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spk15: Hello all and a warm welcome to the Ingersoll Rand 2021 fourth quarter and full year earnings call. My name is Lydia and I'll be your operator today. If you'd like to ask a question at the end of the presentation, you may do so by pressing star followed by one on your telephone keypad. It's my pleasure to now hand you over to our host, Chris Myron, Vice President of Investor Relations at Ingersoll Rand. Please go ahead when you're ready.
spk07: Thank you, and welcome to the Ingersoll Rand 2021 Fourth Quarter and Full Year Earnings Call. I'm Chris Myron, Vice President of Investor Relations, and joining me this morning are Vicente Reynal, Chairman and CEO, and Vic Kinney, Chief Financial Officer. We issued our earnings release and presentation yesterday, and we will reference these during the call. Both are available on the Investor Relations section of our website, www.irco.com. In addition, a replay of this conference call will be available later today. Before we start, I want to remind everyone that certain statements on this call are forward-looking in nature and are 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 two 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 to the most comparable measure calculated and presented in accordance with GAAP in our slide presentation and in our earnings release, both of which are available on the investor relations section of our website. On today's call, we will provide a strategy update, review our company and segment financial highlights, and announce 2022 guidance. For today's Q&A session, We ask that each caller keep to one question and one follow-up to allow time for other participants. At this time, I'll turn the call over to Vicente.
spk18: Thank you, Chris, and good morning to everyone. Starting on slide three, 2021 was a pivotal year for Ingersoll Run with many accomplishments and new records. We solidified our compounding growth story as we reshaped our portfolio to focus on mission-critical flow creation technologies and high-growth, sustainable end markets, while establishing a new capital allocation strategy designed to enable us to consistently compound earnings over time. We continued a strong operational execution where the commercial effectiveness of our team, driven by our IRX process, yielded a backlog at the end of the fourth quarter that was our largest ever and positions us very well for continuous strong results in 2022. as demand for our products and services continues to grow. Moving to slide four, I want to take a moment to recognize some of the accomplishments across each of our five strategic imperatives in 2021. In deployed talent, our employees think and act like owners because they are. Shares granted to employees today have appreciated from $250 million to over $500 million in value. motivating our engaged employee base to make decisions each day that can benefit our value creation and ultimately their personal wealth. Furthermore, we implemented a plan to also grant shares to employees who join us as new employees or via acquisitions. Yet another factor enabling Ingersoll Rand to be considered an employer and acquirer of choice. Our employee engagement score, up 17% over the last three years, also shows the power of ownership. Our current engagement score now ranks in the top quartile of manufacturing organizations. In expand margins, we have improved the company's adjusted EBITDA margin 370 basis points since 2019, including an improvement of 160 basis points in 2021 alone. We have realized $250 million in synergies out of the $300 million commitment from the IR merger, with an additional $50 million expected in 2022. It operates sustainably. 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 IRX to drive performance across a multitude of initiatives. In accelerated 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 marketing qualified leads compared to 2018. IIoT enabled assets were up 250% year over year and new product innovation increased 95% in 2021. In annual capital effectively, we secured approximately $2 billion in gross proceeds from the divestitures of clock car and high-pressure solutions, and redeployed over $1 billion to acquisitions in 2021, which represents over 6% of sales when annualized. We also repurchased $731 million in shares as part of the KKR's finally equity sale, established a new $750 million share repurchase program, and initiated a quarterly dividend of $0.02 per share during the fourth quarter. We're incredibly proud of our 2021 accomplishments and could not have done it without the dedication of our team. Turning to slide five, we're 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. And as you can see, we outperformed 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% in-year growth from M&A and 6% annualized. Our strong pricing, aftermarket, and ITV initiatives enable us to generate operating leverage and incremental productivity. with an expected 100 basis points of margin improvement per year over the period. And in 2021, we overdeliver on this target, capturing 160 basis points of margin expansion despite several challenges like supply chain constraints and inflationary pressures. With IRX as our competitive differentiator and over 275 impact daily management or IDN meetings across our company each week, our high-performance culture encourages strong execution. This continues to support our goal of being a premier high-quality company that consistently compounds earnings by double digits each year with free cash flow margins in the high teens. And we feel that we're well on our way as 