Q3 2020 ITT Inc Earnings Call
Welcome to <unk> Tees, 2023rd quarter Conference call Today is Friday October Thirtyth Twentytwenty today's call is being recorded and will be available for replay beginning at 12 P.M. eastern assets.
At this time, all participants have been placed in a listen only mode and the floor will be opened for your questions. Following the presentation. If you would like to ask a question at that time. Please press star one on your Touchtone phone.
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Ask that you. Please pick up your handset to allow optimal sound quality. It is now my pleasure to turn the floor over to Alex Sherk Investor Relations manager you may begin.
Good morning, Thank you Laurie welcome to Ita Te <unk> third quarter 2020 earnings call. This is Alex Shirk and on the line. This morning are Luca Savi, Chief Executive Officer, and President and Emmanuel cooperate Chief Financial Officer.
Today's presentation <unk> press release, and reconciliations of non-GAAP financial measures to the most comparable GAAP measure can be found on our website at ITC dotcom forward slash investors.
Our adjusted non-GAAP results exclude certain non operating and non recurring items, including but not limited to especially this restructuring asset impairment acquisition related items and certain tax items all adjustments in the quarter are detailed in a reconciliations.
Before we begin I'd like to provide a brief overview of our Q3 GAAP results compared to prior year.
Q3, total revenue decreased 17% to $591 million segment operating income decreased 22% to $84 million regarding U.P.S.. We took out we took our net asbestos liability to a full horizon estimate, resulting in a noncash expenses equivalent to one dollar and 20 cents. The main driver of the 55.
Sandeep, yes loss.
Free cash flow increased 77% $271 million.
Please note that a remaining discussion will primarily focus on non-GAAP or adjusted measures unless otherwise indicated lastly, today's call will contain forward looking statements that are subject to risks and uncertainties, including impacts from the COVID-19 Pandemic Act.
Actual results may vary materially all such statements should be evaluate together with the safe Harbor disclosures and other risks and uncertainties that affect our business, including those disclosed in our SEC filings now, let's turn to slide number three where Luca will take us through the Q3 highlights.
Thank you Alex.
Thank you all for being with US This morning, I truly hope that everyone stays safe.
First things first I like to thank all IP to use it on the word who continue to work tirelessly to wendy's pandemic to serve our customers and to take care of China in challenging conditions.
And to make sure we continue to operate safely we're implementing our ready state go program across identity.
Based on the successful containment strategy first developed by our Asia Pacific team.
Today, we will present the results of IP to use relentless efforts to drive outperformance and fortify our resilience.
During the last few years, we at IBT have elevated the strategic standing of execution.
Q3's outstanding result out of the proof of these and also a testament to our strengthening momentum towards full recovery.
Last quarter, we highlighted our focus on protecting employees and supporting our communities.
Providing superior service to our customers would flawless execution.
We also committed to delight our ship orders, we had record cash flow generation and time be cost actions, what playing offense for the future.
This is exactly what we continue to do in Q3.
We delivered record operating income margin of 15.4%.
We grew 92% sequentially inflection OE sales.
We delivered 19% segment decremental margin and 40% segment incremental margin sequential to Q2.
Lastly, we generated record free cash flow of $271 million.
We are firmly on the road to recovery identities execution capabilities, and our unprecedented granularity didn't even higher volume than expected increase topline sequentially and through strict fixed cost controls produced an ITC record quarterly margin performance.
This is the resilience.
We achieved our highest ever quarterly operating income margin and our highest ever year to date free cash flow.
This is even more remarkable given the cotton macro environment.
This morning, we share the highlights of our performance and the actions we have taken as well as our outlook for the remainder of Twentytwenty we.
We also provide our perspective on the markets we serve.
Before going into Q3 performance I'd like to highlight our safety record.
Safety is we doubted out my top priority with.
We have made tremendous progress in or out of businesses. You have today, we would use the number of incidents by 30%.
Injury frequency rate is 0.8, and 50% of our sites have been incident free for more than a year.
I'm grateful to our teams would that accomplishment and for keeping our people safe.
Now, let's turn to our Q3 results.
On the road to recovery, we focus on what we control and broke some records along the way.
We delivered solid EPS of 82 cents up 44% sequentially.
Strong segment operating income margin of 16.2% up 360 basis points sequentially.
Record operating income margin of 15.4%.
And record free cash flow of 271 million, representing a growth of 77% or $118 million versus prior year.
From an operational excellence standpoint.
We continued our junior back from it out.
Our productivity and cost actions helped to offset the impact materially lower volumes.
In the third quarter I was very fortunate I.
I was able to visit many of our sites in Europe and the us.
Let me tell you.
We have many opportunities and we will go after them.
I also experienced the progress made towards pad.
Progress that helped us to deliver 14.1% operating margin at IP.
This is the highest industrial process Q3 margin ABA and.
We continue to confidently progress toward our long term, 15% plus margin target.
The breadth of the operational improvements delivered by George and his team is impressive.
Not only because of the quality of execution.
But also because of the care they put into structurally we set the IP for the long term.
We are actively shaping our manufacturing footprint and redesigning our product before we stopped a lasting competitive moat and superior margin performance for might be in the years to come.
These 14.1% margin performance represented 120 basis point expansion versus prior year and.
And 40 basis points higher than Q2.
Yes.
Our progress was also evident when they wouldn't be the MTT in budget.
Motion technologies delivered a strong operating margin at 18.5%.
Up to 630 basis points versus Q2, and only 30 basis points below prior year.
We continue to drive productivity through our factories in China in Mexico in particular, couponing pricing would margins near all time highs.
At CCT.
I was encouraged by the many kaizen events surrounding you know Billingses site and all across IBT, we drove high levels of productivity that produce significant segment margin expansion compared to Q2.
