Q2 2019 Earnings Call
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And it's now my pleasure to turn the floor over to him and York Afraid Vice President of Finance as Peony and Investor Relations you may begin.
Thank you Lori and good morning.
Welcome to <unk> second quarter 2019 earnings call.
As the manual and with me today are Luca Savi, President and Chief Executive Officer, and pumps, Connor Chief Financial Officer.
I'd like to highlight that this morning's presentation groceries and reconciliations of non-GAAP financial measures to the most comparable GAAP measures can be found on our website.
Nike Dotcom for Josh.
Before we begin please note that our discussion will refer exclusively non-GAAP or adjusted measures unless otherwise indicated.
Today's call will contain forward looking statements that are subject to risk and uncertainty.
Actual results may vary materially.
All such statements should be evaluated together with the safe Harbor disclosures and the other risks and uncertainties that affect our business.
Including those disclosed.
Let me now turn the call over to.
Thank you, Matt and Hello, everyone.
Thank you for joining us to discuss today <unk> record second quarter results.
I'm very proud of what the I could see us once again delivered revenues and operating income that exceeded our expectations.
Validating our strategic priority.
This quarter marks the eighth consecutive quarter.
Year over year organic revenue growth.
And the eighth consecutive quarter of year over year segment margin girls.
All segments contributed reflecting the strength of our diversified portfolio.
The level of outperformance believe it but I think you'd be sports. It is a testament to the depth and the right.
Oh, the progress we've made over the past two years.
Friction OEM outperformed a little bit older like 1100 babies, born and grew revenue by 4%.
Connie accident group orders when people are saying and revenue 16%.
Connie operating margin reached high double digit.
Friction Mexico, he's already accreted to the adjusted margin in year one.
Your Doctor proceeds grew revenue 13%.
And I'd be expanded margins by 100 basis points, including 200 basis point project margin expansion.
You should be margin.
A record 17.7%.
We reduced corporate color.
Like 24%.
And we funded five minutes I mean back to drive future growth.
As a result of these outperformance.
Q2, EPS grew 13% to a record 93 cents per share.
And we are raising the midpoint of our full year 2018 bps guidance.
For the second time between $3.63 per share.
So let's take a look at the Q2 financial highlights on slide three.
We grew organic revenue, 5% and exceeded $700 million imports can be Robyn for the first time in our history.
We grew segment operating income margin 60 basis points to 16.1%.
We grew operating income margins 100 basis points to 14.7%.
And we <unk> earnings per share, 13% with black or 93 cents for sure.
When you look at our earnings growth excluding foreign exchange.
Segment margin grew 100 basis points.
Operating income grew 18%.
Earnings per share grew 21%.
As you know by now I can see we focus on executing our top priority and building a high performance organization with a continuous improvement mindset.
I'll always read again.
And the sustainability of our results.
Oh, all the more important as we face more uncertain market conditions.
To continue to Delever in these environments, we are laser focused on three priorities.
Operational excellence.
Customer centricity and effective capital deployment.
Beginning with operational excellence.
In the quarter, all three value centers, the new but 50 basis points or more on margin expansion.
I piece 100 basis points margin expansion is even more outstanding when you factor in the impact of the unfavorable mix driven by the 51% project.
CCP expanded margin by 80 basis points, driven by strong permit to performance, especially atop Nogales, Mexico actions and China side.
X. connector margins overall are benefiting from Provident line transfers to these facilities.
Finally, I'm pleased with engine.
Has been nothing short of remarkable.
It seemed to be there like the team to lead by 50 basis points of margin improvement and friction OEM for precise NBC club market conditions.
I'm also very proud of Davita and do you see the new but high teens monogenic Connie.
And high single digit margins at Oxford.
As you can see what effectively deploying our workshop self help opportunities and we continue to identify additional options along the way.
Let me provide you some examples.
At CCT, we have completed the transfer of six connector product line and we are now transferring additional product line.
That's a cost.
We are driving lean shifted at all the monies that California facility to make it out it was pretty center of excellence in both manufacturing and research and development.
In addition.
Our new play team 90, Mexico, even store.
You would start production of play back shelf and other connected components and makes it easier.
These we not only drive down costs.
Oh, so if we improve.
If you really want to see these impressive piece of equipment I, we'd be tweeting a picture of it later on.
My Twitter handle these Luca Savi for <unk>, that's the number four.
Okay. Thank you.
We continued our lean journey for our critical baseline pumps product line.
We focus on improving both the Mexican machining and supply chain to drive even stronger output.
We launched several of the AB even shifting to design cost out of our larger pump problem and financing our competitiveness in Boston market.
And we are actively assessing I know, but we didn't overhead cost structure to a direct model in a time market conditions.
I am D., we transferred coiled spring production to Poland, and execute the departures restructuring ox implant in Germany to improve our cost competitiveness and to better serve probably costing us.
We expanded margin out of Mexico facility once again.
And North American revenues grew by.
43%.
And with continued its effects on labor, we're going to call and copies that expenditure on the European and China time to better align with current market conditions.
Yeah, I did see leadership team and I are actively engaged in energizing and driving improvements across the organization.
We observed first hand, the improvement on our factory shop flows using amongst the operational reviews together I would buy you sent a team.
Damn location not at H. Q.
For example, this quarter, we examine change over improvement at Mt involved your incentive.
At IP Seneca falls, we'd be baking, how we truck pulled their own equipment efficiency out of main machines.
And at CCT, which are POC, we analyze the shelf the only out to improve materials and manufacturing efficiencies.
A junior betterment he this subject.
I'm very passionate about.
And unlocking improvement who signed on engagement with our businesses, it's critical for our future success.
And frankly.
These level of engagement.
And granularity.
Simply the right thing to do.
