ITT Inc.

So we keep on executing on this front, and that will simply not change.

Great. Really appreciate it, Luca. Thank you. Thanks, Mike. The next question is from Jeff Hammond with KeyBank. Your line is open.

Hey, good morning, everyone. Morning, Jeff. Morning, Jeff. So maybe these questions are connected, but your price-cost gap was $0.29 in 1Q, $0.27 in 2Q, and just trying to think how we should look at that price-cost gap into 3Q and 4Q, and then just similarly, margin trajectory and MT into the second half. Do we kind of bounce back to 1Q levels and 3Q, or just how to think about that snapback?

Yeah, you're right. Our margins were heavily impacted by the price-cost gap. I think that when we're moving into Q3 and Q4, we're seeing a much better picture. We're seeing that MT, as we discussed, is finally closing on all the price negotiations with our auto customers. And while we didn't get everything that we wanted, I think this was a good compromise for especially to maintain long-term healthy relationship and growing business with them. And so as the commodities impact is going to lessen, MT should be in a better position from a price-cost standpoint. And then IP and CCT, it's all about driving price. So we mentioned that we are seeing a nice price impact in Q2 orders for IP. That will convert into strong sales in Q3 and Q4. And CCT is a little less advanced, but there remains a lot of opportunities also from a pricing standpoint. So I think that when you look at cost price for the second half, we're probably going to be on par, so flat price. no negative impact, a very little positive impact, which is going to be a big change compared to what we've seen in Q1 and Q2.

Okay, great. And then, you know, great performance in IP. I recall, you know, in 1Q there was a lot of issues with supply chain. I think you still mentioned supply chain being a problem in IP, but it doesn't seem to have – you know, shown through in the results or in, you know, into the second half guide. So just how should we think about some of the supply chain challenges and, you know, are you just kind of overcoming them elsewhere or are you seeing some improvement?

Thanks. Thanks, Jeff. On supply chain, the short answer is it is improving slightly. So let me share some data and give you some color. If you look at Q1, in Q1, the revenue impact from supply chain was roughly 600 basis points. In Q2, it's between 200 and 300 basis points. So, obviously, that is the data that shows the improvement. Most of that was actually in AP. Now, to give some colors, the lead times have probably slightly reduced, and also the commodities, as you know, have reduced a little. but there are still bottlenecks remaining. So when we talk about plastic, paint raisins, electronic components or electric motors, those are still bottlenecks. And going back to the lead times, supplier lead times, whilst they have reduced slightly, they are still quite above pre-pandemic level. So what we are looking is really what we are in control and focusing on the internal bottlenecks, which are more on the production line and improve the velocity in the plant.

Okay. Thanks so much, guys.

Thanks, Jeff. The next question is from Nathan Jones with Stiefel. Your line is open.

Good morning. Hey, good morning. This is Adam Farley on for Nathan.

Good morning. Hi, Adam.

Hey, good morning. So there's been some talk of an automated production ramp in Europe in the second half. You know, what is your view of the likelihood of this, and what are customers saying?

Adam, you cut out in the first part of your question. Would you mind repeating, please?

Yeah, so there's been some talk of an automotive production ramp in Europe in the second half. What is your view of the likelihood of this, and what are customers saying?

Okay, so we are seeing the supply chain challenges easing, and the customers are talking about a better situation for the chip, under the chip shortage. But when we look really at Europe production forecast for the full year, that has not dramatically changed. We're talking about slightly positive, so low single-digit growth. This is still the forecast for Europe. We see good order book on our front, but we know there is outperformance there. But it's still, you know, low single-digit growth for Europe for the full year.

Okay, thank you for that. And then just turning to the orders overall, really strong and robust, especially in IP and CCT orders. So what was the cadence of orders through the quarter, and also if you could provide any color on July in each business? Thanks.

