Welcome to ITT's 2022 Fourth Quarter and 2023 Outlook Conference Call. Today is Thursday, February 9, 2023. This call is being recorded and will be available for replay beginning at 12 PM ET. [Operator Instructions]. It is now my pleasure to turn the floor over to Mark Macaluso, Vice President of Investor Relations. You may now begin.

Thank you, Candice, and good morning. Joining me here this morning are Luca Savi, ITT's Chief Executive Officer and President; and Emmanuel Caprais, Chief Financial Officer. Today's call will cover ITT's financial results for the 3- and 12-month periods ending December 31, 2022, which we announced this morning. Before we begin, please refer to Slide 2 of today's presentation, where we note that today's comments will include forward-looking statements that are based on our current expectations. Actual results may differ materially due to a number of risks and uncertainties including those described in our 2021 annual report on Form 10-K and other recent SEC filings. Except for otherwise noted, the fourth quarter and full year results we present this morning will be compared to the fourth quarter and full year 2021 and include non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures are detailed in our press release and in the appendix of our presentation, both of which are available on our website. This morning, we will begin with an overview of results and our outlook for the year. Emmanuel will then review the fourth quarter results before we close the book on 2022. Luca will discuss some key commercial achievements and our 2023 guidance, and we'll have plenty of time for your questions at the end. Please note there is additional information on the quarter and full year results as well as planning assumptions for 2023 in the supplemental data to our presentation, which I encourage you to review. With that, it's now my pleasure to turn the call over to Luca, who will begin on Slide number 4.

Thank you, Mark, and good morning. Before we discuss ITT's results, I would like to start by thanking our shareholders for their investment in ITT, our customers, we always keep at the center of everything we do, and our employees for their ongoing commitment to ITT. This quarter, more than ever, I was humbled by the efforts and resilience of all our ITTiers. First, in Wuxi, China, our employees delivered the highest production quarter ever despite COVID infection rate of more than 75% in December. Our China team's performance was the highlight of the quarter. Next, across all our factories. We navigated supply chain disruptions and ensure on-time delivery to our customers. And in Europe, our teams worked through the energy crisis, the impact of the war in Ukraine and an updating inflation. I am grateful for the resilience you demonstrated this quarter and throughout 2022. It was your efforts that drove the record performance we are presenting today, including 12% organic orders growth following 13% growth in Q3, over 17% organic revenue growth in all businesses delivering double-digit growth, a record segment margin of 18.6%, 22% EPS growth after 21% in Q3 and over $130 million of free cash flow up 58% versus prior year. In many regards, ITT's fourth quarter was another step-up in performance. Now to the details. Our seventh consecutive quarter of double-digit organic orders growth resulted in an ending backlog of more than $1.1 billion, up 22% versus prior year. Higher volumes and price recovery drove the strong organic revenue growth led by industrial process at 27%. This year, we drove over $170 million of price recovery with MT at the forefront. Execution momentum in IP continued across projects, baseline pumps and aftermarket resulting in 27% organic revenue growth in Q4. CCT grew sales by…

Thank you, Luca, and good morning. Let's begin on Slide 5. Revenue growth of over 17% was driven by double-digit growth in all businesses. In IP, projects increased over 70% organically. Here, we continue to benefit from share gains in large capital CapEx spend and near-shoring activities that are ramping up. Short-cycle revenue increased on a year-over-year basis across baseline pumps parts and service aided by pricing capture. The strength of the commercial aerospace recovery and accelerating demand for defense applications drove strong growth in CCT as well. Our aero components business grew 26%. However, we remain somewhat capacity constrained due to continued supply chain issues. Connectors grew 13% driven by market share gains as the benefit of new product innovations, particularly in defense, began to materialize. In MT, friction OE share gains in all regions and price recovery drove 12% organic growth. Friction's on-time performance was 99% again this quarter despite rising COVID infection rates in China, order volatility and unplanned customer shutdowns. Our rail business grew 10% organically and orders were up 35%, with strength mainly in Europe. On profitability, volume and price added 800 basis points of margin expansion, which more than offset 650 basis points of cost inflation and roughly 100 basis points of FX. We're continuing the push on shop floor improvements as demonstrated by IP's margin of 22.9%, up 700 basis points year-over-year, even excluding roughly 120 basis points of onetime items, IP's margin was still above 21%. This is quite an improvement from what was an 8% margin business in 2016. Next, CCT's margin grew 80 basis points to 19.2%, driven by higher volume and price recovery. For the year, CCT's margin ended at around 18%, up 270 basis points. Finally, in MT, margins declined 500 basis points to 14.7%. This was driven…

