Q2 2023 ITT Inc Earnings Call
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It's now my pleasure to turn the floor to Mark Macaluso, Vice President of Investor Relations and Global Communications you May now begin.
Thank you Alan and good morning, joining me here in Stanford. This morning are Luca Savi, Itt's, Chief Executive Officer, and President and Emmanuel Kirk Reich, Chief Financial Officer, today's call will cover <unk> financial results for the three months period, ending July 1st 2023, which we announced this morning before.
Before we begin please refer to slide two of today's presentation available on our website, where we note that today's comments include forward looking statements that are based on our current expectations actual results may differ materially due to several risks and uncertainties, including those described in our 2022 annual report on Form 10-K, and other recent SEC filings, except where otherwise noted the second quarter results.
We present this morning will be compared to the second quarter 2022 and include non-GAAP financial measures. The reconciliation 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 with that it's 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 thanking our employees around the world who are.
Work hard everyday to ensure we deliver on our commitments to all our stakeholders.
To our shareholders and customers for their ongoing support and investment in ITT.
Last quarter, the IGT story was about growth and execution.
Or the growth rate accelerated.
We expanded our margin, especially in the industrial process and motion technologies and.
Our teams generated significantly higher cash and we deployed it.
Let me share some of the highlights.
<unk> percent organic revenue growth.
280 basis points of segment margin expansion.
36% EPS growth.
And more than $120 million improvement in free cash flow since Q1.
And on top of that orders.
Up 13% organically and 6% sequentially.
Now, let's get into the details.
Growth industrial process delivered a 23% revenue increase and a 15% organic orders growth with another record quarter driven by projects and after market.
On after market, our daily order rates in parts and service remain at historically high levels and we are realizing for the pricing.
On projects orders grew 41% despite a tough prior year comparison.
These include a significant pumps award on an LNG project for one of the world's most prestigious engineering firms.
Green project orders are up.
More than 100% in Q2 and year to date.
Already more than double the amount for all of 2022.
Additionally, our bornemann twin screw and multiphase pump technologies are capturing share for.
For example, <unk> was recently awarded content on one of the world's largest the carbonization projects in Australia that produces roughly 16 million tons of LNG per year.
When it was at our Boardman site in Germany, I saw first hand, how the team's outstanding project management capabilities are driving market share gains.
IP is developing.
Developing best in class project management with strong leaders and rigor across the organization.
With IP outperformance ramping I am pleased to announce that Fernando Roeland has joined <unk> as president of industrial process, succeeding Dave Stateline will retire early this year. After 30 very successful years of service to Goose bumps and ITT.
With more than two decades of senior leadership experience at large multinational companies.
Nando has the expertise to help grow our premier flow business.
It has IP differentiation.
So nanda welcome to ITT.
Continuing with growth motion technologies grew revenue, 10% organically driven by friction outperformance, which in Q2 was nearly 500 basis points. This quarter, we won't content on 67, new electrified vehicle platforms with Premier Auto Oems.
Including Tesla BYD, Porsche Paulista and BMW.
Stepping back from the quarter for a moment one of the unique aspects about friction is the team's ability to serve our customers by anticipating their challenges and developing solutions to meet their needs.
With each market disruption friction found ways to differentiate and accelerate our market share gains.
It happened with copper free brake pad, it's happening with the EBIT transition.
And the next opportunity is the eventual rollout of euro seven and Michelle regulations.
The friction team has been proactively developing euro seven compliant products in partnership with our customers.
Of the expected rollout.
As you might remember in 2022, our ICT ventures fund invested in <unk>, a German company specializing in highly customized roto coated technology.
Today together with <unk>, we are developing low emission braking technology to help our customers achieve euro seven compliance.
Two years before regulation are expected to be enacted.
We expect this will drive further market share gains once again.
Lastly on growth connect.
Connect and control technologies deliver record orders in the quarter growing 7% organically versus prior year.
Aerospace components grew 25% fueled by increased commercial Aero and defense demand in North America.
And despite the challenges in distribution.
<unk> orders grew 2% year over year, and 24% sequentially with a strong performance with our North American OEM customers in commercial Aero and defense.
Well, Don art and the entire connectors team.
On execution.
We grew IP margin more than 600 basis points, driven by volume pricing and shop floor productivity eclipsing, our long term target of 20% for the fourth straight quarter.
