the exit rate in Q4, just five quarters after the acquisition, is in the mid-20s.
Speaker 3: We are well under way to getting CPEX to our PST's sweet average EBITDA market.
Speaker 3: We continue to see sequential increases in PSTs adjusted by the margin, and now PST margins are generally back in line with where we have seen them historically at approximately 30%.
Speaker 3: Both segments finish the year price, cost, dollar, and margin positive, which are the major driver of the company's overall triple digit adjusted EBITDA margin.
Speaker 3: Corporate costs finished the year at $127 million, down $6 million from prior year, largely due to adjustments in management incentive costs.
Speaker 3: And lastly, adjusted EPS for the year was up 13% to $2.36 per share.
Speaker 3: It is important to note that the adjusted EPS growth includes significant one-time headwinds associated with FX, prior year tax rate, and interest expense.
Speaker 3: If you exclude the impact of these headwinds, our adjusted EPS curve would have been over 20%.
Speaker 3: Moving to the next slide, in 2022, we returned $294 million to shareholders.
Speaker 3: for share repurchasing and dividends.
Speaker 3: Free cash flow for the corridor was $321 million including CapEx which totaled $34 million.
Speaker 3: And Total Company liquidity now stands at $2.7 billion based on approximately $1.6 billion of cash and $1.1 billion of availability on our revolving credits.
Speaker 3: It is important to note that these figures include a practically $525 million cash, which has subsequently been deployed for the S.D.X. Flow air treatment business acquisition on January 3rd, 2023.
Speaker 3: Leverage for the quarter was 0.8 turns, which was a 0.3 turn improvement year over year.
Speaker 3: A cashflow outflow for the quarter included $184 million deployed to M&A, $8 million to our dividend payment, and $3 million for share repurchases.
Speaker 3: M&A remains our top priority for our capital allocation, and we continue to expect M&A to be our primary use of cash.
Speaker 3: I will now turn the call back to the sentence to discuss our sentence.
Speaker 6: Thanks Vic.
Speaker 4: On slide 12, our industrial technologies and service supplements deliver strong year-over-year organic revenue growth of 22%, with volume growth out-pacing growth from prices.
Speaker 4: I just said EBITDA increased 24% year-to-year with an adjusted EBITDA margin of 27.4% of 170 basis points from prior year with an incremental margin of 38%.
Speaker 4: We also deliver sequential margin expansion of 120 basis points from Q3 to Q4.
Speaker 4: We continue to see solid demand for our products with organic orders of 4 percent.
Speaker 4: Note that on a two-year stack, the IPS segment organic orders grew more than 20%.
Speaker 4: Moving to the individual categories, each of the figures exclude the negative impact of effects, which year-over-year was a 6 to 7 percentage point headwind across the total segment on both orders and revenue.
Speaker 4: Starting with compressors, we saw orders up in the low simple digits and we continue to see oil-food products orders outpacing oil lubricated products.
Speaker 4: Orders were down mixing the digits in the Americas, driven by a large order pushed from Q4 to the first quarter of 2023.
Speaker 4: ENEA demand continues to be above market with orders of mid-single digits.
Speaker 4: The Asia-Pacific team continues to deliver great performance with orders growth in the mid-teens, which is impressive when you think about that our team in China delivers double-digit growth even throughout the COVID-19 closures and disruptions.
Speaker 4: In vacuum blowers orders were up low 20s globally and the power tool and lifting global orders could meet single digits.
Speaker 4: Moving to the Innovation in Action portion of the slide, we're highlighting our footprint expansion in India, which is another organic investment initiative we're driving.
Speaker 4: We have seen significant growth in India and we continue to drive opportunities for Indian for regional manufacturing which is driving the need for increase in our country.
Speaker 4: Turning to slide 13, revenue depreciation and science technology segment grew 9% organically.
Speaker 4: Additionally, the PSTP in the liver adjusted a data of $93 million, which was up 20% year over year, with incremental margins of over 80%.
Speaker 4: The JOSERI beta margin was 30.1% off 330 basis points year over year.
Speaker 4: We continue to see sequential improvement in our adjusted EBITDA margins driven by price loss improvement and synergy delivery on our recently completed MNA's suggested PIPs.