These operational excellence combined with SPD, an execution enabled us to accelerate working capital reduction and post a year over year at 180 basis points improvement.
Lastly, I want to thank our leaders who help to keep our people safe and advanced identities operational excellence.
On the customer front.
Teams continue to focus on serving our customers with utmost dedication.
Showing through their actions that our customer centric approach is a way of life at today's identity.
Our friction or E sales grew 92% sequentially and that momentum is shared gains continued with each one of our main regions outperforming global production year to date, including over 1000 basis points about performance in North America and China.
Well, we still experience inventory adjustment issues in Europe, we certain customers in the first off of Q3, we.
We saw encouraging signs in OTA OE production, particularly in September and October.
We now expect frictional outperformance for the full year at the lower end of our expectations based on the timing of new platform ramps in the fourth quarter.
IP group organic short cycle pump or this by 14% sequentially on the back of strong Pos which improved gradually during the quarter.
And showed year over year growth in September.
IP deliver a book to Bill of one and as a result, our backlog at the end of Q3 was up 6%, excluding foreign exchange compared to the beginning of Twentytwenty.
IP continues to lead in on time delivery performance.
Today, our customers know they can rely on us to to be but top quality goulds pumps on time at a competitive price and consistently.
This is a key differentiator.
We've been talking a lot about Seneca falls, 95% plus baseline pumps than EBITDA performance for the last 12 months.
And I want you to know that today, the rest of our facilities had been performing at an industry leading level as well.
Finally at CCT, we've been busy played offense and finding new ways to partner with our customers.
Less dramatic rotorcraft business has been nominated on the next you asked me to reconnaissance helicopter Codenamed Farah.
This is a major recognition for our rotorcraft business, which we created organically just a few years ago.
And our composites business is finalizing a strategic partnership with a large aircraft engine manufacturer that we prepare our matrix business to new top line pipe.
The team at CCT has been working hard to adjust our cost structure to the new aero market conditions and at the same time looking for growth opportunities by showcasing our engineering prowess.
I was it also relates to facility last week that was impressed by the new state of the art sound chembio capabilities as well as our new products.
Right.
Lastly on capital deployment.
We continue to drive cash generation through working capital efficiencies and strict capital expenditure focus.
The strengthening our liquidity as.
As a result, we are raising our free cash flow margin target to a range of 13% to 15% for the full year.
Today, we have $1.5 billion of available liquidity and we have ample capital to fund all of our operational needs and investment.
And position us to take advantage of other strategic opportunities.
Our strong liquidity position prepares us well for what's ahead, whether it is facing headwinds or surfing tailwinds.
Finally.
Total <unk>, we successfully terminated and transferred our us pension plan.
These will not only provide outpatient eligible employees great service, but also reduce identities at the university of cost and eliminate any future funding requirements.
Let's now look at our Q3 financial results provide deals like for.
We produced 16.2% segment operating income margin we.
We delivered these margins through productivity and aggressive cost actions that produce segment decremental margin of 19%.
We continue to drive down corporate cost and EBITDA approximately 20 cents structure the runway.
Versus prior year.
EPS was 82 cents per share declined 15% and we'll go ahead.
[music].
Add on cash we generated $71 million free cash will you today up 77%. This is probably for you.
Our trailing 12 month free cash for.
The margin no direct feet deep.
4%.
When should improve it.
<unk> basis points.
I did you.
Q3 results versus 20.
And these results.
From GAAP EPS.
Right.
Switching to our sequential performance on slide five.
Our segment operating income down 48%.
An impressive growth compared to an organic revenue increased 12%.
This is the result of our business I think efficiency and cost actions as we continue to focus on what we control and that's it from operational leverage from impairments and lower.
Cost base.
Our revenue growth was driven by a 92% increasing frequency or.
Mainly coming from outperformance in China, and North America.
Similarly earnings per share grew 44% sequentially, despite a onetime environment better realized last quarter.
What it would cover it remains an even across markets whichever way you choose to look at our financials.
If these businesses delivered outstanding third quarter results.
Now, let me turn it over to Manuel Mike Copilots, a new CFO, who will discuss the Q3 results by segment.
Thanks.
Thanks, Luca, let's start with motion technologies on slide six.
Organic revenue declined 13% lower auto production rates and slower activity in the rail segment due to reduced passenger traffic.
In the quarter friction OEM sales were nearly flat to the prior year.
This is a strong showing with China, and North America, growing 11, and 14%, respectively, which was offset by Europe, where we experienced just talking with some tier one customers.
Sequentially friction OEM sales skyrocketed, 92% gradually accelerating during the quarter to show mid single digit year over year growth in September.
Segment operating income declined 12% to 15 million.
On T. successfully improved decremental margins to 21% and sequentially operating income increased 107%.
36% incremental margin performance.
We drove operating income recovery through productivity and restructuring actions.
Motion technologies delivered outstanding Q3 margins of 18.5%.
30 basis points lower than the prior year.
But increased 630 basis points sequentially.
These results were fueled by strong performance in friction, China, which project produced its highest margin since Q1 2018.
And friction Mexico is now approaching pre pandemic margin levels.
The empty team delivered above our expectations given the revenue decline versus prior year.
In Q4, we expect to deliver margin expansion versus prior year on the back of continuing restructuring actions and productivity.
Well as low single digit organic revenue declines.
The structural cost actions add the two entities many competitive advantages.
Material Science leadership best in class quality and fastest lead times.
All of these together form the foundation for continued outperformance.
And lastly from an award perspective, both friction and Wolverine continued to gain share with conquer wins and new platform wins like the 15, New electric vehicle platform awards in the quarter.
Moving on to industrial process on slide seven.
IP clearly demonstrated the resilience of its business model, considering the challenging environment with 14.1% operating margin.
