Good morning, and welcome to the Ingersoll Rand Q4 2023 Earnings Call. Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Matthew Fort, Vice President of Investor Relations. You may begin your conference.

Thank you and welcome to the Ingersoll Rand 2023 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 yesterday afternoon, 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 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. 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 full year 2024 guidance. For today's Q&A session, we ask that each caller keep to one question and one follow-up to allow time for other participants. At this time, I will turn the call over to Vicente.

Thanks Matthew and good morning to all. I would like to begin by acknowledging and thanking our employees for their hard work in helping us deliver another record year in 2023. We finished the year on a high note with strong fourth quarter and full year results, despite the constantly changing macroeconomic environment. Our 2023 performance reinforces the impact our employee ownership mindset has for Ingersoll Rand. I would also like to welcome our new employees from our recent acquisition of Friulair, whom I had the chance to visit last week in Italy. I was very impressed by the entrepreneurial and technological spirit that has made this company grow at an impressive organic CAGR of 15% over the past three years. Starting on Slide 3, in 2023, we demonstrated again how we continue to outperform against our long-term Investor Day commitments with double-digits growth in revenue, adjusted EBITDA, adjusted EPS and free cash flow. As we move to 2024, demand remains solid. And while macroeconomic and geopolitical uncertainties continue to be at the top of everyone's mind. We remain agile and focus on what we can control. IRX is our competitive differentiator and combined with our ownership model, we remain confident in our ability to execute on our commitments. We recently held our Investor Day this past November, and I'd like to spend a few minutes providing a couple of important highlights that we presented. On Slide 4, we highlighted how we deliver compounding results through our economic growth engine. With the use of IRX, we have created an increasingly durable financial profile underpinned by our employee ownership model. Since 2016, we have transformed the company into a premier growth compounder. We have reduced the cyclicality through divesting our club car and HBS businesses and reinvested approximately $2.3 billion into…

Thanks Vicente. On Slide 11, we finished the year strong in Q4 through a balance of commercial and operational execution fueled by IRX despite the constantly changing macroeconomic environment. Total company organic orders and revenue increased 3% and 4% year-over-year respectively. We remain encouraged by the strength of our backlog, which is up over 8% year-over-year. This provides us with a healthy backlog to execute on entry in 2024 and gives us conviction in delivering our full year 2024 revenue guidance. The company delivered fourth quarter adjusted EBITDA of $501 million, a 19% year-over-year improvement and adjusted EBITDA margins of 27.5%, 160 basis point year-over-year improvement and a hundred basis point improvements sequentially from Q3. Free cash flow for the quarter was $552 million and for the year we delivered nearly $1.3 billion of free cash flow with an 18% free cash flow margin and 105% conversion to adjusted net income. Total liquidity of $3.6 billion at quarter end was up approximately $400 billion sequentially. Our net leverage continues to improve both year-over-year and sequentially. And 0.6 turns, we are 0.2 turns better than prior year and 0.3 turns better than prior quarter. Turning to Slide 12 for the total company on an FX adjusted basis, Q4 orders and revenue both grew 11%. Total company adjusted EBITDA increased 19% from the prior year. The ITS segment margin increased 260 basis points, while the PST segment margin was flat year-over-year, and corporate costs came in at $47 million for the quarter. Finally, adjusted EPS for the quarter was up 19% to $0.86 per share. The adjusted tax rate for the quarter was 20.7% with the full year adjusted rate finishing slightly above 22%. On Slide 13, total company full year orders grew 8% and revenue increased 17%, both on an FX…

