Ingersoll Rand Inc. (IR) Q4 2021 Earnings Report, Transcript and Summary

00:06 Hello all, and a warm welcome to the Ingersoll Rand 2021 Fourth Quarter and Full-Year Earnings Call. My name is Lithia and I'll be your operator today. [Operator Instructions] 00:23 It's my pleasure to now hand you over to our host, Chris Miorin, Vice President of Investor Relations at Ingersoll Rand. Please go ahead when you're ready.

00:33 Thank you and welcome to the Ingersoll Rand 2021 fourth quarter and full-year earnings call. I'm Chris Miorin, 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 yesterday and we will reference these during the call, both are available on the Investor Relations section of our website www.irco.com. In addition, a replay of this conference call will be available later today. 01:07 Before we start, I want to remind everyone that certain statements on this call are forward-looking in nature and are subject to the risks and uncertainties discussed in our previous SEC filings, which you should read in conjunction with the information provided on this call. Please review the forward-looking statements on Slide 2 for more details. 01:27 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. 01:47 On today's call, we will provide a strategy update, review our company and segment financial highlights and announce 2022 guidance. For today's Q&A session, we ask that each caller keep to 1 question and 1 follow-up to allow time for other participants. 02:04 At this time, I'll turn the call over to Vicente.

02:07 Thank you, Chris, and good morning to everyone. Starting on slide 3, 2021 was a pivotal year for Ingersoll Rand with many accomplishments and new records. We solidified our compounding growth story as we reshaped our portfolio to focus on mission critical flow creation technologies and high growth sustainable end markets. While establishing a new capital allocation strategy designed to enable us to consistently compound earnings over time. 02:37 We continue the strong operational execution where the commercial effectiveness of our team, driven by our IRX process yielded a backlog at the end of the fourth quarter that was our largest ever and positions us very well for continued strong results in 2022 as demand for our products and services continues to grow. 03:00 Moving to slide forward, I want to take a moment to recognize some of the accomplishments across each of our 5 strategic imperatives in 2021. In Deploy Talent our employees think like owners, because they are, shares granted to employees today have appreciated from $250 million to over $500 million in value, motivating our engaged employee base to make decisions each day that can benefit our value creation and ultimately their personal wealth. Furthermore, we implemented a plan to also grant shares to employees who joined us as new employees or via acquisitions, yet another factor enabling Ingersoll Rand to be considered an employer and acquirer of choice. 03:49 Our employee engagement score up 17% over the last 3 years also shows the power of ownership. Our current engagement score now ranked in the top quartile of manufacturing organization. In Expand Margins, we have improved the company's adjusted EBITDA margin 370 basis points in 2019, include an improvement of 160 basis points in 2021 alone. We have realized $215 million in synergies out of the $300 million commitment from the IR merger with an additional $50 million expected in 2022. It operates terribly, we continue to make progress and have received recognition from ESG rating agencies, including S&P Global and MSCI. Once again demonstrating how we leverage the power of IRX to drive performance across a multitude of initiatives. 04:46 In accelerate growth our unique growth enablers outlined during our 2021 Investor Day strongly contributed to growth in the past year. Our demand generation engine now generates 3 times more marketing qualified leads compared to 2018. IIoT enabled assets were up 250% year-over-year and new product innovation increased 95% in 2021. We allocate capital effectively, we secured approximately $2 billion in gross proceeds from the divestitures of Club Car and High Pressure Solutions. And we deployed over $1 billion to acquisitions in 2021, which represents over 6% of sales when annualized. 05:32 We also repurchased $731 million in shares as part of the KKR’s final equity sale, established a new $750 million share repurchase program and initiated a quarterly dividend of $0.02 per share during the fourth quarter. We're incredibly proud of our 2021 accomplishment and could not have done it without the dedication of our team. 05:56 Turning to Slide 5. We're committed to executing the strategy we outlined at our 2021 Investor Day and are confident it will produce the expected results. This slide outlines how we are already delivering on that strategy and associated commitment. Our portfolio is now positioned to capitalize on global mega trends, such as digitalization, sustainability and quality of life. We expect to leverage our organic growth enablers to deliver mid-single digit organic growth through 2025. And as you can see, we outperformed on this commitment in 2021, delivering 12% year-over-year organic growth. When coupled with mid-single digit annual growth from M&A and technology investments, we expect to deliver total growth of low double digits through 2025. And in 2021, we delivered 4% in year growth from M&A and 6% annualized. 06:56 Our strong pricing, aftermarket and i2V initiatives enable us to generate operating leverage and incremental productivity with an expected 100 basis points of margin improvement per year over the period. And in 2021 we over-delivered on this target, capturing 160 basis points of margin expansion, despite several challenges like supply chain constraints and inflationary pressures. With IRX as our competitive differentiator and over 275 Impact Daily Management or IDMs across our company each week, our high performance culture encourages strong execution. These continue to support our goal of being a premier high quality company that consistently compounds earnings by double-digit each year, which -- with free cash flow margins in the high teens. And we feel that we're well on our way as in 2021, we grew EPS by 63% and achieve adjusted free cash flow margin of 16%. 07:59 Turning to Slide 6, we have achieved strong margin improvement across our portfolio. since 2019. Looking at the company, margins improved 370 basis points from 2019 despite COVID impact and persistent supply chain and inflationary pressures. In the ITS segment, we improved an impressive 470 basis points since 2019 as we continue to accelerate synergy capture and execute on value creation opportunities from the IR merger. Incremental operating leverage and productivity should enable ITS to achieve margins in the high '20s over time. In the PST segment margins have expanded 170 basis points in 2019 and 290 basis points, excluding M&A. Continued strong flow through in the base PST business coupled with diligent synergy execution as we onboard acquisitions should yield adjusted EBITDA margins in the mid '30s over time. 09:04 It is important to note that as we highlight on the last bullet point, due to the nature of our products we're mission critical with premium brands and high quality and reliability and we have the ability to remain price cost positive. We have accomplished these in each quarter since the merger even during these inflationary times and expect to do the same in 2022. 09:29 Moving to Slide 7. We're thrilled to announce the recent validation of Ingersoll Rand’s progress as an industry leader in ESG. Based on the demonstrated progress we receive another upgrade from MSCI, which is our second upgrade in the past 18 months and now have an A rating. And I'm really excited to announce that S&P Global in its Annual Sustainability Assessment that was just released a few weeks ago scored Ingersoll Rand in the top 15% and included is in its sustainability yearbook for 2022. In addition, S&P Global recognize us with the Industry Mover Award, which is given to the most improved company in each sector of the year. These recognitions exemplify our unwavering commitment to ESG. 10:26 In March of 2021 we are committed to becoming a top quartile ESG industrial company in 3 years. And we believe we have achieved or are on the cost of achieving that goal in one year and S&P Global agrees as it selected is to its sustainability yearbook which recognizes the top 15% ESG performing companies in each industry sector. Despite this progress, we're just getting started on our journey and we're very focused on accelerating progress towards our ESG growth. I'm incredibly proud of our team for being recognized by the rating agencies already this early in our journey. 11:10 I will now turn the presentation over to Vik to provide an update on our Q4 financial performance.

