Q1 2022 ITT Inc Earnings Call
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It is now my pleasure to turn the floor over to Mark Macaluso, Vice President of Investor Relations you may begin.
Thanks, Harry and good morning, my pleasure.
2022 earnings Conference call. Joining me here. This morning are Luca Savi.
Idt's, Chief Executive Officer, and President and Emmanuel O'brien, Chief Financial Officer.
Today's call will cover <unk> financial results for the three months period, ending April 2nd announced this morning.
Today's remarks may contain forward looking statements that are subject to certain risks and uncertainties.
<unk> comments relating to company performance strategic priorities business mix market conditions, and the effects of COVID-19, and 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. The factors described in our 2021 annual report on Form 10-K, and other recent SEC filings.
It is not under any expressly disclaims any obligation to update forward looking statements, whether as a result of new information.
Except where otherwise noted the first quarter results. We present this morning will be compared to the first quarter of 2021 and are based on non-GAAP financial measures. These adjusted results exclude certain nonoperating and nonrecurring items, including but not limited to a charge related to the suspension of operations in Russia restructuring acquisition related charges.
And certain tax.
<unk> related charges.
All adjustments in the quarter 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 is now my pleasure to turn the call over to Luka will begin on slide number three.
Thank you Mark and good morning.
I would like to again begin by thanking our shareholders, our customers and our ITT ers for their continued support and investment in ITT.
I am pleased with Itt's results this quarter, considering the ever challenging environment that we're operating in today, which further demonstrates ITT resilience and the strength of our businesses.
I continue to be confident in itt's growth and outperformance over the long term.
Before we begin I want to take a moment to acknowledge the more than $8 million wafer <unk> from Ukraine, whose lives have been impacted by the war.
We are deeply saddened by the tragic loss of lives that make from the invasion of Ukraine.
We will continue to support our employees in the region, who remain our top priority.
With this in mind.
As discussed for the quarter.
Demand for our products and services remains strong across many of our end market and we are outperforming in most businesses.
We see these in the short cycle chemical and industrial business at industrial process.
In aerospace and defense and connect and control and in our friction business.
Our teams drove 14% organic orders growth this quarter contributing to an ending backlog of nearly $1 billion.
Up over $117 million from this time last year.
On the strength of these demand, we drove 7% organic revenue growth of which approximately 3% came from pricing actions across all our businesses, but most prominently in motion technologies the.
The MTT achieved over 80% of its first quarter pricing targets and is stepping up incremental pricing actions given the continued rise in raw material and energy costs.
On profitability margin this quarter was severely impacted by rising raw material labor and overhead costs, which continued to increase throughout the quarter.
Cost inflation amounted to an approximately 760 basis point headwind, which outpace the 270 basis point positive impact from pricing.
During the first quarter I again experienced firsthand.
And the inefficiencies it creates in our operations.
As an example in one of the many treated they may to Seneca <unk>. This quarter, we develop new actions to mitigate the impact of parts shortages, which are preventing production lines from operating at full capacity.
In our outlook.
Should we expect it to lap the headwinds from higher raw material cost by the second half of 2022 ex Costco would begin to normalize and our price actions would take effect.
However, current prices for steel and the team are now above the escalated levels from 2021, which will put additional pressure on on a full year margin and earnings.
Nevertheless, ITT delivered solid first quarter results in line with our expectations, while continuing to invest in the future. We invested over 3% of revenues in research and development to fund key growth initiatives.
On Capex, we invested in further friction OE price capacity, including the addition of two production lines in our Silao, Mexico plant to support EV wins in North America.
We are also finding product redesigns in IP and CCT.
Print optimization and closures and new product innovation as we continue to refresh the portfolio.
As an example in industrial process, we are launching the third generation of our I alert condition monitoring solution that more quickly and accurately diagnosis status changes and wounds up issues prior to failures.
And particularly excited about another new disruptive technology in industrial process that we significantly reduced energy consumption and <unk> emissions at our Investor Day in June we showed these and other innovations to demonstrate how we differentiate from the competition.
In April we closed our second ITT ventures investment into technology stocked up a focus on the rotor coating market with its groundbreaking <unk> technology.
<unk> is an innovative hard coating application that allows for orders to last longer.
Resist corrosion and reduce fine dust emission these.
These will be critical requirements for electric vehicles.
We also signed a third larger venture investment, which we expect will close in Q2 pending regulatory approval.
Recently, we announced acquisition of habit in an Israeli based designer and manufacturer of above and actuation technologies for the gas distribution biotech and harsh applications sectors.
As Emmanuel and I witnessed firsthand when we met the team in February habit is an attractive offering in LNG and is well positioned for growth in the green hydrogen space through its ultra high pressure and cryogenic offerings.
In addition to <unk> and the Netherlands. The company has a presence in North America, which we will look to expand.
I'm very happy to welcome Ilan and happening to ITT.
Lastly, this quarter, we repurchased nearly $190 million of ITT shares.
Together with increasing dividends and growth Capex, we deployed over $235 million in Q1 and over $375 million year to date, including to have in an acquisition.
Moving to our outlook, we anticipate that the supply chain challenges and the higher raw material inflation. We saw in Q1, we persist throughout 2022.
