U.S. Markets closed

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

Q3 2019 ITT Inc Earnings Call

WHITE PLAINS Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of ITT Inc earnings conference call or presentation Friday, November 1, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Emmanuel Caprais

ITT Inc. - VP of Finance, FP&A & IR

* Luca Savi

ITT Inc. - CEO, President & Director

* Thomas M. Scalera

ITT Inc. - Executive VP & CFO

================================================================================

Conference Call Participants

================================================================================

* Andrew Burris Obin

BofA Merrill Lynch, Research Division - MD

* Brett Logan Linzey

Vertical Research Partners, LLC - VP

* Jeffrey David Hammond

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

* John George Inch

Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials

* Joseph Alfred Ritchie

Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst

* Joseph Craig Giordano

Cowen and Company, LLC, Research Division - MD & 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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to ITT's 2019 Third Quarter Conference Call. Today is Friday, November 1, 2019. Today's call is being recorded and will be available for a replay beginning at 12:00 p.m. Eastern Time. (Operator Instructions)

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

--------------------------------------------------------------------------------

Emmanuel Caprais, ITT Inc. - VP of Finance, FP&A & IR [2]

--------------------------------------------------------------------------------

Good morning, and thank you, Laurie. Welcome to ITT's Third 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 today's presentation, press release and reconciliation of non-GAAP financial measures to the most comparable GAAP measure can be found on our website at itt.com/investors. Our adjusted non-GAAP results exclude certain nonoperating and nonrecurring items, including, but not limited to, asbestos, restructuring, acquisition-related items and certain tax items. All adjustments in the quarter are detailed in the reconciliations.

Before we begin, I'd like to provide a brief overview of our Q3 GAAP results. Q3 total revenue increased plus-5% to $712 million. Segment operating income increased 10% to $118 million, and GAAP EPS of $1.34 per share was 7% higher than the prior year. Please note that our remaining discussion this morning will exclusively focus on 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 risk and uncertainties that affect our business, including those disclosed in our SEC filing.

With that, let me now turn the call over to Luca.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Emmanuel, and hello, everyone.

Thank you for joining us on the morning after Halloween. Today, it is a real treat to discuss another quarter of record results that ITT has all around the world delivered. This is the ninth straight quarter that we delivered year-over-year organic revenue growth, segment operating income growth, margin expansion and EPS growth.

Let's get right into it. At Motion Technologies, friction OEM outgrew the global auto market by more than 1,200 basis points. Our rail business grew revenue 22%. Axtone, our recent rail acquisition, expanded margin 650 basis points, and Friction Mexico continued to deliver new performance records.

At Industrial Process, George Hanna and the team delivered 10% organic revenue growth and 130 basis points of margin improvement that keeps us nicely on track to our long-term margin goal of 15%-plus. CCT delivered 160 basis points of margin expansion to an exceptional 17.6%. And ITT headquarters reduced costs by 21%. Included in all these results was more than $5 million of incremental strategic investments that will continue to drive future growth across all of our businesses.

Now let's go to our Q3 strategic highlights on Slide 3, and let's look at the momentum that we are generating. We grew organic revenue 4%, exceeding $700 million in the quarter. We grew segment operating income margin 90 basis points to a record 16.6%. We grew operating income margin 130 basis points to a record 15.2%. We grew EPS 18% to a record $0.97 per share. And we are raising the midpoint of our full year 2019 EPS guidance for the third time this year to $3.74 per share, representing 16% growth.

As you can see, ITT has worked hard to execute our strategic priorities and build a resilient company that is well equipped to deliver strong returns in a sustainable way, and the momentum is accelerating. This is all the more important as market conditions will most certainly continue to be volatile.

Now I would like to share some example of how we are working hard to generate momentum in each of our strategic priorities of operational excellence, customer centricity and effective capital deployment.

Beginning with operational excellence. In the quarter, we delivered 14% operating income growth, with 90 basis points of margin expansion and solid contributions from all 3 segments. IP delivered a 12.9% operating margin which represents a 130 basis point expansion. This is truly exceptional considering the 38% increase in project revenue growth and the 30 basis points of dilution from the Rheinhütte Pumpen acquisition.

In early October, we were in Seneca Falls for our strategic plan meeting with the ITT Board of Directors, and the improvements in the plant were evident. In addition to improving 5S and streamlining the plant layout, the Seneca Falls team has successfully attacked several production bottlenecks. As a result, the performance of our ANSI baseline pump production line has dramatically improved. We reduced our work-in-progress inventory by 50%. Our average lead time is down 10%, and we crossed the 90% mark for on-time performance. And the beauty is that there are many more opportunities available for the taking in Seneca Falls and at our other IP facilities.

Before we move on, I would like to thank Chris and the Seneca Falls team for their hard work. Thank you, Chris and team.

Now moving on to CCT. We expanded margin by 160 basis points, thanks to a strong connector performance, especially at our Nogales, Mexico facility. Let me share with you some of the Nogales team's achievements that I witnessed firsthand when I visited last week. As you know, in Q1, we announced an investment in a new connector plating line in Nogales. In addition to reducing production costs and providing a strong return on investment, we expect the in-sourcing of this critical process to reduce lead time to our customers by up to 25%. Plating most of our components in-house will simplify our supply chain by eliminating cross-border material flows and will increase our competitiveness. And let me add, the success of Nogales is not limited to the new plating line. This quarter, the plant has improved profitability by 320 basis points compared to the prior year. The number of safety incidents has dropped by more than 60% year-to-date. Machining efficiency is now at 85% and on-time performance has progressed by 700 basis points since the end of 2018. Nogales is our most profitable connector site, and we will continue to leverage the plant with several product line transfers.

Finally, MT continues to demonstrate its outstanding operational execution as the team delivered 50 basis points of margin improvement on significant operational contributions from KONI, Axtone and Friction Mexico under adverse market conditions. That is resilience. As you can see from the comprehensive margin expansion, we are continuing to execute on our extensive war chest of self-help opportunities, and we will identify additional actions as we transition in 2020.

At ITT, all of us are focused on driving operational excellence in everything we do and at every one of our facilities. When the leadership team and I travel to our sites, I'm encouraged by the progress made so far. But when I see the many opportunities we still have ahead of us to drive productivity, to eradicate waste and to capture supply chain benefits, [I smile] and then we work hard to up our game.

