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Edited Transcript of ITT earnings conference call or presentation 3-May-19 1:00pm GMT

Q1 2019 ITT Inc Earnings Call

WHITE PLAINS May 10, 2019 (Thomson StreetEvents) -- Edited Transcript of ITT Inc earnings conference call or presentation Friday, May 3, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jessica Kourakos

ITT Inc. - Head of IR

* 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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* Adam Michael Farley

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

* Andrew Burris Obin

BofA Merrill Lynch, Research Division - MD

* Brett Logan Linzey

Vertical Research Partners, LLC - VP

* Bryan Francis Blair

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

* 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 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

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Presentation

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Operator [1]

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Good morning, and welcome to ITT's 2019 First Quarter Conference Call. Today is Friday, May 3, 2019. Today's call is being recorded and will be available for replay beginning at 12 p.m. Eastern Time. (Operator Instructions)

It is now my pleasure to turn the floor over to Jessica Kourakos, ITT's Head of Investor Relations. You may begin.

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Jessica Kourakos, ITT Inc. - Head of IR [2]

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Thank you, Christie, and good morning. Welcome to ITT's First Quarter 2019 Earnings Call. I'm Jessica Kourakos, and with me today are Luca Savi, ITT's President and Chief Executive Officer; and Tom Scalera, ITT's Chief Financial Officer.

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

Before we begin, please note that our discussion will exclusively focus on non-GAAP or adjusted measures unless otherwise indicated.

During this call, we will make forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

No forward-looking statements can be guaranteed, and actual results may differ materially from those projected.

We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.

Forward-looking statements made on this call should be evaluated together with the risks and uncertainties that affect our business, particularly those disclosed in our SEC filings.

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

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

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Thank you, Jessica, and hello, everyone. Thank you for joining us today to discuss ITT's strong start to 2019. In the first quarter, ITT'ers all around the world delivered strong revenue and operating income growth by intensely focusing on our customers and by generating productivity with even greater speed.

As you see in the results today, we're gaining share in our target growth markets, and we are continuing to drive the cost and efficiency actions to deliver on our increased EPS commitments despite the more volatile market conditions we face.

Our Q1 results demonstrated the depth of our diversification and the magnitude of our self-help war chest. This quarter includes a number of record-setting performances that we will highlight this morning. But I strongly believe 2 things about records: One, they're simply milestone on our journey of betterment; and two, they're made to be broken.

So let's take a look at the Q1 financial highlights on Slide 3. We grew organic revenue 5%. We grew segment operating income margins 120 basis points to a record 16.2%. We grew operating income margins 170 basis points to a record 15.1%. We grew earnings per share 18% to a record $0.91 per share. And we grew free cash flow 154%.

As a result of the Q1 execution and the operating momentum ITT'ers are generating every day, we are raising the midpoint of our 2019 earnings guidance by $0.04 to $3.58 per share. So those highlights detail what we delivered in the quarter.

Now I will discuss how we did it. The how demonstrates the sustainability of our results in the face of more difficult market conditions.

Specifically, we're focused on 3 key drivers in 2019 that will power our performance: operational excellence, customer centricity and diversification and resilience.

Starting with operational excellence. In the quarter, all 3 segments delivered triple-digit margin expansion. These improvements were led by breakthrough execution at CCT connectors locations around the world, well done Farrokh and team, and at MT, in both KONI and our new state-of-the-art friction facility in Silao, Mexico.

And here, at headquarters, we drove efficiency actions that reduced costs by over 40% compared to the prior year.

In addition to these significant gains in Q1, we remain opportunity-rich with numerous self-help actions. So let me list a few of our targeted initiatives that will propel us to our 2019 ITT segment margin expansion goal of 60 to 120 basis points.

At CCT, we are in-sourcing critical plating activities to improve lead times and reduced costs. We are driving best cost manufacturing strategy. We successfully moved 4 product lines, and we have 5 more projects underway. And we are driving operational leverage at our now high-performing manufacturing location in Nogales, Mexico.

At IP, we are leaning manufacturing of critical short-cycle product lines, optimizing supply chain effectiveness in critical areas, such as castings, and we are proactively adjusting our global footprint and cost structure.

At MT, we're driving footprint optimization and productivity in our rail platform, reducing labor and structural cost in friction Europe to address market conditions. And we are efficiently ramping production and speeding up profitability in Silao, Mexico. These are just few examples, and as I said before, we remain opportunity-rich.

I will now move to the next driver of our performance: customer centricity. As you know by now, I believe that actions speak louder than words. So thus far in 2019, I personally met customers from each of our segments on 3 different continents to get a first-hand appreciation for how we're doing and more importantly, what we can do even better going forward. The major themes that I heard from our global customers across end markets were superior technical solutions, frictionless customer experience and speed. We will keep working every day to deliver on these customer expectations, and let me provide some examples of the progress we're making.

Here is an example of a superior technical solutions from IP's Bornemann business. An oil and gas producer was facing the natural phenomenon of reduced well pressure that caused production to stop. Our Bornemann team was able to work with the customer to develop a technical solution to reactivate these wells and significantly extend their production life. These wells went from 0 production to 35,000 barrels of oil and 21 million standard cubic feet of gas per day. As you can imagine, the customer was thrilled and is already looking into new ways to work with us. These kinds of technical solutions powered IP's 47% Q1 increase in project revenue.

At Motion Technologies, our speed and technology, coupled with our frictionless customer experience, drove over 500 basis points of Q1 global OEM outperformance in our friction business, and in the quarter, friction produced a 135% increase in awards that nicely exceeded our Q1 forecast and reflected continued customer alignment with our expanding front axle solutions.

