Q2 2021 ITT Inc Earnings Call
Welcome to Itt's second quarter 2021 earnings Conference call. Joining me here. This morning are Luca Savi, Itt's, Chief Executive Officer, and President and Emmanuel Cabre Chief Financial Officer.
Call will cover Itt's financial results for the 3 months period, ending July 3rd <unk> announced yesterday evening.
Today's remarks may contain forward looking statements, including comments relating to company performance strategic priorities business mix market conditions and the effects of COVID-19 on ITT, which are subject to certain risks and uncertainties. These statements are not guarantees of future performance or events and are based on management's current expectations actual results may vary.
Materially due to among other items. The factors described in our 2020 annual report on form 10-K, and other recent SEC filings ITT is not under any and expressly disclaims any obligation to update forward looking statements, whether as a result of new information future events or otherwise.
Except where otherwise noted the second quarter results. We present this morning will be compared to the second quarter of prior year and based on non-GAAP financial measures.
These adjusted results.
Excluding certain non operating and nonrecurring items, including but not limited to <unk> related charges restructuring asset impairment acquisition related items and certain tax items.
Adjustments in the quarter and expected for the full year 2021 are detailed along with a reconciliation of such measures to the most comparable GAAP figures in our press release and presentation, both of which are available on our website.
Before we begin I'll provide a brief overview of our second quarter GAAP results.
Revenue increased 34% to $692 million segment operating income increased 206% to $114 million, which equates to segment operating margin of 16, 5%.
Reported earnings per share decreased 15% to 45, driven primarily by a $28 million after tax loss on the divestiture of Intelco management LLC, formerly a wholly owned subsidiary that holds the legacy asbestos liabilities and related insurance assets as well as prior year income tax benefits and increased <unk>.
And environmental costs.
With that it's my pleasure to turn the call over to Luca who will begin on slide number 3.
Thank you Mark and good morning.
I want to first thank you our stakeholders for your continued support and investment in ITT.
I also want to thank the nearly 10000 employees at ITT <unk>.
It continued to demonstrate the resilience that makes ITT, a trusted partner for our customers and the communities in which we operate.
We are all focused on ensuring ITT delivers on its commitments.
Our after hour was sticking care of each other our families and our customers.
This has been a pivotal quarter for ITT.
On July 1st we divested the subsidiary that Oleds.
All of our legacy asbestos liabilities to a portfolio company of Warburg Pincus.
Importantly, ITT is indemnified from any further responsibility for all pending and future legacy asbestos claims.
This transaction followed the successful transfer of our U S pension liability in October 2020.
And will allow us to focus more on growing the core business organically and through acquisitions.
We are now beginning the next chapter in <unk> history.
On the operational front over the past few months I've had the privilege of meeting our teams in person at our sites in Italy, California, the Netherlands and the northeast.
I continue to be encouraged by the progress we are making by the opportunities that remain and by the commitment and the passion I see from our workforce.
Before reviewing our results, let me talk a little bit about itt's sustainability efforts.
In the coming weeks, we will be releasing our 2021 sustainability report supplement.
Which we show our commitment to environmental social and governance initiatives.
It is clear that why do we have made significant progress in 2020, despite the impact of the pandemic. There is still more that we can do.
Our employees' efforts during the pandemic to take care of each other and our customers have strengthened our resolve to continuously improve our ESG practices.
And this is what we will do.
Some of our accomplishments, which you can soon read about it in the supplement include a 25% reduction in greenhouse gas emissions.
And a 25% reduction in workplace incidents.
Further we maintain an a rating for our ESG profile as measured by MSCI.
Nicely there in global ESG assessment.
Now, let's review our results for the second quarter, beginning with sales.
Friction.
<unk> to outperform global auto production growth in fact, the outperformance we drove this quarter was significantly above our historical average.
The auto businesses in empty grew organic revenue nearly 80% and mt's revenue exceeded pre COVID-19 levels from 2019 once again this quarter.
More importantly, we continue to win key awards in both conventional vehicles and a new electric vehicle platforms, which will fuel future outperformance.
This quarter, we were awarded content on tenant new electric vehicle platforms, 7 of which were in China and 2 on key strategic platforms in the growing North American market.
We also continue to differentiate ourselves from the competition in.
In July frictions artist ceramic <unk> sold in the aftermarket were ranked the highest among 5 competitors. According to <unk> Europe's largest motoring association based in Germany.
Our brake pads have been our knowledge for the outstanding safety and durability and received the best in class ratings for wear resistance and braking distance.
This is a testament to the supplier excellence and innovation of the friction team.
Let's go back to the quarter.
Building on the first quarter momentum our connectors business in connect and control technologies grew sales sales by 17% organically after 8% organic in Q1, we.
We saw continued strength in the North American distribution channel.
Sequentially industrial connectors in Q2 grew 6% versus Q1 due to distribution strength worldwide.
We also drove 8% organic revenue growth in industrial process.
Driven by strong pump project deliveries, which were up 52% organically in the quarter due to strength in the chemical and oil and gas markets. We achieved this by remaining focused on serving our customers and ensuring with commission that projects on time despite significant so.
<unk> chain disruptions.
Turning to orders.
Energized by the growth our commercial teams generated this quarter across.
All 3 segments.
In total we drove 47% organic orders growth across ITT.
Order levels, surpassing 2019 positioning as well for the second half of the year and for 2022.
First motion technologies grew orders by 76% organically driven mainly by OTA and we also saw a strong performance in <unk>, which grew over 20% organically.
