Q4 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 now begin.
Thank you Candice and good morning, joining me here. This morning are Luca Savi, Itt's, Chief Executive Officer, and President and Emmanuel could break Chief Financial Officer, today's call will cover <unk> financial results for the three and 12 months periods ended December 31, 2022, which we announced this morning.
Before we begin please refer to slide two of today's presentation, where we note that today's comments will include forward looking statements that are based on our current expectations actual results may differ materially due to a number of risks and uncertainties, including those described in our 2021 annual report on Form 10-K, and other recent SEC filings, except where otherwise noted the fourth quarter and full year results.
We present this morning will be compared to the fourth quarter and full year 2021 and include non-GAAP financial measures a reconciliation.
Relation of such measures to the most comparable GAAP figures are detailed in our press release and in the appendix of our presentation, both of which are available on our website.
This morning, we will begin with an overview of the results and our outlook for the year. Emmanuel will then review the fourth quarter results before we close the book on 2020 to Luke will discuss some key commercial achievements in our 2023 guidance and we'll have plenty of time for your questions. At the end. Please note. There is additional information on our quarter and full year results as well as planning assumptions for 2023 and the supper.
A mental data to our presentation, which I encourage you to review with that it's now my pleasure to turn the call over to Luca who will begin on slide number four.
Thank you Mark and good morning.
Before we discuss Itt's results I would like to start by thanking our shareholders for their investment in IGT.
Our customers, who we always keep at the center of everything we do and our employees for their ongoing commitment to ITT.
This quarter more than ever I was humbled by the efforts and resilience of all our ITT Ers.
In the Wuxi China.
Our employees delivered the highest production quarter ever despite COVID-19 infection rates of more than 75% in December.
Our China team's performance was the highlight of the quarter.
Next across all our factories, we navigated supply chain disruptions and then should on time delivery to our customers and in Europe . Our teams worked through the energy crisis, the impacts of the war in Ukraine, and and abating inflation.
I am grateful for the resilience you demonstrated this quarter and throughout 2022.
It was your efforts that drove the record performance we are presenting today in.
Including 12% organic orders growth following 13% growth in Q3.
The 17% organic revenue growth in all businesses delivering double digit growth.
A record segment margin of 18, 6%.
22% EPS growth after 21% in Q3 and over $130 million of free cash flow up 58% versus prior year.
In many regards Itt's fourth quarter was another step up in performance.
Now to the details.
Our seventh consecutive quarter of double digit organic orders growth resulted in an ending backlog of more than $1 1 billion.
Up 22% versus prior year.
Higher volumes and price recovery drove the strong organic revenue growth led by industrial process at 27%.
This year, we drove over $170 million of price recovery with empty at the forefront.
Execution momentum in IP continued across projects baseline pumps and aftermarket.
<unk> in 2007% organic revenue growth in Q4.
CCT grew sales by 16% boosted by share gains in connectors and strong demand for aerospace components.
And in empty. The outperformance continues in every region for the full year, we surpassed global automotive market growth by roughly 400 basis points.
Our price recovery volume growth and productivity led to a record segment margin in Q4, overcoming cost inflation impacts of roughly $50 million for all of ITT, a truly remarkable accomplishment indeed.
Cash after a tough few quarters, we generated strong free cash flow with 17% free cash flow margin in the quarter by far the best performance of the year.
The common thread that underpins it.
<unk> was our people and their commitment to deliver for our customers.
I was fortunate to experience these in Saudi Arabia, where Khalid and the local IP team performed flawlessly and achieved 100% on time performance for our customers in 2022.
In the flow industry. This is a differentiator.
And given this performance we are investing in new testing capabilities to grow our presence in the region.
This has already helped us win more than $20 million in incremental project orders.
Or in like <unk> in South Korea, which has become our new center of excellence for vertical pumps also here, we continue to invest in more technology engineering resources and lead.
Speaking of lean we are working now on our next transformation of the plant layout in Seneca falls to optimize material flows and deficiency, we're already realizing the benefits of Ip's lean efforts with more than 40% incremental margin in Q4 and for the full year.
This relentless focus on excellence continuous improvement and commitment to quality and enabled us to deliver on our original revenue and adjusted earnings per share guidance in 2022, despite numerous anticipated macro headwinds.
On capital deployment, we deployed more than $600 million in 2022 or three five times, our adjusted free cash flow.
Capex increased 18% to support the growth of electrified vehicles and productivity on M&A, how many was a strategic acquisition.
And a great deal.
It expanded Ips of Bob's business by more than 50% and was accretive to Itt's earnings and.
And with this strong performance our effective purchase multiple is now 829 times and dropping versus approximately 12 times at the date of acquisition.
This morning, we announced a dividend increase of 10% after increases of 30, and 20% in 2021, and 2022, respectively, and we repurchased over $250 million of ITT shares lowering our share count by 3%.
Finally on our 2026 long term targets, we are making significant progress a few highlights a relentless focus on safety drove reductions in both injury frequency and severity rates, leading to a 32% decline in the number of incidents in 2022 to a much improved incident frequency rate obviously.
Europe 155.
On sustainability, we're reducing our greenhouse gas emissions, increasing revenues from green products and advancing our diversity equity and inclusion efforts.