11:17 Thanks, Vicente. Moving to Slide 8, we continue to be encouraged by the performance of the company in Q4, which saw a strong balance of commercial and operational execution fueled by IRX to overcome persistent inflationary pressures in a challenging supply chain environment. Through Q4 2021 we have realized $215 million in cost synergies and are on track to deliver on our $300 million commitment. Total company orders and revenue increased 24% and 16% year-over-year respectively, driven by strong double-digit organic orders growth across each segment, despite comparisons to a strong Q4 2020. 11:58 Our orders and revenue in the quarter were a record for the company, eclipsing Q3 and setting us up well for 2022. The company delivered fourth quarter adjusted EBITDA of $342 million, a 15% year-over-year improvement and adjusted EBITDA margin of 24.1%, a 40 basis point sequential improvement. Adjusted free cash flow for the quarter was $225 million after taking into account the unique items as pointed out on the slide. Total liquidity of $3.2 billion at quarter end was up approximately $400 million from prior year. This takes our net leverage to 1.1 times, a 0.9 time improvement from prior year. 12:40 Turning to Slide 9. For the total company Q4 orders grew 25% and revenue increased 18%, both on an FX adjusted basis. Overall we posted a strong book-to-bill of 1.06 for the quarter. We remain encouraged by the strength of our backlog, which is up over 7% from the end of Q3 and over 50% from the end of 2020. Total company adjusted EBITDA increased 15% from the prior year. ITS segment margin declined 40 basis points, while PST segment margin declined 400 basis points, driven largely by the impact of M&A. When adjusted to exclude the impact of M&A completed in 2021, PST margin declined by 120 basis points. 13:26 Finally, corporate costs came in at $26 million for the quarter, down year-over-year, primarily due to lower incentive compensation costs and general savings and prudency. We expect corporate cost to normalize back to the low '30s millions per quarter in 2022. Adjusted EPS for the quarter was up 51% to $0.68 per share. Off note, the adjusted tax rate came in at 5% for the quarter and 12% for full year 2021. Q4 benefited from our ongoing tax restructuring efforts, specifically some non-recurring impacts driven most notably by our efforts to manage and minimize the cash taxes associated with the divestitures of SVT and HPS completed earlier in the year. As we look ahead to 2022 we expect the rate to be back in the low 20s due to the non-repeat of some of these discrete items. 14:19 Turning to Slide 10. On a full year basis, orders grew 28% and revenue increased 16%, both on an FX adjusted basis. The full year book-to-bill was 1.2 and total company adjusted EBITDA was up 28% from 2020. Margin expanded by 160 basis points with ITS margin up by 220 basis points and PST declining 50 basis points. When adjusted to exclude the impact of these acquisitions completed in 2021, PST margins increased by 70 basis points. ITS posted incremental margins of 38% with PST at 27%, or 36% excluding the impact of M&A. 15:03 Moving on to the next slide. Free cash flow for the quarter was $224 million on a continuing ops basis, driven by strong operational performance across the business, while continuing to invest organically. CapEx during the quarter totaled $23 million and free cash flow included $4 million of synergy and stand up costs related to the IR merger. In addition, free cash flow included a net inflow of $3 million in cash taxes related to the divestitures of the HPS and SVT segments. Excluding these items, adjusted free cash flow was $225 million in the quarter. 15:40 Leverage for the quarter was 1.1 times, which was an 0.9 times improvement versus the prior year. And total company liquidity now stands at $3.2 billion based on approximately $2.1 billion of cash and over $1 billion of availability on our revolving credit facility. Liquidity increased by $100 million in the quarter, which included outflows of $165 million towards strategic M&A and $8 million to fund our first quarterly dividend. Our M&A funnel remains robust and active, up in excess of 5 times from the close of the IR merger and we are remaining disciplined in our approach. 16:18 Moving to slide 12. We'd like to provide an update on synergy delivery and some details on the impact of price versus cost. On the left of the page we are updating the cost to achieve the $300 million synergy commitment related to the IR merger, as well as the associated stand-up of the new company from a combined $450 million to now $280 million, an aggregate reduction of roughly 40% or $170 million from our original estimates. This speaks to how we are always heavily focused on high returns on cash investments regardless of the situation. 16:59 I'm very proud of our employee ownership culture continues to overdrive our performance, with everyone thinking like an owner, they think about how every dollar spent generates profit and improvement. In addition to the $215 million in realized synergies to date, we expect an incremental $50 million in 2022 and $35 million in 2023. The synergy funnel remains in excess of $350 million and while we don't expect our synergy commitment to materially change as we look ahead, we will provide periodic updates on status and execution, particularly as we approach the end of the IR merger related synergy delivery. 17:39 The right side of the slide highlights the ongoing price cost dynamic. In 2021 we remain price cost positive each quarter and we expect to deliver the same result in 2022. Note that we are calculating cost including direct material and logistics but not direct labor or labor inflation, as labor is mostly offset with internal productivity actions. In Q4, we delivered an incremental margin of 23% for the total company despite strong inflationary pressures and supply chain challenges. What I'm most proud of is that, even in this environment our team was able to achieve a sequential margin improvement of 40 basis points. This highlights the resilience of IRX in very difficult environments. 18:26 Looking forward to 2022, we expect to remain price cost positive each quarter as we continue to leverage IRX to drive commercial execution and productivity initiatives. Given continued inflationary pressures in a very tough comparison from Q1 of 2021, we expect Q1 to be the most challenged period on a year-over-year basis, but nonetheless, expect incremental margins for the total year to be approximately 35% and the quarterly EBITDA profile to be well in line with prior year quarterly phasing. We know this is not easy, but it just speaks of the commitment of our team to be differentiated and be in the top quartile of performance. 19:04 I will now turn the call back to Vicente do discuss our segments.