Second in industrial process orders were up 18% organically and up 7% sequentially driven by continued recovery in our short cycle business, where orders grew 24% across parts Bobs and service.
Our pump project orders were relatively flat year over year. However, we are increasingly confident that project activity in the funnel is strengthening and we expect to successfully leverage this momentum in the second half.
Finally in CCT orders were up 47% organically driven largely by industrial connectors and aerospace components.
As we mentioned last quarter, we saw some positive signs in commercial aerospace, which we expected would start to pick up in Q2.
And we're seeing that momentum in orders today.
From a profitability perspective, despite increasing pressure from commodity costs and supply chain disruptions, we delivered nearly 400 basis points of adjusted segment margin expansion.
With a triple digit margin expansion in each segment.
This was a result of the incredible growth in volume as I mentioned earlier and the team's ability to generate productivity net of inflation was successfully navigated challenging market conditions.
This was aided in part by the actions we took in 2020 to reduce our structural cost.
As a result of the revenue growth and margin expansion ITT delivered adjusted earnings per share of 94 cents grew.
Growing 65% and surpassing our pre COVID-19 adjusted EPS levels in Q2.2019.
Given the strong first outperformance and our confidence in ITT ability to outperform we are again raising our outlook for 2021, we.
We now anticipate organic revenue growth would be 8% to 10% for the year, a 300 basis point increase on both the low and high end of our already increased guidance from the first quarter.
These will be driven by the strength in friction and short cycle orders growth in both IP and CCT.
The increased sales volume and strong productivity expected in 2021 will generate adjusted earnings per share in the range of $3.90.
$2.4 and 5 <unk> at the high end, which equates to 22% to 27% growth versus prior year.
This is an 8% improvement at the midpoint after a 30% increase after the first quarter.
This puts ITT on pace to comfortably surpass 2019, adjusted EPS, despite significant inflationary pressure.
Let's turn to slide 4 to talk further about the second quarter results.
From a topline perspective motion technologies delivered a solid performance driven by strong growth in the OEM business and continued share gains despite the global chip shortage and supply chain disruptions.
Our friction and Walgreen OE businesses grew over 60 per site organically.
As they always do this quarter I traveled to a number of our facilities, including a world class fiction plant in <unk>, Italy.
Here I saw the teams engineering expertise on full display which will enable us to continue winning an outsized share of global EV platforms.
Our continued investment in automation in all our plants and hour by hour management allows us to continually meet customer demand despite constantly changing production schedules.
And we continue to invest in and develop new technologies to address the needs of the new and more environmentally friendly automotive braking system.
In CCT, we drove nearly 19% organic revenue growth in industrial connectors.
Mainly through distribution continuing the momentum we saw in the first quarter.
Demand in commercial aerospace is increasing.
<unk> by the nearly 70% growth in aerospace orders.
The book to Bill in Cecity was an impressive 1.18 for the quarter, which positions us well for the future.
Now moving to operating margins.
Our focus on operational excellence produced 250 basis points of expansion in Q2 at the ITT level.
And 390 basis points at the segment level.
By segment empty grew margins 660 basis points connect and control to 130 basis points with an incremental margin of 37%.
And industrial process grew margin 100 basis points to nearly 15% once again.
The strong.
Performance was a combination of higher sales volume commercial actions and productivity offset by raw material inflation and unfavorable mix given the growth in pump projects and continued investments for growth, which are critical to sustained itt's outperformance.
Regarding raw materials inflation the impact this quarter was approximately 240 basis points, which was higher than what we expected and what we are deploying pricing actions with our customers based on current prices from material purchases for the remainder of 2021 will.
Expect this phenomenon, we will have a significant impact in the second half.
Free cash flow for the quarter was impacted by the sale of our legacy asbestos liabilities.
Excluding these onetime non recurring item adjusted free cash flow was $131 million.
The decline compared to prior year was the result of higher operating income generation in the segments that was more than offset by strategic investments in working capital to support growing customer demand.
Wrapping up.
ITT has around the world delivered another outstanding performance in Q2.
Organic growth was strong across all 3 segments.
And we converted a higher sales at good margins.
We generated over 400 basis points of productivity, while investing for future growth and successfully navigated challenging market conditions.
And our nearly 50% organic growth in orders position ITT for a strong second half.
Let me now turn the call over to Emmanuel on slide 5 to discuss the segment performance in more detail.
Thank you Luca and good morning motion technologies Q2 organic revenue growth of 64% was primarily driven by strength in auto as.
As you know the second quarter of last year was down significantly due to the pandemic. However, friction continued to outperform global auto production.
A very wide margin.
And from an operating standpoint, our OE business performed very well with 99 plus on time.
10% plus on time performance.
This was a key reason mt's revenue eclipsed pre COVID-19 levels in the second quarter of 2019 by 8%.
The strong orders growth in <unk>. This quarter was a combination of both auto and rail where we continued to gain share.
Segment margin expanded 660 basis points versus prior year to 18, 8%, mainly due to higher volume and productivity offset by the impact of higher raw material costs for steel.
Tin and copper.
As we indicated last year Mt's margins declined sequentially in the second quarter, given the increasing commodities pressure.
However, and key delivered almost 30% incremental margin in spite of these headwinds.
Wolverine sales growth was over 60% driven by OE shifts in North America, and Europe and in ceilings.
While kony grew by double digits organically.
Margins in Wolverine, Kony, and axon were all double digits in the quarter.
For industrial process revenue was up 8% organically.
This was driven partially by easy prior year comparison stemming from steep declines in project shipments, which resulted in over 50% revenue growth this quarter.
