Ingersoll Rand Inc. (IR) Earnings Call Transcript & Summary

All right. Good afternoon again. We're excited to have Ingersoll Rand with us. We've got really all the senior managers here we're very excited. We've got Vicente Reynal, who is the Chairman, President and CEO. We've got Vik Kini, who is the SVP and CFO. We've got Mike Weatherred, who is the SVP of IRX. So as I'm walking over here, the synthase we're essentially 3 years post RMT. I remember you think close your RMT right before the pandemic, we were still at our conference here in February 2020. But maybe you can talk about sort of the progress over the last 3 years. You had initially came out with $250 million of synergies. Now you're at $300 million, but can you give us more color on sort of what's gone right and if anything has gone wrong? And then there are clear reasons for the RMT revenue synergies, main GDI innovation with higher distribution. Maybe talk about what actually has happened about a 6-part question to start, sorry.

No, I think it's been an incredible journey, Andy, and thanks to, obviously, our employee base who are -- have these ownership mindset, and we can talk more about that later. But it's very impressive to us well to think about that when we announced the signing of the transaction, we said that we could be -- that we could see -- we could become a $1.6 billion EBITDA business, right? Remember, we said at the time, it was $1.4 billion, close to $1.50 billion, and look at what we have done now. I mean, if you look at our guidance, we are there. And we are there even when you think about that, we basically divested over $1 billion of revenue and a lot that went with that EBITDA by Club Car and the high-pressure oil and gas business. So again, I think it's pretty remarkable what as a team, we've been able to accomplish and it's all thanks to the team members that we have in the company. I think the most exciting thing for me is that immediately, we were able to create a single culture today, you don't see Gardner Denver culture, Ingersoll Rand culture. It is one single culture. And the best way that our employees like to describe the culture is that they think that they view it as we are in a 160-year-old startup company. So a lot of agility, a lot of nimbleness, a lot of entrepreneurship and we're just very focused on ensuring that we make life better for the customer, the planet, the employee and the shareholders, which, by the way, all the employees are the shareholders. So a lot of great things. And I could -- as you can imagine, I could talk here for hours.

Yes, we could fill that with one question, right?

Yes, that's right.

All right. So maybe just following on there, Vicente, like as you've assessed your market share performance over the last 3 years, would you say taking share? And if so, where? And sort of related to that, it does seem like you've talked a lot about demand generation and those efforts have sort of ramped up into a really differentiated growth driver. So maybe talk about that and maybe the maturity of demand generation efforts, like, again, if you give an American analogy, like what inning are you in of demand generation?

Absolutely, we feel that we are taking share because when clearly, we compare our growth rates compared to those that we can see externally, we're outperforming the growth momentum. And we feel it. We see it in terms of some of the product categories, whether you may think about could be oil-free that we said is very important. We're seeing that oil-free continues to outgrow oil lubricated compressors. And we like that because oil-free penetrates more this high growth, sustainable markets like food, beverage, pharma. And so we like -- we definitely like what we're seeing. To your point, we think that a lot of this has been done via self-help. Self-help, we like to call it as utilizing demand generation, which is our commercial execution engine on how we go about instigating demand from our customer base by utilizing the same techniques that many of us will see on direct-to-consumer, but applying that into the industrial space. So today, we easily generate 5,000 marketing qualified leads every single week. So that's giving us just an incredible amount of visibility and performance in terms of where is it that we can accelerate our growth. And to your point, I mean, this was nonexistent, say, 5 years ago. So we have done an incredible job ramping that up. And in terms of innings, we still feel we're at the very early inning stages because the focus was a lot on the ITS segment. And we're moving now a lot of this demand generation focus to the PST segment. So again, we see that's going to be a new leg of growth that we can accelerate from a dimension perspective.

Got it. I wanted to ask you about, you mentioned sort of the entrepreneurial culture. I think it's very unique, very important given the owner philosophy. So how do you think that's translated. Obviously, you mentioned culture as sort of combine them. So what is -- has that translated well to the overall bigger IR now? And cash was under a bit of pressure in '22, as you know, you're not alone in that. Like -- but how has the owner operator sort of culture helped how do you expect it to help with getting back to 100% or over conversion as you go forward?