Thanks, Vik. On Slide 15, our Industrial Technologies and Service segment delivered solid year-over-year organic revenue growth of 5%. Adjusted EBITDA increased 26% year-over-year with an adjusted EBITDA margin of 30%, up 260 basis points from prior year with an incremental margin of 48%. We also delivered sequential margin expansion of 120 basis points from Q3 to Q4. It is important to note that we have already achieved our 2025 high 20s adjusted EBITDA margin target for ITS, which is a full two years ahead of schedule. We continue to see solid demand for our products with organic orders also up 5%. Moving to the product line highlights. Compressors were up low double-digits in orders and up mid-single-digits in revenue. Industrial vacuum and blower were down low double-digits in orders, but up low double-digits in revenue. The order decline was mainly driven by prudently de-booking an order from an electric truck manufacturer in Europe that had some battery supply issues. However, the prospects are starting to look better for this manufacturer in 2024. Also, it is important to highlight that core product lines continue to show strong momentum on a two year stack, excluding FX and also excluding the recent acquisitions of SPX Air Treatment and Roots’ blower. On a two year stack, compressor orders were up mid-teens and revenue was up high 20s. Industrial vacuum and blower orders were up low double-digits and revenue was up mid-30s. As a reminder for additional detailed information on product lines and regional splits, we have moved the chart, which was previously included on this page to Slide 21 in the appendix. For our innovation in action section, we're highlighting a new compressor with advanced two stage technology. This product is a great example on how Ingersoll Rand is providing an innovative digitally-enabled…

[Operator Instructions] Your first question comes from Mike Halloran with Baird.

So let's start with where you ended there on the guidance piece. Certainly appreciate all the context and help and understand the relatively normal seasonality. But maybe you could just talk to what you're embedding from an underlying assumption perspective when it comes to the broader environment, broader end markets. Is this a year where you just see relatively sequential stability? Any specific pockets you're concerned about or where you see opportunities for acceleration? Less of an Ingersoll specific question meaning. I know you have a lot of drivers that you can use to goose growth relative to whatever the end markets are doing. More of just an end market specific in an environment question.

So maybe kind of give you a perspective here on how we think about it by region first. I would say in America as expected, we're seeing much better momentum. I will say mainland Europe -- I want to say America is -- I mean, not only the U.S. but even also Mexico and South America, where there's a lot of good progress going on with the teams down there. Mainland Europe remains relatively stable. I was just in Europe last week and really solid momentum from some good pockets of growth that we're seeing. But I'll say, I'll call it more stable. I'll say broader Middle East and India, also very good momentum. I mean, particularly in India and you've seen that we have done quite a few investments in India too as well. Not only from an inorganic perspective, but also organic. And I'll say that APAC, Asia Pacific is the one that has the most headwinds specifically I'll say here in the first half of the year. And it is driven mainly by tough comps. I mean, we saw strong double-digit organic revenue growth in the first half of 2023 in Asia Pacific, mainly driven by China. And at this point in time, I mean, China is not a market that we call it that is perhaps booming. We're not immune to that, but we expect to outperform the market there to as well as the teams have proven that they could do that even in 2023. So that's kind of from a regional perspective. I'd say from an end market perspective, nothing that I would call out to be highly differentiated in a sense, as you have seen us always pivot to these high growth sustainable end markets, we gave you one very good example here with arrow based on pump. This is a legacy product line that we kind of reinvigorated reutilized I2V as a way to relaunch the product. And with the use of the demand generation, we were able to position that product line into a very good growth end market on first of all take sales. So, I say Mike, I mean I think the playbook continues to be the same. It is be agile, very nimble, leverage to demand generation and demand generation and IRX as a way to continue to execute.

And then a follow-up on the Life Science side. The one area of PST that like a lot of the folks are seeing some headwinds here. You listened what the bigger players in the industry are saying. There is more stability front half, improvement back half, I don't know, at least modest. Is that similar to what your expectations are from a recovery curve at this point?

That's kind of what we think to as well, Mike. Again, as you said, maybe bottoming out here as we kind of come into the first half and then seeing sequential improvement. I don't say, I mean not in an exponential way, there is not that pent-up demand, but I would say in a very logical way to get back to the good growth that these end markets should continue to see over the long-term.

Your next question comes from Julian Mitchell with Barclays.

First off just wanted to look at the sort of cadence through the year perhaps first off. Based on what you said, is it fair to assume sort of first quarter is about 21% of earnings for the year? And when we're looking at incremental margins, you call out that high 30s figure for the year. Is that fairly steady across both segments, as we move through 2024?