We also saw minor short cycle declines driven by lower service sales and flat growth in baseline pumps due to the materials shortage.
As we have indicated given the order trends, we see across IP. We continue to expect the short cycle businesses to accelerate in the second half.
From an end market perspective growth was spread across general industrial volume.
And gas and chemical markets.
Turning to orders.
IP grew 18% organically and 7% sequentially due to the short cycle, namely parts valves and service.
Our daily order rates continued to be strong into the third quarter orders in all product categories, except baseline pumps were above 2019 levels.
And the month of June was our largest month of project orders since 2015.
We believe this positions us well for the remainder of 2021.
Ip's margin expanded 100 basis points to 14, 7% with an incremental margin of 24%.
This was partially impacted by unfavorable mix given the higher proportion of project.
Versus short cycle sales.
We expect the mix to improve from here on a short cycle continues to recover.
Lastly in connect and control technologies, we continued we turned the corner with incremental margins of 37% this quarter.
This was the result of continued volume leverage and strong productivity, despite inflationary headwinds and continued declines in commercial aerospace.
While OE production continues to improve our largest aerospace customers are managing through elevated inventory levels on key platforms, which will delay a significant recovery in aero components demand until 2022.
Similar to the rest of ITT orders growth was incredibly strong driven by our connector business.
With continued north American distribution strength and growth in aerospace OE and aftermarket.
The book to Bill was largely above 1 and backlog was up 16% compared to year end, 2020, which again position us well.
Heading into 2022.
Before we move on just a few additional comments on EPS for the quarter.
As you can see on the Q2 adjusted EPS walk on Slide 11 day.
Year over year comparisons were negatively impacted by prior year benefits related to environmental temporary cost actions and cares Act credits.
Partially offsetting these items was a roughly <unk> <unk> benefit from foreign currency consistent with our outlook and a roughly <unk> <unk> benefit from a lower than planned effective tax rate of 21.5 per cent.
Let's turn to slide 6 to discuss our asbestos liability sale further.
On July 1.
GT divested 100% of its equity of a subsidiary that holds legacy asbestos liabilities and related insurance assets to <unk> a portfolio company of Warburg Pincus.
At closing ITT contributed $398 million in cash and <unk> contributed $60 million in cash to in telco.
As a result of the transaction.
Peter you removed or.
<unk> obligations.
Related insurance assets and associated deferred tax assets from our consolidated balance sheet.
As of the second quarter.
The benefits of this transaction includes the indemnification for all legacy asbestos liabilities.
And stronger free cash flow generation in the absence of asbestos related payments that we previously estimated at $20 million to $30 million per year on average over the next 10 years prior to the divestiture.
Additionally, the transaction frees up management time and resources to focus more on growing the core business and executing other more strategic initiatives, including ESG and M&A.
Coupled with our successful U S pension plant transfer executed in October 2020.
We are well positioned to grow with a flexible balance sheet and without the risk and uncertainty of managing these legacy liabilities.
Let's now turn to slide 7 to discuss our end markets and the updates to our full year outlook.
As we saw in frictions results.
Global auto production is increasing albeit constrained by the global semiconductor shortage shortage, which is causing inventory levels to remain low.
And while we expect demand will remain strong throughout 2021, the impact of higher raw material prices will weigh on margins and adjusted EPS during the second half.
The growth we're seeing in IP orders is mainly in short cycle on projects. However, we continue to expect the large project spend particularly in oil and gas will not fully recover until 2022.
In the meantime, we're seeing continued momentum in.
Weekly run rates in our short cycle businesses in industrial process, and connectors, which we believe will drive organic revenue growth to a new range of 8% to 10% for the year.
Our assumption regarding commercial aerospace is that a substantial recovery will not occur until early 2022, given the level of inventory at our largest OE customers how's.
However, we see encouraging signs in orders as production levels continue to increase.
Our outlook for adjusted segment margin remains at approximately 17, 1% at the midpoint.
We expect a pronounced impact from raw material inflation, mainly in motion technologies.
Over our teams are driving commercial actions and additional productivity to minimize the impact.
We're planning for raw materials to remain at these elevated levels throughout 2021.
As you will see on slide 7 our revised guidance assumes the incremental impact from this trend will be <unk>.
At the high end for the remainder of 2021.
Our revised adjusted EPS guidance reflects an 8% improvement at the midpoint of our range.
<unk> 2019 levels and our previous high end.
The net impact of all other items is roughly <unk> <unk> benefit to full year, adjusted EPS, including a slightly lower than planned effective tax rate.
Foreign currency and other items will be a minor benefit compared to our previous guidance and we continue to expect a 1 percentage reduction in the weighted average share count given our share repurchases to date.
Additionally, we are raising our adjusted free cash flow guidance by $5 million at the low and high ends of our previous range to reflect the higher operating income generated in the first half offset by further working capital investments to further to support.
Future growth, especially given the supply chain disruptions, we are experiencing today.
In summary, we are again, raising our outlook for 2021 across self earnings and free cash flow.
And with this raise we now expect to eclipse 2019 levels in terms of adjusted segment margin and adjusted earnings per share.
Let's turn to slide 8 too.
To quickly look at the components of our revised 2021 adjusted EPS guidance.
As you can see the majority of the improvement in adjusted earnings per share is operational in nature.
The higher volumes will likely be partially offset by incremental headwinds from rising raw material costs, which we have already discussed.
The remaining changes to our outlook, our rather immaterial.
Before I turn it back over to Luca I want to share some details on what we're seeing thus far in the third quarter.
