Melissa Trombetta - Vice President of Investor Relations Denise Ramos - Chief Executive Officer and President Tom Scalera - Chief Financial Officer and SVP.

Mike Halloran - Robert Baird Nathan Jones - Stifel Joe Ritchie - Goldman Sachs Shannon O'Callaghan - UBS Andrew Obin - Bank of America Joe Giordano - Cowen.

Welcome to ITT's 2015 First Quarter Results Conference Call. Today is Friday, May 1, 2015 and starting the call from ITT today is Melissa Trombetta, Vice President, Investor Relations. She is joined by Denise Ramos, Chief Executive Officer and President; Tom Scalera, Chief Financial Officer.

Today's call is being recorded and will be available for replay beginning at 12:00 Noon Eastern Time. At this time, all participants have been placed in a listen-only mode. And the floor will be open for your questions following the presentation. [Operator Instructions]. It is now my pleasure to turn the floor over to Melissa Trombetta. You may begin..

Thank you, Maria. I'd like to highlight that this morning's presentation, press release and reconciliations of GAAP and non-GAAP financial measures can be found on our Web site at itt.com/ir. During the course of this call, we will make forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

No forward-looking statements can be guaranteed, and actual results may differ materially from those projected. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Forward-looking statements made on this call should be evaluated together with the risks and uncertainties that affect our business, particularly those disclosed in our SEC filings. So let's now turn to Slide number 3, where Denise will discuss our results..

Good morning, everyone. I appreciate you joining us today as we announced our financial results for the first quarter of 2015. As you saw in the earnings material this morning, we delivered another strong operating quarter in Q1.

These results reflects robust net operating productivity and the cost containment actions that we have implemented across the company to manage what we can control despite a softer than expected top line in the challenging macroeconomic environment. We have continued to see external top-line impacts from a stronger U.S.

dollar, weak North American demand, delayed capital spending and challenging oil and gas and industrial market conditions. Despite these top-line challenges, we never lost our focus on strong execution, which is reflected in both our operating margins and our solid $0.65 adjusted earnings per share.

Throughout the quarter, we maintained our operational intensity and we improved our adjusted segment gross margin by 210 basis points. This significantly contributed to the growth of our adjusted segment operating margin, which expanded 150 basis points to 15.2%, a new record for ITT.

This expansion was driven by momentum from our ongoing LEAN transformation, restructuring savings from actions we’ve taken in our Interconnect Solutions and Industrial Process businesses, supply chain benefits and favorable margin impact from foreign currency.

Delivering exceptional performance in the face of diversity is what we do at ITT and I want to tell the teams all across ITT how proud I am of the way that we collectively pull together to overcome challenges and create value for our shareholders.

So now let me share some perspectives on the Q1 financial results and how they will impact our full year outlook. Organic revenue and organic orders were down 5% in the quarter, the similar dynamics impacting both.

Our industrial revenue which was down 12% includes some of our more economically sensitive product lines like connectors that was impacted by the unusually slow start to the year across up major geographies.

These declines were also due to delays in chemical and industrial projects into Q2 and Q3 and difficult comparisons to strong prior year petrochemical and mining projects.

Our revenue in the oil and gas market was down slightly, due to solid project pump shipments in North America and the Middle East that were largely offset by project weakness in other regions and a sharp decline in our book-and-bill upstream connectors.

Our revenue and a transportation space was down 2%, primarily impacted by unfavorable timing and delays. In commercial aerospace and defense delayed connector shipments resulted from operational disruptions due to our move to Mexico.

We also experienced lower aftermarket volumes in our Motion Technologies business due to an anticipated shift in our customers buying pattern. These declines were partially offset by a 16% increase in organic revenue for Motion Technologies global OEM friction products due to improved global production rates and share gains in all of our key markets.

As I mention from a margin perspective we improved adjusted segment operating margins to 15.2%. Our strong execution more than offset challenges at interconnect solution and the negative impact from lower volume and pricing headwinds across most of our businesses.

And as always we continued to fund our long-term growth investments for the future with increased R&D and strategic investments. So now let me provide you with some insights into the operational challenges we experienced at ICS this quarter.

As we indicated on our call back in February we plan to move production lines from Santa Ana California facility into our Nogales Mexico facility. We commented that we expected some disruption in the first half of 2015.