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 since 2019. Looking at the company, margins improved 370 basis points from 2019 despite COVID impact and persistent supply chain and inflationary pressures. In the IPS segment, we improved an impressive 470 basis points since 2019 as we continue to accelerate synergy capture and execute on value creation opportunities from the IR merger. Incremental operating leverage and productivity should enable ITS to achieve margins in the high 20s over time. In the PST segment, margins have expanded 170 basis points since 2019 and 290 basis points excluding M&A. Continued strong flow through in the base PST business coupled with diligent synergy execution as we onboard acquisitions should yield adjusted EBITDA margins in the mid-30s over time. It is important to note that as we highlight on the last bullet point, due to the nature of our products, we're mission critical with premium brands and high quality and reliability, and we have the ability to remain price cost positive. We have accomplished this in each quarter since the merger, even during these inflationary times, and expect to do the same in 2022. Moving to slide seven, we're 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'm really excited to announce that S&P Global, in its annual sustainability assessment that was just released a few weeks ago, scored Incasol RAN in the top 15% and included us in its sustainability yearbook for 2022. In addition, S&P Global recognized us with the Industry Mover Award, which is given to the most improved company in each sector of the year. These recognitions exemplify our unwavering commitment to ESG. In March of 2021, we committed to becoming a top quartile ESG industrial company in three years. And we believe we have achieved or are at the cost of achieving that goal in one year. And S&P Global agrees, as it elected us to its sustainability yearbook, which recognizes the top 15% ESG performing companies in each industry sector. Despite this progress, we're just getting started. on our ESG journey, and we're very focused on accelerating progress towards our ESG goals. I'm incredibly proud of our team for being recognized by the rating agencies already this early in our journey. I will now turn the presentation over to Vic to provide an update on our Q4 financial performance.
spk06: Thanks, Asante. Moving to slide eight, we continue to be encouraged by the performance of the company in Q4. which saw a strong balance of commercial and operational execution fueled by IRX to overcome persistent inflationary pressures in a challenging supply chain environment. Through Q4 2021, we have realized $215 million in cost energies 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, a 15% year-over-year improvement, and 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 at $3.2 billion at quarter end was up approximately $400 million from prior year. This takes our net leverage to 1.1 times, an 0.9 time improvement from prior year. Turning to slide 9, for the total company, Q4 orders grew 25% and revenue increased 18%. both on an FX adjusted basis. Overall, we post a strong book-to-bill of 1.06 for the quarter. 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. ITS 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 costs came in at $26 million for the quarter, down year over year, primarily due to lower incentive compensation costs and general savings and prudency. We expect corporate costs to normalize back to the low 30s millions per quarter in 2022. Adjusted EPS for the quarter was up 51%, 68 cents per share. Of 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 non-recurring impacts driven most notably by our efforts to manage and minimize the cash taxes associated with the divestitures of SVT and HPS completed earlier in the year. As we look ahead to 2022, We expect the rate to be back in the low 20s 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 1.12. And total company adjusted EBITDA was up 28% from 2020. Margin expanded by 160 basis points. with ITS 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. ITS 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. And free cash flow included $4 million of synergy and stand-up 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 SVT segments. Excluding these items, adjusted free cash flow was $225 million in the quarter. Leverage for the quarter was 1.1 times, which was an 0.9 times improvement versus the prior year. And total company equity now stands at $3.2 billion based on approximately $2.1 billion of cash and over $1 billion of availability on a 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'd 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 stand-up of the new company from a combined $450 million to now $280 million, an aggregate reduction of roughly 40% or $170 million from our original estimates. This speaks to how we are always heavily focused on high returns on cash investments regardless of the situation. I am very proud of how our employee ownership culture continues to overdrive our performance. With everyone 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 $350 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 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 IRX in very difficult environments. Looking forward to 2022, we expect to remain price cost positive each quarter as we continue to leverage IRX to drive commercial execution and productivity initiatives. Given continued inflationary pressures and 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 of performance. I will now turn the call back to Vicente to discuss our segments.
