Q3 2021 ITT Inc Earnings Call
Welcome to I T. T 2021 third quarter conference call. Today is Thursday November 4th 2021, today's call is being recorded and will be available for replay beginning at 12 P. M Eastern time.
At this time, all participants have been placed in a listen only mode and the floor will be open for your questions. Following the presentation. If you would like to ask a question at that time. Please press star one on your Touchtone phone if at any point. Your question has been answered you may remove yourself from the queue by pressing the pound key.
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We ask that you please pick up your handset to allow optimal sound quality.
It is now my pleasure to turn the floor over to Mark Macaluso, Vice President Investor Relations you may begin.
Thanks, Catherine good morning, because my pleasure to walk in your Itt's third quarter of 2021 earnings Conference call. Joining me here this morning, or Lucas Avi Igpu's, the Chief Executive Officer, and President and Emmanuel Cabre Chief Financial Officer, today's call will cover Itt's financial results for the three month period, ending October 2nd which were announced yesterday evening.
Today's remarks may contain forward looking statements that are subject to certain risks and uncertainties, including comments relating to company performance strategic priorities business mix market conditions and the effects of COVID-19, and ITD. These statements are not a guarantee of future performance or events and are based on management's current expectations. Actual results may vary materially due to among other items of fat.
As described in our 2020 annual report on Form 10-K, and other SEC recent SEC filings ITT is not under any are expressly disclaims any obligation to update. These forward looking statements were the result of new information future events or otherwise.
Except where otherwise noted the third quarter results. We present this morning will be compared to the third quarter of the prior year and based on non-GAAP financial measures. These.
He suggested result exclude certain non-operating and non-recurring items, including but not limited to a specialist related charges restructuring [noise].
[noise] asset impairment acquisition related items and certain tax items all adjustments in the corner unexpected for the full year 2021 are detailed along with the reconciliation of such measures to the most comparable gap figures and our press release and presentation, both of which are available on our web site with that it is now my pleasure to turn the call over to.
Luka, who will begin on slide number three.
Thank you Mark on good morning, I want to start by once again. Thank you you are stake holders for your continued support and investment in ITT.
I also want to thank the nearly 10000 employees at ITT, who demonstrate our core values on a daily basis, and who make ITT the most reliable.
Customers and the trusted partner for the communities in which we operate.
I am very pleased with the results ITT deliver in the third quarter.
Once again, the resilience about businesses and our team has allowed ITT to execute for our customers in a tough macroeconomic environment.
As a result of the revenue growth continued margin expansion and the effective deployment of the balance sheet.
They leave it adjusted earnings per share of 99 cents growing 21% over the prior year.
During the quarter. It was paramount that we stay focused on execution, while cultivating the significant growth opportunities ahead of us.
And this is exactly what we did.
In the third quarter I continued to walk or shelf flows around the word to ensure we're taking full advantage of our opportunities.
I'm encouraged by what I saw firsthand as we are not even close to being done improving our operational and business accidents.
I saw the engineering expertise and prowess on display at the friction plant and innovation centre in <unk>, Italy.
The productivity and automation opportunities at our Coney plant in odd bail in the Netherlands.
And the energize high performing goose bumps team I reconnected with in demand Saudi Arabia.
I was also fortunate to visit our industrial process team and they say you can Mexico, where we have a good low cost manufacturing setup poised for future growth.
And lastly, a friction planting silao, Mexico is continuing to add a new production lines to support that the winds in evs and share gains unconventional vehicle platforms.
There is a lot to be excited about at ITT.
Let's now talk about some of the key highlights from Itt's third quarter.
We drove broad base sales growth across all three segments and implemented strategic commercial actions to minimize the impact of rising inflation.
We drove incremental productivity in the quarter, roughly 280 basis points through a combination of shop floor and sourcing actions and we continued to apply strict controls over on a fixed costs as growth with us.
We fought to overcome a year over year 23 cent.
Or 370 basis point raw material headwind.
ITT years delivers 60 basis points of adjusting segment operating margin expansion.
An exception of result, considering the supply chain dynamics, we see.
We generated organic all this growth of 27% with strong demand and friction after market rail connectors and industrial controls.
We also continue to grow nicely EAP show cycle and projects.
Finally, we put a capital to work with purchasing an additional $50 million have ITT shares to bring our ear to date repurchases above $100 million exceeding a repurchase come in may for the full year.
These accomplishments I ended dedication have ITT years drove adjusted earnings per share growth of over 20% compared to prior year.
And two per cent above 2019 prepandemic levels.
Looking at the businesses, despite the supply chain disruption that restricted auto production volumes free.
Friction OA continue to outperform while also driving strong after market growth.
We continue to win on both conventional vehicles and on new electric vehicle platforms, which will power future outperformers as they transition to hybrid and ultimately to fool electric accelerates.
This quarter, we won't content on six new electric vehicle platforms in China, the world's largest automotive market.
This year, we have been awarded content on 25, <unk> EV platforms and now to win rate is significantly above our current global Oh his share of August 25%.
Electrification will be Emt's next spring before long term growth given our strategic focus on Evie platforms.
And connect and control technologies, we drove 17% organic sales growth with strong demand in North America distribution.
Especially in the industrial markets.
This coupled with progress on Cct's operations generated 17% adjusted segment margin for the quarter.
Put in the business closer to Prepandemic levels.
Lastly, we generated 8% organic revenue growth and industrial process, driven by show cycle demand across parts vast.
Service.
This is remarkable given the supply chain difficulties, we are experiencing we.
We see positive signs and not a weekly or their race and as you will hear shortly continue to see sequential improvement and market share gains in the long cycle project business, which is an encouraging sign for 2022 and beyond.