From an end market perspective, the trends we saw in the second quarter of remained largely consistent throughout July.
Auto and the short cycle businesses in IP continued to perform well and TCT remains comfortably on path to recovery from both a sales and margin perspective.
On the other hand, our outlook reflects increased commodity pressure and we did not see any near term improvements relate.
Related to the supply chain.
Organic sales growth is expected to be in the mid teens range driven by growth across the portfolio and led by <unk> strong performance.
IP and CCT should both improve to approximately high single digit organic growth driven by short cycle.
Segment margin should be approximately flat sequentially to Q2.
And above prior year, even with the significant raw material headwinds, we anticipate primarily an empty.
This negative impact on <unk> margin.
We will largely be offset by margin improvements in CCT, followed by industrial process.
Despite the margin challenges in Q3, we still expect all 3 businesses to be up over a 100 basis points for the full year, which will eclipse Itt's segment margin for 2019.
The combined impact of higher sales and strong productivity will drive adjusted earnings per share growth in the low to mid teens.
With that let me pass it back to Luca for closing remarks.
Thanks Manuel.
<unk> continues to execute on its strategic priorities to position the company for long term success.
The actions, we took to eliminate our legacy asbestos liabilities will allow our teams to drive better growth in the core and upped our game in capital deployment.
We are now even more laser focus on growing ITT organically and through acquisitions.
While funding high return growth investments, given our capital flexibility and strength and cash flow profile.
Yes.
We continue to outperform across all our businesses and we see encouraging signs in our orders growth, which will position us well for the remainder of 2021.
2022.
And beyond.
And the segments continued to drive strong cash generation through increased income and effective working capital management.
The second half of 2021 will be challenging given the supply chain disruptions commodities pressure and emergence of COVID-19 variance around the world.
However, I'm confident in ITT <unk> ability to navigate these headwinds effectively and drive growth and profitability, while leveraging our optimized cost structure and doing it all in a safe sustainable and efficient manner.
As ever it has been my pleasure speaking with you. All this morning, and we will happily take your questions now Crystal. Please open the line for Q&A.
Thank you the floor is now open for questions. At this time, if you have a question or comment. Please press star 1 on your Touchtone phone.
If for any reason you have your question has been answered you may remove yourself from the queue by pressing the pound key.
We do ask that while you ask your question you pick up your handset to provide optimal sound quality.
Please limit your questions to 1 question and 1 follow up.
Thank you.
Our first question is coming from Jeff Hammond with Keybanc capital markets.
Hey, good morning, guys. Good morning, guys.
Hey, good morning, guys.
Good morning, Jeff So just wanted to.
Get a better feel for sequential margins in the segments. It sounds like empty maybe is under a little bit more pressure and then you get mixed benefits on the other 2 segments is that the right way to think about it.
Yeah.
So so MTS MTS is being <unk>.
Is being impacted by raw materials, and I think Thats. If you look at between Q1 and what's what happened in Q2, there's definitely the impact of those raw materials inflation into Q2, and this is going to go in accelerating in Q3 and in Q4 also.
And the difference where we're going to see in the second half as we going to see a ramp up of all the pricing and productivity actions that we're going to drive to compensate for those.
Negative impacts.
Okay, and then just on the price and where are you specifically pushing price.
So.
Good morning, when you look at price that we have a positive price impact in <unk>.
In IP and CCT. This is where we have the distribution and disease where is.
Always been done also traditionally a positive sign that we've seen in the in Q2 is also price as be neutral for motion technologies, and you know the dynamic and volatile and this is the first time ever the pricing is actually be neutral in motion technologies now we of course, we need to work harder.
To negotiate to stay at the table and negotiate with all our OEM customers as the material cost base now is completely different level. So we are we are expecting to get pricing also at empty in the second half in day of the year.
Okay, Great and then just last 1.
If you look at the 3 point raise in organic growth would you would you say thats fairly balanced between the segments or is that a heavier lean towards empty.
I would say that I think Jeff.
Go ahead please.
I think Jeff it is.
Pretty balanced across all segments, all segments are growing versus our previous expectations and this is really good news.
As we discussed short cycle has been really strong.
In terms of orders for IP and CCT. So I think that we're going to benefit from that and then we continue to see really good momentum from an OTO standpoint, even though.
Volumes have been impacted by VI chip shortage.
And if I can add a point to that 1 Geoff Andy Theres not only you see it in the value on the revenue, but if you look forward you see in the orders. So the orders are very good on the on the short cycle. We haven't signed on the project as well we had good sign on the connectors of Wiglet signed also now in the Aero components and of course rail and auto. So these orders we would feed it.
Okay, Great I appreciate it guys.
Thanks, Jeff Thank you Jeff.
Your next question is from Andrew <unk> with Bank of America.
Yes, good morning.
Hey, Andrea good morning, Andrew.
Just a bigger pick a bigger picture question you guys have been very good at sort of managing the downturn managing the upturn, but given the inflationary pressures both on labor and inputs.
Are you guys changing sort of a way youre thinking about approach to costs supply chain processes and a more structural way do you think what's happening is more permanent in nature and if so.
How are you guys adjusting the organization because they're so far has been superb.
Okay. So <unk>.
Let me tell you a little bit about that.
From a labor from an input perspective, so when you look at from a labor perspective, there is inflation that we have seen and but we haven't really.
We are not facing really any difficulties in terms of our recruiting and finding the labor for our factories over our businesses. So that on the labor front. When you look at our inflation from material point of view, we are really looking at the raw materials. The major impact is an empty youre really looking at day.
Tina.
