Welcome to ITT's 2019 Third Quarter Conference Call. Today is, Friday, November 1st, 2019. Today's call is being recorded, and will be available for replay beginning at 12:00 PM Eastern Time. [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.

Good morning, and thank you, Laurie. Welcome to ITT's Third 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 today'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. Our adjusted non-GAAP results exclude certain non-operating and non-recurring items, including but not limited to asbestos, restructuring, acquisition-related items, and certain tax items. All adjustments in the quarter are detailed in the reconciliations. Before we begin, I'd like to provide a brief overview of our Q3 GAAP results. Q3 total revenue increased plus 5% to $712 million. Segment operating income increased 10% to $118 million, and GAAP EPS of $1.34 per share was 7% higher than the prior year. Please note that our remaining discussion this morning will exclusively focus on 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 disclosures and the other risks and uncertainties that affect our business, including those disclosed in our SEC filings. With that, let me now turn the call over to Luca.

Thanks, Emmanuel, and hello everyone. Thank you for joining us on the morning after Halloween. Today, it is a real treat to discuss another quarter of record results that ITTers all around the world delivered. This is the 9th straight quarter that we deliver year-over-year organic revenue growth, segment operating income growth, margin expansion and EPS growth. Let's get right into it. At Motion Technologies, Friction OEM outgrew the global auto markets by more than 1,200 basis points. Our Rail business grew revenue 22%, Axtone, our recent rail acquisition, expanded margin 650 basis points, and Friction Mexico continued to deliver new performance records. At Industrial Process, George Hanna and the team delivered 10% organic revenue growth and 130 basis points of margin improvement that keeps us nicely on track to our long-term margin goal of 15% plus. CCT delivered 160 basis points of margin expansion to an exceptional 17.6%. And ITT headquarters reduced costs by 21%. Included in all these results was more than $5 million of incremental strategic investments that will continue to drive future growth across all of our businesses. Now, let's go to our Q3 strategic highlights on Slide 3, and let's look at the momentum that we are generating. We grew organic revenue 4% exceeding $700 million in the quarter. We grew segment operating income margin 90 basis points to a record 16.6%. We grew operating income margin 130 basis points to a record 15.2%. We grew EPS 18% to a record $0.97 per share, and we are raising the midpoint of our full-year 2019 EPS guidance for the third time this year to $3.74 per share, representing 16% growth. As you can see, ITTers worked hard to execute our strategic priorities and build a resilient company that is well equipped to deliver strong returns in…

Thank you, Luca. Now let's turn to the Q3 results on Slide 4. Organic revenue grew 4%, once again, reflecting share gains and market growth across most of our end markets. Industrial grew 10%, driven by a 40% increase in chemical. Transportation grew 2% on 22% growth in rail, 9% growth in Friction OEM, and 7% growth in commercial aerospace. These gains were partially offset by lower Wolverine sales and auto aftermarket timing. Oil and gas declined 5% on lower project shipments to the Middle East. From a geographic perspective, our Q3 revenue growth was driven by 14% growth in North America and double-digit growth in auto, oil and gas, chemical, and mining. Europe grew 2%, driven by strong auto OEM and rail activity, partially offset by lower auto aftermarket and defense. Asia declined by 6% on lower projects and lower Wolverine aftermarket, partially offset by solid Friction OEM growth in China and chemical strength. Organic orders decreased 4% driven by a 9% decline in industrial on short cycle weakness, and a 10% decline in oil and gas on project delays and difficult comparison. Transportation orders were flat, as 16% rail strength was offset by defense timing. On a sequential basis, ITT organic orders were flat to Q2 due to an 8% increase in IP sequential orders. Segment operating income increased 10%, driven by net operating productivity, restructuring benefits and volume leverage. These gains were partially offset by FX, tariffs, commodity costs and the funding of more than $5 million of incremental strategic investments. As a result of our value-creating activities, we delivered record EPS of $0.97 per share, which represents an 18% improvement compared to 2018. The double-digit operating income improvement was enhanced by 21% reduction in corporate costs, higher interest income, and a lower tax rate. The 18%…

So, in conclusion, I am very proud of ITT's third quarter results as they reflect our drive to execute on our three strategic priorities. Today's ITT, as I said is diversified, resilient, and opportunity-rich, and we stay humble and continue to diligently execute on our war chest of self-help opportunities. We are cognizant of the challenging environment ahead and we work hard each and every day to continue to outperform our end-markets, expand our margins, and deploy capital effectively. With that, let me now turn it back to Laurie to take your questions. Laurie?

