Q1 2021 ITT Inc Earnings Call
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It is now my pleasure to turn the floor over to Mark Macaluso.
Vice President Investor Relations you may begin.
Thank you Stephanie and good morning, It's my pleasure to welcome you to Itt's first quarter 2021 earnings conference call. Joining me here. This morning are Luca Savi, Itt's, Chief Executive Officer, and President and Emmanuel comprised Chief Financial Officer, Today's press release presentation, and reconciliations of non-GAAP financial measures. The most comparable GAAP measure can be found on on <unk>.
Site at ITT Dotcom forward Slash investors. This call contains forward looking statements that are subject to certain risks and uncertainties, including but not limited impacts from the COVID-19 pandemic all such statements should be evaluated together with the safe Harbor disclosures and the risks and other uncertainties that affect our business, including those discussed in.
On our form 10-K, and other SEC filings actual results may vary materially from the assumptions presented today.
Sept, where otherwise noted the information we present this morning will be based on adjusted non-GAAP figures. These results exclude certain non operating and nonrecurring items, including but not limited to especially as related charges restructuring asset impairment acquisition related items and certain tax items, all adjustments in the quarter and expected for the <unk>.
Full year 2021 are detailed in the reconciliations in the appendix.
Before we begin I'd like to provide a brief overview of our first quarter GAAP results compared to prior year Q1 revenue increased five 3% to $698 million segment operating income increased 52.5 per cent to $119 million and reported earnings per share increased four 2% to nine.
Nine cents.
With that let me turn the call over to Luca who will begin on slide number three.
Thank you Mark and good morning.
I continue to be extremely proud of the way our teams have responded to the crisis.
Your hard work is the reason why ITT has been able to effectively serve our customers throughout the pandemic.
Earlier this week I spoke to our colleagues in India.
As you know engage dealing with the surge in COVID-19 cases across the country.
And they wanted to think on ITT Ers are in bad debt Dora for continuing to take care of each other.
Customers and our business in this difficult time.
Before we discuss on a quarterly result, let's spend a minute recapping, how we got where we are today.
This is important as it sets the foundation on which Q1 results are based.
The health of our people has been a top priority from day one.
Early independent Inc. We implemented ready safe go across ITT.
This allowed us to safely and effectively serve and support our customers faster than our competitors.
We further strengthened our balance sheet is through smart cash management tool.
Today, we have nearly one and a half a billion dollars of liquidity at our disposal.
Moody's recognized our cash performance, we did an upgrade to our credit rating in the third quarter.
Early on we executed a plan to significantly lower our fixed costs.
These resulted in structural reductions in 2020 of nearly $65 million.
Our productivity and cost actions helped to offset the impact on materially lower volume in 2020.
Today, we continue to drive footprint optimization and sourcing excellence at both industrial process and connect and control technologies, while remaining diligent on cost controls.
This has resulted in a step up in profitability above 2019 levels.
All the actions taken over the past year combined with ITT was collected commitment and grit have positioned us well to win in the recovery, we will continue to invest in innovation and growth, including important green projects to become the most sustainable ITT.
We are aggressively and diligently pursuing acquisitions in our core markets to put on a cash to work effectively and build on a strong businesses.
I am invigorated by the progress across our businesses and the momentum which is accelerating.
Now moving to Q1.
We delivered a strong quarter and then encouraging start to 2021.
Let's get into it.
Itt's first quarter sales were higher than 2019.
Organic sales in motion technologies were up 17% after a 10% organic sales growth in the fourth quarter up 2020.
The new auto platforms that we won and frictions ability to deliver for our customers drove a 1500 basis points of outperformance versus global auto production.
And we secured positions on nine new platforms with EV content during the quarter eight of which are in China, the largest automotive market in the world.
This is building on the 42 EV platforms wins in 2020.
Connectors grew sales in all regions.
Orders were up 20% organically with strength, primarily in the distribution channel.
This is encouraging for connect and control technologies heading into Q2.
From a profitability perspective, ITT generated adjusted segment operating income growth of 27 per cent and margin expansion of 300 basis points on 2% organic sales growth income.
Incremental margin was about 70 per cent for the quarter.
I PS margin was nearly 16% driven by net productivity as we continue to drive supply chain improvements and better manufacturing performance.
This follows a 15% plus margin performance in Q4 of 2020.
As a result of the revenue growth and margin expansion ITT delivered adjusted earnings per share of $1.06 a share.
Sequential and year over year increase.
Even more telling is the fact that E. P. S was 15 cents above the first quarter of 2019.
Free cash flow was up 70%, representing a margin of nearly 16%.
On capital deployment, we repurchased ITT shares totaling $50 million early in Q1 executing on our repurchase plan and achieving house on a free.
You're planning on $100 million.
As a result of our strong Q1 performance and our confidence in ITT is the ability to outperform we're raising our outlook for 2021 across all facets of our guidance.
On organic sales, we now anticipate growth of 5% to 7% a 300 basis point increase on both the low and high end of our original guidance.
This is driven by continued share gains in motion technologies.
Meets the broader auto market recovery stronger growth in connectors on the demand in the industrial process short cycle.
On adjusted earnings per share the increased sales volume and the strong productivity expected in 2021 combined with the carry over impact of about 2020 cost actions will generate EPS in the range of $3.80 to $4 a day high end, which equates to 19 to 25.