Thanks, Emmanuel. Before we cover our 2023 outlook, I'd like to share some examples of how performance and innovation are driving customer wins and market share gains across friction, pumps and connectors. As we discussed during Investor Day, Motion Technologies is strengthening its leading position by taking full advantage of the EV transition. This year, we won content on 78 new electrified vehicle platforms, with awards from leading global automotive OEMs, including Tesla, BYD, Rivian, Poster and Neo among others. Our best-in-class quality with defects below 1 part million and outperformance at 99% on-time delivery helped us win the front and rear axle pass on a premium German electrified platform that we launch in 2024. Electrification is also good for our connectors business. We developed and investing in an EV connectors portfolio catering to regional charging infrastructures, and we are seeing orders surge. Customers are choosing our connectors because of our engineering capabilities and responsiveness. In industrial process, we are capturing share in a market that's rebounding from 2 years of supply chain disruptions and component shortages. Over the next 2 years, will deliver pump systems to an independent oil company in Nigeria using our Bornemann twin screw technology. This unique offering will stop flaring at site and eliminate roughly 1,000 tons of CO2 per day. Orders for green projects increased 50% in 2022 compared to prior year. We are winning on near-shoring opportunities including a hazardous waste treatment system for a new semiconductor plant in Arizona and for a commercial EV battery recycling facility in Upstate New York. Finally, we are making progress on the embedded motor drive technology, or EMD, that we displayed at Investor Day. Initial testing showed that our Gen 2 prototypes exceeded expectations in energy efficiency, operating temperature and vibration. We are currently in initial…

[Operator Instructions] So our first question comes from the line of Nathan Jones of Stifel.

Congratulations on 2022. I think that's a pretty phenomenal execution effort given all the incremental headwinds you had to deal with. A few questions on the guidance I'm going to go with. Just looking at the price versus cost inflation buckets in your 2023 bridge, I'm a bit surprised that they're largely offsetting. You had about $0.38, I think, of headwind from price versus inflation in 2022, but you were positive in the second half, and I would have thought that would carry over and you would make some of that back up in 2023. Maybe you can just give us some more color on price versus cost and why that's not reading through as more positive in 2023?

Okay. So I would say when we look at 2023, we are getting roughly half the price that we got in 2022, and those are going to be incremental, right? So those are incremental to the price that we got in 2022. The other element that I would like to stress before maybe passing over to you, Emmanuel, is that when you look at 2023, we're going to be slightly price positive across all the value centers, something that we couldn't say in 2022. So it's a substantial improvement and is a continuation of what we have achieved in Q3 and Q4.

Yes. And Nathan, regarding the -- we were pricing -- price cost positive in Q3 and Q4. However, this wasn't like a large beat. We were slightly price positive. And I think that we maintain that in 2023. Keep in mind, in 2023, that there is some headwinds from a commodity standpoint, notably chemicals in Motion Tech and also energy. And so we are going back to our customers for additional price increases to cover and compensate this commodity increase. Lastly, I would say, in the second half of 2023, we expect things to slow down also. And so we want to be mindful of that economic slowdown when we ask for price increase to our customers.

Okay. And then maybe the operational performance bucket that's [52] to [60]. I think that implies an incremental margin of right about 30% which is kind of what I'd expect from the businesses in the absence of additional productivity, which you guys clearly over-delivered on in 2022, maybe talk about the expectations for productivity in 2023 and the potential for you to deliver better incrementals on that growth?

