Welcome to ITT's 2018 Fourth Quarter Conference Call. Today is Friday, February 22, 2019. And starting the call from ITT today is Jessica Kourakos, Head of Investor Relations. She is joined by Luca Savi, President and Chief Executive Officer; and Tom Scalera, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 12:00 PM Eastern Time. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Jessica Kourakos. You may begin.

Thank you, Maria, and good morning. Welcome to ITT's 2018 earnings and 2019 guidance call. As Maria mentioned, I am Jessica Kourakos, and with me today are Luca Savi, ITT's President and Chief Executive Officer, and Tom Scalera, ITT's Chief Financial Officer. I'd like to highlight that this morning's presentation, press release and reconciliations of GAAP and non-GAAP financial measures can be found on our website at itt.com/ir. Before we begin please note that our discussion will primarily focus on non-GAAP or adjusted measures, including adjusted segment operating income, adjusted margins and adjusted EPS unless otherwise indicated. During the course of this call, we will make forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. No forward-looking statements can be guaranteed and actual results may differ materially from those projected. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. Forward-looking statements made on this call should be evaluated together with the risks and uncertainties that affect our business, particularly those disclosed in our SEC filings. With that let me turn the call over Luca.

Thank you, Jessica. Good morning, and thank you everyone for joining us. I am very honored and humbled to be with you today on my first investor call as ITT's CEO to discuss our record 2018 results, our solid 2019 guidance, and our capital deployment philosophy for the future. Later during our discussion, I will provide you with some insights into my vision for ITT, and more specifically the actions and the approach that we are going to take to deliver on the tremendous growth potential of this historic company that is approaching its 100th year anniversary. So with that, let me begin with the 2018 strategic highlights on slide three. Thanks to the dedicated efforts of our teams across every value center. ITT delivered record orders and revenue, record operating income and margins, record earnings per share, and what they like the most, record free cash flow. We delivered these results while continuing to fund critical long-term strategic investments. Organic orders grew 8% driven by global market share gains and favorable end market demand in chemical, aerospace and defense, and oil and gas. The strong order intake drove our total backlog up 14% excluding FX. Backlog at both IP and CCT improved 18%, providing us with significant revenue visibility into 2019. Total revenue of $2.75 billion increased 4% organically. Segment operating income increased 18%, and margins improved 150 basis points to 15.1%. In addition, we delivered earnings per share of $3.23 and 25% growth. We also produced another strong year of free cash flow, with growth of 34% on a 108% conversion of net income. This is our second consecutive year with a conversion of 100% or better. Our 2018 free cash flow performance was driven by 100 basis point improvement in organic working capital as a percentage of…

Thank you, Luca. Let's now turn to ITT's adjusted fourth quarter results on Slide 5. Organic quarters increased 2% driven by 36% oil and gas growth from project and short cycle demand at IP. Transportation orders were down 1% reflecting an $18 million prior year defense order at CCT. Excluding that impact ITT organic orders would have improved 5% in Q4. Organic revenue improved 1% on solid chemical growth that was diluted by the timing of oil and gas projects shipments at IP and the Friction OEM market dynamics that Luca discussed. Segment operating income improved 11% due to volume and productivity actions partially offset by strategic investments, price mix and commodity costs. Lastly, fourth quarter EPS increased 28% to $0.82 per share reflecting the double digit segment OI growth, favorable corporate costs, and tax favorability in the U.S. and Italy. Slide six shows our Q4 adjusted segment margin walk. Margins improved 140 basis points in total or 170 basis points from an operational perspective before FX and investments. The operational drivers in Q4 were productivity gains including supply chain actions and continued operational improvements at our connector facilities partially offset by a higher material costs. Our enhanced approach to driving operational excellence is clearly producing results as total segment margins improved by at least 130 basis points every quarter this year. The 2018 full-year margin improvement of 150 basis points was driven by 220 basis point improvement at IP and a 250 basis point improvement at CCT. Our 2018 operational momentum and significant set of self-help opportunities provides a solid margin tailwind into 2019 and beyond. Turning now to the fourth quarter adjusted segment results starting on slide seven with Motion Technologies, MT organic revenue increased 1%, driven by a 16% increase in KONI, primarily due to strength in…

