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

Nathan Jones - Stifel, Nicolaus & Co., Inc. Matt Summerville - Alembic Global Advisors LLC Mike P. Halloran - Robert W. Baird & Co., Inc. (Broker) Jeff Hammond - KeyBanc Capital Markets, Inc. Shannon O'Callaghan - UBS Securities LLC Joe Ritchie - Goldman Sachs & Co..

Welcome to ITT's Second Quarter 2016 Earnings Conference Call. Today is Thursday, August 4, 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 PM 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. It is now my pleasure to turn the floor over to Melissa Trombetta. You may begin..

Thank you, Lorie. Please note that our earnings material and discussion this morning will primarily focus on non-GAAP measures.

We believe that these measures provide useful information to investors by helping identify underlying trends in our businesses and facilitate easier comparisons of our performance with prior and future periods and to our peers.

I'd like to highlight, this morning's presentations, 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 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 three, where Denise will discuss our results..

Good morning, everyone. Thank you for joining us to discuss our financial results and strategic progress for the second quarter of 2016. Over the past two years, ITT has consistently driven solid operational results despite the ongoing challenging global economy.

We are proactively addressing the headwinds in key end markets, including oil and gas and mining, by leveraging our balanced and diversified portfolio to drive growth in more robust markets, improved productivity through lean, and deploy capital to position us for the long-term. And the same held true in the second quarter.

We delivered flat total revenue compared to the prior year reflecting the impressive organic share gain in our automotive brake pad business and the benefits from our recent transportation acquisitions.

These contributions offset the anticipated project weakness in oil and gas and mining and extended delays in maintenance spending, both of which negatively impacted our Industrial Process segment performance.

In addition, our adjusted EPS of $0.67 per share exceeded our internal expectations, as we delivered strong productivity gains, sequential adjusted segment margin expansion of 140 basis points and improved corporate efficiency.

So, while I am very pleased with the way our teams are collectively working together to combat these difficult market conditions. I am even more pleased by the accelerated progress, we are making to strategically align our businesses with the market dynamics that we see over the next cycle.

So, let me highlight some of those strategic advances here on slide three.

With regards to optimizing execution, as you would expect, in the current environment, we are laser focused on advancing lean which is driving improved operational effectiveness and flexibility, while ensuring our cost structure is aligned with our grounded expectations for the markets where we participate.

During Q2, all four of our businesses collectively contributed to the 440 basis points of margin benefits generated from productivity actions and restructuring benefits, which helped to fully offset the negative volume impacts and pricing headwinds in our markets. So, let me give you a few examples.

Industrial Process continues to advance their structural reset plans and to generate solid benefits from their work to streamline their businesses for the long-term. Just after the close of the quarter, they successfully achieved their 25% head count reduction target which is ahead of schedule.

This, coupled with the consolidation of IP's global footprint and streamlining of their leadership organizational structure contributed to their 11.3% adjusted segment operating margin. This performance represents a sequential improvement of 550 basis points versus Q1.

While this reset will definitely benefit our cost structure in 2016 results, it will also have a far-reaching impact on our long-term strategy.

With our center of excellence space footprint, simplified organizational structures and improved operational flexibility, Industrial Process will be able to more effectively serve its market even during periods of increased volatility. In the quarter, we also continue to deliver sequential global operational improvements at our ICS business.

Our progress is evident in the 330 basis points of sequential adjusted segment margin expansion from Q1 or 440 basis points, excluding the negative impact from our high-margin upstream oil and gas connectors due to market conditions.

Specifically looking at our Nogales operations, our dedicated team delivered improved volume, improved labor efficiency and lower overhead costs where we continue to optimize that location to better serve our valued aerospace and defense customers.

And while it is good to see these sequential improvements, we remain dedicated to the long-term sustainable success of this critical, low-cost manufacturing location for some of our most highly-engineered connectors.

Moving to our market expansion activities, we also get asked a lot of questions regarding Motion Technologies unique position to outgrow the automotive friction markets like we have successfully done over the last five years. Our market expansion strategy is really simple.

Conquer new platforms in our European core, expand our already diversified customer base and drive global automotive growth in North America where we currently have only a 10% share. In China, we have only a 13% share today. During the second quarter, Motion Technologies delivered in all categories. As we were awarded over a dozen platform wins.