As validation, the Q1 wins included another major share gain win for 100% of the front and rear axle content on a new North American SUV platform. It was the frictionless customer experience that we created that drove this win. Our R&D and testing capabilities and our manufacturing expertise all smoothly merged into the ideal solution for our customer at the right value and at the right speed.

Lastly, let me provide an overview of how our diversification is bolstering our resilience in today's market. The strength of our diversification is a function of our unique geographic, product, aftermarket and end market mix. The Q1 MT results reflect a number of these elements. Our 30% growth in North America, our 19% growth in the independent aftermarket and our 13% growth in rail effectively offset automotive conditions in Europe and China.

From a product perspective, our project backlog continues to generate longer-term visibility despite short-term volatility.

In Q1, project orders at IP increased 15%, backlog grew double digits, and sales improved 47%. The strength of ITT's aftermarket representing over 30% of our revenue will continue to provide additional resilience. And in Q1, it grew 5%.

Adding to our strong aftermarket and geographic diversification is the acquisition of Rheinhütte Pumpen that closed this week.

Let me officially welcome the newest ITT'ers at Rheinhütte. This great company with over 160 years of pump experience strategically expand ITT's specialty pump range and geographic reach in target growth markets, and I'm thrilled to have them as part of the family.

Lastly, ITT is benefiting from meaningful end-market diversification. So let me provide some perspective on what we are seeing across our key end markets. Oil and gas remains solid from a revenue perspective based on our backlog visibility in 2019. We have seen some pockets of moderation in the pipeline opportunities that we are monitoring along with the recent increases in oil prices.

Chemical revenue is expected to remain strong due to our backlog, but 2019 orders will have to contend with tough comparisons, given the outstanding year we had in 2018.

Commercial aerospace and defense continue to look strong in both North America and Europe, propelled by strong secular trends.

General industrial is a mixed bag of short-cycled businesses for us that I would say are generally weaker in Europe and Asia, given global macro conditions.

Lastly, in automotive, our preliminary Q2 visibility suggests some improvement in the order book over the next few months.

In North America, we're well positioned in ramping on some of the largest and fastest growing SUV truck and crossover platforms. This will continue to drive our growth independently of the overall U.S. production rate.

At this point, we still believe that our friction OEM growth in North America and China will outpace their combined markets by double digits in total in 2019.

Our projections for China have moderated from prior expectations due to new platform push-outs, but this has been more than offset by increased demand for our ramping platforms in North America.

Lastly, there is no change to our outperformance expectations in Europe that are expected to be momentum as platforms continue to ramp in 2019.

So in conclusion, today's ITT is nicely diversified across end markets and geographies, and we're opportunity-rich with a proactive approach to realize these opportunities with greater speed.

This is how we're approaching the balance of 2019, following the strong start in Q1. And as a result of this strength, we are raising the midpoint of our guidance to $3.58, which represents solid 11% EPS growth.

With that, let me now turn it over to Tom who will review the earnings results and guidance in more detail. Tom?

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

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Thanks, Luca. Let me begin with the Q1 2019 results on Slide 4.

Organic orders increased 1% or 3% excluding a prior year Russian rail order. The growth was driven by a 26% oil and gas increase on project and short-cycle demand at IP. Transportation orders were up 1% on strong KONI rail and aerospace and defense demand, partially offset by auto and the $14 million prior year Russian rail order at Axtone. Excluding this order, transportation improved 4%.

Project and short-cycle order strength in industrial pump applications was more than offset by industrial connectors and components. The organic revenue growth of 5% reflected broad-based growth across all major end markets. Oil and gas grew 11%, Industrial grew 10% and transportation grew 2%.

By geography, North America grew 14% in the quarter on strength across major end markets, including chemical, oil and gas, auto and aerospace and defense. Europe grew 1% on chemical and rail strength that was partially offset by lower auto production activity. Asia declined 4% on slower-than-anticipated auto production rates in China and delayed new platform launches.

Segment operating income improved 9% or 13% excluding $4 million of unfavorable foreign exchange. The income expansion was driven by volume and productivity actions, partially offset by higher commodity and tariff costs and mix.

Strategic investments primarily at MT were more than offset by European government innovation incentives.

In the quarter, we drove significant efficiency and cost-reduction actions within our corporate functions, and we also drove interest, environmental and tax rate favorability.

The combination of the strong segment operating income expansion and the effective below-the-line cost management drove an 18% increase in earnings per share to an all-time record of $0.91 per share.

Slide 5 shows our adjusted segment margin walk. Q1 margin improved 120 basis points to a record level of 16.2%. This growth was our seventh consecutive quarter of year-over-year margin improvement, and during this run, we averaged margin growth of 130 basis points per quarter.

The Q1 expansion drivers were volume, partially offset by mix, and productivity, supply chain and restructuring actions that more than offset higher commodity, tariff and labor costs.

Price was flat as IP and CCT offset MT. Exceptional margin expansion was produced at MT's KONI and Silao facilities and at CCT's connector operations.

In the quarter, connector set another all-time margin record. As Luca mentioned, our enhanced approach to driving operational excellence is clearly producing consistent results as we continue to implement and execute on a significant set of self-help opportunities that should provide a solid margin tailwind in 2019 and beyond.

Next up is a review of the segment results starting with Motion Technologies on Slide 6. MT's organic revenue decreased 1% despite the over 500 points of global OEM market outperformance delivered by friction. The friction OEM performance included exceptional 30% growth in North America, powered by share gains produced in our new facility in Mexico that nearly offset market weakness in Europe and China.

In addition, we delivered double-digit friction growth in the independent aftermarket, and lastly, KONI delivered a 17% increase on rail strength in Europe and China that offset market-related weakness at Wolverine.

And from an award perspective, in Q1, the MT delivered a major new North American SUV platform share gain win with both front and rear axle content.

