Ingersoll Rand Inc.

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. And after the speaker's remarks, we will conduct a question and answer session. To ask a question at this time, please press star followed by one on your telephone keypad. If you do change your mind at any time, please press star then two to remove your question. And for operator assistance at any time, please press the star zero 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.

Thank you, and welcome to the Ingersoll Rand 2022 Fourth Quarter Earnings Call. I am Matthew Fort, Vice President of Investor Relations, and joining me this morning are Vicente Rinal, Chairman and CEO, and Dick Kinney, Chief Financial Officer. 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 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 two for more detail. 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 and 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 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. At this time, I will turn the call over to the center.

Thanks, Matthew, and good morning to all. I would like to start by acknowledging and thanking our employees for their hard work in helping us deliver a record year in 2022. We finished 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. Our employees consistently exemplify our purpose while thinking and acting like owners to deliver on our commitments. And our performance this year clearly reinforces the impact we have as owners of Ingersoll Run. Starting on slide three, in 2022, we demonstrated again how we continue to over deliver on our investor-based commitments. We also made tremendous progress against our sustainability goals, and I am very proud that Ingersoll Rand was named to the 2022 Dow Jones Sustainability Index. As we look to 2023, the mind 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 focused on what we can control. IRX is our differentiator to fuel our performance and continue to execute on our commitments. Turning to slide four, during our last Investor Day, we highlighted how we delivered compounding results through our economic growth engine. We remain committed to our strategy, and its success is evident, given the results outlined at the bottom of this page. Our portfolio is 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 this commitment again in 2022, delivering 16% year-over-year organic revenue growth. In 2022, we delivered 4% of in-year growth from M&A, or 5% on an annual basis. A combined organic growth and inorganic growth of 20% are surpassed our low double-digit growth commitments. As we look to 2023 and beyond, we reaffirm our commitment to deliver total average growth of no double digits through 2025. Our strong organic growth levers of aftermarket, demand generation, as well as our I2V 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. With IRX, of 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. This continues to support our goal of being a premier company that consistently compounds earnings on average by double digits each year. In 2022, we continue to achieve that goal with adjusted EPS growth of 13%. Moving to slide five, In 2022, we saw strong organic order and revenue growth of 11% and 16% respectively. Aftermarket continues to be a strategic focus, and we deliver growth of 17% excluding effects. Our 120 basis points of adjusted EBITDA margin expansion was driven in part by improvement in our growth margin due to pricing, aftermarket revenue growth, and ITV actions. As we continue to align our business Through the mega growth trends, we formalized our IR digital team to accelerate how we create new revenue streams. It's important to note that this is an incremental investment we made in addition to the teams that reside at the business level. With 90% of our total revenue coming from IIoT-ready products, we have already exceeded our 2023 investor day target. On the right side of the page is a great example of our ability to deliver organic growth by focusing on the sustainability and efficiency megatrend. 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 a capacity to permanently capture and store 12 million tons of carbon dioxide gas every year. This one project will deliver more than $14 million of revenue for Ingersoll Rand between 2023 and 2024. On slide six, M&A continues to be at the forefront of our capital allocation trends. We invested over $800 million in 12 acquisitions in 2022, including the SPX flow transaction, with the annualized revenue from these acquisitions being approximately $300 million. These acquisitions have added both market-leading products and technologies while accelerating our addressable market with close adjacencies. 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. And more importantly, we currently have 11 transactions under LOI. We expect an additional $200 to $300 million in annualized inorganic revenue to be acquired in 2023. Finally, we started the year well. with regards to executing on our inorganic strategy with the recently completed acquisition of Pyramid Tank Truck, a leading provider of solutions used for loading and unloading light work and liquid tanks in demanding industrial environments as well as wood and garbage. Moving to slide seven, we have some exciting news to share. We achieved placement on the DGSI World and DGSI North America indices. 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. This is a perfect example of how we leverage IRX for agile execution across all aspects of our business. In this case, we use our own IRX execution process to go from being unranked to now in the top 10% of all companies reviewed by S&P Global. I will now turn the presentation over to Vic to provide an update on our Q4 and full year 2022 financial performance.

