Ingersoll-Rand (India) Ltd (INGERRAND) Q4 FY22 Earnings Concall Transcript

Ingersoll-Rand (India) Ltd (NSE:INGERRAND) Q4 FY22 Earnings Concall dated Feb. 21, 2023.

Corporate Participants:

Matthew Fort — Vice President, Investor Relations

Vicente Reynal — Chairman & Chief Executive Officer

Vik Kini — Chief Financial Officer

Analysts:

Michael Halloran — Baird — Analyst

Julian Mitchell — Barclays — Analyst

Jeffrey Sprague — Vertical Research Partners — Analyst

Rob Wertheimer — Melius Research — Analyst

Nigel Coe — Wolfe Research — Analyst

David Raso — Evercore ISI — Analyst

Stephen Volkmann — Jefferies — Analyst

Joshua Pokrzywinski — Morgan Stanley — Analyst

Joseph O’Dea — Wells Fargo — Analyst

Adam Farley — Stifel — Analyst

Christopher Snyder — UBS — Analyst

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]

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

Thank you, and welcome to the Ingersoll Rand 2022 fourth quarter earnings call. I’m 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 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 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’ll turn the call over to Vicente.

Vicente Reynal — Chairman & Chief Executive Officer

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 growth 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. Well, thinking and acting like owners to deliver on our commitments. And our performance this year clearly reinforces the impact we have as owners of Ingersoll Rand.

Starting on 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, and I’m very proud that Ingersoll Rand was named to the 2022 Dow Jones Sustainability World Index. As we look to 2023, then demand remains solid and while microeconomic, 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 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 and its success is evident, given the results outlined at the bottom of this page. Our portfolio is positioned to capitalize on global megatrends, digitization [Phonetic], sustainability and quality of life. We expect to leverage our organic growth enablers to deliver mid-single-digit organic growth through 2025. And as you can see, we outperformed this commitment again in 2022, delivering 16% year-over-year organic revenue growth. In 2022, we delivered 4% of in year growth from M&A, 5% on an annualized basis. Combined organic growth and inorganic growth of 20% are surpassed a 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 performance 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 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 i2V actions. As we continue to align our business through the mega growth trends, we formalized our IR digital team to accelerate how we create new revenue streams. It’s important to note that this is an incremental investment we made in addition to the teams that reside at the business level. With 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 megatrend. We were selected to be a critical technology provider for what will be the largest carbon capture and storage project in the world when it comes online in 2024, with a capacity to permanently capture and store 12 million tons of carbon dioxide gas every year. This one project will deliver more than $14 million of revenue for Ingersoll Rand between 2023 and 2024.

On Slide 6, 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 revenue to be acquired in 2023. Finally, we started the year well with regards to executing on our inorganic strategy with the recently completed acquisition of 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 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 Vik to provide an update on our Q4 and full-year 2022 financial performance.

Vik Kini — Chief Financial Officer

Thank you, Vicente. On Slide 8. We finished the year with strong performance in Q4. There was 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 acquired 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 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 a 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 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 with 19.7% and the full-year adjusted rate finishing slightly below 22%.

On Slide 10. Total company full-year orders grew 16% and revenue increased 21%, growth on an FX-adjusted basis. Total company adjusted EBITDA increased 20% from the prior year. The ITS segment margin increased a 100 basis points or the PST segment margin declined 70 basis. When adjusted to exclude the impact of M&A completed modestly 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 acquisition. I’m pleased to report that Seepex was an another major story. We acquired a 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 adjusted EBITDA margins and now PST margins are generally back in-line with where we’ve seen them historically at approximately 30%. Both segments, finished the year price-cost dollar and margin positive, which was the 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. 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 dividends. 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 facility. It’s 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 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 to M&A, $8 million to our dividend payments 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 usage of cash.

I will now turn the call back to Vicente to discuss our segments.

Vicente Reynal — Chairman & Chief Executive Officer

Thanks, Vik. On Slide 12, our Industrial Technologies and Services segments 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 ITS 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 a 6 to 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, 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 pushed 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 vacuums and blowers, orders were up low-20s globally. And the Power Tools & Lifting orders grew mid-single-digits.