Adjusted segment operating income at MT decreased 2% to $62 million, reflecting incremental foreign exchange of $5 million.

Excluding foreign exchange, segment OI increased 6%. The income growth was driven by operating and supply chain actions, combined with proactive cost containment that more than offset higher commodity costs and tariffs.

In addition, MT proactively offset strategic investments in the quarter by obtaining funding from European innovation incentives.

Lastly, I'd like to highlight that MT's margins expanded 110 basis points to 19.5% on exceptional execution at KONI and MT Mexico.

Turning to Industrial Process on Slide 7. Organic revenue was up 16% on a 47% increase in projects, combined with a 9% increase in short-cycle businesses. The project strength was driven by chemical, mining and oil and gas deliveries in the Americas. The 9% increase in short-cycle activity reflected strength across all product categories and all geographies. IP organic orders increased 6% due to a 15% increase in projects and a 4% increase in short-cycle demand. Both increases were led by stronger oil and gas and industrial activity in the Americas. As a result, IP's backlog expanded 19% excluding foreign exchange, providing us a significant project revenue visibility for the balance of 2019. IP's adjusted segment operating income increased 35% to $23 million and margins improved 170 basis points to 10.7%.

The improvement -- improvements were driven by strong project and short-cycle volumes, net productivity gains in price, partially offset by tariffs and unfavorable mix.

Next is Connect and Control Technologies on Slide 8. CCT organic revenue increased 6% on balanced growth of 7% in connectors and 5% in components.

From an end-market perspective, the growth was driven by broad-based 14% growth in aerospace and defense as we benefited from strong secular trends and recent market share gains.

In the defense market, CCT grew 18% on global strength in connectors. Revenue in the commercial aerospace market grew 12% on connector, composite and aftermarket strength across multiple platforms. These gains were partially offset by a 4% decrease in general industrial markets and energy absorption weakness and soft EU demand that more than offset double-digit growth in medical and electric vehicles.

CCT's Q1 organic orders improved 6%, led by a 41% increase in aerospace and defense connector demand, partially offset by an 8% decline in industrial.

Oil and gas connector orders improved 2% reflecting the recent increase in oil prices.

Adjusted segment operating income at CCT increased 19% to $28 million on benefits from volume, net productivity and restructuring gains, partially offset by increased material costs. Segment operating margins expanded 200 basis points to 16.8% due to record-setting margins at connectors.

Now with this in mind, let's take a look at our updated 2019 guidance on Slide 9. We are increasing our total revenue guidance range to up 3% to up 5% or approximately $2.85 billion at the midpoint. This increase includes $24 million of unfavorable incremental foreign-exchange headwinds at current rates more than offset by the incremental $40 million of revenue from the strategic Rheinhütte Pumpen acquisition that closed this week.

Based on the strength of our diversified portfolio, we are not changing our organic revenue target range of up 3% to up 5% for the year, despite the increasing market volatility.

From an adjusted EPS perspective, we are raising the midpoint of our previous guidance by $0.04 to $3.58 by raising the low end of our previous guidance by $0.08.

We now expect to grow EPS 11% at the midpoint. The $0.04 midpoint increase was powered by our strong Q1 outperformance of $0.07 per share and incremental new Q2 to Q4 productivity and cost actions of $0.07. These gains are expected to more than offset incremental foreign exchange and tariff headwinds of $0.10.

From a segment perspective, these headwinds will primarily impact MT. Tariff costs are exceeding our prior expectations due to inequities in the application of the European steel quota system.

Please note that the Rheinhütte Pumpen acquisition is not expected to have a meaningful impact on IP segment operating income or ITT's EPS in 2019, but we'll provide a more detailed update on our Q2 earnings call.

Next, I'd like to provide some Q2 perspective before we wrap up. In Q2, we are projecting flat total revenue as a result of incremental unfavorable foreign exchange impacts, primarily at MT. From an organic revenue perspective, we are expecting low single-digit top line organic growth to be driven by IP and CCT.

In Q2, we expect segment operating margins to align with Q1 levels on solid year-over-year and sequential improvements at IP and CCT. Margins at MT are expected to be flat to the prior year due to FX and tariff impacts. Corporate costs are expected to increase compared to Q1 but will be favorable to the prior year.

In total and including $0.05 of unfavorable foreign exchange, we anticipate high single-digit EPS growth in Q2 compared to the prior year.

So with that, let me now turn it back to Christie to begin the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is coming from Jeff Hammond of KeyBanc Capital Markets.

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

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Can you just talk about what you're seeing kind of into 2Q on Europe and China auto production demand? And then just maybe reference on the North America facility, it sounds like things are going very well there. Where you stand on a profitability basis? And where you think you'll be run rating kind of exiting the year?

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

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Okay. Thank you, Jeff. So when we look at the China and North America, we see that the trend in the European market that we saw in Q1 will probably continue in Q2 as well. And we expect it to outperform that market the same or more than we've been outperforming in Q1. When we look at the -- and we are comfortable with this visibility. When we look at China, we see the situation improving from a market point of view from Q1 to Q2, and that's the market, and we will continue to outperform the market in China, probably better in Q2 than we did in Q1.

Now on China, I would say probably we have also to bear in mind that China is more volatile. When China changes, it changes more and it changes faster. So a little bit less stable than the European Union. The other thing is that you know that there has been an incentive in terms of the reduction of the VAT in China is a RMB 2 trillion package that will -- reduction of VAT, which would reflect a reduction in the calc price of roughly 2.5%. It was implemented on the 1st of April, and it's too early to see if really this has an impact or not. So that is for Europe and China.

When it comes to the North American market, the North American market is going to be down. We think that it's going to be down in Q2 as well as it was in Q1, and we think that we're going to outperform the market substantially. This is higher probably then our expectations when we started the year. And this is exactly because we are in very good platforms as we said during the -- before, the largest and the fastest growing. In regard to this, the North American facility is doing very well and I would say is meeting and/or exceeding our more beautiful expectations.