These wins included seven new platforms for the China market, which will further expand our market share as well as diversify our customer base in that region.

In addition, during the quarter, we won a key global platform that had previously been awarded to a competitor leveraging by our material science expertise and our ability to rapidly prototype a solution that met all of the customer's performance requirements.

We also won another already awarded key platform for a high-performance premium vehicle, where we were able to deliver a unique solution for our customers very challenging technical requirements. Both of these conquer wins, which is a regular event for MT opens up new long-term relationships that will help fuel our future growth.

Lastly, Motion Technologies also expanded their share in Europe with new customers. With the strength of our sales team and our technical expertise, MT secured its first-ever Korean OEM platform win.

So from a strategic perspective, Motion Technologies continues to demonstrate its ability to gain share in all markets as it transforms from a regional player to a global powerhouse.

Another example of how innovation and new product development drive market expansion at ITT, is the accelerating success of our award-winning i-ALERT2 equipment health monitor at Industrial Process.

This plug-and-play device combines the latest in Bluetooth low energy technology with sensors and provides our customers with a low-cost solution to gain access to their pumps and system data right through their smartphones.

This technology is a critical element of our long-term aftermarket strategy and we're thrilled that customer adoption rates have already exceeded our 2016 expectations. And it is important to note that half of our installations have been on other types of rotating equipment including compressors and turbines.

The success of this industry-leading technology stands from its ability to reduce our customers' total cost of ownership for all rotating equipment, which is critical in today's current environment.

The elevated customer engagement and information captured from this installed base is also an essential element of our long-term aftermarket growth strategy. And now our last focus area, capital deployment. During the quarter, we returned capital to shareholders in the form of a solid dividend and $20 million in share repurchases.

And today, we are announcing that we plan to increase our repurchases up to an additional $50 million by the end of the year depending on actionability of acquisitions. And finally, I am pleased to announce that the construction of our North American automotive brake pad facility in Mexico is ahead of schedule.

This new facility will be instrumental in achieving our strategic goal to more than double our 10% North America market share today over the next five years. And as we discussed on the last call, we've already nicely exceeded our incremental new platform award target required to fill the first phase of our North America production.

Switching to guidance. In Q2, we produced solid operational results while advancing our strategic initiatives. However, we now anticipate that the second half of the year will bring incremental market pressures that results in lower revenue and EPS expectations.

Our revised revenue guidance now reflects incremental customer driven project delays, particularly in the oil and gas markets and weaker aftermarket conditions.

Our lowered expectation for the high-margin aftermarket business at Industrial Process reflect the fact that orders have settled in at lower than expected levels and are not expected to improve in the second half.

As a result, we have reduced our previous revenue expectations by two percentage points at the midpoint, and from an adjusted EPS perspective, our new guidance range of $2.34 per share to $2.46 per share reflects a 6% decline at the midpoint versus the prior year or down 3%, excluding the negative $0.08 impact from foreign currency.

It's important to highlight that despite the fact that we expect our total revenue to decline 4% at the midpoint. We are forecasting our adjusted segment operating margins to be down only slightly on a year-over-year basis.

While this certainly speaks to the strength of our diversified portfolio, it also really reflects how we've been running our businesses over the last few years, and given what we are seeing for the second half we will continue our intense focus on productivity in order to unlock further opportunities to streamline our cost structure.

So with that, let me turn it over to Tom to discuss our results and guidance in more detail..

Thanks, Denise. Now let's turn to slide four, for a detailed review of our second quarter results. Total revenue was flat in the quarter, while organic revenue declined 6% after adjusting for foreign-exchange and the $44 million benefit from our Wolverine acquisition.

In the quarter, we delivered strong growth in our transportation end markets, which were up 28% in total and 11% on an organic basis. These gains were offset by a 39% organic decline in our global oil and gas and mining markets, coupled with softness in the chemical and industrial pump markets.

Motion Technologies was the biggest contributor to our transportation strength as global automotive friction increased 19% organically. This dramatic improvement was the result of double-digit OEM market share gains in each of our key geographies.

Our European core business grew 18%, while our growth accelerated in China to 42% and North America remains strong at plus 18%. In addition, Motion Technologies produced strong aftermarket results in the quarter, which were up 15% driven by execution in both the dealer and independent aftermarket channels.