Unfortunately the impact was larger than we had anticipated due to customer qualification delays, supply chain issues and production inefficiencies. These challenges resulted in lost revenue due to past two deliveries to our customers and $5 million of incremental cost.

We are not happy with the magnitude of the impact I am confident that we have the right teams in place to aggressively fix these issues.

Despite these challenges at ICS we collectively delivered solid operating results, these results are reflected in adjusted EPS of $0.65 per share which was up 5% versus last year and up 11% excluding the net negative impact from foreign currency. The growth also reflects a lower effective tax rate lower share counts and lower corporate costs.

So moving on to guidance, we are pleased with our strong earnings results in Q1. But for the full year we do expect incremental foreign currency headwinds and further top line pressure in oil and gas and industrial markets.

To help partially offset these headwinds we are driving additional operational productivity, continued cost containment actions and we also expect incremental benefits from potential restructuring actions with interconnect solution.

As a result of our first quarter performance and our aggressive actions to address headwinds we are recalibrating our adjusted EPS guidance range primarily due to an expected negative $0.8 impact from foreign currency. The previous $2.60 mid point is now the high end of our new $2.50 to $2.60 per share guidance range.

Excluding the approximately $0.26 negative impact of foreign currency our projected adjusted EPS growth of 14% versus 2014 is actually 1 percentage point higher than our initial annual guidance, reflecting strong productivity and cost controls. These incremental foreign exchange headwinds are also impacting our total revenue guidance by 2%.

In addition to the lower organic revenue expectations our organic revenue growth guidance reflects the incremental pressures in the oil and gas markets and the slow start in the industrial markets partially offset by stronger global automotive OEM volumes in our motion technologies business.

As a result we are forecasting total revenue to be down 8.5% to 5.5% and organic revenue to be in the range of down 2% to up 1% versus the prior year. Let's turn to Slide 4 for an update on our three strategic focus areas optimizing execution, market expansion and effective capital deployment. Starting with optimizing execution.

Our focus on execution is what fueled our better than expected Q1 earnings. So let me provide examples and highlight some of our value creating activities this quarter.

First our industrial process business is already generating solid benefit from the actions we are taking to reorganize the business to better leverage previous investments as well as to address the current realities of the global oil and gas market and slowing project activity.

These benefits have come to improved operational effectiveness including productivity and incremental restructuring savings.

We also benefited from strong operating execution in motion technologies that posted a record margin of 21.4% reflecting continued benefit from KONI's transformation and the Wuxi China facility that delivered significant contributions due to higher volumes, improved price efficiency and focused factor efforts.

As we move through the year we are continuing to indentify additional opportunities to improve efficiency and reduce cost. We are now forecasting our restructuring and realignment actions to be in the range of $40 million to $45 million this year.

This range includes potential incremental actions that would take place at Interconnect Solutions, as we look to accelerate restructuring to further improve efficiencies and reduce our cost basis to better align with our top line expectations.

These actions are a continuation of our ongoing optimization of this business and we’ll better position us for the long-term. The anticipated benefits from these actions are positively impacting our adjusted EPS guidance by $0.03 to $0.04.

Finally, we are not only reducing our overall cost structure across the businesses, but we are also significantly reducing our corporate costs. As a result, we are now expecting our full year corporate expense to be approximately $55 million, which is down $5 million from our initial guidance in February. Now let's go to market expansion.

Despite experience market pressures in Q1, we continue to focus on our long-term strategic market. During the quarter, revenues in our friction OEM business grew 16%, excluding the impact of currency, with all major geographies contributing to the results.

Our growth in automotive OEM reflects recent long-term platform wins with key customer, such as Ford in North America; Volvo, Daimler and BMW in Europe and Volkswagen and BMW in China.

Our success at Motion Technologies partly stems from our material science expertise and our ability to leverage our knowledge to develop new technologies quickly to meet our customers evolving demand. The example of the benefit of having these differentiating capabilities is the approval of our copper-free brake pads by General Motors.

We were able to leverage our expertise to successfully develop copper-free brake pads that exceed the future regulatory standards. This approval now allows us to bid on all future General Motors platforms.

We have also continued to focus on the highly profitable aftermarkets which was demonstrated by solid growth in our Industrial Process business, with orders up 13% and revenues up 7% versus the prior year.

The order growth was the result of capital spares for large oil and gas projects previously installed in Latin America and the sales growth was the result of solid parts and monitoring and control system shipments.