Yes. So as you know, Andy, and many of you know, but not just as a background, I mean, we -- every employee in the company has an ownership in Ingersoll Rand we did it back in 2017 when we awarded about $100 million of equity across, at a time, 6,000 employees. Then in 2020 when we close the transaction with Ingersoll Rand, we gave $150 million of equity to 16,000 employees. And this was given to nonmanagement equity participants. So this was to put the equity back into all the way down to the factory hourly workforce. And what we did is we train everyone, and we said, hey, this is not a thank you note. This is -- yes, I mean we might be good guys and nice guys. But we're not doing this because of that. We're doing this because we want you to have skin the game in our long-term journey strategy. So then we train everyone, and we taught them on what is our long-term strategy. Where do we see the growth vectors? How do we see the company moving over the next 3, 5 years horizon? And one of the things that we said is that as owners of the company, we need all 16,000 employees to focus on cash, cash conversion cycles, and we were training and we trained all 16,000 employees in local languages on what does it mean? What is -- how can they unlock cash. And yes, I mean, that has turned big improvements. I mean last year, free cash flow positive every quarter. And we have been free cash flow positive every single quarter since the combination of the merge, and we still see plenty of room for us to continue to improve that. whereas we said at the Investor Day, mid-teens free cash flow margin, and that's a very easy path for us to get there. We want to continue basis and get that to a higher number.

Got it. No, that's helpful. And then you've continued to highlight sustainability as a growth driver for Ingersoll. So maybe talk about how the portfolio is positioned today in terms of helping customers achieve their sustainability goals. How much might U.S. IRA sort of accelerate that focus? And then what are you working on to further differentiate your offerings on the sustainability side?

Yes. So if you step back, I mean, you can consider also that right now Ingersoll Rand, we're a pure play in mission-critical flow creation devices, compressors, blowers, vacuums, pumps, anything that is mission critical in nature where we are at the heart of the process. And that means that we can make a difference in energy savings and water conservation. So we're very focused on ensuring that a lot of our technologies are helping doing that. Best example is compressors. Compressors are consuming roughly 30% to 40% on average of the energy consumption in a typical application. So our technology is that we continue to launch every year, continue to reduce that. In addition, we created new service and with the use of a remotely connected compressor technology we're able to monitor that and actually reduce the energy consumption by fine-tuning the compressor even remotely. So we don't have to do that, and we do that for the customer. So when you look at the product portfolio, we like to say that 30% of our revenue is related to water conservation. And almost 100% could be related to energy conservation because Again, a great example here will be our Runtech business, which is a turbo blower technology for pulp and paper industry that eliminates or reduces water consumption by more than 90% and energy consumption by over 50% in a pulp and paper industry which is very high energy intense and high water consumption intense. So there's a lot of technologies that we have. And to your question about the IRA, really, really honed in on very good specific areas. We see renewable natural gas here in the U.S. as a growth vector for us. We're seeing with our technology for gas compression great penetration there and great momentum. And as we would like to see, let's see what happens with these hydrogen hubs, but we're particularly very well positioned to play on that. And carbon capture, you saw that we announced here on the earnings call a very large and sizable carbon capture project that we got awarded and we're very well participants.

Just one follow-up there, Vicente, because you mentioned hydrogen hubs, we are building them. like how long does it take from like when you build them before you guys sort of get like in order you think?

It will take some time. Yes. I mean.

Is that like a '24 thing?

Yes, not '23, yes. If anything, perhaps.

Even later than '24, '25?

Yes, that's right.

Because you are building them, is just the question?

Yes. And I think for us, what we always said is that if you remember at the Investor Day, and we spoke a lot about hydrogen, particularly for ITS and PST. And PST was about the refueling stations, and we said, those start in Asia Pacific. And in 2021, we saw good momentum. Then later, we're now seeing that momentum in Europe, which we said that was going to be next, and then eventually here in the U.S., whether they select liquid or gas hydrogen, it depends and then that will tell a lot.