Moving on to oil and gas, the market continues to be significantly impacted by lower capital spending levels and longer than anticipated deferrals of maintenance activity, which impacted both IP and ICS revenues.

In addition, we experienced declines in mining across all major geographies due to weak market dynamics and difficult prior-year comparisons. Shifting to orders, total orders increased 3% and organic orders declined 3%, excluding the negative impact from foreign exchange and the $45 million contribution from Wolverine.

Organic orders at Motion Technologies were up 15%, including a 21% increase in global automotive brake pads due to new platform awards and recent wins that are now entering production. We also had solid chemical pump orders in the quarter at Industrial Process that reflected increased petrochemical product activity in North America.

These positive order trends were more than offset by a 24% decline in oil and gas and mining at IT. These declines reflected the weak market conditions resulting from capital project uncertainty, extended deferrals in the aftermarket and replacement cycle and difficult prior-year comparisons, particularly in Latin America.

Q2 adjusted segment operating income of $92 million declined 4%. Our results reflects solid operating productivity across all four of our businesses. This productivity includes the structural reset at IP, the advancement of our world-class manufacturing program at Motion Technologies and steady operational improvements at ICS.

In addition, our results reflect the significant restructuring benefits generated from the aggressive actions taken at IP and ICS. The result also included solid contributions from the strategic Wolverine acquisition. These benefits were offset by the impacts of lower high margin IP volumes and pricing headwinds in our automotive and IP markets.

Second-quarter adjusted EPS of $0.67 nicely exceeded our internal expectations. The EPS performance was driven by both flat top line and flat adjusted operating income that was negatively impacted by a higher tax rate compared to the prior year.

It is important to note that we also funded $0.03 of incremental long-term strategic investments compared to the prior year. Turning to slide five.

Here you can see that we delivered segment operating margins of 14.7% or 15.2% operationally before the impact of 40 basis points of positive foreign exchange, minus 20 basis points from acquisitions and minus 70 basis points for strategic investments.

The strategic growth investments include costs associated with the expansion of our Wuxi, China facility to meet our growing market share gains as well as the impact of start-up costs for our new North American brake pad facility.

Another key area of investment for us is expanding our aftermarket reach and capabilities within our Industrial Process business. We recognize the importance of a robust installed base and we are taking a disciplined approach to expand our range of aftermarket offerings in targeted geographies.

In addition, we are continue to invest in the accelerated advancement of our i-ALERT monitoring devises. These targeted investments will allow us to better serve our installed base, while also enabling IP to expand in undeserved geographies and customers.

Our focused operational execution delivered a combined 440 basis point improvement in the quarter that included $24 million in gross productivity savings, driven by benefits from Lean, a world-class manufacturing program at Motion Technologies and expanded global strategic sourcing, along with $9 million of restructuring benefits primarily at ICS and IP.

However, the benefits from these actions were fully offset by the headwinds from volume at IP and price pressures at both MT and IP. So now let's turn to slide six where we will discuss our end market expectations for the back half of the year.

Starting with our largest and fastest growing market of automotive and rail, we expect approximately 12% total revenue growth in the second half versus the prior year driven by the Wolverine acquisition and OEM share gains, as well as higher dealer stores aftermarket activity, that will overcome the difficult prior year comparisons.

On a sequential basis, we expect to be down 15% due to typical automotive seasonality that is attributable to the first half waiting of independent aftermarket channel activity.

Another contributor in the broader transportation category is our aerospace and defense business, which is expected to be flat on a year-over-year basis in the second half, but sequentially improved 6%.

The sequential growth is driven by our Interconnect Solutions business, as they continue to drive operational improvements and increased throughput at our Nogales Facility. In addition, we expect stronger sales in the second half from our recently acquired Hartzell business due to new program ramp-ups.

These markets will be diluted by second half declines in the high-teens range in chemical and industrial pumps compared to the prior year, and low single-digit sequential declines versus the first half. The year-over-year declines were driven by lower petrochemical and mining project activity and increased pricing pressures on large projects.

In addition, we have experienced weak, short-cycle pump activity due to cautious customer spending and prolonged replacement cycles. And lastly, oil and gas, which is now expected to represent approximately 12% of our 2016 revenues, will be down 46% in the second half versus the prior year and down in the mid-teens range sequentially.

The decline versus 2015 are driven by our late cycle Industrial Process business, which experienced significant project order declines in 2015 due to lower capital expenditures on large projects and intense pricing pressures.