Now moving onto customer centricity. We delivered solid 4% organic revenue growth this quarter. MT, once again, in a very volatile market condition, in Q3, we outperformed global markets and gained share. Friction OEM sales outperformed global auto markets by more than 1,200 basis points. And we outgrew all 3 main markets, Europe, North America and China by at least 600 basis points. Out of all the auto platforms awards we won this quarter, 11 were for electric vehicles, including 1 for a premium German OEM, which we expect will help establish technological benchmark in terms of performance for the future. This underscores the continued technical leadership of our friction business, leadership that we never take for granted and that we work hard every day to strengthen.

The KONI Axtone railway platform delivered 22% organic revenue growth and continues to gain share by focusing on quality and performance. An example of that is the capture of a new contract with a new major Italian rail operator this year. Once again, IP delivered double-digit organic revenue growth as we are executing on our strong backlog. Our growth was driven by project deliveries as well as healthy short-cycle pump activity. We continue to improve our project margins as we experience positive results from our renewed project management discipline.

Finally, moving to effective capital deployment. This year, we have generated solid acquisition momentum, and I'm happy to report that our 2019 additions of RPG at IP and Matrix at CCT contributed $23 million in total revenue in the quarter. And in a very short period of time, these acquisitions were already accretive to Q3 adjusted EPS. We remain laser-focused on growing our M&A pipeline and cultivating additional close-to-core acquisitions across all 3 segments. In addition, today, we're increasing returns to shareholders by announcing $40 million in new share repurchases that will effectively extinguish our previous authorization and that are additive to the $50 million in repurchases we announced in February. And we are announcing a new $500 million indefinite-term share repurchases program.

So in summary, our track record of execution confirms that our intense focus on our top strategic priorities is creating exceptional value in the face of persistent volatility in the various markets and geographies we serve. Today's ITT is diversified, resilient and opportunity-rich. We have a clear strategic vision for long-term value creation and an energized entrepreneurial workforce to deliver it each and every day and remain humble as we have much more work to do.

Let me now turn it over to Tom who will review our results in more detail. Tom?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Luca. Now let's turn to the Q3 results on Slide 4. Organic revenue grew 4%, once again reflecting share gains and market growth across most of our end markets. Industrial grew 10% driven by a 40% increase in chemical. Transportation grew 2% on 22% growth in rail, 9% growth in friction OEM and 7% growth in commercial aerospace. These gains were partially offset by lower Wolverine sales and auto aftermarket timing. Oil and gas declined 5% on lower project shipments to the Middle East.

From a geographic perspective, our Q3 revenue growth was driven by 14% growth in North America and double-digit growth in auto, oil and gas, chemical and mining. Europe grew 2% driven by strong auto OEM and rail activity partially offset by lower auto aftermarket and defense. Asia declined by 6% on lower projects and lower Wolverine aftermarket partially offset by solid friction OEM growth in China and chemical strength.

Organic orders decreased 4% driven by a 9% decline in industrial on short-cycle weakness and a 10% decline in oil and gas on project delays and difficult compares. Transportation orders were flat as 16% rail strength was offset by defense timing. On a sequential basis, ITT organic orders were flat to Q2 due to an 8% increase in IP sequential orders.

Segment operating income increased 10% driven by net operating productivity, restructuring benefits and volume leverage. These gains were partially offset by FX, tariffs, commodity costs and the funding of more than $5 million of incremental strategic investments.

As a result of our value-creating activities, we delivered record EPS of $0.97 per share, which represents an 18% improvement compared to 2018. The double-digit operating income improvement was enhanced by a 21% reduction in corporate costs, higher interest income and a lower tax rate. The 18% third quarter EPS growth represents our ninth consecutive quarter of double-digit EPS growth.

Slide 5 summarizes the various drivers of our adjusted segment margin performance in the quarter. We expanded margins in Q3 by 90 basis points to a record 16.6%. This expansion was primarily driven by 160 basis points of net operating productivity that was powered by shop floor efficiency, project execution and supply chain actions that more than offset cost increases. The ITT margin expansion also benefited from a continued ramp-up at our Friction Mexico plant, operational gains at KONI and Axtone, strong performance from connector operations and effective product line transfers at CCT. Some partial offsets to the operating margin expansion came from strong pump project shipments and weaker Wolverine aftermarket activity.

In addition, our total margin performance was diluted by 80 basis points of strategic investments across the 3 value centers, including the ITT Smart Pad, capacity expansion at Friction Mexico, plating in-sourcing at CCT and VAVE activities at IP.

Finally, the RPG and Matrix acquisitions were dilutive to our margins by 30 basis points. And we accelerated restructuring actions this quarter to better position all of our businesses ahead of a more uncertain 2020.

In summary, in the quarter, we continued to methodically execute on our war chest of self-help opportunities, producing a ninth consecutive quarter of year-over-year margin expansion.

Now let's turn to our segment results, starting with Motion Technologies on Slide 6. Despite challenging auto market conditions, MT organic revenue increased 2%, powered by 9% OEM friction growth driven by global share gains. This growth is a testament to the resilience of MT's operating model and the value we work hard every day to deliver to our customers.

In the quarter, friction grew 2% driven by 9% OEM growth that was partially offset by aftermarket softness. The 9% friction OEM growth outperformed global auto markets by more than 1,200 basis points. This outperformance included: 34% growth in North America; 7% growth in Europe; and a resumption of growth in China of 3%. In addition, KONI and Axtone grew 11% on global share gains in rail, partially offset by a 9% decline at Wolverine and weak aftermarket demand and impacts from customer share loss.

MT's segment operating income increased 1% to $57 million. Excluding $2 million of unfavorable foreign exchange, MT operating income would have grown 5%. Performance at MT was driven by operating efficiencies and productivity as well as restructuring actions that more than offset higher commodity costs and tariffs and funded $3 million of strategic investments. MT margins expanded 50 basis points in the quarter to 18.8%, thanks, in part, to the 650 basis point expansion at Axtone and continued operational improvements at KONI and MT Friction Mexico. This was partially offset by 80 basis points of incremental strategic investments.

Let's now turn to Industrial Process on Slide 7. IP delivered organic revenue growth of 10% and the 38% increase in project deliveries, combined with a 2% increase in short-cycle activity. The project strength is driven by chemical and mining deliveries. And from a geographic perspective, project revenue grew 150% or more in North America, South America and Europe. The 2% increase in short-cycle activity was driven by plus-10% baseline pumps from downstream oil and gas and chemical demand and plus-5% parts partially offset by service and valves weakness.