Copper and steel.
<unk>.
There is limited thing that you can do on this 0.1 thing that I would say is it radically changing Andrew would be 1 you're working on your product. As you know you are moving we're moving all of our brake pads to copper free. So eventually we will be cut their independent and that would be it would be.
A great feeling I can tell you that.
And also the other thing is that changing the mindset and ensuring that also in friction in motion technologies. We go to the table and we work with our Oems and our customers really to get price, we must get price in this condition are indeed is a fundamental change.
Did I answer your question Andrew.
Sorry to keep hitting the I haven't learned how to use the mute button.
Yes.
The question was are you, making any adjustments to your supply chain and the view of sort of supply chain disruptions, but it actually sounds you guys are executing quite well right is that a fair takeaway.
Absolutely right of course as you can imagine not only we are working with our commercial team on the sales front with our Oems, but our supply chain team is working hour by hour 4 of course to find a new source. It but today is particularly in terms of securing the supply because of all these <unk>.
Option that we have on the supply chain being 1 part or being with 1 supplier. So it's more the way day, you're working which is hour by hour as we said in the prepared remarks, because this is exactly what's happening right now.
Got you and just a little follow up you said something about.
Aero industry, having inventory and I am just trying to understand because I think some companies highlighted the fact that on defense side. There was some pull forward of activity last year as Joe Decapped supply chain sort of working and there's bad downturn, but we've also heard.
Some companies talk about the fact that air framers have preordered some components last year to also sort of keep the supply chain whatsoever.
Is that what you were referring to in terms of inventory at your customers. Thank you.
Yes, so for us as we said.
Our aero customers.
Flushed with inventory and.
And while they've been consuming some of the inventory they told us.
Earlier this quarter in April that's that so much inventory that they werent intending to.
Orders some of our components until until next year.
Actually need them until 2022.
So for us aerospace for the moment is.
Our customers are full with inventory, we don't expect really that to change anytime soon on a defense standpoint.
I would say that orders have been pretty good.
And they've been not only good year over year, but they've been also good sequentially growing sequentially Rowan on several high profile programs and so we expect for the year to be.
Mid single digits up in terms of orders.
And revenue should also be b okay.
Your next question comes from the line of Joe Giordano with Cowen.
Hi, Joe Good morning.
Hey, Joe how are you.
Yes.
Yes.
Just curious Jason.
Inc.
Thanks.
Please go ahead.
What was.
Yes.
Hey, Joe you are cutting in an average 1 try 1 more time and if that will come back to you.
Better now.
Yes go ahead.
On the expenses.
Thank you.
I have already covered this.
Good day longer.
Mike.
The online business right now.
Joe we're getting like every third word.
Let's move on and then just paying us when Youre back and will come back to your question. When you have a better connection Krystal can you move to the next question. Please yes, Sir your next.
Question comes from Scott Davis with Melius research.
Hi, Scott Good morning, guys.
Hey, guys good morning.
Lan lineup.
At school.
Skies.
[laughter].
How to use a cell phone anyways.
I know.
Sorry presenters we have lost him. Your next question comes from the line of led by strength with Citigroup.
Good morning, guys Hey.
Hey, Bryan asked here.
<unk> crossed here.
Lasts for.
A question or 2.
We can't really count on <unk>. Please.
So nice quarter, guys, obviously and.
Particularly on the order side. So you've now had I think 700 million plus in orders each of the past 2 quarters.
So can you talk about sort of your confidence in sustaining these stronger order trends and just given all of the supply chain and logistics challenges throughout the industrial economy are you seeing any pull forward or extra or ordering from customers looking just to secure supply or do you.
We think this is really sort of end market levels of demand that youre seeing on the order side.
Okay. Thank you for that too.
Answer the question straight and then give you some color no. This is this is the strength of the demand in these the strength of the performance and the way that we work with our customers. So what we have seen in terms of trends in Q1 have been confirmed in Q2 across all the businesses.
We saw it in rail.
Orders grew sequentially year over year and it happened again in Q2, we saw in auto with the award across the <unk>, The New awards in Europe, and China, North America, and the New awards in the electric vehicles. We saw it of course in connect those we have seen it as a matter of fact, if you look at the distribution.
Connectors over there in Q2 at roughly $46 million.
This is the highest.
On the record for ITT.
And the inventory level at our distributions stays low.
And then if we look at the short cycle for IP.
Very solid and robust Q2 month after month, so let me add to that how we saw in the month of July July is really confirming all of these trends so.
Is not a buildup on the inventory, we don't see the inventory buildup on the in the auto we don't see the inventory buildup on the connectors. So a strength of the demand a strength of our performance.
And with that let me just add a couple of color on the.
A couple of data on the customer inventory for auto specifically.
So inventory.
Customers are very low and this is especially true for North America, where you.
Inventories around 40 days, which is much lower than prior year much lower than prior quarter and is not expected really to recover from.
The full year on the account of the chip shortage. So not only we are seeing strong orders, but there is strong customer demand pull.
From.
<unk>, specifically and that bodes well for the future.
Yeah.
Okay.
That's really helpful.
And then just digging in.
Specifically on the <unk>.
Side of the business.
Can you talk a little more about sort of what youre seeing on the project side, there, obviously very strong shipments in the quarter.
Sort of how long you have visibility to sort of the strong project shipments.
Then what are you seeing in terms of new project activity are you starting to see.
Activity ramp for.
Quarter on newer projects going forward.
So when we look at these projects.
Add that these project usually have.
You execute this project from evergreen between 6 months to 2 or 3 years or.
