Operator: Thank you. We now have Joe O’Dea of Wells Fargo. You may proceed.
Joe O’Dea: Hi. Thanks for taking my questions. I wanted to start on the backlog, and I think you said a little over $2 billion of backlog. But it sounds like the view would be that, that’s more a normalized level, would be trending, I guess, a little bit over 30% of 2023 revenue. I’m guessing, historically, backlog hasn’t been quite as strong relative to revenue. So, could you just talk about sort of what you’re seeing sort of structurally within that, the confidence that we should be thinking about that as more of a normalized backlog level?
Vicente Reynal: Yes, Joe, I would say that normalized maybe right now here in 2023. As we go into 2024 and longer than that, we’ll see. I mean, we expect that things will get back to the way they were before. Our view in terms of why we should continue to see backlog at this higher level is again because of a lot of these kind of long-cycle CapEx releases that we’re seeing that, that should continue to add on to that backlog while we continue to see maybe solid fundamental growth on the short cycle as we have just also stated. So, I think it’s not that the new norm is going to be that 30% or $2 billion. It’s just that right now, at this point in 2023, that is basically what we’re saying is that we’re saying that we’ll continue to — our expectation is that we’re not going to deplete the backlog based on what we see coming through for the rest of the year.
Joe O’Dea: Okay. And then, just a clarification on the $200 million to $300 million of annualized inorganic revenue to be acquired. Of that, how much is included in the 2023 M&A revenue contribution? And does that amount include sort of all 11 of the LOIs that you currently have?
Vik Kini: Yes, Joe, so let me take it in two pieces. So, the guidance — if you go to the guidance slide, $270 million of M&A is included in the guide. That $270 million is for completed and/or closed acquisitions to date. So effectively, everything you’ve seen through 2022 that has any degree of carryover impact as well as probably the two bigger contributions being the SPX Flow Air Treatment business, which closed right at the beginning of the year, and then the Paragon Tank Truck acquisition, comparatively smaller but closed at the beginning of this month. That is all included. That’s what comprises the $270 million. In terms of forward expectations, we do not include any non-closed transactions in guidance. So, the 11 additional transactions that you see at the LOI stage, that would be all incremental to current guidance if and when those transactions close.
And like we’ve done, historically, as those transactions close, we’ll obviously start including them in subsequent guidance. So, again, yes, non-completed or non-closed M&A would be additive to the current guidance for 2023.
Joe O’Dea: Okay. And then — but are those 11 included in the $200 million to $300 million that you’re talking about acquiring over the course of 2023?
Vik Kini: That is correct. Yes. So, I think, our (ph) kind of affirmation of the capital allocation strategy includes that we expect to close another $200 million to $300 million on an annualized basis. And obviously, that’s just contingent on the timing in terms of what will actually impact 2023, but that is correct.
Joe O’Dea: Got it. That’s helpful. Thanks a lot.
Operator: We now have Nathan Jones of Stifel. Your line is now open.
Adam Farley: Good morning. This is Adam Farley on for Nathan.
Vicente Reynal: Good morning.
Adam Farley: So, you performed very well in China in 2022, despite COVID headwinds. Could you provide some color on how you outperformed? And maybe what you expect in 2023 in China, specifically with reopening?
Vicente Reynal: Yes, Adam, so I’ll just say to that, a big thank you to our team in China and team in Asia Pacific, whom I was actually just having a celebratory call last night with them and kind of kicking off into high gear a lot of our initiatives in 2023. So, generally, I think our team continues to be pretty agile and nimble as to finding the growth vectors that are being seen in China, and they’ve taken our products and repositioned them and leveraging our demand generation to accelerate the penetration of those technologies into those very unique end markets. So, I think it’s all about ensuring that our teams are very nimble and very agile and that’s exactly what they’re doing. I mean, they’re finding these very good growth vectors and those could be around battery production, photovoltaic production as well for solar panels or even electric vehicle production.
So — and then they leverage the technology and the demand generation to be able to acquire just incremental market share.
Adam Farley: Okay. And then, on the recent close of the SPX Flow Air Treatment business, could you provide any color on revenue or cost synergy opportunity, given that it’s still early days of integration work?
Vik Kini: Yes, sure, Adam. So, to repeat, we did close the SPX Flow transaction at January 3, at the beginning of this year. Using rough numbers, we can kind of expect something right around $180 million of revenue contribution, so slightly less than $200 million, and very much in line with a lot of the M&A you’ve seen us do historically. It’s coming in right in that kind of mid-20%s type EBITDA margin range. And as we did say when we announced the transaction, we do see — over a multiyear basis, we do see cost opportunities and synergy opportunities to drive that to be accretive to ITS segment margins in due course. So, again, we’re about 45 days in, I would say, the integration process, as you would expect, using IRX and the whole IDM process to kind of guide the integration, it’s going as well as we had expected, and things are very much tracking in line with started.
And as you would expect, that’s the single biggest contributor of the $270 million of M&A that’s included within our guidance.
Adam Farley: Okay. Thank you for taking my questions.
Vik Kini: Thank you.
Operator: Thank you. We now have Chris Snyder of UBS. Please go ahead when you are ready, Chris.
Chris Snyder: Thank you. I want to follow up on some of the order trends. So, the book to bill is going from 0.91 in Q4 to an expected 1.0 in 2023. Should we expect an immediate jump back up to that 1.0 level in Q1, or will it take a couple of quarters to play out? And then what type of visibility do you have into orders as we go beyond Q1, maybe into the back half of ’23? Thank you.
Vik Kini: Yes. Sure, Chris. So, I guess, I’ll start by saying, I think the way you described it is relatively accurate. Yes, we did see a little over 0.9 in Q4. Worth noting here, it’s quite normal in the business to see book to bill less than 1 in the second half of the year, and particularly in Q4. And that’s largely attributable to shipping the longer — the larger, longer cycle orders during the second half. And you see that primarily in the ITS business. And that’s exactly what we saw on Q4 as well as obviously the strong revenue performance. So that did drive the book to bill to be less than 1. But to Vicente’s point and some of the commentary, we are seeing the order momentum continuing here in the first quarter, quarter-to-date through the first week in February.
Orders — organic orders performance is up. And it’s worth noting, that’s driven despite the headwind of the Chinese New Year timing, which is in January this year versus February in last year. So, again, continued to be encouraged by the trending. As Vicente said, backlog continues to remain healthy with a good contribution from the longer cycle projects, which will continue to extend over a 12- to 18-month timeframe. So again, yes, book to bill less than 1, but quite normal in Q4 and continue to be encouraged about what we see here moving into 2023.
Chris Snyder: No, yes, I appreciate that and I appreciate the color on the seasonality. And then, on the implied margin guidance, so my math kind of pegged EBITDA margins up 70 bps, maybe up to 80 bps year-on-year at the midpoint. So obviously, a bit below the run rate that we’ve seen and below the kind of the multiyear target that the company has laid out at 100 basis points. But it sounds like price/cost will continue to be kind of in your favor. So, can you just maybe talk about some of the moving parts there on the margin side as we build up to the guide? Thank you.