In addition, we have experienced lower than expected demand in our aftermarket business at IP, driven by delayed MRO spending, coupled with declines in our short-cycle upstream oil and gas connector business. Sequentially, we expect lower project revenues due to customer delays, as well as the continuation of the delayed OpEx spending.

So, with all of that in mind, let's now turn to slide seven for a 2016 guidance update. As Denise discussed earlier, despite our strong Q2 results, we expect a sequential step-down in the second half from our expectations back in May due to the current market conditions and lower than expected short-cycle activity at IP.

Starting with revenue, compared to our full year expectations on the Q1 call, we now expect some incremental growth in automotive due to greater visibility in the aftermarket. These improvements will help to partially dilute the negative impacts from weaker than expected aftermarket and short-cycle demand at Industrial Process.

In addition, we now expect lower project revenues partially due to customer delays. As a result, we are lowering our full year revenue guidance ranges, with total revenue now down 3% to down 5%, and organic revenue in the range of down 7% to down 9% versus the prior year. Moving on to adjusted EPS.

In Q2, we were able to exceed our internal expectations by $0.07 as a result of higher transportation volume and lower corporate costs that were offset by higher tax rate. But given our revised volume expectations for the second half of the year, we are lowering our EPS guidance range to $2.34 to $2.46 per share with a midpoint of $2.40.

Finally, I would like to provide some additional color into our second half and Q3 expectations. We project Q3 total revenue to be lower than the second quarter and lower when compared to the prior year. Organically, we expect a decline in the high single digits range.

So, we project 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 Q2.

From an adjusted segment margin perspective, in Q3, we expect a decline versus Q2 levels as a result of lower high margin, short-cycle volumes at Industrial Process. These negative impacts will be partially offset by higher restructuring savings from actions taken earlier in the year, along with higher realization of productivity actions at IP.

In addition, we expect sequential margin expansion at ICS, as a result of ongoing operational improvements across the business. In total, Q3 adjusted segment margins are generally expected to align with our 2016 year-to-date average rates.

Shifting to corporate costs for the second half, due to typical functional seasonality and higher environmental costs, we are forecasting second half cost to be sequentially higher than the first half. Looking at the full year, due to the favorability in the first half, we now expect corporate cost to be in the $40 million range.

And finally EPS, as we flow our quarterly top line expectations down through segment margins and corporate assumptions, we expect our second half adjusted EPS to be fairly evenly split between Q3 and Q4. So with that let me now turn it back to Lorie to begin the Q&A session..

The floor is now open for questions. Your first question comes from the line of Nathan Jones of Stifel..

Good morning everyone..

Good morning, Nathan..

Good morning Nathan..

I guess, I'll start in IP, seeing as that seems to be the biggest variance from the previous guidance.

Can you talk a little bit about what's driven the expectation of lower project revenues in the second half, given I would have thought that was already baked into backlog or are customers telling you to slow down, delaying delivery, canceling projects, what kind of dynamics are going on in there, to say, just in the longer cycle business to start with?.

So with that Nathan, really a couple of things happening there. We are seeing that the customers are delaying projects so they are getting pushed out from when we can make the delivery of those projects.

And then the other thing because of what's been happening in the oil and gas markets, is we're seeing that orders associated with new projects is really slow right now. And so we were expecting some of that to flow through in 2016, which would have given us some revenues associated with that in 2016.

And we're no longer banking on that, just because of what we've seen in the marketplace. Think about when we talked at the first-quarter earnings call, oil at that time was between $45 a barrel and $50 a barrel, and look where it is today at $40 a barrel.

So we're seeing much more hesitancy on the part of our customers in terms of placing orders or taking delivery of some of the orders that we currently have.

The other thing that's happening as you look at the GDP rate, and in the second quarter at 1.2%, much slower than we would have expected, and so all those things are factoring in into how our customers are placing orders and how that is impacting us and when they want to take delivery of it..

Have you seen a hesitancy around your customers become more prevalent, increase, as oils come down from $50 a barrel to $40 a barrel, like, has that dynamic deteriorated for you over the last few weeks?.

It's interesting, Nathan, one of the points is, we did experience a lot of quota activity on projects in June. And you can't triangulate that back to kind of higher price of oil. And I think, overall in the quarter, our sequential orders for projects did improve 46% compared to Q1.

