Q2 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.
Thank you, Chris and good morning, It's my pleasure to welcome to Itt's second quarter 2022 earnings Conference call. Joining me here. This morning are Luca Savi, Itt's, Chief Executive Officer, and President and Emmanuel <unk>, Chief Financial Officer, today's call will congratulate financial results for the three months period, ending July 2nd, which we announced this morning.
Today's remarks may contain forward looking statements that are subject to certain risks and uncertainties, including comments or any of your comedy performance strategic priorities business mix market conditions and the effects of COVID-19, ITT. 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.
<unk> is not under any and expressly disclaims any obligation to update forward looking statements, whether as a result of new information future events or otherwise.
Except where otherwise noted the second quarter results. We present this morning will be compared to the second quarter of 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 in the first quarter related to the suspension of operations in Russia restructuring acquisition related charges and certain tax items and in 2021 asbestos related charges, while adjustments in the quarter are detailed along with a reconciliation of such measures to the most comparable GAAP figure.
In our press release and presentation, both of which are available on our website. It is now my pleasure to turn the call over to Luca who will begin on slide three.
Thank you Mark and good morning.
I would like to begin as I always do by thank you our shareholders our customers and our ITT ers for their continued support and investment in ITT.
I firmly believe that the ITT people made a difference.
This topic, we show you what I mean in a few minutes when I talk about the resilience of our people and in Wuxi China.
Let's now discuss the Q2 results.
I am very pleased with the ITT results of this quarter, considering the challenging environment that we're operating in today.
<unk> demonstrated itt's resilience and the strength of our businesses once again this quarter.
I continue to be confident in itt's future growth and outperformance potential as evidenced by the long term financial targets, we announced that 2022 Investor day.
Demand for our products and services remained strong we.
We saw this in the short cycle chemical and industrial verticals in IP.
Where orders grew 26% organically.
In aerospace and defense and connect and control where orders grew 17% organically.
And in our friction business, where we won 18, new electrified vehicle platforms.
Collectively these demand generation drove 13% organic orders growth.
On the strength of this demand we grew organic revenue by 10% aided by both volume and pricing across our businesses.
This was despite the disruptions in China, coinciding with the re emergence of Covid.
On profitability IP expanded adjusted margin 210 basis points versus prior year, and 400 basis points sequentially, while our CCT grew margin 380 basis points versus prior year and 50 basis points sequentially.
We are also seeing signs that commodity inflation pressures are slowing.
You should begin to show up, especially in Mt's results in the fourth quarter.
In terms of the quarter results industrial process was the highlight.
IP showed exceptional profitability and orders demand.
Emmanuel and I spent several days on site in Seneca falls driving the performance together with the team.
Let's take a moment to discuss the team's achievements.
Ips orders.
The highest this quarter since 2014 and the growth in short cycle is coming from share gains, especially in North America.
We are seeing growth in project orders, including for LNG, where we strategically want engineering only orders upwards of two years ago that are now beginning to translate into large wins.
We're also capturing price on baseline pumps and aftermarket that will benefit second half results.
Our lean initiatives in Seneca falls has generated significant benefits and we have more to go after here and at other IP sites.
Earlier this year, we also announced the closure of the foundry in Seneca Falls.
Had a tough decision. This is key for the long term cost competitiveness of AP.
Lastly, as you will hear how Boeing is off to a strong start from a sales and margin perspective and is already contributing to Idt's earnings growth this quarter.
As a result of all of these IP delivered an adjusted margin this quarter that was the highest on record.
Dave and IP team well done and thank you too.
Dave Stateline senior VP of industrial process.
Laugh pumps.
Back to IDT.
Strong volume growth.
Productivity and acquisition contribution drove a sequential and year over year increase in adjusted earnings per share in Q2. Despite a long list of macro headwinds that we had to overcome.
Regarding capital deployment.
In 2021 to divest our legacy asbestos liabilities, coupled with the solid results in the first half of 2022 enabled us to continue investing in the business.
We deployed over 3% of sales through capital expenditures year to date to fund growth as well as footprint rationalizations in empty and IP.
Additionally, we deployed over $170 million towards acquisitions, and ITT ventures investments.
In June we closed our third ITT ventures investment with minority Stakes in CRP.
CRP is an industry leader in developing and manufacturing our reinforced composite materials for <unk> printing and enabled ITT to expand its position in material science.
In Q2, we repurchased over $60 million of ITT shares, bringing our year to date total to $250 million or roughly two five times, our original full year commitment.