Demand remains strong and we are working hour by hour to eliminate the bottlenecks that are impacting our top line growth.
With these dynamics in mind, we are maintaining our full year adjusted EPS guidance range for 2022.
We are trending towards the higher end of the range for organic sales growth given the strong demand and outperformance I cited earlier, however, given the headwinds I mentioned as well as the ongoing war in Ukraine, probably related Lockdowns in China, we're trending towards the lower end of our range for adjusted operating margin.
In summary, we are advancing the actions in itt's control, including share gains pricing actions and capital deployment, while managing through market dynamics that are worse than we initially anticipated and then confident in <unk> ability to deliver.
Let me now discuss a few points I raised in the opening.
Itt's products continue to win in the marketplace.
And gain share.
We see that in our order rates and backlog today.
<unk> increased on a year over year and sequential basis, which drove a 24% increase inorganic backlog year over year that will convert in 2022 and 2023.
We continue to see broad based demand in industrial process, it's short cycle pump and service offerings.
The long cycle pumps business continues to strengthen.
Year over year, the project funnel increase over 30% with strength across the board in mining chemicals and oil and gas.
Our short cycle run rates are well above what was an already high level of orders in prior year.
All product categories, and we expect that the addition of <unk> will add to demand given the fast growing <unk> portfolio and capabilities in LNG.
Orders in connect and control increase with the growth in commercial aerospace and New program Awards in defense.
The connectors business continues to grow in North America, and Europe , driven by increased industrial activity and our ability to deliver on time.
All in these drove organic revenue growth of 23% in CCT for the quarter.
In motion technologies, we continue to position <unk> as.
The brake pad supplier of choice to Oems, especially with electric vehicle manufacturers around the world.
<unk> content on 15 electric vehicle platforms in the first quarter with key wins in Europe , and China. We also gained share through awards on both the front end, we have Axel and a major European premium OEM platform.
While maintaining the strong win rate and continued to outpace global auto production.
Let's turn to slide five to review Icd's capital deployment progress in Q1.
As I previously said capital deployment continues to be one of Itt's top priorities.
We are starting to see the benefits of a heightened focus in this area.
Evidenced by the activity year to date.
We invested in growth Capex to support new electrified vehicle awards in friction that we convert or <unk> share gains into revenue.
We also continued to improve itt's operations through our green Capex initiatives in.
In April we announced a $2 $5 million investment installed a solar lake in barge, Italy that will power nearly 30% of the innovation centers energy needs.
We are well on our way to deploy the $10 million commitment in 2022 for Green Capex to create the most sustainable ITT.
On repurchases, we now expect to reduce our full year share count by a minimum of two 5% given the strong historical cash generation and actions to eliminate our asbestos liability we have a ton of firepower due to deploy and intend to maintain a disciplined approach to capital deployment.
Our M&A pipeline remains very active and we are cultivating a number of additional targets with our revamped M&A team now in place.
As you've heard already in April we announced the acquisition of habit in the acquisition is now part of our industrial process segment.
We acquired the business for $140 million, which amounts to a multiple of less than 13 times EBITDA.
Our goal is to build a much larger and profitable platform for growth with <unk> being the first step in our strategy.
Let me share why I'm, so excited about this business.
First <unk>.
<unk> is a manufacturer of ball valve for harsh applications with strong brand recognition.
The company is attractive positions in gas distribution hydrogen chemical and pharma markets.
Second.
Having him as a strong and defendable market position maintain close relationships with end users.
Is the relentless focus on product quality and likely 90 customer Centricity is a core value.
Third is technology, both on the product and on the process.
On the product as an example have been able to develop a proprietary technology called total telematics, which is a fully see above system the guarantees zero fugitive emissions.
On the process. The company has designed standard core product components, while allowing for late stage customization.
All of these simplifies considerably the supply chain and production processes.
All that happening team is comprised of highly skilled engineers and entrepreneurialism with expertise in applying <unk> technology to solve the customers' most pressing needs.
And finally, <unk> has a strong track record of growth and profitability with the sales CAGR of over 10% for the past four years and EBITDA margins that are accretive to IP and ITT.
I look forward to showcasing happenings and ICT technologies to everyone on June 16 at Itt's Investor Day.
Let me now pass it over to Emmanuel to review the results in more detail.
Luca and good morning, let me begin on slide seven.
From a topline perspective, ITT drove 7% organic growth in the first quarter.
CCT delivered 23% organic growth driven by continued industrial connector strength and recovery in aerospace.
An empty friction was up 5% organically driven by the continued momentum in the aftermarket.
While OE was flat organically given the ongoing chip shortage, we still outperformed global auto production.
And as Luca mentioned, the NTT has been relentless in driving price realization and partnership with our customers.
For all of ITT, we estimate that the ongoing supply disruptions cost us approximately 600 basis points of topline growth in Q1 with the most pronounced impact in industrial process.
Turning to operating income our teams drove productivity in the quarter of roughly 350 basis points of margin through a combination of shop floor in sourcing actions, which partially offsets 760 basis points of cost inflation.
From an earnings perspective, adjusted EPS declined roughly 8% versus 2021, despite the 7% increase in organic revenue.
The difference is largely attributable to the significant cost inflation and impact of the war in Ukraine.