Thank you, Tom. Before we discuss the 2019 guidance, I thought this would be the right moment for me to provide my future vision for value creation at ITT. First, let me start with one of my favorite ways to describe ITT. It is a collection of giants. Many of you have heard me use this phrase before, because I believe it. We have a diversified portfolio of companies and brands that have tremendous potential to gain global market share. How we cultivate our opportunities and how we grow from here will depend on how we will execute our top three priorities. These are customer centricity, operational excellence and efficient capital deployment. These are no new priorities for ITT. But going forward, our energized high performance culture, we drive these priorities we did intensify focus on execution, accountability, and speed. The entrepreneurial way with which we attack the many opportunities in front of us will unlock incremental value for our customers and our shareholders. In my previous role as CEO at ITT I had the opportunity to deeply engage with each and every business and I've been able to see and feel and touch and smell the opportunities to create value first hand. I believe we have an abundance of these internal self-help opportunities and it is our duty to realize them and to realize them with speed. To make this happen we first need to energize the culture and ignite more of an entity wide entrepreneurial spirit. I grew up in an entrepreneur in a family in a small village in Italy as you know where my father made Parmesan cheese. So this way of operating is really a way of life to me and I believe this is how we need to operate at ITT every day and…

Thanks, Luca. Let's move to slide 12 to review - review or 2019 revenue outlook by market. Starting with automotive we expect mid-single digit growth in a flash global market due to our recent share gains in Europe, China and North America. In Europe, we believe we will outpace the market by 2 percentage points to five percentage points of growth due to significant second- half OEM platform ramp ups with large German and French manufacturers. In China and North America, we will outperform the markets once again by double-digits due to the continued ramp of key SUV and light truck platforms in our Mexico facility and strong second- half growth rates from new platforms and ramps in China, including share gains with major global and local OEMs. In the chemical and industrial pump markets, we are expecting growth in the mid-single-digit range led by North American and Asian petrochemical projects in backlog and modestly improved short cycle demand across industrial market. Aerospace and defense is expected to grow mid-single-digits in 2019, and on strong commercial aerospace component and connecter demand aligned with the 737 Max, 777X production ramps and Airbus related share gains, partially offset by difficult comparisons in defense programs and rotorcraft. In general and industrial markets, we expect low-single-digit growth due to relatively stable conditions in North America and growth in medical and EV connectors. And lastly, oil and gas is expected to be up high-single-digits on upstream and downstream project activity in stable short cycle conditions. Note that our market assumptions are based on WTI staying around the $55 per barrel range. On slide 13, we provided an overview of the 60 basis points to 120 basis points of margin expansion that we are targeting for 2019. The expansion will be driven by improved volumes and…

So, let's wrap it up here with an overview of our approach to capital deployment on slide 15. Our approach to capital deployment is grounded in a balanced, disciplined and close to core approach. Our priorities remain funding of organic investments that provide significant returns with a low risk profiles. Before we approve these investments, we will go deep on our analysis as a team and especially now in these more uncertain environments. Next, we will focus on close to core acquisitions that announced the ITT terms and add greater portfolio balance. Our approach here is based on deep cultivation and unprecedented granularity in our analysis. We will target opportunities that provide additional geographic reach and/or technologies to enhance our position in the markets we currently serve. And lastly, we will continue to provide meaningful returns to our shareholders including dividend increases and timely share repurchases. I am a strong believer that actions speak much louder than words. So, today, we are announcing three actions that demonstrate our capital deployment philosophy. Action number one, we are announcing a 10% increase to our quarterly dividend, representing our seventh consecutive increase and our first double-digit increase since 2014. Action number two, we are announcing an incremental $25 million in share repurchases. These are additive to the $25 million we announced in November 2018. Of the total $50 million of authorized we executed $11 million under a 10b5-1 in January and $39 million remains available today. Action number three, today we're announcing the signing of an agreement to acquire Rheinhütte Pumps, an especially centrifugal pump manufacturer with over 160 years of experience that is highly complementary to our good business and its 170 years of experience. Rheinhütte is headquartered in Wiesbaden, Germany with over 80% of its revenue generated outside of the Americas. Rheinhütte produced approximately $66 million in revenue in 2018 with a strong focus in general industry, chemical, and mining markets, and an installed base that produces a strong aftermarket revenue stream at 40%. This close to core acquisition will enhance IP's global reach and product range accelerating efforts to grow globally in target markets like chemical. From a financial perspective, the purchase price was approximately 9 times 2019 EBITDA and Rheinhütte is expected to be accreted to adjusted EPS in the first full-year. No benefits of this acquisition are reflected in our 2019 guidance as we expect to close the transaction in the second quarter and we provide updated information then. That concludes our prepared remarks today. We covered a lot of ground but I wanted to make sure that I provided you all with a comprehensive overview of ITT's strong foundation and a significant number of opportunities that we have to enhance customer centricity to drive operational excellence and to efficiently deploy capital. Our actions, we continue to speak louder than our words, as we navigate market dynamics in 2019 and deliver on our commitments. Maria, you can now begin the Q&A.

