Melissa Trombetta - Vice President, Investor Relations Denise L. Ramos - President, Chief Executive Officer & Director Thomas M. Scalera - Executive Vice President and Chief Financial Officer.

Brian Konigsberg - Vertical Research Partners LLC Matt J. Summerville - Alembic Global Advisors LLC Mike P. Halloran - Robert W. Baird & Co., Inc. (Broker) Joseph Alfred Ritchie - Goldman Sachs & Co. John G. Inch - Deutsche Bank Securities, Inc. Adam M. Farley - Stifel, Nicolaus & Co., Inc. Joseph Giordano - Cowen & Co.

LLC Shannon O'Callaghan - UBS Securities LLC.

Welcome to ITT's First Quarter 2016 Earnings Conference Call. Today is Thursday, March (sic) [May] (00:14) 05, 2016. 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; and Tom Scalera, Chief Financial Officer.

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

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

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

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

we will increase the utilization of our global centers of excellence that best align with long-term customer requirements. At the core, it is a play to our strength strategy that will increase the leverage of our most efficient and most effective facilities.

Since 2014, we have already consolidated four global operating locations into centers of excellence. We have also closed and consolidated nine sales and service locations to further optimize our regional structures. We are continuing to evaluate other opportunities to extend this strategy.

And from a portfolio perspective, we have proactively exited two non-core product lines. And we are expanding our focus on driving growth in core end markets outside of energy, including power, municipal, and general industrial. We are also expanding our market tier strategies in the higher-margin aftermarket business.

By focusing on low cost technological solutions that drive pump efficiency for our customers, we believe that we can outpace the market. An example would be our new i-ALERT2 Equipment Health Monitor, which provides our customers with more convenient access to their pumps and system data right through their smartphones.

It is this type of groundbreaking innovative technology that will continue to differentiate us from our competitors. We are also targeting new aftermarket share capture by utilizing rapid parts replacement technologies for targeted regional and customer opportunities.

While we have made significant progress with our structural reset, we have more work to do. We will continue to aggressively advance our productivity plan as well as work to identify new actions that will further improve our processes and strengthen the foundation that will support our IP business for the long term.

So with that as background, let me provide some additional perspective on our Q1 results and our updated 2016 expectations for IP. Our Q1 revenue was generally in line with expectations, but included a lower than anticipated aftermarket mix.

This negative mix, combined with higher than anticipated foreign exchange headwinds and delayed benefit from our cost actions, negatively impacted our margins versus expectations.

Compared to the prior year, our margins declined 250 basis points to 9% operationally, which excludes a 320 basis point impact from unfavorable foreign exchange and incremental investments. Keep in mind, the first quarter is typically our lowest margin quarter due to seasonally reduced operational activity at our customers.

Now for the balance of 2016, we are projecting weaker baseline and aftermarket volumes in the mining and oil and gas markets based on recent trends. As a result, we now expect the total decline in these categories to be six points lower than our original guidance.

Therefore, we are accelerating $6 million of incremental restructuring actions beginning in the second quarter.

As we progress through the year, we do expect to sequentially improve our margins as a result of increased aftermarket volumes as well as the ramp-up of benefits from productivity and restructuring actions taken early in 2016 and those that we plan to accelerate.

However, for the full year, we believe that IP margins will be challenged to reach 2015 levels due to lower sales volumes, mix pressures, and a 100 basis point headwind from foreign exchange. So with that, let me turn it over to Tom to discuss our results and guidance in more detail..

automotive, rail, and aerospace and defense. Organic orders at motion technologies were up 15% and included a 30% increase in our KONI shock absorbers, primarily for rail and defense, and a 13% increase in global automotive brake pads due to new platform awards and recent wins that are now entering production.

Control Technologies' aerospace and defense growth of 35% was driven by strong defense follow-on orders for key U.S. government programs along with solid wins in commercial aerospace and in the aftermarket. We're encouraged by the improved chemical and industrial pump orders in the quarter that reflected increased activity in North America and Asia.

And in addition, ICS delivered a solid book-to-bill of 1.08 that reflected a 4% sequential order improvement compared to Q4. These positive order trends were more than offset by a 55% decline in oil and gas and mining at IP.

These declines reflected the weak market conditions resulting from capital project uncertainty that froze in (22:40) the aftermarket and replacement cycle and difficult prior year comparisons to our strongest order quarter in 2015 that included a $7.5 million aftermarket parts order.