So what we're really looking at now going forward is, the activity that we saw it kind of increase at points in Q2 started to really die down when oil came back from kind of that high-$40s a barrel, mid-$40s a barrel into the low-$40s a barrel.

So as we are looking into the back half of the year, we are really kind of looking at the price of oil as a key indicator of whether those orders will pick back up, and I think it makes a lot of sense right now to be very cautious given where oil has moved so quickly since in the last couple of weeks..

Yeah. And I think the other thing to remember with these projects, they've got lower margins associated with them than the short-cycle and the aftermarket part of the business for us. And so that's where we're also seeing a slowdown occurring there from what we've seen in the past, again associated with the same factors and the same dynamics.

That's impacting both the revenues and the operating income associated with IP..

The margins was where I wanted to go next. So you have some lower projects, lower aftermarket pricing pressure, volume deleverage going on in here plus savings from the restructuring actions that you've already undertaken.

How should we be thinking about IP margins in the back half of the year? Can they be up from here? Down from here? And what kind of – if we settle in at this kind of volume level, how should we be thinking about margins in IP longer-term?.

Yeah, I think we have to be very sensitive to what's going to happen with the short-cycle business and how that's going to cycle through Q3 and Q4. We actually saw some timing associated with short-cycle business that fell into Q2. We think it will be a little bit less as we get into Q3.

So that will have somewhat of an impact, but our goal is that on a full-year basis, our goal is to hit double-digits with IP on a full-year basis. But again that's going to depend on the aftermarket and the short-cycle business that we have there.

We have been aggressively doing the restructuring in IP and that will give us continued benefits as we go from the first half of the year into the second half of the year and so that will help from a margin perspective..

Okay. That's helpful. Thank you..

Thanks, Nathan..

Thanks, Nathan..

Your next question comes from the line of Matt Summerville of Alembic Global Advisors..

Good morning. Couple of questions.

First, with similar question, I guess, on the Interconnect business, how should we sort of parse the anticipated margin progression there? You had a step function Q1 to Q2, should we expect something similar Q3 to Q4? And maybe Denise, if you're willing to give, kind of, a full-year margin target at this point now that it sounds like you might have a little bit of wind at your back? And then maybe if you could throw some numbers around some of the metrics you're tracking there, whether it be on-time delivery, first pass yield, utilization rates, et cetera, to kind of let us know where you were and where you are now?.

Okay. In terms of ICS and margins, we're very happy with the increase that we saw from Q1 to Q2. We do expect to improve as we go throughout the year. The thing to recognize with ICS is, they've also had a strong oil and gas business that has been impacted by what's been happening with oil price.

So we've seen a decline in that business, for them from where they were in 2014 to where we are today and we continue to see declines in that business. That is our highest margin product line within ICS. So when that goes down, that really impacts the kind of margins that we have in ICS.

So we were happy to see the improvement in Q2 because that was despite the decline that we've seen in oil and gas revenues, and is associated with the fact that we've had a relatively good business in our transportation and industrial segment and ICS, and then we've been seeing these improvements in our aerospace and defense business with what's been happening in Nogales.

From an operational perspective, in Nogales, we've been seeing increasing weekly production rates as things get better as we go forward. In terms of on-time delivery, we're still working through some of those challenges that we have there.

But we've been able to effectively lower some of the overhead costs and really working hard on some of those inefficiencies that we've had in that operation. So it's going to be gradual increases associated with that as we continue to chip away at some of these issues that we've had and the teams have been working very hard in addressing those..

Yeah, Matt, just to give a couple more....

I'm sorry. Yes..

Sorry. Just quick couple – labor productivity in Nogales has been trending up significantly from Q1. We've also seen a nice improvement in our overall utilization rates and machine efficiency is certainly going in the right direction. So we have some good underlying performance results that we track with the team on a regular basis.

And I think there's kind of two sides, we're seeing really good improvement in the throughput and the scheduling and the planning.

We have new leadership in place that's really driving some of these actions and I think the other big category that Denise was touching on too is that we have a much tighter control of our cost and spending, particularly in the overhead freight and other categories were we've had some inefficiencies that have piled up over the year.

So we're working through those pretty well..