spk18: Thank you, Vic. I'm 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, we're overcoming a very strong comp from Q4 2020 of 400 basis point margin expansion. 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 oil-free products growing at over 15% and oil-lubricated products growing at over 25%. The Americas team delivered strong performance, with orders in North America up mid-20s, while Latin America was up high 20s. In mainland Europe, orders were up high teens, while India and the Middle East were down low single digits. Asia Pacific continues to perform very well, with orders up approximately 20% driven by low 20% growth in China and high teens growth across the rest of Asia Pacific. In the back end and below our product line, orders were up approximately 20% on a global basis. Moving next to the power tools and listing, 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 want to highlight our recently acquired company. is a manufacturer of condensate drains, oil and water separators, and air-saving products, which are part of the compressor ecosystem. These products focus on improving overall system performance and creating energy efficiency through efficient use and recycling of fluids and air, which helps our customers achieve their environmental goals. We're very excited about this complimentary acquisition as we continue to expand our offerings with the compressor ecosystem, as well as the impact that York 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 comes due to COVID-related orders and revenue in Q4 of 2020 for the medical business. Additionally, the PSTN 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. Again, the segment was down 120 basis points, excluding the impact of acquisitions in Q4 2021, with an adjusted EBITDA margin of 29.6% ex-M&A. Overall, organic orders were up 14%. driven by the medical and dosatron businesses, which were up strong double digits in the quarter, and as they served lab, life sciences, water, and animal health end markets. Incremental margins were 17%, as reported, and 21% when excluding the impact of M&A. Looking at the sustainable innovation in action portion of the slide, we're highlighting our recent Tooth Hill Pump acquisition. Tooth Hill Pumps manufactures gear and piston pumps for sustainable end markets, such as medical and lab, food and beverage, water and wastewater. Tooth Hill's D-Series magnetically coupled pumps are used in lab applications such as hematology analysis, as well as other chemistry analyzers. The business is complementary to our existing portfolio, and we are well underway with integration of this business. Moving to slide 15, we're 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% and 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 ITS and 8% to 10% growth in PST. FX is expected to contribute a headwind of approximately 1% with 1% to 2% coming in the first half of 2022 and 0% to 1% in the second half. M&A announced and close to date is expected to contribute an incremental $225 million in revenue. This outlook reflects normal seasonality in the business, which is typically lightest 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 $1.375 to $1.415 billion, including corporate costs 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 100%. We anticipate our adjusted tax rate to normalize in the low 20s 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 ITS growing high single digits organically and PST growing low double digits. We also expect flat to slightly positive margin expansion due to the tough year-over-year comparison, 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, I 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 while serving as an industry-leading sustainable company. IRX is truly our backbone and drives every process in our company. Enabling our performance and ensuring our global team is speaking one language, focused on capturing growth opportunities, driving innovation and efficiencies, and acting 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 of performance. With that, I'll turn the call back to the operator and open for Q&A.
spk15: Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad now. To withdraw your question, it's star followed by two. Our first question today comes from Mike Halloran of Baird. Your line is open. Please go ahead.
spk05: Hey, good morning, everyone. Good morning, Mike. Good morning. 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 I'd just like to know the moving pieces there.
spk18: Yeah, I think, Mike, this kind of speaks to our meticulous approach to always look at that return on investment of the money that we use for every project And as Vic mentioned on the remarks, I mean, it also speaks to the power of this ownership mindset that we have that everyone really cares about how we spend the money. So we've been able to be very efficient and very effective on the use of the cash, of this kind of one-time cash for creating the synergies.
spk05: The backlog numbers are obviously really robust. Maybe talk to a couple things. One, how do you look at the sustainability of the underlying demand And second, what the guidance assumes as far as backlog saving. 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?
spk18: Yeah, Mike, in terms of sustainability, I would say that, you know, what we are seeing is that clearly the short cycle continues to be very broad-based, very strong. And, you know, what we eventually will see some top 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. I think we're very kind of excited and pleased with how we've been able to do that in the past, and we expect to continue to do that. I will say, in addition, 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 megatrends that we spoke about in the investor's aid. So, for example, we're seeing capacity expansion due to realigning supply chain, but also the quality of life around pharma or new discovery, drug discovery. We're seeing also CapEx projects related to sustainability, where new technology, of compressors driving higher level of efficiency is kind of widely used by now a lot of 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.
spk05: Great. Really appreciate the time. Thanks, Mike.
spk15: Thank you. Our next question today comes from Josh Poswinski of Morgan Stanley. Josh, your line is open.
spk10: Hey, good morning, guys. Can you hear me? Yeah. Good morning, Josh. Good morning. No, we don't hear you, Josh. Good morning.
