Operator: Your next question comes from Joe O’Dea with Wells Fargo.
Joe O’Dea: 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?
Vik Kini: 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.
Joe O’Dea: 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.
Vik Kini : 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.
Operator: Your next question comes from Nathan Jones with Stifel.
Nathan Jones : 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?
Vicente Reynal : 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.
Operator: Your next question comes from David Raso with Evercore ISI.
David Raso: 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.
Vik Kini: 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.
David Raso: 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?
Vik Kini: 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.
Vicente Reynal: 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.
Operator: Your last question comes from Nicole Deblase with Deutsche Bank.
Nicole Deblase : 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?
Vik Kini: 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.
Nicole Deblase : 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?
Vik Kini: 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.
Operator: 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.
Vicente Reynal : 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.
Operator: This concludes today’s conference call. You may now disconnect.