And we delivered this margin performance, while continuing to invest in the business.
Team is increasing ip's manufacturing capabilities and advanced in the lean transformation in Seneca falls.
And we now expect to have five one piece flow lines running next month.
We're also progressing with the foundry closure, which will provide additional cost benefits beginning in 2024.
An empty margin improved 150 basis points to 16% and 120 basis points sequentially as we anticipated.
With the progress in 2023, we believe empty with the return to roughly 18% margin in 2024 as Destocking in the auto aftermarket debates.
Moving to capital deployment on M&A, we didn't waste any time getting to work with our recent acquisition the connectors and micro motor teams are working together to execute on the commercial synergies and grow the pipeline.
The teams are sharing customer opportunities exploring new ways to package, our products and expand distribution.
We believe macro motor differentiated media too and high frequency design capabilities will enhance itt's product portfolio and customer base and provide further entry into attractive defense and space markets.
Feedback from our customers has been positive and this is leading to other commercial opportunities for our connectors business.
Beyond M&A, we also paid down over $16 million of outstanding commercial paper and repurchased $60 million of ITT shares year to date, including $30 million in Q2.
Okay.
Next to our outlook.
Outperformance through the first half.
A large profitable backlog.
Oh, the acceleration today, we're raising the midpoint of our full year EPS guidance by 25.
With confidence in our ability to deliver over $5 of EPS or 14% growth for the year.
Notably the high end of our previous range now becomes the low end of the new guidance. Thanks to the performance in empty and IP.
Cash generation ramp considerably since Q1 with plenty of room still to grow on a path to nearly $400 million of free cash flow in 2023.
Okay.
With our exposure to growing end markets, including auto and as your Aero and defense and the backlog of more than $1 $2 billion.
<unk> is in a strong position entering Q3.
I mean credibly proud of the team's accomplishments this quarter and we are ready to conquer what lies ahead.
Now I would like to share with you another growth opportunity for ITT.
In June <unk>.
Joining a friction team for a groundbreaking ceremony at Mt's facility intermodal, Italy to announce a 50 million euro investment that we position ITT to quickly gained share in the underserved and profitable high performance vehicles segment.
The investment comprises a new facility.
Grady production equipment, and then expansion of our fast prototyping testing and R&D capabilities.
We're also installing solar panels that we expect will provide more than 20% of the entire family size electricity needs demonstrating.
Demonstrating frictions ongoing commitment to sustainability.
This opportunity was largely driven by feedback from customers about their need for a responsive high quality and high performing partner.
We have earned that trust by understanding their needs and delivering highly customized solution and performing.
And today, they're trusting us again to deliver the same quality for their most prestigious platforms.
This is a win win.
Our customers will benefit from having a trusted and known partner that they know will deliver.
And expected returns for ITT are attractive.
Congratulations to <unk>, the friction and the entire terminal at <unk>.
<unk> earned this investment.
Let me now turn the call over to Emmanuel to discuss our Q2 results and full year outlook in more detail. Thank you Luca let's begin on slide five.
We continue to see strong topline growth in both industrial process and motion technologies in IP project grew over 100%, while baseline pumps and aftermarket grew mid teens.
In empty frictions perfect on time delivery performance drove double digit revenue growth.
Indicated at a conference in June Frictions outperformance rent. This quarter. We also saw strong volume and pricing growth in <unk>, thanks to share gains in rail.
In CCT the growth in our Aero components business, largely offset declines in industrial connectors associated with continued destocking in distribution, especially in Europe .
The team is addressing the dynamics of strong demand coupled with a challenge supply chain and commercial aerospace by reducing our internal lead times.
Moving to our margin performance.
Our incremental margin this quarter was nearly 40% and 50% in IP.
This is driven by over 300 basis points from volume and price and over 200 basis points of productivity, which collectively outpacing cost inflation and unfavorable foreign currency impacts.
Motion technologies delivered a strong sequential and year over year improvement. This will continue as productivity ramps and commodity inflation eases further.
Finally, this quarter, we divested a small product line in CCT and incurred acquisition expenses related to micro mode, which drove a net $5 million gain or <unk> of EPS.
This amounted to 50 basis points of margin improvement that will not repeat.
On adjusted EPS.
Q2 showed another big step up in performance the 36% growth is largely the result of strong operational performance.
Pricing realization that is now outpacing cost inflation.