Yes. Julien, this is Vik. I'll take the first part of your question and I'll let Vicente probably talk on the margin front. I think the phasing -- generally I think you're in the right ballpark. Maybe other way to say it here is, if you look at the phasing in a manner that's consistent with, I'd say, revenue and earnings delivery as we saw in 2023, I think you'd be in the right ballpark in terms of our expectations here for 2024. And then in terms of the incremental margin piece, maybe I'll get started or --

Yes. I can take that. I mean, I think the way I think to about that incremental margin, I mean, think about that 35% to 40% incremental margin. And when you look at the main buckets, I would say, the first bucket of that improvement or good incremental margin comes in from the initiatives that we always do, the I2V, price, very good continued growth momentum on the aftermarket, particularly the recurring revenues. The second bucket will be around the prior M&A improvement activities that we have always spoken about. The third bucket is, you probably saw on some of the appendix that we did some proactive restructuring at the end of 2023. This is kind of part of our continued to be proactive and nimble. And the last fourth bucket I would say in terms of this margin improvement is around corporate cost. You saw corporate cost going down roughly $13 million or so.

And just as we're starting out the year, looking at orders naturally, the sort of volatile quarter to quarter, reflecting what you said on a sort of a tough Asia environment in the first half of the year and sort of very tough orders comps. Do we think about orders being down perhaps in the first quarter year-on-year and then you pick up after that, as the comps and perhaps Asia get better?

Yes. We typically don't guide on the orders for the year or on a quarterly basis but we do definitely expect orders to be up sequentially from Q4 to Q1 on an absolute dollar perspective. The way we think about it too as well is that we typically book above one on a book to bill in the first half do typically to larger longer cycle projects being booked and then projects being booked, and then below one in the second half and we don't anticipate 2024 to be any different to that.

Your next question comes from Jeff Sprague with Vertical Research.

Vicente, can we just come back to Life Sciences for a moment, and just level set us here now after, kind of a couple tough years, what percent of PST is that business now and do you actually expect it to return to growth in 2024?

The Life Science business is roughly 25% to 30% of the PST segment today. I think as we think about going into the second half is when we expect that to be getting back to normal growth.

Thanks for the guidance on price versus volume. Just give a little bit of color on what you're expecting, just kind of the price cost equation, as we move through the year and maybe particularly in ITS.

Yes. Jeff, this is Vik. I'll take that one. I think simply stated here, I don't think you are going to see anything dramatically different than what you've seen historically. Meaning, we expect to generate approximately 2% price on a full year basis. We would expect to be both dollar and margin positive from a price cost perspective each quarter of 2024. So again, nothing different in terms of that equation as we move to the year. Obviously, ITS being the bigger segment clearly that comment pertains to ITS as well as PST as well.

Your next question comes from Rob Wertheimer with Melius Research.

Actually, one more question on life science. I mean, we've seen you guys use demand generation and just IRX to outgrow tough markets in China, and maybe Europe last year. Has that been a factor in life science? Is there anything different in that market that constrains it? And then I wonder if you could just kind of compare market dynamics for you and life sciences to some of the other companies and industrials we've seen and the long drag. What does the recovery look like? Is there a bounce back? Has there been a decent. I mean, maybe just explain the sales dynamic there.

Yes, Rob, I'll say, life sciences and I think you were referring to particularly in China. I mean, they have seen similar declines, like the balance of the life science businesses and biopharma related markets. I would say for the balance of our China exposure, it isn't that much different than the impact we have seen on the ITS side with the one item of node to call out perhaps SPX business that is more impacted by the water market. But that being said, I mean, we're excited with the prospect of SPX in China. And one example is that again, people tend to better end markets. So for example, the SPX took the same product and relaunched that to move away from the water market and move more into the lithium battery production with a very unique proposition without having to reconfigure that product too much. I think we just continue to navigate that. I mean, basically, how do we continue to agile and very nimbly move from one end market to the other without having to reconstruct the product lines.

It was a little bit of two. So it was like, does demand generation -- has demand generation or other tools allowed you to outgrow the decline in life sciences? And then maybe the same question as Jeff asked in a way, but does the other side of this look like a bounce back or does it just look like a return to normal growth? I don't know whether destock or whatever at your customers has led to below normal sales and you kind of pop back up in '25, or whether you just resume normal growth? I will stop there.