Q1 adjusted segment operating income of $81 million declined 10%, but was flat to the prior year, excluding the $8 million of negative foreign exchange impacts.

Our results include solid net operating productivity delivered by Motion Technologies' world-class manufacturing capabilities and significant restructuring benefits from the actions taken at IP and ICS. The results also included solid contributions from the Wolverine and Hartzell acquisitions.

These benefits were offset by the impacts of lower IP volumes, pricing headwinds in our automotive and IP markets, and unfavorable mix. First quarter adjusted EPS of $0.59 per share, which exceeded our expectations, was up 5% compared to last year, excluding the $0.09 unfavorable impact from foreign exchange.

The 5% growth included a lower share count and lower effective tax rate, partially offset by lower investment returns at corporate. Turning to slide seven.

Here you can see that we delivered segment operating margins of 13.3% or 14.8% operationally before the negative 110 basis point impact from foreign exchange and the 40 basis points from incremental investments.

The foreign exchange impact in the quarter were magnified because we had positive transaction benefits in 2015 that now compare to negative transaction impacts on U.S. dollar denominated oil and gas transactions at IP Korea and Czech koruna impacts at our motion tech facility in the Czech Republic.

The organic growth investments were primarily in our Motion Technologies business, as we further expanded our exceptional Wuxi, China, facility to meet our growing production requirements as well as the impact of startup costs for our new North American brake pad facility.

Our focus on operational execution helped to deliver a combined 490 basis point improvement in the quarter that included $25 million in gross productivity savings along with $10 million of restructuring benefits from actions primarily taken at ICS and IP.

However, these actions were not enough to offset the headwinds from volume, mix, and price pressures in the quarter. Our segment operating margins also benefited from our Hartzell and Wolverine acquisitions, which nicely contributed 10 basis points in the quarter.

In the short period of time since we acquired these businesses, they have already started to drive some nice operational improvements. Let's now turn to slide eight for our 2016 guidance update.

As Denise discussed earlier, we are maintaining our total and organic revenue guidance ranges for the full year, with total revenue flat to down 4% and organic revenue in the range of down 4% to down 8% versus the prior year. While the ranges did not change, we have updated some of the drivers of the full-year performance.

Compared to our full year revenue expectations on the February call, we now expect incremental growth in automotive due to an increase in global OEM market share gains.

These improvements will help to offset the weaker than expected short-cycle pump and aftermarket activities, primarily in mining and oil and gas and Industrial Process, due to delayed maintenance spending and weaker market conditions. Moving on to adjusted EPS.

As we mentioned earlier, we are maintaining our adjusted EPS guidance range of $2.42 to $2.68 per share, with a midpoint of $2.55 per share.

At the midpoint, the benefits of higher transportation volumes, incremental benefits from additional restructuring actions at IP, a lower effective tax rate due to jurisdictional mix, and lower corporate costs due to improved environmental management and improved functional efficiencies are expected to offset lower short-cycle volumes and related productivity impacts at IP.

As you will see on the bottom of this slide, we've also provided some of the key factors that we are monitoring related to the low and high end of our guidance ranges. Now let me provide some perspective on Q2 and the second half of 2016.

We project Q2 total revenue to be slightly higher than the first quarter, but to be lower compared to the prior year. Organically, we expect a decline in the mid- to high-single digits range.

While we expect strong growth in our Motion Technologies segment, including incremental benefits from the Wolverine acquisition, the biggest contributor to the decline versus the prior year is a continuation of the weak oil and gas and mining market conditions that we saw in Q1.

And from a segment margin perspective, we do expect a modest sequential improvement from the first quarter. This increase is due to higher aftermarket mix at IP, incremental benefits from Q1 and Q2 cost actions, and lower negative foreign exchange impacts at IP, partially offset by seasonal mix at Motion Technologies.

In the second quarter, we also expect increased corporate costs compared to Q1 due to higher environmental costs, primarily offset by lower foreign exchange headwinds. As a result of these factors, second quarter EPS is expected to be generally in line with Q1 of 2016.

And from a first half or a second half perspective, we expect total revenues to be slightly first half weighted due to the seasonal impacts of a higher aftermarket mix in automotive. On the other hand, we expect adjusted earnings per share to be 53% second-half weighted.