The expanded 120 basis points compared to the prior year, despite an organic revenue decline of 19%.
Sequentially the growth was 40 basis points on slide revenue.
The IP year over year revenue decline was driven by short cycle bookings during the height of the pen Demicks last quarter.
Lower project revenue these many.
Large prior year chemical shipments related to the expansion of plastic production capacity in North America.
Organic orders for the quarter declined 17% coming from 33% to 33% lower project bookings and 12% short cycle decline versus prior year.
Parts orders recovered gradually during the quarter and posted year over year growth in September.
Hi piece book to Bill of one in Q3 and year to date backlog growth of 6%, excluding foreign exchange provide solid revenue visibility into next quarter.
Operating income declined 12, only 12% to 27 million despite significant revenue declines.
Our proactive cost actions shop floor and sourcing productivity resulted in best in class decremental margin of 8%.
IP will continue to benefit from our footprint optimization strategy and in October we completed step one of our European footprint project and announced a new facility closure.
Industrial process segment operating margin of 14.1% was driven by productivity and cost control sourcing and restructuring actions amid a decline in revenue.
We continue to fund innovation, such as the new diagnostic capabilities added to our eilert remote monitoring platform and our product portfolio redesign projects.
Let me expand on our BB to pump redesign project.
As it demonstrates our strategy of playing offense.
As you know we have been hard at work improving our large chemical pump design to reduce materials content improved manufacturability.
And source components from best cost regions, while improving hydraulic performance.
This design has generated so much interest from our customers that we booked 43% higher orders year to date.
For the entire 2019.
We also made some significant headway.
Purchasing performance, thanks to a team of experienced supply chain leaders.
To date, we generated large sourcing savings and the Tim as it the team as explained established long term supply a strategy that will put IP on a path to supply chain excellence for years to come.
Finally, IP improved working capital by 800 basis points as we reduced our pods use by more than 20% and inventory by 14%.
We continue to see more opportunities to further reduce inventory as we consolidated footprint and optimize materials management materials planning management.
IP finished the quarter with 19% working capital as a percent of sales.
IP IP is outstanding performance reflects the multiyear strategy that we outlined back in 2017 and that we are faced fully executing as we advance toward our long term margin target of 15% plus.
We expect to produce produce similar margin in Q4 as sequential volume increase is driven by large project shipments.
Lets complete the overview of our segments with CCT on slide eight.
CCT organic revenue declined 26%, while weakness across all major end markets.
The steep reduction in passenger traffic lowered commercial aero demand and continues to call to cause a major slowdown in OE build rates.
We are also impacted by the specific challenges related to the 737 Max Requalification process.
Our CCT industrial business experienced only a 2% decline as our distribution partners reduced excess inventory.
And adjust to lower levels of activity.
Our W. Owning gas connector business was impacted by reduced North American shale production and lingering difficulties with customers site access and service deliveries in the middle East.
However, we were able to gain share in that region on the back of better quality and delivery performance.
And our year to date orders up 30% year over year.
Operating income declined 40% on the volume drop in margin of 14% showed an improvement of 300 basis points over Q2.
The primary driver of the decline versus prior year was volume impacts from Aero weakness.
These impacts were partially offset by shop floor productivity, especially out of the Nogales and villages sites.
Restructuring actions and benefits from product line transfers.
In Q3, we continued to see Aero de bookings, albeit at slightly reduced levels compared to Q2.
And significant disruptions coming from customers ordering and receiving patterns.
We expect week OE build rates to persist.
Additionally, lower aircraft utilization and weekend airline profitability result in a slow up to market recovery.
Less maintenance is required or gets deferred.
CCT decremental margins of 28% improved sequentially from Q2 and reflects the aggressive restructuring actions executed by the business.
Finally in October Ryan Flanagan was appointed CCG President.
Ryan.
Previously served as the president of our Asia Pacific region, where he drove critical growth initiatives.
David Barr bond was head of our KONI oxen business will not lead to the Asia Pacific region, one of Itcs growth platforms.
Double digit returns to shine now where he previously led the expansion of empty.
As you know last quarter, we raised our cost action targets to a $160 million let.
Let me now give you an update on our plan on slide nine.
Our Capex reduction plan is progressing well we are hard at work on the remaining 125 million of cost reduction, but a large portion of which is structural.
To date, we have completed more than 90% of the four year head count reduction plan.
On the spending front, we are exceeding our savings saving expectations, driven by strong cost controls and sourcing performance.
We are driving footprint optimization at both IP and CCG with several new auctions progressing through granular planning and internal approval stages.
Overall, we expect these actions will generate more than $90 million savings.
Benefits.
$90 million of benefits in 2020, and additional carryover benefits in 2021, partially offset by temporary compensation actions that have been rolled back in Q1 in Q4.
As a result, we are improving our decremental margin targets and we now expect total segment decremental margin for 2022 range from 21% to 24%.
Now I'd like to discuss the results on our net annual asbestos Remeasurement on slide 10, which.
Which is excluded from our Q3 adjusted results.
As explained in our press release and 10-Q, we extended our as best this liability to a full ryzen estimate as we benefited from favorable litigation developments.
We improved our visibility on insurance recoveries and drug insurance settlement.
These developments include the recent agreement with a group of ensure you.
Which they acknowledge you availability a significant amount of solvent coverage.
These events coupled with stability underlying.
Underlying claim data enabled us to extend the period for which we provide an estimate through 2000 22052 from a previous rolling turn your estimate.
Since been excluding the four rise and transition.
Our net liability declined 44% and when accounting for this quarter's non cash $136 million for rising impact the net liability dropped 25%.
This reflects our effective claims management and one from defense strategy as well as aggressive insurance recovery actions that have improved the value of our insurance portfolio.
Importantly, we now expect that our projected annual average net after tax defense and indemnity outflows for the next 10 years will decrease to 20 to 30 million.