IP organic orders decreased 9% due to a 12% decline in projects and a 7% drop in short cycle primarily related to valves and aftermarket. However, on a sequential basis, compared to Q2, IP organic orders increased 8%, reflecting a sequential increase in both projects and short-cycle orders. IP's third quarter segment operating income increased 31% to $31 million, and margins improved 130 basis points to 12.9%. Excluding the impact of the RPG acquisition, IP margins actually grew 160 basis points. The operating income growth was driven by project and short-cycle volume and improved execution, while price continued to offset tariff impacts. The project delivery strength in the quarter had an unfavorable impact on margins, but our focus on project execution and project management discipline is driving project margin expansion and enhanced order intake selectivity.

Lastly, at the end of Q3, we accelerated restructuring actions to drive additional cost efficiency and a leaner organization that will produce incremental benefits in Q4 and into 2020.

CCT's revenue and adjusted income results are detailed on Slide 8. CCT organic revenue declined 1% on flat connector sales and 2% declines in components. From an end market perspective, commercial aerospace grew 7% on OEM and aftermarket demand intensity. Defense declined 5% on difficult component compared to the prior year programs that more than offset 7% growth in connectors. Industrial declined 4% on component weakness due to distributor destocking, partially offset by connector strength in Europe. And lastly, oil and gas connectors declined 9%. CCT's Q3 organic orders declined 7% despite a 3% increase in commercial aerospace and a 10% increase in oil and gas connectors. These gains were more than offset by difficult defense program compares, order timing and industrial weakness. Despite these pressures, the organic year-to-date book-to-bill ratio is 1.03 driving an 8% increase in organic backlog compared to the prior year.

The CCT team delivered 11% segment operating income growth to $30 million on benefits from productivity, including supply chain and the benefits from completed product line transfers, partially offset by increased material costs and investments. Segment operating margin expanded 160 basis points to 17.6%. Once again, connectors Nogalas delivered strong margin expansion of 320 basis points, and we expect this momentum to continue as our new plating line in Nogales has already started production at the end of October, and we will be executing more product line transfers in the future.

Now I'd like to provide the results of our annual asbestos remeasurement on Slide 9. It is important to note that the benefits of the 2019 remeasurement are excluded from our adjusted Q3 results and our 2019 adjusted EPS guidance. As a result of our comprehensive and effective management, the net asbestos liability declined $52 million or 11% since the beginning of 2019. This reduction reflects insurance recoveries and other strategies that have improved the value of our insurance assets. And since 2012, we have reduced our gross liability by 50%, our net liability by 41% and our outstanding claims by 77%.

Lastly, it is important to note that there's no change to the 10-year cash flow projections that we provided last year. Our projected average annual net after-tax defense and indemnity outflows remain $20 million to $30 million for the next 5 years and $35 million to $45 million for years 6 through 10.

So now let's wrap up with our adjusted 2019 guidance on Slide 10. We are increasing our EPS midpoint by $0.11 to $3.74. As a result, we now expect to grow 2019 EPS 16% at the midpoint. The 11% -- $0.11 midpoint increase was powered by our strong Q3 performance and incremental Q4 productivity, cost actions and tax benefits. Our total inorganic revenue guides remain unchanged at plus-3% to plus-5%. And lastly, in Q4, we are projecting mid-single-digit total revenue growth and low single-digit organic revenue growth, and segment operating margin is expected to be slightly lower than Q3, reflecting typical seasonality at MT.

So with that, let me now kick it back to Luca for a wrap-up.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So in conclusion, I am very proud of ITT's third quarter results as they reflect our drive to execute on our 3 strategic priorities. Today's ITT, as I said, is diversified, resilient and opportunity-rich, and we stay humble and continue to diligently execute on our war chest of self-help opportunities. We are cognizant of the challenging environment ahead, and we work hard each and every day to continue to outperform our end markets, expand our margins and deploy capital effectively.

With that, let me now turn it back to Laurie to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Jeff Hammond of KeyBanc Capital Markets.

--------------------------------------------------------------------------------

Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [2]

--------------------------------------------------------------------------------

Great performance on friction. Just want to get a better sense of how you get the margins up in a week after market environment? Talk about the timing issue that you had in independent aftermarket, and just what you're seeing in terms of stabilization in China for Motion.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. So let me try to answer these 3 points. When we look at the opportunities that we do have on the MT side, we have opportunities coming from some restructuring on the Axtone side of the business. Obviously, we had some positive coming from the volume, and then, of course, is -- the other is the productivity on the operations on the shop floor as well as the supply chain. All of these have been able to compensate the headwind that we had in terms of price, in terms of FX, of funding roughly, if I'm not mistaken, 80 basis points of investment, and still be able to deliver the 50 basis points improvement. Mexico, of course, in the ramping up of Mexico is another tailwind that we have today. That's for the profitability. When you look at the outperformance, this business is really resilient. And the resilience comes, as you can see, not just from the execution and the productivity and OI operating margin resilience, but also on the top line because when you have a market -- a business that has been able to outperform in Q1 and Q2 and Q3, in Q3 it was 100 basis points and across all region, Europe, China and North America, and not only outperforming but also growing, this is, as I said, is what I call resilience. Now this is the benefit of the platforms that we won in the last 2, 3 years, Jeff, and that have started their SOP and they're ramping off -- ramping up. Like we've said in the last few quarters, some of these SOPs shifted to the right, but now they've started, both in Europe and in China as well as in North America, and we are getting the benefit of those.

Then your last point was China market. Well, the China market, I would say, has stabilized a little bit because if you think about in Q1 and in Q2, they were down roughly 11% and 18%. I'm talking about production here was -- in Q3, production was down roughly 5%. We are getting the benefits here in China of the start-up production. We were growing 3% in the quarter and this is roughly 800 basis points better than the market. And we see this outperformance to continue in Q4 for the full year as well in the -- in 2020.