Let's move on to next priority customer Centricity.
I'm very happy that our Threed value center, the new that organic revenue growth in this quarter.
We have grown organic revenue eight quarters in a row.
We eat food there Buddy nation that I've shared gains tried to do are bearing fruit.
I'd be continued to deliver above market growth.
As we have executed on the backlog of orders.
Our project revenue growth was driven by large global delivery and we improved profit margins by triple digits.
In Q2, I be signed a five year agreement with a large media E owning gas customer knocking increase market share and further strengthening our relationship.
At Mt. We continue to be in difficult market conditions.
In Q2, we gained share in global OEM market, we friction states outperforming.
By more than 1100 basis points.
We continue to growing north American the ramp up of aboard the platform.
Thanks, Connie actions to be very strong growth in terms of orders and sampling before it's the way we've gotten them continued to gain share.
Finally [laughter].
We believe it's 5% organic revenue growth on the back of strong aerospace and defense activity.
And moderate industry growth.
It is important to note that both connectors and components grew revenue in the second quarter, like 6% and 4% respectively.
Oh CCT backlog, excluding foreign exchange is up 14% compared to the prior year and our year to date book to Bill sounds like a healthy 1.47.
Finally, moving onto our last priority of effective capital deployment on slide four.
I'm happy with the progress we've made on the acquisition front.
In 2019, we've deployed $120 million in capital I meant IP and CCT technological and geographic reach.
These acquisitions are expected to provide approximately $88 million of onboard revenue.
Both RPG and matrix acquisitions are the result of long term cultivation and a disciplined approach to inorganic investments.
They are expected to be accretive in its first year and generate attractive returns.
I want to welcome our matrix for leaks, so I can be segment.
These acquisitions allow the CCT to build up on 25 years of aerospace and defense companies excuse me.
Matrix proprietary production pools, as we drive growth in Ash environment engine components program as we strengthen our competitive position.
These new addition to our aerospace portfolio, we also benefit from CCT customer intimacy to support aggressive.
In the past three months, we've generated solid acquisition momentum would be too close to call and DCP transaction.
And I look forward to sharing programs with you in the future.
Let me now turn it over to Tom who will review the revenue adjusted earnings and guidance in more detail Tom.
Thank you Luca, let's now turn to the Q2 revenue and adjusted income on slide five.
Organic orders decreased 5% driven by a 27% decline in oil and gas.
On project delays and a large prior year upstream project.
More than offset 12% growth in short cycle activity.
Industrial orders declined 6% on pump project and short cycle than that.
However, despite the pressures in the global automotive market transportation orders were flat.
39% growth in rail and solid OEM friction demand in North America and Europe .
It was offset by China auto and Andy Titan.
Despite the water pressure in the quarter.
Our backlog, excluding foreign exchange remains strong at plus 5% compared to the prior year.
On the revenue front organic revenue grew 5% and once again reflected broad based growth across all major end markets.
Oil and gas grew 29%.
Industrial grew 5% and transportation grew 3%.
The 5% I T T revenue growth also demonstrated the strength of our geographic and end market diversification.
North America grew 9% on double digit growth in aerospace.
Auto oil and gas and rail.
Asia grew 7%.
On project and general industrial strength.
More than offset slower than anticipated auto production rates in China.
And Europe was flat as rail and general industrial strength was partially offset by auto aftermarket.
Segment operating income improved 7%.
Excluding 7 million of unfavorable foreign exchange.
Segment operating income improved 13%.
Income expansion was driven by volume productivity cost containment and supply chain actions that are operational execution advances to consistently higher levels of performance.
These gains were partially offset by higher tariffs commodity cost.
An unfavorable mix due to strong pump project deliveries and 5 million of strategic investment that empty and CCT.
In the quarter, we grew earnings per share by 13%.
And delivered EPS of 93 cents per share.
Excluding unfavorable foreign exchange EPS grew 21%.
In addition to the strong segment operating income, we also drove down corporate costs like 24%.
And we execute the strategies that produce interest income incremental investment returns and a lower tax rate.
Slide six provides the details of our adjusted segment margin performance in the quarter.
Q2 margins improved 60 basis points.
16.1% powered by 200 basis points of operational margin expansion.
This quarter marks our eighth consecutive quarter.
Year over year total margin expansion with an average growth rate of 120 basis points per quarter.
The Q2 expansion drivers were 200 basis points from operational execution.
But delivered significant productivity supply chain and the restructuring benefits across segment.
The primary sources of the improvements were project execution that IP.
Coning in Mexico at Mt.
And connector operations at CCT.
In addition, the margin growth benefited from strong share gain driven volumes.
Partially offset by incremental tariffs and project mix.
Price was slightly positive in the corner on IP and CCT improvements at a modest decrease it empty.
Selecting successful pricing actions and rail.
In Q2, the 200 basis points of operational margin growth.
Lets eluded by minus 40 basis points of foreign exchange.
And minus 30 basis points of acquisition.
We also funded 70 basis points, a critical strategic investments in the quarter.
Including <unk> Smart pet application development.
And the CZ T. plating line installation at a world class facility in Nogales, Mexico.
Our enhanced approach to driving operational excellence is consistently producing strong margin expansion.
As we successfully execute on our now famous war chest of self help opportunities.
And we will continue to be proactive in the second half of 2019.
To accelerate actions that will provide incremental benefits and a more uncertain 2020.
Now, let's turn to our segment results, starting with motion technologies revenue and adjusted income on slide seven.
Despite the challenging conditions in the auto market.
And to your organic revenue increased 1%.
This growth in the face of stiff headwinds.
Clearly demonstrates the intensity of empty share gains.
And our geographic and end market diversity.
In the second quarter friction grew 1% driven by 4% OEM growth that was partially offset by aftermarket softness.