I think that on the other side of that, Nathan, is that the -- all the investment in strategic initiatives that we do have that we are working on. Let me give you a couple of examples, is investment in products like the EMD that we talked in the prepared remarks, this mass pad in Motion Technologies or also the digital automatic capital that we are developing for Axtone or the SFO next lean transformation. We are going through a complete relay out of SFO to take that plant to the next level. and also the lean activities that we started in CCT in places like Valence Califone. So -- and that's on top of all the initiatives to sustain our growth. So that is something that we take into consideration when you look at the incremental margin.

Our next question comes from the line of Andrew Obin.

Can you hear me?

Yes.

So I'm going to ask like a bit of a convoluted two-part question, apologies. So the first, you sort of highlight that IT projects were up 70%, citing reshoring, would love specific examples. But then a couple of slides later, you sort of talk about the fact that in the connectors business, you're seeing some weakness in short-cycle which I thought was sort of this lead indicator for potential weakness. So a, maybe specific examples of reassuring, but b, how do you square the circle with IP projects bookings so strong, which indicates very solid underlying activity. At the same time, right, your short cycle can air in the mine, and maybe I'm wrong about that is sort of flashing yellow.

Yes. I think that when we talk about connectors slowing down, we're talking about orders ourselves is still very much growing very fast. I think that our connected business, industrial connected business is mostly -- is majorly U.S. And so what we're seeing is a decline in -- I think, a slowdown in U.S. activity. I think on the other hand, in terms of IP projects, we're seeing I would say, specific growth in U.S. We talked about the semiconductor opportunity or award. We talked about the battery recycling, but also a lot of international growth. we're seeing, as we mentioned, we gained some really good orders in energy. We talked about Nigeria, but we also won in Angola. We won also in Malaysia and obviously, in Saudi Arabia. So I think that's the project growth, there is some in the U.S., but also a lot international.

Great. I appreciate it. And then another question, sort of more of a big picture question. So effectively, if I look at your top line growth, the midpoint is 7%, EPS is midpoint of 7% by the way, one of the best numbers in coverage. So I'm not saying it, but we look at Eaton sort of not dissimilar dynamic. We'll look at Honeywell where in a normal environment, you would sort of expect more operating leverage from this sector. And the question I have, is this sort of the new reality just less operating leverage as we sort of shift into this high growth, high inflation mode? Or does this normalize eventually?

Well, we certainly haven't given up on driving incremental margin. I would say 2023 is a little bit peculiar because we continue, as Luca mentioned, to have significant cost inflation. And also at the same time, we want to solidify the growth and the performance that we have executed on so far. And so this comes with investments both in resources, we're going to -- we're investing in supply chain but also in products. And so I think that kind of limits a little bit our margin and EPS growth. But I think that we are very almost -- we're also very focused on productivity. So I think that in the future, especially when we think about our long-term targets, we are really driving for better than average in terms of incremental margins.

Yes, sure, I don't want to take anything away from the strong performance in the quarter.

Our next question comes from Mike Halloran of Baird.

So a couple of questions just to make sure I understand the guide. First, on the Motion guidance, Luca, I think you said flattish to slightly positive overall kind of global Stars type number. You guys typically have a level of outperformance that kind of puts you above what that mid-single-digit guide would look like. It seems like the rail commentary is at least directionally favorable. So is there -- what kind of sinks at all to get to the mid-single-digit guidance? Is it some negative price downs, kind of normal contract stuff? It doesn't seem like that's the case, but maybe just help us think everything together for me.

Okay. So when you look at Motion Technologies that we have seen that the market will be, as I say, you said 0 to 2 points of growth worldwide. We tend to outperform the market on the OE side, absolutely correct. Now one thing that you need to take into consideration, if you look at the outperformance this year has been 400 basis. And as we continue to win market share and get higher market share, that outperformance cannot be in the 900 points like it has been in the past. So that is something to take into account. Then second, I would say, is the aftermarket. And in the aftermarket, we see that Q1 probably we still suffer like we have seen it offering at the end of 2022, and it will improve in the second half when it took probably the aftermarket. And I would say that is everything that needs to be taken into consideration for Motion Technologies. The other aspect that you might want to think about it is also the potential slowdown in the second half, particularly in Europe.