And our financial performance organic revenue and adjusted EPS growth in 2022 were in line with our long term growth targets.
We are proud of what we accomplished in 2022, but never satisfied and that is why we're encouraged by the opportunities. We see in 2023 with that let me turn the call over to <unk> to discuss our fourth quarter and full year results.
Thank you Luca and good morning, let's begin on slide five.
Revenue growth of over 17% was driven by double digit growth in all businesses.
In IP projects increased over 70% organically.
Here, we continue to benefit from share gains in large capital Capex spend and near shoring activities that are ramping up.
Short cycle revenue increased on a year over year basis across baseline pumps parts and service aided by pricing capture.
The strength of the commercial aerospace recovery and accelerating demand for defense applications drove strong growth in CCT as well our arrow components business grew 26%.
However, we remain somewhat capacity constrained due to continued supply chain issues.
Connectors grew 13% driven by market share gains as the benefits of new product innovations, particularly in defense began to materialize.
In empty friction OEM share gains in all regions and price recovery drove 12% organic growth.
Frictions on time performance was 99% again this quarter, despite rising COVID-19 infection rates in China order volatility and then planned customer shutdowns.
Our rail business grew 10% organically and orders were up 35% with strength mainly in Europe .
On profitability volume and price added 800 basis points of margin expansion, which more than offset 650 basis points of cost inflation and roughly 100 basis points of FX.
We're continuing to push on shop floor improvements as demonstrated by Ip's margin of 22, 9%.
700 basis points year over year.
Even excluding excluding roughly 120 basis points of one time items Ips margin, we're still above 21%.
This is quite an improvement from what was an 8% margin business in 2016.
Next Cct's margin grew 80 basis points to 19, 2% driven by higher volume and price recovery.
The year Cct's margin ended at around 18% up 270 basis points.
Finally, an empty margin declined 500 basis points to 14, 7%. This was driven by a combination of higher material labor and energy costs and unfavorable mix stemming from auto after market declines in Europe .
We also had a tough compare this quarter given the gain on asset sale realized in Q4 2021.
This margin performance was clearly below our expectations, but we expect that mt's margin will return to its previous level as cost inflation subsides, and we sustained pricing benefits.
On EPS this quarter, we overcame 48 cents of cost inflation.
<unk> <unk> of negative FX <unk> for the loss of business in Russia, and <unk> from higher interest expense.
On cash we improved significantly in the fourth quarter exceeding our last forecast on the strength of our collections.
We're seeing the benefits of our daily collection efforts and expect further improvements are supply chain disruptions.
Let's move to slide six.
I want to make a few additional points on this page.
First price recovery again exceeded cost inflation in Q4. This is a testament to the differentiation, we provide compared to the competition.
Second foreign currency was a significant headwind given the strengthening of the U S. Dollar third with interest rates rising throughout the year. Our interest expense was $3 million. This quarter. We expect it will remain at this level throughout 2023.
Finally, despite the long list of challenges we encountered this year, we didn't lose sight of the long term and continue to invest in new product development redesign and innovation.
Let's turn to slide seven to discuss Itt's growth momentum.
Friction continued to win content on new EV platforms, we're making progress on our 2025 EV market share target of 37%.
Further in 2022, our total electrified vehicle revenue was over $100 million.
We're also beginning to see investments in rail infrastructure materialize.
Even with the significant loss of business in Russia in 2022, Reorders were approximately flat for the full year.
IP is seeing strong growth in project.
That will drive future revenue outperformance.
Large our installed base and drive aftermarket demand.
In CCT, we saw another strong quarter with commercial aerospace demand continuing to ramp.
And we also drove significant orders in EV connectors. This business has grown organically to almost $40 million in orders in 2022.
The orders growth in our ending backlog gives us good visibility into the revenue conversion through at least the first half of 2023.
Let's turn to slide eight to wrap up to 2022 discussion.
Here I'd like to quickly recap itt's 'twenty to 'twenty two performance.
The headwinds on this chart for cost inflation foreign currency and the loss, Russia business amounted to over $2 and 30 of impact which was well above our expectations. When we issued our guidance early last year.
As Luca mentioned execution was the differentiator our commercial teams sprang into action to execute pricing negotiations, we ramped our efforts on productivity to address rising cost.
And we completed the acquisition and integration of happening.
While we are incredibly proud of this performance and humbled by the team's achievements. There is still much more that we can and will do well.
We're driving improvements in our on time performance in IP and CCT further expanding our value based pricing strategy and increasing our cash generation to execute more strategic M&A, all of which will drive long term value creation.
With that let me turn the call back to Luca <unk>. Thanks.
Thanks, Amanda before we cover our 2023 outlook I'd like to share. Some examples of how performance and innovation are driving customer wins and market share gains across friction.
Comps and connectors.
As we discussed during Investor Day, Moshe technologies is strengthening its leading position by taking full advantage of the EV transition.
These yet we won't content on 78, new electrified vehicle platforms with awards from leading global automotive Oems, including Tesla BYD revamp pollstar in knee among others.
Our best in class quality with defects below one part per million and after four months at 99% on time delivery helped us win the front and rear axle pads on a premium German electrified platform that will launch in 2024.
Electrification is also good for our connectors business.
We developed and are investing in an EV connectors portfolio catering to regional charging infrastructures and we are seeing there is search.