To the first question, absolutely, demand generation is really helping us tremendously because then think about, I mean, our products can be applicable to pretty much any end market and we're being very selective and with demand generation, we can really reach this highly fragmented customer base in a very cost effective way, very rapid, very quickly. And then, provide a better solution to our customers underneath, call it energy efficiency, water efficiency, digitalization all these thematics that we think are important. For the second question, the way we think about it is more normal. We don't expect this massive bounce back if that happens clearly upside, but the way we like to view it is more normal.

Your next question comes from Andy Kaplowitz with Citigroup.

Vicente, I think you had an increase in your LOIs in Q4 to 10, I think from four last quarter. Are you seeing the M&A market open up a bit more? Is this more your team just finding more deals and those couple of deals that you mentioned that are over a billion, do you see the larger deal market opening up or is it still difficult to get those larger ones over the finish line?

I would say, yes. I mean, the M&A, we feel that continues to open up, and again, I'll put it in perspective that these 10 transactions in the LOI are similar in size and nature to the bolt-on deals that we have done over the past few years. And these 10 LOIs are also sole source, meaning, we have been proactively talking to the family on and have built some incredible relationships. This is exactly what happened with the Friulair acquisition to us, well, which have been in contact with the founder named Luigi. But so again, outside of these LOIs, we still have a couple of those deals in the funnel where purchase price exceeds $1 billion. So yes, there's still --- I mean, timing of that obviously difficult. But we still have a couple of those in our funnel. I will also tell you that we actually -- also, we walked away from one of those billion dollar purchase price transactions, which again, speaks to the prudency and the discipline of our continued model that even after six to nine months of continued diligence, we decided that it was just not the best case for us to proceed. So, we remain highly disciplined in this environment and we see just a lot of good opportunities out there.

And then can you give us more color in terms of the end markets, you answered the question before, but if I look at Americas and EMEA, pretty continued durable growth. Is it more the 20% of your business that's longer cycle larger compressors? Is it more of the short cycle stuff that's supporting your growth? And what do you think the sustainability of the two markets is?

We think that maybe over the past couple years it was a lot more on the longer cycle. We see now, perhaps as you cannot continue to see PMI do better is that shorter to medium cycle will continue to see maybe a better momentum inflecting, we see some of that even already here. And you saw, we spoke about that particularly, let's say even PST on that we said, the industrial shorter cycle of mid-single digits year-over-year and then also sequentially. So, I will say that our teams continue to stay pretty agile in this -- in continuing to pursue energy efficiency in the compressors with our story around how we can save tremendous amount of energy, that is a very good thematic that continues to be out there. The thematic around reshoring is very strong. It continues to be the case in countries even like Mexico or even South America. I think the same thematic are still happening that we've been talking about for the past couple of years, Andy.

Your next question comes from Nigel Coe with Wolfe Research.

All the big questions I think have been asked, but maybe just give us a bit of color on what you've seen in China looks like that was down in the quarter. Maybe just to quantify that and kind of like what's your sort of base case view on China? And then perhaps as part of that first half versus second half, it looks like core growth flat to 2% in the first half of the year and then we're going to lift the mid-single-digits in the back half of the year. Is that simply easier comps or are we seeing some acceleration, I don't know maybe in China or perhaps in life sciences? Any color there?

Yes. I was actually in China a few weeks ago, earlier here in January with the team and we were doing a pre-celebration of the Chinese Happy New Year. But in addition to just reviewing how the business is performing and to keep that in mind, I mean, I think over the past six to nine months, I've been to China now three or four times. I think it's just one that we continue to stay really close to understand how our teams continue to control what we can control. From an orders perspective, yes, I mean China in the fourth quarter was down mid-single-digits, but keep in mind that this is on top of low double-digits orders growth that they saw in Q4 2022. Again I think on a two year stack, they still saw high single-digits order momentum, which is pretty impressive when you consider everything that is going on in China today. I will categorize the environment in China this time that I went to much better than what I saw in 2023, in the sense that there seems to be teams reenergized about maybe what's happening in terms of the stimulus and how the teams continue to leverage our technology into other end markets that they see some good pockets of growth. I was very encouraged to see how the team continues to navigate that difficult market by being very nimble and agile in terms of pivoting to those areas of good growth.