All in we deployed over $500 million in the first half of 2022.
Because of our solid first half performance the large backlog we have accumulated the pricing capture we are executing and the performance momentum, especially at IP and CCT, we are raising our organic sales guidance to a new range of 10% to 12% and we are also tightening our adjusted EPS guidance.
<unk> to a new range of $4 35 to $4 65, and maintaining the prior midpoint.
Before moving to the next slide I wanted to touch on the situation in China.
As you know both the OE production volumes in China were impacted in Q2 by mandatory lockdowns across the country, which drove significant uncertainty and volatility in customer demand as well as on the supply side.
Despite these headwinds our teams continued to before maintaining the quality and on time delivery that differentiates us in the market.
This performance was further demonstrated by the Wuxi, China team at the beginning of Q3.
And they want to take a moment now to tell you about the story.
In July as covered variance were continuing to spread outside of the large cities Wuxi was directly hit and our team that have put off an amazing feat.
Companies in Wuxi were ordered to shut down entirely and as the situation on the ground deteriorated ITT Wuxi decided to seal off the entire manufacturing compound in order to be allowed to operate and to serve our customers.
All essential production and R&D staff volunteered to join decides effort.
Overnight the team purchased sleeping bags water soap and other essential items to enable a full $24 7 million life in the plant.
In total the site has approximately 420 employees for two weeks during which time the team pretend nearly 18000 meals.
In addition, nearly 30 indirect staff volunteered to join the team effort Silvano Carl Sy.
And our lead US took several actions to preserve everyone safety and wellbeing let.
Let me share some highlights.
All 400, plus employees to PCR test everyday were exercise gains and other social activities to maintain morale.
The team dinners and leaders replace production workers on the shelf for some nights.
Finally, our team send videos with words of encouragement to Wuxi that ultimately went viral and China antique tuck and wechat.
Locally our teammate there say became celebrities being part of what was deemed the amazing story in Wuxi.
Operation was covered by newspapers and media and both government officials and other companies in the region came to Wuxi to support us and learn how ICT put out such a feat.
Through all of these there were zero carbon cases that they wished side and the team maintained 100% on time delivery and webcast quality.
Employees broadly embraced the challenge and.
And deliberate.
To say that I and everyone at ITT are proud of the Wuxi team is an understatement.
Our employees' display core ICT values and May sacrifices, we have never seen before.
Wishy team I cannot thank you enough. It is a true honor to work with you all.
Let's now turn to slide five to recap Itt's 2022 Investor day.
ITT hosted its first capital markets day for investors and analysts in June .
The event consisted of presentations by the leadership team interacted technology demonstrations with the engineers and innovators and we issued long term financial targets consistent with our continued growth and value creation.
There are a few key takeaways from the event that I want to reiterate today.
First ITT has market leading positions in attractive and growing end markets, including chemical and industrial pumps commercial aerospace and defense rail and electric vehicles.
We highlighted how we sustain our differentiation through three pillars execution innovation and culture.
Execution starts with the customer who is at the center of everything we do.
Innovation at ITT was on full display in our technology demonstrations, including as Matt pad, the AMD or embedded motor driving industrial process as well as cct's offering for the Fera program.
And culture, the glue that keeps everything together as demonstrated by our team in Wuxi.
Third we will have a ton of capital to deploy upwards of $2 billion based on our expected cash flow generation and leverage capacity.
Fourth regarding ESG, we're making progress with our emissions reduction initiative and we published our first E. One report earlier this year.
Finally, ICD issued long term financial targets, which we work hard to deliver.
With capital deployment are key element of our Investor day, Let's now discuss our continued progress in 2022.
Following our legacy asbestos liabilities divestiture last year, we spoke about accelerating the pace of capital deployment capital deployment.
Fast forward to today and we've started to see this materialize.
In Q2, we announced the acquisition of habit in ending June announced our investment in CRP and additive manufacturing pioneer.
Second we invested in a breakthrough rotor coating technology company to minimize fine dust emissions in braking system that will accelerate the development of new Green solutions for the outer motive industry.
Third we acquired a small energy absorption product line for high cycle applications in industrial automation, which closed in the second quarter.
The product line is complementary to Cct's offering and serves the factory automation workplace safety and E Commerce verticals.
We continue to invest in growth Capex to support production line capacity for new electrified vehicles awards in friction that will convert our <unk> share gains into revenue.
