Ingersoll Rand Q4 2022 Earnings Call Transcript

Participants

Corporate Executives

• Matthew Fort, Vice President, Investor Relations
• Vicente Reynal, Chairman and Chief Executive Officer
• Vikram Kini, Chief Financial Officer

Analysts

• Mike Halloran, Robert W. Baird
• Julian Mitchell, Barclays PLC
• Jeff Sprague, Vertical Research Partners
• Rob Wertheimer, Melius Research
• Nigel Coe, Wolfe Research
• David Raso, Evercore ISI
• Stephen Volkmann, Jefferies Financial Group Inc.
• Joshua Pokrzywinski, Joshua Pokrzywinski
• Joe O'Dea, Wells Fargo & Company
• Adam Farley, Stifel Nicolaus
• Chris Snyder, UBS Group AG

Presentation

[Operator]

Thank you for standing-by. I would like to welcome you all to the Ingersoll-Rand Q4 2022 Earnings Conference Call. [Operator Instructions]. Thank you.

I would now like to turn the conference call over to our host, Matthew Fort. So Matthew, please go ahead.

[Matthew Fort, Vice President, Investor Relations at Ingersoll Rand]

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 Reynal, Chairman and CEO; and Vik Kini, Chief Financial Officer. We issued our earnings release and the 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 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 measures 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 Vicente.

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

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. 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 over-deliver on our Investor Day commitments. We also made tremendous progress against our sustainability goals. I am very proud that Ingersoll-Rand was named to the 2022 Dow Jones Sustainability Index. As we look to 2023, demand remains solid and while macroeconomic, geopolitical and global supply chain uncertainties continue to be top of everyone's mind, we will remain agile and focused on what we can control.

IRX is our differentiator to 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 and its success is evident given the results outlined at the bottom of this page. Our portfolio is positioned to capitalize on global trends, [Technical Issues], sustainability and quality of life. We expect to leverage our oriented growth enablers to deliver mid-single-digit organic growth in 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, 5% on an annualized basis. The combined organic growth and inorganic growth of 22% also passed a low-double-digit growth commitments. 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 I2B 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 IDM across the 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 digit each year. In 2022, we continue 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 strategical and we delivered growth of 17% excluding FX. 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 I2B 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 [Indecipherable]. With 19% of our total revenue coming from IET related products, we have already exceeded our 2023 Investor Day targets. 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 or what will be the largest carbon capture and storage project in the world when it comes online in 2024, with a capacity 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 that segment, 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 million to $300 million in annualized inorganic revenues 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 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 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 company. This is a perfect example of how we leverage IRX for agile execution across all aspects of our business. In this case, we dreamed 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 Vik to provide an update on our Q4 and full-year 2022 financial performance.

[Vikram Kini, Chief Financial Officer at Ingersoll Rand]

Thanks, Vicente. On Slide 8, we finished the year with strong performance in Q4. There is a strong balance of commercial and operational execution, fueled by IRX despite the ongoing macroeconomic concerns. 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, equate 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 days. It's important to note that both segments are price, cost, dollar, and margin positive, which speaks to the nimble actions of our team despite ongoing inflationary headwinds. Corporate costs came in at $33 million for the quarter. And 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 basispoints. When adjusted to exclude the impact of M&A completed largely in 2021, PST adjusted EBITDA margin increased by 60 basis.

As you recall, most of the decline in adjusted EBITDA margins throughout the year was due to the Seepex accusation. I am pleased to report that Seepex is another maintenance story. We acquired the business at mid-teens EBITDA margin and the exit-rate in Q4 just five quarters after the acquisition is in the mid 20s. We are well underway to getting Seepex to our PST fleet average EBITDA margins. We continue to see sequential increases in PST's EBITDA margin 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 is 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 corporate costs. 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 through share repurchases and dividend. Free-cash flow for the quarter was $321 million, including capex, which totaled $34 million. Our 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. It 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 3, 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 a $184 million of M&A and $8 million to our dividend payment and $3 million for share repurchases.