So if I think about our largest project.
<unk> was for the Angola lasting more than free so we have good visibility on the project for the next year a couple of years now.
1 thing, which is interesting, though if you look at the backlog the backlog for IP, which used with rewards, 60% project and 40% share cycle as swap today. The short cycle backlog is 55% of the total wide project is 45%.
And the short cycle backlog that we have today. He is the highest since 2015.
So now going to the second part of your question, which is how do we feel about the projects.
We said last quarter that were warming up and they did they warmed up.
If I look at the orders are for projects in June It was a very strong month and July was a strong month as well to build on that another dots for you is the funnel there.
Funnel of opportunities and we're talking about the funnel of projects continued to improve sequentially Q2 over Q1 was up 11% and when top 2 percentage point in the month of that in the month of <unk>.
July.
Year over year, the funnel is still down.
If you take oil and gas out.
The funnel year over year is up 22% and is up 37% sequentially versus Q1. All of these are good that's good sign that make us think that the projects will re surge towards the end of this year.
That's really helpful color guys. Thanks, very much thanks.
Thanks, Bryan Thank you for that.
Once again in order to ask a question. Please press star 1 on your Touchtone phones.
Your next question comes from the line of Joe Ritchie with Goldman Sachs.
Thanks, Good morning, everybody.
Hey, Jeff Good morning, Joe.
So that landline comment with classic hopefully.
Driving right now, but I think I heard Joe's earlier question I'm going to add to it as they think about the asbestos why the impetus I think.
From a timing standpoint with now.
My question following on on that is really.
When you think about like what that opens up from a balance sheet perspective for M&A I'd be curious how youre thinking about.
Prior to date and $1.
To grow Inorganically.
Sure sure Joe Thank you so <unk>.
Let me frame a little bit.
Briefly our capital deployment during the last couple of years. If you look at the last couple of years, we continue to invest organically in our businesses. We made 2 acquisitions in 2019, we increased our dividend consistently have more aggressively in the last couple of years, we repurchased 73 million.
In 2020 copied year $50 million of share repurchase in 2021, we transferred the U S pension liability and most importantly, we transferred on July 1st all our pending and future legacy vessels obligation.
Obviously as you can imagine the last period, we were on a blackout period. So.
This is just to tell you how we saw the capital deployment. It was really strategic to do all of these steps and now we can really up our game, even more focusing both on the organic but on the M&A with much more flexibility.
Our pipeline is good while we were in blackout and previously we were really working hard to build the pipeline and I can tell you is good and presents opportunities across all the 3 businesses.
1 thing that will keep on later weighted though Joe is that we will remain very diligent and very rigorous both strategically and financially financially that doesn't need to add value strategically and financially.
Got it that's helpful. Luca and then maybe my follow on you guys continued to just.
Keep us updated every quarter on all your EV platform when it seems like Youre getting some pretty good share, particularly in China I'd be curious at this point like how big is your is your <unk>.
<unk> backlog.
And how should we be thinking about that.
The percentage of.
Of what we can see coming through from a growth standpoint in coming years.
Sure.
Thanks, Joe.
When it comes to EV.
The story today is still very much in awards success story.
And the EV volumes that are still very low.
We are projecting the net.
Our market share.
<unk> to be substantially higher than our current market share in IC in 2023, so pretty early.
Now these will not necessarily be very meaningful because also in 2023 day EV vehicles.
<unk> that a big number but you can imagine as EV adoption accelerates in the next day 8.9 years from 2023 to 2030, we will benefit tremendously from.
Already starting high market share in EV.
So I.
I don't know if these helps you to frame it.
Yes, that's perfect. Thank you have a great weekend.
Thank you. Thank you.
We were able to reconnect and we have Scott Davis with Melius research.
Yes, I guess my.
Landline comment was a little premature.
[laughter].
Maybe I'll try to cell phone next time to see if that works.
No next time next time, you will be in the room with Us Scott.
I think thats, probably the safer bet I will just drive up to your office, it's not that far away.
I had asked about on time deliveries and I have no idea what have you heard my question or not but you are you just mentioned 99%.
And motion on Hawaii, which is extremely high for the auto side I mean, I don't know anybody that's anywhere close to that.
So far this quarter, but what.
Love to just get some color on where you're at in your other than your other major businesses, even if it's just ballpark.
Sure.
Obviously.
This quarter, we had some impacts due to supply chain issues.
And if you look at the impact of all of the other businesses.
Probably something around.
A little bit more than $10 million.
That we werent able to ship because we we didn't have the raw materials that was needed a lot of it is in Wolverine and Thats us.
Specifically for steel.
And then some of it is in IP and also CCT.
So overall not.
A very large impact and we're working really hard with our suppliers to make sure that we correct. This and arrived at the end of the year with a much better picture.
And if I can build a couple of points that can build on that 1 Scott first of all Oh.
All of these that backlog is monitored so we are looking at the aging to ensure that these disruption doesn't impact the customer a lot. That's the first point and the second point that it was that I want to recognize all the friction plants because the performance in the OE was 99% plus in Biogen, Inc.
Family in Australia in Wuxi, and <unk> all of them and the supply chain did a terrific job to ensure 99% plus on time delivery.
Okay, that's really helpful.
And then just switching over years to the EV side, because I think those questions are fairly relevant.
You've had.
Lot of cars on the road, but you've got enough cars on the road.
See your performance of your brakes.
And seeing how that aftermarket is evolving is it evolving as you kind of expected clearly I think break usage is a little bit less in the navy, but it breaks a little different so.
