Q3 2023 ITT Inc Earnings Call
We ask that you please pickup your handset to allow optimal sound quality.
My pleasure to turn the floor over to Mark Macaluso, Vice President Investor Relations and Global Communications you may begin.
Thank you Lisa and good morning, joining me and Stanford. This morning are Luca Savi, Itt's, Chief Executive Officer, and President and Emmanuel Cabrera, Chief Financial Officer, today's call will cover these financial results for the three months period, ending September 32023, which we announced this morning before we begin please refer to slide two of the 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 third quarter results represent this morning will be compared to the third quarter of 2022 and includes certain non-GAAP financial measures the record.
Deletion 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, before we begin I would like to share how shocked all our ICT Hey, Bill good terrorist attacks in Israel on October 7th we strongly condemned these terrorist attacks.
Israel is a special place to us given the presence of our colleagues working at our hop on and Bob's business headquartered in the northeast part of the country.
I was fortunate to spend time with the Ilan and the team in August and that was humbled by their capabilities there.
Strong work ethic and commitment to ITT and their customers.
Obviously, all their lives were impacted by these tragic events.
Stay in close contact with our Israeli colleagues there as the safety of our people and their families is always our primary concern.
It is our hope that Pcs restored in the region.
Now to our latest results.
And theme of this call.
Step up in performance based.
A step up in execution.
And a step up in capital deployment.
We are converting itt's $1.2 billion backlog at.
At 19, 4%.
Significant progress towards our 20% long term segment margin target.
We're delivering new levels of earnings we did record EPS this quarter and expected for the full year.
Last but not least we expect over $400 million of free cash flow.
And on capital deployment.
We are accelerating.
Yesterday, we announced the signing of a $400 million strategic acquisition and flow with the addition of Scott Hi.
Now, let's get into the details.
On execution.
Industrial process, we continued to see strength in projects and aftermarket.
Our pump projects parts and service businesses grew revenue double digits organically in the third quarter, demonstrating progress in gaining share and emerging as a leader in profitability and flow.
There are many more opportunities for growth for example, this quarter together with Ip's price, then Fernando I went to Brazil and Peru.
Is intimately familiar with the region coming from Brazil.
Dara, we spend time with our local teams to review our outstanding performance in the region and the new growth initiatives.
The talented local ITT team gave us a greater understanding about the growth actions that we're working on to capture share in mining.
Yes.
Energy.
In connect and control technologies.
Aerospace and defense components business grew revenue, nearly 30% and 6% sequentially, which drove 8% organic growth in CCT.
The growth in our connector or E business more than offset the continued distribution destocking impact in Europe.
Just to step back for a moment.
As you have heard us talk about we've been managing through the Destocking in connect with distribution in Europe for the past three to four quarters.
Youll see weakness in Europe, our North American team has been able to offset that European weakness with actions in OEM and distribution.
Well, Don Art and team.
Finally in motion technologies, we again won share in the electrified Baker market with 30, new platform wins this quarter and over 130 awards year to date at the win rate that is well above our current market share.
Frictional outperformance continued to improve sequentially in Q3, thanks in particular to our China business, which grew sales roughly 25% driving 20% growth year to date.
Also in empty the friction team won new awards in the high performance vehicle market ahead of the recently announced Germany plant expansion, whether the new line will be up and running in Q4 2024.
And the progress did not stop here.
Kony and axon grew double digit on the strength of share gains new product innovation and pricing actions in rail.
In accident, specifically, we have won many new orders this year and as a result, we expect our orders to be up nearly 10% for the full year versus a record year in 2019, when we will see operating in Russia.
Continuing with execution at.
At 19, 4% this quarter, we again made considerable progress towards our 20% long term segment margin target.
Industrial process eclipsed 21% for the fifth straight quarter up 220 basis points year over year, and 40 basis points sequentially with an incremental margin above 40% as our operational drive continues.
Motion technologies reached 17% margin in Q3, improving 100 basis points sequentially as we anticipated with incrementals of 40%.
