Ingersoll Rand - Q4 2022
February 21, 2023
Transcript
Operator (participant)
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. 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 1 on your telephone keypad. If you do change your mind at any time, please press star then 2 to remove your question. For operator assistance at any time, please press the star 0 key. Thank you. I would now like to turn the conference call over to our host, Matthew Fort to begin. Matthew, please go ahead.
Matthew Fort (VP, Investor Relations and Global Financial Planning & Analysis)
Welcome to the Ingersoll Rand 2022 fourth quarter earnings call. I am Matthew Fort, Vice President of Investor Relations. Joining me this morning are Vicente Reynal, Chairman and CEO, and Vikram Kini, Chief Financial Officer. We issued our earnings release and presentation this morning. 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 2 for more details. In addition, in today's remarks, we will refer to certain non-GAAP financial measures.
You can find a reconciliation of these measures 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 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 Vicente.
Vicente Reynal (Chairman and CEO)
Thanks, Matthew. 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. Our performance this year clearly reinforces the impact we have as owners of Ingersoll Rand. Starting with slide 3, in 2022, we demonstrated again how we continue to overdeliver on our investor base 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 demand remains solid.
While macroeconomic, 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 4, during our last Investor Day, we highlighted how we delivered compounding results through our economic growth engine. We remain committed to our strategy. Its success is evident given the results outlined at the bottom of this page. Our portfolio is positioned to capitalize on global mega trends such as digitization, sustainability, and quality of life. We expect to leverage our organic growth enablers to deliver mid-single digit organic growth through 2025. As you can see, we 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 of 5% on an annual basis. A combined organic growth and inorganic growth of 20% also passed our low double-digit growth commitment. As we look to 2023 and beyond, we reaffirm our commitment to deliver total average growth of low 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 as our competitive differentiator and over 300 impact daily management or IDMs 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 continued to achieve that goal with adjusted EPS growth of 13%. Moving to slide 5. In 2022, we saw strong organic order and revenue growth of 11% and 16% respectively. Aftermarket continues to be a strategic focus, and we delivered growth of 17% excluding effects. Our 120 basis points of adjusted EBITDA margin expansion was driven in part by improvement in our gross margin due to pricing, aftermarket revenue growth, and I2V actions. As we continue to align our business to 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 19% 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 mega trend. 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, as of today, it continues to be over five times larger than it was at the time of the RMT. More importantly, we currently have 11 transactions under LOI. We expect an additional $200 million-$300 million in annualized inorganic revenue to be acquired in 2023.
We started the year well with regards to executing on our inorganic strategy with the recently completed acquisition of Paragon Tank Truck, a leading provider of solutions used for loading and unloading dry bulk and liquid tanks in demanding industrial environments as well as food and beverage. Moving to slide 7, we have some exciting news to share. We achieved placement on the DJSI World and DJSI North America indices. Our score of 81 on the S&P Global Corporate Sustainability Assessment puts us at the 1 in North America and 4 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 used 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.
Vikram Kini (CFO)
Thanks, Vicente. On slide 8, we finished the year with strong performance in Q4 through a strong balance of commercial and operational execution fueled by IRX despite the ongoing macroeconomic 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, a 23% year-over-year improvement and adjusted EBITDA margins of 25.9%, a 180 basis point year-over-year improvement, and a 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 will 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 are 0.3 turns better than the prior year and 0.2 turns better than the 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 PST 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 headwinds. Corporate costs came in at $33 million for the quarter. Finally, adjusted EPS for the quarter was up 6% to $0.72 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 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 Seepex acquisition. I am pleased to report that Seepex is another amazing story where we acquired a business at mid-teen EBITDA margins and the exit rate in Q4, just 5 quarters after the acquisition, is in the mid-twenties. We are well underway to getting Seepex to our PST fleet average EBITDA margins.