And that's actually good rich to the next question. We've been pretty clear that there's some conservatism about in the second half of the year because you have concerns over the pace of global economic growth, which makes a ton of sense. If I think about those points of concerts, it's the European OE that you just mentioned, it's the shorter cycle IP pieces. Are there any other areas we should be thinking about? I mean, is this being reflected in how you're thinking about incremental margins as you move to the back half of the year? Is it being reflected in any of the other areas that you touch?

Okay. So you're talking from a margin point of view, I understand -- I understood the question is really, we keep on working on our work chest of opportunities, right? Pricing is still a big component across the board and we need to really step it up, particularly in IP and CTT. We have the lean transformation that we're going to go through Seneca Ford is a completely re-layout as well as the lean transformation of the balance side in CCT. The other aspect to take into account is we talked in the past is that they make and buy. So we really are focused on having the proper make and buy strategy. So if you think about it, once again, in Seneca Force is the closing of the foundry. This is something we announced last year is a process that takes 2 years and will be completed by the end of 2023, as well as the in-sourcing of the contacts on the connector side. So all of those are the stuff that will help on the margin side.

Yes. And I would say also in 2023 in many regards will be different from 2022. You have seen in 2022 that we had a ramp really in margin and in revenue also in the second half. And this is not what we think is going to happen in 2023. We think that 2020 -- the first half of 2023 is going to be pretty strong in terms of EPS growth and similar in so many regards to Q3 and Q4. But we think that the global economy is going to significantly decelerate in the second half.

I was actually -- that was a really good answer, and I wish I would have probably asked the margin question now, but I was more focusing on just the revenue decel expectations. So any comments that you can maybe layer on what you just were talking about, Emmanuel, on the revenue side where those conservatism is embedded anywhere else beyond the European OE and the short-cycle IP? Or is that about it?

Yes. No. So I think that if you think about industrial components, industrial connectors, we think that they're going to decelerate in the second half. We also think that industrial and chemical pumps are going to decelerate in the second half. And energy also. Keep in mind, energy has been really going on all cylinders. And I think that I think the second half, we're bound to see something a lot weaker.

Is the deceleration across the board -- it's not just auto, it's across the board.

Our next question comes from the line of Joe Ritchie of Goldman Sachs.

Not to pile on to the guidance questions, but maybe I'll just tackle this a little bit differently. In taking a look at the range, right, I don't think that we were surprised at all by the high end of the range, but the low end of the range came in a little lower than expected. And so maybe one way to address this is what percentage of your business do you expect to see declines, not just decelerate but actually decline in the back half of the year? And are you already seeing that in your kind of like leading indicators? Are you seeing it in your business today? Or is it more around just an expectation on the broader economy?

Okay. Let me say, is definitely an expectation on the broader economy, Joe, that's number one. But as you know, we have some short-cycle businesses in the portfolio. That means the industrial connectors, it means also the short cycle in IP. So when you look at the short cycle in IP, even though we see still good numbers. When you look at OSAT Q4 is still good for service and good for parts but we saw baseline actually declining. Now service is growing, both because of price but also volume. Part is growing mainly because of price in Q4. So we start seeing some weaknesses there. And then when you look at the industrial connectors business, this, I would say, even though they are still growing year-over-year, which is good. I would say that if you look at the distribution in detail, you see that sequentially, the distribution orders have declined Q4 over Q3. So you start seeing these signs. Did I answer your question, Joe?

Yes, you did. I guess maybe just to kind of contextualize it and we were talking about maybe about 1/4 of your business that you're seeing this potential weakness.

So let me take you through the breakdown. So in IP, we're probably talking about something like 40% of the business. It's probably around 30% of the business. This is industrial connectors. This is industrial components. And MT is mostly driven by auto.

Okay. All right. That's super helpful. And then my follow-on question is just around the IP margins, clearly a great story over the last several years. I mean, even adjusting for the onetime items above 20% is pretty incredible. As the business starts to shift more into projects, what's your expectation for the margin trajectory of this business moving forward?

The trajectory doesn't change, Joe. The trajectory for this business is up. And we have been very, very rigorous, very disciplined, everybody understands in IP that the rigor and the discipline in pricing is fundamental for us to deliver the performance that we are delivering. So just to give you another data point, if we look at the backlog that we do have today, also the projects backlog is at a record high of profitability. So everybody understand it. we have the proper processes, and we are executing that way.