One of the most tally matrix for ITT this quarter was a 27% organic orders growth.
Our order levels again surpassed 2019, even with many of our key and markets still early in their recovery like commercial aerospace.
In industrial process, we generated double digit growth versus 2020 inshore cycle across baseline pumps path and service.
Q3 was also the third consecutive quarter of sequential orders growth in projects with the 36% organic older growth.
As a result.
Peace backlog was up $28 million in the quarter.
In connector control orders grew over 40% organically, including an encouraging 70% or those growth in aerospace and a strong performance in North America distribution.
Finally in motion technologies, we generate a strong demand in the friction after market and in Coney, an accident, which more than offset a slight a declining friction.
Due to the chip shortage impact on our OEM customers.
Even with these challenges mtgo over 20% organic versus 2020 and.
And 4% above 2019.
And for the year, we now expect empty to deliver over $1.3 billion in revenue.
Comfortably above 2019.
As we head into the fourth quarter, we are not anticipating any improvement in the global supply chain or with raw material pricing.
With our teams executing a relentlessly against these challenges we are narrowing and raising a full ear adjusted EPS outlook for 2021 at the midpoint to reflect the strong performance to date and our ability to execute.
We now expect adjusted earnings per share in the range of $4.01 to $4.06 at the high end, which equates to 25% to 27% growth versus prior year.
This is a six cent improvement at the midpoint after a 37 cent increase through the first half of the year.
This puts ITT on pace to comfortably surpassed 2019 adjusted EPS.
Let's turn to his life for to talk about sustainability another key priority for ITT.
Is September ITT released the second supplement to our 2019 sustainability report demonstrating the company's progress on our environmental social and governance practices.
We are continuing to integrate ESG in our business strategy and the day to day operations of all 10000 ITT years.
Some highlights from the reported to note.
We drove at 25% reduction in greenhouse gas emissions and to 23% reduction in waste sent to landfills.
With 25% fewer workplace safety incidents.
We are expanding investments in guarantee of origin certificates throughout our European locations to increase itt's share of electricity from renewable sources.
We are investing in more sustainable product technologies, especially in a pump a business building on the success. We have achieved in empties cup of free brake pads.
As we conduct our operating plan reviews for 2022 ESG continues to be a key element of the leadership teams mandate and there is much more for us to do.
Let's now turn to slide five Twilight, our capital deployment progress in 2021.
Thus far we have deployed capital in an amount nearly three times or ear to date free cash flow across all our capital deployment priorities.
Our capex for the year is approximately 3% of revenues to the third quarter.
We have invested in capacity in a friction plants to support the share gains achieved we new and existing customers as it relates to the accelerated transition to electric vehicles.
We also continue to execute value analyses value engineering to reinvigorate our product offerings in industrial process and connect and control.
From being section of this initiative in 2018, we've commercialized more than 100 different pompa models, representing 23% of our total product portfolio.
In addition, we completed redesign for more than 30 additional pumps ahead of their commercial release.
With only began to scratch the surface with more than 70% of the product offerings still to be addressed.
As an example of these efforts following the success of our B B two pumps.
Ear to date older growth are recently redesigned magneti dry pop is 40%.
Davey announcements resulted in increased performance better reliability.
And short lead times.
Regarding our other capital deployment priorities, we increase our dividend rate by 30% after 15% a year before.
These represents an annual dividend yield of approximately 1%.
Our share repurchases this quarter will drive a 1% reduction in a weighted average share count for the full year.
We will continue to drive repurchase activity in the future and to our existing $500 million authorization.
And lastly, as we discussed last quarter, we divested a legacy asbestos liability to portfolio company of Warburg Pincus. This as reduce itt's risk profile and allows us additional copy that flexibility.
To accelerate M&A activity, we're investing in our capabilities.
I'm happy to welcome Bath Tech Mecca, we escape to ITT.
Bartek Leached strategy development and will drive all merger and acquisition activities, including Itt's newly launched corporate adventure vehicle.
On this front, we made one initial venture investment in Q3, four connectors related assets.
And we have a growing pipeline of leading technologies to enhance our existing product portfolio.
We have stepped up M&A pipeline and cultivation activities and are looking forward to bringing great companies into ITT in the near future.
Let me now turn the call over to a manual on slide six to provide further color on our third quarter results and 2021 outlook and manual over to you.
Thank you Luca and good morning, everyone.
As you heard motion technologies again delivered a solid performance driven by strength in the friction aftermarket.
Okay business friction market outperformance was over 1000 basis points this quarter significantly above our historical average despite large declines in global auto production levels.
For all of ITT, we estimate that the supply chain disruptions deducted approximately 350 basis points from our sales growth this quarter.
However, we expect to recover a majority of the pushed out sales in the next few quarters.
We also saw double digit organic sales growth in IP short cycle and continued strong demand for industrial connectors.
And similar to what we saw in queue to demand in commercial aerospace is increasing as exhibited by the 70% growth in aerospace orders.
On segment margin CCT grew margin by 300 basis points and buy 150 basis points, while empty declined 110 basis points, mainly due to raw material inflation.
We overcame a 470 basis point inflation headwind to drive 60 basis points of adjusted segment margin expansion.
An adjusted EPS. Despite the challenges Luca highlighted in his introduction, we drove a 42 cent operational improvement year over year through a combination of higher sales volumes strategic pricing actions and productivity across the enterprise.
We continue to realize benefits from prior restructuring, including our 2020 cost action plan and were carefully managing the unwinding of temporary cost actions taken in 2020 to ensure these costs align with the pace of Itt's recovery.