Per cent growth versus prior year.
<unk> is a 30% improvement at the midpoint from our prior guidance and puts ITT on pace to surpass 2019 EPS.
Let's turn to slide four to talk further about the first quarter results.
From a topline perspective motion technologies delivered a solid performance driven by strong auto growth and continued share gains in our three main regions.
Our friction OEM business grew nearly 30% organically with impressive 42% growth in North America.
We drove high single digit organic growth in connectors, mainly through distribution.
Together with Bryan Flynn, our CCT price it day in April I visited our U S distributors and sales representative in the northeast and on the West coast to work on our ongoing initiatives.
We still clearly that we have many opportunities to grow this business from a product and a customer service standpoint.
And why some of the Q1 growth may have been due to pent up demand, especially in North America. Our dedicated teams continue to work on the optimal commercial actions to gain market share.
Our focus on operational excellence produced 280 basis points of net productivity in Q1.
These include the $50 million of savings from our 2020 cost actions.
Industrial process drew margin 450 basis points to 15.8 per cent, despite the 12% organic sales decline.
And motion technologies expanded margin nearly 300 basis points to 26 per cent. These include the triple digit margin expansion at both Coney Island the watering.
This quarter I was fortunate to visit a world class friction plant in Belgium, Italy I.
I saw firsthand the continuous improvement in plant productivity on.
Team there has improved its processes to increase machine utilization and to respond more quickly to ever changing order patterns from customers impacted by supply chain challenges.
The strong empty and IP performances, offset connect and control technologies margin decline driven by the pandemic impact on aerospace.
Rising raw material costs, partially upset that this trump productivity.
The impact was 100 basis points this quarter substantially higher than what we were expecting.
We believe this trend will continue to affect our results for the remainder of 2021.
Emmanuel will speak further about these in a moment.
We continue to reinvest in other businesses to drive future organic growth. We are funding the most promising growth initiatives in key markets, including E vs to ensure we keep winning in the marketplace.
When I was in Bajaj I also saw the expansion of our state of the other friction R&D center, including the testing and fast prototyping capabilities, which will be powered by solar panels. Later this year.
These smart growth investments drove roughly 50 basis point impact this quarter.
Rounding out the story of the quarter with free cash flow, we saw a substantial improvement in Q1.
This was mainly driven by higher operating income generation in the segments and slightly lower topics.
Our plan for the year still assumes approximately $100 million of Capex, an increase of over 50% relative to 2020.
In summary, ITT ers around the world delivered a strong performance.
We drove positive organic growth at an incremental margin of over 70%.
We generated nearly 300 basis points of productivity and invested in Itt's future.
We repurchased ITT shares worth $50 million and have raised our dividend 30 per cent the ninth consecutive dividend increase.
And we surpassed 2019 first quarter results in revenue segment margin.
P S and free cash flow.
Let me now turn the call over to Emmanuel on slide five to discuss the segment performance in more detail. Thank.
Thank you Luca let me begin with motion technologies Q1 organic revenue growth of 17% was primarily driven by strength in auto.
Our strong momentum from last year carried forward as Q1 grew 5% sequentially over Q4 2020.
Friction OEM grew 29% organically and we outperformed global auto production by 1500 basis point.
Segment margin expanded 280 basis points versus prior year, and 110 basis points versus Q4 2020.
This was mainly due to higher volumes and productivity benefits, partially offset by higher commodity costs were.
We're very pleased with the performance at Coney on Wolverine, both delivered triple digit margin expansion from operational efficiencies and higher volumes.
And we continue to see more room to grow these margins.
For industrial process revenue was down 12% organically driven by short cycle declines primarily in oil and gas and chemical markets.
However, we continued to see steady sequential progress in short cycle orders with 9% sequential growth from Q4, and a strong book to Bill of 1.1.
We continue to see healthy customer quoting activity, especially in the middle East and North America. In fact, we have seen sequential strength versus the lower Q4 bookings.
However, this quarter, we saw sales and order declines as large project spend continues to be slow.
I P margin expanded 450 basis points to a segment record of 15, 8%.
This represents $6 million of operating income growth on $25 million of lower sales.
Margin expansion was driven mainly by productivity benefits, including a global sourcing performance significant cost actions taken in 2020, and favorable nonrecurring items, which collectively more than offset the decline in volume.
As an example of our progress in IP when we visited our Seneca Falls sites last month, we were really pleased to see the strategies deployed by the manufacturing engineering teams to reduce machining bottlenecks and accelerate output. We continued to drive further footprint optimization and this quarter.
We announced a third consolidation project in ITT.
Lastly, in connect and control technologies, we generated sustained orders progress our connector business was up 20% versus prior year and up 3% sequentially driven by continued north American distribution strength.
As expected south seen aerospace continued to be weak on lower oil production and commercial passenger traffic.
We expect that Aero demand will remain low in Q2, but will begin to pick up in the second half of 2021.
CCT margin decline was the result of lower volumes, partially offset by the benefits of our aggressive cost structure reset in 2020.
As Luca mentioned, we are seeing early signs of performance improvement in CCT as we deploy empties operational excellence playbook from shop floor productivity and improved on time delivery to customer intimacy.
And we delivered a much improved 29% decremental margin in Q1.