Finally on cash another impressive performance, both year over year and compared to Q1 free.
Free cash flow margin was almost 15% this quarter.
The $145 million increase in free cash flow year to date came from a combination of higher operating income and improved inventory management.
What's even more encouraging are the benefits that are still to come from further optimization of working capital.
We also continued to repurchase ITT shares while reducing interest expense from Q1, given our strong cash generation.
With this quarter's performance, we have line of sight to nearly $400 million of free cash flow for the year.
Let's now turn to slide six to look at the EPS drivers in Q2.
We delivered high quality results in Q2.
We're growing operating income through share gains pricing and productivity in fact, the operating income growth rate was almost triple our revenue growth rate this quarter.
Pricing is outpacing cost inflation, we overcame large unprofitable unfavorable year over year foreign currency impacts.
And we are making strategic investments in new and emerging technologies to sustain our differentiation over the long term.
All of this will help to deliver this high level of performance for many years to come.
Let's turn to slide seven to discuss the full year outlook.
The positive demand we saw through the first part of Q2 continued and even rent at the end of the quarter. The result is a large and profitable backlog that provides greater visibility into the second half of 2023.
In IP, our project margin back in backlog expanded over 200 basis points year to date as we continue to drive project management excellence.
In CCT orders in North America are growing sequentially, thanks to OEM share gains.
Setting the fact that our distributors are continuing to work through elevated levels of inventory.
With all this considered we expect to be solidly at the midpoint of our current organic revenue guidance range of 6% to 8%.
Our margin IP as far exceeded our expectations for several quarters.
This and the improved performance and empty are driving a four year segment margin outlook to over 18% at the midpoint.
We see signs of easing inflation and are progressing on our lean transformation.
With a 25 to <unk> 25 increase to our EPS midpoint to $5 and <unk>, we now expect growth of 11% to 16% firmly above our long term targets.
Looking ahead briefly to the third quarter, we expect low to mid single digit organic growth led by industrial process.
Segment margin should be roughly flat sequentially with continued improvement in motion technologies.
Earnings should be up mid single digits year over year.
Finally, our effective tax rate remained at approximately 21%.
Let me turn the call back to Luca on slide eight to wrap up.
Thank you and then with a few points to reiterate before our Q&A.
First growth.
We are positioned in attractive and growing end markets and.
And we are outperforming.
Second the team's execution in these end markets has been outstanding Theyre fighting Seo challenges supply chain conditions, removing bottlenecks and finding new ways to deploy lean processes.
And before you ask let me assure you we will have new long term margin targets for industrial process in the not too distant future given its current performance.
It has been one year since we established a long term segment margin target for ITT of 20%.
And at 18, 7% in Q2, we are already well on our way to achieving our target.
Third we are not losing sight of the long term, we are investing today in innovation product development and capacity to support growth in pump projects in electrified vehicles in the high performance vehicle market and in Aero and defense.
Our teams have been working throughout the summer on their long term strategic plans.
And I'm sure that we will deliver on them as we have done so far.
We've been improving our balance sheet for several years now which enabled us to go on offense.
We are deploying capital Y cultivating a strong M&A pipeline and investing in our business organically.
Lastly, we have raised our full year guidance to over $5 of EPS at the midpoint.
IGT is entering a new stepped up level of performance.
Thank you for your time today and your interest in IGT Alan Please open the line for questions.
Thank you the floor is now open for questions. At this time, if you have a question or comment. Please press star followed by one on a kind of thank you. Pat is there any point. Your question has been answered you may remove yourself from the queue by pressing star followed by an E pad again, we do all that while you pay your question you pick up your handset.
To provide some quality please limit your questions to one question follow up question.
Thank you very much our first question comes from Damian Harris.
UBS Damian Youre line is Nathan Please go ahead.
Hi, good morning, everyone.
Good morning.
Gratulation.
Hey, congrats on the quarter.
Luke I was hoping maybe thank you share some more.
Absolutely maybe you could share some more color on what youre seeing across IP.
You guys had expected some short cycle pressures in the back half.
What are you seeing on the short cycle side and maybe if you could also just speak to the project funnel.
Sure. Thank you Damian so when.
When we're talking about today.
The orders overall.
Orders are very positive as you see 15% growth.
And expectations from here any factors that might be leading to a little bit less uplift and I guess just more generally like how should we be thinking about.
The incrementals for your business.