The 4% friction OEM growth was powered by 43% growth in North America.
And 2% growth in Europe .
More than offset a slower than anticipated China market.
Friction outgrew every global market.
And it was more than 1100 basis points better than the overall auto market.
In addition, our KONI an extra on revenue grew 16%.
In orders grew 20% global share gains and rail.
This revenue growth was offset by a 16% decline at Wolverine and weak aftermarket demand and impacts from customer Cheryl.
Empties segment operating income decreased 2% to 56 million due to unfavorable foreign exchange of 5 million.
Segment operating income increased 7% excluding foreign exchange.
Constant currency income growth was driven by operating efficiencies.
And supply chain actions.
Combined with proactive cost containment and restructuring actions.
More than offset higher commodity costs and huh.
M.T. expanded margins 50 basis points in the quarter to 17.8%.
On 560 basis point growth at KONI.
An exceptional execution that empty Mexico.
Lastly from a strategic perspective.
The friction team won nine new electric vehicle platforms.
Leading oems across multiple regions.
And Tony advance share capture efforts in high speed rail.
And introduced a new unique sensor enable shock absorber for electric bus applications.
That included the CCT connector.
Next up is industrial process revenue and adjusted income on Friday.
IP delivered organic revenue growth of 13%.
On a 51% increase in projects.
Combined with a 3% increase in short cycle activity.
The project strength was delivered across the oil and gas value chain and Petrochem market.
From a geographic perspective project revenue grew 40% or more.
In North America, the Middle East and Asia.
The 3% increase in short cycle activity was driven by 11% aftermarket growth from oil and gas and chemical parts.
Baseline pumps and valves declined 6% on general industrial weakness.
I P organic orders decreased 13% due to a 35% decrease in projects.
And a 5% decrease in short cycle that was primarily related to value.
The decline in projects reflected a large prior year upstream project and increased selective in us and our projects screening activities.
In addition, chemical project order growth of 15%.
Was offset by general industry in mining.
Hi, Pete backlog was flat to the prior year, excluding foreign exchange and including 4 million from the RPG acquisition.
IP second quarter segment operating income increased 24% to 29 million.
And margins improved 100 basis points to 12.5%.
Excluding the impact of the RPG acquisition.
IP margins actually grew 170 basis points for a second straight quarter.
Yeah.
And price that offset tariff impact.
The project delivery strength in the quarter.
[laughter].
Due to the prior year.
Due to improved productivity and execution.
Q2, IP strategic highlights included advancing or specialty pumps and valves technology.
Through organic investments and advance multiphase pumping solutions, and biopharm valves, we streamline customer installation and maintenance requirements.
And through inorganic investments and RPG.
So, let's see seating revenue and adjusted income results are detailed on slide nine.
CCP delivered organic revenue growth of 5%.
On balance growth of 6% in connectors and 4% in components.
From an end market perspective.
Commercial aerospace grew 21% on OEM and aftermarket demand intensity.
Defense declined 9% a difficult compares to prior year component programs.
But more than offset 16% growth in connectors.
Industrial markets grew a modest 1% I'm connector and components strength in Asia and Europe .
Partially offset by weakness in North America.
CCTV Q2 organic orders declined 3%, despite an increase in aerospace and defense connectors.
It was more than offset by oil and gas and industrial.
Book to Bill in the quarter was flat. It was 1.07 on a year to date basis, driving a 14% increase in backlog excluding foreign exchange.
The Cc team team delivered 9% segment operating income growth to 30 million.
Benefits from volume and productivity.
Including supply chain.
Partially offset by increased material costs.
Mix foreign exchange and investments.
Segment operating margins expanded 80 basis points.
To a record 17.7%.
The momentum of the connectors execution continues as margins expanded 210 basis points.
And we are continuing to invest in our connectors execution.
As we move product lines to our best cost facilities and Insource plating activities.
Now this in mind, let's take a look at our adjusted 2019 guidance on slide 10.
We are increasing our EPS midpoint by five cents.
To $3.63.
And we are raising the low end of our guidance to $3.58.
Which was our previous guidance midpoint.
As a result, we now expect to grow 2019, s., 12% at the midpoint.
The 5% midpoint increase was powered by our strong Q2 performance.
Incremental second half productivity and cost actions.
Our total and organic revenue guidance remain unchanged at plus three to plus 5%.
Next I'd like to provide some second half perspective.
And the second half we are projecting mid single digit total revenue growth.
And from an organic revenue perspective, we're expecting low single digit growth with all segments contributing.
Our backlog at IP, CCT and empty rail its strong entering the second half.
And MP is also expected to benefit from friction platform ramp ups in Europe , China and North America.
And the second half, we expect segment operating margins to be slightly lower than the first half.
Reflecting typical seasonality and the dilutive impacts of the RPG and matrix acquisitions.
Lastly for the third quarter, we anticipate lower organic revenue growth in Q2.
Due to the timing of project deliveries that I'd say.
Margins are expected to be slightly lower than Q2 due to unfavorable aftermarket mix it empty and the impacts of the acquisition at IP and CCT.
EPS is expected to be slightly lower than Q2, due to a higher effective tax rate and corporate.
So with that let me now turn it back to Luca for some final comments.
Thanks, Tom.
So in conclusion.
I'm proud indeed, <unk> second quarter results.
As they would like to draw a line of business savvy all around the globe.
We set new records in Q2.
And we will continue to execute on our work checked off south hassle for June .
Why were cognizant of the challenging environment.
We are confident that we will continue to outperform our end markets and make acquisitions that we accelerate our return on capital.
And before we go to the queue in a I just want to like our team inside the dollar India noted, we're thinking of them. If they are dealing with the impact of some severe weather that.