Speaker 4: Organic orders were down 2 percent year-over-year as Q4 comps were challenged due to headwinds from a single large hydrogen order intake in Q4 of 2021, which will deliver a network of refueling stations in New Zealand.
Speaker 4: Adjusting for base hydrogen order, normalized organic orders were up slightly and on a two-year stack, organic orders are up slowly.
Speaker 4: For our PSA Innovation in Action, we're highlighting our EVO electric diaphragm pump.
Speaker 4: This recently launched product with the only electric triple chamber diaphragm pump in the margin.
Speaker 4: The EVO series foam pays utilizing high growth in markets such as electric vehicle battery.
Speaker 4: specialty chemical manufacturing, and fluid and beverage applications.
Speaker 4: This product offers significant energy savings leading to faster payback times for our customers.
Speaker 4: And this is yet another terrific example of sustainability at the growth driver and our focus on high growth sustainable in markets enabling us to deliver global digital growth.
Speaker 4: As we move to slide 14, we're introducing our 2023 guidance.
Speaker 4: Total company revenue is expected to grow between 7% to 9%.
Speaker 4: with the first half growth of 9 to 11 percent and the second half growth of 4 to 6 percent.
Speaker 4: We anticipate organic orders growth of 3-5%, where price is approximately 70% and volume 30%.
Speaker 4: FX is expected to contribute approximately 1% of the headwind for the year, of which the impact will primarily be realized in the first half of the year.
Speaker 4: M&A is projected at 270 million dollars which reflects all completed and closed M&A transactions in 2022 as well as a position of SPX slow air treatment and power and time trucks.
Speaker 4: Corporate costs are planned at $140 million and will be incurred evenly per quarter throughout the year.
Speaker 4: The year-to-year increase is largely driven by investments in IIT and the Land Generation.
Speaker 4: Total adjusted EBITDA for the company is expected to be in the range of $1.57 billion and $1.63 billion.
Speaker 4: At the bottom of the table, we're introducing adjusted EPA guidance.
Speaker 4: While we have not historically guided MEPS, we will now include this two metrics moving forward.
Speaker 4: Adjusted EPS is projected to fall within the range of $2.48 and $2.58.
Speaker 4: We anticipate, or just to saturate to be in the low 20s, interest expense to be approximately $165 million and cap-ex to be around 2% of revenue.
Speaker 4: The right-hand side of the page includes a 2023 four-year guidance bridge showing the growth associated with operational activity and the headwinds associated with interest expenses, effects, and changes in the adjusted tax rate.
Speaker 4: Based on the above guidance, adjusted EPS growth attributed to operational performance is approximately 13 to 17 percent.
Speaker 4: offset by approximately 8% in headwinds from interest expense, FX, and the adjusted tax rate.
Speaker 4: As we sit here in May February and to provide some Q1 commentary, it is worth noting that we have seen organic orders from T to B positive for a quarter to that basis to the first week of February , which is consistent with our expectation.
Speaker 4: Turning to slide 15, as we wrap up today's call, I want to reiterate that InGos or RAN is in a solid position.
Speaker 4: We finished 2022 with strong Q4 results. We continue to monitor the dynamic market conditions while remaining agile and prepare for any challenges that may come.
Speaker 4: To our employees, I want to thank you again for an excellent finish to the year. We delivered strong results by demonstrating our commitment to meet our financial targets and executing our economic growth engine through the strong use of IRX.
Speaker 4: Thank you for your hard work, residency, and focused actions.
Speaker 4: These results show the impact you have as owners of the company.
Speaker 4: Our balance sheet is strong and with our discipline and comprehensive capital allocation policy and strategy, we remain resilient and have the capacity to deploy capital to investments with the highest return as we continue our track record of market performance.
Speaker 4: With that, I will turn the call back to the operator and open for Q&A.
Speaker 7: Thank you.
Speaker 2: We will now begin the question and answer session.
Speaker 2: If you would like to ask a question at this time please press star followed by the number one on your telephone keypad.
Speaker 2: If you change your mind at any time please press star 2.
