ITT Inc. (ITT) Q2 2019 Earnings Report, Transcript and Summary

Welcome to ITT's 2019 Second Quarter Conference Call. Today is Friday, August 02, 2019. Today's call is being recorded and will be available for replay beginning at 12:00 PM Eastern [Operator Instructions]. It is now my pleasure to turn the floor over to Emmanuel Caprais, Vice President of Finance, FP&A and Investor Relations, you may begin.

Thank you, Laurie and good morning. Welcome to ITT's second quarter 2019 earnings call. This is Emmanuel and with me today are Luca Savi, President and Chief Executive Officer and Tom Scalera, Chief Financial Officer. I'd like to highlight that this morning's presentation, press release and reconciliations of non-GAAP financial measures to the most comparable GAAP measure, can be found on our website at itt.com/investors. Before we begin please note that our discussion will refer exclusively to non-GAAP or adjusted measures unless otherwise indicated. Today's call will contain forward-looking statements that are subject to risks and uncertainties. Actual results may vary materially. All such statements should be evaluated together with the Safe Harbor disclosure and the other risks and uncertainties that affect our business, including those disclosed in our SEC filings. Let me now turn the call over to Luca.

Thank you, Emmanuel, and hello everyone. Thank you for joining us to discuss today ITT's record second quarter results. I'm very proud of all the ITT once again delivered revenues and operating income that exceeded our expectation and validated our strategic priorities. This quarter marks the eighth consecutive quarter of year-over-year organic revenue growth and the eighth consecutive quarter of year-over-year segment margin growth. All segments contributed reflecting the strength of our diversified portfolio. The level of our performance delivered by ITT this quarter, is a testament to the depth and the breadth of the progress we've made over the past three years. Friction OEM outperformed global auto by 1,100 basis points and grew revenue by 4%. KONI Axtone grew orders 20% and revenue 16%. KONI operating margin reached high double-digit. Friction Mexico is already accretive to MT adjusted margin in Year 1. Industrial Process grew revenue 13% and IP expanding margin by 100 basis points, including 200 basis point of project margin expansion. CCT margin, it's a record 17.7% and connector margins were up 210 basis points. We reduced corporate costs by 24% and we funded $5 million of investment to drive future growth. As a result of this outperformance, Q2 EPS grew 13% to a record $0.93 per share and we are raising the midpoint of our full year 2019 EPS guidance for the second time this year to $3.63 per share. So let's take a look at the Q2 financial highlights on Slide 3. We grew organic revenue 5% and exceeded $700 million in quarterly revenue for the first time in our history. We grew segment operating income margin 60 basis points to 16.1%. We grew operating income margins 100 basis points to 14.7% and we grew earnings per share 13% to a record $0.93 per share. When you look at our earnings growth excluding foreign exchange, segment margins grew 100 basis points, operating income grew 18% and earnings per share grew 21%. As you know by now at ITT we focus on executing our top priority and building a high-performance organization with a continuous improvement mindset. Our resilient and the sustainability of our result are the more important as we face more uncertain market conditions. To continue to deliver in this environment, we are later focused on three priorities; operational excellence, customer centricity and effective capital deployment. Beginning with operational excellence. In the quarter, all three value centers delivered 50 basis points on margin expansion. IP's 100 basis points margin expansion is even more outstanding when you factor in the impact of the unfavorable mix driven by the 51% project growth. CCT expanded margin by 80 basis points, driven by a strong connector performance especially at our Nogales, Mexico and Shenzhen China side. As connector margins overall are benefiting from product line transferred to this facility. Finally MT's resilience has been nothing short of remarkable. As the team delivered 50 basis points of margin improvement and friction OEM grew 4% in difficult market conditions. I'm also very proud of David and his team. They delivered high teens margin at KONI and high single-digit margin at Axtone. As you can see we're effectively deploying our work check of self-help opportunities and we will continue to identify additional actions along the way. Let me provide you some examples. At CCT we have completed the transfer of 6 connector product lines and we are now transferring 4 additional product lines to our best cost plan. We are driving lean initiatives at our Valencia, California facility to make it our Aerospace Center of Excellence in both manufacturing and research and development. In addition our new plating line in Mexico is installed. It will start production of plated back shelf and other connector components later this year. This will not only drive down our cost but also it will improve our lead time. If you really want to see this impressive piece of equipment, I will be tweeting a picture of it later on. My Twitter handle is @LucaSaviforITT. That's the number 4. At IP, we continued our lean journey for our critical baseline pumps product lines. We focus on improving bottlenecks in machining and supply chain to drive even stronger outflow. We launched several VAVE initiatives to design cost out of our larger pump product and strengthen our competitiveness in industrial market. And we are proactively assessing our IP global footprint and overhead cost structure to a direct more volatile market condition. At MT, we transfer the coiled spring production to Poland and executed a partial restructuring of our action plant in Germany to improve our cost competitiveness and to better serve our ready customers. With expanded margins at our Mexico facility once again and North American revenues grew by 43%. And we've continued to reflect our labor over head cost and capital expenditure at our European and China plant to better align with current market conditions. The ITT leadership team and I are actively engaged in energizing in driving improvements across the organization. We observed firsthand the improvement on our factory sharp flow during our monthly operational reviews together with our value center team at their location, not at HQ. For example, this quarter we examined changeover improvement at MT in Borgia, Italy. At IP Seneca Falls we debated how we track overall equipment efficiency for our main machine. And at CCT Orchard Park, we analyzed the sharp flow layout to improve material flow and manufacturing efficiency. Our journey of betterment is a subject that I'm very passionate about and unlocking improvement through hands-on engagement with our businesses is critical for our future success. And frankly, this level of engagement and granularity is simply the right thing to do. Let's move to our next priority customer-centricity. I'm very happy that our three value centers delivered organic revenue growth in this quarter. We have grown organic revenue 8 quarters in a row. This is further validation that our share gain strategies are bearing fruit. IP continues to deliver above-market growth as we are executing on the backlog of orders. Our project revenue growth was driven by large global delivery and we improved project margins by triple-digit. In Q2, IP signed a five-year agreement with a large Middle East oil and gas customer locking in increased market share and further strengthening our relationship. At MT, we continue to deliver in difficult market conditions. In Q2, we gained share in global OEM market with friction sales outperforming by more than 1,100 basis points. We continue to grow in North America in the ramp-up of awarded platform. And KONI Axtone delivered strong growth in terms of orders and sales in the quarter at our railway platform continue to gain share. Finally, at CCT, we delivered 5% organic revenue growth on the back of strong aerospace and defense activities and moderate industrial growth. It is important to note that both connectors and components grew revenue in the second quarter by 6% and 4% respectively. Our CCT backlog excluding foreign exchange is up 14% compared to the prior year. And our year-to-date book-to-bill stands at a healthy 1.07%. Finally, moving onto our last priority of the effective capital deployment on Slide 4. I'm happy with the progress we've made on the acquisition front. In 2019, we deployed $120 million in capital to augment IP and CCT's technological and geographic reach. These acquisitions are expected to provide approximately $88 million of annual revenue. Both RPG and Matrix acquisitions are the results of long-term cultivation and a disciplined approach to inorganic investments. They are expected to be accretive in the first year and generated attractive returns. I want to welcome our Matrix colleague to the ITT center. These acquisitions allow the CCT team to build upon 25 years of aerospace and defense from project experience. Matrix proprietary production process we drive growth in harsh environment engine component program, as we strengthen our competitive position. With new addition to our aerospace portfolio, we also benefit from CCT's customer intimacy to support aggressive growth trend. In the past three months, we have generated solid acquisition momentum with this due protocol and discipline transaction. And I look forward to sharing progress with you in the future. Let me now turn it over to Tom, who will review the revenue, adjusted earnings and guidance in more detail. Tom?