M&A remains our top priority for 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.

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Thanks, Vik. 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 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 opex, which Year-over-Year was six to seven percentage point headwind across the total segment on both orders and revenue. Starting with compressors, we saw orders up in the low-single digits. And we continue to see oil free 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 and blowers, orders were up low-20s globally and the power tools 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 initiatives we are 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 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 margin, driven by price-cost improvement and synergy delivery on our recently-completed M&As [Technical Issues].

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 these hydrogen order, normalized organic orders were up slightly and on a two-year stack, organic orders are up double-digits. So our PST innovation in action, we're highlighting our EVO electric diaphragm pump. These 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 battery, specialty chemical manufacturing and food and beverage applications.

These products offer significant energy savings, leading to faster payback times for our customers. And this is yet another perfect example of sustainability and the 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% 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 since 2022, as well as acquisition of SPX FLOW Air Treatment and Paragon Tank Truck. Corporate costs are planed 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 are introducing adjusted EPS guidance. While we have not historically guided an EPS, we will now include this metric 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 which is showing the growth associated with operational activity and the headwinds associated with interest expenses, FX and changes in digital 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 February and to provide some Q1 commentary, it is worth noting that we have the organic orders continue to be positive on 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 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 though the strong use of IRX.

Thank you for your hard work, resiliency and focus 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 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.

Questions and Answers

[Operator]

[Operator Instructions]. Yeah, our first question from the line of Mike Halloran of Baird. Your line is now open.

[Mike Halloran, Analyst at Robert W. Baird]

Hey, good morning, everyone.

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Good morning, Mike.

[Mike Halloran, Analyst at Robert W. Baird]

Could we go through the first-half, second-half cadence and we're talking about obviously FX gets a little more favorable in the back-half of the year, but the growth rate slowing, how much of that is organic versus just phasing of acquisitions? And then Is it just price? Is it an assumption on the macro-environment and being a little bit worse? Just kind of any puts and takes on how you think about the seasonal factors,1H versus 2H.

[Vikram Kini, Chief Financial Officer at Ingersoll Rand]

Yeah, hey Mike, I will say that facing comparable to what we have seen historically, clearly, the item to watch is as expected, comps become more meaningful as we go into the back-half of the year. And we don't have anything assuming our guidance or the pricing 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 on the top comp, we will say kind of roughly flattish. And as we said on the remarks, good -- continue 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 loan 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. So net-net, that leads us to believe that we just don't see significant changes in our backlog as we go through 2023.

[Mike Halloran, Analyst at Robert W. Baird]

So you're essentially assuming a pretty normal sequential cadencing and not much change in the macro backdrop, if I interpret that correctly. Isn't it?

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Yeah, that's correct. And basically, as you can see a bit of a prudency here in the [Technical Issues].

[Mike Halloran, Analyst at Robert W. Baird]

Yes, that helps. And then -- then on the M&A side, obviously the backdrop has changed a little bit for you -- not for you all. You guys seem to still see very-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?

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Yeah Mike I would say that-- simple answer is, yes, in the sense that, keep in mind, yes, we're seeing much stronger momentum as we talk to the lot of the sellers out there. And what it has to do primarily because, keep in mind, that 90 plus percent of our deals and transactions are sole sourced. So we have really long-standing cultivating relationships with a company that we're looking for to be attractive to Ingersoll-Rand and the relationship goes along the lines of understanding that there is continues to be all these changes that happen every year and you know and [Indecipherable] ownership is realizing that we are a great place for them to continue to move kind of give the legacy and treat the employees in a very unique way that we knew and that is driving continued momentum of being able to open the door and have a much better conversation with a lot of these companies that we went to bring [Technical Issues].

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.

[Mike Halloran, Analyst at Robert W. Baird]

Makes sense. I appreciate it.