And as a reminder, our first quarter results in 2021, we're incredibly strong.
We also absorbed and favorable foreign currency, which was offset by the benefit of higher share repurchases and a lower effective tax rate.
Finally, working capital requirements continued to weigh on our free cash flow generation.
We are purposefully investing inventory to ensure we are able to guarantee delivery to our customers in this difficult time.
We were also impacted by the timing of accounts receivable collections given the large volume.
Of self in December .
We expect that cash generation will improve beginning in Q2, notwithstanding the inventory requirements.
Let's now turn to slide eight to look further at the earnings performance.
We're driving strong volume growth and productivity through deployment of the empty operating model.
Included in the 29 of operational performance improvement is roughly 22.
Of productivity.
Pricing actions contributed 22 earnings while volume contributed seven with particular.
<unk> strength in CCT.
These improvements however are still lagging the pace of material labor and overhead inflation as.
As a result, we are enacting incremental pricing price increases through the portfolio to address the rising cost.
In Q1, we suspended our operations in Russia, given the war in Ukraine.
We see direct impacts mainly in empty and IP.
As well as indirect impacts from OEM customers that sell in supply into this region.
These cost us approximately <unk>.
In the first quarter.
In 2022, we expect this will result in a revenue decline of approximately $60 million to $85 million as compared to our original plan, which is factored into our current revenue outlook.
Additionally, we are actively investing in M&A.
These investments will help to fund future growth at ITT and this quarter cost us roughly <unk> of earnings.
Finally, given the movements in foreign currency rates, we absorbed or <unk>.
Headwind.
In Q1 and expect this ongoing trend will drive at least a nine.
Headwind for the full year.
Offsetting this first quarter headwind is the benefits of our share repurchases and a slightly lower tax rate.
Let's now turn to slide nine to review the segment results.
Let me begin with motion technologies.
Our friction OE businesses maintained its outstanding on time performance at over 99%.
Affectively, managing the global supply chain disruptions and OEM production impacts created by the war in Ukraine.
<unk> continues to be highly differentiated thanks to its innovation and parallel quality and exceptional on time delivery performance.
By now you probably are aware of the outstanding quality of our friction business that produces less than one defects per million parts.
Amazingly in Q1, the friction team has been further improving their quality performance and reduce the defect rates by double digits versus 2021.
I also want to highlight our Coney shock absorber business, which has improved its cost some are defect rates by an impressive 90% over the past two years, delivering an industry leading quality performance.
On profitability.
Segment margin declined 310 basis points.
This was mainly due to higher than expected material inflation, partially offset by pricing actions and productivity benefits.
We're driving necessary pricing actions with our OEM customers.
Finally, we completed the closure of our lunar and facility in Germany and transferred all production to Poland in Q1.
For industrial process organic revenue grew 2% driven by short cycle strength, partially offset by supply chain disruptions and labor constraints.
Shipments were impacted mainly in January by the rise of the COVID-19, omicron variance at our U S and India sites.
However, when looking at April Ip's performance continues to improve especially compared to what we experienced at the beginning of Q1.
On the demand side.
We are encouraged by the order strength in our short cycle and project business.
This was our fifth consecutive quarter of sequential order growth as short cycle demand remained strong and project activity continues to strengthen.
Ip's margin declined by 300 basis points.
This was driven by unusually high costs for freight and materials.
As well as the slow start in January due to high Covid absenteeism.
As a result, Ips than just undertaking substantial pricing actions to mitigate cost inflation, including a second larger price increase in March of this year.
In Q1, I spent considerable time with our IP team incentives false and was impressed by the positive momentum we have generated on the shop floor over the past five months.
We're continuing to transform our operation by accelerating shop floor velocity velocity and attacking waste in our processes. For example, we shortened the throughput of our small and cheap pump by over 50%.
By streamlining the product release process and reducing non value added activities in the assembly line.
With these improvements achieved were now shifting our focus to our midrange pump line.
Lastly on.
On connect and control we.
Our largest order quarter since Q1 2019, despite the fact that aerospace orders are still more than 30% below pre COVID-19 levels.
Orders grew 28% organically versus prior year, driven by 40% growth in aerospace and defense.
Cct's margins expanded an impressive 550 basis points to 16, 7% driven by higher volume and shortfall productivity.
Notably CCT delivered 42% incremental margin in the face of these inflationary headwinds.
This was without the benefit of significant pricing actions, which we will begin to realize in Q2.
We will also expect we also expect.
That the product Redesigns and range extension, we launched coupled with the process automation, we will implement will drive further margin expansion in the near term.
Let's now turn to slide 10, we provide an updated end market outlook.
Our message here has not changed demand remains strong and we're winning in the marketplace. However, the dynamics were noted around pricing cost inflation in the wine Ukraine will impact our results in the near term.
In auto inventories remain at historically low levels in North America, and Europe , which should drive further demand for deliveries continued to be impacted by the chip shortage.
<unk> ability is being hit by inflation and we're now managing through further disruptions, namely Covid in China and the war in Ukraine.
<unk> is also impacting our rail business.
Demand remains generally strong in the industrial businesses.
However, labor shortages and supply chain disruptions continue to weigh on our top line growth and margin expansion.