spk14: Hi, Josh. Your line is open.
spk10: Hey, guys. Can you hear me? We can hear you now.
spk06: Yeah, we can hear you, Josh.
spk02: Great. Yeah, sorry about that. So maybe just to follow up on Mike's question on some of the backlog phasing, maybe put it in 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, you know, some of those businesses that would be kind of normal seasonally. Like, how do you think about, you know, kind of the sustainability of these like 1.05, you know, ish type book to bill numbers as we go through the year?
spk06: Yeah, Josh, this is Beck. Maybe I'll start and let Vicente add in as well. You know, I think in terms of the absolute order patterns, we're really pleased with the momentum we've continued to see. You know, 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 some of the larger project-type businesses, typically which sell through a lot more into the back half of the year. So obviously being able to sustain above one book-to-bill in the fourth quarter obviously just speaks to clearly the underlying continued strength in the overall demand environment. I think as we kind of turn the calendar here to 2022, I don't think we would expect to see the seasonality, you know, dramatically change. Obviously, we would expect to see book to bill, you know, continue to be healthy. You know, again, above one is the 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 out to the latter half of the year, to probably return back to a typical, you know, more typical seasonality of book to bill being at or, you know, slightly below one in the back half of the year.
spk02: Got it. That's helpful. And then how should we think about price in the guide? Presumably, you know, healthy pricing environment, and you guys are carrying, you know, probably a decent amount of that in backlog in the year as well.
spk18: Yeah, no, that's right, Josh. 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 in from price. And when you think about the phasing, maybe slightly less than that half in the first half of the year. and continue to increase as we continue to take actions in the second half.
spk10: Great. Appreciate the detail. That's all, guys. Thank you. Thanks.
spk15: Our next question today comes from Jeff Sprague of Vertical Research Partners. Please go ahead, Jeff. Your line is open.
spk03: Thank you. Good morning, everyone. Hi, Jeff. Just maybe coming back to price cost, the incremental guide you're laying out here is just 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 give us some context on that. you know, 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.
spk06: Yeah, Jeff, this is Zach. Maybe I'll start and, again, let Vicente add. So, you know, just to reiterate what Vicente said, you know, obviously from our 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, you know, a little lower than that in Q1, and then obviously improving as we move to the quarter. It's just based on, quite frankly, some of 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, you're absolutely right. On a dollar basis, just like we saw in 2021, we expect to be price cost positive from a dollar perspective today. each quarter of 2022. And just as a reminder, in 2021, again, we were price cost positive each quarter, obviously much more so in the first half of the year, and then obviously a tighter spread in Q4 of 2021. I think 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, you know, the actual inflation kind of equation or the way to think about inflation, you know, I think the easiest way to say it is that on supply chain and material inflation, we expect kind of the first half to be very consistent, you know, with what we saw coming out of the back half of 2021. Maybe some slight improvements in second half, but, you know, we're not really in forecasting any huge improvements in the situation in 2022. It is worth noting we've started to see some slight tapering in some of the freight rates, specifically on logistics. But again, the material piece is clearly the biggest piece of the equation. And then just to address it, even though it's 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.
spk03: Great. Thanks for that color. And Vicente, maybe on M&A, comments here again today about the size of the funnel and the like. Obviously, there's been a 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 multiples that, you know, that sellers are expecting in this environment? Or is it, you know, really too early to see that? But just wondering on the kind of actionability of the pipeline and the valuation outlook at this point.
spk18: Yeah, no, Jeff, I would say that perhaps maybe it's a little bit too early to tell, although on a case, I mean, broadly, but on a case-by-case basis, we definitely see in some instances that multiples are starting to kind of maybe slightly come down or expectations as some of the kind of companies that were counting on the kind of one-time COVID revenue to continue to happen is not that materializing that aggressively as they were expecting. So we continue to be highly disciplined. And I think that's 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 work that we have done around employee engagement and the ownership mindset. I can tell you that has been very, very unique proposition 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's maybe some volatility, maybe that entices more faster process to get some M&A executed as, you know, owners want to have that better visibility or kind of get things locked in. And so we're very active on this, Jeff. And I think that's the exciting piece. And as you saw, to your point, the funnel is very strong.
spk05: Great. Thank you.
spk15: Our next question comes from Nicole DeBlase of Deutsche Bank. Please go ahead.