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Thanks, Mike.

[Operator]

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

[Julian Mitchell, Analyst at Barclays]

Hi, good morning.

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Good morning.

[Julian Mitchell, Analyst at Barclays]

Maybe just the first question I wanted to start with -- good morning, just to start would be the top-line outlook. And just to understand it so it sounds like you think that that backlog stays at about $2 billion through the year, a book-to-bill around $1 billion for the year as a whole. And then within the second-half organic sales guide, you're assuming sort of volumes are down slightly, but that's solely a function of comp since it is not related to destocking or any particular region softening or anything like that.

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Yeah, that is absolutely correct Julian. That was accurate. [Speech Overlap]. What I want to add to that Julian is in the report too as well. We view these as prudency. [Indecipherable], and as you know, we'll continue to update as the year goes kind of what is similar to what we did here in 2022.

[Julian Mitchell, Analyst at Barclays]

That's helpful and then just on the thinking about the sort of the earnings seasonality, I know in 2022, we spent the whole year 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. So just to understand for 2023, are you assuming kind of first-half, second-half EPS split, is the consensus. Yeah, 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?

[Vikram Kini, Chief Financial Officer at Ingersoll Rand]

Yeah, Julian. This is Vik. I'll take that. I think the answer is that that's correct. I think the phasing -- what we want to talk about top line or on the earnings side of the equation is very consistent with what you've seen historically. I think the the margin implication on from an adjusted EBITDA perspective is roughly speaking, close to a 100 basis-points on a total year basis for total company which remains relatively consistent and right in line with what we messaged at our last Investor Day. So, again nothing dramatically different there, but yeah, the phasing is very much consistent with what you've seen in years past.

[Julian Mitchell, Analyst at Barclays]

That's great. Thank you.

[Operator]

Thank you. We now have Jeff Sprague of Vertical Research Partners. Please go ahead you are ready.

[Jeff Sprague, Analyst at Vertical Research Partners]

Thank you and good morning. Just on the price cost. Hey, good morning, thanks for the question. I 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 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?

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Yeah, Jeff. So, yes, correct. 70% price as we go and we communicated 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 normalize as what we have done in the past which 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 [Technical Issues] that the cost side, basically stay at these levels. So we [Technical Issues] assuming a major deflationary market.

[Jeff Sprague, Analyst at Vertical Research Partners]

And then just maybe totally shifting gears just thinking about some of the initiatives in the -- in particularly IIOT enabled initiative, to what extent our customers paying additional for that capacity. And to what extent, given the product actually has that capability, is it driving higher or kind of more profitable service or other revenue streams.

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Yeah, a great question, Jeff. You know. So the pay in additional comes in from as you referenced to, again which is with the added services that we're offering. So we are having a remotely connected device. We're able to better service agreements with our customers and therefore that generate a higher recurring revenue streams 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 increased way to add services, increased way of adding energy efficiency and net-net, it's a very quick return for the customer [Technical Issues]

[Jeff Sprague, Analyst at Vertical Research Partners]

Great, thank you.

[Operator]

Thank you, Jeff. Your next question comes from the line of Rob Wertheimer of Melius Research. Please go ahead you are ready.

[Rob Wertheimer, Analyst at Melius Research]

All right. Thank you. Good morning, everybody. So. I just wanted to go back to the revenue outlook -- hey -- the revenue outlook for a minute, where you have backlog of I think 30% in organic growth. You have 70% cover that price up three to five. And so I think you mentioned earlier, Vicente, that you're not assuming a whole lot of supply-chain improvement in cost. Is the revenue still constrained by supply-chain. If that loosens up, is there upside there? How do we sort of sort the backlog and the orders and the revenue outlook?

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Yeah, Rob. I mean, some constrained by supply-chain, but also keep in mind too as well labor. So. I think as we kind of continue to throughout the year and we continue to see better productivity, but it really much more so on the prudency and why we say that backlog will stay at the current level as we continue to shift more towards our more normal facing that we typically have. So, yes, some supply chain constraint, but the majority I'll say more of labor constraints to be able to bring more people to factories and be able to ship more.