Regarding aerospace demand is improving brewers still well below self levels from 2019, we.
We expect this market to continue to steadily accelerating in the second half coinciding with a further increase in global travel and a reduction in the Aero OEM inventory.
All of this informs our guidance update on slide 11.
As you can see we are reaffirming our guidance ranges for revenue adjusted segment margin and adjusted EPS.
We continue to expect organic sales growth of 9% to 11%.
But given our first quarter performance the.
The strong demand, we see IP and CCT and the incremental pricing actions we're taking.
We are trending towards the high end of our organic sales range for the full year.
From a segment margin standpoint for the full year, given the significant cost inflation headwinds, we're trending towards the lower end of our current range.
CCT will drive the strongest margin expansion, while <unk> margin will likely decline close to 200 basis points.
Industrial process margin will expand overcoming the ongoing supply chain disruptions, which will continue to constrain delivery in the first half.
Additionally, the acquisition of <unk> will temper margins in 2022, given M&A costs.
As a result, we now expect IP to deliver between 15 and 16% margin for the year with a significant improvement in Q2 compared to Q1.
<unk> EPS will be impacted by the lost sales in Russia, as well as the impact of cost inflation.
We intend to offset this through a stronger than anticipated performance in CCT lower share count and the addition of <unk>.
The impact of these items suggests we may trend towards the lower end of our adjusted EPS guidance range.
Our ability to drive better performance will depend in part on the cost of key raw materials.
Pace at which we're able to realize benefits from price increases and the impact if any of prolonged lockdowns in China.
Given our use of cash in Q1 free cash flow will likely be lower than anticipated new range of $250 million to $300 million.
And free cash flow margin will approximately be 8% to 10%.
Longer term, we still believe we can effectively improve our cash flow profile through reductions in working capital and earnings growth.
In the event supply chain disruptions do not improve and raw material inflation gets worse, we're planning to take further actions.
<unk> pricing and additional structural cost actions as we have demonstrated before.
In terms of the cadence for the rest of the year.
<unk> EPS for Q2 will be roughly flat sequentially to Q1.
Organic sales growth in Q2 is expected to be in the mid single digit range.
Thanks to the growth in CCT and to a lesser degree.
We expect IP organic sales to increase in Q2, and then to improve sequentially in the third and fourth quarters.
Itt's segment margin in Q2 will likely be flat to Q1.
At approximately 16% with margin expansion in IP and CCT offset by an approximate 200 basis point decline in <unk> margin sequentially given the material inflation headwind. This is obviously not the type of performance, we like to see from empty.
However, we expect <unk> margin will begin to improve sequentially in the third quarter as pricing actions are realized.
With that in the past it back to Luca to wrap up.
Thanks Simona.
Like others.
<unk> is managing through unprecedented market conditions.
We are encouraged by the demand across the portfolio.
All our businesses.
Deliver for our customers.
Thanks to these performance ITT built a robust backlog that will provide a long runway for growth.
Turning on our capital deployment plan, while continuing to invest in the business.
Hi Tech and intense focus on M&A is starting to generate results and we are ready to execute more deals in 2022.
Our solid first quarter results are a testament to the resilience of ITT and its people.
I would like to again, thank our ITT ers.
Suppliers and our customers for working together in these unprecedented macro environment and our shareholders for their investment in ITT.
However, it has been my pleasure speaking with you all this morning, and we will happily take your questions now.
<unk>. Please open the line for Q&A.
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And our first question is from Damien <unk> of UBS.
Your line is open now if you would like to proceed with your question.
Hi, good morning, everyone.
Good morning, Damian Damian.
I wanted to ask you about.
Guidance here and your assumptions for price cost.
Yes.
The progress through the coming quarters.
Expecting to kind of get price cost neutral by year end are still exiting the year with that as a headwind.
And yes, it does sound like Youre expecting them to get worse before it gets better maybe if you could just kind of elaborate on what youre seeing across the supply chain and your manufacturing footprint.
It gives you confidence and ability to achieve that that margin guide for the year.
Talk about pricing and it'll be up supply chain and eventually MMO independent deep dive later.
Of course, we made progress, but theres still much more to do on the IP and CCT front, but these were probably don't phase that because difficulties because <unk> is just going through the distribution channel et cetera.
Wanted to know correctly is more on empty and particularly on the friction on pricing I think our team specifically the friction team are making progress I can give you a couple of example, where the friction team is close the negotiation with a couple of tier ones and a couple of Oems.
In a very fair and <unk> agreements.
The customers ODT.
<unk> did the extra cost and we close it in a very nice way, but there are still some negotiations that are happening and I'm positive that.
When you reach a fair and just solution with our valued customers.
These increase and improve quarter after quarter, if you've seen the adjusted in Q1, we were able to achieve the same amount in millions of dollars that we had for the full year in 2021.
That's on the pricing.
On the on the supply chain I think that the challenge is that debt.
We have seen a persisting.
These are very true, particularly in IP that has been impacted in terms of the revenue.
But we do not necessarily see that really improving substantially until probably the second half or maybe Q4 of these yet.
And in terms of the.
The impact quarter to quarter, so in Q1.
As Luca mentioned, we were not able to compete.