Thank you, Luca. Let's now turn to the Q2 revenue and adjusted income on Slide 5. Organic orders decreased 5% driven by a 27% decline in oil and gas on project delays and a large prior year upstream project. That more than offset 12% growth in short-cycle activity. Industrial orders declined 6% on pump project in short-cycle demand. However, despite the pressures in the global automotive market, transportation orders were flat as 39% growth in rail and solid OEM friction demand in North America and Europe. It was offset by China auto and A&D timing. The pricing order pressure in the quarter, our backlog excluding foreign exchange remained strong at plus 5% compared to the prior year. On the revenue front, organic revenue grew 5% and once again reflected broad-based growth across all major end markets. Oil and gas grew 29%, industrial grew 5% and transportation grew 3%. The 5% ITT revenue growth also demonstrated the strength of our geographic and end-market diversification. North America grew 9% and double-digit growth in aerospace, auto, oil and gas and rail. Asia grew 7% on project and general industrial strength that more than offset slower than anticipated auto production rates in China. And Europe was flat, as rail and general industrial strength was partially offset by auto aftermarket. Segment operating income improved 7% excluding $7 million of unfavorable foreign exchange, segment operating income improved 13%. The income expansion was driven by volume, productivity, cost containment and supply chain actions, as our operational execution advances to consistently higher level of the performance. These gains were partially offset by higher tariffs, commodity costs and unfavorable mix due to strong comp project delivery and 5 million of strategic investments at MT and CCT. In the quarter, we grew earnings per share by 13% and delivered EPS of $0.93 per share. Excluding unfavorable foreign exchange, EPS grew 21%. In addition to the strong segment operating income, we also drove down corporate costs by 24% and we executed strategies that produced interest income, incremental investment returns and a lower tax rate. Slide 6 provides the details of our adjusted segment margin performance in the quarter. Q2 margins improved 60 basis point to 16.1% powered by 200 basis points of operational margin expansion. This quarter marks our eighth consecutive quarter of year-over-year total margin expansion with an average growth rate of 120 basis points per quarter. The Q2 expansion drivers were 200 basis points from operational execution that delivered significant productivity, supply chain and restructuring benefits across segments. The primary sources of the improvement were; project execution at IP, KONI in Mexico at MT and connector operations at CCT. In addition, the margin growth benefited from strong share gain driven volume partially offset by incremental tariffs and product mix. Price was slightly positive in the quarter and IP and CCT improvement had a modest decrease at MT, reflecting successful pricing actions in rail. In Q2, the 200 basis points of operational margin growth was diluted by minus 40 basis points of foreign exchange and minus 30 basis points of acquisition. We also funded 70 basis points of critical strategic investments in the quarter, including ITT Smart Pad application development and a CCT plating line installation at a world-class facility in Nogales, Mexico. Our enhanced approach to driving operational excellence is consistently producing strong margin expansion, as we successfully execute on our now famous war chest of self-help opportunities. And we will continue to be proactive in the second half of 2019 to accelerate actions that will provide incremental benefit in a more uncertain 2020. Now let's turn to our segment results, starting with Motion Technologies, revenue and adjusted income on Slide 7. Despite the challenging conditions in the auto market, MT organic revenue increased 1%. This growth in the face of stiff headwind clearly demonstrates the intensity of MT share gains and our geographic and end-market diversity. In the second quarter, friction grew 1% driven by 4% OEM growth that was partially offset by aftermarket softness. The 4% friction OEM growth was powered by 43% growth in North America and 2% growth in Europe that more than offset a slower than anticipated in China market. Friction outgrew every global market and was more than 1,100 basis points better than the overall auto market. In addition, our KONI and Axtone revenue grew 16% and orders grew 20% in global share gains in rail. This revenue growth was offset by a 16% decline at Wolverine and weak aftermarket demand and impacts from customer share lock. MT's segment operating income decreased 2% to $36 million due to unfavorable foreign exchange of $5 million. Segment operating income increased 7% excluding foreign exchange. The constant currency income growth was driven by operating efficiencies and supply chain actions, combined with proactive cost containment and restructuring actions that more than offset higher commodity costs