And then just as a follow-up, I was wondering if you could describe what's driving the sooner than anticipated build-out if you will of your needed North American capacity? And given that the rate of new wins is coming in faster than you would have thought, I guess what is that initial capacity going to look like? And from – and if you can quantify that? And then I guess, how quickly will it take you to double your market share and do you now have a firm line of sight to actually doing that? It sounds like things are going much better than you would have anticipated?.

They are going well for us, particularly with the new awards that we're winning there and we're happy to see that they are ahead of schedule from what we had even anticipated. This is very similar to what happened to us in Wuxi, when we started building that facility there and it was really local for our customer base.

We started out slow – you'd only build as you see the volumes coming in and as you see the awards coming through. This initial build out for Phase 1 is about 8 million brake pads. And then we will just continue to increment up from there and when we see that we need more capacities.

We'll do what we did with Wuxi and we'll get approval for that and put that into place, so that we can make sure that we hit the ramp up that's necessary. We decided to put this facility in place now because we saw that they were going to be many new platforms in 2018 and 2019 that were going to be coming through.

And so we needed to start building the facility now and winning the awards now because it typically takes that period of time before you actually are going to start seeing the production happening through that facility. So, you know what's nice about it is these are share gain opportunities that were going after here.

We only have a 10% market share today in North America, in China only 13%, and so this is not based on market growth in North America. This is based on market share gains which we have been gaining market share in Europe and in China and we expect to do it in North America, at a rate of three times or four times the market growth.

And so we expect to continue to do that in North America..

Great. Thank you, guys..

Thanks, Matt..

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

Hey, good morning, everyone..

Hi, Mike..

Hi, Mike..

So, on the aftermarket short-cycle side, obviously, some incremental weakness in the back half of the year.

Is that just talking year-over-year growth rates worsening, or are you expecting sequentially things to worsen a little bit as you get through the back half of the year? And then in the context of that, maybe just give a little bit more background on how customers are looking at turnarounds today and the maintenance repair piece, as you go out in the field?.

We were hopeful at the last earnings call that we would see some improvement in the aftermarket and the baseline short-cycle business as we went throughout the year. Unfortunately, we're not seeing that, and we're not seeing it in the order rates. And so we decided to forecast that there will be no improvement.

As we go into the back half of the year, in fact, when you look at the second half versus the first half, we expect our short-cycle business and this forecast to be down about 6%. We are back – after the first quarter earnings call, we actually expected to see some improvement as we went through the back half the year.

And this is really predicated on looking at where order rates are, thinking again about what's happening from a macro economic perspective, that we just think it's prudent to be able to forecast it this way.

And if it turns out better that's great, but we just think things are going to stay pretty low from what we've been seeing in the marketplace today..

That makes a lot of sense.

And then just on the pricing side, are you seeing price deterioration in the backlog still? Have there been any levels of stability? And then on the aftermarket short-cycle piece, maybe some thoughts there on whether things are still stable on that side?.

Pricing in the short-cycle is pretty consistent, haven't seen any real major changes with that. Project side of the business, as we came into this year, we indicated that we were going to have some price pressures from where we were in 2015. Those price pressures continue.

It's really very much project specific, but when you've got the kind of situation that's out there today with projects and not many projects being awarded, it is pretty competitive and we're seeing a little bit more pricing pressure on the project side than we expected, let's say, six months ago.

That is as we work through some of the backlog that we have, the new backlog coming in will reflect those lower prices.

Now as part of that, we're also improving from an operational perspective and we're working on our cost structure, so that we're able to get these products out in a very cost efficient way which is part of the restructuring that we've been doing and the new organizational structure that we put into place.

And that should help us from a margin perspective to partially offset some of the price pressures we're seeing from a customer perspective..

And then lastly on the Motion side, a lot of talk about really strong aftermarket turns on that side, maybe just a little more color on what happened this quarter specifically, if there was any new customer wins, new channel wins, anything of that nature that helped drive the strength or if there were something different?.

You know not much on the independent aftermarket, there's again just some timing associated with the independent aftermarket.

Where we have seen improvement is more on the dealer service activity, which is the OES business and that's because we've been winning so many new platforms, that we're beginning to see that dealer service cycle beginning to kick in and that's where we're seeing the real benefits from an aftermarket perspective is really in that dealer service cycle..

Great. Thanks for the time..

Thank you..

Thanks Mike..

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

Hey good morning..

Good morning..

Good morning Jeff..

Hi.

