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Edited Transcript of ITT earnings conference call or presentation 2-Aug-19 1:00pm GMT

Q2 2019 ITT Inc Earnings Call

WHITE PLAINS Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of ITT Inc earnings conference call or presentation Friday, August 2, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Emmanuel Caprais;Vice President of Finance, FP&A and Investor Relations

* Luca Savi

ITT Inc. - CEO, President & Director

* Thomas M. Scalera

ITT Inc. - Executive VP & CFO

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Conference Call Participants

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* Brett Logan Linzey

Vertical Research Partners, LLC - VP

* Bryan Francis Blair

Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst

* David Emerson Ridley-Lane

BofA Merrill Lynch, Research Division - VP

* Ivana Delevska

Gordon Haskett Research Advisors - Research Associate of Industrials

* Jeffrey David Hammond

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* Joseph Craig Giordano

Cowen and Company, LLC, Research Division - MD and Senior Analyst

* Matt J. Summerville

D.A. Davidson & Co., Research Division - MD & Senior Analyst

* Michael Patrick Halloran

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst

* Nathan Hardie Jones

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

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Presentation

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Operator [1]

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Welcome to ITT's 2019 Second Quarter Conference Call. Today is Friday, August 2, 2019. Today's call is being recorded and will be available for a replay beginning at 12 p.m. Eastern. (Operator Instructions)

It is now my pleasure to turn the floor over to Emmanuel Caprais, Vice President of Finance, FP&A and Investor Relations. You may begin.

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Emmanuel Caprais;Vice President of Finance, FP&A and Investor Relations, [2]

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Thank you, Lori, and good morning. Welcome to ITT's Second Quarter 2019 Earnings Call. This is Emmanuel, and with me today are Luca Savi, President and Chief Executive Officer; and Tom Scalera, Chief Financial Officer.

I'd like to highlight that this morning's presentation, press release and reconciliations of non-GAAP financial measures to the most comparable GAAP measure can be found on our website at itt.com/investors.

Before we begin, please note that our discussion will refer exclusively to non-GAAP or adjusted measures unless otherwise indicated. Today's call will contain forward-looking statements that are subject to risks and uncertainties. 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 in our SEC filings.

Let me now turn the call over to Luca.

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Luca Savi, ITT Inc. - CEO, President & Director [3]

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Thank you, Emmanuel, and hello, everyone. Thank you for joining us to discuss today ITT's record second quarter results. I am very proud of all the ITT'ers who once again delivered revenues and operating income that exceeded our expectations and validated our strategic priority.

This quarter marks the eighth consecutive quarter of year-over-year organic revenue growth and the eighth consecutive quarter of year-over-year segment margin growth. All segments contributed reflecting the strength of our diversified portfolio. The level of outperformance delivered by ITT'ers this quarter is a testament to the depth and the breadth of the progress we've made over the past 2 years.

Friction OEM outperformed global auto by 1,100 basis points and grew revenues by 4%. KONI/Axtone grew orders 20% and revenue 16%. KONI operating margin reached high double digits.

Friction Mexico is already accretive through MT-adjusted margin in year 1. Industrial Process grew revenue grew 13%. And IP expanding margins by 100 basis points, including 200 basis points of product margin expansion. CCT margin hit a record 17.7%, and connector margins were up 210 basis points. We reduced corporate costs by 24% and we funded $5 million of investments to drive future growth.

As a result of this outperformance, Q2 EPS grew 13% to a record $0.93 per share and we are raising the midpoint of our full year 2019 EPS guidance for the second time this year to $3.63 per share.

So let's take a look at the Q2 financial highlights on Slide 3. We grew organic revenue 5% and exceeded $700 million in quarterly revenue for the first time in our history. We grew segment operating income margin 60 basis points to 16.1%.

We grew operating income margin 100 basis points to 14.7%. And we grew earnings per share 13% to a record $0.93 per share.

When you look at our earnings growth excluding foreign exchange, segment margin grew 100 basis points, operating income grew 18% and earnings per share grew 21%.

As you know by now, at ITT we focus on executing our top priorities and building a high-performance organization with a continued improvement mindset. Our resilience and the sustainability of our results are all the more important as we face more uncertain market conditions. To continue to deliver in this environment, we are laser focused on 3 priorities: operational excellence, customer centricity and effective capital deployment.

Beginning with operational excellence. In the quarter, all 3 value centers delivered 50 basis points or more on margin expansion. IP's 100 basis points margin expansion is even more outstanding when you factor in the impact of the unfavorable mix driven by the 51% project growth.

CCT expanded margin by 80 basis points driven by a strong connector performance, especially at our Nogales, Mexico and Shenzhen, China sites as connector margins overall are benefiting from product line transfers to these facilities.

Finally, MT's resilience has been nothing short of remarkable as the team delivered 50 basis points of margin improvement and friction OEM grew 4% in difficult market conditions.

I am also very proud of David and his team that delivered high teen margin at KONI, and high single-digit margins at Axtone. As you can see, we're effectively deploying our war chest of self-help opportunities and we will continue to identify additional options along the way.