entirely. MT expanded margin 50 basis points in the quarter to 17.8% and 560 basis point growth at KONI an exceptional execution at MT Mexico. Lastly from a strategic perspective, the friction team won 9 new electric vehicle platforms with leading OEMs across more of the regions. And KONI advanced share capture efforts and high-speed rail and introduced a new unique sensor-enabled shock absorber for electric bus applications that included the CCT connector. Next up is industrial process revenue and adjusted income on Slide 8. IP delivered organic revenue growth of 13% on a 51% increase in projects, combined with a 3% increase in short-cycle activity. The project strength was delivered across the oil and gas value chain and in petrochem market. From a geographic perspective, project revenue grew 40% or more in North America, the Middle East and Asia. The 3% increase in short-cycle activity was driven by 11% aftermarket growth in oil and gas and chemical parts. Baseline pumps and valves declined 6% on general industrial weakness. IP organic orders decreased 13% due to a 35% decrease in projects and a 5% decrease in short cycle that was primarily related to valve. The decline in projects reflected a large prior year upstream project and increased selectiveness in our project screening activity. In addition, chemical project order growth of 15% was offset by general industry in mining. IP's backlog was flat to the prior year excluding foreign exchange and including $4 million from the RPG acquisition. IP's second quarter segment operating income increased 24% to $29 million and margins improved 100 basis points to 12.5%. Excluding the impact of the RPG acquisition, IP margins actually grew 170 basis points for the second straight quarter. [indiscernible] and price that offset tariff impact. The project delivery strength in the quarter [indiscernible] the prior year due to improved collectivity and execution. In Q2, IP strategic highlights included advancing our specialty pump and valve technology through organic investments and advanced multiphase pump and solutions and biopharm valves the streamlined customer installation and maintenance requirements and through inorganic investments in RPG. Solid CCT revenue and adjusted income results are detailed on Slide 9. CCT delivered organic revenue growth of 5% and balanced growth of 6% in connectors and 4% in component. From an end market perspective, commercial aerospace grew 21% in OEM and aftermarket demand intensity. Defense declined 9% and difficult compares to prior year component program that more than offset 16% growth in connectors. Industrial markets grew a modest 1% and connector and component strength in Asia and Europe partially offset by the weakness in North America. CCT's Q2 organic orders declined 3% despite an increase in aerospace and defense connectors that was more than offset by oil and gas in industrial. The book to bill in the quarter was flat and it's 1.07 on a year-to-date basis, driving a 14% increase in backlog excluding foreign exchange. The CCT team delivered 9% segment operating income growth to 30 million and benefits from volume and productivity including supply chain, partially offset by increased material cost, mix foreign exchange and investment. Segment operating margins expanded 80 basis points to a record 17.7%. The momentum in the connectors execution continued as margins expanded 210 basis points and we are continuing to invest in our connectors execution as we move product lines to our best process facilities and in-store trading activity. Now this in mind, let's take a look at our adjusted 2019 guidance on Slide 10. We are increasing our EPS mid-point by $0.05 to $3.63. And we are raising the low end of our guidance to $3.58 which was our previous guidance midpoint. As a result, we now expect to grow 2019 EPS 12% at the midpoint. The 5% midpoint increase was powered by our strong Q2 performance in incremental second half productivity and cost actions. A total and organic revenue guidance remain unchanged at plus 3% and plus 5%. Next, I'd like to provide some second half perspective. In the second half, we are projecting mid-single-digit in total revenue growth. And from an organic revenue perspective, we are expecting low single-digit growth with all segments contributing. Our backlog at IP, CCT and MT rail, it's strong and during the second half. And MT is also expecting to benefit from Friction Platform ramp up in Europe, China and North America. In the second half, we expect segment operating margins to be slightly lower than the first half reflecting typical seasonality and the dilutive impact of the RPG and Matrix acquisition. Lastly, for the third quarter, we anticipate lower organic revenue growth in Q2 due to the timing of project deliveries at IP. Margins are expected to be slightly lower than Q2 due to unfavorable aftermarket mix at MT, and the impacts of the acquisitions at IP and CCT. And EPS is expected to be slightly lower than Q2 due to a higher effective tax rate in corporate. With that, let me now turn it back to Luca for some final comments.