Customers are choosing our connectors because of our engineering capabilities and responsiveness.
In industrial process, we're capturing share in a market that's rebounding from two years of supply chain disruptions and component shortages.
Over the next two years will deliver pump systems to an independent oil company in Nigeria, using our bornemann twin screw technology.
This unique offering we stopped flaring at the site and eliminated roughly 1000 tons of Cotwo per day.
Orders for Green projects increased 50% in 2022 compared to prior year.
We're winning on near shoring opportunities, including a hazardous waste treatment system for a new semiconductor plant in Arizona and for our commercial EV battery recycling facility in upstate New York.
Finally, we are making progress on the embedded motor drive technology or AMD that we displayed at the Investor day.
Initial testing showed that our gen two prototypes exceeded expectations in energy efficiency operating temperature and vibration.
We're currently in initial discussion in field trials with 10 customers across various industries to demonstrate <unk> capabilities.
In connect and control technologies, we are qualifying new vibration isolation technology that reduces motor induced vibration for military applications with leading helicopter Oems.
With custom design and co developed kind of connectors together with our customers to withstand the most harsh environments and this quarter, we are launching a new family of soldier worn connectors.
Also qualify ruggedized connectors for the net worry or wearable mission command system.
So clearly a lot of exciting innovations that you will hear more about throughout 2023.
Let's now turn to slide 11 to discuss the growth outlook in each business in 2023.
Starting with motion technologies, we expect friction to outperform the market as global production continues to recover to pre pandemic levels.
We foresee auto production to be flat to up low single digits in 2023 and.
And are planning for a slowdown in demand, particularly in Europe in the second half.
On the auto aftermarket we think the weakness we saw in 2022, we persist through Q1, and then begin to improve from there.
On the rail portion of empty after a long year of declines stemming from the war in Ukraine, We exited Q4 with strong orders in both Connie and accident.
Passenger rail is ramping up and with our 2022.
Ward, we think 2023 would be a strong year, despite a potential slowdown in freight activity in the second half.
Longer term this market will be strengthened further by the public investments in rail infrastructure in the U S and in Europe .
Moving to industrial process, we are entering 2023 with a healthy backlog.
The project activity in this segment should continue to ramp with investments to support infrastructure near shoring and clean energy.
Parts and service demand the after market in IP has been strong and this trend continued into January on.
On the other hand baseline pumps activities slowed in Q3 and Q4. So we are monitoring industrial orders closely.
Moving to connect and control technologies in the industrial in the industrial components segment. The outlook is mixed.
In Q4, we saw sequential slowing in the short cycle industrial connectors business.
I encourage you demand in the EV and medical connectors space is providing a partial offset.
In aerospace there is no change to our positive outlook.
Rates are improving and air travel is accelerating amidst the commercial aerospace recovery.
In defense demand remains robust given the current geopolitical conflicts and heightened level of military preparedness around the globe.
Let's now talk about our 2023 guidance.
We expect organic revenue growth of 7% at the midpoint. This is due to a combination of share gains and conversion of our backlog Tampa based low in short cycle demand primarily in the industrial markets.
In 2023, we will drive further value based pricing actions with a notable step up in IP CCT following an absolutely stellar performance in MTS in 2022.
To put this guidance into perspective, we expect to deliver approximately $3 $2 billion in sales in 2023.
On profitability our productivity journey continues we still see many opportunities to improve our supply chain effectiveness. Our assumption is that supply chain and material constraints will continue to ease and higher raw material costs will subside in the second half.
I do want to stress. However that we are still largely in an inflationary environment, even though it might be at a lower rate than last year.
Our productivity actions net of inflation will drive adjusted segment margin expansion of 50 basis points at the midpoint to 17, 7%.
With the progress at IP, and CCT and easing inflation at motion technologies, we are well on our way to the long term margin target of 20%.
The strong topline growth and margin expansion will drive adjusted EPS growth of 7% at the midpoint.
On cash improving our working capital will be a key priority in 2023, we expect to more than double our cash flow generation and drive free cash flow margin of 11% to 12%.
On slide 13, as you can see our strong operational performance and pricing actions without wage cost inflation. This year. However, we expect that the other non operational headwinds related to foreign currency and interest will impact our results, we anticipate a solid 7% growth in adjusted EPS.
Yes.
For the first quarter, we expect to deliver mid to high single digit organic growth led by industrial process followed by CCT.
More than 100 basis points of margin expansion at the midpoint led by IP and CCT with empty approximately in line with Q4 2022 margin rate.
And adjusted EPS growth of over 15% year over year.
We expect EPS growth in the first half of 2023 to be stronger than in the second half.
We are prudently, taking a cautious out to Q3 and Q4 until we have more clarity on the economic situation.
Now before we move to Q&A. Please let me share a few final points.
First all year, we executed for our customers.
Gain market share.
Orders across all our businesses. The result is a strong profitable backlog on which to execute and outgrow the competition in 2023.
Second we see positive signs in several markets and we expect to perform well the foundation for this performance has been laid over the past five years and once again, we're executing.
Still there are signs that growth will slow in the second half in some end markets and so we're staying laser focused on what we can control.
Third as I said in June at our Investor Day electrification is good for ITT.