Thank you. The floor is now opened for questions. [Operator Instructions] Our first question comes from the line of Jeff Hammond of KeyBanc Capital Markets.

Hi, good morning guys.

Good morning, Jeff.

Hi, Jeff.

Hey, great performance on Friction. Just wanted to get a better sense of how you get the margins up in a weak after market environment, talk about the timing issue that you had in independent aftermarket and just what you're seeing in terms of stabilization in China for Motion?

Okay. So let me try to answer these three points. When we look at the opportunities that we do have on the MT side, we have opportunities coming from some restructuring on the Axtone side of the business. Obviously, we had some positive coming from the volume, and then of course is -- the other is the productivity on the operations on the shop floor as well as the supply chain. All of these have been able to compensate the headwind that we had in terms of price, in terms of FX of finding roughly, if I'm not mistaken, 80 basis points of investment, and still be able to deliver the 50 basis points improvement. Mexico of course, and the ramping up of Mexico is another tailwind that we have today. That's for the profitability. When you look at the outperformance, this business is really resilient, and the resilience comes, as you can see, not just from the execution and the productivity, and OI operating margin resilience, but also on the top line, because when you have in market a business that has been able to outperform in Q1 and Q2 and Q3. In Q3, 1,200 basis points and across all regions, Europe, China and North America. And not only outperforming, but also growing. This is, as I said, is what I call resilience. Now this is the benefit of the platforms that we won in the last two, three years, Jeff, and that have started -- they're SOP and they're ramping up. Like we've said in the last few quarters, some of these SOP shifting to the right. But now they've started both in Europe and in China, as well as in North America, and we are getting the benefit of those. Then your last point was China market. Well, the China market, I would say, has stabilized a little bit, because if you think about in Q1 and in Q2, they were down roughly 11% and 18%. I'm talking about production here, while in Q3, production was down roughly 5%. We are getting the benefits here in China of the start of production. We were growing 3% in the quarter and this is roughly 800 basis points better than the market, and we see this outperformance to continue in Q4 for the full-year as well in 2020.

Okay and then just a follow-up. Certainly good to see some proactive restructuring actions as you see a less certain market. One, can you just talk about the -- what do you think you can get in terms of incremental savings from those restructuring in 2020. And then just, any early observations or how you're thinking about growth in 2020 in either overall or in the three businesses? Thanks.

Okay. So let me give you the view in terms of where do we see the growth in the different markets. Let me start with that. So when you look at '20 -- let me give you the sense of 2019 moving into 2020. So when we look at rail, the rail is a good market and we see this market good in 2019 and is going to be good for us in 2020 as well, probably not as a high growth as we had in 2019. But still good for ITT in 2020. When we look at the aero and defense, it has been a good market in 2019. We will see a good and similar story to rail, still good in 2020, probably not as good as it was in 2019. And with the question on the defense, defense could be a positive surprise in 2020, but we will see. When we look at the IP market in terms of the oil and gas, the oil and gas has started low in 2019 for us. We saw stabilizing. We see actually the funnel going up and we see in 2020 for us, a stable market possibly up in the second half of 2020. Chemical has been good for us in 2019. And we see that growth coming down in 2020. And finally auto, auto well -- the market has been pretty ugly for the last four quarters. We have been able to outperform and to post the growth, but we see 2020 as a market that is stabilizing and we continue to outperform the market as well in 2020. So I think that when it comes to our profitability and our margins, I think that we are well on track to achieve our long-term target in terms of margin.

And then Jeff, just to finish off on your restructuring question, we did a -- we've done about $10 million of actions in the last two quarters, accelerating the pace as you indicated, still looking at some other activities perhaps in Q4, to maintain the momentum, probably looking anywhere from $10 million to $15 million of incremental savings rolling into 2020, in addition to all the other productivity actions and the other operating momentum that we already have exiting Q3 and into Q4.

Great, good color, guys.

Thanks, Jeff.

Thanks, Jeff.

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

Good morning, everyone.

Good morning, Nathan.

Hi, Nathan.