Yes. And then one more question on sustainability because I feel like you guys kind of talked about it before, it was in vogue as much like I go back a few years ago, like customer sort of focus on it. How much has it accelerated? What's hard to understand right is separating the macro from demand generation versus customers accelerating focus on energy efficiency and sustainability, which is a big deal for you guys, investors all across the business. So how much is it is that customers are accelerating the focus on sustainability and energy efficiency?

We see it, Andy, and we see it across from a global perspective, customers talking more about it. And not only just talking about just taking action and really allocating CapEx to be able to execute and be able to achieve their 2030 and 2050 greenhouse gas emissions as they relate to Scope 1 and Scope 2. Clearly, when you look at the sustainability reports from a lot of public companies now, they specifically call out compressors and their treatment systems as the way to get to that Scope 1. So it is a reality. We still think that it is definitely early innings from that perspective as everyone kind of starts executing that plan in place, we think this could be a good tailwind for us as we kind of move forward. And the other exciting thing I say Andy, about sustainability, I don't want to miss this opportunity to talk about last year, we were added to the Dow Jones Sustainability Index. So it's not only about the products that we make, but also how we, as a company, are dramatically changing. And 2 years ago, we were completely unranked. Now we're #1 in our category in North America and #4 in the world. So pretty dramatic change that the teams have been able to accomplish.

I want to follow up with you on that -- want to followup with the European orders because I think it's tied to sustainability. I want to talk about to the SVP of IRX in a second, too. But just if I could ask you, Vicente, like your orders in Europe have held up quite well. right? And again, everybody is worried, everybody was worried about a cold weather, it didn't develop. So how much is it cold weather didn't develop so the economies were okay versus again, demand generation, more sustainability focus, like how do we sort of unpack your order resiliency in Europe? And I know you talked about book-to-bill close to 1 this year, all that kind of stuff for the overall company, and we'll get to that, but how do you look at Europe for you guys?

I'll say at this point in time, we continue to feel that it is this self-help commercial actions that we're taking with the demand generation and educating customers about energy reduction and how our products can help them on that journey and doing air audits and going into the facilities and leveraging a lot of that. So I think it's a lot of a big push. Early -- I would say earlier in 2022, clearly, when the situation happened with the energy costs rising a big surge in how can we help customers. And we still see a lot of that conversation, even though energy has become to that level because again, it's still projects that customers need to execute for their sustainability targets. And so we still think it's a good momentum, really driven by our demanding growth engine that we have.

And do you think that book-to-bill can be around 1 in Europe specifically this year?

We don't see why not.

Yes. Okay. And so, Mike, if I just could ask you, like it's great that you're here. You've been able to navigate significant supply chain headwinds over the last couple of years, I think, pretty well versus others. So maybe you can talk about how IRX has been so important to help you achieve your organic and inorganic goals in the current environment? And what kind of visibility it gives you for the future?