So, just as you see some of this incremental weakening in Industrial Process and kind of the more cautious view into second half, how are you thinking about additional restructuring actions or accelerating actions?.

Yeah. Jeff, as Denise mentioned, we're ahead of schedule on the 25%, particularly in Industrial Process that we had identified. So we're happy about that. We're also managing head count through attrition and other activities.

So net positive to where we expected to be which I think is a good indicator, based on what you're seeing as projecting of second half of the year, we are continuing to look for other actions as we kind of go through this reset.

None of which were kind of factored in yet, but we're certainly continuing to evaluate incremental actions as we go through the back half the year..

Okay.

And then, Motion looked pretty good in Europe, but any early signs of any kind of slowing in Europe around Brexit in Motion or any of the other businesses?.

No. With Brexit, our revenues in Europe are minimal to us. There are only about $35 million or so. And part of that – it's across all value centers, about 40% of that is on the automotive side. But we're not seeing any impact associated with that really again it's so insignificant to us. That it's not impacting our results at all..

Okay.

And then just finally on the incremental share repurchase, what's informing that? Is that a function of what's in your pipeline or kind of how you're feeling about your stock price just a little more color there?.

Yeah. I know, Jeff, I think it's the intersection of the two. So we've been working in the pipeline. There have been some acquisitions that we have pursued that are close to core in our typical categories that we've been looking at. And we didn't see the right price opportunity there from a valuation perspective.

So we have exited some activities and remained disciplined through the cycle and based on the velocity that we've seen in the pipeline up to this point. As we've said in the past, if we don't see actionable M&A, then we would want to return incremental capital to shareholders.

And that's why we felt it was the right time and certainly given all relative valuation, we thought it was the right time to do some additional share repurchases and that's what we announced today..

Perfect. Thanks..

Thanks Jeff..

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

Good morning..

Good morning, Shannon..

Hi, Shannon..

Hey. On Motion, I mean, can you just help us frame I think, Denise, you talked about three times or four times market growth, and obviously it was 19% overall this quarter.

I mean, how do we think about market outgrowth for that business based on all these wins you've had, maybe within the different regions where are you in China versus North American and you talked about the low share.

I'm just trying to get a sense of how much you think you really can outgrow auto-build in each of these regions?.

We think about two times to three times the market growth. We should be able to continue to do that. And again it's based on the awards that we've been winning.

And it's also because we're able to go in where we might have a competitor that has won a platform and we come in and we have better technology, we come up with a better solution and we're able to be able to get that business.

It's really how MT operates in terms of the footprint that they have which is similar across the globe, it's the R&D capabilities, it's our ability to prototype, it's our on-time delivery, which is almost 100%, it's our defect rate which is less than 1 ppm. All those things really create this very powerful model that we have in MT.

We're able to continue to outpace the market because we meet the customer's needs that we have. So we look about two times to three times that we should be able to outpace the market growth and we continue to believe that going forward..

Okay, great. And then, just maybe a follow-up on the buyback versus M&A. As well as Motion is doing and it's tough as IP has been, you know you have this dynamic where Motion is becoming bigger and bigger part of the company.

I mean, as you think about M&A is there a threshold of portfolio mix that you concern yourself with or is that not a factor?.

We look to – when we look at acquisitions, we just think about where we can add value in the portfolio. And as you've seen the acquisitions that we've done, we did one in IP a couple of years ago. We've done one in aerospace. We did the Wolverine which was associated with the automotive business.

But we go across the different end markets that we have and we look at where we think we've got the biggest opportunities.

Now from a Motion Tech perspective and automotive perspective, our strategy there has been growing it organically, because we've got such a powerful model in terms of how we can take – how we operate today and just transplant it like we've done in China and like we're doing in North America.

So we like from a brake pad perspective, doing that from an organic perspective and that works well for us because we can replicate the model that we have today. So, we go again, we go across various end markets. We'll continue to do that. And our Motion Tech business is really a unique business.

It is not a typical automotive business and it needs to be valued and recognized that way in the marketplace..

Okay, great. Thanks..

Thank you..

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

Thanks. Good morning, everyone..

Good morning, Joe..

Maybe just a comment on your auto growth. I mean, the two times to three times number, Denise. Is that just a conservative estimate at this point, because you guys are smashing global auto production.

So is that just conservative or how should we be thinking about it?.