Thanks, Asante. On slide eight, we finished the year with strong performance in Q4 through a strong balance of commercial and operational execution fueled by IRX. by the ongoing macroeconomic uncertainty. Total company organic orders and revenue increased 2% and 19% year-over-year respectively. We remain encouraged by the strength of our backlog, which is up 30% year-over-year, equating to over $2 billion of backlog. This provides a healthy backlog to execute on as we enter 2023 and gives us conviction in delivering our 2023 revenue guidance. The company delivered fourth quarter adjusted EBITDA of $420 million 23% year-over-year improvement, and adjusted EBITDA margins of 25.9%, 180 basis point year-over-year improvement, and 110 basis point improvement sequentially from Q3. For the quarter, adjusted EPS was up 6% versus prior year. This is despite some meaningful headwinds that I'll explain shortly. Free cash flow for the quarter was $321 million, despite ongoing headwinds from inventory due to global supply chain challenges, as well as the need to support backlog. Total liquidity of $2.7 billion at quarter end was up approximately $100 million sequentially. Our net leverage continues to improve year-over-year and sequentially. At 0.8 turns, we're 0.3 turns better than the prior year and 0.2 turns better than prior quarter. Turning to slide 9, for the total company, Q4 orders grew 5% and revenue increased 21%, both on an FX-adjusted basis. Total company adjusted EBITDA increased 23% from the prior year, with the ITS segment margin increasing 170 basis points, while the TST segment margin improving 330 basis points. 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 . Corporate costs came in at $33 million for the quarter. And finally, adjusted EPS for the quarter was up 6%, 72 cents per share. 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. The adjusted tax rate for the quarter was 19.7%, with the full year adjusted rate finishing slightly below 22%. On slide 10, Total company of full year orders grew 16% and revenue increased 21%, both on an FX adjusted basis. Total company adjusted EBITDA increased 20% from the prior year. The ITS segment margin increased 100 basis points while the PST segment margin declined 70 basis points. When adjusted to exclude the impact of M&A completed largely in 2021, PST adjusted EBITDA margin increased by 60 basis points. As you recall, Most of the decline in adjusted EBITDA margins throughout the year was due to the CPEX acquisition. I am pleased to report that CPEX is another amazing story, where we acquired a business at mid-teen EBITDA margins, and the exit rate in Q4, just five quarters after the acquisition, is in the mid-20s. We are well underway to getting CPEX to our PST fleet average EBITDA margin. We continue to see sequential increases in PSTs adjusted EBITDA margins, and now PST margins are generally back in line with where we have seen them historically at approximately 30%. Both segments finished the year price, cost, dollar, and margin positive, which was a major driver of the company's overall triple-digit adjusted EBITDA margin expansion. Corporate costs finished the year at $127 million, down $6 million from prior year, largely due to adjustments in management and And lastly, adjusted EPS for the year was up 13% to $2.36 per share. 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. If you exclude the impact of these headwinds, our adjusted EPS growth would have been over 20%. Moving to the next slide, in 2022, we returned $294 million to shareholders for share repurchases and dividends. Free cash flow for the quarter was $321 million, including CapEx, which totaled $34 million. 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 credit system. It is important to note that these figures include approximately $525 million of cash, which has subsequently been deployed for the SPX Flow air treatment business acquisition on January 3rd 2023. Leverage for the quarter was 0.8 turns, which was a 0.3 turn improvement year over year. And cash flow outflows for the quarter included $184 million deployed to M&A, $8 million to our dividend payment, and $3 million for share repurchases. M&A remains our top priority for our capital allocation, and we continue to expect M&A to be our primary use of cash. I will now turn the call back to Vicente to discuss our segments.