19:09 Thank you, Vik. And turning to Slide 13, in our Industrial Technologies and Service segment, organic revenue was up 11%. The team delivered strong adjusted EBITDA, which rose 10% year-over-year and an adjusted EBITDA margin of 25.7%, up 20 basis points sequentially with an incremental margin of 23%. As a reminder, we are overcoming a very strong comp from Q4 2020 of 400 basis point margin expansion. However, important to highlight as well that on a 2-year clip the team has delivered 360 basis point margin improvement. Organic orders were up 19%. 19:55 Starting with compressors, we saw orders up in the low 20% and a further breakdown shows orders for oil-free products growing at over 15% and oil lubricated products growing at over 25%. The Americas team delivered strong performance with orders in North America up mid-20s, while Latin America was up high '20s. In Mainland Europe, orders were up high teens, while India and the Middle East were down low-single digit. Asia Pacific continues to perform very well with orders of approximately 20% driven by low 20% growth in China and high-teens growth across the rest of Asia Pacific. 20:39 In the vacuum and blower product line, orders were up approximately 20% on a global basis. Moving next to the power tools and lifting, orders for the total business were up approximately 20% and saw continued positive momentum, driven mainly by our enhanced e-commerce capabilities and improved execution on new product launches. On our sustainable innovation in action, today we want to highlight our recently acquired company. Jorc is a manufacturer of condensate drains, oil and water separators and air saving products, which are part of the compressor ecosystem. These products focus on improving overall system performance and creating energy efficiency through efficient use and recycling of fluids and air, which helps our customers achieve their environmental goals. We're very excited about these complementary acquisition as we continue to expand our offerings with the compressor ecosystem, as well as the impact that Jorc will have as we scale up and expand geographically. 21:47 Moving to Slide 14. Revenue in the Precision and Science Technologies segment grew 15% organically, which remains encouraging given the tough comps due to COVID related orders and revenue in Q4 of 2020 for the medical business. Additionally, the PS team delivered well adjusted EBITDA of $78 million, which was up 22% year-over-year. Adjusted EBITDA margin was 26.8%, down 400 basis points year-over-year, primarily driven by the impact of M&A. Again, the segment was down 120 basis points, excluding the impact of acquisitions in Q4 2021 with an adjusted EBITDA margin of 29.6% ex-M&A. Overall, organic orders were up 14%, driven by the Medical and Dosatron businesses, which were up strong double digits in the quarter and as they serve lab, life sciences, water and animal health end markets. Incremental margins were 17% as reported and 21% when excluding the impact of M&A. 22:55 Looking at the sustainable innovation in action portion of the slide, we're highlighting our recent Tuthill Pumps acquisition. Tuthill Pumps manufacturers gear and piston pumps for sustainable end markets, such as medical and lab, food and beverage, water and wastewater. Tuthill’s D series magnetically coupled pumps are used in lab applications such as hematology analysis, as well as other chemistry analyzers. The business is complementary to our existing portfolio, and we are well underway with integration of this business. 23:29 Moving to Slide 15. We're pleased to introduce our 2022 guidance. In aggregate, we expect total company revenue to be up 11% to 13% with the first half up 12% to 14% and the second half up 9% to 11%. We expect organic revenue growth of 7% to 9% for the total company with 7% to 9% growth expected in ITS and 8% to 10% growth in PST. FX is expected to contribute a headwind of approximately 1% with 1% to 2% coming in the first half of 2022 and 0% to 1% in the second half. M&A announced and closed to date is expected to contribute an incremental $225 million in revenue. This outlook reflects normal seasonality in the business, which is typically lightest in Q1, similarly stronger in both Q2 and Q3 on an absolute basis and strongest in the fourth quarter. We do not see quarterly phasing to be materially different from 2021. We expect total adjusted EBITDA for the company to be $1.375 billion to $1.415 billion, including corporate cost of approximately $135 million spread evenly over each quarter. 24:51 This yields an incremental margin of approximately 35% for the total company with positive margin expansion expected to sequentially from Q1 through Q4 of 2022. Free cash flow conversion to adjusted net income is expected to be greater than 100%. We anticipate our adjusted tax rate to normalize in the low '20s for the reasons Vik mentioned earlier with CapEx representing approximately 2% of revenue. 25:18 Looking at Q1 specifically, we expect double-digit revenue growth year-over-year with ITS growing high single-digits organically and PST growing low double digits. We also expect flat to slightly positive margin expansion due to the tough year-over-year comparison, ongoing supply chain constraints and inflationary pressures. 25:41 Turning to Slide 16. As we wrap up today's call, I want to reiterate that Ingersoll Rand is in an outstanding position. 2022 is poised to be a strong year despite the challenging environment. To our employees, I want to again thank you for your relentless efforts to execute and solve tough problems in 2021. We accomplished an incredible amount together and we move into 2022 as an even stronger action oriented team. We continue to invest for growth, both organically and inorganically with a focus on increase in the quality of our total portfolio, while serving as an industry-leading sustainable company. IRX is truly our backbone and drives every process in our company, enabling outperformance and ensuring our global team is speaking one language, focused on capturing growth opportunities driving innovation and efficiencies and acting boldly to win in the marketplace. 26:42 Our balance sheet is very strong and with our discipline and comprehensive capital allocation strategy, we have significant ability to redeploy capital to compound earnings and continue our track record of market outperformance. 26:55 With that, I'll turn the call back to the operator and open for Q&A.