The facility is in good shape.
But these are people there that make it great.
So I could see India, we're thinking of you know Laurie let's start the journey.
The floor is now opened for questions. At this time, if you have a question or a comment. Please press star one on your Touchtone phone.
Any point. Your question has been answered you may remove yourself from the queue by pressing the pound key.
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Thank you. Our first question comes from the line of Mike Halloran of Baird.
Hi, good morning, everyone.
So in my anybody.
The the outperformance on the friction sides very impressive versus the end markets.
You know maybe you could just talk a little bit about you know the underlying market dynamics, you're seeing right now excluding the out performance to start out with others. What do you think the markets are growing and on a regional basis I don't know what the N. There you mentioned that the project Onboarding a in a few regions or the platform Onboarding excuse me in a few regions is going to drive some outperformance has worked to back half but.
Maybe you could also talk about what level of outperformance you're expecting on a go forward basis. Since there's just a lot of noise in those markets.
[noise].
Good old market.
I would say that our.
View today.
He the worse than it was.
Operator can you hear us.
My apologies for the technical will delay. Our next question comes from Matt Summerville of D.A. Davidson.
<unk>.
Hi, Laurie I just wonder if.
You guys are on.
Please confirm that the.
I did not hear it on my end, we lost audio.
Okay. So let me let me address the first question and I apologize for the for the technical inconvenience.
So when we look at the market.
Our view on the market today is really to be worse than we had one quarter ago.
And the main reason for that is China. These are either looking at the market look at our data talking to our customers and our people in China.
We see the China property for the full year 2018 will fall in negative double digit.
ROE.
And therefore, the global market, we probably be negative mid single digits.
This is where the main discrepancy easier compare to what we thought one quarter ago.
If the view of the market has deteriorated our view of our outperformance has actually improved and this is across the board in Europe in North America and in China. This is why we posted 1100 basis points of outperformance.
And when we look at the next quarters or is likely that you will see in outperformance at the high end of the range that we previously shared with you.
So this is our view on the on the on the market and thank you for your patience.
Our next question comes from Matt Summerville at D.A. Davidson.
Hey, I just want to verify that you guys can you hear me.
Freaking hearing that we can hear you Matt.
Okay. Thank you so.
Sort of a follow up how much of the impact are you seeing in China.
Yes.
This platform launch.
Both.
Hey, predominantly European growth.
So Matt I.
Question broke up a little bit on our end over here, but I I think where you were headed.
Was a question around you know what what's driving the dynamics in the China market right now.
If not follow up with us So we'll give a little insight into what we're seeing in China.
So certainly there has been a a number of drivers inside the market.
Particularly around the emission standards change from China, five to China's six which which had been talked about quite a bit right now in the marketplace.
In addition to the global uncertainty in the other dynamics that are at play in China that is causing the production rates to keep.
You know dropping or staying at the levels that they're at despite some anticipated recoveries, which obviously have not played out.
So.
For Us we've said that part of the China performances about start up new production for platforms that we've won some of those dates have pushed.
To the right a few have moved forward, but but theres still some pushing have started production.
That has now gone into Q4 and May end up.
At the tail end of 2019.
Well, we've been doing is looking at some other opportunities to gain some share in in China.
There have been some opportunities to go after what we call conquer wins in China, and that's been a part of our performance. There. So we're we're performing and executing in a market that's more difficult we're not expecting any clearance really this year. Some of those production start ups are likely going to push into 2020, and we'll be ready to deliver those when the time is right, but but for now North America and Europe is really.
Significantly driving the outperformance for us.
And Matt if I can be the what Tom said he is there and I would say definitely year to date to as being outperformance everywhere.
But that said I would say in Europe , and North America and China.
What we can share with you is that we closed July last week is that in July .
China positive you know a good day.
Good growth year over year and these are the first time.
In 2018.
And then just as a follow up you mentioned the Wolverine was down 16%. It sounded like there may have been some additional share losses. There can you just talk about sort of the state of the union for for that piece of the business and what you're doing in response to the challenges you're seeing there. Thank you.
Sure.
So we're very in Q2 as you pointed out the mat sales were down 16%, we the low single digit Dubai and $11 million cash generated year to date.
We're not happy about these these fade performance and there are elements that we cannot control like the market and the carrier.
And there are other things about related Dupont.
So the share losses related to some contracts that debt free since we lost and we conquered back again and we we stopped the production in December of 2019 with visa, but we are feeling the impact in 2018 for the full year.
And then there are losses that we have because the market environment change so big customer of ours in China that was supplying the after market in North America because of the timing impact that have lost the business and therefore, we lost that business together with them.
No.
The labs and that obviously that impacted by the tactics in general what we are doing to improve the situation Im wondering and we're getting result.
And we are we have an action on the Tavi front, we are mitigating actions such as building inventory to take advantage of the quarterly water system in Europe , and then we have the long term.
Reassessment of our footprint strategy Im wondering on the sales side, we are going after some conquest opportunities in contract.
Where where we've seen that we have a competitive advantage at all where we have a differentiating opportunities.
Thank you guys.
Thanks, Matt.
Your next question comes from the line of Jeff Hammond of Keybanc.
Hey, good morning, guys.
Hi, Jeff.
Hey.
First first Luke I just want to let you know following on Twitter your follows are going up.
Rapidly this morning [laughter].
Great. Thanks for that good. Thanks, Thank you, though just on.
IP.
I know you had a tough comp in the big order in short cycle seems to be slowing and I think last quarter, you talked about kind of replenishing. The pipeline can you just talk about.
What you're seeing from a project visibility and your confidence that.
Maybe as we move through some of these tough comps we start to see some of the project activity start to drop through.