Let me provide you some examples. At CCT, we have completed the transfer of 6 connector product lines and we are now transferring 4 additional product lines to our best cost plan. We are driving lean initiative at our Valencia, California facilities to make it our aerospace center of excellence in both manufacturing and research and development.

In addition, our new plating line in Mexico is installed. It will start production of plated back shelf and other connective components later this year. This will not only drive down our costs but also it will improve our lead time. If you really want to see this impressive piece of equipment, I will be tweeting a picture of it later on. My Twitter handle is @LucaSavi4ITT, that's the number 4.

At IP, we continued our lean journey for our critical baseline pumps product line. We focused on improving bottlenecks in machining and supply chain to drive even stronger output. We launched several [VADE] initiatives to design costs out of our larger pump products and strengthen our competitiveness in industrial markets. And we are proactively assessing our IP global footprint and overhead cost structure to address more volatile market conditions.

At MT, we transferred coil spring production to Poland and executed a partial restructuring of our Axtone plant in Germany to improve our cost competitiveness and to better serve our rail customers. We expanded margins at our Mexico facility once again, and North American revenues grew by 43%. And we have continuously flexed our labor, overhead cost and capital expenditure at our European and China plants to better align with current market conditions.

The ITT leadership team and I are actively engaged in energizing and driving improvements across the organization. We observed firsthand the improvement on our factory shop floors during our monthly operational reviews together with our value center team at their location, not at HQ. For example, this quarter we've examined changeover improvement at MT in Barga, Italy. At IP Seneca Falls, we debated how we track overall equipment efficiency for arming machines. And at CCT Orchard Park, we analyzed the shop-floor layout to improve material flow and manufacturing efficiencies. Our journey of betterment is a subject that I'm very passionate about. And unlocking improvement through hands-on engagement with our businesses is critical for our future success. And frankly, this level of engagement and granularity is simply the right thing to do.

Let's move to our next priority, customer centricity. I'm very happy that our 3 value centers delivered organic revenue growth this quarter. We have grown organic revenue 8 quarters in a row. This is further validation that our shared gain strategies are bearing fruit. As we continue to deliver above-market growth as we are executing on the backlog of orders, our project revenue growth was driven by large global delivery and we improved project margins by triple digit.

In Q2, IP signed a 5-year agreement with a large Middle East oil and gas customer, locking in increased market share and further strengthening our relationship.

At MT, we continue to deliver in difficult market conditions. In Q2, we gained share in global OEM market with frictions sale outperforming by more than 1,100 basis points. We continued to grow in North America on the ramp-up of awarded platform. And KONI/Axtone delivered strong growth in terms of orders and sales in the quarter as our railway platform continued to gain share.

Finally, at CCT we delivered 5% organic revenue growth on the back of strong aerospace and defense activity and moderate industrial growth. It is important to note that both connectors and components grew revenue in the second quarter by 6% and 4%, respectively. Our CCT backlog excluding foreign exchange is up 14% compared to the prior year and our year-to-date book-to-bill stands at a healthy 1.07.

Finally, moving onto our last priority of effective capital deployment on Slide 4. I am happy with the progress we have made on the acquisition front. In 2019, we deployed $120 million in capital to augment IP and CCT technological and geographic reach. These acquisitions are expected to provide approximately $88 million of annual 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 the first year and generate attractive returns.

I want to welcome our Matrix colleagues to the ITT family. This acquisition allowed the CCT team to build upon 25 years of aerospace and defense [composite] experience. Matrix proprietary production process will drive growth in harsher environment engine component program as we strengthen our competitive position. This new addition to our aerospace portfolio will also benefit from CCT's (inaudible) to support aggressive growth plan.

In the past 3 months, we have generated solid acquisition momentum with these 2 close to core and disciplined transactions. And I look forward to sharing progress 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?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [4]

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Thank you, Luca. Let's now turn to the Q2 revenue and adjusted income on Slide 5. Organic orders decreased 5% driven by a 27% decline in oil and gas on project delays and a large prior year upstream project that more than offset 12% growth in short-cycle activity.

Industrial orders declined 6% on pump project and short-cycle demand. However, despite the pressures in the global automotive market, transportation orders were flat, as 39% growth of rail and solid OEM friction demand in North America and Europe was offset by China auto and A&D timing. Despite the order pressure in the quarter, our backlog excluding foreign exchange remained 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% ITT 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 that 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%. The income expansion was driven by volume, productivity, cost containment and supply-chain action as our operational execution advances to consistently higher levels of performance. These gains were partially offset by higher tariffs, commodity costs and unfavorable mix due to strong pump project deliveries. And $5 million of strategic investments at MT and CCT.

In the quarter, we grew earnings per share by 13% and delivered EPS of $0.93 per share. Excluding unfavorable foreign exchange, EPS grew 21%. In addition to the strong segment operating income, we also drilled down corporate costs by 24%. And we executed strategies that produced interest income, incremental investment returns and the lower tax rates.