27:01 Thank you. [Operator Instructions] Our first question today comes from Mike Halloran of Baird. Your line is open. Please go ahead.

27:20 Hey, good morning everyone.

27:21 Good morning, Mike.

27:22 Good morning.

27:23 First on roughly 40% reduction in costs associated with the synergies, maybe just what's behind that? It's a pretty sizable reduction here. And so just like the moving pieces there.

27:35 Yeah. I think Mike this kind of speaks to our meticulous approach to always look at that return on investment of the money that we used for every project and as we mentioned on the remarks, I mean it also speaks to the power of these ownership mindset that we have that everyone really cares about how we spend the money. So we've been able to be very efficient and very effective on the use of the cash of these kind of one-time charge for creating the synergies.

28:09 The backlog numbers are obviously really robust, maybe talk to a couple of things. One, how you look to the sustainability of the underlying demand? And second, what the guidance assumes as far as backlog phasing, does that backlog kind of normalize as you work through the year or do other challenges, plus the underlying demand kind of start extending when you get some backlog normalization?

28:33 Yeah, Mike. In terms of sustainability, I would say that, what we are seeing is clearly the short cycle continues to be very broad based, very strong and while we eventually will see some tough comps on our ability what we have been able to show is our ability to actually pivot into the end market that might be seeing some good growth and utilizing our products to capture any new trends that might be in the market. I think we're very kind of excited and pleased with how we've been able to do that in the past and we expect to continue to do that. I would say, in addition what we're seeing that what we like in terms of recent trends is that, we're starting to see a lot of the CapEx cycle starting to get release. And it's really for those projects that are really related to the mega-trends that we spoke about in the Investor Day. 29:27 So for example, we're seeing capacity expansion due to re-align in supply chain, but also the quality of life around pharma or new discovery -- drug discovery, we're seeing also CapEx projects related to sustainability where new technology of compressors driving higher level of efficiency. It's kind of widely used by now a lot of the customers looking for reductions in Scope 1 and 2. And I'll tell you that, we're also seeing a lot of customers asking about upgrading their technology to be able to make it more IoT capable products so that they can actually increase and get the total cost of ownership benefit.

30:12 Great. We appreciate the time.

30:16 Thanks Mike.

30:19 Thank you. Our next question today comes from Josh Pokrzywinski of Morgan Stanley. Josh, your line is open.

30:28 Hey, good morning guys. Can you hear me?

30:30 Yeah. Josh, good morning. We don't hear you, Josh.

30:47 Hi, Josh. Your line is open.

30:53 Can you guys hear me.

30:55 We can hear you now. Yeah.

30:56 We can hear you Josh.

30:57 Great. Yeah. Sorry about that. So maybe just a follow-up on my Mike’s question on some of the backlog phasing. Maybe put a different way from an orders perspective, how should we think about book to bill here? I noticed in ITS, you kind of had a small sequential step down in orders, but memory serves, some of those businesses that will be kind of normal seasonally, how do you think about kind of the sustainability if these like 1.05-ish type book to bill numbers as we go through the year?

31:30 Yeah. Josh, maybe I'll start and let Vicente add in as well. I think in terms of the absolute order patterns we're really pleased with the momentum we've continue to see. If you think back and kind of think about typical seasonality that we typically see in the business. This is a business where book to bill typically is above 1 in the first half of the year and then typically becomes a little bit at or below 1 towards the second half of the year, largely attributable to kind of some of the sell-through of the larger project type businesses, typically which sell through a lot more into the back half of the year. So obviously we have been able to sustain above 1 book to bill in the fourth quarter obviously just speaks to clearly the underlying continued strength in the overall demand environment. I think as we kind of turn the calendar here to 2022, I don't think we would expect to see the seasonality dramatically change, obviously we'd expect to see book to bill continue to be healthy, again, above 1 is the expectation in the front half of the year, but then I think we would expect again as supply chains presumably start to normalize, particularly as we think out to the latter half of the year did probably return back to a typical -- more typical seasonality book to bill being at or slightly below 1 in the back half of the year.

32:42 Got it. That's helpful. And then how should we think about price in the guide, presumably healthy pricing environment, you guys are carrying probably decent amount of that in backlog into the year as well.

32:55 Yeah, that's right, Josh. I mean, the way to think about pricing is that, when you look at the kind of the organic growth, think about it on average for the full year, half of the organic growth coming from price and we think about the phasing, maybe slightly less than the half in the first half of the year and continue to increase as we continue to take actions in the second half.

33:16 Great. Appreciate the detail. That’s all guys.

33:20 Thanks.

33:23 Our next question today comes from Jeff Sprague of voice Vertical Partners. Please go ahead, Jeff. Your line is open.

33:33 Thank you. Good morning, everyone.

33:34 Good morning, Jeff.

33:36 Just maybe coming back to price cost, the incremental guide you're laying out here is quite impressive. It actually would suggest you're nicely price cost positive in 2022. Can you just true us up on that. is that in fact the case and maybe give us some context on the impact of inflation algebra so to speak on your margin rate or speak to it in dollars incentive either way, but just love to get kind of a better understanding of what's embedded in the guide for 2022 on a price cost basis?