And we expect second half segment margins to be approximately 200 basis points higher than the first half, primarily due to higher realization of productivity actions and restructuring savings in the second half of the year. So now let me turn it back to Denise to talk about the announcement of our new holding company structure on slide nine..

Thanks, Tom. As you noted in the press release and in the 8-K we filed this morning, later this month, we are planning to execute a reorganization that will create a new holding company as our publicly traded parent entity, which will be called ITT Inc.

At the same time, we will also be implementing an internal reorganization that will separate operating assets from certain legacy liabilities and related insurance assets. This reorganization is a logical next step in our continued strategy to effectively manage our legacy liabilities and associated insurance assets.

This reorganization will also facilitate future growth opportunities by providing greater flexibility in how we think about structuring future M&A transactions. And an additional benefit of the reorganization is the streamlining of the Company's legal entity structure and the associated administrative efficiencies.

An important thing to note about this reorganization is that it will not impact our operations, our ability to serve our customers, or our ability to effectively deploy capital in the form of organic investments, M&A, share repurchases, or dividends.

In addition, the new parent company, ITT Inc., will have the same consolidated assets and liabilities as ITT Corporation had just prior to the reorganization effective date. As a result, our consolidated financial position and cash flows will remain exactly the same as they were immediately prior to the reorganization.

And lastly, this internal reorganization will not impact our capital structure. We expect to formally complete the reorganization in mid-May. From a shareowner perspective, no action is needed, as all outstanding shares will automatically convert into shares of ITT Inc. on a one-to-one basis. And our ITT ticker symbol will remain the same.

So with that, let me now turn it over to start the Q&A..

Kristine, we are ready for the Q&A..

Yes, sir. Our first question comes from the line of Brian Konigsberg..

Good morning, Brian..

Hey everybody..

Hi, Brian..

Good morning. I just wanted to maybe first touch on Industrial Process aftermarket. The assumption is that does start to improve from here.

Are you seeing some of that early indication throughout April and May already or are there other indicators that are giving you confidence that it does in fact get better?.

You know, the interesting thing with the aftermarket is when you look at Q4 to Q1, we improved the aftermarket, I think it was about 3 percentage points between Q4 and Q1. So that gives us a better jumping-off point and a good start to the year associated with that.

And then with the aftermarket and the growth that we're expecting, we've introduced some new technology in the marketplace. We have our i-ALERT2 which is a monitoring system that goes on our pumps. We think that that will give us some benefits in the back half of the year.

And then also we've done some other things with 3D printing in our ProCast operation that we think is going to give us some benefits in the back half of the year. And these technology innovations that we have was something that we've started and we've had in place for the last year or so. So we think that's going to help us.

And we've also been working with our distribution channels to be able to run more volumes through the aftermarket associated with that. So we feel good about the aftermarket and what the projections are that we have for that based on what we saw from Q4 to Q1 and what we project for the back half of the year..

And Brian, I would say we have pretty modest expectations at this stage, recognizing the market dynamics. So our first half expectation versus the prior year is still down 10% in the aftermarket.

So we're expecting to see sequential improvement from Q4 to Q1, Q1 to Q2, but our first half expectations are still reflecting a decline versus the prior year. And even as we go into the second half of the year compared to the prior year, we're still expecting to be pretty much flat to the second half of last year.

So all in, I think we've grounded these assumptions, but it is an important market for us to see some sequential improvements from where we're starting at this point..

Got it. Thanks for the detail. And maybe just secondly, just moving over to – just overall for the IP segment on pricing. If I recall from last quarter, the assumptions within that segment were fairly benign, especially when you compared it to some of the commentary of peers. It sounds like maybe that has become incrementally worse.

Can you give us an update on kind of what the new outlook is for the year on the pricing front?.

You know, we haven't – we've changed it maybe a little bit, but not significantly from where we were at the time of guidance in February. Where we've seen the biggest impact is on the project side of the business and margins associated with that.

But in terms of the baseline and the aftermarket, it's held up, it's relatively consistent with what we saw in 2015..

Got it. Thank you..

Our next question comes from Matt Summerville with Alembic Global Advisors..

Hey, good morning..

Hi, Matt..

Couple of things I just want to touch on.

Given the OEM visibility that you have in the motion tech business, can you sort of recalibrate that in terms of what we should expect on a full-year basis from both an OEM growth perspective and how you are thinking about aftermarket? You touched on it a little bit in your prepared remarks, but maybe a little more granularity would be helpful..

