ITT Inc. (ITT) Q2 2022 Earnings Report, Transcript and Summary

Welcome to ITT's 2022 Second Quarter Conference Call. Today is Thursday, August 4th, 2022. Today's call is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to Mark Macaluso Vice President, Investor Relations, you may begin.

Thank you, Chris and good morning. It's my pleasure to welcome you to ITT second quarter 2022 earnings conference call. Joining me here this morning are Luca Savi ITT's Chief Executive Officer and President; and Emmanuel Caprais Chief Financial Officer. Today's call will cover ITT's financial results for the three month period ending July 2, which we announced this morning. Today's remarks may contain forward-looking statements that are subject to certain risks and uncertainties, including comments relating to company performance, strategic priorities, business mix, market conditions and the effects of COVID 19 on ITT. These statements are not a guarantee of future performance or events and are based on management's current expectations. Actual results may vary materially due to, among other items, the factors described in our end 2021 Annual Report on Form 10-K and other recent SEC filings. ITT is not under any and expressly disclaims any obligation to update forward-looking statements whether as a result of new information, future events or otherwise. Except for otherwise noted, the second quarter results we present this morning will be compared to the second quarter of 2021 and are based on non-GAAP financial measures. These adjusted results exclude certain non-operating, and non-recurring items, including but not limited to a charge in the first quarter related to the suspension of operations in Russia, restructuring, acquisition-related charges and certain tax items and in 2021 asbestos-related charges. All adjustments in the quarter are detailed along with a reconciliation of such measures to the most comparable GAAP figures in our press release and presentation, both of which are available on our website. It is now my pleasure to turn the call over to Luca, who will begin on slide three.