Speaker 2: You have our first question from the line of Mike Hallen's event.
Speaker 2: Your line is now open.
Speaker 8: Hey, good morning, everyone.
Speaker 4: More on my screen. Could we go through the first half, second half cadence and be talking about, you know, obviously, effects get a little more favorable in the back half of the year, but the growth rate is slowing. You know, how much of that's organic versus...
Speaker 4: You know just phasing of acquisitions, and then is it just price is an assumption on the macro environment and being a little bit worse just kind of any puts and takes and how you think about the seasonal factors 1-H vs 2-H.
Speaker 4: Yeah, hey, Mike. I'll say that, you know, facing comparable to what we have seen historically. Clearly, the idea to watch is that as expected, you know, comes become more meaningful as we go into the back half of the year. And, you know, we don't have anything to assume in our guidance or the facing related to supply change returning to normalization or significant.
Speaker 4: We expect that we go through the year to see continuous strength on what we call the loan cycle orders, which are driven by a lot of these mega trends that we've spoken about before in the past, around sustainability, on-shoring and things like that. So net net, that leads us to believe that we just don't see significant changes in our backlog as we move through 2023.
Speaker 3: So you're essentially assuming a pretty normal sequential cadence and not much change in the macro backdrop if I interpret that correctly, Vicente?
Speaker 4: That's correct. Yes, that's correct. And basically, as you can see, a bit of a prudency here in the second.
Speaker 3: Yep, no, that helps. And then on the M&A side, obviously the backdrop's changed a little bit. Not for you all. You guys seem to still see very high levels of success here. Maybe you could just talk about what the buyer's mentality is. Obviously you've got a lot of deals you're working on. The ROIs are high.
Speaker 3: Have you seen a greater willingness by buyers to move forward and consummate some of these transactions? Has there been any change in that landscape at all?
Speaker 4: Yeah, Mike, I will say that the simple answer is yes in the sense that...
Speaker 4: Keep in mind, yes, we're seeing much stronger momentum as we talk to a lot of the sellers out there. But it has to do primarily because keep in mind that 90 plus percent of our deals and transactions are so slow.
Speaker 4: So we have really long-standing cultivating relationships with the companies that we're looking for to be attracted to English for Rent. And the relationship goes along the lines of understanding that, hey, there used to be all these changes that happen every year. You know how many ownership is realizing that we are.
Speaker 4: a great place for them to continue to kind of give the legacy and treat employees in a very unique way the way we do. And that is driving that continued momentum of being able to open the door and have a much better conversation with a lot of these companies that we want to bring to a new trend. So again, I think that.
Speaker 4: for gives us the confidence that our M&A final continues to be very strong and the fact that you see that we still have 11 transactions on their LLI and the momentum continues to get accelerated. So yeah, we're very pleased with what we're seeing here.
Speaker 9: Thanks, Inte. I appreciate it.
Speaker 10: it.
Speaker 2: Thank you. We now have Gillian Mitchell from Bobcliffe. Your learn is open.
Speaker 11: Hi, good morning. Maybe just the first question I wanted to start with, good morning, just to start with the top line outlook and just to understand it. So it sounds like you think that that backlog stays at about $2 billion, you know, through the year, a book to bill around one.
Speaker 11: for the years as a whole. And then, you know, within the second half organic sales guide, you're assuming sort of volumes are down slightly, but that's solely a function of comp. It's not related to destocking or any particular region, softening or anything like that.
Speaker 4: We do this as a prudency right now at this stage.
Speaker 4: And as you know, we'll continue to update as the year goes kind of not too dissimilar to what we did here in 2022.
Speaker 11: That's helpful. And then just on the thinking about the sort of the earnings, you know, seasonality, because I know in 2022, you know, we spent the whole year, you know, people fretting about the sort of Q3, Q4 ramp in EBITDA.
Speaker 11: margins and the implied incrementals in the back half and all the rest of it. So just to understand for 2023,
Speaker 11: Are you assuming kind of first half second half EPS split is the consensus? You know split roughly okay at sort of 45 55 and then anything you're kind of calling out year on year moving around much in the back half
Speaker 12: Yeah, Julian, this is Vic. I'll take that. I think the answer is that that's correct. I think the phasing of whether you want to talk about top line or on the earnings side of the equation is very consistent with what you've seen historically. I think the margin implication from an Adjust-Eva-Duff perspective is...
