Earnings Call Transcript
Ingersoll Rand Inc. (IR)
Earnings Call Transcript - IR Q4 2021
Operator, Operator
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. 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.
Chris Miorin, Vice President of Investor Relations
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. 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 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. At this time, I'll turn the call over to Vicente.
Vicente Reynal, Chairman and CEO
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. 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. 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. Our employee engagement score up 17% over the last 3 years also shows the power of ownership. Our current engagement score now ranks in the top quartile of manufacturing organization. In Expand Margins, we have improved the company's adjusted EBITDA margin 370 basis points in 2019, including 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. 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 allocated capital effectively, securing approximately $2 billion in gross proceeds from the divestitures of Club Car and High Pressure Solutions. We deployed over $1 billion to acquisitions in 2021, which represents over 6% of sales when annualized. We also repurchased $731 million in shares as part of 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. 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. 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-digits each year, 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 achieved adjusted free cash flow margin of 16%. 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 since 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. 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. 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 received 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 us in its sustainability yearbook for 2022. In addition, S&P Global recognized 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. In March of 2021, we committed to becoming a top quartile ESG industrial company in three years. We believe we have achieved or are on the cusp of achieving that goal in one year and S&P Global agrees as it selected us for 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. I will now turn the presentation over to Vik to provide an update on our Q4 financial performance.
Vik Kini, CFO
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 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 order growth across each segment, despite comparisons to a strong Q4 2020. 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. 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. 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 costs 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. 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. 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. Leverage for the quarter was 1.1 times, which was a 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. 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. I'm very proud of our employee ownership culture that continues to overdrive our performance, with everyone thinking like an owner, considering 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. The right side of the slide highlights the ongoing price cost dynamic. In 2021 we remained 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. 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 to the commitment of our team to be differentiated and be in the top quartile of performance. I will now turn the call back to Vicente to discuss our segments.
Vicente Reynal, Chairman and CEO
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, it's 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%. 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. 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 acquisitions as we continue to expand our offerings within the compressor ecosystem, as well as the impact that Jorc will have as we scale up and expand geographically. 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 revenues 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% excluding 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. 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.
Vik Kini, CFO
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 costs of approximately $135 million spread evenly over each quarter. This yields an incremental margin of approximately 35% for the total company with positive margin expansion expected 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. 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.
Vicente Reynal, Chairman and CEO
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 increasing 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. 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. With that, I'll turn the call back to the operator and open for Q&A.
Operator, Operator
Thank you. Our first question today comes from Mike Halloran of Baird. Your line is open. Please go ahead.
Mike Halloran, Analyst
Hey, good morning everyone.
Vicente Reynal, Chairman and CEO
Good morning, Mike.
Vik Kini, CFO
Good morning.
Mike Halloran, Analyst
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.
Vicente Reynal, Chairman and CEO
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.
Mike Halloran, Analyst
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?
Vicente Reynal, Chairman and CEO
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 markets 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 is 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 released. And it's really for those projects that are really related to the mega-trends that we spoke about in the Investor Day. For example, we're seeing capacity expansion due to realigning supply chains, but also the quality of life around pharma or new drug discovery, we're seeing also CapEx projects related to sustainability where new technology of compressors are driving higher levels of efficiency. It's being widely used by 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 they can actually increase and get the total cost of ownership benefit.
Mike Halloran, Analyst
Great. We appreciate the time.
Vicente Reynal, Chairman and CEO
Thanks Mike.
Operator, Operator
Thank you. Our next question today comes from Josh Pokrzywinski of Morgan Stanley. Josh, your line is open.
Josh Pokrzywinski, Analyst
Hey, good morning guys. Can you hear me?
Vicente Reynal, Chairman and CEO
Yeah. Josh, good morning. We don't hear you, Josh.
Operator, Operator
Hi, Josh. Your line is open.
Josh Pokrzywinski, Analyst
Great. Yeah. Sorry about that. So maybe just a follow-up on 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 of these like 1.05 type book to bill numbers as we go through the year?