A reduction of 24% from the midpoint.
Before Luca provides his closing remarks, let me share some perspective on how we see Q4 playing out.
We expect continued sequential improvement in Q4.
It's still anticipate year over year revenue declines to range between high single digits and the low teens.
We expect energy to deliver on low single digits revenue decline.
As friction revenue growth will more than offset.
We'll be more than offset by lower Wolverine and Kodiak some volumes.
We expect auto production rates to improve sequentially, reflecting the market decline of approximately 20% for the full year.
Friction OE outperformance is now expected to be at the lower end of our range.
We also expect IP revenue to show sequential growth in Q4 and year over year declines to a low double digit range most.
Most of our expected Q4 revenue is already in backlog at the end of Q3.
Despite slowly improving passenger air traffic in Q3, we do not see commercial aero production rates materially improving sequentially.
As a result, we expect flattish CCG revenue from Q3 to Q4.
From a segment margin standpoint, we expect to produce strong Q4 margins.
Well over the 15.4% generated last year, driven by benefits from productivity and cost actions.
With outstanding margin performance to date, we expect IP to deliver healthy full year margin expansion copper to 2019.
Consequently, IP is Q4 margin will be similar to Q3 and prior year, while CCT may show, a sequential reduction driven by unfavorable connected mix.
We expect corporate expenses for the full year to be down approximately 40% we.
We also expect Q4 EPS to show low double digit sequential improvement and we are not targeting segments decremental margins of 21% to 24% for the full year.
On free cash flow, we are raising our margin target to 13% to 15% for the full year as we rebuild some working capital to support our business and customers.
Let me now turn you back to look out for his closing remarks on slide 11.
Thanks Emmanuel.
Today is firmly on the road to recovery.
Thanks to the resilience of our businesses and the resilience of our people.
I think these performance is the outcome of the sound and actionable strategy.
One would clear priorities and a strong focus on execution driven by unprecedented level of granularity.
As a result, we generated strong levels of profitability.
And record free cash flow.
We are managing through the storm.
And I will emerge stronger and bolder than ever before.
I look forward to continuing to share the progress we will make you know, Germany and with that let me now Tony back to loyalty to take your questions.
Thank you Sir the floor is now open for questions. At this time, if you have a.
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First question comes from the line of Joe Ritchie of Goldman Sachs.
Hi, Thanks, good morning, everybody.
Morning, Jo Walton Jo.
Hey look at maybe maybe just starting off.
That the performance and friction, particularly in China, and the US continues to be really strong.
I'm curious.
You referenced or at least the manual referenced.
The expectation now is that your your your outperformance tends to be at the lower end of the range.
Of what you previously provided I just want to maybe get a little bit more color on that and then specifically what are you seeing from a competitive standpoint in the market today.
Sure. Thanks, Thanks drew so when we look at the Q3.
In Q3, we outperformed the market globally, we are outperforming chime that we outperformed in North America, we did not outperformed the market in Europe.
What we experience it was a steal some de stocking, particularly the beginning of the quarter.
And also some lower and lower ramp up.
For the for the New conquest also some of the early weeks to give you just a specific example to Europe in France of one of our major customers is that.
Ramp up of the new platform, we would on the existing that is coming down we are adding the new that comes up but all of these coming down the news coming up a little bit lower and therefore, you have a deep in the in that platform for example.
So what we see is that when you look at that 2020 Dcs the quarterly performance, but he is very important to look at year to date because year to date you have weather is very bumpy is more relevant. So you have to date, Joe we have Europe outperforming the market by 380 basis points year to date.
North America, and China open.
Outperforming the market by more than 1000 basis points.
So now the other thing that I would like to share with you is actually what has happened during the month of September in the month of October where actually we have seen oh, what a numbers back to year over year in DC is it positive is another positive sign look.
Looking at the at the order book, we see a good order book for Q4, So look good for November and good for for December.
Having said that we are really working closely with our customers as we are investigating really how much of these is do we have demand and to ensure that we have a better understanding of what is in the final endeavor inventory. So that we are able to match demand we supply.
Now going back to the second part of your question, which is from many competitors point of view.
I can tell you that fully since we have been able to take advantage of in Europe exactly all of us some of our competitors.
Teaching decisions and therefore in some of the awards that we have a 40 in Q3.
There's been some wins with major customer of ours that we were able to further increase our market share.
Nbcs, thanks to some competitors decisions in that region.
Got it that's Super helpful. Luca and then maybe I'll just ask one quick follow on a manual I just want to make sure that I heard you well.
For the for Q4 guide you're expecting.
Q4 to be sequentially up low double digits, so kind of implying like 990 to 95 cents or so in the fourth quarter I just want to make sure I heard that correctly.
Yeah, that's correct Joe.
Okay perfect. Thank you, but I'll get back in queue.
Thank you.
Damian Karen.
Hey, good morning, guys and great job on the margin execution.
Thanks, Damian Thanks Damian.
Speaking of which.
Wanted to ask you about the cost reduction progress that you pointed to on slide 19.
No team.
On the areas, you're exceeding expectation, maybe tilted more towards discretionary side rather than the structural.
But I know you mentioned, you're sort of that 90% of the execution on the on the structural.
Cost savings.
Just wondering as we kind of think about.
Progression from here moving into next year is 35% building appropriate incremental margin to think about.
As the business recovers next year.
Yes, Thanks Damian.
Yes, you're right last quarter, we mentioned that.
Our.
Expectations for incremental margins was going to be north of 35%. This remains the case.
For the full year, we expect to generate more than $90 million of impacts.
In 2020.
We also expect to.
Benefit of carry over into 2021, and then we might remember that some of that will be partially offset by some compensation actions that we have rolled back in Q4, but we are very optimistic and very bullish on our ability to generate incremental margins that are higher than our decremental margins.