Completely compensates the cost inflation, we've been facing.
Mainly driven by delays in getting price.
Mtc.
So the impact on the margin was roughly a little less than 200 basis points for the quarter and then we expect that in Q2 and in the in the next quarters that this will moderate as we were able to step up our pricing.
<unk>.
Our pricing.
Performance as well as increased productivity. So in Q2 will be better and the margin impact will be less than 100 basis points and then roughly for the full year will benefit from these.
The improvement in terms of pricing in Q3 and Q4.
Okay. That's helpful.
And then in IP, you're seeing a lot of activity.
Maybe if you could just give some additional color around.
King.
And how should we think about conversion there.
At some point later this year theres going to be.
Significant step up or just kind of more of a slower grind over time over the next year.
Yes.
Workspace supply chain conditions.
Okay.
So when you look at when you look at IP.
The IP orders that had been an exceptional performance this quarter.
Again.
On the short cycle. These was the best that we've ever seen and stronger than even Q4 project orders of $59 million in the quarter.
With an increased 45%.
Year over year.
And on top of that also the funding.
When you look at that day.
So it is across the board is in oil and gas is in chemical is in general industrial we see it across the regions. If it is zero.
Strong orders performance in projects and stronger funnel.
And.
And just just one last thing regarding IP and our ability to convert so obviously this quarter we mentioned.
Gen 600 basis points of impact on our sales growth.
And due to IP.
And I think when you when you think about the situation. There we have difficulties on a number of components, whether these casing motors.
CLS as well and difficult to get to all of those components on time.
So so we are really driving the conversion and this wasn't in the example that we've given in terms of reduction in the throughput time is one of them, but it's still very difficult.
Okay.
Thank you and our next question is from Joe Ritchie of Goldman Sachs.
Your line will be open now if you'd like to proceed.
Great. Thank you and good morning, everyone.
Hi, Joe.
Guys can you maybe just provide us I wanted to drill down a little bit further into pricing. So last quarter. I think you had set a target of roughly $100 million for the year.
Look I think in your prepared comments, you said that <unk> got 80% of the one key number youre expecting but can you guys. Just maybe just parse out how much youre now expecting for price for the year and how does that break out by segment on a dollar basis.
Yes, so you're right Joe.
We targeted $100 million and even though we fell little bit short in Q1.
We also realize that it's not sufficient so we increased our targets to buy roughly $80 million.
So we're now targeting something between $160 million to $180 million.
And this is mainly driven by empty empties the value centers.
He is impacted the most by inflation on steel tin and copper by our customers and this is why we have increased our pricing recovery target.
And Emmanuel.
How far along are you in locking in the.
The new 160 to 180 target and.
At what point do you expect those negotiations to.
To conclude.
That you feel confident that you are able to achieve those numbers in the back half of the year.
So as Luca mentioned.
We are stepping up overall.
The ITT price recovery targets and so some of it is going to come from CCT and IP also where as Luca mentioned, it's easier to get price. So it's nuts.
It's really the majority of the price increase, but it's still pretty substantial.
And then in terms of our <unk>.
Pricing.
I would say that we are making continuous.
Progress.
In Q2, we have specifically stepped up our actions with customers that are that have not been as cooperative as we would expect and we expect to see significant improvements already in Q2 and in Q3 and the end of Joe I think that if you look at the performance of friction in terms of on time delivery of 99.
The performance on quality. These are all characteristics that the customer values quite a lot and in the challenging market environment that we have today securing the supply is critical and strategic so we are confident that we will find that appropriate adjust that in fair agreement with our customers.
Now that said Super helpful.
I could maybe just follow up one more quick one just on China I know that the guidance doesn't include an impact from from China stains at prolonged lockdown.
Provide a little bit more color on what youre seeing on the ground there and what your expectation is for the rest of the year.
Sure.
He comes to China.
We have two plants, Joe wanting to connect our plantations and the friction plant in Wuxi. So when you look at Q1 Q1 already had the impact of the lockdown, but we additions and when that happened our plant kept operating because we have a dormitory we operated in a closed loop and actually we shut down the factory only for one day.
When it comes to friction the impact of the Lockdowns Asian Guy and automotive are not really into Q1, because that starting towards the end the way that we're operating in the Wuxi, where we don't have the dormitory. We are all still operating and closed loops, we put our people in a close by hotel so that they have not have explored.
Outside the hotel and the shop floor and the plant.
We are securing the supply with an investment in inventory. So we stepped up our inventory over that so the supply and the way that we are operating the plant that is secured we never stopped is more a question of the demand and you are rightly, saying that the demand in Q2 will be impacted I assume the worse.
The mantra is has been April April would be the worst one we'd probably their highest reduction in terms of demand, particularly if you think about all the plants that are around Shanghai may we will be able to be better and recovery will be we started really in June at the end of Q2.
Thank you and our next question is from Mike Halloran of Baird. Your line will be open if you'd like to proceed with your question.
Hey, good morning, everyone.
Good morning.
Hey, everyone. So on the auto side of things, maybe just give a little context too.
Are you thinking about end market demand for the remainder of the year, obviously, a lot of puts and takes happening right now which is referenced China Europe .
On the supply chain challenges, how do you think that cadence is out.