34:15 Yeah. Jeff, this is Vik. Maybe I'll start and again let Vicente add. So just to reiterate what Vicente said. Obviously from our guide perspective, we do expect price to be approximately 50% of the organic growth for each segment. So that's kind of the way you should think about it and a little lower than that in Q1 and then obviously improving as we move through the quarter. It's just based on, quite frankly, some of the continued, let's call it, pricing actions we're taking as we speak, just given the environment. 34:42 In terms of the actual price cost. Yes, you are absolutely right, on a dollar basis just like we saw in 2021, we expect to be price cost positive from a dollar perspective each quarter of 2022. And then just as a reminder, in 2021 again, we were price positive each quarter, obviously, much more so in the first half of the year and then quite -- and then obviously a more tighter spread in Q4 of 2021. I think as we think about 2022, it's probably not too dissimilar in that sense that Q1 will probably be the tightest spread from a price cost perspective, in terms of dollars. And then obviously, we would expect that to get a little bit better as we move through the year, again, based on some of those pricing actions. 35:22 And then specifically with regards to the actual inflation kind of equation or the way to think about inflation. I think the easiest way to say it is that, on supply chain and material inflation we expect kind of the first half to be very consistent. What we saw coming out of the back half of 2021 maybe some slight improvements in second half, but we're not really forecasting and huge improvements in the situation in 2022. It is worth noting, we've started to see some slight tapering in some of the freight rates so it good to be on logistics. But again, the material piece is clearly the biggest piece of the equation. 36:00 And then just to address it, even though it's not necessarily in that price cost equation because we manage the teams to offset labor inflation through productivity. Labor, we would tell you right now we expect to be largely in line with the levels of inflation or merit that we saw in 2021.

36:16 Great, thanks for that color. And Vicente, maybe on M&A comments here again today about the size of the funnel and the like. Obviously, there has been a big dislocation in the market year-to-date and including obviously this whole Russia situation today. Any change in the nature of the dialog? Any impact on multiples that sellers are expecting in this environment or is it really too early to see that, but just wondering on their kind of actionability of the pipeline and the valuation outlook at this point.

36:57 Yeah. No, Jeff, I would say that perhaps maybe it’s a little bit too early to tell, although on a case -- I mean broadly, but on a case-by-case basis we definitely see in some instances that multiples are starting to kind of maybe slightly come down or expectations as some of the kind of companies that were counting on the kind of one-time COVID revenue to continue to happen is not that materializing that aggressively as they were expecting. So we continue to be highly disciplined and I think that's the good news in terms of our funnel is very large, we're very active, we're getting a lot of doors getting opened based on a lot of the work that we have done around employee engagement and the ownership mindset. I can tell you that has been very, very unique proposition for us in the sense of family-owned companies opening door and having that conversation, because they know that we're different and unique. And so the conversations are very active. To your point, I mean I think when the market is in a situation like this that there is maybe some volatility maybe that entices more faster process to get some M&A executed as owners want to have better visibility or kind of get things locked in. And so we're very active on this, Jeff. And I think that's the exciting piece. And as you saw, to your point, the funnel is very strong.

38:26 Great. Thank you.

38:32 Our next question comes from Nicole DeBlase of Deutsche Bank. Please go ahead.

38:39 Yeah, thanks. Good morning guys.

38:42 Good morning.

38:43 Good morning. Can we just talk a little bit about the progression of EBITDA margins throughout the year. Like if we're starting the year flattish, the key driver to getting to the full-year EBITDA margin target which would assume, I guess, progressive year-on-year improvement in margins like M&A dilution going away, price cost. Can we just kind of walk through the puts and takes that drive the conviction around that?

39:11 Absolutely, Nicole. Let me take a stab at that. I'll say, first off, in terms of seasonality, we expect both revenue and adjusted EBITDA for the total company facing to look very comparable to what we saw in 2021. Although I said, we're not expecting some big hockey stick effect in 2022 from a phasing perspective compared to historical performance or anything of that nature based on our current backlog and actions and forecast for the year. And to give you a bit more color in terms of kind of first half to second half adjusted EBITDA split, maybe easier to your point, I’m going to give you that on a year-over-year basis. And I will say that, first, as you may recall comps are extremely challenging, I'll say, in the first half of 2021 where ITS margin expansion in Q1 of ‘21 was more than 600 basis points and then another 250 basis points in Q2 of ’21. So a lot of these back then had to do with the proactive pricing measures that we took towards the end of 2020, particularly in the legacy IR compressor products. And these result --this resulted in very strong carryover pricing into the first half of 2021 before any of the inflationary pressures were really evident and very favorable price cost spread. 40:33 As 2021 progress and kind of what Vik mentioned too as well, we continue to maintain being price cost positive, but the spread clearly tighten in the back half of the year due to the inflationary pressures accelerating. And this now leads to a tougher comp in the first half and more reasonable comps in the second half of 2022. And then in addition, some of the things we mentioned about the M&A, when you think about the impact of M&A, the majority of our 2021 actions were completed in PST in the second half of 2021 and as we now start to execute on the synergy plans associated with those deals, in particularly the SEEPEX company, we would expect that the savings start to materialize in more so in the back half of the year. And for those reasons, we expect margins to sequentially improve each quarter of 2022, but being more favorable price cost spread, normal seasonality and synergies from recent M&A should let themselves through a more of our year-over-year margin expansion being in the back half of 2022.

41:36 Okay, got it. Thanks Vicente. That's really helpful. And then, I guess how did you put your plan together thinking about what's going on from a supply chain perspective. Is the expectation baked into the plan that we see no improvement in supply chain? Or have you guys kind of feathered in easing of the constraints as we progressed through the year?

41:55Yeah. Great question Nicole. It is very, very slight improvement. I mean we're telling our teams plan for the worse and take action based on what we have visibility of it now and don't plan for it to come back very positively and strong in the second half. So our teams are executing plans that being a very kind of stable environment at these kind of levels. And if we see a benefit that inflationary markets abates pretty rapidly, then that's an improvement in our total good margin expansion.