Speaker 12: roughly speaking close to 100 basis points on a total year basis for total company, which remains relatively consistent and right in line with what we messaged at our last investor day. So again, nothing dramatically different there, but yes, the saving is very much consistent with what you've seen in your past.
Speaker 6: That's great. Thank you.
Speaker 6: Thank you. Thank you.
Speaker 2: Thank you. We now have Jeff Sprague, vertical research partners. Please go ahead when you're ready.
Speaker 12: Thank you. Good morning. Hey, just on the price got, hey, good morning. Thanks for the question. Just want to be clear, I think you said 70% of the organic growth guide was priced, just confirming that, but the question is, would that just be a carry over price or are there other actions in flight for...
Speaker 4: And the way to think about it is that on the price, a good portion of that is carryover. We're still doing another regular price increase, but that one is more normalized as what we have done in the past, let's call it maybe 1% to 2% incremental new price.
Speaker 4: that gets realized throughout the year. So that gives you the perspective in terms of what we're seeing on price. And from a price cost perspective, yes, we expect that we're gonna be price cost positive in the quarter through the other year.
Speaker 4: And with that we have a solution that the cost side basically says at this level. So we are now solving its major
Speaker 12: And then just maybe totally shifting gears, just thinking about some of the initiatives and the, and particularly ION-OT enabled initiative. To what extent? Onto.
Speaker 12: Are customers paying additional for that capacity? And to what extent, given the product actually has that capability, is it driving higher or kind of more profitable service or other revenue streams?
Speaker 4: Yeah, great question there, Jeff. So the pain additional comes in from a viewing reference to the OPM, which is with the added services that we're offering. So when we are having a remotely connected device, we're going to be able to provide
Speaker 4: We are able to have better service agreements with our customers and therefore that generates a higher recurrent revenue that streams that we see. So that's the whole purpose of why we want to have our IIoT ready and enabled machines is because we want to generate new revenue streams.
Speaker 4: that are more recurrent in nature, on top of obviously selling the device. So I think that's what we're seeing and in terms of customers willing to pay for it, I'll say yes, I mean because today there's a lot of lack of skilled labor out there.
Speaker 4: And customers are kind of more dependent on companies and OEMs like us to be able to demonstrate the added benefits that we can have. So yeah, I think it's just one of those that we see it as an increased way to add services, increased way of adding energy efficiency, and a net net, it's a very quick return for the customer. and as far as we can see kind of approach and I'll be going further if that's happy with it.
Speaker 10: Great. Thank you.
Speaker 10: Great. Thank you.
Speaker 2: Thank you, Jeff. Your next question comes from the line of Rob Wozniak of Minnius Research. Please go ahead when you're ready.
Speaker 1: Thank you.
Speaker 12: Thank you. Good morning everybody.
Speaker 3: So I just wanted to go back to the revenue outlook for a minute where you have backlogs up I think 30 and organic growth, you know, 70% covered by price up three to five. And so I think you mentioned earlier, Vicente, that you're not assuming a whole lot of supply chain improvement in cost.
Speaker 12: Is the revenue still constrained by supply chain? If that loosens up, is there upside there? How do we sort of flip the backlog and the orders in the revenue outlook?
Speaker 4: Well, I mean some are constrained by supply chain but also keep in mind as well labor. So I think as we continue to throughout the year and we continue to see better productivity but it's really much more so on the prudency and why we say that you know back level say at the current level as we continue to see.
Speaker 4: more towards our normal facing than we typically have. So yeah, so I'm so much obliged to constraint, but the majority I'll say more of labor constraints will be able to bring more people to factories and be able to do what you want.
Speaker 12: Okay, perfect. And then I apologize for missing the prepared remarks, but ICS North America orders were kind of the only weak spot. Any additional color there? I don't know if you're seeing broad-based strength in small projects and large or, you know, in order to hit the ground, if things are fading away. Thank you.