And finally in Q1 our Control Technologies business won a $12 million contract for aerospace interior components, which marks another milestone in European platform expansion. This win was the result of our prudent product innovation, reliability and operational performance. And now our last focus area, capital deployment.

In 2015, we’ve continued our track record of balance and effective capital deployment. So far this year we have deployed a total of $133 million for M&A and share repurchases and we increased our dividend by 7.5%. Shortly after the close of the quarter, we completed the acquisition of Hartzell Aerospace which I’ll discuss in more detail shortly.

But an addition to this acquisition, we also repurchased $80 million of shares during the quarter. It is also important to note that subject to the availability and timing of acquisition targets, we’ve included the impact of up to $20 million of additional share repurchases.

And lastly, we started the third round of organic investments to further expand our Wuxi, China friction facility to meet growing customer demand. As a result of the investments we have made in our China facility, we have continued to deliver tremendous top-line and margin expansion.

In 2014, we grew 26% in our China automotive business and we’re off to a strong start in 2015 with 45% growth in Q1. Turning to Slide 5, we provide details on our latest acquisition Hartzell Aerospace. Hartzell has such a strong strategic fit with ITT and I couldn’t be more excited about the future value creation potential from this combination.

In addition, Hartzell nicely aligned with our key financial metrics including a strong top-line trajectory that reflects content on platforms already secured, as well as EPS and ROIC accretion in year one. From a valuation perspective, this transaction was nicely secured with an attractive EBITDA multiple of 8.5 times including tax benefits.

So little background on Hartzell. There are manufacturer of highly engineered and customized solutions in the aerospace environmental control systems market. Hartzell’s technologies nicely complement our Control Technologies aerospace platform.

The addition of this business will broaden our capabilities, expand our content on key high growth and next generation aerospace platform and help further position ITT as a leader in a broader aerospace market. More specifically it will expand our region to the environmental control systems market.

In addition, we also see significant leverage opportunities as we integrate this business into our highly successful Control Technology segments. So with that I will turn it over to Tom to discuss our results and guidance in more detail..

Thanks, Denise. Now let's turn to Slide 6 for a detailed review of our first quarter results. In the quarter our organic revenue declined 5% primarily due to lower large pump projects across key segments customer directed delays and week connector shipment.

The large pump project declines reflected slowing market conditions and difficult comparisons to significant prior year activity and oil and gas, petrochemical and mining end markets.

These declines were partially offset by 27% increase in our short cycle base line pump performance which was supported by strong backlog entering the year and a 7% increase in the aftermarket. Weaker connector shipments drove 17% organic revenue decline at interconnects solutions.

This decline includes delayed shipment due to the Mexico move disruptions weaker than expected first quarter demand across major geographies and end markets. And significant declines in our book and bill upstream oil and gas business. Automotive was strong in the quarter as Motion Technologies delivered organic growth of 3%.

The Motion Technologies team delivered exceptional 16% growth in global automotive OEM brake pads including 45% growth in China 27% growth in North America and 10% growth in Europe. This growth was partially offset by lower after market volumes due to an anticipated shift and our customer's historic buying patterns and inventory management.

Excluding the impact of the shift Motion Technologies would have grown 6% organically. Moving on to orders, organic orders decreased 5% this quarter due to delays and softness in large pump projects particularly in oil and gas and chemical and industrial markets.

We also experienced connector weakness across key end markets including upstream oil and gas which contributed to the 15% decline that Interconnect Solutions. Partially offsetting these declines are solid orders and our motion technologies business which is up 3% on an organic basis.

Motion technologies performance is driven by global OEM orders and automotive brake pads along with a 7% increase in our KONI shock absorber business resulting from new platform wins and product launches. In the quarter our total backlog increased 2% excluding the impact of foreign exchange partially reflecting the shipment delays mentioned.

In addition in April we did see solid year-over-year organic order growth in a number of our businesses outside of our project business and industrial process including 50% increase in our Control Technologies Aerospace business.

Q1 adjusted segment operating income of 90 million was 3% lower than the prior year, these results reflected negative foreign exchange, lower volumes and the disruption cost at ICS.

These headwinds were partially offset by strong net operating productivity driven by our lean transformation, supply chain efficiencies and restructuring benefits as well as product warranty favorability and industrial process. For the quarter our adjusted EPS of $0.65 per share nicely exceeded our expectations and was 5% higher than the prior year.