Okay, that's very helpful and I guess.
Specifically thinking about.
In the end.
Christian business.
Okay.
And earlier in the call.
Sure.
Near record margin performance in Russia, and Mexico.
You know as you think about.
Production ramping.
No.
The level.
Thanks, Chris.
I'm wondering at what point.
Sort of that incremental margin maybe.
Stabilize or perhaps.
Bert as you need to start investing more on new platform build out just maybe to kind of think about.
To help us think about how to sort of thought the longer trajectory on friction moving problem.
Got it.
Earlier production levels to actually.
Expansion.
Okay.
So when the one thing to bear in mind, a couple of points.
So your question Damian one is that that the our approach in these kinds of situations. So when the market is going down we have it we are treating our fixed costs as valuable and weve variabilize as much as we kind of what fixed cost.
And then when the Revvy when the growth returns, we have trying to retain those fixed cost fix these as a general approach ending D.'s way is helping us obviously to have a better better incremental margin second ease that over all the friction in motion technologies, DNA, which is.
Really driving driving the improvement that put the TVT or to a different level just to give you. An example, I was able to be in.
In the budget plan to.
You will in the month of September these either our old this the most mature the most complex plant, but Dave reach level of labor productivity the highest they have ever seen in might might nine years in a.
In the in motion in motion technologies, and the United States.
To the point that the 40 cents I met too.
Shopfloor workers, so that the set up of days meds WRECO fastest ever changeover.
Safely that we had the emulsion technologies Abba. So that's the general approach you to answer your question Daniel.
Yes, I appreciate that okay I'll pass the line.
Thank you.
Your next question comes from the line of Jeff Hammond of Keybanc capital markets.
Hey, good morning, gentlemen.
Hi, Jeff Good morning, Jeff.
Just just can you just tell us a little bit more about this management change at CCT what prompted it just some of the early opportunities you see are here as you move towards this kind of motion Tech.
Manufacturing approach.
Sure. So just just.
Right.
I personally to recruit the IRI in few years back a while ago I lived in China, and I was scouting for cadence. So at the time Dobie day, who was managing the motion technologies business in China that we just stopped it that way.
Moving back to Europe to manage the Axtone acquisition and the rate of business. So we recruited the Ryan a talented individual who knew I Asia Pacific very well he is very focused on growth.
And right units performed incredibly well in the last three years in it so right now as worked in Europa a South African is working Africa knows very well Asia as what Asia and therefore, it's got a very global mindset now.
We'll be we'll be very benefits from ryans global leadership and focus on growth.
Same time with the right and moving.
We have adopted that was manage the hcone accident has managed the accent acquisition ready, while returning to China to Ron The Asia Pacific and be part of the leadership team one thing that we like to stress as well Jeff is that if you look at the leadership team. What we have is that you look at me you look at the marine.
The CHF ROE you look at demand well you look at right you look at Davida five leaders in the leadership team I actually internet promotional which tell us something about.
The process and the succession program that we have we the United team.
Right and the Dhabi they have bought to work to empty several years, and therefore that we'd be able to expand the motion technologies and fiction approach.
In Asia Pac as well in CCT.
Okay, Great and then just on EPS.
It sounds like auto production had been challenging you have some inventory adjustments in Europe.
We're getting news that piece.
Pieces of Europe, maybe or shutting back down again, and just wondering kind of how you're.
How you're how you're thinking about that within the guide.
And are you seeing any any risk around you know around production in Europe and into Fourq.
Okay. So let.
Let me, let me frame, let me contextualize, how we see the.
Colby situation first so when it comes to call that.
The way that we see in identity.
But we are in discovery storm, a we've been in it for nine months now and we are roughly half way through.
So these two contextualize it.
Then looking back at how we did that during phase one.
When we didn't know anything but.
Then.
About coffee when Destocking in January in China, and Korea, we didn't know anything at all.
When you look at our performance friction plant was the first plant and getting back on line. Our on time delivery with our customers was top notch across all the different businesses the businesses were up and running.
All the time for IP most of the time for the CCT any motion technologies.
And we have limited infections within our employees on top of that we took also some upward we have some opportunities way and that some of our competitors stumble, though we were able to get to some wins along the way.
So this is how we performed in wave one when I say said, we didn't know anything about it no. We know so now the reais that a second wave and most likely audit continuous wave to be honest with you because as we get into the winter, particularly for them.
Any sphere, we see these as these happening but at the same time as I said, we know much more Ryan fleeing the new CCTV that actually led the task force that you look to at all.
Our what we have learned.
But the benchmarks of each country and we came up with this program, which is the Reighty safe goal, which is really our playbook now.
In terms of be ready to ensure that we have all the mask and Tia you know April over the next two years to ensure that we've got all the testing Keith and we know that we do not having any shortages.
We should that we play safe at all the time and safety is our top priority and we keep ongoing and we keep on serving our customers.
These really are.
What we are how we're working it now we are facing it right now as you can see in the but at the end of the day I believe we are awfully through and therefore, we will have to manage and leave we called me through the winter and and spring.
Okay. Thanks, a lot look.
Thank you thank you Jack.
Your next question comes from Michael Halloran, sorry.
Hey, good morning, everyone.
So on in my opening remarks.
Thanks.
So the IP side.
Maybe just some commentary on the underlying trends there the.
The short cycle business I think you said it was year over year positive in September good sign maybe talk about the drivers behind that and how you think about the sequential trend moving forward if thats a good.
Good piece to build off of all or just some.
Pent up demand type things and then compare that a little bit with how you're thinking about the longer lead or larger project type activity. Obviously, you are going to be booking that at better margins, but just a little sense for how you're thinking about the ability to convert or even the desire to convert some of the projects right now.