Yes Nigel on the second part of your question about the growth cadence first half versus second half. Yes probably a couple of factors I'd point to. One being, first and foremost, we do walk into the year with a still healthy backlog, including a good percentage of that that's longer cycle in nature. So that obviously gives us some good visibility into the back half of the year, when a lot of those projects tend to more naturally ship. And then yes, I do think there's a lot of truth in the statement you made about, clearly, comps gets a little bit more moderate in the back half of the year across the Board, but clearly whether it be China as well as the life sciences side of the equation on the PST business. So I think it's a couple of different factors. But again, like we said before, we think the phasing of delivery of revenue and earnings is actually very consistent in '24 versus what you've seen historically.

My follow-up question is, the strength in European compressor orders is remarkable considering what's going on in the economy there. If you had to rank order these three, Scope 1 emission targets, CO2 pricing and high energy prices, obviously, IRX on top of that, but if you have to rank those three, what would you say is the most important factor?

I would say, high energy prices and Scope 1, which are I mean kind of interrelated one with the other one. But yes, I'd say high energy prices, number one, Scope 1 in terms of targets that many of the companies have put out there and then the third will be around the CO2.

Your next question comes from Joe Ritchie with Goldman Sachs.

A nice sense of the year. Obviously, incremental margins were great. You hit your margin targets two years ahead of time. You think about this ITS business now, and I know that you have this incremental margin target for the year of 35 to 40. I guess just to -- I'm just curious, like how much of that do you -- would you say is volume dependent at this point? I know IRX is all about continuous improvement but just your ability to just deliver continued margin expansion if the volumes ultimately turn out to be weaker than expected.

Joe, I would say that, I mean even when you think about our guidance, I mean, it just shows that lower growth but still generating that very good margin. And that's driven by the activities that we have done call it i2V, also a price and even after market. So I think those are three core initiatives that we have continued to do really well. We always said that the ITS was very well ahead, because that was part of a integration between Gardner Denver and IR on how we did those three initiatives prioritize there. But I can tell you, I mean the PST team like even two weeks ago, they had like a worldwide i2V event and it was just highly, highly encouraging to see how our new leader is just driving that type of methodology into a segment that in the past -- they did it, but not in a way that we'd like that to be done. In addition, I think what you saw here in the fourth quarter is that, we took some proactive surgical -- what we call surgical restructuring at the end of the year. Again, that's a prudency for us to continue to protect the P&L. I think that's controlling what we can control and taking the actions to ensure that we can deliver that solid margin improvement.

Look, it sounds like you've been on the road slow trotting the last several weeks. I'm curious, just from a regulatory standpoint, are there any kind of changes in regulations that you guys are seeing across any particular region that might be impacting your business or could impact your business going forward in the next we'll call it next 12 to 24 months?

I mean, nothing that I would say of significant dramatic change that is new. I mean, we know about clearly the energy efficiency standards that are coming into effect by the federal government in the U.S., there's some refrigeration standards that will drive basically our air treatment business. I would be it in a positive way, driven first in Europe and then in the U.S. too as well. But those are kind of known that we have known for a little while and but they're not new.

Your next question comes from Steve Volkmann with Jefferies.

Maybe just a couple of longer term ones here. Just kind of going back to orders in backlog, now that the world is sort of normalizing again over some period, should we expect backlog to decline or do you think it's kind of at the rate that it should be going forward?

I'll categorize that. I mean, so good news is that clearly we're still a pretty high backlog, which is encouraging to see. I think over time perhaps yes, it will get normalized. But again, I think when we think about the business that if we continue to get this book to build of one of approximately one that we continue to expect to see here in 2024, I think backlogs seem to be continuing at a pretty higher level than what we have done historically.

The other thing I would say there is, with the amount of, as they said with some of the longer cycle, we do fundamentally feel that compared to years in the past, there is just a higher amount of our backlog that's the longer cycle projects, which then clearly leads to the level of backlog you have now. So I think that you have seen a little bit of a structural change in the composition of the backlog as compared to more historic times.

And then switching gears a little bit, companies that are acquisitive and sort of have this flywheel that you guys have occasionally something comes over the transom that isn't quite what you thought it was going to be? And you may have a little disappointment in some piece of some business or something? So I'm just curious, any lessons learned, anything like that happening? And more importantly, should we expect some level of divestitures to be kind of part of this machine as we go forward?