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

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Okay. Great. And then, Luca, you mentioned in the prepared comments some signs of moderation and project activity or pipeline. Can you just kind of expand on that? Where you're seeing that? And kind of how it plays out in your mind?

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

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Sure. So when you look at IP, bear in mind that when we look at the IP orders, we are 3% up sequentially from Q4 2018 to Q1 2019. And Q4 '18 was already a very strong quarter in terms of orders. And when -- and those are mainly -- that is mainly an oil and gas story because our orders were 31% up in oil and gas, mainly upstream and downstream. So with all these orders that -- good performance in 2018, good performance in Q4 '18, good performance on the orders and in the oil and gas in Q1 '18 (sic) [Q1 '19], when we look at our funnel of opportunities is resetting and is reshaping. Practically, if you want to look visually, it looks like it's a pear shape reversed in terms of all the opportunity that were closed today -- closing and negotiation came into the orders and we're resetting. So we now have a more on the opportunity side.

On the chemical side, I would say 2018 is going to be more of a revenue story because we had very good order performance in 2018, and here, what we have -- we see, we see also the funnel opportunities resetting, but this is going to be a very good revenue story for 2019.

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Operator [6]

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Your next question is from John Inch of Gordon Haskett.

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John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [7]

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I want to go back to the Silao plant. I think we were breakeven in 2018. Luca, you mentioned or perhaps it was Tom or Luca mentioned that there was a big profit improvement there. What sort of run rate are we at? And where would you expect to exit 2019 in that facility specifically, which I guess is reflective of your OE North American friction profitability?

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Luca Savi, ITT Inc. - CEO, President & Director [8]

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Okay. So when we look at the Silao facilities -- Silao facility, we started really need in shipping the products need of 2018, and we got it to breakeven in Q4 of 2018. Now it's -- the facility is, as I said, is already profitable, and we are expecting to be in the mid-teens for 2019. Having said that, [Chaser] and the team, if you're listening, if you want to beat that, please feel free.

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John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [9]

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And that -- I'm assuming, 2020, as you continue to see volume ramp and order wins, I'm assuming that, that threshold based on sort of your Italy targets, right, or your Italy profitability, I'm assuming those numbers keep moving higher potentially. Or is there some sort of natural reinvestment barrier, if you will? And the other thing is, Luca, does that plant have enough capacity to satisfy all of this growth? Or would you have to expand it kind of in the future?

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

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Okay. All right, John. So first of all, we think that the Mexico facility is setting itself up to achieve the best profitability that we had in other plants. So that is a journey that will take probably another 18 to 24 months, I would say. And I've seen that they are very well set to achieve that. Now when it comes to the investment, this is an area where we will continue to invest organically because of the success that we are having on the awards, on the orders and the ramping up of the platforms. So we're going to put down this year another couple of lines in the plant that -- who's production has already been allocated. So when you talk about investment, no more investment in land, no more investment in plants, but we're going to add just the lines of awards that we have already won.

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John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [11]

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Got it. And then just as a follow-up here, so Parker and 3M, each announced this during season, some recent very nosebleed valuation deals, and many of us would like you to do deals. We think that you're set up to possibly be in a position to do that, but nobody wants you to destroy shareholder value. So Luca, how are you thinking about your opportunity set in acquisitions, particularly given the high valuation environment today, juxtaposed against your own strategy, maybe bolt-ons? Or how do you get around this? And what kind of activity should we be expecting kind of in 2019, if anything?

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Luca Savi, ITT Inc. - CEO, President & Director [12]

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Good to hear, John, about your support for M&A. As a matter of fact, M&A is a focus area for me, for Tom and for the entire team. I'm pleased to say that first of all, just a couple of days ago on April the 30th, we closed the Rheinhütte Pumpen acquisition, which was a very good strategic acquisition for IP. And I can say it also that now all these 3 value centers, all these 3 businesses can now cultivate more actively and execute an acquisition and integrate. And this is exactly what they're doing. Now having said that, now more than ever, we need to stay very, very disciplined, and I agree with you in the sense that, a, the target, the acquisition must be strategic of course and must create value. This is -- we really need to stay very focused on that one, and as a matter of fact, we walked away from a couple of deals in the last couple of months. So we definitely more than -- more active now than ever before across all the 3 [vicinities], but we stay very disciplined in terms of generating value.

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Operator [13]

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Your next question comes from 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 [14]

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So on the -- first on the short-cycle businesses, you guys have broadly -- any discernible momentum or trend that you saw through the quarter and in the first part of the second quarter here?

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Luca Savi, ITT Inc. - CEO, President & Director [15]

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Okay. So when we look at the -- as I said, the orders were positive, but also when you look at the short-cycle order, Mike, those were positive. Those were up 4%. So all of this is good, and also, the backlog of the short-cycle order went up a bit. So this is positive. So it's not just kind of a revenue up but also the orders. Having said that, we see some moderation here and there, but North America, we saw it strong. Now if I look, for instance, at the orders of parts from our distribution channel, those are the strong in the last 3 -- in the first quarter, those have been the strongest that have been in the last 4 years.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [16]

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And then specifically, as you worked through the quarter and in the first part here, did you see sequential improvement, sequential moderation, normal seasonality? I mean how did those short-cycle businesses -- not just for IP but also thinking on CCT, any kind of trend as you worked through the quarter from that perspective?

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Luca Savi, ITT Inc. - CEO, President & Director [17]

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That's a very sharp point, Mike, and I would say that when we look at the distribution, for instance, on the CCT front, we saw some moderation as we moved in the quarter. Now we are monitoring closely to try to understand how much of that is coming from really the end market and the market situation that is slowing the growth or some specific resetting of the inventory levels at some of our distributors. But we've seen some of these signs.