Speaker 4: Yeah, no thanks. That's a great question Robin. We're seeing actually a very good momentum acceleration of what we call the long cycle orders which are basically driving strong CAPEX cycles that we see and as we get into more projects related to the growth of like secular trends. So for example
Speaker 4: we actually saw acceleration organically going into the second half, from compared to the first half. And that is because, you know, it's important to note that also I see as America has missed third quarter, we have one of the biggest quarters that we can recollect for where booked the bill was close to 1.2 by 23.
Speaker 4: So again, I think we viewed more from the first half going into the second half. And what we saw was really older acceleration in the IPAs of America, which kind of gives us good confidence on continued kind of fundamental solid strength demand. And as we said also in the remarks, as we go into here into the 2023.
Speaker 4: We're seeing continued positive organic order momentum pretty much across all the regions.
Speaker 4: including the United States of America.
Speaker 10: Great, thank you.
Speaker 2: Thank you. We now have Nigel Coe of Wolf Research. Your line is open, Nigel.
Speaker 11: Thanks, good morning everyone. So it seems like, you know, you're talking about this hydrogen order in the prior year, an order in North America slipping into 2023. So it seems like we've got larger lumpier orders coming through, which, you know, given these mega project decar, reshoring type projects.
Speaker 11: We should expect, mean, you agree with that, disagree with that, that we will have lumpier orders scrunchly from here. And my real question is, you know, as we get larger orders.
Speaker 11: Do we have comparable margins on these larger orders versus run rates?
Speaker 4: So to answer the question, absolutely yes. We think that we see a lot of these kind of mega projects that are getting a lot of the CAPEX released. And yes, I can tell that historically we have always said that these projects come in with pretty good margin too as well. And obviously being large enough to as well create good flow through as they kind of go through the P&L. OK Yea, OK Mahal.
Speaker 11: Okay, yeah nothing wrong with lumpy as long as they can do their revenue. And then I want to go on service revenue, but I think you said 17% XFX. So that implies, I don't know, low-mid-teens organic service growth, which is pretty good. So, yeah...
Speaker 11: Just wondering, to come back to Jeff's question, to what extent is the service growth being driven by some kind of deferred catch up or are we seeing this IoT enabled device to start contributing to revenue growth? Anything for that would be helpful.
Speaker 4: Yes, it is. I will say it's more of the of the latter. So, regards as you remember during our investors, they we spoke about our care packages and service agreements that we develop as they get related to their eye IOT related services. And we definitely seem very good acceleration. So, thank you very much for your cooperation with us.
Speaker 4: such as not being able – customers not able to find the skilled labor that is needed in the factory to be able to service, repair and maintain compressors or other devices where we can provide that. And in addition to that we can provide an energy efficiency – I don't say guarantee but energy efficiency reduction that a customer can have and basically see.
Speaker 4: in addition to other benefits. So it is actually good news for us to see that good solid momentum and work that the teams are doing very well.
Speaker 6: Great, I'll leave it at that. Thanks for the questions.
Speaker 6: questions. Thank you.
Speaker 2: Thank you. The next question comes from David Rasso of Evercore ISI.
Speaker 12: Hi, thank you. I just wanted to pick up on the order so far in 23 commentary, even excluding the hydrogen comp.
Speaker 12: PFT orders were up 0.2, basically flattish year over year, while the IT obviously was up 3.6. Are you saying the order growth has accelerated so far in 23, just to be clear?
Speaker 4: Well, David, yes, we are saying that the order momentum is actually positive across the two sections. So yes, if you think about it from a percentage perspective, that is correct.
Speaker 12: And the type of projects that you're getting, just to understand what's the pricing in these new orders versus what's in the backlog already, just to get some sense of, assuming costs don't reaccelerate. What is the pricing dynamic in the new order book?
Speaker 12: Yeah, David, I would say to the sentence, you know, to remarks that, you know, orders in first quarter, quarter to date across both segments are trending positive on an organic basis.
Speaker 12: And within that, I would say the pricing dynamic, given the carry-over pricing dynamic that Vicente mentioned, which as you would expect is more obviously evident in the first half of the year compared to what we're speaking. I'd say it's comparable to what you have seen in the 2022. So nothing has dramatically changed in that respect. And I think the question I would ask before.