So, you've seen us now since the merger done, we've done over 40 transactions and obviously not all of them have been a hundred percent the same. But what we would say here is, and we've acknowledged this before, probably the ones that maybe slightly below expectations comparatively speaking are probably the ones where IRX and that integration process probably didn't get embedded from day one, if not before. So if the lesson learned here is, we've got a playbook whether it's an ITS acquisition or a PST acquisition, we're going to continue to deploy that playbook on the IRX side because we fundamentally view that as the catalyst for success in terms of the integration and really embedding those businesses within the core.

Yes, I mean, the only thing that I'll add to that too as well is that, I think we said this before but my staff meeting, which happens typically on Fridays it's run as an IDM part of the IRX and one of the areas of focus is basically we have a dashboard of all the M&As as that are getting integrated, where we can clearly see if there's any issues or gaps. And that was an implementation that we did quite a few months ago, I would say 18 months ago as we saw maybe some businesses that were not properly integrated. So I think it's just part of that as Vik said, continuous improvement, good evolution and having the news travel fast, so that we can react and course correct if something is not going the right way.

Your next question comes from Chris Snyder with UBS.

I wanted to also ask on the M&A engine and maybe a more high level one. So revenue in 2024 is going to be about 40% above 2021. Does that make it more difficult for the company to add this 400 to 500 basis points M&A contribution every year? And does it change anything around the process of doing so? Just as the numbers have, again, I guess gone 40% bigger versus three years ago to keep that same run rate.

Chris, I would say that, I mean, it has become more difficult. I would say that when you think about it back in 2021, I think our addressable market, back in the Investors Day, we said it was maybe what $25 billion -- but it was $25 billion, $30 billion. And you saw our most recent Investors Day, our addressable market being $55 billion. Clearly, when we make an acquisition, we look at it also from the entrepreneur perspective of are we able to increase the addressable market and by increasing the addressable market. We're doing it in a highly fragmented market that gives us a greater pool of transactions to be able to be acquired. We're always very thoughtful on this kind of flywheel of the M&A engine as to just being one that is just an ongoing engine that can continue to grow. I think that's in terms of statistics and data points that's why we track number of transactions by tollgate and with the probability. I think the cadence of that M&A, it's pretty solid. In terms of change in the process, I mean nothing that I will say has been dramatic change. We continue to always make some tweaks and improvements. I think about a year ago, we spoke about how we look at about 100 micro trends and that leads into new M&A transactions that we can actually possibly do. We're always trying to continue to evolve our process to make it better on an ongoing basis. Changing the process, yes, because we are always continually improving the way we do things.

And then maybe just a follow-up on productivity and efficiency of the business. Obviously, margins have been really strong here the last three to four years. Do you feel like the efficiency of manufacturing has returned to pre-COVID levels? Obviously, there's a lot of disruption, coming out of the pandemic, which I'm sure was a headwind to margins in some capacity. Do you feel like that is fully back at this point?

I mean, I don't think so. Only because I mean, I think still there's a little bit of supply chain disruption here and there that happens, right? And so giving you, for example, I mean, the situation with the Red Sea, the situation in the Panama Canal, I mean, a lot of that creates supply chain disruption and we as a company that we're so global and being so good in terms of assembly, anytime oil supply chain disruption, it creates inefficiencies in the factory. I would say that, it is not back to the normal stability that we have seen maybe pre-COVID. That's my view. I think also we are pretty critical, Chris, in terms of how we want to continue to improve our factories and our operations. Is that lean mindset that of continuous improvement that always view as that -- we always have to do better than what we did in the past.

Your next question comes from Joe O'Dea with Wells Fargo.

I wanted to just start on the growth algorithm and if we think about a couple of points of price and a point of volume and just how you're thinking about the overall macro and the type of growth that you have kind of underlying on the volume side. Really just trying to understand how much demand generation is embedded in this initial guide. Is that one point of volume reflective of outgrowth, or is there potential sort of upside on the demand generation side of things?