Thank you. The floor is now open for questions. [Operator Instructions] Thank you. Our first question is coming from Jeff Hammond of KeyBanc Capital Markets.

Hi, good morning.

Good morning, Jeff.

Good morning, Jeff.

Luca, thanks for all the great color. That was great. Just on -- you talked about -- just kind of going through the facilities and finding still a lot of opportunity after a really good year, but the productivity bridge is kind of a deceleration, so can you kind of balance the -- what you see as the long run opportunity with what seems like maybe a little bit lower productivity growth in '19?

Okay. So, I think it's different for, I would say, different value centers, but as I said, we are still opportunities rich. So when we are looking at our factories in IP as well in CCT, I think that we have opportunities to lean out our factories in terms of material flow, in terms of increasing the throughput, in terms of getting more labor productivity as well as more machine efficiencies. Another aspect where we are expecting more productivity is on the supply chain effectiveness. This is true across all of the three value centers. Now, one thing also to bear in mind is that probably when we start seeing when we think about MT some positive momentum in 2019 with the ramp up of the Mexico facility as well. I don't know, Tom if you want to add anything to that.

Yes, and Jeff, I would say too on the 50 basis points, I think what's not there is probably in the line up above which is the IP project performance is probably up in the mixed line. And that's a real productivity driver as well just the way we classified it on the walk if that's where you're picking up the 50 basis points mix in our product execution. We mentioned that we have good backlog in our IP projects and the margin profile is solid, and that's another indication of the execution that we have, but I'd also add lastly that material costs are obviously one of the drivers that dilute down the productivity as well. So some of the headwinds there that we're dealing with are just rising commodities, but I would say the underlying level of productivity that Luca mentioned and that we're driving on a gross basis is higher than it was entering this point last year.

Okay, helpful. And then just on IP it looks like you called out unfavorable mix, I just want to understand a little bit better because it seemed like short cycle kind of appeased [ph] projects. And then I think you called out a couple one-time items if you can if you can quantify those two items in any way, that'd be great.

Sure, yes. Just the mix at IP was a little bit of the revenue recognition's flow through that I won't bore you with on the way the projects from the past flowed through in Q4 into the new revenue recognition. So I would consider that kind of a not an indication of how we enter 2019. So that was a little bit of a mix within the project universe, but not one that stays with us going forward. I think as we mentioned the mix for projects and the margins start to improve as we move into next year. The temporary items I would say that that hit IP in Q4 were the due diligence cost associated with the acquisition that we announced today. We've been working on that very aggressively through the quarter, a lot of deep due diligence, so we had that issue, and then we had or that opportunity I should say, and then we did have some expediting cost associated with our lien reset in our IP location. Those two kind of Q4 items probably impacted us by about 100 basis points to 120 basis points in Q4 and really all three of those items I described are not factors as we look into 2019.

Okay. And if I could sneak in one more, the 1Q guide of kind of 2% organic, is that just simply a function of CCT IP kind of grow within the full-year range and then MT has got you know got a bigger drag you know given some of the noise in China and in Europe. I'll back in the queue.