Yeah. Sure, Matt. Our expectations for OEM growth, we have taken those up from where we started the year. And overall, Motion Technologies, organically, we are seeing an increase from what we planned on coming into the year.

So they're going to be up a point or two organically in total, and the bulk of that strength is really coming from the OEM side of the business, continuing to take share and do that on a global basis. So I would say the biggest driver is really OEM, where we're seeing the uplift from what we saw coming into the year.

The aftermarket, I'd say, is reasonably consistent with what we thought. Certainly if there are more opportunities to capture in the aftermarket, we'll go after those. But our increased view of the motion tech organic revenue is really based on OEM..

And then I guess my follow-up more has to do with kind of how you are ring sensing, if I call it that, your legacy liabilities. And what the next one, two, three steps might be in terms of how that gets addressed. What is the strategy that sort of underpins the move you're making from a corporate structure standpoint? Thank you..

So in terms of the structure that we're putting into place, I think it's important to note that we've been working on this for a while now. And this is, in our minds, just a logical next step to all the work that we've been doing and how we effectively and efficiently manage these legacy liabilities.

So setting up this holding company allows us to separate the operating assets from our legacy liabilities. When you look at managing operating assets versus managing legacy liabilities, you manage them differently.

And putting this structure in place and allowing us to focus and having a team of people focused on just managing these liabilities we believe is going to benefit us into the future because you have a different focus, a different intensity associated with that.

I talked on the call also about some future growth opportunities and how we'll get more flexibility in structuring future acquisitions that we've got. But it's important to note that we don't see any changes in terms of our liability profile. We have adequately capitalized this new entity going forward.

So from that perspective, there's really nothing that's different associated with this..

Great..

Our next question comes from Mike Halloran with Robert Baird..

Good morning, everyone..

Hi, Mike..

Mike..

So let's touch on the margins. Appreciate the candor in discussing the ICS and the IP margins, in particular. Obviously, control tech saw a nice rebound here.

So one, could you talk about if the control tech side is sustainable from these levels? And then secondarily, for the ICS/IP side, maybe a little bit more detail on what that progression looks like through the year and where those expectations now are set..

Yeah. Sure, Mike. Yeah, I think CT is starting to get its momentum going in the right direction. We saw a good 19.1% margin performance at Control Technologies. And that was impacted by the acquisitions, kind of getting them back into that 20% margin range. I think we're more confident in the margin trajectory from this level up.

So we initially thought maybe they'll be a little slower out of the gates because of some investments in the first half of the year. They've been managing through those much more efficiently.

So I think we're kind of on a trajectory with Control Technologies as the year progresses to see sequential improvement from where we start in Q1 through the balance of the year.

And our expectations for their margins based on the underlying productivity and some of the trends in the aerospace business and defense business are leading us to actually think that their margins are going to be higher than what we initially planned coming into the year. So we like the momentum there.

I would say as it relates to ICS, pretty much consistent with what we thought coming into the year. The kind of mid- to high-single digits as we go through the year at ICS growing quarter-by-quarter. Little bit of a slower start than we anticipated.

I think there's more that's going on in Q1 as it relates to closing Santa Ana and moving into our new Irvine facility. But as you heard Denise mention, there were some positive operational trends and some good order intake activity.

So we expect ICS to benefit from improving volumes and improving performance quarter-by-quarter as we kind of move to that mid- to high-single digit range from a margin perspective. And then – I'll just kind of go around the whole horn here. Motion tech, we're feeling a little stronger about their productivity and the incremental volume we're seeing.

So we're seeing some positive momentum in the margins at Motion Technologies, primarily tied to volume and just the improved efficiency that they're continuing to generate. And at Industrial Process, as we mentioned, we're going to struggle to get back in line with prior year levels.

We've got a 100 basis point year-over-year foreign exchange headwind at IP. We've got lower aftermarket volumes than we planned on. We are adding the additional restructuring to kind of start driving those margins forward. The plan is, obviously, sequentially to kind of improve, but I would expect a nice pop up from where we were in Q1 into Q2.

And then the benefits of restructuring and higher aftermarket content in the second half of the year..

That's helpful. And then second one, I don't think it's a surprise to see the end market pressures in the IP side based on what we're seeing in the marketplace and what other companies are talking about. Order progression, obviously, with the oil and gas, mining remains challenging. Good to see some positive signs elsewhere.