With the wins to date, we are on pace to have nearly 37% share of all global OE electrified vehicle volumes by 2025.
And finally, we repurchased $250 million of ITT shares to date, which will reduce our full year share count by 3%.
So to summarize the quarter.
We are winning in the marketplace and orders growth rates are outpacing that of our peers.
We're offsetting cost inflation through pricing and shifting the pricing paradigm in auto.
We're driving productivity in our plans to expand our margin.
We are deploying capital to grow our portfolio, both organically and inorganically as we'd happening.
And we're continuing on the ESG journey on route to becoming a more sustainable ITT.
Now, let me turn the call over to Emmanuel to discuss our results and outlook in detail.
Thank you Luca and good morning, we continue to see strong demand in Oro businesses, we drove 10% organic sales growth up to 7% in the first quarter with CCT again, leading the charge as.
As we anticipated growth in connectors and aerospace.
And defense components is driving great performance in CCT from both a revenue and a margin perspective.
Demand across IP short cycle continues to be strong and this quarter, we approached 20% organic growth.
We are also gaining share in projects, where orders grew 48% organically this quarter.
This drove a 26% increase in orders at IP and the funnel continues to increase increase with large larger multimillion dollar projects moving to the stage.
In empty friction was up 6% organically driven by the continued momentum in aftermarket similar to Q1.
Our OE business was up 3% organically, despite the ongoing chip shortage emt.
PMT team has been relentless in driving price realization in partnership with our customers and the negotiations in friction with customers or almost complete at this time.
We also saw another and over 200 basis points impact to reported revenue growth from happening we estimate that the ongoing supply chain disruptions cost us approximately two to 300 basis points of topline growth with the most pronounced impact in IP.
Adjusted operating income was roughly flat this quarter with margin declining 70 basis points.
We saw higher sales volumes in IP, and CCT and pricing and productivity benefits in all businesses.
Adjusted segment operating margin was 15, 9% in line with our expectations from last quarter. However.
However, as you will see on slide 14 volume pricing and productivity were outweighed by 880 basis point headwind from a cost from cost inflation.
The teams drove productivity of roughly 220 basis points through a combination of shop floor in sourcing actions.
Further our strategic FX hedging actions of the Euro delivered a 120 basis points benefit.
From an earnings perspective, adjusted EPS increased sequentially and on a year over year basis, despite impacts from significant cost inflation supply chain disruptions, the China, Lockdowns and an estimated <unk> <unk> impact from the war in Ukraine.
The share repurchases higher tax rates and higher interest expense netted to a benefit of roughly <unk>.
On cash working capital requirements continued to weigh on our free cash flow generation. We are purposefully investing in inventory to ensure we are able to secure delivery to our customers in this difficult time.
Cash improved sequentially from Q1, but were still below our expectations through the first half. However, this performance should continue to improve in the second half.
Additionally, today, we are committed $8 million for energy efficiency and renewable projects is greens projects will protect us from energy scarcity and inflation and make ITT a more sustainable company.
Finally, foreign currency translation negatively impacted our cash flow generation.
Let's now look further at the earnings performance.
I want to make just to Q a key few points on this slide.
First we continued to drive strong volume growth pricing capture and productivity across our businesses. In 2021. This was led by empty and now IP and CCT is building on MTS performance.
We are driving productivity in the second half, which will help to overcome lingering inflation and foreign currency headwinds the latter of which was not contemplated in our previous outlook we.
We drove 16 of productivity and 16th of volume growth or pricing actions contributed 32.
On pricing, we made a ton of progress in Q2, the negotiations with OE customers in friction our most complete and while the total amounts realized is below what we initially anticipated the agreement secured will deliver growth and value creation long term.
In IP, we are already seeing the benefits of our pricing efforts.
Q2 orders, which will flow through earnings more impactful in the second half.
These improvements in total is still lagging the pace of material labor and overhead inflation today, we're seeing slowing commodity pressures and we expect this will begin to drive benefits for us in the fourth quarter most prominently in empty.
The lagging realization is due to a strategic decision earlier in the year to lock in supply of steel tin and copper to ensure we could deliver to our customers on time.
As you know in Q1.
We suspended the majority of our operations in Russia, given the war in Ukraine, we are seeing direct impacts mainly in MTN IP as well as indirect impacts from auto OEM customers that sell or supply into Russia.
This cost us approximately <unk> of EPS in the second quarter in.