Vik Kini, CFO
Sure, I'll begin and then Vicente can add his thoughts. We are very pleased with the order momentum we have seen. Typically, in our business, the book-to-bill ratio is above 1 in the first half of the year and tends to decline to around 1 or below in the second half due to the nature of larger projects that generally close later in the year. We managed to maintain a book-to-bill ratio above 1 in the fourth quarter, showing the continuing strength in demand. As we move into 2022, we don't anticipate a significant change in this seasonality. We expect the book-to-bill ratio to remain strong, above 1 in the first half of the year. However, as supply chains start to normalize, we expect the ratio to revert to more typical levels, around or slightly below 1 in the second half of the year.
Josh Pokrzywinski, Analyst
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.
Vicente Reynal, Chairman and CEO
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 half in the first half of the year and continue to increase as we take actions in the second half.
Josh Pokrzywinski, Analyst
Great. Appreciate the detail. That’s all guys.
Vicente Reynal, Chairman and CEO
Thanks.
Operator, Operator
Our next question today comes from Jeff Sprague of voice Vertical Partners. Please go ahead, Jeff. Your line is open.
Jeff Sprague, Analyst
Thank you. Good morning, everyone.
Vicente Reynal, Chairman and CEO
Good morning, Jeff.
Jeff Sprague, Analyst
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 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?
Vik Kini, CFO
Yes, Jeff, this is Vik. I'll start and Vicente can add later. To reiterate what Vicente mentioned, from our guidance perspective, we anticipate that pricing will contribute about 50% to the organic growth in each segment. This is how you should think about it, although it will be slightly lower in Q1, with improvements expected as we progress through the quarter due to ongoing pricing actions we are implementing given the current environment. Regarding the price-cost dynamic, you are correct; similar to 2021, we expect to be price-cost positive on a dollar basis through each quarter of 2022. As a reminder, in 2021, we were price positive each quarter, particularly in the first half, followed by a tighter spread in Q4 of 2021. For 2022, we anticipate that Q1 will also have the tightest spread in terms of dollars, with improvements expected later in the year as a result of those pricing actions. On the inflation front, we believe that supply chain and material inflation will mirror what we experienced in the latter half of 2021, with only minor improvements anticipated in the second half, and we are not forecasting any significant changes in the situation for 2022. It’s worth noting that we've seen some slight decreases in freight rates, which is positive for logistics. However, the material costs remain the largest factor. Additionally, even though labor costs are not directly included in the price-cost equation, we are managing teams to counteract labor inflation through improved productivity. We expect labor costs to remain largely consistent with the inflation or merit levels we experienced in 2021.
Jeff Sprague, Analyst
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 dialogue? 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.
Vicente Reynal, Chairman and CEO
I think it's a bit early to give a definitive answer, but we are seeing some instances where multiples might be slightly decreasing. Companies that relied on one-time COVID revenue are finding that those expectations are not materializing as strongly as they had hoped. We're maintaining a disciplined approach, which is encouraging as our pipeline remains large and we are actively opening many doors thanks to our efforts in employee engagement and fostering an ownership mindset. This has been particularly appealing to family-owned businesses, which recognize our unique approach. The discussions are very active. In a volatile market, this might accelerate the M&A process as owners seek clarity and want to secure outcomes. We're very engaged in this arena, and it's an exciting time with a strong pipeline.
Jeff Sprague, Analyst
Great. Thank you.
Operator, Operator
Our next question comes from Nicole DeBlase of Deutsche Bank. Please go ahead.
Nicole DeBlase, Analyst
Yeah, thanks. Good morning guys.
Vicente Reynal, Chairman and CEO
Good morning.
Nicole DeBlase, Analyst
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?
Vicente Reynal, Chairman and CEO
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. 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 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. As 2021 progressed and kind of what Vik mentioned too as well, we continued to maintain being price cost positive, but the spread clearly tightened in the back half of the year due to the inflationary pressures accelerating. This now leads to a tougher comp in the first half and more reasonable comps in the second half of 2022. Additionally, some of the things we mentioned about the M&A, regarding 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, particularly the SEEPEX company, we expect that the savings start to materialize more so in the back half of the year. 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 allow themselves through more of our year-over-year margin expansion to be in the back half of 2022.