Slide 6 provides the details of our adjusted segment margin performance in the quarter. Q2 margins improved 60 basis points to 16.1%, powered by 200 basis points of operational margin expansion. This quarter marks our eighth consecutive quarter of 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 that delivered significant productivity, supply chain and the restructuring benefits across segments. The primary sources of the improvements were project execution at IP, honing 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 quarter on IP and CCT improvements and a modest decrease at MT, reflecting successful pricing actions in rail.

In Q2, the 200 basis points of operational margin growth was diluted by minus 40 basis points of foreign exchange and minus 30 basis points of acquisitions. We also funded 70 basis points of critical strategic investments in the quarter, including ITT Smart Pad application development and the CCT 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 and self-help opportunities. And we will continue to be proactive in the second half of 2019 to accelerate actions that will provide incremental benefits in a more uncertain 2020.

Now let's turn to our segment results starting with Motion Technologies revenue and adjusted income on Slide 7. Despite the challenging conditions in the auto markets, MT organic revenue increased 1%. This growth in the face of stiff headwinds clearly demonstrates the intensity of MT 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 that more than offset the slower-than-anticipated China market.

Friction outgrew every global market and was more than 1,100 basis points better than the overall auto market. In addition, our KONI and Axtone revenue grew 16% and orders grew 20% in global, share gains and rail. This revenue growth was offset by a 16% decline at Wolverine and weak aftermarket demand and impacts from customer share loss.

MT's segment operating income decreased 2% to $56 million due to unfavorable foreign exchange of $5 million. Segment operating income increased 7%, excluding foreign exchange. The constant currency income growth was driven by operating efficiencies and supply-chain actions, combined with proactive cost containment and restructuring actions that more than offset higher commodity costs and tariffs.

MT expanded margins 50 basis points in the quarter to 17.8% and 560 basis point growth at KONI and exceptional execution at MT Mexico.

Lastly, from a strategic perspective, the friction team won 9 new electric vehicle platforms with leading OEMs across multiple regions. And KONI advanced share capture efforts in high-speed rail and introduced a new unique sensor-enabled shock absorber for electric bus applications that included a CCT connector.

Next up is Industrial Process revenue and adjusted income on Slide 8. 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 in 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. IP organic orders decreased 13% due to a 35% decrease in projects and a 5% decrease in short cycle that was primarily related to valves. The decline in projects reflected a large prior year upstream project and increased selectiveness in our project-screening activities.

In addition, chemical project order growth of 15% was offset by general industry and mining. IP backlog was flat in 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 acquisitions, IP margins actually grew 170 basis points for a second straight quarter.

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and price that offset tariff impacts. The project delivery strength in the quarter drove

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to the prior year due to improved selectivity and execution.

In Q2, IP strategic highlights included advancing our specialty pumps and valve technology through organic investments and advanced multiphase pumping solutions and BioPharm valves which streamline customer installation and maintenance requirements and through inorganic investments in RPG.

Solid CCT revenue and adjusted income results are detailed on Slide 9. CCT delivered organic revenue growth of 5% and balanced 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% on difficult compares to prior year component programs that more than offset 16% growth in connectors. Industrial markets grew a modest 1%, and connector and component strength in Asia and Europe partially offset by weakness in North America.

CCT's Q2 organic orders declined 3%, despite an increase in aerospace and defense connectors but more than offset by oil and gas in industrial.

Book-to-bill in the quarter was flat and is 1.07 on a year-to-date basis, driving a 14% increase in backlog excluding foreign exchange.

The CCT team delivered 9% segment operating income growth to $30 million and benefits from volume and productivity, including supply chain, partially offset by increased material costs, mix, foreign exchange and investment. Segment operating margins expanded 80 basis points to a record 17.7%. The momentum in the connectors execution continued as margins expanded 210 basis points. And we are continuing to invest in our connectors execution as a new product line to our best-cost facility and in-source plating activity.

Now with this in mind, let's take a look at our adjusted 2019 guidance on Slide 10. We are increasing our EPS midpoint by $0.05 to $3.63. And we are raising the low end of our guidance to $3.58, which is a previous guided midpoint. As a result, we now expect to grow 2019 EPS 12% at the midpoint. The 5% midpoint increase was powered by our strong Q2 performance and incremental second half productivity and cost actions. Our total and organic revenue guidance remained unchanged at plus 3% to plus 5%.

Next I'd like to provide some second half perspective. In the second half, we are projecting mid single-digit total revenue growth. And from an organic revenue perspective, we are expecting low single-digit growth with all segments contributing. Our backlog at IP, CCT and MT rail is strong entering the second half. And MT is also expecting to benefit from friction platform ramp-ups in Europe, China and North America. In 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 at (inaudible).

Margins are expected to be slightly lower than Q2 due to unfavorable aftermarket mix at MT and the impacts of the acquisitions at IP and CCT. And EPS is expected to be slightly lower than Q2 due to a higher effective tax rate in corporate.

So with that, let me now turn it back to Luca for some final comments.

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Luca Savi, ITT Inc. - CEO, President & Director [5]

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Thanks, Tom. So in conclusion, I am proud indeed of ITT's second quarter results as they reflect the drive of business-savvy ITT'ers all around the globe. We set new record in Q2, and we continue to execute on our war chest of self-help opportunities. While we are cognizant of the challenging environment, we are confident that we will continue to outperform our end markets and make acquisitions that will accelerate our return on capital.