Yes. Great question, Andy. I think that -- well, first off, I would say that any time I get to talk to a group like this, I'll bet nobody came to this breakout hoping to hear about an operating system because I know you hear a lot of junk and you see a lot of movie sets. The thing that I would say for us is we used IRX for the plan -- the integration planning. So going all the way back to the RMT. So we had our Level 1 team. So for example, Vik run the finance, swim lane, et cetera, et cetera. And when you think about that, so we had the $250 million target and then we chunk that up by area of focus. And then we set 100-day goals, and we build a bridge of an X to Y and we think about what are the headwinds and what are the areas of focus, and then we just execute. And we execute on what we call swim lanes, where we set 100-day objectives. We try and measure the leading indicators, and we talk about it on every 7-day cycle. So we have -- at the time of the RMT, we had about 70 of those processes running. We call them IMPACT Daily Management. Today, we have about 300. And so if you think about -- and there's usually about a dozen to 15 people who participate in those sessions, some people go to 2 or 3 a week, but you think about hundreds and now thousands. We think there's about 6,000 people that participate on a weekly basis. And what they're basically going through is a process where they set 100-day objective think about some standard work they're going to go execute on what they're going to measure from a leading indicator standpoint. So for sales, we're not going to measure bookings. We're going to measure things like sales calls, sales quotes, funnel size, et cetera, et cetera. And then on a weekly basis, the first thing they say is my 100-day objective is, and I'm in control. In control means I'm going to achieve my 100-day objective or I'm out of control, which means right now I can't see it but I'm still working on it. And again, in a 13-week cycle, you're going to get red, red, red, red and then somewhere around week 4, 5 and 6, they start to come into control. So back to your question around things like supply chain challenge, it's the perfect -- bad news is actually the perfect application for the tool because you're going to take that bridge mentality and you're going to look at those headwinds head on. Now to our team's credit, I wouldn't give IRX a ton of credit for bullying their way through it. I think that was daily management, that was hourly management that was staying on top of it and focusing on it almost minutely from the time that we saw it coming. Because if you think back to where we were, we weren't only in a headwind challenge from a cost going up, we were in a headwind challenge from a publicly committed $250 million target, of which Vik could tell you the number, but it was the large percentage of that $250 million. So I think the beauty of the process then is talking about it every 7 days. And it's not something that we deploy down into Level 3, 4, 5 and 6. We're all in, the 3 of us. Vik runs an IDM for finance, who runs several IDMs for IT. Vicente, he calls it a staff meeting. It's really an IMPACT Daily Management meeting on Friday, and it's a 60-minute tour around the world across the 5 BUs across all the functions, including supply chain, where we're looking at probably a dozen KPIs in the supply chain and what's happening on a 6 or 7 day cycle. The other thing that I don't want to leave out is the last part of that script at the swim lane is, "And I need help, fill in the blank." And so again, in a 6- or 7-day cycle and we went through, say, 5 of a 13-week cycle, you get a 7-day chance to ask for help and help is -- I mean nothing gets responded to faster than a request for help from an IMPACT Daily Management meeting. So I think it helps us tease out exceptions and problems really quickly and then act on an equally as quick.

Yes. So I'll say the thing to add to as well, as Mike pointed very well is that how news travel opened out really fast. And in the supply chain, when we were at the peak of that environment, in the asking for help, it was asking for me to call other CEOs to see how can we unlock those castings chips, whatever supply is that we needed to.

Yes. So Mike or Vicente, just two follow-ups. Like so one is, like, obviously, most of us know where you came from. And so think about the Danaher Business System, a lot of times it gets lost in translation and -- again, I'm not saying that yours is exactly the same, but like goes to different companies, it kind of gets lost and the idea of continuous improvement sort of gets very complicated. So how do you keep it simple? You talked about 6,000 things going on. It's like how do you keep it simple and directed? And then how does it help because you guys have been very acquisitive still over the last year when a lot of other companies have happened how does IRX help you give more inorganic things?

Yes, I'll take the second one, and then I'll let Vicente take the first one. From an integration standpoint, it's the perfect tool. And what I mean by that is we use the same sort of IDM or swim lane philosophy when we're planning for an integration. So about 60 days prior to -- so I'll use SPX as the most recent example. So in probably middle of October, we started an IDM process across all the functions, planning for the SPX integration, which happened on January 3. And we have now 24 -- and this is how it gets better over time. So we've been running that for probably 4 or 5 years. Now we've gotten it down to a precision level where there's 23 things from payroll to culture and IT availability, Pcards, everything in between, but 23 key deliverables that we want to deliver on day 1 for a successful integration to get momentum. And I think, again, the beauty -- so we've done 30 transactions since the RMT. So we've gotten 30 laps around that track. And every single one of them is better because we learn as we execute like that. So we -- in due diligence, we're going to form a plan for what good looks like from an integration standpoint, including synergy capture and revenue growth. We're going to execute on that for 75, 60, 75 days. And then on January 3, I mean, on January 3, things started to happen in a big way. We did a monthly business review with SPX FLOW 2 weeks ago. and that was for the month of January. So they're 30 days in, 45 days in, 30 days of results in, it did not look like an exception to the rest of Ingersoll Rand. And I think that's really -- there's really 3 reasons for that. One is that our people doing that, people like Vik, Matthew Fort, other people that have been working on these integrations now for years. They know how to help and they know how to prepare and they know how to wear the systems together. The second thing is that in using that process, so now SPX FLOW will start to run IMPACT Daily Management on their own because they've gotten the reps as it's been handed off from integration planning to integration execution. And as they reach that first 100-day mark, they'll sort of we'll let go the string and they'll be off to the races. And the third thing is that I think with that level, so there's probably 50 people that have been -- I'm talking about 50 senior people that have played a huge role in planning for and now executing on that integration, SPX FLOW feels very welcome. They're told they get to keep their brands, they're told they get to become owners of the company. They were not telling them really what to do, which is -- gets to the first part of your question around DBS. So this is not about the what. It's more about the how -- and then they get the tool, they get their reps and they're off on their own.