Nicole DeBlase, Analyst
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?
Vicente Reynal, Chairman and CEO
Yeah. Great question Nicole. It is very, very slight improvement. I mean, we're telling our teams plan for the worst 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 are very stable at these kind of levels. And if we see a benefit that inflationary markets abate pretty rapidly, then that's an improvement in our total good margin expansion.
Nicole DeBlase, Analyst
Thank you. I'll pass it on.
Vicente Reynal, Chairman and CEO
Thank you.
Operator, Operator
The next question in the queue comes from Rob Wertheimer of Melius Research. Your line is open.
Rob Wertheimer, Analyst
Thank you. Good morning. I appreciate your insights on price and cost. I'm curious about the volatility you're seeing in the cost side of pricing and the supply chain. It seems like everyone is working really hard on this. How far ahead can you anticipate stability, maybe in the first or second quarter? Also, could you update us on how quickly you can adjust pricing if costs increase? How do you handle potential volatility? Thank you.
Vicente Reynal, Chairman and CEO
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 puts a high level of emphasis on controlling what we can control and controlling your destiny, and that basically means supply chain. In terms of the cost, yeah, I mean it's a bit of a mixed bag in the sense that sometimes if you supply and logistics, then you see steel. Steel is not coming back 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 as early on as we can. So to your question, 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.
Vik Kini, CFO
Rob, regarding your question about pricing and flexibility, I believe the team has done an excellent job in that area. We have discussed this several times with the improvements in our processes and the dedicated pricing team that enables us to be agile. By utilizing the IRX toolkit, we can connect with our supply chain and operations team to assess the impact of inflation regularly and adjust our pricing accordingly. In 2021, we implemented multiple pricing actions across almost all aspects of our business, and we've demonstrated our ability to respond quickly. We're prepared to react similarly in 2022.
Rob Wertheimer, Analyst
Thank you.
Operator, Operator
The next question today comes from Nigel Coe of Wolfe Research. Please go ahead, your line is open.
Nigel Coe, Analyst
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 means 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 ITS is going to be up – ITS is going to be up year over year. Just maybe just confirm that, how we think about it?
Vik Kini, CFO
Sure. So yes, Nigel, I'll address those points separately. Regarding the pricing dynamics, you can expect that pricing will be at least comparable to what we had in Q4. As we mentioned, we are still evaluating and adjusting our pricing strategies as necessary due to the constantly changing environment that Vicente referred to. Concerning the segment margin spread, you are correct. Q1 for PST will show a year-over-year margin decline, primarily due to M&A effects. On the ITS side, we anticipate that it will align more closely with the overall market, showing flat to slightly higher margins. Additionally, some corporate factors will also contribute to the overall expectation of flat to slightly increased performance for Q1 in 2022.
Nigel Coe, Analyst
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 on 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 equipment or does that require a bit more of a meaningful replacement cycle?
Vicente Reynal, Chairman and CEO
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 based. 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. 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.
Nigel Coe, Analyst
Great. Thank you very much.
Operator, Operator
The next question comes from David Raso of Evercore. Please go ahead.
David Raso, Analyst
Hi, thank you for the time. Vicente, based on your experience, could you share your thoughts on the current situation with Russia-Ukraine and its effect on natural gas prices? Clearly, both natural gas and oil prices are strong right now. I'm trying to understand if high gas prices are causing some European factories to reconsider their capital expenditure plans. While it's still early to tell, how do you perceive the potential impact of this situation, particularly if it continues for an extended period?