[Rob Wertheimer, Analyst at Melius Research]

Okay, perfect. And then I apologize if I missed in the prepared remarks, but, I see 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 [Indecipherable] or things are fading. Thank you.

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Yeah. I think it's great question, Rob and you know, we're seeing it 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 some times better to look at it first-half to the second-half and we actually saw acceleration organically going into the second-half from compared to the first-half.

And that is because it's important to note that also IPS Americas in the third-quarter, we had one of the biggest quarters that we can recollect, for our 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 IPS Americas, which kind of gives us good confidence on continued kind of fundamental solid strength, demand and as we said also in the remarks, as we go into year -- into the 2023, we're seeing continued positive organic order momentum pretty much across all the regions, Including IPS Americas.

[Rob Wertheimer, Analyst at Melius Research]

Great, thank you.

[Operator]

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

[Nigel Coe, Analyst at Wolfe Research]

Thanks, good morning, everyone. So it seems like you know -- morning -- you talked about hydrogen order in the prior year and order in North American slipping into 2023. So it seems like we've got larger lumpy orders coming through, which given these mega projects, decarb reshoring type projects, we should expect. I mean, do you agree with that disagree that we will have lumpier orders sequentially from here. And maybe a question, as we get larger orders, do we have comparable margins to -- on these larger orders versus run rate?

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

So, to answer the first question, that's really 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 these projects come in with pretty good margin too as well. And obviously, being large, so it will 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 a 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.

[Nigel Coe, Analyst at Wolfe Research]

Okay, yeah, nothing, no lumpy sounds there-- They can you be revenue. And then I want to go and see this revenue growth [Technical Issues] is at 17% ex-FX. Just so that implies I don't know mid-teens, low-mid teens organic service growth, which is pretty good. So, just wondering you come back to Jeff's question, to what extent is the sales growth being driven by I don't know some kind of deferred catch up or are we felt seen this IIoT enabled devices down to contribute meaningfully to revenue growth and anything for that would be helpful.

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Yes. It is, I would say, it's more of the latter in some regards. As you remember, during our Investor Day, we spoke about our care packages and service agreements that we developed as they get related to our IIoT-related services. And we're definitely seeing very good acceleration of that, driven by trend such as not been able -- customers not able to find the skilled labor that is needed in the factory to be able to service, repair and maintain compressors or other devices where we can provide that. And in addition to that, we can provide an energy efficiency as a 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 [Technical Issues] teams are doing very well on that.

[Nigel Coe, Analyst at Wolfe Research]

All right, I'll leave it there. Thanks for the questions.

[Operator]

Thank you. Your next question comes from David Raso with Evercore ISI.

[David Raso, Analyst at Evercore ISI]

Hi. Thank you. I just wanted to pick up on the orders so far in '23 commentary. Even excluding the hydrogen comp, PST orders were up 0.2%, basically flattish year-over-year, while the ITS obviously was up 3.6%. Are you saying the order growth has accelerated so far in '23, just to be clear?

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

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

[David Raso, Analyst at Evercore ISI]

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

[Vikram Kini, Chief Financial Officer at Ingersoll Rand]

Yes, 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 that 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 book/ship type business. So, we've been seeing comparable margin performance and comparable pricing across both the shorter cycle and longer cycle components of our business.

[David Raso, Analyst at Evercore ISI]

I appreciate it. Thank you.

[Operator]

Thank you. We now have Steve Volkmann of Jefferies. Please go-ahead when you ready.

[Stephen Volkmann, Analyst at Jefferies Financial Group]

Great, thanks, good morning guys. I wanted to go back to the supply-chain. I was interested in your comments that you didn't project anything really improving through the year. But can you just give us the sort of current conditions, because it seems like we're hearing sort of broadly that things are improving, so I just wanted to kind of square those up.