Sure. So let me let me talk about the orders the in into ways about the project and the pumps short cycle. So when we look at day and the project is really the story of the Q2 of the Q2 orders that and and this is because of the LIBOR project, which is roughly $14 million or their debt.
We posted in Q2 2018 and that we are actually in the process of delivering right right now and now when it when you look at that.
Project.
We doubt the lead on that on a like for like and we are actually.
Flat on a on a year to date basis.
And if you look at the visibility in the future for projects.
We see and things that need to be shipped into the right.
So nbcs confirmed also by the GDP W.W.R., what these our distribution network.
We had debt and we had a meeting incentive for our leadership team had a meeting with our distributors in Seneca Falls this week.
And they are experiencing the same thing, we see our customer being ready to be more prudent on the investment and shifting the project and it'll be to the to the right.
When we look at the at the short cycle.
At four times.
The short cycle times is that at Pratt was practically flat in Q2, we had a April that was not so good but it improved in may and it improved again in June to end up flat for the quarter year to date, we have plus 2% for the pumps or cycle and as I told you for empty. We close also IP last last week for July and end July short cycle pumps, what actually good the same level of June . So this gives us good visibility for that.
For.
For the short term and medium term 2019.
If I can close the loop of the orders we get visibility on 2018, I can tell you that our backlog.
Backlog is flatter.
Year over year, and we have good visibility for the project in terms of we got the backlog for the food project for 2019, and also a very solid and good visibility on the short cycle for 2018.
Okay, Great and then.
Just on.
Just on the you know.
I guess this comment that maybe we're entering a more uncertain environment into 2020, and you talked about this war chest of opportunities can you just talk about.
What do you think you can do to continue to flex the margins up in a less certain environment and what maybe some of the big needle movers are.
As you look into 2020 in terms of margin expansion. Thanks.
Okay sure.
So when that when you look at.
It's a little bit different in terms of Oh.
What I want a different after a different value centers because when you look at motion technologies and you look at Outta Motiva I mean, we have been in the that usually negative scenario now for the last four quarters. So when you look at that motion technology. When you look at friction is really market share gains that outperformance and that we are driving efficiency in terms of the factory shop floor in terms of the supply chain is the Mexico.
The Mexican improvement in terms of the profitability because he is already accretive to.
Empty margins.
And then staying on NTT posted improvement on acceptance now has improved by 40 basis points and we we see these improvements continue in this segment now and this is very much the story of the motion technology now when when you look at CCT.
In terms of all but the insourcing of some of the activities that we have done as I shared with you and it seems that you're falling make tweet you will see the feature later on you will see the plating line in our state of the art facility in Nogales, Mexico that insourcing will start up in I think at the end of the at the end of the Q4 in Q4 and did we start generating savings because in the TV today, we actually do out there outside.
On the on the IP front or what we would like to mention is why what continues work to lead our factories, but also the project margin improvements in the Internet in IP. If you think about if you think about it.
In Q2, we grew substantially and lot of the some of these growth was on the short cycle, but the projects and grew 51% and despite these 51% gross margin expansion on a on a peak.
Was it was 100 basis points.
So these shows you that they not only the backlog of project is more profitable when you did the backlog, but it's also when we are executing it and it is important.
Okay. Thanks, a lot.
Your next question comes from the line of Brian Kinstlinger of Oppenheimer.
Hi, good morning, everyone solid quarter.
Hi, Brad Hi, Brian Thank you.
I was hoping you could offer a little more color on Mexico profitability now accretive to.
The second segment average margins so operating in the high teens.
And specifically, how how far ahead of internal expectations Youre at this point.
Our view coming into the year was that breakeven fourth quarter of 2018 that high teens would be a solid run rate profitability for 2020, obviously, you've gotten there well ahead of time.
Sure.
So that's a that's true is that obviously the read there are two stories on the on the Mexico profitability. One of course is related to volume because some of the platform that we launched and they we are launching our platforms and as the volume goes faster we are able to get benefits out of this volume I walk I want also to commend our team in Mexico. Because these growth is probably higher than what we expected and the plant has been able to execute flawlessly and was a very smooth execution. So that's very good and when they look for is of a deficiency of the pricing of the equipment in Mexico is higher than 82%, which for the first yeah, Gary executing either is pretty good.
So I would say it.
It's.
Faster than what we were expecting and an execution that we that is almost flawless.
That is what I would say.
Got it appreciate the color.
And then circling back to the level of expected market outperformance from friction. He said the high end of the prior range that.
That you put out.
Are there any differences in expected Threeq and Fourq, two dynamics given platform timing or any other any other factors that.
I would I would say that you know there are.
But the world things happening in 2018, and there are things that happened in 2018 that make the market a little bit.
More volatile. So if you think about it you had a Q2 Q3 and Q4 2018 that were impacted by the Dabir as Pete.
In Europe .
And that generated some disturbance.
And that smooth out at the beginning in the first two quarters of this year.
And now when you look at 2019 as you add the China six.
That started in July 2019.
That.
Probably something that we keep on dragging in terms of impact to the market in the next in the next quarter or or so and also 28 in Q3 is when the problem really started facing in China. So I would say some of these the W. Sep has no impact anymore, but the China seeks we still have so there is still some volatility in the market, particularly I would say in China.
But if I have to say probably July has been known for where we've seen a more stability and less volatility in our order book.
Having said that I would also add that we are monitoring our order book on a daily basis. So that we stay ahead of the game and we are ensuring that for the next eight weeks for the eight eight weeks forward, we are matching demand we supply.
Brian if if we kind of look I would you know the level of outperformance is going to stay at these elevated levels.
I think when you look regionally it may likely accelerate in Europe .
Based on some ramps and some activity that we have building momentum in Europe .
I would say North America came out very very strong and we are.