Excluding the negative impact of foreign currency our adjusted EPS grew 11% versus the prior year. The growth reflects strong segment operational performance along with the lower effective tax rate and share account and lower corporate costs than included prudent cost containment actions.

Compared to our expectations 60% of our first quarter strength was driven by operational execution primarily in Industrial Process and Motion Technologies that more than offset by ICS weakness. The remaining 40% was primarily driven by corporate cost controls. On Slide 7 you can see that segment operating margin expanded 150 basis points to 15.2%.

Our margin expansion was largely the result of strong operational execution that generated 24 million of growth productivity savings and drove our adjusted segment gross margins up 210 basis points to 33.8%.

These improvements were driven by our collective lean transformation, expanded global strategic sourcing and significant benefits from the restructuring actions at interconnect solutions and industrial process. Our margin expansion also reflects the 5 million of operational disruption in our connector business offset by product warranty favorability.

Included in our first quarter margin expansion was a record profitability at our Motion Technologies operations in China that continue to increase manufacturing efficiencies while satisfying the growing demand of foreign and local customers in China.

During Q1 our margins also benefited from favorable currency transaction impacts which more than offset the expected negative translation. Once again our productivity gains self funded 30 basis points of organic investments primarily at motion technologies and help to offset the unfavorable impact from lower volumes.

Before we move on I would like to highlights that the first quarter marks our 9th consecutive quarter of year-over-year margin expansion with an average of 115 basis points of growth over that time validating the strength and sustainability of our lean transformation. Finally let's turn to Slide 8 for our 2015 guidance updates.

As Denise discussed earlier we lowered and widened our total inorganic revenue guidance ranges for the full year. We are now forecasting our total revenue to be down 8.5% to 5.5% and organic revenue to be in a range of down 2% to up 1% versus the prior year.

The revised total revenue guidance reflects 53 million of incremental foreign currency headwinds primarily impacting Motion Technologies and to a lesser extent Industrial Process. So let me provide some additional insights into our organic revenue reset by market.

In the oil and gas market, we now expect to be down 17% in 2015, compared to the prior year. This compares to our prior oil and gas guidance of down 11%. The reduced expectations reflect intensifying pressures in our short cycle upstream oil and gas business at Interconnect Solutions and reduced upstream activity in Industrial Process.

In the industrial markets, we now expect to be down 2% to flat, primarily reflecting the lower than anticipated levels of economic activity in the first quarter across multiple end markets and geographies.

However, we do anticipate gradual improvements in our markets from the low Q1 levels and we now expect moderate 3% growth for the balance of the year. In the transportation markets, we now project stronger organic growth of 7%, driven by increased volumes from OEM share gains and platform wins at Motion Technologies.

In addition, the transportation market growth for the balance of the year will be based on addressing disruption challenges at ICS as the year progresses, the aftermarket phasing at Motion Technologies and delivering on increased order activity at Control Technologies.

Turning to adjusted EPS, provided on this slide is roll-forward from our previously issued guidance. As you can see the major driver of the EPS reset is the incremental foreign exchange.

For the full year, we are now expecting an incremental negative impact from foreign exchange of approximately $0.08, bringing the full year impact to $0.26 versus the prior year. And please note that this adjustment reflects not only the euro at a $1.09, but also the impacts of various other currencies on our global business.

In addition, we are forecasting $0.03 of net favorability from our strong first quarter results combined with additional operational productivity, continued cost containment actions and incremental restructuring benefits that are expected to more than offset impacts from the incremental top-line pressures articulated above.

So in total while we’re reducing the guidance midpoint by $0.05, we’re actually raising our year-over-year guidance growth rate excluding foreign exchange from 13% to 14%. Our new adjusted EPS range is now $2.50 to $2.60 per share.

Given the macroeconomic backdrop, I thought it will be important to provide some color into our second quarter and second half expectations.

We project Q2 revenue and growth rates to be higher than the first quarter due to project timing in Industrial Process, Q1 delayed shipments at ICS that are expected to ship in Q2 and the incremental revenue from the Hartzell acquisition. And from a segment margin perspective, we do expect a sequential decline from the first quarter.

This decline is due to a higher weighting of pump projects, the impact of the Hartzell acquisition and the seasonal mix at Motion Technologies related to aftermarket sales. In the second quarter, we also expect increased corporate cost compared to Q1, due to higher environmental costs and lower investment earnings.