I would like to start with the 160 basis points of net operating productivity. Luca, can you give us some more detail on kind of the major buckets that that's coming from, how we should expect that number to progress going forward. Are you picking the low hanging fruit, so to speak, early in the piece here. Maybe what kind of net operating productivity number you'd be looking at for 2020, and how you would achieve that?

Okay. You're talking about the improvement in terms of productivity across the Board for ITT or you were specific on one that value center, Nathan?

Across the board.

Across the board? So, when we look across the board, I think that what we have is, you can see across the board some benefits coming from the restructuring side, as Tom was talking about IP. We have been able to work in a proactive way also in CCT as well as MT, particularly on the Axon acquisition. So you see benefits coming from the restructuring side. You will see benefits coming also from the volume, probably in 2020 when you're talking about the automotive and rail, and also when you talk about the CCT business. And then of course the supply chain is across the board. Supply chain benefits across the board; that will be another very good buckets for ITT. Then is operations, when you talk about operations, you may have -- you may look at it differently for the different businesses but, for instance, if you talk about the IP, think about the machine efficiency, the labor productivity, the VA/VE, the value analysis, value engineering of some products. We actually are coming out with a new product today that will start being sold today of a new BB2 pump that has got less metal, better efficiency, etc. as well as footprint rationalization in AP. When it comes to CCT, it is really in terms of benefits from the in-sourcing that we talked about in the prepared remarks of the plating line that is started running in Q4 and the continuous transfer of lines to Nogales that now is the best operating plant for connectors. As well as improvement in other site like Orchard Park and Valencia. Last but not least, on the MT front, our tailwind in terms of net productivity are coming from the continuous improvement in our acquisition Axtone, as well as Mexico that we'll keep on growing the platform that they've already started, and there are the new contract that will start ramping up. And then of course China. As I was telling before, the China market has stabilized, we are growing and therefore we'll get also the benefits of that, as well as the typical MT approach and DNA of waste eradication.

So there's a lot in there, obviously, doing a lot to generate that kind of 160 basis point level. Is there some things in that that are discrete kind of restructuring savings and there are some things in there like VA/VE and machine efficiency improvements, other operational improvements that you should be able to continue to generate further savings for probably years going forward. Can you talk a little bit about what are the areas of focus for you over the long-term, just in terms of driving productivity into the organization over and above what's been done over the last few years.

Yes, Nathan. So I'll kick it off here. There really weren't any kind of one-time benefits in the margin story for Q3. And I think the positive there is the momentum that we have continues as we exit this year and into 2020. As I mentioned before, we would expect some restructuring rollover savings into next year from the actions that we've taken and the ones that we have lined up in the short-term. So that will give us good momentum. But I think all of the items that Luca outlined, they have this continuity that there are more line transfers to be done. We kind of think of some of these in phases. So we've effectively done the first phase of line transfers across the CCT organization and we have more now that we can do in the next phase. We're able to really balance our footprint most effectively and we'll continue to certainly do those things into next year. The operational execution around projects is critical, certainly, and a driver of margins this year, but we'll continue to improve into next year. So I think there's good sustainability in the margin trajectory that we're producing and this war chest of opportunities that's giving us this 160 basis points in the quarter, continues to provide benefits next year. And like you said, we're getting into new categories like VA/VE where we haven't talked much about those, but these are opportunities that are in motion for us, new products that we're launching that are obviously well designed to drive better performance and better margin enhancement. So, operating in a number of fronts, additional phases in what we've been doing and some new things that are in the works that will give us some additional momentum into next year.

And if I can build on what [indiscernible] Go ahead. Go ahead Nathan.

I was going to say those are the kinds of things that I'm looking at. The model line transfers to CCT, VA/VE, and how you go through the product portfolio and how long a runway you have for those kinds of operational improvements to drive value over multiple number of years here?

So, Nathan, If I can address that with a couple of point. First of all is, we have plenty of opportunities. And as I said in the remarks, we see those every time we go out and we spend time in the business with our customers as well as with our people in the operations, and this is exactly why we have worked on this change in terms of always spending time at the site, on the shop floor, in the reviews that are not happening in the headquarters, they're happening on site every single month. Now these, of course, will keep on feeding with ideas, with actions and is really -- and how you sustain that is in -- really in, still in this granular culture and these operational culture in the organization and this is what will make these continuous improvement sustainable in the long-term.

Great color. Thanks very much. I'll pass it on.