Sure. Sure. So the cadence of orders in the month was pretty even. There was strength in the quarter. There was strength for every month during the quarter. And July was not that different from what we've seen in Q2 in IT. We had a really strong month in June, and a lot of it was due to projects. which accumulated at a fast pace in June. But overall, there was no really – the growth in orders was pretty even, and the numbers is pretty good across the board in Q2. In terms of CCT, it's the same thing. And I would say that July orders are not that different also from what we've seen in Q2. So for the moment, it looks like the strength continued in Q2, and it doesn't look like there is much different for the moment in July. But there's a lot of ground to cover before the end of the year. So we remain very attentive to that order number and what it says about the market.

One thing that we'll expect, Adam, when it comes to the future order, particularly in IP, is that we expect projects gaining more and more momentum, where we expect probably the short cycle leveling off. And this is also, if you look at the backlog today for IP, 55% of our backlog is short cycle, 45% is projects that will eventually have to swap. to be 60 projects, 40 short cycles like it should usually be.

Thanks for taking my questions.

The next question is from Vlad Bystrycki with Citigroup. Your line is open.

Good morning, Vlad.

Good morning, Tim. Good morning, guys. Thanks for taking my question here. So maybe just following up on that IP, on those IP comments, And when we see, you know, short cycle orders 21% in the quarter, can you talk about, you know, how should we think about how much of that is, you know, actual end market demand, you know, going out to going out to the field versus, you know, any channel stocking for inventory that you might be seeing?

Sure. So I think that for the moment, our distributors, which where a lot of our short cycle business is going, are not reported any type of increase in inventory. What we don't monitor is the inventory at their customers. But for the moment, we don't see really any type of inventory buildup anywhere. As Luca mentioned, those are really strong order growth numbers. And so we expect that over time, this level of short cycle orders cannot sustain. And so we'll see leveling off, as Luca said. I think one thing that is important is pricing that I want to highlight here because I think that while we are very encouraged by the pricing benefits we have seen in the short cycle in IP, I think we are only at the beginning of the journey. And I think that short cycle is going to benefit a lot from a renewed pricing approach that I think is going to really focus on the differentiation that we bring with our products compared to our flow peers.

Okay, that's really helpful. Color manual, I appreciate it. And then maybe just shifting to capital allocation. You know, you've obviously been leaning into share repurchases more here, given where the share price has been. So I guess just thoughts on continuing to lean into share repurchases, you know, given where the share price is, and then also similarly just – Can you talk about, you know, your appetite for larger scale M&A given, you know, the health of the balance sheet, you know, maybe versus obviously some macro concerns out there?

So, Vlad, when it comes to capital deployment, the priority are the same. This has not changed. The money goes first in organic investment. This is where we have the best returns. These are the less risky investments. And we have seen it, you know, being in IP or being in motion technologies or in CCT. So this is where money goes first. And 80% of that capex is really going into growth and productivity. Second is M&A. And you have seen it applied in this first half of the year with the acquisition of Habonim. That is already accretive. It's a great story already. 140 million deployed there in ventures like, you know, Cotswolds or Wacodur or CRP in all adjacencies to the business. And this is where money goes second. And then, of course, dividend and share repurchases. And, you know, this is a good use of our capital. And today we have the opportunity to do all three of them. And this is what we continue to do. When it comes to acquisitions, we have a very good funnel of opportunities, and the opportunities there are in the bulk is anything between, you know, $50 to, you know, $300 million of revenue. And, of course, there might be a few that are a little bit larger than that, but, you know, the bulk of the M&A opportunities are in that range.

Okay, thanks for that, Luca. I'll get back to you. Thanks, Brad. The next question is from Damien Karras with UBS. Your line is open.

Good morning, Damien.

Hi.

Good morning. Congrats on the hard work and accomplishments in WUSHI.

Thank you. Thank you, Damien.

So, just a follow-up question on price as it relates to orders. When we look at those robust order rates in IP and CCT, You know, could you just help us unpack how much is from inflationary effects versus underlying unit demand? I mean, are we, you know, kind of talking high single digit, low double digit on price, the rest on order? Maybe just help us unpack that a bit.

Sure. So in IP, the majority of the growth is through volume. We are seeing pricing building into our backlog, but for the moment, this is still the majority of the growth is driven by volume. And I'm talking specifically on the short cycle here, so mainly baseline pumps and spare parts. In terms of CCT, I would say the large majority is also volume because CCT is less advanced from a pricing standpoint. The only exception maybe that I would say is industrial connectors where we're seeing a flattish type of volume, and what gets us a little bit over is pricing.