Frictions flawless performance and many competitive advantages amplified as the industry transitions to evs.
And we are well on our way to achieve our EV market share targets.
Lastly, once again in 2023 execution will be the differentiator and death is itt's threat.
I would like to thank all our stakeholders for their continued support of ITT as always it has been my pleasure speaking with you all this morning.
Candice Please open the line for questions.
Thank you.
The floor is now open for your questions. At this time, if you have a question or comment. Please press star followed by one on your touch time fine if at any point. Your question has been answered you may remove yourself from the queue by pressing star followed by case again, we do ask while you pose your questions you pick up your handset to provide.
Tomilson quality. Please limit your questions to one question one follow up only.
So our first question comes from the line of Nathan Jones of Stifel. Your line is now open. Please go ahead.
Good morning, everyone.
Hi, Nathan good morning.
Congratulations on 2022, I think that's a pretty phenomenal execution given all the incremental headwinds you had to deal with.
Yes. My question is on the guidance.
Going to go with.
Just looking at the price the cost inflation buckets in your 2023 bridge I'm a bit surprised that.
That largely offsetting.
That 38% I think of headwind from price versus inflation.
2022, but you were positive in the second half and I would've thought that would carry out about and you would make some of that back up in 2023.
Maybe you can just give us some more color on on price versus cost and why thats not rating choice more positive in 2023.
Okay. So.
I would say.
When we look at the 2023.
We are getting roughly half the price that we got in 2022, and but those are going to be incremental right. So those are incremented. The price that we got in 2022. The other element that I would like to stress before may be passing it over to you Emmanuel is that when you look at 2023, we're going to be slightly price.
Positive across all the value centers something that we couldnt say in 2022, so it's a substantial improvement and is a continuation of what we have achieved in Q3 and Q4 and Nathan.
Regarding the.
We were pricing.
This cost positive in Q3 and Q4.
However, this wasn't like a large beat we were we were slightly price positive and I think that we maintain that in 2023 keep in mind in 2023 that there is some headwinds from a commodity standpoint, notably.
Chemicals in motion Tech's motion Tech and also energy and so we are going back to our customers for additional price increases to cover and compensate.
These commodity increase lastly, I would say in the second half of 2023, we expect things to slow down also and so we want to be mindful of that economy slowdown when we ask for price increase to our customers.
Okay. Thanks for that.
And then maybe the operational performance bucket, that's 52 to $60.
I think that implies an incremental margin of about 30%, which is kind of what I would expect from the business is in the absence of additional productivity, which you guys clearly delivered on in 2022.
Maybe talk about the expectations for productivity in 2023, and the potential for you to deliver better incrementals on that growth.
I think that on the on the other side of that Nathan is that Theyre all day investment in strategic initiatives that we do have.
We are working on let me give you a couple of examples is investment in products like the <unk> that we talked in the prepared remarks. This March tad emotional technologies or also the bag. The digital automatic cap layer that we're developing for four acts done or the <unk>.
For next lean transformation, we're going through a complete re lay out of <unk> to take that client to the next that the next level and also the lean activities that we started in CCT in places like at Valencia, California, So and that's on top of all the initial.
To sustain our growth so that is something that we take into consideration what you look at the incremental margin.
Yes.
Okay. Thanks for taking my questions.
Thanks Nathan.
Thank you.
Our next question comes from the line of.
Andrew open.
Your line is now open. Please go ahead.
Hey, guys. Good morning can you hear me.
Sure.
Hey, Hi.
I'm going to ask.
Sort of a convoluted two part question.
Apologies.
You sort of highlight that IP projects ramped up 70%, citing reassuring.
Would love specific examples, but then a couple of slides later, you sort of talk about the fact that in the connectors business Youre seeing some weakness in short cycle, which I thought was sort of a lead indicator for potential weakness.
Hey, maybe specific examples of reassuring, but b, how do you square the circle.
With IP projects bookings, so strong which indicate very solid underlying activity at the same time right Youre short cycle kind of air in the mine and maybe I'm wrong about that as sort of a flashing yellow. Thank you.
Yes, I think that when we talk about connectors.
Slowing down we're talking about orders ourself is still very much a growing very fast I think thats.
Our connector business industrial connector business he is mostly.
Major immediately.
And so what we're seeing is a.
Declining U.
I think as.
Slowdown in U S activity.
I think on the other hand in terms of IP projects, we're seeing.
I would say specific growth in U S. We talked about.
Conductor opportunity or award we talked about the battery recycling, but also a lot of international growth. We're seeing as we mentioned we gained some really good orders in the energy.
We talked about Nigeria, but we also won in Angola.
We want also in Malaysia.
Have you seen Saudi Arabia, So I think Thats. The project growth there is some in the U S. But also a lot internationally.
Oh great.
I appreciate it and then another question on sort of more of a big picture question. So effectively if I look at your top line growth.
The midpoint of 7% EPS at the midpoint of 7% by the by the way one of the best numbers and coverage, so im not saying it but.
Look at Eaton sort of not this similar dynamic will look at Honeywell.
Yeah.
In a normal environment, you would sort of expect more operating leverage from this sector.
The question I have is this sort of the new reality, just less operating leverage as we sort of shift into this higher growth higher inflation mode or does this normalize eventually thank you.