Thanks, Vic. On slide 12, our industrial technologies and service segments deliver strong year-over-year organic revenue growth of 22% with volume growth outpacing growth from pricing. Adjusted EBITDA increased 24% year-over-year with an adjusted EBITDA margin of 27.4% of 170 basis points from prior year with an incremental margin of 38%. We also deliver sequential margin expansion of 120 basis points from Q3 to Q4. We continue to see solid demand for our products, with organic orders of 4%. Note that on a two-year stack, the IPS segment organic orders grew more than 20%. Moving to the individual product categories, each of the figures exclude the negative impact of effects, which year-over-year was a 6% to 7% headwind across the total segments on both orders and revenues. Starting with compressors, we saw orders up in the low single digits, and we continue to see oil food products orders outpacing oil lubricated products. Orders were down mid-single digits in the Americas, driven by a large order push from Q4 to the first quarter of 2023. EMEA demand continues to be above market, with orders up mid-single digits. 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 delivered double-digit growth even throughout the COVID-related closures and disruptions. In vacuum blowers, orders were up low 20s globally, and the power tool and lifting global orders grew mid-single digits. 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. We have seen significant growth in India, and we continue to drive opportunities for in-region for regional manufacturing, which is driving the need for increase in our footprint. Turning to slide 13, revenue in the precision and science technology segment grew 9% organically. Additionally, the PST team delivered adjusted EBITDA of $93 million, which was up 20% year-over-year, with incremental margins of over 80%. Adjusted EBITDA margin was 30.1%, up 330 basis points year-over-year. We continue to see sequential improvement in our adjusted EBITDA margins driven by price cost improvement and delivery on our recently completed M&As . Organic orders were down 2% 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. Adjusting for this hydrogen order, normalized organic orders were up slightly And on a two-year stack, organic orders are up double-digit. For our PST innovation in action, we're highlighting our EVO electric diaphragm pump. This recently launched product is the only electric triple-chamber diaphragm pump in the market. The EVO series pump is utilized in high-growth end markets, such as electric vehicle batteries, specialty chemical manufacturing, and food and beverage applications. This product offers significant energy savings, leading to faster payback times for our customers. And this is yet another perfect example of sustainability as a growth driver and our focus on high growth, sustainable end markets, enabling us to deliver global digital growth. As we move to slide 14, we're introducing our 2023 guidance. Total company revenue is expected to grow between 7% to 9%, with the first half growth of 9% to 11%. and the second half growth of 4% to 6%. We anticipate organic orders growth of 3% to 5%, where price is approximately 70% and volume 30%. FX is expected to contribute approximately 1% of a headwind for the year, of which the impact will primarily be realized in the first half of the year. M&A is projected at $270 million, which reflects all completed and closed M&A transactions in 2022, as well as acquisition of SPX flow air treatment and power and time truck. Corporate costs are planned at $140 million and will be incurred evenly per quarter throughout the year. The year-over-year increase is largely driven by investments in IIoT and demand generation. Total adjusted EBITDA for the company is expected to be in the range of $1.57 billion and $1.63 billion. At the bottom of the table, we're introducing adjusted EPS guidance. While we have not historically guided an EPS, we will now include these two metrics moving forward. Adjusted EPS is projected to fall within the range of $2.48 and $2.58. We anticipate our adjusted tax rate to be in the low 20s, interest expense to be approximately $165 million, and capex to be around 2% of revenue. The right-hand side of the page includes a 2023 full-year guidance bridge showing the growth associated with operational activity and the headwinds associated with interest expenses, FX, and changes in the adjusted tax rate. Based on the above guidance, adjusted EPS growth attributed to operational performance is approximately 13% to 17% offset by approximately 8% in headwinds from interest expense, FX, and the adjusted tax rate. As we sit here in mid-February and to provide some Q1 commentary, it is worth noting that we have seen organic orders continue to be positive on a quarterly basis through the first week of February, which is consistent with our expectations. Turning to slide 15, as we wrap up today's call, I want to reiterate that Ingersoll Brand is in a solid position. We finished 2022 with strong Q4 results. We continue to monitor the dynamic market conditions while remaining agile and prepared for any challenges that may come. 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. Thank you for your hard work, resiliency, and focused actions. These results show the impact you have as owners of the company. Our balance sheet is strong, and with our discipline and comprehensive capital allocation policy and strategy, we remain resilient or have the capacity to deploy capital to investments with the highest return as we continue our track record of market outperformance. With that, I will turn the call back to the operator and open for Q&A.

Thank you. We will now begin the question and answer session.

If you would like to ask a question at this time, please press star followed by the number one on your telephone keypads.

If you change your mind at any time, please press star two. We have our first question from the line of Mike Hallen of Baird.

Your line is now open.

Hey, good morning, everyone. Good morning, Mike.

Good morning. Could we go through the first half, second half cadence that you're talking about? You know, obviously... FX gets a little more favorable in the back half of the year, but the growth rate's slowing. How much of that's organic versus just phasing of acquisitions? And then is it just price? Is it an assumption on the macro environment being a little bit worse? Just kind of any puts and takes and how you think about the seasonal factors, one-inch versus two-inch.