As a result of these factors second quarter EPS is expected to be generally in line with the prior year.

And from the first-half or a second half perspective, we expect adjusted earnings per share and revenues to be slightly second half weighted and we expect second half segment margins to be approximately 100 basis points higher than the first half, primarily due to higher restructuring savings in the second half of the year.

So now let me turn it back to Maria to start the Q&A session..

Thank you. This floor is now open for question. [Operator Instructions]. Thank you. Our first question is coming from Mike Halloran of Robert Baird..

So let's start on the margin line; obviously, really strong performance this quarter.

On the IP piece, maybe you could help us out with what the warranty benefit was and how sustainable that is? And then, more broadly, put that in the context of looking at the first quarter margin level and seeing how representative that is on a go forward basis relative to the revenue level.

I know you just said that 2Q, maybe a little bit more project activity, so there could be some slight compression there, but just a general conversation on the IP side would be very helpful?.

The warranty gave us a couple of 100 basis points of pick up in the quarter from the margin perspective at IP. So I’d like to highlight that it's really an underlying reflection of the progress that we’re making in improving our operational effectiveness at Industrial Process.

We need to kind of reach certain levels of performance with key customers to be able to clear through those issues. So the warranty does reflect the improved underlying operations that we’re building with the new IP transformation.

So that was one of the drivers in the quarter but I do think it's a reflection that the productivity actions we're driving restructuring actions that we have queued up for the balance of the year are starting to kind of come together until much more efficient and effective industrial process business.

So as the year progresses we continue to expect to see margin expansion more pronounced in the second half because of the incremental restructuring benefits coming through Q2 as I mentioned on the prepared remarks Q2 will come down a little bit because of the project mix which was a little lower in Q1 that we expected those projects will ship in the Q2 and create a bigger margin headwind.

But the underlying effectiveness at IP is certainly improving based on the actions we've taking in the last several months..

Yes, we're very excited about the IP business and what exactly they're achieving there. As we had said before they're in process with the organization restructuring to have it align around the three key verticals that we have in industrial process with our engineered business the industrial products business and then the aftermarket business.

As Tom said we're starting to see some nice benefits flowing through that, we're going to see more and more of that as we get into the back half of the year.

So they're going to be much more effective much more optimized from an operational perspective as well as recognizing the challenges that are out there from an oil price perspective in the new oil and gas market and really right sizing the organization associated with that.

So we're very excited about what's happening there and as Tom indicated we're going to see some nice margin progression as we get into the back half of the year..

And on the Motion side, two questions. One, when does the aftermarket piece start normalizing for you guys year-over-year? It sounds like it's maybe the second quarter here, but would be curious on that.

And also anything on the margin progression relative to the revenue line that was abnormal in the first quarter or if that is a good base for us to build off going forward?.

Sure Mike. The aftermarket actually was a margin headwind in the quarter for Motion Technologies, that’s typically the strongest volume quarter in the aftermarket. And some of those volumes are going to push out into Q2, Q3 and Q4.

And this is the first time we've seen that customer use this new order pattern after this relationship which has been many, many years.

So the shift will push out in the Q2, Q3 and Q4 but the margin delivery in Q1 at Motion Tech is really a solid reflection of operational execution around the world and most notably includes the benefits from the China operations.

And as you know we've been making significant investments in scaling out that facility and the team there both from the KONI, Wuxi team and our friction team in KONI are continuing to really rock out solid efficiency gains.

And that was really the margin story at motion technologies we faced a bigger headwind from less aftermarket and more than exceeded it on really good foundational work in China..

And then last one for me.

Stripping out the oil and gas and just referring to the industrial growth that you highlighted in the guidance-related comments, what gives you some confidence that the growth rate gets better from the first quarter on an organic basis from here? We have certainly heard other companies talk about deteriorating CapEx environment a little bit more pressure on the industrial lines, so wouldn't mind hearing what's unique about your portfolio that gives you the confidence in that growth..

One of the interesting things when you look at the growth for IP M we're all projecting for the back half of the year. While we expect to see some improvements from what we saw on Q1 we are really not expecting to see a dramatic improvement in our sales and in the IP business.

But what we do expect to see is that the oil and gas we see continued challenges in that with projects, we are doing much better with the aftermarket and the baseline performance in the business.