--------------------------------------------------------------------------------

Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [4]

--------------------------------------------------------------------------------

Okay. And then just a follow-up. Certainly, good to see some proactive restructuring actions, as you see a less certain market. One, can you just talk about the -- what you think you can get in terms of incremental savings from those restructurings in 2020? And then, just any early observations or how you're thinking about growth in 2020, either overall or in the 3 businesses.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. So let me give you the view in terms of where do we see the growth in the different markets. Let me start with that. So when you look at '20 -- let me give you the sense of 2019, moving into 2020. So when we look at rail, the rail is a good market, and we see this market good in 2019, and it's going to be good for us in 2020 as well. Probably not as a high growth as we had in 2019 but still good for ITT in 2020. When we look at the Aero and Defense, it has been a good market in 2019. We will see good and similar story to rail, still good in 2020, probably not as good as it was in 2019. And with a question on defense, defense could be a positive surprise in 2020, but we will see. When we look at the IP market in terms of the oil and gas, the oil and gas started low in 2019. For us, we're still stabilizing. We see actually the funnel going up. And we see in 2020, for us, a stable market possibly up in the second half of 2020. Chemical has been good for us in 2019, and we see that growth coming down in 2020.

And finally, auto. Auto -- well, the market has been pretty ugly for the last 4 quarters. We have been able to outperform and to post the growth, but we see 2020 as a market that is stabilizing, and we continue to outperform the market as well in 2020. So I think that when it comes to our profitability and our margins, I think that we are well on track to achieve our long-term target in terms of margin.

--------------------------------------------------------------------------------

Thomas M. Scalera, ITT Inc. - Executive VP & CFO [6]

--------------------------------------------------------------------------------

And then, Jeff, just to finish off on your restructuring question. We did -- we've done about $10 million of actions in the last 2 quarters, accelerating the paces, as you indicated. Still looking at some other activities, perhaps, in Q4 to maintain the momentum, probably looking anywhere from $10 million to $15 million of incremental savings rolling into 2020 in addition to all the other productivity actions and the other operating momentum that we already have exiting Q3 and into Q4.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [8]

--------------------------------------------------------------------------------

I would like to start with the 160 basis points of net operating productivity. Luca, can you give us some more detail on kind of the major buckets that that's coming from? How we should expect that number to progress going forward? Are you picking the low-hanging fruit, so to speak, early in the pace here? Maybe what kind of net operating productivity number you'd be looking at for 2020 and how you would achieve that?

--------------------------------------------------------------------------------

Luca Savi, ITT Inc. - CEO, President & Director [9]

--------------------------------------------------------------------------------

Okay. You're talking about the improvement in terms of productivity across the board for ITT? Or you were specific on 1 value center, Nathan?

--------------------------------------------------------------------------------

Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [10]

--------------------------------------------------------------------------------

Across the board.

--------------------------------------------------------------------------------

Luca Savi, ITT Inc. - CEO, President & Director [11]

--------------------------------------------------------------------------------

Across the board. So when we look across the board, I think that what we have is -- you can see across the board some benefits coming from the restructuring side. As Tom was talking about IP, we have been able to work in a proactive way also in CCT as well as MT particularly on the Axtone acquisition. So you see benefits coming from the restructuring side. You will see benefits coming also from the volume probably in 2020 when you're talking about the automotive and rail and also when you talk about the CCT business. And then, of course, the supply chain is across the board. Supply chain benefits across the board, that will be another very good bucket for ITT.

Then is operations. When you talk about operations, you may have -- you may look at it differently for the different businesses. But for instance, if you talk about IP, think about the machine efficiency, the labor productivity, the VAVE, the value analysis, value engineering of some products. We actually are coming out with a new product today that will start being sold today of a new BB2 pump that has got less metal, better efficiency, et cetera, as well as footprint rationalization in IP. When it comes to CCT, is really in terms of benefits from the in-sourcing that we talked about in the prepared remarks of the plating line that started running in Q4 and the continuous transfer of lines to Nogales that now is the best operating plant for connectors as well as improvement in other sites like Orchard Park in Valencia.

Last but not least, on the MT front, our tailwind in terms of their productivity, are coming from the continuous improvement in our acquisition, Axtone, as well as Mexico that will keep on growing the platform that they've already started, and there are the new contracts that will start ramping up. And then, of course, China. As I was telling before, the China market has stabilized. We are growing, and therefore, we'll get also the benefits of that as well as the typical MT approach and DNA of waste eradication.

--------------------------------------------------------------------------------

Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [12]

--------------------------------------------------------------------------------

So there's a lot in there. Obviously, doing a lot to generate that, kind of, 160 basis point level. There are some things in there that are discrete, kind of, restructuring savings, and there's some things in there like VAVE and machine efficiency improvements, other operational improvements that you should be able to continue to generate further savings from for probably years going forward. Can you talk a little bit about what are the areas of focus for you over the long term, just in terms of driving productivity into the organization over and above what's been done over the last few years?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, Nathan. So I'll kick it off here. There really weren't any kind of onetime benefits in the margin story for Q3. And I think the positive there is the momentum that we have continues as we exit this year and into 2020. As I mentioned before, we would expect some restructuring rollover savings into next year from the actions that we've taken and the ones that we have lined up in the short term. So that will give us good momentum. But I think all of the items that Luca outlined, they have this continuity that there are more line transfers to be done. We, kind of, think of some of these in phases. So we've effectively done the first phase of line transfers across the CCT organization, and we have more now that we can do in the next phase. We're able to really balance our footprint most effectively, and we'll continue to certainly do those things into next year. The operational execution around projects is critical, certainly, and a driver of margins this year, but will continue to improve into next year. So I think there's good sustainability in the margin trajectory that we're producing and this war chest of opportunities, that's given us this 160 basis points in the quarter, continues to provide benefits next year. And like you said, we're getting into new categories like VAVE, where we haven't talked much about those. But these are opportunities that are in motion for us, new products that we're launching that are obviously well-designed to drive better performance and better margin enhancement. So operating on a number of fronts, additional phases of what we've been doing and some new things that are in the works that will give us some additional momentum into next year.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And if I can build on what...

--------------------------------------------------------------------------------

Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [15]

--------------------------------------------------------------------------------

The things that...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Go ahead, Nathan.

--------------------------------------------------------------------------------

Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [17]

--------------------------------------------------------------------------------

I was going to say, those are the kinds of things that I'm looking at. The things the -- more line transfers to CCT, VAVE and how you go through the product portfolio and how long a runway you have for those kinds of operational improvements to drive value over multiple number of years here.