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [18]

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Yes. And I would say, Mike, too, the key driver of our IP short-cycle business as you know is our U.S. installed base. It's our largest market, and increases in U.S. economic output capacity utilization broadly are a positive for our short-cycle business at IP. So we're watching the signs, but we also think we're playing in the right markets at the right times.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [19]

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Okay. And then second one, when you think about the strong IP backlog growth, up 14% organically. Can you just unpack what that means for this year? How much of that do you expect to book this year? What that means from a growth perspective for this year? Any kind of color around the implications there would be great.

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [20]

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Sure. Mike, the backlog visibility has been fantastic. We indicated that we increased the backlog 19% in the quarter for IP. The good project volume that we generated from an order perspective added to our already strong position coming into the year. So we've had very high confidence in our project backlog conversion to revenue. That's been an underpinning element of our 2019 guidance all year, so we just need to execute and deliver and ship those projects. But I would say that we have more project visibility now and backlog now than we planned on coming into 2019. Obviously, some of that will stretch into 2020, so we're starting to fill in a little bit into 2020, but I would say that what we've seen at this point gives us more confidence in the project element of our IP guidance for the year.

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Operator [21]

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Your next question is from Bryan Blair of Oppenheimer.

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Bryan Francis Blair, Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst [22]

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Nice start to the year.

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [23]

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Thanks, Bryan.

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Bryan Francis Blair, Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst [24]

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I just wanted to circle back to friction OE trends and the levels that have been in terms of expected revenue cadence throughout the year. I know there are a lot of moving parts here, but is it fair to expect kind of stabilization in terms of second quarter trends, then solid acceleration in the back half, given SOP timing and obviously as a little bit easier comps in the second half?

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Luca Savi, ITT Inc. - CEO, President & Director [25]

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Yes, that's absolutely fair. I think that the first half is going to be worse than second half, and the Q1 is probably worse than the Q2 in terms of also the -- our -- if I look at our platforms and our SOP. So both from a market point of view and specifically for us, ITT, the way that you described it is spot on, Bryan.

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Bryan Francis Blair, Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst [26]

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Okay. Very helpful. And then aftermarket was slightly positive in the quarter and good to see that resiliency in a tough market backdrop. In Europe, how should we think about the core aftermarket growth outlook for this year, and then China's obviously early stage? But on the aftermarket side, any color on expected 2019 contribution or potential 2020 ramp would be great as well.

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Luca Savi, ITT Inc. - CEO, President & Director [27]

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Okay. So when we look at the -- at Europe, the aftermarket overall was positive. And this helped in terms of getting to almost flat from a friction point of view, which in this market situation is really an outstanding performance. Now when you look at the aftermarket is the tale of 2 stories. One is the independent aftermarket, which was very, very positive in terms of growth, and the other one was the OES, where -- which didn't grow at all. So overall, positive. Aftermarket, up more than 10%, and when -- the OES, because some specific dynamic with a couple of OEMs, was actually negative. So we see the aftermarket overall to keep on growing, and it should be a growth for the entire year of roughly 3 percentage points, up 3% for 2019.

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Bryan Francis Blair, Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst [28]

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Okay. Got it. And then one last one, if I may. Tom, I'm sorry if I missed this but strong cash generation in the quarter, year-on-year improvements. I know it's a seasonally weaker conversion quarter, but trends there seems really solid. Have you updated the adjusted free cash conversion guidance for the year?

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

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We haven't yet, Bryan, but I think we certainly are encouraged and feeling good about the momentum that we're generating. Our working capital improved by 40 basis points as a percent of sales when you adjust for foreign exchange in the quarter. So we're continuing to drive good working capital performance. You're seeing it flow through in the free cash flow. Improvement of 154% in Q1. So we are feeling incrementally better about our progression of free cash flow generation and moving our conversion guidance up. We just haven't done it quite yet, but I think all the momentum is going in the right direction.

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

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And on the working capital, Bryan, I mean, one thing that I wanted to stress again, the improvement at IP, where our working capital was 24.7% and is an improvement of 200 basis points. Well done, IP.

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Operator [31]

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

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [32]

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Just back to IP, given the growth you're seeing in projects trying to balance out with the activity you're seeing in aftermarket, can you maybe help us and talk through what the anticipated margin cadence in that business looks like in Q2 and into the back half of the year?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [33]

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Yes, Matt. So from a margin perspective, it's -- I'd say each quarter is going to have a different story from an IP perspective, and some of that's going to be based on the mix of projects. We had a very high project delivery mix in Q1 of this year, still outperformed last year. But in general, we expect IP margins to outperform the prior year and every quarter. Now this is before we add in the Rheinhütte Pumpen acquisition, which will have a little bit of an impact on margins, but the core business, we expect it to outperform the prior year in every quarter.

There's no real pattern that I could point you to as how it's going to roll out. I would say that Q2 and Q4 are going to be on the higher end of the margin profile, and Q3 having just based on the shipments that we're seeing is somewhere in the middle. But I would say, overall, good continued project execution and productivity initiatives that we're driving across the portfolio are going to give us that strong triple-digit margin expansion for the year with each quarter doing better than the prior year.

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Luca Savi, ITT Inc. - CEO, President & Director [34]

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And Matt, I would say that when you look at IP and the 170 basis points improvement that we have seen in IP and you look at the net productivity, a couple of those elements mainly are coming from the supply chain, and a big one is also from better project execution that we see across the board.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [35]

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And just back over to friction OEM. You typically give a regional sort of scorecard between how your business performed versus the market. And I think you gave a global view of 500 basis points plus, but I was hoping to maybe get some regional granularity there.