As a remember remainder for both I CCT and IP businesses the impact of the COVID-19 pandemic was minimal until early Q2 2020, we expect favorable compares to peak in Q2.
Just a few additional comments on EPS for the quarter.
In addition to lower corporate costs. We also saw a benefit from both the cares act and foreign currency.
Really offsetting the share count benefit was a roughly <unk> <unk> headwind from a higher than planned effective tax rate of 22 per cent.
You will find on EPS walk, explaining our Q1 performance compared to 2020 in the back of our presentation.
Let's turn to slide six to review our revised outlook for 2021.
Our end markets are continuing to show signs of recovery.
Global auto production is increasing albeit constrained by the global semiconductor shortage, causing inventory levels to remain relatively low.
We expect that demand will continue to be strong in the next few quarters, especially in North America, and Europe, despite headwinds related to supply chain challenges and rising raw material costs.
Weekly run rates.
Our short cycle businesses, primarily in industrial process and connectors showed encouraging signs of recovery in Q1 and April orders are in line with expectations.
We believe that there's some pent up demand from 'twenty 'twenty that is carried over into 2021.
Given our Q1 performance and momentum in certain end markets. Our outlook is more favorable than we anticipated in February.
We expect our connectors growth as well as the stronger growth in friction stemming from continued share gains in auto will partially will be partially offset by declines in pump project activity and commercial aerospace.
Our assumption is that commercial aerospace may begin to recover in the second half of the year as passenger air traffic continues to increase.
We are not anticipating a recovery in oil and gas in 2021, consistent with our initial outlook.
The increase in adjusted segment margin expansion by 40 basis points across our range reflects our expectations for higher volumes and continued productivity generation. In addition to the stronger than planned margin expansion from Q1.
We expect this will be partially offset by inflation and higher raw material costs, driven by steel copper and to a lesser extent Tim.
As you will see on slide seven our revised guidance assumes the incremental impact from this global trend will be 25 to 30 cents for the remainder of 2021.
However, we remain optimistic in our team's ability to continue to mitigate this impact through strategic pricing and demand generation.
We'll continue to monitor this closely throughout the year.
Our revised EPS guide reflects the 30 cent improvement at the midpoint of our range to $3.90, which would put us nine cents above 2019.
Some other items to note.
Given the strengthening of the U S dollar the foreign currency benefit contemplated in our guidance is less than originally planned.
For your effective tax rate is now expected to be approximately 22 per cent.
This will likely be partially offset by a slightly higher benefit from share repurchases.
Given the execution in Q1.
Our guidance also continues to assume a reduction of approximately 1%.
Now for your weighted average share count.
We are raising our free cash flow guidance by $25 million.
At the midpoint.
To reflect the impact of higher operating income and we now expect free cash flow margin of 11 to 12 per cent.
Ohio growth outlook will require further working capital investments. However, we expect working capital to continue to decline as a percent of sales during the year and over the long term.
On slide seven let's look at the components of our revised 2021.
Adjusted EPS guidance.
As you can see the majority of our earnings growth will be generated by stronger volumes and net productivity, partially offset by the incremental headwinds from rising raw material costs and our continued investment for growth.
Before I turn it back over to Luca I want to share some detail on what we're seeing thus far in the second quarter.
The Delta in the second quarter will likely look incredibly strong given the pandemic impact in Q2 of 2020.
Organic sales growth is expected to be above 20% driven by empty strong performance and an easy 'twenty 'twenty compare.
This will be partially impacted by the global semiconductor chip shortage.
The other segments are each expected to grow mid single digits with anticipated strength in Ip's short cycle.
Our outlook for CCT has improved given the strong organic sales and orders growth in connectors in Q1.
The margin expansion is expected to be several hundred basis points, driven by empty and to a lesser extent CCP.
From a total ITT perspective.
Justice segment margin should be equal or slightly above second quarter of 2019 of 16, 1%, which we believe is a more representative comparison.
The combined impact of high yourself and strong productivity will drive significant adjusted earnings per share growth.
On a dollar basis, we expect Q2 will be slightly below the second quarter of 2019.
And the second half of the year May look very similar to 2019.
As a reminder, Q4 of 'twenty 'twenty was especially strong. Therefore, we will have a tough comparison in the fourth quarter with that let me pass it back to Luca for closing remarks.
Thanks Emmanuel.
I am very pleased with Itt's results in the first quarter.
We see signs of a recovery in our end market and our people continue to differentiate ITT from the competition.
We are leveraging and building upon the cost actions, we executed in 2020 to drive solid incremental margins as sales volumes increase.
And we are investing our capital effectively.
As we said before friction continues to win in the marketplace and will be the springboard for growth in 2021 day.
This performance should continue throughout the year, notwithstanding some of the macro headwinds related to supply chain and the rising raw material costs that we will need to manage effectively.
From an operational standpoint, we made further progress in our transformation at both industrial process and connect <unk> control technologies.
I'm encouraged by what they saw during my visits over the past few months and what they heard in my conversations with employees customers and shareholders about the strength of ITT.
We also appreciate the partnership with our distributors and sales reps working as a team with ITT to deliver these results.
We are laser focused on growing ITT through acquisitions, while funding high return growth investments.
And the momentum is accelerating.
Our financial health is our strongest ever and these will allow ITT to effectively deploy our capital on all fronts.