Yeah. Thanks Damian.
So we expect segment margin to be generally in line with Q2 for Q3 and Q4.
And here, it's important to keep in mind that empty continues to improve sequentially.
Well I I P will probably settle between 'twenty, one and 22% I think it's important also to remember that last year in the second half there were a few one off positive that's impacted mostly IP and that will need to lot lap in the second half. So overall I think it's fair a little bit of deceleration off.
Incrementals in the second half.
But still very very healthy.
Yeah.
Understood. Thank you very much and best of luck.
Thank you Damian our next question comes from Jeff Hammond from Keybanc capital markets. Jeff. Your line is now open. Please proceed.
Hey, good morning, guys.
Just wanted to really get an update on the Destocking progress in <unk>.
Industrial connectors and Europe automotive I think you pointed out some better orders and connectors.
And and you know it looks like the orders were pretty good in M. T as well. So I'm just wondering if if those are those issues are starting to resolve themselves ahead of ahead of plan are still thinking that kind of runs through the year.
Thanks, Jeff Good morning, no when you look at the aftermarket.
And most of the technologies the aftermarket you still destocking. So this situation data is not has not changed so the destocking and probably will continue for all of 2023. This is when it comes to automotive when you look at the connectors.
Connectors.
Very good quarter in terms of orders.
It was a record as a matter of fact, I think that we are still facing destocking, particularly in Europe like Amanda was sharing in the prepared remarks, what the team has been able to do is to perform incredibly well on the orders with OEM and also they worked very hard in the distribution here in North America.
And larger the product portfolio that we put through distribution and these as led also to a very good order intake in distribution in North America in Q2.
Okay and then.
This 5% gain is that in CCT and am I thinking about that the right way.
Yes. This is this isn't TCT. This is a small product line roughly $3 million of sales annually.
We decided to.
To sell to focus really on the core business of CCT.
Okay, so, but if you take out that $5 million in the margins were pretty low there. So maybe just what's going on with.
You know what the underlying margins in CCT.
Yeah, Yeah, you're right, Jeff So CCT I had.
Little bit of an issue in in Europe .
Dealing with low levels of demand and adjustment of the cost base.
So we'd now we're happy to report that.
As of June .
As of June really the second part of June and also what we saw in July we're back on track and we back to the previous levels of performance. So so we feel pretty confident that CCT is going to be higher than 17% in the back half of the year.
Okay. Good color thanks, guys.
Thank you Jeff. Our next question comes from Joe Ritchie from Goldman Sachs. J. Your line is now open. Please go ahead with your question.
Hey, guys good morning.
Yeah.
So.
Couple of quick questions first one just fine.
Just on the organic growth that you guys saw this quarter and he just made.
Thats down a little bit further for us like what are you seeing friction versus the rail business and then like any other geographic color would be helpful too.
Okay. So first of all when you look at our friction in automotive I seen that there was a positive performance. When you look at the OE. So we outperformed the market by five basis points.
Especially performing was was China, where we will almost twice the growth of the market.
And we continue to win awards I will give a little bit more color later.
The aftermarket is still de stocking.
Overall, the Oes it was positive by the independent aftermarket negative growth year over year.
Rail had a very had a very good order order intake. So when you look at colony for example, kony orders in the quarter were up 25% and we expect the orders to be up double digits for all of 2023.
And also ask Don you might remember Oksana.
25% of the act on visa was actually in Russia, and we got hit pretty hard.
Last last year now the team has worked incredibly hard to offset that does Russian orders that we'd that more passenger orders in in western Europe and other regions. So we expect the orders for 2023 to fully offset the business that we suspended it.
Russia, so overall positive across our across the board so too.
Joe to round it all up on in terms of revenue.
Friction so strong growth in friction mid teens. This is really driven by friction OE plus 21%, which is a really strong number as Luca mentioned and based on the outperformance.
Rail also was up 25% and this is both coming from Kuhnian axon. So not only we had strong revenue and we really the team really increase the output or factories, but on top of that we had really strong orders as Luca was mentioning.
Awesome, that's great to hear guys and then my quick follow on I saw the price cost was.
Was that was a nice contributor to earnings.
On a year over year basis.
Versus last quarter, I think you guys were flat.
What's the expectation into the back half of the year Emmanuel for price cost and how that's expected to contribute on a year over year basis.
Yes, so you're right Joe.