Speaker 12: The margin profile is healthy on those projects and the pricing levels on those projects are commensurate or comparable to what you see in some of the more standard book shift type business. So we've been seeing comparable margin performance and comparable pricing across both the shorter cycle and longer cycle components of our business.
Speaker 10: All right, appreciate it. Thank you.
Speaker 2: Thank you. We now have Steve.
Speaker 2: Please go ahead when you're ready.
Speaker 13: Thanks. Good morning, guys. I wanted to go back to the supply chain. I was interested in your comments that you didn't project anything really improving through the year, but can you just give us the sort of current conditions? Because it seems like we're hearing sort of broadly that things are improving, so I just wanted to kind of square those up.
Speaker 4: Yeah, I mean so it is definitely proven as compared to last year. What we're saying is that there's still some bottlenecks and issues that pop up here and there. So I guess what we're saying is that it is not perfect, it is not back to normal conditions and that what we foresee here as we go into 2023.
Speaker 4: back to normal from a supply chain perspective as we go into the second half based on a lot of these other kind of trends or indicators that we're seeing that are happening.
Speaker 13: Okay, great. Thanks. And then, just like anything – I think you mentioned 100 basis points of EBITDA margin through the year. Anything to think about relative to the two segments or one versus the other?
Speaker 12: Yeah, that's a good question. So yeah, approximately 100 base points enterprise-wise. You're going to see both segments trend right around there. I do think the PST probably is a little bit more outside than ITS, probably not overly surprising because you had a little bit of the inverse happening in 2022. So I think a lot of this now, quite frankly, as we've now got CPECs.
Speaker 12: which was probably the largest headwind on EBSOM margins through the better part of 2022. Now that's coming closer to fleet average with frankly still room to run, I think you're going to see a little bit more outpace on the PST side comparatively speaking. Total business should be trending close to the 100 base.
Speaker 10: Great. Thank you, guys.
Speaker 10: Great, thank you guys.
Speaker 2: Thank you. We now have Josh Borlanski from Morgan Stanley . Your line is now open, Josh.
Speaker 14: Hi, good morning guys.
Speaker 12: I'm going to dig into the complexion of what you're seeing on the compressor side, or even maybe more broadly across IC&S. You talked about some of the big drivers of Centay around things like Nearshoring, kind of both broader tap-ex cycle. I mean...
Speaker 12: We just haven't seen one of those in so long. I'm just wondering, like, are you seeing, you know, larger pieces of equipment, a lot more of what looks like capacity versus replacement? I know some of that detail, it can go missing in the numbers. But as you talk to customers, like, are they adding roofline? Are they adding capacity? Or is this...
Speaker 13: It's sort of an extended replacement cycle that, you know, has kind of been caused by all this, you know, post-COVID interruption.
Speaker 4: I'll say that we're seeing a little bit of a good blend of both in terms of new rooftops as well as expanding capacity. And just to put it in perspective, I mean it's not dissimilar to what we at Ingersoll Run were doing ourselves. So as you remember last year we reopened our portfolio facility so that was considered that as an expansion of capacity.
Speaker 4: And our customers are doing the same. And we're very close to the customers because we believe to be in region for region is the most strategic factor and uniqueness that we have as a company. And this goes back so goes back all the way from our grander Denver days that we were doing that so. So we've seen a lot of good momentum of that in region for region.
Speaker 4: continuation because of ensuring not only the U.S. but we're seeing it in India, we see it in China, we see it in Europe . And I think our ability to flex our products and our localization to that is driving that pretty good momentum I would say. And from a technology perspective to your question, we're seeing solid momentum and we said that on the very marks on.
Speaker 12: follow up on hydrogen specifically. I think there's a lot of stuff out there that's in discussion, maybe projects that are not quite ready to go FID because it's rollback in clarity in the IRA that hasn't been established yet. But just wondering how you guys are thinking about the timing of when you could see another order wave there.
Speaker 12: and anything you're watching specifically that could help us track alongside that.