Turning to cash we achieved and adjusted trailing 12 month free cash flow margin of more than 11% this quarter due to higher segment's operating income.
On a year to date basis, excluding as best as payment in Q2, adjusted free cash flow declined by driven by strategic investments and working capital.
That sense of side seven.
As I mentioned earlier performance this quarter was largely operationally driven.
A year over year growth was significantly impacted by twenty-three headwind related to raw material inflation and a nine headwind from prior environmental settlements and temporary cost actions.
Partially offsetting this items was a roughly 4% benefit from foreign currency.
We also realized a slightly lower effective tax rate versus the prior year, which drove a two cent benefit.
This was due to effective tax planning strategies related to our patent portfolio abroad.
We now expect a four year effective tax rate to be approximately 20, 75%.
Let's turn to slide eight to look further at the segments.
Motion technologies Q3 organic revenue growth of 20% was primarily driven by strength in the aftermarket as the friction OA business declined slightly given the supply chain headwinds affecting Oems.
This and the raw material inflation also impacted operating margin as we had signal last year.
Last quarter.
The friction team is working diligently with our customers to drive equitable price recovery action.
Given the significant inflation, we're seeing today.
We were able to pass price increases onto our customers this quarter and manage the impact of contractual price concessions. However, there is much more to be done to compensate for the inflation we are experiencing.
Motion technologies team will continue to methodically execute incremental pricing actions in Q4 and 2022.
We also experienced significant production inefficiencies, resulting from large variations in customer orders patterns.
However, as with last quarter, a friction OA business executed very well with over 99% on time performance across all friction plans.
In challenging economic conditions friction continues to be widely recognized as the quality is the highest quality and most reliable supplier in the market.
And in Coney, we continue to improve our quality performance and remain deeply focused on serving our customers amidst supply chain disruption.
Finally, we also continue to evaluate strategic footprint actions and announced one additional plant closure in Europe, This quarter, which will drive further cost competitiveness within our rail business.
For industrial process revenue was up 8% organically. This was driven primarily by short cycled demand across parts valves and service.
Serving a customer this quarter.
Serving our customers this quarter required tremendous focus coordination and efforts by the IP team to overcome supply chain disruption.
Are all hands on deck approach made this happen.
As we signal last quarter, we see the project funnel continuing to grow and IP was able to capture significant sure as evidenced by the 36% organic already growth and projects this quarter.
We see this constructive momentum continuing and expect to deliver similar year over year growth in queue for.
IP margin extended 150 basis points to 15.6% with an incremental margin of 33%.
This was driven by higher sales volume favorable mix, given the higher proportion of short cycle sales productivity and price, partially offset by labor and material inflation as well as higher freight charges given shipping delays.
Similar to empty, we're making progress on footprint optimization and have executed one plant closure during the quarter with another plant in Brazil in queue for.
And connecting control technologies, we continued to drive a recovery from both itself and margin perspective.
With incremental margin of 35% CCT generated segment margin above 17%.
This is a 300 basis points improvement over prior year.
The margin expansion was the result of continued volume leverage and strong productivity, including restructuring savings despite inflationary headwinds.
This margin profile is approaching prepandemic levels.
But with approximately $20 million less in revenue.
Well there is much work to be done to further solidify. This performance. We're very encouraged by the work that she has done thus far and it gives us confidence in the future prospects at CCT.
And so I'll turn to say nine to look at the orders that the growth in orders in the third quarter.
As you can see our teams have done a good job capturing the demand leading to solid autograph growth in Q2 and Q3.
A few highlights to note.
First we're continuing to win New awards on conventional OA hybrid and electric vehicle platforms in empty.
It is important to note that our ability to win a majority of the easy competitions that we bid on is key to creating the longterm growth platform that Luka talked about.
Second and industrial process the strength, we anticipated in short cycle is materializing.
But even more encouraging is the order growth.
And continuing recovery in long psychopomp projects.
Both the number and the size of orders in the final is increasing.
And we have seen a steady sequential order increase throughout 2021.
This is the result of a relentless focus on customer Centricity and operational excellence, which is increasingly recognized by R. O E customers.
Third.
CCT orders were up 40, 40% organically in on the strength of our connector portfolio.
Particularly in North America.
The commercial connector performance, especially with our distribution partners, he's encouraging and we're working to replicate the strong momentum across all our customers.
We also continue to see a gradual recovery in commercial aerospace, which will further bolster the sales growth in CCT over the next several years.
[noise] CCT backlog is up 17% organically or $40 million since you're and with a book to bill of 1.06.
This is a notable improvement for CCT since this since this time last quarter.
With all this in mind, it's turned to slight tend to discuss improve improvements in a full year outlook.
Through two quarters, we had raised our organic sales outlook by 600 basis points and adjusted EPS by 37 cents versus the midpoint of our original guidance.
Given our strong performance today, we are again, raising the midpoint of our adjusted Epa's range by an additional six cents to reflect the stronger than anticipated results and lower tax rates.
We're not anticipating any improvement in the market headwinds in the near term. Nevertheless in 2021, we expect to comfortably.
Seed Prepandemic adjusted EPS levels.
As we look ahead to the fourth quarter, we expect revenue to be the strongest of the year, thanks to IP and CCT.
IP will grow revenue in the low single digit range, while CCT will drive mid 10% revenue growth.
Facing a tough comparison after a strong queue for last year and the continued impact from constrained OEM demand empty revenue will declined by mid signal digits in queue for however, we expect to largely outperform the global auto markets into.
In total this will drive approximately flat to slightly up organic revenue growth in queue for.