Moving to the innovation in action portion of the slide, we’re highlighting our footprint expansion in India, which is another organic investment initiative we’re driving. We have seen significant growth in India, and we continue to drive opportunities for in region for 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 improvements and synergy delivery on our recently completed M&A adjusted effect.

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 years span, organic orders are up double digit. For our PST innovation in action, we’re highlighting our EVO Electric Diaphragm pump. This recently launched product is the only electric triple chamber diaphragm pump in the market. The EVO Series pump is utilizing high growth in markets, such as electric vehicle batteries, specialty chemical manufacturing and food and beverage applications. This product offers significant energy savings leading to faster payback times for our customers. And this is yet another perfect example of sustainability as a growth driver and our focus on high-growth sustainable end markets, enabling us to deliver 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 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 IoT and demand generation. Total adjusted EBITDA for the company is expected to be in the range of $1.57 billion and $1.63 billion.

At the bottom of the table, we’re introducing adjusted EPS guidance. While we have not historically guided an EPS, we will now include these key 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 activities and the headwinds associated with interest expenses, FX and changes in the adjusted tax rate. Based on the above guidance, adjusted EPS growth attributed to operational performance is approximately 13% to 17%, offset by approximately 8% in headwinds from interest expense, FX and the adjusted tax rate. As we sit here in mid-February and to provide some Q1 commentary, it is worth noting that we have seen organic orders continue to be positive on a 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 prepared for any challenges that may come. To our employees, I want to thank you again for an excellent finish to the year. We delivered strong results by demonstrating our commitment to meet our financial targets and executing our economic growth engine through the strong use of IRX. Thank you for your hard work and focused actions. These results showed the impact you have as owners of the company. Our balance sheet is strong, and with our discipline and comprehensive capital allocation policy and strategy, we remain resilient or have the capacity to deploy capital to investments with the highest return as we continue our track record of market outperformance.

With that, I will turn the call back to the operator and open for Q&A.

Questions and Answers:

Operator

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

[Operator Instructions]

We have our first question from the line of Mike Halloran of Baird. Your line is now open.

Michael Halloran — Baird — Analyst

Hey. Good morning, everyone.

Vicente Reynal — Chairman & Chief Executive Officer

Good morning, Mike.

Vik Kini — Chief Financial Officer

Good morning.

Michael Halloran — Baird — Analyst

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

Vicente Reynal — Chairman & Chief Executive Officer

Yeah. Hey, Mike, I’ll say that pacing comparable to what we have seen historically, clearly, the item to watch is that expected comps become more meaningful as we go into the back half of the year. And we don’t have anything assumed in our guidance or the pacing related to supply chain returning to normalization or significant commodity deflation either. And so in terms of the organic, I mean, second half, based on that and the top comp we say, kind of roughly flattish. And as we said on the remarks, good, continued momentum that we see on price. And what we expect is that, we expect as we go through the year to see continued strength on kind of what we call the 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.

Michael Halloran — Baird — Analyst

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

Vicente Reynal — Chairman & Chief Executive Officer

That’s correct. Yes, that’s correct. And basically, as you can see a bit of a prudency here in the second half.

Michael Halloran — Baird — Analyst

Yes. No, that helps. And then on the M&A side, obviously, the backdrop has changed a little bit. Not for you all, you guys seem to still see very high levels of success here. Maybe you could just talk about what the buyer’s mentality is? Obviously, you’ve got a lot of deals you’re working on, the LOIs are high. Have you seen a greater willingness by buyers to move forward and consummate some of these transactions? And has there been any change in that landscape at all?

Vicente Reynal — Chairman & Chief Executive Officer

Yeah, Mike, I would say that the simple answer is yes in the sense that, keep in mind — yes, we’re seeing much stronger momentum as we talked to a lot of the — sellers out there. And — but it has to do primarily because keep in mind that 90%-plus of our deals and transactions are sole sourced. So we’ve really long-standing cultivating relationships with the company that we’re looking for to be attracted to Ingersoll Rand. And the relationship goes along the lines of understanding that, hey, there used to be all these changes that happen every year and how many ownership is realizing that we’re a great place for them to continue to kind of give the legacy and treat employees in a very unique way the way we do. And that is driving 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. 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.