Thanks, Nathan.

Thanks, Nathan.

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

Hi, good morning guys.

Good morning, Brett

Hi, Brett.

Hey, appreciate all the good color in the markets into 2020, but specific to auto, really strong outgrowth this year. I think you're running about -- a 10% or so above production. Is that 500 basis point to 700 basis point outgrowth range still the right number for next year. I'm just trying to think about how that big backlog in Friction has -- kind of paces out into 2020?

Okay. So we gave that range at the beginning of this year for 2019 and it's likely that we will beat that range. We will be more in the 900 basis point, 1,000 basis point. That will be the range for the full-year of 2019. Now when we look at 2020, the color of the market we think is more stable but for -- we will continue to outperform. At this point in time, we're still in the operating planning phase. What I can tell you is that there will be a healthy level of outperformance. But we are still analyzing our budget for 2020, but it's going to be a healthy level.

Okay, great. And then positive to see sequentially orders in Industrial Process were actually up pretty strongly. I guess based on what you're seeing in October and then thinking about those sequential trends, how does that inform your order profile year-over-year in Q4? You still have a tough comp, but do you think you can expect a similar level of decline, as you saw in Q3 or maybe something better?

So, let me give you the straight answer and a little bit of color behind it. When we look at Q4, orders for IP, we probably see a slightly down year-over-year. So, probably a little bit better, when you're comparing Q3 year-over-year. Now, when we look at the Q3 and Q2 for IP, we knew coming into 2019 that this was going to be a tough compare because last year they were plus 27% and plus 18% or something like that. So there were tough compares. On top of that, talking to customers, we saw projects shifting to the right, and we are in kind a of slow down on the short cycle. But on an encouraging note, what we see is that customer -- when I talked to customer, they're still optimistic on the investment, is still a shift. When I look at the baseline pump, they're still growing year-over-year roughly 1% and sequentially Q3 over Q2 is up 8%, and the short cycle sequentially is up 1%. So you see this kind of stabilization. And on top of that we have this funnel. If you remember, when we had the last earnings call in August regarding Q2, we shared with you that we saw that the funnel stabilizing but grow in July. That growth kept on happening in August and in September, so our funnel has not only stabilized, but has gone up in the last three months. Healthy double-digit from what it was in June. Now, having said that, I want to just to remind everybody that we are going to stay selective on the orders and it's important that we bring in profitable growth. Now, everybody says that and I want to ensure that you understand that this is not a blah, blah, blah, but this is really what we are trying to do is trying to be -- for the project business, to create a resilient OI. What I mean by that is that in a lumpy business like projects, our OI needs to deliver all the time, which means that if we are improving 100 basis points, the orders coming in projects is neutralizing a decline of 20% in orders. So you understand now what we are trying to do.

That's great to hear. I'll leave it there. Thanks a lot.

Thanks, Brett.

Thanks, Brett.

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

Good morning, everybody.

Hi, John.

Good morning, John.

Hi Luca, hi Tom, Emmanuel. So working capital was worst this quarter, inventory, receivables, your free cash conversion through the first nine months is much lower than last year. Is this IP, Tom, project lumpiness and where do you think working capital heads next quarter and then how are you thinking about it for next year. because you guys have done a pretty good job right of certainly improving your free cash conversion. I think that'll actually help your valuation, because the old ITT had kind of struggled with this. Where are things now and why is this happening?

Yes. Thanks, John. Our three-year free cash flow conversion average has been 101%. So we've had some momentum as of late, but we want to keep driving that kind of consistent performance year-to-date. As you indicated, we're around 78% conversion, which is down from a real strong last year. Two drivers before we get to working capital are cash taxes and our CapEx are both up on a year-over-year basis and I would generally consider those more to be timing related. So we're still on track for our initial plan for the year to convert at above 95% level for this year. So it should be another overall strong year conversion. But on a year-to-date basis, there has been some timing in those other categories. As it relates to working capital, generally it's IP where we're seeing the most pressure through the cycle. With a 44% year-to-date increase in project sales, that's putting a little bit more stress on the working capital as you can well imagine from an AR perspective and an inventory perspective. We need to continue to drive hard to reach our target. We're driving to get into the low-20s for the year and we'll have to really bear down, particularly in the IP project part of the business based on the volume of activity. And then lastly, I would add one thing on the inventory front, which is rather unique in our attempts at Wolverine and Motion Technologies to avoid some of the tariff issues, we have had to pre-position inventory in Europe to mitigate some of the quota system risks that have come through from a tariff perspective. So it's a type of inventory decision that you make because it incrementally creates value in reducing these tariffs, but it's a negative on the working capital at this point that we'll try to work down as the year progresses.