Thank you, Mark, and good morning. I would like to begin as I always do, by thanking our shareholders, our customers and our ITTers for their continued support and investment in ITT. I firmly believe that at ITT, our people, made a difference and on this topic, I will show you what I mean in a few minutes, when I talk about the resilience of our people in visit China. Let's now discuss the Q2 results. I'm very pleased with ITT's results this quarter, considering the challenging environment that we are operating in today. Our team demonstrated ITT's resilience and the strength of our businesses once again this quarter. I Continue to be confident in ITT's future growth and outperformance potential as evidence by the long-term financial targets, we announced that our 2022 Investor Day. Demand for our products and services remains strong. We saw this in the short-cycle chemical and industrial verticals in IP where orders grew 26% organically. In aerospace and defense, in Connect and Control where orders grew 17% organically. And in our friction business where we want 18 new electrified vehicle platforms. Collectively, this demand generation drove 13% organic orders growth. On the strength of this demand we grew organic revenue by 10% aided by both volume and pricing across our businesses. This was despite the disruptions in China coinciding with the reemergence of COVID. On profitability, IP expanded adjusted margin 210 basis points versus prior year and 400 basis points sequentially while CCT grew margin 380 basis points versus prior year and 50 basis points sequentially. We are also seeing signs that commodity inflation pressures are slowing which should begin to show up especially, in MT's results, in the fourth quarter. In terms of the quarter results Industrial Process was the highlight. IP showed exceptional profitability and orders demand. Emmanuel and I spend several days on site in Seneca Falls, driving the performance together with the team. Let's take a moment to discuss the team's achievements. IP's orders were the highest this quarter since 2014 and the growth in short cycle is coming from share gains, especially in North America. We are seeing growth in project orders, including for LNG, where we strategically won engineering only orders upwards of two years ago that are now beginning to translate into large wins. We are also capturing price on baseline pumps and aftermarket that will benefit second half results. Our leading initiatives in Seneca Falls is generating significant benefits and we have more to go after here and at other IP sites. Earlier this year, we also announced the closure of the foundry in Seneca Falls, while a tough decision, this is key for the long-term cost competitiveness of IT. Lastly, as you will hear Habonim is off to a strong start from a sales and margin perspective and he is already contributing to ITT's earnings growth this quarter. As a result of all of these, IP delivered an adjusted margin this quarter there was the highest on record. Dave and IP team well done and thank you. To call David Steblein, Senior VP of Industrial Process, we love pump. Back to ITT, the strong volume growth, Pricing, productivity and acquisition contribution drove a sequential and year-over-year increase in adjusted earnings per share in Q2 despite a long list of macro headwinds that we had to overcome. Regarding capital deployment, our action in 2021 to divest our legacy asbestos liabilities, coupled with the solid results in the first half of 2022 enabled us to continue investing in the business. We deployed over a 3% of sales to capital expenditures year-to-date to fund growth as well as footprint rationalizations in MT and IP. Additionally, we deployed over $170 million towards acquisitions and ITT Venture of investments. In June, we closed our third ITT Venture's investment with minority stakes in CRP. CRP is an industry leader in developing and manufacturing reinforced composite materials for 3D printing and enabled ITT to expand its position in material science. In Q2 we repurchased over $60 million of ITT shares bringing our year-to-date total $250 million or roughly 2.5 times our original full year commitment. All in, we deployed over $500 million in the first half of 2022. Because of our solid first half performance, the large backlog we have accumulated, the pricing capture we are executing and the performance momentum especially at IP and CCT, we are raising our organic sales guidance to a new range of 10% to 12% and we are also tightening our adjusted EPS guidance to a new range of 435 to 465 and maintaining the prior midpoint. Before moving to the next slide, I wanted to touch on the situation in China. As you know, both the OE production volumes in China were impacted in Q2 by mandatory lockdowns across the country. Which drove significant uncertainty and volatility in customer demand, as well as on the supply side. Despite these headwinds, our teams continue to perform maintaining the quality and on-time delivery that differentiates us in the market. This performance was further demonstrated by their WUXI China team at the beginning of Q3, and they want to take a moment now to tell you about the story. In July as COVID variance were continuing to spread outside of the large cities, WUXI was directly hit and our team there are put of an amazing feat. Companies in WUXI were ordered to shut down entirely and at the situation on the ground deteriorated ITT WUXI decided to sell off, the entire manufacturing compound in order to be allowed to operate and to serve our customers. All essential production and R&D staff volunteered to join decides effort. Overnight the team purchase sleeping bags water, soap and other essential items to enable a full 24-7 life in the plant. In total, the side house approximately 420 employees for two weeks, during which time the team prepare nearly 18,000 meals. In addition, nearly 30 in-direct staff volunteered to join the team effort. [indiscernible] and our leaders took several actions to preserve everyone's safety and well-being. Let me share some highlights. All 400 plus employees to PCR test every day. We had exercise, games and other social activities to maintain morale. The team cooked dinners and leaders replace production workers on the shop for some nights. Finally, our team send videos with words of encouragement to wish ultimately went viral in China on TikTok and WeChat. Locally, our team mate, they say became celebrities being part of what was deemed the amazing story in WUXI. The operation was covered by newspapers and media and both government officials and other companies in the region came to WUXI to support us and learn how ITT pulled out such a feat. Through all of these, there were Zero COVID cases at WUXI side and the team maintained 100% on time delivery and world-class quality. Our employees proudly embrace the challenge and delivered. To say that I and everyone at ITT are proud of the WUXI team is among statement. Our employees display core ITT values and may sacrifices we have never seen before. WUXI team I cannot thank you enough, it is a true honor to work with you all. Let's now turn to slide five to recap ITT's 2022 Investor Day. ITT hosted its first Capital Markets Day for investors and analysts in June. The event consisted of presentations by the leadership team, interactive technology demonstrations with the engineers and innovators and we issued long-term financial targets consistent with our continued growth and value creation. There are a few key takeaways from the event that I want to reiterate today. First ITT has market-leading positions in attractive and growing end markets including chemical and industrial pumps, commercial aerospace and defense, rail and electric vehicles. Second, we highlighted how we sustain our differentiation through three pillars, execution, innovation and culture. Execution starts with the customer who is at the center of everything we do. Innovation at ITT was on full display in our technology demonstrations including our smart pad, the EMD or embedded motor drive in Industrial process as well as CCT's offering for the fair a program. And culture, the glue that keeps everything together as demonstrated by our team in Worship. Third, we would have a ton of capital to deploy. Upwards of $2 billion based on our expected cash flow generation and leverage capacity. Fourth, regarding ESG, we're making progress with our emissions reduction initiatives and we published our first EEO one report earlier this year. Finally ITT issued long-term financial target which we work hard to deliver. The capital deployment, a key element of our Investor Day. Let's now discuss our continued progress in 2022. Following our legacy asbestos liabilities divestiture last year we spoke about accelerating the pace of capital deployment. First forward to today and we have started to see these materialize. In Q2, we announced acquisition of Habonim and in June, announced our investment in CRP, an additive manufacturing Pioneer. Second, we invested in a breakthrough Rotocoating technology company to minimize fine dust emissions in braking system, that will accelerate the development of new green solutions for the automotive industry. Third, we acquired is more energy absorption product line for high cycle applications in Industrial Automation, which closed in the second quarter. The product line is complementary to CCT's offering and serve the factory automation workplace safety and e-commerce verticals. We continued to invest in growth CapEx to support production line capacity for new electrified vehicles awards in friction. There we convert our EV share gains into revenue. With the wins to-date, we are on pace with nearly 37% share of all global OE electrified vehicle volume by 2025. And finally, we repurchased $250 million of ITT shares to date, which will reduce our full-year share count by 3%. So, to summarize the quarter we are winning in the marketplace and all this growth rate are outpacing that of our peers. We are offsetting cost inflation through pricing and shifting the pricing paradigm in auto. We're driving productivity in our plans to expand our margin, we are deploying capital to grow our portfolio both organically and inorganically as with Habonim and we are continuing on the ESG journey on route to becoming a more sustainable ITT. Now let me turn the call over to Emmanuel to discuss our results and outlook in detail.