Thanks, Tom. So in conclusion, I am proud indeed of ITT's second quarter results, as they reflect the drive of business that the ITT has all around the globe. We set new records in Q2. And we will continue to execute on our work check of self-help opportunities. While we are cognizant on the challenging environment, we are confident that we will continue to outperform our end market and make acquisitions that will accelerate our return on capital. And before we go to the Q&A, I just want to let our team in Vadodara, India know that we are thinking of them as they are dealing with the impact of some severe weather there. They facilitate in the shape but it is our people there that make it great. So ITT India we're thinking of you. Now Laurie let's start the Q&A.

[Operator Instructions] Our first question comes from the line of Mike Halloran of Baird.

Good morning, everyone.

Good morning, Mike.

So the outperformance on the friction side is very impressive versus the end markets. Maybe you could talk a little bit about the underlying market dynamics you're seeing right now excluding the outperformance to start out unless what do you think the markets are growing at on a regional basis? And I know at the end there, you mentioned that the project on boarding in a few regions or the platform on boarding, excuse me, in a few regions is going to drive some outperformance as we work through to back half but maybe you could also talk about what levels outperformance you're expecting on a go-forward basis. And there's just a lot of noise in those market.

Overall market, I would say that our view today is worse than it was [indiscernible]. Operator, can you hear us?

My apologies for the technical delay. Our next question comes from Matt Summerville of D.A. Davidson.

Hold on a second Laurie. I just wonder if you guys heard the answer. Could you please confirm that please?

I did not hear it on my end, we lost audio.

Okay. So let me readdress the first question and I apologize for the technical inconvenience. So when we look at the market, our view on the market today is still to be worse than we had one quarter ago. And the main reason for that is China. This is looking at the market, looking at our data, talking to our customers and our people in China. We see that China probably for the full year 2019 will post a negative double-digit raw. And therefore the global market, will probably be negative mid-single-digit. This is where the main discrepancy is compared to what we thought one quarter ago. If the view of the market has deteriorated, our view of our outperformance has actually improved and this is across the board. In Europe, in North America and in China. This is why we posted 11,000 basis point outperformance and when we look at the next quarters, it's likely that you will see an outperformance at the high-end of the range that we previously shared with you. So this in our view on the market. And thank you for your patience.

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

Hi. I just want to verify that you guys can hear me.

We can hear you, Matt.

We can hear you, Matt. Okay, thank you. So it's sort of a follow-up. How much of the impact are you seeing in China will [indiscernible] platform launches, predominantly European driven.

So Matt, the question broke up a little bit on our end over here, but I think where you were headed was a question around what's driving the dynamics in the China market right now. If not follow up with us, but we'll give a little insight into what we're seeing in China. So certainly, there has been a number of drivers inside the market, particularly around the emission standard change from China 5 to China 6, which has been talked about quite a bit right now in the marketplace in addition to the global uncertainty and the other dynamics that are at play in China. That is causing the production rates to keep dropping or staying at the levels that they are at the sites and anticipated recoveries, which obviously have not played out. So for us, we've said that part of the China performance is about sort of new production for platforms that we've won, some of those dates have pushed to the right, a few have moved forward, but there is still some pushing of started production that has now gone into Q4 and they end up at the tail end of 2019. What we've been doing is looking at some other opportunities to gain some share in China. There have been some opportunities to go after, what we call conquer wins in China and that's been part of our performance there. So we're performing and executing in a market that's more difficult. We're not expecting any clearance really this year. Some of those production startups are likely going to push into 2020 and we'll be ready to deliver those when the time is right, but for now, North America and Europe is really significantly driving the outperformance for us. And Matt, if I can be what Tom said is, I would say definitely year-to-date has been outperformance everywhere. Better I would say in Europe and North America, then China. What we can share with you is that we closed July last week, is that in July, China posted a good a good growth year-over-year and this is the first time in 2019.

And then just as a follow-up. You mentioned Wolverine was down 16%. It sounds like there may have been some additional share losses there. Can you just talk about sort of the state of the union for that piece of the business and what you're doing in response to the challenges you're seeing there? Thank you.

Sure. So whether in Q2 as you pointed out, Matt, sales were down 16% with a low single-digit ROI and $11 million cash generated year-to-date. We are not happy about these outperformances and there are elements that we cannot control, like the market and the tariffs and there are other things that are related to us. So these share losses are related to some contracts that reasons we lost and we conquered back again and we will start the production in December of 2019 so these -- but we are feeling the impact in 2019 for the full year. And then there are losses that we have because the market environment changed. So big customer of ours in China that will supply the aftermarket in North America because of the tariff impact has lost the business and therefore, we lost the business together with them. Now, there are, and that obviously they're impacted by the tariffs in general. What we are doing to improve the situation in Wolverine and Wolverine results, we are -- we have action on the tariff front, we are mitigating actions such as building inventory to take advantage of the quarterly quota system in Europe. And then we have long-term reassessment of our footprint strategy in Wolverine. On the sales side, we are going after some concrete opportunities in contract fit where we think that we have a competitive advantage or where we have a different shaking opportunity.

Thank you, guys.

Your next question comes from the line of Jeff Hammond of KeyBanc.