spk01: Yeah, thanks. Good morning, guys. Morning. 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 the full year EBITDA margin target, which would assume, I guess, progressive year-on-year improvement in margins, like M&A dilution going away, price cost. Can we just kind of walk through the puts and takes that drives the conviction around that?
spk18: Absolutely, Nicole. Let me take a stab at that. I'll say, you know, 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 said, you know, we're not expecting some big hockey stick effect in 2022 from a facing perspective. compared to historical performance or anything of that nature based on our current backlog and actions and 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 to your point, kind of give you that on a year-over-year basis. And I'll say that first, you know, as you may recall, comps are extremely challenging, I'll say, in the first half of 2021 where ITS margin expansion in Q1 of 21 was, more than 600 basis points, and then another 250 basis points in Q2 of 21. So a lot of this 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 this resulted in very strong carryover pricing into the first half of 2021 before any of the inflationary pressures were really evident and very favorable price cost spread. As 2021 progressed, and kind of what Vic 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 accelerating. And this 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 PST in the second half of 2021, And as we now start to execute on the synergy plans associated with those deals, in particularly the CPEX company, we would expect that the savings start to materialize in more so in the back half of the year. And for those reasons, we expect margins to sequentially improve each quarter of 2022, but be more favorable price-cost spread. Normal systemality and synergies from recent M&A should let themselves do more of our year-over-year margin expansion being in the back half of 2022.
spk01: Okay, got it. Thanks, Vicente. 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 the constraints as we progress through the year?
spk18: Yeah, great question, Nicole. It is very, very slight improvement. I mean, we're telling our teams, plan for the worst, and 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 of being a very kind of stable environment at these kind of levels. And if we see a benefit that inflationary markets abate pretty rapidly, then that's an improvement in our total good margin expansion.
spk01: Thank you. I'll pass it on.
spk18: Thank you.
spk15: The next question in the queue comes from Rob Wertheimer of Milius Research. Your line is open.
spk04: Thank you. Good morning. Thanks for the comments on price cost. 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's working incredibly hard on it. How far out can you sort of see stability, whether it's 1Q, 2Q, and then just maybe you could refresh us on how much pricing or how quick pricing flexibility can come if costs do pop up to the upside. Just how you manage that sort of potential volatility. Thanks.
spk18: Yeah, sure, Rob. There's definitely volatility. And to your point, I mean, it's kind of what I said. It's definitely a lot of hard work by the teams are doing to really control what we can control. And so that is the focus of our of our kind of culture is that put 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, yeah, I mean it's a bit of a kind of whack-a-mole in the sense that sometimes you see logistics, then you see steel, steel not coming back, coming down, you see ferrous materials going up, you see non-ferrous materials going down. So we got a team that is basically looking at a lot 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 question, yes, I think I'll still see a lot of volatility on a kind of commodity to commodity that kind of lends to a total average to be still that flat-ish stable as to what we saw in the second half of the year.
spk06: And then, Rob, on the second part of your question around pricing and kind of the flexibility, Yeah, I mean, I think the team has done a fantastic job on that end. I mean, we've talked about it a number of times in the context of a lot of the process improvements, the distinct, you know, pricing team that we have in place to really be agile, utilizing a lot of the IRX toolkits to be able to, you know, one, connect with our supply chain operations team to understand the impact of inflation, as Asante said, almost on a 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, you know, we've shown it and obviously we're able to react in a comparable manner here in 2022. Thank you.
spk15: The next question today comes from Nigel Coe of Wolf Research. Please go ahead. Your line is open.
spk13: Thanks. Good morning. Thanks for the question. Hi, guys. Just want to go back to kind of the margin cadence points. So LIFO charges are excluded from the adjusted EBITDA. So I think that means the inflation kind of bucket, you know, steps up from 4Q to 1Q. Implies that price also steps up materially from 4Q to 1Q. Just maybe just confirm that you do have a bit more price coming in in Q1 versus Q4. And then the comments around 1Q margins flat for the corporation, it looks like PST is going to be down again materially on the M&A dilution. So it implies that IT is going to be up. So ITS is going to be up year-over-year. Just maybe just confirm that. That's how we should think about it.