In 2022, we continue to expect this will impact revenue by approximately $80 million, which equates to an approximate <unk> 20 headwind to earnings.
Okay.
Our acquisition of <unk> is already contributing to earnings given the strong start.
As that continues the effective purchase multiple of less than 13 times adjusted EBITDA should continue to decline further demonstrating the strength and strategic rationale for the deal.
Finally, as we have done throughout 2021 and 2022, we continue to ramp up our strategic investment to fill to fund all of the groundbreaking technology that was on display at Investor day.
This will drive further value analysis value engineering product redesign for the next generation of pumps and game changing breakthrough formulations.
This is the best use of our capital.
Let's turn to slide nine to review the segment results.
Let me begin with motion technologies.
Friction maintain his outstanding quality and on time delivery performance effectively managing the global supply chain disruptions auto OE production volatility and the Lockdowns in China that Luca alluded to earlier.
We also saw strong demand in the aftermarket given the continued low level of new vehicle sales.
On profitability Mt's adjusted segment margin declined 430 basis points, many resulting from higher than expected material inflation.
This was partially offset by productivity benefits and enhanced pricing actions.
<unk> made significant progress in securing price commitments, but most of it's OE customers, which we will begin to realize at a greater pace in the second half.
We believe this quarter was the trough for empty and results should improve from here.
Industrial performance performance performance. This quarter was exceptional we saw growth across most short cycle product categories. Despite the supply chain disruptions and labor constraints that continued to hamper the industry.
This was the sixth consecutive quarter of sequential order growth and Ip's highest order quarter since 2014.
See strength in both short cycle and project orders our book to Bill was an impressive 125 and the organic backlog is up 50% since prior year.
Ips margin improved on both a sequential and a year over year basis. After a slow start in Q1, we.
We are improving ip's execution in manufacturing throughput and we're seeing the benefits of the pricing capture to offset inflation.
The result was a 33% incremental margin in Q2.
Furthermore, <unk> profitability was accretive to Ip's adjusted segment margin, even after including the impact of purchase price amortization.
Lastly, on connect and control, we drove another strong quarter of orders and revenue.
Growth stemming from the continued recovery in commercial aerospace as well as in distribution.
On connectors, we saw growth across the industrial and defense vertical.
While components was primarily aerospace driven distribution revenue was up over 40% organically this quarter.
Cct's margins expanded an impressive 380 basis points to over 17% driven by higher sales volume and continued shop floor productivity.
Notably CCT delivered 35% incremental margin in the face of continued inflation inflationary headwind.
Let's now turn to slide 10 to discuss our updated financial guidance.
Today, we are raising our organic sales growth outlook to 10% to 12% given our strong first half performance the.
The strong demand and backlog growth in IP, and CCT and the pricing we were realizing.
Our total revenue growth is impacted by foreign currency headwinds of approximately five percentage points.
We're maintaining our adjusted segment margin and will likely be at the low end of the range. This is stemming from continued cost inflation headwinds that we're working to offset through pricing and productivity. Nevertheless, we saw strong sequential and year over year margin improvements in IP and CCT, which we expect will continue.
In Q3 and Q4.
For the full year industrial process margins would expand above 16% overcoming ongoing supply chain disruptions and cct's margin should end above 18%.
We continue to expect that Mt's margin will likely decline close to 200 basis points to end around 17% for the full year.
To recap what I discussed we are overcoming the lost earnings in Russia Q2 Lockdowns.
Foreign currency headwinds and higher cost inflation, and we're doing this through stronger sales, including pricing better margin in CCT, the lower share count and the addition of Avenue.
We expect commodity pressures will slow in Q4, and we affirmed up the pricing benefits for the remainder of 2022, which gives us greater confidence in achieving our full year outlook.
This is reflected in our tighter range for adjusted EPS of $4 35 to.
$4 65.
Or growth of 7% to 15% versus prior year.
Lastly, we continue to expect that free cash flow will be $250 million to $300 million.
And free cash flow margin will be approximately 8% to 10% longer term. We expect this will improve on the path to our free cash flow margin target of 11% to 13%.
Looking at the third quarter organic sales growth in Q3 is expected to be in the low teens range. Thanks to the growth in CCT, which should approach, 20% and to a lesser degree in empty, where revenue will ramp up sequentially as pricing benefits materialize in China volumes recover.
We expect to IP organic sales to increase in Q3 around 10% with an additional step up in Q4.
Itt's adjusted segment margin in Q3, we will improve sequentially through the high teen range with margin expansion led by IP and CCT we.