Hi, good morning guys.

Hi, Jeff.

First, look, I just want to let you know I'm following you on Twitter. Your follows are going up rapidly this morning.

Great, thanks for that.

Good, thank you. Thank you, Jeff.

So just on IP. I know you had a tough comp in the big order and short cycle seems to be slowing and I think last quarter you talked about kind of replenishing the pipeline. Can you just talk about what you're seeing from a project visibility and your confidence that maybe as we move through some of these tough comps, we start to see some of the project activity start to drop sort of?

So let me talk about the orders in two ways. About the project and the pumps short cycle. So when we look at the project, it is really the story of the Q2 orders. And this is because of the Aliba project, which is roughly $14 million order that we posted in Q2 2018. And that we are actually in the process of delivering right now. Now, when you look at the project without the a Aliba on the like-for-like, we are actually flat on a year-to-date basis. If you look at the visibility in the future for project, we see things for a little bit shift into the right. And this is confirmed also by the GDPWW, our distribution networks. We had a meeting in Seneca for -- our leadership team had a meeting with our distributors in Seneca for this week and they are experiencing the same thing. We see our customer being a little more prudent on the investment and shifting the projects and it will be to the right. When we look at the short cycle for pumps, this short cycle for pumps is -- was practically flat in Q2. We had April, that was not so good, but it improved in May, and it improved again in June to end up flat for the quarter. Year-to-date we are plus 2% for the pumps cycle and as I told you for MT, we closed also IP last week for July. And in July, short cycle pumps were actually good. The same level of June. So this gives us good visibility for the short-term and medium-term 2019. If I can close the loop for the orders with the visibility on 2019, I can tell you that our backlog is flat year-over-year and we have a good visibility for the project in terms of we've got the backlog for the full project for 2019. And also a very solid and good visibility on the short cycle for 2019.

Okay, great. And then just on -- I guess this comment that maybe we're entering into a more uncertain environment into 2020 and you talked about this war chest of opportunities. Can you just talk about what you think you can do to continue to flex the margins up in a less certain environment and what maybe some of the big needle movers are as you look into 2020 in terms of margin expansion? Thanks.

Okay. Sure. So when you look at the -- it's a little bit different in terms of all our different -- at the different value centers. Because when you look at the Motion Technologies and you look at Automotive, I mean, we have been in the usually negative scenarios now for the last four quarters. So when you look at Motion Technology and when you look at Friction, is really market share gains, outperformance and we are driving efficiency in terms of the factory shop floor, in terms of the supply chain, in the Mexico improvement, in terms of the profitability because is already accretive to MT margins. And then restrain on MT is also the improvement of an [indiscernible] but now has improved by 40 basis points and we will see these improvements continue in the second half. And this is very much the story of Motion Technologies. Now, when you look at CCT, in terms of the insourcing of some of the activities that we have done, as I shared with you and since that you're following my Twitter, you will see the picture later on. You will see the plating line in our state-of-the-art facility in Nogales, Mexico. That insourcing will start in -- I think at the end of the Q4, in Q4 and this will start generating savings because of the activity that we actually do outside. On the IP front, what I would like to mention is why we continuously work to lean our factory but also the project margin improvements in IP. If you think about it, in Q2, we grew substantially. A lot of the -- some of this growth was on the short cycle, but the projects grew 51%, and despite this 51% growth, the margin expansion on IP was 100 basis points. So this shows you that not only the backlog of project is more profitable, when it is the backlog but is also when we are executing it, and this is important.

Okay, thanks a lot.

Thanks, Jeff.

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

Good morning, everyone. Solid quarter.

Good morning, Bryan.

I was hoping if you could offer a little more color on Mexico profitability accretive to the second segment average margins. Operating in the high teens and specifically, how far ahead of internal expectations you are at this point. Our view coming into the year was that break even fourth quarter of 2018, that high teens would be a solid run rate profitability for 2020, obviously you've gotten there well ahead of time.

Sure. So that's true, obviously there is -- there are two stories on the Mexico profitability. One of course, is related to volume because some of the platform that we launched and that we are launching are good platforms and as the volume goes faster, we are able to get benefits out of these volumes. But I want also to commend our team in Mexico because this growth is probably higher than what we expected. And the plant has been able to execute flawlessly and was a very smooth execution; so that's very good. And when I look for instance at deficiency of the prices and of the equipment in Mexico, it's higher than 82% which for the first year that we're executing is pretty good. So I would say it's faster than what we were expecting in execution, but is almost flawless and that is what I would say.

Got it. I appreciate the color. And then circling back to the level of expected market outperformance from Friction. You said high-end of the prior range that you put out. Are there any differences in expected 3Q and 4Q dynamics given platform timing or any other factors there?

I would say that, there are -- the worst things happening in 2018, and there are things that happened in 2019 that make the market a little bit more volatile. So if you think about it, you had Q3 and Q4 2018 that were impacted by the WLTP in Europe and that generated some disturbance. And that moving out at the beginning in the first, two quarters of this year. And now, when you look at 2019, you had the China 6 that started in July 2019. That's probably something that will keep on dragging in terms of the impact of the market in the next quarter or so. And also 2018 Q3 is when the problem really started facing in China. So I would say some of these -- the WLTP has no impact anymore but the China 6 will still have. So there is still some volatility in the market, particularly I would say in China, but if I have to say probably July, it's been the month where we have seen more stability and less volatility in our order book. Having said that, I would also add that we are monitoring our order book on a daily basis. So that we stay ahead of the game, and we are ensuring that for the next eight weeks, for the eight weeks forward, we are matching demand we supply.