Yes, how material was that inventory pre-positioning? And then Tom, are you saying the -- are you saying free cash goes to a 100% for the year, which means you've got to have a very big fourth quarter and do you think it's a 100% in 2020 based on everything you're looking at or is it too soon to tell?

So the Wolverine was around $6 million to $7 million of inventory pre-positioning, that we hope to burn down. Our goal for the year has been to exceed 95% conversion and that remains our target at this point. Some of the timing on CapEx. We expect CapEx actually on a year-over-year basis to be down, even though it's up around 10% through Q3, year-to-date. So we'll pick up some timing benefits and we'll keep driving working capital to the completion and true for that above 95% target for this year.

And then just maybe it's more of a question for Luca, asbestos continues to improve. Your balance sheet, debatably is under-capitalized. It's got a lot more firepower. ITT is not a big company, you clearly have operational competencies. You could be doing more M&A. I realize you've done a couple of deals. But Luca, why are you doing share repurchase versus M&A? are the two not mutually exclusive? Like, I'm thinking out loud, wouldn't you want to be getting your shares into more people's hands not trying to pull them back from the market. Just what are your thoughts there?

Okay. So when we come to effective capital deployment, what we could do and always do, first thing first, is organic investment, and this is really where we got our best returns, is -- we know what we do, we got the return on investment that are very -- on invested capital which are very, very healthy. And this is where the money goes first. Where it goes second is really in inorganic. So, because the three businesses are performing or three that are actively cultivating and therefore we have opportunities in the pipeline. But at the same time, John, I want to be very diligent and rigorous in the process. So we had one opportunity in Q3 where we, we went quite deep and we were at a very good stage. But we decided to walk away because we saw that the valuation did not reflect the value that we've been be able to create. So we will keep on cultivating very granular and I agree with you in terms of adding inorganic, close-to-core, long-term strategic acquisitions. The two acquisitions that we made, Matrix and RPG are performing well after only five and eight months since the closing. So, that is encouraging. So we will do more, but we stay rigorous and diligent, and we will look at creating value, and not just do it for the sake of doing inorganic acquisition. And then, because we have firepower, then is returning to the shareholders, like we did at the beginning of the year with a 10% increase in dividend and the share repurchases that we did in Q1, we did some share repurchases also in Q3, $18 million of share repurchases in Q3, but I think that this was is -- we want to stay opportunistic in terms of the repurchases.

And then, John, I would just add to that is the $500 million authorization indefinite term. So we're going to keep prioritizing the deployment, as Luca articulated. And just interesting to note since spin back in 2012, 2011, we've done about $500 million to repurchases. We depleted the old program effectively, so we're just reupping and we'll continue to look opportunistically to deploy capital across all categories defined.

Yes. No, I get it. And you definitely don't want to overpay because of some sort of systematic pressure. Appreciate the answer. Thank you.

Thanks, John.

Thanks, John.

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

Thanks. Morning. Can you maybe provide a little bit of detail around where the IP backlog ended in the third quarter, and how you feel it will close out the year relative to '18 and what that speaks to in terms of organic opportunity in '20?

Okay. So if I start and Tom, feel free to jump in. When we look at the backlog for IP, the backlog is 3% down since January 2019. So it's a very good backlog, and one thing also that I want to remind when you look at it. It gives a good visibility in Q4 and in Q1 2020. And also, when you talk about projects, if you think about we will have -- we will have until probably half of 2022 to bring in project that will be relevant from a revenue perspective for next year. Now, always remember that our resilience or resilient OI that we want to build. And then, when you look at the backlog, what we have the short cycle backlog I think is up since the beginning of the year, roughly 8%. So this is where we stand at the end of Q3.

Thank you, that's helpful. And then Tom, can you remind us what the funded status is of your pension plans? What pension expense looks like in '19 and what the rate environment could mean for that in '20?