At what point though, do you need to see the order progression get towards flat, maybe even positive this year, in order to think that 2017 revenue gains are realistic?.

Mike, I think for us, kind of the sequence that we're looking at, the market really is first through the lens of the aftermarket and the baseline business, getting that velocity back up to the level that's going to help us power through 2016 and 2017. We think those activities will start to produce more positive order trends faster than the projects.

And that's because of the maintenance deferrals and the activity that seems to be kind of boiled (42:35) up, particularly in North America. As it relates to kind of projects, we do have percentage of completion accounting.

So projects that we take at any point in this year and even early into next year will have an impact on our 2017 results, assuming we could turn those and get those moving very quickly. So as you know, a lot of these project orders have been worked on. Some of them are going through delay cycles, certainly in Q1.

We'd expect some of that delay to certainly continue into Q2. But the idea is that these are projects that have been evaluated, that are pretty well known, and as soon as the orders do start to come through, whenever the market decides it's the right time, we'll turn those pretty quickly into revenue for us.

So Q3, Q4 uptick in projects would be positive certainly for 2017, but we can certainly take Q4 orders and turn those into 2017 revenue as well as booking things in 2017 that will help us from a project basis convert to revenue. So that's just the backdrop.

I think if you go back to IP many, many years ago before we had the project business, we were on a completed contract methodology. But based on our large engineered systems activity, we now have percentage of completion, which means soon as we get to work on those projects, we'll see revenue..

You know, the other thing that I would add to that is, so Tom gave a good review of what we need to see from an IP perspective.

But when you pull back and you look at it from an ITT perspective, you've got the IP dynamics going on, but then you've got the rest of the portfolio and the strong growth that we've had in the transportation side of things here.

We've been investing in the transportation side and we expect to see continued improvement as we get into 2017 associated with these investments that we've been making, that's going to help, again, from a cyclical standpoint and diversified portfolio is going to help to offset some of the challenges we may have from an IP perspective..

Thank you..

Thanks Mike..

Our next question comes from Joe Ritchie with Goldman Sachs..

Thanks. Good morning, everyone..

Good morning, Joe..

Good morning, Joe..

So Denise, I just wanted to go back to your comments on the reorganization and the opportunities for potential future growth opportunities. I just want to make sure I understand it correctly.

Because clearly, if you're separating the assets and the liabilities, it would seem that certain parts of your business, particularly the IP business, would be a much cleaner entity if you were thinking about potentially divesting the business units.

So I want to get your thoughts around that specifically, and then maybe touch on the future growth opportunities and how this new structure helps that..

You know, we didn't do this in terms of looking at doing anything as a follow-on associated with this reorganization. This was done as a standalone action because we decided that this was the best thing for us to do going forward and the benefits that we're going to get associated with that.

So I think it's important that everybody understand that, that it was done as just the next logical step in how we manage this as best as the liabilities that we have here, all the legacy liabilities, and the associated assets associated with that.

It's clear to me that when you've put a structure in place and you've got focused people just working on that entity and that structure, you begin to move the needle and you begin to see things and do things somewhat differently associated with that. And we think that there could be some benefits again associated with that.

And the other one that I talked about was the acquisition benefits that we would have, where you acquire a company and we're able to now put these assets directly under the new holding company with the operating assets and keep them separate from legacy liabilities going forward.

And then just as a follow-on to this, it helps clean up our legal entity structure and it created some efficiencies associated with that. So we think that this is just going to be a better process for us to help managing these legacy liabilities going forward..

Okay.

But no changes expected at this point from a portfolio perspective?.

No changes at this point..

Okay. And I guess my follow-on question, Tom, perhaps maybe stepping into the ICS margins and the ramp expected for the rest of the year. Fully (47:07) recognize with the closing of Santa Ana that some of this duplicative costs associated with that will now go away.

And I guess how are we thinking about the exit rate into 2017 on the margins? And has anything changed from your perspective on the longer-term opportunity, because you guys have talked about being able to get into the mid- to high-teens and just curious whether anything in that regard has shifted?.

No, Joe. You know, I think it's – we still have the same view of the entitlement margins for this business that we've had when we took the decision to exit Santa Ana, move in to Nogales. It certainly it's a complex product that we produced. It's highly engineered, and our focus has been getting this right for the long-term.