Notably we saw a strong improvement in both Walgreens and axon due largely to pricing actions and we expect both businesses to be back to double digit profitability in Q4.
This is quite an accomplishment considering the challenges our teams confronted from high cost steel inflation.
And the war in Ukraine.
Moving to capital deployment.
We are accelerating.
In October we announced a new $1 billion share repurchase program with an indefinite term debt, we will strategically implement at the completion of the current $500 million plan.
But more importantly yesterday, we entered into a definitive agreement to acquire very high a Denmark based supplier of cryogenic marine pumps and aftermarket services for liquefied gas.
The company operates in attractive industries tied to long term trends included de carbonization energy transition and growth in marine transportation.
I will share more about this exciting acquisition momentarily.
Coming back to our full year results.
We are raising our 2023 outlook once again across all metrics.
At the midpoint, we now expect nearly 8% organic revenue growth.
140 basis points of margin expansion nil.
Nearly 17% earnings growth and over $400 million of free cash flow generation.
This sets us up for a record year and I'm really proud of what our teams all over the world at accomplishing.
Now, let's turn to slide four to talk about our pending acquisition.
Savanna hi.
Yesterday, we announced our intent to acquire <unk>, a leading cryogenic marine pumps supplier for approximately $400 million.
The purchase price multiple equates to less than 12 times estimated 2023, EBITDA and the deal is expected to close in the first quarter of 2024.
Standard high has leading positions in cryogenic applications for the marine sector, including deep well gas cargo fuel and energy pumps, which have the technology to process all future LNG transition fuels.
Like IP the company has a large installed base of pumps and teekay profitable after market business. Thanks to its differentiated service model with global reach.
The regulatory nature of vessels service allows us the danaher to benefit from recurring aftermarket revenue with sole sourced positions.
Its products and services are also widely regarded as the highest quality in the industry, which drives customer loyalty.
Stepping back there is a lot to love about this business, which at cryogenic pumps to outflow portfolio.
First the company has a strong management team that has a deep knowledge of their markets and a clear focus on driving performance.
Next we have a good line of sight to future revenue growth coming from the carbonization in energy transition, where <unk> has leading positions in three out of four verticals in which it operates.
Ship owners are required to service and upgrade their fleet, which we expect will drive recurring demand for <unk> products and aftermarket services.
And the shift to more environmental friendly propulsion technology capital with growing ocean cargo activity with increased demand for new marine vessel built.
With all of these we expect <unk> to lead in the global energy transition across most vertical with a multiyear outgrowth supported by their backlog by their differentiated technology and predictable aftermarket revenue.
I would like to welcome <unk> and the entire Savannah high team to ITT.
I also want to tell you that our M&A pipeline remains active.
In Q3, the business Emmanuel and I continue to invest significant amount of time visiting potential target operations as we work further to further enhance our acquisition pipeline.
Let me now turn the call over to Emmanuel for more details on the quarter.
Thank you Luca and good morning.
Starting with revenue industrial process. Once again led the way this quarter with 11% growth on the strength of the aftermarket driven by both volume and price and project shipment.
IP is also growing its backlog, which is up 18% year to date with project orders up 29%, including Green projects, which are already up 160% versus all of 2022.
CCT growth was primarily driven by a more than 20% increase in aerospace components and defense underpinned by macro trends in these markets.
Notably, we also generated 9% sequential growth in connectors due to share gains.
And SKU expansion with distributors in the U S more than offsetting weaker European distribution.
Motion Technologies' growth was driven by friction OE at 7%.
And higher pricing in Kony, <unk> and Wolverine.
This was mostly offset by timing of the friction aftermarket driven by distribution inventory reduction looking.
Looking ahead, we expect our auto aftermarket business to be flat in Q4 and to start growing again in 2024.
Rounding out the ITT topline core volume growth contributed 300 basis points, while pricing actions contributed 200 basis points to pricing was most prominent in the IPF to market an arrow in CCT.