From a segment margin standpoint, we expect all businesses to expand sequentially with CCT growing triple digits and building on strong Q3 performance.
Year over year, we expect segment margin to grow approximately 50 to 75 basis points.
Because of an exceptionally strong queue for last year Q4, adjusted EPS will grow in the low single digit range year over year and this will drive for your adjusted EPS above 2019 with that let me pass it back to Luka.
Thanks, and manual let me wrap it up [laughter].
First ITT.
ITT is performed extremely well in a challenging climate, we fought through adversity, and we're winning in the market.
Second we have the resilience set of businesses that have demonstrated over and over again the ability to effectively manage multiple external factors, while investing in long term growth.
We delivered strong growth in revenue and margin, while not all of our markets I fully recovered yet.
Third west, we're continuing to invest for long term growth and sustainability.
Funnel of opportunities is increasing and the growth in orders throughout 2021, we paved the way for continued outperformance.
Lastly, we have deployed over 2.8 times a year to date adjusted free cash flow through asbestos divestiture dividends and share repurchases.
And we are increasing our focus on M&A.
We are in a favourable position to execute acquisitions, given a balance sheet strength, and we're growing up pipeline and expanding our target cultivation activity as I said earlier.
There is a lot to be excited about at ITT.
As ever it has been my pleasure speaking with you all this morning, and we will happily take your questions now.
Catherine Please open the line for Q&A.
Alright now open for questions. At this time, if you have a question or comment. Please press star one on your Touchtone phone if at any point. Your question has been answered you may remove yourself from the queue by pressing the pound key.
Again, we do ask that while you pose your question you pick up your handset to provide optimal sound quality. Please.
Please submit your questions to one question and one follow up.
Our first question comes from Scott Davis Smelliest Research your line is open.
Hi, good morning good.
The morning slot this morning, Scott [noise].
A lot of great detail and and the comments, but maybe I'll start with bartek since he's brand new.
What's what's the mandate I mean, you have such a broad product portfolio.
How do you.
How do you kind of focus it in and narrow down what you're most care about her or whatever you're willing to publicly talk about as far as what you'd like to see bartek accomplishing his first year or so.
Sure So Scott.
Let me get this straight on M&A, we haven't been slower than we anticipated.
We have not been sitting in we deployed our capital with a very strategic deal like asbestos last quarter, but now when these behind us.
The addition of biotech Michael <unk>, we are accelerating our actions on cultivation and on targets. So we are active on rail.
In the pumps and valves and we have a few things on the CCT front as well.
Biotech is also responsible of our venture capital initiative that we initiated in Q1 2021.
And the main Haim on that on that front is really to boost innovation to accelerate the growth opportunities to innovation and investing some specific technology very adjacent to what we do.
Okay, that's super helpful actually.
And then just switching to the E V Awards.
Perhaps just a little bit of color of their six.
That forms of that.
Six different oes or or or some number less than that and then just.
Just give us a sense of the competitive landscape is it the same competitors.
Is not a V.
Same intensity or is everybody really racing to try to get on these.
On these things for what kind of obvious reasons.
Okay, I think they're on the on the E. B the level of competition that we are facing Scott is very similar to the one that we had in the traditional internal combustion engine and on the hybrid I seen that on the customer side is different in terms of that you have a different customers.
Because there are some new players when it comes to the specific at six Evs Awards. These out of six different Oems and they're all in China.
If I may elaborate a little bit more on the on the EV front and not just the on the Evs Scott, but also the hybrid is important because we need to consider the hybrid as we are managing the transition to fully electric 2021.
We probably see 20% of production in hybrid Nev. These we'd probably go above 30% in two years, probably about 40% by 2025 and.
And now if you look at our percentage of mass market share win in the awards, which is much higher than our current market share and you see the acceleration in E b.
Then you can see that it is almost like a compounding effect in our outperformance in the medium long term.
It sounds very encouraging I'll pass it on thank you and good luck to you guys.
The next question comes from Antar Open with Bank of America. Your line is open.
Hey, Good morning, guys. This is Emily shoe on for Andrew Open.
Hi, Emily.
Just a question on pace cost what was causing the quota for the total company and can you talk.
Talk about the typing dynamics for each of the segment as well as how you ask that caused the plant next quicker. Thanks.
Hi, Emily.
So price cost for the overall company. This is this is obviously a negative impact we made a lot of good progress in obtaining printed price compensation from our customers, especially in motion technologies, where we were net positive from a pricing recovery standpoint, and this is very different from the past and it's also different from cue to wear.
We were price neutral.
In queue for we expect this to et cetera also.
The price coast equate equation for for ITT was around between 200 to 300 basis points negative impact year over year. We expect this to continue in queue for.
And then two <unk> two slowly reduced in 2022, as we are able to get compensation from our customers.
And to emulate building on that one that going back but by different businesses. If you look at the business in AP any CCT. These are businesses aware ITT has pricing power.
When you look in motion technologies out the motive is amendment was saying is it is it is a different story, but is very encouraging as we see the pictures of men would describe the improving quarter after quarter.
And just just as a final point, Emily just a little bit more detail on what Lucca was saying in terms of pricing power in IP for instance, we already passed three price increases this year one in January one in July and one in November just recently and they've been pretty substantial and the last one.
Crews also surcharges for for increased freight costs.
Anything for a CCT, where we passing several price increases this year.
Okay great.
And then maybe you can go with that as a region by region.
N T performance.
<unk>.
A lot of like it and then it's up to them.
M K as in which regions.
Oh, yeah, and supply chain, no stress and that'll be it federal tax.