42:28 Thank you. I'll pass it on.

42:32Thank you.

42:35 The next question in the queue comes from Rob Wertheimer of Melius Research. Your line is open.

42:43 Thank you. Good morning. Thanks for the comments on price cost. One other one, just -- I don't know how much kind of volatility you're seeing underneath the cost side of price cost and supply chain. I'm sure, everybody is working incredibly hard on it. How far out can you sort of see stability, whether it's 1Q, 2Q? And then just maybe you could refresh us on how much pricing or how quick pricing flexibility can come if cost do pop up to the upside? Just how do you manage that to the potential volatility? Thanks.

43:12 Yeah. Sure Rob. There is definitely volatility. And to your point, I mean, it's kind of what I say, it's definitely a lot of hard work by the teams are doing to really control what we can control. And so, that is the focus of our kind of culture is that, put high level of emphasis on controlling what we can control and control your destiny, and that basically means supply chain. In terms of the cost, yeah, I mean it's a bit of a kind of [indiscernible] in the sense that sometimes if you supply and logistics, then you see steel. Steel is not coming back, coming down, you see ferrous materials going up, you see non-ferrous material going down, so we got a team that is basically looking at a lot of indicators, and then taking actions as proactively as possible with our supply base, very, very quickly and very early on. 43:59 So to your questions, yes, I think I’ll still see a lot of volatility on account of commodity to commodity that kind of lends to a total average to be still that flattish stable as to what we saw in the second half of the year.

44:15 And then, Rob, on your -- the second part of your question around pricing and then kind of the flexibility. Yeah, I mean I think the team has done a fantastic job on that end. I mean, we've talked about it a number of times in the context of a lot of the process improvements, the distinct pricing team that we have in place to really be agile utilizing a lot of the IRX toolkit to be able to: one, connect with our supply chain and operations team to understand the impact of inflation as Vicente said, almost weekly, monthly basis as necessary and then recalibrate pricing. Obviously in the context of 2021, we indicated that we took multiple pricing actions across pretty much every part of our business and so the ability to be able to react in a pretty quick timeframe we've shown it and obviously we're able to react in a comparable manner here in 2022.

45:01 thank you.

45:07 The next question today comes from Nigel Coe of Wolfe Research. Please go ahead, your line is open.

45:14 Thanks. Good morning. Thanks for the question. Hi guys, I just want to go back to kind of the margin cadence points. So LIFO charges are excluded from adjusted EBITDA. So I think that mean the inflation kind of bucket steps up from 4Q to 1Q, implies that price also steps up materially from 4Q to 1Q. Just wanted to confirm that you do have a bit more price coming in Q1 versus Q4? And then the comments around 1Q margin is flat for the corporation. It looks like PST is going to be down again materially on the M&A dilution, so it implies that IT is going to be up – ITS is going to be up year over year. Just maybe just confirm that, how we think about it?

46:07 Sure. So yes, Nigel, I'll take those in pieces here. I think with regards to the price cost kind of dynamic in the pricing. I think you can probably expect that pricing is at least comparable to what you saw in Q4 and as we indicated here, clearly we are still looking at and recalibrating and taking pricing actions frankly as appropriate, just given the, let's call it, the kind of ever evolving environment that Vicente has spoke to. 46:34 In terms of the segment margin spread, you are correct. Obviously, Q1 for PST will still show -- will show margin decline year-over-year, largely attributable to the M&A dynamic. On the ITS side, we would expect to be, I would say, ITS is probably more so in line with the total overall environment, so flattish to slightly up, and then obviously you can also kind of look at some of the corporate has being kind of the rest of that noise to kind of get to that flattish to slightly up kind of expectation that we indicated for Q1 and 2022.

47:15 Okay, great, thanks. And my follow-up is really just going to compressor order trends. North America stands out, once again it is pretty strong and it sounds like we might be seeing some elements of some supply chain benefits environmental upgrades and you mentioned IoT. So I'm just wondering if you could maybe flush out from that end market commentary? And perhaps on the IoT is that a retrofit to existing equipments or does that require a bit more of a meaningful replacement cycle.

47:48 Yeah. Nigel, In terms of the Americas, I mean we were very pleased to see how the team performed, not only in the US, but also even Latin America as well, really good performance there. From an end market perspective, I will say that, fairly broad base. I mean general industrial being strong, but also anything that has to do with oil-free products, such as food, pharma, semiconductor industry. So a lot of good momentum on our oil-free product line here in the US. And in terms of the IIoT, you're absolutely right. Yes, we can retrofit the compressors and the approach that we have in the field. That is definitely something that we're doing in order to kind of generate more of that recurring revenue stream that we spoke about during the Investor Day, but also in many instances the customers when they look at the IIoT, we have our teams very well trained to talk about that. If they're going to retrofit, they might as well should look into the total new compressor, for example, so that they can actually maximize the energy savings that they can achieve and not just retrofit and all technology. So I think it's an opening the door conversation topic that leads into a higher ASP selling point.

49:08 Great. Thank you very much.

49:14 The next question comes from David Raso of Evercore. Please go ahead.

49:19 Hi, thank you for the time. I was just curious, Vicente, can you give us from your years of experience thoughts around what we're seeing with Russia-Ukraine and so with NAT gas prices. Obviously very strong, oil price is strong. Just trying to balance -- now, obviously some of these could be even positive demand drivers when it comes to where commodities are, but are there may be European factories filling the squeeze of high gas prices that may be cool their thoughts on CapEx. So I know it's early, but just given the dynamics of the day here, I'm just curious how do you think about the impact of a situation like that, especially that last a while.