Aero OE contracts is an area, where we are dedicating more energy as more long term agreements are coming up for renewal in 2024.
Moving to margin, we improved in Q3 due to a combination of profitable growth and pricing actions.
Volume and price contributed over 200 basis points, while our net productivity actions drove drove 150 basis points of expansion.
More than offsetting the impact of foreign exchange and investments.
Specifically, we continue to invest in sales and operations planning to augment the lean improvements in IP and CCT.
The impact of stronger organic growth.
And improved margins drove 14% earnings per share growth, which includes the benefit of a 1% share count reduction.
Last but certainly not least our teams delivered another impressive cash performance with nearly $150 million of free cash flow or roughly $300 million for the year to date.
This amounted to over seven times more free cash flow compared to the same period in 2022.
Our free cash flow margin this quarter was 18% driven by stronger collections and higher net income.
Cash is improving but working capital was still a use of cash year to date, mainly due to inventory. We expect this dynamic to reverse in 2024 with improved inventory management.
On slide six you can see we delivered a 14% EPS increase this quarter.
<unk> to $1 37.
New record for ITT, we also continue to invest in new product development, including four Ips embedded motor drive, which is currently deployed in customer field trials and undergoing reliability and certification testing.
As you can see on slide seven today, we are raising our full year outlook given the year to date growth in orders and robust backlog and higher revenue growth segment margin expansion and strong free cash flow generation.
This is a testament to the execution our teams have delivered throughout 2023.
We're moving our revenue guide to the upper end of the range at 7% to 8% organic growth, which implies the following for Q4.
We expect low single digit organic revenue growth led by motion Technologies' CCT Aero should continue its growth trajectory coincides with increasing air traffic and we also foresee a pickup in defense demand near and midterm.
We also expect continued strength in the IP aftermarket based on strong daily order rates exiting Q3 as.
As well as in October offset by lower baseline in project shipments on.
On segment margin, we are increasing the midpoint of our margin range by 50 basis points to 18, 6% and approaching 19% at the high end segment margin in Q4 should be roughly flat sequentially.
These dynamics should drive low single digit.
Adjusted EPS growth year over year.
Finally cash performance is outstanding more than a year ago, we made a conscious decision to invest in inventory to support our customer amidst significant supply chain challenges at the expense of our free cash flow. As a result, we won new business built a robust backlog and gain market share.
Fast forward to today, we have a record backlog up 13% versus the end of last year profit is way up in our collections and cash flow are improving every quarter.
As a result, we are increasing our guidance to more than $400 million and our free cash flow margin is already at 12% double from last year.
Before I turn the call back to Luca I'd like to share some highlights from our from Itt's 2023 sustainability update released last Friday last.
Last year, we made considerable progress in our on our sustainability journey, including.
A 32% reduction you're recordable safety incidents for.
The 7% reduction in greenhouse emissions.
And in water consumption.
And a $25 million commitment to solar energy projects. This year, we connected solar installations in barge Lancaster bare land and Nogales. These installations along with other pending projects are expected to reduce our seo to emissions by approximately 6%.
Last year was a significant step on our sustainability journey and we look forward to sharing more good news in the future you can read more about our sustainability highlights in the appendix now back to Luca.
Thanks, Emmanuel before we move to Q&A I'd like to share a few closing thoughts about our execution and accelerated capital deployment.
First we continued to outperform in some of the worlds fastest growing end markets and we are finding new avenues to differentiate whether we groundbreaking innovation or new areas for growth.
Second we are well on our way to reaching the 20% long term segment margin target that we set just last year.
Industrial process led the charge beginning at the end of last year and the clips that long term target for five straight quarters.
Third because of the momentum we have built we raised our outlook for revenue.
Margin.
Our earnings and free cash flow and with a double digit increase in our backlog expected by the end of this year. We are confident that ITT will continue to grow in 2024.