A nice contribution from price cost clearly positive from a dollar basis.
And more than 100 basis points of margin margin expansion thanks to that.
And let me let me just precise that when we talk about price cost here, we talk about price versus all our cost so not only material. It includes also labor and overhead.
And so in this in the second half of the year I would say that we should still see a positive trend on on <unk>.
Price cost definitely positive from a dollar basis, and then from a margin basis below less than a 100 basis points.
Perfect. Thanks, guys.
Thank you Jay Thank you and our next question comes from lots of question.
Great. Thanks.
Go ahead. Your line is now open.
Good morning Vlad.
Please go ahead your line outcome.
We can hear hey, good morning, guys, sorry about that yeah, sorry about that guys.
Can you hear me now.
Yep Yep.
Okay, great. So.
Just wanted to ask you guys about channel destock in CCT connectors and.
Where you think that channel is in the Destocking cycle and what you're hearing in terms of actual end market dynamics there.
Yeah. So so I think what we're seeing is the destocking that we're seeing is happening in Europe in Europe .
We're not seeing destocking for the moment in North America, while we hear from our distributors partners is that their customers are destocking, but we're not seeing a clear just talking movement at our customers in North America, I would say from a from a demand standpoint, we feel pretty.
Good as Luca was mentioning.
We have been able to expand our product lines with our distributors, especially in North America and that has yielded a significant.
Share gains.
And we'll continue to really in CCT developed new products, especially including the ones that we acquired we micro mode to really boost our presence with distributors.
Okay.
That's helpful and then.
I just wanted to shift on the friction announcement.
Yeah.
And then you mentioned.
Quite interesting so I guess, just any color you can give on.
When youre expecting that plant to come online and how youre thinking about.
Visibility to demand.
For the four product offerings out of that out of that facility.
Or is this sort of displacing incumbents or more focused on winning new content on new vehicles as they are introduced.
Are you thinking about ramping.
Sure. Thank you. Thank you for that so the first part of the question is that the plant will be up and the building will be up by September next year. The equipment will be installed in September next year and the line will be running in October 2024, So you're talking about.
15 months from now.
Yes, 14 15 months from now.
That's the timing.
When it comes to awards, we have already won.
One some of that was that we would be producing in those plants. So we've got very good visibility.
And.
A good start up with a line running from day, one and this is a underserved market. So so we're lucky enough to be able to guarantee our customers. The same performance we.
We delivered to them on conventional vehicles on those high performance vehicles and so given these the differentiation we have with the competition. We feel very confident that this is a high success, we have a high success rate here.
In fact, we already spoke I was mentioning got some awards and it was a great combination because the awards that we got were for high performance vehicles, but also including low emission break options, which are.
Fully fitting the euro seven.
Requirements that will have to face.
Two years. So it's also a great testing ground for this new technology.
That's that's all great to hear I appreciate it I'll get back in the queue. Thanks.
Thank you Ed Thank you for that.
Our next question comes from Matt Summerville from D. A Davidson. Your line is open. Please go ahead.
Good morning couple of questions first just on on friction OEM, what sort of production. The outlook are you looking at for 'twenty, three and maybe an early thought on how you are building your business plan around 24 production outlook regional color would also be helpful and then.
Maybe touch on.
500 basis points of outperformance I guess I thought you guys had talked about that gap may be starting to close, but indeed, youre still holding onto a pretty wide margin relative to global vehicle output. So maybe touch on that a little bit.
Sure. Thank you, Matt So Q1 and Q2 production have been.
It pays a surprise when it because they were better than the original forecast. So the first offer is roughly plus 11% worldwide. So when you look at the forecast for the full year today is that mid single digit. This is what IHS is saying roughly $86 7 million vehicles produced.
We tend to be more conservative. So we are more on the low single digit worldwide.
80, 485 million vehicles produced and we continuously expect to outperform that market growth.
Then you asked about the region.
We've seen that that Europe is probably growing mid single digit.
The year to day to day growth, 16% for H one.
I think China is going to be probably flattish, whereas North America is probably growing mid single digit. This is when it comes to the market and the region as I said, we still expect to outperform you're quoting 500 basis points of outperformance in Q2 I.
I would say.
The outperformance was outstanding in that in China, China need extremely well I will I will talk a little bit about that in a second but we expect the outperformance to continue that because that.