And Brian, if you kind of look at it, the level of outperformance is going to stay at these elevated levels. I think when you look regionally, it may likely accelerate in Europe, based on some ramps and some activity that we have building momentum in Europe. I would say North America came out very, very strong and we are -- probably not going to maintain that level of outperformance in North America because we're starting to compare against prior year production, but the outperformance in Europe is improving. And in China it's improving, in North America it's going to moderate down from an exceptional first half of the year to something that is still very, very, very strong.

Got it. Makes sense. And then on CCT obviously, strongly benefiting from the warchest of sales opportunities that you guys have. You are in the high teens with margins right now. So is it fair looking forward to say that your entitlement margin is in the plus of the previously stated high teens plus range?

It's a great, great, great observation Bryan. For sure, we had a very strong quarter at CCT. Funded investments, there were some FX pressures as well for the 17-07, operationally was very, very strong. The momentum is good. Obviously a lot of it coming from our connector facilities. Product line moves have been very successful in getting production to our best locations inside of our CCT footprint. Greater leverage of CCT Nogales, which is good for not only the connectors business but we're increasing component activity moving there as well. So I think this is also a quarter that demonstrates where CCT can go, but we're still on the transition phase in these product line moves and the insourcing. So we'll continue to make momentum on the year-over-year basis. This is likely the highest margin we posted this year and CCT, all of the team I'm sure is up for the challenge but I think the underlying strength of what we're doing at CCT is going to continue to put some stress on defining that plus in the margin entitlement sooner rather than later.

And if I can be on this one. Some of the things that we shared with you in terms of the debt. We layout of the Orchard Park facility that we [indiscernible] ended different material flow. This will deliver improvement on the CCT front and in transforming our Valencia, California through the Aerospace and Defense Center of Excellence for R&D and also for manufacturing. That is another opportunity we have in our work chart. And then it's also the acquisition, because usually when you look at our acquisitions, Brian, usually we tend to take acquisition to our strategic fit long-term play. And usually they are operational, that might be dilutive to our margin but they represent strong improvement potential.

All right. Thanks again, guys.

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

I'd like to start with a question on the MT margins. I understand you guys have contracts that don't allow higher costs to be passed through to the customer -- all lower costs to be passed through the customer and you've been dealing with pretty significant inflation on the input cost side and you did call that out as a headwind this quarter. Certainly it seems steel costs come down over the last few quarters. So I would think that at some point here that's likely to turn into a tailwind for you guys rather than a headwind. Can you talk about what you're seeing in terms of raw material prices that you're purchasing currently? How long that should take the flow through the inventory in into the P&L?

Yes, Nathan. I think the point's a good one. We would expect second half favorability in some of our input costs at Motion Technologies compared to what we thought entering the year and compared to the first half because of the way we locked in contracts and now the new spot rates that we're buying at or that the price forward. So we should get some lift there, some of that list -- we had anticipated brewing so I wouldn't say it's kind of an incremental new data point to our guide because we saw that drilling -- I would say in Q1. Part of the offset that we talked about as well in Q1 that is continuing to play out, is the incremental tariffs that we face as the year has gone primarily at Wolverine. So those are the couple of dynamics that we're dealing with on the input front if you will, but certainly a better environment from the raw material perspective and a generally plays through -- pretty quickly from inventory into our results given how fast we turn inventory in the MT business.

Would you expect price cost to be a tailwind or a headwind in the second half for MT?

I would say muted. We did have some good success Nathan, on the rail side from a price perspective. I think what we're seeing in Motion Technologies is pretty flattish environment. I think we did a good job in the first half of the year. I think the second half we're going to continue to maintain some of that momentum but I don't think there is a major shift we are getting. The MT price impacts to be minimum in 23 basis point of hit depending on which we look at it compared to what and when, but that's obviously much better than what we've seen historically, where we average anywhere from 50 basis points to 150 basis points. So the actions are having an impact, particularly in rail.

Okay. That is helpful.

And one thing about the margins in MT. You also think about the phasing of the aftermarket, Nathan. Because when you look at our independent aftermarket, it has been growing substantially year-to-date. But this is mainly a question of timing, so we will see less aftermarket in Q3 compared to Q3 last year and this is a little bit of a reverse in what we have seen in Q1 and Q2.

Okay, that's helpful. And then maybe a question on rail. Certainly KONI has been gaining a lot of share, both KONI at Axtone have seen pretty significant improvements in margin,. Maybe you could describe a little bit about what's going on over the last couple of years. Do you see the significant improvement that you've generated in those two businesses? I think you said KONI's margins are now in the double-digit, high double-digits. Axtone high single-digits. Maybe where you think they could go over the next couple of years.