Well, we certainly haven't given up on driving incremental margin I would say 2023 is a little bit peculiar because we continue as Luca mentioned to have significant cost inflation.
And also at the same time, we want to solidify the growth and the performance that we have executed on so far and then so these comes with investments both in resources, we're going to we're investing in supply chain, but also in products.
So I think that kind of limits a little bit or.
Our margin.
And EPS growth.
But I think that we are very almost we also very focused on productivity. So I think thats in.
In the future, especially when we think about our long term targets.
We are really driving for a better than average in terms of incremental margins.
Yes, Jonathan I didn't want to take anything away from the strong performance in the quarter. Thank you very much.
Thanks Andrea.
Thank you.
Our next question comes from Mike Halloran of Baird. Your line is now open. Please go ahead.
Hey, good morning, everyone.
A couple question Hey, there. So a couple of questions just to make sure I understand the guide here first on the motion guidance Luke.
I think you said flattish to slightly positive overall.
Kind of global Sars type number you guys typically have a level of outperformance that kind of puts you above what that mid single digit guide would look like.
It seems like the rail commentary at least Directionally favorable.
So is there what kind of sinks at all to get to the mid single digit guidance is it some negative price downs kind of normal contract stuff. It doesn't seem like that's the case, but maybe just help us think everything together for me.
Okay. So when you look at motion technologies that we have seen that the market would be as you say you said zero to two points of growth worldwide. We tend to outperform the market on the OE side, absolutely correct now one thing that you need to take into consideration. If you look at the outperformance easier.
As being 400 basis points and as we continue to win market share and get higher market share that outperformance you know cannot be in the 900 points like it has been in the past. So that is something to take into account that second I would say he's a day after market.
And in the aftermarket we see that the Q1, probably we still suffer like we have seen it suffering at the end of 2022 and it will improve in the in the second half when he took probably the aftermarket.
And I would say that that is everything that needed to be taken into into consideration for that for our motion technologies. The other aspect that you might want to think about it is also the potential slowdown in the second half, particularly in Europe .
Thank you for that and that's actually a good bridge to the next question.
<unk> been pretty clear that there is some conservatism embedded in the second half of the year.
Because you have concerns over the pace of global economic growth, which makes a ton of sense.
If I think about those points of conservatism, it's the European OEM that you just mentioned, it's the shorter cycle IP pieces.
Are there any other areas, we should be thinking about I mean, this is being reflected in how youre thinking about incremental.
Incremental margins as you move to the back half of the year, it's been reflected in any of the other areas.
You touch.
Okay. So you took it from it from a margin point of view is that I understand I understood. The question is that is really we keep on working on our war chest of opportunities right pricing is still a big components across the board that we need to really step it up particularly in IP and CCT, we have that day.
They lean.
The lean transformation that we're going to go through Seneca falls as a complete re layout as well as the lean transformation of the balance of <unk>.
The other aspect to take into account is we've talked in the past is that they make them buy so we really are focused on having the proper make them buy strategy. So if you think about it that once again in Seneca falls is the closing of the foundry. This is something we announced last year is a process. It takes two years and will be.
Completed by the end of 2023.
As well as the in sourcing of the contacts on the connector side. So all of those are they stopped that will have.
On the margin side, yes, and I would say also in 2023. Many regards will be different from 2022, you have seen in 2022 that we had a ramp really in margin.
And in revenue also.
In the second half and this is not what we think is going to happen in 2023, we think that 2020. The first half of 2023 is going to be.
Pretty strong and in terms of EPS growth and similar in so many regards to Q3 and Q4, but we think that's a.
The global economy is going to significantly decelerate in the second half.
So thanks for that I was actually that was a really good answer and I wish I would probably ask the margin question now, but I was more focusing on just the revenue <unk> patients.
Any comments that you could maybe lay around what you just were talking about Emmanuel on the revenue side, where those conservatism.
There's embedded anywhere else beyond the.
The European and the short cycle IP or is that about it.
Yes, so no. So I think that if you think about the industrial components industrial connectors.
We think that theyre going to decelerate in the second half.
We also think that.
Industrial and chemical pumps are going to decelerate in the second half.
And then energy also keep in mind the energy has been really good.
Going on all cylinders and I think Thats a.
The second half we are bound to see something a little a little weaker is a deceleration across the board. It's not just auto is across the board.
Great really appreciate the thoughtful answers thank you.
Thank you thanks, Mike.
Thank you.
Our next question comes from the line of Joe Ritchie of Goldman Sachs. Your line is now open. Please go ahead.
Thanks, guys.
Good morning, Joe not to hand.
Not to pile on to the to the guidance questions, but maybe I'll just tackle this a little bit differently and taking a look at the range right I don't think that there we were surprised at all by the high end of the range, but the low end of the range.
Came in a little lower than expected and so maybe one way to address this is what percentage of your business do you expect to see declines not just decelerate, but actually decline in the back half of the year and are you already seeing that in your kind of like leading indicators are you seeing in your business.
Or is it more around it just an expectation on the broader economy.
Okay, let.
Let me say is definitely an expectation on the broader economy Joe.
Number one.
But as you know we have some short cycle businesses in the portfolio that means the industrial connectors.
He is also the short cycle in IP. So when you look at the show cycle in AP.