And at what point in time do you think inventory can start catching affordable.
Okay. Thanks, Mike obviously, the market for 2022 will not be as positive as the originally forecasted by H IHS IHS. We're thinking eight five is already down to four four for 2022.
We always approach it in a more conservative way. So we've seen that actually Europe will probably be up flat to up low single BJ to China will be down low single digits I know the America will be up single digit so, but what we are at what.
The way that we perform well, we'll be able to overcome the lack of growth in the market with our outperformance and if you think about the awards that we had in Q1 Q1 was a perfect quarter in the in the in the awards because we re won every field that we were in <unk>.
Output for renewal and we added on top of some platforms where.
We will not price it so that we keep on feeding our market share gains and our outperformance is tasked to operate in this environment because the volatility is incredibly high but the team has performed incredibly well with 99% on time delivery so far.
Now going back to the inventory because that was the second part of your question I mean, the demand is there the inventory added a record low for North America, and Europe , and because of the challenge on the supply chain I don't really see that changing in 2022.
Great. Thanks for that and then follow up just on the capital deployment, obviously got a lot going on both internally with the capital Youre spending internally as well as externally when you think about the external bounce between the M&A and the buyback side of things do you think you can keep this cadence up.
Going forward, obviously get a lot of bandwidth.
The guidance implies some further share repurchase from here.
Some context on how you balance that with what the pipeline might look like on the M&A side.
Okay. The pipeline is.
It's very good pipeline is robust and is full of opportunities.
Some like Hibernia.
We think happening with an exclusive deal we cultivated this deal for quite a while and we were able to bring it home. We now are getting into into the process. So we have some of those and that is rich data at different staging the tunnel. So I'm confident that we will do more deals in 2022 now.
If things do not work out because of different expectation or alpha of course, we will we will go back to their to the share repurchases.
I would say first priority is organic investment second is M&A and of course, then is at share repurchases and dividends.
Thank you and our next question is from Jeff Hammond of Keybanc. Your line is now open. Please proceed.
Hey, good morning, guys.
Hi, Jeff.
So just I just wanted to be clear so the organic growth at the high end.
That's despite the $60 million to $85 million headwind from Russia.
Correct, that's correct Jeff.
Okay, so you'd be two to three points above if not for Russia can you breakout kind of where that because it seems like it touches a number of businesses kind of how you think that 60 to 85.
Falls across the segments.
Sure. So obviously, we have really strong order momentum in IP, and CCT and and so we had $6 85.
In terms of the Russia impact.
This is mainly coming from.
<unk>.
We have.
Two kinds of impact we have a direct impact.
Which is basically.
Everything that we sell directly into Russia, and that's around $60 million.
And that is probably equally split between IP and at.
Either of our OEM customers in auto.
The lack of supply that were produced in the Ukraine and Russia.
<unk> or <unk>.
Yes.
Sales into Russia.
That accounts for the for the rest.
So this is the impact on Russia.
Okay, perfect and then.
IP it seems like the margin step up nicely in <unk> and I'm just trying to understand.
What's the what are the moving pieces there because you still seem pretty confident about the margin trajectory there.
Sure so.
So obviously, we were disappointed in the Q1 performance a lot of the revenue we were expecting in January Didnt come out and then we we tried really hard to catch up in February and March but given the omicron.
Impact he was very difficult. So when we look at Q2 the improvement in margin is going to be driven by obviously volume.
We're going to have more volume in April is already showing really nice.
Really nice increase compared to what we've seen in January .
And then.
And then we're going to have a step up in terms of pricing, we launched a pricing campaign in March that is going to yield results in Q2.
As well as improved productivity.
So those are the main drivers for margin expansion sequentially. So Jeff we were impacted heavily by by Covid.
If you think about in 2021, our average number of new cases per month were roughly 50 to 60 people new cases every month in January .
800 people in.
In February was around 450, and a couple of hundred in March most of that in the U S and the Seneca falls was impacted heavily so.
You think about the under absorption that you have in during the month of January and February visa is not the case right now.
Great. Thank you and our next question is coming from flat to plus treaty of tissue flat. Your line is now open. Please proceed.
Flatbush Creative Alright. Your line is now open.
Okay.
Okay, sorry about that good morning Andrea.
Good morning.
Okay.
So can you just talk maybe a little bit more specifically.
Around the organic growth outlook.
We are absorbing.
Meaningful headwinds for Russia.
The outlook is unchanged and you're talking about that.
Top end of the range.
Can you talk more specifically about what's getting better to offset the headwinds is it mainly the incremental pricing actions you are putting in place or is there something else, where youre seeing better <unk>.
On the organic growth outlook.
Sure Brad so.
You see we are.
Were impacted positively by higher growth rates in terms of orders specifically in IP and CCT were seeing really good orders.
That will convert in 2022 and 20.
2023.
From all different end markets and Luca mentioned.
Our growth is really across the board chemical oil and gas.
In general industrial all double digits, and and so that will help us in.
In converting into revenues in aerospace defense, but also general industrial for both components and connectors and as we mentioned we've launched also a pricing a new pricing campaign that will impact our Q2 revenues are going to are.
We're going to really drive incremental incremental revenue.
Both from a volume and a pricing standpoint, and if I can build on what Manuel said, if you think about CCT.