Speaker 4: Sure, maybe I'll see it in two buckets. One is on the PST side where we make dispensing units. We're seeing better momentum and acceleration than we see here in Europe where more countries are leveraging for our
Speaker 4: hydrogen and so we expect to maybe see better momentum as we go here in 2023 in Europe . The early cycles of that PSC hydrogen really happened more so in Asia Pacific and we always said that that was kind of the core start and then it was going to move to Europe and eventually get to the US.
Speaker 4: about. On the IPS, you know, it's not too dissimilar but I will say that the large capital investments that have been talked about in terms of hydrogen, we're not seeing that kind of come to fruition yet within the compressor side or the IPS side.
Speaker 4: We still think there is more room to come on that. As you said, whether IRA or some of the other funds that are in Europe , hopefully that gets some of the projects getting released. We expect for a couple of years to come.
Speaker 6: Grenade bags will cover all liter
Speaker 6: Excellent. Thank you for having me.
Speaker 7: Thank you.
Speaker 2: You now have Joe O'Dea of Wells Fargo. You may proceed.
Speaker 3: Hi, thanks for taking my questions. I wanted to start on the backlog and I think you said a little over $2 billion of backlog, but it sounds like the view would be that that's more a normalized level, would be trending I guess a little bit over 30% of 2023 revenue.
Speaker 12: I'm guessing historically back all it hasn't been quite a strong relative to revenue. Could you just talk about what you're seeing structurally within that, the confidence that we should be thinking about that as a normalized backlog level?
Speaker 4: Yeah, Joe. I will say that I've normalized maybe right now here in 2023 as we go into 24 and longer than that. We'll see. I mean, we have to think that things will get back to the way that we're before. Are you in terms of why we should continue to see back look at the higher level is again because about all of these kind of long cycle capex releases that we're seeing that that should continue to.
Speaker 4: Our expectation is that we are not going to deplete the backlog based on what we see coming through for the rest of the year.
Speaker 3: Okay, and then just a clarification on the 200 to 300 million of annualized inorganic revenue to be acquired. Of that, how much is included in the 2023 M&A revenue contribution and does that amount include sort of all 11 of the LOIs that you currently have?
Yeah, Jeff, let me take it in two pieces. So the guidance, if you go to the guidance slide, it's $270 million of M&A is included in the guide. That $270 is for completed and or closed acquisitions to date. So effectively everything you've seen through 2022 that has any degree of carryover impact.
as well as two bigger contributions being the XK-X-Flow air treatment business, which closed right at the beginning of the year, and then the Paragon tank truck acquisition, comparatively smaller, but closed at the beginning of this month. That is all included. That's what comprises the $270 million. In terms of forward expectations, we do not include any non-
as those transactions close, we'll obviously start including them in subsequent guidance. So again, yes, non-completed or non-closed M&A would be additive to the current guidance for 2023. So, again, non-closed M&A would be additive to the current guidance for 2023.
Okay, and then but are those 11 included in the 200 to 300 that you're talking about acquiring over the course of 2023? That is correct, yes. So I think our reaffirmation of the capital allocation strategy includes that we expect to close.
another 200 to 300 million on an annualized basis. And obviously that's just contingent of the timing in terms of what left the impact 2023, but that is correct.
Got it. That's helpful. Thanks a lot.
Got it, that's helpful. Thanks a lot. Yep.
We now have Mason Jones of D4.
We now have Mason Jones as default. Your line is now open.
Good morning. This is Adam Farley on for Nathan.
So you performed very well in China in 2022 despite COVID headwinds. Did you provide some color on how you outperformed?
Maybe what you expect in 2023 in China, specifically with reopening? Yeah, so I'll just say, you know, a big thank you to our team in China and in Asia Pacific, whom I was actually just having a celebratory call.
last night with them and kind of kicking off into high gear a lot of our initiative in 2023. But you know I think our team continues to be pretty agile and nimble as to finding the growth vectors that are being seen in China and then taking our products and reposition them and leveraging our demand generation.
to accelerate the penetration of those technologies into those very unique end markets. So I think it's all about ensuring that our teams are very nimble and very agile and that's exactly what they're doing. I mean they're finding these very good growth vectors and those can be around battery production, photovoltaic production as well for – —
solar panels or even electric vehicle production. And then they leverage the technology and the demand generation to be able to acquire just incremental market share.