Yeah, I'm, probably not going to maintain that level of outperformance in North America, because we're starting to.
To compare against prior year production, but the outperformance in Europe is improving and in China, It's improving in North America, it's going to moderate down from a an exceptional first half of the year to something that is still very very very strong.
Got it makes sense.
Then on C.C., obviously, yes.
Strongly benefiting from the war chest of self help opportunities you guys have.
You are in the high teens Swiss margins right now so is it fair looking forward to say that your entitlement margin is in the plus of the previously stated high teens plus range.
Yeah.
That's a great great great observation, Brian you know for sure. We we had a very strong quarter at CCT.
Funded investments.
There were some FX pressures.
As well so the Seventeenseven operationally it was it was very very strong momentum is good.
We see a lot of it coming from our connector facilities.
Product line moves have been very successful in getting production to through our best locations inside of our CCT footprint.
Greater leverage of Cc, Tino Gallus, which is good for not only the connectors business, but we're increasing component activity moving there as well.
So I think this is also a you know a quarter that.
That demonstrates where CCT can go but we're still in the end the transition phase in these product line moves and the insourcing. So we'll continue to make momentum on a year over year basis.
This is likely the highest margin we post this year in MCC team, although the team as I'm sure up for the challenge.
But but I think the underlying strength of what we're doing at CCT.
It is a it's going to continue that to put some stress on defining that plus in the margin entitlement it sooner rather than later.
And if I could if it can be the on these one or some of the things that we shared with you in terms of the did we lay out of the Orchard Park facility.
That that we live in the different material flow. These we believe an improvement on the CCP front aimed at transforming our Valencia, California through the aerospace and Defense Center of excellence.
For R&D and also for manufacturing debt using the opportunity. We have you know what you never want to check.
And then it also the acquisitions because usually when you look at our acquisitions Brio.
Usually we tend to.
Take acquisition to our strategic fit long term play and the App and usually they are operational plays that might be dilutive to our margin, but they represent strong improvement potential.
All right. Thanks again guys.
Our next question comes from the line of Nathan Jones of Stifel.
Good morning, everyone.
Hi, Nathan morning, Evan.
I'd like to start with a question on the M.T.K. margins.
I understand you guys have contracts that don't allow.
Hi, a cost to be passed through to the customer will lower costs to be passed through to the customer and you've been dealing with pretty significant inflation.
On the input cost side, and you did call that out as a headwind this quarter.
Certainly, saying steel costs come down over the last few quarters. It. So I would think that at some point he that's likely to turn into a tailwind for you guys rather than a headwind.
Can you talk about what you're seeing in terms of raw material prices that that you're you're purchasing currently how long that should take to flow through the inventory and into the pay now.
Yeah, Nathan I think the point is a good one we would expect second half.
Favorability in some of our input costs at motion technologies compared to what we thought entering the year and compared to the first half.
Because of the way, we locked in contracts and and now the the new spot rates that would never buying out or that the price forward.
So we should get some lift there some of that left you know we had anticipated.
Brewing, So I wouldn't say, it's kind of an incremental new data point to or our guide because we saw that that drilling I would say in Q1.
Part of the offset that that that we talked about as well in Q1 that it's continuing to play out the incremental terrace.
That we face as the year has gone on primarily Wolverine.
So those are the couple of dynamics that we're dealing with on the.
On the.
On an input front, if you will but but certainly a better environment from a raw material perspective, and a generally plays through.
Pretty quickly from from inventory into our results given how fast return.
Inventory on the in the MP business.
Would you expect price cost to be a tailwind or headwind in the second half for empty.
I would I would say muted we did have some good success Nathan on the rail side.
From from a price perspective, I think what we're seeing in motion technologies.
Is it pretty flattish environment, you know I think we did a good job in the first half of the year.
I think the second half.
Yeah, we're going to continue to maintain some of that momentum, but I don't think theres, a major shift, but we're getting.
You know the M.T. Rowe price.
Impacts to be minimal 10 2030 basis points.
Of hit depending on which way you look at it compared to what and when but that's obviously much better than what we've seen historically, where we average anywhere from 50 basis points to 150 basis points. So the actions are having an impact particularly in rail.
And one thing I would say, that's how I feel about the demand you're seeing there in empty.
You also have to think about the phasing of the of the aftermarket Nathan.
Because when you look at our independent aftermarket.
It has been growing substantially year to date.
But it is mainly a question of timing. So we will see less aftermarket in Q3 compared to Q3 last year and it did is it because the reverse and what we see now in Q1 and Q2.
Okay. That's helpful. Then.
Maybe a question on rail.
Certainly kind has been getting a lot of share both tiny next time.
I'd say pretty significant improvements in margin, maybe you could describe a little bit about.
What's gone on over the last couple of years to say that the significant improvement that you've generated in those two businesses. I think you said carnies margins are now in the in the double digits high double digits extra in high single digits, maybe where you think that could go over the next couple of years.
Sure.
So and you're absolutely right Nathan when you say what does that mean the last couple of years, because you don't turn it around in a quarter and they seem to be the good job that davida and team, calling inox and are doing so when you look at when you look at KONI.
Is the plan to add around the world in the in the in China in Russia in or Balan, the Netherlands, Austria in the Czech Republic that all are performing very well in terms of the in terms of lean.
You should see it and labor productivity.
Our performance in terms of quality has been outstanding we have reviewed our ppm by more than 70% in the last couple of years and all that what RTD easy. It's very good now when you look at the rail industry. The supply chain that is that made all that they tend to be tend to be made by smaller companies more into a printer company and therefore, a professional company like Connie performing very well from a quality and OTI deeper spectator gets rewarded by our our cost and they really appreciate his performance and evenings why our range of revenue or went up tremendously and why we keep on winning orders across the word in China, Europe , North America and across all the different type of train make true locomotive coach and high speed train.