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Luca Savi, ITT Inc. - CEO, President & Director [36]

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Sure. Of course. So when we look at China, we outgrew the China market. But this was less than what we expected starting the year, and this is due mainly to some timing of some customers' orders between Q4 of last year and Q1 of this year. And we expect to go back to the new normal beating in Q2 and Q3 of 2019. So China, our outgrow was at the lower end of our expectations.

When it comes to North -- to Europe, we outgrow the range that we said before in terms of exactly where we expect it to be, and this could be even more positive as we move into Q2 and in the next few quarters. And when we come to North America, we beat our expectation in terms of the range. So when you look at globally is exactly in the range of 500, but it didn't come in the same way that we expected. Less in China, the same in Europe, more in North America. This is exactly the way that it worked out.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [37]

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Got it. And then with respect to -- I think you called out China, but maybe you're seeing some of this in Europe even, but we've heard from other companies that they're being negatively impacted by delays in platform launches, major model redesigns. I guess to what extent are you seeing that impact your business? And do you think you'll be able to effectively recapture that in the year? Or is it -- I guess help me understand the visibility you have on some of these new platforms, particularly in China.

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Luca Savi, ITT Inc. - CEO, President & Director [38]

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Sure. So that's a very fair point, Matt. So when we look at Europe, we have not seen a big movement in terms of SOP or a big implication for us so far. So move Europe out of the way in that consideration for the moment for us at least right now. And when we look at China, we have seen a little bit of that in terms of some of the SOP shifting to the right, and what this means is really usually a shift of 3 to 6 months. So the impact is not a medium-, long-term, it's a short-term impact. This is usually what happens.

And it's not so much -- of course, we will recapture that because we won those awards, and we will start the production, but it might be just start by -- 3 or 6 months later. And we saw a little bit of that in China, and this is really also why we are seeing China not too outgrowing the way that we were expecting at the beginning.

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Operator [39]

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Your next question is from Andrew Obin of Bank of America.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [40]

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Great quarter.

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

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Thank you.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [42]

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Just back to China auto. Can you comment -- because I was in China, I think, back in March, and I was just amazed by how bad March was and all of the sort of percolations through the supply chain of production shortfall. Can you just comment on what are you seeing in April in China production volumes? And if you're surprised, is it in line with our expectations? Is it worse? And then the follow-up question on China, what's your exposure in China? Could you remind us versus -- on JVs versus Chinese OEs because our understanding is that market share is shifting towards Chinese OEs?

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Luca Savi, ITT Inc. - CEO, President & Director [43]

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Okay. Sure. So yes, when you look at China, I think that the consumer confidence is -- has really been affected by everything that's going around in the world by the trade war between China and U.S. And therefore, this has impacted the consumer confidence and you see translated in the market. Now I think that there was some economic indicator that came out just yesterday in terms of the China that was actually giving some positive sign about the China economy during the later -- the latest compared to Q1. But we think that the situation will improve in Q2 and in the next few quarters. Also favored by an easy comparison when you think about Q3 and Q4 of last year. Now when we look at us, we are very well spread across all the different OEMs, Andrew, and this is a strategy that we implemented at the beginning, very -- at the beginning when we started to work in China. We started with Western OEMs, and then we diversified, going back to the concept of diversification, and we went also to the Chinese OEMs.

Today, I would say probably, we are 65-35, something like that, Western OEMs and the Chinese OEMs. And I would say Western and also Japanese OEM versus the Chinese OEM. It's true that you see this trend moving, and as the Chinese OEM are gaining more share, they're getting also more sophisticated with the -- with their requirements, and this is going to really play in our field. It's going to be very good for us.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [44]

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That sounds great. And just a follow-up question. On IP capacity, looking at your bookings, looking I think one of your competitors had strong bookings this morning. What do you feel is the industry capacity? And how much flexibility is there to deliver on -- to sort of flex up in deliveries in 2019? And I'm specifically talking about process downstream, all that good stuff and chemicals?

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Luca Savi, ITT Inc. - CEO, President & Director [45]

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Yes. Personally, Andrew, I don't see any issue with that, so I think that the industry and the market will be able to deliver and provide the good service to our customers. I don't see capacity issues. Also, in addition to that, when I look at ITT specifically because our productivity and all the initiatives that we put in place in all our plans, that actually is going to be a nice tailwind for our numbers.

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Operator [46]

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Your next question is from Nathan Jones of Stifel.

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Adam Michael Farley, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [47]

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This is Adam Farley on for Nathan. You guys have provided a lot of updates on the auto markets within MT, which is very helpful. But shifting to the rail business, you guys called out some market share gains. So my question is, if you can provide some color around what happened in the quarter, what -- where you're taking share and then your expectations for the full year.

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Luca Savi, ITT Inc. - CEO, President & Director [48]

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Thank you, Adam. I was waiting for somebody to ask the question on rails. So that -- I really appreciate it. So KONI had a great, great performance. So I want just to congratulate David, [Yaroon] and Charles because when I look at the order performance in rail, it was 31% year-over-year. And this is mainly because of rail where the orders grew more than 50%. This is mainly coming from 2 regions: Europe, and China. Both Europe and China were strong.

So when you look at China mainly is high-speed train and -- but also coach, which is a profitable -- very profitable train for us. And when you look at customers, you're talking about customers, of course, CRCC in China but also customers like (inaudible) in France, (inaudible), Siemens, Hyundai for Korea, so it's across the board.

This is pure market share gains. Where this is coming from is really thanks to the performance of the business. When you look at this business has really turned around. If we think about 6 years ago, KONI was losing money. We had quality issues. We had big delinquent backlogs. We had, I remember, in Austra, in the Czech Republic, in 2012, we had 12,000 shock absorbers delinquencies. So that was really a pain, trust me on that.