We keep on winning a very fair share of the new platforms.
To give you an idea we have.
Been awarded at 100% of the front axle and 100% of the rear axle of a major EU premium OEM EV platform Dcs for friction the largest award ever did.
The launch will be in 2025, and <unk> will last for 10 years.
<unk> will last for 20 years, so think about the visibility you have on this platform.
We won we'd be weide.
We won.
The front axle update cyber track with Tesla. So we continue to see that electrification is really a tailwind for our outperformance in the future.
That's great I appreciate all that color Luca and then just maybe comment on the M&A pipeline action ability, what youre seeing from a multiple standpoint, among the three business segments, maybe where youre seeing the most near term activity and maybe what your expectations are for incremental deals to close beyond.
One you had in May thank you.
Sure when.
When you look at the M&A you know we have built a strong M&A function.
Continuing to build the pipeline, we see some good interesting opportunities move through the pipeline and those range from the bolt ons to larger scale transaction.
We stay focused on the strategic fit and the asset quality and I will say the area that we are making progress on particularly because the pipeline is richer and because he is also our focus at <unk>.
Really inflow, which means pumps and valves.
And connectors.
And from a multiple standpoint, I would say that we we see still pretty high multiples I think it's difficult for sellers to give up on those high multiples that they had before.
Before.
And so that's why we pay real attention to the.
The business case that are presented to us with those opportunities and I think that we've been pretty successful in rationalizing those those business case and really discussing with sellers the logic of those and in some cases debunking also there there are there assumptions because they were approved.
To be too optimistic so we're very attentive on the valuation we're very attentive on the business spend that are presented to us because we want to make sure that we are.
We stay close to the returns we've been able to provide a so far.
Yeah.
Thank you guys appreciate it.
Thanks, Matt Thank you Matt.
Our next question comes from Mike Halloran from Baird Your.
Your line is now open. Please proceed with your question.
Thank you good morning, everyone.
So two questions here first on the on the margins for motion.
Certainly you heard of any of those comments about sequentially up as you move into <unk>, maybe just talk about the timing of the recovery curve given all the moving pieces on the cost volume expensive side of them.
Yes, Mike So we're very excited with the motion Technologies' performance at 16% as we mentioned this is a 150 basis points over prior year and 120 sequentially.
<unk> productivity continued to be productivity and we see many more opportunities, especially as we grow rapidly our topline and expand into new types of products new types of technology for a breakdown.
So so friction is still a lot of runway in terms of productivity and then if you look at our rail platform <unk>, we see many opportunities both from a pricing standpoint and also.
Our productivity standpoint, so here in pricing, we've just scratched the surface and there is still much more to go after and because this is a longer cycle business, we're not seeing all the impacts of pricing.
Yet.
In our in our P&L, So we're going to continue to drive this.
Sure.
And with further margin expansion from Kodiak stone as well as from from friction.
We expect really emotional technologies to be in a position in 2020 for some time in 2020 for it to be.
This 18% Mike.
That's helpful. Appreciate it and then following up on an earlier question on the 18th side underlying trends.
You talked about a pretty robust funnel just a little help on the composition of that funnel.
And in any way you can delineate between underlying health of the underlying markets versus what's clearly some share gain going on in your and your efforts there.
So.
Mike when you look at the funnel, which is op.
<unk>.
Just a couple of stats, 38% year over year and is up 11%.
Since January January 1st.
Is that across.
Most of the region is a very strong in.
America is up in also Europe , the middle East as well as the in Asia Pacific and also when you look at the market we're talking about.
<unk> op in the oil and gas and the final is also on the on the chemicals I think that we have a good degree.
Green projects I think if you look at our booking in terms of green projects.
<unk> is very is very good and today they represent roughly 33% of all the orders that we booked that we booked in projects and we have a good size of opportunities in the funnel that as well.
Okay.
Thanks, Mike.
Good morning, everyone.
I just have a couple of follow ups two questions.
Yeah.
Okay.
Can you just give us a number for what capacity this is adding and over what time period do you expect that to be filled up.
Yeah.
Okay.
Our high performing vehicles. So these tend to be.
Low volume high mix.
And they tend to be high value in terms of our products. So you are talking about.
Anything that could go from five to maybe 10, if maximum 50 million pads are probably in the next let's say seven to 10 years.
And so and so in terms of capacity you know how we.
We operate.