That's right, Jeff. That's the way to think about it. We'll continue to outperform those markets particularly North America, China and Europe, but we are expecting a slower start to the year in China and in Europe. And as the year progresses, a lot of the platforms that we're on that are ramping is particularly in Europe and also in China, they are loaded into the second- half of the year.

Okay. Thanks a lot.

Thanks, Jeff.

Our next question comes from line of Joe Giordano of Cowen.

Hey, guys. Good morning.

Hi, Joe.

Hi, Joe.

Can you get into maybe quantifying a little bit how much the Mexico facility has been a drag on margins maybe in 2018 as it's been ramping towards breakeven. And what percentage of like your pads is putting out right now?

Well, Joe, so it's been a drag all year, we've basically a good chunk of your strategic investments that we've had at MT this year are really tied to ramping up that location with some other growth that we've had in -- China as well, but if you look at the strategic investments in total and again Mexico is a big piece of that or without getting into all the sub details, MT margins on a full-year basis were impacted by 90 basis points from strategic investment, so I would look at that as being heavily weighted to the MT Mexico facility. I think the good news as we mentioned is we've reached a breakeven point at Mexico much sooner than we expected and the ramp that we're projecting for that location is very significant next year. We're ramping up some of the biggest platforms in North America and we'll continue to see a significant increase in volumes running through that location so that'll be part of the margin story for MT next year that will be much more positive than what we had in the investment phase in 2018.

So, if I compare to that, Tom is, if you look at this Mexico facility as we said the Cesare and the team were able to bring it to breakeven in Q4. That was the third quarter of operation and what we can tell you is that they are already making money in January. So that drag is no longer there in 2019.

And then so, is there any real reason we shouldn't think that facility which I'm assuming will basically be supplying your entire North American or close to it should be like a high teens facility by like 2020 or something like that is that a reasonable expectation, is that have a pretty impactful change to your overall dynamic there?

I think that -- I think you're right and but I would say Cesare, if you're listening to the call and you want to beat it and please feel free, but your expectation is pretty spot on, Joe.

Okay, fair enough. Look, if I can -- now that you've been all around the firm that you're in your seat here. When I think about putting your deployment strategy into context, is there anything that you've seen that maybe it doesn't make sense for ITT anymore where you're not planning on deploying enough growth capital where you look for potential divestments?

Well, one thing going around as I said I really think that one confirmation that they're having going around and meeting with some of the customers as well as our people is that ITT is really a portfolio of gems and each that we have a really good niches. So, as it stands right now I'm pretty comfortable with what we have now in our portfolio. And when it comes to capital deployment and I think that our -- we have done a pretty good job in the way that we deployed capital in the past. If you look at historically one-third, one-third, one-third, one-third, one-third organic, one-third in acquisition, one-third in shareholder return to the shareholders. That has been a very good imbalanced strategy that I will work to emulate and copy and we will keep on in that direction, I would say.

And if I can sneak in one last one, a competitor of yours in the pump space yesterday, it was similarly positive on the project outlook for oil and gas, but also noted that pricing was still pretty challenging in that - in that market. And is that -- so look for some color there, and they also said that second- half turnaround MRO type activity is something that they're keeping a pretty sharp eye on, so just curious, if you have any color on either of those?

Okay. So if I think about today the market, I would say, yes, there are several opportunities out there in the market, if we think about this funnel. For us the funnel of opportunities that we ended the year with was larger than the funnel one year ago and this despite a growth of a 13% in orders. So I -- the data we'll -- I would say validate what you said in terms of opportunities for the project. When we look at the price, I would say still a very competitive market there. And I personally haven't experienced a better price in the project just because of all of these opportunities. This has been our experience.

Thanks, guys.

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

Thanks, couple of questions. First with respect I mean, someone something you said earlier Luca that the quality of the IP project backlog, the margin in the project backlog being notably better in 2019 versus 2018, is there any way to sort of quantify that? And then, I have a follow-up on auto.

Yes, probably, I would say, a couple of hundred points, I would say.