So when you saw what happened in Q1 with our baseline being up a strong as it is with 27% lot of from that backlog last year but still a good indicator and then our aftermarket being up 7%.

What IP is really is focusing on the core product that they've got and that would be with our baseline in the aftermarket recognizing that we're going to be seeing some declines in our project business..

And Mike as we think about the broader industrial performance throughout the year Q1 of last year industrial businesses were up 13%. So we did have a tough year-over-year compare and really hit us in Q1 on projects and mining in general chemical and petrochemical.

So we had a bigger headwind what we're projecting for the balance of the year on these broader industrial markets is 3% organic growth which we think is reasonably balanced given kind of the lower growth expectations across the market.

But typically our short cycle businesses would start to see pick up when the activity comes back from the low levels we saw in Q1..

So sequentially not that a typical of a pattern?.

Correct. Actually slightly less than what we had last year in the broader industrial markets. So we have a lower growth expectations but fairly similar from pattern perspective to what we've seen in the past..

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

Can we start with the positive effect that FX had on gross margins and just give us a little bit more color on where that came from? I assume some of it's from Motion Technologies importing into the U.S.?.

Correct, we have a little pick up on transaction Nathan from Motion Technologies, but the larger pick up was from the Industrial Process portfolio which is a very global mix of businesses including operations in Mexico and China.

So we did see transactional benefits, certainly on the margin line offsetting some of the translation pressures, actually flipping them to be a positive. So we have about 70 basis points of positive transaction from a margin perspective, but it did include Motion Tech and also Industrial Process as the main drivers..

And just to pick on the guidance a little bit, you have got here 2.60 going to 2.55 at the midpoint with $0.08 FX and $0.03 of market headwinds and execution benefits. You had guided the first quarter to be down $0.10 year-over-year and it came in up $0.03, so there is $0.13 of a beat in the first quarter.

How does that factor into the guidance for the rest of the year?.

I mean an easy way to think about it Nathan is the $0.12 beat in the quarter, really is going from our perspective is going to offset some of the incremental operational headwinds or market headwinds that we’ve been talking about with the reset organic revenue guidance.

So that the Q1 strong performance really offsets the lower organic revenue expectations that next then really we look at $0.08 of the foreign exchange headwind and we’re netting that against $0.03 of incremental restructuring benefits at ICS. So that’s a loss within the $0.12 of market related impact.

There is a mix of increased productivity and cost containment going against some of the lower organic expectations we have..

So the first quarter base is captured in that $0.03. Then onto ICS, you talked about lost revenues, 5 million of incremental cost.

How much of the lost revenue is recoverable versus went to a competitor or something like that? And are we expecting any further incremental costs as part of this move?.

The incremental revenues that we lost as part of this move we think is about 5 million to 7 million something like that in Q1. We should see some of that getting factored in back in into Q2 and potentially into Q3 with that. In terms of the disruption cost, we identified 5 million of disruption costs at ICS.

Let me say that this was a very complex move that was taking place at ICS and so it was really moving a lot of our aerospace and defense content from California down to Nogales.

And as we were doing that, there were some challenges from making that move with inefficiencies associated from a production perspective and some qualification issues with our customers. So we’ve been working through that, that’s going to take us some time to fix that.

So we will see gradual improvement over the course of the next three to six months with that and we should have lower cost as we go through the balance of Q2 and Q3 associated with that disruptions into seeing the note that their margins if you excluded that would have been double-digit margin.

So, we’re going to work through it, I am very confident in that, the teams are all over it and we will see improvement in the ICS margins as we go through the back half of the year..

So that sounds like while you expect improvement, you're not jumping straight back into double-digits, so maybe it takes a quarter or two to get back to double-digits?.

Yes, we’ll have to see how it progresses, but I would say just assume that in that we’ll see double-digit margins as we progress month-by-month through -- as we get into Q3 more into Q3 than Q2 at this point. Even though we could see something in Q2 depending on how quickly these fixes happen and we get some of these shipments out to our customers..

The other point to Nathan is the oil and gas reset hits the upstream connector business and that was part of our recalibration with new oil and gas numbers that has a meaningful impact on ICS on both the top-line and from a margin perspective as well. So that’s another headwind that we’ll be dealing with as we go through the year..

That's fair. And then on Motion Technologies, you had 3% organic growth. You said the shift in the aftermarket buying pattern cost you three points of growth that gets redistributed through the rest of the year.