And before we go to the Q&A, I just want to let our team in Vadodara, India know that we are thinking of them as they are dealing with the impact of some severe weather there. The facility's in good shape, but it is our people there that make it great. So ITT India, we're thinking of you.

Now, Lori, let's start the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Mike Halloran of Baird.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [2]

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So the outperformance on the friction side is very impressive versus the end markets. Maybe you could talk a little bit about the underlying market dynamics you're seeing right now, excluding the outperformance to start out with. In other words, what do you think the markets are growing at on a regional basis? I know at the end there you mentioned that the project onboarding in a few regions -- or the platform onboarding, excuse me, in a few regions is going to drive some outperformance as we look to back half. But maybe you could also talk about what level of outperformance you're expecting on a-go forward basis? Seems just a lot of nuance in those market

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Luca Savi, ITT Inc. - CEO, President & Director [3]

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market. I will say that our view today is worse than it was

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Operator, can you hear us? Okay, yes.

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Operator [4]

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My apologies for the technical delay. Our next question comes from Matt Summerville of D.A. Davidson.

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Luca Savi, ITT Inc. - CEO, President & Director [5]

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Hold on a second, Lori. I just wonder if you guys heard the answer. Could you please confirm that please?

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Operator [6]

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I did not hear it on my end. We lost audio.

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Luca Savi, ITT Inc. - CEO, President & Director [7]

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Okay. So let me readdress the first question. And I apologize for the technical inconvenience. So when we look at the market, our view on the market today is a little bit worse than we had 1 quarter ago. And the main reason for that is China. This is looking at the market, looking at our data, talking to our customers and our people in China. We see that China, probably for the full year 2019, will post a negative double-digit growth. And for the global market, we'll probably be negative mid single-digit. This is where the main discrepancy is compared to what we thought 1 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 1,100 basis points outperformance. And when we look at the next quarters, it's likely that you will see an outperformance at the high end of the range that we previously shared with you. So this is our view on the market. And thank you for patience.

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Operator [8]

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Your next question comes from Matt Summerville of D.A. Davidson.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [9]

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Okay. I just want to verify that you guys can hear me.

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Luca Savi, ITT Inc. - CEO, President & Director [10]

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We can hear you, Matt.

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [11]

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We can hear you, Matt.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [12]

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Okay. So it's sort of a follow-up. How much of the impact are you seeing in China

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platform launch

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [13]

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So Matt, I -- the question broke up a little bit on our end over here. But I think where you were headed was a question around what's driving the dynamics in the China market right now. If not, follow-up with us. But we'll give a little insight in what we're seeing in China. So certainly there's been a number of drivers inside the market, particularly around the emission standards change from China 5 to China 6, which has been talked about quite a bit right now in the marketplace. In addition to the global uncertainty and the other dynamics that are at play in China, that is causing the production rates to keep 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 performance is about start of new production for platforms that we've won. Some of those dates have pushed to the right. A few have moved forward, but there's still some pushing of start of production that has now gone into Q4 and they end up at the tailwind of 2019. What we've been doing is looking at some other opportunities to gain some share 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 performing and executing in the market that's more difficult. We're not expecting any clearance really this year. Some of those production startups are likely going to push into 2020 and we'll be ready to deliver those when the time is right. But for now, North America and Europe is really significantly driving the outperformance for us.

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Luca Savi, ITT Inc. - CEO, President & Director [14]

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And Matt, if I can build on what Tom said, is I would say definitely year-to-date has been outperformance everywhere. But better I would say in Europe and North America than in China. What we can share with you as we closed July last week, is that in July, China posted a good growth year-over-year. And this is the first time in 2019.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [15]

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And then just as a follow-up, you mentioned that 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 that piece in the business? And what you're doing in response to the challenges you're seeing there?

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Luca Savi, ITT Inc. - CEO, President & Director [16]

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Sure. So Wolverine Q2, as you pointed out, Matt, sales were down 16% with a low single-digit ROI and $11 million cash generated year-to-date. We are not happy about this performance. And there are elements that we cannot control, like the market and the tariffs. And there are other things that are related to us. So these share losses are related to some contracts that recently we lost, and we conquered that again and we restarted production in December of 2019. So these -- that we are feeling the impact in 2019 for the full year. And then there are losses that we have because the market environment changed. So a big customer of ours in China that was supplying the aftermarket in North America because of the tariffs impact have lost the business. And therefore, we lost the business together with them. Now the [last] impact, obviously they are impacted by the tariffs in general. What we're doing to improve the situation with Wolverine and Wolverine results, we are doing an action on the tariff front, we're mitigating actions such as building inventory to take advantage of the quarterly quota system in Europe. And then we have long-term reassessment of our footing strategy in Wolverine. On the sales side, we are going after some conquer opportunities in contracts where we think that we have a competitive advantage or where we have a differentiating opportunity.

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Operator [17]

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Your next question comes from the line of Jeff Hammond of KeyBanc.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [18]

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First, Luca, I just want to let you know I'm following you on Twitter. Your followers are going up rapidly this morning.