Got it. And then, with respect to aftermarket, can you provide what your organic expectation is for ITT or for MT Friction aftermarket in 2019? And then specifically, can you speak to China. I think in one of the slides you had referenced maybe having some success early on in cultivating China after-markets, so also maybe speak to what your approach is in that country versus what your approach has been historically in Europe? Thank you.

Matt, so as the year kind of plays out in the aftermarket, kind of the typical story you'll hear from us as we enter the year, the phasing in the quarterly progression of the aftermarket is always a volatile one for us. We are expecting independent aftermarket to be stronger than it was in 2018. We were kind of flattish there, but we do expect more strength in the independent aftermarket in 2019 kind of in the low-single-digit to mid-single-digit kind of range I would say. And then the other portion of our aftermarket which is more of the dealership aftermarket that that's been also a little bit erratic in the last year and we're keeping a low-single-digit to kind of flattish expectations there, but we are starting to see ramps in that portion of the aftermarket in China and in North America as our installed base is growing. So, we have seen those categories grow off a small base much larger percentages and we think that trend will continue and as it relates to the independent aftermarket in those regions, we are taking some rifle shot approaches at growing selectively where we think it makes sense at this point.

And when in -- Matt, this is Luca. And when you talk about general approach, we say when we look at OES of the aftermarket, we are working closer with the each account, each OEM account by account. And when you look more at the independent aftermarket we're working in all the different regions and then with Continental Europe that to explore even more growth strategies over there.

Great, thank you.

Our next question comes from line of John Inch of Gordon Haskett.

Thank you. Good morning, everyone.

Hi, John.

Hi, John.

Hi, guys. Tom, I think you said -- I know it's a direct quote but you said something to the effect of you're going to be prudent toward deploying capital in this more uncertain environment. Can you give us a context of what you mean by the more uncertain environment like more uncertain versus what timeframe do you mean since start of the year like what exactly do you mean since a year ago like what exactly do you mean and how are you working through that?

Yes, John, I would say that in Q4 and certainly in the automotive markets we've seen the global market slowdown particularly in China and even in Europe. Some of that was timing there are different dynamics but I think that's a market area that we're mindful of. We don't like to get ahead of any of the markets that we serve. We do continue to expect strength in North America and across markets. So that should be a market that's solid for us. But I think as we look at our investments we will continue to be very prudent as kind of Luca discussed the process that we're using, the rigor that we're going through I think as is appropriate as we're rolling through the year we don't want to get ahead of ourselves. But we do feel very good about the backlog we have exiting 2018 ITT across the board is up 14% in backlog that gives us a lot of nice visibility but a lot of the capital we deploy is obviously setting up late 2019 and even in 2020. So I think we're just going to make sure that we're approaching it in the right way, there's obviously the tariff and other uncertainty in the macro environment. So I wouldn't say there's a major takeaway there John other than we're just going to be prudent and keep doing what we've been doing, but we're happy that we have the backlog entering this year that we do.

Okay. So you just hit on an important point, right. The capital you're putting in place sets you up for capacity and other considerations kind of into 2020 and beyond. I mean are you in terms of the runway of your business cadence obviously we can look at motion and look at the $3 billion and so forth. But are you are there other things that you expect that could lead to some sort of a trajectory altering if you will kind of beyond this year. I just you tell me the experience and you both here with the experience of historical ITT. Are there any sort of watch signs you're looking for as part of kind of your deployment of capital pertaining to your own outlook for operations business demand that sort of thing?

I think John that the one thing that we look at probably is the start of the awards that we already have in our kind of treasure chest of wins if you will. So, usually I wouldn't say that particularly on the motion technology side, it's not about necessarily recalculating the amount of capital. It's just about the timing and the phasing. So we don't invest in capital in Motion Technologies until we have an award in hand. The only variable then is exactly when will that project or that award start production. So, with that variable we do look a quarter here and a quarter there to make sure that we're aligning that capital deployment with that award. But I think what's unique about our capital deployment is the certainty and the visibility that we have around Motion Technologies in particular. And I'd say that that remains as solid as it's ever been with a good 30% to 40% ROIC return profile, but the one variable we watch is really when these new platforms start up and like I said, it could move a quarter here and there.