We continued to deliver on our commitments and Q1 has positioned us to surpass 2019.
It has been my pleasure speaking with you. This morning with debt Stephanie. Please open the line for Q&A.
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Thank you. Our first question comes from Damian Paris with UBS.
Hi, good morning, gentlemen, and congrats on the solid progress.
Thank you Danielle Thanks Damian.
So I wanted to ask you about friction here.
At this stage.
The.
Auto production.
Assuming for the year I think previously.
You had said kind of 10% globally.
The number you are working with but given some of the supply chain issues and and other developments. We've seen just wondering if you could share what your thoughts on on that and I guess your expectation for share gains for.
For the full year.
Sure. Thanks, Dan when we look at auto production.
We enter into 2021 day the expert in IHS, we're talking about the growth of roughly 14% and as we moved into Q1, what we saw on one side positive side, it demand, which was higher than expected.
On the other side the negative was really the supply chain disruption on the cheap shortages that you were talking about as well as the coffee to third wave in Europe. So today, what do you see he's on a Oh, you chase or projecting roughly of growth for all of about 12%.
$83 5 million vehicles produced for the year are where they need to be more conservative than that around that 10% or they need to be lower than 10 per cent and please always remember that we are projecting to outperform the market.
D C as well we have done so for the last 19 years as an average of 880 basis points per year, and we expect to continue to outperform in the next few years as well.
Okay. That's helpful.
And then switching over to IP.
I guess kind of that 15% Mark.
<unk> target.
<unk> is a little outdated now.
Just wondering kind of whats is there is.
Is there a higher number that you think you can achieve.
For the IP segment margin.
And does the I guess the.
For two to be they will get a lot harder from here.
Thanks, Damian so for IP, you're right. We are extremely pleased with the progress we've made to date.
Keep in mind for in the 15, 8% margin for IP in Q1, there was a couple of nonrecurring items that were favorable so most likely our actual level is probably something like 140 150 basis points under that 15.8.
We are really working right now to solidify that path to 15% plus and there's still a lot of work that needs to be done because we have so many opportunities I talked about how we analysis third consolidation projects and we have more to come and so I think that right now.
We're focused on really making sure that you know in a sustainable way, we can achieve that 15% plus and then when this is done well think about a different target.
Yeah.
Okay, great. Thanks for clarifying.
Thanks Amy.
Your next question comes from Matt Summerville with D. A Davidson.
Thanks, Good morning.
But sticking with empty for a second can you give a little more granularity on what you saw in the OE business by region during Q1, and how we should be thinking about for full year. In addition, what you saw on the aftermarket side of friction as well.
Sure.
Thanks, Matt.
What we have seen per region either.
China is growing at an incredible amount just because you know they need to compare they've all got to heat the really hard by COVID-19 in Q1 of 2020, and we outperformed China by roughly 400 basis points.
The European market to decline by roughly 1% and we outperform Europe, but by roughly 1000 basis points and the North American market debt declined for 5% and we outperformed by a multiple of the towers and so that is what we saw in our in the region Obviously, Inc.
Different regions, obviously, there has been a lot of volatility in the market. This volatility has increased in the second half of the quarter of Q1, and we expect this volatility to remain in Q2, our customers are actually telling us that Q2, probably will be the worst quarter for our multi production in the year.
In terms of in terms of the full year, what we like what they are projecting ease of Europe, but probably growing double digit.
Sales for North America, and China mid single digit.
Now going to the aftermarket.
We have seen an increase without the market year over year in terms of that mid to.
High single digit differing for Oes and independent aftermarket and we expect the aftermarket to grow high single digit low teens for the full year of 2021.
Thank you and then again sticking with <unk> with.
MTN the friction side. These sporadic OEM shutdowns driven by the semiconductor shortage or is there any way to quantify the impact that had on your top line in Q1, how should we should think about Q2 to your point that that might be the most challenging period and then what the full year impacts might be thank you.
Okay. So the most important thing here in the way that we're operating Matt is really to stay super close to our customers. So we are aligned to our production and our plane to the customer a scheduling and this is what we have been doing in Q1, what would you in Q2 and.
This is what we will do for the full year. So all of these these embedded already in Iowa in on what our guidance now if you look at Q1 and Q2, probably the impact on production will be in the region of $2 5 million vehicle.
Less produced in the in the first offer of the of the year the.
The second off up my get that need to be better.
But eh quarter after quarter, but it may well be debt that we're going to have a similar impact in the second half as well, but better sequentially.
Got it thanks Luca.
Thank you Matt.
Your next question comes from Mike Halloran with Baird.
Hey, good morning, everyone.
Good morning, Mike or Mike.
Thanks, guys. So first on the balance sheet side of things, obviously understanding that the acceleration of share repurchase.
First what is it wouldn't be chances that that changes through the year.
And gets Upsized and then could you put that in the context of you know.
How youre thinking about the M&A funnel action ability and an ability to deploy capital on that side.
Sure. Thanks, Thanks, Mike So when it comes to capital deployment, our strategy on capital deployment is no really changed.
The money goes first into the organic investment. This is where we have got the best returned is where there is least risk.
Second it goes into M&A and third he returned to our shareholders.