Men to embedded combined 2022 is the third.
This quarter when our.
<unk> business is actually growing year over year in revenue.
After eight quarters of decline so.
This is an important.
<unk> had a very good incremental margins.
Okay, that's great to hear.
And current Jr.
On the air side.
Sure.
So maybe just a follow up on the momentum youre seeing in the <unk>.
Hi, Pete.
Project orders.
Can you talk more I know you mentioned, it's broad based and across regions and industries, but can you talk about.
Really what's driving that is deferred capex, that's coming back now are you seeing any.
<unk> field activity.
And then specifically in North America are you seeing any signs of.
No.
Vlad Aten today Sir.
The oil and gas.
The fact that these at this sector would be done with the.
In the last few years of course.
The board fleets and also in the Middle East.
Of course, it will be we don't see right now, but there will be investment in us.
Energy challenge that they will have to face in the next couple of years is becoming less dependent.
From the from the Russia gas and then obviously there are more capital in.
Investment in North America, because of the re shoring all of these.
Our pieces of the Paso.
<unk>.
Makes us in PA.
Okay.
And our next question is from Andrew <unk> of Bank of America.
Hey, guys good morning.
Andrea.
Can we just dig into a little bit more IP.
And I think flows are had a similar narrative.
Pumps.
Covid hit earlier.
This quarter, but I am just trying to understand because one when everybody in the industry in mid February .
So was the surprise in ability to catch up.
In the second half.
Of Q1, and I just wanted to get a better understanding on what specifically, what where the pinch points.
And sort of in the pump supply chain.
A limited ability to ship and get margins up thank you.
So.
Hi, Andrew So if we think about IP I think that some of the challenges that of course did the carve it up.
Cynthia them was it was a big challenge was a bit challenging in January and continuing that for the first half of February and some of that we were not able to recover.
That was practically because of the supply chain challenges that continue to persist as Emmanuel said, if you think about it in terms of the revenue that we were not able to deliver in Q1 that we will deliver further later in the year was roughly $30 million for IP needed because of the field.
Notice of casting.
And for that if you think about the deadline of $30 million of revenue that would have been flat.
Okay and will that deliver imaging, which was more aligned to what was probably lost last year. So what's really the supply chain that didn't even improve towards that didn't allow us to recover in Q1.
Gotcha.
Question, just as you think about the organization.
You have this unprecedented volatility.
And in terms of input price slight ability to actually source staff.
Can you just.
And what kind of conversations youre, having with your supply chain in order to take out this volatility out.
Because you guys have managed it remarkably well, but just if you could share with us if you can.
Do you have to extend contracts for your suppliers do you have to pay more versus the spot price how do you ensure.
In this unprecedented environment.
Again, I'll sort of availability of product and some sort of visibility to as much as you can as to what kind of price you have to pay in the second half. Thank you.
Hi, Andrew.
It's really a mix and we do not have a silver bullet that you say is going to is going to solve it. So let me give you a couple of examples which may give you some color and to understand exactly how we're operating when it comes to most of the technology that we're still going to see binary in Shanghai.
And practically how we were able to do that but as we increase the inventory.
Some of the warehouses were locked down in Shanghai.
This year working with the government to get a special permission. So that you have a special permission to get that and get the material that have critical for your production.
Or sometimes that you really have a special team that goes and pickup truck and the highway gate to guide them to campus. This is how the China team operated so far in China to guarantee the level of service.
When youre looking at the Shanghai poor do you stay ahead of the game and Youre shifting your shipments.
From the Shanghai forward to other ports nearby or towards the north of China.
But there are challenges out that some of our suppliers are also in terms of steel and I'm not willing to commit to the full volume when it comes to Q4 of <unk>. So you keep on stay on the board you keep on talking to them and you get mass guaranteed supply vesey the rule of the game today.
Is guaranteeing the supply for ourselves and <unk> is that also some of the leverage that we have with our customers because we're able to deliver for them I hope.
And in terms of financial obviously this is a financial impact.
It has a financial impact because we have to hold more inventory and also in some cases, we had to prepay some suppliers in order to secure.
Parts to be delivered to our facilities.
No.
It is a.
It is the.
The impact on our cash performance as you have been able to see in the first quarter.
Excellent. Thank you and our next question is from Nathan Jones of Stifel. Nathan. Your line is now open. Please proceed.
Good morning, everyone.
Good morning Nathan.
I wanted to go back to.
Price plus productivity correct me if any of these numbers are wrong, you talked about 760 basis points of headwind from costs 378 tailwind from price and 350.
And from productivity I think the business would typically be negative on price cost mostly out of the MTA segment that you typically make up with productivity, but it clearly would have had that biggest spread.
Can you talk about that kind of dynamic historically, how far behind you typically are on price cost that you make up every year with productivity primarily out of the MTI business.
So on price cost as we mentioned we are.
We're behind in Q1, and this was both from a lower.
Price recovery.
Performance as well as increased.
Cost inflation that we're seeing mainly on raw materials.
And so that impacting us negatively in this impact is coming mostly from MTS.
As we as we move forward.
We're really pushing on price recovery.
And the productivity because cost inflation as Luca mentioned it is what it is we're not able to really impose any type of price with customers. We are battling to get supplies.