Help us understand at least what what's your thinking on now that you've had some.
Some time in this space here, what youre thinking about the aftermarket potential sure sure.
Still a little bit too early.
Scott the 2.2 to draw a conclusion because different Oems.
I really adopting different approach there are Oems that are using these brake pads exactly in that in the same in the same way there are different Oems that are really reducing the thickness of the path and therefore for them the aftermarket probably will continue to persist.
It's still probably too early to assess is still at the embryonic stage has not been matured enough to know exactly how it's going to pan out.
Okay.
I'll keep asking.
Sure I appreciate it thanks, Scott Thanks, Scott.
Your next question comes from Mike Halloran with Baird.
Hey, good morning, everyone.
Good morning, Mike Mike So so lot of moving pieces on the motion side.
Typically on the friction side I'm looking for maybe a little longer term view on how you think this shakes out in the next 12 to 18 months so inventory per your comments is low.
A lot of inflation pricing actions, which is seems like a little bit of a change versus history, and how frequently are going and trying to get those.
Supply chain challenges are pretty pretty high.
Are you going to see push outs on these numerous project awards.
Platform Awards that you keep getting how does that timeframe work out how do you think this whole thing kind of cadence is out if you take a little longer lens in just the next 6 months.
Okay.
Thank you Scott.
Thank you Mike.
When youre talking about day supply chain disruption Micah.
We foresee that to continue for the foreseeable future. So this is exactly the state of mind and the mindset that we have in our plan in our supply chain. So the management hour by hour that I was talking about will continue for a while.
Therefore, we it is important to our supply chain to keep on working with our supplier closely and also find new supplier to reduce some of these disruptions on the supply chain disruption.
We will lap from from.
From a platform that we won in terms of delays et cetera, if I look at the impact so far.
The SRP delays.
That we've seen there has been some.
Net debt to be honest as being immaterial wasn't that different regions have acted differently, but overall worldwide were talking a knee impact of a delay of roughly less than net $5 million for a year so less than that.
Less than that so I would say is a rather rather immaterial.
I think that what we have seen is that the Oems have shifted net production to more profitable.
Those to more profitable platforms and in some region like in North America. This probably as benefited US and this is also why our outperformance of the market in North America, it's been very very significant in this quarter.
Thanks for that and then just from the connector side, maybe just a little bit.
Thoughts on sustainability underlying trends here, the short cycle pieces seem like Theyre doing well.
How much of that is just kind of a catch up from a bottom versus what you think of as sustainable demand as we sit here across those specific end markets.
When they talk to.
Some of our distributors some of them.
Our rep count so some of it with the reps that in connectors.
Is really market demand and this is confirmed by the lower level of inventory that we see in all our distributors on the connectors the strength of the connect does come on the defense on the on the industrial and we start seeing moving also in the aerospace that in our in the in Q2.
So he's really it's really demand.
The inventory level, Adam La auto connectors.
It is not a concern at all today.
Thank you Luca I appreciate it.
Thank you Mike.
Our next question comes from the line of Damian Karas with UBS.
Hey, good morning, everyone.
Hey, David how are you.
Yeah.
Doing well thanks.
So I wanted to ask you a follow up question on friction.
We continue to see some really solid outperformance there.
But obviously.
The market growth is quite high right now.
Given.
Where we're coming off versus last year just wondering.
Based on from your comments on EV.
And where you see the business as.
The market growth rate for auto OE starts to norm.
From a line.
We should be thinking about for friction versus.
Versus the market.
So.
So damian.
Is that is true, but don't forget that what we're talking always it is a business here that is outperforming the market. So is true that the market probably is going to grow.
In 2021.
Between 8 and 10% depending on who you're talking to.
But if we look just at the market I personally see some good tailwind in the market because the production today is not satisfying the demand that is out there and you see it in talking to our customers and.
Trying to buy a car today police says if you go out that <unk>, even to the dealers, but then building on this 1 as I said, we've always outperformed every single year for the last 90 at roughly 900 basis points every year.
Today in 2021, we will outperform the market EBIT stronger.
And because of these outperformance Damian we expect to surpass 2019 levels. These EBITDA at friction.
The market will probably hit 2019 level in 2023.
<unk> is always the game of outperformance of the market in the down and in the App.
Okay. That's helpful.
And then just a follow up on the raw materials inflation that you guys are seeing just wondering if you know.
As the copper and steel.
These products that you alluded to where you are feeling that.
Should they start subsiding.
Next year would you see kind of a full offset on that or.
I think it's mostly an M key should we kind of view that as a sunk cost.
Okay.
Yeah. So in terms of our raw materials for the moment there is no sign of abating.
The copper copper is Sutton out.
As the higher at the highest level.
But steel is really very much on an accelerating path and so for us the.
The game is to go back to customers and to.
To really negotiate price recovery to offset those.
Those negative impacts and that's what we're going to do and that's what we're doing also already some success in it.
The second quarter.
Okay got it appreciate it thanks, guys best of luck.
Thanks, Damien Thanks Damian.
Your next question comes from the line of Joe Giordano with Cowen.
Hey, guys can you hear me better now.
We can hear you great. Thank.
Thank you.
So just on the raw materials.
I'm I'm curious like from a bigger picture standpoint.
As you look at the market and you think about the future like when do you start thinking. Okay. This is something thats going to temporary increase that kind of goes back down cyclically or maybe we should think about redesigning certain of our products to use different types of materials or be lighter I know you guys are kind of going through that process and IP more broadly but.
Whereas like that threshold, where you begin to think about raw material costs on a more structural basis, rather than kind of cyclical changes.