I think on the first question on how do we keep it simple and I'll try to keep it simple, but it really starts with, first of all, defining our strategic path for the next 5 years. And you can easily see that on our economic growth engine. And we actually show that on the Investor Day, but we also showed that on the last earnings call, and we'll continue to update that. And then -- because that defines where we want to be. And we said we want to grow organically mid-single digits inorganically and other mid-single digits. And obviously, over the -- from now until 2025 and see how, obviously, through the use of IRX and the event methods be able to deliver double-digit earnings growth compounded. And -- but then also, we take it as to, okay, that's where we want to be. And then we also surround ourselves with the best possible people. I mean, so it's all about having the team and not only the team that is here, but the team that is in our locations, but also our Board. And when you look at our Board, we have a phenomenal board members. We have very specifically attractive board members at built on only from Mettler-Toledo. Mettler-Toledo, you know the story, which has been a very amazing story over the past 20, 25 years and still continues. We have a board member from Roper Technologie with John Humphrey and obviously all of -- all of us here know that phenomenal story of transformation. Mettler was organic, Roper was inorganic transformation. And then we also have a board member from ThermoFisher, which obviously, again, is a combination of organic and inorganic. So what we have been able to do is really take a lot of the learnings from obviously where we came from. But at the same time, from Danaher, which is a phenomenal company and incredibly successful, but also take the learnings from Mettler, take the learnings from Roper, from Thermo and apply that into a very simplistic tool, how do we execute, how do we find a good way to what Mike said about those 100-day game plans that we take the 5-year horizon that we have and translate that into weekly chunks that the team can execute across the world.

Got it. So let me focus a little bit more on the short term, you just completed earnings yesterday. So it seems like what you said yesterday was you still feel pretty good because you sort of guided to book-to-bill around 1, as I said, for the whole company. So it seems like you're going to -- if conditions kind of remain the same, end '23, was still pretty strong backlog, and that would actually set you up for '24. Maybe talk about risk factors you see there? But in general, that's kind of the message I got from you guys yesterday.

Yes. And that's spot on. So I think the way we think about the year and as we think about the guidance, we said about 3% to 5% organic FX is a little bit of a headwind mainly in the first half of the year. We have a nice tailwind with the inorganic, so about $270 million of revenue growth embedded in the guide from M&A. The biggest piece of which actually is the SPX FLOW transaction. So I think in totality, pretty pleased with how we have set up the year as we move into 2023. If you think about kind of where we're starting and we mentioned this yesterday, one, we're starting with a very healthy backlog. Backlog continues to be about 30% up versus prior year. It's roughly speaking, 1.5x, 1.5x plus bigger than what I would call more historical norm. So it's giving us more visibility as we walk into the year, which is great. In terms of the organic piece of the guide that, let's call it, midpoint of 4%, we did say about 70% price a meaningful piece of which is coming from the carryover. So really actions already taken through the duration of 2022 will carry into 2023, largely through the first half of the year, and then the 30% roughly being volume. And if you think about kind of the way the year is playing itself out, and we talked about this as well yesterday, it does set itself up for more -- the implied guide is a little bit more flattish on the organic side in the back half of the year, which I think right now is prudency as we look at the balance of the year. Much like you saw in 2022, we would say that the piece that we would consider, say, potentially, hopefully, upside opportunity as we think about the back half of the year would probably be that organic volume side, right, not too dissimilar from how you saw 2022. And interesting enough here in Q4 of 2022, you saw some nice outsized revenue growth, particularly on the ITS side, really coming from a lot of that organic volume. So again, I think that's kind of the way we see things setting up, but we're going to continue to be very disciplined, very prudent. As we talked about here, this is kind of the final year of some of those merger-related synergies, and we have more than that in terms of productivity. But it's also worth noting embedded in our guide is a, I'd say the requisite amount of reinvestment in a lot of our, we'll call it, commercial growth type tools, so whether that be at the corporate side, IoT, demand generation or commercial resources within the business because to your point, we want to be here every year talking about that outsized organic growth, and we want to make sure we have the right level of investment to drive not just organic growth in the next 12 months but for the foreseeable future.

