ITT Inc (ITT) 2022 Q2 法說會逐字稿

Welcome to ITT's 2022 Second Quarter Conference Call. Today is Thursday, August 4, 2022. 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 Mark Macaluso, Vice President, Investor Relations. You may begin.

Thank you, Chris, and good morning. It's my pleasure to welcome you to ITT's 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 3-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's 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 where 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 nonoperating and nonrecurring 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 3.

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 Wuxi, 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 evidenced by the long-term financial targets we announced at our 2022 Investor Day.

Demand for our products and services remain 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 & Control, where orders grew 17% organically; and in our Friction business, where we won 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 to 110 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 spent several days on site in Seneca Falls, driving their 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 2 years ago that are now beginning to translate into large wins. We're also capturing price on baseline pumps and aftermarket that will benefit second-half results.

Our Lean 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 IP.

Lastly, as you will hear, Habonim is off to a strong start from a sales and margin perspective and is already contributing to ITT's earnings growth this quarter.

As a result of all of this, IP delivered an adjusted margin this quarter that was the highest on record. Dave and IP team, well done and thank you. To quote Dave Steblein, Senior VP of Industrial Process, "We love pumps."

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 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 Ventures investments.

In June, we closed our third ITT Ventures investment with minority stakes in CRP. CRP is an industry leader in developing and manufacturing reinforced composite materials for 3D printing and enables ITT to expand its position in material science.

In Q2, we repurchased over $60 million of ITT shares, bringing our year-to-date total to $250 million or roughly 2.5x 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 $4.35 to $4.65 and maintaining the prior midpoint.

Before moving to the next slide, I wanted to touch on the situation in China. As you know, auto 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 the Wuxi China team at the beginning of Q3, and I want to take a moment now to tell you about this story.

In July, as COVID variants were continuing to spread outside of the large cities, Wuxi was directly hit, and our team there put up an amazing feat. Companies in Wuxi were ordered to shut down entirely and that the situation on the ground deteriorated, ITT Wuxi decided to seal 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 this site effort. Overnight, the team purchased sleeping bags, water, soap and other essential items to enable a full 24/7 life in the plant. In total, the site had approximately 420 employees for 2 weeks, during which time the team prepared nearly 18,000 meals.

In addition, nearly 30 indirect staff volunteered to join the team effort. [Silvan and Carol Si] and our leaders took several actions to preserve everyone's safety and well-being.

Let me share some highlights. All 400-plus employees took PCR tests every day, [they] exercised, games and other social activities to maintain morale. The team cooked dinners and leaders replaced production workers on the [shop] for some nights. Finally, our teams sent videos with words of encouragement to Wuxi that ultimately went viral in China on TikTok and WeChat.

Locally, our team (inaudible) 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 put out such a feat.

Through all of these, there were zero COVID cases at the Wuxi side and the team maintained 100% on-time delivery and world-class quality. Our employees proudly embraced the challenge and delivered.

To say that I and everyone at ITT are proud of the Wuxi team is an understatement. Our employees displayed core ITT values and made 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 5 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 3 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 Driving industrial process as well as CCT's offering for the FARA program. And culture, the glue that keeps everything together, as demonstrated by our team in Wuxi.

Third, we will 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 are making progress with our emissions reduction initiatives, and we published our first [EEO-1] report earlier this year.

Finally, ITT issued long-term financial targets, which we will work hard to deliver.

With 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 -- fast capital deployment. Fast forward to today, and we have started to see this materialize.

In Q2, we announced the acquisition of Habonim. And in June, announced our investment in CRP, an additive manufacturer in [Pioneer].

Second, we invested in a breakthrough rotor coating technology company to minimize fine dust emissions in braking systems that will accelerate the development of new green solutions for the automotive industry.

Third, we acquired a small 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 serves the factory automation, workplace safety and e-commerce verticals.

We continue to invest in growth CapEx to support production line capacity for new electrified vehicles awards in Friction that will convert our EV share gains into revenue. With the wins today, we are on pace to have nearly 37% share of all global OE electrified vehicle volumes 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 orders' growth rates 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 plants 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 continue 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. In this quarter, we approached 20% organic growth. We are also gaining share in projects where orders grew 48% organically this quarter. All this drove a 26% increase in orders at IP, and the funnel continues to increase with large -- 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 chip 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 to 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 a cost -- from cost inflation.

The teams drove 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 lockdown 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 was still below our expectations through the first half. However, this performance should continue to improve in the second half.

Additionally, to date, 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.

Let'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 latter of which was not contemplated in our previous outlook.