Our next question comes from the line of Damian Karas of UBS.

I want to start off asking you about the friction. I know you mentioned with respect to EV still targeting getting to that 30% global market share by 2026 and share gains continued to be expected this year. But there have been some headlines out recently about the global market leader in EVs, losing some market share to some of the Chinese manufacturers. And in general, it seems that EV space is getting more competitive. So just curious to hear your guys thoughts on what it means for ITT friction, your market positioning and profitability.

Well, that's very true, Damian. I think that the dynamic probably is changing, it's getting more competitive out there, a couple of things. I think that the market will keep on growing, growing very fast, that has not changed. When it comes to the competition, we are still able to differentiate ourselves when we're playing against the competition. So you're still facing challenges when you are designing the braking system for EVs that are still relatively new. And therefore, the speed to solve those problems is something that really helps you to differentiate. And this has really helped us so far, and we believe it's going to help us for the years to come. We haven't -- and this is demonstrated by the number of electric vehicle platforms that we have been winning in 2022 with 78% for the full year.

And Damian, I would say that the greatness of friction is that we play with everyone. And so whether it is a Chinese electric vehicle or a more traditional OEM also continuing to develop ICE platforms, we made a point to apply the same focus and to defend our existing business and go after the competition. And so I would say that even if there's a transition that changes a little bit or slows down, this does not impact our business.

Understood. And as it relates to capital deployment, it doesn’t seem like you’re planning for much buyback this year. Are you maybe expecting some acquisitions to hit or – why is that? If not on the deal front, would it possibly make sense to repurchase more shares or offset some of the higher interest expense. Really appreciate just any thoughts around that. A –Emmanuel Caprais: Sure. So as you mentioned, Damian, we are really focused on growing this business through M&A and adding complementary businesses to really strengthen IT. And so we mentioned several times that we have a very healthy pipeline. We’re going after great opportunities. And when we travel around to see all these opportunities, it’s really refreshing to see that the team can relate immediately to the business opportunity or even the customers. And so we feel pretty good about our M&A activity in 2023. And that’s why it’s going to take precedence above repurchases. If that doesn’t materialize for whatever reason, then we’ll continue to be aggressive in repurchases as we’ve been in 2022.

Our next question goes to Joe Giordano of Cowen.

I just wanted to start on the cost side for expectations into '23. So the cost inflation, I know it's less than -- you're guiding to less inflation than what you had in '22, but it's incremental inflation off a high number. And Emmanuel, I think you called out chemicals, you called out energy. I'm sure there's some labor in there. But I just want to understand the lags here because if it's like chemicals and energy and things levered to oil prices and gas prices, I mean, in the U.S., they're down and in Europe, gas prices are down like 85% versus the peak and they're down -- they're at late '21 levels now. So just curious as to like how -- what those exposures are and what -- it seems like there has to be some give back on the energy side pretty soon.

No, no, we agree, Joe. I think that for the moment, there's -- we're still in a period where we have high cost. And one thing that we have to keep in mind is that even if the markets show a significant decline, whether it is in energy or for the price of steel or those type of things, there's still a lag before we can experience it. And I think that what you're seeing here is that Q1 is really very much in line with what we've seen in the second half of 2022. And we're going to start seeing progressive benefits in Q2 and later in the year. So I think that a lot of the incremental inflation that you're seeing is on the chemical, the other raw materials. We buy aromatic fiber, for instance, and that has shot up through the roof, 10 is not easing up either. But on the commodities that are going to go down, we're going to experience that decline later in the year.

Okay. And then if I could just follow-up on MT, specifically on the margins. Obviously, there's a lot of upside to where you used to be there. How much of this is like specific COVID-related costs in China, just for like having to keep people on site and all the extra stuff you had to do during shutdowns? And if that -- if we get back to China, just living with the virus like we do here now -- how much does that give you back like almost immediately if you can take some of those precautions away?

So I would say when it comes to -- that is a known issue, Joe. As I think that China has been able to go through all of that performance, those costs have been fully compensated by productivity and the volume. And so not at all. That's the short answer.

Our next question comes from the line of Vlad Bystricky from Citigroup.