We continue to be very aggressive on the cultivation side across all the different businesses. Mike. So we're talking about rail what do we want to build a platform organically and Inorganically about 500 $600 million. We talked about you know some material science, we deem that we didn't M T. Maybe some.
Aerospace that companies are in the CCT.
So the all the most important thing though is to ensure that we have a rigorous process both strategically and financially we are looking at debt regions like Europe, and North America and the size of the company that out today or in the pipeline is something between 'twenty and $200 million in sales.
Now, we still see valuations are a little bit on the high side and you know we did COVID-19 a little bit difficult to do the proper due diligence, but in the meantime, we do not stay steel. So we have increased our dividend by 30% and we repurchased shares by $50 million. So we will continue with the strategy and the strategy isn't there.
Changed.
Thanks for that Luca and then.
Slide 17, you gave some good context on the raw material inflation for the remainder of the year. The 25 30 cents.
Could you talk about how youre thinking about then price cost through the year I'm sure productivity is a good balancing mechanism there as well, but I didn't see inflation pressure layers through through the remainder of the year is it more concentrated <unk> knees.
When does that peak pain, but then also balance that against how you're thinking about the pricing dynamics out there.
Yeah, so from a commodity standpoint, we've seen in Q1.
The pressure that started in Q1, and we estimate something like $3 million to $4 million of impact on our on our results.
Some of it we've been able to pass that through to customers and industries, especially value debt and this will be increasingly valid for IP CCT.
And also our rail business momentum.
We expect that this trend to Inc to increase and to strengthen our inc.
In Q2 in the second half one of the reasons is because we have contracts on steel and we booked six months in advance and so at the end of Q1, we're running out of our last booking that was relatively favorable in terms of price.
On the the difficulty is going to be in friction where this is a really competitive environment and as a result, its very difficult to get in front of our customers and ask for a price increase so I think that here, we're going to try to offset it with productivity as much as we can use.
Use some of the escalator contracts, we have with our customer with some of our customers and then try to negotiate lower price reductions are contractual price reductions in order to offset some of that impact.
Thank you I appreciate that Emmanuel thanks for the take care guys.
Thanks, Mike.
Your next question is from Scott Davis with <unk> research.
Hey, guys.
Scott Hi, Scott.
Let's start for the year.
The emphasis that you guys.
A couple of times.
And it on on M&A.
The press release met another comment on it is there.
I know, it's hard to really talk about this but is there a preference to expanding in.
You know any particular segment or are they each kind of love your children equally or how do you guys kind of think about that or is there even an opportunity for us.
On a fourth leg.
Okay.
I wish I could say I love My my children equally and their family obviously, you haven't met them.
But when it comes to when it comes to motion to when it comes to ITT and motion technologies, CCT and IP I would say in our in motion technologies that the focus is really on rail.
Probably more than on the friction side Shunyi, we're looking at material science, but rate really has been the focus in motion technologies.
When it comes to IP pumps and valves, we are looking at the advanced company in some pumps, but he is really to focus either niche niche companies that are really have it probably the differentiator not the big companies. We are now looking at to play on the consolidation gains over that and when we look at CCT.
We are looking for in the aerospace environment. So these are really day three.
Segments, I would say the three industry, where we are really looking at looking after.
Okay. That's that's helpful and then.
Just to back up.
And on the nine EV wins and.
It's hard to really have any context around why.
That's.
Good or bad given I don't know how many you bid on so maybe you can comment on that but really the main question I have is just to clarify what the performance and technological differences.
And that product you are going to be supplying into those platforms versus perhaps.
On a more traditional.
Non EV platform.
Sure sure Scott.
ITT win rate in Evs awards is considerably higher than our existing market share.
And these will continue to feed our market share gains as the market is moving more and more into evs.
And one on all day on one of the platform in China is actually would be white D, which is that one of the H electric vehicle manufacturer Chinese electrical.
Vehicle manufacturer.
And when you look at day at the performance.
There is a day leaves a difference.
As of today. The market is I would say is not as well developed both sophisticated to require those kind of be free seats polices in the noise in.
And the nice performance.
He will come and this is exactly the reason why we open a research and development center in China, specifically focus on what we call day E pad, which is the pad the day material science for the electric vehicles just to give you an idea Scott the electric vehicles is very silent I didn't know if you drove a net it tested out.
Throw on or whatever but there is no noise in there for the breaking news that is something that you really need to make it zero nice perfect and that diesel is a good opportunity for our material science excellence in our in <unk> in motion technologies.
Interesting. Thank you good luck guys I'll pass it on.
Thanks Scott.
Your next question comes from Joe Ritchie with Goldman Sachs.
Hi, good morning, everybody.
Good morning, Joe.
Hey, Luca could you maybe start on some of the commentary on the connector side of the business you know, it's encouraging to see this bad debt that you order growth number was up 20% interest thing that that comment that you made in your prepared comments.
As it relates for like the opportunity that youre seeing with distributors can you just maybe elaborate on that a little bit more.
Of course, Joe.
I was I was fortunate actually to travel together with Ryan and we met our we'd a couple about what distributors are in the in the U S and also.
But he face to face and also I was able to meet virtually we did some of our sales reps.
Early earlier in the week and.
At the opportunities out there across the portfolio and also for a better response to the market from Iowa and from an operational perspective, we have room to improve and debt debt improve maintain our on time delivery et cetera.