Today, our quality is -- and we have reduced our PPM by more than 70%. That quality is felt in the field. The customers see it. Our on-time delivery is top-notch. And as you perform, the customer is rewarding, and this is really why we're winning shares.

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Adam Michael Farley, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [49]

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That's really helpful. And then on the Smart Pad, kind of a high level, it sounds like there are some incrementally positive developments there. Again on a high level, maybe if you could just tell us when you expect that to move to direct vehicle integration? Or just for provide any color on Smart Pad, that'd be great.

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

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Sure. On the Smart Pad, we keep on investing. So we are actually utilizing it as a developmental tool right now. Now we are -- keep on working to improve also the applications. Now because of the specific situation in the market, in the automotive, many of the OEMs have actually slowed down some of the investments and -- because they shifted more on the electrification, for instance. So we saw some investment from OEM coming down, so we see that this could be postponed a little bit further down. But we keep on investing, and we have not slowed down on the R&D perspective.

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [51]

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And one thing to add there, Adam, you may have seen that we did receive some government incentives supporting our innovation efforts in Europe, and that was a nice offset to the investments we've been making in Smart Pad, which as Luca indicated, are going to be a longer-term investment. But the right one, the right technology, but we'll go at the pace of the market, and if we can gain incentives and support from the local European governments along the way, we'll certainly do that.

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Operator [52]

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Your next question is from Joe Ritchie of Goldman Sachs.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [53]

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Nice quarter.

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

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Thanks, Joe.

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Luca Savi, ITT Inc. - CEO, President & Director [55]

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Thank you, Joe.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [56]

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So my first question, Tom, if I heard you correctly, on Q2 organic growth, it sounded like you were calling for low single-digit growth, yet. The orders in IP were really good. It sounds like Motion Tech organic growth should be better in 2Q than 1Q. And obviously the Control Technologies business is still doing well. So I'm trying to understand like why should we see a desell. It only tough get -- comps get all that much harder in the second quarter. So I'm just wondering what I'm missing here for 2Q.

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [57]

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Joe, the biggest piece is probably just the timing of project shipments at IP compared to what we had queued up to go out in Q1. So we always kind of talk about the fact that within IP, there's that project variable, which is anywhere from $10 million to $20 million of revenue that moves based on the ultimate delivery dates with our customers. That's probably one of the bigger variables. You'll see the biggest change from Q2 growth rates compared to Q1 growth rates at IP, and I would tie that almost exclusively to project deliveries.

As far as Motion Technologies, we kind of indicated that it would be more in the flattish range from an organic perspective. And I think CCT is trending in line. There's a little bit of adjustment on the short cycle that we're just being mindful of, I would say. We have pretty good visibility through Q2, but we certainly don't get too far ahead of ourselves in any of our short-cycle projection. So those are some of the elements from an organic perspective that we're looking at in Q2 versus Q1.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [58]

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Okay. That make sense, Tom. I guess so in -- following up on that comment, if you're projects -- then they're going to be a little bit more back half-weighted. You obviously had some good growth here in the first quarter. Does that then naturally imply that your incremental margins in 2Q in IP are going to be better?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [59]

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Going back to, yet, to the earlier comment on the trajectory and the progression of the margins, I think that's a good inference to make and the opposite being true perhaps in Q3 where we have a higher project shipment as a percent of the total. So you'll see kind of margins benefit from that mix in Q2. The mix will be more project-heavy in Q3 and kind of reflect that. And then in Q4, we're all in and working both fronts aggressively. So that's why we do think Q3 and Q4 will be the stronger margin quarters of the year in 2019.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [60]

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Got it. If I could ask one more just on Motion Tech and the Mexico facility. So obviously, it sounds like you guys are off to a really great start there. I guess I'm trying to understand the longer-term margin potential of that facility. And I know that currently, you have some production for North America that is being manufactured in Europe. So maybe try to -- if you can provide maybe some color on how you see the margins trajecting in that business over time. And how much better the margins can be potentially in Mexico versus where you're producing today in Europe for North America?

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Luca Savi, ITT Inc. - CEO, President & Director [61]

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Okay. So when we look at Mexico, our expectation is that for Mexico to be the best-performing facility worldwide, both in terms of quality, service to our customers and profitability. So this will be a journey, as I said, of 2 to 3 years, but we will expect the profitability there to be the best in the world. Now what was the second part of the question, Joe? Just the...

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [62]

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Yes, Luca, just a piece that I know that you're producing right now in Europe for North America as well?

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

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Yes. Yes. Yes. Those -- that kind of thing obviously will float -- will change a little bit, Joe, but you may always have some pieces producing in Europe for North America or in China for North America because when you win a global platform, you make the investment, unless it's really huge, only in one plant. So if you win a platform that is going to produce, for instance, 400 million (sic) [4 million] pads, and 300 of -- 3 million pads of those are going to be for China and 1 million for North America. You just do the investment in China, produce everything over there, and then you ship them because you ship brake pads, very easy to pack, you're not shipping air. So obviously these are going to reduce. They're going to reduce those examples, those situations, but you will always have a little bit of that. Does it make sense, Joe?

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [64]

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Yes. That makes sense.

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Operator [65]

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Your next question is from Brett Linzey of Vertical Research.

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Brett Logan Linzey, Vertical Research Partners, LLC - VP [66]

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Just wanted to focus on price cost. Just wondering what gross price was in the quarter. And specific to IP projects, how does the pricing look in that particular business? And then within the guidance bridge, you talked about productivity and cost actions. We should see some relief on input costs here. And I mean is that included in that bucket, some relief? And then just the follow-up to that is the RPG acquisition, I see you included it in revenue, it doesn't look like there's any accretion in the guide. Is that just contingency? Any color would be good.