We drove $0.16 of productivity and $0.16 of volume growth. Our pricing actions contributed $0.32.

On pricing, we made a ton of progress in Q2. The negotiations with OE customers in Friction are almost complete. 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 impactfully 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 lag in realization is due to a strategic decision earlier in the year to lock in supply of steel, tin 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 continue to expect this will impact revenue by approximately $80 million, which equates to an approximate $0.20 headwind to earnings.

Our acquisition of Habonim is already contributing to earnings, given their strong start. As that continues, the effective purchase multiple of less than 13x 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 continue 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 segments' results. Let me begin with Motion Technologies.

Friction maintained 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 sales.

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 continue to hamper the industry.

This was the sixth 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 capture to offset inflation. The result was a 33% incremental margin in Q2.

Furthermore, Habonim's profitability was accretive to IP's adjusted segment margin, even after including the impact of purchase price amortization.

Lastly, on Connect & 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% incremental margin in the face of continued inflationary headwind.

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 in backlog growth in IP and CCT and the pricing we're realizing. Our total revenue growth is impacted by foreign currency headwinds of approximately 5 percentage points.

We're 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're 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 end above 18%. We continue to expect that 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, a 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, which 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-teens range, with margin expansion led by IP and CCT.

We expect MT margin to inflect from Q2, given the firming of our pricing benefits and easing commodity costs. 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 will provide a 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 will begin to accelerate in the second half of 2022.

Our unwavering focus on continuous improvement remains. We are working daily to improve our operations and replicate the success at MT in our 2 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. Chris, please open the line for Q&A.

(Operator Instructions) Our first question comes from Mike Halloran with Baird.

So Luca, you always give great context on how you're looking at the auto market. So you've always been a little bit more conservative in the trend line there.

So maybe you could talk a little bit on how you see the recovery cadence going, what it means for this year, what it means for next year. Obviously, ITT has 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, it's probably we are looking at -- in the region of 20 -- 80 million, 80.5 million vehicles produced, a growth of 4% to 4.5% for the year.

Different picture in the different regions. For instance, flat to slightly positive in Europe. Flattish in China. And double-digit growth for North America.

What was interesting, Mike, was seeing actually China, that quite resilient market. If you think particularly what happened in Q2, April and May, still the forecast for the full year has not changed, thanks to the resilience of the market and the incentive also of the government there.

Let me reiterate also the continuous outperformance. If you look at the market, it's projected to return to pre-COVID level in probably 2024, maybe 2025. ITT was sort of past pre-COVID level in 2021. So that will keep on -- that outperformance will keep on happening.

Really appreciate the color there. And then a follow-up on the IP side of things. Obviously, really good backlog ramp. Maybe talk about two things. One, the visibility you're seeing right now with frontlog, conversations with clients and some of the key markets there.

And secondarily, anything going on competitively that would be concerning. Obviously, you're gaining some share there. I'm just curious, how the pricing dynamics in the marketplace are playing and competitive pressures as new projects start coming forward?

Sure. When we're looking at the market, we see strength across all the markets 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.

When 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 the strength in the funnel in the orders in Europe. That is the area where probably we don't see that.

Then when it comes to pricing, Mike, pricing is key and pricing discipline is a must, particularly when you're talking about flow and particularly when 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 that will simply not change.

The next question is from Jeff Hammond with KeyBanc.

So maybe these questions are connected, but your price cost gap was $0.29 in 1Q, $0.27 in 2Q. And just trying to think how we should look at that price cost gap into 3Q and 4Q.

And then just similarly, margin trajectory in MT into the second half, do we kind of bounce back to 1Q levels in 3Q? Or just, how to think about that snapback?

Jeff. So yes, you're right. The -- we were heavily -- our margins were heavily impacted by the price cost gap. I think that when we're moving into Q3 and Q4, we're seeing a much better picture. We're seeing that MT 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 should be in a better position from a price cost standpoint.

And then IP and CCT, it's all about driving price. So we mentioned that we are seeing a nice price impact in Q2 orders for IP. That will convert into strong sales in Q3 and Q4. And CCT is a little less advanced, but there remains a lot of -- 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. 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, Jeff. On supply chain, the short answer is it is improving slightly. So let me share some data and give you some color.

If you look at Q1, in Q1, the revenue impact from supply chain was roughly 600 basis points. In Q2, it is between 200 and 300 basis points. So obviously, the data shows the improvement. Most of that was actually in IP.