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Luca Savi, ITT Inc. - CEO, President & Director [19]

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That's great. Thank you for that. Good. Thank you, Jeff.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [20]

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So just on IP, I know you had a tough comp in the big order and 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?

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Luca Savi, ITT Inc. - CEO, President & Director [21]

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Sure. So let me talk about the orders in 2 ways, about the projects and the pumps short cycle. So when we look at the projects, this is really the story of the Q2 orders. And this is because of the (inaudible) project, which is roughly $14 million order that we posted in Q2 2018 and that we are actually in the process of delivering right now. Now when you look at projects without the (inaudible) on a like-for-like, we are actually flat on a year-to-date basis. If you look at the visibility in the future for projects, we see things a little bit shifting to the right. So -- and this is confirmed also by the GDPWW, our distribution network. We had a meeting in Seneca -- our leadership team had a meeting with our distributors in Seneca Falls this week and they are experiencing the same thing. They see our customers being a little bit more prudent on the investment and shifting the projects a little bit to the right. When we look at the short cycle for pumps, the short cycle for pump is -- 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 are plus 2% for the pump short cycle. And as I told you for MT, we closed also IP last week for July. And July short-cycle pumps were actually good, the same level of June. So this gives us good visibility for the short-term and medium-term 2019. If I can close the loop of the orders with the visibility on 2019, I can tell you that our backlog is flat year-over-year. And we have good visibility for the project in terms of we got the backlog for the full project for 2019. And also a very solid and good visibility on the short cycle for 2019.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [22]

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Okay. Great. And then just on -- 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 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?

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Luca Savi, ITT Inc. - CEO, President & Director [23]

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Okay. Sure. So when you look at -- it's a little bit different in terms of all our different -- at the different value centers. Because when you look at the Motion Technologies and you look at automotive, I mean we've been in these usually negative scenarios now for the last 4 quarters. So when you look at Motion Technologies, when you look at friction, it's really market share gains, outperformance and we are driving efficiency in terms of the factory short flow, in terms of the supply chain, in the Mexican improvement in terms of the profitability because it's already accretive to MT margins. And then staying on MT, it's also the improvement on Axtone that now has improved by 40 basis points. And we will see this improvement continue in the second half. And this is very much the story of Motion Technologies.

Now when you look at CCT, in terms of the in-sourcing of some of the activities that we have done, as I shared with you and since you're following my Twitter, you will see the picture later on, you will see the plating line in our state-of-the-art facility in Nogales, Mexico that in-sourcing will start in -- I think at the end of the Q4 -- in Q4 and this will start generating savings because it's an activity that we actually do outside.

On the IP front, what I would like to mention is our continuous work to lean our factories but also the project margin improvements in IP. If you think about it in Q2, we grew substantially. A lot of this -- some of this growth was on the short cycle but the projects grew 51%. And despite this 51% growth, the margin expansion on IP was 100 basis points. So this shows you that not only the backlog of project is more profitable when it is a backlog, but it's also when we are executing it and this is important.

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Operator [24]

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Your next question comes from the line of Bryan Blair of Oppenheimer.

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Bryan Francis Blair, Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst [25]

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Solid quarter. I was hoping you could offer a little more color on Mexico profitability. Now accretive to second average margins, so operating in the high teens. And specifically, how far ahead of internal expectations you are 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.

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Luca Savi, ITT Inc. - CEO, President & Director [26]

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Sure. So that's true. It's -- obviously there is -- there are 2 stories on the Mexico profitability. One of course is related to volume because some of the platform that we launched and that we are launching are good platforms. And as the volume grows faster, we are able to get benefit out of this volume. But I want also commend our team in Mexico because this growth, it's probably higher than what we expected and the plant has been able to execute flawlessly and with a very smooth execution. So that's very good. And when I look for instance at the efficiency of the prices and of the equipment in Mexico, it's higher than 82%, which for the first year that you are executing is pretty good. So I would say it's faster than what we were expecting, and execution that is almost flawless. That is what I would tell.

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Bryan Francis Blair, Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst [27]

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Got it. Appreciate the color. And then circling back to the level of expected market outperformance from friction, you said high end of the prior range that you put out. Are there any differences in expected 3Q and 4Q dynamics, given platform timing or any other factors there?

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Luca Savi, ITT Inc. - CEO, President & Director [28]

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I would say that there are -- there were things happening in 2018 and there are things that happened in 2019 that make the market a little bit more volatile. So if you think about it, you had Q3 and Q4 2018 that were impacted by the WLTP in Europe. And that generated some disturbance. And that moved out at the beginning -- in the first 2 quarters of this year. And now when you look at 2019, you add the China 6 that started in July 2019. That's probably something that will keep on dragging in terms of impact to the market in the next quarter or so. And also 2018 Q3 is when the problem really started facing in China. So I would say some of this, the WLTP has no impact anymore. But the China 6, 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 a month where we have seen more stability and less volatility in our order book. Having said that, I will also add that we are monitoring our order book on a daily basis so that we stay ahead of the game and we're ensuring that for the next 8 weeks -- for the 8 weeks forward, we are matching demand with supply.