Sure. Thanks, Mike So when you look at when you look at Q3, and Oh, there was up to three which was a little bit better than Q2.
Sequentially, but you got two different stories that you have you said projects and what you're having to project that we keep on seeing postponing and some delays it to 2020 one for the major projects for the Big project, but also for some smaller ones as a matter of fact I was talking to one of our larger distributor.
Part of the GDP W. W. They distribution network that we have in North America, which is the envy of the industry and he was just shared with me that three out of the five projects that he had the full 2020 has been postponed to Q2, Twentytwenty, one and that we see also.
In the middle East of some of the projects awards that I'm going to I'm going to be a little bit longer in terms in terms of the delivery. So we keep on seeing these these project, but at the same time, what we are seeing is a 2020 one that we'd be able to reach all the flotation at least these EBITDA I'm receiving from cost.
Summit and from our regional leaders.
When it comes to the short cycle.
We had good sequential improvement Mike It was roughly 14% into when you look at Pos and baseline and we know that base that visa is our bread and butter and that was what was good also that sequentially in the quarter improved.
And when you look at total about actually the numbers for the short cycle were better than what we were expecting and were also better than year over year.
As a matter of fact, if I can take a challenging from a fee.
The entire.
For the month of October we had orders, 2% higher year over year and these are the first month.
In Twentytwenty Wendy's, what visa as happened.
So now when you look at the show cycling with specific on the show cycle. The hydraulic Institute for reasons that was that was stating that today and see market in North America was probably down 30 around 35% and I can tell you that our assay business as I said, the bread and butter, we would be we will.
Be outperforming that market by roughly 800 to 1000 basis points.
Then you ask us in terms of the project that you are absolutely right on that project that this story is not change on the backlog of the project in the sense. They back the project backlog is really more profitable business. Then was one year ago, but also these are relevant to say that what we have shipped in the project that has been.
Closed or bills that are better margin that was little sheep and close last year. So you have these reinforcing loop happening today.
<unk> expense for that and then.
Question on the friction business.
And that the project the new platforms are getting pushed to the right a little bit.
But obviously continue to see nice wins, how are you thinking about the cadence of those platforms over the next couple of years here or is this just a pickup the end just push everything to the right from a calendar perspective or do you think that there's a little bit more of a slow adoption to start out and then accelerate later on in any kind of context with the latest thinking this.
Great.
Okay. So I see that we have to differentiate in terms of awards and Sophie So having said that if you look at this year. For example, these yet we've been seeing a lower activity in terms of platform award no debt situation.
Plays to our advantage if you think about that in Europe, where we have a very high market share, but obviously in countries like North America, China, where we are going after market share gains.
Usually we need the Daus awards, and we need those platforms to improve our market share gains I think that you know these activity in terms of awards that we'd probably accelerate in the in Twentytwenty, one and for the next couple the next couple of years.
One thing to highlight on the award that Mike is that when you look at all the awards that we won so far in 2020.
60%, 60% have been awards, we win and 40% have been New awards in Caldwell, which is feeding the market share gains in the future obviously that percentage is different for different different regions.
And then.
Manuel was talking about 15 awards in the quarter for electric vehicles. These either a strategic a strategic platform for growth in the medium to long term because there is a lot of talk about it but think about our much electric vehicles out as a percentage of the total vehicles and this deal to be low 10%.
And in Q4 that would be the stock of production of the E.
The platform, where we are on with the leading manufacturer, but also forward was spoken about the launch of the milk E class.
Loss from web at where we are so.
So a good story on the awards Mike.
Thanks for the color as always appreciate it look at.
Thank you.
Your next question comes from Scott Davis of Melius insights.
Hey, good morning, everybody.
Morning.
Hi, Jim.
Curious I don't know.
If this is the right way to ask the question, but when you think about the structural cost out is there is there kind of a percentage of footprint that you've been able to take out if you think about just the square footage.
Reduction is that is that.
A way that you guys look at that.
Yes, that's a that's a great question.
We <unk> cost.
Action plan, we have highlighted several areas and footprint is definitely one of them specifically for IP and CCTV and so at IP, we already completed one in Europe, and we're really excited about this because this is going to really help us reduce our fixed cost. We also announced one October in North America.
And we really trying to implement the bid the empty business approach, which is about a concentrated footprint close to our customers with very efficient manufacturing structures. So so far we are not we are not realizing any of those savings in terms of footprint because.
Takes time, but this is going to be a 2021 and 2022 benefit and the primary areas. We are going to focus on our smaller to mid size plants that were going to consolidate into large plans for IP and for CCT.
Okay.
That's helpful color and then.
She is a follow up that the pension termination one of them one of the mechanics, it's been got I feel like it's been a decade such seen one of these.
What are the mechanics involved in closing out the pension you do you have to.
Right it write a check and firm things up as is or is there an.
An upfront cash cost that kind of gets paid back because you don't have to do it anymore. How do you how do you at least I'll.
Just stop there what are the mechanics so.
So maybe maybe in men with that let me frame. It first and then so you can that you can answer. The question is the one thing that as Scott that to bear in mind is that as a company. We made a very good decision at the time at the end of 2018 to freeze.
Dave.
Pension plan and at the time, we were 108% funded okay. So disease, when we froze frozen for the plan and this is when really the process that process started.
Yeah, and so in terms of the intensive process you know it's a similar it's a very regular process of bidding process, we had five or six different insurers will we went with massmutual because they they we presented the best proposal I think the final cash outlays was around $8 million, which is a.
Which is at the lower end of our expected range.
And so and so it's really we transferred to the.
The contribution that we had made and made that an additional $8 million or payment and we we terminated the pension plan. Consequently.
Also only $8 million Wow, Okay second one hundreds of millions and I would say so congrats on that.
I'll pass it on to the other guys. Thank you.