Thank you, Luca, and good morning. We continued to see strong demand in all our businesses. We drove 10% organic sales growth after 7% in the first quarter with CCT again leading the charge. As we anticipated growth in connectors and aerospace and defense components is driving a great performance in CCT from both a revenue and a margin perspective. Demand across IP short cycle continues to be strong, and this quarter we approached 20% organic growth. We are also gaining share in projects where orders grew 48% organically this quarter. All of this drove us 26% increase in orders at IP and the funnel continues to increase with larger multimillion dollar projects moving to the FID stage. In MT, Friction was up 6% organically driven by the continued momentum in aftermarket similar to Q1. Our OE business was up 3% organically despite the ongoing ship shortage. The MT team has been relentless in driving price realization in partnership with our customers and the negotiations in friction with customers are almost complete at this time. We also saw an over 200 basis points impact to reported revenue growth from Habonim. We estimate that the ongoing supply chain disruptions cost us approximately 200 basis points 300 basis points of top line growth with the most pronounced impact in IP. Adjusted operating income was roughly flat this quarter with margin declining 70 basis points. We saw higher sales volumes in IP and CCT and pricing and productivity benefits in all businesses. Adjusted segment operating margin was 15.9% in line with our expectations from last quarter. However, as you will see on slide 14 volume pricing and productivity were outweighed by 880 basis point headwind from cost inflation. The teams to drive productivity of roughly 220 basis points through a combination of Shop Floor and Sourcing actions. Further our strategic FX hedging actions of the euro delivered a 120 basis points benefit. From an earnings perspective, adjusted EPS increased sequentially and on a year-over-year basis, despite impacts from significant cost inflation, supply chain disruptions, the China lockdowns and an estimated $0.05 impact from the war in Ukraine. The share repurchases, higher tax rates and higher interest expense netted to a benefit of roughly $0.02. On cash, working capital requirements continue to weigh on our free cash flow generation. We are purposefully investing in inventory to ensure we are able to secure delivery to our customers in this difficult time. Cash Improved sequentially from Q1, but we're still below our expectations through the first half. However, this performance should continue to improve in the second half. Additionally, today we have committed $8 million for energy efficiency and renewable projects. These green projects will protect us from energy scarcity and inflation and make ITT a more sustainable company. Finally, foreign currency translation negatively impacted our cash flow generation. And it's now look further at the earnings performance. I want to make just a key, few points on this slide. First, we continue to drive strong volume growth, pricing capture and productivity across our businesses. In 2021, this was led by MT and now IP and CCT are building on MT's performance. We are driving productivity in the second half, which will help to overcome lingering inflation and foreign currency headwinds, the ladder of which was not contemplated in our previous outlook. We drove $0.16 of productivity and $0.16 of volume growth of pricing actions contributed $0.32. On pricing, we made a ton of progress in Q2. The negotiations with OE customers in friction are almost completed. And while the total amount realized is below what we initially anticipated. The agreement secured will deliver growth and value creation long-term. In IP, we are already seeing the benefits of our pricing efforts in our Q2 orders which will flow through earnings more impact-fully in the second half. These improvements in total are still lagging the pace of material, labor and overhead inflation. Today we're seeing slowing commodity pressures and we expect this will begin to drive benefits for us in the fourth quarter most prominently in MT. The lagging realization is due to a strategic decision earlier in the year to lock in supply of steel, zinc and copper to ensure we could deliver to our customers on time. As you know in Q1 we suspended the majority of our operations in Russia, given the war in Ukraine. We are seeing direct impacts mainly in MT and IP as well as indirect impacts from auto OEM customers that sell or supply into Russia. This cost us approximately $0.05 of EPS in the second quarter. In 2022, we continued to expect this will impact revenue by approximately $80 million which equates to an approximate $0.20 cents headwind to earnings. Our acquisition of Habonim is already contributing to earnings, given the strong start. As that continues, the effective purchase multiple of less than 13 times adjusted EBITDA should continue to decline further demonstrating the strength and strategic rationale for the deal. Finally, as we have done throughout 2021 and 2022 we continued to ramp up our