I would say the outperformance that is continuing and when we look at Q3, the outperformance as a nine west said was also much much stronger and thanks to the market share gains empty friction in between 2019 at.
This year, we surpassed 2019 levels and this is ahead of the market that will recover probably in a capital in two or three years region by region Europa declined substantially and we outperformed by more than 1000 basis points.
In China in North America, while the market decline roughly respectively by 17, and 25% we actually grill.
So as you can see the outperformance has been substantial in every single region.
Great. Thanks, I'll pass it on.
Thank you Anthony.
The next question comes from my Colleran with Barak Your line is open.
Hey, good morning, everyone.
So I just wanted to continue on the Atlantic questioning so.
Obviously, the outperformance is insubstantial.
Talk about how you feel like this is gonna cadence out over the next few quarters here.
Where to inventory levels stand as chip shortage.
Starts normalizing over the next year year and a half whatever it is do you do you see that consistent outperformance maybe not what she saw the last couple of quarters, but maybe that legacy normal historical type consistent outperformance vs. What the market does is there some sort of variance that's going to happen I guess I'm just trying to understand how ya.
Think this plays out over the over the next period of time here given the outperformance has been so stark lately and does that have any implications move forward.
I Hope I hope that question makes sense.
Yeah sure. So so we're very bullish on our commercial performance in an empty any friction specifically also we won several.
Several new platforms any V and also in hybrid and conventional or so we are very.
We're very confident that we can maintain that outperformance in the next in the next few years to come there's no reason why we should you should be different from what we've seen so far and as you were saying you know as we are really strong gneezy and getting all these awards there is going to be a compounding effect in the end.
The future and keep in mind that when we talk about awards, usually we see the actual volumes in production in two to three years. After the award date.
We are also pretty bullish on the demand and we think that in ODO, there's a lot of pent up demand.
In the system and the reason for this is because of you see production is not keeping up with with the actual demand and and so what you see is that the inventories, especially in North America are going down there at the end of Q3, there were more or less 30 days of.
Inventory.
And I was pulling in more than 40 days in queue too.
And then in Europe.
Things are pretty stable. So we expect this is really going to help us and this is a really good productive setup for empty.
Just to clarify the inventory kind of it was that the inventory for autos on a global basis or is that more pertaining to your inventory levels of the customer.
Yeah. So that those are the inventories a dealership from Oems.
And how would you characterize your inventory levels.
Our inventory levels are we obviously in terms of inventory, we had a little bit of a headwind because of the changing order patterns and and so we had to accumulate there will be more inventory. So this is impacting working capital, but in the in the channel with our customers.
There's no indication that they're building inventory.
Could affect future demand.
Okay. That's that's great Super helpful. There and then.
Lot of footprint actions that you talked about over the course of the prepared remarks here how far into the journey do you think you are at this point to right size the global footprint. It feels like you've made a tremendous amount of progress here. So just curious what you think is left if much at all.
Sure Mike that is a never ending journey. So the footprint is of course the acquisition. We made the of rail. So there is a plan that we are consolidating our lowest cost base in Poland and then if you think about the one that that my amendment was talking about in Brazil, as the consolidation of two plans into wanting south Brazil, so but he's.
Constant journey as we are looking for more automation as we're looking at the far more efficiency. So this is the way that we look at it in 19.
Great I appreciate it.
Thank you Mike.
The next question comes from Flatbush Tricky with Citigroup. Your line is open.
Good morning, guys how are Ya.
Good morning that money rat.
Thanks for taking my questions. So maybe just wanted to follow up on on the friction and the platform wins.
You are seeing their you mentioned, obviously C. A tendency on this platform when's production ramps sort of two to three years out so.
Can you give us some color on how to think about pricing and margin on these wins given input costs volatility in the marketplace.
Do you have mechanisms in place on these new wins that are.
Able to protect your margins as volumes ramp over time.
Sure So I think that it's.
That is not a a big challenge at this moment in time I would save lives because when we are quality in these in these new and then the new platforms. We are currently using the current prices, which this means of course, it will we would probably benefit that when the inflation we.
Come down in one or two years from now and we are currently in the process of negotiating with all our customers are because we have seen a level of inflation, which was unprecedented so that goes beyond the usual terms and conditions that you have with the customers. The challenge is really in.
Changing the mindset and the culture and the skills of our organization because if you think about the motive that'd be used for 20 years to give price and now we are in a different situation. Therefore, we need to train all our people give them the appropriate tool to get the customer at the table to negotiate price increase.
He is indeed is probably the largest challenge.
Yeah, [laughter] excuse me that's helpful.
And maybe just.
Shipping too.
Shifting.
Industrial process.
Obviously very good very nice orders I guess can you talk about.
Where distributor inventory and industrial process stance today are you seeing still relatively balanced sell and sell out or.
Do you think you are benefiting from any restocking tailwinds there.
Sure of that so we're very we're very happy with our orders and industrial process, but we were up 26% and he was pretty broad based there.
The grosses and he was sequentially also higher than what we saw in queue too and.
And we expect this to continue in queue for and and so far there's no indication that issue stubble. So in 2022. So we're we're very happy because it's both the short cycle.
And a project of you see the your question doesn't apply to project, but in terms of short cycle for a baseline pumps, we're not seeing any indication and we have a pretty close a rapport with our with our our distributor partners, we're not seeing into any indication that they're building stock.
On the contrary as we mentioned we are it's hard for us to keep up with the with the increased demand so they're pretty.
Despite jenny's pretty tense.
Yeah, and if it can add to that the bladder I'm going to meet all the distributors next week in California of the GDP W. W and the discussion on the agenda is the Israeli how we can respond faster how we can increase our throughput the because of the demand that they are seeing so no no no problem the inventory level.