Yes. Matt, so our funded status is around 103%, and coming into the quarter, we did some additional discretionary contributions to elevate the funded status and -- to give us more optionality there and to avoid any of the kind of penalties from an insurance perspective there that you have to pay to the pension guarantee. So we're in good shape from a funded status. We want to create the optionality, I don't think there is a major expense story. I think because of our funded status we're rebalancing our asset allocation reflective of that waiting, getting into the probably now 105%, 106% funded status. So we're going to keep adjusting our asset allocation over time, which will bring some of our returns down in line. But on a year-over-year basis from an expense perspective, rolling into 2020, I don't see there being a major year-over-year change in the US pension plans with the give and takes that we're projecting at this point.

And then, just a follow-up on IP with respect to kind of the timeline, maybe when do you feel you can get to kind of that 15% plus OI margin in that business, Luca. And I guess your model around that would contemplate what kind of organic growth to get there?

Okay. What we said, Matt, is that 15% plus was our target in the strategic plan horizon, which was four, five years without counting on growth. So if there is growth, of course, this is going to accelerate and we're going to get there sooner. I think that we are on track. I'm pleased to see that we are on track to achieve our long-term goal in terms of profitability for IP. At this moment in time, I'm sticking to that -- this timeline because of the market environment and what we see out there, but if there is an opportunity to accelerate, trust us, we will take it. As you have seen in Q3, without acquisition we improved 160 basis points in terms of IP. And we had a good improvements on IP quarter-over-quarter, which is something that has never happened before. Q3 was better than Q2, Q2 was better than Q1 and Q4 will be better than Q3.

Very good. Thank you, guys.

Your next question comes from the line of Mike Halloran of Baird.

Hey, good morning, everyone.

Hi Mike.

So on the non-aerospace and defense part of CCT, could you just talk about what kind of trends you saw sequentially through the quarter, any signs of stabilization in some of the more challenging markets and also maybe some thoughts on the oil and gas side in that business where revenue down this quarter but strong orders in what's a tough market there. So maybe just some more context on those points?

Sure, Mike. So when we look at the -- if I got the cut right. The components industrial portion of CCT, so the non-connectors piece, is that the one you were focusing on?

Yes, because this is obviously more short cycle slowing. The revenue is down 4%. Just kind of want to understand how that cadences out moving forward. Any sign of a sequential stability, things like that?

Yes. That business sequentially, the overall industrial, so this picks up the connectors pieces, it picks up some medical and electric vehicles, which are some different sub categories and then our Industrial Components. So, sequentially it's down around the same amount. So this trend is pretty consistent on a sequential basis. Year-to-date, we're down around 1% in overall industrial sales, with connectors showing a little bit of strength on a year-over-year basis both in the quarter and on a year-to-date basis. We're seeing more pervasive weakness on the component side of our business, components is smaller than the connector piece here on the industrial front. These are all short cycle businesses, these are all the businesses that are moving with the different economic indicators. Interestingly for us, Europe in Q3 was stronger on the industrial front than North America and Asia. So, we have a number of different categories that we play in on this space, but I would generally say the trends have been down as of late, low-to-mid single-digits but it seem to be kind of stabilizing. But each geography is probably moving in a more erratic way. And that commentary is really primarily on a sales basis, just to give you some perspective of how the year is flowing, since it's a shorter cycle in nature.

Helpful. And then an easy one, Tom, you mentioned a lower tax rate in the fourth quarter. What are you guys anticipating?

We haven't put a full stake in the ground yet, Mike, but we could see another 50 basis points, maybe even north of that. There is a lot of work going on, as you all know, related to tax reform, and I'm sure you're seeing it in a lot of other companies that there is we're all processing through the filings and the tax reform implications, as they play out. So we're working a lot of different strategies and opportunities and digesting that but I think we have maybe anywhere, I'd say 50-plus basis points of potential we're going after.

Thank you. Appreciate it.

Thanks, Mike.

Thanks, Mike.

Your next question comes from the line of Joseph Ritchie of Goldman Sachs.

Thanks, good morning guys.

Hi, Joe.

Hi, Joe.

So, I didn't hear you guys mention it earlier, and clearly the performance in North America in Motion Tech was really good this quarter, but what. if any, impacted did the GM strike have on your quarter? And then what do you expect it to have potentially in Q4?