We like to be able to beat some of the numbers that we've put out there. But I think if you just look at it over time, two times to three times is probably the right way to think about it. The other thing to remember is, Europe, we're at a 50% market share in Europe, maybe a little bit more than that, little bit less than that.

So, there's not as much opportunity in Europe as we see in China and then North America. So we think two times to three times is the right metric to think about. At any one point in time it could be more than that, but that should be a good ballpark for you..

And, Joe, if you look back to the churn rates, so in Europe, even in tough markets, we're focus in on conquering share. So we have been outgrowing Europe market rates one and a half times, two times on average, based on our competitive positioning in Europe. And in North America and China, the rates of growth would be certainly in excess.

So we're looking at, depending on where we are in the cycle, three times to five times growth in those regions in some cases. Our goal as we've been talking about for China, North America, is to double our share in those regions over the next five years.

So we see the share wins that we've already generated and the opportunities that we have giving us the opportunity and the entitlement to go for that level growth.

We'll do everything we can to position ourselves that way, but I think the opportunity set, the wins that we already have, give us some good visibility into significant outgrowth in North America and China, and above average performance in Europe, which is what we've been able to do over the years..

Yeah. That makes sense, Tom. I guess, maybe switching gears and just talking about Industrial Process for a second. I'm going to ask Shannon's question slightly differently.

If you think about just your portfolio longer-term, how are you thinking about Industrial Process? Does it have to be – is it something that has to be part of the portfolio? I mean there are a lot of multi-industry companies right now that are interested in those types of assets.

And clearly, when you bought Bornemann, I know GE was interested in it at that point in time.

Just curious, like how are you thinking about the longer-term nature of that portfolio and whether it should be part of ITT?.

IP is a great business. It still remains a great business, and we still see some longer-term trends that are really going to benefit us. So you're going through a cycle right now with IP. But in terms of the quality of the operation, in terms of the brand name, the equity that we have, the position that we have, it's a very strong position for us.

And so, we look at all the elements of our portfolio, all the time and think about how do we feel about it, how does it look, how does it fit and we make assessments according to that. But there is a lot of opportunity for IP out into the future.

And we're in the process of restructuring that organization, putting in place the right leadership structure, the right cost structure, creating centers of excellence with our manufacturing footprint and really aggressively going after some of the aftermarket and some of those opportunities.

So, we've got a lot of work ahead of us there, but there's just a lot of opportunity for us also..

Yeah. And I would just add to that, Joe, that our view is, we would like to grow our Industrial Process business. From an M&A perspective, right now, it's important that we have clarity from a strategic perspective of where these end markets are going and how are we going to realign ourselves to be best positioned for those organically.

And I think it's a critical first step in rethinking through the M&A pipeline as well. So we're making sure that the M&A pipeline that we're building for the future at IP aligns with where we think the businesses are going.

And that will allow us to kind of target some opportunities that we consider close to the core that we're establishing for the long-term. But as you know right now in this space, I think valuations are very complicated and it's very difficult to have meaningful conversations even on small targets that fit into some of the strategic areas of focus.

So for all those reasons, we're still looking at IP as a way to grow our portfolio, but we're going to do it with the right pacing and sequencing that makes sense for the creation of long-term value, and we're kind of in the middle of that process right now, given all the market dynamics..

Got it.

If I can just maybe sneak in one more on Industrial Process – the petrochem orders that you got this quarter is – since you're seeing a step down in second half versus second half, is it safe to assume that those orders are going to ship in 2017?.

Hard to say Joe. They're not as big as some of the petrochemical projects we've seen as far as the size of the orders. But we did see a nice uptick. I think some of that will fill in to 2016. But we were expecting more to be coming through.

And given the nature that they're not as large – if we ship them out the door this year, it would benefit 2016 most likely more than carry into 2017. But we are seeing, as we mentioned, some customer delays once we even have orders kind of on the books as to when they want to ship these.

So I wouldn't draw too much from it other than it's nice to see that there are some increased activity in petrochem. And I think we're going to go through the cycle with hits and misses around the different end markets.

So a project here are there gives us a very nice variant, but it doesn't necessarily mean that there is a dramatic change in where things are going. But I would say what we're seeing in petrochem, in particular, this Group is probably a 2016 shipment category more than a 2017..

Okay got it. Thank you, guys..

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