--------------------------------------------------------------------------------

Luca Savi, ITT Inc. - CEO, President & Director [18]

--------------------------------------------------------------------------------

So Nathan, if I can address that with a couple of points. First of all is, we have plenty of opportunities. And as I said in the remarks, we see those every time we go out and we spend time in the business with our customers as well as with our people in the operations. And this is exactly why we have worked on this change in terms of always spending time at the sites, on the shop floor, in the reviews that are not happening in the headquarters. They are happening on-site every single month. Now these, of course, will keep on feeding with ideas, with actions. And it's really -- and how you sustain that is in really instilling this granular culture and this operational culture in the organization. And this is what will make this continuous improvement sustainable in the long term.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Brett Logan Linzey, Vertical Research Partners, LLC - VP [20]

--------------------------------------------------------------------------------

I appreciate all the good color in the markets into 2020, but specific to auto, really strong outgrowth this year. I think you're running about 10%-or-so above production. Is that 500 to 700 basis point outgrowth range still the right number for next year? I'm just trying to think about how that big backlog in friction has -- kind of paces out into 2020.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. So we gave that range at the beginning of this year for 2019, and it's likely that we will beat that range. We will be more in the 900, 1,000 basis point, that would be the range for the full year of 2019. Now when we look at 2020, the color of the market, we think, is more stable, but for -- we will continue to outperform. At this point in time, we're still in the operating planning phase. What I can tell you is that there will be a healthy level of outperformance, but we are still analyzing our budget for 2020. But it's going to be a healthy level.

--------------------------------------------------------------------------------

Brett Logan Linzey, Vertical Research Partners, LLC - VP [22]

--------------------------------------------------------------------------------

Okay. Great. And then, positive to see sequentially orders in industrial process were actually up pretty strongly. I guess, based on what you're seeing in October and then thinking about those sequential trends, how has that informed your order profile year-over-year in Q4? You still have a tough comp, but do you think you can expect a similar level of decline as you saw in Q3 or maybe something better?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So let me give you the straight answer and a little bit of color behind it. When we look at Q4 orders for IP, we probably see slightly down year-over-year, so probably a little bit better when you're comparing Q3 year-over-year. Now when we look at the Q3 and Q2 for IP, we knew coming into 2019 that this was going to be a tough compare because last year, they were plus-27% and plus-18% or something like that, so there were tough compares. On top of that, talking to customers, we saw projects shifting to the right. And we are in a, kind of, a slowdown on the short cycle. But on encouraging note, what we see is that customers, when I talk to customers, they're still optimistic on the investment is still a shift. When I look at the baseline pump, they are still growing year-over-year, roughly 1%. And sequentially, Q3 over Q2 is up 8% and the short cycle sequentially is up 1%. So you see this kind of stabilization. And on top of that, you -- we have the funnel. If you remember, when we had the last earnings call in August regarding Q2, we shared with you that we saw the funnel stabilizing but growing in July. That growth kept on happening in August and in September. So our funnel has not only stabilized but has gone up in the last 3 months, healthy double-digit from what it was in June.

Now having said that, I want just to remind everybody that we're going to stay selective on the orders, and it's important that we bring in profitable growth. Now everybody says that, and they want to show that you understand that this is not a blah, blah, blah, but this is really what we are trying to do is trying to be -- for the project business, to create a resilient OI. What I mean by that is that in a lumpy business like projects, our OI needs to deliver all the time, which means that if we are improving 100 basis points, the orders coming in, in projects is neutralizing a decline of 20% in orders. So you understand now what we're trying to do.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [25]

--------------------------------------------------------------------------------

So working capital was worse this quarter, inventory, receivables, your free cash conversion through the first 9 months is much lower than last year. Is this IP, Tom, project lumpiness? And where do you think working capital heads next quarter? And then how are you thinking about it for next year? Because you guys have done a pretty good job, right, of certainly, improving your free cash conversion. I think that's actually helped your valuation because the old ITT had kind of struggled with this. Where are things now and why is this happening?

--------------------------------------------------------------------------------

Thomas M. Scalera, ITT Inc. - Executive VP & CFO [26]

--------------------------------------------------------------------------------

Yes. Thanks, John. Our 3-year free cash flow conversion average has been 101%. So we've had some momentum as of late, but we want to keep driving that kind of consistent performance. Year-to-date, as you indicated, we're around 78% conversion, which is down from a real strong last year. 2 drivers before we get to working capital: Our cash taxes and our CapEx are both up on a year-over-year basis. And I would generally consider those more to be timing related. So we're still on track for our initial plan for the year to convert at above 95% level for this year. So it should be another overall strong year conversion, but on a year-to-date basis, there has been some timing in those other categories.

As it relates to working capital, generally, it's IP, where we're seeing the most pressure through the cycle with the 44% year-to-date increase in project sales. That's putting a little bit more stress on the working capital, as you can well imagine, from an AR perspective and an inventory perspective. We need to continue to drive hard to reach our target. We're driving to get into the low 20s for the year. And we'll have to really bear down, particularly in the IP project part of the business based on the volume of activity. And then lastly, I would add one thing on the inventory front, which is rather unique in our attempts at Wolverine, at Motion Technologies to avoid some of the tariff issues. We have had to preposition inventory in Europe to mitigate some of the quota system risks that have flow -- that have come through from a tariff perspective. So it's a type of inventory decision that you make because it incrementally creates value in reducing these tariffs, but it's a negative on the working capital at this point that we're trying to work down as the year progresses.

--------------------------------------------------------------------------------

John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [27]

--------------------------------------------------------------------------------

Yes. How material was that inventory prepositioning? And then, Tom, are you saying the -- are you saying free cash goes to 100% for the year, which means you've got to have a very big fourth quarter? And do you think it's 100% in 2020 based on everything you're looking at or is it too soon to tell?

--------------------------------------------------------------------------------

Thomas M. Scalera, ITT Inc. - Executive VP & CFO [28]

--------------------------------------------------------------------------------

So the Wolverine was around $6 million to $7 million of inventory prepositioning that we hope to burn down. Our goal for the year has been to exceed 95% conversion, and that remains our target at this point. Some of the timing on CapEx, we expect CapEx, actually on a year-over-year basis to be down, even though it's up around 10% through Q3 year-to-date. So we'll pick up some timing benefits, and we'll keep driving working capital to the completion and shoot for that above 95% target for this year.