strategic investment to fund all of the groundbreaking technology that was on display at Investor Day. This will drive further value analysis value engineering product redesign for the next generation of pumps and game changing brake pad formulations. This is the best use of our capital. Let's turn to Slide 9 to review the segment result. Let me begin with Motion Technologies. Friction maintain its outstanding quality and on-time delivery performance effectively managing the global supply chain disruptions, Auto OE production volatility and the lockdowns in China, that Luca alluded to earlier. We also saw strong demand in the aftermarket given the continued low level of new vehicle sale. On profitability MT's adjusted segment margin declined 430 basis points, mainly resulting from higher than expected material inflation. This was partially offset by productivity benefits and enhanced pricing actions. MT made significant progress in securing price commitments for most of Its OE customers, which we will begin to realize at a greater pace in the second half. We believe this quarter was the trough for MT and results should improve from here. Industrial performance this quarter was exceptional. We saw growth across most short cycle product categories, despite the supply chain disruptions and labor constraints that continued to hamper the industry. This was the 6th consecutive quarter of sequential order growth and IP's highest order quarter since 2014. We see strength in both short cycle and project orders. Our book-to-bill was an impressive 1.25 and the organic backlog is up 50% since prior year. IP's margin improved on both a sequential and a year-over-year basis after a slow start in Q1. We are improving IP's execution and manufacturing throughput and we're seeing the benefit of the pricing captured to offset inflation. The result was at 33% incremental margin in Q2. Furthermore, Habonim profitability was accretive to IP's adjusted segment margin even after including the impact of purchase price amortization. Lastly on Connect and Control we drove another strong quarter of orders and revenue growth stemming from the continued recovery in commercial aerospace, as well as in distribution. On connectors, we saw growth across the industrial and the defense verticals, while components was primarily aerospace driven. Distribution revenue was up over 40% organically this quarter. CCT's margin expanded an impressive 380 basis points to over 17% driven by higher sales volume and continued shop floor productivity. Notably CCT delivered 35% increment more margin in the face of continued inflationary headwinds. Let's now turn to slide 10 to discuss our updated financial guidance. Today we are raising our organic sales growth outlook to 10% to 12%, given our strong first half performance, the strong demand and backlog growth in IP and CCT and the pricing we are relating. Our total revenue growth is impacted by foreign currency headwinds and of approximately 5% points. We are maintaining our adjusted segment margin and will likely be at the low end of the range. This is stemming from continued cost inflation headwinds that we are working to offset through pricing and productivity. Nevertheless, we saw strong sequential and year-over-year margin improvements in IP and CCT which we expect will continue in Q3 and Q4. For the full year, Industrial Process margin will expand above 16% overcoming ongoing supply chain disruptions and CCT's margin should and above 18%. We continue to expect the MT's margin will likely decline close to 200 basis points to end around 17% for the full year. To recap what I discussed, we are overcoming the lost earnings in Russia. Q2 lockdowns, foreign currency headwinds and higher cost inflation and we're doing this through stronger sales including pricing, better margin in CCT, the lower share count and the addition of Habonim. We expect commodity pressures will slow in Q4 and we have firmed up the pricing benefits for the remainder of 2022, which gives us greater confidence in achieving our full-year outlook. This is reflected in our tighter range for adjusted EPS of $4.35 to $4.65 or growth of 7% to 15% versus prior year. Lastly, we continue to expect that free cash flow will be $250 million to $300 million and free cash flow margin will be approximately 8% to 10%. Longer term, we expect this will improve on the path to our free cash flow margin target of 11% to 13%. Looking at the third quarter, organic sales growth in Q3 is expected to be in the low teens range. Thanks to the growth in CCT, we should approach 20% and to a lesser degree in MT, where revenue will ramp up sequentially as pricing benefits materialize and China volumes recover. We expect IP organic sales to increase in Q3 around 10% with an additional step up in Q4. ITT's adjusted segment margin in Q3 will improve sequentially to the high-teen range with margin expansion led by IP and CCT. We expect MT margins to inflect from Q2, given the firming of our pricing benefits and easing commodity cost. This will drive adjusted EPS growth in Q3 of roughly 20% year-over-year. With that, let me pass it back to Luca to wrap up.