spk06: Sure. So, yes, Nigel, I'll take those in pieces here. I think with regards to the price-cost kind of thing, you know, dynamic in the pricing. You know, 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, you know, frankly, as appropriate just given the, let's call it the kind of ever-evolving environment that Vicente spoke to. In terms of, you know, the segment margin spread, you are correct, obviously. Q1 for PST will still show a margin decline year over year, largely attributable to the M&A dynamic. On the ITS side, we would expect to be, I would say ITS is probably more so in line with the total overall environment, so flattish to slightly up. And then obviously, you can also kind of look at 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.
spk13: Thanks. And my follow-up is really just going to compressor order trends. North America stands out, once again, is pretty strong. And it sounds like we might be seeing some, you know, elements of some supply chain benefits, environmental upgrades, and you mentioned IoT. So I'm just wondering if you could maybe flesh out some of that end market commentary. And perhaps, you know, on the IoT, is that a retrofit to existing equipment, or does that, you know, require a bit more of a meaningful replacement cycle?
spk18: Yeah, Nigel, in terms of the Americas, yeah, 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 fairly broad-based, I mean, general industrial, being strong, but also anything that has to do with oil-free products, such as, you know, food, pharma, semiconductor industry. So a lot of good momentum on our oil-free product line here in the U.S. And in terms of the IIoT, you're absolutely right. Yes, we can retrofit the compressors and the products that we have in the field. 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's day. But also, in many instances, the customers, when they look at the IIoT, we have our teams very well trained to talk about that if they're 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 and all technology. So I think it's an opening the door conversation topic that leads into a higher ASP selling point.
spk13: Great. Thank you very much. Thank you.
spk15: The next question comes from David Rasso of Evercore. Please go ahead.
spk12: Hi. Thank you for the time. I'm just curious, Vicente, can you give us from your years of experience thoughts around you know, what we're seeing with Russia, Ukraine, and say like nat gas prices, obviously very strong. Oil prices strong. Just trying to balance, you know, obviously some of these could be even positive demand drivers when it comes to where commodities are, but are there maybe European factories feeling the squeeze of high gas prices that maybe 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 if it lasts a while?
spk18: Sure. Very interesting question. I mean, I'll tell you that I'll say, first of all, you know, our thoughts and prayers go to the people of Ukraine and Eastern Europe. I mean, obviously, dark days indeed I can tell you that from our side, our revenue in the Ukraine and Russia, I'll say, is fairly immaterial and nominal. In terms of the overall impact, yes, I expect that gas prices will continue to rise based on what we're seeing in Europe. They're already very high. I will say that what we have seen in ourselves, in our internal factories, and potentially this kind of correlates to others as well, and we're seeing it, is that in many cases, our teams are accelerating the projects to reduce the cost of energy. So cost, energy efficiency, and when you think about compressors that are roughly 30% of the energy consumed in a factory, it is a very high speaking point to then, as people think that these high energy prices are going to be here for the long, it really accelerates 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 solar energy into our factories as well. And that is increasing the level of conversations to our customer base. So I think that mega trend around sustainability and how our products can really help our customer is a very high point of conversation.
spk12: All right, thank you for that. And quickly, when I think about the 22 guide and the margins between the segments, if you had to think of an area where, you know, let's say early in the year, you're hopefully maybe leaving a little in your back pocket for where maybe margins could surprise 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 an ITS just given strong volumes and particularly nice margin backlog that's priced well? Or is it more maybe PSP on hopefully some of the acquisitions you've made that have been diluting the margin? You can drive those margins now that they're under your control.
spk18: I'll say, David, that it will definitely be on the ITS. And you even saw it, when you think about it, Q3 to Q4, our sequential margin actually improved, even in an inflationary market that continues to rise. So I would say that, if anything, we'll continue to see very strong momentum on the ITS. Okay.
spk12: Thank you very much. I appreciate it.
spk18: Thank you.
spk15: Our next question comes from Joe Ritchie of Goldman Sachs. Your line is open.
spk08: Thanks. Good morning, everybody. Hey, Joe. Hey, Joe. Hey, so I guess maybe my first question, as the quarter progressed, I'm just curious, like, did things get worse at all from like absenteeism, labor, supply chain perspective, and maybe even in the early part of 2022? And I'm also curious, you know, obviously the backlog very good. I'm curious, were there any revenue deferrals into 2022?