We continue to see sequential increases in PST's adjusted EBITDA margins. 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 incentive costs. 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 through share repurchases and dividends. Free cash flow for the quarter was $321 million, including CapEx, which totaled $34 million. 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 facility. 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.
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 usage of cash. I will now turn the call back to Vicente to discuss our segments.
Vicente Reynal (Chairman and CEO)
Thanks, Vic. On slide 12, our Industrial Technologies and Services segment delivered 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%, up 170 basis points from prior year with an incremental margin of 38%. We also delivered sequential margin expansion of 120 basis points from Q3 to Q4. We continue to see solid demand for our products with organic orders up 4%. Note that on a 2-year stack, the ITS segment organic orders grew more than 20%. Moving to the individual product categories, each of the figures exclude the negative impact of FX, which year-over-year was a 6-7 percentage point headwind across the total segment on both orders and revenue.
Starting with compressors, we saw orders up in the low single digits. We continue to see oil-filled 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. EMEIA 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. 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. We continue to drive opportunities for in-region, for-region manufacturing, which is driving the need for increase in our footprint. Turning to slide 13. Revenue in the Precision and Science Technologies 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 synergy delivery on our recently completed M&As such as Seepex.
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 digits. 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.
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 double-digit earnings growth. As we move to slide 14, we're introducing our 2023 guidance. Total company revenue is expected to grow between 7%-9%, with the first half growth of 9%-11% and the second half growth of 4%-6%. We anticipate organic orders growth of 3%-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 the acquisition of SPX FLOW Air Treatment and Paragon Tank 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-$1.63 billion. At the bottom of the table, we're introducing adjusted EPS guidance.
While we have not historically guided on 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%-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 quarter-to-date 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 Rand is in a solid position. We finished 2022 with strong Q4 results. We continue to monitor the dynamic market conditions while remaining agile and prepare for any challenges that may come. 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, with our discipline and comprehensive capitalization policy and strategy, we remain resilient and have the capacity to deploy capital to investments with the highest return as we continue our track record of market outperformance. With that, I will turn the call back to the operator and open for Q&A.
Operator (participant)
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 keypad. If you change your mind at any time, please press star two. We have our first question from the line of Michael Halloran of Baird. Your line is now open.
Michael Halloran (Senior Research Analyst)
Hey, good morning, everyone.
Vicente Reynal (Chairman and CEO)
Morning, Mike.
Michael Halloran (Senior Research Analyst)
could we go through the first half, second half cadence, and 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. You know, how much of that's organic versus, you know, just phasing of acquisitions? Is it just price? Is it assumption on the macro environment, being a little bit worse? Just kind of any puts and takes in how you think about the seasonal factors, one inch versus two inch?
Vicente Reynal (Chairman and CEO)
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. You know, we don't have anything assumed in our guidance, or the pacing related to supply chains returning to a normalization or significant commodity deflation either. In terms of the organic, I mean, second half based on that and the top comps, we say kind of roughly flattish. As we said on the, on the remarks, you know, good continued momentum that we see on price.
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 mega trends 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.
Michael Halloran (Senior Research Analyst)
You're essentially assuming a pretty normal sequential cadence and not much change in the macro backdrop, if I interpret that correctly, Vicente?
Vicente Reynal (Chairman and CEO)
That's correct. Yeah, that's correct. Basically, as you can see, a bit of a prudency here in the second.
Michael Halloran (Senior Research Analyst)
Yep. No, that helps. 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. You know, 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?
Vicente Reynal (Chairman and CEO)
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. It has to do primarily because keep in mind that, you know, 90% plus of our deals and transactions are source. We have really long-standing, cultivating relationships with the companies that we're looking for to be attracted to Ingersoll Rand.
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. That is driving the continued momentum of being able to open the door and have a much better conversation with a lot of these companies that we want to bring to Ingersoll Rand. 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.
Yeah, we're very pleased with what we're seeing here.
Vikram Kini (CFO)
Thanks, Vicente. Appreciate it.