Thanks, Emmanuel. Before jumping into Q&A I want to recap a few key points. We are encouraged by the strong demand across the portfolio and by our team's ability to deliver for our customers and outperform in all our businesses. Thanks to this performance, ITT built a robust backlog that we provide the runway for growth in 2022 and 2023. On pricing. Our actions are ramping with particular strength in friction. We have reached agreements with the majority of our OE customers which provide good visibility to profitable growth over the long term. And we are making significant progress at IP and CCT, that we begin to accelerate in the second half of 2022. Our un-weathering focus on continuous improvement remains, we are working daily to improve our operations and replicate the success at MT in our two segments. And finally, we are executing all elements of our capital deployment plan, while continuing to invest in the business. As ever, it has been my pleasure speaking with you all this morning and we will happily take your questions now. Please open the line for Q&A.

[Operator Instructions] Our first question comes from Mike Halloran with Baird. Your line is open.

So Luca you guys gave great context and how you're looking at the auto market. So we've always been a little bit more conservative than the trend line there. So maybe you could talk a little bit of how you see the recovery cadence going, what it means for this year, what it means for next year? Obviously ITT differentiation versus what those end markets look like, but any color you could give there would be great.

Sure. So let me start saying that ITT outperformed the market in Q2 and we expect to outperform the market also this year like we have done in the last 10 years. But we're talking specifically about the market -- the market in Q2 was really flat year-over-year after a Q1 that was down. And if you look at the 2022 projection is probably we are looking at in the region of 20 -- 80, 80.5million vehicle produced. A growth of 4% to 4.5% for the year. Different picture in the different regions, for reasons flat to slightly positive in Europe, flattish in China and double-digit growth for North America. What was interesting Mike, We're seeing actually China that quite resilient market. If you think particularly what's happened in Q2 April and May, Still, the focus for the full year has not changed. Thanks to the resilience of the market, the incentive also of the government there. Let me reiterate also the continuous outperformance. If you look at the market is projected to return to pre-COVID level in probably 2024, maybe 2025, ITT was sort of passed pre-COVID level in 2021 so that will keep on that outperformance will keep on happening.\

Thanks. Really appreciate the color, and then follow-up on the IP side of things. Obviously, really good backlog grant. Maybe talk about two things, one, the visibility you're seeing right now with the front log conversations with clients and some of the key markets there and secondarily, anything going on competitively that would be, concerning obviously you're getting some share there, I'm just curious of the pricing dynamics in the marketplace are playing and competitive pressures as these new projects start coming forward.