Even though we see still a good numbers when you look at <unk> Q4 is there is still good for service.
And good for park.
But we saw baseline actually declining now service is growing both in because of price, but also volume.
Policy is growing mainly because of price in Q4, so we start seeing some weaknesses there and then when you look at the industrial connectors business there.
These are I would say, even though they are still growing year over any year over year, which is good.
I would say if you look at the distribution in detail Youll see that sequentially the distribution orders.
<unk> decline Q4 over Q3, so you started seeing the signs did I answer your question Joe.
Yes, you did I guess, maybe just to kind of contextualize that we're talking about maybe about a quarter of your business that you are seeing.
Potential weakness.
So let me let me take you through the breakdown.
In IP, we're probably talking about something like 40% of the business.
In CCT.
It's probably around 30% of the business. This is industrial connectors industrial components.
And an empty is mostly driven by by auto.
Okay, Alright, that's Super helpful. And then my follow on question is just around the IP margins.
It's clearly a great.
Story over the last several years I mean, even even adjusting for the onetime items above 20% is pretty incredible.
As the business starts to shift more into projects.
What's your expectation for the margin trajectory of this business moving forward.
The trajectory doesn't change Joe.
January for this business is up and we have been very very rigorous very disciplined everybody understands in AP that.
The rigor and discipline in pricing is fundamental for us to deliver the performance that we are delivering so just to give you. Another data point, if we look at the backlog that we do have today.
So the projects backlog is at a record high of profitability. So everybody understand it we have the appropriate processes and we are executing that way.
Okay, that's incredible.
Thanks, guys.
Thank you Joe.
Thank you.
Our next question comes from the line of Damian Karas of UBS. Your line is now open. Please go ahead.
Hi, good morning, everyone.
Good morning, Jamie.
Let me start off asking you about friction I know you mentioned.
With respect to EV.
Phil still targeting getting to that 30% global market share by 2020.
And share gains continued to be expected this year.
But there have been some headlines out recently.
The global market leader in Evs.
Losing some market share with some of the Chinese manufacturers and in general theme that EV space is getting more competitive. So just curious to hear you guys talk about what it means.
For ITT friction your market positioning and profitability.
Well.
That's that's very that's very true Damian I seen that dynamic probably is changing this is getting more and more competitive out there a couple of things I think that the market will keep on growing growing very fast.
That has not changed when it comes to the competition, we are able to differentiate our south for when we're playing against the competition. So you are still facing challenges when you're designing the braking system for evs that.
Still relatively new and therefore, the speed to solve those problems is something that really helps you to differentiate and.
<unk> has really helped us so far.
And we believe it's going to happen for the years to come.
We haven't.
This is demonstrated by the number of electric vehicle platforms that we have been winning in 2022.
78 for the full year.
And David I would say that.
The greatness of friction is that we play with everyone.
And so whether it is a Chinese electric vehicle OEM or a more traditional OEM also continuing to develop IC platforms.
We made a point to to apply the same focus and to defend our existing business and go after the competition and so I would say that even if there is a transition that changes a little bit or slows down this does not impact our business.
Understood. Thank you.
And as it relates to capital deployment it doesn't seem like you're planning for much buyback. This year are you may be expecting some acquisitions to hit our.
Why is that.
If not on the deal front.
Absolutely makes sense to repurchase more shares are awesome at some of the <unk>.
Higher interest expense.
Really appreciate just any thoughts around that.
Sure. So as you mentioned Damian we're really focused on growing this business through M&A, and adding complementary businesses to really strengthen ITT and so.
We mentioned several times that we have a very healthy pipeline.
We're going after are great opportunities.
And when when we travel around to see all these opportunities you know its really refreshing to see that the team can relate immediately to the business opportunity or even the customers and so we feel pretty good about our M&A activity in 2023, and that's why it's going to take precedence.
Above.
Above repurchases.
That doesn't materialize for whatever reason then we will continue to be aggressive and repurchases as we've been.
In 2022.
Okay.
Great. Thanks, a lot guys best of luck.
Thanks, Damien Thanks Damian.
Thank you.
Our next question guys to calculate <unk> of Cowen. Your line is open. Please go ahead.
Hey, guys good morning.
Good morning, Joe.
Hey, I just wanted to start on the cost side for expectations into 'twenty three so the cost inflation I know, it's less than youre guiding to less inflation than what you had in 'twenty, two but its incremental inflation off of a high number and.
And then you I think you called out chemicals, you called out energy.
Im sure Theres some labor in there, but I just wanted to understand the lag here, because if it's like chemicals and energy and things levered to oil prices and gas prices in the U S. They're down and in Europe gas prices are down like 85% versus peak in there.
<unk> 'twenty late 'twenty one levels now so just curious as to like how.
What those exposures are and what it seems like there has to be some give back on the energy side pretty soon.
No no.
We agree Joe I think that for.
For the moment.
We're still in a period, where we have high cost.
And one thing that we have to keep in mind is that even if the markets show a significant decline whether it is in energy for the price of steel and those type of things Theres still a lag before we can experience it and I think thats what youre seeing here is that Q1 is really very much in line with what we've seen in the second half.
Of 2022, and we're going to start seeing.