All right that's great great to hear thanks for the call.
But the next question.
<unk> comes from gave me and Carl Sweat UBS. Your line is open.
Okay. Good morning, guys.
Hey, David.
Hey.
I wanted to ask you about.
<unk>, you mentioned, you're saying positive signs and gaining.
Gaining market share on some of these long cycle project towards.
Obviously back in the project heyday.
That was an area that became a little bit challenging with respect to profitability. So I'm curious what the framework is.
Or which you're looking at these projects Luka.
And how should we think about the impact that they'll have on your market profile and he'd deliver on them over time.
Sure. Thanks, I mean first of all on the on the other front. This is the third quarter, where we see you know project or there's increasing and we told you last quarter. They were warming up and here we are with 36% increase in projects area. You see these also as a result of I know if you remember guys, but we were talking about winning on the engineering only.
Oh, there is you know last year and now all of these obviously is coming to fruition.
The final of opportunities also getting larger so obviously projects. We let you know will be a bigger part of the mix as we're moving forward.
Usually these damien like you're right, we said will be a little bit of pressure on the profitability because of the mixer is going to be less favorable, but we have a framework today that deliver this project in a profitable manner is the way that we had a winning them in the way that we had a managing them.
The project reviews and also ultimately all the efforts that we've done in terms of V. A V and also a foot frequent consolidation we'll have this project to be more profitable than before so all the cost actions and their Riga in running them will ensure that the profitability would be better than in the.
Past.
Okay, Great that's helpful.
And and then you I believe you made a comment earlier on the 40% organic growth and connectors orders and.
And how you are looking to replicate some of the distribution partner successes you've had could you just elaborate on that comment in and what you meant by that.
Sure. So so today as we mentioned a lot of our success is coming from North America.
Some sort of distribution and what we wanted to do and we still have to do is to replicate that success.
In Europe and in Asia Pacific.
There's a lot a lot of work to do and we have just recruited a new G M for European connector business and she she is going to drive that and we had some pretty good proof of that even recently so so.
So there's a lot of work that needs to be done to re energize the relationship and the the execution of our distribution partners outside of North America. We're working on this and then the other aspect to this is that these success in terms of customer Centricity customer intimacy. We also want to replicated with Yo yes.
We have seen that over the years that relationship added a little bit deteriorated and it's important for us to be close to them because.
Those are going to be those are going to ensure that our connectors are chosen for future applications and that's why we are also working with them to modify and improve the design of our products as Luka was talking about we also implementing V. A V actions with our connector business and and let me.
A little bit older than mine with a side is not just that they are equivalent of Allen, which absolutely she's an amazing asset with organization, but what Ryan and a team of danis to reorganize the connector business worldwide before it was run by in the U S by California on a worldwide basis, but you know when you are sitting in California, you're not that very.
Close or intimate with a customer in Germany, or Europe or in China for that matter and therefore, what Ryan a team of done that developed a regional organization. We the region in Europe bathing out of Germany, The U S and in China. In this region why do they are still working interdependent their stay much closer to the customer and Dizzy.
Fundamental change.
Gray appreciate the collar guys in bulk.
Crappy job.
[laughter].
The next question comes from Brian Blair with Oppenheimer. Your line is open.
Thanks, Good morning.
Good morning, Bryan Bryan.
It mentioned the rail facility consolidation and some other footprint works that's underway how should we think about the timing and level of cost savings going forward.
Okay.
Yeah. So so in terms of consolidation Ah. So we just announced that so it's gonna it's gonna take a little bit a little bit of time I would expect this between probably four to six months.
And this is after that we were going to start to see the savings.
For this facility and it's the same as well for the IP facilities. So I think that's what you're going to be able to see in terms of impact it.
It's going to happen towards the second quarter of next year and full full ramp in in second half of 2022, so definitely disease.
More of a structural and long term approach, but it's gonna, it's gonna help us in 2022, meaning.
Okay understood.
Maybe offer a little more color on the M&A environment, specifically seller expectations and valuation.
And then manually aspersers off your balance sheet, and a cleaner perspective on leverage calculations.
Do you think of us as current or near term dry powder. However, you are trained now.
So when it when it comes to the different area. We are as I said that very active today in the in the cultivation in the target and analyzing it some companies. The main areas, where we are active right now is that rail Andes a worldwide.
[noise] effort, we believe that in in the rail business.
About the possible positive impact coming away from the infrastructure spending, giving the U S. But also from the focus on environment. These will have a positive impact on our business both for passengers as well as for for freight then we see the violence businesses interesting.
Space for Us and also on the pumps, but bear in mind not playing the consolidation game in the in the pump and then there are also areas in CCT that will be interested if you think about it our first.
Investment in venture has been actually in the connector space in an area, where they're really differentiating announcing our proud does differentiating our products to get that we dare I say in the defence and aerospace business.
And in terms of so you see this is a very competitive market. We still think that there are many good companies that I think we can add to the portfolio without necessarily overpaying.
So Ah Asuka mentioned, we are very active in cultivating.
And this is stepped up even more with your arrival of Bartok.
And the great thing about this is that you've heard say say it for several quarters. Now is that we really don't have to choose where to deploy capital as you can see we've.
Deployed $100 million.
This year in terms of repurchases and it's not at all at the expense of M&A, we still have significant dry powder I would say.
A little bit over 2 billion, probably in dry powder for M&A with while maintaining our investment grade rating. So so I think that we have a lot of possibilities ahead of us.
Very helpful detail, Thanks again guys.
That's right.
The next question comes from Jeff Hammond with Keybanc. Your line is open.