Sure. When we're looking at the markets we see strength across all the market in terms of oil and gas, in terms of chemical, in terms of general industrial. We see that in the orders, we see that in the funnel of opportunities. Where you look geographically, Mike, we see very good strength in the orders as well as in the funnel, particularly in North America, Asia Pacific, Latin America and Middle East. Probably, we do not see this trends in the funnel in the orders are in Europe, that is the area where probably we don't see that. Then when it comes to pricing, you know Mike, pricing is key and pricing discipline is a must. Particularly, when you're talking about flow, a particularly what you're talking about projects. And if you do not have that price discipline, there is no way that you can deliver the margins that we are delivering today. So we keep on executing on this front, and I will simply not change.

The next question is from Jeff Hammond with KeyBanc. Your line is open.

So maybe these questions are connected, but your price cost gap was $0.29 in 1Q and $0.27 in 2Q and just trying to think how we should look at price got cost gap in the 3Q and 4Q. And then just similarly margin trajectory In MT into the second half, do we kind of bounce back to 1Q levels in 3Q or just how to think about that snap back?

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

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

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

The next question is from Nathan Jones with Stifel. Your line is open.

Hi, good morning. This is Adam Farley on for Nathan. So there's been some talk of automation production ramp in Europe in the second half, what is your view of the likelihood of this and what are customers saying?

Adam, you cut out in the first part of your question, would you mind repeating it? Please.

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

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

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

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

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

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

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

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

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

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

The next question is from the Damian Karas with UBS. Your line is open.

Good morning. Congrats on the hard work and accomplishments on WUXI.

Thank you, Damian

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

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

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

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

And Damian, the team did an amazing job in the quarter. If you think about all the headwinds that we had to face the Emmanuel reiterated in the prepared remarks and many piece of the puzzle that actually coming together, have been the backlog, been the pricing, been the execution on the shop floor being WUXI. So, and this is the reason why we really tightened the range. You know, things are coming together.

The next question is from Joe Giordano with Cowen. Your line is open.

Yes, I had a similar question on that, maybe just asked a little differently. So last quarter when you were talking towards like the lower part of the guidance. And then, at Investor Day I guess, qualitatively, just based on the bullet point that you guys had it did sound like incrementally, the guidance was getting a little bit worse. And now I think raising the low end is a major statement here. So I'm just curious of anything actually changed in your mind between kind of Investor Day commentary and today?

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

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

I appreciate that. Again on orders, I know we've talked a lot about business. I think it's hard to, or some of the year on your comparison is just become challenging just because the numbers are weird and price and inflation. If you were to think about it unless strip out MT because that's its own kind of animal, but if we think about IP and CCT orders if we think about it is unlike a dollar basis per day or something like that. How do you see that going from a get 2Q level, Orders per day still going up. I don't care about the year-on-year so much. I'm just thinking about the sequential progression in dollar terms from here. How do you see that?

So when you look, is a little bit different picture, I would say, depending on the different markets. But if you look at the Q2 in the short-cycle indicator, So, you talked about baseline tops, service, valves and we actually, we are really looking at some of those numbers every day or every week, Joe, exactly you are saying. Q2 was a very strong quarter so, and these was sequentially. Was there -- So that is a very good sign. But I would say, Joe also that what we expect in IP, those order in the short-cycle to level off and we expect the project to come up stronger in the second half of the year. That either for the short cycle in IP. We see also some good sequential orders in a connector, for example, as well as in components are coming mainly from aerospace and defense and those are very strong and compensating some of the industrial connectors that a manner was talking about, which showed some weakness sequentially. Did I answer your question.

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

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

Good morning, Sabrina.

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

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

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

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

Our final question is from Matt Summerville with D.A. Davidson. Your line is open.

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

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

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

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

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