We expect <unk> margin to inflect from Q2, given the firming of our pricing benefits and easing commodity costs.
This will drive adjusted EPS growth increased three of roughly 20% year over year.
With that let me pass it back to Luca to wrap up.
Thanks, Emmanuel before jumping into Q&A I want to recap a few key points.
We are encouraged by the strong demand across the portfolio and by our team's ability to deliver for our customers and outperform in all our businesses.
Thanks to this performance ITT built a robust backlog that will provide a runway for growth in 2022 and 2023.
On pricing.
Actions are ramping with particular strength in friction we have reached agreements with the majority of our OE customers, which provide good visibility to profitable growth over the long term.
And we are making significant progress at IP and CCT that will begin to accelerate in the second half of 2022.
Our unwavering focus on continuous improvement remains we're working daily to improve our operations and replicate the success at IMTT in two segments.
And finally, we are executing all elements of our capital deployment plan, while continuing to invest in the business.
As ever 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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Thank you.
Our first question comes from Mike Halloran with Baird. Your line is open.
Hey, good morning, everyone.
Good morning, Mike.
So look we always give great context in how you're looking at the auto market.
We've always been a little bit more conservative than the trend line. There. So maybe you could talk a little bit how you see the recovery cadence going what it means for this year what it means for next year.
Obviously ITT is differentiation versus what those end markets look like but any color you could give there would be great.
Sure. So let me start saying that IDT outperformed the market in Q2, and we expect to outperform the market also this year like we have done in the last 10 years, but we're talking specifically about the market.
The marketing Q2 was really flat year over year. After a Q1 that was down and if you look at the 2022 projection is probably we're looking at.
In the region of 20%.
85 million vehicles produced a growth of 4% to four 5% for the year.
Different feature in the different regions for instance, flat to slightly positive in Europe .
Flattish here in China, and double digit growth for North America, what was interesting Mike we're seeing actually China debt.
Quite resilient market, if you think particularly what happened in Q2 April and May still the forecast for the full year has not changed thanks to the resilience of the marketed incentive also.
The government did that.
Let me reiterate also the continuous outperformance if you look at the market is projected to return to pre COVID-19 level in probably 2020 for maybe 2025.
IDT was.
Sort of past pre COVID-19 level in 2021.
No.
That will keep on that outperformance will keep on happening.
Hey, Thanks really appreciate the color there and then follow up on the on the IP side of things.
Really good backlog grant maybe talk about two things one the visibility you're seeing right now with new front log conversations with clients and some of the key markets, there and secondarily anything going on competitively that would be concerning obviously, you're gaining some share there I'm just curious how the pricing dynamics in the marketplace are playing and competitive pressures.
Projects that are coming forward.
Sure.
We are looking at the markets that we see.
Strength across all the market in terms of oil and gas in terms of chemical in terms of general industrial we see that.
In the orders, we see that in the funnel of opportunities when you look at geographically Mike we.
We see very good strength in the orders as well as in the funnel, particularly in North America Asia Pacific Latin America, and Middle East, probably we do not see the strengths are in the final in the orders are in the Europe that is the area, where it probably we don't see we don't see that.
When it comes to pricing.
Mike.
Pricing is key and pricing discipline is that is a must particularly what youre talking about flow, particularly why youre talking about projects and if you do not have that price discipline. There is no way that you can deliver the margins that we are delivering today. So we keep on executing on this front and.
And I will simply not change.
Great really appreciate the Lucas thank you.
Thanks, Mike.
The next question is from Jeff Hammond with Keybanc. Your line is open.
Hey, good morning, everyone. Good.
Good morning, Jeff Good morning, Jeff.
So maybe these questions are connected but your price cost gap was 29, and <unk> 27, and <unk> and just trying to think how we should look at that price cost gap in the <unk> and then just similarly.
Margin trajectory and empty into the second half do we kind of bounce back to <unk> levels in <unk> or just how to think about that snapback.
Hey, Jeff So yes, you're right we were heavily our margins were heavily impacted by the price cost gap I think thats when were moving into Q3 and Q4, we're seeing.
Better picture, we're seeing that empty is as we discussed this finally closing on all the price negotiations with our auto customers and while we didn't get everything that we wanted.
I think this was a good compromise, especially to maintain long term.
<unk> relationship and growing business with them.
And so as the commodity the commodities impact he is going to is going to lessen.
<unk> should be in a better position from a price cost standpoint.