Hi, Good morning, guys a lot covered just on the buyback I'm just wondering if.
This is kind of a change in approach around.
Especially as being behind you or was more opportunistic around you know dislocation in the stock or just maybe how to think about buybacks differently here going forward.
Yeah, I think you're going to see us.
More aggressive on buybacks.
I'm not crazy more aggressive, but I think if you look at today, we've done over $100 million in terms of repurchases.
And that corresponds to more or less 1% of outstanding shares being retired I think this is going to continue along those lines.
Because really the priority for us is really M&A.
And buybacks are just are coming after that.
Okay, and then CCT I mean, you guys have have done a lot of work there through kind of a downturn and now we're seeing.
The inflection here I think the Incrementals, where mid thirties in a in a tough environment just how should we think about incrementals here over the next couple of years and and CCT as as Arrow in particular recovers.
Yeah, So I think.
You have the right intuition right.
<unk> is going to be very accretive to to our incrementals.
And as I mentioned.
We already are almost prepandemic levels.
With $20 million less revenue by quarter.
So are we going to get two prepandemic levels in terms of margin sooner than we expect absolutely.
And I think Thats CCT, we're fortunate because CCT has the highest incrementals out of Itt's portfolio and so I think this is this is going to be very positive for CCT.
As we as we drive to our heightened plus margin target.
There is I wanted tone that a little bit because there is still a lot of investments that are needed for CCT, we talked about V. A V. But there's also a lot of fundamental R&D that needs to happen and that's gonna come at a cost in terms of margin, but I think that's definitely.
Really strong incrementals.
Okay.
So much.
Thanks, Jeff Thanks, Jeff.
The next question comes from jail, Richie with Goldman Sachs. Your line is open.
Hi, good morning, everyone.
Jojo.
Hey, So just a few quick ones for me just the friction aftermarket that 70% I mean by my calculation. It seems like it throw most of the year over year growth and M. T. I'm just I'm just curious like what what happened this quarter why would why or is it says strong on a year over year basis.
Sure. So let me let me let me tell you they want so obviously Joe there is some easy compares if you think about the 2020 in terms of the covered year, but also think about it we play the after market mainly in Europe, and what does happen. If you look at also sequentially also the ear of area is that Europe was coming.
The the data vaccination in Q2, and therefore in Q3, they were coming out the vaccination that were coming out of the Lockdowns and therefore people traveling. So this is what pushed the after market tremendously and on top of that I would also say that a lot of the dealers with less sales coming from the way they really pushed it.
For service.
All of these combined with their war that that we want to get that with the continental at the outset, Brian by Addax, which is a very establish a German certification all of that have to our our growth. The growth is both on the independent market as well as on the side.
So we expect at the end of the year I have a very healthy double digit growth for aftermarket.
Yeah, that's that's super helpful and great to hear I guess just on the.
The 350 basis points that got pushed out this quarter is it fair to say that most of that came in the friction O E business or did it affect other parts of the portfolio as well.
So Joe as he does most of the delays were actually in IP and there were do too and that's that's around $15 million. So that the 350 basis points is like around $20 million and 15, Oh that is is coming from IP and it's coming from castings in frames.
From outer region is that.
Really disrupted our operations and then once we receive them we had to reshuffle and reorganize the labor to to make sure that we transform those those components. So so a lot of it came from IP and.
Then we had some still issues.
The Wolverine.
And as well a little bit of pleading issues with our suppliers for CCT overall as we mentioned that we expect to recover this nothing is really coming out of our backlog we expect to.
We cover this over the next few quarters, so two framing Joe the 350 basis points.
Your supply chain challenges and D. R exclude these exclusion.
With a completely that cheap shortage.
Issues that our Oems customers had in empty.
Got it.
Super Helpful. And then maybe my one last one on the fourth quarter you guys talk about margins being up 50, 275 basis points I guess as I kind of think through on a segment level basis.
Seems like M T likely down year over year, but up sequentially and then I guess.
Industrial processes based.
Basically consistent with <unk> is that kind of the way to think about it.
Sure.
I think you're right in empty, we're gonna see sequentially sequential improvement because of the the incremental pricing we were getting in queue for compaq too compared to Q3, and IP, probably pretty pretty in line with with Q3, and then CCT Justice small progress as we.
As we we benefit from all the the efficiency actions. We're taking this is this is allowing us to improve also cct's margin sequentially.
Great. Thank you.
Thank you Joe.
The next question comes from that Somerville with da Davidson. Your line is open.
Thanks, [laughter], Hey morning, just two quick ones on M. T. First if input costs sort of stay where they're at and don't rise further can you achieve price cost parity in that business given how the auto industry sort of functions from a contractual standpoint, and if so when would you expect.
<unk> to be in parody.
Yeah, I think we can but it's a question of timing. It's a question of timing so that it's gonna take a long time.
Because right now we made we had we stopped giving any price concession in queue too we started recovering and getting a price increases in Q3, we're going to do more in queue for but to be honest. This is very very difficult and so it requires a lot of negotiation a lot of the.
The interactions with our customers. So it's going to take several quarters for us to to get there.
And then and just keeping just keep in mind that for 2022.
In terms of raw materials, we're not expecting thing inflation to to get worse, but we do expect to you over your negative impact, especially in the first half where we benefited from a lot of the still bookings that we did at the end of 2020 and that positively impacted our first half of 2021, the mad when I look at the ITT port.
For you is it.
A good portfolio and businesses, where we have pricing power wise, I really CCT and IP disease, where we have more price empowers Indies is probably where we're gonna end up using it more.
Sure that.