Yeah, hey, Mike, I'll say that, you know, facing comparable to what we have seen historically, clearly the item to watch is that as expected, you know, comps 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 chain returning to normalization or significant commodity deflation either. And so in terms of the organic, I mean, second half, Based on that and the top comps, we say kind of roughly flattish. And as we said on the remarks, good continued momentum that we see on price. And what we expect is that we expect as we go through the year to see continued strength on kind of what we call the long cycle orders, which are driven by a lot of these megatrends that we've spoken about before in the past around sustainability, onshoring, and things like that. Net-net, that leads us to believe that we just don't see significant changes in our backlog as we go through 2023.

So you're essentially assuming a pretty normal sequential cadence thing and not much change in the macro backdrop, if I interpret that correctly, Vicente?

That's correct.

Yeah, that's correct. And basically, as you can see, a bit of a prudency here.

Yep, that helps. 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 LOIs are high. 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?

Yeah, Mike, I would say that the simple answer is yes in the sense that, you know, 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, you know, 90 plus percent of our deals and transactions are sole source. So we have really longstanding cultivating relationships with the companies that we're looking for. to be attracted to Ingersoll Rand. And the relationship goes along the lines of understanding that, hey, you know, there continues to be all these changes that happen every year. And, you know, family ownership is realizing that we are a great place for them to continue to kind of give the legacy and treat employees in a very unique way that we do. And that is driving that continued momentum of being able to open the door and have a a much better conversation with a lot of these companies that we want to bring to our use of RAN. So, again, I think that's what gives us the confidence that our M&A funnel continues to be very strong, and the fact that you see that we still have 11 transactions under LOI, and the momentum continues to get accelerated. So, yeah, we're very pleased with what we're seeing here.

Thanks, Vicente. Appreciate it. Thanks, Mike.

Thank you. We now have Julian Mitchell from Barclays. Your line is open.

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 for the year 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 comps. It's not related to destocking or any particular region softening or anything like that.

Yeah, that is absolutely correct, Julian. Yes, that's exactly right. And again, you know, we're saying that we're viewing these as a Perfect. Yeah, I was going to add to that, Julian, as I said on the answer before, too, as well. We view these as a prudency right now at this stage, and as you know, we'll continue to update as the year goes, kind of not to dissimilar to what we did here in 2022.

That's helpful. And then just on the thinking about the sort of the earnings – know seasonality because i know in in 2022 you know we spent the whole year you know people fretting about the the sort of q3 q4 ramp in ebitda margins and the implied incrementals in the back half and all the rest of it um so just to understand for 2023 um Are you assuming kind of first half, second half, EPS split? Is the consensus 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?

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, is very consistent with what you've seen historically. I think the margin implication from an adjusted EBITDA perspective is roughly speaking close to 100 basis points on a total year basis for a 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 phasing is very much consistent with what you've seen in years past.

That's great. Thank you.

Thank you. Thank you. We now have Jeff Sprague for Vertical Research Partners. Please go ahead when you're ready.

Thank you. Good morning. Hey, just on the price, Scott. Hey, good morning. Thanks for the question. Just want to be clear. I think you said 70% of the organic growth guide was price, just confirming that. But the question is, would that just be a carryover price or are there other actions in flight for 2023 and Maybe you could also just give us some perspective on just the total price cost equation for 2023 embedded in the guide.

Yeah, Jeff. So, yes, correct. 70% price as we go and we communicate it. 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, which you call it maybe 1% to 2% incremental new price 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 going to be price-cost positive every quarter throughout the year. And with that, we have a final question. that the cost side basically stays, you know, at these levels. So, we're not assuming a major deflationary market.

And then just maybe totally shifting gears, just thinking about some of the initiatives and the, in particular, the IIoT-enabled initiative. To what extent are customers paying additional for that capacity? and and to what extent given the product actually has that capability you know is it driving higher or you know kind of more profitable you know service or other revenue streams yeah a great question there jeff uh you know um so so the pain uh the pain additional comes in from as you now reference all the end which is with the added services that we're offering so

When we are having a remotely connected device, we're able to have better service agreements with our customers, and therefore that generates a higher recurrent revenue to that stream that we see. So that's the whole purpose of why we want to have our IIoT ready and enabled machines, because we want to generate new revenue streams 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, you know, I'll say yes. I mean, because today there's a lot of lack of skilled labor out there, 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 net-net, it's a very quick return for the customers on what they pay.

Great. Thank you.

Thank you, Jeff. Your next question comes from the line of Rob Wozniak of Milius Research. Please go ahead when you're ready.