And if I can, if I can build on that on John is that one thing that in answering to these uncertain and volatile environment, we are being very granular and in the questions and then looking at each and every one the request for a copy that comes in, so that we ensure that we do not buy any new machine if we have one machine that is not running in the high 80% or 90% efficiency. And we are really checking if our assets are out there is waiting or not before we sign an approval.

Okay. So, one more final clarification if I hear you right Tom, you are saying that the $3 billion motion backlog, the timing of that could -- it could slide a quarter or two. But that said I think you commented last quarter that you said you expected Chinese and North American OE to accelerate into the mid-teens in 2019. Is that what you expect? And did I characterize the context of what could be project deferral timing by quarter or two, or is there a risk that the $3 billion get pushed out much further if say China auto gets worse or something like that?

John, I don't think we see any major risk to the $3 billion. If you really look at, it's about the award generation and the wins and we're up 20% this year compared to the target of awards that we had for ourselves entering the year. So from that perspective, we're ahead of what we planned on coming into the year and that includes a really significant front axle win in North America on a big ramping platform. So, we feel good about that the $3 billion, timing, production rates, that's always a variable that we're constantly managing over a five year cycle. But like I said it's a quarter here and there and we're always monitoring the conditions before we make the decision. But the core $3 billion is solid and our win rate is better than we expected coming into the year.

Got it. Thanks very much.

Thanks, John.

Our next question comes from one of Andrew Obin of Bank of America.

I was on mute. Good morning. How are you?

Good. How are you?

Good morning, Andrew.

Hi. Just a question, I know you highlighted rotorcraft strength in commercial aerospace is that helicopters. I'm just wondering. And what's driving that strength and what is driving the strength?

I would say this is -- this is one of our I would say another gem, is a beautiful investment, is one of the inorganic investment is a GAAP that we saw in the market a few years back that was discussed at one of our strategic staging meetings when we review the strategy and we realized that we were not playing in the rotorcraft business at all. But one of our competence is really energy absorption noise vibration. These are key and in our center of excellence in Orchard Park, New York. And therefore we will look at the market. So, we saw a gap. We worked very closely with the customers to develop a solution where they had an issue and this translated in millions and millions of dollars of order. The return on invested capital here is beautiful.

So but that -- that's a market share opportunity. It's not the end market, right. It's just you gaining share in the new market.

Absolutely right. And this is what has helped us if you wanted to have the growth in order that we had in the growth in revenue in 2018, but as we said as it's also a very nice beautiful aftermarket opportunities.

Got you. And I apologize if I missed the answer, but on IP you highlighted expediting costs, these seem to linger and given sort of the ramp up and backlog and bullishness, how fast will those go away and what makes you think they won't linger?

Okay. So this is an issue that we have on a specific site. As a matter of fact when we look at delinquent backlog across many of our facilities it went down, it went down in international operations. I gave you the example of Saudi but they could tell you about [Indiscernible] I could tell you about Korea. So all of this is good, but in one specific aside which is the Seneca Falls facility we just reset a layout, we went for a lean and a one piece flow operation for our R&C pumps. These as a change also the way they're planning and scheduling. And therefore they're working together with the supplier hit some bumps in the road. We were out of that now and we are improving. So it will not linger.

Thank you. And I'll just sneak in one more question on sort of more philosophical question. We'll look at CapEx revisions for larger oil and gas companies for North American producers and all we're seeing all of these guys consistently guiding to no CapEx growth. And you know, we have -- you have your other competitors in the flow space. I mean the backlog is just seemed to completely your revenues and backlog just seemed to completely contradict what your large customers are telling the Street in terms of their spending plans. And I'm just trying to reconcile why is the industry seeing those you know good visibility in to 2019 optimistic about the backlog, the numbers are there, you have your customer base is consistently telling the Street even in the E&C space we are seeing the same thing, but your customer base sort of tells the Street that there's not going to be any CapEx growth in 2019, if you could help us? Thank you.