That brings up a I guess an additional follow up question just on your procurement. How are you thinking about your by ahead strategy or lack thereof for things like steel copper other inputs of consequence for you guys, whereas last year, maybe you used a different approach. Thank you.
So in.
In 2020, and 2020 of you see we pre booked a lot of stuff in 2021.
And that was very positive as I just mentioned on 2021 first half.
21, because there was so much volatility we went on.
We were we were not taking long term commitments I think is the picture has been improving yeah. We're.
We are monitoring and obviously, we're monitoring when prices very very regularly we are starting again to take some long term strategies and and we're just gonna see but but I think that's right now there's so much volatility that it's really hard to predict what what the prices are going to be an amount today.
If I if I can build on that one I would say we're working on the two main things. The first thing that we need to do really math is work closely with our suppliers to secure supply. So because you need to ensure that you have those supplies that we you in your inventory if you want to maintain the 99%.
Class on time delivery day friction is delivering very few companies very few teams are able to do that and then of course you look also at different regions different suppliers to take advantage for some specific opportunistic situations. In addition to everything that the man was set.
[noise] got it. Thank you very much goes.
Hey, Matt.
The next question comes from Joe Giordano with Colin Your line is open.
Hey, guys I'm warning can you hear me.
Hi, Joe Yep.
Hey, just along those same lines.
I've seen some interesting moves and like iron ore recently like very quick decline if that was to translate into steel price reduction.
Like kind of quick reductions what what are the implications on Margaret how how quickly does that flow through to you guys, giving backlog and like how does that change the calculus on your discussions with your customers and empty.
Well, Joe where we're not really counting on the on the on the on a price going down of seal. If you think about them, making the seal is not just the iron ore is the energy that you're using and you have a lot of issues on energy these years and today and the price of energy probably will go up and then is the transformation of every single industry.
To a green industry. So it's green still so we are not necessarily counting on on the ongoing down now obviously, we are having different conversation today with different oem's today. The conversation that we have with the Oem's is that in terms of price increases that so we are not <unk>.
Even at poverty is amendment set so I don't even if that happens I don't see that the challenge of coming to our table anytime soon.
Okay Fair enough and then one of the things I thought was interesting was the sequential increase in.
Bookings at IP, and so that was not the case at all of your competitors can you talk about just sequentially. What's driving that is it or are you seeing any activity sequentially in project bookings picking up and just curious on in the energy sector kind of specifically two I'm curious.
Sure.
So you're right sequentially orders increased by 6% in IP and this is really good the majority of that increase came from actually short cycle. Our project increase but he was a roughly mid single digits.
And are there a lot of the increase was from our basic for a baseline pumps, which are really the higher margin stuff for us.
So so we're very happy to see to see that that increase obviously, because it has a positive impact in terms of mix, even if it's short cycle. So short lived.
From an end market standpoint.
We saw really strong performance from our general industrial.
As well as oil and gas and chemical mining was a little bit lower but so we had a really good performance recently in mining. So I think if if you when I look at the.
Maybe going back a couple of the drivers behind it in terms of the <unk>.
Baseline at the show cycle, a lot of that comes through our distribution and our distribution is really a differentiator factor for IP.
And we are you know is the envy of all of our competition. So that's definitely there is a positive side and then I want to remind that until Q1 of 2021, and we were performing with a plus 90% on time delivery and obviously our performance is paying the price today were not even close to that by staying very.
Intimate with our customers we are managing this situation, we know exactly what is the demand and we're working that through.
Thanks, guys.
Thanks, Joe Thanks, Joe.
Our final question today comes from Nathan Jones with Stifel. Your line is open.
Good morning, everyone.
Good morning Nathan.
Question on the IP on the project side of IPA typically when we say downtowns, Hey, you've got.
Capacity chasing volume and pricing stuff is because of it given all of the supply chain constraints and the improving demand you probably know have demand chasing capacity does that give you guys the opportunity to be at higher margins.
Potentially say better industrial are.
Better IP margin performance on the projects that are going into backlog current land maybe over the next few quarters.
I think they would tell you are.
Definitely right you are on top of things. This is actually something that we are going to discuss with AP in the next few weeks because youre right, but I think it's still a little bit.
Early in the process, but they've seen that that's exactly what will happen I agree with you Nathan.
Okay, and then in motion Tech some of your competitors there I haven't I haven't historically had the best operating metrics.
Just on time delivery and could probably be even more challenged in the current environment does that really highlight to customers the differentiation of <unk> and <unk>.
Potentially present, even more share gain opportunity for you than you've seen over the last few years.
I've seen that.
Three things that really the differentiating ITT from everybody else was a the level of quality the level of consistency. The consistency that you have across every single plant around the world. The performance on trying to leave all of that is differentiation and it seemed that he we keep on happening I would say, we haven't seen any change on that front.
One thing that I believe he's gonna help even more motion technologies and differentiation is our R&D is our material science and our people that have been able to come up with the right mix with the right material science knowledge.
Would they be for instance, and this is why we're winning more in the Evs and our market share we need there with these higher that that is probably the differentiation that is more valuable today.
And then one last one I haven't heard an update for a while on smart pad I know a lot of the investment dollars over the years have gone into smart pad can you give us an update on where that is in development and when potentially it could go into.
The operation.
Sure we have the product.
It's been finalized in I would say in the 60% of these.
<unk> capabilities and we are still working with some Oems are in terms of the testing and being a safety component. You know there are a lot of tests that the Oems and the tier one that needs to feel comfortable we'd before putting on a platform, but we are actively discussing.
With the capital and the one specific tier one today.
Great. Thanks for taking my questions.
Thanks Nathan.
Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.
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