Thank you Scott.
Your next question comes from Brian Blair of Oppenheimer.
Thanks, Good morning, everyone.
Good morning, Brian morning, Brian.
I was hoping we could circle back to the friction OEM outlook from a slightly different angle I understand the timing kind.
Kind of restrict that performance a bit and 2020, but based on prior wins and the degree of platform and so the visibility that you have is it reasonable to expect your typical seven hundreds of thousand basis points up performance next year or other reasons to lean above or below that range based on current level.
Okay. So.
I would say that it's a probably is that.
We wanted to see it really how the market. These developing during Q4, because what if I look at what outlook right.
Right now Brian on Q4.
I will I risk of being overly optimistic and they really want to and we really want to understand how much of what we see in the order book up Q4 ease of real demand rather than feeling they did final or the inventory or being concerned of a cycling away from some of the.
Of the major Oems So we want to see exactly how Q4, Lisa is panning out to to better understand the better give a guided range for 2020 one.
That's completely understandable.
And you've highlighted cctvs, increasing adoption of DMT business approach and look you've talked for a while about making IP. The motion tech of the flow World, We can see the operational momentum there.
Thinking about CCT, what does the empty approach mean.
Yes, more directly outside of resetting cost structure, what changes the cenveo for the business.
Sure. So it's Brian is a very timely question, hey, so I spend two weeks.
In California imbalance in Irvine, where we have about what connectors and components planned and together with the team.
And so what to what the empty I approach will mean is that probably taking the level of granularity to a complete unprecedented level NDS easier talking about when you are running for a new a new opportunity sales in new awards or when you are running into a production or a machine.
So let me give you. An example in terms of the level all of that data, but overall.
Of the machines over the labor productivity and growing you really with reality and understanding every single step that you having the operation. They spent some time every single day to get that we draw both to get that we debuted the new plant manager of Valencia in looking exactly how the operation were running down and doing a lot of kaizen events.
Which improve the profitability of the of the plant, but there is more to come. So these really what what we're looking for in terms of Ti playbook for a full CCT unprecedented granularity in every single step of the operations.
Okay I appreciate the colors always.
Thank you.
Your next question comes from the line of John.
Hi, Scott.
Thank you good morning, everybody.
Hi, John.
What is happening and what has happened.
To your friction aftermarket business in Europe, presumably lockdowns make it worse versus the recession double wedo nine right because we'll probably its reasons of driving and can you just remind us what percent of aftermarket is in the mix currently and is it higher or lower.
In terms of margins versus the segment average.
Okay. So first of all when you look at the aftermarket and OE, we had roughly 65% or 35% aftermarket and when you look at this 35% after market that you can split out runoff in independent aftermarket and Oh, Yes. John This is how is complete now when you look at the performance in the quarter.
I would say we didn't see any improvement in Q3 I can tell you that we are seeing a substantial improvement in Q4, and therefore, we have been we have improved our full year forecast that all of the aftermarket for the full year 2020, we were thinking last quarter, what we communicated with you that they are.
The market was going to be in the region between minus 22 minus 24% year over year, we out to date thinking of a negative high teens for the aftermarket for the full year. So the feature a substantially improved that is more related to Q4 and the other moves that we've seen before the end of Q3 performance.
Now when you talk about the margin I would say obviously the after market Thats got higher margin than OEM, but.
Think about it.
Yes profitability plants today are China, and Mexico, and both of those that are actually on the OE. So I will I will know really draw any conclusion in terms of the aftermarket margin into managing.
No that's fair.
In aerospace they track take.
Takeoffs and landings flight hours, all that sort of stuff I mean, these lock ins being reimposed in Europe look I appreciate the wins well no. It's a great business.
I don't know if there's evidence of that is going to restrict driving capacity, but does that put a bit of a governor on the aftermarket business.
As you look ahead, so not about sort of the wins that you just talked up right. But looking ahead is there. This correlation between sort of these lockdowns and fewer cars than on the road other than just like less wear and tear in terms of driving the aftermarket.
Business.
I think that's absolutely fair John is absolutely logical one thing that has changed Conversely on the other side is that public transportation versus your own car. So just because of the concern of being public transport down you have people then when some of these look down.
Get lifted they prefer to drive their car ride that day and that going on at Boston or on a plane. So you have some conflicting that trains on the on that respect.
Yes, I agree with that and then just lastly could you talk about because you know Mexico in China are clearly doing very well operationally.
How has in Mexico, particularly important region for you in terms of production I was the integrity of your supply chain in Mexico fared over the past six months during the pandemic and kind of whats. The current status and are there initiatives that you're trying to and bold into.
But up or are you just happy with the performance.
I think that we will you know the teammates really manage to date did risk and that manage that process very well. So when we look at the supply chain in that particularly in the motion technologies business that we haven't suffered any disruption at all.
I think that to.
To be fair, we have that we have seen is some of these wraps shown in a in I remember in one project for leases in IP, where a major supplier of about was that just because of technical problems and cultivate that delayed some of their deliveries, but we are working better.
Closely with them, we're working with the customer and everything is that managed properly.
No major disruption on the supply chain I mean, I can tell you about one these events for the auto light duty.
Perfect. Thanks, Luca Thanks Emmanuel.
Thanks, John Thank.
Thank you John.
Your next question comes from Nathan Jones of Stifel.
Good morning, everyone.
Hi, Nathan morning, Nathan.
Just one follow up on IP.
I think looking you mentioned that the project margins in backlog are better than they were a year ago.
We do tend to say in environments like this where volumes are down pretty aggressively that the bidding the pricing on these projects get pretty aggressive can you talk about how you're approaching.
The need to you need to fill your factories and they could go up your fixed costs we've.
Looking to fill the backlog up with low margin programs.