spk18: Yeah, I think in terms of progression, Joe, Q4 in terms of absenteeism, not so much that we can call out that really spiked. I mean, clearly absenteeism spiked in the early part of 2022 kind of January, but we're back to normal levels now. So I'd say from a quarterly progression in the fourth quarter, absenteeism normal, in terms of inflationary fairly 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. But as we look here in the first quarter, you know, we see the better stability here now that we have passed that spike of the Omicron.
spk06: Yeah, and Joe, in the second part of your question, in terms of any revenue deferrals or anything of that nature, Would I point to anything, you know, in terms of, like, true deferrals or things of that nature from a customer-based perspective, asking for things to be moved out, nothing of any consequence there? Obviously, probably fair to say that, you know, just given some of the supply chain constraints and, you know, we would fully acknowledge, obviously, backlog being at levels they are, and even some past due backlog that obviously are intended to get out the door here in Q1, you know, clearly there were, you know, maybe a low single-digit, you know, points from an organic growth perspective that you could argue could have been a little bit better, but, but again, you know, given the supply chain environment and the constraints, you know, quite frankly, fully expected. And I think the teams did a fantastic job, uh, all in, you know, quite frankly, still hitting, you know, what we'd say our commitments in the context of, uh, of top line from a Q4 perspective.
spk08: Great. No, that's, that's, that's, that's great to hear. And then I guess my, my following question is going back to the margin, uh, particularly in PST. And I wanted to just focus on honing on CPEX for a second. So I think we have those margins coming in in like the low 20s. 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 or what gets that business back to more kind of like TST level type margins over the next, you know, 12 to 18 months.
spk06: Yeah, absolutely. So, Joe, I think the way you're thinking about it is spot on. You know, let me just to calibrate everyone here. The CPEX business, you know, roughly $200 million revenue-based business that we indicated that when we purchased it, which was in the latter half of Q3 of 2021, you know, more in the mid-teens EBITDA margin realm. But gross margin profile is extremely strong. You know, it plays, you know, in, if not better than the overall PST, you know, margin or segment profile margin from a gross margin perspective. So you're absolutely right. Obviously, there is, you know, synergy plans in place. I will tell you a lot of those actions are actually kind of, you know, 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, you know, eclipsing that 20% margin, EBITDA margin mark is completely fair. I think obviously then as we, you know, continue to integrate, you know, we've always said within a three-year timeframe, we expect that to kind of be, you know, closer to the PST segment margin profile. You know, 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 You know, quite frankly, getting from mid-teens to over 20% here, you know, 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, you know, 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 that the margin progression there does get better as 2022 progresses, just quite frankly, given that we're taking some of those synergy actions as we speak right now.
spk08: Great to hear. Thanks, guys. Thanks, Joe.
spk15: Our next question comes from Nathan Jones of Stiefel. Please go ahead.
spk16: Good morning, everyone. Good morning. I want to start off, Vicente. Good morning. Vicente, you talked about larger capital projects starting to come back into the market, which I think is encouraging as we start to see some mid to later cycle capital come back into the market. Can you give us a little more color on where you're seeing those projects, what kind of end markets, what kind of geographies you're starting to see those projects and what you think the outlook for growth in those is over the next two or three years?
spk18: Yeah, in terms of where, Nathan, we're seeing good momentum in what we call in Asia Pacific and in the Middle East. And from an end market perspective, we're seeing water and wastewater as being one that is highly active. whether projects in India or projects in China or even in Southeast Asia, we're seeing a lot of good momentum on water and wastewater. And I think the good news here, you know, I had some meetings with some large actually EPC company and C-suite to C-suite conversation. I mean, there's definitely a lot of very strong momentum. And what I like that I heard is that a lot of these kind of hydrogen conversion is here. pretty soon to come, maybe. And as you saw on our Investors Day, we spoke a lot about excitement on kind of how our products can play in that role. So that's the one piece that we haven't seen anything come yet from a kind of 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 and the energy conversion, that's yet to come.
spk16: And I want to follow up. on your response to Dave's question on the energy efficiency of compressors. I think it's an important point that pumps and compressors in some of these manufacturing facilities, the power usage, electricity usage of these things contributes pretty significantly to the operating costs of those facilities. Can you talk about what kind of the payback period is on a compressor that reduces the 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 one of these facilities, just to give people an idea of what the potential savings for customers are here.