Vicente Reynal (Chairman and CEO)
Yep. Thanks, Mike.
Operator (participant)
Thank you. We now have Julian Mitchell from Barclays. Your line is open.
Julian Mitchell (Managing Director, U.S. Industrials Equity Research)
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. It sounds like you think that backlog stays at about $2 billion, you know, through the year, a book to bill around 1 for the year as a whole. 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.
Vicente Reynal (Chairman and CEO)
Yeah, that is absolutely correct, Julian. Yes, that's exactly right. Again, you know, we're saying that we're viewing these as.
Julian Mitchell (Managing Director, U.S. Industrials Equity Research)
That's helpful. Thank you.
Vicente Reynal (Chairman and CEO)
Perfect. Yeah. No, I was gonna add to that, Julian, is that as I said on the, 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 too dissimilar to what we did here in 2022.
Julian Mitchell (Managing Director, U.S. Industrials Equity Research)
That's helpful. Then, just on the thinking about the sort of the earnings, you know, seasonality, 'cause I know in 2022, you know, we spent the whole year, you know, people fretting about the sort of Q3, Q4 ramp in EBITDA margins and the implied incrementals in the back half and all the rest of it. Just to understand for 2023, are you assuming kind of first half, second half EPS split? Is, is the consensus, you know, split roughly okay at sort of 45%, 55% and then anything you're kind of calling out year-over-year moving around much in the back half?
Vikram Kini (CFO)
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 wanna talk about top line or on the earnings side of the equation is very consistent with what you've seen historically. You know, I think the margin implication on from an adjusted EBITDA perspective is, you know, roughly speaking close to 100 basis points on a total year basis for total company, which remains relatively consistent and right in line with what we messaged at our last Investor Day. Again, nothing dramatically different there, but yes, the phasing is very much consistent with what you've seen in years past.
Julian Mitchell (Managing Director, U.S. Industrials Equity Research)
That's great. Thank you.
Operator (participant)
Thank you. Thank you. We now have Jeff Sprague for Vertical Research Partners. Please go ahead when you're ready.
Jeffrey Sprague (Founder and Managing Partner)
Thank you. Good morning. Hey, just on the.
Vicente Reynal (Chairman and CEO)
Good morning.
Jeffrey Sprague (Founder and Managing Partner)
On the price, Scott. Hey, good morning. Thanks for the question. Just wanted to be clear, I think you said 70% of the organic growth guide was price, just confirming that. The question is would that just be a carryover price or are there other actions in flight for 2023? Maybe you could also just give us some perspective on just the total price cost equation for 2023 embedded in the guide.
Vicente Reynal (Chairman and CEO)
Yeah, Jeff. Yes, correct. 70% price as we go, and we communicated. The way to think about it is that on the price, a good portion of that is carryover. We're still doing another, you know, regular price increase, but that one is more normalized as what we have done in the past, which call it maybe 1%-2% incremental new price that gets realized throughout the year. That gives you the perspective in terms of what we're seeing on price. From a price cost perspective, yes, we expect that we're gonna be price cost positive every quarter throughout the year. With that, we have assumed also that the cost side basically stays, you know, at these levels.
We're not assuming a major deflationary market.
Jeffrey Sprague (Founder and Managing Partner)
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 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?
Vicente Reynal (Chairman and CEO)
Yeah. A great question there, Jeff. You know, the paying additional comes in from, as you now referenced, at the end, which is with the added services that we're offering. 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 streams that we see. That's the whole purpose of why we wanna have our IIoT ready and enabled machines, is because we want to generate new revenue streams that are more recurrent in nature on top of obviously selling the device. I think that's that's what we're seeing. 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. Yeah, I think it's just one of those that, we see it as a increased way to add services, increased way of adding energy efficiency. Net-net, it's a very quick return for the customers on what they pay.
Speaker 15
Great. Thank you.
Vicente Reynal (Chairman and CEO)
Yep.