--------------------------------------------------------------------------------

John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [29]

--------------------------------------------------------------------------------

And then just maybe as more of a question for Luca. Asbestos continues to improve, your balance sheet debatably is undercapitalized, it's got a lot more firepower. ITT is not a big company, you clearly have operational competencies, you could be doing more M&A. I realize you've done a couple of deals, but Luca, why are you doing share repurchase versus M&A? Or are the 2 not mutually exclusive? Like, I'm thinking out loud, wouldn't you want to be getting your shares into more people's hands, not trying to pull them back from the market? Just what are your thoughts there?

--------------------------------------------------------------------------------

Luca Savi, ITT Inc. - CEO, President & Director [30]

--------------------------------------------------------------------------------

Okay. So when we come to effective capital deployment, what we could do and always do, first things first, is organic investment. And this is really where we got our best returns is we know what we do, we've got return on investment that are very -- on invested capital, which are very, very healthy. And this is where the money goes first. Where it goes second is really in inorganic. So because the 3 businesses are performing, all 3, they are actively cultivating, and therefore, we have opportunities in the pipeline. But at the same time, John, I want to be very diligent and rigorous in the process. So we had one opportunity in Q3, where we went quite deep, and we were at a very good stage. But we decided to walk away because we saw that the valuation did not reflect the value that we've been able to create. So we will keep on cultivating very granular, and I agree with you in terms of adding inorganic close-to-core, long-term strategic acquisitions. The 2 acquisitions that we made, Matrix and RPG, are performing well after only 5 and 8 months since the closing, so that is encouraging. So we will do more, but we will stay rigorous and diligent, and we will look at creating value and not just do it for the sake of doing inorganic acquisition. And then because we have firepower, then is returning to the shareholders like we did at the beginning of the year with a 10% increase in dividend and the share repurchases that we did in Q1. We did some share repurchases also in Q3, $18 million of share repurchases in Q3. But I think that this was -- is -- we want to stay opportunistic in terms of the repurchases.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And then, John, I would just add to that is the $500 million authorization indefinite terms, so we're going to keep prioritizing the deployment, as Luca articulated. And just interesting to note since then back in 2012, 2011, we've done about $500 million of repurchases. We depleted the old program effectively. So we're just reupping, and we'll continue to look opportunistically to deploy capital across all categories defined.

--------------------------------------------------------------------------------

John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [32]

--------------------------------------------------------------------------------

Yes. No, I get it. And you definitely don't want to overpay because of some sort of systematic pressure. Appreciate the answer.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [34]

--------------------------------------------------------------------------------

Can you maybe provide a little bit of detail around where the IP backlog ended in the third quarter and how you feel it will close out the year relative to '18 and what that speaks to in terms of organic opportunity in '20?

--------------------------------------------------------------------------------

Luca Savi, ITT Inc. - CEO, President & Director [35]

--------------------------------------------------------------------------------

Okay. So if I start and Tom, feel free to jump in. When we look at the backlog for IP, the backlog is 3% down since January 2019. So it's a very good backlog. And one thing also that I want to remind when you look at that, it gives a good visibility in Q4 and in Q1 2020. And also, when you talk about projects, if you think about, we will have until probably half of 2020 to bring in projects that would be relevant from a revenue perspective for next year. Now always remember that our resilience -- resilient OI that we want to build. And then when you look at the backlog, what we have, the short-cycle backlog, I think, is up since the beginning of the year, roughly 8%. So this is where we stand at the end of Q3.

--------------------------------------------------------------------------------

Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [36]

--------------------------------------------------------------------------------

That's helpful. And then, Tom, can you remind us what the funded status is of your pension plans? What pension expense looks like in '19? And what the rate environment could mean for that in '20?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, Matt. So our funded status is around 103%. Coming into the quarter, we did some additional discretionary contributions to elevate the funded status and to give us some more optionality there and to avoid any of the, kind of, penalties from an insurance perspective there that you have to pay to the pension guarantee. So we're in good shape from a funded status. We want to create the optionality. I don't think there's a major expense story. I think, because of our funded status, we're rebalancing our asset allocation reflective of that weighting, getting into the probably now 105%, 106% funded status. So we're going to keep adjusting our asset allocation over time, which will bring some of our returns down in line. But on a year-over-year basis, from an expense perspective, rolling into 2020, I don't see there being a major year-over-year change in the U.S. pension plans with the give and takes that we're projecting at this point.

--------------------------------------------------------------------------------

Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [38]

--------------------------------------------------------------------------------

And then just a follow-up on IP with respect to, kind of, the time line maybe by which you feel you can get to, kind of, that 15%-plus OI margin in that business, Luca, and I guess, your model around that would contemplate what kind of organic growth to get there.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. What we said, Matt, is that 15%-plus was our target in the strategic plan horizon, which was 4, 5 years without counting on growth. So if there is growth, of course, this is going to accelerate, and we're going to get there sooner. I think that we are on track. I'm pleased to see that we are on track to achieve our long-term goal in terms of profitability for IP. At this moment in time, I'm sticking to this time line because of the market environment and what we see out there. But if there is an opportunity to accelerate, trust us, we will take it. As you have seen in Q3, without acquisition, we improved 160 basis points in terms of IP. And we had good improvement on IP quarter-over-quarter, which is something that has never happened before. Q3 was better than Q2, Q2 was better than Q1 and Q4 will be better than Q3.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

Your next question comes from the line of Mike Halloran of Baird.

--------------------------------------------------------------------------------

Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [41]

--------------------------------------------------------------------------------

So on the non-aerospace and events part of CCT, could you just talk about what kind of trends you saw sequentially through the quarter? Any signs of stabilization in some of the more challenging markets? And also maybe some thoughts on the oil and gas side in that business where revenue's down this quarter, but strong orders in what's a tough market there. So maybe just some more context on those points.

--------------------------------------------------------------------------------

Thomas M. Scalera, ITT Inc. - Executive VP & CFO [42]

--------------------------------------------------------------------------------

Sure, Mike. So when we look at the -- if I got the cut right, the components industrial portion of CCT, so the non-connectors piece, is that the one you were focusing in on?

--------------------------------------------------------------------------------

Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [43]

--------------------------------------------------------------------------------

Yes. Yes, because there's obviously more short-cycle slowing. The revenue is down 4%. Just, kind of, want to understand how that cadence is out moving forward? Any sign of sequential stability, things like that.