Okay, one more just on the corporate expense you called out that being down.
Quite a lot this quarter I Didnt know Jessica made that much money.
But Dan talked about it being up in the third quarter.
Can you maybe give us some guidance on on weight.
Corporate should come in for the year and how you'll approach maybe maintain that kind of level.
As we go forward.
Yes, Nathan we've.
We had a a pretty strong result in Q1 as well so the year to date improvements in corporate.
Had been pretty sustainable some are some prior year items at that.
That didn't repeat.
With some transitions.
But the underlying functional cost actions you were driving the same efficiency a corporate we're driving in <unk> and <unk> and our businesses.
Eliminating waste and really focusing on driving incremental efficiency. So there has been a good structural improvement there's always some uncertainty on some of the things that just happen in corporate that are a little bit unpredictable. So we're always kind of factoring that into into the quarter forward as we're thinking about our guide, but the kind of the level that we're at for Q2, I think plus or minus is a it is a good starting point, obviously interest and other variables are beyond our control, but we did have a good outcome and interest investment returns in taxes in Q2, as well, but I would say for the balance of the year, we're going to be in the same ballpark.
As Q2, plus or minus a million here and there a million or two based on.
Environmental legal or other dynamics that are generally hard to forecast.
Fair enough okay. Thanks for the help.
Okay.
Your next question comes from the line of challenging Giordano of Cowen.
Hey, guys good morning.
Hi, Joe Hi, Joe.
And so on.
On the industrial piece of CCT.
When we listen to calls from other connector players the commentary on industrial was much weaker. So you guys are getting put up a small positive number and industrial for CCT can you maybe flush out a little bit I know you have some transportation in there you have some medical so.
Can you guys talk to the sub markets, there and what what are you kind of seeing incrementally.
So Joe from a from a revenue perspective, the industrial conductors if you just take straight industrial.
Excluding our specialty connectors of medical electric vehicle or.
Industrial connectors were.
We're up low single digits in the quarter and that primarily came out of Asia and Europe .
So North America, which certainly we from an order perspective in a revenue perspective that's.
Some of the Destocking that we.
We're seeing in the distribution channel.
But but globally orders were slightly positive on the industrial front as well again driven by.
By Europe and Asia. So those are the dynamics at play I think our execution and and how that team has been performing have helped us outperform some of the broader market, but clearly in an area that we're watching and particularly in the distribution cycle on connectors that there's a.
Continued destocking likely.
You know dynamics, so we need to continue to compete and execute at a high level, but but that's where we ended up for the quarter.
Okay, and then if I switch over to IP, and we think about I know you're not looking to give guidance here for 2020, but if we start thinking about the strong revenue delivery that we're seeing here or are starting to.
So off a little like how are you guys internally thinking about.
2020, just given the current outlook as like the ability to continue to grow how dependent is 2020 on order rates in the first half of that year like how should we how should we start to early kind of conceptualize that.
Well, Joe I think the way that we're thinking about it at this point not only that people probably across the businesses.
What can we control getting us set up for 2020. So the markets are volatile. There is there are there other conditions that are that are continuing to drive uncertainty.
In the macro economy isn't and their nearly daily events right. So.
For us it's about this war chest of opportunities you'll hear us talk about it a lot more.
Particularly as the year goes on it looking at overhead cost structures at IP looking at.
Our footprint looking at the way that we operate and eliminate waste.
The momentum that we have is very solid and it but I do think we need to be prepared for tough environment across the board I think thats pretty consistent in them and the environment that we're all operating in today, but I would say what's unique about us.
That's how many opportunities we already have identified new ones that were adding as the year goes on there's plenty of time to continue to replenish the project backlog.
You know as we go into 2020, so it's a little early to start to extrapolate too much there, but our short cycle businesses Luc indicated the orders you know revenue has been relatively stable so for us.
Continuing to execute.
Build up this war chest of opportunities accelerate and implement the ones that we can this year and I think thats a way forward. We did a lot of modeling with the teams, particularly we are left with them.
As a leadership team in Seneca falls and across the organization, we had our leaders with us and we've gone through a detailed kind of scenario analysis on on recession.
Considerations and we all know what direction, we want to go and what needs to get done.
And look I just want to see when you you were talking about like the ramp up.
Platform deliveries in Europe for empty.
I feel like that's an area where there's.
There's a lot of the base still among people, where some are using much more bearish.
On production numbers for 2020, I know you guys have some visibility to the very near term on one specific platforms are going to ramp, but given like how are you guys internally modeling out.
The forward projections for European production I, just feel like Thats.
There is a lot of variance in essence I'm hearing from different people.
I'm sure no one now when we look at and so first of all when the when we are looking at the market as I shared before our view today is probably to be worth and what it's for a quarter ago.
That is probably more true for more substantial in China versus the European and North American markets.
And he said that Joe is always a question of outperformance. So we won market share one knock on platforms that are ramping up in the in Europe .
And and therefore, we are expecting to keep these outperformance for the next step for the next few quarters on top of that I would say that that we are also winning more awards now.
Than than before which means that needs we feed our growth for the for the future, but bear in mind that they they award that we now probably would feed the 2020 one.
But out of the awards that we won last year that we went to 20. So the outperformance story I expect to continue and these now Josh for the next couple of quarters.
Okay. Thanks, guys.
Okay. Thanks.
Your next question comes from the line of Brett Linzey vertical research.
Hey, good morning, all.
Hey, Brett.
I will tell you what I wanted to come back to China friction you mentioned some signs of an actual stance potentially developing in China on the Q1 call and I understand you're making inroads with a lot of those local Chinese Chinese ollie's.