Thank you. Good morning, everybody. So I just wanted to go back to the revenue outlook for a minute, where you have backlog up, I think, 30, and organic growth, you know, 7% covered by price, up 3 to 5. And so I think you mentioned earlier, Vicente, that you're not assuming a whole lot of supply chain improvement in cost. Is the revenue still constrained by supply chain? If that loosens up, is there upside there? How do we sort of put the backlog and the orders in the revenue outlook?

Yeah, Rob, I mean, some constraint by supply chain, but also keep in mind, too, as well, labor. So I think as we kind of continue 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, backlog will stay at the current level as we continue to shift more towards our more normal facing that we typically have. So, yeah, some supply chain constraint, but the majority, I'll say, most, of labor constraints to be able to bring more people to factories and be able to.

Okay, perfect. And then I apologize if I'm 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 them or if things are fading away. Thank you. Yeah, no, thanks.

That's a great question, Robin. You know, 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, onshoring, energy efficiency, carbon capture, we see more of that. And what that creates is maybe sometimes a little bit of lumpiness quarter to quarter. But when ITS, when you look at the ITS America, and it's sometimes better to look at it, you know, first half to the second half, and you, 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 ITS America in the third quarter, we had one of the biggest quarters that we can recollect for where book to bill was close to 1.2 back in Q3. So, again, I think we view it more from first half going into the second half. And what we saw was really order acceleration in the ITS Americas, which kind of gives us good confidence on continual kind of fundamental solid strength demand. And as we said also in the remarks, as we go into here into the 2023, we're seeing continued positive organic order momentum pretty much across all the regions, including ITS Americas.

Great. Thank you.

Thank you. We now have Nigel Coe from Wolf Research. Your line is open, Nigel.

Thanks. Good morning, everyone. So it seems like, you know, you have morning. You're talking about, you know, this hydrogen order in the prior year, an order in North America slipping into Europe. 2023, so it seems like we've got larger, lumpier orders coming through, which, you know, given these mega, you know, mega project decar reshoring type projects, we should expect. I mean, do you agree with that, disagree with that, that we will have lumpier orders sequentially from here? And my real question is, you know, as we get larger orders, you know, do we have comparable margins to, you know, on these larger orders, you know, versus sort of run rates?

So to answer the first question, absolutely yes. I mean, we think that we see a lot of these kind of mega projects that are getting a lot of the CapEx release. And yes, I mean, and I can tell that historically we have always said that, you know, these projects come in with pretty good margin too as well. And obviously being large, you know, to as well create a good flow through as they kind of go through the P&L. So it's for us, it's good news that we're seeing the release of these CapEx projects. They're more long cycle, gives us better visibility. and at the same time, they're pretty well aligned with a lot of our secular growth trends that we're seeing around sustainability, energy efficiency, onshoring, and the like.

Okay. Yeah, nothing wrong with lumpy as long as they contribute revenue. And then I want to go on service revenue, but I think you said 17% XFX. So that implies, I don't know, mid-teens, low mid-teens, organic service growth, which is pretty good. So Just wondering, coming back to Jeff's question, to what extent is the service growth being driven by, I don't know, some kind of deferred catch-up? Or are we seeing this IoT-enabled devices starting to contribute meaningfully to revenue growth? Any details there would be helpful.

Yes, it is. I would say it's more of the latter in some regards. As you remember, during our Investors Day, we spoke about our care packages and service agreements that we developed as they get related to our IoT-related services. And we're definitely seeing very good acceleration on that, driven by trends such as 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 the customer can have and visibly see 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. Great.

I'll leave it there. Thanks for the questions. Thank you.

Thank you.

The next question comes from David Rasso of Evercore ISI.

Hi, thank you. I just wanted to pick up on the orders so far in 23 commentary. Even excluding the hydrogen comp, PFT orders were, you know, up 0.2, basically flattest year over year, while the, you know, IT obviously was up 3.6. Are you saying the order growth has accelerated so far in 23, just to be clear?

Well, David, yes, we're saying that the order momentum is actually positive across the two sectors. So, yes, I mean, if you think about it from a percentage perspective, that is correct.

And the type of projects that you're getting, just to understand what's, you know, the pricing in these new orders versus what's in the backlog already, just to get some sense of, you know, assuming costs don't reaccelerate, what is the pricing dynamic in the new order books?