Maybe just following up on Joe's question there and I'll ask them in a different way. So I think about the progression of MT profitability going forward. Can you talk about the path back to high teens margins in that business? And sort of given what you know today, how you're thinking about the time line to get back to those prior peak-ish ranges?

Okay. So when we think about MT, the long-term target that we shared at Investor Day have not changed. Within, MT can reach the operating margin long term. That's for sure. And when we think in terms of time line, just because of what has happened probably, they're going to get there a little bit later than CCT and NIP. But that 20% is there can be achieved. We just have to get a little bit of this since they go through this make out of this NIC. But we have a clear visibility to get there.

Yes. And I would say, Vlad, that when you think about the past, obviously, maintaining pricing is important for us, while commodities are slowly declining. I think productivity has been has been a war machine in terms of productivity. And obviously, we continue to count on that. And then when you think about the other businesses out of friction, they've been also quite impacted by commodities inflation business like Axtone [indiscernible] Steel, for instance, Wolverine as well. And so we're really driving the recovery in those businesses to help us get back to that 20% margin target. That, as Luca was saying, may not be around that 3-year horizon, but more around the 5-year horizon.

So Vlad, if you think about Axtone, I mean 25% of Axtone business disappeared overnight and that was a very good profitable Russia business. Now despite all of that, Axtone was profitable in the mid-single digit. But as you see now, they have to recover and have to rebuild with a different footprint with a different market.

Maybe just as a follow-up, Wanted to ask you a little about Habonim actually. That business seems to be performing quite well versus your expectations, and you highlighted how the business expanded IP's valves portfolio. So could you talk about sort of your opportunity in VAVE and how you're thinking about the potential to continue expanding your presence there either with Habonim or through incremental capital deployment in that end market?

Thanks for your question, Vlad. That's spot on. I think the VAVE is an area where we are investing and growing organically and inorganically. We have some very differentiated products with IP, with intellectual property that can be used in pharma and biopharma that happens when with some key accounts. And we keep on investing on that front. On an organic point of view, we have opportunities in the pipeline. So we will keep on investing also inorganically and as well as leverage the Habonim acquisition to expand more with -- more with the Habonim happening products in North America. So all of that is happening. And there are some key markets where Habonim is strong. It might be cryogenic, pharma, hydrogen that we are penetrating more and more, that in terms of investment, in terms of opportunity for the future, M&A, et cetera. When it comes to the results, it's been a great acquisition. It's been a very well-executed integration that was not so focused on the integration as much as value creation. And if you think about the multiples related to today is between 8% and 9%. So it was, as I said, a great deal and very well executed by Ilan and by Kasturi by the entire team.

And I would add to this that as we had previewed when we acquired Habonim, it is also helping that acquisition is also helping us see things differently in the way we manage our existing engineered VAVE business. And so we've been driving a lot of the margin up in that business, which has participated in the margin expansion story also of IP. And I would say on that business, engineer Valves, which was the legacy business of ITT, we are seeing significant opportunities from the biopharm standpoint. So also in that regard, Habonim as well as our existing business are expected to grow significantly in 2023.

Our next question comes from the line of Jeff Hammond of KeyBanc Capital Markets.

I think you gave some good color on the segment guidance for 1Q, but I'm just wondering like if you can rank order kind of confidence in the level of margin expansion for each of the segments or where you see the most and least.

So when I look at the 3 different businesses, they are facing a little bit of a different challenges, Jeff. In terms of IP, we have a very good momentum there, and we are taking to the next level. We need to invest. We need to invest there and keep on investing in this business. But we need also to keep a very close eye because you have a short cycle business that is slowing and a long cycle with big projects that is really hard. So you really need to wait and decide properly where to invest. So good momentum, keep an eye on what is going out there in the industrial. When you look at Motion Technologies, is working like crazy on the operational efficiency while sticking on the pricing and negotiate as well as you can on the pricing. So that there is still quite a lot of work to do, and it's quite difficult because you are dealing with automotive with a very difficult market scenario. When it comes to CCT, CCT has got plenty of opportunities and in terms of -- because of the aerospace that is growing. But at the same time, what we experienced in CCT in Q4 was challenged on the supply chain that were higher than expected. So if we look at Q4, probably we were not able to deliver roughly $10 million, $20 million of revenue just because of supply chain issues and labor shortages and CCT is probably where we need to pay more attention because of those kind of issues.