Sure. And you're absolutely right, Nathan when you say, what does that in the last couple of years because you've done turn it around in the quarter. And I think that this is the good job that David and the team did in KONI and Axtone outdoors. So when you look at KONI, is the plans around the world in China, in Wuxi; in Port Wayland, The Netherlands, and also in the Czech Republic, they are all performing very well in terms of -- in terms of lean, efficiencies and labor productivity. Our performance in terms of quality has been outstanding. We have reduced our PPM by more than 70% in the last couple of years and our OTD is very good. Now, when you look at the rail industry, the supply chain is made of -- they tend to be made by companies, more entrepreneur companies and therefore, a professional company like KONI performing very well from a quality and OTD perspective, gets rewarded by our costs, they really appreciate this performance. And this is why our rail revenue went up tremendously and why we keep on winning for this across the world. In China, Europe, North America and the across all the different type of trains, metro, locomotive coach and high-speed train.

Okay, one more just on the corporate expense. You called out that being down quite a lot this quarter. I didn't know Jessica made that much money, but then talked about it being up in the third quarter. Can you maybe give us some guidance on where corporate should come in for the year and how you will approach, maybe maintain that kind of level as we go forward?

Yes, Nathan. We had a pretty strong result in Q1 as well, so the year-to-date improvements in corporate have been pretty sustainable. Some are some prior year items that didn't repeat with some transition but the underlying functional cost actions that we're driving this inefficiency at corporate, we're driving it in our businesses, eliminating ways and really focusing on driving incremental efficiency. So there has been a good structural improvement, there's always some uncertainty on some of the things that have happened in corporate that are a little bit unpredictable. So we're always kind of factoring that into the quarter forward as we're thinking about our guide but because of the level that we're at for Q2, I think, plus or minus is a good starting point. Obviously, interest and other variables are beyond our control but we did have a good outcome and interest investment returns and taxes in Q2 as well, but I would say for the balance of the year, we're going to be in the same ballpark as Q2 plus or minus $1 million here and there $1 million or $2 million based on environmental, legal or other dynamics that are generally hard to forecast.

Fair enough. Okay, thanks for the help.

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

So on the industrial piece of CCT. If we -- when we listen to calls from other connector players the commentary on industrial was much weaker. So you guys have put up a small positive number on industrial for CCT. Can you may be less a little bit, I know you have some transportation in there, you have some medical. So can you kind of talk about the submarket there and what are you kind of seeing incrementally?

So Joe, from a revenue perspective, the industrial connectors, if you just take straight industrial excluding our specialty connectors with medical and electric vehicle, our industrial connectors were up low single-digits in the quarter. And that primarily came out of Asia and Europe. So North America, we certainly need from an order perspective and a revenue perspective that some of the destocking that we were seeing in the distribution channel. But globally, orders were slightly positive on the industrial front as well. Again, driven by Europe and Asia. So those are the dynamics at play. I think our execution and how the team has been performing has helped us outperform some of the broader markets. But clearly, an area that we're watching, particularly in the distribution cycle on connectors. There is continued destocking likely the dynamics that we need to continue to compete and execute at a high level but -- so that's where we ended up for the quarter.

Okay. And then if I switch over to IP and we think about, I know you're not looking to give guidance here for 2020. But if we start thinking about the strong revenue delivery that we're seeing here, we're starting to tail-off a little light, how are you guys internally thinking about 2020 just given the current outlook? Like the ability to continue to grow, how dependent is 2020 on order rates in the first half of that year and how should we start that early to kind of conceptualize that?

Well, Joe, I think the way that we're thinking about it at this point, not only in IP put probably across the business is what can we control getting us set up for 2020? So the markets are volatile. There are other conditions that are continuing to drive uncertainty in the macro economies and they're nearly daily events. Right. So for us, it's about this war chest of opportunities. So you'll hear us talk about it a lot more, particularly as the year goes on. Looking at overhead cost structures at IP, looking at our footprint, looking at the way that we operate and eliminate waste. The momentum that we have is very solid and -- but I do think we need to be prepared for tough environment across the board. I think that's pretty consistent in the environment that we're all operating in today, but I would say what's unique about us is how many opportunities we already have identified. New ones that we're adding as the year goes on. There's plenty of time to continue to replenish the project backlog as we go into 2020 or early to start to extrapolate too much there but our short-cycle business as Luca indicated the orders, revenues and relatively stable. So for us continuing to execute, build up this war chest of opportunities, accelerate and implement the ones that we can this year and I think that's our way forward. We did a lot of modeling with the teams, particularly we were last with them as a leadership team in Seneca Falls and across the organization. We had our leaders with us and we've gone through a detailed kind of scenario analysis on recession considerations and we all know what direction we want to go and what needs to get done.

Luca, you were talking about like the ramp-up of platform deliveries in Europe for MT. I feel like that's an area where there's a lot of debate still among people where some are using much more bearish production numbers for 2020. I know you guys have some visibility to the very near term on when specific platforms are going to ramp. But given like -- how are you guys internally modeling out the forward projection for European production? I just feel like that's -- there is a lot of variance and that's something I'm hearing from different people.

Sure. Now when we look at -- so first of all, when we are looking at the market as I shared before, our view today, probably to the work and what it was a quarter ago. That is probably more true or more substantial in China versus the European and North American market. Having said that, Joe, there's always a question on outperformance, so we want market share, we want platforms that are ramping up in Europe and therefore we are expecting to keep this outperformance for the next few quarters. On top of that, I would say that we are also winning more awards now than before which means that these we feed our growth for the future. But bear in mind that the award that we are winning now probably will feed 2021 but are the awards that we won last year that will feed 2020. So the outperformance story, I expect to continue and is not just for the next couple of quarters.