Now giving -- 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 resins, electronic components or electric motors, those are still bottlenecks. And going back to the lead times, supplier lead times, whilst they have reduced slightly, they are still quite above pre-pandemic levels.

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.

This is Adam Farley on for Nathan. So there's been some talk of an [automation production ramp] in Europe in the second half. Now, what is your view of the likelihood of this? And what are customers saying?

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

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 customer are talking about a better situation for the chip [undergoing] the chip shortage.

But when we look really at Europe, production forecast for the full year, is really -- that has not dramatically changed. We're talking about slightly positive, so low single-digit growth. This is still the forecast for Europe.

We see good order book on our front, but we know that there is outperformance there. But is still low single-digit growth for Europe for the full year.

Okay. 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 could provide any color on July in each business.

Sure. So the cadence of orders in the month was pretty even. There was strength -- there was -- in the quarter. There was strength for every month during the quarter. And July was not that different from what we've seen in Q2 in IP.

We had a really strong month in June, and a lot of it was due to projects which accumulated at a fast pace in June. But overall, there was no really -- the growth in orders was pretty even, and the number 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 difference for the moment in July.

But there's a lot of ground to cover before the end of the year. So we remain very attentive to that order number and what it says about the market.

One thing that we will expect, Adam, when it comes to the future order, particularly in IP, is that we expect 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 is 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.

So maybe just following up on those IP comments. I mean 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 for the moment, our distributors, which were a lot of our short-cycle business is going, have not reported any type of increase in inventory. What we don't monitor is the inventory at their customers. But for the moment, we don't see really any type of inventory buildup anywhere.

As Luca mentioned, 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 while we are very encouraged by the pricing benefits we have seen in the short cycle in IP, I think we are only at the beginning of the journey.

And I think that short cycle is going to benefit a lot from renewed pricing approach that I think is going to really focus on the differentiation that we bring with our products compared to our [floor] peers.

Okay. That's really helpful color, Emmanuel, 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 price is.

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 priorities are the same. This has not changed. The money goes first in organic investment. This will be where we have the best returns. These are the less-risky investments.

And we have seen it, being in IP or being in Motion Technologies or in CCT. So this is where money goes first. And 80% of that CapEx is really going into growth and productivity.

Second is M&A. And you have seen it applied in this first half of the year with the acquisition of Habonim. That is already accretive. It's a great story, already. $140 million deployed there. In ventures like COTSWORKS 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 today, we have the opportunities do all 3 of them. And this is what we'll continue to do.

When it comes to acquisitions, we have a very good funnel of opportunities. And the opportunities there are in the bulk, is anything between $50 million to $300 million of revenue. And of course, there might be a few that are a little bit larger than that, but the bulk of the M&A opportunities are in that range.

The next question is from Damian Karas with UBS.

Congrats on the hard work and accomplishments in Wuxi.

Thank you. 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, are we kind of talking high single digit, low double digit on price, the rest on order? Maybe just help us unpack that a bit.

Sure. So in IP, the majority of the growth is through volume. We are seeing pricing building into our backlog. But we're -- for the moment, this is still the majority of -- the growth is driven by volume. And I'm talking specifically on the short cycle here, so mainly baseline pumps and spare parts.

In terms of CCT, I would say, the large majority is also volume because CCT is less advanced from a pricing standpoint.

The only exception maybe that I would say is industrial connectors, where we're seeing a flattish type of volume, and what gets us a little bit over is pricing.

Okay. That's helpful. 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 $4.30 low end of your EPS guide, considering all the exogenous issues out there in some of your markets.

Just thinking about the updated guidance, where would you say the biggest risk is of not hitting that guidance this year?

I would say, the biggest risk, probably, is an external risk, some type of demand -- disruption to demand like we've seen in Q2 fall with the China lockdown. The rest, we have really strong backlog in IP and CCT. We have proven that we're able to ramp up volumes.

As you've seen in Q2, IP was roughly $25 million above Q1, organically. And then CCT was $10 million above Q1 also. So we know how to flow through these additional products through our facilities. And then from a cost control, we've been very attentive to cost and 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. And if you think about all the headwinds that we had to face that Emmanuel reiterated in the prepared remarks, many pieces of the puzzle are actually coming together, being the backlog, being the price and being the execution on the shelf floor, being Wuxi. So -- and this is the reason why we really tightened the range. Things are coming together.

The next question is from Joe Giordano with Cowen.

I have a similar question on that, maybe just ask a little different. Like so last quarter, when you were talking towards like the lower part of the guidance, and then at Investor Day, I guess, qualitatively, just based on the bullet points that you guys had, it did sound like incrementally the guidance was getting a little bit worse.