50:00 Sure. A very interesting question. I mean, I’ll tell you that -- I'll say, first of all, our thoughts and prayers go to the people of Ukraine and based on Europe, I mean obviously dark days indeed. I can tell you that from our side, our revenue in the Ukraine and Russia, I'll say is fairly immaterial and nominal. In terms of kind of the overall impact. Yes, I mean, I expect that gas prices will continue to rise based on what you were seeing in Europe, they are already very high. I will say that what we have seen in ourselves, in our internal factories and potentially these kind of correlates to others as well and we're seeing it, is that, in many cases our teams are accelerating the projects to reduce the cost of energy. So cost energy efficiency and when you think about compressors that are roughly 30% of the energy consumed in a factory it is a very high speaking point. So then as people think that these high energy prices are going to be here for the long, it really accelerate that conversation of that new compressor to reduce the energy. And in our factories we're doing it, we're upgrading our compressors we're putting -- we're putting solar energy into our factories as well and that is increasing the level of conversations to our customer base. 51:27 So I think that megatrend and sustainability and how our products can really help our customer is a very high point of conversation.

51:39 Thank you for that. And quickly, when I think about the ‘22 guide and the margins between the segments, if you had to think of an area where, let's say, early in the year you hopefully maybe leaving a little in your back pocket for maybe margins could surprise to the upside or it's simply cushion if price cost goes the wrong direction, but at least thinking on a glass half full view, if you were to say where there is more margin potential to surprise to the upside, would it be more in ITS just given strong volumes and particularly nice margin backlog that's priced well or is it more maybe PST and hoping some of the acquisitions you've made that have been diluting the margin, you can drive those margins now that they're under your control.

52:27 I'll say, David, that it will be -- it will definitely be on the ITS. I mean -- and you even saw it, when you think about it Q3 to Q4 our sequential margin actually improved even in an inflationary market that continues to rise. So I would say that if anything will be continue to see very strong momentum on the ITS.

52:47 Okay. Thank you very much, I appreciate it.

52:50 Thank you.

52:55 Our next question comes from Joe Ritchie of Goldman Sachs. Your line is open.

53:02 Thanks. Good morning everybody.

53:05 Hi, Joe.

53:06 Hi, Joe.

53:07 So I guess maybe my first question. As the quarter progressed, I'm just curious like did things get worse at all Mike like absenteeism, labor, supply chain perspective and maybe even in the early part of 2022. And I'm also curious, obviously, the backlog is very good. I'm curious, were there any revenue deferrals into 2022?

53:33 Yeah, I think there is a progression Joe. Q4 in terms of absenteeism, not so much that we can call out that really spiked. I mean clearly absenteeism spiked in the early part of 2022 kind of January, but we're back to normal levels now. So I'd say, from a quarterly progression in the fourth quarter absenteeism normal, in terms of inflationary, fairly normal to kind of continuing to rise. That's why we continue to put our emphasis on more incremental price increases that we have continued to do. And -- but as we look here in the first quarter, we see the better stability here now that we have passed that spike of the Omicron.

54:25 Yeah. And John, the second part of your question in terms of any revenue deferrals anything of that nature. What I point to anything in terms of like true deferrals or things of that nature from a customer base perspective asking for things [indiscernible] nothing of any consequence there, obviously probably fair to say that, just given some of the supply chain constraints, and we would fully acknowledge obviously backlog being at level they are and even some past due backlog that obviously are intent is to get out the door here in Q1. Clearly, there were a low single digit points from an organic growth perspective. But you could argue, could have been a little bit better. But again, given the supply chain environment and the constraints quite frankly fully expected and I think the teams did a fantastic job all in, quite frankly still hitting what we say our commitments in the context of topline from a Q4 perspective.

55:13 Great. Now that's great to hear. And then I guess my follow-on question is going back to the margin particularly in PST and I wanted to focus on -- holding on feedback for a second. So I think we have those margins are coming in like the low '20s. I'm just curious like as you kind of see the progression and the synergies in that business, maybe just kind of talk us through the cadence or what gets that business back to more kind of like PST level type margins over the next 12 to 18 months?

55:45 Yeah. Absolutely. So Joe, I think the way you're thinking about it is spot on, let me just calibrate everyone, the SEEPEX business roughly $200 million revenue base business that we indicated that when we purchased it, which was in the latter half of Q3 of 2021, more in the mid-teens EBITDA margin realm, but gross margin profile is extremely strong in all place, if not better than the overall PST margin -- our segment profile margin from a gross margin perspective. So you're absolutely right, obviously there is synergy plans in place. I will tell you a lot of those actions are actually kind of going into motion as we speak. And so I think the way that you have thought about it in the context of where we expect the margin profile to be here from a 2022 perspective, eclipsing the 20% margin -- EBITDA margin mark, it is completely fair. I think obviously then as we continue to integrate we've always said within a 3-year time frame we expect that to kind of be closer to the PST segment margin profile. We're not even 1 year at this point in time. So obviously we still have a little bit of a road ahead of us. But quite frankly, getting from mid-teens to over 20% here within the first year is obviously quite encouraging. And then the other piece here is now as we start to also integrate from a commercial perspective. The technology is very complementary to the broader PST segment. So again, we expect to see some good revenue growth in synergy profile coming from that. 57:06 So again, everything continues to be well on pace, you are correct. Obviously, our expectation is that the margin progression there does get better as 2022 progresses, just quite frankly given that we're taking some of those synergy actions as we speak right now.

57:21 Great to hear. Thanks guys.

57:24 Thanks Joe.

57:27 Our next question comes from Nathan Jones of Stifel. Please go ahead.

57:33 Good morning, everyone. I want to start off with -- good morning. Vicente, you talked about larger capital projects starting to come back into the market, which I think is encouraging as we start to see some mid to later cycle capital come back into the market. Can you give us a little more color on where you're seeing those projects, what kind of end markets, what kind of geographies you're starting to see those projects? And what you think the outlook for growth in those is over the next 2 or 3 years?