I think we always view that there's upside on the demand gen side and frankly even on the volume side. Let me kind of unpack that a little bit. I think Vicente mentioned earlier, when you look at the regional trends here with primarily America is kind of at the top of the stack, EMEA relatively more stable and APAC which is largely China for us, probably facing the most headwinds at least as we enter the year. That's kind of the balanced equation that we looked at as we thought about the growth algorithm, as you said. Now that being said, we entered the year with healthy backlog, solid backlog. Demand generation without question is part of the equation here. And clearly, we would say not to dissimilar from frankly, even years past. If there's upside opportunity in the context of the guide or in the context of the year, it really probably more so becomes that organic volume piece, probably more so into the -- as the year progresses. Again, I don't think the equation for us is dramatically different than you've seen historically. But we are conscious and taking into consideration, some of the regional trends that we're seeing, particularly as we enter the year, and we're going to continue to monitor those and pulse those as we get through the quarter and into second quarter in the back half of the year.

On ITS margins in the 30% in the fourth quarter, if you could kind of unpack that a little bit and bridging that sequential improvement from 3Q to 4Q. Also, just to clarify, it sounds like the 35% to 40% incrementals applies to both segments. It's not like that exit rate sets up a tough incremental comp. Not sure if any restructuring that sort of hit the ITS side or if that was more on the PST side, but just some details there would be helpful.

Yes, sure. Maybe I'll take those in pieces here. So, if my memory serves in correctly, it went from about 28.8% EBITDA margins to about 30%. So a little over a 100 basis points, sequential margin expansion from Q3 to Q4. I point to a couple things here. One, frankly as the revenue and volume levels tend to pace to the year, a lot of our productivity measures are tied to volume activity measures the i2V to follow, I'd say that's probably one of the single biggest drivers. I think price cost continue to remain quite positive and overall just strong solid execution as we exited the year. The other thing that I think we continue to see good what I'd say momentum on is the aftermarket side. That really sets up nicely even during the Investor Day. We indicated that aftermarket as well as the whole recurring revenue side of the equation is a big focal point for us and we would expect to continue to see that not only ramp as we think about the next few years, but also that being margin accretive in the overall equation. Again, I think that's probably the way that we think about the equation in terms of what kind of drove Q4 specifically. Now in terms of the whole incrementals and how we think about 2024 like we said, 35% to 40% is the kind of the overall average. The way I'd probably think about it here is, ITS is probably playing maybe towards the lower end of that probably in the 30s realm. PST obviously probably has a little bit more outsized opportunity. But I think that also goes with the fact that we said, that while we're pleased with PST delivering 30% EBITDA margins in the full year of 2023, we know that that business can get up into that mid 30s realm. And as such, there should be a little bit more of an outpaced opportunity. So there's a little bit of puts and takes there as well as Vicente mentioned earlier, a little bit of upside on the corporate cost as we think year-over-year. So hopefully that kind of gives you a little bit of a sense of how we're thinking about the airplane itself out.

Your next question comes from Nathan Jones with Stifel.

A couple fairly narrow questions. I know one of the strategic additions you've made in M&A has been to add drying to the portfolio. So I was just hoping to get an update on the benefits that you're seeing there, revenue synergies that you're generating there, whether or not you think that portfolio is built out or it's still an opportunity to add more of that capability?

Yes, it's definitely a very exciting addition to -- and you have seen that we made quite a few acquisitions on that. I mean, not only the SPX flow or treatment side, Oxywise, we acquired Holtec, we acquired a couple years ago and now Friulair to as well. And then in China, even also Hanye. And the reason for this is that because air treatment is very good from the perspective of being attached to a compressor. If you think about the attachment rate, it should be like 70% attached to a compressor. So clearly, that’s in terms of a KPI of a metric that we use with our teams is exactly that. What is the attachment rate? When you say a compressor, how often are you attaching that air treatment to that and that definitely drives some good growth momentum. And then to think about it too as well, air treatment is roughly 50% of aftermarket. So it generates a very good solid aftermarket. So the combination of those two factors, we like it a lot. And then the third item of why we like it is because you can actually optimize energy efficiencies much better when you have the combination of the compressor and the air treatment talking to each other in a common way and being remotely connected and then fine tuning that connectivity. So, I think it is a multiple levers of strategic growth that we see on this dryer portfolio.