And now I think raising the low end is a major statement here. So I'm just curious if anything actually changed in your mind between kind of Investor Day commentary and today?

So I think that -- 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 -- [service] performance improving in May versus April and then in June versus April and May.

And so I think that when you think about all the progress we've done in terms of pricing, especially at MT, which was really the biggest [prize] 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 the fourth of July, celebrating Independence Day here in the U.S. and you're on call with Wuxi, where companies are shutting down and the team is putting the amazing feat that we were describing before.

So just this gives you an idea of the volatility that you have to deal with. But as I said, the pieces are coming together nicely so far.

I appreciate that. Again, on orders, I know we've talked a lot about this. I think it's hard to -- some of the year-on-year comparisons just become challenging just because the numbers are weird in price and inflation.

If you were to think about -- and let's strip out MT because that's its own kind of animal, but if we think about IP and CCT orders, if we think about it on like a dollar basis per day or something like that, how do you see that going from like a 2Q level? Are orders per day still going up?

I don't care about the year-on-year so much. I'm just thinking about the sequential progression in dollar terms from here. How do you see that?

So when you look -- it's a little bit different picture, I would say, depending on the different markets. But if you look at the Q2, in the short-cycle indicators, so you're talking about baseline, parts, service, valves.

And actually, we are really looking at some of those numbers every day or every week, so exactly what you're saying. Q2 was a very strong quarter. So -- and this was sequentially, was -- 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 projects to come out stronger in the second half of the year. That is for the short cycle in IP.

We see also some good sequential orders in connectors, for example, as well as in components, coming mainly from aerospace and defense. And those are very stronger, compensating some of the industrial connectors that Emmanuel was talking about, which showed some weakness sequentially. Did I answer your question?

Yes. Perfectly.

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

You have Sabrina Abrams on for Andrew Obin. Can you just talk, please, about the structure of inventory on your own balance sheet and sort of how much of the issue is sort of a golden screw issue?

How do you think about dealing with the potential bullwhip effect down the line when lead times normalize? And when do you think levels of working capital start to normalize?

Yes. So obviously, working capital is a huge issue for us. Working capital has been a use of cash in the first half and a really large one. And so right now, I would say that we 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 agreed on and that we haven't been able to -- 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, is a good description. We have a lot of our projects that are half finished or 90% finished and are not leaving the dock because we're missing a motor, we're missing a casting.

And so we're focusing on making sure that we improve our supply chain. At the same time, as Luca was saying, we improve the velocity through our factories. And I think this is going to give us some significant benefits in the second half in terms of working capital.

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

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're really paying attention to our consumption of energy. And we are really working with the business in order to reduce our electrical energy consumption.

And then on the -- over the long -- the medium and long term is 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 a significant portion, like for instance, when a typical solar panel project for our facilities between 10% to 20% of the energy that we need, 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.

A couple of questions on MT. What will price cost coverage actually look like when all the actions you've taken, the contract negotiation process, is fully complete? What will that coverage ratio look like?

And then in these new contracts, are -- is there anything structurally different about how you might be able to pass on raw material inflation and deflation in the future, looking forward, that is maybe different than the structure previously? And then I have a follow-up.

Okay. Thanks, Matt. First of all, I'm very proud of the results that has been done by the team because the team has been able to shift, as we said, the auto paradigm of giving price and then be able to obtain price.

When we look at the cost price equation, if you look at the entire inflationary costs, including energy, et cetera, we are still not able to cover everything. So for 2022, it's going to be a hit when you look at the [oil] cost inflation. Better picture if you just look only on the material side.

When you look at the -- as we're 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 take that negotiation to our advantage. But as we've shared the pain, then it will be shared also the other side when you move in the other direction. So I think that, that will present an opportunity for us.

And as Emmanuel always describe this, this is a timely thing and we will come out of this in the next 18, 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 or you set forth at your Analyst Day as of late?

Sure. Thanks, Matt. First of all, these are electrified platforms. So you're talking about both EV and hybrid. So this is -- I mean, 18 electrified platforms in the quarter is massive. And if you -- to give you some examples, these are customers like BYD or a new part of Tesla. So these are all very good, successful.

Our win rate in awards of electrified platforms is considerably higher than our global market share today. And so in 2022, like in 2021, our market share in electrified platforms will be higher already than internal combustion engine.

So -- and the other thing is that this is perfectly aligned for us to get to that 37% market share that we discussed during the Investor Day and that we said all in the prepared remarks, we are on a good path there.

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