It enabled us to win more in the market the trend is positive.
As you have seen in the orders last year last quarter and you start seeing now in the revenue in this quarter and once more on the orders and sequentially.
So those other opportunity they see in net in the market better performance on our side.
Lead times on our side they are going to go down our spending.
Spending more time on the engineering side in terms of developing prototype and foster a samples to keep to our sales rep and to our customers.
Got it that's super helpful.
Great day here I think maybe just following falling back on the question it's Scott.
Yeah.
What your competitive advantage is on the on the inside of the business, but I guess as you think about those eight wins in China I'm curious if you could maybe provide some context, what that means for them like a market share perspective, our debt.
You still have that ambition to be able to double your market share there over the next few years.
Any context around that would be helpful.
Sure when we look at debt when we look at China.
We close our market share in China in 'twenty 'twenty at 24, 5%. So this means that in 2020 in a in a in the COVID-19 era, we were able to gain a between one five and two percentage of market share in one year now.
The win rates are also for <unk> in China for a visa on the awards on its higher than these market share, Joe which means that it will translate in a continuous market share gain in the years to come and Joe keep in mind that the volume for easy even if it's growing fast is still relative.
The small so we expect that the contribution of EV will take a little bit time to materialize.
That makes sense, thanks, guys congrats.
Thanks for thank you Joe.
Your next question comes from John inch with Gordon Haskett.
Good morning, everybody.
Hey, just wanted to confirm so.
I think you said Emmanuel so we're talking two to three cents of raw material drag in the first quarter did you say how much was in the second quarter, maybe you could say that and I'm curious what sort of pricing are you getting for your rising backlogs and does it actually match raw price increases based on where they are today or are you just trying to get ahead of the curve anticipating further.
Price increases in terms of your.
Components and raw pricing.
Right. So we didn't disclose Q2, I think it'll be a little probably a little higher than what we've seen in Q1 as some of the bookings that are that we are that we did in Q4 are running out.
In terms of our in terms of our ability to price. It for why do we have in the backlog I think that's why you're seeing a little bit low delay between the time, we actually receive the cost increase and the time, we were able to transfer to our customers. So on the backlog, we're not really able to go.
Back to our customers, but since that since Israel are in connectors and the short cycle.
Turns pretty in the short cycle of IP. The baseline pumps. These turns pretty fast we're able to in the next iteration two to put that in and then for friction it'll take a little time, there will be numerous conversations, but I think that at certain point in time customers are going to realize that.
If this is here for to stay.
We will come to an agreement and the and John If you are thinking for instance, two day big projects in a P. You have just seen that every time, we are quoting on those big projects, we got for on the quotes from our supplier base so that the.
Debt is protecting us.
No that makes sense does this translate them into some sequential margin pressure.
For any of the segments.
Do you anticipate either Q2 or Q3, I mean, I think for 25 to 30. So I'm just trying to understand if that triangulates back into some margin pressures. Thank you.
You would care to call out.
Yeah. That's correct. That's correct John there was going to be sequential margin pressure, especially in the second half and he's going to be mainly with motion Tech. Because this is where we buy most of the steel a little bit of copper and also some 10, which are.
Heavily impacted by disinflation.
Makes sense and then as you go.
Orient towards M&A, and I'm thinking specifically in the connector business Lucas you just mentioned that your focus is on aerospace.
Long term, that's clearly a great industry. It hasn't served the dynamics well being so concentrated in aerospace.
Just because of the aerospace downturn, but obviously, we're gonna come through that.
I think it's sort of an interesting concept of building connectors period, considering this business, maybe even not that long ago was sort of viewed perhaps for investors is the candidate that maybe should be divested can you talk about.
On that front can you talk about your critical mass in connectors competing with.
On the Amphenol so the world E. The reason youre going after aerospace is because that's where you feel you can sort of.
Achieving and drive critical mass and then sort of going into more industrial connectors. It just can be spread too thin or what what's really the strategy that's underlying that business. Thank you.
Okay sure.
Thanks, John So it's that when we look at the aerospace there is aerospace industrial and defense that you you tend to have these companies that are covering all those for those three areas now going back to the point that you're making in terms of connectors that I'm actually quite pleased from the performance of connect was in Q1.
Look at the profitability of connectors.
In our in CCT in Q1, we were already at the pre COVID-19 level of profitability. Despite the revenue decline. So the reason the ability to compete with debt.
Would it be guys are obviously, you you tend to be more niche. It you tend to be more maybe sometimes closer to the customer and that would be able to engineer a solution together with them and they seem to D. C is what that will enable us to differentiate ourselves and to win in the market that we are providing a.
The service that they some of the other bigger companies that they cannot provide that just because they are much bigger.
Makes sense, thanks very much.
Thanks, John.
Your next question is from Brett Linzey with vertical research.
Hi, Brett.
Vince here over the last for years.
Couple of years right you hear me okay.
Yeah, we missed the first part of your question Brett.
Oh, Okay, I'm, sorry, yeah, you've strung together, a number of EV wins over the last two or three years and I. Appreciate the color on some of the technology, but are you winning both front and back actual in EV and just trying to get a census, the you know the dollar content in EV versus conventional has shifted higher.
Sure.
When I look at the last last year in 2020 and debt and.
These that we were there were 42, if I, if I remember correctly EV platforms that day.