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [67]

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Sure, Brett. So on price cost, I would say, for us, in total, price was neutralized. You know we have the headwind for Motion Technologies every year and the actions we put in place at IP, and CCT, we're able to offset price at the overall ITT level. So we're -- our price cost dynamic, I would say, is always different because of the MT dynamic that we deal with. Certainly, we generated more than adequate productivity, both in supply chain and in our facilities to offset the increase in commodity costs. So a lot of that kind of combined into a very strong margin expansion that was really driven, I would say, by net productivity that our actions and supply chain productivity more than offset material and labor cost escalation. And that was the real driver behind the margin expansion in the quarter.

On the RPG front, I would say just maybe a little too early at this point, Brett, for us to think the purchase accounting and some of the transitional issues early on. Let us get our hands through that -- through those activities, and we'll revisit in Q2. But we're certainly thrilled to have it closed, and we know that revenue's going to be there, and we'll work on the P&L impact. We expect it to be EPS accretive certainly within year 1, but we just didn't want to get too ahead of ourselves given we just closed. But we'll have more updates shortly.

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Brett Logan Linzey, Vertical Research Partners, LLC - VP [68]

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Okay. Understood. And then just one on Europe friction. Appreciate the color on the market and what you guys did in terms of growth in the quarter. But just specifically on the outgrowth factors in Europe, I mean you already have a high market share. Is there more room there? And I guess how do you think about the content multiple per vehicle as you expand the scope of the offerings? Can you size that? And can you sustain that outgrowth in Europe?

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Luca Savi, ITT Inc. - CEO, President & Director [69]

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So when we look at Europe, our expectation on -- in terms of outgrow of the market are moderate, exactly because as you said, when you already have that market share, you can outgrow only a certain amount. What we are pleased about is that we see that we are meeting that, and we are projecting beating that later on in the year. What is influenced by that is the ramping up of some of the new platforms in the year. They're ramping up. They started in Q1 and will start also in Q2 where we have won a higher content. And this obviously will keep on helping our market share there as well.

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [70]

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And I would say, Brett, from a front axle content, rear axle, certainly, our biggest opportunities are in North America and in China to increase our front axle content percentage. And you're seeing some of that momentum build particularly in North America and in China. I would say in Europe where we have a more established presence, we do have a higher weighting on the front axle than we have elsewhere in the world. But certainly, all of those were opportunities for us to continue to grow share as we move forward.

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Operator [71]

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We do have time for one final question. That question will come from Joe Giordano with Kevin.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [72]

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So Parker Hannifin acquired one of your competitors in rotorcraft, and I know that it's a smaller area for you guys. That's one we've been talking about as gaining a lot of share over the last couple of quarters. Just curious if that acquisition changes the landscape at all.

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [73]

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I think it's a validation, Joe, of the value of the platforms that we participate in. We do compete in some of the same spaces, in particular, rotorcraft, which is an area of -- where we generated a lot of growth lately, and we're going to continue to go after market share in the global rotorcraft space. So our goal is to maintain the technology and the overall performance that we've been generating to capture more and more share. So we'll look forward to competing against any and all players in the space, but for us, I think it's a validation that we do play in some very attractive spaces.

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Luca Savi, ITT Inc. - CEO, President & Director [74]

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And Joe, if I can build on that, this is an area where we have seen that our organic investment is really paying off. So we have developed a great engineering team, a great R&D team, operations in Orchard Park with a very moderate investment. We've been able to penetrate the rotorcraft organically, and the return on investment of that initiative is really awesome.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [75]

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Okay. And then if I can shift over to CCT. If some of the margin growth that you've had over the last bunch of quarters here, partially because of the comps you had and now that Nogales is kind of at a normalized level, I just -- I'm just curious -- I just want to understand the forward opportunities. I think when we were be talking under the old segment structure where the move was conceived to kind of bring it to a 20-ish percent kind of margin opportunity. Just kind of curious on an update there.

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Luca Savi, ITT Inc. - CEO, President & Director [76]

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Sure. So when you look at the profitability at CCT, it's a fantastic 200 basis points improvement, very, very good improvement. And these -- I will say, you have the negative price and mix was compensated by volume. So all of this -- all of the net productivity really dropped to the bottom line, coming from a lean project, coming from supply chain, coming from restructuring.

Now when you look -- we have -- as we've described before, we have a war chest of opportunities in CCT. So if I think about example, I shared with you before in terms of insourcing of the plating, this is something that is going to be implemented towards the end of the year, and that profitability will come in in 2020. In addition to that is loading factories and move some of the product lines to factories like Shenzhen or even more in Nogales. So we have room to go to achieve the target goal that we set ourselves for the long term.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [77]

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Okay. Great. And if I can sneak in one last one. Just given the kind of volatility in China, you guys had spent a lot of money on Wuxi to ramp that facility up. Is there any opportunity now to kind of step back and take out? I know those -- the MT facilities run very lean anyway but curious if there was any opportunities to kind of readdress some maybe some cost in a more volatile market here.

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Luca Savi, ITT Inc. - CEO, President & Director [78]

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No, Joe. When I look at those lines, they are running fully in terms of 5 days a week, in terms of 3 shifts. And where we're looking at the structural cost, this is what we have done in Europe. And this is also what has helped delivering these margin improvement and will help us deliver margin improvements in the next few quarters.

So let me close. So before we break today, I would like to thank you all for being in the call. In particular, I'd like to thank all of our customers that trust us to deliver their most critical and safety technical solutions. We will keep working faster and harder every day, and we'll keep the customer at the center of all we do for our customer to succeed. And I'd like to thank all of our ITT'ers around the world that deliver for our customers and that deliver these beautiful record results. Thank you.

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Operator [79]

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