Operator (participant)
Thank you, Jeff. Your next question comes from the line of Robert Wiercinski of Melius Research. Please go ahead when you're ready.
Robert Wiercinski (Managing Director, Senior Research Analyst)
Thank you. Good morning, everybody.
Vicente Reynal (Chairman and CEO)
Morning, Rob.
Robert Wiercinski (Managing Director, Senior Research Analyst)
I just wanted to go back to the revenue outlook for. Yep, hey. 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%-5%. 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 flip the backlog and the orders and the revenue outlook then?
Vicente Reynal (Chairman and CEO)
Yeah. Rob, I mean, some constrained by supply chain, also keep in mind too as well labor. I think as we kinda 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 phasing that we typically have. Yeah. Some supply chain constraints, but the majority, I'll say more of labor constraints to be able to bring more people to factories and be able to ship out.
Robert Wiercinski (Managing Director, Senior Research Analyst)
Okay. Perfect. I apologize if I'm missing the prepared remarks, but ITS 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, an order.
Vicente Reynal (Chairman and CEO)
Mm-hmm. Mm-hmm.
Robert Wiercinski (Managing Director, Senior Research Analyst)
... or if things are fading. Thank you.
Vicente Reynal (Chairman and CEO)
Yeah. No, thanks. That's a great question, Rob. You know, we're seeing an actually a very good momentum acceleration of what we call the long cycle orders, which are basically driving strong CapEx cycles that we see. 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. What that creates is maybe sometimes a little bit of lumpiness quarter to quarter. 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, we actually saw acceleration organically going into the second half, from compared to the first half.
That is because, you know, it's important to note that also ITS Americas is 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. Again, I think we view it more from a 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. As we said also on the remarks, as we go into year into the 2023, we're seeing continued positive organic order momentum pretty much across all the regions, including at ITS Americas.
Robert Wiercinski (Managing Director, Senior Research Analyst)
Great. Thank you.
Operator (participant)
Thank you. We now have Nigel Coe of Wolfe Research. Your line is open, Nigel.
Nigel Coe (Managing Director)
Thanks. Good morning, everyone.
Vicente Reynal (Chairman and CEO)
Morning
Nigel Coe (Managing Director)
It seems like, you know. Yeah, morning. You talked, you know, you talked about, you know, this hydrogen order in the prior year, an order in North America slipping into 2023. It seems like we've got larger lumpier orders coming through, which, you know, given these mega project decarb reshoring type, projects, we should expect. I mean, do you agree with that, disagree with that we will have lumpier orders sequentially from here? 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?
Vicente Reynal (Chairman and CEO)
To answer the great question, I'll say yes. I mean, as we think that we see a lot of these kind of mega projects that are getting a lot of the CapEx release. Yes, I mean, I can tell that historically we have always said that, you know, these projects come in with pretty good margin too as well. Obviously being large enough to as well create very good flow through as they kind of go in through the P&L. 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. 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 likes.
Nigel Coe (Managing Director)
Okay. Yeah. Nothing wrong with lumpy as long as they can contribute revenue. Then, you know, I want to go on service revenue growth. I think you said 17% ex FX just that implies, I don't know, mid-teens, low mid-teens organic service growth, which is pretty good. Just wondering, you know, come back to Jeff's question, you know, to what extent is the service growth being driven by, I don't know, some kind of deferred catch up?
Joshua Pokrzywinski (Analyst)
Are we start seeing this IoT-enabled devices starting to contribute meaningfully to revenue growth? Any details there would be helpful.
Vicente Reynal (Chairman and CEO)
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 the IIoT related services. 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 factories to be able to service, repair, and maintain compressors or other devices, where we can provide that. In addition to that, we can provide an energy efficiency, I won't say guarantee, but energy efficiency reduction that the customer can have and visibly see, in addition to other benefits.
It is actually good news for us to see that good solid momentum and work that the teams are doing very well on that.