Yes. So I already asked you, Vicente, about European orders. So I've gotten a question already about your North American orders because when you talked about the lumpiness yesterday as you're getting a little bit larger projects and one bigger 1 slipped into Q1. But like someone said to me well, Copco had pretty weak orders and small to midsize compressors. So is it really lumpiness? Or is it kind of weakness? Like how would you sort of respond to that?

Yes, I think the best way to think about and to maybe smooth out some of the lumpiness is just look at the first half to the second half. And for the ITS Americas, which is primarily the U.S., you'll see that there was a organic growth from the first half to the second half of roughly 5%. So basically, continuous acceleration. And it was also because, again, Q3 was a very robust orders growth number. I think it was over 30% growth that we saw in the Americas, book-to-bill over 1.2. So I think it was just -- I mean, that basically the timing. And I think it's just one of those that again, when we look at the leading -- the next leading indicator for us, which is the marketing qualified leads, still very stable and very good momentum that we see. And what we like is that there's also a lot of the tailwinds that we just talked about with IRA, that we're seeing it already, some of them come through fruition.

And to be clear, you talked about orders being positive in January and so far in February?

That's right. And as we said on the earnings call, yes, between January -- I mean, the first 5 weeks total orders and also by segment, we were positive organically on a year-over-year basis. And that's also thinking that Chinese New Year basically is a headwind. So -- and we're not excluding that. That's all in. And again, it shows that there was actually a good continued momentum here.

I think China has been pretty good for you and -- like have you seen a pickup post Chinese New Year? Or is it still too early to kind of call that?

Chinese -- even through the Chinese New Year, we actually it was -- that was the biggest surprise for us is that we continue to see that kind of good momentum. So post Chinese New Year, yes, I mean, the team is very excited and the momentum there continues. I think this is a very again, talk about self-help growth again. This is one where the team localized and develop an oil-free compressor for China -- in China for China, and that we're now taking and actually utilizing globally, blowers, vacuums. I mean, in the [Kenya acquisition] that we made a couple of years ago. We're leveraging that to put that in China, and the team is seeing that growth on that. So it's a great story.

And what gives you the confidence in North America? Is it more the long cycle, the 20% of your business, the larger compressors that are starting to ramp up and they're going to take the place of small to midsize or like how do you get the visibility there?

Yes. I mean, I think -- so one thing is that we have never been a big player in that small kind of compressor level as others have been. We're kind of more medium and now obviously, with the acquisition of Ingersoll Rand also on the large side. But I would say, yes, the confidence comes in from MQL's to be able to drive what we call the short cycle orders and how we see stable there. And when we look at the funnel of the projects that our teams have on the longer cycle, that is also the pretty exciting thing that we see these kind of tailwinds.

I don't think people ask you this yesterday in the seat might be mistaken. But like Buffalo, I think you said 6 quarters ago, it was kind of for like all of '23 or something like that. You continue to push that out into '24 now. large compressors, right?

That is multistage Centrifugal large compressors, Yes. but they're used onto large areas.

Are they going to like auto, LNG, things like that?