On the split that was that was we need more on the front axle for the E vs. Now if I look at day eight day nine platform wins eight of which were in China. These days.
Quarterly in Q1, I would say the split the ease of reverse is actually 60% on the idea of axle and 40% on the front axle. So I would say no substantial difference right to a one year on my going one direction and what do you mean, the other but no no substantial difference now.
Got it and just shifting back to the footprint optimization, you said you had announced a third third program here.
What are the expected savings for this year from those actions and then could you just give us an update on what the total savings are for all actions 2020, 'twenty one actions and then what the carryover might look like into next year.
Sure sure so in terms of footprint.
Really the benefits that we're gonna have he's related to this.
The footprint, we announced last year in Q3.
IP because we since then close the factory and then we are enjoying will be enjoying the savings are probably in Q2.
Starting to to for the other footprint actions. The other two is they are quite I'm quite a comprehensive and as a result, we don't expect to have material benefits. This year and the benefits, we'll get we'll get we'll get it in 2022.
I think that's a regarding the the rest of the cost actions. So you may remember that last year, we announced that we were going to have a $40 million gross carryover impact in 2020. One and then some of it was going to be offset probably $15 million to $20 million by.
Some costs that are rolling back such as our executive compensation and other sales and marketing costs. So this is still our view we are putting a really strong emphasis on fixed cost and here the mantra is that whenever.
Revenue is down our fixed costs are variable and whenever revenue is up our fixed costs are fixed and this is why you've seen a lot on leverage.
Benefit of that leverage in Q1, and we expect to get more of that in also the next few quarters.
And could you maybe just put a rough estimate on what the round two round three actions will yield into next year and beyond.
We were not really prepared for for that right now so we'll get back to you on this in the next few quarters.
Okay great.
Start to the year.
Thanks, Brad Thanks for that.
Your next question comes from Joe Gear Dano with Cowen.
Hey, Joe Hey, guys good morning.
Hi, Joe.
Can you maybe talk about anything you're seeing from your customers and you can talk kind of wherever it needs to go in the portfolio, but are you seeing examples of kind of not.
And not just restocking, but like ordering much earlier than normal on kind of stockpiling because of fears of not having available supply.
Okay. So when the when we look at our let's start with debt with friction of course.
D. C is where we are facing day the biggest challenge for me supply chain point of view.
When talking to our customers. What we see is really dictate Q2 is probably going to be the worst quarter, they're gonna be day production. He is gonna be impacted the most.
But then when you look at the inventory that you have in automotive in the different regions that you still see a relatively low inventory worldwide is that we had you have a pickup in inventories going up a little bit in China, but that is not too much too much of a concern.
And that you have a low inventories in Europe and extremely low inventory also in the in North America. So our.
Debt to either from a from a from an automotive debt perspective.
When we look at when we talk to in a P to our distributors for instance, I was that we'd get some some of our distributors in Florida last week and it was like one of their sites and they walk the shop for one day. So the inventory I was not surprised either by the low or the other inventory absolutely absolutely.
Normal normal operation. So I don't see that there is anything like that and other important things that we see in IP and this is not talking to the cost for them, but just in looking at the funnel of opportunities that for projects. So what we saw is debt that day final got larger.
In the quarter the final wind up at the end of the at the end of March compared to the beginning of the year by 2% and the trend continued in April in April was up 11% from the beginning of the year.
And then let's move on into into connectors into CCT.
In aerospace for instance, that Ah I seen debt that would be no built up but the positive trend on this one that we have seen is actually on our backlog in aerospace that they started going up in January February and March in the quarter. The connector side is where we have seen you know the orders going up substantially come.
From distribution and visa is where we've seen there is some buildup of inventory.
He said that when I talked to some of our distributors are in connectors that data bookings there are you know.
Our net book to Bill is higher than one. So these building up on the inventory is going to feed you know a very good bookings that day, having their books.
That's very helpful. Thank you.
Annual.
On IP margins can you just let us know what what what are those nonrecurring things hitting this quarter and even if we back that out.
Is there any element of margins in IP now that are like almost unsustainable because of the mix because of how little project activity is and how much it skewed more towards higher margin piece of the business. How should we think of that as economies normalized and you're in more of a normal flow of business starts coming in diabetes.
Yeah, So actually Joe Yeah. The mix was negative this quarter in our in IP and so because we had a really flats project revenue and then a much lower short cycle and so the impact of the the nonrecurring in the quarter as I say, we're around 140.
150 basis points. There was one on a successful project that we delivered and we are we had a settlement with a customer and so that went our way and then we had also a positive impact.
On from the Cares Act.
For roughly a million also so overall, a 140 to 150 basis points negative mix in the quarter. So we think that the rest outside of that he's a pretty sustainable.
Perfect. Thank you.
Thanks, Joe.
Your next question is from Andrew <unk> with Bank of America.
Hey, guys good morning.
Good morning Andrea.
As I said, all a great quarter.
Just a question on well on Capex I think I sort of commented that you don't expect.
Pick up on of all the Capex I think Emerson highlighted improvement.
You know potential improvement on second half I think closer.
Ah is a difference in the mix that you are more tied to production versus automation.
Are you just being conservative just wanted to try to understand why you're being somewhat more conservative relative to peers. Thank you.