And obviously, as we've talked about, it's taken longer than we initially planned. But because of the highly engineered content and the unique nature of what we manufacture at ICS, whether it be medical, oil and gas, or aerospace and defense, I think the margin entitlement is a very strong one.

So it really has always been for us about operations and getting the efficiencies up. And I think what we're seeing month-by-month in 2016, particularly in the Nogales, I think is a good sign.

We haven't locked and sustained these improvements, but we're seeing what we used to see out of Nogales before this move, because keep in mind Nogales for us has been one of our top manufacturing locations in ITT.

And we've added a lot of complexity and we're going to get through that and we're going to get back to the type of performance that we've had historically out of Nogales prior to this move. So the entitlement is still there, Joe. And I think as we exit this year, we're planning to get closer to the jumping-off point that we've been shooting for.

But we have a lot of work to do between now and then to get there. Part of it is volume, so we're encouraged by some of the order momentum. The book-to-bill is going to help as well. But if we can add some more volumes on top of this, that would certainly help.

Because, as you know, one of the big headwinds inside of this business that is market driven is oil and gas. And that's probably the external factor that we don't have much control over right now, is how much is that's going to slow our margin progression. What we'll focus on is continuing to make Nogales better every day..

Okay. Got it. Thanks, guys..

Thanks Joe..

Our next question comes from John Inch with Deutsche Bank..

Thanks. Good morning everyone..

Good morning, John..

Good morning. Does this reorganization allow you, Denise, to raise financial leverage in the future? Because I know the ratings agencies historically have – you look at asbestos price and (49:49), thought of it as part of your leverage structure.

Would it allow you to raise more debt in the future to possibly step up M&A?.

You know, I guess what I would say, I'll leave that to the ratings agencies to make that determination. I think the important thing to note is that nothing really changes from a consolidated financial perspective here. We've got the same capital structure, we've got the same cash deployment strategies.

None of that has really changed by this structure that we've put into place here. So I don't – there's no change in external or internal access to capital. We're not utilizing third party debt.

So we'll leave that to the rating agencies to determine that, but from our perspective, when you look at the consolidated financial statements, everything is the same..

Okay. So does it give you any other benefits, though? I mean I'm still trying to – I'm not completely sure I understand why you're doing it.

If there aren't these benefits – like, does it give you any sort of a tax benefit going forward? I think you said it allows people to focus on managing operations versus legacy, but were they not doing that now? I guess – I don't want to beat a dead horse.

I'm just trying to understand – there's got to be some sort of a benefit to this, no? Down the road or why do it?.

when you manage things in a different way and you've got a team of people that are just managing it and just focused on that, I do believe that the intensity is different and that it will move the needle. I mean they may see things in a different way and manage things in a different way. So that was the one benefit.

The other one is the future growth opportunities. And so that, if – when we continue to do acquisitions going forward, we're going to be able to take these assets and put them under this new holding company and separate them from the legacy liabilities that we've got there.

So that is why we're doing it, and we believe that there's going to be benefits associated with that..

Yes. No, I get it. That makes sense. Hey, Tom, as raw material prices have gone up, can you remind us – some of the feedback we've had from other energy companies is oil in the mid $40s isn't enough to get projects going. I guess it maybe helps to stabilize the market.

And I think you talked a little bit about that with respect to sort of expectations for sort of longer-term aftermarket benefit. But it does theoretically put some pressure on your COGS.

If I'm not mistaken, historically, you've been able to just pass that along certainly on the pricing side for projects, but what about the non-project side? So just kind of the recurring pumps business.

Is this going to be some sort of a margin pressure because steel prices, et cetera, are all up from kind of where they were a few months ago?.

You know, John, we're not anticipating any additional headwinds across the portfolio from the change, particularly in steel. It is a raw material that we use in the Motion Technologies side of the business, perhaps, and I think we've done some of the right activities there to make sure that we're locking in at the right prices.

As it relates to the pumps, you're spot on. We do typically pass that to our larger projects, less so on aftermarket and baseline activities. So there could be some pressure there, but it's not something that we've seen elevate to a new risk factor that we're not able to address with our sourcing initiatives and other activities we have.

I think you saw on our transformation slide, we're looking to drive a lot of incremental sourcing benefits, including the consolidation of 35% of our supply base.