But have you seen that dynamic shallow accelerate here what is a growing preference for China suppliers, given some of the fixed the trade center in any any change their behavior.
So.
No I wouldn't say a major major chains change is that right when it when we look at the ex China I would say that.
From in that OEM perspective.
We have both the.
If I look at the top 10 foreign brands.
Production they tend to be from a on a year to date.
All pretty much down with few exceptions, you're talking about the one that are growing production year to date or are they BMW in diner as well as a couple of Japanese reordering Honda.
Everybody out there he is in decline.
And now when you look at.
The Chinese with the exception of the great wall in Cherry, which have not been year to date production, increasing all the others are declining and that but I would say then.
The declines are across the board no major shift between <unk> and <unk> and Chaney.
On our side, what I can tell you we do.
Ethan really to ensure that we have we need on the electric vehicle platforms in China.
Because you know that probably China from an electric vehicle point of view is the biggest market would rise. So that's some of the wins that the platform wins that we shared with you during the prepared remarks.
I actually with the Chinese Oems as well as that we the European and North American that it was important to we'd be content easily.
Okay, Great and I guess my follow up would be specific to easy.
You noted some of the wins in the prepared remarks, and I guess, if you just isolate easy opportunities and how large that that award funnel is today.
From a dollar revenue perspective are you are you starting to get some critical mass there and can you maybe size it.
We don't have it its size, but I would say that.
We had a very very high win rate of.
Awards in this quarter and we do have a China innovation center.
And we're making a lot of progress in any easy.
Building, the core capabilities and I would say our win rate has is accelerating and right now.
It certainly ahead of our win rate in other categories. So we want to continue to be a major player in an easy.
And.
Progress so far year to date as a good sign that things are going in the right direction for us, but unfortunately, we don't have a lot of numbers yet other than nine wins at a much higher rate than than we typically see another competition.
Okay, Great I'll leave it there thanks I appreciate it.
Sure. Thanks.
Your next question comes from the line of John and Jeff Gordon Haskett.
This is your vinyls for John .
Just wanted to ask about on the IP side, how project mix effects of IP margins and how should we think about margins for the rest of the year when this potentially reverses.
Sure on it so so the project mix.
It certainly has as an impact but as we discussed the margin profile. Those projects has improved 100 200 basis points.
Compared to what we've seen in the past so while it is still dilutive.
It's not quite as dilutive as as it has been in the past and that's why you're seeing this continued lift.
In the IP project margins.
In the quarter, you know I would I would say that.
You typically can see anywhere from.
You know what up to 100 basis points of of mixed pressure when you do the algebra.
There but.
Projects being around 25.
Percent of our business in a big quarter could be as much as 30%.
And a different mix it could be as low as 20%, but we're starting to see project margins are getting into the to the high single digits and that's a reflection of the project manager management that we put in a good execution. So those are some dynamics the margin profile for the balance of empty for IP excuse me.
We'll be driven largely by the mix.
And and.
You know, but the level that we're at now a pretty good indicators of of how we see the the balance of the year going.
Thank you.
And then last point I would say and this also applies to the CCT I PMTCT second half margins will be impacted by the the acquisition impact there's dilution 30, 40 basis points or 50 basis points in that range per quarter based on what we would have done from an organic perspective. So just want to remind everyone too to factor in the acquisition impact in the back half of the year for CCT and IP margins.
Very helpful. Thanks.
Your next question comes from the line of Andrew Open a bank of America Merrill Lynch.
Hi, This is David Ridley Lane on for Andrew.
Could you talk about which segments that you saw the incremental second half productivity gains that drove the five cents increase in your guidance.
So David I would say that the productivity gains.
Pretty you know we were working on actions across the board I mean, I think thats what you what's what's unique about this this war chest.
It is not concentrated to a few things in a few places there are a lot of actions.
Going on across ITC and the major ones that are gaining momentum or are the product line moves.
At CCT.
I think the project execution continuing to gain momentum at IP.
And empty, Mexico and KONI rail.
At Mt, though those are continuing opportunities to drive margin expansion.
I think as I mentioned, just a minute ago, you'll see some dilution at TCT and IP from acquisitions, but the underlying momentum incremental productivity I would say is the actions that we've already started accelerating those and driving additional benefits and then we have and bring some ideas you know effectively from the 2020.
Plan. If you will we are bringing some actions in a in the 2019 second half they give us some additional productivity as we end the year, but to really get a set up for 2020.
Understood and then.
Just a quick follow up.
So I heard some of your short cycle.
Products turned up in July , but just more comprehensively how did your short cycle trends go through the second quarter and to July .
Hi, TT wide basis.
Thank you.
Sure David So I think it's a different dynamic between the pumps valves and connectors parts of the business are slightly different.
Different drivers I would say on the connector side, which is one of the larger and the component side, which plays to the industrial space.
We've said there's been this north American distribution weakness, we think that that's.
Reflected in the broader markets that we serve there has been de stocking and we would expect that that has played out.
Pretty much throughout the quarter and into July we would expect you know that that plays through.
I think Luca mentioned on the on the pumps.
Side, the short cycle pumps have been progressively getting a more stable a little bit better as the quarter went on and the indicators in July from a from a pumps and parts perspective has been solid so far.
So those are some of the shorter cycle dynamics that we typically see automotive being a you know different.
Different category, but but the indicators due July as Luca mentioned on the automotive side have been.
Solid relative to our expectations, particularly in China were up for the first time in July on a year over year basis. So those are some of the dynamics, we're seeing in the short cycle.
Appreciate the color. Thank you.
Thanks, David.
Thank you I will now turn the call to management for any additional or closing remarks.
No. We thank you Laurie we have no additional remarks, and thanks, everybody for Apple clinic, they have a good day.
Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful bank.