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Yes. I mean, so it is definitely improving as compared to last year. What we're saying is that -- but there's still some bottlenecks and issues that pop up here and there. So, it's not -- again, 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, these were 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 there.

[Stephen Volkmann, Analyst at Jefferies Financial Group]

Okay. Great. And then, just Vik, anything -- I think you mentioned 100 basis points of EBITDA margin through the year. Anything to think about relative to the two segments or one versus the other?

[Vikram Kini, Chief Financial Officer at Ingersoll Rand]

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

[Stephen Volkmann, Analyst at Jefferies Financial Group]

Great, thank you guys.

[Operator]

Thank you. We now have Joshua Pokrzywinski from Morgan Stanley. Your line is now open. Josh.

[Joshua Pokrzywinski, Analyst at Joshua Pokrzywinski]

Just wanted to dig into -- 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 [IT&S]. You talked about some of the big drivers, Vincente, around things like nearshoring, kind of a broadercCapex cycle. I mean, we just haven't seen one of those in so long. I'm just wondering like are you seeing 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 has kind of been caused by all this post-COVID interruption?

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Yes, 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 even capacity. And just to put in perspective, I mean, it's not dissimilar to what we or Ingersoll Rand were doing ourselves. So, as you remember, last year, we reopened our Buffalo facility. So that was -- you could consider that as an expansion of capacity. We also invested in expanding our factory in Brazil. So that was actually you can think about 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 a most strategic factor and uniqueness that we have as a company and this goes back goes back all the way from our Gardner Denver days that we were doing that. So we've seen 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, and I think our ability to flex our products and our localization to that, it's driving that pretty good momentum. I would say.

And from a technology perspective to your question, we're seeing solid momentum, and we said that on the prepared remarks on oil-free, which again is good news because we're moving more towards these kind of high-growth sustainable end-markets, food, beverage, pharma, that, we can provide more unique solutions to those customers and therefore see that accelerated growth.

[Joshua Pokrzywinski, Analyst at Joshua Pokrzywinski]

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

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Sure, Josh. Maybe I'll see it -- kind of put it in two buckets. One is the -- on the PST side, where we make dispensing units, we're seeing better momentum on acceleration that 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 gets to the U.S. And we're seeing that. Started in Asia Pacific, it's moving to Europe, and we're seeing conversations about dispensing hydrogen networks and things like that in the US, as you very well saw on the IRA budgetary commentary that we will read about.

On the ITS, it's not too dissimilar. But I will say that the large capital investments that have been talked about in terms of hydrogen, we're not seeing that kind of come through fruition yet within the compressor side or the ITS side. So, we still think that there may be 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. But -- so good tailwinds we expect for a couple of years to come.

[Joshua Pokrzywinski, Analyst at Joshua Pokrzywinski]

Great. Thanks for the color. I'll leave it there.

[Operator]

Thank you. We now have Joe O'Dea from Wells Fargo. You may proceed.

[Joe O'Dea, Analyst at Wells Fargo & Company]

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?

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Yes, 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 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 -- 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.

[Joe O'Dea, Analyst at Wells Fargo & Company]

Okay. And then, just a clarification on the $200 million 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?

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Yes, Joe, so 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 million 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 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. 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.

[Joe O'Dea, Analyst at Wells Fargo & Company]

Okay and then. But are those 11 included in the 200 to 300 that you're-- talking about acquiring over the course of 2023.

[Vikram Kini, Chief Financial Officer at Ingersoll Rand]

That is correct. Yes, so. I think our re-- kind of affirmation of the capital allocation strategy includes that we expect to close another $200 million 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.

[Joe O'Dea, Analyst at Wells Fargo & Company]

Got it that's helpful, thanks a lot. Thanks a lot.

[Operator]

We now have, Nathan Jones, Stifel. Your line is now open.