These are third straight quarter of raising EPS guidance and our progress towards our long term margin target is accelerating.
Finally, we're also accelerating capital deployment.
We are acquiring <unk> to grow our flow portfolio and we continue to evaluate other high quality target inflow and connectors to put our strong balance sheet to use.
Additionally, our new $1 billion share repurchase program gives us flexibility in allocating capital effectively.
We have reached another new stepped up level of performance for ITT.
Thank you for joining us today and for your continued interest in IDT.
Lisa Please open the line for questions.
Thank you.
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Thank you and at this time, we'll be ready for our first question.
And our first question will be coming from Michael Halloran of Baird. Your line is open.
Hi, good morning, everyone. Thanks for taking the questions.
Good morning, Mike.
So first can we talk about the IP side of things, what youre seeing from a fundamental order trajectory perspective and.
Maybe you could parse that out a little bit by the.
The end market applications here energy the short cycle General industrial Chem businesses mining in any of the other.
Or any other end markets do you think I missed there.
Sure Let me let me start in the manner you can build on that one so when we look at that when we look at the orders the orders in Q3 declined 2% that you have short cycle. There was flat year over year and the project Awards a decline now having said that.
That was a lot of timing that shifted from the quarter to October and what I can tell you that looking at the orders in October.
<unk> strong year over year, the short cycle orders in October our offer and our rate is higher than what has been in Q3 and the projects in October are more than 40% year over year, because some of the projects shifted so data is the picture on the <unk>.
And the funnel is still very very healthy.
By end markets, just to add a little bit more color Ken.
We see a slowdown in chemical but our general industrial.
Markets are really strong we continue to gain share there and then if you look at the funnel I would say the funnel is also very strong as Luca was mentioning year over year. Our project funnel is up 16% versus the beginning of the year, it's up almost 10% and this is driven by really energy Kevin.
Call General industrial so pretty pretty good picture from a project standpoint also.
Great I appreciate that and then.
Follow up is maybe.
You could give some thoughts on how you see the auto market tracking and any thoughts on 2020 for build rates on a global basis, you always give really good color. There certainly I appreciate <unk> comments on.
The sequential improvement on the aftermarket side going into the next.
Going into next year, but any other color would be great.
Sure. Thank you Mike when we look at the market the market was up in Q3, a good suite <unk>, 8%. The production was up in Europe was up in North America. Despite the strike, whereas in Q3 was that was flat in China, but then when you look at and this was after a first offer which was.
Already very good so when you look at the full year for 2023, we expect the market to be up roughly 7% so mid single digit.
Europe.
Low double digit North America mid single digit and also China mid single digits. So China was able to surprise us in 2023, as we forecast it to be flat for the year, So and on top of these market. As you know we continue to outperform the performance was very good was roughly <unk>.
800 basis points in Q3 and accelerating.
Year to date of roughly 400 basis points of our performance when you look at 2012.
2023, Youre, probably thinking about roughly 88 million vehicles produced $1 80, 889. When you look at 2024 is a still a little bit too early to tell but that probably is going to be a low single digit growth.
We are considering right now the aftermarket which was the second part of your question is going to be flat in Q4 year over year Q3 was a tough quarter in terms of comparison versus 2022, and we expect it to grow again based on what the customer is telling us in Europe in 2024.
Okay. Thanks, great color as always really appreciate it guys.
Thanks, Mike.
Thank you.
One woman.
While we prepare for the next question.
And our next questioner today will be coming from Damien <unk> of UBS. Your line is open.
Hey, good morning, everyone. Congrats on the deal.
Sure.
So maybe higher level question on.
An empty and friction because there hasnt been a lot of noise out there in the automotive world.
Obviously, the strikes in the U S pushing back a lot of these EV production schedules.
OEM price wars.
In China.
Curious Luca how are you seeing all of this affecting your business.
And just on the margin front.
Is that path of 19, plus 19% plus.
You kind of see that sooner or later.
Okay. So let me address that.