And then IP and CCT, it's all about driving price. So we mentioned that we are seeing a nice price impact.
In Q2 orders for IP that that will convert into strong sales in Q3, and Q4 and CCT is a lot less advanced but there remains a lot of <unk>.
Lot of opportunities also from a pricing standpoint, so I think that when you look at cost price for the second half, we're probably going to be on par so flat.
No negative impact, but very little positive impact, which is going to be a big change compared to what we've seen in Q1 and Q2.
Okay, Great and then.
Great Great performance on IP.
I recall.
<unk> there was a lot of issues with supply chain I think you still mentioned supply chain being a problem in IP, but it doesn't seem to have.
As shown through in the results are in.
Into the second half guide so just how should we think about some of the supply chain challenges and are you just kind of overcoming them elsewhere or.
Or are you seeing some improvement thanks.
Thanks, Thanks, Jeff on supply chain. The short answer is it is improving slightly so let me share some data and give you. Some color. If you look at the Q1 in Q1 that the revenue impact from supply chain was roughly 600 basis points.
In Q2 is between 203 hundred basis points. So obviously that is a data shows the improvement most of that was actually in AP.
Now given to give some colors.
The lead times have probably slightly reduced and also the commodities as you know have reduced a little.
But there are still bottlenecks remaining.
So when we talk about plastic paint raisings electronic components or electric motors, those are still bottlenecks and going back to the lead times supplier lead times, whilst they have reduced slightly they are still quite above pre pandemic level. So what what we are looking is really.
What we are in control and focusing on the internal bottlenecks, which are more on the on the production line and improve the velocity.
The plant.
Okay. Thanks, so much guys.
Thanks, guys.
The next question is from Nathan Jones with Stifel. Your line is open.
And is there any emphasis hey, good morning. This is Adam Farley on for Nathan.
Good morning.
Hey, good morning, So theres been some talk of an automobile.
Yes.
In the second half.
What is your view of the likelihood of this and what our customers.
Adam you cut out in the first part of your question would you mind repeating please.
Sure.
Yes, so there's been some talk of an automotive production ramp in Europe .
In the second half.
What is your view of the likelihood of this and what are customers, saying.
Okay. So we are seeing the supply chain challenges easing and the customers talking about a better situation for us for the chip.
The chip shortage, but when we look really at Europe production forecast for the full year is really that has not dramatically changed.
We're talking about.
Slightly positive so low single digit growth. This is still the forecast therefore for Europe , we see good order book on our front, but we know Disney's outperformance there, but there is still a low single digit growth for Europe for the full year.
Hey, guys. Thank you for that.
And then just turning to the orders overall really strong and robust, especially in IP and CCT.
So what was the cadence of orders through the quarter and also provide any color on July .
Each business. Thanks.
Sure. So the cadence of orders in the month was pretty even.
There was strength.
In the quarter there was strength for every month during the quarter and and July was not that different from what we've seen from what we've seen in Q2 and IP, but we had a really strong month in June and a lot of it was due to project to projects, which were which accumulated at a fast pace in June .
But overall there was no really.
The growth in orders, where it's pretty even and the number is.
<unk> is pretty good across the board in Q2.
In terms of CCT, it's the same thing and I would say that July orders are not set different also from what we've seen in Q2, so for the moment.
It looks like there.
The strength continued in Q2 and it doesn't look like there is much different for the moment in July .
But there is a lot of there's a lot of ground to cover before the end of the year. So we remain very attentive to that.
That order number and what it says about the market.
One thing one thing that we will expect.
Adam when it comes to the future order, particularly in AP is that we expect that project, gaining more and more momentum, where we expect probably the short cycle leveling off.
And this is also if you look at the backlog today for IP, 55% of our backlog is short cycle of 45% is that projects.
That will eventually have to swap to be 60 projects 40 show cycle like it should easily be.
Thanks for taking my questions.
The next question is from led by sticky with Citigroup. Your line is open.
Good morning, Vlad good morning.
Guys. Thanks for taking my question here.
Yes.
So maybe just following up on that IP.
On this IP comments, when we see short cycle orders, 21% in the quarter.
Can you talk about.
How should we think about how much of that is actual end market demand going out going out to the field versus any channel stocking or inventory that you might be seeing.
Sure. So I think that for the moment, our distributors, which where a lot of our short cycle business is going and not reported any type of increase in inventory, while we don't.
Monitor is the inventory at their customers.