Okay. That's helpful. I guess just thinking about expectations going into the quarter, I think a lot of investors were concerned you'd be lucky to even hit the 430 low end of your EPS guide, considering all the exogenous issues out there in some of your markets. Just thinking about the updated guidance, where would you say the biggest risk is of not hitting that guidance this year?

I would say the biggest risk probably is an external risk, some type of disruption to demand like we've seen in Q2 with the China lockdowns. The rest, you know, we have really strong backlog in IP and CCT. We have proven that we're able to ramp up volumes. As you've seen, in Q2, IP was roughly 25 million above Q1 organically, and then CCT was 10 million above Q1 also. So we know how to flow through these additional products through our facilities. And then from a cost control, we've been very attentive to cost and tightening all our expenses. So I would say, to me, the impact or the downside potential is mainly due to external factors.

And Damien, the team did an amazing job in the quarter. If you think about all the headwinds that we had to face, Emmanuel reiterated in the prepared remarks. And many pieces of the puzzle are actually coming together, being the backlog, being the pricing, being the execution on the shelf floor, being whooshy. And this is the reason why we really tighten the range. Things are coming together.

Thanks, guys. Appreciate your thoughts.

Thanks, Damien. The next question is from Joe Giordano with Callen. Your line is open.

Morning, Joe. Hey, guys. Yeah, I had a similar question on that. Maybe just ask a little different. Like, so last quarter, when you were talking towards like the lower part of the guidance, and then at investor day, you know, I guess qualitatively, just based on the bullet points that you guys had, it did sound like incrementally, the guidance was getting a little bit worse. And now, I think raising the low end is a major statement here. So I'm just curious if anything actually changed in your mind between kind of investor day commentary and today?

So I think you'll appreciate that the environment is very volatile. And so for us, this is impacting our visibility on what we're seeing out there. And so I think that we've been appropriately cautious in our description of what we were seeing out there. And at the same time, in parallel, we were driving execution within our segments. And I think that we saw some really strong performance improving in May versus April, and then in June versus April and May. And so I think that when you think about all the progress we've done in terms of pricing, especially at MT, which was really the biggest price that we were going after, We now feel more confident that this pricing is almost more or less done. And then we've got to focus on making sure that we take advantage of commodities going down and the same execution that you've seen in Q2 in terms of on-time delivery and quality for all our businesses.

And, Joe, if you think about volatility, just to give you an example, I mean, you're on the 4th of July celebrating Independence Day over here in the U.S., and you're on call with WUSHE where companies are shutting down and the team is putting the amazing feed that we were describing before. So just this gives you an idea of the volatility that you have to deal with. But as I said, the pieces are coming together nicely so far.

No, I appreciate that. Again, on orders, I know we've talked a lot about this. I think it's hard to – some of the year-on-year comparisons just become challenging just because the numbers are weird and price and inflation. If you were to think about – and let's strip out MT because that's its own kind of animal. But if we think about IP and CCT orders, if we think about it on like a dollar basis per day or something like that, how do you see that going from like a 2Q level? Are orders per day still going up? I don't care about the year on year so much. I'm just thinking about the sequential progression in dollar terms from here. How do you see that?

So when you look, it's a little bit different pictures, I would say, depending on the different markets. But if you look at the Q2 in the short cycle indicator, so you talk about baseline parts, service, valves, and we actually, we are really looking at some of those numbers every day or every week, Joe, exactly like you are saying. Q2 was a very strong quarter. So, and these were sequentially. So that is a very good sign. But I would say, Joe, also that what we expect in AP, those order in the short cycle to level off, and we expect the projects to come out stronger in the second half of the year. That is for... the short cycle in ap we see also some good sequential orders in a connector for example as well as in components coming mainly from aerospace and defense and those are very strong at compensating some of the industrial connectors that amanda was talking about which showed some weakness sequentially did i answer your question yep perfectly thank you thanks joe

The next question is from Andrew Obin with Bank of America. Your line is open.