Joshua Pokrzywinski (Analyst)
Great. I'll leave it there. Thanks for the questions.
Vicente Reynal (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. The next question comes from David Raso of Evercore ISI.
David Raso (Senior Managing Director and Partner)
Hi. Thank you. I just wanted to pick up on the orders so far in 2023 commentary. Even excluding the hydrogen comp, PST orders were, you know, up 0.2%, basically flattish year-over-year, while the, you know, IT obviously was up 3.6%. Are you saying the order growth has accelerated so far in 2023, just to be clear?
Vicente Reynal (Chairman and CEO)
Well, David, yes. We're saying that the order momentum is actually positive across the two segments. Yes, I mean, if you think about it from a percentage perspective, that is correct.
David Raso (Senior Managing Director and Partner)
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 re-accelerate, what is the pricing dynamic in the new order book?
Vikram Kini (CFO)
Yeah, David, I would say, so to Vicente's, you know, remarks that, you know, orders in first quarter to date across both segments are trending positive on an organic basis. 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. Nothing has dramatically changed in that respect. I think to the question that was asked before, the margin profile is, you know, healthy on those projects and the pricing levels on those projects are commensurate or comparable to what you see in some of the more standard book ship type business.
We've been seeing comparable margin performance and comparable pricing across both the shorter cycle and longer cycle components of our, of our business.
David Raso (Senior Managing Director and Partner)
All right. I appreciate it. Thank you.
Operator (participant)
Thank you. We now have Stephen Volkmann of Jefferies. Please go ahead when you're ready.
Stephen Volkmann (Managing Director, Equity Research Analyst)
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. Can you just give us the sort of current conditions? 'Cause it seems like we're hearing sort of broadly that things are improving, so I just wanted to kind of square those up.
Vicente Reynal (Chairman and CEO)
I mean, it is definitely improving 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. 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 gonna be continued constraints in the supply chain.
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 gonna 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 out there.
Stephen Volkmann (Managing Director, Equity Research Analyst)
Okay. Great. Thanks. Just, Vic, I think you mentioned 100 basis points of EBITDA margin through the year. Anything to think about relative to the two segments or one versus the other?
Vikram Kini (CFO)
It's a good question. Approximately 100 basis points enterprise-wide. You're gonna 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. You know, I think a lot of this now, quite frankly, as we've now got Seepex, you know, which was probably the largest headwind on EBITDA margins through the better part of 2022. Now that that's coming closer to fully average with frankly still room to run, I think you're gonna see a little bit more outpace on the PST side comparatively speaking. Total business should be trending close to the 100 basis points.
Stephen Volkmann (Managing Director, Equity Research Analyst)
Great. Thank you, guys.
Vicente Reynal (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. We now have Joshua Pokrzywinski from Morgan Stanley. Your line is now open, Josh.
Joshua Pokrzywinski (Analyst)
Hi. Good morning, guys.
Vicente Reynal (Chairman and CEO)
Morning, Josh.
Joshua Pokrzywinski (Analyst)
Hey, good morning. Just wanted to dig into the complexion of what you're seeing on the compressor side or even maybe more broadly across ITS. You know, you talked about some of the big drivers, Vicente, around things like nearshoring, 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. As you talk to customers, like, are they adding roof line? Are they adding capacity, or is this, you know, sort of an extended replacement cycle that That's kind of been caused by all this, you know, post-COVID interruption.
Vicente Reynal (Chairman and CEO)
Yeah, Josh, I'd say that we're seeing a little bit of a good blend of both in terms of new rooftops as well as expanding leading capacity. Just to put it in perspective, I mean, it's not dissimilar to what we at Ingersoll Rand were doing ourselves. As you remember, last year, we reopened our Buffalo facility, that was. You could consider that as an expansion of capacity. We also invested in expanding our factory in Brazil, 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. I think it's. Our customers are doing the same.