Okay. Thanks, Joe. Now, as you know, the GM had a big impact on the Tier 1. We are a Tier 2. So because of the supply chain and because where we are in the chain, we tend to see the impact a little bit later. So the impact in Q3 has been really not that big, has been minimum. We will have an impact in Q4, but this will not affect our growth in terms of growth for the North America. And we will post in Q4 for North America, a very solid growth, double-digit. But of course it is going to have an impact. But we will keep on outperforming and posting the growth, not as healthy as probably we have done it in the Q3.

That's helpful, Luca. And then maybe just my quick follow-on, just staying on Motion Tech for a second. Can you just give a little bit more color what's happening in the aftermarket channel. I know you guys had some initial comments on independent aftermarket timing. But I'd love to hear a little bit more about what's happening there specifically. It's odd to see it down so much this past quarter.

Yes. So the aftermarket is really particularly the independent aftermarket is lumpy and they tend to change their phasing and timing year after year in trying to manage their inventory. So we had very good -- when you -- so let's stick with the big picture, when you look at the total aftermarket for the full-year 2019, it's likely to be slightly negative around minus 2% year-over-year. This is the total aftermarket. Now, obviously, you have different dynamics with the independent and the OES. The big swing that you saw in Q3 which was the independent aftermarket is just timing, because what you have -- we had a very good quarter in Q1, good quarter in Q2, Q3 they're adjusting. So year-to-date we are flat, but we will be positive in the independent aftermarket at the end of the year. We would be negative on the OES at the end of the year and that is because of something that has happened to one specific customer of ours and something that has happened in the market in general where some OES has shifted to a second line and we are setting up our strategy to penetrate also the second-line market.

Got it. That's helpful. Thank you very much.

Thanks, Joe.

Thanks, Joe.

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

Hi guys. Good morning.

Hi, Andrew.

Hi, Andrew.

Hi Tom, Luca. Just a question, how should we think just thinking about orders being negative and I understand sort of the bottoms up story, but from a top down story, it seems like you guys think that you will continue to have growth momentum into 2020. So when do orders bottom out then, is this the bottom for orders? Is this the quarter where orders bottom?

Andrew, I think we're certainly encouraged by the flat sequential order activity at IP, particularly in the short-cycle side of -- sequentially flat across ITT, driven by the 8% at IP. And inside of IP where 75% of that business is in the short cycle, we have seen some stabilization there on a sequential basis. And on the project side of IP, as Luca mentioned, it's going to be lumpy. There will continue to be project delays and we're going to stay disciplined. But the funnel has improved. So, I think those are some stabilizing indicators for us. Clearly on the transportation side of the house, Luca mentioned we're expecting. It's really about awards not necessarily about orders and our visibility into 2020 continues to support healthy growth above market once again, so. And rail, I would say is other business where we have ample backlog already going into the year. So there are a number of good stabilizing forces right now that we're watching. Clearly, we're no different than a lot of our peers. We're feeling some of the short-cycle pressures in the industrial markets, but they feel to be stabilizing at these levels. So I think for us we're wrapping all that together and hoping for some stabilization across the board at these levels. And then for us, we'll just continue to drive the operational execution that we did in the quarter and drive the kind of margin expansion and income growth that you've been seeing on top of this level of revenue.

Terrific. And just another question, you guys sort of said that China has stabilized. And I just want to understand, is that an mostly auto comment or are you seeing sort of broad stabilization in China, if you could give more color on that?

Yes. So, the stabilizing of China might be a little bit of an overstatement when I said in the sense, so you have a China in Q3 which is down, if I'm not mistaken 5% in terms of car production. But it is much more stable to -- when you compare to a minus 18% or minus 11% that was before. I think that also when you think about stabilizing, it's also an easy compare, because if you remember, automotive start going really down in Q3 of last year in Europe with the WLTP and in China when the problem started was Q3. Now when we look -- when we talk to our customer, when I talk to Ryan, our President of Asia Pacific who is based out in Shanghai, there is, more -- there is less of a nervous-ism over there. Obviously we are helped by our outperformance. But there are some signs that still keep us worried. For instance if you look at the level of inventory in China, it's probably still too high. I will -- I would prefer it to see a little bit lower. But definitely, it is much better than the way it started in 2019. On top of that, I would say it's nice to see the SOP really starting, because if you remember when we started Q1 and Q2, we shared with you that many start of production were shifting to the right, which happened. We only saw one cancellation that was not really material and it's nice to see this SOP starting and actually generating volume and feeding our growth and our outperformance.