So some of the headwinds that may come through from pricing, we are – I'd say probably more aggressively than ever going after our supply chain in the Industrial Process business, driving consolidation, driving efficiencies. So I think we'll stay ahead of those increases at this point..

Yeah. Okay. That makes sense. Maybe one last one. You guys continue to knock the cover off the ball for motion – right up 14% organic. Yet, the year-over-year, without nitpicking, but I will anyway – the year-over-year margins were kind of flattish.

Is that all because it was such a high OE in the mix? Or is it just incremental pricing associated with some of these wins, call it, in China or wherever?.

You had two impacts that impacted Motion Technologies' margins in the first quarter. One was the acquisition that we did at Wolverine, which was about 110 basis points impact. And then we also had foreign exchange, which was 70 basis point impact.

So if you adjusted for that and you looked at how they grew their margins year-over-year, they grew them about 100 basis points. So....

Yes. And we did make the additional investments, too, John, in the North American facility. But just to touch on, one other quick point on China growth, the margin profile of our business in China is at parity or at times slightly above what we see elsewhere in Europe. So as we've grown in China, we're very happy to kind of report that.

We have not experienced incremental headwinds from an OEM perspective. And in addition, our operations have quickly scaled up to the margin profile that we have in Europe. And that same blueprint is what we're going to use to scale up our growth in the North American operations..

So you are, Tom, when you strip everything out, you're looking at your core variable contribution in motion, you actually are seeing – because you would expect it to be very high because the profitability of the segment is so high.

You actually are seeing that fall through, right? Is that what you are saying?.

We are. It's exactly right..

Okay. Good. Thank you. Appreciate it..

Thanks John..

Thanks John..

Our next question comes from Nathan Jones with Stifel..

Hey, good morning. This is Adam Farley on for Nathan Jones..

Hi, Adam..

Hey. My first question is, you talked about the development and progress for the new brake pads facility in Mexico.

Maybe just some of the expectations?.

Sure. We're very excited about the new facility going into Mexico for Motion Technologies. The opportunity that we see there is a share gain opportunity. And we know that there are lot of new platforms that are coming on in 2018 and 2019, so we want to be positioned to take advantage of those platforms when they come on.

We've located a site for a facility. The facility is being constructed. We expect to startup that facility in the second half of 2017. As I said on the call, we have already won all of the what we call Phase 1 award, for how we're building out this facility. And we do it in a very modular fashion, which is very similar to what we did with China.

So with that first phase that we're building out, we already have all of the platforms associated with that, that we've been awarded. So it's a good story. We feel good about it, and we see that there's going to be a lot of growth associated with it as we go into the future..

Okay. Great.

Then following up, in the M&A pipeline are you guys seeing any companies that you're targeting or – is it a buyer's market at all?.

You know, we're active in the M&A arena. And in the pipeline, we've got our list of companies that we focus on, that we're looking at. New ones come into the mix all the time. So we actively assess that to see how it fits in with our strategy and with the portfolio that we've got.

I would say that there are still some disconnects between buyer and seller expectations from a price perspective. There was one recent deal that we've walked away from because we thought the price got way too high on it. So we remain disciplined from that perspective.

So yes, I think that there is still a disconnect from a pricing perspective between buyers and sellers. But saying that, we're still active in this space. We're still looking at good acquisitions to complement and supplement the portfolio that we have..

All right. That's great. Thank you..

Our next question comes from Joe Giordano with Cowen..

Hey, guys. Thanks for taking my question. It's been about a little less than a year now, but I was just curious. As far as Wolverine, you had talked initially about the ability to leverage some interesting material science capabilities.

And I'm just curious how – what you've seen there and what do you think you can do with that, with that kind of new technology?.

Well, I went and visited Wolverine recently, just to see the progress associated with that. You know, we've owned them for about maybe six months now. I will tell you that there is no major surprises. We had done some extensive due diligence associated with that acquisition, and no major surprises. We still see a lot of opportunity associated with that.

We do see that there are some operational synergies that we're going to get over a period of time, but it takes some time to get those in place. And so we have an action plan over the next couple of years in order to make some of those operational improvements associated with Wolverine.

And then we're looking also at the gasket business that we acquired associated with that, to look and see if there are any strategic opportunities that we have associated with that. So early days; we like the acquisition. It's meeting all of our benchmarks. The integration is going well and we're excited about the future..