[Adam Farley, Analyst at Stifel Nicolaus]

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

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Yes, Adam, so I'll just say to that, a big thank you to our team in China and 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. So, generally, I think our team continues to be pretty agile and nimble as to finding the growth vectors that are being seen in China, and they've taken our products and repositioned 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.

[Adam Farley, Analyst at Stifel Nicolaus]

Okay. And then, on the recent close of the SPX FlLOWAir Treatment business, could you provide any color on revenue or cost synergy opportunity, given that it's still early days of integration work?

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Yes, sure, Adam. So, to repeat, we did close the SPX FLOW transaction at January 3, at the beginning of this year. Using rough numbers, we can kind of expect something right around $180 million of revenue contribution, 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-20%s type EBITDA margin range. And as we did say when we announced the transaction, we do see -- over a multiyear basis, we do see cost opportunities and synergy opportunities to drive that to be accretive to ITS segment margins in due course.

So, again, we're about 45 days in, I would say, the integration process, as you would expect, using IRX and the whole IDM process to kind of guide the integration, it's going as well as we had expected, and things are very much tracking in line with expectations. [Technical Issues] started and as you would expect, that's that's the single biggest contributor up to $270 million of M&A that's included within our guidance.

[Adam Farley, Analyst at Stifel Nicolaus]

Okay, thank you for taking my questions.

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Thank you.

[Operator]

Thank you. We now have Chris Snyder with UBS. Please go-ahead. When you're ready, Chris.

[Chris Snyder, Analyst at UBS Group]

Thank you. I want to follow up on some of the order trends. So, 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 of quarters to play out? And then what type of visibility do you have into orders as we go beyond Q1, maybe into the back half of '23? Thank you. Yes. Sure, Chris. So, I guess, I'll start by saying, I think the way you described it is relatively accurate. Yes, we did see a little over 0.9 in Q4. 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. And that's largely attributable to shipping the longer -- 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 bill to be less than 1. But to Vicente's point and some of the commentary, we are seeing the order momentum continuing here in the first quarter, quarter-to-date through the first week in February. Orders -- 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, continued to be encouraged by the trending. As Vicente said, backlog continues to remain healthy with a good contribution from the longer cycle projects, which will continue to extend over a 12- to 18-month timeframe. So again, yes, book to bill less than one, but quite normal in Q4 and continue to be encouraged about what we see here moving into 2023. No, yes, I appreciate that and I appreciate the color on the seasonality. And then, on the implied margin guidance, so my math kind of pegged EBITDA margins up 70 bps, maybe up to 80 bps year-on-year at the midpoint. So obviously, a bit below the run rate that we've seen and below the kind of the multiyear target that the company has laid out at 100 basis points. But it sounds like price/cost 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.

[Vikram Kini, Chief Financial Officer at Ingersoll Rand]

Sure. I'll take that one, Chris. So, yes, 80 basis points 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 multiyear timeframe. Obviously, worth noting that we have outpaced that in the prior two years. So, 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 to continue to be price/cost positive. We are still driving productivity, as well as the synergies, the last phase of the merger to merger-led synergies to offset any degree of merit and/or labor inflation, which obviously we are seeing and speaks 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 Investor Day target. 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 called out specifically even at the corporate level around demand generation and IIoT.

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 could continue to sequentially increase quarter-to-quarter as we move from Q1 to Q4, much like you saw in 2022.

[Chris Snyder, Analyst at UBS Group]

Appreciate all of that. Thanks for taking the questions.

[Operator]

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

[Vicente Reynal, Chairman and Chief Executive Officer at Ingersoll Rand]

Thank you so much. As I kind of wrap up the call today, I just want to say that our teams have done an outstanding job executing our plan throughout 2022, despite the ongoing macro challenges, and that's because they think and act like owners, because they are owners to the company at Ingersoll Rand. 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 in sustainability, innovative product 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.

[Operator]

[Operator Closing Remarks]