Yeah, David, I would say to Vicente's remarks that orders in first quarter, quarter to date across both segments are trending positive on an organic basis. And within that, I would say the pricing dynamic, given the carryover pricing dynamic that Vicente mentioned, which as you would expect is more obviously evident in the first half of the year, comparatively speaking, I'd say it's comparable to what you have seen exiting 2022. So nothing has dramatically changed in that respect. And I think to the question I was asked before, 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 bookshelf-type businesses. So we've been seeing comparable margin performance and comparable pricing across both the shorter cycle and longer cycle components of our business.

All right. I appreciate it. Thank you.

Thank you. We now have Steve Bauchman of Jefferies.

Please go ahead when you're ready.

Great. Thanks. Good morning, guys. I want 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.

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, you know, that pop up here and there. So it's not, 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, whether it is with the reopening of China or a lot of the CAPEX cycle releases that we're seeing in terms of long cycle, we think there's going to be continued constraints in the supply chain. So at least we're just being more proactive in terms of kind of realizing that there's a lot of work that our teams need to continue to do and realizing that, hey, things are not going to be 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 in this.

Okay, great. Thanks. And then just, Vic, anything? I think you mentioned 100 basis points of EBITDA margins. through the year, anything to think about relative to the two segments or one versus the other?

Yeah, it's a good question. So, yeah, approximately 100 basis points enterprise-wide. You're going to see both segments trend right around there. I do think that PST probably is a little bit more outsized than ITS, probably not overly surprising because you had a little bit of the inverse happening in 2022. So, you know, I think a lot of this now, quite frankly, as we've now got CPECs you know, which was probably the largest headwind on EBITDA margins through the better part of 2022. Now that's coming closer to fully average, but frankly still room to run, I think you're going to see a little bit more outpace on the PST side, comparatively speaking. But total business should be trending close to the 100 basis points.

Great. Thank you, guys.

Thank you.

We now have Josh Gorlinski from Morgan Stanley. Your line is now open, Josh.

Hi, good morning, guys. Morning, Josh. Just wanting to dig into the complexion of what you're seeing on the compressor side or even maybe more broadly across IT&S. You know, you talked about some of the big drivers, Vicente, around things like near-shoring, kind of a broader CapEx cycle. I mean, 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 sort of an extended replacement cycle that, you know, has kind of been caused by all this, you know, post-COVID interruptions?

Yeah, Josh, 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 living capacity. And just to put it in perspective, I mean, it's not dissimilar to what we at Ingersoll Rand were doing ourselves. So, as you remember, last year, we reopened our Buffalo facility. So, that was, you can consider that as an expansion of capacity. We also invested in expanding our factory in Brazil. So that was actually, you could think about it, an incremental rooftop. We just here announced our expansion of the footprint and creation of a new building facility in India. This is on top of our already four manufacturing facilities in India. So I think it's, 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 all the way from our Garner Denver days that we were doing that. So, again, we're seeing a lot of good momentum of that in region for region continuation because of unshoring not only in 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 in the prepared remarks, on oil-free, which, again, is good news because we're moving more towards these kind of high-growth, sustainable-in-markets food, beverage, pharma, that we can provide more unique solutions to those customers and therefore see that accelerated growth.

Got it. That's helpful. And then just to follow up on hydrogen specifically, I think there's a lot of stuff out there that's in discussion, you know, maybe projects that are not quite ready to go FID because of some rulemaking clarity in the IRA that hasn't been established yet. But just wondering how you guys are thinking about, you know, the timing of when you could see another order wave there and anything you're watching specifically that could help us track alongside that.

Sure, Josh. Maybe I'll put 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 hydrogen. And so we expect to maybe see better momentum as we go here in 2023 in Europe. the early cycles of that PST 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 U.S. And we're seeing that, you know, started in Asia Pacific, it's moving to Europe, and we're seeing conversations about dispensing hydrogen networks and things like that in the U.S., as you very well said, on the IRA platform. you know, budgetary commentary that we all read about. On the IPS, you know, not too dissimilar, but I would 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. So we still think that there's many more room to come on that. And as you very well said, whether IRA or some of the other funds that are in Europe, hopefully that kind of gets some of the projects getting released. So, you know, good tailwinds. We expect for a couple of years to come.

Great. Excellent call. We'll leave it there.

Thank you. We now have Joe Odia of Wells Fargo. You may proceed.

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. I'm guessing historically backlog hasn't been quite as strong relative to revenue. So could you just talk about sort of what you're seeing sort of structurally within that, the confidence that we should be thinking about that as more of a normalized backlog level?