Progressive benefits in Q2 and later in the year. So I think thats a lot of the incremental inflation that youre seeing is on the chemical other raw materials, we buy our <unk> fiber for instance, and that is shut up through the roof 10 is not easing up either.
But.
On the commodities that are going to go down and we're going to experience that decline later in the year.
Okay, and then if I could just.
Follow up on empty specifically in the margin.
Obviously, theres a lot of upside to where you used to be there how much of this is like.
Specific COVID-19 related costs in China, just for like having to keep people on site and all the extra stuff you had to do during shutdowns.
If that if we get back to China just.
Living with the virus like we do here now.
How much does that give you back like almost immediately if you can take some of those precautions away.
So I would say when it comes to that there is a known issue Joe.
I've seen that.
China has been able to go through all of that performance that those costs have been fully compensated by productivity.
And the volume and so.
Now that all that is the short answer.
Okay. Thanks, guys.
Thank you Joe Thanks, Joe.
Thank you.
Our next question comes from the line of flat by sticky from Citigroup. Your line is open. Please go ahead.
Good morning Vlad.
Good morning, guys. Thanks for taking my call.
Maybe just following up on Joe's question, there and I'll ask in a different way.
So when I think about the.
Progression of empty profitability going forward.
Can you talk about.
<unk>.
The path back to high teens margins in that business and sort of given what you know today, how you're thinking about the timeline to get back to those.
Prior peak ish ranges.
Okay.
So when we think about empty the long term target that we shared at Investor day have not changed we've seen the MTA can reach the 20%.
Operating margin long term that's for sure and that when we think in terms of timeline just because of what has happened probably they're going to get that a little bit later than CCT and IP, but that 20% is that is that can be achieved we just have to get a little bit of D. C.
<unk> gone through this snake out of the snake, but.
We have a clear visibility to get there and I would say flat. That's when you think about the path you see.
Maintaining pricing is important for us.
Well commodities are slowly declining I think productivity you know has been.
And she has been a war machine in terms of productivity and obviously, we continue to count on that.
And then when you think about the other businesses out of friction.
So quite impacted by commodities inflation the business like Oxytone buys a lot of steel for instance, Wolverine as well and so we're really driving the recovery in those businesses to help us get back to that 20%.
Margin targets that as we go were saying may not be around that three year horizon, but more around the five year horizon. So Vlad if you think about accident.
I mean, 25% of accident vis vis these appeared overnight and that was a very good profitable Russia business now despite all of that the accident was profitable in the mid single digit, but as you see now they have to recover and they have to rebuild it with a different footprint with a different market.
That's all really helpful color guys I appreciate it.
Maybe just.
As a follow up.
Wanted to ask you a little about how bunin actually.
That business seems to be performing quite well versus.
Your expectations.
You highlighted how the business expanded Ips themselves portfolio. So could you talk about sort of your opportunity in valves and how youre thinking about the potential.
To continue expanding your presence there either.
Hello, naeem or through incremental capital deployment in that end market.
Thanks for your question Vlad is spot on.
<unk> is an area, where we are investing and growing organically and inorganically. We have some very differentiated products with IP intellectual property that can be used in the pharma and biopharma that happens when we summarize some key accounts and we keep on investing on that front.
On an organic point of view, we have opportunities in the pipeline. So we will keep on investing also inorganically and as well as leverage that had been an acquisition to expand more we more with their happening projects in North America. So all of that is happening and there are some key markets, where there had been any strong.
It might be you know cryogenic pharma hydrogen that were penetrating more and more that is terms of.
Investment in terms of opportunity for the future M&A et cetera, when it comes to the results.
It's been a great acquisition has been a very well executed integration that was not so focused on the integration is match is a value creation and if you think about the multiples. They made it up to today is between eight and nine so was there as I said, a great deal and very well executed.
By Ilan and biker story by the entire team and I would add to this is that as we had previewed when we acquired <unk>.
It is also helping that.
That acquisition is also helping us see things differently than the way, we manage our <unk>.
Existing engineered valves business and so we've been driving a lot of the margin up.
In that business, which has participated in the margin expansion story also of IP.
And I would say on that business engineered valves, which was the legacy business of ITT.
We are seeing significant opportunities from our Biopharma standpoint, so also in that regard.
I believe as well as our existing business I expect it to grow significantly in 2023.
Great I appreciate all the information this.
Thanks, a lot for that.
Thank you.
Our next question comes from the line of Jeff Hammond of Keybanc capital markets. Your line is now open. Please go ahead.
Hey, good morning, everyone.
Hey, good morning, guys.
Yes, good morning.
Yes, I think you gave some good color on the segment guidance for <unk>, but I'm just wondering like if you can rank order kind of confidence in the level of margin expansion for each of the segments or where you see the most and least.
So.
When I look at the three different businesses there.
Facing a little bit of a different challenges Jeff in terms of IP, we have a very good momentum that and.
We have taken to the next level.
Need to invest we need to invest that and keep on investing in this business, but we need also to keep it very close eye because you have a short cycle business that is slowing and the long cycle with big projects.
That is that is really hot so you really need to do.
Way to end and the site property where to invest so good momentum keep an eye on what is going out there on the industrial when you look at motion technologies is working like crazy on the operational efficiency wireless sticking on the pricing and negotiate as well as you can on the pricing so that.