The last part of the question first.
Long term target for motion technologies is 20%. This has not changed and we have a clear path to get that you can see our margin already up sequentially and year over year to 17%. These will keep on improving and we will be able to wait 18% in 2000 in sometime in 2024 now going back.
To some of the dynamics that you shared the strike the strike it was really immaterial for us probably what was the hit there was a couple of million dollars in terms of revenue. So really immaterial. When you look at the EV production sure when you're listening, particularly in the North American market that you may see some slowing down in terms of.
But the adoption and maybe investment from the Oems, but this is really I would say a north American dynamic. The electrification is really going full speed when you look at Europe, and northern and in China and by the way Damian.
We are really targeting all electrified vehicles youre talking about youre talking about hybrid youre talking about IC and we're winning across the across the board. So we are also very successful in defending all our platforms that we are in the internal combustion engine that is on the EV when it comes to China.
I'm glad that you are mentioning China, because China is a is a great story for us when you look at our China business $300 million.
80% of that is friction.
Winning is a great. Good operation good financially, let me give you a couple of examples where youre talking about financially. This is a plant that is only producing OE no aftermarket steel is the most profitable plant for friction in the word.
When you look at operations in Q3, we had roughly 40 PV 40 process validation every month. This is when you run your P path for the S&P for the start of production. When you do that you do you have a lot of.
Interruption, you have a lot of disruption in production.
Despite all of that the fantastic Chinese team delivered 90, 993% of on time delivery and this is why the Chinese keep on awarding us.
The platforms.
Today at the end of September <unk> already reached 90% of the full year Award target.
We are winning with the winners more than 60% of what we are producing is for the Chinese Oems. So is a great story there too.
Great. Thanks for all that.
And I know I'm going to box the name of it but on the <unk>.
Deal any color you can give on EPS accretion and if my math is correct. It looks like it may.
Maybe slightly dilutive to IP margins.
Just curious if there's any synergies with <unk> or the rest of the pumps business.
Yes, thanks, Damian so yeah. So we're very happy with our ability to secure that deal with the two by two buys vanhoy. It's a great business gives us entry into cryogenic technology, we're very very excited.
If you think about.
Accretion from an EPS accretion standpoint.
<unk> will be accretive in 2024 keep in mind that this is a business. There's a lot of long term backlog. So there will be a negative impact on in terms of intangible depreciation in 2024, but overall.
Very strong business as Luca mentioned, a very strong management team. So really excited about that in terms of margin youre right its going to be.
From an EBITDA margin standpoint, it's going to be slightly dilutive to IP, but there are many opportunities as we mentioned this is a.
Our business with end markets that are in growth for a multiyear multi years and so and so we expect that to be to be reflected in the growth rate of this business in the years to come and then.
The team has identified significant opportunities from a.
From a cost synergy standpoint, we visited in August their facilities. They are in great shape, but we think that we can help them become even more efficient.
Much appreciate it best of luck guys.
Thanks Danielle.
Thank you one moment, while we prepare for the next question.
Our next question will be coming from Andrew <unk> of.
Bank of America. Your line is open.
Hey, Good morning, you have Sabrina Abrams on for Andrew.
Good morning, Sabrina morning Sabrina.
Yeah.
The gross margin expansion in the quarter is really impressive and I think some of your peer as is the price cost spread and I think some of your peers have been talking about price cost, peaking here are in <unk> and the spread narrowing in fourth Q.
Just wanted to ask like how sustainable are these levels and any thoughts on around whether it can hold.
Yes. Thank you. Thank you Sabrina and I think you pointed out.
A really good start our gross margin indeed.
<unk> been on a path of increase year after year and also within within the year of 2023, we started the year with a little bit more than 33%. We're now at 34% and we expect in Q4 to continuously improve on top of that so.
What's really good about our.
Operating margin improvement both segment and EBIT is that it's underpinned by a strong gross margin.
Improvement as well.
From a pricing standpoint.
Think.