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [29]

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And Bryan, if we kind of look at -- like 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 probably not going to maintain that level of outperformance in North America because we're starting to compare against prior year production. But the outperformance in Europe is improving and in China it's improving and in North America is going to moderate down from an exceptional first half of the year to something that is still very, very, very strong.

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Bryan Francis Blair, Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst [30]

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Got it. Makes sense. Then on CCT, obviously strongly benefiting from the war chest of self-help opportunities that you guys have. You are in the high teens with 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?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [31]

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It's a great observation, Bryan. For sure, we had a very strong quarter at CCT. Funded investments, there were some FX pressures as well. So the 17.7% operationally was very, very strong. The momentum is good. Obviously, a lot of it coming from our connector facilities. Product line moves have been very successful in getting production to our best locations inside of our CCT footprint. Greater leverage of CCT Nogales, 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 quarter that demonstrates where CCT can go but we're still in the transitioning phase in these product line moves and the in-sourcing. So we'll continue to make momentum on a year-over-year basis. This is likely the highest margin we post this year in CCT, although the team is, I'm sure, up for the challenge. But I think the underlying strength of what we're doing at CCT is going to continue to put some stress on defining that plus in the margin entitlement sooner rather than later.

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Luca Savi, ITT Inc. - CEO, President & Director [32]

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And if I can build on this one, some of the things that we share with you in terms of the (inaudible) layout of the Orchard Park facility that we [led] and the different material flow, these will deliver improvements on the CCT front in transforming our Valencia, California to the aerospace and defense center of excellence for R&D and also for manufacturing. That is another opportunity we have in our war chest. And then it's also the acquisitions. Because usually when you look at our acquisitions, Bryan, usually we tend to take acquisition as our strategic fit, long-term play and usually they are operational plays that might be dilutive to our margin but they represent strong improvement potential.

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Operator [33]

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Your next question comes from the line of Nathan Jones of Stifel.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [34]

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I'd like to start with a question on the MT margins. I understand you guys have contracts that don't allow higher costs to be passed through to the customer or lower costs to be passed through to the customer. And you've been dealing with a pretty significant inflation on the input-cost side and you did call that out as a headwind this quarter. I'm starting to think steel costs come down over the last few quarters, so I would think that at some point here, 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 you're processing currently? How long that should take to flow through inventory and into the P&L?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [35]

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Yes, Nathan. I think the point's 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 now the new spot rates that we're buying at are the price forward. So we should get some lift there. Some of that lift we had anticipated brewing, so I wouldn't say it's kind of an incremental new data point to our guide because we saw that brewing, I would say in Q1.

Part of the offset that we talked about as well in Q1 that is continuing to play out is the incremental tariffs that we've faced as the year has gone on primarily at Wolverine. So those are the couple of dynamics that we're dealing with on the input front, if you will. But certainly, a better environment from a raw material perspective and it generally plays through pretty quickly from inventory into our results, given how fast we turn inventory in the MT business.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [36]

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Would you expect price cost to be a tailwind or a headwind in the second half for MT?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [37]

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I would say muted. We did have some good success, Nathan, on the rail side from a price perspective. I think what we're seeing in Motion Technologies is pretty flattish environment. I think we did a good job in the first half of the year. I think the second half, we're going to continue to maintain some of that momentum, but I don't think there is a major shift that we are getting.

The MT price impacts to be minimal and 23 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 action, they're having an impact, particularly in rail.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [38]

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Okay, that's helpful.

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Luca Savi, ITT Inc. - CEO, President & Director [39]

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And one thing we're thinking about, the demand is in MT. You've also to think about the phasing of the aftermarket, Nathan, because when you look at our independent aftermarket, it has been growing substantially year-to-date, but this is mainly a question of timing. So we would see less aftermarket in Q3 compared to Q3 last year. And this is a little bit of a reversal of what we are seeing in Q1 and Q2.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [40]

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Okay, that's helpful. And then maybe a question on rail. Certainly KONI has been getting a lot of share. Both KONI and Axtone have seen very significant improvement in margin. Maybe you could describe a little bit about what's going on over the last couple of years to see the significant improvement that you've generated in those 2 businesses. I think you said KONI's margins are now in the double-digit, high double-digits; Axtone, high single-digits. Maybe where you think they could go over the next couple of years?

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Luca Savi, ITT Inc. - CEO, President & Director [41]

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Sure. So -- and you're absolutely right, Nathan, when you're saying what is happening the last couple of years because you don't turn it around in a quarter. And the thing they did is a good job that David and the team in KONI and Axtone are doing. So when you look at KONI is the client around the world: In China, in Wuxi; in Dalen, The Netherlands; also in the Czech Republic; they are all performing very well in terms of the lean efficiencies and labor productivity.

Our performance in terms of quality has been outstanding. We have reduced our PPM by more than 70% in the last couple of years. And our OTB is very good. Now when you look at the rail industry, the supply chain is made of -- they tend to be made by smaller companies, small entrepreneurial companies. And therefore, a professional company like KONI, performing very well from a quality and OTB perspective, gets rewarded by our company because we really appreciate this performance.