58:06 Yeah. In terms of where, Nathan, we're seeing good momentum in what we call in Asia Pacific and in the Middle East. And from an end market perspective, we're seeing water and wastewater as being one that is highly active. Where the project in India or projects in China or even in the Southeast Asia we're seeing a lot of good momentum on water and wastewater. And I think the good news here, I had some meetings with some large actually EPC company and C-suite to C-suite conversation. I mean there is definitely a lot of very strong momentum and what we -- what I like that I heard is that, a lot of these kind of hydrogen conversion is here pretty soon to come maybe. And as you saw on our Investor Day we spoke a lot about excitement on kind of how our products can play in that role. 59:03 So that does a one piece that we haven't seen anything come yet from our kind of large CapEx, except in our fuel expense business that we continue to see good momentum. But from a compressor perspective as it is aligned to hydrogen and the energy conversion, that's yet to come.

59:21 And I wanted to follow up on your response to Dave's question on the energy efficiency of compresses. I think it's an important point that pumps and compressors in some of these manufacturing facility, the power usage, electricity usage of these things contributes pretty significantly to the operating costs of those facilities. Can you talk about what kind of the payback period it is on a compressive that reduces the energy usage by 30%? And any metrics you have around what that contributes? What kind of the energy consumption contributes to the operating costs at one of these facilities. Just to give people an idea of what the potential savings for customers are here?

60:09 Yeah, absolutely, Nathan. Based on the energy cost where it is now, some payback projects or even a year or less in some cases. So I think it depends on the country where if you -- for example Germany, where energy costs are very high or even China too as well. The payback is actually fairly quickly or fairly quick. And to your point, when you look at the compressor, a compressor consumes approximately on average 30% of that energy that gets consumed in the 12 factory. And again, it depends on the type of factory, but clearly one of those were – I’m very excited about that opportunity, but it's not only a compressors it is also a blower. I mean, when you look at the blowers in the wastewater facility, a blower consumes 60% of the energy. And so we're talking to upwards of 50% reduction from that 60% or that 30%. And to your point in terms of absolute dollar savings, it ranges based on the size of the company, but we can tell you that -- we have -- we received a phone call from a very large beverage company that installed some of our compressors and basically they called us, they told us they received a call from the utility company, because there were energy being reduced by more than 50%. So again they were surprised that thinking that energy utility company surprised that potentially they were shutting down the factory and indeed, what it was happening is that the new compressors were consuming 50% of energy, therefore savings couple of hundred thousand dollars of energy cost per year.

61:59 Great. Thanks for all the color. Thanks for taking my questions.

62:05 Thank you, Nathan.

62:07 The next question comes from Stephen Volkmann of Jefferies. Your line is open.

62:14 Hi guys. Most has been answered, but just Vincente, I'm curious, the playbook that you have for kind of these global dislocations like what we're seeing in Russia now, obviously your stock has been caught in the downdraft here. And given your balance sheet, do you focus more on sort of opportunistic repurchases in this type of environment? Or do you kind of circle the wagons a little bit and protect the balance sheet.

62:42 I’d say -- Jeff, good question. I mean, we don't want to kind of dramatically change our strategy. And to be honest, in these kind of dislocation of the market, this is a good opportunity to also be more aggressive on M&A. Some of the price points kind of get to the level that are actually more -- even more appealing to the way it was before. So we see that in this type of dislocation. Yeah, I mean, good opportunity to be aggressive on the M&A, which continues to be our number 1 capital allocation priority, but obviously very prudently. But as you saw, we definitely have very good use of cash, you saw that we approve that $750 million share repurchase from the Board and then we definitely plan to utilize that.

63:32 Great, thank you.

63:35 And our final question today comes from Joe O'Dea of Wells Fargo. Please go ahead.

63:46 Hi, good morning. I wanted -- Hi. When you think about kind of 2022 and digitalization targets can you give us any insight in terms of kind of what you're looking at in terms of kind of what would be successful for you in the progress toward the 5-year framework you gave? And whether that's penetration of field units or whether that's kind of percentage of IoT ready products, but what you're thinking about in terms of 2022 targets?

64:17 In our goals and objectives that we deploy to our team there is actually a very specific goal to digitization and it relates in this case to the revenue that we can generate, so with the digital assets that we're connecting. And in our case, it is very specifically tied to service and how that recurring service revenue, in this case, particularly compressors should accelerate as we continue to digitize and connect our compressors. At a lower level we also have clearly that leading indicators of metrics, such as the revenue that we're shipping with digitally enabled products across the entire company. And we think that that is a great indicator for us to say how much of our assets are being shipped that already enable that then later we moved into our future revenue streams. 65:11 And one thing I could tell too as well, Joe, I mean the excitement of some of these M&A that we're doing is that, as we kind of go deeper into companies like SEEPEX. SEEPEX is doing a phenomenal job on IoT, I mean phenomenal. And one that even on comparable to some of the kind of IoT standalone companies, again, we're very excited that that was an acquisition that we've got a great technology, while we also got a great team that is highly comparable to these kind of IoT standalone software companies and then here is the great benefit that we were able to find and unlock. Not only a great progressive cavity pump but also a team that we're going to leverage to the better benefit of the entire company, not just the SEEPEX business. So a lot of good momentum and good excitement around this topic.

66:05 Great. Thank you.

66:09 We have no further questions in the queue, so I'll hand back to the management team for closing remarks.

66:17 Thank you. As we close, we clearly are in some pretty volatile times as someone said on the Q&A. But as you can see from our performance, we and actually particularly on Slide 6, even in these very difficult environment we were able to perform and outperform too, maybe because we have a team that has these ownership mindset, the life to control their destiny and really execute to what we can control, and also make life better for our employees, customersm the planet and also important to shareholder, which in this case, our employees are shareholders of the company. So with that, I just want to say, again, a big thank you to our employees, a big thank you to all the support that all of you are giving us. 2021 was a great year and we're here ready to take on any challenges that come into 2022. So thank you again.

67:05 This concludes today's call. Thank you for joining. You can now disconnect your line.