Vicente Reynal, Chairman and CEO
Sure. That's an interesting question. First, I want to express our thoughts and prayers for the people of Ukraine during these dark times. From our perspective, our revenue in Ukraine and Russia is minimal. Regarding the overall impact, I do expect gas prices to keep rising, especially given the current high prices in Europe. In our internal factories, we are seeing that our teams are speeding up projects aimed at reducing energy costs. Energy efficiency is crucial, particularly since compressors account for about 30% of the energy used in a factory. As the expectation grows that high energy prices will persist, it encourages discussions about new compressors that can lower energy consumption. We are upgrading our compressors and incorporating solar energy into our factories, which is enhancing our conversations with customers. I believe the trends in sustainability and how our products can support our customers are important topics right now.
David Raso, Analyst
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're 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.
Vicente Reynal, Chairman and CEO
I would say that it will definitely be on the ITS. When you consider the sequential margin improvement from Q3 to Q4, it shows that we managed to enhance our margins even in a rising inflationary market. Therefore, I believe we will continue to see very strong momentum in the ITS.
David Raso, Analyst
Okay. Thank you very much, I appreciate it.
Vicente Reynal, Chairman and CEO
Thank you.
Operator, Operator
Our next question comes from Joe Ritchie of Goldman Sachs. Your line is open.
Joe Ritchie, Analyst
Thanks. Good morning everybody.
Vicente Reynal, Chairman and CEO
Hi, Joe.
Vik Kini, CFO
Hi, Joe.
Joe Ritchie, Analyst
So I guess maybe my first question. As the quarter progressed, I'm just curious like did things get worse at all 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?
Vicente Reynal, Chairman and CEO
I believe there has been a progression. Absenteeism in the fourth quarter didn't spike significantly. It did increase in early 2022, around January, but we have returned to normal levels now. Therefore, I'd say absenteeism in the fourth quarter was normal. Regarding inflation, it was relatively stable, though it did continue to rise, which is why we are focusing on implementing gradual price increases. Looking ahead to the first quarter, we are seeing better stability now that the Omicron spike has passed.
Vik Kini, CFO
Yeah. And Joe, the second part of your question in terms of any revenue deferrals or anything of that nature. I would point to anything in terms of like true deferrals or things of that nature from a customer base perspective asking for things like that, nothing of any consequence there. Obviously, probably fair to say that, just given some of the supply chain constraints, we would fully acknowledge obviously backlog being at levels they are and even some past due backlog that obviously our 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 hitting what we say our commitments in the context of topline from a Q4 perspective.
Joe Ritchie, Analyst
That's great to hear. My follow-up question is about the margin, particularly regarding PST. I wanted to focus on feedback for a moment. I think those margins are coming in around the low '20s. I'm curious about how you see the progression and synergies in that business. Could you discuss the timeline or what would help that business return to more PST-level margins over the next 12 to 18 months?
Vicente Reynal, Chairman and CEO
Yes, I completely agree. Joe, your understanding of the situation is correct. To provide some context, the SEEPEX business has a revenue base of about $200 million, which we mentioned when we acquired it in the latter half of Q3 2021. At that time, the EBITDA margin was in the mid-teens range, but the gross margin is very strong, potentially even better than the overall PST margin. You're absolutely right that we have synergy plans underway, and many of those initiatives are already being implemented. I believe your perspective on where we expect the margin profile to be in 2022, surpassing the 20% EBITDA margin mark, is entirely reasonable. As we integrate further, we have always indicated that within a three-year timeframe, we expect the margins to align more closely with the PST segment. Since we are not yet one year into the acquisition, we do have some progress to make, but reaching above 20% from the mid-teens within the first year is certainly promising. Additionally, as we integrate commercially, the technology is highly complementary to the PST segment, leading us to anticipate good revenue growth and synergy benefits. Everything is progressing well, and we expect the margin improvement to continue as 2022 goes on, particularly as we implement some of these synergy initiatives currently.
Joe Ritchie, Analyst
Great to hear. Thanks guys.
Vicente Reynal, Chairman and CEO
Thanks Joe.
Operator, Operator
Our next question comes from Nathan Jones of Stifel. Please go ahead.
Nathan Jones, Analyst
Good morning, everyone. I want to start off by saying good morning. Vicente, you mentioned that larger capital projects are beginning to re-emerge in the market, which is encouraging as we observe some mid to later cycle capital coming back. Can you provide more details on the locations of these projects, the end markets involved, and the geographies where they are starting to appear? Additionally, what is your outlook for growth in these areas over the next two to three years?