Okay. So this is a process that is already going on across all the businesses that Joe.
Of course, you mentioned IP <unk>, the BB to BB to pumps, but all the other family of pumps that we are redesigning in order to reduce metal. Okay. And this is something that is happening in IP, but this has happened for the last 10 years I E motion technologies, So think about all the copper free.
Prepays that we are producing now there were zero a few years ago now I would say probably between 35% to 45% of our production is that we doubt that without copper and reducing our cup independents and these we accelerate and we are constantly reviewing.
Our recipes so that the 4 reasons, we are going to be even less relying on <unk> because <unk> is a not a scarce resource whose price will keep on going up. So this is something that has happened constantly on top of course of all the supply chain initiatives that you have.
When you were talking about from a time perspective as Emmanuel said, we don't see the pressure in terms of raw materials inflation.
Inflation debating anytime soon.
Right Okay.
Helpful color. There I think you mentioned that Wolverine Kony and <unk> were all at double digit margins in a quarter, which is good to see.
Whats like a realistic target for businesses like that over like you know a 1.2 year period from here.
So so Joe for US there's no reason why we are not able to bring those 3 businesses in line with where friction is today, that's going to require a lot of work.
We have definitely line of sight, and we're making both the improvement or the investments in terms of our production capability, but also in the way, we manage our existing assets and our existing resources. We've seen some really nice progress, especially in Wolverine that had been impacted very much so by the tariffs.
But we're very confident that we can bring those businesses to the level that friction is at today in the next few years.
Awesome. Thanks, guys. Thanks for let me jump back on.
From Joe Hey, Joe.
Your next question is from Nathan Jones with Stifel.
Good morning, everyone.
Hey, Nathan.
I just wanted to follow up on price cost commentary on in the brake pad business. Historically that business has had a lot of fixed price contracts and also historically auto Oems are not the easiest to renegotiate fixed price contracts with.
I think Luca you noted being price cuts from neutral in the second quarter.
Unexpected can be price cost neutral in the back half on brake pads.
Can you talk about how that's possible given that historical contract structure, how things change there what's the mechanism that you're using to actually generate based pricing improvements given where the contracts have historically been structured.
Yes, Nathan just just a quick.
Just a quick rectification here so in the quarter. What Luca said is that we were we were price neutral on the price. So we didn't give any price reductions to.
2 customers like we usually do unusually something like between.
1% to 3%.
So we didn't give any price reductions because we were able to get some price increases.
And then so we were we were neutral in terms of margin from a price standpoint in the quarter.
The impact of commodities in the quarter were.
We are already high in Q2.
And I would say that the price cost impact this quarter was around 200 basis points overall at ITT level, a little higher at motion technologies, and we expect that price cost impact to be around 200 basis points as well for the full year as the <unk>.
Pricing is ramping up but it is offset by.
Higher.
Higher price price negotiations or higher price impact from the negotiations with customer.
And keep in mind that this.
There is a timing component to it where are we going to reach a much different picture.
At the end of Q4, then where are we going to be.
For for instance, an average in Q3.
And Nathan if I can build on what Emmanuel side regarding the process.
There is no.
Secret recipe here.
Really we need to work harder on pricing sitting down and negotiating with our customers a good and fair deal very flat.
Completely different raw materials cost base.
This is a must this is what we have already started doing with some good results and some mixed results, we have been able to sit down with some customers and to have constructive conversations.
And we had some strong resistance from others now.
Now on our side Nathan what helps is our quality track record.
We are the best quality supplier in terms of brake pads and on time performance at 99% plus.
During a period of the market.
Supply chain disruptions.
<unk> says in the negotiation for sure.
You guys have also had you guys ask that generally had a much much higher margin Dana brake pad business and the overall industry does.
Most of the rest of the industry I think makes about low single digit kind of margins.
Which would mean that they are under significant pressure from raw materials that you guys are.
Are you, saying that present, you any channel.
The opportunity to gain market share as some of the competitors might be struggling more than they have over the last few years.
I think that if I, if I look at the priority today.
Nathan I think that we are already.
Winning market share because of the performance we have because of the differentiation we have in terms of our product.
And because of the quality we are delivering those are the key criteria that how helping us to win market share as of today, we are not envisioning really using price to win market share today I think the effort would be really to use price to compensate some of the headwinds that we have because of the raw material cost.
That would be the priority.
And just 1 last 1 I think you guys had signaled last quarter that you were anticipating a poor I MX in industrial process.
Hi project shipments in the quarter.
Clearly had a short cycle orders being stronger.
Are you expecting Inc.
And mix as we go through <unk> and any comments you can give us on how that impacts margins in the back half.
Yes, Nathan this is Emmanuel yeah, absolutely we are expecting an improving mix in Q3.
And then to the point to that in Q4 as well to the point that.
The mix the mix impact for the full year will be substantially lower than.
Then what we have experienced in Q2.
And this is on the back of really strong short cycle growth.
You see year over year over year, but also very much so from a from a sequential basis compared to Q1, we've seen really really strong.
Service and valves order growth sequentially and some pretty decent also activity from a baseline standpoint. So we expect these will contribute very positively to the mix in Q3, and Q4 and I would say, we're happy with that but this is not what we're using to really drive margin expansion at IP.
For us fundamental progress on the fundamentals is much more important and we will take some positive mix any day.
But this is not the indicator of success for us.
We have reached the allotted time for questions. This does conclude today's conference call. Please disconnect. Your lines at this time and have a wonderful day.
Okay.
[music].
[music].
[music].
[music].