Yeah, Joe, I would say that normalized maybe right now here in 2023, as we go into 2024 and longer than that, we'll see. I mean, we expect that things will get back to the way they were before. Our view in terms of why we should continue to see backlog at this higher level is, again, because of a lot of these kind of long cycle CapEx releases that we're seeing, that that should continue to add on to that backlog while we continue to see maybe, you know, solid fundamental growth on the short cycle, as we have just also stated. So I think it's not that the new norm is going to be that 30% or 2 billion. It's just that right now, at this point in 2023, that is basically what we're saying is that we're saying that we'll continue to – or our expectation is that we're not going to deplete the backlog based on what we see coming through for the rest of the year.

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, Jess, let me take it in two pieces. So the guidance, if you go to the guidance slide, $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 FK Exploit 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-closed transactions in guidance. So the 11 additional transactions that you see at the LOI stage, that would be all incremental to current guidance if and when those transactions close. And like we've done historically, 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.

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. Yeah.

So I think, you know, our re-affirmation 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 on the timing in terms of what will actually impact 2023. But that is correct.

Got it. That's helpful. Thanks a lot. Yep.

We now have Mason Jones of Stiefel.

Good morning, and this is Adam Farley on for Nathan. Good morning.

So you performed very well in China in 2022 despite COVID headwinds. Could you provide some color on how you outperformed and maybe what you expect in 2023 in China, specifically with reopening?

Yeah, so I'll just say, you know, to that, Big thank you to our team in China and the team 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 initiatives 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 repositioning 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 could be around battery production, photovoltaic production as well for solar panels or even electric vehicle production. So, 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 course of the SBEX flow ahead treatment business, could you provide any color on revenue or cost synergy opportunity, given that it's still early days of integration work?

Yeah, sure. To repeat, we did close the SX flow transaction 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. It's coming in right in that kind of mid-20s type EBITDA margin range. And as we did say when we announced the transaction, we do see, you know, over a multi-year basis, we do see cost opportunities and synergy opportunities to drive that to be accretive to ITS segment margins in due course. So, again, you know, we're about 45 days in. I would say the integration process, you know, 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, you know, things are very much tracking in line with expectations. hopefully enough to kind of get 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 when you're ready, Chris.

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 of 2023? Thank you.

Yeah, sure. Chris. So I guess I'll start by saying, I think the way you described Israel is relatively accurate. Yes, we did see a little over point 94, 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. And that's exactly what we saw on Q4, as well as obviously the strong revenue performance. So that did drive the book to build to being less than one. But to Vicente's point and some of the commentary, we are seeing, you know, 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 driven despite the headwind of the chinese new year timing which is in january this year versus february in last year so again continue to be encouraged by the the the trending you know as vicente said backlog continues to remain healthy with a good contribution from the longer cycle projects which will continue to extend you know over a 12 to 18 month time frame so again yes book the bill less than one but quite normal in q4 and continue to be encouraged about what we see here moving into 2023.

No, yeah, I appreciate that and appreciate the color on the seasonality. And then on the implied margin guidance, so my math kind of pegs EBITDA margins up, you know, 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 multi-year target that the company has 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 yeah, 80 to 90 basis points, slightly right below 100 basis points. That's probably right in line. I think it's a few things to note. When we gave our investor day targets, we said to expect about 100 basis points on average over a multi-year time frame. Obviously worth noting that we have outpaced that in the prior two years. So, you know, we're still very much tracking in line with that. And I think in terms of the guidance, your point is spot on. We do expect it to be price cost positive. We are still driving productivity as well as the, you know, the synergies, the last phase of the merger-related synergies to offset any degree of merit and or labor inflation, which obviously we are seeing and speaking to Vicente's point earlier. But I think the other thing here is that we are continuing to reinvest for growth and to drive ongoing organic growth, which is very much part of our investment targets. So you are seeing requisite investments in to the 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 demand generation and 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.

Appreciate all that. Thanks for taking the questions. You bet.

Thank you. I would now like to turn it back to the CEO, Lucente, for some final remarks.

Thank you so much. You know, 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 macro challenges. And that's because they think and act like owners, because they're all owners 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 on sustainability, innovative products and solutions. And that, we believe, is truly positioning Ingersoll Rand as a global leader.

So thank you for the time and attention today. Thank you.

Thank you all for joining us to conclude today's call. Please have a lovely day, and you may now disconnect your line.