And this is why our rail revenue went up tremendously and why we keep on winning orders across the world in China, Europe, North America and across all the different type of train, metro, locomotive, coach and high-speed trains.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [42]

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Okay. One more just on the corporate expense. You called out that being down quite a lot this quarter. I did not know [Jessica] made that much money. But then you talked about it being up in the third quarter. Can you maybe give us some guidance on where you think corporate should come in for the year and how you will approach, maybe maintain that kind of level as we go forward?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [43]

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Yes. Nathan, we had a pretty strong result in Q1 as well. So the year-to-date improvements in corporate have been pretty sustainable. Some are some prior-year items that didn't repeat with some transition, but the underlying functional cost actions that were driving this inefficiency at corporate, that we're driving in our businesses, eliminating waste and really focusing on driving incremental efficiencies.

So there has been a good structural improvement. There is always some uncertainty on some of the things that just -- that happened in corporate that are a little bit unpredictable. So we're always kind of factoring that into the quarter forward as we're thinking about our guide. But at the kind of the level that we're at for Q2, I think plus or minus is a good starting point. Obviously, interest and other variables are beyond our control, but we did have a good outcome in interest investment returns and 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 $1 million here and there. $1 million or $2 million based on environment, legal or other dynamics that are generally hard to forecast.

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Operator [44]

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Your next question comes from the line of Joe Giordano of Cowen.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [45]

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So 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 I think put up a small positive number in the Industrial for CCT.

Can you maybe flesh that out a little bit? I know you have some transportation in there. You have some medical. So can you kind of talk to the submarket there and what are you kind of seeing incrementally?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [46]

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So Jeff, from a revenue perspective, the industrial connectors, if you just take straight industrial excluding our specialty connectors with medical and electric vehicles, our industrial connectors were up low single digits in the quarter, and that primarily came out of Asia and Europe. So North America is certainly weak from an order perspective and a revenue perspective. That's some of the destocking that we were seeing in the distribution channel.

But globally, orders were slightly positive on the industrial front as well, again driven by Europe and Asia. So those are the dynamics at play. I think our execution and how that team has been performing has helped us outperform some of the broader markets. But clearly an area that we're watching, particularly in the distribution cycle on connectors. There is continued destocking [will actually --] dynamics. So we need to continue to compete and execute at a high level, but that's where we ended up for the quarter.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [47]

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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 what we're seeing here or are starting to tail off a little, like how are you guys internally thinking about 2020 just given the current outlook? Like the ability to continue to grow. How dependent is 2020 on order rates in the first half of that year? And how should we start to early kind of conceptualize that?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [48]

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Well, Joe, I think the way that we're thinking about it at this point, not only at IP but probably across the business, is what can we control getting us set up for 2020? So the markets are volatile. There's -- there are other conditions that are continuing to drive uncertainty in the macro economy as in -- and there are 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's 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 -- but I do think we need to be prepared for a tough environment across the board. I think that's pretty consistent in the environment that we're all operating in today. But I would say what's unique about us is how many opportunities we already have identified, new ones that we're adding as the year goes on. There's plenty of time to continue to replenish the project backlog as we go into 2020. So it's a little early to start to extrapolate too much there.

But our short-cycle business, as Luca indicated, the orders -- 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 that's our way forward.

We did a lot of modeling with the teams, particularly (inaudible) 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 recession considerations. And we all know what direction we want to go and what needs to get done.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [49]

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And Luca, I just want to sneak one in. You were talking about like the ramp-up of platform deliveries in Europe for MT. I feel like that's an area of where there is a lot of debate still among people where some were using much more bearish production numbers for 2020. I know you guys have some visibility to the very near-term on when specific platforms are going to ramp.

But given like -- how are you guys internally modeling out the forward projection for European production? I just feel like that's -- there is a lot of variance and that (inaudible) I'm hearing from different people.

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Luca Savi, ITT Inc. - CEO, President & Director [50]

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Sure. Now when we look at -- so first of all, when we are looking at the market, like I shared before, our view today is probably to be worse than what it was a quarter ago. That is probably most true and more substantial in China versus the European, the North American market. Having said that, Joe, there's always the question of outperformance. So we want like a share, we want platforms, platforms that are ramping up in Europe.

And therefore, we are expecting to keep this outperformance for the next 3 quarters. On top of that, I would say that we are also winning more awards now than before, which means that this will feed our growth for the future. But bear in mind that the award that we're winning now probably would feed 2021, as are the award that we won last year that will feed 2020. So the outperformance story I expect to continue, and it's not just for the next couple of quarters.

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Operator [51]

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Your next question comes from the line of Brett Linzey of Vertical Research.

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Brett Logan Linzey, Vertical Research Partners, LLC - VP [52]

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I want to come back to China friction. You've 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 OEs. But have you seen that dynamic accelerate here? Was it a growing preference for China suppliers given some of the trade tension? Any change there in behavior?