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. This goes back all the way from our Gardner Denver days that we were doing that. We're seeing a lot of good momentum of that in region for region continuation because of onshoring, not only in the US, but we're seeing it in India, we see it in China, we see it in Europe. I think our ability to flex our products and our localization to that, it's driving that pretty good momentum, I would say. From a technology perspective to your question, we're seeing solid momentum, and we said that on the prepared remarks on oil free.
Which again is good news because we're more and more towards these kind of high growth, sustainable end markets, food, beverage, pharma, that where we can provide more unique solutions to those customers and therefore see that accelerated growth.
Joshua Pokrzywinski (Analyst)
Got it. That's helpful. Just to follow up on hydrogen specifically, you know, 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 rule making clarity in the IRA that hasn't been established yet. 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.
Vicente Reynal (Chairman and CEO)
Sure, Josh. Maybe I'll see it in... I kind of put it in two buckets. One is the on the PST side, where we make dispensing units. We're seeing, you know, 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 gonna 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, on the IRA, you know, budgetary commentary that we all read about. On the, on the ITS, you know, it's probably 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 ITS side. So we still think that there's maybe more room to come on that.
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. You know, good tailwinds we expect for a couple years to come.
Joshua Pokrzywinski (Analyst)
Great. Excellent color, there.
Operator (participant)
Thank you. You now have Joe O'Dea of Wells Fargo. You may proceed.
Joe O'Dea (Managing Director and Senior Equity Analyst)
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. It sounds like, you know, 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, you know, quite as strong relative to revenue. Could you just talk about sort of what you're seeing sort of structurally within that, the confidence that, you know, that we should be thinking about that as more of a normalized backlog level?
Vicente Reynal (Chairman and CEO)
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 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. I think it's not that the new norm is gonna 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 expectation is that we're not gonna deplete the backlog based on what we see coming through for the rest of the year.
Joe O'Dea (Managing Director and Senior Equity Analyst)
Okay. Just a clarification on the $200 million-$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?
Joshua Pokrzywinski (Analyst)
Joe, let me take it in two pieces. The guidance, if you go to the guidance slide, it's $270 million of M&A.
Vikram Kini (CFO)
Is included in the guide. That 270 is for completed and or closed acquisitions to date. Effectively everything you've seen through 2022 that has any degree of carryover impact as well as probably the two bigger contributions being the SPX FLOW Air Treatment business, which closed right at the beginning of the year, and then the Paragon Tank Truck acquisition, comparatively smaller, but closed at the beginning of this month. That is all included. That's what comprises the $270 million. In terms of forward expectations, we do not include any non-closed transactions in guidance. 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. Like we've done historically, as those transactions close, we'll obviously start including them in subsequent guidance.
Again, yes, non-completed or non-closed M&A, would be additive to the current guidance for 2023.
Speaker 15
Okay. Are those 11 included in the 200-300 that you're talking about acquiring over the course of 2023?
Vikram Kini (CFO)
That is correct. Yeah. I think, you know, our re kind of affirmation of the capital allocation strategy includes that we expect to close another $200 million-$300 million on an annualized basis. Obviously that's just contingent on the timing in terms of what will actually impact 2023. That is correct.
Speaker 15
Got it. That's helpful. Thanks a lot.
Vikram Kini (CFO)
Yep.
Speaker 15
We now have Nathan Jones of Stifel. Your line is now open.
Adam Farley (Analyst)
Good morning. This is Adam Farley on for Nathan.
Vikram Kini (CFO)
Morning.
Adam Farley (Analyst)
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?
Vikram Kini (CFO)
Yeah, Adam. I'll just say, you know, to that, a 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. You know, I think our team continues to be pretty agile and nimble as to finding the growth vectors that are being seen in China, and then taking our products and reposition them and leveraging our demand generation to accelerate the penetration of those technologies into those very unique end markets. 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. Then they leverage the technology and the demand generation to be able to acquire just incremental market share.