It didn't sound like there was any real one-off items in there, so if I start at three as a baseline, add a point to each quarter from the redistribution of the aftermarket, we should be looking at kind of a minimum of 4% growth each quarter going forward?.

The other big piece Nathan is platform start-ups and volumes on some platforms that we’re on -- the customer volumes are going to start to scale up as the year progresses as well. So, our win rate on the OEM side have been very, very strong and that’s going to add incremental growth as the year plays out beyond just recalibrating for the aftermarket.

So we talked about actually an increase in organic revenue expectations and transportation and that’s really coming from motion technologies showing strong OEM volumes relative to what we expected. The phasing by the end of the year generally plays itself out..

So we should be looking for a kind of upper mid single-digits?.

I think there is a lot of good indicators that motion technologies that we feel good about. It won't be a linear though Nathan it will be a little each quarters is going to have different start times and recalibrations as the year progresses they will keep moving up nicely from where they are in Q1 from a year-over-year organic perspective..

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

So I guess maybe just -- maybe focusing on Slide 14. What strikes me about this slide is that oil and gas was basically barely down and general industrial was down double-digits, and now there is an expectation that you will see that really reverse as the year progresses. And so, the two questions.

One, on general industrial specifically, was it just large projects being deferred and that's why we saw the double-digit decline there? And I guess, secondly, just staying with general industrial, what really drives your confidence that you're going to get to a plus three type number as we progress through the year?.

Definitely the mining the petrochemical projects are going to really bumps through the quarter that there is going to be some real tough compares as we lap 2014.

So you'll see a lot of movement I think as the year progress where those two particular categories of revenue and that’s all about project overlap compared to the conditions we saw last year. Particularly petrochemical and one of the markets we're seeing a lot less activity this year as in Asia.

So that’s one headwind that we'll be dealing with on a larger project side. Our general industrial business there was a little bit of an impact from what we saw in the connector disruption that impacted that performance in the quarter.

And this just was a slow start, the order activity started to pick up, we exited April with very solid order indicators. So we think we're moving forward pretty nicely getting back to more normalized rates but to your point the biggest impact has been large projects and that’s going to ebb and flow as we go through the year..

Maybe one last question on just oil and gas.

What are you seeing or what are your customers saying from a pricing standpoint, and what are you embedding into your expectations for the remainder of the year?.

We put our guidance together at the end of the year. We really thought through the price impact that we were seeing because we recognized that there was going to be some price pressure that we were going to be experiencing this year. And I would say it's about the same if not a little bit more competitive then what we had thought.

So we have factored in what we think is an appropriate amount of price pressure in our numbers for this year..

Our next question comes from the line of Shannon O'Callaghan of UBS..

So on the industrial process margins, you called out the warranty benefit, but noted that it's a reflection of real underlying improvement there.

But how should we think about the real baseline at this point for where industrial process margins are, and should we still be expecting strong year-over-year margin improvement on that for the balance of the year..

Absolutely Shannon, we're still driving towards the margin expansion that we had articulated coming into the year, we're actually a slight bit of ahead of what we thought coming into the year from a margin perspective.

So the underlying -- once we kind of get through the Q2 project recalibration and we start to see the restructuring benefits we’re going to generate nice sequential margin expansion, there is lot of opportunity for us to drive efficiencies, bring down these kind of manufacturing costs and operation leakage that we've seen over the years by driving improved efficiencies.

So while this is a warranty event in Q1 it's a reflection of us going after kind of cost within the factor that we think we can control more effectively through better execution.

So absolutely the margins will expand quite nicely in the second half of the year, the margins are in line with we expected and they will be up nicely from where we were at the end of last year. We feel very good about the trajectory we're on..

And then on the motion margins, so can you quantify there what -- looking at the operating margin in the quarter, what the -- how much of the year-over-year change was from the improved Wuxi margins and also from currency? And then, if 21 is a margin and kind of an off aftermarket quarter, I mean what's the margin on a good aftermarket quarter?.

Right, it's still our biggest aftermarket quarter of the year, it's just less than what we’ve seen in previous year’s first quarter. So just want to make that point, we see significantly less volume in each quarter from an aftermarket perspective. So that typical step-down we’ll continue to play out.

The foreign exchange was only a 20 basis point impact in the quarter, so very small pick up from transaction. Really the story was strong execution across the board.