But for the moment, we don't see really any type of inventory buildup anywhere as Luca mentioned.
Those are really strong order growth numbers and so we expect that over time.
These.
This level of short cycle orders cannot sustain and so we'll see.
We will see a leveling off as Luca said I think one thing that is important is pricing that I wanted to highlight here because we think that while we are very encouraged by the pricing benefits. We have seen in the short cycle in IP I think we are.
Only at the beginning of the journey and I think that short cycle is going to benefit a lot from.
<unk>.
Renewed pricing approach.
He is going to really focus on the differentiation that we bring with our products compared to our flow peers.
Okay.
That's really helpful color menu will appreciate it and then maybe.
Just.
Shifting to capital allocation.
No.
Yes.
You've obviously been leaning into share repurchases more here, given given where the share price has been so I guess just thoughts on continuing to lean into share repurchases.
Given where the share prices and then also similarly just.
Can you talk about your appetite for larger scale M&A, given the health of the balance sheet.
Maybe versus obviously, some macro concerns out there.
So when it comes to capital deployment.
The priority.
The same this does not change the money goes for inorganic investment these would be where we have the best returns.
Yes.
The less risky investments and that day, and we have seen it being in IP or being Moshe technologies. All in CCT. So this is where the money goes first and 80% of that Capex is really going into growth.
And productivity.
Second is M&A and you have seen at the applied these.
In the first half of the year, we dealt with the acquisition of <unk> that is already accretive is a great story already $140 million deployed there.
In ventures like.
Cuts works or WAC of duo CRP.
All are adjacencies to the business and this is where our money goes second and then of course dividends and share repurchases and.
This is a good use of our capital and today, we have the opportunity to do all three of them and that is what we'll continue to do when it comes to acquisitions that we have a very good funnel of opportunities and the opportunities there are.
In the bulk is anything between.
$50 million to $300 million of revenue and of course, there might be a few that are ready to be larger than that but the bulk of the M&A opportunities are in in that range.
Okay. Thanks for that Luca I'll get back in queue.
Thanks, Matt.
The next question is from Damian Karas with UBS. Your line is open.
Good morning, Dave.
Hey, good morning, Congrats on the hard work and accomplishments in Wuxi.
Thank you thank you Damian.
So just a follow up question on price as it relates to orders.
When we look at those robust order rates in IP and CCT.
Could you just help us unpack how much is from inflationary effects.
Versus underlying unit demand.
Kind of talking high single digit low double digit on price. The rest are on order, maybe just help us unpack that a bit.
Sure so in IP.
The majority of the growth is through volume.
We are seeing pricing building into our backlog, but for the moment. This is this is still the majority of the growth is driven by volume.
And I'm talking specifically on the short cycle here, so mainly baseline pumps and spare parts.
In terms of CCT I would say the large majority he's also volume because cct's less advent from a pricing standpoint, the only exception maybe that it will that we would say is industrial connectors, where we are seeing.
Flattish type of volume and.
What gets us a little bit over is is pricing.
Okay. That's helpful.
And.
I guess, just thinking about expectation going into the quarter.
I think a lot of investors were concerned you would be lucky to even hit the 430 low end of your EPS Guide.
<unk> all the exogenous issues out there in some of your markets.
Just just thinking about the updated guidance, where would you say the biggest risk is.
Not hitting that guidance this year.
I would say the biggest risk probably is an external risk some type of demand disruption to demand like we've seen in Q2 for with the China Lockdowns.
The rest we have really strong backlog.
In IP and CCT.
We have proven that we're able to ramp up volumes as you've seen in Q2, IP was roughly $25 million above Q1 organically and then and in CCT was $10 million above Q1 also so we know how to flow through these additional products through our facilities.
And then from a cost control, we've been very attentive to cost and being and tightening all our expenses. So I would say to me.
<unk>.
The impact or the impact or the downside potential is mainly due to external factors.
And then the team did an amazing job.
In the quarter and if you think about all the headwinds that we had to face the manuela reiterated in the prepared remarks, and many piece of the pads that are actually coming together have been the backlog being the price and be the execution on the on the shop floor being being Wuxi. So and this is the reason why we really tightened the range.
Things are coming together.
Thanks, guys I appreciate your thoughts.
Thanks Amy.
The next question is from Joe Giordano with Cowen Your line is open.
Good morning, Joe.
Hey, guys.
Similar question on that maybe just asked a little differently. So last quarter. When you were talking towards the lower part of the guidance and then at Investor Day.