So Jeff, in terms of margin trajectory, I think that if you think about IP and CCT, as Luca mentioning, they are in a different dynamic than MT, where if you think about IT, we probably closed from a sustainable margin performance in IP at around 18% in 2022. And so we're going to drive roughly 100 basis points higher in 2023 than that. CCT is going is also going to drive significant margin expansion a little less than 100 basis points compared to the 18 -- roughly 18% in 2022. So really good momentum there. In MT, we're clawing our way back into the high teens. And so I think you're going to see a nice improvement, but still very much affected, as we mentioned, by material cost inflation that still remains pretty big.

Okay. That's very good color. Maybe I guess, within MT and maybe broader just -- you talked about particular, I think, aftermarket weakness in Europe in the front half, production slowdown in auto in the back half in Europe. Maybe just dial in a little more on how you're thinking about North America and China? And just more broadly, what's your expectation for kind of rate of recovery here? We hear a lot of different things on China in general and just want to understand what's kind of built into your guidance?

Okay. So when we look at the market for 2023, I said, we said 0 to 2 the market, 2% growth, we will outperform that. And then Europe, probably we estimated flat also China and low single-digit growth for North America. That is our expectation. And we expect -- our forecast and we expect to outperform that, as I said. When it comes to the second point in terms of China, from an economy point of view, I think it's going to -- China is going to do fine. If I think about the difficulties that we had in Q4 in December, 75% of all our people got COVID, never heard of. And guess what? They're all back in right now and they're all working. So my view on China is actually a positive one.

And so in terms of outperformance versus all the different regions, we expect that we're going to have first overall global an outperformance in the market in '23, that's going to be a little higher than what we've seen in '22. And then all the different markets are going to be -- we're going to outperform all the different markets with the highest outperformance probably in China and an equal outperformance in both Europe and North America.

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

I guess following up on the frictional outperformance question, it sounds like step up a little bit relative to the 400 basis point run rate at least globally that's certainly below the 900 that we've grown accustomed to over the years, but it makes sense given the share gain trajectory that you've been on for so long. If we think about the next few years? Is mid-single-digit outgrowth the right place to kind of hang our hat and modeling friction OE? And how should we think about that? By region, we've also gotten accustomed to strong outgrowth in China, really significant outperformance in North America and then more modest just based on your elevated share in Europe.

Spot on, Brian. So I think it would be different, different geography and what you said is correct. So probably lower in Europe and more in North America and in China. I would say, even higher in China because also our performance in terms of award has been outstanding also in 2022, thanks to [indiscernible] and our sales team over there. One positive tailwind that might be on top of that, on top of what we said is the EV. And the reason why I'm saying that is because our win rate in electrified platforms is much higher than our market share. So that might feed a larger outperformance in the years to come. So we don't see that yet because the start of production is going to be in the next 2, 3 years. But with them materializing, that could be a tailwind to our -- to a lower outperformance.

I appreciate the detail. And following up on having that seems to be a win for [indiscernible]. Could you offer some finer points on exactly how it's pacing relative to your initial deal model? And if there is a figure you can speak to, how much your new energy project funnel has expanded since acquiring the asset?

Yes. So I think that what we're seeing is that hydrogen -- the hydrogen opportunity is definitely there, and we're expanding really very much on that end market. bone is gaining share. It's taking share from everyone. I would say from an order standpoint, we're seeing some really nice number clearly outperforming the model. from a revenue standpoint also and for a margin. So really across the board, including cash, where we -- and we've seen some nice improvement in the fourth quarter in terms of working capital reduction also. Well, we -- the next opportunity that we have with Abom, is to really drive the productivity in there. They are producing -- let me give you an example. They're still producing in batch there. And so that's limiting their production capacity. And so very constructively, we're going to implement lean and so free up a lot of capacity, which is going to allow us to support future growth without making CapEx investment, but just reorganizing the line. So we should see in addition to volume, really, the margin taken off.

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