Michael Halloran — Baird — Analyst

Thanks, Vincente. I appreciate it.

Vicente Reynal — Chairman & Chief Executive Officer

Thanks, Mike.

Operator

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

Julian Mitchell — Barclays — Analyst

Hi. Good morning. Maybe just the first question I wanted to start with…

Vicente Reynal — Chairman & Chief Executive Officer

Good morning.

Julian Mitchell — Barclays — Analyst

Good morning — just to start with the topline 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 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 comps. It’s not related to destocking or any particular region softening or anything like that?

Vicente Reynal — Chairman & Chief Executive Officer

Yeah, that is absolutely correct, Julian. Yes, that’s exactly right.

Julian Mitchell — Barclays — Analyst

That’s helpful. Thank you.

Vicente Reynal — Chairman & Chief Executive Officer

And again, we’re saying that we’re viewing these as — perfect. I was going to add to that, Julian, is that as I said on the answer report to as well, we view these as a prudency right now at this stage. And as you know, we’ll continue to update as the year goes kind of not to the similar to what we did here in 2022.

Julian Mitchell — Barclays — Analyst

That’s helpful. And then just on the thinking about the sort of the earnings seasonality because 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 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?

Vik Kini — Chief Financial Officer

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

Julian Mitchell — Barclays — Analyst

That’s great. Thank you.

Operator

Thank you. We now have Jeff Sprague of Vertical Research Partners. Please go-ahead when you’re ready.

Jeffrey Sprague — Vertical Research Partners — Analyst

Thank you. Good morning. Hey, just on the price cost…

Vicente Reynal — Chairman & Chief Executive Officer

Good morning.

Jeffrey Sprague — Vertical Research Partners — Analyst

Hey, good morning. Thanks for the question. Just want to be clear, I think you said 70% of the organic growth guide was priced, just confirming that. But the question is, would that just be a carryover price? Or are there other actions in flight for 2023? And maybe you can also just give us some perspective on just the total price cost equation for 2023 embedded in the guide?

Vicente Reynal — Chairman & Chief Executive Officer

Yes, 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 if that one is more normalized as what we’ve 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’ve that the — cost side basically stays at this level. So we’re not assuming a major deflationary market.

Jeffrey Sprague — Vertical Research Partners — Analyst

And then just maybe totally shifting gears, just thinking about some of the initiatives in 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, is it driving higher or kind of more profitable service or other revenue streams?

Vicente Reynal — Chairman & Chief Executive Officer

Yeah. Great question there, Jeff. So the paying additional comes in from, as you now referenced to [Indecipherable] which is with the added services that we’re offering. So, we’re having a remotely connected device, we’re able to have better service agreements with our customers, and therefore, that generates a higher recurring revenue streams that we see. So that’s the whole purpose of why we want to have our IIoT ready and enable machines, because we want to generate new revenue streams that are more recurring in nature on top of, obviously, selling the device. So I think that’s what we’re seeing. And in terms of customers willing to pay for it, I’ll say, yes. I mean, because today, there’s a lot of lack of skilled labor out there 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 yes, I think it’s just one of those that we see it as an increased way to add services, increased way of adding energy efficiency. And net-net, it’s a very quick return for the customers on what they pay.

Jeffrey Sprague — Vertical Research Partners — Analyst

Great. Thank you.

Operator

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

Rob Wertheimer — Melius Research — Analyst

Thank you. Good morning, everybody.

Vicente Reynal — Chairman & Chief Executive Officer

Good morning, Rob.

Rob Wertheimer — Melius Research — Analyst

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

Vicente Reynal — Chairman & Chief Executive Officer

Yeah, Rob, I mean, some constraint by supply chain, but also keep in mind too as well labor. So I think as we kind of continue throughout the year and we continue to see better productivity, but it’s really much more so on the prudency and why we say that backlog will stay at the current level as we continue to shift more towards our more normal pacing that we typically have. So some supply constrained, 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 — Melius Research — Analyst

Okay. Perfect. And then I apologize if I missed in 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 in order [Indecipherable] are fading away. Thank you.