Vicente Reynal, Chairman and CEO
We're seeing strong momentum in the Asia Pacific and Middle East regions, particularly in the water and wastewater sector. In countries like India, China, and Southeast Asia, there's significant activity in those areas. I had meetings with major EPC companies, and the discussions indicated a positive trend. I'm encouraged by the prospects of upcoming hydrogen conversions, which we highlighted during our Investor Day as a key opportunity for our products. While we haven't seen substantial developments in our larger capital expenditures aside from our fuel expenses business, we do anticipate future growth in the compressor market related to hydrogen and energy conversion.
Nathan Jones, Analyst
And I wanted to follow up on your response to Dave's question on the energy efficiency of compressors. I think it's an important point that pumps and compressors in some of these manufacturing facilities, 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 compressor that reduces 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?
Vicente Reynal, Chairman and CEO
Certainly, Nathan. Given the current energy costs, some payback projects could take a year or less. This can vary by country; for instance, in Germany and China where energy costs are particularly high, the payback period is relatively quick. When we consider compressors, they typically account for about 30% of the energy consumed in a factory, though this varies based on the type of factory. I’m quite optimistic about this opportunity, as it's not just about compressors, but also about blowers. In wastewater facilities, blowers can consume up to 60% of the energy. We're looking at potential reductions of around 50% from that 60% or 30%. In terms of actual dollar savings, this depends on the company’s size, but we've had feedback from a large beverage company that installed our compressors. They reported receiving a call from their utility company because their energy consumption had dropped by more than 50%. The utility company was surprised, thinking they might have shut down their factory, but in reality, the new compressors were using 50% less energy, resulting in savings of several hundred thousand dollars per year on energy costs.
Nathan Jones, Analyst
Great. Thanks for all the color. Thanks for taking my questions.
Vicente Reynal, Chairman and CEO
Thank you, Nathan.
Operator, Operator
The next question comes from Stephen Volkmann of Jefferies. Your line is open.
Stephen Volkmann, Analyst
Hi guys. Most has been answered, but just Vicente, 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.
Vicente Reynal, Chairman and CEO
Jeff, that's a great question. We don't want to significantly alter our strategy. In fact, during market dislocations like this, it presents a good opportunity to be more aggressive with mergers and acquisitions. Some price points are reaching levels that are more attractive than before. We see this type of dislocation as a favorable chance to pursue M&A, which remains our top priority for capital allocation, albeit with caution. As you've noticed, we are effectively using our cash, as demonstrated by the approved $750 million share repurchase plan from the Board, which we intend to execute.
Stephen Volkmann, Analyst
Great, thank you.
Operator, Operator
And our final question today comes from Joe O'Dea of Wells Fargo. Please go ahead.
Joe O'Dea, Analyst
Hi, good morning. When considering 2022 and your digitalization targets, can you share any insights on what you view as successful progress toward the five-year framework you outlined? Specifically, are you focusing on field unit penetration or the percentage of IoT-ready products? What are your thoughts on the targets for 2022?
Vicente Reynal, Chairman and CEO
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 indicator 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 move into our future revenue streams. 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 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 better benefit of the entire company, not just the SEEPEX business. So a lot of good momentum and good excitement around this topic.
Joe O'Dea, Analyst
Great. Thank you.
Operator, Operator
We have no further questions in the queue, so I'll hand back to the management team for closing remarks.
Vicente Reynal, Chairman and CEO
Thank you. As we close, we clearly are in some pretty volatile times as someone said in the Q&A. But as you can see from our performance, we and actually particularly on Slide 6, even in these very difficult environments we were able to perform and outperform, maybe because we have a team that has this ownership mindset, the life to control their destiny and really execute to what we can control, and also make life better for our employees, customers, the planet and also important to shareholders, 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.
Operator, Operator
This concludes today's call. Thank you for joining. You can now disconnect your line.