--------------------------------------------------------------------------------

Thomas M. Scalera, ITT Inc. - Executive VP & CFO [44]

--------------------------------------------------------------------------------

Yes. That business sequentially, the overall industrial, so this picks up the connectors pieces, it picks up some medical and electric vehicles, which are some different subcategories and then our industrial components. So sequentially, it's down around the same amount. So this trend is pretty consistent on a sequential basis. Year-to-date, we're down around 1% in overall industrial sales. With connectors showing a little bit of strength on a year-over-year basis, both in the quarter and on a year-to-date basis, we're seeing more pervasive weakness on the components side of our business. Components is smaller than the connector piece here on the industrial front. These are all short-cycle businesses. These are all the businesses that are moving with the different economic indicators. Interestingly for us, Europe in Q3 was stronger on the industrial front than North America and Asia. So we have a number of different categories that we play in, in this space. But I would generally say, the trends have been down as of late low to mid-single digits, but seem to be kind of stabilizing, but each geography is probably moving in a more erratic way. And that commentary is really primarily on a sales basis, just to give you some perspective of how the year is flowing since it's a shorter cycle in nature.

--------------------------------------------------------------------------------

Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [45]

--------------------------------------------------------------------------------

Helpful. And then an easy one, Tom, you mentioned a lower tax rate in the fourth quarter. What are you guys anticipating?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

We haven't put a full stake in the ground yet, Mike, but we could see another 50 basis points, maybe even north of that. There's a lot of work going on, as you all know, related to tax reform, and I'm sure you're seeing it in a lot of other companies that there's -- we're all processing through the filings and the tax reform implications as they play out. So we're working on a lot of different strategies and opportunities and digesting that. But I think we have maybe anywhere, say, 50-plus basis points of potential we're going after.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

Your next question comes from the line of Joe Ritchie of Goldman Sachs.

--------------------------------------------------------------------------------

Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [48]

--------------------------------------------------------------------------------

So I didn't hear you guys mention it earlier, and clearly, the performance in North America in Motion Tech was really good this quarter. But what, if any, impact did the GM strike have on your quarter? And then, what do you expect it to have potentially in Q4?

--------------------------------------------------------------------------------

Luca Savi, ITT Inc. - CEO, President & Director [49]

--------------------------------------------------------------------------------

Okay. Thanks, Joe. Now as you know, the GM had a big impact on the Tier 1. As you know, we are a Tier 2, so because of the supply chain and because where we are in the chain, we tend to see the impact a little bit later. So the impact in Q3 has been really not that big, has been minimum. We will have an impact in Q4, but this will not affect our growth in terms of growth for the North America, and we will post in Q4 for North America, a very solid growth, double digit. But, of course, it's going to have an impact. But we will keep on outperforming and posting the growth, not as healthy as probably we have done it in Q3.

--------------------------------------------------------------------------------

Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [50]

--------------------------------------------------------------------------------

That's helpful, Luca. And then maybe just my quick follow-on, just staying on Motion Tech for a second. Can you just give a little bit more color what's happening in the aftermarket channel? I know you guys had some initial comments on independent aftermarket timing. But I'd love to hear a little bit more about what's happening there, specifically, it's odd to see it down so much this past quarter.

--------------------------------------------------------------------------------

Luca Savi, ITT Inc. - CEO, President & Director [51]

--------------------------------------------------------------------------------

Yes. So the aftermarket is really -- particularly the independent aftermarket is lumpy. And they tended to change their phasing in the timing year after year in trying to manage their inventory. So we had very good -- when you -- so let's take the big picture. When you look at the total aftermarket for the full year 2019, it's likely to be slightly negative, around minus 2% year-over-year. This is the total aftermarket. Now obviously, you have different dynamics with the independent and the OES. The big swing that you saw in Q3, which was the independent aftermarket, is just timing because what you have, we had a very good quarter in Q1, good quarter in Q2, Q3 they're adjusting. So year-to-date, we are flat, but we will be positive in the independent aftermarket at the end of the year. We will be negative on the OES at the end of the year, and that is because of something that has happened to one specific customer of ours and something that has happened in the market in general, where some OES has shifted to a second line, and we are setting up our strategy to penetrate also the second-line market.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [53]

--------------------------------------------------------------------------------

Just a question. How should we think just thinking about orders being negative? And I understand, sort of, the bottoms-up story. But from a top-down story, it seems like you guys think that you will continue to have growth momentum into 2020. So when do orders bottom out then? Is this the bottom for orders? Is this the quarter where orders bottom?

--------------------------------------------------------------------------------

Thomas M. Scalera, ITT Inc. - Executive VP & CFO [54]

--------------------------------------------------------------------------------

Andrew, I think we're certainly encouraged by the flat sequential order activity at IP, particularly in the short cycle side of -- sequential -- flat, across ITT, driven by the 8% at IP, and inside of IP, where 75% of that business is in the short cycle, we have seen some stabilization there on a sequential basis. And on the project side of IP, as Luca mentioned, it's going to be lumpy, there will continue to be project delays, and we're going to stay disciplined, but the funnel has improved. So I think those are some stabilizing indicators for us. Clearly, on the transportation side of the house, Luca mentioned we're expecting. It's really about awards, not necessarily about orders. And our visibility into 2020 continues to support healthy growth, above-market once again. So -- and rail, I would say, is another business where we have ample backlog already going into the year. So there are a number of good stabilizing forces right now that we're watching. Clearly, we're no different than a lot of our peers. We're feeling some of the short-cycle pressures in the industrial markets, but they feel to be stabilizing at these levels. So I think for us, we're wrapping all that together and hoping for some stabilization across the board at these levels. And then for us, we'll just continue to drive the operational execution that we did in the quarter and drive the kind of margin expansion and income growth that you've been seeing on top of this level of revenue.

--------------------------------------------------------------------------------

Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [55]

--------------------------------------------------------------------------------

Terrific. And just another question. You guys sort of said that China has stabilized. And I just want to understand, is that a mostly auto comment or are you seeing sort of broad stabilization in China? If you could give more color on that?