Vicente Reynal — Chairman & Chief Executive Officer

Yes. Thanks, that’s a great question, Rob. And we’re seeing actually a very good momentum and 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 Americas, and it’s something better to look at it first half to the second half. And you — we actually saw acceleration organically going into the second half from — compared to the first half. And that is because it’s important to note that also ITS Americas in the third quarter, we have one of the biggest quarters that we can recollect for where book-to-bill was close to 1.2 back in Q3. So again, I think we view it more from 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 continued kind of fundamental solid strength demand. And as we said also in the remarks, as we go into — here into the 2023, we’re seeing continued positive organic order momentum pretty much across all the regions, including ITS Americas.

Rob Wertheimer — Melius Research — Analyst

Great. Thank you.

Operator

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

Nigel Coe — Wolfe Research — Analyst

Thanks. Good morning, everyone.

Vicente Reynal — Chairman & Chief Executive Officer

Good morning.

Nigel Coe — Wolfe Research — Analyst

Yes, good morning. You talked about this hydrogen order in the prior year, an order in North America slipping into 2023. So it seems like we’ve got larger, lumpier orders coming through, which given these mega project decarb reshoring type projects we should expect, I mean, do you agree with that, that we will have lumpier orders sequentially from here? And my real question is, as we get larger orders, do we have comparable margins to — on these larger orders versus sort of run rate?

Vicente Reynal — Chairman & Chief Executive Officer

So to answer the first question, sort of 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 you that historically, we have always said that these projects come in with pretty good margin too as well, and obviously, being large as well create good flow-through as they kind of go in through the P&L. So it’s — for us, it’s good news that we’re seeing the release of these capex projects. They are more loan cycle, gives us greater 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 likes.

Nigel Coe — Wolfe Research — Analyst

Okay, yeah, nothing on the lumpy as long as there they can generate revenue and then I’m going to go and revenue growth, you said 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 just question, to what extent is the sales growth being driven by I don’t know some kind of deferred catch-up or would it are start seeing are we seeing this IIoT-enabled devices starting to contribute meaningfully to revenue growth? Any details there would be helpful.

Vicente Reynal — Chairman & Chief Executive Officer

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 trends such as not been able to — 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 on work that the teams are doing very well on that.

Nigel Coe — Wolfe Research — Analyst

Great. I’ll leave it there. Thanks for the questions.

Vicente Reynal — Chairman & Chief Executive Officer

Thank you.

Operator

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

David Raso — Evercore ISI — Analyst

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 & Chief Executive Officer

Well, David, yes, 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 — Evercore ISI — Analyst

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?

Vik Kini — Chief Financial Officer

Yes, David, I would say, so 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 — Evercore ISI — Analyst

All right. Appreciate it. Thank you.

Operator

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

Stephen Volkmann — Jefferies — Analyst

Great, thanks. Good morning, guys. I want to go back to the supply chain. I was interested in your comments, but 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 & Chief Executive Officer

Yes. I mean, so it is definitely improvement as compared to last year. What we’re saying that, but there’s still some bottlenecks and issues that here and there, so it’s up. I guess what we’re saying that it is not perfect, it is not back to normal conditions. And that what we foresee here as we go into 2023, was that aided headed with the reopening of China or a lot of the capex cycle releases that we’re seeing in terms of loan cycle, we think there’s going to be continued constraints in the supply-chain so these we’re just being more proactive in terms of kind of realizing that there’s a lot of work that our teams need to continue to do and realizing that, hey, things are not going to be back to normal from a supply-chain perspective as we go into the second half based on a lot of these other kind of trends or indicators that we’re seeing that are happening in there.

Stephen Volkmann — Jefferies — Analyst

Okay. Great. Thanks. 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?

Vik Kini — Chief Financial Officer

Yeah. It’s a good question. So, yeah, approximately 100 basis points enterprise-wide. You’re going to see both segments trend right around there. I do think 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 — Jefferies — Analyst

Great. Thank you, guys.

Operator

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

Joshua Pokrzywinski — Morgan Stanley — Analyst

Hi, good morning, guys.

Vicente Reynal — Chairman & Chief Executive Officer

Good morning, Josh.