Tony, if I can just squeeze one more in, can you just comment this difference between shale and process when once again oil stabilize and I know you addressed it, but are you seeing stabilization on the shale side as well?

We're not a big player on the shale front, Andrew.

I'm thinking more on the connector side.

Yes. The connector business for us, we're pretty global. We're -- I think we're about 40%, 50% North America, but a lot of the dynamics that we have in oil and gas are also picking up the Middle East activity and activity around the globe. So I wouldn't necessarily say what we're seeing is exclusively on the order front shale. But as it were on a year-to-date basis, our North American connector business is up kind of high-single-digit. So -- but I think for us it's a lot about share gains. There are not too many players in this space. We have a great product offering. We have some great technological innovation. So I would not look at us necessarily as a call on the broader markets. But I think we have been able to gain share in North America, and we've been able to also grow in the Middle East, which represents a pretty healthy portion of the business as well.

Fantastic, thank you.

Thanks Andrew.

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

Hey guys, good morning.

Hi, Joe.

Hi, Joe.

So you mentioned Axtone up 650 basis points year-on-year in margin side, obviously a pretty huge number. I guess what I'm interested in knowing is kind of what's -- how much revenue in MT is still sub-segment average there?

Okay. So let me try. So when you think -- so probably one third of it. That's the short answer. And really you're talking about the Axtone which is improving, KONI which has got a very good healthy mid double-digit margin. And then of course we have the Wolverine, that has been facing, a different world with the trade wars and with the commodities. So roughly it is at 30% and I would say starting the best -- the closest is KONI and then go down Axtone and then Wolverine.

And what's the view of the potential to bringing those businesses up to the average. I know Wolverine and my follow-up was going to be on Wolverine. That's been like an obvious underperformer for a bit here. What's the outlook there. And is it realistic -- is there a structural margin potential for that third of the business to be at -- to be non-dilutive over the next, like 12 to 18 months?

I would say 12 months to 18 months probably is a stretch. Over a long period of time, yes. And the timing would be different for the different businesses. So when you're talking about KONI, I was actually in KONI Oud-Beijerland which is the headquarter of KONI in the Netherlands and walking around in the shop floor with [Carlos] and Davide, the Value Center president of MT and the General Manager for KONI, we saw all the opportunities that we had in Oud-Beijerland. Even though they have the best profitability ever in that plant, there were opportunities in terms of machine utilization and the maintenance that -- the way that we do maintenance in those machines. And as well as in KONI Ostrava in the Czech Republic. So I would expect KONI to achieve a better level profitability closer to you know their entitlement in a period of probably of a couple of years. When we talk about Axtone, Axtone is a little bit different. It's an acquisition that we made in 2017, and therefore we are working on the footprint, in consolidating the footprint. Davide has been able in these -- in 2019 to work on his key five priorities, which were really in terms of price, in terms of cost of the product in terms of the Russian profitability, in terms of the supply chain and also there was another one which I don't remember exactly at this point in time, what's the value analysis and value engineering on the products and therefore Axtone is going to take probably a pretty of over three to four years to achieve a mid-solid-double-digit profitability. And when it comes to Wolverine, we're working on the repositioning because of what's happening to the world, and this is going to take a little bit longer in terms of two or three years, from a strategic point of view.

Okay. You mentioned earlier on rail that you think 2020 looks good, maybe not as fast growth as 2019 on tough comps, but what are you guys doing there? Like -- I feel like there's just been such a -- such an acceleration of that business over the last two years or so. Is this really like an IP? Is it new products that are winning because you have the best sitting out there or is this a better relationship with key customers? Like, what's been driving this kind of shift in your positioning in that market over time here.

Okay. A couple of -- thanks for talking about rail. Really appreciate it because is an industry that we like. Secular growth, tailwinds in terms of the macro trends and really, what has happened, when you look about it, the railway industry is very fragmented. And you have maybe small companies, very fragmented. And we have a -- we performed tremendously well in terms of quality, we improved quality in the last four, five years tremendously. And also we're performing very well in terms of on-time delivery and the customers being operators or the OEM are really appreciating this level of performance and gave us more orders and we won market share. On top of that we have some innovation, some new products that are playing in high-speed trains, and this has helped us as well. So these are really -- is the dynamic behind this beautiful growth.

Great, thanks guys.

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