2023 has been really strong from a pricing I mean, we're going to probably finish the year at.
At ITT level with low less than $100 million of pricing that we recovered this is less than what we recovered.
In 2022.
But.
If you remind that is obviously incremental.
But I would say with the commodity cost as a tailwind.
We created an even bigger spread from a price cost standpoint.
And then on a quarterly standpoint.
So we're thinking about Q3 Q4, maybe 2024, but for sure it's going to be stepping is going to step down in the second half and Thats logic logical right. So the third and fourth quarter will have less price benefits year over year, but on an absolute basis. This is a really large contributor to our margin expansion story.
In 2023 and in 2024, and then going forward, we expect IP and CCT to be price takers.
As we differentiate even more on our value proposition.
Great.
Thank you both for the color.
And then looking at the backlog commentary.
It sort of suggests having somewhere around 35% backlog coverage next year based on 24 consensus.
First is maybe somewhere around 30% last year could you guys provide some color on that coverage relative to history and any timing on when you expect backlog to return to historical levels or do you think we remain elevated going forward.
Yes so.
The backlog as kept on growing.
As we mentioned.
In IP for instance year over year backlog is up 11%, so more than double digits and we expect to finish the year with also backlog increasing versus 2022.
So I think in IP.
Today, we are at a lower higher level of coverage.
We have usually.
Which is very very positive the backlog story is also very good in CCT ware.
We are growing backlog and since the beginning of the year, we added almost $30 million of backlog in CCT, obviously, driven by aerospace and defense.
Average here there is much much higher than that it is typically for aerospace component business and also what's really good is that.
There's a lot of long term backlog so into 'twenty five 'twenty six if I can if I can add.
Pulling that Sabrina is there, particularly when you look at IP, both the projects and the short cycle backlog up year over year versus the beginning of the of the year at the end of the year will be up 16%, which will feed the growth in 2024 and last but the least is the profitability of the backlog.
Now when we look at the profitability that the backlog has is roughly 200 basis points better than what it was at the beginning of the year.
Okay. Thank you guys so much I'll pass it on.
Thanks Sabrina.
Thank you.
Our next question will come from <unk>.
Hi, Jackie.
Citigroup Your line is open.
Good morning, Vlad <unk>.
Good morning, guys. Thanks for taking my call.
Congratulations on that.
Nice quarter and the deal announcement there.
So maybe just following up on that commentary around IP and the owners sort of Reacceleration youre seeing in <unk>.
Early October.
So over here can you talk about.
How youre thinking about the potential for that business to continue maintaining positive organic growth overall.
Over the next couple of quarters as comps get.
Notably more difficult.
Sure I think that.
All of that is linked to the performance and the continuous improvement that we're pushing through lean and reduction of our lead times are when he comes to the short cycle. So.
Important to continue to execute on the on the project side of the business and because we are executing in a rigorous and <unk>.
Manner does that improve the customer loyalty and the customer are giving us more opportunities and more win when that when we're bidding so that is on one side.
When you look at the projects and the Green project in particularly we are also using <unk>.
Some differentiation from a technical point of view, if you look at our multiphase pump technology with our bornemann pumps. This is something that enabled us to win that we that we dealt with chevron with some of our customers for the green projects being a carbon capture be eliminating slurry. So.
All of those will continue to see the organic organic growth and also we are working with some customer where our market share is and also to.
To improve in the let's say call it empty.
<unk>.
Great.
Helpful color.
And just really nice performance from IP.
Maybe just.
Just shifting to CCT.
No.
<unk> weakness, obviously isn't new.
On the channel destock, but can you just give us more color on whether the weakness you're seeing there is still really mainly channel destock, driven or whether youre seeing.
Signs of incremental end market or sell out.
Weakening.
Okay.
Weakness is mainly distribution and is mainly European is linked a little bit of a weakness probably in Asia Pacific on the connector side of the business that is very localized as a matter of fact, when you look at our connector business in North America.