Suppliers, we're battling to get supplies.
And so we're driving price with our customers.
And trying to really differentiate ourselves and making sure that we provide the value that others cannot provide we're increasing our price recovery targets as I mentioned earlier.
And this is going to be a central piece of us being able to recover.
Cost inflation that were facing productivity for sure. It is very important but this is not going to make the difference price you've got to make the difference in order to recover the cost inflation with pricing.
So if you look at motion technologies and <unk>.
Right.
Yes go ahead David.
If you look at most of our technology in Q1, and we have the gross productivity of more than 400 basis points, but that inflation is more than 1000 material. It's 800 basis points you have overheads, which include the energy, which is roughly 200 basis points. So to a manual point gross productivity is not able to cover for that you have to go for pricing.
And I guess my.
<unk>, where we've been.
<unk> historically, because I know you have price downs in the motion Tech business, our munitions, obviously weighted price cost spread is historically negative.
You have price downs in that business that you typically make up for in productivity.
If I look at.
Cost minus.
Price plus productivity minus costs, you were fairly close to neutral.
Overall in the business.
Where is that historically been have you historically been able to use price and productivity overcome cost inflation.
And you're back down to a neutral here.
I'm, just trying to get a sense of where that would be historically for the people.
Yes, so so.
So actually we would be able to drive the margin equation by really driving productivity because as you rightly mentioned price was a negative impact on margin and we would be probably emotion tag between one five and 2% price down.
Every year year over year.
And so we were able to continuously improve the margin because we will drive productivity and at this point new cost inflation will be retained.
And then so right now what we're seeing is that we're able to continue to drive productivity.
And we were able to get price increases the problem is that the cost inflation is outpacing our cost.
Our pricing price recovery and as a result, this is a negative equation for MTN for ITT.
Thank you and our next question is from Joe Giordano of Cowen <unk> Co. Your line is now open.
Yes.
Hey, Good morning. This is Robert Jameson in for Joe.
I just wanted to ask a couple of questions about Europe . The first one.
<unk> in Ukraine can you give us a little bit of color on what youre seeing on the changes to the energy landscape, there and are there potential opportunities where you could benefit.
Okay. So.
In the <unk>.
Things that we've seen is that all right.
We don't necessarily see yet in the in the pipeline the necessary investment to reverse from the Russia dependency, but it is something that.
Will happen just because of the geopolitical environment, so that will be it could be the more LNG.
Investment in terms of terminals that for.
It's coming from Qatar or from the U S.
We haven't seen those yet in the pipeline, but we know that there are work in progress and that would be a positive sign for a positive tailwind for IP, but we're talking about that medium term not short term.
Okay.
Okay, Great that helps and then just another one.
Or was this kind of has this had any impact on your M&A strategy in Europe .
The different assets you are looking at there I think you are looking at some opportunities within rail.
But yes, just like an update on that as well.
Sure.
Now of course the situation in Europe is there is dramatic.
But I would say when we look at our acquisition the areas that the pieces that we are looking at being in the in the Thompson and the valves being on the on the connector side of the business the Odeon rail.
The opportunity that we're cultivating both in Europe and.
And in North America disease, where big Stereography, where our pipelines are.
<unk> is now really change there of course, we are not that we're not looking at acquisitions in the in the in the eastern part of Europe at this moment in time.
Thank you very much and our final question for today is from Matt Summerville of D. A Davidson your line is now open.
Hi, This is Jonathan on for Matt Summerville This morning.
Yes.
Hey, good morning, good morning.
I mean.
Hi, Thank you for squeezing me in last minute here I want to ask two questions. The first regarding capital deployment.
You put a lot of resources to work in the first quarter and I'm wondering to what extent has your thinking about capital allocation and influenced by inflation and the fact that it has become more costly to hold net cash on the balance sheet and I'm. Just wondering if your thinking has changed at all in response to that.
Of course on the inflation is is the challenge that we're facing today that we're facing for the quarters to come.
So having said that the use of capital is something that was important before and there is even more important now so I would say the strategy hasn't really changed.
We plan that capital deployment was a top priority at the beginning of the year is a top priority now and when you look at the deployment of the capital is organic versus M&A and then.
Share repurchases and dividends third and I would say that.
For us.
The consequence is that when we look at and when we look at targets, what's really important for us is to understand their pricing power and how they're able in this environment to differentiate from the competition and this is something that we saw with <unk>.
Understood. Okay. Thank you and then I want to pivot here and ask.
Your your friction business I'm wondering if you can help me understand a little bit better what what's driving the fact that you continue to win share in that business is that a function of the fact that you can continue to deliver on time, 99% of the time, where others can't or is it a function of.
The fact that ITT, great solutions in that business happen to be higher quality than the other solutions that are out there.
I think if it makes a thing of course the delivery is one component.
Relative to demand was talking about is another but then he is also the speeding finding the solution and the fact that our R&D and our performance in terms of material science is better and faster than the competition and then there is a cost advantage as well.
Have a lower cost structure than most of our competitors and therefore this allows us to win in the market when sometimes they count so it's a combination of things.
Thank you and this does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.
Thank you.
[music].
Yes.
Okay.