They're going to semiconductor, they go into actually use also for hydrogen for steel industry. So it's a lot of basically U.S. applications. So a lot of what we call onshoring applications.

Okay. So I want to open it up to the audience. Maybe just ask you about price versus cost briefly. Like, again, you seem pretty positive about yesterday, like stickiness of pricing, clients have started to come up again? Is it sort of normal price increases this year? Like how are you guys thinking about all that?

Yes, price cost continues to be -- I mean, I think we've been price cost positive for every quarter, and we expect that to happen as deflation may -- so our guidance assumes no deflation, even though, clearly, we're working with suppliers to get that. But because of the inventory sizes that we have we may not see that kind of come through in this year. So that might be upside as we can maybe go into 2024, which is great. Because when you think about 70% of our cost of goods sold is direct material. So it's a big improvement area that we always work on. But again, also, I think we continue to see good momentum. In terms of new price, yes, we have some carryover price. As Vik said, 70% of the growth comes from price and a good portion of that is carryover. But we still, this year, we'll do kind of more normalized price, 1% to 2% at this point in time. If we see that later in the year, we need to do more easily, we can do more. But that's.

Got it. Let me ask you about Precision and Science, and I'll open it up like -- so that business, like it seems like there's still a little bit of a pandemic hang over, call it, like are still down this past quarter. I mean you mentioned that they were up, I guess, in the first 5 weeks. So have we turned the corner there? Like what's going on? And can we get back to high single-digit growth, which I think you said is more normalized order growth?

Yes. So 2021 was a pretty unique year because 2021, we saw a lot of outsized growth because of COVID, clearly, oxygen concentration and other ventilators and things that are related more on the medical side. And then we saw the initial big wave of hydrogen. And as we said, the New Zealand country-wide expansion, Korea and many other orders that we saw also in 2021 that or the majority part did not repeat because these are kind of one large projects that take a long lead time to get produce and then implement it. So yes, as we go here into 2023 and 2024 and then forward, we expect to see more normalization of that. Clearly, these hydrogen, if we get it, these are large orders, and they might create a bit of lumpiness. But again, these are orders that lumpiness that are good because we can generate good cash and good margin and obviously position us pretty well for this extended growth market that we see going forward by -- it's a market that is expected to be over $2 billion by 2023.

Is there anything else that you're watching to drive precision and science orders? Like we kind of know what drives industrial orders, but like anything else that you guys are watching to drive Precision and Science orders with it?

We were back to the basics of the MQLs marketing qualified leads. And again, it's an area that early innings in the PST more so than the ITS, but it is one that we watch carefully. I mean PST is one that similar to my staff meeting at my level, the PST at their level they do a very similar IDN where by each of the P&Ls, we track revenue orders, orders on price on bookings, MQLs, Net Promoter Scores, and that drives a lot of the momentum that gets deployed into the locations of the factories as well.

Questions from the audience, any questions? Anyone want to ask a question? I'll continue. So M&A, I think you said 11 LOIs right now, it sounds it normal for you guys. But I guess, I'll just say it's like how would you compare the activity level that you expect in '23 versus '22? We know about the $270 million that's already in the guide. But like I think you may be talking about $300 to $400 million, you guys tell us?

Yes. So I'd actually say we expect it to be actually fairly comparable to what you've seen last year. You are correct, just to calibrate, we have $270 million of M&A included in the revenue guide in terms of the in-year contribution. That's essentially all the deals closed to date, inclusive of the 2 that we've done this year, SPX FLOW Air Treatment as well as the Paragon Tank Truck acquisitions. In the context of the funnel, so just to give the highlights, funnel still remains about 5x larger than where it was about 3 years ago at the time of the RMT. We have 11 more transactions under LOI. Just to put that in perspective, last quarter, I think we said we had around 8. We closed 2 deals. So it went from 8 down to 6, and we obviously have added 5 more. So the funnel continues to remain really healthy. The LOIs, I would describe as the classical bolt-on, so very similar in size to what you've seen us do kind of in the context of 2022, think of the smaller-sized niche kind of technology bolt-ons, not too dissimilar from like the paragons of the world. And in the context of what the expectation is for in year, yes, we have said that we expect to be able to execute 400 to 500 basis or 4% to 5% of annualized inorganic growth or inorganic revenue growth acquired in year. So think of effectively 2023, playing itself out very similar to 2022. The conversation of the funnel, continue to move in the right direction, continue to be quite healthy. So I'd say 2023 in our mind is continuing to play itself out much like you've seen us execute the last 2 years.