spk18: Yeah, absolutely, Nathan. You know, based on the energy cost, where it is now, some payback projects are even a year or less in some cases. I think it depends on the country where if you go to, for example, Germany where energy costs are very high or even China too as well, the payback is actually fairly quick. And to your point, when you look at a compressor, a compressor consumes approximately on average 30% of that energy that gets consumed in the total factory. And again, it depends on the type of factory, but clearly, one of those where we're very excited about that opportunity. But it's not only the compressors. There's also the blowers. I mean, when you look at the blowers, you know, in the wastewater facility, a blower consumes 60% of the energy. And so we're talking upwards of 50% reduction from that 60% or that 30%. And to your point in terms of absolute dollar savings, It ranges based on the size of the company. But we can tell you that, you know, we received a phone call from a very large beverage company that installed some of our compressors, and basically they called us. They told us they received a call from the utility company because there were energy being reduced by more than 50%. So, again, they were surprised at thinking that the energy utility company surprised that. Potentially, they were shutting down the factory, and indeed what was happening is that the new compressors were consuming 50% less energy, therefore saving a couple hundred thousand dollars of energy cost per year. Great. Thanks, Carlos. Thanks for taking my questions. Thank you, Nathan.
spk15: The next question comes from Stephen Volkman of Jefferies. Your line is open.
spk11: Hi, guys. Most of it's been answered. But just, Vincente, I'm curious, the playbook that you have for kind of these global dislocations like what we're seeing in Russia now, you know, obviously your stock has been caught in the downdraft here. And given your balance sheet, do you focus more on sort of opportunistic repurchases in this type of environment? Or do you kind of circle the wagons a little bit and protect the balance sheets?
spk18: I'd say, Jeff, you know, good question. I mean, we don't want to kind of dramatically change our strategy. And to be honest, in this kind of dislocation of the market, this is a good opportunity to also be more aggressive on M&A. Some of the price points kind of get to the level that are actually even more appealing to the way it was before. So we see that in this type of dislocation, yeah, I mean, it's a good opportunity to be aggressive on the M&A, which continues to be our number one capital allocation priority, but obviously very prudently. But as you saw, we definitely have very good use of cash. You saw that we approved that $750 million share repurchase from the board, and that we definitely plan to utilize that.
spk10: Great. Thank you.
spk15: And our final question today comes from Joe Odea of Wells Fargo. Please go ahead.
spk09: Hi, good morning. I wanted to ask on digitization. Hi. When you think about kind of 2022 and digitization targets, can you give us any insight in terms of kind of what you're looking at in terms of kind of what would be successful for you and the progress toward the five-year framework you gave and whether that's and a penetration of fielded units, or whether that's kind of percentage of IoT-ready products, but what you're thinking about in terms of 2022 targets.
spk18: No, that's good, Joe. You know, in our goals and objectives that we deploy to our team, there's actually a very specific goal to digitization, and it relates, in this case, to the revenue that we can generate. So with the digital assets that we're connecting, and in our case, it is very specifically tied to service and how that recurrent service revenue, in this case particularly compressors, should accelerate as we continue to digitize and connect our compressors. At a lower level, we also have clearly the 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 being shipped that are already enabled that then later we move into our future revenue streams. One thing I could tell you as well, Joe, I mean, the excitement of some of these M&A that we're doing is that as we kind of go deeper into companies like CPEX, SIPX is doing a phenomenal job on IoT. I mean, phenomenal. And one that even I'm comparable to some of the kind of IoT standalone companies. So again, we're very excited that there was an acquisition that we 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 and unlock, not only a great progressive cavity pump, but also a team that we're going to leverage to the better benefit of the entire company, not just the CPICS business. So a lot of good momentum and good excitement around this topic.
spk09: Great. Thank you.
spk15: We have no further questions in the queue, so I'll hand back to the management team for closing remarks.
spk18: Thank you. As we close, we clearly are in some pretty volatile times, as someone said on the 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 that likes to control their destiny and really execute to what we can control. and also make life better for our employees, customers, the planet, and also important, the shareholder, which in this case, our employees are shareholders of the company. So with that, I just want to say, again, a big thank you to our employees, a big thank you to all the support that all of you are giving us. 2021 was a great year, and we're here ready to take on any challenges that come into 2022. So thank you again.
spk14: This concludes today's call. Thank you for joining. You can now disconnect your lines.
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