We only book incremental capacity when we have orders.
<unk>.
So thats the infrastructure and then we're going to fill it up with the new prices as we receive orders, but we already started receiving some orders, especially from Porsche and also for from a Daimler or with the AMG segment.
Like I said, the revenue may not be that good but it.
Revenue that you are booking yes. So.
So I think it's fair to say that there will be lower unitary volumes per platform. The price is going to be much higher than what we're selling today and I would say our expectations from a profitability standpoint is that it'll be higher than our business with conventional brake pads.
And while we're at it.
It was going to ask for an update on the smart pad I haven't had an update on that for a while just any update you have got on the progress being made there.
Yeah.
Sure. This is my pet as part of.
The initiatives that we have on the innovation we have.
Several projects going on in this map that we have a map a project on one sensor.
We are working together with some I would say and conversion of customers in terms of SMB fleet management and look at that as a business opportunity different than the OEM side and then we are working together with a couple of Oems and tier one on the three sensors and <unk>.
There are a lot of changing happening from a technology point of view on the on the braking with autonomous vehicles et cetera, and those are progressing well as well Nathan.
Thanks, just one final one on the <unk> de stocking.
Really in Industrials Hussein.
A lot of Destocking going on people built too much inventory in 2022.
Places Youre seeing end market softening.
Lead times are coming down and supply chains are improving.
There is multiple inputs on on why Destocking is happening do you have any color on how much of this is being driven by the fact that lead times are getting sure people may be built so much inventory last year.
Actual softening of underlying demand, which we are pretty clearly is going on in parts of Europe .
So I think that when we look at the at the Destocking through the connectors in distribution as a man was said before we are seeing that particularly on the European side Nathan.
And the area, where we were strong was that Aero defense.
And also industrial in terms of orders and.
DSA is also thanks to the great job that the team has done in terms of enlarging the product portfolio that we are offering through the north American distribution, so distribution in North America and distribution worldwide, because et cetera performance in North America as being strong for ITT connectors in Q2.
Great. Thanks, very much for taking my questions.
Thanks Nathan.
Thank you our last question today comes from Jay <unk> from TD, Kevin J. Your line is now open. Please proceed.
Good morning, Joe.
Hey, guys. Good morning. This is zane on for Joe Giordano.
Congrats on the quarter guys. So my.
Motion technologies, the 18% margin you guys mentioned.
Just wanted to confirm.
Like do you view that as a run rate margin I know there is some pricing is still being worked through but long term how do you view that.
So I think.
18% that we talked about is just the first step to get to our 20% target you may remember that last year, we committed to those targets and for motion technologies.
So I would say we feel pretty good about this 18% first step.
We continue to drive productivity, we continue to drive pricing also as I mentioned, especially especially in rail.
And I think thats.
<unk> aftermarket recovers next year.
And we also have the platforms the new platforms with a better coverage in terms of cost inflation that are kicking into production next year and in 'twenty five we feel like structure, we feel that structurally motion technologies well.
At a higher level of profitability. So we have definitely a good line of sight for that 18% in 2024, and then to build on that and get to our 2020.
To our 20% long term target.
In the next.
Three to four years.
That's helpful. Thank you for that.
Last question would be yes.
On your backlog. So you guys have currently I think one point too.
Broadly speaking how much visibility.
Our coverage do you guys think that provides into 2024.
So backlog has been really strong.
Really strong data point for us.
Really strong performance from a commercial standpoint.
Our backlog in IP is almost $700 million, it's up $50 million in Q2 versus Q1. So think about that we grew our revenue by almost 23% in IP and despite that we were able to grow our backlog by $50 million. So year to date, we have one two book to <unk>.
Bill.
So definitely we expect that this level of backlog will be able to grow in 2024, and IP and CCT. We continue to to also.
<unk> drive a lot of backlog accumulation backlog was up $25 million versus Q1.
11% year over year and the book to Bill is at 115. So also here really strong performance from our from our commercial aerospace standpoint.
And so here in commercial aerospace and in defense, we accumulate long term backlog. So this bodes well for CCT as revenue in 2024.
And then as I mentioned an empty.
Backlog is mostly centered around rail.
We have this definitely gives us really good line of sight for the second half.
And it's not just the size, but he is also the profitability of these backlog, which is better and higher than it towards as an example, one year ago.
Yeah.
That's awesome. Thank you very much.
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