I'll just ask you 2 more questions, one on the margin side. Like I imagine you're still pretty comfortable. You've got IT&S margin targets of high 20s, you kind of ended in '22 in the mid-20s. Precision and Science kind of mid-30s, like these are pretty high targets. So you guys tell me, I mean supply chains is what it is. Like what needs to happen to get to these margin targets?

Sure. So I think if you go back now, it's been about 1.5 years from the Investor Day, where we set targets. If I think kind of enterprise-wide, we said on average each year between ending '21, but it's 2025, about 100 basis points of margin expansion. And you've now seen '21 and '22, actually be slightly on the higher side of that. If you look at the guidance that we actually issued yesterday, you're going to be 80, 90 basis points of margin, but we would expect to hopefully build-out execute that. So we're right in line with that expectation. If you look at 2022, I think fair to say that ITS probably was a little bit more of the outperformer comparatively speaking. We think that actually sets up for a nice opportunity set here as we think about 2023 for PST to be a little bit more outperforming that kind of what call it total company average. But if you think about the setup and Vicente mentioned a few of these things, I think to 2024 now, hard to prognosticate what might happen a year from now. But we know that the model and the company, delivering 1% to 2% price year in, year out, no reason we can't do that. If things continue to play themselves out, just like we talked about, presumably, we'll be more of a deflationary state moving in from a materials perspective. We obviously have the continued momentum on productivity and things like that within the enterprise. Also worth mentioning that even in the delivery of the $300 million of synergies, the kind of the third leg of that stool we always said, even 3 years ago, it's going to deliver towards the end as things like footprint. Well, the reality here is -- we're going to get to that $300 million target without really having had to execute on the footprint. And frankly, the last 12 to 18 months, I don't think was really the environment to be thinking about footprint opportunities. So that, frankly, even still sits ahead of us in many cases. So I think there's continued levers, continued opportunity. And I think the framework we're thinking about in the layer on top the continued aftermarket growth, the continued expansion of IoT, which continue to drive higher margin mix on the aftermarket growth that should continue to be a tailwind as we think about the next 24 to 36 months. So we still feel comfortable with those targets and see good runway to continue to move to those margin targets you mentioned.

Got it. So I still have 25 seconds, I'll ask you just last question and asking all the companies on this question. So what are the top 2 or 3 innovations, megatrends or structural changes that will affect your company over the next 5 years? And are there any emerging industry trends that are perhaps being overlooked?

I mean, I definitely think that I go back to the megatrends of sustainability, which we talked a lot about here already now. Digitization, again, we'll go back to the Investor Day, we said there's 5 million assets that we can connect out there in the field. And when you look at the -- what we said on the earnings call just yesterday, 19% of our revenue that we shipped last year shipped with IoT-enabled devices. So it means that we're now connecting them to -- and we do it to generate revenue -- new revenue stream. So that's a big next leg that we see in terms of accelerating our aftermarket. And this digitally connected revenue, I mean, it comes in a pretty heavy software layered gross margins. And the third megatrend that we're very well aligned is the quality of life. So think about it from control, agricultural environment situations where indoor farming, hydroponics, I mean, weather patterns are just damaging a lot of their food and livestock in the world, while the world population continues to grow. So more and more, there's going to be a lot of this controlled environment agriculture. And we are at the core and at the center of that with our Dosatron pumps and our Dosatron solutions and Maximus Solutions. And we're very excited for things like that as well as a lot of the potential that we see in terms of quality of life as it relates to personalized medicine and how a lot of our medical liquid handling solutions are playing a very role critical on that side.

Awesome stuff. I think we can end on that note. Thank you.

Thank you, Andy. Appreciate it.