Okay sure Nathan So I think that as that today these pretty ingrained in the mindset of of of the people today and the process that we are very disciplined today in what we go through in terms of a rig viewing day proposal both from a technical point.
View from a cost point of view and also from a terms and conditions point of view. So these proceeds is very diligent and that we say we will not be able to deliver these better margin Nathan if it we will not have done. These are for the last three years.
No. It's not it's nothing new Nathan do something that we started when we got into a Pea in January 2017, and we have improved since then.
So that's a that's important one thing also to bear in mind is that as it is happening on the project side of the business and there are projects going down there are some of the I would call. The service project small project that you do on services that coming off the NDC is that if you stay close to your customers. If you got the customer.
The Missy disease, what is coming into the funnel.
On top of that to date profitable managing the project managing on the backlog is better also because of all the initiatives that we have been doing on the on the on the pro on the product based on that data is also extremely helpful.
Okay. The second question on to talk about was a free cash flow of 15.
15.4%, a trailing free cash flow margins. So while were on the call I went back and looked at it historically and post the spin of xylem and Exelis from 2012 to 17 that module is about 5% 18 and 19 it was about 10% trailing.
Trailing 12 months to about 15% obviously in environments like these working capital throws off would be to cash.
Can you talk about how the approach to free cash flow generation has changed and what you think of sustainable free cash flow margin for that business.
So let me, let me stop and that demand whether you can you can take it from there is a if you look at what working capital.
That is that an area, where we have been focused tremendously webby improved year over year for identity at 180 by 180 basis points and if you look at the improvement yet we have empty being stable roughly in CCT, we deteriorated that need to be year over year, and then hey.
IP, we improved by 800 basis points year over year, and we improved again from Q2 to Q3, if you think about IP today working capital is that 19%. They are the best in the ITC.
And the improvement of being particularly on the accounts receivable and accounts receivable past you and there is still a lot of improvement to be made to invent or other areas, but Emmanuel I leave you to yes and in terms of long term margins I would say, we're not really ready to give you a number especially because.
The 15.4% free cash flow margins that we realized so far.
I mean, we manage really well working capital as Luka said, but there is also an impact of a lower revenue base, which is improving that number also and so.
It's not really a long term or long term target for us I would say that.
In addition to our Lucas said.
We have working capital being a major driver of our free cash flow performance, we still have some opportunities inventory turns for instance, and all our businesses are the inventories.
Opportunities on inventory, Hey, I'll pass you is also a major opportunity for us even though we have made a lot of progress. So I would say free cash flow performance. He is going to be called is going continue to be driven by working capital improvements.
We have implemented a really nice.
Disciplined around Capex and we intend to continue to this to continue to focus on productivity and innovation.
But I think that.
I would say overall, we would expect to.
To be above 10% for sure but in the future.
Great. Thanks very much.
Your next question comes from the line of Matt Summerville of D.A. Davidson.
Hi, just one quick question.
With respect to the incremental cost reduction benefits, you're going to see in 21 from what you've done thus.
Thus far in 20 can you maybe quantify that as well as what you expect to derives from the latest footprint actions that you just mentioned today when I talk to you in CCT. Thank you.
Sure Matt So as I said, we expect full 2020 PML benefits of more than $90 million this year.
The carryover impact on EPS of some of those actions that have started mid year, he's going to bring to us, but not an incremental 40 million of positive benefits in 2021. Some of our temporary cost actions are going to be enrolled duct already in Q4, so they're going to be a headwind to that carry over.
In 2021.
But as I said this is when footprint is going to kick in and footprint is going to bring a lot of benefits probably in the second half of 2021 and also into 2022. So and this is obviously this does not include the regular productivity that we have.
We are implementing and driving through all three value centers.
Finally, I would say that's for 2021, we expect to add more actions and were actively planning window active in the planning cycle here and so we're looking at what we can do incrementally in 2021, that's going to impact both 2021 and 2022.
Thank you.
Thanks, Matt.
Your next question comes from Brett Linzey of vertical research partners.
Hey, good morning, everyone.
Hey, just just one for me on industrial process specific to the orders down 17% just curious how you see the order profile in that segment playing out over the next few quarters. I mean do you think Q3 is the low of here and maybe just share some differences in that business now versus 15 16, whether it be.
Good aftermarket mix market collection that might prevent those orders from worsening to those levels historically thanks.
Maybe a stock of manual and you can be on that one when we look at the orders for IP I seen that for the full year or for the full year, but we are looking at probably a declining over the year of roughly 11% for the for the full year.
And when you look at the geographically I would say that there are some bright spots in these ones like for instance, the Europa, a Latin America or middle East to in terms of in terms of projects and.
Another element to to give is probably we are seeing the supply chain that I just mentioned sorry, the short cycle improving.
Proved in September improved again in October the trend is positive and when I talk about it.
Being positive I know there was talk about versus probably by 2% to the positive. We're really IP that was positive 9% October year over year and motion technologies as well. So this is what's happening from a from a trend perspective, and I would say for FFO for the long term when we look at our funnel.
I'll funnel has been going down there is a little a little uptick in October, but it's really too early to tell if this is a meaningful trend and I would say when we when we look at the funnel going down this is mainly coming from upstream and downstream oil and gas as.
As well as some chemical some chemical product GMV, which is.
Really the core of our IP business is behaving pretty well and it's showing some some positive signs but for the moment in terms of project activity. The picture is pretty grim given the current environment.
And I guess, just a follow up point of clarification. So you said the total IP orders were positive in October.
That's correct that's correct. Okay. Okay earlier I thought just short cycle. Okay got it that's all I had I appreciate it.
Thank you Brett.
Ladies and gentlemen, we have reached the allotted time for questions and answers. This does conclude today's teleconference. Please disconnect. Your lines at this time and have a wonderful day.
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