Thanks, guys.

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

Hey, good morning all. I want to come back to China friction. You mentioned some signs of an actual stance potentially developing in China on the Q1 call and I understand you're making inroads with a lot of those local Chinese OEs. But have you seen that dynamic accelerate here? What is the growing preference for China suppliers given some of the trade tension? Any change there and behavior?

Yes. I wouldn't say major changes there, Brett. When we look at China, I would say that from an OEM perspective, we have both the -- if I look at the top 10 foreign brand production, they tend to be from on a year-to-date all pretty much down with few exceptions. You're talking about the one that are growing production year-to-date, the BMW and Daimler, as well as a couple of Japanese Toyota and Honda. Everybody else is in big decline. Now when you look at the Chinese with the exception of a Great Wall in Cherry which have got the year-to-date production increasing, all the others are declining and -- but I would say the declines are across the board. No major shift between the foreign and Chinese. On our side, what I can tell you we do is really to ensure that we are winning on the electric vehicle platforms in China because -- you know that probably China from an electric vehicle point of view is the biggest market worldwide. So the -- some of the wins -- the platform wins that we shared with you during the prepared remarks are actually with the Chinese OEM as well as that with the European and North American but it was important to win the Chinese OEM.

Okay, great. I guess my follow up would be specific to EV. You noted some of the wins in the prepared remarks and I guess if you just isolate EV opportunities and how large that award funnel is today, from a dollar revenue perspective, are you starting to get some critical mass there and can you maybe size it?

We don't have its size but I would say that we had a very, very high win rate of award in this quarter and we do have a China Innovation Center and we're making a lot of progress in an easy, building the core capabilities. And I would say, our win rate is accelerating and right now it's certainly ahead of our win rate in other categories. So we want to continue to be a major in EV and so far -- thus so far year-to-date is a good sign that things are going in the right direction for us. But unfortunately, we don't have a lot of numbers yet other than 9 wins at a much higher rate than we typically see in other competition.

Okay, great. I'll leave it there. Thanks, I appreciate it.

Sure. Thanks, Brett.

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

Giovanna, so the project mix certainly has an impact but as we discussed the margin profile of those projects has improved to 100, 200 basis points compared to what we've seen in the past. So while it's still dilutive, it's not quite as dilutive as it has been in the past and that's why you're seeing it has continued within the IP project margins. In the quarter, I would say that it typically could see anywhere from up to 100 basis points of mix pressure when you do the algebra there but projects being around 25% of our business in a big quarter could be as much as 30% in a different mix. It could be as low as 20% but we're starting to see product margins that are getting into the high-single digits and that's a reflection of the project management that we've put in good execution. So those are some dynamics. The margin profile for the balance of MT -- for IP, excuse me, will be driven largely by the mix and -- but the levels that we're at now are pretty good indicators of how we see the balance of the year going.

And then last point, I would say, this also applies to the CCT. IP and CCT second half margins will be impacted by the acquisition impact, there is dilution, 30, 40 basis points -- 30 basis points in that range per quarter based on what we would have done from an organic perspective. So I just want to remind everyone to the factor in the acquisition impact in the back half of the year for CCT and IP margins.

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

And this is David Ridley-Lane on for Andrew. Could you talk about which segments that you saw the incremental second half productivity gains that drove the $0.05 increase in your guidance?

David, I would say that the productivity gain pretty -- we're working actions across the board. I mean I think that's what's unique about this war chest. It is not concentrated to a few things in a few places. There are a lot of actions going on across ITT. And the major ones that are gaining momentum are the product line moves at CCT. I think the project execution is continuing to gain momentum at IP and MT, Mexico and KONI rail at MT. Those are continuing opportunities to drive margin expansion. I think as I mentioned just a minute ago, you'll see some dilution at CCT and IP think from acquisitions. But the underlying momentum the incremental productivity, I would say is the actions that we've already started, accelerating those and driving additional benefit. And then we have been bringing some ideas effectively from the 2020 plan, if you will, we are bringing some actions in the 2019 second half to give us some additional productivity we end the year but to really get a set up for 2020.

Understood. And then just a quick follow-up. So I heard some of your short cycle products turned up in July, but just more comprehensively how did your short-cycle trend growth the second quarter into July on ITT wide basis? Thank you.

Sure, yes, David, so I think it's a different dynamic between the pumps valves and connectors parts of the business is slightly different. Different drivers, I would say on the connector side, which is one of the larger -- and the component side which plays in the industrial space. We've said there has been this North American distribution weakness. We think that's reflected in the broader markets that we serve. There has been destocking and we would expect that that has played out pretty much throughout the quarter and into July, we would expect that played through. I think Luca mentioned on the pumps side the short cycle pumps have been progressively getting more stable and a little bit better as the quarter went on. And the indicators in July from the pumps and parts perspective has been solid so far. So those are some of the shorter cycle dynamics that we typically see. Automotive being different category but the indicators due July as Luca mentioned on the automotive side have been solid relative to our expectations, particularly in China, where we're up for the first time in July on a year-over-year basis. So those are some of the dynamics we're seeing in the short-cycle.

Appreciate the color. Thank you.

Thanks, David.

Thank you. I will now turn the call to management for any additional or closing remarks.

No, we -- thank you, Laurie. We have no additional remarks. And thanks everybody for connecting. Have a good day.

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