I guess qualitatively just based on the bullet points that you guys had it did sound like incrementally.
Okay.
Guidance was getting a little bit worse, and now I think raising the low end is a major statement here.
So I'm just curious if anything actually changed in your mind between kind of Investor day commentary and today.
So I think that I think you'll appreciate that the environment is very volatile and so for us.
This is impacting our visibility on what we're seeing out there.
And so I think that's we've been appropriately cautious in our description of what we were seeing out there.
And at the same time in parallel we were driving execution with within our segments and I think that.
We saw some really strong performance.
So with performance improving in May versus April and then in June versus April and May and so I think that when you think about all the progress we've done in terms of pricing, especially at <unk>, which was really the biggest.
The biggest.
The price that we were going after.
Now we now feel more confident that this pricing is.
<unk> is almost more more or less done.
And then and then we got to focus on making sure that we take advantage of commodities going down.
And the same execution that you've seen in Q2.
In terms of on time delivery and quality for all of our businesses and Joe. If you think about volatility to just to give you. An example, I mean you are on the fourth of July elaborated independence day over here in the U S and year on call with Wuxi.
There are companies that are shutting down and the team is is put an amazing feat that that we were describing before so this gives you an idea of the volatility that you have to deal with but as I said the pieces are coming together nicely.
So far.
No I appreciate that.
Again on the orders I know, we've talked a lot about this but I think it's hard to count.
Some of the year on year comparisons just become challenging just to get the numbers of weird.
Price and inflation. If you were to think about in western about empty because that's its own kind of animal, but if we think about IP and CCT orders. If we think about it. Unlike a dollar basis per day or something like that how do you see that going from like a QQ level, our orders per day still going up.
They're about the year on year, so much I'm just thinking about the sequential progression in dollar terms from here, how do you see that.
So when you look at it a little bit different pictures, I would say depending on the different markets.
If you look at the Q2 in the short cycle indicators. So you talked about baseline parts service valves and we actually we are really looking at some of those numbers everyday or every week, Joe exactly like USA Q2 was a very strong quarter.
So and these was it sequentially was that so that is a very good sign but I would say Joe also that what we expect in AP those order in the short cycle to level off and we expect the projects to come out stronger in the second half of the year that is.
For the short cycle in IP, we see also some good sequential orders in a connector for example, as well as the components are coming mainly from aerospace and defense.
And those are very strong at compensating some of the industrial connectors that Amanda was talking about which showed some weakness sequentially.
Did that answer your question.
Yes perfectly thank you.
Thanks, Joe.
The next question is from Andrew <unk> with Bank of America. Your line is open.
Hey, you have Sabrina Aam's answer Andrew Ben how are you guys.
Good morning, Sabrina Marni.
Can you just talk please about the structure of inventory on your own balance sheet and sort of how much of the issue is sort of a golden screw in shale.
How do you think about dealing with the potential bullwhip effect down the line when lead times normalized and when do you think levels of working capital start to normalize.
Yes, so so.
So.
Working capital is a huge issue for us.
Working capital has been a use of cash in the first half and a really large one.
And so right now I would say that we're targeting to reduce our working capital by roughly something like a little bit more than $100 million in the second half and this is going to be a function of.
Collecting past.
As us and collecting.
Some of the pricing that we agreed on and that we haven't.
We haven't been able to we haven't collected yet.
And then the large part of it is going to be inventory and I think.
For a description of the Golden's crew I think it's a good description.
Have a lot of our projects that are have finished or 90, 90% finished and then leaving the dock.
Because we are missing.
What are we missing a casting.
And so until we are focusing on making sure that we improve our supply chain at the same time as I was saying, we improve the velocity through our factories and I think that this is going to give us some significant benefits in the second half in terms of working capital.
Great. Thank you.
Yes.
How are you thinking about getting their European business ready for potential disruptions related to Russian gas and that falls last Wednesday.
Okay. So there are two there are two things that we're doing.
Things that we're doing in the short term and in the short term we are across the board everywhere globally, we're really paying attention to our consumption of energy.
And we are really working with the business in order to reduce.
Our electrical energy consumption.
And then on the over the long term or the medium long term is that we are investing heavily in renewables. So I mentioned that we have committed $8 million of renewable projects.
Solar projects.
Our facilities globally.
And those projects are going to come online between the second half than the first quarter of 2023.
So as a result, this should really help us.
The consumption of external energy and produce our own energy.