--------------------------------------------------------------------------------

Luca Savi, ITT Inc. - CEO, President & Director [56]

--------------------------------------------------------------------------------

Yes. So the stabilizing of China may be a little bit of an overstatement when it's said in this sense. You have China in Q3, which is down, if I'm not mistaken, 5% in terms of car production. But it's much more stable when you compare it to a minus 18% or minus 11% that it was before. I think that also, when you think about stabilizing, it's also an easy compare because if you remember, automotive started going really down in Q3 of last year in Europe with the WLTP, and in China, when the problem started was Q3. Now when we look, when we talk to our customer, when I talked to Ryan, our President of Asia Pacific, who's based out of Shanghai, there is more -- there is less of a nervousism over there. Obviously, we are helped by our outperformance, but there are some signs that still keep us worried. For instance, if you look at the level of inventory in China, it's probably still too high. I would prefer it to see a little bit lower. But definitely, it's much better than the way it started in 2019.

On top of that, I would say, it's nice to see the SOP really starting because if you remember, when we started Q1 and Q2, we shared with you that many start-up productions were shifting to the right, which happened. We only saw 1 cancellation that was not really material. And it's nice to see this SOP starting and actually generating volume and feeding our growth and our outperformance.

--------------------------------------------------------------------------------

Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [57]

--------------------------------------------------------------------------------

Got you. And if I can just squeeze one more in. Can you just comment this difference between shale and processed when, once again, while oil is stabilizing? And I know you addressed it, but are you seeing stabilization on the shale side as well?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

We're not a big player on the shale front, Andrew.

--------------------------------------------------------------------------------

Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [59]

--------------------------------------------------------------------------------

I'm thinking more on the connector side.

--------------------------------------------------------------------------------

Thomas M. Scalera, ITT Inc. - Executive VP & CFO [60]

--------------------------------------------------------------------------------

Yes. The connector business for us -- we're pretty global. We're -- I think we're about 40%, 50% in North America, but a lot of the dynamics that we have in oil and gas are also picking up the Middle East activity and activity around the globe. So I wouldn't necessarily say what we're seeing is exclusively on the order front shale. But as it were on a year-to-date basis, our North American connector business is up, kind of, high single digits. So -- but I think for us, it's a lot about share gains. There are not too many players in this space. We have a great product offering. We have some great technological innovation. So I would not look at us necessarily as a call on the broader markets. But I think we have been able to gain share in North America. And we've been able to also grow in the Middle East, which represents a pretty healthy portion of the business as well.

--------------------------------------------------------------------------------

Operator [61]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD & Senior Analyst [62]

--------------------------------------------------------------------------------

So you mentioned Axtone up 650 basis points year-on-year on the margin side. Obviously, a pretty huge number. I guess, what I'm interested in knowing is kind of what's -- how much revenue in MT is still sub-segment average there.

--------------------------------------------------------------------------------

Luca Savi, ITT Inc. - CEO, President & Director [63]

--------------------------------------------------------------------------------

Okay. So let me try. So when you think -- so probably 1/3 of it. That's the short answer. And really, you're talking about Axtone, which is improving. KONI, which has got a very good, healthy mid-double-digit margin. And then, of course, we have a Wolverine that has been facing a different world with the trade wars and with the commodities. So roughly, it's 30%. And I would say, starting the best -- the closest is KONI, and then go down, Axtone and then Wolverine.

--------------------------------------------------------------------------------

Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD & Senior Analyst [64]

--------------------------------------------------------------------------------

And what's the view of the potential to bring those businesses up to the average? I know Wolverine -- and my follow-up was going to be on Wolverine, that's been like an obvious underperformer for a bit here. What's the outlook there? And is it realistic? Is there a structural margin potential for those -- for that 1/3 of the business to be non-dilutive over the next, like, 12 to 18 months?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I would say, 12 to 18 months, probably is a stretch. Over a long period of time, yes, and the timing will be different for all the different businesses. So when you're talking about KONI, I was actually in the KONI Oud-Beijerland, which is the headquarter of KONI in the Netherlands, and walking around on the shop floor with Carlo and David, the Value Center President of MT and the General Manager for KONI, we saw all the opportunities that we had in Oud-Beijerland, even though they have the best profitability ever in that plant, there were opportunities in terms of machine utilization and the maintenance that the way that we do maintenance in those machines. And as well as in KONI also in the Czech Republic. So I will expect KONI to achieve a better level of profitability closer to their entitlement in a period of -- probably of a couple of years.

When we talk about Axtone, Axtone is a little bit different. It's an acquisition that we made in 2017 and, therefore, we are working on the footprint, in consolidating the footprint. David has been able in this -- in 2019 to work on his key 5 priorities, which were really in terms of price, in terms of cost of the product, in terms of the Russian profitability, in terms of the supply chain, and also, there was another one, which I don't remember exactly at this point in time, it was the value analysis and value engineering on the products. And therefore, Axtone is going to take probably a 3 to 4 years to achieve a mid- solid double digit profitability.

And when it comes to Wolverine, we are working on the repositioning because of what's happening to the world, and this is going to take a little bit longer in terms of 2 or 3 years to -- from a strategic point of view.

--------------------------------------------------------------------------------

Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD & Senior Analyst [66]

--------------------------------------------------------------------------------

Okay. You mentioned earlier on rail that you think 2020 looks good, maybe not as fast growth as 2019 off tough comps. But what are you guys doing there? Like, I feel like there's just been such an acceleration of that business over the last now 2 years or so. Is this really like an IP? Is it new products that are winning because you have the best thing out there? Or is this a better relationship with key customers? Like what's been driving this kind of shift in your positioning in that market over time here?

--------------------------------------------------------------------------------

Luca Savi, ITT Inc. - CEO, President & Director [67]

--------------------------------------------------------------------------------

Okay. A couple of -- thanks for talking about rail, really appreciate it because it's an industry that we like. Secular growth, tailwind in terms of the macro trends. And really, what is happening when you look about it, the railway industry is very fragmented, and you have many small companies, very fragmented. And we have a -- we performed tremendously well in terms of quality. We improved quality in the last 4, 5 years tremendously. And also, we're performing very well in terms of on-time delivery. And the customers, the operators or the OEMs are really appreciating this level of performance and gave us more orders, and we won market share. On top of that, we have some innovations, some new products that are playing in high-speed trains, and this has helped us as well. So these are really -- is the dynamic behind this beautiful growth.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

That was our final question. We thank you for participating in ITT's 2019 Third Quarter Conference Call. You may now disconnect your lines, and have a wonderful day.