Being very successful with that great orders on the OEM and dose at a nice long term orders that will keep on feeding the revenue, but also with the SKU expansion that Amanda was talked in the prepared remarks that we were able also to have a very good distribution orders when it comes to North America and all.
That had been able to offset some of the weakness that we had in Europe.
So if we look at our connectors.
Orders they were up 3% this quarter and for the full year, we expect them to be roughly flat and a lot of the strength is coming obviously from aerospace defense.
Way up in the double digits.
<unk> energy also energy has been a has been a good a good story for us. So I think that it's true that we are seeing weakness in European distribution, but I think the strength of our portfolio and the commercial actions. We're taking are able to nicely offset that weakness in steel in Q3 come out with.
Growth in terms of orders.
Okay.
That's really helpful guys. Thanks appreciate it pulled it back in queue.
Thanks, Matt Thanks, Matt.
Thank you.
Our next question will come from Joe Ritchie of Goldman Sachs. Your line is open.
Good morning, Joe.
Hey, good morning, Good morning, guys, Hey, maybe maybe just hitting on that last that last point.
<unk> brought up on the connectors business. So how much is the European connectors business down how much was it down this quarter, because obviously, there's probably going to create a pretty easy comp for you guys as we head into 2024.
This quarter connectors was down in the low double digits.
This is mostly driven by industrial.
So so we expect that probably in terms of the Destocking, we're going to be nearing the end of the Destocking and then sometime in 2024, we will see.
We will see an improvement.
And Emmanuel is that better than where you were last quarter.
Connector side, specifically in Europe, or the industrial connector side.
I'm not so sure because also you have to think about in Europe seasonality in Q3 with August so.
In my it may not be it may not be the case.
Okay Alright.
That's helpful. And then I guess, just just a longer term question.
Just the industrial process margins continue to surprise to the upside.
I know that you guys are continually focused on continuous improvement as you kind of think through 2024 and margin expansion potentially for this business can you maybe just talk about some of the levers and how youre thinking about this business longer term.
Sure I think that is.
When it comes the of course when it comes to IP, we will have to share that with you guys. Our new long term long term targets, which we will do some times that sometime next year when that when we look at this business. There is investment that needs to be made Sam that we are making the right now we are investing both in there.
<unk> process. So that we are you really have a stronger fundamentals in the in the long term, but some of the levers that you have on the other side is for instance, the closing of the foundry, we're making progress on the closing of the foundry will close already one line.
We finished the closing by Q1 2024, and this will allowed us to be more cost competitive.
In our product set as well as reduce some some of our lead times.
Leverage on there on the purchasing side on the on the supply chain. This is one of that one of the other levers that.
We continue our value analysis value engineering of all the family family of products and and then I would say the continuous reduction in terms of our cost structure I would say these are the levers that we have in our hands today.
Great. Thank you Luca I appreciate the time.
Thanks, Joe.
Thank you.
Our next question.
It will be coming from Jeff Hammond of.
<unk> key.
Bank capital markets.
Your line is open hi, Jeff.
Hi, Jeff.
Morning, Jeff can you hear us.
Okay.
I think these are probably you can move to the next question.
Okay I'll go on to the next question.
Our next question will be coming from Bryan Blair.
Of open <unk> your line is open.
Thank you and good morning, everyone.
Hi, Brian Hi, Brian morning, Brian.
You've highlighted.
Green energy.
Energy transition momentum and it seems to be.
Quite strong.
Gordon wins, some patent applications now.
Spanning all I, hopefully I'm pronouncing that correctly.
What is the current scale of that.
I guess aggregated revenue stream for for Green energy or energy transition.
And where should we expect that to go over time.
Yes so.
We are really excited by this because we really were able to create a new leg for IP. There is really just associated with from <unk>.
Any consideration on the price on the on the actual price of energy, because it's really driven by regulation.
Today, our green projects year to date is it will be more than $80 million.
And then so if you think about the way the World decided this number has evolved.