Your next question comes from David Raso with Evercore ISI.

Just a couple quick questions. A clarification on the M&A comment. I thought I heard the word incremental 400 to 500, but you already have 2% to 2.5% of acquired revenues booked that'll flow through this year. Was that truly 400 to 500 above what's already booked or just getting up to the framework of 400 to 500 basis points of acquired revenues? If you can just clarify that.

So, I think, take them in pieces here. So you obviously have the carryover as well as the Friulair acquisition. So you see in our guidance be approximately $160 million of revenue contribution, that's the carryover and the completed to date, obviously would expect to book to close more acquisitions as the year goes by. But embedded in the guide is that 160. The comment about 400 to 500 would be the acquisitions that we expect to make in the year and the annualized revenue contribution. So for all the deals that we expect to make here, based on the funnel and all the comments that Vicente made, we would expect that to be 400 to 500 basis points on an annualized basis. So you should take those kind of two statements separate from each other. But again, I think, the short answer here is we expect to continue to operate well in line with our stated economic growth engine and how you've seen us operate in years past.

And on the call out to that EV truck manufacturer in Europe on the vacuum and blower order weakness, you made a comment like I think prospects are improving potentially for that again. Just so I'm clear, do you think that order could come back on the books because it seemed to be of some size must be $20 million, $30 million or so, not small? Is that something that can come back on the books?

Let me take the first part of that and I’ll let Vicente to answer. The way I would describe it is, interestingly enough, we de booked it in Q4 of ‘23 and the original order happened to have come in Q4 of ‘22. So interestingly enough, it kind of it hit us both ends, both in the quarter as well as the comp. Vicente, I'll let you speak to the prospects going forward.

And the prospect going forward is that, I mean we we're still in touch with them. I mean, basically they had a situation where the battery supplier went bankrupt, and that led to these truck manufacturing not being able to produce the trucks. This is needless to say what we're seeing now is that it's been acquired, the assets have been acquired and they have great technology. I mean, this is for the last mile delivery trucks in Europe, which is very highly needed. And so the conversations continue to happen, which obviously means that there could be some good prospects here as we go into 2024.

Your last question comes from Nicole Deblase with Deutsche Bank.

Maybe just starting with the free cash question. So conversion of 100% all the CapEx plans. How are you guys thinking about working capital for 2024?

Sure. I think in the call, I think broad structure, we still see an opportunity here. I think is the long and short of it. While we were pleased with our kind of exit momentum heading into '23, particularly on the inventory side, which was very much a source of cash in the quarter. We frankly still sit at elevated levels, comparatively speaking to, I'd say, the pre-supply chain dynamics and things of that nature. So I think that's definitely an opportunity as well as I'd say some of the just core -- I'll just call it blocking and tackling, whether that be just kind of the collections and things of that nature, fair to say that we still have a component of our portfolio whether it be part of the PST organization as well as a lot of some of the bolt-on M&A, that's not in the shared service environment, which obviously, for us, is a big catalog of working capital improvement. So you put that all together, I think that still lends itself as a good source of opportunity for '24 and beyond.

And then -- and just -- it doesn't look like you guys have any buybacks in the guidance based on the share count outlook. So how is your view on potential buyback activity in 2024?

Yes, that's correct. We do not have any, I would say, incremental buybacks as part of the guidance. Now that being said, I think the way you should expect us to operate here in 2024 is similar to the prior years, meaning a requisite amount approximately. We've always said approximately $250 million is probably a good proxy and a placeholder in terms of expectations for the year. But you are correct that it's not formally in the guidance.

There are no further questions at this time. I will now turn the call back to Ingersoll Rand's CEO, Vicente Reynal for any closing remarks.

Thank you, Brian. And as we wrap up here, I just want to pass 1 more thank you to our employees who will continue to think and act like owners because they are owners of the company. And it's very exciting to see as I travel around the world, the high level of engagement and energy that we have across our organization. I think our economic growth engine is powered by that momentum on the ownership mindset and leveraging our IR. So again, very encouraged, very happy and to see the performance and look forward to another great year here in 2024. Thank you.

This concludes today's conference call. You may now disconnect.