Andrew. Yes, so for us what we have in backlog is generally the orders that we received during the course of 2018 with a lead time of 12 months to 18 months on average, and our oil and gas orders entering backlog entering 2019 you know we're from a invest -- different investment cycle perhaps and those are the ones that we're going to be working on and shipping in 2019. And the strength there for us is, generally the downstream category, where we have the bigger sales expectation, a lot of our growth is already in backlog. So for us, the backlog in oil and gas is strong and the orders really across the oil and gas space, even beyond the projects, the orders were very strong across all the categories in 2018. So we have seen some good -- some good solid growth in the market and we're going to execute on that in 2019. Obviously, the funnel that we're monitoring is what's critical for us as we build order momentum in backlog momentum into 2020. But as it relates to 2019, based on the strength that we see in downstream and some of the other recent wins we've had on the upstream so it to add to that, it gives us the certainty in the oil and gas market today…

And Andrew…

Yes, and now these are all the usual suspects, right. There's nothing strange about people of ordering stuff right?

Correct, and I would say the other thing too is, we're a niche player, so we can win an award here and there and we do end up with at a very nice growth rate. So we're not the biggest player in the space that we do go after very specific opportunities. And that is why we've been able to take some really nice share in the oil and gas market and that's what we're delivering now.

One thing, Andrew, where we suffered probably in Q4 on the oil and gas is connector side of the business. This is much faster and is a small business. You're talking about roughly $30 million, $40 million business yearly. And this is a business as soon as the price of oil collapsed they pull it out and this was more related to the price of the Canadian oil actually than anything else. So, when you - as you see the price of the connected and oil is coming up and we saw also that business of oil and gas connectors picking up as well, but it was mainly related to that probably.

And that's upstream, right.

Industry is upstream, correct.

Thank you very much for a very thorough answer. I appreciate it.

Thank you, Andrew.

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

Good morning, everyone. Thanks for fitting me in here.

Hi, Bryan.

Hi, Bryan.

Just wanted to quickly circle back to the unique platform visibility, you have in Friction is there at this point. To ask more directly any reason to question further OE acceleration into 2020?

Okay. So not really so, as Tom would say, we won those awards, the awards that we are ramping up, the awards that we won two years ago. So, when you see the growth in North America, a lot of the growth that we've come in North America are projects that are already ramping up. So, 80% of that are project that already started the production. Then when you look at Asia in China for instance, the growth is wow, so a lot of the growth in 2019 will come naturally from SOP, so the awards that we won in the last 12 months, 18 months, well they need to start-up production. So the only reason that we were discussing like before with John is, if you are shifting the start-up production by few months or a quarter that I would say, there that is only risk that that we could see.

Okay, and I appreciate that color. And then, on the non-Friction side of Motion Tech, can you speak to the current blended margin of non-Friction. I think you've said in recent past something in the 10% range, and then where we should expect that to go in 2019/2020?

Okay. So let me give you some color on that and then Tom you may add to that. So when you look at - there are three different businesses of over there, there is KONI, Wolverine, and Axtone. So when you look at KONI, KONI was a turnaround story and that from a turnaround story it became a platform from growth, KONI as - has achieved that already very good and healthy double-digit margin and even though, I would say, there is room to keep on improving to reach the entitlement. The acquisitions Axtone and Wolverine, they are on their journey to get to what we've seen in their [ph] entitlement need, but I do not. Tom, if you want to add to anything to that?

That's right, Luca and I think the KONI generally more established has been moving into the mid-teens, low mid-teens kind of range, Axtone and Wolverine mid to high single-digits on the journey. Those three entities will be an important part of the margin expansion story for MT. Obviously, we need to keep building the momentum and it's step-by-step, it's going to be a gradual improvement in those businesses. But they do drive some of the margin expansion that we're planning for MT in 2019.

All right. Thank you again.

All right. Thanks.

Thanks.

And ladies and gentlemen, we have time for one more question. Our final question comes from one of Nathan Jones of Stifel.

Good morning, everyone.

Hi, Nathan.

Hi, Nathan.

Good thing I'm last, I've only got about half an hour's worth of questions.

Perfect.

Just starting with your outlook on the auto and rail markets, you've got flat global market growth. Can you possibly split that into what your assumption is on rail and then what your assumption is on auto OEM and auto aftermarket?