Wuxi is kind of the story for us because it kind of stepped into a new level of margin performance, but I certainly don’t want to underplay the level of continuous improvement productivity that we’re driving out of our based operations in Europe as well.

So it is a nice aggregate performance, but I think the news event was Wuxi demonstrating what is capable of doing and as they keep factoring in what put new investments online in Wuxi as we talked about and we’ll have some start-up costs and some new activities playing through those margins as the year progresses.

So we can’t bank on this level performance every quarter going forward because we’re still in the investment phase, but we like what we were able to demonstrate in Q1 as an indicator of where these operations can go..

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

Just two part question on FX. First, on Page 8 when you talk -- expect unfavorable FX, just want to understand is this number net of transaction benefit or not, or do you calculate transaction benefit separately? Just want to clarify that..

It reflects the transaction that we saw in Q1, so that’s kind of big through. But it is hard for us to project transaction there, so many cross currency movements, the timing effective of transaction is something that we find a very hard to forecast.

So we typically do not try to project too far on the transaction line based on some very obvious things that we would see. On translation it's easier math, so we do just part translation as the biggest driver there..

Yes, so to build on that, when I saw your guys at the Hanover show, right, I mean, clearly you have one of the bigger European footprints within our coverage.

How do you guys think longer-term about adding capacity, adding R&D to Europe to take advantage of the fact that you do have pretty good base there and the fact that euro is weaker versus where it was a year ago?.

Our European exposure right now is primarily centered on the Motion Technologies business with the facility that we've got in Barga, Italy. The growth for Motion Technologies is primarily focused on China and North America at this point. So that’s where we’ve been investing organically to build out that business.

We do already have within the IP business Bornemann facility, and so that’s associated with these highly engineered pumps that we’ve got that go primarily into the oil and gas market. So we already make those pumps within Europe which should give us somewhat of an advantage from a footprint perspective.

And then even in ICS, we’ve got one of the main facilities in ICS in Weinstadt, Germany. So when you look across our platform and where we manufacture, we manufacture in North America, we manufacture in Europe and we manufacture in Asia.

So, we’re very global, we’ve got footprint in all those locations which allows us to help take advantage of some of these situations that come up particularly right now with what’s happening in Europe..

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

I just wanted to clarify a point on Wuxi. I know obviously margins are improving quite a bit there and you gave some good color on that, but I was wondering.

Is that still dilutive to overall MT margins at this point, despite the growth there?.

It's interesting because our goal there was always to get those margins close to where we are with our -- the margins that we’ve got in our European facility, and we're doing very nicely along with that. And so in Q1, we had some really, really nice benefits rolling through there with got us relatively close to where we are in Barga.

But as Tom mentioned, we’ve got continued investments there, continued start-up costs, so we’ll see how it transpires for the rest of the year. But we’re very pleased with what the performance is in that facility right now..

So still opportunities to scale there as you guys grow. That's great. And then, I wanted to talk about kind of appetite for buybacks and capital deployment moving forward.

You front loaded the buyback and I know you factored in 20 million to the rest of the year, but I was wondering how would you balance appetite for M&A, and if M&A takes longer, how would you think about an additional buybacks on top of 20 million?.

Acquisition is really at the forefront pricing something that we very much focus on. As you saw in this quarter, we did the Hartzell acquisition which we’re very excited about, we think it's going to be a nice addition to our aerospace platform.

We’ve got a lot of people focused on acquisitions for, that's an important -- very important deployer of our capital. We think it's important for the long-term growth prospects of this company.

Same at we also believe in very balanced capital deployment and we initiated the share repurchase program this year up to $100 million we've done 80 million in the first quarter. So we very much look at how we balance this at out with our acquisitions.

So again acquisitions being the primary driver but share repurchase is we think it make some sense and going forward that’s how we'll continue to think about it..

At this time I'm showing no further questions. I would like to turn the floor back to Denise Ramos for any additional or closing remarks..

Well let me just thank everybody for joining us on the call today. It is a tough environment out there right now and we recognize that.

But we're doing what we do best in this environment and that is that we execute, we drive productivity, we pay attention to those things that we can control as an organization and we're going to continue to do that despite what's happening from a macro-economic perspective, we're excited about it.

We think we've got extremely strong prospects for the future and we thank you for participating on this call and we look forward to talking with you next quarter..

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