Okay, and then on the recent close of the SBA Explorer Head Treatment business, could you provide any color on revenue or cost energy opportunity, given that it's still early days of integration work? Ok, great, pleasure.
Yeah, sure. I might, so to repeat, we did close the SxFlow transaction on January 3rd, so the beginning of this year. Using rough numbers, you can kind of expect something right around $180 million of revenue contributions, so slightly less than $200 million. And very much in line with a lot of the M&A you've seen us do historically.
So again, we're like 45 days in. I would do the integration process. As you would expect using IRX and the whole IDM process to kind of guide the integration. It's going as well as to be expected and things are very much tracking in line with X. I hope with enough defending started and as you would expect.
That's the single biggest contributor of the $270 million of M&A that's included within our guidance. Okay, thank you for taking my questions. Thank you. Thank you. We now have Chris Schneider of UBS. Please go ahead for your request.
Thank you. I want to follow up on some of the order trends. So the book to bill is going from a 0.91 in Q4 to an expected 1.0 in 2023. Should we expect an immediate jump back up to that 1.0 level in Q1, or will it take a couple quarters to play out and then
What type of visibility do you have into orders as we go beyond Q1, maybe into the back end, 23? Thank you.
Yeah sure Chris so I guess I'll start by saying I think the way you described it is relatively you know accurate yes we did see a little over 0.9 in Q4. You know worth noting here it's quite normal in the business to see book to bill less than one in the second half of the year and particularly in Q4 and that's largely attributable to
shipping the larger, longer cycle orders during the second half. And you see that primarily in the ITS business. So that's exactly what we saw in Q4, as well as obviously the strong revenue performance. So that drives the book to build to being less than one. But to the sent-based point and some of the commentary.
We are seeing the order of momentum continuing here in the first quarter. Quarter today through the first week in February . Organic orders performance is up and it's worth noting that's different despite the headwind of the Chinese New Year timing which is in January this year versus February in last year. Again, continue to be encouraged by the trending.
And then on the implied margin guidance, so my math kind of pegged EBITDA margins up 70, maybe up to 80 bits year on year at the midpoint. So obviously a bit below the run rate that we've seen, and below the kind of the multiyear target that the company's laid out at 100 basis points, but it sounds like price costs will continue to be kind of in your favor.
So can you just maybe talk about some of the moving parts there on the margin side as we build up to the guide? Thank you. Sure. I'll take that one, Chris. So yes, 80 to 90 basis points, slightly right below 100 basis points. That's probably right in line. I think a few things to note. When we gave our investor day targets, we said to expect about 100 basis points on…
synergies, the last phase of the merger-led strategies to offset any degree of merit and labor inflation, which obviously we are seeing and speaking to the Sente's point earlier. But I think the other thing here is that we are continuing to reinvest for growth and to try ongoing organic growth, which is very much part of our investment targets. So you are seeing requisite growth in the U.S. economy.
investments in appropriate commercial resources and growth resources in the business, as well as some of the investments we call that specifically, even at the corporate level around the Manageration IoT. So again, we'll continue to be very prudent. We continue to expect margin expansion year over year as we go through the year, and sequentially the margins continue to sequentially increase.
quarter to quarter as we move from Q1 to Q4, much like you saw in 2022. I appreciate all that. Thanks for taking the questions.
Thank you. I would now like to turn it back to the CEO , Lucente, for some final remarks. Thank you so much. As I kind of wrap up the call today, I just want to say that our teams have done an outstanding job executing our plan throughout 2022 despite the ongoing micro-challenges. And that's because they think and act like owners because they're the oldest of the company.
I think it's a run and we have clearly demonstrated that there's a lot of resiliency here in our business as we continue to invest organically and Inorganically and continue to focus ourselves into sustainability innovative progress and solutions
And that we believe is truly positioning in the Saranathic level, neither. So thank you for the time and attention today. Thank you.
Thank you all for joining. Let's conclude today's call.
Please have a lovely day and you may now disconnect your line.