Adam Farley (Analyst)
Okay. Then on the recent close of the SPX FLOW Air Treatment business, could you provide any color on revenue or cost synergy opportunity and given that it's still early days of integration work?
Vikram Kini (CFO)
Yeah, sure, Adam. Repeat, we did close the SPX FLOW transaction, January third, so the beginning of this year. Using rough numbers, you can kind of expect something right around, you know, $180 million of revenue contribution, so slightly less than $200 million. Very much in line with, you know, a lot of the M&A you've seen us do historically. It's coming in, you know, right in that kind of mid-twenties type EBITDA margin range. 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 being accretive to ITS segment margins in due course.
Again, you know, we're, you know, 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 could 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.
Adam Farley (Analyst)
Okay. Thank you for taking my questions.
Vikram Kini (CFO)
Thank you.
Speaker 15
Thank you. We now have Chris Snyder of UBS. Please go ahead when you're ready, Chris.
Chris Snyder (Analyst)
Thank you. I wanted to follow up on some of the order trends. The book to bill is going from 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? Then what type of visibility do you have into orders, you know, as we go beyond Q1, maybe into the back half of 2023? Thank you.
Vikram Kini (CFO)
Yeah, sure, Chris. I guess I'll start by saying, I think the way you described it is relatively, you know, accurate. Yes, we did see, you know, a little over 0.9 in Q4. You know, worth noting here, it's quite normal in the business to see book to bill less than 1 in the second half of the year, and particularly in Q4. That's largely attributable to shipping the longer, you know, the larger, longer cycle orders during the second half. You see that primarily in the ITS business, that's exactly what we saw in Q4, as well as obviously the strong revenue performance. That did drive the book to bill to being, you know, less than 1.
You know, to Vicente's point and some of the commentary, we are seeing, you know, the order of momentum continuing here in the first quarter to date 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. Again, continue to be encouraged by 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 12-18 month time frame. Again, yes, book to bill less than 1, but quite normal in Q4 and continue to be encouraged about what we see here moving into 2023.
Chris Snyder (Analyst)
No, yeah, appreciate that and appreciate the color on the seasonality. Then on the implied margin guidance, my math kind of pegs EBITDA margins up, you know, 70, maybe up to 80 bps year-over-year at the midpoint. Obviously a bit below the run rate that we've seen, and below the kind of the multi-year target that the company's laid out at 100 basis points. It sounds like price cost will continue to be kind of in your favor. 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.
Vikram Kini (CFO)
Sure. Yeah, I'll take that one, Chris. Yeah, you know, 80 to 90 basis points, you know, slightly right below 100 basis points. That's probably right in line. You know, I think, you know, 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 2 years. You know, we're still very much tracking in line with that. I think in terms of the guidance, your point is spot on. We do expect it to continue to be price cost positive.
We are still driving productivity as well as the, you know, the synergies, the last phase of the merger-led synergies to offset any degree of merit and/or, and/or labor inflation, which obviously we are seeing and speaks to Vicente's point earlier. 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 Investor Day targets. 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. Again, we'll continue to be very prudent. We continue to expect margin expansion year-over-year as we go through the year.
sequentially, the margins should continue to sequentially increase quarter-to-quarter as we move from Q1 to Q4, much like you saw in 2022.
Chris Snyder (Analyst)
Appreciate all that. Thanks for taking the questions.
Vikram Kini (CFO)
You bet.
Operator (participant)
Thank you. I would now like to turn it back to the CEO, Vicente, for some final remarks.
Vicente Reynal (Chairman and CEO)
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. That's because they think and act like owners because they are owners of the company at Ingersoll Rand. 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. That, we believe, is truly positioning Ingersoll Rand as a global leader. Thank you for the time and attention today. Thank you.
Operator (participant)
Thank you all for joining. That does conclude today's call. Please have a lovely day. You may now disconnect your line.