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Luca Savi, ITT Inc. - CEO, President & Director [53]

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No. I wouldn't say major changes there, right? When we look at China, I would say that from an OEM perspective, we have both the -- if I look at the top 10 foreign brand production, they tend to be from a -- on a year-to-date, all pretty much down with few exception. You're talking about the one that are growing production year-to-date are the BMW and Daimler as well as the capital of Japanese, the Toyota and Honda.

Everybody else is in big decline. Now when you look at the Chinese, with the exception of Great Wall and [Cherry], which have got the new play production increasing, all the others are declining. And that I would say the declines are across the board, no major shift between foreign and Chinese. On our side, what I can tell you we do is really to ensure that we are winning on the electric vehicle platform in China. Because you know that probably China, from an electric vehicle point of view, is the biggest market worldwide. So there are some of the wins, the platform wins that we shared with you during the prepared remarks are actually with a Chinese OEM. As well as with the European and North America, but it was important to win with some Chinese OEMs.

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Brett Logan Linzey, Vertical Research Partners, LLC - VP [54]

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Okay. Great. I guess my follow-up will be specific to EV. You noted some of the wins in the prepared remarks. And I guess if you just isolate EV opportunities and how large that award funnel is today, from a dollar revenue perspective, are you starting to get some critical mass there? And can you maybe size it?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [55]

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We don't have 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 EV building the core capabilities. And I would say our win rates is accelerating. And right now, it's certainly ahead of our win rate in other categories. So we want to continue to be a major player in EV, and progress so far year-to-date is a concern that things are going in the right direction for us. But unfortunately, we haven't had a lot of numbers yet, other than 9 wins at a much higher rate than we typically see in other competition.

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Operator [56]

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Your next question comes from the line of John Inch of Gordon Haskett.

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Ivana Delevska, Gordon Haskett Research Advisors - Research Associate of Industrials [57]

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This is Ivana on for John. Just wanted to ask about -- on the IP side, how project mix affected IP margins. And how should we think about margins for the rest of the year when this potentially reverses?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [58]

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Sure, Ivana. So the project mix, it certainly has an impact. But as we discussed the margin profile, those projects have improved 100, 200 basis points compared to what we've seen in the past. So while it's still dilutive, it's not quite as dilutive as it has been in the past and that's why you're seeing this continued lift in the IP project margin.

In the quarter, I would say that we typically could see anywhere from -- up to 100 basis points of mixed pressure when you do the algebra there. But projects being around 25% of our business, and 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 that are getting into the high single digits and that's a reflection of the project management that we put in a good execution.

So those are some dynamics. The (inaudible) profile for the balance of NT -- for IP, excuse me, will be driven largely by the mix. And -- but the levels that we're at now are pretty good indicators of how we see the balance of the year going.

Oh, and then last point I would say, and this also applies to CCT. IP and CCT second half margins will be impacted by the acquisition impact. There's dilution 30, 40 basis points, 50 basis points, in that range per quarter based on what we would've done from an organic perspective. So I just want to remind everyone to factor in the acquisition impact in the back half of the year for CCT and IP margins.

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Operator [59]

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Your next question comes from the line of Andrew Obin of Bank of America Merrill Lynch.

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David Emerson Ridley-Lane, BofA Merrill Lynch, Research Division - VP [60]

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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 $0.05 increase in your guidance?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [61]

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Dave, I would say that the productivity gains pretty -- we're working on actions across the board. I mean I think that's what's unique about this war chest. It is not concentrated to a few things in a few places. There are a lot of actions going on across ITT and the major ones that are gaining momentum are the product line moves at CCT.

I think the project execution continuing to gain momentum at IP and MT Mexico and KONI rail at MT. Those are continuing opportunities to drive margin expansion. I think as I mentioned just a minute ago, you'll see some dilution at CCT and IP from acquisitions. But the underlying momentum, the incremental productivity I would say is the actions that we've already started, accelerating those and driving additional benefits.

And then we have been bringing some ideas effectively from the 2020 plan, if you will. We are bringing some actions into 2019 second half to give us some additional productivities as we end the year, but to really get us setup for 2020.

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David Emerson Ridley-Lane, BofA Merrill Lynch, Research Division - VP [62]

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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 into July on a ITT-wide basis?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [63]

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Sure, yes. David, so I think it's a different dynamic between the pump sales and connectors parts of the business. They are slightly different drivers. I would say on the connector side, which is one of the larger; and the component side, which plays to the industrial place, 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 destocking, and we would expect that. That has played out pretty much throughout the quarter. And into July, we would expect that gets played through. I think Luca mentioned on the pumps side, the short-cycle pumps have been progressively getting more stable and a little better as the quarter went on.

And the indicators in July, 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 different category, but the indicators through July, as Luca mentioned on the automotive side, have been solid relative to our expectations, particularly in China where we're 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.

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Operator [64]

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Thank you. I will now return the call to management for any additional or closing remarks.

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Luca Savi, ITT Inc. - CEO, President & Director [65]

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No. We -- thank you, Lori. We have no additional remarks, and thanks, everybody, for connecting.

Have a good day.

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Operator [66]

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Thank you. This does conclude today's teleconference.

Please disconnect your lines at this time, and have a wonderful day.