So, for auto, we were in the flattish range, that's definitely in the -- depending on the region anywhere from flat to plus or minus 1. So, that's how we've looked across the spectrum. I would say on rail, probably a little bit more of a low-single-digit market in rail and it's a very regional business rail, so you really have to kind of break it down by what we're seeing in the North American, the European and the China markets. I'd say we had a little more strength as of late and good backlog in Europe and North America and I think we're a little bit more cautious on the China rail market dynamics going into 2019.

The auto aftermarket?

That one we don't really tagged to the market, we kind of look at our own projections and I think our blend of some of the prior commentary, Nathan, probably gets the auto aftermarket for us in a flattish to low-single-digit kind of growth environment.

Okay. And then on the -- I mean IP and CCT businesses I guess combined, you've got high-teens backlog growth year-over-year there, some continuing pretty strong orders in IP, get your, only talking about 3% to 5% growth in all of the segments. So, IP is got to be in that as well. Can you maybe square that with the backlog growth with continued strong what is here with only, only 3% to 5% growth in that segment in 2019?

So, I think Nathan, obviously, there's a book in our expectations as we go into the year. We do enter both IP and CCT with more backlog than we had last year at this point. So that gives us some good visibility, but I think there's always that 40%, 50%, 60% of our revenue that still book and bill in the short cycle, where there's some uncertainty there. The other factor that while we have great project visibility on the IP side, we also have to be aligned with our customers on when they will take delivery and that can be a factor at times in the ultimate conversion of that backlog to revenue. So, there's a little bit of those things that we think about as we look through in our backlog, but a lot of our backlog as you can imagine the short cycle side, is really part of the Q1 or Q2 story and then we'll wait to see how the back-half of the year fills in.

Just a little bit more, there's some lack of visibility into the second-half.

I would say, and plus on the project side, delivery is always it's partially our execution and we're going to work like heck to make sure that we're hitting our marks and then it's also the customer's final delivery and acceptance states and sometimes there could be some pushing and pulling there that that could take really good backlog that's ready to go and turned it into to backlog versus revenue as we exit the year, so we're hopeful that we can get them all out the door on schedule, but we do plan for some -- customer perhaps delays of projects that are nearly ready to go.

Okay. And then I've got a longer one for Luca here. You did mention, margin entitlements and I've heard some of these before. Maybe you could run through what you think the margin entitlements are over a cycle longer-term in IP, MT and CCT and how you get from here to there?

Okay. So when we look at the margin entitlement, I don't know if we'll all that time, Nathan right now, but I know that we're going to have later on our one-to-one. So, but in terms of margin entitlement for IP, I think that it should be in 15% plus, this is what we thought and this is what we keep on thinking. And the reason for that is because we continue to see opportunities in terms of leading the fact as I said that the VAVE in terms of we -- how are we engineer the product, the supply chain effectiveness, but also if you think about the -- with the acquisition of Ryan [indiscernible] today is going to be a great opportunity for us also to expand to leverage more our engineering as well as to look at the opportunities in terms of our footprint. So these only confirmed this view of 15% plus for IP. When we look at CCT, I think that is the in the high-teens and it's a little bit of a same story. I was know in terms of how do we reach these high-teens, high-teen plus for CCT is -- it's really in terms of -- I would say efficiencies on -- in the factories in the way that with our engineered product and the supply chain again. Now also the strategy of where we make and buy and where we make, what we decide to make, so, you've seen our transfer to Nogales. Maybe -- there more utilization of our factory in Shenzhen on the connector side of the business, all of that will help us in getting to the high-teens plus for CCT. All of these I would say are between three years to five years vision. Regarding MT, I think that we can say that we will continuously solidly expand our MT productivity and these will come obviously from the acquisitions that we'll have to reach their entitlement which is going to be in the double-digit. But the ramp up of the Mexican facilities will help in the short-term. Now, the material cost is near at where we are going after tremendously. This is also what has affected a little bit 2018 in terms of our MT results. And as well what I'm really pleased about is every time I go into a Friction factory shop floor; the team is always creative in finding a way to find further efficiency and further savings, so solid expansion there as well.

Okay. Thanks very much and for all the color.

Thanks, Nathan.

Thank you.

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