Hey, you have Sabrina Abrams on for Andrew Obin. How are you guys?

Good morning, Sabrina. Good morning.

Can you just talk, please, about the structure of inventory on your own balance sheet and sort of how much of the issue is sort of a golden screw issue? How do you think about dealing with the potential bullwhip effect down the line when lead times normalize? And when do you think levels of working capital start to normalize?

Yeah, so obviously working capital is a huge issue for us. Working capital has been a use of cash in the first half and a really large one. And so right now, I would say that we're targeting to reduce our working capital by roughly something like a little bit more than $100 million in the second half. And this is going to be a function of collecting AR past use and collecting some of the pricing that we agreed on and that we haven't been able to – we haven't collected yet. uh and then the large part of it is going to be inventory and i think uh you know your description of the golden screw i think it's a good description we have a lot of our projects that are half finished or 90 90 finished and they're not leaving the dock because we're missing a motor we're missing a casting and so and so we're focusing on making sure that we improve our supply chain at the same time as luca was saying we improve the velocity through our factories And I think that this is going to give us some significant benefits in the second half in terms of working capital.

Great. Thank you. And how are you thinking about getting the European business ready for potential disruptions related to Russian gas in the fall slash winter?

okay so there are two there are two things that we're doing uh things that we're doing in the short term and in the short term we are across the board everywhere globally we're really paying attention to our consumption of energy and we are really working with the business in order to reduce our electrical energy consumption And then over the medium-long term, we are investing heavily in renewables. So I mentioned that we have committed $8 million of renewable projects, solar projects, in our facilities globally. And those projects are going to come online between the second half and the first quarter of 2023. and so as a result this should really help us reduce the the consumption of external energy and produce our own energy in in a significant portion like for instance when a typical solar panel project for facilities between 10 to 20 percent of the energy that we need that we're going to produce in-house so so we're rolling out those projects for the medium term and and this is going to help us rethink in terms of our energy consumption

Great. Thank you so much. I'll pass it on.

Thank you. Our final question is from Matt Somerville with DA Davidson. Your line is open.

Thanks. A couple questions on MT. What will priced cost coverage actually look like when all the actions you've taken, the contract negotiation process is fully complete? What will that coverage ratio look like? And then in these new contracts, is there anything structurally different about how you might be able to pass on raw material inflation and deflation in the future looking forward that is maybe different than the structure previously? And then I have a follow-up.

Okay. Thanks, Matt. First of all, I'm very proud of the results that have been done by the team because the team has been able to shift, as we said, the auto paradigm of giving price and then be able to obtain price. When we look at the cost-price equation, if you look at the entire inflationary cost, including energy, et cetera, we are still not able to cover everything. So for 2022, it's going to be a hit when you look at the all-cost inflation. a better picture if you just look only on the material side. When you look at the – as we're moving forward, then it will be once again being on the table of the negotiation, and it will be up to the team in trying to take that negotiation to our advantage. But as we've shared the pain, then it will be shared also the – the other side when you move in the other direction. So I think that that will present an opportunity for us. And as Emmanuel always described, this is a timely thing. And we will come out of this in the next 18, 24 months. But the other side probably will be more positive than this one.

Got it. And then just as a follow-up, sticking with MT, I think you mentioned 18 new EV platform wins in the quarter. How should we be thinking about what that kind of win rate that suggests, and how is that tracking to the plan you laid forward or you set forth at your analyst day as of late? Thank you.

Sure. Thanks, Matt. First of all, these are electrified platforms. So you're talking about both EV and hybrid. So 18 electrified platforms in the quarter is massive. And if you give some examples, these are customers like BYD or a new part of Tesla. So, these are all very good, successful. Our win rate in awards of electrified platforms is considerably higher than our global market share today. And so, in 2022, like in 2021, our market share in electrified platforms will be higher already than internal combustion engine. The other thing is that this is perfectly aligned for us to get to that 37% market share that we discussed during the investor day and that we said all the prepared remarks. We are on a good path there. Got it. Thank you, Luca. Thanks, Matt.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.