Thank you Andrew So let me, let me share with you a couple other Dallas a cap on up data data for you.
First of all when you look at the oil and gas for ITT, probably than it will be less than 10% overall.
Now when you look specifically in AP and we look at the order is in AP.
Q1 in the quarter you have the orders of our oil and gas that was the only sector, where which was down.
The quarter after a year over year was down roughly 30%, whereas chemical and general industrial where we're up so what are what we see.
Some improvements because when you look at this sequentially then you will see that both general industrial chemical and oil and gas orders that are up sequentially, but what our view is that we really start to seen most of the projects actually moving towards the end of the year.
In the Inc, Q3, and in Q4 and the disease. This is what our customer is telling us in D. C is what what we see and why you've got these projects booking towards the end of the year, you would not be able to see the revenue straight away because you're talking about the 618 24 months of execution.
Got you I'll I'll follow up off line on our <unk>.
And another question.
I apologize if you've sort of answered. This question, but you know the unemployment numbers today people are having difficulties getting our folks back into the workforce.
Can you just comment what are you seeing in terms of being able to quality find qualified labor force out there.
What is it doing.
To labor inflation and you know how are you thinking about sort of mix between labor and capital given this strange labor market. Thank you.
So yeah, so around the world I think for different reasons, our sites are having difficulties somewhat difficulties in finding talent.
So far he doesn't impact it really our operations, but it's a it's a it's pretty difficult and some of it is because there's a tight labor market as you mentioned.
In North America for instance, some of it is because of the Lockdowns in Europe for instance.
So at the moment, we're not seeing a increased inflation from a labor standpoint.
However, we know we always ready to pay a competitive wage so I won't point in time, because that happens will adjust but I think that for the moment, we haven't really been impacted I think regarding your second for the second part of your question regarding our choice says if we go manual or more automation.
We are looking very closely on automation.
Some of our businesses you know Kony business for instance, you know axon business, we're looking at automation.
You know our CCT business also we've made some pretty good capex capex investment for machining centers.
And so as a result, we're always trying to look at the tradeoff between the investment and Emmanuel Emmanuel and costs coming from manual operations, and and when and where and so far we've been able to make some pretty good to have some pretty good benefits because of that.
Thanks for everybody shows I, just had credit quarter I'm sure. The team worked extraordinarily hard churches.
Thanks, Andrew Andrew.
We have time for one final question. Your last question comes from Bryan Blair with Oppenheimer.
Hey, Bryan. Thanks, Thanks, Good morning, guys.
Hi, Bryan I was hoping you could.
For a little more color on friction OEM share gains and how we should think about.
The cadence of your outperformance throughout the year.
Kind of assuming coming into 2021 based on.
The huge outgrowth that you had to kick off 2020 that outperformance would be back half weighted so 500 basis points outperformance was not on the radar for me.
It sounds like your confidence in sustained out performance going forward.
As you always are.
But just curious how we should think about that quarter by quarter or first half for second half. However, you could frame them.
So Bryan it's very difficult to look at our performance quarter by quarter now it was true in it was difficult in 2020, because it was a very volatile environment because of COVID-19. When you look at 2021 hour for the volatility will be different will be reduced.
But there will still be quite a lot of volatility it will still be quite bumpy because of the strain in the supply chain and different Oems that have been impacted differently in different regions. So you really need to stay close to your cost him into the OEM to the G. M. Two levels Wagner and did they still.
Mandates and align your production schedules to them be superfast Super agile and flexible and deliver on time. So do not look on a quarterly by quarterly basis is that because that would be very dangerous. It would be a bumpy ride with a lot of volatility one thing I can tell you is that we will continue to outperform.
For him to senior level on what we have done in the past for nine years.
Okay I appreciate the color there.
And a follow up on your intensified M&A focus commented on priorities across platforms. Your messaging has been pretty consistent there.
I was wondering if you would.
If you're willing to share if there has been a notable increase in your pipeline over the last few months on weather.
The increasing optimism on 2020 to being more of a normalized year is leading to more constructive conversations.
And I guess on the same at least for U S companies weather.
The likely changes in tax code have.
Pulled forward any conversations.
Okay. So maybe let me address the M&A and maybe a man where you can talk about the tax in terms of I absolutely. There has been an increase there are many.
Many more discussion on the M&A.
We have reestablish a regular cadence and regular meetings within 90 to review you know what is in the pipeline in each other businesses.
And just in the last couple of months that you know we at quarter I've been involved in several conversations with a couple of businesses that on the on what is in the pipeline. So that's absolutely the case, yeah and Bryan in terms of the rest of your question I think for US we are really focused on the quality of the businesses.
And then if there is a tax impact. This is just a side benefit for us we want really to make sure that we have targets that are complementary to our existing businesses strengthening those businesses and as such we've been increasing the rotation of the things that we look at AR and AR and we really have that as Luca was saying that Inc.
Hence if I'd focus on M&A.
We have restarted that yes.
Okay. All makes sense, thanks again guys.
Thanks, Bryan Thanks Bryan.
At this time I would like to turn it back over to management for closing remarks.
We'd like to thank everyone for joining us today, and we'll talk to you soon have a great weekend and happy mother's day.
Thank you that does conclude today's conference call. Please connect disconnect. Your lines at this time and have a wonderful day.
Yeah.