Joshua Pokrzywinski — Morgan Stanley — Analyst

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 broader capex 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 & Chief Executive Officer

Yes, Josh, I’ll say that we’re seeing a little bit — good land of both in terms of new rooftops as well as expanding leading capacity. And just to put it in perspective. I mean it’s not dissimilar to what we are Ingersoll Rand, we’re doing ourselves. So as you remember, last year we reopened our portfolio facility. So that was you can consider that as an expansion of capacity. We also invested in expanding our factory in Brazil. So that was actually you can think about it incremental rooftop. We just here announced our expansion of the footprint and creation of a new build 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 in the 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. So again we’ve seen a 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 when we did that on the prepared remarks on oil-free, which again is good news because we’re more-and-more towards these kinds 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 — Morgan Stanley — Analyst

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 it’s not 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 & Chief Executive Officer

Sure, Josh. Maybe I’ll see it — I 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 US. 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 said on the IRA budgetary commentary that we’re 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 — Morgan Stanley — Analyst

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

Operator

Thank you. We now have Joe O’Dea of Wells Fargo. You may proceed.

Joseph O’Dea — Wells Fargo — Analyst

Hi, thanks for taking my questions. I wanted to start on the backlog, I think you said a little over $2 billion of backlog, but it sounds like the view would be that’s more 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 & Chief Executive Officer

Yeah, Joe, I would say that normalized maybe right now here in 2023. As we go into 2024 and longer than that, we’ll see. I mean, we expect that things will get back to the way they were before. Our view in terms of why we should continue to see backlog at this higher level is again because of a lot of these kind of long cycle capex releases that we’re seeing that, that should continue to add on to that backlog while we continue to see maybe solid fundamental growth on the short cycle as we’ve 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.

Joseph O’Dea — Wells Fargo — Analyst

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?

Vik Kini — Chief Financial Officer

Yeah, 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.

Joseph O’Dea — Wells Fargo — Analyst

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

Vik Kini — Chief Financial Officer

That is correct. Yes, so I think our kind of affirmation of the capital allocation strategy includes that we expect to close another $200 to $300 million on an annualized basis and obviously that’s contingent on the timing in terms of what will actually impact 2023, but that is correct.

Joseph O’Dea — Wells Fargo — Analyst

Got it. That’s helpful. Thanks a lot.

Operator

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

Adam Farley — Stifel — Analyst

Good morning. This is Adam Farley on for Nathan.

Vicente Reynal — Chairman & Chief Executive Officer

Good morning.

Adam Farley — Stifel — Analyst

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 & Chief Executive Officer

Yeah, 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 — Stifel — Analyst

Okay. And 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?

Vik Kini — Chief Financial Officer

Yes, sure. So to repeat. we feel close the SPX Air Flow transaction January 3, the beginning of this year. In rough numbers you can kind of expect something right around $180 million of revenue contributions, slightly less than $200 million and very much in-line with a lot of the M&A deal historically it’s coming in right in that kind of mid 20s type EBITDA margin range. And as we did say when we announced the transaction, we do see, over a multi year basis, we do see cost opportunities and synergy opportunities to drive that to be accretive to ICS 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 that [Indecipherable] help with enough to kind of 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 — Stifel — Analyst

Okay. Thank you for taking my questions.

Vik Kini — Chief Financial Officer

Thank you.

Operator

Thank you. We now have Chris Snyder with UBS. Please go ahead when you’re ready.

Christopher Snyder — UBS — Analyst

Thank you. I want to follow-up on some of the order trends. So. the book-to-bill is going from a $0.91 million in Q4 to an expected 1.0 in 2023. Should it 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.

Vik Kini — Chief Financial Officer

Yeah. 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’re 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 1, but quite normal in Q4 and continue to be encouraged about what we see here moving into 2023.

Christopher Snyder — UBS — Analyst

No, yeah, 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.

Vicente Reynal — Chairman & Chief Executive Officer

Sure, I’ll take that one. Chris. So, yes, 80 to 90 basis-points. So slightly red below 100 basis-points, that’s probably right in-line. I think, a few things to note, When we gave our Investor Day targets we said to expect about 100 basis-points on average over a multi year 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 lead service to offset any degree of merit and/or labor inflation, which obviously we are seeing. speaks to our percentage point earlier. Well 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. 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 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.

Christopher Snyder — UBS — Analyst

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 & Chief Executive Officer

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’ve 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]