Great. And then on IP aftermarket, I just want to clarify. Did you say that the mix – aftermarket mix as a percentage was down year-on-year? That seems a little bit surprising, just given the magnitude of the OE decline. So I just wanted to kind of clarify there.

And I know you said it's up on a sequential basis on the aftermarket, but that mix on a full year seemed a little bit surprising to me..

Yes. Joe, the mix challenge is probably more versus our initial expectations from a guidance perspective. So that's where we're seeing the bigger headwinds relative to how we entered the year..

Okay. Fair enough. And then just to clarify, did you update FX rates in your new guidance to the current rates or are they still using year end? (01:00:18)..

Well, we update them, Joe. And I think one of the challenges that we certainly saw in Q1 is it's very hard to predict transaction impacts, which kind of are much more difficult for us to forecast. So we can forecast translation using current rates.

The variation that we saw in Q1 relative to the prior year of the $0.09 and certainly relative to our expectations, which was about a $0.03 or $0.04 headwind. Those came from transaction impacts that are much more difficult for us to forecast, and we don't try to call those.

Often they net out over time or in shorter increments of time, but we certainly had positive 2015 transaction that turned to negative transaction in Q1. We're hoping to pick up the benefits of some translation as the year goes on at the current rates, but we're watching some of the potential transaction impacts that could eat into that benefit..

Okay. Thank you..

Thanks Joe..

Our final question comes from Shannon O'Callaghan with UBS..

Morning..

Hi, Shannon..

Hi, Shannon..

Hi, Denise. Hey. Maybe start with Tom, just on the corporate and the tax, where are those going to come in this year? And are those things sustainable or jurisdictional? And then some of the environmental stuff, I mean should we – whatever the numbers are this year, is that a good future run rate? Thanks..

Sure. Yeah, so for tax, we're probably looking at a rate now between 25% to 25.5% is the range. I think it kind of goes hand-in-hand with what we're seeing in North America. So a lot of the weakness in the aftermarket and the baseline business is high margin North American revenue.

And there is a tie, if you will, between what we're seeing in that mix and how our tax rate is playing out relative to initial expectations. As it relates to corporate, we are driving sustainable improvements in efficiency. We would expect it to come down from our initial guide maybe in the range of about $5 million.

And we are driving many activities to sustain that kind of improvement. Environmental is, as you know, a little bit of a wildcard because events happen that are kind of beyond our control. I would say that when we do have a site, we manage it as effectively as we possibly can.

And if we have an opportunity to recover from our insurance carriers, we also aggressively go after those opportunities. But the one externality that we struggle with to project is environmental because we don't have all the control, if you will..

Okay. Great. And then just on the restructuring benefit, it was 170 basis points for the first quarter.

Maybe just a little more color on how does that 170 basis points sort of trend through the year by the different segments and what drives it?.

Yes. So one of the key elements for, certainly, for IP is the incremental restructuring that we're driving for the year. And we have stepped up that number from our initial expectations. So I'll kind of give you more of an indication from a dollar perspective.

The total year-over-year savings that we're driving at IP in 2016 are between $30 million and $35 million. So it's a big set of activities that we're driving, primarily, around head count to really right size the organization for the long-term strategic reset that we talked about.

That's probably the biggest area where we're seeing the benefit, but if you look within our ICS business, which is the next largest beneficiary of restructuring, on a full-year basis, we're looking at about anywhere from $8 million to $10 million of restructuring benefits from actions that we've put in place or that are in the works.

Lesser benefit, certainly, at Control Technologies and motion tech. But really where our focus has been is on the IP. And that is a big factor in our second half guidance, where for both IP and ICS, we expect those restructuring benefits to build momentum in Q2 and certainly into the back half of the year as well.

So we would expect probably net-net anywhere from $10 million to $14 million more benefit in this second half from restructuring actions across the portfolio than we had in the first half..

And how much hit in IP and ICS in the first quarter?.

From a margin perspective, how much benefit did those guys pick up?.

Or just the dollars – like on the $30 million to $35 million in IP, how much was in 1Q?.

So restructuring benefits in the first quarter for IP were in and around $6 million to $7 million for IP and ICS was around – about $3 million, $3.5 million year-over-year. Those are year-over-year savings that we generated in those two segments..

Got you. Okay. Great. Thanks a lot..

Thanks, Shannon..

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