There is still quite a lot of work to do and it's quite difficult because you are dealing in the automotive.
Difficult market scenario when it comes to CCD CCD has got plenty of opportunities there.
And in terms of that because of the aerospace that is growing but at the same time what we.
Spirit and CCT in Q4 was challenges on the supply chain that.
Were higher than expected. So if we look at Q4, probably we were not able to deliver roughly $10 million to $20 million of revenue just because of supply chain issues and labor shortages and CCT is probably where we need to pay more attention because of those kinds.
Of issues.
So Jeff in terms of margin trajectory I think that if you think about IP and CCT as Luca mentioned, they're on a different trajectory different dynamic than empty.
If you think about IP, we probably closed from.
From a sustainable margin performance and IP at around 18% in 2022, and so we're going to we're going to drive roughly 100 basis points higher in 2023.
Then that CCT is you're also going to drive it.
We're going to drive significant margin expansion, a little less than 100 100 basis points compared to the 18 roughly 18% in 2022.
So really good momentum there in an empty will clothing, we're clawing back our way back into the high teens.
And so I think you're going to see.
Nice improvement, but still very much affected as we mentioned by.
By material cost inflation, that's still remains.
Pretty big.
Okay, that's very good color.
Maybe.
I guess within FMT and maybe broader just you talked about particular, I think aftermarket weakness in Europe in the front half production slowdown in auto in the back half in Europe , maybe just dial in a little more on how Youre thinking about North America, and China and just more broadly.
What's your expectation for kind of rate of recovery here, we hear a lot of different things on China in general and just just wanted to understand what's what's kind of built into your guidance. Thanks.
So when we look at the at the market for 2023, Jeff.
It's zero to two.
The market, 2% growth, we will outperform that and then Europe , probably we estimate flat flat also China and low single digit growth for North America that is our expectation and we expect our focus and we expect to outperform that as I said.
When it comes to the second point in terms of China.
From an economy point of view I think is going to China is going to do fine.
I think about it the difficulties that we had.
Q4 in December 75% of all our people got Covid.
Never heard of and guess what that all back in right now and that are working so.
My My my view on China is actually a positive one.
And so in terms of outperformance versus all the different regions, we expect that we're going to have.
First overall global and outperformance in the markets in 'twenty, three that's going to be a little higher than what we've seen in 'twenty two and then all the different markets are going to be.
We're going to outperform all of the different markets with the highest outperformance probably in China, and then equal outperformance in both Europe and North America.
Alright appreciate it guys.
Thanks, Jeff.
Thank you.
Last question comes from the line of Brian <unk> of Oppenheimer. Your line is now open. Please go ahead.
Good morning, Brian Good morning, Brian Thank you.
Thanks, Good morning.
I guess following up on the friction OEM performance.
Question.
It sounds like step up a little bit relative to the 400 basis point run rate, Italy globally.
That certainly below the 900.
We've grown accustomed to over the years, but it makes sense given the share gain trajectory that <unk> been on for so long.
If we think about.
The next few years.
Is mid single digit outgrowth in the right place to kind of hang our hat and.
In modeling friction OEM and how should we think about that.
By region, we we've also gotten accustomed to strong outgrowth in China.
Really significant.
Outperformance in North America, and then more modest just based on your.
Elevated share in Europe .
Spell Tom Brian So I think it would be different different geography, and what you said is exactly correct, so probably lower in Europe and more in North American in China, I would say even higher in China. Because also the outperformance in terms of awards has been outstanding also in 2022, thanks to <unk> and <unk>.
Our sales team over there.
One a positive a tailwind that my.
It might be on top of that on top of what we said is the EV.
And the reason why I'm, saying that is because our win rate in electrified platforms is much higher than our market share so that might feed.
A larger outperformance in the in the years to in the years to come.
So we don't see that yet because they start of production is going to be in the next two to three years.
We then materializing and that could be a tailwind to our to a lower outperform it.
Okay.
Thanks, I appreciate the detail.
And following up on <unk> and that seems to be a win all around.
Could you offer some finer points on exactly how it's pacing relative to your initial deal model.
And if there is a figure you can speak to how much you are.
New energy project funnel has expanded.
Since acquiring the asset.
Yes, so I think thats what were seeing is that a hydrogen the hydrogen opportunity is definitely there and we're expanding really.
Very much on the on that end market <unk> is gaining share it's taking share from it from from everyone.
I'd say from a from an order standpoint, we're seeing some really nice number clearly outperforming the model from a revenue standpoint also and from a margin so really across across the board, including cash well and we've seen some nice improvement in the fourth quarter in terms of working capital reduction wholesale.
Well the next opportunity that we have with having them is to really drive productivity in there.
They are producing let me give you an example, theres still producing in batch there and so thats limiting their production capacity and so.
Very constructively, we're going to implement lean.
And so free up a lot of capacity, which is going to allow us to support future growth without making a capex investment, but just reorganizing than.
So we should see in addition to volume, but really the margin taking off.
Okay I appreciate the color. Thanks again guys.
Okay.
Thank you.
This does conclude today's teleconference.
Please disconnect your lines at this time and have a wonderful day.
Okay.
Yeah.
Yes.
Yeah.
Yes.
Yes.
Yes.
Okay.
Yes.