In 2022 it was around.
Okay.
As he was around $20 million, so really strong growth.
That is really.
Driven by the technology differentiation, we have in our bornemann.
Product line, but also as you were mentioning how the name with their play in in hydrogen so very happy with our growth and that's a market potential that he represents.
I appreciate the detail and just to level set on auto aftermarket you mentioned flattish Q4, so that stabilization is.
As encouraging.
Where do you expect with that outlook full year.
Organic sales declined to shake out and if we if we were just kind of snap the line on.
Destocking impact and have that.
Last year on year, what kind of growth would that imply for 2024.
So when you look at 2023.
After market will be probably down for the full year, 6%.
5% would be the oes, there roughly 10% the independent aftermarket that is for the full year of 2023, and I think that debt out of that base. We will start growing again in 2024 when it comes to exactly the growth for 2034 now is that it'll be too early to tell I would say.
Okay.
Okay. That's fair I appreciate the color as always.
Thanks, Brian Thanks, Brian.
Thank you.
Our next question will be coming from Nathan Jones of Stifel. Your line is open.
Good morning, everyone.
Hi, Nathan.
Just a follow up on Brian's question there on the after market you said, 5% down some 10% down independent after market do you have a view on what of that is inventory de stocking versus one of that is actual softer end market demand.
It's mostly inventory.
Talking.
We are the aftermarket is pretty stable in Europe, I think it's up 2% to 3% and so it's mostly our specific customer, but which had been ordering a lot last year and that is working through that excess inventory they have.
Got it Thats helpful.
You guys had previously talked about wanting to expand the pump business into Europe.
The two acquisitions that you've done that have done that.
Does that continue to be a priority for you what are the other areas of priority strategically for capital deployment M&A.
When you look at the categories for the M&A is really you are talking about the flow youre talking about the connector business and you have a little bit of a railing.
Look at it the acquisitions the two acquisitions. We made this year is really macro mode on the connector side and now is not a high in the <unk>.
But I wouldn't say like.
European region I wouldn't say this is a cut that we look at specifically when we look at M&A. We really look at companies that are that are high quality.
That have an ability to differentiate from the competition and that's what we saw with <unk>.
And Coincidently, that's what we saw also with Vannoy.
It is also easier for us to.
Being European too.
To get to know the business, there and to see and to connect with the people. So we use that for sure, but I wouldn't say that Europe is a priority for our M&A target.
That's right.
I would've thought.
Savanna, OE business would be definitely more focused on growth and probably less focused on cost synergies can you talk about.
The cost synergies that are there and whether this is more of a break down break what's going on there already in terms of taking cost out and focus more on growth.
You are spot on Nathan and I think that when that one of the thing that we really liked about vandehei is that the team is soaring and Johnny the management team very competent and they know that their market. They know their customers very well they've got there.
A differentiated service that differentiated the product leadership position. So is a growth play and more than a cost the cost synergies.
So definitely thats the case in our industry in attractive markets. So its cryogenic pumps, which is adding to our portfolio and that probably will be another lever for growth.
For our goose bumps in our pumps business traditional over here is that marine.
Where theres going to be investment in terms of green in the future and why you talked about the energy transition in alternative fuels being ammonia spanning how it will be a great player in debt. So this is really what we like the growth opportunities and the team and for sure. They know what they do.
And <unk>.
And we are very happy with that.
Just any color on what you expect the growth rate today over the next few years to them.
So we expect that for the next several years.
So at least for the first four to five years. It is going to be low double digits and then after that to high single digits.
Thank you thanks for taking my questions.
Thanks, Nick Thanks, Nick.
Thank you.
Our last question will be coming from.
Jeff Hammond of Keybanc capital markets.
Your line is open good morning, Jeff.
Hi, Jeff.
Jeff can you hear us we can't hear you.
Okay. Okay. So it doesn't sound like we can get we can talk to Jeff. So I think we can close the call.
Thank you.
This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.
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